Earnings Call: Q4 2013

Jan 31, 2014

Summary

FY 2013 revenue reached a record $17.1B and net income rose 5% to $1.17B; Q4 net income grew 32% YoY to $334M. Truck demand, parts growth, and new product launches supported a cautiously improving 2014 outlook.

Good morning, and welcome to Paccar's fourth quarter 2013 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 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. As with prior conference calls, if there are members of the media participating, we request that they participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. I would now like to introduce Mark Pigott. Good morning. It's a pleasure to share that in 2013, Paccar achieved record annual revenues and earned our third-best annual net income. For the year, Paccar reported record revenues of $17.1 billion. Net income was $1,170,000,000, an increase of 5% versus a year ago. 2013 was Paccar's 75th consecutive year of earning a net income. Having been at the helm of this great company for each of the top 10 years for revenue and net income, I can say that each year has its own unique path. What is consistent is the quality and determination of our 22,000 employees who deliver industry-leading products and services to our customers every day. Paccar reported strong revenues and net income for the fourth quarter of 2013. Paccar's fourth quarter sales and financial services revenue were $4.6 billion, and quarterly net income was $334 million, an after-tax return on revenues of 7.3%. This was the best quarterly net income since the first quarter of 2007. Net income increased 32% compared to results generated in the fourth quarter last year. Positive contribution of all the company segments enables Paccar to attain the highest operating margins in our industry and to deliver excellent shareholder returns while investing during all phases of the business cycle. Paccar declared cash dividends of $1.70 per share last year, an 8% increase compared to 2012. Paccar's total return to shareholders was 34.9% last year, and stockholder equity at year-end was a record $6.6 billion. Paccar delivered 36,400 trucks during the fourth quarter, a 3% increase versus the third quarter. The improvement reflects increased European truck deliveries as customers purchased trucks ahead of the January 1, 2014, implementation of the Euro VI regulations. Paccar began production of many new vocational vehicles in the fourth quarter: the Peterbilt Model 567, the Kenworth T880, and DAF's CF and LF Euro VI models. In addition, we began production of the new PACCAR MX-11 diesel engine for Europe. This engine is planned to be available in Kenworth and Peterbilt trucks in 2015. We expect to increase truck deliveries in the first quarter by 5% compared to a year ago. A major highlight during the fourth quarter was the start of production at DAF's new truck assembly plant in Brazil. This wonderful accomplishment was due to the efforts of many Paccar employees worldwide. Truck production at the DAF facility is planned to gradually increase over the next 18 to 24 months. DAF has a long-term market share goal in Brazil of 20%. Brazil truck market above 6 tons was 149,000 vehicles last year and is expected to be at comparable levels this year. Peterbilt and Kenworth achieved excellent market share of 28% in the U.S. and Canadian heavy-duty truck market last year. Industry retail truck sales totaled 212,000 units. U.S. and Canadian Class 8 industry truck retail sales are estimated to be in the range of 210,000 to 240,000 units this year, reflecting ongoing replacement demand and some expansion of the industry fleet. For the full year, DAF achieved record market share of 16.2% in the above 16-ton European truck market, which totaled 240,000 units last year. Looking at this year, we're encouraged by the improved GDP growth of the Euro zone, which should benefit the truck market. Excluding the effects of the pre-buy, which is estimated at 20,000 to 30,000 units, we anticipate that the European industry truck sales could be slightly higher this year. Switching to parts. Paccar Parts business generated record quarterly revenues of $730 million, a 9% increase compared to $671 million in the same quarter of the prior year. Paccar Parts quarterly pre-tax income was $105 million, an increase of 12% compared to $94 million earned in the fourth quarter of 2012. The excellent results were driven by strong freight tonnage, improved fleet utilization, and the many innovative products and services offered by Paccar Parts. For the full year, Paccar Parts achieved record revenues of over $2.8 billion. Paccar Financial Services revenue were $300 million in the fourth quarter, compared to $298 million a year ago. Paccar Financial's fourth quarter pre-tax income was a record $90 million, compared to $79 million earned a year ago. The excellent results benefited from growth in asset balances and continuing strong portfolio performance. For the full year, Paccar Financial Services earned record pretax income of $340 million. Many records last year. Paccar's capital spending of $350 million-$400 million this year is targeted at enhanced powertrain development and increased operating efficiency of our assembly facilities. R&D expenses are estimated to be in the range of $225 million-$275 million. On a personal note, I'd like to say thanks for the excellent questions that you have generously asked on our quarterly calls during the last 17 years. It's an honor and a privilege to work at Paccar, and I appreciate your interest in the company as you tour our wonderful factories and meet our outstanding employees. Thank you. Pleased to answer your questions. At this time, I would like to inform everyone in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jamie Cook from Credit Suisse. Hi. Good morning to you. And congratulations, Mark. Thank you. Just a couple questions. Just one, you talked about deliveries, I think, being up 5% in the first quarter. Can you talk about what you expect the mix is U.S. versus Europe? I guess also any color you are seeing in order trends in Europe as we look to January, given the strong pre-buy that we had. My last question, how are you thinking about the ability to improve margins in 2014 over 2013, given your retail sales forecast? Thanks. Okay, let's start with margins. We think margins for the first quarter will be comparable to about a year ago. Is that on gross or operating? Gross margins. In terms of production, first quarter versus fourth quarter will probably be down about 10%, and most of that is in Europe. As I say, year-on-year, production will be up about 5%, so we are pleased with that. As the year goes on, we look for some steady improvement in the margin side. I think Kenworth, Peterbilt, and DAF are all doing a very good job, and all the new products that we have been working on for the last three, four years seem to be met with very strong market reception. Customers like it. They are delivering all the attributes we wanted, and I think when we look at things like record market share at DAF, it's a very positive signal for the company. I guess just last question, how do you feel about your ability to fully pass through the Euro 6 cost? Well, initially. Are you seeing that margin accretive? Is the margin dilutive? I think we've been able to do it reasonably well, and obviously, that's our goal, and it's been our goal every year or two as we have new environmental regulations to comply with. That's certainly something that I think we're becoming quite proficient at incorporating into our designs and working with our dealers to pass through most of that additional cost. All righty. Thanks. I'll get back in queue. You bet. Thank you. Your next question comes from the line of Stephen Volkmann from Jefferies. Hi, Stephen. Hi, good morning. I'm wondering if I can switch over to Brazil. I know you mentioned that you'd sort of see gradually improving production rates down there. I guess I'm just trying to sort of maybe get a little bit sharper pencil on that. Really, what I'm trying to get at is thinking about the impact on profitability in 2014. I assume it's a drag as it was in 2013, but less of a drag. I don't know, as we end the year, is that business break even, or is that too optimistic? Well, the good news is we're doubling production in a week or so from one truck to two trucks a day. That's always positive. Can you do that every day? We know. If you've got the magic wand, we'd be interested. It's going well. Obviously, it's a multiple year program as we gradually ramp up production. But we're encouraged in the early days, and I think as we get towards the end of the year, certainly we hope to be at least break even at the facility. I think your analysis is accurate. Okay, great. Then I guess just back on Europe for a second, and then I will pass it on. The registration data in Europe was huge in December, much bigger than what your revenues might suggest. I guess I am trying to figure out just how this whole cadence worked. Was there some inventory build that happened and then things got registered out of inventory in the fourth quarter? Or it does not look like your market share changed in any negative way. I think it was actually up a little bit, so. Yes. Our market share is a record. In fact, we had very strong market share in the fourth quarter and in December for DAF, over 17%, and so we are very pleased with that. Did you sell a bunch out of inventory in the fourth quarter? Well, the pre-buy started in the third quarter, and inventories increased at the end of the third and during the fourth. But as we got to the end of the fourth, a lot of those trucks started to be delivered to customers, registered, and so we finished very strongly. I got it. Is there some delivery potential in the first quarter that's still Euro 5, or was it a hard stop on January 1? Yeah, that's a good question. Really, as we look through this year, we'll probably have about 20% of our production will be Euro 5, primarily for markets outside of Western Europe. That'll be ongoing for a number of years. Okay. Thank you so much. You bet. Your next question comes from the line of Andy Casey from Wells Fargo Securities. Morning, Andy. Morning, Mark. Congratulations. Thank you. A couple questions, mostly, surprisingly, around Europe. Earlier in the week, different manufacturer talked about a difficult pricing environment. Are you seeing that? No. I think the pricing environment is pretty steady. If anything, it might be a little bit better. I am not sure who you are talking about. We have increased share. Some of our competitors might have lost a little bit of share, which might have some impact on them. But, our products are very well received. We are having a lot of great truck shows. The dealers are excited about it, and our goal is to continue to have the best products in the industry and gain a little bit of share every year. So I think pricing is reasonable. Okay. It was a Scandinavian, soon-to-be German competitor. Oh, well. Then second, if memory serves, the U.K. had an earlier stop in terms of the Euro 6 transition, like September timeframe. We are now a few months past there. Have you seen any improvement in the demand given that the economy is doing pretty well? Yeah. The economy, they are talking about over 2% GDP growth, I think, for the U.K. this year, which would be very healthy. Yes, they had a slightly different program in the U.K. As a result, we still are delivering some Euro 6 and Euro 5 vehicles in the U.K. They seem to be very upbeat in the U.K. right now, which is encouraging. I know even on the car side, they are going to be well over 2 million units for the car industry. Have you seen a greater uptick in the Euro 6 appetite in the U.K. than other regions? Yeah, I think the U.K. is always pretty forward-thinking in terms of embracing the new product. So I think our share, once again, went up in the U.K. as a marketplace, and the dealers have embraced all the new products. But everybody in all the regions that we operate, this is every couple of year program. So I think the industry, the customers, the dealers have been through it in the last 10 years, three times. So they know the drill. Okay. Then switching over to U.S. and Canada, we've had so far kind of a muted cycle relative to the last two. We've had some recent volatility in the orders, two good months, one weaker relative month in between. How are you characterizing the cycle? I think we are on a steadily improving path, and a couple of reasons for that. First of all, in the fourth quarter, talking about U.S. and Canada, the industry had a little over 70,000 orders, which is the best quarter since the first quarter of 2006. So that's quite a few years ago. Second, as you've seen, just the macroeconomic data, the U.S. GDP growth in the fourth quarter was a little over 3%, which is good for all industries. Finally, as we talk with our customers, and we just had our large dealer meetings, more and more fleets are saying, they feel good about it. Construction is going to be, home construction starts over 1 million, 16 million car production estimated this year, that they're starting to say, "Let's start to replace our vehicles. We feel good about our own industry. We see our end customers are improving their business." So I think a steadily improving path, positive. So we feel good about it. Okay. Thank you very much. You bet. Thank you. Your next question comes from the line of Andrew Pratt Lewerke from Barclays. Morning, Andrew. Morning, guys. Solid quarter. Thank you. Mark, can you talk about your rest-of-world sales or your other sales? Those sales have continued to weaken a little bit sequentially. Do you think you are at a bottom in those markets now, and you should actually start to grow again in 2014? Maybe you could sort of parse out the regions for us and what you are seeing in the different regions. Okay. We look at rest of the world, or we look at them all as home markets. That is how we look at them. Russia continues to be a very strong growth story for us, and 3,900 units, primarily DAF, put some Kenworth trucks in there, adding new dealers. We are very excited about that market. Taiwan, we are now the second-largest market share in the sort of 16-ton market, and that continues to grow. Mexico is down a little bit because of some, let us call it economic changes that they are implementing. But we think that is starting to stabilize. Colombia, which is a very strong market for us for most of the last decade, has declined because they finished some major infrastructure projects. I think that is now probably at a stable platform, and hopefully, that will improve. Australia actually is improving again. It has been pretty good through all the last decade. For us, we see that is a very important part of our business, and probably we might be at the low point and look for some positive improvement there. That's helpful, Mark. Maybe if I could shift to Paccar Parts. For the year, you had about 6% growth, but your fleet continues to get larger. You've talked about adding distribution centers. You've added them. We're going to see some growth here in the overall NAFTA market. Can we see some acceleration in that business in 2014? Should we see some margin improvement still? It's been good margins, and it has been improving, but could we see that continue? Yeah. They're very proud of the team at Parts. Record total revenues, $2.8 billion. As you've indicated, they continue to grow. We're looking for some growth again this year of hopefully at least 5%. We did add a number of parts distribution centers. Our largest one in Eindhoven opened up about a year ago. We continue to examine, do we need additional ones? We have a new PDC in Brazil, connected with the factories. That's starting its operation. So these parts guys are always coming up with very innovative ideas. We have a record truck market out there in terms of number of vehicles, and they're doing a very good job of growing the business into other businesses, whether it's competitive brands or bus business, trailer business. So that's a big driver for us, and at least 5% growth this year. Thanks, Mark. Appreciate it. You bet. Thank you. Your next question comes from the line of Ann Duignan from J.P. Morgan. Good morning, Ann. Hey, it's Mike Shlisky filling in for Ann. Good morning. Okay, good morning. Kind of a two-part question here on Brazil. Can you maybe share with us what market share of retail sales do you expect to get by the end of the year in 2014? I guess part two of that would be, would the share of factory shipments be above retail for 2014 given the ramp here? Yep. Our share, it's early days, but 1%-2%, I think is a very reasonable target. As soon as we get the orders in, we build them, we ship them, we sell them. So it's a pretty quick process for us in Brazil. Got it. Well, thanks so much. You bet. Thank you. Our best to Ann. Yep. Your next question comes from the line of Jerry Revich from Goldman Sachs. Hi, Jerry. Hi. Good morning and good afternoon. Mark, congratulations. Thank you. A bit of an improvement in the market share and financial position since 1997, I think. Been a great company for 108 years, and it is a great company going forward. Congratulations to Ron and Bob. I am wondering, Ron, if you could just talk about what are the biggest strategic priorities that you see for the business over the next three to five years? Obviously, we are building out the business in Brazil, but I am wondering if you just expand and talk about additional opportunities that you are evaluating. Let me jump in on that. That will be a great topic probably when I am not actually in the seat. Let us take that offline. All right, fair enough. Mark, for the parts business, can you just talk about the trends that you're seeing in Europe? Obviously, everyone's focused on the pre-buy, but the underlying freight volumes have actually been really positive over the past couple of quarters. Are you seeing the same thing in your parts business? I guess what does that mean for your expectations of production ramp over the course of the second quarter? For parts? Sorry, for trucks. If the parts business is picking up steam, presumably we could see orders picking up for new trucks once we get through the overhang. Well, let's just start with parts, but parts in Europe has done a very good job, and as I said, they've got some new infrastructure and new programs there. The dealers have completely embraced a lot of the new innovative programs that they've introduced. So we're encouraged with parts, and we think that'll have some growth this year. I think, on the truck side, everybody, the whole industry benefited from the pre-buy. I think a number of the manufacturers are back to production levels that they were at about a year ago. As Europe gets a positive GDP, we expect to gradually increase production. Mark, in terms of the Paccar Parts performance in the quarter, was it stronger in Europe or North America? Can you just give us some color? It was pretty good all the way around. I think all the different areas made a good contribution. Lastly, in the U.S., your trucking customers have had trouble pushing price increases, or at least as anticipated in 2013. I am wondering if you could talk about what you are hearing from them about the pricing landscape for their business at this point as they set some of their annual contracts in the spring. I think, basically the customers are doing well. Some of them have seen profits down from a year ago. Some have seen them up. But I think overall, as the U.S. and Canadian economies achieve some strong GDP growth, I think that will be good for our customers, and I think they are optimistic. They have been through some tough times, but over the last year or 2 or 3, things are improving. So you are starting to see some pretty good results from a wide range of industries, and most of them have some sort of trucking impact in terms of deliveries or shipments or whatever. So I think our customers are feeling pretty good. Okay. Thank you. You bet. Thank you. Your next question comes from the line of Joel Tiss from Bank of Montreal. Joel, good morning. Hey, how's it going? You have your Seahawk garb on? Yeah, of course. It's a shame you don't have the pleasure of Navistar competing in Europe. I'm sure they'd find a way to shift those L5 engines all the way out until 2017. I'm not sure. Anyway. I wonder if, since you sound like you're being a little more generous than usual on trying to help us out, can you help us understand some of the mix implications for 2014? Everyone's asking about margins. I think this would help to clear it up. The growth rate of parts relative to Europe, relative to the U.S., and what all those pieces do for the mix. Well, I think we're looking at, as I said, 5% plus growth for Paccar Parts, and we expect to see that both in North America and in Europe. I do not know what else I can really add in terms of that. Kenworth Peterbilt, we're looking for some steady growth in terms of increased production. DAF, we think we've covered in pretty much good detail, and we continue to have some growth outside of Western Europe, so that's encouraging. To say we just launched a whole new range of vocational vehicles just in the last few months at Kenworth Peterbilt and DAF, and I think the timing appears to be very good as the, let's call it, the construction markets and different applications are starting to see some improved economics. We feel good about that also. Is the faster Kenworth Peterbilt growth relative to DAF good for margins? Well, I think all of our truck groups have good margins, so we look to improve every one of our truck brands. All right. It was worth a try. Even, I guess your seat is still warm, so I want to ask if there's any chance to You're wonderful. use the balance sheet a little more aggressively. Is there any updated thinking? Lots of companies have piled up the cash, and they're looking at other ways to deploy it. I know you've spent a lot of time building out engines, and you're building out Brazil and the rest of the planet. Are there any other things on the horizon? Well, we've had a strong return to our shareholders, very important platform for our company for, let's say, 108 years, and that'll continue to be a main driver for Paccar. I think we've had steady growth in our quarterly dividend program. When appropriate, we've had the special dividend. I think that our cash position is pretty much in line with where it's been for a number of years. Yes, as you say, we have invested a lot in many parts of the world, and I think that'll start to really generate some positive benefits for the company over the next few years. All right. Thank you. Thank you, Joel. Your next question comes from the line of Steven Fisher from UBS. Good morning, Steven. Good morning. How are you? Good, thank you. Just want to gauge your confidence in the 150,000 Brazil market forecast relative to your confidence in the growth in some of the other markets. Well, last year, as you know, was 149, so we said it's going to be comparable. We are increasing our production rates, as I mentioned. Brazil certainly has been in the news in the last few months about different macroeconomic policies. In terms of the effect on us, it probably not that much because we're really just growing our business right now. People like the DAF products. Our dealers are investing and putting in new service locations throughout the country. Obviously, we track what's going on at a macro level, but we continue to invest in Brazil, and we look at this as a 50 to 100-year Program, and we're excited about it. The more of your own company actions are going to be more impactful than what the overall market is there, it sounds like. Yes. On the vocational side of the new products you launched, at what point would you have a view on the traction that those new products are gaining in the marketplace? I think we're having already a positive view just in the last month or so, and it's certainly very early days. Certainly, on the dealer side and the customer side, we're starting to get some orders, and the product seems to be doing very well and meeting the expectations of what our customers expect. It's a little bit wider cab, very fuel efficient, very comfortable, and seems to be just what the customers have been looking for. Okay. Thank you very much. Thank you. Appreciate it, Stephen. Your next question comes from the line of Rob Wertheimer from Vertical Research. Good morning. Yes. Good morning. And congratulations, Mark. Just to expand on your comments earlier, you mentioned a little bit of a broadening out recovery in the U.S. Construction across different types of machines has had some pretty mixed results. What are your thoughts on whether you are actually starting to see a more sustained improvement in the construction vocational dumps and all the different kinds of truck serving the construction industry? Well, I think, two major ones. One would be home construction. The other one that's been in the news, obviously, is with the natural gas. Looking at home construction, it's rebounding at a reasonable rate. Everything that goes into a house is brought by truck. A lot of trucks are in that business, whether it's steel, brick, glass, sofas, white goods, whatever. I think that is very encouraging. On the natural gas exploration, that's, I think it's been pretty stable to a little bit lower in the last year or two. But I think home construction, very strong. Then on the cars, 16 million cars. Trucks play a very important part of that, moving componentry to factories, completed goods from factories to dealerships. We're encouraged by that also. Okay. Let me ask you a different question. You had a little bit of a pulse on R&D with all the emissions, and you did a seemingly very successful launch in the engines with a penetration type launch- Thank you and everything. Thank you. So really successful. R&D is coming down a little bit as a result. Do you think that this is sort of a temporary down and you have a couple of waves of investment to come as more, I mean, there is a little bit less tightness on the emission. There is always fuel economy, or do you think that was the pulse before and we are at a new level at this point, relative to sales? You are talking about the R&D expenditures? Yes. That is right. I think R&D, we've had so many wonderful products and projects underway in the last five-plus years. As we always do, we have a lot of programs going on right now. I think R&D might be a little bit lower this year than last year. As you say, we've concluded a lot of these programs. They're doing well, and it may be a little bit lower for the next year or so, but still at a very steady rate. Great. Thank you, and- Thank you. Thank you. I appreciate it. Your next question comes from the line of J.B. Groh from D.A. Davidson. Good morning, J.B. Hey, morning, Mark. Congratulations on your semi-retirement. Thank you. I just had a question on, you may have addressed this, but I apologize if you did. Go ahead. Can you give the penetration of the Paccar engines in North America currently and sort of what your goals are there? We did, and sort of high 30%, 37%. High 30s. 38%, and our goal is to keep growing it. I think as we look at the entire industry last year for North America, as we've mentioned this in the last year or so, the 13-liter, which is the engine that we have, of course, we just introduced a new 11-liter for Europe, and soon to be in North America. The 13-liter is about 50% of the market, and the 15-liter is about 50%. That seems to be holding very true, and we think that the 13-liter will continue to grow. We feel good about it, and we've now manufactured over 50,000 engines at our Mississippi factory, and it's doing well. Great. On launch. Thank you. Good. Then maybe one for Bob. Could you address what happened with that provision in financial services in the quarter? Is that just a true-up for the year? How did that work? Yeah, it really reflects just the timing of some recoveries on some previous charge-offs that we've had. Okay. Thank you. Thank you. Appreciate it. Your next question comes from the line of Seth Weber from RBC Capital Markets. Good morning, Seth. Hey, good morning. How are you? Pretty good. Congratulations. Thank you. Going back to a question about your customers. Fleet utilization is running very high. It's in the high 90% range. I mean, do you have a view of what the upward limit of that is, and do you get the sense that your customers are pushing that higher relative to prior cycles? Well, yeah, I think you're correct. Probably mid-90s, low to mid-90s. Sometimes it's a little hard to actually get an accurate number on fleet utilization. It's certainly higher than it's been because we've been through some challenging times, but starting a few years ago, I think fleets have focused on their improved fleet utilization. Obviously, there is an upper limit. It's hard to get more than 100%, basic math. I think that's one of the positive drivers for our industry in terms of orders. As I mentioned, the fourth quarter was 70,000 units for the industry. You get to mid-90s, and for a customer to grow, you've got to probably take on additional trucks. So I think that's another positive factor in our industry this year. Okay. Maybe just separately on the smaller customer, smaller fleet side, are you seeing anything with more available financing? I know obviously Paccar Financial or just across the industry, have you been noticing any loosening up towards the smaller operators? I think there's pretty good financing available out there. Certainly, we've got a great program with Paccar Financial. Then we have our leasing arm, which is doing very well and achieving strong results. And then, we see a few more banks coming back into the business. As the economy improves, everybody wants to get back into it. So I think for the small, the medium, the large fleets, there's certainly good availability for financing. Okay. Thank you very much. Thank you. Your next question comes from the line of Adam Uhlman from Cleveland Research. Good morning, Adam. Good morning, guys, and congrats, Mark. Thanks. Well deserved. Bob, Ron, congrats as well. Thank you. Sticking with the engine theme a bit. You sold 50,000 units in North America. It would seem as if some of those are starting to come into the out of warranty coverage. I am just wondering if that is a bigger factor in 2014 than it was in 2013 for the Paccar Parts business. No, it is a good question, but I do not think it really has any impact. No. We are still probably a little ways away from the positive impact on maybe parts and service side of it. Still really growing our population of engines, the way I would look at it. Okay. Got it. Could you guys comment on the impact of currency to the quarter for revenue and earnings? Yes. Sure. The impact on earnings was about $12 million, and the impact on revenues was about $80 million. All right. Thank you very much. Positive. Good. Thank you. Your next question comes from the line of Ted Grace from Susquehanna. Good morning, Ted. Ted, your line is open. Hi, Ted. This question has been withdrawn. Your next question comes from the line of Jeff Kauffman from Buckingham Research. Hi, Jeff. Hey, guys. Hey, Mark. Good morning. How are you? Pretty good. Thank you. Good. I wanted to dive a little bit deeper into the currency question, Bob and Robin, if I can. You said it was $12 million positive to earnings in the quarter. Could you differentiate that, say, your EUR exposure versus your BRL exposure? Then talk about, given the big moves we've seen in the currency markets, particularly emerging markets, how could this impact 2014 just based on your outlook? Well, the impact on the quarter, that $12 million is a pre-tax number, just to clarify. Right. The impact was mostly from the movement of the euro, and currently, our revenue stream from Brazil is low enough that it is not going to have a big impact on us, the movements of the real. Mm-hmm. Looking toward the year, you would say no real impact as you are ramping up Brazil? Correct. Okay. I was just thinking about cash. You mentioned, Mark, that maybe this year is an off year for R&D, but normally relative to your revenues, the spending is a little higher. Is this more of a respite for a year, and then the spending picks up a little, or do you think this is a good run rate for R&D for you right now? Well, I think right now it is probably a reasonable run rate. Then, in a year or two, you get into, call it early midlife updates on the vehicles. There is always engine work going on, and continue to look at enhancements to our facilities. But I think reasonable run rate right now. Okay, and final question. I am sure this is something you will hit at the truck show in March. What are the one or two new products that excite you most as you head into 2014? I think I mentioned earlier that the timing for Kenworth, Peterbilt, and DAF to come out with their new vocational vehicles, it seems to be, plus we have some great sales and marketing guys. I think they really hit the timing perfectly on these new products coming out. Okay. The MX-11. I think that is going to be a big win for Paccar for once again, for all of our truck guys around the world. Okay. Well, congratulations. Thank you. Best of luck, and we'll see you in March. Thank you. Thank you. Your next question comes from the line of Tim Denoyer from KSA Capital. Tim, good morning. Good morning. I had a couple of quick cash flow questions for you. I am wondering if you can help me understand the cash flow, operating cash coming from the manufacturing operation. I know you do not break it out that way, but if we look at the $2.4 billion of total operating cash flow, and take out the $300 million of finance income, $600 million of equipment depreciation, and it looks like you usually have about $200 million of residual value in deferred revenue. Are there any other big factors to consider when just trying to get at the manufacturing operating cash flow? Excellent question. No, I mean, that is- You've hit most of the Yep main segments. Okay, great. Then one other cash flow question. I noticed that you didn't buy back any stock in 2013 after buying back about $500 million in 2011 and 2012. Can you talk about why not? Obviously, you're still a very healthy cash position. Did you just not find We continue to evaluate it, and we do have authorization, as it makes sense to do it. Right now, we've been investing in new products and engines and factories and distribution centers, but certainly, an ongoing strategic road for us. Great. Okay, if I could throw this just one more in. You talked about the success of your nat gas products. Can you talk about whether or not you would consider taking some of your Paccar engines and switching those over to nat gas? Absolutely. We got great engines, and that's something that is always being evaluated. Any timeframe? No timeframe at this time. Okay. Thanks very much. Thank you. Appreciate it. Your next question comes from the line of Scott Group from Wolfe Research. Scott, good morning. Hey, good morning. Thanks. Mark, you mentioned a couple of times about the strong order momentum in fourth quarter. Can you give us a view on what you are expecting for first quarter order momentum? Certainly, the truckers are seeing tighter capacity and rates are starting to move up. Do you feel like there is any improving momentum on first quarter orders? I know it is early, but the range of 210,000 to 240,000 for 2014 is kind of wide. Do you have a view towards the upper or lower end of that range at this point? Well, I think as we are here on the last day of January, I think we will stay with that range, but I think your analysis is correct, and we look forward to updating you in a few months. You say we have got an important truck show coming up in probably about six weeks. We will get a better flavor then, but it looks encouraging. I will just put it that way. Okay. Just to follow up on that last nat gas question, what price do you think nat gas needs to be for that to be a competitive option? Is it losing some competitiveness with gas at $5 right now? Nat gas at $5. That is a real, excellent question. I think we have got probably a little more time than we might have on this call because I think the price of natural gas, the price differential to diesel is just one component of that equation. The other ones have certainly been discussed and debated and reviewed, and that is the infrastructure, the benefit, and the effects of improving diesel engines. The way we look at it is that we are very pleased to have a strong share of the natural gas market. It is still in that 1%-2% range of the total industry. As it grows, and we expect it will grow over time, we will look to grow our own business with it. That is a broad discussion that probably do not have time to do right now. Yeah. Just one follow-up on that point. Where do you see the spread right now in the cost of the truck for diesel versus nat gas, and is that starting to come in yet? One more time with that question. The spread, the difference between the cost of buying a diesel truck versus a nat gas truck right now, and is that coming in? Yeah, I think that cost is declining as we are getting a little bit more volume of installing natural gas onto our trucks, our chassis, and some of the suppliers are gearing up to improve the efficiency of making some of the componentry. So I think over time, that spread will decline, will decrease. Okay. All right. Thanks, Mark. Thank you. Appreciate it. Your next question comes from the line of Brian Sponheimer from Gabelli & Company. Good morning, Brian. Good morning. How are you? Pretty good. How you doing? Very good. All right. Question for you on just from a directional perspective, how you've seen used prices on some of your trucks over the course of, let's say, the last nine or three, six, and nine months. I guess take it from there. Okay. Yeah, used trucks are really both in North America and Europe. Our brands continue to maintain their strong position relative to the competition, and it's been really steady over the last year. So let's say a truck coming off a program in December, would you have been getting the same price for that truck in December, let's say, you would have gotten in April or May of this past year? Yeah. Yes, we would. Okay. All right. Thank you very much. Thank you. Your next question comes from the line of Tim Robinson from Susquehanna. Good morning, guys. Hi, morning. I was just wondering if you could give us an update on the investments you are making in the enhanced powertrain development, maybe give us a sense for the timetable. Yeah. We are working on the SuperTruck project with the government and Cummins, and that is exciting. We are looking at the whole, let us call it powertrain componentry and what we can do, either working with our suppliers or working independently on continuing to enhance and make it more efficient. I think that is about all we really can talk about. Got it. Then lastly, Paccar Parts, the margins were great all year, and it just looked like there was a bit of a tail off in Q4. I was just wondering, is there seasonality in that business that we should be aware of, or what drove the sequential decline there? There is really not that much. I would say each quarter has its own season, but we look to ramp up each quarter depending on that season. So that really is not a factor. No, I think there are just a lot of Paccar Parts business in the fourth quarter, and I think they did a great job of handling it. I do not think there is much to read into that. Got it. All right. Thank you very much. You bet. Thank you. 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.