Earnings Call: Q3 2012

Oct 25, 2012

Summary

Q3 revenue was $3.8B and net income $234M; 9M revenue and earnings grew strongly, with record shares for key truck brands. Q4 deliveries were expected to rise modestly, while 2013 outlook depended on macro conditions and a possible European pre-buy.

Good morning, and welcome to Paccar's third quarter 2012 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. Joining me this morning are Mark Pigott, Chairman and Chief Executive Officer, Ron Armstrong, President, and Michael Barkley, Vice President Controller. As with prior calls, if there are members of the media participating, we request that they participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. I would now like to introduce Mark Pigott. Good morning. Paccar reported good revenues and net income for the third quarter of 2012. Paccar's third quarter sales revenue were $3.8 billion, and quarterly net income was $234 million. An after-tax return on revenues of 6.1%. For the first nine months of this year, revenues were $13 billion, up 13% compared to the same period last year. Net income for the nine months was $858 million, a 20% increase versus the same period last year. Earnings per share for the first nine months this year were $2.41, an increase of 24% compared to the same period last year. I am pleased to report that the results for the first three quarters of this year are the fourth-best nine-month results in Paccar's history. In addition, Paccar's dividend increased by 38% compared to a year ago. I am very proud of our 22,500 employees who have delivered industry-leading products and services to our customers worldwide. Our dealers and customers in North America and Europe are benefiting from good freight demand and good freight rates, as evidenced by strong aftermarket parts and service business and excellent Paccar Financial Services performance. Customers are focused primarily on truck replacement as they navigate the uncertain global economy. Paccar delivered 31,200 trucks during the third quarter, about 17% lower than the second quarter. However, year to date, we delivered 12% more trucks than the same period in 2011. More good news is that Peterbilt, Kenworth, and DAF grew their market share to record levels as customers recognized the benefits of our high quality and efficient trucks. Paccar's retail share of the U.S. and Canadian Class 8 truck market was 29% for the first nine months. DAF's market share of truck registrations in Europe above 16 tons reached a record 16%. In the Andean region of South America, that's the region outside of Mercosur, Kenworth and DAF deliveries increased by 38% to record levels in the first nine months of this year compared to the same period last year. Looking forward, Paccar could deliver 1%-2% more trucks in the fourth quarter compared to the third quarter, recognizing that in Europe we have our traditional summer shutdown. U.S. and Canadian Class 8 industry retail sales are estimated to improve this year to a range of 210,000-220,000 units, up 9% compared to the 197,000 units registered last year. In Europe, the above 16-ton truck market is anticipated to be in the range of 215,000-225,000 units this year, compared to 241,000 units registered last year. Looking at the 2013 market, U.S. and Canadian Class 8 industry retail sales are estimated to improve to a range of 210,000-240,000 units. In Europe, the market next year for above 16-ton truck market registrations are anticipated to be in the range of 210,000-250,000 units as some customers may purchase Euro V vehicles ahead of the introduction of the Euro VI emission requirements in January 2014. 2012 has been a milestone year for Paccar as we've launched more new trucks than at any time in our history. Kenworth, Peterbilt, and DAF have updated over 60% of their product range with new fuel efficient, ergonomic, and I like to say stylish vehicles. At the IAA truck show in Hanover, Germany, DAF launched its newest model, the DAF XF Euro 6, which is powered by the fuel efficient PACCAR MX-13 Euro 6 engine. This is the most comprehensive design and development program in DAF's 84-year history. Customer and dealer feedback has been excellent, and I think some of you listening today have had a chance to be at that Hanover show and see the truck in person. DAF will commence production of this new model in the second quarter next year. The new Kenworth T680 and the Peterbilt Model 579 are now in production, and customers and dealers are very enthusiastic. Paccar is well positioned for future growth as the truck markets recover. It's also interesting to note, speaking of products, that the North American truck industry, 13-liter engines are now at 50% of the market, comparable to the 15-liter share. That's good news for our MX engine. Looking around the world, our business initiatives are performing well. Capital spending this year is estimated to be $475 million-$525 million. In 2013, we'll invest between $400 million and $500 million. Research and development expenses this year are estimated to be $280 million-$290 million. Next year, R&D will be in the range of $275 million-$325 million. Construction of our new DAF assembly factory in Ponta Grossa, Brazil, is progressing, and we plan to be building DAF trucks in Brazil late next year. There's a nice picture of the plant in the press release. CapEx will also continue to be invested in our regular product development programs. Paccar is enhancing its network of 15 parts distribution centers. We're building a new 280,000 square foot distribution center in Eindhoven, the Netherlands, to be opened next spring. We're doubling the capacity of our distribution center in Lancaster, Pennsylvania. We're also constructing a new distribution center in Brazil to complement our new DAF factory. Paccar Financial revenues were $274 million in the third quarter, compared to $264 million last year. Paccar Financial's third quarter pre-tax income jumped to a quarterly record $80 million, compared to $62 million earned in the third quarter last year. The record results benefited from growth in portfolio balances and a lower provision for credit losses. Paccar Financial, with its strong A+ credit ratings, has excellent access to the commercial paper and medium-term note markets. Paccar Financial has issued over $1.9 billion in medium-term notes this year. In conclusion, Paccar is enhancing its leadership position in the global truck market by investing in new geographic regions, building on the strength of our dealers worldwide, a robust finance company, and the highest quality products in the industry. Thank you. I'd be pleased to answer your questions. At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Andy Kaplowitz from Barclays. Morning, Andy. Good morning, guys. Nice quarter. Thank you. Mark, you mentioned delivering 1%-2% more trucks in 4Q. Can you talk about truck production in 4Q? Has it stabilized for you guys? We notice inventories are up a little bit as sales have fallen. How do we look at margins in 4Q? Do we have more absorption issues in 4Q than we did in 3Q, I guess, is what I'm trying to ask. Well, we're talking about 1%-2% more production in Q4. As I indicated, we have our normal couple week summer shutdown in Europe, as most companies do. We're past the summer, so we're just back to business as usual. Margins for the fourth quarter, I think will be comparable to the third quarter. And Mark, it's fair to say that the current production is set for what the current order rates are, correct? Yes, it reflects incoming order rate. Can I- That's with the higher market share that we've been able to achieve, which we're pleased about. Got you. Can I ask you about the seasonality of the U.S. truck business? It seems like since the recession, seasonality has been stronger than it was pre-recession. Do you guys see that? Do you expect orders to ramp up here over the next few months as the fleet guys get ready for the '13 trucks? Well, that's interesting you talk about seasonality. It's probably been dampened down a little bit since the recession because an important consideration would be the vocational market, particularly, let's call it residential and commercial construction. You had some of that, I think, not offset, but by the, let's call it natural gas, oil. I wouldn't call that seasonal, but that's offset it somewhat. As you've seen in the papers, there's some improvement in housing starts across the U.S. in particular, which is good. Still at relatively low levels, but certainly it looks like it's off the bottom. So we're seeing a little bit more interest from some of the major construction groups in getting some new vehicles. Okay. Thanks, Mark. I appreciate it. Yeah, you bet. Good questions. Your next question comes from the line of Andy Casey with Wells Fargo Securities. Good morning, Andy. Good morning, Mark. How you doing? Pretty good. You doing okay? A little bruised, but okay. Okay. Couple detailed questions for you relative to the 2013 outlook. Sure. The comment about a pre-buy in Europe, kind of widely expected. I am just wondering what sort of magnitude you are building into that industry forecast. Yeah. I think looking at the industry, probably in the 5%-10% range of our total industry outlook. Okay. Then, building off of Andy's question earlier, the 2013 U.S. and Canada industry sales outlook, could you comment on not so much your production, but what you think the impact of modest improvement in sales would have on industry production, given pretty sizable 2012 year-to-date industry overproduction on many measures? Well, I think that's a good question, sort of a relative question. I'm not sure that there's overproduction. Obviously, as we've talked the last few years, and you've been asking good questions, there's a lot of older vehicles out there. I think as I see many of our customers, the customers are doing well. They're very happy with our products, and that's contributed to our growth and market share. When I talk to them, there's a lot of interest in purchasing new vehicles. They've been, I think, more of a replacement cycle at this time. But as we have some general, slowly improving economic outlooks, whether it's housing or consumer spending, I think we may see a little bit of first replacement of older fleets and then possibly some expansion of those fleets. The companies that are operating today that have been around for the last decade are very well managed. They know how to analyze the market. They've got good customer relationships, and frankly, they would like to get some of the new products that certainly we've introduced over the last 12 months. Sure. I guess a follow-up on that. If we look at your fourth quarter production more on a daily rate as opposed to the quarter total- Sure Do you expect that probably goes up during the year? You are talking about fourth quarter of this year? Yes. We are anticipating building more trucks this quarter than last quarter. Right. I am just wondering, based on what you are seeing in both U.S. and Canada, as well as Europe actually, is that production in the fourth quarter kind of underproducing demand relative to what you are seeing to kind of rebuild backlog? We really match. I'm not sure what our competitors do, but we really match and align our production levels with incoming orders and having a reasonable backlog of demand. I think our production really reflects what the market is doing, at least for our customers, is all I can really say. Okay, and one last one for me. Sure. There's some potential short-term tax law changes out there. When you develop your total dividend payout in any one given year, do you consider things like short-term tax law changes? We certainly take into all the relevant laws out there and what will be the most beneficial for our shareholders. Absolutely. Okay. Thank you very much. Good. Hope you are feeling better. Thanks. Your next question comes from the line of Ann Duignan from JP Morgan. Good morning, Ann. Hi. How are you guys? Pretty good. Saw you had some good ink in The Wall Street Journal a few days ago. Well, I guess it's better than bad ink, isn't it? I guess so. My question is around your outlook for 2013, both U.S., Canada, and Europe. Could you just talk about what kind of macro environment is encapsulated in the low end of the guidance and the high end? I am just trying to understand as we go through the year, how your views might change. Yeah. I think on the macro side, it would very much reflect what is going on in total GDP for each of those regions, whether it is U.S., Canada, Mexico, or overall in Europe. You see the headlines as well as we do, particularly in Europe, of what is the next steps towards the resolution of some of the challenges throughout the Eurozone. I am not sure the final chapter has been written, and I do not even know what is going to be in that final chapter. So that will certainly have an impact on consumer confidence, how our customers are doing, freight demand. We follow the Maut kilometers driven through Germany, and they are better than the last few years, but certainly not at the levels of 2007 and 2008. It is one of the macro criteria that we track. And the good news is, I know our inventories are in very good shape. Our dealers are doing well. Our customers are doing well. But certainly, the macro will have a lot of impact on our business. So if people feel good, whether it is after the election or we get the fiscal cliff behind us in some way, shape, or form. People feeling good. They are probably going to buy more, they will build more, and hopefully that will drive demand for trucks. I hesitant to ask this, but what is your personal view? Do you think that we will see an acceleration in economic activity post-elections in Europe? My job is focused on building the best trucks in the world for the greatest customers and providing those services. I will have to take that offline sometime. Oh, okay. Let me ask a different one then that you might answer. Your assessment of the pre-buy in Europe. There's a lot of discussion around that, whether there will be a pre-buy or there won't be a pre-buy. We haven't any precedent for a pre-buy in Europe, albeit there have been tax incentives in prior cycles. But can you talk about what are you hearing from your dealers or what are you seeing that has caused you to assume there will be a pre-buy? Well, talking with particularly our customers, and we saw quite a few of them at the IAA truck show in the last month or so. There's a price increase of 14,000, 15,000 euros. So that's real. If you're a person operating trucks in your business, that's something you've got to be thinking about. I think that's going to be a very important consideration for a number of our customers if they want to have a pre-buy. As I think I mentioned to Andy, we're looking at maybe 5%-10%. It's not a large pre-buy if it happens. I think your assessment is correct. There typically hasn't been too much of a pre-buy. Each country takes a look at their infrastructure sort of separately and determines if they want to make any incentives for the customers to purchase greener vehicles. We'll just have to see how that shakes out. Okay. I'll get back in line. I appreciate this. All right. Thanks, Ann. Take care. Your next question comes from the line of Jerry Revich from Goldman Sachs. Hi, Jerry. Good morning, Mark. Hi, everyone. Mark, can you talk about your expectations for your Latin America and Australia businesses in 2013? Perhaps give us an update on order trends or how you're thinking about that, look broadly. Sure. Well, looking at Latin America, we'll be excluding Mercosur because we're just building our factory. The Colombia market has been very strong for us as they have transferred a lot of oil. They're building a pipeline now, so they're just coming out with some new regulations in the country of Colombia to begin, I think, some infrastructure investment, which will be good. I think overall for the non-Mercosur, it'll be maybe a little bit lower than it has been. What we're looking to do is offset that with growth. We're appointing new dealers. Our current dealers are investing in their territories. We've introduced the DAF product line in a number of countries in Latin America. I think overall, it might be a little bit of a slower market, but we're looking to see what we can do working with our dealers who continue to deliver and get a higher share in that region. In Australia, it's been good for us. They've had a strong market. It had a little bit of a slowdown, but now seems to have rebounded a little bit. Australia, the economy seems to be in good shape, so I think steady as she goes. Mark, is there a way to put the new locations in Latin America into context? How many are you expecting to add dealer locations in 2013 versus where you're running now? I would say probably, without putting a number on it, 10%-15% more locations would be in the ballpark. Perfect. Thanks for that. On capital deployment, you have just delivered major new products in the U.S. and Europe. I am wondering if you can just provide high-level view of where you are deploying your R&D budget over the course of 2013 and next couple of years, just from a high-level standpoint. You bet. As I mentioned, a milestone year this year. Great new product. Obviously, one of the major CapEx users next year will be building a beautiful factory in Brazil, and that is ongoing. Then we have our normal cycle of new trucks being developed and then parts warehouses. There are always lots of initiatives to keep our factories the most efficient in the industry and R&D centers. So that is kind of the high level, but I think primarily focused on factory Brazil, new products, engine development, pretty normal. Okay. Lastly, your comments on the North America production schedule for the fourth quarter implies, I think that you picked up some order share over the course of the third quarter because the industry as a whole has been out producing orders by about 30% in the third quarter. So they probably need to cut. Is that a fair comment? You've seen the industry order numbers. Have you picked up order share in the third quarter? Well, we picked up a little bit, but our dealers are in great shape. They have very low inventory and they're excited about these new products that Kenworth and Peterbilt introduced at Mid-America Trucking Show in March, and those are really coming into production now. So I think it's pretty steady with the third quarter. A little bit of improvement for Peterbilt and Kenworth. Thank you very much. Thank you. Your next question comes from the line of J.B. Groh from D.A. Davidson. Good morning, J.B. Morning, Mark. How you doing? Pretty good. You doing okay? I'm doing well. I just wanted to kind of square up these, sort of beat a dead horse here. The Q4 outlook versus one of the retailers had some pretty dour comments on Q4 sales. Is this just a truing up of their inventory levels? Is that what it is? I think those are coming down. I'm not sure who you're talking about. I know what we're doing. That's about all I can really say. Okay. Maybe you could help us on the provision for losses and financial services has been coming down pretty nicely. Sort of give us some insight there. That primarily reflects the portfolio performance as we progress through the year. Past dues at the end of last year were 1.5% for our financial services companies worldwide. At the end of the third quarter, that had come down to 90 basis points. Just as Mark mentioned, our customers are performing well, and we're seeing that in the performance of our portfolio. Okay. I know it comes out in the queue, but could you give us the breakdown between the truck sales and the parts sales? Sure, yeah. The truck sales were $2.8 billion in the third quarter, and aftermarket parts was $650 million. Great. Okay. Thank you. Appreciate it. You bet. Thank you. Our next question comes from the line of Joel Tiss from BMO Capital. Joel, where are you nowadays? Yeah, I don't even know myself. Well, wherever you are, you're doing a good job, I'm sure. Oh, yeah. I don't know. You haven't talked to my wife lately. I guess you're not going to answer this anyway, but What is it? Can you just frame for us what Brazil looks like in terms of, is it accretive in 2014? What kind of market share? Just so we can try to get a sense of where things are going. How big is it? No, it's a great question, and we're investing now, as you know. It's a $300 million investment, and I was just there a few weeks ago, and it's really shaping up. But it'll take a year to actually build a factory after we've had all the pre-construction work. So, we're looking to get a few trucks out next year. In 2014, we begin to ramp up. Of course, we're appointing dealers, and we've got some great dealers joining our team. We're looking forward to having them with us, and they're looking forward to selling DAF trucks. So 2014, you begin the ramp-up of production. I think it really has a tangible benefit in 2015, would be the pretty normal way when we're building and bringing a factory online. Then if we just wanted to think about 2015, I'm just trying to get, like, a normalized early-stage revenues, sort of $300 million-$500 million. You can make it as wide a range as you want, just to think about it. Yes. 2015, our goal for medium-term is to get up to 20% share, but right now we're starting at zero, so it's going to take some time to get there. 2015, why don't we say $200 million-$400 million? Okay. All right. Well, that's helpful. Thank you. You bet. Does the replacement cycle, the number of units in replacement demand go higher over the next couple of years as this big bubble of 2006 trucks come to the end of their useful life? Or does that really not affect it? It's smoothed out. You know what I mean? Your 200,000- I think they will certainly contribute to some of the demand in the marketplace. Whether it's a bubble, some of those companies that purchased in 2006 may not be around anymore. Depending on what total GDP growth is, that'll have an impact on how much freight's being transferred. I think it makes a contribution. Whether it's a bubble or not, boy, that's hard to tell. There's a lot of great customers with products they'd love to trade in right now, and having just talked with many of them in the last week or 2, they're saying first half of 2013, they're going to be really taking a serious look at starting to update and upgrade their vehicles. How hard is it going to be for one of your competitors who's been struggling with market share when they come back to the market with their new product, that's not all of a sudden the cheapest product out there anymore? How hard is it going to be for them to rebrand and to gain that share back? I'm not sure. That's obviously a great philosophical question and- All right what we're focused on is If you're in a good mood, don't give it a try this being a milestone year and best products we've ever had, we're excited about them and Dealers are in the strongest position they've been for years and years. We're going to keep focused on what we do. Right. Okay. Thank you. Good. Good to talk with you, Joel. Yep. Your next question comes from the line of Stephen Volkmann from Jefferies. Steve, good morning. Good morning, Mark. I, too, am going to focus on what you do. I had a couple of things to ask you, and I'm trying to think a little bit about kind of mix, I guess, as a way to put it as we go into 2013. The T680 579, how much of your North American production, just order of magnitude, could that be next year? I'd say it could be, for the whole year, obviously, we'll be looking to improve that through the year and we're ramping up production now. For the whole year, I'd say 20%-30%. Okay. My understanding was that that had been sort of specifically engineered to have sort of more commonality and better margins than some of your historical product. Is that accurate? It's the highest quality product, the most automotive, and certainly, there have been some lower costs associated with the design. Great. Okay. Yeah. That's helpful. On the DAF XF, can I think of that in similar terms? It's the highest quality, most automotive product, absolutely. It's also aligned with Euro 6, and as I indicated, there are some significant cost increases that the industry will face with Euro 6. So it's not quite the same, but fabulous new vehicle? Absolutely. Okay. Fair enough. What do you think the MX engine mix is in 2013? Again, order of magnitude in the U.S., sorry. Yeah. I think it will continue to improve. I am not going to put an exact number on it, but as I indicated in my prepared comments, to have the 13-liter now be essentially 50% of the U.S. and Canadian Class 8 market is a significant number. I think that may continue to grow, the 13-liter. As we tie our MX engine in with the new Kenworth and Peterbilt trucks, it is a very exciting, fuel-efficient combination for our customers. We are looking for steady growth. Okay. Are all those MX engines now coming out of Mississippi, or are you still getting some parts of some of them or anything from Europe? I think certainly early next year, it is going to be all out of Mississippi. You get parts sourced from different sections of the world, but you need to think of it essentially as a Mississippi engine. Okay. Can I assume the cost structure on an engine that comes from Mississippi is better than one that comes from Europe for you? Yes. Okay. That's why we built it in Mississippi. That's what I thought, but we just want to make sure we're all on the same page here. I appreciate that. My final one, just quickly. Sure. Some speculation about pricing pressure in the North American market because of the little bit of weakness we're seeing here. Any comment on that? I think margins for the fourth quarter will be comparable to the third quarter. I think if that's kind of reading between the lines of your question. I think our industry is pretty straightforward. When there's a strong market and good demand, margins tend to move up. When demand slows down, whether it's macro or micro, margins tend to move down. Excellent. I appreciate your answers. Good write-up. We appreciate what you wrote. Your next question comes from the line of Tim Thein from Citibank. Good morning. Good morning. Thank you. Just to follow up on that last one, Mark, can you maybe just switch over to Western Europe in terms of what you're seeing there on the pricing side? I do not know if that fits into your commentary with regards to margins in the fourth quarter, but what specifically you're seeing in Western Europe. If we can just quantify it in terms of what the average truck sales price change was in the sales bridge. I know that comes out in the queue, but I am wondering if you had that for the third quarter. Yeah, I think pricing is pretty flat in terms of in Europe. We have been very good. The DAF team has done a fantastic job of not only developing great products and services, but growing share. DAF is either number 1 or number 2 in every market, I think, except for Germany, or number 3. There is a lot of variables in Europe, and obviously, some of them affect the truck market in terms of what the customers are willing to pay for the product. I think it has been relatively flat. Okay. Got you. Back on the, you alluded to dealer inventories earlier, and I am wondering, based on what is included and what we can see anyway from the cash flow statement, it looks like wholesale receivable payments exceeded investments in new loans. Obviously, that reflects a weakening sales environment. I was wondering if we can extrapolate anything from that further in terms of dealer inventory levels, both either here or in Europe. Can you comment on that? Yeah. The number in our cash flow statement is a year-to-date number, and so I think if you look at that for the quarter, there actually was a reduction in the amount. We have seen dealer inventories in North America decline. Dealer inventories in Europe are steady, and they are in great shape. I mean, very well-balanced with the market demand. Okay. Right. I think it was actually a source of cash, though, right? In the third quarter? Third quarter, yes. Yeah. Okay. Yeah. Alrighty. Thank you. You bet. Thank you. Good questions. Your next question comes from the line of Jamie Cook from Credit Suisse. Good morning, Jamie. Actually, this is Andrew Buscaglia on behalf of Jamie. Or Andrew. Afternoon. Yeah. Congrats on a good quarter, guys. Thank you very much. Appreciate it. I just have a quick one. Can you guys comment a little bit on your, what you saw in material costs this quarter? Then just sort of walk through what you're thinking about it, into Q4 and then potentially into 2013 as you begin your planning process. Yeah. I think material has been probably relatively flat, within a narrow range. Of course, we track all the major indices for raw materials, and a lot of those have gone down as worldwide demand has softened. There's been a few exceptions, but a lot of that is offset because we have over 75% of our supplier agreements are long-term, so multiple year, which is a nice arrangement for us and our partners who are suppliers. What was your next question? Okay. Just to clarify, I know you said you have about 5%-10% baked in for the pre-buy in Europe. If we don't see this come to fruition, I guess we could assume, as the year progresses, maybe that your initial industry outlook might come down a little bit, or is that you're not expecting the pre-buy until later in the year? Can you just talk a little about that? Yeah. I think in terms of the pre-buy, you're absolutely correct. That would be third, fourth quarter of next year. On the positive side, we still may achieve that range if the general economy has some improvement. Of course, reading the press nowadays, in Europe, you've got limited growth, for many countries, but we're also looking at gaining some share. If the macroeconomic environment in Europe does not improve, then it may have an impact on the total truck industry, even if there is a pre-buy. So, there's a couple moving parts that have to take into account, depending on what's going to happen in the total market. Obviously, on a quarterly basis, we're going to be revising and updating our total industry forecast. All right. That's it for me. Thanks, guys. Okay. Good questions. Your next question comes from the line of Seth Weber from RBC Capital Markets. Morning, Seth. Morning. Thanks for taking the call. You bet. Happy to. I am down to one question here. You have done a nice job. Some of the expenses have stepped down here recently. Do you think that is sustainable going forward? I guess what I am getting at is, in a flattish build environment in 2013, would you expect margins to be flat or up? I think margins for 2013, our initial look is probably flattish. One of Paccar's strengths is excellent cost control and controlling our expenses. We are very diligent about that every single day, and we look to have a very low SG&A ratio. I think we will continue to focus on that every day and selling a lot more of these wonderful new products we introduced this year. Okay. SG&A may come back up from where it has ticked down here recently, so we may expect that to come back up next year. Well, it very much is going to be reflective of what's going on with the marketplace. We're going to be producing more units, reflecting a stronger market. SG&A will probably go up a little bit. Okay. Thank you very much. You bet. Your next question comes from the line of Alex Potter from Piper Jaffray. Morning, Alex. Morning. I had one question here on 13 versus 15-liter, and then I had a couple housekeeping questions. Sure. First, on the 13, I guess if we were 5, 10 years in the past, and I were to tell you that by today, the market would be 50% 13-liter, would you have been surprised that it had progressed that quickly? And if you look 5, 10 years into the future, where do you think that breakdown will be? Well, I'd have to get you on my strategic staff here, Alex. The vast majority of the world, in the truck world, 13-liter is the engine of choice when you look at Europe, Africa, Asia, South America. It provides a good combination, excellent combination of horsepower, torque, weight, cost, all the things you're looking for when you're operating a truck business. I think North America, U.S., Canada, Mexico, is just really moving towards a reflection of what's happening in the rest of the world. And I would expect that will continue. Now, there are some applications where a larger engine, a 15-liter, may have some advantages. You're talking about a lot of weight you're hauling or very arduous operating environment. There are certainly benefits for having that larger size engine. But for the vast majority of truck operators, 13 liter is what's driving the industry. If you have an 80,000-pound total payload in North America or 80,000 pounds in Europe or Asia, it is still 80,000 pounds, and everybody has mountains and long areas. 13 liter is probably going to continue to grow. You have good combination of torque and horsepower, and it is a great engine. Five, 10 years ago, we knew it was going to transition. I think it is probably moved a little faster than the industry anticipated. Okay. Fair enough. Then, housekeeping. Was wondering if you could give me gross margin in new trucks and aftermarket. I know you gave revenue already, but just looking for gross margin. Sure. Yeah. For the quarter, the truck gross margins were 7.2% and 34.5% for parts. Overall is 12.3%. Okay. Very good. Then could I also get deliveries by region, North America, Europe, South America/other? Can we take that one offline? We will take that offline. Sure. Sounds good. Thanks, guys. Good. Thank you. Your next question comes from the line of Adam Uhlman from Cleveland Research. Hello, Adam. Hello. First of all, on the inventories, I might have missed it, but why exactly have the inventories grown so much year to date relative to the second quarter? Yeah, I think two areas. One is in line with the rest of the industry. We have some engine inventory, anticipating the EPA13 transition, so it is very normal. This happens every couple of years as we go to a new EPA emission level. So that is a portion of it, and the other portion is some trucks, body builders getting ready for delivery that will be gone by the end of the year. So that is pretty straightforward. Okay. Now the emissions standard, the onboard diagnostics, doesn't seem to be that expensive. Is that correct, or is that a bigger price increase than I would've? No, I think you're correct. It's part of the ongoing program of producing a greener and greener engine, but this one is not as significant as, say, EPA10. Okay. A lot of work, though. Yeah, sounds like it. On the fourth quarter build rates, I am sorry, I am a little bit dense, but we are picking up a couple of weeks extra production in Europe relative to the third quarter. Does that mean that the fourth quarter production in the U.S. is going to be down, like, 15%? No, I think it should be relatively flat. Flat. Okay. Down in Brazil, I might be looking into this a bit too closely, but Okay Has the timetable changed? It sounds like now it is late 2013, the tail end of the year for the initial No, it's on schedule, and I think we had a good discussion a few minutes ago that in terms of having a real impact, it would be really 2015 because we'll be ramping up in 2014. But, no, it's going well, and it's going to be another world-class facility. I look forward to having many of you there and touring around to see what we're doing. Great. Thanks very much. Congratulations. You bet. Thank you. Your next question comes from the line of David Leiker from Robert W. Baird. Good morning. Morning, David. I just want to follow up on the last comment you made, Mark, where you're talking about U.S. sales or production here, North America production flat, essentially Q4 versus Q3. With your comment about industry volume, it looks like sequentially it is down pretty significant double digits. If you could reconcile those two, because it seems to be larger than just market share opportunities. Well, we've had, looking at U.S., Canada, Mexico, which has seen a little bit more of a slowdown, but U.S. and Canada is a little bit up, so overall it's flat. Europe is up, primarily because we don't have the couple week shutdown during our normal summer vacation schedule. Okay. But it seems like your 215,000 U.S./Canada retail sales number would imply a fourth quarter number versus Q3 that is down. Well, it might reflect that. I am really focused on what we are doing. Okay. Yeah. All right. Understand. Yeah. As we look at the, we have been talking about the last couple of years about the increased cost for emissions and the challenge in the market of passing that on. As Navistar comes in a market with a cost structure that is going to be more comparable to everybody else, do you think that is an opportunity to recoup some of those costs, or do you think that is an opportunity to continue to drive share? That is an excellent question, and I look forward to sharing the answer as time progresses. All right. Thank you very much. Thank you. Your next question comes from the line of Kristine Kubacki from Avondale Partners. Good morning, Christine. Morning. I just want to ask a question about, I guess, address a little bit of, as I perceive, a bit of a disconnect on your view between a flat market in 2013 in North America. I realize that you mentioned that customers are doing fine. But it seems like what we're hearing out of this at ATA and out of this earning season, both from public and private carriers, is that freight has definitely turned choppy. Rates are not doing so great, and costs are going up. I guess with all that said, it sounds like carriers are generally thinking CapEx is going to go down and not up next year after using bonus depreciation in 2011 and 2012 in a softer used truck market. Do you think carriers are just being too cautious, and they're really worried about the headwinds facing them right now and things get better? Or do you think that really that there is maybe downside risk to your estimate in 2013 that we could be looking at a down year-over-year versus flat to up? The carriers are excellent. We love our customers. You know that. Having been in the industry for 35 years, what I've been able to observe, and I know that you've been tracking the industry for quite a while, so you probably know the same thing, is that if you talk with those same excellent customers in August, I'm talking about in the U.S. and Canada now, freight was going up, good rates, fuel was up, but they passed that through. There was strong discussion about, boy, 2013 really going to be great. We're going to buy a lot of trucks. Now, fast-forward six weeks, and people are saying, "Well, fuel's gone up a little bit more. Not sure what's going to happen." Of course, everybody's spending a lot of time looking at the election and what's going on in their state and what's going on nationally. It is choppy, I think, to use your words. But fast-forward another six weeks, and you could be getting a story saying, "Things are now looking a little better. I think 2013 is going to be good." So what that says is, when things are going well, a lot of people think that it is always going to go well. When things are not going as well, a lot of people think it is never going to get better. What I found is that what makes this industry so much fun is that there is a cyclicality to it. Sometimes that is measured in decades, years, or months. I think with the customers doing well, you have seen many of them have reported in the last week or 2. Some of them have increased their profits, some have lowered their profits, but most have made a profit, which is the most important thing. Dealers doing very well. Strong absorption, parts and service business good, finance good. Lay the overarching opportunity of having a very old truck fleet, whether it is 6, 7, or 8 years, and you can get any of those numbers depending on who you are talking to. I think with some growth, housing market, general GDP, consumers feeling a little bit better, I think it could be a reasonable year next year. That is the way I look at it. Fair enough. Maybe if we get the right outcome in the election as well. Well, election, it is obviously every election is important for us. But at the end of the day, we have seen strong markets with all sorts of different types of leadership in Washington, D.C. When you talk with a truck, and it does not talk much, but if it is 8 years old, it knows it wants to get replaced. That is what we are focused on. Fair enough. Thank you. Thank you. Appreciate it, Christine Kubacki. Your next question comes from the line of Patrick Nolan from Deutsche Bank. Hello, Patrick. Good morning, everyone. I just want to follow up on the last question. Most of my other questions have been answered, but when you guys updated your Q3 guide in September, it was looking like your inquiries were actually tracking up pretty nicely sequentially. When we look at the industry orders, we haven't really seen a pickup there. How are the inquiries tracking now, and is there a disconnect? Are the customers really still kind of hitting you to get quotes, and you really think that if things do improve, we can really see the orders really get on the books really quickly? Well, I think as we've said, really for North America, we see Q4, Q3 pretty comparable, pretty steady. As we look at net orders on a quarterly basis through the year, they're certainly, for the industry, has seen a slowdown. Third quarter, the industry adjusted their build down from the second quarter. You also have to lay in, as you know, we've been able to pick up a couple points of share because of the great dealers and great products we have. If things get good again, the industry can certainly deliver. If things continue as they are, I think everybody has pretty much adjusted their production to reflect this build rate. I think, the guidance we gave for the third quarter, we're another quarter smarter now. I think right now we're looking at, as I said, perhaps 1%-2% increased truck deliveries production for us in the fourth quarter. Next year, I think could be slightly better both in North America and in Europe. That's helpful. Thank you very much. You bet. Good question. Your next question comes from the line of Jeff Kauffman from Sterne Agee. Jeff, good morning. Hey. Boy, you guys are popular. All right. Most of the good questions have been asked here at this point. Sure. If it's okay, Mark, I just want to get a clarification and then kind of an open-ended question here. You made the comment a couple of times that you're expecting to sell another 1% or 2% more with flat margins. Are we talking margin dollars or margin percentages here? Yeah, percent. Percent. Can I get your thoughts on the adoption rate of natural gas engines? Sure. There have been several very well-attended, and I think, excellent speakers at a number of natural gas conferences over the last few months, and we have been involved with a number of them. This is a great industry because, in many ways, we are really a leader, on particularly a lot of the environmental aspects. If you go back a number of years and start with hybrids, and I think on the car side, probably the Toyota Prius gets most of the credit for pioneering that, and I think they are still the largest seller of hybrid cars, I think, worldwide. There was a lot of discussion about how fast would hybrids take over, and you could read lots of different press, and they threw a lot of numbers out. At the end of the day, it is still only 1%-2% at that. There are a lot of reasons why it is not higher, but that is what it is. An interesting statistic, and I think it is accurate, but you can never tell, that less than 25% of all hybrid owners buy another one. What does that mean? I think if you look at, say, Apple computers, probably something over 90% buy another Apple computer. So the whole press got excited about it, and it is still good, and we still sell hybrid, and a number of our customers have great benefit from it. Then it goes into the electric introduction, and whether it is our government or other groups saying they are going to pour billions of dollars into electric cars, and there are certainly some real benefits to it. The early projections of strong growth have not materialized, and there have been obviously a lot of more challenges, and a number of companies have gone out of business, and the demand has not been there. Natural gas, 5 years ago, there was not a lot of discussion about it. Now, I think particularly for the U.S., there is a great discussion about being energy independent, which is wonderful. You did not see too many articles about the U.S. being energy independent 5 or 10 years ago, but now we are talking about it, which is great. Natural gas, I am very proud that particularly the Kenworth and Peterbilt teams, they are the market leaders. 40% of all natural gas heavy trucks are Kenworth or Peterbilt. We are a real leader in things like the waste haulage industry, but other industries. Certainly lots of press, lots of investment, lots of states have benefited from it. What is a long-term benefit, or what's the long-term growth of natural gas? I think like these other two, the hybrid, the electric, there's numbers of 5, 10, 15, 20% of the market will have it at some time period. We're not seeing it now. Maybe we'll see it in the future. Irregardless of what the market share is, I would expect that Paccar will be one of the leaders in that marketplace. Okay. Thank you very much for your thoughts. You bet. Good question. Your next question comes from the line of Rob Wertheimer from Vertical Research. Rob, good morning. Hey. Good morning, Mark. One question on the U.S. Outside of the biggest fleets, have you noticed any issues with, I don't want to say exactly getting financing, but because fleets have stretched out trucks, they may have a lower down payment available or a lower value of the trade-in. Even the used values are high, obviously, the trade-in may just be older and worth less. Is there any concern that the bigger fleets have the firepower to keep going and the medium-sized fleets don't? Is that an issue for you guys next year, you think? I don't think so. I think we've seen pretty readily available credit to our customers that want to buy trucks, really in all of our markets at this point. Credit availability has not been an issue. Perfect. Thank you. I don't know if you can find a way to answer or opine on this one or want to or not, but a lot of us have been a little bit puzzled with not so much Paccar build rates in North America, but industry build rates, which have come in, but maybe were a little slow to come in. Do you feel like there is any inventory overhang, and do you feel like that has the potential to affect pricing or not? I think our dealers, our customers, are in very good shape. If you're building a product and indicating it'll do X, Y, and Z, and then for whatever reason, it doesn't do X, Y and Z, it causes challenges within your markets at this point. Credit availability has not been an issue. Perfect. Thank you. I don't know if you can find a way to answer or opine on this one or want to or not, but a lot of us have been a little bit puzzled with not so much Paccar build rates in North America, but industry build rates, which have come in, but maybe were a little slow to come in. Do you feel like there is any inventory overhang, and do you feel like that has the potential to affect pricing or not? Well, I think our markets at this point. Credit availability has not been an issue. Perfect. Thank you. I don't know if you can find a way to answer or opine on this one or want to or not, but a lot of us have been a little bit puzzled with not so much Paccar build rates in North America, but industry build rates, which have come in, but maybe were a little slow to come in. Do you feel like there is any inventory overhang, and do you feel like that has the potential to affect pricing or not? Well, I think our dealers, our customers, are in very good shape. If you're building a product and indicating it'll do X, Y, and Z, and then for whatever reason it doesn't do X, Y, and Z, it causes challenges within your system, and that may be what you're hearing from competitors. Yeah. Okay. Just build rates were slow to come down. Well, okay, I'll think about that for a minute. So just in general, are you able to comment on whether you think pricing environment is as robust at this point as it was last year? I think the pricing environment for our industry was probably more robust in the first six months of this year and then has probably moderated in the last six months. Okay. Thank you very much. You bet. Thank you. Your next question comes from the line of Tim Denoyer from Wolfe Trahan. Tim, good morning. Good morning. Quick question on European orders. I realize that you're keeping production rates, or you're raising production in the fourth quarter, but can you talk about the order intake during the quarter? A lot of your large European competitors saw pretty substantial drops of around 20%. Can you comment on how you did relative to that? Yeah, our orders are pretty steady. For DAF Trucks, they are steady. We are seeing some growth in Russia. It is a market that is really starting to gather some traction. And of course, we sell also in the Middle East. We are growing in Africa. We have a joint venture assembly agreement in Morocco. And throughout Western Europe, it is obviously down from a couple of years ago, but steady. Then Central Europe, we see that as some areas that are growing. So overall, pretty steady for DAF. Okay, thanks. And one question on the U.S., with the fuel economy standards coming in in 2014, some of the OEMs have talked about introducing trucks that meet those early, even as early as the next couple of months. Can you comment on your plans for that? Yeah. You are talking about greenhouse gas and others. Right. We have been approved by the EPA for some of our vocational vehicles, so that is good. That was done earlier this month. So like everybody else, we are working on it, and I think are in very good shape. Okay. Thank you very much. You bet. Good question. Your next question comes from the line of Michael Sheridan from Longbow Research. Good morning, Michael. Hello. My question's been answered. Thank you. Okay, well, good to have you here. Thank you. Your next question comes from the line of Christian Frens from T.I.A. Crest. Yeah, hi. Thanks for taking my question, and congrats on the numbers. Thank you. Just three quick questions on my part. Just coming back to the build rate issue, which I think has been asked a couple of times already. Just to help me reconcile the ACT data, which shows build rates in excess of order rates for the industry, and I think would imply that industry production comes down in Q4. First of all, do you agree on that view for the industry? Then is Paccar different effectively because of share gains and maybe EPA13 or what have you? Just wanted to know if you could expand on that, and then I have two follow-up questions. Yeah, I think as we've shared, the Kenworth and Peterbilt, U.S. and Canada, comparable fourth quarter, third quarter. Mexico, slightly down. I can't really expound on what went into the ACT numbers. What's your next thought? Okay. The next question is very brief. Just your financial sub, how should we expect assets to grow into the final quarter of the year? Assets? Yeah, for the financial- I think there will be a slight uptick, probably, as we progress through the rest of the quarter. A lot of customers will be entering financing vehicles to take advantage of the tax benefits at the end of the year. The slight uptake being a couple of percentage points, single digit kind of thing? Yeah, something like that. Yeah. Lastly, just on European demand. The pre-buy discussion. I guess two things here. First of all, I was wondering whether you could clarify a little bit what, specifically for Germany, what type of incentives or early adoption incentives Germany has this year, and how that compares to the last time around. Second of all, I was just listening to the Scania call the other day, and they saw a weak Europe in September, specifically, it was mentioned. They also mentioned that the Middle East was turning down. I am just wondering why it seems that your view is a little bit different, or am I missing something here? Thanks. Well, I think Germany actually had an announcement during the Hanover Show, which they were having lower incentive levels, so that is all we can, and you were probably at the show, so that is all we can really comment on that. In terms of what our competitors are seeing, I do not really know. We can track what their market share is, and you can derive an answer from that. In terms of the Middle East, yes, it might be slowing down. The good news for us is that we are a relatively small player, so we see some incremental growth opportunities, which is good for DAF. You did not see a September drop in Europe? A significant. No, that's in the third quarter. That's behind us. We're looking forward. Okay, thanks. Thank you. That's my question. Our next question comes from the line of Robert Pickels from Manning & Napier. Good morning, Robert. Thanks for taking my call. Absolutely. Just a quick strategy question. In Brazil, it looks like your plan is to sort of build your own facilities and kind of organically try to penetrate that market, and it seems a little bit different strategy than some of the other efforts you've made, maybe in Europe, where you've maybe made some acquisitions. Can you just talk about that strategy, why you chose to build versus buy, or how that might change over time? Or just anything you can provide on that would be great. Thank you. Okay. Good question. I didn't know there was anybody available to purchase in Brazil. They typically are a division of a larger corporate entity, so I don't think any of those are actually for sale. Second, we've got what we consider the best product in the world. We're bringing the DAF product in there, and you've seen the wonderful success that DAF, through its products and its dealers and its customers, have enjoyed over the last 15-plus years. We're looking to certainly build on that. We've got a great group of world-class suppliers in Brazil that are enthusiastic about us beginning to manufacture in-country. We're also really able to take advantage of a new group of dealers who have experience in-country that are excited about being able to sell the DAF product. It seems to be the very logical choice is to grow organically in Brazil and all of South America. Okay, great. Well, thank you. You bet. Good question, Robert. Thank you. Your next question comes from the line of Satish Athavale from KSA Capital. Good morning, Satish. Good morning, Mark. Good to have you on the call. Thank you. Mark, can you comment on the cadence of production and sales expectations for first half versus second half next year? I think we'll see probably the first half might be comparable to fourth quarter. We're looking for some improvement in the second half. Okay, great. Thank you. Thank you, Satish Athavale. 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, and thank you, operator. Ladies and gentlemen, this concludes Paccar's earnings call.