Oct 29, 2013
Executives
Robin E. Easton - Treasurer Mark C.
Pigott - Chairman, Chief Executive Officer and Chairman of Executive Committee
Analysts
Stephen E. Volkmann - Jefferies LLC, Research Division Jamie L.
Cook - Crédit Suisse AG, Research Division Andrew M. Casey - Wells Fargo Securities, LLC, Research Division Ross P.
Gilardi - BofA Merrill Lynch, Research Division Andrew Kaplowitz - Barclays Capital, Research Division Ann P. Duignan - JP Morgan Chase & Co, Research Division Seth Weber - RBC Capital Markets, LLC, Research Division Jerry Revich - Goldman Sachs Group Inc., Research Division Joel Gifford Tiss - BMO Capital Markets U.S.
Steven Fisher - UBS Investment Bank, Research Division Robert Wertheimer - Vertical Research Partners, LLC Alexander E. Potter - Piper Jaffray Companies, Research Division Adam William Uhlman - Cleveland Research Company Ted Grace - Susquehanna Financial Group, LLLP, Research Division Neil Frohnapple - Longbow Research LLC Daniel Johansson Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated
Operator
Good morning, and welcome to PACCAR's Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's call is being recorded, and if anyone has an objection, they should disconnect at this time.
I would now like to introduce Mr. Robin Easton, PACCAR's Treasurer.
Mr. Easton, please go ahead.
Robin E. Easton
Good morning. We would like to welcome those listening by phone and those on the webcast.
My name is Robin Easton, Treasurer of PACCAR. And joining me this morning are Mark Pigott, Chairman and Chief Executive Officer; Ron Armstrong, President; Bob Christensen, Chief Financial Officer and Executive Vice President; and Michael Barkley, Vice President, Controller.
[Operator Instructions] Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. I would now like to introduce Mark Pigott.
Mark C. Pigott
Good morning. PACCAR reported good revenues and net income for the third quarter of 2013.
PACCAR's third quarter sales and financial services revenue were $4.3 billion, and quarterly net income was $309 million, an after-tax return on revenues of 7.2%. This is the best after-tax return on revenue in 5 years.
Net income increased 32% compared to the results generated in the third quarter last year. I'm very proud of our 22,700 employees, who have delivered industry-leading products and services to our customers worldwide.
PACCAR's third quarter truck results reflect improved reflect improved industry truck sales in North America and Europe compared to the third quarter last year. PACCAR is in the final stages of the largest new truck and engine family launch in our history.
In the next 6 weeks, we'll begin production of our new vocational vehicles, the Peterbilt Model 567, the Kenworth T880 and the DAF CF Euro 6. In addition, we'll begin production of our new MX-11 diesel engine for Europe.
Our new assembly plant in Brazil began producing DAF Trucks in early October and will gradually increase production over the next 18 to 24 months. The Brazil truck market, greater than 6 tonnes for next year, is estimated to be approximately 150,000 units.
I'm also pleased to note that PACCAR's manufacturing trucks on every continent, except Antarctica. Our customers and dealers are very excited about the many new vehicles and services that PACCAR is delivering to the market.
PACCAR delivered 35,400 trucks during the third quarter, a 2% increase versus the second quarter and in line with our projections. The U.S.
and Canadian Class 8 industry truck retail sales are estimated to be in the range of 205,000 to 215,000 units this year. The U.S.
and Canadian Class 8 industry truck sales next year are expected to improve to be in the range of 210,000 to 240,000 units, reflecting ongoing replacement demand and some expansion of industry fleet capacity. European truck orders jumped in the third quarter as customers purchased trucks ahead of the January 1, 2014, implementation of the Euro 6 environmental regulations.
Third quarter DAF truck orders increased by 70% compared to a year ago and were up 16% compared to the second quarter. In Europe, the greater than 16-tonne truck market is projected to be in the range of 215,000 to 225,000 units this year.
DAF deliveries in the fourth quarter will benefit from the pre-buy. I'd also like to note that DAF's new Euro 6 vehicles are receiving very good industry reviews, and customers are pleased with the new products.
Looking at the industry, it's anticipated that the greater than 16-tonne European truck market next year will be in the range of 200,000 to 230,000 vehicles. PACCAR's truck deliveries worldwide in the fourth quarter are expected to increase by about 5% compared to the third quarter.
Fourth quarter gross margins should improve compared to the third quarter, reflecting higher truck production. There are also a number of encouraging economic indicators in North America that should benefit truck demand.
First, residential and commercial construction activity is improving. Housing starts in the U.S.
are projected to be approximately 900,000 units this year. Second, North American auto production is expected to be over 15 million vehicles this year.
And third, freight tonnage in the U.S. is at a seasonally adjusted record level.
These economic improvements have enabled our dealers and customers to generate strong results. PACCAR Parts business generated record quarterly revenues of $715 million, an increase of 10% compared to $650 million in the same quarter last year.
PACCAR Parts quarterly pretax income was $107 million, an increase of 20% compared to $89 million earned in the third quarter last year. The excellent results were driven by strong freight tonnage and improved fleet utilization.
PACCAR Financial Services revenue were $294 million in the third quarter compared to $274 million in the third quarter last year. PACCAR Financial third quarter pretax income was a record $88 million compared to $80 million earned last year.
The excellent results benefited from growth in asset balances and the continuing strong portfolio performance. PACCAR's capital spending is estimated to be $425 million to $475 million this year.
In 2014, capital investment is estimated to be $350 million to $400 million. Research and development expenses this year are estimated to be $250 million to $260 million, while next year R&D will be in the range of $225 million to $275 million.
The positive contribution of all of the company's segments has enabled 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's average annual shareholder return over the last decade was 13.1%.
Shareholder return is 24.5% through September this year. PACCAR continues to enhance its leadership position in the global truck market by launching many new products and services and by continuing to invest in new geographic regions.
Thank you. I'll be pleased to answer your questions.
Operator
[Operator Instructions] Your first question comes from the line of Stephen Volkmann from Jefferies.
Stephen E. Volkmann - Jefferies LLC, Research Division
I was wondering if we could dig into the margins a little bit. Versus my model, they're a little better than I expected, which is great, obviously.
Mark C. Pigott
Good news.
Stephen E. Volkmann - Jefferies LLC, Research Division
And -- yes, of course, and was curious if you might be able to bucket for us kind of what's starting to go right on the margin front and how sustainable we think this is going to be.
Mark C. Pigott
Well, we indicated that we estimate that margins in the fourth quarter should be a little bit better than the third quarter. We have come out with a lot of new products this year, as you're aware, and we're starting to see some benefits from that.
Also, our customers, over the last few years, have done pretty well, so there might be a slight improvement in industry pricing, and working with our suppliers on reducing some supplier costs is having a benefit. So I think all in all, those are probably 3 primary reasons.
Stephen E. Volkmann - Jefferies LLC, Research Division
And is there any reason that any of those things should not continue to sort of improve as we get into 2014?
Mark C. Pigott
I think we're working hard on all 3 of those main avenues to continue that positive trend.
Stephen E. Volkmann - Jefferies LLC, Research Division
Okay, great. And then can I just ask you your view on what's happening in Europe?
And I guess specifically obviously sort of some eye-popping numbers on the DAF orders this quarter, do we pay all that back in the first quarter next year? Or how do you think that unfolds?
Mark C. Pigott
I think that order intake, if you -- well, obviously, you've have had some very good success as I think the entire industry has in terms of the pre-buy, there's a couple of other elements to consider. One, we're still waiting, as the whole industry is, for Germany to share their thoughts on any MAUT discount, so I look at that as a bit of an incentive to purchase Euro 6.
We expect that in the next month or so. So that'll be a benefit for the industry.
I think in terms of orders, we're finding very good success with our customers on acceptance of the Euro 6 vehicles. They perform well.
They have good fuel economy. They're attractive and continue to lower the cost of operation for our customers, so we take that as a good sign.
But you have to overlay that with what's happening throughout the Eurozone and some of the challenges ongoing. The U.K.
is having a remarkable uptick in their economic performance, and that's a strong market for DAF, and -- but -- we're looking forward to next year. We've got great products.
We continue to add dealers. We're growing in Central Europe.
We're growing in Russia. We're growing in Turkey, and so there's a lot of positive momentum for the DAF.
Stephen E. Volkmann - Jefferies LLC, Research Division
So just to be clear on that, you're saying you have some reasonable orders for Euro 6 trucks already?
Mark C. Pigott
Yes, we do. Yes.
Absolutely. Good questions.
Operator
Your next question comes from the line of Jamie Cook from Crédit Suisse.
Jamie L. Cook - Crédit Suisse AG, Research Division
Just a clarification. When I think about your margin performance in the quarter, your operating margin improved sequentially.
Your gross profit improved, I think, year-over-year, but sequentially, it was just sort of flat. So when you think about where we should see the margin improvement, do you see, going forward, it improving more on sort of the gross profit margin line or on the operating margin line or both?
And then I just guess my second question. On the pricing environment, as we look to 2014, do you think you'll be able to pass through the full cost of the Euro 6 price increase?
And then also your view on your ability to hold price and market share with Navistar, with the Cummins engine back in the market?
Mark C. Pigott
Okay. Well, with respect to the question about gross profit, when we talked about margins in the opening comments, we were talking about the gross profit will benefit, in the fourth quarter, from the higher production levels.
So that will pass through to the operating profit line. With respect to Euro 6, Euro 6 does have a cost uptick, and we're working with our customers and trying to realize what the potential of the product.
Product is great. The customers have received it very well, and we're excited about being able to offer that in the European market as we begin next year.
And then your final question about market share growth. We're and have been for 108 years are focused on high quality and great returns to our shareholders.
There's always competitors. Each of them have their own unique approach to the marketplace.
They come, they go, sometimes they even come back when you think they're gone. So I'm sure that we'll continue to have good share and great support from our customers.
Operator
Your next question comes from the line of Andy Casey from Wells Fargo.
Andrew M. Casey - Wells Fargo Securities, LLC, Research Division
A couple of questions. In the North American market, I'm trying to reconcile the difference between what we're seeing in some of the very strong indicators and industry orders up through September.
And we're hearing a lot of mixed signals from some of your North American customers. I'm just wondering if the normal order acceleration took hold so far in October.
Mark C. Pigott
We're seeing some improvement in October. I think you've accurately summarized the economic environment in, let's call it, the U.S.
and Canada. I think Mexico is a separate market again.
There is a lot of different types of signals facing our customers and their end customers. We're looking for some general economic growth to kick in, and that's going to -- that's more than just the trucking industry.
But we are seeing some improvement in orders. Once again, we've got a whole new range of Kenworth and Peterbilt products that have been well received, and our PACCAR engine is doing well.
Our customers are making money. Some of them are not making as much money as they did a year ago.
There are different industry factors affecting that. But overall, we have some positive GDP growth, which we are, this year, and we hope to have an improved GDP next year.
It should benefit all of us.
Andrew M. Casey - Wells Fargo Securities, LLC, Research Division
Okay. And then flipping over to Europe, if I could.
The orders, as Steve had said in a prior question, quite impressive. Did you continue to see most of the Euro 5 pre-buy, meaning against the Euro 6 standard next year, happening in the U.K.?
Or did that spread out into some other regions?
Mark C. Pigott
No, it was throughout Europe, absolutely.
Operator
Your next question comes from the line of Ross Gilardi from Bank of America.
Ross P. Gilardi - BofA Merrill Lynch, Research Division
Could you just talk a little bit more about your expectation for Q4? I think for sales to be up 5% how that would split out between the U.S.
and Europe?
Mark C. Pigott
Well, I think on the truck side, I think we'll see most of the improvement will be in Europe because of the benefit from the, call it the pre-buy. And U.S.
and Canada would be sort of in line with what's been going on. There's a few less production days during the quarter.
Then, of course, we have the parts and finance business, which continue to perform well and are achieving many record levels, and they're working hard to keep that going.
Ross P. Gilardi - BofA Merrill Lynch, Research Division
When you think about a 70% increase in orders, which is just a staggering number in Q3 for DAF, I mean, how are you positioned from a capacity perspective to fulfill those orders by the end of the year? And can you actually deliver some of those orders in 2014?
Mark C. Pigott
Well, we have increased our production rates about 4x in the last 2 months to meet that increased demand. Even at the production rates we're at now, they're still a little bit lower than we were back in 2007, 2008.
So we do have the capacity infrastructure. And obviously, it takes a lot of coordination, working with our suppliers, very good suppliers, and because they've got to ramp up recognizing that the first quarter next year will return to more normal levels.
So there's very much of an integrated logistics approach here.
Ross P. Gilardi - BofA Merrill Lynch, Research Division
I guess what I'm getting at is that could some of that 70% order -- increase in order intake spill over into the 2014 year?
Mark C. Pigott
Not per the guidelines that each of the countries have. I mean, the good news is that we're getting a very good response on the Euro 6 vehicles, and that is certainly the focus now of our customers and our dealers, who have been processing, as you've indicated, a lot of Euro 5.
And that has pretty much come to a conclusion and now people are saying, "Hey, I love these DAF Euro 6 vehicles. Let's start selling those and getting those in the factories."
So we're filling up the first quarter with Euro 6. Also, the Euro 5 will continue to be a factor outside of Western Europe.
So Russia, Turkey, Middle East, Africa, Australia, China, Taiwan. So that will still be an ongoing contribution to our production through next year and actually for probably 2 or 3 years.
Ross P. Gilardi - BofA Merrill Lynch, Research Division
Okay. And then just lastly on Brazil, how are you progressing with some of your dealer network?
And do you feel obviously that the long-term opportunity is enormous, but do you feel like the mood has changed at all given some of the concerns on the Brazilian economy?
Unknown Executive
No, we don't feel that the mood has changed at all. In fact, the heavier side of the Brazilian business is actually performing quite well.
We're very encouraged with the way things are developing on our project in Brazil. The dealer body is very active constructing their new facilities, training their people.
This week, all of our dealers are participating in the Fenner tran show in South America, and we expect to gradually improve our deliveries in Brazil over the next 12 months.
Mark C. Pigott
That's exciting, exciting times, and the truck market in Brazil is continuing to grow. We registered our first group of DAF Trucks a month or so ago, so that was a memorable highlight.
And the factory is good. I think there's videos and pictures on the Internet.
So it's going very, very well, and we'll be there next 50 to 100 years. We're looking forward to it.
Operator
Your next question comes from the line of Andrew Kaplowitz from Barclays.
Andrew Kaplowitz - Barclays Capital, Research Division
Mark, in the first half of the year, you guys saw a decent pickup in vocational truck activity. Can you talk about whether you've seen follow through in that activity?
Or maybe any falloff in construction maybe was a little bit soft in the summer?
Mark C. Pigott
The vocational, as you indicated, we have seen some improvement. We're also very excited about launching our new vocational products here in the next 6 weeks of Kenworth, Peterbilt and DAF, which I think will give us a nice boost.
And certainly, our dealers and customers are looking forward to it. There has been a little bit of slowdown in some of the vocational markets, but there's still a lot more demand than there was a year ago, so we're taking advantage of that.
So when we go to vocational shows, we talk with our end customers. They haven't been purchasing for a number of years, so they're excited to be back in the market, and they're very excited by the new products that we're launching.
Andrew Kaplowitz - Barclays Capital, Research Division
Okay, Mark, that's helpful. Maybe just a follow-up on another question, previous questions.
How do you plan for production in the EU given the spike you're seeing here? And then next year, you're forecasting relatively flattish market.
Does that mean that the second half of this year is somewhat flat with the first half of next year, but you'll have lumpiness within that production? Do you understand what I'm saying?
Mark C. Pigott
I do. It's a great question.
First of all, well, you plan it as far in advance as you can, and it's obviously an integrated program with our suppliers, as I mentioned earlier. In terms of the production for the second half versus the first half, I think the second half will be higher production than the first half.
And yes, I don't know, I won't consider it lumpiness. I consider it opportunity to make more trucks but...
Operator
Your next question comes from the line of Ann Duignan from JPMorgan.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Just to be clear, I know this question has gotten asked a hundred times different ways. But from everything you've said, Mark, we should be putting plus 70% in our models for DAF for fourth quarter.
Is that correct?
Mark C. Pigott
No, no, that is not correct. But it's a nice thought.
No, we're talking about overall 5% for the company. That's the -- that's our shared guidance.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Right. But DAF specifically, you're saying orders are up 70% and they have to be delivered before year-end.
Mark C. Pigott
They're up compared to a year ago. And -- but we've also increased through this year, so you have to take a look at the increase from the second quarter of DAF, which were up 16%.
And then obviously, the rest of the world, some are going up, some are going down. So overall for PACCAR, it's 5%, which is a very good, robust number, I believe.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Okay. It seems a little conservative.
And then just the cynic in me wants to say, customers are so excited about the Euro 6, why, are we seeing any prebuying at all?
Mark C. Pigott
Ann, you've been in this industry quite a long time. It's just the industrial pre-buy psychology, that's what people do.
Obviously, there is a price increase in the marketplace of between EUR 10,000 and EUR 15,000. So if you're a customer and that's a major consideration, you have to make the best business case for your own business.
That's typically why we see a pre-buy.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Yes, okay. And I was being cynical.
And your dealers in your Europe so, I mean, can you talk a little bit about where do the used trucks go? I've heard some dealers in Europe articulate some concerns that once these Euro 6 trucks roll out and come back to the dealers, they lose a lot of their potential and used equipment sales markets because a lot of European used equipment goes to Eastern Europe, goes to Africa, places that don't have ultra-low-sulfur diesel.
Are your dealers talking about that at all? Is that a potential issue 3, 4 years down the road?
Mark C. Pigott
There are some very minor discussion, but I think, as you pointed out, it is 3, 4, 5, 6 years down the road. Each country, and we're in 100 countries around the world, is proactively trying to meet North American and European environmental regulations.
So I would expect that a number of years down the road, there'd be more regions of the country that are adopting almost a global environmental standard. And so I think that the used trucks will have many happy homes wherever they go.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Okay. And just finally, real quick, in Brazil, are you hearing anything about higher interest rates or the potential for no tsunami [ph] next year given the fact that we have an election and interest rates are rising?
What are you guys hearing kind of from feet on the street tender on tsunami? [ph]
Unknown Executive
We're expecting the program to continue into 2014 but perhaps at slightly higher rates.
Operator
Your next question comes from the line of Seth Weber from RBC Capital Markets.
Seth Weber - RBC Capital Markets, LLC, Research Division
Just going back to the Europe production ramp in the fourth quarter, can we just -- how do you address that? Will you be hiring temporary employees?
And how should we think about the expenses related to managing that production?
Mark C. Pigott
Yes, we do flex our employment rate, utilizing some temporary workers, and that's a pretty common industry practice and been going on for quite a few years. And it works well for everybody.
And as I've indicated, the production increase from, let's call it, second to third quarter, it's probably 5% to 7% for DAF and then continue to increase that. So I think the 70% it's -- we're very pleased to get the number of orders, but I don't think that should be taken as a stand-alone number in terms of production increase.
Seth Weber - RBC Capital Markets, LLC, Research Division
Sure. No, I understand.
I'm just trying to understand if, I mean, if your expenses may flex up here in the fourth quarter, do they then come back down in the first quarter?
Mark C. Pigott
Well, they move sort of in sync with our truck production. So obviously, we're selling more trucks.
We're manufacturing more trucks, and we need more material and labor to -- in order to produce those trucks. So it moves in sync; don't think it's anything.
It's very normal.
Seth Weber - RBC Capital Markets, LLC, Research Division
It's not out of bounds with the normal...
Mark C. Pigott
It's very normal.
Seth Weber - RBC Capital Markets, LLC, Research Division
Okay. And then just on Brazil, can you just remind us what's your market share targets are for that market over the -- in maybe 2014 and over the next couple of years?
Mark C. Pigott
Over the next couple of years, as I shared in my opening comments, we're just looking for a steady, gradual growth, sort of 18 to 24 months. Longer term, as we said in a number of press releases, we'd like to achieve 20% share, which is our target in all of our markets, but it's early days.
We're pleased to be getting the production of DAF Trucks and we're just beginning the whole process. So steady as she goes.
Operator
Your next question comes from the line of Jerry Revich from Goldman Sachs.
Jerry Revich - Goldman Sachs Group Inc., Research Division
Mark, can you talk about your Parts business, really strong acceleration this quarter on a year-over-year basis, excellent performance. Can you just give us some context which regions were up more than others?
How broad-based is that?
Mark C. Pigott
Sure. I think the Parts team have done a remarkable job.
When you look at a couple of things of why they've been able to achieve that. First, we have the largest population of PACCAR vehicles in our history out running around between 1.5 million and 2 million vehicles, Kenworth, Peterbilt and DAF trucks.
Second, we've got the most dealers in our history. Third, we've increased share over the last number of years from, let's call it, 22% to almost 30% in North America and in Europe from, certainly, 10% to 16%.
So we just have a lot more activity out in the marketplace. Complementing that, the Parts group has -- have been very innovative in developing their TRP, their all makes brand, and also working with the customers you typically wouldn't think of, whether it's the bus market or gen sets or industrial equipment who need parts.
So they really had a broad approach to the parts marketplace. And we continue to add our distribution centers.
I know a number of companies seem to get a lot of press when they add distribution centers. Well, we're adding distribution centers.
We just opened up our largest one in the last year in Eindhoven, 280,000 square feet. We just opened up a new one in Brazil.
We just double the size of one in Lancaster, Pennsylvania. So you take all those very positive investments and approaches, and the result is you got a Parts business that is continuing to grow and generate good returns.
Jerry Revich - Goldman Sachs Group Inc., Research Division
And I guess using it as a proxy to understand where your customers are doing better than in other regions, is it stronger in Europe versus North America? Is it possible to break that out on a year-over-year basis?
Mark C. Pigott
I think North America is a little bit stronger. Europe is improving, but it has a little bit of the flavor of some economic challenge, but it's good all the way around the world.
Jerry Revich - Goldman Sachs Group Inc., Research Division
And, Mark, in North America, can you talk about, based on your conversation with customers, how you expect the order cadence to play out over the next couple of quarters? I know you folks are the first to adjust your build rates to any changes in customer demand trends.
So I'm wondering how do you see it beyond 4Q based on your customer conversations? How are the discussions going relative to your planned 4Q build rates.
Unknown Executive
Sure. In North America, the discussions are going very well.
As Mark indicated, generally our customers, their utilization rates are high. Rates are maybe not as great as they would like, but they're definitely looking at replacing the fleet and looking for some growth with economic growth.
Jerry Revich - Goldman Sachs Group Inc., Research Division
Okay. And lastly, Mark, you mentioned about the ramp higher in Europe that you're executing here.
How difficult is it to transition into the first quarter? I know you folks have done it countless times, but just help us understand how complex is that process and how challenging will margin profile be in the first quarter if it will be challenging.
Mark C. Pigott
I think the teams are very used to the ebb and flow of the industry and do it very, very well. We have a lot of great people working in.
Obviously, we also have a lot of good systems, whether it's the PACCAR production system, and we're also a leader on Six Sigma. So I think in just terms of building more trucks or building less trucks, that is part of what our team does.
I think, the first quarter will probably be more in line with the rest of the year excluding the pre-buy. So we're looking for a reasonable quarter.
Operator
Your next question comes from the line of Joel Tiss from Bank of Montréal.
Joel Gifford Tiss - BMO Capital Markets U.S.
So I just wonder if you could give us a sense of the cost that you spent throughout 2013 on your expansion that might be going away as we go into '14.
Mark C. Pigott
I think the -- well, we've kind of shared the R&D and the CapEx, and I think that shows a slight reduction, which reflects a lot of these projects coming to fruition. I think the other one is as we began to ramp up Brazil, there should be some benefit from the reduction or the elimination of startup and construction costs.
We've got a great factory there and starting to build trucks. So I think that'll have some benefits for the company.
Joel Gifford Tiss - BMO Capital Markets U.S.
And then as you look out, say, over the next couple of years, you still have quite a bit of cash. You're generating a lot of free cash flow.
You've done your Brazilian project. Can you give us a sense of what's kind of in the planning stages, or what are you thinking about over the next 5 years areas to expand into?
Mark C. Pigott
Well, we want to obviously keep all of our products leading edge. So that's an ongoing program for any company in the automotive industry.
We also want to continue to expand our services. We've got great success with our finance and lease operations, which we see has more opportunities.
And then you've got all of Asia, which we've had good success. We've been there for many decades, but it's still relatively small contributor to our overall profits and sales.
So that's got to be an area in a region that has a lot of potential if we can do it in a correct manner, and we've had a lot of time to study it.
Operator
Your next question comes from the line of Steven Fisher from UBS.
Steven Fisher - UBS Investment Bank, Research Division
Just regionally, the other category in the quarter I think it was down about 20% year-over-year. Can you just talk about what drove that?
Unknown Executive
Okay, you bet. Most of that was currency movements.
Steven Fisher - UBS Investment Bank, Research Division
Okay. So the underlying organic, was that up?
Unknown Executive
Our winds business was down a bit.
Steven Fisher - UBS Investment Bank, Research Division
Okay. And then, I guess, separately, can you just give us a sense of how many weeks of production you have in backlog today?
And then should we expect that, that would come down as you deliver the European pre-buy over the course of the quarter?
Mark C. Pigott
I -- we don't typically break out weeks of production. But I think in line with the rest of the European industry, we're essentially sold out in Europe through the end of the year.
And the rest of our production backlog is in line with what's going on in the industry.
Steven Fisher - UBS Investment Bank, Research Division
Okay. And then maybe lastly, can you just remind us how many units you expect to ship out of Brazil in the fourth quarter?
Mark C. Pigott
I don't think we've actually ever broken that out. It's just early days.
It's just ramping up the factory at this time. So it's --
Steven Fisher - UBS Investment Bank, Research Division
I thought the number was somewhere around like a few hundred. That's an order of magnitude?
Mark C. Pigott
I think it's in that range, yes.
Operator
Your next question comes from the line of Rob Wertheimer from Vertical Research.
Robert Wertheimer - Vertical Research Partners, LLC
Just a quick question on R&D. I know we asked you this, Mark, on last call and you sort of said you might get some small benefit.
We had 2 quarters of decently low R&D. Are you going to be in a mode where you're able to harvest a lot of the good investment you've made over the past couple of years and sort of stay at this level?
Or will it bounce back up?
Mark C. Pigott
Well, we've indicated for next year that we see R&D and CapEx will be slightly lower than what we're doing this year. But it's a very exciting industry.
You've got to keep investing. There's always opportunities to come out with new products.
We also have different regulatory programs that we're working with in different parts of the world. Greenhouse gas comes to mind, new engine and powertrain regulations.
So that all takes certainly a fair amount of capital and R&D. So I think in terms of harvesting, we look for these wonderful new products and services to generate good returns for our customers, our dealers and ourselves.
That'll be the harvest, the bountiful harvest.
Robert Wertheimer - Vertical Research Partners, LLC
And then just one minor one. Did turning on the Brazil plant make any impact on gross margin, either this quarter or will it next?
Mark C. Pigott
No, not really, no. And I invite you to tour the plant.
It's up and running. It's really looking good.
Operator
Your next question comes from the line of Alex Potter from Piper Jaffray.
Alexander E. Potter - Piper Jaffray Companies, Research Division
I was wondering if you could break out the percent of your production in Q4 that you think is going to be Euro 6 compliant versus Euro 5.
Mark C. Pigott
Well, it'll be a portion. We probably won't break that out, but we are making Euro 6 product in Q4, and it's going well, but it's a minority.
Alexander E. Potter - Piper Jaffray Companies, Research Division
Sure, right. Okay, fair enough.
Then I was just wondering also, kind of a philosophical question, on 15-liter versus 13-liter in the North America, I guess, trucking market in general, not just for your company specifically, I know that you guys are making your vertically integrated with regard to the 13. So trying to push production of the 13 or sales of the 13, you have an incentive to do that.
But industry-wide, do you think you're seeing a shift or I guess more regionalization among trucking companies and more preference as a result of the 13-liter?
Mark C. Pigott
That's a great topic. I'm glad you raised that.
Right now -- and we've seen this trend over the last 5 years. The 13-liter is about the same as the 15-liter in terms of industry market share.
That's for the whole industry. And it's interesting that there have been more new 13-liter engines introduced over the last 2 years than 15-liter from anybody in the industry as people -- and our customers certainly become aware that 13-liter has a lot of benefits.
The fuel economy is very good. A little lighter weight, it has the same durability, reliability, a little lower cost.
And essentially, it's the engine that is the high-end engine around the world in any region you go to, from Asia to Europe to Africa, South America. We just introduced our 11-liter, which we're beginning production.
It'll be installed in the DAF product this year. And we're even hearing now from customers that for vocational, the 11-liter may be the engine of choice for that application, where you're driving within a 50-mile radius from your home, your base, it's got a lot of power, a lot of torque.
And once again, it's a little lighter weight, a little lower cost, and it could be the solution that a lot of our customers are looking for. So I think like you see in the whole automotive industry, including cars, you're getting more power density and you see the car guys are now coming out with, I mean, even 1-liter engines and 2- and 3-liter engines, whereas 10 years ago, 15 years ago, those were 5- and 6- and 7-liter engines.
So we see that same thing going on in the commercial vehicles.
Alexander E. Potter - Piper Jaffray Companies, Research Division
Any willingness, I guess, to take a stab at what that 50-50 breakdown might be in 2014, 2015? Do you think -- how quickly do you think the 15-liter share deteriorates?
Mark C. Pigott
Well, I look at it on a positive side as how fast the 13-liter can grow. But I think if you look out 5 years, I think the 13-liter will continue to increase its share.
Operator
Your next question comes from the line of Adam Uhlman from Cleveland Research.
Adam William Uhlman - Cleveland Research Company
Mark, I was wondering if you could remind us what proportion of DAF build would be outside of the Euro 6 standards for next year.
Mark C. Pigott
I would say as we go forward, it's probably in the 15% to 20% range would be Euro 5 product and the remainder would be Euro 6 product.
Adam William Uhlman - Cleveland Research Company
Okay, got it. And then was there any impact to currency on earnings this quarter?
And then also how are you thinking about the tax rate going forward?
Unknown Executive
Yes, we -- the impact on currencies was fairly muted. We got some benefit from the higher euro on revenues and a bit on income, and the tax rate we expect for the full year to be around 31%.
Operator
Your next question comes from the line of Ted Grace from Susquehanna International.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
I was just wondering if you could maybe give us a little more perspective on how sentiment feels among your North American clients, starting with kind of the owner/operators versus small fleets midsized larger and then the private guys. I mean is there discernible differences in kind of how they're looking at 2014 and how much you characterize those?
Mark C. Pigott
Of course, the owner-operator market as we know it essentially has been amalgamated into fleets. So you're really talking about fleets, whether they're small, medium or large.
And we've had different regulations, and different federal guidelines have been implemented in the last 12 months that they're now taking on board, whether it's hours of operation or just how the vehicle is going to be performing. But it's a very resilient dynamic industry, great fleet operators, great fleet owners.
They've been around through a couple of pretty serious downturns over the last decade, and I think they're doing well. They're excited about the new products.
They're seeing some general growth in the economy. We've got the vocational side starting to improve.
Consumer size seems to be reasonable. So I think for North America, or U.S.
and Canada, I think it should be a good year.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Would you see any distinction between long-haul and regional guys or shorter-haul customers?
Mark C. Pigott
I think you could say there might be some distinction between truckload versus less-than-truckload, but I think that's been in play for the last decade or so. But I think the customers that we typically work with across the board are in good shape.
Ted Grace - Susquehanna Financial Group, LLLP, Research Division
Okay. And second thing I was hoping to ask is we saw the pretax margin -- margins for both trucks and parts.
Could you give us a sense for what the gross margins look like for both of those businesses?
Unknown Executive
We typically don't break that out the gross margins.
Mark C. Pigott
Yes, we don't break that out.
Operator
You have a follow-up question from the line of Joel Tiss from Bank of Montréal.
Joel Gifford Tiss - BMO Capital Markets U.S.
I apologize. I know you thought you were done with me.
Just one quick one there. Daimler has had a lot of success with this AMT transmission rollout.
And can you just talk about -- you mentioned that as one of your longer-term investment priorities. Can you just give us an update of what's going on in the market?
And how you think about being able to compete with that product longer term?
Mark C. Pigott
Yes, we've got 2 excellent transmission or gearbox suppliers, Eaton and ZF. Each of them has slightly different, although there some overlap in their approach in the marketplace.
ZF is our primary supplier for the DAF product in Europe and wherever else we sell. DAF and then Eaton would be primarily for Kenworth and Peterbilt.
And they've got products that compete very well against all of our competitors. And everybody's working on the same engineering premise in terms of making it truly an integrated powertrain from the engine, all the way back to the rear axles.
And I think the success that we're getting with the PACCAR engine integrated with ZF or Eaton is standing up very well. And we continue to have very good shares, so we're having good success.
So every automotive supplier is certainly evaluating their approach to powertrain and seeing if they can get a benefit for their customer.
Operator
Your next question comes from the line of Neil Frohnapple from Longbow Research.
Neil Frohnapple - Longbow Research LLC
What was the MX engine penetration rate in North America in the third quarter for Kenworth and Peterbilt trucks?
Mark C. Pigott
35%.
Neil Frohnapple - Longbow Research LLC
It ticked up from the second quarter?
Mark C. Pigott
Yes, very exciting, and we can keep working on it. Every year, we have certain goals.
And if you have a chance to go down to the Mississippi factory, I encourage you to. It's a beautiful facility.
Neil Frohnapple - Longbow Research LLC
Great. And then along those lines, what percentage of your North American production in the third quarter were for the new products?
I think you had mentioned 30% in the second quarter. Did that tick up also?
Mark C. Pigott
Yes, it did. Probably about 35% to 40%.
Operator
You have a follow-up question from the line of Ann Duignan from JPMorgan.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
I forgot to ask about natural gas. In the context of your MX penetration on the 13-liter, we're hearing some very positive things about customers wanting to at least try out the 12-liter nat gas, the Westport Cummins.
Can you talk about if that engine is successful, does that displace your 13-liter MX? Just talk about the dynamics there.
Are Kenworth and Peterbilt still even offering a 15-liter HPDI?
Mark C. Pigott
Yes, we are, and we continue to have about 40% share in the natural gas industry. So we're very excited about that.
And as that market grows, we expect to grow with it. Natural gas is about 1% of the total marketplace.
Customers are starting to invest. The infrastructure is in the early stages of being built out.
So we see that as an alternative fuel for customers that it makes sense for. And we're right there with it and, in fact, leading the way.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
But you didn't answer my question, Mark. The 12-liter Cummins Westport is the offering that customers are leading towards.
Does that displace the 13-liter MX?
Mark C. Pigott
Yes, it's a good engine, and Cummins continue to be a major supplier to us, a major partner. And we offer a variety of engines, but I think in the big scheme of things, everybody happily coexists.
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Would -- if that market took off, would you consider developing your own spark-ignited 13-liter?
Mark C. Pigott
There's always the opportunity to develop a whole new range of engines, absolutely.
Operator
Your next question comes from the line of Daniel Johansson from UBS O'Connor.
Daniel Johansson
I was wondering on the order intake, the DAF order intake being up 70%, did you say what the book-to-bill was?
Mark C. Pigott
What is our production versus that?
Daniel Johansson
Yes, exactly. I mean, what you produced in the quarter and how the orders relate to that.
Mark C. Pigott
You bet. Well, we've -- we're talking about globally that PACCAR will increase its production by about 5% with slightly improved margins in the fourth quarter.
We're seeing an increase in production at DAF, and we will complete building all of our Euro 5 vehicles for Western Europe this year but continue building Euro 5 vehicles for the rest of the world for at least the next few years.
Daniel Johansson
But did DAF get more orders in the third quarter than they produced?
Unknown Executive
Yes.
Mark C. Pigott
Yes, yes. And some of those orders were also for Euro 6, which we are producing now and in the first quarter also.
Daniel Johansson
I mean a big portion of DAF is U.K. I think around 20%.
And I believe U.K. has September 30 and not December 31 as the deadline, right?
Mark C. Pigott
That is correct, and we've essentially built all those vehicles for the U.K. We're still sound a little bit of a derogation.
Unknown Executive
We continue to build trucks for the U.K. with Euro 5 and Euro 6 in the fourth quarter.
So it's ongoing. But very good.
Daniel Johansson
Okay. I mean, in terms of your -- dealers are in general, they are independent, right?
Mark C. Pigott
That is correct.
Daniel Johansson
And what is the normal lag between registration and when you ship to your dealers?
Mark C. Pigott
It depends. If it's for on-highway or if it's for vocational, and they need to get a body.
So if a dealer gets a vehicle day 1 for on-highway, it can be registered into the customer's hand within a week or 2. If it's for a body, it can be anywhere from 4 to 12 weeks, depending on the backlog at the body manufacturer.
Daniel Johansson
So if we talk about the 2014 outlook with 2% to 3% down on midpoint, I believe, is that -- that is the registration number?
Mark C. Pigott
Yes, that's correct. In Europe, it's registration.
That's correct.
Operator
Your next question comes from the line of Jeff Kauffman from Buckingham Research.
Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated
A couple of questions. Can you give me an idea of what set of circumstances gives you a number closer to the $225 million under the range versus the $275 million under the range?
Mark C. Pigott
I think as most companies do when you're looking out over the next 14 months, we like to have a range that provides for a lot of different eventualities. But I would think that the range would probably be on the lower half of that.
Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated
Okay. And the tax rate, 31%, I think, was the guidance for the year.
I'm assuming that's based on your mix of global profits. Should I be thinking about, as I look forward, a different tax rate, 32%, 32.5% versus 31% kind of the range you think I should be thinking about given what you see right now?
Unknown Executive
Given our mix of global earnings, 31% is pretty close for this year. 31% to 32% next year, I think, would be a good way to think about it depending on global earnings.
Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated
Okay. What's driving that down is just a higher mix of European and maybe Brazilian earnings?
Unknown Executive
Yes, the tax rate in Europe is in the low 20s, so that's a mix.
Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated
Okay. And then just one final follow-up.
In -- well, let me go away from that gas. Now that the Brazil plant is open, you did say it was going to be a ramp.
You said no gross margin impact. But how should I think about the Brazilian plant impacting SG&A over the next few quarters as you do build up production?
Mark C. Pigott
I think as we look forward, we've had our dealer development people. We've got salespeople in place, so then we'll see some slight increase, but it's not going to be a major factor.
Operator
There are no other questions in the queue at this time. Are there any additional remarks from the company?
Robin E. Easton
I'd like to thank everyone for their excellent questions. And thank you, operator.
Operator
Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating.
You may now disconnect.