Paccar Inc (PCAR) — Q3 2015 Earnings Call Transcript

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR’s Director of Investor Relations. And joining me this morning are Ron Armstrong, Chief Executive Officer; Bob Christensen, President and Chief Financial Officer; and Michael Barkley, Vice President, Controller. As with prior conference calls, if there are members of the media on the line, we ask that they participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. I would now like to introduce Ron Armstrong.

Good morning. PACCAR reported strong quarterly net income of $431 million for the third quarter of 2015. This is the second best quarter in the Company’s 110 year history. Net income increased 16% compared to the third quarter last year. PACCAR’s third quarter sales and financial services revenues were $4.9 billion. Gross margins for truck, parts and other operations were outstanding at 15.3%. These strong margins were the result of our excellent product lineup and rigorous cost control generating an 8.9% after-tax return on revenues. This was the highest return on revenues achieved since the first quarter of 2007. I’m very proud of our 24,500 employees who have delivered industry-leading products and services to our customers worldwide. PACCAR delivered 39,400 trucks during the third quarter, a 6% increase compared to the third quarter of last year. The European economic and truck market outlook continues to improve. GDP growth expectations for this year are 2.6% in the UK, which is PACCAR’s strongest market in the region; GDP growth is also accelerating on the continent. Freight transport activity on German highways is up 3% year-to-date compared to the same period last year. DAF truck registrations in the European above 16 tonne market are up 30% year-to-date compared to a 20% growth for the market as a whole. We’ve raised this year’s 2015 forecast for Europe’s greater than 16 tonne market to a range of 255,000 to 265,000 units. We expect strong market conditions to extend into next year. Our 2016 forecast for Europe’s heavy truck market is a range of 250,000 to 280,000 trucks. DAF has begun construction of a $110 million cab paint facility in Westerlo, Belgium to support its future growth. The U.S. economic picture is also positive with GDP forecast to grow 2.5% this year. The housing and automotive industries are bright spots in the economy and create a large amount of freight. Housing starts are projected to grow 13% this year to 1.1 million, and the automotive industry is expected to deliver a near-record 17.2 million vehicles. U.S. freight tonnage is at strong levels. Our estimate of retail sales for this year’s U.S. and Canadian Class 8 truck market is a range of 275,000 to 285,000 units. For 2016, U.S. economists are forecasting 2.7% growth in GDP, 13% growth in housing starts, and another year of strong sales in the automotive industry, all of which is positive for freight tonnage and truck sales. Next year should be another strong year for the U.S. and Canadian Class 8 truck industry and be in a range of 240,000 to 270,000 units. Gross margins in the fourth quarter for truck, parts and other are forecast to be one half to one percentage point higher than last year's fourth quarter. PACCAR's global truck deliveries in the fourth quarter are estimated to be about 9% lower than the third quarter, reflecting increased holidays and lower build rates in North America. This is partially offset by more production days and higher bill rates in Europe. PACCAR's parts business generated record revenues of over $2.3 billion and record pretax profits of $430 million for the first nine months of this year. Profit is a 17% increase, compared to the same period last year. The strong results were driven by economic growth and strong freight tonnage in the U.S. and Europe and the many innovative products and services offered by PACCAR parts and our dealers. Excluding the effects of foreign currency translation, parts revenues would have been up 8% or $173 million for the first nine months of this year. For the third quarter of 2015, PACCAR parts pretax profit of $145 million generated an excellent return on sales of 18.7%. To support the growing demand for PACCAR and TRP branded parts, PACCAR parts will open a new 160,000 square foot distribution center in Renton, Washington in the first half of next year. PACCAR financial services third quarter pretax income was $93 million, compared to $97 million earned a year ago. Excluding the effects of foreign currency translation, profit would have increased by $2 million for the quarter. The portfolio continues to grow and perform well. PACCAR’s strong balance sheet and positive cash flow have enabled the Company to continuously invest in new products and facilities. PACCAR recently announced a launch of the PACCAR MX-11 engine in North America early next year. PACCAR successfully launched the MX-11 in Europe two years ago and has installed over 10,000 MX-11 engines in DAF trucks. Capital expenditures for 2016 are projected to be $325 million to $375 million, and research and development expenses are estimated to be $240 million to $270 million. These investments will further enhance our global product ranges, aftermarket support and our manufacturing facilities. In the third quarter, PACCAR repurchased 1.4 million shares of the Company's stock for $79 million. In September, the PACCAR Board approved a repurchase of an additional $300 million of common stock. PACCAR continues to enhance its leadership position in the global truck market by developing the highest quality products and services in the industry. Thank you, and I’ll be pleased to answer your questions.

Just related to the 2% growth outlook in Europe for 2016, which market or markets within Europe do you think still have the most upside relative to replacement demand potential?

Probably in terms of the growth percentage, probably the southern markets would have the highest growth prospects just because they have been relatively low, so I think percentage-wise that will be the case. Another opportunity for DAF is the Russian market which has been down a fair amount over the last couple of years and there is obviously potential for that to grow from a very low level currently this year.

And then on the buyback can you talk about how you decided on the $300 million number and whether you think there is any motivation there to make that materially larger and then potentially multiples of that number?

Yes, we have done $300 million over the last couple of times, it's a number that we feel very comfortable with, provides a reasonable horizon and if we see the opportunity present itself we’ll authorize an additional amount above and beyond that at the appropriate time.

Make sure where the stock is trading now, that’s not part of your thinking at the moment?

Yes, we obviously have bought back shares during the quarter, and with the additional authorization, we have the capability to continue to buy shares as we go forward.

So my first question for you is around the 4Q production outlook, so within the 9% year-on-year decline, I am just curious how you might frame that within the U.S. and Canada versus Europe?

So Europe will be up probably in the 30% to 35% range with the fact that we've got more production days and a higher daily build rate and offset by a similar percentage on the North American side reflecting increased holidays and lower build rates in North America.

And then my second question is with respect to what you guys are hearing from your customers. We have had a few big fleets decide to cut their 2015 and 2016 CapEx outlook saying I know the market is super fragmented, but I'm curious in particular about what you're hearing from your owner operator customers about their plans for spending next year in North America?

I would say most of our discussions with our customers, mostly the large fleet customers, their expectations are to buy a similar number of trucks next year as they've purchased in 2015. I think we’re seeing that in the code activity that's going on currently with Peterbilt and Kenworth as well as the order intake that’s coming in, so people are starting to make decisions about 2016 purchases.

Okay, thanks. I'll pass it on.

Nicole, I would add that we already have several of our large customer orders in the house. And those volumes are generally the same or larger than last year.

I'm wondering if you could talk about the R&D budget for next year. Obviously, you've given yourself room depending on end-market variability, but at the midpoint of the range is pretty good R&D growth within the context of mixed end-market outlook. Can you just talk about the potential programs that you're increasing spending on in 2016 versus 2015 and then any additional color on U.S. versus Europe that you might be able to share?

With so much of our product lineup now being global in nature, I see next year being somewhat like this year in terms of investing really across all elements of our products from continuing to enhance the individual component offerings within our various models at Peterbilt, Kenworth, and DAF. We continue to invest in our engine technology, obviously we’re launching the MX-11 in January in North America. And we have greenhouse gas requirements coming into play in 2017. So we’ll continue to invest in our engine technology, our engine efficiency; the engines are performing excellently in the North American market and have for obviously 10 years in Europe. So we continue to invest in those areas as well as new systems and enhancements to our manufacturing capabilities.

And then I'm wondering if you might be able to share with us your book-to-bill in the quarter in Europe and separately in the U.S. or if not, just maybe update us on how long your lead time spanned in the two regions?

In Europe, the order intake for this quarter is up about 30% over where it was last year. So we have a good solid backlog for the fourth quarter and as a result, we’re increasing the build rates. We've seen the industry orders in North America and that has reduced that window somewhat, and as a result, we've adjusted build rates in North America accordingly.

And then lastly, obviously the concern is what the margin performance will look like if we get to the lower end of your outlook for U.S. and Canada next year. But can you just talk about structural differences we should think about in your business this cycle versus last? I guess your gross margins are certainly higher than what most people would have expected in this cycle. Can you just help us understand how we should think about decrementals etc., if we get to the lower end of your retail sales outlook?

I think it starts with the engineering of the product, and our engineers with the development of the 2.1 meter cabs, and those products for Peterbilt and Kenworth, and the Euro 6 products did a fantastic job of developing optimal designs with the balance of cost and performance for our customers. The manufacturing building is excellent. So we’re in great shape from an operating standpoint, and the products are performing very well in the marketplace. So we feel good about structurally our position in our factories. Our suppliers are performing well, and we’re able to continue to make the 5% to 7% annual enhancement that is sort of our expectation for ongoing operating efficiency and overall operational improvements.

A couple of questions; one, the margin performance in the quarter was impressive and, in my opinion, relative to where the sales came in. So can you talk about what the drivers were behind that? Was there any material cost benefit? What was the FX, how did FX impact the operating margin? And then I guess just my second question is I know you said you are optimistic about 2016 based on what your large fleets customers are telling you. At the same time for the broader industry cancellations have picked up over the past three quarters relative to what you had seen on a normalized basis. So have you seen anything like that? Is that part of the reason why you're taking your fourth quarter production down? Is it just a function of people shifting delivery of trucks from the fourth quarter to 2016 or is it just orders going away at this point but you're confident that the customers will come back? Thanks.

Okay, I’m just going to try and tackle all that; so the first part about margins Jamie was really the benefits of a lot of different areas. Obviously, as I mentioned, it starts with great product and pricing has been solid for us in the third quarter compared to where we’ve been. So products continue to earn a premium in the marketplace. We are benefiting from somewhat lower material costs and commodity costs. We’re seeing the benefits of operating efficiencies in our factories, and the products are performing excellently in the marketplace, and all those really come together to generate the overall margin performance. In terms of cancellations, cancellations for us have just been very normal, I mean nothing to speak of that’s different than what we would normally expect. And in terms of timing of deliveries, obviously there was a large order intake in the fourth quarter of last year, the first quarter of this year, and now orders are being placed for 2016. So I think there is a bit of a lull in the build as we see it currently, but the prospects for 2016 are excellent.

And I am sorry, can you quantify the material cost benefit that you got in the quarter?

I don’t have those particular numbers Jamie, but it was a tenth or two of margin percent, I think.

And what got you the FX as well?

So the FX we continue to benefit from a fair amount; of our engine components that for North American build come from Europe, and so we benefitted from that during the course of the quarter.

But you won’t quantify the amount?

I don’t have that in front of me.

Ron, I just wanted to go back to your comments about U.S., Canada truck 2016 order placement looking like it’s good. Does that suggest that despite the production commentary that you gave earlier that we should expect a positive change in order trends for the last three months of the year?

I would say that would be the case. I mean, orders for the third quarter are at a 17,000-18,000 a month, so I think you’ll see an increase in that. As I know certainly that the Peterbilt and Kenworth numbers should increase from what they saw in the third quarter.

If we can revisit the question about the margin, it's clear you're expecting mixed market conditions. You had impressive margin performance in the third quarter, including an aftermarket parts margin improvement of 240 basis points year-on-year, which has stayed above 18% for the third consecutive quarter. What is driving that performance? Is it a structural change, or is it mainly due to pricing adjustments as you suggested?

No, I think it's more structural. Obviously, we just celebrated the production of our 100,000 MX engine in our Columbus engine factory. And so the population of MX engines continues to grow, and we’re seeing an increased percentage of MX engine part sales and other engine part sales in the market, and that is beneficial. Our team has done a great job of putting together some really innovative programs and offerings and leveraging their cost structure for their parts warehouse. So it's a combination of a lot of different elements, but I’d say that the increase in proprietary parts is a key part of it.

And then last question, it looks like you are projecting capital investments to go up in '16 versus '15. Is that driven by the projects that you talked about in your monologue or are there…?

We have the cab paint shop in Westerlo, along with several plant projects at Chillicothe and Denton. Additionally, there are product projects involving trucks and engines, and we are continuing to enhance our systems to advance our business. All these elements contribute to our growth.

Yes, just a couple of questions, just back on the Europe topic. Clearly, you’ve seen a lot of strength in Europe year-to-date. But you're forecasting a pretty significant deceleration in 2016, and I am just wondering does that reflect what you are seeing in your order book now or is that just conservatism?

If you consider the current market conditions, this is likely the best market since 2008 and ranks among the top five markets in the history of Europe. It looks promising, and we anticipate a growth rate of 1.5% on the continent while expecting strong growth in the U.K. This is our best estimate at this moment; we’ll gain more clarity with each report in the coming year, and we feel optimistic about the European market and its prospects for next year.

And then I am just wondering if you have seen anything in Europe, any type of change in order momentum or customer discussions in the aftermath of what's happened with VW in the auto space. And has that impacted really any of the cadence of what's going on in Europe, and has it opened up any type of market share opportunity for you over the next 12 months?

I would say that’s been a non-event from our market and our business perspective. It's certainly related to the automotive but no effect on our business.

And then I just want to make sure I understood your comments before on your approach in North America when you talked about 35% production changes. Were those year-on-year or sequential comments?

Sequential.

For both Europe and for North America…

Yes.

So Europe up 35%, North America down 35?

Yes.

I am wondering if maybe I can push you a little bit on some other drivers for 2016 just to kindly get your thinking direction?

Sure.

Directionally, I know you have put a lot of effort into bringing your parts distribution and all. Is there any reason that parts business would not be up again next year?

Yes, I think it's a lot of it is economic driven. It is the amount of freight tonnage. As I mentioned in my comments, freight tonnage in North America is strong, near record levels, and the same is the case in Europe. We monitor the month statistics and other freight metrics in Europe, and those are really almost at near-record levels. So as long as the freight movement is there, there is going to be a need to service and support the truck in keeping the uptime going. So we think with our innovative practices, some of the things that our team does with other fleet services programs, some of the online programs, that we can continue to grow our share of that aftermarket parts business as we progress through 2016.

And then I don’t know, maybe similar comments on finance; you are also, I think, penetrating a little more in that market?

As is typical during a cycle when things get really good, there are a lot more lenders that come into the market and think that they are going to be able to take advantage of that. So we are in that particular phase, and we continue to focus on what we do very well. We have a great customer support mechanism, we are focused on serving the commercial vehicle business, and our guys do a great job. We will continue to be in that 25% to 30% share of the finance market as we go forward.

And then just finally on the MX engine, I assume you would be expecting to sell more of those next year as a percentage total and maybe any thoughts on what types of volume the MX-11 might be able to drive?

The MX-11 is not as prevalent an engine in the market as the MX, as a 13-liter engine is, but now we have our own engine that we can offer in that range, and so that will add several percentage points to our PACCAR engine penetration as we get into the next year. So I think in the near-term we’d expect 40% to 50% of our engines to be PACCAR engines.

Just a couple of follow-up questions. First on North American pricing, in previous cycles as volumes started to come off from the peak, we saw pricing start to get weaker. What are your expectations for that as we go next year, as the market starts to move more towards a trend level over the next couple of years?

I think we are very comfortable with pricing being comparable to current levels. We are competitive in a marketplace; we got a great product, and our products realize a fair price in the market, and so I don’t see any significant price movement in the near-term at all.

And if I could just go back to the margin question again, maybe ask it a different way. So if next year Europe will be up a bit, that’s more vertically integrated market, so in theory the incrementals are better on that volume growth? And North America, based on your guidance, will be off a bit and then there is some cost savings on the gross margin line. Do you think that measures up to a kind of flattish gross margin next year? Or do you think gross margin would be down slightly if revenue declines a bit?

I would say it will track volume a little bit, but I would say it would be flattish margin achievement next year compared to this year.

And if I could just sneak one more in, what's your preliminary view on taxes next year as Europe becomes a bigger portion of the earnings?

Yes, we still expect the overall tax rate to be around 31%-32%, depending on the extra earnings and other factors.

Most of the questions have been asked already, but can you just comment on what you're feeling about dealer inventories? We've been hearing some chatter about inventories across the industry maybe getting a little bit elevated, are you seeing that? Or have you heard anything to that effect?

No, not at all. Our dealers are typically PACCAR dealers, and they have sort of the low industry average inventory levels, and we’re in that position currently, and dealers are in great shape. So feel good about where we’re at.

Going back to Europe, how much of the strength do you think is due to replacement demand versus improvements in the macro environment or the aging fleet? There hasn't been a cycle there. What's your opinion on this?

I think it's a combination of both of those. Just like we saw in North America, there is a combination of some pent-up demand as well as some capacity growth.

Could you just talk about used truck price in North America? What are you seeing in the market? We've heard some signs of deterioration in the last 30-60 days. Are you guys seeing anything similar and just any color you can add there and how that will potentially impact the new truck sale side?

Yes, I don't see used truck pricing having a significant effect on the new truck sales levels. I would say as the third quarter pricing was comparable to what it was a year ago, but you're coming into a period now where there is going to be more trucks in the market, and we’ll see how that will develop as we progress in the coming quarters.

And then do you have an updated industry outlook for heavy duty industry registrations in the South American market? I think previously you have mentioned 70,000 to 80,000 for 2015 and just any initial thoughts on 2016?

I'll let Bob talk to that.

We think that 70,000 to 80,000 is a good measure for the balance of this year, and we’ll probably experience a similar level of demand in 2016.

And then just one final housekeeping question. Of the 24,200 units in U.S. and Canada, do you have a specific breakdown by region in the quarter?

Between U.S. and Canada?

Correct.

I don't.

I wanted to go back to the earlier comment on what large fleets have been saying because I think other than Swift, actually all that have made 2016 comments have said that they're continuing to grow their fleets next year in addition to normal, and some have even said accelerated replacement to get the average age down. So with that dynamic and then looking at your forecast for next year to get the retail sales decline in the industry, is there a bridge between those two things? Maybe just a deceleration in fleet growth, so 2015 was a very healthy year of expansion, next year is going to be good but just not at 2015's level?

I believe that is a reasonable perspective. Our discussions indicate that people will likely invest based on their experiences from 2015. The pace of investments may be more measured due to the significantly higher order intake in the fourth quarter of 2014 and the first quarter of 2015.

And then just based on your prior cycle experiences, it would seem to be unusual to have that sort of commentary from the large fleet, even though they are a small piece of the industry, directionally they're helpful to get those comments. And then expecting there has been whispers that volumes are down 15%-20% next year, that just seems too great of a disconnect. Would you generally agree with that view?

Our thoughts are as long as the economy is in that 2% to 3% growth and there is continued strong housing and automotive activity and consumer spending is up 3% or 4% year-on-year, I think the fundamentals of the economy and therefore the effects on our business are all good. So I would agree that 15% to 20% is probably overly pessimistic.

I was wondering if you can comment on, I guess just give an update on Brazil. Obviously, macro down there, it seems like things are pretty much coming apart at the seams, but less of the material issue for you guys since you're growing off a non-existent base. But I guess just maybe an update on how volumes are ramping down there, I guess dealer development, and then maybe South America more broadly speaking as well?

Yes, I feel very good about the progression our team has made. Our team is very solid, we just recognized as having one of the top truck models in the marketplace. And yes, the market is a difficult market, but our team is growing and establishing the footprint and doing all the things necessary to position us for long-term growth in that market. Bob, do you have other things to add?

We’re continuing to add dealers even in a very difficult market. They are continuing to invest in their footprint. We will be introducing some new truck models at the large South American truck filled FENATRAN next month. Our production volume is small, but it is growing slightly, and the fundamentals in Brazil are difficult right now, but the long-term fundamentals for trucking are very good.

And then I guess one question on the truck cycle in North America then I’ll pass it on. Shifting specifically to medium duty, there has been some commentary regarding I guess sustained power of the medium duty market maybe not getting whipped around as much as the heavy-duty market. Would you say that that’s generally consistent with the way you guys are viewing things looking into 2016?

Yes, I think that traditionally has been the case, and I think that’s how we think about as we go forward that the ups and downs of that market typically are a little more muted than the heavy-duty segment.

A quick question for you; I mean you gave some detail on the 11-liter which seems to be very successful in Europe. Do you happen to have the current mix? Has it reached its natural level in Europe or is it still growing and the potential for the U.S. is a follow-through?

Yes, so I think it hasn’t reached the total potential in Europe. I think there, as time goes on and greenhouse gas requirements and fuel efficiency expectations increase, we’ll see more and more downsizing. The MX-11 has capability to go up to 430 horsepower and 1,550 foot pounds of torque. So it's a very capable engine. The customers that are using it in Europe are very satisfied with the capabilities, and I think we will continue to see a migration to a higher percentage. And it's about 25%-30% of DAF’s build at this point. We’ll ramp that up in North America as we go and I think as more customers experience its capability, you’ll see just like we’ve seen with the MX-13, we’ll see a progression of more and more customers taking that engine on.

Perfect. Is that solely on sale in 1Q or is it going to be a staged ramp?

No, it will be a ramp-up during the course of next year.

And then if I can ask one more, in Europe could you speak to your share? Your share gains, is that geographic more or is it gaining penetration in truck versus tractor you think for a long time? Or is it maybe if you could give us any color on that? Thanks.

Yes, I think it's really across almost all the markets. 2014 was impacted by the Euro 5 pre-buy, which was really across most of the geographies. And so we’ve seen a recovery this year across all; they almost were up about one percentage point across the breadth of Europe and we’ve seen similar progression in most countries.

First, it looks like you did take build down in September in Class 8 for U.S. and Canada. So just whether or not that fully now reflects your expectation for what both build rate should be into the end of the year or if there is a little bit more work to do on taking build lower?

No, I think we’ve adjusted build rates to where we think they need to be, and we would anticipate based on where we’re at today that that will be how we’ll start next year.

And then also on North America, within location, you’ve previously talked about having very strong share within that market. The order trends within Class 8 straight have been softer recently, and so if you could just talk to whether or not that has affected some of the applications that you go into or if you're a few more protected from it and then your kind of outlook for how that should trend moving forward if we get some relief from some of that softness?

Some of that order trend that you refer to is seasonality. We have two new models, one on the Kenworth side and one on the Peterbilt side that are doing very well, the 567 and the T880, and we would anticipate that we would have another strong construction season upcoming.

I was hoping to dig into the parts business a little more and follow-up on some of Steve's questions. Could you walk through regionally how that business performed and also give us a sense for what the impact of FX was in the quarter?

So in terms of the performance regionally, both North America and Europe participated in about 7% to 8% growth year-on-year for the year-to-date period, so they both have done very well with their programs to get a greater share of the market and take advantage of the strong freight market. So I’ll let Michael talk to the exchange rate effects.

The impact on parts revenues for the quarter was $50 million, and for the year-to-date figures $155 million, it has been running about that $50 million pace during…

Any impact on profits?

The impact on profit for the quarter was pretax income impact was about $10 million.

Okay, can you remind us what is year-to-date?

And year-to-date would be about $30 million.

Okay.

And about a $10 million a quarter pace. That will diminish, of course, as we enter into different comparatives going into '16 with exchange rates having been relatively stable at these low levels for the past few months.

And I think as we just think about the growth, I know you said it has been pretty even between North America and Europe, can you talk about it and largely on economic and freight volume driven, but can you talk about how we should think about maybe the underlying growth versus some of the company-specific initiatives to take share, whether that’s more store growth or the DC initiatives, etc., just so we get a sense for what the underlying because obviously, freight volumes are growing at high single-digits so just trying to understand that dynamic?

There are many aspects to consider. We're actively investing in expanding our distribution capabilities. We've established a new warehouse in Eindhoven and recently enhanced our racking capacity in Budapest. We've also doubled the size of our Lancaster warehouse and are effectively doubling our capacity in the Pacific Northwest with the new facility in Renton. Our ongoing investments aim to deliver exceptional service to our dealers and customers. Additionally, we have launched TRP standalone stores to bolster the TRP brand and improve access for second and third owners of mixed trucks, buses, trailers, and more. Our dealers have also opened numerous locations across North America and Europe, enhancing their market presence, and we are witnessing positive results from these efforts. Moreover, the various initiatives and programs developed by our parts team are collectively contributing to our 8% growth.

And then the last thing, if I could just sneak it in, a follow-up to a question Jamie had about pricing. I know you made the comment that pricing overall was solid, could you actually speak to pricing in the U.S. versus Europe and are you seeing any signs or isolated pockets of pricing weakness in Europe?

No, pricing in both markets I say is very solid. With again the markets as we see them currently are top five markets and our products are performing well; they have got a lot to offer a customer in terms of efficiency and low operating costs, and so we are seeing good solid pricing with our products.

Okay, I am thinking more from the standpoint of competitors, from select competitors than from progressive?

I guess it's typical business. I mean, we have business that we think is very important to us, and another OEM has business they think is important to them, and so that’s just normal. I would say it's all normal marketplace behavior that we see in both North America and Europe.

So I wanted to touch back on your Class 5 to 7 share during the quarter; looked pretty solid. I kind of wonder if you can give us kind of color as to perhaps were there any kind of products in the end-market that did better than others in the quarter or any initiatives that you guys took in the quarter to kind of gain some additional share there?

No, nothing. I think as time goes on, more and more our dealers appreciate what that product can do for their customers. And we continue to see those products perform very well, and they just continue to get a growing share of that Class 5 to 7 market.

And then secondly, I also just want to ask about the upcoming new paint facility over in Europe. Is paint currently a pinch point for production or for margins, and can we expect the opening of the facility to perhaps unlock some kind of volume upside either in '16 or possibly in '17?

As we look out for DAF’s growth expectations, we've talked before about medium-term targeting a 20% share of the European market, and we need more capacity in our paint operations. In addition to giving us the capacity, obviously, it will be state-of-the-art, very environmentally friendly, and really provide some good efficiencies and qualitative performance that we’ll enjoy for years to come.

I think most of my questions have been answered by now, but I just want to circle back a couple of things. The MX 11 engine that will replace or compete with your current medium-duty engine, which if I recall correctly is built by Cummins, is that correct?

Yes, it will compete with Cummins’ offering. I mean we will basically just replace the offering from Cummins.

Yes, I just wanted to make sure that because I think Cummins builds it for you but you brand it, don't you?

Well, we have a 9-liter that we buy from them that is branded, and we’ll continue to buy that 9-liter. But we also buy some 11-12 liter engines from them that this would essentially replace.

And then if we look at orders over the last three months, Canada and export orders have been down significantly, Canada down more than 50%, export orders down 70% plus. Can you talk about those markets as you head into 2016 and how divergent those might be versus your outlook for the U.S.?

I think the Canadian order levels have been impacted obviously more by oil and gas, I think than what we've seen elsewhere. So obviously, lower oil and gas prices are very positive for almost all of our customers, but there are some regions that get impacted by the lower oil and gas prices, and so Canada is one of those areas that have seen that. But the rest of the Canadian operations and fleet activities that are very good. Export, I would say that those markets are down compared to where they have been, and Bob talked about some of the South American markets; 70,000 to 80,000 probably more normal range would be 100,000 trucks or so per year.

And you have baked those two markets into your outlook that you have given us today. You’re not expecting those to get any better or?

No, they are just part of the, it is very similar, yes.

Thank you. I would like to thank everyone for their excellent questions. And thank you, operator.