Paccar Inc (PCAR) — Q1 2018 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; Harrie Schippers, President and Chief Financial Officer; and Michael Barkley, Senior Vice President and Controller. As with prior conference calls, we ask that any members of the media on the line 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 record revenues and strong operating results for the first quarter of 2018. PACCAR’s first quarter sales and financial services revenues were $5.65 billion and first quarter net income was $512 million, a 9.1% after-tax return on revenues. Revenues were 33% higher and net income was 65% higher compared to the first quarter last year. PACCAR Parts achieved record quarterly pre-tax profits of $192 million. PACCAR achieved excellent Truck, Parts and Other gross margins of 14.8% helped by strong global truck and aftermarket parts demand. First quarter margin benefited from a favorable customer mix and increased seasonal demand for proprietary parts in the aftermarket. I’m very proud of our 26,000 employees who have delivered industry-leading products and services to our customers worldwide. PACCAR delivered a record 44,500 trucks during the first quarter. U.S. and Canada Class 8 industry truck orders averaged 42,000 units per month in the first quarter and have exceeded 30,000 units per month for the last six months. DAF above 16-tonne orders increased 41% in the first quarter compared to the same period last year. Due to the robust orders, we expect to deliver 7% to 9% more trucks in the second quarter of this year compared to the first quarter. Second quarter gross margins for trucks will be similar to the first quarter of around 12%. Parts margins will reflect increased sales of TRP and routine maintenance parts. Total Truck, Parts and Other gross margins will again be strong at the mid-14% level. The U.S. economy's growth is driving record freight tonnage. Customers are operating at high utilization levels and are expanding their fleets. We’ve raised our estimate of U.S. and Canadian Class 8 truck industry retail sales to a range of 265,000 to 285,000 vehicles this year. PACCAR’s forecast for the European above 16-tonne market has been increased to a range of 300,000 to 320,000 units, reflecting the strong freight transport activity and truck demand, as well as the steady economic outlook. The new DAF CF and XF, which won the International Truck of the Year, are seeing strong demand, achieving a 16.4% share of the European heavy truck market registrations in the first quarter. PACCAR Parts quarterly pre-tax income of $192 million was 27% higher than a year ago. Pre-tax return on revenue was an excellent 20.4%. PACCAR Parts business generated record quarterly revenues of $940 million, 19% higher than in the same quarter of last year. These results were driven by growing numbers of PACCAR trucks and engines in operation, PACCAR’s investment in distribution centers, and the many innovative products and services offered by PACCAR Parts and our dealers. For the year, we expect parts sales to increase by 10% to 12%. PACCAR Financial Services first quarter pre-tax income was $68 million, 19% higher than first quarter last year. The PACCAR financial portfolio performed well. Industry demand and pricing for used trucks increased compared to the first quarter last year. PACCAR Financial continued to invest in the remarketing of PACCAR trucks by opening its fourth truck remarketing center near Los Angeles. These truck centers further enhance Kenworth and Peterbilt residual values, which command a 10% to 20% premium over competitors’ trucks. PACCAR’s strong balance sheet and positive cash flow have enabled the company to invest $3 billion in new products and facilities in the last five years. This year, capital expenditures of $425 million to $475 million, and research and development expenses of $300 million to $320 million are targeted for new truck models, integrated powertrains including electric, hybrid, and hydrogen fuel cell technologies, and new product technologies for advanced driver assistance systems and truck connectivity. Additional investments are also being made to expand and enhance manufacturing and parts distribution facilities. PACCAR is realizing the benefits of strong market conditions by delivering the highest quality products and services in the industry and investing for future growth. Thank you. I’d be pleased to answer your questions.

Yes. Thanks, guys. First, I wanted to ask a question about the revenue growth in parts. You mentioned seasonality there but also the proprietary parts. I was just wondering if you could give a little bit more clarity on what’s driving that very strong year-over-year growth. And also, if you could, I guess in that context, talk about TRP, the extent to which that’s contributing as well? Thanks.

Sure. The growth is really across all the product lines. Obviously, freight activity has a large impact. But our teams, we’ve expanded our distribution facilities. We’ve got lots of great programs with engines, with our fleet services, our e-commerce capabilities. So, the team has done a great job of really putting together programs that build the loyalty of our customers to PACCAR Parts because they can provide the parts faster and more efficiently than some of the competition can. So, the team has been working on these initially for many years. And now we’re seeing the real fruits of the investments and the efforts the team has put forth. On the TRP side, if you look at same-store sales year-over-year, we’re up about 20% on the independent standalone TRP side.

And what margin impact did that have to the extent TRP ends up being a bigger or smaller percentage of mix?

It would probably pull the overall average down just a bit, because it typically all makes parts for all brands of vehicles.

Okay. Very good. And then I guess one last question on used truck pricing. There is some thought, I suppose, that used truck prices could eventually start trending lower as we get lower towards the back half of the year. Just wondering if you’re starting to see any of that or if you agree with that being the thing.

I think, again, we’ve seen a positive trending in the last three to six months on the used truck pricing. And so, we’re seeing just the opposite. We’re seeing the positive trends.

Good morning or afternoon, whatever. My first question may be around if you could speak to what you’re seeing out there by segment. We’re seeing Class 8 sleeper orders up about 140%, day cab is up about 112% and straight truck is up about 43%. Just curious what you guys are seeing there by mix application or segment in terms of your backlog or your orders?

Yes. I think we’re seeing increases in all those segments sort of across the board. I wouldn’t say there is any particular segment that’s outperforming the other, probably a little bit higher sleeper mix just because of the demand for on-highway trucks.

Okay. And it does look like the sleepers started to accelerate into the end of last year. Is that the case?

Yes. I think more of the on-highway fleets will place their orders in the late fourth quarter, early first part of the year. So, I think we’re just seeing the effects of the timing of when they place their orders.

And given your backlog year-to-date, do you have enough capacity to meet demand for this year or do you envision maybe having to push back some of those deliveries into next year? And do you think there is any risk that we see production expand into or extend into 2019, just on the back of capacity constraints?

Well, demand is good. And we see no indications that demand is lessening. So, we’re going to build the trucks that we can build and we have the capacity to be able to support our customers’ needs.

Okay. And then, just quickly as a final follow-up. Could you just discuss input cost versus pricing power, and what’s the pricing environment like out there, given the strength in orders and demand?

Yes. We’ve seen some moderate ability to increase prices, particularly on smaller truck orders. But, we’re also seeing some moderate increases in the input costs, and we continue to see commodity costs trend upward. But, again, our long-term agreements facilitate that being smooth over time and we’re able to realize that as a marketplace for the most part.

So, you wouldn’t expect the mix to be negative this year or am I raising into it or…

No, at this point, we don’t see that.

I’m wondering if you could talk about your expectations of vehicle mix in the second quarter. In the first quarter, you spoke about getting a tailwind from a mix of business. I’m wondering how do you expect that to evolve into 2Q? And you have spoken about gross margin expectations for the year. I’m wondering if you could touch on the second quarter specifically.

Yes. So, we talked about our second quarter overall gross margins being in the mid-14% levels, and we will see an increased mix of deliveries to fleet customers in the second quarter. But, that’s all very normal. And so, we expect another strong margin quarter as we mentioned.

Okay. And in terms of factory overhead costs, those took a leg higher to support the higher production levels in the fourth quarter. Can you just talk about how that trended into the first quarter and what expectations are over the balance of the year?

Yes. The factory overhead and all of our other costs trended exactly as we expect with higher volume, and we’re seeing the benefits of the operating leverage. We see that in the 14.8% margin for the quarter.

Okay. And last year because your dealers hit their threshold for part sales, we saw, I think in the third quarter, the weaker pricing than we would otherwise expect. Anything that we need to keep in mind in terms of rebates as we think about this year compared to the way last year played out?

You saw the great results that we had in the first quarter with a 19% increase. So, we are expecting our dealers, and dealers are doing very well. And so, we’re providing the support for those incentives as we go.

Okay. So, it won’t be as lumpy as we saw last year?

No.

So, I wonder if you could just talk a little bit about any supplier constraints and kind of just what’s happening along the chain on the way to your factories for the different parts.

Yes. Our truck divisions and materials teams, our purchasing groups have done a great job of really coordinating well with our suppliers on our build plans. As we mentioned, we’re planning to increase our build rates in the second quarter. And so, it’s a very coordinated approach with our supply base to make sure that we can execute that. We don’t take the build rates up unless we feel confident in their ability to deliver. And so, we’re working very closely with them as we always do. But, so far, it’s been excellent in terms of the support.

Can you provide any insights on cancellation rates, perhaps in the context of the entire industry, as well as your thoughts on maintaining strong production through 2019 and your overall impression of the market? I'm not looking for a specific forecast.

Sure. The cancellation rates are very low, Joel, just the occasional cancellations and reorder, but that’s pretty uncommon at this point. And so, in terms of the customer demands in Europe and in North America, it’s really strong. The economies are all trending positively. So, I don’t see any reason why the demand can’t be good for the foreseeable future.

I wanted to revisit the gross margin topic briefly. If I'm correct, you mentioned it was in the mid-14% range for the second quarter this year. Last year, you achieved a similar margin with significantly lower revenue. I'm trying to understand why the margins aren't increasing year-over-year despite the higher revenue.

We have a higher mix of fleet deliveries in the second quarter.

We have a higher mix of fleet deliveries in the second quarter, and that’s...

Yes, that's a valid observation. If we examine the truck mix, we anticipate an increase of over 30 percent in truck sales during the first quarter, and this trend will continue into the second quarter. However, the additional profit margin on trucks is not as substantial as it is for parts. Therefore, this distribution is contributing to a reduction in the overall margin.

I apologize, are you referring to year-over-year or the upcoming fourth quarter?

Yes, year-over-year, year-over-year. Yes.

Right. Okay. So, it’s a mix issue. Even though the parts business is growing quickly, the trucks are growing more rapidly.

Yes.

Right. Okay. That’s helpful. Thanks. And then, just on the Brazil investment that you called out in the press release, is there any color around that? And I guess, can you talk about what you’re doing with that investment and kind of how you feel like your distribution is set up in that market at this point?

Yes. So, our distribution, we’ve had presence in the Andean region in South America for decades. And we introduced the DAF truck models into that region five years ago and continue to see the DAF models increase their penetration in the Andean region of South America. And we continue to invest in products for that part of the business. And of course, Brazil, we introduced a heavy application, off highway application late last year at the Fenatran Truck Show, and that truck is now entering production and should help support our dealers and our customers with an addition of expanded product line in Brazil. The team there is doing a great job, the product is very well received, and our distribution network continues to expand as we progress and build out our truck line as well as distribution capabilities for the country.

Hi. This is Joe Vruwink for David.

Good morning, Joe.

I might have missed this, so I apologize. But I think gross margins in Q1 finished above the guide you provided a quarter ago. What exactly drove the upside in profitability?

Yes, I believe that in the first quarter, we benefited from a favorable mix of customers, particularly concerning deliveries to dealers for their inventory needs and smaller fleets. In the upcoming second quarter, we expect to see a higher volume of larger fleets. Additionally, there was strong activity in our parts business regarding proprietary parts during the first quarter.

Okay. That makes sense. If I can shift gears, the 40% increase in orders for DAF, that’s a pretty big gain, particularly it seems like some of your competitors in Europe are seeing decelerating order activity. Any more color on why DAF would be performing at such a wide variance to what maybe some of the other OEMs are seeing?

Well, I got a few thoughts; I’m sure Harrie will have a few. But, the key thing is great products. I mean, the CF/XF was named International Truck of the Year, provides a 7% better fuel efficiency. And so, I think the customers appreciate that. And they’re seeking to take advantage of the great products that DAF is offering. Harrie, do you anything to add?

I can only echo that, Ron. The end result is that we’ve nicely grown market share in the first quarter. And it’s not only in registration—the share, we see that in order intake too. More customers, more fleets are choosing the DAF International Truck of the Year.

And then, I know what I’m about to ask is a bit of convoluted calculation. But, if I think about your presence in Europe, obviously great positioning in the UK. The UK market has started to soften. So, to do this type of market share in Europe, I have to imagine that you’re reaching new all-time record levels of share in a lot of individual countries. Is that a fair characterization?

Yes, at or near record high levels in a lot of markets. So, yes, the trucks are performing well and it’s well recognized across Europe.

I’m wondering, Ron, as we sort of stretch out the backlog here, what you’re seeing in terms of new truck pricing? Is there an opportunity to get a little bit more as the backlog stretches out?

Yes. It’s typically—it’s a supply and demand business. And yes, there is definitely an opportunity. And it’s also moderate pricing gains in the first quarter.

But, again, given sort of the length of the backlog, I’m supposing that probably wouldn’t really show up until the second half of the year in terms of maybe seeing it in your numbers or maybe the margins, slightly better or just how would we think of that timing?

Yes. I think, you’ll see it gradually progress as we progress through the year.

Okay, thanks. And then, I’m curious if you have any kind of initial, just big picture thoughts on the cycle relative to what 2019 might look like. And we’ve obviously had lots of cycles that have been heavily impacted by emission changes, or they have at this time. What’s your view—is ‘19 reasonably assumed to be sort of flattish or does it need to be down just because we’re having a big year this year? How do you just look at the longer term?

We’re going to continue to build trucks for customers. And we’ve seen no signs of lessening in demand. So, as the year progresses, we’ll get a better feel for 2019. But our assessment is that as long as the economy is good, the truck markets will be good.

And do you have already some of your build slots in ‘19, spoken for?

Yes, for sure. Customers—there are larger fleet customers who oftentimes will place orders for multi-year. So, yes, there is a nice baseline, if you will, of business that’s been booked for 2019.

Thanks a lot. And how are you guys doing?

Great. And you, Andy?

I’m doing fine. Thanks.

Has the snow ended?

I think so. Fingers crossed. I don’t think you addressed this. But, could you just help us understand the currency impact on revenue and EBIT margin? I’m just wondering what that—how that may have impacted the overall incremental margin performance?

Yes. I’ll let Michael address that.

Yes. The impact on currency compared to prior year on revenues is about $240 million of increase, and that’s mostly due to the euro appreciating against the dollar. And the impact on pre-tax income was about $19 million positive.

Okay. Thank you. That explains some of it. And then, kind of going back to the pricing question that Steve asked just a bit ago. Can you discuss how you approach balancing price up versus market share, specifically in the U.S. and Canadian market? Your European orders are quite strong obviously.

Well, it’s the same every day. I mean it’s a competitive marketplace. And everybody is quoting customers. And so you have multiple people buying for business. And we obviously continue to earn a premium on our products relative to the competition. But, customers are willing to pay extra for the lower total operating costs, the higher residual values, but there is a limit to that. And so, we focus on the value of our products and we don’t compete on price necessarily.

Sure. It’s just the reason for the question, Ron as it just seems like some of your competitors appear to have constraints that are limiting their ability to satisfy additional orders in 2018, a couple of them to be specific. But, I’m just wondering since you have incremental capacity that you could service orders that may have some more immediacy than waiting until let’s say the first part of next year for delivery. Does that offer pricing opportunity or is it…

Yes. I mean, it’s going to be moderate, Andy, I think in terms of the overall effect on margins.

I just wanted to ask you about your warranty experience. I think, you’ve been running better than some accrual rates on certain products. I’m not sure if that was the MX-11. Just wondering if that’s continued. And if so, is there a certain point at which you reassess that accrual rate that could come in and support margins?

Yes. We reassess accrual rates every quarter. And so, it’s closely watched by Michael and his team and the operating folks. And so, our warranty expense really reflects our best assessment of what’s going on in the field. At any point in time as you transition to new models, you’ll provide a little bit of extra warranty in the early days, but our experience is that that will rapidly come down because the products are better. And so, we see the ebbs and flows of new models and in maturity of new model, etcetera over time.

Is that something that could be a second half tailwind for this year?

We’ll evaluate it every quarter. So, we’re reflecting our best estimates every quarter along the way.

Okay. And you mentioned that there are some modest pricing available with smaller orders. So, when do you think production might be tight enough in the industry to see that higher pricing more broadly? I’m not sure if there is a certain level of industry production or retail sales that you’re thinking about that might be more supportive of a broad-based pricing improvement. But I guess, I’ll ask it in those terms.

I think, again, it’s a competitive environment. So, you always balance pricing opportunity with your ability to earn the share that you think you should earn. So, it’s an ongoing balancing of those two factors.

So, when do you think you might get an indication of pricing initially for 2019, typically would be in your fourth quarter? Others have said, perhaps you could happen earlier than that this year. Is that the way you’re thinking about it?

Again, pricing is sort of an ongoing daily assessment of how the market is trending. And so, we’ll see—we’ll just make those calls as we progress throughout this year.

Hi. Good afternoon. I guess, just two quick follow-ups. In case, if I missed it, did you talk about what your gross margin assumption was for the year? I know, you gave it sort for the second quarter. And then, last, you’ve raised your R&D again. Is this the new run rate in terms of how we should think about R&D, given just required investment, NAV and alternative technologies?

Yes. So, for margins, I think that mid-14% level for the year is probably a pretty good proxy for what we think the average for the year will end up being. And in terms of R&D, yes, I think, the run rate in the first quarter is a good proxy. The first quarter—we saw about $5 million to $6 million increase in R&D as a result of currency movements. But, the rest of it is focused on new truck models, new engines, including, as you mentioned, electric hydrogen fuel cell and hybrid vehicles. So, we’re making investments on a lot of fronts, including advanced driver assistance assistance autonomy and truck...

And sorry that comment was—my question was more towards beyond 2018. So, that’s for beyond ‘18 as well, right, just long term?

Yes. I think that’s a good indicator for the run rate. Yes.

Hi. Thanks, guys. Just curious if you can give us an update on the penetration for your MX engines, and if you’ve updated your long-term goals for that. And then also if there is any difference to what you guys are currently seeing in the quarter versus what’s in your backlog? And then, secondly just any impacts that that might be having on the aftermarket sales that we’re seeing from you guys, especially since we’re starting to be about 5 or 6 years out…

So, we continue to be in the 40% to 45% range. And we would love to see that develop over the coming years. And we think it will as more and more customers realize the benefits of the engine and as we get into greenhouse gas regulations in 2021 and subsequent years, I think the demand for our engines will continue to increase. And yes, we are definitely seeing the benefits of that in the part sales. And we’re now into the seventh year since we started the production of the engine here in North America and the population continues to grow. I think we’re approaching close to 200,000 MX engines in North America and of course DAF has a PACCAR engine in all of its trucks. And so, yes, we’re definitely seeing the benefit on the aftermarket part size, as a result of the engine introduction and continuing growing population.

Is there any way to quantify that?

Yes. I would say that I don’t know the exact numbers, but the MX engine growth is definitely probably above the overall average for year-on-year.

Hi. Thanks for taking my question. I’m not sure if it’s one given your history you’re going to answer. But, if you can add a little context to the mix issue. I know you’re not going to state blatantly difference in the margin between owner operator sale on a fleet. But, I think we’re all trying to understand where we are in the cycle, but on the margins themselves. If you pull out the currency for the quarter, it’s still say 16% operating incremental margin. I mean, it’s still not great. We’re just trying to think through, if ‘19, the cycle is longer than people thought, and the mix lean back the other way a bit, what kind of impact is that really having on the margins? It wasn’t like last year’s incrementals were that fantastic either with the different mix or it was not a negative of the mix. So, can you at least frame it a little bit for us what the mix implications are and the profitability?

David, I’d just have to disagree with you a little bit. I think the margins are excellent in terms of looking at what we’re providing to our shareholders. And so, as we think about the mix, the mix goes up and down quarter-to-quarter, depending on whether you’re selling a large mix of fleet customers at a point in time. And so, that’s sort of ebbs and flows from quarter-to-quarter, year-to-year. And so, we feel good about the operating results. We have the best margins, best operating margins in the industry. So, I think, we feel good about where we’re at.

Okay. And then, just so we level set people’s expectations, are these gross margins, these truck volumes something that you’re comfortable with? I mean, should we not expect margins to be viewed internally as we needed to move these higher materially or as someone said earlier, higher revenues, higher unit deliveries? We’re not seeing a lot of gross margin improvement. Just so we understand, I mean maybe it’s proper investments for future growth, technology, pushing in other geographies, just move the cycles out, but I think people keep going back to the well hoping there is quarter or two the margins can nearly pop, and maybe just our fault on the street expecting that to occur?

Well, I think as we’ve talked about earlier, the growth in revenue is particularly strong on the truck side relative to the parts side. And so, at 12% on trucks and 27% on parts, the trucks are accelerating faster; that sort of dampens the incremental. And you can—we delivered 15% to 20% incrementals over time, and that’s what we’d expect.

Hey, guys. So, your share in medium duty has been pretty strong this year so far in North America. Are there any success stories here that kind of caused or any kind of model the end market? And can you give us more broader view on the market for the year?

Well, on the medium duty side, we think the market will actually be a little bit stronger this year than last year. And of course, last year was a record year for PACCAR for medium duty truck deliveries over 29,000 trucks. And so, based on the strong share and the good market conditions, we have an opportunity, we have an excellent year on the medium duty side. We’ve had some growth in expanding our customer base and some significant orders that have come in. And so, we’re excited about the prospects for that vehicle. And we continue to invest in enhancing that vehicle over time.

Okay, great. I also wanted to ask secondly about SG&A. Jamie asked about R&D. It’s little bit higher this year, up 20% plus from the previous year. Is that just because of the top-line increases or is there any higher structural costs we should be aware of for the rest of the year?

So, about $7 million of that increase on SG&A was currency driven, slightly higher professional fees. The first quarter typically has a little bit higher cost related to long-term incentive grants that doesn’t recur for the rest of the year. So those are sort of the key reasons for the increase.

So, perhaps maybe up slightly year-over-year when you net those things out, but it shouldn’t be a huge increase for the rest of the year compared to…

Yes. As we look forward to the next few quarters, I would say, it would be probably slightly lower maybe than first quarter level.

I had a quick on the current orders and then a bigger picture one to some electrification. So, on current orders, I mean, the strong ones we’ve seen in the recent months this year, do you have sense your customers want to take delivery of truck right now and OEMs want to push that a little bit or are they really seeing a longer duration of cycle and happy to have it 2 or 3 or 4 quarters from now? I’m just curious about the urgency of those orders.

No. I think the urgency is strong. I think the customers want their trucks as they’ve put in orders for this year or orders for maybe that extend into 2019. But, they thought about what—when they want the deliveries. And so, it’s—they’re definitely looking to get the trucks. The fuel economy of our current vehicles is excellent. And so, they get operating advantages by buying that new truck as well. So definitely, I think there they’re definitely wanting to get the trucks delivered.

Okay, makes sense. The second question, just if you could give an update on electrification. And we’ve seen some product announcements in recent days and obviously you guys have what you’re working on. I mean, how do you think about the next five years? Is it where you’re trialing solutions and experiments with different suppliers, different platforms, different ideas in the markets 5 and 10 years out or do you think you actually have to be making some real decisions on platforms that will continue and endure. I am really curious about how you approach investing in that and what level of decision do you think you have to make and how fast?

So, we are exploring a lot of different avenues with full electric, hydrogen fuel cell, hybrid. And so, we’ve got a really diversified program. We’ve got trucks that are in the field being tested. And as we look at the truck segment that we participate in, we think the part where the evolvement will be the greatest will probably be on the medium duty side, the light or heavy side, regional, urban deliveries where they can support the range. The still the issue is the economic viability of electric and fuel cell vehicles, just because the up-charge typical electric trucks is going to be about twice as expensive as a normal diesel vehicle. So, as long as there are subsidies and as long as maybe the regulations dictate, zero-emission vehicles in certain zones, in large cities, that’s going to create some demand. But, until it’s economically feasible, there won’t be widespread demand. So, that could be five plus years.

Perfect. And that five plus years applies to even like the medium duty and the in town Class 8s, I mean obviously long hauls are a long way out, but…

It applies to all, because again the economic feasibility has got to make sense for the customer.

You’ve taken up the parts revenue outlook the past few quarters. And I guess, piggybacking on an earlier question about kind of MX engines. Can you give us a sense of how we should think about the revenue growth opportunity longer term in parts?

If you look at the last 15 years of our parts revenue development, it’s averaged an 8% average annual growth over that period. And I think with the engines, I don’t see any reason that we’ll see a significant deviation. Again, the team has done a great job. We continue to make strategic investments in new distribution capability, continue to invest in technology in those distribution centers to be able to have the best parts availability and on-time delivery for our customers. The programs the team has put together continue to be enhanced. And so, I think we’ll continue to see that pace of growth, I think, as we look into the future.

That’s helpful. And I’m kind of thinking about your factory utilization. You’ve obviously brought up production rates more recently. Can you give us a sense of where you are on kind of the number of shifts where that can go to before you see potential constraints in terms of PACCAR hitting its customer needs?

Well, we have assembly capacity that can go well beyond, but obviously, it’s—as I said before, it’s a very coordinated effort that is required with our suppliers, to make sure that we’ve got all the components to be able to support the trucks. And our teams have done a great job of delivering on that. So, it just has to develop over time, as we work with our supply base and our teams to make sure that works, doing it cost-effectively and efficiently.

Of course. And I guess, if I’m thinking about your answer, how much flexibility do you have with your supplier base to increase further from where the build plan is going for 2018?

We always seem to be able to find a way to get that next incremental truck. So, I don’t think there is a limit on what we can do. It just takes gradual progression over time.

Of course. And if I can squeeze one more in. From your customer base, how many of orders are coming in without a trade, i.e. kind of net fleet growth, particularly in the kind of the smaller owner-operator and kind of medium-sized fleets you guys interact with?

The vast majority would come in without a trade. Yes.

Thanks. I’m just trying to figure this out—you may have mentioned back in February. But, 100% write-off used equipment, what’s happened to the used truck fleet in light of the ability to deduct 100%. And then, the same thing with regards to your dealers preordering, you kind of tick and tie the two together? And then, I’m going to assume that what happens in November after the election at 100% write-off is eliminated. Do you get a surge in orders for equipment, but you can’t handle it?

Yes. I think, the demand for orders has largely been driven by the economics, the demand for freight by shippers to get goods delivered. Obviously, the 100% deductibility of equipment costs is definitely a positive for customers, both new and used. And we have seen some uptick in the demand for used trucks as well as the pricing for used trucks, and how you attribute that to the tax change or other things, but it’s one of the factors I’m sure...

Thank you. And now for the easy one. Navistar—Volkswagen has taken their company public, they’ll be buying Navistar at some point. There are some discussions that Marchionne is going to be leaving and retiring, and he wants to merge IVECO with someone, the only logical player is DAF. Can you comment on any of these? Let’s start with the easy one—Navistar, Volkswagen, any particular changes in distribution as a result?

No, we’ve expected that to be there for…

Sometime, yes, I know. Listen I was just on a rush call. So, I’ll listen to what Rusty says about life and liberty. Thanks very much. Look forward to seeing you again.

Yes.

We’d like to thank everyone for participating. And thank you, operator.