Paccar Inc (PCAR) — Q4 2019 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 Preston Feight, 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. For additional information, please see our SEC filings in the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Good morning. Harrie Schippers and I will update you on our excellent fourth quarter and record full year 2019 results and business highlights. Thanks to PACCAR's outstanding employees around the world, 2019 was the best year in the company's 114-year history. PACCAR achieved record revenues of $25.6 billion and record net income of $2.39 billion, a 9.3% after-tax return on revenues. PACCAR's strong financial performance in 2019 benefited from PACCAR Parts' record pre-tax profits of $831 million and PACCAR Financial Services' pre-tax profits of $299 million. PACCAR has achieved 81 consecutive years of net income and a total shareholder return in 2019 of 45%. The company has paid a dividend every year since 1941. In 2019, PACCAR declared dividends of $3.58 per share, a 16% increase over 2018. Total dividends declared were a record $1.24 billion. PACCAR's fourth quarter revenues were $6.1 billion and fourth quarter net income was $531 million. PACCAR delivered 45,700 trucks during the fourth quarter compared to 49,300 in the third quarter. There were fewer build days and lower build rates in North America compared to the third quarter. The U.S. economy performed well in 2019, which contributed to a strong truck market. In 2019, U.S. and Canadian Class 8 truck retail sales were 309,000 units, the second highest truck sales in history. During 2019, Kenworth and Peterbilt combined market share increased to 30% compared to 29.4% in the prior year. In 2020, the U.S. economy is expected to grow by about 2%. The new U.S.-Mexico-Canada Agreement and China Phase 1 trade agreements could provide upside in the economy and are good for PACCAR. We estimate that 2020 U.S. and Canada Class 8 truck market to be in a range of 230,000 to 260,000 vehicles. European above 16-tonne truck registrations were 320,000 vehicles in 2019, reflecting continued robust customer demand after several years of steady economic growth. DAF delivered a strong 16.2% market share. In 2020, the European economies are projected to continue growing and we expect another excellent truck market with above 16-tonne registrations in a range of 260,000 to 290,000 vehicles. I would like to recognize PACCAR's high-performing Kenworth, Peterbilt, and DAF dealers who are the best in the industry and important contributors to our success. Truck and parts gross margins were 14.4% in the fourth quarter. Truck pricing increased during the quarter, more than offsetting costs. In the first quarter, we expect deliveries to be 5% to 7% lower than the fourth quarter due to normalized markets and build rates in North America. First quarter truck and parts gross margins are estimated to be around 14%. PACCAR continues to take a rigorous approach to controlling costs throughout the business cycle and delivers industry-leading operating margins. Other 2019 accomplishments included PACCAR delivering a record 199,000 trucks worldwide. Kenworth, Peterbilt, and DAF are expanding the range of battery electric, hybrid, and hydrogen fuel cell trucks in field testing with customers; and South American deliveries increased by 60%. The company's focus on sustainable business practices were recognized by the environmental reporting firm CDP. For the second consecutive year, PACCAR achieved an A rating, which puts us in the top 2% of more than 8,000 companies that report to CDP. PACCAR is one of only 35 companies in the United States to earn the A rating. In addition, we're proud that Peterbilt, Kenworth and PACCAR Parts were recognized as top workplaces for women by the organization Women in Trucking. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and PACCAR's investments in future growth.

Thanks, Preston. In 2019, PACCAR Parts generated record annual revenues of more than $4 billion and record annual pre-tax profit of $831 million. Annual parts revenue grew 5% and profit grew 8% compared to 2018. Parts fourth quarter revenues were $994 million and quarterly pre-tax profit was a strong $205 million. PACCAR has steadily increased its truck and engine market share over the years, resulting in a greater number of PACCAR trucks and engines in operation. At the same time, PACCAR has consistently expanded its network of parts distribution centers such as the ones opening this year in Las Vegas, Nevada, and Ponta Grossa, Brazil. Kenworth, Peterbilt and DAF dealers have made large investments to increase their service capacity. The growing park of PACCAR trucks and power trains and the enhanced parts distribution and service network grant future long-term growth. In 2020, we estimate parts sales to grow by 4% to 6%. PACCAR Financial Services achieved 2019 records in annual revenues of $1.48 billion, new business volume of $5.6 billion, and portfolio assets of $16.1 billion. The portfolio continues to perform well with low past dues and low credit losses. Fourth quarter pre-tax income was $68 million, the same as in the third quarter. PACCAR Parts and PACCAR Financial Services profit contributions enhance PACCAR's financial results through all phases of the business cycle. I'm pleased to share that in 2019, PACCAR was recognized for its products and manufacturing innovations. DAF earned Truck of the Year awards in the U.K., Poland, Czech Republic, and Slovakia and the Green Truck Logistics Solution Award in Germany. Kenworth Chillicothe and Peterbilt Denton each earned a prestigious 2019 Manufacturing Leadership Award from the National Association of Manufacturers. At the CES Technology Show in Las Vegas earlier this month, PACCAR showcased a Level 4 autonomous vehicle and two battery electric trucks. We had a terrific turnout of people interested in PACCAR technology and the opportunity to see the trucks first-hand. Kenworth, Peterbilt, and DAF have each announced that they will begin producing alternative powertrain trucks in the next 12 to 18 months. PACCAR is a leader in all powertrain technologies that drive our industry including diesel, battery, hybrid, and hydrogen fuel cell. PACCAR invested a record $744 million in capital and $327 million in R&D expenses last year. In 2020, we're planning capital investments in the range of $625 million to $675 million and R&D expenses of $310 to $340 million. These capital and R&D projects will develop the next generation of fuel-efficient vehicles and enhance the company's manufacturing and parts distribution facilities. Thank you. We'd be pleased to answer your questions.

Thank you. Good morning. Preston, to start with the guidance for the first quarter, I'm observing the projected build plans for North America showing a slight increase from the fourth quarter to the first quarter. I'm interested in understanding how PACCAR aligns with this, especially considering your mention of a 5% to 7% decrease in deliveries, and how North America compares to Europe and other markets.

Sure, as we just said, we do expect deliveries to be overall 5% to 7% lower, and that's kind of matching to where the market really is. North America is more of that than Europe is. Europe's been fairly stable for us through the fourth quarter and into the first quarter and real issues matching to where the normalized market has become where we're seeing the normalized market. So it's nice for us as we have a pretty good percentage of the backlog, I think it is roughly 34% of the backlog compared to the inventory where we are a smaller percentage of the inventory. In fact, we only have about two months' worth of inventory, 2.5 months of inventory sitting in there. So we are in pretty good shape that way and it's just normalizing to the market.

Okay, all right and then on the margins in the first quarter, there is obviously, you'll get a little bit more help from a seasonal perspective in the second quarter, but how are you considering that roughly 14% margin today in the first quarter relative to the full year?

So when you look at the first quarter and it's kind of where we stop our guidance to it is we look at the 14%, I think that's really continuing to deliver as PACCAR does excellent industry-leading margins and that's kind of consistently good for us and we're pleased to be able to deliver that and that's really because of the performance of our teams on the truck side, the financial services side, and the Parts team and in composite that works really well.

Alrighty, I will now pass it on. Thank you.

Okay, thank you. Have a good day.

Hi, this is Thompson Rich on behalf of Ann.

Hello.

Hi, quick question on SG&A, which came in a bit higher than we had modeled for the fourth quarter. Can you just talk about what drove the year-on-year increase. Is Q4 a fair run rate for 2020?

When we look at SG&A, one of the nice things for PACCAR is we have the lowest SG&A in the industry by a substantial margin. We do a great job of managing that. As a percentage of sales, it was actually down in 2019 at the end of the year and we always take a look, we have a rigorous approach to cost control at all elements of the business both in up cycles and down cycles and we continue to manage that cost to the great levels we maintain. That's how we think about it. Consider very little things, very little is fixed costs and just try to do a great job.

Okay. And can you discuss new orders in North America and Europe for PACCAR relative to the industry. I think last quarter you noted your backlog represented 36% of the industry backlog. Where does it stand at the end of Q4?

Sure, our backlog is really sitting around 34% is what we have now. As we look at orders, orders are a complicated thing because it depends on everybody's inputs for what's an order and what's been canceled. So what we think about more is we make sure that what we're building has a firm order with a customer name on it, and that's what we do and so we've been able to adjust our build rates aligned with our orders and that carries us forward as we look into next year.

Good morning, gentlemen. I'm curious, Preston, based on what you know today, obviously things could change, but are the run rates for each of your factories kind of what you'd expect to be sort of stable through the year or do you think at some point there will be another production cut needed?

I think we think about it in a little bit more close in view than that. We think about whether the orders we have right now present the backlog we need to keep the factories running smoothly and that's where we're at right now. We've continued to adjust as I said, we think, first quarter's deliveries will be down 5% to 7% and build kind of matches that. Actually, it has to tie together. So that's where we're thinking about in the first quarter. We are operating in what we think is a good economy, GDP growth is going to be up almost 2% in the U.S. We think European GDP is growing. So there are some positive reasons to think about the economy and the operating environment. So we'll see what happens through the course of the year as far as build.

Okay, thanks. And can you just comment on what you're seeing in terms of used pricing and I'll pass it on.

Sure, used pricing as we said in the last quarterly is continuing to be a headwind. I think in the last time we talked about it being somewhere in the double-digit declines. A nice thing for being part of PACCAR, as we have an amazing team in our PACCAR Financial Services Group that does a great job of managing the used trucks. We sell the best trucks in the industry and the second owners love buying PACCAR products. It's really one of our inherent advantages, and the other part of it is, I think we continue to invest in our used truck organization so that we add new used truck centers throughout Europe and North America to make sure that we are meeting the market needs as we grow our market share, it means there is ultimately more used trucks, and we want to take care of our customers with those used truck centers.

Thank you.

Thanks a lot. Good morning.

Good morning.

I want to kind of flip over to Financial Services. Revenue was quite strong. Can you comment on what drove the strength in revenue and then also within the Financial Services, the provision for losses on receivables dropped on an absolute basis sequentially against what continues to be a pretty challenging used truck price environment that you just described and I'm just wondering what the drivers were for that as well?

Sure. Harry, you want to?

Sure. So the PACCAR Financial had a good quarter. We have a good portfolio, record revenues, so that drives a lot of the profit improvement, but like Preston said used trucks continue to be a headwind for the finance company. We expect that that will continue in the first quarter and customers continue to pay their bills. Past dues are low, below 1% and credit losses are favorable too. So we expect with all of that the first quarter results of the finance company to be very similar to the fourth quarter.

Thank you, Harrie. The revenue has increased significantly both year-over-year and sequentially. Was there any impact related to that?

Sure, some of that reflects the increased volume of used truck sales that flow through the finance company.

Okay, thank you very much.

You're welcome.

Yes, hi, good morning and good afternoon everyone. I'm wondering if you could please talk about what you're seeing out of your competitors in the U.S. and Canada. Typically, when we are heading into a production downturn, you folks are the first to cut production and your market share in the initial stages of a downturn is typically lower as a result and this time your production share actually went up in the first quarter, a reduction here, can you just talk about what you're seeing out of your competitors and what's driving the different cadence in terms of your production share in this fourth quarter compared to the past couple of production downturns?

Currently, we have exceptional products and a strong dealer network, which has created significant demand for our offerings. People are eager to drive the best trucks and access superior services and powertrains, and that’s exactly what we provide. We are focused on fulfilling our orders, which has contributed to our increase in market share. Overall, it’s a positive situation for us because we have outstanding products.

And when you look at the overall inventory picture for the industry. So we're exiting '19 with about 73,000 trucks in inventory, which if you apply prior cycles, looks like the industry need to take out about 20,000, maybe 30,000 trucks out of dealer inventories. What does that picture look like for PACCAR just as the natural transition for some custom end applications that are completed at the dealer site, how much do you anticipate your dealer inventories coming down in '20?

It's a good question. Our inventories are in a really good shape. You said 73,000. So that's kind of a round number. If I use a round number for us, call it 18,000 of Kenworth and Peterbilt combined. It obviously depends when you start it, but as we have 30% of the market share, we really only have 25% of the inventory. So that says again that we're in pretty good condition and some of that inventory, quite a bit of that inventory is with body builders right now. So we have the leader in the vocational market and so some of those trucks are getting bodies put onto them right now.

In the parts business, you've maintained steady performance despite fluctuations in freight markets. Could you discuss your outlook for 4% to 6% growth and how much this is influenced by your engines and the new truck lineup in relation to parts consumption versus underlying freight traffic? Please provide some context on how you're considering these factors in your outlook.

Yes, I think that there are a couple of things going on and the parts team continues to do an outstanding job. They have great technologies they are employing. It is something that we maybe don't give enough sharing of. Their e-commerce program is outstanding and that's doing a great job of making sure we have the right products at the right places. As we mentioned in our earlier comments, we're investing in distribution centers as well. A new distribution center coming online this year in Las Vegas, Nevada, another one in Ponta Grossa in Brazil. Those contribute to parts performance. We continue to grow our proprietary power trains you mentioned. So I wouldn't say that's stable. That's a growing opportunity for us. Last year, we finished at 43% for engine sales being with our MX engines. So that's great. It was 47% actually in the fourth quarter. That's another opportunity for us. You mentioned the great trucks and the growing share they contribute to the parts team's growth. There's just a lot of great things happening on the parts team and so we have a great future to look forward to there.

So you don't need really strong pickup in freight volumes to get the 4% to 6% growth target?

No, I think freight volume influences demand, but the main factors are the size of the part and the proprietary content, which takes a few years to develop for parts consumption to grow. Looking ahead, there's a substantial amount of freight being transported. Freight tonnage increased by over 3% last year, which will contribute to utilization, and we agree on that.

I appreciate the discussion. Thanks.

Have a good day.

Yes, good morning guys. I just had a question on decremental margin. I mean, if you go back to 2016, you seem to have sort of a similar revenue composition of down truck production but very steady parts and that translated into kind of 15%-ish type decremental gross margin pre-R&D. Is there any reason why you shouldn't be able to sustain a similar level of performance or anything to think about this time around versus then?

No, I think you characterized it well and then we think about incrementals and decrementals in that 15% to 20% range and so what as you said, we saw in the 2016 time frame and I think that's a nice way to look at it going forward.

Okay, great. And then the parts business has remained very resilient but certainly did decelerate a bit as the year kind of grinded on. Are you seeing any type of maintenance deferrals amid softer market conditions and when you say that you expect the business to be up 4% to 6% in 2020, is that somewhat second half weighted or do you think we'll see this acceleration back to that growth trajectory out of the gate in the first half of the year?

Yes, I think that the 4% to 6% obviously is what we said for how we look at it going forward and I don't think I would try to stratify that by quarter. I think it's going to be good performance throughout. Obviously, there can always be moments of cyclicality that are impossible to kind of guess where people are going to be by weeks or a month, but in general with great freight volumes, a great parts team, the right product lineups, and the right investments, it's going to continue to deliver.

And then just on the SG&A, the question you got before. Are you trying to say that SG&A as a percentage of sales overall should be roughly similar to where it was in 2019?

Well, that's, if you go back and look, that's where SG&A has kind of run for us. Again, comparing it to the industry, it's significantly, the leanness of PACCAR shows through and we continue to do a great job of managing that SG&A and I think we'll continue to do that going forward.

I believe the previous question pointed out that there was a noticeable increase in the fourth quarter compared to the third quarter. So, if we're considering the entire year, I'm trying to understand how your sales figures are projected to look.

Take a longer view of it and look where PACCAR has historically performed and know that we'll perform in that same level, as I think I would guess I'd share is we will continue to rigorously manage our costs and control them and make the right decisions to build the future of the company in a great way.

Okay. And then just lastly on the R&D side, I mean you're guiding to sort of stable R&D, but in the context of getting to production models for your alternative powertrain models over the next year and a half, how should we think about that? I guess I'm a little bit surprised that that number is not ramping up a little bit as you're moving in that direction?

I think we have an amazing team of engineering people around the world and they're doing a fantastic job of looking at how we should go to production. We're working closely with all the customers whose interest is in alternative powertrains and we'll have the right technologies for those customers when it comes time. We continue to do that in PACCAR's way which is with good decision-making, prudent investments, and leveraging our supply base and the other companies that are out there.

Thanks very much.

You bet.

Hi, good morning. I guess two follow-up questions one within the U.S. when you're talking about your orders and your backlog, can you distinguish between what you're seeing on the vocational side versus line-haul side? If there is any variation there and then just second a nuance when you're talking about Europe relative to the retail sales guide and relative to what other customers have come out to set it sounds like you're seeing Europe sort of more stable. I'm just wondering if Europe is trending a little better than what you would have thought so far and if so what geographies are driving that? Thank you.

Let's address the first part of your question. I believe we are leading in the vocational market with Peterbilt and Kenworth excelling in that area. The vocational market is performing well across the U.S. and Canada, with housing starts increasing and strong construction activity. PACCAR is effectively capitalizing on this, making it a significant portion of our orders. We are pleased with this progress and expect it to continue throughout the year as the economy evolves. Regarding Europe, it appears to be unfolding as we anticipated for the first quarter, with our build rates remaining stable for over two quarters. We are gaining good market share, and customer feedback on DAF trucks has been very positive. There is a persistent trend of freight moving from Central and Eastern Europe to Western Europe, which benefits us since DAF is a market leader in those regions, greatly contributing to our success.

Okay. Thank you.

You bet.

Thanks. Good morning, guys. Wondering how you feel about the second half visibility and your confidence in the outlook, obviously in the first half you have more backlog, but curious how you formed your full year market view and your assumptions in the first half versus the second half?

Yes, I think what we did is we said that we have a growing economy. So that's contributory. We're very close with all our customers and we spend a lot of time talking to them about how their businesses are working because that's really the underlying principle for how our build will develop. In the last even few weeks last week or two, I've talked to several of my friends that are refrigerated carriers, flatbed haulers, and truckload carriers throughout the country just to see how their businesses are running, they're running well and yet, we still feel like there will be some, there was probably an over-buy in 2018/2019 and so that's going to normalize itself into the 230,000 to 260,000 kind of a market for U.S. and Canada.

Are those customers indicating that they will increase their orders at some specific point this year to achieve the 230,000 to 260,000 market target?

It's not that specific. I think people buy trucks when they need them, and there is a huge population of people buying trucks, so it would be not accurate to model it that way, not that specifically.

Hey, good morning everyone. I wanted to revisit the question about Europe. If my data is correct, the market share for DAF decreased slightly in 2019 compared to 2018. Is there anything you would highlight regarding specific regions or countries, and do you expect that to change in 2020? Thank you.

We experienced a 16.2% share in 2019, which was our second-best year, following a 16.6% share previously. This reflects a 1-point increase, and we maintained significant momentum from that gain. On the medium-duty side, our share rose from 9% to 9.7% in 2019, indicating growth in that area. The U.K. performed exceptionally well, but we are also seeing strong performance in several European markets, with DAF trucks contributing to our customers' success.

Okay, thanks. And then just to follow up on, I think you mentioned pricing price-cost was positive in the fourth quarter, anything you'd call out for your thoughts for 2020. Do you expect that to continue?

I think what we saw was prices realized over a little bit over 2% and costs were less than 2% and we'll watch what happens in 2020 and see how that model develops for us, but there's obviously going to be fluctuations as we go forward?

Okay. That's all I had. Thanks guys.

Hi, thank you. I wanted to pick up on the point about price-cost. Is the first quarter, the implied deliveries are down about 17% year-over-year and in that context, I think the 14% gross margin would be viewed as fairly impressive? Price-cost you said was positive in the fourth quarter, can you give us some sense of the cadence or what do you expect for the first quarter. I think people are just trying to figure out if there is a risk to the top line, what's the decremental on it. In the first quarter, the setup on the guide, again relatively impressive at 14% gross margin with that kind of delivery decline. So can you help us a bit on maybe mix in the backlog, price/cost in the first quarter? We're just trying to get a sense of the resiliency of that again, relatively impressive decremental in the first quarter?

Thank you for the question, David. When we consider this, it’s important to ensure we are producing the right number of trucks, which depends on matching orders effectively. We're not experiencing significant changes in costs or prices. The positive price realization we had in the fourth quarter was beneficial, and we will see how this develops in 2020 as we observe that model.

So the price and cost spread in the fourth quarter is not expected to change significantly in the first or second quarters. We were trying to determine whether this reflects a mix or a price cost benefit that will help maintain 14% gross margins, or if it’s structurally about parts and such that allows us to feel somewhat comfortable with a more conservative top line while still ensuring gross margin resiliency. That's the essence of the question.

Yes, I think if I capture the essence of it, when we consider prices, the team does an excellent job of supporting customers, and people are willing to pay for our trucks. The key point about pricing for me is that customers desire PACCAR products because they are the best, and they are willing to purchase them. I believe that the strong performance of our truck segment and the gross margin performance is linked to our parts organization’s success. As truck sales decline, the parts mix increases, which also contributes to our performance, and both of these factors help us maintain industry-leading levels.

But it's not necessarily because price/cost gets notably better in the first quarter as and maybe some thought your costs are down from steel?

So there's nothing substantial there.

All right, appreciate it. All right, thank you.

Morning, guys. Just back on the FinCo again. I just wanted to understand because it seemed like your pre-tax profit was down and I think Steven asked earlier, just about carrying forward the margin, but was there anything one-time that was impacting margins this quarter or is it just the weaker used values. Are there any impairments or increased depreciation expenses that are really causing that big step-up in the interest in other borrowing expenses?

Yes, your final statement is characterizing it accurately. What you say is we had record new business volume in 2019, the $5.6 billion that was a contributor to revenue growth and then more volume on the used side was the other contributor to revenues and that was the headwind on the profit side.

And I think you mentioned that you're still seeing the double-digit declines in used. Have you seen any stabilization in used values or is it's still wait and see kind of how that market checks out?

Well, it is a dynamic market. I think that the nice thing is, as I said and it can't be overstressed, the fact that especially maybe the second or equally the second owners really like our products. So that's helpful to us from the price position compared to the rest of the industry. So that works to keep us at a premium, not just for the first, but the second owner and then I would share your comment that things have stabilized a little bit. We see one way to look at that is that the amount of inventory coming in is equal to the inventory going out. So that's helpful as well. We're not building used inventory and so kind of the state of where it is right now.

And then just on the CapEx side, I think your CapEx for the year came in about $100 million below what your guidance had been and you obviously didn't change the CapEx guidance for next year. So just wanted to understand kind of what that discrepancy was and if anything is proceeding ahead of schedule or any projects got cut?

No, in fact that's not exactly how we saw it. We saw CapEx was kind of slightly higher than where we'd started and we have a good cash flow or CapEx plan for 2020 as well, which is going to deliver the great products we need. I wonder if you're looking at the cash flow statements more than your CapEx commitments.

Okay. Yes, I was looking at the 575 versus the guidance for $625 million to $675 million but maybe that's the issue.

I think that's the number we're discussing for 2019.

Okay, perfect. Thank you for clarifying that. And then, and then just lastly, I think the comments that your build has remained steady. I just want to make sure that, that means that you really don't anticipate any further production cuts from the build rates that you are at currently?

I think what we said is we would expect in the first quarter that deliveries will be down 5% to 7% and that's obviously matching the order intake.

Hey guys, how is it going?

Really good how about for you?

Hanging in there. Yes, so I wonder if we could, if you could spend a minute just talking about Latin America, about how the setup is? Kind of what your market share is looking like and how you think you can gain a little bit more share in 2020 and just kind of the setup of the market there?

Sure, it's been a fantastic journey for us there. We have a great set of dealers really neat products down there. We've got a lot of success with the dealers and the customers. I think the brand reputation for DAF in Brazil has grown tremendously in just a very short period of time. We're looking at our market share growth opportunities as being substantial. We think that the market is relatively stable down there. So Brazil comes in at 75,000, the South American market overall is 100,000 to 110,000. As we noted, we increased our deliveries by 60% last year in South America. So, substantial growth that way. We'll just look forward to continuing growing the truck sales. The parts business is doing really well. We introduced the Financial Services business for customer financing in Brazil last year. So a lot of good activity happening for us in South America.

Okay. Thank you.

Yes, thanks for squeezing me in here. I appreciate some of the color on the parts outlook but as for sort of dissecting some of the different buckets within the business, I'm curious if you have an update on the TRP Stores. How many do you plan to add next year and maybe any color on some sort of same-store sales growth number in that existing base of the stores?

TRP has been a great addition for us in reaching a new customer base. They've done a fantastic job of that. There's 210 stores now that are in operation. So that's growth year-over-year. We'll keep growing the number of stores where they make sense with our dealers all around the world. That's in Europe, it could be in Russia, it could be in South America and North America, all of the above, really. So we'll continue to see the brand grow and perform well and bring new customers to PACCAR.

Okay. And then just curious to see if you have an update on the margin profile into next year for the parts business. On one hand, you obviously have the aging MX engine population and then the other one the TRP revenue increase. So any color would be appreciated on that?

I think the margin profile will stay relatively in the same range.

Oka, like 27%, 28%?

That kind of range.

Got it. Thank you.

Hi guys, good morning, good afternoon. Going back to the MX engine, it looks like you had a pretty strong fourth quarter. I don't know how much of that increase was mix of customers that you're shipping the engine out to, but how are you thinking about your penetration rate for this year?

So we have a great powertrain offering, obviously the MX engine that's a core of it. We have great relationship with Cummins as well who does a great job of supporting our customers with their powertrain. We did grow our MX engine share to 47% in the fourth quarter for a full year average of 43%. Part of what enabled that is we invested in manufacturing capacity in the course of the year last year. So we have adequate capacity to build as many MXs as we want for the customers and we look forward to seeing that continue to grow as we move through the cycle.

Okay, got you. And then just a clarification, again on the Financial Services revenue, can you tell us how much your used truck sales were up in the quarter?

I don't have that detail sitting around in front of me, but they did increase. I just don't know the number in front of us.

Good morning and good afternoon, everyone. Thanks for taking my question. I think your heavy-duty percentage tends to be around 85% historically. So first, are you still comfortable with that breakout longer term? And the second part of my question, what was it in the fourth quarter?

I believe the general percentage is acceptable, but we see significant growth opportunities in both the heavy and medium segments moving forward. We will continue to see positive developments in market share at PACCAR. We will maintain a steady approach, which has proven successful in growing our share, and we expect to replicate that success. I don’t anticipate much change in this regard, although I don’t have the precise numbers on hand; your ratio estimates seem accurate.

Okay. And do you think that you may have picked up some share with the GM strike in the Class 6 to Class 7 categories in the fourth quarter?

I think we picked up share because we just have great trucks, great people, great dealers.

Could you provide an update on your strategic priorities from a longer-term perspective? Are there any areas that you anticipate will receive more focus or drive growth, such as specific regions, greater integration of PACCAR engines, alternative technologies, or anything else?

Well, you hit some of them right, we're going to keep growing organically. We're going to grow geographically where it makes sense and provides a profit for the corporation and we're going to keep making the prudent investments in technologies that deliver great trucks and powertrains to our customers when they need them. So all of those will be areas that we grow in.

Yes, hey everybody. My question is, you gave helpful comments on the European market share. Are you willing to sort of talk about your theme of improving straight truck market share, where that's progressing and whether you need that to work to sort of get above a certain threshold. Any update you can give us there?

It continues to be a focus. We continue to do well with it. We did grow as a percentage there in the straight truck market. That's going to continue to be an area of what we just talked on the prior question is organic growth for us.

Are you experiencing growth in both tractor and straight truck share in Europe, or is there a limitation on the tractor side?

No, there is no limit. I mean, we're the market leader in tractors and we'll continue to be enjoying that and looking for extension of that and growing on the straight truck side as well.

So we have the product in the straight truck side. So if you look at markets where that has been for a long time, the U.K. Netherlands, Belgium, a straight truck market share is about the same as the tractor market share. So we do have the products. It's just a matter of growing that business also in markets like Germany, France, Italy, and Spain.

Thank you. I have a question that may be difficult to answer, but I'll go ahead and ask it. In a typical up and down cycle, what is your preferred approach to adjusting production in light of the supply chain and ramping factors? Would you consider making adjustments one or two quarters in advance, or further out, like two or three quarters? I understand that you aim to keep inventory low and avoid disrupting dealers, so I'm curious about your perspective on the timing of production changes.

Yes, I think we build trucks to order is the essence of it, which is different than the automotive industry. What we do is when we talk to our customers and they need a truck, then we schedule that in and we try to maintain some kind of visibility whether that's four, eight, 12 weeks and that's how we define our production schedules.

Okay. No, thank you.

All right.

Hi, good morning. My impression so far and commentary around pricing expectations is that it's more of a wait and see into 2020? What we saw the last time, demand did soften in 2016 is that there was a little bit of pricing pressure and I'm just curious whether you anticipate that we should be looking at something similar just given a little bit softer demand or if you're seeing anything different out there across competitor behavior that would suggest that the pricing can hold up?

I think if you think of in terms of truck part and other, in the truck side, there will be obviously market dynamics drive differences, but we have a continued strong performance, an increasing percentage of our performance coming from parts and they are doing a great job. So it's a little bit of a balancing factor to it looking back to prior cycles, but no, I don't think you should think that PACCAR's going to do anything except deliver the best margins in the industry.

And then I guess related but a little bit more of a mix type question. Similarly, going back from if we just track 2015 to 2016, the average truck price was down and it was more than just a pure pricing effect. Is there anything to just be aware of with general mix in a softer demand environment and what that means for average unit pricing just given the mix effect.

I don't really think so. I don't think there's anything in there.

Okay, thanks a lot.

Thank you very much. Hi everyone. Hey, you know, a lot of the real smart questions have been asked here, I just want to follow up with one. I think I know the answer to and just a detail, but when you're giving the 5% to 7% down figure. That's sequentially versus 4Q, that's not a year-on-year number. Correct?

Yes, correct.

Okay, thank you. And then secondly, with the U.S. pulling back a little bit more than Europe, at least in the outlook. How should I think about tax rate or are there any other changes that I would think about to some of the other line items that would occur as a result of that?

Yes, I don't expect much change in the overall tax rate.

Okay, so consistent with where we are this year.

Yes.

Okay, that's all I have. Thank you very much and congratulations.

You bet. Have a great day.

Hello. Again, thanks for the follow-up. Two questions, one short-term. I know it's a smaller volume market for you, but you have a pretty good share over there. I'm wondering if you could comment on whether you expect the Australian natural disasters to have any tangible impact on 2020 demand?

Our hearts and prayers go out to the people and the country that have been adversely affected. However, I don’t believe it will have any long-term impact on us. We will maintain our position as the market leader.

Okay, thanks. And then separately, longer term, you talked about it at CES and then again in the release today, the battery electric trucks expected to hit the market a year to year and a half from now. Are you, based on your work with the customers, seeing any potential for acceleration in adoption rates versus what you originally expected or is it pretty much on track?

I think it's pretty much on track. It has to make commercial sense or be regulated in, and we have really good partnerships that we're working with to bring the right trucks to the customers and we will supply them the best trucks, the best alternative powertrain trucks as they need them.

Thanks. And then a little bit more detail on that, Preston, you have kind of divergent, I think divergent potential regulations going on between the EPA and CARB maybe that's been closed, but is there potential for a significantly different adoption rate in let's say California and associated states versus the rest of the country?

There could be. I mean that can happen. It can happen in Europe that way as well. I think from our standpoint, that's not going to material effect how we develop the products. What we're going to do is develop the best technologies with the highest performance and then we will just supply those for the markets they need based upon where the customers are operating.

Okay, thank you very much.

We'd like to thank everyone for joining the call and thank you, operator.