Paccar Inc (PCAR) — Q1 2020 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 and the Investor Relations page on paccar.com. I would now like to introduce Preston Feight.

Good morning, everyone. Harrie Schippers and I will update you on our first quarter results and our business highlights. I'd like to begin by expressing my sincere thanks and appreciation to all PACCAR employees for their dedication, hard work and their upbeat spirit as we tackle today's challenges and work towards a bright future. The trucking industry has been declared as an essential business. PACCAR employees along with our dealers are providing critical support to our customers who are delivering medical supplies, food and essential services to our communities around the world. I also want to express my gratitude and thanks to the millions of men and women who are working hard to support those affected by the pandemic. I'm pleased to share that the PACCAR Foundation has donated $2 million to United Way and other organizations to help our communities. Over the next few weeks, we are beginning a gradual resumption of truck production at selected factories. The specific restart timing for each plant and office location is being aligned with government directives, implementation of our work and social distancing measures, parts availability from suppliers and our business needs. During this gradual restart, our highest priority is on ensuring the health and safety of our employees and their families. Looking at our first quarter financial results, PACCAR achieved good revenues and net income. PACCAR's first quarter sales and financial services revenues were $5.2 billion, and first quarter net income was $359 million. PACCAR delivered 38,400 trucks during the first quarter. PACCAR Parts achieved quarterly revenues of $999 million. Parts pretax profits were a record $215 million, 3% higher than the same period last year. Truck and Parts gross margins were 12.3% in the first quarter. The first quarter results included $50 million in higher accruals for product support costs. PACCAR Financial achieved pretax income of $48 million. DAF, Peterbilt and Kenworth delivered excellent heavy duty market share in the first quarter. Kenworth and Peterbilt’s U.S. and Canada market share increased to 30.4% compared to 30% for the full year of 2019. DAF's European market share increased to 16.7% in the first quarter compared to 16.2% last year. And in Brazil in the above 40-tonne segment, first quarter DAF market share increased to a record 8.7% compared to 6.1% last year, fantastic work. PACCAR has steadily grown market share over the long-term by delivering excellent value to our customers in terms of product quality, innovative technologies, and low total cost of ownership. The global macroeconomic environment is uncertain at this time. Therefore, we will not provide guidance on estimated 2020 truck industry market sizes, next quarter’s truck deliveries and gross margins and PACCAR Parts revenues. Our employees are doing an excellent job managing through the pandemic. We are rigorously aligning cost to the changing market conditions, including reducing capital investment and research and development costs. As a result of the Company's strong culture and discipline, we've achieved 81 consecutive years of profitability and have a bright future. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Harrie?

Thanks, Preston. PACCAR continues to provide strong operating cash flow for reinvestment in future growth and distribution to stockholders. Operating cash flow was $416 million in the first quarter. PACCAR delivered an excellent return on invested capital of 23% over the last five years, due to a combination of strong profitability and a consistent conservative approach to investing in the business. Yesterday, the PACCAR Board of Directors announced the regular quarterly dividend of $0.32 per share. PACCAR has a strong balance sheet with $4.3 billion of cash and marketable securities, no manufacturing debt, and an A+/A1 credit rating. PACCAR Parts achieved quarterly revenues of $999 million, which is comparable to the same period last year. Parts pretax profits were a record $215 million, 3% higher than the first quarter last year. To drive growth, PACCAR has made consistent investments in parts distribution capacity and customer focused technologies. PACCAR Parts will open two new parts distribution centers this year: One is Ponta Grossa, Brazil; and the other one is in Las Vegas, Nevada. PACCAR Parts has also made significant investments in e-commerce platform, which is benefiting our customers and dealers in this challenging time. PACCAR Financial Services first quarter revenues were $384 million and pretax income was $48 million, reflecting lower used truck sales results. Kenworth and Peterbilt truck resale values command a 10% to 15% premium over competitors’ trucks. PACCAR Financial is investing to increase its retail used truck sample capacity worldwide, which enhances its used truck sales margins. PACCAR Financial recently opened a used truck center in Denton, Texas, and plans to open additional used truck centers in Prague, Czech Republic, and in Madrid, Spain this year. PACCAR Financial Services has excellent ongoing access to the debt markets, including commercial paper on a regular basis. During the first quarter, PACCAR issued 3 and 5-year term notes, totaling $632 million. In addition, in early April, PACCAR Financial issued $400 million 3-year fixed rate notes. We have reduced 2020 capital expenditures by $100 million to a range of $525 million to $575 million and have reduced research and development expenses by $45 million to a range of $265 million to $295 million. PACCAR’s strong financial position enables us to continue investing in important capital and R&D projects in all market conditions. And finally, we thank our excellent independent Kenworth, Peterbilt and DAF dealers for their support of our customers. Kenworth, Peterbilt and DAF dealers are well-capitalized and have invested $2.6 billion in their businesses in the last 10 years. These investments continue to make a significant contribution to PACCAR’s Truck market share PACCAR Parts and Financial Services performance. Thank you. We'd be pleased to answer your questions.

Maybe, perhaps, let me go back to your opening comments. I'm curious about a little more detail about how you're thinking about reopening production because you mentioned a number of things there. You mentioned local regulations, parts availability, and then you mentioned market demand. So, there are sort of three buckets to consider here. Can you give us any more color on the rate of reopening that you might expect as we go forward?

I'd tell you that the most important thing as we think about restart is, again, I just keep reemphasizing that this is the health of our employees, their families, our concern for getting it right, and making sure we take care of them. That's number one, that's number two, and that's number three for us. And then as we look at this, we obviously want to make sure that we have alignment with the government agencies, that's really important to us, so that we are staying aligned with best practices for how we can reopen and restart operations. It's also essential to consider our supply base and their readiness for the restart in our factories to ensure we stay aligned with them and, of course, our business needs. So, all those things together are where we're thinking about it. We’re really pleased with the best practices that we have put in place in the factories, including temperature checks for our employees, distancing protocols, separation of employees, spacing and barriers, and then wearing masks, personal protective equipment and enhanced cleaning. So, all these factors are into our approach for reopening the factories. It is going to be a gradual reopening. It's going to be done on a location-by-location basis in a phased manner. We started some this week, factories, kind of at the start of operations in Europe and in Australia. And then we will work through the rest of our plants in the coming weeks and make sure we take care of the employees and bring the truck factories back up and running.

So, would you expect to have everything back up and running at some level by the end of the quarter perhaps? What's a good way to kind of put bookends around that?

That's a long window, and I feel pretty good about that. I think, we’re thinking it sooner, but we obviously don't have the final answers and we are working through that in a constructive way with the local agencies and supply base.

Great. Thanks.

You bet.

Thanks and good to talk to everybody today.

Good to talk to you too.

I guess, following on Steve's question, PACCAR really has a strong supply chain management track record. You mentioned that that's one of the factors. Couple of questions if I may about that. First, have you encountered any smaller suppliers running into liquidity issues? And then, second, it seems like the world may be looking at kind of a piecemeal reopening in terms of when to ease the current virus containment efforts. How much of an impact/challenge could that have or be to get your operations back up and running?

Great question. It's a fun thing for our teams to be working through right now with our suppliers. We have such good communication with them that it's really helpful to know when you can tell that relationships matter. We're paying attention to what they're doing and when their restart timings are. And large and small suppliers have been doing a really good job of keeping us informed of their readiness. They are doing the same things we are. They are trying to take care of their employees; they're trying to make sure they stay in line with the governments; and then they're moving forward with restarts. And so far, that's part of the whole puzzle we're putting together and getting the truck factories back up.

Okay. And then, just a question on the quarter and the Truck segment. Now, the decremental margins were somewhere around 25% and 26%. It's not the highest PACCAR has ever seen, but it’s kind of higher than typical. You mentioned product accrual was running high. But, could you give us a little more color on what kind of growth, the margin compression? I mean, obviously some of it is the shutdown.

Well, I think that as you mentioned, we had the $15 million that we took the opportunity to book for the improvement of our continuous refinement of our engines, our MX engine was a lot of that. We are doing some software and hardware upgrades on the engine. So, that's something that we want to do is make sure that our customers keep having the best experiences that come with our engines. And as far as what the future looks like, we're going to see how the pandemic works its way through the system. And that will certainly be something we're all watching closely.

I am wondering if you could just give us an update on dealer inventory levels when we were pressing discussion we had last quarter, obviously we had different environment. But, I'm wondering if you could give us an update on declines in dealer inventory levels in March and anticipated declines from here and a conversation around timing of the restart. I'm wondering if the calculus has evolved at all, given potentially an opportunity to lean out inventories before we're ramping up production?

Sure, glad to. So, the North American industry has roughly 3.8 months of retail sales in inventory. PACCAR has less than that. We have 3.4 months of retail sales through March for Kenworth and Peterbilt dealers. And of our 3.4 months, roughly half of that is at bodybuilders. So, that's being worked on right now. And so, our inventory is in really good shape right now.

And in terms of the Parts part of the business, can you talk about what the cadence has been in April? Obviously very steady performance in the March quarter. I'm wondering if you’d be willing to talk about what kind of trends you've seen so far in April.

One of the things that's interesting and just kind of gives a little help I hope is that 75% of all goods are moved by trucks. And so, a lot of the trucking companies are really busy right now and they're moving around the country taking care of our communities. And as that's happening, those trucks end up consuming parts. So, there was a lot of strong activity in March and we still have going on in April. And we'll kind of watch how the quarter develops. But, we expect our Parts team to continue to perform really well. And they have great programs. And one of the things that's been nice to watch is their e-commerce programs and the way they're handling our customers and working directly with customers and dealers to support these critical needs is going really well.

And then, in terms of the operational discussion, the conversation you just had with Andy on the warranty program. So, if we back out the warranty program, decremental margins would have been 20%. Is that the sort of run rate that we're comfortable thinking through, or is the level of being shut down for most of April, if not all of April, does that throw that type of decremental margin off as we think about what this quarter might look like?

Yes, I think your assessment of the impact of the product support fees aligns with the margin. However, I would say that looking ahead, we will monitor how the situation evolves, especially regarding when our factories resume operations and the state of the economy in the second quarter.

My first question is regarding the loss provisions within FinCo, which were higher than I anticipated, at least in absolute terms, although not in terms of direction. Can you comment on whether there is a specific region or customer segment that stands out? I'm trying to understand how this might affect the outlook, particularly if we may face a tougher environment for truckers in North America in the short term. Could you clarify your views on loss provisions and your experiences during the quarter?

The $50 million increase in credit loss provision reflects the weaker economy. And the weak economy under the new CECL accounting standards resulted in a more volatile number. So, with the weak economy, the calculation resulted in a $50 million higher credit loss provision. If we look at the finance company, the portfolio is in really good shape. We have a very healthy mix of very good A and B customers. And past dues remain really low, currently less than 1%. So, finance company is in good shape. But the weak economy and the accounting standards drive most of that increase in credit loss reserve.

I have one final question. I'm interested in how closely the Parts team follows the trends. In the K, I noticed a forecast indicating that parts demand in the U.S. is expected to decline by around 20%. I understand you aren't providing specific guidance on parts sales, but do you have any comments regarding this forecast?

I don’t have any comments on the case numbers. What we’re watching is a team with great programs that are well-positioned to provide not just parts, but also knowledge, and they are doing an excellent job. As I mentioned, I have been in discussions with numerous customers and our dealers, and there is still a lot of activity happening out there, so we will support at the level that is necessary.

Regarding the values of used equipment, approximately 28% of your finance portfolio is based in Europe, with a significant portion likely involving guaranteed residuals. Could you discuss the pricing in the FinCo business and how it might evolve moving forward?

Used truck prices in Europe came down a little bit in the first quarter. North American used truck prices were mostly flat, of course down compared to where we were a year ago. Kenworth and Peterbilt trucks commanded a 10% to 15% premium over our competitive vehicles. So, we're in a really good shape from that perspective. But adding used truck retail centers, opening one in Czech Republic this quarter, just added one in Denton, Texas. The used truck inventories, as far as we can tell in Europe are a little bit higher than where they've been, especially for the industry. Thus, used truck inventory is in relatively good shape, if you compare it to where the rest of the industry is.

That's exactly right. I mean, we have a lower percentage of the inventory of used trucks in Europe than the industry does. And that puts us in good position.

But you did mention that used prices in Europe are weaker than they were a quarter ago or compared to last year.

A little bit lower than a quarter ago and lower than a year ago, but…

That's kind of industry wide.

Okay. And then, just on production cuts, can you give us any kind of direction in terms of the number of deliveries, truck deliveries you had in Q1? And any ideas as you ramp back up, what you would expect deliveries to be quarter-over-quarter? I mean, I know you can't see past the second quarter. But, as you ramp, any direction, at least give us a ballpark for Q1 and then where we might think about Q2 being?

Certainly, Ann. We can discuss that. The deliveries for the three-month period were 38,400. Looking ahead, our primary focus right now is ensuring our employees are taken care of. As we manage that, we will gradually increase our production to match the demand, and we'll see how that plays out in the second quarter.

Okay. I'll leave it there in the interest of time. Thank you.

Okay.

Hi. Good morning. My question is more about the overall picture, looking at how this period is different or similar to 2008-2009. Can you highlight the differences or similarities in how you're managing this period, focusing on at least three specific areas? You mentioned in your prepared remarks that you have had 81 consecutive years of profitability. Back in 2009, there were two quarters that were essentially break-even. Could you address the prospect of this being your 82nd year of profitability? Secondly, the gross margin declines were around 14.5% to 15%, but they fell to 8% to 8.5% in 2009. I'm curious about the differences in the business model and what might account for that change. Lastly, regarding the special dividend, the equipment company still had a net cash position in 2009, yet you decided to significantly cut the special dividend year-over-year. I would like to see how those three key points relate to the differences and similarities between today and the Great Recession.

Sure, David. Good to talk with you. First off, you got to start by thinking that we did succeed in '08 and '09. And as we look at the Company right now, as we sit here in 2020, we're an even stronger company than we were there. We have $4.3 billion in cash sitting on our balance sheet. We have great liquidity. We have great access to liquidity in the market still that hasn't changed during this timeframe. Our parts business has grown over that more than a decade, and it's just a foundational part of our business, does a great job. And we have an experienced leadership team that has been through a lot of cycles. And we know how to manage things, we know how to control costs, and we have amazing trucks and engines out there. The MX engine is doing a great job and it's 43% of our builds. So, that's helpful to us from a Parts standpoint. Just the business that we've built is really strong and is doing a good job of taking care of our customers. And freight continues to move in this environment. So, we feel positive about our future and the product we have on the field and those that we're developing.

But, could you address those three issues to some degree? Just the idea of however you feel the flex in your costs, how the situation may be, and even just your framework, it sounds like you do expect obviously some uneven, but at least some reopening of the factories in the not too distant future. Can we look at '09 as a guide point that if you were able to stay profitable in that environment, this should be similar? The gross margin is getting cut in half roughly, a little bit better than that is a framework and also the handling of the special dividend. If you can just give some parameters of the difference now versus then for those three issues in particular?

We recently announced our first-quarter dividend of $0.32 per share, which reflects our strong performance. We have a solid history of paying dividends, and we will continue to evaluate our future decisions based on our annual results as determined by the Board. I don't think it’s appropriate to compare the current situation to what happened in 2008-2009, as each scenario is different and unique. Currently, freight is being moved, which is a positive indicator. Our Company is well-positioned with strong liquidity, cash reserves, and product investments. Our trucks are top-notch, which is encouraging.

And the comfort in the larger parts business and a business that's more on your own vertically integrated drivetrain than back then. Is that something else that we should take a little more comfort in versus '09? But at the same time the unevenness of the production, it's really less of almost your decision that when you can ramp up. I mean, is that the yin and yang here better about Parts, a little more uncertain about the Truck margins, just given in a way a bit out of your hands?

Sure. We have the stronger foundational parts market. We have the growth in our engine business, right, '08, '09 wasn't here in North America. So, that's good. I think, the other thing to think about the share growth over that timeframe has been significant. So, we've had really strong share growth over that time, which contributes extra volume to us. And PACCAR does a great job. Our team is so good at adjusting the business, both in capital and expense side to think about how the business should be run. And so, we really do adjust to market conditions.

So, just to follow up on kind of the thrust of Ann and David's questioning. Does your intelligence, like what you know and see today and hear, does that give you a sense that by the end of the second quarter, you'll be able to give us more, whatever it is, like a clearer view of what the rest of the year looks like and how things play out?

I think, as a general sense, it seems like by the next quarter gets through us, we’ll have a lot more information than we do today and we'll share with you what we can at that point.

And then, I wonder if you could give us a little bit of a sense like you're kind of hinting at flexibility in the factories and every time you walk through, there's fewer and fewer people or there's more automation, whatever the right way to say it is. Can you give us a sense of some of the internal focus points? You guys are kind of using this pandemic as an opportunity to come out of this situation stronger over the next 5 or 10 years than you were going into it?

When I think about our factories, the first thing that comes to mind is how impressive our people are. Whether I’m at a distribution center, a truck factory, or anywhere else, I am continually amazed by our exceptional team. I’m incredibly proud of what they are achieving. They are constantly working to find new ways to enhance our efficiencies and effectiveness, and they do this every single day. We utilize Six Sigma as a valuable tool to optimize our processes, and we will keep doing so. This is an important time for us as we focus on truck production and our future strategies. We will gain new insights that will be beneficial for improving our business and increasing our effectiveness and efficiency as we move forward.

Your employees are going to make a recording of this and come back to you and ask for a raise next January. Thanks very much.

They are the best in the world. They are fantastic.

I want to try and dig through a little bit of kind of the segments within the trucking space and your customers. I mean, there are some parts that are strong, consumer focus, package delivery focus. There are some that are really weak, energy and auto related. Could you talk a little bit about that customer mix for you, for your products, and how that would compare to the industry overall in general?

You did a great job summarizing the situation. Refrigerated carriers and protein haulers have experienced a shift in their business direction. Long-haul trucking companies that are making deliveries are performing well. We are a leader in the vocational segment, and that business has been robust. I mentioned that part of our inventory is currently with bodybuilders, being prepared for summer production. The status of over-the-road trucking companies varies by the individual company. Some have a solid customer base, which positions them favorably. Although the energy sector is down, fuel prices have decreased by 20%. Since fuel costs make up a third of a trucking company's operating expenses, this reduction is beneficial for their operational models. You captured that well, and that's additional context for you.

Good morning, guys.

Good morning, Ross.

I have two questions. First, regarding the new parts distribution centers you plan to add, can you provide an estimate of the global increase in parts footprint that this will represent? Also, do you have any concerns about expanding parts distribution capacity during a recession? I want to understand how many distribution centers you have added over the past 5 to 10 years. Although the market is less volatile than the overall truck cycle, if the economy slows down for an extended period, will there be a limit to how much you can continue to expand that distribution network?

Sure. We have 18 distribution centers, and we'll be adding two more. We just opened a new facility down in Las Vegas a couple of weeks ago, and it's just beautiful. I know the employees are excited to move in there as we're talking about it. I think, one of the things that's happening is there's always opportunity to gain share. And we continue to use those distribution centers and the best practices around them to gain share. For example, our distribution centers are more closely aligned to our dealer body, and we're able to deliver more overnight parts to our customers and keep their uptime at maximum levels, which is one of our key objectives. That gives us a competitive advantage against the market. So, that's part of the thinking. It’s not just about parts and storage, it's about getting them to the customers as quickly as possible, and that's been really successful for us in helping the parts team grow the business.

Okay. So, are they all fairly similar in size? If you're adding two on a network of 18, is this a 10% increase? Will the business benefit from some type of pipeline fill, and will that be a second quarter event or a second half event that will help support the top line for the parts business this year?

So, you're right in saying it will continue to support the top line growth of the business. And yes, roughly 10%. There is some variation in the size of the PDCs, but they're roughly the same order of magnitude.

Okay, got you. And then just lastly, can you quantify your energy exposure? I realized that it's tricky. But maybe at the very least, you could tell us what portion of your U.S. and Canadian dealer network is located in the Gulf region or other energy-dependent regions? And anything like that would be really useful.

Yes, we have a very diversified portfolio that is not overly concentrated in the energy sector. Some dealers do have more exposure, but our dealers are doing an excellent job of growing their businesses. They have strong absorption rates and robust parts and service operations across varied customer bases. Overall, the dealer network is in great shape and is managing these challenges effectively.

Okay, thanks.

You bet.

Hi. Good morning. And I'm glad everyone is healthy and okay in this environment. I guess just two questions. One, can you just talk to, like on the truck side in Europe and in the U.S., what you're hearing from your customers in terms of trends in April? And I understand that you don't want to give an industry forecast, but what your customers are sort of telling you, how they're thinking about the year because that would imply you're probably managing your business for whatever they're telling you? And then, I guess, just my second question, understanding you're taking initiatives to cut R&D and CapEx, but how do you think sort of the coronavirus impacts people's view around alternative technologies, like EV or fuel cell relative to diesel, particularly with diesel prices lower now, perhaps we focus more on economics? So, if you could help give color on that, that would be helpful.

Yes, it's great to speak with you, Jamie. From our interactions with customers and dealers, we have noted that while some segments are performing well, others are facing moderate slowdowns, which is understandable given the current dynamic environment. Our customers have a solid base and manage their operations effectively, making necessary adjustments. Although some trucks are not being fully utilized, I am impressed with how they discuss their business and customer relations. They are vital to our economy and will continue to transport freight, which is important to remember. Regarding technology, R&D, and CapEx alignment, we have several promising programs underway, including initiatives related to battery electric vehicles. We will continue to advance these projects that are critical for building a strong future for our company and ensuring we provide our customers with the lowest possible operating costs. That's an overview of the current situation.

You guys called out some nice market share gains across the regions. What is your order share in backlog tell you about what your market share of retail and production might be over the next few quarters, and are there any regional differences?

Well, I think, we have seen good market share gains, as we mentioned, the 30.4% in the U.S. and 16.7% in Europe and really strong 8.7% in Brazil; and in the medium-duty side also good growth in both Europe and North America. So, that's been good. And as far as what order intake has been, I think the last month we have numbers for we had was March and we had 38% of the order intake in the month of March. We're in a good position.

Some more color on Europe. I think the market share growth to 16.7% for DAF has been in most markets, especially the UK. The UK share in the first quarter grew to 35%. So, we’re really benefiting from the fact that we have an excellent factory in Leyland and are able to build our trucks for the UK, in the UK.

Actually, I wanted to follow up on Steve's last question on the used sales mix. Is there any color you can provide on sort of where you see the channel mix works today, where you think it's going as far as retail versus wholesale or auction, anything that we can kind of use to frame what the opportunity there is to get the margins up?

What I look at is, the PACCAR Financial team has done a really good job of building this used truck center network, and we've seen even in the U.S. an uptick in the recent time of more retail activity flowing through the used truck centers. And as we build like the one in Prague and expand our capabilities, that just creates an outlet for the strong customer demand for PACCAR products and the used market. And it gives them a good place to go to get a young truck that's going to serve their needs really well, and they're happy to buy those trucks from us, because they know what they're getting. That helps values.

Have you discussed the new truck pricing environment? Last quarter, you mentioned it was up about 2%. I'm curious if anything has changed considering the macroeconomic situation and the decline in used pricing. Are any of your competitors acting irrationally, or are you still observing positive pricing on the new truck side? Thank you.

Well, I’ll let you talk to the competitors and what they do that's irrational. But for us, what we see is steadiness in pricing. And I think there continues to be a strong desire to have the best trucks, which are Kenworth, Peterbilt and DAF.

I was wondering if you could just share with us a little bit more detail on how to think about some of the fixed costs associated with the plant shutdowns and then also with the plant reopenings. And if any of the protocols that you're enacting that could last for a bit longer might impact the cost basis over the next 12 to 18 months?

Sure. As far as the protocols we're implementing, come back to the statement, because it's core to us. Our biggest focus right now is making sure that our employees are cared for and operating in a healthy and safe environment. And so, those protocols, things like temperature testing, when they enter the facilities and making sure there's 6 feet between them or 1.5 meters in Europe that we have put up spacing and barriers, where we're building the trucks. The people are wearing masks that we're doing great cleaning and that we're comparing all of our practices that I just described to other industry leaders to make sure we have the best practices in place. Those will carry on as long as they need to make sure that our employees are healthy and protected. And they're involved in the process and want them to feel comfortable with their environments. And that's really important to us. And then, as far as the costs that we experienced, our company is always thinking about capital costs and expense costs and looking for ways to reduce them. And our teams are fully focused on that. That's why you see the reduction in the CapEx spending plans that we outlined in our opening comments, and why we are looking at R&D reductions that we can take just so that business is optimized and set up for this industry cycle.

Is there anything you could share with us, just maybe about factory overhead costs that might not be getting cut just for the week that you're shut down? And then, if there's any difference between the shutdowns in North America versus in Europe?

Yes. The difference is that we have furloughs from employees during the stopping point. And that's what we've done in North America and Europe. In the Netherlands, we have a good relationship with our unions there, our employees there, and with the government there, and they've been able to help us support people still working during the shutdown, the overhead side of the business. And that's great, because we're continuing to make progress in these practices to keep a healthy and safe environment, and even on the engineering side, they are continuing to work on new projects and processes that are aligned with government support programs.

And those support programs are in place, not only in the Netherlands, but also in Belgium and the UK and qualifies to all those programs.

And then, just lastly, your parts margins did hold up very well this quarter. You mentioned that you've been building out the e-commerce platform, but are you seeing any structural changes that you think might last in terms of how your customers are interacting with that business in this environment?

I believe this may accelerate the shift towards increased e-commerce in the parts business. Our team has developed an effective system to make this accessible for customers and dealers, and we are continuing to utilize the e-commerce and MDI systems to ensure that everyone has the right parts in the right locations at the right times. This approach helps us optimize our customers' uptime. There could be a further shift in this direction, which is beneficial for PACCAR and our parts team.

Great. Thanks.

You bet.

Good morning and thank you. So, the truckload industry, which is an important part of your customer base, had been dealing with some headwinds like rising insurance premiums and low freight rates, which was resulting in a lot of market exits. But now, they also have the tailwind of lower diesel prices. So, my question is, if we start to see an economic rebound, while at the same time oil prices lag and remain relatively low, which would be good for the health of the truckload industry, do you have any sense of how quickly that could translate into higher orders and how we could see a benefit from that?

That's a good point you made. I believe it's true that the combination of the pandemic and low oil prices, along with the fact that our customers, the trucking companies, are continuing to deliver freight, is significant. When they deliver freight, they are putting miles on their trucks, which is promising for us in the future because these trucks are consumable and will eventually need to be replaced.

That makes sense. And then, just one follow-up on the balance sheet side. You don't have manufacturing debt, but you do obviously go to debt markets in your financial services segment. If this economic crisis intensifies and morphs into a financial crisis, do you think you may have to borrow on your manufacturing segment for your financial services segment?

So, you’re right. PACCAR has a very strong balance sheet with a $4.3 billion in cash, a strong A+/A1 credit rating, and no manufacturing debt. And that is exactly how we like it.

And we've had good access to the markets; we do. We have great credit ratings and good access to the markets. And we've had no trouble in getting midterm notes and our issuances in the first quarter were $632 million. And we did an issuance in April for $400 million. And we've got a really good position to support our financial services business.

I really just have a quick question around how to think about the Parts business going forward. I think, obviously Trucks still moving is a positive for the business. But outside of looking at industry truck utilization, was there anything we should think about around the strong 1Q performance in that business, dealers building parts inventory, given some uncertainty ahead or any color in the way you think inventory levels might be today?

Certainly. The key point is that the PACCAR Parts team, along with our dealers, has effectively established the right systems to support our customers. They have become a reliable source during these times and are successfully meeting the demand. As the situation evolves, customers are focused on ensuring that the necessary parts are readily available. They have achieved this, and as we progress, the parts are being used, and reorders will take place.

Just for starters. As far as the social distancing and the staggered shifts that you guys are employing in the factories, would that have any impact on production capacity?

Excuse me. What was the last part?

Would that have any impact on production capacity?

I believe that we have enough capacity in the current market, and by implementing these best practices, we will be able to meet our customers' needs effectively.

Okay. And can you provide some color around the order intake and cancellations that you've been seeing so far at least through April? I just want to understand if your backlog is essentially holding or shrinking at this point?

Yes. I think that through the month of April, our backlog actually improved and increased because we weren’t building trucks. And so, we do have good backlog through the second quarter and we'll watch how that carries on.

My question is just on your visibility into any future supply chain disruption from all the obvious impacts. Does that feel like a major uncertainty still, or is your visibility in the supply chain and how your suppliers are working seeing less volatile and less of a disruptive risk?

We're working really close with all suppliers, have daily contact with them. And we have a great strong supply base. We choose them for their strength and continue just alignment with them so that when we restart, they're ready to go and align with us. There's daily conversations. There's nothing that seems unstable right now. It's just making sure they’ve put the best practices in, care for their people, which they want to do and align up with the government directives.

And you’ve made a number of helpful comments on parts? Are you able to say from telematics or otherwise, how far miles driven or down in April just to give a sense of real-time pulse of the economy?

Yes, that's interesting. In North America, all of our trucks are connected. The connected trucks allow us to monitor vehicle miles traveled and fleet utilization. While there is a slight decrease, the figures are still holding up well and remain high compared to historical levels.

With respect to the facility restart and you talked about deploying safety protocols and government regulations and supply chain. Can you talk about any government regulations today that prevent you from operating, and are there protocols that you have not yet deployed or are sort of facilities ready to operate and regulations aren't restricting you, and it's just about sort of comfort level with supply chain?

We continue to work in alignment with the initial declarations, which is that trucking is an essential business and the parts supplies an essential business. So, that's one of the things that we work with and then the others to make sure that these best practices we put in for our employees are sufficient and are robust and protect them well. And those two things in alignment define our restart strategy.

And so, you're still rolling out some of those safety protocol actions at facilities?

Indeed we are and staying aligned with each state's directives as well.

I guess, kind of piggybacking on some of the adjustments you guys have made to the factories to obviously protect the employees and respect social distancing. Is there any cost quantification that you can kind of help us think about whether it’s the impact to gross margins or kind of incremental costs per piece associated with the cleaning, with the temperature taking, as well as spacing out employees a little bit more than we would historically have seen?

No, there's nothing that's that concrete. We take the temperatures of the employees we're going to or as they come back into the factories pre-production, and we make sure everybody is healthy when they come to work. That's good for everybody. The teams are doing a really good job of just bringing in safety protocols that work with truck production. And that overlay has gone very well in our factories where we're starting up.

And like Preston has said, the number one priority is the safety of our employees. And there might be some costs associated with that, but that's not the number one player.

Of course, you have made that very clear and we'll kind of keep that in mind. As we're looking forward, as we look through kind of the first quarter, can you give us a sense of what the parts revenue cadence was by month? Like, do we see any sort of major difference in your parts revenue in the month of March relative to January-February?

It was mostly consistent throughout the quarter. There were some variations from week to week, but overall it remained stable during the first part of each month.

That's helpful. And then, on the provisions for losses on receivables. With the step up that we saw obviously kind of tied to the economy, are you seeing any difference in terms of the receivables that you have for customers relative to dealers in kind of one of those two channels? Was there a big customer impact? I'm just trying to better understand as we think about the impact looking forward.

We talked about the past dues being really low. Most customers are in a good position to pay their bills on time. Finance company is doing well. We're financing a stable portion of the trucks that we sell, with all good well-dated customers that pay their bills.

I appreciate the time, guys.

You bet. Have a good day.

Thank you for taking my question. I have two quick questions. First, following up on what Jamie mentioned earlier, is it just a matter of delaying capital expenditures and research and development, or is there a structural adjustment where we might not pursue certain initiatives? Additionally, do you think the slowdown in the electric vehicle movement due to low fuel prices is influencing this? In terms of research and development programs or capital spending, where is the flexibility, and what do you think should be postponed in this environment?

Happy to answer that question with you. I would say that is whether deferred or canceled, we have a great portfolio of projects. They all have good returns and provide values for our customers. So with those projects, often what we're looking at right now is, can we do a phase now, can we postpone a phase to a later point? Very few of them will cancel. We just look at how well they can be done and how do we can more efficiently execute them. And as that lies into the EV movement or to autonomous vehicles or connected vehicles, those technologies really continue to progress into the truck industry in the coming years. PACCAR is going to continue to be a leader in offering EV vehicles to our customers and developing autonomous vehicles, leveraging partnerships and working with suppliers and doing in-house developments, so that we can have all of those ready when our customers want them. We will continue to have that leadership position.

Yes. I guess, I would just like to close by saying thank you to everybody for the calls. And again, just to recognize the outstanding people in our Company that are doing such a fantastic job, and then also to recognize those people that are handling and managing and working with the COVID situation around the world. Our heartfelt thoughts and prayers are with them, and we're all going to come through this stronger in the final analysis.