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Edited Transcript of PCAR earnings conference call or presentation 21-Apr-20 3:00pm GMT

Q1 2020 Paccar Inc Earnings Call

BELLEVUE Jun 10, 2020 (Thomson StreetEvents) -- Edited Transcript of PACCAR Inc earnings conference call or presentation Tuesday, April 21, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harrie C. A. M. Schippers

PACCAR Inc - President & CFO

* Ken Hastings

PACCAR Inc - Senior Director of IR

* R. Preston Feight

PACCAR Inc - CEO & Director

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Conference Call Participants

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* Andrew Millard Casey

Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst

* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* Courtney Yakavonis

Morgan Stanley, Research Division - Research Associate

* David Jon Leiker

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* David Michael Raso

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team

* Faheem Farid Sabeiha

Longbow Research LLC - Research Analyst

* Felix Boeschen

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Jeffrey Asher Kauffman

Loop Capital Markets LLC, Research Division - MD

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Joel Gifford Tiss

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Joseph John O'Dea

Vertical Research Partners, LLC - Partner

* Matthew Youssef Elkott

Cowen and Company, LLC, Research Division - Director

* Robert Cameron Wertheimer

Melius Research LLC - Founding Partner, Director of Research & Research Analyst

* Robert Hudson Salmon

Wolfe Research, LLC - Research Analyst

* Ross Paul Gilardi

BofA Merrill Lynch, Research Division - Director

* Seth Robert Weber

RBC Capital Markets, Research Division - Equity Analyst

* Stephen Edward Volkmann

Jefferies LLC, Research Division - Equity Analyst

* Steven Fisher

UBS Investment Bank, Research Division - Executive Director and Senior Analyst

* Timothy Thein

Citigroup Inc, Research Division - Director and U.S. Machinery Analyst

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Presentation

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Operator [1]

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Good morning. And welcome to PACCAR's First Quarter 2020 Earnings Conference Call. (Operator Instructions) Today's call is being recorded. And if anyone has any objections, they should disconnect at this time.

I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

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Ken Hastings, PACCAR Inc - Senior Director of IR [2]

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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 of paccar.com.

I would now like to introduce Preston Feight.

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R. Preston Feight, PACCAR Inc - CEO & Director [3]

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Well, 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're 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 have 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?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [4]

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Thanks, Preston. PACCAR continues to provide strong operating cash flow for reinvestment in future growth and distributions 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 5 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 a 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 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 2 new parts distribution centers this year. One is in Ponta Grossa, Brazil and the other one is in Las Vegas, Nevada. PACCAR Parts has also made significant investments in its 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 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 -- issuing 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 a $400 million, 3-year fixed rate note. 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 and PACCAR Parts and Financial Services' performance.

Thank you. We'd be pleased to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Stephen Volkmann of Jefferies.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [2]

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Maybe, Preston, we 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 sort of local regulations. You mentioned parts availability, and then you mentioned kind of market demand. So there's sort of 3 buckets to think about there. But can you give us any more color of the rate of reopening that you might expect as we go forward?

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R. Preston Feight, PACCAR Inc - CEO & Director [3]

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Hey, Stephen, good to talk to you. Very glad to. I'd tell you that the most important thing as we think about restart is, again, I keep reemphasizing this is the health of our employees, their families are concerned for getting it right, making sure we take care of them. That's #1, that's #2 and that's #3 for us actually. And then as we look about it, we obviously want to make sure that we have alignment with the government agencies. That's really important to us so that we're staying aligned with best practices for how we can reopen, restart society. It's also important that we think about our supply base and their readiness for the restart of our factories and make sure we stay aligned with them. And then, of course, our business needs.

So all those things together and where we're thinking about it, and I can -- really pleased with the best practices that we put in place in the factories. As far as temperature-taking for our employees, the distancing protocols, separation of the employees with spacing and barriers, and then wearing masks and personal protective equipment and enhanced cleaning. So all those things are going 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 already started some this week. In fact, we're kind of in the start-up 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.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [4]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [5]

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That's a long window, and I feel pretty good about that. I think we're thinking of 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.

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Operator [6]

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Our next question comes from the line of Andy Casey of Wells Fargo Securities.

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Andrew Millard Casey, Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst [7]

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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. A 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?

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R. Preston Feight, PACCAR Inc - CEO & Director [8]

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A 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 right now that it's really helpful to know when you can tell the relationships matter is 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. And they're doing the same things we are. They're 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 restart. And so far, that's part of the whole puzzle we're putting together and getting the truck factories back up.

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Andrew Millard Casey, Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst [9]

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Okay. And then just a question on the quarter in the truck segment. The decremental margins were somewhere around 25% and 26% revenue drop. 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.

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R. Preston Feight, PACCAR Inc - CEO & Director [10]

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Well, I think that, as you mentioned, we had the $50 million that we took the opportunity to book for the improvement of our continuous refinement of our engines. Our MX engines was a lot of that. We're 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 of experiences on the account of their 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.

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Operator [11]

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Your next question comes from the line of Jerry Revich of Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [12]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [13]

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

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [14]

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Okay. 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.

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R. Preston Feight, PACCAR Inc - CEO & Director [15]

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One of the things that's interesting, and this 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 activity 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. 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.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [16]

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Okay. 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 math off-kilter as we think about what this quarter might look like?

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R. Preston Feight, PACCAR Inc - CEO & Director [17]

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Yes. I think that we're -- your assessment of the impact of the product support fees does match into the margin. But I would say that looking forward and what it's going to be going forward, we're going to watch how the situation develops, and when we get our factories running and what the state of the economy is in the second quarter.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [18]

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Okay. And maybe just a clarification on the warranty program. Was that just a onetime over-the-air software update or across the population? Or can you just give us some context behind what exactly that warranty item was?

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R. Preston Feight, PACCAR Inc - CEO & Director [19]

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Well, we had the opportunity to optimize the performance of our trucks and engines, mostly on our MX engine from the 2017 to 2019 engines. And so that was hardware and software upgrades. And this accrual, we think, we got that all covered and making sure that our customers have optimally performing trucks and engines, always part of our game plan.

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Operator [20]

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Your next question comes from the line of Tim Thein of Citigroup.

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [21]

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The first question I had was on loss provisions within the Finkel. And they were certainly higher than I was expecting, at least the absolute level was not -- obviously not directionally, but maybe if you could comment there in terms of -- is there a specific region or a customer set that maybe you'd call out? And I'm just thinking about how that potentially looks going forward. Should we, at least shorter term, have a more challenging backdrop for truckers, at least in North America? So maybe just how to think about, again, loss provisions and what you experienced in the quarter?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [22]

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Yes. The $15 million increase in credit loss provision reflects the weaker economy, and a weaker economy under the new CECL accounting standards result in a more volatile number. So with that weak economy, the calculation resulted in a $15 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 the finance company is in good shape, but the weak economy and the accounting standards drive most of that increase in credit loss reserve.

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Timothy Thein, Citigroup Inc, Research Division - Director and U.S. Machinery Analyst [23]

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Okay. Maybe just one last one. Preston, I'm curious from the Parts team, how -- I'm not sure how closely they follow it. But MacKay -- and I know you're not talking or you're not giving guidance on parts sales specifically, but it kind of jumped out at me. I saw MacKay put out a forecast the other day that they expect, and again, this -- not to say this aligns with PACCAR exactly. But I'm talking about parts demand to be down like 20% in the U.S. I'm just curious if you had any comments on that.

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R. Preston Feight, PACCAR Inc - CEO & Director [24]

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Well, I don't really have any comments on MacKay's numbers. I know what we're watching is a team that's got great programs and really strongly positioned to support with not just parts, but knowledge, and they're doing a great job of that. And as I said, talking to a lot of customers and our dealers, there is a lot of activity still going out there and we'll support at the level that's needed.

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Operator [25]

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Your next question comes from the line of Ann Duignan of JPMorgan.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [26]

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On the used equipment values, about 28% of your finance book is European, and most of that, I think, is probably guaranteed residuals. So can you talk about the used pricing in the Finkel business and what that might manifest -- how that might manifest itself as we go forward here?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [27]

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Used truck prices in Europe came down a little bit in the first quarter. North America used truck prices was mostly flat, of course, down compared to where we were a year ago. Kenworth and Peterbilt trucks command a 10% to 15% premium over our competitor vehicles. So we're in a really good shape from that perspective. But adding used truck retail centers, opening 1 in Czech Republic this quarter. Just added 1 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. DAF's used truck inventory is in relatively good shape if you compare it to where the rest of the inventory -- the industry is. Anything you want to add there?

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R. Preston Feight, PACCAR Inc - CEO & Director [28]

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Yes, that's exactly right. I mean, we are -- we have a lower percentage of the inventory of used trucks in Europe than the industry does, and that puts us in good positions.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [29]

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But you didn't call out Europe -- used prices in Europe being weaker than they were a quarter ago or weaker than they were last year.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [30]

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They were a little bit lower than a quarter ago and lower than a year ago. But...

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R. Preston Feight, PACCAR Inc - CEO & Director [31]

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That's kind of industry-wide there.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [32]

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That's industry-wide. Yes.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [33]

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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 idea 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?

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R. Preston Feight, PACCAR Inc - CEO & Director [34]

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Sure, Ann. We can talk a little bit about that and that deliveries were 38,400 for the 3-month period. But as far as what we'll see going forward, like I said, I'd come back to is, our biggest focus right now is making sure that our employees are well cared for. And as we watch that and take care of that, then we'll ramp back up our production and we'll align that to the demand, and we'll see where that takes us in the second quarter.

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Operator [35]

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Your next question comes from the line of David Raso of Evercore ISI.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [36]

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My question is sort of bigger picture. Trying to think about this period, the nuances of how this is different or similar than '08, '09, sort of how you -- what are the differences, the similarities between how you're handling this period and that period, with maybe 3 things in particular, if you could address at a minimum.

You mentioned in your prepared remarks, 81 consecutive years of profitability. Obviously, back in '09, there were 2 quarters that were basically around breakeven. Just wanted to see if you could address the idea of this being year number 82, just if you're willing to speak to that.

Second, the gross margin declines roughly were kind of 14.5%, 15%, they dropped down to 8% to 8.5% in 2009. Just trying to get some sense of magnitude, what's different about the business model, more parts, whatever it may be.

And lastly, the special dividend. Your balance sheet, the equipment company was still net cash back in '09, but you still chose to greatly reduce the special dividend year-over-year. Just wanted to try to lead those 3 key pieces in in answering the question of the differences and similarities of today versus the Great Recession.

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R. Preston Feight, PACCAR Inc - CEO & Director [37]

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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 time frame. Our Parts business has grown over that more than a decade. And it's just a foundational part of our business and 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 build. 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 products we have on the field and those that we're developing.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [38]

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But could you address those 3 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, 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're able to stay profitable in that environment, this should be similar? The gross margins 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 3 issues in particular.

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R. Preston Feight, PACCAR Inc - CEO & Director [39]

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Well, let's just take the last and you mentioned on dividends. And we announced our dividends yesterday for the first quarter at $0.32 a share, which is a strong indicator of what we've done. We have a great history of dividends, and we look forward to what our future is going to be, and that's a Board decision. And we take care of that as we progress through the year based upon the results.

I think that -- I don't think that it's a fair thing to think of it as an '08, '09 kind of a thing. They're just different. Each situation is unique. And what we've got is freight being moved. And I'm kind of giving you -- the kind of the truth of the matter is the freight is being moved, our company is well-built, we have a great position in terms of our liquidity, our cash position, our product investments. Our trucks are the best in the world, and that feels pretty good.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [40]

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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, that's out of your hands?

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R. Preston Feight, PACCAR Inc - CEO & Director [41]

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Sure. We have the stronger foundational parts market. We have the growth in our engine business, right? And in '08, '09, it wasn't here in North America. So that's good. I think the other thing to think about the share growth over that time frame 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 the market conditions.

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Operator [42]

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Your next question comes from the line of Joel Tiss of BMO.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [43]

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And 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 -- a more whatever it is, like a clearer view of what the rest of the year looks like, and how things play out?

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R. Preston Feight, PACCAR Inc - CEO & Director [44]

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Yes. I think that's -- 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.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [45]

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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?

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R. Preston Feight, PACCAR Inc - CEO & Director [46]

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Well, I think -- what I look at is -- the first thing comes to my mind is, when we go to our factories, when I go to our factories and I meet with our people, whether it's in a distribution center or a truck factory or anywhere, is just how impressive they are. And we have such an incredible group of people, and they're just exceptional. They're just exceptional people. I'm so proud of them and what they're doing. So they're the ones that are every day thinking of new ways to optimize our efficiencies and effectiveness, and they do it every day. And they continue in that vein, and we use Six Sigma as a great tool for ourselves and optimizing, and we'll continue doing that. This is accretive time for us as we look at truck production and how we come back, and we'll learn some new things, and they'll be helpful to improving the business and making us even more effective and efficient as we look forward.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [47]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [48]

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

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Operator [49]

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Your next question comes from the line of David Leiker of Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]

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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-focused, package; delivery-focused. There are some that are really weak, energy and auto related. Can 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?

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R. Preston Feight, PACCAR Inc - CEO & Director [51]

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Sure. You did a good job of summarizing what's really going on. If you look at refrigerated carriers or protein haulers, they obviously have just seen a shift in where their business is going. So those long-haul trucking companies that are delivering that are doing well. Locational segment is where we're a market leader, the market leader. And that business has been strong, and I mentioned that part of our inventory is at body builders right now. So that inventory is being built and being ready for production for a summer season.

And I think as you look at some of the over-the-road trucking companies, it varies by company. Talking with some of them, they have a good base of customers. And those that have a good base of customers, they're really well positioned. And there, as you said, the energy sector has been lower, but the yang to that ying is that fuel prices are down 20%. And if fuel prices are 1/3 of the operating cost for a trucking company, then that's helping them from their operating models as well. So that's kind of -- you characterized it well, and that's a little bit more information on it.

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Operator [52]

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Your next question comes from the line of Ross Gilardi of Bank of America.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [53]

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I had 2 questions. First one on the PDCs and the 2 additional ones that you're going to add, can you quantify at all how big of a global increase in parts footprint that this will represent when you open them? And do you worry at all about adding parts distribution capacity in the middle of a recession? And I'm trying to just get at -- like how many -- you guys have added a lot of distribution centers over the last 5 to 10 years, and granted that market's not going to move like -- as volatile as the overall truck cycle. But if we're in a slower economy for a longer period of time, do you bump up and will limit at some point how much you can continue to expand that distribution network?

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R. Preston Feight, PACCAR Inc - CEO & Director [54]

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Sure. We have 18 distribution centers. We'll be adding 2 more. I was just down in the Las Vegas facility a couple of weeks ago, the new one. It's just beautiful. And I know the employees are excited to move in there because 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, if our distribution centers are more closely aligned to our dealer body, then 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. And that gives us a competitive advantage against the market. So that's part of the thinking. It's not just about parts and storing. And it's about getting them to the customers as quickly as possible, and that's going -- been really successful for us in helping the parts team grow the business.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [55]

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Okay. So is it fair -- are they all fairly similar in size? If you're adding 2 on a network of 18, is it sort of like a 10% increase? And will the business benefit from just some type of pipeline fill? And I don't know if that would be a second quarter event or a second half event that will help continue to support the top line for the parts business this year?

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R. Preston Feight, PACCAR Inc - CEO & Director [56]

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Sure. You're right in saying it will continue to support the top line growth for the business. And yes, roughly 10%. There is some variance in the size of the PDCs, but they're roughly the right order -- same orders of magnitude.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [57]

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Okay. Got you. And then just lastly, can you quantify your energy exposure? I realize 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.

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R. Preston Feight, PACCAR Inc - CEO & Director [58]

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Yes, we have a very diversified portfolio. It's not concentrated overly in the energy sector. So the dealers that have -- there are some dealers that obviously have more exposure, but our dealers are doing just such a great job of building their businesses that they have good absorption, good parts and service businesses throughout a diversified customer bases, even for themselves. And so dealer body is in really good shape and managing that well.

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Operator [59]

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Your next question comes from the line of Jamie Cook of Crédit Suisse.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [60]

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I guess just 2 questions. One, can you just talk to, like on the truck side in Europe and in the U.S., like what you're hearing from your customers in terms of trends in April. And understanding 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 that -- 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, in particular, with diesel prices lower now? Perhaps we focus more on economics. So if you could help give color on that, that would be helpful.

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R. Preston Feight, PACCAR Inc - CEO & Director [61]

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Yes. Sure. Good to talk to you, Jamie. I'd say from a customer standpoint, we do talk to a lot of our customers and the dealers and keep track what's going on. And there is -- as we said before, some segments are doing well, and some are experiencing moderate slowdowns, and that's to be expected in a situation with this much dynamic factoring going into it. But we've got a good customer base, and they do a good job managing their business. So they're making the adjustments. And there's some trucks that are not as fully utilized, that's true. But I'm pretty impressed with how they talk about their business and their customer base. And again, they're an essential part of our economy, and they will continue to move freight and are continuing to move freight. So that's pretty important to keep perspective on.

From a tech standpoint and an R&D CapEx alignment to that, and when I look at that, I'd say we have some really neat programs going on. And we're continuing on some of the exciting programs that we have within our portfolios, and some of those are R&D-related. So whether that's battery-electric vehicles or work that we're doing, that work's going to continue. We're going to keep moving along and doing the critical things that are going to build a bright future for our company and provide our customers the lowest operating costs possible. So it's kind of a bit of a look at what's going on.

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Operator [62]

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Your next question comes from the line of Steven Fisher of UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [63]

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I just -- you guys called out some nice market share gains across the regions. What does 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?

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R. Preston Feight, PACCAR Inc - CEO & Director [64]

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Well, yes, 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 in 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.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [65]

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So more color on Europe. I think the market share growth to 16.7% for DAF has been in most markets, especially the U.K. In the U.K., our share in the first quarter has grown 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 U.K. in the U.K.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [66]

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Okay. And then you have some plans to open up some international used truck centers. How much better do you expect the used margins to be at these company-owned retail centers versus any other used sales channels that are out there?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [67]

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With the -- those used truck centers, one of the benefits that we have is that they predominantly sell to retail customers. And the margins we make when we sell a used truck to a retail customer are significantly higher than selling them to wholesalers or other customers. So those used truck centers really give us a very nice return on our investment there.

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Operator [68]

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Your next question comes from the line of Seth Weber of RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, Research Division - Equity Analyst [69]

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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, where it's today, where you think it's going as far as retail versus wholesale or auction? Anything that we can kind of used to frame what the opportunity there is to get the margins up?

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R. Preston Feight, PACCAR Inc - CEO & Director [70]

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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 in 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.

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Seth Robert Weber, RBC Capital Markets, Research Division - Equity Analyst [71]

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Right. Okay. And then sorry if I missed this, but have you address -- have you talked to just the new truck pricing environment? I think last quarter, you said it was up about 2%. Just wondering if anything has changed, given the -- that the macro and then also the weakness in used pricing, if anybody -- if any of your competitors are doing anything irrational? Or is that -- you're still seeing positive pricing on the new truck side.

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R. Preston Feight, PACCAR Inc - CEO & Director [72]

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

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Operator [73]

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Your next question comes from the line of Courtney Yakavonis from Morgan Stanley.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [74]

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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.

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R. Preston Feight, PACCAR Inc - CEO & Director [75]

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Sure. As far as the protocols we're implementing, I'll come back to the statement because it's core to us is our biggest focus right now is making sure that our employees are cared for and operate 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, that 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, 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 experience, right? We're a company that's always thinking about capital cost and expense costs and looking for ways to reduce them. And our teams are fully focused on that. Looking -- that's why you see the reduction in the CapEx spending plans that we outlined in our opening comments and why we're looking at R&D reductions that we can take, just so that the business is optimized and set up for this industry cycle.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [76]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [77]

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Yes. There -- the difference is that we have furloughed some 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, with our employees there and with the government there. And they've been able to help us support people still working during the shutdown, in 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're continuing to work on new projects and processes that are aligned with government support programs.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [78]

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

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [79]

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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?

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R. Preston Feight, PACCAR Inc - CEO & Director [80]

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I think that this may hasten the move towards more and more e-commerce in the parts business. But our -- and our team has built a great system to make that available for the customers and for the dealers to work with. And we continue to use the e-commerce and the MDI systems to help everybody have the right parts at the right places at the right time, so we can make sure our customers' uptime is optimized. There may be a little bit of a move towards that furthering, and that's good for PACCAR and good for our parts team.

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Operator [81]

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Your next question comes from the line of Matt Elkott of Cowen.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - Director [82]

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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 are you happy that you could see a benefit from that?

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R. Preston Feight, PACCAR Inc - CEO & Director [83]

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That's a good commentary you offered. I think it's a truth of the confluence of the pandemic and the low oil prices and the fact that customers continue -- our customers, trucking companies, continue to deliver freight. And when they're delivering freight, they're putting miles on trucks. And so that bodes well for us in the future because they're consumable, and over time, we'll need to replace them.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - Director [84]

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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?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [85]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [86]

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And we've had good access to the markets.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [87]

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We do.

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R. Preston Feight, PACCAR Inc - CEO & Director [88]

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We have great credit ratings and good access to the markets, and we've had no trouble in getting mid-term notes. And our issuances in the first quarter, $632 million, and we did an issuance in April for $400 million, and we've got really good positions to support our financial services business.

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Operator [89]

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Your next question comes from the line of Felix Boeschen of Raymond James.

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Felix Boeschen, Raymond James & Associates, Inc., Research Division - Senior Research Associate [90]

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I really just have a quick question around how to think about the Parts business going forward. I think, obviously, trucks still moving as 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 on where you think inventory levels might be today?

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R. Preston Feight, PACCAR Inc - CEO & Director [91]

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Sure. I think that the most significant factor is the team at PACCAR Parts has done a great job with -- alongside of our dealers of having the right kind of systems in place to support the customers, and so they become a go-to organization in these times. And they're doing a great job of beating the demand there. And I think that they're -- obviously, as the situation is dynamic, people were looking at that. And so they want to make sure that they have parts on the shelf to take care of the customers, and they've done that. And as we move forward, they're consuming those parts and they'll reorder.

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Operator [92]

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Your next question comes from the line of Faheem Sabeiha of Longbow Research.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [93]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [94]

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Excuse me, what was the last part?

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [95]

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Wouldn't that have any impact on production capacity?

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R. Preston Feight, PACCAR Inc - CEO & Director [96]

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Yes. I think that we always -- we think that in the market we're in, we have sufficient capacity. And even bringing in these great best practices, we'll have sufficient capacity to build for our customers' needs.

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Faheem Farid Sabeiha, Longbow Research LLC - Research Analyst [97]

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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.

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R. Preston Feight, PACCAR Inc - CEO & Director [98]

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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.

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Operator [99]

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Your next question comes from the line of Rob Wertheimer of Melius Research.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst [100]

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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?

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R. Preston Feight, PACCAR Inc - CEO & Director [101]

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

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst [102]

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Okay. That's helpful. 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?

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R. Preston Feight, PACCAR Inc - CEO & Director [103]

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Yes. That's interesting. We do have -- in North America, all of our trucks are connected, so the people that can work trucks are connected. And we watch vehicle miles traveled, and we watch utilization of the fleet. And while it's down just a little bit, it's also holding up pretty well and remains at high levels over the historical framework.

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Operator [104]

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Your next question comes from the line of Joe O'Dea of Vertical Research.

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Joseph John O'Dea, Vertical Research Partners, LLC - Partner [105]

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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?

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R. Preston Feight, PACCAR Inc - CEO & Director [106]

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Well, we continue to work in alignment with the initial declarations, which is that trucking is an essential business and the parts supply is an essential business. So that's one of the things that we work with. And then the other is to make sure that these best practices we put in for our employees are sufficient and are robust and protect them well. And those 2 things in alignment are what define our restart strategy.

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Joseph John O'Dea, Vertical Research Partners, LLC - Partner [107]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [108]

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Indeed, we are and staying lined up with each state and their directives as well.

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Operator [109]

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Your next question comes from the line of Rob Salmon of Wolfe Research.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [110]

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I guess kind of piggybacking on 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 cost per piece associated with the cleaning, with the temperature-taking as well as phasing out employees a little bit more than we would historically have seen?

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R. Preston Feight, PACCAR Inc - CEO & Director [111]

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No, there's nothing that's that concrete. Or we'd take the temperatures of the employees -- we're going to, as they come back into the factories, preproduction, make sure everybody is healthy when they come to work. That's good for everybody. And then 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.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [112]

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And like Preston has said, the #1 priority is the safety of our employees. And there might be some costs associated with that, but that's not the #1 priority.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [113]

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Yes. Of course, you guys made that very clear, and we'll kind of keep that in mind. As we're looking forward -- or 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 did we see any sort of major difference in your parts revenue in the month of March relative to January, February?

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R. Preston Feight, PACCAR Inc - CEO & Director [114]

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It was relatively flat through the quarter. I mean there were weeks and differences by weeks, but it was relatively flat through the first -- for each of the months.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [115]

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That's helpful. And then on the provisions for the losses on the receivables, with the step-up that we saw, obviously, kind of tied to the economy, were you seeing any difference in terms of the receivables that you have for the customers relative to dealers in kind of one of those 2 channels? Was there a big customer impact? I mean I'm just trying to better understand as we think about the impact looking forward.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [116]

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No. We talked about the past dues being really low. And 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, and with all good -- updated customers that pay their bills.

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Operator [117]

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Your next question comes from the line of Jeff Kauffman of Loop Capital Management.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [118]

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I guess 2 questions. Number one, following up on what Jamie was asking earlier. The -- is it more a deferral on CapEx and R&D or more of a structural adjustment, where maybe we're not going to do certain things? And where do you think, in terms of -- I think Jamie was hinting is the EV movement slowing down because of low fuel prices and pushing things out. But in terms of looking at R&D programs or capital spending, where is the flex, and kind of what do you think should be pushed out in this kind of environment?

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R. Preston Feight, PACCAR Inc - CEO & Director [119]

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Okay. Happy to answer that question with you. So I would say that it's, whether deferred or canceled, we have a great portfolio of projects. They all have good returns and provide values to our customers. And 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 that will cancel. We just look at how well they can be done and how do we become more efficient at doing them.

And as that lies into the EV movement or autonomous vehicles or connected vehicles, those technologies continue to be progressing into the truck industry in the coming years, and 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 their suppliers and doing in-house development so that we can have all of those ready when our customers want them, and we'll continue to have that leadership position.

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Operator [120]

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And there are no further questions in queue at this time. Are there any additional remarks from the company?

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R. Preston Feight, PACCAR Inc - CEO & Director [121]

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Yes. I guess I'd 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. And our heartfelt thoughts and prayers are with them, and we're all going to come through this stronger in the final analysis.

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Operator [122]

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And ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for your participation. You may now disconnect.