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Edited Transcript of PCAR earnings conference call or presentation 23-Jul-19 4:00pm GMT

Q2 2019 Paccar Inc Earnings Call

BELLEVUE Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of PACCAR Inc earnings conference call or presentation Tuesday, July 23, 2019 at 4:00:00pm 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

* 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 O'Dea

Vertical Research Partners, LLC - Principal

* Neil Andrew Frohnapple

The Buckingham Research Group Incorporated - Analyst

* Robert Cameron Wertheimer

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

* Robert Hudson Salmon

Wolfe Research, LLC - Research Analyst

* Ross Paul Gilardi

BofA Merrill Lynch, Research Division - Director

* Seth Robert Weber

RBC Capital Markets, LLC, Research Division - Analyst

* Stephen Edward Volkmann

Jefferies LLC, Research Division - Equity Analyst

* Steven Fisher

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

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Presentation

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Operator [1]

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Good morning and welcome to PACCAR's Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

Today's call is being recorded, and if anyone has an objection, 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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Good morning. Harrie Schippers, Michael Barkley and I will update you on PACCAR's excellent second quarter results and business highlights. First and foremost, I'm very proud of our exceptional employees. We're passionate about providing our customers the highest quality, highest performing trucks and services in the world. I also want to thank those analysts who participated in our Investor Conference in New York in May. The PACCAR team appreciated the opportunity to provide an update on our business.

PACCAR achieved record quarterly sales and Financial Services revenues of $6.6 billion, and excellent net income of $620 million, resulting in a 9.3% after-tax return on revenues. PACCAR Parts generated record revenues of over $1 billion and record pretax profits of $211 million. Parts revenues increased 6% and profits grew 8% compared to the second quarter of last year. PACCAR achieved robust Truck, Parts and Other gross margins of 14.8%, driven by record truck deliveries, aftermarket parts demand and strong operational performance.

PACCAR delivered a record 52,300 trucks during the second quarter, 13% higher than the second quarter of last year. This reflects increased build in North America, partially offset by lower build in Europe. The U.S. and Canadian Class 8 industry backlog remains high. Kenworth and Peterbilt's 2019 production schedules are substantially full, with customers ordering trucks for delivery in the first half of next year. In Europe, DAF has achieved an excellent year-to-date market share of 16.7%, and the DAF XF was honored as the Fleet Truck of the Year in the U.K.

PACCAR continues to provide excellent annual operating margins, resulting in strong operating cash flow for distribution to shareholders and for reinvestment in future growth.

PACCAR declared second quarter dividends of $0.32 per share and first half dividends of $0.64 per share. First half dividends were 21% higher than dividends declared in the same period last year. The company has delivered annual dividends in the range of 45% to 55% of net income for many years and has paid a dividend every year since 1941. PACCAR has increased its quarterly dividend an average of 11% per year during the last 20 years.

We repurchased 345,000 shares of stock during the second quarter, with a $484 million remaining in the current Board of Directors' authorization.

PACCAR is investing in future growth with capital expenditures of $675 million to $725 million, and R&D expenses of $320 million to $340 million this year. These investments will fund enhanced aerodynamic truck models, integrated powertrains, 0 emissions electric and hydrogen fuel cell technologies, advanced driver assistance systems and truck connectivity. We're also enhancing our manufacturing and distribution facilities. At the Kenworth Chillicothe, Ohio truck factory, we added a new robotic CAD build cell and are constructing a new state-of-the-art paint facility which will lower operating costs, enhance quality and increase capacity.

To meet increased customer demand for the popular PACCAR MX engine, we're adding machining and assembly equipment in the Columbus, Mississippi engine plant. We recently opened 2 global software R&D centers, one in Kirkland, Washington, and one in Eindhoven, The Netherlands. These centers will accelerate the development of embedded vehicle software and PACCAR connected vehicle solutions for our customers.

In the third quarter, truck deliveries will be higher in North America due to higher build rates and lower in Europe reflecting the normal 3-week summer shutdown. Global deliveries will be 5% to 7% higher than the third quarter of last year. We forecast third quarter gross margins for Truck, Parts and Other to remain strong and be in a range of 14.5% to 15%. 2019 will be another outstanding year for the company.

Harrie Schippers will now provide an update on truck markets, PACCAR Parts and PACCAR Financial Services.

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

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Thanks, Preston. U.S. economy is in good shape, helped by strong job markets, growing wages and increased business investment. Freight tonnage has grown a healthy 4.4% year-to-date. We've raised our estimate of U.S. and Canadian Class 8 truck industry retail sales to a range of 300,000 to 320,000 vehicles this year. We're in a period of robust customer demands, demonstrated by the historically high backlog, truck production levels and retail sales.

The U.S. and Canada Class 8 backlog was 188,000 trucks at the end of June. Kenworth and Peterbilt's backlog represented 36% of the industry. We are raising our European above 16-tonne market projection to a range of 300,000 to 320,000 vehicles this year. The European economies are growing at a lower rate than last year. PACCAR delivered record first half net income of $1.25 billion. PACCAR Parts achieved record first half revenues of $2.03 billion, and record pretax profits of $418 million. PACCAR has steadily increased its truck and engine market share over the years, resulting in a greater number of PACCAR trucks and engines in operation. This large and growing Kenworth, Peterbilt and DAF truck part has driven 8% annual PACCAR Parts revenue growth over the last 15 years. This generates consistent high-margin profitability in all phases of the business cycle.

We continue to invest in the Parts business with new parts distribution centers under construction in Las Vegas, Nevada, and Ponta Grossa, Brazil. We expect parts sales to grow 5% to 7% for the full year 2019.

PACCAR Financial Services earned second quarter pretax income of $18 million, 11% higher than the second quarter last year. The PACCAR Financial portfolio performed well. This year, PACCAR Financial will open used truck centers in Prague, Czech Republic and Denton, Texas, to support solid customer demand for DAF, Peterbilt and Kenworth trucks.

One of PACCAR's greatest assets does not appear on the balance sheet. I'm referring to the independent, financially strong Kenworth, Peterbilt and DAF dealers, who operate more than 2,200 sales, service and TRP store locations worldwide. Our dealers reflect the industry-leading quality and premium truck brand image of Kenworth, Peterbilt and DAF trucks. We're proud of our global dealer network, they are the best in the industry.

Thank you. We would 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) Our first question comes from Stephen Volkmann with Jefferies.

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

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Harrie, I wonder if I could get you to make a few more comments about some of your kind of end market visibility. And what I'm thinking about is, obviously, you said you're sort of taking orders for the first half of 2020, but of course the overall order rate has come down quite a bit and I'm curious, just kind of what you're hearing from customers and seeing in your order trends relative to demand in 2020. Do you think things tick up again as we get into the fall selling season? Or are you hearing kind of caution because freight rates have come down? Just kind of some thoughts about the quality of the 2020 order.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [3]

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So if you look at the backlog for North America today, we're in really good shape. And like Preston said, we're increasing build rates in North America. Europe, the backlog's very normal and our production levels are in line with the orders and the backlog in the market as we see it today.

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

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Okay. So do you have any kind of preliminary thoughts about what 2020 might look like? Obviously, the market is sort of primed for a big decline.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [5]

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We typically comment on 2020 once we get closer to it, so that's probably something for the next call.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [6]

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All right. I figured it might be worth a try. Can I sneak one more in on just kind of what you're seeing relative to pricing in the new truck environment?

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Ken Hastings, PACCAR Inc - Senior Director of IR [7]

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Yes. As we look at the pricing realization in trucks, on the second quarter we saw, I'm going to say a couple percent price realization, largely offset by cost. And so that's kind of in balance with each other.

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Operator [8]

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Our next question comes from Andy Casey with Wells Fargo Securities.

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

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I have a question on the shipments. It went up about 1.5% in Q2 from Q1. It's a little different than the outlook on the short term that you gave last quarter, 2% to 4%. Was the entire difference between actual and predicted driven by Europe? And if so, I guess to piggyback on Steve's question, can you describe what your European order intake maybe was compared to last year? And then also some color around the overall market development.

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

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Yes, so just look at the -- start at the highest level, although we did see growth in North America this year and that was, as we said, offset a little bit by what we experienced in Europe, we have really good balance here right now between our order intake and our build rates, so we've got that set up really well. And in fact, if you look at the first half market share results, we have 16.7% which is above last year's record, 16.6%. So that's set up very nicely for us right now. And we kind of see that order intake is, as I said, matching into what we're doing with build right now.

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Andrew Millard Casey, Wells Fargo Securities, LLC, Research Division - Senior Machinery Analyst [11]

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Okay. And then, on the, just specifically looking at the truck segment margin and it pretty much seemed to be in line with what you were looking for, but flattish, up maybe 10 basis points year-over-year and then down from Q1 despite higher revenue in both cases. Can you elaborate now that the quarter is done in terms of what some of the headwinds might have been that limited those segments' ability to realize maybe some better margin leverage on that revenue growth?

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R. Preston Feight, PACCAR Inc - CEO & Director [12]

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Sure. I think if you look at, if you start with, you say was 14.8% in the overall gross margin feels very strong. So when we look at it from a year-over-year standpoint, truck has been able to hold on to that. I think the reason it doesn't see significant movement up is because it's already operating at a very high level. So we're at a very efficient point in the gross margins. And then I think if you just talked about it a little bit from a sequential standpoint, only difference between Q1 and Q2 has to do with really the customer mix that's happened between quarter 1 and quarter 2.

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Operator [13]

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Our next question comes from Joel Tiss with BMO.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [14]

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I wondered, just to try to be Steve for a second here, can you talk about second half production instead of just third quarter? And the production schedules and just sort of give us a little bit of an idea so maybe we can have a small window into the fourth quarter?

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

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Well, we, if I try to talk about it in terms of second half, we have, again, North America going up in the second half. And then Europe we think is stable where we've got it right now. So we feel like those are balanced for what we would expect to see through the second half.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [16]

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Okay. And then beyond the customer mix, it sounded like in North America, but maybe I'm reading too much into that. Is there any negative margin? The incremental margin's at 10%, you've been kind of running 12% or 13%, is there any -- because Latin America was so strong, is that a factor in there? Or not at all?

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

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No, Latin America is a small percentage of the business still, so it really doesn't have that much weighting factor to us. I mean, there's a little bit of benefit to it but there's not a lot.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [18]

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Okay. And then just last, the receivable's up 30%. Is there any color you can add to that? Why is that so high?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [19]

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I believe that was increased -- increasing in the build rates has been the primary driver of that.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [20]

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Okay. It just seems like it's up a lot more than builds.

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Operator [21]

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

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [22]

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I'm wondering if you could expand on your comments on the European production adjustment that you took in the quarter to match incoming order rates. When was that -- production adjustment take place? And as we think about the third quarter, normal seasonality would have production down 5% to 10% sequentially for you in Europe, so are we on -- at the right production point entering the third quarter where we should see that normal seasonality? Or is production coming down sequentially more than that normal 5% to 10% rate?

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R. Preston Feight, PACCAR Inc - CEO & Director [23]

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So the adjustments we made were just in the second quarter and again, this -- they happened throughout the second quarter, and they still delivered us this excellent market share that we saw. From the third quarter looking forward, we do have a normal summer shutdown which is a 3-week summer shutdown so there is an overall effect on the market. But from a daily build rate standpoint, we're in a good position.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [24]

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Okay. And in North America, we obviously know that you folks are build-to-order and when market in flex, we typically see production adjustments from you folks first so when you folks are raising build rates sequentially 3Q versus 2Q, that implies that you've had a full backlog scrub and you're comfortable with the level of dealer inventories. Can you just confirm that point and that expected deliveries for 3Q have firm customer specification through them as opposed to what are some typical dealer specs?

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R. Preston Feight, PACCAR Inc - CEO & Director [25]

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I think you did a really nice job of characterizing it. Actually we do do backlogs to make sure we have clean orders in there and we do build to order, and as we look through that, and we see that there's still very strong order backlog. And Harrie said that 36% of the backlog for the industry is ours. And so we want to make sure we get the trucks to the customers. They need the trucks to run their businesses and so we're in the manner of building as quickly as we can for them.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [26]

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And in terms of the level of dealer inventories, can you just calibrate outside of the industry statistics that we have? You mentioned a backlog worth 36% of backlog, what about out of inventories?

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R. Preston Feight, PACCAR Inc - CEO & Director [27]

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Well, if you think of the inventory numbers for the industry, they're at 2.8 months and for PACCAR in North America, it's 2.3, so we have our inventory in a very good position with our dealers.

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Operator [28]

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Our next question comes from the line of Ann Duignan with JPMorgan.

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

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I'd like to circle back to Europe, I mean registrations year-to-date are up closer to 10% and your deliveries are basically flat, maybe up slightly year-to-date. Can you talk about the discrepancy? Have we seen the pull forward of registrations ahead of the midyear tachograph requirement? Or is there anything unusual going on in the marketplace versus what -- how you are choosing to deliver?

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R. Preston Feight, PACCAR Inc - CEO & Director [30]

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No, I think you actually nailed it, Ann. I think that remote tachograph is probably the biggest impact on what's pulled forward the orders from, in front of June 15. And so that's what we saw. We still expect to market in the 300,000 to 320,000 truck range and we should be able to have some really excellent market share, and with our build rates from the first half and second half for that.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [31]

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And just as a follow-up to that, again, on Europe, and given the announcement today and the new leadership in the U.K., does that raise or reaccelerate the concerns around Brexit and the impact that that could have on freight and just the whole industry as we get closer to the end of the year? Or what are you hearing over there in terms of -- now it sounds like it's a little bit more definitive.

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R. Preston Feight, PACCAR Inc - CEO & Director [32]

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Yes. So one of the nice things for us is we are the market leader in the U.K. We do a great job all around Europe and our share's up in Europe and up in the U.K. also specifically. So as we look at what might happen with Brexit, we have a great advantage in that we do manufacture all our truck models for the U.K., in the U.K. So I don't know what the outcomes will be, but PACCAR's really well positioned with our manufacturing base in Europe to take advantage of it either way it goes.

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

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Yes, I meant more broadly, what impact it might have on just freight and the whole European economy. Any comments on that?

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

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Yes, I don't think we know that answer any better than anybody else. I would say that we've been pleasantly surprised with how the U.K. has performed in the first half of the year. There has been strong customer demand in the first half and that's been great.

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Operator [35]

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Our next question comes from David Leiker with Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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I wanted to talk about this kind of triangle effect between orders, backlog, inventory, you can throw cancels in there. Now what we're going through here in North America is while the order rates have fallen, the backlogs have remained elevated. And I'm not sure we've ever gone through a period of falling orders where backlogs remained elevated. I'm wondering if that may change a little bit of the economics of the earnings you might see as these lower order rates flow through the numbers?

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

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I think one thing to keep in mind is the bigger picture, what happened last year, we had 458,000 industry orders last year. So that's a big number and it takes a while for that to normalize through things. But it's not going to have any effect on our financial performance. We've got great financial performance and our dealers are doing really well and our customers love the trucks. And so those things continue to work well and the results will be solid.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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Great. And then just, I'm going to pick on Europe also. Any particular markets or areas over there that you're feeling more worried than the others? I mean a lot of those -- a lot of your customers from those markets are exporting out of Europe into other parts of the world as well.

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

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No, I think that Europe has done really well this year for us. I mean, obviously we have the market range of 300,000 to 320,000 trucks and us gaining share. So this would be the fourth year in a row above 300,000. If it stays like this, and that's a fantastic market size and the DAF team, all the employees and teams, the dealers are doing a great job of growing the business. And the customers love the trucks and the fuel economy's outstanding. And it's working really well.

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Operator [40]

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Our next question comes from Steven Fisher with UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [41]

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How do the orders that you guys have taken for 2020 compare to the level of what you typically take in at this time of the year for the following year? I assume it's got to be much higher. And if that's so, I guess why are -- I guess going back to Steve Volkmann's question, why are customers rushing to place orders if freight fundamentals are softening?

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R. Preston Feight, PACCAR Inc - CEO & Director [42]

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Well, I would say it this way. As I'd say, we probably, just get to the first part of your question, we do see order intake for 2020 higher than we might typically see it. That's in large part because in a different market, you might see that there is a lot more activity surrounding about filling 3Q and 4Q of the current year you're in, but since that's substantially full, there is interest in 2020. And so that's kind of just, I think where people's energies go to.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [43]

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But with freight fundamentals softening, why wouldn't they just wait it out a little bit to see how the rest of the year is going to go?

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

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I think some people do. But freight fundamentals are really mixed, right? We have a great economy in North America. GDP growth is occurring. I think through May, ATA truck tonnage was up 4.4% so there's not like things are going badly. And we spend a lot of time as a team, our employees and our dealers talking to customers and, customers are doing a good job. You see the truck companies' earnings reports and they're coming out really strong in a lot of cases. So there's lot of reason for optimism, too.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [45]

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Got it. And then you said that the cost offset price in the quarter. It sounded like price, you said it was a couple of percent, which may be down 1% or so from the first quarter. I would have expected costs to be coming down so I guess why was the pricing growth moderating? And should we be expecting that costs are actually coming down going forward here?

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

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Do you want to provide color-?

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [47]

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It's like Preston just said, it's mostly customer mix that pricing was aligned with the cost increases, more or less.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [48]

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And what was that customer mix difference between the Q2 and Q1?

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R. Preston Feight, PACCAR Inc - CEO & Director [49]

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So the customer differences in the first quarter, a lot of dealers will have stock trucks on their lots and those are, they're small quantity buys and then we get to a more distributed look at customer mix in the second quarter. So there's still the stock orders but then there's just the low to large-sized customer orders come in.

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Operator [50]

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Our next question comes from Seth Weber with RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [51]

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I just wanted to go back. I think your guidance for the parts revenue growth for this year, you moderated the top end, I think you're now saying 5% to 7%, it was previously 5% to 8%. Is there anything you would call out there that is causing the, just sort of the moderation?

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R. Preston Feight, PACCAR Inc - CEO & Director [52]

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Yes, sure. The parts business is really doing fantastic, continues to perform at a high level. Take the opportunity to say this, we look at where investments are going in that business, and the new distribution centers in Ponta Grossa, Brazil and Las Vegas and the way the team is moving through their initiatives with things like e-commerce, and TRP growth is really fantastic. The only reason for any adjustment is really a currency effect that we pushed into the 5% to 7%.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [53]

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Yes. It's the revenues in Europe in euros that translate into fewer dollars but we -- when we do the translation.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [54]

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Got it, that's helpful. And then, maybe just a quick follow-up. The FinCo margin actually came down sequentially. Is there anything that you'd call out there? And is that sort of the run rate we should think of going forward?

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R. Preston Feight, PACCAR Inc - CEO & Director [55]

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I don't think so. I don't think it's -- when we look at the new business generation, it's actually up quarter-over-quarter, so it's more about portfolio that I think you're talking about and that the team is doing really good. If you looked at their earnings per quarter, it went up to $80 million into the $164 million in the first half and it's just doing fantastic.

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Operator [56]

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Our next question comes from Ross Gilardi with Bank of America.

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

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I was just wondering, what are you seeing in the Mexican truck market? And what would you do if some of the trade tensions that started to rematerialize a couple of months ago came back? And do you think your overall footprint in North America, given your relative lack of exposure to Mexican production is behind any of the order share strength that you've seen? In other words, are customers perhaps ordering more from PACCAR just because there's greater surety of supply given some of your competitors being relatively more exposed to Mexican production?

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

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I think the team in Mexico is just doing a really good job down there. We have great trucks, obviously, the newest trucks we've introduced, the latest generation are fantastically well received by the customers. And so their share was exceptionally good. And if you look at -- there was an emissions change that happened in the middle of the year. So there was a strong buy ahead of that. But even since then, order intake has been positive and doing quite well. I don't think it's really affected by where people think we're going to build the trucks. We obviously can build trucks in Mexico for Mexico, we can make our domestic U.S. and Canadian production in local markets, so. I think we just have a great manufacturing footprint that works well and I don't think there's anything about trade tensions affecting that, I think it's more about great trucks and people.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [59]

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I guess that's the point. Most of what you produce in Mexico is for the Mexican market, correct? And if you did see tariffs all of a sudden actually come back and put into place, do you feel like you have sufficient capacity in the U.S. market to just relocate some of that production in a very short-term basis?

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R. Preston Feight, PACCAR Inc - CEO & Director [60]

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Yes. We do have that capability.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [61]

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Okay. And then I think you made a comment about adding engine capacity in Mississippi, if I heard it right. And wondering if you could talk a little bit more about that. Are you seeing share shift more towards the MX engine with the trucks that you're selling?

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R. Preston Feight, PACCAR Inc - CEO & Director [62]

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The MX engine, MX-11 and 13 engines, are doing really well. They're providing I think just outstanding fuel economy in the market space. People have had time to get used to them obviously now. And we're seeing strong demand from our customers for those engines for their light weight and high performance. So we've increased our capacity in Columbus and just recently finished that capacity increase at the end of the second quarter and going to be able to build some more engines for our customers in the second half.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [63]

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Can you say roughly how much you've increased capacity in Columbus?

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

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It's been meaningful, but it's 10% to 20% kind of numbers.

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Ross Paul Gilardi, BofA Merrill Lynch, Research Division - Director [65]

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Got it. And just lastly, on Brazil, maybe you could comment there. I mean, you've had obviously pretty explosive growth over the last couple of years. Remind us where you are on market share. And I think, from the beginning, the target was to get to 10% in 5 to 6 years. As you continue to get closer to that number, do you start to grow more in line with the Brazilian market in the next couple of years?

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R. Preston Feight, PACCAR Inc - CEO & Director [66]

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The trucks, the DAF trucks in Brazil are working very, very well for our customers. I was down there just a couple of months ago and the dealers and customers are really excited with the performance they get, reliability and durability and fuel economy that they're providing in Brazil. So that's enabling our continued growth. From a year-over-year standpoint, market share is up just a bit and it'll continue to grow, continue to make investments in Brazil. Parts business is doing really well down there. In the middle of building a new distribution center in Ponta Grossa, 160,000 square-foot distribution center in Ponta Grossa, which will support the business growth. And the market overall is improving in Brazil. So really feeling good about the efforts our team has made down there, the results they're bringing, the success with the dealers now, and just how the business is going to continue forward.

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Operator [67]

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Our next question comes from the line of Jamie Cook with 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 [68]

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I guess just a question, specifically, what is your visibility in 2020 this quarter relative to last quarter? I'm just trying to understand if it's increased and to what degree? And then my second question is, assuming industry forecasts are correct next year, I'm just -- if you can walk us through, is there anything we should consider with regards to decrementals relative to previous cycles in the sense that, one, I would assume the parts business obviously helps your margins, you have the content on the MX engine, at the same time one could argue you're more vertically integrated and R&D costs should be structurally higher. So if there's anything you could help us out with? And then, one, is the, are the shift decrementals being meaningfully different in Europe versus the U.S?

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R. Preston Feight, PACCAR Inc - CEO & Director [69]

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Sure. There's a lot of questions in there, I'll make sure if I can get them right for you. From a 2020 order intake, I think that we're seeing, as I said earlier, a higher percentage than we do typically. We have great visibility, that means, comparatively to normal times for 2020. I might decline to kind of really talk about a specific value there, but it feels positive compared to previous years. From a effect of what 2020's overall market's going to be, I think as Harrie said and we'd all say is, it's a little early to be talking about what the full market size is going to be in 2020.

And from an effect on decremental margin or margins or incremental margins as they may end up being, I'd say, that we see that, we keep our operating cost really low and I think that means there's relatively minor shifts in the decremental or incremental margins and continue to provide great value to our -- to the margin, the overall margin, stateside.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [70]

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Okay. But no meaningful difference relative to previous downturns? I mean is there any structural reason why decrementals would be better? Or just, I mean if you're right on the top line in incrementals, that's a different question, but are decremental to...

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R. Preston Feight, PACCAR Inc - CEO & Director [71]

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No. I don't think so.

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Operator [72]

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Our next question comes from Courtney Yakavonis with Morgan Stanley.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [73]

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Just going back to Andy's question on your production this quarter. I think you had originally forecasted that all of the increase would be from North America. It kind looks like it was pretty evenly split between North America and other. So was your North America production in line with your expectations? I know we discussed Europe kind of at length, but just wanted to confirm that.

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R. Preston Feight, PACCAR Inc - CEO & Director [74]

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Yes, our North American production was in line with expectation. I think the only place where there was any slight change was in Europe, where we just made sure we got our build rates adjusted to the market. So that's the overall effect.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [75]

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Okay. Got you. And then just on the CapEx raise, just wanted to make sure, is this similar to last quarter where it's a lot of projects getting done faster or moving more quickly than expected? Or are there any new projects that we should be thinking about?

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R. Preston Feight, PACCAR Inc - CEO & Director [76]

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Sure. We -- it's really fun, I mean we're making these great investments in the future for the company and so that's why you're seeing the CapEx changes, but we had just some fantastic opportunities that are really, in terms of our capacity and quality in our factories, our distribution centers for parts and used trucks. And then maybe most importantly, for the long-term benefit is the investments in new products that we're creating. And so we have a lot of programs going on and they're successfully moving along. And we think it's really building a bright future for us.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [77]

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Okay. Got you. And then just finally, in South America, I think you slightly reduced your industry guidance there. I just wanted to confirm that and maybe how it compares. I think last quarter you had guided to Brazil, up 65,000 to 75,000, just wanted to understand the dynamics at play there?

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

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No, I think the guidance for Brazil is the same as what we did last time. I think for total South America, the range might have dropped 5,000. So from a, I think we're now...

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R. Preston Feight, PACCAR Inc - CEO & Director [79]

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100,000 to 110,000 for South America in total.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [80]

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Yes. But it's outside Brazil.

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R. Preston Feight, PACCAR Inc - CEO & Director [81]

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Brazil is still guiding at 70,000 as a midpoint, 65,000 to 75,000; South America at 100,000 to 110,000.

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Operator [82]

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Our next question comes from Jeff Kauffman with Loop Capital Markets.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [83]

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A lot of my questions have been answered at this point. Just a couple of nits. You mentioned that you are seeing orders for 2020 at this point, yet we do know there are some aspects of the trucking markets seeing pain, particularly on the pricing side, to your point, not so much the volumes. Have you seen any change on the specs that customers are asking for 2020 versus 2019?

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R. Preston Feight, PACCAR Inc - CEO & Director [84]

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No. It's a nice question. I think that really, the customers are always looking for the most fuel-efficient, lowest operating cost trucks that they can find. And that's the beauty of being PACCAR, is we provide that to our customers. We have this passionate team of people who do a great job of making sure that the trucks we develop and sell are really at the best and most efficient vehicles for our customers. And so I think that's what they're always looking at. We're always talking to the customers, to make sure the specs stay lined up that way but there hasn't been any fundamental shift.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [85]

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Okay. And then just one last nit. I did notice the tax rate was up a little bit sequentially from the first quarter. That could be just randomness but I'm wondering, might that have to do with maybe more profitability being driven out of North America? What should I be thinking in terms of tax rate for the full year?

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

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Yes. I think you hit it on the head there. It's the income mix in North America tax rates. So including the states, they're a little bit higher than Europe, and so that affected the quarter.

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Operator [87]

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Our next question comes from Joe O'Dea with Vertical Research.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [88]

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With the North America build rate going up in 3Q, I think historically it's not uncommon to then see it come down in 4Q, but that's usually with Europe going up. And so I'm just curious with some of what's going on in Europe right now, should we expect that your current plans at this point are that that increase in the build rate in North America for 3Q is something that you would maintain in 4Q?

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R. Preston Feight, PACCAR Inc - CEO & Director [89]

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Yes. We have a strong backlog, as we said. It's substantially full for the second half, and so we don't see any reason not to think the build rate stays roughly where it is for the fourth quarter in the U.S. and Canada.

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [90]

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But you're right, that the fourth quarter in the U.S. and Canada will have more holidays than the third quarter and Europe is just the opposite.

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

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So daily build rates, it doesn't change necessarily overall.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [92]

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Just a question on the daily build rate, so, yes. And then from the, your comments around months of inventory and industry at 2.8, you're at 2.3. Historically, the industry average is in the low 2s. So I'm just curious, I mean historically, where you average as we think about sort of through-cycle targets?

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R. Preston Feight, PACCAR Inc - CEO & Director [93]

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This is within our normal band and it's kind of a healthy space to be.

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Joseph O'Dea, Vertical Research Partners, LLC - Principal [94]

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Perfect. And then just one on the 2020 orders you're taking, how does that pricing compare to 2019?

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R. Preston Feight, PACCAR Inc - CEO & Director [95]

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It just depends on the customer, but the pricing is fairly consistent right now.

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Operator [96]

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Our next question comes from Neil Frohnapple with Buckingham Research.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [97]

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Is inventory at your used truck centers starting to rise at all? And any thoughts on the used truck market in North America and Europe both from a demand and pricing standpoint?

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

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Yes. I think if you look at the used trucks, maybe the pricing has moderated a bit from where it was in Q1, but one of the nice things about being part of PACCAR is our trucks have commanded a 10% to 15% premium in the market. And as we've watched our market share grow over the past several years, we've invested in creating a great used truck capability, selling capability, so that's why we've got this new facility, used truck facility we're building in Denton, Texas. A few years ago we did one in Los Angeles. In Europe, we're creating one in Prague, in the Czech Republic as well. And then adding on capacity. We have a fantastic dealer network that does a good job of managing used trucks and distributing used trucks to customers. So between our premium position and our capability, we feel like we're in a good space.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [99]

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Okay. And as a follow-up on that, if used truck prices were to continue to moderate, what's the time lag as far as when that would start impacting the FinCo profitability? I think it usually runs through that Interest and Other line? Is there a couple of quarter lag? Or any thoughts there?

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R. Preston Feight, PACCAR Inc - CEO & Director [100]

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Yes. I don't think we've kind of calibrated into which quarter it would have an impact on and obviously it will depend on the amount of the fact and it depends a lot on the percent of retail versus wholesale, and our team has done a really good job of selling a lot of used trucks in a retail position, so there's too many mix effects in there to really characterize it.

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Neil Andrew Frohnapple, The Buckingham Research Group Incorporated - Analyst [101]

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Okay. And then just one final one. On the medium duty market here in North America, any notable changes to the outlook? What you're seeing from customers, market share, et cetera?

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R. Preston Feight, PACCAR Inc - CEO & Director [102]

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Yes, sure. Thanks for the questions. No, the market size seems consistent to what we've said previously, and 100,000 units plus or minus, and the business is doing really well. I think that our trucks are performing well in the space, and our market share will be roughly in the same range.

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Operator [103]

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(Operator Instructions) Our next question comes from Robert Wertheimer with Melius.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery [104]

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My question is pretty simple. I wonder if you could remind us of the mechanics on orders for next year. Is the order book open for all models and configurations? And then is pricing established or people are just sort of just taking a bet on it and is that the same as every year or this year?

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R. Preston Feight, PACCAR Inc - CEO & Director [105]

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So I would say that the order book is open for all trucks and all models. We love taking orders for trucks, it's something we enjoy a lot. And when I think about it in terms of the pricing being established, in the deals that we're discussing right now, those end up being with the customers and they end up being focused around what we've done previously and what their spec is and what we're doing. So those end up being worked through almost individually.

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Operator [106]

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Our next question comes from Scott Group with Wolfe Research.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [107]

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It's Rob on for Scott. A quick clarification question, with regard to the build rate, am I hearing it right that you guys are basically planning on maintaining the third quarter level of production in the fourth quarter? Or is there some increase you're implying there in the back half guidance?

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

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I think that the firm space is the third quarter going up and then we watch where the fourth quarter, as we substantially are full, we'll watch what the fourth quarter does. But I don't expect to see any significant shifts.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [109]

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That's helpful. And your preliminary comments about the order book and the strength looking out to next year, were you guys intimating that we could see revenue actually be up next year?

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R. Preston Feight, PACCAR Inc - CEO & Director [110]

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I don't think we intimated next year.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [111]

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And then just a couple of quick questions with regard to the used truck market. You said you saw it soften up a little bit. Could you describe if you're seeing that in 1 specific channel, i.e., kind of small fleets or kind of the owner-operator end of the marketplace? And what sort of increase on a year-over-year basis you're seeing from a price realization currently would be helpful as well.

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R. Preston Feight, PACCAR Inc - CEO & Director [112]

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Yes. I think it's -- we think about it in terms of the PACCAR products, Kenworth and Peterbilt, North America; DAF in Europe are just -- they command a premium, so it's a relative positioning to the competition; they're doing really well. And then, I think from a, as I said earlier, I think a lot of effect has to do with how many trucks are coming back in and what percent you retail those trucks out, and we've been able to grow our retail percentage, especially in North America which has brought us good results. As far as the overall trends to the market, I think those vagarities are difficult to plan forward to. But we'll watch them. We have a great team that's managing that business really well.

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

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That's helpful. Final one, which I guess kind of relates to the FinCo, as we a saw slight uptick in the provision for losses on receivables, obviously still at a low level, and that was a sequential uptick, so nicely improved on a year-over-year basis. What's driving that? Is that just some of the small carriers that you're seeing a little bit of softening in terms of their receivables, or is this...

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Harrie C. A. M. Schippers, PACCAR Inc - President & CFO [114]

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Most of that is due to the larger portfolio. Past due remain -- past due's remained really low, the credit losses remain low, the portfolio has managed really well, so we've got a lot of good customers that make money with their trucks and pay their bills on time.

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Operator [115]

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Our next question comes from David Raso from Evercore.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [116]

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Quick question. North America, I know you've sliced that U.S., Canada, how you get deliveries, but in your commentary about your backlog, can you just help us a bit with your U.S./Canada, or one defined as North America, your backlog year-over-year as we sit today, just some sense of the year-over-year in that position.

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R. Preston Feight, PACCAR Inc - CEO & Director [117]

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Well, it's up substantially year-over-year from a normal cycle. Obviously, that's moderated from what happened in 2018's 358,000 truck order intake -- or 458,000 truck order intake. So it's -- if you look at it on a pure sequential year-over-year, it's probably down, but it was down from a level that was not sustainable, it's so high. And so compared to normal levels, it's still very high and very strong. 73,000 trucks in the backlog and doing really well.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [118]

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I mean look, clearly the industry is down. In data we most all use, it's down about 17% year-over-year. I'm just trying to get a feel, is your backlog down less than the industry?

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

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Well I think the best way to think about that, David, is to think about that in a percentage of backlog that Harrie talked about earlier, the 36% of the industry backlog, which is, if you call us a 30% market share and 36% of industry backlog, it means we have a very healthy backlog relative to our market share.

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David Michael Raso, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Industrial Research Team [120]

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Yes, I think we're just trying to figure out how much of that goes into 2020, how much is helping the fourth quarter. Is the, if the fourth quarter builds just have a normal seasonal less build days, but the daily rate stays the same, I would argue that's probably a little better than people were thinking. I'm just trying to get a feel. While that helps the fourth quarter, what does it mean about 2020? But you're still speaking pretty constructively about your orders into 2020. So just trying to put the mosaic here together. But, again, your backlog's doing better than the industry given the share gain obviously implied in that backlog versus the industry totals.

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

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Yes. I think you're characterizing it really well, David. I think that's exactly right; there's (inaudible) well to that, and we'll watch what 2020 does as it get closer to us.

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Operator [122]

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

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Ken Hastings, PACCAR Inc - Senior Director of IR [123]

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

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R. Preston Feight, PACCAR Inc - CEO & Director [124]

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Thanks, everyone. Have a great day.

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Operator [125]

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Ladies and gentlemen, that concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.