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Paccar Inc (PCAR) Q1 2019 Earnings Call Transcript

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Paccar Inc  (NASDAQ: PCAR)
Q1 2019 Earnings Call
April 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to PACCAR's First Quarter 2019 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. 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.

Ken Hastings -- Senior Director of Investor Relations

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Ron Armstrong, Chief Executive Officer; Preston Feight, Executive Vice President; 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. A summary of risks and uncertainties is described in more detail in our periodic reports filed with the SEC. For additional information, please see our SEC filings and the Investor Relations page of paccar.com.

I would now like to introduce Ron Armstrong.

Ronald E. Armstrong -- Chief Executive Officer and Director

Good morning. Preston Feight, Harrie Schippers and I will update you on PACCAR's excellent first quarter results and business highlights. PACCAR reported record revenues and net income for the first quarter of 2019. PACCAR's first quarter sales and financial services revenues were $6.5 billion and first quarter net income was $629 million, an excellent 9.7% after-tax return on revenues.

Revenues were 15% higher and net income was 23% higher compared to the first quarter last year. PACCAR delivered a record 51,500 trucks during the first quarter. PACCAR Parts achieved record quarterly revenues of $1 billion, an increase of 7% compared to the first quarter last year. Parts pre-tax profits were also a record of $208 million. I'm very proud of our 28,000 employees, who are passionate about delivering the industry's best products and services to our customers and achieving strong results for our shareholders. PACCAR continues to outperform its peers and provide strong operating cash flow for reinvestment in future growth and distributions to stockholders.

One key measure where PACCAR sales return on invested capital. In the first quarter, PACCAR achieved a return on invested capital of 25%. And over the last five years, achieved an annual average return of 22%. PACCAR's delivered annual dividends of approximately 50% 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 and raised another 14% in the first quarter to $0.32 per share. PACCAR repurchased 491,000 of its outstanding shares during the first quarter. The increase in truck production in the first quarter was primarily due to more build days in North America compared to the fourth quarter and good supplier performance.

Truck and parts gross margins were 15% in the first quarter. Truck pricing was good with price realization of 3%. Our Peterbilt, Kenworth and DAF factories, and purchasing and supplier management teams did a fantastic job of managing production, delivering a record number of trucks, and achieving the highest operating margins in the industry. In the second quarter, we're expecting deliveries to be 2% to 4% higher than the first quarter, due to increased production in North America. Truck, Parts and Other gross margins in the second quarter are estimated to be in a range of 14.5% to 15%.

Preston Feight, will now provide an update on DAF and PACCAR parts.

Preston Feight -- Executive Vice President

Thanks, Ron. DAF achieved record market share of 17.1% in the first quarter. European economies and freight transport activity are projected to grow at a moderate pace in 2019. This year should be another good year in the European heavy truck market with registrations in a range of 290,000 to 320,000 trucks.

Turning to PACCAR Parts global results. Parts first quarter revenues were a record and for the first time reached the $1 billion level. As Ron mentioned, Parts quarterly pre-tax profit was a record $208 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 combined with consistent investments in parts distribution capacity and customer-focused technologies has created a very strong foundation for growth in PACCAR Parts. To support this growth, PACCAR Parts has begun construction of two new parts distribution centers. One at Ponta Grossa, Brazil and the other one is in Las Vegas, Nevada. We expect part sales to grow 5% to 8% for the full year 2019.

Harrie Schippers will now provide an update on Kenworth, Peterbilt and PACCAR Financial Services.

Harrie Schippers -- President and Chief Financial Officer

Thanks, Preston. The U.S. economy and freight tonnage continue to grow this year. A consensus of economists predicts 2.2% (ph) GDP and 2.6% industrial production growth for the full year 2019. First quarter GDP growth was a strong 3.2%. Freight tonnage increased 3.8% in the first quarter compared to a year earlier. This provides a healthy backdrop for the 2019 truck market. First quarter 2019, U.S. and Canada Class 8 truck industry retail sales increased 23% compared to the same period last year.

We have increased the midpoint of the U.S. and Canada Class 8 truck market projection to over 300,000 units due to the strong industry backlog. PACCAR Financial Services pre-tax income was $84 million in the first quarter, an increase of 24% compared to a year earlier. First quarter revenues were $350 million. PACCAR Financial Services assets increased to a record $14.9 billion, with the portfolio performing well. Kenworth and Peterbilt Class 8 used truck values increased again in the first quarter compared to the same period last year.

Kenworth and Peterbilt truck resale values commanded 10% to 20% premium over competitor's vehicles. In 2019, we are increasing capital investments to $625 million to $675 million and R&D expenses to $320 million to $340 million. We're investing in new products and expand its facilities, while increasing our funding for alternative powertrain development.

As we mentioned in the press release, DAF has recently introduced electric and hybrid vehicles that are undergoing field testing throughout Europe. Peterbilt and Kenworth have also working on hydrogen fuel cell, hybrid and electric power trains, as well as autonomous vehicle technology, in collaboration with our Silicon Valley Innovation Center.

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Hi, good morning, everyone.

Ronald E. Armstrong -- Chief Executive Officer and Director

Good morning, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

I wondering if you could talk about what booking trends you're seeing in your European business? How long are the lead times? Nice to hear about the share gain opportunity set. Maybe just flush that out in terms of where book-to-bill is -- has tracked year-to-date and any more color there would be helpful.

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, the backlog is -- I'd say normal, in terms of visibility that we have for our factory operations. And as we saw in the first quarter, registrations in the European market were up over last year and you'll just continue to see a good market for this year and for the full year as our forecast indicates.

Jerry Revich -- Goldman Sachs -- Analyst

And so your orders then are up year-over-year to support the comment about share gains of the markets at healthy levels and you folks are picking up share that's in the order book, Ron?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, the actual order intake is down a bit over last year was a very strong first quarter. So, order intake is down similar to levels we've seen with our other European competitors.

Jerry Revich -- Goldman Sachs -- Analyst

Okay. And then in the U.S. business, can you talk about whether you've seen any shifts in the production request from your customers? Are you seeing any folks looking to get earlier in the queue or later in the queue, relative to the production plan. I guess how fluid is the backlog situation in North America and how firm is the production plan for the third quarter as you see it?

Ronald E. Armstrong -- Chief Executive Officer and Director

I think it's all very firm. So, I think all the movement of trucks in and out is just very normal and the backlog is very firm.

Jerry Revich -- Goldman Sachs -- Analyst

Okay. And then from an SG&A standpoint, you folks were able to keep SG&A flat and really strong sales growth, I'm wondering is there any comp dynamic going on in the year ago period? Or if -- you folks as you continue to raise production year-over-year can maintain flat SG&A? Any moving pieces for us to think about?

Harrie Schippers -- President and Chief Financial Officer

Well, as you know, Jerry, rigorous cost management is something that we're very focused on in managing that over the cycle. There was some benefit in the quarter from some currency movement. But for the most part, it's just our ongoing focus on managing our cost for the entire cycle.

Jerry Revich -- Goldman Sachs -- Analyst

Okay. Strong performance. Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Joel Tiss with BMO. Your line is now open.

Joel Tiss -- BMO Capital Markets -- Analyst

How is it going guys?

Ronald E. Armstrong -- Chief Executive Officer and Director

Good, Joel. You?

Joel Tiss -- BMO Capital Markets -- Analyst

Hanging in there. So I keep here and you guys are gaining market share in the Parts and some of your dealers are gaining market share in Parts. And I just wonder if you can kind of illuminate for us a little bit. You know who is losing share or is there just such a big opportunity out there for everybody that there is a lot more room to keep going?

Ronald E. Armstrong -- Chief Executive Officer and Director

I think a lot of that share gain comes from our engines. We've been in the engine business in North America, this is our ninth year. And so, the -- as a percent of the total population of engines, the PACCAR MX engine is just becoming a bigger portion. And so, that engine business is a nice add-on. Plus, we now have a 175 or so TRP Stores around the globe. And so, that enables the Parts group to get more penetration with all mix customers, trailers, buses, et cetera. So I think those are probably the two key drivers of share -- share growth in the Parts arena.

Joel Tiss -- BMO Capital Markets -- Analyst

So, the more the pirates I guess, we are losing out?

Ronald E. Armstrong -- Chief Executive Officer and Director

Excuse me?

Joel Tiss -- BMO Capital Markets -- Analyst

The pirates like the third-party, like non-OEM guys are the ones who are losing out?

Ronald E. Armstrong -- Chief Executive Officer and Director

On the TRP side, that would -- it could be the WDs, it could be other OEs, I don't know.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay. And also can you talk a little bit about what you guys have been working on for the last couple years to handle? We've been hearing about a potential slowdown in fourth quarter production levels. And can you just give us a little sense of how you guys can work your detrimental margins in your cost structure to balance that out?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, I mean we're full ahead on our production. We're going to put -- continue to produce trucks as I said the backlog is firm, the demand we're quoting business into 2020. So full ahead for us and where we've because we -- as we mentioned earlier we manage that cost structure prudently during all times -- all phases of the cycle. We've proven historically that we can manage our cost structure quite efficiently, and this will be no exception. We'll be able to, to manage that quite effectively with our factories and with our other operations.

Joel Tiss -- BMO Capital Markets -- Analyst

Thanks. And just one last one, sorry to hog up all the time. Can you talk a little bit about Brazil, I see you highlighted that and where your market share is and what the market looks like for the next year or two there. Thank you. And then, I'm done.

Harrie Schippers -- President and Chief Financial Officer

Yeah. So we are at 6.7% share last year similar in the first quarter. We are continuing to increase our production. We produced over 1,000 trucks in the first quarter. In 2018, we basically doubled production from the prior year and will be in a similar kind of scale this year for 2019. So we -- the product has just been very well received by all of our customers and the industry as a whole. And we've been recognized as the brand of the year for the last three years.

So, we have great dealership representatives. We've got a good, good network to support the trucks and so we're continuing to improve our positioning there and we're also expanding our parts and service presence. So we're going to add a 160,000 square foot PDC that will be opening probably in the early first half of 2020. We've been using part of our truck factory as a Parts warehouse, so we need to grow that and support that. So the future is very bright for our Brazilian operations.

Joel Tiss -- BMO Capital Markets -- Analyst

That's awesome. Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of David Raso with Evercore ISI. Your line is now open.

David Raso -- Evercore ISI -- Analyst

Hi, good morning. A quick question, the second quarter you have deliveries, up 4% but you're implying gross margins flat to down. Can you help explain that?

Harrie Schippers -- President and Chief Financial Officer

Yeah, so the truck margins are in the 12%, 12.5% range, first quarter the truck margins were 12.5%. So a lot of the incremental revenue will come from the truck side and so that's -- that waiting affect of trucks versus parts will sort of keep us in a similar range as to the first quarter.

David Raso -- Evercore ISI -- Analyst

Okay. Thank you. And then also I noticed the CapEx increase, but you hold the R&D are actually even tweeted a little lower. And I'm just trying to say -- this might be a question more for the meeting coming up in May, but just trying to understand, with all the new Drivetrain technology and so forth. And for a long time people voice wondered how the R&D as a percent of sales is so low for PACCAR. Can you help explain, is there some capitalization of some of these dollars that maybe some people might think would be expenses, R&D, can you just help us a little bit with the divergence between the CapEx increase and the R&D?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, the CapEx -- CapEx increase is purely just as we have gotten into the year. The ability of our teams to move things forward has gone quicker than what we anticipated. Our plans are still pretty much the same, but we're actually going to be able to get things done quicker than what we had originally anticipated. So that's the capital increase, the R&D is just part of how we prudently manage our product development efforts and have for years. We're probably going to spend a record amount of R&D for our company this year but it's well thought out, well positioned and we feel good about, we're doing everything we need to do, to support the future needs for greenhouse gas changes, future products and also the advanced powertrain arena.

So, I think we feel really good about what we're doing and the things that we're investing in both on the capital and R&D side.

David Raso -- Evercore ISI -- Analyst

Well, I was, I think this is an important issue because people are trying to figure out the cost pressures on the company, with potentially some volume declines coming in the next year or two. So the divergence of, we were able to pull things forward, and thus the CapEx goes up but not the R&D. Can you help us understand the R&D a little better (multiple speakers) no, no but the change. The change from the start of the year that caused the CapEx to go up, hasn't had a commensurate increase in the R&D.

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, because the plans in the projects that we're working on hasn't changed, it's just the pace at which those capital projects are being executed and the ability to get those done quicker than what we had originally anticipated. So there was no change in the projects, it's just, it's just recognition of the timing of incurring those capital-related costs.

David Raso -- Evercore ISI -- Analyst

I guess we can dive into this more in the May meeting. But I think the idea is sure, if there's CapEx related cost for the new introductions, the R&D as stated are relatively low level. And I think the ability to continue to do that the next couple of years or lack thereof is a big discussion around the earnings resiliency. So I look forward to go into a little more detail, in May.

Ronald E. Armstrong -- Chief Executive Officer and Director

Sure.

David Raso -- Evercore ISI -- Analyst

Thank you very much. Appreciate it.

Ronald E. Armstrong -- Chief Executive Officer and Director

Okay. Thanks David.

Operator

Our next question comes from the line of Steven Fisher with UBS. Your line is now open.

Steven Fisher -- UBS Investment Bank -- Analyst

Thanks. Good morning.

Ronald E. Armstrong -- Chief Executive Officer and Director

Good morning.

Steven Fisher -- UBS -- Analyst

Good morning. Harrie mentioned that used truck values are up year-over-year. I'm curious on used truck inventories. How does the levels in Q1 compared to Q4 2018 both on your own lots and on dealer lots and what you're expecting for the used truck market later this year as trade-ins likely coming in?

Harrie Schippers -- President and Chief Financial Officer

Well, used truck inventories are I think almost the same level as they were at the end of last year. Demand for used trucks and especially in North America has been really good, we see good pricing, good demand for premium trucks.

Ronald E. Armstrong -- Chief Executive Officer and Director

And we're continuing to fill out our used truck locations. We're going to be adding a new location on the property where our (inaudible) factory is located to further supplement our ability to sell used trucks, where the biggest used truck seller for Peterbilt and Kenworth vehicles and we continue to support those excellent residual values.

Steven Fisher -- UBS -- Analyst

Okay, and then I know you guys generally frame oil and gas as being really only a very modest contributor to earnings, but curious just on order trends in oil and gas for trucks, and how the capacity expansion of pipeline later this year might affect some of the market assumptions you might have?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, if there are is pipeline capacity expansion and more importantly if there is infrastructure program that gets -- that gets approved that will be where the vocational truck leader in North America in both, both of those things would be big pluses for our business. But as we said the backlog for this year is very firm.

Steven Fisher -- UBS -- Analyst

Okay, great. Thanks very much.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.

Jamie Cook -- Credit Suisse -- Analyst

Hi, good morning. I know you're talking about price --. Good morning. Our price realization in the quarter of 3%. I think you said, which was pretty good. Can you just, was that better than your expectations and sort of what are your assumptions for the remainder of the year? And then my second question, understanding you have very good visibility into 2019, just based on the conversations you're having with your customers, what are they saying about 2020 is it in line with industry forecasts? And then I guess last, congratulations, Ron and Preston, any initial views on as you take over any top priorities? Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Hello, Preston go first or I will start with the back then.

Preston Feight -- Executive Vice President

I think the PACCAR has been performing exceptionally well. We have a long history. We're great team in place, bringing great results and good strategy and we plan to continue with that.

Ronald E. Armstrong -- Chief Executive Officer and Director

So back on the truck pricing, I think on a year-over-year basis, I think we'll see similar comparison when you look back to the same quarter of the prior year. Similar performance, that offset some increases in costs. But, well, I think we'll see similar performance of what we saw in the first quarter.

Jamie Cook -- Credit Suisse -- Analyst

And then just color on what are your customers are saying about 2020 relative to industry forecasts are saying?

Ronald E. Armstrong -- Chief Executive Officer and Director

Well, I mean we're having negotiations with customers on an ongoing basis about 2020 delivery. So, I think there is still recognition that the economy is good, the demand for freight is good, discussions with customers, people that need all freight, it's -- there still a pretty tight market to be able to get things delivered on a timely basis. So, we're preparing for a continuation of the good market conditions into 2020.

Preston Feight -- Executive Vice President

And with all the improvements in greenhouse gas emissions, our customers keep seeing that the trucks we're building today deliver up to 15% better fuel economy than the trucks they booked four years ago, and that really helps them when they have to decide and replacing their equipment.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Thank you. I'll get back in queue.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Joe O'Dea with Vertical Research. Your line is now open.

Joseph O'Dea -- Vertical Research -- Analyst

Hi, good morning. You continue to post share gains in Europe this quarter. Can you just give a little bit of detail within the region where you're seeing some of that progress? And then, if there is any mix effect in that as well, are you seeing a little bit better traction with some of the larger fleets in Europe?

Preston Feight -- Executive Vice President

Yeah, I'll take that one. Really having excellent broad performance across Europe, but it's exceptionally strong in Poland and the U.K. has produced nice results this year. I think that we, as DAF have the best trucks, operating the best life cycle cost for our customers and that's being born out with the performance of them in the market, and we're seeing the fleets recognize that now. So we're gaining share with some of the larger fleets in Europe and growing broadly throughout Europe. That's what's leading to the strong performance.

Joseph O'Dea -- Vertical Research -- Analyst

And then on the CapEx front and the investment in the engine plants, is that tied it all to things you see on the horizon as an opportunity to really catalyze the next stage of engine penetration for you? I don't know whether that's related to the Phase II or anything else, but as we saw the initial progress and share gains since the launch in 2010, that plateaued a bit kind of wondering what you see on the horizon both contributing toward making the investment now and kind of triggering some potential share gains?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah. Basically we're selling every engine that we can produce and so we need the additional capacity in our factories and we need the additional capacity with our suppliers. So, that's where the investment is focused. So we can go to those next plateaus and deliver great engines to our customers.

Joseph O'Dea -- Vertical Research -- Analyst

Got it. Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open.

Neil Frohnapple -- Buckingham Research -- Analyst

Hi, thanks. Just a couple of follow-ups from earlier question. So, if I recall, PACCAR was the first in the industry to cut production in the fourth quarter of 2015, ahead of the 2016 decline in Class 8 production. You guys obviously still saw pretty positive on the fundamentals, but the industry is chewing through backlog at a quick pace. So, curious on what you're looking at and whether you will start to take down the daily build rate later this year? Do you need Class 8 orders to rise in the summer early fall time frame? Just any more thoughts there would be helpful.

Ronald E. Armstrong -- Chief Executive Officer and Director

The back -- as I said, the backlog is firm, we are more moving full ahead. So...

Neil Frohnapple -- Buckingham Research -- Analyst

Okay. You guys are continuing to build momentum in Brazil, what are the plans on launching more products in the region for some of the lower weight classes of vehicles?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, that's certainly on the drawing board in part of our process we've obviously been balancing our entry into the market, and as we continue to grow and expand our business we will be introducing new products just like we do in all markets around the world to continue to enhance our position in that market as well. So, yeah, that's definitely on our roadmap.

Neil Frohnapple -- Buckingham Research -- Analyst

Okay. And then one last one, Ron. So it sounds like the supplier constraints are largely improved. I mean are they completely behind at this point or is there still an opportunity to benefit the margins as we move through the year?

Ronald E. Armstrong -- Chief Executive Officer and Director

No, we're going to continue to work very closely with our suppliers to continue to move up or build rates in the second quarter and third quarters in North America. And so, it's always an orchestrated effort with our suppliers. We feel good about that obviously the performance in the first quarter was much better than what we saw in the second half of the year and we expect that to continue for the rest of this year.

Neil Frohnapple -- Buckingham Research -- Analyst

Okay. Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Ross Gilardi with Bank of America. Your line is now open.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Thanks guys.

Ronald E. Armstrong -- Chief Executive Officer and Director

Good morning.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Good morning. I was just wondering if I could get some of your thoughts on how they're evolving in alternative powertrain. What are you insourcing versus outsourcing? And as things develop, are you leaning more toward doing more in-house versus outsourcing and why?

Ronald E. Armstrong -- Chief Executive Officer and Director

I think it's a real exploratory time with respect to a lot of the new technologies and we are taking multiple paths in terms of developing our own internal capabilities, working closely with a variety of suppliers who are developing their capabilities. And as we progress over the next 12 to 24 months, we will be sort of figuring out what the best path is for us for the long term and there is still quite a bit of challenge with respect to the economic viability of some of these powertrain choices and -- can they survive without high degree of subsidization.

So in our mind, it's still early days and we have a lot of customers who want to have some initial trucks to have in their fleet. So, they can understand the capability and we're supporting those, and so we'll continue to explore our avenues. And as I say, the next 12 to 24 months are very critical for us to sort of define our way forward.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

What about, Ron, your Silicon Valley office? What are you learning out there, particularly on the autonomous development?

Ronald E. Armstrong -- Chief Executive Officer and Director

A lot. When we first made the decision to open that office that was -- it was clear there was a lot of research that was being done on that area. And so, our team in Silicon Valley, that's where we're really developing our internal capabilities for autonomy. We have great team there and they're really working closely with some third-party suppliers to develop our own packages, and then as I said, we're working with others who have their packages and want to incorporate those into our vehicles. And so we have multiple paths that we're working on there, but the Silicon Valley office and Silicon Valley team has been very helpful, as well as our technical teams and our tech center appear in Mount Vernon and Washington and in Eindhoven. They're all working together quite well to help further our efforts and be smarter about what's possible, all the things you have to think about to accomplish successful implementation.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

And then just lastly, geographically, I mean now that you've had the real success with Brazil and got that off the ground, and I think when you originally launched that investment the idea was you get to a 10% market share, first five years or so. And you seem like you're well on the path to doing that. Might we hear something relatively soon about other geographies, be it China and India, which you've talked about on and off for years? Are you getting any closer to making investment in one of those regions?

Ronald E. Armstrong -- Chief Executive Officer and Director

Well, the way I think about every day that goes by where a day closer. But there is nothing on the horizon. We continue to -- we have offices in Beijing, we have offices in Shanghai, we have an office in Pune, India, with hundreds of employees working in those areas and they're providing valuable support for sourcing from suppliers, for engineering technology, embedded software. So, we get a lot of support from those teams and we make a lot of trips and have a lot of discussions with potential partners both on the OEM side, the component side, to evaluate -- where is that opportunity, that's going to provide us a good return for our shareholders. And so we will continue to evaluate, because it is -- they are large markets and there is opportunity there. It just has to be a situation that's going to make sense for us as a company and provides kind of reasonable return.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Okay, great. Look forward to seeing you guys in a couple of weeks. Thanks.

Ronald E. Armstrong -- Chief Executive Officer and Director

Okay. Thank you.

Operator

Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Robert Wertheimer -- Melius Research -- Analyst

Hi. Good morning to you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Good morning, Rob.

Robert Wertheimer -- Melius Research -- Analyst

And just, just a quick follow-up, you've discussed the parts business where you had a long-run of success in both improving revenues and margins. Has the mix of those more proprietary engine parts been a material contributor to your margin gain? Or has that then more operational? Is the mix on the come still. I don't know if you're willing to segment that margin gain but that's the question.

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, I think there has been a positive impact on the margin performance of our operations in North America. Europe, we've always had our own engine and so we've enjoyed those margins for quite some time and we've seen margin enhancement in North America, as a result of selling, -- the engine parts sales have sort of outsized the total growth in North America and so that's a contributor.

Robert Wertheimer -- Melius Research -- Analyst

And then, have we seen that, that gain flow-through from the market share gain, you have on your engine in North America or I don't know the full lag of when Part sales comp versus the engine? I hope there is still some maturity come in that margin mix. Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah. So, I mean as the engines matured and you get to -- we're getting to the point now where you're starting to get into more replacement and overhaul kinds of activities for our engines. And so we're just starting to see the benefits of that phase of the aftermarket opportunity.

Robert Wertheimer -- Melius Research -- Analyst

Alright. That's helpful. Thank you.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Adam Uhlman with Cleveland Research. Your line is now open.

Adam Uhlman -- Cleveland Research -- Analyst

Hey, good morning, everybody, and congrats on all the records and congrats on the retirement Ron and Preston. First, to start with the step up in CapEx for the year, I might have missed it earlier in the call, but what exact projects were pulled forward, is this the peak facility or some of the distribution centers are landing in this year, or could you expand on that a bit, please?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, there is really nothing, I guess, I would say no projects pulled forward. It's just the execution of the projects that we have been planning all along. We have -- we have new PDC's, we have factory expansions. We had a nice groundbreaking for the Chillicothe paint shop. And those things are just that we're going to be able to get those projects done faster, and moving quicker than what we had originally anticipated, so our spending is just purely just a matter of the timing of the span, those have always been part of our plan.

Adam Uhlman -- Cleveland Research -- Analyst

Got you. Thank you. And then with the build rates expected to be up 2% to 4% sequentially in the second quarter. Could you help us understand how that plays out between North America and Europe? And then I guess, I think you had mentioned a minute ago that builds would be increasing again in the third quarter for North America. Did I hear that right and by how much? Thanks.

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, I think what we'll see is the production that 2% to 4% is pretty much all North America driven. And I think in the third quarter, we'd probably see a similar level of production. We have the two week summer shutdown at DAF in the third quarter. So that we'll see a reduction in production in Europe, but it should be for the most part, offset by production levels in North America.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. Got you. Thanks. And then, just a clarification, I think you mentioned that the orders were down in Europe, could you tell us about how much and what their orders in North America been looking like year-over-year?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, the orders in North America are -- given because of the strength of the backlog, they're reflective of just the customers that are really filling in, the few open slots that exists for 2019, but mostly it's for 2020 build. And again in Europe we saw a reduction in orders from last year's first quarter was when the backlog really got built up for DAF. And so we saw a reduction in the first quarter, I guess, (inaudible) more normal levels of order intake.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Robert Salmon -- Wolfe Research -- Analyst

Hey, good morning, guys. It's Rob on for Scott.

Ronald E. Armstrong -- Chief Executive Officer and Director

Hi, Rob.

Robert Salmon -- Wolfe Research -- Analyst

With a quick follow-up in terms of the North America production outlook that you guys are expecting to ramp up, you guys generated some very good incremental margins and I'm backing into on the truck in the first quarter. Should we be thinking about similar incremental margins, as we look out in the second quarter, based on the roughly 3% pricing you guys were talking to, as the production ramps as well.

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, I'd say, similar. I mean it depends a little bit on the customer mix, the model mix, the geography mix. So there is lot of factors that weigh into that, so something in a similar range would be.

Robert Salmon -- Wolfe Research -- Analyst

And the past couple of quarters on the finance side, you guys have had very low provisions for losses on receivables is this good run rate looking forward based on your outlook of the market at around 0.6% of revenue or should we be expecting that to kind of move, as we look forward ?

Ronald E. Armstrong -- Chief Executive Officer and Director

Well, I mean, because of the strength of the freight markets, our customers have enjoyed excellent performance. Our credit teams and our finance teams have done a lot of work to really apply lot of intelligent data analytics to our credit underwriting. We feel really good about the capabilities there. And so, as long as the economy is good, the freight markets are good, the portfolio will continue to perform very well. And we've seen improvement in used trucks and the portfolio is growing, our team has some great technology, that they have made available to our customers. And so I think all of that is playing to our finance companies capabilities and performance.

Robert Salmon -- Wolfe Research -- Analyst

That makes sense. And can you remind me -- your used truck pricing was up in the quarter, and the type of volumes that you guys saw.

Harrie Schippers -- President and Chief Financial Officer

Yeah, it was up 2% to 3% compared to the first quarter of last year. I don't have the used truck volumes last -- last year for 2018, we sold about 15,000 Kenworth, Peterbilt and DAF used trucks, and so that's 3,000 to 4,000 a quarter. So I would guess that we -- probably somewhere in the 3,000, 3,500 range for used truck sales in the first quarter.

Robert Salmon -- Wolfe Research -- Analyst

Thank you, appreciate the time.

Harrie Schippers -- President and Chief Financial Officer

You bet.

Operator

Your next question comes from the line of Seth Weber with RBC Capital. Your line is now open.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, good morning, guys.

Ronald E. Armstrong -- Chief Executive Officer and Director

Good morning.

Seth Weber -- RBC Capital Markets -- Analyst

Just a quick -- couple of quick follow-ups. I guess just thinking about the Parts business again. I mean, would you, do you think it's fair to -- fair to think about that business being -- that business could be up next year, even if new truck demand is lower, that's my first question.

Ronald E. Armstrong -- Chief Executive Officer and Director

That surely would be for our aim. Again, we're continuing to add additional TRP Stores, we're continuing to add additional Peterbilt and Kenworth dealer locations, adding locations and markets like Brazil and other areas. And so our goal is to continue to have the new programs in place, additional technology to continue to build that business throughout all cycles.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. So you think like a low-to-mid single digit kind of number for next year is reasonable?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yes, probably a little bit early to commit to something.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, fair enough. And then just going back to the pricing and the incremental margin questions, I mean are you, are you assuming that, that input costs kind of stay where they are for the rest of the year? I mean, I guess some companies are talking about input cost coming down for the balance of the year. So just trying to kind of frame where operating leverage coming from (multiple speakers)

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, I think that's our assumption is probably a pretty steady input cost. We have most of our components are purchased under long-term agreements, so it takes a little while to blend cost movements into the cost of the vehicles, et cetera. So, I think that's pretty much, our assumption is a pretty stable cost environment.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, that's all I had. Thank you very much.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from the line of Faheem Sabeiha with Longbow Research. Your line is now open.

Faheem Sabeiha -- Longbow Research -- Analyst

Hi, good morning and congrats on a great quarter. Just a question on the MX production. Is there maybe some plans or an ability to accelerate that production capacity coming online sooner? It just seems like with your share remaining in the -- where it's at now exiting the cycle, could maybe stall engine parts growth opportunity that you laid out in your Investor Day last year?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, as a company, we produced last year 97,500 engines, which is the highest that we've ever produced. And obviously that every one of those, DAF had record production. And so every DAF truck has a PACCAR engine. And so, as time goes on, we'll have to see more penetration of those engines into Kenworth and Peterbilt trucks and we are -- we've committed the money to get the capacity in place, as quickly as we can. I think most of that will be being implemented in the 2019, 2020 time frame for having full availability into 2021-ish time frame.

Faheem Sabeiha -- Longbow Research -- Analyst

Okay. And kind of adding to Seth's question, I guess with looming decline in Class 8 production, do you think, say a more favorable price cost environment, lower-premium freight costs and lower over-time to the extent you're at that level today will maybe offset the decline in volumes when you look at your gross margin next year?

Ronald E. Armstrong -- Chief Executive Officer and Director

Yeah, -- the demand for trucks is there, and we're all ahead as I mentioned before. When things do adjust downward, we've proven over many, many cycles that we're very adept at managing through them. So, we will continue to execute that very well at whatever point that may happen.

Faheem Sabeiha -- Longbow Research -- Analyst

Okay. Thanks.

Ronald E. Armstrong -- Chief Executive Officer and Director

Thank you.

Operator

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

Ken Hastings -- Senior Director of Investor Relations

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

Operator

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

Duration: 46 minutes

Call participants:

Ken Hastings -- Senior Director of Investor Relations

Ronald E. Armstrong -- Chief Executive Officer and Director

Preston Feight -- Executive Vice President

Harrie Schippers -- President and Chief Financial Officer

Jerry Revich -- Goldman Sachs -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

David Raso -- Evercore ISI -- Analyst

Steven Fisher -- UBS Investment Bank -- Analyst

Steven Fisher -- UBS -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Joseph O'Dea -- Vertical Research -- Analyst

Neil Frohnapple -- Buckingham Research -- Analyst

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Robert Wertheimer -- Melius Research -- Analyst

Adam Uhlman -- Cleveland Research -- Analyst

Robert Salmon -- Wolfe Research -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Faheem Sabeiha -- Longbow Research -- Analyst

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