Earnings Call: Q4 2019

Jan 28, 2020

Summary

FY19 delivered record revenue and net income, supported by record Parts results and strong Financial Services. 2020 guidance anticipates normalized truck markets, lower Q1 deliveries and continued Parts growth.

Good morning, and welcome to Paccar's fourth quarter 2019 earnings conference call. All lines will be in 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. 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. Good morning. Harrie Schippers and I will update you on our excellent fourth quarter and record full year 2019 results and business highlights. Thanks to Paccar's outstanding employees around the world, 2019 was the best year in the company's 114-year history. Paccar achieved record revenues of $25.6 billion and record net income of $2.39 billion, a 9.3% after-tax return on revenues. Paccar's strong financial performance in 2019 benefited from Paccar Parts record pre-tax profits of $831 million and Paccar Financial Services pre-tax profits of $299 million. Paccar has achieved 81 consecutive years of net income and a total shareholder return in 2019 of 45%. The company has paid a dividend every year since 1941. In 2019, Paccar declared dividends of $3.58 per share, a 16% increase over 2018. Total dividends declared were a record $1.24 billion. Paccar's fourth quarter revenues were $6.1 billion and fourth quarter net income was $531 million. Paccar delivered 45,700 trucks during the fourth quarter compared to 49,300 in the third quarter. There were fewer build days and lower build rates in North America compared to the third quarter. Build rates in Europe remained steady. The U.S. economy performed well in 2019, which contributed to a strong truck market. In 2019, U.S. and Canadian Class 8 truck retail sales were 309,000 units, the second highest truck sales in history. During 2019, Kenworth and Peterbilt combined market share increased to 30%, compared to 29.4% in the prior year. In 2020, the U.S. economy is expected to grow by about 2%. The new USMCA and China Phase One trade agreements could provide upside in the economy and are good for Paccar. We estimate the 2020 U.S. and Canada Class 8 truck market to be in a range of 230,000 to 260,000 vehicles. European above 16 ton truck registrations were 320,000 vehicles in 2019, reflecting continued robust customer demand after several years of steady economic growth. DAF delivered a strong 16.2% market share. In 2020, the European economies are projected to continue growing, and we expect another excellent truck market with above 16 ton registrations in a range of 260,000 to 290,000 vehicles. I would like to recognize Paccar's high-performing Kenworth, Peterbilt, and DAF dealers, who are the best in the industry and important contributors to our success. Truck and parts gross margins were 14.4% in the fourth quarter. Truck pricing increased during the quarter more than offsetting costs. In the first quarter, we expect deliveries to be 5%-7% lower than the fourth quarter due to normalized markets and build rates in North America. First quarter truck and parts gross margins are estimated to be around 14%. Paccar continues to take a rigorous approach to controlling costs throughout the business cycle and delivers industry-leading operating margins. Other 2019 accomplishments included Paccar delivering a record 199,000 trucks worldwide. Kenworth, Peterbilt, and DAF expanding their range of battery electric, hybrid, and hydrogen fuel cell trucks in field testing with customers. South American deliveries increasing by 60%. The company's focus on sustainable business practices were recognized by the environmental reporting firm CDP. For the second consecutive year, Paccar achieved an A rating, which puts us in the top 2% of more than 8,000 companies which report to CDP. Paccar is one of only 35 companies in the U.S. to earn the A rating. In addition, we're proud that Peterbilt, Kenworth, and Paccar Parts were recognized as top workplaces for women by the organization Women In Trucking. Harrie Schippers will now provide an update on Paccar Parts, Paccar Financial Services, and Paccar's investments in future growth. Thanks, Preston. In 2019, Paccar Parts generated record annual revenues of more than $4 billion, a record annual pretax profit of $831 million. Annual parts revenue grew 5%, and profit grew 8% compared to 2018. Parts fourth quarter revenues were $994 million, and quarterly pretax profit was a strong $205 million. Paccar has steadily increased its truck and engine market share over the years, resulting in a greater number of Paccar trucks and engines in operation. At the same time, Paccar has consistently expanded its network of parts distribution centers, such as the ones opening this year in Las Vegas, Nevada, and Ponta Grossa, Brazil. Kenworth, Peterbilt, and DAF Dealers have made large investments to increase their service capacity. The growing park of Paccar trucks and powertrains and the enhanced parts distribution and service network drive future long-term growth. In 2020, we estimate parts sales to grow by 4% to 6%. Paccar Financial Services achieved 2019 records in annual revenues of $1.48 billion, new business volume of $5.6 billion, and portfolio assets of $16.1 billion. The portfolio continues to perform well with low past dues and low credit losses. Fourth quarter pretax income was $68 million, the same as in the third quarter. Paccar Parts and Paccar Financial Services profit contributions enhance Paccar's financial results through all phases of the business cycle. I am pleased to share that in 2019, Paccar was recognized for its product and manufacturing innovations. DAF earned Truck of the Year awards in the U.K., Poland, Czech Republic, and Slovakia, and the Green Truck Logistics Solution award in Germany. Kenworth Chillicothe and Peterbilt Denton each earned a prestigious 2019 Manufacturing Leadership Award from the National Association of Manufacturers. At the CES technology show in Las Vegas earlier this month, Paccar showcased a Level 4 autonomous vehicle and two battery electric trucks. We had a terrific turnout of people interested in Paccar technology and the opportunity to see the trucks firsthand. Kenworth, Peterbilt, and DAF have each announced that they will begin producing alternative powertrain trucks in the next 12 to 18 months. Paccar is a leader in all powertrain technologies that drive our industry, including diesel, battery, hybrid, and hydrogen fuel cell. Paccar invested a record $744 million in capital and $327 million in R&D expenses last year. In 2020, we are planning capital investments in the range of $625 million to $675 million and R&D expenses of $310 million to $340 million. These capital and R&D projects will develop the next generation of fuel-efficient vehicles and enhance the company's manufacturing and parts distribution facilities. Thank you. We would be pleased to answer your questions. At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Our first question comes from Tim Thein with Citigroup. Your line is now open. Thank you. Good morning. Preston, maybe the first one just on the guidance here for the first quarter. I am looking at build rates at an industry level, at least projected build plans for North America, calling for a modest, a small sequential step up from 4Q to 1Q. I am curious how Paccar fits into that in terms of within the context of that, I think you said down 5%-7% deliveries, where North America fits in relative to Europe and some of the other markets. Sure. As we just said, we do expect deliveries to be overall 5%-7% lower, and that is matching to where the market really is. North America is more of that than Europe is. Europe has been fairly stable for us through the fourth quarter and into the first quarter. It is really just matching to where the normalized market has become, where we are seeing the normalized market. So what is nice for us is we have a pretty good percentage of the backlog. I think it is roughly 34% of the backlog, and compared to the inventory where we are a smaller percentage of the inventory. In fact, we only have about two months worth of inventory, two and a half months of inventory sitting in there. So we are in pretty good shape that way, and it is just normalizing to the market. Okay. All right. Then on the margins in the first quarter, there is obviously you will get a little bit more help from a seasonal perspective in the second quarter. But how are you considering that roughly 14% margin today in the first quarter relative to the full year? So we look at the first quarter, and it is where we stop our guidance to it, is we look at the 14%. I think that is really continuing to deliver, as Paccar does, excellent industry-leading margins, and that is consistently good for us. We are pleased to be able to deliver that. That is really because of the performance of our teams on the truck side, the financial services side, and the parts team. You can posit that works really well. All righty. I will now pass it on. Thank you. Okay. Thank you. Have a good day. Our next question comes from the line of Ann Duignan with JP Morgan. Your line is now open. Hi, this is Tom Simonitsch on behalf of Ann. Hey. Hello. Hi. Quick question on SG&A, which came in a bit higher than we had modeled for the fourth quarter. Can you just talk about what drove the year-on-year increase, and is Q4 a fair run rate for 2020? When we look at SG&A, one of the nice things for Paccar is we have the lowest SG&A in the industry by a substantial amount. We do a great job of managing that. As a percentage of sales, it was actually down in 2019 at the end of the year. We always take a look. We have a rigorous approach to cost control in all elements of the business, both in up cycles and down cycles, and we'll continue to manage that cost to the great levels we maintain. That's how we think about it. Consider very little as fixed costs and just try to do a great job. Okay. Can you discuss new orders in North America and Europe for Paccar relative to the industry? I think last quarter you noted your backlog represented 36% of the industry backlog. Where does it stand at the end of Q4? Sure. Our backlog is really sitting around 34%. That's what we have now. As we look at orders are a complicated thing because it depends on everybody's inputs for what's an order and what's been canceled. We think about more is we make sure that what we're building has a firm order, a customer name on it, and that's what we do. We've been able to adjust our build rate aligned with our orders, and that carries us forward as we look into next year. Our next question comes from Stephen Volkmann with Jefferies. Your line is open. Hi. Good morning, gentlemen. I'm curious, Preston, based on what you know today, obviously things could change, but are the run rates for each of your factories what you'd expect to be stable through the year? Or do you think, at some point there will be another production cut needed? I think we think about it in a little bit more closer in view than that. We think about whether the orders we have right now present the backlog we need to keep the factories running smoothly, and that's where we're at right now. We've continued to adjust. As I said, we think first quarter deliveries will be down 5%-7%, and build kind of matches that. Eventually, it has to tie together. That's what we're thinking about in the first quarter. We are operating in what we think is a good economy. GDP growth is going to be up almost 2% in the U.S. We think European GDP is growing, so there's some positive reasons to think about the economy and the operating environment. We'll see what happens through the course of the year as far as build. Okay, thanks. Can you just comment on what you're seeing in terms of used pricing, and I'll pass it on. Sure. Used pricing, as we said in the last quarterly, is continuing to be a headwind. I think in the last time we talked about it being somewhere in the double-digit declines. One of the nice things for being part of Paccar is we have an amazing team in our Paccar Financial Services group that does a great job of managing the used trucks. We sell the best trucks in the industry, and the second owners love buying Paccar products. It's really one of our inherent advantages. The other part of it is, I think we continue to invest in our used truck organization so that we add new used truck centers throughout Europe and North America to make sure that we are meeting the market needs. As we grow our market share, it means there's ultimately more used trucks, and we want to take care of our customers with those used truck centers. Thank you. You bet. Our next question comes from Andy Casey with Wells Fargo Securities. Your line is now open. Thanks a lot. Good morning. Morning. I want to kind of flip over to the financial services. The revenue was quite strong. Can you comment on what drove the strength in revenue? And also within the financial services, the provision for losses on receivables dropped on an absolute basis sequentially against what continues to be a pretty challenging used truck price environment that you just described. I am just wondering what the drivers were for that as well. Sure. Harry, you want to Sure. The Paccar Financial had a good quarter. We have a record portfolio, record revenues, so that drives a lot of the profit improvement. But like Preston said, used trucks continue to be a headwind for the finance company. We expect that will continue in the first quarter. Customers continue to pay their bills. Past dues are low, below 1%, and credit losses are favorable, too. We expect with all of that, the first quarter results of the finance company to be very similar to the fourth quarter. Okay. Thank you. Just, Harry, back on the revenue. It went up pretty significantly year-over-year, but also sequentially. Was there any Sure. Some of that reflects the increased volume of used truck sales that flow through the finance company. Oh, okay. Okay. Thank you very much. You're welcome. Our next question comes from Jerry Revich of Goldman Sachs. Your line is now open. Yes. Hi, good morning and good afternoon, everyone. I wonder if you could please talk about what you're seeing out of your competitors in the U.S. and Canada. Typically, when we are heading into a production downturn, you folks are the first to cut production, and your market share in the initial stages of a downturn is typically lower, as a result. This time your production share actually went up in the first quarter of a reduction here. Can you just talk about what you're seeing out of your competitors and what's driving the different cadence in terms of your production share, in this fourth quarter compared to the past couple of production downturns? Well, what we experience right now is we have just fantastic products out there. We have great dealer network, great products out there, and I think there is just this strong demand for our products. It is really as simply as it can be put, is people want to drive the best trucks and have the best services and the best powertrains, and that is what we offer. We build, again, coming back to it, we build to the orders we have, and that is driving our increase in share, and that is as simple as we think about it. It is really kind of a nice picture for us because they are great products. When you look at the overall inventory picture for the industry, so we are exiting 2019 with about 73,000 trucks in inventory, which, if you apply prior cycles, looks like the industry needs to take out about 20,000 maybe 30,000 trucks out of dealer inventories. What does that picture look like for Paccar, just as the natural transition for some custom end applications that are completed at the dealer site, how much do you anticipate your dealer inventories coming down in 2020? It is a good question. Our inventories are in really good shape. You said 73,000, so that is kind of a round number. If I use a round number for us, it is, call it 18,000 of Kenworth and Peterbilt combined. It obviously depends on when you start it. But as we have 30% of the market share, we really only have 25% of the inventory. So that says, again, that we are in pretty good condition. Some of that inventory, quite a bit of that inventory is with body builders right now. So we have the leader in the vocational market, and so some of those trucks are getting bodies put onto them right now. Okay. On the parts business, you folks have continued to have pretty steady performance, even though there has been some puts and takes for freight markets. Can you just talk about in your outlook for 4%-6% growth, how much is the contribution from your engines hitting the sweet spot, the new truck lineup hitting the sweet spot for parts consumption versus underlying freight traffic? Can you just give us a bit more context directionally how you are thinking about the pieces relative to the outlook? Yeah, I think that there's a couple things going on in that the Paccar Parts team continues to do an outstanding job. They have great technologies they're employing. It's something that we maybe don't give enough sharing of. Their e-commerce program is outstanding, and that's doing a great job of making sure we have the right products at the right places. As we mentioned in our earlier comments, we're investing in distribution centers as well. The new distribution center coming online this year in Las Vegas, Nevada, another one in Ponta Grossa in Brazil. Those contribute to Paccar Parts performance. We continue to grow our proprietary powertrains you mentioned. I wouldn't say that's stable. That's a growing opportunity for us. Last year, we finished at 43% for engine sales, being with our MX engines, so that's great. It was 47%, actually, in the fourth quarter. That's another opportunity for us. You mentioned the great trucks and the growing share that contribute to the Paccar Parts team's growth. There's just a lot of great things happening on the Paccar Parts team, and we have a great future to look forward to there. You don't need really strong pickup in freight volumes to hit the 4%-6% growth target for Paccar Parts? No, I think what you see is the freight volume does drive demand, but it's really about the size of the part. Bigger influences are size of the part, size of your proprietary content, and that takes a few years to mature, where parts consumption is really growing. Again, looking forward, I think that we have a great amount of freight being hauled, right? Freight tonnage was up last year over 3%, and that's going to contribute to utilization year. We agree with you on that. Okay. I appreciate the discussion. Thanks. Have a good day. Our next question comes from Ross Gilardi with Bank of America. Your line is now open. Yeah, good morning, guys. Morning. I just had a question on decremental margin. If you go back to 2016, you seem to have sort of a similar revenue composition of downed truck production, but very steady parts, and that translated into kind of a 15%-ish type decremental gross margin, pre-R&D. Is there any reason why you shouldn't be able to sustain a similar level of performance or anything to think about this time around versus then? No, I think you characterized it well. We think about incrementals and decrementals in that 15%-20% range. It, as you said, we saw in the 2016 timeframe, and I think that's a nice way to look at it going forward. Okay, great. The parts business has remained very resilient but certainly did decelerate a bit as the year kind of grinded on. Are you seeing any type of maintenance deferrals amid softer market conditions? When you say that you expect the business to be up 4%-6% in 2020, is that somewhat second half weighted, or do you think we'll see this acceleration back to that growth trajectory out of the gate in the first half of the year? Yeah, I think that the 4%-6% obviously is what we said for how we look at it going forward, and I don't think I would try to stratify that by quarter. I think it's going to be good performance throughout. Obviously, there can always be moments of cyclicality that are impossible to kind of guess where people are going to be by weeks or month. But in general, with great freight volumes, a great Paccar Parts team, the right product lineups, and the right investments, it's going to continue to deliver. And then just on the SG&A, the question you got before, are you trying to say that SG&A as a percentage of sales overall should be roughly similar to where it was in 2019? Well, if you go back and look, that's where SG&A has kind of run for us. Again, comparing it to the industry, it's significantly the leanness of Paccar shows through, and we continue to do a great job of managing that SG&A, and I think we'll continue to do that going forward. Well, I think the context of the prior question was just that it did jump a little bit in the fourth quarter, relative to the third quarter. So just holistically, if we're looking at it for the full year, I'm just trying to get a sense if- I would take a longer- sales are going to. Take a longer view of it and look where Paccar has historically performed and know that we will perform at that same level. As I think I would guess I would share is we will continue to rigorously manage our costs and control them and make the right decisions that build the future of the company in a great way. Okay, then just lastly, on the R&D side, you are guiding to sort of stable R&D, but in the context of getting to production models for your alternative powertrain models over the next year and a half, how should we think about that? I guess I am a little bit surprised that that number is not ramping up a little bit as you are moving in that direction. I think we have an amazing team of engineering people around the world, and they are doing a fantastic job of looking at how we should go to production. We are working closely with all the customers whose interest is in alternative powertrains, and we will have the right technologies for those customers when it comes time. We continue to do that in Paccar's way, which is with good decision-making, prudent investments, and leveraging our supply base and the other companies that are out there. Thanks very much. You bet. Our next question comes from Jamie Cook with Credit Suisse. Your line is now open. Hi, good morning. I guess two follow-up questions. One, within the U.S., when you are talking about your orders and your backlog, can you distinguish between what you are seeing on the vocational side versus linehaul side, if there is any variation there? And then just second, a nuance. When you are talking about Europe, relative to the retail sales guide and relative to what other customers have come out to said, it sounds like you are seeing Europe sort of more stable. I am just wondering if Europe is trending a little better than what you would have thought so far, and if so, what geographies are driving that? Thank you. Well, let's take the first part of the question. I think we are the leaders in the vocational market. Peterbilt and Kenworth are, and they do a great job of that. The vocational market is doing really well throughout U.S. and Canada, with housing starts up and construction being strong. Paccar does a great job there, and so that's a good percentage of our orders. We're obviously pleased with how that's working and feel like that'll continue through the course of the year as the economy develops. I think from the European side of the question, I think Europe is working the way we thought it might work into the first quarter, where our build rates have been stable there for two quarters now, more than two quarters. And we're delivering good market share, and people are loving the DAF trucks. Freight continues to be moved from Central and Eastern Europe into Western Europe. That's kind of the continuing trend line, macro trend. And we benefit from that because DAF is the market leader in those areas, and it really contributes to our success. Okay, thank you. You bet. Our next question comes from Steven Fisher with UBS. Your line is now open. Thanks. Good morning, guys. Hey, good morning. Morning. Wondering how you feel about the second half visibility and your confidence in the outlook. Obviously, in the first half, you have more backlog, but curious how you formed your full-year market view, and your assumptions in the first half versus the second half. Yeah. I think what we did is we said that we have a growing economy, so that's contributory. We're very close with all our customers. We spend a lot of time talking to them about how their business are working, because that's really the underlying principle for how our build will develop. In the last even few weeks, last week or two, I've talked to several of my friends that are refrigerated carriers and flatbed haulers and truckload carriers throughout the country, just as to see how their businesses are running. They're running well, and yet we still feel like there was probably an overbuy in 2018, 2019, and so that's going to normalize itself into the 230,000 to 260,000 kind of a market for U.S. and Canada. Are those customers telling you that they're going to start stepping up their orders at some particular point in the year to be able to hit that, make that 230,000, 260,000 market number work? It's not that specific. I think people buy trucks when they need them, and there's a huge population of people buying trucks, so it would be not accurate to model it that way, not that specifically. Okay, and then just one quick one on the FinCo. As you think about 2020, should we sort of carry forward this Q4 profitability level for the whole year of 2020? Or do you think there'll be some fluctuations on that relative to just demand and used values? I think the team has done a really nice job in the FinCo of delivering good performance, and we expect that performance to deliver through the first quarter, and then we'll watch as the year develops through that. Okay, thank you. You bet. Our next question comes from Seth Weber with RBC Capital Markets. Your line is now open. Hey, good morning, everybody. Good morning. Just wanted to circle back on the Europe question. I think if my numbers are right, your market DAF share actually ticked down a little bit, 2019 versus 2018. Is there anything you'd call out there from a regional or country perspective? Do you think that that reverses here in 2020? Thanks. Yeah. So two thoughts to that is we had 16.2% in the 2019, which was the second-best year ever, which is coming off of our 16.6%. You're right. That was up a point and 1.3%. So we had a huge gain, and we've held onto that gain, and we have good momentum right now, I think. The other part of it is on the medium-duty side, we grew our share from 9% to 9.7% during the course of 2019. So we actually grew there. Then I wouldn't try to isolate down from that. The U.K. did really well, but we're performing well in a lot of the markets in Europe. I think the DAF trucks are really performing and helping our customers be successful. Okay, thanks. Then, just to follow up on, I think you mentioned pricing, price cost was positive in the fourth quarter. Anything you would call out for your thoughts for 2020? Do you expect that to continue? I think what we saw was prices were realized a little bit over 2%, and costs were a little less than 2%, and we will watch what happens in 2020 and see how that model develops for us. But there is obviously going to be fluctuations as we go forward. Okay. That is all I had. Thanks, guys. Our next question comes from David Raso with Evercore ISI. Your line is now open. Hi, thank you. I wanted to pick up on that point about price cost. The first quarter, the implied deliveries are down about 17% year-over-year. In that context, I think the 14% gross margin would be viewed as fairly impressive. Price cost, you said, was positive in the fourth quarter. Can you give us some sense the cadence or what do you expect for the first quarter? I think people are just trying to figure out if there's a risk to the top line, what's the decremental on it? In the first quarter, the setup on the guide, again, relatively impressive at 14% gross margin with that kind of delivery decline. So can you help us a bit on maybe mix in the backlog, price cost in the first quarter? We're just trying to get a sense of the resiliency of that, again, relatively impressive decremental in the first quarter. Yeah. Thanks for the question, David. I think when we think about it's really about making sure that we are building the right quantity of trucks, which is obviously based on having the right orders, and so we have those matched well together. We're not seeing tremendous fluctuations in costs. We're not seeing tremendous fluctuations in price. The fact that we had a good price realization in the fourth quarter was advantageous to us, and we'll see what happens as we get into 2020 and watch what that model looks like. It's kind of a- The price-cost spread in the fourth quarter, you don't expect it to be terribly different in the first or second. I think people are just trying to figure out, is that really a mix price-cost benefit to get you to stay at 14% gross margins? Or is it just structurally with parts and so forth, that we can be somewhat comfortable even if we do want to model more conservative top line, that the gross margin resiliency is there? That's the kind of spirit of the question. Yeah. I think if I try to get to the spirit of it, really, if you think about price, it's because the team does a great job of supporting customers, and people are willing to pay for our trucks. That's the overarching thing on price to me, is that people want to have Paccar products because they're the best, and then they are willing to buy those products. I think that part of the truck part and other gross margin performance has to do with the strong performance of our parts organization. So that as truck sales is down, parts mix is up. That's a contributor as well. Really, it's just both of those things that keep us performing at the industry-leading levels. But it's not necessarily because price cost gets notably better in the first quarter as there'd be some thought your costs are down from steel to- No, there's nothing that's- Okay substantial there. All right. I appreciate it. All right. Thank you. You bet. Our next question comes from Courtney Yakavonis with Morgan Stanley. Your line is now open. Morning, guys. Morning. Just back on the FinCo again. I just wanted to understand because it seemed like your pre-tax profit was down. I think Steve had asked earlier just about carrying forward the margin. Was there anything one-time that was impacting margins this quarter, or is it just the weaker used values? Are there any impairments or increased depreciation expenses that are really causing that big step-up in the interest and other borrowing expenses? Yeah. Your final statement's characterizing it accurately. What I would say is we had record new business volume in 2019 of the $5.6 billion. That was contributor to revenue growth. More volume on the used side was the other contributor revenues, and that was the headwind on the profit side. I think you mentioned that you're still seeing the double-digit declines in used. Have you seen any stabilization in used values, or is it still wait and see kind of how that market shakes out? Well, it is a dynamic market. I think that the nice thing is that, as I said, and it can't be overstressed, the fact that especially maybe the second owners, or equally the second owners really like our products. That's helpful to us from the price position compared to the rest of the industry. That works to keep us at a premium, not just for the first but the second owner. I would share your comment that things have stabilized a little bit. We see one way to look at that is that the amount of inventory coming in is equal to the inventory going out. That's helpful as well. We're not building used inventory. Kind of the state of where it is right now. And then just on the CapEx side, I think your CapEx for the year came in about $100 million below what your guidance had been, and you obviously didn't change the CapEx guidance for next year. Just wanted to understand what that discrepancy was, and if anything's proceeding ahead of schedule or if any projects got cut. No. In fact, that's not exactly how we saw it. We saw CapEx was kind of slightly higher than where we'd started, and we have a good cash flow or CapEx plan for 2020 as well, which is going to deliver the great products we need. I wonder if you're looking at the cash flow statements more than you are CapEx commitments. Okay. Yeah, I was looking at the 575 versus the guidance for 625 to 675. But maybe that's the issue. I think that's what you're looking at. Yeah, I think 744 is the number that we were talking about for 2019. Okay, perfect. Thank you for clarifying that. You bet. Then just lastly, I think the comments that your builds has remained steady. I just want to make sure that means that you really don't anticipate any further production cuts from the build rates that you're at currently. I think what we said is we would expect in the first quarter that deliveries would be down 5%-7%, and that's obviously matching the order intake. Okay, perfect. Thank you. You bet. Our next question comes from Joel Tiss with BMO. Your line is now open. Hey, guys. How's it going? Really good. How about for you? Hanging in there. Good. I wonder if you could spend a minute just talking about Latin America, about how the setup is, kind of what your market share is looking like, and how you think you can gain a little bit more share in 2020, and just kind of the setup of the market there. Sure. It's been a fantastic journey for us there. We have a great set of dealers, really neat products down there. We've got a lot of success with the dealers and the customers. I think the brand reputation for DAF in Brazil has grown tremendously in just a very short period of time. We're looking at our market share growth opportunities as being substantial. We think that the market is relatively stable down there. Brazil comes in at 75,000. The South American market overall is 100,000 to 110,000. As we noted, we increased our deliveries by 60% last year in South America, so substantial growth that way, and we'll just look forward to continuing growing the truck sales. The parts business is doing really well. We introduced the Paccar Financial Services business for customer financing in Brazil last year, so a lot of good activity happening for us in South America. Okay. Thank you. You bet. Our next question comes from Felix Boeschen with Raymond James. Your line is now open. Yeah. Hey, thanks for squeezing me in here. I appreciate some of the color on the parts outlook, but as we're sort of dissecting some of the different buckets within the business, I'm curious if you have an update on the TRP stores. How many do you plan to add next year? And maybe any color on some sort of same-store sales growth number in that existing base of the stores? Yeah, TRP has been a great addition for us in reaching a new customer base. They've done a fantastic job of that. There's 210 stores now that are in operation, so that's growth year-over-year. We'll keep growing the number of stores where they make sense with our dealers all around the world, whether that's in Europe, it could be in Russia, it could be in South America, North America, all of the above, really. So we'll continue to see the brand grow and perform well and bring new customers to Paccar. Okay. Just curious to see if you have an update on the margin profile into next year for the parts business. On one hand, you obviously have the aging MX engine population, and then the other one, the TRP revenue increase. Any color would be appreciated on that. I think the margin profile will stay relatively in the same range. Okay. Like 27%, 28%? Yeah, in that kind of range. Got it. Thank you. You bet. Our next question comes from Adam Alman with Cleveland Research. Your line is open. Hi, guys. Good morning. Good afternoon. Good morning. Good afternoon. Hey, going back to the MX engine. It looks like you had a pretty strong fourth quarter. I don't know how much of that increase was mix of customers that you were shipping the engine out to, but how are you thinking about your penetration rate for this year? We have a great powertrain offering, obviously, with the MX engine. That is a core of it. We have a great relationship with Cummins as well, who does a great job of supporting our customers with their powertrain. We did grow our MX engine share to 47% in the fourth quarter for a full-year average of 43%. Part of what enabled that is we invested in manufacturing capacity in the course of the year last year. We have adequate capacity to build as many MXs as we want for the customers, and we look forward to seeing that continue to grow as we move through the cycle. Okay. Gotcha. Then just a clarification again on the financial services revenue. Can you tell us how much your used truck sales were up in the quarter? I do not have that detail sitting around in front of me, but they did increase. I just do not know the number in front of us. Okay. Thank you. You bet. Our next question comes from Matt Elkott with Cowen. Your line is now open. Good morning and good afternoon, everyone. Thanks for taking my question. I think your heavy-duty percentage tends to be around 85% historically. First, are you still comfortable with that breakout longer term? The second part of my question, what was it in the fourth quarter? I think that general percent is okay, but we have great growth opportunities on the heavy side and the medium side as we look forward to it. We will continue to see share develop for Paccar positively. Take a steady approach to it, and we have been very successful growing share, and we will continue to find that same success. I do not think there will be much of a shift, though, and I do not have the exact number, but your numbers of ratios are about right. Okay. Do you think that you may have picked up some share due to the GM strike in the Class 6 to 7 categories in the fourth quarter? I think we picked up share because we just have great trucks, great people, great dealers. Got it. Just one other question. If we take a longer-term view, could you update us on your strategic priorities? Anything that's likely to become more of a focus, more of a growth driver, whether it's a specific region or more vertical integration of Paccar engines or alternative technologies or anything else? Well, you hit some of them, right? We're going to keep growing organically. We're going to grow geographically where it makes sense and provides profit for the corporation, and we're going to keep making the prudent investments in technologies that deliver great trucks and powertrains to our customers when they need them. All of those will be areas that we grow in. Great. Thank you very much. You bet. Our next question comes from Rob Wertheimer with Melius Research. Your line is now open. Yeah. Hey, everybody. Hey. My question is, you gave helpful comments on European market share. Are you willing to talk about your theme of improving straight truck market share, whether that's progressing and whether you need that to work to get above a certain threshold? Any update you can give us there? It continues to be a focus. We continue to do well with it. We did grow as a percentage there in the straight truck market. That's going to continue to be an area of, we just talked on the prior question, is organic growth for us. Are you growing both, do you have room to grow both tractor and straight truck share in Europe, or is there any kind of limit on the tractor side? No, there's no limit. We're the market leader in tractors, and we'll continue to be enjoying that and looking for extension of that, and growing on the straight truck side as well. Yeah, we have the product in the straight truck side. So if you look at markets where DAF has been for a long time, the U.K., Netherlands, Belgium, our straight truck market share is about the same as the tractor market share. So we do have the products. It's just a matter of growing that business also in markets like Germany, France, Italy, and Spain. Okay, thank you. If I can, I don't know if this is an answerable question, but I'll ask it anyway. In a normal up-and-down cycle, what's your preferred pacing of production changes? Given supply chain, given ramping, et cetera, would you be looking to make adjustments one and two quarters out, or two quarters and three quarters out? I know you don't try to hold a lot of inventory, not trying to stuff the dealers, just a little bit about the rhythm of how you think about production changes. Yeah, I think we build trucks to order is the essence of it, which is different than the automotive industry. What we do is when we talk to our customers and they need a truck, then we schedule that in, and we try to maintain some kind of a visibility, whether that's four, eight, 12 weeks, and that's how we define our production schedules. Okay, no. Thank you. All right. Our next question comes from Joe O'Dea with Vertical Research. Your line is now open. Hi, good morning. Good morning. My impression so far, and commentary around pricing expectations is that it is more of a wait-and-see into 2020. What we saw the last time demand did soften in 2016 is that there was a little bit of pricing pressure. I am just curious whether you anticipate that we should be looking at something similar, just given a little bit softer demand, or if you are seeing anything different out there, cross-competitor behavior that would suggest that pricing can hold up. I think if you think of it in terms of truck part and other, in the truck side, there will be obviously market dynamics drive differences. We have a continued strong performance and increasing percentage of our performance coming from parts, and they are doing a great job, so that is a little bit of a balancing factor to it, looking back to prior cycles. No, I do not think you should think that Paccar is going to do anything except deliver the best margins in the industry. I guess related but a little bit more of a mix-type question. Similarly going back from, if we just track 2015 to 2016, the average truck price was down, and it was more than just a pure pricing effect. Is there anything to just be aware of with general mix in a softer demand environment and what that means for average unit pricing, just given the mix effect? No, I do not really think so. I do not think there is anything in there. Okay. Thanks a lot. You bet. Our next question comes from Jeff Kauffman with Loop Capital Markets. Your line is now open. Thank you very much. Hi, everyone. Hello. Hey. A lot of the real smart questions have been asked here. I just want to follow up with one I think I know the answer to, and just a detail. When you are giving the 5%-7% down figure, that is sequentially versus 4Q. That is not a year-on-year number, correct? Yes, correct. Okay. Thank you. Secondly, with the U.S. pulling back a little bit more than Europe, at least in the outlook, how should I think about tax rate? Are there any other changes that I would think about to some of the other line items that would occur as a result of that? Yeah, I do not think there is not going to be much change in tax rate overall. Okay, so consistent with where we are this year? Yep. Okay. That is all I have. Thank you very much, and congratulations. Hey, you bet. Have a great day. As a reminder, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. Our next question comes from Andy Casey with Wells Fargo Securities. Your line is now open. Hello again. Thanks for the follow-up. Hello, Andy. Two questions, one short term. I know it's a smaller volume market for you, but you have pretty good share over there. I am wondering if you could comment on whether you expect the Australian natural disasters to have any tangible impact on 2020 demand. Well, first of all, our hearts and prayers go out to the people there in the country that have been affected by that, adversely affected to it. No, I don't think in the longest term that it's going to have any impact to us. We will continue to be the market leader. Okay, thanks. Separately, longer term, you talked about it at CES and then again in the release today, the battery electric trucks expected to hit the market year to year and a half from now. Are you, based on your work with the customers, seeing any potential for acceleration in adoption rates versus what you originally expected? Or is it pretty much on track? I think it's pretty much on track. It has to make commercial sense or be regulated in. We have really good partnerships that we're working with to bring the right trucks to the customers, and we will supply them the best trucks, best alternative powertrain trucks as they need them. Thanks. A little bit more detail on that, Preston. You bet. You have kind of divergent, I think divergent potential regulations going on between the EPA and CARB. Maybe that's been closed, but is there a potential for a significantly different adoption rate in, let's say, California and associated states versus the rest of the country? There could be. That can happen. It can happen in Europe that way as well. I think from our standpoint, that's not going to materially affect how we develop the products. What we're going to do is develop the best technologies with the highest performance, and then we will just supply those to the markets they need based upon where the customers are operating. Okay. Thank you very much. You bet. There are no other questions in queue at this time. Are there any additional remarks from the company? We'd like to thank everyone for joining the call, and thank you, operator. This concludes today's Paccar's earnings call. Thank you for participating. You may now disconnect.