Earnings Call: Q2 2019

Jul 23, 2019

Summary

Q2 delivered record revenue, net income and truck shipments, with strong parts results and a high North American backlog. 2019 guidance remained robust, while European conditions and the 2020 market outlook carried uncertainty.

Good morning, and welcome to Paccar's second 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. 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. 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, Michael Barkley, and I will update you on Paccar's excellent second quarter results and business highlights. First and foremost, I am very proud of our exceptional employees, who are passionate about providing our customers the highest quality, highest performing trucks and services in the world. I also want to thank those analysts who participated in our investor conference in New York in May. The Paccar team appreciated the opportunity to provide an update on our business. Paccar achieved record quarterly sales and financial services revenues of $6.6 billion, an excellent net income of $620 million, resulting in a 9.3% after-tax return on revenues. Paccar Parts generated record revenues of over $1 billion and record pre-tax profits of $211 million. Parts revenues increased 6%, and profits grew 8% compared to the second quarter of last year. Paccar achieved robust truck, parts, and other gross margins of 14.8%, driven by record truck deliveries, aftermarket parts demand, and strong operational performance. Paccar delivered a record 52,300 trucks during the second quarter, 13% higher than the second quarter of last year. This reflects increased build in North America, partially offset by lower build in Europe. The U.S. and Canadian Class 8 industry backlog remains high. Kenworth and Peterbilt's 2019 production schedules are substantially full, with customers ordering trucks for delivery in the first half of next year. In Europe, DAF has achieved an excellent year-to-date market share of 16.7%, and the DAF XF was honored as the Fleet Truck of the Year in the U.K. Paccar continues to provide excellent annual operating margins, resulting in strong operating cash flow for distribution to shareholders and for reinvestment in future growth. Paccar declared second quarter dividends of $0.32 per share and first-half dividends of $0.64 per share. First-half dividends were 21% higher than dividends declared in the same period last year. The company has delivered annual dividends in the range of 45%-55% of net income for many years and has paid a dividend every year since 1941. Paccar has increased its quarterly dividend an average of 11% per year during the last 20 years. We repurchased 345,000 shares of stock during the second quarter, with $484 million remaining in the current board of directors' authorization. Paccar is investing in future growth with CapEx of $675 million-$725 million and R&D expenses of $320 million-$340 million this year. These investments will fund enhanced aerodynamic truck models, integrated powertrains, zero emissions electric and hydrogen fuel cell technologies, advanced driver assistance systems, and truck connectivity. We're also enhancing our manufacturing and distribution facilities. At the Kenworth Chillicothe, Ohio truck factory, we added a new robotic cab build cell and are constructing a new state-of-the-art paint facility, which will lower operating costs, enhance quality, and increase capacity. To meet increased customer demand for the popular Paccar MX engine, we're adding machining and assembly equipment in the Columbus, Mississippi engine plant. We recently opened two global software R&D centers, one in Kirkland, Washington, and one in Eindhoven, the Netherlands. These centers will accelerate the development of embedded vehicle software and Paccar connected vehicle solutions for our customers. In the third quarter, truck deliveries will be higher in North America due to higher build rates and lower in Europe, reflecting the normal three-week summer shutdown. Global deliveries will be 5%-7% higher than the third quarter of last year. We forecast third-quarter gross margins for truck, parts, and other to remain strong and be in a range of 14.5%-15%. 2019 will be another outstanding year for the company. Harrie Schippers will now provide an update on truck markets, Paccar Parts, and Paccar Financial Services. Thanks, Preston. The U.S. economy is in good shape, helped by a strong job market, growing wages, and increased business investment. Freight tonnage has grown a healthy 4.4% year to date. We've raised our estimate of U.S. and Canadian Class 8 truck industry retail sales to a range of 300,000-320,000 vehicles this year. We're in a period of robust customer demand, demonstrated by the historically high backlog, truck production levels, and retail sales. The U.S. and Canada Class 8 backlog was 188,000 trucks at the end of June. Kenworth and Peterbilt's backlog represented 36% of the industry. We are raising our European above 16 ton market projection to a range of 300,000-320,000 vehicles this year. The European economies are growing at a lower rate than last year. Paccar delivered record first half net income of $1.25 billion. Paccar Parts achieved record first-half revenues of $2 billion and $30 million, and record pre-tax profits of $418 million. Paccar has steadily increased its truck and engine market share over the years, resulting in a greater number of Paccar trucks and engines in operation. This large and growing Kenworth, Peterbilt, and DAF truck park has driven 8% annual Paccar Parts revenue growth over the last 15 years. This generates consistent high-margin profitability in all phases of the business cycle. We continue to invest in the parts business with new parts distribution centers under construction in Las Vegas, Nevada, and Ponta Grossa, Brazil. We expect parts sales to grow 5%-7% for the full year 2019. Paccar Financial Services earned second quarter pre-tax income of $18 million, 11% higher than the second quarter last year. The Paccar Financial portfolio performed well. This year, Paccar Financial will open used truck centers in Prague, Czech Republic, and Denton, Texas, to support solid customer demand for DAF, Peterbilt, and Kenworth trucks. One of Paccar's greatest assets does not appear on the balance sheet. I'm referring to the independent, financially strong Kenworth, Peterbilt, and DAF dealers who operate more than 2,200 sales, service, and TRP store locations worldwide. Our dealers reflect the industry-leading quality and premium truck brand image of Kenworth, Peterbilt, and DAF trucks. We're proud of our global dealer network. They are the best in the industry. Thank you. We would be pleased to answer your questions. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our first question comes from Stephen Volkmann with Jefferies. Your line is now open. Hi, good morning, everybody. Good morning. Harry, I wonder if I could get you to make a few more comments about some of your end market visibility. What I'm thinking about is, obviously, you said you're sort of taking orders for the first half of 2020. But of course, the overall order rate has come down quite a bit, and I'm curious just what you're hearing from customers and seeing in your order trends, relative to demand in 2020. Do you think things tick up again as we get into the fall selling season? Or are you hearing caution because freight rates have come down? Just some thoughts about the quality of the 2020 order. If we look at the backlog for North America today, we're in really good shape. Like Preston said, we're increasing build dates in North America. Europe, the backlog's very normal, and our production levels are in line with the orders and the backlog in the market as we see it today. Okay, do you have any kind of preliminary thoughts about what 2020 might look like? Obviously, the market is sort of primed for a big decline. Well, we typically comment on 2020 once we get closer to it, so that's probably something for the next call. All right. I figured it might be worth a try. Can I sneak one more in on just what you're seeing relative to pricing in the new truck environment? Yeah. We look at the pricing realization in trucks. In the second quarter, we saw, I'm going to say, a couple percent price realization, largely offset by cost. That's kind of in balance with each other. Okay, great. Thank you very much. Our next question comes from Andy Casey with Wells Fargo Securities. Your line is now open. Thanks a lot. Good morning as well. Good morning. Have a question on the shipments. It went up about 1.5% in Q2 from Q1. It is a little different than the outlook on the short term that you gave last quarter of 2%-4%. Was the entire difference between actual and predicted driven by Europe? If so, I guess to piggyback on Steve's question, can you describe what your European order intake maybe was compared to last year? Then also some color around the overall market development. Yeah. Just look at the start of the highest level of it. We did see growth in North America this year, and that was, as we said, offset a little bit by what we experienced in Europe. We have really good balance in Europe right now between our order intake and our build rates. So we have that set up really well. In fact, if you look at the first half market share results, we had 16.7%, which is above last year's record, 16.6%. So that is set up very nicely for us right now. We kind of see that order intake is, as I said, matching into what we are doing with build right now. Okay. Thank you. On the, just specifically looking at the truck segment margin, it pretty much seemed to be in line with what you were looking for, but flat-ish, up maybe 10 basis points year-over-year, then down from Q1 despite higher revenue in both cases. Can you elaborate now that the quarter is done in terms of what some of the headwinds might have been that limited the segment's ability to realize maybe some better margin leverage on that revenue growth? Sure. I think if you start with it, say it was 14.8% in the overall gross margin, feels very strong. So when we look at it from a year-over-year standpoint, truck has been able to hold onto that. I think the reason it does not see significant movement up is because it is already operating at a very high level. So we are at a very efficient point in the gross margins. Then I think if you just talked about it a little bit from a sequential standpoint, the only difference between Q1 and Q2 has to do with really the customer mix that has happened between quarter one and quarter two. Okay. Thank you very much. Our next question comes from Joel Tiss with BMO. Your line is now open. Hey, guys. How's it going? Really good. How's it going for you? All right. I wondered, just to try to be Steve for a second here, can you talk about second half production instead of just third quarter and the production schedules and just sort of give us a little bit of an idea so maybe we can have a small window into the fourth quarter? Well, if I try to talk about it in terms of second half, we have, again, North America going up in the second half, and Europe we think is stable where we've got it right now. So we feel like those are balanced for what we would expect to see through the second half. Okay. Beyond the customer mix, it sounded like in North America, but maybe I'm reading too much into that. Is there any negative margin? The incremental margins at 10%, you've been kind of running 12% or 13%. Is there any, because Latin America was so strong, is that a factor in there or not at all? Latin America is a small percentage of the business still, so it really doesn't have that much weighting factor to us. There's a little bit of benefit to it, but there's not a lot. Okay. Just last, the receivables up 30%. Is there any color you can add to that? Believe that increasing Why is that so high? Increasing in the build rates has been the primary driver of that. Okay. It just seems like it's up a lot more than builds. Okay. Thank you very much. You are welcome. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Yes. Hi, good morning. Good afternoon, everyone. Good morning. Good afternoon. I'm wondering if you could expand on your comments on the European production adjustment that you took in the quarter to match incoming order rates. When was that production adjustment take place? As we think about the third quarter, normal seasonality would have production down 5%-10% sequentially for you in Europe. Are we at the right production point entering the third quarter where we should see that normal seasonality, or is production coming down sequentially more than that normal 5%-10% rate? The adjustments we made were just in the second quarter, and again, they happened throughout the second quarter, and they still delivered us the excellent market share that we saw. From the third quarter looking forward, we do have a normal summer shutdown, which is a three-week summer shutdown, so there's an overall effect on the market. From a daily build rate standpoint, we're in a good position. Okay. In North America, we obviously know that you folks are built to order, and when market inflects, we typically see production adjustments from you folks first. When you folks are raising build rates sequentially, 3Q versus 2Q, that implies that you've had a full backlog scrub and you're comfortable with the level of dealer inventories. Can you just confirm that point and that the expected deliveries for 3Q have firm customer specifications to them as opposed to what are some typical dealer specs? I think you did a really nice job of characterizing it. Actually, we do a backlog scrub and make sure that we have clean orders in there, and we do build to order. As we've looked through that and we see that there's still very strong order backlog. Harrie said that we have 36% of the backlog for the industry is ours. We want to make sure that we get the trucks to the customers. They need the trucks to run their businesses, and so we're in the manner of building as quickly as we can for them. And in terms of the level of dealer inventories, can you just calibrate outside of the industry statistics that we have? You mentioned a backlog worth 36% of the backlog. What about out of inventories? So if you think of the inventory numbers for the industry, they're like 2.8 months, and for Paccar in North America, it's 2.3. So we have our inventory in very good position with our dealers. Okay. All right. Thank you. Our next question comes from the line of Ann Duignan with J.P. Morgan. Your line is now open. Hi, everybody. I'd like to circle back to Europe. Registrations year-to-date are up closer to 10%, and your deliveries are basically flat, maybe up slightly year-to-date. Can you talk about the discrepancy? Have we seen a pull forward of registrations ahead of this mid-year tachograph requirement? Or is there anything unusual going on in the marketplace versus how you are choosing to deliver? No, I think you actually nailed it, Ann. I think that remote tachograph is probably the biggest impact on what's pulled forward the orders from in front of June 15th. That's what we saw. We still expect to market in the 300,000 to 320,000 truck range. We should be able to have really excellent market share with our build rates from the first half and second half for that. And just as a follow-up to that, again, on Europe, given the announcement today and the new leadership in the U.K., does that raise or re-accelerate the concerns around Brexit and the impact that that could have on freight and just the whole industry as we get closer to the end of the year? Or what are you hearing over there in terms of now it sounds like it's a little bit more definitive? Yeah. So one of the nice things for us is we are the market leader in the U.K. We do a great job all around Europe, and our share is up in Europe and up in the U.K. also specifically. So as we look at what might happen with Brexit, we have a great advantage in that we do manufacture all our truck models for the U.K. in the U.K. So I don't know what the outcomes will be, but Paccar is really well-positioned with our manufacturing base in Europe to take advantage of it either way it goes. Yeah. I meant more broadly what impact it might have on just freight and the whole European economy. Any comments on that? Yeah, I don't think we know that answer any better than anybody else. I would say that we've been pleasantly surprised with how the U.K. has performed in the first half of the year. There's been strong customer demand in the first half, and that's been great. Okay. Thank you. I'll get back in line. I appreciate it. Thanks, Ann. Our next question comes from David Leiker with Baird. Your line is now open. Good morning, everyone. Good morning. I wanted to talk about this kind of triangle effect between orders, backlog, inventories. You can throw cancels in there. What we are going through here in North America is while the order rates have fallen, the backlogs have remained elevated. I am not sure we have ever gone through a period of falling orders where backlogs remain elevated and wondering if that might change a little bit of the economics of the earnings you might see as these lower order rates flow through the numbers. I think one of the things you have to keep in mind is the bigger picture of what happened last year. We had 458,000 industry orders last year. That's a big number, and it takes a while for that to normalize through things. But it's not going to have any effect on our financial performance. We've got great financial performance, and our dealers are doing really well, and our customers love the trucks. So those things continue to work well, and the results will be solid. Okay, I'm going to pick on Europe also. Any particular markets or areas over there that you feel more worried than others? A lot of your customers from those markets are exporting out of Europe into other parts of the world as well. No, I think that Europe has done really well this year for us. Obviously we have the market range of 300,000 to 320,000 trucks and us gaining share. So this will be the fourth year in a row above 300,000 if it stays like this, and that's a fantastic market size. The DAF team, all the employees, the team, the dealers are doing a great job of growing the business. I think the customers love the trucks, and the fuel economy is outstanding, and it's working really well. Okay, great. Thank you. Our next question comes from Steven Fisher with UBS. Your line is now open. Thanks. Good afternoon and good morning. Good afternoon and good morning. How do the orders that you guys have taken for 2020 compare to the level of what you would typically take in at this time of the year for the following year? I assume it has to be much higher. If that is so, this is going back to Steve Volkman's question, why are customers rushing to place orders if freight fundamentals are softening? Well, I would say it this way. I'd say we probably just to get to the first part of your question, we do see order intake for 2020 higher than we might typically see it. That's in large part because in a different market, you might see that there's a lot more activity surrounded about filling Q3 and Q4 of the current year you're in. But since that's substantially full, there's interest in 2020. That's kind of just, I think, where people's energies go to. With freight fundamentals softening, why wouldn't they just wait it out a little bit to see how the rest of the year is going to go? I think some people do, but freight fundamentals are really mixed, right? We have a great economy in North America. GDP growth is occurring. I think through May, ATA truck tonnage was up 4.4%. So there's not like things are going badly. We spend a lot of time as our team, our employees, and our dealers talking to customers, and customers are doing a good job. You see the truck companies' earnings reports, and they're coming out really strong in a lot of cases. So there's a lot of reason for optimism, too. Got it. Then you said that the cost offset price in the quarter, it sounded like price. You said it was a couple of percent, which may be down 1% or so from the first quarter. I would have expected costs to be coming down. So I guess why was the pricing growth moderating and should we be expecting that costs are actually coming down going forward here? You want to offer any color? As Preston just said, it is mostly customer mix that pricing was aligned with the cost increases more or less. What was that customer mix difference between the Q2 and Q1? The customer mix difference is in the first quarter, a lot of the dealers will have stock trucks on their lots, and those are small quantity buys. Then we get to a more distributed look at customer mix in the second quarter. There is still the stock orders, but then there is just the low to large size customer orders come in. Terrific. Thanks, guys. You bet. Our next question comes from Seth Weber with RBC Capital Markets. Your line is now open. Hey, good morning, everybody. I just wanted to go back. I think your guidance for the parts revenue growth for this year, you moderated the top end. I think you are now saying 5%-7%. It was previously 5%-8%. Is there anything you would call out there that is causing the moderation? Thanks. Yeah, sure. The Parts business is really doing fantastic, continues to perform at a high level. Take the opportunity to say this, we look at where investments are going in that business, and the new distribution centers in Ponta Grossa, Brazil and Las Vegas, and the way the team is moving through their initiatives of things like e-commerce, and TRP growth is really fantastic. The only reason for any adjustment is really a currency effect that we pushed into the 5%-7%. Yeah, it's the revenues in Europe and EUR that translate into fewer dollars when we do the translation. All right. That's helpful. Thank you. Maybe just a quick follow-up. The FinCo margin actually came down sequentially. Is there anything that you'd call out there? Is that sort of the run rate we should think of going forward? Thank you. I don't think so. When we look at the new business generation, it's actually up quarter-over-quarter, so it's more about portfolio that I think you're talking about. But the team is doing really good. If you looked at their earnings per quarter, it went up to $80 million and is $164 million in the first half, and it's just doing fantastic. Yep. Okay. Thank you very much, guys. Our next question comes from Ross Gilardi with Bank of America. Your line is now open. Yeah, thanks, guys. I was just wondering, what are you seeing in the Mexican truck market? What would you do if some of the trade tensions that started to rematerialize a couple of months ago came back, and do you think your overall footprint in North America, given your relative lack of exposure to Mexican production, is behind any of the order share strength that you've seen? In other words, are customers perhaps ordering more from Paccar just because there's greater surety of supply given some of your competitors being relatively more exposed to Mexican production? Any thoughts there? I think the team in Mexico is just doing a really good job down there. We have great trucks. Obviously, the newest trucks we've introduced, the latest generation, are fantastically well-received by the customers, and so their share was exceptionally good. If you look at there was an emissions change that happened in the middle of the year, so there was a strong buy ahead of that. But even since then, order intake has been positive and doing quite well. I don't think it's really affected by where people think we're going to build the trucks. We obviously can build trucks in Mexico for Mexico. We can make our domestic U.S. and Canadian production in local markets. I think we just have a great manufacturing footprint that works well, and I don't think there's anything about trade tensions affecting that. I think it's more about great trucks and people. I guess that's the point. Most of what you produce in Mexico is for the Mexican market, correct? If you did see tariffs all of a sudden actually come back and put into place, do you feel like you have sufficient capacity in the U.S. market to just relocate some of that production in a very short-term basis? Yeah, we do have that capability. Okay. I think you made a comment about adding engine capacity in Mississippi, if I heard it right. I wonder if you could talk a little bit more about that. Are you seeing share shift more towards the MX engine with the trucks that you're selling? Yeah, the MX engine, MX-11 and 13 engines are doing really well. They're providing, I think, just outstanding fuel economy in the market space. People have had time to get used to them obviously now, and we're seeing strong demand from our customers for those engines for their lightweight and high performance. So we've increased our capacity in Columbus and just recently finished that capacity increase at the end of the second quarter and going to be able to build some more engines for our customers in the second half. Can you say roughly how much you've increased capacity in Columbus? It's been meaningful, but it's 10%-20% kind of numbers. Got it. Okay. Thank you. And just lastly on Brazil, maybe you could comment there. You've had obviously a pretty explosive growth over the last couple of years. Remind us where you are on market share. And I think from the beginning, the target was to get to 10% in five to six years. As you continue to get closer to that number, do you start to grow more in line with the Brazilian market in the next couple of years? Well, the DAF trucks in Brazil are working very, very well for our customers. I was down there just a couple of months ago, and the dealers and customers are really excited with the performance they get, the reliability and durability and fuel economy that they are providing in Brazil. That is enabling our continued growth. From a year-over-year standpoint, market share is up just a bit, and it will continue to grow. We continue to make investments in Brazil. The parts business is doing really well down there. In the middle of building a new distribution center in Ponta Grossa, 160,000 sq ft distribution center in Ponta Grossa, which will support the business growth. And the market overall is improving in Brazil. Really feeling good about the efforts our team has made down there, the results they are bringing, the success of the dealers now, and just how the business is going to continue forward. Thank you. You bet. Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open. Hello. I guess just a question. Specifically, what is your visibility in 2020 this quarter relative to last quarter? I'm just trying to understand if it's increased, and to what degree. My second question is, assuming industry forecasts are correct next year, if you can walk us through, is there anything we should consider with regards to decrementals relative to previous cycles in the sense that, one, I would assume the parts business obviously helps your margins. You have the content on the MX engine. At the same time, one could argue you're more vertically integrated, and R&D costs should be structurally higher. So if there's anything you could help us out with. One is, should decrementals be meaningfully different in Europe versus the U.S.? Thanks. Sure. There's a lot of questions in there. I'll make sure if I can get them right for you. From a 2020 order intake, I think that we're seeing, as I said earlier, a higher percentage than we do typically. We have great visibility, that means, comparatively to normal times for 2020. I might decline to really talk about a specific value there, but it feels positive compared to previous years. From an effect of what 2020's overall market's going to be, I think as Harrie said, and we'd all say is it's a little bit early to be talking about what the full market size is going to be in 2020. From an effect on decremental margin or margins, or incremental margins as they may end up being, I'd say that we see that we keep our operating costs really low. I think that means there's relatively minor shifts in the decremental or incremental margins and continue to provide great value to the margin then, the overall margin stays high. Okay, but no meaningful difference relative to previous downturns? Is there any structural reason why decrementals would be better or just, if you are right on the top line in incrementals, that is a different question. But on decrementals? No, I do not think so. No meaningful shift. Okay. Thank you. You bet. Our next question comes from Courtney Yakavonis with Morgan Stanley. Your line is now open. Hi. Thanks for the question. Yes. Just going back to Andy's question on your production this quarter. I think you had originally forecasted that all of the increase would be from North America, and it looks like it was pretty evenly split between North America and other. Was your North America production in line with your expectations? I know you discussed Europe at length, but just wanted to confirm that. Yeah. Our North American production was in line with expectations. I think the only place where there was any slight change was in Europe, where we just made sure we got our build rates adjusted to the market. That's the overall effect. Okay. Gotcha. Then just on the CapEx raise, just wanted to make sure, is this similar to last quarter, where it's a lot of projects getting done faster or moving more quickly than expected? Or are there any new projects that we should be thinking about? Sure. It's really fun. We're making these great investments in the future for the company, so that's why you're seeing the CapEx changes. But we have just some fantastic opportunities that are really in terms of our capacity and quality in our factories, our distribution centers for parts and used trucks, and then maybe most importantly for the long-term benefit is the investments in new products that we're creating. So we just have a lot of programs going on, and they're successfully moving along, and we think it's really building a bright future for us. Okay. Gotcha. Then just finally, in South America, I think you slightly reduced your industry guidance there. Just wanted to confirm that and maybe how it compares. I think last quarter you had guided to Brazil at 65,000 to 75,000. Just wanted to understand the dynamics at play there. No, I think the guidance for Brazil is the same as what we did last time. I think for total South America, the range might have dropped 5,000. So from, I think we're now- 100 to 110 for South America in total? Yeah. But it's outside Brazil. Brazil was still guiding at 70,000 as a midpoint, 65,000 to 75,000. South America at 100,000 to 110,000. Okay, great. Thank you. You bet. Our next question comes from Jeff Kauffman with Loop Capital Markets. Your line is now open. Thank you very much. Good morning, everyone. Good morning. Thank you. A lot of my questions have been answered at this point, just a couple nits. You mentioned that you are seeing orders for 2020 at this point, yet we do know there are some aspects of the trucking market seeing pain, particularly on the pricing side, to your point, not so much the volumes. Have you seen any change on the specs that customers are asking for 2020 versus 2019? No, it's a nice question. I think that really the customers are always looking for the most fuel-efficient, lowest operating cost trucks that they can find. That's the beauty about being Paccar, is we provide that to our customers. We have a passionate team of people, we do a great job of making sure that the trucks we develop and sell are really at the best and most efficient vehicles for our customers. I think that's what they're always looking at. We're always talking to the customers about to make sure the specs stay lined up that way, but there hasn't been any fundamental shift. Okay, then just one last nit. I did notice the tax rate was up a little bit sequentially from the first quarter. That could be just randomness, but I'm wondering, might that have to do with maybe more profitability being driven out of North America? What should I be thinking in terms of tax rate for the full year? Yeah, I think you hit it on the head there. It's an income mix. North America tax rates, including states, are a little bit higher than Europe, so that affected the quarter. Okay. All right, that is all I have. All the questions have been asked already. Congratulations and thank you. Great. Thank you. Great. Thanks a lot. Our next question comes from Joe O'Dea with Vertical Research. Your line is now open. Hi. With the North America build rate going up in 3Q, I think historically it's not uncommon to then see it come down in 4Q, but that's usually with Europe going up. I'm just curious with some of what's going on in Europe right now, should we expect that your current plans at this point or that increase in the build rate in North America for 3Q is something that you would maintain in 4Q? Yeah. We have a strong backlog, as we said, substantially full for the second half. We don't see any reason not to think the build rate stays roughly where it is for the fourth quarter in the U.S. and Canada. You're right that the fourth quarter in the U.S. and Canada will have more holidays than the third quarter. Sure. Europe is just the opposite. Yeah. So daily build rate doesn't change necessarily, but the overall- Just a question on the daily build rate. Okay. From your comments around months of inventory, industry at 2.8, you're at 2.3. I think historically the industry average is in the low twos. I'm just curious, historically, where you average as we think about through-cycle targets. This is within our normal band, and it's kind of a healthy space to be. Perfect. Then just one on the 2020 orders you are taking. How does that pricing compare to 2019? That just depends on the customer, but the pricing is fairly consistent right now. Got it. Thanks very much. You bet. Our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open. Hi, good morning. Good morning. Is inventory at your used truck centers starting to rise at all? And any thoughts on the used truck market in North America and Europe, both from a demand and pricing standpoint? Yeah, I think if you look at the used trucks, maybe the pricing has moderated a bit from where it was in Q1. But one of the nice things about being part of Paccar is our trucks command a 10%-15% premium in the market. As we've watched our market share grow over the past several years, we've invested in creating a great used truck capability, selling capability. That's why we've got this new used truck facility we're building in Denton, Texas. A few years ago, we did one in Los Angeles. In Europe, we're creating one in Prague, in the Czech Republic as well. Then adding on capacity, we have a fantastic dealer network that does a good job of managing used trucks and distributing used trucks to customers. So between our premium position and our capability, we feel like we're in a good space. Okay. As a follow-up on that, if used truck prices were to continue to moderate, what's the time lag as far as when that would start impacting the FinCo profitability? I think it usually runs through that interest and other line. Is that a couple quarter lag or any thoughts there? Yeah, I don't think we've kind of calibrated into which quarter it would have an impact on, and obviously it would depend on the amount of effect, and it depends a lot on the percent of retail versus wholesale. Our team has done a really good job of selling a lot of used trucks in a retail position. So there's too many mix effects in there to really characterize it. Okay. Then just one final one on the medium-duty market here in North America. Any notable changes to the outlook, what you're seeing from customers, market share, et cetera? Thank you. Yeah, sure. Thanks for the questions. No, the market size seems consistent to what we've said previously, and 100,000 units, plus or minus. The business is doing really well. I think that our trucks are performing well in the space, and our market share will be roughly in the same range. Great. Thanks so much. You bet. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Robert Wertheimer with Melius. Your line is now open. Thank you, and good morning, everybody. Good morning. My question is pretty simple. I wonder if you could just remind us of the mechanics on orders for next year. Is the order book open for all models and configuration? Is pricing established or are people sort of just taking a bet on it? Is that the same as every year this year? I would say that the order book is open for all trucks and all models. We love taking orders for trucks. It's something we enjoy a lot. When I think about it in terms of the pricing being established, in the deals that we're discussing right now, those end up being with the customers, and they end up being focused around what we've done previously and what their spec is and what we're doing. So those end up being worked through and almost individually. Okay, perfect. That's it. Thanks. You bet. Our next question comes from Scott Group with Wolfe Research. Your line is now open. Hey, good morning, guys. It's Rob on for Scott. Morning, Rob. A quick clarification question with regard to the build rate. Am I hearing you right that you guys are basically planning on maintaining the third quarter level of production in the fourth quarter, or is there some increase you're implying there in the back half guidance? I think the firm space is the third quarter going up. Then we watch what the fourth quarter, as we substantially are full, we will watch what the fourth quarter does. But I do not expect to see any significant shifts. That is helpful. Your preliminary comments about the order book, and the strength looking out to next year, were you guys intimating that we could see revenue actually be up next year? I do not think we intimated next year. Okay. Then just a couple of quick questions with regard to the used truck market. You said you saw it soften up a little bit. Could you describe if you are seeing that in one specific channel, i.e., kind of small fleets or kind of the owner/operator end of the marketplace? What sort of increase on a year-over-year basis you are seeing from a price realization currently would be helpful as well. Yeah, we think about it in terms of the Paccar products, Kenworth and Peterbilt North America, DAF in Europe are just, they command a premium, so it's a relative positioning to the competition. They are doing really well. I think from, as I said earlier, I think a lot of effect has to do with how many trucks are coming back in and what percent you retail those trucks at, and we have been able to grow our retail percentage, especially in North America, which has brought us good results. As far as the overall trends for the market, I think those vagaries are difficult to plan forward to. But we will watch them. We have a great team that is managing that business really well. Yeah, that is helpful. Final one, which I guess kind of relates to the FinCo, is we saw a slight uptick in the provision for losses on receivables, obviously still at a low level. That was a sequential uptick, still nicely improved on a year-over-year basis. What is driving that? Is that just some of the small carriers that you are seeing a little bit of softening in terms of their receivables or is this- No, most of that is due to the larger portfolio. But past dues remain really low. Credit losses remain low. The portfolio is managed really well. So we have got a lot of good customers that make money with their trucks and pay their bills on time. Really helpful. Appreciate the time, guys. Yeah, you bet. Have a good day. Our next question comes from David Raso with Evercore. Your line is now open. Thank you. Quick question. North America, I know you slice it U.S., Canada, how you give deliveries. In your commentary about your backlog, can you just help us a bit with your U.S., Canada, or you want to define it as North America, your backlog year-over-year as we sit today, just some sense of the year-over-year in that position. Well, it's up substantially year-over-year from a normal cycle. Obviously, that's moderated from what happened in 2018's 358,000 truck order intake or 458,000 truck order intake. If you look at it on a pure sequential year-over-year, it's probably down, but it's down from a level that was not sustainable, so high. Compared to normal levels, it's still very high and very strong. Very strong. 73,000 trucks in a backlog and doing really well. Yeah, but look, clearly the industry is down. The data we most all use, it's down about 17% year-over-year. I'm just trying to get a feel. Is your backlog down less than the industry and then trying Well, I think the best way to think about that, David, is to think about that percentage of backlog that Harrie talked about earlier, the 36% of the industry backlog, which is, if you call us a 30% market share and 36% of industry backlog, means we have very healthy backlog relative to our market share. Yeah, I guess we're just trying to figure out how much of that goes into 2020, how much is helping the fourth quarter. Because if the fourth quarter builds just have the normal seasonal less build days, but the daily rate stays the same, I would argue that's probably a little better than people were thinking. I'm just trying to get a feel, while that helps the fourth quarter, what does it mean about 2020? You're still speaking pretty constructively about your orders into 2020. Just trying to put the mosaic here together. But again, your backlog's doing better than the industry, given the share gain obviously implied in that backlog versus the industry totals. Yeah, I think you're characterizing it really well, David. I think that's exactly right, is we're doing pretty well to that, and we'll watch what 2020 does as it gets closer to us. Very helpful. Thank you, guys. You bet. There are no other questions in queue at this time. Are there any additional remarks from the company? Yes. We'd like to thank everyone for joining the call, and thank you, operator. Thanks, everyone. Have a great day. Ladies and gentlemen, that concludes Paccar's earnings call. Thank you for participating. You may now disconnect.