Earnings Call: Q1 2019

Apr 30, 2019

Summary

Q1 revenue and net income set records, with truck deliveries and Parts results also at highs. Firm backlogs supported higher near-term production, while 2019 investment increased for capacity and new technologies.

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. Good morning. We'd 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. Well, 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 at $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 excels is 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 has 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 it 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%-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%-15%. Preston Feight will now provide an update on DAF and Paccar Parts. 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 290,000-320,000 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 in Ponta Grossa, Brazil, and the other one is in Las Vegas, Nevada. We expect parts sales to grow 5%-8% for the full year 2019. Harrie Schippers will now provide an update on Kenworth, Peterbilt, and Paccar Financial Services. Thanks, Preston. The U.S. economy and freight tonnage continue to grow this year. A consensus of economists predicts 2.6% 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 command a 10%-20% premium over competitors' vehicles. in 2019, we are increasing capital investments to $625 million-$675 million, and R&D expenses to $320 million-$340 million. We are investing in new products and expanded 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 are also working on hydrogen fuel cell, hybrid, and electric powertrains, as well as autonomous vehicle technology in collaboration with our Silicon Valley Innovation Center. 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. We will pause for just a moment to compile the Q&A. Our first question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open. Yes. Hi, good morning, everyone. Morning, Jerry. I'm 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 opportunities that maybe just flesh that out in terms of where book-to-bill has tracked year to date, and any more color there would be helpful. Yeah. The backlog is I'd say normal in terms of visibility that we have for our factory operations. As we saw in the first quarter, registrations in the European market were up over last year, and continue to see a good market for this year, for the full year, as our forecast indicates. 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 run? Yeah. The actual order intake is down a bit over last year, which was a very strong first quarter. Order intake is down similar to levels we have seen with our other European competitors. Okay. In the U.S. business, can you talk about whether you have seen any shifts in the production requests 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? I think it is all very firm. I think all the movement of trucks in and out is just very normal, and the backlog is very firm. Okay. From an SG&A standpoint, you folks were able to keep SG&A flat on really strong sales growth. I am 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 a flat SG&A, any moving pieces for us to think about? Well, as you know, Jerry, rigorous cost management is something that we're very focused on and 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 costs for the entire cycle. Okay. A strong performance. Thank you. Thank you. Our next question comes from the line of Joel Tiss with BMO. Your line is now open. Hey, how's it going, guys? Good, Joel. You? Hanging in there. I keep hearing you guys are gaining market share in parts and some of your dealers are gaining market share in parts. I just wonder if you can illuminate for us a little bit who's losing share, or is there just such a big opportunity out there for everybody that there's a lot more room to keep going? Yeah, 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. As a percent of the total population of engines, the Paccar MX engine is just becoming a bigger portion. That engine business is a nice add-on. Plus We now have 175 or so TRP stores around the globe. That enables the Paccar Parts group to get more penetration with all makes customers, trailers, buses, et cetera. I think those are probably the two key drivers of share growth in the parts arena. Are they more the pirates, I guess, who are losing out? Excuse me? The pirates, like the third party, like non-OEM guys, are the ones who are losing out? On the TRP side, that would Yeah. It could be the WDs. It could be other OEs. I don't know. Okay. Can you talk a little bit about what you guys have been working on for the last couple of 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 decremental margins and your cost structure to balance that out? Yeah, we're full ahead on our production. We're going to continue to produce trucks. As I said, the backlog is firm, the demand. We're quoting business into 2020. So, full ahead for us. Because, 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 manage that quite effectively with our factories and with our other operations. Thanks. Just one last one. Sorry to hog up all the time. Can you talk a little bit about Brazil? I see you highlighted it. Sure 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. Yep. So we're 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. We'll be in a similar kind of scale this year for 2019. So, 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 network to support the trucks, and so we're continuing to improve our positioning there. 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 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's very bright for our Brazilian operations. That's awesome. Thank you. Thank you. Our next question comes from the line of David Raso with Evercore ISI. Your line is now open. 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? Yeah. The truck margins are in the 12%-12.5% range. First quarter, the truck margins were 12.5%. A lot of the incremental revenue will come from the truck side. That weighting effect of trucks versus parts will sort of keep us in a similar range as to the first quarter. Okay. Thank you. Also, I noticed the CapEx increase, but you hold the R&D, or actually even tweaked it a little lower. I am just trying to understand, 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 have always 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 expense as R&D? Can you just help us a little bit with the divergence between the CapEx increase and the R&D? Yeah. The 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 are actually going to be able to get things done quicker than what we had originally anticipated. So that is the capital increase. The R&D is just part of how we prudently manage our product development efforts, and have for years. We are probably going to spend a record amount of R&D for our company this year, but it is well thought out, well positioned, and we feel good about we are doing everything we need to do to support the future needs for greenhouse gas changes, future products, and also the advanced powertrain arena. I think we feel really good about what we are doing and the things that we are investing in, both on the capital and R&D side. Well, 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 has gone up. No, but 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. Yeah, because the plans and 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 recognition of the timing of incurring those capital-related costs. Yeah. 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 has stayed at a relatively low level. Correct. 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. I look forward to going into a little more detail in May. Sure. Thank you very much. Okay. I appreciate it. Bye. Yeah. Thanks, David. Our next question comes from the line of Steven Fisher with UBS. Your line is now open. Thanks. Good morning. Morning. Morning. Harrie mentioned that used truck values are up year-over-year. I am curious on used truck inventories. How do the levels in Q1 compare to Q4 2018, both on your own lots and on dealer lots? What you are expecting for the used truck market later this year as trade-ins likely keep coming in. Well, used truck inventories are at, I think, almost the same level as they were at the end of last year. Demand for used trucks, especially in North America, has been really good. We see good pricing, good demand for premium trucks. We are continuing to fill out our used truck locations. We are going to be adding a new location on the property where our Denton factory is located to further supplement our ability to sell used trucks. We are the biggest used truck seller for Peterbilt and Kenworth vehicles, and we continue to support those excellent residual values. Okay. 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 pipelines later this year might affect some of the market assumptions you might have. Yeah. If there is pipeline capacity expansion, and more importantly, if there is infrastructure program that gets approved, we are the vocational truck leader in North America, and both of those things would be big pluses for our business. But as we said, the backlog for this year is very firm. Okay, great. Thanks very much. Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open. Hi. Good morning. Good morning. Good morning. Price realization in the quarter of 3%, I think you said, which was pretty good. Was that better than your expectations, and what are your assumptions for the remainder of the year? My second question, understanding you have very good visibility into 2019, just based on conversations you are having with your customers, what are they saying about 2020? Is it in line with industry forecasts? I guess last, congratulations Ron and Preston, but Preston, any initial views as you take over, any top priorities? Thank you. I will let Preston go first. All right, let us start with the back then, Dylan. I think that Paccar has been performing exceptionally well for our long history. We have a great team in place, bringing great results, a good strategy, and we plan to continue with that. Back on the truck pricing, I think on a year-over-year basis, I think we will see similar comparison when you look back to the same quarter of the prior year, similar performance. That offsets some increases in costs, but I think we will see similar performance of what we saw in the first quarter. Just color on what your customers are saying about 2020 relative to what industry forecasts are saying. Well, we are having negotiations with customers on an ongoing basis about 2020 deliveries. I think there is still recognition that the economy is good, the demand for freight is good. Discussions with customers, people that need all the freight, there is still a pretty tight market to be able to get things delivered on a timely basis. We are preparing for continuation of the good market conditions into 2020. With all the improvements in greenhouse gas emissions, our customers keep seeing that the trucks we are building today deliver up to 15% better fuel economy than the trucks they bought four years ago. That really helps them when they have to decide in replacing their equipment. Okay, thank you. I'll get back in queue. Thank you. Our next question comes from the line of Joe O'Dea with Vertical Research. Your line is now open. 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's any mix effect within that as well? Are you seeing a little bit better traction with some of the larger fleets in Europe? Yeah, I'll take that one. We're 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 borne 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 this strong performance. Then on the CapEx front and the investment in the engine plants, is that tied at 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 Phase 2 or anything else, but as we saw the initial progress on 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. 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. Got it. Thank you. Thank you. Our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open. Hi, thanks. Just a couple follow-ups from earlier questions. 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 sound pretty positive on the fundamentals, but the industry is chewing through backlog at a quick pace. So curious on what you're looking at on 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 or early fall timeframe? Just any more thoughts there would be helpful. As I said, the backlog's firm. We're moving full ahead. 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? Yeah, that's certainly on the drawing board and 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'll 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. Yeah, that's definitely on our roadmap. Okay, and then one last one, Ron. It sounds like the supplier constraints are largely improved. Are they completely behind at this point, or is that still an opportunity to benefit the margins as we move through the year? We're going to continue to work very closely with our suppliers to continue to move up our build rates in the second quarter and third quarters in North America. It's always an orchestrated effort with our suppliers, and we feel good about, 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. Okay. Thank you. Thank you. Our next question comes from the line of Ross Gilardi with Bank of America. Your line is now open. Thanks, guys. Good morning. Morning. I just wondered if I could get some of your thoughts on how they're evolving in alternative powertrain. What are you insourcing versus outsourcing? As things develop, are you leaning more towards doing more in-house versus outsourcing, and why? Yeah, I think it's a real exploratory time with respect to a lot of the new technologies. We're taking multiple paths in terms of developing our own internal capabilities, working closely with a variety of suppliers who are developing their capabilities. As we progress over the next 12-24 months, we'll be sort of figuring out what the best path is for us for the long term. There's still quite a bit of challenge with respect to the economic viability of some of these powertrain choices, and can they survive without a high degree of subsidization? So in our mind, it's still early days. I know we have a lot of customers who want to have some initial trucks to have in their fleet so that they can understand the capability, and we're supporting those. So, we'll continue to explore our avenues. As I say, the next 12-24 months will be critical for us to sort of define our way forward. What about, Ron, your Silicon Valley office? What are you learning out there, particularly on the autonomous development? A lot. When we first made the decision to open that office, it was clear there was a lot of research that was being done on that area. Our team in Silicon Valley, that's where we're really developing our internal capabilities for autonomy. We have a great team there, and they're really working closely with some third-party suppliers to develop our own packages. Then, as I said, we're working with others who have their packages and want to incorporate those into our vehicles. 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 up here in Mount Vernon, in Washington, and in Eindhoven. They're all working together quite well to help further our efforts and be smarter about what's possible and all the things you have to think about to accomplish successful implementation. Then just lastly, geographically, now that you've had the real success with Brazil and gotten that off the ground. I think when you originally launched that investment, the idea was you'd get to a 10% market share in the 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 an investment in one of those regions? Well, the way I think about every day that goes by, we're a day closer. There's nothing on the horizon. 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. They're providing valuable support for sourcing from suppliers, for engineering technology, embedded software. We get a lot of support from those teams. 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's that opportunity that's going to provide us a good return for our shareholders. We'll continue to evaluate because they are large markets and there's opportunity there. It just has to be a situation that's going to make sense for us as a company and provide us a reasonable return. Okay, great. Look forward to seeing you guys in a couple of weeks. Thanks. Okay. Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open. Hi. Good morning to you. Good morning, Rob. Just a quick follow-up. You've discussed the Paccar Parts business where you've 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 been 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. Yeah, I think that 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. Have we seen that gain flow through from the market share gain you had on your engine in North America? I do not know the full lag of when parts sales come versus the engine. I do not know if there is still some maturity come in that margin mix. Thank you. Yeah. As the engines mature and we are getting to the point now where you are starting to get into more replacement and overhaul kinds of activities for our engines. We are just starting to see the benefits of that phase of the aftermarket opportunity. That is helpful. Thank you. Thank you. Our next question comes from the line of Adam Uhlman with Cleveland Research. Your line is now open. Hey, good morning, everybody, and congrats- Adam on all the records. Thank you. And congrats on the retirement, Ron and Preston. Yeah. Hey, 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 paint facility or some of the distribution centers are landing in this year, or could you expand on that a bit, please? Yeah, there's 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 new PDCs. We have factory expansions. We had a nice groundbreaking for the Chillicothe paint shop. And those things are just we're going to be able to get those projects done faster and move them quicker than what we had originally anticipated. So our spending is purely just a matter of the timing of the spend. Those have always been part of our plan. Got you. Thank you. With the build rates expected to be up 2%-4% sequentially in the second quarter, could you help us understand how that plays out between North America and Europe. 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? By how much? Thanks. Yeah. I think what we will see is the production, that 2%-4% is pretty much all North America driven. I think in the third quarter, we would probably see a similar level of production. We have the 2-week summer shutdown at DAF in the third quarter, so that we will see a reduction in production in Europe. But that should be, for the most part, offset by production levels in North America. Okay. Gotcha. Thanks. Just a clarification. I think you mentioned that the orders were down in Europe. Could you tell us by about how much and what the orders in North America have been looking like year-over-year? Yeah. The orders in North America are, again, because of the strength of the backlog, I think they are reflective of just the customers that are really filling in the few open slots that exist for 2019, but mostly it is for 2020 build. 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. So we saw a reduction in the first quarter to, I guess I was going to say, more normal levels of order intake. Okay, thanks. And again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our next question comes from the line of Scott Group with Wolfe Research. Your line is open. Hey, good morning, guys. It's Rob on for Scott. Rob. 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 that I'm backing into on the truck in the first quarter. Should we be thinking about similar incremental margins as we look out into the second quarter based on the roughly 3% pricing you guys were talking to as the production ramps as well? Yeah, I'd say similar. It depends a little bit on the customer mix, the model mix, the geography mix. So, there's a lot of factors that weigh into that. So something in a similar range would be. The past couple of quarters on the finance side, you guys have had very low provisions for losses on receivables. Is this a 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? Well, 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 a lot of intelligent data analytics to our credit underwriting. We feel really good about the capabilities there. As long as the economy is good, the freight markets are good, the portfolio will continue to perform very well. We've seen improvement in used trucks and the portfolio is growing. Our team has some great technology that they've made available to our customers. I think all of that is playing to our finance company's capabilities and performance. That makes sense. Can you remind me what your used truck pricing was up in the quarter and the type of volumes that you guys saw? Yeah, it was up 2%-3%, compared to the first quarter of last year. I don't have the used truck volumes. Last year, for 2018, we sold about 15,000 Kenworth, Peterbilt, and DAF used trucks, so that's 3,000 to 4,000 a quarter. So I would guess that we'd probably somewhere in the 3,000, 3,500 range for used truck sales in the first quarter. Thank you. Appreciate the time. You bet. Our next question comes from the line of Seth Weber with RBC Capital. Your line is now open. Hey, good morning, guys. Morning. Just a couple of quick follow-ups. I guess, just thinking about the Paccar Parts business again, do you think it is fair to think about that business could be up next year even if new truck demand is lower? That is my first question. That surely would be our aim. Again, we are continuing to add additional TRP stores. We are continuing to add additional Peterbilt and Kenworth dealer locations, adding locations in new markets like Brazil and other areas. Our goal is to continue to have the new programs in place, the additional technology to continue to build that business, throughout all cycles. Okay, so you think like a low to mid-single digit kind of number for next year is reasonable? It is probably a little bit early to commit to something. Okay. Fair enough. Just going back to the pricing and the incremental margin questions. Are you assuming that input costs kind of stay where they are for the rest of the year? I guess, some companies are talking about input costs coming down for the balance of the year or so. Just trying to kind of frame Yeah, I think that our assumption is probably a pretty steady input cost here. 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. Okay. That's all I had. Thank you very much. Thank you. Our next question comes from the line of Faheem Sabeiha with Longbow Research. Your line is now open. Hi, good morning, and congrats on a great quarter. Thank you. 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, we're at that now exiting the cycle could maybe stall engine parts growth opportunity that you laid out on your investor day last year. Yeah. As a company, we produced last year 97,500 engines, which is the highest that we've ever produced. Every one of those, DAF had record production, so every DAF truck has a Paccar engine. As time goes on, we'll have to see more penetration of those engines into Kenworth and Peterbilt trucks. 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 timeframe for having full availability at the 2021-ish timeframe. Okay. Kind of adding to Seth's question, I guess, with the looming decline in Class 8 production, do you think, say, a more favorable price cost environment, lower premium freight costs, and lower overtime to the extent you're at that level today, would maybe offset the decline in volumes when you look at your gross margin next year? Again, the demand for trucks is there, and we're all ahead. As I had mentioned before, when things do adjust downward, we've proven over many cycles that we're very adept at managing through those. So, we'll continue to execute that very well at whatever point that may happen. Okay, thanks. Thank you. 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. Ladies and gentlemen, this concludes Paccar's earnings call. Thank you for your participation. You may now disconnect.