Earnings Call: Q2 2018

Jul 24, 2018

Summary

Q2 revenue reached a record $5.81B and net income rose 50% YoY to $560M. Strong truck backlogs, record parts results and positive demand supported upbeat H2 and 2019 expectations.

Good morning, and welcome to Paccar's second quarter 2018 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 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 Ron Armstrong, 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. I would now like to introduce Ron Armstrong. Good morning. I first want to thank the investors and analysts who participated in our investor conference in Eindhoven in May. The DAF employees and the Paccar team were proud to share DAF's world-class facilities and innovative products and services. Paccar's pleased to report outstanding financial results for the second quarter of 2018. Paccar achieved record quarterly sales and financial services revenues of $5.81 billion and strong net income of $560 million, a 9.6% after-tax return on revenues. Revenues were 23% higher and net income was 50% higher compared to the second quarter last year. Paccar Parts generated record revenues and record pretax profits of $195 million, its sixth consecutive record profit quarter. Paccar achieved excellent truck parts and other gross margins of 15%, driven by industry-leading products and services, robust global truck and aftermarket parts demand, and strong operational performance. I am extremely proud of our 27,000 employees who have delivered industry-leading products and services to our customers worldwide. Paccar delivered a record 46,400 trucks during the second quarter, 5% more than the first quarter this year. U.S. and Canada Class 8 industry truck orders in the first six months of 2018 were more than double the orders in the first half of last year. DAF achieved record market share of 16.5% year to date this year. DAF's above 16 ton orders were 26% higher in the first half of 2018 compared to the same period last year. Paccar's forecast for the European above 16 ton market is a range of 300,000-320,000 units, reflecting strong freight and truck demand and a good economic outlook. We expect to deliver slightly more trucks in the third quarter this year compared to the second quarter. Deliveries will be higher in North America, partially offset by fewer build days in Europe due to the normal summer shutdown. Second half gross margins for truck parts and other will be similar to the first half. The U.S. economy's growth is driving record freight tonnage. Customers are operating at high utilization levels and are expanding their fleets. We estimate the U.S. and Canadian Class 8 truck industry retail sales to be in a range of 265,000-285,000 vehicles this year. Paccar Parts quarterly pretax income of $195 million was 29% higher than a year ago. Pretax return on revenue was an excellent 20.1%. Paccar's parts business generated record quarterly revenues of $968 million, 18% higher than in the same quarter of last year. These results were driven by the growing number of Paccar trucks and engines in operation, Paccar's investments in distribution centers, and the many innovative products and services offered by Paccar Parts and our dealers. For the year, we expect parts sales to increase by 13%-15%. Paccar Financial Services' second quarter pretax income was $72 million, 16% higher than second quarter last year. The Paccar Financial portfolio performed very well. Used truck industry demand in the U.S. has increased, boosting used truck prices by 5%-10% compared to last year. Paccar's strong balance sheet and positive cash flow have enabled the company to invest $3 billion in new products and facilities in the last five years. This year, capital expenditures of $425 million-$475 million and research and development expenses of $300 million-$320 million are targeted for new truck models, integrated powertrains, including electric, hybrid, and hydrogen fuel cell technologies, and new product technologies for advanced driver assistance systems and truck connectivity. At our investor event in May, we were pleased to have the DAF CF Electric and hybrid trucks available for the attendees to drive. In May, Paccar's board of directors increased Paccar's regular quarterly dividend by 12% to $0.28 per share. Earlier this month, authorized an additional $300 million share repurchase program. Paccar is realizing the benefits of strong truck markets worldwide, and is delivering the highest quality products and services in the industry. Thank you, and I'd be pleased to answer your questions. At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from Stephen Volkmann with Jefferies. Your line is open. Hi, good morning, gentlemen. Morning. I guess, I'm trying to get a sense of, Ron, you talked a little bit about how used truck pricing is up 5%-10%. Can you give us a sense of what you're seeing in new truck pricing? Then related to that, how far out now are you quoting deliveries? I'm trying to get a sense of how stretched out the backlog is and how much impact that might be having on your ability to get some price. Yeah. New truck pricing is up a bit, and we've seen commodity costs move up a bit during the course of the year, and our sales prices have moved up to offset that and earn a little bit additional margin. On the backlog, backlogs are strong. We're taking a fair number of orders for 2019 build at this point. So the backlogs are really solid, really in almost all of our markets. Okay, then I guess in Europe specifically, I think you said DAF order is up 26% in the first half. That is correct. obviously the market growth rate is nowhere near that high in terms of your forecast. So it looks like this may be a year when DAF really gains quite a bit of market share, or do you think there is some reason that DAF's order rates may fade in the second half? We are at 16.5% year to date. And Harrie, what was the number for last year for DAF? 15.3. Yeah, 15.3. So almost a share point gain based on first half results. DAF had great product introductions in the second half of last year with the new CF, XF, and LF. CF XF won International Truck of the Year. The feedback in the trade press and from customers has just been outstanding. That is well-recognized, and that is really what is driving DAF's excellent performance for the first six months this year. Okay, and then just a quick follow-up, and I'll let it go, is that obviously the markets are concerned about things peaking and sometimes, I guess, good is bad or something like that. I'm just curious if you have any opinion as to what the length of this cycle might look like, and whether you feel like current conditions are sort of peaky and kind of as good as it gets. I think as we mentioned in our press release, we feel very good about 2019 based on the demand that's in there for our excellent products. Parts business is great. Financial Services has got great new business volume. We see no signs of abatement in terms of the second half and heading into 2019. Steve, I would like to add that if you look at the current market dynamics, a lot of the demand is driven by strong freight, strong economy, excellent fuel economy. Some of the prior cycles in 2007, 2010, and 2013, the demand was driven by pre-buys or emission legislation, and that's different today. Great. That's helpful. Thanks, guys. Yep. Your next question comes from Steven Fisher with UBS. Your line is open. Thanks. Good morning. Morning, Steven. Just on the deliveries in the quarter were up, you said about 5% versus, I think, the original guidance of 7% to 9%. To what extent was that due to supplier constraints, or was it something else? Then maybe you just broadly talk about supplier picture at the moment. Yeah, as I've mentioned previously, that as we go up in build rates, it requires really close coordination with all of our suppliers. As we work through the details, that was what was able to be delivered. Teams like purchasing, supplier quality, materials, plant guys did a great job of working with our suppliers. As we mentioned, we'll continue to see some upward momentum and build, particularly in North America in the third quarter, as we continue to work with our suppliers to support the demand for our customers. Do you think the supply chain constraints are materially eased at this point, are relatively balanced and able to meet the production requirements that the industry needs? Or is it still- Yeah, I'd say balanced. Yeah. Okay. Yeah. Then maybe just shifting gears a little bit, if you can talk about what you're seeing in the oil markets today. How much of your revenues are oil-related overall, and maybe how much you're getting in help from actually transporting of oil versus trucks needed in the production process? Gosh, the oil segment really accounts for a small percentage of our total business. Peterbilt and Kenworth and DAF all have great products to support the industry. We're seeing some benefits in that arena, but we're seeing benefits in all areas. So oil is just not a significant piece of the total pie. Okay. Thank you. Thank you. Your next question comes from Ross Gilardi with Bank of America. Your line is open. Hey, good morning, guys. Hi, Ross. I just wanted to get back to production. As you said, your DAF orders are up 26% in the first half. Your European deliveries were up 12%, rest of world up 15%. Clearly, production has lagged thus far. The message coming out of the investor day seemed to be that capacity is a non-issue for DAF. Have you rethought that at all, or why the actual lag on production versus orders? Well, if you look at North America, orders are double. Retail sales and production are nowhere near the order intake rates. The customers' order intake usually is more lumpy than production and retail sales. It is just balancing longer-term production rates with order intake rates over a period of time. I wouldn't read anything to that. The factory has plenty of capacity, and in Europe as well. We work closely with our suppliers to support our ability to deliver timely to our customers based on their delivery expectations. Now, if you looked at the ACT data over the course of the second quarter, for the overall market, there seemed to be a production hiccup in May that sort of bounced back in June. Did you experience any of that production slowdown or have any issues with production in the U.S. throughout the second quarter? No, it is pretty normal for this time of the cycle. Okay. Just with respect to the Class 8 orders, of course, they remain off the charts good. Do you think there is any double or triple ordering going on to enable fleets to get in front of the production queue? Do you have any policies in place on down payments or otherwise to prevent double ordering? Any reason to think that that is going on? We have long-term relationships with a lot of our customers. I have no idea what they are doing with other makes, but we feel good about the backlog and where it is set at this point with good quality, long-term customers. Got it. Thank you. Thank you. Your next question comes from Ann Duignan with JP Morgan. Your line is open. Hi, good morning. Hi, Ann. When we were sitting here a quarter ago, you said a couple of things about gross margins going forward. One, you said that your mix of truck deliveries would be more levered to fleets, and therefore, that would weigh on margins. Then I think you had expected parts to slow down and also mix to weigh on margins there. Can you just update us on both of those and what you did see in the quarter? Should we just take away from the strong gross margin that volume is a wonderful thing? Clearly, we saw the benefits of operating volumes in the quarter. Parts margins were 27.9% the first quarter, 27.5% in the second quarter. As we look to the second half of the year, we think that the margins for the second half will be comparable to the excellent first half margins. So in that 14.5%-15% range. So 14.5% to 15%. No fleet mix issues, no nothing. What about FX? Is FX likely to weigh on margins, either at the gross level or at the EBIT level in the second half? What we saw on exchange rate is the benefit of exchange rate added to the margin dollars, but it did not affect the margin percentage. It will be less of a tailwind if currency stays where it is today. It was not a factor in terms of margin percentage, no. Yeah. Okay. Then just following up on one of the things we heard, we have the truck show in Hanover this year, once every three years, I believe. My understanding is that almost every OEM will have an electric truck on display. Will DAF be exhibiting electric vehicles at that show? What can you tell us about what you would expect to see by your competitors at this IAA? I can't comment on what the competitors. You obviously seen ours, you've ridden in ours. You've had a chance to take it around the test track. We'll display those at the Hanover show. Yeah, and remember, mine was a manual drive, too. And you did a great job. You didn't make it easy for me. Then just a quick follow-up on the 26% order increase for DAF versus 41 in Q1. What does that mean Q2 orders were year-over-year? And given the registrations are only up about 4%, I'm going to assume that these are dealer orders in anticipation of sales picking up. Is that the right interpretation? And I'll leave it there. The orders are typically driven by customer orders, so yeah. We obviously sell some stock trucks, but the vast majority of our orders are driven by customer demand. So, no exception with DAF. Harry, do you have the second quarter? Second quarter was up 10% compared to the second quarter last year. Last year, we had a strong second quarter, too. Yeah. Okay. Thank you. I appreciate the color. You betcha. Your next question comes from Alex Potter with Piper Jaffray. Your line is open. Hi, guys. Hey, Alex. I guess one, maybe two questions on Europe. First of all, I was interested if you could comment on any mix trends that you're seeing. Obviously, not all trucks are created equal, so if it's a medium-duty trucks versus heavy-duty trucks, or Eastern Europe versus Western Europe, anything that we should know about in terms of what that volume might mean for the margin profile of what you're delivering? I would say the share enhancement that has occurred has really been driven by the tractor side. DAF, for the first half of this year, had the number one tractor in the market, in Europe. The CF, XF, the fuel efficiency gains, the 7% or so on average fuel efficiency gain is really well appreciated by the on-highway long-haul customer. We did see a bit of an increase in that particular area. Okay, and that should be margin accretive, if I'm reading that correctly. Is that right, or what? Yeah. Margins are all pretty representative when you talk about the heavy side. Okay. I guess also on Europe, just if you could maybe take a step back, I know that historically it's not been maybe as violently cyclical as the U.S. If you could just maybe update us on your longer term, two, three, four-year outlook for the European cycle. Not a specific forecast or anything, just sort of the general feel. Just general feel, the economy has been in growth mode for three or four or five years, and the central bank and others are managing inflation and growth quite prudently. There is nothing that we see in our radar that is going to change the economic outlook for Europe for the near midterm. Okay, great. Last one. Specifically on gross margin, you had mentioned there some gross margin numbers for Paccar Parts in particular. It sounds like the Paccar Parts segment has been doing quite well, or at least no major downside from a gross margin standpoint, which I was a little bit surprised about. It seems like I would go with quite well. Yeah. That is what it looks like. But it seems, and maybe I am reading it incorrectly, but from listening to comments from others across the supply chain, it seems like a lot of the pressure, to the extent that pressure exists from supply chain bottlenecks or steel, aluminum, things like that, have been borne primarily by Paccar Parts, as people prefer to prioritize ordering or delivering the OEM-oriented parts instead of aftermarket. But apparently you did not see any of that. So just any comments on that topic would be insightful. Thanks. No, I think as we look, obviously, you got to keep the factory running, and so that is job one, but the suppliers have done a great job supporting our total business, both the factories and the aftermarket parts business. So, at this point, we're in good shape from a supply support standpoint. Okay, thanks very much. Thank you. Your next question comes from Jerry Revish with Goldman Sachs. Your line is open. Yes. Hi, good morning, and good afternoon, everyone. Hey, Jerry. I'm wondering if you could talk about your expectations of gross margin cadence Q4 versus Q3. Over the past two years, we've seen Q4 have lighter gross margins than Q3, either because of timing of parts deliveries or rebates. I just wanted to see if we could just get more granular comments from you folks. You mentioned back half margins look like first half, but does that mean Q3 higher than that and Q4 lower than that? Can you just give us some more context on No, I think they'll margin seasonality this year? They will be in the range that we talked about. For both 3Q and 4Q? Yeah. As you folks assess the impact on the supply base of the tariffs that were put in place on July 6, can you just talk about what is your rough sense on whether any of your suppliers could be impacted by tariffs? Do you have an early read on how that looks for your supply base? Yeah, I think the early read is that there's not going to be a significant impact to our business and our expectations for operations based on what we know now. As you know, things can change quickly in that arena. Okay. Lastly, Gabe, can you just update us on the productivity that you folks are seeing as you've ramped up production significantly in the U.S.? What kind of productivity are you seeing from the labor force and the next round of production increases? Can you just give us a flavor for how much of that will be overtime versus new shifts? Most of it is just adding to the first or second shift up, mostly the second shift operation, to support our demands in our factories. The productivity that you're seeing as you're adding to that shift, how does that compare? It's consistent with what we typically would see. You're leveraging that fixed cost structure and the supervisory structure and management structure of the facilities as you go up, for sure. Okay. Thank you. Thank you. Your next question comes from Joel Tiss with BMO Capital Markets. Your line is open. Hey guys, how's it going? Good, Joel, and you? Hanging in there. We missed you in Eindhoven. Yeah, I know. I wonder, can you give us a little bit of an update on Brazil and maybe just talk generally about any other geographic markets that you're looking at that might turn out to be interesting? Yeah. Brazil, the team, as we've talked about before, has done a great job of having a great product for the market. It's very well received by our customers. We're going to continue to increment production. For the year, we'll probably deliver about twice as many trucks this year as we did last year, which will yield some further share growth. I think through mid-month, we're roughly at about a 6% share of the above 40 ton market in Brazil. The team is doing great. We're being able to leverage the fixed costs, and so we'll continue to develop that business. The dealers are doing well, and so the long-term prospects for Brazil continue to be excellent. As you look at other parts of the world, Mexico, we continue to generate the highest share in our company at 35% or so share of the heavy market in Mexico. Australia, the economy's good, truck demand is good. Building trucks at a strong rate in Australia. And demand for products outside of our primary markets in places like Russia, Turkey is good. Good Things are good around the world as we sit here today. All right. Just a couple of nitpicky. Can you talk a little bit about the $300 million going forward of share repurchase? Is that aimed at just soaking up options or do you aim to take the share count down a little bit? Your inventories and receivables are up about 36%, which is well above your revenues. I just wondered, is there a strategy there to have a little extra parts inventory, or is there something else going on? The share repurchase, as you know, from time to time, we will buy back shares at the current bargain price. It is quite a deal. We should be active in the market. Thinking about the receivables and inventory, as you may or may not recall, we typically close some of the factories down over the Christmas holiday period, and so inventories and receivables at year-end are lower than they are relative to activity levels than if you look at the other three quarters of the year. We are seeing some effect of that on both of those metrics. Okay. Thank you. Thank you. Our next question comes from Seth Weber with RBC Capital Markets. Your line is open. Hey, good morning. Morning. I just wanted to go back to the supply chain discussion for a second. Is Paccar making any extra investments in its suppliers to sort of help them along here, or is it just business as usual? I would say it's pretty much business as usual, but we've had a long history of where suppliers can benefit us and them from a win-win circumstance. We're more than happy to make those investments and support suppliers to support Paccar. Okay. But nothing kind of unusual for Paccar. Nothing of significance at this point. Okay. Just to follow up just on the strength in the parts business, you raised the outlook, the revenue outlook there. Can you just maybe frame what areas, whether it's engines or just regular business activity has been surprising to you or the source of the upside relative to your prior expectations? Thanks. Yeah. I'd say nothing surprising, but engine parts growth is higher than average because we're growing the park of Paccar MX engines every day. We're putting 100% of Paccar engines in DAF vehicles, and they're building at record production rates. In Europe, we're putting 40%-45% MX engines in Kenworth and Peterbilt trucks, which are at high production rates. The engine has now been in the field for eight years, and so we're starting to see just the ongoing benefits of the engine parts sales. Our teams, they've put together some programs of supporting fleets, the TRP stores, the e-commerce initiatives. All those things are yielding just great results, and support for our customers. A big focus with their uptime initiatives to service our customers in the best way in the industry, and that's recognized and it keeps customers coming back to Paccar Parts on an ongoing basis. Sure. Okay. Very helpful. Thank you very much. Thank you. Your next question comes from Andy Casey with Wells Fargo Securities. Your line is open. Hi, guys. How are you doing? Thanks for taking the question. Morning, Andy. Hey, Ron. On the outlook, just going back to Seth's question from a different perspective. Paccar Parts up to 13%-15% from prior 8%-10%. At the midpoint, it kind of implies a slight decline. I mean, slight like 1% in the second half for revenue from the first half, and that's coming after 10 consecutive quarters of sequential growth. Then clearly also moderation year-over-year to about 10% from 18% in the first half. Can you help us with the key factors, when you're looking into the second half that might be causing you to expect a flattening out? Yeah, I think that's the conservative guys at corporate, not listening to the Paccar Parts guys what they're going to be able to do. Paccar Parts team is obviously doing a great job, a lot of initiatives ongoing, and so we just appreciate the trends they've been, and we're just being a little bit conservative in terms of our outlook at this point. Okay, thank you. Then I'm just wondering with the currency shifts that have occurred, and maybe it's a little bit too early to see this, but has that impacted any export demand in any region? If so, where are you seeing any sequential hesitation? I'm just sort of searching my mind. I can't think of currency impacting demand. Yeah, I think demand is there, and currencies impact price realization or cost from time to time, but again, nothing significant. Okay. Thank you very much. Thank you. Your next question comes from Jamie Cook with Credit Suisse. Your line is open. Hi, good morning. I guess first question, just back to visibility that you guys cited into 2019. Can you just talk about how far your visibility extends relative to sitting here last year, and was that comment specific just to North America or Europe as well? My second question, as we think about 2019, and if you think about what some of the industry experts are forecasting, should we expect incremental margins, given where we are in this cycle, improve from this level, or should we expect them to temper just because the growth rates probably won't be as robust? Yeah. If you look at the orders, again, order backlogs are strong around the globe, and order intake is a combination of current year and future year. A lot of fleets are reserving spots for next year's build to make sure they get their trucks that they need. We're in great shape from that perspective. From a margin standpoint, we've sort of talked about what we expect for the second half, and we'll see what next year brings. But is your visibility greater as we sit here today versus last year or comparable? Oh, yeah. For sure. Okay. You've said before, normalized incremental margins are 15%-20%. Is that off the table going forward? I think that's what it's been for years, up and down. I think that's a pretty good metric. Okay. Thank you. I'll get back in queue. Thank you. Your next question comes from Courtney Yakavonis with Morgan Stanley. Your line is open. Courtney Yakavonis, your line is open. Apologies for that. Thanks for the question. Just going back to Steve's question on pricing. I think you guys have mentioned in the past that you've been able to get a little bit better pricing on some of your smaller truck orders. I'd just be curious, in the backlog right now, has it been a lot of those big orders from large fleets, or has a lot of the pricing been coming through still on those smaller orders, to offset commodity costs? And then also, are you getting any pricing on the parts business, or is that all volume? I think the pricing has been pretty normal in terms of the mix of customers that are in the build as well as in the backlog. I don't think there's any particular mix difference. And on the parts side, pricing is, again, it's a competitive market, and we constantly monitor what's the competitive price that we need to achieve our goals and targets, and the team does a good job of managing that on an ongoing basis. I think you'll see in the 10-Q analysis that we've seen some price realization in the parts business in the first half this year. Okay, great. And then, just when we think about the used market, you've obviously talked about how the pricing has been up. And just curious if, is there anything about the mix of the used market right now, is it younger than it's historically been? Are there more automated versus manual trucks in it? Or anything we should be thinking about kind of what the used market looks like today? I would say, from our used truck perspective, what you will see is the trucks that are coming back starting now going forward are more of the latest developed trucks, the Euro 6 trucks, the model 2.1 meter trucks in North America, which will have some benefit on our used truck pricing as we move forward. Okay, great. Thanks, guys. Thank you. Your next question comes from David Raso with Evercore ISI. Your line is open. Hi, thank you. Just a straightforward question. I must have missed this. Price versus cost in the quarter just reported, did it improve from what we saw in the first quarter? The rest of the year, does price versus cost, not just pricing, but price versus cost, improve from here? No, I think the second quarter was similar to what we saw in the first quarter, and I think it will be similar in the second half of the year. Okay. Again, I might have missed this. The extension of the orders, the visibility into 2019, can you quantify it a little bit or give us some sense of what percent of the builds for, say, first half of 2019 are spoken for, assuming all the orders stick? No, we do not want to talk about that at this point. All right. I appreciate it. Thank you. Yeah. Thanks. Your next question comes from Sameer Rathod with Macquarie. Your line is open. Hello, and good morning. Good morning. I think there's been some recent discussion about the current administration revoking clean air waivers in the state of California. Any potential thoughts or any thoughts on the potential impact that could have on the truck market? It's so hypothetical. We don't really think about that. We know what the current law is. We know what has been established for Greenhouse Gas Phase II for 2021, 2024, and 2027. We're managing our business to deal with what we know. That's what we're focused on. If something were to change, we'd deal with that at the time, but right now we're focused on the laws that exist. Okay, thanks. I guess my next question is on labor. Are you having difficulty finding labor in any of your facilities? Thank you. No. We have great facilities. We have a great place to work. We provide a great salary and benefits package for our employees. We're fortunate in that we're in communities that that's well recognized, and when we typically recruit for people to support build rates, we don't have any problem increasing our headcount to support that. Thank you. Thank you. Your next question comes from Joe O'Dea with Vertical Research. Your line is open. Hi, good morning. When you talk about customers now ordering for 2019, and I think what you talked about was these are some large fleets who are trying to make sure that they get build slots. Typically, we think about model year, at this point, 2020 prices is not really being set, and I think there is some speculation that some of these orders could be an attempt to get in front of more price increases. I guess, how do you address that, and how do you make sure that you take advantage of the opportunity to price in the strong demand environment and not give some of that away by just early orders? Well, again, for those transactions, there is typically multiple brands competing, and you have to be competitive in the marketplace. So it is what the market will bear. Well, I guess, just have you seen that competitive dynamic ease at all as the backlogs have done what they have done and lead times have extended, and when you get those multi-brand competitions in the bids, have you seen a little bit less price competition on those? No, I would say it is very typical. It is very typical of normal circumstances. Okay. When we think about Europe and where you are sizing the over 16-ton market, midpoint of about 310,000, at 16.5% share, that would be 51,000 units or so. It looks like you are on a delivery pace that would be slightly north of 60,000. Can you just talk about the medium duty, how big that is, and are some of these deliveries going to dealers who are trying to stock on the new trucks, just given stronger demand levels there? Well, we sell a lot of trucks outside of the European market, Russia, Turkey, Africa, Middle East, South America, Australia. The truck production from Eindhoven and Leyland is not just for the European market, it is for the globe. Okay. But I guess if U.K. is going down and you have strong share there, where is it that you are seeing some of the share outperformance now? We are doing really well in Central Europe, Eastern Europe, Poland, Czech Republic. Hungary is where we have grown share significantly, but also markets like Germany, France, and Spain. Got you. Thanks very much. Your next question comes from Mike Shlisky with Seaport Global. Your line is open. Hey, guys. Morning, Mike. I wanted to start with the R&D budget. The run rate so far this year in the first half is at the low end of your outlook for the full year. I was kind of wondering if you anticipate a ramp-up in spending in the back half of the year, and could you give us a sense of what you might be seeing as far as the R&D run rate in 2019 as well? Yeah, I think look at the second half, the quarter is probably $75 million-$80 million a quarter. Next year, I think the pace of spending would be similar to this year. Great. I also want to just get a quick detail on Brazil and how it is going there. Clearly, you have had very well-received models over there. My question is, there was a trucker strike during the second quarter here where there was some freight that was jammed up on the highways or just didn't get on the road. Those disputes are kind of continuing. I was wondering if there was any impact to your business in the quarter, and could there be some pent-up demand post-election late in 2018 into 2019, once it all gets sorted out? The trucker strike, it affected the entire country in terms of shipments. Parts getting into the factory, there was a week or so where that was a challenge. But those trucks have been made up or are being made up as we speak. The Brazilian economy has lots of potential, and we are seeing growth this year absent the trucker strike. The demand from customers is excellent, and particularly for the DAF product. We are optimistic. As we mentioned, we are going to be increasing our build rates in the second half of the year, and we will hope that continue to build to grow our business in the future. Great. Just a quick follow-up on that as well. It's now year four or five that you're in Brazil in any kind of way. Is this the point where you start to see parts ramp up in that part of the world, or is that more of a year six, seven, eight story there? No, it's ramping up all the time. It's relatively low numbers relative to our other markets because of the extensive truck parts. But it's basically incrementing every month as more and more trucks get in the field, more and more of our dealers get connected with all the transport companies, and get the service into the shops. So it's an ongoing growth business as we go forward. Got it. Super. Thank you. Thank you. Your next question comes from Neil Frohnapfel with Buckingham Research. Your line is open. Hi, thanks. Hi, Neil. Good morning. Ron, can you talk about the used truck pricing outlook in North America for the second half of the year and into 2019? I mean, it sounds like industry demand remains very strong for used trucks. Do you think that's the biggest risk to the Class 8 market in your view, given the increase in supply that could be hitting the market over the next few quarters? No, I don't feel that's a significant risk at all. In fact, there's good demand. As lead times for new trucks go up, used trucks become more and more interesting alternatives. Yeah, late model used is a very good market right now. Okay, and you don't anticipate that changing or the increases moderating at all from here? Yeah. I think it feels like it's going to be a good second half, and a good start to the first half for used trucks, as we said here today. We'll see how it develops. Okay. As a follow-up to some earlier questions on the parts business, I mean, the sales growth for the parts business continues to exceed expectations, and I would certainly imagine it's outpacing the industry. I understand you won't provide 2019 specific guidance, but is there any reason to think that the business can't continue to grow double digits in 2019 when considering the benefits like MX engine penetration, the expansion of TRP? Yeah, we'll see how that develops. I don't have further comment on it at this point. Okay. One last one. How much did TRP increase on a year-over-year basis in the quarter? If you look at TRP stores and the same store sales, stores that have been in existence for more than 12 months, I think the comp is up like 20%. Okay, great. Thanks very much. Thank you. Your next question comes from Rob Wertheimer with Melius. Your line is open. Hey, good morning, gentlemen. Hey, Rob. This is a tricky question to answer also, but it's also on parts. You guys have had such tremendous execution and success in growing that business very steadily. Are you able to comment on the cyclicality of that business? I mean, should we expect when the downturn comes that, I don't know whether you're getting 5 or 10 points of growth from cyclicality or whether it's really all your own initiatives. I just don't know if you have any way to measure market share gains you've had or upswing, downswing in that business that you expect if there is an eventual downturn. Yeah. It's difficult to measure market share, but I think clearly our business has grown at a faster rate than the overall industry. Again, I attribute that to all the initiatives that our teams have put together. If you look over time, obviously the volatility of parts is much less than trucks, and it's the steady revenue and cash flow source that they're day in, day out. No, it's been exceptional. Just a quick question just on the margin. There was a time a few years back when oil prices fell, and maybe you and some other parts businesses maybe picked up some margin, partly because of distribution costs falling. At the end of the day, your margins just keep going up and up. So I assume that your competitiveness at these margin levels is as good as or better than ever. You don't have any fears on that point? No, not at all. Okay, great. I'll stop there. Thanks. Yeah, thank you. Your next question comes from Mike Baudendistel with Stifel. Your line is open. Great. Thank you. You saw the press release, you are going to offer the Paccar transmission with the MX-11 engine. Can you just talk a little bit about the share that Paccar has within it that is vertically integrated on transmissions, where you think that is going to go, and is that big enough to move the needle? Well, I apologize, Mike. I do not have a current sort of assessment of the penetration rate of that transmission with the engine, but it is excellent. I just do not know what that is. So let me. We will come back to you on that. Okay, no problem. I just wanted to ask you also, it seems like you have more sort of confidence in the electric market than you did maybe a couple of quarters ago when you said there really was not a lot of demand from customers. Could you just talk a little bit about sort of where are you seeing that sort of extra demand versus a few quarters ago? What types of customers are demanding electric? Yeah, I don't think there's much more demand. You just have to be prepared as the regulatory environment may dictate some level of zero emission vehicles. We've been quite active in developing our capabilities, and we'll continue to do so. The reality is the price of an electric vehicle is more than two times the cost of a diesel engine. You've got some range issues, weight issues. So, the economic viability of electric is not great. You have to be prepared. So I don't think there's going to be a huge demand for electric or hydrogen fuel cell. Infrastructure and other things, just a lot has to happen for that to be any sizable portion of the markets the next 5 or 10 years. Got it. Thanks very much. Thank you. Your next question comes from Adam Uhlman with Cleveland Research. Your line is open. Hi, good morning, everyone. Morning, Adam. First, let's start with a clarification on the deliveries that are expected in the third quarter. How much of an improvement are you looking for in North America? Should we look for above normal seasonality as kind of make up some deliveries from the second quarter? Related to that, are we taking the normal summer shutdown in Europe, which is, I think it's down like 10% from the second quarter. If so, why not cut the summer schedules short to try to clear up some of the backlog and meet customer deliveries? Yeah, you just have to manage the vacation periods, et cetera, and this is the most efficient way to manage that vacation period. So, it's proven over the years it's the most efficient way. So, we'll be down in Europe a couple of thousand trucks, and that'll be offset plus a little bit in North America. Okay. Could you talk about the capacity that you have in North America today for the MX engine? If I were to order a truck with that engine versus a Cummins engine, is there any difference in lead times and availability? No. We've just completed about a $35 million investment in the Columbus engine factory to be able to increase machining capacity by about 40 engines a day. We also completed a similar size investment in Eindhoven to be able to machine MX-11 engines in Eindhoven. So we're in good shape from an engine capacity standpoint for the foreseeable future. Great. Thank you. Thank you. Your next question comes from Rob Salmon with Wolfe Research. Your line is open. Hey, good morning, guys, and thanks for taking the question. As we look out to the third quarter with the delivery update, can you give us a sense if you've got a bunch of effectively red-tagged trucks that are just waiting on a couple of parts in terms of seeing that sequential uptick, excuse me, on deliveries? No, it's mostly just production rates that we are anticipating. Okay, that's helpful. Ron, with your commentary about the used trucks, I think being up about 5%-10% compared to last year, can you give us a sense if that included the benefit from mix in terms of seeing a greater portion of the newer spec-ed trucks that you guys are selling, or is that just the broader market, and you think you're going to get more of a benefit in the second half as the specs start flowing through your used? Yeah, I'd say most of that is the broader market, and there will be some benefit from the model mix. Yeah. Got it. I realize it's a smaller piece of the business, the Paccar Lease, can you give us a sense of your plans for either fleet growth there and what you're seeing in that end market from a utilization perspective? Yeah, the utilization in the leasing market is excellent. With the transportation demand, when there's supplemental capacity needed, the lease and rental trucks, there's a good demand in the leasing business. Ours as well as our dealers who operate Paccar Lease franchises have had a really good year, and orders for lease trucks are up year-on-year. So yeah, it's been a really good year for Paccar Lease. Can you remind us how big is a percentage of the financial services that the leasing business represents for you guys? Yeah, we have a truck portfolio of around 190,000 trucks, and there's 39,000 trucks in the Paccar Lease operation. So whatever that 20%, 25%. Yeah. Okay. So as a proportion of earnings, it's the same regardless of if it's being financed or leased, I guess, over the cycle. That's correct. Yeah. Okay. Really helpful. I appreciate the time, guys. You bet. There are no other questions in the queue at this time. Are there any additional remarks from the company? We would like to thank everyone for their participation, and thank you, operator. Ladies and gentlemen, this concludes Paccar's earnings call. Thank you for participating. You may now disconnect.