Earnings Call: Q4 2017

Jan 30, 2018

Summary

FY17 revenue reached a record $19.5B, with adjusted net income of $1.5B excluding a one-time tax benefit. 2018 guidance points to higher truck markets, 5%–8% parts growth, and Q1 gross-margin improvement.

Good morning, and welcome to Paccar's fourth quarter 2017 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, and 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. Thanks to the accomplishment of Paccar's 25,000 outstanding employees around the world, 2017 was an excellent year for the company. Paccar achieved record revenues of $19.5 billion and net income of $1.68 billion. Net income includes a $173 million one-time benefit from the new U.S. tax law. Excluding the one-time tax benefit, Paccar reported annual adjusted net income of $1.5 billion, the second highest in the company's history. 2017 was Paccar's 79th consecutive year of generating positive earnings. Last year's results reflect record heavy-duty truck market share in the U.S. and Canada, record worldwide aftermarket parts results, and a strong European truck market. Paccar celebrated many important achievements in 2017. DAF XF and CF trucks earned the prestigious International Truck of the Year award. Kenworth and Peterbilt achieved record U.S. and Canada Class 8 retail market share of 30.7%. Kenworth and Peterbilt also launched the new Paccar front and rear axles and the Paccar automated transmission in North America. The Paccar engine factory in Mississippi earned the 2017 Plant of the Year honor from Quality Magazine. The Paccar Innovation Center opened in Silicon Valley. Paccar Parts opened new distribution centers in Brisbane, Australia, and Panama City, Panama, and is constructing a new PDC in Toronto. DAF was honored as Truck Brand of the Year in Brazil for the second year in a row. Paccar's fourth quarter sales and financial services revenues were a quarterly record $5.45 billion, and quarterly net income was $589 million, including the $173 million one-time tax benefit. Quarterly adjusted net income, excluding the one-time tax benefit, was $416 million. Paccar delivered a record 44,300 trucks during the fourth quarter, 10% higher than third quarter deliveries. Paccar increased its regular quarterly dividend in April last year and declared total annual cash dividends of $2.19 per share, including a $1.20 per share special dividend declared in December. Paccar has paid a dividend every year since 1941, and its total dividend yield was an excellent 3.1% at year end. We estimate that Paccar's 2018 effective tax rate will be 23%-25%, compared to an effective tax rate of approximately 31% prior to the new law. The new U.S. corporate tax rate and accelerated depreciation of machinery and equipment will generate positive cash flow for Paccar and its customers. We expect first quarter margins to be about 50 basis points higher on similar truck and parts volumes when compared to the fourth quarter last year. Based on our current market assumptions, we expect 2018 full year margins to be comparable to first quarter levels. U.S. and Canada Class 8 truck industry retail sales totaled 218,000 units last year. In 2018, we estimate that the market will be in a range of 235,000-265,000 units. The 2018 U.S. and Canada truck market will benefit from U.S. GDP and industrial production growth, as well as greater capital investment resulting from the new U.S. tax law. The European heavy truck market was a robust 306,000 units in 2017. Looking at this year, we anticipate that the above 16-ton truck market will be another strong year and be in a range of 290,000-320,000 vehicles. Paccar Parts generated record pre-tax profit of $614 million and revenues of $3.3 billion in 2017. These outstanding results were driven by a growing population of Paccar trucks and engines and investments in technology and distribution centers. For the fourth quarter, Paccar Parts achieved record quarterly revenues of $877 million and record pre-tax income of $157 million. We expect parts revenues to grow 5%-8% this year. Paccar Financial Services revenues were $332 million in the fourth quarter, and pre-tax income was $73 million. The good results benefited from continuing strong portfolio performance. U.S. Class 8 industry used truck sales volumes increased during the quarter. Kenworth and Peterbilt truck resale values continue to command a 10%-20% premium over competitors' vehicles. For the full year, Paccar Financial Services earned pre-tax income of $264 million. For 2018, Paccar plans to increase research and development spending to a range of $280 million-$310 million, and capital expenditures to a range of $425 million-$475 million. Paccar is investing in new aerodynamic truck models, integrated powertrains, including zero-emission electric and hydrogen fuel cell technologies, advanced driver assistance and truck connectivity technologies, and expanded manufacturing and parts distribution facilities. As the company begins its 113th year, we are in an excellent position to lead the industry with the highest quality products and services. Thank you. I would 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 Steve Volkmann with Jefferies. Your line is open. Good morning, Steve. Your next question comes from Steven Fisher with UBS. Your line is open. Thanks. Good morning. Good morning. I know this will be in the K, but can you give us maybe what the year-over-year contribution was for volume and currency in the quarter on revenue and gross margin, and maybe how you are thinking about the components of what gets you to the 50 basis point margin improvement over the course of 2018? I will let Michael talk about the revenues and the currency effects, but I will just address the margins. As we look at the first quarter, in the fourth quarter, because of the holiday period in North America, Peterbilt and Kenworth have fewer production days, so they will have more production days, and we have a bit higher margins in North America compared to Europe. So that mix is a bit of an unfavorable effect in the fourth quarter, and it will be favorable in the first quarter. Just other expenses and sort of the customer and product mix in the first quarter is more favorable than what we saw in the fourth quarter. Yeah, this is Michael. The overall currency effects for the fourth quarter were $142 million additive to revenue and about $8 million to pre-tax income. Okay. Sorry, that was foreign currency, you said? Yes. Okay. Terrific. I wonder if you could just talk about the supply chain here. How is it managing the increased demand for trucks, and where are the tightest points that you're seeing at this point? Is it able to meet the ramp-up here? As we do in all ramp-ups, we always work very closely with our suppliers, give them a lot of forewarning about our plans. At this point, we don't see any particular challenges in working with suppliers to achieve the market demands that we currently see. Okay, thank you. Thank you. Your next question comes from Stephen Volkmann with Jefferies. Your line is open. Hi, guys. Should we try again? Okay. Sorry about that. I just wanted to make sure I understood, Ron, when you're talking about the margins in the first quarter for the full year, are you talking EBIT or gross margin? I'm talking about gross margin for truck and parts. Okay. Yeah. That's what I thought. Then let's discuss just a little on SG&A. Should we think about that being sort of flat in dollar terms, or will you spend a little bit more there as well? Just your thinking there. If you look at the fourth quarter, that's probably fairly indicative of what our run rate will be for 2018, probably with a little bit of upward pressure because of exchange rates. Okay, great. That's helpful. Because we figure the exchange rates will be higher for 2018 than they were in 2017. Okay. Then you talked about sort of spending a little bit more on some drivetrain integration and electric and all that. How should we think about this kind of longer term over the next kind of three to five years? Are you going to have to sort of spend increasingly larger amounts of R&D and CapEx to kind of get ready for whatever the future looks like in heavy truck, or is this sort of a sustainable kind of rate? I'd say it's more sustainable. With 2021 greenhouse gas emissions on the horizon, we're investing now for that. So I think we have a pretty clear view of this level is probably kind of the sustainable level for the next foreseeable few years. Do you have a target year for when you think you'll have an electric vehicle of any sort ready for the market? Then I'll pass it on. We'll have it ready when the customer demand is there to support that. We're obviously investing, like a lot of companies are, in zero emission technologies. As the world evolves and as those vehicles become economical to the customers, that's a point at which we'll definitely have a product in the market. Okay, fair enough. Thanks. Thank you. Your next question comes from Jerry Revish with Goldman Sachs. Your line is open. Hi, good morning, everyone, and good afternoon. Hi, Jerry. I am wondering if you can update us on factory overhead performance in the quarter or over the year. You folks have had costs rising to support the production ramp, and I am just wondering how did that evolve into the fourth quarter? Yeah, it was very normal. It reflected our build rates. We got good operating leverage on our factory operations. I would say it was very normal. In terms of the drag from that factory overhead ramp, how does that evolve as we think about 2018? Is it any easier to ramp up from here, or are we thinking about similar drag in terms of factory overhead cost growth in 2018 as we saw in 2017? I think we will see, again, very normal progression. Factory overhead will go up as we increment build rates or come down as we decrement build rates. All very normal, so I do not have anything else to add there. Okay. Can you talk about the Paccar Parts business? The price cost dynamic was a headwind on a year-over-year basis for the past two quarters. Did you folks turn the corner in the fourth quarter, and can you just talk about the strategy there in terms of why pricing has lagged inflation for parts for you? Yeah, I do not think it is pricing. We have incentives and because of the great volume, the great programs that our Paccar Parts team provides, the dealers earn some higher incentive levels that they have not earned before. That is reflected, but that also is reflected in the fact that we achieved record sales and record profits. Okay. Lastly, in terms of the new tax structure, does that impact your thinking in terms of how much excess cash you need on the balance sheet since now you don't have unremitted foreign earnings the way you did under the prior tax jurisdiction? Any change to how you're thinking about target levels of cash? Yeah. As we progress through this year, we'll become much more smarter each quarter about how this progresses. We do see definitely a favorable benefit, so we'll be thinking about our capital allocation strategy as we go forward. Okay. Thank you. Thank you. Your next question comes from Joel Tiss with BMO. Your line is open. Hey, guys. How's it going? Good, Joel, and you? Hanging in there. Good. I am just wondering if you can give us some of the factors, like what held back the incremental margins in 2017? Just some of the things. Have you pretty much optimized all your production, or is there something else in there? No, the single biggest item, Joel, was just material cost movement. In 2016, we had a very nice favorable material cost movements. 2017 was just the opposite. They went in different directions year-over-year, and so that was probably the single biggest item. Then we launched some new products that had a lot of new elements to it. As we launched those products, we put our initial accrual rates for warranty and some of the other costs at slightly higher rates just to be conservative. Products are performing excellently in the market, so we will see some benefit of that as we go forward. Okay. I did not see in the press release your market share in Europe. Can you give us a sense of what it was? Yeah, it was 15.3% for the full year and 15.7% in the fourth quarter. Great. Then just last, on that AMT product, is that a Paccar product, or do you buy it from someone else and rebrand it? It's rebranded. Okay. Thank you so much. But I would say, Joel, it is customized to mesh with our axles and our MX engines, so it's a unique configuration for our vehicles. Your customers wouldn't expect anything less. There you go. Thank you. Thank you. Your next question comes from Ross Gilardi with Bank of America. Your line is open. Hey, good morning, guys. Thank you. Good morning, Ross. Hey, Ron, I was just curious what you're seeing with used truck pricing, and are you seeing any recovery there, and if so, is it translating at all into better new truck pricing? I would say it's stable. The used truck prices have been fairly stable during the second half of the year as we start into 2018. I would say the same thing for new truck pricing, that it's relatively stable. Okay, got it. Any thoughts on the FinCo, how that would shake out? You got off to a, in 2018, you got off to a weaker start in early 2017, that was partly due to the weakness in used truck pricing. Do you think you get a little bit of a bump there, should we consider this Q4 run rate for earnings, should we use that for 2018? Yeah, I think, probably if you took an average of the full year last year and divided that by four, that's probably a fairly indicative run rate, plus or minus, for developments during the course of the year. Got it. Okay. Just thoughts on the state of the U.K. market. The U.K. registrations have been soft. It's always hard to know if that's really indicative of what you guys are experiencing. So, did you see a tailing off of momentum or absolute declines in your U.K. business as the year closed out, expectations in the U.K. for 2018? Yeah, our team there did a great job. When you look at the combined above 16 ton and the 6 to 16 ton market, they, for the second year in a row, were over 30% share of that market. Our teams do a great job there, and we're working closely with our customers for negotiating orders for 2018. We expect as the year progresses, that the U.K. market, by the time we get through the year, will be similar to 2017 levels. Got it. Thank you. Thank you. Your next question comes from Jamie Cook with Credit Suisse. Your line is open. Hi, good morning. Two questions. Good morning. One, on the margin commentary for 2018. You're tweaking your margins down or maybe splitting hairs, essentially flat versus what you said last quarter for 2018, but your industry retail sales forecasts are up. I'm just wondering what's changed. Is it just material costs? Is it market share? If you could just talk through why wouldn't the operating leverage be better on higher sales? Maybe if you hit the high end of your forecast, how to think about margins. Then my second question, some people are increasingly concerned that as the U.S. truck market continues to be stronger, and we continue to raise 2018 industry forecasts, that that takes away from 2019. Are you getting more concerned that 2018 is the peak of the cycle, given the strength that we're seeing? Thank you. No, we're not concerned about the peak. We're obviously working closely with our customers to meet their needs, today, tomorrow, and whatever those needs are, we'll be working closely with them to make sure that we meet those, and we'll flex to adjust to whatever the market demands are, and that's a real strength of our company. As we think about margins, there's a lot of factors that can impact 2018 margins, material costs, other factors as we progress through the year. So, it's early days. We feel pretty good about the first quarter, and we'll see how things develop for the full year. Okay. Thank you. Thank you. Your next question comes from Ann Duignan with JP Morgan. Your line is open. Good morning. This is Abdul Tambal on behalf of Ann. Can you just talk about what kind of impact you expect changes in the U.S. tax law to have on your capital allocation strategy? Would you expect to make any changes on your dividend payouts, which is currently around 50% of net income? No, I don't foresee any particular change. Obviously, that'll be a matter for discussion with the board as we discuss things during 2018. But I don't see us making radical changes, significant changes in our capital allocation approach and our dividend practices. Okay, thank you. Sure. Your next question comes from Tim Thein with Citigroup. Your line is open. Thank you. Ron, good morning. I just wanted to circle back with your comments earlier on pricing. Maybe you could just talk a little bit more about the outlook in terms of what you're assuming here in '18, both in the U.S. and in Europe. And I guess somewhat related to that, I'm just thinking from an industry standpoint here, we're approaching two and a half, kind of three-plus year highs in terms of quarterly projected build rates. I'm just curious what you think. I know there's some changes in terms of potential ownership, similar to what we saw in Europe, I guess, a couple of years back. But maybe just what do you think the dynamic is holding back, or dynamics that are holding back the pricing opportunity in North America, and I guess less so in Europe. So maybe just some comments there. Tim, can you clarify for me what you talked about, changes in potential ownership? Yeah, just some potential consolidation. You had some ownership change a couple of years ago in Europe by another entity, and I am just wondering if there is similar kind of overlay here and potentially in North America, without naming obvious companies. Yeah, sure. There is consolidation that goes on continuously in the transportation industry, and we work very closely with the predecessor and the successor companies to try and maintain the strong relationships. As you know, this is an industry that is built a lot on personal relationships, and that is important for us and our teams. As we think about pricing, it is just a competitive market, and we price to meet our customers' needs. We have great trucks that have, earn a premium in the marketplace. We work closely to earn our share of the market, and we are all about profitable market share, and that is our focus, and we will continue to do that. The competitive environment will dictate what the pricing opportunities will be or not be. Okay. All right. Thanks a lot. Thank you. Your next question comes from Seth Weber with RBC Capital Markets. Your line is open. Hey, good morning. Wanted to ask about the strength in the parts sales again. Is there anything that you could call out there with respect to whether it's the MX engine starting to kick in and just, is a mid to high single-digit growth rate the right way to think about this business now going forward? Is my first question. Yeah. Parts are, I think it's a combination of higher truck populations and certainly the increased engine population with MX engines in North America now. The programs that the teams have put together with fleet services, billings, the e-commerce capabilities that we have, we're now up to over 130 TRP stores around the globe, the TRP brand. All those things are elements that contribute to, I would say, above industry growth levels in the parts business, and sure, we'd hope to be able to continue to build on those. But we're focused on continuing to build that business during the course of this year. Okay, thanks. On the, I think I heard deliveries flat sequentially, Q4 to Q1. Is there any regional color that you could give us there to help? Yeah, I think just because of the workday adjustments, there will be slightly higher North American deliveries in the first quarter and slightly lower European deliveries in the first quarter. Makes sense. Okay. Thank you, guys. Yep. Your next question comes from David Leiker with Baird. Your line is open. Hi, this is Joe Vruwink for David. Morning, Joe. I enjoyed your booth at CES, so it was good to see a truck company at a tech show. Yeah. Harrie was there. Harrie, what is your comments about that? Well, we had the nice hydrogen truck there and our autonomous trucks, and it got a lot of traction, a lot of positive feedback from everybody who was at the show. I actually wanted to ask about the zero-emission truck because it is obviously not new for Paccar. You have had vehicle imports, I think, for several years now. What are some of the, I guess, challenges in getting the existing electric platforms into higher volume applications at existing fleets? I think the major thing we need is a breakthrough in battery technology for electric trucks to really scale and really be significant for heavy commercial trucks. When you think about fuel cell trucks, there is a lot of infrastructure that has to, hydrogen fuel cell, that has to be developed to support fuel cell technology. But all things that we are working with our truck divisions and with some of our suppliers on developing the capabilities to be ready when the demand is right. When we think about breakthroughs in battery technology, is that energy density? Is it packaging? Is it thermal in a heavy-duty application? There's obviously very aggressive forecasts for automotive lithium-ion battery technology. What are some of the limitations in taking that into a heavy-duty application? For the heavy-duty applications, weight is very important because a truck carries a lot more than a person, like a passenger car does. The cost and the range that the truck can operate. Those are three things that are much more important for a heavy truck than they are for a car. Yeah. The packaging on the chassis and on the trucks. I think, boy, there's a lot of things that will matter as that technology gets closer to the market. We'll see applications in the smaller trucks first, and it will make its way in the coming years. If you have your crystal ball in the room, five years from now, what sort of volume might this be commanding of Paccar overall? That crystal ball is a little bit dim right now. Okay. Fair enough. Thank you. Thank you. Your next question comes from Nicole DeBlase with Deutsche Bank. Your line is open. Yeah, thanks. Good morning. Morning. Or, yeah, good afternoon to everyone else. I guess, on the truck segment, last quarter, you guys did 1% positive pricing. Did that continue into Q4? I assume you're getting that from the 10-K or 10-Q? That was from the Q. Yeah, Ron. Yeah. There's a lot of dynamics in those individual line items that impact, whether it's heavy-duty mix, medium-duty mix, customer mix. You've got to look at that total table as one. It's a little bit difficult to parse in any individual line item. Okay, so we should just wait for the K for that, I guess. Yeah. I guess on what you guys have seen internally with respect to order activity in the fourth quarter, it's been really strong for the whole industry. Just curious about mix. Anything interesting that you're seeing with respect to day cabs versus sleepers versus vocational vehicles, et cetera? No, I think the demand is up in really all segments. I would say that, probably in terms of percentage growth, maybe a little bit higher demand on the day cab side, and we're seeing some of that in the used truck market, where the used day cabs have a bit of a benefit compared to what they had been, say, six months, nine months ago. Okay, thanks. I'll pass it on. Thank you. Your next question comes from Andy Casey with Wells Fargo. Your line is open. Thanks, and hi, everybody. Morning, Andy. Ron, I'm wondering, or somebody, could you please discuss how Q4 gross margin performed versus whatever the embedded expectation was in the Q3 call when you gave volume growth? It ended up being a little bit higher. I'm wondering if the margin was a little bit lower, and if so, was it lower? I don't remember exactly what we said, but as you look at third quarter versus fourth quarter, part of what we saw was the fact that fourth quarter had higher deliveries in Europe versus North America, which, again, a bit of a dampening effect on overall margins. There were some impacts of customer and model mix in terms of the products that got sold, the customers that we sold to. We talked a little bit about the fact that fourth quarter was a record sales period for the parts business, and the good news is we had to pay slightly higher incentives, but the incentives really helped spur on the additional volume and profitability. Okay, thank you. I guess if we step back from the shorter term, I am wondering if the company has changed how it balances short-term truck margin versus longer-term total margin growth or profit growth potential, that could be driven by increased engine population in the field that could support higher aftermarket sales in the future. I do not think there is anything fundamentally that has changed about how we think about operating leverage and margin enhancement. Some years, quarters, things go your way, like material costs. Sometimes they do not. But I think long-term, we still have a similar perspective on how we thought about margins and operating leverage over time. Okay, thanks. I know you suggested new and used pricing right now is pretty stable in North America. I am just wondering if you are seeing any of the typical forward signals that could suggest pricing could start to improve during 2018. As we sit here today, I would say pricing is fairly stable. Okay. Thank you very much. Yep, thank you. Your next question comes from David Raso with Evercore ISI. Your line is open. Hi, good morning. David. The margins. I am just trying to get a feel for the fourth quarter, the price cost that was incurred, and what is your price cost assumption for 2018? When you pull out the currency, the gross margin was 14.2. A year ago, you pull out currency, the gross margins were 14.7. So to see the gross margins down even ex-currency, and North America is 51% of deliveries this quarter. A year ago, fourth quarter, they were only 42, so I thought that would be a positive mix. I am just trying to digest, A, how painful was the price cost in the fourth quarter, and what are you expecting for next year to come up from this level and then maintain? As I mentioned before, the key differences are the mix between Europe and North America in terms of volume. I apologize, I am talking year-over-year. Year-over-year, North American deliveries were 51% of the total. They were only 42% a year ago, so the mix is positive year-over-year, but the margins ex-currency are down 50 bits. That is all. It is a price-cost issue. I am just trying to reconcile it. Yeah, I do not know what currency numbers you are using and how you are getting those. All I can just tell you is that when you look at fourth quarter 2017 versus fourth quarter 2016, you had the effects of material cost movements was the single biggest factor, beneficial in 2016, challenging in 2017. The parts incentives had a bit of an impact, and those are sort of the two biggest factors, and as you look forward into next year, those sort of tend to reverse, and you got the European North American mix favorable as we get into the first quarter. Just to be clear, maybe I misheard you. I thought earlier you did give us the currency impact for the quarter. It was $142 million for revs and 8 for profit. That is for the total company. Total revenues, total profitability, truck parts, finance, et cetera. Okay. So I was giving it all to the truck part. Yeah. I think it is the large majority. But again, just so I am clear, price cost next year, what is the base? Is it a neutral after this year, a negative, or sorry, 2017 a negative? Just making sure we understand the puts and takes. Yeah, I'd say at this point, we're probably thinking about it neutrally. Yeah. Neutral. Okay. Really appreciate it. Thank you. You bet. Your next question comes from Mike Shlisky with Seaport Global. Your line is open. Hey, good morning, guys. Wanted to touch on the used truck market again. It's certainly great, of course, that your brands have good value retention over time and get solid pricing. But if we have a fairly strong 2018 for new truck sales, is there a risk that the supply of trade-ins on the used side rises as we go through 2018, and that pricing could come down a bit? Can you give us a little more color as to what Paccar has done to work with their dealers since the last time we had high inventories on the used side to keep the impact small going forward? Yeah. So as we think about used trucks, we're seeing good demand for used trucks as we sit here today. No reason to indicate that that's not going to continue for the near term. We've done a lot of things to support our ability to handle greater volumes of used trucks. We built a new used truck center in the Chicago area that's been open now just about a year. We're just opening another used truck facility in the Los Angeles area in Fontana. So we continued to enhance our internal abilities, and obviously, we've always worked very closely with our dealers on the distribution of used trucks through the market. So we've done a lot of things to enhance our capabilities over the last several years. Okay, got it. Secondly, just on parts, can you tell us how many TRP parts stores opened during the quarter, and how far along are you to a full build-out to what you're hoping to do globally? Well, I don't know how many during the quarter. I know we finished over 120 at year-end, and we're over 130 as we sit here today. I don't think we have a view of what full population is, and just as we continue to add dealer locations for Peterbilt, Kenworth, DAF, we'll add locations for TRP to meet market demands as they develop. So there's no end number or end game in sight. It's just continue to take advantage of distributing parts to all the areas where we can support our customers. Can I ask then, is that a big piece of the 5%-8% growth you've got planned for parts in 2018? Are there additional locations planned with first stock-ups coming here, or is the vast majority of your growth for 2018 organic parts growth? I'd say it's a combination of both. I think it's the programs, it's the population of vehicles, and it's TRP expansion. Got it. Thank you so much. Thank you. Your next question comes from Mike Baudendistel with Stifel. Your line is open. Thank you. I just wanted to ask you if you had any preliminary expectations for Class 8 market share in 2018. Does it decline from what it was in 2017 if there's a big shift from vocational trucks to sales to large fleets? No. Our teams, they've worked very hard over the years to develop the market share. When I started with the company 24 years ago, Peterbilt and Kenworth had a combined share of 21%, and over the 24 years, they've been able to increment that to 25%, to 28%, to now 30%. Our view is to continue to develop the best trucks in the market, provide the best value for our customers, and organically grow our share profitably in our primary market. That will be our focus for 2018 as well. Got it. I also wanted to ask you, is there anything we should be thinking about in terms of the mix impact of TRP? If TRP consists of a larger portion of your total parts business, does that cause a drag on margins and parts at all? No. In terms of the percentage, it's in the 10%-15% of total sales range, so I don't see it being a major factor in parts margins. Okay. Thanks very much. Thank you. Your next question comes from Joe O'Dea with Vertical Research. Your line is open. Hello. Morning. First question is just on build rates. Are you currently building to the kind of volumes that you expect in 2018, or do you think that there's still some upward move in where your build is to hit the midpoint of your expectations? Well, as we have progressed into 2018, we have taken some additional build rate increases both in North America and Europe to support demand. We'll maintain that as long as the demand is there. Okay. Then, a quarter ago, you talked about the sort of 14%-15% gross margin range. It looks like initial expectations for 2018 are that you'll kind of be in the middle of that range. There are industry forecasts out there with volumes, particularly in North America, well above where you are currently. If we think about the market maybe trending closer to those expectations versus yours, how do you think about the operating leverage on that? Would that mean gross margin closer to the higher end of the range? Are there reasons why we shouldn't anticipate some leverage on that? As I mentioned earlier, there's a lot of factors that impact that overall margin outcome. We feel really good about what we're seeing and expecting for the first quarter. The rest of year, there could be opportunities. We'll just have to see how the year develops. Okay. Thanks a lot. Thank you. Your next question comes from Neil Frohnapple with Buckingham Research. Your line is open. Hi, good morning. Hi. Ron, can you give us more granularity on the outlook for the European above 16-ton market for this year? What are the drivers to get you to the higher end of the range and then conversely, the lower end? As a follow-up, can you share anything regarding the trends in your order book for DAF in Europe like you've done in prior quarters? Yeah, orders for DAF have been very strong. When we look at fourth quarter compared to, say, the fourth quarter of prior year, I think they're up about 20%. 27% up. 27% up. As I mentioned, we have plans to increase our build rate this quarter. It's going to be dependent on the market. You look at the ton freight activity in Germany. In the month of December, I think the activity was up 6%, and for the full year up about 4%. We enter the beginning of this year with strong freight activity. DAF obviously has a great product, just won International Truck of the Year in the fourth quarter, and those products provide up to 7% improved fuel efficiency. It's a great value proposition for the customers. If the customers haven't bought trucks for four or five years, today's trucks, it's double-digit improvement in terms of operating efficiency. There's a lot of reason for customers to purchase new vehicles to take advantage of the lower operating cost. Okay, great. Ron, given the outlook for North America heavy duty industry production to continue to increase this year, it sounds like you guys have already increased your daily build rate. As we begin to close in on the recent peak 2015 levels, does Paccar have enough capacity in its factories to support this level of demand? Or if the market continues to inflect higher, considering where your market share is today versus just a few years ago. Yeah, we definitely do. We continue to monitor that and make the investments. As you know, we completed the Westerlo paint facility in Europe last year, which basically increased the capacity of our paint operations in Europe by about 50%. We continue to monitor those capacity factors and make the investments. In our capital plans this year, next year, we'll continue to look at that, not just for our factories, but obviously we're looking at that for our parts distribution activities as well. We're building the new PDC in Toronto, and we're looking at some additional investments on the parts side to continue to support our customers with their truck uptime. All right, great. Thanks very much. Thank you. There are no other questions in the queue at this time. Are there any additional remarks from the company? Yes, 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.