Earnings Call: Q1 2015

Apr 21, 2015

Summary

Q1 revenue reached $4.8B and net income rose 38% YoY to $378M as truck deliveries increased 20%. Higher Q2 production and strong freight demand support the outlook, while economic weakness and currency translation remain risks.

Good morning, and welcome to Paccar's first quarter 2015 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. 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, Bob Christensen, President and Chief Financial Officer, and Michael Barkley, Vice President Controller. As with prior conference calls, if there are members of the media on the line, we ask that they 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. Paccar reported excellent revenues and net income for the first quarter of 2015. Paccar's first quarter sales and financial services revenues were $4.8 billion, and quarterly net income was $378 million, an after-tax return on revenues of 7.8%. Net income increased 38% compared to the results generated in the first quarter last year. I am very proud of our 23,000 employees who have delivered industry-leading products and services to our customers worldwide. The first quarter marked another major milestone for Paccar, with DAF celebrating its one millionth truck delivery. I am very proud of the thousands of DAF and Leyland employees over the years who contributed to this achievement. Paccar delivered 38,300 trucks during the first quarter, a 20% increase versus the first quarter last year, slightly ahead of our expectations. The improvement reflects increased truck deliveries in the U.S. and Canada due to a good economy, record freight demand, and expansion of fleet capacity. Deliveries in Europe were 10% higher than last year's first quarter. Looking ahead, we expect to increase truck deliveries in the second quarter by 5%-7% compared to the first quarter, reflecting higher production rates for medium and heavy-duty trucks in North America and Europe. Second quarter gross margins are projected to be slightly higher than the first quarter, reflecting the benefits of increased production levels and improved operating efficiencies. Europe's economic outlook has been helped recently by the European Central Bank's quantitative easing program in lower oil prices. GDP growth expectations for this year are 2.6% in the U.K., which is Paccar's strongest market in the region, and 1.3% on the continent. Freight transport activity on German highways in March was up 4% over last year and at the highest first quarter level since the German toll system was launched in 2007. We have raised our forecast for Europe's greater than 16 ton market to a range of 220,000-250,000 units, reflecting a rebound in orders and the brighter economic outlook. Year to date, DAF has achieved a 15.5% share of the heavy truck market. I want to comment on the effects of the translation had on our revenues during the first quarter of this year. Looking at truck and other revenue, revenues were impacted by $232 million. Looking at parts was impacted by $49 million for a total impact on revenues of $281 million. The impact on financial services was a reduction of $16 million. On profit, the effects of translation are largely offset by a natural hedge that we have with respect to the purchase of engine components for our engines that we manufacture in North America. Turning to the U.S., the economic picture in the U.S. remains positive, with GDP forecast to grow 2.9% this year. The housing and automotive industries create a large amount of freight. Housing starts are projected to grow 14% this year to over 1.1 million, and the automotive industry is expected to deliver 16.8 million vehicles near record levels. We estimate U.S. and Canadian Class 8 industry retail sales will be in a range of 260,000-290,000 units this year, up from 250,000 units in 2014. The stronger market reflects expansion in industry fleet capacity due to continued strong freight fundamentals. Industry truck orders for the U.S. and Canada in each of the last two quarters were the highest since 2006. Peterbilt and Kenworth combined share of the U.S. and Canadian market is over 27% year to date. Paccar's parts business generated quarterly revenues of $753 million, a 4% increase compared to $727 million in the same quarter of last year. Paccar Parts quarterly pre-tax income was $139 million, an increase of 24% compared to the $112 million earned in the first quarter of 2014. The strong results were driven by high fleet utilization, growth in the size of the North American truck parc, and the many innovative products and services offered by Paccar Parts and our dealers. Paccar Financial Services first quarter pre-tax income was $89 million compared to $86 million earned a year ago, with profits which resulted from growth in asset balances and excellent portfolio performance. Paccar's strong balance sheet and positive cash flow have enabled the company to invest over $3.1 billion in new products and facilities in the last five years. We are delighted that the new Kenworth T880 truck, powered by the PACCAR MX-13 engine, was honored as the 2015 commercial truck of the year by the American Truck Dealers. Paccar's capital spending of $325 million-$375 million this year is targeted at enhanced powertrain development and increased operating efficiency of our assembly and distribution facilities. Research and development expenses are estimated to be in a range of $225 million-$250 million. Paccar continues to enhance its leadership position in the global truck market by developing the highest quality products and services in the industry. Thank you. I would be pleased to answer your questions. As a reminder, if you would like to ask an audio question, simply press star, then the number one on your telephone keypad. Your first question comes from the line of Andy Casey with Wells Fargo. Thank you. Good morning, everybody. Morning, Andy. Just a quick question, Ron, on whether you guys have seen any improvement in the outlook for pricing, whether it be Q2 or second half, specifically in North America. I'd just say pricing is very stable. Customers recognize the value of the Peterbilt, Kenworth, and DAF products around the world. Markets are always competitive, and we have a great product to offer, so I think that the pricing at this point is very stable. Okay, thanks. On the comment about the 5%-7% sequential production increase, is part of that more days in the quarter, or are you able, specifically in North America, to increase production by utilizing some of your other production sites as opposed to the two primary ones for Class 8? Yeah, I'd say most of it is higher daily production rates with maybe a day or two extra. Okay. Thank you very much. Sure. Your next question comes from the line of Andrew Kaplowitz with Barclays. Hey, good morning, guys. Nice quarter. Thank you. Morning, Andrew. Incremental margin appeared to take a meaningful jump this quarter, and gross margin was well ahead of your previous guidance of 100-150 basis points of year-over-year improvement. Can you talk about what ended up being better than your expectations? It does look like some of that is strong parts margin, and maybe your distribution centers are ramping up there significantly, I don't know. Are you starting to get better absorption and pricing in Europe? I think your observation about parts is right on point. Several things there. One was a favorable mix of the products that were sold, the operating leverage of our cost structure, and we did see some benefits from the lower oil price and the effect on our delivery costs from our parts business. So those factors played a role, and then just a more stable build rate and the operating efficiencies that come with operating at a stable level. Okay, that's great. Ron, you said that gross margin would be about 50 basis points better for the year, but after being better than expectations in 1Q, what could that margin improvement look like for the year? I would think that for the year, we'd look at something that would be comparable to first quarter levels. Okay. Thank you. Yeah. Your next question comes from the line of Ann Duignan with JPMorgan. Hi. Good morning, guys. Morning, Ann. Good morning. Can you comment on what you mentioned about some fleet expansion out there, whether that's part of a trend you're beginning to see? We hear a lot about driver shortage, et cetera. Then comment on if we continue to see some fleet expansion, could that have a negative impact on your parts business as we go forward? More new trucks, fewer parts and services. I think the parts business is well positioned. The trucks that are there are operating at over 90% utilization, which is really at peak level. I do not see any tapering off from whether those are new trucks or older trucks. I think the parts business will continue to benefit from strong freight markets, not only in North America but also in Europe. I think the fleets, there was some pent-up demand over the more challenging years, and I think more and more fleets are renewing their fleets. Also, I think if they had additional drivers, they would probably purchase additional trucks. We have seen some fleets being able to make those expansions. Okay, thank you. Just if you could comment on the rise in cancellations last month. I know it was an industry number, but are you seeing anything out there on the cancellation side that causes you any concern as we go through the year? No Oil and gas or anything? No. No concerns at all. Thank you. Appreciate it. Thank you. Your next question comes from the line of Jerry Revich with Goldman Sachs. Jerry, your line is open. Please proceed with your question. Good morning. Sorry about that. I am wondering if you gentlemen can talk about the book-to-bill in the quarter in Europe. One of your competitors spoke about a 40% year-over-year increase in orders in the quarter. Are you seeing as much momentum as they are? Can you just calibrate us there? Yeah. As we look at DAF's orders in the first quarter compared to fourth quarter levels, we're also up about 40%. In terms of in the Paccar Financial business, you continue to have pretty good margin performance there. Can you just talk about how we should think about the debt-to-equity ratio for that business? You've taken it down about a turn over the past year plus. Can you just talk about what's driving the more conservative balance sheet there, and how we should think about the ratio longer term? I think, we've retained the earnings that we've achieved over the last many years and retained those in the business. More of our portfolio is being funded with the equity. I would see that leverage would continue at similar levels to where we're at currently in the foreseeable future. Okay. Can you update us on your push on the operating lease side? What's your penetration look like? Is that still a meaningful priority for you folks in that business? Yeah, we have a full line of products that Paccar Financial Services offer, so we are very willing to provide loans, leases, floor plan financing, all the products that we offer to all of our customers and our dealers. We are not preferential to any one particular product. We just want to meet our customers' needs and support the growth of the sale of Paccar trucks. Thank you. Thank you. Your next question comes from the line of JB Groh with D.A. Davidson. On the SG&A, year-over-year, that pretty nice decrease there. Is there something that was happening last year that caused that to be a little higher? Is this roughly $110 million a good run rate for the remainder of the year, or should that go up a little bit? The SG&A did benefit about EUR 10 million from exchange effects. Okay. At current exchange rate, this is a fairly good run rate. Okay. I know you can't give us any details on this European Commission in terms of the potential impact, but how about timing? Any idea when there'll be some sort of Yeah. We've provided the update in our press release. Really have nothing else to add at this point, JB Groh. Okay, that's fair. How about an update on South America? How are things going there? Things are going very well. Our factory continues to build excellent trucks for the Brazilian market. More and more dealers are opening their new facilities, continue to construct new facilities. We're still identifying dealers in some areas of expansion. It's all progressing very well, and as we look at the long term, that will be an excellent investment for us. But is the rate that you're currently delivering there, is that probably a little bit of a drag on the margin? Our deliveries are very steady, so it has been at the same rate for the last several quarters. Okay. Did you give the delivery numbers? By region? A total of 38,300 trucks in the first quarter. Okay. Thank you. Thank you. Your next question comes from the line of Joel Tiss with Bank of Montreal. Morning, Joel. Hey, how's it going? Great. That was a beautiful quarter. Thank you. Is your European share gain, do you think that is going to continue, or do you think the growth for the foreseeable future is going to be more or less in line with the market growth? I think our growth will be in line with market. If you look over the last 15 years, we have sort of gone from less than 10% to up to 16% last year being a little bit of an anomaly with the Euro 5 noise in the market. I think the 15.5% is about where we expect to see the year, and hopefully we will continue to grow and build on that base as we go forward in the years to come. Are we going to see any tax rate benefit from the mix shift, maybe a little more Europe coming in the future? Yeah. It could be tenths of a point, but it's not going to be significant. Won't be meaningful. Yeah. Great. Thank you so much. Thank you, Joel. Your next question comes from the line of Steven Fisher with UBS. Thanks. Good morning. Morning. Not sure if this is what you were exactly answering Andy Kaplowitz before, but how sustainable do you think this level of parts margin is, and what were the biggest contributors to the mix in there that you mentioned? The mix is primarily just a higher mix of proprietary and PACCAR-branded product compared to maybe all makes versus in vendor product lines. That is the mix side of that. 4%, we expect the year to be somewhere in the 2%-5% range at current exchange rates. Okay. But the 18.5% margin that you did in the parts business and the sustainability of that? Yeah, I think we see that the parts margins, as we go forward in the succeeding quarters, would be comparable to first quarter level. Okay. Can you just talk about the cadence of free cash flow over the balance of the year? It looks like your CapEx might be ramping up from the $55 million in the first quarter, but would you see some offsets there to get your free cash flow close to your net income level? Yeah, I think we will see an acceleration of capital spending as we progress through the year. It won't be dramatic. We continue to generate strong operating cash flow, and we'll see it be pretty normal as we progress through the rest of this year. Okay. Thank you. Thank you. Your next question comes from the line of Tim Thein with Citigroup. Great. Thank you. Good morning. Good day. Ron, the first one is just on, actually two on Europe. As we kind of exit 2015 based on the way that you expect the market to play out, where would you expect to be in terms of that spread between the average truck price in Europe relative to the higher Euro 6 content, that headwind that you faced in 2014, does that go away or volumes not high enough to be able to offset the full amount? Tim, I think it really depends on the strength of the market and the competitive nature of the market, and it's early days. We have seen some very positive signs in the last couple of months in terms of order intake activity in Europe, but we will see how things progress. It will really be dependent on level of market demand at that point. Okay. Then just, again, sticking in Europe, did you adjust your parts on a constant currency basis? Did you adjust your full-year parts sales expectations in Europe on the back of the better freight environment that you mentioned? Yeah. We expect that parts will grow in Europe during the course of this year because of the effects of currency. Parts revenue growth consolidated will be somewhere probably in the 2%-5% range for the year. It was 4% for the first quarter. Okay. Thanks a lot. Thank you. Your next question comes from the line of Nicole DeBlase with Morgan Stanley. Yeah, good morning, guys. Nice quarter. Thank you. My question is around pricing in Europe. I think that this was alluded to a little bit earlier in the call, but can you discuss what you are seeing? Are you seeing competitors get a bit more aggressive with pricing since volumes are starting to pick up there? No, I don't see aggressiveness in pricing. I think we see pretty consistent pricing with what we've been seeing, and the level of market demand will sort of dictate how things will progress on the pricing side as we progress through the rest of this year. So right now, I'd say it's pretty steady. Okay, got it. Then just going back to the oil and gas issue, we talked about this on the last call, but I'm just curious if you've heard any changes, any oil and gas customers that are cutting back on their spend for the year. Anything anecdotal you've heard there? No, nothing significant from what we talked about before. I think for oil and gas exploration and production-related items will probably be lower this year, but that's offset by other things, other segments of the market. So I think it will be pretty nominal impact. All right. Thanks. I'll pass it on. Your next question comes from the line of Stephen Volkmann with Jefferies. Hi, good morning. Just a couple of quick clarifications. You said production up 5%-7% sequentially. Which will be up more, U.S. or Europe? It's going to be pretty even across the board in terms of Europe and North America. Okay, thanks for that. I'm just curious about your view, and I'll take opinion here rather than fact, if you like. I'm curious what you think of the North American cycle. Obviously, there's a lot of debate there. We did see a little bit weaker Class 8 order number recently, and then Ann alluded to the cancellations being up a little bit. Is it your view that this is kind of the peak of the cycle, or do you think there's enough demand drivers, whatever you might want to list, that could keep this cycle going a couple more years? Yeah, the economy is good, and as long as the economy continues at a good growth pace, I think there'll be the need for the movement of goods, and that will create demand for freight. And the freight numbers continue to be at or near record levels. So I think as long as that continues and trucks are operating at 90% plus utilization, then we'll see a reasonably good demand for trucks in the foreseeable future. Thanks very much. Thank you. Your next question comes from the line of Jamie Cook with Credit Suisse. Hi, good morning, and congrats on a nice quarter. Thank you. I guess just two questions. One, can you talk about your market share opportunity in the U.S. for the sort of back half of the, or I guess, the remaining eight months of the year? One of your peers is out of capacity. Your other peer, people are reluctant to buy trucks from. Do you think as we look to 2015, Paccar's ability to gain share is probably above what it is historically just because of the dynamics of the market? My second question, can you sort of talk about what your lead times are? Then I guess the other question is just given, I guess, your approach to managing the cycle, would you rather extend your backlog so at some point you get some visibility into the latter half of the year or into 2016, or take production up and gain share? Thanks. Okay. From a market share standpoint, obviously, we're very focused on growing the profitable market share that we can achieve in the market. We have great products, a full lineup with a combination of the 2.1-meter cab, the other products that we offer in the on-highway, off-highway. So we have a great product lineup, and we're looking to grow our share and continue to move that forward. Lead times are very normal. Customers can get a truck within a reasonable window of time, and so we're very comfortable with where we're at in lead times and good prospects backlog for the second half of the year. Going into 2016, we're very vigilant in monitoring orders. Orders come from customers when they need a truck, we'll slot it in the backlog, and so we build based on the orders that we have. That's been our approach for 110 years, and that'll continue to be our approach as we go forward. I guess just one follow-up question. The margin performance and the incremental margins in the quarter were obviously, they exceeded my expectations. You guys did a great job. Historically, you've played down your ability to achieve sort of prior peak margins. Did this quarter surprise you? How do you think about your ability to get back to prior peak based on the performance you had this quarter and just the overall strength you're seeing in sort of the U.S. and Europe? The prior peak obviously benefited from very extended backlogs both in North America and Europe. The markets today are still, if you look at Europe, they're probably 20%-25% below what they were in the 2006, 2007 timeframe. Here, North America, they're 10%-15% below those levels. We still haven't gotten to those kinds of levels. Margins are excellent, and the operational efficiency that we're able to achieve with our factories has been outstanding, and the stability of our build rates is serving us well. We'll continue to focus on continuing to move the needle forward and achieving the best operating margins that we can for our shareholders. Alrighty. Thanks. I'll get back in queue. Thank you. Your next question comes from the line of Seth Weber with RBC. Good morning. This is Emily McLaughlin on for Seth. Just a couple of questions. Given your production guidance for 2Q, can you comment on the growth mix by heavy duty versus medium duty within the regions? Yeah, I think it will be similar. We will see growth in both medium duty and heavy duty in the quarter, probably of comparable amounts. Okay. Then with build rates picking up, has the supply chain continued to meet OEM needs? Are there any bottlenecks there at this point? Supply chain has done just a marvelous job of supporting the ramp-up activities, and the first quarter was very smooth. The supply base, I think, is well-positioned to support the industry at this and even potentially higher levels. Okay, then one more, if I may. Can you just speak to what's going on in some of the individual countries in Europe, what you're expecting for the rest of the year there? Well, the U.K. is our largest market, and as we mentioned in my comments, the GDP growth in the U.K. is very good and just had the NEC show in Birmingham last week where DAF was well-represented and lots of positive feedback from customers in the U.K. We talked about Germany, where the freight activity in Germany in the month of March was at the highest level since they've been tracking the MAUT toll statistics. So German freight activity is good. Some of the southern countries, Spain and Italy, they really had a very challenging situation with the crisis and in the ensuing couple of years. But we're starting to see some rebounds between Italy, Spain, and Portugal. So that's moving forward as well. So I'd say the mood in Europe is generally as positive as it's been in a couple of years. That's great. Thanks very much. Thank you. Your next question comes from the line of David Leiker with Robert W. Baird. Hi, good afternoon. This is Joe Growing for David. Morning, Joe. When you see high-end brands like Scania and DAF gaining market share at the high end of the market, what's your general interpretation of that sort of trend going on in Europe, particularly in the sense that normally if you see the premium brands gaining share, that's a pretty good indication of kind of underlying health in the marketplace? I think it's a focus on value and operating efficiency, and DAF really focuses on lowest total operating cost, providing great fuel efficiency with the PACCAR MX engines, both the MX-11 and the MX-13. The Euro VI products have performed excellently in the market. Now that we're past the Euro V transition period, the DAF products are standing tall in the market and very well-received by our customers from a value and operational efficiency perspective. There was a question earlier on pricing competition that may or may not be occurring in Europe. Just from your vantage point, it may very well be occurring, but the customers you're targeting probably aren't forcing that issue with you? No, it's a very competitive market. It's still at 220,000 to 250,000 trucks. It's still 30% below the peak level. So there's a lot of competition to gain customers, but our products and our services stand tall in the marketplace. Then one last one. I missed the comment earlier on the strength in parts margins. Are we finally beginning to see more of an impact from Paccar-specific engine parts show up in the mix of the segment? Is that what's happening? Yeah. So obviously the Paccar engines have been in Europe for many years, so that's always been there, and we're seeing the growth of the PACCAR MX engine. At the end of last year, we had 75,000 engines in the market, and that will continue to grow again this year. So yeah, as time goes on, we'll continue to see that benefit, more and more parts sales supporting Paccar engines. Okay. Great. I'll leave it there. Thank you. Thank you. Your next question comes from the line of Rob Wertheimer with Vertical Research. Hi. Good morning. Hi, Rob. I had a smaller impact on the transactional offset from currency. I wonder if you can give an overview. I know you had started assembly of engines here, then you sort of moved more integrated. There is obviously a bunch more that I am not thinking of that you are sending, I guess, from Europe to U.S. Maybe you could just outline generally what that stuff is. Well, we are buying blocks and heads and a lot of components for our plant in Columbus from European suppliers. So a good portion of the material content comes from Europe. Perfect. That I figure. Is there much outside of engines or no? No, it is primarily engine components. Okay. I'll follow up offline. Thank you. Yeah. Thanks, Rob. Your next question comes from the line of David Raso with Evercore ISI. Yeah, my question's related to currency. The operational improvement was solid for the quarter, but it seems like currency did help your margins by 60 bps. Somewhat related to the last question, that should also be a help to 2Q as well. Can you explain a little more detail, if you could, how currency, obviously negative 7% or so for the quarter, can still be neutral on EBIT, because a 60 bp help to the quarter is obviously something that, it helped the quarter. It should happen for 2Q, maybe even 3Q. Once the currency situation flattens out, I'm just trying to manage expectations here a little bit on the margin performance, what's really operational versus just currency. Yeah, most of the effects are operational. We had, as I mentioned on the profit side, the translation effects on our pre-tax income were largely offset by the effects of the natural hedge that we have with the purchase of components. I do not know the numbers, but Well, just to be clear, maybe clarify if I heard incorrectly, $281 million revenue help to truck and other. No, that was a decline. A decline. Well, I mean help meaning you take away the revenue. Sure There's no impact on the EBIT. That's a 60 bps help to the margins. Yeah. Okay. So and that should help 2Q as well and 3Q, but just when I think about the cadence of the gross margin guidance, it's 14, then up a little bit, but then only for the year, it seems like the second half is not sequentially improving. Is that partly it? You lose some of the currency help to margin. Is that the way to think about it? No, as we mentioned for the second quarter, we will see some slight improvement with the higher volumes. The currency impact assuming a constant currency is where we are at now. We will see a similar benefit in the second quarter. But then the second half, it diminishes a little bit, and that is why I am just trying to manage expectations a little bit on it is not gross margins going at 14.5, then 14.9 in the back half, and then to 16. Just being sensitive to the currency is helping the gross margin right now, the operating margin as well. It benefited in the first quarter, and we will see that benefit again, assuming that consistent with the current translation rates. We will see that benefit in the second quarter as well. All right. That is great. I just wanted to clarify that. Thank you so much. Yeah, sure. Thank you. Bye-bye. Your next question comes from the line of Alex Potter with Piper Jaffray. Hi, guys. One housekeeping question here. Could we get the deliveries by region, so Europe, U.S., Canada, and other? Sure. U.S. deliveries were 21,400 in 2015 and compared to 16,100 last year. Canada was 3,000 compared to 2,500. Europe was 10,100 compared to 9,300, and Mexico, Australia, and other was 3,800 compared to 3,900 last year. Okay, excellent. I guess one last question on pricing. You mentioned that in Europe, obviously the trajectory of pricing is going to be dependent upon the strength of the market, the competitive position, but ultimately it comes down to volume. In North America, we are obviously seeing very strong volume. Typically speaking, that should imply that the OEMs have good pricing power, but we have not necessarily seen a big uptick in pricing. Was just wondering if you can comment on what exactly it is you think is going on there. Thanks. I think, again, it is a very competitive market, and each transaction is negotiated with the customer and the dealer, so you reflect what the market conditions are. We have great products and they get a premium value for what we sell. That is evidenced by the fact that our operating margins, when compared and looked at the competition, are the highest in the industry. So, we are proud of our product, and we will look to continue to grow our share profitably. Okay. Thank you. Thank you. Your next question comes from the line of Neil Frohnapple with Longbow Research. Hi, good morning. Quick question, regarding used truck pricing in North America, what are you seeing in the market? Are you seeing any signs of softening with greater supply coming into the market? I'd say that the prices certainly aren't going up. They're stable compared to where they were a year ago. There are more trucks, but there's also a bit more demand. The pricing is very stable, and we see the similar thing in Europe. Prices in Europe are reasonably stable compared to where they were at this time last year. All right. Can you provide any more color on what you're seeing in the medium-duty market in North America and your outlook for that business this year relative to heavy-duty? Yeah. I think last year, the medium, the Class 6 to 7 market was in the 73,000 truck range, and we think 70,000-80,000 trucks is a reasonable range for that market for this year. The market has started off with good demand. We've been able to increase our production of the Peterbilt and Kenworth medium-duty trucks for the North American market. And so we're- Great. Then just one last one. Can you provide the MX penetration rate in the U.S. and Canada in Q1? As a follow-up, any way to quantify the percentage in your current order board? Just curious if you're on track to get in the 40% range for the full year, like you guys had outlined at Mid-America. Thank you. Yeah. The first quarter was about 37% for MX, and 40% is very reasonable target for this year. Great. Thanks very much. Thank you. Your next question comes from the line of Ted Grace with Susquehanna. Good morning, gentlemen. Good morning, Ted. I was hoping to circle back to parts. Could you just comment how each region performed, U.S., Europe? I just want to confirm, did you say that FX was a $49 million headwind to parts overall? Yes, it was. $49 million is the effect. Both North America and Europe performed very well in the parts business. The effects of currency, it is primarily the effect of the euro. Okay. Organically, you are up more like 10%? Could you just maybe give us the If you add back the exchange rate effect, that is roughly where the growth would have been at 10% rate. Yeah. Exactly. Could you just give us a sense for what U.S. would've done versus Europe in the context of that 10%? North America would be slightly above the 10%, and Europe would be slightly below. Okay. The other thing I just wanted to ask you, Ron, is if you take out your long-term crystal ball and you think about Paccar's vertical integration looking out five or 10 years, how would you frame what Paccar will look like on that basis looking that far out? Well, we've got an excellent business model that serves us well. We obviously have a little bit more vertical integration in Europe where we make axles. We buy axles in North America. We have the flexibility and, from time to time, we'll evaluate what level of vertical integration makes sense for our company. But I think we're very comfortable with where we're at currently, and I don't see any major revisions to how we've managed that and positioned ourselves in the marketplace in the near future. In the near future, but is there potential to see some type of step function improvement looking out five or 10 years, or is that the wrong way to think about the business? Anything can happen, but I would say at this point, we're pretty comfortable with the structure as we have it today. Got it. Okay. Well, congratulations again, and best of luck this quarter, guys. Yeah, thank you. Your next question comes from the line of Scott Group with Wolfe Research. Hi, Scott. Hi, good morning. This is actually Rena Christian sitting in for Scott Group. Okay. Most of our questions have been answered. Maybe just to follow up on that question related to vertical integration. I guess you guys mentioned you're comfortable where things are. Does that mean you haven't thought about maybe looking at where you could be with the medium-duty market, in terms of more vertical integration, or is it just something you don't want to talk about at this moment? If you guys feel comfortable just giving some color there. I think we've got great medium-duty products, but obviously over the years, we continued to invest in all of our products. We'll continue to make enhancements to heavy-duty, medium-duty engines, components. We work closely with our major suppliers around the world to provide us customized products that integrate with our componentry to provide an outstanding operating solution for our customers. I think we'll continue to have an ongoing investment program that will continue to move the needle forward for us. Okay, then just one last follow-up related to fleet expansion. Could you guys maybe give us some color in terms of what you're hearing from your fleets as it relates to fleet expansion this year versus last year? Would you say it's at a similar level or is it accelerating? Again, just in the context of where the driver situation is and where capacity could probably be for the industry. I think it's a similar state of affairs for our customers, that they're all making very good profits in their business, reinvesting in new trucks and expanding their fleet, I think both strategically and tactically. This is really just the second year where we've had expansion after five or six years of below replacement level demand. I think our customers are enjoying good rates, good profitability, and thinking about their business expansion plans in a pretty aggressive way. Okay, great. Thank you for your time. Thank you. Your next question comes from the line of Michael Shlisky with Global Hunter Securities. Morning. Morning. You had mentioned in your release that your key plants are producing at record levels, and it sounds like you'll have probably another record coming up here in Q2. Is there a way you can kind of quantify for us just how close you are to hitting your max levels, and are there any breakpoints where you have to add additional shifts which may impact margins above a certain volume level going forward? We're in great position capacity-wise. We have lots of capacity to support higher production levels in North America, Europe, and around the world. We're in great shape capacity-wise. Great, thanks. Just to kind of follow up on that, could you maybe just tell us a little bit about are you constrained at all with your people at your facilities? Are they at some point maxed out where you're going to have to hire some additional folks who might be less experienced to handle additional volumes? As we go up in volumes, we provide a great opportunity for people that are living, work around our factories. We're a great employer. We have a great working environment. When we solicit applications for people to join our company, we always get many more than the number of openings. So, filling open positions for our factories is something that obviously takes time and effort and a lot of focus to get the right people, but lots of supply to support the demand that we have. Super. Great quarter. Appreciate it, guys. Thank you. Your next question comes from the line of Michael Feniger with Bank of America. Hey, guys, this is Mike Destef filling in for Ross Gilardi. Just a quick question. I mean, the U.S. market has been on a gradual upward trajectory. Orders have been strong in Q4. They came back a little bit in March. What is your view the biggest risk to get to the bottom end of your forecast? It would be the economy. I mean, if the economy softens substantially in the second quarter, things do not progress as economists project, that clearly is the thing that has the biggest impact on our business. The economy is good. I think you will continue to see good demand. When you look at the products that we continue to enhance, you have connected truck capability, you have the predictive cruise control capability for our products. The attractiveness and the operating benefits that customers can get with current and products that we will be introducing into the market in the second half are very attractive propositions for them. Thanks, guys. Thank you. As a reminder, press star one to ask a question. There are no other questions in the queue at this time. Are there any additional remarks from the company? I would like to thank everyone for their excellent questions, and thank you, operator. Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.