PACCAR Inc (PCAR) Q2 2019 Earnings Report, Transcript and Summary

Good morning and welcome to PACCAR Second Quarter 2019 Earnings Conference Call. [Operator Instructions] 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 Preston Feight, Chief Executive Officer; Harrie Schippers, President and Chief Financial Officer; and Michael Barkley, Senior Vice President and Controller. As with prior conference calls we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties including general economic and competitive conditions that may affect expected results. For additional information please see our SEC filings in the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Good morning. Harrie Schippers, Michael Barkley and I will update you on PACCAR's excellent second quarter results and business highlights. First and foremost, I am very proud of our exceptional employees. We're passionate about providing our customers, the highest quality, highest performing trucks and services in the world. I also want to thank those analysts who participated in our investor conference in New York in May. The PACCAR team appreciated the opportunity to provide an update on our business. PACCAR achieved record quarterly sales and financial services revenues of $6.6 billion and excellent net income of $620 million resulting in a 9.3% after tax return on revenues. PACCAR Parts generated record revenues of over $1 billion and record pretax profits of $211 million. Parts revenues increased 6% and profits grew 8% compared to the second quarter of last year. PACCAR achieved robust Truck, Parts and Other gross margins of 14.8%, driven by record truck deliveries, aftermarket parts demand and strong operational performance. PACCAR delivered a record 52,300 trucks during the second quarter, 13% higher than the second quarter of last year. This reflects increased build in North America, partially offset by lower build in Europe. The US and Canadian Class 8 industry backlog remains high. Kenworth and Peterbilt’s 2019 production schedules are substantially full with customers ordering trucks for delivery in the first half of next year. In Europe, DAF has achieved an excellent year-to-date market share of 16.7% and the DAF XF was honored as the fleet truck of the year in the UK. PACCAR continues to provide excellent annual operating margins resulting in strong operating cash flow for distribution to shareholders and for reinvestment in future growth. PACCAR declared second quarter dividends of $0.32 per share and first half dividends of $0.64 per share. First half dividends were 21% higher than dividends declared in the same period last year. The company has delivered annual dividends in the range of 45% to 55% of net income for many years and has paid a dividend every year since 1941. PACCAR has increased its quarterly dividend an average of 11% per year during the last 20 years. We repurchased 345,000 shares of stock during the second quarter with a $484 million remaining in the current Board of Directors authorization. PACCAR is investing in future growth with capital expenditures of $675 million to $725 million and R&D expenses of $320 million to $340 million this year. These investments will fund enhanced aerodynamic truck models, integrated powertrains, zero emissions electric and hydrogen fuel cell technologies, advanced driver assistance systems and truck connectivity. We are also enhancing our manufacturing and distribution facilities. At the Kenworth Chillicothe, Ohio truck factory we added a new robotic cab build cell and are constructing a new state-of-the-art paint facility, which will lower operating costs, enhance quality and increase capacity. To meet increased customer demand for the popular PACCAR MX engine, we’re adding machining and assembly equipment in the Columbus, Mississippi engine plant. We recently opened two global software R&D centers, one in Kirkland, Washington and one in the Eindhoven, in The Netherlands. These centers will accelerate the development of embedded vehicle software and PACCAR connected vehicle solutions for our customers. In the third quarter, truck delivery will be higher in North America due to higher build rates and lower in Europe, reflecting the normal three week summer shutdown. Global deliveries will be 5% to 7% higher than the third quarter of last year. We forecast third quarter gross margins for Truck, Parts and Other to remain strong and be in a range of 14.5% to 15%. 2019 will be another outstanding year for the company. Harrie Schippers will now provide an update on truck markets, PACCAR Parts and PACCAR Financial Services.

Thanks, Preston. US economy is in good shape, helped by a strong job markets, growing wages and increased business investment. Freight tonnage has grown a healthy 4.4% year-to-date. We’ve raised our estimate of US and Canadian Class 8 truck industry retail sales to a range of 300,000 to 320,000 vehicles this year. We’re in a period of robust customer demand, demonstrated by the historically high backlog, truck production levels and retail sales. The US and Canada Class 8 backlog was 188,000 trucks at the end of June. Kenworth and Peterbilt’s backlog represented 36% of the industry. We are raising our European above 16 tonne market projection to a range of 300,000 to 320,000 vehicles this year. The European economies are growing at a lower rate than last year. PACCAR delivered record first half net income of $1.25 billion. PACCAR Parts achieved record first half revenues of $2.30 billion [ph] and record pre-tax profits of $418 million. PACCAR has steadily increased its truck and engine market shares over the years, resulting in a greater number of PACCAR trucks and engines in operation. This large and growing Kenworth, Peterbilt and DAF truck part has driven 8% annual PACCAR Parts revenue growth over the last 15 years. This generates consistent higher margin profitability in all phases of the business cycle. We continue to invest in the parts business with new parts distribution centers under construction in Las Vegas, Nevada and Ponta Grossa, Brazil. We expect parts sales to grow 5% to 7% for the full year 2019. PACCAR Financial Services earned second quarter pretax income of $18 million, 11% higher than the second quarter last year. The PACCAR Financial portfolio performed well. This year, PACCAR Financial will open used truck centers in Prague, Czech Republic and Denton, Texas to support solid customer demand for DAF, Peterbilt and Kenworth trucks. One of PACCAR's greatest assets does not appear on the balance sheet. I am referring to the independent financially strong Kenworth, Peterbilt and DAF dealers, who operate more than 2200 sales, service and TRP store locations worldwide. Our dealers reflect the industry leading quality and premium truck brand image of Kenworth, Peterbilt and DAF trucks. We’re proud of our global dealer network. They are the best in the industry. Thank you. We would be pleased to answer your questions.

[Operator Instructions] Our first question comes from Stephen Volkmann with Jefferies. Your line is now open.

Hi. Good morning, everybody.

Good morning.

Harrie, I wonder if I could get you to make a few more comments about some of your kind of end market visibility. And what I'm thinking about is obviously, you said you're sort of taking orders for the first half of 2020, but of course the overall order rate has come down quite a bit. And I'm curious just kind of what you're hearing from customers in seeing in your order trends relative to demand in 2020? Do you think things tick up again as we get into the fall selling season? Or are you hearing kind of caution because freight rates have come down. Just kind of some thoughts about the quality of the 2020 order?

So if you look at the backlog for North America today, we’re in really good shape. And like Preston said, we’re increasing build rates in North America. Europe, the backlog is very normal and our production levels are in line with the orders and the backlog in the market as we see it today.

Okay. So do you have any kind of preliminary thoughts about what 2020 might look like? Obviously, the market is sort of primed for a big decline?

We typically comment on 2020 once we get closer to it, so that's probably something for the next call.

All right. I figure it might be worth a try. Can I sneak one more in on just kind of what you’re seeing relative to pricing in the new truck environment?

Yes. As we look at the pricing realization in trucks, in the second quarter we saw I'm going to say a couple of percent, price realization largely offset by costs. And so that's kind of in balance with each other.

Okay. Great. Thank you very much.

Our next question comes from Andrew Casey with Wells Fargo Securities. Your line is now open.

Thanks a lot. Good morning as well.

Good morning.

I have a question on the shipments. It went up about 1.5% in Q2 from Q1. It's a little different than the outlook on the short term that you gave last quarter of 2% to 4%. Was the entire difference between actual and predicted driven by Europe? And if so, I guess, to piggyback on Steve’s question, can you describe what your European order intake maybe was compared to last year? And then, also, some color around the overall market development.

Yes. So, just look at the - start at the highest level, although, we did see growth in North America this year and that was, as we've said, offset a little bit by what we experienced in Europe. We have really good balance here, right now, between our order intake and our build rates. So we've got that set up really well. And in fact, if you look at the first half market share results, we had 16.7%, which is above last year's record 16.6%. So that's set up very nicely for us right now. And we kind of see that order intake, as I said, matching into what we are doing with build right now.

Okay. Thank you. And then on the – just specifically looking at the truck segment margin and it pretty much seemed to be in line with what you were looking for. But flattish, up maybe 10 basis points year-over-year and then down from Q1, despite higher revenue in both cases. Can you elaborate now that the quarter is done in terms of what some of the headwinds might have been that limited the segment’s ability to realize, maybe, some the better margin leverage on that revenue growth?

Sure. I think if you look at – if you start with – it was 14.8% in the overall gross margin, it feels very strong. So when we look at it from a year-over-year standpoint, truck has been able to hold onto that. I think, the reason it doesn't see significant movement up is because it's already operating at a very high level. So we’re at a very efficient point in the gross margins. And then, I think if you just talked about it a little bit from a sequential standpoint, only difference between Q1 and Q2 has to do with really the customer mix that's happened between quarter one and quarter two.

Okay. Thank you very much.

Our next question comes from Joel Tiss with BMO. Your line is now open.

Hey, guys. How’s it going?

Really good. How's it going for you?

All right. I wondered, just to try to be Steve for a second here. Can you talk about second half production instead of just third quarter? And the production schedules and just sort of give us a little bit of an idea, so maybe we can have a small window into the fourth quarter.

Well, we – if I try to talk about it in terms of second half, we have, again, North America going up in the second half. And then, Europe, we think is stable where we got it right now. So we feel like those are balanced for what we would expect to see through the second half.

Okay. And then beyond the customer mix, it sounded like in North America, but maybe I am reading too much into that. Is there any negative margin? The incremental margins at 10%, you’ve been kind of running 12% or 13%, is there any – because Latin America was so strong, is that a factor in there or not at all?

Latin America is a small percentage of the business still, so it really didn't have that much weeding factor to us. I mean, there is a little bit of benefit to it, but there's not a lot.

Okay. And then just last, the receivable’s up 30%. Is there any color you can add to that? Why is that so high?

Increasing in the build rates has been the primary driver of that.

Okay. So it just seems like it's up a lot more than builds. Okay. Thank you very much.

You’re welcome.

Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi. Good morning and good afternoon, everyone.

Good morning and good afternoon.

I am wondering if you could expand on your comments on the European production adjustment that you took in the quarter that could match income in order rates. When was that production adjustment take place? And as we think about the third quarter, normal seasonality would have production down 5% to 10% sequentially for you in Europe. So are we on at the right production point entering the third quarter where we should see that normal seasonality? Or is production coming down sequentially more than that normal 5% to 10% rate?

So the adjustments we made were just in the second quarter and again they happened throughout the second quarter and they still delivered this excellent market share that we saw. From the third quarter looking forward, we do have a normal summer shutdown, which is a three week summer shutdown, so there is an overall effect on the market. But from a daily build rate standpoint we’re in a good position.

Okay. And in North America, we obviously know that you folks are build-to-order and when market are in flex, we typically see production adjustments from you folks first, so when you folks are raising build rates sequentially 3Q versus 2Q, does that imply that you’ve had a full backlog scrub and you’re comfortable with the level of dealer inventories? Can you just confirm that point and that expected deliveries for 3Q have firm customer specifications through them as opposed to what are some typical dealer specs?

I think you did a really nice job of it. I think we actually do, do backlogs to make sure we have clean orders in there and we do build-to-order. And as we look through that and we see that there is still very strong order backlog. And Harrie said that 36% of the backlog for the industry is ours. And so we want to make sure that we get the trucks to the customers. They need the trucks to run the businesses. And so we’re in a manner of building as quickly as we can for them.

And in terms of the level of dealer inventories, can you just calibrate outside of the industry statistics that we have. You mentioned a backlog were 36% of backlog what about out of inventories?

So if you think of the inventory numbers for the industry they're at 2.8 months and for PACCAR in North America it's 2.3. So we have our inventory in a very good position with our dealers.

Okay. All right. Thank you.

Our next question comes from the line of Ann Duignan with JPMorgan. Your line is now open.

Hi, everybody. I'd like to circle back to Europe, I mean registrations year-to-date are up closer to 10% and your deliveries are basically flat, maybe up slightly year-to-date. Can you talk about the discrepancy, have we seen a pull forward of registrations ahead of the mid-year tachograph requirement? Or is there anything unusual going on in the marketplace versus how you are choosing to deliver?

I think you actually nailed it Ann. I think that remote tachograph is probably the biggest impact on what's put forward the orders in front of June 15th. And so that's what we saw. And we still expect the market in the 300,000 to 320,000 truck range. And we should be able to have really excellent market share and with our build rates from the first half and second half for that.

And just as a follow-up to that again on Europe, given the announcement today and the new leadership in the UK, does that raise or reaccelerate the concerns on Brexit and the impact that that could have on freight and just the whole industry as we get closer to the end of the year? What are you hearing over there in terms of now it sounds like it's a little bit more definitive?

Yes. So one of the nice things for us is we are the market leader in the UK. We have a great job all around Europe and our share is up in Europe and up in the UK also specifically. So as we look at what might happen with Brexit, we have a great advantage in that we do manufacture all our truck models for the UK, in the U.K. So I don't know what the outcomes will be, but PACCAR is really well positioned with our manufacturing based in Europe to take advantage of it either way it goes.

I meant more broadly what impact it might have on just freight and the whole European economy, any comments on that?

Yes, I don't think we know that answer any better than anybody else. I would say that we've been pleasantly surprised with how the UK has performed in the first half of the year. There have been strong customer demand in the first half and that's been great.

Okay. Thank you. I’ll get back in line. I appreciate it.

Thanks, Ann.

Our next question comes from David Leiker with Baird. Your line is now open.

Good morning, everyone.

Good morning.

I wanted to talk about this kind of triangle effect between orders, backlog, inventory if you can throw counsels in there. Now what we’re going through here in North America is while the order rates have fallen, the backlogs have remained elevated. And I'm not sure we’ve ever gotten through a period of falling orders where backlogs remained elevated. I am wondering if that may change a little bit of the economics, the earnings you might see as these lower order rates flow through the numbers?

I think one thing you just need to keep in mind is the bigger picture what happened last year with 458,000 industry orders last year. So that’s a big number and it takes a while for that to normalize through things. But it's not going to have an effect on our financial performance. We've got great financial performance and our dealers are doing really well and our customers love the trucks. And so, those things continue to work well and the results will be solid.

Great. And just I'm going to take on Europe also. Any particular markets or areas over there that you feel more worried than others? I mean, a lot of those - a lot of your customers from those markets are exporting out of Europe and to other parts of the world as well?

I think that Europe has done really well this year for us. I mean, obviously, we have the market range of 300,000 to 320,000 trucks and us gaining share. So this would be the fourth year in a row about 300,000, if it stays like this and that's a fantastic market size. And the DAF team, all the employees, the teams, the dealers are doing a great job of growing the business. I think, the customers love the trucks and the fuel economy is outstanding. It's working really well.

Okay. Great. Thank you.

Our next question comes from Steven Fisher with UBS. Your line is now open.

Thanks. Good afternoon and good morning.

Good afternoon and good morning.

How do the orders that you guys have taken for 2020 compare to the level of what you typically take in at this time of the year for the following year? I assume it's got to be much higher. And if that's so, I guess why are - I guess going back to Steve Volkmann's question, why are customers rushing to place orders if freight fundamentals are softening?

Well, I would say it this way. As I'd say, we probably just get to the first part of your question, we do see order intake for 2020 higher than we typically see it. That’s in large part because in a different market, you might see that there's a lot more activities surrounded about filling 3Q and 4Q of the current year you’re in. But since that's substantially full, there is interest in 2020. And so that's kind of just I think where people’s energies go to.

But with freight fundamentals softening, why wouldn't they just waited out a little bit to see how the rest of the year is going to go?

I think some people do, but freight fundamentals are really mixed, right? We have a great economy in North America. GDP growth is occurring, I think through May ATA truck tonnage was up 4.4%. So there's not like things are going badly. And we spend a lot of time as a team with our employees and our dealers talking to customers. Customers are doing a good job. You see the truck companies’ earnings reports and they are coming out really strong in a lot of cases. So, there’s lot of reason for optimism too.

Got it. And then you said that the costs offset price in the quarter. It sounded like price you said it was a couple of percent which may be down 1% or so from the first quarter. I would have expected cost to be coming down. So I guess why was the pricing growth moderating? And should we be expecting that costs are actually coming down going forward here?

Harrie, you want offer your color?

It's like Preston just said, it's mostly customer mix that pricing was aligned with the cost increases more or less.

And what was that customer mix difference between Q2 and Q1?

So, the customer difference is in the first quarter a lot of dealers lot of stock trucks on their lots and those are small quantity buys and then we get into a more distributed look at customer mix in the second quarter. So, there’s still the stock orders, but then there's just the low to large-sized customer orders come in.

Terrific. Thanks, guys.

You bet.

Our next question comes from Seth Weber with RBC Capital Markets. Your line is now open.

Hey. Good morning, everybody. I just wanted to go back. I think your guidance for the parts revenue growth for this year you moderated the top end, I think you're now saying 5% to 7%, it was previously 5% to 8%. Is there anything you can call out there that is causing the sort of moderation? Thanks.

Yes. Sure, the parts business is really doing fantastic. It continues to perform at a high level. Take the opportunity to say as we look at where investments are going in that business and new distribution centers in Ponta Grossa, Brazil, and Las Vegas and the way the team is moving through their initiatives with things like e-commerce and TRP growth is really fantastic. The only reason for any adjustment is really a currency effect that we pushed into the 5% to 7%.

It's the revenues in Europe in euros that translate into a fewer dollars when we do the translation.

That's helpful. Thank you. And then maybe just a quick follow-up. The FinCo margin actually came down sequentially. Is there anything that you'd call out there? And is that sort of the run rate we should think of going forward? Thank you.

I don't think so. I don't think it's - when we look at the new business generation, it's actually up quarter-over-quarter. So it's more about portfolio that you're talking about. But the team is doing really good. If you look at the earnings per quarter, it went up to $80 million and to the $164 million in the first half and it's just doing fantastic.

Yes.

Okay. Thank you very guys.

Our next question comes from Ross Gilardi with Bank of America. Your line is now open.

Yes. Thanks, guys. I was just wondering what are you seeing in the Mexican truck market and what would you do if some of the trade tensions that started to rematerialize a couple of months ago came back? And do you think your overall footprint in North America given your relative lack of exposure to Mexican production is behind any of the order share strength you’ve seen? In other words are customers perhaps ordering more from PACCAR just because there's greater surety of supply, given some of your competitors being relatively more exposed to Mexican production?

I think the team in Mexico has just done a really good job down there. We have great trucks. Obviously, the newest trucks we've introduced, the latest generation are fantastic were well received by the customers. And so, their share was exceptionally good. And if you look at the recent emissions changes happened in the middle of the year. So there is a strong buy ahead of that. But even since then, order intake has been positive and doing quite well. I don't think it's really affected by where people think we're going to build the trucks. And we, obviously, can build trucks in Mexico for Mexico. We can make our domestic U.S. and Canadian production in local markets. So I think we just have a great manufacturing footprint that works well and I don't think there is anything about trade tensions affecting that, I think, it's more about great trucks and people.

I guess, that's the point. Most of what you produce in Mexico is for the Mexican market, correct? And if you did see tariffs all of a sudden, actually come back and put into place, do you feel like you have sufficient capacity in the US market to just relocate some of that production in a very short-term basis?

Yes. We do have that capability.

Okay. And then, I think, you made a comment about adding engine capacity in Mississippi, if I heard it right. And I'm wondering if you could talk a little bit more about that. Are you seeing share shift more towards the MX engine with the trucks that you're selling?

The MX engine, MX-11 and 13 engines are doing really well. They are providing, I think, just outstanding fuel economy in the market space. People had time to get used to them obviously now. And we’re seeing strong demand from our customers for those engines, for their lightweight and high performance. So we've increased our capacity in Columbus and just recently finished that capacity increase at the end of the second quarter and going to be able to build some more engines for our customers in the second half.

Can you say it roughly how much you've increased capacity in Columbus?

It’s been meaningful, but it's 10% to 20% kind of numbers.

Got it. Okay. Thank you. And just lastly on Brazil, maybe you could comment there. I mean, you've had obviously pretty explosive growth over the last couple of years. Remind us where you are on markets share? And I think from the beginning, the target was to get to 10% in 5 to 6 years. As you continue to get closer to that number, do you start to grow more in line with the Brazilian market in the next couple of years?

Well, the trucks, the DAF trucks in Brazil are working very, very well for our customers. I was down there just a couple of months ago and the dealers and customers are really excited with the performance they get, reliability, durability and fuel economy that they're providing in Brazil. So that's enabling our continued growth. From a year-over-year standpoint, market share is up just a bit and it will continue to grow, continue to make investments in Brazil. Parts business is doing really well down there. In the middle of building a new distribution center in Ponta Grossa, 160,000 square-foot distribution center in Ponta Grossa, which will support the business growth. And the market overall is improving in Brazil. So really feeling good about the efforts our team has made down there. The results they're bringing, the success with the dealers now and just how the business is going to continue forward.

Thank you.

You bet.

Our next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.

Hello. I guess, just a question, specifically, what is your visibility in 2020 this quarter, relative to last quarter? I am just trying to understand if it's increased to what degree? And then my second quarter - second question is, assuming industry forecasts are correct next year, I'm just - if you can walk us through over there, is there anything we should consider with regards to decrementals relative to previous cycles in the sense that one I would assume the parts business, obviously, helps your margins, you have the content on the MX engine at the same time one could argue you are more vertically integrated and R&D costs should be structurally higher. So if there's anything you could help us out with? And then one is the – are the shift decrementals be meaningfully different in Europe versus the U.S? Thanks.

Sure. There is a lot of questions in there, I'm not sure I can get it right for you. From a 2020 order intake, I think that we’re seeing as I said earlier, the higher percentage than we do typically. We have great visibility that means, comparatively to normal [Technical Difficulty] but it feels positive compared to previous years. From effective what 2020 overall market is going to be, I think as Harrie said, and we all say is it’s a little bit early we're talking about what the full market size is going to be in 2020. And from an effect on decremental margin or margins or incremental margins, they may end up being, I'd say, that we see that we keep our operating costs really low, and I think that means those relatively minor shifts in the decremental or incremental margins and continue to provide good value to our – to the margin the overall margin stateside.

Okay. But no meaningful difference relative to previous downturns? I mean, is there any structural reason why decrementals would be better? Or just, I mean, if you're right on the top line in incrementals that's a different question, but are decrementals should…

No. I don't think so.

Okay. Thank you.

You bet.

Our next question comes from Courtney Yakavonis with Morgan Stanley. Your line is now open.

Hi. Thanks. Thanks for the question. Just going back to Andy's question on your production this quarter. I think you had originally forecasted that all the increase would be from North America and kind of it looks like it was pretty evenly split between North America and other. So why is your North America production in line with your expectations? I know we discussed your kind of at once, but just wanted to confirm that.

Yes. Our North American production was in line with expectation. I think the only place where there was any slight change was in Europe where we just made sure we got our build rates adjusted to the market. So that's the overall effect.

Okay. Got you. And then just on the CapEx waves [ph], just want to make sure, is this similar to last quarter where it's a lot of projects getting done faster or moving more quickly than expected? Or are there any new projects that we should be thinking about?

Sure. It's really fun, I mean, we're making these great investments in the future for the company, and so that's why you're seeing the CapEx changes. But we have just some fantastic opportunities that are really in terms of our capacity and quality in our factories, our distribution centers for parts and used trucks. And then maybe most importantly for the long-term benefit is the investments in new products that we are creating. And so there is a lot of programs going on and they're successfully moving along. And we think it's really building a bright future for us.

Okay. Got you. And then just finally in South America I think you slightly reduced your industry guidance there. I just wanted to confirm that and maybe how it compares. I think last quarter you had guided to Brazil up 55,000 to 75,000, just wanted to understand the dynamics at play there?

I don't think the guidance for Brazil is the same as what we did last time. I think for total South America, the range might have dropped 5,000. So from a – I think we’re now…

100 to 110 for South America in total.

Yes, but it's outside Brazil.

Brazil is still guiding at 70,000 as a midpoint, 65,000 to 75,000, South America 100,000 to 110,000.

Perfect, great. Thank you.

You bet.

Our next question comes from Jeff Kauffman from Loop Capital Markets. Your line is now open.

Thank you, very much. Good morning, everyone.

Hey, good morning.

Thank you. A lot of my questions have been answered at this point. Just a couple of nits. You mentioned that you are seeing orders for 2020 at this point, yet we do know there are some aspects of the trucking markets seeing pain particularly on the pricing side to your point not so much the volumes. Have you seen any change on the specs that customers are asking for 2020 versus 2019?

No. It's a nice question. I think really the customers are always looking for the most fuel efficient, lowest operating costs trucks that they can find. And that’s the beauty of being PACCAR as we provide that to our customers. We have this passionate team of people who do a great job of making sure the trucks we develop and sell are really at the best and most efficient vehicles for our customers. And so, I think that's what they're always looking at. We're always going to the customers about to make sure the specs stay and lined up that way, but there hasn't been any fundamental shift.

Okay. And then just one last nit. I noticed that tax rate was up a little bit sequentially from the first quarter. That could be just randomness, but I am wondering, might that have to do with maybe more profitability being driven out of North America? What should I be thinking in terms of tax rate for the full year?

Yes. I think you hit it on the head there. It's an income mix of North America tax rates. So, including states, a little bit higher than Europe, and so that affected in the quarter.

Okay. All right. That’s all I have. All the questions have been asked already. Congratulations and thank you.

Great. Thanks a lot.

Our next question comes from Joe O'Dea with Vertical Research. Your line is now open.

Hi. With the North America build rate going up in 3Q, I think historically it's not uncommon to then see it come down in 4Q, but that's usually with Europe going up. And so I'm just curious with some of what's going on in Europe right now? Should we expect that you got your current plans at this point that that increase in the build rate in North America for 3Q is something that you would maintain in 4Q?

Yes. We have a strong backlog as we said. It's substantially full for the second half and so we don't see any reason not to think the build rates stays roughly where it is for the fourth quarter in the US and Canada.

But you're right that the fourth quarter in US and Canada will have more holidays than the third quarter and Europe is just the opposite, so daily build rates doesn't change overall.

Yes. Just a question on the daily build rates, so yes. And then, your comments around months of inventory, industry at 2.8, you're at 2.3. I think historically, the industry average is in the low two. So I'm just curious historically, where you average as we think about sort of through cycle targets?

This is within our normal band and it is kind's of a healthy space to be.

Perfect. And then just one of the 2020 orders you're taking, how is that pricing compared to 2019?

It just depends on the customer, but the pricing is fairly consistent right now.

Got it. Thanks very much.

You bet.

Our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open.

Hi, good morning. Is inventory at your used truck centers starting to rise at all? And any thoughts on the used trucks market in North America and Europe both from a demand and pricing standpoint?

Yes. I think if you look at the used trucks maybe the pricing has moderated a bit from where it was in Q1, but one of the nice things about being part of PACCAR is our trucks have commanded 10% to 15% premium in the market. And as we've watched our market share grow over the past several years we've invested in creating a great used truck capability, selling capability. So that's why we got this new facility, used truck facility we're building a Denton, Texas. A few years ago we did one in Los Angeles. In Europe we're creating one in Prague, in the Czech Republic as well. And then adding on capacity, we have a fantastic dealer network that does a good job of managing used trucks and distributing used trucks to customers. So between our premium position and our capability we feel like we’re in a good space.

Okay. And as a follow-up to that if used truck prices were continue to moderate, what's the time lag as far as when that starts impacting the FinCo profitability? I think it usually runs through that interest and other lines? Is there a couple of quarter's lag or any thoughts there?

Yes. I don't think we kind of calibrated into which quarter it would have an impact on and obviously it would depend on the matter of fact and depends a lot on the percent of retail versus wholesale. And our team that's a really good job of selling a lot of used trucks in the retail position. So there is too many mix effect in there that really characterize it.

Okay. And then just one final one on the medium duty market here in North America, any notable changes to the outlook? What you're seeing from customer’s market share et cetera? Thank you.

Yes, sure. Thanks for the questions. The market size seems consistent to what we said previously and 100,000 units plus or minus and then the business is doing really well. I think that our trucks are performing well in the space and our market share will be roughly in the same range.

Great. Thanks so much.

You bet.

[Operator Instructions] Our next question comes from Robert Wertheimer with Melius. Your line is now open.

Thank you and good morning everybody.

Good morning.

My question is pretty simple. I wonder if you could just remind us of the mechanics on orders for next year. Is the order book open for all models and configurations? And then is pricing established or if goes for just - taking a bet on it and is that the same as every year this year?

So I would say that the order book is open for all trucks and all models. We love taking orders for trucks, we enjoy it a lot. When I think about it in terms of the pricing being established, in the deals that we're discussing right now those ended up being with the customers and they end up being focused around what we have done previously and what their spec is and what we're doing. So those end up being worked through almost individually.

Okay, perfect. That’s it. Thanks.

You bet.

Our next question comes from Scott Group with Wolfe Research. Your line is now open.

Hey. Good morning, guys. It's Rob on for Scott.

Good morning, Rob.

A quick clarification question with regard to the build rate, am I hearing it right that you guys are basically planning on maintaining the third quarter level of production in the fourth quarter? Or is that some increase you're implying there in the back half guidance?

I think that the firm’s piece is the third quarter is going up and we watch where the fourth quarter - as we substantially are full, we'll watch what the fourth quarter does, but I don't expect to see any significant shifts.

That's helpful. And your preliminary comments about the order book and the strength looking out to next year, were you guys intimating that we could see revenue actually be up next year?

I don't think we intimated next year.

Okay. And then just a couple of quick questions with regard to the used truck market. You said you saw it soften up a little bit. Could you describe if you’re seeing that in one specific channel, i.e., kind of small fleets or kind of the owner operator end of the marketplace? And what sort of increase on year-over-year base are you seeing from a price realization currently would be helpful as well?

Yes. As we think about it in terms of the PACCAR products Kenworth, Peterbilt, North America, DAF, and Europe are just - they command the premium, so it's a relative position I think competition doing real well. And then I think - as I said earlier, I think a lot of effect has to do with how many trucks are coming back in and what percent you retail those trucks out and we've been able to grow our retail percentage, especially North America, which has brought us good results. As far as the overall trends of the market, I think those majorities are difficult to plan forward to. But we'll watch them. We have a great team that's managing that business really well.

That's helpful. Final one which I guess kind of relates to the FinCo. As we a saw slight uptick in the provision for losses on receivables, obviously, still at a low level and that was a sequential uptick, so nicely improved on a year-over-year basis. What's driving that? Is that just some of the small carriers that you're seeing a little bit of softening in terms of their receivables or is this…

Most of that is due to the larger portfolio. But past dues remain really low, credit losses remained low, the portfolio has managed really well. So, we've got a lot of good customers that make money with their trucks and pay their bills on time.

Really helpful. Appreciate the time guys.

Yes, you bet. Have a good day.

Our next question comes from David Raso with Evercore. Your line is now open.

Thank you. Quick question. North America, I know you’ve sliced at U.S., Canada how you get deliveries, but in your commentary about your backlog, can you just help us a bit with your US, Canada, or you want to define it as North America, your backlog year-over-year as we sit today, just some sense of the year-over-year in that position?

Well, it’s up substantially year-over-year from a normal cycle. Obviously, that's moderated from what had happened in 2018's 358,000 truck order intake or 458,000 truck order intake. So, its - if you look at it on a pure sequential year-over-year, it's probably down, but it's down from a level that was not sustainable so high. And so compared to normal levels, it's still very high and very strong, 73,000 trucks in the backlog and doing really well.

I mean, clearly the industry is down. I mean the data we most all use, it's down about 17% year-over-year. I am just trying to get a feel is your backlog down less than the industry?

Well, I think the best way to think about that David is to think about that in a percentage of backlog that Harrie talked about earlier, the 36% of the industry backlog which is if you call us a 30% market share and 36% industry backlog, means we have a very healthy backlog relative to our market share.

Yes. I was just trying to figure out how much of that goes into 2020, how much is helping the fourth quarter? If the fourth quarter builds just have a normal seasonal less build days, but the daily rate stays the same, I would argue that's probably a little better than people were thinking. I am just trying to get a feel while that helps the fourth quarter, what does it mean about 2020? But you're still speaking pretty constructively about your orders into 2020. So, just trying to put a mosaic here together. But again, your backlog is doing better than the industry given the share gain obviously implied in that backlog versus the industry totals?

Yes. I think you're characterizing it really well David.

Okay.

I think that's exactly right this that improve pretty well to that and we'll watch what 2020 does as it get closer to us.

Very helpful. Thank you, guys.

You bet.

There are no other questions in queue at this time. Are there any additional remarks from the company?

Yes. We’d like to thank everyone for joining the call and thank you operator.

Thanks everyone. Have a great day.

Ladies and gentlemen that concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.