Q3 2019 Earnings Call
Good morning, and welcome to Packers third quarter 2019 earnings Conference call.
All lines will be in 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.
I would now like to introduce Mr., Ken Hastings, Paccars 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 Paccars director of Investor Relations and joining me. This morning morning, or Preston fight Chief Executive Officer, Harry Skippers, President and Chief Financial Officer, and Michael Barclay.
And controller.
As with prior conference calls, we ask that any members of the media on the line participate and they listen only mode.
Certain information presented today will be forward looking at involve risks and uncertainties, including general economic and competitive conditions that may affect expected results for additional information. Please see our FCC filings and the Investor Relations page of Packer Dot com.
I would now like to introduce Preston fight.
Good morning, Harry Skippers, and I'll provide you an update on top of course excellent third quarter results and business highlights.
To begin I'm proud of our employees around the world to provide our customers the highest quality trucks, our trains and transportation solutions.
In the third quarter Paccar achieved sales in financial services revenues of $6.4 billion and net income of $608 million, resulting in a strong 9.5% after tax return on revenues.
Our net income increased 11% compared to the third quarter of last year.
Paccar achieved robust truck parts and other gross margins of 14.9% in the third quarter and also for the year to date.
Through the first nine months for the year, our team achieved record revenue and earnings.
I heard delivered 49300 trucks during the third quarter compared to 52200 into second quarter.
This reflects fewer billing days in Europe due to das regular summer shutdown, which was partially offset by higher deliveries in North America.
In the fourth quarter deliveries will be lower by 6% to 8% compared to the third quarter due to fewer production days in North America.
Lower daily build rates in North America in Europe .
Fourth quarter truck parts and other gross margins are estimated to be in the range of 14 to 14 and a 5%.
Packer declared third quarter dividends of 32 cents per share and year to date dividends of 96 cents per share.
Year to date dividends were 19% higher dividends declared in the same period last year.
We repurchased 833000 shares of stock during the third quarter.
Theres $431 million remaining in the current 500 million board of directors authorization.
Packer continues to create a full lineup of innovative truck models and technologies.
Kenworth Peterbilt and DAF have introduced a range of electric powertrain vehicles in the last two years that customers are field testing in a variety of applications.
Packers well positioned to supply the industry with a complete set of powertrain technologies, including battery electric fuel cell and diesel engines.
This year Packers open to global software research and development centers in the U.S. and Europe .
What are accelerating the development of embedded vehicle software and pack our connected vehicle solutions for our customers.
The Packer innovation center in the Silicon Valley, which we opened in 2017 complements Packers extensive R&D efforts and is focused on the development of anchor level too and for autonomous trucks.
I will showcase many of our innovative products and technologies at the North American commercial vehicle show in Atlanta next week.
And at the CES technology show in Las Vegas in January .
We hope to see there.
We're pleased to share that kenworth peterbilt and Paccar parts were each recognize as top employers for women at the women and trucking annual conference.
Honored for excellent work environment and company culture that supports gender diversity.
Harry Skippers will now provide an update on Paccars truck segment Paccar parts financial services and investment priorities for next year.
Thanks Preston.
Our 2019 forecast is for Europe's greater than 16 centric market.
To be in a range of sooner than 10 disputed and 20000 units.
Affecting continued modest economic growth and.
Strong trophy month.
Next year, the eurozone and UK economies are expected to go down 1%.
We expect 2020 to be another good year.
The European above 16, Tom truck market in a range of 260 to tune up to 90000 vehicles.
Do you guys economy is growing 2.3% this year.
It's 50 year, low unemployment and strong consumer spending.
Freight tonnage as growing 4.2% year to date.
In the U.S. in Canada.
Eight industry retail sales continue to grow in 2019.
Following the strong orders in production over the last two years.
We estimate 2019, you as the Canadian closet industry retail sales.
To be in the range of sealant and tend to see on 20000 trucks.
We expect 2020 to be another good economy.
An estimate the U.S. and Canadian class eight truck markets.
In the range of doing a 32 and a 60000 trucks in line with normal replacement demand.
South American of F. Sixteens on truck market should be in a range of 95 to one of them at 5000 trucks. This year.
Slightly higher in 2020.
In Brazil.
Sixtym truck segment is projected to be in a range of 65 to 75000 vehicles. This year.
Hi next year.
Hi, good parts business generated strong quarterly revenues of $1 billion.
What we pretax income was 207 million.
10% higher than a third quarter last year.
Consistent investments parts distribution capacity.
Customer focused programs, such as fleet services and to your piece stores and a growing number of pickup trucks and engines and operations.
Drove these results.
Since 2013 Duff.
Kenworth and Peterbilt view those open nearly 200 CFP retail stores.
On six continents.
The stores provide high quality TFT branded.
Aftermarket products and services too onerous old mix of trucks trailers doses and engines.
There are parts is constructing two new distribution centers that will open next year.
A 250000 square foot facility, Las Vegas, which will make efficient use of solar power.
And a wonderful to 60000 square foot facility in photographs of Brazil.
We expect parts sales to grow by 4% to 6% next year.
Hi, Good financial services during third quarter pretax income of $67 million.
The portfolio was a record $15.6 billion this quarter and performed well with low past dues.
In the third quarter industry used truck inventory increased you strip pricing declined.
Kenworth and Peterbilt truck resale values come on the 10% to 15% premium into market.
We estimate 2019 capital spending to be in the danger of $675 million to $725 million and R&D expenses to be sooner than 25 to see another 35 million.
In 2020.
Planning for capital investments of $625 million to $675 million.
And R&D expenses, sealant, and 22 350 million.
These investments will continue to enhance bankers truck.
Our trainings and transportation solutions.
Thank you we'd be pleased to answer your questions.
At this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for a moment compiled acuity roster.
Our first question comes from Joel Tiss with BMO. Your line is now open.
Well I'm not used to be in first.
Has gone Brasil.
First time for everything I guess.
So I just wondered if you could give us any sense of up production.
Levels for 2020.
You know after mentioning kind of we got a sense, where the industry is going to be and and then mentioning that inventories for the industry are up a little bit.
And I just wondered if you could give us any sense of where your production where are you thinking for 2020 sure you know as we've watched the industry normalize look at inventory really think that right now it's not in bad shape at all for US. We just had 2.4 months of of inventory retail sales sitting out there. So it's a nice level in good shape.
We've already adjusted our backlog.
To be we have 36% of the backlog in the industry. So that's in good shape and then as we look forward and think about build rates, we took adjustments into the.
Ended the third quarter, there for both North American Europe to get that right for the markets. So that we feel like we've got to a reasonable build going into 2020.
Okay and can you give us any sense about the the parts margins if I could see and we can all see in 2019.
The margins are up a little bit profits growing faster than revenues you gave us a revenue number for next year is there enough momentum in the business and the new parts distribution centers to be able to do that again in 2020, you think.
The guidance, we gave on the 4% to 6% growth than I think margins would likely be comparable to what we saw this year ended 27% to 28% range. That's what we typically see for parts.
That's great. Thank you very much guys.
Thank you Joel.
Our next question comes from Stephen Volkmann with Jefferies. Your line is now open.
Hi, good morning, I'm I'm not used to Jobing first either.
Good morning.
But maybe all pile on to his question a little bit. So I'm precedent just thank you for the comments around sort of production expectations. It is it your expectation at this point that.
The production declines that you've kind of baked in for the here in the second half of 19 will be enough and that you'll be able to sort of keep stable through 2020 is that the way. The plan is laid out.
We'll watch what happens in 2020, I don't think it's going to be an even a year.
Year every month will be different I mean, you every quarter will be different so we'll make sure that we adjust build rate appropriately to the orders we have.
Right now we have reasonable backlog in the first quarter, especially North America.
So we feel like we've got ourselves about right and we'll watch as the year comes along what we need to do others go up or down and build rate.
Okay understood and can we talk maybe this is a Harry question, just a little bit about the decremental margins since I guess it will be decremental next year.
You know you've done a good job holding your incrementals kind of in the mid teens with an occasional high teens I'm kind of number and I'm. Just curious as you have sort of more vertically integrated a little bit with your engine growth in the U.S. and.
All these parts distribution centers et cetera, do you think your decremental margin will also be in that kind of mid teens level or is there a reason to think it could be higher because of the additional investment.
I think we've historically, we've seen incremental and decremental margins into 15% to 20% range.
And I would expect it to be similar for next year.
Alright Super Thank you so much I'll pass it on.
Right I have a good day.
Our next question comes from Andy Casey with Wells Fargo Securities. Your line is now open.
Hi, Thanks, Hello, everybody.
Andy.
Couple of questions first on the financial services Miss this is kind of picking at it but.
Ask DNA and provision for losses on receivables were were up a little bit sequentially and year over year, what was driving that change and was it due to any specific region.
What we saw in financial services, we've had really low credit losses, we've had low past dues portfolio continues to perform really well in fact.
We're pretty pleased that portfolio the.
We only had when we've had in.
Financial services was used trucks.
Okay. Thanks Preston.
And then.
I just want to make sure I have this right and if I compare the truck segment performance to Q3 18.
We had a pretty beneficial gross spread between the 12% revenue increase and the 3% volume growth.
And I recall Q3 last year.
Had some timing issues related to buyback contracts and stuff like that.
Was that.
The difference in the revenue growth and the volume growth really driven by comps and pricing or was there something else that occurred in the quarter.
Yeah. If you just think about what this quarter was about we did have.
Reasonable pricing influence.
And that more than offset costs. So I think those are the things that drove our stronger margin performance for the quarter.
Don't know type gun going back it doesn't kind of a bridge due to the Threeq you have 18 numbers and what was going back in there.
We did have fewer operating lease deferrals in Q3 of 19 versus Q3 of 18, and therefore that that helped revenue a bit.
Okay. Thank you and then.
On the they used.
Truck market and they in North American you mentioned.
Inventories are growing I think.
Have you started to see the the price trends kind of gradually decline are we starting to see more double digit.
So you think about used trucks, one of the things that.
Has been nice for pack or is we've made investments over the past few years to grow our used truck capability.
As a new used trucks that are Los Angeles.
We're in the middle of creating one it didn't Texas will open in the fourth quarter.
Obviously paccars used trucks provided premium value in the marketplace. So thats, a nice thing for our customers and really have a 10% to 15% premium over our competitors and actually sometimes more than that covered some of the competitors.
But we have seen that used truck market in general go into that double digit level of declines that 10% to 15% decline.
And that's already been kind of dealt with through this quarter.
Okay. Thank you very much.
Our next question comes from and Diagon with Jpmorgan.
Your line is now open.
Yes, good morning, yes, our data that we analyze and publish shows that the why do you do garner at premium in these markets that you are used prices are down year over year, just like everybody else. So thank you for confirming that my questions around the month of inventory I do your dealers being you know.
2.4 months, but that's based on a trailing 12 month.
Trailing sales for Cheddar are at a peak so isn't is inevitable that as we go into next year those month supply at the dealers are going to expand and you're going to have to cut production. So could you just talk about that and why you wouldn't have treated under produce me 10 sales going into next year. Despite the fact.
But you've got higher backlog.
Well I think maybe that's a little bit less and less than I would think about it and I think we feel like the inventory while you admitted what you acknowledges the trailing run rate.
We still do talk to our dealers all the time and our customers all the time and we see that there will be good demand for the products as we look forward.
So I would say that.
The.
Last quarter's order intake has been lower but as we get into the fourth quarter and we're meeting with customers and talking about what next year's buying patterns and expect people buying trucks and I think that indeed, the vocational markets seems to continue to be very solid throughout the country throughout Canada. So I would expect that our inventories okay.
As far as adjustments go to production like we said earlier I think we make those adjustments up and down as the market demands.
Yeah. That's that's for sure and then you know just based on your guys' history I know at the truck side goes over the long term and a lot of them have been man made but and if we're going into a decline in 2020 for whatever reason and you don't have we ever seen FICA limits on the one year D.
Fine or.
Should we be bracing for a couple of years and then back to normal again, just your perspective on that front from years of experience will be beneficial. Thanks.
Yeah. That's it that's a that's a tough thing to forecast out what kind of a decline read there would be and if it might last longer than a year I think we probably look at this and say there is still strong economic fundamentals in the U.S. in Canada right now.
He is positive ton miles or high I think we think this normalizing of the market estimate of 230 to 60 is just kind of feels like where things are happening too as far as of being beyond next year.
Idea if it's just a pause in the economy, we accelerate or if it will slow down for more than a year.
Okay, well I leave it there I appreciate your color and insight. Thanks.
Thank you and our next question comes from David Leiker with Baird. Your line is now open.
Good morning. This is Erin Wilson back on for David.
My question for you is just how from does the backlog look from an industry perspective, and when would you expect order activity to pick up this year if at all.
Sure well I think that.
We've already done a good job of looking into our backlog and working with our customers is to make sure that we had real backlog.
And that if there were cancellations, we took them if there were different scheduling needs. We've addressed them I cant speaks to the total industry. They feel like we feel like our backlogs in reasonable shape right now.
Okay and then my second question just maybe you can provide some additional color on your thoughts for Europe and any regional variances you would expect there next year given your outlook.
For double digit declines in sales.
One of the things we've seen in Europe has been the UK has has done quite nicely for us this year. So.
In spite of all the news around it and maybe that will continue we also are leading brand of tractors throughout Europe .
As we watch Europe really expand east continue to expand east in development.
Our dog premium products do agree job throughout all of Europe .
Market leadership in countries like Poland that were strong in Hungary, and Romania, and those kinds of country. So as the.
As a total market Europe matures doff does very well.
It was as to grow share there.
Great. Thanks for taking my question.
Our next question comes from Jerry <unk> with Goldman Sachs. Your line is now open.
Good morning, everyone. This is Ben brewed on for Jerry.
Morning, Good morning, just wanted to spend a few more minutes on Europe . So.
The second quarter of production adjustments in a row, it seems and it seems to be the main driver of.
Deliveries on the increasing 3% year over year in the quarter I believe your guidance three months ago was 5% to 7%. So can you just spend a little more time on what drove the softness there if thats continuing and and if you guys like to flex production over there you know on on a quarterly based.
This or if the second production adjustment.
What was more of a surprise any any color there will be helpful. Thank you.
Sure I think I think your comments are reasonably accurate as we did take the adjustments to Europe to were a point, where it matched the market demand.
And we've seen that weve held onto our market share gains with their build rates. So we're sitting at like 16.4%, which is near historic highs for us a dog in market share. So we think we havent balanced about right now and.
Europe was probably a little sooner coming down and maybe we thought it might be and that's where we made the necessary adjustments and it feels like we're sitting in the rate levels.
Got it and then can you give us an update on how you're thinking about dealer location growth next year.
For for the TRP locations are you still thinking of adding 50, new locations per per year, and any expected increase in kenworth and peterbilt dealers in 2020.
Yeah, we have I mean, I'll start by just saying we have the best dealer network in the industry and I mean spent a lot of time with them.
There are fantastic business partners, we see significant investments from them in North America and in Europe . So it's one way to think about this is that they're constantly renewing their facilities and adding service bays and shop capability to make sure customers Maximizer uptime.
And so we'll watch next year that they'll continue to make those investments into new facilities with lots of great plans around adding locations.
And we'll see some location growth in North America, what I'd expect more in Europe is it'll be continuing development of replacement locations and improved service they capability or more service capability.
And to your point of tier excuse me TRP stores, we will be adding TRP stores in 2020 as well.
Much along the lines as we haven't this year.
Got it thank you.
Sure.
Our next question comes from Timothy Chan with Citigroup. Your line is now open.
Thank you good morning for first question just.
Just on a from a mix standpoint, just revenue per truck that call it 10% or almost 10% year over year growth was that just all the contribution from North America being a bigger part of their deliveries or is there kind of at our underlying content grocer mix story Thats also can.
Repeating.
No you again, you got it about right, it's mostly contribution from North America.
Okay.
<unk> yeah.
Right right Okay.
And then just back on the financial services in the pre tax profits.
In terms of the increase I know that we have limited.
Disclosure here in the release, but at the increase in that interest and other line how much of that is a change in terms of higher depreciation that.
We will potentially be sustained going forward versus maybe a impairments or losses on use that presumably more onetime in nature and it disappeared and the question is just should we assume a kind of a similar run rate in terms of a from a profitability perspective, as a third quarter or.
Where there are some kind of one timers within that within that line. Thank you.
So as far as the continuing to profitability, we think those the strong profits we had in the third quarter will continue going forward and for the detailed your question let Michael.
With that one yeah. We did have some impairments that were taken and we also adjusted our depreciation to reflect the expected future impairments and so that run rate will continue going forward and his Preston indicated will be reflected at a similar pace in coming quarters.
Yes.
Thank you.
Our next question comes from Ross Gilardi with Bank of America. Your line is now open.
Yes. Good morning, good afternoon, guys and good morning, good afternoon.
Im just trying to understand gross margins in a in a more draconian scenario than than what you're forecasting for next year. I mean, I think if you go back and gross margins ex R&D in more of a.
Garden variety downturn had been around 12% to 13%, but you've got to go back like seven or eight years to see it I'm. Just wondering how do you think gross margins look in the next downturn whenever it comes in relation to that 12% to 13% given the way the company has evolved over the last decade, particularly with the growth in the parts business.
I think one of the great strengths of pack or is it we are always looking at operational efficiency gains not just in one year, but over the course of time.
We're always thinking about cost control.
So as we head into markets like the normalized market. We're facing we've already been aggressively thinking about cost control and I think thats will enable us to deliver the solid gross margins, we had this quarter and.
Even the quarterly gross margins, we predict for next quarter in 14% to 14.5%. So I think that we're always managing the business efficiently for the benefit or customers and we think that.
You know, 14% to 14.5% that we deliver next quarter will be pretty solid.
Now I mean, I realize that I wasn't asking about next quarter. It I'm not asking for to forecast when the next trough is I'm just saying when eventually it does come Hot what do you think you're.
Your gross margins would look like and with in comparison to what prior downturns look like I mean, I imagine you're seeing very difficult to stay in the 14, a 14.5% range if class eight build.
Goes to sub 200000 number.
Well, that's it that's kind of hypothetical to us I think what it might go down to and how we might react in those circumstances, but you can imagine that we will always be focused on cost control and we have a long long history of all different markets back through that.
The.
Recession of 2009, and we still continue its profitability will continue to do good job in those even if those circumstances where to return, which we don't predict.
Okay.
How quickly can you reduce SGN a is class eight production.
Normalizes and what would be the source the savings and just how should we think about SGN a into next year as we revert back to replacement level demand I mean, if we model. It at 2.3% of sales are so for this year does it stay at that ratio in 2020 as production normalizes or do we see it that the ratio move higher.
Yes, I think it.
What we're always looking for in those in SGN, a and in our spending is to make sure that we're developing the right products and services for our customers.
Looking into the future and so.
As we shared we think and then the the level of spending for us on R&D and capital.
Our capital come down a little bit R&D is roughly flat and I think in Sq Nay, we will apply rigorous disciplines to make sure the costs are appropriately control.
And is that just from from flexing the workforce or what are the other is that the main source of savings if you.
And when you when you get to that point.
Workforces won contracts is another.
Sensing agreements work, we do those kinds of things all get looked at we really don't think of things in terms of a lot of fixed pricing we go through our overhead.
But it didn't close as every year as a zero based budgeting closes and we review all necessary spending in detail.
Make sure that we're keeping our organization as lean as possible.
Got it thanks, sorry, and then can you just remind us as a percentage of your European deliveries that come from the UK I seem to remember it's around 20% is that in the right ballpark.
And can you remind us what portion of lakelands capacity sell to the UK market versus the European Union I mean on that note could you shift production out of the UK to die off in the Netherlands to to serve Europe . If we if we did go through a hard Brexit.
So as I think we think about the UK one of the beautiful thing for us as we have great production capacity in the UK. We also have it in and hoping in so we.
We were able to flex depending on what Brexit might or might not be appropriately for the market. So we can build the trucks, we need in the UK in the UK.
And we can build all the trucks CF excess we need for the continent, we can build on the continent as well. So it gives us good flexibility and I hear you were looking up the numbers indicate typically is between 15 and 20% or.
European European production.
Okay. So most of the existing.
Production at least for year like this year would just beat would be for the UK market.
How did the UK factory.
Yes.
We can we can use it for both and we have enough there to support the UK, we have enough capacity in Europe to support Europe and being the only truck manufacturer that has a factory in the UK that could give as a very nice advantage.
Got it thanks guys.
Our next question comes from Jamie Cook from Quest Credit Suisse.
Your line is now open.
Hi, Good afternoon, I guess one question on has your thinking about the commentary that you made about decrementals of 15% to 20% or so are there any variances. There are differences as we think about where that the weakness is coming from our the Decrementals. You know just similar Andy you western Europe or or not so much.
Anymore, we're seeing more vertically integrated in the U.S. now and then I guess my second.
You know question regarding <unk>, which relates to sort of price costs, obviously pricing has been pretty strong for you guys. This year in a downturn that you guys are forecasting you do you think you could hold sort of pricing that material cost could potentially be a tailwind for you. Thank you.
Yeah, I think it'll be thank you second pretty question is quite possibly true.
Continuing to manage price.
Most of our ability in the market and we're always aggressively looking or cost structure and as you mentioned that could be a bit of a tailwind for us in terms of what happens next year as in 2019 suppliers are running at full capacity some inefficiencies and their shifts so maybe there's some some upside in that.
And just the first part differentiates versus Europe in terms of impact on margins, yes, they're very similar very similar.
Okay. Thank you.
You bet.
Our next question comes from cardiac Avantas with Morgan Stanley . Your line is now open.
Hi, Thanks for the question I just wanted to go back to the clarification on the comments on your build rate being appropriate for the orders to have right now in the backlog for the first quarter. So is your assumption than that but at the beginning of 2020 that we should return to that kind of replacement rate of two.
2000 orders a month or.
Is your current build rate kind of assuming that we remain at this sub 15000 orders and the backlog can can fill in the rest and then also just wanted to make sure. The comment was that the September filtrate is the right assumption, we should have going forward.
Well, we've made adjustments in the first parts of October for a build rates coming at that so we think we've got that set up right. When I think about our backlog and and build rates for next year.
We still have quite healthy backlog and so there could be a little bit more time before the normalization to that to the quarter intake of 20000 per month as you put the number out there but.
Orders are definitely starting to pick up it's a very normal part of the cycle to have lead some or be quiet and then as people are putting their capital budgets into place than to see the fourth quarter be at time of ordering and we're seeing that right now.
So whether it's got to that level this month or it'll take a month or two to normalize out should normalize out.
Got you, but it sounds like before the beginning of the Harry you do expect that return on and then just on Capex and R&D in a you gave us guidance for 2020, and I think is a bit of a step down in capex versus 19, but still an elevated level relative to its historically seen.
How did you guys. So is that kind of right run rate that we should be thinking about the investments that you're right that the that the business kind of needs at this point or are a lot of those onetime in nature.
And then you know kind of same question on R&D, which is expecting to pick up.
And especially in light of you know concerns about Decrementals next year are there any pockets and R&D that potentially could be successful.
Sure for both of them as far as or whether they are onetime or could you just run rates. What we do as we always look at the portfolio of projects and opportunities that are going to bring value and we invest in those we've built the business for the long haul don't think about the quarterly cycle as much as we'd who's making the right level of investments and we have that's how we've arrived at the number.
And the guidance number it 625 to 675 and Capex in the same approaches on R&D. It was just a lot a really good projects out there right now that have greed ROI for customers and so we're looking at those.
And always evaluating whether they should be done whether to bring the right value in the portfolio. We have is it's a fantastic portfolio. Both for factory improvements what are the ones. We mentioned is that still the coffee new paint facility, which will improve efficiencies and quality just as an example.
And as we look at the R&D spending kinds of projects on power trains, we mentioned electric vehicles.
Thomas vehicles and.
More dynamic truck models improvements all of those are things that we still got to say hey, if we can do this and it's going to make our already best in class trucks, even better than we're going to doing.
Got to and then just lastly, I think last quarter, you called out some customer mix headwinds.
Obviously, we saw an improvement in margins this quarter I'm part of that was just stopping from the headwinds from last quarter, but you know.
Were there any customer mix changes this quarter and you know that we should we thinking about kind of for the remainder thier.
We already kind of talked about North America being a positive for us in the quarter.
And I think Thats really the only minor thing that was I would say it was a contributor but overall, it's good pricing good cost control.
And a stronger North American mix.
Okay. Thank you.
Our next question comes from Adam Allman, with Cleveland Research. Your line is now open.
Hey, good morning, guys good afternoon.
I wanted to start with a clarification or the fourth quarter production being down.
6% to 8%.
Sequentially could you could you break that out between your plans for North America in Europe .
Okay.
So I think there they're fairly comparable without running exact numbers, they're both roughly in the same ranges in that in the quarterly look at.
The moved about.
Single digits in North America and.
It was a series of smaller steps through Europe . They did the same thing.
Okay and then.
And I'm wondering what's your view is on medium duty truck markets next year in North America.
And then also.
Thoughts on on Europe as well.
So for the medium duty market in North America, I think we're seeing is around 100000.
The North America and right around 50000 in Europe for next year, so comparable numbers this year.
Okay got you and then just back to Europe .
I'm wondering if you would be willing to share with us the magnitude of the order declines that you did see in that region and you get the sense that order rates are bottoming out now if we start to see a leveling out of the the pace of decline or is that maybe still too early.
You know it what we're always trying to look at is what's going on with the cycle and what's going at the timing of the calendar year and effective recently, we've seen improving order intake in Europe actually.
Matching up to our bill so thats been nice balancing point.
Hopefully that'll be what continues.
Is there any particular region are part of the continent. That's.
So in the health improvement.
Got to believe it has something to do it providing great trucks to our customers.
I think that really is a big part of it at the end of the day I think that we've been able to get to our a record market shares in Europe and hold onto that share because people are experiencing or are fantastic trucks, and saying well in some more of those.
Okay. Thank you.
Our next question comes from David Raso with Evercore ISI. Your line is now open.
Hi, Thank you.
I was impressed with the parts outlook for next year can you give us a little more comfort on your visibility to project I kinda parts growth for next year I know you have some help from the aging of the engines hitting a sweet spot, but can you help us killed more comfort with that stronger growth.
Sure I think Thats strong growth as a result of as you said the engines. It's also this investment in tier piece that we're doing our team there is a fantastic job in ecommerce and reaching out to our customers are new ways that are meeting their needs. So we're able to just kind of keep taking more and more of the market.
These investments in or Pdcs that we mentioned, both and pumping gross in Brazil, and in Las Vegas allow us to get parts to the customers more quickly in those regions, which makes us more desirable.
Provider.
And really frankly in partnership with our dealerships who are fully committed to growing their parts business because it's good for them good for customers and good for US is one of those real opportunities for win win win.
It is are there any metrics of any kind, though that you you know for backlog of some kind or some parts of the percent of the parts business that has some sort of anywhere contract.
Yeah parts don't really work off that kind of along backlog, it's I worry about that but just any anything you're looking at.
That might give us some more confident a number.
Well I think the comfort should come from the historically strong performance and then the reasons that we just talked about which are just a lot of great products growing population of paccar products in Europe , and North America over the past several years and that has also contributed to that growth will continue to contribute to that growth.
Some strong markets that were that we have a large part of trucks out there.
And last left for the European business. The leasing of trucks can you help us a little bit. We said there was less of it in this quarter sort of what are you seeing on on that front for the mix going into next year.
Mystic missed the first by the question on this like you said again David.
For the European business, the mix of businesses, where there's some buyback guarantees and the leasing in the business. How do you represent to the revenues it impacted the price per unit delivery. This quarter can you just help us take us through your thoughts on 20 on on the mix for that into next year.
It's probably going to run a lot like this.
Some of.
Those adjustments were more 19 to 18 than they were looking forward so were pretty stable rate of.
Optional fixed rate geographies.
Okay. Thank you very much I appreciate it.
Our next question comes from Jeff Kauffman with <unk> capital markets. Your line is now open.
Thank you very much good morning, everybody.
A lot of my questions have been answered I wanted to focus a little bit on tax rate. If thats. Okay. It looks like the tax rate outlook could come down a little bit and.
Maybe about thinking about it right I would've thought more north American exposure would have driven at higher or am I wrong does it drive at lower and is that kind of a lower level of taxes that we should be thinking about for the rest of this year.
The tax rate normal I normally you should think about a 23% level. We benefited in Q3 from higher R&D credits than originally anticipated.
Our final returns.
Okay. So should I carry that through to the end of the year or is it more of a third quarter. Thanks.
Well I think you should think in terms of 23% for Q4, and a and for 2020.
Okay, and as I look to Okay, you set for 2020.
That's my question on my others have been answered thank you.
Great. Thank you.
Okay.
Our next question comes from Joe O'dea with vertical research. Your line is now open.
Hi Inn, you us in Canada, It looks like class six seven growth was it was pretty healthy in the quarter and.
Better than the market and so curious whether thats just sort of time.
So you still there.
Lynsey are you there.
Yes, I am showing that Joel is still connected.
Okay.
Well I guess will this we aren't hearing from you will just kind of try to.
Hopefully your question a little bit and so are we could we could move out and maybe jochen rejoin so.
Okay, Great. Our next question comes from Neil Frohnapple with Buckingham Research.
In line is now open.
Good morning. Thanks.
I believe I Carter's marketshare, historically times to be countercyclical I mean is there any reason to think that your market share why don't be higher in 2020 in your your production wasn't outperformed the industry I guess I'm just asking a production question a little differently.
Sure I think you know.
The trucks are performing exceptionally well in the field I think our customers are experiencing that we're delivering the.
Best fuel economy, and the lowest operating costs of any brand. So we do think that should drive our market share up and looking forward to that happening working everyday to make sure that does happen.
Okay, Great and then just going back to the parts sales growth outlook for next year, 4% to 6% I'm presuming that.
The lower outlook I guess relative to the 8% part segment Cagar that you talked about the interest at the Investor day.
Is it more Judah just you know fleets pulling back on spending and purchasing obviously a lot less trucks next year. So I guess at what point do you think that that growth rate can start to reaccelerate in order for you guys. The hit those long term targets.
Yeah, I think that the 4% to 6% numbers, a nice steady growth rate in the markets is declining is depending on what happens and and again I think that theres lot of things working right to it as far as when it come back up we'll keep our eyes on that and and watching for every opportunity to grow it.
Alright, thanks, so much.
Thank you.
Our next question comes from Robert Salmon with Wolfe Research. Your line is now open.
Hey, Dan and thanks for taking the question.
Could you give a little clarification on the used truck outlook.
It sounded like in the third quarter is down 10% to 15% is that what you guys are contemplating it looking out or are you contemplating kind of a similar absolute level of used truck sales from a price perspective.
I think that that down amount that we've seen maybe that will continue its obviously difficult to forecast entirely world, where it'll stay settled out too.
But.
Good stated on for the next couple of quarters.
I think you know the thing we're looking at is just that Theres. A there is still a really healthy demand out there for day cabs. Specifically you know the values are down we have the advantage of pack or having a mix of trucks.
You know uniform and our truck distribution loaded cabs lot of pickup and delivery, let vocational trucks and some sleeper trucks as well so I think our ability to move those trucks should should at least performed in the marketing probably outperform and again, we'll keep getting the premium for those trucks.
That's helpful and as I look at the gross margin outlook for the fourth quarter can you give an update on what that the price cost.
Spread was in the third quarter, and then looking out to the fourth quarter. If there any any sort of different assumptions you have built in there.
Just to get a sense of what sort of Decrementals you guys are kind of thinking about in production versus a different price price cost mix.
During the third quarter, we saw price of roughly 3% and cost of one of the App and I think in the fourth quarter I think there'll be more pricing pressure, but there could be some opportunity costs that were evaluating right now.
And would you expect the cost opportunity kind of continue should step up in 2020 relative to your experience in the fourth quarter, where you kind of thinking about something similar.
I think it might be hard to guess out what is going to be in 2020 right.
Okay.
Appreciate the time gas.
You bet.
And again, ladies and gentlemen, if he would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Sean Kim with Gabelli funds. Your line is now open hi, good morning, guys. Thanks for taking my question here.
Wanted to follow up on the parts business.
I think at your Investor Day, You mentioned you guys expect to have 450000 MX engine to service by 2024, but I guess said another way I mean, if that is that the right way to look about your total addressable market for the parts business in the mid 2020. So if I think the active U S class a population is about 2.2 million trucks I guess, how did that 2.2 million figure what's the opportunity for.
You guys long term regarding servicing those trucks on the road.
So I think about it in a couple different ways. One is the you mentioned is the growing amex parks itself. There at least we did add capacity to Columbus engine plant.
And increase our build rates of MX engines in fact in the second first half and were 39% MX and in the third quarter over 40 fibrosis. We saw some growth there and do see some continued upside from makes engines as people get to realize the benefits of that great engine.
And then I think it's not just about our.
Part of vehicles for Kenworth, and Peterbilt and off for the engine.
Our team does a great job of also capturing into the all makes business with the TRP brands, where 50% of those customers are new to Paccar, Greece agreed opportunity for growth for us as well.
We're always looking at opportunities to grow not just the parts business itself, but provide increased levels of service for our customers and that comes through higher degrees of connectivity of the truck do understand better what's going on so all of those 0.2 opportunities to keep growing parts business over time.
Great. Thank you guys.
You bet.
There's no other questions in queue. At this time are there any additional remarks from the company.
Yes, we'd like to thank everyone for joining the call and thank you operator.
Ladies and gentlemen, this concludes Packers earnings call. Thank you for participating you may now disconnect.