帕卡 (PCAR) 2016 Q4 法說會逐字稿

Good morning and welcome to PACCAR's fourth-quarter 2016 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. Joining me this morning are Ron Armstrong, Chief Executive Officer; Bob Christensen, President and Chief Financial Officer, Michael Barkley, Senior Vice President and Controller; and Harrie Schippers, Senior Vice President.

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 comparative conditions that may affect expected results.

I would now like to introduce, Ron Armstrong.

Good morning. Thanks to the accomplishment of PACCAR's 23,000 outstanding employees around the world, 2016 was a very good year for the Company. PACCAR achieved revenues of $17 billion and adjusted net income of $1.355 billion, a strong after-tax return on revenues of 8%. Including the $833 million nonrecurring charge for the European Commission settlement, net income was $522 million.

2016 was PACCAR's 78th consecutive year of earning a net income. Last year's results reflect the strongest European heavy truck market since 2008, and excellent operating performance in truck operations around the world. In addition, PACCAR Parts and PACCAR Financial Services generated good operating results.

PACCAR celebrated many important achievements in 2016. These included market share increases of 1 full percentage point in both the North American and European heavy duty truck markets, the introduction of the PACCAR MX-11 engine in North America, the launch of the PACCAR tandem axle in North America, and the introduction of the DAF Connect telematics system in Europe. DAF's registrations in the European above 16-tonne market were a record.

PACCAR invested $650 million of capital in R&D in premium quality products and services, and facility enhancements to provide for future growth. PACCAR's fourth quarter sales and Financial Services revenues were $4.1 billion and quarterly net income was $289 million.

PACCAR delivered 33,900 trucks during the fourth quarter, in line with expectations. The profitable contribution of all Company segments enables PACCAR to attain the highest operating margins in our industry.

PACCAR declared cash dividends of $1.56 per share last year, including a $0.60 per-share special dividend declared in December. PACCAR has paid a dividend every year since 1941.

During 2016, PACCAR repurchased 1.4 million shares of its stock for $71 million. PACCAR's total shareholder return was 38% in 2016, compared to 12% for the S&P 500. PACCAR's shareholder return has exceeded the S&P 500 return for the previous 1-, 5-, 15-, and 20-year time periods.

In the first quarter of this year, vehicle truck deliveries, vehicle deliveries, and truck and other gross margins are expected to be slightly higher than the fourth quarter. Peterbilt and Kenworth achieved an excellent market share of 28.5% in the US and Canadian heavy-duty truck market in 2016.

Class 8 industry detail sales totaled 216,000 units last year. Into 2017, we estimate the US and Canadian Class 8 truck market will be in a range of 190,000 to 220,000 units. The market will be supported by estimated US GDP growth of 2% to 2.5%, and industrial production growth projected at 1.5%.

DAF increased its market share to 15.5% in the European above 16-tonne truck market last year, compared to 14.6% in 2015. The EU heavy truck market was a robust 303,000 units in 2016.

Looking at this year, we anticipate that the European above 16-tonne truck market will be another good year and be in a range of 260,000 to 290,000 vehicles. Economic growth in Europe is expected to be a stable 1.5% this year.

PACCAR Parts generated pretax profit of $544 million and revenues of $3 billion in 2016. The good results were driven by a growing population of PACCAR trucks and engines, and the many innovative products and services offered by PACCAR Parts.

For the fourth quarter, PACCAR Parts achieved revenues of $765 million, and pretax income of $138 million. Fourth-quarter pretax income was 9% higher than the fourth quarter last year on a revenue increase of 2%. We expect Parts revenues to grow 2% to 4% this year.

PACCAR Financial Services revenues were $304 million in the fourth quarter, and pretax income was $78 million. The good results benefited from the continuing strong portfolio performance. The Financial Services portfolio includes 178,000 trucks and trailers, including 38,000 PACCAR leasing units. For the full year, PACCAR Financial Services earned pretax income of $307 million.

For 2017, PACCAR's research and development spending of $250 million to $280 million and capital expenditures of $375 million to $425 million will expand Kenworth, Peterbilt and DAF product offerings, enhance the PACCAR powertrain, build on advanced driver assistance and connected technologies, and increase the capacity and operating efficiency of our factories and distribution centers.

I would like to recognize Bob Christensen for over 33 years of outstanding service to PACCAR. Bob is retiring tomorrow and we wish he and his family the best. Harrie Schippers has been named Executive Vice President and CFO. I know many of you have met Harrie in the last six or seven years during his time as President of DAF Trucks and as Senior Vice President in our Corporate Group.

As the Company begins its 112th year, we are in an excellent position to lead the industry with the highest quality products and services. Thank you, I'd be pleased to answer your questions.

(Operator Instructions)

Ross Gilardi, Bank of America Merrill Lynch.

I'm interested in a couple up front here. First, just on the North American Class 8 market, do you think orders have bottomed out at this point? And assuming that they have, if that's what you think, what quarter do you think Class 8 production bottoms out?

Well, based on our view of the market, I think the inventories, backlogs and -- are pretty well in balance and that order intake will be indicative of production, et cetera, going forward. So I would say that, based on our market size estimates of 190,000 to 220,000, that we expect that production will improve as the year progresses.

Okay, thank you.

And just also wanted to ask you about the UK. What trends did you sequentially from Q3 to Q4 in the UK? And do you get hit on FX importing engines from the Continent, or anything in particular that you would note on FX that we should consider in our models for the UK?

The UK is DAF's largest market. It's been a great market. In fact, DAF set an all-time market share record in the UK market last year for the combined above 6 to16 tonne and above 6 tonne of 30%. So our team has done a great job there, and we continue to see the good demand from our customers.

I think the economy there is good. There's been no indications. The movement in the pound following the Brexit vote, those movements are similar to what we've seen over the years, and while there's some headwind temporarily, that will adjust over time.

Thanks very much.

Alex Potter, Piper Jaffray.

Good morning, Alex.

Good morning.

So following up there more broadly on Europe, just hoping you could try to help me understand maybe a little bit what's going on in the European truck cycle. From a high level, it seems like we're still below historical peak, and all else equal, it seems like the European fleet maybe didn't go through a true up cycle. But now everyone's guidance seems to suggest that the cycles may be taking a breather before running its full course. I'm just wondering if maybe the macro issues there are overpowering what would otherwise be a continued upturn? Or if you think that the cycle actually really did run its full course? So any additional color there would be helpful.

Yes, I think, and last year obviously was a great year for the European truck market, and DAF, in particularly, being able to improve its share 1 full percentage point in that market. If you look at the transportation statistics, the German [mount]statistics, December was another excellent month, transport activity is at record highs across Germany. So there's nothing near-term that would say that the demand will tail off. I think we're being a bit conservative in how we view the market next year. We're actually starting the year at a higher production rate for our heavy-duty vehicles than we started last year. But we're just being a bit conservative in terms of how long that stays at that level.

Okay, great. And then one other one there.

You've historically talked about in Europe rolling out more Financial Services availability and expecting, at least over the medium or long term, that, that would start to impact your market share in the truck segment. Just wondering the extent to which you believe that was one of the reasons behind your share gain over the last year in Europe? Or whether you think the impact of the increased Financial Services has maybe yet to be felt, and will be felt over the next couple of years?

I think we're seeing that we've been open now in our Financial Services business for about two or three years in Poland, the Czech Republic, and we're seeing our share of the financing in those markets grow. And I think that also is translating into additional sales for DAF trucks. DAF has a very strong position in the Central European countries. And so I think as we look forward, we are looking at expanding some of our financing activities into the Romanian market. We have opened our sales subsidiary in Turkey. So at some point, we'll have some financing capability there.

We are also, while it's not in Europe, we are also going to be opening a bank in Brazil to support the financing of DAF trucks in Brazil. We continue to grow our footprint in our Finance business around the world, and it's an integral part of the model that supports our trucks in all of our markets.

Interesting. Okay, thanks very much.

Thank you.

Ann Duignan, JPMorgan.

You guide to US and Canada for your outlook for here at this region. Could you talk a little bit about Mexico itself and what your expectations are there so that we can reconcile our NAFTA outlook with your US-Canada?

Yes, I think Mexico will have another good year, probably in the 20,000 to 25,000 truck range would be how we would see that market for next year. We continue to be the market leader in Mexico. The Kenworth brand is very well received. We've launched our 2.1 meter product, our MX engine, so they have all the latest products. And our dealers and our customers are very excited about the prospects to continue to have an excellent business in the Mexican market.

So the market will be okay, but you would expect to outperform, is that what I hear you saying?

Well, I think, no, I just think we'll continue to be at the -- the market leader in the 35% to 40% share of the heavy-duty market.

Okay, okay, got you. Thank you for the color.

And then on gross margins, you had guided for full year 2017 What are you currently thinking on gross margins for 2017? It sounds like you might be a little more upbeat than you were third quarter.

Yes, I'd say the range for the year would be in the 13.5% to 14.5% range, and that will tie in the with those market ranges that we've talked about.

So no change from Q3?

No change, yes. No, I think that's still how we would view the year for next year.

Okay, and where do you see the biggest upside risk and the biggest downside risk? I think your volumes might come in a bit better if I'm not reading too much into what you're saying. And then, where might the biggest headwinds be that we need to take into consideration?

Typically, it's the level of demand and pricing in a given market. So I think at the upper end of those ranges, there will be opportunities for some pricing leverage; at the lower end it's a competitive market. Always has been and always will be, so you just have to manage your pricing accordingly.

Okay, I will leave it there and get back in line. Thanks.

Thank you.

David Raso, Evercore ISI.

Good morning, David

Good morning.

The truck deliveries fourth quarter to first quarter, can you help us a bit with the geographic mix of saying up a bit sequentially?

Yes, I think it would be up, that 1% to 2% increase in volume probably is all North America.

Okay.

That just reflects additional production days. We shut our factories down during the Christmas holiday period in North America.

Helpful, and on the gross margins, you're saying up a little bit from fourth quarter to first quarter. And then the comment earlier about your US-Canada production sequentially improves throughout the year. So the gross margin starting the year, make a number up, 14.1% of the fourth quarter was 13.9%. If you're already above the midpoint of the full-year guide and your US production improves as the year goes on, why would it drag down as the year goes on? Is that a price cost comment? Or something about Europe we should infer from that statement?

I think it's just predicated on the market continuing to improve as the year progresses.

But if that was the case, if you're 14.1% or so to start the year, why would the rest of the year drag you back down to 14%, or for that matter, to the low end of the range?

As I mentioned, the year ranges, they're 13.5% to 14.5%, so there's lots of room within that range.

Okay, I appreciate it. Thank you.

You bet.

Jamie Cook, Credit Suisse.

Or good afternoon, depending on where you are. Just a couple questions.

You mentioned to Ann you think gross margins for the year will be 13.5% to 14.5%, but can you just comment, and I think everyone's trying to get a question specifically, what you're assuming for 2017 in terms of potential for material cost headwinds? And can price offset that specifically?

Yes, I think in terms of commodity costs, I think there's a bit of an upward trend in terms of pressure on commodity costs. But our purchasing and materials and operations teams work very closely with our suppliers. We have long-term agreements that smooth the effects of commodity cost movements, and we have a continual effort on cost-reduction activity. So we don't see material cost being a significant factor in the cost of our product in 2017.

But is price cost net positive? Flat? Just to be clear.

I would say the pricing environment in North America is probably a little more competitive in the second half of last year as we start this year. Europe I think is pretty flat. You just have the effects of the pound-euro exchange rate that have some temporary effects.

So on a margin, a little bit of a headwind it sounds like.

Yes.

Okay, and then my second question: can you talk about what your assumptions are on the 13-liter for market share in 2017 versus 2016 and on the 11-liter. And then, last question, sorry. Obviously energy has been a headwind for the broader group. Are you seeing any signs of pickup, just based on some of where your dealers are located? Could that be a potential tailwind in 2017?

I think the PACCAR engine, around that 50% mark is how we see the PACCAR engines MX-11 and MX-13. And I think there is a bit of optimism about the energy market and the opportunities for next year. But again, that's not a significant element of our total business.

And you didn't see anything in the fourth quarter or January?

No.

Thanks, I'll get back in queue

Thank you.

Tim Thein, Citigroup.

The first question was just on the used market in North America. Maybe you could just update us in terms of what you're seeing or what you have seen with respect to pricing? And then, just in terms of overall inventory levels, there has been some chatter here recently about some of the OEM groups, or I shouldn't say some; maybe one or two OEM groups holding abnormally high inventory levels. I'm just curious about your degree of confidence and the market's ability, if in fact that's the case, to be able to absorb that level of inventory?

Sure, from a pricing standpoint, if you look at today versus, say, a year ago, prices are down about 10% for our product. We continue to maintain a premium relative to the competition in the used truck market. A lot of the trucks, now that we're starting to see return, and we'll seeing return this year, will be our new 2.1 meter product, and that will even have a better value compared to some of our legacy products. So we're actively engaged and working with our customers on lease returns, trade packages. We just opened our newest used truck facility in Chicago in December. So we're continuing to build our capabilities to handle additional volumes of used trucks. As time goes on, we're also looking at a couple of other locations during the course of this year. So we feel very comfortable with our ability to handle the volume of trucks that we're seeing in our inventory, and will be coming back to us during the course of 2017.

Okay, got it.

That 10%, I know there's some quite big spreads between wholesale and retail. What would you put for the market, closer to 20% in terms of year over year, and adjusting for model years and everything? In terms of your --

All I know is our product and our prices

Fair enough.

(Inaudible) about 10%.

Okay, and then just on the raw material question, can you update us? I know that you had done some work in the factory a couple of years ago in terms of some of the base of the engineering out some cost. I believe you were about two-thirds of production North America was -- had moved to that updated model. Is that where we sit today? I'm just curious if there's more room to effectively increase those production of the models that --

Part of our R&D budget last year, this year, will just be continued to enhance the product offerings of our 2.1 meter product line. So it's 70%, 75% of what we do today and it will continue to grow as the years progress. So the federal benefits of that will continue to be recognized.

Great, thanks a lot.

Thank you.

Steven Fisher, UBS.

Thanks, good morning.

I was wondering what your outlook is for Parts margins from here? And I think the theory was that the more of your own engines you have out there, the more they're aging, the margin mix of your Parts business should start to get more robust. But where are you in that process? It looks like the margins have maybe leveled off a little bit.

If you look back over a two- or three-year period, the margins in our Parts business have progressed nicely. And so it depends a lot any given time on the mix of parts that you sell, et cetera. We expect the percentage of engine parts to continue to grow gradually over the time, and I think that will have a positive impact on margin percentages.

The other side of that is, we're also growing and expanding our TRP capability. We ended the year with 77 independent TRP stores owned by our dealers. Those parts carry a lower margin, but they also give us additional volume, additional contact with additional customers, and is a great initiative that has really been a key focus of our dealers to take advantage of that opportunity to grow their presence in their markets. So there's a balance of puts and takes there.

Do think that adds up to a higher Parts margin in 2017 versus 2016?

It's going to be -- the effects are going to be, I think, nominal.

Okay, and then the Financial Services sequential profit improvement reversed a four-quarter slide. Were there any one-time benefits? How should we think about the trajectory of Financial Services' profit in 2017?

As we look at 2017, I think the portfolio balance will be comparable to where it has been. A lot of the variations in profitability over the last eight quarters had been tied to used truck movements. And so used trucks will play a significant part in how the profitability of the Financial Services segment performs in 2017.

So the fact that it's showing improvement, do you think that's also a reflection of the more balanced used market?

Yes, I think that's a key element of it, and when you recognize the impact of lower used truck prices on your portfolio.

Okay, thank you.

Thank you.

Jerry Revich, Goldman Sachs.

Good morning, Jerry.

Good morning, good afternoon, everyone.

I'm wondering if you could talk about the impact of dealer inventory destock on your Parts business in 2016? I think over the past couple of quarters, you mentioned that some dealers had reduced inventories, and now that the new order picture is clearing up, I'm wondering if we could see some inventory stocking in 2017? Can you just frame the order of magnitude for us?

Our dealer inventories have been in great shape really throughout 2016; and as we enter 2017, if anything, our dealers probably could use a few more trucks. And we're seeing some good orders early on in 2017 for inventory. So I think the Parts impact of that is, it's business as usual.

Okay. I'm wondering if you could talk about how far out your lead times extend in Europe? You spoke about starting the year at higher build rates than a year ago. How much visibility do you have? What was book to bill in the fourth quarter, if you're willing to share it, for Europe specifically?

I would just say our backlogs are in excellent shape all around the world, and all of our businesses and Europe is right in line with that. So we're very comfortable with our backlogs. They're really balanced in with order intake and demand in the markets right now.

Okay, and on pricing in the 10-Q for last quarter, Mexico was a significant headwind. I'm wondering if you can talk about, is that continuing? Is that what you alluded to the prior Q&A as a headwind in North America? And how much of that is currency-driven?

One more time, Jerry? I missed the first part.

The pricing situation in Mexico? So you talk about a significant headwind in the third quarter 10-Q, and I'm wondering is that situation continuing into the first quarter here? Would you attribute that to the currency moves? And any other color you can give us on what's playing out in that market from a pricing standpoint?

I wouldn't -- I don't know if we said significant headwind; that doesn't make sense to me. But with the depreciating peso, it's a competitive market, and so we try and -- we basically sell in US dollars. So you've got to work with customers to balance their ability to invest in new equipment and our ability to sell it at a fair price.

So if the currency continues to move in the direction it's been trending over the past, call it, one to two quarters, do you have any opportunities to mitigate the currency impact on your sales into Mexico? Maybe a small assembly operation? Anything along those lines we should be thinking about?

For Mexico, we produce all of our trucks in Mexico. So we don't have cross-border matters to deal with there. But a lot of the components come from US suppliers, as they always have.

Thank you.

Thank you.

David Leiker, Robert W Baird.

Good morning, David.

This is actually Joe for David.

Good morning, Joe.

You've been giving order share in the US-Canada markets in recent quarters. Is it possible to get an update of maybe where that was during Q4?

Yes, so for the full year, Peterbilt and Kenworth were at 32% share of the order intake. And I think for the fourth quarter just under 30% in the fourth quarter.

Okay. So, given share has been so high recently, and I think you've talked in the past it's a competitive market, it's tough to maintain such a magnitude of a jump that PACCAR is seeing. Are you seeing maybe greater inroads in thinking about the 2017 environment? Particularly the two European OEMs entered 2016 with very high inventory, maybe they start to come back a bit?

Our guys, we have great products and I think the market has always recognized the premium value of Kenworth and Peterbilt in North America and DAF in Europe. Our teams are working hard to sell those great products. It's a premium value at a premium price and not everybody is willing to pay that. But we've grown our share over time in both markets, and our goal is to continue to increment share as we progress over the coming years.

And then, maybe a similar conversation in Europe: I think what people might be trying to figure out is an industry forecast minus 9% in 2017. You're going to start up, it sounds like. You started to see some softening in particular countries. The UK softened at year end. Is that difference between DAF and the industry just your order intake and your backlog, and that's what's driving it?

I think our market is such, as I mentioned previously, is probably a bit conservative based on where we're at currently. But the UK market has been pretty steady. And we have gotten good orders this year into the UK and all of our markets around the market. So I think we're in good shape as we enter 2017.

Okay, great, thank you.

Thank you.

Nicole DeBlase from Deutsche Bank.

Good morning.

Good morning, Nicole.

My first question is around the tone of conversations that you're having with dealers and customers in the US. We've got improvement in the PMIs, and it feels like general business sentiment is getting better. So I'm just curious if you're seeing that reflected in your conversations with dealers and customers as well?

I might let Bob address that for North America and let Harrie comment on the Europe situation.

I think that's a correct assessment, that the tone of conversations is generally positive. We just came back from the American Truck Dealers meeting in New Orleans this past weekend. I would say dealers are looking optimistically towards the year. Quote activity seems to be normalized, and it should be a very good year for the truck industry once again in 2017.

In Europe, I think I can confirm that business and industry confidence levels are at high levels. Freight, like Ron mentioned, is at good, strong levels. And as a result, our order and backlog is in good shape.

Okay, great, thanks.

This one's nit-picky, but I'm getting to the bottom of my question list here. Why did you guys opt to cut R&D guidance for 2017? Is there anything significant there?

Nothing significant. As we dialed in our budgets for next year and looked at our product plans, that's the amount we need to continue to support the product and build our business. So I think we're just a little bit of sharpening of the pencil as they say.

Got it, thanks, I'll pass it on.

Thank you.

Andy Casey, Wells Fargo Securities LLC.

Good morning, Andy.

Good morning and afternoon, and good luck, Bob

Thank you.

You're welcome.

I'm not sure if you guys mentioned this already, but can you share any change in the order activity? I know in Europe, Harrie just talked about it being in good shape. Was that up, down, flat?

I think when you compare orders, Harrie, you've got some information in terms of the fourth quarter this year compared to the fourth quarter of the prior year?

Total order intake for DAF in the fourth quarter in the heavy segment was up 19% in the fourth quarter of 2016 compared to 2015.

Okay. And then rest of world volume, it's been steadily growing through 2016. Can you give a little color as to what regions were driving that?

We continued to increment our build in Brazil; it's a difficult market. But our team is step-by-step increasing production and increasing their market share. Mexico was a good year for Mexico. Australia, the mining sector has slowed, but we just launched our new T610 product in Australia. And their backlog is starting off very strong, and we'll be looking at some build-rate increases in Australia in the coming weeks. We are seeing some increasing demand in markets like Russia. The demand for Euro 5 vehicles is increasing and DAF is doing a good job of getting their share of that additional demand in Russia.

That's good news. Thank you very much.

Seth Weber, RBC Capital Markets.

Good morning, Seth.

Good morning, good afternoon. I just wanted to go -- a couple quick questions.

On Brazil, you mentioned that the market's obviously still tough. But your volumes are increasing and your absorption should be getting better. Is there a critical mass that we should be thinking about for that region or for your production where, I don't know if you'll comment on it, but is that facility breakeven for you or profitable for you today? Or can that flip from losing money to making money anytime soon? If you'd comment on that?

I think it just all really depends on the economic developments in the country. And we've seen two years of contraction of over 3%. The expectations for this year is more of a flat development. But the Brazilian economy and the Brazilians have a lot going for them in terms of resources, agricultural capability. So I think we feel very comfortable long term with our investment. And as time goes on, it will provide a good return to our shareholders.

But at current levels, though, it's still a drag to you?

It is, yes.

Okay. And then just a follow-up question.

As production volumes get better just across the Company or North America, given the puts and takes around material costs and things like that, is there an incremental margin that you're comfortable talking to as volumes get better?

I think if you just look at the history of incremental and decremented margins, I think that's how you should think about us going forward.

So something like the 20% range or so?

Exactly.

Okay. Thank you very much, guys.

Thank you.

Mike Shlisky, Seaport Global Securities.

Good morning, guys.

Just following up on Seth's question about Brazil. Does opening a bank in Brazil help you ramp up the market-share penetration? It's been roughly 1% a year for a couple of years now. Does it make it any more of a positive tailwind on that, either 2017 or 2018?

Yes, for sure it does, and that's our whole drive behind our finance business is profitably supporting the sale of PACCAR products around the world, and Brazil is no different. And as we have that financing capability that will enhance DAF's ability to sell to more customers in the Brazilian market.

So if you've been getting about 1% a year, could it maybe get you to 2% a year of additional share going forward? Just help us to quantify the upside here?

I can't really comment on that. I think there's some benefit there. We've been able to get that share here. The product is performing great. We have a great team that represents the DAF brand in the market. And I am totally confident that we'll continue to grow our share at whatever pace that might be. And that the finance company, all other things being equal, will enhance that share growth.

Okay, great. And then secondly, I saw on your release you have got a Toronto Parts DC opening. Is that going to open in 2017?

That will probably be mid-2018. We're just finalizing the purchase of the land, and there will be a permitting process. So construction will start probably midyear for this year, and then finalize midyear 2018.

Is that going to serve just Canada, or it will it also serve the Eastern US? I was curious as to what kind of operation you're placing there? Is that going to be a good margin efficiency improvement like we saw in Renton this year?

I was just in our current Toronto distribution center about two weeks ago. The team does a great job in a 55,000 square-foot facility. This will triple the amount of space. We have a growing business, both our dealers and our customers, in that area. And this will allow them to grow their Parts business in that area, and better support a growing base of customer.

So you saw us build the Renton PDC this last year, which doubled the amount of square footage. We expanded our PDC in Lancaster in Pennsylvania that really supports the Northeastern part of the US. We have a distribution center in Montreal that supports customers in Quebec. So this particular PDC is primarily focused on the Ontario area in middle Canada.

Perfect, thank you very much.

Thank you.

Neil Frohnapple, Longbow Research

Good morning, Neil.

I believe a few years ago you indicated that Kenworth and Peterbilt's US and Canada Class 8 vocational truck share was above 40%. Is that still the case today? And as a follow-up, could you just talk about order activity for the segment of the market and the prospects from higher infrastructure spending potentially coming in 2018?

I think that share position is still about right in terms of demand in that arena. I think demand has been pretty consistent. And for sure if there is substantial infrastructure investment, I think that would bode well for our ability to sell more trucks into that segment. So the Peterbilt and Kenworth products do great in that area.

Could you also talk about your industry outlook for the US and Canada medium-duty market versus 2016? Whether you expect that to be flat, up, or down?

I think fairly flat.

Great, thanks a lot. Congratulations, Bob.

Robert Wertheimer, Barclays.

Hey, good morning. Could you talk about, you mentioned Russia earlier? Where are we versus peak in Russia? And what's the outlook for the next two, three years, gradual strengthening and return? And maybe just a second comment: we have data on used truck pricing, which you alluded to in the North American market. What is European used truck pricing like? Up or down or flat?

I'd say European used truck pricing is relatively flat. In terms of the Russian market, we're probably still on the ascent. In terms of a couple of years ago, the market was stronger, DAF sold about 3,000 trucks into Russia. Last year it was just under 1,000, and so there's good upward trend, but certainly more upside potential.

Great, thank you.

Thank you.

Sam Rathod, Macquarie.

Good morning, Sameer Rathod. There's been a lot of discussion by the current administration about reducing regulation, including environmental. Do you think this is a net positive or negative for intermediate truck demand? Because on one hand, you have newer standards historically helping driving replacement cycles; on the other hand, reduced regulation may spur business activity.

We're preparing for the regulations as they exist currently. It's difficult to plan based on speculation. So we're developing our products for the future following the greenhouse gas regulations that are in place. So if those change, we'll reevaluate our plans and adapt accordingly.

Okay, thank you.

Thank you.

Scott Group, Wolfe Research.

Thanks, good morning, guys.

Good morning.

Can you share with us, sorry if I missed it, what you're expecting for Parts revenue growth this year and Financial Services margins?

So Parts revenue growth, I indicated we expect 2017 to be a 2% to 4% growth rate. Financial Services margins, I think we're probably see our spreads be relatively steady, and I think a big factor in the results will be the movement of these truck values. But our portfolio in our Finance business is performing excellently. Our team generated a share of 26% of all PACCAR products sold that they financed last year. So the Finance team continues to manage their business in a very prudent way and generate a good contribution to PACCAR's results.

Okay, and then just secondly, can you just talk about the percent of your US cost of goods sold that are imported into the US? And then maybe just broadly how you're thinking about any potential changes you might want to make if we get a border adjustment tax?

That's a lot of speculation on trade matters, and so we'll address those as they come at us. We source materials from all over the world, a majority out of the US; I don't know what that percentage might be. But we source, just as all the automotive and commercial vehicle industry does. So whatever the effects might be for us would be similar for the industry.

So you're saying that you don't want to give a number in terms of how much of your US cost of goods are imported? But you're saying you wouldn't think it's any different than any other OEM?

I wouldn't think it's any different.

Okay, perfect. Thank you.

Thank you.

Joel Tiss, BMO Capital Markets.

Last and least, I'm used to that.

The best for last, Joel. That's how I look at it.

Something like that. There's been a lot of questions, so I'll make it quick.

But the fourth quarter, the drop-off in the gross margin and the profitability is really just from an end-of-year adjusting inventory, cleaning out whatever, getting rid of some new and used product, and feeling some of the pricing pressure that's been evident in the market to set up for 2017? Is that fair?

Yes, I think there is a bit of competitive pricing pressure that the pound-euro exchange rate had some effect. And in our fourth quarter, we typically will do some projects in our factory. So we have some maintenance projects that we do over the shutdown period. And so, just normal stuff, so nothing unusual.

Okay. And then there was a slide from your December presentation that you -- it suggested at least that you were going to capture some Parts sales from the more technologically advanced stuff, like adaptive cruise control and lane departure warning systems. Can you give me a sense of how can you do that? Those are someone else's -- those are mostly someone else's parts. So I don't know, it's hard for me to understand that. But I'm not the brightest guy on the planet, either.

Joel, we sell a combination of our captive parts as well as vendor-supplied parts that we bring into our warehouse and have available for dealers. We manage that dealer inventory, and as parts for those systems are consumed at retail, then we will resupply the dealer from our warehouses. But we have access to all parts that are used on PACCAR products around the world.

Okay. So just maybe a little bit less marked up, just because there's more hands touching it or something like that?

Yes, I think that's fair

All right, I'm not getting back into queue. Thank you very much.

Joel, always good to talk to you.

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

We would like to thank everyone for their participation, and thank you, Operator.

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