帕卡 (PCAR) 2018 Q1 法說會逐字稿

Good morning, and welcome to PACCAR's First Quarter 2018 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 Ron Armstrong, Chief Executive Officer; Harrie Schippers, President and Chief Financial Officer; and Michael Barkley, Senior Vice President and Controller.

As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

I would now like to introduce Ron Armstrong.

Good morning. PACCAR reported record revenues and strong operating results for the first quarter of 2018. PACCAR's first quarter sales and Financial Services revenues were $5.65 billion. And first quarter net income was $512 million, a 9.1% after-tax return on revenues. Revenues were 33% higher and net income was 65% higher compared to the first quarter last year. PACCAR Parts achieved record quarterly pretax profits of $192 million.

PACCAR achieved excellent Truck, Parts and Other gross margins of 14.8%, helped by strong global truck and aftermarket parts demand. First quarter margins benefited from a favorable customer mix and increased seasonal demand for proprietary parts in the aftermarket.

I'm very proud of our 26,000 employees who have delivered industry-leading products and services to our customers worldwide. PACCAR delivered a record 44,500 trucks during the first quarter. U.S. and Canada Class 8 industry truck orders averaged 42,000 units per month in the first quarter and have exceeded 30,000 units per month for the last 6 months. DAF above 16-tonne orders increased 41% in the first quarter compared to the same period last year.

Due to the robust orders, we expect to deliver 7% to 9% more trucks in the second quarter this year compared to the first quarter. Second quarter gross margins for trucks will be similar to the first quarter at around 12%. Parts margins will reflect increased sales of TRP and routine maintenance parts. Total Truck, Parts and Other gross margins will again be strong at the mid-14% level.

The U.S. economy's growth is driving record freight tonnage. Customers are operating at high utilization levels and are expanding their fleets. We've raised our estimate of U.S. and Canadian Class 8 truck industry retail sales to a range of 265,000 to 285,000 vehicles this year. PACCAR's forecast for the European above 16-tonne market has been increased to a range of 300,000 to 320,000 units, reflecting the strong freight transport activity and truck demand as well as the steady economic outlook. The new DAF CF and XF, which won the International Truck of the Year, are seeing strong demand, achieving a 16.4% share of the European heavy truck market registrations in the first quarter.

PACCAR Parts' quarterly pretax income of $192 million was 27% higher than a year ago. Pretax return on revenue was an excellent 20.4%. PACCAR Parts business generated record quarterly revenues of $940 million, 19% higher than in the same quarter of last year. These results were driven by the growing number of PACCAR trucks and engines in operation, PACCAR's investments in distribution centers and the many innovative products and services offered by PACCAR Parts and our dealers. For the year, we expect part sales to increase by 10% to 12%.

PACCAR Financial Services' first quarter pretax income was $68 million, 19% higher than first quarter last year. The PACCAR Financial portfolio performed well. Industry demand and pricing for used trucks increased compared to the first quarter last year. PACCAR Financial continued to invest in the remarketing of PACCAR trucks by opening its fourth truck remarketing center near Los Angeles. These truck centers further enhance Kenworth and Peterbilt residual values, which command a 10% to 20% premium over competitors' trucks.

PACCAR's strong balance sheet and positive cash flow have enabled the company to invest $3 billion in new products and facilities in the last 5 years. This year, capital expenditures of $425 million to $475 million and research and development expenses of $300 million to $320 million are targeted for new truck models, integrated powertrains, including electric hybrid and hydrogen fuel cell technologies, and new product technologies for advanced driver assistance systems and truck connectivity. Additional investments are also being made to expand and enhance manufacturing and parts distribution facilities.

PACCAR is realizing the benefits of strong market conditions by delivering the highest quality products and services in the industry and investing for future growth.

Thank you. I'd be pleased to answer your questions.

(Operator Instructions) Your first question comes from Alex Potter with Piper Jaffray.

First, I wanted to ask a question about the revenue growth in parts. You mentioned seasonality there, but also, the propriety parts. I was just wondering if you could give a little bit more clarity on what's driving that very strong year-over-year growth. And also, if you could, I guess, in that context, talk about TRP, the extent to which that's contributing as well.

Sure. The growth is really across all the product lines. Obviously, freight activity has a large impact. But our teams, we've expanded our distribution facilities. We've got lots of great programs with engines, with our fleet services, our e-commerce capabilities. So the team has done a great job of really putting together programs that build the loyalty of our customers to PACCAR Parts, because they can provide the parts faster and more efficiently than some of the competition can. So the team's been working on these initiatives for many years and now we're seeing the real fruits of the investments and the efforts the team's put forward. On the TRP side, if you look at same-store sales year-over-year, we're up about 20% on the independent stand-alone TRP scores.

And what margin impact does that have, to the extent TRP ends up being a bigger or smaller percent of the mix?

It would probably pull the overall average down just a bit because it's typically all makes parts for all brands of vehicles.

Okay. Very good. And then, I guess, one last question on used truck pricing. There's some thought, I suppose, that used truck prices could eventually start trending lower as we get toward the back half of the year. Just wondering if you're starting to see any of that or if you agree with that view.

No, I think -- again, we've seen positive trending in the last 3 to 6 months on used truck pricing. And so we're seeing just the opposite. We're seeing the positive trends.

Your next question comes from Ann Duignan with JPMorgan.

My first question may be around if you could speak to what you're seeing out there by segment. We're seeing Class 8 sleeper orders up about 140%, big cabs up about 112%, and straight trucks up about 43%. And just curious what you guys are seeing out there by mix of application or segment, in terms of your backlog or your orders.

Yes, I think, we're seeing increases in all those segments, sort of across the board. I wouldn't say there's any particular segment that's outperforming the other, probably a little bit higher sleeper mix just because of the demand for on-highway trucks.

Okay. And then, it does look like the sleeper has started to accelerate into the end of last year. Is that the case?

Yes, I think more of the on-highway fleets will place their orders in the late fourth quarter, early first part of the year. And so I think we're just seeing the effects of the timing of when they place their orders.

And given your backlog year-to-date, do you have enough capacity to meet demand for this year? Or do you envision maybe having to push back some of those deliveries into next year? And do you think there is any risk that we see production expand into or extend into 2019, just on the back of capacity constraints?

Well, demand is good and we see no indications that demand is lessening. And so we're going to build the trucks that we can build and we have the capacity to be able to support our customers' needs.

Okay. And then, just quickly, as a final follow-up, could you just discuss input cost versus pricing power? And what's the pricing environment like out there, given the strength in orders and demand?

Yes, we have -- we've seen some moderate ability to increase prices, particularly on smaller truck orders. But we're also seeing some moderate increases in the input costs. I mean we continue to see commodity costs trend upward. But again, our long-term agreements facilitate that being smoothed in over time, and we're able to realize that in the marketplace for the most part.

So you wouldn't expect the net to be a negative this year? Is that -- am I reading too much into it, or...

No, I don't -- at this point, we don't see that.

Your next question comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could talk about your expectations of vehicle mix in the second quarter. In the first quarter, you spoke about getting a tailwind from a mix of business. So I'm wondering how do you expect that to evolve into 2Q. And you had spoken about gross margin expectations for the year. I'm wondering if you could touch on the second quarter, specifically.

Yes. So we talked about our second quarter overall gross margins being in the mid-14% levels. And we will see an increased mix of deliveries to fleet customers in the second quarter, but that's all very normal. And so we expect another strong margin quarter, as we mentioned.

And in terms of factory overhead costs, those -- it took a leg higher to support the higher production levels in the fourth quarter. Can you just talk about how that trended into the first quarter, and what the expectations are over the balance of the year?

Yes, the factory overhead and all of our other costs trended exactly as we would expect with higher volume, and we're seeing the benefits of the operating leverage and you see that in the 14.8% margin for the quarter.

Okay. And last year, because your dealers hit their threshold for part sales, we saw I think in the third quarter, weaker pricing than we would otherwise expect. Anything that we need to keep in mind in terms of rebates, as we think about this year compared to the way last year played out?

Well, you saw that -- the great results that we had in the first quarter with the 19% increase. So we're expecting our dealers, and our dealers are doing very well. And so we're providing the support for those incentives as we go.

Okay. So it won't be as lumpy as we saw last year?

No.

Your next question comes from Joel Tiss with BMO.

So I wonder if you could just talk a little bit about any supplier constraints, and kind of just what's happening along the chain on the way to your factories for the different parts.

Yes. Our truck divisions, the materials teams, the purchasing groups have done a great job of really coordinating well with our suppliers on our build plans. As we mentioned, we're planning to increase our build rates in the second quarter. And so it's a very coordinated approach with our supply base to make sure that we can execute that. We don't take the build rates up unless we feel confident in their ability to deliver. And so we're working very closely with them, as we always do, but so far, it's been excellent in terms of the support they've provided.

And then, is there any commentary or any color you can give us around cancellation rates, maybe even just fuzz it up for the whole industry, and the ability for -- or the -- whatever, the -- you’re feeling about keeping production strong through 2019? Just kind of the way the market feels to you. I'm not asking for a forecast.

Sure. Cancellation rates are very low, Joel. I just have the occasional cancellation and a reorder, but that's pretty uncommon at this point. And so in terms of the customer demands in Europe and in North America, it's really strong. The economies are all trending positively. So I don't see a reason why the demand could -- can't be good for the foreseeable future.

Your next question comes from Seth Weber with RBC Capital Markets.

I just wanted to go back to the gross margin point for a second. And correct me if I'm wrong, but I think you said mid-14% for the second quarter this year. And you guys did about the same last year on much lower revenue. So I'm just trying to -- am I -- I'm just trying to understand why the margin isn't increasing year-over-year with a higher revenue.

Well, that's -- we're -- we got a lot -- like I said, a higher mix of fleet deliveries in the second quarter, and that's...

Trucks go out faster than parts.

Yes. That's a good point. If you look at the mix of trucks, we're going to be up -- we're up 30-plus percent on trucks in the first quarter, and the same will be true in the second quarter. And the incremental margins on trucks just isn't as great as it is on parts. So that proportion has a dampening effect on the overall margin.

That's -- I'm sorry, you're talking year-over-year? Or the first quarter?

Yes. Year-over-year. Year-over-year. Yes.

Right. Okay. So it's a mix issue. Even though the parts business is growing quickly, the trucks are growing more rapidly?

Are going a lot faster.

Right. Okay. That's helpful. And then, just on the Brazil investment that you called out in the press release, is there any color around that? And I guess, can you talk about what you're doing with that investment and kind of how you feel like your distribution is set up in that market at this point?

Yes. So our distribution, we've had presence in the Andean region of South America for decades. And we introduced the DAF truck models into that region about 5 years ago and continue to see the DAF models increase their penetration in the Andean region of South America. And we continue to invest in products for that part of the business. And of course, Brazil, we introduced a heavy application, off-highway application late last year at the Fenatran truck show. And that truck is now entering production and should help support our dealers and our customers with an additional expanded product line in Brazil. The team there is doing a great job. The product is very well received. And our distribution network continues to expand as we progress and build out our truck line as well as our distribution capabilities for the country.

Your next question comes from David Leiker with Baird.

This is Joe Vruwink for David. I might have missed this, so I apologize. But I think gross margins in Q1 finished above the guide you provided a quarter ago. What exactly drove the upside in profitability?

Yes. I think, as again, the first quarter, we had a favorable customer mix in terms of deliveries to dealers for stocking purposes as well as smaller fleets, and we'll see more larger fleets in the second quarter. And the parts business, great activity with respect to propriety parts in the first quarter.

Okay. That makes sense. If I can shift gears, the 40% increase in orders for DAF, that's a pretty big gain. Particularly it seems like some of your competitors in Europe are seeing decelerating order activity. Any more color on why DAF would be performing at such a wide variance to what maybe some of the other OEMs are seeing?

Well, I've got a few thoughts. I'm sure Harrie will have a few. But the key thing is the great products. I mean, the CF XF was named International Truck of the Year. It provides a 7% better fuel efficiency. And so I think the customers appreciate that, and they're seeking to take advantage of the great products that DAF is offering. Harrie, you have any...

I can only echo that, Ron. And I think the end result is that we've nicely grown market share in the first quarter, and it's not only in registrations and share, we see that back in our order intake too, that more customers, more fleets are choosing for the DAF International Truck of the Year.

And then, I know what I'm about to ask is a bit of a convoluted calculation. But if I think about your presence in Europe, obviously, great positioning, and the U.K. market has started to soften. So to do this type of market share in Europe, I have to imagine that you're reaching new all-time record levels of share in a lot of individual countries. Is that a fair characterization?

Yes. At or near record-high levels in a lot of markets. So yes, the trucks are performing well and it's well-recognized across Europe.

Your next question comes from Steve Volkmann with Jefferies.

I'm wondering, around as we sort of stretch out the backlog here, what you're seeing in terms of new truck pricing. Is there an opportunity to get a little bit more as the backlog stretches out?

Yes. I mean, that's typical. It's a supply and demand business. And yes, there is definitely an opportunity, and we had saw some moderate pricing gains in the first quarter.

But again, given the sort of the length of the backlog, I'm supposing that probably wouldn't really show up until the second half of the year, in terms of maybe seeing it in your numbers? Or maybe the margin's slightly better? Or just how would we think of that timing?

Yes. I think you'll see it gradually progress as we progress through the year.

Okay. And then, I'm curious if you have any kind of initial just big picture thoughts on the cycle relative to what 2019 might look like. And we've obviously had lots of cycles that have been heavily impacted by emission changes. We don't really have that this time. What's your view? Is '19 reasonably assumed to be sort of flattish? Or does it need to be down, just because we're having a good year this year? What -- how do you just look at the longer term?

We're going to continue to build trucks for our customers and we see no signs of lessening in demand. So as the year progresses, we'll get a better feel for 2019. But our assessment is that as long as the economy is good, the truck markets will be good.

And do you have already some of your build slots in '19 spoken for?

Oh yes, for sure. Your customers, there's larger fleet customers oftentimes will place orders for multiyear. So yes, there's a nice baseline, if you will, of business that's being booked for 2019.

Your next question comes from Andy Casey with Wells Fargo Securities.

I'm just wondering, I don't think you addressed this, but could you help us understand the currency impact on revenue and EBIT margin? I'm just wondering what that -- how that may have impacted the overall incremental margin performance.

Yes. I'll let Michael address that.

Yes. The impact on currency compared to prior year on revenues is about $240 million of increase. And that's mostly due to the euro appreciated against the dollar. And the impact on pretax income was about $19 million, positive.

Okay. That explains some of it. And then, kind of going back to the pricing question that Steve asked just a bit ago. Can you discuss how you approach balancing price-up versus market share, specifically in the U.S. and Canadian market? Your European orders are quite strong, obviously.

Well, it's the same every day. I mean it's a competitive marketplace. And everybody is courting customers and so you have multiple people vying for business. And we obviously continue to earn a premium on our products relative to the competition. But customers are willing to pay extra for the lower total operating costs, the higher residual values, but that's -- there's a limit to that. And so we focus on the value of our products, and we don't compete on price necessarily. So...

Sure. Just the reason for the question, Ron, is it just seems like some of your competitors appear to have constraints that are limiting their ability to satisfy additional orders in 2018, a couple of them to be specific. But I'm just wondering, since you have incremental capacity that you could service orders that may have some more immediacy than waiting until, let's say, the first part of next year for delivery. Does that offer a pricing opportunity? Or is it -- is it...

Yes. I mean, I guess -- it's going to be moderate, Andy, I think, in terms of the overall effect on margins.

Your next question comes from Steven Fisher with UBS.

Just wanted to ask you about your warranty experience. I think you've been running better than some accrual rates on certain products. I'm not sure if that was the MX-11. Just wondering if that's continued. And if so, is there a certain point in which you reassess that accrual rate that could come in and support margins?

Yes, we reassess accrual rates every quarter. And so it's closely watched by Michael and his team and the operating folks. And so our warranty expense really reflects our best assessment of what's going on in the field at any point in time. As you transition to new models, you'll provide a little bit of extra warranty in the early days. But our experience is that, that will rapidly come down because the products are better. And so we see the ebbs and flows of new models and then maturity of new models, et cetera, over time.

So is that something that could be a second-half tailwind for this year?

We'll evaluate it every quarter. So again, we're reflecting our best estimates every quarter along the way.

Okay. And you mentioned that there's some modest pricing available with smaller orders. When do you think production might be tight enough in the industry to see that higher pricing more broadly? I'm not sure if there's a certain level of industry production or retail sales that you're thinking about that might be more supportive of a broad-based pricing improvement. But I guess I'll ask it in those terms.

Yes, I think we're -- again, it's a competitive environment. And so you always balance the pricing opportunity with your ability to earn the share that you think you should earn. So it's an ongoing balancing of those 2 factors.

So when do you think you might get an indication of pricing initially for 2019? Typically, it would be in your fourth quarter. Others have said perhaps it could happen earlier than that this year. Is that the way you're thinking about it?

Again, pricing is sort of an ongoing daily assessment of how the market's trending. And so we'll see. We'll just make those calls as we progress throughout this year.

Your next question comes from Jamie Cook with Credit Suisse.

I guess, just 2 quick follow-ups. In case I missed it, did you talk about what your gross margin assumption was for the year? I know you gave it, sort of, for the second quarter. And then, last, you raised your R&D again. It's just -- is this the new run rate in terms of how we should think about R&D, given just required investment in EV and alternative technologies?

Yes. So for margins, I think that mid-14% level for the year is probably a pretty good proxy for what we think the average for the year will end up being. And in terms of R&D, yes, I think the run rate of the first quarter is a good proxy, the first quarter. And did see -- we saw about a $5 million to $6 million increase in R&D as a result of currency movements. But the rest of it is focused on new truck models, new engines, including, as you mentioned, electric, hydrogen fuel cell and hybrid vehicles. So we're making investments on a lot of fronts, including the advanced driver-assisted systems, autonomy, and truck [connect].

And sorry, that comment was -- my question was more towards beyond 2018. So that's for beyond '18 as well, right? Just longer term?

Yes. I think that's a good indicator for the run rate. Yes.

Your next question comes from Courtney Yakavonis with Morgan Stanley.

Just curious if you can give us an update on the penetration for your MX engines, and if you've updated your long-term goals for that? And then, also if there's any difference to what you guys are currently seeing in the quarter versus what's in your backlog. And then, secondly, just any impact that, that might be having on the aftermarket sales that we're seeing from you guys, especially since we're starting to be about 5 to 6 years out from when those first engines came onboard.

Sure. So yes, we continue to be in the 40% to 45% range and we would love to see that develop over the coming years. And we think it will as more and more customers realize the benefits of the engine and as we get into greenhouse gas regulations in 2021 and the subsequent years. I think the demand for our engines will continue to increase. And yes, we are definitely seeing the benefits of that in the part sales. And we're now into the seventh year of -- since we started production of the engine here in North America, and the population continues to grow. I think we're approaching close to 200,000 MX engines in North America. And of course, DAF has the PACCAR engine in all of its trucks. And so we definitely are seeing the benefit on the aftermarket parts side, as a result of the engine introduction and the continuing growing population.

Is there any way to quantify that?

Yes. I would say that -- I don't know the exact numbers. But the MX engine growth is definitely -- probably above the overall average for year-on-year.

Your next question comes from David Raso with Evercore ISI.

I'm not sure if it's one, given your history, you're going to answer but if you could add a little context to the mix issue. I know you're not going to state blatantly your difference in margin between an owner-operator sale on a fleet. But I think we're all trying to, a, understand where we are on the cycle. But even on the margins themselves, if you pull out the currency for the quarter, it's still, say, a 16% operating incremental margin. I mean, it's still not great. And we're just trying to think through, if '19, the cycle is longer than people thought, and the mix leaned back the other way a bit, what kind of impact is that really having on the margins? Because it wasn't like last year's incrementals were that fantastic either with a different mix, or at least not as negative a mix. So can you at least frame it a little bit for us, what the mix implications are on the profitability?

I -- David, I just have to disagree with you a little bit. I think the margins are excellent in terms of looking at what we're providing to our shareholders. And so as we think about the mix, the mix goes up and down quarter to quarter, depending on whether you're selling a large mix of fleet customers at a point in time. And that sort of ebbs and flows from quarter to quarter, year to year. And so we're -- we feel good about the operating results. We have the best margins -- best operating margins in the industry. So I think we feel good about where we're at.

Okay. I mean, just so we level set people's expectations, I mean, are these gross margins at these truck volumes something that you're comfortable with? I mean, should we not expect margins to be viewed internally as we needed to move these higher materially? Or as someone said earlier, higher revenues, higher unit deliveries, we're not seeing a lot of gross margin improvement. Just so we understand. I mean, maybe it's the proper investments for future growth, technology, pushing in other geographies to smooth the cycles out. But I think people keep going back to the well hoping there's a quarter or 2 where the margins can really pop. And maybe it's just our fault on the Street expecting that to occur.

Well, I think yes, as we talked about earlier, the growth in revenue is particularly strong on the truck side relative to the parts side. And so at 12% on trucks and 27% on parts, as the trucks are accelerating faster, that sort of dampens the incremental. And you can look, we've delivered 15% to 20% incrementals over time, and that's what we'd expect.

Your next question comes from Mike Shlisky with Seaport Global.

So your share in medium division has been pretty strong this year so far in North America. Are there any success stories here that kind of caused that? Any kind of model to end market? And can you give us, maybe, your more broader view on the (inaudible) market for the year?

Well, on the medium-duty side, we think the market will actually be a little bit stronger this year than last year. And of course, last year was a record year for PACCAR for medium-duty truck deliveries, over 29,000 trucks. And so -- hence, based on the strong share, and the good market conditions, we have an opportunity to have an excellent year on the medium-duty side. We've had some growth in expanding our customer base, some significant orders that have come in. And so we're excited about the prospects for that vehicle, and we continue to invest in enhancing that vehicle over time.

Okay. Great. I also wanted to ask, secondly, about SG&A. I want to follow up on what Jamie asked about R&D. It got -- it went a little bit higher this year, up 20%-plus from the previous year. Is that because of the top line increases? Or is there any higher structural costs we should be aware of for the rest of the year?

So about $7 million of that increase on SG&A was currency-driven, slightly higher professional fees. The first quarter typically has a little bit higher cost related to long-term incentive grants that doesn't recur through the rest of the year. So those are sort of the key reasons for the increase.

So perhaps maybe up slightly year-over-year when you [stencil] those things out, but it shouldn't be a huge increase for the rest of the year compared to (inaudible)...

Yes. As we look forward to the next few quarters, I would say it would probably be slightly lower, maybe, than first quarter levels.

Your next question comes from Rob Wertheimer with Melius Research.

I had a quick one on the current orders, and then, a bigger picture one to some electrifications. So on current orders, I mean, the strong ones we've seen in the recent months this year, do you have a sense -- do customers want to take delivery of truck right now, and OEMs want to push them out a little bit? Or are they really seeing a longer duration of the cycle and happy to have it 2, or 3, or 4 quarters from now? I'm just curious about the urgency of those orders.

No, I think it's -- I think the urgency is strong. I think the customers want their trucks as -- they've put in orders for this year or orders for, maybe, that extend into 2019. But they've thought about what they -- when they want their deliveries. And so it's -- they're definitely, definitely looking to get the trucks. The fuel economy of our current vehicles is excellent. And so they get an operating advantage by buying that new truck as well. So no, definitely, I think there's -- they're definitely wanting to get the trucks delivered.

Okay. Makes sense. The second question, just, if you could give an update on electrification. We've seen some product announcements in recent days, and obviously, you guys have what you're working on. I mean, how do you think about the next 5 years? Is it where you're trialing solutions and experimenting with different suppliers, different platforms, different ideas in the markets 5 and 10 years out? Or do you think you actually have to be making some real decisions on platforms that will continue and endure? I'm just really curious about how you approach investing in that, and what level of decision you think you have to make? And how fast?

Yes. So we are exploring a lot of different avenues with full electric hydrogen fuel cell, hybrid. And so we've got a really diversified program. We've got trucks that are in the field being tested. And as we look at the truck segments that we participate in, we think the part where the involvement will be the greatest will probably be on the medium-duty side, the lighter heavy side, regional urban deliveries, where they can support the range. Still, the issue is the economic viability of electric and fuel cell vehicles just because the up-charge, typical electric truck's going to be about twice as expensive as a normal diesel vehicle. So as long as there's subsidies and as long as maybe the regulations dictate zero-emission vehicles in certain zones in large cities, that's going to create some demand. But until it's economically feasible, there won't be widespread demand. So that could be 5-plus years.

Perfect. And that 5-plus years applies to even like the medium-duty and the in-town Class 8s? I mean, obviously, long haul's a long way out, right? But I don't know if you feel...

I don't think it applies to all because, again, the economic feasibility has got to make sense for the customer.

Your next question comes from Robert Salmon with Wolfe Research.

You've taken up the parts revenue outlook the past few quarters. And I guess piggybacking on an earlier question about kind of the MX engines, can you give us a sense of how we should think about the revenue growth opportunity longer term, in parts?

If you look at the last 15 years of our parts revenue development, it's averaged an 8% average annual growth over that period. And I think with the engines, I don't see any reason that we'll see a significant deviation. Again, the team has done a great job. We continue to make strategic investments in new distribution capability, continue to invest in technology in those distribution centers to be able to have the best parts availability and on-time delivery for our customers. The programs the team has put together continue to be enhanced. And so I think that we'll continue to see that pace of growth, I think, as we look into the future.

That's helpful. And if I'm kind of thinking about your factory utilization. You've obviously brought up production rates more recently. Can you give us a sense of where you are on kind of number of shifts, where that can go to before you see potential constraints in terms of PACCAR hitting its customer needs?

Well, we have assembly capacity that can go well beyond. But obviously, it's a -- as I said before, it's a very coordinated effort that is required with our suppliers to make sure that we've got all the components to be able to support the trucks, and our teams have done a great job of delivering on that. So it just has to develop over time as we work with our supply base and our teams to make sure that we're doing it cost effectively and efficiently.

Of course. And I guess, if I'm thinking about your answer, how much flexibility do you have with your supplier base to increase further from where the build plan is going for '18?

We always seem to be able to find a way to get that next incremental truck. So I don't think there is a limit on what we can do. It just takes gradual progression over time.

Of course. And if I can squeeze one more in. From your customer base, how many of orders are coming in without a trade? I.e., kind of net fleet growth, particularly in the kind of the smaller owner-operator and kind of medium-sized fleets that you guys interact with.

Oh, the vast majority would come in without a trade. Yes.

Your next question comes from Mario Gabelli with GAMCO Investors.

I'm just trying to figure out this -- you may have mentioned it back in February. But 100% write-off used equipment, how -- what's happened to the used truck fleet in light of the ability to deduct 100%? And then, the same thing with regards to your dealers preordering, so you kind of tick and tie the 2 together? And then, I'm going to assume that what happens in November -- after the election, that 100% write-off is eliminated. Do you get a surge in orders for equipment, but you can't handle it?

Yes. I think the demand for orders has largely been driven by the economics, the demand for freight by shippers to get freights, get goods delivered. Obviously, the 100% deductibility of equipment costs is definitely a positive for customers both new and used. And we have seen some uptick in the demand for used trucks as well as the pricing for used trucks and how you attribute that to the tax change or other things. But it's in one of the factors, I'm sure...

And now for the easy one, Navistar -- Volkswagen has taken their company public. They'll be buying Navistar at some point. There's some discussions that Marchionne is going to be leaving and retiring, and he wants to merge IVECO with someone. The only logical player is DAF, i.e. which on any of these would you comment on? Let's start with the easy one, Navistar and Volkswagen, any particular changes in distribution as a result?

No. We've expected that to be there for -- since they...

Some time, yes, I know. Listen, I was just on a rush call, so I'll listen to what Rusty says about life and liberty.

Your last question comes from Steve Volkmann with Jefferies.

I snuck one in. I was just curious, how you guys are thinking about cash these days. You have like $3.5 billion, I know you like to have cash on the balance sheet, but I'm assuming you have a little more flexibility post the tax changes, et cetera. And I'm curious if you're -- have any thoughts relative to share repurchases? Or do you prefer to just kind of put it into the dividend at year-end? Or just any guidelines about how you think about that?

Yes. I mean, if you look at our cash balances -- balance relative to our asset base, it's stayed in the 15% to 20% range over quite some time, and that's about where it's at currently. So we're quite comfortable with where we're at. And obviously, the tax law provides some additional benefits that the Board will take a look and evaluate, as they always do, the opportunity to repurchase shares and to pay dividends. So it's an ongoing capital allocation assessment that gets discussed at the Board meetings.

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

We'd like to thank everyone for participating and thank you, operator.

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