帕卡 (PCAR) 2018 Q2 法說會逐字稿

Good morning, and welcome to PACCAR's Second 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. 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. I first want to thank the investors and analysts who participated in our investor conference in Eindhoven in May. The DAF employees and the PACCAR team were proud to share DAF's world-class facilities and innovative products and services.

PACCAR's pleased to report outstanding financial results for the second quarter of 2018. PACCAR achieved record quarterly sales and Financial Services revenues of $5.81 billion and strong net income of $560 million, a 9.6% after-tax return on revenues. Revenues were 23% higher, and net income was 50% higher compared to the second quarter last year.

PACCAR Parts generated record revenues and record pretax profits of $195 million, its sixth consecutive record profit quarter. PACCAR achieved excellent Truck, Parts and Other gross margins of 15%, driven by industry-leading products and services, robust global truck and aftermarket parts demand, and strong operational performance. I am extremely proud of our 27,000 employees who have delivered industry-leading products and services to our customers worldwide.

PACCAR delivered a record 46,400 trucks during the second quarter, 5% more than the first quarter this year. U.S. and Canada Class 8 industry truck orders in the finals -- in the first 6 months of 2018 were more than double the orders in the first half of last year. DAF achieved record market share of 16.5% year-to-date this year. DAF's above 16-tonne orders were 26% higher in the first half of 2018 compared to the same period last year.

PACCAR's forecast for the European above 16-tonne market is a range of 300,000 to 320,000 units, reflecting strong freight and truck demand and a good economic outlook. We expect to deliver slightly more trucks in the third quarter this year compared to the second quarter. Deliveries will be higher in North America, partially offset by fewer build days in Europe due to the normal summer shutdown. Second half gross margins for Truck, Parts and Other will be similar to the first half.

The U.S. economy's growth is driving record freight tonnage. Customers are operating at high utilization levels and are expanding their fleets. We estimate the U.S. and Canadian Class 8 truck industry retail sales to be in a range of 265,000 to 285,000 vehicles this year.

PACCAR Parts' quarterly pretax income of $195 million was 29% higher than a year ago. Pretax return on revenue was an excellent 20.1%. PACCAR's parts business generated record quarterly revenues of $968 million, 18% 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 13% to 15%.

PACCAR Financial Services' second quarter pretax income was $72 million, 16% higher than second quarter last year. The PACCAR financial portfolio performed very well. Used truck industry demand in the U.S. has increased, boosting used truck prices by 5% to 10% compared to last year.

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-assisted systems and truck connectivity. At our investor event in May, we were pleased to have the DAF CF electric and hybrid trucks available for the attendees to drive.

In May, PACCAR's Board of Directors increased PACCAR's regular quarterly dividend by 12% to $0.28 per share, and earlier this month authorized an additional $300 million share repurchase program. PACCAR is realizing the benefits of strong truck markets worldwide and is delivering the highest-quality products and services in the industry.

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

(Operator Instructions) Your first question comes from Steve Volkmann with Jefferies.

So I guess I'm trying to get a sense of -- Ron, you talked a little bit about how used truck pricing is up 5% to 10%. Can you give us a sense of what you're seeing in new truck pricing? And then, sort of related to that, how far out now are you sort of quoting deliveries? And I'm trying to get a sense of how stretched out the backlog is and how much impact that might be having on your ability to get some price.

New truck pricing is up a bit. And we have seen commodity costs move up a bit during the course of the year. And our pricing -- our sales prices have moved up to offset that and earn a little bit additional margin. And on the backlog, backlogs are strong. We're taking a fair number of orders for 2019 build at this point. So the backlogs are really solid, really in almost all of our markets.

Okay. And then, I guess, in Europe specifically, I think you said DAF order is up 26% in the first half, and...

That's correct.

Obviously, the market growth rate is nowhere near that high in terms of your forecast. So it looks like this may be a year when DAF really gains quite a bit of market share. Or do you think there's some reason that DAF's order rates may fade in the second half?

So we're at 16.5% year-to-date. And Harrie, what was the number for last year, for DAF?

15.3%.

Yes, 15.3%. So almost a share point gain based on first half results. So DAF had great product introductions in the second half of last year with the new CF, XF and LF -- CF, XF won International Truck of the Year. The feedback in the trade press and from customers has just been outstanding. And so that's well-recognized, and that is really what's driving DAF's excellent performance for the first 6 months this year.

Okay. And then, just a quick follow-up, and I'll let it go, is that, obviously, the markets are concerned about things peaking and sometimes I guess good is bad, or something like that. But I'm just curious if you have any opinion as to sort of what the length of this cycle might look like, and whether you feel like current conditions are sort of peaky and kind of as good as it gets.

So I think as we mentioned in our press release, we feel very good about 2019 based on the demand that's in there for our excellent products. Parts business is great. Financial Services has got great new business volume. So we see no signs of abatement in terms of second half and heading into 2019.

And Steve, I would like to add if you look at the current market dynamics, a lot of the demand is driven by strong freight, strong economy, excellent fuel economy. And some of the prior cycles in 2007, 2010 and 2013, the demand was driven by prebuys or emission legislation, and that's different today.

Your next question comes from Steven Fisher with UBS.

Just on the deliveries in the quarter were up, you said about 5% versus, I think the original guidance is 7% to 9%. To what extent was that due to supplier constraints? Or was it something else? Then, maybe you just broadly talk about supplier picture at the moment.

Yes. As I think -- as I've mentioned previously, that as we go up in build rates, it requires really close coordination with all of our suppliers. And as we work through the details, that was what was able to be delivered. And so teams purchasing, supplier quality, materials, plant guys, did a great job of working with our suppliers. And as we mentioned, we'll continue to see some upward momentum and build in the -- particularly in North America in the third quarter, as we continue to work with our suppliers to support demand from our customers.

Do you think the supply chain constraints are materially eased at this point? Or are they relatively balanced and able to meet the production requirements that the industry needs? Or is it still...

Yes, I'd say balanced. Yes.

Okay. And then, maybe just shifting gears a little bit, if you can talk about what you're seeing in the oil markets today. How much of your revenues are oil-related overall, and maybe how much you're getting in help from actually transporting of oil versus trucks needed in the production process?

Gosh, the oil segment really accounts for a small percentage of our total business. Peterbilt and Kenworth and DAF all have great products to support the industry, and we're seeing some benefits in that arena. But it's really -- we're seeing benefits in all areas. So oil is just not a significant piece of the total pie.

Your next question comes from Ross Gilardi with Bank of America.

I just wanted to get back to production. I mean, as you said, your DAF orders are up 26% in your first -- in the first half. I mean, your European deliveries were up like 12%. Rest of the world, up 15%. So clearly, production is -- has lagged thus far. I mean, the message coming out of the Investor Day seemed to be that capacity's a nonissue for DAF. I mean, have you rethought that at all, or why the actual lag on production versus orders?

Well, I mean, if you look at North America, orders are double, and retail sales and production are nowhere near their order intake rates. And so the customers' order intake usually is more lumpy than production and retail sales. So it's just balancing longer-term production rates with order intake rates over a period of time. So I wouldn't read anything to that. The factory has plenty of capacity and in Europe as well. We work closely with our suppliers to support our ability to deliver timely to our customers based on their delivery expectations.

Now if you looked at the ACT data over the course of the second quarter, there -- for the overall market, there seemed to be a production hiccup in May that sort of bounced back in June. Did you experience any of that production slowdown, or have any issues with production in the U.S. in -- throughout the second quarter?

No it's pretty normal for this time in the cycle.

Okay. And then, just with respect to the Class 8 orders, I mean of course -- I mean, they remain off-the-charts good. I mean, do you think there's any double or tripling -- triple ordering going on and to enable fleets to get in front of the production queue? And do you have any policies in place on down payments or otherwise to prevent double ordering? Any reason to think that, that's going on?

We have long-term relationships with a lot of our customers. And I have no idea what they're doing with other makes, but we feel good about the backlog. And we're set at this point with good-quality long-term customers.

Your next question comes from Ann Duignan with JPMorgan.

When we were sitting here a quarter ago, you said a couple of things about gross margins going forward. One, you said that your mix of truck deliveries will be more levered to fleets, and therefore that would weigh on margins. And then, I think you had expected parts to slow down, and also, mix to weigh on margin [SIR]. Could you just update us on both of those and what you did see in the quarter? Should we just take away from the strong gross margin that volume is a wonderful thing?

Clearly, we saw the benefits of operating volumes in the quarter. Parts margins were 27.9% in the first quarter, 27.5% in the second quarter. As we look to the second half of the year, we think that the margins for the second half will be comparable to the excellent first quarter -- first half margins. So that 14.5%, 15% range.

So 14.5% to 15% now? So no fleet mix issues, no nothing? And what about FX? Is FX likely to weigh on margins, either at the gross level or at the EBIT level in the second half?

So what we saw on exchange rate is the benefit of exchange rate added to the margin dollars, but it didn't affect the margin percentage.

So it would be less of a tailwind if currency stays where it's at today?

It was not a factor in terms of margin percentage. No.

Okay. And then, just following up on -- one of the things we'd heard -- we have the truck show in Hannover this year, once every 3 years, I believe? My understanding is that almost every OEM will have an electric truck on display. Will DAF be exhibiting electric vehicles at that show? And what can you tell us about what you'd expect to see by your competitors at this IAA?

I can't comment on what the competitors -- you've obviously seen ours. You've ridden in ours. So you've had a chance to take it around the test track. So yes, we'll have -- we'll display those at the Hannover show.

Yes. And remember, mine was a manual drive too.

And you did a great job.

You didn't make it easy for me. And then, just a quick follow-up on the 26% order increase for DAF versus 41% in Q1. What does that mean Q2 orders were year-over-year? And then, given that registrations are only up about 4%, I'm going to assume that these are dealer orders in anticipation of sales picking up. Is that the right interpretation? And I'll leave it there.

The orders are typically driven by customer orders. And so yes, that's -- we obviously sell some stock trucks, but the vast majority of our orders are driven by customer demand. And so no exception with DAF. And Harrie, do you have the second quarter?

Second quarter was up 10% compared to the second quarter last year. Last year, we had a strong second quarter too.

Yes.

Your next question comes from Alex Potter with Piper Jaffray.

I guess one -- maybe 2 questions on Europe. First of all, I was interested if you could comment on any mix trends that you're seeing. Obviously, not all trucks are created equal. So if it's a medium-duty truck versus heavy-duty trucks or Eastern Europe versus Western Europe. Anything that we should know about in terms of what that volume might mean for the margin profile of what you're delivering?

So I always say the share enhancement that has occurred has really been driven by the tractor side DAF for the first half of this year was the -- had the #1 tractor in the market in Europe. So again, the CF, XF, the fuel efficiency gains, the 7% or so on average fuel efficiency gain is really well appreciated by the on-highway long-haul customer. And so we did see a bit of an increase in that particular area.

Okay. And that should be margin-accretive if I'm reading that correctly. Is that right? Or would...

Yes. Yes. Margins are all pretty representative when you talk about the heavy side.

Okay. And then, I guess, also on Europe, just if you could maybe take a step back. I know that historically it's not been maybe as violently cyclical as the U.S. If you could just, maybe, update us on your longer-term, I mean 2-, 3-, 4-year outlook for the European cycle. Not a specific forecast or anything, just sort of the general feel.

Just general feel, the economy has done -- has been in growth mode for 3 or 4 or 5 years. And the central bank and others are managing inflation and growth quite prudently. And so I -- there's nothing that we see in our radar that's going to change the economic outlook for Europe for the near midterm.

Okay. Great. And then, last one. Specifically, on gross margin, you had mentioned there some gross margin numbers for parts in particular. It sounds like parts segment has been doing quite well, or at least no major downside from a gross margin standpoint, which I was a little bit surprised about. It seems like...

I would go with quite well.

Yes. That's what it looks like. But it seems -- maybe I'm reading it incorrectly, but it's from sort of listening to comments from others across the supply chain, it seems like a lot of the pressure, to the extent that pressure exists from supply chain bottlenecks or steel, aluminum, things like that, has been borne primarily by parts. And people prefer to prioritize ordering or delivering the OEM-oriented parts instead of aftermarket. But apparently, you didn't see any of that. So I -- just any comments on that topic would be insightful.

I think, as we look -- obviously, you've got to keep the factory running, and so that is job one. But the suppliers have done a great job supporting our total business, both the factories and the aftermarket parts business. So at this point, we're in good shape from a supply and support standpoint.

Your next question comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could talk about your expectations of gross margin cadence 4Q versus 3Q? Over the past 3 years, we've seen 4Q have lighter gross margins than 3Q, either because of timing of parts deliveries or rebates. And I just wanted to see if we could get just more granular comments from you folks. You mentioned back half margins look like first half. But does that mean 3Q higher than that, and 4Q lower than that? Can you just give us some more context on margin seasonality this year?

They'll be in the range that we talked about.

For both 3Q and 4Q?

Yes.

Yes.

Okay. And then, as you folks assess the impact on the supply base of the tariffs that were put in place on July 6, can you just talk about what's your rough sense on whether any of your suppliers could be impacted by tariffs? Do you have an early read on how that looks for your supply base?

Yes. I think the early read is that there's not going to be a significant impact to our business and our expectations for operations based on what we know now. As you know, things can change quickly in that arena.

Okay. And lastly, can you just update us on the productivity that you folks are seeing as you've ramped up production significantly in the U.S? What kind of productivity are you seeing from the labor force and the next round of production increases? Can you just give us a flavor for how much of that will be overtime versus new shifts?

Most of it is just adding to the first or second shift -- mostly the second shift operation, to support our demands in our factories.

And the productivity that you're seeing as you're adding to that shift? How does that compare?

It's consistent with what we typically would see. I mean, you're leveraging that fixed cost structure and the supervisory structure and management structure of the facilities as you go up, for sure.

Your next question comes from Joel Tiss with BMO Capital Markets.

I wonder -- can you give us a little bit of an update on Brazil, and maybe just talk generally about any other geographic markets that you're looking at that might turn out to be interesting?

Yes. Brazil -- the team, as we've talking about before, has done a great job of having a great product for the market. It's very well-received by our customers. We're going to continue to increment production. For the year, we'll probably deliver about twice as many trucks this year as we did last year, which will yield some further share growth, I think, through mid-month, or roughly at about a 6% share of the above 40-tonne market in Brazil. So team is doing great. We're being able to leverage the fixed costs, and so we'll continue to develop that business. The dealers are doing well. And so the long-term prospects for Brazil continue to be excellent. As you look at other parts of the world, Mexico, we continue to generate the highest share in our company at 35% or so share of the heavy market in Mexico. Australia is -- the economy is good, truck demand is good, building trucks at a strong rate in Australia. And demand for products outside of our primary markets in places like Russia, Turkey, is good. So it's good. Things are good around the world as we sit here today.

All right. And just a couple of, like, nitpicky. Can you talk a little bit about the $300 million going forward of share repurchases that aimed at just soaking up options? Or do you aim to take the share count down a little bit? And your inventories and receivables are up about 36%, which is well above your revenues. And I just wondered is there a strategy there to have a little extra parts inventory? Or is there something else going on?

So the share repurchase, I mean, as you know, from time to time, we'll buy back shares. At the current bargain price, it's quite a deal. So we should be active in the market. And thinking about the receivables and inventory as you're -- as you may or may not recall, we typically close some of the factories down over the Christmas holiday period. And so inventories and receivables at year-end are lower than they are relative to activity levels, than if you look at the other 3 quarters of the year. And so we're seeing some effect of that on both of those metrics.

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

Just wanted to ask -- go back to the supply chain discussion for a second. Our -- is PACCAR making any extra investments in its suppliers to sort of help them along here? Or is it just kind of business as usual?

I would say it's pretty much business as usual. But we've had a long history of where suppliers can benefit us and them from -- if there's a win-win circumstance, we're more than happy to make those investments and support suppliers -- to support PACCAR.

Okay. But nothing kind of unusual for CapEx?

Nothing of significance at this point.

Okay. And then, just follow-up just on the strength in the parts business. You raised the outlook, the revenue outlook there. Can you just -- maybe just frame what areas, whether it's engines or kind of just regular business activity has been surprising to you, or the source of the upside relative to your prior expectations?

Yes. I'd say nothing surprising. But engines -- engine parts growth is higher than average because we're growing the part of PACCAR MX engines every day. We're putting 100% of PACCAR engines in DAF vehicles, and they're building at record production rates in Europe. We're putting 40% to 45% MX engines in Kenworth and Peterbilt trucks, which are at high production rates. And the engine has now been in the field for 8 years, and so we're starting to see just the ongoing benefits of the engine parts sales. Our teams have just done -- they put together some programs of supporting fleets. The TRP stores, the e-commerce initiatives, all those things are yielding just great results and support for our customers, a big focus with their uptime initiatives to service our customers in the best way in the industry. And that's recognized and it keeps customers coming back to PACCAR Parts on an ongoing basis.

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

On the outlook, just going back to Seth's question from a different perspective. Parts up to 13% to 15% from prior 8% to 10%. At the midpoint, it kind of implies a slight decline, I mean, slight, like 1%, in the second half for revenue from the first half. And that's coming after 10 consecutive quarters of sequential growth, and then, clearly, also moderation year-over-year to about 10% from 18% in the first half. Can you help us with the key factors when you're looking into the second half that might be causing you to expect a flattening out?

Yes. I think that's the conservative guys at corporate not listening to the parts guys, what they're going to be able to do. So the parts team is obviously doing a great job, a lot of initiatives ongoing. And so we're just -- appreciate that they've done -- the trends have been, and we expect -- we're just being a little bit conservative in terms of our outlook at this point.

Okay. And then, I'm just wondering, with the currency shifts that have occurred, maybe it's a little bit too early to see this. But has that impacted any export demand in any region? And if so, where are you seeing any sequential hesitation?

Well, I'm just sort of searching my mind. I can't think of currency impacting demand. Yes, I think demand is there. And currencies impact price realization or cost from time to time, but again, nothing significant.

Your next question comes from Jamie Cook with Credit Suisse.

I guess, first question, just back to visibility that you guys cited into 2019, can you just talk about how far your visibility extends relative to sitting here last year? And was that comment specific just to North America or Europe as well? And then, my second question, as we think about 2019 if you think about what some of the industry experts are forecasting, I mean, should we expect -- can incremental margins, given where we are in the cycle, improve from this level? Or should we expect them to temper, just because the growth rates probably won't be as robust?

Yes, I -- if you look at the orders -- again, order backlogs are strong around the globe, and there's a -- order intake is a combination of current year and future year. And a lot of fleets are reserving spots for next year's build to make sure they get their trucks that they need. And so we're in great shape from that perspective. And from a margin standpoint, we've sort of talked about what we expect for the second half, and we'll see what next year brings.

But is your visibility greater as we sit here today versus last year? Or comparable?

Oh, yes. Yes. No -- yes, I think -- yes, for sure. Yes.

Okay. And then, you've said before, normalized incremental margins are sort of 15% to 20%. Is that off the table going forward?

I don't think that's -- that's what it's been for years, up and down. So I think that's pretty good metric.

Your next question comes from Courtney Yakavonis with Morgan Stanley.

Just going back to Steve's question on pricing. I think you guys have mentioned in the past that you've been able to get a little bit better pricing in some of your smaller truck orders. So I'd just be curious, in the backlog right now, has it been a lot of those big orders from large fleets? Or have the -- has a lot of the pricing been coming through still on those smaller orders to offset commodity costs? And then, also, are you getting any pricing on the parts business? Or is that all volume?

I think the pricing has been pretty normal in terms of the mix of customers that are in the build as well as in the backlog. So I don't think there's any particular mix difference. And on the parts side, pricing is -- again, it's a competitive market in our -- we constantly monitor what's the competitive price that we need to achieve our goals and targets. And the team does a good job of managing that on an ongoing basis. I think you'll see in the 10-Q analysis that we're seeing some price realization in the parts business in the first half this year.

Okay. Great. And then, just when we think about the used market, I just -- you've obviously talked about how the pricing has been up. And just curious, is there anything about the mix of the used market right now? Is it younger than it's historically been? Are there more automated versus manual trucks in it? Or anything we should be thinking kind of what the used market looks like today?

I would say, from our used truck perspective, what you'll see is the trucks that are coming back starting now going forward are more of the latest developed trucks, the Euro 6 trucks, the model 2.1 meter trucks in North America, which will have some benefit on our used truck pricing as we move forward.

Your next question comes from David Raso with Evercore ISI.

Just a straightforward question, I must have missed this. Price versus cost in the quarter just reported, did it improve from what we saw in the first quarter? And the rest of the year, does price versus cost, not just pricing, but price versus cost, improve from here?

No, I think it was -- the second quarter was similar to what we saw in the first quarter. And I think -- without -- I think it will be similar in the second half of the year.

Okay. And again, I might have missed this. The extension of the orders, the visibility into '19, can you quantify it a little bit, or give us some sense of what percent of the builds for say, first half of '19 are spoken for, assuming all the orders stick?

No, we don't want to talk about that at this point.

Your next question comes from Sameer Rathod with Macquarie.

I think there's been some recent discussion about the current administration revoking clean air waivers in the state of California. Any potential thoughts or any thoughts on the potential impact that could have on the truck market?

We just -- it's so hypothetical, we don't really think about that. We know what the current law is. We know what has been established for Greenhouse Gas Phase 2 for 2021, 2024 and 2027, and we're managing our business to deal with what we know, and so that's what we're focused on. If something were to change, we can deal with that at the time, but right now, we're focused on the laws that exist.

Okay. I guess my next question is on labor. Are you having difficulty finding labor in any of your facilities?

No. The -- we have great facilities. We have a great place to work. We provide a great salary and benefits package for our employees. And so we're fortunate in that we're in communities that, that's well recognized. And when we typically recruit for people to support build rates, we don't have any problem increasing our headcount to support that.

Your next question comes from Joe O'Dea with Vertical Research.

When you talk about customers now ordering for 2019, and I think what you talked about was these are some large fleets who are trying to make sure that they get build slots. Typically, we think about model year, at this point 2020, prices is not really being set. And I think there's some speculation that some of these orders could be an attempt to get in front of more price increases. I guess, how do you address that? And how do you make sure that you take advantage of the opportunity to price in the strong demand environment and not give some of that away by just early orders?

Well, again for those transactions, there's typically multiple brands competing, and you have to be competitive in the marketplace. So it's what the market will bear.

Well, I guess, just have you seen that competitive dynamic ease at all, as backlogs have done what they've done, and lead times have extended, and when you get those multi-brand competitions in the bids, have you seen a little bit less price competition on those?

No, I'd say it's very typical. It's very, very, very typical of normal circumstances.

Okay. And then, when we think about Europe and where you're sizing the over 16-tonne market, midpoint about 310,000, at 16.5% share, that would be 51,000 units or so. I mean, it looks like you're on a delivery pace that would be slightly north of 60,000. Can you just talk about the medium-duty, how big that is? And are some of these deliveries going to dealers who are trying to stock on the new trucks, just given stronger demand levels there?

We're selling -- we sell a lot of trucks outside of the European market, so Russia, Turkey, Africa, Middle East, South America, Australia. So those -- the truck production from Eindhoven and Leyland is not just for the European market, it's for the globe.

Okay. But I guess it's -- I mean, if U.K. is going down and you've got strong share there, where is it that you're seeing some of the share outperformance now?

So we're doing really well in Central Europe, Eastern Europe. Poland, Czech Republic, Hungary is where we've grown share significantly, but also markets like Germany, France and Spain.

Your next question comes from Mike Shlisky with Seaport Global.

So I wanted to start with the R&D budget. The run rate so far this year in the first half is at the low end of your outlook for the full year. I was kind of wondering if you anticipate a ramp-up in spending in the back half of the year? And can you give us a sense of what you might be seeing as far as the R&D run rate in 2019 as well?

I think I look at the second half, the quarter is probably $75 million to $80 million a quarter. And next year, I don't -- I think the pace of spending would be similar to this year.

Great. And I also want to just get a quick detail on Brazil and how it's going there. Clearly, you've had very well-received models over there. My question is, there was a truckers' strike during the second quarter here where there was some freight that was jammed up on the highways or sort of didn't get on the road. Those disputes are kind of continuing. I was wondering if there was any impact to your business in the quarter, and could there be some pent-up demand postelection late in '18 into 2019, once it all gets sorted out?

So the truckers' strike, it affected the entire country in terms of shipments, and so yes, parts getting into the factory. There was a week or so where that was a challenge. But those trucks are -- have been made up or are being made up as we speak. The Brazilian economy has lots of potential. And we're seeing growth this year absent the truckers' strike. And the demand from customers is excellent, and particularly for the DAF product. And so we're optimistic. As we mentioned, we're going to be increasing our build rates in the second half of the year and hope that, that continue to build -- to grow our business in the future.

Great. Just a quick follow-up on that as well. It's now year 4 or 5 that you're in Brazil in any kind of way. Is this the point where you start to see parts ramp up in that part of the world? Or is that more of a year 6, 7, 8, story there?

It's ramping up all the time. It's relatively low numbers relative to our other markets because of the extension truck parts. But it's basically increased -- incrementing every month as more and more trucks get in the field, more and more of our dealers get connected with the -- all the transport companies and get the service into the shops. So it's an ongoing growth business as we go forward.

Your next question comes from Neil Frohnapple with Buckingham Research.

Ron, can you talk about the used truck pricing outlook in North America for the second half of the year and into 2019? I mean, it sounds like industry demand remains very strong for used trucks. But do you think that's the biggest risk for the Class 8 market in your view, given the increase in supply that could be hitting the market over the next few quarters?

No, I don't feel that's a significant risk at all. In fact, it's -- there's good demand and...

And as lead times for new trucks go up, used trucks become more and more interesting alternatives.

Yes. So late model used is a very good market right now.

Okay. And you don't anticipate that changing or increases moderating at all from here?

Yes. I think it feels like it's going to be a good second half and a good start to the first half for used trucks as we sit here today. But that's -- that will -- we'll see how it develops.

Okay. And as a follow-up to some earlier questions on the parts business. I mean, the sales growth for the parts business continues to exceed expectations. And I would certainly imagine it's outpacing the industry. And I understand you won't provide 2019 specific guidance, but is there any reason to think that the business can't continue to grow double digits in 2019 when -- considering the benefits, like MX engine penetration, the expansion of TRP?

Yes, we'll see how that develops. I don't have further comment at this point.

Okay. And one last one, how much did TRP increase on a year-over-year basis in the quarter?

So if you look at TRP stores and the same-store sales, stores that had been in existence for more than 12 months, I think the comp is up like 20%.

Your next question comes from Rob Wertheimer with Melius.

So maybe this is a tricky question to answer also, but it's also on parts. And you guys have had such tremendous execution and success in growing that business very steadily. Are you able to comment on the cyclicality of that business? I mean, should we expect, when the downturn comes, that -- I don't know whether you're getting 5 or 10 points of growth from cyclicality, or whether that's really all your own initiative. So I just don't know if you have any way to measure market share gains you've had, or upswing, downswing in that business that you expect, if there is an eventual downturn.

Yes, it's a difficult to measure market share. But I think, clearly, our business has grown at a faster rate than the overall industry. And again, I attribute that to all the initiatives that our teams have put together. If you look over time, obviously, the volatility of parts is much less than trucks. And it's the steady revenue and cash flow source that is there day in, day out.

No, it's been exceptional. And then, just a quick question just on the margin. I mean, there was a time a few years back when oil prices fell. And maybe you and some other parts businesses maybe picked up some margin, partly because of distribution costs falling. But at the end of the day, your margins just keep going up and up. So I assume that your competitiveness at these margin levels is as good as or better than ever. You don't have any fears on that point?

No. Not at all.

Your next question comes from Mike Baudendistel with Stifel.

I saw the press release you're going to offer the PACCAR transmission with the MX-11 engine. Can you just talk a little bit about the share that PACCAR has within it that's vertically integrated on transmissions? Where you think that's going to go? And is that big enough to move the needle?

Well, I apologize, Mike. I don't have a current sort of assessment of the penetration rate of that transmission with the engine, but it's excellent. I just don't know what that is. So let me -- we'll come back to you on that.

Okay. No problem. And just wanted to ask you also, it seems like you have more sort of confidence on the electric market than you did maybe a couple of quarters ago when you said there really wasn't a lot of demand from customers. Can you just talk a little bit about sort of which -- where are you seeing that sort of extra demand versus a few quarters ago? What types of customers are demanding electric?

Yes, I don't think there's much more demand. You just have to be prepared as the regulatory environment may dictate some level of zero-emission vehicles. So we've been quite active in developing our capabilities, and we'll continue to do so. The reality is the price of an electric vehicle is more than 2x the cost of a diesel engine. You've got some range issues, weight issues. So the economic viability of electric is not great. And so -- but you have to be prepared. So I don't think there's going to be a huge, huge demand for electric or hydrogen fuel cell that -- infrastructure and other things. It's just a lot has to happen for that to be any sizable portion of the markets in the next 5 or 10 years.

Your next question comes from Adam Uhlman with Cleveland Research.

First, let's start with the clarification on the deliveries that are expected in the third quarter. How much of an improvement are you looking for in North America? Should we look for above-normal seasonality as kind of make up some deliveries from the second quarter? And then, related to that, are we taking a normal summer shutdown in Europe, which is I think it's down like 10% from the second quarter. And if so, why not cut the summer schedule short to try to clear up some of the backlog in the customer deliveries?

Yes. You just have to manage the vacation periods, et cetera, and this is the most efficient way to manage that vacation period. So it's proven over the years, it's the most efficient way. And so we'll be down in Europe a couple of thousand trucks, and that will be offset plus a little bit in North America.

Okay. And then, could you talk about the capacity that you have in North America today for the MX engine? If I were to order a truck with that engine versus a Cummins engine, is there any difference in lead times and availability?

No. No. We've just completed about a $35 million investment in the Columbus engine factory to be able to increase machining capacity by about 40 engines a day. We also completed a similar-sized investment in Eindhoven to be able to machine MX-11 engines in Eindhoven. So we've -- we're in good shape from engine capacity standpoint for the foreseeable future.

Your next question comes from Rob Salmon with Wolfe Research.

As we look out to the third quarter with the delivery update, can you give us a sense if you've got a bunch of effectively red-tagged trucks that are just waiting on a couple of parts, in terms of seeing that sequential uptick on deliveries?

No. It's mostly just production rates that we are anticipating.

Okay. That's helpful. And then, Ron, with your commentary about the used trucks, I think, being up about 5% to 10% compared to last year, can you give us a sense if that included the benefit from mix in terms of seeing a greater portion of the newer spec trucks that you guys are selling? Or is that just the broader market, and you think you're going to get more of a benefit in the second half as the specs start falling through your used?

Yes, I'd say most of that is the broader market. And there will be some benefit from the model mix, yes.

Got it. And I realize it's a smaller piece of the business, the PACCAR truck leasing. Can you give us a sense of your plans for either fleet growth there and what you're seeing in that end market, from a utilization perspective?

Yes. The utilization in the leasing market is excellent, with the transportation demand. When there's supplemental capacity needed, the lease and rental trucks, there's good demand in the leasing business. Ours as well as our dealers who operate PacLease franchises have had a really good year, and orders for leased trucks are up year-on-year. So yes, it's been a really good year for PacLease.

And can you remind us how big is the percentage of the Financial Services that the leasing business represents for you guys?

Yes. There's about -- we have a truck portfolio of around 190,000 trucks. And there's 38,000, 39,000 trucks in the PacLease operation. So whatever is that, 20%, 25%.

Okay. So as a proportion of earnings, it's the same regardless of if it's being financed or leased, I guess, over the cycle?

That's correct. Yes.

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 their participation, and thank you, operator.

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