Ken Hastings - Director, IR Ron Armstrong - CEO Harrie Schippers - President and CFO Preston Feight - Executive Vice President Michael Barkley - SVP and Controller.

Joel Tiss - BMO Capital Markets Jerry Revich - Goldman Sachs Ann Duignan - JPMorgan Alex Potter - Piper Jaffray Andy Casey - Wells Fargo Securities Jamie Cook - Credit Suisse Steve Volkmann - Jefferies Steven Fisher - UBS Ross Gilardi - Bank of America Courtney Yakavonis - Morgan Stanley David Raso - Evercore ISI Joe Vruwink - Baird Sameer Rathod - Macquarie Joe O'Dea - Vertical Research Jeff Kauffman - Loop Capital Markets Neil Frohnapple - Buckingham Research Faheem Sabeiha - Longbow Research Scott Group - Wolfe Research.

Good morning and welcome to PACCAR's Third 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'd 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; Preston Feight, Executive Vice President; 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.

A summary of risks and uncertainties is described in more detail in our periodic reports filed with the SEC. For additional information, please see our SEC filings in the Investor Relations page of paccar.com. I would now like to introduce Ron Armstrong..

Good morning. Harrie Schippers, Preston Feight, and I will update you on our excellent third quarter results. PACCAR's third quarter sales and Financial Services revenues were $5.8 billion and third quarter net income was $545 million, a strong 9.5% after tax return on revenue.

Revenues were 14% higher and net income was 35% higher within the third quarter last year. PACCAR's Truck Division's produced a record number of trucks in the third quarter and PACCAR Parts achieved 14% revenue growth compared to the third quarter last year.

I am extremely proud of our 28,000 employees who have delivered the world's highest quality Trucks, Parts, and Financial Services to our customers worldwide. PACCAR delivered 47,800 trucks during the third quarter, 3% higher than the second quarter.

Increased build rates in North America were partially offset by fewer build days in Europe due to DAF's regular summer shutdown. Truck and Parts' gross margins were 14.1% in the third quarter. Truck pricing was good with price realization comparable to the second quarter at about 3%.

Costs were impacted by parts shortages from a small number of North American suppliers, including a few affected by Hurricane, Florence. As a result of these part shortages, we incurred additional material and labor costs.

Our Tier 1 suppliers are investing in additional capacity and working closely with Tier 2 suppliers to meet PACCAR factory delivery requirements. We expect this situation to normalize in the near term.

Our Peterbilt and Kenworth teams in the U.S., Canada, and Mexico did a fantastic job of managing record third quarter production and achieving the highest operating margins in the industry.

In the fourth quarter, we're expecting 4% to 8% higher deliveries compared to the third quarter, primarily due to an increase in the number of production days in Europe and higher daily build rates. Truck and Parts gross margins are estimated to be higher in the fourth quarter at around 14.5%.

Preston Feight will now provide an update on DAF, PACCAR Parts, and PACCAR Financial Services..

Thanks Ron. Our 2018 forecast is for Europe's greater than 16 tonne market to be in the range of 310,000 to 320,000 units, reflecting continued strong demand in growing European economies. We expect 2019 to be another excellent year with the market in the range of 290,000 to 320,000 trucks.

The eurozone's GDP growth expectation for this year is 2% with 2019 projected at a similar level. Freight transport activity on German highways is at record levels up 3.5% this year. DAF has had an incredible year in 2018.

DAF XF and CF trucks which were honored as international truck of the year 2018 achieved European above 16 tonne market share of 16.6% year-to-date compared to 15.1% in the same period last year. DAF is making great progress towards its goal of 20% share.

PACCAR's Parts business generated strong quarterly revenues of $960 million, 14% higher than the same period last year. Parts quarterly pretax income was $189 million, 24% higher than last year.

The growing number of PACCAR trucks and engines in operation and consistent investments in parts distribution capacity and customer focus technologies drove these results. We are pleased to have opened our new 160,000 square foot parts distribution center in Toronto this month. We expect part sales to grow an additional 5% to 8% next year.

PACCAR Financial Services third quarter pretax income increased 12% to $79 million compared to $71 million a year ago. The portfolio which was a record $14.1 billion this quarter continued to perform well. Kenworth and Peterbilt Class 8 used truck values increased more than 10% compared to the third quarter of last year.

Kenworth and Peterbilt truck resale values commanded 10% to 20% premium over competitors' vehicles. PACCAR Parts and PACCAR Financial Services profit contributions are much larger than they were 15 years ago.

These businesses are inherently less cyclical than the sale of new trucks and their consistent profitability enhances PACCAR's financial results throughout the business cycle. Harry Schippers will now provide an update on Kenworth and Peterbilt and PACCAR investments..

Thanks, Preston. We have raised our estimate of retail sales for this year's U.S. and Canadian Class 8 truck markets to a range of 280,000 to 290,000 units. In 2019, we expect the U.S. and Canada Class 8 truck markets to expand further to a range of 280,000 to 310,000 vehicles. U.S.

economic and freight indicators are very strong with 3% GDP growth and nearly 4% industrial production growth expected this year. Freight tonnage growth has been a robust 7.5% year-to-date. We head into 2019 with great momentum, including the industry's best products and factory visibility that extends into the second half of next year.

The record truck orders this year are driven by a strong economy. In the past, the surge in orders was often driven by a pre-buy related to an emissions change. Customers across all segments are experiencing strong demand from growing freight volume, very high fleet utilization and strong pricing.

Customers are also benefiting from the industry leading operating efficiency provided by DAF, Peterbilt and Kenworth trucks, as well as superior aftermarket support from PACCAR Parts and PACCAR Financial Services. PACCAR is creating innovative products and technologies for the future.

DAF showcased several advanced powertrain vehicles at the IAA truck show last month. The DAF CF Electric, LF Electric and CF hybrid trucks are entering field testing with customers. We look forward to customer demands for electric and hybrid powertrains in certain applications such as refuse, urban delivery and product operations.

Longer term, electric vehicles will be competitive in more applications. While we are preparing for the long-term by making investments in alternative powertrain technologies, we do expect diesel to remain the most efficient powertrain technology in heavy truck applications for the foreseeable future.

We estimate capital spending of $425 million to $475 million and R&D expenses of $300 million to $310 million this year. In 2019, we are planning for increased capital investment of $525 million to $575 million and increased R&D expenses of $300 million to $330 million.

These investments will develop the next generation of Kenworth, Peterbilt and DAF trucks and enhance PACCAR's diesel and alternative powertrain technologies and add additional capacity and efficiency to the company's manufacturing and parts distribution facilities.

During the third quarter, we repurchased $59 million of PACCAR stock, with $241 million remaining of the $300 million authorization approved by the PACCAR board in July. Thank you. We'd be pleased to answer your questions..

[Operator Instructions] Your first question comes from Joel Tiss with BMO Capital Markets. Your line is open..

While, I am little shocked here, I usually don't even get on.

How are you?.

We love you..

Yeah.

So can you just explain maybe philosophically the gap between very strong truck shipments and the driver shortages? And is that kind of setting up cancellations in the future or how are all these fleets absorbing all these new trucks?.

I think they're - the number of trucks is it's not at sort of historical peak levels, but it's strong and they're getting the increased operating efficiencies. And we've seen, you know, there's additional demand, we've seen more used trucks also being sold and the utilization of the fleets now are at record levels.

So they really show no issues of being able to absorb the trucks, and I think what we hear is that there would be even more trucks purchased if there were drivers to put in the seats..

And then can you like help us maybe look forward a little bit and there's some new emission standards coming and then there's a particle emission standard coming in 2023.

Is there enough sort of advancements and changes that are likely to come, say over the next five years to kind of keep the run rate of truck demand at a higher level or do you think the normal cyclicality that we see especially in North America is going to be more the way that the next five years look?.

I think the capability of engines for the last couple of iterations has been to improve fuel efficiency which translates into lower total operating costs for our customers and that won't change. As we look forward, we have greenhouse gas reductions in 2021, 2024 and 2027 in North America.

Europe is close to proposing some limitations beginning in 2025 and 2030. So, we're going to continue to innovate and improve the efficiency of the diesel engines for the foreseeable future.

In addition, obviously we're working on alternative powertrains and those will be attractive for certain applications, which I think Harrie mentioned those in his comments that, applications like refuse ports et cetera there could be a reasonable business case for those particular applications..

And then, sorry just last one.

So do you think that those forces are strong enough to be able to change the shape of the historic cycle or it's not a fair question?.

Well, it's -– I think in the past cycles, we're very much focused on sued and NOx emissions with no benefits for our customers. So future cycles or future emissions legislates are greenhouse gas reduction. So there will be cost increases for new technology to be added, but it brings a benefit for our customers to enjoy..

Okay. All right. Thank you very much..

Thanks, Joel..

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

Yes. Hi. Good morning, good afternoon..

Good morning, Jerry..

Can you folks talk about where the supply base stands today in terms of catching up with the really robust order cycle we've had and at which point, do you expect industry lead times to try to stabilize and maybe start to come down towards your historical target 10 to 12-week lead times?.

I think from my perspective the supply base is making progress. As I mentioned, they're making some investments working with all levels of the supply base Tier 1, Tier 2. The Hurricane Florence we have a couple of suppliers who are located in the Carolinas.

And unfortunately, due to the time they had to take the shut down and some of the impacts of floods et cetera that had an impact. And so we're working through each one of those and we are as I said we expect in the near-term we'll work through those. I had a discussion with one of our suppliers yesterday.

A good discussion, good healthy discussion and so everybody's got the same interest at heart. So we'll work probably during this quarter..

And so from a margin standpoint you folks had margin in the high 14% range at the gross margin line and the first half of 2018.

Once you work through those supply chain issues, can you get back towards that level of gross margin performance that we saw in the first half of this year before the supply chain issue started to play out?.

I think with certainly that the possibility is there Jerry..

Okay. And then your retail market share is up significantly in Europe.

Can you just give us a sense for where your orders market share is tracking, is that retail momentum set to continue based on how the orders look heading into the fourth quarter?.

We don't get quarter market data. We only know what we have done. The DAF quarter percentage has been strong this year with the year-over-year increases. And so we had ended next year with a good solid backlog and expect to be able to continue at our current pace for the - at least for the near term..

And lastly can you talk about how - if a significant know input supply basis from China for your sourcing strategy.

And whether we should expect a pickup in inflation in early 2019 as the tariffs move to 25% from 10%?.

Yeah, our team has done a good job of evaluating the impacts of tariffs and other trade arrangements. And I would tell you that the effect is hundreds of dollars per truck.

And so it's not a major item, but it's something obviously that just like other cost increases that where we manage that into our costing and pricing projections and work with that with our customers on future deliveries..

Okay. I appreciate the discussion. Thank you..

Absolutely..

Your next question comes from Ann Duignan with JPMorgan. Your line is open..

Hi, good morning..

Good morning..

I have to dig in, find a few questions remaining. Can you talk a little bit about - we had heard during the quarter that a lot of dealers were ordering for inventory because lead times were extending, not necessarily PACCAR's dealers, although one of them was a PACCAR's, but Kenworth dealer.

Can you talk a little more about where your dealer inventories are versus maybe historical norm and is there and risk that they are ordering to inventory and that could cause significant downturn when the market rolls over?.

We're really in good shape dealer inventory wise. I think we comment historically that if we're in the 60 day range in terms of inventory plus or minus and that's right where we were at in North America, as well as in Europe. So, the dealer inventories are in excellent shape as we sit here today..

Okay. That's good to hear. I appreciate that. And then specifically on the margin, gross margin for Q4, I know once you get all these supply chain issues resolved, the probability is that as long as volumes are, gross margins will go back to the 14.5% to 15%.

But specifically for Q4, should we anticipate that supply chain issues will still weigh on gross margins? Thank you..

Yeah. At this point, we think something around 14.5% is probably a reasonable expectation for the fourth quarter..

Okay. I'll leave it there. And get back in queue. Thank you..

Okay. Thanks, Ann..

Your next question comes from Alex Potter with Piper Jaffray. Your line is open..

Hi, guys. Thanks. I was wondering if you could comment, there has been a couple of announcements recently I'm sure you're aware of FDR, catalyst and things of this nature degrading over time.

Just wanted to see what your confidence is that there won't be any charges coming from PACCAR projecting similar issues?.

Yeah, we're not aware of a similar deterioration effect in our after treatment. But that's on - subject to ongoing testing and there's no assurance, but at this point, we're - we feel good about our approach and our - the chemistry that we've used in our after treatment system..

Okay. It's good to hear.

Tax rate was a bit lower in the quarter, I was just wondering if you should provide any guidance regarding what we should be modeling for the next quarter and year I guess?.

I think Michael can address that..

Yes. We have a couple of positive one-time items in the quarter that we don't expect to repeat. So you should expect a range of 22% to 23% going forward..

Okay. That's very helpful. And then last one, I guess, if you could just comment on you mentioned that the portfolio is still doing very well with the FinCo used vehicle pricing is doing okay.

It looks like if you could just provide maybe first of all over the next year we've got a changing interest rate environment any commentary you might give around those likely performance of that segment would be helpful?.

Yeah. As long as the freight demand is there and we're at record levels of freight activity in both North America and Europe that obviously provides a great opportunity for our customers to earn a profit. And we're seeing the past dues continue to be at about 50 basis points really historical low levels.

So, there's nothing that we see in the near term that is going to impact the performance of the portfolio. We've - our teams continue to exercise very prudent credit underwriting and taking advantage of data analytics tools to continue to enhance the capability on the way forward..

Okay. Very good. Thanks, guys..

Thank you..

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

Hi. Thanks. This is Brandon on first Seth.

Just going back to your dealer inventories, are you doing anything extra vetting or anything like that to discourage any double ordering there?.

No. We monitor the level of order intake for customer orders or stock orders, and so our divisions are very adept at sort of managing that and ensuring that what we have in the backlog is buildable [ph] to the best extent that we can..

Any other thing we're doing is we're making sure that the customers are putting deposits down on vehicles so we understand the relationship to the customers well enough to know when is a serious order or not a serious order. So we're carefully managing the firmness of the backlog..

Okay.

And I apologize if I've missed this, but could you give a color on your outlook for the Brazilian market and what's happening with your market share there?.

Yeah. The market share continues to tick up. We've progressively increased build rates throughout this year. We have one more increase coming in the month of December. And so we're going to deliver about 2300 trucks this year and that the build rate that we'll in end this year, there's no reason at this point to say that that won't progress.

We'll probably deliver over 3000 trucks next year and so from a market perspective Ken you have some..

Yes. Yeah, I do. So for 2018 the above 16-tonne truck market we expect to be 45,000 to 55,000 vehicles and next year we're expecting 60,000 to 70,000 vehicles..

Okay. Great. Thank you..

Thank you..

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

Thanks a lot. Good morning out there..

Good morning, Andy.

Just wanted to take your temperature there, the really strong order intake that we've seen, how far into 2019 are your lead times, we're hearing some of the products are quite extended.

And if we assume supply chain normalization occurs, how quickly do you think some of those lead times can be reduced?.

The backlog is extended. It's longer than it has been for some time. And as we always do we work closely with our suppliers to manage their capabilities, our capabilities, so that we get the right support of our customers and we can meet their delivery needs.

So it's the clarity of sort of how that progresses is a little bit fuzzy at this point, but I suspect supply base will continue to improve its capability to deliver in the coming months for sure..

Okay. Thanks, Ron. And I think it may have been Preston talking about deposits for orders to manage the firmness of the backlog.

Is that something PACCAR has done in the past?.

Yeah. We do some of that and then we also - there's a cancellation policy that we put into effect that cancellation fee that is there to require that orders are buildable and more firm..

Okay. Thanks. And then just on pricing first on Truck and then on Parts.

Are the orders given that you've taken deposits and you have that cancellation fee, are the orders in backlog price protected or for some of these orders that are way out can you actually increase prices?.

We typically - we've got a commitment at a price. We've factored in our best estimate of what we think future costs are going to look like when we deliver those trucks. And so we have a pretty good feel about what we think the realization will be when we deliver those trucks..

And we have a price again in place for the first half of next year for North America. And like we said the backlog is already extending into the second half of next year. So with the pricing, cancellation fees, we feel clearly confident that dealers will only put in those orders that they really need..

Okay. Thank you, Harrie. And then skipping over to Parts.

I mean, the tariff impact if it's going to impact anything, maybe it's there, but should we think about any increases that you may see within the Parts' portfolio? Should we expect that just to be offset by pricing? And if so, how much of the - I believe I heard 5% to 8% growth in 2019 is unit volume..

Yes. I'd say most of that is unit volume growth and our teams look very closely at the components that are affected by tariffs and manage that. Our expectation is generally that will be passed on to the market..

Okay. Thank you very much..

Thank you..

Your next question comes from Jamie Cook with Credit Suisse. Your line is open..

Hi. Good morning. I guess a couple of questions. One, obviously the market is very concerned that truck is peaking, the stocks are pricing that in and then you made a comment earlier people probably under appreciate your Parts contribution et cetera.

So is there any way you can help us frame if you're thinking about sort of potentially the next downturn in earnings? What are the factors that would allow PACCAR to contribute - I'm sorry to earn-up higher trough relative to where we were? And how do you think about share repurchase in that context, just given where your stock is today versus your view on the market?.

Yes. I think our factories we continue to make investments in our facilities to improve efficiency. You've been to our factories. You know the efficiency that we have in our factories and we continue to try and move the needle to manage our costs - the lowest cost manufacturer during all phases of the cycle.

So that doesn't change and we'll continue to make those investments. Obviously the lower tax rate has a significant incremental effect on earnings versus a 31% rate historically versus a 22% to 23% rate.

Currently that changes a little bit depending on where the earnings come from, but that's a significant enhancement from what we've seen historically. Parts and finance are making sizable contributions to the profitability of our operations. So we excel during the cycles and we will continue to excel.

We can manage our cost structure better than anybody in the industry..

Okay. And then just when you talk about - I know you have fairly good visibility extending into beyond the second half of 2019 or whatever.

I mean, is that fairly broad based small versus large fleets or occasional? Can you just talk about if it's broad-based or specific to sort of one type of customer?.

Yes, it is broad based. I mean, obviously the fleets are probably better at getting their orders in earlier and there's probably some smaller guys that will come. And so - but our teams are closely matching backlog to make sure that we meet the needs of all of our customers from small to - sort of smallest to the biggest..

Okay. Thank you. I'll get back in queue..

Thank you..

Your next question comes from Steve Volkmann from Jefferies. Your line is open..

Hi, good morning, guys..

Hi, Steve..

Most of my questions have been answered. But I wonder if you have a sense of the supplier issue that you saw in the quarter.

Any broad sense of what that might have impacted your gross margin?.

You know, it's one of those deals that it's really tough to - some things you can quantify specifically others are a little bit vague. But I have a guess probably 50 basis points would be the effect on the overall margin for the third quarter. And so yes, it was significant.

Our teams did a great job sort of managing the schedule and managing the offline flow in our factories, and we're still managing through that, but I think we're seeing our way through the end of the tunnel..

Okay, super. And then as we look out into 2019 and even though maybe people are starting to think about what the downturn would look like, it seems like the 2019 outlook is actually up a bit. And I'm curious how you think we should think about profitability.

Can you grow gross margin with a little more volume and maybe a little last supplier issues and so forth or should we think more in the sense of gross margin being kind of flat and then you'll lever on SG&A?.

I think all those things are possible and so as we think about next year something probably in the 14% to 15% range for overall total gross margin is sort of where our heads are at currently..

Okay. Thank you..

Thank you..

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

Thanks. Good afternoon..

Good afternoon..

Just a couple of questions on Europe.

Can you give us a little more color on the European region? Curious what your order trends are looking like, if we segment the Europe into Eastern Europe, Continental Western and then U.K.?.

Sure. Just talking about Europe for a second the 16.6% share is again a record. Where we're seeing growth is pretty uniform. We're seeing growth throughout we've - with a couple of points we'd become the leading import brand in Germany which is roughly 20% of the European markets so that's nice accomplishment by the team in Europe.

We're also seeing Eastern Europe grow as even more important part of the sector and DAF is very strong there. We're a market leader in several countries in Eastern Europe with growing share year-over-year sometimes 2% to 3% and 4%. So as the total of Europe evolves and matures DAF is really well positioned for strong growth in the future..

And U.K.

if you could comment on that?.

Well, the U.K. we're the market leader in the U.K. We'll continue to be the market leader. Obviously, there's some dynamics in U.K. with the general economy, but we continue to be strong in the U.K. as well, which is down as a percentage of the total market..

Okay. And then related to Brexit, how much of your European production would you say is in the U.K.

maybe on a year-to-date basis? And how much is exported to Continental Europe? And if we ended up with a hard break scenario what would you do to manage that? Would you consider relocating any production?.

We have great flexibility. It's one of our real strengths. So we're able to produce a full range of products that we make in our factory in U.K. at Leyland which is something that was a unique advantage for us. So we can make those medium duties as well as all the heavy duties in the U.K.

So we're well positioned for any kind of scenarios that would happen hard or soft. And then, we have great obviously manufacturing capacities in our main plants at Eindhoven. So we're watching what's happening there, but we feel very well positioned..

Yeah. When I was over there several weeks ago at Preston I met with the team and really had a good discussion about of what the range of outcomes could be. And so we are prepared to manage that whatever the outcome might be..

Okay. I'll follow up there.

And then just one last clarification on the emissions degradation, are you guys using the same suppliers that your European peer is that announced their issues?.

No, no..

Okay. Thank you..

Yeah..

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

Good morning. Hey, guys..

Hey, Ross..

Hey, Ron. Just had kind of a philosophical question I mean, most of my questions have been answered but to me PACCAR has been an outstanding stock over the long-term but in the last five years you've got earnings double and you continue to establish all sorts of internal records.

You've got an extremely robust cycle right now and the stock is essentially flat even if we ignored today's move.

So what is the market missing about PACCAR? And does the stock performance influence how you look at the business or your strategy? And more importantly, how do you drive value on the stock from here?.

Well, I think we just continue to - we're record truck deliveries record; truck revenues record, product revenues record, financial services portfolio our focus is to continue to grow the company and grow the earnings over the long-term and that will pay-off eventually. You probably know more about why today is what it is in the market.

It doesn't make any sense to us but we're going to continue to focus on what we do, how we do it, and execute better than anybody in the industry..

Got it. Okay. Thank you. And just curious anything in your North American business? I mean you never seen the oil service companies talk about at least a temporary slowdown in the Permian.

Are you seeing any slowdown at your Gulf Coast dealers at all due to what's going on down there? Any granularity in order trends in that region?.

Ross we've not seen anything like that. I mean again oil affects a small percentage of our total truck production and overall business.

So, it's not something that we monitor that closely, but I think the Peterbilt and Kenworth trucks, we have great customers in the oilfield and we're continuing to see steady - pretty steady demand I think from those customers. So not much impact.

Oil prices have rebounded nicely and so I think that bodes well for the mid-term for that segment and it also has a nice benefit for our Winch business..

Got it. Thanks, Ron..

Thank you..

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

Thanks, guys. Just curious - obviously, you're working through some of these part shortages currently. But if we think about your guidance for next year or the industry guidance for North America, your truck retail sales kind of coming in at the high end.

What are the other bottlenecks we need to be thinking about in terms of getting your build rates higher to meet that increased level in demand that we could potentially see next year?.

I think right now suppliers are the pacing item. And we're - again, we are working closely on additional investments and that is the item that will make the difference for us..

Okay.

And just to make sure that I fully understand the view is that is a near-term issue that will be fixed by the end of the fourth quarter?.

Yes. That's our goal for sure. And our supplier - we have great suppliers and again, some were dealt some pretty difficult hands with a hurricane affecting their operations and so that's - again, it's all temporary and it can be worked through..

Okay. Great. Thanks. And then also just thinking about the pricing environment heading into next year. I think I believe you said this quarter it was pretty similar to last quarter.

Can you just give us any sense of, kind of, how you guys are thinking about the pricing environment?.

I would say steady. A lot of orders taken and negotiated with many of our customers. And so I think we feel good about the direction of pricing. It's very reasonable for the current market circumstances so..

Okay. Great. Thank you..

Thank you..

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

Hi. Thank you. Just quick question really more for my modeling. I'm trying to understand why the deliveries were up 19%, but the Truck revenues were only up 14.5%? It's been a little while since the Truck revenues were below the deliveries.

So, first of all I would say, well, maybe it's the mix geographically, but really your best growth rates were in some of the higher price point trucks, right North America, Europe.

Is there something within the mix of the size of the trucks, type of trucks that went out that would have the deliveries up that much more than the revenue growth you booked?.

Yes, Michael has some thoughts that he could share on that..

Right.

You'll probably notice that in Europe our deliveries were up 14%, 15% and truck revenues were down and that's mostly due to we had more truck sales that were deferred because they were associated with guaranteed residual value contracts, which resulted in us deferring the sales revenues over the term of the residual value guarantee, and so that just worked out this quarter to be in effect that was noticeable..

And what's the reason why it was greater? And maybe if you could help us frame it for us a little bit how much greater than normal the percentage of trucks that went out in Europe with the deferred?.

Yeah, I think typically David that just really a function of the particular customers that you're doing business with at any particular quarter.

Preston, do you have anything?.

Yeah, I would just say it's timing. And we've grown in the large fleets. We talked earlier in the call about fleet growth Eastern Europe and DAF is doing a good job of making penetrations and some of those large fleets come with JRVs, but largely it's timing..

Okay. So yeah, even when we're in Germany, like the idea of your market share are higher in some of the Eastern European countries, some of the bigger logistics truck companies or the ones getting share out of that region.

That this is reflective of that essentially?.

Yes..

I think you're starting to see that the DAF trucks in Europe they have the best fuel economy, the lowest operating cost and that's having the biggest fleets taking a really good at us and we're winning share there..

And one of the element currency and I apologize I jumped on late, have you given the exact currency impact for the quarter?.

Yeah. The currency impact for the quarter with respect to revenues is about $50 million or so of reduction of revenues due to currency movements. The dollar was strong during the quarter compared to last year and impact on income this quarter was pretty minimal..

And that was 50 or 15?.

50..

50. Okay. I appreciate it. Thank you..

You bet. Thanks, David..

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

Hi. This is Joe Vruwink for David..

Hi, Joe..

Just one question for me. Everything on the call sounded really positive and the industry is doing well.

So what if anything, are you worried about as you look into 2019?.

Yeah, the backlogs and the business conditions are very good. So we feel really good about, like I said we're at record levels in all of our segments and our focus is to continue to grow, take advantage of the current market opportunities. So I'd say there's not any major concerns on our horizon..

Trucks are performing great. And all our customers are very happy with the trucks that they are buying, pretty good position to be in..

When you - maybe I'll throw one idea out there, when you look at pricing trends and the spot market and how that ultimately flows into your customers' core rates, there's definitely been some moderation there so, when you think about orders that have been in place Q3, Q4 of this year and you think about your customers pricing maybe moderating from the high levels it's been at, does that give you a cause for concern? Or if there's any headwind from that dynamic maybe it's more of a late 2019 phenomenon ultimately?.

So, yeah, the Financial Services portfolio has been at less than 1% past dues for about six consecutive years. And that was during periods of really strong freight markets down to maybe not so strong freight markets.

So I don't see that the customer's ability to meet their obligations is going to be significantly affected by some moderate reduction in pricing in the freight market. It's just been extraordinarily good in the last six months. And so I don't see that being a factor in our customer's decisions to buy trucks or being able to meet their commitment..

Okay. Great. Thank you very much..

Thank you..

Your next question comes from Sameer Rathod with Macquarie. Your line is open..

Hi. Good morning. Thank you for taking my question. Just one quick question on wage and wage pressure. Are you guys seeing any lack of availability in terms of hiring people versus any increases in wages that you have to pay in the tight market? Thank you..

We just have - we have great facilities. We have great reputations in the communities in which our factories and warehouses are located. We probably have some of the longest tenured employees in the industry that work in our operations. And so, when we have a need for employees, we'll probably get 10 apps for every job that we post.

So we're viewed as a premium employer in the markets that we're in. And so we're able to find the people we need to do our staffing.

That being said there are some pockets where that's part of the suppliers' challenge is getting employees in some of the areas in which they are in and so again they're working through that to try and solve those challenges..

Thank you..

Thank you..

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

Hi, thanks. Good morning..

Good morning..

First just talking about gross margins next year in the 14% to 15% range and kind of in line with where you are this year and then thinking about what looks like a setup for some tailwinds on price, supply chain issues, abating mix that looks like if anything it's a bit of a benefit on stronger North America.

And so what's some of the kind of offsets to that might be such that we don't see year-over-year margin expansion?.

If all those things you said occur there's no offset. But it's a dynamic world and you got to manage the best you can with circumstances and that's what we do every day..

Okay. I appreciate it.

And then just on the cash side of things ending the quarter with $3.8 billion of cash and marketable securities and trying to think about deployment options and just any context around how much cash you feel you need to have on the balance sheet for the credit rating and for other operational uses? And whether you think about stepping above the typical payout range target or whether you think about other deployment options just given we continue to see the cash balance move higher and presumably it's set to go even higher next year..

Yes, we think about all those things. But if you look at historically about our cash balance, if you go back 10 years, it's in the mid- to high teens as a percent of our total assets and that's where it sits currently. But it's an ongoing discussion and review with the board about payouts and buybacks et cetera and that will continue..

Okay. Thanks a lot..

Thank you..

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

Thank you very much. I guess a new guy gets back in the pack here. I got to be honest - thank you very much. My questions have really been answered and David Raso I think asked a big question I had on mix so let me just dive a little deeper into it. I understand what you're saying about the residual value contracts in Europe.

I was a little surprised that the impact was as big as it was. So if I look at your forecast fourth quarter 4% to 8% deliveries, I assume you're still getting 3% price and facing kind of 1% currency headwind.

Do these residual value guarantees is it more related to just traded a particular cohorts of trucks and with lower residuals during 3Q? Is it more that we're just trying to clear some inventory out of market? When I think about revenues relative to deliveries because as David said that was kind of the part that surprised me was the difference here.

Should I be thinking about kind of more 1:1 ratio as we head into 4Q or do these residual value deals continue to drag a little bit more heavily for the next quarter or two?.

I don't think we have the visibility to necessarily what the specifics of that but I think fourth quarter revenue I think thinking about it on a 1:1 basis is probably the way to think about it..

Okay. Fair enough. Well congratulations and thank you..

Thank you, Jeff..

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

Hi thanks.

One more follow-up on the gross margin performance in 3Q, Ron you indicated 3% new truck price realization in the quarter but can you say if this more than offset higher average per truck material and labor cost? I know we typically have to wait for the 10-Q to get those specific numbers, but can you at least say whether the relationship was still positive in the third quarter?.

It was roughly offset. I mean when you see the 10-Q as we've drafted it now it looks like it's pretty much an offset for material and labor..

Okay. Thanks. And then Ron just going back to the heavy-duty share gains in Europe due in part to the new product introductions, I believe you said that heavy duty orders were up 26% in the first half of the year.

Are you able to say what DAF's order rate - order growth rate was in the third quarter?.

I don't have that detail handy here. But let's see if it's something we can grab. So if you compare the third quarter this year to the third quarter last year total European orders are at 4% for the quarter in Europe and 17% year-to-date..

Great. Thanks a lot. I'll pass it on..

Thank you..

Your next question comes from Faheem Sabeiha with Longbow Research. Your line is open..

Hi, good morning.

I was wondering if you guys can provide a little more color around the Parts outlook for next year, just wondering how much of that growth is expected to come from freight activity versus higher engine sales and higher TRP part sales?.

I think it comes from a lot of different avenues. We continue to increase the level of EMX engines in the truck park on an ongoing basis. I think we're - since we started production I think we're at about 200000 and so with engine production next year that probably goes up another 15% or 20%.

The engines are getting - the engines that we produced three or four, five, six, seven years ago are getting more into their maintenance period and so that's going to be a positive effect. So I think engine parts has been and probably will continue to be the highest percentage growth driver for PACCAR Parts.

But then you look at the increased level of TRP stores, the fleet services initiatives that our team is championing the e-commerce initiatives to really make it easier to interface with PACCAR Parts the team has done a great job and really superb performance this year..

Sounds good.

And then with regard to the gross margin outlook for next year, what does that assume as the parts margin are you guys expecting the parts margin to be relatively flat versus 2018? Or are you expecting continued growth there?.

No, I think that 27%, 27.5% range is probably a reasonable way to think about it..

Okay. Thank you..

Thank you..

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

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

Hey, Rob..

Looking out to next year with regard to kind of the gross margins are you expecting any sort of drag in the first half associated with the hundreds of dollars of impact that you called out on the tariffs? Or should we be thinking about kind of price like this quarter offsetting any sort of that cost inflation?.

I think we should think about it better offsetting..

All right. That's helpful. And then, I think I had missed it if you can provide some color in terms of the used truck pricing trends that you guys are seeing from your models.

I know you're continuing to generate a premium to the overall market, but can you give a sense of what you guys saw from that used price realization?.

Yeah. I think if you compare the third quarter this year to a year ago, it's up about 10% overall. So it's been good. And we see that in the results in our Financial Services business in North America. In Europe, pricing is a little bit flat compared to where it was a year ago..

Got it. Helpful. Final one, in terms of the mix was the revenue per unit in U.S. and Canada how much was that down year-over-year? And I realized that the price realization is up 3%, but I'm assuming there's some mix within that segment as well.

Am I thinking about that right for the third quarter?.

Yeah. I don't think there's any dramatic puts and takes in terms of price per unit. I mean, it gets impacted a little bit by the mix of medium versus heavy-duty. But again, I don't think there's anything there that's different than what we would normally expect..

Okay. Really helpful, guys. Appreciate the time..

You bet..

Your next question comes from Ann Duignan with JPMorgan. Your line is open..

Yeah. Hi, guys. I just had a follow-up as soon as we just came back from IAA a couple of weeks ago whenever it was. One of the things that I find most interesting was walking IVECO's exhibit and all the signage they had around their booth for no diesel, no diesel, no diesel.

Can you just talk about your outlook longer-term for the growth of electric vehicles in Europe in particular just given the 2025 regulations that are going to come in place? And do you think that in Europe specifically the law would be the need for diesel also?.

I think in the economics of diesel just makes sense and they're going to continue to make sense for a long time. So it's going to be the dominant power source for long-haul trucking certainly. There's obviously going to be opportunities that will develop in urban areas that may bring about hybrids or electric vehicles and so we're prepared for those.

You obviously saw at the IAA Show and drove our CF Electric. We have a full suite of vehicles in terms of all-electric, heavy, light-duty, and we do that both in North America and Europe. So, we're well-prepared for the places where it makes sense.

We think there will be local geographies more than they will generally widespread displacement of diesel for the foreseeable future..

Yes.

I think there's a growing sentiment that maybe the diesel with a zero emission hybrid capability may be the best economic solution for those inner-city applications where you need that zero emission requirement as opposed to a full electric option, which - it's just the batteries and the weight are still present and absent a break through that - to the economic case is a bit challenging..

Yes. Maybe misinterpreted if that was the intent, but maybe it is more there approach to meeting these new non-diesel catchments as opposed to there won't be any diesel trucks left. So, I appreciate your color on that. That's helpful. Thank you..

Sure. Yes, thank you..

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..