Good morning and welcome to PACCAR’s First Quarter 2020 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. Today’s call is being recorded. And if anyone has any objections, 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 Preston Feight, 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.

For additional information, please see our SEC filings and the Investor Relations page on paccar.com. I would now like to introduce Preston Feight..

Good morning, everyone. Harrie Schippers and I will update you on our first quarter results and our business highlights. I'd like to begin by expressing my sincere thanks and appreciation to all PACCAR employees for their dedication, hard work and their upbeat spirit as we tackle today's challenges and work towards a bright future.

The trucking industry has been declared as an essential business. PACCAR employees along with our dealers are providing critical support to our customers who are delivering medical supplies, food and essential services to our communities around the world.

I also want to express my gratitude and thanks to the millions of men and women who are working hard to support those affected by the pandemic. I'm pleased to share that the PACCAR Foundation has donated $2 million to United Way and other organizations to help our communities.

Over the next few weeks, we are beginning a gradual resumption of truck production at selected factories. The specific restart timing for each plants and office location is being aligned with government directives, implementation of our work and social distancing measures, parts availability from suppliers and our business needs.

During this gradual restart, our highest priority is on ensuring the health and safety of our employees and their families. Looking at our first quarter financial results, PACCAR achieved good revenues and net income. PACCAR's first quarter sales and financial services revenues were $5.2 billion, and first quarter net income was $359 million.

PACCAR delivered 38,400 trucks during the first quarter. PACCAR Parts achieved quarterly revenues of $999 million. Parts pretax profits were a record $215 million, 3% higher than the same period last year. Truck and Parts gross margins were 12.3% in the first quarter.

The first quarter results included $50 million in higher accruals for product support costs. PACCAR Financial achieved pretax income of $48 million. DAF, Peterbilt and Kenworth delivered excellent heavy duty market share in the first quarter. Kenworth and Peterbilt’s U.S.

and Canada market share increased to 30.4% compared to 30% for the full year of 2019. DAF's European market share increased to 16.7% in the first quarter compared to 16.2% last year. And in Brazil in the above 40-tonne segment, first quarter DAF market share increased to a record 8.7% compared to 6.1% last year, fantastic work.

PACCAR has steadily grown market share over the long-term by delivering excellent value to our customers in terms of product quality, innovative technologies, and low total cost of ownership. The global macroeconomic environment is uncertain at this time.

Therefore, we will not provide guidance on estimated 2020 truck industry market sizes, next quarter’s truck deliveries and gross margins and PACCAR Parts revenues. Our employees are doing an excellent job managing through the pandemic.

We are rigorously aligning cost to the changing market conditions, including reducing capital investment, and research and development costs. As a result of the Company's strong culture and discipline, we've achieved 81 consecutive years of profitability and have a bright future.

Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and Other business highlights.

Harrie?.

One is Ponta Grossa, Brazil; and the other one is in Las Vegas, Nevada. PACCAR Parts has also made significant investments in e-commerce platform, which is benefiting our customers and dealers in this challenging time.

PACCAR Financial Services first quarter revenues were $384 million and pretax income was $48 million, reflecting lower used truck sales results. Kenworth and Peterbilt truck resale values command a 10% to 15% premium over competitors’ trucks.

PACCAR Financial is investing to increase its retail used truck sample capacity worldwide, which enhances its used truck sales margins. PACCAR Financial recently opened a used truck center in Denton, Texas and plans to open additional used truck -- in Prague, Czech Republic and in Madrid, Spain this year.

PACCAR Financial Services has excellent ongoing access to the debt markets, including commercial paper on a regular basis, -- issuing commercial paper on a regular basis. During the first quarter, PACCAR issued 3 and 5-year term notes, totaling $632 million. In addition, in early April, PACCAR Financial issued, $400 million 3-year fixed rate notes.

We have reduced 2020 capital expenditures by $100 million to a range of $525 million to $575 million and have reduced research and development expenses by $45 million to a range of $265 million to $295 million. PACCAR’s strong financial position enables us to continue investing in important capital and R&D projects in all market conditions.

And finally, we thank our excellent independent Kenworth, Peterbilt and DAF dealers for their support of our customers. Kenworth, Peterbilt and DAF dealers are well-capitalized and have invested $2.6 billion in their businesses in the last 10 years.

These investments continue to make a significant contribution to PACCAR’s Truck market share PACCAR Parts and Financial Services performance. Thank you. We'd be pleased to answer your questions..

[Operator Instructions] Your first question today comes from the line of Stephen Volkmann of Jefferies..

Maybe, perhaps, let me go back to your opening comments. I'm curious about -- a little more detail about how you're thinking about reopening production because you mentioned a number of things there. You mentioned sort of local regulations, you mentioned parts [ph] availability and then you mentioned kind of market demand.

So, there's sort of three buckets to think about there.

But, can you give us any more color of the rate of reopening that you might expect as we go forward?.

I'd tell you that the most important thing as we think about restart is, again I just keep reemphasizing this is the health of our employees, their families, our concern for getting it right, making sure we take care of them. That's number one, that's number two, and that's number three for us actually.

And then, as we look about it we obviously want to make sure that we have alignment with the government agencies, that's really important to us, so that we are staying aligned with best practices for how we can reopen and restart society.

It's also important that we think about our supply base and their readiness for the restart for our factories to make sure we stay aligned with them, and then of course our business needs. So, all those things together are where we're thinking about it.

And we’re really pleased with the best practices that we put in place in the factories, as far as temperature checking for our employees, the distancing protocols, separation of the employees, the spacing and barriers and then wearing masks, personal protective equipment and enhanced cleaning.

So, all those things are going into our approach for reopening the factories. It is going to be a gradual reopening. It's going to be done on a location by location basis in a phased manner. We already started some this week, factories, kind of in the start of the operations in Europe and in Australia.

And then, we will work through the rest of our plants in the coming weeks and make sure we take care of the employees and bring the truck factories back up and running..

So, would you expect to have everything back up and running at some level by the end of the quarter perhaps? What's a good way to kind of put bookends around that?.

That's a long window, and I feel pretty good about that. I think, we’re thinking it sooner, but we obviously don't have the final answers and we are working through that in a constructive way with the local agencies and supply base..

Great. Thanks..

You bet..

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

Thanks and good to talk to everybody today..

Good to talk to you too..

I guess, following on Steve's question, PACCAR really has a strong supply chain management track record. You mentioned that that's one of the factors. Couple of questions if I may about that.

First, have you encountered any smaller suppliers running into liquidity issues? And then, second, it seems like the world may be looking at kind of a piecemeal reopening in terms of when to ease the current virus containment efforts.

How much of an impact/challenge could that have or be to get your operations back up and running?.

Great question. It's a fun thing for our teams to be working through right now with our suppliers. We have such a good communication with them right now that it's really helpful to know when you can tell the relationships matter. We're paying attention to what they're doing and when their restart timings are.

And large and small suppliers have been doing a really good job of keeping us informed of their readiness. And they are doing the same things we are. They are trying to take care of their employees; they're trying to make sure they stay in line with the governments; and then they're moving forward with restarts.

And so, so far that's part of the whole puzzle we're putting together and getting the truck factories back up..

Okay. And then, just a question on the quarter and the Truck segment. Now, the decremental margins were somewhere around 25% and 26% revenue drop. It's not highest PACCAR has ever seen, but it’s kind of higher than typical. You mentioned product accrual was running high.

But, could you give us a little more color on what kind of growth, the margin compression? I mean, obviously some of it is the shutdown..

Well, I think that as you mentioned, we had the $15 million that we took the opportunity to book for the improvement of our continuous refinement of our engines, our MX engine was a lot of that. We are doing some software and hardware upgrades on the engine.

So, that's something that we want to do is make sure that our customers keep having the best experiences that come with our engines. And as far as what the future looks like, we're going to see how the pandemic works its way through the system. And that will certainly be something we're all watching closely. .

Your next question comes from the line of Jerry Revich of Goldman Sachs. .

I am wondering if you could just give us an update on dealer inventory levels when we were pressing discussion we had last quarter, obviously we had different environment.

But, I'm wondering if you could give us an update on declines in dealer inventory levels in March and anticipated declines from here and a conversation around timing of the restart.

I'm wondering the calculus has evolved at all, given potentially an opportunity to lean out inventories before we're ramping up production?.

Sure, glad to. So, the North American industry has roughly 3.8 months of retail sales in inventory. PACCAR has less than that. We have 3.4 months retail sales through March for Kenworth and Peterbilt dealers. And of our 3.4 months, roughly half of that is at bodybuilders. So, that's being worked on right now.

And so, our inventory is in really good shape right now. .

And in terms of the Parts part of the business, can you talk about what the cadence has been in April? Obviously very steady performance in the March quarter. I'm wondering if you’d be willing to talk about what kind of trends you've seen so far in April..

One of the things that's interesting and just kind of gives a little help I hope is that 75% of all goods are moved by trucks. And so, a lot of the trucking companies are really busy right now and they're moving around the country taking care of our communities. And as that's happening, those trucks end up consuming parts.

So, there was a lot of strong activity in March and we still have going on in April. And we'll kind of watch how the quarter develops. But, we expect our Parts team to continue to perform really well. And they have great programs.

And one of the things that's been nice to watch is their e-commerce programs and the way they're handling our customers and working directly with customers and dealers to support these critical needs is going really well..

And then, in terms of the operational discussion, the conversation you just had with Andy on the warranty program. So, if we back out the warranty program, decremental margins would have been 20%.

Is that the sort of run rate that we're comfortable thinking through, or is the level of being shut down for most of April, if not all of April, does that throw that type of decremental margin out -- off filter as we think about what this quarter might look like?.

Yes. I think that we’re -- your assessment of the impact of the product support fees does match into the margin. But, I would say that looking forward and what is going to be going forward, we're going to watch how the situation develops and when we get our factories running and what the state of the economy is in the second quarter..

Okay. And maybe just a clarification on the warranty program.

Was that just a one-time Over-the-Air software update across the population, or could you just give us some context behind what exactly that warranty item was?.

Well, we have the opportunity to optimize the performance of our trucks and engines, mostly on our MX engine for the 2017 to 2019 engines. And so, that was hardware and software upgrades. And this accrual we think we got that all covered and making sure that our customers have optimally performing trucks and engines, always part of our game plan..

Your next question comes from the line of Tim Thein of Citigroup..

First question I had was on loss provisions within the FinCo and I think, were certainly higher than I was expecting, at least the absolute level was, not -- obviously not directionally.

But A, if you could comment there in terms of -- is there a specific region or a customer set that maybe you'd call out? And I'm just thinking about how that potentially looks going forward.

Should we, at least, shorter term have a more challenging backdrop for truckers, at least in North America? So, maybe just how to think about again loss provisions and what you experienced in the quarter?.

The $50 million increase in credit loss provision reflects the weaker economy. And weak economy under the new CECL accounting standards resulted in a more volatile number. So, with the weak economy, the calculation resulted in $50 million higher credit loss provision. If we look at the finance company, the portfolio is in really good shape.

We have a very healthy mix of very good A and B customers. And past dues remain really low, currently less than 1%. So, finance company is in good shape. But the weak economy and the accounting standards drive most of that increase in credit loss reserve..

Maybe just one last one question. I'm curious from the Parts team how -- I'm not sure how closely they follow it. But in the K, and I know you're not talking or you’re not giving guidance on parts sales specifically.

But, kind of jumped out at me, I saw in the K put out a forecast the other day that they expect, and again, this is not to say this aligns with PACCAR exactly. But, I'm talking about parts demand to be down like 20% in the U.S.

I'm just curious, if you had any comments on that?.

Well, I don't really have any comments on the case numbers. I know that -- what we're watching is a team that's got great programs and really strongly positioned to support with not just parts but knowledge, and they're doing a great job of that.

And as I said, talking to a lot of customers and our dealers, there is a lot of activity still going out there and we'll support at the level it's needed..

Your next question comes from the line of Ann Duignan of JP Morgan. .

On the used equipment values, about 28% of your finance book is European, and most of that, I think is probably guaranteed residuals.

So, can you talk about these pricing in the FinCo business and what that might manifest itself -- how that might manifest itself as we go forward here?.

Used truck prices in Europe came down a little bit in the first quarter. North American used truck prices was mostly flat, of course down compared to where we were a year ago. Kenworth and Peterbilt trucks commanded 10% to 15% premium over our competitive vehicles. So, we're in a really good shape from that perspective.

But adding used struck retail centers, opening one in Czech Republic this quarter, just added one in Denton, Texas. The used truck inventories, as far as we can tell in Europe are a little bit higher than where they've been, especially for the industry.

Thus, used truck inventory is in relatively good shape, if you compare it to where the rest of the inventory -- the industry is.

Anything you want to add to that?.

That's exactly right. I mean, we have a lower percentage of the inventory of used trucks in Europe than the industry does. And that puts us in good position..

But you did call out Europe -- used prices in Europe being weaker than they were a quarter ago or weaker than they were last year..

A little bit lower than a quarter ago and lower than a year ago, but….

That's kind of industry wide..

That's industry wide. Yes..

Okay. And then, just on production cuts, can you give us any kind of direction in terms of the number of deliveries, truck deliveries you had in Q1? And any ideas as you ramp back up, what you would expect deliveries to be quarter-over-quarter? I mean, I know you can't see past the second quarter.

But, as you ramp, any direction, at least give us a ballpark for Q1 and then where we might think about Q2 being?.

Sure, Ann. We can talk a little bit about that and that deliveries were 38,400 for the three-month period. But, as far as what we'll see going forward, like I said, I'd come back as -- our biggest focus right now is making sure that our employees are well cared for.

And as we watch that and take care of that, then we'll ramp back up our production, align that to the demand and we'll see where that takes us in the second quarter..

Okay. I'll leave it there in the interest of time. Thank you..

Okay..

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

Hi. Good morning. My question is sort of bigger picture, trying to think about this period, the nuances of how this is different or similar than ‘08-‘09, so that how you -- what are the differences or similarities between how you're handling this period and that period with maybe three things in particular, if you could address at a minimum.

You mentioned in your prepared remarks, 81 consecutive years of profitability. Obviously, back in '09, there were two quarters that were basically around breakeven. Just wanted to see if you could address the idea of this being your number 82, which is if your willingness to speak to that.

Second, the gross margin declines roughly were kind of 14.5%, 15%. They dropped down to 8% to 8.5% in 2009. Just trying to get some sense of magnitude, what's different about the business model, more parts, whatever it may be. And lastly, the special dividend.

Your balance sheet, the equipment company was still net cash back in '09, but you still chose to greatly reduce the special dividend year-over-year.

Just wanted to try to weave those three key pieces in answering the question of the differences and similarities of today versus the great recession?.

Sure, David. Good to talk with you. First off, you got to start by thinking that we did succeed in '08 and '09. And as we look at the Company right now, as we sit here in 2020, we're an even stronger company than we were there. We have $4.3 billion in cash sitting on our balance sheet. We have great liquidity.

We have great access to liquidity in the market still that hasn't changed during this timeframe. Our parts business has grown over that more than a decade, and it's just a foundational part of our business, does a great job. And we have an experienced leadership team that has been through a lot of cycles.

And we know how to manage things, we know how to control costs, and we have amazing trucks and engines out there. The MX engine is doing a great job and it's 43% of our builds. So, that's helpful to us from a Parts standpoint. Just the business that we've built is really strong and is doing a good job of taking care of our customers.

And freight continues to move in this environment. So, we feel positive about our future and the product we have on the field and those that we're developing..

But, could you address those three issues to some degree? Just the idea of however you feel the flex in your costs, how the situation may be, and even just your framework, it sounds like you do expect obviously some uneven, but at least some reopening of the factories in the not too distant future.

Can we look at '09 as a guide point that if you were able to stay profitable in that environment, this should be similar? The gross margin is getting cut in half roughly, a little bit better than that is a framework and also the handling of the special dividend.

If you can just give some parameters of the difference now versus then for those three issues in particular?.

Well, let's just take the last one, you mentioned the dividends. And we announced our dividends yesterday for the first quarter, $0.32 a share, which is a strong indicator of what we've done.

We have a great history of dividends and we'll look forward to what our future is going to be and that's a Board decision and we take care of that as we progress through the year, based upon the results. I think that -- I don't think that it's a fair thing to think of it as an '08-'09 kind of a thing, they are just different. Each situation is unique.

And what we've got is freight being moved, kind of giving you the kind of the -- the truth of the matter is the freight is being moved. Our Company is well-built. We have a great position in terms of our liquidity, our cash position, our product investments. Our trucks are the best in the world. And that feels pretty good..

And the comfort in the larger parts business and a business that's more on your own vertically integrated drive train than back then. Is that something else that we should take a little more comfort in versus '09? But at the same time the unevenness of the production, it's really less of almost your decision that when you can ramp up.

I mean, is that the yin and yang here better about Parts, a little more uncertain about the Truck margins, just given in a way a bit of out of your hands?.

Sure. We have the stronger foundational parts market. We have the growth in our engine business, right, '08, '09 wasn't here in North America. So, that's good. I think, the other thing to think about the share growth over that timeframe has been significant. So, we've had really strong share growth over that time, which contributes extra volume to us.

And PACCAR does a great job. Our team is so good at adjusting the business, both in capital and expense side to think about how the business should be run. And so, we really do adjust to market conditions..

Your next question comes from the line of Joel Tiss of BMO..

So, just to follow up on kind of the thrust of Ann and David's questioning.

Does your intelligence, like what you know and see today and hear, does that give you a sense that by the end of the second quarter, you'll be able to give us more, whatever it is, like a clearer view of what the rest of the year looks like and how things play out?.

I think, as a general sense, it seems like by the next quarter gets through us, we’ll have a lot more information than we do today and we'll share with you what we can at that point..

And then, I wonder if you could give us a little bit of a sense like you're kind of hinting at flexibility in the factories and every time you walk through, there's fewer and fewer people or there's more automation, whatever the right way to say it is.

Can you give us a sense of some of the internal focus points? You guys are kind of using this pandemic as an opportunity to come out of this situation stronger over the next 5 or 10 years than you were going into it?.

Well, I think, what I look at is first -- the first thing that comes to my mind is when we go to our factories, when I go to our factories, I meet with our people, whether it's in a distribution center or a truck factory or anywhere, it's just how impressive they are.

And we have such an incredible group of people and they're just exceptional, they're just exceptional people. I'm so proud of them and what they're doing. So, they're the ones that are everyday thinking of new ways to optimize our efficiencies and effectiveness and they do it every day. And they continue in that vein.

And we Six Sigma as a great tool for ourselves and optimizing and we'll continue doing that. This is accretive time for us as we look at truck production and how we come back. And we'll learn some new things and they’ll be helpful to improving the business and making us even more effective and efficient as we look forward..

Your employees are going to make a recording of this and come back to you and ask for a raise next January. Thanks very much..

They are the best in the world. They are fantastic..

Your next question comes from the line of David Leiker of Baird..

I want to try and dig through a little bit of kind of the segments within the trucking space and your customers. I mean, there are some parts that are strong, consumer focus, package delivery focus. There are some that are really weak, energy and auto related.

Could you talk a little bit about that customer mix for you, for your products, and how that would compare to the industry overall in general?.

Sure. You did a good job of summarizing what's really going on as if you look at refrigerated carriers or protein haulers. They obviously have just seen a shift in where their business is going. So, those long-haul trucking companies that are delivering that are doing well. Vocational segment is where we're a market leader -- the market leader.

And that business has been strong. And I mentioned that part of our inventory is at bodybuilders right now. So, that inventory is being built, being ready for production for a summer season. And I think, as you look at some of the over the road trucking companies, it varies by company. Talking with some of them, they have a good base of customers.

And those that have a good base of customers, they're will really well positioned. And there, as you said, the energy sector has been lower but the yin to that yang is that fuel prices are down 20%. And if fuel prices are one third of the operating costs for a trucking company, then that's helping them from their operating models as well.

So, that's kind of you -- you characterized it well. And that's a little bit more information on it..

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

Good morning, guys..

Good morning, Ross. .

I have two questions. First on the PDCs and the two additional ones that you're going to add.

Can you quantify at all how big of a global increase in parts footprint that this will represent when you open them? And do you worry at all about adding parts distribution capacity in the middle of a recession? And I'm trying to just get at like how many -- you guys have added a lot of distribution centers over the last 5 to 10 years, and granted, that markets not going to move like -- is volatile as the overall truck cycle.

But, if we're in a slower economy for a longer period of time, do you bump up and will limit some point as to how much you can continue to expand that that distribution network?.

Sure. We have 18 distribution centers, we'll be adding two more that was down in Las Vegas facility a couple of weeks ago, new one, it's just beautiful. And I know the employees are excited to move in there as we're talking about it. I think, one of the things that's happening is there's always opportunity to gain share.

And we continue to use those distribution centers and the best practices around them to gain share. For example, our distribution centers are more closely aligned to our dealer body, then we're able to deliver more overnight parts to our customers and keep their uptime at maximum levels, which is one of our key objectives.

That gives us a competitive advantage against the market. So, that's part of the thinking. It’s not just about parts and storing, it's about getting them to the customers as quickly as possible, and that's been really successful for us and helping the parts team grow the business..

Okay.

So, is it fair -- are they all fairly similar in size? If you're adding to on a network of 18, is this sort of like a 10% increase? And will the business benefit from just some type of pipeline fill in the -- I don’t know if that'd be a second quarter event or a second half event that will help continue to support the top-line for the parts business this year?.

So, you're right in saying it will continue to support the top line growth of the business. And yes, roughly 10%. There is some variation in the size of the PDCs, but they're roughly the right order, same orders of magnitude..

Okay, got you. And then just lastly, can you quantify your energy exposure? I realized that it's tricky. But maybe at the very least, you could you could tell us what portion of your U.S. and Canadian dealer network is located in the Gulf region or other energy-dependent regions? And anything like that would be really useful..

Yes. We have a very diversified portfolio. It's not concentrated overly in the energy sector. So, the dealers that have -- there are some dealers that obviously have more exposure.

But, our dealers are doing just such a great job of building their businesses that they have good absorption, good parts and service businesses throughout diversified customer bases, even for themselves. And so, dealer body is in really good shape and managing that well..

Okay, thanks. .

You bet..

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

Hi. Good morning. And I'm glad everyone is healthy and okay in this environment. I guess, just two questions. One, can you just talk to, like on the truck side in Europe and in the U.S., like what you're hearing from your customers in terms of trends in April.

And I understand that you don't want to give an industry forecast, but what your customers are sort of telling you, how they're thinking about the year because that would imply you're probably managing your business for that for whatever they're telling you? And then, I guess, just my second question, understanding your taking initiatives to cut R&D and CapEx, but how do you think sort of the coronavirus impacts people's view around alternative technologies, like EV or fuel cell relative to diesel, in particular with diesel prices lower now, perhaps we focus more on economics.

So, if you could help give color on that that would be helpful..

Yes, sure. Good to talk to you, Jamie. I'd say from a customer standpoint, we do talk to a lot of our customers and the dealers and keep track of what's going on. And there is -- as we said before, some segments are doing well and some are experiencing moderate slowdowns.

And that's to be expected in a situation with this much dynamic factoring going into it. But, it's got a good customer base and they do a good job managing their business. So, they're making the adjustments. And if there's some trucks that are not as fully utilized, that's true.

But, I'm pretty impressed with how they talk about their business and their customer base. And again, they're an essential part of our economy and they will continue to move freight and are continuing to move freight. So, that's pretty important to keep perspective on.

From a tech standpoint and R&D and CapEx alignment to that, when I look at that and say, you have some really neat programs going on and we're continuing on some of the exciting programs that we have within our portfolios, and some of those are R&D related.

So, whether that's battery electric vehicles or work that we're doing, that work's going to continue. We're going to keep moving along and doing the critical things that are going to build a bright future for our Company and provide our customers the lowest operating cost possible. So, it's kind of a bit of a look at what's going on. .

Your next question comes from the line of Steven Fisher of UBS. .

You guys called out some nice market share gains across the regions.

What is your order share in backlog, tell you about what your market share of retail and production might be over the next few quarters, and are there any regional differences?.

Well, I think, we have seen good market share gains, as we mentioned, the 30.4% in the U.S. and 16.7% in Europe and really strong 8.7% in Brazil; and in the medium duty side also good growth in both Europe and North America. So, that's been good.

And as far as what order intake has been, I think the last month we have numbers for we had was March and we had 38% of the order intake in the month of March. We're in a good position..

Some more color on Europe. I think the market share growth to 16.7% for DAF has been in most markets, especially the UK. The UK, share in the first quarter grown to 35%. So, we’re really benefiting from the fact that we have an excellent factory in Leyland and are able to build our trucks for the UK, in the UK..

Okay. And then, you have some plans to open up some international used truck centers.

How much better do you expected the used margins to be at these company-owned retail centers versus any other used sales channels that are out there?.

Those used truck centers, one of the benefits that we have is that they predominantly sell to retail customers. And the margins we make when we sell a used truck to a diesel customer are significantly higher than selling them to wholesalers or other customers. So, those used truck centers really give us a very nice return on our investment there..

Your next question comes from the line of Seth Weber of RBC Capital Markets..

Actually I wanted to follow up on Steve's last question on the used sales mix.

Is there any color you can provide on sort of where you see the channel mix works today, where you think it's going as far as retail versus wholesale or auction, anything that we can kind of use to frame what the opportunity there is to get the margins up?.

What I look at is, the PACCAR Financial team has done a really good job of building this used truck center network and we've seen even in the U.S. uptick in the recent time of more retail activity flowing through the used truck centers.

And as we build like the one in Prague and expand our capabilities, that just creates an outlet for the strong customer demand for PACCAR products and the used market.

And it gives them a good place to go to get a young truck that's going to serve their needs really well and they're happy to buy those trucks from us, because they know what they're getting. That helps values..

And then, sorry, if I missed this. But, have you talked to just the new truck pricing environment? I think, last quarter, you said it was up about 2%. I'm just wondering, if anything has changed given the macro and also the weakness in used pricing.

If anybody -- if any of your competitors are doing anything irrational, or is that you still seeing positive pricing on the new truck side? Thanks..

Well, I’ll let you talk to the competitors and what they do that's irrational. But for us, what we see is steadiness in pricing. And I think there continues to be a strong desire to have the best trucks, which are Kenworth, Peterbilt and DAF..

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

I was wondering if you could just share with us a little bit more detail on how to think about some of the fixed costs associated with the plant shutdowns and then also with the plant reopenings.

And if any of the protocols that you're enacting that could last for a bit longer might impact the cost basis over the next 12 to 18 months?.

Sure. As far as the protocols we're implementing, come back to the statement, because it's core to us. Our biggest focus right now is making sure that our employees are cared for and operating in healthy and safe environment.

And so, those protocols, things like temperature testing, when they enter the facilities and making sure there's 6 feet between them or 1.5 meters in Europe that we have put up spacing and barriers, where we're building the trucks.

The people are wearing masks that we're doing great cleaning and that we're comparing all of our practices that I just described to other industry leaders to make sure we have the best practices in place. Those will carry on as long as they need to make sure that our employees are healthy and protected.

And they're involved in the process and want them to feel comfortable with their environments. And that's really important to us. And then, as far as the costs that we experienced. We’re -- Company is always thinking about capital costs and expense costs and looking for ways to reduce them. And our teams are fully focused on that.

That's why you see the reduction in the CapEx spending plans that we outlined in our opening comments, and why we are looking at R&D reductions that we can take, just so that business is optimized and set up for this industry cycle..

Is there anything you could share with us, just maybe about factory overhead costs that might not be getting cut just for the week that you're shut down? And then, if there's any difference between the shutdowns in North America versus in Europe?.

Yes. The difference is that we have furloughs from employees during the stopping point. And that's what we've done in North America and Europe.

In the Netherlands, the good relationship with our unions there and with our employees there and with the government there, and they've been able to help us support people still working during the shutdown, the overhead side of the business.

And that's great, because we're continuing to make progress in these practices to keep a healthy and safe environment, and even on the engineering side, they are continuing to work on new projects and processes that are aligned with government support programs..

And those support programs are in place, not only in the Netherlands, but also in Belgium and UK and qualifies to all those programs..

And then, just lastly, your parts margins did hold up very well this quarter.

You mentioned that you've been building out the e-commerce platform, but are you seeing any structural changes that you think might last in terms of how your customers are interacting with that business in this environment?.

I think that -- I think this may hasten the move towards more and more e-commerce in the parts business.

And our team has built a great system to make that available for the customers, for the dealers to work with, and we continue to use the e-commerce, MDI systems to help everybody have the right parts at the right places at the right time, so that we can make sure our customers’ uptime is optimized.

There may be a little bit of a move towards that furthering. And that's good for PACCAR and good for our parts team..

Great. Thanks. .

You bet..

Your next question comes from the line of Matt Elkott of Cowen. Your line is open..

Good morning and thank you. So, the truckload industry, which is an important part of your customer base, had been dealing with some headwinds like rising insurance premiums and low freight rates, which was resulting in a lot of market exits. But now, they also have the tailwind of lower diesel prices.

So, my question is, if we start to see an economic rebound, while at the same time oil prices lag and remain relatively low, which would be good for the health of the truckload industry, do you have any sense of how quickly that could translate into higher orders and how we could see a benefit from that?.

That's a good commentary you offered. I think it's a truth of the confluence of the pandemic and the low oil prices and the fact that customers continue -- our customers, trucking companies continue to deliver freight. And when they're delivering freight, they're putting miles on trucks.

And so, that bodes well for us in the future because they're consumable and over time will need to replace them..

That makes sense. And then, just one follow-up on the balance sheet side. You don't have manufacturing debt, but you do obviously go to debt markets in your financial services segment.

If this economic crisis intensifies and morphs into our financial crisis, do you think you may have to borrow on your manufacturing segment for your financial services segment?.

So, you’re right. PACCAR has a very strong balance sheet with a $4.3 billion in cash, a strong A+/A1 credit rating and no manufacturing debt. And that is exactly how we like it. .

And we've had good access to the markets, we do. We have great credit ratings and good access to the markets. And we've had no trouble in getting midterm notes and our issuances in the first quarter were $632 million. And we did an issuance in April for $400 million. And we've got really good position to support our financial services business..

Your next question comes from the line of Felix Boeschen of Raymond James..

I really just have a quick question around how to think about the Parts business going forward. I think, obviously Trucks still moving as a positive for the business.

But outside of looking at industry truck utilization, was there anything we should think about around the strong 1Q performance in that business, dealers building parts inventory, given some uncertainty ahead or any color in the way you think inventory levels might be today?.

Sure. I think that the most significant factor is the team at PACCAR Parts has done a great job with -- alongside of our dealers with having the right kind of systems in place to support the customers. And so, they become a go to organization in these times. And they're doing a great job of meeting the demand there.

And I think that there -- obviously, as the situation is dynamic, people were looking at that. And so, they want to make sure that part is on the shelf to take care of the customers. They've done that. And as we move forward, they're consuming those parts and they’ll reorder..

Your next question comes from the line of I shouldn't mention the line of Faheem Sabeiha of Longbow Research. Your line is open..

Just for starters.

As far as the social distancing and the staggered shifts that you guys are employing in the factories, would that have any impact on production capacity?.

Excuse me.

What was the last part?.

Would that have any impact on production capacity?.

I think that we always -- we think that in the market we're in we have sufficient capacity. And even bringing in these great best practices will have a sufficient capacity to build for our customers' needs..

Okay.

And can you provide some color around the order intake and cancellations that you've been seeing so far at least through April? I just want to understand if your backlog is essentially holding or shrinking at this point?.

Yes. I think that through the month of April, our backlog actually improved and increased because we weren’t building trucks. And so, we do have good backlog through the second quarter and we'll watch how that carries on..

Your next question comes from the line of Rob Wertheimer of Melius Research..

My question is just on your visibility into any future supply chain disruption from all the obvious impacts.

Does that feel like a major uncertainty still, or is your visibility in the supply chain and how your suppliers are working seeing less volatile and less of a disruptive risk?.

We're working really close with all suppliers, have daily contact with them. And we have great strong supply base. We choose them for their strength and continue just alignment with them so that when we restart, they're ready to go, and align with us, being ready to go. So, there are daily conversations. There's nothing that seems unstable right now.

It's just making sure they’ve put the best practices in, care for their people, which they want to do and align up with the government directives..

And you’ve made a number of helpful comments on parts? Are you able to say from telematics or otherwise, how far miles driven or down in April just to give a sense of real time pulse of the economy?.

Yes. That's interesting. We do have -- in North America all of our trucks are connected. So, the people that can work, trucks are connected. And we watch vehicle miles traveled and we watch utilization of the fleet. And while it's down just a little bit, it's also holding up pretty well and remains at high levels over the historical framework..

Your next question comes from the line of Joe O'Dea of Vertical Research..

With respect to the facility restart and you talked about deploying safety protocols and government regulations and supply chain.

Can you talk about any government regulations today that prevent you from operating, and are there protocols that you have not yet deployed or are sort of facilities ready to operate and regulations aren't restricting you, and it's just about sort of comfort level with supply chain?.

We continue to work in alignment with the initial declarations, which is that trucking is an essential business and the parts supplies and essential business. So, that's one of the things that we work with and then the others to make sure that these best practices we put in for our employees are sufficient and are robust and protect them well.

And those two things in alignment are what define our restart strategy..

And so, you're still rolling out some of those safety protocol actions at facilities?.

Indeed we are and staying lined up with each seat in their directives as well..

Your next question comes from the line of Rob Salmon of Wolfe Research..

I guess, kind of piggybacking on some of the adjustments you guys have made to the factories to obviously protect the employees and respect social distancing.

Is there any cost quantification that you can kind of help us think about whether it’s the impact to gross margins or kind of incremental costs per piece associated with the cleaning, with the temperature taking, as well as spacing out employees a little bit more than we would historically have seen?.

No, there's nothing that's that concrete. We take the temperatures of the employees we're going to or as they come back into the factories pre-production, make sure everybody is healthy when they come to work. That's good for everybody. And then, the teams are doing a really good job of just bringing in safety protocols that work with truck production.

And that overlay has gone very well in our factories where we're starting up..

And like Preston has said, the number one priority is the safety of our employees. And there might be some costs associated with that, but that's not the number one player..

Of course, you have made that very clear and we'll kind of keep that in mind.

As we're looking forward, as we look through kind of the first quarter, can you give us a sense of what the parts revenue cadence was by month? Like, do we see any sort of major difference in your parts revenue in the month of March relative to January-February?.

It was relatively flat through the quarter. I mean, there were weeks and differences by weeks, but it was relatively flat through the first -- for each of the months..

That's helpful. And then, on the provisions for losses on receivables.

With the step up that we saw obviously kind of tied to the economy, are you seeing any difference in terms of the receivables that you have for customers relative to dealers in kind of one of those two channels? Was there a big customer impact? I'm just trying to better understand as we think about the impact looking forward..

We talked about the past dues being really low. Most customers are in a good position to pay their bills on time. Finance company is doing well. We're financing a stable portion of the trucks that we sell and with all good well-dated customers that pay their bills..

I appreciate the time, guys..

You bet. Have a good day..

Your next question comes from the line of Jeff Kauffman of Loop Capital Management. Your line is open..

Thank you very much and thank you for taking my question. I guess, two quick questions. Number one, following up on what Jamie was asking earlier. Is it just more deferral on CapEx and R&D or more of a structural adjustment where maybe we're not going to do certain things.

And where do you think in terms of -- I think, Jamie was hinting as the EV movement slowing down because low fuel prices and pushing things out.

But, in terms of looking at R&D programs or capital spending, where is the flex, and kind of what do you think should be pushed out in this kind of environment?.

Happy to answer that question with you. So, I would say that is whether deferred or canceled, we have a great portfolio of projects. They all have good returns and provide values for our customers. And so with those projects, often what we're looking at right now is, can we do a phase now, can we postpone a phase to a later point.

Very few of them will cancel. We just look at how well they can be done and how do we can more efficient in doing them. And as that lies into the EV movement or to autonomous vehicles or connected vehicles, those technologies really continue to be progressing into the truck industry in the coming years.

PACCAR is going to continue to be a leader in offering EV vehicles to our customers and developing autonomous vehicles, leveraging partnerships and working with suppliers and doing in-house developments, so that we can have all of those ready when our customers want them. And we will continue to have that leadership position..

Okay. That answers both questions. Thank you..

You bet. Thank you..

And there are no further questions in queue at this time.

Are there any additional remarks from the Company?.

Yes. I guess, I would just like to close by saying thank you to everybody for the calls. And again, just to recognize the outstanding people in our Company that are doing such a fantastic job and then also to recognize those people that are handling and managing and working with the COVID situation around the world.

And our heartfelt thoughts and prayers are with them and we're all going to come through this stronger in the final analysis..

And ladies and gentlemen, this concludes PACCAR’s earnings call. Thank you for your participation. You may now disconnect..