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Paccar (NASDAQ:PCAR)
Q4 2018 Earnings Conference Call
Jan. 29, 2019 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to PACCAR's fourth-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.

Ken Hastings -- Director of Investor Relations

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's director of investor relations. And joining me this morning are Ron Armstrong, chief executive officer; Harrie Schippers, president and chief financial officer; 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 and the Investor Relations page of paccar.com.

I would now like to introduce Ron Armstrong.

Ron Armstrong -- Chief Executive Officer

Good morning. Harrie Schippers, Preston Feight and I will update you on our excellent fourth-quarter and full-year results for 2018, important business highlights and PACCAR's focus on innovation. Since the PACCAR's 28,000 outstanding employees around the world, 2018 was a record-setting year for the company. PACCAR achieved record revenues of $23.5 billion and record net income of $2.2 billion, a 9.3% after-tax return on revenues.

PACCAR parts set annual revenue and profit records, and PACCAR financial achieved record new business volume and a 17% improvement in pre-tax income. PACCAR celebrating 80 consecutive years of net income. We celebrated many other 2018 accomplishments. PACCAR delivered a record 189,000 trucks worldwide.

DAF earned the prestigious International Truck of the Year 2018 award. Kenworth, Peterbilt and DAF introduced a broad range of battery-electric, hybrid and hydrogen fuel cell truck models, which are currently in field testing with customers. DAF Brasil earned the Truck Brand of the Year honor for the third consecutive year, and increased its market share in just five years of operation to 6.7%. PACCAR's focus on sustainable business practices were recognized by the environmental reporting firm, CDP.

PACCAR achieved an A rating, which puts us in the top 2% of the over 6,000 companies, which report to CDP. And we're especially proud that Peterbilt and Kenworth were recognized as top workplaces for woman by the organization Woman In Trucking. PACCAR has a strong record of shareholder returns. PACCAR's paid a dividend every year since 1941, and has delivered annual dividends of approximately 50% of net income for many years.

In 2018, PACCAR declared dividends of $3.09 per share, which was a 41% increase over 2017. Total dividends declared exceeded $1 billion for the first time. PACCAR's increased its regular quarterly dividend an average of 11% per year during the last 20 years and raised the quarterly dividend another 14%, beginning in 2019. PACCAR's total dividends declared for 2018 result in a robust yield of 5.4% at year-end.

PACCAR repurchased 5.8 million shares for $354 million in 2018, which was the most since 2007. The board of directors authorized additional share repurchases last year with $540 million remaining at year-end. PACCAR's fourth-quarter revenues were a record $6.3 billion, and fourth-quarter net income was $578 million. Revenues were 15% higher than the fourth quarter last year, and net income was 39% greater compared to the adjusted net income of $416 million earned in the fourth quarter last year.

PACCAR delivered a record 50,400 trucks during the fourth quarter, 6% more than the third quarter. The increase in production resulted for more build days in Europe compared to the third quarter and better supply and performance. Truck and parts gross margins were 14.2% in the fourth quarter. Truck pricing was good with price realization comparable to the second and third quarter at about 2%.

During the quarter, we incur some additional material labor cost due to supplier constraints, but conditions improved compared to the third quarter. By the end of the fourth quarter, supplier deliveries to the factories were in good shape. Our Peterbilt, Kenworth and DAF factories and purchasing and supplier management teams again, did a fantastic job of managing production, delivering a record number of trucks and achieving the highest operating margins in the industry. In the first quarter, we're expecting slightly higher deliveries compared to the fourth quarter.

Deliveries are projected to be up over 15% when compared to last year's first quarter. Truck and parts gross margins are estimated to increase in the first quarter to around 14.5%. Now Preston Feight will provide an update on DAF, PACCAR parts and PACCAR financial services.

Preston Feight -- Executive Vice President

Thanks, Ron. Both had an outstanding 2018. DAF achieved record year being above 16-tonne market share of 16.6% compared to 15.3% in 2017. DAF was the market leader in European tractor registrations, and is making great progress toward its goal of 20% market share.

Europe's greater than 16-tonne truck market was a robust 319,000 registrations, reflecting continued strong demand and growing European economies. European economies and freight transport activity are projected to grow again in 2019. We expect 2019 to be another excellent year with the market in the range of 290,000 to 320,000 trucks. In 2018, PACCAR's parts business generated record annual revenues of $3.8 billion, and record annual pre-tax profit of $769 million.

Annual revenue grew 15% and annual profit grew 26% compared to 2017. Parts' fourth-quarter revenue were a record $971 million, and quarterly pre-tax profit was a strong $194 million. PACCAR has steadily increased its truck and engine market share over the years, resulting in greater number of PACCAR trucks and engines in operation. This, combined with consistent investments in parts distribution capacity and customer focus technologies, has created a very strong growth environment for PACCAR parts.

We expect parts sales to grow by 5% to 8% this year. PACCAR financial services annual pre-tax income increased 17% in 2018 to $306 million. 2018 revenues were $1.36 billion. Fourth-quarter pre-tax income increased 21% to $87 million.

The portfolio increased to record size and continues to perform well. Kenworth and Peterbilt class 8 used truck values increased over 10% in the fourth quarter compared to the same period last year. Kenworth and Peterbilt truck resale values commanded 10% to 20% premium over competitor's vehicles. We expect 2019 to be another good year for used trucks volumes and prices.

PACCAR parts and PACCAR financial services profit contributions are much larger than they were 20 years ago. These businesses are inherently less cyclical than the sale of new trucks, and their consistent profitability enhances PACCAR's financial results throughout all phases of the business cycle. Harrie Schippers will now provide an update on Kenworth and Peterbilt and PACCAR innovation.

Harrie Schippers -- President and Chief Financial Officer

Thanks, Preston. In 2018, U.S. and Canadian class 8 truck retail sales were 285,000 units. Kenworth and Peterbilt had a record production and achieved strong 29.4% market share.

In 2019, we expect U.S. and Canada class 8 truck market to expand further to a range of 285,000 to 315,000 vehicles. Kenworth and Peterbilt have a records backlog with production visibility into late 2019. U.S.

economic and freight indicators were strong in 2018, with nearly 3% GDP growth, 3.8% industrial production growth and 6.6% freight tonnage growth. Fleet utilization levels are very high at 97% in the fourth quarter of 2018. In 2019, U.S. GDP and industrial production are expected to grow another 2% to 3%, which bodes well for freight volumes and the amount for trucks.

In the past, a surge in orders was often driven by a prebuy related to an emissions change, that is not the case in this cycle, which has been driven by economic and freight growth. Kenworth and Peterbilt customers are benefiting from the industry-leading operating efficiency provided by our trucks, as well as superior aftermarket support from PACCAR parts and PACCAR financial services. PACCAR showcase many innovative products and technologies last year. DAF introduced the CF electric, LF electric, XF hybrid and CF hybrid trucks.

Peterbilt introduced Model 579, Model 520 and Model 220 electric trucks. Kenworth introduced a T680 hybrid truck and two T680 hydrogen fuel cell models. Earlier this month, several of these trucks were on display at the CES technology show in Las Vegas. We had a terrific turnout of people interested in PACCAR technology and the opportunity to see the trucks and technology firsthand.

We were the only OEM displaying trucks at the show. Kenworth, Peterbilt and DAF's alternative powertrain products are in field trials with customers, focusing on regional distribution, refuse, urban delivery and port applications. These applications will be the most economically feasible for customers in the medium term. Longer-term, alternative powertrain vehicles will likely 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 and cost-effective powertrain technology in heavy-truck applications for the foreseeable future. The PACCAR Innovation Center in Silicon Valley completed its first full year of operations in 2018. The Innovation Center of team complements PACCAR's extensive R&D efforts and is focused on developing a production-ready level for autonomous PACCAR truck. The team has developed an excellent reputation with the entrepreneurial community of start-up companies, venture capital firms and academia.

PACCAR was recognized in 2018 for its innovations in software and manufacturing. DAF has won it with a computable award 2018 in the Netherlands for its 3D truck configurator web application. Peterbilt in Denton, Texas, the PACCAR engines factory in Columbus, Mississippi and a PACCAR truck factory in Sainte-Therese, Canada, each earned a prestigious manufacturing leadership award from Frost & Sullivan. These manufacturing innovations and arms factory capacity, efficiency and safety exemplify PACCAR's operational excellence.

We invested $437 million in capital and $306 million in R&D expenses in 2018. In 2019, we're planning to increase capital investments to $525 million to $575 million, and increased R&D expenses to $320 million to $350 million. These investments will develop the next generation of Kenworth, Peterbilt and DAF trucks, enhance PACCAR's diesel and alternative powertrain technologies and add additional capacity and efficiency to the company's manufacturing and parts distribution facilities. Thank you.

We'd be pleased to answer your questions. 

Questions and Analyst:

Operator

[Operator instructions] Our first question comes from the line of Ross Gilardi with Bank of America Merrill Lynch. Your line is now open.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, good afternoon, everybody. Just got a couple of questions. First of all, maybe you could talk a little bit more about the parts business.

Where do you think we are in the cycle? You'll be factoring in some deceleration this year. But I remember an interesting chart you had at your Investor Day showing that we're in somewhat of a sweet spot for parts, given the age class of the active fleet. So why would that actually even slow down this year?

Ron Armstrong -- Chief Executive Officer

Well, I'll just say last year was an extraordinary year for PACCAR parts. They put a lot of things in place which -- we reaped the benefits of those last year. We continue to invest in additional capacity this year, so we've got two pretty major projects, one in Las Vegas and one in Brazil for next year. So the programs that have been put in place will continue to generate positive returns, and so we think -- or at this point, somewhere in the 5% to 8% range.

But we'll see how the year progresses and we'll have better insight in that as we have this discussion three months from now.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Yes, got it. Thanks, Ron. And then maybe you could just talk about class 8 order trends a bit, I mean, obviously, they were at supernormal levels throughout the year, and they've started to slow, just back toward smart, more normal levels. What you've seen there? Is it the big fleets, the smaller fleets? Is it really just everybody there? I mean, you sound like you're still quite positive this year.

But any color on order trends would be great.

Ron Armstrong -- Chief Executive Officer

Yes. Over 450,000 orders last year was -- I would sort of call it supernormal, I would call it abnormal, which was, yes, great for the backlog. I was just at the ATD meeting last week, meeting with several of our dealers, the dealers are very confident about the ability to deliver the trucks that are in the backlog and very confident about orders that will continue to fill in the openings that are there. And we've already taken some orders for 2020.

I'd say industry conditions are very positive from our perspective.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Thank you.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Joel Tiss with BMO. Your line is now open.

Joel Tiss -- BMO Capital Markets -- Analyst

Two things. Can you give us a sense, maybe, this is more of a Harrie question. Why the inventories are running up kind of 27.5% at the end of the year? Usually you normalize them toward the end of the year and I just wondered if there's something unusual in there or you just gearing up for a strong 2019?

Ron Armstrong -- Chief Executive Officer

Are you talking about by looking at the balance sheet, the...

Joel Tiss -- BMO Capital Markets -- Analyst

Yes.

Ron Armstrong -- Chief Executive Officer

Carrying value from year to year? I'd say, it's -- I mean, Harrie can have this one. But I think it's mostly just reflecting higher production levels.

Harrie Schippers -- President and Chief Financial Officer

Exactly right, Ron. Reflecting the higher build rates.

Ron Armstrong -- Chief Executive Officer

Yes.

Joel Tiss -- BMO Capital Markets -- Analyst

And then can you give us a little background? Can you tell us what your penetration rate is on your parts? Out of your total installed base, what do you guess your market share is on the parts penetration? Is it 15% or 40%, or just an idea so we can also gauge how much growth potential there is longer term?

Ron Armstrong -- Chief Executive Officer

Yes. That's a very -- unfortunately, there was not a real strong gauge of the parts market like there is on trucks. But I would say, based on seeing our parts revenue growth relative to the competition, what we can glean from that is that our share position improved really in all of our markets last year. And again, kudos to the parts team for the great things and investments they've made in warehousing, in programs.

And I think we'll continue to grow our share without -- again, without knowing precise numbers.

Joel Tiss -- BMO Capital Markets -- Analyst

All right. Thank you.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

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

Steve Volkmann -- Jefferies -- Analyst

Hi. Good morning, guys.

Ron Armstrong -- Chief Executive Officer

Hi, Steve.

Steve Volkmann -- Jefferies -- Analyst

Ron, I was going to see if I could push you a little bit for a little bit more color on your pricing commentary. I think you said, the prices were up about 2% in the second, third and it sounds like also the fourth quarter. And I'm curious about two things. One, is how does that sort of compare with the increases that you saw in things like parts' costs and labor inflation and so forth? In other words, price, cost, neutral, negative or positive, I'd just be curious on how that trended? And then, as we look into 2019, are there some opportunities to maybe get a little bit more price with the backlog being as long as it is? And how does the price cost kind of balance look to you guys going forward?

Ron Armstrong -- Chief Executive Officer

We'll let Michael talk a little bit about the details of the cost side, and then I'll talk about 2019. Michael?

Michael Barkley -- Senior Vice President and Controller

Yes, the cost side for the fourth quarter, they were up about 1.6% or -- which was less than our revenue side, which is up by over 2%. So we had some positive price realization during the quarter.

Ron Armstrong -- Chief Executive Officer

So but as you look next year, Stephen, I think, the orders are pretty well in the house for North America, and so we know what that pricing is. And we commented on what we think the first-quarter margins, a little bit enhancement up to around 14.5% in the first quarter. And we'd say, if you look at the full year, probably in the 14% to 15% range for the year.

Michael Barkley -- Senior Vice President and Controller

OK. Thanks, that's helpful.

Ron Armstrong -- Chief Executive Officer

Yes, sir.

Operator

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

Jerry Revich -- Goldman Sachs -- Analyst

Hi, good morning and good afternoon everyone.

Ron Armstrong -- Chief Executive Officer

Good morning, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

I wonder if you can talk about the new products that you were stepping through at the beginning of the call, the battery-power products are in various stages of customer testing. Can you talk about what are the most successful variant so far? And when do you think we'll see them in commercial production and in your facilities? I appreciate that it's early, but maybe could you share with us the early results?

Ron Armstrong -- Chief Executive Officer

Yes. I think we sort of think about in three different layers. I think where we're at today in sort of the demonstration phase where we're learning about new technologies and how they work, next step, would probably be some level of low-volume production, which would probably be starting next year. And then at some point, once the commercial viability of these technologies are good and the customers -- the customer demand is there, I mean, ultimately for us, it's all about the customer demand.

And I think the economic feasibility will dictate a lot of that as time goes on. And so we're doing everything we can to be prepared and be ready and be as smart as we can be about those technologies. And we'll be ready to start production when the customers' demand is there for those products.

Jerry Revich -- Goldman Sachs -- Analyst

OK. And then the low-volume production that's expected next year, can you talk about what the powertrain looks like in terms of is it a PACCAR-supplied powertrain? Is it third party? I guess, what we've seen from you folks in the past from that diesel side is lower volume products you've attempted to use third-party powertrains and where you have more scale you've done in-house, and I'm wondering is that the framework we should be thinking about at least in the early stages of EV?

Ron Armstrong -- Chief Executive Officer

Yes. I think in the early stages, we're working with a variety of partners to identify what technologies work best. But also getting smarter about what role we want to play and what position we want to have in these alternative powertrain components. So that's still being studied and evaluated for the long-term.

Jerry Revich -- Goldman Sachs -- Analyst

And in PACCAR financial, you folks had really strong margins this quarter, sounds like used truck values were a contributor to that? Can you just flesh that out, was that a mark-to-market or is that sustained benefit now that values have moved higher? Can you just give us a bit more context behind the strong parts or -- excuse me, FinCo margin improvement?

Ron Armstrong -- Chief Executive Officer

Yes. There's no mark-to-market. We adjust, we look at valuations of our used truck inventories every quarter and once we adjust, typically, if there is a writedown needed, we take the writedown and then that becomes the basis going forward. So no mark-to-market enhancements.

It's all about just the market pricing is better, and we're getting a better result from our used truck activities, particularly in North America.

Jerry Revich -- Goldman Sachs -- Analyst

OK, thank you.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

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

David Raso -- Evercore ISI -- Analyst

Hi. Thank you very much. Regarding the first quarter delivery comment, if I heard correctly, up 15% year over year. Can you help us geographically, how we're thinking about deliveries sequentially?

Ron Armstrong -- Chief Executive Officer

I think the lion's share of that will probably be in North America was some improvement in Europe as well compared to last year's first quarter. And we'll see -- yes, we're seeing -- we'll see some improvement in South America as well. So I think most of the regions will be up and Mexico, I think, will be up as well.

David Raso -- Evercore ISI -- Analyst

Yes, I'm just trying to look at normal sequentials. Usually Europe and rest of world are down 4Q to 1Q. So most of the sequential growth is North America. And I guess what was driving it, you haven't found this constructive on the supply chain for a little while, sounds like that's improving?

Ron Armstrong -- Chief Executive Officer

It is...

David Raso -- Evercore ISI -- Analyst

So while I appreciate the price cost, I have to believe the inefficiencies in the supply chain have been rather notable the last couple of quarters. So with that starting in the past, I guess, maybe I'm just pushing a little bit on the gross margin, to have the gross margin in the first quarter still down year over year? I'm just trying to get a sense of do we see at some point, the gross margins can grow on that stronger delivery growth especially if North America sort of driving the growth? I would have thought the supply chain improvements may be able to bump up the gross margin thoughts?

Ron Armstrong -- Chief Executive Officer

Yes, I -- so if you look at the truck margins, truck margins in the fourth quarter, I think, were about 11.9% -- 11.8%, 11.9%. And so because the revenue growth in the first quarter will be more related to trucks than parts, you get a bit of a mix effect that has a margin impact. So that's sort of what we're seeing. And if -- we're seeing good, really good performance by our suppliers in the month of January and should that continue that there could be some upside.

But right now, we're making our best call based on how we see it currently.

David Raso -- Evercore ISI -- Analyst

No. I appreciate that. Yes, we have -- on a pre-tax level, margin truck was still down year over year in the fourth quarter. But are you saying that at least there's a chance, say, the pre-tax truck margins should have a chance to start growing year over year with the deliveries? That answer or we're looking for that extra little pop to earnings power can we start to assume some improving year-over-year margin?

Ron Armstrong -- Chief Executive Officer

It could. And so we'll -- again, I think we'll see how things progress here as we work through the first quarter.

David Raso -- Evercore ISI -- Analyst

OK. And quick follow-up on Europe. I appreciate the derisking, the guide down a little bit, but can you help us with how the orders were in the fourth quarter year over year?

Ron Armstrong -- Chief Executive Officer

Let me just see if we can -- well, the orders were strong while we look for the numbers. We had a really strong December in Europe. And...

Harrie Schippers -- President and Chief Financial Officer

Yes, fourth-quarter orders were up 8%, and for the full year, orders were up 17% in Europe.

David Raso -- Evercore ISI -- Analyst

OK. Well, so it's up 8% going into the year. And lastly, the repo. The repo was a nice step-up in the fourth quarter.

Maybe if you can just help us how you think about the cycle and how it maybe influences at your thoughts on the share repo.

Ron Armstrong -- Chief Executive Officer

Yes. I mean, we -- when the evaluation is attractive as it is currently, we step up our efforts on the repurchase activity. And so that's been the approach we've taken for years, and we'll continue to apply that. We still have $540 million of authorization that we'll continue to manage through 2019.

David Raso -- Evercore ISI -- Analyst

OK. I appreciate it. Thank you so much.

Ron Armstrong -- Chief Executive Officer

Thank you, David.

Operator

Our next question comes from the Seth Weber with RBC. Your line is now open.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, good morning, good afternoon everybody. Just kind of going back to David's question on the gross margin, is there any way to quantify how much the supply chain disruption or some hiccups cost you in margin in the fourth quarter? I think you said it was maybe 50 basis points in the third quarter. Did it get less onerous in the fourth quarter?

Ron Armstrong -- Chief Executive Officer

Yes, that's a tough one, you know. There's just -- there's so many inputs that go with that. So I don't recall that being that specific. So it is an impact in -- it's tens of millions, but it's hard to quantify.

Seth Weber -- RBC Capital Markets -- Analyst

OK, fair enough. And then I wanted to ask about the higher CAPEX that you're looking for in 2019. You did mention some incremental spend on manufacturing facilities. I'm wondering, is that -- are you adding brick-and-mortar or is it just sort of adding incremental machine tools, or what? Can you just give us any color on that specific part of the higher CAPEX on the manufacturing side? And also, are you ramping up spending on any suppliers? Thanks.

Ron Armstrong -- Chief Executive Officer

So I'd say it's a combination of all those things. There will be some additional bricks and mortar added to some of our facilities to really increase the efficiency. One of the things that we're going to be doing, we're going to be investing in a new paint shop in Chillicothe, Ohio. So that'll be a pretty sizable addition, and we'll redirect the current paint shop to be more involved with assembling capacity.

We're also looking at machining investments to support the success of the PACCAR MX engine and just to continue to increase the efficiency of all of our factories around the world. And we'll be preparing for new product launches and the facility requirements to go with that.

Seth Weber -- RBC Capital Markets -- Analyst

OK. And are you investing in suppliers to help -- kind of help them along a little bit these days? Or...

Ron Armstrong -- Chief Executive Officer

We definitely are. Where there's -- supplier is -- you can't get it done fast enough to support what we want to do, then yes, definitely, we're providing suppliers with a capital investment and it's going to benefit PACCAR.

Seth Weber -- RBC Capital Markets -- Analyst

Great. OK. Thank you very much, guys.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Andy Casey with Wells Fargo. Your line is now open.

Andy Casey -- Wells Fargo -- Analyst

Good morning out there. How's everybody doing?

Ron Armstrong -- Chief Executive Officer

Great Andy. And you?

Andy Casey -- Wells Fargo -- Analyst

Doing fine. Thanks.

Ron Armstrong -- Chief Executive Officer

Staying warm?

Andy Casey -- Wells Fargo -- Analyst

Trying. The worst is coming. Your welcome to come out and join us.

Ron Armstrong -- Chief Executive Officer

Sunny here in Seattle today.

Andy Casey -- Wells Fargo -- Analyst

Oh, that's great. Hey, in your European outlook, I mean, some of the questions have already been asked, but you're expecting the industry sales down around 4% at the midpoint. You had 8% organic growth -- or sorry, order growth in the fourth quarter. Should we read that to mean that you expect industry trends, not necessarily PACCAR but industry trends, to kind of deteriorate through the year?

Ron Armstrong -- Chief Executive Officer

You know, the European market has been above 300,000 for three straight years. We -- based on how we see things, we think 2019 could be the fourth. And so we're starting the year in a real positive vein with where we're at. But it's four years, and it's -- we'll see how long it runs, but we do have some conservatism baked into our thinking as we progress through the year.

But hopefully, that doesn't turn out to be the case.

Andy Casey -- Wells Fargo -- Analyst

OK. Thanks for that, Ron. And then just a little bit further on that topic, have you started to see any weakness in any of those select countries that create the Europe region?

Preston Feight -- Executive Vice President

You could say that Germany is the place where, if there's anything, there's a little bit of noise and, obviously, the U.K. But in general, as Ron just said, we see strong performance in order intake and how the trucks are certainly being received with the customers. So with order intake up and market share growth that we've achieved, feels pretty good for 2019.

Ron Armstrong -- Chief Executive Officer

Yes, we're pretty fortunate in the U.K. We have -- we're the only OEM in Europe that has a plant manufacturing products in the U.K., and that provides us a bit of a competitive advantage, depending on how things play out with Brexit. And I think everybody believes that there won't be a hard Brexit. But in the event there is, it actually -- from a competitive situation, it actually plays into our favor.

So we'll how it all develops, but we're hopeful that's there's a nice, smooth approach to the transition there.

Andy Casey -- Wells Fargo -- Analyst

OK. Thank you. And then if we can flip over to parts, if I look at it on an annual basis, you had around 150 basis points of operating margin improvement year over year. Clearly, a very strong performance.

When you look back on the entire year, could you kind of review of what the main factors driving that improvement were? And then kind of reflect on whether you expect further upside to the margin during 2019?

Ron Armstrong -- Chief Executive Officer

So the big thing is just the operating leverage on the warehouse and sales and marketing spend, and so you get the benefit of that. You get to -- we continue to see growth in our engine park and engine parts sales, which typically have a little bit higher-than-average margin, and I don't think that's going to change. I think we'll continue to see engines -- engine parts growth probably still be a leading product line that will help us develop the parts business into 2019. So offsetting that, we -- last year, we constructed the Toronto PDC, which is now up and running and doing great.

And so you have some project costs that we continue to incur just to support the growth of the business going forward. So that tends to offset a little bit, but that'll be pretty -- all pretty normal. And so we'd see some -- probably some leverage from that 5% to 8% revenue growth.

Andy Casey -- Wells Fargo -- Analyst

OK. Thank you very much.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Ann Duignan with JP Morgan. Your line is now open.

Ron Armstrong -- Chief Executive Officer

Good morning, Ann.

Ann Duignan -- J.P. Morgan -- Analyst

Sorry, I had you on mute. Sorry. Good morning. I guess, a lot of my questions have been answered, but if we could take a step back and look at your backlog again, strictly in North America, can you talk a little bit about the mix in there of sleeper versus Class 8? And also maybe large fleet versus smaller owner-operator? Or any other color you can give us on the mix of that backlog, it would be great.

Harrie Schippers -- President and Chief Financial Officer

Ann, if I look at the backlog for 2019, it's pretty normal. We got a very normal mix of fleet business, bigger fleets and smaller fleets retail business by our dealers. And we try to manage that backlog also that in a year where our lead times extend, that we're able to supply all our loyal customers with the trucks that they need.

Ann Duignan -- J.P. Morgan -- Analyst

So nothing unusual, sleeper versus class 8 straight? I'm thinking more oil and gas kind of related infrastructure?

Harrie Schippers -- President and Chief Financial Officer

No, that's very normal.

Ann Duignan -- J.P. Morgan -- Analyst

OK, that's good to hear. Thank you. And then in that context also, perhaps we could talk about used values and also the cancellations that escalated for the industry over the last couple of months? Can you talk about what you've seen in cancellation rates? Or were you're dealers not ordering for stock to begin with, so there have not been the same level of cancellations? If you could talk little bit about that that'll be good.

Harrie Schippers -- President and Chief Financial Officer

Yes. Used truck prices have improved nicely as we mentioned. And if we look at cancellations, we don't see a lot of real cancellations. If we see cancellations, it's cancellations for reorders.

So a dealer changes the type or a customer for a truck, but not any significant cancellations so far.

Ann Duignan -- J.P. Morgan -- Analyst

And is that your assessment of the industry cancellation rates? That it is more canceling and resetting of delivery train trucks that...

Ron Armstrong -- Chief Executive Officer

We just -- don't know what the other -- we know what our situation is, but we don't really have any read into what the competitor numbers look like.

Ann Duignan -- J.P. Morgan -- Analyst

OK. And one quick follow-up on your European outlook. What exactly do you have baked in the outlook for Brexit? You're assuming it's a normal or that it doesn't happen? Or what's the downside risk if we do not get order past the expiration date?

Ron Armstrong -- Chief Executive Officer

You know, I think there's bound to be some -- if there is a hard Brexit, it's -- there's bound to be some temporary disruption. But that's, again, that's temporary. And again, because we are the sole producer in the U.K., from a competitive standpoint, it's actually a bit of an advantage for us.

Ann Duignan -- J.P. Morgan -- Analyst

No. But in the long-term, post any disruption, obviously?

Ron Armstrong -- Chief Executive Officer

Yes. I think long-term, it all sorts itself out. Yes. But short-term, challenges.

Ann Duignan -- J.P. Morgan -- Analyst

Yes. OK. I'll leave it there and get back in line. Thank you.

Appreciate it.

Ron Armstrong -- Chief Executive Officer

OK. Thanks, Ann.

Operator

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

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning.

Ron Armstrong -- Chief Executive Officer

Good morning, Jamie.

Jamie Cook -- Credit Suisse -- Analyst

I guess, first question, I was sort of surprised when you talked about customers already starting to talk about 2020. And obviously, when we look at your stock price and the multiple the world assumes in 2020, the truck market, obviously, rolls over. So can you just talk, understanding it's far out, but sort of what your customers are talking about in terms of how they're thinking about 2020 and sort of how far out you are? And then my second question, I'm sorry, I just wanted to push again on the margins for 2019. I know you said -- I think you said 14% to 15%.

But like, how is not the midpoint to the high end 14.5% to five more realistic, just given price? I mean, material costs are going down. The supplier constraints and inefficiencies should be going away. I just -- I don't understand how we get to the low end?

Ron Armstrong -- Chief Executive Officer

So the backlog -- the customers are engaging in discussions about 2020. They've got their build slots outlined for 2019, and so some of those discussions are occurring and...

Harrie Schippers -- President and Chief Financial Officer

But it's still very limited for 2020. The big fleets plan their requirements into 2020. In general, we haven't issued our pricing for 2020 yet, so that's still to come. So once we launch or issue our pricing for 2020, we'll see more orders for 2020.

Ron Armstrong -- Chief Executive Officer

Yes, and as far as margins...

Jamie Cook -- Credit Suisse -- Analyst

I'm just wondering if you have a strong view on whatever the industry forecasts are out there for 2020 of down 25% based on what you're hearing. If you think the market is too pessimistic or you don't forecast you'll run the business no matter what's...

Ron Armstrong -- Chief Executive Officer

Yes, I mean, what will actually be 2020, that's to be determined. But as we see it right now, there's -- people still need and want trucks, and we're trying to figure out how to build more trucks. Not -- that's -- and that's what you see a little bit in our first-quarter delivery plan. As far as margins, we're just starting the year, given a pretty broad range.

And we'll have better feel for how suppliers are going to perform over the year and how cost movements will be, what's the impact of commodities and tariffs, etc. So that's still -- we think we have all that pretty well dialed in, but we'll see how it progresses as we go through the first quarter.

Jamie Cook -- Credit Suisse -- Analyst

OK. Thanks. I'll get back in queue.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

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

Steven Fisher -- UBS -- Analyst

Hey, guys.

Ron Armstrong -- Chief Executive Officer

Hey, Steven.

Steven Fisher -- UBS -- Analyst

I wanted to follow up on the supply chain topic. And I think, Ron, you said that the suppliers reached a good shape by the end of the fourth quarter. But I guess I'm curious, you're confident that they'll be able to seamlessly ramp up further to meet a still higher rate of production in 2019.

Ron Armstrong -- Chief Executive Officer

Yes. Our teams are -- our materials teams, our purchasing teams, our quality teams, they're working closely with our suppliers. And they had some -- our suppliers had some difficult hands they got dealt with a few hurricanes and a few things like that in the second half of last year, which -- that's sort of behind us. And so they've gotten their legs under them, and so we're working closely with them to be able to support the progression of build that we want to achieve during 2019.

Steven Fisher -- UBS -- Analyst

So is it smooth so far in, say, the month of January?

Ron Armstrong -- Chief Executive Officer

Yes. January has been the best we've seen in -- through a couple of quarters.

Steven Fisher -- UBS -- Analyst

OK, terrific. And then just on Financial Services, just curious how much visibility you have at this point for 2019. I mean, the current quarter of profit was a nice run rate at $87-or-so million. Is that something you expect to build on in 2019? Or might it kind of sustain here and then moderate after a couple of quarters?

Ron Armstrong -- Chief Executive Officer

Well, we've grown the portfolio with the additional truck deliveries, record truck deliveries and the ability that we've -- we financed about 24% of those globally last year, and we expect that will continue next year. So I think we'll continue to see some modest portfolio growth, and right now, the portfolio is performing excellently. Our past dues are really at historically low levels. And so we entered 2019 in good shape, and so we feel good about where we're at for 2019 with our financial services business, for sure.

Steven Fisher -- UBS -- Analyst

Very good. Thanks a lot.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

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

Joe O'Dea -- Vertical Research -- Analyst

Thanks for taking my questions. First, just wanted to understand gross margin potential. And when you talk about another strong year in 2019 and a 14% to 15% range. And you go back to the middle part of last decade in a strong market conditions when you're doing 15% to 16% range, a host of things on the emissions front, obviously, price cost considerations, but just wanted to understand the major kind of structural swings that appear to mark step down in the structural sort of gross margin potential.

Ron Armstrong -- Chief Executive Officer

You know, 14% to 15% margins are excellent. There could have been some unusual circumstances 10 years ago, 15 years ago, but I think we're in great shape. The cost and the revenue side of trucks these days are much higher, given all the emissions add-ons that have occurred over time, so that probably could have some impact on the percentage realization over time. But whether it's 14% or 15%, 15% to 16%, it's pretty strong.

Joe O'Dea -- Vertical Research -- Analyst

OK. And then on the share repo front, stepping it up in 2018, but vis-à-vis, the cash that's on the balance sheet, the potential to do something much larger than, and I guess, maybe just why not step it up and be a little bit more active on the share repo front?

Ron Armstrong -- Chief Executive Officer

Yes. We just -- we feel really good. If you look at our cash over time, it's plus or minus 15% of our balance sheet, and we're basically sitting about that point. And so we're quite comfortable with where we're at and continuing to opportunistically buy shares as work for us, and we will continue to apply that approach in 2019.

Joe O'Dea -- Vertical Research -- Analyst

And then just one on DAF and the share gains in 2018. I think some nice progress toward the 20% target. When you think about the momentum you have there, the good orders that you have in 4Q, I mean, do you have any kind of sense on short of hitting that 20% target? Does that time line look more in view today than it has over the past couple of years, I imagine? And just trying to think about the -- what you see out there as a reasonable time line to get there?

Ron Armstrong -- Chief Executive Officer

Yes. So if you look at 20 years' history, we were at 10% 20 years ago, and now we've progressed to 16.6%. So is 20 in our sights? Absolutely. And a key reason for the success this year was the -- that model your '17 truck that was an excellent investment, both from a performance standpoint, a apparent standpoint, a fit-and-finish standpoint.

So it's -- the truck has just gotten better and better, and we're continuing to make investments for the future. And I think as -- just as we've seen in North America, we've grown -- in that 20-year period, we've grown basically 9 share points in North America from 21 to 30. And so yes, 20% is definitely in our sights.

Joe O'Dea -- Vertical Research -- Analyst

Great. Thanks very much.

Ron Armstrong -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Neil Frohnapple with the Buckingham Research. Your line is now open.

Neil Frohnapple -- Buckingham Research -- Analyst

Hi, guys.

Ron Armstrong -- Chief Executive Officer

Good morning, Neil.

Neil Frohnapple -- Buckingham Research -- Analyst

Good morning. At the Investor Day, Ron, you guys talked about the potential down the road of expanding further into China. Can you provide any commentary here? Has the vision changed at all with all the cross-currents?

Ron Armstrong -- Chief Executive Officer

It hasn't changed. We continue to look for a window of opportunity that can provide a return, and that's the challenge in China is finding the right combination where you can get a reasonable return. Harrie, Preston and I, we've all traveled there in the last several months. And so we continue to be there, evaluate it.

And the window will open, but it's just -- it's an area of future opportunity, and we'll continue to evaluate just there as we do other parts of Asia.

Neil Frohnapple -- Buckingham Research -- Analyst

All right. And then can you provide an outlook for the North American medium-duty market. It seemed show more signs of life and exhibit faster growth in 2018. So yes, just curious on what your thoughts are for that market in 2019.

Ron Armstrong -- Chief Executive Officer

Yes, the class 6 and 7 market, which is where we play, is roughly up 100,000 trucks in 2018, and Peterbilt and Kenworth achieved record deliveries, record market share, 17.5%. So the products that we have are doing great. And just like everything else, we'll continue to make investments into product enhancements as we go forward. And as time goes on, more and more and more of our dealers get more engaged in that business.

And so as we look at 2019, we think 100,000 trucks is probably a pretty reasonable approximation of that market for this year.

Neil Frohnapple -- Buckingham Research -- Analyst

OK. Thanks, Ron. I'll pass it on.

Ron Armstrong -- Chief Executive Officer

Sure.

Operator

Our next question comes from the line of Adam Uhlman with's Cleveland Research. Your line is now open.

Adam Uhlman -- Cleveland Research -- Analyst

Hi. Good morning, everyone.

Ron Armstrong -- Chief Executive Officer

Good morning.

Adam Uhlman -- Cleveland Research -- Analyst

I was wondering if you could chat about the MX engine. I think I heard earlier, Ron, you mentioned adding some more machining capacity. I assume you're kind of maxed out on production today, but correct me if I'm wrong. And what type of growth should we expect in that business, either in terms of penetration or production rates in 2019 as that investment comes online?

Ron Armstrong -- Chief Executive Officer

Yes, so the -- we'll start making those investments in 2019. The coming online is probably 2020 and will -- that'll be able to support the increased penetration. As we said before, the MX engine, basically, will support 80% of customer applications, and it just takes time to increase that penetration. We could put more in today if we had the capacity.

And so that's why we're making the additional investments, and we'll continue to see that penetration grow to 50%, 60% over the coming near-term period, I think.

Adam Uhlman -- Cleveland Research -- Analyst

And where did we end in 2018?

Ron Armstrong -- Chief Executive Officer

Yes, just over 40% in North America. And of course, it's 100% for all the DAF products that get sold in Brazil and Europe. And so I think, overall for PACCAR, it's about 60% penetration for all of PACCAR.

Adam Uhlman -- Cleveland Research -- Analyst

Got you. And then can we switch back to Europe? And could you talk about what you're seeing in the used truck pricing there? And then is there any difference between Western Europe or Eastern Europe? Any kind of changes would be helpful.

Ron Armstrong -- Chief Executive Officer

Yes. Pricing is pretty steady. Not seeing any appreciation, but just pretty steady. And demand, more of the used trucks tend to go toward Central and Eastern Europe.

There's -- that's also a big growth area for DAF for new trucks. DAF is the -- a leader in the Central European markets. And so that's steady as she goes is how I would think about it. That's what we saw in 2018 is how we're thinking about 2019 at this point.

Adam Uhlman -- Cleveland Research -- Analyst

Great, thanks.

Operator

Our next question comes from the line of Scott Group with Wolfe Research. Your line is now open.

Rob Salmon -- Wolfe Research -- Analyst

Hey, good morning, good afternoon. It's Rob Salmon on for Scott.

Ron Armstrong -- Chief Executive Officer

Good morning, Rob.

Rob Salmon -- Wolfe Research -- Analyst

Good morning, guys. In the guidance that you provided, at the midpoint, it's implying roughly a little under 10% growth in the R&D budget. Could you talk about how we should be thinking about the R&D as we look out a few years in light of some of the emission standards changes, as well as the investments that you guys are making into some kind of new trucking products? And what the flexibility you guys have on that line item if we do kind of encounter an industry downturn in 2020?

Ron Armstrong -- Chief Executive Officer

Well, the flexibility of managing cost structure is a real strength of PACCAR, and we can manage that quite well. But also, we're making some great investments, as we always do, in the products for the future. I would say, incrementally, we're going to -- we're seeing more investments in R&D on the alternative powertrain and software development side. That's where the intellectual property is being created, and we're making those investments there.

And we continue to make good, strong investments in diesel powertrains. We've got emissions requirements being enhanced in really all of our markets. And so we continue to invest in those arenas and in the new products of the features that are going to get us to those market share goals that we talked about earlier.

Rob Salmon -- Wolfe Research -- Analyst

OK. That makes sense. With the record backlog, has that given you any ability to kind of make the pricing, as well as the orders be much more firm throughout kind of 2019, just given that we're looking at roughly a 12-month delay in terms of when a truck is ordered to when it gets produced today?

Ron Armstrong -- Chief Executive Officer

The pricing has been negotiated, agreed, and it's representative of our market price and the great value that our products bring to our customers. So it's pretty well set.

Rob Salmon -- Wolfe Research -- Analyst

That makes sense. So that's what we're hearing from your end customers as well. So I appreciate the time, guys.

Ron Armstrong -- Chief Executive Officer

Sure.

Operator

Our next question comes from the line of Joel Tiss with BMO. Your line is now open.

Joel Tiss -- BMO Capital Markets -- Analyst

I love you guys too much, I can't stay away.

Ron Armstrong -- Chief Executive Officer

Appreciate it, Joe.

Joel Tiss -- BMO Capital Markets -- Analyst

I just wondered if you could talk a little bit about your approach on autonomous. Are you guys going to outsource that whole process? Or are you thinking that there's parts of that that you'd like to take control of? Or just give me a little sense in that regard of how you guys are thinking about that?

Ron Armstrong -- Chief Executive Officer

Yes. We're still working through that, Joel. We've worked with quite a few companies who are developing autonomous technology, so partnering with them. But we're also developing our own capabilities.

We have our Silicon Valley Innovation Center, and we've hired software engineers specifically focusing on developing our own Level 4 capability. And so we're very focused on, again, sort of like alternative powertrains, trying to figure out where we want to have the intellectual property and where we want to partner with others on developing that capability.

Joel Tiss -- BMO Capital Markets -- Analyst

OK. Thank you. Yes, everything else has been asked already. Thank You.

Ron Armstrong -- Chief Executive Officer

OK. Thanks, Joel.

Operator

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

Ron Armstrong -- Chief Executive Officer

We'd like to thank everyone for joining the call, and thank you, operator.

Operator

[Operator signoff]

Duration: 58 minutes

Call Participants:

Ken Hastings -- Director of Investor Relations

Ron Armstrong -- Chief Executive Officer

Preston Feight -- Executive Vice President

Harrie Schippers -- President and Chief Financial Officer

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

Steve Volkmann -- Jefferies -- Analyst

Michael Barkley -- Senior Vice President and Controller

Jerry Revich -- Goldman Sachs -- Analyst

David Raso -- Evercore ISI -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Andy Casey -- Wells Fargo -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Steven Fisher -- UBS -- Analyst

Joe O'Dea -- Vertical Research -- Analyst

Neil Frohnapple -- Buckingham Research -- Analyst

Adam Uhlman -- Cleveland Research -- Analyst

Rob Salmon -- Wolfe Research -- Analyst

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