PACCAR Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2022

There are 19 speakers on the call.

Operator

Morning, and welcome to PACCAR's Third Quarter 2022 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 an objection, they should disconnect at this time. I would now like to introduce Mr.

Operator

Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Speaker 1

Good morning. We'd like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Preston Feit, Chief Executive Officer Harry Skippers, 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 Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

Speaker 1

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

Speaker 2

Good morning. Harry Skippers, Michael Barclay and I will update you on our Q3 financial results and other business highlights. While I truly appreciate all of PACCAR's outstanding employees, we delivered record 3rd quarter results in the highest quality trucks Transportation solutions to our customers around the world. PACCAR's 3rd quarter net income more than doubled to $769,000,000 And revenues increased 37 percent to $7,060,000,000 PACCAR Parts pretax profits were a record $374,000,000 32% higher than the same period last year. Parts 3rd quarter revenues increased to a record $1,470,000,000 Truck Parts and Other gross margins expanded to 14.9% in the 3rd quarter compared to 14.4% in the 2nd quarter.

Speaker 2

Strong business operating conditions in PACCAR's increased mix of premium new truck models and excellent aftermarket parts business contributed to the higher gross margins. PACCAR Financial had a year over year pretax income increase of 22% $146,000,000 reflecting a high quality portfolio and robust used truck results. We estimate this year's U. S. And Canadian Class 8 market to be in a range of 265,000 to 285,000 trucks And next year to be in a range of 260,000 to 300,000.

Speaker 2

Overall, the strong truck market is expected to continue As a result of the solid freight volumes, high customer truck utilization and the increased fleet age, Customers are replacing their trucks with the new Peterbilt and Kenworth models that enhance their operational efficiencies, Achieve industry leading fuel economy and attract and retain the best drivers. Kenworth and Peterbilt now have a backlog that extends into the Q2 of 2023. In Europe, this year's truck industry registrations in the above 16 ton segment are estimated to be in a range of 275,000 to 295,000 vehicles. Like in the U. S, freight demand and customer utilization remains high.

Speaker 2

The 2023 market is expected to be in the range of 260,000 to 300,000 trucks. DAS year to date market share has increased to 17.4% compared to 15.8% a year ago. This growth reflects the exceptional performance Aptof's industry leading and award winning new XF and XG trucks that began production at the end of last year. DAF recently introduced a new XD distribution and vocational truck product line. The new DAF XD models Earned the 2023 International Truck of the Year award at this year's truck show in Germany.

Speaker 2

The new XD lineup begins production this quarter. The complete new range of DAF trucks offers customers in Europe the only trucks that utilize the new masses and dimensions regulations and are differentiated from the competition due to their more aerodynamic design, Superior safety features and spaciousness for the driver. These trucks provide our customers the most fuel efficient, Driver friendly premium trucks in the European market. The South American about 16 ton market is projected to be in a range 125,000 to 135,000 trucks this year and in a similar range next year. In Brazil, thoughts about 16 Market share through September was a record 6.9% compared to 5.6% last year.

Speaker 2

The outstanding PACCAR team and dealers around the world are performing well and delivering excellence to our customers. Thank you. Perry Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Perry?

Speaker 3

Thanks, Preston. PACCAR delivered 44,400 trucks during the Q3. We estimate 4th quarter deliveries to increase to a range of 46,000 to 50,000 trucks. This reflects higher build rates, more production dates in the 4th quarter And a gradually improving supply base performance. Truck Parts and Auto Close margins increased to 14.9% in the 3rd quarter.

Speaker 3

We anticipate 4th quarter close margins to be in the 15% to 15.5% range, Reflecting higher truck deliveries and continued strong performance of PACCAR Parts. Becker Parts had an outstanding 3rd quarter with parts close margins of 30.4%. Customers' high truck utilization and increased average fleet age contributed to Packer Parts' record results. TECA Parts opened a new 260,000 Square Foot Parts Distribution Center in Louisville, Kentucky in the 3rd quarter To further enhance parts availability for customers and dealers, PACCAR Parts' outstanding performance It's driven by its network of 18 distribution centers, 2,300 dealer locations, 250 independent TRP stores As well as technologies like managed dealer inventory and innovative e commerce systems. We currently expect 4th quarter part sales to be 8% to 10% higher than the same period last year.

Speaker 3

PACCAR Financial Services benefited in the 3rd quarter from high used truck prices and excellent portfolio quality. Pre tax income was $146,000,000 22% higher than last year. The amount continues to be strong for PACCAR pre owned vehicles as customers appreciate and pay a premium For the superior reliability and durability, Becker Financial has been increasing its network of retail used truck centers And opened a new location in Madrid, Spain in the Q3. We now have 13 centers to sell used trucks at retail prices, which enhances profits. PACCAR has invested $7,300,000,000 in new and expanded facilities, Innovative products and new technologies during the past decade.

Speaker 3

These investments have created the newest The most impressive lineup of trucks in the industry and will contribute to excellent financial returns for many years. PACCAR's return on invested capital further improved to an industry leading 23% in the 1st 9 months of this year. Capital expenditures are projected to be $475,000,000 to $500,000,000 in 2022 And $525,000,000 to $575,000,000 next year. Research and development expenses Are estimated to be $330,000,000 to $340,000,000 this year and $350,000,000 to $400,000,000 next year. PACCAR's exciting new lineup of trucks and transportation solutions, efficient R and D and capital investments, Strong aftermarket parts and financial services business and flexible operating structure position the company for a bright future.

Speaker 3

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

Operator

Thank We will pause for just a moment to compile the Q and A roster. Your first question today comes from the line of Chad Dillard with Bernstein, your line is now open.

Speaker 4

Hi, good morning guys.

Speaker 2

Hey, hello Chad.

Speaker 4

So first question is about just taking pricing in the Q3. Can you just give us a sense for what it looked like on the truck side? And then How to think about that going into Q4? Any thoughts on just pricing into the 2023? And it seems like the exit rate of margins are pretty strong.

Speaker 4

I How much more upside do you think you could generate going into 2023?

Speaker 2

Yes, sure. I think that what you saw And the Q3 was really strong performance from all the divisions of PACCAR. There was price realization for us. Costs were up also, but we had a net positive on that and we would expect that to continue in the Q4. And as we shared with you, we're thinking that truck part and other gross margins will increase from To the 15 to 15.5 range and at a really high level of performance.

Speaker 2

And we look out into 2023 and think we'll have a really good year in 2023.

Speaker 4

Great. And just one more question for you. I was hoping you could give a little more Color on your Europe guide, just what are you baking in from like a macro perspective, from a freight demand perspective, just like what's being discounted there?

Speaker 2

Yes. Harry, you want to go and then I'll follow-up with anything?

Speaker 3

Yes. We see demand for trucks and transportation to continue to be strong in Europe. One of the statistics that we like to follow is the mount, the toll paid in Germany, which is at similar levels as it was last year. So freight and transportation continues at strong levels. We see it that customers love the new trucks, strong order intake and 1st quarter is basically full with orders and we're now starting to fill up the Q2 in Europe.

Speaker 3

So the outlook for Europe is really good.

Speaker 4

Great. Thank you. Your

Operator

next question comes from the line of Felix Beauchene with Raymond James.

Speaker 5

Hey, good morning, everybody.

Speaker 2

Hi, Felix.

Speaker 5

Hey, I was hoping we could talk about the parts business. It's obviously been super strong, but I was just curious if you could provide some high level thoughts on how you think the Parts business might hold up if we do see a more pronounced slowing of the freight market or the macro in the U. S. And Europe next year. What I'm really trying to understand is, we can use the industrial recession as a proxy to see how parts kind of did in that scenario.

Speaker 5

But fleet seem over aged, you have more proprietary content on the trucks. So I'm just kind of curious if you could directionally talk about any puts and takes to parts into next year.

Speaker 2

One of the things that's wonderful about the team here is that they've done a great job of developing a very robust part And that serves the customers well, and I think that's one of the key elements that's driving the performance of the business is having the right systems and capabilities to provide customers trucks. We've expanded our footprint and distribution centers around the world. That enables us to be even a better partner with our dealers and our customers. So that helps the performance and insulates us a little bit from cyclicality, gives us a strong recurring revenue business. We've seen the Growth of our engine business around the world over the several past years, which also gives us a strong future look into the parts business.

Speaker 2

And I think that with the elevated fleet age, we're going to continue to see strong truck performance and parts performance for the next while.

Speaker 5

Okay. Super helpful. And if I could just have one quick follow-up. You mentioned the new model mix in Europe. Do you have a percentage of what that was out of European builds, in the quarter and where you kind of expect it to go into 4Q?

Speaker 2

I think we're getting towards 70% now of the new model mix in Europe and I expect that in the for the Q4 and then You'll see that increase next year as well. I can tell you we're over at the IAA show in September in Hanover in Germany and The trucks are simply amazing and the customers are really realizing the benefits of their fuel efficiency and driver performance. And that's driving a very strong demand for those new products.

Speaker 5

Super helpful. I appreciate it.

Speaker 3

Good.

Operator

Your next question comes from the line of Tami Zakaria with JPMorgan. Your line is now open.

Speaker 6

Hi, good morning. Thank you so much for taking my questions. So my first question is hi. So my first question is, so you're expecting some growth in North America truck sales next year. Could you help us understand what kind of macro growth assumptions or GDP growth assumptions are embedded In that guide for truck sales?

Speaker 2

Yes. We don't think of it that way, When we think about the truck industry and what's going on within the truck industry that's driving the volumes and as you can as you look at it, right, freight demand is at very high levels. Truck utilization is at a high level. The age of the trucks out in the park has increased for the past 3 years. And there continues to be supply based constraints that limit build.

Speaker 2

And when you put all of that together and combine it with the excellent new products that are delivering 7% to 10% better fuel economy for our customers, which is 1,000 of dollars per truck per year in savings, it points to a really good market for PACCAR next year.

Speaker 6

Got it. So it seems like you're saying even if let's say there's a broader macro recession, the factors you mentioned Specific to the truck industry makes you comfortable in guiding to a growth number for next year?

Speaker 2

Well, as we said, we think that it will be a strong truck market next year as we showed with our industry expectations of 260,000 to 300,000 in both Europe and North America. So that's pretty strong markets.

Speaker 6

Got it. That's super helpful. Thank you. And then From a gross margin perspective, with commodity prices coming down and you have a pretty decent visibility to truck volumes next year, Do you expect gross margin rate improvement to continue next year as well?

Speaker 2

Well, we talked about the 4th quarter in this call and we expect the 4th quarter to increase to the 15% to 15.5% range.

Speaker 7

Got it. Okay. Thank you so much.

Speaker 4

All right.

Operator

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

Speaker 8

Thanks. Good morning. You gave us the growth in deliveries in Q4 and the steady retail for Of a question mark, would you say is the second half of twenty twenty three in your mind at this point? Or Are you anticipating still a pretty solid trajectory of orders really for the next few months that would still set up your second half For an extended period of steady production.

Speaker 2

Well, thanks for the question. The way we look at it is that the Q1 is substantially full as Harry Jared, we're taking strong order intake into the second quarter and into the second half as well. So we see nothing that's slowing us down in the year. Obviously, the further it gets out, the less clarity there is. But there's a great backlog of orders and it's growing.

Speaker 3

Yes. Right now, I would say that it's basically the supply base and the availability of components to build trucks That determines the pace of growth in the Q4 and that's probably going to continue as we enter into next year as well and then we'll see how long that takes.

Speaker 8

Okay. And then maybe if you could just give us some color on maybe the order activity By customer type, how much of the strength in trucks are you seeing is large fleets that are trying to take their fleet age down versus more broad Strength, are you seeing smaller and midsized fleets strong in the ordering as well as the large ones? And how you expect that to evolve in kind of Q4 and in 2023? I'm guessing that the smaller fleets are maybe a bit more Sensitive to the freight market conditions, but I'm curious what you're seeing sort of in

Speaker 1

the underlying buildup of your book. Yes.

Speaker 2

I think that it's pretty well spread that there's a strong demand out there for trucks. I mean the vocational markets remain very good, 30% of the build. The larger companies are also ordering trucks for the year and they think it comes back to those fundamentals of great trucks and an underspied market for the past few years bodes well for a strong

Speaker 8

Okay. Thank you very much.

Speaker 2

You bet.

Operator

Your next question comes from the line of Tim Stein with Citigroup. Your line is now open.

Speaker 9

Thanks. Good morning. So the first question is just kind of continuing on what you just mentioned as to The component availability restricting build rates and just overall production. To the extent that, and I would presume and maybe I'm wrong in this, but I would presume that that's led to some Potentially some kind of prioritization as to what you want to produce. Does that To the extent that eases next year, is there has there been a kind of a mix benefit That potentially goes the other way.

Speaker 9

And again, to the extent you're producing more vehicles, But presumably some that may or may not carry as attractive economics. So effectively, has this year led to Again, stronger mix benefit that potentially becomes less of a tailwind next year if we do start to see some easing in the supply base.

Speaker 2

Maybe Harry, you want to swing at that? No.

Speaker 3

I don't see that we've prioritized certain customers over others True. I think we want to take care of all our customers and by supplying them the trucks they need. Like Preston said, we've been capacity constrained for the last 3 years or so. So most customers that I Talk to or hear from, they want to have more trucks and they want to have them quicker. And so we try to satisfy everybody more or less proportionally.

Speaker 10

Yes, I

Speaker 2

think that would be too detailed. I would agree with Harry. So I think it's a little bit too detailed to try to think about it in terms of sectors and tailwinds and headwinds of what we're building. We're building All the trucks we can for our customers and we're going to keep doing that.

Speaker 9

Got it. Okay. And then Harry, maybe back to your In your old shoes, Brendan Doss. Curious what you're seeing there from the standpoint of one of your peers had noted some Fairly sizable increase in energy related costs and some relief to suppliers. How big, if at all of an impact, Has that been to DAF and its operations in Europe?

Speaker 3

We do see in Europe that energy costs have gone up. And like I think somebody mentioned on the call before, steel and aluminum prices have come down a little bit. So there is a balance there that With higher energy costs and higher labor costs overall, cost levels remain elevated. That's also why truck prices have gone up and continue to go up. But I would say that in this environment with the new trucks that we just launched that customers love It gives us a really good starting point to sell more trucks and grow market share as we've done.

Speaker 3

So DAF team is doing really well in In a market we're currently in and taking full benefit of the new truck models that we launched.

Speaker 9

Okay. And just I guess We'll see it when the queue comes out. But just on that relationship between price and variable costs, was did the benefit increase From where it was in the Q2 overall, not just Europe, but overall for the company?

Speaker 3

I would say that price has continued And increased in the Q3 compared to the Q2 and so did cost the price versus cost differential continue to be Favorable for the company, that's why gross margins went up.

Speaker 9

Got it. All right. Thanks for the time.

Speaker 2

You bet.

Operator

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

Speaker 7

Hi. Good morning, good afternoon, depending where you are. Nice quarter. I guess two questions. First, the deliveries.

Speaker 7

The deliveries were on the lower end of what you guys had forecast for the Q3 and you obviously have that improving In the Q4 to the $46,000 $50000 range. So what's giving you confidence to bring up your delivery forecast and why was the Q3 at the low end? And then where do you see sort of red tags as we exit the year? And then my second question, I guess the one thing that struck me this quarter was the incremental margins. We're very strong, I think in the low 20s, which is above average.

Speaker 7

It's a better incremental margin than PACCAR typically puts up. Your view sort of on the sustainability of that just given the strength that you're seeing in parts and then potentially the help from the new product launches? Thanks.

Speaker 2

Well, let me start with the deliveries one as we guided 44 to 48, we had 44 to 400. When we think about the Q3, deliveries are obviously, there's fewer trucks built in Europe. There's about 4,000, 4,500 trucks less built in Europe. And then we continue as we say this to have limitations under build based on the supply base constraints that are happening. So We see that gradually improving, hence our guidance to the Q4 plus the no summer shutdown, so more build days.

Speaker 2

And our red tags are kind of at a similar level as you call them red tags For the second and third quarter. And we kind of expect that will improve slightly in the Q4. So from a margin standpoint, your second question, you kind of almost answered it, right? We're Great parts performing team. And we guided in the Q4 that gross margins are going to improve to 15% 15.5% range.

Speaker 2

We think that that's Going to continue to be strong performance based upon the excellent new products as you mentioned. That's what's going to keep the performance at the very high levels that we're seeing.

Speaker 7

Okay. So low 20s incrementals isn't a bad way to think about your business assuming volumes are there?

Speaker 2

I'll let you think about it that way. We think about In terms of how the business is running and what we're providing?

Speaker 7

I just want to know if my thinking is right, but, I should have. Okay.

Speaker 11

Thank you. I appreciate it.

Speaker 2

All right. Take care.

Operator

Your next question comes from the line of Steven Volkmann with Jefferies. Your line is now open. Great.

Speaker 12

Thank you, guys. Most of my questions have been answered. But I guess maybe a longer term bigger picture question. You've done a great job growing the parts business including the gross margins kind of through the issues we've had over the last 2 or 3 years, but your truck Gross margins are still circa 300 basis points, I think, below pre COVID levels. And I'm just curious how you're Thinking about that going forward, is there anything that would preclude us from getting back to those kind of 2018, 2019 levels of gross margin?

Speaker 12

And If not, what would be sort of the key levers that need to be pulled to get back there?

Speaker 2

Well, Pierre, you want to add?

Speaker 3

Well, Steve, as you know, our margins continue to improve and the new products that we launched And North America and Europe have provided good tailwinds, I would say, to margin growth. And as you see it now, our margins are the best in the industry. And that's our goal, to stay the best in the industry. And parts plays a key role there and the new trucks and strong margins on those new trucks will be a key element of that as well.

Speaker 2

And I would agree with everything Harry said, and I would add to that that our operations teams have done an incredible job around the world of Making sure we get as many trucks out as we can and sometimes that's done less efficiently. So if that smooths out then that will be an upside as well.

Speaker 12

Okay. Yes. Harry, we always want more. So that was the theory

Speaker 3

of the question. And then maybe

Speaker 12

I can just attach one more here. I was interested, I mean your financial services Results were quite good despite kind of lower revenue there. Was that mostly kind of the goodness of used truck sales? And I'm curious if that You're starting to see those prices kind of normalize again or maybe not yet?

Speaker 3

It's nice to see how the finance company continues to perform Really, really strong, dollars 146,000,000 in the Q3, 2nd best quarter ever. So very proud of the team achieving and delivering those results. Business continues to go well. Portfolio quality is excellent. Past dues are like 0.3%.

Speaker 3

Coverage range are really, really low. Revenues reflect the fact that our used truck inventories are at low levels, so there's less flow, less Sales of used trucks, but the used trucks that we sell, so that now 13 used truck centers, a growing portion of it, That provides a nice tailwind for the finance company, and I would expect the finance company to continue to do well as we enter the Q4 and going into next year.

Speaker 12

All right. Thank you, guys.

Speaker 3

You bet. Have a good day, Steve.

Operator

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

Speaker 10

Hi, thank you. For 2023, the order books, Can you let us know how far they're open? And is that open for national fleets? Is it open for all size customers? Just trying to get a sense of How far out the books are open in North America and in Europe?

Speaker 10

Thank you.

Speaker 2

Yes. The order books are open, Dave. It's, as we said, substantially full in Q1, filling in well in the second quarter and even through this into the second half as customers look at their full year delivery plans and allocate their capital for next year. So yes, going well by all segments and really kind of as we would expect it for a strong year.

Speaker 10

And the pricing that's in the backlog, is that notably higher than what was shipping in the Q3? Just trying to get a sense of sequential pricing From what's already in the book?

Speaker 2

Well, we talked about the margins improvement into the Q4, 14.9% gross from 15% to 15.5%. So that kind of implies that We have confidence in our price versus cost model and we think we'll have that next year too.

Speaker 10

I know you don't divulge truck margins by geography, But when you see what's in the book, you know what the new trucks are doing on your economics. When we think of any margin improvement next year And at the moment, you're not assuming radically different growth rates in even EU versus U. S, Canada. How should we think about the margin improvement geographically? I'm trying to get a sense a bit, obviously, just cyclically thinking about next year.

Speaker 10

But structurally, is there something about some geographies? It might even be within other geographies.

Speaker 4

Just how

Speaker 10

to think about the margin improvement geographically knowing what the new trucks are doing?

Speaker 2

What I think is that the new trucks around the world for PACCAR are doing so well in terms of their operating cost Our customers that that is helpful to us in terms of margin. The percent of the product that we changed in Europe is a higher percent than we changed in North America. And so that's really helpful to us in Europe. And I think that our team in South America is doing a great job. In Australia, they're doing a great job.

Speaker 2

In Mexico, they're doing a great job. So I kind of look at it and think that it's happening everywhere for us.

Speaker 10

Terrific. One last quick one, if you don't mind. The used gain on sale, the used trucks In the Finco. For the Q3, I was curious, I mean, obviously shipments have gotten a little better, but overall the unit delivery wasn't great. And obviously we can kind of equate when you're selling more new, it creates more used opportunities regardless of the used truck price.

Speaker 10

Was the gain on sale in the Q3 similar to the 1st two quarters, that roughly $35,000,000 run rate?

Speaker 3

Yes. I would say it was more or less similar, David.

Speaker 2

Yes. Helpful.

Speaker 10

I appreciate it. Thank you.

Speaker 2

All right. Good day.

Operator

Your next question comes from the line of John Joyner with BMO Capital Markets. Your line is now open.

Speaker 1

Hey, good morning. I just have one question. So following up on Steve's and Rasa's question, With regard to used prices and such, I mean so I guess what happens on the other side of this When used prices do moderate to maybe a more normal level, I mean, do you tend to put the trucks back through wholesale or I guess, how are you thinking about that?

Speaker 2

Well, I think what we think is that if there is going to be a market that is constrained like it has been and truck ages up and freight volumes are up, That could be some time before we experience that. We know the markets are cyclical. We have a great team in our Financial Services business. They do a really good job of Adjusting to where the market is and maximizing the return on the DAF, Kenworth and Peterbilt products that really get a premium in the marketplace. So Regardless of the part of the cycle we operate in, we tend to get that premium.

Speaker 2

We continue to expand our capability in that area. We've opened up a new used truck center in Madrid. We continue to take advantage of the opportunities of selling more retail and that's helpful to the business in the long term. Was there anything you'd add Harry?

Speaker 3

I think that summarizes it.

Speaker 1

Okay. All right. Thanks, Lynn. Thank you.

Speaker 2

Thanks, John.

Operator

Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is now open.

Speaker 11

Yes. Thanks, guys. Thanks for taking my question.

Speaker 2

Sure.

Speaker 11

So maybe just starting with a little bit more on supply chain. Totally understand that there's still a lot of constraints here. But have you guys observed any major signs of improvement if we just think about like How supply chain is going relative to last quarter and where we were at this time last year?

Speaker 2

I think that compared to year over year, it's definitely better. I think that sequentially in the quarters, we see different issues that are kind of adjusting. We have really good relationships with our suppliers. We continue to work with them to kind of solve out the issues. I'd say that it has shifted a little bit from being purely semiconductors to maybe being other labor kinds of issues and other material kinds of issues.

Speaker 2

They're doing a really good job of helping us get the parts we need. Hence, we see that the production should grow in the Q4.

Speaker 11

Okay. That's really helpful. And you guys have increased your CapEx and R and D in 2023 relative 22 as per the new guidance today. I guess what are the big drivers there? I think R and D most people understand where the investment lies.

Speaker 11

But with respect to CapEx, What is causing that year on year step up?

Speaker 2

Well, we have a lot of really neat projects that we're working on. We have some great clean diesel projects. We have some great zero emissions projects. We continue to make investments into our autonomous vehicle platform, our connected services platforms around the world And enhancing our production capacity so we can build more trucks and engines and all of that is kind of what's driving those numbers. So It's fun to see those numbers moving just because they portend a great future for us.

Speaker 11

Got it. Thanks. I'll pass it on.

Speaker 2

Thanks.

Operator

Your next question comes from the line of Rob Wertheimer with Valleus Research, your line is now open.

Speaker 13

Hi, thanks and good morning everybody.

Speaker 2

Hello.

Speaker 4

So I guess my first question, I

Speaker 13

have 2. One is on Europe and not so much on the demand side, but just on supply where There's a lot of unease around energy and shortages and whether that will cause disruptions in the supply chain. And so I guess from your internal point of view, Is that something you worry about? Do you see the next 3 to 6 months of being risky and you don't know if a supplier is going to have an issue and shut down? Or is that something you see as more stable than perhaps

Speaker 2

Well, I think that everybody can read the same headlines, but I would tell you that from inside of our business, We work really closely with our suppliers so that we can understand anything they're dealing with. And so far, it's been pretty good. We look into next year and everybody is And attention to it, we'll continue to work as partners to try to make sure we get the parts we need. I think we find ourselves in a pretty good position as we sit today.

Speaker 13

Okay. Thank you. And the other one, and I apologize if you answered this in reference to Steve, but When you look at your aftermarket margin, obviously, there's been a lot of effort over a lot of years and revenues and margin are both increasing. At this point, are you seeing disproportional contribution From proprietary parts, did you kind of get that mix up or is there still runway across the aftermarket business on revenue and margin? Thank you.

Speaker 13

I'll stop there.

Speaker 2

Sure. I don't think it's disproportional. I think a lot of what's going on is that parts team and our dealers Are doing a fantastic job of this business growth and creating recurring revenue by serving the customers well and by helping them become more I think that's a lot of systems, a lot of e commerce, a lot of relationship building and I expect that will continue.

Speaker 3

Got it. Thank you.

Speaker 2

All right.

Operator

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

Speaker 14

Hi, good morning, good afternoon, everyone.

Speaker 5

Okay, Gerry.

Speaker 14

Chris, I'm wondering if you could talk about as you're having conversations with your customers that are interested in making longer term Plans for electrifying their fleets. How is their approach to procurement different at all in terms of The number of truck OEMs they're looking to use or any other differences in the process and the impact that you might have on your Opportunity to get potentially better share in medium to the market in an EV environment versus diesel?

Speaker 2

Yes. I think that they use the same kind of analytics they do to make any kind of a buying decision as they're looking for an operating cost advantage, Total cost of ownership equation to work for them. It adds elements now with EVs because they think about charging Sure and return and mileage and route and utilization. So we partner with them at Peterbilt Kenworth, DAF and parts. I'll partner with them to try to make sure they think about all the Put costs that are going into it and then as well the incentives that are available to it and use all that together to come up with kind of like when is it time to Start into the market, try 5 or 10 or 20 and then when is the time going to be to move even more quickly.

Speaker 2

And I think that that's kind of a very active Dialogue that depends upon their use case.

Speaker 14

Okay. And is that conversation any different in terms And number of participants versus diesel purchases, are they concentrating those conversations with fewer suppliers than they were in a Diesel environment given the complexity?

Speaker 2

No, I think that they have a high trust in PACCAR and our high quality and excellent performance overall. We have that that It's kind of a promise we make to them that we want to deliver on and we'll do that through EVs as well. So I think that makes it we have a seat at the table to work with them and provide a successful solution for them.

Speaker 14

Okay. Super. And just to shift gears, Harry, I apologize if I missed this. You talk about in Europe, the Backlog covers that you have, how far are the lead times track today? And can you talk about so we're in the mid-17s from a market share standpoint in Europe As regulations are implemented, can you talk about the timeframe and opportunity for market share to continue Potentially move higher once the new regulations that you alluded to in the prepared remarks are implemented?

Speaker 3

Yes. The new Moss and Dimension regulations that we talked about allows for more aerodynamic And more fuel efficient trucks to be designed if you meet certain criteria. I think Dove is taking full benefit of the new legislation. So as far as we can tell, That was the only truck manufacturer in Europe that has those trucks on the market today, which is in a really strong position to grow Margins and market share, like you said, 17.4% share year to date, that's a record for Dove. With the new trucks, we're in an excellent position to go that market share even further in the coming years.

Speaker 14

And sorry, Harry, the lead time part of that question, how far out are you taking orders in Europe?

Speaker 3

We the Q1 is more or less Full today at the current capacity that suppliers are providing us. And then we're filling in the Q2 nicely at this moment in time. So That's a really good balance. That's a nice backlog for us as we enter 2023.

Speaker 14

Okay. I appreciate the discussion. Thanks.

Operator

Your next question comes from the line of Michael Feniger with Bank of America. Your line is now open.

Speaker 15

Hey, thanks for taking my questions. I know this got asked a little earlier, but just How should investors think about the gap you're seeing between spot freight rates and contract rates right now? How does that dynamic Impact your customers' investing decisions going forward. Is that data point, that spread you're seeing between the contract and spot rates, Is that relevant in terms of how they think about their investment profile and purchasing decisions profile over the next few months?

Speaker 2

Well, I think that when you think that spot rates are a minority of the market as 15%, 20% portion of the market, When there's strong contract rates, which there are and when tonnage is at such high levels like it is, then I think there's still plenty of good business for them to have. And I think that they're still oversubscribed in terms of people wanting loads carried is a general statement, which is good for their businesses. And I would expect that that's, they're being good for their business will be good for our business.

Speaker 5

Makes sense. And If I

Speaker 15

look back like 9 out of the last 12 years, your gross margins are up Q1 over Q4. So with the 15% to 15.5% guide in Q4, maybe help us understand why wouldn't gross margins Increased from that level in the Q1 of next year. Anything we should think about there?

Speaker 2

I don't think we said that they shouldn't. I we said that we have good gross margins this quarter. We expect them to be very good next quarter Q4 and that we think 2023 will be a really good year.

Speaker 15

That's helpful. And just if I could squeeze one more in just on the R and D. I mean, you're finishing this year, I think, on an annual basis up 2% to 5%. Your truck sales are up nearly 30%. You guys did guide for next year.

Speaker 15

It seems like there's a little bit of a catch up and R and D spending is going to be up double digits. But How should we think about like going forward into 2024? Is you should be looking at R and D as

Speaker 5

a percent of sales as a

Speaker 15

metric? Any way to kind of think about some of the investments that you guys are making, and how to think about that over the next few years, Given your backlog and how you guys are thinking about the truck cycle going forward?

Speaker 2

Sure. I can share with you how we think about it. We think of Spending on R and D is we have good projects that bring value to our customers. We're such a strong financially positioned company that we spend the money we want to On the products are going to bring value to our customers and that's how we define our R and D spending.

Speaker 15

Perfect. Thank you.

Speaker 2

You bet.

Operator

Your next question comes from the line of Jeff Kauffman with Vertical Research Partners. Your line is now open.

Speaker 16

Thank you very much. Well, congratulations everybody. Thank you. Hey, a lot of my questions have been answered, but I wanted to kind of follow-up. I Things are changing globally and currency has been one of those things and has changed pretty dramatically.

Speaker 16

But you'd never know it looking at your results. And I was just kind of curious if you could talk a little bit about how currencies impacting Whether it's the revenues or the profits being reported back and kind of give us an idea of what kind of impact to think about, whether we're talking about the truck business, Whether we're talking about the parts business, financial services business as we think about moving toward 2023.

Speaker 1

Yes, this is Michael. Revenues for Q3 were reduced by $325,000,000 due to currency effects, mostly the euro, some offset with

Speaker 2

the Brazilian real was stronger. And for

Speaker 1

the year, it was $740,000,000 So there's been that effect and the impact on profit was about net profit was about $20,000,000 Q3 $50,000,000 for year to date.

Speaker 16

Okay. And then just one follow-up. You talked about some of the new investment platforms. And I was just wondering because every time I see one of your trucks out there, there seems to be an Aurora system attached Gust maybe building some platforms where PACCAR could be a beneficiary of some of the information and data flows on some of these new vehicles for customers That we're looking to electrify or go autonomous in a couple of years. Just kind of an update on some of these new platforms?

Speaker 2

Sure. We're really pleased with the progress we're making with our partnerships with Aurora and others and it's going really well. They're making excellent progress. Together we are. We are developing, as you mentioned, Jeff, we're making this autonomous vehicle platform, which creates a system of redundancy, which makes operating the vehicle feasible.

Speaker 2

It Into the truck through software as well. And our expertise and their expertise combined is creating, I think, a really neat product for the future.

Speaker 16

Okay. That's all I have. Thank you so much.

Speaker 2

Great.

Operator

Your next Question comes from the line of Matt Elkott with Cowen and Company. Your line is now open.

Speaker 17

Thank you. Maybe I'll ask you guys on the cadence of new truck deliveries going forward. Given how Anomalous this environment has been and how it's pushed out the production cycle. As supply chain disruptions Continue to ease and you're able to further optimize your manufacturing processes. Could we see a more linear quarterly cadence But is it historically with deliveries or maybe even like steady modest quarter over quarter increases and deliveries in the next few quarters?

Speaker 2

Well, I think that as the supply base improves, it does make it smoother as you're right to say that. I think we got to See it get totally smooth before we can take full advantage of that. I think that prediction of when that will be, we don't know how to make that. We just keep Building all the trucks we can. And I would expect that as we said, we expect deliveries increasing in the Q4.

Speaker 2

And beyond that, we'll watch How the opportunities are as we think that the demand is strong, we do think that next year still feels like at least at the beginning to be supply constrained.

Speaker 17

Got it. And then just one last question. If you ask the off highway Manufacturers are expecting infrastructure related projects to start hitting their backlog late this year. If we look back historically, can you is it easy for you guys to kind of trace some of your business to either residential or non residential Construction activity in the U. S, residential is obviously moderating, but there's An expectation that infrastructure projects will start coming in next year.

Speaker 2

And the U. S. Markets Kenworth and Peterbilt are the leaders in the vocational markets for trucks that support those kinds of projects and expect that will continue next year and we do see strength in those markets.

Speaker 3

So we would expect that

Speaker 2

to be good news and a tailwind for 2023.

Speaker 17

Great. Thank you very much.

Operator

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

Speaker 18

Hey, thanks. We saw the really strong industry order numbers for September. Any color on October? Are you seeing anything directionally similar with September?

Speaker 2

Yes, we're seeing continued strengthening even. So we're seeing that September was strong and we see October being strong as well.

Speaker 18

Okay. On the currency question that Jeff asked, is 4th quarter similar with Q3 in terms of that Net $20,000,000 headwind or could it be a lot bigger than that?

Speaker 2

Michael?

Speaker 1

It will be similar to that. The euro had already started to drop last In the Q4 of last year. So but I would expect

Speaker 3

to be about a similar number. Of course, depends on the exchange rate. Sure. 2 months still.

Speaker 18

And then just last thing, with Nikola acquiring Romeo, does that have any impact on Battery suppliers for you, how do you think about that?

Speaker 2

Yes. We have a really good supply base structure with the battery producers in the world And have long term contracts in place to give us adequate supply.

Speaker 18

So nickel as a competitor acquiring Plyer brew doesn't

Speaker 2

change. No impact at all to our ability to produce EV vehicles.

Speaker 3

Okay. All

Speaker 17

right. Thank you, guys.

Speaker 4

Yes, you bet.

Operator

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

Speaker 1

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

Operator

Thank you. This concludes today's conference call. Thank you for attending. You may now

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Earnings Conference Call
PACCAR Q3 2022
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