PACCAR Q4 2021 Earnings Report

PACCAR EPS Results

• Actual EPS: $0.65
• Consensus EPS: $0.58
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $0.52

PACCAR Revenue Results

• Actual Revenue: $6.30 billion
• Expected Revenue: $5.44 billion
• Beat/Miss: Beat by +$850.26 million
• YoY Revenue Growth: +12.60%

PACCAR Announcement Details

• Quarter: Q4 2021
• Date: 1/25/2022
• Time: Before Market Opens
• Conference Call Date: Tuesday, January 25, 2022
• Conference Call Time: 1:04PM ET

PACCAR (NASDAQ:PCAR) is a global technology leader in the design, manufacture and customer support of light-, medium- and heavy-duty commercial vehicles. The company’s products are marketed under well-known brand names including Kenworth, Peterbilt and DAF and span vocational and long-haul applications. PACCAR’s core business includes vehicle engineering and assembly as well as the supply of components and proprietary powertrain systems designed to meet regulatory and customer performance requirements.

In addition to truck manufacturing, PACCAR operates a comprehensive aftermarket parts business, distributes used trucks and provides commercial vehicle financing and leasing through its financial services operations. The company also offers digital services and telematics platforms to fleet customers for vehicle diagnostics, uptime management and preventive maintenance. PACCAR supports its products through an extensive global dealer and parts-distribution network to deliver service and parts availability across major markets.

Founded in 1905 as Pacific Car and Foundry Company, PACCAR has grown through investments in engineering, manufacturing and international distribution to serve customers in North America, Europe, Australia and other regions. The company emphasizes research and development in areas such as vehicle efficiency, emissions reduction, electrification and connected-vehicle technologies to address evolving customer needs and regulatory trends in commercial transportation.

PACCAR Q4 2021 Earnings Call Transcript

Key Takeaways

• Financial results: In Q4, PACCAR reported revenues of $6.7 billion and net income of $511 million (up 26% year-over-year), while full-year 2021 revenues reached $23.5 billion with net income of $1.85 billion, marking the 83rd consecutive year of profitability and dividends of $2.84 per share.
• Production & deliveries: PACCAR delivered 47,600 trucks in Q4 (45% higher than Q3) and forecasts Q1 2022 deliveries of 41,000–45,000 units (limited by semiconductor supply), with market forecasts of 250,000–290,000 Class 8 trucks in North America and strong global order backlogs.
• Gross margin guidance: Q4 truck and parts gross margin was 11.4% due to higher offline truck mix, while Q1 2022 gross margin is expected to rise to 13.0%–13.5% as production steadies and new product ramps drive efficiency and price-cost realization.
• Record Parts & Financial Services: PACCAR Parts posted Q4 revenue of $1.3 billion with a 38% profit increase and expects >10% parts sales growth in Q1, while Financial Services achieved record pretax income of $135 million in Q4 and $438 million for the full year on $15.4 billion portfolio assets with low delinquencies.
• Innovation & new products: In 2021, PACCAR launched new heavy/medium-duty Kenworth, Peterbilt, and DAF trucks, advanced autonomous and zero-emission vehicle programs, and global connected services, earning multiple industry awards and planning $350 million–$400 million in R&D for 2022.

Presentation

[Operator]

Good morning, and welcome to PACCAR's fourth quarter 2021 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. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

[Ken Hastings, Director of Investor Relations at PACCAR]

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. Joining me this morning are Preston Feight, Chief Executive Officer, Harrie Schippers, President and Chief Financial Officer, and Michael Barkley, Senior Vice President and Controller. As with prior conference calls, we ask that any members of the press on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. For additional information, please see our SEC filings and the investor relations page of paccar.com. I would now like to introduce Preston Feight.

[Preston Feight, CEO at PACCAR]

Hey, good morning. Harrie Schippers, Michael Barkley, and I will update you on a very good fourth quarter and full year 2021 results, as well as other business highlights. First, I really appreciate our outstanding PACCAR employees. They deliver the highest quality trucks and transportation solutions to our customers and focus on the safety and health of each other. They're truly an impressive team. In 2021, PACCAR achieved annual revenues of $23.5 billion and very good net income of $1.85 billion. PACCAR's financial performance benefited from record results in our parts and financial services divisions. PACCAR has achieved 83 consecutive years of net income and has paid a dividend every year since 1941. In 2021, PACCAR declared dividends of $2.84 a share.

[Preston Feight, CEO at PACCAR]

PACCAR's fourth quarter revenues were $6.7 billion, and fourth quarter net income increased from the prior year by 26% to $511 million. PACCAR Parts achieved record fourth quarter revenues of $1.3 billion and record pre-tax profits of $306 million, which was a 38% increase compared to the same period last year. PACCAR delivered 47,600 trucks during the fourth quarter, 45% higher than the third quarter. This included delivering 7,000 trucks that were awaiting components. In the first quarter of 2022, deliveries are forecast to be in the range of 41,000-45,000, a number that is limited by the global supply of semiconductors. In 2021, U.S. and Canadian Class 8 truck retail sales were 250,000 units.

[Preston Feight, CEO at PACCAR]

In 2022, the U.S. economy and industrial production are projected to expand by about 4%. The 2022 U.S. and Canadian Class 8 truck market deliveries are forecast to increase to a range of 250,000-290,000 vehicles as the global supply chain gradually improves throughout the year. European above 16 ton truck registrations were 278,000 units in 2021. In 2022, the European economies are projected to continue growing, and we expect the above 16 ton truck registrations to be in a range of 260,000-300,000 trucks. In 2021, the South American above 16 ton truck industry registrations were 127,000.

[Preston Feight, CEO at PACCAR]

In 2022, the South American market is expected to be in the range of 125,000-135,000. The growing global economies, robust freight activity, and strong customer demand for DAF, Peterbilt, and Kenworth trucks has resulted in a substantial order backlog in all markets. Truck and parts gross margins were 11.4% in the fourth quarter, reflecting higher labor and materials costs associated with the completion of offline trucks and the resulting increased mix of trucks versus parts. We estimate first quarter truck and parts gross margins to increase and be in the range of 13%-13.5% as we ramp up production of our new products and realize production efficiencies.

[Preston Feight, CEO at PACCAR]

In 2021, PACCAR introduced exciting new heavy and medium-duty Kenworth, Peterbilt, and DAF trucks, which are proving to be very successful in the market. PACCAR also delivered many important technology and innovation milestones, such as a strategic partnership to develop and sell autonomous trucks, production of zero emissions vehicles, and we launched PACCAR's proprietary global connected service offerings. The new DAF lineup, launched in 2021, earned the prestigious International Truck of the Year award, and the innovative DAF XF Hydrogen internal combustion technology vehicle won the Truck Innovation Award. Kenworth and Peterbilt earned five Manufacturing Leadership awards from the National Association of Manufacturers, and DAF Brasil was awarded the Truck Brand of the Year for the fourth time. Last year, PACCAR was again recognized as a global leader in environmental practices by the reporting firm CDP.

[Preston Feight, CEO at PACCAR]

PACCAR achieved an elite A rating, which places the company in the top 200 of over 13,000 reporting companies. In 2021, PACCAR was recognized as a top place for women to work by the Women In Trucking organization for the fourth consecutive year. The truck market is strong and demand is high for PACCAR's excellent new trucks and transportation solutions. We look forward to 2022 being a very good year. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Harrie?

[Harrie Schippers, President and CFO at PACCAR]

Thank you, Preston. In 2021, PACCAR Parts set new quarterly and annual records for revenues and profits. Annual revenues were $4.9 billion, and annual pre-tax profit increased by 38% to $1.1 billion. This is an outstanding performance by the global parts team and really highlights the fact that PACCAR Parts is a high-margin growth business. PACCAR Parts has expanded its global network to 18 distribution centers and will open another facility in Louisville, Kentucky, later this year. We estimate parts sales to grow by over 10% in the first quarter of this year compared to the same quarter last year, as we continue to see strong demand for parts worldwide and especially for our outstanding e-commerce business. PACCAR Financial Services' fourth quarter pre-tax finance income increased to a record $135 million.

[Harrie Schippers, President and CFO at PACCAR]

Annual revenues grew to $1.7 billion in 2021, and annual pre-tax income increased to $438 million, nearly double the profit earned in 2020. Portfolio assets were $15.4 billion. The portfolio continues to perform well with very low past dues and low credit losses. PACCAR Financial benefited from strong used truck pricing in 2021. PACCAR Financial increased the sales volume in its retail used truck centers, which has contributed to higher used truck price realization. PACCAR Financial has 12 used truck facilities worldwide, and in 2022 will open another used truck center in Madrid, Spain. We expect PACCAR Financial's strong performance to continue this year.

[Harrie Schippers, President and CFO at PACCAR]

In 2021, PACCAR invested $512 million in capital projects and $324 million in R&D, as we launched the largest number of new truck models in our history. In 2022, we're planning capital investments in the range of $425 million-$475 million, and R&D expenses will increase and be in the range of $350 million-$400 million as we accelerate our investments in clean combustion, zero emissions, autonomy, and connected vehicle programs. PACCAR's independent Kenworth, Peterbilt, and DAF dealers continue to invest in their businesses to provide our customers the highest level of service in the industry. These investments make a significant contribution to PACCAR's long-term success and support the growth of PACCAR Parts and PACCAR Financial Services. PACCAR had an excellent year in 2021 and we're enthusiastic about the future. Thank you. We'd be pleased to answer your questions.

[Operator]

At this time, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Per the company request, one question and one follow-up question per analyst. Your first question will come from Chad Dillard with Bernstein.

[Chad Dillard, Senior Analyst at Bernstein]

Hi, good morning, everyone.

[Preston Feight, CEO at PACCAR]

Morning, Chad.

[Chad Dillard, Senior Analyst at Bernstein]

I was wondering if you could talk about just your gross margins in the quarter, which seemed a little bit light just given the revenue that you did. Just how should we think about the breakdown between the absorption versus the price cost mix, and then, you know, as we kinda think through the evolution from, you know, one Q, like what's the trajectory from here for the year?

[Preston Feight, CEO at PACCAR]

Sure. Happy to do that. If you think about the fourth quarter, our teams did a fantastic job of identifying the chips they needed through engineering efforts, through finding broker parts, through partnering with their suppliers to come up with what they need to deliver the offline trucks. They did deliver the higher volume of trucks. Those trucks have been absorbed in the third quarter. Just a huge shout out to everybody that was part of that effort. I would say looking forward, we see improvement in production steadiness. It's not completely solved, but our team's doing a good job of creating a more steady production outlook for us, and so we're getting the production efficiencies associated, and hence we show you 13%-13.5% in Q1.

[Preston Feight, CEO at PACCAR]

I guess I'd add to that and say that, you know, if we see that the market continues to gradually improve, we should see improvement from there.

[Chad Dillard, Senior Analyst at Bernstein]

Yeah, that's super helpful. Can you talk about your backlog, market share versus retail, sales market share? Are you seeing any gains from new product intros or anything like that?

[Preston Feight, CEO at PACCAR]

I think what's happening with our backlog right now is the new trucks we launched in 2021 are just ramping up in, especially in Europe, which was launched kind of October timeframe. Customers in North America for the new medium duty love 'em. For the new Kenworth and Peterbilt are just enjoying the benefits of the 7% improvement in fuel economy. In Europe, you have the 10% improvement in fuel economy. The fact that the new European truck, the XF, XG+, those are the only trucks in the market that meet the new mass and dimensions regulations. We have a great advantage there for those trucks, and they're performing really well. That's leading to a strong backlog for us. We have about, you know, six months plus of backlog, and that's kinda measured by what we can build.

[Preston Feight, CEO at PACCAR]

As we get more parts and availability, we'll probably be able to take some additional orders and build more, but really strong backlog right now.

[Chad Dillard, Senior Analyst at Bernstein]

Great. Thanks. I'll pass it on.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question will come from Jamie Cook with Credit Suisse.

[Jamie Cook, Managing Director of Equity Research at Credit Suisse]

Hi, good morning. Congrats on a nice quarter. Just digging in first on, I know you talked about margins for the first quarter and for the year. X-ing out, you know, benefits from, you know, the new products, how do we think about sort of what your assumptions are for price cost for the year, given some of the list increases out there? Do we think we can be neutral? I guess that's my first question.

[Preston Feight, CEO at PACCAR]

Yeah, we do. I mean, we've gotten a little bit more stability than we had last year, and so I think we expect to have price cost realization as we go through the year.

[Jamie Cook, Managing Director of Equity Research at Credit Suisse]

Okay. That's helpful. Then, you know, I guess my second question, just your sort of, view on the cycle with supply chains, you know, potentially easing, how are you thinking about sort of 2023 and what it could mean with the 2024 carbon emission standards? Do you think, you know, the production forecasts out there are correct? Or how are you thinking about the incremental cost on the truck? Thank you.

[Preston Feight, CEO at PACCAR]

You know, I think the first thing to start with is our customers are doing really well. There's a lot of freight to be hauled out in the market. That doesn't seem like that's a short-term thing. That's a long-term demand thing. I would expect that to continue, obviously, subject to any interruptions. If that continues well, then I would expect 2022, 2023 beyond should be good. I mean, if you think about 2024, while an emissions change, that emissions change brings fuel economy, which should be good for our customers as well. It looks like we're in the beginning of a good, steady, strong market.

[Jamie Cook, Managing Director of Equity Research at Credit Suisse]

Okay, thank you.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question is from Stephen Volkmann with Jefferies.

[Stephen Volkmann, Equity Analyst at Jefferies]

Hi. Good morning, guys. I just wanna ask Jamie's question just slightly differently. You know, given the backlogs that you guys have, and everyone across the industry, I guess I might have thought that price cost could be positive this year, you know, given the demand drivers. Would you disagree with that, or is there some other offset?

[Preston Feight, CEO at PACCAR]

No, I completely agree with you. I think that price cost should be positive for the year.

[Stephen Volkmann, Equity Analyst at Jefferies]

Got it. Okay. Maybe I misunderstood that answer. Can you also update us maybe a little bit, Preston, you mentioned the big new product or maybe Harrie did, the big new product rollout that you guys have this year. I know you guys always sort of target margin expansion when you do these big model changeovers. I guess as you're rolling through that process, you know, any updates on how you're thinking about the impact that that new model rollout will have on margins?

[Harrie Schippers, President and CFO at PACCAR]

The new DAF, Steve, has been extremely well received in the market by customers, dealers, the press, everybody. The fuel economy improvement, the ride and drive of the vehicle, the performance, the technology, and I think Preston said it's the first and only truck in the market right now that makes use of those new masses and dimensions regulations in Europe. It really puts DAF in a class of its own, and it's a premium class. Yeah, that's gonna be very good for our market share growth, margin, everything. Customers benefit from it most.

[Stephen Volkmann, Equity Analyst at Jefferies]

Great. Thanks, Harrie. Appreciate it.

[Operator]

Your next question will come from Tami Zakaria with JPMorgan.

[Tami Zakaria, Executive Director at JPMorgan]

Hi, everyone. Thanks for taking my questions. I have a couple of quick ones. The first question I have is what's your outlook for the parts business after a record year? I know you're guiding to 10% growth in the first quarter, but beyond that, is the current fleet age conducive to the parts business as you look to the next few quarters?

[Preston Feight, CEO at PACCAR]

That's a great question, Tami. I'd say that, indeed we said 10% year-over-year and strong in the first quarter like it was in the fourth quarter. We see that the trucks are being used out there, which as they get used means they consume parts. That's one thing that bodes well for the year of 2022. I would also point to the fact that our team, our global team, has done a great job of launching things like e-commerce and bringing that to our customers, which makes it easier to, for them to buy from PACCAR than anyone else, and that contributes to the long-term success and growth of the business. We expect 2022 to be a great parts year.

[Tami Zakaria, Executive Director at JPMorgan]

Got it. Thank you so much. Another quick one. I think you noted about 10,000 red tag parked trucks end of last quarter. Any updates on that front as you exited the fourth quarter?

[Preston Feight, CEO at PACCAR]

Sure, Tami. We in the fourth quarter were able to deliver about 7,000 offline trucks because of the great work of the teams. That number's been reduced dramatically. It's one of the reasons we think that production is getting a little bit more stable is because we had good supply and good partnership work going on.

[Tami Zakaria, Executive Director at JPMorgan]

Great. Thank you so much.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question will come from David Raso with Evercore.

[David Raso, Senior Managing Director at Evercore]

Hi, good morning.

[Preston Feight, CEO at PACCAR]

Good evening.

[David Raso, Senior Managing Director at Evercore]

Hey, good morning. You noted in the press release the supply chain improvement, but then on your comments you're a little more cautious about the supply chain improving. Can you just square up though? I mean, you didn't raise your unit forecast at all for 2022 from three months ago. Should we take it as, you know, you were able to ship a bit better in the fourth quarter, but there has not been any improvement in the supply chain? Just trying to square that up and then I have a quick follow-up on the backlog.

[Preston Feight, CEO at PACCAR]

Sure, let's do that first. If I think about it, supply chain has improved, compared to what we experienced in 3Q and 4Q, it's definitely improved. Improved is different than being fully resolved. I think we're sitting in between improved and resolved, David, just to kind of give you some boxes for that.

[David Raso, Senior Managing Director at Evercore]

Oh, okay. No change to the forecast, though? Like that improvement hasn't been baked into any updating of forecast? Is that-

[Preston Feight, CEO at PACCAR]

Well, I look at it and think that we have a 250,000-290,000 unit range. At the tight side of the range, 290,000 is a pretty significant improvement above a 250,000 market in 2021. I think that as we watch the year progress, we'll get better clarity for how supply base continues. As it continues to improve, we'll make adjustments appropriately.

[David Raso, Senior Managing Director at Evercore]

On the backlog, how it relates to price cost in the full-year gross margin comments, how much of the backlog already has the pricing locked in and your cost structure generally locked in on what you can control, of course? How much is still out there, say, for the second half of the year on your cost, where maybe you know you can get some help on some of the cost relief maybe we're seeing in some of the materials? Just trying to think that through. What's in the backlog and what's sort of a left open a little bit for later in the year to see how the gross margins play out?

[Preston Feight, CEO at PACCAR]

I think of it a little bit like, you know, some of the bigger customers have their backlog priced and out there, and then some of the stock units and smaller fleets maybe don't. It kind of depends, right? It's a mixed bag, and every truck order stands on its own. It obviously, the further out you go, get out a quarter or two, it becomes less certain. That gives us more flexibility as we move out a quarter or two. I think in general

[David Raso, Senior Managing Director at Evercore]

Well, that's inter-

[Preston Feight, CEO at PACCAR]

We see this improvement.

[David Raso, Senior Managing Director at Evercore]

Yeah

[Preston Feight, CEO at PACCAR]

come sequentially through the quarters.

[David Raso, Senior Managing Director at Evercore]

Well, just to clarify, and I'll hop off. You know, we know from the channel, like not all orders have a price yet with it. It was interesting you commented on flexibility left in price for some orders. How much of your cost have you locked in yet, meaning steel and, you know, things you can kind of look out and maybe lock in a bit for most of the year? Thank you.

[Preston Feight, CEO at PACCAR]

Sure, we do that. Yeah, we do that, David. We have, you know, long-term contracts with our suppliers in many cases. We hedge in many cases. Together, that gives us some control over our cost structure for materials.

[David Raso, Senior Managing Director at Evercore]

Thank you.

[Preston Feight, CEO at PACCAR]

You bet. Operator, do we have a caller?

[Operator]

Hello, Steven, your line is.

[Preston Feight, CEO at PACCAR]

Is that Steven Fisher from UBS?

[Steven Fisher, Managing Director and Research Analyst at UBS]

Yes.

[Operator]

UBS, please proceed.

[Steven Fisher, Managing Director and Research Analyst at UBS]

Okay. Sorry, my line cut out there. So it sounds like you still have a few thousand red tags. Does your 41,000-45,000 delivery numbers assume you get through all those in the quarter? Then once you do get through those, what's the underlying or sort of normalized margin once you're just sort of producing and delivering at the same pace?

[Preston Feight, CEO at PACCAR]

We've had a variety of chip supplies have come in and out, and I'm hesitant to give you an absolute answer on what Q1 will be in terms of number of offline units that might still remain. We see improvement through the quarter, but it's every day the team's working together with supply base to work through that. Some portion may remain as offline, but it's decreasing. I would say as far as underlying assumptions, we feel good about the margins looking forward into the year and seeing them grow into a higher range.

[Steven Fisher, Managing Director and Research Analyst at UBS]

Okay. There were some big industry cancellations in the fourth quarter. Can you just talk about your experience with cancellations and how scrubbed your backlog is? I'm wondering, you know, whether those cancellations were more proactive or sort of reactive.

[Preston Feight, CEO at PACCAR]

Yeah, from a customer standpoint, we have not had customers who don't want their trucks. That is not something that we've experienced. I can't speak to anybody else, but I can tell you that all the customers I talk to and the teams are working with see just a strong demand for as many trucks as we can get them.

[Steven Fisher, Managing Director and Research Analyst at UBS]

Okay, thank you.

[Preston Feight, CEO at PACCAR]

You bet. Have a good day.

[Operator]

Your next question will come from Robert Wertheimer with Melius Research.

[Robert Wertheimer, Director of Research at Melius Research]

Howdy. Good morning, everybody.

[Preston Feight, CEO at PACCAR]

Hello.

[Robert Wertheimer, Director of Research at Melius Research]

Obviously delivering, you know, trucks that were non-standard production just waiting on components is an expensive thing. I'm pretty sure your 1Q gross margin guide indicates this, but were you kind of already there in 4Q on cost if you sort of take those trucks out? You know, you're up to a pretty healthy gross margin already, or is there a bunch you have to do to get to the 1Q goal, if you see what I mean?

[Preston Feight, CEO at PACCAR]

Yeah, I would say that if you think about the cost of the delivery and the things we had to incur in labor and materials for those 4Q units, that's a big portion of the difference. Then obviously as we look forward, and we've had a chance to react to last year's cost increases, we've been able to price that in more and more effectively, and that's how you see the trend developing.

[Robert Wertheimer, Director of Research at Melius Research]

Perfect. All right. That's pretty clear, I guess. The other, or one of the other uncertainties overlaying the market is just Omicron and sick outs, and hopefully it's a, you know, obviously less severe, but people might be out. Do you have a sense on whether that's disruptive to 1Q at this point, and whether it's cresting or not on your own, you know, work absences?

[Preston Feight, CEO at PACCAR]

Sure, I can comment to that and say that if I look at the plants around PACCAR facilities, the people are doing such a fantastic job. I mean, probably should park on that for a little bit for just what a tremendous job the people are doing in terms of getting to work and getting the trucks built and delivered. I just couldn't be more pleased with the people all around PACCAR. We see that having some limited effects on us in the immediacy right now, but moderating as time passes. Of course, with this latest two-year period, who knows what three months from now might bring.

[Robert Wertheimer, Director of Research at Melius Research]

I understand that part. Thank you much.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question will come from Jerry Revich with Goldman Sachs.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Yes. Hi, good morning, everyone.

[Preston Feight, CEO at PACCAR]

Hi, Jerry.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Can we talk about the factory overhead costs that you folks have been reporting with, obviously all of the supply chain goodness going on over the past couple of quarters that's been running in the $70 million-$100 million range per quarter? You know, how did that trend in the fourth quarter? How much of an overhang does the range, you know, let's say at the midpoint, anticipate from that, you know, $70 million-$100 million run rate that we've been at continuing into the first quarter?

[Preston Feight, CEO at PACCAR]

I think, Jerry, we're gonna let Michael answer that one for you.

[Michael Barkley, SVP and Controller at PACCAR]

I would just say that our factory overhead costs were increased partly due to getting those trucks out that we've been talking about and also due to higher volume. We see them more normalizing as the year progresses into 2022.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Michael, can you comment on the first quarter? Or does that embed something like $30 million-$40 million headwind? Is that the ballpark? Or can you just help us with how much of an overhang is baked into that first quarter guide?

[Michael Barkley, SVP and Controller at PACCAR]

I can't comment on that specificity.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Okay. Separately, you know, I'm wondering if you could talk about as you folks are getting electric vehicle orders, what's the add-on that you're seeing for your dealers to the extent you folks have opportunities to participate on charging infrastructures and other add-ons that obviously you wouldn't get with diesel truck orders? Is there a per ticket item that you can talk about or a take rate from any participation you have in contributing to building out the charging infrastructure with the trucks on those initial orders you've booked so far over the past year?

[Preston Feight, CEO at PACCAR]

Yeah, it's early days, but I think it's an interesting thing to think about in terms of the zero emissions vehicle programs, battery electric trucks. We've built over 100 units. We've taken orders for over 100 vehicle chargers, battery electric chargers at this point as well. That's kind of an add-on incremental business opportunity for us. When you get into that, as you match a charger and a vehicle, the opportunity of software for charging optimization and battery energy management of the vehicle is something that PACCAR has expertise in, and that'll benefit our customers. That's an add-on opportunity as well. As that market begins to develop, the zero emissions market begins to develop, those should be good opportunities for PACCAR.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Very interesting. Thanks.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question will come from Ross Gilardi from Bank of America.

[Ross Gilardi, Managing Director at Bank of America]

Yeah, good morning, guys.

[Preston Feight, CEO at PACCAR]

Good morning, Ross.

[Ross Gilardi, Managing Director at Bank of America]

Hey, Preston, when you think about normalized, you know, North American Class 8, you know, truck demand, I mean, the number that's commonly thrown out forever is like 250,000 units, although obviously it's rare that we actually see a year where it's not materially above or below that number. I'm just curious, do you think that figure is still directionally accurate? Or do you think normalized demand for Class 8 vehicles is now much higher than what you would have thought of a few years ago, just due to the continued explosion of e-commerce and just the variety of other factors?

[Preston Feight, CEO at PACCAR]

Ross, I think you posed a good question that I think that 250,000 might be a bit dated. It's hard to know what the number is, but you know, the trucking delivers 72% of the business around freight demand, and that's not decreasing, that's increasing. E-commerce contributes to that. Speed of delivery that people are looking for contributes to that. Efficiency of trucks has grown so much, especially our PACCAR trucks, where the fuel efficiencies are so much higher. Yeah, I think that you're onto something there, that it could be a little bit higher than that.

[Ross Gilardi, Managing Director at Bank of America]

Okay. Interesting. Can you talk a little bit about that, the hydrogen ICE vehicle that you've got, that you recently received an award on? What kind of reception is hydrogen internal combustion engine getting from regulators, you know, on that engine type as a true zero emission solution? How do you think it stacks up on the vehicle performance versus a, you know, a hydrogen fuel cell vehicle?

[Preston Feight, CEO at PACCAR]

Well, what we're trying to do as PACCAR is make sure that we pay attention to all the different opportunities out there, and then we'd like the market to decide which is the right ones. Right now, we have great success with our battery electric vehicles, obviously a leader in the hydrogen fuel cell area. The team over at DAF led this hydrogen combustion engine development program, which we won the Truck Innovation Award for. That has nearly zero CO2 output. It's really just some trace CO2 from the lube oil stuff. I think we want that out there as an opportunity so that we can work with the governments and see what's gonna be acceptable and what's gonna provide our customers the right benefits.

[Preston Feight, CEO at PACCAR]

We think it's early days, and pre-selecting the right answer is not necessary. We'll just continue to leverage our strong partnerships, our technologies, and bring the right solutions to our customers.

[Ross Gilardi, Managing Director at Bank of America]

Got it. Thank you.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question will come from Nicole DeBlase with Deutsche Bank.

[Nicole DeBlase, Managing Director at Deutsche Bank]

Yeah, thanks. Good morning, guys.

[Preston Feight, CEO at PACCAR]

Morning.

[Nicole DeBlase, Managing Director at Deutsche Bank]

Maybe just a question on Europe. What are you guys seeing there from an order perspective? I'm just kind of surprised that looks like you're forecasting delivery is more flattish in 2022, especially since you talked about improvement in supply chain.

[Harrie Schippers, President and CFO at PACCAR]

The order situation in Europe has been very strong and much in line with what Preston just commented on the U.S. and the rest of the world for PACCAR. I think a market between 260,000 and 300,000, again, is a pretty wide range, and it shows that there's still quite some uncertainty with maybe COVID-related stuff, chip situation. But whatever the market does, with our new trucks, the new DAF truck models, we're in a very good position to grow market share in whatever the market size will be. That will go well. DAF production and DAF volumes.

[Nicole DeBlase, Managing Director at Deutsche Bank]

Okay. Got it. Understood. Just to follow up on dealer inventory. I suspect that they're probably still very low, but just wanted to get an update there and if you guys see the potential for some restocking to help volume as we move into the second half of the year.

[Preston Feight, CEO at PACCAR]

Yeah, I'd say that, you know, inventories are lower than we'd wish them ideally to be, but that's obviously a result of the supply-based situations, and that does give us a strong confidence that we'll be able to build every truck that we can get the parts for this year, which should create a really good year. We'll see inventory react as we can build enough trucks.

[Nicole DeBlase, Managing Director at Deutsche Bank]

Thanks. I'll pass it on.

[Preston Feight, CEO at PACCAR]

All right. Great.

[Operator]

Your next question will come from Courtney Yakavonis with Morgan Stanley.

[Courtney Yakavonis, Equity Analyst at Morgan Stanley]

Hi. Good afternoon, guys. Thanks for the question. Maybe if we can just go back to the question on Europe and, you know, I think that was where you saw the biggest sequential step-up in deliveries this quarter. So is it the right way to understand that was where most of those red tag trucks were? And how should we be thinking about the remaining couple thousand? Are those in Europe? Are those in North America? And then, you know, if you could also just comment on the FinCo. I think you had very strong margins this quarter. You know, Harrie commented on, you know, the higher used pricing. But how should we think about that business going forward, if there's any guardrails you can give us aside from just, you know, continued strength?

[Preston Feight, CEO at PACCAR]

Sure. Hey, Courtney, how about I start off on the European deliveries, and then Harrie can pick up and add anything he wants to and talk about the FinCo. There were three things I would weigh into the difference sequentially in deliveries. One of them is seasonality. One of them is build rate increases that we've had. The other is really probably tied to the offline reduction that we had. Those three things kind of changed the 10,000 to the 18,000. Harrie, anything you'd add on that?

[Harrie Schippers, President and CFO at PACCAR]

No, I think it, the offline truck production was proportional.

[Preston Feight, CEO at PACCAR]

Yeah.

[Harrie Schippers, President and CFO at PACCAR]

The DAF did similar to the other brands. The seasonality is a big impact if you compare the third to the fourth quarter. The third quarter, that's typically December shutdown with fewer production days in the third quarter. Those things combined explain the increases together with an increased build rate. That's always nice to see. For the finance company, yeah, great results in the fourth quarter. We've seen the used truck market improve by a lot. PACCAR Financial has expanded its used truck center and sales capability over the years. This is really a year that it starts to pay dividends. Looking into next year, I would say the outlook for the next couple of quarters is really good, and we expect PACCAR Financial's strong performance to continue.

[Courtney Yakavonis, Equity Analyst at Morgan Stanley]

Okay, thank you.

[Harrie Schippers, President and CFO at PACCAR]

Thank you.

[Operator]

Your next question will come from Matt Elkott with Cowen.

[Matt Elkott, Transportation OEM Analyst at Cowen]

Good morning. Thank you. As you guys continue to tackle supply chain issues this year, is part of the solution using more engines from your suppliers as opposed to in-house, so you can focus on other parts of the supply chain?

[Preston Feight, CEO at PACCAR]

That's not quite how it really works, Matt. Each chip is funny. Each chip kind of goes to a component, and you can't really know how that's gonna shake out. They're not the same chips each place. The teams have done a really good job of figuring out how to reengineer in different chips to be used in our engines, and Cummins does the same as a good partner. We've also been able to kind of go back and track similar types of chips and find ways to use them. I think that's independent of the engine, independent of the component, really. It's just a great team effort by everyone at PACCAR and our suppliers. We would expect to see the MX share in North America go up significantly in 2022.

[Matt Elkott, Transportation OEM Analyst at Cowen]

Got it. Just one more question on the outlook for the Class 8 build next year. You know, we had the disruptions pushing out some deliveries this year and last year. There could be a potential pre-buy in 2023. You know, could 2023 be materially up from this year, or do you guys not think there will be a meaningful pre-buy ahead of 2024?

[Preston Feight, CEO at PACCAR]

I think there's a lot of variables between now and the end of 2023. I think in general, it feels like the market's gonna be really good this year, and it seems likely it'll be very good next year as well.

[Matt Elkott, Transportation OEM Analyst at Cowen]

Great. Thank you very much.

[Preston Feight, CEO at PACCAR]

You bet.

[Operator]

Your next question will come from Jeff Kauffman with Vertical Research.

[Jeff Kauffman, Partner at Vertical Research]

Thank you very much. I wanted to ask a question on production rates. When we were down in the third quarter, approximately what was the trucks per day production that you were seeing across the network? Where are we exiting the fourth quarter? Where do you believe that number could go by the middle of 2022?

[Preston Feight, CEO at PACCAR]

You know, I would answer it this way, so we don't really provide our build rates. I'd just simply say is we have seen build rate increases from the fourth quarter into now, and we would anticipate being able to or hoping to take additional build rate increases as we can get the components we need to build the trucks.

[Jeff Kauffman, Partner at Vertical Research]

Okay, is there any metric to think about where you are now versus where you were during the peak of the crisis in chips and parts and things like that, just to get an idea how much production scaled up?

[Harrie Schippers, President and CFO at PACCAR]

We were 45% higher than the third quarter.

[Jeff Kauffman, Partner at Vertical Research]

Mm-hmm.

[Harrie Schippers, President and CFO at PACCAR]

That's quite a step up, if that answers your question.

[Jeff Kauffman, Partner at Vertical Research]

Yeah. All right.

[Preston Feight, CEO at PACCAR]

To add on to what Harrie is saying, I think right now maybe a 10%-20% increase from what we've had in production, not deliveries, and a continuing growth in that area is what it feels like.

[Jeff Kauffman, Partner at Vertical Research]

Okay, that's all I have. Thank you.

[Preston Feight, CEO at PACCAR]

All right, great.

[Operator]

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

[Preston Feight, CEO at PACCAR]

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

[Operator]

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

Participants

Executives

• Harrie Schippers, President and CFO
• Ken Hastings, Director of Investor Relations
• Preston Feight, CEO

Analysts

• Chad Dillard, Senior Analyst at Bernstein
• Courtney Yakavonis, Equity Analyst at Morgan Stanley
• David Raso, Senior Managing Director at Evercore
• Jamie Cook, Managing Director of Equity Research at Credit Suisse
• Jeff Kauffman, Partner at Vertical Research
• Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs
• Matt Elkott, Transportation OEM Analyst at Cowen
• Michael Barkley, SVP and Controller at PACCAR
• Nicole DeBlase, Managing Director at Deutsche Bank
• Robert Wertheimer, Director of Research at Melius Research
• Ross Gilardi, Managing Director at Bank of America
• Stephen Volkmann, Equity Analyst at Jefferies
• Steven Fisher, Managing Director and Research Analyst at UBS
• Tami Zakaria, Executive Director at JPMorgan