PACCAR Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2022

Key Takeaways

  • PACCAR reported Q1 revenue of $6.47 billion (up 11 %) and net income of $601 million (up 28 %), driven by strong sales momentum.
  • PACCAR Parts achieved record Q1 revenue of $1.39 billion (up 20 %) and pretax profits of $340 million (up 35 %), with margins expanding to 30.1 %.
  • PACCAR Financial Services delivered record pretax income of $147 million (up 92 %), fueled by healthy new loan volume and robust used-truck pricing.
  • New Peterbilt, Kenworth and DAF heavy- and medium-duty trucks are gaining market share with industry-leading fuel efficiency and digital features, supporting higher gross margins.
  • PACCAR expects Q2 truck deliveries of 44 000–48 000 units and sees the North American Class 8 market at 260 000–290 000 and the European market at 270 000–300 000, while supply-chain and semiconductor challenges persist.
AI Generated. May Contain Errors.
Earnings Conference Call
PACCAR Q1 2022
00:00 / 00:00

There are 20 speakers on the call.

Operator

Good morning, and welcome to PACCAR's First 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 would like to welcome those listening by phone And those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Preston 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 in a listen only mode.

Speaker 1

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 Feidt.

Speaker 2

Hey, good morning. Harry Skippers, Michael Barclay and I will update you on our Q1 results and business highlights. PACCAR achieved excellent revenues and net income in the Q1. PACCAR sales and financial services revenues increased 11% To $6,470,000,000 Net income increased 28% to 601,000,000 PACCAR Parts 1st quarter revenues increased by 20% to a record $1,390,000,000 Parts pre tax profits were a record $340,000,000 35% higher than the same period last year. Truck Parts and Other gross margins expanded to 13.4% in the Q1 compared to 11.6% in the Q4 of last year.

Speaker 2

Packard Financial had a record quarter increasing pretax income by 92% to $147,000,000 Due to healthy new business volume and strong used truck results. I appreciate PACCAR's outstanding employees who delivered the excellent financial results And the highest quality trucks and transportation solutions in the industry. Last year, PACCAR introduced a complete new product lineup of Peterbilt, Kenworth and Doth heavy and medium duty trucks. This was a record number of new product introductions and these investments are generating excellent results for the company. Our customers are benefiting from the industry leading fuel efficiency, while drivers love the new digital instrumentation, luxurious interiors, Stylish LED headlights and beautiful exterior styling.

Speaker 2

The new trucks and growth in PACCAR's aftermarket business contributed to the increased gross margins this quarter. We expect gross margins to continue increasing this year as the new trucks become a higher percentage of the build. Looking at the economy, U. S. GDP is estimated to grow 3.2% And industrial production is projected to expand 4.4% this year, which continues to provide a favorable operating environment for PACCAR and its customers.

Speaker 2

We estimate the U. S. And Canadian Class 8 market to be in the range of 260,000 to 290,000 trucks. The European and UK economies are also experiencing good economic growth. Economists project UK GDP to increase 4% And European GDP to increase by 3.2%.

Speaker 2

The 2022 European truck market is expected to be in a range of 270,000 300,000 trucks. We expect truck markets to remain strong. PACCAR's industry leading new truck lineup, Highly efficient factories, best in class parts and financial services business and the continued development of advanced technologies Are creating an exciting future. Harry Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Speaker 3

Thanks, Preston. PACCAR delivered 43,000 trucks during the Q1. We're focused on increasing production in our factories and estimate second quarter deliveries to be in the range of 44 to 48,000 trucks. Truck Parts and Other gross margins increased to 13.4% in the 1st quarter. With higher production and a more favorable mix of new model trucks to be delivered, we anticipate 2nd quarter gross margins to increase and be in a range of 13.5% to 14%.

Speaker 3

Many customers are operating their trucks longer than they normally would, Which has increased the fleet age. Truck utilization is very high due to the strong economy and freight activity. As Preston shared, PACCAR Parts had an outstanding Q1 with Parts gross margins growing to a record 30.1%. Becker Part's business model, which is based on convenience and technology, Contributes to our customers' success. PACCAR is best in class at maximizing uptime for customers by having high quality parts Conveniently available when needed.

Speaker 3

The success of Pega parts is driven by an expanding network of 18 parts distribution centers And 2,200 dealer locations, 250 independent TRP stores as well as technologies like managed dealer inventory and innovative e commerce systems. Becker is continuing its investments by opening a new distribution center in Louisville, Kentucky This quarter, Pekka Financial Services benefited in the Q1 from strong new loan and lease business, High used truck prices and excellent portfolio quality. Revenues were $366,000,000 in the 1st quarter. Pre tax income was a record $147,000,000 92% higher than last year. A silver lining to the industry wide undersupply of semiconductors is continued strong demand for PACCAR pre owned vehicles.

Speaker 3

Customers appreciate their superior reliability and durability and pay a premium. PACCAR Financial has been increasing its retail used truck center capacity and now has 12 facilities worldwide. These facilities sell used trucks at retail prices, which contributes to higher profits. Becker Financial is opening another used truck retail center in Madrid, Spain this year. Becker has invested $7,300,000,000 And new and expanded facilities, innovative products and new technologies during the past decade.

Speaker 3

These investments Have created the newest and most impressive lineup of trucks in the industry. Capital expenditures are projected to $475,000,000 to $475,000,000 and research and development expenses are estimated to be 350,000,000 to $400,000,000 Pega is continuing its investments in clean combustion, 0 emissions, autonomy and connected vehicle programs. Thank you. We'd be pleased to answer your questions.

Operator

Your first question will come from the line of Tami Zakaria with JP JPMorgan, please proceed with your question.

Speaker 4

Hi, everyone. Thanks and congrats on the solid results. A couple of questions from me today. First, can you update us on any Red Tag units in inventory end of the quarter? And what kind of cost absorption impact it had in 2Q?

Speaker 4

And if you expect any remnant impact And impact it had in 2Q and if you expect any remnant impact in the Q2 as well?

Speaker 2

Sure thing. Good to talk to you. Well, I'd say on the red tags, we are in roughly the same spot now as we were at the end of the year. So we have a managed number of offline and Our team is doing a really fantastic job of working through a global issue and getting trucks to our customers. As it relates to cost, our price cost was roughly even with each other in the Q1 on a year over year basis.

Speaker 4

Got it. Thank you. And a second one from me. Do you expect chip availability challenges to Creep up this year as certain automotive production restarts? Or do you expect gradual improvement throughout the rest of the year?

Speaker 2

I think that as Harry announced, right, we expect our build to increase. So we do anticipate some improvement. Having said that, I would tell you that our chips Become less of the issue and more there's the general supply challenges in terms of getting all the materials we need into the plants at any given time. And again, our suppliers, our teams, our purchasing teams, the ops teams are all doing a really good job working through that.

Speaker 4

Understood. Thank you so much.

Speaker 2

You bet.

Operator

Your next question will come from the line of Steven Fisher with UBS. Please proceed with your question.

Speaker 5

Thanks very much. I wonder if I could just ask you to maybe quantify the numbers on those Partly completed trucks, I think you said it's about the same spot as in Q1. Does that mean you had about 3,000 left, I think, coming into the quarter. Did those all get shipped and then you kind of came out with 3,000 new ones? How do we think about Maybe a little more quantification there if we could.

Speaker 2

Sure. Fair question enough. Easy enough to answer is we did have like you said 3,000 at the end of the year And that number is in the low 3000s right now and it is definitely different trucks. So we get the parts in, we work through them, The teams get them to our customers who really need trucks right now and then some other issue might come up and we work on getting that resolved.

Speaker 5

Okay. Fair enough. And then just relative to the parts business, just curious what was Better than expected in the quarter and the growth rate was about double what you were looking for. How much was that pricing versus volume? And if you have any particular expectations for Q2 and the full year on growth rates?

Speaker 5

Thank you.

Speaker 2

Well, I'll share a couple of comments Maybe Harry has some too, but I would say that one of the big things in the parts business that's driving growth is an excellent team of people that are doing a really good job of getting Our systems connected to our dealers and customers, which is bringing a high degree of stickiness into our business. We're using great technology To ensure that they their first look and last look is at PACCAR for where they get their parts. Another factor is over the years we've increased the proprietary content Of our trucks and engines, which is helping to grow that business and we think that has sustainable legs to it. And I think the other part is obviously there's a lot of freight business out there. So people are running trucks and trucks that are running consume parts, which is good for us.

Speaker 2

Harry, anything you'd add?

Speaker 3

No, those are the main items. The Average age of trucks is going up. They consume more parts. It also means there's going to be a strong market for trucks for probably a longer period of time. The strong demand for parts we've seen especially in North America where we have the PACCAR engine Successfully growing and contributing to the parts growth.

Speaker 5

And you could think we could continue to see kind of upwards of this 10% to 20% growth rate for the rest of the year in parts?

Speaker 3

We expect the 2nd quarter part sales and results to be very similar to the first So yes, we'll continue to perform very strongly in the parts sector.

Speaker 5

Thanks very much.

Operator

Your next question will come from the line of Tim Thein with Citigroup. Please proceed with your question.

Speaker 6

Great. Excuse me. Thank you and good morning. Just a follow-up, Preston, on the comments earlier on the gross margins for the Your expectations for the Q2, so just as it relates to price cost. So if that was Roughly in line in the Q1 as you roll through more And you get more of the 2022 pricing, presumably more of those are starting to flow through the P and L.

Speaker 6

How should we be thinking about the interplay between price versus the variable costs here in the Q2.

Speaker 2

Great question. Good conversation to have with you. I'd say that we should expect that we should see some improvement as we continue on in part Because of what you mentioned, but it also make the mention of these fantastic new trucks in Europe and North America being a contributor to that. So as they grow in percentage of build, that's helpful. So those are the positives to it.

Speaker 2

And obviously there's the supply base issue of making sure we build as many trucks as we can and sometimes that's less efficient than we'd like it to be, but we want to satisfy the By the customers demand, so that's the balance to it.

Speaker 6

Got it. Okay. Maybe Preston, if we could obviously a very healthy market as you hear commentary from your larger Over the road customers, at least from the public eyes in North America, maybe that they don't obviously represent the entire market. So there's been a number of new entrants in North America that have come into the market in the last year or 2. And you're facing some rather significant increase in operating costs and the prospect of higher rates.

Speaker 6

Just maybe what are you hearing as you kind of talk to dealers and again more in the over

Speaker 7

the road

Speaker 6

side North America and Europe, again, we can all see the headlines and commentary from the large public TL players, but Just across the customer base, just kind of what's the tone and sentiment?

Speaker 2

Well, I would understand where you're coming from and I would say that The customers we have are extremely good at operating their businesses and doing a great job. They have a lot of freight to be hauled right now And they have a lot of requests for our fantastic new trucks. So that's putting that's creating a market environment or environment a business environment for us, which Should make it strong for a long period of time. As you mentioned, there have been some new entrants, but I think they operate really on the fringe of it. Maybe they're contributors to some of the used truck pricing we see, but I don't think it's really material to the strength of the market.

Speaker 6

Got it. Thanks a lot.

Speaker 2

Okay.

Operator

Your next question will come from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Speaker 8

Hi, good morning. Nice quarter. I guess first, can you just help us understand sort of what percent of build With your new product launches in the Q1 and how we expect that, the new trucks as a percent of build to play out In the second, third and fourth quarter. So I guess that's my first question. And then can you help us understand sort of how far Your backlog is out and what your market share is trending within backlog, given what I assume some of the success with some of these new trucks.

Speaker 8

I mean, it looks like your Europe market share went up as well. So I'm just trying to get a sense for backlog and market share trends as we exit 2022. Thanks.

Speaker 2

Sure thing. As a percent first part of your question was as a percentage of the new build

Speaker 8

For the first quarter, yes, and then how we think about the rest of the year.

Speaker 2

Right, right. So the Q1, it was roughly a third of our build in Europe of the new product and that will increase in the second quarter, maybe we'll get to the halfway point or 50 of our build as we get into the 2nd quarter and then increase from there in the 3rd 4th. And in North America, the new Peterbilt Model 579 and the Kenworth T680 Roughly, again, a third of our build in North America and those models have transitioned now. And our new medium duty product, which we build, is Probably less than 50% yet transitioned to the new model and it will grow through the year. So that kind of covers that.

Speaker 2

As far as the backlog look, our backlog is really solid. We're substantially full for the year in Europe and North America. As As we adjust build rates, we can create some openings if we can get the parts for that. So there's some positive area there, but really strong backlog. All the conversations with the customers are that they really need trucks and continue to do so.

Speaker 2

So the backlog feels solid. And then as far as our market share trends, as you note, like in Europe, in our Q1, we're at 17% market share in Europe, which is a really strong market share. And for North America, we've grown from 24 to 28 quarter for the Q1 of 2021 to the Q1 of 2022, so year over year growth. And we'd expect to be in that 30%, 31% range of the full year.

Speaker 8

Wow. Okay. Thank you very much.

Operator

Session. Your next question will come from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Speaker 9

Hi, good morning everybody. Maybe just a quick follow on to Jamie's question. Preston, by 2023, should we Assume that pretty much all of production is these new products or does it still do you still continue to offer The older stuff as well.

Speaker 2

So fair question. We'll continue to offer some of the other products as well, into 2023, But there is a transition going on there.

Speaker 9

Okay, thanks. And then, can you talk a little bit about Europe specifically? I mean, it seems like there's a number of raw materials and energy costs and freight and so forth have all Kind of inflected quite a bit higher over the past few weeks, in connection with what's going on in Eastern Europe. And I assume that's a bit of a headwind for you guys at some point, but how should we think about that? Does it take a while to flow into your cost structure?

Speaker 9

Do you think you can kind of cover it with pricing on real time? Just how does that dynamic work in Europe specifically?

Speaker 2

And maybe Harry can offer some comments on that.

Speaker 3

Yes, Steve, our cost situation in Europe has not been so much different from North America. So We've seen direct material cost increases and price increases, which have been similar. We're not exposed too much as far as we can tell right now to the situation in Ukraine and Russia. So our parts availability and the ability to produce trucks has been good. I think the economy and customer demand is very similar to what Preston just mentioned.

Speaker 3

Customers want to have their trucks. They want to have more trucks. They want to have them faster. So really strong market this year. That's also why we increased the range of our outlook for Europe a little bit this time.

Speaker 3

And we think it will be a strong market going forward. So very, very similar to what we see in North America.

Speaker 9

Great. Thank you, guys. You bet.

Operator

Your next question will come from the line of David Raso with Evercore ISI. Please proceed with your question.

Speaker 10

Hi, good morning. When I think about 2023 and around the industry currently, the orders are being a bit suppressed. When you open your order book for 2023 and maybe it's a statement for the industry as well, what you're hearing from your customers, do you expect orders to reaccelerate Given they're suppressed today and then I'm curious your view about demand for 2023, if you think they're going to accelerate once those books are open.

Speaker 2

Sure, David. Thanks for the question. We do expect that 2023 should be a good year for Several reasons really. We expect that our new trucks, as I said, will be a growing percentage of the build. Those trucks, the fuel economy they provide is compelling for people to want to get the new trucks into their fleet, which is going to be really good for their operating costs.

Speaker 2

So we expect that will drive demand. And so as 2023 gets closer to us and we start taking a substantial number of more orders, we'll see that to be a we predict that will be good order intake.

Speaker 10

So no dampening in your review of 23% with any of the macro developments since last quarter. Is that a fair General, is there anything

Speaker 2

else you can confirm? There is that view out there, I guess, but as we look at it also, there's the other view is that the economy is growing. We expect that GDP growth is positive, that freight volumes stay at a high level, that truck age is up 10% to 15% and that we have fantastic new trucks. All of those for PACCAR are good news in terms of what we expect the future to look like.

Speaker 10

Thank you. Then on the deliveries for 2Q versus 1Q, Midpoint up about 7%. Can you take us through the geographies with a little bit of help on each one sequentially, U. S, Canada, Europe and Thank

Speaker 2

you. I think I'll offer a couple of comments. Eric can add anything you want to anyone else, but I would say that we do expect volumes to grow in each of the regions In the second quarter in contribution to that 44,000 to 48,000 units. And then specifically inside of that, it's harder to tell Because the supply base issues can be unique month by month.

Speaker 3

Yes. Europe typically has fewer working days in the second quarter, a little bit more National holidays in different countries at different moments in time. So that We've been offset maybe a little bit, but we've also seen that the material availability in Europe is good. We're increasing production there. So overall, I would think that all regions would make a contribution to the higher production in the Q2.

Speaker 11

All right.

Speaker 10

Thank you very much.

Speaker 2

You bet.

Operator

Your next question will come from the line of John Joyner with BMO. Please proceed with your question.

Speaker 11

Hey, thank you for taking my questions. So I guess first and you gave some color in your release, but Is there anything else that you can offer on the performance of the Financial Services business? I mean, if I go back, say, 35 years, which is As far back as the model goes, the profitability has never been this impressive. So if you can add anything else to that and do you anticipate this continuing for the rest

Speaker 3

The finance company results were excellent in the Q1. I think the team has done an amazing job Creating a strong book of business with strong A and B credits, past dues are less than 0.5%, so customers are paying their bills on time. Like we said in the press release, used truck business continues to be very strong. I think a big difference maybe compared to 20 or 30 years ago is the retail used truck centers that the finance company has established. We have 12 of those now.

Speaker 3

That allows us To sell a bigger portion of our used trucks directly to end customers, and that helps profitability. So we expect the finance company to do well for the remainder of this year. Although the supply of used trucks Could be a little less in the second and the third quarter, because customers hold on to their trucks because they're waiting for new trucks. And It again underlines how strong the demand for the new trucks is going to be.

Speaker 11

Okay, okay. That's great. And then Maybe just following up on that, the when you mentioned the used truck centers, I mean, I guess how much is left to go there with building those out? And then I guess The same question on the parts business in terms of geographic how much geographic build out remains For that business, both TRP stores as well as the distribution centers.

Speaker 3

So on the used truck centers, we've added a couple of used truck centers. And I think per year in the last couple of years made some upgrades, adding another one this year. There is definitely opportunity to add a few more. I would say that it's still a minority of the trucks we sell through the used truck centers. So there's still room of opportunity to grow in that area.

Speaker 3

And on the parts, Preston? Yes.

Speaker 2

I think on the parts side of it, if you think about that, I'd say that the parts team is doing has the opportunity to continue growth. We've built out distribution centers. We'll continue to do that. That puts distribution centers closer to our dealers, closer to our customers, which gets an increased percentage of Same day delivery, but equally important if not more so is the kinds of systems we're implementing and the capability to connect with the customers directly And make sure that their trucks are operating the way they want them to and get them trucks and parts that they need every single day. So we use data analytics.

Speaker 2

We have connected systems with our dealers and we think that has a great sustained future.

Speaker 11

Okay, excellent. Thank you so much.

Speaker 2

You bet.

Operator

Your next question will come from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Speaker 12

Yes, thanks guys. Good morning or good afternoon, whatever it is. I guess, a lot's been covered here, but can we talk a little bit about Inventory, I think if you look at the ACT data, just truck inventory at the dealers has begun to tick up a bit. What is PACCAR seeing with respect to inventory in the channel?

Speaker 2

Yes. I mean inventory is still at pretty low levels. If you You look at it, it was like 2.3 months of retail sales in March compared to 1.9 a year ago. And for PACCAR, we're less than that slightly. So there's still not a lot of inventory sitting out there and it's really just about the ability to get the trucks from production into the customers' hands as quickly as we can.

Speaker 12

Okay, understood. Thanks. And just a follow-up on the discussion around supply chain. So, I guess like I know You guys are embedding a little bit of an improvement as the year goes on. What did you see in the Q1?

Speaker 12

I mean, there's a lot of noise with respect to geopolitical risk.

Speaker 11

Like, did supply chain get more challenging or is it kind of more of the

Speaker 12

same that you've been seeing in the Q1?

Speaker 2

I think that what we've seen is that Maybe we've gotten through some of the earliest semiconductor issues, and those have Not become the most dominant side of it. So other little issues come up now. They could be labor related. They could be geopolitically related. It could be shipping related and so some of them are temporary.

Speaker 2

I think that what's going on now is we have really strong communication Between us and our supply base and so our ability to manage that is maybe improving and we hope overall the situation is improving, which is leading us to see that we think we can Deliver some more trucks in the Q2 and on out.

Speaker 12

Got it. Thank you. I'll pass it on.

Speaker 6

All right.

Operator

Your next question will come from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Speaker 13

Hey, good morning everybody. Good morning Rob. Harry, I'm sorry. The results were great. I'm sorry to ask you a couple of accounting questions in the midst of that.

Speaker 13

But I noted you switched from LIFO to FIFO for U. S. Inventory accounting. When I read that, I assume that was just to be more comparable EuropeanGlobal peers. I wonder if you had any other thought process And I wonder will it have any materials from a cash tax impact?

Speaker 14

This is Michael. Yes, that's one of the reasons why we switched To become more comparable with our European peers who use IFRS and don't have LIFO, We also wanted to have better matching of our revenues and costs as inflation creeps up, you end up Accelerating cost realization when you honor LIFO, which we don't think provides very good matching. For years, LIFO has been fairly benign and not much of an impact. And with the inflation creeping up the way that it is, It's become more of a thing and distorts the numbers unnecessarily. So better comparability, better revenue recognition, we thought it was the right thing to

Speaker 13

And is there any cash tax impact that we should care about? And then

Speaker 14

Our LIFO reserve is about $200,000,000 We're going to end up paying about $50,000,000 in taxes, which is We're happy to do.

Speaker 13

Okay, perfect. And then on the finance subs here to your questions and answers earlier, I'm not quite sure if it works this way, but as trucks come off lease, I mean, do you make more of a profit just because you own them and you sell them into a strong market? Was that a material

Speaker 3

Yes, of course, the trucks that come off lease that Our trucks, that's good business for us right now. Those trucks come back in a very favorable market for used trucks, And that's definitely a good thing for the finance company.

Speaker 13

All right. Thank you.

Operator

Your next question will come from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Speaker 15

Yes. Hi. Good morning, everyone. I'm wondering if we could just talk about the supply base for you folks in Europe. A couple of your competitors had down days because of supply 5 base issues from Eastern Europe in the quarter and it doesn't look like you folks had any issues.

Speaker 15

Is that a function of you folks using multiple suppliers or A different supply base. Can you just talk about how you folks have to be in the quarter inflexing if at all given that you have political issues? Thanks.

Speaker 2

Well, we've noted the same thing with them. We just haven't been affected that way. We've had good supplier Ability to provide us the parts we need in Europe. And we've looked out into the future and tried to forecast where that might be and we'll have to watch and see how it is. But right now there's nothing that's showing us that we And we continue to work closely with all the suppliers that have facilities in Eastern Europe to

Speaker 3

make sure that we're on top of it. Yes. We're one of the few truck manufacturers that doesn't have a factory in Russia. And so our exposure to Russia and the Ukraine has been a lot less than what you may have seen somewhere else.

Speaker 15

And Harry, earlier you mentioned the strength of the business in Europe. I'm wondering if you could just expand on that. Did bookings See shipments in the quarter, can you comment on that?

Speaker 3

Yes. Order bookings, I think it's again the same approach In North America, as we've seen in Europe, demand is very, very strong and we manage order bookings a little bit with lead times And we see there are some inflation and cost increases and we want to manage that just very carefully. So I think in today's environment, we could easily get more order bookings than we need. But it's A function of filling the backlog with strong business and not getting exposed out to 2023 where we don't know exactly what Costs are going to be.

Speaker 2

And I would add that it really it's hard to appreciate how phenomenal the new top

Speaker 3

truck is. I I mean,

Speaker 2

it's the only truck that meets all the new masters and dimensions regulations. It's providing a 10% better fuel efficiency. So several $1,000 a year per truck Operating cost advantage. It's a truck that meets the upcoming new direct vision requirements in Europe. It's really a game changing product And it's got a lot more proprietary content on it and the drivers love it.

Speaker 2

So there's a lot of reasons that we see strong demand for that

Speaker 15

Okay, super. And lastly, I'm wondering if you can just comment about the evolution of demand for your electric Vehicles, how has that evolved over the past quarter or 2? And where are you folks expecting to ship them Geographically, is it still predominantly in Europe where you're seeing demand?

Speaker 2

Sure. We are seeing increasing order intake for those vehicles. I We talked even a year ago and we said, we'd start in the tens and grow to the hundreds and then get to the thousands. And this year already we expect that we'll deliver In the hundreds of vehicles and take lots more orders than that for the vehicles. We're having customers putting them into service and Seeing how they work out for them, 5 or 10 at a time typically and then enjoying the benefits of what PACCAR quality looks like in a 0 emissions vehicle.

Speaker 2

So We kind of see that as a growing opportunity and we continue to refine our technology on those vehicles. Feel Feel like we want to stay at the leading edge of technology and it's nice to be actually delivering 0 emissions vehicles to our customers.

Speaker 15

Okay. Appreciate the discussion. Thanks. You bet.

Operator

Your next question will come from the line of Chad Dillard with Bernstein. Please proceed with your question.

Speaker 16

Hi, good morning guys.

Speaker 3

Good morning.

Speaker 16

So how much room do you have to raise price on parts? And can you just talk a bit more about just your On pricing, I mean, are you guys can you potentially raise price to cover, let's say, like airfreight, for example? And then maybe you can break down the outperformance of your parts business. I mean, how much is coming from just better growth on the engine side versus rest of truck? And then lastly, Harry, if you could just clarify your comment about parts demand being similar in 2Q versus 1Q.

Speaker 16

Are you talking about dollar wise or the percent growth year on year?

Speaker 2

Well, I mean, obviously, it's a competitive market out there. We've done a team has done a really good job of increasing the prices as costs have gone up and we've had some good realization Over the few quarters here, largely it's driven by the need for these parts and the fact that we are connected with the customers more and more, right? Trucks are getting complicated. We have sophisticated customers and the interaction between PACCAR, our dealers and our customers is a real contributor to growth As well as more proprietary content like engines, like our PACCAR transmissions, PACCAR axles, all of this is just helping us flow through a connected position So that'll continue and that's great for the future.

Speaker 16

And if you can just clarify the parts guidance commentary, you're talking about dollar wise versus percent wise growth. And then just a separate question just on just how you guys are thinking about how much pent up demand there is

Speaker 3

To go back to the parts comment, the parts comment was on revenues. We expect parts revenue in the second quarter to be similar to parts revenue in the first quarter. Parts pricing has been strong. If you go back to the Q1, Q1 pricing was slightly Over 10% up compared to the Q1 of 2021. So that just shows you that it's an environment where cost increases Are translated into price increases as well.

Speaker 3

And second question you had was?

Speaker 16

Just how to think about just How much pent up demand there is either in the industry or if you can talk about PACCAR more specifically?

Speaker 2

Sure. I mean, I'll take that one and just kind of think Think of it this way. So we've just come through a couple of years where we've not been able to build the number of trucks we need as an industry. We've had really strong freight volumes. People are running them Running their trucks out there, we're putting miles on them.

Speaker 2

They have an operating model, which says they either want their fleet age to be 2 years or 3 years or whatever it is. And they've exceeded that By 10% or 15%. And they're probably not going to adjust that business model, which is successful for them. So they're going to want to draw down that age of fleet as they can. And That's going to take some time.

Speaker 2

As the supply base remains constrained, we expect to see these improvements in our deliveries, but They're not going to be just for a quarter. We expect to see this to be a good period of time for PACCAR and the industry.

Operator

Your next question will come from the line of Ross Gilardi with Bank of America. Please proceed with your question.

Speaker 17

Good morning.

Speaker 16

I'm not sure if

Speaker 17

you guys replied to this similar question earlier, but what do you make of the erosion in spot rates? And clearly PACCAR is very positive, but why isn't Is that an indication that excess capacity is creeping into the freight markets and that demand is ultimately softening? And why would orders reaccelerate in 2023 if spot rates Thanks.

Speaker 2

Yes, sure Ross. I mean, I think that it's a fair question. If you think of spot rates, they're really the fringe of the business. They're not the foundation of the business. And so I think people may want to use them as a leading indicator, but they shouldn't think of them as systemically covering what freight is doing out there.

Speaker 2

And so since there is strong business out there, even if spot rates decline a little bit, they're still present And the fixed contracts are still really strong. So as long as that continues, it bodes well for the market.

Speaker 9

Okay.

Speaker 17

Got it. Thanks, Preston. And then I haven't asked you a consolidation question in a while. And clearly PACCAR You've gone on it organically very successfully for a very, very long time. But just was curious on your general view.

Speaker 17

I mean, do you The heightened need for increased consolidation in the commercial vehicle space in light of all the inflationary pressures, just need for Perhaps greater localization supply chain or just greater overall scale. And do you think regulators would allow a combination Of any of the top 6 or 7, I mean, some of the European names have really been bruised and battered in the aftermath of Russia and so forth, and you Could PACCAR potentially play a role as an industry consolidator in the next couple of years?

Speaker 2

Well, it's funny that you haven't asked that question in a while. And I would simply say, the way we look at The business is doing fantastic. PACCAR continues to grow. We expect to keep growing and we always are looking around the world for the best things for our shareholders. And I think that's as much as we can say right now.

Speaker 6

Thanks a lot.

Speaker 2

You bet.

Operator

Your next question will come from the line of Jeff Kauffman with Vertical Serge, please proceed with your question.

Speaker 13

Thank you very much and congratulations. Just a quick question on timing and then another one on numbers. You reiterated the R and D range for the year, but R and D came in, I think, a lot lower than that trend this quarter. I'm assuming that's just The timing issue, but could you talk a little bit about that?

Speaker 2

Sure. I think you nailed it. It's a timing issue on the year. So we still hold that $350,000,000 to $400,000,000 in the full year with $78,000,000 in the Q1. So it's just a it's a run rate for new technology, some pretty fun projects that we have that are that we're spinning up That will help us in the future.

Speaker 13

Okay. So just for modeling, should we think of that more as a back half a year impact as we catch up?

Speaker 3

It's a pretty gradual increase during the year, I would model.

Speaker 13

Okay. Thank you. And then, a lot of detail on new unit Sales, but I know you've had a couple of questions about this. What do used unit sales look like on a year on year basis?

Speaker 2

I mean, as a general sense, you can say that they've declined, right? We've had About a year ago, we were coming into the strong used truck market. So there was used inventory out there. And obviously now with the strong freight demand, People are holding on to those units. So they're just not coming into the inventory of our dealers or our used truck centers.

Speaker 2

So it's at a lower level and That's likely to continue for a while. So as far as a specific number to think of it in terms of months, I still think there's a less than 2 months of inventory out there.

Speaker 13

All right. And that's consistent with the commentary you made about 2Q, 3Q. So any benefit that we're seeing on used vehicle impact to financial Services is entirely used vehicle price at this point, correct?

Speaker 3

That's probably the biggest variable in that profit number, yes.

Speaker 13

Okay. That's all I have.

Speaker 3

Thank you.

Speaker 15

You bet.

Operator

Your next question will come from the line of Felix Boschian with Raymond James. Please proceed with your question.

Speaker 18

Hey, good morning, everybody.

Speaker 2

Good morning.

Speaker 18

Hey, Preston, I just have one. You mentioned earlier in the call, average truck age is up 10% to 15 And can you clarify that comment a little bit? Is that a North America number, a year over year number? And I'm really curious Just big picture versus different cycles, say going back a couple of years, maybe industrial recession levels. How has the average age of the North American You know fleet changed over time versus where it is today?

Speaker 2

Yes. I would think of it, if you're saying macroscopic, I would think of it in terms of each Year is its own circumstance and that the model can be disrupted by any number of factors. But I don't think that the general expectation of the fleets is changing much. They want to maintain a fleet age at a certain level. And when they get beyond that, then they want to replace it.

Speaker 2

Obviously, there's slight nuances to cycle timing, but Their freight volume is strong. And the easiest way for we as we think about it, as their freight volume is strong and they look at the opportunity of owning the great new Kenworth, Peterbilt and DAF trucks And the fact that those are going to yield 1,000 of dollars per unit in savings, we see no reason that won't continue. Nuances beyond that seem less significant.

Speaker 3

And I would say that that's more or less around the globe. We Every market of us had COVID related shutdowns and underproduction in 2020. Every market had chip Shortages in 2021. So we underproduced customer demand for almost 2 years or a big chunk of those 2 years. And yes, that means there's a lot of pent demand that we're trying to recover now, but it's probably going to it's going to take longer than just this year before we get there.

Speaker 2

Right. Helpful. I appreciate it.

Speaker 15

You bet.

Operator

Your next question will come from the line of Courtney Bonus with Morgan Stanley. Please proceed with your question.

Speaker 19

Hi, good morning guys. So I guess I just wanted to first just get a check on the quarter. Obviously, you guys came in smack in the middle of your delivery guidance. But I think Europe was a little higher than we were expecting. U.

Speaker 19

S. Was North America was a little bit lower. So just wanted to get how it came Versus your expectations on a geographic level, I think you mentioned that you're expecting shipments to increase For all geographies heading into next quarter. And then just more broadly on the industry outlook, it sounds like Supply chain issues are getting a little bit better. You're still very positive about end market demand.

Speaker 19

So you raised the low end of your guidance for the industry, but just curious why there was no adjustment to the top end?

Speaker 2

Sure. As we looked at the segment deliveries, geographic deliveries, I would say that North America, we just Saw that we had in the medium duty market actually some impact to the supply base there, which kind of constrained North American medium duty deliveries. And that was probably what weighed in the Q1. And hopefully, we'll see some reconciliation there in the Q2 of that. And I'd say from an industry standpoint, our guidance is just we tightened it up a little bit And we tightened it up to move the midpoint up because the market still feels really strong to us.

Speaker 2

So in that view is where we saw ourselves sitting.

Speaker 19

Okay, great. And then you made some comments earlier just about the positive mix improvement as new trucks Higher percentage of the build, and I think you gave us some color on how that mix should improve through the year. But can you just help us understand what the margin differential is between that new product line in North America and Europe versus last year's and how big of a gap? Is it mostly just in pricing or is the cost structure significantly better?

Speaker 3

Yes, the margin opportunity for the new models is, of course, excellent. The 7% fuel economy improvement We saw for the Kenworth and Peterbilt trucks, that just puts them best in class in the industry in terms of fuel efficiency. With the new DAF, with the 10% Fuel economy improvement, that's class leading in Europe. And being able to create so much value for our customers, That's of course also going to be a good thing for PACCAR.

Speaker 2

And the only add to it I'd give is that if these trucks are not just good for their pocketbooks, but their drivers, Which is such a key element of their business right now. There's no truck they'd rather be in than the new DAF, the new Peterbilt and the new Kenworth. I was at a truck stop A week ago and at the fuel island, I was talking to somebody who had a new PACCAR product and they were just beside themselves with the way this Truck looks and drives down the road. So I think it's important to realize that the drivers have a big play here and PACCAR products are where people want to be.

Speaker 19

I guess my question was more in relation to your cost structure as opposed to the customer.

Speaker 2

Sure, understood. And when we make investments and big capital investments, we do it to be more efficient and we strive for that. So yes, there's some of that in there as well.

Speaker 19

Okay, thanks.

Operator

Your next question will come from the line of Matt Elkott with Cowen. Please proceed with your question.

Speaker 7

Thank you. Good morning. Could you guys update us on your view on a possible 2023 pre buy and How material it could be? And if you couple that with your view that orders could accelerate again, Are we looking at another solid delivery growth year in North America in 2023?

Speaker 2

Well, I would say let me take the back half of your question. So yes, we think 2023 could be a good year. It's pretty far out, but we think it could be a really good year. As As far as comments on pre buy, we think that conversation is overdone. I think that there's a lot of great new products in the market out there.

Speaker 2

There's not Change going into the general U. S. Market in terms of technologies. There'll be some improvements in CO2 reductions or fuel economy again, which Can cause some people to want to buy early or some people to want to wait for those improvements. So I think that it's really mostly California impact in terms of what might happen In terms of Realtek change, so I wouldn't overweight that in my thoughts of 2023.

Speaker 7

Okay. That's helpful. And Preston, can you maybe provide some more insight on how manufacturing lead times for Class 8 trucks have changed over the last few quarters And where they are for orders placed today? And could longer lead times be contributing to the moderation in orders?

Speaker 2

Well, what I would think of it as is we have a strong order backlog that's substantially full. So if you place an order for a truck today, You might be able to get it in the Q4, but it's starting to slide out and that's why the orders have been limited is because we're not ready to open up Fully the 2023 order board because of the uncertainties of what parts supply is going to be and the cost structure is going to be. And so that's how we look at it.

Speaker 7

Got it. So the order moderation could be related to 2023 book not being open yet and not necessarily a function of underlying demand for trucks.

Speaker 2

You're absolutely right. That in fact is what's happening.

Speaker 7

Thank you very much.

Speaker 2

You bet.

Operator

Your final question in queue is a follow-up from David Raso with Evercore ISI. Sai, please proceed with your question.

Speaker 10

Hi, thank you. I just wanted some clarification on the sequential builds in Europe. I mean, even if they're just flat, that's up 37% year over year. And I'm just trying to understand, it's not necessarily a terribly easy comp that's driving it. Is this that much share gain from the new truck?

Speaker 10

Is it an understanding that dealers want a little pipeline fill, If available, I'm just trying to understand the magnitude of the growth in Europe we just saw and the implied for 2Q. Thank you.

Speaker 3

Harry, anything? No, the demand for the new truck has been excellent. And I would say that also in Europe, DAP is doing an excellent job building as many trucks as we can. So build rates Continue to go up. And even with the lower number of working days in the Q2, we expect that Q2 Production would be the same or slightly up.

Speaker 3

From 1Q, okay. From Q1.

Speaker 10

On Q1, exactly. And year over year, that's up 37 plus percent year over year. So I just wanted to clarify that. And lastly, June 1, the upcoming meeting, anything you Want to provide for us in this platform to mull over as we think about the main takeaways we should be getting out of that meeting?

Speaker 2

Well, we look forward to seeing you in person. That's going to be fun. And I think it's going to be a little bit more information about how the business is doing, what the future looks like for us and the strength of PACCAR going forward, That's going to just accelerate. So we look forward to seeing everybody there.

Speaker 10

All right. I'll be there. Thank you.

Speaker 2

Appreciate it. All right.

Speaker 3

Okay. Look forward to seeing you, David.

Operator

There are no other questions in 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

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

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