PACCAR Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 17 speakers on the call.

Operator

Good morning, and welcome to PACCAR's First Quarter 2023 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 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. Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

Speaker 1

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

Speaker 2

Hey, good morning. Harry Skippers, Michael Barclay, Ken Hastings and I will update you on 1st quarter results and our business highlights. PACCAR achieved record revenues and excellent net income in the Q1 due to continued strong global demand for trucks, aftermarket parts and financial services. PACCAR's revenues increased 31% to $8,470,000,000 and net income was $734,000,000 including an after tax Non recurring charge of $446,000,000 The charge released to civil claims in Europe was previously reported in an 8 ks last week and is the total estimated cost. Excluding the non recurring charge, 1st quarter adjusted net income was $1,180,000,000 up from $600,000,000 in the Q1 of last year.

Speaker 2

In the Q1, truck parts and other gross margins expanded to a record 19.3% compared to 15.9% in the Q4 of last year. PACCAR is benefiting from investments in new truck models, global growth and PACCAR Parts' continued expansion. PACCAR Parts 1st quarter revenues increased by 17% to a record $1,620,000,000 Parts pretax profits were record $439,000,000 or 29% higher than the same period last year. PACCAR Financial had an excellent quarter, achieving pretax income of $149,000,000 which is similar to the same quarter of last year. I appreciate PACCAR's outstanding employees who delivered these excellent financial results and the highest quality trucks and transportation solutions in the industry.

Speaker 2

Their commitment to the company and to our customers is foundational to our success. Looking at the U. S. Economy, GDP is estimated to grow modestly, freight tonnage continues to be good and customers are updating their vehicles with new high performing Peterbilt and Kenworth trucks. This continues to be a favorable operating environment and we're increasing our forecast for the U.

Speaker 2

S. And Canadian Class 8 market to 280,000 to 320,000 trucks. European Economies are also experiencing modest growth. DAF's excellent new trucks are providing customers with the latest technology and best operating efficiencies. We have raised our 2023 European above The South American above 16 ton truck market is expected to be in the range of 115,000 to 125,000 vehicles this year.

Speaker 2

In Brazil, DAF achieved a record 8.6% share in the Q1. DAF Brazil is celebrating its 10th year of operations. DAF trucks are highly desired by customers in South America and the region is an important part of PACCAR's growth and success. PACCAR's industry leading truck lineup, highly efficient operations, best in class parts and financial services companies and the continued development of advanced technologies position the company well for an excellent year. Perry Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Speaker 2

Perry? Thanks,

Speaker 3

Preston. PACCAR delivered 51,000 trucks during the Q1. The supply chain is improving, There are some periodic supplier shortages affecting production. In the Q2 of 2023, Deliveries are forecast to increase to a range of 51,000 to 54,000 trucks. Truck Parts and Other gross margins increased to 19.3% in the Q1.

Speaker 3

We anticipate 2nd quarter gross margins to be strong and in the range of 18% to 19%. PACCAR Parts had an outstanding 1st quarter with parts gross margins expanding to a record 32.2%. PACCAR Parts business model is based on the application of technology to provide our customers excellent access to high quality parts. PACCAR Parts is expanding the use of technologies such as e commerce and leveraging data from PACCAR's connected trucks. PACCAR Parts' expanding network of 18 parts distribution centers serves more than 2,000 dealer locations and 250 independent TRP stores, which provides best in closets uptime for our customers.

Speaker 3

PACCAR Parts is a high growth and high margin recurring revenue business. We estimate part sales to grow by 10% to 12% in the Q2 of this year compared to the same quarter last year. PACCAR Financial Services benefited in the Q1 from a larger portfolio, excellent portfolio quality and good use truck business. Pre tax income improved to $149,000,000 Back our financials, 13 used truck facilities worldwide Contribute to higher price realization compared to wholesale channels. New strip prices have moderated, but remain historically strong.

Speaker 3

With its larger portfolio and superb credit quality, Becker Financial is having another very good year. Becker has invested over $4,000,000,000 in new and expanded facilities, innovative products and new technologies during the past 5 years. These investments have created the newest and most impressive lineup of trucks in the industry, as well as highly efficient factories and distribution centers. PACCAR is continuing its investments in clean diesel, 0 emissions, autonomy and connected vehicle programs. Capital expenditures are projected to be $600,000,000 to $650,000,000 and Research and Development expenses are estimated to be $380,000,000 to $420,000,000 this year.

Speaker 3

Customer demand is strong for PACCAR's industry leading trucks and transportation solutions in all markets. We expect 2023 to be an excellent year. Thank you.

Speaker 2

So as we complete our comments, I'd like to thank our Senior Vice President and Controller, Michael Barkley, who will be retiring at the beginning of June after a wonderful 32 year career. Michael has participated in 66 earnings calls over the past 16 years. He's a great controller, He's an excellent business partner and he's a true friend. Michael, you're appreciated and you'll be missed. Joining us today and for future calls is Bryce Poplowski, our new Vice President and Controller.

Speaker 2

Bryce has been with PACCAR for 25 years. Welcome, Bryce. So now we're pleased to answer your questions.

Operator

We will now begin the question and answer session. Our first question comes from the line of Tammy Zakaria with JPMorgan. Please go ahead.

Speaker 4

Hi, good morning. Thanks so much for taking my questions. Congrats on the great results. That gross margin number was nothing less than So in hindsight, what was the biggest source of the upside versus your original guide of 2016 to 2017? And is the 2018 to 2019 that you're expecting for 2Q sort of a good run rate for the rest of the year?

Speaker 2

Well, thanks for the question and good morning. What we saw in the Q1 was we saw Very good operating efficiencies and cost increases were less than expected. Those are the 2 contributors to the margin improvement over what we've guided. And then as Harry shared, 18% to 19% is what we expect in the 2nd quarter. And we think we'll have a really good year.

Speaker 4

Perfect. If I can ask one more question. Sure, sure Harry.

Speaker 3

I think the parts growth Of 17% exceeded our projections a quarter ago, and parts margins were better too, and that contributes to the 19.3% As well, of course.

Speaker 4

Got it. Thank you so much. And if I can ask one more. I think some industry data showed some orders slow down, but my understanding is that PACCAR numbers are not really in that Dana, and so can you from your perspective, can you share with us what you're seeing in terms of order activity? How deep into the 3rd or 4th quarter your order books have opened.

Speaker 4

Any comments on order trends you're seeing?

Speaker 2

Sure, Tammy. Glad to. What we've seen is good order intake, continued good order intake, and we're substantially full for the year. So 3rd quarter is full, few slots left in the 4th quarter, but substantially full.

Speaker 4

Great. Thank you so much.

Speaker 2

Sure. You bet.

Operator

Thank you. Our next question comes from the line of Dylan coming with Morgan Stanley. Please go ahead. Great.

Speaker 5

Good morning. Thanks for the question. Just wanted to ask first from financing perspective, a lot of concern in the market with regards to customers not being able to get financing from smaller to midsized banks. But in terms of what you see on the ground, 1st of all, has that impacted your kind of order intake or kind of customer sentiment? And second of all, has that created an incremental opportunity for PFS Get some more financing business as a result of smaller banks maybe not being able to finance the same number of customers that they're used to.

Speaker 3

Yes. I'm not aware of any customers that are not going to get the financing that they need. It's good to have Pekka Financial, We're able to finance our customers in good times and bad times. Becca Financial had a great quarter. We're financing about 25% of the trucks that we sell.

Speaker 3

In some years, that has even grown to 30%. So we're there for any customers that need us.

Speaker 1

Got it. Thanks, Harry. If I could just ask kind of

Speaker 5

a longer term question around pricing sustainability. We're obviously coming off of a couple of years here, really strong pricing. I'm kind of assuming given the margin performance in the quarter that pricing was also pretty strong as well. Kind of as we think about how the back half of the year develops going into next year, Pairing that off with the potential kind of pre buy dynamics in 2025, 2026, can you just give us any flavorcolor on how you're thinking about pricing kind of Developing for the rest of the year and next year, if there's a kind of scope for it to remain resilient in the event that 2024 builds are actually down year over year?

Speaker 2

Well, I think that we feel good about 2023 as

Speaker 3

we said. We think we

Speaker 2

have an excellent year that we're working on right now. We see continued strong demand for the products. I mean, think we've reintroduced or introduced new products in North America and Europe and in South America in the last couple of years And those products are providing great value to the customers. That value to the customers is why they would like to have them. So we're helping their operations, which is good.

Speaker 2

And as Harry mentioned, the parts business We're utilizing technology in new ways to help improve the value to our customers through the parts business. They're doing a great job and those things, They contribute to good performance for the company.

Speaker 5

Great. Very clear. Thanks for the time.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Chad Dillard with Bernstein. Please go ahead.

Speaker 6

Hi, good morning guys. Good morning. So my first question is compared to the last cycle, Can you just talk about how much structural uplift in parts margins

Speaker 7

do you think you've seen?

Speaker 2

Sure. I think that I would point towards again the way I just talked about the scenario in the last question is The parts team has done an excellent job of creating value for the customers. So it's not just providing parts, it's about having the right parts in the right locations. Our 18 PDCs Located throughout the world make it easier to have parts available to our customers next day and even same day in many cases. They're also using Tools like MDI Managed Dealer Inventory so that we work closely with the dealers to make sure that they that we know what parts they need That's really supportive to the business.

Speaker 2

And I think that the connected vehicle status is also helping us as well. So those things all help the parts business. We see the powertrain business, the engine business being a good contributor to the parts growth. And as we look forward into the future and think about The electric vehicle world that will also be likely accretive to our business in parts. So we feel like there's a great future for us.

Speaker 6

That's helpful. And second question, how should we think about PFS profitability for the balance of the year? And Do you think the environment is strong enough for you to maintain the current run rate of loss provisions?

Speaker 3

Yes. Like we said, PACCAR Financial is having an excellent year. Used truck gains are a little less than what they were a quarter ago or a year ago, But the portfolio is larger with the growing number of trucks in the portfolio and the higher value per truck in the portfolio. In addition, we see a strong portfolio performance with continued low credit losses, low past dues. We expect the finance company to continue seeing good quarters as we progress during the year.

Speaker 7

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Please go ahead.

Speaker 8

Hi, thank you. My question is on supply chain as you kind of exited the queue. Industry volume seem to have improved markedly. You guys Obviously, you had extraordinary risk. And so curious is supply disruption, direct costs from shipping, etcetera, Back to normal, is there still more improvement to be had there and how would that, if at all, impact your decision on pricing?

Speaker 2

Sure. We've worked really closely with the supplier partners we have over the past couple of years and I give them a lot of credit for what they've been able to In a dynamic world environment, but it's not finished yet. We still do see some constraints in supplier deliveries and we keep working through those And they kind of act some ways as a throttle on our build right now, but generally improving circumstances and we look forward to that Even improving further throughout the year.

Speaker 8

Okay, perfect. Thank you. If I missed one other one, when you look at your raised outlook and I guess competitors have done the same, so you guys are seeing definitely strong demand and yet there's fears of recession and slowdown out there. Are you seeing any material mix shift within your orders, say, to construction with project activity versus Sleeper cab or would you say it's kind of strong throughout? And I'll stop there.

Speaker 8

Thank you.

Speaker 2

Bob, I think you're right on it. I think that what we've seen is Strong demand through all parts of the market. But if there's a trimming in the truckload area, then I would say that's fully offset by the robust vocational markets that we see.

Speaker 6

Great. Thank you.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Steve Volkmann with Jefferies. Please go ahead.

Speaker 9

Great. Good morning, everybody. Thank you for taking the question. I'm wondering if we can go back to the gross margin and I just Want to try to understand some of the drivers because if you have a slightly higher production in the 2nd quarter versus the first, but your gross margin is down, Call it 100 basis points or maybe a little less. I'm just curious what would drive that gross margin down lower sequentially?

Speaker 2

Well, in the Q1, I just mentioned the supply base has not fully improved. So there still are costs and things that we experienced in terms of deliveries. In fact, in the Q1, There were some trucks that we didn't finish delivering, so we had better absorption in the Q1 than we might see in the Q2, which contributes a little bit. And I don't know if

Speaker 3

there's anything you'd add, Harry, to that, but And I would say the trucks production and deliveries increasing to 51,000 to 54,000, Trucks will grow a little faster than parts, so we would see a little bit of an unfavorable truck versus parts mix, Which is why we get to that 18% to 19% excellent margin for the Q2.

Speaker 9

Yes, still very high, but just wanted to understand the moving parts. Thank you. And then maybe Preston, you mentioned this, but supply chain, I guess, we assume that will continue to improve as the year progresses. So If that's the case, would you imagine given the demand environment, would you imagine that you would be able to continue to increase kind of quarterly production rates In the second half as well?

Speaker 2

Well, continue to improve might not be Huge changes in production output. So we'll have to see what that looks like, Steve. And we're always looking to build those trucks, especially with the backlog we have.

Speaker 9

Understood. Thank you, guys.

Speaker 2

You bet. Have a good day.

Operator

Thank you. Our next question comes from the line of David Raso with Evercore ISI. Please go ahead.

Speaker 10

Hi. Thank you for the question. So essentially the sequential margins, all right, we've got truck revenues up sequentially, parts revenue down So a little weaker mix and a little less overhead absorption from you can kind of see in the company inventory, right, what didn't ship, but you built. But on price cost, I'm curious the rest of the year, how do you see price cost versus what you experienced in the Q1? I'm also curious too if you can help me a little bit with the FIFO, LIFO change a year ago.

Speaker 10

I know it's only about 40% of the inventory got changed for it. Just curious at all if you could help us How has that accounting change helped a bit with the margins? And last, I'll throw 1 in there if you can answer it. When do you expect to open the order books for 2024? So again, price cost, why don't we take a reverse order?

Speaker 2

Why don't we take a reverse order and say that we're already having good conversations with some of the customers who got their needs in 2024 and there's a strong interest in the trucks that continues to be good. It's early days. We'll see what happens there. Michael, you've got 66 calls under your belt. Why don't you do the LIFO FIFO call?

Speaker 1

Well, last year, the FIFO Difference was about $50,000,000 in cost, this year probably something similar to that. So it's really it helps a little bit, but it's Maybe a 0.1% or 0.2% is not a huge mover out there. Helpful.

Speaker 2

And then on your first question, you asked about price cost. I think we have shared that we had good price to cost realization in the Q1. We expect that in the Q2 and We have a good order book for the 3rd Q4, so it should be pretty good.

Speaker 10

So the price cost wouldn't be part of why Gross margins down sequentially. It's really more the sequential revenue mix and the reduced overhead absorption. Is that a fair Yes.

Speaker 2

That's how I would get it. That's correct. I appreciate it.

Speaker 10

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please go ahead.

Speaker 11

I guess just my first question back to the margin again, your pretax truck margins were I think 13.9%, which is a record high. So can you help us understand sort of what's structural or related to some of the new product introductions that are more profitable versus sort of Just deflation sort of helping the margins. So I guess that's my first question. And then my second question, when you talk about the order book for 2023 being substantially full, is that across sort of all geographies and what are you telling customers about pricing specifically for 2024 as you're engaging in conversations? Thank you.

Speaker 2

Sure. First of all, I think on the new products and thanks for bringing them up because we've shared that we've invested 1,000,000,000 of dollars in these new products. We brought them out in the last couple of years here, but they're fully introduced. And they're providing 7% to 10% better fuel economy. That's just one thing.

Speaker 2

So that's $15,000 to $20,000 of value for the customer over a few year cycle. It really makes it important for them to replace the trucks they bought 4 years ago with these excellent new DAF, Peterbilt and Kenworth trucks, it's important for them to do that because they get an operating advantage. Never mind the fact that these are the Drivers' favorite trucks to drive and there's a lot of demand to have them. You see them on the road, they're beautiful. It's what people want to be operating in all the markets.

Speaker 2

So that's really important as well. I think that the other part of it is they're efficient to build for us. So that's also helpful. So I think that new products are good for us. It's not just limited to The traditional markets of Europe and North America, South America is doing excellent well.

Speaker 2

The Dot brand is a leading brand there. We're gaining market share quickly. The dealers are doing really well and South America is just a growing part of our performance, which is contributing to our Overall margin growth. As far as what we see, it is substantially full in all markets. So that includes South America, Europe, North America, Australia, Mexico, pretty much everywhere.

Speaker 2

So the demand for PACCAR is great right now. And as far as 2024, well, 2024, it's the early conversations with people as they're kind of figuring out what their capital plans will be And how many trucks they'll buy next year. So those are early conversations.

Speaker 4

Thank you.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Steven Fisher with UBS. Please go ahead.

Speaker 12

Thanks. Good morning. I want to come back to the parts business. I'm curious What actually drove the faster than expected revenue growth in your parts business? The guidance again is Somewhat similar to what you rolled out for Q1.

Speaker 12

So curious what was the surprising part to you? I mean, it doesn't seem like it was And accelerating freight market since we don't really have that. So I'm curious about that. And maybe just generally how cyclical or really not cyclical you I

Speaker 2

don't know, Harry, you want to share some thoughts on that?

Speaker 3

Sure. I think I want to echo what Preston said that we've invested a lot of new systems to make it easier for our dealers and customers to have the right parts on the When trucks come in the workshop, it is the proprietary components, the PACCAR engines, the PACCAR transmissions, PACCAR axles, all the new proprietary Parts on the new trucks, where customers only can get service at a Kenworth Peterbilt ORDAS dealership. So the trucks come into our workshops. Once it's in the workshop, our teams do a great job, make sure the parts are there that those trucks need and that sells the parts. We've invested in more distribution centers, added a new one In Louisville, Kentucky, so we continue to build out that footprint.

Speaker 3

I think the Q1 was especially strong in Europe, We saw parts growing really strong. It's just a combination of all those efforts that Come together and having the parts available, strong performance by the team worldwide.

Speaker 2

And I would add into that, I'll echo everything Harry said, but I'll say our dealers have done a really good job of making investments into their workshops and making it more convenient for trucks to come back to them. So that's good for our customers and good for the parts business. And I also wouldn't lose the idea that truck age is still pretty high. And there's been an undersupply for 3 years and those older trucks are consuming parts still. So even as freight tonnage may have trimmed a little bit, I'd still say there's a lot of consumption of parts on the trucks out there.

Speaker 12

Okay. And then just lastly, can you just remind us of where you are in that Penetration of the new products and how much runway there is still to go?

Speaker 3

For DAF, The new DAF is currently about 75%, 80% of the production mix, and you could compare that to around 25% where we were a year ago. So that ramp up has Really successful, well executed by the operations team in Europe.

Speaker 2

And in the U. S, it's been complete. The transition is complete fully.

Speaker 3

For heavy trucks, but also for the new medium duty truck that went into production, what is it, 1.5 years ago? And that's completely changed over now. That new medium duty truck is made for those customers, Class 6, 7, 8 or low Class 8, provides, Like the heavy trucks, more value for customers and built in a very efficient way.

Speaker 2

Thank you. You bet.

Operator

Thank you. Our next question comes from the line of Tim Thein with Citi. Please go ahead.

Speaker 7

Thank you. Good morning. Maybe just continuing on the parts discussion, the full year Revenue growth projection at the 8% to 11%. I apologize if I missed that. Are you sticking with that or is that Are you taking that?

Speaker 7

Do you now see that higher just given what you see in the first half of the year?

Speaker 3

We didn't say anything on the full year. We said it would be 10% to 12% for the 2nd quarter after 17% in the first quarter. And at that run rate, you would get we're between 10% and 13% for the year maybe.

Speaker 7

Got it. Okay. All right. And then Just on the you mentioned the supply chain issues that continue. And as we think about the interplay there with production for the full year, Do you foresee any change in to the extent maybe The assumption that the supply chain is getting better maybe in the second half than the first.

Speaker 7

Do you foresee much by way of a mix change there in terms of Potentially maybe some units that weren't able to get completed, I'm thinking of a heavy versus medium duty mix. Do you foresee that changing much in an environment where the supply chain is better or is that just kind of around the edges? I'm just Wondering if there has been somewhat of an emphasis to maybe getting certain units out the door faster and if that normalizes, Could that potentially have some impact on mix in the back half of the year?

Speaker 2

No, I kind of think your words are really good there, Tim. I think it's around the edges right now that that would be I think it's fairly just generally improving and we feel pretty good about the way it's working through. There's just moments And our teams and the suppliers are doing a really good job of solving those moments. And so it feels like we'll just continue to see that trend upward.

Speaker 7

Okay. All right. Thanks for the time.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of John Joyner with BMO Capital Markets. Please go ahead.

Speaker 13

Okay. Thank you very much. I feel that things are always great at PACCAR. So sorry for another supply chain issue, but maybe I can ask it, I guess, another way. And with all the work To, I guess, help improve available supplies, are there any areas that are actually maybe better today Then prior to COVID, can you possibly bucket kind of the percentage of areas that are relatively more normal today versus ones that are still constrained?

Speaker 2

You say that is your question compared to pre COVID, did you say? Yes.

Speaker 13

I'm trying to understand, I mean, I guess that things are improving, but is there but just given a lot of the work that's been going on to help the supply base, to help the kind of velocity Within the supply chain, are there any areas that are actually structurally better? I mean, maybe that's a dumb question, but I feel like It could be the case.

Speaker 2

Well, I think that I would give a lot of credit. We built 51,000 trucks In a quarter, that's a lot of output. So the supply base is doing a good job. That's a high number if you wanted to go back to pre COVID. And our 51,000 to 54,000 in the 2nd quarter is also a high number.

Speaker 2

So I would say that great suppliers, good partnerships there and they are doing generally a good job. And just always opportunities to keep improving and we do that together with them.

Speaker 13

Okay. All right. Thank you very much. And then with regard to the CapEx, bump that up a little bit this year, what Incremental investments are causing the step up and do you expect the total to keep progressing higher or maybe in that $600,000,000 to $700,000,000 range for the next few years?

Speaker 2

We think the $6,000,000 to $650,000,000 is the right number. We've got some really fun and exciting projects that we're working on that are coming along nicely right now as The 3rd phase of our battery electric vehicles, it's engine platforms that we're developing, it's new truck platforms that we're working on. Just a lot of really interesting things and As long as we can make good progress on them, we'll spend the money and commit to that.

Speaker 13

Okay. All right. Excellent. Thank you, Preston.

Speaker 2

You bet.

Operator

Thank you. Our next Question comes from the line of Nicole DeBlase with Deutsche Bank. Please go ahead.

Speaker 14

Yes. Thanks, guys. Good morning to you.

Speaker 2

Hello.

Speaker 14

Can we just start with South America? I think you Tweaked your industry forecast a bit lower there. So we'd love to hear what you're hearing on the ground in that region. Thanks.

Speaker 2

Sure. I mean, we've had great success so far in South America in the Q1. What we see is there's pretty high interest rates down there and I think there's questions about from the customers about what might happen with those interest rates. So there's Maybe Ben, for some parts of the market a pause in that space, but really we still have a great backlog there and expect things to keep going. Our build rates have increased there and we expect them to stay high and those are the kind of primary things that are happening.

Speaker 2

So our tweak down is really about That interest rate pause that we've seen in the market a little bit.

Speaker 3

Yes. At the same time, Brazil is transitioning from Euro5 to Euro6, And we know Dove has an excellent Euro 6 product in the market out there, so great opportunity for us to grow our market share a little bit further.

Speaker 14

Got it. Okay, that's helpful. And then second question on the 2Q build guidance. Any thoughts From a regional perspective, like is everything kind of flattish sequentially versus the 51,000 in 1Q, everything up slightly? Like Any thoughts by region would be helpful.

Speaker 2

Yes, I wouldn't try to differentiate too much between the regions. I think we're going to see good performance in all of the regions for PACCAR.

Speaker 14

Thanks. I'll pass it on.

Speaker 2

All right. You bet.

Operator

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 15

Yes. Hi. Good morning, everyone. And Michael and Bryce, congratulations. I'm wondering if you could Talk about the cost performance, so really interesting to see operating cost per truck down about $1,000 sequentially 1st quarter versus 4th quarter.

Speaker 15

As we think about the potential for continued improved supply chain performance, how should we be thinking about the pricing Part of that equation as costs normalize for you folks, should we think about pricing following Suit or are we thinking about de linking the 2 based on the value proposition at this point?

Speaker 2

Our focus is on making sure our customers have the best trucks in the world and we're doing that and that has a value to them. And so that's kind of where we see ourselves positioned in the market and that's what we would expect to continue as we look forward.

Speaker 15

That's clear. And then looking at your pre tax profit per truck this quarter, so 17,500 In 2019, pre COVID, you folks had a high of 10,000, so really outstanding Performance. I'm wondering, can we just step through what proportion of that would you attribute to the higher value add of the new Products versus difference in the marketplace and competitive discipline, how would you counsel us to think about the relative Sizes of those pieces and any others you would add?

Speaker 2

I would say that 2018, 2019 were very good years as well. So you put them in Kind of comparable markets. And then I would say a lot of that value is really because of the investments we made in the products, in the trucks. But as we've said earlier in the discussion, it also has to do with the And I would add the 3rd leg of the stool is really becoming technology and how we're employing technology, which is helping us a lot to provide Reasons for people who want to buy the PACCAR Premium products.

Speaker 15

And I'm wondering, Preston, can you just expand on that point? And technology, are we talking about the functionality of the telematics? Or what specific Technology, can you just expand on that last point, if you don't mind?

Speaker 2

Yes, sure. It's the use of telematics, which is also A great opportunity for us and we announced that we have a partnership, an enhanced partnership with Platform Science, which is a great partner for us in terms of how we can connect The vehicle brings useful apps to the customers and that's accretive to their business growth. So we like to be participative in that. I think the other part of it is with the dealer systems. And we mentioned managed dealer inventory a lot over the years, but now it's like A complete seamless operation with the dealers of them getting the parts based upon the needs as defined by PACCAR Parts.

Speaker 2

So that's a great way to see the business growth And we continue to see that expanding over the years.

Speaker 15

Great. And if I can just One last one in, Harry. The parts performance really strong as well in the quarter. Is this the new run rate for parts percent Margins or as volumes are going to be down seasonally, should we think about margins Being good, but maybe not as good as 1Q.

Speaker 3

Well, we don't guide for parts margins typically But 32%, like you said, was really strong in the Q1. We continue to grow the parts business. As the parts business grows, we leverage the cost structure. So there's a good basis for PACCAR Parts to continue that strong margin performance.

Speaker 15

Appreciate the discussion. Thank you.

Speaker 2

You bet. Have a good day.

Operator

Thank you. Our next question comes from the line of Matt Elkott with Cowen and Co. Please go ahead.

Speaker 16

Good morning. Just one more follow-up on the parts, what you've said on parts already. If I look historically, Parts revenue went from 15% of total revenue 10 years ago to 20% in 2022. And I think that growth has been around 8% CAGR versus the remainder of the business at 5%. And it's been more linear, less cyclical growth.

Speaker 16

My question is, do you see this level of outsized growth continuing for parts revenue at a similar level For the next 5 years or so, and is there a sweet spot for parts as a percent of the total that you'd like to see longer term?

Speaker 2

I tell you, we don't think of it that way. We think of value creation for the customer. And I think that the parts business is doing that. That's why it's picking up share and it's picking up overall share of the parts business. And I think that the trend is that the world is becoming a little bit more vertical for us with our power Trains, but also with technology and those things both will contribute to further parts growth over the coming years.

Speaker 2

So I think that the value opportunity for the parts team continues to be there for us.

Speaker 16

Okay. Makes sense. And then just any update that you guys might give us on the Infrastructure bill and if there is any kind of demand that can be attributable to that?

Speaker 2

Yes, I think that the amount of spending being done into the economy, whether it's restoring or infrastructure is really great for PACCAR. We're the vocational market leaders. And so as money is spent in the economy, that will be good for us in the long term as well.

Speaker 16

Got it. Thank you very

Speaker 2

much. You bet.

Operator

Thank you. Our next question comes from the line of Jeff Kauffman with Vertical Research Partners. Please go ahead.

Speaker 9

Thank you very much. Just two questions. You mentioned interest rates and the effect On your South American outlook, can you talk at all as to your dealers with their floor plans and how interest rates Might be affecting your dealer base?

Speaker 2

Let me hop for one thing and then see if Harry has any other thoughts. I'd say that structurally In North America, interest rates are still at a reasonable level. So from a historical standpoint, they're very much in the middle of the world right or middle of the road of what history has had. So we're not very worried about interest rates here. And I don't know if I'd carry you to add anything else.

Speaker 3

Brazil is a little different story. Interest rates in Brazil are running at, what is it, 14 kind of percent rate. So that's completely different than what we see in North America or Europe. And so it gets a little bit more customer and dealer attention in Brazil. But like we said, the new trucks come with a lot better fuel economy.

Speaker 3

So if you're buying a new truck, the fuel savings for many customers offset the higher interest rate expense.

Speaker 9

All right. Thank you. And then I just want to pivot to a more forward looking question. You were talking about the new telematics packages and I know we don't have autonomous trucks on the road yet, but everywhere I go there's an Aurora Peterbilt Truck on display someplace. When do you think we start to see revenue potentially From things like connectivity, things that you're preparing for the customer.

Speaker 9

And then as we start to Does that get reported as part of the truck business? Is that a standalone business as you think about it? I just kind of want to think forward on Maybe some new revenue streams you may generate from these technology additions.

Speaker 2

Sure. I think from a connected vehicle standpoint, we do see revenue, I'd call it indirect revenue and profits that we get. We've been talking a lot about the parts business. We can talk about the vehicles being connected and what it does for the customers, but it's an indirect play in. So it shows up in parts, it shows up in truck.

Speaker 2

It even shows up in financial services in terms of We're able to help customers manage their business. From the autonomy standpoint, Jeff, I'd say that Aurora is a really good partner And we're pleased with the progress they're making with their autonomous driver and we're pleased with the progress we're making on having an autonomous vehicle platform that operates with that. Together, we're just trying to make sure that we focus on safety being the primary tenant of this. And we'll be on the road with those With drivers now and I think that we'll just have to wait and see when it will be time for us to go into a revenue producing autonomy model that doesn't have a driver and that could be a while.

Speaker 9

Thank you very much.

Speaker 2

You bet.

Operator

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

Speaker 1

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

Operator

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

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Earnings Conference Call
PACCAR Q1 2023
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