Operator:

Good morning and welcome to PACCAR’s Second Quarter 2024 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 any 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.

Preston Feight:

Hey, good morning. Harrie, Brice, Ken and I will update you on our excellent second quarter results and business highlights. I’d like to start by saying thank you to PACCAR's great employees who provide our customers with the best trucks and transportation solutions in the world. They are really an impressive group of people. PACCAR's excellent revenues of $8.8 billion and net income of $1.12 billion were due to the strong performance of truck and parts operations around the world. PACCAR Parts second quarter revenues increased to $1.7 billion. Parts pre-tax profits were $414 million with 30.3% gross margin. PACCAR Financial achieved good pre-tax income of $111 million. And truck, parts, and other gross margins were very strong 18% in the second quarter. Looking at the U.S. and Canadian truck market, the vocational segment, where Peterbilt and Kenworth are the market leaders, remains strong with continued infrastructure investments. The less than truckload market is also performing well while being offset by a truckload segment where rates remain soft. Kenworth and Peterbilt’s first half share grew significantly to 31.5%, up from 27.7% in the same period last year. We estimate this year’s U.S. and Canadian Class 8 market to be in a range of 240,000 to 280,000 trucks. Demand for medium-duty trucks continues to be strong, Kenworth and Peterbilt have increased their medium-duty market share in the first six months this year to 17.3% compared to 12.8% in the same period last year. In Europe, economies and the truck market are softer this year. DAF’s premium new trucks provide customers with the latest technology and best operating efficiency. We project the 2024 European above 16-ton market to be in a range of 260,000 to 300,000 trucks. South America is a region of PACCAR's geographic growth. DAF Brazil increased market share to 10.3% in the first six months of this year, compared to 9.2% a year ago. DAF trucks are highly desired by customers in South America. Over the last few quarters, we've been updating you on the progress of a battery joint venture that PACCAR formed with Cummins, Daimler Truck, and EVE Energy. This joint venture, named Amplify Cell Technologies will produce state-of-the-art batteries that are specifically designed for commercial vehicle duty cycles. Amplify Cell Technologies began construction of the new factory in the second quarter. PACCAR continues to demonstrate strong performance through all phases of the business cycle and is expanding its global manufacturing capacity, as we are excited about the future. Harrie Schippers will now provide an update on PACCAR parts, PACCAR financial services, and other business highlights. Harrie?

Operator:

Thank you. [Operator Instructions] Our first question today comes from the line of Steven Volkman with Jefferies. Please go ahead, your line is open.

Preston Feight:

You bet.

Preston Feight:

Good question. Thanks for taking the time to ask it. I'd start by saying that the reason our R&D and CapEx expenses are moving upward is because we have a lot of really good projects to work on. They come in the form of technology related to emissions, but also just improvements in operating efficiency of trucks and transportation solutions we can provide to our customers. So when we have a good set of projects, we invest in them and that's what we're doing right now. Regarding the changes in emissions regulations, we don't have the answer to that. And what we do think is it's unlikely and that it won't change the total number of trucks PACCAR delivers over a few year period of time. It might just shift the timing of those.

Preston Feight:

We've shared with you previously that our intention is to grow our market share. And so what we're doing is getting capacity in a line with that, so that if we see peak market conditions that are kind of similar to what we saw in 2023, that we can grow market share in those markets as well. So you could think of it as like a 10% to 15% in some case increase in capacity.

Preston Feight:

You bet. Have a good day.

Steven Fisher:

Thanks for taking the question. And good morning. Just wanted to unpack the Q3 expected 17% truck parts and other margins a little bit. Can you just give us a sense of, how much of a factor if there's any perhaps one-time costs in there, any pricing changes or pressure, any mix from trucks versus Parts in there? I would have thought that that might be a little more supportive. Just anyway to unpack that 17% a little bit.

Steven Fisher:

Okay. And then maybe on the Parts margin specifically in the quarter, can you talk about what drove the negative incremental this quarter and what maybe you're expecting for Q3 and Q4? It was just a surprising takedown. Just, kind of wondering if this is a maybe a more broader correction after a strong period of the cycle or is there maybe just any sort of one-time dynamic?

Steven Fisher:

Okay, thank you very much.

Tami Zakaria:

Hi, everyone. Thank you so much. So I think, Preston, I just heard you say, hi. So I think I just heard you say that Q3, typically Europe sees some seasonal shutdown. And over the last few years, we've seen fourth quarter deliveries actually a bit higher than the third quarter. Is that how we should be thinking about this year as well?

Tami Zakaria:

Got it. That's helpful. And then my second question is, I think you tweaked lower the U.S. Canada outlook by about 10,000 units. What are some of the pockets of strength versus weakness? What I'm trying to understand is which category within that bucket weakened in the last few months that drove you to reduce the outlook?

Tami Zakaria:

Got it. Okay, great. Thank you.

Operator:

Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead. Your line is now open.

Harrie Schippers:

Price cost in the second quarter for trucks, price was up slightly less than a percent, cost was up slightly more than a percent. So pretty much in balance. If we look at the Parts business, price was up 3%, cost was up 5%. So a little bit more margin pressure there, as we saw in the 30.3% gross margin for Parts. But a really nice performance if you take into account that the overall aftermarket Parts market was smaller, especially in the U.S. and Canada this year.

Angel Castillo:

That's very helpful. And maybe just to kind of continue down that path, just in terms of your order book fill rate for the third quarter and fourth quarter, could you just talk about the level of visibility that you have beyond maybe as we think about even heading into the fourth quarter and orders? Yes, just any comments there.

Angel Castillo:

Very helpful. Thank you.

Operator:

Our next question comes from Jamie Cook with Trist. Please go ahead, your line is now open.

Preston Feight:

Sure, Jamie. I think that was actually three questions, but it's good to hear from you and nice to get the questions from you. If you look at any other commentary around the 48.4 and the 18%, there's not really anything different that we'd share on that. It's kind of exactly what we thought would happen. Obviously we had a, we had a, the industry had a supplier who had an issue in Mexico in the quarter and we kind of had to manage through that. So I think that we managed through our teams that have a fantastic job working with the supplier who did a great job recovering and that allowed us to get to that 48.400 number. So kudos to the suppliers, kudos to our teams and our ops teams for getting that sorted out and that led to the strong performance. I think you could say that the trend from Q1 to Q2 and to Q3 should be similar and that will have price and cost challenges sitting in front of us with that implied in the 70%. And again, the reason is, is I think we're looking at the truck load carriers and watching how they're making their decisions right now and seeing where they go from there. But that being offset by strong vocational and LTL markets and a very good performing medium duty truck. So the trucks are performing well. It's just the underlying basis of contract rates I'd say. And then maybe Harrie, any commentary on trends in the EU?

Preston Feight:

And I think, Carrie, you said it, but I just re-emphasize the fact that the pricing discipline of the team is very good right now.

Preston Feight:

Yes, you bet.

David Raso:

Hi, thank you for the time. I was just curious, your conversations with customers regarding the potential or already putting in motion plans for a pre-buy, has the tone or the conversation changed all with the last month of what we've seen politically? And then I have a quick follow-up on U.S. Canada, we call it North America inventory. I know you're looking to gain share and you've gained share already this year, but I'm just trying to be thoughtful about going into 2025, the inventory in the industry is a bit elevated, right? The backlog to build is pushing below 4. So just how do you see your inventory exiting 2024 into 2025? And again, circle back if you can to the question about the pre-buy.

Harrie Schippers:

I'll kind of just follow up on that comment on vocational. Obviously it's a strength for PACCAR. Are you looking at the vocational market where you're having, say, better visibility into 2025 already, just given a key supplier that's maybe limiting a little bit how many vocational you can sell? How should we think about vocational into 2025 versus, obviously we all can think through a pre-buy or not, but the vocational in particular. Thank you.

David Raso:

All right, thank you.

Operator:

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

Preston Feight:

Yes, good observation, Jerry. Warranty costs have been developing very favorable, and it reflects the excellent trucks that we're currently building and that customers are experiencing. So yes, that's moving into the right direction.

Harrie Schippers:

I think for the pricing, I said pricing was up 3%, and cost was up 5%, and we expected continued to see favorable pricing developments as we move through the year. I think as we look forward in the Part side, maybe specifically, we would start to see some improvement in price versus cost in the outer quarter.

Preston Feight:

The 5% cost increase is broad-based. Its inflation in the Parts business is a little different than the trucking business. But the price versus cost reflects the softer off the sales market in North America, mainly, that we talked about earlier during the call.

Preston Feight:

The California market has taken a bit of a pause and a breath. I think, as the Advanced Clean Fleet, Advanced Clean Truck rules have come into place, the market has slowed down and say that we are the only ones that have developed an engine that I'm aware of, an engine that is fully compliant. And so that engine is just entering the market because there was a lot of carryover from last year there but that engine is entering the market and will be an early look at technology for 2027 and really pleased to be kind of leading the way into that.

Preston Feight:

You bet.

Chad Dillard:

All right. Good morning, guys.

Chad Dillard:

So, got a two-part question. Hey, so if you compare the truck industry today to what it was, let's say, five years ago, how has the industry's ability to hold on to price changed? That's the first part. And then second, if it comes to it, is PACCAR willing to seize truck market share if it means holding the line on price?

Harrie Schippers:

The one thing that drives this, Chad, is also the legislation on greenhouse gas reductions. So over the last five, eight years, we've been improving clean air gas emissions, which means fuel economy improvement for our customers. So it means that if you buy a new truck today compared to five years ago, you'll get a truck with 10%, 15% better fuel economy. And that's creating a lot of value for our customers.

Preston Feight:

Well, what I look at right now is I think the team's done a fantastic job of looking at the share growth that we're realizing right now. I mean, we've gone from 27.7% last year to 31.5% this year and delivered 18% gross margins in the second quarter. I'm really proud of what they're doing in keeping both in balance.

Preston Feight:

You bet. Thanks.

Rob Wertheimer:

Thank you, Ed. Preston, I wonder if you'd expand [ph] on the comments, the share performance is remarkable. I know there's probably a mixed benefit on vocational versus sleeper cabs or whatever, but it seems like it's probably more than that and more broad based. So I wonder if you just have any comments to help on the sustainability of that or what's driven it aside from DAF [ph] products.

Harrie Schippers:

The last two or three years, I think we were also held back by supplier capacity. And now with the supply base easing up, we get the opportunity to go market share. And that's what we're doing with the great new products.

Preston Feight:

Great question. I think it's what we're all trying to understand in the future. It's part of the reason we did this in a joint venture is we wanted to develop batteries that were optimized for the commercial vehicle market and had a great cost position for them. So we had the most competitive products out there. So we get scale here, but we also get benefits of cost. The primary applications will start, I think, in return to base. So that could be medium duty or pickup and delivery where trucks' total cost of ownership could be positive with a battery operation, but you can keep your charging in a local area. I think that will be kind of how we thought about the offtake, and it'll take, I think, significantly more time before this would translate into an over-the-road solution. But we can use this battery factory to serve other markets as well. It's not just have to be North America. And I think it was a proven to be a good decision the way we structured it.

Operator:

Our next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead, your line is now open.

Preston Feight:

No, I think I would look at it, Nicole, as saying that that's half of the total delivery shift between 2Q and Q3, and then the other is market.

Preston Feight:

Market in North America. And America adjustments that I would say are reflecting in that.

Harrie Schippers:

So we get guidance for the third quarter with an excellent 17% gross margin. Fourth quarter, we'll talk about that during the next call, Nicole.

Nicole DeBlase:

Got it. Thank you, guys.

Operator:

Our next question comes from Kyle Menges with Citigroup. Please go ahead, Kyle. Your line is open.

Harrie Schippers:

That sounds about right.

Harrie Schippers:

They support the growth. It's not, if you add a distribution center that automatically results in Parts growth, but it gives us a proximity and capacity for Parts and better delivery performance that benefits our dealers and customers. So it definitely supports the growth, but it's not the only thing that drives the Parts sales.

Kyle Menges:

Great. Thank you.

Operator:

The next question comes from Scott Group with Wolfe Research. Please go ahead, Scott. Your line is open.

Preston Feight:

Yes. I mean, 50% full for 4Q this time of year is extremely normal. So if you went back over the longest term, this is right in the wheelhouse of normal. And that's what we see in the market too. We see kind of a very normal, successful market where PACCAR can perform well. And I think that it's too early to talk about 2025 pricing.

Preston Feight:

Yes, sure, Harrie.

Scott Group:

Meaning you think that they continue to trend lower or you think they sort of stabilize from here?

Scott Group:

Okay. Helpful. Thank you, guys.

Operator:

The next question comes from Michael Feniger with Bank of America Merrill Lynch. Please go ahead, Michael. Your line is open.

Preston Feight:

Michael, it's a good question. I think we'll have to watch and see what that is. I think it's obviously not that easy to predict it. There's a lot of factors that go into it. So I think that our focus is on making sure that we gain our share of whatever the market size is, which teams are really demonstrating success in doing with great products. But knowing the cadence for when that might turn, I think you think in a couple of quarters might be a good way to think of it, plus or minus.

Preston Feight:

I would look at it and say that we have a long history in the industry of having these emissions changes. And I think when they bring cost into the market than people want to buy their product sooner. And I think we'll see the same kind of approach here. How far forward that will trend, I think it depends on too many factors to kind of weigh in on it.

Preston Feight:

You bet.

Jeffrey Kauffman:

Thank you very much and good afternoon. My questions have been -- a lot of my questions have been asked at this point. So let me dig back into one that Rob Wertheimer asked. The market share gains are fantastic, and you guys have a great product lineup, and I know that's driving it. But out of the 380 basis points of market share that you improved, if you had to guess, I mean, how much of it was -- were dominant in categories that are outgrowing the market versus we've got new product, and we're taking share from other products in the existing market?

Jeffrey Kauffman:

I thought I'd ask if you had a view. Well, congratulations.

Operator:

The next question comes from the line of Miguel Borrega with BNP Paribas. Please go ahead Miguel, your line is open.

Harrie Schippers:

The market in Europe is down. And you're right, we're seeing some pricing pressure there. But I think the team does a really nice job in keeping the premium position of the new DAF in Europe, and we'll continue to do so.

Harrie Schippers:

I don't think we -- I don't think the mix, geographical mix has a big impact on our overall margin. I think all the regions are performing really well at this point in the cycle.

Miguel Borrega:

Thank you very much.

Operator:

Our next question comes from Tim Thein with Raymond James. Please go ahead Tim, your line is open.

Preston Feight:

Yes, Tim, I think it's a very good question. And you know obviously, PACCAR quite well. And our approach is a long-term strategic view of the market. We're in it for the long-term. We're here to support our customers. We keep making smart investments, which are good for the long-term. And so we aren't quite as concerned about an outlook of what the market might be in a quarter. We're just going to doing the right things and gradually growing our share and increasing the performance of our products for our customers and growing the business. And that's the way it works out for us. And as we started the call with Harrie mentioned making investments in capital and products that support future growth, and we're going to continue doing that in the wisest way possible.

Preston Feight:

Well, I think that we've kind of hit that a couple of ways in this call, and I would say that the vocational market is -- continues to be solid. And so with that strength, that's good for us. Our inventory at 3.3 months compared to industry at 3.9 feels quite healthy and appropriate given the share gains we're making, and then I think the mixture of where truck and other things come in is there's some timing associated with that. We're sitting here in late July now. Fleets tend to enter into this a little bit later. Over the next couple of months, they'll get more clarity on what their capital allocation plans are for the next year, and then we'll see what that balance looks like in the fourth quarter.

Preston Feight:

You bet.

Ken Hastings:

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

Operator:

Good morning, and welcome to PACCAR's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's call is being recorded.

Ken Hastings:

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 Feight, Chief Executive Officer; Harrie Schippers, President and Chief Financial Officer; and Brice Poplawski, Vice President and Controller.

Tami Zakaria:

So my first question is on the deliveries for the second quarter, 48,000 around. Can you provide some color on how to think about deliveries that geography in the second quarter?

Harrie Schippers:

Sure. I think, Tami. The spread over the geographies will be very similar to the first quarter. I don't think we expect too many big changes. I think Europe, North America, the rest of the world should be at similar levels, more or less, some variation, of course, but pretty close.

R. Feight:

Sure. Happy to do that. First off, if you look at our inventory, it's really less than 3 months of inventory in the Class 8 side of it, when the industry is a little bit higher than us. One of the things to think about when you consider PACCAR's inventories are strong vocational market share. If you think about the fact that a vocational truck takes maybe 6 months longer to put into service, it means there's additional time. So the stronger vocational market has a natural cadence to increasing inventory. But overall, our inventory is in very good shape, and our market share is increasing. So we saw market share growth from 4Q to 1Q. We expect that we have the right mix of build and a healthy inventory. All feels pretty good.

Angel Castillo Malpica:

Congrats on a strong quarter. Just wanted to go back to your comment, I guess, to the prior question. Just in terms of the second quarter level of delivery is being similar to the first quarter, very strong deliveries in North America if we kind of assume similar deliveries in the second quarter were run rating at quite positive rates. So I just wanted to kind of then bridge that to the lowered guide for shipments for the full industry for North America. So can you help us understand what is otherwise a very strong first half, inventories that seem to be kind of at a good level versus an industry view that seems to be little bit more modest? Is it market share? Is it something specific to the second half? Just again, help us bridge that and understand the change.

R. Feight:

Yes, I think so. If we look at it and you said, we already mentioned the strong vocational market and the strong LTL market in our comments. And we do see the Truckload segment having continued softness, and you heard that in some of the public companies calls -- think that's balanced against the fact that at some point, they want to stay on their cadence of buying and that cadence is going to need to continue. So that's why we think the market is good for 2024. And then we would expect '25 and '26 to start to look even more positive as we head into the 2027 emission cycle.

R. Feight:

Yes. We have good fill in the second quarter, substantially full through all markets and filling nicely into the third quarter now.

Robert Wertheimer:

I had a question just on the interest rate sensitivity where, I guess, historically, trucks have been perceived to be a market that you can stimulate or not with rising lower rates from the Fed. And are you seeing that as rates have risen, has that been a major factor in either new or used purchases? And to your earlier comments, Preston, it seems like vocational is a great setup right now. Is that less sensitive to vagaries of interest rates just because of megaproject demand infrastructure or older fleets. So just maybe any comments you have on that risk.

R. Feight:

But as a percentage of their total just out in what Harrie's saying, it's a percentage of the total business for them, it's not that significant. And I think we also look at it and say, like interest rates are in pretty normal levels from a long-term history standpoint. So with the economy moving along nicely with economic growth expected, we think it should be a good year.

R. Feight:

Sure. Great topic for us. And you think about it, we have over 40% share in the vocational market between Kenworth and Peterbilt. It's -- I mean, this is not a perfect number, but it's roughly 25% of the total market. Obviously, it varies plus or minus, and is exceptionally strong right now. Backlog is effectively full for that market through much of the year. We're kind of stacked up at body builders. So that bodes well for Kenworth and Peterbilt for the balance of the year and going forward. And we think just as you look at the infrastructure spending in the country, and that's continuing to happen, and it's going to continue to be strong for us.

Stephen Volkmann:

I guess we'll get more detail in the queue, but can you just comment on how pricing is looking these days?

Brice Poplawski:

Yes. Our pricing is approximately 3% higher, and that's very much in line with costs, Stephen.

R. Feight:

Yes, I do. I think, obviously, the future is unknowable caveat that for you. But I would say that when you look at the buying cycle and trucks are being run and the fact that people are sensitive to those emissions changes, that it should help '25 and '26 be very strong years for the industry. And I think the question that everybody is kind of trying to figure out is when will that start and how significant will that initiation point begin. So for right now, what we look at is the trucks we're producing are the best trucks we've ever built. They have great efficiency, and they're not only great new trucks, but they're also great used trucks in a few years. So between that spot, the '25 and '26 strengthening market, I think, all feels really good.

Jamie Cook:

Just on the answer to Steve's question, the 3% price that you said in line with costs. Was that -- can you, I guess, extinguish between truck OE and aftermarket? And then I guess, any commentary on pricing in the remaining 3 quarters. I'm just curious like your truck deliveries in the second quarter are similar to first, but margins are expected to be lower in the second quarter versus the first quarter. So any color on that?

R. Feight:

You bet, Jamie. There's a lot of questions in there, but it's good to hear you. So I'd say to start with on the truck side, the price versus cost is 3 and 3. And on the Parts side, price is 3 and cost is 2. So that kind of helps you there kind of expect something maybe in a similar range going forward through the course of the year. That all, of course, leads into your questions on margin and I look at the margins.

Operator:

Our next question comes from Chad Dillard from Bernstein.

R. Feight:

Well, I think that right now, if I get with you, Chad, it's that what we're seeing is truckload sector, people want to keep buying trucks. They're concerned about getting aged inventory. They want to stay on buying cycle. I think that there is capacity out there, obviously. It's a very normal cycle is what it feels like right now, a healthy normal cycle. And their question is, when does this thing turn and when do they need to make sure that they're continuing to get their orders placed. So the conversations are their interest in the future and what's that going to look like? Is it 3 months from now, 6 months from now, a year from now, that they need to make sure they have acquired the capital and the trucks that they need.

R. Feight:

On our product strategy? Let's share it. First of all, again, a shout out to the team, what they've accomplished. There are a couple of things I'd like to mention on that. One is from a product strategy standpoint, we just introduced the new model 589 at Peterbilt in January, which is a fantastic new truck, an iconic truck.

Harrie Schippers:

And if I may add there, Preston, that the 2027 emissions that we will see nationwide, what CARB is doing this year is already very similar in 2024. And we will launch a PACCAR engine in California that meets their requirements this year. So we'll get -- we'll know exactly which technology to apply there.

David Raso:

I'm curious about Europe. The deliveries for the first half of the year, it looks like you're planning to be down around 31% and the market guide, your midpoint is down 18%. You didn't change the guide for the industry. Just wanted to get your thoughts on, is that level of delivery clearing out inventory? Or just trying to understand your considerations of lowering the European industry guide when you're going through these numbers. Just trying to get a sense of how you view that market the rest of the year.

Harrie Schippers:

Coming off -- we're also coming off a record quarter in last year. First quarter of 2023 was record quarter for DAF in Europe, and so a lot of that what Preston's talking about the fuel economy benefits and the great performance of the new truck. So the comps are getting a little bit more difficult, too, there.

R. Feight:

I wouldn't read in that way, David.

R. Feight:

I wouldn't try to read it for the full year that way. And then I think the U.S. Canada, the delivery schedule seems really solid and stable for us right now. We've again, the thing I would want to remind is a 270,000 truck market at the midpoint, it's a very nice market. And with PACCAR share increasing, that feels positive to us.

R. Feight:

Well, I think what we shared is we're filling the third quarter right now. And so obviously, you and everyone else is watching the second half of the year to see what happens. And I think it's a little bit too much of a prognostication to guess what Q4 is going to be, but the math says it should be a good year. Our order intake looks like should be a good year. The truck performance is good. The margin performance is good. So we feel like it all adds up to as far as the story can go, really positive outlook.

R. Feight:

Yes, David, that's another really good point you brought up. Thanks for bringing that up.

Clay Williams:

This is Clay on for Jerry. Our question here is what has been the early feedback from customers on how they're thinking about the higher cost profile, the next-generation trucks? And to what extent do they value the embedded extended warranty?

R. Feight:

Yes, it will. Frankly, simply, yes, it will.

Jeffrey Kauffman:

Congratulations on a solid quarter. A lot of my questions have been asked. So I want to drill down on truck ASP. You mentioned that new truck pricing is up about 3%. But I'm calculating ASP to be closer to up 8%. So I'm assuming the difference between the 3% and the 8% is mostly mix related. Can you help me bridge that gap and help me understand maybe how much of this could be more vocational in the U.S. versus over the road or versus, say, North American sales versus European sales, which is, David Raso, noted are down substantially. Just trying to understand the difference between the 2 numbers.

Jeffrey Kauffman:

Okay. So as I think forward for the year, I would probably expect your average reported ASP to be up a little more than your price increases as a result of mix kind of carrying through 2024. Am I thinking about it wrong?

Jeffrey Kauffman:

Okay. Again, congratulations.

Ken Hastings:

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

Operator:

Good morning and welcome to PACCAR’s Fourth 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 any objection, they should disconnect at this time. I would now like to hand the call over to Mr. Ken Hastings, PACCAR’s Director of Investor Relations. Mr. Hastings, please go ahead.

Preston Feight:

Hey. Good morning. Harrie, Bryce, Ken and I will update you on a record fourth quarter and full year 2023 results as well as other business highlights. PACCAR's outstanding employees delivered the excellent results by providing our customers with the highest quality trucks and transportation solutions in the industry. In 2023, PACCAR achieved annual revenues of $35.1 billion, net income of $4.6 billion, and an after-tax return on revenue of 13.1%. All three were records. PACCAR's strong financial performance benefited from record deliveries of DAF, Kenworth, and Peterbilt's innovative trucks, record results in our parts division, and strong financial services performance. PACCAR shareholders and customers benefited from the $7.8 billion invested over the past 10 years in new products, world-class facilities, and state-of-the-art technologies. PACCAR achieved 85 consecutive years of net income and has paid a dividend every year since 1941. In 2023, PACCAR declared a record $4.24 per share in dividends, including an extra cash dividend of $3.20 per share. PACCAR's fourth quarter revenues were $9 billion. Quarterly net income was a record $1.42 billion, which was 54% higher than the prior year. Fourth quarter net income included a $120 million tax provision release in Brazil. PACCAR Parts achieved fourth quarter revenues of $1.61 billion and pre-tax profits of $432 million. In the fourth quarter of 2023, PACCAR delivered 51,000 trucks and for the first quarter of 2024, deliveries are forecast to be around 48,000. Last year, US and Canadian Class 8 truck retail sales were 297,000 units. Kenworth and Peterbilt's full year deliveries increased from 96,000 to 109,000. In 2024, the US economy is projected to expand within the truck sector, the vocational less than truckload and medium-duty segments are experiencing strong demand and customers are benefiting from the superior performance of new Kenworth and Peterbilt truck models. The 2024 US and Canadian Class 8 truck market is forecast to be in a range of 260,000 to 300,000 vehicles. European above 16-tonne truck registrations were 343,000 last year. DAF's 2023 European deliveries increased to a record 63,000 trucks. DAF's customers appreciate the industry-leading fuel efficiency and driver comfort of DAF's premium trucks. These trucks have a unique competitive advantage in the European market due to an innovative aerodynamic design that features the largest and most luxurious cab interior. In 2024, the European economy is forecast to grow modestly. We expect the above 16-tonne truck registrations to be in the range of 260,000 to 300,000. Last year, the South American above 16-tonne truck market was 110,000 vehicles and is expected to be similar this year. In Brazil, DAF achieved a record 10.2% share, up from 6.9% last year. DAF Brazil makes a growing contribution to PACCAR's global success. PACCAR full year truck parts and other gross margins were 19.3% and were 19.4% in the fourth quarter, reflecting strong truck deliveries and excellent parts business. We estimate PACCAR's worldwide first quarter truck and parts gross margins to remain strong and be in the range of 18.5% to 19%. 2023 was another great year for PACCAR with many highlights, including revenue and net income records. PACCAR announced a joint venture to manufacture commercial vehicle batteries. DAF opened a new electric truck assembly plant and earned the Green Truck award as the most fuel-efficient truck in Europe. PACCAR Parts celebrated its 50th anniversary and Kenworth celebrated its 100-year anniversary. We're looking forward to 2024 being another excellent year. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Harrie?

Operator:

Thank you. [Operator Instructions] Our first question today is from Nicole DeBlase from Deutsche Bank. Nicole, please go ahead. Your line is open.

Preston Feight:

Good morning, Nicole.

Preston Feight:

Well, let me take that one for the time being and say that I think what we see is strong global markets, right, Australia is doing really well. Mexico is doing really well. South America is doing really well. North America is steady at very high levels, and we've seen normalization in Europe, which is probably we said the market in 2024 is 260 to 300, which is 15% to 20% lower, and that's kind of what we see in our deliveries in Europe. As far as the slowdown in orders, I'm not sure I can recognize that in our major North American markets, we see good order intake and good visibility.

Preston Feight:

Thanks, Nicole. I mean I think what we have going on is -- and we've shared this many times, but it's worth repeating is, we have refreshed our entire product lineup in the last few years. We have really high-performing products that are delivering excellent results to the customers. And I think that the latest recognition of that is the Green Truck award in Europe, for the new DAF products that were awarded as the most fuel-efficient product in Europe as a result of that kind of performance of product, we're seeing good pricing realization for the trucks around the world for PACCAR.

Preston Feight:

All right.

Angel Castillo:

Hi. Thanks for taking my question. And congrats on a strong quarter. So maybe just to dig in a little bit more on kind of the pricing dynamic. I was wondering if you could kind of expand that into more of a price cost and give a sense for how you're kind of thinking about decrementals and just underlying kind of margins for 2024 overall. I think you guided to 18.5% to 19% for the first quarter on gross margins. So maybe if you could again give a little bit more color on the full year and how we should see that progressing?

Angel Castillo:

Understood. Thank you. And maybe just switching over to parts a little bit. The 3% to 5% that you guided to for 2024. Just curious if you could break that down a little bit more into the pieces of what you're seeing in terms of price, volume kind of assumptions?

Angel Castillo:

Very helpful. Thank you.

Operator:

Thank you. Our next question today is from Tami Zakaria from JPMorgan. Tami, please go ahead. Your line is open.

Preston Feight:

Well, I don't think I would characterize it as weaker, Tami. I think I would say that in 2023, Europe was 343,000 units, which was a very, very high year, in fact, a record year for us, right, by a lot. And I think if we estimate the market at a midpoint to be 280,000, that's a nice year. I think that what we see is, obviously, the normalization of sales in that range, but we still have these new products, which are providing great margins for us in the European theater.

Harrie Schippers:

Yes, more or less similar. I think Europe is a little softer, so you'd expect some effect from that in Europe. But also in Europe, the new DAF continues its premium position. And as a result, we get excellent margins on those trucks.

Preston Feight:

Great. Thanks, Tami.

Chad Dillard:

Hey. Good morning, guys. I was hoping you could unpack your gross margin guide of 18.5% to 19%. Maybe give some puts and takes of trucks versus parts. And then as you're thinking about like the full year, it sounds like parts are going to grow by mid-single digits. Should we expect gross margins in that business to continue that upward path?

Chad Dillard:

Got it. Okay. And just a second question, just on your SpinCo profitability. Just trying to think through the moving parts in 2024, do you expect that profitability to grow. To what extent are you contemplating any buy downs or any additional reserves given just like the sale truck market?

Chad Dillard:

Great. Thank you. I'll pass the.

Operator:

Thank you. Our next question today is from David Raso from Evercore ISI. David, please go ahead. Your line is open.

Preston Feight:

Sure, sure. I mean, let me start by saying that it's not just a truckload carrier market out there. And in the LTL, the medium duty and the vocational markets, we're seeing strong performance of the products and strong interest from the customers with good order intake. I'd also say that from an overall PACCAR standpoint, as I mentioned, our global markets are doing quite well for us. but to dial in a little bit to your question, David, what I think is happening is the good operators, the ones that are thinking clearly about long term are continuing to buy trucks. And so they're looking to keep their fleet at a reasonable age and buying trucks and continuing that pattern. And then they're managing that against the fact that contract rates and spot rates are lower than they were and trying to maintain that balance of fleet age with capital spending. And we think that's going to continue. We think that there's an emissions change in 2027 and that the sophisticated buyers are conscious of that and take that into consideration as they make their purchase plans. And that will have an increasing effect as we move forward.

Preston Feight:

I think it's fleet dependent. I think it depends on where they're at and what they're hauling, and I think how they're doing and how many trucks they need in their fleet. So I think generalizing that into 2024 might be a little much, but the premise of your conversation or our conversation about does that feature into the -- later this year or next year or the year after? I think there's some truth in that. I think we see positive benefit from that.

Preston Feight:

You bet.

Jeff Kauffman:

Thank you very much. Well, first of all, congratulations, fantastic year.

Jeff Kauffman:

You guys crushed it. I want to ask about two, kind of, oddities if I can. I don't want to focus on the tail wagging the dog, but I think they're relevant questions. The first has to do with what's going on with electric vehicles right now. And it seemed like there was this big push for EV, and you're still seeing that in some of the lighter duty models, but a little bit of a pullback on the heavy side. But we are moving forward with the EV plant for batteries and we're moving forward with investment. What is your feeling about the state of the EV market? And is this a surprise at all? Is it expected, how should we be thinking about framing EV demand for commercial vehicles?

Jeff Kauffman:

Okay. Thank you. And then the second one, I'm expecting, kind of, a no comment on this one, but I'm going to ask anyway. The last time we had a certain Republican President, there were some EPA mandates that ended up being canceled and rolled back and who knows what the future holds. But I think there's an industry think that there is a certainty about a massive 2026 pre-buy. And I think everyone is kind of thinking about that. I know it was part of David Raso's question earlier. Do you political people think there's any risk if there's a Republican victory, and we get a certain presidential candidate back that any of these EPA mandates might be at risk or card mandates might be at risk?

Jeff Kauffman:

Exactly. We're going to drive the road we see in front of us. I get it. Well, again, congratulations and thank you.

Operator:

Thank you. Our next question today is from Jerry Revich from Goldman Sachs. Jerry, please go ahead, your line is open.

Preston Feight:

Yes. It's a fun conversation to have with you. First of all, our hats off to the supply base. They've done a really good job of trying to work through the challenges. And I think as you note, things have become improved, maybe not perfect, but improved, which is good. We're used to that. And I think as we look at it, smoother factories are more efficient factories. And so as we look into 2024, if we have a smoother supply provided to the factories, we will have benefits in that regard. So, it could be a tailwind as you word it.

Preston Feight:

Well, I can say that we have a great group of analysts who understand our business well because I think that your question is salient, it is true. Like we've seen increasing truck complexity over the decades as an industry, with more electronics on them, that contributes to more opportunities. But we do think that the trucks are performing well and we'll be in that kind of normal range again.

Harrie Schippers:

So, you're spot on, Jerry. We've 3% to 5% growth this quarter compared to the record quarter last year, a nice performance. It effect really reflects all the fantastic things our parts team is doing. Focusing on technology that makes it easy to the buyer from us, the e-commerce technology, the MDI, where we manage the dealer's inventory, make sure the parts are available when needed. Our continuous investments in parts distribution centers. The strong performance of the PACCAR engine that provide us more proprietary part. So, it just all adds up, and we've been seeing some nice trends on parts over the years as a result of these and we expect those to continue into this year.

Preston Feight:

Thank you.

Steven Fisher:

Thanks. Good morning. Just as we think about 2024. How much visibility do you have on the truck outlook? Like, how well are you booked into Q1 and Q2? I imagine Q1 is pretty solidly booked and maybe even Q2 at this point, but curious also about the second half. And what are your customers kind of telling you about later in the year?

Steven Fisher:

Okay. Great. And then can you talk about the cost inflation that you're seeing, both on the direct and the indirect side. Is it safe to assume that, that maybe in line with the overall inflation in the economy, maybe you still have some puts and takes in various directions, but it kind of nets out to the overall level of inflation in the economy. And then, if that's the case, is the pricing strategy to sort of just cover those costs? Or do you have maybe some additional cost reduction programs aimed at sort of trying to preserve margins in 2024. I know you always have some efficiency things that you have going on, but I'm curious if this is a year to sort of step up the cost reductions if you're only able to cover inflation with your pricing.

Steven Fisher:

Okay. Thank you, very much.

Operator:

Thank you. Our next question is from Tim Thein from Citigroup. Tim, please go ahead. Your line is open.

Preston Feight:

Thanks, Tim. What I think is going on is we're seeing that over the last couple of years, we've probably been, as an industry not able to supply everyone the trucks they needed. And I think that there's a strong vocational market, a strong LTL market, a strong medium-duty market. So we're now kind of able to build those trucks, and we're seeing that as a different percentage and increased percentage in our backlog. I wouldn't differentiate them in margin. They can both be good margin products for us. On a percentage basis, yes. And then I think that as far as the larger carriers and the impact of it, I think that it's really not that different than many years, right? It's not substantially different. So we don't see anything dramatically affecting our model. We've had some of the biggest carriers ordering a lot of trucks, and we've had some small carriers ordering trucks. But it's all kind of within the normal boundary.

Operator:

Thank you. Our next question today is from Matt Elkott from TD Cohen. Matt, please go ahead. Your line is open.

Preston Feight:

We are the vocational market leader. So there is some benefit in that. And as I mentioned too, I think our teams have done a great job over the last several years developing a new product lineup, which is the newest in the industry, which is helpful to us and I think has given us good backlog. If you think about it at the fundamental level, we tied up in a lot of different things. But at the fundamental level, our goal is to build great trucks for our customers to provide them the lowest total cost of ownership. And when they do that, then they order the trucks. And we think we're doing that well. The products are performing well. They're the best in the industry, and that's contributing to our order visibility.

Harrie Schippers:

Yes. With the -- we've built a record number of trucks last year. MX engines that is for North America, Europe worldwide, I would say. Yes, and the investments that we've been continuing to make in our engine manufacturing capacity. We -- that will help us to grow engine penetration in North America this year. That's a very good position to grow that percentage this year.

Operator:

Thank you. Our next question is from Scott Group from Wolfe Research. Scott, please go ahead. Your line is open.

Preston Feight:

Harrie, do you have any thoughts on that?

Preston Feight:

The only thing I'll add is that volumes continue to be good in that space as well. So we watch both price and volume, and it seems like it's a – it's a big change from what it was, but it's still not at a bad level.

Preston Feight:

Yes

Preston Feight:

My view is that the team of PACCAR, people around the world, whether in the factories or the engineers or the controllers organizations over the last several years have done a fantastic job of building a really robust business. And it's lean, it's efficient and it produces great products for our customers. And I think that's the driving force between the margins that were generated as parts business. It's the truck business. That strength and focus of serving our customers and our shareholders are working really well.

Preston Feight:

Well, what we shared with you is the first quarter we think is 18.5% to 19%. And -- that's pretty darn good.

Preston Feight:

You bet.

Michael Feniger:

Yes. Thanks for taking my question. Obviously, the pricing in 2023 was very impressive. I know you talked a little bit about the used market, I'm curious when we look at the spread between your price increases for 2024 relative to what you're seeing in the used market with trade-in that spread widening? Just any commentary that you're seeing in the used market that kind of informs 2024? Because obviously, the used market was very strong a few years ago. It seems like it's some cooling, but I'm just curious how we think about that spread between the new pricing they use and how to kind of think about that for 2024?

Michael Feniger:

Perfect. And just to follow-up. Another different customers in the transportation market who buy your trucks. You put up excellent truck deliveries in 2023 at a time where spot freight rates were actually falling. And now that we see spot freight rates potentially bottoming and maybe picking up through 2024, how do we kind of think about what happened in 2023 and how that might potentially play out in 2024 and how that kind of translates to demand for your trucks?

Michael Feniger:

Thank you.

Operator:

Thank you. Our next question is from Guillermo Herrera from Gabelli Funds. Guillermo, please go ahead. Your line is open.

Preston Feight:

Thanks.

Preston Feight:

Sure thing. We're really pleased with how the company has performed financially. We have a strong history of dividend payouts of around 50% of net income. We continue to do that. We noted in our comments, record dividend payouts in 2023. We think our shareholders are happy with that approach. We'll continue to do that. We do have uses for cash. Obviously, we are doing this joint venture, which will be something we fund out of cash. PACCAR has got a long history of making strategic acquisitions when they make sense, and we continue to make those evaluations at all times. And having the cash gives us that flexibility to build an even more robust company as we move forward into the future.

Preston Feight:

You bet.

Daniel Johansson:

Hello? Hello? Can you hear me?

Daniel Johansson:

Thank you. Thank very much for taking my question. Sorry, maybe this has already been discussed. And I guess, the question is, has a lot of different levels to think about. But thinking about your cost per unit and how that has been going up a little bit here over the last few years? I mean, there's mix, there is more content per unit, et cetera, et cetera. But how to think about that going forward? And especially so given that you had pretty high capacity utilization last year?

Daniel Johansson:

And should we expect cost per unit to continue to go up, you think, even in a very good volume scenario?

Daniel Johansson:

Okay. Thank you very much.

Daniel Johansson:

Thanks.

Ken Hastings:

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

Operator:

Good morning, and welcome to PACCAR's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions]. I would now like to hand the call over to Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Preston Feight :

Good morning. Harrie, Brice, Ken and I will update you on our record third quarter financial results and other business highlights. PACCAR's outstanding employees delivered this excellent performance by providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR's third quarter net income increased 60% year-over-year to a record $1.23 billion and revenues increased 23% to $8.7 billion. Truck, Parts and Other gross margins expanded to 19.5% in the third quarter compared to 14.9% in the same period last year. PACCAR's global investments in innovative new DAF, Kenworth and Peterbilt trucks, as well as investments in technology and manufacturing were key elements in delivering this strong performance. PACCAR Parts third quarter revenues increased to $1.58 billion. Parts pretax profits were $412 million or 10% higher than the same period last year. PACCAR Parts provides its customers with industry-leading technology that enhances their uptime. PACCAR Financial earned a strong pretax income of $134 million in the third quarter, reflecting its high-quality portfolio. We estimate this year's U.S. and Canadian Class 8 market to be in a range of 295,000 to 315,000 trucks and next year to be in a range of 260,000 to 300,000 vehicles. Customers are replacing their trucks with the new heavy and medium-duty Peterbilt and Kenworth models that enhance their operational efficiencies, achieve industry-leading fuel economy and attract and retain the best drivers. Demand is strong for Kenworth and Peterbilt trucks with the first quarter of 2024 filling in quickly. In Europe, this year's truck industry registrations in the above 16-tonne segment are estimated to be in a range of 310,000 to 330,000 vehicles. The 2024 market is expected to be in the range of 260,000 to 300,000 trucks. The new DAF trucks have redefined the premium truck segment in Europe and offer superior aerodynamics, award-winning fuel economy and enhanced features that make them the driver's choice. The South American above 16-tonne market is projected to be in a range of 105,000 to 115,000 trucks this year and in a similar range next year. DAF Brazil recently celebrated its 10th anniversary and has increased its greater than 16-tonne share to a record 10%. The DAF lineup of trucks is performing exceptionally well for customers in all Brazilian operating environments. PACCAR recently announced its participation in a new battery cell joint venture. The joint venture will be located in the United States and will manufacture battery cells for use in medium and heavy-duty trucks. PACCAR's proprietary battery cells will create value for our customers, and help them achieve their future operational and environmental goals. PACCAR's employees and dealers are delivering excellent results for our customers, and we're excited about the future. Thank you. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Operator:

[Operator Instructions] Our first question today comes from Tami Zakaria from JP Morgan.

Preston Feight:

Happy to start with that, and Harrie can add anything he wants. I think what Harrie shared with you is that we think parts growth is going to be in the 7% to 9% in the fourth quarter. And to your point, on the effective of PDC, it's almost immediately good for the business, right? What a PDC does is it allows us to have closer points of contact with our customers, get them parts in a more quick way and support their businesses for more same day or next day parts delivery. So it's really quickly beneficial to them, Tami.

Preston Feight:

I think what we've been able to do in the last few years, and we shared this as we've introduced more new products at any time in our history, and we continue to that with the new Peterbilt Model 589. Those products are doing exceptionally well for us in the marketplace. So we're pleased with how they're performing and that means performing for our customers. So they're getting value out of that. And I think we'll watch how the market develops for next year and we have a lot better insights into margin and what's going on as we get into the first quarter for 2024.

Steve Volkmann :

Preston, I think it was you who was talking about the launch of the new Peterbilt, I think, in January of '24, you said, sorry if I got that wrong. I'm just curious how big of a launch is that? Okay. Great. How big of a launch is that? How much of your North American revenue could that be? And where I'm trying to go with this is, you guys always seem to engineer in sort of higher margins as you do these changeovers. So I'm trying to figure out how much of a tailwind that might be in 2024.

Harrie Schippers :

The 589 Steve will replace the 389. And a good way to think about it, the 389 is now about 20% of Peterbilt's production. So maybe 6%, 7% of PACCAR's total production. And the 589, like I said, will be placed and maybe grow even a little bit more.

Harrie Schippers :

We -- the portfolio quality, Steve, continues to be very strong. We have a portfolio of almost $20 billion now. with past dues less than 1%. So yes, higher interest rates do drive higher payments for our customers. But with all the new products that we launch that have better fuel efficiency, they do see savings on the fuel bill, that more than offset the higher interest payments in today's environment.

Chad Dillard :

So first question for you is how much visibility do you have into engine rebuilds? And what does it tell you about your engine parts demand or what it could look like more broadly into 2024?

Chad Dillard :

Got it. That's helpful. And the second question, can you talk about your approach to managing the growth in air pocket in '24, just given that you do have a prebuy ahead of the 27 emission standards that could probably start in 2025 and '26? I just want to get a sense for how you're thinking about labor line rates, maintaining your suppliers, so you can catch the rebound.

Operator:

Our next question is from Rob Wertheimer from Melius Research.

Preston Feight:

Rob, I think you're paying attention to what's going on. I mean we do see a really strong vocational market out there. We see a strong medium-duty market. The LTL market is very strong. And then as we were talking about in the last question from Chad, the idea that I think customers that are sophisticated or paying attention to the next few years and want to keep their fleet age at a low level. So there's a lot of contemplation for them to stay on a smart buying cycle for them. And frankly, as we've said and we keep saying, right, these new trucks are providing good value to them. So there's a reason for them to keep buying trucks. And I think that all factors into where we think the market is going to be looking forward.

Preston Feight:

Yes. There were a lot of questions in there, but let me kind of give you an overview and come back into it if you want to. So what we see is, as we move forward, there's going to be a host of technologies employed for how we use motor power. I think clean diesel is going to be part of it. We obviously think that batteries are going to be part of it as we did this joint venture into proprietary battery cells. And we think that hydrogen can play a role as well, whether that's internal combustion or it could be through fuel cells. But in the case of batteries, when you create a battery electric vehicle, the cost of the vehicle is highly impacted and influenced by the cost of the battery. So having it be more vertically integrated is an advantage, we think, for our customers and gives us an ability to control both the energy in the battery as well as the battery energy management system to the vehicle. So we felt like getting involved in that space was important, and we think that will be a few years before it develops. Obviously, we don't have our regulatory approvals yet. And so we'll give a little bit of caution that we need those approvals for forward-looking, but that feels like it's going in a good direction. And then as I think about the kinds of chemistry you asked about the technology we've chosen is LFP, lithium-iron-phosphate or some derivative of that that we might use. And the benefit of that is it's a safer battery chemistry. It doesn't rely on rare earth minerals. It's more durable, it's faster to charge, and it has a better life capability. So -- and a better cost structure. So all of those factors are the reason we chose that technology and just huge credit to our technology teams who have thought this through for the last several years as they made this decision and got us going on this great path.

David Raso :

The comments earlier about the first quarter of '24 are starting to fill up quickly. Can you give us some insight on how the pricing is for those first quarter deliveries? And then maybe a sense of the cadence year-over-year that you expect the U.S./Canada down 8% to play out for the industry?

David Raso :

That's helpful. The order book right now, how far can the dealers order out to, say, U.S., Canada into '24?

Operator:

Our next question is from Jerry Revich from Goldman Sachs.

Harrie Schippers :

And the new DAF is currently a little over 80% of all the trucks that DAF is building. I remember DAF was also building trucks for export outside Europe. But I would say within Europe, almost all the trucks that we're selling are the new DAF with the improved aerodynamics and the better fuel economy because that's what customers want. And then going forward, yes, we're planning to bring that new DAF product also to other markets. And any market where we're currently selling DAF is an opportunity to sell the new DAF in the future.

Harrie Schippers :

Well, like I said, the 589 is -- the 389 is 20% of Peterbilt's production. So it's about 6%, 7% maybe of PACCAR's production. So with the 589 replacing the 389 next year, it will be a similar percentage, I would think as the 389 is today.

Preston Feight:

Of course, yes, I'll help a little bit here. Like you see what our R&D numbers are for next year. We think there's a ton of great projects that we have out there that provide good value to our customers and shareholders. And so we -- that pipeline is very full.

Preston Feight:

I think you just captured the issues that are unknowable at this point right now. Regulation is a factor. Energy is a factor. Infrastructure is a factor and the rate of adoption for EVs. Price is a factor as well. But our position is as PACCAR is, we want to make sure that we offer our customers the right solutions, right? So we make the investments now. We're less concerned about whether the adoption curve is rapid in '27 or if it's '28 or whenever it is. We'll have great diesel engines, we have great electric vehicles, great hydrogen vehicles. And that puts us in a position of supporting their needs regardless of the circumstances.

Steven Fisher :

Preston, you gave us some reasons for generally high margins in terms of the investments in technology and manufacturing, but I guess what was so much better than you expected in margins in the quarter at the TPO level? I mean still like 100 basis points above your midpoint. So just curious kind of was there any 1 of those factors or just conservatism that you're now baking into your numbers?

Steven Fisher :

Okay. That's helpful. And then I'm just curious what indications do you have from your suppliers for costs on 2024. At this point, does it make sense to assume that the costs are generally going to be higher? And do you have an overall sort of cost strategy as you think about framing up 2024 at this point?

Steven Fisher :

Okay. I just had 1 quick clarification. The cost you mentioned on the R&D -- or sorry, on the new battery plant. How does that flow through the financials? Is that going to be a -- is that part of R&D costs? Or where does that flow through?

Operator:

Our next question is from Tim Thein from Citigroup.

Preston Feight:

Absolutely, Tim. Fun to talk about it. I think that the overarching view I take of it is our parts team has done a great job of transitioning over the past several years, they're not really parts providers, they're transportation solutions providers, right? So they're thinking about what's valuable to the customer and what's valuable in the engagement with the dealer. And they've done a really good job of that. And I think that's foundationally lifted their performance over time, which goes along to the -- was it roughly 9% per year growth they've had over the past 20 years. So I think that they've done a really nice job of continuing to evolve the business through the application of technology and analytics, and I expect that, that will over the medium term continue and long-term continue. So positive in that regard. I heard everything you said about the sensitivity to market, there's truth in that as well. And that way, we'll just look at what 2024 does.

Preston Feight:

Yes. Very good, Tim. You did ask that the first time. Sorry, I missed it. We saw that there was some probably strong interest in having enough inventory when supply was limited. And I think that, that was mitigated for a little bit. And I would say things are more back to normal in terms of overstock, destock and kind of sitting at a level where inventory feels like a rational and healthy level for our dealers now.

Nicole DeBlase :

Maybe just starting on Europe. So obviously, a lot of talk about U.S. and Canada on this call, but what are you guys seeing from an order perspective within Europe that's kind of underpinning a weaker outlook for 2024 relative to the U.S.?

Nicole DeBlase :

That makes sense.

Nicole DeBlase :

Understood. And then in the U.S., can you just speak to a little bit of what you're hearing by customer side? So any major divergence in order activity from like small versus medium versus large fleets?

Operator:

Our next question is from Matt Elkott from Cowen.

Preston Feight:

Better than the forecast in terms of?

Harrie Schippers :

Our strong presence in the vocational segment where we have 40% market share, that strength obviously should translate into PACCAR doing really well next year.

Preston Feight:

Well, I think what we did is we gave the forecast with the range because that's what we think the range could be, right? That's why we came out 260 to 300 because that's how we see it.

Preston Feight:

Well, our truck plants, and it's a good opportunity, thanks for bringing it up. I mean, the mixture and how that works is our truck plants are just done an absolutely amazing job around the world, managing the last few years, and they are artisans at being able to build the trucks that they need to build. So I couldn't be more proud of them and pleased with the results that they've delivered. And I think that if we see mix shifts from on-highway into the location market, that's very adaptive for us. We can build any truck in our factories that we need to and they're very good at putting those trucks out. So I think that, that will be just fine for us if we see that shift, and it won't -- it will be -- and it will be good for PACCAR and good for our customers.

Jeff Kauffman :

Congratulations. I want to think a little bit that -- you're welcome. I want to think a little bit about this joint venture. So you said I guess, 2 questions. Number 1 on CapEx. You said $600 million to $900 million. Let's assume that you can get all of the approvals that you need, does that imply when we're thinking about '25, '26 CapEx, we could be looking at $1 billion plus in terms of total firm CapEx? That's question one.

Harrie Schippers :

So the $600 million to $900 million investment in the joint venture will be showing up as an investment. It will not show up as our capital investment plan. So the capital numbers we just mentioned for this year and next year are without the joint venture.

Preston Feight:

Yes, Jeff, that is perfect math. I think you can use that and you probably can go back to the future with that.

Scott Group :

So I just wanted to just follow up on 1 of the earlier questions. What percentage of your mix is typically the large truckload? And then within the 2024 trucks, is there any change in mix of sales with the MX versus not? Is that mix going higher or lower?

Scott Group :

And then any changes again in the -- of what you're selling for '24 if MX penetration is higher, lower, unchanged?

Scott Group :

Okay. Any color on how to think about the FinCo margins from here, loss provisions up a little bit. But how do we think about FinCo from here?

Scott Group :

Okay. And then if I could just ask 1 more, just big picture. I know there's been a lot of questions about gross margin. But you go back 30 years, it's never -- you've never had a year at over 16%, and this year is going to be over 19%. So it's a lot of what you've been talking about. I guess what do you think is the right -- what's the new range that you would think about through a cycle for PACCAR gross margin going forward?

Operator:

Thank you. This is all the questions we have today. So I'd like to hand back to management for any closing remarks.

Operator:

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.

Operator:

Good morning and welcome to PACCAR’s Second Quarter 2023 Earnings Conference Call. All lines have been in a listen-only mode until the question-and-answer session. Today’s call is being recorded and if anyone has any objection, they can disconnect at this time. I would now like to introduce Mr. Ken Hastings, PACCAR’s Director of Investor Relations. Mr. Hastings, please go ahead.

Preston Feight:

Hey, good morning. Harrie Schippers, Brice Poplawski, Ken Hastings, and I will update you on our second quarter financial results and business highlights. I’ll start by saying thank you to PACCAR’s great employees who continue to deliver excellent results and provide our customers with the best trucks and transportation solutions in the world. PACCAR achieved record revenues and net income in the second quarter due to its excellent portfolio of new trucks, robust aftermarket parts business, healthy financial services performance and continued strong market demand. PACCAR’s revenues increased 24% to $8.9 billion. Net income increased 70% to $1.22 billion. PACCAR Parts’ second quarter revenues increased by more than 11% to $1.6 billion. Parts’ pretax profits were $419 million, 19% higher than the second quarter of last year. Truck, parts and other gross margins were excellent in the second quarter at 18.8%, up from 14.4% in the same period last year. PACCAR is delivering structurally higher margins as a result of our investments in the industry-leading new range of premium trucks, our sophisticated and successful aftermarket parts business, and as a result of our overall global growth. PACCAR’s innovative research and development programs and partnerships provide our customers with the right products and technology to help them optimize their operations. During the second quarter, we’re pleased to announce the expansion of our strategic partnership with Toyota to develop and bring to market zero emissions hydrogen fuel cell-powered Peterbilt and Kenworth trucks. PACCAR’s Powertrain portfolio of hydrogen fuel cell, hydrogen combustion, battery electric and clean diesel technologies position the company and our customers for an excellent future. PACCAR Financial also had an excellent quarter, achieving profits of $145 million due to its high-quality portfolio and positive used truck results. Looking at the truck market. Industry build has been gradually increasing this year. And in the US and Canada, we estimate that Class 8 market to be in the range of 290,000 to 320,000 trucks. The 2023 European truck market is expected to be in a range of 300,000 to 330,000 units. We project the South American above 16 tonne truck market to be in a range of 105,000 to 115,000 vehicles this year. South America is an important region for PACCAR’s geographic growth. DAF Brasil has done an excellent job growing market share since we opened the business 10 years ago, achieving a record 9.2% share in the first six months of this year. As we look forward to the rest of this year, and 2024, the truck markets are expected to remain healthy and PACCAR will continue to deliver excellent performance. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Operator:

Thank you. [Operator Instructions] Our first question today is from Steve Volkmann from Jefferies. Steve, please go ahead. Your line is open.

Preston Feight:

Well, Steve, it’s good to talk to you. Thanks for the question. I’d start by saying being full for 2023 right now is a great place to be operating from. The markets continue to be healthy for us around the world, and what we see is that we have great conversations going on with our customers, and so we’re having great conversations around what the trucks are going to be and their order needs are going to be for next year. There are some sectors out there that are exceptionally good. That’s LTL, vocational and otherwise, and demand is expected to be strong.

Preston Feight:

Well, Steve, you know we don’t provide 2024 guidance in this call. And I think you do hit up on a really good point, though, which is the structural improvements of PACCAR compared to a few years ago are significant, right. The product investments we’ve made; industry-leading trucks we have in Europe that are significantly outperforming; the growth we have in South America, which is significant; the new medium-duty products in North America; and the fact that PACCAR Parts is doing such a great job with being a high-margin, high-growth, technology-driven transportation solutions provider for our customers, all of those things contribute to a great future.

Preston Feight:

You bet. Have a good day.

Tami Zakaria:

Hi. Good morning. Thank you so much for taking my questions. So my first question is, since your order books are full for this year, like you said, you probably have visibility into fourth quarter deliveries as well. So should the fourth quarter deliveries be sequentially better than the third quarter or possibly the highest delivery quarter of the year? Or how should we think about 4Q versus 3Q?

Tami Zakaria:

Got it. Thank you. And then, can you comment on what was the price realization for trucks and parts in the second quarter? And do you expect price realization to sequentially decline in the back half?

Harrie Schippers:

Pricing for trucks in the second quarter was up 15%. We saw significant cost increases still in the order of magnitude of 9% for trucks. And then for parts, cost increases were a little higher, but more than offset by price increases for parts of around 13%.

Harrie Schippers:

So with that –

Harrie Schippers:

No, with all the new products and the structural improvements that Preston just explained, I think we’re in a good position to maintain our pricing discipline.

Tami Zakaria:

Perfect. Thank you.

Operator:

Thank you. Our next question is from Chad Dillard from Bernstein. Chad, please go ahead. Your line is open.

Preston Feight:

I guess we don’t spend as much time thinking about it in those terms. We continue to think about it in terms of the relationships we have with our customers, the strength of the product performance and the value that provides to the customer. Like as we’ve shared before, the new trucks are providing you know at least 7% improvement in fuel economy, which is bringing thousands and thousands of dollars of benefit to our customers, there’s the trucks that these drivers want. And so I think our customers make a good decision around trying to buy the best product for their operations which are PACCAR’s products, and that gives us a good pricing position as a premium brand in the market. Cost. Well, cost is something that you know you get to follow as much as us, and we look at the world around us and see some movement in costs in positive ways and still labor pressures on the other side of it. So it’s a little bit ambiguous.

Preston Feight:

I think the Parts business is growing for several reasons. One is it’s because our ability to get parts to our customers in the same day or next day has changed a lot. So we are the desired place to go for parts for people. I think the application of technology by our team has been an enabler as well, like we make sure that our dealers have the right parts that they need and support. And I think that understanding our customers’ needs is how we think about it. So, Parts is really a transportation solutions provider, which makes them the go-to source for customers. And we think we’re the leader in that space, and that helps us grow the business through all parts of the coming years.

Preston Feight:

You bet.

Rob Wertheimer:

Thank you. Good morning, guys.

Rob Wertheimer:

Just a mechanical question on how you typically open orders for the year forward? Are you still holding back at all just on containing other uncertainty? And then a real market-based question on vocational trucks, whether you expect or have already seen some of the strength that may come with the infrastructure bill or general construction appearing there and whether there are any constraints on that market growth from body building or other capacity issues? Thank you.

Rob Wertheimer:

Got it. Thank you.

Operator:

Thank you. Our next question today comes from David Raso from Evercore ISI. David, please go ahead. Your line is open.

Harrie Schippers:

So the 6% to 8% growth in the third quarter, what you have to take into account, David, is that last year, we saw a very strong growth in Parts, especially in the third quarter. And with this 6% to 8% growth, we expect the year to be 10% to 13% higher than last year, which is excellent and above our long-term average.

Harrie Schippers:

I wouldn’t call it a slowdown, David. I think with the Parts business is growing 6% to 8% in the quarter, 10% to 13% for the year. That’s an excellent performance by the entire PACCAR Parts’ team.

Harrie Schippers:

Sure. Of course, it’s a combination of volume and price.

David Raso:

That’s fair. Okay. So we’re just sort of normalizing the Parts after heavy last year kind of stocking. And then by the end of the year, you’re hopefully balanced here on the Parts? Is that sort of the idea?

David Raso:

Okay, thank you. And one follow-up. On the order books for ‘24, are we looking to do that a quarter or six months at a time like we’ve done recently? Or more return to a more traditional you know open up for the full year? Thank you.

David Raso:

Okay. I appreciate it. Thank you.

Operator:

Thank you. Our next question is from Jamie Cook from Credit Suisse. Jamie, please go ahead. Your line is open.

Preston Feight:

So the first part of your question, Jamie, good talking with you, is really around – I do think that the supply constraints continue at some modest level, and that modest level does provide a tailwind to the market in 2024. I agree with you. I think on the second side of your question, I don’t know, maybe Harrie has thoughts on it or something like that. But –

Preston Feight:

Yeah. To add into it, I would say like you know our build percentage is increasing. And as our build percentage increases, which has been supply-constrained, then our market share grows. And we see nothing but strong demand for the products. So it’s really just about being to associate that demand, and that’s just going to take us some time to get the build out.

Preston Feight:

You bet.

Steven Fisher:

Great, thanks. Good morning. So within your 18% to 19% Q3 gross margin forecast, can you just help us with some of the underlying factors there? I assume the European shutdown will be a headwind. So does that mean kind of mix of Parts versus Trucks is a tailwind that offsets that? Or the mix from new models is still a tailwind? What – or are there other factors to consider? Maybe you could just help us with a little bit of buildup of how that kind of stays in that range.

Harrie Schippers:

I would echo that. If I look at the third quarter, it’s probably just a continuation of what we’ve seen in the second quarter.

Preston Feight:

Yeah. I would say that what we’re doing in Chillicothe is what we do all the time, which is making investments into our facilities to increase capacity and efficiencies. It’s just a good example of it in Chillicothe, and that 105,000 square foot building expansion we did there just helps us get more product out and even increases the level of high quality to a next level-up. From a build-out standpoint, that’s just what we do. Like I said, we’re doing it there. We’re making investments in Columbus. We’re making investments in Mexico. Really all around the world in South America. So, we see the growth of PACCAR in the long-term, and so we want to make sure that we’re prepared for that with the factories. From a supply base standpoint, we have great suppliers. We work closely with them to make sure that they have the capacity. Obviously, they’ve had unusual circumstances in the past couple of years. I’d expect some normalization there, and we’ll continue to work closely with them to make sure that they can provide the product we need.

Preston Feight:

You bet.

Tim Thein:

Great, thank you. Good morning. Yeah, Preston, it’s just, I guess, yet another one on the Parts business, and I think you know this will be a North American focus. But I’m just curious you know if you listen to some of the public truckload companies that have reported. I mean they’ve seen some pretty – you know a lot of pressure just in terms of utilization and pressure on profitability. I’m just curious you know a lot of the discussion was just on the positive messaging that you’re kind of conveying. But any warning signs that you’re seeing or hearing from either your large fleet customers or your dealers in terms of you know sometimes when you get pressure on profitability, you may get some maintenance intervals that get pushed out or a rebuild that get extended or what have you? I’m just curious if there’s been any signs of that? Or is it just, they’re chugging right through that and it’s you know that the business is not feeling that? I’m just curious it’s kind of real time what you’re hearing from the team specific to your truckload customers.

Tim Thein:

Got it, okay. And that makes sense. And then just within your truck order board within the backlog. Is there you know historically, PACCAR, again, more North American-oriented question. But pretty well balanced you know certainly at least against some of your OEM peers across you know small, mid, large-sized fleets. Is the order board and kind of the – how the deliveries have played out, are you seeing more – has that shifted more towards your big large fleets or I guess you know large fleet this year? And what do you think about the investment appetite for your small to mid-sized carriers as you think about ‘24?

Tim Thein:

Got it. Okay.

Operator:

Thank you. Our next question comes from Nicole DeBlase from Deutsche Bank. Nicole, please go ahead. Your line is open.

Harrie Schippers:

That is correct, Nicole. And Europe that has a 3-week summer shutdown every year. It takes three weeks of production out. And some of that is offset by higher production in all the parts of the world.

Preston Feight:

Yeah. That’s a – it’s a great question. It’s one that the customers are trying to understand the choices out in front of them, right, with the regulations coming, they’d like to know whether they’re going to be using clean diesel, whether hydrogen infrastructure is going to develop, whether they can use hydrogen combustion, hydrogen fuel cells or battery electric. It seems like it will be some combination of both for a while or some all of the above for a while. And so I think there is quite a bit of an interest on behalf of Peterbilt and Kenworth and the Toyota fuel cell project, and we’ve got strong inquiries and orders for that already. And I would expect people will explore that. Obviously, they’re trying to balance this total cost of ownership for all the different technologies and it’s early days, and I think that they’re trying to learn right now more than they’re trying to convert.

Operator:

Thank you. Our next question is from Jerry Revich from Goldman Sachs. Jerry, please go ahead. Your line is open.

Preston Feight:

Sure. Thanks for the question. I do think that what the investments we’ve made over the past several years are paying off. I mean are paying off in a bunch of different markets. So paying off in the fact that within DAF in Europe, we have the only truck that complies with mass and dimensions is fully compliant with that. It provides great aerodynamic benefit, great driver benefit we’re able to sell it at a higher price and provide better profitability for ourselves, because the customers get a benefit in that fuel economy. Similarly, at Kenworth and Peterbilt, the new T680 and 579 are doing a great job of providing the industry’s leading fuel economy for our customers. And then the new medium-duty products that we launched give us a different level of profitability in the medium-duty space and customer benefits as well. So all of those things kind of are taking our profitability to a structurally-improved level. And South America, I should add, is also a business growth area for us where that’s contributing. So we see that these are sustainable, long-term advantages. And then to the second part of your question about future. Well, we couldn’t be more excited than we are about the investments we have going forward. There’s a whole suite of things that we’re working on right now that I think will just continue to set the standard in terms of premium trucks and transportation solutions.

Harrie Schippers:

Yeah we continue to control our SG&A expenses very tightly. That’s how we run the business. So we’ve seen some increases here and there, but it’s offset by being more efficient elsewhere and, a very controlled SG&A spending level going forward is what you’re going to expect from us.

Preston Feight:

Yeah, I think that that’s – it’s a fair observation that a year ago, things were pretty tight and constrained in terms of Parts inventory, and that’s been maybe ameliorated to some percentage. So that’s helping people get their service done in a more quick way which is good for our customers, which is what we’re always out for.

Preston Feight:

And it’s helped us as we grow our overall share of the Parts business.

Operator:

Thank you. Our next question is from Matt Elkott from Cowen & Co. Matt, please go ahead. Your line is open.

Preston Feight:

I think is that – I think what you’re saying is that you can imagine the European economy has maybe – has felt like the mouth kilometers are down a little bit year-over-year, and we recognize that. But we do think that the new truck is performing so well that that’s to our advantage in Europe.

Preston Feight:

No, I think that we do still think it can be a solution. I think that it depends upon regulatory allowance. Like in Europe, hydrogen ICE is allowed as a zero emissions product. That’s not determined yet in the North American space. It has to be still discussed with the agencies. Again, we think that there is efficiencies of fuel cells and different efficiencies with hydrogen ICE and different ones for battery electric. So I think it’s important that we explore and work through all of those and figure out what the best total cost of ownership is for our customers because that’s really what we’re driving for. And that’s the level of the conversation right now. And we think it’s a bit early to make a call on which one is going to be right. We do think that diesel engines will be a significant part of that for the years to come.

Preston Feight:

I don’t know if there’s a way to gauge it. I would say the suppliers are doing a pretty good job of trying to work through it as quickly as they can and trying to increase their capacity and meet the – satisfy the market. Nobody wants to do it more than them or us. And so together, we’re working through that. And I keep seeing this improvement. It’s far better than it was a couple of quarters ago, and we expect it will be better in the quarters to come.

Operator:

Thank you. Our next question is from Jeff Kauffman from Vertical Research Partners. Jeff, please go ahead. Your line is open.

Harrie Schippers:

The average sales prices of trucks have gone up quite a bit over the last couple of years. We said earlier during the call, in the second quarter, pricing was at 15%. So even with 2% growth in the total fleet for PACCAR Financial, the total assets grow with the higher prices per truck as well, of course.

Preston Feight:

Well, sure, happy to do that. So 2024 is when we think we’ll be putting fuel cell trucks out there with the Toyota project. So that’s – we’ve already done 11 of them in the market. That was our first fleets that we did last year, and now we’re kind of just finishing up what will be a higher volume run. We expect that to be in the hundreds still. It’s kind of what I would expect on the fuel cell level. Your comments on people pulling back or not, we see still strong interest on EV, battery electric EV, but there is an infrastructure thing that needs to be worked through as a society. What our position is, is PACCAR will have the best products, whether they’re battery electric, diesel, hydrogen fuel cell, hydrogen combustion. We’ll have that entire suite available, and then we’ll be ready for the market. So we work closely with the regulatory agencies to support them and work with our customers to support them and puts us in a great position for the future. We could not be more excited about the kinds of technologies and what that does for PACCAR’s future and how we’ll perform.

Preston Feight:

You bet.

Michael Feniger:

Thank you. Preston, are you seeing anything in the Truck market in terms of the way freight moves or your customers’ purchasing patterns that maybe suggest a normal traditional replacement cycle? It’s higher than what we’ve observed historically. Are fleet operators trying to keep a younger fleet? Or any other trends that maybe what we normally think is replacement demand if the market returns there is actually higher given some changes in the freight and the transportation market?

Michael Feniger:

Helpful. And you mentioned earlier in the call how used truck values have moderated, yet still high on a historical basis. Do you find the spread between new truck pricing and your used truck pricing wider than normal? Or is the moderation in used truck values more of just a normalization of production? Curious how you’re kind of seeing that used values playing out in the second half of this year?

Michael Feniger:

Thank you.

Operator:

Thank you. [Operator Instructions] We have no further questions. I would like to hand back for any closing remarks.

Operator:

Thank you, everyone for joining today’s call. You may now disconnect your lines, and have a lovely day.

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. [Operator Instructions] I would like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Preston Feight:

Hi, good morning. Harrie Schippers, Michael Barkley, Ken Hastings and I will update you on our first quarter results and our business highlights. PACCAR achieved record revenues and excellent net income in the first quarter due to continued strong global demand for trucks, aftermarket parts and financial services. PACCAR's revenues increased 31% to $8.47 billion and net income was $734 million, including an after-tax non-recurring charge of $446 million. The charge release to civil claims in Europe was previously reported in an 8-K last week and is the total estimated cost. Excluding the non-recurring charge, first quarter adjusted net income was $1.180 million, up from $600 million in the first quarter of last year. In the first quarter, Truck, Parts and Other gross margins expanded to a record 19.3%, compared to 15.9% in the fourth quarter of last year. PACCAR is benefiting from investments in new truck models, global growth and PACCAR Parts continued expansion. PACCAR Parts first quarter revenues increased by 17% to a record $1.62 billion. Parts pretax profits were a record $439 million or 29% higher than the same period last year. PACCAR Financial had an excellent quarter, achieving pretax income of $149 million, 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. 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.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 16 tonne market projection to a range of 280,000 to 320,000 trucks. The South American above 16 tonne truck market is expected to be in the range of 115,000 to 125,000 vehicles this year. In Brazil, DAF achieved a record 8.6% share in the first quarter. 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. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Harrie?

Preston Feight:

So as we complete our comments, I'd like to thank our Senior Vice President and Controller, Michael Barkley, who'll 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 are appreciated and you'll be missed. Joining us today and for future calls is Brice Poplawski, our new Vice President and Controller. Brice has been with PACCAR for 25-years. Welcome, Brice. So now we're pleased to answer your questions.

Tami Zakaria:

Hi, good morning. Thanks so much for taking my questions. Congrats on the great results. That gross margin number was nothing less than spectacular. So in hindsight, what was the biggest source of the upside versus your original guidance of 16% to 17%, and is the 18% to 19% that you're expecting for 2Q sort of a good run rate for the rest of the year?

Tami Zakaria:

Perfect. If I can ask one more question. Sure. Sure, Harrie.

Tami Zakaria:

Got it. Thank you so much. And if I can ask one more, I think some industry data showed some order slowdown, but my understanding is that PACCAR numbers are not really in that data. 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 third or fourth quarter, your order books have opened? Any comments on order trends you're seeing?

Q – Tami Zakaria:

Great. Thank you so much.

Operator:

Thank you. Our next question comes from the line of Dillon Cumming with Morgan Stanley. Please go ahead.

Harrie Schippers:

Yes. I'm not aware of any customers that are not going to get the financing that they need. It's good to have PACCAR Financial, who was able to finance our customers in good times and bad times. PACCAR Financial had a great quarter. We're financing about 25% of the trucks that we sell in some years, that has even grown to 30%. So we're there for any customers that need us.

Preston Feight:

Well, I think that we feel good about 2023, as we said. We think we have an excellent year that we're working on right now. We see continued strong demand for the products. I mean, I 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. And as Harrie mentioned, the Parts business continues to perform well. 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 in those things. They contribute to good performance for the company.

Preston Feight:

You bet.

Chad Dillard:

Hi. Good morning, guys. So my first question is compared to the last cycle. Can you just talk about how much structural uplift in Parts margins do you think you've seen?

Chad Dillard:

That's helpful. And then 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?

Chad Dillard:

Great. Thank you.

Rob Wertheimer:

Hi, thank you. My question is on supply chain as you, kind of, exit on Q. Industry volumes seem to have improved markedly. You guys obviously had extraordinary [technical difficulty] And so I'm curious, is supplying disruption, direct costs from shipping, et cetera. back to normal? Is there still more improvement to be had there? And how would that, if at all, impact your decision on pricing?

Rob Wertheimer:

Okay, perfect. Thank you. If I ask 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. Thank you.

Rob Wertheimer:

Great. Thank you.

Operator:

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

Preston Feight:

Well, in the first quarter, 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 first quarter, there were some trucks that we didn't finish delivering. So we had better absorption in the first quarter than we might see in the second quarter, which contributes a little bit. And I don't know if there's anything you'd add, Harrie to that, but…

Steve Volkmann:

Yes, still very high, but just wanted to understand the moving parts. 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?

Steve Volkmann:

Understood. Thank you, guys.

Operator:

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

Preston Feight:

Why don't we take it in reverse order. I would say that we're already having good conversations with some of the customers about their needs in 2024 and there's a strong interest in the truck, 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?

Preston Feight:

And then your first question, you asked about price cost. I think we have shared that we had good price to cost realization in the first quarter. We expect that in the second quarter, and we have a good order book for the third and fourth quarter. So it should be pretty good.

Harrie Schippers:

That's correct.

Preston Feight:

You bet.

Jamie Cook:

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 margin? 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.

Jamie Cook:

Thank you.

Operator:

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

Preston Feight:

Harrie, do you want to share some thoughts on that?

Preston Feight:

And I would add into that, everything -- I'll echo everything Harrie said, but I'll say our dealer has done a really good job of making investments into their workshops, 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 three 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.

Harrie Schippers:

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 been really successful, well executed by the operations team in Europe.

Harrie Schippers:

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 build in a very efficient way.

Preston Feight:

You bet.

Tim Thein:

Yes, 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 -- do you now see that higher just given what you see in the first half of the year?

Tim Thein:

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? 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, and 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? And I'm just wondering if there's been somewhat of an emphasis to maybe get 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?

Tim Thein:

Okay, all right. Thanks for the time.

Operator:

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

Preston Feight:

Is your question compared to pre-COVID, did you say?

Preston Feight:

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 second quarter is also a high number. So I would say that great suppliers, good partnerships there and they are doing generally a good job. And there's just always opportunities to keep improving. And we do that together with them.

Preston Feight:

We think the $600 million to $650 million 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, it's the third phase of our battery electric vehicles, it's engine platforms that we're developing is 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.

Preston Feight:

You bet.

Nicole DeBlase:

Yes, thanks, guys. Good morning to you. Can we just start with South America. I think you tweaked your industry forecast a bit lower there. So would love to hear what you're hearing on the ground in that region.

Harrie Schippers:

Yes, at the same time, Brazil is transitioning from Euro 5 to Euro 6. And we know DAF has an excellent Euro 6 product in the market out there. So a great opportunity for us to grow our market share a little bit further.

Preston Feight:

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.

Preston Feight:

All right, you bet.

Jerry Revich:

Yes, hi. Good morning, everyone. And Michael and Brice, congratulation.

Brice Poplawski:

Yes, thank you.