Q3 2020 Paccar Inc Earnings Call

All lines will be in a listen only mode until the question and answer session.

Today's call is being recorded and if anyone has an objection. They should disconnect at this time.

I would now like to introduce Mr., Ken Hastings, Paccars director of Investor Relations.

Mr. Hastings. Please go ahead.

Good morning, we would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, Paccars director of Investor Relations.

Joining me this morning, our press them twice Chief Executive Officer every skippers, President and Chief Financial Officer, and Michael Barkley Senior Vice President and controller.

As with prior conference calls, we ask that any members of the media on the line participates in a listen only mode.

Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions.

It may affect may affect expected results.

For additional information please see our SEC filings and the Investor Relations page I heard dot com.

I would now like to introduce reference site.

Hey, good morning.

Very skippers, Michael Barkley and I will update you on our excellent third quarter results and business highlights.

First and foremost I appreciate our outstanding Paccar employees.

Continued to focus on staying safe and healthy while delivering the highest quality trucks advanced power trains and transportation solutions to our customers.

Paccar achieved strong revenues and net income in the third quarter.

Hi, Carl quarterly truck deliveries doubled to 36000 vehicles compared to the second quarter of this year.

Quarterly sales and financial services revenues were $4.9 billion and third quarter net income was $386 million.

Paccar parts achieved quarterly revenues of over 1 billion and pretax profits of $210 million exceeding the strong third quarter of last year.

Truck parts and other gross margins increased to 12.8%.

Paccar financial achieved robust new financing business and pre tax income of $56 million.

US and Canada class a truck industry orders through September were 18% higher than the same period last year.

Paccar expects fourth quarter deliveries to be 10% higher than the third quarter as build rates increase in all markets.

The fourth quarter with fewer Bill days in North America, and more Bill days in Europe.

Fourth quarter truck parts and other gross margins are estimated to be in a range of 12% to 13%.

We have raised our 2020 market size estimates in North America Europe.

Europe and South America.

We estimate class eight industry retail sales in the us and Canada to be in a range of 190 to 210000 trucks. This year.

Peterbilt and kenworth have achieved 29.7% market share through September.

Compared to 29.2% for the same period last year.

For 2021 US economy is expected to grow about 4% and we estimate us and Canadian class eight truck market to be in the range of 210 to 250000 vehicles.

In Europe truck industry registrations in the above 16 tonne market are estimated to be in a range of 210 to 230000 vehicles. This year.

DAF has achieved market share of 16.1% through September of this year.

In European economies are projected to grow about 5% next year, and we expect to truck registrations to increase to a range of 230 to 270000 units.

The South American above 16 tonne market is projected to be in a range of 95 to 105000 units next year.

Dot, Brazil introduced a new XF truck in the third quarter, which has been well received by our customers.

In the Brazilian above 40 ton segment, where das competes tough market share through September increased to a record 9.3%.

Paccar zero emissions vehicle programs continue to move forward.

We've begun accepting orders for our industry, leading battery electric trucks that will serve the medium duty regional haul and refuse markets in Europe and North America.

Production of these trucks will begin next year.

Vehicle charging stations will be available through paccar parts.

We're pleased to share that Paccar, kenworth, Peterbilt paccar parts and Diana craft were each recognized as a top company for women to work for in transportation by the women in trucking Association.

We were honored for excellent working environment and company culture that supports gender diversity.

Paccars committed to hiring and promoting the most talented people in the world.

And we know that the best people represent the diversity present in the global community.

Harry Skippers will now provide an update on paccar parts Paccar financial services and other business highlights. Thank you Harry.

Thanks Preston.

That's helpful to use to provide excellent operating cash flow for reinvestment in future growth.

Distributions to stockholders.

Last month, the second board of Directors announced a regular quarterly dividend of 30.

32 cents per share.

Pick apart achieved quarterly revenues of $1 billion and $20 million.

Pre tax profits $210 million.

Becca parts benefited from the economic recovery Heidi.

Hi truck utilization.

Growing global distribution network and is.

And investments in our state of the art E Commerce platform.

Ecommerce is pickup parts fastest growing business.

Becca financial services third quarter revenues.

I don't have the $98 million.

Pre tax income was $56 million.

These results reflect strong portfolio performance.

Low pass dues and record used truck sales.

Robust used truck sales led to a reduction to introduction used truck inventory.

Like a financial is increasing its used truck center capacity worldwide, which enhances margins.

Becca financial recently opened used truck centers in the all fronts.

In Texas and in Prague, Czech Republic.

And plans to open another facility in Madrid, Spain next year.

Because truck resale values command a premium over to competition.

Research and development expenses.

Expected to be interchange of $270 million to $218 million this year.

Capital investments are projected to be in a dangerous $570 million to $600 million.

In 2021, we're planning for R&D expenses, assuming a 32 $360 million I can.

Capital investments of $575 million to $625 million.

Beck, our is investing for long term growth and new truck models low emission diesel zero emissions powertrain technologies as well.

As phones driver assistance systems and connected services.

And finally, our independent Kenworth Peterbilt and DAF dealers continued to provide outstanding support to our customers.

Our dealers are well capitalized and have invested $2.6 billion in their businesses in the last 10 years.

Making a significant contribution to fact gross success.

Thank you we'd be.

Pleased to answer your questions.

At this time, if you would like to ask a question. Please press star one on your telephone keypad.

Our first question comes from the line of Nicole Deblase with Deutsche Bank. Your line is open.

Yes. Thanks, Good morning, guys. Good afternoon warranties crisp.

I guess, maybe starting with the outlook for Q.

Are you guys said that you expect to build rates to increase across all markets is there any way that you could kind of characterize the level of growth that you're seeing.

North America versus Europe, given that element of Bill days.

Yes, great comments, Nicole since you already captured part of the answer and talking about Bill days, but we have seen increases in build rates.

Throughout the third quarter.

And more than doubling from the second quarter. The fourth quarter will also see increases in build rates.

Daily build rates in all markets and then from a total delivery standpoint, we'd expect to see it.

Higher number of deliveries in.

In Europe because of the mix, there, where we have more build days in Europe compared to the third quarter, where there is the holiday shutdown, but all markets are seeing increases and in build rates as the with the strong order intake we've been seeing.

Got it okay that makes sense and then just one more on your App I mean, obviously, we're all seeing the headlines with respect to the case is ramping up just curious what you guys have seen most recently with respect to order activity from customers, whether that's been impacted by that.

Sure well, obviously, we read the same news you do and and we watched increased in cobot cases, but our customers have really been providing strong order intake for the excellent DAF trucks that we that we make.

We haven't seen any hesitation in orders in recent times that has come up at all.

At our factories are doing a great job of making sure that health and safety is the most important thing we focus on each and every day. So we're able to build trucks in the environment safe and effective way.

And order intake remained strong.

Got it thanks I'll pass it along.

All right great. Thanks have a good day.

Our next question comes from the line of Andy Casey with Wells Fargo Securities.

Your line is now open.

Good day everybody.

Andy.

Hi question on the battery electric trucks, you're introducing next year.

I'm wondering if you're accepting orders for those are ready at the reason I'm asking is the narratives.

On those type of trucks is that a.

They probably are going to have lower future parts sales opportunity then clean diesel equipped trucks first is that you know.

Does that Jive with your expectations and then second.

Can you help us understand how you would approach pricing given that.

Potential lower future parts revenue stream.

Should you expect to capture kind of a higher margin upfront.

Or anything you could do to help us would be appreciated.

Sure thing.

Your first comment about whether we're accepting orders we are accepting orders with peterbilt kenworth and offered taking orders for the trucks, we expect to begin production next year.

The trucks, we are actually providing them to customers already and doing test work with our customers.

We're working on battery technology, as well as hydrogen fuel cell technology and in fact, just from a funding to share last week, Kenworth and Peterbilt and took a hydrogen fuel cell truck and a battery electric truck count can worse was the hydrogen fuel cell peoples was a battery electric and they drove them up Pikes peak all the way to the sub.

So the programs are progressing along nicely the team driven a lot of fun developing excellent products and.

And we're looking forward to that market developing it is early days and so.

From a standpoint of how many orders that could be in one hundreds when we look at your question of parts sales and what we think looking forward.

I think theres going to be plenty of parts that go along with electric vehicles for a while and one way to think about it is the cost of a battery pack is pretty significant contributing factor to a cost of electric vehicle and somewhere in a lifetime of battery pack could be replaced they also had the same suspension components. The same steering components and they will have where items just like every year.

Other every other truck does so I think that the pricing of how we'll do that will be based on cost and good margins and.

Very well and in addition to the trucks that we will also be selling charges and also the charges will need replacement parts.

So the total of all of that I think is is that I don't.

I think it's going to be disruptive to our model.

It could even be helpful to our model for the coming period of time.

Okay. That's very helpful. Thank you very much.

Our next question comes from the line of Stephen Volkmann with Jefferies.

Your line is now open.

Great Hey, good morning, everybody good morning afternoon.

Yes.

Maybe just sort of sticking with that but broadening it out a little bit sometimes I get questions around just how do you view kind of R&D spending for the next few years and some people seem to think maybe others are spending more I know your business model as a little bit more outsourced a little bit more partner driven.

But maybe you can just talk about.

How we should view year level R&D spending over the next few years as we kind of make this transition.

Well, we always make sure that we invest appropriately for the for the opportunities that we have and I think our history has demonstrated a great set of investments that have been good for our customers and we always think about it from a customer standpoint.

And I can tell you what I've never been more excited than I am right now about the kind of products, we're bringing out over the coming year or two and going forward for the next five year strategy. We've laid out we have a great set of products coming out. So there will the spending may increase a little bit as Harry showed commented.

Commented on that we could see 330 to 360 and R&D spending next year, but our real focus on making sure that our customers get the very best trucks transportation solutions and parts and its ever.

It's ever been better than right now.

Okay. All right. Thanks for that and then just a quick follow up I. Appreciate your initial views on 21, I'm just curious relative to kind of inventories I know you guys are big on inventories, but would you expect to produce more next year than whatever the retail sales and turns out to be or would you sort of produce.

In line with that do you think what you see.

You start with where we're at now there's two announcements of industry inventory out there and Paccar can repeat we'll have about 2.2 months and so when I look at that and think about what the order intake looks like build rates and I think it will be roughly in line could be a little bit more production, but but not too much.

Great. Thanks Preston.

I have a great day.

You too.

Our next question comes from the line of Ross Gilardi with Bank of America. Your line is now open.

Hey, good morning, guys morning afternoon.

Maybe he will stay on the topic.

Topic, if you look out five years.

I have an expectation that you can share of eases a percentages.

You to class eight or our class six seven production.

Sure when we when we think is the way this market's going to develop processes is going to be hundreds kind of next year and then we'll get to a point in 2024, and 2025, where there is some regulatory requirements for production and by that time, we should see ourselves in the thousands low thousands and it will obviously depend on what kind of regulatory environment develops throughout Europe.

Or California.

And.

What we want to make sure. We have is the products are ready to go and the most reliable and capable products and so that's the path. We're on so we'll be ready if theres ready for thousands or stays with hundreds and if it wants to go to tens of thousands will be prepared for that.

So low low thousands by 2024 25 on a 250000 replacement market, you're talking like one 1% of the market by by that.

Yep Yep.

Okay, and how about class eight versus six seven because certainly in a battery up until now has been.

You know a bigger technical challenge, but of course, you're working on hydrogen fuel cell as well. So what are your thoughts there.

So thinking is there as you mentioned well Ross it will be medium duty in urban environments, where trucks returned back to fix location fixed operation is an easy place reduction to begin but if there are places like in Europe, where cities might not allow a diesel truck in that'll mean regional haul trucks could end up being battery electric and then as fuel cell.

Sales become viable and commercial lease.

Relevant then they could play a role also.

So I think right now what we're doing is making sure that we look at the range of full capabilities and technology choices out there and integrating them in an in an effective way for our customers.

Got it and then.

Can you talk a little bit about just.

How you see the shape of the cycle evolving next couple of years with the explosion of E commerce not that ecommerce is a new thing, but clearly we're all for all see the numbers for.

For E Commerce and.

Kind of where I'm thinking of it in North America class eight replacement is normally 225 to 250000.

Are we at a higher number now because of the environment, where you can and then also on top of that is there any motivation for the company to move down market into the light duty space to capitalize on more of the growth in things like delivery vans and last mile.

Well I think that those ecommerce comes along.

It's not going to affect the fact that people consume on an individual basis. The same amount of goods as maybe is how those goods are delivered but they'll still be manufacturing and distribution and I don't think that will fundamentally are structurally change any way from a class six through eight market I would share.

I would share that we have some amazing products in that class six markets base right now with our cab over products here in North America. It's also the market leader in the UK.

For that cab over Lf.

And we have some really neat products, we're developing to fill in and continue to develop the medium duty space for ourselves in the coming years.

Thanks, very much you bet.

Our next.

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

Hi, good morning.

Good morning.

I guess two questions. My first question as we think.

As we think about 2021 can you talk about your confidence level in terms of market outgrowth, whether it be on the parts side, you know market share on track.

You know already 11, and 13 liter engine just how we should think about that as markets recover and then my second question can you comment was there any sort of mix or pricing dynamics in the third quarter.

What you saw in that front. Thank you.

So just to start with his time think about share we've got 29.7% of the market share in the us and Canada right now year to date compared to 29.2, So we're seeing good share growth for ourselves.

MX engines are doing a great job out there with the 11 liter and the 13 liter of course is 100% of their engine volume in Europe and is 41% in North America. So that's working really well for US. In addition, and then from a price.

Pricing for review the pricing in the third quarter was more or less less likely down like up a percent or so but.

Good performance in terms of pricing given the current market dynamics and.

And thats compared to very strong 2019, absolutely absolutely.

Okay. Thank you I appreciate it.

You bet have a good day.

Our next question comes from the line of Ann Diagon with JP Morgan Your line is open.

Yes, Thank you and just a few follow up questions and interventional services on the interest expense line that was higher than we had expected can you just talk about that line item. What was in there were there any anomalies or is that kind of the runway rate that we should look at going forward.

In the third quarter, Jamie we sold a record number of used trucks.

The cost of those used trucks appear in that line item.

You spoke results.

Unfavorable compared to last year, but they were fairly similar.

To to.

Through the second quarter.

Overall, the finest companies doing really well so low credit losses, we have low paused use of.

The only 0.6% at the end of the third quarter.

Good portfolio and B credits customers continue to pay their bills.

And it's going to be doing really well.

But but are you, saying that thats Pat was higher expenses than the last couple of quarters that you're recording a loss on each sale of used truck and sell more used truck sales means a higher loss.

All right higher expenses.

Yes look like in the second quarter visa.

Results on used trucks with unfavorable it was nice to see that the used truck inventory came down during the third quarter. So that's that's going to be good going forward.

You know and we're starting to see that in some of the some of these trucks areas where people are looking for great products. They are they are starting to see pricing increases.

And peterbilt kenworth up that continue to provide a premium resale value and are used trucks business compared to the competition.

Yes, part of Everybodys used prices there Dan.

Kind of run like a pyramid.

We of course, we get a premium on the used trucks, but yes.

Only one and the used truck market and.

Exactly.

And then can you just explain a little bit more talk a little bit more about the E commerce business in parts.

Give us a little bit more color, what's going on there you highlighted that in your opening comments.

I'd like to hear more thank you for thing and I mean, we've had ecommerce for a long time, but.

But our paccar parts team did a fantastic job of creating a real user friendly easy to use for customers and dealers E. Commerce system that just makes ordering easier but it also makes related parties here. So that is quite simple to go in and find if you buy a filter for something you might also pointing towards another component. So the team has done a great job of making.

In a very.

Easy user interface and we've seen significant growth in the amount of ecommerce. We are doing is one fast it is the fastest growing part of our parts business as people transition. There. So that's really nice I'd also just give a shout out to the parts team for the way they are engaging with the dealers on auto except for dealer inventory stocking so they're doing a fantastic job on that front too.

I think both those things.

Support of how the.

Team is supporting our customers is leading to the growth.

And so the way for us to think about that business going forward, Dave there's opportunity for a more.

More customers to use E commerce, and then be a higher spend per customer is that are there two opportunities. There is that the right way for us to think about it and then I like making great wording and I agree with you yes.

Okay. That's it from me in the interest of time. Thank you.

Good day.

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

Hi, Good morning, good afternoon, everyone, Hey, Gerry.

You know were really jumped out.

This quarter was you're actually in a performance like you mentioned production nearly doubled your M&A was up 7% sequentially. How should we think about this year in a run rate from here any costs that we should think about as coming back in better times or is this a situation where we're at.

Are we going to be able to run rate this level of DNA going forward.

Well I think the team has done a fantastic job with cost controls as as always right. We look at everything we do and and spend where it's necessary.

So I think there will be some modest increases as we get into the fourth quarter. Just to for example, if you think about travel right getting getting anywhere internationally has been relatively limited so when that opens up or as travel reopens that will become a possibility for SGN increases.

Okay.

And then in terms of your.

Electric vehicle lineup really impressive range of products are you folks would have available for water.

Sure obviously skewing on the local range one of your new competitors is laying out a 500 mile product that 180000 can you just talk about your decision not to lay out a product.

Then that mileage range and how feasible that you think that cost point is if we're talking about.

Five years out for your for the industry as a whole can you weigh in.

Sure happily I do think as I said earlier that the urban areas will be the easiest places to make it cost effective decision around battery electric vehicles, and I think in the battery electric space for the regional home markets in the refuse market. That's also an opportunity again, where you are coming back to a charging station when you get into the longer length of haul, especially a number like 500 miles.

You're talking about needing.

Needing a significant charging infrastructure and you also have to realize that the weight of the batteries become significant to the total operating efficiency of the of the hall. So.

So we think that it will evolve in a rational manner and we'll participate in that and that's why we look at both the battery electric and hydrogen fuel cells, because battery electric will be rational.

For some of the wells, we just described and potentially fuel cell will take off on some of the longer haul, but it also needs and infrastructure. So.

We just want to make sure that were there with the right product for customers and as they want them, we'll have them.

And lastly, the carb regulations for 2024 look for pretty meaningful increases in warranties and big reductions in Nox. Good can you talk about your plan for those standards and how much does the cost structure. After we've hired some industry participants are talking.

The warranty costs being over $10000 essentially adding to the cost of a truck can you just talk about how you see it playing out and your plans for the standards.

Well, we've been through a lot of admission cycles as we've gone through the decades now.

And as an industry and certainly as Paccar were always able to meet them. We intend to we intend to be able to meet them as well, we do expect that the warranty requirements change and that just does that's an accrual rate. So we'll make the right accrual rates for that but we believe in our technical capabilities for both us and our partners and Cummins to develop great engines and powertrain settle.

I'll meet the diesel emissions requirements for the coming decades, and as we've talked a lot about already today, we'll have a complimentary set of products in the electric vehicle space in hybrid space.

And is that $10000 plus number increasing the growth vehicle is a is that reasonable to it can you just weigh in on that aspect how material is that cost increase for that customer.

Yes, I I don't think that it would be appropriate at this point, it's pretty early days and we have a lot of great people working on those things and we'll figure out ways to manage that cost to to the lowest level possible.

Thank you Chris I appreciate the discussion thanks, everyone have a great day.

Our next question comes from the line of David Raso with Evercore ISI your.

Your line is now open.

Hi, Thank you for taking the question. So my question relates to good afternoon. My question relates just trying to think through the gross margin profile for 2021.

In the third quarter and first quarter. This year, you delivered 36030, 8000 trucks, respectively, and you're anticipating 39 to 40000 deliveries next quarter or the fourth quarter and.

And during the middle of last decade, when you were delivering similar volumes each quarter gross margins were pretty comfortably between 14 and 15% and this.

And this year in those quarters, including what you're forecasting for the fourth quarter.

There are only between 12 and 13% I would.

Now I would assume addressing cost and manufacturing volatility due to the pandemic.

Could account for maybe all of that 200 basis points, a lower gross margins even though.

Even though parts is a bigger piece of the revenue today than five years ago.

So that'll said I'm just trying to think about for 2021, just trying to think through likely quarterly delivery volumes.

Should we expect to return to the relationship of usual where volumes are.

And gross margins or is there something about incremental cost or sales mix for 21 that we really should consider moving off that traditional relationship of volume and gross margin.

Well two part answer to your question David. Thanks for the question. Good discussion is when you think about our market sizes right now that we're talking about we're coming off of the second quarter. As you as you know well was pretty quiet, we're returning to some more increased rates. So if this year is 192.

10, we think next year in the US Canada could be in that two tend to to 50 range. It still below replacement value. So it's still not a giant market, it's a healthy market.

And I think there's a lot of uncertainty around what next year will bring in terms of the general economy in co bid and protocols. We have in place from a labor control standpoint, making sure our employees are safe and cared for so I think it's a little bit early to be kind of weighing in on what next year's full margins might likely be.

Should I take that though because volumes are similar to prior period when the volumes are the same.

Is it a function of it's simply about price cost and obviously the more robust the market is the better you can do on price.

It was also efficiently for any mix I'm, just trying to understand 200 basis points. This year with not a normal year, so I'm not saying the margin should be as high as five years ago with these volumes I'm just trying to figure out if we can move through this just kind of framework something to think about for 21 and it sounds like you're saying all volumes aren't created equal and it's not necessarily due to.

Mix, but it's more the robustness of the market, where maybe you can get a little bit of price or not is that a fair generalization. Yes, I think that's a fair generalization I think the other way to think of it as you know as we look historically and even right now paccar always delivers the best Industrys highest operating margins and we'll continue to focus on delivering that.

I appreciate it one last quick question delivery lead times, obviously orders are ramping up a bit but can you give us a sense of where delivery lead times today.

Typically added at a dent in until a coffee versus this time last year.

Just a rough idea and say number of weeks sure happy to do that you know we're looking at filling in just the final slots in the fourth quarter were substantially full in both the us and Europe. There are a few slots in that late November December timeframe. They are moving quickly and were really kind of getting our attention focused into the first part of next year.

And how would you compare that versus this time last year.

Well I think they are totally different markets you know last year at this point, we're coming off of a very strong market and coming into a more.

Normalized market I think and now we're looking at the beginning of an acceleration in the market.

I appreciate it thanks for the time.

Today.

Our next question comes from the line of Joel Tiss with BMO. Your line is now open.

Okay. Thanks, guys. Most of them have been answered I wondered if you think you're going to be just in your model and the way things are sort of laid out you think you're going to be close to breakeven by that 2025 in electrical or you think it's going to take it's going to take a little longer than that.

Well, we like we like to make money and everything we do Joel and and so I think that our angle is to do that it's early days, but our focus is always too.

Build great products provide great services to our customers and make money doing it and Thats. Our model for you just as well is there anything else we do.

And are you seeing any any sort of outsized market share opportunities with one of your bigger competitors being a little distracted.

Just sort of business as usual.

We think that we think that if we can just share with the customers how great. Our trucks are especially things were developing that are coming out in the coming years.

That will take care of market share for us we want to make sure we got.

Them to understand how fantastic the performance as these products were creating.

All right at least the guide you to last.

Hi, Joe.

I agree day.

Our next question comes from the line of Steven Fisher with EUV, Yes.

Your line is now open.

Thanks, Good morning, guys.

Two.

Just want to follow up on the rest of his question, but more in the near term rather than 2021 the margins in Q4, it sounds like on the 10% increase in deliveries, but the flat margin.

Well can you just talk about what some of the puts and takes in the near term our.

Within that keeping the margin flat on higher volume.

We think that that 12% to 13% as good margin performance for where we're sitting in the market sizes that were dealing with but just a couple of the puts and takes as in the fourth quarter. There are more build these in Europe compared to North America and there is a myth mixed shift in and as trucks increased compared to parts and so those are two factors that that way into that fourth quarter margin, but we still believe that.

You know our focus is on providing the industrys best operating margins and expect to do so.

Okay. That's helpful. And then just curious how much is timing within the order book shifting around right now and in what direction I'm wondering to what extent, you're seeing orders either getting accelerated or getting pushed out I imagine there might be some different dynamics.

Within some of the different end markets that you're serving be it on highway or vocational construction et cetera, I'm curious where it all nets out if you're seeing people actually wanting trucks earlier or if you're.

Trying to push them out a little and people are pushing that a little further on.

What we see is nothing really related to push outs right now and what we see is that the trucking economy is doing pretty well and most of its sectors. So the refrigerated carriers are doing well the housing people in support of vocational markets are doing well the consumer goods markets are doing well and this is true for both Europe and North America.

And people been running their trucks at below replacement value replacement market size for a year and so the opportunities are there. They are ready for the excellent performing high fuel efficiency high reliability trucks that we're building now and so there's no real push outs happening is people that are ordering to support their businesses, which are doing really well.

And any accelerations.

Yeah, we've been there has been growth in orders as obvious or the last quarter or so and it continues to be a pro.

Appropriate to the market sizes that were sitting in.

Okay. Thanks, a lot.

All right you bet have a great afternoon.

Okay all right.

Our next question comes from the line of Chad Dillard with Bernstein. Your line is now open.

Hi, good afternoon, everyone Hi, good afternoon.

So can you talk a little bit more about your strategy of providing charging infrastructure for the battery electric vehicles.

If you could touch on the scope.

The topic of investment needed to get to that I guess at that level thousands that you're talking about 2024.

Yes, I know you know Packers, it's providing but there is a cost included in the actual.

And the actual price you know to the to the consumer or is this more about that sort of paccar won't feel needs to be made to get to that market discount.

I think the way to think about charging is it.

You need a charger for your vehicle or for every two vehicles, depending on how you operate and so thats something that will develop as the vehicle park increases it will probably be through our dealerships who are doing a great job of kind of preparing themselves for the industry, but will also be through our customers who are operating as I said in locally domiciled routes and then I think there will be a more general.

Cool.

Development of the charging infrastructure as it goes along and again, a one way to think about charging stations is to kind of getting to be 150000, or a couple hundred thousand dollars to put in a charging infrastructure station for yourself. So that's that is going to be something where people are having to spend money on.

Paccar parts has is selling them now and our financial companies are offering supportive that so kind of have created an entire models for our customers as we move into that.

New opportunity.

Got it that's helpful.

Can you just provide color on on that engine parts mix versus other other parts of the business in the quarter and how close.

How close are we to see that inflection point, where your engine sold several years ago actually consuming more parts and how do you think about that from a gross margin mix perspective, as we look towards the next year.

Yeah, I think that the there continues to be when we started the engine in the North American market in 2010, so people have gone through obviously, a build cycle that we've got repeat customers are seeing you know.

Over that span growth in the engine business and its provides great parts return.

But it's fair to say that the engine parts business has grown faster than on average parts business.

So we do get benefits from that going forward.

Thanks, I'll pass it on.

Our next question comes from the line of Seth Weber with RBC capital markets.

Your line is now open.

Hi, guys good morning.

Thanks for taking my question.

Nice to see the the parts revenue turn positive here in the quarter I was wondering if you could just give any color on the cadence. There I think you had previously said June was running I think down mid single digits.

Should we is the right way to think about it that September was up kind of mid to high singles is that fair.

Sure.

When you think about the ramp.

Thats correct September was on a per day basis was up.

4% compared to last year, so we've seen.

Continued positive momentum through the quarter.

Okay. Thanks, and then just going back to the Finco the financial business Finco business. It sounds like you kind of cleared the decks here a little bit with some inventories. So should we start to should we expect to start to see margin.

It will be up going forward and can do you think that that can get back into that sort of 20% margin business next year.

It was really good to see the used truck inventory come down.

Having a little bit used trucks.

That will be used for performance will depend on what the used truck market. This in general.

Beck, our trucks get a nice premium, but we're also dependent on what our competitors are doing in that same marketplace.

Okay, if I could maybe just tuck in one last one on on the higher Capex going forward does any of that too.

To to include investments in your any of your suppliers or can you just talk about the health of the supply chain.

Sure happy to take that one on and say that our supply chains in a really good job as we've managed through the last couple of quarters very dynamic they've done a good job of pulling as we're watching the build rates go up across the world. They are supporting that very well they are focused on health and safety for their employees to.

And.

The supply base is in good shape and so that continues to be one of our great partnership is working with them and making sure. They are ready as we go as far.

As far as investments, we don't have anything specifically earmarked are called out in terms of investments and suppliers.

Okay guys I appreciate it. Thank you you bet every day you too.

You too.

Our next question comes from the line of Matt Elkott with Cowen Your line.

Your line is now open.

Good morning, and good afternoon.

I may ask a question on the class eight build cycle I think after the initial goals and shutdowns. We saw a number of dynamics and John you know lower fuel prices lower interest rates and maybe talk insurance premiums not as bad as they had been feared given that.

While lower claims for insurance companies.

Are we effectively basically pulling forward the.

A cyclical expansion in class eight orders.

In North America, and we could see someone on a moderation in one shot we regain some sort of a postcode normalcy.

I think we know we just came off of the third quarter, which was.

Good quarter, but we think there is a lot of room for the markets to continue to just gradually strengthen depending on what happens in the general economy.

Related to insurance and stuff, what I would what I would share from our standpoint in play and that is we make sure that our trucks are able to be equipped with the latest in safety technologies to support low rates to make sure that our customers have vision systems and.

Lane departure and those kinds of features that help our customers keep their drivers and the general public safety Thats, where our focus is there, but I think it's I think it's a little early adaptor just a just a month or two of goodness to start thinking about it being towards the towards the top.

Yes, that's fair point and just one last quick question do you guys have any manufacturing facilities anywhere around the world that are currently at a higher risk of operational disruptions related to the ebbs and flows as well.

Shutdown that we shut downs in Bogot.

Transmission.

That's a good question.

We spent a lot of time as a company, making sure that health and safety is the number one two and three priority for us and all of our factories compare best practices and all of them are operating in a safe healthy way and so I don't see any greater risk in one place or the other because of the great job.

John the operations teams have done around the world.

Great. Thanks pressing appreciate it.

Well.

Every day question.

Our next question comes from the line of Rob Wertheimer with Smelliest research.

The line is now open.

Thank you good morning, everybody.

Good morning afternoon.

So my question is just on the vocational segment. We've seen obviously cobot is done on certain things to municipal budgets around the country and then construction equipment spend a little bit weak I don't know if you have an opinion on whether municipalities or or related customers are more cautious in their purchasing or weather.

That recovery is proceeding along with everything else in trucks, and maybe a similar question for dump and other similar related markets construction. Thanks.

Sure thing what we've seen as you know we're the leader in those segments it with our great Peterbilt and kenworth products and the products.

Great job of our customers and I.

I would say the vocational market seems to be doing quite well. It's one of the places where people are spending money on their homes are putting index doing whatever they are doing and so there's a lot of shipment of goods for home improvement. There's a lot of construction still continuing housing starts are are strong and so I think the sector is really doing pretty well there is oil and gas is down but in general that.

Total sector is doing really well.

Okay that answers thank you.

Our next question comes from the line of Joe O'dea with vertical research. Your line is now open.

Hi, everyone.

Question, it's good to hear that pricing has been pretty stable through the disruption. This year I'm interested in how you're thinking about the pricing opportunity next year as those build slots start to open up in the order book.

They're not at a below replacement demand type of outlook, you see an opportunity to get price or if you think it's going to be more of a flattish kind of environment.

I think people's People's pricing expectations or are always we would like to see our trucks continue to provide great service and as our trucks provide great service a low operating costs.

Create a pricing premium for the paccar products and that's kind of the way we think about it relative to this quarter, we'll see how the market develops as we look forward.

And then on the fuel cell side of things with Toyota selecting Hino for a class eight hydrogen fuel cell truck in North America does that have any impact on what you've been doing on the hydrogen fuel cell work in collaboration with them.

No it doesn't at all right I mean to it as a great partner for us in developing these hydrogen fuel cell products and.

Not exclusive thing and it will need the hydrogen fuel cell market will need a lot of players a lot of volume to make it commercially viable so it's accretive to our business model with them.

Got it thanks very much.

It.

Your next question comes from the line of Adam Allman with Cleveland Research. Your line is now open.

Hey, guys. Good morning, good afternoon I wanted.

I wanted to go back to look at the beginning of the prepared remarks, you talked about the order rates that you're seeing in North America.

Could you tell us what the order intake in Europe was for the third quarter relative to last year.

Orders in Europe were up 6% compared to the third quarter of last year.

Okay, Great. That's helpful. Thanks, and then.

And I guess more broadly on.

Talked earlier about some of the key.

R&D spend going up.

Into next year I was.

I was wondering if you could spend some time talking about some key programs that would be new and different that are meaningful size.

That are getting pulled it into the budget I assume some of the spend next year is also catch up from this year, if you could maybe.

Dimension that a little more 'cause it.

Yes. It is a relatively big increase relative to this year I'm just trying to get at that normalized rate would be over the medium term, but we.

Well, we have some really exciting happy to do so it's a really exciting truck programs that are ongoing right now.

We will develop further next year and we'll be looking forward to sharing those with you. When we when its time is right. We have engine development programs going on with their high performing diesel engine programs around the world and then you add to that the autonomy connectivity electrification efforts at our teams are working on and those are kind of the the bulk of the work that we have outlined for next year in the coming year.

Yes.

Okay. Thanks, you bet.

You bet.

Our next question comes from the line of Rob Salmon with Wolfe Research. Your line is now open.

Hey, good morning, and good afternoon, a few kind of follow up questions related to the the fourth quarter gross margin outlook are you.

Are you guys baking in kind of a similar aftermarket sales growth rate as you were seeing in September for the fourth quarter.

Or is it something different kind of baked and related to your your outlook.

Oh, the 12% to 13% gross margin and presence that is that.

Achieving the best margins in the industry and.

And where we expect to be in that range. Despite a mix of more truck and.

Or are these more truck growth the parts growth.

I think you should see parts as being the same or a little bit up compared to last year in the fourth quarter.

That's helpful. And then any comments you guys had mentioned about sequential growth in deliveries.

Was that it it sounded.

It sounded to me like it was more of a comment related to deliveries per day.

Good day would the comment about sequential growth on an absolute level relative to third quarter deliveries and us Canada apply or is it too early to tell on that front.

Comment on 10% higher truck deliveries wasn't on the total number not on a per day number.

It was the common you'd made that you would see growth across all segments.

It is what I was alluding to in the prepared remarks, Pratt, perhaps I misheard that.

That comment but was just curious if it got.

Alright.

But we're taking build rates up in all our markets. So the increase building supplies to all our factories.

But we do have fewer working days in North America in the fourth quarter compared to the third quarter the more in Europe.

Which which is to get that to you.

Okay.

And then the final question I had is related to the charging infrastructure. When you think about historical returns in your financial services segment, how should we think about kind of charging infrastructure returns on the investment that you would expect to achieve relative to the broader financial services service.

Yes, I would say you could expect at this point to think of them in a similar fashion.

Sounds good appreciate the time guys you bet have a great day.

Our next question comes from the line of Courtney covenants with Morgan Stanley. Your line is now open.

Hi, Good afternoon, guys. Thanks for the question afternoon, Corey maybe just maybe just following up on that question could you just share with us how to think about the sequential increase in deliveries between God U.S. in Canada versus Europe for the fourth quarter.

Well, one way to think of it as that Harry outlined it really wells thing, but the build days, what I would rather say as you know theres build rates daily build rates are going up in all markets fairly good manners.

And we think that that could continue and so.

And so that's the easiest way to think about it without getting.

Conflicted about the never build days in the quarter. So build rates are up markets are improving trucks are doing really well.

And we think we've got a good look at the future coming towards us.

Okay got yet and and then maybe just on the parts growth I think you had commented you know thinking it'll probably be.

Slightly up in the in the fourth quarter I think you had previously talked about a lot of deferred maintenance.

What's happening at this point do you feel like that's most that's largely caught up and there is.

Theres not much more deferred maintenance and then if you can also just give us a sense of the ecommerce platform. I think you had said it was up 20% in the first half a year are you still seeing those levels in the third call.

In the third quarter and into the fourth.

I think the way to think about the parts business right. Now is that there is strong truckload business around the country truckload vocational all those markets are doing well with trucks are running they consume parts. So thats whats happening, mostly that's whether that's one of the reasons. The parts business is doing good and the other is as we mentioned we've got great distribution capabilities, which means we're getting an increasing share of the mark.

Get the parts business teams did a fantastic job not just with primary pars, but with all make parts as well or to your p. brands around the world. So thats contributing to the growth and then the ecommerce programs that we that we have put in place are they put in place are just fantastic also right. They just they help make it easier to buy parts through paccar and that's what the team.

As always focused on is making our customers lives easier and doing a great job in providing that transportation solution for them.

That really nailed it.

Got you that's helpful. And then just lastly, just a follow up to the comments I'm about between that part.

Partnership.

How but you know kind of understand when we're thinking about hydrogen fuel cell truck.

How much of it is the design of the trial versus you know the the fuel cell provider and that really is going to dictate the difference in performance. You know just based on you know the different prototypes that you have out there and are you guys also considering other fuel cell providers. In addition to Toyota.

Sure, but I would think about it is the fuel cells a critical part of the business. The truck is a critical part of the business. The integration of the two is a critical part of the business.

Supporting them in the field is a critical part of the business the distribution all that matters.

So we are paying attention to all elements of that and I guess to your to your other question is yes. We are always looking for the great partners to work with so it is a great partner.

With partners a battery electric we're always looking for the right people to be partnered with to make sure our customers get.

The premium trucks, we provide.

Got you thanks.

Right.

Great day.

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

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

Ladies and gentlemen, this concludes Packers earnings call. Thank you for participating you may now disconnect.

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