Q4 2020 Paccar Inc Earnings Call
[music].
Good morning, and welcome to Packers fourth quarter 2020 earnings Conference call.
All lines will be in a listen only mode until the question and answer session.
Today's call is being recorded and if anyone has an objection. They should disconnect at this time.
I would now like to introduce Mr. Ken Hastings Packers director of Investor Relations Mr.
Mr. Hastings. Please go ahead.
Good morning.
Like to welcome those listening by phone and those on the webcast my.
My name is Ken Hastings, <unk> director of Investor Relations and.
Joining me this morning are Preston Feight.
Chief Executive Officer, Harry Skippers, President and Chief Financial Officer, and Michael Barkley, Senior Vice President and controller.
As with prior conference calls, we ask that any members of the media on the line participate in a listen only mode.
Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may expect may affect expected results for additional information. Please see our SEC filings on the Investor Relations page on <unk> Dot com.
I'd now like to introduce Preston Feight.
Hey, good morning, everyone.
Harry Skippers, Michael Barkley and I will update you on a good fourth quarter and full year 2020 results as well as provide you an update on other business highlights.
First I really appreciate our outstanding pack our employees around the world.
Their focus on safety and health throughout the pandemic continues to be outstanding as they deliver the highest quality trucks and transportation solutions to our customers.
In 2020, <unk> achieved annual revenues of $18 7 billion and good net income of $1 3 billion.
Patkars performance benefited from a recovery in truck demand to normal levels in the second half of the year and.
And strong performance from our trucks parts and financial services divisions.
<unk> has achieved 82 consecutive years of net income.
The company has paid a dividend every year since $19 41.
And has delivered annual dividends of approximately half of net income for many years.
In 2020 Pac are declared dividends of $1 98 per share.
<unk> fourth quarter revenues were $5 $6 billion in fourth quarter net income increased to $406 million.
Our parts achieve fourth quarter revenues of $1 billion and $70 million and record pretax profits of $223 million.
Which was an 8% increase compared to the same period last year.
<unk> are delivered 4700 trucks during the fourth quarter.
<unk> to 36000 in the third quarter.
In the first quarter of 2021, we expect deliveries to be 10% higher than the fourth quarter due to stronger markets and higher customer demand for kenworth, Peterbilt and <unk> great trucks.
In 2020 U S and Canadian class eight truck retail sales were 216500 units.
Kenworth and Peterbilt combined class eight market share increased to 31% and medium duty share increased to a record 22, 6%.
For 2021, the U S economy, and industrial production are projected to expand by about 4%.
The strengthening economy.
Low fuel prices and high volumes of freight are good for the truck industry.
We estimate the 2021 U S and Canada class eight truck market to increase to a range of 250 to 280000 vehicles.
European above 16 tonne truck registrations were 200 3500 last year.
And <unk> achieved strong market share of 16, 3%.
In 2021, the European economies are projected to continue growing.
And we expect the above 16 tonne truck registrations to increase to a range of 250 to 280000.
The South American above 16 tonne truck industry registrations were 93000 last year.
In Brazil, <unk> increased its share of the greater than 16 tonne market from four three to a record five 7%.
In 2021, the South American market is expected to increase to a range of 100 to 110000 units.
Truck and parts gross margins were 12, 6% in the fourth quarter.
We estimate first quarter truck and parts gross margins to increase to around 13, 5%.
<unk> takes a rigorous approach to controlling costs throughout all phases of the business cycle and continues to deliver industry leading margins.
Last week, we announced a strategic partnership with Aurora.
A leader in autonomous driving technology.
This partnership will integrate <unk> autonomously enabled truck platform with euro self driving sensor and software system.
The goal of this collaboration is to create a commercially viable autonomous truck that enhances safety and operational efficiency.
<unk> customers.
<unk> zero emissions vehicles continue to lead the industry.
<unk> zero emissions vehicles have accumulated nearly 500000 miles.
Peterbilt Kenworth and <unk> battery electric trucks are beginning production in the second quarter of this year.
And we're continuing in the development of hydrogen fuel cell powered zero emissions vehicles.
Last year Packer was again recognized as a global leader in environmental practices by the reporting firm CDP, which.
Which places <unk> in the top 15% of over 9500 reporting companies.
And the women in trucking organization ordered our pack, our corporate office Peterbilt, Kenworth and <unk> are parts and diner craft as a top place for women to work.
Kenworth and Peterbilt received a total of five manufacturing leadership awards from the National Association of manufacturers.
And the <unk> on the fleet truck of the year 2020 award in the United Kingdom.
There are a multitude of exciting things happening around <unk> and.
And Harry Skippers will now provide an update on <unk>, our parts Packer financial services and <unk> investments in future growth.
Harry.
Thanks Brendan.
In 2020 parts generated excellent annual revenues of.
More than $3 9 billion.
And annual pre tax profit of $799 million.
Fourth quarter gross revenues.
A record $1 billion on $70 million.
On quarterly pretax profit was a record $223 million.
One of the great things about Pekka parts.
It provides steady profitability too.
Through all phases of the business cycle.
Becker is increased market shares over the years.
Resulting on a greater number of cook and powertrain parts opportunities.
Becca parts has excellent long term growth reflects investments in distribution.
And technology.
Paccar parts has expanded its global network through 18 distribution centers.
And is currently constructing another facility in Louisville, Kentucky.
<unk> investment in leadership and E Commerce technologies proved valuable last year.
As E commerce retail sales increased by 25%.
In 2021, we estimate our sales to grow by 72, 9%.
Becker financial services achieved 2020 annual revenues of $1 57 billion.
Annual pre tax income of $223 million.
And portfolio assets of $15 8 billion.
The percentage of pickup truck sales finance buyback on financial services income.
Increased from 25% to 28% last year.
The portfolio continues to perform well with low past dues on low credit losses.
Pretax <unk> income increased from $55 million in the third quarter.
To 64 million in the fourth quarter.
Becker financial added use strict census in Denton, Texas.
Moving on France.
In Prague, Czech Republic last year.
We'll open a new used truck centers in Madrid, Spain this year.
Our gross <unk> on our last year, we invested.
$570 million of capital.
$274 million in R&D.
In 2021, we're planning to increase capital investments to the range of $575 million to $675 million.
And R&D expenses will grow to be in the range of $350 million to $375 million.
These capital and R&D projects will develop.
The next generation of fuel efficient diesel powertrains.
Zero emission vehicles.
As well as advanced driver assistance systems autonomous vehicles.
<unk> services on cutting edge manufacturing capabilities.
Becker has started 2021 with strong momentum.
The truck and parts businesses are growing.
Kenworth Peterbilt and <unk> market share is increasing.
On investing in new trucks, and technologies that will deliver enhanced operational efficiency safety and environmental benefits to our customers.
Thank you we'd be pleased to answer your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or cash Keith Please standby, while we compile the Q&A roster.
And our first question comes from Joel <unk> with BMO. Your line is now open.
Well I don't think I ever been first to anything in my life.
Right.
I guess maybe to get fired.
Good day to all glad to talk to you Yeah, I still got to work on that.
Can you talk a little bit about.
I think your European market share hit 17% at some point and now it's a little more than 15 can you just talk about what's going on there.
Sure.
It's the record we'd had in Europe was 16, 7%. This was actually our second best year in our history. So that's up <unk> 10 from last year, and we have strong momentum as we enter into the 2021 timeframe. So it's really a good year for the European team and market share and we have market leadership in a number of countries and current including Great Britain of a lot of them.
Countries in Eastern Europe, and we grew share in principle markets like France as well.
Alright.
I have a lot of questions. So maybe I'll just try to glue two together to cheat a little bit here.
On the size of the can you talk a little bit about the size of the EV market.
Today, and maybe in 2025 or a couple of years down the road and what are examples of Nextgen manufacturing and distribution I was trying to think of what you meant there, but I couldn't figure it out and then I'll leave it to everyone else. Thank you.
Well, let's talk about the electric vehicles are zero emissions vehicles, one if we look at the world around US right now the most important thing that we're doing at <unk> is having the right technologies in place. So we have spent considerable amount of time and energy.
Bringing to market battery electric vehicles that fit the zero emissions class both in Europe, and North America, both for our medium duty and heavy duty products and.
And the key there is making sure we have the right technology and the right leverage for those products as we move forward. So we've done a good job of debt as we shared last time, we announced the sale of the product and now we're going to production with those trucks beginning in the second quarter.
As far as volumes go all of those as we shared last time, we expect that the industry will have volume in the hundreds in the coming year or two and then as we get to the 2025 timeframe like you referenced that might grow into the thousands and we would expect that we'll have a good market share representation as the industry comes along.
Most important thing again right now is making sure we have great technology and I got to say I'm really excited about the products, we're bringing to market.
So on the second point of advanced manufacturing.
What we're really talking about there is how we have a connected factory. So if we look at how the factory works together, what kind of data analytics, we're sharing within the in the factories on the robotics work together and making sure that we just enhanced on even higher degree already excellent quality.
And I think just to add to the earn our new paint shop in Chillicothe, Ohio.
Here is an excellent example of debt.
So on top of the things that present. It also will be a lot more environmental friendly it will be the most modern campaign facility in the industry.
Alright, great. Thank you very much.
Have a good day Joel.
Our next question comes from Rob Wertheimer with Melius Research. Your line is now open.
Yeah, Hi, My question is on gross margin and thank you for your outlook into <unk>, you're improving from the <unk> levels and the <unk> can you describe what the dynamic is is that maybe there was quantifiable COVID-19 supply chain or otherwise costs that are fading, maybe it's mix maybe it's pricing.
What was weighing on the last half of 'twenty on what's getting better. Thank you.
Sure I'm happy to take that the biggest thing that's affecting gross margins as being in this global pandemic and the fact that we have made sure rigorously the safety of our employees.
Most important priority for ourselves that's number one number two and number three so there is additional cost associated with that.
For us, but not just for US. It also goes along with the supply base. So that has obviously had some margin impact to us there is raw material pricing.
Effects that we're seeing as we see the economies recover on a global level.
And we're at the different point on the cycle than we have been we're just starting to see the truck market recovery and so that has an impact as well.
Okay Alright.
So yes, so the.
From an improving to 13, 5% and in the first quarter was a nice improvement on.
It's been we continue to achieve the highest margins in the industry.
And is there anything from the Covid, that's you've got straightened out and I mean, obviously in six months hopefully this is irrelevant and I understand that but I mean, I'm just a little bit curious if theres anything.
Driving the sequential and I'll stop there. Thank you.
Figured out again, the most important thing is safety and so we have figured that out we've been able to provide a great safe environment for our people and that's been.
Most important priority for us.
Okay. Thank you gentlemen.
You bet on a good day.
Our next question comes from Tim Thein with Citigroup.
Citigroup Your line is now open.
Alright, great. Thanks, Good morning, just maybe to take that gross margin question net a step further and thinking beyond the first quarter.
Typically there's there can be impacts I think especially in kind of early stages of an up cycle like this.
Do you have some some customer mix impacts in the first quarter, whether it's dealers, placing more more stock orders and maybe get a little bit heavier.
Small small customer.
Sales slowing into that first quarter.
Whereas you get some of the larger fleet start to take delivery in the spring. So is that would you expect that to be.
Just as we think about first quarter impacts potentially moving beyond does that is it meaningful or is it just kind of gets washed out.
I think theres a lot of factors that play into what the second third fourth quarter, we'll be able to depend on the strength of recovery and how the market continues you mentioned some good points. Those are true things that mix can have an effect on things. We've also seen some of the larger customers be the people that continued buying in the fourth quarter and through the first quarter. So there is offsetting factors in net.
Okay.
Good day, Preston I was interested to see that maybe you've disclosed that before but the comment that you included in the release on the T 680, net fuel cell electric having.
350 mile range I'm just curious.
Obviously I would assume that you would expect debt over time too.
Probably not stay at that debt level and potentially increase but I guess the question is what do you have a sense for what.
Maybe what percentage of.
Either your truckload or.
On that potentially L T L customer base.
Is what could that be relevant to in terms of.
Yeah, obviously the trend over time has been.
Towards more of a shorter length of haul so I guess I'm just I'm curious what percentage of the customer set do you think a 350 mile range vehicle could.
It will be relevant to.
Yes, I would what I would say is that the technologies that are being evaluated right now batteries and fuel. So both have capacity to expand range just takes more batteries or it takes more fuel cell. So range is really about how much space you take up on the truck and the energy density at this point in time is higher for fuel cells for hydrogen fuel cells. So thats our advantage there.
We have of course, both types of solutions, Inc, infrastructure development and infrastructural development.
How close charging stations are for either system will decide how much range you need on the vehicle. So I think it's a little early to tell what's going to happen.
In which technology will play out on which markets.
Okay, alright, thanks for the time take care sure you bet.
Our next question comes from the line of Nicole <unk> with Deutsche Bank. Your line is now open.
Yes, thanks, good morning, guys.
Hey.
Maybe just starting with a little bit might be tell around the commentary on one Q the 10%.
Cascade.
On increase in production can you guys. Just talk about is that kind of across geographies. Any comment you have on you ask the person Sierra versus rest of world.
Sure. Good question and it kind of is across geographies, we see increases in the North American market Kenworth and Peterbilt are doing really well have strong order intake and the same is true enough.
Both both economies have strong trade activity trucks moving in.
Good good order intake right now.
Okay got it and then just on the parts business.
Does that lead to price by the acceleration Darren to the price on the top line can you just talk a little bit about sustainability of that strength into next year or two.
It sounds from a sense of what you guys are thinking for parts revenue growth in 2021.
Yes, I think that if you look at our parks and they just did a fantastic job in the past year and for the past several years really of not just serving our customers, but creating creative solutions for our customers. One of the things we talked about I mentioned was E commerce, they've created a state of the art system, where you can go online and get your parts makes a lot easier they made a best in investments in.
The distribution network, so that the next day delivery and even same day delivery of parts is increase in percentages.
And they just do a fantastic job of taking care of all the different kinds of customers in meeting their needs, which is bringing business to them. So we do think that growth will continue in the coming years for our parts team and kind of a similar rate.
Got it thanks I'll pass it on.
Our next question comes from Stephen Volkmann with Jefferies. Your line is open.
Great. Good morning, guys. Just a quick follow up on that one should we also expect gross margins in that parts business to continue to expand as well in this scenario.
Well I think the gross margins we enjoy in parts are very high and we would expect them to continue to be very high Steven So.
We will look for that to continue through certainly through the quarter and year.
Okay, and then kind of on my broader question just about how you guys are looking at the year I'm, assuming that the first quarter will be sort of the low delivery quarter of the year and things will sort of slowly grow as the year progresses to kind of hit your industry targets. Please disagree.
If that's not the way youre thinking about it.
I'm curious if we should also think about the first quarter is kind of the low gross margin quarter as well.
The truck business.
I think we were at the beginning of the cycle right now where you look at where we're coming out of and where we're going to and obviously a better clarity on the first quarter than we do the second third and fourth quarter.
So right now.
Quarters full and Bill we have great visibility in the second quarter.
As it stands we expect three and four to go that way, but there's a lot of time between now and debt. So maybe or maybe your modeling is right, but I think it's early to kind of call. The call. This latter part of the year.
Okay, maybe just conceptually they're in a different way.
You guys have done quite a bit of work on the parts business and on the cost structure to some extent I guess I'm. Just curious if you running the company kind of expect overall margins to be higher this cycle than they were in the previous cycle.
Well I think.
We've made some good investments we have some great things happening right now so I think the recovery in gross margins to 13, and a half that we're saying it'll be around in the first quarter is good progress and then I will share with you that this is going to be a really exciting year for <unk> in terms of new product introductions. So on the coming months, both in the United States and Canada as well as in.
Europe is from big introductions that we think will be really.
Really helpful to our company growth.
Great Super Thank you guys.
Our next question comes from Jamie Cook with Credit Suisse. Your line is now open.
Hi, Good morning, I guess, a couple of questions. One on the fourth quarter can you just provide any granularity on sort of pricing or mix dynamics in the quarter I think pricing was slightly negative last quarter.
He could help us out on that Brian.
So I guess I'll I'll start I'll start with that and then I'll ask my follow up.
Pricing was very very stable, maybe slightly down in the fourth quarter.
Okay.
Pretty normal from where we are in the cycle right now.
Okay and was there anything else like related to mix or anything besides that.
The pricing commentary that impacted the fourth quarter.
And then I guess my follow up question just since I have you is.
Just any additional color you can provide on the R&D increase.
Where where the spend is going how much of that can be.
Due to the recent announcement with Oh are on the autonomous side. Thanks.
Yeah, Jamie Thanks for the questions on on the <unk>.
On the pricing side, you know you look at just a little bit of it is cycle timing and just where we're at how much backlog there has been and so we're seeing an improvement in that as we go through this year now I would say there has been commodity cost increases which has had some impact on obviously the ifs.
<unk> of managing the pandemic has had some effects. So those are kind of the key factors you'd look at pricing as we can.
Okay.
We see some opportunities on that.
We look forward to those opportunities.
And then in terms of your second question can you repeat what your specifically my question, Yes, just any additional color you can provide on the R&D spend I know we increased it a letter from what we said last quarter and how much of that if any is attributed to a or any color you can provide on that.
Sure I would share kind of the.
The same thought I should receive as it were.
We have a lot of great things happening right now on the company in terms of new product introductions that we'll see this year and some of that R&D spending as a supportive those really exciting products that youll get to hear about shortly.
And also.
We have a great focus on on technology.
Mentioned in the comments for our factories, but also in the space of zero emissions vehicles connected services and autonomous vehicle development in Adas level two projects. So we have a lot of great things going on at the Bill for a strong future.
Okay. Thank you you.
You bet.
Our next question comes from the line of Anne Duggan with Jpmorgan. Your line is now open.
Hi, good morning, everybody.
And good morning.
If you could give us some color on your outlook from both regions you know what.
Do you think the biggest drivers are going to be whether it's line haul in the U S. Whether it's Sam.
Severe service and just some color on both.
North America, and Europe, maybe Europe by region also as well as mix. Thank you.
Let's just start with the U S, Canada markets and say that we have good housing starts the auto industries are performing well expected to perform even better in 2021. So those are both good for our businesses on people continue to.
Live their daily lives as they need to so the refrigerated carriers and protein haulers are doing a good job as well.
Basically the truck industry is doing pretty well.
And I don't expect that to change truck utilization is high and so I think that.
We're even starting to see signs of green shoots in the oil and gas industry. So all of that combined points to a good year for us in the U S and Canada I don't think it is very dissimilar in Europe.
I'd add Harry.
Europe Trans productivity remained strong as well and we just got the the German most statistic and that's the number of milestone which trucks at the big total in Germany that was up more than 4% in December.
After a 4% increase in November so that just shows that trucks are driving our customers are doing well.
In terms of regional probably would expect central and eastern Europe to do a little bit better than the U K maybe.
But it's a trend we see across Europe.
Okay. Thank you I appreciate that and then with the R&D spend increase on the number of new products that you're launching Nick junior debt alluded to.
Should we anticipate that SG&A will be higher also in maybe second third quarter as you launch all of these products Inc.
You increased your marketing and you increase your spend.
Above and beyond maybe any impact that might have on manufacturing in gross margins as you launch these products.
No I don't think so I think as you look at last year, we had improvements reductions on our SG&A and for the full year and also even on the fourth quarter and we would expect to kind of the fourth quarter to be at a run rate for 2021. So.
The effective last year and trimming things on the business will continue we always want to make sure that we're diligent in providing the lowest fixed cost that we candidly to our shareholders.
Okay, and no incremental costs from commodity prices steel price is there anything I know youre more of an assembler. So.
Yeah, the impact on you being muted, but are you anticipating any kind of supply shortages supply chain issues related to lack of availability of steel or anything like that.
So we have a great team in our materials teams are purchasing teams around the world and while theres much been written about on supply shortages.
They have done a fantastic job of making sure we have all the parts, we need to put the trucks together and create our products.
And we don't anticipate anything significant in the first quarter, it's tight for.
For the whole world, but they are just doing a really good job and one of the reasons, we're able to do that is they do a good job of forecasting out to our supply base.
What our schedules are and I think thats much appreciated it allows our suppliers to be successful and it allows R. R.
Company to be successful.
Okay I appreciate that I'll get back in line. Thank you Karen.
Our next question comes from Steven Fisher with UBS. Your line is now open.
Thanks, Good morning, good morning.
I'm curious about how your order share in Q4 trended was it higher or lower than your retail share in Q4.
As a as an indicator of where market share might be going in the relative near term and just curious how that looked in north America versus Europe.
Sure. If you look at our order share and I think it's easier to look at it in bigger chunks.
Because of the cyclicality that our order share grew in 2020 as a percentage of the industry. So that's a positive thing.
And obviously, we grow market share a little bit and we feel well positioned to continue growing in 2021.
Okay, and then I know, it's still very early days on this but curious how the orders on the electric trucks looked in Q4, and if youre seeing any momentum building on that into in Q1.
There is definitely momentum building. Good question, there is momentum building, but its momentum building from a.
Kind of a very very low level and now I think people are interested in trying a truck or two or 10.
And so that's kind of the scale you're talking about in terms of the industry right now for zero emissions vehicles. It does still depend heavily on government subsidies to make it an economic.
Economically workable solution.
So again I would emphasize that expect the industry will see hundreds of units on sales this year and that will get a good percentage of those.
Terrific. Thank you you bet.
Our next question comes from David Raso with Evercore. Your line is now open.
Hi, Thank you so on the gross.
<unk> I'm just trying to think about every year, there's always a lot of investment and product initiatives that are clearly not in full production.
But just given the technology push that we're seeing right now across a variety of drivetrains and autonomous and so forth.
Or is there any level of costs that you would call out that's incremental this year than normal.
First quarter gross margins are pretty impressive I mean, it implies like a 25% incremental sequentially.
Just trying to think through or maybe some of those new costs.
No not going up that much year over year. So the volume really gets levered more than normal I'm, just trying to think through.
It'll be some costs that are above normal and again it makes the gross margin guide a little more impressive, but I'm just trying to sanity check it and then I had a quick follow up related to the factories.
I would start by saying that if you will.
Look at the gross margin effects of it.
It has a lot more to do with the.
The Covid global pandemic, then it has to do with the R&D that we're doing.
Really think of those relatedly.
And I would just say that.
We are seeing.
Good improvement coming from the first quarter on gross margin with the 12 six journey towards the around 35 level.
I feel good about the growth, we're getting and again, it's tied to the.
Place we are in the.
And the market and the market's improvement more about that on the gross margin to me then.
R&D spending R&D spending is going to be great because we're bringing on these fantastic new products.
That should be helpful to us in gross margin.
Lumpy on the R&D are there any incremental costs for products that are not providing much of any revenue let alone profits than you would normally see in a cycle. Let me get on the R&D, that's not an immaterial number but I'm just trying to think through.
The ramp in costs, given that as a bit of a unique time in the technology rollout in the industry.
You're saying you wanted to describe this as any more abnormal than maybe the R&D is up debt given the new product rollout you you would not describe this as a bit abnormal.
So I think our R&D spending is an increase.
On the products, we're introducing but it and it's on the technology of introducing but we continue to have R&D as a percentage of sales.
Our lowest levels of anybody that we do.
Do a great job our engineering teams to do a fantastic job of working with partners and having those partnerships so that we bring.
Bring great technology to our customers, but we co develop.
And that seems to be a great model on it.
Part of the story around arose we pick industry leaders like them that are fantastic with technology.
And were fantastic and developing an autonomous enabled trucking together that becomes an efficient way to bring an industry leading solution to the market at a reasonable cost.
And then when it comes to my factory question.
Where are the factories I mean, the real core ones like Denton, and Chillicothe and embracing the cycle on the sense of adding the extra shifts, adding a skeleton third shifts.
I'm just trying to get a sense of where are you on balancing adding the capacity.
The order book is very strong it's not necessarily risky, but just the idea of where are you, adding that and the confidence in the order book and second of course, there's always that balance of adding capacity versus pricing.
For those shifts running right now.
So on the truck factories have done a fantastic job.
Managing the increases that we've seen over the last quarter, they've just done a beautiful job of keeping people safe I just want to keep emphasizing that because thats. Our most important priority is our employees.
And they've done a great job of being able to increase build while protecting people and giving them a safe working environment and we don't see any limitations are that we see the ability to keep increasing build rate as we even in our factories to support the market really not any limitation on that so they are not operating at near Max capacity at this point.
Are they all on second shift.
Second, whereas at skeleton and there's always those inflection points in the cycle, where you have to.
To make that jump on them.
David on Rolling are in.
Some of them as appropriate would be on second shifts and some of them are not as appropriate so.
Each factory is.
And its own balance right now.
Alright I appreciate the time. Thank you you bet have a great day.
Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.
Yes, hi, good morning, and good afternoon.
Hey, how are you Jerry.
Doing well thanks.
And you.
I'll stay on healthy out here I hope you are too.
Absolutely.
Personally I'm wondering if you could just expand on your comments about XP.
Expectations are very good market share on.
Trucking hydrogen vehicles.
What's your win rate now out of what's been bid for delivery over the next year, you mentioned industry size a.
A couple of hundred units.
Curious.
What are you focusing in terms of your success rate on it on.
On those bids.
Our success rate tends to be pretty good when we obviously have a strong relationship with our existing customers provide them great products low operating costs and repeat.
Of that is at extremely high levels and our win rate continues to be high when we go out and are able to show people Kenworth Peterbilt and <unk> trucks that have never tried it before when they get to experience from I think they are impressed also and thats.
The reason, we've been growing our market share.
Reason, we expect to keep growing our market share.
And part of the reason why you folks have a higher market share in heavy duty to medium duty is because you get paid for that higher features on higher spec trucks.
The Navy World.
On the human per truck costs on higher I'm. Just wondering is that a tailwind that you're seeing is that where you're from the lead to some.
Customers that would be more value focused on trying your trucks in medium duty. So this dynamic.
Essentially be a market share tailwind for you folks who am I understanding it right.
I think it could be but here you want to.
I think kenworth peterbilt and <unk> have been real leaders in customization and giving customers exactly the trucks the way they want them on how do they want them on.
With electrification thats, probably even more important than.
Just configured a truck is exactly to their needs their transport task.
Making sure the weight on the charging on all of that is optimized for their for their requirements.
Add on to that it kind of brings a more integrated experience for the user because you've got to think about how much time do you need to charge it and that's why one of the reasons, we're selling charging station through Packer parts.
We think that whole energy management opportunity is good for our customers and should be good for <unk>.
Okay and low.
I'm wondering if you can provide an update on your telematics and now that you have even more data with more trucks from the field is there anything that you're able to offer customers or anything that you can do incrementally within your operations to increase efficiency building on that growing dataset.
That is a fun topic and we could spend all day talking about it maybe we get back together liable spend a lot more time on it but in brevity on.
I would say that our connected services business really as a growth opportunity all our trucks in North America come from the factory connected a majority vast majority in Europe from connected as well and so we collect a lot of data from them, which we share with the customers as their data we share that with the customers and talk about how to improve their operating efficiency and talk about how the vehicles performing debt.
That involves our discrete distribution network as well so our dealers are looking at that data and they know how to take care of the customer as well.
We have event managed service event management capabilities, we understand where vehicles are in the network how to take care of them better.
So it's really kind of all about optimizing our customers' experience and that obviously can be good for pass car as well.
Okay I appreciate the discussion. Thank you you bet have a good day.
Our next question comes from Chad Dillard with Bernstein. Your line is now open.
Hi, good morning, good afternoon guys.
Yeah.
So you guys guided true pretty solid.
Would start to see the first quarter on trucks and I was just curious on how you're thinking about the first half versus second half seasonality and kidney from recognizing it's still early but well have adjusted for how you guys are thinking about it.
Sure I think the way we're looking at the World right now is that it's the beginning of an improvement towards.
Replacement level and that as we trend towards replacement level.
We'll see where the market goes if we're saying the midpoint is 265000, both Europe and in North America.
It's a healthy market.
And it feels like it's a sustainable market for a while but obviously it depends a lot on the economy.
Generally happening.
Okay.
And can you talk about your approach to building your autonomous popcorn.
There will be more like the open source so many digital drivers.
Okay interface with it or will it be a little more exclusive on maybe you could walk through your thought process behind making that decision.
Sure.
The way we're looking at this right now is this is a nascent technology that has a lot of development and it can take several years to do as we shared in our announcement.
Aurora is a great company with a lot of really skilled people that are very impressive group of people and our team is working on autonomously enabled trucks. There's also skill and we think that the best approach to bring something robust safe secure to market is to work together our leadership with their leadership to create a capable low.
For autonomous vehicle and then we'll do a lot of testing on that.
We will.
At the end game B to provide our customers a safe efficient vehicle take several years to do that.
Thank you.
You bet.
Our next question comes from the line of Ross Gilardi with Bank of America. Your line is now open.
Hey, good morning, guys. Thank you.
Hey, Ross.
First and maybe you can just elaborate a little bit more on Aurora since you've just on that topic.
Anything incremental that you can you can provide us to help us think about it a little bit more whether it's the economics of debt.
Collaboration.
How should we think about it in terms of your competitive position is its something thats going to drive the fastest speed to market for pass car with level.
For autonomy and do you think that you will experience a meaningful increase in pricing power as you as you do that.
Well I think that erosion is a really good company, we've chosen because of our working relationship with them and.
What youll see is as we develop capable systems that have redundancy in steering braking power systems control software.
They developed a ton of us driver with sensors and <unk>.
Software stacks that are integrated into that that integration will be important I think it will provide a good strength for our customers. It will be obviously advantageous for Aurora and Packer will benefit because we will have this autonomous enabled platform.
Which will be of value to our customers and at what goes on you'll use our distribution system.
It will make their operations potentially more efficient and it should be one of those situations on life that creates a win for US a win for ROI on a win for our customers.
And any particular milestones we should just think about.
Obviously, it's a great great opportunity.
You should give you guys an advantage, but what.
What's to look out for is this just something that I think over the next three years, we'll just get <unk>.
Occasional updates or is there anything you could point to as kind of the next key milestones to look forward for Aurora.
I think I think that will be.
Conservative in our milestones and we've definitely taken some interesting progress right now its really exciting inside but as far as laying out milestones I think we'd probably not want to do that right now.
Okay, and then just the last thing I want to ask you I realize you've gotten a lot of questions on on gross margin on.
Already I'm, sorry to dwell on it but.
I'm just looking for the first quarter you implied truck deliveries.
Seem to put you on the level of deliveries that were similar to the first quarter of 18 net.
First quarter 2018, your gross margin was 14, eight and now youre, saying its going to be about 13, five and I understand that you've invested in safety and so forth and you've got some inefficiencies in the supply chain and whatnot, but is it possible to say how much of that that difference is.
It's really tied what you think are sort of COVID-19 related inefficiencies and more importantly is there any reason to expect lower gross margins through the next cycle versus prior cycles.
Yes.
We estimate that the.
The cost associated with with.
Increased safety higher absenteeism and overtime as a result of the safety measures, we've taken would be around 40 basis points maybe for us.
So thats, a little bit of a drag but yes.
Yes.
Despite the debt.
Covid impact, we still see margins nicely improved to 13, 5% and.
Like I said before that that's probably the highest margin in the industry.
Thanks, Alright, we keep thinking about this right as we are going to continue rigorously focused on providing the industry's highest highest gross margins and we do that and we expect to continue doing that so it's kind of a.
Happy with the margins being industry leading.
But to the fact that they already are industry, leading as do you feel like there's a ceiling on them at this point and that youre going to potentially drift lower just because where you are saying youre going to be in the first quarter and I guess this is a very odd cycle, we're going through to say the least it just seems like you're on a just a lower level at the beginning of the year relative.
Where you were on a similar amount of delivery several years ago.
I think you have to I think you said it well in saying that it's an odd cycle and then we will see how the year develops on that cycle.
Yeah.
Okay Fair enough. Thank you guys you bet.
Our next question comes from Matt Alcott with Cowen. Your line is now open.
Thank you good morning, and good afternoon, if we take a very long say 10 year view.
You guys have any broad vision or you know high level opinion of what percentage of your truck production might be level, four and level five autonomous and basically same question by NRG type what percentage might be anything other than conventional diesel.
10 years.
Well, Matt that as that is asking us to prognosticate out there. It's a decade level on what I would share with you is the way we think about that question, which we obviously do is we want to make sure we have the right.
Capabilities for what the customers' needs are so autonomy.
If there was the rate of operating environment for level four level five autonomy, we want to have the right products there for our customers as soon as that makes sense too and that's why we took the step we did and similarly on zero emissions vehicles. There is going to at some point be an economic payback for them and so that's why we keep being invested in on.
All of the different.
Battery electric and hydrogen fuel cell on hybrid capabilities, so that when the market chooses.
<unk> is there for the product that they want and we kind of think of ourselves as.
Powertrain agnostic and want to make sure that we can provide the customers the product they need.
But in summary, we do think diesel engines will be our primary motive power for the.
Timeframe up to the next decade.
Got it that's very helpful and if I may ask just one more.
Intermediate term question here.
You mentioned that the truck market has been very strong.
The driver market has gotten tighter in TL, specifically do you see any signs that the class eight orders.
That youre getting from growth may begin to moderate as carriers worry about seating trucks and if so do you think.
Whatever replacement demand as lasse will be enough to keep the order momentum going this year.
Well I don't we don't see simply we don't see any moderation order intake from the strong demand for.
Peterbilt and Kenworth trucks, right now and we expect that would continue as the cycle goes.
So.
Things feel good.
Very reasonable lead times on a competitive customers from when I have trucks in the second quarter, we can provide them and make sure they get what they need.
Got it. Thank you very much appreciate it yeah, you bet have a good day.
Our next question comes from Brett Linzey with vertical research partners. Your line is now open.
Hi, Good morning, just just one for me and back to the parts distribution strategy.
18 currently I think you said youre going to add another one this year what is the right investment to support that strategy and are you budgeting continued upward move.
In investment related to distribution and then just as a follow up.
Could you just talk about in the second half of 'twenty, how the E commerce retail sales trended versus your fleet billings versus engine parts as the markets recovered. Thanks.
Well.
If I think about parts distribution strategy. Our goal is to make sure that we service our customers as effectively and efficiently as possible, which is getting parts of them.
Same day and next day with expertise that being a critical part of it and then make sure that we're supporting their organizations through not just apart, but also technical knowledge and interface with our fantastic dealer networks around the world as well so the distribution strategy as to how to optimize that in one part of that is bricks and mortar like you mentioned the 18 distribution centers.
On the Louisville Center that will be working on this year and opening next year. So that's an addition.
And then as we look forward to it.
The bricks and mortar we need but theres going to continue to be a key focus on technology. So that we can.
<unk> continued to expand the service excellence, we provide to the customers and as far as the other part of the question on <unk> touch Yes sure E. Commerce of course has been the fastest growing segment within <unk>, 25% like we said.
Enterprise is a good session with a 13%.
Year over year.
I think those are trends that we expect to continue going forward.
Okay, Great and just a follow up on R&D obviously.
Sort of a snapback here off of a pandemic low in 2020, but it was up or at least the expectation for 'twenty. One is up about 10% of the 2019 base well.
What is the right incremental jump we should see over the next two to three years is it 10% plus or do you think you're at a good level of any any color you can give us.
We feel like we're going to get a good level at this number.
One of the things, we always do as that Theyre, great projects for us to work on we work on them.
A really strong balance sheet low cash in.
Boy it wisely to the benefit of our shareholders.
Okay got it I'll leave it there thanks for the questions.
Have a good day.
Our next question comes from Adam Uhlman with Cleveland Research. Your line is now open.
Yes.
Hey, guys. Good morning, good afternoon.
Aye.
I wanted to start with I appreciate your share in your expectations for.
Truck sales in the parts business I'm wondering if you could do the same.
So the finance subsidiary any any thoughts on sales on earnings this year.
Finance company, so a nice improvement in profit from the third to the fourth quarter.
And.
If you look at the profit level in the fourth quarter of.
$64 million with.
Low past dues, good performing portfolio.
On credit qualities.
On a level that we would anticipate for the coming quarters.
As a range.
Okay, and it seems like used truck valuations have moved.
Moved quite a bit higher recently could you what are you seeing in the market and is there any chance that positively benefits.
Your business.
<unk> seen positive momentum both in Europe.
In North America, Europe, probably bottoming out.
Right now, but North America has seen a nice improvement about 10% to 12%.
So that's a really nice strength at the same time.
Our used truck groups.
On a number of used trucks on as we build our inventories right now are have come down very nicely to very very healthy levels.
I would just add that our teams have done a great job on Europe, and North America in establishing these retail centers that we've added.
Okay, and then just a clarification could you.
Update us on your Amex engine penetration here recently, and any plans or goals for penetration rates in 2021.
Yeah like over the years, we've seen steady growth in the MX engine and we expect that growth to continue and we think about things. We're talking about is if we had 10 years ago to estimate or our proprietary engine share. It was probably 30% now at 60% and it continues to grow each year is a different story, depending on who's buying trucks on what parts of the market are alive.
Do you expect steady growth on immix engines.
Okay. Thank you.
Net.
Our next question comes from Rob Salmon with Wolfe Research. Your line is now open.
Hey, good morning, guys and thanks for taking the questions.
A few follow ups with regard to Aurora could you give us a sense with this partnership if you guys are taking a stake.
In Aurora and kind of big picture.
How do the economics look for for pack on obviously you'd be selling a higher spec truck, but curious if there's any sort of.
Revenue you'd be getting from on a mileage basis or anything along those lines.
Okay that the team down there led by <unk>.
Chris in Sterling.
Great in terms of technology.
They're they're understanding what the model might be going forward on understanding the model might be going forward. It looks the same and that we would distribute trucks through our network of obviously, providing a driver autonomous driver for them is something that would have lots of updates and lots of them.
Our engagement with this low to sell and forget things to sell and engage and maintain an update so that'd be I'm sure part of their model and for US. The similar thing right. The truck will need updates it'll be really important that these that the trucks to the industry uses for the autonomous are at the highest quality highest reliability safest products, which is what <unk> provides so it puts us.
On a strong position there.
Having a great distribution network of dealers, which we do to take care of those trucks, because that will still be a need.
You'd expect that there'll be an engagement of software updates and.
How the truck performs and so that will provide opportunity for pack on it on a steady basis as well as just a one time sale.
And compression do you have a sense I know you've talked about kind of looking out a few years.
This penetration goes up that you guys are currently thinking about from an EBITDA.
I think it's a little bit early to make that call. I think people have tried to make that call on the car industry. A few years ago and it found that that was a difficult decision and I think the most important thing is to make sure that it's completely safe and completely reliable and that's where our focus is.
Got it appreciate the time guys.
Net.
As a reminder, ladies and gentlemen, please press star one on your telephone to ask a question.
Our next question comes from Courtney <unk> with Morgan Stanley.
Your line is open.
Hi, good morning, good afternoon guys.
Just wanted to follow up on that on the conversation used.
Truck pricing you mentioned that you know this income margins had improved I think last quarter you talked about this.
Trucks really point to it at no margin.
But just wanted to understand has the used inventory been kind of entirely worked through at this point and then what are the implications then when you think about new pricing for next year, because I think you had mentioned that new pricing was about flat in the quarter.
So how we should be thinking about.
To your new pricing.
So if you look at the used truck inventory has come down nicely.
We don't have any used trucks anymore. We can continue to have you stripped but it's on.
16% lower than that.
<unk>.
Beginning of the quarter, it's lower than what it was at the beginning of the year.
We continue to sell those trucks through our used truck center like Preston said.
We sell them at those used truck centers typically we would get a premium over there on $5000 per truck.
So that will support margins.
Yes on better used trucks of course provide better trading values from a customer that will be a good thing for them too.
And then just any thoughts on it.
New truck pricing for this year, and then I guess, you know, especially with respect to some of the comments.
That you've made on commodity price pressure can you just give us a sense of.
How much steel and aluminum could be impacting your margins this year and what you're thinking about them as it relates to price cost.
I don't give us anything specifically to say about that is I mean, we're working with our customers on the <unk>.
Trucks, they need for the.
From a little bit to the small vocational to the on highway and and we have a <unk>.
From a relationship with the dealers as we do that and make sure. We provide the best parts trucks finances altogether for our customers working with the supply base of course, typically we have long term agreements with our suppliers.
Does allow us three to six months between the raw materials go up.
And at the prices for those components would go up so that gives us.
Lead time.
True price it into a truck into attractive when needed.
So.
That's very normal.
Okay Gotcha.
And then just lastly.
You mentioned your parts growth expectation for next year I think you know coming out of free you talked about the acceleration that you saw in parts growth have we seen parts growth largely stabilized with high single digit level or budget exiting the quarter much higher.
And have continued to grow throughout the quarter.
I think the parts team showed their real strength and capability by having a record quarter and another fourth quarter was an all time record for them. So that's that's steady strong growth for them. They did a great job.
We expect to see that continue through the year.
Okay, great. Thanks.
You bet have a good day Courtney.
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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