Q4 2021 Paccar Inc Earnings Call

January 25, 2022

Good morning, and welcome to Pandora's fourth quarter 2021 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 Patkars 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, <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 press on the line participate in a listen only mode.

Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results for additional information. Please see our SEC filings and the Investor Relations page of <unk> Dot com.

I would now like to introduce Preston Feight.

Hey, good morning.

Harry Skippers, Michael Barkley and I will update you on a very good fourth quarter and full year 2021 results as well as other business highlights.

First I really appreciate our outstanding pack our employees they deliver the highest quality trucks and transportation solutions to our customers and focus on the safety and health of each other.

They are truly an impressive team.

In 2021 Packer achieved annual revenues of $23 5 billion and very good net income of $1 85 billion.

Backers financial performance benefited from record results in our parts and financial services divisions.

<unk> achieved 83 consecutive years of net income and has paid a dividend every year since $19 41.

In 2021 pack, our declared dividends of $2 84 a share.

<unk> fourth quarter revenues were $6 7 billion and.

Fourth quarter net income increased from the prior year by 26% to $511 million.

<unk> are parts achieved record fourth quarter revenues of $1 3 billion.

And record pretax profits of $306 million, which was a 38% increase compared to the same period last year.

Pac are delivered 47600 trucks during the fourth quarter, 45% higher than the third quarter.

This included delivering 7000 trucks that were awaiting components.

In the first quarter of 2022 deliveries are forecast to be in the range of 41% to 45000, a number that is limited by the global supply of semiconductors.

In 2021 U S and Canadian class eight truck retail sales were 250000 units.

In 2020 to the U S economy, and industrial production are projected to expand by about 4%.

2022, U S and Canadian class eight truck market deliveries are forecast to increase to a range of 250 to 290000 vehicles as the global supply chain gradually improves throughout the year.

European above 16 tonne truck registrations were 278000 units in 2021.

In 2022, the European economies are projected to continue growing and we expect the above 16 tonne truck registrations to be in a range of 260 to 300000 trucks.

In 2021, the South American above 16 tonne truck industry registrations were 127000.

And in 2022, the South American market is expected to be in the range of 125 to 135000.

The growing global economies robust freight activity and strong customer demand for <unk> Peterbilt and kenworth trucks has resulted in a substantial order backlog in all markets.

Truck and parts gross margins were 11, 4% in the fourth quarter, reflecting higher labor and materials cost associated with the completion of offline trucks, and the resulting increased mix of trucks versus parts.

We estimate first quarter truck and parts gross margins to increase and be in the range of 13% to 13, 5% as we ramp up production of our new products and realized production efficiencies.

In 2021 pack or introduce exciting new heavy and medium duty kenworth, peterbilt and <unk> trucks, which are proving to be very successful in the market.

<unk> also delivered many important technology and innovation milestones.

Such as a strategic partnership to develop and sell autonomous trucks.

Production of zero emissions vehicles, and we launched <unk> proprietary global connected service offerings.

The new <unk> lineup launched in 2021 earned the prestigious international truck of the year Award and the innovative <unk> excess hydrogen internal combustion technology vehicle when the truck Innovation Award.

Kenworth and peterbilt each are kenworth and Peterbilt earned five manufacturing leadership awards from the National Association of manufacturers and.

<unk>, Brazil was awarded the truck brand of the year for the fourth time.

Last year <unk> was again recognized as a global leader in environmental practices by the reporting for CDP.

<unk> achieved an elite a rating, which places the company in the top 200 of over 13000 reporting companies.

In 2021, <unk> was recognized as a top place for women to work by the women in trucking organization for the fourth consecutive year.

The truck market is strong and demand is high for Packers excellent new trucks and transportation solutions, we look forward to 2022 being a very good year.

Harry Skippers will now provide an update on <unk>, our parts Packer financial services and other business highlights.

Thank you Preston.

In 2021.

<unk> set new quarterly and annual records for revenues and profits.

Annual revenues were $4 9 billion.

And annual pretax profit increased by 38% to $1 1 billion.

This is an outstanding performance by the global parts team.

And it really highlights the fact that pickup parts is a high margin growth business.

Becker parts has expanded its global network to 18 distribution centers.

And we will open another facility in Louisville, Kentucky later this year.

We estimate parts sales to grow by over 10% in the first quarter of this year compared to the same quarter last year as.

As we continue to see strong demand for parts worldwide, and especially for our outstanding E Commerce business.

Becker financial services fourth quarter pretax <unk> income increased to a record $135 million.

Annual revenues grew to $1 7 billion in 2021.

An annual pretax income increased to $438 million.

Nearly double the profits earned in 2020.

Portfolio assets were $15 4 billion.

The portfolio continues to perform well with very low past dues are low credit losses.

Becker financial benefited from strong used truck pricing in 2021.

Becker financial increased the sales volume and its retail used truck centers.

Which has contributed to higher used truck price realization.

<unk> financial has 12 used truck facilities worldwide.

And in 2022, we'll open another used truck centers in Madrid, Spain.

We expect Peck, our financials strong performance to continue this year.

In 2021, Becker invested $512 million of capital projects.

$324 million in R&D.

We launched the largest number of new truck models in our history.

In 2022, we are planning capital investments in the range of 425 to 470.

$5 million and R&D expenses will increase and be in the range of $350 million to $400 million.

As we accelerate our investments in clean combustion zero emissions autonomy and connected vehicle programs.

<unk> independent Kenworth, Peterbilt and <unk> dealers continue to invest in our businesses.

To provide our customers the highest level of service in the industry.

These investments make a significant contribution to <unk> long term success.

Fourth the growth of pickup parts Paccar financial services.

Becker had an excellent year in 2021, and we're enthusiastic about the future.

We'd be pleased to answer your questions.

At this time to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

The company request one question and one follow up question per analyst.

Question will come from Chad Dillard with Bernstein.

Yeah.

Hi, good morning, everyone.

Good morning, Chad.

So I was wondering if you could talk about.

Just your gross margins.

<unk>, which seemed a little light just given the revenue that you did.

Just how should we think about the breakdown between the absorption versus price cost mix and then as we kind of think through the evolution from <unk>.

Jack going from here.

For the year.

Sure happy to do that so if you think about the fourth quarter. Our teams did a fantastic job of identifying the chips they needed through engineering efforts through finding broker parts through partnering with our suppliers to come up with what they need to deliver the offline trucks and so they did deliver the higher volume of trucks those trucks had been absorbed in the third quarter and so just.

Huge shout out to everybody. It was part of that effort I would say looking forward, we see improvement in production steadiness, it's not completely solved but our teams have done a good job of creating a more steady production outlook for us and so we're getting the production efficiencies associated and hence we show you a 13 to 13, 5% in Q1.

And then I guess I would add to that and say that if we see that the market continues to gradually improve we should see improvement from there.

Got it that's super helpful and.

And then can you talk about your backlog.

Market share versus retail sales market share are you seeing any gains from new product insurance or anything like that.

I think what's happening with our backlog right now is the new trucks. We launched in 2021 are just ramping up and especially in Europe , which was launched in kind of October timeframe and customers in North America for the new medium duty love them for the new Kenworth and Peterbilt are just enjoying the benefits of the 7% improvement in fuel economy in Europe , the up to 10% improvement in fuel economy.

And the fact that the new European drug the ex FX <unk> plus those are the only trucks in the market.

That meet the new messaging dimensions regulations. So we have a great advantage there for those trucks and they're performing really well that's leading to a strong backlog for us. So we have about six months plus a backlog and thats kind of measured by what we can build so as we get more parts and availability will probably be able to take some additional orders and build more but really strong backlog right now.

Great. Thanks, I'll pass it on.

You bet.

Question will come from Jamie Cook with credit Suisse.

Hi, good morning.

Congrats on a nice quarter.

Thanks, Jamie.

Digging in first on I know you talked about margins for the first quarter and for the year ex ing out benefits from the new.

New products, how do we think about sort of what your assumptions are for price cost for the year given some of the lift increases out there or do we think we can we can be neutral I guess, that's my first question.

Yes, we do I mean, we've gotten a little bit more stability than we had last year and so I think we expect that price cost realization as we go through the year.

Okay.

That's helpful and then.

I guess my second question, just your sort of.

Our view on the cycle with the supply chain.

Potentially easing how are you thinking about sort of 2023 and what it could mean with the 2024 carbon emission standards do you think the <unk>.

Production forecasts out there are correct here and how are you thinking about the incremental cost on the trial. Thank you.

I think the first thing to start with is our customers are doing really well there is a lot of freight to be hold out in the market that doesn't seem like that's a short term thing thats long term demand thing. So I would expect that to continue obviously.

Butane interruptions, but if that continues well then I would expect 2022 2023 beyond should be good. If you think about 2020 for Watson emissions change that emissions change brings fuel economy, which should be good for our customers as well. So it looks like we are in the beginning of a good steady.

<unk> market.

Okay. Thank you.

Your next.

Question is from Stephen Volkmann with Jefferies.

Hi, good morning, guys.

I wanted to ask Jamie's question, just slightly differently.

Given given the backlogs that you guys have.

And everyone across the industry I guess I might have thought that price cost could be positive this year.

Given the demand drivers would you disagree with that or is there some other offset.

I completely agree with you I think that price cost should be positive for the year.

Got it okay, maybe I misunderstood that answer.

Can you also update us maybe a little bit pressing you mentioned, the big new product or maybe Harry did the big new product rollout that you guys have this year and I know you guys always sort of target margin expansion. When you do these big model changeovers.

And so I guess as you're as you're rolling through that process any updates on how youre thinking about the impact that that new model rollout will have on margins.

The.

The new Dove, Steve has been extremely well received in the market by customers dealers depresses, everybody the fuel economy improvement to ride and drive of the vehicle the performance the technology.

I think <unk> said it it's the first and only trick in the market right now that makes use of those new masters and dimensions regulations in Europe .

So it really puts them in a class of its own and it is a premium costs. So that's going to be very good for our market share growth margin.

Everything and customers benefit from Atmos.

Great. Thanks, Gary I appreciate it.

Your next question will come from Tami Zakaria with JP Morgan.

Hi, everyone. Thanks for taking my questions I have a couple of quick ones.

So the first question I have is what's your outlook for the parts business. After a record year I know youre guiding to 10% growth in the first quarter, but beyond that is the current fleet age conducive to the parts business as you look to the next few quarters.

That's a great question, Tammy I'd say that indeed, we said, 10% year over year and strong in the first quarter like it was in the fourth quarter and we see that the.

Trucks are being used out there, which is they get use means they consume parts. So thats one thing that bodes well for the year of 2022 and I would also point to the fact that our team our global team has done a great job of launching things like e-commerce , and bringing that to our customers, which makes it easier for them to buy from <unk> than anyone else and that contributes to the long term success and growth of the business.

So we expect 2022 to be a great parts here.

Got it. Thank you so much and another quick one I think you noted about 10000 red pad.

Parked trucks.

End of last quarter.

Any updates on that front as you as you exited the fourth quarter.

Sure Tammy we in the fourth quarter, we are able to deliver about 7000 offline trucks because of the great work of the teams and so that number has been reduced dramatically.

It's one of the reasons, we think that production is getting a little bit more stable is because we had good supply and good partnership were going on.

Great. Thank you so much.

Net.

Your next question will come from David Raso with Evercore.

Hi, good morning.

The press release, Hey, Good morning, you noted in the press release, the supply chain improvement and then on your comments Youre, a little more cautious about the supply chain improving.

Can you just square up that you Didnt raise your unit forecast at all for 'twenty two from three months ago. So should we take it as.

You were able to ship.

Better in the fourth quarter, but there has not been any improvement in supply chain, just trying to square that up and then I have a quick follow up on the backlog.

Sure, let's do that first.

About its supply chain has improved compared to what we experienced in <unk> and <unk> has definitely improved but improved as different than being fully resolved and so I think we're sitting in between improved and resolved David just kind of give you some boxes for that.

So I would say no change.

Change in the forecast, though but that improvement hasnt been baked into any.

Updating our forecast is that.

I look at it and think that we have a 250 to 290000 unit range at the tie side of the range 290 is a pretty significant improvement above the $2 50 market in 2021, and I think that as we watch the year progress, we'll get better clarity for how supply base.

Continues and as it continues to improve we will make adjustments appropriately.

And then on the backlog how it relates to price cost and the full year gross margin comments, how much of the backlog already has the pricing locked in and your cost structure generally locked in what you can control of course.

And then how much is still out there say for the second half of the year on your cost where maybe you can.

Get some help on some of the costs really maybe what we're seeing in some of the materials.

And I think that through what's in the backlog and what sort of a.

The left open a little bit for later in the year to see how the gross margins play out.

I think of it a little bit like some of the trucks.

Some of the bigger customers have there.

Backlog pricing out there and then some of the stock units and smaller fleets maybe don't.

It's kind of depends right. So it's a mixed bag as every truck order stands on its own. It obviously the further out you go get out a quarter or two it becomes less of it is certain and so that gives us more flexibility as we move out a quarter or two but I think in general essentially.

Yes.

Sequentially through the quarters.

Boston, just to clarify and I'll hop off.

We know from the channel is not all orders have a price yet with it but it was interesting you commented on flexibility left in price for some orders, but how much of your cost have you locked in yet, meaning steel and things you can kind of look out maybe lock in a bit for most of the year we.

We do do that yes, we do that David we have long term contracts with our suppliers in many cases, we hedge in many cases and so together that gives us some control over all of our cost structure for materials.

Thank you.

You bet.

Operator, do we have a collar.

Okay.

Hello, Steven your line is.

Okay.

Is that Steve Fisher from UBS.

Yes.

Yes, please alright.

Sorry, My line cut out there.

It sounds like you still have a few thousand red tags.

Is your 41% to 45000 delivery number assume you get through all of those in the quarter and then once you do get through those.

What's the underlying or sort of normalized margin. Once you are just sort of.

Producing and delivering at the same same pace.

So we've had.

A variety of chips supplies have come in and out and so hesitant to give you an absolute answer on what Q1 will be in terms of number of offline use it might still remained we'd see improvement through the quarter, but it's every day. The teams working together supply base to work through that so some portion may remain as offline, but it's decreasing.

And then I would say as far as underlying assumptions, we feel good about the margins looking forward into the year and seeing them grow into our into a higher range.

Okay, and then there were some big industry cancellations in the fourth quarter can you just talk about your experience with cancellations and <unk>.

<unk> scrubbed your backlog is wondering whether those cancellations were more proactive or.

A reactive.

From a customer standpoint, we have not had customers who don't want their trucks that is not something that we've experienced I cant speak to anybody else, but I can tell you that all the customers I've talked to and the teams are working with C. Just strong demand for as many trucks. So we can get them.

Okay. Thank you.

You bet have a good day.

Your next question will come from Robert Wertheimer with Melius research.

Good morning, everybody.

Hello.

So obviously delivering trucks that were non standard production just waiting on components is an expensive thing I am pretty sure. Your <unk> gross margin guide indicates this but when you kind of already there in <unk> on costs, if you sort of take those trucks out.

You're off to a pretty healthy healthy gross margin already or is there a bunch of you have to do to get to the <unk> piece here.

I would say that that if you think about the cost of the delivery and the things we had to incur in labor and materials for those <unk> units.

A big portion of the difference.

And then obviously that as we look forward and we've had a chance to react to last year's cost increases we've been able to price that into more and more effectively and that's how you see the trend developing.

Perfect Alright, that's pretty clear I guess and then the other or one of the other uncertainties overlaying. The market is just omicron in scouts and hopefully it's a.

Obviously less severe but people might be out. So do you have a sense on whether that's disruptive to <unk> at this point and whether it's cresting or not on your own aircrafts.

Dragon I can comment to that and say that if I look at the plants are around pack our facilities.

People, who are doing such a fantastic job.

Should park on that for a little bit.

Tremendous job that people are doing in terms of getting to work and getting the trucks built and delivered.

And I just couldn't be more pleased with the people all around <unk>.

We see that having some limited effects on us in the immediate C. Right now, but moderating as time passes and then of course with this latest two year period, who knows what three months from now might bring.

I understand that part thank.

Thank you much.

Ed.

Your next question will come from Jerry Revich with Goldman Sachs.

Yes, hi, good morning, everyone.

Hi, Jerry.

Can we talk about the.

And factory overhead costs that you folks had been reporting with obviously all of that.

Fly chain goodness going on over the past couple of quarters, that's been running in the $70 million to $100 million range per quarter, how did that trend in the fourth quarter.

Really nice to see the improvement in the first quarter guide.

How much of an overhang does the range, let's say at the midpoint anticipate from that.

$100 million run rate.

We've been at.

Into the first quarter.

I think Jeremy I'll, let Michael answer that one for you I would just say that our factory overhead costs.

<unk> increased partly due to get those trucks out that we've been talking about and also due to higher volume.

We see them.

More normalizing as the year progresses into 2022.

And Michael can you comment on the first quarter does that embed something like $30 $40 million headwind is that.

Ballpark.

Can you just help us with how much of an overhang.

Looked into that first quarter guide.

I can't comment on that specificity.

Okay.

And separately I was wondering if you could talk about as you folks are getting electric vehicle orders.

What's the add on that Youre seeing for your dealers to the extent you folks have opportunities to participate on the charging infrastructure.

Other add ons that obviously you would you would get with diesel truck orders is there a per ticket item that you can talk about or take rate from any participation you have in contributing to building out the charging infrastructure with the trucks on those initial orders you've booked so far over the past year.

Yes, it's early days, but I think it's a it's an interesting thing to think about in terms of the zero emissions vehicle programs battery electric trucks. We've now got we built over 100 units.

<unk> taken orders for over 100 vehicle Chargers battery electric Chargers at this point as well so thats kind of an add on incremental business opportunity for us and then when you get into that as your magic charger in a vehicle the opportunity of software for charging optimization and battery energy management and the vehicle is something that <unk> has expertise in and that will benefit our customers. So that's an add on.

<unk> as well so as that market.

Begins to develop zero emissions market begins to develop those should be good opportunity for <unk>.

Very interesting thanks.

You bet.

Your next question will come from Ross Gilardi from Bank of America.

Yes, good morning, guys.

For us.

What do you think about normalized.

North American class eight truck demand I mean, the number that is commonly thrown out forever is like 250000 units. Although obviously, it's rare that we actually see a year, where we are.

It's not materially above or below that that number and I'm. Just curious do you think.

That figure is still directionally accurate or do you think normalized demand for class eight vehicles is now much higher than what you would've thought a few years ago, just due to the continued explosion of E Commerce and just a variety of other factors.

Ross I think you parse it out a good question that I think that that $2 50 might be a bit data. It's hard to know what the number is but the trucking deliver 72% of the business around.

Freight demand and that's not decreasing that's increasing e-commerce contributes to that speed of delivery that people are looking forward contributes to that efficiency of trucks has grown so much, especially our pack our trucks, where the fuel efficiencies are so much higher.

So, yes, I think that you're you're onto something there that it could be a little bit higher than that.

Okay.

And then can you talk a little bit about that the hydrogen ice vehicle that you've got.

<unk> received an award on.

What kind of reception is hydrogen internal combustion engine getting from regulators on.

That engine type of the true zero emission solution and how does it how do you think it stacks up on that vehicle performance versus hydrogen fuel cell vehicle.

Well, what we're trying to do is pass cars make sure that we pay attention to all the different opportunities out there that will let the market we'd like the market to decide which is the right ones right. Now we have great success with our battery electric vehicles, obviously, a leader in the hydrogen fuel cell area.

Then the team over at <unk> led this hydrogen combustion engine development program, which we won the innovation truck award for and so that has nearly zero Sidoti <unk>. Its really just some <unk> from the lube oil stuff and I think we want that out there as an opportunity. So that we can work with the governments and see what what's going to be acceptable and what is going to provide our customers. The right benefits. We think it is early days.

As in pre selecting the right answers not necessary.

So we will continue to leverage our strong partnerships, our technologies and bring the right solutions to our customers.

Got it thank you.

You bet.

Your next question will come from Nicole <unk> with Deutsche Bank.

Yes, thanks, good morning, guys.

Good morning.

Maybe just a question on Europe .

What are you guys seeing there from an order perspective, I'm, just kind of surprised that it looks like youre forecasting deliveries more flattish in 2022, especially since.

You talked about improvement in supply chain.

So the auto situation in Europe has been very strong and much in line with what Preston just commented on the U S and the rest of the world for Packer.

I think a market between 260 <unk> hundred thousand again is a pretty wide range.

And it shows that there is still quite some uncertainty.

Maybe COVID-19 related stuff.

Chip situations.

But whatever the market does with our new trucks, new Dr truck models.

A very good position to grow market share and whatever the market size will be.

So.

Well production.

Production in volumes.

Okay got it understood and then just a follow up on dealer inventory. So I suspect that theyre, probably still very low, but just wanted to get an update Darren if you guys see the potential for <unk>.

This document to help volumes as we move into the second half of the year.

Yes, I would say that inventories are lower than we wished him ideally to be but that's obviously a result of the supply base situations and that does give us strong confidence that we'll be able to build every truck that we can get the parts for this year, which should create a really good year.

We'll see inventory react as we can build enough trucks.

Thanks, I'll pass it on.

Alright, great.

Your next question will come from Courtney Yucca bonus with Morgan Stanley .

Hi, Good afternoon, guys. Thanks for the question.

Yes.

Maybe if we can just go back to the.

The question on Europe , and I think that was where you saw the biggest sequential step up in deliveries this quarter.

So is it the right way to understand that that was where most of those red tagged trucks were and how should we be thinking about the remaining couple thousand are those in Europe are those in North America.

And then.

If you could also just comment on the <unk> I think you had very strong margins this quarter.

Harrie comment.

How are you pricing, but how should we think about that business going forward. If there is any guide rail. So you can give us the types of just continued strength.

Sure Hey, Courtney how about I start off on the European.

Deliveries and then Harry can pick up and add anything he wants to talk about the <unk> three.

Three things I would wait to think way into the different sequentially in deliveries one of them is seasonality.

One of them is build rate increases that we've had and then the other is really probably.

Tied to the offline reduction that we had so those three things kind of change the 10000 to 18000 and Harry anything you'd add on that.

Offline truck production was proportional.

It's similar then.

Other brands.

And the seasonality is a big impact if you compare the third to the fourth quarter. The third quarter is typically December shutdown with fewer production days in the third quarter then.

These things combined.

Explain the increases together with an increased building.

It's always nice to see.

And for the Finance company Great results in the fourth quarter we.

We've seen the used truck markets improve by a look.

<unk> financial has expanded its use truck center and sales capability over the years.

This is really a year that starts to pay dividends.

Looking into next year I would say the outlook for the next couple of quarters.

Very good and we expect better financial strong performance to continue.

Okay. Thank you.

Thank you. Your next your next question will come from Matt Alcott with Cowen.

Good morning, Thank you so.

And you guys continue to capital supply chain issues. This year as part of the solution using more engines from your suppliers as opposed to in house. So you can focus on other parts of the supply chain.

That's not quite how it really works, Matt we have.

Each at each each ship is funny each chip kind of goes to the component and you can't really know how that's going to shake out they're not the same chips. Each place. So the teams have done a really good job say again figure out how to reengineer and different chips to be used in our engines and Cummins does the same as a good partner and we've also been.

To kind of go back and track similar similar.

Types of chips and find ways to use them. So I think thats independent of the engine independently component really is just a great team effort by everyone at <unk> and our suppliers and we would expect to see the amex share in North America go up significantly in 2022.

Got it and just one more question on the outlook for the next.

Next year.

We had the disruptions pushing out some deliveries this year than last year.

And then there could be potential pre buy in 2023, so 23 be materially up from this year or do you guys not think there will be a meaningful pre buy ahead of 2024.

I think theres a lot of variables between now and the end of 2023 and I think in general it feels like the market is going to be really good this year and it seems likely it will be very good next year as well.

Great. Thank you very much.

You bet.

Your next question will come from Jeff Kauffman with vertical research.

Thank you very much.

I wanted to ask a question on production rates.

We were down in the third quarter.

Approximately what was the trucks per day production that you were seeing across the network and then.

Where are we exiting the fourth quarter and where do you believe that number could go by the middle of 'twenty two.

I would ask you to answer it this way so we don't really provide our build rates. So I would just simply say as we have seen build rate increases through in the fourth quarter into now and we would anticipate being able to we're hoping to take additional build rate increases as we can.

Get the components, we need to build the trucks.

Okay, but is there any metric to think about where you are now versus where you were during the peak of the crisis and chips and parts and things like that just to get an idea of how much production scaled up.

We're 40, 45% higher than the third.

Third quarter so.

Quite a step up as the answer to your question.

Alright.

Harry is saying I think right now maybe you have a 10% to 20% increase from what we've had in production deliveries.

And the continuing growth in that areas, what it feels like.

Okay. That's all I have thank you alright.

Alright, great.

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 <unk> earnings call. Thank you for participating you may now disconnect.

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Good morning, and welcome to <unk> fourth quarter 2021 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 Patkars 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 <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 COO.

<unk>.

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

I would now like to introduce pressing site.

Hey, good morning.

Harry Skippers, Michael Barkley and I will update you on a very good fourth quarter and full year 2021 results as well as other business highlights.

First I really appreciate our outstanding pack our employees they deliver the highest quality trucks and transportation solutions to our customers and focus on the safety and health of each other.

They are truly an impressive team.

In 2021 Packer achieved annual revenues of $23 5 billion and very good net income of $1 85 billion.

Packers financial performance benefited from record results in our parts and financial services divisions.

<unk> achieved 83 consecutive years of net income and has paid a dividend every year since $19 41.

In 2021 pack, our declared dividends of $2 84 a share.

<unk> fourth quarter revenues were $6 7 billion.

Fourth quarter net income increased from the prior year by 26% to $511 million.

<unk> are parts achieved record fourth quarter revenues of $1 3 billion and.

And record pretax profits of $306 million, which was a 38% increase compared to the same period last year.

<unk> are delivered 47600 trucks during the fourth quarter, 45% higher than the third quarter.

This included delivering 7000 trucks that were awaiting components.

In the first quarter of 2022 deliveries are forecast to be in the range of 41% to 45000, a number that is limited by the global supply of semiconductors.

In 2021 U S and Canadian class eight truck retail sales were 250000 units.

In 2020 to the U S economy, and industrial production are projected to expand by about 4%.

The 2022 U S and Canadian class eight truck market deliveries are forecast to increase to a range of 250 to 290000 vehicles as the global supply chain gradually improves throughout the year.

European above 16 tonne truck registrations were 278000 units in 2021.

In 2022, the European economies are projected to continue growing and we expect the above 16 tonne truck registrations to be in a range of 260 to 300000 trucks.

In 2021, the South American above 16 tonne truck industry registrations were 127000.

And in 2022, the South American market is expected to be in the range of 125 to 135000.

The growing global economies robust freight activity and strong customer demand for das Peterbilt and Kenworth trucks has resulted in a substantial order backlog in all markets.

Truck and parts gross margins were 11, 4% in the fourth quarter, reflecting higher labor and materials costs associated with the completion of offline trucks, and the resulting increased mix of trucks versus parts.

We estimate first quarter truck and parts gross margins to increase and be in the range of 13% to 13, 5% as we ramp up production of our new products and realized production efficiencies.

In 2021 pack or introduce exciting new heavy and medium duty kenworth, peterbilt and <unk> trucks, which are proving to be very successful in the market.

<unk> also delivered many important technology and innovation milestones.

Such as a strategic partnership to develop and sell autonomous trucks.

Production of zero emissions vehicles, and we launched <unk> proprietary global connected service offerings.

Kenworth and peterbilt each are kenworth and Peterbilt earned five manufacturing leadership awards from the National Association of manufacturers and.

<unk>, Brazil was awarded the truck brand of the year for the fourth time.

Last year Packer was again recognized as a global leader in environmental practices by the reporting for CDP.

<unk> achieved an elite a rating, which places the company in the top 200 of over 13000 reporting companies.

In 2021, <unk> was recognized as a top place for women to work by the women in trucking organization for the fourth consecutive year.

The truck market is strong and demand is high for Packers excellent new trucks and transportation solutions, we look forward to 2022 being a very good year.

Harry Skippers will now provide an update on pack, our parts Packer financial services and other business highlights Eric.

Thank you Brendan.

In 2021.

<unk> set new quarterly and annual records for revenues and profits.

Annual revenues were $4 9 billion.

And annual pretax profit increased by 38% to $1 1 billion.

This is an outstanding performance by the global parts team.

And it really highlights the fact that pick of parts is a high margin growth business.

Pekka parts has expanded its global network to 18 distribution centers.

And we will open another facility in Louisville, Kentucky later this year.

We estimate part sales to grow by over 10% in the first quarter of this year compared to the same quarter last year as.

As we continue to see strong demand for parts worldwide, and especially for our outstanding E Commerce business.

Becker financial services fourth quarter pretax <unk> income increased to a record $135 million.

Annual revenues grew to $1 7 billion in 2021.

An annual pretax income increased to $438 million.

Nearly double the profits earned in 2020.

Portfolio assets were $15 4 billion.

The portfolio continues to perform well with very low pause juice and low credit losses.

Becker financial benefited from strong new strict pricing in 2021.

Becker financial increased the sales volume and its retail used truck centers.

Which has contributed to higher used truck price realization.

Becker financial that's 12 used truck facilities worldwide.

And in 2022, we'll open another used truck centers in Madrid, Spain.

We expect our financials strong performance to continue this year.

In 2021, Becker invested $512 million of capital projects.

$324 million in R&D.

We launched the largest number of new truck models in our history.

In 2022, we are planning capital investments in the range of $425 million to $475 million and R&D expenses will increase and be in the range, you'll see another $50 million to $400 million as.

As we accelerate our investments in clean combustion zero emissions autonomy and connected vehicle programs.

<unk> independent Kenworth, Peterbilt and <unk> dealers continue to invest in our businesses.

To provide our customers the highest level of service in the industry.

These investments make a significant contribution to <unk> long term success.

The growth of pickup parts Paccar financial services.

Becker had an excellent year in 2021, and we're enthusiastic about the future.

We'd be pleased to answer your questions.

At this time to ask a question you will need to press star one on your telephone to withdraw your question press the pound key part of the company request one question and one follow up question per analyst.

First question will come from Chad Dillard with Bernstein.

Okay.

Hi, good morning, everyone.

Good morning, Chad.

Okay.

So I was wondering if you could talk about just your gross margins in the quarter, which seemed a little light just given the revenue that you did and just how should we think about the breakdown between the absorption versus the price cost mix and then as we kind of like the evolution from <unk>.

The trajectory from here.

Sure happy to do that so if you think about the fourth quarter. Our teams did a fantastic job of identifying the chips they needed.

Through engineering efforts through finding broker parts through partnering with our suppliers to come up with what they need to deliver the offline trucks and so they did deliver the higher volume of trucks those trucks had been absorbed in the third quarter.

And so just a huge shout out to everybody. It was part of that effort.

Looking forward, we see improvement in production steadiness.

Not completely solved but our team did a good job of creating a more steady production outlook for us and so we're getting the production efficiencies associated and hence we show you a 13 to 13, 5% in Q1.

And then I guess I would add to that and say that if we see that the market continues to gradually improve we should see improvement from there.

Yes, that's super helpful.

And then can you talk about your backlog.

Market share versus retail sales market share are you seeing any gains from new product intros or anything like that.

And the fact that the new European drug the ex FX <unk> plus those are the only trucks in the market.

That meet the new medicine dimensions regulations. So we have a great advantage there for those trucks and they're performing really well that's leading to a strong backlog for us. So we have about six months plus of backlog and thats kind of measured by what we can build so as we get more parts and availability will probably be able to take some additional orders and build more but really strong backlog right now.

Great. Thanks, I'll pass it on.

You bet your.

Your next question will come from Jamie Cook with credit Suisse.

Hi, good morning.

Congrats on a nice quarter. Thanks.

Thanks, Jamie.

Digging in first on I know you.

You talked about margins for the first quarter and for the year ex ing out benefits from the new products. How do we think about sort of what your assumptions are for price cost for the year given some of the lift increases out there or do we think we can we can be neutral I guess, that's my first question.

Yes, we do I mean, we've gotten a little bit more stability than we had last year and so I think we expect that price cost realization as we go through the year.

Okay.

That's helpful and then.

I guess my second question, just your sort of.

View on the cycle.

Hi chain potentially easing how are you thinking about sort of 2023 and what it could mean with that 2024 carbon emission standards do you think.

Production forecasts out there are correct here and how are you thinking about the incremental cost on the trial. Thank you.

Subcutaneous eruptions, but if that continues well then I would expect 2022 2023 beyond should be good I mean, if you think about 2020 for Watson emissions change that emissions change brings fuel economy, which should be good for our customers as well. So it looks like we are in the beginning of a good steady.

<unk> market.

Okay. Thank you.

Your next.

Question is from Stephen Volkmann with Jefferies.

Hi, good morning, guys.

I wanted to ask Jamie's question, just slightly differently.

Given given the backlogs that you guys have.

And everyone across the industry I guess I might have thought that price cost could be positive this year.

Given the demand drivers would you disagree with that or is there some other offset.

No I completely agree with you I think that price cost should be positive for the year.

Got it okay, maybe I misunderstood that answer.

And so I guess as you're as you're rolling through that process any updates on how youre thinking about the impact that that new model rollout will have on margins.

The.

The new Dove, Steve has been extremely well received in the market by customers dealers depresses, everybody the fuel economy improvement the ride and drive of the vehicle the performance the technology.

And I think <unk> said it it's the first and only trick in the market right now that makes use of those new masters and dimensions regulations in Europe .

So it really puts them in a class of its own and it's a premium costs. So that's going to be very good for our market share growth margin.

Everything and customers benefit from Atmos.

Great. Thanks, Terry I appreciate it.

Your next question will come from Tami Zakaria with JP Morgan.

Hi, everyone. Thanks for taking my questions I have a couple of quick ones.

Yes, great question, Tammy I'd say that indeed, we said, 10% year over year and strong in the first quarter like it was in the fourth quarter and we see that the trucks are being used out there which is they get use means they consume parts. So that's one thing that bodes well for the year of 2022 and I would also point to the fact that our team our global team has done a great job of.

Launching things like e-commerce , and bringing that to our customers, which makes it easier for them to buy from <unk> than anyone else and that contributes to the long term success and growth of the business that we expect 2022 to be a great parts here.

Got it. Thank you so much and another quick one I think you noted about 10000 red pad.

Park trucks.

The end of last quarter any update on that front as you as you exited the fourth quarter.

Sure Tammy we in the fourth quarter, we are able to deliver about 7000 offline trucks because of the great work of the teams and so that number has been reduced dramatically and.

It's one of the reasons, we think that production is getting a little bit more stable is because we had good supply and good partnership were going on.

Great. Thank you so much.

Got it.

Your next question will come from David Raso with Evercore.

Hi, good morning.

The press release, Hey, Good morning, you noted in the press release, the supply chain improvement and then on your comments Youre, a little more cautious about the supply chain improving.

Can you just square up that you Didnt raise your unit forecast at all for 'twenty two from three months ago. So should we take it as.

You were able to ship.

Better in the fourth quarter, but there has not been any improvement in supply chain, just trying to square that up and then I have a quick follow up on the backlog.

Sure, let's do that first.

So I would say no change.

Change in the forecast, though like that improvement hasnt been baked into any.

Updating our forecast is that when I look at it and think that we have a 250 to 290000 unit range at the tie side of the range 290 is a pretty significant improvement above the $2 50 market in 2021, and I think that as we watch the year progress, we'll get better clarity for how supply base.

Continues and as it continues to improve we will make adjustments appropriately.

And then on the backlog how it relates to price cost and the full year gross margin comments, how much of the backlog already has the <unk>.

Reising locked in and your cost structure generally locked in what you can control of course.

And then how much is still out there say for the second half of the year on your cost where maybe you can.

Get some help on some of the costs really maybe we're seeing in some of the materials. Just just trying to think that through what's in the backlog and what sort of a.

Left open a little bit for later in the year to see how the gross margins play out.

I think I think of it a little bit like some of the trucks that have.

Some of the bigger customers have there.

Backlog pricing out there and then some of the stock units and smaller fleets maybe don't.

Yes.

Sequentially through the quarters.

Well just to clarify and I'll hop off.

David we have long term contracts with our suppliers in many cases, we hedge in many cases and so together that gives us some control over our cost structure for materials.

Thank you.

You bet.

Operator, do we have a color.

Hello, Steven your line is.

Hmm.

Is that Steve Fisher from UBS.

Yes.

Okay Alright.

Sorry, My line cut out there.

So it sounds like you still have a few thousand red tags.

Sure.

41% to 45000.

Delivery number assume you get through all of those in the quarter and then once you do get through those.

Whats the underlying or sort of normalized margin. Once you are just sort of.

Producing and delivering at the same same pace.

We've had.

A variety.

City of chip suppliers have come in and out and so hesitant to give you an absolute answer on what Q1 will be in terms of number of offline use it might still remained we'd see improvement through the quarter, but it's every day. The teams working together supply base to work through that so some portion may remain as offline, but it's decreasing.

And then I would say as far as underlying assumptions, we feel good about the margins looking forward into the year and seeing them grow into our into a higher range.

Okay, and then there were some big industry cancellations in the fourth quarter can you just talk about your experience with cancellations and how scrubbed. Your backlog is wondering whether those cancellations were more proactive or.

Sort of reactive.

From a customer standpoint, we have not had customers who don't want their trucks that is not something that we've experienced I cant speak to anybody else, but I can tell you that all the customers I talked to and the teams are working with C. Just strong demand for as many trucks that we can get them.

Okay. Thank you.

You bet have a good day.

Next question will come from Robert Wertheimer with Melius research.

Good morning, everybody.

Hello.

You're off to a pretty healthy healthy gross margin already or is there a bunch of you have to do to get to the <unk> piece here.

Yes, I would say that.

If you think about the cost of the delivery and the <unk>.

We had to incur in labor and materials for those <unk> that was a big portion of the difference.

And then obviously that as we look forward and we've had a chance to react to last year's cost increases, we've been able to price that into more and more effectively.

That's how you see the trend developing.

Perfect Alright, that's pretty clear I guess and then the other or one of the other uncertainties overlaying. The market is just omicron in scouts and hopefully.

Obviously less severe but people might be out. So do you have a sense on whether that's disruptive to <unk> at this point and whether it's cresting or not on your own aircrafts.

Dragon I can comment to that and say that if I look at the plants or around <unk> of our facilities.

We are doing such a fantastic job I mean, probably should park on that for a little bit for just a tremendous job that people are doing in terms of getting to work and getting the trucks built and delivered.

And I would just.

Couldn't be more pleased with the with the people all around <unk>. So we see that having some limited effects on us immediately right now, but moderating as time passes and then of course with this latest two year period, who knows what three months from now might bring.

I understand that part thank.

Thank you much.

Ed.

Your next question will come from Jerry Revich with Goldman Sachs.

Yes, hi, good morning, everyone.

Hi, Jerry.

Can we talk about the.

Factory overhead costs that you folks had been reporting with obviously all of the <unk>.

Fly chain goodness going on over the past couple of quarters, that's been running in the $70 million to $100 million range per quarter, how did that trend in the fourth quarter.

Really nice to see the improvement in the first quarter guide.

How much of an overhang does the range, let's say at the midpoint anticipate from that.

$100 million run rate.

We've been at continuing into the first quarter.

I think Jeremy I'll, let Michael answer that one for you I would just.

Say that our factory overhead costs.

<unk> increased partly due to get those trucks out that we've been talking about and also due to higher volume.

See them.

More normalizing as the year progresses and into 2022.

And Michael can you comment on the first quarter does that embed something like $30 million to $40 million headwind is that the ballpark or can you just help us with how much of an overhang is baked into that first quarter guide.

I can't comment on that specificity.

Okay.

And separately I was wondering if you could talk about as you folks are getting electric vehicle orders.

To add on that you were seeing before your dealers to the extent you folks have opportunities to participate on the charging infrastructure and other add ons that obviously you wouldn't you wouldn't get with diesel truck orders is there a per ticket item that you can talk about or take.

Take rate from any participation you have in contributing to building out the charging infrastructure with the trucks on those initial orders you've booked so far over the past year.

Yes, it's early days, but I think it's a it's an interesting thing to think about in terms of the zero emission vehicle programs battery electric trucks. We've now got we built over 100 units.

Taken orders for over 100 vehicle Chargers battery electric Chargers at this point as well so that's kind of an add on incremental business opportunity for us and then when you get into that as your magic charger in a vehicle the opportunity of software for charging optimization and battery energy management and the vehicle is something that <unk> has expertise in and that will benefit our customers. So that's an add on.

<unk> as well so as that market.

Begins to develop zero emissions market begins to develop those should be good opportunity for <unk>.

Very interesting thanks.

You bet.

Your next question will come from Ross Gilardi from Bank of America.

Yes, good morning, guys.

For us.

What do you think about normalized.

North American class eight truck demand I mean, the number that is commonly thrown out forever.

250000 units, although obviously it is rare that we actually see a year.

It's not materially above or below that number and I'm just curious do you think.

That figure is still directionally accurate or do you think normalized demand for class eight vehicles is now much higher than what you would've thought a few years ago just to due to the explosion of E Commerce and just a variety of other factors.

I think you parse it out a good question that I think that that $2 50 might be a bit data. It's hard to know what the number is but the trucking delivered 72% of the business around freight.

Freight demand and that's not decreasing thats, increasing e-commerce contributes to that speed of delivery that people are looking forward contributes to that efficiency of trucks is going so much, especially a pack of our trucks, where the fuel efficiencies are so much higher and so yes, I think that you are you're onto something there that it could be a little bit higher than that.

Okay.

And then could you talk a little bit about that the hydrogen.

Vehicle that you've got that you.

Recently received an award on.

What kind of reception is.

Hydrogen combustion engine getting from regulators on that engine type of true zero emission solution and how does it how do you think it stacks up on that vehicle performance versus hydrogen fuel cell vehicle.

Well.

We're trying to do is pass cars to make sure that we pay attention to all the different opportunities out there and we will let the market we'd like the market to decide which is the right ones right. Now we have great success with our battery electric vehicles, obviously, a leader in the hydrogen fuel cell area and then the team over at <unk> led this hydrogen combustion engine development program, which we won the innovation truck award for and so that has nearly zero.

<unk> output is really just some <unk> from the lube oil stuff and I think we want that out there as an opportunity. So that we can work with the governments and see what what's going to be acceptable and what's going to provide our customers. The right benefits. We think it's early days and pre selecting the right answers not necessary.

So we will continue to leverage our strong partnerships, our technologies and bring the right solutions to our customers.

Got it thank you.

You bet. Your next question will come from Nicole <unk> with Deutsche Bank.

Yes, thanks, good morning, guys.

Good morning.

And maybe just a question on Europe .

What are you guys seeing there from an order perspective, I'm, just kind of surprised that it looks like you're forecasting deliveries more flattish in 2022, especially since.

You talked about improvement in supply chain.

Yeah.

So the auto situation in Europe has been very strong and much in line with what Preston just commented on the U S and the rest of the world for Packer.

I think a market between $260 300000, again is a pretty wide range.

And it shows that there is still quite some uncertainty.

Maybe COVID-19 related stuff.

Chip situations.

But whatever the market does with our new trucks, new Dr truck models.

We're going to very good position to grow market share.

Whatever the market size will be.

So that bodes.

Well.

Production in volumes.

Okay got it understood and then just a follow up on dealer inventory. So I suspect that they are probably still very low, but just wanted to get an update darrin. If you guys see the potential for.

Some restocking onto help volumes as we move into the second half of the year.

Yes, I'd say that inventories are lower than we were.

Wished them ideally to be but that's obviously a result of the supply base situations and that does give us strong confidence that we will be able to build every truck that we can get the parts for this year.

Create a really good year. So we will see inventory react as we can build enough trucks.

Thanks, I'll pass it on.

Alright, great.

Your next question will come from Courtney Yakov bonus with Morgan Stanley .

Hi, Good afternoon, guys. Thanks for the question.

Maybe if we can just go back to the.

The question on Europe , and I think that was where you saw the biggest sequential step up in deliveries this quarter.

So is it the right way to understand it that was where most of those red tagged trucks were and how should we be thinking about the remaining couple thousand are those in Europe and North America.

And then.

If you could also just comment on the <unk> I think you had very strong margins this quarter.

Harrie comment.

The higher use pricing, but how should we think about that business going forward. If there's any kind of growth you can give us aside from just continued strength.

Sure Hey, Courtney how about I start off on the European.

Deliveries and then Harry can pick up and add anything he wants to talk about the <unk>.

Three things I would wait to think way into the different sequentially in deliveries one of them is seasonality.

One of them is build rate increases that we've had and then the other is really probably.

Tied to the offline reduction that we had so those three things kind of change the 10000 to 18000 and Harry anything you'd add on that I think it offline truck production was proportional.

Similar then.

Other brands.

And the seasonality is a big impact if you compare the third to the fourth quarter. The third quarter is typically the summer shutdown.

Fewer production days in the third quarter then.

These things combined.

Explain the increases together with an increase building.

It's always nice to see.

And for the Finance company you got a good results in the fourth quarter we.

We've seen the used truck market improved by a look.

<unk> financial has expanded its used truck center in sales capability over the years.

And this is really a year that starts to pay dividends.

<unk>.

Looking into next year I would say the outlook for the next couple of quarters.

Really good and we expect better financial strong performance to continue.

Okay. Thank you.

Thank you. Your next your next question will come from Matt Alcott with Cowen.

Good morning, Thank you so.

As you guys continue to capital supply chain issues. This year as part of the solution using more engines from your suppliers as opposed to in house. So you can focus on other parts of the supply chain.

That's not quite how it really works, Matt we have.

Each at each each ship, it's funny each chip kind of goes to the component and you can't really know how that's going to shake out they're not the same chips. Each placed so the teams have done a really good job say again figuring out how to reengineer indifferent chips to be used in our engines and Cummins does the same as a good partner and we've also been.

To kind of go back and track similar similar.

Types of chips and find ways to use them. So I think thats independent of the engine independently component really is just a great team effort by everyone at Packer and our suppliers and we would expect to see the <unk> share in North America go up significantly in 2022.

Got it and just one more question on the outlook for next.

Next year.

We had the disruptions pushing out some deliveries this year than last year.

And then there could be potential pre buy in 2023, so plenty plenty of three be materially up from this year or did you guys not think there will be a meaningful pre buy ahead of 2024.

Great. Thank you very much.

You bet.

Your next question will come from Jeff Kauffman with vertical research.

Thank you very much.

Wanted to ask a question on production rates.

When we were down in the third quarter.

Approximately what was the trucks per day production that you were seeing across the network and then where are we exiting the fourth quarter and where do you believe that number could go by the middle of 'twenty two.

I would I would ask you to answer it this way so we don't really provide our build rates. So.

I would just simply say as we have seen build rate increases through in the fourth quarter into <unk>, and we would anticipate being able to we're hoping to take additional build rate increases as we can.

Get the components, we need to build the trucks.

Okay, but is there any metric to think about where you are now versus where you were during the peak of the crisis and chips and parts and things like that just to get.

An idea of how much production scaled up.

Over 40%, 45% higher than the third.

Third quarter, so that's quite a quite a step up as the answer to your question.

Right.

<unk> San I think right now maybe you have a 10% to 20% increase from what we've had in production deliveries.

The continuing growth in that area is what it feels like.

Okay. That's all I have thank you alright.

Alright, great.

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 Patkars earnings call. Thank you for participating you may now disconnect.

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