Q1 2022 Paccar Inc Earnings Call

April 26, 2022

Good morning, and welcome to <unk> first quarter 2022 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 <unk> director of <unk>.

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 media on the line participate in a listen only mode.

Certain information presented today will be forward looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results.

For additional information please see our SEC filings and the Investor Relations page of <unk> Dot com.

I'd now like to introduce breath and fight.

Hey, good morning.

Harry Skippers, Michael Barkley and I will update you on our first quarter results and business highlights.

<unk> achieved excellent revenues and net income in the first quarter.

Our sales and financial services revenues increased 11% to $6 billion $470 million.

Net income increased 28% to $601 million.

Peck, our parts first quarter revenues increased by 20% to a record $1 39 billion.

Parts pretax profits were a record $340 million, 35% higher than the same period last year.

Truck parts and other gross margins expanded to 13, 4% in the first quarter compared to 11, 6% in the fourth quarter of last year.

<unk> financial had a record quarter, increasing pretax income by 92% to $147 million.

Due to healthy new business volume and strong used truck results.

I appreciate Packers outstanding employees, who delivered these excellent financial results in the highest quality trucks and transportation solutions in the industry.

Last year <unk> introduced a complete new product lineup of Peterbilt, Kenworth and <unk> heavy and medium duty trucks. This was a record number of new product introductions and these investments are generating excellent results for the company.

Our customers are benefiting from the industry, leading fuel efficiency, while drivers loved the new digital instrumentation luxurious interiors stylish led headlights and beautiful exterior styling.

The new trucks and growth in <unk> aftermarket business contributed to the increase gross margins this quarter.

We expect gross margins to continue increasing this year as the new trucks become a higher percentage of the build.

Looking at the economy.

U S. GDP is estimated to grow three 2% and industrial production is projected to expand four 4%. This year, which continues to provide a favorable operating environment for <unk> and its customers.

We estimate that the U S and Canadian class eight market to be in the range of 260 to 290000 trucks.

The European and U K economies are also experiencing good economic growth.

Economists project UK, GDP increased 4% and.

And European GDP increased by three 2%.

The 2022 European truck market is expected to be in a range of 270 to 300000 trucks.

We expect truck markets to remain strong.

<unk> industry, leading new truck lineup highly.

Highly efficient factories best in class parts and financial services business and the continued development of advanced technologies are creating an exciting future.

Harry Skippers will now provide an update on packer parts.

Our financial services and other business highlights.

Thanks Preston.

Becker delivered 43000 trucks during the first quarter.

We're focused on increasing production in our factories.

<unk> second quarter deliveries.

To be in the range of 44 to 48000 trucks.

Truck parts and other gross margins increased to 13, 4% in the first quarter.

With higher production.

On a more favorable mix of new model trucks to be delivered.

We anticipate second quarter gross margins to increase and be in a range of 13, 5% to 14%.

Many customers are operating their trucks longer than they normally would.

Which has increased the fleet age.

Truck utilization is very high due to the strong economy.

Rate activity.

As Preston shares.

Parts had an outstanding first quarter.

With parts gross margins growing to a record 31%.

Pickup parts business model, which is based on convenience and technology.

<unk> to our customers' success.

Becker is best in class at maximizing uptime for our customers by having high quality parts.

<unk> available when needed.

The success of pickup parts is driven by an expanding network of 18 parts distribution centers in 2200 dealer locations.

250, independent TRP stores as well as technologies like manage dealer inventory and innovative E Commerce systems.

Becker is continuing its investments.

Opening a new distribution center in Louisville, Kentucky this quarter.

Pekka financial services benefited in the first quarter from strong new loan and lease business.

<unk> strip prices and excellent portfolio quality.

Revenues were $366 million into first quarter.

Pretax income was a record $147 million.

And 92% higher than last year.

The silver lining to the industry wide under supply of semiconductors.

Strong demand for pick a pre owned vehicles.

Customers appreciate the superior reliability and durability.

Premium.

<unk> financial has been increasing its retail used truck center capacity.

And now it's 12 facilities worldwide.

These facilities sell used trucks at retail prices, which contributes to higher profits.

<unk> financial is opening another used truck retail center immigrate, Spain this year.

Becker has invested seven 3 billion and.

New and expanded facilities.

<unk> products are new technologies during the past decade.

These investments have created the newest and most impressive lineup of trucks in the industry.

Capital expenditures are projected to be $425 million to $475 million.

Our research and development expenses.

Estimated to be $350 million to $400 million.

February is continuing its investments and clean combustion zero emissions autonomy and connected vehicle programs.

Thank you we'd be pleased to answer your questions.

At this time, if you would like to ask a question that is star then the number one on your telephone keypad to withdraw your question. Please press the pound key.

First question will come from the line of Tami Zakaria with Jpmorgan. Please proceed with your question.

Hi, everyone. Thanks, and congrats on the solid results.

Couple of questions from me today.

First can you update us on any of that tug units in inventory end of the quarter.

And.

What kind of cost absorption impact could head into Q and if you expect any remnant impact in the second quarter itself.

Sure thing good to talk to you.

Well I'd say on the Red Tag we are in roughly the same spot now as we're at the end of the year. So we have a managed number of offline and our team's doing a really fantastic job of working through a global issue and getting trucks to our customers.

As it relates to cost or price cost was roughly even with each other in the first quarter on a year over year basis.

Got it. Thank you and second one from me do you expect chip availability challenges to creep up this year as certain automotive production restarts or do you expect gradual improvement throughout the rest of the year.

I think that as Harry announced rate, we expect our build to increase so we do anticipate some improvement having said that I would tell you that our chips have become less of the issue and more of the general supply challenges in terms of getting all the materials, we need into the plants at any given time.

Again, our suppliers our teams our purchasing teams. The ops teams are doing a really good job working through that.

Understood. Thank you so much.

You bet your.

Your next question will come from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks, very much wondering if I'd just ask you to maybe quantify the the numbers on those partly completed trusted instead, it's about the same spot as in Q1 does that mean.

You had about 3000 left I think coming into the quarter.

Did those all get shipped and then you kind of came out with 3000, new ones. How do we think about maybe a little more quantification there if we could.

Sure Fair question enough.

The answer is we did have like you said 3000 at the end of the year and that number is in the low three thousands right now and it is definitely different trucks. So we get the parts and through them the teams get them to our customers, who really need trucks right now and then.

Some other issue might come up.

Work on getting that result.

Okay fair enough.

And then just relative to the park business, just curious what was better than expected.

Quarter end the growth rate was about double what you were looking for and how much was that pricing versus volume and if you have any particular expectations for Q2 and the full year on growth rates. Thank you.

Well I'll share a couple of comments, maybe Harry has some too, but I would say that one of the big things in the parts business. That's driving growth is an excellent team of people that are doing a really good job of getting our systems connected to our dealers and customers, which is bringing a high degree of stickiness to our business reason great technology.

To ensure that their first look and last look as it <unk> for where they get their parts. Another factor is over the years, we've increased the proprietary content of our trucks and engines, which is helping to grow that business and we think that is sustainable legs to it.

And I think the other part is obviously, there's a lot of freight business out there. So people are running trucks and trucks are running consume parts, which is good for us.

Terry anything you'd add.

Those are the main items.

Average age of trucks is going up they're consuming more parts. It also means there's going to be a strong market for trucks.

Probably a longer period of time.

The strong demand so far we've seen especially in North America, where we have the Beck our engine successfully growing.

Contributing to the parts growth.

And you could think we could continue to see kind of upwards of 10% to 20% growth rate for the rest of the year and parts.

We expect the second quarter, the part sales and results will be very similar to the first quarter. So we will continue to perform very strongly into parts sector.

Thanks very much.

Your next question will come from the line of Tim Thein with Citigroup. Please proceed with your question.

Great.

Great. Thank you and good morning, just.

Follow up question on the commentary around gross.

Gross margins for the your expectations for the second quarter, so as it relates to two.

Price cost so if that was.

Roughly in line in the first quarter as you.

Yes.

<unk> through more.

You get more of the 2022 pricing, presumably more of those are starting to flow through the P&L.

How should we be thinking about that.

Play between price versus the.

The variable costs.

Here in the second quarter.

Great question, good conversation to have with you I would say that we should expect that we should see some improvement as we continue on in part just because of what you mentioned, but it also make dimension of these fantastic new trucks in Europe , and North America being a contributor to that so as they grow and percentage of Bill that's helpful.

So those are the positives to it and obviously there is the supply base issue of making sure we build as many trucks as we can and sometimes it's less efficient than we'd like it to be but we want to satisfy the customer's demand. So that's the balance to it.

Got it okay.

Maybe Preston.

We could.

A very healthy market would be here.

Commentary from your larger over the road customers at least from the public guys in North America maybe.

They don't obviously represent the entire market.

So.

Theres been a number of new entrants.

American that have come into the market in the last year or two.

And you're facing some rather significant increase in operating costs. The prospect of higher rates. Just maybe what are you hearing as you kind of talk to dealers and again more on the over the road side in North America and Europe .

Again, we can all see the headlines and commentary from the large public TL players but.

Yes.

The customer base, just kind of what's the tone and sentiment.

I understand where you're coming from and I would say that.

The customers we have are extremely good at operating their businesses are doing a great job.

They have.

A lot of freight to be hold right now and there are a lot of requests for our fantastic new trucks, So thats putting.

Thus, creating a market environment or environment business environment for us, which should make it strong for a long period of time as.

As you mentioned there have been some new entrants, but I think they operate really on the on the fringe of it.

Maybe they are contributors to some of the used truck pricing, we see but I don't think it's really material to the strength of the market.

Got it thanks, Thanks a lot.

Okay.

Your next question will come from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, Good morning, Nice quarter, I guess first can you just help us understand sort of what percent of billed was with your new product launches in the first quarter and how we expect that.

The new trucks as a percent of bill to play out.

Second third and fourth quarter.

So I guess, that's my first question.

And then can you help us understand sort of how far your backlog now and what your market share trending within backlog given what I assume some of the success with some of these new trucks I mean, it looks like your Europe .

Our market share went up would welcome just trying to get a sense for backlog and market share trends as we exit 2022.

Sure thing as a percent first part of your question was as a percentage of the new build.

The first quarter and then how we think about the rest of the year.

Right right. So the first quarter. It was roughly a third of our build in Europe of the new product and that will increase in the second quarter, maybe we will get to the halfway point or 50% of our build as we get into the second quarter and then increase from there in the third and fourth and in North America.

Built model 579, and the <unk> are roughly again, a third of our build in North America and those models are transitioned now.

And our new medium duty product, which we build.

Probably less than 50% yet transitioned to the new model and it will grow through the year, so that kind of covers that.

As far as the backlog look our backlog is really solid we're substantially full for the year in Europe , and North America as we adjust build rates, we can create some openings. If we can get the parts for that so there is some positive area, there, but really strong backlog.

All of the conversations with the customers are that they really need trucks and continued to do so so the backlog feels solid.

And then as far as our market share trends as you note like in Europe in our first quarter, we're at 17% market share in Europe , which is really strong market share and for North America, we've grown from <unk>.

For 2004 to 2008 quarter for the first quarter of 2021 to the first quarter of 2022, so year over year growth and we'd expect to be in that 30%, 31% range of the full year.

Wow, Okay. Thank you very much.

Your next question. Your next question will come from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Hi, Good morning, everybody, maybe just a quick follow on to Jamie's question Preston by 2023 should we assume that pretty much all of production as these new products or does it still do you still continue to offer the older stuff as well.

So.

Fair question, we will continue to offer some of the other products as well.

Into 2023, but theres a transition going on there.

Okay. Thanks, and then can you talk a little bit about Europe , specifically I mean, it seems like there is a number of raw materials and energy costs and freight and so forth have all kind of inflected quite a bit higher over the past few weeks in connection with what's going on in eastern Europe and.

I assume that's a bit of a headwind for you guys at some point, but how should we think about that because it takes a while to flow into your cost structure. Do you think you can kind of cover it with pricing on real time, just how does that dynamic work in Europe specifically.

And maybe Harry can offer some comments on that.

Steve or.

Cost situation in Europe has not been so much different from North America. So.

We've seen a direct material cost increases.

Price increases, which which have been similar.

We're not exposed too much as far as we can tell right now.

The situation.

Ukraine and Russia.

Our parts availability.

And the ability to produce trucks has been good.

I think the economy.

The demand is very similar to Preston just mentioned customers want to have that trucks, we want to have more trucks, they want to have them faster.

So really strong market. This year. That's also why we increased our range of our outlook for Europe , a little bit this time.

We think it will be strong months strong market going forward. So.

Very very similar to what we see in North America.

Great. Thank you guys.

You bet.

Your next question will come from the line of David Raso with Evercore ISI. Please proceed with your question Hi.

Hi, good morning.

Think about 2023 and around the industry currently the orders are being a bit suppressed when you open your order book for 2003, and maybe it's a statement for the industry as well.

What youre hearing from your customers do you expect orders to Reaccelerate.

Given their suppressed today and then I'm curious your view about demand for 'twenty. Three if you think theyre going to accelerate once those books are open.

Sure David Thanks for the question.

We do.

We do expect that 2023 should be a good year for.

Several reasons really we expect that our new trucks as I said will be a growing percentage of the build.

Those trucks the fuel economy. They provide is compelling for people to want to get the new trucks into the fleet, which is going to be really good for their operating costs. So we expect that will drive demand.

So as 2023 gets closer to us and we start taking a substantial number of more orders, we will see that to be we predict that will be good order intake.

So no dampening in your review of 'twenty three.

Any of the macro developments since last quarter is that a fair.

General and later on there is that view out there I guess, but as we look at it also there is the other the other view is that the economy is growing.

The GDP growth is positive.

Freight volumes stay at a high level that truck age is up 10% to 15% and that we have fantastic new trucks all of those for pack or a good news in terms of what we expect the future look like.

Thank you and then on the deliveries for <unk> versus <unk>.

Mid point up about 7% can you take us through the geographies with a little bit of help on each one sequentially U S. Canada Europe . Another thank you.

I think I'll offer cup commentary can add anything you want to anyone else, but I would say that we do expect volumes to grow in each of the regions.

In the second quarter and contributed contribution to that 44 to 48000 units.

And then specifically inside of that it's harder to tell because the supply base issues can can be unique.

By month.

Typically as fewer working days into the second quarter, a little bit more Nash.

National holidays in different countries at different moments in time.

So.

It would be an offset maybe a little bit, but you're also seeing that the material availability in Europe is good.

But do you think production there. So so overall I would think that all regions with.

<unk> contribution to these to the higher production in the second quarter.

Alright, Thank you very much.

You bet.

Your next question will come from the line of John Joyner with BMO. Please proceed with your question.

Okay.

Hey, Thank you for taking my questions.

So I guess first and you gave some color in your release, but is there anything else that you can offer on the performance of the financial services business. I mean, if I go back say 35 years, which is as far back as the model goes the profitability has never been this impressive. So if you can.

Could add anything else to that and do you anticipate this continuing for the rest of the year.

Okay.

The finance company results were excellent in the first quarter I think the team has done an amazing job.

Creating a strong book of business.

With strong A&P credits.

Past dues are less than half a percent so customers are paying their bills on time.

Like we said in the press release used truck business continues to be very strong.

I think a big difference maybe compared to.

30 years ago with the retail used truck centers that the finance company has established we have 12 of those now that allows us to sell a bigger portion of our used trucks directly to end customers.

And that helps profitability.

So we expect to finance company to do well for the remainder of this year.

Although the supply of used trucks.

Could be a little less in the second or third quarter.

Because customers hold onto their trucks, because they are waiting for new trucks.

Again, underlines how stronger demand for the new trucks is going to be.

Okay. Okay. That's great and then maybe just following up on that when you mentioned the used truck centers.

I guess, how much is left to go there with.

With building those out and then I guess the same question on the parts business in terms of.

Geographic how much geographic Buildout remains for this for that business, both TRP stores as well as the distribution centers.

So on the used truck centers, we've added a couple of used truck centers.

I think per year over the last couple of years made some upgrades.

Having another one this year.

Definitely opportunity to add a few more.

I would say that it's still a minority of the trucks, we sell sort of used truck centers.

Still room or opportunity to grow in that area.

The parts, yes, I think on the parts side of it if you think about that I would say that the parts team is doing is the opportunity for continued growth.

Built out distribution centers will continue to do that that puts distributions centers closer to our dealers closer to our customers, which gets an increased percentage of same day delivery.

But equally important if not more so is the kinds of systems, we are implementing and the capability to connect with the customers directly.

And make sure that their trucks are operating the way they want them to and get them trucks and parts that they need every single day. So we use data analytics.

We have connected systems with our dealers and we think that has a great sustained future.

Okay excellent. Thank you so much.

You bet. Your next question will come from the line of Nicole to place with Deutsche Bank. Please proceed with your question.

Yeah. Thanks, guys good morning, or good afternoon, whatever it is.

I guess.

A lot's been covered here, but can we talk a little bit about inventory I think if you look at the ACC data.

Yes.

Truck inventory at the dealers have begun to tick up a bit.

What does pack are seeing with respect to inventory in the channel.

Yes, I mean inventory still at pretty low levels.

If you look at it was like two three months of retail sales in March compared to $1 nine a year ago and for Pac are we're less than that slightly. So there is still not a lot of inventory sitting out there and it's really just about.

The ability to get the trucks from production into the customers' hands as quickly as we can.

Okay understood. Thanks, and just a follow up on the discussion around supply chain. So I guess, Mike I know you guys are embedding a little bit of an improvement as the year goes on what what did you see and in the first quarter I mean, theres a lot of noise with respect to geopolitical risks like did supply chain get more challenging or is it kind of more of the same.

And that you've been seeing for the past couple of quarters.

I think that what we've seen is that maybe we've gotten.

Through some of the earliest semiconductor issues.

And those of.

Not become the most dominant side of it so other little issues come up now they can be labor related they could be geopolitically related it.

It can be shipping related and so some of them are temporary and I think that what's going on now is we have really strong communication between us and our supply base.

And so our ability to manage that as may be improving.

We hope overall the situation is improving which is leading us to see that we think we can deliver some more trucks in the second quarter and on out.

Got it thank you I'll pass it on.

Alright.

Your next question will come from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Hey, good morning, everybody.

Rob.

I'm sorry, I know the results were great I'm, sorry to ask a couple of accounting questions in the midst of that but I noted you switch from LIFO to FIFO for U S inventory accounting when I read that I assume that was just to be more comparable European slashed global peers I Wonder if you had any other thought process around that and I wonder what will have any material cash tax impact.

<unk>.

As Michael up that's one of the reasons why we switched.

To become more comparable with our European peers, who use <unk> for us and don't have LIFO. We also wanted to have better.

Matching of our revenues and courses.

Inflation creeps up you end up.

Celebrating cost realization when you honor LIFO, which we don't think provides very good matching.

For years, LIFO has been fairly benign and not much of an impact.

The inflation creeping up the way that it is.

Become more of a thing and distorts the numbers unnecessarily so.

For comparability better revenue recognition.

We thought it was right thing to do at this time.

And is there any cash.

Cash tax impact that we should care about and then.

Our LIFO reserve is about $200 million, we're going to end up paying about $50 million in taxes.

Which is.

We're happy to do.

Okay, perfect and then find that sub tier to your questions and answers earlier I'm not quite sure. If it works this way, but as trucks come off lease I mean, do you make more of a profit just because.

When you saw him into a strong market without a material impact this quarter or for the year and I'll stop there. Thank you.

Yes of course, the tricks that come off lease.

Our trucks.

That's good business for US right now those trucks come back in a very favorable market for used trucks and Thats definitely a good thing for the finance company.

Yeah.

Alright, thank you.

Your next question will come from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes, hi, good point of view.

I'm wondering if we could just talk about the supply base for you folks in Europe .

A couple of your competitors had down days because of supply base issues from eastern Europe in the quarter and it doesn't look like you folks had any issues was that a function of you folks using multiple suppliers or a different supply base can you can you just talk about how nimble you folks had to be in the quarter and flexing if at all given the geopolitical.

Issues. Thanks.

Well, we've noted the same thing with them, we just havent been affected that way we've had good supplier.

Ability to provide us the parts, we need in Europe and.

We've looked out into the future and tried to forecast where that might be and we will have to watch and see how it is but right now there's nothing that's showing us that we aren't going to get the parts.

And we continue to work closely with all of those suppliers that have facilities in eastern Europe to make sure that that we're on top of it.

We're one of the few truck manufacturers that doesn't have a factory in Russia.

And.

So our exposure to.

Russia, and the Ukraine has been a lot less than what you may have seen somewhere else.

And Harry.

Earlier, you mentioned the strength of the business.

Europe I'm wondering if you could just expand on that bookings exceed shipments in the quarter can you comment on that.

Yes.

Bookings.

It's again the same approach in North America as we've seen in Europe . The amount is very very strong and we manage order bookings a little bit with lead times.

We see there is some inflation in cost increases and we want to manage that very carefully so.

I think in today's environment, we could easily get more order bookings.

Do we need.

Got it.

A function of well.

Filling the backlog with <unk>.

Strong business.

Nope getting exposed to out to 2023, where we don't know exactly what costs are going to be.

And I would add that.

It really it's hard to appreciate how phenomenal the new cost buckets I mean, it's the only truck that meets all the new masses and dimensions regulations is providing a 10% better fuel efficiency. So several thousand dollars a year per truck and operating cost advantage. It is.

Truck that meets the upcoming new direct condition requirements in Europe , It's really it's really a game changing product.

And it's got a lot more proprietary content on it and the drivers love. It. So there's a lot of reasons that we see strong demand for that for our European market right now.

Okay Super and lastly, I'm wondering if you could just comment about the evolution of demand for electric vehicles and how is that.

Over.

Past quarter.

A quarter or two and where are you folks expecting to ship.

Geographically is it still predominantly in Europe , where youre seeing demand.

Sure we are seeing increasing order intake for those vehicles I think we talked even a year ago. We said we'd start in the tens and grow to 100, and then get to the thousands and this year already we expect that we will deliver in the one hundreds of vehicles and take lots more orders than that for the vehicles.

Having customers putting them into service and.

Seeing how they work out for them five or 10 at a time typically and then enjoying the benefits of what pack our quality it looks like in a zero emissions vehicle.

No.

Kind of see that as a growing opportunity and we continue to refine our technology on those vehicles and feel like we want to stay at the leading edge of technology, and it's nice to be actually delivering zero emissions vehicles to our customers.

Okay I appreciate the discussion thanks.

You bet.

Your next question will come from the line of Chad Dillard with Bernstein. Please proceed with your question.

Hi, good morning, guys.

Morning.

How much room do you have to raise price on parts and can you just talk a bit more about just your philosophy on pricing I know you guys can.

Can you potentially raise price to cover let's say like interface for example.

And then maybe you can breakdown the outperformance of your people.

<unk> business I mean, how much is coming from just better growth on the agent side versus rest of the truck and then lastly here. If you could just clarify your comment about parts demand being similar in <unk> versus <unk> or you're talking about dollar wise or percentage growth year on year.

Well I mean, obviously, it's a competitive market out there we've done the team has done a really good job of increasing the prices as costs have gone up and we've had some good realization over the few quarters here.

Largely it's driven by the need for these these parts and the fact that we are connected with the customers more and more right trucks are getting complicated we have sophisticated customers in the interaction between pack our dealers and our customers is a real contributor to growth as well as more proprietary content like engines like our pack our transmission.

<unk> Pak our axles all of this is just helping us flow through a connected position.

To our customers so that will continue and that's great for the future.

And.

Can you just clarify.

The parts guidance commentary Youre talking about dollar wise versus percent wise growth.

And then just.

Quick question just on how you guys are thinking about how much pent up demand there is in the industry today.

But to go back to the parts comment that parts comment.

Was on revenues.

Parts revenue in the second quarter to be similar.

Two parts revenue in the first quarter.

Pricing has been strong to go back to the first quarter.

First quarter pricing was slightly over 10% up compared to the first quarter of 2021.

That just shows you that.

It's an environment where there.

Cost increases.

Our translated into price increases as well.

And the second question you had was.

Just how to think about how much pent up demand there is either in the industry or if you can talk about packer more specifically.

Sure I'll take that one and just kind of think of it this way.

We've just come through a couple of years, where we've not been able to build the number of trucks, we need as an industry. We've had really strong creep volumes people are running them running their trucks out there putting miles on them. They have an operating model, which says either want their fleet age to be two years or three years or whatever it is and they've exceeded that by 10 or 15% and theyre, probably not going to do.

Just that business model, which is successful for them, so they're going to want to drawdown that age of fleet as they can.

And that's going to take some time.

As the supply base remains constrained we expect to see these improvements in our deliveries, but theyre not.

They're not going to be just for a quarter, we expect to see this to be a good period of time for <unk> and the industry.

Your next question will come from the line of Ross Gilardi with Bank of America. Please proceed with your question.

Hey, good morning.

I'm not sure if you guys replied to this.

Similar question earlier, but what do you what do you make of the erosion in spot rates clearly pack is very positive, but why isn't that.

Is that an indication that excess capacity is creeping into the freight market and the demand is ultimately softening and why would orders reaccelerate in 2023 its spot rates are falling.

Yes, sure Ross I mean, I think that it's a fair question and if you think of spot rates, they're really the fringe of the business, they're not the foundation of the business and so I think people may want to use them as a leading indicator, but they shouldnt think of them as systemically covering what freight is doing out there and so since there is strong business out there, even if spot rates decline a little bit.

They are still present and the fixed contracts are still really strong so as long as that continues it bodes well for the market.

Okay.

Got it thanks, and then I have been asked to consolidate and I haven't asked you a consolidation question.

While clearly tank cars is gone at it organically very successfully for a very very long time, but.

Was curious on your general view I mean, do you see a heightened need for increased consolidation in the commercial vehicle space in light of all the inflationary pressures that need for perhaps greater localization of supply chain.

Greater overall scale do you think regulators would allow a combination of any of the top six or seven.

Some of the European names, it really been bruised and battered.

Aftermath is by Russia, and so forth.

<unk> are potentially play a role as an industry consolidator in the next couple of years.

Well, it's funny that you have had to ask that question a while I would simply say is the way we look at it as a business is doing fantastic pack or continues to grow we expect to keep growing and we always are looking around the world for the best things for our shareholders.

That's as much as we can say right now.

Thanks, a lot.

You bet.

Our next question will come from the line of Jeff Kauffman with vertical research. Please proceed with your question.

Well, thank you very much and congratulations.

Just a quick question on timing and then another one on numbers.

You reiterated the R&D range for the year, but R&D came in I think a lot lower than that trend. This quarter I'm, assuming that's just a timing issue, but could you talk a little bit about that.

Sure.

It's a timing issue in the year. So we still hold that $3 50 to 400 and the full year was <unk> 78 in the in the first quarter. So it's just a it's a run rate for new technologies. Some pretty fund projects that we have that we're spinning up that'll help us in the future.

Okay. So just for modeling should we think of that more as a back half of year impact.

Impact as we catch up.

Sure.

Is it pretty gradual increase during the year I would model.

Okay. Thank you and then.

A lot of detail on new unit sales, but.

<unk> had a couple of questions about this what do used unit sales look like on a year on year basis.

I mean as a general sense, you can say that they've declined rate we've had.

We had a.

About a year ago, we were coming into this strong used truck market. So there was used inventory out there.

And obviously now with the strong freight demand.

People are holding onto those units. So they are just not coming into the inventory of our dealers of our used truck centers. So it's at a lower level.

That's likely to continue for a while so as far as the specific number to think of it in terms of months and still think of it as a less than two months of inventory out there.

Alright, thats consistent with the commentary you made about two Q3 Q. So any benefit that we're seeing on unused vehicle impact to financial services is entirely used vehicle price at this point correct.

That's probably the biggest.

Variable and the profit number yet.

Okay. That's all I have thank you.

You bet.

Your next question will come from the line of Bill expulsion with Raymond James. Please proceed with your question.

Hey, good morning, everybody.

Good morning.

I just have one you mentioned earlier in the call average trial pages up 10 to 15 percentage points.

Clarify that comment a little bit is that a north American number a year over year number and I'm really curious just big picture versus different cycle say going back a couple of years, maybe industrial recession levels. How has the average age of the North American fleet changed over time versus where it is today.

Yes, I would think of it if you are seeing Macroscopically I would think of it in terms of each year as it has its own circumstance and that the model can be disrupted by any number of factors, but I don't think that the general expectations of fleets is changing much they want to they want to maintain a fleet age has a certain level.

And when they get beyond that then they won't replace it obviously there is slight nuances to cycle timing, but they're they're free volume is strong and the easiest way for wheat as we think about it as air freight volume is strong and they look at the opportunity of owning the great New Kenworth, Peterbilt and <unk> trucks, and the fact that those are going to yield thousands of dollars per unit and savings.

We see no reason that won't continue.

Nuances beyond that seem less significant.

And I would say, that's more or less around the globe.

Every market.

Covid related shutdowns and underproduction in 2020.

Every Margaret a chip shortages in 2021.

Under produced.

There's still demand for almost two years, so it's a big chunk of those two years.

Yes that means there's a lot of pent up demand that.

We're trying to recover now, but it's probably going to it's going to take longer than just this year before we get there.

Right helpful. I appreciate it.

But.

Your next question will come from the line of Courtney <unk> bonus with Morgan Stanley . Please proceed with your question.

Hi, good morning, guys.

So I guess I just wanted to first just get a check on the quarter. Obviously you guys came in.

Back in the middle of your delivery guidance, but I think Europe is a little higher than we were expecting U S.

North America was a little bit lower so just wanted to get how it came in.

Versus your expectations on a geographic level I think you mentioned that youre expecting shipments to increase.

For all geographies heading into next quarter.

And then just more broadly on the industry outlook. It sounds like supply chain issues are getting a little bit better. So very positive about end market demand. So you raised the low end of your guidance for the industry, but just curious why there was no adjustment to the top end.

Sure as we looked at the segment deliveries to graphic deliveries I would say that in North America. We just saw that we had in the medium duty market actually some impact to the supply base, there, which kind of constrained north American medium duty deliveries and that was probably wait in the first quarter and hopefully we'll see some reconciliation there in the second quarter of that.

And I'd say from an industry standpoint, our guidance is just we tightened it up a little bit and we tied it up to move the midpoint up because the market still feels really strong to us so in that in that in our views, where we saw ourselves sitting.

Okay, Great and then you made some comments earlier just about the positive mix improvement as new trucks, you can have a higher percentage of the Bill I think you gave us some color on how.

That mix should improve through the year, but can you just help us understand what the margin differential is between that new product line in North America and Europe versus.

Last year's end.

How big of a gap is it mostly just in pricing or is the cost structure significantly better.

Yes.

Margin opportunity for the new models is of course excellent 7% fuel economy improvement, we saw for the Kenworth and peterbilt trucks that just puts them best in class in the industry in terms of fuel efficiency.

With the new Dove with a 10% fuel economy improvement that's class leading in Europe .

And being able to create so much value for our customers.

Of course also going to be a good thing for Becker.

The only add to it I'd give us.

If these trucks are not just good for their pocketbooks, but they are drivers, which is such a key element of their business right. Now there is no truck they'd rather be in the new <unk>, new peterbilt and kenworth trucks up.

Week ago, and at the fuel islands talking to somebody who had a new <unk> product and they were just decide themselves.

Truck looks and drives down the road so I think.

It is important to realize that the drivers are a big play here and pack our products are where people want to be.

I guess my question is more in relation to your cost structure.

As opposed to.

Sure understood and when we make investments and big capital investments, we do it to be more efficient and we try and we strive for that so yes. There is some of that in there as well.

Okay. Thanks.

Your next question will come from the line of Matt Alcott with Cowen. Please proceed with your question.

Thank you and good morning.

Could you guys update us on your view on a possible 2023 pre buy and how material it could be and if.

If you coupled out with your view that orders could accelerate again or are we looking at another solid delivery growth year in North America in 2023.

Well I would say, let me take the back half of your question. So yes, we think 2023 could be a good year, it's pretty far out, but we think it could be a really good year as far as comments on pre buy we think that conversation has.

Overdone.

There's a lot of great new products in the market out there, there's not a substantial change going into the general.

The U S market in terms of technologies there'll be some improvements in COPD reductions or fuel economy again, which.

Can cause some people to want to buy earlier some people to want to wait for those improvements. So I think that it's really mostly a california impact in terms of what might happen in terms of real tax change. So I wouldnt overweight that in my thoughts for 2023.

Okay. That's helpful.

Can you maybe provide some more insight on how manufacturing lead times for class eight trucks have changed over the last few quarters.

And where they are.

For orders placed today.

Good good longer lead times would be contributing to the moderation in the orders.

Well, what I would what I would think of it as we have a strong order backlog is substantially full so if you place an order for a truck today, you might be able to get it in the fourth quarter.

But it's starting to slide out and Thats why the orders have been limited just because we're not ready to open up fully to 2023 order board.

Because of the uncertainties of what the.

Parts supply is going to be in the cost structure is going to be.

And so that's how we look at it.

Got it.

All of our moderation could be related to 2023 books, not being open yet and not necessarily a function of underlying demand for trucks.

Absolutely you're right that in fact is what's happening.

Thank you very much.

You bet.

Your final question in queue is a follow up from David Raso with Evercore ISI. Please proceed with your question Hi. Thank you I just wanted some clarification on the sequential builds in Europe I mean, even if they are just flat that's up 37% year over year and I'm just trying to understand it's not necessarily a terribly easy comp.

That's driving it is this that much share gain from the new truck is it and understanding the dealers want a little pipeline fill.

<unk> I'm just trying to understand the magnitude of the growth in Europe . We just saw in the implied for <unk>. Thank you.

The demand for the new truck has been excellent.

I would say that.

Also in Europe is doing excellent job building as many trucks as we can.

So.

Build rates continue to go up and even with the lower number of working days in the second quarter, we expect that second quarter production would be.

The same or slightly up.

From <unk> Okay.

Q1.

Q1, exactly year over year, that's up 37% year over year.

I just wanted to clarify that and lastly June 1st the upcoming meeting anything you want to provide for us in this platform to.

Moreover, as we think about the main takeaways we should be.

Getting out of that meeting.

Well, we look forward to seeing you in person thats going to be fun, and I think it's going to be a little bit more information about how the business is doing what the future looks like for us in the street.

Length of <unk> going forward and how thats going to just accelerate so we look forward to seeing everybody there.

Okay.

Alright, I'll be there. Thank you appreciate it look forward to seeing you David.

Yes.

There are no questions other questions in 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 does conclude <unk> earnings call. Thank you for participating you may now disconnect.

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Q1 2022 Paccar Inc Earnings Call

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