Q2 2022 Paccar Inc Earnings Call
Please standby we're about to begin.
Good morning, and welcome to Patkars second 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, 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.
Joining me. This morning are Preston Feight, Chief Executive Officer, Barry <unk>, 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 at <unk> Dot com.
I would now like to introduce present right.
Good morning.
Skippers, Michael Barkley and I will update you on our second quarter financial results and business highlights.
I truly appreciate Packers outstanding employees around the world, who continue to deliver excellent results in the highest quality trucks and transportation solutions.
<unk> achieved record revenues and net income in the second quarter.
<unk> revenues increased 23% to $7 billion $160 million.
Net income increased 45% to $720 million.
<unk> second quarter revenues increased by 18% to a record $1 43 billion.
Parts pretax profits were a record $353 million.
32% higher than the same period last year.
Truck parts and other gross margins expanded to 14, 4% in the second quarter compared to 13, 5% in the second quarter of last year.
Becker's increased vehicle production, new lineup of premium trucks and strong aftermarket parts business drove the higher gross margins.
Our financial had an excellent quarter, increasing year over year pre tax income by 36% to $144 million due to its high quality portfolio and strong used truck results.
Becker is an industry leader in diesel and zero emissions powertrains autonomous trucks and next generation connected services.
<unk> best in class, New trucks, it's new clean diesel and electric powertrain lineup.
It's ongoing research and development programs provide our customers with the right products and technology to help them optimize their operations.
The entire pack our team has done an excellent job of working with our suppliers to manage supply base shortages and we've been able to gradually increase daily truck production.
In the U S economy unemployment remains low.
GDP is estimated to grow and industrial production is projected to expand.
Based on this favorable operating environment, we estimate 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 growing with eurozone unemployment at low levels.
The 2022 European truck market is expected to be in the range of 270 to 300000 trucks.
Looking at <unk> operating environment.
Our new generation of trucks in Europe , and North America are providing our customers the benefit of owning the most desirable and most efficient trucks in the industry.
Great tonnage remains at great levels.
We're sold out for the year and the first quarter is beginning to fill in nicely.
With fleet age up and truck utilization high we anticipate continued strong demand for pack, our parts trucks and financial services.
Thank you.
Every skippers will now provide an update on packer parts pack or financial services and other business highlights Gary.
Thanks Brendan.
Beck, our deliberate 47000 trucks during the second quarter.
A 9% increase over the first quarter.
We estimate third quarter deliveries.
To be in the range of 44 to 48000 trucks.
As higher daily build rates will be offset by the normal summer shutdown in Europe .
Truck parts and other gross margins increased to 14, 4% through the second quarter.
We anticipate third quarter gross margins to be into <unk> into 14.5% to 15% range.
Reflecting a continued strong performance of <unk> parts.
And a favorable mix of new truck models in production.
Becker parts had an outstanding second quarter.
<unk> gross margins of 30%.
Customers increase truck utilization and higher average fleet age of contributed to pick up parts record results.
Becca parts outstanding performance is driven by an expanding network of 18 parts distribution centers.
<unk> thousand 200 dealer locations.
250 independent TRP stores.
As well as technologies like manage dealer inventory.
Innovative E Commerce systems.
Becker is continuing its investments into parts business by.
By opening a new distribution center in Louisville, Kentucky this quarter.
Becker financial services benefited in the second quarter from higher used truck prices and excellent portfolio quality.
Revenues were $373 million into second quarter.
Pretax income was $144 million.
36% higher than last year.
Demand continues to be strong for <unk> pre owned vehicles as customers appreciate.
Are willing to pay a premium for their superior reliability and durability.
Becker financial has been increasing its network of retail used truck centers and.
In his opening to used truck retail center in Madrid, Spain. This year.
These facilities, so used trucks at retail prices, which contributes to higher profits.
Becker has invested $7 3 billion in new and expanded facilities innovative products and new technologies during the past decade.
These investments have created the newest.
Most impressive lineup of trucks in the industry.
We will contribute to excellent shareholder returns for many years.
Okay.
After tax return on invested capital improved to an industry, leading 23% in the first half of this year.
Capital expenditures are projected to be $425 million to $475 million this year.
Research and development expenses are estimated to be $330 million to $350 million.
<unk> exciting new line of trucks and transportation solutions.
<unk> R&D and capital investments.
Strong after market parts and financial services business and a flexible operating structure positions the company for a bright future. Thank you we'd be pleased to answer your questions.
Thank you to signal for a question. Please press star one on your telephone keypad also if you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Voice prompt on your phone line will indicate when your line is open.
State your name and company before posing your question again press Star one at this time to ask a question, we'll pause just for a moment to allow everyone an opportunity to signal.
We will take our first question.
And caller. Your line is open if you would please check your mute button.
Alright, but from Bernstein.
First question for you just on your gross margin trajectory if I look.
Recall the last time.
We had like 1000 build whereas 2014 and I think you guys are doing around I guess.
Margins.
If we fast forward to where we are today.
Looks like we are.
Heading for like a 14, 5% run rate.
Kind of curious about just like to thank all of our cycle durability and then secondly, just like how to think about the evolution of the margin doesn't go through the back end of the year and any early comments you can give on your thoughts at least not going to touch on <unk> given that you are taking orders right now.
Sure I'd be happy to take the question I feel like things are going really well for the company as.
As we shared in the commentary the new trucks are performing really well in the market in Europe and in North America.
That performance is helping our customers perform better providing excellent fuel economy for them and the result of that is an improvement in margins.
That is really the fundamental underlying principle for increase in truck margins I'd also share that our parts team is doing a great job.
Set another record in the first quarter. We expect continued strong performance in the second quarter I should say, we expect continued strong performance throughout the year for them.
Fleets have aged and Utilizations are at high levels, which is driving parts performance.
So we do expect to see continued improvement in margins for some time.
And then just second question on parts, just how to think about it.
Year on year growth pretty Q as well as just how to think that margins on that.
Barry you want to offer commentary sure we expect parts sales to continue to be strong.
The third quarter, probably similar to the second quarter.
Which would be up 12% to 14% from the third quarter last year.
Yeah.
Thank you.
You bet.
Move onto our next question.
Okay.
Hey, good morning, everybody, it's Rob Wertheimer of Melius research.
Okay.
Good morning.
Yes, Greg we are here so two quick questions.
One is just could you update the results were great margins look very strong obviously some tailwind from parts. As you noted could you update us on where you stand on price versus inflation is there continued.
Up from price and I don't know if you make any comments on truck pricing how far it was up for you guys in the quarter.
Michael you want to share any thoughts on that.
Yes, we had good price realization during the quarter that kept pace.
A little bit more than kept pace with our.
Cost increases.
Okay perfect.
And the second one is a little bit bigger picture Europe .
<unk> a customer in Europe I suppose you have a lot of different things you can choose to worry about with energy security and so forth and I am curious whether.
Knowing maybe your orders are capitalized supply chain or whatever just what your mood from your customers in Europe and is there any sign of.
Impending downturn there. Thank you.
You bet well, our European business is doing fantastic right now the new trucks that we introduced are.
Really delivering for our customers.
They are an increasing percentage of our build that roughly 50% in the second quarter and increasing in the third quarter demand is exceptionally strong for those products. The only trucks that meet the new masses and dimensions regulations in Europe , which provides great <unk> driver comfort.
They operate in a premium position in the market.
And they're doing a fantastic job. So I think that what we see is continued strong demand in Europe freezes moving effectively and we think it will continue to do so.
Thank you.
You bet.
Well move on to our next caller.
Hi, Good morning, Jamie Cook can you hear me.
Hey, Jamie we can hear you.
Hi, I guess two questions first of all great great performance in the quarter.
You talked about the new products being about 50% of build in the second quarter. I think that was specific to Europe can you comment on where those build rates are in terms of new products for the U S. I guess, that's my first question.
And then my second question.
Just given the deflationary pressures that could be.
Facing us in the back half of the year into 2023, your confidence level in being able to.
Maintain the pricing levels that you that you have today, just given your new product introductions.
Do you think you can maintain that the list price increases that you have out there.
Well, let's start with the first one which is new the north American new products. The medium duty product that was on a brand new platform in the heavy duty product for the new $5 79, and <unk> and we've completed those transitions in North America now and you are right to note that it is the European product that's continuing to increase so that's good news for all of us.
We will take build rates up to the new products continually being.
Exceptionally well received by our customers.
And then as far as a commentary on pricing as we feel like because we've got the right products in the marketplace and that the best products delivering thousands of dollars per truck per year in fuel economy savings that our customers will continue to want to buy those trucks from us.
And so we think that the pricing model will stay intact.
I guess a follow up question, if I could again just given the.
New product introductions.
And.
That just performance from your perspective, what do we need to see in the market to get your truck gross profit margin sort of back to the pre sort of Covid 11 ish 11, 11, and 12% margin.
I think every market stands on its own as you would be well aware of note and we've talked about in the past right. There have been supply challenges and we've put a priority on making sure that we get the most trucks out of our customers that we could so that has been the thing that we dealt with really effectively great congratulations to our team and our suppliers for working through that and continuing to work.
Through that.
But our focus has been on getting the right trucks out to our customers and making the transition to the new products and we think that looking forward, we will see continued growth.
Gary noted in the comments.
Thank you.
<unk>.
And we'll take our next question.
Yes, hi, good morning, and good afternoon. This is Jerry Revich of Goldman Sachs.
Hi, Jerry.
Hi.
Your parts business is really interesting and over the past five years, you folks have taken up margins by over a point per year and I'm wondering as we look at the parts business over the next couple of years.
Your engine field population grows is that level of margin expansion sustainable 234 years out can you just talk about the <unk>.
Moving pieces in here, if you don't mind.
Yes.
Like you said, Jerry the parts margins have improved very nicely.
Good levels of around 30% now.
A lot of that is driven by the increasing.
As of the <unk> engine.
As the population grows.
The engine is getting older and get into more maintenance work.
That should be a tailwind for parts margin in the future as well.
Yes, I think Thats, what Harry said, it makes complete sense and I would just add to it the opportunity of what the parts team is doing from a technology standpoint, and how effective they are at capturing an increasing percentage of the market is also helpful to us improving margins. So the systems. They are employing the technology. They are employing and put us at the top of the class in terms of how we support customers.
Okay Super and then just a follow up to Jamie.
Jamie's question in terms of labor hours per unit on trucks.
Now that you've built with the toughest part of the supply chain challenges are you back on trend line levels of labor hours per unit or is there more efficiency gains on that normalization in the next couple of quarters for us to think about.
I think that is.
Great comment and I think what we've seen is again the focus on getting trucks through to our customers and that continues to be our focus.
We're not back to our optimized efficiencies, but very darn efficient I think from a standpoint of how we're producing the new trucks and what they are bringing and we're going to continue to make sure. We build as many trucks as we can and that's what really are our first priority.
Okay.
Lastly, obviously Europe is a big region can you just talk about differences in order trends.
By your major countries.
Anything that you would point out in terms of any differences in order intake rates over the past couple of months.
Now maybe here you want to offer something on that yes sure.
As we noted in our press release.
Our market share in Europe has grown to 17, 5%.
A lot of those gains have come out of the let's say bigger markets like Germany, France, and Spain, where we have opportunity to grow and it's really really really exciting to see that in the first half year of those countries going through and Dove has done really well in those markets. So that's been a big part of the success.
Terrific. Thanks.
And then we'll move on to our next caller.
Yeah.
Hi, Thanks, Good morning, its Steve Fisher from UBS.
Curious, how youre thinking about seasonality.
Hi, Good morning, I'm curious, how you're thinking about the seasonality of EPS. This year, because typically Q3 would.
Would be lower than Q2 due to the European shutdowns and then Q4 picks up again do you think Q2 was sort of the typical peak of EPS for the year.
Or do you think there's enough pent up production and mix benefits in parts strength that we could see something even better than this as we get towards the end part of the year.
Yes, I think that we feel like the business is running really well that the teams have done a great job in the second quarter. We look forward to the third quarter as Harry talked about we think truck part and other margins are going to increase in the third quarter. You noted that the fewer build days in the third quarter in Europe , but all in all feel.
I feel like the business is running quite well and we will do so in the third quarter as well.
Okay, and then looking out to 2023, how are you deciding when to fully open up the order books and how.
Far out are you comfortable with with pricing decisions at this point.
So as you as you said and what we shared with you as we have.
<unk> begun to fill our orders for the first quarter of next year. Some of those end up being full year contracts, we see really strong interest from the customers and so we're having good good.
<unk> and order intake.
Say that is I think a bit more macroscopically as we shared rate fleet ages up 10, or 15% truck utilization is very high freight tonnage and volumes are very high levels.
We think those set up the market for a strong future for truck sales.
Okay. Thank you very much.
Beth.
And we'll move to our next question.
Okay.
Good morning, This is Matt <unk> from Cowen.
I think you guys I think the inventory only grew $10 million sequentially in the quarter, which is way less than the increases over the last few quarters is this mainly a result of a lot fewer trucks waiting for parts.
Do you think this hall read Todd.
Who is largely behind us.
<unk>.
That's helpful.
Probes.
And Michael you want to share some thoughts on that well, we did experience a reduction in the number of <unk>.
Trucks.
That were offline during the quarter. So we had good sequential improvement and that we also.
<unk>.
Currency weakness also had an impact on reducing our inventories which are you know.
We'll see how that goes as the year progresses, but.
Or has that impact as well to think about.
Okay, and then any supply chain update would be helpful.
Sure I'd say as the as.
He mentioned the supply chain.
And our team have done a fantastic job really.
Finding solutions and enabling us to increase our daily build rate through the last quarter and so while were not complete and through the through the supply chain limitations, we think that that probably actually contributes to a strong truck cycle for a long period of time.
Great. Thank you very much.
Beth.
Thank you and we'll move onto our next question.
Hi, Steve Volkmann of Jeffries.
Good morning afternoon, guys hear me okay.
Hey, good morning, good afternoon.
So just a couple of quick follow ups, if I may well excuse me what was the currency impact on the second quarter maybe on sales.
Yes, the impact on sales was about $270 million.
<unk>.
And the impact on net income was about $25 million compared to last year for the quarter.
Great. Thanks, and then maybe similarly, I think Harry you mentioned in your comments that high used truck prices were a benefit.
For fin co income how much was that kind of gain on sale stuff how much did that contribute.
Yeah.
I don't have the number readily available as Steve, but it was a nice benefit to the results of the finance company both in the first and second quarter.
And we expect the used truck market remained strong and a finance company also to perform very very solid in the third quarter.
Okay, I guess, where I'm going with that is at some point I suppose used truck prices will kind of normalize but at the same time you guys are doing a lot to improve your used truck marketing and so forth and I'm just curious maybe as we think out into 'twenty three.
When and if used truck prices kind of normalize.
Would that be a bit of a headwind for you or do you think you'll be able to kind of keep this higher level of sales because of the way you're marketing to used trucks.
The used truck.
Fills facilities that we've added Steve will definitely.
Benefit the finance company.
Next year in many years that it allows us to sell more trucks at retail prices to end customers.
Which is good for a refinance company's profitability.
Great. Okay. Thank you.
Okay.
And we will take our next question.
Great. Good morning, guys. This is Dylan coming from Morgan Stanley .
Just wanted to ask first on R&D, you guys took that back a bit this quarter I was just curious if that was more reflective of your ability to actually spend the money in terms of any kind of supply chain issues that was more kind of just pull back on their side.
So it's not necessarily a pullback on the R&D if you look at the.
Second quarter, the lowered R&D I would say that the majority of that is again due to currency.
A weaker euro.
Our outlook for the year.
Means that we're going to be spending R&D at record levels.
So we feel very good about.
The money, we're spending the projects, we're developing the technologies that will be coming to customers.
Got it thanks, Harrie and then maybe just one on the battery electric side. I mean, you guys have been planning to take our production has gone.
Progress, but just be curious if you can kind of give an update around the supply chain situation on the battery side, and whether or not procurement of packed cells et cetera, that's kind of improve through the year or is there any kind of color you can give on how that build rate path has progressed.
You bet I think that where we sit with that as we have seven truck models in production now around the world that are battery electric and zero emissions product lines, which is fantastic. We've supplied we've secured supply for the batteries and systems we need.
<unk>, specifically for the coming years, and we continue to work with our partners as we ramp up our production. So we're seeing that growth quarter over quarter.
And as we've shared a few times, we expect that this year will be in the one hundreds of units and then over the coming years out or grow into the one thousands of units and we see just a steady progression. There is our technology comes to market.
Got you. Thank you.
You bet.
And we will take our next question.
Okay.
Yes, Hi, this is Mike Feniger from Bank of America, just two quick questions on at your Investor Day, you flagged how we can expect order rates to be constrained over the next few months as Oems are managing production closely and the old rule of thumb is the 250 K Saar is kind of like the replacement level demand for <unk>.
And thats kind of where orders have been if we look at the last 12 months.
Do you think orders would get weaker in the next few months before they get stronger and is that rule of thumb that replacement level demand do you feel like that's added eight do you think thats, maybe now higher than it was in the past.
Well first of all I think this has been an uncommon couple of years and I think trying to put too much math into order intakes is a is a difficult thing to get accurate what I would talk about is it the year sold out there was obviously some.
Pause for everyone in terms of strong order intake because everyone to see what the market was going to be and what the suppliers' capabilities. We're going to be we've now are closer to 2023 and so we're taking we've opened the order books more fully and we're taking orders and demand is strong for that.
I would expect to see order intake increase now.
But for the coming time.
Great and I recognize that the spot market is not the entire freight market yet there are worries with spot freight rates down on a year over year basis and potential impact on future truck trucker profitability on that how should we view that weakness in spot is that not an accurate.
Portrayal of the U S truck market in your view do you feel like it's misleading given the strength you pointed to and other data points, just love to get <unk> view on how we should kind of interpret some of the weakness in the last few months almost spot freight market. Thank you.
Sure Great question.
I think that we probably overemphasized the significance of the spot market, it's 10% to 20% of the total market in range and it's really the part that deals with the tips of anything.
It's a good leading indicator, maybe but what I would suggest is that spot contracts are quite.
Robust spot rates are down from extremely high levels.
And normal contracts truckload contracts and other are doing very well and that rates are actually increasing that area combine all those factors with strong freight tonnage and you should expect to see a good truck market for some time.
And we'll move on to our next question.
Hey, Thanks, It's Scott group from Wolfe Research.
Things just wanted to follow up on it wasn't clear to me. If you feel like you still need to be limiting orders for 23.
And then.
You had a comment that your used truck is still really good and don't expect any impact on <unk> results are you not seeing any sort of pressure on used truck like the overall market is starting to see the last couple of months you wouldn't expect to see any sort of sequential drop off.
Yes, we did see that used truck prices came down a little bit in the second quarter compared to the first quarter.
In North America that is but used truck prices are still up more than 60% compared to the same quarter last year. So this what we call. It a really strong used truck market for us.
And did you have did you have a first question Seth.
Okay.
Yeah, Hi, guys, Nicole <unk> from Deutsche Bank.
I need to go.
Maybe just going back to the question asked earlier on the Red tagged inventory to kind of tie things up there.
I think last quarter as well.
When we were on this earnings call you guys said that kept trucks, we're kind of in the low 3000 range. When we talk about sequential improvement like to what extent have dam Korea like how close are we to getting that number towards zero.
Well good question and the number will never go to zero, because theres always trucks that are.
Being final delivery to I would say so I would never look for that number to be zero, but what we have seen is an improvement from the low three thousands into the high two thousands.
So we see that sequential improvement and we hope that that sequential improvement will continue.
Okay got it that's helpful and then.
We've gotten through a lot of the questions here talked a lot about the U S and Europe , but I guess, what are you seeing with respect to order rate and the rest of world any change in the trend that you had been seeing things kind of pretty strong over the past few quarters.
But sure that if you look at South America team down there has been a really great job in South America, specifically in Brazil, we've grown market share considerably we've had strong order intake. The trucks are performing very well for the customers. We have established ourselves as a premium brand in Brazil.
It feels like a great market for us.
In Mexico, we are doing well also so.
Europe North America.
South America, Australia is doing well.
And a fantastic year, there as well.
Thanks, I'll pass it on.
Thank you and we'll go to our next question.
Hey, everybody is Jeff Kauffman of vertical research partners good afternoon.
Hello, Jeff.
Hey.
Quick question on raw materials, and raw material costs.
Pretty inflated in the second quarter is still somewhat inflated but.
Steel aluminum almost any raw material youll look at it's been coming down pretty sharply over the last four to six weeks.
Could you remind us kind of how long it takes raw materials to work through.
Inventory and become part of the P&L and I guess kind of the cost you are running through your P&L when were those raw materials acquired and what we're seeing now in terms of the change in the markets is that something thats going to be more of an early 'twenty three.
Change in cost of goods sold is it probably a little later this year I would just love a little insight on that.
Well, we don't really break the model out that way to think about it in terms of.
Sequential timing of that it obviously depends on which materials in the trucks.
Bring up the comment of which is we.
We have seen in the last several weeks some softening in materials prices, but from very very high levels.
So we continue to include that in our conversations with customers as we priced the trucks.
It's one of the elements that goes into the cost of a truck like labor is an efficiency is in.
The new truck models.
Because many elements that go into the pricing for trucks.
So I should think about it is the pricing will follow the cost.
It's a good that's a good general rule.
Yeah in General Wonderful. That's my question. Thank you guys alright.
Thank you and we'll move to our next question.
Hi, Thank you. So much this is tami zakaria from Jpmorgan.
For taking my questions I have a couple of quick ones. So my first question is.
Is there any risk to your production in the third or fourth quarter.
Given what we're hearing about a potential gas shortage in Europe are you preparing for any disruption should there be any.
Well on that topic, Tammy I would say that.
Those conversations are always ongoing what we've seen in the last five months since the Ukraine conflict started as the countries have done a great job of continuing to have supply.
Packers done very well in that timeframe and we think that will continue to do well as we look forward.
Got it Super helpful.
So this is my second question is more of a macro question I think Preston you you just mentioned.
Contract freight market is actually increasing.
What we're hearing from retailers that theres, an inventory overhang and growing consumer demand.
So what do you think is really driving the contract freight market.
That is going up now.
I think that the most fundamental thing is the economy is very large and at a very large level and is probably going to continue to be.
So I think that anything that 75% of what gets delivered in this country is done through trucks and ours is the most desirable trucks, so I kind of expect that as the.
Car market is strong as housing is strong as consumer goods, even if it moderates is at high levels and there's a lot of freight that's going to need to be hold and so that creates a strong market dynamic for us.
Got it thank you so much.
We will take our next question.
Hello. Your line is open please check your mute button.
Hi, Tim Thein here from Citi, sorry about that Colin can you exchange.
Impressed and the first question I had was just.
With respect to the from a truck perspective.
Margins and we've talked a lot about price versus material cost, but is there a way to quantify what what sort of impact you've experienced just from the standpoint of from factory efficiency or I guess in this case inefficiencies over the last several quarters from us and from for more.
Stop start or Andrew or a slower than normal build rate is there a way to kind of quantify what that drag has been.
And then presumably that becomes more of a tailwind in <unk> and 'twenty three.
Well I think no there's not really an easy way to do that are necessary way to do that I think what we've.
Look at is the improvement in margins that we've realized year over year and sequentially and the continued improvement in margin that we're forecasting out into the future and think that that kind of takes the whole macro picture of pricing cost and efficiency into play and shows you that we see things going in the right direction.
Hi.
Alright, and then.
Back to the comment on foreign exchange, if we just used where the dollar is settled.
Started the quarter is there.
Maybe Michael can help just.
Ballpark figure I know, there's multiple cross currency impacts, but just dollar euro or.
What we should think about from the standpoint of.
Second half headwind, either top and our bottom line.
If the dollar stayed okay.
Current levels.
Yes.
What happened in Q2 is probably.
It would be a similar effect.
In Q3 and Q4.
Kind of last years.
Currency was already dropping in Q3 and Q4 of last year. So there's there's multiple cross current serves but directionally it would be similar probably to Q2.
Okay understood. Thank you.
We will take our next question.
Hi, This is John Joyner with bank of Montreal.
Hello.
So and maybe you touched on this already but.
You've done an excellent job of controlling I guess equipment related SG&A dollars, particularly in light of the strong sales so.
I guess what has been driving your success here.
Well.
You'd have to give all the credit in the world to the entire team at <unk> and we have a focus on excellence and our focus on efficiency and operating well and they have delivered fantastic performance in that area.
Okay.
Okay. Thank you and then.
Just one more on the.
On your outlook.
Maybe if you could talk about beyond this year or at least give some light.
At least directionally in terms of capital expenditures I mean, do you kind of have to anticipate those picking up or staying at similar levels or maybe even declining from here I mean, I would assume that you would.
You would be.
We are continually investing back into the businesses.
With new technologies, and such but if you could give any color there that would be helpful.
Sure.
Obviously last year and through the start of this year have been introducing new products at the same time, we're working on some really exciting new technology projects in both the battery electric space hydrogen fuel cell space connected vehicles space in autonomous space. So we see that we have a great future set of product portfolios that we're working on that will deliver.
Great results for the future.
Okay fantastic. Thank you so much.
Well take our next question.
Hey, this is Felix <unk> from Raymond James.
Thanks Felix.
Hey, I just have one question I guess two parts, but you mentioned earlier in the call that the new model transition in North America is largely complete.
Curious if you could talk about the uptake on the pack hard transmission for the medium duty lineup.
What percent of builds have them and then similarly, if you could update us on what percent of your heavy duty builds in North America now carry an ex energy.
That's really it for me.
Sure thing as we think about it we have been able to grow over the years, our proprietary powertrains that continues to grow.
Alright, and MX engine performance percentages in the U S is now right around 40% in the low 40 percents is what we'd expect to see through the year.
And the transmission that we introduced in the medium duty the automated pack our transmission has done a great job I don't have the numbers in front of you in terms of in front of me in terms of percentages, but it is definitely growing.
We'll move on thank you for color.
David Raso from Evercore ISI I was curious with the new models and assume the majority of Europe . This new model what is the margin differential with the new models out in the U S Canada versus your European business. Thank you.
Hey, David we don't break that out.
We think that what we've been able to do is transition the.
Uh huh.
Dov Kenworth and Peterbilt brands to these new models and we definitely see that as an advantage for our customers as we said each of those each truck can save them. Several thousand dollars per year in operating cost and then of course as we mentioned that's really good for the company, but we haven't differentiated those those margins.
Could you at least answer how does the GAAP changed with the new models.
Well I think yes. It has right we've seen improved.
From them, because they are delivering benefits to our customers.
So it's a win win situation.
No I meant the gap between the U S, Canada and Europe has it changed with the new models out.
I think I think there's several factors that go into that in one of those market strengths and we have seen increasingly strength equally strong markets in Europe . So that's to an advantage and then the new trucks are definitely performing really well. So directionally. The margin question of Europe , improving yeah, great margins.
In Europe .
Yes.
Alright, Thank you very much I appreciate it.
You bet and as a final reminder, star one at this time for questions. We will take our next question.
Okay.
Yeah.
Hey, It's Scott group from Wolfe again, I don't know what happened can you guys hear me now.
We sure can.
Okay, great. So.
One of my follow ups was just it wasn't clear to me. If you guys are still in a place where you need to be.
<unk> orders for 23.
No no I wouldn't think of us as being limiting orders for 2023, I think that there is a normal cadence to how fleets by and how the market goes.
So it's really just the start of that season.
And that's what you are seeing is an uptick in order intake as we as we move through the calendar year.
Okay, and then I just wanted to ask a bigger picture question. So you guys are talking about gross margins of 14, 5% to 15% we haven't been above 15% since 2016 so.
As you think about price and cost and units and just your Crystal ball does third quarter.
Feel like it's about as good as it gets from a gross margin standpoint, or would you think you could build on that build on that into into next year.
I would say that we've had a fantastic team of people working really hard around the business to deliver the great results that we as we shared we think that third quarter looks fantastic as well and we think that there is.
Great business going forward.
Okay, and then if I can just one last just follow up with that so the last time you guys were at high 14% kind of gross margins.
<unk> for truck were right around 11%.
Next time, we get back to high teens high 14%, 15% gross margin you think that the.
Operating margins EBIT margins should be better worse, similar with that 11% that you had last time.
Yes, I think like Preston said, we will continue to deliver good margins.
<unk>.
The outlook for the company's excellent.
Demand is strong the new products are doing well.
We are in excellent position to deliver it as a very very good margins.
For next quarter and going forward.
Okay, Alright, thank you guys.
And there are no further questions I'll turn it back to our presenters for any additional or closing comments.
We'd like to thank everyone for joining the call and thank you operator.
Thank you ladies and gentlemen, this concludes Patkars earnings call. Thank you for participating you may now disconnect.
Okay.