Q3 2022 Paccar Inc Earnings Call
Effects income increase of 22% to $146 million, reflecting our high quality portfolio and robust used truck results.
We estimate this year's U S and Canadian class eight market to be in a range of 265 to 285000 trucks and next year to be in the range of 260 to 300000.
Overall, the strong truck market is expected to continue as a result of the solid freight volumes high customer truck utilization and the increased fleet age.
Customers are replacing their trucks with the new Peterbilt and kenworth models that enhance their operational efficiencies.
<unk> industry, leading fuel economy.
And attract and retain the best drivers.
Kenworth and Peterbilt now have a backlog that extends into the second quarter of 2023.
In Europe . This year's truck industry registrations in the above 16 tonne segment are estimated to be in a range of 275 million to 295000 vehicles.
Like in the U S freight demand and customer utilization remains high.
The 2023 market is expected to be in the range of 260 to 300000 trucks.
<unk> year to date market share has increased to 17, 4% compared to 15, 8% a year ago.
This growth reflects the exceptional performance of <unk> industry, leading and award winning new excess and ex fuel trucks.
Began production at the end of last year.
<unk> recently introduced a new XD distribution and vocational truck product line.
The new Das XD models earned a 2023 international truck of the year Award at this year's truck show in Germany.
And the New X gene lineup begins production this quarter.
The complete new range adopt trucks offers customers in Europe , the only trucks that utilize the new masses and dimensions regulations and are differentiated from the competition due to their more aerodynamic design.
Superior safety features and spaciousness for the driver.
These trucks provide our customers the most fuel efficient driver friendly premium trucks in the European market.
The South American above 16 tonne market is projected to be in a range of 125 to 135000 trucks. This year.
And in a similar range next year.
In Brazil, <unk> above 16 tonne market share through September was a record six 9% compared to five 6% last year.
The outstanding pack, our team and dealers around the world are performing well and delivering excellence to our customers.
Thank you Barry Skippers will now provide an update on <unk>, our parts pack or financial services and other business highlights.
Thanks Preston.
PARAGARD delivered 44400 trucks during the third quarter.
We estimate fourth quarter deliveries to increase to a.
The range of 46 to 50000 trucks.
This reflects higher bill thanks.
More production days in the fourth quarter, and a gradually improving supply base performance.
Truck parts and other gross margins increased to 14, 9% in the third quarter.
We anticipate fourth quarter gross margins to be in the 15% to 15, 5% range.
Reflecting higher truck deliveries and continued strong performance of pickup arts.
Like our parks had an outstanding third quarter.
With parts gross margins of 34%.
Customers high truck utilization and increased average fleet age contributed to pickup parts record results.
Pick a parts opened a new.
260000 square foot parts distribution center in Louisville, Kentucky in the third quarter.
To further enhance parts availability for customers and dealers.
Becker parts outstanding performance is driven by its network of 18 distribution centers.
Dealer locations.
250, independent TRP stores as well as technologies like manage dealer inventory.
Innovative E Commerce systems.
We currently expect fourth quarter product sales to be 8% to 10% higher than the same period last year.
Becker financial services benefited in the third quarter from higher used truck prices and excellent portfolio quality.
Pretax income was $146 million.
22% higher than last year.
Demand continues to be strong for pickup pre owned vehicles.
Customers appreciate and pay a premium for the superior reliability and durability.
<unk> financial has been increasing its network of retail used truck centers.
And opened a new location in Madrid, Spain in the third quarter.
We now have 13 centers to sell used trucks at retail prices, which enhances profits.
Becker has invested $7 3 billion in new and expanded facilities.
<unk> products and new technologies.
During the past decade.
These investments have created the newest and most impressive lineup of trucks in the industry.
And will contribute to excellent financial returns for many years.
<unk> return on invested capital further improved to an industry, leading 23% in the first nine months of this year.
Capital expenditures are projected to be $475 million to $500 million in 2022.
$525 million to $575 million next year.
Research and development expenses are estimated to be $330 million to $340 million this year and $350 million to $400 million next year.
Becca, it's exciting new lineup of trucks, and transportation solutions efficient R&D and capital investments strong aftermarket parts and financial services business at.
Our flexible operating structure positions the company for a bright future.
Thank you we'd be pleased to answer your questions.
Okay.
Thank you if you would like to ask a question at this time simply press Star then the first one.
Star one.
On your telephone keypad.
We will pause for just a moment to compile the Q&A roster.
Your first question today comes from the line of Chad Dillard with Bernstein. Your line is now open.
Hi, good morning, guys.
Hello, Chad.
So first question.
Whats ticket pricing in the third quarter can you just give us a sense for what it looks like on the truck side and then how to think about that going into the fourth quarter any thoughts on just pricing in 2023.
Yes, it seems like.
I mean, the margins are pretty strong I mean, how how much more upside do you think you could generate filling in 10 to 23.
Yes, sure I think that what you saw in the in the third quarter was really strong performance from all the divisions of <unk>.
There was price realization for us costs were up also but we had a net positive on that and we would expect that to continue in the fourth quarter and as we shared with you.
We're thinking the truck part and other gross margins will increase to.
To the 15% to 15, five range and that really high level of performance.
When we look out into 2023 and <unk>.
Really good year in 2023.
Okay.
Great and just one more question for you.
Was hoping you could give a little more color on Europe guide just what are you baking in from a macro perspective from a freight demand perspective. Thanks.
What's been the kind of it there.
Yes, Harry you want to go on and I'll follow up with anything yet.
We see demand for trucks and transportation to continue to be strong in Europe .
One of the statistics that we like to follow up is the amount. The total paid in Germany, which is at similar levels as it was last year.
So freight and transportation continues at strong levels, we see that customers love the new trucks.
Strong order intake.
First quarter is basically full with order then we're now starting to fill up the second quarter in Europe . So the outlook for Europe is really good.
Great. Thank you.
Your next.
Next question comes from the line of Helix Beauchesne with Raymond James Your line is now open.
Hey, good morning, everybody.
Hi, Felix.
Hey, I was hoping we could talk about the parts business. It's obviously been super strong, but I was just curious if you could provide some high level thoughts on how you think the parts business might hold up if we can see a more pronounced slowing up the freight market or the macro in the U S and Europe next year.
What I'm really trying to understand is.
We can use the industrial recession as a proxy to see how parts kind of bid in that scenario with fleet seem over age to have more proprietary content on the trucks. So I'm just kind of curious if you could directionally talk about any puts and takes to parts into next year.
One of the things.
Wonderful about the team here is that they've done a great job of developing a very robust parts system that serves the customers well and I think thats one of the key elements is driving the performance of the business is having the right systems and capabilities to provide customer structure, we've expanded our footprint in distribution centers around the world that enabled us to be even a better partner.
With our dealers and our customers so that helps the performance.
Insulates us a little bit from.
Cyclicality gives us a strong recurring revenue business.
You've seen the.
Growth of our engine business around the world over the several past years, which also gives us a strong future look into the parts business.
And I think that with the elevated fleet age and we're going to continue to see strong truck performance in parts of performance for the for the next while.
Okay Super helpful and if I could just have one quick follow up you mentioned the new model mix in Europe do you have a percentage of what that was out of the European builds in the quarter and where you kind of expect it to go into <unk>.
I think we're getting towards 70% now of the new model mix in Europe , and I would expect that in the for the fourth quarter and the fourth quarter and then you'll see that increase next year as well.
I'll tell you we're over at the IAA show in September .
And over in Germany, and the trucks are simply amazing and the customers are really realizing the benefits of their fuel efficiency and driver performance and that's driving a very strong demand for those new products.
Super helpful. I appreciate it.
Okay.
Your next question comes from the line of Tami Zakaria with Jpmorgan. Your line is now open.
Hi, good morning. Thank you so much for taking my question.
Well my first question.
Hi.
So my first question is.
We're expecting some growth in North America truck sales next year.
Could you help us understand what kind of macro growth at Samsung.
Or GDP growth assumption.
Embedded.
And that.
Died four truck sales.
Yes, we don't think of it that way Tim when we think about the truck industry and what's going on within the trucking industry, that's driving the volumes and as you can as you look at it right freight demand is at very high levels.
Truck utilization is at a high level of the age of the trucks out in the park has increased for the past three years.
And there continues to be supply based constraints that limit build when you put all of that together and combine it with the excellent new products that are delivering like 7% to 10% better fuel economy for our customers, which is thousands of dollars per trucks per year in savings it points to a really good market for <unk> next year.
Got it.
Like you're saying, even if let's say the broader macro recession. The factors you mentioned.
Turning to the truck industry.
On portable and guiding to a growth.
For next year.
Well as we said, we think that it will be a strong truck market next year as we showed with our industry expectations of 260 to 300, thousands in both Europe and North America, So that's pretty strong markets.
Got it that's super helpful. Thank you and then from a gross margin perspective.
With commodity prices coming down and you have a pretty decent visibility to truck volumes next year.
Do you expect gross margin rate improvement to continue next year as well.
Well, we talked about the fourth quarter in this call and we expect the fourth quarter, an increase of 15% to 15, 5% range.
Got it okay. Thank you so much.
Alright.
Your next question comes from the line of Steven Fisher with UBS. Your line is now open.
Thanks, Good morning.
You gave us the growth in deliveries in Q4, and the steady retail for 2023, and you mentioned peterbilt and kenworth backlog are.
Extending to the second quarter of next year I'm, just curious how much.
Of a question Mark would you say is the second half of 2023 in your mind at this point or are you anticipating still a pretty solid trajectory of orders.
For the next few months that would still set up your second half.
For an extended period of steady production.
Well thanks for the question the way we look at it is that the first quarter is substantially full as Harry shared we're taking strong order intake into the second quarter and into the second half as well. So we've seen nothing thats slowing us down in the year.
Obviously, the further it gets out the less clarity there is but.
Theres, a great backlog of orders and its growing.
Now I would say that it's basically the supply base and the availability of components to build trucks that determines the pace of growth in the fourth quarter and Thats, probably going to continue as we enter into next year as well and then we'll see how long that.
Thanks.
Okay, and then maybe if you could just give us some color on maybe the order activity.
By customer type how much of the strength in trucks do thing is large fleets that are trying to take their fleet age down versus more broad strength are you seeing smaller and mid sized fleets strong in the ordering as well as the large ones.
And how do you expect that to evolve in Q4 and in 2023, I'm guessing that the smaller fleets or maybe a bit more.
<unk> to the freight market conditions, but I'm curious to what you're seeing sort of in the underlying buildup of your book.
Yes, I think.
It's pretty well spread there is a strong demand out there for trucks in the vocational markets remained very good 30% of the build.
The larger companies are also ordering trucks for the year and I think it comes back to those fundamentals of great trucks, and then under supplied market for the past few years bodes well for a strong future.
Okay. Thank you very much Matt.
Matt.
Your next question comes from the line of Tim Thein with Citigroup. Your line is now open.
Thanks, Good morning.
So the first question.
Just kind of.
Continuing on what you just mentioned is today.
Component availability restricting.
<unk> rates and just overall production.
The extent that.
And I would presume maybe im wrong on this but I would presume that that's led to some.
Potentially some some kind of prioritization as to what you want to produce.
Does that.
To the extent that eases next year.
Is there has there been any.
Kind of a mix benefit.
That potentially go the other way and again to the extent youre producing more vehicles, but presumably some of that may or may not curious as attractive economics.
Effectively yes.
And as this year led to.
Stronger mix benefit that potentially becomes less of a tailwind next year.
Can you just start to see some easing of the supply base.
We hear you on a swing at that.
Okay.
See that we did with prioritize customers overall of those two.
I think we want to take care of our customers.
By supplying them the trucks they need.
Preston said, we've been capacity constrained for the last three years or so.
So.
Most customers.
Talk to her from they want to have more trucks, and we want to have them quicker.
And so we tried to satisfy everybody more or less proportionately.
Yeah, I think that'd be too detailed I would agree with Eric I think it's a little bit too detailed to try to think about it in terms of sectors of tailwind and headwinds of what we're building. We're building all the trucks, we can for our customers.
We're going to keep doing that.
Got it Okay, and then maybe back to your own.
And your own shoes running dot.
Curious what youre seeing there from the standpoint of.
One of your peers have noted some fairly sizable increase.
In the energy related costs and some some relief to suppliers how big if at all have an impact has that been to.
<unk> and its operations in Europe .
But we do see in Europe , the energy cost.
It's gone up and like.
I think somebody mentioned on the call before steel and aluminum prices have come down a little bit. So there is a balance there that with higher energy costs and higher labor cost overall cost levels remain elevated that's also electric prices have gone up and continue to go up.
But I would say.
But in this environment with the new trucks that we just launched it.
Customers Love It gives us.
A really good starting point to sell more trucks and grow market share as we've done.
So the team is doing really well in the market. We're currently in and taking full benefit of the new truck models that we launched.
Okay, and just I guess will you will see it when the Q comes out, but just on that relationship between price and variable cost.
Did the benefit increase from where it was in the second quarter.
Overall, not just Europe , but overall for the company.
I would say the clients has continued.
Increased in the third quarter compared to the second quarter and so did cost.
Price versus cost differential continues to be favorable for the company. That's why gross margins went up.
Got it alright, thanks for your time.
You bet.
Your next question comes from the line of Jamie Cook with Credit Suisse. Your line is now open.
Hi, Good morning, good afternoon, depending where you are a nice quarter.
I guess two questions first the deliveries the deliveries were on the lower end.
What you guys had forecast for the third quarter and you obviously had that improving.
And the third and the fourth quarter at a 46 50000 range, so what's giving you confidence.
To bring up your delivery forecast and why it was the third quarter, it's a while Ed.
And then where do you see sort of red tagged as we exit the year and.
And then my second question I guess, the one thing that struck me this quarter was the incremental margins.
We're very strong I think in the low twenty's, which is.
And by that it's a better incremental margin in Pac are typically puts up your view sort of on the sustainability of that just given the strength that youre seeing in parts and then potentially.
Help from the new product launches. Thanks.
Well, let me start with the deliveries one as we guided 44 to 48, we had 44 400.
We think about the third quarter deliveries are obviously fewer trucks built in Europe and there is about 4000 4500 trucks less built in Europe .
And then we continue as we say this limitations under built based on the supply base constraints that are happening.
So we see that gradually improving hence our guidance for the fourth quarter plus the no summer shutdowns. So more build days in our red tag or kind of a similar level as you call them. It takes for the second and third quarter.
And we kind of expect that will improve slightly in the fourth quarter.
So from a margin standpoint. Your second question, you kind of almost answered it right with great parts performing team and we guided in the fourth quarter. The gross margins are going to improved 15% to 15, 5% range. We think that that's going to continue to be strong performance based upon the excellent new products as you mentioned.
We're going to keep the performance at the very high levels that we're seeing.
Okay. So low twenty's incrementals isn't a bad way to think about your business assuming volumes are there.
I'll, let you think about it that way we think about.
In terms of how the business is running and what we're providing.
I just wanted to know if my thinking is right but.
Okay.
I appreciate it.
Alright take care.
Your next question comes from the line of Stephen Volkmann with Jefferies. Your line is now open.
Great. Thank you guys. Most of my questions have been answered, but I guess, maybe a longer term bigger picture question.
You've done a great job growing our parts business, including the gross margins kind of through the issues. We've had over the last two or three years, but your truck gross margins are still circa 300 basis points I think below pre COVID-19 levels and I'm just curious how youre thinking about that going forward is there anything that.
Would preclude us from getting back to those kind of 2018 19 levels of gross margin.
If not what would be sort of the key levers that need to be pulled to get back there.
Okay.
No Steve.
Our margins continue to improve and the new products that we launched in North America and Europe .
<unk> provided.
Good tailwind I would say to margin growth.
As you see it now our margins are the best in the industry.
That's our goal is to stay the best in the industry.
And parts plays a key role there and the new trucks.
Strong margins on those new trucks.
A key element of that as well and then what I would agree with everything <unk> said and I would add to that that our operations teams have done an incredible job around the world, making sure we get as many trucks out as we can sometimes just on less efficiently. So if that smooths out then that will be an upside as well.
Okay, Yes.
Harry we always want more so.
Thanks, Eric for the question.
And then maybe.
Maybe I can just.
Attach one more here I was interested in your financial services results were quite good despite kind of lower revenue. There was that mostly kind of the goodness of used truck sales and I'm curious if that youre starting to see those prices kind of normalize again or maybe not yet.
It's nice to see how the finance company continues to perform really really strong or another $46 million in the third quarter second best quarter ever so very proud of the team achieving in delivering those results.
The business continues to go well portfolio quality is excellent past dues.
3% got it and so really vivo.
Our revenues.
The fact that our used truck inventories are at low levels that is less flow list.
Sales of few strokes, but the used trucks that we sell through that <unk> 13 used truck centers growing portion of it that provides a nice tailwind for the finance company.
I would expect to finance company to continue to do well as we enter the fourth quarter and going into next year.
Okay.
Alright, Thank you guys.
Hey, Steve.
Your next question comes from the line of David Raso with Evercore. Your line is now open.
Hi, Thank you for 2023, the order books can you, let us know how far they're open and is that open for national fleets as it opened for all size customers just trying to get a sense of how far out. The books are open in North America and in Europe .
Thank you.
Order books are open David.
It's as we said substantially full in Q1 filling in well in the second quarter and even through this into the second half as customers look at their full year delivery plans and allocate their capital for next year so going.
Going well by all segments.
And really kind of as we would expected for a strong year.
And the pricing that's in the backlog.
Is that notably higher than what was shipping in the third quarter, just trying to get a sense of sequential pricing from what's already in the book.
Well, we talk about the margins improvement into the fourth quarter.
$14 nine gross for 15% to 15, five so that kind of implies that we have.
Confidence in our price versus cost model and.
And we think we'll have that next year or two.
I know you don't divulge truck margins by geography, but when you see what's in the book you know what the new trucks are doing on your economics, when we think of any margin improvement next year.
And at the moment youre, not assuming radically different growth rates in the EU versus versus U S. Canada, how should we think about the margin improvement geographically I'm trying to get a sense a bit obviously, just cyclically thinking about next year, but structurally is there something about some geographies it might even be with another gi.
<unk>, just how to think about the margin improvement geographically, knowing with new trucks are doing.
Yes, I think is that the new trucks around the world for Pac or are doing so well in terms of their operating cost performance to our customers that that is helpful to us in terms of margin.
As a percent of the product that we changed in Europe is a higher percent than we changed in North America and so that's really helpful to us in Europe , and I think that our team in South America is doing a great job in Australia. They are doing a great job in Mexico, Theyre doing a great job. So I kind of look at it and think that.
It's happening everywhere for us.
Terrific. One last quick one if you don't mind the use gain on sale that used trucks in the fin co.
For the third quarter I was curious I mean, obviously shipments have gotten a little better but overall the unit delivery wasn't great and obviously, we can kind of equate when youre selling more new creates more used opportunities regardless of the used truck price.
It was the gain on sale in the third quarter similar to the first two quarters that roughly $35 million run rate.
I would say, it's like it was more or less similar there David.
I appreciate it thank you.
Good day.
Your next.
Next question comes from the line of John Joyner with BMO capital markets. Your line is now open.
Hey, good morning.
I just had one question so following up on <unk>.
Steve <unk> question.
With regard to used prices and such I mean, so I guess what happens on the other side of this when used prices to moderate to maybe a more normal level I mean do you tend.
Tend to put the trucks back through wholesale or I guess, how are you thinking about that.
Well I think what we think is if there is going to be a market that is constrained like it has been in truck ages up in freight volumes are up and that could be some time before we experienced that we know the markets are cyclical and we have a great team in our financial services business. They do a really good job of.
Adjusting to where the market is and maximizing the return on on the Das Kenworth and peterbilt products that really get a premium in the marketplace. So regardless of the part of the cycle. We operate in we tend to get that premium we continue to expand.
Spanned our capability in that area, we've opened up a new used truck center of Madrid.
We continue to take advantage of the opportunities of selling more retail and that's helpful to the business in the long term.
Is there anything you'd add Harry.
I think that summarizes it well okay.
Alright, Thanks, a lot. Thank you.
Thanks, Sean.
Okay.
Your next question comes from the line of Nicole to place with Deutsche Bank. Your line is now open.
Yeah. Thanks, guys. Thanks for taking my question.
Sure.
So maybe just starting with a little bit more on supply chain. So totally understand that there's still a lot of constraints here, but have you guys observed any major signs of improvement as we just think about like how supply chain is going relative to last quarter and where we were at this time last year.
I think that compared year over year, it's definitely better.
Think that sequentially in the quarters, we see different issues that are kind of adjusting we have really good relationships with our suppliers and we'll continue to work with them to kind of solve out the issues I would say that it has shifted a little bit from being purely semiconductors to maybe being other labor kinds of issues and other materials kinds of issues, but they're doing a really good job of helping us get the parts we need.
Hence, we see that the production should grow in the fourth quarter.
Okay, that's very helpful.
You guys have increased your capex and R&D in 2023 relative to 'twenty two as per the new guidance today I guess what are the big drivers there I think R&D most people understand where the investment lives, but with respect to capex, what is causing that year on year step up.
Well, we have a lot of really neat projects that we're working on.
Okay, great clean diesel projects with some great zero omissions projects, we continue to make investments into autonomous vehicle platform, our connected services platforms around the world and enhancing our production capacity. So we can build more trucks and engines and all of that is kind of what's driving those numbers. So it's fun to see those numbers moving just because.
Portend, a great future for us.
Got it thanks I'll pass it on.
Thanks.
Your next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.
Hi, Thanks, and good morning, everybody.
Hello.
So I guess my first question I have two one is on Europe and not so much on the demand side, but just on supply where there's a lot of unease around the energy and shortages and whether that will cause disruptions in the supply chain and so I guess from your internal point of view is that something you worry about do you see the next three to six months has been.
Rescuing you don't know if a supplier is going to have an issuance shutdown or is that.
Something you see is more stable than perhaps either.
Well I think that everybody can read the same headlines, but I would tell you that from inside of our business.
We work really closely with our suppliers. So that we can understand anything they're dealing with and so far it's been pretty good.
We look into next year and everybody's paying attention to it and continue to work as partners to try to make sure we get the parts we need.
I think we find ourselves in a pretty good position as we sit today.
Okay. Thank you and the other one and I apologize if you answered this in reference to Steve but.
When you look at your aftermarket margin, obviously theres been a lot of effort over a lot of years in revenues margin are both increasing at this point are you seeing disproportional contribution from proprietary parts as you kind of get that mix up or is there still runway across the aftermarket business on revenue and margins.
Sure.
Sure I don't think it's disproportionately I think I think a lot of what's going on is the parts team and our dealers are doing a fantastic job of this business growth and creating recurring revenue by serving the customers well and helping them become more efficient I think that's a lot of systems a lot of e-commerce a lot of.
Relationship building and I expect that will continue.
Got it thank you.
Alright.
Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.
Hi, good morning, good afternoon, everyone.
Hey, Jerry.
First one I'm wondering if you could talk about as you're having conversations with your customers that are interested in making longer term plans for electrifying their fleets how's their approach to procurement.
Different at all in terms of the number of truck Oems that are looking to use or any other differences.
In the process.
And the impact that you might have on on your opportunity to get potentially better share in medium duty market in an easy environment versus diesel.
Yes, I think that they use the same kind of analytics, they do to make any kind of a buying decision as they are looking for.
<unk> and operating cost advantage total cost of ownership equation to work for them.
It adds elements now with Evs, because they think about charging an infrastructure and return in mileage and route and utilization. So we partner with them at Peterbilt, Kenworth Dov and parts all partner with them to try to make sure. They think about all the input costs that are going into it.
And then as well the incentives that are available to it and use all of that together to come up with kind of like when is it time to start into the market try five or 10 or 20, and then what is the time going to be to move even more quickly.
I think that that's kind of a very active.
Dialog that depends upon their use case.
Okay Alright.
That conversation any different in terms of number of participants versus diesel purchases are they concentrating those conversations with fewer suppliers when they were in a diesel environment given the complexity.
So I think that they have a high trust and Packer and our high quality and excellent performance overall, we have that.
It's kind of a promise we make to them that we want to deliver on and we'll do that through <unk> as well. So I think that makes it we have a seat at the table to work with them and provide a successful solution for them.
Okay Super and just to shift gears.
Harry I apologize if I missed this did you talk about in Europe . The backlog coverage that you have how far out lead times.
Track today and can you talk about so we're in the mid Seventeens from a market share standpoint in Europe .
As regulations are implemented can you talk about the timeframe and opportunity for market share.
To continue to potentially move higher once.
New regulations that you alluded to in the prepared remarks are implemented.
Yes, the new market dimension regulations that we talked about.
Allows for more aerodynamic.
And more fuel efficient trucks to be designed if you meet certain criteria.
Novice, taking full benefit of the new legislation so as far as we can tell that was the only.
Truck manufacturer in Europe that has those trips on the market today.
Puts us in a really strong position to grow margins and market share.
As like you said 17, 4% share year to date, that's a record for them.
With the new trucks.
We are in an excellent, particularly dakota market share even further in the coming years.
And sorry, Harry the lead time part of that question how far out are you.
Taking orders in Europe .
Well, we the first quarter is more or less full today.
Current capacity that suppliers are providing us and then we're filling in the second quarter nicely at this moment in time. So that's that's a really good balance a nice backlog.
For us as we enter 2023.
Okay I appreciate the discussion thanks.
Your next question comes from the line of Michael Feniger with Bank of America. Your line is now open.
Hey, Thanks for taking my questions and I know this got asked a little earlier, but just how should investors think about the gap you're seeing between spot freight rates and contract rates right now how does that dynamic impact your customers investing decision decisions going forward as that date.
The point that spread you're seeing between the contract and spot freight is that relevant in terms of how they think about their investment profile and purchasing decisions profile over the next few months.
Well I think that when you think that spot rates are a minority of the market.
20% portion of the market.
When there's strong contract rates, which there are and when tonnage is at such high levels like it is.
There's still plenty of good business for them to.
And I think that Theres still oversubscribed in terms of people wanting loads carried as a general statement, which is good for their businesses and I would expect that thats there being good for their business will be good for our business.
Makes sense.
If I look back like nine out of the last 12 years. Your gross margins are up Q1 over Q4.
With the 15% to 15, 5% guide in Q4, maybe help us understand why why wouldn't gross margins.
Increase from that level in the first quarter of next year anything we should think about there.
I don't think we said that they shouldnt I think we said that we have good gross margins. This quarter, we expect them to be very good next quarter in the fourth quarter, and we think 2023 will be a really good year.
That's helpful and just if I could squeeze one more in just on the R&D. I mean, you are finishing this year I think on an annual basis up 2% to 5%. Your truck sales are up nearly 30% you guys did guide for next year It seems like.
There is a little bit of a catch up in R&D spending could be up double digits, but how should we think about like going forward into 2024 is should we be looking at R&D as a percent of sales as a metric.
And any way to kind of think about some of the investments that you guys are making.
How to think about that over the next few years, given your backlog and how you guys are thinking about the truck cycle going forward.
Sure I can share with you we think about it we think of spending on R&D is what we have good projects that bring value to our customers.
We're such a strong financially positioned company that we spend the money we want to on the products that are going to bring value to our customers and that's how we define our R&D spending.
Perfect. Thank you.
Okay.
Your next question comes from the line of Jeff Kauffman with vertical Research partners. Your line is now open. Thank you very much congratulations everybody.
Hey.
A lot of my questions have been answered, but I wanted to kind of follow up I mean things are changing globally.
And currency as it has been one of those things if it has changed pretty dramatically.
But you would never know it looking at your results and I was just kind of curious if you could talk a little bit about how currencies impacting whether its the revenues of the profits being reported back and kind of give us an idea of what kind of impact to think about when we're talking about the truck business, whether youre talking about the parts business financial services.
This business is.
As we think about moving towards 2023.
Yes. This is Michael <unk>.
Revenues for Q3 were reduced by $325 million due to currency effects, mostly the euro some offset with the Brazilian real was stronger.
And for the year was $740 million so.
Theres been that effect and the impact on profit was about net profit was about $20 million for Q3 and $50 million for year to date.
Okay, and then just one follow up you talked about some of the new investment platforms.
I was just wondering because every time I see one of your trucks out there there seems to be an Aurora system attached to it these days.
In terms of just showing what's on the horizon.
Can you talk a little bit about your progress there and you had discussed maybe building some platforms where.
Pac or could be a beneficiary of some of the information and data flows. Some of these new vehicles for customers that were looking to electrify or go autonomous a couple of years.
Just kind of an update on some of these new platforms.
Sure, we're really pleased with the progress, we're making with our partnerships with Aurora and others, and it's going really well, they're making excellent progress together. We are we are developing as you mentioned, Jeff we're making this autonomous vehicle platform, which creates a system of redundancy, which makes operating the vehicle feasible it integrates into the truck through software as well.
Our expertise and their expertise combined is creating I think.
A really neat product for the future.
Okay. That's all I have thank you so much.
Great.
Your next question comes from the line of Matt Alcott with Cowen <unk> Company. Your line is now open.
Thank you maybe I'll ask you guys on the.
Cadence of new truck deliveries going forward.
Given how anomalous this environment has been and how it's first off the production cycle.
As supply chain disruption.
Continue to ease and Youre able to further optimize our manufacturing processes.
We see a more linear quarterly cadence historically with deliveries or maybe even like steady modest quarter over quarter increases in deliveries in the next few quarters.
Well I think that as the supply base approves it does make it smoother as youre right to say that I think we got to see it get totally smooth before we can take full advantage of that to think that.
Prediction of when that will be we don't know how to make that we just keep building all the trucks are Ken and I would expect that as we said, we expect deliveries increasing in the fourth quarter.
And beyond that we'll watch how the.
The opportunities are as we think that the demand is strong we do think that next year is still feels like at least the beginning to be supply constrained.
Okay.
Got it.
Just one last question.
If you ask the off highway equipment manufacturers are expecting infrastructure related projects and start hitting their backlog late this year. If we look back historically kidney is it easy for you guys to kind of you know.
<unk> some of your business to either residential or nonresidential construction activity.
U S.
Residential is obviously moderating.
And expectation that infrastructure projects will start coming in.
Next year.
In the U S market's kenworth and Peterbilt are the leaders in the vocational markets for trucks that support those kinds of projects.
Expect that will continue next year and we do see strength in those markets. So we would expect that to be a good good news and a tailwind for 2023.
That's great. Thank you very much.
Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.
Hey, thanks.
We further really strong industry order numbers for September any color on October are you seeing anything <unk>.
Directionally similar work with September .
Yes, we're seeing continued strengthening even so we're seeing that September was strong we see October being strong as well.
Okay.
The currency question that Jeff asked us.
Fourth quarter, similar with Q3 in terms of that net $20 million headwind or could it be a lot bigger than that.
Michael.
It will be similar to that the euro had already started to drop last.
The fourth quarter of last year so.
I would expect it to be about a similar number.
Of course the <unk>.
Sure So two months still.
And then just last thing with <unk>.
Nicole.
<unk> Romeo does that have any impact on battery suppliers for you how do you think about that.
Yes, we have a really good supply base structure with the battery producers in the world.
Long term contracts in place that give us adequate supply.
So Nicola is a competitor acquiring a supply of or it doesn't.
Kingdom enacted all it's our ability to produce EV vehicles.
Okay.
Alright, Thank you guys.
Yes, you bet.
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.
Thank you. This concludes today's conference call. Thank you for attending you may now disconnect.
Hum.