Good morning, and welcome to PACCAR's First Quarter 2022 Earnings Conference Call. 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, PACCAR's 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, PACCAR's Director of Investor Relations. And joining me this morning are Preston Feight, Chief Executive Officer; Harry Schippers, 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 paccar.com. I would now like to introduce Preston Feight.

Good morning. Harry Schippers, Michael Barkley, and I will update you on our first quarter results and business highlights. PACCAR achieved excellent revenues and net income in the first quarter. PACCAR sales and financial services revenues increased 11% to $6.470 billion. Net income increased 28% to $601 million. PACCAR 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. PACCAR 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 PACCAR's outstanding employees, who delivered the excellent financial results and the highest quality trucks and transportation solutions in the industry. Last year, PACCAR introduced a complete new product lineup of Peterbilt, Kenworth and DAF 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 love the new digital instrumentation, luxurious interiors, stylish LED headlights, and beautiful exterior styling. The new trucks and growth in PACCAR's aftermarket business contributed to the increased 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, US GDP is estimated to grow 3.2% and industrial production is projected to expand 4.4% this year, which continues to provide a favorable operating environment for PACCAR and its customers. We estimate the US and Canadian Class 8 market to be in the range of 260,000 to 290,000 trucks. The European and UK economies are also experiencing good economic growth. Economists project UK GDP to increase 4% and European GDP to increase by 3.2%. The 2022 European truck market is expected to be in a range of 270,000 to 300,000 trucks. We expect truck markets to remain strong. PACCAR's industry-leading new truck lineup, highly efficient factories, best-in-class parts and Financial Services business and the continued development of advanced technologies are creating an exciting future. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights.

Thanks, Preston. PACCAR delivered 43,000 trucks during the first quarter. We're focused on increasing production in our factories and estimate second quarter deliveries to be in the range of 44,000 to 48,000 trucks. Truck, Parts and Other gross margins increased to 13.4% in the first quarter. With higher production and a more favorable mix of new model trucks to be delivered, we anticipate second quarter gross margins to increase and be in the 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 and freight activity. As Preston shared, PACCAR Parts had an outstanding first quarter, with Parts gross margins growing to a record 30.1%. PACCAR Parts' business model, which is based on convenience and technology, contributes to our customers' success. PACCAR is best in class at maximizing uptime for customers by having high-quality parts conveniently available when needed. The success of PACCAR Parts is driven by an expanding network of 18 parts distribution centers and 2,200 dealer locations, 250 independent TRP stores as well as technologies like managed dealer inventory and innovative e-commerce systems. PACCAR is continuing its investments by opening a new distribution center in Louisville, Kentucky this quarter. PACCAR Financial Services benefited in the first quarter from strong new loan and lease business, high used truck prices, and excellent portfolio quality. Revenues were $366 million in the first quarter. Pre-tax income was a record $147 million, 92% higher than last year. The silver lining to the industry-wide undersupply of semiconductors is continued strong demand for PACCAR pre-owned vehicles. Customers appreciate their superior reliability and durability and a premium price. PACCAR Financial has been increasing its retail used trucks sales capacity, and now has 12 facilities worldwide. These facilities sell used trucks at retail prices, which contributes to higher profits. PACCAR Financial is opening another used truck retail center in Madrid, Spain this year. PACCAR has invested $7.3 billion in new and expense facilities, innovative products, and 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, and research and development expenses are estimated to be $350 million to $400 million. PACCAR is continuing its investments in clean combustion, zero emissions, autonomy, and connected vehicle programs. Thank you. We'd be pleased to answer your questions.

Your first question will come from Tami Zakaria with JPMorgan. Please go ahead with your question.

Hi everyone. Thanks and congrats on the solid results. A couple of questions from me today. First, can you update us on any red tag units in inventory at the end of the quarter? And what kind of cost absorption impact it had in 2Q? And if you expect any remnant impact in the second quarter as well?

Sure thing. Good to talk to you. Well, I'd say on the red tags, we are in roughly the same spot now as we were at the end of the year. So we have a managed number of offline, and our team is doing a really fantastic job of working through a global issue and getting trucks to our customers. As it relates to cost, our price cost was roughly even with each other in the first quarter on a year-over-year basis.

Got it. Thank you. And a 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 Harrie announced, right, 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 an issue and more there's general supply challenges in terms of getting all the materials we need into the plants at any given time. And again, our suppliers, our teams, our purchasing teams, and the ops teams are all doing a really good job of working through that.

Understood. Thank you so much.

You bet.

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

Thanks very much. Could you provide some details on the number of partly completed trucks? You mentioned it's similar to Q1. Does that mean you had about 3,000 remaining at the start of the quarter? Did those all get shipped out and were replaced with 3,000 new ones? It would be helpful to have more details on that.

Sure. Fair question enough. Easy enough to answer; we did have, like you said, 3,000 at the end of the year. And that number is in the low 3,000s right now, and it is definitely different trucks. So we get the parts in, we work through them. The teams get them to our customers who really need trucks right now. And then some other issue might come up, and we work on getting that resolved.

Okay, fair enough. And then just relative to the parts business, just curious what was better than expected in the quarter, and 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.

I would like to share a few thoughts, and perhaps Harrie has some insights as well. One of the key factors driving growth in the parts business is our outstanding team, which is effectively linking our systems with our dealers and customers, creating a strong loyalty to our brand. We have invested in great technology to ensure that PACCAR is the first and last choice for parts. Additionally, over the years, we have enhanced the proprietary content of our trucks and engines, contributing to business growth that we believe is sustainable. Furthermore, there is a significant demand for freight services, meaning that trucks are in operation and consuming parts, which benefits us. Harrie, do you have anything to add?

Those are the main items. The average age of the trucks is going up. They consume more parts. It also means there’s going to be a strong market for trucks for probably a longer period of time. The strong demand for parts we’ve seen especially in North America, where we have the PACCAR engine successfully growing and contributing to that parts growth.

And you could think – we could continue to see kind of upwards of this 10% to 20% growth rate for the rest of the year in parts?

We expect the second quarter part sales and results to be very similar to the first quarter. So, yeah, we'll continue to perform very strongly in the parts sector.

Thanks very much.

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

Great. Excuse me, thank you, and good morning. Just a follow-up. Preston, on the comments earlier on the gross margins for your expectations for the second quarter. So just as it relates to price cost, so if that was roughly in line in the first quarter as you roll through more and 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 the interplay between price versus the variable costs here in the second quarter?

Great question, good conversation to have with you. I'd say that we should expect to see some improvement as we continue on, in part just because of what you mentioned. But I'll also make the mention of these fantastic new trucks in Europe and North America, being a contributor to that. So as they grow in percentage of build, that's helpful. So those are the positives to it. And obviously, there's the base issue of making sure we build as many trucks as we can, and sometimes that's less efficient than we'd like it to be, but we want to satisfy the customer demand. So that's the balance to it.

Got it. Okay. And maybe, Preston, if we could – obviously, a very healthy market as you hear 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 – and there's been a number of new entrants in North America that have come into the market in the last year or two, and you're facing some rather significant increase in operating costs and the prospect of higher rates. Just maybe what are you hearing as you kind of talk to dealers, again, a bit more in 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 just across the customer base, just kind of what's the tone and sentiment?

I would – I understand where we're coming from, and I would say that the customers we have who are extremely good at operating their businesses are doing a great job. They have a lot of freight to be hauled right now, and they have a lot of requests for our fantastic new trucks. So that's putting – that's creating a market environment or a business environment for us, which should make it strong for a long period of time. As you mentioned, there have been some new entrants, but I think they operate really on the fringe of it. Maybe they're 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 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 build was your new product launches in the first quarter and how we expect that the new trucks as a percent of build to play out in the 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 backlogs out and what your market share is trending within backlog, given what I see some of the success with some of these season trucks, I mean, it looks like your Europe market share went up as well. So I'm just trying to get a sense for backlog and market share trends as we exit 2022? Thanks.

Sure. Regarding your first question about the new build percentages, in the first quarter, approximately one-third of our build in Europe was from the new product, and we expect that to rise to about 50% in the second quarter, with further increases in the third and fourth quarters. In North America, the new Peterbilt Model 579 and Kenworth T680 also made up around one-third of our build, and we are still transitioning our new medium-duty product, which is not yet over 50% transitioned but is expected to grow throughout the year. As for our backlog, it remains robust, and we are largely full for the year in both Europe and North America. Adjustments to build rates may create some openings, assuming we secure the necessary parts. Customer feedback indicates a strong demand for trucks, which reinforces the strength of our backlog. In terms of market share, in the first quarter in Europe, we achieved a 17% market share, which is quite strong. For North America, we have increased our market share from 24% to 28% from the first quarter of 2021 to the first quarter of 2022. We anticipate maintaining a market share in the 30% to 31% range for the full year.

Well, okay. Thank you very much.

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

Hi, good morning, everyone. Just to follow up on Jamie's question, Preston, by 2023, should we expect that nearly all production will consist of the new products, or will the older products still be available?

So a fair question. And we'll continue to offer some of the other products as well into 2023, but there's a transition going on there.

Okay. Thanks. And then can you talk a little bit about Europe specifically? I mean, it seems like there's 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 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? Does it take 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, our cost situation in Europe has not been so much different from North America. So, we've seen direct material cost increases and price increases, which have been similar. We're not exposed too much as far as we can tell right now to the situation in Ukraine and Russia. So, our parts availability and the ability to produce trucks has been good. I think the economy and customer demand is very similar to what Preston just mentioned. Customers want to have their trucks. They want to have more trucks; they want to have them faster. So really strong market this year. That's also why we increased the range of our outlook for Europe a little bit this time. And we think it will be a strong month, 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, good morning. When I think about 2023 and around the industry currently, the orders are being a bit suppressed. When you open your order book for 2023, and maybe it's a statement for the industry as well, what you're hearing from your customers? Do you expect orders to reaccelerate given their suppressed today? And then I'm curious your view about demand for 2023 if you think they're going to accelerate once those books are open.

Thank you for the question, David. We believe 2023 will be a strong year for several reasons. We anticipate that our new trucks will represent a growing share of our production. The fuel efficiency these trucks offer is attractive, encouraging customers to integrate them into their fleets, which will positively impact their operating costs. This should drive demand. As we approach 2023 and start receiving a significant number of new orders, we expect to see a positive uptick in order intake.

So no dampening in your review of 2023 with any of the macro developments since last quarter. Is that a fair general assumption to…?

There is that view out there, I guess. But as we look at it also, the other view is that the economy is growing, and we expect GDP growth is positive, that freight volumes stay at a high level, that truck age is up 10% to 15%, and then we have fantastic new trucks. All of those for PACCAR are good news in terms of what we expect the future to look like.

Thank you. Then on the deliveries for 2Q versus 1Q, midpoint up about 7%. Can you take us through the geographies with a little bit of help on each one sequentially, US, Canada, Europe, and others? Thank you.

I think I'll offer a couple of comments. Harry can add anything he wants to, anyone else. But I would say that we do expect volumes to grow in each of the regions in the second quarter and contribution to that 44,000 to 48,000 units. And then specifically inside of that, it's harder to tell because the supply base issues can be unique month-by-month.

Europe typically has fewer working days in the second quarter; a little bit more national holidays in different countries at different moments in time. So that would be an offset maybe a little bit, but we've also seen that the material availability in Europe is good with increasing production there. So overall, I would think that all regions would make a contribution to the higher production in the second quarter.

All right. Thank you very much.

You bet.

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

Thank you for taking my questions. First, you provided some insight in your release, but is there anything more you can share about the performance of the Financial Services business? Looking back over the past 35 years, the profitability has never been this impressive. Can you add anything further to that? Do you expect this trend to continue for the rest of the year?

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 and B credits. Past dues are less than 0.5%, so customers are paying their bills on time. Like we said in the press release, the used truck business continues to be very strong. I think a big difference maybe compared 20 or 30 years ago is 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 the 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 and third quarter because customers hold on to their trucks because they're waiting for new trucks. And again, it underlines how strong the demand for the new trucks is going to be.

Okay. That's great. Following up on that, when you mentioned the used truck centers, how much more is there to build out? Additionally, how much geographic expansion is left for the parts business, including TRP stores and distribution centers?

So on the used truck centers, we've added a couple of used truck centers, and I think per year in the last couple of years, made some updates, adding another one this year. There's definitely opportunity to add a few more. I would say that it's still a minority of the trucks we sell through the used truck centers, so there's still room for opportunity to grow in that area. And on the parts, Preston?

Yes, I think on the parts side of it, if you think about that, I'd say that the parts team has the opportunity of continued growth. We've built out distribution centers. We'll continue to do that. That puts distribution 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're 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 DeBlase with Deutsche Bank. Please proceed with your question.

Yes. Thanks guys. Good morning.

Good morning.

I guess, a lot’s been covered here, but can we talk a little bit about inventory? I think if you look at the ACT data, just truck inventory at the dealers has begun to tick up a bit. What is PACCAR seeing with respect to inventory in the channel?

Yes. I mean, inventory is still at pretty low levels. If you look at, it was like 2.3 months of retail sales in March compared to 1.9 a year ago. And for PACCAR, we're slightly less than that. So there's 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.

Thanks for the clarification. I'd like to follow up on the supply chain discussion. I know there are some improvements expected as the year progresses. What was your experience in the first quarter? There seems to be a lot of noise regarding geopolitical risks. Did the supply chain become more difficult, or was it consistent with what you've been observing over the past few quarters?

I think that what we've seen is that, maybe we've gotten through some of the earliest semiconductor issues, and those have not become the most dominant side of it. So, other little issues come up now. They could be labor-related. They could be geopolitically related. They could 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 is maybe improving. And 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.

All right.

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

Good morning everybody.

Good morning Rob.

Harrie, the results were great. I have a couple of accounting questions. I noticed that you switched from LIFO to FIFO for US inventory accounting. I assumed this was to align more closely with European and global peers. Did you have any other reasoning behind this decision? Also, will it have any significant cash tax impact?

It’s Michael. That's one of the reasons why we switched to become more comparable with the European peers who use IFRS and don't have LIFO. We also wanted to have better matching of our revenues and costs. As inflation creeps up, you end up accelerating 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. And with inflation creeping up the way that it is, it's become more of a thing and distorts the numbers unnecessarily. So, better comparability, better revenue recognition, we thought it was the right thing to do at this time.

And is there any cash tax impact that we should care about? And then I have one more question from me.

Yes, our LIFO reserve is about $200 million, and we will end up paying about $50 million in taxes, which we are pleased to do.

Okay, perfect. And then on the final subs 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 you own them and you sell them into a strong market, or was that a material at this quarter or for the year? I will stop there. Thank you.

Yes. Of course, the trucks that come off lease that are our trucks, that's a good business for us right now. Those trucks come back in a very favorable market for used trucks, and that's definitely a good thing for the finance company.

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

Yes, good morning everyone. I wonder if you 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 doesn't look like you folks had any issues. Is that a function of you folks using multiple suppliers or a different supply base? Can you just talk about how nimble you folks had to be in the quarter in flexing, if at all, given the geopolitical issues? Thanks.

Well, we've noted the same thing with them; we just haven’t 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'll have to watch and see how it is. But right now, there's nothing showing us that we aren't going to get the parts. And we continue to work closely with all the suppliers that have facilities in Eastern Europe to make sure that we're on top of it.

Yes, we're one of the few truck manufacturers that doesn't have a factory in Russia. And so, our exposure to Russia and Ukraine has been a lot less than what you may have seen somewhere else.

And Harrie earlier you mentioned the strength of the business in Europe, I'm wondering if you could just expand on that. Did bookings exceed shipments in the quarter? Can you comment on that?

Yeah. Order bookings, I think 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. And we see there are some inflation and cost increases, and we want to manage that just very carefully. So I think in today's environment, we could easily get more order bookings than we need, but it's a function of filling the backlog with strong business and not getting exposed out to 2023 where we don't know exactly what costs are going to be.

I would like to highlight how remarkable the new dock truck is. It is the only truck that complies with all the new mass and dimension regulations. It offers a 10% improvement in fuel efficiency, resulting in several thousand dollars in annual operating cost savings per truck. This truck also adheres to the upcoming direct vision requirements in Europe. It is a transformative product, features significant proprietary content, and the drivers appreciate it. Therefore, we anticipate strong demand for it in our European market at this time.

Okay, super. And lastly, I'm wondering if you can just comment about the evolution of demand for your electric vehicles. How has that evolved over the past quarter or two? And where are you folks expecting to ship them geographically? Is it still predominantly in Europe where you're seeing demand?

Sure. We are seeing increasing order intake for those vehicles. I think we talked even a year ago when we said we start in the tens and grow to the hundreds and then get to the thousands. And this year already, we expect that we'll deliver in the hundreds of vehicles, and take lots more orders than that for the vehicles. And we're 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 PACCAR quality looks like in a zero-emissions vehicle. So we kind of see that as a growing opportunity, and we continue to refine our technology on those vehicles, 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. 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.

Good morning.

How much room do you have to increase prices on parts? Can you elaborate on your pricing philosophy? Are you considering raising prices to offset costs like airfreight? Additionally, could you explain the factors contributing to the strong performance of your parts business? How much of that is attributed to growth on the agent side compared to the overall truck business? Lastly, Harry, could you clarify your comment regarding parts demand being similar in the second quarter compared to the first quarter? Are you referring to dollar amounts or year-over-year percentage growth?

Well, I mean, obviously, it's a competitive market out there. We've done a 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 driven by the need for these parts and the fact that we are connected with the customer numbers more and more, right? Trucks are getting complicated. We have sophisticated customers, and the interaction between PACCAR, our dealers and our customers is a real contributor to growth as well as more proprietary content like engines like our PACCAR transmissions, PACCAR 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? You're talking about dollar-wise versus percent-wise growth? And then just a separate question, just on just how you guys are thinking about how much pent-up demand there is in the industry today?

To go back to the parts comment, the parts comment was on revenues. We expect parts revenue in the second quarter to be similar to parts revenue in the first quarter. Parts 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. So that just shows you that – it's an environment where cost increases are translated into price increases as well. And the second question you had was?

Just how to think about just how much pent-up demand there is either in the industry or if you can talk about PACCAR 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 freight volumes. People are running their trucks out there, putting miles on them. They have an operating model, which says they 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 they're probably not going to adjust that business model, which is successful for them. So they're going to want to draw down 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 they're not going to be just for a quarter. We expect to see this to be a good period of time for PACCAR in the industry.

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

Good morning. I'm not sure if you guys replied to this a similar question earlier. But what do you make of the erosion in spot rates? And clearly, PACCAR is very positive. But why isn't that an indication that excess capacity is creeping into the freight markets and the demand is ultimately softening? And why would those reaccelerate in 2023 as spot rates are falling? Thanks.

Yes. Sure, Ross. I mean, I think that it's a fair question. 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 shouldn't 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're still present, and the fixed contracts are still really strong. So as long as that continues, it bodes well for the market.

Okay, thanks, Preston. I haven't asked about consolidation in a while. PACCAR has successfully grown organically for a long time. I'm curious about your general perspective on this. Do you believe there's an increased need for consolidation in the commercial vehicle sector given the current inflationary pressures and the potential need for more localized supply chains and greater overall scale? Also, do you think regulators would permit a combination of any of the top six or seven companies? Some European firms have faced significant challenges recently, particularly after the situation with Russia. Could PACCAR possibly take on a role as an industry consolidator in the next couple of years?

Well, it's funny that you haven't asked that question in a while. I would simply say, the way we look at it is the business is doing fantastic. PACCAR continues to grow. We expect to keep growing, and we always are looking around the world for the best things for our shareholders. And I think that's as much as we can say right now.

Thanks a lot.

You bet.

Your next question will come from the line of Jeff Kauffman with Vertical Research. Please proceed with your question.

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. I think you nailed it. It's a timing issue in the year. So we still hold that $350 million to $400 million in the full year with $78 million in the first quarter. So it's a run rate for new technologies, some pretty fun projects that we have that we're spinning up that will help us in the future.

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

Pretty gradual increase during the year, I would model.

Okay. Thank you. And then a lot of detail on new unit sales, but I know you've had a couple of questions about this. What do used unit sales look like on a year-on-year basis?

In general, the number of used trucks has declined. About a year ago, we were entering a robust used truck market, which had ample inventory available. Now, due to strong freight demand, people are holding onto their trucks, so fewer are entering the inventories of our dealers or used truck centers. Consequently, the inventory levels are lower and are likely to remain so for some time. In terms of specific figures, you should consider it as having less than two months of inventory available.

All right. And that's consistent with the commentary you made about 2Q, 3Q. So any benefit that we're seeing on used vehicle impact to financial services is entirely used vehicle price at this point, correct?

That's probably the biggest variable in-depth profit number, yes.

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

Hey, good morning everybody.

Good morning.

Preston, I just have one. You mentioned earlier in the call average truck age is up 10% to 15%. Can you 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 cycles, 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 see it as each year being its own unique situation, and various factors can disrupt the model. However, I don't believe the overall expectation for the fleet is shifting significantly. They aim to keep the fleet age at a certain level and will replace vehicles when they exceed that age. While there are minor variations in timing, their freight volume remains strong. As we consider their strong freight volume and the opportunity to own new Kenworth, Peterbilt, and DAF Trucks, which are expected to generate substantial savings per unit, we don't foresee any reason for this trend to change. Other nuances appear to be less important.

I would say that's applicable globally. Every market experienced COVID-related shutdowns and underproduction in 2020, and every market faced chip shortages in 2021. As a result, we underproduced compared to customer demand for nearly two years, or a significant portion of that time. This has created substantial pent-up demand that we are currently working to address, but it is likely to take longer than just this year to fully meet that demand.

Your next question will come from the line of Courtney Yakavonis 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 smack in the middle of your delivery guidance, but I think Europe was a little higher than we were expecting. US was – 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 – you mentioned that you're 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…there was no adjustment to the top end.

Sure. As we looked at the segment deliveries, geographic deliveries, I would say that 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 what weighed in the first quarter. And hope 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 tightened it up to move the midpoint up because the market still feels really strong to us. So in that view is where we saw ourselves sitting.

Okay. Great. And then you made some comments earlier just about the positive mix improvement as new trucks become a higher percentage of the build. And 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? And how big of a gap is it mostly just in pricing, or is the cost structure significantly better?

Yeah, the margin opportunity for the new models is, of course, excellent. The 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 DAF with a 10% fuel economy improvement. That's class leading in Europe and being able to create so much value for our customers, that's, of course, also going to be a good thing for PACCAR.

And the only add to what I'd give is if these trucks are not just good for their pocketbook but their drivers, which is such a key element of their business right now. There's no truck they'd rather be in than the new DAF, the new Peterbilt, the new Kenworth. I was at a truck stop a week ago and at the fuel island talking to somebody who had a new PACCAR product, and they were just beside themselves with the way this truck looks and drives down think it's important to realize that the drivers have a big play here and PACCAR products are where people want to be.

Well, I guess my question was more in relation to your cost structure as opposed to the customers.

Sure. Understood. And when we make investments and big capital investments, we do it to be more efficient, and we strive for that. So, yeah, there's some of that in there as well.

Okay. Thanks.

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

Thank you. Good morning. Could you guys update us on your view on a possible 2023 pre-buy and how material it could be? And if you couple that with your view that orders could accelerate, again, are we looking at another solid delivery growth year in North America in 2023?

I would say that regarding the second part of your question, we believe 2023 has the potential to be a strong year. Although it's still early, we anticipate it could be a really positive year. Concerning the pre-buy discussions, we think that topic has been overstated. There are many excellent new products available in the market. While there won't be significant technological changes entering the general US market, there will be some enhancements in CO2 reductions and fuel efficiency, which may lead some consumers to make purchases sooner, while others may not wish to wait for those advancements. Ultimately, the real technological shifts will primarily affect California. So, I wouldn't place too much emphasis on that when considering 2023.

Okay. That's helpful. And Preston, can you maybe provide some more insight on how manufacturing lead times for Class 8 trucks have changed over the last few quarters? And where they are for orders placed today, and could longer lead times be contributing to the moderation in orders?

Well, what I would think of it as is we have a strong order backlog, 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 that's why the orders have been limited is because we're not ready to open up fully the 2023 order board because of the uncertainties of what the parts supply is going to be and the cost structure is going to be. And so that's how we look at it.

Got it. So the order moderation could be related to 2023 book not being opened yet and not necessarily a function of underlying demand for trucks?

You're absolutely 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. Just wanted some clarification on the sequential build in Europe. I mean, even if they're 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 an understanding that dealers want a little pipeline fill, if available? I'm just trying to understand the magnitude of the growth in Europe we just saw and the implied for 2Q? Thank you.

Harrie?

No, the demand for the new truck has been excellent. And I would say that also in Europe, DAF is doing an 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 1Q? Okay.

From Q1.

Exactly. And lastly, June 1, the upcoming meeting, anything you want to provide for us in this platform to mull over as we think about the main takeaways we should be getting out of that meeting?

Well, we look forward to seeing you in person. That's 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 and the strength of PACCAR going forward and how that's going to just accelerate. So we look forward to seeing everybody there.

All right. I'll be there. Thank you. Appreciate it.

All right.

Okay. Look forward to see you there.

There are no 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 PACCAR's earnings call. Thank you for participating. You may now disconnect.