Good morning, and welcome to PACCAR's First Quarter 2024 Earnings Conference Call. Today's call is being recorded. I'd 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; Harrie Schippers, President and Chief Financial Officer; and Brice Poplawski, 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 considerations 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. Harrie, Brice, Ken and I will update you on our excellent first quarter results and business highlights. I'd like to begin by thanking PACCAR's outstanding employees who do a great job providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR achieved excellent revenues and net income in the first quarter due to the strong performance of its truck aftermarket parts and financial services businesses. PACCAR achieved revenues of $8.74 billion and net income of $1.2 billion. This is comparable to adjusted net income of $1.18 billion in the first quarter of last year. Truck Parts and other gross margins were 19% in the first quarter. PACCAR's margin is benefiting from investments in new truck models, good global performance and PACCAR Parts continued growth. PACCAR Parts achieved record quarterly pretax income of $456 million, 6% higher than the $439 million earned in the first quarter of 2023. 2024 quarterly parts revenues increased to $1.68 billion, and we are pleased with the continued growth at PACCAR Parts after a record-setting 2023. PACCAR Financial had a good quarter, achieving pretax income of $114 million. These results are comparable to the fourth quarter of 2023. Looking at the U.S. economy, GDP is estimated to grow 2.4% this year with a resilient labor market and healthy consumer spending. The vocational sector where Peterbilt and Kenworth are the market leaders remain strong with continued infrastructure investments. The less-than-truckload market is also performing well, while being offset by a softer Truckload segment. Kenworth and Peterbilt share in the first quarter was 30.3%, up from 27% in the same period last year. Overall, we estimate this year's U.S. and Canadian Class 8 market to be in a range of 250,000 to 290,000 trucks. In the medium-duty markets, the new best-in-class Kenworth and Peterbilt models increased their combined first quarter share to 17%. We expect this year's medium-duty market to be around 100,000 units. In Europe, economies and the truck market are softer this year. DAF's premium new trucks provide customers with the latest technology and best operating efficiency. We project the 2024 European above 16-tonne market to be in a range of 260,000 to 300,000 trucks. The South American above 16-tonne truck market is expected to be in the range of 105,000 to 115,000 vehicles this year. In Brazil, DAF achieved a record 10.7% share in the first quarter compared to 8.6% in the same period last year. DAF trucks are highly desired by customers in South America and the region is an important part of PACCAR's growth and success. In the third quarter of last year, PACCAR announced a commercial vehicle battery joint venture. And construction of the 21-gigawatt hour factory located in Mississippi is expected to begin this quarter. PACCAR anticipates investing $600 million to $900 million over the next several years in this factory to create cost-efficient commercial vehicle batteries. PACCAR's industry-leading trucks, expanding Parts business, best-in-class financial services and advanced technology strategy position the company well for an excellent future. Harrie Schippers will now provide an update on truck deliveries, PACCAR Parts, PACCAR Financial Services and other business highlights.

Thanks, Preston. PACCAR delivered 48,100 trucks during the first quarter and anticipates second quarter deliveries to be around 48,000. PACCAR achieved excellent truck parts and other gross margins of 19% in the first quarter. We anticipate second quarter margins to be strong and in the range of 18% to 18.5%. PACCAR Parts had an outstanding first quarter with price gross margins of 32.5%. We estimate Parts sales to grow by 4% to 6% in the second quarter following last year's record performance. PACCAR Parts' excellent long-term growth reflects the benefits of investments in transportation solutions that increase vehicle uptime and convenience for customers. PACCAR aftermarket Parts business provides strong profitability through all phases of the business cycle. PACCAR Parts has 19 parts distribution centers or PDCs worldwide, and is expanding its global distribution network with the construction of a new PDC in Germany, which will open this year. PACCAR Financial Services benefited in the first quarter from excellent portfolio quality. Pretax income was $114 million. Used truck prices have normalized. With its largest portfolio, and superb credit quality, PACCAR Financial is having another good year. PACCAR achieved an industry-leading return on invested capital of 28% in the first quarter. In 2024, we're planning capital investments in the range of $700 million to $750 million and R&D expenses in the range of $460 million to $500 million as we continue to invest in key technology and innovation projects. These include clean diesel combustion engines, battery and hydrogen electric powertrains, advanced driver assistance systems and new connected vehicle services. PACCAR is also investing in manufacturing capacity to support future growth, including expansions at Kenworth, Peterbilt, PACCAR Mexico, and DAF in Brazil and Europe. We're also investing in a new PACCAR engine remanufacturing facility in Columbus, Mississippi and in the new battery joint venture. We expect 2024 to be an excellent year. Thank you. We're pleased to answer your questions.

Our first question for today comes from Tami Zakaria from JPMorgan.

So my first question is on the deliveries for the second quarter, 48,000 around. Can you provide some color on how to think about deliveries by geography in the second quarter?

Harrie, do you want to offer any comments?

Sure. I think, Tami. The spread over the geographies will be very similar to the first quarter. I don't think we expect too many big changes. I think Europe, North America, and the rest of the world should be at similar levels, more or less, some variation, of course, but pretty close.

Got it. My follow-up is about the dealer inventory situation in North America. I'm asking because your deliveries in North America were up nearly 14% year-over-year in the first quarter, yet some industry data sources indicate that retail sales declined during the same period. Can you comment on the health of the inventory in the channel?

Sure. Happy to do that. First off, if you look at our inventory, it's really less than 3 months of inventory in the Class 8 side of it, when the industry is a little bit higher than us. One of the things to think about when you consider PACCAR's inventories are strong vocational market share. If you think about the fact that a vocational truck takes maybe 6 months longer to put into service, it means there's additional time. So the stronger vocational market has a natural cadence to increasing inventory. But overall, our inventory is in very good shape, and our market share is increasing. So we saw market share growth from Q4 to Q1. We expect that we have the right mix of build and a healthy inventory. All feels pretty good.

Our next question comes from Angel Castillo of Morgan Stanley.

Congrats on a strong quarter. Just wanted to go back to your comment, I guess, to the prior question. Just in terms of the second quarter level of delivery is being similar to the first quarter, very strong deliveries in North America if we kind of assume similar deliveries in the second quarter were run rating at quite positive rates. So I just wanted to kind of then bridge that to the lowered guide for shipments for the full industry for North America. So can you help us understand what is otherwise a very strong first half, inventories that seem to be kind of at a good level versus an industry view that seems to be a little bit more modest? Is it market share? Is it something specific to the second half? Just again, help us bridge that and understand the change.

Yes, sure, happy to delve in that. First of all, the adjustment is a small adjustment and a midpoint of 270,000, we think, is a great market in North America. But also I think what you're seeing, we're reflecting as PACCAR is that we're continuing to demonstrate that our business is structurally stronger, that the margins are higher, and that our market share is increasing in the U.S. and Canada, both in heavy duty and medium duty. And so we feel good about the way the market is going for PACCAR, which is obviously a place we know the most about, and we feel very good about it.

But maybe just from a broader industry perspective, was there anything in particular that kind of triggered the modest change?

Yes, I believe so. When we analyze the situation, it's clear that we have already highlighted the robust vocational market and the strong LTL market. However, the Truckload segment continues to show some weakness, as noted in the calls of certain public companies. That said, we also recognize that they will want to maintain their purchasing pace, which is essential. This leads us to believe that the market outlook for 2024 is positive, and we anticipate that 2025 and 2026 will appear even more favorable as we approach the 2027 emission cycle.

That's helpful. And then just lastly, just on the order books, could you just help us or just remind us where you're at in terms of kind of 2Q order book fill rate, 3Q and 4Q, at least industry data, it seemed like 2Q and 3Q are pretty full. Just help us understand the cadence of what kind of those rates are at now.

Yes. We have good fill in the second quarter, substantially full through all markets and filling nicely into the third quarter now.

Our next question comes from Robert Wertheimer of Melius Research.

I had a question just on the interest rate sensitivity where, I guess, historically, trucks have been perceived to be a market that you can stimulate or not with rising or lower rates from the Fed. And are you seeing that as rates have risen, has that been a major factor in either new or used purchases? And to your earlier comments, Preston, it seems like vocational is a great setup right now. Is that less sensitive to the vagaries of interest rates just because of megaproject demand infrastructure or older fleets? So just maybe any comments you have on that risk.

Robert, starting on the interest rate. So higher interest rates, of course, make trucks more expensive to lease for many of our customers. So it does have some impact there. But please also bear in mind that customers are buying a new truck today; they replace a 3 or 4 year old truck, and that new truck comes with significant better fuel efficiency somewhere in the 7% to 12% range. So that offsets some of those higher interest rate payments. But of course, you're right, our customers would like lower interest rates; they always do.

But as a percentage of their total, just out in what Harrie's saying, it's a percentage of the total business for them, it's not that significant. And I think we also look at it and say, like interest rates are in pretty normal levels from a long-term history standpoint. So with the economy moving along nicely with economic growth expected, we think it should be a good year.

Is vocational a different market? Could you comment on its strength? It appears to be stronger. Can you discuss the difference between that segment and the long-haul segment, how significant it is, and whether it is more resilient considering the infrastructure developments?

Sure, that's a great topic for us. We hold over 40% of the vocational market with Kenworth and Peterbilt, which represents around 25% of the total market. While this number may vary, the current situation is exceptionally strong. Our backlog for that market is nearly full for most of the year, and we are somewhat backed up at body builders. This is positive for Kenworth and Peterbilt for the remainder of the year and into the future. Additionally, with ongoing infrastructure spending in the country, we expect this strength to continue.

Our next question comes from Steve Volkmann of Jefferies.

I guess we'll get more detail in the queue, but can you just comment on how pricing is looking these days?

Brice, do you want to share anything on price?

Yes. Our pricing is approximately 3% higher, and that's very much in line with costs, Stephen.

Got it. And then I'm curious, Preston, I think you said that you thought '25 and '26 would be improved or I think more positive, I wrote down here. Are you thinking that we will start to see some prebuy as early as '25? I know there's a very big price increase coming here. Just your thoughts about how that plays out.

Yes, I do. I think, obviously, the future is unknowable; caveat that for you. But I would say that when you look at the buying cycle and trucks are being run and the fact that people are sensitive to those emissions changes, that it should help '25 and '26 be very strong years for the industry. And I think the question that everybody is kind of trying to figure out is when will that start and how significant will that initiation point begin. So for right now, what we look at is the trucks we're producing are the best trucks we've ever built. They have great efficiency, and they're not only great new trucks, but they're also great used trucks in a few years. So between that spot, the '25 and '26 strengthening market, I think all feels really good.

Our next question is from Jamie Cook of Truist.

In response to Steve's question about the 3% price increase in line with costs, could you clarify the distinction between truck original equipment and aftermarket pricing? Additionally, I would appreciate any insights on pricing trends for the next three quarters. I'm curious why your truck deliveries in the second quarter are on par with the first quarter, yet you anticipate lower margins for the second quarter compared to the first. Any thoughts on this would be helpful. Furthermore, Preston, margins have been robust, but as we navigate through this cycle and demand begins to stabilize, what is your perspective on the structural improvement of your margins? How much do you think they have improved, and will you need to consider adjusting prices due to market share and new truck introductions? I'm interested in your overall approach to margin enhancement during this cycle.

You bet, Jamie. There's a lot of questions in there, but it's good to hear you. So I'd say to start with on the truck side, the price versus cost is 3 and 3. And on the Parts side, price is 3 and cost is 2. So that kind of helps you there; kind of expect something maybe in a similar range going forward through the course of the year. That all, of course, leads into your questions on margin and I look at the margins. One of the things we're really proud of is our people at PACCAR are creating these great trucks, these great parts business systems because it is delivering these structurally stronger margins for everyone. Really happy with how that's going. The fact that we delivered a 19% margin in a time when there's truckload carriers are a bit softer feels really positive. And the fact that we shared with you the second quarter looks like 18% and 18.5%, really strong margins for the company, which is showing that we can demonstrate excellent performance through all parts of the business cycle. Really pleased with the team for what they're doing.

Our next question comes from Chad Dillard from Bernstein.

So I was hoping to get to your thoughts on the shape of the cycle. I think Preston, you mentioned that '25 to '26 would be a better year versus '24. Just want to get a sense for whether you're seeing a bottom in orders, like what gives you that confidence? And then do you think capacity needs to leave the market before you see an order rebound?

Well, I think that right now, if I get with you, Chad, it's that what we're seeing is truckload sector; people want to keep buying trucks. They're concerned about getting aged inventory. They want to stay on the buying cycle. I think that there is capacity out there, obviously. It's a very normal cycle is what it feels like right now, a healthy normal cycle. And their question is, when does this thing turn and when do they need to make sure that they're continuing to get their orders placed. So the conversations are their interest in the future and what that's going to look like? Is it 3 months from now, 6 months from now, a year from now, that they need to make sure they have acquired the capital and the trucks that they need.

Got it. That's helpful. I would like to get some insight into your product strategy as you promote the prebuy. I know you did well in Europe during the regulatory change and introduced timely new products. Could you share your thoughts on what the next couple of years look like in that regard?

On our product strategy? Let's share it. First of all, again, a shout out to the team, what they've accomplished. There are a couple of things I'd like to mention on that. One is from a product strategy standpoint, we just introduced the new model 589 at Peterbilt in January, which is a fantastic new truck, an iconic truck. It's doing really well in the market. So it's just part of our continued rollout of new products. The new medium-duty products in North America are doing exceptionally well. We see the market share continuing to grow. End of last year, we were at 14.5%, gone to 17% in medium duty with really strong margin performance. And then if I think more broadly about strategies of product introductions, we're continuing to develop new trucks, new engines, and new alternative energy capability so that we have a very capable powertrain portfolio to handle the emissions changes that are coming forward and the uncertainty, frankly, that the industry will experience with regulations. So it feels like PACCAR is very well positioned to handle anything that comes forward at us.

And if I may add there, Preston, that the emissions forecast for 2027 nationwide aligns closely with what CARB is implementing this year, which is already very similar to what we'll see in 2024. We will introduce a PACCAR engine in California this year that complies with their requirements, allowing us to determine the most effective technology to use.

Our next question comes from David Raso from Evercore ISI.

I'm curious about Europe. The deliveries for the first half of the year, it looks like you're planning to be down around 31% and the market guide, your midpoint is down 18%. You didn't change the guide for the industry. Just wanted to get your thoughts on, is that level of delivery clearing out inventory? Or just trying to understand your considerations of lowering the European industry guide when you're going through these numbers. Just trying to get a sense of how you view that market the rest of the year.

Yes, I think I'll start and Harrie can add whatever he'd like to. I would say that the European truck market has seen softening, and that's especially true in Central and Eastern Europe, which are strong markets for DAF. So we've seen those delivery numbers adjust appropriately around that. And we have the build dialed into the delivery schedule. So we think that the new DAF truck continues to deliver for PACCAR great margin performance, which is a pretty important thing for us with this new product, it's delivering great fuel economy for our customers. And so I think that you're just seeing the cadence of the market down and we would expect to see that probably continue throughout the year. Maybe you'd add, Harrie?

We are coming off a record quarter from last year. The first quarter of 2023 was a record quarter for DAF in Europe, and much of what Preston mentioned regarding fuel economy benefits and the excellent performance of the new truck applies here. This makes the comparisons a bit more challenging.

Yes. I mean the comp does ease in the fourth quarter, too. I'm just trying to get a sense of should we expect deliveries to be that far below your industry outlook for most of the year in Europe. Again, I know the fourth quarter gets easier. And then...

I wouldn't read it in that way, David.

Okay.

I wouldn't try to read it for the full year that way. And then I think the U.S.-Canada delivery schedule seems really solid and stable for us right now. We've again, the thing I would want to remind is a 270,000 truck market at the midpoint, it's a very nice market. And with PACCAR share increasing, that feels positive to us.

Yes. I think we're just trying to figure out if like U.S.-Canada first half of the year, deliveries are up 8%, but we're looking for Class 8 as an industry to be down 9% medium is some offset, but we're just trying to get a sense of like the second half of the year, how much does the U.S.-Canada build schedule come down? And that's sort of what we're trying to...

Well, I think what we shared is we're filling the third quarter right now. And so obviously, you and everyone else is watching the second half of the year to see what happens. And I think it's a little bit too much of a prognostication to guess what Q4 is going to be, but the math says it should be a good year. Our order intake looks like it should be a good year. The truck performance is good. The margin performance is good. So we feel like it all adds up to, as far as the story can go, really positive outlook.

Yes. At least the mix is favoring you with the vocational strength given your position in that market.

Yes, David, that's another really good point you brought up. Thanks for bringing that up.

Our next question comes from Jerry Revich from Goldman Sachs.

This is Clay on for Jerry. Our question here is what has been the early feedback from customers on how they're thinking about the higher cost profile, the next-generation trucks? And to what extent do they value the embedded extended warranty?

Well, I think they're obviously paying attention to what it's going to be. Nobody knows what those new prices are going to be yet. There's lots of speculation out there. It's a bit early for the speculation, I think, other than to know the emission standards are going to be requiring additional aftertreatment changes to the engines and different capabilities to manage the aftertreatment. So with those, there's going to be costs and I think at any time, throughout the years the customers pay attention closely to that. So I think as we already shared, they kind of feel like they'd like to get their orders in a steady way and also kind of avoid any kind of point of disruption around the introduction of the new emission cycle. So that's what's going to pull forward the '25 and '26 purchases, I think.

And along the same lines as the installed base of those trucks, the '27 emission trucks grows, will your parts market share benefit from the expanded warranty provisions?

Yes, it will. Frankly, simply, yes, it will.

Our next question comes from Jeff Kauffman of Vertical Research Partners.

Congratulations on a solid quarter. A lot of my questions have been asked. So I want to drill down on truck ASP. You mentioned that new truck pricing is up about 3%. But I'm calculating ASP to be closer to up 8%. So I'm assuming the difference between the 3% and the 8% is mostly mix related. Can you help me bridge that gap and help me understand maybe how much of this could be more vocational in the U.S. versus over the road or versus, say, North American sales versus European sales, which is, as David Raso noted, are down substantially. Just trying to understand the difference between the two numbers.

Sure, Jeff. Thanks for the opening comment also. You nailed it. I already think as you typically do is like if you look at the vocational markets, the truck prices are high there. And I would also say that the mix between North America to Europe is a contributing factor.

Okay. So as I think forward for the year, I would probably expect your average reported ASP to be up a little more than your price increases as a result of mix kind of carrying through 2024. Am I thinking about it wrong?

It could be that's a logical assumption based on all those things.

Okay. Again, congratulations.

Thank you. There are no other questions at this time. So I'll hand back to the management team for any further remarks.

We'd like to thank everyone for joining the call, and thank you, operator.

Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.