PACCAR Inc (NASDAQ:PCAR) Q1 2023 Earnings Call Transcript

PACCAR Inc (NASDAQ:PCAR) Q1 2023 Earnings Call Transcript April 25, 2023

PACCAR Inc beats earnings expectations. Reported EPS is $2.25, expectations were $1.81.

Operator: Good morning, and welcome to PACCAR’s First Quarter 2023 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. Today’s call is being recorded. I would like to introduce Mr. Ken Hastings, PACCAR’s Director of Investor Relations. Mr. Hastings, please go ahead.

Ken Hastings: 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 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.

Preston Feight: Hi, good morning. Harrie Schippers, Michael Barkley, Ken Hastings and I will update you on our first quarter results and our business highlights. PACCAR achieved record revenues and excellent net income in the first quarter due to continued strong global demand for trucks, aftermarket parts and financial services. PACCAR’s revenues increased 31% to $8.47 billion and net income was $734 million, including an after-tax non-recurring charge of $446 million. The charge release to civil claims in Europe was previously reported in an 8-K last week and is the total estimated cost. Excluding the non-recurring charge, first quarter adjusted net income was $1.180 million, up from $600 million in the first quarter of last year.

In the first quarter, Truck, Parts and Other gross margins expanded to a record 19.3%, compared to 15.9% in the fourth quarter of last year. PACCAR is benefiting from investments in new truck models, global growth and PACCAR Parts continued expansion. PACCAR Parts first quarter revenues increased by 17% to a record $1.62 billion. Parts pretax profits were a record $439 million or 29% higher than the same period last year. PACCAR Financial had an excellent quarter, achieving pretax income of $149 million, which is similar to the same quarter of last year. I appreciate PACCAR’s outstanding employees, who delivered these excellent financial results and the highest quality trucks and transportation solutions in the industry. Their commitment to the company and to our customers is foundational to our success.

Looking at the U.S. economy, GDP is estimated to grow modestly. Freight tonnage continues to be good, and customers are updating their vehicles with new, high-performing Peterbilt and Kenworth trucks. This continues to be a favorable operating environment, and we’re increasing our forecast for the U.S. and Canadian Class 8 market to 280,000 to 320,000 trucks. European economies are also experiencing modest growth. DAF’s excellent new trucks are providing customers with the latest technology and best operating efficiencies. We have raised our 2023 European above 16 tonne market projection to a range of 280,000 to 320,000 trucks. The South American above 16 tonne truck market is expected to be in the range of 115,000 to 125,000 vehicles this year.

In Brazil, DAF achieved a record 8.6% share in the first quarter. DAF Brazil is celebrating its 10th year of operations. DAF trucks are highly desired by customers in South America, and the region is an important part of PACCAR’s growth and success. PACCAR’s industry-leading truck lineup, highly efficient operations, best-in-class parts and financial services companies and the continued development of advanced technologies, position the company well for an excellent year. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Harrie?

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Harrie Schippers: Thanks, Preston. PACCAR delivered 51,000 trucks during the first quarter. The supply chain is improving, but there are some periodic supplier shortages affecting production. In the second quarter of 2023, deliveries are forecast to increase to a range of 51,000 to 54,000 trucks. Truck parts and other gross margins increased to 19.3% in the first quarter. We anticipate second quarter gross margins to be strong and in the range of 18% to 19%. PACCAR Parts had an outstanding first quarter, with Parts gross margins expanding to a record 32.2%. PACCAR Parts business model is based on the application of technology to provide our customers excellent access to high-quality parts. PACCAR Parts is expanding the use of technologies such as e-commerce and leveraging data from PACCAR’s connected trucks.

PACCAR Parts expanding network of 18 parts distribution centers serves more than 2,000 dealer locations and 250 independent ERP stores, which provides best-in-class uptime for our customers. PACCAR Parts is a high-growth and high-margin recurring revenue business. We estimate part sales to grow by 10% to 12% in the second quarter of this year, compared to the same quarter last year. PACCAR Financial Services benefited in the first quarter from a larger portfolio, excellent portfolio quality and good used truck business. Pretax income improved to $149 million. PACCAR Financials’ 13 used truck facilities worldwide contribute to higher price realization, compared to wholesale channels. Used truck prices have moderated, but remain historically strong.

With its larger portfolio and superb credit quality, PACCAR Financial is having another very good year. PACCAR has invested over $4 billion in new and expanded facilities, innovative products and new technologies during the past five years. These investments have created the newest and most impressive lineup of trucks in the industry, as well as highly efficient factories and distribution centers. PACCAR is continuing its investments in clean diesel, zero emissions, autonomy and connected vehicle programs. Capital expenditures are projected to be $600 million to $650 million and research and development expenses are estimated to be $380 million to $420 million this year. Customer demand is strong for PACCAR’s industry-leading trucks and transportation solutions in all markets.

We expect 2023 to be an excellent year. Thank you.

Preston Feight: So as we complete our comments, I’d like to thank our Senior Vice President and Controller, Michael Barkley, who’ll be retiring at the beginning of June after a wonderful 32-year career. Michael has participated in 66 earnings calls over the past 16-years. He’s a great Controller. He’s an excellent business partner, and he’s a true friend. Michael, you are appreciated and you’ll be missed. Joining us today and for future calls is Brice Poplawski, our new Vice President and Controller. Brice has been with PACCAR for 25-years. Welcome, Brice. So now we’re pleased to answer your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. Our first question comes from the line of Tami Zakaria with JPMorgan. Please go ahead.

Tami Zakaria: Hi, good morning. Thanks so much for taking my questions. Congrats on the great results. That gross margin number was nothing less than spectacular. So in hindsight, what was the biggest source of the upside versus your original guidance of 16% to 17%, and is the 18% to 19% that you’re expecting for 2Q sort of a good run rate for the rest of the year?

Preston Feight: Well, thanks for the question. Good morning. What we saw in the first quarter was we saw very good operating efficiencies and cost increases were less-than-expected. Those are the two contributors to the margin improvement over what we had guided. And then as Harrie shared, 18% to 19% is what we expect in the second quarter. And we think we have a really good year.

Tami Zakaria: Perfect. If I can ask one more question. Sure. Sure, Harrie.

Harrie Schippers: I think the Parts growth of 17% exceeded our projections a quarter ago. And Parts margins were better, too, and that contributes to the 19.3% as well, of course.

Tami Zakaria: Got it. Thank you so much. And if I can ask one more, I think some industry data showed some order slowdown, but my understanding is that PACCAR numbers are not really in that data. And so can you, from your perspective, can you share with us what you’re seeing in terms of order activity? How deep into the third or fourth quarter, your order books have opened? Any comments on order trends you’re seeing?

Preston Feight: Sure, Tami, glad to. What we’ve seen is good order intake, continued good order intake and we’re substantially full for the year. So third quarter is full, few slots left in the fourth quarter but substantially full.

Q – Tami Zakaria: Great. Thank you so much.

Preston Feight: Sure. You bet.

Operator: Thank you. Our next question comes from the line of Dillon Cumming with Morgan Stanley. Please go ahead.

Dillon Cumming: Great, good morning. Thanks for the question. Just wanted to ask first from a financing perspective. A lot of concern in the market with regards to customers not being able to get financing from smaller to midsized banks. But in terms of what you see on the ground, first of all, has that impacted your, kind of, order intake or kind of customer sentiment? And second of all, has that created an incremental opportunity for PFS to maybe get some more financing business as a result of smaller banks maybe not being able to finance the same number of customers that they’re used to?

Harrie Schippers: Yes. I’m not aware of any customers that are not going to get the financing that they need. It’s good to have PACCAR Financial, who was able to finance our customers in good times and bad times. PACCAR Financial had a great quarter. We’re financing about 25% of the trucks that we sell in some years, that has even grown to 30%. So we’re there for any customers that need us.

Dillon Cumming: Got it. And thanks, Harrie. And I’ll just ask kind of a longer-term question around pricing sustainability. We’re obviously coming off in a couple of years here, a really strong pricing. I’m kind of assuming given the margin performance in the quarter that pricing was also pretty strong as well. Kind of as we think about how the back half of the year develops going into next year, pairing that off with a potential kind of prebuy dynamics from ‘25, ‘26. Can you just give us any flavor or slight color on how you are thinking about pricing, kind of, developing for the rest of the year into next year? If there’s kind of scope for it to remain or resilient in the event that ‘24 builds are actually down year-over-year?

Preston Feight: Well, I think that we feel good about 2023, as we said. We think we have an excellent year that we’re working on right now. We see continued strong demand for the products. I mean, I think we’ve reintroduced or introduced new products in North America and Europe and in South America in the last couple of years, and those products are providing great value to the customers. That value to the customers is why they would like to have them. So we’re helping their operations, which is good. And as Harrie mentioned, the Parts business continues to perform well. We’re utilizing technology in new ways to help improve the value to our customers through the Parts business. They’re doing a great job in those things. They contribute to good performance for the company.

Dillon Cumming: Great, very clear. Thanks for the time.

Preston Feight: You bet.