PACCAR Inc (NASDAQ:PCAR) Q1 2024 Earnings Call Transcript

PACCAR Inc (NASDAQ:PCAR) Q1 2024 Earnings Call Transcript April 30, 2024

PACCAR Inc beats earnings expectations. Reported EPS is $2.27, expectations were $2.17. PCAR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to PACCAR’s First Quarter 2024 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. Today’s call is being recorded and if anyone has any objection, they should disconnect at this time. I’d now 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 Brice Poplawski, Vice President and Controller. As with prior conference calls, we will 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.

Preston Feight: Hey, 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, remains 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’s 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-ton market to be in a range of 260,000 to 300,000 trucks. The South American above 16-ton 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. Harrie?

Harrie Schippers: 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 a range of 18% to 18.5%. PACCAR Parts had an outstanding first quarter with parts 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’s 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 larger 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 at DAF in Brasil 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, but please to answer your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question for today comes from Tami Zakaria from JPMorgan. Your line is now open. Please go ahead.

Tami Zakaria: Hi, good morning. Thank you so much. 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?

Preston Feight: Harrie, you want to offer any comments?

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

Tami Zakaria: Got it. So my follow-up is how is the dealer inventory looking like in North America? The reason I ask seems like your deliveries in North America was up almost 14% year-over-year in the first quarter, but some industry data vendors suggest that retail sales were down in the quarter. So can you comment on the health of the inventory in the channel?

Harrie Schippers: Sure, happy to do that. First off, you look at our inventory, it’s really less than three 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 inventory is our strong vocational market share. If you think about the fact that a vocational truck takes maybe six months longer to put into service, it means there is 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 4Q to 1Q. We expect that we have the right mix of build and a healthy inventory. All feels pretty good.

Tami Zakaria: Wonderful. Thank you.

Harrie Schippers: You are quite welcome.

Operator: Thank you. Our next question comes from Angel Castillo of Morgan Stanley. Your line is now open. Please go ahead.

Angel Castillo: Hi, thanks for taking my question and congrats on a strong quarter.

Harrie Schippers: Thank you.

Angel Castillo: Just wanted to go back to your comment, I guess to the prior question. Thanks for – just in terms of the second quarter level of deliveries being similar to the first quarter, very strong deliveries in North America. If we kind of assume similar deliveries in the second quarter, we are 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 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.

Preston Feight: Yes, sure, and happy to delve in that. First of all, the adjustment is a small adjustment and a mid-point of 270, we think is a great market in North America. But also I think what you’re seeing, we’re reflecting is PACCAR is that we’re continuing to demonstrate that our business is structurally stronger, that the margins are higher, 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.

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

Preston Feight: Yes, I think so. If we look at it and you said, we already mentioned the strong vocational market and the strong LTL market in our comments. And we do see the Truckload segment having continued softness, and you heard that in some of the public companies calls think that’s balanced against the fact that at some point, they want to stay on their cadence of buying and that cadence is going to need to continue. So that’s why we think the market is good for 2024. And then we would expect 2025 and 2026 to start to look even more positive as we head into the 2027 emission cycle.

Angel Castillo: That’s helpful. Thank you. And then just lastly on, 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.

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

Angel Castillo: Helpful. Thank you.

Preston Feight: Yes, great. Have a good day.

Operator: Thank you. Our next question comes from Rob Wertheimer of Melius Research. Your line is now open. Please go ahead.

Rob Wertheimer: Thank you. 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 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 vagaries of interest rates just because of megaproject demand infrastructure or older fleets? So just maybe any comments you have on that risk. Thank you.

Harrie Schippers: Yes. Rob, 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 three or four-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.