PACCAR Inc (NASDAQ:PCAR) Q3 2023 Earnings Call Transcript

PACCAR Inc (NASDAQ:PCAR) Q3 2023 Earnings Call Transcript October 24, 2023

PACCAR Inc beats earnings expectations. Reported EPS is $2.34, expectations were $2.07.

Operator: Good morning, and welcome to PACCAR’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Today’s call is being recorded. [Operator Instructions]. I would now like to hand the call over to 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 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. I would now like to introduce Preston Feight.

Preston Feight : Good morning. Harrie, Brice, Ken and I will update you on our record third quarter financial results and other business highlights. PACCAR’s outstanding employees delivered this excellent performance by providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR’s third quarter net income increased 60% year-over-year to a record $1.23 billion and revenues increased 23% to $8.7 billion. Truck, Parts and Other gross margins expanded to 19.5% in the third quarter compared to 14.9% in the same period last year. PACCAR’s global investments in innovative new DAF, Kenworth and Peterbilt trucks, as well as investments in technology and manufacturing were key elements in delivering this strong performance.

PACCAR Parts third quarter revenues increased to $1.58 billion. Parts pretax profits were $412 million or 10% higher than the same period last year. PACCAR Parts provides its customers with industry-leading technology that enhances their uptime. PACCAR Financial earned a strong pretax income of $134 million in the third quarter, reflecting its high-quality portfolio. We estimate this year’s U.S. and Canadian Class 8 market to be in a range of 295,000 to 315,000 trucks and next year to be in a range of 260,000 to 300,000 vehicles. Customers are replacing their trucks with the new heavy and medium-duty Peterbilt and Kenworth models that enhance their operational efficiencies, achieve industry-leading fuel economy and attract and retain the best drivers.

Demand is strong for Kenworth and Peterbilt trucks with the first quarter of 2024 filling in quickly. In Europe, this year’s truck industry registrations in the above 16-tonne segment are estimated to be in a range of 310,000 to 330,000 vehicles. The 2024 market is expected to be in the range of 260,000 to 300,000 trucks. The new DAF trucks have redefined the premium truck segment in Europe and offer superior aerodynamics, award-winning fuel economy and enhanced features that make them the driver’s choice. The South American above 16-tonne market is projected to be in a range of 105,000 to 115,000 trucks this year and in a similar range next year. DAF Brazil recently celebrated its 10th anniversary and has increased its greater than 16-tonne share to a record 10%.

The DAF lineup of trucks is performing exceptionally well for customers in all Brazilian operating environments. PACCAR recently announced its participation in a new battery cell joint venture. The joint venture will be located in the United States and will manufacture battery cells for use in medium and heavy-duty trucks. PACCAR’s proprietary battery cells will create value for our customers, and help them achieve their future operational and environmental goals. PACCAR’s employees and dealers are delivering excellent results for our customers, and we’re excited about the future. Thank you. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Harrie Schippers : Thanks, Preston. PACCAR delivered 50,100 trucks during the third quarter. We estimate fourth quarter deliveries to be similar and in the range of 48,000 to 51,000 trucks. More production days in the fourth quarter in Europe will be offset by fewer production days due to holidays in North America. The supply base is improving but continues to limit production. Truck parts and other gross margins increased to 19.5% in the third quarter. We anticipate fourth quarter close margins to be around 19%, reflecting the strong performance of our new truck models and PACCAR Parts. PACCAR Parts delivered third quarter gross margins of 31.5%. PACCAR Parts innovative programs such as Advanced Fleet Management Services and Predictive Dealer Inventory Management, helped customers increase vehicle uptime and their financial performance.

For the fourth quarter, we expect part sales to be 7% to 9% higher than in the same period of last year. PACCAR Financial Services results in the third quarter benefited from excellent portfolio quality and positive used truck results. Pretax income was $134 million. PACCAR Financial is the market leader supporting the superior Kenworth, Peterbilt and DAF products with innovative technologies and a strong global used truck network. In the last 2 years, DAF, Kenworth and Peterbilt have introduced more new truck models than at any comparable time in the company’s history. The pace of these introductions continues with a new flagship Peterbilt’s Model 589 that begins production in the first quarter of 2024. PACCAR’s capital investments in new and expanded facilities, innovative products and new technologies have created the highest performing trucks and transportation solutions in the industry and will contribute to excellent financial returns for many years.

PACCAR’s return on invested capital further improved to an industry-leading 35% in the first 9 months of this year. This year’s capital expenditures are projected to be between $650 million and $675 million and will increase to $675 million to $725 million next year. Research and development expenses will be $410 million to $420 million this year, and increase to between $470 million and $520 million next year. In addition to the capital and R&D investments, the company will own a 30% share in the battery cell joint venture and expects to invest $600 million to $900 million over the coming 3 years. With the most advanced truck range in the industry, efficient investments, strong aftermarket parts and financial services businesses, and exciting new strategic opportunities, PACCAR is positioned well for the future.

Thank you. We would be pleased to answer your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Tami Zakaria from JP Morgan.

Tami Zakaria : So my first question is about parts growth. I think in the press release, you said you’re opening a PDC in Germany next year. So how should we be thinking about parts growth in 2024 in terms of how long does it take a PDC to sort of ramp and reach run rate capacity? How do we think about growth overall? If you could give some color on that, that would be very helpful.

Preston Feight: Happy to start with that, and Harrie can add anything he wants. I think what Harrie shared with you is that we think parts growth is going to be in the 7% to 9% in the fourth quarter. And to your point, on the effective of PDC, it’s almost immediately good for the business, right? What a PDC does is it allows us to have closer points of contact with our customers, get them parts in a more quick way and support their businesses for more same day or next day parts delivery. So it’s really quickly beneficial to them, Tami.

Tami Zakaria : Got it. That’s very helpful. And then how should we think about decremental margins next year, given you’re expecting truck sales down both in Europe and U.S., Canada?

Preston Feight: I think what we’ve been able to do in the last few years, and we shared this as we’ve introduced more new products at any time in our history, and we continue to that with the new Peterbilt Model 589. Those products are doing exceptionally well for us in the marketplace. So we’re pleased with how they’re performing and that means performing for our customers. So they’re getting value out of that. And I think we’ll watch how the market develops for next year and we have a lot better insights into margin and what’s going on as we get into the first quarter for 2024.

Operator: Our next question today is from Steve Volkmann from Jefferies.

Steve Volkmann : Preston, I think it was you who was talking about the launch of the new Peterbilt, I think, in January of ’24, you said, sorry if I got that wrong. I’m just curious how big of a launch is that? Okay. Great. How big of a launch is that? How much of your North American revenue could that be? And where I’m trying to go with this is, you guys always seem to engineer in sort of higher margins as you do these changeovers. So I’m trying to figure out how much of a tailwind that might be in 2024.

Preston Feight: Steve, well, first of all, I mean, the thing about it, what we try to engineer in is higher value for our customers. And I think that that’s what we’ve been able to do with these new products. The 589, well, the right word is it’s cool. When we did the introduction for it, it was just exciting to see it. It’s going to be iconic in the industry. It looks fantastic, and I think it will be a great flagship for the Peterbilt team. As far as percentages, maybe Harrie, you want to —

Harrie Schippers : The 589 Steve will replace the 389. And a good way to think about it, the 389 is now about 20% of Peterbilt’s production. So maybe 6%, 7% of PACCAR’s total production. And the 589, like I said, will be placed and maybe grow even a little bit more.

Steve Volkmann : Great. Okay. And then my follow-up is on the Financial Services, Harrie. I’m curious, obviously, it was down a little bit year-over-year. How do the higher rates that we’re seeing in the market kind of layer in? Because obviously, you get some income, I guess, on your cash balances, which is great, but then there’s probably some headwinds in the finance book. And I don’t know, just any color you could give us on that would be great.