PACCAR Inc (NASDAQ:PCAR) Q4 2022 Earnings Call Transcript

PACCAR Inc (NASDAQ:PCAR) Q4 2022 Earnings Call Transcript January 24, 2023

Operator: Good morning, and welcome to PACCAR’s Fourth Quarter 2022 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 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.

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: Hey, good morning. Harrie Schippers, Michael Barkley and I will update you on our record fourth quarter and full year 2022 results as well as other business highlights. First, I appreciate our outstanding PACCAR employees. They consistently deliver the highest quality trucks and transportation solutions to our customers and excellent financial results for our shareholders. They’re truly an impressive team. In 2022, PACCAR achieved record annual revenues of $28.8 billion and record net income of $3.01 billion. PACCAR’s financial performance benefited from strong business growth across all of PACCAR’s major truck markets, and record results in our parts and financial services divisions. PACCAR has achieved 84 consecutive years of net income and has paid a dividend every year since 1941.

In 2022, PACCAR declared dividends of $4.19 per share and announced a 50% stock dividend. PACCAR’s fourth quarter revenues were record $8.1 billion and quarterly net income increased from the prior year by 78% to a record $921 million. PACCAR Parts achieved fourth quarter revenues of $1.47 billion and record pretax profits of $380 million, which was 23% increase compared to the same period last year. PACCAR delivered 51,600 trucks during the fourth quarter. This was 7,300 more than the third quarter and was a result of higher truck production, and the completion of nearly all the vehicles that were awaiting components. The supply chain is improving, though there may be some supplier constraints throughout the year. In the first quarter of 2023 deliveries are forecast to be strong and in the range of 49,000 to 53,000.

In 2022, US and Canadian Class 8 truck retail sales were 283,500 units. PACCAR’s market share increased to 29.8%. The US economy is projected to expand modestly in 2023. In this truck sector, there’s pent-up demand from the prior three years of industry under production, and customers need to replace aging fleets to benefit from the superior performance of the newer Kenworth and Peterbilt models. The 2023 US and Canadian Class 8 truck market deliveries are forecast to be in a range of 270,000 to 310,000 vehicles. European above 16-ton truck registrations were 298,000 last year, and DAF market share increased to a record 17.3% reflecting the success of the new generation of DAF trucks. In 2023, confidence in the European economy is growing and with pent up demand for new trucks we expect the above 16-ton truck registrations to be in the range of 270,000 to 310,000.

In 2022, the South American above 16-ton truck market was 138,300. And this year, the South American market is expected to be in the range of 125,000 to 135,000 units. In Brazil, DAF achieved a record 6.9% share in the above 16-ton market, up from 5.7% last year. DAF Brazil has gross steadily since we opened the factory 10 years ago, and makes a healthy contribution to PACCAR’s global success. Truck, Parts and Other gross margins expanded to 15.9% in the fourth quarter, reflecting strong global performance, higher truck deliveries, excellent parts of business and supply chain improvements. We estimate PACCAR’s worldwide first quarter truck and parts gross margins to be in the range of 16% to 17%. In 2022, PACCAR and its customers realize the financial benefits of the new range of heavy and medium duty Kenworth, Peterbilt and DAF trucks.

These new trucks are successful in the market due to their premium quality, excellent fuel efficiency and low operating costs. Last year, PACCAR earned recognition in several areas. The new DAF XG distribution and vocational truck was named the 2023 International Truck of the Year. Kenworth and Peterbilt earn six manufacturing leadership awards from the National Association of Manufacturers. The reporting firm CDP again recognized PACCAR as an environmental leader with an elite A rating. This rating places PACCAR in the top 1.5% of over 18,000 reporting companies. And PACCAR was recognized as a top place for Women to Work by the Women and Trucking Organization for the fifth consecutive year. Demand is strong in all markets for PACCAR’s industry leading new trucks and transportation solutions.

And we look forward to 2023 being another excellent year. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Harrie?

Harrie Schippers: Thank you, Preston. In 2022, PACCAR Parts set new records for annual revenues and profits. Annual revenues increased by 17% to $5.8 billion and annual pretax profit increased by 30% to $1.45 billion. Annual gross margins expanded to 30.4% from 28.6% in the prior year. PACCAR Parts is a high margin and high growth business. PACCAR Parts expanded its global distribution network in 2022 by opening a new parts distribution center in Louisville, Kentucky, and its 18 PDCs worldwide. We estimate Parts sales to grow by 10% to 13% in the first quarter of this year, compared to the same quarter last year, as high truck utilization contributes to strong global demand for parts. PACCAR Financial Services’ fourth quarter pretax income increased to a record $151 million which is a 12% increase from last year.

Annual pretax income increased 35% to a record $589 million. Portfolio assets increased to $17.2 billion. The portfolio continues to perform well with very low past due and low credit losses. PACCAR Financial benefited from strong used truck prices in 2022. Last year, PACCAR Financial opened a new retail used truck center in Madrid, Spain, bringing the total to 13 used truck facilities worldwide. This retail used truck centers contribute to higher price realization compared to wholesale channels. In 2023, we expect used truck prices to moderate but remain historically strong. With its larger portfolio and superb credit quality, PACCAR Financial should have another very good year. In 2022, PACCAR invested $505 million in capital project and see another $41 million in research and development.

PACCAR’s return on invested capital improved to an industry leading 35.2%. In 2023, we are planning capital investments in the range of $525 million to $575 million and R&D expenses will be in the range of $360 million to $410 million as we invest in key technology and innovation projects. These include next generation clean diesel and hydrogen conversion engines, battery and hydrogen electric power trains, autonomous driving systems, connected vehicle services, advanced manufacturing and enhanced distribution capabilities. PACCAR’s independent Kenworth, Peterbilt and DAF dealers continue to invest in their businesses to provide our customers the highest level of service in the industry. These investments are enhancing our industry leading distribution network, making a significant contribution to PACCAR’s long-term success and supporting the growth of PACCAR Parts and PACCAR Financial Services.

PACCAR had an outstanding year in 2022. And we’re very positive about 2023. Thank you, we’d be pleased to answer your questions.

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Q&A Session

Operator: Our first question comes from David Raso from Evercore ISI.

David Raso: Hi, thank you. My question relates to the gross margin for the first quarter and how do we think about the cadence from there? So for the first quarter, you have deliveries very similar to the fourth quarter, the mix between truck revenues and parts revenues seems like it’s pretty similar. So for the stronger gross margin in the first quarter and the fourth quarter, is that essentially that you’re shipping less red tag trucks a little more overhead absorption and price cost gets better? And I’m just trying to think about price costs moving forward after the first quarter. Thank you.

Preston Feight: Yes, sure. David, good to talk to you. The way we’re looking at it as the offline units that have been limited by supplier constraints have been largely resolved. So it’s fairly behind us right now. But there were some of those that were taken care of in the fourth quarter. So when we think about deliveries in the first quarter, that’s basically production is good run rates, we would say that our margins are doing well on both the parts side and the truck side. And that’s really a factor of all of the new trucks being in the market and pretty much fully released now in Europe and North America. So the customers are getting the benefits of those trucks, as are we. And I would add one more thing, which is the strong global performance of the team, whether it’s in Australia, or in South America is going well and that’s contributing.

David Raso: So taking that from the first quarter, then if you’re pricing your backlog, I assume isn’t going to dissipate the next few quarters. I would like to think some costs may be come down as the year progresses. If that’s what you’re able to do in the first quarter in price costs, maybe gets a little better over the next couple of quarters, not worse. How should we think about the gross margins moving forward after the first quarter?

Preston Feight: Well you know that we guide, we share information and we think the first quarter will be in general, we think 2023 will be a good year.

Operator: Our next question comes from Steven Fisher from UBS.

Steven Fisher: Thanks. Nice quarter with the better-than-expected deliveries, to what extent are you backfilling that backlog? Or are you perhaps or net just burning that backlog a bit faster than expected? And I guess I’m curious how much visibility you have later in the year and how much you — how full your backlog is for say Q3 and Q4.

Preston Feight: I mean I think the macro way to think about it is, since 2020, the industry has really been not able to supply all the trucks that have been needed. So there is a strong pent-up demand for the trucks. And in addition to that, obviously, we’ve launched more new products at any time in our history. So that’s contributing, we have excellent visibility looking into the year, we’re full through the first half filling the third quarter nicely. Demand continues to be strong in line with build. And so it’s looking like a really good year.

Steven Fisher: Okay. And just in terms of the cost and inflation side of things. I’m curious what you’re seeing from your suppliers in terms of prices. Is there sort of a range that you’re seeing where some of them are still raising prices? Some are holding or falling? What are you seeing in terms of the net inflation and actions from your suppliers here?

Preston Feight: I think you did a great job of characterizing it. You see some raising some holding some where there’s commodity costs where there have been improvements, but it’s a mixed bag. Obviously, labor is still a factor as far as our supplier, for our suppliers, and all of those wash into the mix.

Operator: Our next question comes from Dillon Cumming from Morgan Stanley