PACCAR Inc — 2024 Q1

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, the rest of the world should be at similar levels, more or less, some variation, of course, but pretty close.

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 4Q to 1Q. We expect that we have the right mix of build and a healthy inventory. All feels pretty good.

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 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, that our market share is increasing in the U.S. and Canada, both in heavy duty and medium duty.

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

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 '25 and '26 to start to look even more positive as we head into 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.

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.

Sure. Great topic for us. And you think about it, we have over 40% share in the vocational market between Kenworth and Peterbilt. It's -- I mean, this is not a perfect number, but it's roughly 25% of the total market. Obviously, it varies plus or minus, and is exceptionally strong right now. Backlog is effectively full for that market through much of the year. We're kind of stacked up at body builders. So that bodes well for Kenworth and Peterbilt for the balance of the year and going forward. And we think just as you look at the infrastructure spending in the country, and that's continuing to happen, and it's going to continue to be strong for us.

Brice, do you want to share anything price?

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

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.

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.

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 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's that 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.

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.

And if I may add there, Preston, that the 2027 emissions that we will see nationwide, what CARB is doing this year is already very similar in 2024. And we will launch a PACCAR engine in California that meets their requirements this year. So we'll get -- we'll know exactly which technology to apply there.

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?

Coming off -- we're also coming off a record quarter in last year. First quarter of 2023 was record quarter for DAF in Europe, and so a lot of that what Preston's talking about the fuel economy benefits and the great performance of the new truck. So the comps are getting a little bit more difficult, too, there.

I wouldn't read in that way, David.

I wouldn't try to read it for the full year that way. And then I think the U.S. Canada, the 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.

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

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 on the, and just to manage the aftertreatment.

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.

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.

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

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