PACCAR Inc.

Good morning and welcome to PACCAR's first 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.

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 Fite, Chief Executive Officer, Harry Skippers, 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 Fite. Hey, good morning.

Harry Skippers, Michael Barkley, and I will update you on our first quarter results and business highlights. PACCAR achieved excellent revenues and net income in the first quarter. PACCAR sales and financial services revenues increased 11% to $6,470,000,000. Net income increased 28% to $601,000,000. PACCAR parts first quarter revenues increased by 20% to a record $1.39 billion. Parts pre-tax profits were a record $340,000,000, 35% higher than the same period last year. Truck parts and other gross margins expanded to 13.4% in the first quarter, compared to 11.6% in the fourth quarter of last year. Packard Financial had a record quarter, increasing pre-tax income by 92% to $147 million due to healthy new business volume and strong used truck results. I appreciate Packard's outstanding employees who delivered the excellent financial results and the highest quality trucks and transportation solutions in the industry. Last year, PACCAR introduced a complete new product lineup of Peterbilt, Kenworth, and Doth heavy and medium-duty trucks. This was a record number of new product introductions, and these investments are generating excellent results for the company. Our customers are benefiting from the industry-leading fuel efficiency, while drivers love the new digital instrumentation, luxurious interiors, stylish LED headlights, and beautiful exterior styling. The new trucks and growth in Packard's aftermarket business contributed to the increased gross margins this quarter. We expect gross margins to continue increasing this year as the new trucks become a higher percentage of the build. Looking at the economy, U.S. GDP is estimated to grow 3.2%, and industrial production is projected to expand 4.4% this year, which continues to provide a favorable operating environment for PACCAR and its customers. We estimate the U.S. and Canadian Class VIII market to be in the range of 260,000 to 290,000 trucks. The European and U.K. economies are also experiencing good economic growth. Economists project U.K. GDP to increase 4%, and European GDP to increase by 3.2%. The 2022 European truck market is expected to be in a range of 270,000 to 300,000 trucks. We expect truck markets to remain strong. Packard's industry-leading new truck lineup, highly efficient factories, best-in-class parts and financial services business, and the continued development of advanced technologies are creating an exciting future. Harry Skippers will now provide an update on PACCAR parts, PACCAR financial services, and other business highlights.

Thanks, Preston. PACCAR delivered 43,000 trucks during the first quarter. We're focused on increasing production in our factories and estimate second quarter deliveries to be in the range of 44,000 to 48,000 trucks. Truck parts and other gross margins increased significantly. to 13.4% in the first quarter. With higher production and a more favorable mix of new model trucks to be delivered, we anticipate second quarter gross margins to increase and be in a range of 13.5% to 14%. Many customers are operating their trucks longer than they normally would, which has increased the fleet age. Truck utilization is very high due to the strong economy and freight activity. As Preston shares, Becker Parts had an outstanding first quarter, with parts gross margins growing to a record 30.1%. Becker Parts' business model, which is based on convenience and technology, contributes to our customers' success. Becker is best in class at maximizing uptime for customers by having high-quality parts conveniently available when needed. The success of Packer Parts is driven by an expanding network of 18 parts distribution centers and 2,200 dealer locations, 250 independent TRP stores, as well as technologies like managed dealer inventory and innovative e-commerce systems. Packer is continuing its investments by opening a new distribution center in Louisville, Kentucky this quarter. PECA Financial Services benefited in the first quarter from strong new loan and lease business, high used truck prices, and excellent portfolio quality. Revenues were $366 million in the first quarter. Pre-tax income was a record $147 million, 92% higher than last year. A silver lining to the industry-wide under-supply of semiconductors its continued strong demands for PECCAR pre-owned vehicles. Customers appreciate their superior reliability and durability and pay a premium. PECCAR Financial has been increasing its retail used truck center capacity and now has 12 facilities worldwide. These facilities sell used trucks at retail prices, which contributes to higher profits. Becker Financial is opening another used truck retail center in Madrid, Spain this year. Becker has invested $7.3 billion in new and expanded facilities, innovative products and new technologies during the past decade. These investments have created the newest and most impressive lineup of trucks in the industry. Capital expenditures are projected to be $425 to $475 million, and research and development expenses are estimated to be $350 to $400 million. Becker is continuing its investments in clean combustion, zero emissions, autonomy, and connected vehicle programs. Thank you. We'd be pleased to answer your questions.

At this time, if you would like to ask a question that is star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Your first question will come from the line of Tammy Zakaria with JP Morgan. Please proceed with your question.

Hi, everyone. Thanks and congrats on the solid results. A couple of questions from me today. First, can you update us on any red tag units in inventory end of the quarter? and what kind of cost absorption impact it had in 2Q and if you expect any remnant impact in the second quarter as well.

Sure thing, good to talk to you. Well, I'd say on the red tags, we are in roughly the same spot now as we were at the end of the year. So we have a managed number of offline and our teams are doing a really fantastic job of working through a global issue and getting trucks to our customers. As it relates to cost, our price-cost was roughly even with each other in the first quarter on a year-over-year basis.

Got it. Thank you. And a second one from me. Do you expect chip availability challenges to creep up this year as certain automotive production restarts, or do you expect gradual improvement throughout the rest of the year?

You know, I think that as Harry announced, right, we expect our build to increase, so we do anticipate some improvement. Having said that, I would tell you that our chips have become less of the issue and more there's the general supply challenges in terms of getting all the materials we need into the plants at any given time. And, again, our suppliers, our teams, our purchasing teams, the ops teams are all doing a really good job of working through that.

Understood.

Thank you so much.

You bet.

Your next question will come from the line of Stephen Fisher with UBS. Please proceed with your question.

Thanks very much. One of you, I just asked you to maybe quantify the numbers on those partly completed trucks. I think you said it's about the same spot as in Q1. Does that mean you had about 3,000 left, I think, coming into the quarter? Did those all get shipped and then you kind of came out with 3,000 new ones? How do we think about it? Maybe a little more quantification there if we could.

Sure. Fair question enough. Easy enough to answer is we did have, like you said, 3,000 at the end of the year. And that number is in the low 3,000s right now. And it is definitely different trucks. So we get the parts in, work through them. The teams get them to our customers who really need trucks right now. And then some other issue might come up, and we work on getting that resolved.

Okay. Fair enough. And then just relative to the parts business, just curious what was better than expected in the quarter, and the growth rate was about double what you were looking for. How much was that pricing versus volume? And if you have any particular expectations for Q2 and the full year on growth rates. Thank you.

Well, I'll share a couple comments, and maybe Harry has some too. But I would say that one of the big things in the parts business that's driving growth is an excellent team of people that are doing a really good job of getting the our systems connected to our dealers and customers, which is bringing a high degree of stickiness to our business. We're using great technology to ensure that their first look and last look is at PACCAR for where they get their parts. Another factor is over the years we've increased the proprietary content of our trucks and engines, which is helping to grow that business, and we think that has sustainable legs to it. And I think the other part is obviously there's a lot of freight business out there. So people are running trucks. and trucks that are running consume parts, which is good for us. Harry, anything you'd add?

Those are the main items. The average age of trucks is going up. They consume more parts. It also means there's going to be a strong market for trucks for probably a longer period of time. The strong demands for parts we've seen, especially in North America, where we have the PACCAR engine successfully growing and contributing to that parts growth.

And you think we could continue to see kind of upwards of this 10% to 20% growth rate for the rest of the year in parts?

We expect the second quarter of parts sales and results to be very similar to the first quarter. So, yeah, we'll continue to perform very strongly in the parts sector.

Thanks very much.

Your next question will come from the line of Tim Fine with Citigroup. Please proceed with your question.

Great. Excuse me. Thank you. And good morning. Just a follow-up, pressing on the comments earlier on the gross margins for the, your expectations for the second quarter. So just as it relates to price costs. So if that was roughly in line in the first quarter, as you, you know, roll through more and you get more of the 2022 pricing, Presumably more of those are starting to flow through the P&L. How should we be thinking about the interplay between price versus the variable costs here in the second quarter?

Great question. Good conversation to have with you. I'd say that we should expect that we should see some improvement as we continue on, in part just because of what you mentioned. But it also makes the mention of these fantastic new trucks in Europe and North America being a contributor to that. So as they grow in percentage of build, that's helpful. So those are the positives to it. And obviously there's the supply base issue of making sure we build as many trucks as we can. And sometimes that's less efficient than we'd like it to be, but we want to satisfy the customer's demand. So that's the balance to it.

Got it. Okay. Yeah. Maybe, Preston, if we could, you know, obviously a very healthy market as you hear, you know, commentary from your larger over-the-road customers, at least from the public eyes in North America. Maybe, you know, that they don't obviously represent the entire market. So, you know, there's been a number of new entrants in North America that have come into the market in the last, you know, year or two, and you're facing some rather a significant increase in operating costs and out of prospect of higher rates. Just maybe what are you hearing as you kind of talk to dealers, and again, more in the over-the-road side, North America and Europe? Again, we can all see the headlines and commentary from the large public TL players, but just across the customer base, just kind of what's the tone and sentiment?

Well, I would... I understand where you're coming from, and I would say that the customers we have are extremely good at operating their businesses and doing a great job. They have a lot of freight to be hauled right now, and they have a lot of requests for our fantastic new trucks. So that's creating a market environment or environment, a business environment for us, which should make it strong for a long period of time. As you mentioned, there have been some new entrants, but I think they operate really on the fringe of it. maybe they're contributors to some of the truck pricing we see, but I don't think it's really material to the strength of the market.

Got it. Thanks a lot.

Okay.

Your next question will come from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi. Good morning. Nice quarter. I guess first, can you just help us understand sort of what percent of build was your new product launches in the first quarter and how we expect that you know, the new trucks as a percent of bill to play out, you know, in the second, third, and fourth quarter. So I guess that's my first question. And then can you help us understand sort of how far your backlog's out and what your market share is trending within backlog, you know, given what I assume some of the success with some of these new trucks? I mean, it looks like your market share went up as well. So I'm just trying to get a sense for backlog and market share trends as we exit 2022. Thanks.

Sure thing. The first part of your question was as a percentage of the new build.

For the first quarter, yeah, and then how we think about the rest of the year.

Right, right. So the first quarter, it was roughly a third of our build in Europe of the new product, and that will increase in the second quarter. Maybe we'll get to the halfway point or 50% of our build as we get into the second quarter and then increase from there in the third and fourth. And in North America, the new Peterbilt Model 579 and the Kenworth T680 are are roughly, again, a third of our build in North America, and those models have transitioned now. And our new medium-duty product, which we build, is probably less than 50% yet transitioned to the new model, and it'll grow through the year. So that kind of covers that. As far as the backlog look, our backlog is really solid. We're substantially full for the year in Europe and North America. As we adjust build rates, we can create some openings if we can get the parts for that, so there's some positive area there. but really strong backlog. All the conversations with the customers are that they really need trucks and continue to do so. So the backlog feels solid. And then as far as our market share trends, as you know, like in Europe, in our first quarter, we're at 17% market share in Europe, which is a really strong market share. And for North America, we've grown from 24 to 28 quarter for the first quarter of 2021 to the first quarter of 2022. So year over year growth. and we'd expect to be in that 30%, 31% range of the full year.

Wow. Okay. Thank you very much.

You're welcome. Your next question will come from the line of Stephen Volkman with Jefferies. Please proceed with your question.

Hi. Good morning, everybody. Maybe just a quick follow-on to Jamie's question. Preston, by 2023, should we assume that pretty much all of production is these new products, or do you still continue to offer – the older stuff as well.

So fair question. We'll continue to offer some of the other products as well into 2023, but there's a transition going on there.

Okay, thanks. And then can you talk a little bit about Europe specifically? I mean, it seems like there's a number of raw materials and energy costs and freight and so forth have all kind of inflected quite a bit higher over the past few weeks in connection with what's going on in Eastern Europe. And I assume that's a bit of a headwind for you guys at some point, but how should we think about that? Does it take a while to flow into your cost structure? Do you think you can kind of cover it with pricing on real time? Just how does that dynamic work in Europe specifically?

Maybe Harry can offer some comments on that.

Yes, Steve. Our cost situation in Europe has not been so much different from North America. So we've seen direct material cost increases and price increases which have been similar. We're not exposed too much as far as we can tell right now to the situation in Ukraine and Russia. So our parts availability And the ability to produce trucks has been good. I think the economy and customer demand is very similar to what Preston just mentioned. Customers want to have their trucks. They want to have more trucks. They want to have them faster. So really strong market this year. That's also why we increased the range of our outlook for Europe a little bit this time. And we think it will be a strong market going forward. Very, very similar to what we see in North America.

Great. Thank you, guys.

You bet.

Your next question will come from the line of David Rasso with Evercore ISI. Please proceed with your question. Hi.

Good morning. When I think about 2023 and around the industry currently, the orders are being a bit suppressed. When you open your order book for 23, and maybe it's a statement for the industry as well, What you're hearing from your customers, do you expect orders to reaccelerate given they're suppressed today? And then I'm curious your view about demand for 23 if you think they're going to accelerate once those books are open.

Sure, David. Thanks for the question. We do. We do expect that 2023 should be a good year for several reasons, really. We expect that our new trucks, as I said, will be a growing percentage of the build. Those trucks, the fuel economy they provide is compelling for people to want to get the new trucks into their fleet, which is going to be really good for their operating costs. That will drive demand. And so as 2023 gets closer to us and we start taking a substantial number of more orders, we'll see that to be a – we predict that will be good order intake.

So no dampening in your review of 23 with any of the macro developments since last quarter. Is that a fair –

I mean, there is that view out there, I guess, but as we look at it also, the other view is that the economy is growing. We expect that GDP growth is positive, that freight volumes stay at a high level, that truck age is up 10% to 15%, and that we have fantastic new trucks. All of those for PACCAR are good news in terms of what we expect the future to look like.

Thank you. Then on the deliveries for 2Q versus 1Q, you know, midpoint up about 7%. Can you take us through the geographies with a little bit of help on each one sequentially, U.S., Canada, Europe, and other? Thank you.

You know, I think I'll offer a couple comments. Harry can add anything he wants or anyone else. But I would say that we do expect volumes to grow in each of the regions in the second quarter in contribution to that 44,000 to 48,000 units. And then specifically inside of that, it's harder to tell because the supply base issues can be unique month by month.

Europe typically has fewer working days in the second quarter, a little bit more national holidays in different countries at different moments in time. So that would be an offset maybe a little bit, but we've also seen that the material availability in Europe is good. We're increasing production there. So overall, I would think that all regions would make a contribution to the higher production in the second quarter.

All right. Thank you very much.

Your next question will come from the line of John Joyner with BMO. Please proceed with your question.

Hey, thank you for taking my questions. So I guess first, and you gave some color in your release, but is there anything else that you can offer on the performance of the financial services business? I mean, if I go back, say, 35 years, which is as far back as the model goes, the profitability has never been this impressive. So If you can add anything else to that, and do you anticipate this continuing for the rest of the year?

The finance company results were excellent in the first quarter. I think the team has done an amazing job creating a strong book of business with strong A and B credits. Past dues are less than half a percent, so customers are paying their bills on time. Like we said in the press release, Ustruck business continues to be very strong. I think a big difference maybe compared to 20 or 30 years ago with the retail used truck centers that the finance company has established. We have 12 of those now that allows us to sell a bigger portion of our used trucks directly to end customers, and that helps profitability. So we expect the finance companies to do well for the remainder of this year. Although the supply of used trucks could be a little less in the second and the third quarter because customers hold on to their trucks because they're waiting for new trucks. And again, underlines how strong the demand for the new trucks is going to be.

Okay, okay, that's great. And then maybe just following up on that, when you mentioned the used truck centers, I mean, I guess how much is left to go there with building those out? And then I guess the same question on the parts business in terms of How much geographic build-out remains for that business, both TRP stores as well as the distribution centers?

On the used truck centers, we've added a couple used truck centers in, I think, per year in the last couple of years, made some upgrades, adding another one this year. There's definitely opportunity to add a few more. I would say that it's still a minority of the trucks we sell through the used truck centers, so there's still room of opportunity to grow in that area.

And on the parts, President? Yeah, I think on the parts side of it, if you think about that, I'd say that the parts team has the opportunity of continued growth. We've built out distribution centers. We'll continue to do that. That puts distribution centers closer to our dealers, closer to our customers, which gets an increased percentage of same-day delivery. But equally important, if not more so, is the kinds of systems we're implementing and the capability to connect with the customers directly and make sure that their trucks are operating the way they want them to and get them trucks and parts that they need every single day. So we use data analytics. We have connected systems with our dealers, and we think that has a great sustained future.

Okay, excellent. Thank you so much. You bet.

Your next question will come from the line of Nicole DePlace with Deutsche Bank. Please proceed with your question.

Yeah, thanks, guys. Good morning, or good afternoon, whatever it is. I guess – A lot's been covered here, but can we talk a little bit about inventory? I think if you look at the ACT data, just truck inventory at the dealers has begun to pick up a bit. What is PACCAR seeing with respect to inventory in the channel?

Yeah, I mean, inventory's still at pretty low levels. If you look at it, it was like 2.3 months of retail sales in March compared to 1.9 a year ago. And for PACCAR, we're less than that slightly. So there's still not a lot of inventory sitting out there, and it's really just about the ability to get the trucks from production into the customer's hands as quickly as we can.

Okay, understood. Thanks. And just to follow up on the discussion around supply chain. I guess, like, I know you guys are embedding a little bit of an improvement as the year goes on. What did you see in the first quarter? I mean, there's a lot of noise with respect to geopolitical risk. Like, did supply chain get more challenging, or is it kind of more of the same that you've been seeing for the past several quarters?

I think that what we've seen is that maybe we've gotten through some of the earliest semiconductor issues, and those have not become the most dominant side of it. So other little issues come up now. They could be labor-related. They could be geopolitically related. They could be shipping-related. And so some of them are temporary. I think that what's going on now is we have really strong communication between us and our supply base. And so our ability to manage that is maybe improving. And we hope overall the situation is improving, which is leading us to see that we think we can deliver some more trucks in the second quarter and on out.

Got it. Thank you. I'll pass it on.

All right.

Your next question will come from the line of Rob Wertheimer with Milius Research. Please proceed with your question.

Hey, good morning, everybody. Good morning, Rob. Harry, I'm sorry. The results were great. I'm sorry to ask you a couple of accounting questions in the midst of that. But I noted you switched from LIFO to FIFO for U.S. inventory accounting. When I read that, I assumed that was just to be more comparable with European-slash-global peers. I wonder if you had any other thought process around that, and I wonder will it have any material sort of cash-tax impact.

As Michael – yeah, that's one of the reasons why we switched to become more comparable with our European peers who use IFRS and don't have LIFO. We also wanted to have better matching of our revenues and costs as – As inflation creeps up, you end up accelerating cost realization when you honor LIFO, which we don't think provides very good matching. For years, LIFO has been fairly benign and not much of an impact. And with the inflation creeping up the way that it is, it's become more of a thing and distorts the numbers unnecessarily. So better comparability, better revenue recognition. We thought it was the right thing to do at this time.

And is there any cash tax impact that we should care about?

Yeah, we're going to, you know, our LIFO reserve is about $200 million. We're going to end up paying about $50 million in taxes, which we're happy to do.

Okay, perfect. And then on the finance sub to your questions and answers earlier, I'm not quite sure if it works this way, but as trucks come off lease, I mean, do you make more of a profit just because you own them and you sell them into a strong market? Was that a material impact this quarter or for the year? And I will stop there. Thank you.

Yes, of course, the trucks that come off lease, our trucks, that's good business for us right now. Those trucks come back in a very favorable market for used trucks. and that's definitely a good thing for the finance company.

All right. Thank you.

Your next question will come from the line of Jerry Ravitch with Goldman Sachs. Please proceed to put your question.

Yes, hi. Good morning, everyone. I'm wondering if we could just talk about the supply base for you folks in Europe. You know, a couple of your competitors had down days because of supply base issues from Eastern Europe in the quarter, and It doesn't look like you folks had any issues. Is that a function of you folks using multiple suppliers or a different supply base? Can you just talk about how nimble you folks have to be in the quarter in flexing, if at all, given that you have political issues? Thanks.

Well, we've noted the same thing with them. We just haven't been affected that way. We've had good supplier ability to provide us the parts we need in Europe and We've looked out into the future and tried to forecast where that might be, and we'll have to watch and see how it is, but right now there's nothing that's showing us that we aren't going to get the parts. And we continue to work closely with all the suppliers that have facilities in Eastern Europe to make sure that we're on top of it.

Yeah, we're one of the few truck manufacturers that doesn't have a factory in Russia, and so our exposure to Russia and the Ukraine has been a lot less than what you may have seen somewhere else.

And Harry, earlier you mentioned the strength of the business in Europe. I'm wondering if you could just expand on that. Did bookings exceed shipments in the quarter? Can you comment on that?

Yeah, order bookings, I think it's, again, the same approach in North America as we've seen in Europe. Demand is very, very strong. And we manage order bookings a little bit with lead times. And we see there's some inflation and cost increases. and we want to manage that just very carefully. So I think in today's environment, we could easily get more order bookings than we need, but it's a function of, well, filling the backlog with strong business and not getting exposed out to 2023 where we don't know exactly what costs are going to be.

And I would add that, you know, it really is hard to appreciate how phenomenal the new Dodge truck is. I mean, it's the only truck that meets all the new masses and dimensions regulations. It's providing a 10% better fuel efficiency, so several thousand dollars a year per truck in operating cost advantage. It's a truck that meets the upcoming new direct vision requirements in Europe. It's really a game-changing product, and it's got a lot more proprietary content on it, and the drivers love it. So there's a lot of reasons that we see strong demand for that for our European market right now.

Okay, super. And lastly, I'm wondering if you could just comment about the evolution of demand for your electric vehicles. You know, how has that evolved over the past quarter or two, and where are you folks expecting to ship them geographically? Is it still predominantly in Europe where you're seeing demand?

Sure, we are seeing increasing order intake for those vehicles. I think we talked even a year ago and we said, you know, we start in the tens and grow to the hundreds and then get to the thousands. And this year, already we expect that we'll deliver in the hundreds of vehicles and take lots more orders than that for the vehicles. We're having customers putting them into service and seeing how they work out for them, you know, five or ten at a time typically, and then enjoying the benefits of what Packard quality looks like in a zero emissions vehicle. So... We kind of see that as a growing opportunity, and we continue to refine our technology on those vehicles. I feel like we want to stay at the leading edge of technology, and it's nice to be actually delivering zero-emissions vehicles to our customers.

Okay. I appreciate the discussion. Thanks.

You bet.

Your next question will come from the line of Chad Diller with Bernstein. Please proceed with your question.

Hi. Good morning, guys. Morning. How much room do you have to raise price on parts? And can you just talk a bit more about just your philosophy on pricing? I mean, are you guys, you know, can you potentially, you know, raise price to cover, let's say, like air freight, for example? And then maybe you can break down the outperformance of your parts business. I mean, how much is coming from just, you know, better growth on the engine side versus best of trucks? And then lastly, Harry, if you could just clarify your comment about parts demand being similar in 2Q versus 1Q. Are you talking about dollar-wise or percent growth year-on-year?

Well, I mean, obviously it's a competitive market out there. We've done a team that's done a really good job of increasing the prices as costs have gone up, and we've had some good realization over the few quarters here. Largely it's driven by the need for these parts and the fact that we are connected with the customers more and more, right? Trucks are getting complicated. We have sophisticated customers, and the interaction between PACCAR, our dealers, and our customers is a real contributor to growth, as well as more proprietary content like engines, like our PACCAR transmissions, PACCAR axles. All of this is just helping us flow through a connected position to our customers. So that will continue, and that's great for the future.

And can you just clarify the parts guidance commentary? You're talking about dollar-wise versus percent-wise growth. And then just a separate question just on just how you guys are thinking about how much pent-up demand there is in the industry today.

To go back to the parts comment, the parts comment was on revenues. So we expect parts revenue in the second quarter to be similar to two parts revenue in the first quarter. Parts pricing has been strong. To go back to the first quarter, the first quarter pricing was slightly over 10% up compared to the first quarter of 2021. So that just shows you that it's an environment where cost increases are translated into price increases as well. And the second question you had was?

Oh, just trying to think about just how much pent-up demand there is either in the industry or if you can talk about Packer more specifically.

Sure. I'll take that one and just kind of think of it this way. We've just come through a couple years where we've not been able to build the number of trucks we need as an industry. We've had really strong freight volumes. People are running their trucks out there, putting miles on them. They have an operating model which says they either want their fleet age to be two years or three years or whatever it is, and they've exceeded that. by 10 or 15%. And they're probably not gonna adjust that business model, which is successful for them. So they're gonna wanna draw down that age of fleet as they can. And that's gonna take some time. As the supply base remains constrained, we expect to see these improvements in our deliveries, but they're not gonna be just for a quarter. We expect to see this to be a good period of time for PACCAR and the industry.

Your next question will come from the line of Ross Gilardi with Bank of America. Please proceed with your question.

Good morning. I'm not sure if you guys replied to this similar question earlier, but what do you make of the erosion in spot rates? And, you know, clearly PACR is very positive, but why isn't that an indication that excess capacity is creeping into the freight markets and that demand is ultimately softening? And why would orders reaccelerate in 2023 if spot rates are falling? Thanks.

Yeah, sure, Ross. I mean, I think that it's a fair question. If you think of spot rates, they're really the fringe of the business. They're not the foundation of the business. And so I think people may want to use them as a leading indicator, but they shouldn't think of them as systemically covering what freight is doing out there. And so since there is strong business out there, even if spot rates decline a little bit, they're still present, and the fixed contracts are still really strong. So as long as that continues, it bodes well for the market.

Okay. Got it. Thanks, Preston. And then I'm going to ask you a consolidation question in a while. And, you know, clearly PACCAR has gone at it organically very successfully for a very, very long time. But I was curious on your general view. I mean, do you see a heightened need for increased consolidation in the commercial vehicle space in light of all the, you know, inflationary pressures, just, you know, need for perhaps greater localization supply chain for just greater overall scale? And do you think regulators would allow a combination of any of the top six or seven? I mean, some of the European names have really been bruised and battered, you know, in the aftermath of, you know, Russia and so forth. And, you know, could PACCAR potentially play a role as an industry consolidator, you know, in the next couple of years?

Well, it's funny that you haven't asked that question in a while. And I would simply say, you know, the way we look at it is the business is doing fantastic. PACCAR continues to grow. We expect to keep growing, and we always are looking around the world for the best things for our shareholders, and I think that's as much as we can say right now. Thanks a lot. You bet.

Your next question will come from the line of Jeff Kaufman with Vertical Research. Please proceed with your question.

Thank you very much, and congratulations. Just a quick question on timing and then another one on numbers. You reiterated the R&D range for the year, but R&D came in, I think, a lot lower than that trend this quarter. I'm assuming that's just a timing issue, but could you talk a little bit about that?

Sure. You nailed it. It's a timing issue in the year, so we still hold that 350 to 400 in the full year with 78 in the first quarter. So it's a run rate for new technology, some pretty fun projects that we have that we're spinning up that will help us in the future.

Okay, so just for modeling, should we think of that more as a back half a year impact as we catch up?

A pretty gradual increase during the year, I would model.

Okay, thank you. And then a lot of detail on new unit sales, but I know you've had a couple questions about this. What do used unit sales look like on a year-on-year basis?

I mean, in a general sense, You can say that they've declined, right? We had about a year ago we were coming into this strong used truck market, so there was used inventory out there. And obviously now with the strong freight demand, people are holding on to those units, so they're just not coming into the inventory of our dealers or our used truck centers. So it's at a lower level, and that's likely to continue for a while. So as far as the specific number to think of it in terms of months, I still think there's less than two months of inventory out there

All right, and that's consistent with the commentary you made about 2Q, 3Q. So any benefit that we're seeing on used vehicle impact to financial services is entirely used vehicle price at this point, correct?

That's probably the biggest variable in that profit number, yeah.

Okay, that's all I have. Thank you.

You bet.

Your next question will come from the line of Felix Boshin with Raymond James. Please proceed with your question.

Hey, good morning, everybody. Hey, Preston, I just have one. You mentioned earlier in the call, average truck age is up 10 to 15%. Can you clarify that comment a little bit? Is that a North American number, a year over year number? And I'm really curious, just big picture versus different cycles, say going back a couple of years, maybe industrial recession levels. How has the average age of the North American fleet changed over time versus where it is today?

Yeah, I would think of it, if you're saying macroscopic, I would think of it in terms of each year is its own circumstance and that the model can be disrupted by any number of factors. But I don't think that the general expectation of the fleets is changing much. They want to maintain a fleet age at a certain level. And when they get beyond that, then they want to replace it. Obviously, there's slight nuances to cycle timing, but their freight volume is strong. And the easiest way, as we think about it, as their freight volume is strong, and they look at the opportunity of owning the great new Kenworth, Peterbilt, and Doff trucks, and the fact that those are going to yield thousands of dollars per unit in savings, we see no reason that won't continue. Nuances beyond that seem less significant.

And I would say that's more or less around the globe. Every market of us had COVID-related shutdowns and underproduction in 2020. Every market had chipped shortages in 2021. So we underproduced customer demand for almost two years, or a big chunk of those two years. And yeah, that means there's a lot of demand that we're trying to recover now, but it's probably going to take longer than just this year before we get there.

Right. Helpful. I appreciate it.

Your next question will come from the line of Courtney Iacovonis with Morgan Stanley. Please proceed with your question.

Hi, good morning, guys. So I guess I just wanted to first just get a check on the quarter. Obviously, you guys came in, you know, smack in the middle of your delivery guidance. But, you know, I think Europe was a little higher than we were expecting. North America was a little bit lower. So just wanted to get, you know, how it came in, you know, versus your expectations on a geographic level. I think you mentioned that you're expecting shipments to increase significantly for all geographies heading into next quarter. And then just more broadly on the industry outlook, it sounds like, you know, supply chain issues are getting a little bit better. You're still very positive about end market demand. So, you know, you raised the low end of your guidance for the industry, but just curious why there was no adjustment to the top end.

Sure. As we looked at the segment deliveries, geographic deliveries, I would say that in North America we just saw that we had in the medium-duty market actually – some impact to the supply base there, which kind of constrained North American medium-duty deliveries. And that was probably what weighed in the first quarter. And hopefully we'll see some reconciliation there in the second quarter of that. And I'd say from an industry standpoint, our guidance is just we tightened it up a little bit, and we tightened it up to move the midpoint up because the market still feels really strong to us. So in that view is where we saw ourselves sitting.

Okay, great. And then you made some comments earlier just about, you know, the positive mix improvement as new trucks become a higher percentage of the build, and I think you gave us some color on how that mix should improve through the year. But can you just help us understand, you know, what the margin differential is between that new product line in North America and Europe, you know, versus last year's and, you know, How big of a gap is it mostly just in pricing, or is the cost structure significantly better?

Yeah, the margin opportunity for the new models is, of course, excellent. The 7% fuel economy improvement we saw for the Kenworth and Peterbilt trucks, that just puts the investing class in the industry in terms of fuel efficiency. With the new DAF, with the 10% fuel economy improvement, that's class leading in Europe. And being able to create so much value for our customers, that's, of course, also going to be a good thing for Packard.

The only add to it I'd give is that if these trucks are not just good for their pocketbook, but their drivers, which is such a key element of their business right now, there's no truck they'd rather be in than the new DAF, the new Peterbilt, and the new Kenworth. I was at a truck stop. a week ago and at the Fuel Islands talking to somebody who had a new PACCAR product and they were just beside themselves with the way this truck looks and drives down the road. So I think it's important to realize that the drivers have a big play here and PACCAR products are where people want to be.

I guess my question is more in relation to your cost structure as opposed to the customer.

Sure, understood. And when we make investments and big capital investments, we do it to be more efficient and we strive for that. So, yeah, there's some of that in there as well.

Okay, thanks. Your next question will come from the line of Matt Elcott with Cowen. Please proceed with your question.

Thank you. Good morning. Could you guys update us on your view on a possible 2023 pre-buy and how material it could be? And, you know, if you couple that with your view that orders could accelerate again in Are we looking at another solid delivery growth year in North America in 2023?

Well, I would say, let me take the back half of your question. So, yeah, we think 2023 could be a good year. It's pretty far out, but we think it could be a really good year. As far as comments on pre-buy, we think that conversation is overdone. I think that, you know, there's a lot of great new products in the market out there. there's not a substantial change going into the general U.S. market in terms of technologies. There will be some improvements in CO2 reductions or fuel economy again, which can cause some people to want to buy earlier, some people to want to wait for those improvements. So I think that it's really mostly a California impact in terms of what might happen in terms of real tech change. So I wouldn't overweight that in my thoughts of 2023.

Okay, that's helpful. And Preston, can you maybe provide some more insight on how manufacturing lead times for Class 8 trucks have changed over the last few quarters and where they are, you know, for orders placed today? And, you know, could longer lead times be contributing to the moderation in orders?

Well, what I would think of it as is we have a strong order backlog because it's substantially full. So if you place an order for a truck today, you might be able to get it in the fourth quarter. But it's starting to slide out. And that's why the orders have been limited is because we're not ready to open up fully the 2023 order board because of the uncertainties of what the parts supply is going to be and the cost structure is going to be. And so that's how we look at it.

Got it. So the order moderation could be related to 2023 books not being open yet and not necessarily a function of underlying demand for trucks.

You're absolutely right. That, in fact, is what's happening.

Thank you very much.

You bet.

Your final question in queue is a follow-up from David Rosso with Evercore ISI. Please proceed with your question.

Hi, thank you. Just wanted some clarification on the sequential builds in Europe. I mean, even if they're just flat, that's up 37% year over year. And I'm just trying to understand, it's not necessarily a terribly easy comp that's driving it. Is this that much share gain from the new truck? Is it an understanding the dealers want a little pipeline fill, if available? I'm just trying to understand the magnitude of the growth in Europe we just saw and the implied for 2Q. Thank you. Harry?

The demand for the new truck has been excellent, and I would say that also in Europe, DAAP is doing an excellent job building as many trucks as we can. So build rates continue to go up and even with the lower number of working days in the second quarter, we expect that second quarter production would be the same or slightly up.

From one queue. Okay. From queue one. From Q1, exactly. And year over year, that's up 37 plus percent year over year. So I just wanted to clarify that. And lastly, June 1st, the upcoming meeting, anything you want to provide for us in this platform to mull over as we think about the main takeaways we should be getting out of that meeting?

Well, we look forward to seeing you in person. That's going to be fun. And I think it's going to be a little bit more information about how the business is doing, what the future looks like for us, and the strength of PACCAR going forward and how that's going to just accelerate. So we look forward to seeing everybody there. All right. I'll be there. Thank you. Appreciate it. All right. Okay. Look forward to seeing you, David.

There are no other questions in queue at this time. Are there any additional remarks from the company?

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

Ladies and gentlemen, this does conclude PACCAR's earnings call. Thank you for participating. You may now disconnect.