Paccar Inc (PCAR) — Q4 2020 Earnings Call Transcript

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 on the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Hey, good morning, everyone. Harrie Schippers, Michael Barkley, and I will update you on our strong fourth quarter and full year 2020 results, as well as provide you an update on other business highlights. First, I would like to express my appreciation for our outstanding PACCAR employees around the world. Their focus on safety and health throughout the pandemic has been remarkable as they deliver the highest quality trucks and transportation solutions to our customers. In 2020, PACCAR achieved annual revenues of $18.7 billion and good net income of $1.3 billion. PACCAR's performance benefited from a recovery in truck demand to normal levels in the second half of the year and strong performance from our Trucks, Parts, and Financial Services divisions. PACCAR has now achieved 82 consecutive years of net income. The company has paid a dividend every year since 1941 and has delivered annual dividends of approximately half of net income for many years. In 2020, PACCAR declared dividends of $1.98 per share. PACCAR's fourth quarter revenues were $5.6 billion, and fourth quarter net income increased to $406 million. PACCAR Parts achieved fourth quarter revenues of $1.70 billion and record pre-tax profits of $223 million, which was an 8% increase compared to the same period last year. PACCAR delivered 40,700 trucks during the fourth quarter compared to 36,000 in the third quarter. In the first quarter of 2021, we expect deliveries to be 10% higher than the fourth quarter due to stronger markets and heightened customer demand for Kenworth, Peterbilt, and DAF grade trucks. In 2020, U.S. and Canadian Class 8 truck retail sales totaled 216,500 units. Kenworth and Peterbilt's combined Class 8 market share increased to 30.1%, and medium-duty share increased to a record 22.6%. For 2021, the U.S. economy and industrial production are projected to expand by about 4%. The strengthening economy, low fuel prices, and high volumes of freight are positive for the truck industry. We estimate the 2021 U.S. and Canada Class 8 truck market to increase to a range of 250,000 to 280,000 vehicles. European above 16-tonne truck registrations were 230,500 last year, and DAF achieved a strong market share of 16.3%. We anticipate the above 16-tonne truck registrations in Europe will increase to a range of 250,000 to 280,000 in 2021. In the South American above 16-tonne truck industry, registrations were 93,000 last year. In Brazil, DAF increased its share of the greater than 16-tonne market from 4.3% to a record 5.7%. We forecast that the South American market is expected to increase to a range of 100,000 to 110,000 units in 2021. Truck and parts gross margins were 12.6% in the fourth quarter. We estimate first quarter truck and parts gross margins will rise to around 13.5%. PACCAR consistently takes a rigorous approach to controlling costs throughout all phases of the business cycle and continues to deliver industry-leading margins. Last week, we announced a strategic partnership with Aurora, a leader in autonomous driving technology. This partnership will integrate PACCAR's autonomously enabled truck platform with the Aurora self-driving sensor and software system. The goal of this collaboration is to create a commercially viable autonomous truck that enhances safety and operational efficiency for PACCAR's customers. PACCAR’s zero-emission vehicles continue to lead the industry. Our zero-emissions vehicles have accumulated nearly 500,000 miles. Peterbilt, Kenworth, and DAF battery electric trucks are set to begin production in the second quarter of this year, and we're continuing the development of hydrogen fuel cell-powered zero-emissions vehicles. Last year, PACCAR was again recognized as a global leader in environmental practices by the reporting firm CDP, placing PACCAR in the top 15% of over 9,500 reporting companies. Additionally, the Women in Trucking organization named our PACCAR corporate office, Peterbilt, Kenworth, PACCAR Parts, and Dynacraft as a top place for women to work. Kenworth and Peterbilt received a total of 5 manufacturing leadership awards from the National Association of Manufacturers, and the DAF XF was recognized as the Fleet Truck of the Year 2020 in the United Kingdom. There are numerous exciting developments happening around PACCAR. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and PACCAR's investments in future growth.

Thanks, Preston. In 2020, PACCAR Parts generated excellent annual revenues of more than $3.9 billion and an annual pre-tax profit of $799 million. Fourth quarter Parts revenues reached a record $1.70 billion, and quarterly pre-tax profit was also a record at $223 million. One of the great attributes of PACCAR Parts is that it provides steady profitability through all phases of the business cycle. PACCAR has increased its market shares over the years, resulting in a greater number of truck and powertrain parts opportunities. The excellent long-term growth of PACCAR Parts reflects our investments in distribution and technology. PACCAR Parts has expanded its global network to 18 distribution centers and is currently constructing another facility in Louisville, Kentucky. Our investment and leadership in e-commerce technologies proved valuable last year as e-commerce retail sales increased by 25%. In 2021, we estimate Parts sales will grow by 7% to 9%. PACCAR Financial Services achieved annual revenues of $1.57 billion in 2020, with an annual pre-tax income of $223 million and portfolio assets of $15.8 billion. The percentage of PACCAR truck sales financed by PACCAR Financial Services increased from 25% to 28% last year. The portfolio continues to perform well, with low past dues and minimal credit losses. Pre-tax finance income increased from $55 million in the third quarter to $64 million in the fourth quarter. PACCAR Financial added used truck centers in Denton, Texas; Lyon, France; and Prague, Czech Republic last year, and we will open a new used truck center in Madrid, Spain this year. Across PACCAR, last year we invested $570 million in capital and $274 million in R&D. In 2021, we're planning to increase capital investments to the range of $575 million to $625 million, and R&D expenses will grow to be in the range of $350 million to $375 million. These capital and R&D projects will develop the next generation of fuel-efficient diesel powertrains, zero-emissions vehicles, as well as advanced driver assistance systems, autonomous vehicles, connected services, and cutting-edge manufacturing capabilities. PACCAR has started 2021 with robust momentum. The truck and parts businesses are growing. Kenworth, Peterbilt, and DAF market shares are increasing, and we're investing in new trucks and technologies that will deliver enhanced operational efficiency, safety, and environmental benefits to our customers. Thank you. We would be pleased to answer your questions.

Can you discuss your European market share, which reached 17% at one point and is now slightly above 15%? What is happening in that region?

Sure. The record we've had in Europe was 16.7%. This is actually our second-best year in our history, so that's up one tenth from last year, and we have strong momentum as we enter the 2021 timeframe. So it's really a good year for the European team in market share. Additionally, we have market leadership in several countries, including Great Britain and many countries in Eastern Europe, and we expanded our share in significant markets like France as well.

All right. And I have a lot of questions. So maybe I'll just try to combine two together to cheat a little bit here. Can you talk a little bit about the size of the EV market today and maybe in 2025 or a couple of years down the road? And what are examples of next-gen manufacturing and distribution? I was trying to think of what you meant there, but I couldn't figure it out. And then I'll leave it to everyone else.

Well, let's discuss the EVs or zero-emission vehicles first. Currently, the most crucial aspect at PACCAR is having the right technologies in place. We have invested considerable time and effort into bringing battery electric vehicles to market that fit the zero-emissions class, both in Europe and North America, for medium-duty and heavy-duty products. The key is ensuring we have the right technology and leverage for those products moving forward. As we shared previously, we announced the sale of these products, and we're moving into production with those trucks beginning in the second quarter. Regarding volumes, as we mentioned before, we expect the industry will have sales in the hundreds in the coming year or two, and as we look to the 2025 timeframe, that could grow into the thousands. We anticipate that we will hold a significant market share as the industry develops. The primary focus right now is to ensure we have excellent technology. I'm genuinely excited about the products we are launching. As for advanced manufacturing, we are referring to a connected factory. This encompasses how well the factory integrates, the data analytics shared, and the synergy of robotics to ensure that we continue to enhance our already extraordinary quality.

To add to that, our new paint shop in Chillicothe, Ohio, which will open this year, is an excellent example of that. It will also be much more environmentally friendly and will be the most modern paint facility in the industry.

My question is on gross margin, and thank you for the outlook in the first quarter. You're improving from the third quarter and fourth quarter levels into the first quarter. Can you describe what the dynamics are? Is it quantifiable COVID supply chain or otherwise costs that are fading, perhaps it's mix, or maybe it's pricing? What was weighing on the second half of 2020, and what's getting better?

Sure. I'm happy to take that. The primary factor affecting gross margins is the ongoing global pandemic. We have made rigorous efforts to ensure employee safety, which is our number one priority. This has incurred additional costs for us, not just for our company but also across our supply base. Moreover, this has had some margin impact for us. We also face raw material pricing effects that are emerging as the global economies recover. We’re at a different point in this cycle than we have been before. We are just beginning to see the truck market recovery, which also has an influence. Harrie, would you like to add anything?

Yes. Achieving a gross margin increase to 13.5% in the first quarter is a positive development. We continue to maintain the highest margin in the industry.

Is there anything from COVID that you've managed to streamline? I understand this may evolve over time, but I'm curious if there's anything specifically driving the sequential increase, and I'll stop there?

The most critical aspect is safety. We have successfully developed a safe environment for our employees, which remains our top priority.

To expand on the gross margin question, given that the first quarter usually reflects potential customer mix changes during the initial phases of an upcycle, do you expect this to be significant, or does it balance out?

I believe several factors will contribute to what the second, third, and fourth quarters will hold. Your observations are valid; customer mix can undoubtedly influence results. We've also seen larger customers continue buying into the fourth quarter and through the first quarter, so there are offsetting factors.

I was intrigued to see the comment about the T680, fuel cell electric, having a 350-mile range. I'm curious if you anticipate that mileage to increase over time. Additionally, what percentage of your truckload or LTL customer base do you think is relevant for a 350-mile range vehicle?

What I can say is that the technologies being evaluated currently, both batteries and fuel cells, have the capacity to expand range; it just requires more batteries or fuel cells. The range depends on the space available on the truck. The energy density at this point is greater for hydrogen fuel cells. However, both solutions require infrastructure development for charging stations, which will influence the necessary range on the vehicle. Hence, it's somewhat premature to predict what will transpire and how these technologies will play out in the respective markets.

Starting with a bit more detail around the commentary on the first quarter and the 10% forecasted increase in production. Can you tell us if this increase is across all geographies?

Good question. Yes, the increase is fairly widespread. We see improvements in the North American market. Kenworth and Peterbilt are performing very well, with strong order intake, and similar trends are seen elsewhere. Both economies have robust freight activity, and trucks are moving with good order intake currently.

Got it. Regarding the Parts business, I was pleasantly surprised by the fourth-quarter acceleration on the top line. Can you talk about sustainability or strength into next year or your thoughts for Parts revenue growth in 2021?

If you observe our Parts division, they have done a fantastic job in the past year and over several years of not just serving customers, but also creating innovative solutions. One notable advancement was in e-commerce. They've established a state-of-the-art system that allows customers to order parts online, significantly streamlining the process. We have made substantial investments in our distribution network, improving next-day and same-day delivery percentages tremendously. This dedication undoubtedly brings business to our Parts team, and we project that growth will persist in the coming years.

Should we expect gross margins in the Parts business to continue expanding in this scenario?

The gross margins we attain in Parts are quite high, and we would anticipate them to remain high. So we're optimistic about that into the future.

Along with my broader question, I'm assuming that the first quarter will represent the low delivery quarter of the year, with growth expected throughout the year for your industry targets. Do you foresee the first quarter as also having lower gross margins in the truck business?

Currently, we are at the start of a cycle where we look at where we have been and where we're heading. Naturally, we have clearer visibility for the first quarter than we do for the second, third, and fourth quarters. Presently, our quarter is filling up, and we anticipate strong visibility into the second quarter. While we'd expect the third and fourth quarters to follow a similar trend, there is a significant time gap until then. Your modeling may be accurate, though it is somewhat early to make predictions regarding the latter part of the year.

Conceptually, you have worked extensively on the Parts business and on the cost structure. I wonder if you expect overall margins to be higher in this cycle compared to the last one?

We have made solid investments, and there are exciting developments. The recovery in gross margins to 13.5% that we are observing is favorable. As we move forward, this year promises to be particularly exhilarating for PACCAR, with numerous new product introductions on the horizon.

Could you provide granularity on pricing or mix dynamics in the fourth quarter? I think pricing was slightly negative last quarter, so any insights would be appreciated.

Pricing has remained very stable and may have slightly declined in the fourth quarter, but it is relatively normal for our current cycle.

Was anything else related to mix impacting the fourth quarter, besides the pricing commentary? Also, could you provide additional color on the R&D increase, particularly where the spending is directed, and how much can be attributed to the recent Aurora announcement?

On the pricing side, there is some cyclical timing and how much backlog we managed to maintain. We expect improvements in that area as we make our way through this year. Commodity cost increases and pandemic management have also affected pricing, which are critical factors we are addressing. As for your second question, we have many promising projects underway in the company, including new product introductions. Our R&D spending supports these exciting products. We are also dedicated to enhancing technology and concentrating on zero-emissions vehicles and connected services, along with autonomous vehicle development and advanced driver assistance systems. We have numerous fantastic initiatives that are poised for a strong future.

Can you provide some color on your outlook for both regions and the principal drivers, whether it's line haul in the U.S., or severe service? Please elaborate across North America and Europe, potentially by region and mix?

Certainly. Let's start with the U.S. and Canadian markets. We observe positive housing starts and a robust auto industry expected to improve in 2021, both beneficial to our business. Daily life continues, thus refrigerated carriers and protein haulers perform well. Overall, the truck industry seems to be doing well, and I don’t foresee any substantial changes. Truck utilization is high, and we’re beginning to witness optimistic signs within the oil and gas industry. This overall combination highlights a promising year for us in both the U.S. and Canada, which I believe reflects across Europe as well.

Economic activity in Europe remains strong as well. Recently, we received the German Maut statistics regarding toll miles driven by trucks, which increased more than 4% in December, following a similar rise in November. This data indicates that trucks are actively on the road and our customers are performing successfully. Regionally, I would anticipate Central and Eastern Europe might perform better than the UK overall, but we see positive trends throughout Europe.

With the increase in R&D spending and the number of new products being launched, should we expect SG&A expenses to rise as well, particularly in the second to third quarter in conjunction with product launches and marketing increases?

I don’t expect that will be the case. Reflecting on last year, we reduced our SG&A throughout the year, including in the fourth quarter. We would anticipate the fourth quarter run rate to align with 2021. Our efforts from last year in trimming expenses should persist. We aim to uphold the lowest fixed costs for the benefit of our shareholders.

Could you clarify if there are incremental costs stemming from commodity prices, specifically steel and aluminum? Although your role primarily involves assembly and may mute the effects, are you expecting any supply shortages related to steel or associated supply chain issues?

Our materials and procurement teams are exceptional, and even amidst much discussion around supply shortages, they have skillfully ensured we have all necessary parts to assemble trucks. We do not anticipate any significant constraints in the first quarter. Although tightness exists in the global market, our team has excelled at providing accurate forecasting to our suppliers, allowing them to be successful as well, which ultimately benefits our company.

Can you share how your order share in Q4 compared to your retail share? Was it higher or lower, indicating future market share trends? Also, how do these dynamics look in North America versus Europe?

Reflecting on our order share, I believe it's generally more straightforward to view it in larger segments because of cyclicality. Our order share did increase as a percentage of the industry in 2020, which reflects positively. We gained a slight growth in market share, and we feel confident about continuing this trend into 2021.

Any insights into the electric truck orders in Q4? Are you witnessing momentum building, particularly in Q1?

Indeed, there is momentum building. However, it is essential to note that it comes from a very low initial level. Many customers are expressing interest in experimenting with one or two trucks or even ten. Thus, while the traction is noteworthy, we are still starting from a baseline where government subsidies are critical to making them financially viable. Overall, I anticipate seeing hundreds of units sold in the industry this year, and we expect to capture a reasonable percentage of that.

Regarding the gross margins, throughout the year, significant investments and product initiatives are often made before entering full production. Given the current technological push, do you foresee any elevated costs this year compared to typical expectations? The implied gross margins in the first quarter seem impressive, suggesting a sequential increase. I'm trying to determine if some of these costs are not expected to climb as dramatically year-over-year. Thus, will volume likely leverage higher than usual?

To start, the gross margin effects are significantly influenced by the COVID-19 pandemic rather than our ongoing R&D efforts. I don't view those two as directly related. We are anticipating a notable improvement in the upcoming first quarter gross margins, projecting growth from 12.6% to roughly 13.5%. I see encouraging momentum based on where we stand in the market. The improvement is primarily tied to market recovery rather than R&D.

Beyond R&D, are there any additional costs for products that do not yield significant revenues or profits that you would typically consider? The first quarter's gross margin projection seems impressive, and I'd like to inquire if you see elevated costs above what is generally expected in a cycle, especially given the unique technology rollout timing?

Essentially, while our R&D expenses are on the rise, they are directed towards our product and technology rollout. We consistently maintain our R&D spending as a percentage of sales at the lowest levels in the industry. Our engineering teams excel in collaborating with partners to bring outstanding technology to our customers as cost-effectively as possible, which is part of the narrative surrounding our partnership with Aurora. As for our core facilities in Denton and Chillicothe, they are embracing the current cycle by adding an additional shift when appropriate. I'm eager to emphasize that our priority remains the safety and well-being of our employees. They are successfully achieving increased production while also maintaining safe practices. We don't foresee constraints on our capabilities and are well-positioned to ramp up production to meet market demand.

Are the factories fully operational on second shifts, or are they maintaining skeleton shifts? There are always inflection points in the cycle where leaps in capacity must be struck.

Some of our factories are indeed operating on full second shifts, while others are not as appropriate for such operations. Each factory currently operates in a suitable balance according to its requirements.

Preston, could you specify your expectations surrounding market share for both trucks and hydrogen vehicles? What is your win rate for upcoming deliveries over the next year? You mentioned the industry is projected to sell a couple hundred units. How does the bidding success rate look?

Our success rate has traditionally been high. We have strong relationships with existing customers, delivering exceptional products and low operating costs. This helps our repeat business levels to remain extremely high, and our win rate continues to be favorable as we showcase Kenworth, Peterbilt, and DAF trucks to potential customers who have not tried them before. Typically, they are impressed, which fuels our market share growth.

As a follow-up, the reason for higher market share in heavy-duty trucks compared to medium-duty is based on customers valuing the highest features. In the EV sector, where truck costs are elevated, do you think more value-focused customers may transition to exploring your medium-duty trucks, potentially giving you a sharing boost?

That very well could be the case. Harrie, do you have anything you'd like to add?

Both Kenworth, Peterbilt, and DAF have been leading in customization, providing customers exactly the trucks they desire. With electrification, this becomes even more critical to ensure we configure the vehicle to meet their specific needs, transport tasks, and charging requirements.

Additionally, this integrated experience is crucial because it underpins how much time a customer needs for charging. This is why we are also offering charging stations through PACCAR Parts; we believe this energy management opportunity is beneficial for both customers and PACCAR.

Furthermore, could you provide an update on your telematics system? With a growing data set from more trucks, are there new offerings for customers, or enhancements to increase efficiency?

Telematics is indeed a fascinating topic. We collect a considerable amount of data from our connected trucks in North America and Europe, which we share with customers to help improve their operational efficiency and vehicle performance. Our distribution rate has a large volume of data that benefits customers as our dealers leverage it to enhance the care provided. We also have event-managed services to track vehicle locations and improve service levels, ensuring we optimize our customers' experiences, which ultimately benefits PACCAR as well.

You guided to a solid start to the first quarter regarding trucks. How are you reflecting on seasonality and cadence between the first and second halves of the year? While still early, how do you perceive it?

We currently view this as a starting point for a return to replacement levels. As we trend towards these levels, we can evaluate the market going forward. If we suggest a midpoint of 265,000, both Europe and North America should perform adequately, creating a sustainable market for an extended period. However, it heavily depends on the overall economy and other overarching factors.

Could you elaborate on your approach to building the autonomous platform? Will it be more open-source, allowing digital drivers to interface, or will it be somewhat exclusive? Please share your reasoning behind this approach.

We consider autonomy to be nascent technology that requires significant development over several years, which we've disclosed in our announcements. Aurora, being an outstanding company with skilled individuals, is a natural fit for us to work alongside. The collaboration will involve both teams combining efforts to create a strong Level 4 autonomous vehicle. We will conduct extensive testing to ensure we are providing our customers with safe, efficient vehicles. This process will inevitably take years.

Could you elaborate a bit more about Aurora? Any specifics to help us understand the collaboration better? What is the economic structure like, and will it speed up PACCAR's time to market for Level 4 autonomy?

Aurora is a top-notch company, and our ongoing relationship with them is solid. As we develop capable systems with embedded redundancy in steering and braking, we will rely on their expertise coupled with our distribution network to deliver a dependable, safe product to our customers. Thus, the partnership presents an excellent opportunity for both companies. We expect it will allow us to streamline operations and exhibit the utmost quality for consumers.

Could your collaboration result in specific milestones? Should we anticipate sporadic updates over the next few years, or is there a significant milestone that we should consider?

While we are making considerable progress internally, we'll remain prudent regarding our milestone announcements. Thus, at this time, we prefer not to outline specific targets.

Lastly, regarding gross margin, I see that your first quarter implications mirror similar delivery figures seen in the first quarter of 2018. That year, your gross margin was 14.8%, whereas you're forecasting around 13.5%. Understanding costs of safety measures and pandemic-related inefficiencies, would you attribute any of the decline to COVID-19? Furthermore, do you have a projection indicating lower gross margins moving forward in this cycle compared to previous cycles?

I'd assess that COVID related costs such as enhanced safety, higher absenteeism, and overtime from safety precautions would account for about a 40 basis point drag for us. Nevertheless, we already see margins improving nicely to 13.5%, likely positioned as the highest in the industry.

As we evaluate long-term margin objectives, our focus primarily lies in delivering leading gross margins consistently. Our continuous effort will direct us toward accomplishing that goal, ensuring we remain competitive in the marketplace.

When considering a long-term outlook over the next decade, do you have a vision of what percentage of your production might be Level 4 and 5 autonomous vehicles? Moreover, what percentage do you foresee transitioning from conventional diesel to alternative energy within the same period?

You are asking us to project a decade into the future. Our anticipation is centered on preparing for customer needs regarding product capabilities. If the operational environment permits Level 4 or 5 autonomy, we want to be equipped with the right offerings. Thus, our investments in battery electric, hydrogen fuel cell, and hybrid alternatives to ensure we are ready when market preferences shift while acknowledging that diesel engines will still dominate in the next decade.

As a follow-up, I've heard that the truck market is strong, but the driver market has become tight, particularly in TL. Do you suspect that Class 8 orders may start to moderate as carriers face challenges in filling trucks? If so, will remaining replacement demand suffice to maintain order momentum this year?

We have observed no moderation in order intake, driven by robust demand for DAF, Peterbilt, and Kenworth trucks. We expect this trend to sustain itself as the cycle progresses.

The truck market remains very reasonable. Lead times are competitive, and if customers need trucks in the second quarter, we will ensure they receive them.

Could you discuss your parts distribution strategy? Currently, you mentioned 18 distribution centers, with plans for an additional center. What is the right investment level to support that strategy, and do you anticipate ongoing upward moves to distribution investment? Furthermore, could you comment on the trends in e-commerce retail sales in the second half of 2020, particularly as markets began to recover?

In terms of the parts distribution strategy, our goal is to optimize our service quality, achieving effective and efficient delivery, whether same-day or next-day, enriched by technical support and the expertise of our dealer networks around the globe. The strategy includes physical expansions like the 18 distribution centers and the new Louisville center being developed. In parallel, we are also focused on utilizing technology to enhance service levels. Regarding e-commerce, it has been the fastest-growing segment within PACCAR Parts, experiencing a remarkable 25% growth last year, and Parts remains on track for a year-over-year growth of 13%.

The Parts division had an outstanding year, with record sales and strong performance metrics. We expect these trends to continue moving forward.

I wanted to start with your outlook for the finance subsidiary. Could you share any insights or expectations on sales or earnings for this year?

Our finance operations saw a commendable improvement in profits from the third to fourth quarter. In the fourth quarter, profit hit $64 million, showing great credit quality and a low past-due rate. We anticipate this performance will continue in the forthcoming quarters.

Is there any significant change in the used truck valuation? What are market trends looking like, and might they positively affect your business?

Indeed, used truck valuations have gained positive momentum in both Europe and North America, with the North American market exhibiting improvements of approximately 10-12%. Our used truck groups have sold a significant quantity, resulting in healthy inventory levels.

Our teams have effectively established retail centers in Europe and North America, enhancing our ability to offer customers quality used trucks that benefit their operations.

Absolutely. Our commitment to creating used truck centers plays a significant role in our strategies for the future.

Could you provide an update on your penetration rates for the MX engine and any targets for improvement in 2021?

Over the years, we've seen steady growth in MX engine adoption, which we expect to maintain. Notably, ten years ago, our proprietary engine share was around 30%, now it’s achieved approximately 60%, and this figure continues to trend upward. Variances arise based on market dynamics, but we remain optimistic about consistent growth in MX engines.

Could you provide more details regarding the partnership with Aurora? Are you investing in Aurora, and how do the economics look for PACCAR from this collaboration? Will it influence your pricing strategy?

Yes, the teams have been engaging closely, and we have a shared vision of how the business model will evolve. We will be distributing trucks through our dealer network, with a focus on establishing reliable and efficient operations. Software updates will be pivotal for maintaining our trucks, ensuring both parties benefit from this alliance, leading to mutually productive outcomes. We are cognizant of the level of interest surrounding EVs, and while we have strategies in place based on current trends, we remain focused on delivering significant value as the industry shifts toward these technologies.

We appreciate everyone joining the call today and thank you for your participation.