Paccar Inc (PCAR) — Q3 2022 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 and the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Good morning. Harrie Schippers, Michael Barkley and I will update you on our third quarter financial results and other business highlights. I truly appreciate all of PACCAR's outstanding employees who delivered record third quarter results in the highest quality trucks and transportation solutions to our customers around the world. PACCAR's third quarter net income more than doubled to $769 million and revenues increased 37% to $7.06 billion. PACCAR parts pre-tax profits were a record $374 million, 32% higher than the same period last year. Parts third quarter revenues increased to a record $1.47 billion. Truck parts and other gross margins expanded to 14.9% in the third quarter compared to 14.4% in the second quarter. Strong business operating conditions and PACCAR's increased mix of premium new truck models and excellent aftermarket parts business contributed to the higher gross margins. PACCAR financials had a year-over-year pre-tax income increase of 22% to $146 million reflecting a high-quality portfolio and robust used truck results. We estimate this year's U.S. and Canadian Class 8 market to be in a range of 265,000 to 285,000 trucks and next year to be in a range of 260,000 to 300,000. Overall, the strong truck market is expected to continue as a result of solid freight volumes, high customer truck utilization, and the increased fleet age. Customers are replacing their trucks with the new Peterbilt and Kenworth models that enhance their operational efficiencies, achieve industry-leading fuel economy, and attract and retain the best drivers. Kenworth and Peterbilt now have a backlog that extends into the second quarter of 2023. In Europe, this year's truck industry registrations in the above 16-tonne segment are estimated to be in a range of 275,000 to 295,000 vehicles. Like in the U.S. freight demand and customer utilization remains high. The 2023 market is expected to be in the range of 260,000 to 300,000 trucks. DAF's year-to-date market share has increased to 17.4% compared to 15.8% a year ago. This growth reflects the exceptional performance of DAF's industry-leading and award-winning new XF and XG trucks that began production at the end of last year. DAF recently introduced a new XD distribution and vocational truck product line. The new DAF XD models earned the 2023 International Truck of the Year award at this year's Truck Show in Germany. The new XD lineup begins production this quarter. The complete new range of DAF trucks offers customers in Europe the only trucks that utilize the new masses and dimensions regulations, and are differentiated from the competition due to their more aerodynamic design, superior safety features and spaciousness for the driver. These trucks provide our customers with the most fuel-efficient, driver-friendly, premium trucks in the European market. The South American above 16-tonne market is projected to be in a range of 125,000 to 135,000 trucks this year and in a similar range next year. In Brazil, DAF's above 16-tonne market share through September was a record 6.9% compared to 5.6% last year. The outstanding PACCAR team and dealers around the world are performing well and delivering excellence to our customers. Thank you. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights.

Thanks, Preston. PACCAR delivered 44,400 trucks during the third quarter. We estimate fourth quarter deliveries to increase to a range of 46,000 to 50,000 trucks. This reflects higher build dates, more production days in the fourth quarter, and a gradually improving supply base performance. Truck parts and other gross margins increased to 14.9% in the third quarter. We anticipate fourth quarter gross margins to be in the 15% to 15.5% range, reflecting higher truck deliveries and continued strong performance of PACCAR Parts. PACCAR Parts had an outstanding third quarter with parts gross margins of 30.4%. Customers' high truck utilization and increased average fleet age contributed to PACCAR Parts record results. PACCAR Parts opened a new 260,000 square foot parts distribution center in Louisville, Kentucky in the third quarter to further enhance parts availability for customers and dealers. PACCAR Parts' outstanding performance is driven by its networks of 18 distribution centers, 2,300 dealer locations, 250 independent TRP stores, as well as technologies like managed dealer inventory and innovative e-commerce systems. We currently expect fourth quarter parts sales to be 8% to 10% higher than the same period last year. PACCAR Financial Services benefited in the third quarter from high used truck prices and excellent portfolio quality. Pre-tax income was $146 million, 32% higher than last year. The demand continues to be strong for PACCAR pre-owned vehicles as customers appreciate and pay a premium for their superior reliability and durability. PACCAR Financial has been increasing its network of retail used truck centers and opened a new location in Madrid, Spain in the third quarter. We now have 13 centers to sell used trucks at retail prices, which enhances profits. PACCAR 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 and will contribute to excellent financial returns for many years. PACCAR's return on invested capital further improved to an industry-leading 23% in the first nine months of this year. Capital expenditures are projected to be $475 million to $500 million in 2022 and $525 million to $575 million next year. Research and development expenses are estimated to be $330 million to $340 million this year, and $350 million to $400 million next year. PACCAR's exciting new line of trucks and transportation solutions, efficient R&D and capital investments, strong aftermarket parts and financial services business, and flexible operating structure position the company for a bright future. Thank you. We will be pleased to answer your questions.

The first question is about stick-your-price in the third quarter. Can you provide insight into what it looked like on the truck side and how to approach that going into the fourth quarter? What are your thoughts on potential developments in 2023, especially considering the strong exit rate of margins? How much additional upside do you think you could achieve heading into 2023?

Yes, sure. I think that what you saw in the third quarter is really strong performance from all the divisions of PACCAR. There was price realization for us and cost-reduction as well, but we had a net positive in that, and we would expect that to continue in the fourth quarter. And as we've shared with you, we're thinking that truck part and other gross margins will increase to the 15% to 15.5% range and at a really high level of performance. And we look out in 2023 and think it will be a really good year.

Great. And just one more question for you. I was hoping you'd give a little more color on your Europe guide just, what you're baking in from a macro perspective, from a freight demand perspective. Just like what's being accounted for there?

Yes. Harrie, do you want to go and then I’ll follow-up with anything?

Yes. We see demands for trucks and transportation continue to be strong in Europe. One of the statistics that we like to follow is the amount of toll paid in Germany, which is at a similar level to last year. So freight and transportation continues at strong levels. We see that customers love their new trucks, strong order intake, and the first quarter is basically full with orders, and we’re now starting to fill up the second quarter in Europe. So the outlook for Europe is really good.

Hey, I was hoping we could talk about the parts business. It's obviously been super strong, but I was just curious if you could provide some high-level thoughts on how you think the parts business might hold up if we do see a more pronounced slowing of the freight market or the macro in the U.S. and Europe next year. What I'm really trying to understand is, can we use the industrial recession as a proxy to see how parts kind of did in that scenario, with fleets seeming overaged due to more proprietary content on the trucks? So I'm just kind of curious if you could directionally talk about any puts and takes to parts into next year?

One of the things that's wonderful about the team here is that they've done a great job at developing a very robust parts system that serves our customers well. And I think that's one of the key elements explaining the performance of the business is having the right systems and capabilities to provide customers with the parts they need. We've expanded our footprints and distribution centers around the world that enable us to be an even better partner with our dealers and our customers, so that helps our performance and insulates us a little bit from cyclicality, giving us a strong recurring revenue business. We've seen growth in our engine business around the world over the several past years, which also gives us a strong future outlook for the parts business. And I think that with the elevated fleet age, we're going to continue to see strong truck performance and parts performance for the next while.

Okay. Super helpful. And if I could just have one quick follow-up. You mentioned the new model mix in Europe. Do you have a percentage of what that was out of European builds in the quarter and where you expect it to go into 4Q?

I believe we are approaching 70% of the new model mix in Europe, and I expect that will continue into the fourth quarter. I also anticipate further increases next year. I can tell you that during the IAA show in September in Hanover, Germany, the trucks were impressive, and customers are truly experiencing the advantages of fuel efficiency and driver performance, which is leading to a strong demand for those new products.

Hi, good morning. Thank you so much for taking my questions.

Okay.

My first question is about the expected growth in North America truck sales next year. Could you explain the macro growth or GDP growth assumptions that are factored into your guidance for truck sales?

Yes, we don't view it that way, Tami. Instead, we focus on the truck industry and the factors influencing volume trends. Freight demand remains at high levels, truck utilization is strong, and the average age of trucks in operation has been rising for the last three years. Additionally, there are ongoing supply constraints that limit production capabilities. When you consider these elements alongside our impressive new products, which offer 7% to 10% improved fuel efficiency for our customers, translating to significant savings per truck annually, it indicates a very positive market outlook for PACCAR next year.

Got it. So it seems like you're saying, even if let's say there's a broader macro recession, the factors you mentioned specific to the truck industry makes you comfortable in guiding to a growth number for next year?

Well, as we said, we think that it'll be a strong truck market next year, as we showed with our industry expectations of 260,000 to 300,000 in both Europe and North America. So that's pretty strong markets.

Got it. That's super helpful. Thank you. And then from a gross margin perspective with commodity prices coming down and you have pretty decent visibility to truck volumes next year, do you expect gross margin rate improvement to continue next year as well?

Well, we talk about the fourth quarter in this call, and we expect the fourth quarter to increase in the 15% to 15.5% range.

Thanks. Good morning. You gave us the growth and deliveries in Q4 and the steady retail for 2023, and you mentioned Peterbilt and Kenworth backlog are extending through the second quarter of next year. I'm just curious how much of a question mark would you say is the second half of 2023 in your mind at this point? Or are you anticipating still a pretty solid trajectory of orders really for the next few months that would still set up your second half for an extended period of steady production?

Well, thanks for the question. The way we look at it is that the first quarter is substantially full as Harrie shared. We're taking strong order intake into the second quarter and into the second half as well. So we see nothing that's slowing us down in the year. Obviously, the further it gets out, the less clarity there is, but there's a great backlog of orders, and it's growing.

Yes. But right now, I would say that it's basically the supply base and the availability of components to build trucks that determine the pace of growth in the fourth quarter and that's probably going to continue as we enter into next year as well. And then we'll see how long that takes.

Okay. And then maybe if you could just give us some color on the order activity by customer type. How much of the strength in trucks do you think is large fleets that are trying to take their fleet age down versus more broad strength? Are you seeing smaller and mid-sized fleets strong in the ordering as well as the large ones? And how do you expect that to evolve in kind of Q4 and in 2023? I'm guessing that the smaller fleets are maybe a bit more sensitive to the freight market conditions, but I'm curious what you're seeing sort of in the underlying buildup of your book.

Yes. I believe there is a strong demand for trucks. The vocational markets continue to perform well, making up 30% of the build. Larger companies are also placing orders for trucks this year. This reflects the fundamentals of high-quality trucks and an undersupplied market over the past few years, which suggests a positive outlook for the future.

Thanks. Good morning. My first question continues with the topic of component availability limiting build rates and overall production. I assume this has likely led to some prioritization in what you choose to produce. If supply conditions ease next year, could there be a shift in the mix of vehicles you produce that might not be as economically beneficial? Essentially, has this year resulted in a stronger mix benefit that could diminish next year if we start to see an improvement in the supply chain?

Maybe Harrie, you want to swing at that?

Yes. I don't see that we've prioritized certain customers over others. We aim to serve all our customers by providing them with the trucks they need. As Preston mentioned, we've faced capacity constraints for the past three years. Most customers I speak with want more trucks and want them delivered faster. We strive to meet everyone's needs as evenly as possible.

Yes. I think that would be too detailed. I would agree with Harrie just said; I think it's a little bit too detailed to try to think about it in terms of sectors and tailwinds and headwinds of what we're building. We're building all the trucks we can for our customers and we're going to keep doing that.

Got it. Okay. Harrie, can you share what you've observed regarding energy-related costs and any relief to suppliers? How significantly has this affected DAF and its operations in Europe?

Well, we do see a Europe that energy costs have gone up and like I think somebody mentioned on the call before, steel and aluminum prices have come down a little bit. So there's a balance there that with higher energy costs and higher labor costs, overall cost levels remain elevated. That's also why truck prices have gone up and continue to go up. But I would say that in this environment with the new trucks that we just launched, that customers love, gives us a really good starting point to sell more trucks and grow market share as we've done. So DAF team is doing really well in the market we're currently in and taking full benefit of the new truck models that we launched.

Okay. We will see when the Q comes out, but regarding the relationship between price and variable costs, did the benefit increase from where it was in the second quarter, not just in Europe but overall for the company?

I would say that prices continued to increase to the third quarter compared to the second quarter. And so did the cost. The price versus cost differential continued to be favorable for the company. That's why gross margins went up.

Hi, good morning or good afternoon depending on your location. It was a solid quarter. I have two questions. First, regarding the deliveries, they came in at the lower end of your forecast for the third quarter, but you anticipate an improvement in the fourth quarter to between 46,000 and 50,000. What gives you confidence in increasing your delivery forecast, and why was the third quarter on the low side? Additionally, where do you see potential challenges as we approach the year's end? My second question pertains to the incremental margins, which were impressively strong, around the low 20s, surpassing the average and performing better than what PACCAR usually achieves. What is your outlook on the sustainability of this increase, especially considering the strength in parts and the anticipated impact of new product launches? Thank you.

We guided deliveries in the range of 44,000 to 48,000, and we achieved 44,400. Looking at the third quarter, there were fewer trucks built in Europe, approximately 4,000 to 4,500 fewer. We are still facing limitations on production due to supply chain constraints, but we expect gradual improvement, which is why we are optimistic about the fourth quarter, particularly with no summer shutdown and more build days. Our backlog remains consistent between the second and third quarters, and we anticipate a slight improvement in the fourth quarter. Regarding margins, you are correct; we have a strong parts performance team. We expect gross margins to rise to the 15% to 15.5% range in the fourth quarter, driven by our impressive new products. This performance should help maintain high overall results.

Great. Thank you, guys. Most of my questions have been answered, but I guess maybe a longer-term bigger picture question. You've done a great job growing the parts business including the gross margins kind of through the issues we've had over the last two years or three years, but your truck gross margins are still circa 300 basis points, I think below pre-COVID levels. And I'm just curious how you're thinking about that going forward. Is there anything that would preclude us from getting back to those kind of 2018, 2019 levels of gross margin? And if not, what would be sort of the key levers that need to be pulled to get back there?

Well, Harrie, you want to?

No, well, our margins continue to improve, and the new products we launch in North America and Europe have provided positive support for margin growth. Currently, our margins are the best in the industry, and we aim to maintain that status. Parts play a crucial role in this, and the new trucks with strong margins are also a key factor in achieving our goals.

And I would add, I agree with everything Harrie said, and I would add to that, that our operations teams have done an incredible job around the world of making sure we get as many trucks out as we can, and sometimes that's done less efficiently. So if that smooths out, then that will be an upside as well.

Okay. Yes, and Harrie, we always want more, so that was the spirit of the question.

We wish we had.

I’m curious about your financial services results, which were quite strong despite lower revenue. Was this mainly due to the performance of used truck sales? Are you starting to see those prices normalize, or is that not happening yet?

It's nice to see how the finance company continues to perform really, really strong. Run at a $46 million in the third quarter, second best quarter ever. So very proud of the team achieving and delivering those results. Business continues to go well. Portfolio quality is excellent. Past dues are like 0.3% kind of range are really, really low. The revenues reflect the fact that our used truck inventories are at low levels, so there's less flow, less sales of used trucks. But the used trucks that we sell; we now have 13 used truck centers, a growing portion of it that provides a nice tailwind for the finance company. And I would expect the finance company to continue to do well as we enter the fourth quarter and going into next year.

Hi, thank you. For 2023, the order books, can you let us know how far they're open, and is that open for national fleets? Is that open for all size customers? Just trying to get a sense of how far out the books are open in North America and in Europe. Thank you.

Yes. The order books are open, Dave, it's as we said, substantially full in Q1 filling in well in the second quarter and even through this into the second half as customers look at their full-year delivery plans and allocate their capital for next year. So yes, going well by all segments and really kind of as we would expect it for a strong year.

And the pricing that's in the backlog, is that notably higher than what was shipping in the third quarter? Just trying to get a sense of sequential pricing from what's already in the book.

Well, we talked about the margins improvement into the fourth quarter, 14.9% gross from 15% to 15.5%, so that kind of implies that we have confidence in our price versus cost model, and we think we'll have that next year too.

And I know you don't divulge truck margins by geography, but when you see what's in the book, you know what the new trucks are doing on your economics, when we think of any margin improvement next year, and at the moment you're not assuming radically different growth rates and even EU versus U.S., Canada. How should we think about the margin improvement geographically? I'm trying to get a sense a bit obviously just cyclically thinking about next year, but structurally, is there something about some geographies it might even be with another geographies just how to think about the margin improvement geographically knowing what the new trucks are doing?

You know what? I think is that the new trucks around the world for PACCAR are doing so well in terms of their operating cost performance to our customers. That is helpful to us in terms of margin. The percent of the product that we changed in Europe is a higher percent than we changed in North America. And so that's really helpful to us in Europe. And I think that our team in South America is doing a great job. In Australia, they're doing a great job and in Mexico they're doing a great job. So I kind of look at it and think that it's happening everywhere for us.

Terrific. One last quick one if you don't mind. The used gain on sale, the used trucks in the FinCo, for the third quarter, I was curious, I mean obviously shipments have gotten a little better, but overall the unit delivery wasn't great and obviously we can kind of equate when you're selling more new, it creates more used opportunities regardless of the used truck price. Was the gain on sale in the third quarter similar to the first two quarters that roughly $35 million run rate?

No, I would say it was more or less similar, David.

Hey, good morning. I just had one question. So following up on Steve's and Raso's question, with regard to used prices and such I mean so I guess what happens on the other side of this when used prices do moderate to maybe a more normal level? I mean do you tend to put the trucks back through wholesale or I guess how are you thinking about that?

Well, I think what we think is that if there is going to be a market that is constrained like it has been and the truck ages up, and freight volumes are up, then that could be some time before we experience that. We know the markets are cyclical. We have a great team in our financial services business. They do a really good job of adjusting to where the market is and maximizing the return on the DAF, Kenworth and Peterbilt products that really get a premium in the marketplace. So regardless of the part of the cycle we operate in, we tend to get that premium. We continue to expand our capability in that area. We've opened up a new used truck center in Madrid. We continue to take advantage of the opportunities of selling more retail, and that's helped as a business in the long term. Is there anything you'd add, Harrie?

No, I think that summarizes it well.

Okay.

Yes, thanks guys. Thanks for taking my questions.

Sure.

So maybe just starting with a little bit more on supply chain. So totally understand that there's still a lot of constraints here, but have you guys observed any major signs of improvement? If we just think about like how supply chain is going relative to last quarter and where we were at this time last year?

I think that compared to year-over-year, it's definitely better. I think that sequentially in the quarters, we see different issues that are kind of adjusting. We have really good relationships with our suppliers and we continue to work with them to kind of solve out the issues. I'd say that it has shifted a little bit from being purely semiconductors to maybe being other labor kinds of issues and other material kinds of issues, but they're doing a really good job of helping us get the parts we need. Hence, we see that the production should grow in the fourth quarter.

Okay. That's really helpful. And you guys have increased your CapEx and R&D in 2023 relative to 2022 as per the new guidance today. I guess what are the big drivers there? I think R&D most people understand where the investment lies, but with respect to CapEx, what is causing that year-on-year step-up?

Well, we have a lot of really neat projects that we're working on. We have some great clean diesel projects. We have some great zero-emissions projects. We continue to make investments into our autonomous vehicle platform, our connected services platforms around the world, and enhancing our production capacity so we can build more trucks and engines and all of that is kind of what's driving those numbers. So it's fun to see those numbers moving just because they pretend a great future for us.

So I guess my first question or two, one is on Europe, and not so much on the demand side, but just on supply where there's a lot of unease around energy and shortages and whether that will cause disruptions in the supply chain. And so I guess from your internal point of view, is that something you worry about? Do you see the next three months to six months being risky? You don't know if a supplier's going to have an issue and shut down or is that something you see as more stable than perhaps I do?

Well, I think that everybody can read the same headlines. But I would tell you that from inside of our business, we work really closely with our suppliers so that we can understand anything they're dealing with. And so far, it's been pretty good. We look into next year, and everybody is paying attention to it. We'll continue to work as partners to try to make sure we get the parts we need. I think we find ourselves in a pretty good position as we sit today.

Okay. Thank you. And the other one and I apologize if you answered this in reference to Steve. But when you look at your aftermarket margin, obviously, there's been a lot of effort over a lot of years, and revenues and margin are both increasing. At this point, are you seeing disproportional contribution from proprietary parts as you kind of get that mix-up? Or is there still runway across the aftermarket business on revenue and margin? Thank you. I'll stop there.

Sure. I don't think it's disproportional. I think a lot of what's going on is the parts team and our dealers are doing a fantastic job of this business growth and creating recurring revenue by serving the customers well and by helping them become more efficient. And I think that's a lot of systems, a lot of e-commerce, a lot of relationship building, and I expect that will continue.

Preston, wondering if you could talk about as you're having conversations with your customers that are interested in making longer-term plans for electrifying their fleets. How is their approach to procurement different at all in terms of the number of truck OEMs that are looking to use? Or any other differences in the process and the impact that you might have on your opportunity to get potentially better share in medium duty market in an EV environment versus diesel?

Yes. I think that they use the same kind of analytics they do to make any kind of a buying decision as they're looking for an operating cost advantage, a total cost of ownership equation to work for them. It adds elements now with EVs because they think about charging and infrastructure and return and mileage and route and utilization. So we partner with them at Peterbilt, Kenworth, DAF and parts all partner with them to try to make sure they think about all the input costs that are going into it. And then as well, the incentives that are available to it and use all that together to come up with kind of like when is it time to start into the market, try five or 10 or 20. And then when is the time going to be to move even more quickly. And I think that that's kind of a very active dialogue that depends upon their used case.

Okay. And is that conversation any different in terms of number of participants versus diesel purchases? Or are they concentrating those conversations with fewer suppliers than they were in a diesel environment given the complexity?

No, I think that they have a high trust in PACCAR and our high quality and excellent performance overall. We have that is kind of the promise we make to them that we want to deliver on, and we'll do that through EVs as well. So I think that makes that we have a seat at the table to work with them and provide a successful solution for them.

Okay. Super. And just to shift gears. Harrie, I apologize if I missed this. Can you discuss the backlog coverage in Europe and the current lead times? Given that we hold a market share in the mid-17s as regulations are implemented, what is the timeframe and opportunity for market share to potentially increase once the new regulations you mentioned in your prepared remarks are put in place?

The new mass and dimension regulations we've discussed enable the design of more aerodynamic and fuel-efficient trucks when specific criteria are met. DAF is fully capitalizing on this new legislation, and as far as we know, DAF is currently the only truck manufacturer in Europe offering these trucks on the market. This places us in a very strong position to increase both margins and market share. As you've mentioned, achieving a 17.4% market share year-to-date is a record for DAF. With the introduction of the new trucks, we are well-positioned to further expand that market share in the upcoming years. The first quarter is currently at full capacity based on the suppliers' output, and we are effectively filling the second quarter at this time. This creates a favorable balance and establishes a solid backlog as we approach 2023.

Hey, thanks for taking my questions. I know this got asked a little earlier. But just how should investors think about the gap you're seeing between spot freight rates and contract rates right now? How does that dynamic impact your customers' investing decisions going forward? Is that data point, that spread you're seeing between the contract and spot rates, is that relevant in terms of how they think about their investment profile and purchasing decisions profile over the next few months?

I believe that since spot rates represent a small portion of the market, about 15% to 20%, and with strong contract rates prevailing along with high tonnage levels, there remains a significant amount of good business available. Additionally, there is still a high demand for loads to be carried, which bodes well for their businesses. I expect that their positive business situation will also benefit us.

Makes sense. And if I look back like nine out of the last 12 years, your gross margins are up Q1 over Q4. So with the 15% to 15.5% guide in Q4, maybe help us understand why wouldn't gross margin increase from that level in the first quarter of next year. Anything we should think about there?

I don't think we said that they shouldn't. I think we said that we had good gross margins this quarter. We expect them to be very good next quarter and fourth quarter, and that we think 2023 will be a really good year.

That's helpful. And just if I could squeeze one more in just on the R&D. I mean you're finishing this year, I think, on an annual basis, up 2% to 5%. Your truck sales are up nearly 30%. You guys did guide for next year. It seems like there's a little bit of a catch-up and R&D spending is going to be up double digits. But how should we think about like going forward into 2024? Should we be looking at R&D as a percent of sales as a metric? Any way to kind of think about some of the investments that you guys are making and how to think about that over the next few years, given your backlog and how you guys are thinking about the truck cycle going forward?

Sure. I can share with you how we think about it. We think of spending on R&D as we have good projects that bring value to our customers. We're such a strong financially-positioned company that we spend the money we want to on the products that are going to bring value to our customers, and that's how we define our R&D spending.

Thank you very much. Well congratulations everybody.

Thank you.

Hey, a lot of my questions have been answered, but I wanted to kind of follow-up. I mean things are changing globally, and currency has been one of those things that has changed pretty dramatically. You'd never know it looking at your results. And I was just kind of curious if you could talk a little bit about how currency is impacting, whether it's the revenues or the profits being reported back. And kind of give us an idea of what kind of impact to think about when we're talking about the truck business, whether we're talking about the Parts business, Financial Services business, as we think about moving toward 2023.

Jeff, this is Michael. Revenues for Q3 experienced a decrease of $325 million due to currency fluctuations, primarily the euro, with some offset from the strengthening Brazilian real. For the entire year, the reduction amounted to $740 million. Consequently, this led to an impact on profit, with net profit being approximately $20 million for Q3 and $50 million year-to-date.

Okay. And then just one follow-up. You talked about some of the new investment platforms. And I was just wondering because every time I see one of your trucks out there, there seems to be an Aurora system attached to it these days in terms of just showing what's on the horizon. Can you talk a little bit about your progress there? And you had discussed maybe building some platforms where PACCAR could be a beneficiary of some of the information and data flows on some of these new vehicles for customers that are looking to electrify or go autonomous in a couple of years. Just kind of an update on some of these new platforms.

Sure. We're really pleased with the progress we're making with our partnerships with Aurora and others, and it's going really well. They're making excellent progress. Together, we are. We are developing as you mentioned, Jeff, we're making this autonomous vehicle platform, which creates a system of redundancy, which makes operating the vehicle feasible. It integrates it into the truck through software as well. And our expertise and their expertise combined is creating, I think, a really neat product for the future.

Thank you. Maybe I'll ask you guys on the cadence of new truck deliveries going forward, given how anomalous this environment has been and how it's pushed off the production cycle. As supply chain disruptions continue to ease and you're able to further optimize your manufacturing processes, could we see a more linear quarterly cadence than historically with deliveries or maybe even like steady, modest quarter-over-quarter increases in deliveries in the next few quarters?

Well, I think that as the supply base improves, it does make it smoother, as you're right to say that. I think we got to see it get totally smooth before we can take full advantage of that. I think that prediction of when that will be, we don't know how to make that. We just keep building all the trucks we can. And I would expect that, as we said, we expect deliveries to increase in the fourth quarter. And beyond that, we'll watch how the opportunities are. As we think that the demand is strong, we do think that next year still feels like at least the beginning to be supply constrained.

Yes, understood. I have one final question. If you speak with off-highway equipment manufacturers, they anticipate that infrastructure-related projects will begin to impact their backlog late this year. Looking back historically, can you identify if your business is linked to either residential or non-residential construction activity in the U.S.? While residential activity is clearly slowing, there is an expectation that infrastructure projects will begin to emerge next year.

And the U.S. markets, Kenworth and Peterbilt are the leaders in the vocational markets for trucks that support those kinds of projects and expect that will continue next year, and we do see strength in those markets. So we would expect that to be good news and a tailwind for 2023.

Hey thanks. We saw the really strong industry order numbers for September. Any color on October? Are you seeing anything directionally similar to September?

Yes. We're seeing continued strengthening even so we're seeing that September was strong, and we see October being strong as well.

Okay. On the currency question that Jeff asked, is fourth quarter similar with Q3 in terms of that net $20 million headwind? Or could it be a lot bigger than that?

Michael?

It will be similar to that. The euro had already started to drop in the fourth quarter of last year, so I would expect it to be about a similar number.

It will depend on what the exchange rates will be in two months. Yes.

And then just last thing with Nikola acquiring Romeo, does that have any impact on battery suppliers for you? How do you think about that?

Yes. We have a really good supply base structure with the battery producers in the world and have long-term contracts in place that give us adequate supply.

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