Paccar Inc (PCAR) — Q1 2023 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.

Hi, good morning. Harrie Schippers, Michael Barkley, Ken Hastings and I will update you on our first quarter results and our business highlights. PACCAR achieved record revenues and excellent net income in the first quarter due to continued strong global demand for trucks, aftermarket parts and financial services. PACCAR's revenues increased 31% to $8.47 billion and net income was $734 million, including an after-tax non-recurring charge of $446 million. The charge released to civil claims in Europe was previously reported in an 8-K last week and is the total estimated cost. Excluding the non-recurring charge, first quarter adjusted net income was $1.180 million, up from $600 million in the first quarter of last year. In the first quarter, Truck, Parts and Other gross margins expanded to a record 19.3%, compared to 15.9% in the fourth quarter of last year. PACCAR is benefiting from investments in new truck models, global growth and PACCAR Parts continued expansion. PACCAR Parts first quarter revenues increased by 17% to a record $1.62 billion. Parts pretax profits were a record $439 million or 29% higher than the same period last year. PACCAR Financial had an excellent quarter, achieving pretax income of $149 million, which is similar to the same quarter of last year. I appreciate PACCAR's outstanding employees, who delivered these excellent financial results and the highest quality trucks and transportation solutions in the industry. Their commitment to the company and to our customers is foundational to our success. Looking at the U.S. economy, GDP is estimated to grow modestly. Freight tonnage continues to be good, and customers are updating their vehicles with new, high-performing Peterbilt and Kenworth trucks. This continues to be a favorable operating environment, and we're increasing our forecast for the U.S. and Canadian Class 8 market to 280,000 to 320,000 trucks. European economies are also experiencing modest growth. DAF's excellent new trucks are providing customers with the latest technology and best operating efficiencies. We have raised our 2023 European above 16 tonne market projection to a range of 280,000 to 320,000 trucks. The South American above 16 tonne truck market is expected to be in the range of 115,000 to 125,000 vehicles this year. In Brazil, DAF achieved a record 8.6% share in the first quarter. DAF Brazil is celebrating its 10th year of operations. DAF trucks are highly desired by customers in South America, and the region is an important part of PACCAR's growth and success. PACCAR's industry-leading truck lineup, highly efficient operations, best-in-class parts and financial services companies and the continued development of advanced technologies, position the company well for an excellent year. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Thanks, Preston. PACCAR delivered 51,000 trucks during the first quarter. The supply chain is improving, but there are some periodic supplier shortages affecting production. In the second quarter of 2023, deliveries are forecast to increase to a range of 51,000 to 54,000 trucks. Truck parts and other gross margins increased to 19.3% in the first quarter. We anticipate second quarter gross margins to be strong and in the range of 18% to 19%. PACCAR Parts had an outstanding first quarter, with Parts gross margins expanding to a record 32.2%. PACCAR Parts business model is based on the application of technology to provide our customers excellent access to high-quality parts. PACCAR Parts is expanding the use of technologies such as e-commerce and leveraging data from PACCAR's connected trucks. PACCAR Parts expanding network of 18 parts distribution centers serves more than 2,000 dealer locations and 250 independent ERP stores, which provides best-in-class uptime for our customers. PACCAR Parts is a high-growth and high-margin recurring revenue business. We estimate part sales to grow by 10% to 12% in the second quarter of this year, compared to the same quarter last year. PACCAR Financial Services benefited in the first quarter from a larger portfolio, excellent portfolio quality and good used truck business. Pretax income improved to $149 million. PACCAR Financial's 13 used truck facilities worldwide contribute to higher price realization, compared to wholesale channels. Used truck prices have moderated but remain historically strong. With its larger portfolio and superb credit quality, PACCAR Financial is having another very good year. PACCAR has invested over $4 billion in new and expanded facilities, innovative products and new technologies during the past five years. These investments have created the newest and most impressive lineup of trucks in the industry, as well as highly efficient factories and distribution centers. PACCAR is continuing its investments in clean diesel, zero emissions, autonomy and connected vehicle programs. Capital expenditures are projected to be $600 million to $650 million and research and development expenses are estimated to be $380 million to $420 million this year. Customer demand is strong for PACCAR's industry-leading trucks and transportation solutions in all markets. We expect 2023 to be an excellent year. Thank you.

So as we complete our comments, I'd like to thank our Senior Vice President and Controller, Michael Barkley, who'll be retiring at the beginning of June after a wonderful 32-year career. Michael has participated in 66 earnings calls over the past 16 years. He's a great Controller. He's an excellent business partner, and he's a true friend. Michael, you are appreciated and you'll be missed. Joining us today and for future calls is Brice Poplawski, our new Vice President and Controller. Brice has been with PACCAR for 25 years. Welcome, Brice. So now we're pleased to answer your questions.

Hi, good morning. Thanks so much for taking my questions. Congrats on the great results. That gross margin number was nothing less than spectacular. So in hindsight, what was the biggest source of the upside versus your original guidance of 16% to 17%, and is the 18% to 19% that you're expecting for 2Q sort of a good run rate for the rest of the year?

Well, thanks for the question. Good morning. What we saw in the first quarter was we saw very good operating efficiencies and cost increases were less than expected. Those are the two contributors to the margin improvement over what we had guided. And then as Harrie shared, 18% to 19% is what we expect in the second quarter. And we think we have a really good year.

Perfect. If I can ask one more question. Sure. Sure, Harrie.

I think the Parts growth of 17% exceeded our projections a quarter ago. And Parts margins were better, too, and that contributes to the 19.3% as well, of course.

Got it. Thank you so much. And if I can ask one more, I think some industry data showed some order slowdown, but my understanding is that PACCAR numbers are not really in that data. And so can you, from your perspective, can you share with us what you're seeing in terms of order activity? How deep into the third or fourth quarter, your order books have opened? Any comments on order trends you're seeing?

Sure, Tami, glad to. What we've seen is good order intake, continued good order intake and we're substantially full for the year. So third quarter is full, few slots left in the fourth quarter but substantially full.

Great. Thank you so much.

Sure. You bet.

Great, good morning. Thanks for the question. Just wanted to ask first from a financing perspective. A lot of concern in the market with regards to customers not being able to get financing from smaller to midsized banks. But in terms of what you see on the ground, first of all, has that impacted your kind of order intake or kind of customer sentiment? And second of all, has that created an incremental opportunity for PFS to maybe get some more financing business as a result of smaller banks maybe not being able to finance the same number of customers that they're used to?

Yes. I'm not aware of any customers that are not going to get the financing that they need. It's good to have PACCAR Financial, who was able to finance our customers in good times and bad times. PACCAR Financial had a great quarter. We're financing about 25% of the trucks that we sell in some years, that has even grown to 30%. So we're there for any customers that need us.

Got it. And thanks, Harrie. And I'll just ask kind of a longer-term question around pricing sustainability. We're obviously coming off in a couple of years here, a really strong pricing. I'm kind of assuming given the margin performance in the quarter that pricing was also pretty strong as well. Kind of as we think about how the back half of the year develops going into next year, pairing that off with a potential kind of prebuy dynamics from ‘25, ‘26. Can you just give us any flavor or slight color on how you are thinking about pricing, kind of, developing for the rest of the year into next year? If there's kind of scope for it to remain or resilient in the event that ‘24 builds are actually down year-over-year?

Well, I think that we feel good about 2023, as we said. We think we have an excellent year that we're working on right now. We see continued strong demand for the products. I mean, I think we've reintroduced or introduced new products in North America and Europe and in South America in the last couple of years, and those products are providing great value to the customers. That value to the customers is why they would like to have them. So we're helping their operations, which is good. And as Harrie mentioned, the Parts business continues to perform well. We're utilizing technology in new ways to help improve the value to our customers through the Parts business. They're doing a great job in those things. They contribute to good performance for the company.

Great, very clear. Thanks for the time.

You bet.

Hi. Good morning, guys. So my first question is compared to the last cycle. Can you just talk about how much structural uplift in Parts margins do you think you've seen?

Sure. I think that I would highlight how the Parts team has done an excellent job of creating value for customers. It's not just about providing parts; it's about having the right parts in the right locations. Our 18 PDCs located around the world enable us to have parts available for our customers the next day or even the same day in many cases. They are also utilizing tools like managed dealer inventory to collaborate closely with dealers, ensuring we understand their parts needs, which significantly supports the business. Additionally, the connected vehicle status is also benefiting us. All these factors contribute positively to the Parts business. Furthermore, the powertrain and engine businesses are good contributors to Parts growth. Looking ahead, we believe that the electric vehicle sector will also positively impact our business and parts. Overall, we see a bright future ahead.

That's helpful. And then second question, how should we think about PFS profitability for the balance of the year? And do you think the environment is strong enough for you to maintain the current run rate of loss provisions?

Yes. Like we said, PACCAR Financial is having an excellent year. Used truck gains are a little less than what they were a quarter ago or a year ago. But the portfolio is larger with the growing number of trucks in the portfolio and the higher value per truck in the portfolio. In addition, we see a strong portfolio performance with continued low credit losses, low past dues. So we expect the finance company to continue seeing good quarters as we progress during the year.

Great. Thank you.

Hi, thank you. My question is about the supply chain as we move into the next quarter. Industry volumes appear to have improved significantly. You've certainly faced some major challenges. I'm wondering if supply disruptions and direct shipping costs have returned to normal, or if there's still room for improvement. Also, how might this impact your pricing decisions?

Sure. We've worked really closely with the supplier partners we have over the past couple of years, and I give them a lot of credit for what they've been able to accomplish in a dynamic world environment. But it's not finished yet. We still do see some constraints in supplier deliveries, and we keep working through those, and they kind of act some ways as the throttle on our build right now, but generally improving circumstances, and we look forward to that even improving further throughout the year.

Thank you. I have another question. Looking at your raised outlook, it seems that competitors are experiencing the same thing, indicating strong demand despite concerns about a recession and a slowdown. Are you noticing any significant changes in the mix of your orders, for example, towards construction with project activity compared to sleeper cabs, or is demand strong across the board? I'll leave it at that. Thank you.

I think you're right on it. I think that what we've seen is strong demand through all parts of the market. But if there's a trimming in the truckload area, then I would say that’s fully offset by the robust vocational markets that we see.

Great. Thank you.

You bet.

Great. Good morning, everybody. Thank you for taking the question. I'm wondering if we can go back to the gross margin, and I just want to try to understand some of the drivers because if you have a slightly higher production in the second quarter versus the first, but your gross margin is down, call it, 100 basis points or maybe a little less. I'm just curious what would drive that gross margin down lower sequentially?

Well, in the first quarter, I just mentioned the supply base has not fully improved. So there still are costs and things that we experienced in terms of deliveries. In fact, in the first quarter, there were some trucks that we didn't finish delivering. So we had better absorption in the first quarter than we might see in the second quarter, which contributes a little bit. And I don't know if there's anything you'd add, Harrie to that, but...

And I would say the trucks production and deliveries increasing to 51,000 to 54,000 trucks will grow a little faster than Parts. So we would see a little bit of an unfavorable truck versus parts mix which is why we get to that 18% to 19% excellent margin for the second quarter.

Yes, still very high, but just wanted to understand the moving parts. And then maybe, Preston, you mentioned this, but supply chain, I guess, we assume that will continue to improve as the year progresses. So if that's the case, would you imagine given the demand environment, would you imagine that you would be able to continue to increase kind of quarterly production rates in the second half as well?

Well, continue to improve might not be huge changes in production output. So we'll have to see what that looks like, Steve. We're always looking to build those trucks, especially with the backlog we have.

Understood. Thank you, guys.

You bet and have a good day.

Thank you for your question. Regarding the sequential margins, we have seen truck revenues increase sequentially while parts revenue has decreased, resulting in a slightly weaker mix and less overhead absorption, which is evident in the company's inventory. There are some items that did not ship, but inventory was built up. I'm interested in your outlook for price versus cost for the remainder of the year compared to what you experienced in the first quarter. Additionally, could you provide some insights on the impact of the FIFO and LIFO accounting changes from last year? I understand that only about 40% of the inventory was affected, but I would like to know how this change has influenced margins. Lastly, when do you anticipate opening the order books for 2024? Thank you.

Why don't we take it in reverse order. I would say that we're already having good conversations with some of the customers about their needs in 2024 and there's a strong interest in the truck, that continues to be good. It's early days. We'll see what happens there. Michael, you've got 66 calls under your belt, why don't you do the LIFO, FIFO call?

Last year, the FIFO difference was about $50 million in cost. This year will likely be similar, which provides some assistance, but it's only around 0.1% or 0.2%, not significant.

And then your first question, you asked about price cost. I think we have shared that we had good price to cost realization in the first quarter. We expect that in the second quarter, and we have a good order book for the third and fourth quarter. So it should be pretty good.

So the price cost wouldn't be part of why gross margin is down sequentially. It's really more the sequential revenue mix and the reduced overhead absorption. Is that fair?

That's correct.

I appreciate it. Alright, thank you.

You bet.

I guess just my first question, back to the margin. Again, your pretax truck margins were, I think, 13.9%, which is a record high. So can you help us understand, sort of, what's structural or related to some of the new product introductions that are more profitable versus, sort of, just deflation, sort of, helping the margin? So I guess that's my first question. And then my second question, when you talk about the order book for 2023 being substantially full, is that across, sort of, all geographies? And what are you telling customers about pricing specifically for 2024 as you're engaging in conversations? Thank you.

Sure. First of all, I think on the new products and thanks for bringing them up because we've shared that we've invested billions of dollars in these new products. We brought them out in the last couple of years here, but they're fully introduced. And they're providing 7% to 10% better fuel economy, that's just one thing. So that's $15,000 to $20,000 of value for the customer over a few year cycle. It really makes it important for them to replace the trucks they bought even four years ago with these excellent new DAF, Peterbilt and Kenworth trucks. It's important for them to do that because they get an operating advantage. Never mind the fact that these are the drivers' favorite trucks to drive, and there's a lot of demand to have them. You see them on the road, they're beautiful. It's what people want to be operating in all the markets, so that's really important as well. I think that the other part of it is they're efficient to build for us. So that's also helpful. So I think that new products are good for us. It's not just limited to the traditional markets of Europe and North America. South America is doing excellent as well. The DAF brand is a leading brand there. We're gaining market share quickly. The dealers are doing really well, and South America is a growing part of our performance, which is contributing to our overall margin growth. As far as what we see, it is substantially full in all markets. So that includes South America, Europe, North America, Australia, Mexico, pretty much everywhere. So the demand for PACCAR is great right now. And as far as 2024, well, 2024, it's the early conversations with people as they're, kind of, figuring out what their capital plans will be and how many trucks they'll buy next year. So it's the early conversations.

Thank you.

You bet.

Thanks. Good morning, I want to come back to the Parts business. I'm curious what actually drove the faster-than-expected revenue growth in your parts business? The guidance, again, is somewhat similar to what you rolled out for Q1, so curious what was the surprising part to you? I mean it doesn't seem like it was an accelerating freight market since we don't really have that. So I'm curious about that. And maybe just generally how cyclical or really not cyclical you think the Parts revenues might be over the next few years?

Harrie, do you want to share some thoughts on that?

Sure. I think I want to echo what Preston said that we've invested a lot of new systems to make it easier for our dealers and customers to have the right parts on the shelf when trucks come into workshop. It is the proprietary components, the PACCAR engines, the PACCAR transmission, PACCAR axles, all the new proprietary parts on the new trucks, where customers only can get service at a Kenworth, Peterbilt or DAF dealership. So the trucks come into our workshops. And once it's in the workshop, our teams do a great job to make sure the parts are there that those trucks need and that sells the parts. We've invested in more distribution centers, added a new one in Louisville, Kentucky. So we continue to build out that footprint. I think the first quarter was especially strong in Europe, where we saw Parts growing really strong. It's just a combination of all those efforts that come together and having the parts available, strong performance by the team worldwide.

I want to emphasize that our dealers have made significant investments in their workshops, which has improved convenience for trucks returning to them. This is beneficial for our customers and positively impacts the Parts business. It's also important to note that the average age of trucks remains quite high, and there has been a shortage of supply for the past three years, leading to continued demand for parts for older trucks. Despite a slight decrease in freight tonnage, there is still substantial consumption of parts for the trucks currently on the road.

Okay. And then just lastly, can you just remind us where you are in that penetration of the new products and how much runway there is still to go?

For DAF, the new DAF is currently about 75%, 80% of the production mix, and you could compare that to around 25% where we were a year ago. So that ramp-up has been really successful, well executed by the operations team in Europe.

And in the U.S., it's been complete. The transition is complete fully.

For heavy trucks, but also for the new medium-duty truck that went into production, what is it, 1.5 years ago and that's completely changed over now. That new medium-duty truck is made for those customers, Class 6, 7, 8 or low Class 8 provides like the heavy trucks, more value for customers and builds in a very efficient way.

Thank you.

You bet.

Thank you. Good morning. I would like to follow up on the discussion regarding Parts. Are you maintaining your full year revenue growth projection of 8% to 11%? Or has that changed based on what you've observed in the first half of the year?

We didn't say anything on the full year. We said it would be 10% to 12% for the second quarter after 17% in the first quarter. And at that run rate, you would get somewhere between 10% and 13% for the year maybe.

Got it. Okay. All right. You mentioned the ongoing supply chain issues, and as we consider how that interacts with production for the full year, do you anticipate any changes? Specifically, do you think the assumption that the supply chain improves in the second half compared to the first holds true? Will there be any significant mix changes in terms of units that perhaps couldn't be completed, particularly regarding heavy versus medium duty? Do you expect that to shift much if the supply chain improves? Or is it more of a minor adjustment? I'm also curious if there has been an emphasis on accelerating the release of certain units. If that process normalizes, could it possibly affect the mix in the latter half of the year?

No, I kind of think your words are really good there, Tim. I think it's around the edges right now that, that would be dealt with. I think it's fairly just generally improving and we feel pretty good about the way it's working through. There's just moments. And our teams and suppliers are doing a really good job of solving those moments. And so it feels like we'll just continue to see that trend upward.

Okay, all right. Thanks for the time.

You bet.

Okay, thank you very much. I feel that things are always great at PACCAR. So sorry for another supply chain issue, but maybe I can ask it, I guess, another way. And with all the work to, I guess, help improve available supplies. Are there any areas that are actually maybe better today than prior to COVID? And can you possibly bucket kind of the percentage of areas that are relatively more normal today versus ones that are still constrained?

Is your question compared to pre-COVID, did you say?

I'm trying to understand if things are improving. Given all the efforts to enhance the supply base and increase the speed within the supply chain, are there any areas that are actually better now? I know this might seem like a simple question, but it feels like it could be true.

Well, I think that I would give a lot of credit. We built 51,000 trucks in a quarter. That's a lot of output. So the supply base is doing a good job. That's a high number if you wanted to go back to pre-COVID. And our 51,000 to 54,000 in the second quarter is also a high number. So I would say that great suppliers, good partnerships there and they are doing generally a good job. And there's just always opportunities to keep improving. And we do that together with them.

Thank you very much. Regarding the increase in capital expenditures this year, what additional investments are contributing to this rise? Do you anticipate that the total will continue to trend higher or remain within the $600 million to $700 million range for the next few years?

We think the $600 million to $650 million is the right number. We've got some really fun and exciting projects that we're working on, that are coming along nicely right now, it's the third phase of our battery electric vehicles, it's engine platforms that we're developing is new truck platforms that we're working on. Just a lot of really interesting things, and as long as we can make good progress on them, we'll spend the money and commit to that.

Okay, alright. Excellent. Thank you, Preston.

You bet.

Yes, thanks, guys. Good morning to you. Can we just start with South America? I think you tweaked your industry forecast a bit lower there. So would love to hear what you're hearing on the ground in that region.

Sure. We've had great success in South America during the first quarter. There are quite high interest rates in that region, and customers are expressing concerns about what might happen with those rates. This has led to a pause in some parts of the market. However, we still have a strong backlog and expect business to continue progressing. Our build rates have increased, and we anticipate they will remain high. The adjustments we've made are primarily due to the interest rate pause we’re observing in the market.

Yes, at the same time, Brazil is transitioning from Euro 5 to Euro 6. And we know DAF has an excellent Euro 6 product in the market out there. So a great opportunity for us to grow our market share a little bit further.

Got it. That's helpful. For my second question regarding the second quarter build guidance, can you provide any insights from a regional perspective? Is everything remaining relatively flat compared to the 51,000 in the first quarter, or are there slight increases? Any thoughts by region would be appreciated.

I wouldn't try to differentiate too much between the regions. I think we're going to see good performance in all of the regions for PACCAR.

Thanks. I'll pass it on.

Alright, you bet.

Yes, hi. Good morning, everyone. And Michael and Brice, congratulations.

Thank you.

Yes, thank you.

I'm wondering if you could just talk about the cost performance. So really interesting to see operating cost per truck down about $1,000 sequentially first quarter versus fourth quarter. As we think about potential for continued improved supply chain performance, how should we be thinking about the pricing part of that equation as costs normalize for you folks? Should we think about pricing following suit? Or are we thinking about delinking the two based on the value proposition at this point?

Our focus is on making sure our customers have the best trucks in the world and we're doing that, and that has a value to them. And so that's kind of where we see ourselves positioned in the market, and that's what we would expect to continue as we look forward.

That's clear. And then looking at your pretax profit per truck this quarter, so 17,500 in 2019, pre-COVID, you folks had a high of 10,000. So really outstanding performance. I'm wondering, can we just step through what proportion of that would you attribute to the higher value-added of the new products versus a difference in the marketplace and competitive discipline? How would you counsel us to think about the relative sizes of those pieces and any others you would add?

I would say that 2018, 2019 were very good years as well. So you put them in kind of comparable markets. And then I would say a lot of that value is really because of the investments we made in the products and the trucks. But as we've said earlier in the discussion, it also adds to the outstanding performance of the Parts team and what they're doing. And so it's trucks, the value they create, it's parts, the way they support the customer, and I would add the third leg of stool has really become technology and how we're employing technology, which is helping us a lot to provide reasons for people who want to buy the PACCAR premium products.

And I'm wondering, can you just expand on that point and in technology? Are we talking about the functionality of the telematics? Or what specific technology? Can you just expand on that last point, if you don't mind?

Yes, sure. It's the use of telematics, which is also a great opportunity for us, and we announced that we have a partnership, an enhanced partnership with Platform Science, which is a great partner for us in terms of how we can connect the vehicle, bring useful apps to the customers, and that's accretive to their business growth. So we like to be participating in that. I think the other part of it is with the dealer systems. And we mentioned managed dealer inventory a lot over the years, but now it's like in a complete seamless operation with the dealers of them getting the parts based upon the needs as defined by PACCAR Parts. So that's a great way to see the business growth, and we continue to see that expanding over the years.

Great. And if I can just sneak one last one in, Harrie. The parts performance, really strong as well in the quarter. Is this the new run rate for parts percent margins? Or as volumes are going to be down seasonally should we think about margins being good, but maybe not as good as 1Q?

We don't guide for parts margins typically in our calls, but 32%, like you said, was really strong in the first quarter. We continue to grow the Parts business. As the Parts business grows, we leverage the cost structure. So there's a good basis for PACCAR Parts to continue that strong margin performance.

Appreciate the discussion. Thank you.

You bet. Have a good day.

Good morning. I want to follow up on what you've mentioned about parts. Historically, parts revenue has increased from 15% of total revenue a decade ago to 20% in 2022. The growth rate has been around 8% annually, compared to 5% for the rest of the business, indicating a more consistent and less cyclical growth pattern. My question is whether you expect this strong growth in Parts revenue to continue at a similar rate over the next five years. Also, is there a target percentage of total revenue from parts that you would consider optimal in the long term?

I tell you, we don't think of that. We think of value creation for the customer. And I think that the Parts business is doing that. That's why it's picking up share and it's picking up overall share of the Parts business. And I think that the trend is that the world is becoming a little bit more vertical for us with our powertrains but also with technology and those things, both will contribute to further parts growth over the coming years. So I think that the value opportunity for the Parts team continues to be there for us.

Okay. Makes sense. And then just any update that you guys might give us on the infrastructure bill and if there's any kind of demand that can be attributable to that?

Yes. I think that the amount of spending being done into the economy, whether it's reshoring or infrastructure is really great for PACCAR. We're the vocational market leaders. And so as money is spent in the economy, that will be good for us in the long term as well.

Got it. Thank you very much.

You bet.

Thank you very much. Just two questions. You mentioned interest rates and the effect on your South American outlook. Can you talk at all as to your dealers with their floor plans and how interest rates might be affecting your dealer base?

Let me add one point and then see if Harrie has any additional thoughts. I would say that in North America, interest rates are still at a reasonable level. Historically, they are very much in the middle of what we've seen, so we are not particularly concerned about interest rates here. Harrie, do you want to add anything else?

Brazil presents a different situation as interest rates there are around 14 percent, which contrasts sharply with what we observe in North America or Europe. This results in higher customer and deal retention in Brazil. However, as we mentioned, the new trucks offer significantly improved fuel efficiency. Therefore, for those purchasing a new truck, the savings from fuel often compensate for the increased expense of higher interest rates.

All right. Thank you. And then I just want to pivot to a more forward-looking question. You were talking about the new telematics packages, and I know we don't have autonomous trucks on the road yet, but everywhere I go, there's an Aurora Peterbilt truck on display some place. When do you think we start to see revenue potentially from things like connectivity, things that you're preparing for the customer? And then as we start to see that, does that reported as part of the truck business? Is that a stand-alone business as you think about it? I just kind of want to think forward on maybe some new streams you may generate from these technology additions?

Sure. I think from a connected vehicle standpoint, we do see revenue, I'd call it indirect revenue and profits that we get. We've been talking a lot about the Parts business. We can talk about the vehicles being connected and what it does for the customers, but it's an indirect play in. So it shows up in parts and it shows up in truck. It even shows up in financial services in terms of how we're able to help customers manage their business. From the autonomy standpoint, Jeff, I'd say that Aurora is a really good partner and we're pleased with the progress they're making with their autonomous driver, and we're pleased with the progress we're making on having an autonomous vehicle platform that operates with that. And together, we're just trying to make sure that we focus on safety being the primary tenet of this. And we'll be on the road with those with drivers now. And I think that we'll just have to wait and see when it will be time for us to go into a revenue-producing autonomy model that doesn't have a driver and that could be a while.

Thank you very much.

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