Paccar Inc (PCAR) — Q4 2024 Earnings Call Transcript

Good morning. We'd 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 Brice Poplawski, 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 that may affect expected results. For additional information, please see our SEC filings at the Investor Relations and the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Hi. Good morning, everyone. Harrie, Brice, Ken and I will update you on our fourth quarter and full year 2024 results as well as other business highlights. PACCAR's outstanding employees delivered strong results by providing our customers with the highest quality trucks and transportation solutions in the industry. In 2024, PACCAR achieved annual revenues of $33.7 billion, net income of $4.2 billion and an after-tax return on revenues of 12.4%. This is the second highest profit in the company's history, and it was a great year for PACCAR. PACCAR's strong financial performance reflects the higher profitability of the latest generation of Kenworth, Peterbilt and DAF Trucks, record results in our Parts division and another good year for PACCAR Financial Services. PACCAR shareholders and customers benefited from the $8.6 billion invested over the past 10 years in new products, world-class facilities and state-of-the-art technologies. PACCAR achieved 86 consecutive years of net income and has paid a dividend every year since 1941. In 2024, PACCAR declared $4.17 per share in dividends, including a year-end dividend of $3 per share. This is a 53% payout of net income and a dividend yield of 4%. PACCAR's fourth quarter revenues were $7.9 billion, and net income was $872 million. PACCAR Parts achieved excellent fourth quarter revenues of $1.6 billion and pre-tax profits of $428 million. Last year's US and Canadian Class 8 truck retail sales were 268,000 units. Kenworth and Peterbilt's share increased to a strong 30.7%, up from 29.5% in the prior year. In the medium-duty market, Kenworth and Peterbilt's excellent new medium-duty truck has created customer value and market share grew from 14.5% to 18% as they produced a record 21,500 medium-duty trucks. In 2025, the US economy is projected to expand by more than 2%. The vocational truck sector, where Peterbilt and Kenworth are market leaders, is steady. The less-than-truckload market is performing well, while the truckload segment is beginning to show signs of improvement. The US and Canadian Class 8 truck market is forecast to be in a range of 250,000 to 280,000 vehicles. We anticipate a strengthening market as we progress through the year. European above 16-tonne truck registrations were 316,000 last year. Customers appreciate DAF's industry-leading fuel efficiency and driver comfort. DAF trucks have a competitive advantage in the European market due to an innovative aerodynamic design and feature the largest and most luxurious cabin interior. In 2025, the European economy is forecast to grow modestly. We expect above the 16-tonne truck market to be in the range of 270,000 to 300,000 registrations. Last year, the South American above 16-tonne market was 119,000 vehicles and is expected to be similar this year. DAF's market share in the important Brazilian market was around 10%, reflecting a 23% production increase to more than 10,000 trucks in 2024. In addition to its growing business in Brazil, DAF trucks are now sold in Mexico and in the Andean region of South America. PACCAR Truck, Parts, and other gross margins were solid at 15.9% in the fourth quarter. These margins are considerably higher than in prior industry cycles, reflecting the increased value the new Kenworth, Peterbilt, and DAF trucks provide to customers as well as the continued growth of PACCAR Parts. In the fourth quarter, PACCAR delivered 43,900 trucks, and in the first quarter of 2025, deliveries are forecast to be around 40,000. We estimate PACCAR's worldwide first quarter Truck and Parts gross margins to be similar to the fourth quarter and in a range of 15.5% to 16%. In addition to the strong financial performance, other business highlights in 2024 included PACCAR's progress on Amplify Cell Technologies, our joint venture to manufacture commercial vehicle batteries in the United States. DAF was honored as a Fleet Truck of the Year in the U.K. PACCAR Parts celebrated the 30th anniversary of TRP. Peterbilt earned the Environment and Energy Leader Award for Sustainability, and Kenworth celebrated the 50th anniversary of its world-class truck factory in Chillicothe, Ohio. We look forward to an excellent year in 2025 as we celebrate the 120th anniversary of PACCAR's founding in 1905. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights.

Thank you, Preston. In 2024, PACCAR Parts set new records for revenues and profits. Annual revenues increased by 4% to a record $6.7 billion, and pre-tax profit increased to a record $1.71 billion. Parts gross margins averaged 30.9%. In the current freight environment, we estimate parts sales to grow by 2% to 4% this year. PACCAR Parts' excellent long-term growth reflects the benefits of investments that increase vehicle uptime and convenience for customers. PACCAR's aftermarket parts business provides strong profitability through all phases of the business cycle. PACCAR Parts has expanded to 20 parts distribution centers or PDCs worldwide, including a new PDC in Germany, which opened in November. This PDC enhances parts availability and delivery times to German dealers and customers and is part of a strategy to increase DAF's truck market share in the largest truck market in Europe. PACCAR Financial Services achieved fourth quarter pre-tax income of $104 million. Annual pre-tax income was $436 million. PACCAR Financial is performing well with a portfolio that has excellent credit quality and low past dues. PACCAR Financial provides the highest quality service in the market and makes it easy for customers to do business with them through the efficient use of technology in the credit application and loan servicing processes. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt, and DAF used trucks, and is adding a new used truck center in Warsaw, Poland this year. Last year, PACCAR invested $796 million in capital projects and $453 million in research and development. PACCAR delivered an excellent return on invested capital of 25.5%. This year, we are planning capital investments in the range of $700 million to $800 million and R&D expenses in the range of $460 million to $500 million as we invest in key technology and innovation projects. These include new clean diesel and alternative fuel engines, the next generation of battery electric powertrains, advanced driver assistance systems, and integrated connected vehicle services. PACCAR is expanding manufacturing capacity at our factories in Europe, North America, Brazil, and Australia. These investments will support PACCAR's future growth as well as our customers' success. PACCAR's independent Kenworth, Peterbilt, and DAF dealers consistently invest in their businesses, enhancing our industry-leading distribution network and making a significant contribution to PACCAR's long-term success. PACCAR looks forward to another excellent year in 2025. Thank you. We'd be pleased to answer your questions.

Hey, good morning. Thank you so much for taking my question. So my first question is on the delivery guide. Can you help us understand how to think about deliveries by geography in the first quarter versus the fourth quarter, trying to bridge the gap and where that difference is coming from, which geography, if you could highlight?

Yeah. Happy, Tami. Good to talk to you. What I would share with you is in the US, we expect Class 8 to be flat or up even a little bit in Q1. But what we've seen is the medium-duty market, which has just been very robust is probably normalizing now. So we'll see a bit smaller medium-duty market. I'd also remind people that there was a Euro 6 implementation in Mexico that was in the fourth quarter, so there was a bit of a pre-buy in Mexico that won't be present in their first quarter. And also, if you're doing comparisons of Q4, Q1, we had good supplier performance in the fourth quarter that allowed our normal year-end inventory reduction to take place. So all those things kind of had an impact, and maybe the only last one I'd add is we have fewer production days outside the US, specifically in South America as an impact. So all that goes into that delivery guidance. But in essence, we're seeing flat Class 8, maybe slightly up Class 8 in the U.S. markets.

Thank you for that information. My second question is regarding the investments for Amplify, specifically the joint venture with Cummins and Daimler. Do you think it might be time to reconsider the whole idea given the recent shift in administration away from battery electric vehicles?

Well, I'll share this with you. I am so happy with how that's going. And I think if I could remake the decision now knowing what I know, I'd make the same decision. It's a long-term strategic objective for our company to be able to offer our customers a full portfolio of powertrain choices. We see that there will be places where battery electric vehicles make sense or could be hybrid vehicles. And our Amplify Cell Technologies joint venture will allow us to have the lowest cost, highest quality batteries so that we'll be the most competitive in the market, which will be in support of our customers.

Okay. Great. Thank you.

Thanks, guys. So you did reference the vocational strength, and it seems like that's been a big piece of why we've seen this order resilience in Class 8. But I guess just what gives you confidence that dealers aren't overordering here to stay in body builders' pipelines? And just could you maybe give us a gauge of how many of those orders actually have a customer's name attached? Thank you.

Yes. Yes. We have all of our customers who feel really solid. In fact, one way to look at it is inventory. So the industry inventory is running, what, 3.1 months in heavy-duty, and Kenworth and Peterbilt's inventory levels at 2.3 months. So our inventory is in good shape. There is a backlog at body builders, but those are really spoken for trucks.

Okay. Thank you. And then if you could just provide maybe a little more color on how you're thinking about the medium-duty market in U.S. and Canada as we progress through the year. You mentioned probably down a little bit in 1Q, but I guess just how are you thinking about the growth as we move throughout the year, first half versus second half would be helpful? Thank you.

Yes. I think that what we saw, referencing back, Kyle, to last year, you'd say that we had a pretty steady set of builds in the year. There were strong builds. There was, if you recall, a mirror factory fire that amplified some deliveries in the third quarter. So when you're comparing 3Q to 4Q, you'd see lower deliveries at 4Q. And now we just think that the medium-duty market is going to go back to more normal, historically normal levels. And in those normal levels, we'll continue to see our new products perform well. Customers seem quite happy with the new 2.1-meter wide Kenworth and Peterbilts. They work well, and body builders are gaining our market share. In fact, we've grown from 14.5% to 18% share in the medium-duty market last year. So we feel good about our position. The cadence of half one to half two probably would expect it also to see strengthening in the second half.

Great. Good morning, everybody. Thank you for taking my call. I'm curious as we sort of do the dumb math and look at total truck revenues divided by the deliveries, it seems like the kind of revenue per truck was down 5%-ish, which is one of the bigger declines we've seen recently. And I know there's a lot in there between price and mix and things like that. But I'm curious if you can provide any color, was that mostly mix? Is there kind of more day cab happening or more vocational? Or how do we think about kind of what's going on in price mix?

Yes, Steve, there is a slight regional mix at play. North America sees more vacation or holiday activity in the fourth quarter, leading to a stronger mix in Europe during the same period. Additionally, we faced unfavorable foreign exchange rates due to a very strong dollar, which likely accounts for about half of the decrease in average sales price.

Got it. Okay. Right. A lot in there. Okay. And then slightly differently, have you guys announced or started telling your customers kind of the order of magnitude of the expected price increase for the 2027 regulations that we're all looking forward to?

We're having general conversations with them about that, and we're still saying it can be in the $10,000 to $15,000 price range for adjustments to 2027. Obviously, the details of that aren't finalized, but that's kind of what it feels like right now.

Okay. Thank you, guys.

You bet.

Thank you. I had two, if I may. First is just I'd love to hear your thoughts on gross margin trend and truck pricing. It seems like used market to stabilize, inventory at least on sweep business come down. I don't know if you see that and probably better data that you have. And just curious whether you see any hopefulness or the reverse on new truck pricing? That's my first one.

Yes. Sure. Rob, what we'd say is that we're looking into Q1 and seeing like things should be pretty steady, as you can tell from our guide, where we said 15.5% to 16% gross margin. So see that things are starting to look up but just beginning to, as we noticed the truckload carriers starting to come back into the market and then probably gaining strength through the course of the year.

And then on the used truck side, Rob, I would add that PACCAR Financial's used truck inventory is at very healthy and low levels right now. And so that's also a good thing.

That's a good leading indicator as well.

The bottom there. Okay. Perfect. And then Preston, just spark my curiosity, you mentioned hybrid trucks. And I think across the auto, maybe even the truck world, years ago, there was a bit of resistance to hybrids and the feeling that you'd go full electric. I'm curious what you're hearing from your customers. Is that something that there's actual demand for now? Or are there really use cases that are non-regulatory? I'm just curious about your thoughts there. I'll stop there. Thank you.

Yes. Great question, Rob. I think what we see is that through hybrid systems, we might be able to improve fuel efficiency and likewise, greenhouse gas by double-digit levels. And if we're able to do that, that's obviously desirable for our customers. There is an added cost to it. So the balance of what's the payback time sits into there. So there is a striving for a business case, which is free of regulatory hurdles, but we know that there will be regulations coming and going over time. So that could also be an added incentive to hybrid business cases. And that's true for both US and Europe, maybe especially true in Europe.

Hi. Thanks. Good afternoon. I just wanted to touch upon the margins in the first quarter. As you said, Preston, they're going to be pretty stable, which is pretty impressive on 10% lower production. I guess, I'm just curious what is enabling that steadiness of the margins in light of that lower level of production?

Well, I think what we're seeing is the trucks are performing really, really well. So that's helpful to us, obviously, in terms of discussions with customers. Fuel economy is great. The reliability is great. Our warranty costs are slightly down. And it just feels like between all those factors and where the market is starting to head, we think that we'll see that kind of a margin appear in the first quarter.

Okay. And I guess, just curious about the broader pricing environment now. Do you think that it's now kind of more stable that we're in this part of the downturn? And how confident can we be that sort of we've hit the low point on margins and pricing discounts for the year?

Sure. Great question again. And I think what we've shared and we continue to share is like we see 2025 with improvement coming throughout the year. We think for sure in the second half, maybe it's in the second quarter, we'll have to watch how the world develops, of course, but it feels like a positive trend.

Hi, yes, can you hear me at this time?

Yes, you're not giving us quite the static you did on your first time.

I apologize for that. It sounds like it's working right now. Thank you for taking my question. I apologize if someone already asked it, but I believe you lowered the R&D expense for the full year. Can you discuss what is driving that? Additionally, returning to an earlier question about the Amplify joint venture, there are clearly strategic reasons to continue investing in it, but I understand it is a multiphase project. Can we assume that you will proceed in phases and decide whether to move forward, or should we assume that all three phases are advancing?

Yeah, sure. It's a great question, both of them. So R&D is going to be still year-over-year, we thinking slightly up. So probably in the range of 5% up from last year just because there's a lot of great projects for us to be working on. Of course, the Amplify project doesn't really fit into that space. But what we're doing with Amplify is we've cleared the ground now. We're putting in the buildings. And then what we'll do is measure how much capacity we need to install. But we want to get started on that. So we have some capacity available for the markets that exist. And then we'll just scale capacity based upon market demands for the EVs or hybrids.

That's helpful. And then I wanted to go back to some comments you've made this quarter and I guess last quarter as well in terms of maybe some green shoots on the TL and are starting to see some improvements. I think you mentioned that you could maybe see some improvement as soon as 2Q. Can you just give us a little bit more color what exactly are you hearing from your customers in terms of potential green shoots on the TL market? And maybe what would give you confidence in that 2Q number starting to show a rebound versus maybe more of a second half?

A couple of things. One is, we've just started to see spot rate improvement. So that's something that's measuring into our thoughts. I'd say some of the capacity has come out the market. So it's making it easier for the good carriers to become successful. And then I would also add, as we said earlier, that the used market inventories are quite low. And so that's kind of a tell of how the world is starting to turn a little bit. So all of those are soft indicators of what we think is to come.

Very helpful. Thank you.

You bet.

Hi. Thank you for the time. Your comment about strengthening market as the year progresses; how is that influencing how you're pricing the 2026 model years that start shipping in April? And then wrapping with that maybe a bit, your reaction to some of the recent executive orders from the White House just to think about how that influences how you think about the pre-buy, which I assume sort of dovetails a little bit into how you think about pricing?

Well, we look at the executive orders, we pay attention to it, but we know what the rules are today, and we are ready for those rules. If they were to change then we'd be ready for that, too. I think one of the things we've been able to do is develop the suite of technologies we need. The California has already implemented low NOx engines and PACCAR has an NOx engine in California. So we can be available to that. And I think shift around, we'll be ready in that position as well. To the first question you asked about pricing in 2026 product shipments. I think as the market moves around and people are experiencing the great performance of the Kenworth, Peterbilt and DAF trucks, we expect that we will see strengthening price positions for ourselves as the course of the year progresses, right? We think that trend carries on even beyond 2025 we anticipate.

And we hear the model year 2026 start shipping in April. I know there'll be a little mix of 2025s and 2026s in 2Q. But is that accurate? We start getting some of the 2026 models shipping in 2Q for this year?

Yes. Your comment, David, there, I don't know what that is, but that doesn't resonate to me of a model year 2026 shifting in April for us. So I'm not sure how to answer that.

Okay. We can talk offline. But basically, the higher pricing sequentially is what you're referencing as the year goes on however you want to name the model.

That's reasonable, but yes.

Yes. Hi. Good morning and good afternoon, everyone. I wanted to ask on the per truck performance in terms of operating cost. Can you talk about the cadence that you expect over the next couple of quarters? It sounds like based on the gross margin guidance for the first quarter, maybe we're seeing a decline in per truck costs. I'm wondering based on your contract structures, et cetera. Can you just talk about the cadence over the next couple of quarters?

In 2024, we saw increased content on trucks, particularly in Europe, due to legal requirements that included connected features and advanced driver assistance systems among others that we implemented throughout the year. We anticipate that those cost levels will remain relatively stable as we move into the new year, but I don't foresee any significant changes in 2025 at this point.

Okay. Regarding EPA 27, while we anticipate it will move forward, it's important to note that governments can implement changes. In the event of an unfavorable legal decision or similar circumstances, could you elaborate on how the company would respond if there are varying regulations in California and other states compared to the rest of the U.S.? How do you foresee that affecting your planning process?

One of the things that's great about PACCAR is the quality of people in this company, and our ability to be nimble and reactive is, I think, second to none. So I think if there are changes in regulations, there is nobody better at adjusting to those regulatory changes than the people at PACCAR. And so we'll make sure we have the right products in front of the customers that are going to give them the best operating condition for regulatory environment.

Okay. Appreciate it. Thank you.

You bet.

Thank you very much. I have two questions. First, I want to revisit the fact that revenue per truck decreased by about 4.9. I believe you mentioned that this was due to pricing. I am assuming that most of the remaining difference is related to mix and currency. Could you help me understand that calculation?

Yes, as we mentioned, about half of the impact is due to currency. Additionally, in the fourth quarter, the U.S. and Canada have more holidays, which caused a heavier mix towards Europe and other markets outside the U.S. However, average sales prices for trucks are lower, and the trucks themselves are smaller.

Thank you. I would like to follow up on David Raso's question. As the administration introduces new regulations, where do you think we stand, aside from the EPA developments in 2027? Are there other potential rulings that could pose risks for PACCAR that we should consider?

I don't think of them as risk as much as I think of them as opportunities. I think any time environments change, if you operate better than your competitors, then you'll find yourself in a winning position, and that's where we intend to be.

So Preston, what would be some of those opportunities be in your mind?

The fact that we produce local-for-local, have factories in the US, where we produce the trucks for the US. Same in Mexico, Brazil, Europe makes us very well protected to things like tariffs, for example. So we feel we're in a really good spot there.

Okay. Thank you very much.

You bet.

Yes. Hi, everyone. Thanks for having me on. Just PACCAR has clearly gained a lot of share. I realize it's because of your great trucks and your products, just I'm curious if we see other OEMs raising capacity, trying to go after your market share, pricing intensifies, I'm curious how you guys weigh the puts and takes there? Is PACCAR more likely to continue to kind of price for your premium trucks and look to hold that margin? Or is it every year, your goal is to try to gain that level of market share? Is that not as linear? Is that more over a multi-cycle basis? Just kind of curious how you think about that because you guys have gained so much share and there is some other OEMs kind of raising capacity?

Yes. The way we think about it is we try to, first off, make sure that we produce great trucks for our customers. And if we produce great trucks for our customers that are valuable to them, then they're willing to pay us for those trucks and share in that value equation. That's the most fundamental thing. The more we can do that for them, the better it works for us, and you gave a nod to the people that PACCAR producing great trucks. I'd also share in that our dealers are really outstanding and do a good job of supporting our customers and going out there and showing them the benefits of our trucks. So it's really about great trucks that achieve benefits to our customer. That helps us maintain our premium position and allows us also to simultaneously gain market share.

Great. Regarding parts, your revenue has increased by 4% over the last three quarters. However, the pre-tax profit has been slightly lower compared to the previous year. Is there anything you want to highlight for 2024? As we move forward, will pre-tax profit and parts profit grow in alignment with sales as we approach 2025? Any insights on this would be appreciated.

In 2024, we saw part sales increase by 4%. At the same time, we see that the market for auto sales for parts was down 2% or 3%. So growing our parts sales in a smaller market at excellent margins, that's a really impressive performance by the entire PACCAR parts team. And as we go into 2025, we expect parts to grow by 2% to 4% for the year. So that will be another strong year for PACCAR parts.

Yes, you bet.

Hey. Thanks. Good morning, good afternoon. I just want to actually follow-up on that last question. So if you think about last year, the markets down and parts sales are up 4%. And I guess this year, you think the market is flat to up, but the parts growth slows. So help me understand why we're not seeing a pickup in part sales if the market is improving?

Well, one of the things, as Harrie indicated, is like the cadence of the parts market last year and like the general market, it's going to be a tale of two halves, probably for the total market. So what we're talking about right now is Q1 and excellent parts performance in Q1, and we would expect to see then growth through the course of the year.

It's strongly related to freight activity in the rest of the business. So it should also have that kind of cadence.

I'd like to thank everyone for joining the call, and thank you, Charlie.