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CTW.1122. PACCAR

Medium- and heavy-duty trucks are vital to the global economy, but they threaten the global climate: They account for 25% of all automobile-based CO2 emissions, even though they make up just 10% of the vehicles on the road. Paccar, which owns top-selling heavy truck brands including Peterbilt, Kenworth, and DAF, is doing its part to green the trucking fleet. Paccar’s first EVs hit the market in 2021, and it now sells a total of seven battery-electric models worldwide. Semis in general cost anywhere from $100,000 to over $500,000, and Paccar estimates it will deliver hundreds of electric trucks this year; the company, based in Bellevue, Wash., expects more than half of its production to be zero-emissions vehicles by 2035. Paccar’s brands have also been refuting the stereotype that electric haulers can’t tackle steep hills: Earlier this year, the DAF CF Electric truck became the first battery-electric heavy truck to tame Austria’s highest mountain pass, on the Grossglockner High Alpine Road.

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Paccar is a light-, medium-, and heavy-duty truck manufacturer that also provides technical and financial services support for its products.

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G500-2020-497-Paccar

The company manufactures light, medium, and heavy duty trucks under the brand names Peterbilt, Kenworth, and DAF.

This year's Fortune 500 marks the 66th running of the list.

F500-2020-118-Paccar

This year's Fortune 500 marks the 65th running of the list.

Here are the World's Most Admired Companies for 2018 as ranked in their industries. See who made the list.

This year's Fortune 500 marks the 64th running of the list.

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This year's Fortune 500 marks the 63rd running of the list.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Paccar (PCAR): Company Profile, Stock Price, News, Rankings

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Paccar

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Good morning, and welcome to PACCAR's First Quarter twenty twenty five Earnings Conference Call. All lines will be in listen only mode until the question and answer session. Today's call is being recorded. And if anyone has an objection, you should disconnect at this time. I would now like to introduce Mr.

Ken Hastings, PACCAR's Director, Investor Relations. Mr. Hastings, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Preston Feit, Chief Executive Officer Harry Skippers, President and Chief Financial Officer Kevin Bainie, Executive Vice President and Bryce Poplowski, 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 page of paccar.com. I would now like to introduce Preston Feit.

Thanks, Ken. Good morning, everyone. First, I'd like to congratulate Harry Skippers on his upcoming retirement after a wonderful thirty nine year career at PACCAR. We'll all miss him. And we wish him all the best on the next chapter in his life.

Congratulations to Kevin Bainie, our Executive Vice President, who's been responsible for DAF Trucks and will now become responsible for PACCAR Financial Services. Kevin will also work with Ken on Investor Relations. And congratulations to Bryce, who has been promoted to PACCAR Senior Vice President and CFO, reporting directly to me. I'd like to thank PACCAR's outstanding employees who did an excellent job providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR achieved good revenues and net income in the first quarter, including record revenues at PACCAR Parts, good performance by the truck divisions and strong financial services results.

PACCAR achieved revenues of $7,400,000,000 and adjusted net income of $770,000,000 PACCAR Parts achieved record quarterly revenues of $1,700,000,000 and quarterly pre tax income of $427,000,000 We're pleased with the continued growth at PACCAR Parts after a record setting 2024. PACCAR Financial had a very good quarter, achieving pre tax income of $121,000,000 to 6% higher than the $114,000,000 in the first quarter of last year. We estimate this year's U. S. And Canadian Class eight market to be in a range of 235,000 to 265,000 trucks.

The North American truck market is being affected by uncertain economic conditions and the overall impact of new tariffs. In Europe, DOPS premium aerodynamic trucks provide customers with the latest technology and the best operating efficiency. We project the 2025 European above 16 ton market to be in a range of 270,000 to 300,000 trucks. This year's South American above 16 ton truck market, where DAF trucks are highly desired by our customers, is expected to be in a range of 100,000 to 110,000 vehicles. PACCAR delivered 40,100 trucks during the first quarter and anticipates delivering 37,000 to 39,000 trucks in the second quarter.

PACCAR's truck parts and other gross margins were 14.8% in the first quarter as economic uncertainties and tariffs began affecting input costs and truck pricing. For the full quarter of current tariff related impacts, we anticipate second quarter margins could be in a range of 13% to 14%. Margins could improve considerably depending on how the announced truck tariff policy investigation progresses. In the second half of the year, we anticipate increased customer demand as policy and emissions regulations become more stable. PACCAR's industry leading trucks, expanding parts business, best in class financial services and advanced technology strategy position the company well for an excellent future.

Harry Skippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Harry, over to you one last time.

Thanks, Preston. PACCAR's first quarter adjusted net income of $770,000,000 excludes the $265,000,000 after tax provision related to EU civil litigation settlements. Is making good progress on resolving the civil litigation. The company has settled with the majority of claimants and continues to pursue appropriate resolutions. PACCAR Parts achieved record revenues in the first quarter with excellent gross margins of 30.7%.

We estimate parts sales to grow by 2% to four percent in the second quarter and for the full year. Parts is beginning to benefit from the live data of the 600,000 connected Kenworth Peterbilt and Dove trucks in operation. This connectivity enhances our customers' operational efficiency and vehicle uptime. PACCAR Parts has 20 parts distribution centers worldwide and continues to expand its global distribution network. PACCAR Financial Services pretax income was a robust $121,000,000 compared to $114,000,000 a year earlier.

This reflects solid portfolio growth and continued strong credit quality. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt and DAF used trucks and is building a new used truck center in Warsaw, Poland this year. Used truck demand and pricing improved in the first quarter and we expect it to further improve throughout the year. Similar to PACCAR Parts, PACCAR Financial provides steady profitability during all phases of the business cycle. In 2025, we're planning capital investments in the range of 700,000,000 to $800,000,000 and R and D expenses in the range of $450,000,000 to $480,000,000 as we continue to invest in key technology and innovation projects.

These include next generation powertrains, advanced driver assistance systems and integrated connected vehicle services. PACCAR is also investing in manufacturing capacity to support future long term growth and our customers' success. This includes an expansion of the DAF factory in Brazil, construction of a new PACCAR engine remanufacturing facility in Columbus, Mississippi and an expansion of the PACCAR Technical Center in Washington State. As Preston noted, this is my last earnings conference call. PACCAR is an exceptional company, and I want to thank all my colleagues, past and present, for making it such a wonderful place to have a career.

Our first question comes from Chad Dillard of Bernstein. Chad, your line is open. Please go ahead.

Hey. So I wanted to dig a little bit more into your guidance for gross margins. I was hoping you could tease out just how much are you embedding in terms of incremental tariff costs and how much you expect to pass through to customers? And then just talk through how we're thinking about gross margins for the balance of the year, please.

Yes, Chad. As we shared in our comments, it's a little bit uncertain out there right now in terms of what the tariff policies will look like. You may or may not be following how they apply to trucks specifically, but last week the government announced a section two thirty two investigation into tariffs for medium and heavy duty trucks to value what their policies would be. There's an open comment period through the May and then they haven't declared when they would make any kind of revision to those policies, but they're under review which could have meaningful impact to what the impact is on a per truck basis. And obviously that's an input cost to us right now, so it could have a shaping form factor for us in Q2 and beyond.

And of hard to actually know what the exact numbers are going to be because of that uncertainty. But we think that right now, you know, we are an American company that builds our trucks in the markets for the markets. So our teams in Denton and Chillicothe are doing a great job building trucks for us for The US markets, but there are components that come into those factories from our suppliers from other countries. And so we don't know how they would be affected.

Got it. That's helpful. And then just over to the Vocation side of your business. I know that you guys tend to over index to that part of the market. I would just be curious on how you're thinking

Yes, it's still a solid part of our business right now. I mean, the vocational market is reasonable and so it feels like that will continue to be a strength throughout the year. And we'll see how that plays. The LTL market still also feels stable. And I think everybody kind of is aware that the truckload carriers are still under some pressure.

And so that pressure is something that we feel in the market estimations for the year.

Thank you. Our next question comes from Jamie Cook of Truist. Jamie, your line is open. Please proceed with your question.

Hi, good morning. I guess, if you could just unpack a little further the margin disappointment relative to I mean, deliveries were essentially in line with expectations. The margins, were lighter relative to your guide. I know you talked about input costs and and truck pricing. If you could unpack that more and let us know, you know, what price cost was for for both truck and parts.

I guess that's my first question. And then my question, just, you know, your comfort level with inventory level some of the, industry experts, the you know, the inventory levels are really elevated. And I'm wondering if that's a concern in yours, how that impacts orders and if you could comment on your order specifically. And then last, congratulations to Harry. Thank you for all your help throughout the years and congrats, Bryce.

Look forward to working with you. Thanks.

Well, Jamie, it's nice of you to recognize, Harry. We're all going to miss him greatly. He's a good guy. To pick up on your first question, I mean, think if you try to I think your words unpack it a little bit further. If I think about the margin, think of sequentially cost being up 1% and price being relatively flat.

And that's really a factor of the tariff impacts that we saw, but they weren't a full quarter of impact of those tariffs. That's the easiest way to think about the delta of what we shared previously and what we experienced today. And now what we see coming into a look for Q2 is we took the conservative view we shared with you is to say that if there's a full quarter of tariff impacts, it could look like this. Now life isn't quite that straightforward because we'll also be pricing those tariffs into our customers' trucks as we go along, but we do have the backlog that we have to manage and we can't just pass that along as we have relationships with people. So there's a partial pass along and we'll work with our suppliers on that as well.

So it's kind of few inputs and a few outputs out of this. And we see that over time, we'll be adjusting our pricing to match the tariffs, but it takes some time to do that. Or as we mentioned, the tariffs might change, and that would reduce the need to make those adjustments.

Did did you guys put through the four to 7% that's out there in the sorry. Go ahead. Go ahead.

No. I was just gonna say a follow-up. You know, there's been talk that, you know, the industry has put through an incremental, I think, percent to 7% price increase, you know, at the end of the first quarter. Wondering if you were in if if you also were were put putting price increases through at that level. And then, sorry, you can answer after that the question on the elevated inventories.

Your numbers are about the right numbers to think about in terms of what's been passed along. You just have to get into the sequencing of when you announce a price increase, when you're gonna build it, what your backlog was that already was behind that. So you don't affect all of that and that's the puts and takes of that. If I switch over to your question on inventory levels, we look at the inventory for Class A for the industry is around four months and we're at three point one months. And then I think back to the earlier conversation we had with Chad, you know, we have a lot of vocational trucks, so we're probably actually lighter on a like for like comparison because vocational trucks take a longer time to get a body put on and put back into service, put into service.

So we feel pretty comfortable with our three months of retail inventory.

Thank you. Our next question comes from Michael Feniger of Bank of America. Michael, your line is open. Please proceed.

Thank you. Thanks guys for taking my question. Just on the EPA emissions change, if there is a change in '27, how how does that inform your view in terms of how you guys are looking at your cost as the truck markets soft? So, you know, is this a time when you guys normally might pull back more cost to protect margins? Or is there an eye on 2026 where we you know, if there is a view that the EPA twenty seven is is still intact that we have to build towards that.

So just kinda curious how that also is shaping your guys' kind of view as you kinda go through 2025.

Yeah. Great great conversation for us to have together, I think. As we think about the regulatory standards, there's a lot that gets mixed into that conversation. And it's really not one conversation, it's really a couple parts to that. One is greenhouse gas or CO two reductions, which have a standard which is intended to come into effect in 2027.

So that's where you see an ACT impact, clean truck impact. The EPA has stated that they intend to look at those standards and potentially not implement GHG phase three in 2027. That would mean the number of electric vehicles, the kind of CO2 reductions that come with that could be adjusted. That's not what they've done yet, but that's what they've made a stated intent to address. Those changes really don't have a significant input cost change for us in terms of vehicle costs.

So the trucks that are GHD compliant aren't don't look like the diesel trucks that are GHD compliant don't have a real different cost structure in 2027. So if those changes are made, there might just be less requirements for EVs made. That's a part one of this regulatory discussion. The part two of the regulatory discussion is around NOx. And the NOx standards which are in place call for reduction from today's 200 milligram engines down to a 35 milligram engine.

That's the law that's in place today. If that law enacts, then cost of the vehicles will go up significantly because there'll be additional hardware required to meet those NOx levels. The government has said they intend to look at that and consider whether that will stay at 200 or, excuse me, move to three thirty five milligrams or stay at today's 200. And that's less clear that there would be really an adjustment there. The good thing for PACCAR is we've made great investments in clean diesel technology along the way, never adjusted from that as we've shared with you over the years.

And so we're prepared for any of these situations that come up. We've got great engines for today that meet the NOx standard at today's cost structure. We've got new engines designed and running that can meet the 35 NOx standard, and they come with some on cost. So whichever way the standards go, we'll be in a very good position to meet those for our customers. And, of course, what the government does will inform the market's reaction.

And so what we look at is, say, today's numbers are thirty five milligrams that would drive up the cost of a product in 2027, and we're prepared for that. If it changes, we'll be in good shape too.

Understood. If I could just my follow-up, just if you could kind of dive into the parts side, it seems like the growth was a little slower than we expected. Margins, just are we starting to kind of normalize here? What do you kind of see when we think of the parts margins on a year over year sequential basis? We kind of think about that profitability?

You just kind of think about that as we're thinking for the full year and into Q2, but for 2025? Thank you.

So we were very proud of the parts team that they've been able to grow parts sales in the first quarter in a soft market for parts and service. And the margin levels of above 30%, that's pretty good margin for PACCAR Parts. And think TIM does an amazing job getting solid good margins out of a soft market these days. And we expect parts to continue that growth throughout the year at levels between 24%.

And I would add to everything Harry said And let's say he shared in his opening comments the number of connected vehicles we have now and the number of connected vehicles and the technology that our parts team is bringing gives us a great confidence that parts will continue to grow over the short, medium and long term at good levels.

Thank you. Our next question comes from Tamy Zakaria of JPMorgan. Tamy, your line is open. Please go ahead.

Hey. Good morning to all, and congrats to Kevin on the new role. And Harry, what an exemplary career at PACCAR. And I will definitely miss you, but best of luck. I'm sure great things await you.

So so I wanted to ask a question on tariffs again. I just wanted to clarify, and I appreciate the situation is very fluid, but it seems like there aren't any potential Section two thirty two tariffs embedded in the second quarter gross margin guide. Is that correct? And if so, what's essentially embedded in that 13% to 14%? Does it include the now paused tariffs which could become effective at any point next month?

So so what's really in that 13 to 14% guide?

13 to 14% includes tariffs as they are today, is the impact of what's going on there. So that's as it is, that's as the rules are today, that's what we've given you. The section two thirty two adjustments could include impact on foreign made trucks, it could include impact on components, it could also include exemptions on components for US made trucks. None of that is clear. And so we have to wait and see what that looks like.

I think it's okay to summarize that the of the impact would be less unfavorable or even favorable. Is that

I think that's a fair way to say it. I mean, that's kind of what we that we try to give you that conservative look at the quarter with the standards of today because we know what we know. And if the rules change, then we think that if anything, it should be upside for us.

Understood. That's that's very helpful. And then in the same thread, I wanted to understand the impact potential impact of tariffs on the parts business. I I I know that you don't manufacture parts yourself, but any color on what mix of parts come into The U. S.

From the outside and how much is locally sourced and whether you have to take pricing to offset some of these tariff headwinds on the cost of procurement?

only the precedent will continue. But for parts, we don't have a backlog. So if we get cost increases for parts, it's much easier to pass those on with almost immediate effect. So it has less of a margin impact there. There is parts that are sourced and are impacted by tariffs, but we're working with the suppliers.

And if and when those costs for us would go up, would increase prices accordingly.

Yeah. And just to give you ballparks, I'd say less than half of our purchases are really from maybe country of origin outside The U. S. Parts, it's a little bit higher percentage than nominal, but it's not it's not the majority. Because as you said, we actually do make some of our parts.

Right? The the proprietary part are in many cases things we do make for ourselves and do get made in America.

Understood. That's very helpful. Thank you.

Thank you. Our next question comes from Rob Wertheimer of Melius Research. Rob, your line is open. Please go ahead.

Thank you. My first question is on the Section two thirty two tariff truck policy investigation. Is a potential positive there a relative one because you make more trucks in The US, I suppose, than some of your competitors? Or is it more of an industry comment you were making where they could kind of offset some of the hit to purchase parts from overseas?

I think it could be both, Rob. I think yours is an astute observation, but I think it could be both. It could be a relative and it could be an absolute.

Okay. Perfect. Thank you. And the second one is gonna be a little bit general, but, you mentioned, you know, you have the truck backlog, you're not repricing those instantly for tariffs. I'm a little bit curious how are you managing through this fairly dynamic environment?

I mean, when you know the tariff, are you pricing that immediately into, current orders? Or do you not because the tariff could change by the time the truck gets made and delivered? And a little bit, if you're willing, same question on do you anticipate any margin impacts on from production variances from supply chain from when you order and when you choose to order depending on tariff. I mean, is that a potential margin risk towards the end of the year or not? And if I don't get back on the line, I'd just like to say, Harry, congratulations.

It's been a pleasure talking with you over the years, and thank you for everything.

Yeah. I think that all the things you said in terms of the pricing structures and the timing for them are all are all true, but there's not a single thirty second answer I could give you about how they affect things. There are times when we have a backlog we're protecting. There's times when component prices are coming in. There's times when we know what they're going to be.

There's times when it's little bit uncertain. We're still defining HTS codes, is what the government defines the tariff structures around. And so we're deciding whether those specific components or subassemblies are USMCA compliant. That's having some impact. So I I really can't give you a better answer than it's pretty dynamic right now.

And the beautiful thing about being part of this company is having great people who are thinking about it every day. And we work closely with our suppliers on this. I think collaboratively with our suppliers, our dealers, our customers, and this great team, we feel like we've got our fingers really on the pulse of it and are right on top of it.

Thank you. Our next question comes from Steve Volkmann of Jefferies. Steve, your line is open. Please go ahead.

Thank you very much and my congratulations as well, Harry. You're going to miss this, believe it or not. And my question is, I can see you shaking your head there. Anyway

I said I know I will, Rob. Know I will miss this, please. So I'm going

Well, anyway, I'm curious, I know there's a

lot of moving pieces on the tariffs here. Assuming nothing changes on to February, they just that doesn't happen. And what's in place today stands, is it reasonable to assume the gross margins will be the lowest of the year in the second quarter and then sort of improve as the year progresses as pricing comes in?

Well, like you know, we're in a really uncertain economic time and tariff time. So guiding the second quarter is something more than even a lot of people are doing. Asking me to go out into Q3 and Q4 and forecast that. I'm very reluctant to that. We do feel like we have a great strategy in place and that the more time passes, the more likely we are to get that in place.

And we do feel like the market will strengthen as we get into the second half of the year. So if you want to suppose that into improving margins, that's a fair supposition.

Building our trucks in The U. S. For The U. the end of the day, that should be a good thing for us.

Okay. And then I don't know if, Preston, this is what you were thinking, but I'm curious how you're thinking about the potential for pre buys. And now it feels like there could be two flavors here. One, ahead of any emission changes. I think we've talked about that on previous calls.

I'm curious if for an updated thought there. But we might also see some pre buys if this $2.32 thing comes in and people wanna buy the pre tariff trucks off the lot, maybe. I don't know. Just any thoughts in in that direction would be great.

I don't I don't really see that commentary on the section two thirty two of the buying the trucks off the lot because we're really building trucks for customers, so they have a customer name on them. And the consideration of section two thirty two is whether there would be tariffs applied to trucks built outside of The US and then how they would treat components that are coming into trucks that are built in The US. So I don't really think there's kind of a pre buy scenario around tariffs that I would envision. I would say that regarding the regulatory standards as we shared, if there is a current NOx standard implemented or if there's a NOx standard change implemented in 2027, so a move from 200 milligram engines to 35 engines, that will affect hardware on trucks, which will drive up costs on trucks. And so that could drive customer buying patterns into 2026.

Paccar (PCAR) Q1 2025 Earnings Call Transcript

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