PACCAR Q4 2022 Earnings Call Transcript

Presentation

[Operator]

Good morning and welcome to PACCAR's Fourth Quarter 2022 earnings conference call. [Operator Instructions]

I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

[Ken Hastings, Director of Investor Relations at PACCAR]

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.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Hey, good morning. Harrie Schippers, Michael Barkley, and I will update you on the record fourth quarter and full year 2022 results as well as other business highlights. First, I appreciate our outstanding PACCAR employees. They consistently deliver the highest quality trucks and transportation solutions to our customers and excellent financial results for our shareholders. They're truly an impressive team.

In 2022, PACCAR achieved record annual revenues of $28.8 billion and record net income of $3.01 billion. PACCAR's financial performance benefited from strong business growth across all of PACCAR's major truck markets and record results in our Parts and Financial Services divisions. PACCAR has achieved 84 consecutive years of net income and has paid a dividend every year since 1941. In 2022, PACCAR declared dividends of $4.19 per share and announced a 50% stock dividend. PACCAR's fourth quarter revenues were a record $8.1 billion and quarterly net income increased from the prior year by 78% to a record $921 million.

PACCAR Parts achieved fourth quarter revenues of $1.47 billion and record pretax profits of $380 million, which was 23% increase compared to the same period last year. PACCAR delivered 51,600 trucks during the fourth quarter. This was 7,300 more than the third quarter and was a result of higher truck production and the completion of nearly all the vehicles that were awaiting components. The supply chain is improving, though there may be some supplier constraints throughout the year. In the first quarter of 2023, deliveries are forecast to be strong and in the range of 49,000 to 53,000. In 2022, U.S. and Canadian Class 8 truck retail sales were 283,500 units. PACCAR's market share increased to 29.8%.

The U.S. economy is projected to expand modestly in 2023. In this truck sector, there's pent-up demand from the prior three years of industry underproduction, and customers need to replace aging fleets to benefit from the superior performance of the newer Kenworth and Peterbilt models. The 2023 U.S. and Canadian Class 8 truck market deliveries are forecast to be in a range of 270,000 to 310,000 vehicles. European above-16-tonne truck registrations were 298,000 last year, and DAF's market share increased to a record 17.3%, reflecting the success of the new generation of DAF trucks. In 2023, confidence in the European economy is growing, and with pent-up demand for new trucks, we expect the above-16-tonne truck registrations to be in the range of 270,000 to 310,000. In 2022, the South American above-16-tonne truck market was 138,300, and this year the South American market is expected to be in the range of 125,000 to 135,000 units. In Brazil, DAF achieved a record 6.9% share in the above-16-tonne market, up from 5.7% last year. DAF Brazil has grown steadily since we opened the factory 10 years ago and makes a healthy contribution to PACCAR's global success.

Truck, Parts, and Other gross margins expanded to 15.9% in the fourth quarter, reflecting strong global performance, higher truck deliveries, excellent Parts business, and supply chain improvements. We estimate PACCAR's worldwide first quarter truck and parts gross margins [Technical Issues]. PACCAR and its customers realized the financial benefits of the new range of heavy and medium duty Kenworth, Peterbilt, and DAF trucks. These new trucks are successful in the market due to their premium quality, excellent fuel efficiency, and low operating costs.

Last year, PACCAR earned recognition in several areas. The new DAF XD distribution and vocational truck was named the 2023 International Truck of the Year. Kenworth and Peterbilt earned six manufacturing leadership awards from the National Association of Manufacturers. The reporting firm CDP again recognized PACCAR as an environmental leader with an elite A rating. This rating places PACCAR in the top 1.5% of over 18,000 reporting companies. And PACCAR was recognized as a top place for women to work by the Women in Trucking organization for the fifth consecutive year.

Demand is strong in all markets for PACCAR's industry-leading new trucks and transportation solutions, and we look forward to 2023 being another excellent year. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Harrie.

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

Thank you, Preston. In 2022, PACCAR Parts set new records for annual revenues and profits. Annual revenues increased by 17% to $5.8 billion, and annual pretax profit increased by 30% to $1.45 billion. Annual gross margins expanded to 30.4% from 28.6% in the prior year. PACCAR Parts is a high-margin and high-growth business. PACCAR Parts expanded its global distribution network in 2022 by opening a new parts distribution center in Louisville, Kentucky, and has 18 PDCs worldwide. We estimate Parts sales to grow by 10% to 13% in the first quarter of this year compared to the same quarter last year as high truck utilization contributes to strong global demand for Parts.

PACCAR Financial Services fourth quarter pretax income increased to a record $151 million, which is a 12% increase from last year. Annual pretax income increased 35% to a record $589 million. Portfolio assets increased to $17.2 billion. The portfolio continues to perform well with very low past dues and low credit losses. PACCAR Financial benefited from strong used truck prices in 2022. Last year, PACCAR Financial opened a new retail used truck center in Madrid, Spain, bringing the total to 13 used truck facilities worldwide. These retail used truck centers contribute to higher price realization compared to wholesale channels. In 2023, we expect used truck prices to moderate but remain historically strong. With its large portfolio and superb credit quality, PACCAR Financial should have another very good year.

In 2022, PACCAR invested $505 million in capital projects and $341 million in research and development. PACCAR's return on invested capital improved to an industry-leading 35.2%. In 2023, we're planning capital investments in the range of $525 million to $575 million, and R&D expenses will be in the range of $360 million to $410 million as we invest in key technology and innovation projects. These include next-generation clean diesel and hydrogen combustion engines, battery and hydrogen electric powertrains, autonomous driving systems, connected vehicle services, advanced manufacturing, and enhanced distribution capabilities. PACCAR's independent Kenworth, Peterbilt, and DAF dealers continue to invest in their businesses to provide our customers the highest level of service in the industry. [Technical Issues] significant contribution to PACCAR's long-term success and supporting the growth of PACCAR Parts and PACCAR Financial Services. PACCAR had an outstanding year in 2022, and we're very positive about 2023.

Thank you. We'd be pleased to answer your questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.

[David Raso, Analyst at Evercore ISI International]

Hi, thank you. My question relates to the gross margin for the first quarter and how do we think about the cadence from there. So for the first quarter, you have deliveries very similar to the fourth quarter. The mix between truck revenues and parts revenues seems like it's pretty similar. So for the stronger gross margin in the first quarter and the fourth quarter, is that essentially that you're shipping less red-tagged trucks, a little more overhead absorption, and price/cost gets better. And I'm just trying to think about price/costs moving forward after the first quarter. Thank you.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah. Sure, David. Good to talk to you. The way we're looking at it as the offline units that have been limited by supplier constraints have been largely resolved, so it's fairly behind us right now, but there were some of those that were taken care of in the fourth quarter. So when you think about deliveries in the first quarter that's basically production. That's good run rates. We would say that our margins are doing well on both the parts side and the truck side, and that's really a factor of all of the new trucks being in the market and pretty much fully released now in Europe and North America, so the customers are getting the benefits of those trucks as are we. And I would add one more thing, which is the strong global performance of the team, whether that's in Australia or in South America, it's going well and that's contributing.

[David Raso, Analyst at Evercore ISI International]

So taking that from the first quarter then, if your price and your backlog I assume isn't going to dissipate the next few quarters, I would like to think some costs maybe come down as the year progresses. If that's what you're able to do in the first quarter and price/costs maybe gets a little better over the next couple quarters, not worse, how should we think about the gross margins moving forward after the first quarter?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Well, you know well that we guide and give you share information on we think the first quarter will be. In general, we think 2023 will be a good year.

[David Raso, Analyst at Evercore ISI International]

All right. Thank you very much.

[R. Preston Feight, Chief Executive Officer at PACCAR]

You bet, David.

[Operator]

Our next question comes from Steven Fisher from UBS. Please go ahead. Your line is open.

[Steven Fisher, Analyst at UBS Investment Bank]

Thanks. Nice quarter. With the better-than-expected deliveries, to what extent are you backfilling that backlog or are you perhaps just burning that backlog a bit faster than expected? I guess I'm curious how much visibility you have later in the year and how full your backlog is for say Q3 and Q4.

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think the macro way to think about it is that since 2020 the industry has really been not able to supply all the trucks that have been needed, so there is a strong pent-up demand for the trucks. And in addition to that, obviously, we've launched more new products than any time in our history, so that's contributing. We have excellent visibility looking into the year. We're full through the first half, filling the third quarter nicely, demand continues to be strong in line with build, and so it's looking like a really good year.

[Steven Fisher, Analyst at UBS Investment Bank]

Okay. And just in terms of the cost and inflation side of things, I'm curious what you're seeing from your suppliers in terms of prices. Is there a range that you're seeing where some of them are still raising prices, some are holding or falling? What are you seeing in terms of the net inflation and actions from your suppliers here?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah. I think you did a great job of characterizing it. You see some raising, some holding, some where there's commodity costs where there have been improvements, but it's a mixed bag. Obviously, labor is still a factor as far as our supplier -- for our suppliers. And all of those wash into the mix.

[Steven Fisher, Analyst at UBS Investment Bank]

Okay. Thank you.

[R. Preston Feight, Chief Executive Officer at PACCAR]

You bet.

[Operator]

Our next question comes from Dillon Cumming from Morgan Stanley. Please go ahead. Your line is open.

[Dillon Cumming, Analyst at Morgan Stanley & Co., LLC]

Great, good morning, guys. Thanks for the question. Just wanted to ask the first one on the Parts growth. 10% to 13% in the first quarter is pretty admirable just considering some of the rumblings we heard in the channels with regards to truck utilization maybe being a bit more challenged. But you've obviously been getting the benefit of the MX engine penetration, could you just maybe pair off those two headwinds and tailwinds going into the first quarter, how much of that growth is coming from MX engine penetration versus any headwind from truck utilization maybe moderating a bit?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah. The 10% to 13% growth rate that we expect for the first quarter really reflects all of those things. So we continue to see the PACCAR engine performing really well. That, of course, drives incremental Parts sales. But the Parts team is doing an amazing job launching new programs, whether it's fleet sales, ecommerce. Our MDI system continues to improve. So it also means that we continue to grow our share in the Parts business. We're announcing our TRP business, adding stores, selling more parts with TRP. So it's a mixture of all of those things that allowed us to do really well in the first quarter.

[Dillon Cumming, Analyst at Morgan Stanley & Co., LLC]

Got you. Thanks. Harrie, and I'm going to ask the second one on the finco. The margin performance in the quarter really strong considering the deceleration we've seen in used truck pricing more recently. Is that just reflective of PACCAR trucks commanding a premium in the market on used basis or what would you attribute that more recent strength to, considering the decline you've seen in used truck prices more recently?

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

Yeah. We continue to see a 10% or 15% premium for Kenworth. Peterbilt used trucks in the marketplace. That's been around for a long time. That continues. But we also see more and more benefits of the used truck centers that we have been developing and opening over the recent years. We now have 13 used truck centers worldwide. It allows us to sell more used trucks at retail prices, instead of wholesale. So all of those things have contributed to the finance company. Like we said, the portfolio is in really good shape, past dues are low less, than 0.5%. So yeah, customers continue to pay their bills and the finance company continues to benefit from that.

[Dillon Cumming, Analyst at Morgan Stanley & Co., LLC]

Got it. Sounds good. Thanks for the time.

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

You're welcome.

[Operator]

Our next question comes from Tami Zakaria from JP Morgan. Please go ahead. Your line is open.

[Tami Zakaria, Analyst at J.P. Morgan Securities]

Hi, good morning. Thank you so much. So my first question is how should we think about seasonality of builds and delivery in 2023? Is the first quarter delivery number a good run rate for the rest of the year?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Tami, it's good to talk to you. I think that what we see is we have had increasingly steady production and that's why you're seeing this first quarter number be pretty high without any of the offline issues of last year that are behind us. So it feels pretty steady there. And I think there's opportunity for us in 2023 as we look forward.

[Tami Zakaria, Analyst at J.P. Morgan Securities]

Got it. That's super helpful. And then my second question is, how should we think about your market share gain expectation this year? Should share capture continue at a clip similar to 2022 or do you see any reason or chances of that accelerating this year?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Well, I think that our teams have done a fantastic job around the world of introducing new products over the last 1.5 year on the truck side and, as Harrie mentioned, on the Parts side and the Financial Services side. So the totality of what benefit PACCAR is providing to our customers is very high. And I think that that high benefit to them helps us grow our share. And so when our customers are successful and our dealers are successful, then we're successful and that's how we think of it.

[Tami Zakaria, Analyst at J.P. Morgan Securities]

Got it. Thank you so much.

[R. Preston Feight, Chief Executive Officer at PACCAR]

You bet.

[Operator]

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

[Charles Dillard, Analyst at Sanford C. Bernstein & Co., LLC]

Hi. Good morning, everyone. So I was hoping you could talk about your industry view on the first half versus second half production cadence, just given that there are number of crosscurrents with in PACCAR pre-buy resulting in pent-up demand. So how should we think about that production level?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Well, I think that -- again I'll come back for our sector. We, as an industry, have not built enough trucks for the past few years, and that combined with excellent new trucks that provide really good operating cost advantage to our customers is incentive for them to continue to buy trucks. I think that the pre-buy for 2024 is a nonissue. It's too limited and really only California, and customers end up benefiting in most cases when we bring in new products because we bring them features and content and advantages that help them run their operations better. I think that when we think about the year, it feels steady and strong throughout.

[Charles Dillard, Analyst at Sanford C. Bernstein & Co., LLC]

That's helpful. And then just over to your EV offering. Can you just talk about what the composition of production is for this year and then how has the passage of the Inflation Reduction Act just changed like the conversations that you're having with customers and ultimately how are you seeing that translate into your demand curve shift in production?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah. I'll make a couple comments with and then Harrie or someone can add in. What we see is I think what we've shared before and is coming through is that we think that the EV market, the zero emissions vehicle market will just gradually grow. Customers are experimenting with it now, trying to understand it. They're buying chargers, putting in infrastructure around it. PACCAR has nine electric vehicle models in production, nine. So our teams have done a fantastic job of putting the products out there for customers to get used to and applications that fit all their needs. And we think it'll grow. As we've shared previously, we think it will be in the hundreds and it'll stay in the hundreds for a little while. And then as regulations come in and experiences become more familiar, it'll grow and turn into the thousands and extend from there. So I think that at the moment it's in the hundreds, and we're well positioned for that growth, and we have some fantastic vehicles out there that are providing great experiences. Anything to add, Harrie?

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

No, I think that's spot on.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Thank you.

[Operator]

Our next question comes from Rob Wertheimer from Melius Research. Please go ahead. Your line is open.

[Rob Wertheimer, Analyst at Melius Research]

Thank you. Preston, you mentioned a couple times how the industry has been tight obviously with COVID over the past couple years and customers haven't been able to get all the trucks they want. Are you able to split that in North America at all into the freight truck category versus more fleet trucks? Presumably the Infrastructure Act will drive demand for cement and dump and things like that. I don't know if that's happening already, if you're seeing any early orders, or if that's more of a '24 effect, and I don't know how the fleet age and tightness on that side of the market compares with the more freight market.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah, Rob, it's an interesting way to think about it. I think what we've seen is generally strength in both sides, truck and tractor. Obviously, there's local market impacts there, but the total general statement would be strong demand for trucks and strong demand for tractors.

And I would add if anything that in the freight truck segment, PACCAR has a market share of more than 40%. So any growth -- accelerated growth in that area, Kenworth and Peterbilt will definitely benefit from that.

[Rob Wertheimer, Analyst at Melius Research]

Okay, great. Thank you. And then you touched on supplier component inflation or whatever to you earlier. There's a lot of debate or speculation as to whether logistics fall -- logistics costs are falling or will fall materially. Do you have any sense of the current trend for PACCAR and how that looks in the early '23? And I'll stop there. Thank you.

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think the logistics costs have been buried. Obviously, over the last year they increased. And now I think what we're talking about is there's high input costs there, but it's moderating now. And I don't think we're especially concerned about it for 2023.

[Rob Wertheimer, Analyst at Melius Research]

Got it.

[Operator]

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.

[Jamie Cook, Analyst at Credit Suisse Group]

Hi, good morning. Nice quarter. I guess just two questions. One, I was impressed with the incremental margins you guys put up this quarter. I think 35.5%. I don't think I've ever seen you put up incremental margins that high. So can you talk about how we should think about normalized incremental margins going forward just with some of the new product introductions that are more favorable to mix versus some things that might be more one time in nature?

And then my second question is just to follow up on, I know you said the order book is or your backlog through the second quarter building through -- starting to build for the third quarter. Is that across the board in North America or Europe, if you could just distinguish between the two? Thank you.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Sure. We think about it entire team of PACCAR is doing a good job. So our margin performance is based upon providing great trucks that are providing value to our customers. They're realizing those benefits, they've had time with those trucks now. And so that is effective for them and then consequently effective for PACCAR on the truck side. As Harrie did a really nice job of outlining, the Parts business growth has been strong and continues to be strong, and we predict it will continue to be strong. So that's helpful to our margins. And I'd also say that, to tie into your second question, is we've seen strength globally for PACCAR. Europe is doing very well for us. The new trucks there, the XD, XF, XG product lines are the only trucks in the industry in Europe that are taking advantage of the masses and dimensions regulations, which allow a different shape. So that gives us a distinct advantage in Europe, so the European market for PACCAR is strong as is understood by our 17.3% record market share we enjoy there. And I would say that Brazil, Australia, North America, all are doing well. So there's not a single market or a single sector right now. We've just got a great team of people that have done a good job of giving our customers what they want and those products are working really well.

[Jamie Cook, Analyst at Credit Suisse Group]

Okay. Thank you. Nice job.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Thank you.

[Operator]

Our next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead. Your line is open.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Yeah. Thanks, guys. Maybe just starting with a question on Parts. Margins there continue to surprise to the upside, look really strong. I guess, how do you think about the ability for that business to continue expanding margins into 2023 and beyond?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Well, Harrie offered some commentary on Q1 growth and said it's very positive. One of the things we should highlight in addition to some of the ongoing initiatives is our continued integration of PACCAR Parts with our customers and our dealers. I think it's a really important growing part of our business as it adds to recurring revenue strength for the future. So, for us, the future looks very bright for the Parts team as they bring data and capabilities into the truck, into the dealerships, and into the customers, so there's a higher degree of connectivity there, and that will all be helpful to us.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. Thank you. And then maybe just a shorter-term question. In the outlook for 1Q deliveries of 49,000 to 53,000, any distinguishing features among the regions like what you're expecting sequentially for Europe versus North America versus rest of world? Thank you.

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

If you look at the range for the first quarter, we expect build dates to improve basically in all the geographies we're in, so Australia, Brazil, Europe, North America, we're going to be building more trucks in all of those areas. So it's going to be across the board.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks. I'll pass it on.

[Operator]

Our next question comes from Matt Elkott from Cowen. Please go ahead. Your line is open.

[Matt Elkott, Analyst at Cowen and Company, LLC]

Good morning and good afternoon. So last year we saw some big monthly spikes in Class 8 orders as you guys and other OEMs opened more of the order books, like in September. Would you say order logs are open for much of 2023 and that should mean a less erratic order numbers month from month going forward?

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think that following orders on a month-to-month basis is a risky thing to do and to try to get any guidance out of that because sometimes it's fleet buying season, sometimes there's different OEMs will handle it differently. For us, we're taking orders in the second half, they're coming in nicely, and it seems like it'll fill in 2023 well.

[Matt Elkott, Analyst at Cowen and Company, LLC]

Got it. And just one more question, Preston. Any update on the natural gas engine you announced back in August with Cummins? Anything to report on that?

[R. Preston Feight, Chief Executive Officer at PACCAR]

No, I think nothing else other than to say that we continue to be the leader in the natural gas offerings in North America and our partnership with Cummins is fantastic. They're doing a really good job, and I think that the development of the ongoing development of natural gas engines is something that will survey a portion of the market. You can get lower emissions than that, and so that's a part of the total portfolio of PACCAR to give our customers what they need.

[Matt Elkott, Analyst at Cowen and Company, LLC]

Great. Thank you very much.

[Operator]

Our next question comes from Jeff Kauffman from Vertical Research Partners. Please go ahead. Your line is open.

[Jeffrey A. Kauffman, Analyst at Vertical Research Partners]

Thank you very much and I'll echo Jamie's comments. Terrific quarter. Two questions. First one focusing on PACCAR Financial. I was just curious, just a big jump in assets, almost 8% sequentially, after assets had been flattish for the previous four to six quarters. I was just wondering what PACCAR Financial's percentage of PACCAR aggregate unit sales are if there was a jump in that accounted for that differential or what would have driven the assets in PFS up so much sequentially.

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

So the assets of PACCAR Financial Services increase...

[Jeffrey A. Kauffman, Analyst at Vertical Research Partners]

Yeah.

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

...of course, benefited from a nice increase in the dealer flooring [Phonetic] towards the end of the year. Our share is about 36% -- 36% of the trucks that Kenworth, Peterbilt and DAF have sold were financed by PACCAR Financial Services. That's about the same as it was a year ago. I think the big increase that we see in the asset growth impact our Financial is the higher prices for trucks. The trucks are sold at a higher price and that creates more assets for the finance company. And that's also one of the reasons that we expect the finance company to continue to perform well as we go into 2023.

[Jeffrey A. Kauffman, Analyst at Vertical Research Partners]

Okay. Thanks, Harrie. And just real quick, I was at CES and I saw something I didn't expect, which was a fuel cell truck that you were starting the market. I know that's not going to be big numbers anytime soon, but can you talk a little bit about it?

[R. Preston Feight, Chief Executive Officer at PACCAR]

Sure. When we think about the technologies that will bring us to the future, we think clean diesel will be the dominant path forward for the next several years. But we're all trying to understand whether it'll be driven by battery electric, hydrogen combustion, or hydrogen fuel cell as the capabilities for zero emissions products. And PACCAR has made prudent investments into each of those technologies so that we understand them so that if one brings a distinct advantage to our customers, we're ready to offer it to them. And as you noted, we had both trucks. We had a battery electric and hydrogen fuel cell at CES because we're working on both of them, and we'll put them in market when it makes sense financially.

[Jeffrey A. Kauffman, Analyst at Vertical Research Partners]

And the fuel cell truck, I'm assuming that's a Toyota engine with the partnership. But is that a commercial-grade engine or is that more passenger cells that you're using?

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think what we're doing is developing a product that's specific for the truck market, and we're doing that in close collaboration with them.

[Jeffrey A. Kauffman, Analyst at Vertical Research Partners]

Okay. Thank you.

[R. Preston Feight, Chief Executive Officer at PACCAR]

You bet.

[Operator]

Our next question comes from Scott Group from Wolfe Research. Please go ahead. Your line is open.

[Scott Group, Analyst at Wolfe Research]

Hey, thanks. So if you guys hold this 16%, 17% gross margin for the year, it'll be your best gross margin ever. I guess how should we think about the new range of gross margins through a cycle? Meaning if in the last decade it's been 12% to 15%, give or take, is the right range, what do you think the new range is for gross margin through cycle?

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think of it as PACCAR has an incredibly capable team of people around the world, and they're doing a fantastic job of giving our customers the trucks and transportation solutions they need. This is a really strong company. It's a growing company in all elements of the business. So we look forward to the future pretty well. And the margins will be good we think, but they'll obviously be what the market is.

[Scott Group, Analyst at Wolfe Research]

Okay. And then is there -- I know there are some mix changes with wholesale versus retail and unused. Is there any kind of sensitivity you can give us on used prices and the finco margins, earnings and any help you can help us with?

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

Used truck prices have come down a little bit from the historical highs earlier last year. But I would say that even at today's valuations, used trucks are very attractive business for the finance company, selling used trucks and making profits while we do so.

[Scott Group, Analyst at Wolfe Research]

Do you think finco is a business that can grow earnings this year?

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

We don't guide that specifically on the finco earnings for the year, but I would say that 2023 will be another excellent year for the finance company.

[Scott Group, Analyst at Wolfe Research]

Okay. Thank you, guys.

[Operator]

Our next question comes from Miguel Borrega from BNP Paribas Exane. Please go ahead. Your line is open.

[Miguel Borrega, Analyst at Exane BNP Paribas]

Hi. Hello, everyone. Couple of questions for me. The first one just on your market guidance for Europe and North America. Just wanted to understand why would you not expect more growth from both markets, assuming supply chains keep easing so, what could be the headwind on production for 2022? And also, why are you less positive on European market versus North America given that your exit rates are much stronger in Europe versus the U.S.? Thank you.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Well, I think we're positive on the European market, and we're positive on the North American market. And I think that we feel good about the year. I think that our production rates are increasing. Obviously, we see that in the fourth quarter, first quarter production plans, though there could still be uncertainties [Indecipherable] and that could have an impact. But right now, it looks pretty good.

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

I would like to emphasize too that the supply base has been improving, but we still see uncertainties in the supply base, and that's why we have the ranges that we have for the first quarter and for the markets for North America and Europe for the entire year.

[Miguel Borrega, Analyst at Exane BNP Paribas]

Great. And then my second question just on shareholder returns. This is obviously a record net cash position. Can you give us a sense on how much cash you need to run the business and how are you thinking about capital allocation going forward? Thank you very much.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Well, we have a very good history of how we allocate capital. We return excellent returns for our shareholders, as we noted, 17% return last year. We pay dividends every year. That goes well for our shareholders, and we use money in a smart way, make future investments in a way that's also good for our shareholders. So anything you'd add, Harrie?

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

It's nice to see that the cash balance increased to more than $6 billion at the end of December. So that's really a nice milestone that we achieved. And bear in mind, we paid a nice year-end dividend, almost $1 billion that will be paid in January. So we use the cash to make the investments that Preston mentioned, but also to make a nice return for our shareholders.

[Operator]

Next question comes from Michael Feniger from Bank of America. Please go ahead. Your line is open.

[Michael Feniger, Analyst at BofA Securities]

Yeah. Thanks, everyone. Just two questions, one on the longer term and the shorter term. First off, is there anything you think the industry, the OEMs learned in 2022 that is more sticky and structural in terms of managing orders, production, pricing strategies, even as production bottlenecks ease and normalize. Is there anything that sticks out to you that could be a more structural thing going forward? Maybe pricing discipline with some of these more public players. Love to get any comment on that.

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think in answer to that, I think our teams do a fantastic job of working closely with our customers to understand what their needs are and making sure we meet their needs as quickly as possible. I think the teams, especially in 2022, did a great job. Our production teams, our purchasing teams, our materials teams, and our suppliers together producing as many trucks as we could for the customers with that strong demand. And I think that PACCAR has a long history of trying to work well in all market conditions, and I think we'll continue with that.

[Michael Feniger, Analyst at BofA Securities]

Understood. And just for a more shorter-term question. Some market participants point to a rollover in and create [Phonetic] spot rates, and there's gap between spot rates and contract rates. I'd love to know how you view that. Is that just a smaller portion of the customer base, doesn't really accurately reflect maybe the strength of the freight market or pent-up demand? Just curious how you -- in your seat, how you view that distinction.

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think we try to take a broad look at it and think that freight tonnage is up over 3% -- 3.7% for the year in 2022. So that's a good indicator of what's really going on out there. And as I've shared and we've talked a lot about, I think older trucks are more expensive to operate and with our introduction of new trucks, coupled with strong tonne miles being driven, that's good for PACCAR and bodes well for a strong year.

[Michael Feniger, Analyst at BofA Securities]

Thank you.

[Operator]

Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead. Your line is open.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Yes, hi, and good afternoon, everyone. I just want to go back to the really strong margin performance and the outlook. So when we look back when you were posting anywhere close to this level of margins, your Parts margins is up significantly from that timeframe. OEM margins are a touch lower than where they were in 2006. And I'm wondering, Preston, just earlier in the conversation you mentioned the improved fuel economy and other features. Are we at a point where we can expect new truck margins to also be up versus the last cycle as well as we think about what that looks like over the next couple of quarters?

[R. Preston Feight, Chief Executive Officer at PACCAR]

What I think I'd point you towards is the good performance of the trucks. Kenworth, Peterbilt, and DAF have brought out trucks that are really performing well. They're winning awards. They're the most fuel-efficient trucks in the industry, the most desired trucks in the industry, and that bodes well for our truck margins.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Okay. And then you spoke about a new approach to the telematics part of the business. Can you just talk about the revenue opportunity for PACCAR? If you can charge $20 per month per truck on your field population, that would suggest a pretty healthy subscription opportunity. I'm wondering what could the economics look like to you folks based on the partnership structure and how do you think about the cadence of the product rollout.

[R. Preston Feight, Chief Executive Officer at PACCAR]

We think that there's a growing business in connected vehicles, and it's growing because we have our vehicles connected. There's a lot of interesting and useful data to our customers on the vehicles that we have. We've offered our PACCAR Connect system. And that PACCAR Connect system is now going to be intertwined with the Platform Science's operating system and application storage. So with the combination of those, it gives us an opportunity for further growth. That's one thing.

I'd also say that our Parts team is working closely with the data that comes from the truck. Our Financial Services team works closely with the data that comes from the truck, all to the benefit of our customers and our dealers, and we think that will be a growing opportunity in recurring revenue.

[Jerry Revich, Analyst at The Goldman Sachs Group]

And can you just talk about your expected economics, what do you expect the charge for the enhanced features for some comparable systems that are available after market, they do go as high as $20 per month. Is that feasible for your offering?

[R. Preston Feight, Chief Executive Officer at PACCAR]

I think it's going to vary depending on the customer and the suite of technologies that they take?

[Jerry Revich, Analyst at The Goldman Sachs Group]

All right, thanks.

[R. Preston Feight, Chief Executive Officer at PACCAR]

You bet.

[Operator]

[Operator Instructions] Our last question will come from David Raso from Evercore ISI. Please go ahead. Your line is open.

[David Raso, Analyst at Evercore ISI International]

Hi. I might try to squeeze in two quickly, a little longer term and one short-term, sorry. Longer term, the idea of a pre-buy mid-decade, I am curious, if you think about your builds for the industry yourselves in '24 being influenced by an assumed recovery in '25 and '26, the pre-buy before the '27 models are out and spring of '26. Just theoretically, should that provide a higher floor to '24 builds because of we've seen in the past, obviously, some of these pre-buys get well ahead of supply. Is that being too cute thinking about '24 builds, whatever macro view someone may have, that they can be influenced by somewhat assured, some sense of a pre-buy in '25 and '26? And then I'll be quick on the near-term question. But if you can answer that.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Hey, David, I'm going to let you work that. That's not how we are looking at it. We just think about the products we're offering, the benefit to the customers, and making sure that we're the leader in the market with those products. So how the market...

[David Raso, Analyst at Evercore ISI International]

Are there conversation with customers about...

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah, of course, we do. But the market will be in '24 and '25 I think is beyond this call.

[David Raso, Analyst at Evercore ISI International]

Okay. And then real quick on the near term. The gap between used and new prices on tractor sleepers is getting obviously a lot wider than it was six months ago. How does that usually manifest itself? And is that more about maybe residual values getting marked down a little bit on leases? How does that usually begin to flow into your business model when you see the gap between your used tractors and the new prices widening the way it's been the last few months?

[Harrie C.A.M. Schippers, President and Chief Financial Officer at PACCAR]

David, I would say that both on tractors and sleepers, PACCAR Financial does really well selling those trucks at that premium pricing. And it's part of the success of the company that we build trucks that get a premium, whether it's in a new truck market or in a used truck market, and benefits the finance company and it fits the truck divisions as well.

[David Raso, Analyst at Evercore ISI International]

All right. Thank you very much for the time.

[R. Preston Feight, Chief Executive Officer at PACCAR]

Yeah, you bet.

[Operator]

There are no other questions in queue at this time. Are there any additional remarks from the company?

[R. Preston Feight, Chief Executive Officer at PACCAR]

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

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Ken Hastings, Director of Investor Relations
• R. Preston Feight, Chief Executive Officer
• Harrie C.A.M. Schippers, President and Chief Financial Officer

Analysts

• David Raso, Evercore ISI International
• Steven Fisher, UBS Investment Bank
• Dillon Cumming, Morgan Stanley & Co., LLC
• Tami Zakaria, J.P. Morgan Securities
• Charles Dillard, Sanford C. Bernstein & Co., LLC
• Rob Wertheimer, Melius Research
• Jamie Cook, Credit Suisse Group AG
• Nicole DeBlase, Deutsche Bank Aktiengesellschaft
• Matt Elkott, Cowen and Company, LLC
• Jeffrey A. Kauffman, Vertical Research Partners
• Scott Group, Wolfe Research
• Miguel Borrega, Exane BNP Paribas
• Michael Feniger, BofA Securities
• Jerry Revich, The Goldman Sachs Group, Inc.