PACCAR's Strategic Response to Inflationary Pressures and Capital Spending Challenges

Impact of Inflation on Costs

PACCAR is experiencing a broad-based 5% cost increase due to inflation, affecting both its Parts and Trucking businesses. Inflationary pressures on material and labor costs are challenging earnings, and efforts to balance pricing and costs are ongoing, with potential impacts expected in the third quarter.

"• Continued increases in material and labor costs, as well as other inflationary pressures, could negatively impact earnings." --- (CMI, sec filing, 2024/Q1)

"Inflation was at 1.4% when DJT left office. No getting around that. Wages can never keep up with inflation of this scale, nor with the rising interest rates." --- (PCAR, twitter, 2024/05/17)

"So, first of all, as I articulated, the order board is pretty long. And so some of the work to improve price/cost in response to inflation and performance of the business takes some time to play out." --- (CMI, earning call, 2024/Q1)

"And I think that has some opportunity of impact for pricing and cost balance in the third quarter as well." --- (PCAR, earning call, 2024/Q2)

"Preston Feight: The 5% cost increase is broad-based. Its inflation in the Parts business is a little different than the trucking business." --- (PCAR, earning call, 2024/Q2)

Pricing Strategies Amid Inflation

PACCAR is focusing on real pricing relative to wage growth, similar to Ford's approach. GM's strategy includes inflation-adjusted pricing and strategic investments, while also maintaining pricing strength despite increased incentives and inventory normalization. Both companies prioritize profitability and margins amid inflationary pressures.

"We keep watching not nominal pricing. We'll keep looking at real pricing. So that is cost increases, prices increases relative to wage growth. And we're still at the higher end of what we saw pre" --- (Ford, conference, 2024/06/11)

"Well, number 1, inflation adjusted probably takes that 7% to 8% to 10%. And the 10.5% to 11.5% we're actually doing it while building a portfolio, investing in ICE, investing in EVs and rebuilding our infrastructure for the long term." --- (GM, conference, 2024/06/11)

"Industry supply demand normalizing. From a planning perspective, we're assuming lower industry pricing of roughly 2%, driven by higher incentive spending as we move through the year." --- (Ford, earning call, 2024/Q1)

"I wanted to start first with a question on pricing. If you could just provide a bit of context on the pricing strength we've seen, not only in 2Q, but in 1Q, if you just look at the incentives, the incentives are clearly up, but your pricing has actually been net flat, any color behind this? And then maybe you could just talk to the sustainability of this in light of the fact that we've seen some inventory normalization, but prices held in, do you view this price as sustainable beyond this year, factoring in that there is going to be some increase in incentives as inventory ticks up further from here?" --- (GM, earning call, 2024/Q2)

"For Q1, pricing was down only about $200 million year-over-year driven by demand for our products and a disciplined go-to-market strategy that prioritizes profitability and margins." --- (GM, earning call, 2024/Q1)

Supply Chain Management

PACCAR is localizing its battery supply chain through joint ventures like Amplify Cell Technologies, enhancing robustness and responsiveness to market needs. This strategy addresses supply chain challenges by balancing short-term responses with long-term stability, ensuring efficient ramp-up capabilities amidst inflationary pressures and capital spending constraints.

"This initiative will localize the battery supply chain, making it more robust and responsive to the needs of the growing electric commercial vehicle market in North America." --- (PCAR, press release, 2024/07/01)

"So coming off a period where the supply chain has kind of been whipped around and has struggled to ramp up, how do you kind of -- it's not just a PACCAR question, but how does the industry kind of balance those two forces where you have to you have to respond to conditions in the near term, but with also not jeopardizing yours and the supply chain's ability to ultimately then ramp back up?" --- (PCAR, earning call, 2024/Q2)

"So coming off a period where the supply chain has kind of been whipped around and has struggled to ramp up, how do you kind of -- it's not just a PACCAR question, but how does the industry kind of balance those two forces where you have to you have to respond to conditions in the near term, but with also not jeopardizing yours and the supply chain's ability to ultimately then ramp back up? How do you kind of thread that needle?" --- (PCAR, earning call, 2024/Q2)

"Accelera by Cummins, Daimler Trucks & Buses US Holding LLC and PACCAR have completed the formation of their joint venture, now known as Amplify Cell Technologies, to localize battery cell production and the battery supply chain in the United States." --- (PCAR, press release, 2024/06/04)

"About Amplify Cell Technologies Amplify Cell Technologies, a joint venture between Accelera, Daimler Trucks & Buses US Holding LLC, and PACCAR with EVE Energy as technology partner, is localizing battery cell production and the battery supply chain in the United States through the production of lithium-iron-phosphate (LFP) battery cells for electric commercial vehicles and industrial applications." --- (PCAR, press release, 2024/07/01)

Operational Efficiencies

PACCAR's focus on operational efficiencies is mirrored in the automotive industry, with companies like GM and Ford emphasizing cost efficiencies and manufacturing improvements to offset inflationary pressures and capital spending challenges.

"This was slightly better-than-expected due to a continued focus on cost efficiencies." --- (GM, earning call, 2024/Q1)

"The other area we're seeing progress is in manufacturing, and Bryce and his team as they're working to drive efficiencies to help offset the increases we have this year based on the contract that we signed last year." --- (F, earning call, 2024/Q1)

"We ramped our first battery JV plant last year, and as they increased production and made other efficiencies, the cost of cells came down significantly." --- (GM, earning call, 2024/Q1)

Financial Performance Metrics

PACCAR Financial achieved excellent profits of $540 million in 2023, driven by investments in used truck centers and prudent financial management. Over the last three years, profitability increased by 70% from 2018, with strong portfolio performance and market expansion. PACCAR's liquidity and financial stability remain robust, supported by solid cash balances and investment-grade credit ratings.

"And in 2023, PACCAR Financial achieved excellent profits of $540,000,000 This performance is a result of our investments in used truck centers, excellent portfolio quality and prudent financial management." --- (PCAR, Investor Day, 2024/06/05)

"And over the last 3 years, Packer Financial Services has reached a new level of profitability, up 70% from 2018, reflecting solid portfolio performance, expansion into the Brazilian market and continued portfolio growth in other core markets." --- (PCAR, Investor Day, 2024/06/05)

"PACCAR's strong financial performance for the last 20 years is highlighted here." --- (PCAR, AGM, 2024/04/30)

"PACCAR Financial Services Achieves Good Quarterly Profits PACCAR Financial Services (PFS) achieved pretax income of $113.9 million in the first quarter of 2024, compared to $148.8 million earned in the first quarter of 2023." --- (PCAR, press release, 2024/04/30)

"The Company believes its cash balances and investments, collections on existing finance receivables, committed bank facilities and current investment-grade credit ratings of A+/A1 will continue to provide it with sufficient resources and access to capital markets at competitive interest rates and therefore contribute to the Company maintaining its liquidity and financial stability." --- (PCAR, sec filing, 2024/Q1)

Future Outlook and Strategic Plans

PACCAR is focusing on developing new trucks, engines, and alternative energy capabilities to meet future emissions regulations and industry uncertainties. Investments in clean diesel, zero-emission powertrains, and autonomous truck development are key. Financial services support truck sales and innovative transportation solutions, while significant capital is allocated to manufacturing and equipment investments.

"And then if I think more broadly about strategies of product introductions, we’re continuing to develop new trucks, new engines, new alternative energy capability so that we have a very capable powertrain portfolio to handle the emissions changes that are coming forward and the uncertainty, frankly that the industry will experience with regulations." --- (PCAR, earning call, 2024/Q1)

"In summary, PACCAR Financial Services worldwide operations profitably support the sale of Kenworth, Peterbilt and DOB trucks utilizing an industry leading technology platform with excellent used truck remarketing capabilities and a leading full service and rental provider in pack lease, positioning us to successfully deliver innovative transportation solutions to drive future growth." --- (PCAR, Investor Day, 2024/06/05)

"So PACCAR is investing in new technologies and trucks for the future. These include clean diesel and 0 emission powertrains to meet regulations and customer needs advanced new vehicle designs to drive aerodynamics and freight efficiency global connected services that enhance our customers' operations and we are the OEM of choice for autonomous truck development." --- (PCAR, Investor Day, 2024/06/05)

"Management expects this method of funding to continue in the future. Investments for manufacturing property, plant and equipment in the first three months of 2024 were $162.2 million compared to $127.9 million for the same period of 2023." --- (PCAR, sec filing, 2024/Q1)