PACCAR Inc (PCAR) Earnings Call Transcript & Summary

[Presentation] Okay, that was a fun video. I think that video does a great job of conveying the pride and emotion that the wonderful people, employees of PACCAR around the world do in creating great products and services that we offer. And it shows a great picture of our bright future. PACCAR is a global technology leader in the commercial vehicle business. And in 2021, we celebrated 83 consecutive years of profitability. 2021 total revenues were $23.5 billion and net income was $1.85 billion. Our Truck products include medium- and heavy-duty commercial vehicles, diesel engines and other advanced powertrain components. They represent 72% of our total business. Aftermarket parts supports our global network of over 2,200 dealerships and made up 21% of total revenues. And Financial Services was 7% of total sales and had a portfolio of 204,000 vehicles and assets of $15.4 billion. PACCAR's core strengths are industry-leading quality, applied technology and continuous innovation. These core values form the basis for our broad strategies of providing premium products and services for our customers, profitable market share growth and business expansion. Our investments are driven by our passion for excellence. Over the past 5 years, PACCAR has invested $4.2 billion in facilities and products, a few of which are shown here. They include an increasing capacity at our PACCAR engine factories, creating strategically located parts distribution centers, like the one opening in Louisville, Kentucky this year; used truck centers that support our Financial Services businesses; and the creation of efficient, modern truck factories, like the one in Bayswater, Australia, Westerlo, Belgium and Chillicothe, Ohio. Our investments have resulted in us having the world's most modern and most efficient lineup of medium-duty trucks in the world and heavy-duty trucks in the world, beautiful product line shown on the screen. And we are ready for the future. Our teams are continuously introducing and developing new and innovative products in the areas of zero emissions with both battery electric and hydrogen-powered trucks in production and in development; autonomous vehicles being developed in coordination with the industry's most capable partners; and global connected services that will provide incremental revenue opportunities for us. In 2021, PACCAR Parts achieved record profit of $1.1 billion on revenues of $4.9 billion. Over the past 20 years, revenues have grown at an average rate of 80% per year. And strong growth in revenue of 13% to 15% is expected in 2022. This growth is a result of our investments in innovative technologies and state-of-the-art distribution centers that provide our customers with the right place at the right time to meet their needs. In 2021, PACCAR Financial Services had record profits of $438 million. PACCAR Financial Services profitably supports the sale of PACCAR trucks by offering industry-leading financing and full-service lease and rental options. PACCAR Financial Services will have incremental opportunities in zero-emission vehicles, autonomy and very importantly, in trucks-as-a-service, which will all support future PACCAR growth. PACCAR is a leader in environmental, social and governance areas. On the top left, PACCAR received an A rating from CDP, or Climate Disclosure Project. This places PACCAR in the top 2% of more than 13,000 companies that report data to the organization. Shown on the top right, PACCAR is committed to science-based CO2 reductions of 35% in scope 1 and 2 and at least 25% in scope 3 by 2030. In the bottom right, as a result of our team's focus, PACCAR is ranked in the top quartile of machinery companies by Sustainalytics and by the S&P Global Corporate Sustainability Assessment. And on the bottom left, PACCAR's OSHA recordable injury score, which is shown in blue, is industry-leading with OSHA recordables number that is less than half of the other U.S. heavy truck manufacturers, really proud of taking care of our employees. PACCAR offers its employees a chance to be part of organizations that promote diversity and inclusion, such as the PACCAR Women's Association and various diversity councils. These organizations promote cultural understanding and exchange through various events and create a workplace that is welcomed to individuals of all backgrounds. Proud to share that many PACCAR divisions were recognized as top companies for women to work for by the Women in Trucking Association. And I'm also pleased that PACCAR Chief Information Officer, Lily Ley, earned the 2021 Influential Women in Trucking Award. Lily's recognition was displayed on the NASDAQ Times Square billboard, shown on the right. So let's look at the economy for a second. Shown here is the GDP growth of 4 global economies over the past 5 years and a forecast for 2022. All have a similar pattern. There were 3 good years followed by the recession in 2020, a recovery in 2021 and most importantly, there's a positive outlook for 2022. The freight economy is strong. Shown on the left, truck utilization is at high levels and is forecast to remain elevated throughout the year. On the right, truck tonnage is near-record levels and is expected to continue to be strong also throughout the year. Demand for our new trucks is strong. The industry market size will be determined only by the number of trucks the industry can build. As a result, the U.S. and Canada market is expected to increase and be in a range of 260,000 to 290,000 Class 8 trucks this year. We also expect another strong European truck market this year, ranging from 270,000 to 300,000 trucks. And in South America, the above 16-tonne truck market is projected to be in a range of 125,000 to 135,000 trucks this year. So we expect this truck market will be stronger for longer for several reasons. Trucks are 10% to 15% older than they were just a couple of years ago. Supply chain disruptions have limited the industry's ability to increase build rates, which has led to an undersupply of trucks. The backlog is strong. Our customers just simply want more trucks and they want them faster. The U.S. continues to see elevated consumer spending and the products purchased need to be transported throughout the country. The recently passed infrastructure bill will require new trucks to move materials and equipment to construction sites and to create highways and roads. And record fuel prices will incentivize customers to upgrade to our new, more efficient vehicles. Shown here are some of the major truck markets in the world. Over 70% of the profits are made in North America, Europe, South America and Australia, markets where PACCAR has a strong presence. China and India are large markets but represent significantly lower portions of the global profit pool. We continuously assess different geographic markets to determine where and when we might enter additional markets and must be profitable. Since 2012, PACCAR's net income per truck produced has increased. And we expect this trend to continue. New trucks with increased safety and emissions content that will drive increased revenue and margin opportunity. Our parts business is strong and will continue to grow. PACCAR Financial's transition to a truck-as-a-service provider will offer new revenue opportunities. Autonomous and zero-emissions vehicles represent a large opportunity for PACCAR as both technologies require significantly more content than the current human-driven and diesel-powered trucks. And our proprietary PACCAR Connect system offers customers over-the-air software updates, advanced fleet management tools. And this will drive new revenue streams for PACCAR. All of these trends support great future growth for our company. As we look at the future, it is very bright. And we see that starting right now. Thank you. I'd now like to introduce Mike Dozier, PACCAR's Senior Vice President, to share about PACCAR industry-leading trucks. Mike, you're up.

Thank you, Preston, and good morning. I'm Mike Dozier, PACCAR's Senior Vice President. And it's great to be with you today. And having spent roughly half my career in engineering and product development roles, it is my pleasure to be able to take you through our fantastic and exciting new products. Now I've been with PACCAR for 34 years. And prior to my current responsibility, I held leadership roles as PACCAR Vice President and General Manager of the Kenworth Truck Company, Managing Director of PACCAR Australia as well as Assistant General Manager of Operations for Peterbilt and Chief Engineer at Kenworth. As a global technology company that designs and manufactures premium light-, medium- and heavy-duty commercial vehicles around the world, PACCAR's continued investments in industry-leading trucks and support services deliver outstanding performance and value to our customers, reflecting our core business values of quality, innovation and technology. And as shown in this slide, in 2021, PACCAR introduced the most comprehensive portfolio of new trucks in our history. This included the new generation of DAF on-highway trucks, shown in the middle of the slide, and the new Peterbilt and Kenworth medium- and heavy-duty products, shown on the left and the right. Shown here is the fantastic new DAF lineup, consisting from right to left of the XF, the XG and the new industry flagship, the XG+. These new models are the only trucks to take advantage of the new European masses and dimensions standards. Now this allowed for a new level of aerodynamic performance, that when combined with the PACCAR MX engine performance enhancements, deliver a 10% fuel efficiency improvement over existing models. Industry-leading driver comfort and efficiency is supported by larger interior space, side view cameras and a customizable digital dashboard. The industry-leading reliability, efficiency and driver comfort provided by the new DAF models was recognized with the 2022 International Truck of the Year Award for all three models. This is the second time in the last 5 years and the fifth time overall that DAF has won this prestigious award. The new models are already 1/3 of DAF's build and will continue to increase throughout the year. 2021 also saw the introduction of the new Kenworth T680 heavy-duty on-highway model, shown on the left, and the new medium-duty platform, which is shown in a T370 van application on the right. As with the new DAF, the T680 provides more aerodynamic exterior design that, in combination with the latest MX engine, delivers up to a 7% improvement in fuel economy. Driver comfort features include the state-of-the-art headlamps, optimized cab entry features and a configurable digital display. The new medium-duty product, available in Class 5, 6 and 7 configurations, shares a large portion of the base cab components with the Class 8 product and provides outstanding overall visibility, ingress and egress features and a configurable digital display, all of which provide enhancements in driver comfort and efficiency. Peterbilt also introduced its flagship Model 579 heavy-duty on-highway model, shown on the right, as well as the new medium-duty Peterbilt model product line, which is shown on the left, in a Model 536 delivery van configuration. As with the Kenworth medium-duty product, the Peterbilt product is available in Class 5, 6 and 7 configurations and provides significant enhancements in driver comfort and efficiency. Like the Kenworth heavy-duty product, the Model 579, paired with the PACCAR MX engine, delivers similar fuel economy benefits while also incorporating driver-focused comfort and efficiency features that are receiving outstanding reviews by both fleet managers and drivers. Looking at the PACCAR product portfolio from a segmentation standpoint. The new on-highway Peterbilt, Kenworth and DAF products further strengthened PACCAR's position in the market through the incorporation of exciting styling and the integration of the latest performance-focused technologies, including vehicle connectivity systems and the latest ADAS safety systems. The result is class-leading safety, efficiency and driver comfort that deliver excellent resale values and the lowest total cost of ownership. In the vocational segment, PACCAR is a market leader due to the broad application coverage provided by the products and the outstanding reliability and durability they deliver to our customers. From the Peterbilt Model 520 in refuse applications to the Peterbilt 567, Kenworth T880 and DAF CF in applications such as mixers and dump trucks, PACCAR's vocational products deliver segment-leading performance. And PACCAR's medium-duty product portfolio includes a full range of Class 5 through 7 vehicles. The exciting new Kenworth and Peterbilt medium-duty conventional lineup, combined with the DAF LF-based cabover lineup, provide extensive application coverage and industry-leading driver comfort and performance features. The cost-optimized design of our medium-duty products are also supported by automated cab assembly processes. Now this slide highlights a key performance element associated with the industry-leading cost of ownership provided by PACCAR products. As noted in the chart on the left side of the slide, since 2004, PACCAR has reduced particulate matter, noted by the horizontal axis, and nitrogen oxide, or NOx, emissions noted by the vertical axis, by 90% and 92%, respectively. During the same period, and as shown in the chart on the right, fuel efficiency as represented by North American data here has increased by 64%. To put this in perspective, a 5-mile per gallon level of performance in 2005 has increased to over 8 miles per gallon in 2021. PACCAR's continued investment in powertrain development will drive continued emissions and fuel economy performance enhancements that create further value for our customers while also benefiting society at large. Complementing the PACCAR portfolio of industry-leading diesel- and natural gas-powered products is the comprehensive lineup of Peterbilt, Kenworth and DAF zero-emission battery electric vehicles shown here. PACCAR is a leader in zero-emission vehicles. Consisting of both heavy- and medium-duty products, our EV portfolio covers applications ranging from refuse and drayage to regional haul and local pickup and delivery. And these products reinforce PACCAR's environmental leadership. In 2021, PACCAR began producing these exciting new products and has received hundreds of orders from customers in a wide variety of applications. With production activities underway, we're now delivering these products to customers around the world. John Rich, PACCAR Vice President and Chief Technology Officer, will provide more on these and other technologies during his presentation. Operations and supply chain management are critical aspects of PACCAR's performance and ongoing growth. The combination of logistics delays, semiconductor supply, labor shortages and the impact of global conflicts have highlighted the importance of these capabilities more than ever. PACCAR has and continues to successfully manage through supply chain disruptions as they develop. A key advantage to PACCAR's supply chain is that we focus on sourcing components in the same areas where our manufacturing operations are located. As a result, approximately 95% of our Tier 1 suppliers are located in the same region as our truck assembly plants. We believe this provides a competitive advantage over sourcing components from regions more removed from our operations. The current business environment in the U.S. and Canada is very favorable. The industry backlog is strong. And most truck manufacturers are managing order intake as the industry can only gradually increase build rates due to supply-based constraints. We expect orders to remain modest for the coming months as build goes up and as we open the 2023 order book in phases. The result could be a less volatile and stronger-for-longer truck market cycle, as Preston mentioned. PACCAR's approach to market share growth is to pursue profitable growth in all markets where we operate. We achieve this by providing our customers the best trucks and outstanding aftersales support, industry-leading financial services, all supported by the best dealer networks in the industry. PACCAR market share growth since 2001 in North America, Australia, Europe and South America is summarized here with 2001 in orange, 2011 in yellow and 2021 in green. Our medium-term goals are noted by the red lines. PACCAR's combined share in the U.S. and Canada increased from 19.6% to 29.2% with a medium-term goal of 32%. PACCAR is a market leader in Australia with a share of 27.1%. DAF increased to 15.9% in Europe in 2021 on its way to its medium-term goal of 20%. And PACCAR's investment in South America has enabled share to increase to nearly 7% with a focus on achieving the near-term goal -- medium-term goal of 12%. Critical to our continued market share and overall growth is the continued investment in product development and our manufacturing operations. Expanding on Preston's comments, shown here are the results of some of our recent manufacturing investments. Combined with the new products I just reviewed, over the last 5 years, PACCAR has invested $4.2 billion to bring the products to market and continually enhance our state-of-the-art manufacturing facilities. The focus of our manufacturing investments is the continual enhancement of safety and quality as well as capacity and efficiency, all in support of margin growth. Now here's a short video that highlights our investment in an automated cab build cell at the DAF facility in Westerlo, Belgium. [Presentation]

Now for those who've visited Kenworth's Chillicothe plant in February, we certainly enjoyed hosting you and providing you with a first [ inner ] view to some of our more recent investments in state-of-the-art manufacturing technology. For those of you who haven't visited one of our facilities recently, we'd like to invite you, come see them in person, a truly fantastic [indiscernible] as Preston noted [indiscernible] people in person, there's no substitute. So you're all invited. PACCAR's commitment to investing in its products has resulted in the newest, most exciting portfolio of new products in the industry. Our new line of heavy- and medium-duty trucks have received excellent feedback from our customers and will create value for them through reduced fuel and overall operating expenses. As shown in the video, we continue to invest in new products and state-of-the-art manufacturing facilities to drive increased quality, efficiency and capacity. Thank you. And now I'd like to introduce John Rich, PACCAR Vice President and Chief Technology Officer. John?

All right. Thanks, Mike, and good morning. I'm John Rich, the company's Chief Technology Officer. For those of you I haven't met before, I'm just over a year with PACCAR, so I'm the new face in the team. I came here after 30 years at Ford Motor Company. And it's great to be at PACCAR. I'll start with an update on future regulatory requirements, which drive many of our capital allocation decisions. The first thing I should tell you though is that we believe that diesel will continue to have an important place in the market, alongside battery electric, for the foreseeable future. And we will continue to bring a set of solutions that are class-leading for cleanliness and efficiency. This slide provides a summary of global emissions and fuel economy requirements in our primary markets. Across the top of the timeline is Europe. By 2030, greenhouse gases are reduced by 30% and zero-emissions vehicles will start to be required in 2025 and the phase-in of Euro 7 emissions is expected to begin in 2026. North America is in the lower section. California will lead the nation with a sub-25% nitrogen oxide reduction in 2024. And at the same time, they will require manufacturers to sell a rising number of zero-emission vehicles. Nationwide, greenhouse gases will be reduced by 25%. And the EPA is expected to impose a national NOx limit that is modeled on California standards in 2027. We will meet these challenges with class-leading products. Now let's talk about zero-emissions vehicles. The technologies are advancing quickly. And we see a great adoption curve through the decade. This is our view of the technology use case fit for battery and hydrogen propulsion over time. The battery electric solutions will easily handle lighter loads and shorter distances, dominating the lighter-duty segments. In the middle, heavier regional applications will start with batteries. But as routes get longer, they may eventually migrate to hydrogen. And with hydrogen, regional corridors are a really attractive starting point as the infrastructure investment has to lead the deployment of vehicles. At the bottom of the page is long-haul applications. Especially in the U.S., we believe these are not well-suited for current battery technologies. We see continued deployment of advanced diesel engines, clean diesel engines, until hydrogen is a viable solution and infrastructure is available. Almost a year ago, we sold our first battery electric vehicle and delivered it into the customers' service. As shown in the image, we are now producing and delivering 7 different models globally across Classes 6 through 8. We are actively delivering hundreds of units this year. With trucks, we offer 11 different integrated charging solutions. These are tailored to the deployment needs of our customers. And we deliver them turnkey. This is how we expect zero-emissions adoption to play out over the -- across over all of our markets over time. Later in the decade, zero-emission vehicles start to take a meaningful share. And as we get out to 2035, we expect more than half of our production to be ZEVs, or zero-emission vehicles. Obviously, different markets have different adoption rates. In all markets, we believe this transition will be driven by regulatory mandates for some time. Our product strategy is designed around the adoption curve, advancing through several quick product cycles. As mentioned, we are in production with 7 models. These are designed to sell hundreds of units a year, meeting market and regulatory demands. We are actively learning from our field experience with these vehicles and incorporating the lessons we learned into the next phase of the business. In 2024, volumes accelerate, we add more models, we commonize systems across trucks and we bring the cost down appreciably. Individual models will be made in the thousands of units in this space. Moving out to 2027 and beyond, we hit an inflection point for ZEV adoption. And deeper investment in vertical integration is required. Here, we will bring operating costs in line with diesel for many applications. As discussed, not all trucking use cases are well-suited for battery electric applications. The loads and the distances traveled are often incompatible with the present state of battery technology. For these applications, we are heavily considering hydrogen as a fuel of choice. The image on the left is our fuel cell collaboration with Toyota Mirai. While not yet selling vehicles to customers, we have just completed an extensive demonstration in the Port of Long Beach. Hauling drayage daily, the fuel cell demonstrated that the technology is ready for prime time. At the same time, we have a hydrogen combustion initiative, allowing a bridge for existing equipment and infrastructure to the hydrogen economy. Shown on the right is the DAF hydrogen combustion truck that won this year's innovation award. Both technologies have shown great promise for high-mileage, long-distance applications. As you know, our business model today goes well beyond the initial transaction of the truck. That's because today's truck is a 1 million-mile machine, and our business is set up to support the vehicle throughout its entire life. Obviously, a diesel powertrain is a very important part of that revenue model. Laura Bloch will tell you a little more about that later in the presentation. I want to stress a BEV powertrain -- with a BEV powertrain, we see significant opportunities to enhance and improve that aftersales and service model. While we lose a diesel driveline, we replace it with electric motors, transmissions, power electronics, a variety of pumps, compressors and heaters and a whole lot of battery. These vehicles are complex and they are sophisticated. And they will be laden with proprietary parts and software. The total value of the system is greater than the diesel. And they still need to be on the road for over 1 million miles. Further revenue opportunities include charging infrastructure and enhanced subscription services. Battery electric vehicles are a great business for PACCAR. All zero-emission applications are a departure from the simplicity of today's diesel products. And PACCAR approaches every sale of a truck with consulting services to help our customers make this transition. Charging is essential. But these solutions go well beyond just deploying the right charging infrastructure. Connectivity tools allow a customer to optimize their fleet, including features like predictive maintenance, smart energy management and integration with third-party fleet apps and services. These solutions enable uptime and reduce operating costs and will eliminate range anxiety. On a human-driven truck, PACCAR is advancing through Level 2 drivers assist with clear focus on the features that our customers want, technologies that reduce the number of accidents. Today, we offer systems that improve the driver's ability to maintain vehicle control, active steering, adaptive cruise and automatic braking. We will continue to add safety features and systems that enhance the driver's awareness and ability to manage his surroundings with features like advanced detection, driver state monitoring and intelligent emergency braking. Level 4 automation is different. And it is not a progression from ADAS. PACCAR has a clear Level 4 strategy, delivering a proprietary and scaled autonomous vehicle platform. We engineer and build a digitally controlled truck that enables the driver, developing redundant steering and braking, power systems and a suite of proprietary embedded software to actuate all vehicle functions. In this model, we work with AV developers to integrate their AI driver into our platform. In our model, we deliver the vehicle platform, again a proprietary system that includes redundant steering, braking and power systems as well as an extensive set of advanced controls. We partner with the AV developers, who deliver the sensors, the compute and most importantly, the self-driving software. We work together to integrate the AV driver into the truck in a robust and a secure manner. And the result is a production Level 4 solution, a robust yet scaled and affordable vehicle that is ready to deploy. Our autonomous model is enabled by partnerships to deliver a safe, reliable and efficient transportation system. Ultimately, we expect this to include multiple autonomous truck developers, such as Aurora, Waymo or Kodiak. Equally important are the fleet partners who own and operate these vehicles. Typically, these are customers we know very well today. Shown in the image are Kenworth and Peterbilt trucks integrated with an AV driver from Aurora Innovations. Aurora is our first deep partner in this space. PACCAR is deeply integrated into the autonomous truck and adds value across the AV transportation system. We engineer and manufacture the truck. We repair and service the vehicle in field. We provide all of the parts support. And we continuously monitor the truck in service. The autonomous vehicle business model leverages all of our historical strengths. Finally, PACCAR Global Connected Services presents an opportunity for us to grow revenue and improve our value equation with customers. Our park of connected vehicles is now at 400,000 units. It will grow to exceed 1 million units later in the decade. Today, our customers up-fit their trucks with multiple stand-alone devices and tools. They are expensive. They do not work together. And they substantially clutter the driver's cockpit. The picture on the left is typical. Our customers want seamless solutions, integrated hardware and software. And they want to buy it from the factory. Shown on the right is our recently introduced DAF Connect system in Europe, where multiple functions are integrated through productivity apps into a factory-supplied display. PACCAR Connect is now established in the market and will continue to roll out more features and capabilities, improving customer satisfaction with over-the-air updates and remote diagnostics and providing a payment platform and third-party apps through an app store. Ultimately, our connected capabilities improve our most compelling value equation, ensuring maximum planned uptime. They improve our real-time vehicle support and service scheduling. They grow our predictive maintenance capabilities. And they deliver valuable performance data. These tools and capabilities continue to improve over time and will generate more revenue per truck over time. So as the newest member of the PACCAR team, I'll conclude on a personal note by telling you how happy I am to be here. We are witnessing a convergence of technologies that make this an amazing moment in the truck industry. And PACCAR has just a wonderfully strong history of leading successful deployment of this technology. And I hope you see what we see here, that these are opportunities to make a strong business model stronger. So thanks. I look forward to catching up during lunch or during Q&A. And we will now transition to a 15-minute break. [Break]

Let's probably wait a minute here for everyone. Preston, wait for Preston. All right. Good morning, I'm Laura Bloch, PACCAR Vice President and General Manager of PACCAR Parts. Really nice to be here with you today. This is my first time. I look forward to getting to know all of you. I've been with PACCAR for 18 years with roles in operations and sales, including 3.5 years in the U.K. [indiscernible] shows the 20-year history of global part sales and profit. Over the last 20 years, PACCAR Parts revenue has increased $3.9 billion, reflecting 8% annual growth. In 2021, PACCAR Parts achieved record sales of $4.9 billion. The 2021 sales record was accompanied by a record profit of $1.1 billion, breaking the $1 billion mark for the first time. Since 2002, PACCAR Parts profit has grown 11% annually. PACCAR Parts has delivered many new sales records in the first quarter of 2022, building on the excellent 2021 results. Record sales of $1.39 billion and record profit of than $40 million were achieved in the first quarter. Engine part sales grew 25% and sales through the fleet program grew 27%. Sales [indiscernible] e-commerce solution increased to 17%, helping dealers grow their retail while TRP store retail sales grew 22%. 2022 is off to a strong start. And we expect another excellent year of sales and profit growth. PACCAR Parts has robust product segmentation strategy. The broad portfolio drives volume and increasing customer loyalty and margin as purchases are shifted up through the tiers. Vendor brands at the bottom are sold through competing OEs as well as independent distributors. We directly compete for this business. And they are often a customer's first purchase from our dealers. Our strategy is to transition customers from vendor brands to PACCAR's TRP brand of all makes, products, providing customers with a strong value proposition through high-quality parts. PACCAR proprietary parts included first-fit OE parts, along with DAF, Kenworth and Peterbilt proprietary-patented parts. This segment provides customers the assurance that their parts are identical to those used in production. They allow customers to maintain industry-leading performance and equipment resale value. Electric vehicle parts such as e-axles and controllers will continue to drive increases in this segment. [indiscernible] uses technology-driven solutions to increase our value proposition and stickiness with customers. The next-gen e-commerce platform is easy to use. It provides related parts and suggestions and has integrated loyalty offers, giving customers an easy, one-stop online shop for their parts purchases. PACCAR Parts uses data analytics throughout the business. Artificial intelligence is used to create part recommendations and provide dealer performance insights. PACCAR Solutions' connected trucks provide real-time monitoring for all PACCAR trucks on the road. The immediate information is key to increasing service efficiency and driving customer uptime. PACCAR service technology provides over-the-air diagnostics and integrated global solutions to help customers maximize efficiency. Now I'll show you a video highlighting PACCAR Parts' commitment to providing technology to make doing business easy. [Presentation]

We're really excited with customer adoption of this new system. The powertrain business is the fastest-growing product category for PACCAR Parts. Over 10 years of PACCAR MX engine installations in North America provides excellent parts sales opportunities today and into the future. There are currently 285,000 PACCAR MX engines operating in North America. As shown on the graph, engines go through different part consumption phases based on age and mileage. 27,000 MX engines have been produced for EPA 21, as shown in blue. These engines use maintenance parts only, such as oil and filters in year 1 through 4. Years 5 through 8 consume more wear parts, as shown in green. Years 8 through 12, the current maturity of EPA 13 engines, we use overhaul kits and consume the most parts. Then the older engines, such as EPA 10 in red, start their second life. By 2030, more than 725,000 PACCAR powertrains will be in service across all stages of the product life cycle. The EPA 24 and EPA 27 will benefit from increased mix of MX engines, generating diesel engine part sales for many years to come. And new electric vehicles will start a new parts revenue stream. Parts and services [indiscernible] as more engines are in the service and overhaul segments. Second and third owners will operate trucks throughout the yellow and red phases and will be the largest purchaser of MX engine parts. Remanufactured engines and component offerings will be in place to service older trucks with parts remanufactured to genuine OE specifications. As electric vehicles enter the marketplace, PACCAR Parts will gain incremental share and revenue. Batteries and safety systems are significant to electric vehicle aftermarket revenue. Branded parts, such as electric axles and electric accessories, along with increasing complexity, will drive customers to PACCAR dealerships and enhance margins. PACCAR chargers represent a new revenue stream. The chargers are designed to work with all makes of vehicles, positioning PACCAR as a leader in EV charging. Charger service-level agreements will create recurring revenue streams, tying the customer to PACCAR Parts and driving future parts sales. Overall, we believe that the incremental parts benefit of electric truck over an internal combustion engine is $5,000 to $10,000. PACCAR Parts Fleet Services is a key initiative for growing part sales with the largest fleets in all of our markets. In 2021, global fleet revenues reached over $640 million, up 26% across 2,400 fleets. The PACCAR Parts fleet services program provides a consistent parts experience across the dealer network, offering national parts pricing and one consolidated monthly invoice for all parts and services purchases. Captive fleet e-commerce integrates directly into fleet business systems, providing a sticky purchasing experience for parts. In 2022, global fleet service revenues will reach $800 million, growing 24%. In the U.S. and Canada, the total industry retail parts opportunity for Class 6, 7 and 8 commercial vehicles is estimated to be $30 billion this year. This includes all vehicles in service up to 25 years old. Original equipment manufacturers typically offer 1- to 5-year warranty periods and capture the bulk of the $7 billion market in the early life cycle. Independent parts retailers have share in the $23 billion 5- to 25-year portion of the vehicle's life cycle. PACCAR Parts' share of the market is shown in white. In 2021, U.S. and Canada parts sales achieved $3.3 billion across all of our product segments. The remaining area in red is the sales growth opportunity. The TRP brand is a strategic component of PACCAR Parts' wide product offering to expand our market opportunity. This is the area where the quality and value of TRP parts have a competitive advantage over other brands. While these charts focus specifically on the U.S. and Canadian market, similar opportunities for TRP in every market. One way we have grown the TRP brand is with our growing network of TRP stores. Shown on this slide, dealer-owned TRP stores by global region. The first TRP store was opened in 2013. And we recently opened a store in Switzerland, bringing the total count to 253. TRP stores have proven to reach new customers. 50% of the customers purchasing at TRP stores are new to the PACCAR dealer network. Retail growth is very strong. Year-to-date, the global network retail sales growth is an impressive 22%. One of the hallmarks of PACCAR Parts' success is distribution excellence, operating 18 world-class facilities across 4 continents. In support of uptime, dealers are able to order any part 24 hours a day, 7 days a week for next-day delivery. Stock replenishment orders are shipped within hours of order receipt to ensure parts are back on dealers' shelves and available for sale, enhancing purchase loyalty. With shipping accuracy of 99.99%, PACCAR's dealers confidently auto-receive shipments, further improving retail availability. PACCAR is committed to continuous improvement as demonstrated by investments in new automation technologies and enhancements to voice picking systems, ensuring future success. Innovation is driving distribution optimization for our customers. PACCAR Parts analysts plan and order dealer stocking parts through managed dealer inventory, auto-accept. A streamlined ordering process, combined with PDC same stock order shipping -- same-day stock order shipping, allows parts to flow from the distribution center to dealers. Dedicated delivery from PACCAR PDCs to dealerships is a major logistics advancement, reducing transit time. Combined with auto-receipt, parts are delivered and received into inventory and available for sale first thing every morning. Continued PDC network expansion puts parts closer to dealers and customers in support of business growth. These technologies and investments have delivered an 85% reduction in delivery time, cutting the lead time from 6 days down to 1. [indiscernible] here are the last 4 distribution center expansions around the world. In 2018, the new Toronto PDC was opened, increasing storage capacity. In 2020, new PDCs in both Ponta Grossa, Brazil and Las Vegas were opened, replacing smaller facilities. And this summer, the new PDC in Louisville, Kentucky will add 260,000 square feet distribution to our network. I was just there last week, and I could not be more excited for what this is going to bring to our network. The distribution center expansion has been paired with an increasing number of Peterbilt and Kenworth dealers. Since the launch of the MX engine in 2010, the number of locations has grown from 554 to 890. In the last 10 years, dealers have invested $2.1 billion in their facilities. These locations will drive PACCAR Parts' long-term growth. Global [indiscernible] parts supports a network of over 2,200 dealer locations, shown by the green dots. This profitable independent dealer network is recognized as a leader in the commercial vehicle industry, delivering superior customer service. The red circles on this map designate PACCAR Parts' 18 global distribution centers, strategically located to provide expeditious delivery to those dealer locations. PACCAR Parts [indiscernible] future expansion to the network to grow the parts business with new products and new markets. PACCAR Parts is growing in every market served. Engine parts and the fleet services program are propelling double-digit growth. TRP stores are capturing new customers every day. Technologies such as e-commerce increase efficiency and the ease of doing business. Electric vehicle adoption is creating new revenue streams and new parts sales opportunities. Distribution optimizations ensure speed to customer. These combined efforts drive strong dealer and customer loyalty, customer satisfaction, margin and uptime. Thank you. I'd like to introduce Todd Hubbard, PACCAR Vice President of Financial Services.

Thank you, Laura. Good morning, everyone. I'm Todd Hubbard, PACCAR Vice President. I have 35 years of financial services experience in all facets of the business. My responsibilities include global financial services, treasury and credit. PACCAR Financial Services is an industry-leading financial services provider that includes the worldwide operations of PACCAR Financial and PacLease. Our mission is to profitably support the sale of Kenworth, Peterbilt and DAF trucks. We operate in 26 countries in 4 continents, as shown in green on this slide. We have 1,000 dedicated employees working out of 24 locations. The primary ones are shown on this map. Experience has shown us that having captive financing available improves PACCAR truck market share by providing customers tailored finance solutions and being there for those customers that require a one-stop truck and financing package. We support the growth of our dealer network by providing inventory financing and business expansion loans. PacLease gives our dealers access to the important full-service leasing segment of the truck market. Ongoing contact with customers throughout the term of their contract gives us advanced knowledge of repurchase timing and supports high customer retention for PACCAR. Providing financing and full-service leasing allows us to bundle financing, parts and service with the truck sale, thus enhancing the total PACCAR value. PACCAR Financial Services financed 26.6% of PACCAR trucks sold worldwide in 2021, generating a record $5.7 billion in new business volume, as shown in the top left graph. The strong new business volume resulted in total Financial Services assets of $15.4 billion last year. As shown on the lower left, Financial Services pretax profit was a record $438 million in 2021. The increase was primarily due to improved used truck results and a lower provision for credit losses. Moving to the lower right, strict adherence to our underwriting standards and the use of data analytics to enhance our credit scorecards has enabled the worldwide portfolio to perform very well. And past dues have remained at historically low levels over the past 10 years. PACCAR Financial Services consistently deliver superior return on assets when compared to our peer companies. Over the past 10 years, PACCAR Financial Services, shown in green, has outperformed the peer group with average return on assets of 2.7%. 2021 return on assets improved to 3% on the strength of higher used truck resale values and excellent portfolio performance. PACCAR Financial Services continued its strong performance in the first quarter of this year. And key accomplishments included growth of total assets to $16 billion, record profit of $147 million pretax, financing in markets that comprise 97% of PACCAR truck sales as shown on the map. And we sold 2,100 used trucks through our network of used truck centers, such as the Salt Lake City facility shown in the lower left. And as illustrated in the lower right graph, we've increased quarterly profit by 200% over the past 2 years. PACCAR Financial Services offers a full range of finance products that meet the needs of our customers. We have excellent access to customers through our close relationships with the truck divisions and dealers, something the banks don't have. Our online services platform is considered best-in-class. And our industry-first e-contract and e-signature functionality has further improved the ease of doing business with us. PACCAR Financial's excellent credit rating and strong balance sheet allows us to offer competitive interest rates to customers. Our network of used truck retail centers in the U.S. and Europe enable us to maximize resale values. And banks outsource their used truck sales to auctions and, as a result, receive lower prices for their equipment. And our move to developing and building all of these retail centers throughout the world has been a huge competitive advantage for us in the marketplace. In addition to providing great financial products, we also offer leading-edge technology capabilities that streamline the entire truck purchase and financing experience for our customers, which is a huge competitive differentiator in today's marketplace. We're upgrading our operating system platforms in all major markets to support future growth initiatives. Our online services platform allows customers and dealers to make payments, payoffs and see real-time account information 24/7 on any mobile device. Today, in the U.S., 100% of contracts are funded utilizing e-contract and e-signature. And we're expanding in this functionality worldwide. We recently launched an industry-first dealer finance portal, which will be utilized by the entire dealer network to expedite the finance quoting and credit application process. PACCAR Financial Services is leveraging connected services data from PACCAR Solutions, along with the PACCAR cloud and advanced analytical tools, to grow revenue by using algorithms to identify predictive sales leads to generate incremental volume; and dynamic pricing for each customer transaction using real-time data to enhance loan and lease spread in used truck resale values; to mitigate risk by leveraging an early warning system that alert us to decreased truck usage, so we can proactively implement collection strategies to mitigate loss; and providing performance reporting to enable the PacLease franchise network to actively manage their fleet to optimize profits; and finally, enhanced decision-making by maintaining market-specific credit scorecards to accurately assess customer creditworthiness at loan inception; and utilizing artificial intelligence to identify customers who qualify for automated credit approvals to capture incremental high-quality business. PACCAR Financial is one of the leading sellers of premium used trucks in the world. Last year, we sold a record 20,700 pre-owned PACCAR trucks worldwide by leveraging our extensive remarketing network of 11 used truck centers, shown by the red dots in the map. We'll expand the network once construction of our Madrid location is completed later this month. These centers provide us the opportunity to sell used trucks at retail prices, which deliver a significant premium compared to wholesale pricing. We increased our mix of retail sales worldwide to 40% in the first quarter of 2022, as shown in the lower left graph. We recently enhanced our used truck website in the U.S. and Canada that includes search engine optimization, side-by-side truck comparisons and buy-now automated online bidding capability. Coupled with our high quality and lowest overall cost of ownership, DAF, Peterbilt and Kenworth trucks command the highest resale values in the industry, which makes it very easy to sell our trucks quickly. PACCAR Financial Services consists of a finance company, PACCAR Financial, and a leasing company, PacLease, because each company serves the different segment of the truck market. Finance company customers are generally over-the-road transfer companies or common carriers. Their business is trucking. They generate revenue by using their trucks to move freight for other companies. They often maintain their own service shops and provide the maintenance for their trucks. These customers generally want to own the trucks at the end of the lease period. Full-service leasing represents roughly 20% of the U.S. truck market. This is where PacLease primarily operates. Leasing company customers are private fleets. They are companies whose primary business is not trucks. But they need trucks to move their own products around. Trucks represent an expense of doing business for them. And they utilize full-service leasing, so they can essentially fix the cost to transport. The customer provides a driver and pays for the fuel. All other costs associated with the truck are covered by the lease payment. Maintenance is provided through the PacLease dealer franchise network. At the end of the lease term, the customer returns the truck to the leasing company. PacLease is the fifth-largest full-service lease and rental provider in North America. Our 38,600 truck fleet generates valuable contributions to PACCAR. Over the last 5 years, PacLease has purchased, on average, 6,300 new Kenworth, Peterbilt and DAF trucks, making PacLease the largest fleet customer for PACCAR. PacLease has 4,000 full-service lease customers that are serviced through a worldwide network of 587 locations. PacLease's current service offerings begin with full-service leasings, which are long-term contracts, typically 5 to 6 years, with a full maintenance program included. PacLease also has a comprehensive network of rental trucks. These are used to meet customers' short-term needs, anywhere from a week up to 12 months. PacLease manages both full-service lease and rental through a network of locations denoted on the map, backed by a full national sales team. Over the short to medium term, PacLease is expanding its service offerings. We have recently launched the PacLease managed maintenance program, which is an unbundled service for companies who are not full-service lease customers. PacLease acts as a single-source provider, coordinating and managing all aspects of a customer's maintenance needs, utilizing data generated from PACCAR Connected Services. PacLease is also supporting PACCAR's EV rollout with full-service leasing and rental offerings, including both the truck and battery charger, and will also be part of PACCAR's autonomous development strategy, collecting truck data through our partnership with autonomous development partners, ultimately creating an autonomous full-service lease pricing model. PacLease will be uniquely positioned to evolve our product offerings into a truck-as-a-service model, which enables customers to pay only for what they use, either by mile or by kilowatt-hour, encompassing both EV or autonomous trucks. Customers' payment is inclusive of vehicle cost, battery charging, training and maintenance. And PacLease will utilize data from PACCAR Connected Services to feed information to the customer and PacLease for support of the truck. In a fully autonomous model, PacLease will be able to lease both the truck and the autonomous driving system, all in one combined monthly payment. Thank you. I'd now like to introduce Harrie Schippers, PACCAR President and Chief Financial Officer.

Thank you, Todd. Let me start with adjusting this a little bit. There you go. PACCAR's consistent profitability reflects its industry-leading product quality, financial discipline and continuous innovation. In the first quarter of 2022, PACCAR earned $6.5 billion in revenues. The company had excellent net income of $601 million and delivered 43,000 new trucks. PACCAR Parts achieved record quarterly revenue of $1.4 billion. PACCAR's excellent A1/A+ credit rating allows us to borrow at attractive rates to support customers who buy or lease our trucks. PACCAR has increased its regular quarterly dividend by 8% per year on average over the last 10 years. The company has declared $8 billion in dividends in the last decade and has paid a dividend every year since 1941. Quarterly revenue and net income over the last 2 years are shown in the graphs. Both revenue and net income have increased since the COVID shutdowns in the second quarter of 2020. First quarter 2022 revenue of $6.5 billion was up 11% compared to the same period a year earlier. And net income of $601 million was up 28%. These charts summarize PACCAR truck parts and other profit and margins. Profits are the green bars and margin percentages are the yellow lines. Growth in operating profit and margin performance have increased over the period shown, driven by good economic growth and strong freight activity. Profits and margins have been affected by inefficiencies related to the pandemic in 2020 and supply chain disruption in 2021 and 2022. Gross margin improved to 13.4% in the first quarter with operating margin improving to 9.7%. We see profit and margin upside in the coming quarters as the pandemic recedes, supply chain issues are gradually resolved and the share of our new products in production increases. Both the truck and parts segment have increased profits and margins during the period. The Truck segment experienced a larger operational impact from the pandemic and supply chain constraints, which have created an industry-wide undersupply of new trucks. Parts gross profit shown on the right, has steadily grown to a quarterly record of [Technical Difficulty] and a gross margin of 30.1%. The lack of available new trucks has caused [Technical Difficulty] customers to operate older trucks [Technical Difficulty] for PACCAR. PACCAR's balance sheet is a pillar of strength. The company has no manufacturing debt and $4.7 billion in cash and marketable securities. This supports our excellent A1/A+ credit ratings. Financial services assets of almost $16 billion were approximately 52% of the balance sheet total. Stockholders' equity was a record $12.1 billion at the end of March. PACCAR's return on invested capital was an excellent 16.9% in 2021, as shown in green. Due to PACCAR's high profitability, strong working capital management and prudent investments, PACCAR leads the peer group with a 5-year average return on invested capital of 20.4%. PACCAR's net profit as a percent of revenues shown in green has been best in class during the 10-year period shown. This reflects the premium value of our products and our exceptional operating efficiency. PACCAR achieved an industry-leading after-tax return on revenues of 9.8% in the first quarter of 2022. This reflects the strong performance of PACCAR parts and margin improvements from the new truck models launched last year. With all competitors now being public companies, it's also interesting to see and be able to compare to those competitors, at least over the last 5 years, and we look forward to their plans to increase their operating margins, which could be good for the entire industry. PACCAR's SG&A as a percent of revenues has ranged from 2.3% to 3% over the last decade and is significantly lower than our peers. This is a testament to PACCAR's lean and efficient organization and strong financial discipline. PACCAR generates excellent cash flow from operations. Operating cash flow has grown at an annual average of 6% over the last 20 years to $2.2 billion in 2021. 2021 operating cash flow reflects temporarily increasing working capital of approximately $300 million to address supply chain challenges. PACCAR's regular quarterly dividend, shown in green, has increased steadily over the last 10 years to a record $1.34 per share in 2021. PACCAR has also paid an annual dividend in each of the past 10 years. The gray line indicates that PACCAR strives for a total dividend payout of approximately 50% of earnings. Total dividends declared were $2.84 per share or $990 million last year. Over the last 10 years, PACCAR has declared $8 billion in dividends. In addition to dividends, PACCAR has a stock repurchase program that it executes opportunistically. PACCAR's current Board authorization of $390 million has been suspended since the pandemic. Combined with cash dividends, PACCAR has returned nearly $9 billion in total to its stockholders since 2012. As the graph shows, to return capital to stockholders, in general, the company has a preference for cash dividends over stock repurchases. PACCAR has historically held approximately 15% of balance sheet assets in cash and marketable securities, as shown by the yellow line. Our conservative balance sheet allows PACCAR to invest in future growth throughout the business cycle and enables PACCAR Financial Services to borrow at very competitive interest rates. The strong balance sheet benefit the company during the pandemic and during the recent supply chain challenges. We expect our balance sheet to be very valuable as PACCAR continues to invest in its digital transformation across autonomous, electric and connected technologies. PACCAR has invested $7.3 billion in capital projects, innovative products and new technologies in the last 10 years. The result is an industry-leading range of products and services that benefits our customers. For 2022, total R&D and capital investments are projected to remain fairly stable at just over $800 million with a shift from capital to R&D, which is typical during the early phase of new technology programs. A growing percentage of PACCAR's R&D is focused on next-generation technologies. We lead the industry in zero-emission vehicles powered by batteries and hydrogen. PACCAR has established itself as the partner of choice for developing autonomous vehicles and has created a global connected services platform to drive new revenue streams. Summarized here are PACCAR's second quarter and full year 2022 outlook. Second quarter deliveries are expected to be in the range of 44,000 to 48,000 units. Part sales are expected to grow 14% to 16% from the same period last year. Truck, Parts and Other gross margin is expected to be in the range of 13.5% to 14%, and we anticipate continued strength in PACCAR Financial. Based on 2 good months of April and May, we currently project truck deliveries and gross margins to be at the higher end of this forecast range. For the full year, Heavy-duty markets are expected to improve to 260,000 to 290,000 units in the U.S. and Canada, 270,000 to 300,000 units in Europe and 125,000 to 135,000 units in South America. PACCAR Parts revenues are expected to grow 12% to 15% year-over-year. And we expect capital spending to be between $425 million and $475 million and research and development expense to be between $350 million and $400 million. PACCAR has invested $1 billion in the new DAF XF and XG range during the last few years. Let's watch a short video of the most desired truck in Europe. [Presentation]

That is such a fun video. The new DAF truck will be a game changer for DAF and PACCAR. It's going to be the best truck that money can buy in Europe. I'm so proud of the team who brought this all together. The future is bright for PACCAR. We have industry-leading profitability and PACCAR Parts is a dynamic growth business. We expect the truck cycle to be stronger for longer and supply chain disruptions at limited build rates, while customers need PACCAR's new truck models to benefit from our trucks industry-leading fuel economy. We have the newest, highest-performing product portfolio in the industry. We have demonstrated leadership in zero emissions and autonomous trucks. Our new PACCAR Connect system has excellent recurring revenue growth opportunities, and our margins should continue to expand as supply chains normalize and our factories transition to building more of our new products. Thank you for joining us today. We'll now take a 15-minute break and then open it up for questions from the audience here in the room with us today. Thank you.

Okay. I think we're back now. And what we did is we wanted to make sure that we spent enough time with you to let you answer and ask questions, and we kind of as a group, try to take them on and make this interactive and fun for everyone, hopefully, informative as well. So that was kind of how we plan to use the balance of our time. Before we start with the first question, David Roomes, Rene put this together for us all, and they always do a great job and they, again, did a great job even with the travel disruption. So thank you for that. And we'll kind of go ahead and let anybody ask any questions. Yes, Jerry?

And the question is really about runway. You guys have obviously had tremendous success in parts. So this is not meant to be a negative one. But if I eyeball the area under the 2 curves, your parts share is lower than your OE share. Is that fair or not fair? And then just some of that engines coming along and engines and so forth. But what's a reasonable entitlement per PACCAR over the years on parts like what kind of market share can you get to? What are the -- you're not going to sell an axle into this barrier, but what's the entitlement?

First comment is simply, we don't see anything about opportunity, right? It's -- there is a large portion of the market that we don't yet have and that's where we are positioned with our brands, our portfolio to capture more. I think there's a lot of opportunity. One with TRP, as I talked about, but there's also opportunity as we -- the trucks gain complexity to make sure they're coming back to our dealers as opposed to maintenance in their own shops. We see really -- I don't see any odd reason with the slow -- that we slow and we keep growing in the near to medium term.

Yes, Jeff?

Probably an unfair question, but you talked about planning for the future and investing for the future. As we move toward a 0 emissions world and on autonomous world, how does the truck life cycle change? And I guess here's kind of where I'm going. We say 1 million miles is still 1 million miles, but with an EV or a fuel cell truck, that million mile journey is going to be different than it is with diesel ICE in terms of parts, in terms of service cycles. As we move toward AV and we're hearing trucks may run 200,000 miles a year instead of 100,000 miles a year, that's going to change the truck life cycle. That's going to change the truck replacement cycle. You can run more miles in a year, but the truck may not necessarily last longer as a result. I mean, should we be thinking about manufacturing capacity for 350,000 to 400,000 unit year 10 years from now and how do we invest for that and change for that?

John, do you want to say anything on that?

Yes, autonomy will run more miles faster, you'll run the truck 20 hours a day, you'll retire the truck earlier or put it earlier into its second life. Miles traveled, I don't know, increases. It depends on your assumption on miles traveled to really calculate do you need to up capacity for the industry. So it's -- if autonomy grows the pie for moving goods via trucks, it will increase capacity. Otherwise, it will be substitutional in many cases.

So when do you think about whether it's time to invest in flex capacity because these 300,000 truck year as we talk about as peak a cycle may become 350,000 or 380,000 truck years, 10 years from now.

I'll let you answer.

So think about it this way, we showed you -- Mike showed you the slide on the $4.2 billion in factory investments we've made, we are continually looking at where our capacity is. We don't want to be capacity constrained. We don't find ourselves to be capacity constrained right now. And we have always had a philosophy that says be able to build trucks for the market peaks. And that's what we've done through the investments in Westerlo, through the investments in our engine factories through pretty much all the investments we've done around the world. And we'll continue to do that in align with our medium-term market share goals. So when to invest, now. So that we're ready for the future. Steve?

You talked about your medium-term market share goals. Could you just define what medium term means, first of all? And then second, what are the key things that will get you there? Is it continued rollout of more dealers? Is it something -- some other factors? How do you get to those medium-term targets?

So the term is intentionally nebulous, right? We didn't say 5 years, but you could probably think of it in terms of the 5 years or that kind of plus or minuses to it. It obviously -- we feel very good about the share gains we're getting because of the great new products we just introduced, right? We just replaced the product line. I know we say it and it's still something that we almost go too fast over is what I would say, is like PACCAR spent well over $1 billion on new medium-duty, heavy-duty in North America flagships and new products in Europe. That is a tremendous advantage for us over the rest of the competitors we're dealing with. That puts us in the market-leading position in terms of the best, most desirable products that drivers really want to have and the most fuel-efficient that the purchasers want to have, right? So that is a heck of a tailwind for us in terms of growing market share. That said, it's only an element of our share growth opportunity. The other things are the parts business and the stickiness and how we're connected with the customer that matters, right? So when -- I'm a customer and the truck is increasingly complicated, my decision is who's going to care for me, not just on the initial purchase but who's going to take care me along the way and manage my fleet, as Laura showed, who's going to have the best e-commerce system so that I can just get online, have the right parts at the right spot when I need it next day, keep the truck uptime high. That's another key element of our business growth. And I think being on the right spot of technology can't also be overestimated with what we're doing and John shared a lot about that, right? Like it's not making a decision to say, we're all in on hydrogen fuel cell or we're all in on NMC batteries. It's covering the field right now with appropriate investment levels so that as the market develops, our customers trust us that we're not selling an answer that we presuppose but we're meeting a need that they have, right? We always come at this thing with the customer first standpoint and that's what will drive market share. What's good for them, it's good for them, we support it, then we win, right? Together, we win. So I think that, that market share growth has income by product, by services and by attention to customer and premium services, so all that together.

And could I ask a follow-up to Harrie. Just on your comments about the Q2 to date, could you just give a little more color on what's driving that in terms of regional mix? Is that mostly North America? Is it balanced across the regions? And are you anticipating with kind of the upper level now at the 48,000, do you think that will build from here over the course of the year and maybe you can see a 50,000 plus at some point later on in the year?

Sure. We -- like I said, April and May have been pretty good months for our factory. I think we've seen better supply of components than we maybe anticipated 5, 6 weeks ago. I would say that, that's across the board. So in the U.S. and Europe, we've been able to increase build rates as we hoped for. I haven't seen any significant shutdown days as could have happened with some of the supply challenges. So I would say it's across the board. People in the factories have done an amazing job, together with our purchasing teams, to get the components in, to get better chips, redesign the chips, find alternative chips in cases where that was needed. And looking at it now with 2 months behind us, we feel that we should be closer to the high end of the range than we saw 5, 6 weeks ago. And I think that more positive view on the volume side. Also on the margin side, we see similar expectations. We should be closer to that 14% and the 13.5% as we see it going forward now.

So you guys had this slide with global ZEV market penetration longer term. Just curious how you think about heavy-duty penetration over that time frame. And then any thoughts on EV penetration over that time frame. And then if I can just ask a separate more near-term question. It sounds like maybe you'll be limiting orders again for 2023. When do you think that ends?

So we'll let John take the first part of the question. Will cover the second part of the question.

And Scott, just to clarify, you're asking Class 8 AV or EV penetration?

Class 8 and EV...

Well, Class 8, you have shorter-range day cabs and you have line haul, long-haul trucking. We see heavy penetration through the day cab market, especially in the U.S. And we don't see a great solution right now for line haul, especially in the U.S., given the patterns and the weights involved the batteries. So that penetration will be limited until there's a better technology solution in the Class 8 space. In Europe, it may go a little further. The speeds are slower, the distances are lighter. And frankly, the regulation is a little bit more aggressive or we expect it to be a little more aggressive in the space. But clearly, the short-range Class 8 stuff is going to go electric over the time horizons that we showed. And sorry, then the question on AV...

Penetration that you said that could be 20% by 2030, 15% by 2035. Like what would come like that...

I think we need to wait and see on putting real numbers on that. We will start to see, again, over the next several years routes start to be established that become reliable, safe and efficient transportation. The speed with which AV companies take those routes and expand is really an unknown. And I don't think I want to put a number on that in this forum.

So just to add a little bit to that, I think that we characterize this EV sector being things that can be returned to base at night, right? That's where it makes sense, whether it's medium-duty or pickup and delivery on the Class 8 side, being able to get back and charge overnight has sensibilities [Technical Difficulty] and the economics can start to work out. So when you think about EV being something where you're going to go out and run long distance, maybe an unknown freight path even as you start, that's a longer adoption curve, right? So we think there's a logical approach that will flow through the world here as batteries come along. To John's point on autonomy, it's all about safe, reliable, regulated properly and understood and wished for by the consumer and ready for the society, right? So there's a lot of adoption in those statements. I just had it there. And it's going to take a little while for that to sort out. We're really pleased with the progress we've made in that space over the last several years. It's been amazing, right? We have trucks running on highways with safety drivers always, but we have trucks running that are operating autonomously. So we feel like by working with the leading partners, Aurora, Waymo, Kodiak and [ BARC ] the list goes on, right, that gives us a window to how they're doing. It lets us understand and integrate their capabilities into our truck and not have to make the decision about whether it's 2 or 3 or 4 years. Ready, safe, reliable, right? That matters for timing. So the second part of your question or third part, I guess, it would be, the third part of your question was kind of around the order book. And what we'd say is we told you a lot of reasons through the course of our presentation, so why we think we're in a stronger for longer kind of a cycle, we've been limited in build. We expect that, that build limitation will continue for some time. And we're trying, as Harry said, to increase it and doing -- having some success. But our customers have a lot of freight to haul. And we expect that will continue for the time being. And as long as that continues, what we've decided, given the supply base and stability is to not just open up the books. So our historical, many in the room, right, our historical model was to think about like, let me check orders for 2023 [Technical Difficulty] what the year is going to be. I'd advise that, that's not a valid approach right now. I'd advise the approaches and we're not unique in this. Let's see where we're at. Let's see what we can build. Let's see if Shanghai comes out of lockdown. Let's see what happens in the Ukraine. Let's watch the world and moderate out the orders in an appropriate way so that we're not whipsawing customers around [Technical Difficulty] to get a better look at things and it let's just have this steadiness which we think carries on for the future. You're going to get to it, Scott? Steve?

I had a question around your engine capacity. You said you had increased engine capacity. I'm just curious what the capacity is now. And if you have updated thoughts about how much of your product will have proprietary engines.

Yes, we've stated that we want to have that continually growing, and it will continually grow. We're not capacity constrained around the world in terms of our engines. Sometimes in the course of last year, we've been constrained on supply base componentry. That has ebbed and flowed by Cummins or PACCAR engines. That will continue. But what we see is that we won't -- like different trucks, we won't see capacity constrained in terms of our ability to grow our share of engines.

Go up significantly?

It does for sure. Jamie? Let's get you a mic.

I guess a couple of questions. I think during your prepared remarks when we were talking about battery electric and hydrogen, you talked about some deeper level of vertical integration needed. So I'm just trying to understand is there any update on vertical integration or on diesel relative to BEV or hydrogen? And then my second question, as -- to you, Harrie, you made the comments about margins in the second quarter. Just wondering how you're thinking about margins in 2022 or 2023. And as inflationary pressures lessen over time, do you think you can keep the pricing that you guys have put out in the market?

Do you want to do your first, John, on partnerships side?

Yes. The early phases of electrification, we've approached aggressively with partnerships for obvious reasons. We're still not making enough trucks as an industry, the adoption curve just isn't there. As we step into tens of thousands of trucks, we will vertically integrate select components and subsystems for all the reasons that we integrate and vertically integrate into engines and other places on the truck. It will be selective. It will be capital efficient, but we -- there will be the right point in time to go there just to drive the cost, the operating cost of a battery electric truck for the right applications down towards the cost of diesel or even better than the cost of diesel. But this will take time. The market has to mature. The volumes have to come up to the point that we can scale these efficiently. So there will be a right moment to invest. We're just not quite at that right moment yet.

Harrie, you want to do the margin?

Sure. So Jamie, I hope you remember my slide that showed that we have the highest profitability in the industry. But yes, we've set record margins in parts of 30% in the first quarter. Overall 13.4% was a strong performance. We expect the parts margin to be at that level more or less. As we progress during the year, we would see our truck margins improve every quarter during the year as the supply base improves and the mix of new products and the mix that we sell goes up. So those should support a growing truck margin but with stronger growth in trucks than in parts. Again, the overall Truck, Parts and Other margin will improve, but the 13.5% to 14% is more or less the result of strong parts margins, improving truck margins. We expect that, like I said, to continue as we progress during the year, 13.5% to 14%, as we said before now with 2 months behind us, we feel confident that we should be closer to the 14% than we would be to the 13.5%.

We've been like favoring one side of the room. We've got to kind of get some balance here.

Maybe first one, Todd, for you. Just on the chart you showed of the retail sales mix for the used, is that kind of an opportunistic increase just in light of the tightness in the used market that you push more there, or is that -- should we expect that will be more kind of ongoing just as you build out these use centers?

Yes, that -- it has been opportunistic. I mean a significant increase up to 40%. There's no reason why we can't move that north of 40%. We have an extensive network throughout the U.S. and to sell trucks retail to end users, fleets, even dealers that have customers, are buying used trucks at elevated prices and then turn around and taking care of some of their biggest fleet customers. So what I see happening is as new truck production improves and increases and fleets get their deliveries, it will gradually ramp down used truck demand throughout the year, but I don't think it's going to impact pricing because what we'll do to offset that because of our retail centers is increase the percent we sell at retail to maintain our gain on sale margins on a per unit basis with a shift in a higher gear. We can -- we've got the ability to do it. We have less than 60 days supply of inventory in the ground. We can afford to do it. We have to sell fewer used trucks at retail prices, we'll still maintain our margins.

Got it. Maybe, Preston, one for you. M&A has never been a discussion really at least externally. I'm just curious as given all these emerging technologies that are out there and the dislocation at least in public markets that we're seeing on -- more on the technology side of things, is that changing the discussion internally in terms of maybe some of these areas that presumably would have been outside of the comfort zone historically from a valuation perspective now maybe more in your wheelhouse? Or is that not really part of the discussion?

Your final kind of comments centers really well. We're comfortable with M&A. We just want it to make sense. And we know that a vast majority or majority of the M&A deals don't necessarily work out for both parties. So we're looking for the ones that do make sense, that do have strategic value to PACCAR, and we are completely open to it. right? We just want to make sure they're sensible. They can be in the technology areas. They could be tangential areas, they could be in core areas. So we maintain an open hand to it. We're looking at those and evaluating those opportunities and, obviously, have great cash and great balance sheet. So yes, those are always opportunities for us. Yes. Matt?

Preston, is there any way to gauge the market opportunity for you guys from the time line, the greenhouse emission reduction time line that you showed through 2030? Just any type of -- have you done any like internal calculations as to what the market opportunity is just from the emission reduction?

Well, I mean, Mike can jump in on this too, but I would look at it and start by saying that everybody has that requirement, like those are -- those are targets that everybody whoever acquired it had a minimum hit, right? Our goal is always not to just get to the minimum, but to exceed that. That's why, as Mike showed, right, we have the 60-plus percent increase in fuel economy. On the new trucks we've just introduced in North America, brought us an additional 7%, not regulated, right? That's 7% fuel efficiency, which is 7% greenhouse gas reduction. So the opportunity is really the tie of emissions and fuel economy is 1 to 1 with greenhouse gas, right? That's the thing to keep in mind. When we do launch in particular, sometimes there's an offset, but with GHG and fuel economy, what's good for the environment is good for the customer. Direct correlation, right? So we're driving with all full force to get that maximized in terms of fuel economy and CO2 reduction. So it ties together nicely. The opportunity is to do it better than our competitors. That's what we strive to do. Mike, anything would you add?

The only thing I'd throw in is you have a step along the way '24 then '27 and a lot of it comes to the interaction with our customers and educating them on what it means ahead of time. So what our sales teams, our engineering teams spend a lot of time with customers, just helping them understand what's coming because they need to plan in their business, too. And when you can get that, the benefits out there and well understood what it means, that generates the opportunity down the road.

Got it. And just one follow-up, Preston, you mentioned that you guys are constantly looking at new geographies for opportunities. Are there any geographies that are more appealing today than previously?

Well, I would say that there's some geographies that don't look as attractive today as they might have 5 years ago. The world might have viewed certain geographies as really desirable 5 years ago that don't appear so now. And PACCAR has always taken a mature and wise approach to investment to not be following the herd but to do the thing that's right for the long-term benefit of our shareholders. And we think that, that has played out very nicely for us. Nothing is off the books ever. We continually look around the world. We continue to look at those opportunities. One of the ones that's working really well is South America, where we made significant investments, and we find that to be a great operation for us. We showed you the growing market share, the growing benefits of the PACCAR total business it's bringing. We feel great about South America and Brazil and the team down there. I couldn't say enough about them. We were down there a few weeks ago visiting with them and the dealers, the customers, the factory, it's just -- it's fun. Jerry?

I wanted to ask, the plan for parts capacity, what does that look like over the next 5 years as you laid out the engines entering their sweet spot. How much more square feet are we going to be adding? And in terms of the dealer footprint big growth since the last time we were together in New York, how much more white space is there to grow -- for the dealers to grow the location count?

So we have a 5-year plan for distribution capacity that we look to review, and we request capital on a regular basis, right? I think that there is plan to grow. We have opportunities, in particular, in Europe to do some different -- take some different steps. But it will -- it has to play out with all the other capital needs and all of the -- and as the market grows and develops and as dealer locations grow and develop. So there's always -- I would say there's white spots. There are places to put more dealer locations. We especially talk to our dealers about that and work with them to find those right spots. I mean, as they do, we'll be there to support all that business.

And I'd add that we have a lot of capital to deploy. So where it makes sense, where we can increase the speed of parts delivery to our customers, to our dealers, then we're making those investments, right? So we're constantly kind of what we've shown you. Laura showed you that we kind of always have one going on. And so we're making investments in hard spots, but we're also -- and I think it's again, a major point for us is the speed of delivery really matters. So the systems capabilities we've done through e-commerce and through fleet management and engagement allows us to meet the needs targeted in a way that doesn't always require capital. It's technology deployment that lets us meet the customers' needs for parts. That's a great way to do it, right? So that's the first and foremost way to be successful. And her team and the team all around the world at PACCAR parts has done a great job there. And then you deploy capital as you need to. So I'd invert maybe the way the thinking about it as technology capability is one, capital deployment is 2. We do both as appropriate to be the best in class, which we are.

So how should we think about R&D in the medium term? Is 2022 a good gauge for what's to come in the next, let's say, 3 to 5 years?

John, do you want to say anything about that?

I mean I think you all recognize that PACCAR is probably the industry leader in efficient investment in R&D to -- it's a notable outlier. Now we are facing an era of transition where we still have to invest in -- selectively invest in internal combustion engines, again, to deliver great products to carry us through as well as move up a curve on electrification aggressively. So I think we'll see an era where we have to -- we may have to exceed -- slightly exceed our historical norms, but we'll do that with rigor and efficiency.

I do have one more follow-up. Just to ask Jamie's question a little differently. What are some of the emerging technologies you think is important to develop in-house for competitive reasons versus what are some other technologies you don't mind partnering with other people to do it?

There are select elements of the -- there are a lot of things you really don't have to do yourself here, and you shouldn't try to do yourself. But when it comes -- especially in the near term, battery supply is going to be a very difficult subject for the next decade or the better part of the next decade for all OEMs and you see that play out across the industry. We feel like there are packs, in particular, doing your own pack. It's a central proprietary piece, both for function and, again, control over your own destiny. And I think you -- there's logical points where you get it into things like eaxles and select elements of the driveline, but it's not across the entire spectrum of subsystems.

And the other thing I'd add to [indiscernible] is like one of the central tenets for us is embedded software and controls algorithms, right? We have invested in capability in Europe. In North America, we have a center, in India, we have a center and having the ability to integrate everything through proprietary software and controls is a really powerful tool for PACCAR. So historically, you might have thought of it as hardware in a factory where you assembled the truck together and that was a core competency of ours. And for sure, now one of our core competencies is the ability to integrate software that comes either proprietary software or supplier software into a synthesized model that gives us a degree of performance optimization but also aftermarket control and benefit. So I would add that to the list of things that we would say that's us, right? That's a PACCAR skill that we're going to continue to develop and lead with. And then I think that the other things are decisions based upon make buy that we always have made. We've always been prudent in the application of our engineering resources and our capital about whether we should buy it or make it depending on the volume. Looking forward, there's a long future of diesel. We have great PACCAR engines and powertrains. We'll continue to make those investments as well for the next cycles. And then as John talked about, on the EV side of it, there's some technologies we can see right now that are clear, that are great places for us to be. And then there are some things that should be partnered. And one of our real strengths is to make each of those decisions in real time rather than suppose them for the next 5 years and to be dynamic and capable as we assess those.

A quick technology follow-up maybe for John. I was curious, when you talked about sort of adoption curves and so forth, you didn't mention hybrids, you didn't really mention natural gas. I think you mentioned maybe a little hydrogen at the end for internal combustion. But given that you already have a lot of proprietary content in those types of applications, why wouldn't there be a more meaningful adoption of those kind of interim technologies for drivetrains?

There's an interesting bundle of questions in there. But let me start with natural gas is -- we do natural gas very well on a partner basis. It is a transitional technology, most likely a transitional technology. As you step into hybridization, right now, every truck manufacturer has built series hybrids. We've all experimented with them. There are other companies doing them. Right now, it's an answer to a question that no regulator has asked, we continue to work with these. We are ready to go that direction if it makes sense from a market benefit or regulatory standpoint. But right now, there's not a compelling fit -- what were the other technologies you had in the...

I was thinking of alternative fuels of various types and up to -- including hydrogen, but in internal combustion...

And then hydrogen internal combustion. We are -- we have active programs in hydrogen combustion. Again, a very nice application. It could be a bridging technology to get to a more complete hydrogen economy when infrastructure exists. The beauty of hydrogen combustion is one, you use a lot of your existing assets in that transition period. And secondly, you don't require terribly pure hydrogen like you do with fuel cells. So we're very interested in hydrogen combustion and continue to work that problem, but we'll see how these things emerge. There's a lot of technical interdependencies to get to the hydrogen economy for trucking that have yet to be resolved. We're playing, I think, appropriately in the spaces around them to allow us to move as things become more clear over time.

Sorry, to press. But as you get out to, say, 2030, is hydrogen combustion, a meaningful part of the pie?

Hydrogen combustion can be a meaningful part of the pie, if the regulations and the infrastructure are there to support it. The hydrogen combustion -- the thermal efficiency is very similar to fuel cell, surprisingly good. It works very well in existing architectures, and it can be a meaningful part of that equation if the other elements come with it to support it.

Steve, so the way we're thinking about it macroscopically is we're not going to know the answer for 2030 and 2022. The regulators haven't decided the answer, European regulators, North American regulators. So supposing what it's going to be, would be investment-intensive and could be wrong. What we want to be, what John is and the team is, whether it's on batteries or hydrogen or clean diesel or hybrid is knowledgeable and ready with a suite of products that serve the market. We want to listen to the customers, let them tell us, listen to the regulators and work with them and let them help us along that path. And then when it's time, have development to a level where we can go forward quickly, right, and take the market as the leader. So the way we've done it in the past, it's really not that different. We can afford to be almost agnostic to the choice of motive power that's made as long as we're smart about all of them. And the team has done a great job of becoming smarter and ready for those technologies. It's like heavily biased this side of the room for questions. Go ahead, Ken.

Just wanted to ask, I recognize that you guys are guiding now to the higher end of your gross margin range for the quarter. If we're now in this slow and steady gradual pace, how you're managing the order book, does that help you get to a 15% gross margin faster than maybe you would have in a boom-bust cycle, just trying to gauge that how to think about that over the next year or 2. And then you mentioned how you have the highest margins, and Roy [Technical Difficulty] your competitors. And I know you're not going to talk specifically about your competitors. But there's been a lot of changes in the public equity markets with truck manufacturers. We've seen some consolidation, some spinouts. And I just was hoping if you can more broadly talk about, has that changed at all the operating environment, the competitive environment, any differences in strategy that you've seen as kind of PACCAR has kind of stuck to their strategy and kind of gone ahead while we've seen some changes with European players and U.S. players?

Sure. The first part of the question in terms of margin and Harrie and I are kind of protecting this, I guess, is we think that a stable market that we're in, which has legs to it and can continue for some time, so that's multiple years is good for the industry and good for PACCAR and allows us to continue to see improvements. We think that the products that we've introduced and are still growing their percentages in our business are helpful to our margin performance as well. We think that operating truck plants at near capacity, which is kind of where we're getting to, those are good things for our margin performance as well. So kind of an answer to your question is, yes, stability and strength are good for us and good for our margin trends over time. So we expect that. Second part of your question, again, was tied to...

Changes you've seen in like the competitive environment based on the fact that the public -- we see some changes in public truck manufacturers. Curious if that's changed at all, any of the operating or strategic players and decisions playing out in the market.

Right. I think as you noted, we're not going to talk about our competitors. What we'll say is that we try to operate independently of what they're doing. We always want to have the best performance. We delivered that. We intend to deliver that going forward. On ROIC, Harrie showed you the charts, on return on revenue, and we intend to continue doing that. We think that they will have some of the focus given to them that we've gotten to enjoy over the years, and I think that will be probably only advantageous for us, whomever can you choose.

This question for John and maybe for Preston. I'm not sure if it's inbounds or not, but I'm intensely curious about it. You mentioned the R&D efficiency. And if you look at the slides that you guys shared today, the SG&A efficiency is astonishing, your margins are industry-leading and the R&D efficiency is astonishing. You're a newcomer, how does PACCAR do? Like what's the mechanism how PACCAR does...

Here you go, John.

Yes. This is -- it's actually one of the reasons I came to PACCAR because I had done this benchmarking at another employer that wasn't so efficient. PACCAR, this is an industry of capital junkies, right? It's just for years, and the return on equities across the industry are not great. PACCAR is an absolute outlier. And it is a combination of discipline around projects, not stopping projects once they're started but picking the right projects and carrying through, not playing in the sandbox too much, knowing your customer and knowing what you're going to go after and what you're going to spend money on and very, very effective partnering and not being afraid to be a good partner and play with a partner and void that investment. It is -- it also gets to the chemistry of the leadership team and the focus and the agreement they have on selecting those projects and moving them forward. So it's kind of a complex puzzle, but it's really -- actually, if you've been in this industry as long as I have been, as long as all you guys have -- it's a pretty amazing point on the chart. Do you want to add to there?

I like it. But I'd only add to it and say that the other thing to look around the company and see is this is -- he mentioned chemistry, it's topped through the organization all the way through, right, the teams and on our plans. When you go to a manufacturing plant, some of you had the opportunity to Chillicothe earlier. You walk around the plants and you see how people are and how engaged they are and how bought in they are, they're amazing, right? Like the past years, since 2020, as we walked through COVID together and supply-based constraints, the people are just amazing, right? They're different level capability than I think anywhere I've ever seen. We've gotten to see all the supply bases. We get to see the other companies and whether it's somebody who's an artist building a truck, I'll call it, or whether it's an engineer who's doing something and doing embedded software work for us, we just have people that are a cut above and it makes all the difference in the world, right? Because they can operate lean, they can make decisions. And once you get the culture and buy in, and John is like a perfect fit with us, then you can run fast and make good decisions.

I had a long term and then near term. So any way to think about how big of a business the subscription connected truck business could be for you 5 years from now? And then as zero-emission vehicles ramp up, is that good or bad for gross margins? And then near term, any thoughts on used truck pricing?

So I think, Todd, do you want to start on the used truck comment? That's an easy one, and we'll go from there.

Used truck pricing has come off a little bit from its peak in the first quarter but continues to remain very robust, especially when you take a look at it over a year-over-year -- on a year-over-year basis. And we have been very prudent in setting our residual values over the past 4 or 5 years. And the current used truck and pricing environment, it's very favorable to us from a gain on sale perspective, and I expect that to continue for the foreseeable future.

And then to work through the memory test, you gave us some 3 questions. On the EV side of it, I would say that no, I don't see them as decremental but more incremental to margin benefit over time. Think about the cost of the vehicle, right? The cost of the vehicle is going to go up. The opportunity of the integration on the vehicle goes up compared to historicals. And as Laura showed you, right, the opportunity from us from a parts standpoint is going to grow. So I think of EV being an incremental opportunity for us as we look at the world. From a connected services business, right, you all think about it. We think about our parts business as being sustaining continuous revenue that's less affected by cycle, and we see the connected businesses being that way as well. And it's not just a connected business in terms of our PACCAR connected programs where we're charging subscription fees and app fees and monthly recurring fees, that's great, right? That's really good business. It's good business because it's valuable for the customer. That's the starting point, right, is that you're giving them something that provides value. And if you're doing that, then they're willing to pay you for it, right? It's just a business-to-business transaction. So we see that as being a good opportunity. And then we started to talk with you about trucks as a service and Todd's organization and the ability to create another revenue stream, which is sustaining and growing for us, which is to the benefit of us in the future.

[indiscernible]

I don't think I can give you a number in billions, but think of it in billions.

[indiscernible]

Well, I mean -- no, it's not that simple, right? It's not that binary. It's not binary because when you think about the connected businesses that we have today of e-commerce,and how we're delivering and how Laura's team is delivering fleet services, those are all integrated already. So this is not like a step change thing that happens. It's an evolutionary thing that happens. So it's not like a 0 to 100. It's somewhere along the journey we're 35 out of 100 or 40 out of 100, but there's still a lot of room left to grow. We should go to the other side of the room for a second. Come back to you, Jeff, if that's okay.

Yes. Can you talk about production mix in the near term on medium duty versus heavy-duty? And then on the -- as parts get rolled out, you mentioned -- as the new models get rolled out, you mentioned parts commonality between heavy duty and medium duty. Can you talk about how that's changed versus the existing models?

Mike, do you want to do anything?

So the first part, the heavy versus medium duty, we're continuing to work through all our factories to take production up as we can. The priority has been and will continue to be heavy duty versus medium duty. But again, we're seeing improvement, the continue more steps forward with the supply base, so that will offer opportunity on both sides. The second part was I would say -- I can't give you a direct percentage, but there is a significant portion when we think about chassis powertrain, harnessing electrical systems, very, very common, cab componentry, common, much of what you see, the exterior and basic chassis framework just due to the weight differences in class but cab electrical system, fastening components very, very similar.

And is it a big improvement versus buy moves?

Absolutely. I think I touched on in my presentation, the base cab shares that's completely shared when we look at the body and white cab structure we leverage what we had done in North America with the conventional product. We leverage that 2.1-meter cab platform to build the basic structure for the medium-duty platform and only modified where necessary due to duty cycle, so we have big changes there. Electrical system, the digital -- the configurable digital displays I talked about, those shares [Technical Difficulty] the background, the base software, identical carryover. Electrical architectures, similar situation. So leveraging where appropriate but then are making the medium-duty specific pieces that are required for performance unique to the models.

And the other areas that are growing, and John hit on this is like when you look at zero emissions vehicles, that's a global technology skill that we develop, right? So we can look at e-motors and e-axles and all the batteries and all of that, and we do that in a global manner. And we do embedded software in a global manner. So we find the places to leverage and then where it makes sense, we do that. And then where there's market specific changes that are needed to meet the customers' needs, then we do that, right? And those exist, right? And they'll continue to exist and we want them to exist, right? Because customers have unique preferences by brand. And so we apply it appropriately to get where we need to go. Jeff?

Well, Mike's on a roll. So I'm going to bring a question back to him and then a second question for John. So we've got CARB 24 and EPA 27. And I know there's been a legal challenge now by the Truck and Engine Manufacturers Association to CARB 24. But irrespective of that, are you where you're comfortably needed to be for CARB 24? What needs to be done to get to where you need to be for EPA 27?

So I'm going to take the first swing at it, but I can see John just chomping at the bit being the engine guy, so he could probably quickly jump. I think 2024, that is a very mature program continue, if we think about it in the process of product development, we're really headed towards -- in the final phases headed toward the production solution in there. 2027, there's still a good bit of definition and understanding what the right solution will be, what the right mix of technologies will be to address the '27. So I think from a -- the '27 requirements, if we think it on the product development curve, we're not at the peak yet and there are still some decisions being made on what the appropriate technologies will be the right mix of pieces to address the regulation as currently written.

Now as we move away from greenhouse gas and back towards NOx and particulates, the history of this was the truck got more expensive and it may or may not have been more efficient. I know ACT Research has come out with an estimate $30,000 to $35,000 more than a truck could cost in '27, do you have any thoughts on this?

I think it would be premature right now without specific number for '27, given what I just spoke about, there are still the analysis being done on the right mix of technologies to address the regulation. There are still questions. Will the regulation look exactly like it does right now come 2027? So I think there is more yet to come. Anything you want to?

Yes, I'm not -- also not going to give you a specific number not surprisingly. But '24, again, we're pretty close to '24. We're pretty locked down with what we're going -- where we're going with it. It starts with California. Some other states will opt in. It's not clear that all states will opt in on the NOx portion. Everybody gets very excited about the Clean Trucks and the ZEV mandates. They get a little lukewarm when they have to sign on to the NOx implications. We'll see where that goes. Certainly, some states. Well, '27 is the bigger hurdle. It's nationwide. We are committed to re-architecting selectively. We're required to meet those standards. We will meet them, we will exceed them. We will come with engines that are leaner, meaner and greener. We will not back down from this challenge at all. I'd say it is a very healthy technical challenge, but we will -- we have plans to comply and comply with great product, great product that will improve fuel efficiency and reduce operating costs for our customers at the same time.

A couple of follow-ups. So on the trucks as a service, can you just characterize push versus pull? Is this something that you're sort of more trying to stimulate in the market? Or is this something that you are seeing more demand for? And then what are the things that you need to make sure you get right as that business develops?

Yes. I think that will be driven through the PacLease dealer network through the full-service leasing. We have 587 locations, as I mentioned, throughout the U.S. that's going to be more of a pull because a lot of customers, especially in the ports, out of California, congested areas, are going to want to dip their toe in the water on this technology, and they're going to want to do it via a full service lease where they don't have everything bundled together with the charger and the truck, even autonomy, ultimately, where you get the driver and the truck together. And we think PacLease is going to be a great opportunity for us to learn about these technologies, to learn about resale values and then expand it further beyond that where the finance company actually gets involved, in financing this technology once it gets some maturity to it for our fleet, and it's going to become a normal course of business. We're just financing a different technology. So we really like the glide path that we have there to learn about it and mature with it.

Maybe just an overall margin question. Just curious, you have a lot of new products and services that you're talking about. So curious from a peak-to-peak perspective, any way to frame what we should be thinking about in terms of margin potential? Is this sort of -- would you measure it in hundreds of basis points over the next 1 to 2 kind of peaks?

Well, first of all, I think there's peak-to-peak thing's overused personally. I think that we should be thinking about a market which is not as sinusoidal as maybe we've historically seen it as. And the reason for that is because you're seeing strength of revenue through the aftersales. You're seeing this truck as a service opportunity. You're seeing the dominance of trucks in general. And so yes, there's going to be economic moves in the market based on truck demand and how the economy is doing, but it's probably more damp than what we've historically seen. I think we all got trained up in the model when it was EPA '07 and it was like DPFs and prebuys and big things that were bad for the customer that really dragged the cycle down. And now we live in a world where much of what we're trying to regulate, as I said, CO2 which is when you reduce CO2, you're improving fuel economy. So as the regulations come through, the customers are split. Some are saying, "Well, I don't want to be the first one with the technology, I'll hold." Others are saying, "5% improvement in fuel economy, I'm in," right? I need that 5% improvement in fuel economy. And so I think that that's kind of going to be less dramatic. As soon as I say that I'll be wrong, but I think in general, that's true. And in terms of margin, right, the new products are going to drive margin. The growth in aftersales is going to drive margin. On the technologies we talked about are going to drive margin. I'm going to avoid giving you a 200 basis point kind of answer. But I'm going to tell you that we see continued great trends as we look forward into the future through the investment strategies and profitability of the company.

Just a quick one for me. I'm trying to better understand the unit economics of parts in the EV versus an internal combustion engine. So you mentioned the incremental 5,000 to 10,000 that you -- actually is going to be higher, I want to first clarify, number one, does that include the upfront charger sale that you guys are including in the parts segment? Or is that excluding the charger sale?

Without giving you a spreadsheet, excludes the charger sale, but it would include charger part sales.

Okay. And then secondly, as I think about the diesel earnings stream in a parts environment, you have this sort of curve that goes sort of up between ages 8 and 12. Do you think that dramatically changes in EV configuration at all as different parts might age quick or need to be replaced differently? Or should we think about that slope being relatively the same over that time period?

I mean so my powertrain chart showed years 1 to 4 being a lot of filters and that sort of thing. There are some changes in how it shifts, but -- and I don't have anything more specific to say about exactly how that's all going to play out over the years. Maybe John may.

Yes. The shape of that might shift a little bit. I'm not sure I want to predict that. There are a lot -- there's just a lot of stuff on the truck. There's a lot more value add, as you saw in the slides, but there's just a lot of pumps, compressors and other things that just will wear out over this time frame in a pretty similar matter to what we see today. Again, rotors and stators, no, you're not going to wore, but there's a lot of devices with bearings, there's a lot -- again, a lot of systems that support the truck that are different with electrification, but they are wear items. And again, this truck stays on the road a long time, much longer useful life than, for example, your Tesla that you -- when your battery fails, you turn in at 150,000 miles. It's just a completely different animal, and it has a wonderful business attached to keeping it on the road.

Okay. Have we got everybody's questions?

This is John Joyner. So just with regard to the investments that you have made into digital connectivity online services, such as in your parts division, e-commerce, financial services, I guess, how integrated are these systems, maybe more kind of like your technology stack to really be able to harvest the data and utilize the data?

The answer is very integrated. When you think about kind of examples, if we have a truck as we have these trucks, these 400,000 trucks sort of connected, we get to look at those trucks on a lot of different levels. We can look at performance data to decide how we can make sure they're optimally running. We get to look at those trucks from a Financial Services standpoint to see how customers are doing in operating the vehicles and whether they're making payments on time and how things match up in terms of utilization. We get to utilize that data in terms of how the business works for PACCAR parts and who's looking for kinds of parts. It leads us towards predictive maintenance in the future and brake to part selling. So the integration level is really high and will go only higher. So it's really kind of a nice opportunity for us. David, I can't believe you're not asking a question. I'm just shocked. But I'm pleased if they're all getting answered for you. Anybody else have any questions for us? If not, we really appreciate the time you took for us. Great to spend the time with you talking about the business. We're excited for how the future looks. We feel like we're in the beginning of a nice gradual good time, and PACCAR is well positioned for the future. Look forward to sharing lunch with you and answering any more questions and having dialogues with you. Thank you very much. Appreciate it.