Q2 2023 Paccar Inc Earnings Call

July 25, 2023

Operator: Good morning, and welcome to PACCAR's Q2 2023 earnings conference call. All lines will be in a listen-only mode until the question and answer session. Today's call is being recorded, and if anyone has any objections, they can disconnect at this time. I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning, and welcome to pack called second quarter 'twenty, two 'twenty three earnings conference call all lines will be in a listen only mode until the question answer session.

Today's call is being recorded and if anyone has any objections. They can disconnect at this time.

I would now like to introduce Mr. Ken Hastings, <unk> director of Investor Relations. Mr. Hastings. Please go ahead.

Ken Hastings: Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations, and joining me this morning are Preston Feight, Chief Executive Officer, Harrie Schippers, President and Chief Financial Officer, and Brice Poplawski, Vice President and Controller. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. For additional information, please see our SEC filings and the investor relations page at paccar.com. I would now like to introduce Preston Feight.

Good morning, we would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings <unk> director of Investor Relations and joining me. This morning are Preston Feight, Chief Executive Officer, Barry <unk>, President and Chief Financial Officer, and Bryce Poplawski Vice President.

As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. For additional information, please see our SEC filings and the investor relations page at paccar.com. I would now like to introduce Preston Feight.

And controller.

As with prior conference calls, we ask that any members of the media on the line participate in a listen only mode.

Certain information presented today will be forward looking at involve risks and uncertainties, including general economic and competitive conditions that may affect expected results for additional information. Please see our SEC filings and the Investor Relations page at <unk> Dot com.

I would now like to introduce Preston Feight.

Preston Feight: Hey, good morning. Harrie Schippers, Brice Poplawski, Ken Hastings, and I will update you on our second quarter financial results and business highlights. Well, I'll start by saying thank you to PACCAR's great employees, who continue to deliver excellent results and provide our customers with the best trucks and transportation solutions in the world. PACCAR achieved record revenues and net income in the second quarter due to its excellent portfolio of new trucks, robust aftermarket parts business, healthy financial services performance, and continued strong market demand. PACCAR's revenues increased 24% to $8.9 billion. Net income increased 70% to $1.22 billion. PACCAR Parts's second quarter revenues increased by more than 11% to $1.6 billion. Parts pre-tax profits were $419 million, 19% higher than the second quarter of last year.

Hey, good morning.

Harry Skippers, Bryce Poplawski, Ken Hastings, and I will update you on our second quarter financial results and business highlights.

Well I'll start by saying, Thank you to Packers, great employees, who continue to deliver excellent results and provide our customers with the best trucks and transportation solutions in the world.

PACCAR achieved record revenues and net income in the second quarter due to its excellent portfolio of new trucks, robust aftermarket parts business, healthy financial services performance, and continued strong market demand. PACCAR's revenues increased 24% to $8.9 billion. Net income increased 70% to $1.22 billion. PACCAR Parts's second quarter revenues increased by more than 11% to $1.6 billion. Parts pre-tax profits were $419 million, 19% higher than the second quarter of last year.

<unk> achieved record revenues and net income in the second quarter due to its excellent portfolio of new trucks robust aftermarket parts business health.

Healthy financial services performance and continued strong market demand.

<unk> revenues increased 24% to $8 $9 billion.

Net income increased 70% to $1 two 2 billion.

Packer parts second quarter revenues increased by more than 11% to $1 6 billion.

Parts pretax profits were $419 million.

19% higher than the second quarter of last year.

Preston Feight: Truck parts and other gross margins were excellent in the second quarter, at 18.8%, up from 14.4% in the same period last year. PACCAR is delivering structurally higher margins as a result of our investments in the industry-leading new range of premium trucks, our sophisticated and successful aftermarket parts business, and as a result of our overall global growth. PACCAR's innovative research and development programs and partnerships provide our customers with the right products and technology to help them optimize their operations. During the second quarter, we were pleased to announce the expansion of our strategic partnership with Toyota to develop and bring to market zero-emissions, hydrogen fuel cell-powered Peterbilt and Kenworth trucks. PACCAR's powertrain portfolio of hydrogen fuel cell, hydrogen combustion, battery electric, and clean diesel technologies position the company and our customers for an excellent future.

Truck parts and other gross margins were excellent in the second quarter, at 18.8%, up from 14.4% in the same period last year. PACCAR is delivering structurally higher margins as a result of our investments in the industry-leading new range of premium trucks, our sophisticated and successful aftermarket parts business, and as a result of our overall global growth. PACCAR's innovative research and development programs and partnerships provide our customers with the right products and technology to help them optimize their operations.

Truck parts and other gross margins were excellent in the second quarter at 18, 8% up from 14, 4% in the same period last year.

Patkars delivering structurally higher margins as a result of our investments in the industry, leading new range of premium trucks are sophisticated and successful aftermarket parts business and as a result of our overall global growth.

Packers innovative research and development programs and partnerships provide our customers with the right products and technology to help them optimize their operations.

During the second quarter, we were pleased to announce the expansion of our strategic partnership with Toyota to develop and bring to market zero-emissions, hydrogen fuel cell-powered Peterbilt and Kenworth trucks. PACCAR's powertrain portfolio of hydrogen fuel cell, hydrogen combustion, battery electric, and clean diesel technologies position the company and our customers for an excellent future.

During the second quarter, we were pleased to announce the expansion of our strategic partnership with Toyota to develop and bring to market zero emissions hydrogen fuel cell powered peterbilt and kenworth trucks.

Patkars powertrain portfolio of hydrogen fuel cell.

<unk> combustion battery electric and clean diesel technologies position, the company and our customers for an excellent future.

Preston Feight: PACCAR Financial also had an excellent quarter, achieving profits of $145 million due to its high-quality portfolio and positive used truck results. Looking at the truck market, industry build has been gradually increasing this year, and in the US and Canada, we estimate the Class 8 market to be in the range of 290,000 to 320,000 trucks. The 2023 European truck market is expected to be in a range of 300,000 to 330,000 units. We project the South American above 16-ton truck market to be in a range of 105,000 to 115,000 vehicles this year. South America is an important region for PACCAR's geographic growth.

PACCAR Financial also had an excellent quarter, achieving profits of $145 million due to its high-quality portfolio and positive used truck results. Looking at the truck market, industry build has been gradually increasing this year, and in the US and Canada, we estimate the Class 8 market to be in the range of 290,000 to 320,000 trucks. The 2023 European truck market is expected to be in a range of 300,000 to 330,000 units. We project the South American above 16-ton truck market to be in a range of 105,000 to 115,000 vehicles this year. South America is an important region for PACCAR's geographic growth.

Pack, our financial also had an excellent quarter, achieving profits of $145 million due to its high quality portfolio and positive used truck results.

Looking at the truck market.

Industry build has been gradually increasing this year.

And in the U S and Canada, we estimate the class eight market to be in the range of $290 to 320000 trucks.

The 2023 European truck market is expected to be in a range of 300 to 330000 units.

We project the South American above 16 tonne truck market to be in a range of 105000 to 115000 vehicles. This year.

South America is an important region for Packers geographic growth.

Preston Feight: South Brazil has done an excellent job growing market share since we opened the business ten years ago, achieving a record 9.2% share in the first six months of this year. As we look forward to the rest of this year and 2024, the truck markets are expected to remain healthy, and PACCAR will continue to deliver excellent performance. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights.

South Brazil has done an excellent job growing market share since we opened the business ten years ago, achieving a record 9.2% share in the first six months of this year. As we look forward to the rest of this year and 2024, the truck markets are expected to remain healthy, and PACCAR will continue to deliver excellent performance. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights.

Brazil has done excellent job growing market share since we opened the business 10 years ago, achieving a record nine 2% share in the first six months of this year.

As we look forward to the rest of this year.

And 2024.

Markets are expected to remain healthy and <unk> will continue to deliver excellent performance.

Harry Skippers will now provide an update on packer parts pack or financial services and other business highlights.

Harrie Schippers: Thanks, Preston. PACCAR delivered 51,900 trucks during Q2. Supply chain is improving, though occasional supplier shortages still limit production. We estimate Q3 deliveries to be in the range of 48,000 to 52,000 trucks. The Q3 delivery estimate reflects the normal summer shutdown in Europe. PACCAR achieved strong truck, parts, and other growth margins of 18.8% in Q2. We estimate Q3 growth margins to be in the 18% to 19% range, reflecting continued high-level performance of PACCAR's truck and parts business. PACCAR Parts achieved strong Q2 growth margins of 31.6%. The parts business continued its track record of high sales and profit growth, with quarterly sales growing by 11% and profits by 19% compared to the same period last year.

Thanks Preston.

Okay got delivered 51900 trucks during the second quarter.

Supply chain is improving.

<unk> supplier shortages still limit production.

We estimate third quarter deliveries to be in the range of 48 to 52000 trucks.

The third quarter delivery estimate reflects the normal summer shutdown in Europe .

Becker achieved strong truck parts and other gross margins of 18, 8% in the second quarter.

We estimate Q3 growth margins to be in the 18% to 19% range, reflecting continued high-level performance of PACCAR's truck and parts business. PACCAR Parts achieved strong Q2 growth margins of 31.6%. The parts business continued its track record of high sales and profit growth, with quarterly sales growing by 11% and profits by 19% compared to the same period last year.

We estimate third quarter gross margins to be in the 18% to 19% range.

Selecting continued high level performance.

Truck and parts business.

Paccar parts achieved strong second quarter gross margins of 31, 6%.

The parts business continued its track record of high sales and profit growth with.

With quarterly sales growing by 11% and profits by 19% compared to the same period last year.

Harrie Schippers: PACCAR Parts is focused on expanding its customer base and providing a full range of technology-enabled transportation solutions, is driving its excellent results. In the last five years, annual parts sales have grown by 73%, and parts profits have increased by 136%. The consistent performance of parts as a high-growth, high-margin business is structurally beneficial to PACCAR. Q3 parts sales are expected to increase 6% to 8% compared to the same period last year. PACCAR Parts' growth is supported by a network of 18 distribution centers, more than 2000 dealer locations, and 250 independent DRP stores, as well as technologies like Managed Dealer Inventory and innovative e-commerce systems. PACCAR Parts continues to expand and will open a new distribution center in Massbach, Germany, next year.

PACCAR Parts is focused on expanding its customer base and providing a full range of technology-enabled transportation solutions, is driving its excellent results. In the last five years, annual parts sales have grown by 73%, and parts profits have increased by 136%. The consistent performance of parts as a high-growth, high-margin business is structurally beneficial to PACCAR. Q3 parts sales are expected to increase 6% to 8% compared to the same period last year.

Backup parts its focus on expanding its customer base and providing a full range of technology enabled transportation solutions is driving excellent results.

In the last five years annual parts sales have grown by 73%.

<unk> profits have increased by 136%.

The consistent performance of parts as a high growth high margin business.

Structurally beneficial to Pac arm.

Third quarter parts sales are expected to increase 6% to 8% compared to the same period last year.

PACCAR Parts' growth is supported by a network of 18 distribution centers, more than 2000 dealer locations, and 250 independent DRP stores, as well as technologies like Managed Dealer Inventory and innovative e-commerce systems. PACCAR Parts continues to expand and will open a new distribution center in Massbach, Germany, next year.

<unk> growth is supported by our network of 18 distribution centers.

And then 2000 dealer locations and 250 independent TRP stores.

Well, let's technologies like manage dealer inventory.

Innovative E Commerce systems.

<unk> parts continues to expand.

We will open a new distribution center in Germany next year.

Harrie Schippers: Each new distribution center increases the number of dealers and customers benefiting from receiving parts on the same or next day. PACCAR Financial Services' Q2 pre-tax income was a solid $145 million. The financial services business benefited from excellent portfolio quality and good used truck results. Used truck prices have moderated but are historically strong. With its larger portfolio and superb credit quality, PACCAR Financial is having another very good year. PACCAR has invested $7.5 billion in new and expanded facilities, innovative products, and new technologies during the past decade. These investments have created the newest and most impressive lineup of trucks in the industry and will contribute to excellent performance for many years.

Each new distribution center increases the number of dealers and customers benefiting from receiving parts on the same or next day. PACCAR Financial Services' Q2 pre-tax income was a solid $145 million. The financial services business benefited from excellent portfolio quality and good used truck results. Used truck prices have moderated but are historically strong. With its larger portfolio and superb credit quality, PACCAR Financial is having another very good year.

Each new distribution center increases the number of <unk> customers benefiting from receiving parts on the same or next day.

Becker financial services second quarter pretax income was a solid $145 million.

The financial services business benefited from excellent portfolio quality and good used truck results.

You strip prices have moderated, but our historically strong.

With its larger portfolio.

Superb credit quality Becker financial is having another very good year.

PACCAR has invested $7.5 billion in new and expanded facilities, innovative products, and new technologies during the past decade. These investments have created the newest and most impressive lineup of trucks in the industry and will contribute to excellent performance for many years.

Becker has invested $7 5 billion in new and expanded facilities innovative products and new technologies during the past decade.

These investments have created the newest and most impressive lineup of trucks in the industry.

And we will contribute to excellent performance for many years.

Harrie Schippers: PACCAR's after-tax return on invested capital improved to an industry-leading 35% in the first half of the year, up from 22% in the same period last year. Capital expenditures are projected to be $625 to 675 million this year, and research and development expenses are estimated to be $400 to 430 million. PACCAR's industry-leading truck lineup, highly efficient manufacturing operations, best-in-class parts and financial services businesses, and the continued development of advanced technologies position the company well for today and for the future. Thank you. We'd be pleased to answer your questions.

PACCAR's after-tax return on invested capital improved to an industry-leading 35% in the first half of the year, up from 22% in the same period last year. Capital expenditures are projected to be $625 to 675 million this year, and research and development expenses are estimated to be $400 to 430 million. PACCAR's industry-leading truck lineup, highly efficient manufacturing operations, best-in-class parts and financial services businesses, and the continued development of advanced technologies position the company well for today and for the future. Thank you. We'd be pleased to answer your questions.

After tax return on invested capital.

Roofs to an industry, leading 35% in the first half of the year.

Yep.

22% in the same period last year.

Capital expenditures are projected to be $625 million to $675 million this year.

In research and development expenses.

Tomato beforehand to $430 million.

<unk> industry, leading truck lineup.

Highly efficient manufacturing operations.

In class parts and financial services businesses, and the continued development of advanced technologies positioned the company well for today and for the future.

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

Okay.

Operator: Thank you. As a reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two, and when preparing to ask your question, please ensure you are unmuted locally. So that's star followed by one on your telephone keypad to register a question. Our first question today is from Steve Volkman from Jefferies. Steve, please go ahead. Your line is open.

Thank you.

A reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.

If you would like to withdraw your question. Please press star followed by one preparing to ask a question. Please ensure you Amit.

That star followed by one on your telephone keypad to register a question.

Our first question today is from Steve Volkmann from Jefferies.

Please go ahead your line is open.

Stephen Volkmann: Great. Thank you, guys, for the question. Preston, since you brought it up, I'm curious if you might be willing to provide any additional thoughts on 2024, you know, being a robust year. Do you guys have orders for 2024? And you know, how much visibility and how much confidence do you have that 2024, you know, can be a robust year?

Steve Volkmann: Great. Thank you, guys, for the question. Preston, since you brought it up, I'm curious if you might be willing to provide any additional thoughts on 2024, you know, being a robust year. Do you guys have orders for 2024? And you know, how much visibility and how much confidence do you have that 2024, you know, can be a robust year?

Great. Thank you guys for the question Preston since you brought it up I am curious if you might be willing to provide any additional thoughts on 2024.

Being a robust year do you guys have.

Orders for 24 and <unk>.

Much visibility and how much confidence do you have.

2024.

<unk> can be run.

The best year.

Preston Feight: Well, Steve, it's good to talk to you. Thanks for the question. I'd start by saying, being full for 2023 right now is a great place to be operating from. The markets continue to be healthy for us around the world, and what we see is that we have great conversations going on with our customers. And so we're having great conversations around what the trucks are going to be and their order needs are going to be for next year. There's some sectors out there that are exceptionally good, whether it's LTL, vocational, and otherwise, and demand is expected to be strong.

Well, Steve as good to talk to you. Thanks for the question.

I'd start by saying being full for 2023 right now is a great place to be operating from.

The markets continue to be.

Healthy for us around the world and what we see is that we have great conversations going on with our customers and so we're having great conversations around what the trucks are going to be in their order needs are going to be for next year. There is some sectors out there that are exceptionally good.

<unk> vocational and otherwise and demand is expected to be strong.

Stephen Volkmann: Okay. Maybe I'll pivot again on 2024. But if 2024 were to be a down year in any amount, you talked about sort of structurally higher margins. I'm curious how you guys think the decremental margins would look if there was a decrement.

Steve Volkmann: Okay. Maybe I'll pivot again on 2024. But if 2024 were to be a down year in any amount, you talked about sort of structurally higher margins. I'm curious how you guys think the decremental margins would look if there was a decrement.

Okay, maybe I'll pivot again on 24, but if 24 were to be a down year in any amount you talked about sort of structurally higher margins I'm curious how you guys think the decremental margins would look if there was a decrement.

Preston Feight: Well, Steve, you know we don't provide 2024 guidance in this call. I think you do hit upon a really good point, though, which is the structural improvements at PACCAR compared to a few years ago are significant, right? The product investments we've made, the industry-leading trucks we have in Europe that are significantly outperforming, the growth we have in South America, which is significant, the new medium duty products in North America, and the fact that PACCAR Parts is doing such a great job with being a high margin, high growth, technology-driven transportation solutions provider for our customers. All of those things contribute to a great future.

Well, Steve you know, we don't provide 2024 guidance in this call.

Can you do hit upon a really good point, though which is the structural improvements at <unk> are compared to fears of our significant write the product investments. We've made the industry leading trucks, we have in Europe that are significantly outperforming.

The product investments we've made, the industry-leading trucks we have in Europe that are significantly outperforming, the growth we have in South America, which is significant, the new medium duty products in North America, and the fact that PACCAR Parts is doing such a great job with being a high margin, high growth, technology-driven transportation solutions provider for our customers. All of those things contribute to a great future.

The growth we have in South America, which is significant the new medium duty products in north in North America, and the fact that Packer parts is doing such a great job with.

Being a high margin high growth Tech.

Technology, driven transportation solutions provider for our customers all of those things contribute to a great future.

Stephen Volkmann: Got it. Thank you, guys.

Steve Volkmann: Got it. Thank you, guys.

Got it thank you guys.

Preston Feight: You bet. Have a good day.

You bet, so a good day.

Okay.

Operator: Thank you. Our next question is from Tami Zakaria, from J.P. Morgan. Tami, please go ahead. Your line is open.

Thank you.

Our next question is from Tami Zakaria from J P. Morgan Tony. Please go ahead. Your line is open.

Tami Zakaria: Hi, good morning. Thank you so much for taking my questions. My first question is, since your order books are full for this year, like you said, you probably have visibility into fourth quarter deliveries as well. So should the fourth quarter deliveries be sequentially better than the third quarter, or possibly the highest delivery quarter of the year? Or how should we think about Q4 versus Q3?

Hi, good morning. Thank you so much for taking my questions. So my first question is since your order books are full for this year like you said.

You probably have visibility into fourth quarter deliveries as well.

So should the fourth quarter deliveries be sequentially better than the third quarter or possibly the highest quarter of the or how should we think about <unk> versus <unk>.

Preston Feight: Yeah, what I would think about is the second half, Tami, and the second half being a strong second half with the full backlog. You know, you have some, you have some differences in the markets in Q3 and Q4. In Q3, Europe has its summer shutdowns, so that affects things. In North America, in Q4, there's more holidays as well. But in general, we will be trying to increase build. We still continue to look at the market as being somewhat constrained in terms of supply base, and that periodically affects us and everyone else, and so that may have a pacing item on the deliveries in Q4.

Yes, what I would think about it as the second half Tami and the second half being a strong second half with the full backlog you have some you have some differences in the markets in Q3, and Q4 and Q3 Europe has its summer shutdowns. So that affects things in North America in Q4, Theres more holidays as well, but in general we will be trying to increase build we still continue.

Look at the market as being somewhat constrained in terms of supply base.

Obviously affects us and everyone else and so that may have a pacing item on the deliveries in Q4.

Tami Zakaria: Got it. Thank you. And then, can you comment on what was the price realization for trucks and parts in the second quarter, and do you expect price realization to sequentially decline in the back half?

Got it thank you.

Then can.

Can you comment on what was the price realization for trucks and parts in the second quarter and do you expect price realization to sequentially decline in the back half.

Preston Feight: I'll let Harrie kind of talk about that one.

I'll, let Harry kind of talked about that one.

Harrie Schippers: Yep. Pricing for trucks in Q2 was up 15%. We saw significant cost increases, too, in the order of magnitude of 9% for trucks. Then for parts, cost increases were a little higher, but more than offset by price increases for parts of around 13%.

Pricing for trucks in the second quarter was up 15%.

We saw significant cost increases through in the order of magnitude of 9% for trucks.

And then for parts gross increases, but a little higher but more than offset by price increases for parts of about 13%.

Tami Zakaria: Any comments on the back half pricing outlook?

And any comments.

The pricing outlook.

Harrie Schippers: No, with all the new products and the structural improvements that Preston just explained, I think we're in a good position to maintain our pricing discipline.

With all the new products and the structural improvements that Breslin just explained I think.

<unk> two to maintain our pricing discipline.

Preston Feight: I think Harrie shared that, you know, we expect margins of 18% to 19% in Q3, and I think that's kind of a testament to how we see the price cost analysis going.

Kerry shared that we expect margins of 18% to 19% in Q3, and I think thats kind of a testament of how we see that price cost analysis going.

Tami Zakaria: Perfect. Thank you.

Perfect. Thank you.

Preston Feight: You bet. Have a good day.

You bet have a good day.

Operator: Thank you. Our next question is from Chad Dillard from Bernstein. Chad, please go ahead. Your line is open.

Thank you.

Next question is from Chad Dillard from Bernstein. Please go ahead. Your line is open.

Stephen Volkmann: Hi. Good morning, guys. So as you think about price costs over, say, like the next twelve months, and also contemplate the pullback we've seen in raw material costs, do you think the market's strong enough for you to actually increase that price-cost spread? Or do you think you'll need to give some back just to understand how you're thinking about, you know, managing that balance?

Chad Dillard: Hi. Good morning, guys. So as you think about price costs over, say, like the next twelve months, and also contemplate the pullback we've seen in raw material costs, do you think the market's strong enough for you to actually increase that price-cost spread? Or do you think you'll need to give some back just to understand how you're thinking about, you know, managing that balance?

Okay.

Hi, good morning, guys.

So as you look as you think about price cost.

Uh huh.

Over the next 12 months.

And also contemplating a pullback we've seen in raw material costs.

Do you think the market is strong enough for you to actually increase that price cost spread or do you think youll need to give some back to understand how you're thinking about managing that balance.

Preston Feight: I guess we don't spend as much time thinking about it in those terms. We continue to think about it in terms of the relationships we have with our customers, the strength of the product performance, and the value that provides to the customer. Like, as we've shared before, the new trucks are providing, you know, at least 7% improvement in fuel economy, which is bringing thousands and thousands of dollars of benefit to our customers. They're the trucks that the drivers want. And so I think our customers make a good decision around trying to buy the best product for their operations, which are PACCAR's products, and that gives us a good pricing position as a premium brand in the market.... Cost?

I guess, we don't spend as much time thinking about it in those terms, we continue to think about it in terms of the relationships, we have with our customers the strength of the product performance and the value that provides to the customer as we've shared before the new trucks are providing at least 7% improvement in fuel economy, which is bringing thousands and thousands of dollars of benefit to our customers.

Like, as we've shared before, the new trucks are providing, you know, at least 7% improvement in fuel economy, which is bringing thousands and thousands of dollars of benefit to our customers. They're the trucks that the drivers want. And so I think our customers make a good decision around trying to buy the best product for their operations, which are PACCAR's products, and that gives us a good pricing position as a premium brand in the market.... Cost?

The trucks that are drivers want and so I think our customers make a good decision around trying to buy the best product for their operations, which are <unk> products and that gives us.

A good pricing position as a premium brand in the market.

Preston Feight: Well, cost is something that, you know, you get to follow as much as us, and we look at the world around us and see some movement in cost in positive ways and still labor pressures on the other side of it. So it's a little bit ambiguous.

Well, cost is something that, you know, you get to follow as much as us, and we look at the world around us and see some movement in cost in positive ways and still labor pressures on the other side of it. So it's a little bit ambiguous.

<unk> well cost is something that you get to fall as much as us and we look at the world around us and see some movement in costs in positive ways and still labor pressures on the other side of it so it's a bit ambiguous.

Chad Dillard: Got it. Okay. And just second question. So there are some industry forecasts calling for something on the order of like a 15% cut of production in the coming year, and I'm certainly not, you know, holding you up to that, but how should we think about your ability to grow your parts business in such an environment?

Got it okay.

Second question. So there are some industry forecasts are calling for something on the order of like a 15% cut to production in the coming year.

Certainly not holding you to that.

How should we think about your ability to grow your parts business in such an environment.

Preston Feight: I think the parts business is growing for several reasons. One is because our ability to get parts to our customers in the same day or next day has changed a lot. So we are the desired place to go for parts for people. I think the application of technology by our team has been an enabler as well. Like, we make sure that our dealers have the right parts that they need in support. And I think that understanding our customers' needs is how we think about it. So parts is really a transportation solutions provider, which makes them the go-to source for customers. And we think we're the leader in that space, and that helps us grow the business through all parts of the coming years.

I think the parts business is growing for several reasons, one is because our ability to get parts to our customers in the same day or next days changed a lot. So we are the desired place to go for parts for people I think the application of technology by our team has been an enabler as well like we make sure that our dealers have the right parts that they need.

And I think that understanding our customers' needs is how we think about it. So parts is really a transportation solutions provider, which makes them the go-to source for customers. And we think we're the leader in that space, and that helps us grow the business through all parts of the coming years.

And support and I think that understanding our customers' needs is how we think about it. So parts is really a transportation solutions provider, which makes them. The go to source for customers and we think we're the leader in that space and that helps us grow the business through all parts of the coming years.

Chad Dillard: Great. Thank you.

Great. Thank you.

Preston Feight: You bet.

You bet.

Operator: Thank you. Our next question comes from Rob Wertheimer from Melius Research. Rob, please go ahead. Your line is open.

Okay.

Thank you.

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

Rob Wertheimer: Thank you. Good morning, you guys. I guess just a mechanical question on how you typically open orders for Q4. Are you still holding back at all, just on sustainability and other uncertainty? And then a real market-based question on vocational trucks, whether you expect or have already seen some of the strength that may come with the infrastructure bill or general construction appearing there, and whether there are any constraints on that market growth from bodybuilding or other capacity issues. Thank you.

Hi, Thank you good.

Good morning, guys.

Hi, guys just a mechanical question on.

How you typically open orders for the year for are you still holding back at all just on sustained and other uncertainty and then a real market based question on vocational trucks, whether you expect or have already seen some of the strength that may come with the infrastructure Bill or general construction, appearing there and whether there are any.

Strengths on that market growth from bodybuilding or other capacity.

Issues. Thank you.

Preston Feight: Yeah, so, so the first question on how we think about the order book, and we have close relationships with our customers, and those relationships carry on all the time. So some customers want to place orders already and want multi-year orders, and we deal with those customers on a case-by-case basis. We try not to get ahead of ourselves in general pricing release before we understand what the world is going to look like a little bit in twenty twenty-four. So the next quarter or so, that'll start to free up. In terms of the vocational market, when we think about that, it is exceptionally strong right now. There is a limitation from the bodybuilder standpoint. They're trying to build as many bodies as they can. We're building as many vocational trucks as we can, and we think we're at the beginning of that.

Yes. So so the first question on how we think about the order book, we have close relationships with our customers and those relationships carry on all the time. So some customers wanted to place orders already in what multiyear orders that we deal with those customers on a case by case basis, we try not to get ahead of ourselves in general pricing release before we understand what the <unk>.

World is going to look like a little bit in 2024. So the next quarter, so that will start to free up.

So the next quarter or so, that'll start to free up. In terms of the vocational market, when we think about that, it is exceptionally strong right now. There is a limitation from the bodybuilder standpoint. They're trying to build as many bodies as they can. We're building as many vocational trucks as we can, and we think we're at the beginning of that. So we think that that will continue for quite some time as investments into America are continuing.

In terms of the locational market I think about that it is exceptionally strong right now or there is a limitation on from the bodybuilder standpoint, they're trying to build as many bodies as they can we are building as many vocational trucks as we can and we think we're at the beginning of that so we think that that will continue for quite some time.

Preston Feight: So we think that that will continue for quite some time as investments into America are continuing.

As investments into America continuing.

Rob Wertheimer: Got it. Thank you.

Got it thank you.

Preston Feight: You bet.

You bet.

Operator: Thank you. Our next question today comes from David Raso from Evercore ISI. David, please go ahead. Your line is open.

Thank you.

Our next question today comes from David Raso from Evercore ISI. David. Please go ahead. Your line is open.

David Raso: Hi, thank you for the time. The parts business, Q3, the up 7% midpoint. I'm just trying to get a sense of the volume baked in. Q1, right, pricing was up 15% in parts. You had a little bit of currency drag, so you know, volumes were up a little. Q2, given that price comment, I'm not sure volume was, was up at all in parts. Q3, I'm just getting a sense of the volume. Are the volumes assumed down in Q3 year over year, and then you have the price to get back to 7% total?

Hi, Thank you for the time the parts business the third quarter, the up 7% midpoint I'm, just trying to get a sense of the volume baked in.

The first quarter pricing was up 15% in parts you had a little bit of currency drag so volumes were up a little.

Second quarter, given that price comment I'm not sure of volume was up at all in parts the third quarter.

Trying to get a sense of the volume of the volumes assumed down in the third quarter year over year, and then you have the price to get back to 7% total.

Harrie Schippers: So the six to eight percent growth in the third quarter, what you have to take into account, David, is that last year, we saw very strong growth in parts, especially in the Q3. With this six to eight percent growth, we expect the year to be ten to thirteen percent higher than last year, which is excellent and above our long-term average.

So the 6% to 8% growth in the third quarter.

Would you have to take into account David is that last year, we saw very strong growth in parts, especially in the third quarter.

And with this 6% to 8% growth, we expect the year to be 10% to 13% higher than last year.

Which is excellent and above our long term average.

David Raso: Okay, so that implies Q4 is up at least similar to Q3. But again, I know it's tough comp, just so I kind of understand the volume price issue. Is the slowdown mostly volume going a bit negative, or is there something about the pricing? I'm just trying to understand that cadence between volume and price, so I can better understand how to model the margins.

Okay. So that implies the fourth quarter was up at least similar to the third but again I know, it's tough comp just so I kind of understand the volume price issue.

Is the slowdown mostly volume going a bit negative or is there something about the pricing I'm just trying to understand that cadence.

Between volume and price I can better understand how to model the margins.

Harrie Schippers: I wouldn't call it a slowdown, David.

I wouldn't call it a slowdown I think.

David Raso: Yeah.

Harrie Schippers: I think for the parts business is growing 6% to 8% in the quarter, 10% to 13% for the year. That's an excellent performance by the entire PACCAR Parts team.

The parts business is growing 68% in the quarter, the 10% to 13% for the year, that's an excellent performance by the entire <unk> team.

David Raso: Yeah, I'm not refuting it. I'm just trying to get a sense of the volume versus price that you're thinking about the rest of the year. That's all. In the up seven, is that all price, or is it volume down and price up to more than negate the volume decline? I'm just trying to get that split.

I'm not I'm not refuting that I'm, just trying to get a sense of the volume versus price that youre thinking about the rest of the year. That's all in the up seven is that.

All all price or is it volume down and price up to more than negate the volume decline I'm, just trying to get that debt that split.

Harrie Schippers: Sure. Of course, it's a combination of volume and price.

Sure of course, it's a combination of volume and price.

Preston Feight: Yeah, if you're trying to get it in the macro, David, maybe you could look at it and say, like, there was a lot of pent-up pressure for parts and getting inventories right into people's businesses, dealerships, customers. I think some of that has been met on the parts side of the business, not on the truck side, really. And now that's kind of the flow that we're looking at going forward.

Yes, if youre trying to get it in the macro David maybe you could look at it and say like there was a lot of pent up pressure for parts and getting inventories right into People's businesses dealerships customers. I think some of that has been has been met on the parts side of the business not on the truck side really and now thats kind of the.

Flow that we're looking at going forward.

David Raso: Oh, that's fair. Okay, so we're just sort of normalizing the parts after a heavy last year of kind of stocking, and then by the end of the year, you're hopefully kind of balancing it on the parts. Is that sort of the idea?

Oh, that's fair Okay. So we're just sort of normalizing the parts after heavy last year account stocking and then by the end of the year hopefully come down.

Balancing on the parts is that sort of the idea.

Preston Feight: I guess we'd say it differently. As Harrie said, I think aptly, that we see the growth being steady growth over the full year with just a 6% to 8% third quarter in it, and then growth again next year. So the business is doing tremendously well.

Okay.

Let me say it differently as Harry said I think I believe that we see the growth being steady growth over the full year with just a 6% to 8% third quarter in it and then growth again next year. So the business is doing tremendously well.

David Raso: Okay, thank you. And one follow-up on the order books for 2024. Are we looking to do that a quarter or six months at a time like we've done recently, or more return to a more traditional, you know, open up for the full year? Thank you.

Okay. Thank you and one follow up on the order books for 24 are we looking to do that a quarter or six months at a time like we've done recently or more returned to a more traditional open up for the full year.

Preston Feight: I think what we'll do is we'll look at the first part of the year and decide what the first part of the year looks like and release like that as we get into the general pricing.

Thank you.

What we'll do is we'll look at the first part of the year and decided that the first part of the year looks like and.

Released like that as we get into the general pricing.

Timothy Thein: ... Okay, I appreciate it. Thank you.

David Raso: ... Okay, I appreciate it. Thank you.

Okay I appreciate it thank you.

Preston Feight: You bet.

You bet.

Operator: Thank you. Our next question is from Jamie Cook from Credit Suisse. Jamie, please go ahead. Your line is open.

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

Jamie Cook: Hi, good morning. Nice quarter. I guess just two questions. One, I know you're full on production for 2023, and that's limited to some degree, you know, by supply chain constraints still. Can you talk to sort of where delivery for the year or in the back half if supply chain was back to more normalized levels? I'm wondering, you know, potentially, is that a tailwind to 2024? You know what I mean, if markets- if supply chain gets back to normal share because we've underserved the market. And then my second question, can you just give-- I know you had some, you know, nice market share gains in South America.

Hi, Good morning, Nice quarter, I guess, just two questions. One I know you are full on production for 2023, that's limited to some degree.

By supply chain constraints can you talk to sort of where delivery for the year or in the back half if supply chain was back to more normalized levels. I'm wondering you know potentially is that is that a tailwind to 2024 markets and supply chain gets back to normal because we've underserved market and then my second question.

Can you just I know you had some nice market share gains and in South America could you just give a broad view on what your market share is relative to the U R bucket, that's improved and sort of what market potentially next year and down assuming the downturn happens.

Jamie Cook: Could you just give a, you know, broad view on what your market share is relative to the order book, if it's improved, and sort of what markets potentially next year and a downturn, assuming the downturn is happened, where would be the biggest opportunity for PACCAR to gain market share? Thank you.

Could you just give a, you know, broad view on what your market share is relative to the order book, if it's improved, and sort of what markets potentially next year and a downturn, assuming the downturn is happened, where would be the biggest opportunity for PACCAR to gain market share? Thank you.

It would be the biggest opportunity for <unk>.

To gain market share. Thank you.

Preston Feight: So the first part of your question, Jamie, good talking with you, is really around. I do think that the supply constraints continue at some modest level, and that modest level does provide a tailwind to the market in 2024. I agree with you. I think on the second side of your question, I don't know, maybe Harrie has thoughts on it or something like that, but-

So the first part of your question Jamie Good talking with you is really around I do think that supply the supply constraints continue at some modest level and that modest level does provide a tailwind to the market in 2024 I agree with you.

I think on the second side of your question.

Hi.

I don't know maybe hear your thoughts on it or something like that but.

Harrie Schippers: Well, I think market share, we've been building as many trucks in the first half of this year as we can around the world. So market share is the result of that, and yeah, we've seen strong market share growth in South America. We expect further growth opportunities there. Market shares in North America and Europe have had a slow start of the year, but as we progress during the year, we expect growth opportunities across the world.

Well I think market share.

<unk> been building as many trucks in the first half of this year as we can in the world.

<unk>.

So market share as a result.

Of that and yet we've seen strong market share growth in South America, we expect further growth opportunities there.

Market shares in North America, and Europe had a slow start of the year.

But as we progressed during the year, we expect growth opportunities across the world Yes.

Preston Feight: Yeah, to add into it, I would say, like, you know, our build percentage is increasing, and as our build percentage increases, which has been supply constrained, then our market share grows. We see nothing but strong demand for the products, so it's really just about being able to satiate that demand, and that's just gonna take us some time to get the build out.

Add into it I would say like our build percentages, increasing and as our build percentage increases which has been supply constraint than our market share grows and we see nothing but strong demand for the products. So it's really just about being to associate that demand and that's just going to take us some time to get the build out.

Jamie Cook: Thank you.

Thank you.

Preston Feight: You bet.

You bet.

Operator: Thank you. Our next question today is from Steven Fisher from UBS. Steven, please go ahead. Your line is open.

Thank you. Our next question today is from Steven Fisher from UBS. Steven. Please go ahead. Your line is open.

Steven Fisher: Great, thanks. Good morning. So within your 18 to 19% Q3 gross margin forecast, can you just help us with some of the underlying factors there? I assume that the European shutdown will be a headwind, so does that mean kind of mix of parts versus trucks is a tailwind that offsets that, or the mix from new models is still a tailwind? What or are there other factors to consider? Maybe you could just help us with a little bit of build up of how that kind of stays in that range.

Great. Thanks, good morning.

So within your 18% to 19% in Q3 gross margin forecast can you just help us with some of the underlying factors there I assume the European shut down will be a headwind.

Does that mean kind of mix.

Parts versus trucks is is a tailwind that offsets that or the mix from new models is still a tailwind or are there. Other factors to consider maybe you could just help us a little bit of buildup of how that kind of stays in that range.

Preston Feight: You know, I think it's pretty steady performance between parts and trucks in Q3 from Q2, which I think kind of lays into what we're seeing in the market, which is a strong market with strong performance, and that's happening on the truck and parts side, and we see that continuing.

Yes.

I think thats pretty steady performance between parts and trucks in Q3 from Q2, which I think.

Ladies into what we're seeing in the market, which is a strong market with strong performance and that's happening on the truck and parts side and we see that continuing.

Harrie Schippers: I would echo that. If I look at Q3, it's probably just a continuation of what we've seen in Q2.

I would echo that.

When I look at the third quarter.

Probably just a continuation of what we've seen in the second quarter.

Steven Fisher: Okay, that's helpful. And then you had in the release about the expansion of Chillicothe. I guess, in terms of capacity needs, how are you planning for 2025 and 2026? There's some talk about this being sort of a record North American upcycle. How are you thinking about that, and how do you think the rest of the supply chain is preparing for this? Are there gonna be kind of capacity strengths if this demand cycle plays out, with that pre-buy, as people are thinking?

Okay. That's helpful.

And then you had in the release about the expansion of Chillicothe I guess in terms of capacity needs. How are you planning for 2025 and 2026, there's some talk about this being sort of a record North American upcycle.

How are you thinking about that and how do you think the rest of the supply chain is preparing for this are there going to be kind of capacity strained.

This demand cycle plays out with.

With that pre buy as people are thinking.

Preston Feight: Yeah, I would say that what we're doing in Chillicothe is what we do all the time, which is making investments into our facilities, to increase capacity and efficiencies. It's just a good example of it in Chillicothe, and that 105,000sq ft building expansion we did there just helps us get more product out and even increases the level of high quality to a next level up. From a build out standpoint, that's just what we do. Like I said, we're doing it there. We're making investments in Columbus. We're making investments in Mexico, really all around the world, in South America. So we see the growth of PACCAR in the long term, and so we want to make sure that we're prepared for that with the factories. From a supply base standpoint, we have great suppliers.

Yes, I would say that what we're doing in Chillicothe is what we do all the time, which is making investments into our facilities.

Kris capacity and efficiencies. It's just a good example of it in Chillicothe and that 105000 square foot building expansion. We did there just helps us get more product out and even increases the level of high quality to a next level up.

From a build out standpoint, that's just what we do. Like I said, we're doing it there. We're making investments in Columbus. We're making investments in Mexico, really all around the world, in South America. So we see the growth of PACCAR in the long term, and so we want to make sure that we're prepared for that with the factories. From a supply base standpoint, we have great suppliers.

From a build out standpoint, that's just what we do like I said, we're doing it there we're making investments in Columbus, we're making investments in Mexico really all around the world in South America. So we see the growth of <unk> in the long term and so we want to make sure that we're prepared for that with the factories.

From a supply standpoint, we have great suppliers, we work closely with them to make sure that they have the capacity.

Preston Feight: We work closely with them to make sure that they have the capacity. Obviously, they've had unusual circumstances in the past couple of years that expects some normalization there, and we'll continue to work closely with them to make sure that they can provide the product we need.

We work closely with them to make sure that they have the capacity. Obviously, they've had unusual circumstances in the past couple of years that expects some normalization there, and we'll continue to work closely with them to make sure that they can provide the product we need.

Obviously, they've had unusual circumstances in the past couple of years I would expect some normalization there and we'll continue to work closely with them to make sure that they can provide the product we need.

Steven Fisher: Okay, thank you very much.

Okay.

Okay. Thank you very much.

Preston Feight: You bet.

You bet.

Operator: Thank you. Our next question today comes from Timothy Thein from Citigroup. Tim, please go ahead. Your line is open.

Thank you.

Our next question today comes from Tim Thein.

Citigroup Tim. Please go ahead your line is open.

Timothy Thein: Great. Thank you. Good morning. Yeah, Preston, it's just a, I guess, yet another one on the parts business, and it obviously a North American focus. But I'm just curious, you know, if you listen to some of the public truckload companies that have reported, I mean, they've seen some pretty, you know, a lot of pressure just in terms of utilization and pressure on profitability. I'm just curious, you know, a lot of the discussion was just on, you know, positive messaging that you're kind of conveying.

Great. Thank you good morning Preston.

Yet another one on.

On the parts business.

Facility.

North American focus, but I'm just curious.

Listen to some of them.

<unk> truckload companies that have reported.

Some pretty.

Yes.

Pressure I guess in terms of utilization.

Pressure on profitability I'm just curious.

The discussion was just on.

Positive messaging that you've kind of conveying but any any warning signs that you're seeing or hearing from your large fleet customers in the year.

Timothy Thein: But any warning signs that you're seeing or hearing from either your large fleet customers or your dealers in terms of, you know, sometimes when you get pressure on profitability, you may get some, you know, maintenance intervals that get pushed out or rebuilds that get extended or what have you. I'm just curious if there's been any signs of that, or is it just they're chugging right through that, and it's, you know, the business is not feeling that. I'm just curious, just kind of real time, what you're hearing from the team, specific to your truckload customers.

But any warning signs that you're seeing or hearing from either your large fleet customers or your dealers in terms of, you know, sometimes when you get pressure on profitability, you may get some, you know, maintenance intervals that get pushed out or rebuilds that get extended or what have you. I'm just curious if there's been any signs of that, or is it just they're chugging right through that, and it's, you know, the business is not feeling that. I'm just curious, just kind of real time, what you're hearing from the team, specific to your truckload customers.

Dealers in terms of sometimes when you get pressure on profitability you may get some.

No maintenance intervals, they get pushed out or rebuilding and that can extended or what have you I guess just curious thanks.

If theres been any sign that that origin.

Eric Kevin right through that.

The business is not feeling that I'm, just curious kind of in real time, what youre hearing from the team.

Specific to the truckload customers.

Preston Feight: Sure. Great, great question. Good to think about it in that broad term. You know, I think from a truckload carrier standpoint, you've heard their comments in their earnings calls, as have we, and in our relationships with them, and they've come through, I think, a tough few months for them in terms of utilization and rates. But they also kind of will say that they maybe have seen the bottom of it, and things are starting to show signs of improvement in that truckload carrier. But that's not the whole market. We also see the LTL market continuing to be strong, and we see the vocational market continuing to be strong, as well as medium duty. So from a total business standpoint, we see this steady, strong position that we're in, and we expect that to continue.

Sure Great Great question, good to think about it in that broad term I.

I think from a truckload carrier standpoint.

You heard their comments and their earnings calls as have we and in our relationships with them and they've come through I think a tough few months for them in terms of utilization and rates, but they also kind of I will say that there may be you would see at the bottom of it and things are starting to show signs of improvement in that truckload carrier.

But that's not the whole market. We also see the LTL market continuing to be strong, and we see the vocational market continuing to be strong, as well as medium duty. So from a total business standpoint, we see this steady, strong position that we're in, and we expect that to continue.Then that may even be aided as the truckload carriers see improvement in their businesses in the coming quarters.

But that's not the whole market. We also see the <unk> market continuing to be strong and we see the vocational market continuing to be strong as well as medium duty. So from a total business standpoint, we see this steady strong position that we're in and we expect that to continue and then that may even be aided as the truckload carriers see improvements in their businesses in the coming quarters.

Preston Feight: Then that may even be aided as the truckload carriers see improvement in their businesses in the coming quarters.

Timothy Thein: Got it. Okay, that makes sense. Then, just within your truck order board and within the backlog, is there, you know, historically, PACCAR, again, more North American-oriented question, but pretty well balanced, you know, certainly at least against some of your OEM peers across, you know, small, mid, and large-sized fleets. Is the order board and kind of how the deliveries have played out; are you seeing more, has that shifted more towards your big, large fleets, or I guess your large fleet this year? And what, you know, what do you think about the investment appetite for your small to mid-sized carriers as you think about 2024?

Got it okay that makes sense and then just within your truck order board within the backlog is there historically.

Historically pack or again more again more north American oriented question, but.

Pretty well balanced certainly at least against some of your Oems tiers across small mid large size fleets is the and the order board.

And kind of the.

How the deliveries are playing out or are you seeing more that shifted more towards your big large fleets.

Largely this year and what what do you think about the investment appetite for.

Small to mid sized carriers as you think about 'twenty four.

Preston Feight: You know, I think of it - I think it's more representative of the first way you kind of came at the market, through the vocational, truckload, and over-the-road carriers versus vocational, rather than the small, mid, large. I think that there's variance within that small, mid, large sector.

I think of it I think it's more representative of the first way you kind of came at the market through the vocational and truckload over the road carriers versus vocational.

Rather than the small and mid large I think that there's variance within that small mid large sector.

Timothy Thein: Got it. Okay. Very good. Thank you.

Got it okay.

Very good thank you.

Operator: Thank you. Our next question comes from Nicole DeBlase, from Deutsche Bank. Nicole, please go ahead. Your line is open.

Thank you.

Next question comes from Nicole <unk> from Deutsche Bank Mizuho. Please go ahead. Your line is open.

Nicole DeBlase: Yeah, thanks for the question. Maybe just starting with your Q3 delivery outlook, down at the midpoint a little bit Q on Q. Is that 100% driven by European holidays, so you're effectively projecting US production flat to up in the third quarter?

Yeah. Thanks for the question, maybe just starting with your <unk> delivery outlook.

Down at the midpoint, a little bit Q over Q is that 100% driven by European holidays, So youre effectively predict projecting U S production flat to up in the third quarter.

Harrie Schippers: That is correct, Nicole, and Europe does have a three-week summer shutdown every year, takes three weeks of production out, and some of that is offset by higher production in other parts of the world.

That is correct vehicle in Europe .

Three week summer shutdown every year fix three weeks of production.

Some of that is offset by higher production in other parts of the world.

Nicole DeBlase: Okay. Okay, understood. And then, you know, in the spirit of the expanded relationship with Toyota on the hydrogen fuel cell side, can you just talk a little bit about the level of customer demand that you're actually hearing for hydrogen fuel cell trucks at this point?

Okay, Okay understood and then in the spirit of the expanded relationship with Toyota on the hydrogen fuel cell side can you just talk a little bit about the level of customer demand that youre actually hearing for hydrogen fuel cell trucks at this point.

Preston Feight: Yeah, that's a great question. It's one that the customers are trying to understand the choices out in front of them, right? With regulations coming, they'd like to know whether they're going to be using clean diesel, whether hydrogen infrastructure is going to develop, whether they can use hydrogen combustion, hydrogen fuel cells, or battery electric. It seems like it'll be some combination of both for a while or some all of the above for a while. And so I think there is quite a bit of an interest on behalf of Peterbilt, Kenworth, and this Toyota fuel cell project, and we've got strong inquiries and orders for that already. I would expect people will explore that.

Yes, that's a great question. It's one that the customers are trying to understand the choices out in front of them with regulations coming they'd like to know whether theyre going to be using clean diesel whether hydrogen infrastructure is going to develop whether they can use hydrogen combustion hydrogen fuel cells or battery electric it seems like it'll be some combination of both for <unk>.

And so I think there is quite a bit of an interest on behalf of Peterbilt, Kenworth, and this Toyota fuel cell project, and we've got strong inquiries and orders for that already. I would expect people will explore that. Obviously, they're trying to balance this total cost of ownership for all the different technologies, and it's early days, and I think that they're trying to learn right now more than they're trying to convert.

While there are some all of the above for a while and so I think there is quite a bit of an interest.

On behalf of Peterbilt, and Kenworth and this toward a fuel cell project and we've got strong inquiries and orders for that already and I would expect people will explore that obviously they are trended balances total cost of ownership for all the different technologies in its early days and I think that they're trying to learn right now more than they are trying to convert.

Preston Feight: Obviously, they're trying to balance this total cost of ownership for all the different technologies, and it's early days, and I think that they're trying to learn right now more than they're trying to convert.

Nicole DeBlase: Thanks. I'll pass it on.

Yeah.

Thanks, I'll pass it on.

Operator: Thank you. Our next question is from Jerry Revich from Goldman Sachs. Jerry, please go ahead. Your line is open.

Thank you.

Next question Ed.

<unk> Revich.

Goldman Sachs. Jerry. Please go ahead your line is open.

Timothy Thein: Thank you. Good morning and good afternoon. Preston, I wonder if I could ask, you know, your profit per truck; it now stands at $18,000. You know, in prior cycles, it hasn't gotten above $10,000. Can you just talk about what's driven that acceleration? Because, you know, you've always had the premium brand in the market. It feels like you're getting a higher return on the incremental fuel efficiency improvements and automation. I'm wondering if you could just maybe help us understand how much of that improvement is those areas versus improved competitive discipline, and how are you thinking about opportunities from here on the next set of product development platforms that you folks have set up on the roadmap?

Jerry Revich (Goldman Sachs: Thank you. Good morning and good afternoon. Preston, I wonder if I could ask, you know, your profit per truck; it now stands at $18,000. You know, in prior cycles, it hasn't gotten above $10,000. Can you just talk about what's driven that acceleration? Because, you know, you've always had the premium brand in the market.

Hi, Thank you good.

Good morning, and good afternoon.

I Wonder if I could I ask your profit per truck.

Now stands at $18000 in prior cycles.

It Hasnt gotten above 10000 can you just talk about what's driven that acceleration because you've always had the premium brand in the market it feels like youre getting.

It feels like you're getting a higher return on the incremental fuel efficiency improvements and automation. I'm wondering if you could just maybe help us understand how much of that improvement is those areas versus improved competitive discipline, and how are you thinking about opportunities from here on the next set of product development platforms that you folks have set up on the roadmap?

A higher return on the incremental fuel efficiency improvements in automation I'm wondering if you could just.

Maybe help us understand how much of that improvement.

Those areas versus improved competitive discipline in how are you thinking about opportunities from here on the next set of product development.

The platforms that you folks have set up on the roadmap.

Preston Feight: Sure. Thanks for the question. I do think that what the investments we've made over the past several years are paying off, and they're paying off in a bunch of different markets. They're paying off in the fact that within DAF in Europe, we have the only truck that complies with mass and dimensions, is fully compliant with that. It provides great aerodynamic benefit, great driver benefit. We're able to sell it at a higher price and provide better profitability for ourselves because the customers get a benefit in that fuel economy. Similarly, at Kenworth and Peterbilt, the new T-680 and 579 are doing a great job of providing the industry's leading fuel economy for our customers. And then the new medium duty products that we launched give us a different level of profitability in the medium duty space and customer benefits as well.

Alright, thanks for the question.

Do think that with the investments we've made over the past several years are paying off.

There are paying off in a bunch of different markets are paying off and the fact that within <unk> in Europe . We have the only truck that complies with Madison dimensions is fully compliant with that it provides great aerodynamic benefit great driver benefit we're able to sell it at a higher price and provide better profitability for ourselves because the customers get a benefit in that fuel economy. Similarly, it Ken.

Similarly, at Kenworth and Peterbilt, the new T-680 and 579 are doing a great job of providing the industry's leading fuel economy for our customers. And then the new medium duty products that we launched give us a different level of profitability in the medium duty space and customer benefits as well.

<unk> the new <unk> hundred 80, and 579 are doing a great job of providing the industry's leading fuel economy for our customers and then the new medium duty products that we launched give us a different level of profitability in the medium duty space and customer benefits as well. So all of those things kind of are taking our profitability to a structurally improved level.

Preston Feight: So all of those things kind of are taking our profitability to a structurally improved level. And South America, I should add, is also a business growth area for us, where that's contributing. So we see that these are sustainable long-term advantages. And then to the second part of your question about future, well, we couldn't be more excited than we are about the investments we have going forward. There's a whole suite of things that we're working on right now that I think will just continue to set the standard in terms of premium trucks and transportation solutions.

So all of those things kind of are taking our profitability to a structurally improved level. And South America, I should add, is also a business growth area for us, where that's contributing. So we see that these are sustainable long-term advantages. And then to the second part of your question about future, well, we couldn't be more excited than we are about the investments we have going forward. There's a whole suite of things that we're working on right now that I think will just continue to set the standard in terms of premium trucks and transportation solutions.

And South America I should add is also a business growth area for us where that's contributing so we see that these are sustainable long term advantages and then to the second part of your question about future, while we couldnt be more excited than we are about the investments we have going forward. There's a whole suite of things that we're working on right now that I think we'll just continue to set the standard in.

Terms of premium trucks and transportation solutions.

Jerry Revich: Super. Then, you know, from an SG&A standpoint, any one-off pieces in the quarter? Really interesting to see SG&A down as much as it was sequentially and flat year-over-year, given the top line growth. How should we be thinking about the SG&A leverage off of this Q2 base?

Jerry Revich (Goldman Sachs: Super. Then, you know, from an SG&A standpoint, any one-off pieces in the quarter? Really interesting to see SG&A down as much as it was sequentially and flat year-over-year, given the top line growth. How should we be thinking about the SG&A leverage off of this Q2 base?

Okay Super and then from an SG&A standpoint.

Any one off pieces in the quarter really interesting to see.

G&A down as much as it was sequentially and flat year over year, given given the top line growth.

Be thinking about.

SG&A leverage off of the off of this <unk> base.

Harrie Schippers: Yeah, we continue to control our SG&A expenses very tightly. That's how we run the business. So we've seen some increases here and there, but it's offset by being more efficient elsewhere. And a very controlled SG&A spending level going forward is what you're going to expect from us.

We continue to control our SG&A expenses.

Very tightly.

That's how we run the business.

So we've seen some increases here and there, but it's offset by being more efficient elsewhere.

And.

Hey.

Controlled SG&A spending level going forward is what you can expect from us.

Jerry Revich: Thanks, Harrie. And then, just last one. In the prepared remarks, you spoke about the new facilities improving dealer on-time deliveries and ability to stock. Where do dealer inventories of your, you know, A runners stand today versus a year ago? Is it fair to assume service levels are up versus a year ago, and inventories are up at your dealers' level for your, the high volume runners?

Jerry Revich (Goldman Sachs: Thanks, Harrie. And then, just last one. In the prepared remarks, you spoke about the new facilities improving dealer on-time deliveries and ability to stock. Where do dealer inventories of your, you know, A runners stand today versus a year ago? Is it fair to assume service levels are up versus a year ago, and inventories are up at your dealers' level for your, the high volume runners?

Okay. Thanks, and then just last one in the prepared remarks, you spoke about the new facilities improving.

Dealer on time deliveries and ability to stock where does your dealer inventories of your <unk>.

Runners stand today versus a year ago is it fair to assume service levels are up versus a year ago and inventories are up.

Our dealers level for the high volume runners.

Preston Feight: Yeah, I think that that's a fair observation, that a year ago things were pretty tight and constrained in terms of parts inventory, and that's been maybe ameliorated to some, some percentage. So that's helping people get their service done in a more quick way, which is good for our customers, which is what we're always out for.

Yes, I think Thats a fair observation is it a year ago things were pretty tight and constrained in terms of parts inventory and thats been maybe ameliorated to some some percentage. So that is helping people get their service done in a more quick way, which is good for our customers, which is what we're always out for.

Harrie Schippers: Parts inventories have gone up, of course, as we sell more. Net inventory turns were at record levels in the second quarter. So continue to have the inventory that we need to satisfy our customers.

As far as inventories have gone up of course, as we expect we sell more.

Net net inventory turns.

<unk> levels.

So.

Continue to have the inventory that we need to satisfy our customers and it helps us as we grow our overall share of the parts business.

Preston Feight: It's helped us as we grow our overall share of the parts business.

Harrie Schippers: Yep.

Jerry Revich: Perfect. Thank you.

Jerry Revich (Goldman Sachs: Perfect. Thank you.

Perfect. Thank you.

Operator: Thank you. Our next question is from Matt Elkott from Cowen and Co. Matt, please go ahead. Your line is open.

Thank you. Our next question is on Matt Alcott from Cowen and co. Please go ahead. Your line is open.

Matt Elkott: Good morning, and good afternoon, and thank you. Just a quick follow-up on Europe. You guys obviously have a technology advantage over the last few quarters there. But is the outlook in Europe primarily driven by technology? Because the European economy does face, you know, some challenges broadly, and that's being reflected in freight at times, at least on the intermodal side, on the rail intermodal side.

Yeah.

Good morning, and good afternoon, and thank you just a quick follow up on Europe .

You guys, obviously have a technology advantage over the last few quarters there but.

Is the outlook in Europe , primarily driven by technology, because the European economy does face some challenges broadly and thats being reflected in freight at times at least on the intermodal side.

Revenues from all sides.

Preston Feight: Yeah, I think it's that. I think what you're saying is that you can imagine the European economy has maybe felt like the market kilometers are down a little bit, year over year, and we recognize that. But we do think that the new truck is performing so well that that's to our advantage in Europe.

Yes.

I think what you are saying is that you can imagine the European economy has maybe.

Felt like the melt kilometers are down a little bit year over year, and we recognize that but we do think that the new truck is performing so well that that's to our advantage in Europe .

Matt Elkott: Okay. And then, a follow-up, another follow-up on the hydrogen side, with Toyota Fuel Cell. You guys have been somewhat of the opinion that hydrogen ICE engines could be a, you know, one of the most viable bridges to whatever technology we coalesce around long term. Do you still think that, or, or is, is the Toyota Fuel Cell partnership, you know, does it mark a, a change?

Okay.

And then.

Follow another follow up on the hydrogen side.

Fuel cell you guys had been somewhat of the opinion that hydrogen.

One of the most viable bridges to whatever technology really coalesce around long term.

Do you still think that or is that a fuel cell partnership.

But does it market have changed.

Preston Feight: No, I think that we do still think it can be a solution. I think that it depends upon regulatory allowance. Like in Europe, hydrogen ICE is allowed as a zero emissions product. That's not determined yet in the North America space. It has to be still discussed with the agencies. Again, we think that there is efficiencies of fuel cells, and different efficiencies with hydrogen ICE, and different ones for battery electric. So I think it's important that we explore and work through all of those and figure out what the best total cost of ownership is for our customers, because that's really what we're driving for. That's the level of the conversation right now. Everything's a bit early to make a call on which one's going to be right.

No I think that we do still think it can be a solution I think it depends upon regulatory allowance like in Europe hydrogen ice has allowed us a zero emissions product that's not determined yet in the north American space to be still discussed with the agencies.

Again, we think that there is some efficiencies of fuel cells and different efficiencies with hydrogen ice and different ones for battery electric So I think it's important that we.

So I think it's important that we explore and work through all of those and figure out what the best total cost of ownership is for our customers, because that's really what we're driving for. That's the level of the conversation right now. Everything's a bit early to make a call on which one's going to be right. We do think that diesel engines will be a significant part of that for the years to come.

Explore and worked through all of those and figure out what the best total cost of ownership is for our customers because that's really what we're driving for.

And that's the level of conversation right now and we think it's a bit early to make a call on which one is going to be right and we do think that diesel engines will be a significant part of that for the years to come.

Preston Feight: We do think that diesel engines will be a significant part of that for the years to come.

Matt Elkott: Got it. Yeah, and, and just one final clarification. I know supply chain disruptions have eased materially in recent quarters, but is there a way to gauge how far we still are from pre-COVID levels, and if you guys see a line of sight into getting back to those levels, you know, next year?

Got it and then just one final clarification I know supply chain disruptions.

In recent quarters.

Is there a way to gauge how far we still are from pre COVID-19 levels and if you guys see a line of sight into getting back to those levels.

Next year.

Preston Feight: I don't know if there's a way to gauge it. I would say the suppliers are doing a pretty good job of trying to work through it as quickly as they can and trying to increase their capacity and meet the, satisfy the market. Nobody wants to do it more than them or us, and so together, we're working through that. I keep seeing this improvement. It's far better than it was a couple of quarters ago, and we expect it to be better in the quarters to come.

I don't know if theres a way to gauge it I would say the suppliers are doing a pretty good job of trying to work through it as quickly as they can and trying to increase their capacity and meet this satisfy the market nobody wants to do it more than them or us and so together, we're working through that and I keep saying this improvement is far better than it was a couple of quarters ago, and we expect to be better in the quarters to come.

Matt Elkott: Great. Thank you very much.

Alright, Thank you very much.

Operator: Thank you. Our next question is from Jeff Kauffman from Vertical Research Partners. Jeff, please go ahead. Your line is open.

Thank you.

Next question is from Jeff Kauffman from vertical Research partners. Please go ahead. Your line is open.

Jerry Revich: Thank you very much. Hi, guys. Just wanted to get clarity on one item, and then I want to go back to the zero emission vehicles and a follow-up there. For PACCAR Financial, it looks like the fleet was up about 2%, but assets were up about 6% versus first quarter. Could you help me understand that differential?

Jeff Kauffman: Thank you very much. Hi, guys. Just wanted to get clarity on one item, and then I want to go back to the zero emission vehicles and a follow-up there. For PACCAR Financial, it looks like the fleet was up about 2%, but assets were up about 6% versus first quarter. Could you help me understand that differential?

Thank you very much hi, guys.

Just wanted to get a charity on.

One item and then I want to go back to the zero emission vehicles and a follow up there.

Paccar financial it looks like the fleet was up about 2%, but assets were up about 6% versus first quarter.

Could you help me understand that differential.

Harrie Schippers: Yeah, the average sales prices of trucks have gone up quite a bit over the last couple of years. We said earlier during the call, in the second quarter, pricing was up 15%... So, even with 2% growth in the total suite for PACCAR Financial, the total assets grow with the higher prices per truck as well, of course.

The average sales prices of trucks have gone up quite a bit over the last couple of years, We said earlier during the call in the second quarter pricing was up 15%.

So even with 2% growth.

And the total fleet flipped back our financial the total assets grow with the higher prices.

Well of course.

Jeffrey Kauffman: All right. Thanks, Harrie. And, secondly, talking about the new emission vehicles, I had a chance to see the new truck at ACT Expo. And I was asking, "Well, are people putting in orders, and when would you deliver to market?" And I was told, "Oh, yeah, you can put in an order today, but we're probably looking at a 2025-ish timeframe." And I just wanna kind of follow up on that. The electric vehicle push was aggressive. It feels like some folks are pulling back over challenges with the charging infrastructure and what have you. You answered the earlier question, what are you seeing on fuel cell? But can you give us an idea of when that truck is likely to be available and, and maybe kind of update what's going on with customers on the battery electric side?

Jeff Kauffman: All right. Thanks, Harrie. And, secondly, talking about the new emission vehicles, I had a chance to see the new truck at ACT Expo. And I was asking, "Well, are people putting in orders, and when would you deliver to market?" And I was told, "Oh, yeah, you can put in an order today, but we're probably looking at a 2025-ish timeframe." And I just wanna kind of follow up on that.

Alright, Thanks, Harry and secondly, talking about the new emission vehicles I had a chance to see the new truck It Act Expo.

And I was asking will or people, putting in orders and when would you deliver to market and I was told Oh, yes, you can put in an order today, but we're probably looking at a 2025 ish timeframe.

And I just wanted to kind of follow up on that.

The electric vehicle push was aggressive. It feels like some folks are pulling back over challenges with the charging infrastructure and what have you. You answered the earlier question, what are you seeing on fuel cell? But can you give us an idea of when that truck is likely to be available and, and maybe kind of update what's going on with customers on the battery electric side?

The electric vehicle push was aggressive it feels like some folks are pulling back over challenge of the charging infrastructure and what have you you answered. The earlier question. What are you seeing on fuel cell, but can you give us an idea.

Of when that truck is likely to be available and maybe kind of update what's going on with customers on the battery electric side.

Preston Feight: Well, sure, happy to do that. So 2024 is when we think we'll be putting fuel cell trucks out there with the Toyota project. So that's, we've already done 11 of them in the market. That was our first fleets that we did last year, and now we're kind of just finishing up what will be a higher volume run. We expect that to be in the hundreds still. It's kind of what I'd expect on the fuel cell level. Your comments on people pulling back or not, we see still strong interest on EV, battery electric EV, but there is an infrastructure thing that needs to be worked through as a society. What our position is, is PACCAR will have the best products, whether they're battery, electric, diesel, hydrogen, fuel cell, hydrogen combustion.

Well sure happy to do that so 2024 is when we think we'll be putting the fuel cell trucks out there with the Toyota project. So thats.

We've already done 11 of them in the market that was our first fleets that we did last year and now we're kind of just finishing up what will be a higher volume run we expect that to be in the hundreds still it's kind of what I would expect in the fuel cell level.

Your comments on people pulling back or not, we see still strong interest on EV, battery electric EV, but there is an infrastructure thing that needs to be worked through as a society. What our position is, is PACCAR will have the best products, whether they're battery, electric, diesel, hydrogen, fuel cell, hydrogen combustion.

Your comments on people pulling back or not we see still strong interest on EV battery electric EV, but there is an infrastructure thing that needs to be worked through as a society. What our position is as <unk>. We will have the best products, whether they are battery electric diesel hydrogen fuel cell hydrogen combustion will have that entire suite available and then we will be ready for the market.

Preston Feight: We'll have that entire suite available, and then we'll be ready for the market. So we work closely with the regulatory agencies to support them and work with our customers to support them. It puts us in a great position for the future. We could not be more excited about the kinds of technologies and what that does for PACCAR's future and how we'll perform.

We'll have that entire suite available, and then we'll be ready for the market. So we work closely with the regulatory agencies to support them and work with our customers to support them. It puts us in a great position for the future. We could not be more excited about the kinds of technologies and what that does for PACCAR's future and how we'll perform.

So we work closely with the regulatory agencies to support them and work with our customers to support them and puts us in a great position for the future we could not be more excited about the kinds of technologies and what that does for Packers future Intel will perform.

Jeffrey Kauffman: Awesome. Thank you.

Jeff Kauffman: Awesome. Thank you.

Awesome. Thank you.

Preston Feight: You bet.

You bet.

Operator: Thank you. Our next question is from Michael Feniger, from Bank of America. Michael, please go ahead. Your line is open.

Thank you our next.

Question is from Michael Feniger from Bank of America. Michael. Please go ahead. Your line is open.

Michael Feniger: Thank you. Preston, are you seeing anything in the truck market in terms of the way freight moves or your customers' purchasing patterns that maybe suggest a normal, traditional replacement cycle is higher than what we've observed historically? Are fleet operators trying to keep a younger fleet or any other trends that maybe what we normally think is replacement demand, if the market returns there, is actually higher given some changes in the freight and the transportation market?

Thank you Preston are you seeing anything in the truck market in terms of the way freight moves or your customers purchasing patterns that may be suggests a normal traditional replacement cycle is higher than what we've observed historically, our fleet operators trying to keep a younger fleet or any other trends.

Maybe what we normally think as replacement demand if the market returns there is actually higher given some some changes in the freight and the transportation market.

Preston Feight: You're right. I do think it will be higher than maybe people used to think of it. But more importantly to me is the fact that the trucks that are being produced, specifically by PACCAR, are providing operating cost advantages, which helps people want to renew their fleet at a sooner level. If you get a 7% benefit in fuel economy from a new Peterbilt or Kenworth or a DAF in Europe, the value is so high that you just want to replace the truck, plus the driver satisfaction is higher, and it's just a good business decision. So I think we see those turns happening more frequently.

Alright, I do think it will be higher than maybe people who used to used to think of it but more importantly to me is the fact that the trucks that are being produced specifically bipack are providing operating cost advantages, which helps people want to renew their fleet that is sooner level at a 7% benefit in fuel economy from a new Peter Voser.

<unk> worth of <unk> in Europe .

The value is so high that you just want to replace the truck plus the driver satisfaction is higher and its just a good business decision. So I think we see those turns happening more frequently.

Michael Feniger: Helpful. And you mentioned earlier in the call how used truck values have moderated, yet still high on a historical basis. Do you find the spread between new truck pricing and your used truck pricing wider than normal? Or is the moderation in used truck values more of just a normalization of production? Curious how you're kind of seeing that used values playing out in the second half of this year.

Helpful and you mentioned earlier in the call how used truck values have moderated yet still high on a historical basis do you find the spread between new truck pricing and your used truck pricing wider than normal or is the moderation in used truck values more of just a normalization of production.

Option curious, how youre kind of seeing that used values playing out in the second half of this year.

Harrie Schippers: Talk about normalization of used truck prices. If we compare back to a year ago, used truck prices were extremely high and probably not even healthy for the market. I think in the meantime, used truck prices have come down to very normal levels. And our company, it's the finance company that sells the used trucks, and we've built out a network of 13 used truck centers that help us to sell more used trucks to retail customers at a premium price. So even at a slightly moderated used truck pricing levels, the finance company continues to do well and is able to sell the used trucks that we get back at profit levels.

Talk about normalization of used truck prices, if we compare back to a year ago used truck prices were extremely high.

Probably not even healthy food.

For the market I think in the meantime, you strip prices have come down to very normal levels.

Our companies to finance company that sells the used trucks.

We've build out a network of <unk> 13 used truck centers.

It helped us to sell more used trucks to retail customers at a premium price.

So even at a at a slightly moderated used truck.

Reising levels.

<unk> complete continues to do well and is able to sell used trucks that we get back at profit levels.

Michael Feniger: Thank you.

Thank you.

Preston Feight: You bet.

You bet.

Operator: Thank you. As a final reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad now. We have no further questions, so I'd like to hand back for any closing remarks.

Thank you.

As a final reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad now.

We have no further questions I would like to hand back for any closing remarks.

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

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

Operator: Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.

Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.

Okay.

Thank you everyone for joining us.

Q2 2023 Paccar Inc Earnings Call

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