Good morning and welcome to PACCAR’s Second Quarter 2024 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 objection, they should 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. 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 that may affect expected results. For additional information, please see our SEC filings and the Investor Relations’ page of paccar.com. I would now like to introduce Preston Feight.

Hey, good morning. Harrie, Brice, Ken and I will update you on our excellent second quarter results and business highlights. I’d like to start by saying thank you to PACCAR's great employees who provide our customers with the best trucks and transportation solutions in the world. They are really an impressive group of people. PACCAR's excellent revenues of $8.8 billion and net income of $1.12 billion were due to the strong performance of truck and parts operations around the world. PACCAR Parts second quarter revenues increased to $1.7 billion. Parts pre-tax profits were $414 million with a 30.3% gross margin. PACCAR Financial achieved good pre-tax income of $111 million. And truck, parts, and other gross margins were very strong at 18% in the second quarter. Looking at the U.S. and Canadian truck market, the vocational segment, where Peterbilt and Kenworth are the market leaders, remains strong with continued infrastructure investments. The less-than-truckload market is also performing well while being offset by a truckload segment where rates remain soft. Kenworth and Peterbilt’s first half share grew significantly to 31.5%, up from 27.7% in the same period last year. We estimate this year’s U.S. and Canadian Class 8 market to be in a range of 240,000 to 280,000 trucks. Demand for medium-duty trucks continues to be strong, and Kenworth and Peterbilt have increased their medium-duty market share in the first six months of this year to 17.3% compared to 12.8% in the same period last year. In Europe, economies and the truck market are softer this year. DAF’s premium new trucks provide customers with the latest technology and best operating efficiency. We project the 2024 European above 16-ton market to be in a range of 260,000 to 300,000 trucks. South America is a region of PACCAR's geographic growth. DAF Brazil increased market share to 10.3% in the first six months of this year, compared to 9.2% a year ago. DAF trucks are highly desired by customers in South America. Over the last few quarters, we've been updating you on the progress of a battery joint venture that PACCAR formed with Cummins, Daimler Truck, and EVE Energy. This joint venture, named Amplify Cell Technologies, will produce state-of-the-art batteries that are specifically designed for commercial vehicle duty cycles. Amplify Cell Technologies began construction of the new factory in the second quarter. PACCAR continues to demonstrate strong performance through all phases of the business cycle and is expanding its global manufacturing capacity, as we are excited about the future. Harrie Schippers will now provide an update on PACCAR parts, PACCAR financial services, and other business highlights.

Thanks, Preston. PACCAR delivered 48,400 trucks and achieved excellent truck parts and other gross margins of 18% in the second quarter. We estimate third quarter deliveries to be around 43,000 trucks to 44,000 trucks, with strong truck parts and other gross margins of around 17%. The third quarter delivery estimate reflects normal truck markets and the regular summer production shutdown in Europe. PACCAR parts achieved excellent second quarter gross margins of 30.3%. Parts quarterly sales grew by 4% compared to the same period last year and are expected to grow around 4% for the rest of this year. PACCAR Parts' focus on expanding its customer base and providing a full range of transportation solutions is enabling solid revenue growth in a softer after-sales market. PACCAR Parts opened a new distribution center in the country of Colombia in the second quarter and will open another distribution center in Germany later this year. Each new distribution center increases the number of dealers and customers benefiting from receiving parts on the same or next day. PACCAR Financial is having another good year. PACCAR Financial Services' second quarter pre-tax income was $111 million, reflecting its high-quality portfolio and normal used truck markets. PACCAR achieved an industry-leading return on invested capital of 27% in the first half of this year. In 2024, we're projecting R&D expenses in the range of $460 million to $480 million as we continue to invest in key technology and innovation projects. These include a full suite of high-quality clean diesel and zero-emission powertrains, innovative advanced driver assistance systems, and new connected vehicle services that enhance our customers' operational efficiency. PACCAR is planning capital investments in the range of $725 million to $775 million this year as we continue expanding manufacturing capacity at our factories in Europe, the United States, Mexico, Brazil, and Australia. These investments are supporting PACCAR's growth as well as our customers' success. PACCAR's investments in its industry-leading truck lineup, efficient manufacturing capacity, 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.

Thank you. Our first question today comes from Steven Volkman with Jefferies. Please go ahead, your line is open.

Hi, good morning, gentlemen. Thank you for taking the question.

You bet.

The question is, appreciate it, the question actually is kind of around your sort of R&D and CapEx ramp that we're seeing. It strikes me that probably one of the key things that I would worry about would be if there's a potential that the various emission regulations actually change with a changing government. And I'm assuming you guys must have some good connections in Washington and certainly not asking you to pontificate on the outcome of this, but is there a risk in your mind that the target moves here and that you actually may have to do something different than what you're currently doing relative to these regulations?

Good question. Thanks for taking the time to ask it. I'd start by saying that the reason our R&D and CapEx expenses are moving upward is because we have a lot of really good projects to work on. They come in the form of technology related to emissions, but also just improvements in operating efficiency of trucks and transportation solutions we can provide to our customers. So when we have a good set of projects, we invest in them and that's what we're doing right now. Regarding the changes in emissions regulations, we don't have the answer to that. And what we do think is it's unlikely that it won't change the total number of trucks PACCAR delivers over a few-year period of time. It might just shift the timing of those.

Okay, great. And can you speak broadly to how much capacity you're adding across the system with these various investments?

We've shared with you previously that our intention is to grow our market share. And so what we're doing is getting capacity in line with that, so that if we see peak market conditions that are similar to what we saw in 2023, that we can grow market share in those markets as well. So you could think of it as like a 10% to 15% increase in capacity in some cases.

Great. Thank you. I'll pass it on.

You bet. Have a good day.

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

Thanks for taking the question. And good morning. Just wanted to unpack the Q3 expected 17% truck parts and other margins a little bit. Can you just give us a sense of how much of a factor if there's any perhaps one-time costs in there, any pricing changes or pressure, and any mix from trucks versus Parts in there? I would have thought that that might be a little more supportive. Just anyway to unpack that 17% a little bit.

Well, I would start by saying remember in Q3 there's a typical holiday season in Europe that takes a few thousand units out, which has some impact to it. I'd also say that as we look at the truckload sector, our customers' rates are remaining low. And I think that has some opportunity of impact for pricing and cost balance in the third quarter as well. But there's no big one-time thing sitting in there.

Okay. And then maybe on the Parts margin specifically in the quarter, can you talk about what drove the negative incremental this quarter and what maybe you're expecting for Q3 and Q4? It was just a surprising takedown. Just kind of wondering if this is maybe more of a broader correction after a strong period of the cycle or is there maybe just any sort of one-time dynamic?

No, I think what you look at is the comps are really strong from last year when the market was just constrained by supply. And now it's not. So I think everybody's participating in the truck and the parts market. I think the team is just doing a fantastic job. I mean, 30.3% Parts margins are very strong and continue to be strong. So we think that we'll see improvement in those as time comes along again. But obviously, we're making sure that we keep our share of the market. And I would kind of remind that the after-sales market is down this year. And so Parts growing in a down after-sales environment is a testament to their great abilities. And still achieving margins above 30%.

Okay, thank you very much.

The next question comes from the line of Tami Zakaria with JPMorgan. Please go ahead, your line is open.

Hi, everyone. Thank you so much. So I think, Preston, I just heard you say, hi. So I think I just heard you say that Q3, typically Europe sees some seasonal shutdown. And over the last few years, we've seen fourth quarter deliveries actually a bit higher than the third quarter. Is that how we should be thinking about this year as well?

No, I think what we'd say in the previous years is you can look at a lot more other factors driving things. There was timing of deliveries. I mean, there's the term that you all would like to use, the red tags of a period of a couple of years ago. So I think you'd have to say we're in a more normal operating environment right now. And normal feels healthy and good, but you'd expect the Q3 deliveries to be in that 43,000 to 44,000 range.

Got it. That's helpful. And then my second question is, I think you tweaked lower the U.S. Canada outlook by about 10,000 units. What are some of the pockets of strength versus weakness? What I'm trying to understand is which category within that bucket weakened in the last few months that drove you to reduce the outlook?

Sure, Tami. Good question to think about the totality of the market. What we see is like the vocational market remains strong for us. We still have a lot of demand for our market-leading trucks for Peterbilt and Kenworth in that space. The LTL market remains healthy with kind of a normal cadence to it. But I think our customers in the truckload sector are still seeing spot rates at low levels and contract rates at low levels. And maybe that's the part that there might have been an expectation of starting to lift off the bottom at this point for them.

Got it. Okay, great. Thank you.

You bet.

Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead. Your line is now open.

Hi, good morning. Thanks for taking my question. I just wanted to go back to the comment about price cost and perhaps, hi, Preston just the price cost comment around the Parts segment, if we could kind of expand on that more broadly for trucks, parts, and the full kind of equipment business. Just curious if price cost is going to be a little bit more negative or under pressure across just the broader business. And your comment around maintaining share in the Parts business, how should we think about that as it pertains to pricing strategy, both in Parts, but also any kind of weakness in trucks as well and pricing strategy there?

Price cost in the second quarter for trucks, price was up slightly less than a percent, cost was up slightly more than a percent. So pretty much in balance. If we look at the Parts business, price was up 3%, cost was up 5%. So a little bit more margin pressure there, as we saw in the 30.3% gross margin for Parts. But a really nice performance if you take into account that the overall aftermarket Parts market was smaller, especially in the U.S. and Canada this year.

Yes, just kind of what Harrie said, Angel. I think the fact that our after-sales parts team is growing in a market that's declining, that our truck division and Peterbilt and Kenworth are growing market share in a market that's smaller last year is just a testament to the high-quality products and transportation solutions the team's providing. And I think it's just showing up there.

That's very helpful. And maybe just to kind of continue down that path, just in terms of your order book fill rate for the third quarter and fourth quarter, could you just talk about the level of visibility that you have beyond maybe as we think about even heading into the fourth quarter and orders? Yes, just any comments there.

Sure, happy to do that, Angel. Yes, you bet. If you look at the third quarter, we have a few openings left in the third quarter, but we're substantially full for the quarter. And in the fourth quarter, we're over half full. So obviously, as we said before, the vocational segment is the place where they have the greatest strength and then the LTL market, less than truckload market. And then the truckload carriers, I think, are trying to decide what their cadence is going to be for the balance of the year.

Very helpful. Thank you.

You bet.

Our next question comes from Jamie Cook with Trist. Please go ahead, your line is now open.

Hi, good morning. I have two questions. First, your deliveries were 48,400, which is slightly above your expectation of 48. However, your margin was at the lower end of your target range of 18% to 18.5%. Was there anything else affecting the margin aside from the price cost challenges you mentioned? I'm curious if there's anything unusual impacting that. Also, do you anticipate price costs to remain negative in the fourth quarter? My second question is about Europe; your deliveries are down 30% in the first half compared to the industry retail sales forecast, which predicts a decline of 13% to 22%. Why are we lagging behind the market, at least for the first half of the year? Any insights on that would be appreciated. Thank you.

Sure, Jamie. I think that was actually three questions, but it's good to hear from you and nice to get the questions from you. If you look at any other commentary around the 48.4 and the 18%, there's not really anything different that we'd share on that. It's kind of exactly what we thought would happen. Obviously we had a, we had a, the industry had a supplier who had an issue in Mexico in the quarter and we kind of had to manage through that. So I think that we managed through our teams that have a fantastic job working with the supplier who did a great job recovering and that allowed us to get to that 48,400 number. So kudos to the suppliers, kudos to our teams and our ops teams for getting that sorted out and that led to the strong performance. I think you could say that the trend from Q1 to Q2 and to Q3 should be similar and that will have price and cost challenges sitting in front of us with that implied in the 70%. And again, the reason is, is I think we're looking at the truckload carriers and watching how they're making their decisions right now and seeing where they go from there. But that being offset by strong vocational and LTL markets and a very good performing medium duty truck. So the trucks are performing well. It's just the underlying basis of contract rates I'd say. And then maybe Harrie, any commentary on trends in the EU?

Yes, in Europe, the volume is down 30%, particularly in Central and Eastern Europe where DAF is strong, and the market is softening. DAF is addressing this situation. We continue to benefit from our new DAF, which offers the best fuel economy in the industry and is positioned at a premium price. We will keep benefiting from that. However, the weaker markets in Central and Eastern Europe are impacting DAF more than they are affecting Europe as a whole.

And I think, Carrie, you said it, but I just re-emphasize the fact that the pricing discipline of the team is very good right now.

Thank you. I appreciate the call.

Yes, you bet.

The next question comes from David Raso with Evercore ISI. David, please go ahead. Your line is now open.

Hi, thank you for the time. I was just curious, your conversations with customers regarding the potential or already putting in motion plans for a pre-buy, has the tone or the conversation changed all with the last month of what we've seen politically? And then I have a quick follow-up on U.S. Canada, we call it North America inventory. I know you're looking to gain share and you've gained share already this year, but I'm just trying to be thoughtful about going into 2025, the inventory in the industry is a bit elevated, right? The backlog to build is pushing below 4. So just how do you see your inventory exiting 2024 into 2025? And again, circle back if you can to the question about the pre-buy.

Yes, sure. So David, pre-buy, we're spending a lot of time with our customers. I don't think there's been any change in kind of their assumptions. The EPA rules are sitting out there already. I think they'll probably remain out there. It's easy to hypothesize they wouldn't, but I think that's speculative. And so I think they're trying to figure out what their buying plans will be in 2025 and then into 2026. But I don't think there's any change in assumption right now. I think trucks are being well-used. There is a lot of freight being moved out there. So trucks are being healthily consumed and they'll need a replacement at some point. I'd also say that from an inventory standpoint, the industry is at like 3.9 months of retail sales. And PACCAR is at a very healthy 3.3 months. So as we're seeing our market share gain, we feel like our inventory is in really good shape. And I would add to that the factor that we have such a high vocational share that's also contributing to where our inventory levels are at. So things feel quite good for us in terms of inventory with the shared growth we're realizing.

I'll kind of just follow up on that comment on vocational. Obviously it's a strength for PACCAR. Are you looking at the vocational market where you're having, say, better visibility into 2025 already, just given a key supplier that's maybe limiting a little bit how many vocational you can sell? How should we think about vocational into 2025 versus, obviously we all can think through a pre-buy or not, but the vocational in particular.

You bet. I think that with the infrastructure spending that's just getting really going in the U.S. and the amount of reshoring that seems to be happening, that bodes well for a strong vocational market for a while, and there have been supply constraints in the inventory or in the vocational side of the market. So I think that we see steady strength for quite a period of time.

All right, thank you.

You bet.

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

Yes, hi. Good morning, everyone. I just want to ask on warranties. Hi, Preston. On warranties, you folks have put up really good margin for the past couple of years while paying for higher warranty costs that were out of period. Where do we stand now? Are your warranty accrual rates starting to come down? Are we starting to see that tailwind playing out in the numbers?

Yes, good observation, Jerry. Warranty costs have been developing very favorably, and it reflects the excellent trucks that we're currently building and that customers are experiencing. So yes, that's moving in the right direction.

And, Harrie can I ask the cost number if I heard right for Parts was up 5% year-over-year? What drove that, and what's the outlook for cost per unit for your Parts business? If we see it continue at this 5% rate, is it fair to think about pricing re-accelerating to recoup that for the Parts business?

I think for the pricing, I said pricing was up 3%, and cost was up 5%, and we expected continued to see favorable pricing developments as we move through the year. I think as we look forward in the Parts side, maybe specifically, we would start to see some improvement in price versus cost in the outer quarters.

So was it just a one-off related to a supplier issue that you spoke about earlier, or was that just on the OEM side? I'm just wondering how broad-based is the inflation that we saw in the quarter versus just transitory?

The 5% cost increase is broad-based. Its inflation in the Parts business is a little different than the trucking business. But the price versus cost reflects the softer off the sales market in North America, mainly, that we talked about earlier during the call.

And lastly, I'm wondering if you could just update us on the performance of your trucks in California that are on the new emissions specs, what's been the fuel economy and broader performance since you rolled out the new engines?

The California market has taken a bit of a pause and a breath. I think, as the Advanced Clean Fleet, Advanced Clean Truck rules have come into place, the market has slowed down and say that we are the only ones that have developed an engine that I'm aware of, an engine that is fully compliant. And so that engine is just entering the market because there was a lot of carryover from last year there but that engine is entering the market and will be an early look at technology for 2027, and I'm really pleased to be kind of leading the way into that.

Super. Thank you.

You bet.

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

All right. Good morning, guys.

Hey, Chad.

So, got a two-part question. Hey, so if you compare the truck industry today to what it was, let's say, five years ago, how has the industry's ability to hold on to price changed? That's the first part. And then second, if it comes to it, is PACCAR willing to seize truck market share if it means holding the line on price?

That's a great question, and I appreciate your insights on the truck market today. I believe that the market currently has access to excellent PACCAR products that are offering a lower total cost of ownership now more than ever. These trucks are making our operators and customers more successful, which, in turn, contributes to a structurally stronger PACCAR that can achieve better margins consistently. The same applies to our transportation solutions and PACCAR Parts businesses, where we're increasingly able to deliver more parts to our customers on the same day, which is extremely valuable to them. This is why our structurally stronger business model is performing so effectively.

The one thing that drives this, Chad, is also the legislation on greenhouse gas reductions. So over the last five, eight years, we've been improving clean air gas emissions, which means fuel economy improvement for our customers. So it means that if you buy a new truck today compared to five years ago, you'll get a truck with 10%, 15% better fuel economy. And that's creating a lot of value for our customers.

Got it. Regarding the second part, is PACCAR prepared to take truck market share by utilizing inventory to maintain pricing?

Well, what I look at right now is I think the team's done a fantastic job of looking at the share growth that we're realizing right now. I mean, we've gone from 27.7% last year to 31.5% this year and delivered 18% gross margins in the second quarter. I'm really proud of what they're doing in keeping both in balance.

Okay, thank you. That's all for me.

You bet. Thanks.

Our next question comes from Rob Wertheimer with Melius Research. Please go ahead.

Thank you, Ed. Preston, could you elaborate on the share performance? It's impressive, and while there may be mixed advantages to vocational versus sleeper cabs, it seems to be broader than that. Do you have any insights on the sustainability of this performance and what factors are driving it beyond DAF products?

Sure, I think that over the last few years, as we've shared often with you, we've invested in new product upgrades and we've spent wisely in our research and development efforts. And the trucks out there are performing exceptionally well for our customers. And that's contributing to the share growth. I also think we have a fantastic dealer network who's done a good job of taking care of our customers. And as I just mentioned, the Parts organization is also a fantastic support. I don't think you can say it's one or the other; it's all of them that are structurally helping us. And then the additive to that is, as you said, a strong vocational market where we're the market leader is helpful as well. And we see that also in the medium duty side, right? It's not just the heavy-duty side, but we introduced a new product and we've grown significantly with that new product and really supportive of our customers' businesses. And Harrie, anything you'd add?

The last two or three years, I think we were also held back by supplier capacity. And now with the supply base easing up, we get the opportunity to go market share. And that's what we're doing with the great new products.

Okay, that makes sense. If I may, on the battery JV, it's still a ways out, I know, and the market is still going to develop. But do you have any thoughts on offtake, on ramping offtake of the batteries? I don't know whether it's clear to you, whether that'll be largely medium duty or whether you're still introducing products that will absorb those batteries or just any comments on where the evolution of that is? And I'll stop there. Thank you.

Great question. I think it's what we're all trying to understand in the future. It's part of the reason we did this in a joint venture is we wanted to develop batteries that were optimized for the commercial vehicle market and had a great cost position for them, so we get scale here, but we also get benefits of cost. The primary applications will start, I think, in return to base. So that could be medium duty or pickup and delivery where trucks' total cost of ownership could be positive with a battery operation, but you can keep your charging in a local area. I think that will be kind of how we thought about the offtake, and it'll take, I think, significantly more time before this would translate into an over-the-road solution. But we can use this battery factory to serve other markets as well. It's not just have to be North America. And I think it was proven to be a good decision the way we structured it.

Thank you.

Our next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead, your line is now open.

Yes, thanks for the question, guys. I guess maybe just starting with the 3Q delivery outlook. So I know we've got the usual production shutdown in Europe, which has an impact of a few thousand units. Does that imply that U.S. and Canada is kind of flat to down slightly from a delivery perspective?

No, I think I would look at it, Nicole, as saying that that's half of the total delivery shift between 2Q and Q3, and then the other is market.

Market in North America…

Market in North America. And America adjustments that I would say are reflecting in that.

Okay, got it. That's clear. Thank you. And then, sorry to belabor the point on price. I know you guys have had this question like a million different ways, but is there a risk within the truck segment only that pricing could potentially go negative in the back half, or is that not what you guys would expect to see?

So we get guidance for the third quarter with an excellent 17% gross margin. Fourth quarter, we'll talk about that during the next call, Nicole.

Yes, I think I would look at it also in saying that while prices are feeling effective in the market, you could also say that costs might have some opportunity, but just not as much as price right now. And so I think, as you said, we talked about Q3 gets less clear at Q4, but we'll definitely update you in the next call.

Got it. Thank you, guys.

You bet.

Our next question comes from Kyle Menges with Citigroup. Please go ahead, Kyle. Your line is open.

All right. Thank you. I just wanted to clarify the Parts growth outlook, 4% in the back half of the year. Should we think about that as a guide for 4% growth in 3Q and then another 4% year-over-year growth in 4Q?

That sounds about right.

Okay. And then I'm curious, how much does the opening of some of these distribution centers impact that growth outlook?

They support the growth. It's not, if you add a distribution center that automatically results in Parts growth, but it gives us a proximity and capacity for Parts and better delivery performance that benefits our dealers and customers. So it definitely supports the growth, but it's not the only thing that drives Parts sales.

Yes, I think exactly what Harrie said. I'd echo the fact that these investments are strategic and long-term in thinking, right? They just build a better support system for our customers and our ability to get same-day deliveries, which contributes to the long-term success and performance of the Parts team.

Great. Thank you.

You bet.

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

Hey, thanks, guys. So I think you said you were roughly 50% sold out for fourth quarter. Do you have any just perspective? What's normal at this point of the year? Is that 50% of that right or not? And then as you start at some point, start selling trucks for 25, any directional color on price for the 25 trucks?

Yes. I mean, 50% full for 4Q this time of year is extremely normal. So if you went back over the longest term, this is right in the wheelhouse of normal. And that's what we see in the market too. We see kind of a very normal, successful market where PACCAR can perform well. And I think that it's too early to talk about 2025 pricing.

Okay. And then just quickly, any color on used truck pricing and how you see that trending in the back half of the year?

Yes, sure, Harrie.

Used truck prices have come down to more normal levels. And especially in North America, with inventories also at normal levels, we expect that to continue in the second half of this year.

Meaning you think that they continue to trend lower or you think they sort of stabilize from here?

I would expect them to stabilize from here for the U.S. and Canada.

Okay. Helpful. Thank you, guys.

You bet. Have a good day.

The next question comes from Michael Feniger with Bank of America Merrill Lynch. Please go ahead, Michael. Your line is open.

Yes. Hi, everyone. Thanks for squeezing me in. Preston, you mentioned obviously rates have been softer on the truckload segment, contract rates are at low levels. It sounds like when you listen to the public players, there's overcapacity there. I'm just curious, do you feel like that can improve in a quarter or two or does that take more time to kind of work through that overcapacity based on your experience with cycles? It sounds like there's confidence on the vocational side into 2025. I'm just curious if we think that softness could kind of bleed into 2025 on that particular side of the market.

Michael, it's a good question. I think we'll have to watch and see what that is. I think it's obviously not that easy to predict it. There's a lot of factors that go into it. So I think that our focus is on making sure that we gain our share of whatever the market size is, which teams are really demonstrating success in doing with great products. But knowing the cadence for when that might turn, I think you think in a couple of quarters might be a good way to think of it, plus or minus. Yes, good observation. Well, I'll kind of reiterate, there hasn't been a change in assumptions and that's what we're looking at. So I don't know if I can call it a pre-buy or not, but there seems to be some strength in that that I'm seeing in our production.

Fair enough. And Preston, I know there are so many questions on the pre-buy. I mean, you guys are investing and making sure you have capacity will be there. It sounds like others are, too. I'm curious roughly when a customer needs to place in order to secure slots ahead of the EPA 27. Is there just anything we should be aware of out of these emission standards change compared to others, can fleet wait for the second half of 2025 or early 2026 to place an order and secure a truck? Or does that start to cut it too close? I'm just curious how we should kind of think about that in the context of other emission change or changes.

I would look at it and say that we have a long history in the industry of having these emissions changes. And I think when they bring cost into the market then people want to buy their product sooner. And I think we'll see the same kind of approach here. How far forward that will trend, I think it depends on too many factors to kind of weigh in on it.

Thank you.

You bet.

The next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead, Jeff, your line is open.

Thank you very much and good afternoon. Many of my questions have already been addressed. So, let me revisit a point that Rob Wertheimer raised. The market share gains are impressive, and your product lineup is strong, which I know is contributing to this success. However, out of the 380 basis points of market share improvement, can you provide an estimate of how much was due to being a leader in fast-growing categories versus the influence of new products capturing share from competitors in the existing market?

Well, that's a fun question, Jeff. And I wish I knew the answer to it, but I would say that the two you characterized are probably the dominant characteristics of why the share gain is coming from great products. And then I think the strong sectors where PACCAR is the leader. So I don't know if it's necessary to kind of put percentages on them. I think we'll just say that it's nice to see both performing so well.

I thought I'd ask if you had a view. Well, congratulations.

You bet.

The next question comes from the line of Miguel Borrega with BNP Paribas. Please go ahead Miguel, your line is open.

Hi, good afternoon, everyone. Thanks for taking my question. The first one, just wondering about the competitive environment in Europe, where the market is obviously weaker. Traditionally, that would lead to some price pressure. Are you seeing any of that today? Are you seeing any attempt of discount in any segment in particular, you see weaker from a pricing perspective? That's my first question.

The market in Europe is down. And you're right, we're seeing some pricing pressure there. But I think the team does a really nice job in keeping the premium position of the new DAF in Europe, and we'll continue to do so.

Thank you. That's very good. And then secondly, just in terms of the mix, can you give us some color whether the mix from a regional perspective was a positive or negative contributor to the margin with Brazil rebounding, Europe substantially down, but U.S. and Canada up. Can you help us understand the different moving parts, some kind of color?

I don't believe the geographical mix significantly affects our overall margin. All regions are performing very well at this stage in the cycle.

I think one of the things you can see that's really helpful to us is the strength in South America and Brazil specifically, another place where market share has grown significantly. So that's grown with good margin performance also. Obviously not as big as the U.S. and Europe, but it is a contributor in a positive way. So I think as Harrie said, all the teams are doing a good job of keeping the balances right. Pleased with the performance it's delivering.

Thank you very much.

You bet.

Our next question comes from Tim Thein with Raymond James. Please go ahead Tim, your line is open.

Thank you, Preston. My first question is about your approach to managing the outlook in light of a potential softening in the second half of this year, which could extend into 2025. Looking ahead, assuming legislation proceeds as expected, we could see the largest market yet. Given the fluctuations in the supply chain and its challenges with ramping up, how do you balance responding to current conditions while also ensuring that you and the supply chain can effectively scale up in the future? How do you navigate that situation?

Yes, Tim, I think it's a very good question. And you know obviously, PACCAR quite well. And our approach is a long-term strategic view of the market. We're in it for the long-term. We're here to support our customers. We keep making smart investments, which are good for the long-term. And so we aren't quite as concerned about an outlook of what the market might be in a quarter. We're just going to do the right things and gradually grow our share and increase the performance of our products for our customers and grow the business. And that's the way it works out for us. And as we started the call with Harrie who mentioned making investments in capital and products that support future growth, and we're going to continue doing that in the wisest way possible.

Got it. Okay. Regarding the order board, specifically in the fourth quarter, which you mentioned is about 50% full, there's been a lot of discussion about pricing. I'm curious about the composition of the backlog, as it can influence price realization. Not wanting specifics, but regarding the mix between fleet and retail, do you have any insights? A year ago, trucks were hard to obtain, but now inventories seem a bit heavy. I assume that situation has changed. Is this affecting the pricing discussion in terms of the composition of the orders and who the final buyers are?

I think we've touched on this in several ways during the call. The vocational market remains strong, which is beneficial for us. Our inventory stands at 3.3 months compared to the industry average of 3.9, which feels healthy and suitable considering the market share gains we're achieving. Additionally, the timing of truck deliveries and other factors play a role in this. As we move into late July, fleets typically finalize their plans a bit later. Over the next couple of months, they will get a clearer picture of their capital allocation for the upcoming year, and we will see how that impacts the balance in the fourth quarter.

Got it. Okay, alright thank you Preston.

You bet.

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

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

Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.