Good morning, and welcome to PACCAR's First Quarter 2025 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 an objection, you should disconnect at this time. I'd 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; Kevin Baney, Executive Vice President; 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 at the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Thanks, Ken. Good morning, everyone. First, I'd like to congratulate Harrie Schippers on his upcoming retirement after a wonderful 39-year career at PACCAR. We all miss him. And we wish him all the best on the next chapter in his life. Congratulations to Kevin Baney, our Executive Vice President, who's been responsible for DAF Trucks and will now become responsible for PACCAR Financial Services. Kevin will also work with Ken on Investor Relations. And congratulations to Brice, who has been promoted to PACCAR's Senior Vice President and CFO, reporting directly to me. I'd like to thank PACCAR's outstanding employees who did an excellent job, providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR achieved good revenues and net income in the first quarter, including record revenues at PACCAR Parts, good performance by the truck divisions and strong financial services results. PACCAR achieved revenues of $7.4 billion and adjusted net income of $770 million. The PACCAR Parts achieved record quarterly revenues of $1.7 billion and quarterly pretax income of $427 million. We are pleased with the continued growth at PACCAR Parts after a record-setting 2024. PACCAR Financial had a very good quarter, achieving pretax income of $121 million, which is 6% higher than the $114 million in the first quarter of last year. We estimate this year's U.S. and Canadian Class 8 market to be in a range of 235,000 to 265,000 trucks. The North American truck market is being affected by uncertain economic conditions and the overall impact of new tariffs. In Europe, DAF's premium aerodynamic trucks provide customers with the latest technology and the best operating efficiency. We project the 2025 European above 16-ton market to be in the range of 270,000 to 300,000 trucks. This year, the South American above 16-ton truck market, where DAF trucks are highly desired by our customers, is expected to be in a range of 100,000 to 110,000 vehicles. PACCAR delivered 40,100 trucks during the first quarter, and we anticipate delivering 37,000 to 39,000 trucks in the second quarter. PACCAR's truck parts and other gross margins were 14.8% in the first quarter as economic uncertainties and tariffs began affecting input costs and truck pricing. With the full quarter of current tariff-related impacts, we anticipate second quarter margins could be in a range of 13% to 14%. Margins could improve considerably depending on how the announced truck tariff policy investigation progresses. In the second half of the year, we anticipate increased customer demand as policy and emissions regulations become more stable. PACCAR's industry-leading trucks, expanding parts business, best-in-class financial services, and advanced technology strategy position the company well for an excellent future. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Harrie, over to you one last time.

Thanks, Preston. PACCAR's first quarter adjusted net income of $770 million excludes a $265 million after-tax provision related to EU civil litigation settlements. PACCAR is making good progress on resolving the civil litigation. The company has settled with the majority of claimants and continues to pursue appropriate resolutions. PACCAR Parts achieved record revenues in the first quarter, with excellent gross margins of 30.7%. We estimate part sales to grow by 2% to 4% in the second quarter and for the full year. PACCAR Parts is beginning to benefit from the life data of the 600,000 connected Kenworth, Peterbilt, and DAF trucks in operation. This connectivity enhances our customers' operational efficiency and vehicle uptime. PACCAR Parts has 20 parts distribution centers worldwide and continues to expand its global distribution network. PACCAR Financial Services pretax income was a robust $121 million compared to $114 million a year earlier. This reflects solid portfolio growth and continued strong credit quality. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt, and DAF used trucks and is building a new used truck center in Warsaw, Poland this year. Used truck demand and pricing improved in the first quarter, and we expect it to further improve throughout the year. Similar to PACCAR Parts, PACCAR Financial provides steady profitability during all phases of the business cycle. In 2025, we are planning capital investments in the range of $700 million to $800 million and R&D expenses in the range of $450 million to $480 million as we continue to invest in key technology and innovation projects. These include next-generation powertrains, advanced driver assistance systems, and integrated connected vehicle services. PACCAR is also investing in manufacturing capacity to support future long-term growth and our customers' success. This includes an expansion of the DAF factory in Brazil, construction of a new PACCAR engine remanufacturing facility in Columbus, Mississippi, and an expansion of the PACCAR Technical Center in Washington State. As Preston noted, this is my last earnings conference call. PACCAR is an exceptional company, and I want to thank all my colleagues past and present for making it such a wonderful place to have a career. We are pleased to answer your questions.

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

Hi. Good morning, guys.

Hey, Chad.

Hey. So I wanted to dig a little bit more into your guidance for gross margins. I was hoping you could tease out just how much are you embedding in terms of incremental tariff costs and how much you expect to pass through to customers? And then just talk through how you're thinking about gross margins for the balance of the year, please?

Yes, Chad, as we shared in our comments, it's a little bit uncertain out there right now in terms of what the tariff policies will look like. You may or may not be following how they apply to truck specifically, but last week, the government announced a Section 232 investigation into tariffs for medium and heavy-duty trucks to evaluate what their policies would be. There's an open comment period through the middle of May, and then they haven't declared when they would make any kind of revision to those policies, but they're under review, which could have a meaningful impact on what the impact is on a per truck basis. And obviously, that's an input cost to us right now. So it could shape our form factor for us in Q2 and beyond. And it's hard to know what the exact numbers are going to be because of that uncertainty. But we think that right now, we are an American company that builds our trucks in the markets for the markets. So our teams in Denton and Chillicothe have done a great job building trucks for us for the U.S. markets, but there are components that come into those factories from our suppliers in other countries. And so we don't know how they would be affected.

Got it. That's helpful. And then just over to the vocation side of your business. I know that you guys tend to over-index to that part of the market. I would just be curious about how you're thinking about the contribution from there as you go through the balance of the year?

Yes. It's still a solid part of our business right now. I mean, the vocational market is reasonable. And so it feels like that will continue to be a strength throughout the year. We'll see how that plays. The LTL market still also feels stable. And I think everybody kind of is aware that the truckload carriers are still under some pressure. And so that pressure is something that we feel in the market estimations for the year.

Okay. Thanks. I'll pass it on.

Have a good day.

Thank you. Our next question comes from Jamie Cook of Truist. Jamie, your line is open. Please proceed with your question.

Hi. Good morning. I guess if you could just unpack a little further the margin disappointment relative to – I mean, your deliveries were essentially in line with expectations. The margins were later relative to your guide. I know you talked about input costs and truck pricing. If you can unpack that more and let us know what price cost was for both truck and parts? I guess that's my first question. And then next question. Just your comfort level with inventory levels – some of the industry experts, the inventory levels are really elevated. And I'm wondering if that's a concern in the years how that impacts orders? And if you could comment on your order specifically? And then last, congratulations to Harrie. Thank you for all your help throughout the years. And congrats Brice, look forward to working with you. Thanks.

Thank you.

Well, Jamie, it's nice to recognize Harrie. We're all going to miss him greatly, yes, he is a good guy. To pick up on your first question, I think your words unpack a little bit further. If I think about the margin, I think of sequentially and cost being up 1% and price being relatively flat. That's really a factor of the tariff impacts that we saw, but they weren't a full quarter of impact of those tariffs. That's the easiest way to think about the delta of what we shared previously and what we experienced today. And now what we see coming into a look for Q2 is we took the conservative view we shared with you to say that if there's a full quarter of tariff impacts, that could look like this. Now life isn't quite that straightforward because we'll also be pricing those tariffs into our customers' trucks as we go along, but we do have the backlog that we have to manage, and we can't just pass that along as we have relationships with people. So there's a partial pass along, and we're working with our suppliers on that as well. So it's kind of a few inputs and a few outputs out of this. And we see that over time, we'll be adjusting our pricing to match the tariffs, but it takes some time to do that or as we mentioned, the tariffs might change, and that would reduce the need to make those adjustments.

Did you guys put through the 4% to 7% that's out there – sorry, go ahead. Go ahead.

Go ahead, Jamie.

No, I was just going to say a follow-up. There's been talk that the industry has put through an incremental, I think, 4% to 7% price increase at the end of the first quarter, wondering if you were in if you also were putting price increases through at that level? And then, sorry, you can answer after that, the question on the elevated inventories.

Yes. Inventory. Yes, for sure. Yes, your numbers are about the right numbers to think about in terms of what's been passed along. You just have to get into the sequencing of when you announce a price increase, when you're going to build it, and what your backlog was that already was behind that. So you don't affect all of that, and that's the puts and takes of that. If I switch over to your question on inventory levels, we look at the inventory for Class 8 for the industry is around four months, and we're at 3.1 months. And then I think back to the earlier conversation we had with Chad, we have a lot of vocational trucks. So we're probably actually lighter on a like-for-like comparison because vocational trucks take a longer time to get a body put on and put back into service or put into service. So we feel pretty comfortable with our three months of retail inventory.

Thank you. That was very helpful.

Great. Have a good day.

Thank you. Our next question comes from Michael Feniger of Bank of America. Michael, your line is open. Please proceed.

Thank you. Thanks, guys for taking my question. Just on the EPA emissions change, if there is a change in 27, how does that inform your view in terms of how you guys are looking at your cost as the truck markets soft? So is this a time when you guys normally might pull back more costs to protect margins? Or is there an eye on 2026 where we – if there is a view that the EPA 27 is still intact, that we have to build towards that. So just kind of curious how that also is shaping your guys' kind of view as you kind of go through 2025?

Yes. Great conversation for us to have together. I think as we think about the regulatory standards, there's a lot that gets mixed into that conversation. And it's really not one conversation. It's really a couple of parts to that. One is greenhouse gas or CO2 reductions, which have a standard, which is intended to come into effect in 2027. So that's where you see an ACT impact, clean truck impact. The EPA has stated that they intend to look at those standards and potentially not implement GHG Phase III in 2027. That would mean the number of electric vehicles, the kind of CO2 reductions that come with that could be adjusted. That's not what they've done yet, but that's what they've made a stated intent to address. Those changes really don't have a significant input cost change for us in terms of vehicle costs. So the trucks that are GHG compliant don't look at like the diesel trucks that are GHG compliant don't have a real different cost structure in 2027. So if those changes are made, there might just be fewer requirements for EVs made. That's part one of this regulatory discussion. The part two of the regulatory discussion is around NOx and the NOx standards, which are in place call for a reduction from today's 200-milligram engines down to a 35-milligram engine. That's the law that's in place today. If that law enacts, then the cost of the vehicles will go up significantly because there'll be additional hardware required to meet those NOx levels. The government has said they intend to look at that and consider whether that will stay at 200 milligrams or move to 335 milligrams. That's less clear that there would be any real adjustment there. The good thing for PACCAR is we've made great investments in clean diesel technology along the way, never adjusted from that, as we've shared with you over the years. And so we're prepared for any of these situations that come up. We've got great engines for today that meet the NOx standard at today's cost structure. We've got new engines designed and running that can meet the 35-milligram NOx standard and they come with substantial costs. So whichever way the standards go, we'll be in a very good position to meet those for our customers. And of course, what the government does will inform the market's reaction. And so what we look at is a today's numbers, or 35 milligrams that would drive up the cost of a product in 2027, and we're prepared for that. If it changes, we'll be in good shape, too.

Understood. If I could just – my follow-up, just if you could kind of dive into the parts side. It seems like the growth was a little slower than we expected. Margins, just – are we starting to kind of normalize here? What do you kind of see when we think of the parts margins on a year-over-year sequential basis, how we kind of think about that profitability anything you just kind of think about that as we're thinking for the full year and into Q2, but for 2025? Thank you.

We are very proud of the parts team that they've been able to grow part sales in the first quarter than in a soft market for parts and service. And the margin levels of above 30%. That's a pretty good margin for PACCAR Parts. And we think in there is an amazing job getting solid good margins out of a soft market these days. And we expect parts to continue that growth throughout the year at levels between 2% and 4%.

I would add to everything Harrie said, it makes perfect sense, and I'd say he shared in his opening comments, the number of connected vehicles we have now and the number of connected vehicles and the technology that our parts team is bringing gives us great confidence that parts will continue to grow over the short, medium, and long term at good levels.

Thank you. Our next question comes from Tami Zakaria of JPMorgan. Tami, your line is open. Please go ahead.

Hey. Good morning to all and congrats to Kevin on the new role. And Harrie, what an exemplary career at PACCAR? I will definitely miss you, but best of luck. I'm sure great things await you. So I wanted to ask a question on tariffs again. I just wanted to clarify, and I appreciate the situation is very fluid, but it seems like there aren't any potential Section 232 tariffs embedded in the second quarter gross margin guide. Is that correct? And if so, what's essentially embedded in that 13% to 14%. Does it include the now post tariffs, which could become effective at any point next month? So what's really in that 13% to 14% guide?

13% to 14% includes tariffs as they are today, is the impact of what's going on there. So that's as it is, as the rules are today, that's what we've given you. The Section 232 adjustments could include impact on foreign-made trucks. It could include impact on components. It could also include exemptions on components for U.S.-made trucks. None of that is clear. And so we have to wait and see what that looks like.

But I think it's okay to summarize that the overall impact would be less unfavorable or even favorable. Is that...

I think that's a fair way to say and that's kind of – we tried to give you that conservative look at the quarter with the standards of today because we know what we know. And if the rules change, then we think that if anything, it should be upside for us.

Understood. That's very helpful. And then in the same thread, I wanted to understand the impact – potential impact of tax on the parts business. I know that you don't manufacture parts yourself, but any color on what mix of parts come into the U.S. from the outside? And how much is locally sourced and whether you have to take pricing to offset some of these tariff headwinds on the cost of procurement.

Yes.

The present will continue. But for parts, we don't have a backlog. So if we get cost increases for parts, it's much easier to pass those on with almost immediate effect. So it has less of a margin impact there. There are parts that are sourced and are impacted by tariffs, but we're working with the suppliers. And if and when those costs for us would go up, we would increase prices accordingly.

Yes. And just to give you a ballpark, I'd say, less than half of our purchases are really from maybe country of origin outside the U.S. parts it's a little bit higher percentage than nominal, but it's not the majority. Because as you said, we actually do make some of our parts, right? The proprietary part are, in many cases, things we do make for ourselves and do get made in America.

Understood. That's very helpful. Thank you.

You bet.

Thank you. Our next question comes from Rob Wertheimer of Melius Research. Rob, your line is open. Please go ahead.

Thank you. My first question is on the Section 232 tariff truck policy investigation. Is the potential positive there a relative one because you make more trucks in the U.S., I suppose, than some of your competitors? Or is it more of an industry comment you were making where they could kind of offset some of the hit to purchase parts from overseas?

I think it could be both, Rob. I think yours is an astute observation, but I think it could be both. It could be a relative and it could be an absolute.

Okay. Perfect. Thank you. And the second one is going to be a little bit general. But you mentioned you have the truck backlog, you're not repricing those instantly for tariffs. I'm a little bit curious how are you managing through this fairly dynamic environment? I mean, when you know the tariff, are you pricing that immediately into current orders? Or do you not because the tariff could change by the time the truck gets made and delivered? And a little bit, if you're willing the same question on, do you anticipate any margin impacts from production variances from supply chain from when you order and when you choose to order depending on tariff? I mean, is that a potential margin risk towards the end of the year or not? If I don't get back on the line, I'd just like to say, Harrie, congratulations. It's been a pleasure talking with you over the years, and thank you for everything.

Thanks, Rob.

Yes. I think that all the things you said in terms of the pricing structures and the timing for them are all through, but there's not a single 30-second answer I could give you about how they affect things. There are times when we have a backlog, we're protecting. There's times when component prices are coming in. There's times when we know what they're going to be. There's times when it's a little bit uncertain. We're still defining HTS codes, which is what the government defines the tariff structures around, and so we're deciding whether those specific components or subassemblies are USMCA compliant. That's having some impact. So I really can't give you a better answer than it's pretty dynamic right now. And the beautiful thing about being part of this company is having great people who are thinking about it every day, and we work closely with our suppliers on this. I think collaboratively with our suppliers, our dealers, our customers, and this great team, we feel like we've got our fingers really on the pulse of it and are right on top of it.

Understood. Thank you.

You bet.

Thank you. Our next question comes from Steve Volkmann of Jefferies. Steve, your line is open. Please go ahead.

Thank you very much. And my congratulations as well, Harrie. You're going to miss this, believe it or not. And my question is I can see you shaking your head there. Anyway....

I said I know I will, Steve. I know I will miss this, Steve…

All right. Well, anyway, I'm curious about the tariffs here. Assuming nothing changes on 232, they just – that doesn't happen and what's in place today stands. Is it reasonable to assume that gross margins will be the lowest of the year in the second quarter and then sort of improve as the year progresses as pricing comes in?

Well, like you know we're in a really uncertain economic time and tariff time. So guiding the second quarter is something more than even a lot of people are doing, asking me to go out into Q3 and Q4 and forecast that. I'm very reluctant to that. We do feel like we have a great strategy in place and that the more time passes than we're likely to get that in place. And we do feel like the market will strengthen as we get into the second half of the year. So if you want to suppose that into improving margins, I think that's a fair supposition.

Building our trucks in the U.S. for the U.S. at the end of the day, that should be a good thing for us.

Okay. And then I don't know if Preston, this is what you were thinking, but I'm curious how you're thinking about the potential for prebuys. And now it feels like there could be two flavors here. One, ahead of any emission changes. I think we've talked about that on previous calls. I'm curious for an updated thought there. But we might also see some pre-buys if this 232 thing comes in and people want to buy the pre-tariff trucks off the lot, maybe, I don't know, just any thoughts in that direction would be great?

I don't really see that commentary on the Section 232, the buying the trucks off a lot because we're really building trucks for customers, so they have a customer name on them. And the consideration of Section 232 is whether there would be tariffs applied to trucks built outside of the U.S. and then how they would treat components that are coming into trucks that are built in the U.S. So I don't really think there's kind of a pre-buy scenario around tariffs that I would envision. I would say that regarding the regulatory standards, as we shared, if there is a current NOx standard implemented or if there's a NOx standard change implemented in 2027. So a move from 200-milligram engines to 35-milligram engines, that will affect hardware on trucks, which will drive up costs on trucks. And so that could drive customer buying patterns into 2026. The thing is nobody knows that right now because the rule is in place, the law is in place around the 35-milligram NOx standard, but there is a statement made that they're considering opening it back up. And we recognize that on cost for our customers, makes their lives difficult. So we're well positioned to offer our customers a 200-milligram engine if that's what's legally allowed. And we also recognize that the government says it's going to be 35-milligram engines. We have great engines to offer them there, too.

Thank you.

You bet.

Thank you. Our next question comes from Steven Fisher of UBS. Steven, your line is open. Please go ahead.

Thanks very much. And I'll, of course, add my thank you to Harrie and congratulations. It's been a real pleasure. Just from a backlog perspective, and ordering, what kind of visibility do you guys have to Q2 to Q4 at this point? We've heard some anecdotes about it's really challenging for buyers to kind of step up and place orders at the moment. So I'm curious what kind of visibility and what's the fill-out look like at this point? And how does that vary between North America and Europe?

Yes. Sure. I think we're in the kind of a normal pattern for ourselves of where we are in the market cycle, and we have substantially full in the second quarter, taking orders through the third and fourth quarters right now. Could say that this actually comparable between the U.S. and Europe in terms of backlog, kind of that substantially full in the second quarter and starting to think through the third quarter right now. And I agree with your comments that the customers are trying to discern what their buying pattern should be and what the tariff policies will be. And so they're kind of contemplative of that, and it's affecting some people's buying patterns. But listen, the trucks we're building today are the most efficient trucks we've ever built, and they're good for operating costs and the customers love them. So there is that pull towards those trucks as well.

That makes sense. And then just on the parts growth. I'm just curious what do you think is going to drive the acceleration in that in the – in Q2 and for the rest of the year? What kind of sort of freight conditions you're assuming for that? And then I know you've mentioned a couple of times about general improvement for the second half of the year. Just curious, I guess, beyond parts, what are you assuming is going to change to drive that improvement? Thank you.

I just think the general comment, the last one first. It feels to me like our customers, truckload customers have been come through a long period of low rates – and yet there's still a lot of ton miles being driven. So trucks are being used and kind of back to what I just stated before is like the trucks we're building today are the most efficient, highest-performing trucks we've ever built. And so there is a desire for those trucks, especially as their older trucks continue to accumulate miles. I'd also add that we're seeing the used truck market start to show some good signs of pricing in the U.S. And so that's an upside for people to think about turning their fleets also. So if there's a good residual value on their truck and there always is for the PACCAR premium trucks, then that's helpful to them to think about how they want to do their second half buys. You bet.

Our next question comes from David Raso of Evercore. David, your line is open. Please go ahead.

Hi. Thank you for the time. And obviously, thank you, Harrie, for all the meetings and time in Europe together and obviously, congrats to you and Kevin. First question, production versus retail 2Q, how are you thinking about your deliveries, your production versus retail? And sort of how do you think about production versus retail for the rest of the year? And then I have a quick follow-up about the sequential pattern of cost versus price.

Production versus retail, I think they're pretty much in good position with each other. We already talked about inventory levels for us being in a reasonable position. So I think production versus retail, there's not a lot of step change between the two of them. And then your sequential question is what specifically, David.

And that's the full-year comment on production versus retail, just to clarify the first part. That's a comment basically for the rest of the year, not just 2Q. You're pretty comfortable production.

Well, I would say more specifically to Q2. I'd say it more specifically to Q2, but I think it does generally apply to the full year.

Okay. Then a follow-up. The math you're implying sequentially is, say, revenue is down $250 million, $270 million sequentially, but gross profit is down $190 million, right? So a pretty challenging decremental sequentially. But when I think about that, is the second quarter getting full tariff impact from what we know now, not speculating about future tariffs? Is it a full quarter of tariff hit but not a full benefit from the pricing actions you're expected to take? So would the idea be by the third quarter that negative sequential gross margin, all else equal, should get better? Or is it now we're getting what we can on price in 2Q and that quarter hit on tariffs, it doesn't really necessarily get any better in 3Q? Just trying to get a sense of that negative sequential how painful is that? Or is that just sort of the way to think about the rest of the year?

David, I can always count on you to come up with some good analysis for us. And once again, didn't disappoint. I would say that your assessment is about correct, is like the sequential change is really because of the full quarter impact of the tariffs without the ability to fully pass that into price. And then as we see stability in tariff policy going forward, you would expect to see the pass-on of price and cost to be more aligned.

Okay. Thank you very much. I appreciate it.

Great question. Thanks.

Thank you. Our next question comes from Angel Castillo of Morgan Stanley. Your line is open. Please proceed with your questions.

Hi. Thanks for taking my question. And Harrie, I just want to echo everybody else, congratulations and wish you all the best. Maybe just to continue to unpack that a little bit more the 2Q. Could you just maybe parse out how much of that is maybe volume related, the contraction in gross profit margins sequentially, how much of that is volume versus the tariff flow through you're talking about? And if you could talk about also the deliveries you're guiding to for 2Q by region, that would be helpful.

I would say that, of course, when you have – if there's a few less trucks in the quarter, that could have some impact. But I would say it's mostly more to do with the discussion around tariffs is driving it. So that feels more likely to be the talking point. And then in a by-region standpoint, I think the North America or U.S., Canada feels relatively flat in deliveries, similar to Europe. What we've seen is the Mexico market is really kind of given a pause right now, and that pause is probably because their economy can be impacted by the trade discussions that are ongoing. So customers are hesitant there. And that's really the biggest number change between deliveries in Q1 and Q2.

Got it. That's very helpful. And then could you maybe – on the tariff side, there's been a lot of discussion around the pricing ability. But maybe could you touch on just your – the levers or the ability to maybe mitigate some of these potential headwinds kind of near-term as you think about either cost management or other kind of initiatives you can implement? And just more broadly, strategy-wise, how should we think about just all of this uncertainty impacting your desire to either invest or the location or maybe the areas that you choose to invest in going forward, right? I saw the R&D reduction. So just a broader discussion there would be helpful.

I would frame the investment appetite we have is to continue making great investments on the products that we have for the future with no real deviation in that approach. We love what our business plans and product plans look like for the next five years. And so we'll continue making those investments because we have great returns for our customers and our company and our shareholders. So no change there at all, high confidence in those product developments that's what I would share on that one. And can you remind me again your first question?

Yes. Just on the tariffs, just anything that you can do in terms of levers that you can pull for cost management or other ways to kind of mitigate some of the margin pressure?

Yes. I mean, we work closely with our suppliers. Obviously, as one of the key elements we can do here. So where are components coming from? And are they USMCA qualified? So does that mean they have an HC code applied to them, skip the acronym. Do they have a code applied to them and an understanding that they are USMCA compliant? And if they do, then that reduces the tariff impact, that's really dynamic because you're talking about not just first tier, but second and third-tier suppliers. So I think we have a great team of people working on this cost management programs in partnership with our wonderful suppliers. Together, they're controlling costs in the best way possible. And we think there is some potential to mitigate some of those costs, no matter what the scenario.

Very helpful. Thank you.

Great.

Our next question comes from Kyle Menges of Citi. Kyle, your line is open. Please go ahead.

Thank you. And I'll echo everyone else, congrats on the retirement, Harrie and best wishes. I was hoping if you guys could, again, just elaborate on the gross margin in the quarter and just what's embedded in the guide for 2Q. And I think just more specifically, I'm trying to get a handle on the cost inflation you're seeing and what could actually be, I guess, stickier notwithstanding tariff impacts? Just kind of thinking about what could maybe be a little bit stickier on the cost inflation side, just in kind of the big buckets of raw materials, components, labor, and I guess anything else to call out?

Yes. I feel like we've done a pretty good job of explaining everything we can around gross margins for Q1 to Q2. And I think that most of the impacts are really related to the cost impact and most of the Q2 cost impact is assigned to tariffs. And I think we've kind of shared quite a bit on that. I'm not sure what else I could add on that. I don't know if anybody else would.

On the other cost elements, we've seen costs being flat, good productivity flow through our cost reduction efforts. We have cost production CMP programs going along with a lot of our suppliers and productivity in the factories is going well, too with off-line inventories at low levels. Production is pretty smooth in most factories. So yes, from that perspective, things are moving well along.

Okay. Got it. And then I just wanted to dig into the parts growth a little bit more for the second quarter, expecting anything up 2% to 4%. Just a little surprised by that, I guess, with deliveries implied down 20 and then freight activity could be fairly muted. So just help me understand what gives you confidence in parts growth of that 2% to 4%. I guess, is a lot of it pricing?

Some of it is pricing. So if you look at the – the first quarter, sequentially, pricing was up like 2.5%. Cost was up similar, but the price increase of between 2% and 3%, of course, that helps with revenue growth as well.

Okay. Thank you.

Thank you. Our next question comes from Tim Thein of Raymond James. Tim, your line is open. Please proceed.

Great. Thank you. Good morning. Maybe just to start as an update just from the standpoint of your – sorry, your footprint in North America and just thinking, again, obviously, hard to know where the tariff winds are going to blow. But as we sit here today, I'm just curious if the company is thinking of any changes to the footprint with respect to the Canadian and Mexican output? And then I guess related to that, there's been some capacity increases that have been put forth. And I'm just thinking – I'm curious if you're rethinking those or how you're approaching those with the potential that maybe the market sizes aren’t as large as maybe what we would have thought a year or so ago. So kind of a two-part question just on the North American capacity and footprint?

Thanks, Tim. Thanks for the question. Footprint in North America is really well positioned. I think we have a great Peterbilt factory, a principal Peterbilt factory in Denton, Texas, with fantastic people and fantastic investments we've made there, brought up the efficiencies. Chillicothe, Ohio, also does a great job for us for our Kenworth factory for Class 8. We have our plant in Renton, Washington, which has capacity for us. Those are the principal three Class 8 truck plants that we use for North America, for U.S. production. And then we have our plant in Mexico, which basically produces a lot for the Mexican market. That's its biggest space that we've done, and we've made great investments in that because the market down there is good, and we're the market leader in Mexico. And then we have our St. Torres factory. We've made investments there. And that's a great factory with good people in it, too. So we feel like the footprint – we probably have the best footprint of anybody, I think, and we feel very proud of our people and the great work they do in those factories. We can't give them enough of a shout out for how good they are, especially in dynamic times. And then I would say the capital investments we've made around capacity will be well served for us, right? We don't think about quarters of our investments, we think about years and providing great values to our customers and being able to build the trucks they want from us, better, cleaner, more efficient trucks, and that's what those investments have been centered around. And so they're going to be good for our shareholders, good for our customers, good for our dealers, and good for PACCAR.

Okay. Thank you, Preston. And just on the medium-duty market, obviously, it's becoming a bigger one and a more important one for PACCAR in recent years. The outlook for 90,000 to 100,000 units in 2025, was that altered in terms of how you're thinking about the market size this year?

No, we still think that's the market size for the medium-duty market.

Okay. All right. Thank you.

You bet.

Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Jerry, your line is open. Please go ahead.

Yes. Hi. Good morning, everyone. Congratulations, Harrie, Brice, and Kevin. Can I ask in terms of the impact of tariffs that we spoke to over the course of this call, so over the past two quarters, your profit per truck as a result of the tariffs is down about $5,000 for 2Q versus 4Q roughly. Based on where you're putting trucks in March and April, is it fair to say you're going to make up a big chunk of that headwind based on the mid-single-digit number for pricing that you quoted, Preston, that sounds like you should be able to make really good progress in 3Q relative to that number. But I'm wondering if you could put a finer point on that?

Yes, Jerry, I think I understand the math you're doing, I think it's really hard to see what Q3 is going to look like right now simply because I think we really should wait and see what the tariff policy is and what the changes might be to it. And it will be a lot easier to talk about that once we have that clarity for ourselves. So I think that – let's just hang on that question for a little bit and see what the policies become.

Okay. Fair enough. And then in terms of your production flexibility, you could make any truck at any plant if you want to, depending on how tariffs go, to what extent could it make sense to make medium-duty trucks in the U.S. plant? In other words, what kind of impact on productivity would it make if you just increase the variability SKU if you choose to move in that direction?

Yes. I mean, you said we have the flexibilities in our plans, which is great, but we like the way we have our build laid out right now and don't have any plans to change that.

Okay. Thank you.

Thank you. Our next question comes from Jeff Kauffman of Vertical Research Partners. Jeff, your line is open. Please go ahead.

Thank you very much. And like everybody else, Harrie, best of luck in retirement. Congratulations to Kevin and Brice. I feel like the tariff and EPA questions have been beaten pretty hard here. So I want to go back to your comment, which I thought was great, which is, look, freight still moving and ton miles are still up, and this is really kind of a tariff cost impact and at the end of the day, we still got to move freight. So I guess my takeaway is despite the uncertainty and despite people delaying decisions, would your view be over a three to five-year period that there's unlikely to be any destruction in truck demand over the long term?

Jeff, I think that's the right observation to make, right? America, over 70% of the product in America is moved by trucks, is still going to be moved by trucks in the next three to five years and trucks are wear-out items. And the trucks we build become more and more efficient, which increases people's desire to have them. So the number of trucks over that period of time is going to be constant. We expect our percentage to grow over time because we build the very best trucks, and that becomes increasingly important. We are the best dealers. And so we expect that that's going to increase over time. So that bodes well for the future.

That's my one. Thanks.

You bet.

Thank you. Our next question comes from Scott Group of Wolfe Research. Scott, your line is open. Please go ahead.

Hey, thanks. On the guidance for deliveries, do you have any just directional color by region you can give?

Yes. Yes. I think we even shared that a little bit earlier, but maybe you didn't catch it is we think that the U.S. market is relatively flat. We think Europe is relatively flat. We think most of the impact and change sequentially is through Mexico.

Okay. Helpful. And then I think you guys said cost in Q1 was up 1% sequentially and price was flat. Do you have just – how should we think about that embedded within the guide for Q2 in terms of costs, sequential and price sequential?

Yes. We would expect in Q2, we would see some price increase. And then depending on how the tariff structures are, there could be costs higher than that.

Okay. So I guess, ultimately, my big picture question is like, is this Q2 a timing issue was suggested earlier of full cost impact of tariffs, but timing and ability to price it? Or is there some in a soft market, is there some lack of ability to actually get the full pricing benefit? Is it – is it a timing issue? Or is it a pricing power issue, I guess, is ultimately my question.

I thought I would look at it like you did with the timing issue being the principal effect there for the quarter? I think that's the right way to think about it is mostly a timing effect. I mean there's – obviously, it depends on the state of the market. But I think that the biggest impact right now is this timing impact of pricing versus the cost timing.

Okay. Thank you. Appreciate it.

You bet.

Thank you. There are no further 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.

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