Good morning, and welcome to PACCAR's Second Quarter 2025 Earnings Conference Call. Today's call is being recorded. If anyone has an 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; Kevin Baney, Executive Vice President; and Brice Poplawski, Senior Vice President and Chief Financial Officer. As with prior conference calls, we ask that 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 at paccar.com. I would now like to introduce Preston Feight.

Thanks, Ken. Good morning, everyone. Kevin, Brice, Ken, and I will update you on our second quarter financial results and business highlights. In these dynamic times, our PACCAR employees have done a great job providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR achieved good revenues and net income in the second quarter, including record revenues at PACCAR Parts, good performance by the truck divisions, and strong financial services results. PACCAR achieved revenues of $7.5 billion and adjusted net income of $724 million. PACCAR Parts achieved record quarterly revenues of $1.72 billion and excellent quarterly pretax income of $417 million. The team did a great job increasing revenues in an overall flat parts market. PACCAR Financial had a very good quarter, increasing pretax income to $123 million. And we estimate this year's U.S. and Canadian Class 8 market to be in a range of 230,000 to 260,000 trucks. The North American truck market size is a result of general economic conditions, a soft truckload market, and tariff and EPA '27 policy uncertainty. Customer demand in the less than truckload and vocational segments is good. In Europe, DAF's innovative aerodynamic trucks provide customers with best-in-class fuel efficiency and driver comfort. We recently visited Europe and met with some of those customers who shared their appreciation for the performance of these great DAF trucks. We project the 2025 European above 16-tonne market to be in a range of 270,000 to 300,000. This year's South American above 16-tonne truck market is expected to be in the range of 90,000 to 100,000 vehicles. PACCAR delivered 39,300 trucks during the second quarter and anticipates delivering around 32,000 to 33,000 in the third quarter. Third quarter production reflects the normal summer shutdown in Europe and build rates in North America that are matched to the market. PACCAR's Truck, Parts, and Other gross margins were 13.9% in the second quarter. Given the uncertain tariff structure, it's difficult to forecast third quarter margins. Assuming the current tariff structure and market conditions, third quarter margins could be around 13%. I'm proud to share that over 90% of PACCAR's U.S. delivered trucks are produced in our American factories. Clarification of the ongoing IEEPA and Section 232 trade policies could enhance market clarity as well as benefit PACCAR and our customers. We anticipate the North American market will strengthen as tariff policies become certain, the truckload market gains momentum, and customers begin to anticipate the 2027 NOx Emission standards. Kevin Baney will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Kevin?

Thank you, Preston. PACCAR Parts achieved record revenues in the second quarter with excellent gross margins of 30%. We estimate that PACCAR's year-over-year part sales will grow by 4% to 6% in the third quarter. PACCAR Parts continues to grow through ongoing investments in capacity and services. PACCAR Parts is focused on delivering the right part to the right place at the right time to provide industry-leading support for our customers. PACCAR Financial Services pretax income was a robust $123 million, up from $111 million a year earlier. This reflects strong credit quality and improving used truck results. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt, and DAF used trucks. PACCAR is building another used truck center in Warsaw, Poland, which will open this year. PACCAR used trucks sell at a premium compared to competitors' used trucks. Similar to PACCAR Parts, PACCAR Financial provides steady foundational profitability during all phases of the business cycle. This year, PACCAR is planning capital investments in the range of $750 million to $800 million and R&D in the range of $450 million to $480 million as we invest in key technology and innovation projects. These include next-generation clean diesel and alternative powertrains, advanced driver assistance systems, and integrated connected vehicle services. PACCAR is also investing in its truck and engine factories to support long-term growth as well as our customers and dealer success. PACCAR's industry-leading trucks, expanding parts business, best-in-class financial services, and advanced technology strategy position the company for an excellent future. We are pleased to answer your questions.

Our first question today comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could just comment on the really strong sequential price improvement performance you saw in the quarter. How much of that was mix versus getting the price increases in for the higher tariff content? And as you think about pricing based on what's in backlog for 3Q, what does that cadence in pricing look like 3Q versus 2Q compared to the roughly 2% sequential increase we just saw in this quarter?

Sure, Jerry. Interesting time in the market. As we look at the effect of tariffs on Q2, they were certainly well present for us. We think that the amount of tariff impact will increase in Q3, so it will have an increased weight of impact on price versus cost for us in Q3, and that's obviously a North American-centric comment. There's some variability in there because it depends on how the tariff structures continue, whether that's 232 or court rulings on IEEPA. It could also be affected by the current August 1 statements around what new tariffs might be implemented and what rates they'll be at.

And then in terms of your discussions on Section 232 with the government, can you touch on that? We've heard that they might be committing to a 60-day review cycle versus the quoted maximum of 270. Are you hearing that in your conversations as well?

Well, the way we think about it is PACCAR builds, as I said, over 90% of our trucks for the U.S. market in the United States. That’s really good for the country. If we reference 232 for the auto and light truck industry, they viewed it as strategically important that cars and light trucks be made in America. The current ongoing investigation in 232 for medium and heavy trucks has completed its open comment period, and they are now in the investigation phase. As you noted, Jerry, they don't have to take the full 270 days, so it wouldn't be surprising if it was less than that and the conclusion was made sooner.

Super. And lastly, in terms of the tariff impact on a per unit basis in the third quarter, can you just comment directionally? Is that in the $4,000 per unit range the way it looks from the bill of materials? Or can you help us understand that?

Yes. As we look at it, there is some variability within that tariff structure, whether copper is included or whether it's an August 1 change to things. So I will give you a plus or minus number. But in general, what we would say is maybe the quarterly effect is something like $75 million.

Nice performance given the variability.

Appreciate the comment, Jerry. Thanks for the questions.

Our next question comes from Jeff Kauffman with Vertical Research Partners.

Congratulations on an uncertain environment. I was just wondering with the passage of the one big beautiful bill act and the R&D and CapEx, depreciation acceleration that a lot of companies will be getting, have customers re-engaged you about the '26 order season?

Yes. Appreciate the comments on the quarter and also a really insightful question. The answer is yes, they're actually starting to engage us on that as that legislation has passed. It does have benefits to their cash, which allows them to deploy that cash for capital asset purchases like trucks. This is becoming a part of the conversation and is part of our optimism for the latter part of the year.

Yes. And I would just add, this is Brice. It will be very positive for us as a company as well. The R&D expensing, along with the immediate R&D expense and expensing on the fixed assets, we think will provide cash tax benefits in the $300 million to $400 million range. So it's good news for our customers.

Brice, you beat me to the second half of the question. So that's all I had.

Our next question comes from Angel Castillo with Morgan Stanley.

Just wanted to follow up in terms of the second half delivery implied by the industry outlook. Assuming your market share remains intact, is a little bit more kind of stable in terms of U.S. and Canada for the second half versus the first half? With the comments around seeing good conversations with customers regarding potential benefits from the one big beautiful bill, could you provide more color? We've had three months now of fairly weak orders, so do you expect to see a rebound in the upcoming months that gives you confidence for the second half?

Yes, really fun question, Angel. Thanks for asking. There are a few factors going into the sequencing of orders. One of the things in the truckload sector, which is a significant part of the overall market in the U.S. and Canada, is that there was some overcapacity. I think that overcapacity is coming out gradually. As that gets balanced, it will help with rates and profitability for carriers, which will consequently help with truck orders. Another key factor is the big beautiful bill that you've referenced as an upside potential for us as the year progresses. Furthermore, regulatory emission standards will play a role. The greenhouse gas component for 2027 is likely not to change, meaning additional GHG requirements will not come. However, there will be NOx standards regulated in 2027, which will create costs for the product and likely encourage customers to buy trucks later this year. If we gain clarity on tariff policies in the third quarter, customers' reactions will be positive for PACCAR. Many reasons give us confidence to see improvement as the year proceeds.

Super helpful. I thought your guidance for Parts in the third quarter was interesting. You guided for 4% to 6% top line growth. Can you help us understand what's driving this reacceleration in the Parts business, what you’re seeing in demand trends, and what gross margin is assumed for 3Q within your Parts guidance?

I'll start by reiterating that we had record revenue in Q2 with 3.4% sales growth, which is impressive in a flat parts market. Any time we can achieve revenue growth in a flat market is noteworthy. The forecast for 4% to 6% in the third quarter reflects the Parts team doing an exceptional job providing parts and programs to ensure excellent customer service. Performance is reverting to stronger sales growth, so I believe the Parts outlook is strong.

In the second quarter, we had more bank holidays and other holidays in Europe, leading to a higher number of shipping days in the third quarter—our strong market for parts sales—which will also benefit us.

Our next question comes from Chad Dillard with Bernstein.

To what extent is the possibility of pre-buy changing your down cycle playbook? Do you feel the need to hold on to labor longer, just in case if a pre-buy happens? Just curious how this influences your view on what sort of fixed cost absorption is acceptable?

Yes. PACCAR focuses on lean efficient production, and we continue to do that. We have done well controlling costs in our operations and factories. We aim to maintain balance, so as we see market upside, we want our team to keep building great trucks. If the market improves as this year progresses, that will benefit everyone.

That's helpful. Can you comment on the sort of pricing you see in the back half of the year? Are prices increasing as clients expect?

I think, as we discussed earlier about the general market, with improving profitability and increasing demand for trucks, the market dynamics will benefit us. Currently, there's a balance being reached, and once we achieve that point, demand will increase. Remember, the market primarily involves replacement trucks, which should be around 260,000 to 270,000, and freight ton miles are not low, creating some pent-up demand for the future.

Our next question comes from Michael Feniger with Bank of America.

On the parts with the 4% to 6% top line, do you think you can grow profit at that same rate? What’s the right environment to see parts revenue and profit and margin growth?

Michael, great question. We're proud of the team for delivering parts growth in a flat market. We see upside. With the overall truck park still at elevated levels, those customers need truck servicing, which drives parts sales. Our dealers continue to expand capacity, adding new locations and distribution centers. Ongoing sales growth points to profit upside as well.

Great. And on inventory, how do you feel about your inventory given the moving pieces with tariffs and a potential pre-buy next year? Do you carry a little extra inventory or aim to work it down as the year progresses?

If you look at the Class 8 inventory, it’s at 4.2 months of retail sales, while Peterbilt’s inventory is really at 2.9 months. We feel good about our inventory position. Given that roughly half of our trucks are with body builders, that contributes to our inventory position as PACCAR leads in the vocational segment. We are maintaining our discipline and are well-positioned from an inventory standpoint.

Our next question comes from Jamie Cook with Truist Securities.

The deliveries improved and exceeded your expectations for the quarter, and margins were at the high end. Was there anything unusual on margins? Why were deliveries better? Was it just a pre-buy ahead of tariffs? Also, how confident are you that the 13% in the third quarter could mark the bottom for margins?

Thanks for the comments on the quarter. As for deliveries, we have the standard European summer shutdown. Additionally, adjustments in the market may play a part. Next, stability regarding tariffs and regulatory clarity on NOx emissions will impact our forecasting. The 13% in the upcoming quarter might mark the bottom of a cycle. We’ve analyzed current cycles and can compare to previous years with similar deliverables and lower revenues. This illustrates our cycle-over-cycle structural strength and perspectives.

Any insights on how you're considering 2026 based on the flat production outlook?

We feel confident about 2026. Clarity on regulatory standards and tariffs will come, as will the opportunities for used trucks. So, we expect to see improvement.

Our next question comes from Tami Zakaria with JPMorgan.

I want to ask you about the engine remanufacturing plant. When is it expected to be fully operational? And how many engines do you expect that facility to remanufacture annually?

Good question, Tami. The facility will be operational in the first quarter of next year. Once fully running, we anticipate about 5,000 remanufactured engines annually through that facility.

And on the outlook for South America, is the reduced outlook linked to Brazil? Can you explain what changed driving this revision?

You're correct, Tami. The revision is largely driven by Brazil, mainly due to interest rates. They've experienced a 400-basis point rise in rates since the start of the year, which greatly impacts consumer confidence and willingness to invest in trucks at this time.

Our next question comes from Stephen Volkmann with Jefferies.

We don't have as much visibility into the European market. Do you believe it to be a growth market going forward? We've heard about government investments, but curious if you've seen anything?

Given the overall economic conditions in Europe, with some uncertainty, a market of 270,000 to 300,000 trucks is relatively strong. PACCAR and DAF have performed well, particularly strong market share in Eastern Europe. We visited customers recently and saw some upside. The market size indicates a performance above replacement value, which looks promising.

Our new product offering is competitive, meeting industry standards for size and dimensions, and it delivers outstanding fuel economy. We have another exciting rollout of advanced technology in 2025, enhancing truck performance and fuel efficiency. The DAF team has much to be proud of.

On the vocational side, I've heard there have been many orders but also that they have slowed. Are you concerned that the vocational market could decline before it improves?

I wouldn't characterize the vocational market as weaker. It was frothy for a while, but now it is in a stable condition. Infrastructure spending is significant, positively impacting the vocational sector. We anticipate that it will maintain steady strength moving forward.

Our next question comes from Steven Fisher with UBS.

Regarding pricing, how far out can you provide firm pricing to your customers? Do all units come with a caveat that prices can change with tariffs?

We currently include a tariff surcharge for our trucks in the U.S. and Canada, which allows us to create future pricing. These relationships with customers as business partners enable us to have ongoing discussions regarding possible tariff adjustments and pricing.

Beyond cyclical dynamics, are there growth opportunities in trucks? Or is growth mainly in Parts and Financial Services? Should we expect more focus on Parts and Financial Services?

Trucks will continue to be essential for freight movement in the country. Autonomy may increase the number of trucks due to enhanced efficiency once developed. Regarding EVs, we remain prudent in investments as they transition into the market. Moreover, increasing regulations lead to more complexity, translating into more proprietary parts share, favorable for PACCAR's business. Our focus on parts, financial services, and connected vehicles aligns with delivering value to our customers, ensuring better uptime, which benefits both PACCAR and our customers.

Our next question comes from Kyle Menges with Citigroup.

Can you comment on the medium-duty truck market, particularly inventories, and whether your positive outlook for '26 applies there as well? Do you see any changes in emissions standards affecting pre-buy potential next year?

Medium-duty industry inventory is about six months, while for Kenworth and Peterbilt it's around 4.5 months. We hold a solid position in terms of medium-duty inventory. Similar factors for the 2027 standards could stimulate improvement in the medium-duty market in '26.

Our next question comes from Scott Group with Wolfe Research.

Regarding the $75 million of estimated tariff costs in 3Q, can you quantify what the impact was in Q2? If things stay stable, where would you anticipate that number going in Q4?

The impact in Q2 was certainly less than $75 million due to timing. The $75 million estimate is based on the gradual tariff increase. In Q4, the situation depends largely on clarification surrounding 232 and related tariff structures.

Okay. That’s helpful. Regarding the order book for '25, how's that looking? When do you anticipate opening '26, and what are you seeing in terms of order contrast among vocational, private fleet, and for-hire segments?

The North American order book is presently around 50% filled, while Europe's is mostly complete. The vocational market remains robust, with LTL markets also performing well. The legislation you referenced may provide added benefit to our customers' financial positions and encourage ordering as clarity returns.

Our next question comes from Nick Housden with RBC Capital Markets.

For the Q3 deliveries of 32,000 to 33,000, can you discuss the regional breakdown of that?

You'll see normal regional splits with some effects based on the European shutdown and slight drops in North America. Mexico faces some tariff challenges, which might soften that market.

Regarding your comment that 90% of trucks for the U.S. are built domestically, can you discuss the supply chain breakdown and how it might shift?

The supply chain involves variations among Tier 1, 2, and 3 suppliers and where parts are sourced from geographically. While PACCAR produces a significant amount of its trucks in the U.S., we source components from multiple regions, including Mexico and Canada. The administration's focus on American production is beneficial.

Our next question comes from an analyst.

Your partner, Aurora, is well respected in the technology industry and used your truck in their driver-out program this past quarter. There was some interest in having them put a driver back in. What was the reasoning for that? How is this different from other PACCAR trucks using autonomous technology? What are the milestones needed to allow a driver out?

Great question, and thank you for asking. PACCAR is making significant strides in autonomous vehicle platforms. We believe that safety is our fundamental principle, so having a driver in simply seems prudent. It's how we operate the trucks.

Is there a specific milestone you hope Aurora will achieve for the driver to be removed?

We do not disclose production timelines, as we aim to ensure that everything is fully validated before moving to production.

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.