PACCAR Inc (PCAR) Earnings Call Transcript & Summary

Good morning. My name is Ken Hastings. I'm PACCAR's Director of Investor Relations. We'd like to welcome everyone to PACCAR's 2026 Investor Conference. We have an excellent day planned with the first couple of hours being presentations and Q&A. The webcast playback and slides will be available at paccar.com shortly after the meeting. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. For the most recent information about PACCAR, please see our SEC filings on the Investor Relations page of paccar.com. I would now like to introduce PACCAR's Chief Executive Officer, Preston Feight.

Well, how many times we got to have dinner in a working manufacturing plant while the people are building trucks? I think that's a testament to the leadership team and their ability to engage us, let us sit in their plant and then kind of show off the cleanliness of how PACCAR runs its operations and its plants and the quality of the people. I tell you the sidebar conversations with some of the workers was the pride that they get to have you in their plant. The relationship is great. And so they're pleased that you were there. Hope it was fun for you. I think I was as excited as all of you, maybe more excited than I'm kind of a nerdy engineer that likes this stuff. David Raso and I were just having a brief conversation about the headlines today in the Wall Street Journal, Trump to repeal landmark climate findings and huge regulatory rollback, irrelevant to what we're talking about today. It means it's greenhouse gas related. And so the impact to what we're doing today is kind of [indiscernible] for our plans, and John will share more about regulations upcoming anyways. So today, it's going to be really fun because we'll share information on our strong cycle-over-cycle performance and what it's looked like for us. We'll talk about the leadership team here and all the great people we have that you'll hear from today, and they will review the various parts of the business. So as you look at it, our leadership team wakes up every day thinking about how we're going to build trucks and transportation solutions so that we can make our customers' businesses more successful. Shown here in order of presentation are the 5 members of the PACCAR executive team who are sharing information today. Laura Bloch is PACCAR's Senior Vice President. She has responsibility for Kenworth, Global Purchasing, Dynacraft and supplier quality. John Rich is Executive Vice President and Chief Technology Officer with responsibility for Peterbilt, PACCAR Powertrain globally, ITD, Global Electronics and Technology. Kevin Baney is PACCAR's President. He's responsible for DAF, PACCAR Parts, PACCAR Financial Services and Investor Relations; and Brice Poplawski is PACCAR's Senior Vice President and Chief Financial Officer, who also has responsibility for global manufacturing. Together, this group has over 150 years of experience. And I think you're going to enjoy hearing from each of them and their unique perspectives on our business. So all of us in the leadership team wake up every day thinking about how do we develop trucks and transportation solutions that drive the world to a better future. In order to do this most effectively, we focus on understanding our customers' needs and helping them to deliver the essential items that support the communities where we all live and work. The trucks we build today are 20x cleaner and 40% more fuel efficient than they were 20 years ago. That's significant. It's a really big accomplishment for PACCAR. And we're just getting started. We have an excellent growth plan that will ensure PACCARs, our dealers, our customers and our shareholders' future success. As noted on the bottom of the slide, the foundational elements of PACCAR's strong 121-year young culture are the pursuit of quality, the implementation of leading edge applicable technologies and a drive for continuous innovation. These attributes are part of PACCAR's unique culture of excellence. I'm humbled to be working with PACCAR's global team who have a sharp focus on creating premium trucks, optimizing transportation solutions, are pursuing market expansions and are using advanced manufacturing. These elements, plus many others, continuously drive our profitable growth plans. To begin with, I thought I'd share a video with you that captures how our culture of excellence feeds out to our customers and how it's always not just about the science and the math and the financials So please enjoy. [Presentation]

We're going to talk about numbers today. So there's plenty of time for that in the world. But I think it is important to think about what the trucks do for people in the world, and that's kind of what we're trying to demonstrate there. It's not far off of right. I know people that run second-generation businesses that use our trucks depend upon us. And it's fun to be part of an industry that is actually making the world a better place. So I hope you enjoyed it. PACCAR is structurally stronger. Shown here is a comparison of PACCAR's performance from 2014 to 2025. Pick those years because they are years where we built a similar number of trucks. The financial comparison shows that revenues grew from $19 billion to over $28 billion, so around a 50% increase. Income increased from $1.4 billion to $2.6 billion, an 86% increase. Return on revenue increased from 7.2% to 9.3%, while the inherently cycle-over-cycle strong Parts and Financial Services businesses have grown from 43% of profit to 71%, effectively dampening cyclicality, impressive changes that demonstrate structural strength. PACCAR Parts and Financial Services growth over the past 20 years provides new levels of profitability to our overall business. Parts has grown from $244 million in profits in 2005 to nearly $1.7 billion in 2025. Financial services has grown from $200 million to nearly $500 million in the same period. These businesses provide excellent cash flow and profit throughout the cycles. They also support future truck sales as customers and dealers become fully integrated into the PACCAR ecosystem of transportation solutions. The performance of the company in trough markets and peak markets is demonstrated here. On the left side of the slide is PACCAR's adjusted net income from the previous market trough in 2020 compared to the most recent one in 2025. Earnings doubled in that period from $1.3 billion to $2.6 billion. To the right, you can see PACCAR's profit during the last 2 market peaks of 2019 and 2023. Profitability again more than doubled from $2.4 billion to $5 billion. Cycle over cycle, PACCAR is stronger and well positioned to continue this growth as we look to the future. Another compelling metric is PACCAR's 5-year average net income per truck produced. This number has nearly doubled from just over $9,500 per truck to $18,000 per truck. Our excellent lineup of trucks and engines are the foundation of this performance. Parts and Financial Service growth is also instrumental. PACCAR's advanced and efficient manufacturing strategy is contributing to increasing profits. And our unique local-for-local production capability positions PACCAR for flexibility and low-cost manufacturing that is optimized around the market's tariff operating environment. Over the past 5 years, PACCAR has invested over $5 billion in facilities and products. This money has been used to create flexible manufacturing capability in our factories, like those that are here in the room saw last night, build new parts distribution centers, invest in new clean combustion engines, build new connected vehicle solutions, design a state-of-the-art autonomous truck platform and develop zero emissions vehicles. These investments have resulted in PACCAR having the world's most modern and most efficient lineup of trucks and powertrains as well as world-class parts and financial services businesses. Our investments in technology are positioned and have positioned PACCAR to drive the future to even higher levels of performance. Our portfolio of industry-leading zero emissions vehicles puts PACCAR in an excellent position as the world transitions to a low-carbon future. Our connected services create value for our customers in the form of advanced telematics and prognostic solutions that provide new profit streams for PACCAR. Our autonomous vehicle platform and partnership position place PACCAR in the autonomous vehicle leadership status, and it allows PACCAR to optimize how we go to market with autonomy in the future. As said last night and today, our advanced manufacturing strategy allows PACCAR to optimize efficiency and flexibility in our factories while building customized bespoke trucks. PACCAR is taking a leadership role in the utilization of AI in our organizations. For example, we use it in manufacturing to create the flexible factories you see. We use it in our parts business to create advanced and efficient materials management that provides our dealers and our customers at the right part at the right place and at the right time. And we use it in internal development to enable faster, more efficient processes throughout PACCAR. Now let's show you a quick little fun video of AI highlighting PACCAR's approach. [Presentation]

Well, I think it was 1964 when Bob Dillon saying times there are changing. And I think we're all living in that space right now of times changing. And we're embracing it. We're enjoying it, and we're finding the benefits of it, which is pretty important. PACCAR is continuing its broad-based global leadership. On the top left, we earned an A score from the CDP in 2025, which places us in the top 4% of reporting companies from around the world. In the top right, PACCAR is a leader in operational safety, consistently achieving a best-in-class OSHA safety score. In the bottom right, 90% of our trucks components are recyclable, and we continue further enhancing recyclability. In the bottom left, PACCAR has achieved the highest level of fuel economy and the lowest level of GHG emissions in our history, which reduces expenses for our customers and benefits society through the reduction of carbon emissions. PACCAR is rigorously pursuing best-in-class long-term performance. And as you look at the bottom left in fuel efficiency and greenhouse gas with today's announcements, the reason it's not so significant for us is because fuel economy and GHG are tied one-to-one for each other, and we are always pursuing optimized fuel economy, so we will always pursue lowest GHG. It's an economic benefit for our customers, so they go hand in hand. PACCAR and each of us as leaders care about the people and our communities. To that end, since 1951, the foundation of PACCAR has contributed over $250 million to education, social services and the arts. PACCAR donates generously in locations where our employees live and work all around the world. In 2025, the foundation approved over $10 million in grants to many different organizations, a few of which are listed on the screen. And I do think that a significant part of our cultural success is to care deeply about our people and the communities in which we operate. Our independent network of 2,400 DAF, Kenworth and Peterbilt dealers are another of our valuable assets. They provide a strong competitive moat to our business that is not easily replicated. And though it doesn't appear on our balance sheet, our dealers represent an estimated $20 billion asset that provides significant value to our customers as well as our business model. All of this leads to best-in-class return on invested capital. PACCAR's high technology, high-margin, asset-light business model as well as our discipline in capital allocation enables us to produce the highest returns on invested capital. In 2024, PACCAR's ROIC was a record 55.5%. This leadership is not a lucky break. Over the past 5 years, PACCAR has consistently outperformed all our peers in the truck sector as well as many other well-known industrial companies. PACCAR's performance is best in class. And PACCAR is continuing to grow net income profitably. We're gaining share in the markets where we operate. Our capital and R&D strategy allows us to invest in high ROI projects to develop new products and improve operating effectiveness and efficiencies and the growth in our parts and financial services businesses have put a new higher floor on profitability throughout every part of the business cycle. So throughout this presentation, you'll hear us share more with you about why PACCAR is the leading industrial company. We've demonstrated improved cycle-over-cycle performance. Our advanced manufacturing strategy creates the world's best factories. PACCAR has and will continue to invest in the right technologies that provide premium trucks and transportation solutions for our customers. And we have and will continue to demonstrate robust growth in our parts and financial services businesses. All of this is enabling PACCAR to be optimally positioned to deliver excellent profitability for the next 5 years and beyond. Thank you. Laura, I look forward to hearing what you're going to share about our great products as well as our manufacturing strategy. So over to you.

Thank you, President. Good morning. I'm Laura Bloch, Senior Vice President. This morning, I'm going to cover PACCAR's products and advanced manufacturing strategy. PACCAR is a global technology company that provides premium transportation solutions with industry-leading trucks, powertrains and support services that deliver outstanding performance and value to our customers, operating around the world under these brands. Our core truck brands, our Kenworth, Peterbilt and DAF. One of the reasons that PACCAR delivers cycle-over-cycle performance improvements are our outstanding products. In the following slides, I'll show you the comprehensive truck product lines for each of the truck brands as well as a few products launched since we last met. . The truck lineup on this slide shows Kenworth's complete product line with the medium-duty and heavy-duty trucks shown along the top, 0 emissions trucks shown below on the left and vocational trucks on the right. Altogether, this is the most capable truck lineup in the industry. Kenworth recently launched T880 high horsepower delivers a new level of power in our vocational portfolio, featuring enhanced cooling capacity, and rugged styling that sets it apart from its peers. The T880s enables our customers on the record, heavy haul and dove truck space to tackle any job. Peterbilt started this year with the newest and widest lineup in their 87-year history. 2025 saw the announcement of a new electric heavy and medium-duty models, including the industry's first electric vocational specific truck, the Model 567 EV, and Denton now produces all of Peterbilt trucks models for the U.S. market. Since we last met, Peterbilt began delivering the new Model 589, which is based on the latest cab platform, leveraging the most advanced driver comfort and technology. The 589 represents Peterbilt's premium brand and the extreme customer loyalty in the traditional heavy-duty truck segment. The 589 is the aspirational truck that leads the owner-operator market. Since its launch, Peterbilt has produced over 12,0589s. This is DAF's lineup. From the spacious DAF XG to the DAF XD on the top and including the new XG and XGs Electric launching this year along the bottom. DAF has the most advanced and broadest lineup in its history. Shown here adopts new XD and XF electric trucks that in November were awarded the prestigious International Truck of the Year award. This is the third time in 5 years that DAF has won this award, an unprecedented accomplishment. Whisper quiet, a great driving dynamic and the cabin of absolute luxury. Rounding out with a few of our great products from around the world, highlighted here are the Kenworth vocational model in Mexico and over the road truck in Australia, a DAF mining truck available in the Andean region and DAF XF Off-road operating in demanding conditions in Brazil. This chart shows PACCAR's heavy-duty market share. In South America on the left, Europe and Australia in the middle and North America on the right. From 2005 and of 2015 and 2025. The red line highlights our midterm goal for each market. In South America, where we began the period with share under 3%. With the opening of DAF Brazil, we've grown from there to 7.7% in 2025. PACCAR's share in Europe remained steady while increasing truck margin dollars. In Australia, we've grown from 24% share in 2005, up to 27.7% share last year. Finally, PACCAR's combined North America share increased from 24% in 2005 to 30.4% in 2025. PACCAR's approach to market share is to pursue profitable growth in every market in which we operate. We operate best-in-class operations. Last year, we achieved an outstanding 1.36 average OSHA score. We also delivered best-in-class quality. Our investments have increased our capacity by 17% over the past 3 years. We gained efficiency with the deployment of Industry 5.0 and Vision AI technology. and we increased our flexibility by investing in plant local-for-local production. Our market share expansion is driven by strategic capital deployment in manufacturing operations. The projects shown here are examples of recent facility enhancements PACCAR has deployed $800 million over the past 5 years to increase operational flexibility across our manufacturing footprint. These capital expenditures deliver compounding benefits. -- enhanced workplace safety and product quality, expanded production capacity and improved operational efficiency, all contributing directly to margin expansion. The following video highlights these facility enhancements and their operational impact. [Presentation]

All of our stakeholders. Recent operations efforts have enhanced our local-for-local production. PACCAR is optimally positioned for Section 232 tariffs moving to a build local-for-local strategy. Prior to Section 232 from March through November, U.S. PACCAR production was exposed to tariffs on non-US MCA components as well as steel and aluminum tariffs. Meanwhile, trucks assembled in Canada and Mexico, including most competitor vehicles, qualified for USMCA and had minimal tariff impact. With the Section 232 finding, taking advantage of our North American manufacturing base, we have shifted to build production to the U.S. for U.S. sold trucks. Medium-duty trucks previously built in St. Torres, Canada, were moved to Kenworth Chile coffee and Peterbilt Denton. In addition, low cab forward refuse trucks previously built in Mexico for the U.S. are now being produced in Denton. Post the Section 232 finding, we are positioned to significantly benefit from the tariff offset program. In all, we expect more than 50% relief on our tariff exposure. While our competitors importing into the U.S. are now subject to new tariffs, Section 232 enhances our position in the market and the value of our manufacturing footprint. We are accelerating towards 2030, deploying AI throughout our processes. Our new AI-driven specification tool ensures customers get the best truck for their application with option content recommendations. In truck build, vision tools ensure high-quality wells and verify paint color match. At the end of line, trucks are scanned to guarantee that all of the specified content has been correctly installed on the cab. These are just a few examples of where AI technology is supporting our sales and operations teams. Our global brands, manufacturing footprint and advanced manufacturing capabilities uniquely position PACCAR to win profitable share in the coming years. Thank you. I'd like to introduce John Rich.

All right. Thank you, Laura, and good morning. I'm John Rich, PACCAR Executive Vice President and CTO. PACCAR's business model, has been tested over multiple technology transitions. And we have always succeeded by letting our customers job to be done, drive our technology decisions. PACCAR's development model is well suited to manage through an operating environment with a high degree of uncertainty. We build or commit resources once there's high volume, technology stability and a compelling proprietary business opportunity. We partner selectively in emerging technologies with uncertain volumes and high development costs. And we choose to buy where volumes remain low or where there's a high degree of regulatory risk or other uncertainties. This approach allows us to develop premium products while maintaining the industry's benchmark capital efficiency and expense ratios. And with this model, technology and regulatory shifts has served to strengthen the quality of our business over time. So much has changed in the past year, but our powertrain strategy has not. Clean and efficient internal combustion engines remain the core of our lineup. In time, our proprietary engines will be complemented by hybrid electric solutions. Battery electric trucks remain the pragmatic 0 emission solution, and we continue to expand offerings where the use case is appropriate. We continue to investigate hydrogen solutions, including fuel cells and hydrogen combustion, but we have not committed capital to these applications. This slide is a summary of the latest status of emissions and fuel economy in the United States and Europe. Clearly, a lot has changed over the last year and even a little bit this morning. While there's no delay in the 35-milligram NOx standards for '27, the EPA may relax requirements and warranty -- around warranty and full useful life. We'll know a little bit more at the end of March. The standard remains extremely challenging, and the required technology will add to the transaction price of a new truck. What has changed significantly is the elimination of greenhouse gas Phase III and California's unique programs for NOx and 0 emission vehicles. As you saw in this morning's journal, the new administration seeks to resend the CO2 endangerment findings. Note this all have no impact on 2027 NOx is as a purely a greenhouse gas play. Now in Europe, on the other hand, not much has changed at all. regulatory requirements remain stable. NOx will reduce with Euro VI regulations, in 2029, while greenhouse gas takes a sizable step change in 2030. So this is a global view of how we expect 0 emissions adoption to affect our powertrain mix through the end of the decade. This transition will be shaped by regulations, infrastructure and cost of ownership. Adoption rates will now differ substantially by region. And as we approach 2030. We start to see 0 emissions and hybrid vehicles take more -- a more meaningful share of our European business. In the same time frame, we do not expect substantial zero-emission share penetration in North America. In all markets, we still expect strong demand for diesel-based solutions. So with this in mind, let's dive a little bit deeper into the different components of our strategy. So diesel as you know, moves to the world today. And we believe clean, efficient diesel solutions will continue to have an important place in the heavy-duty market for the foreseeable future. proprietary engines, our PACCAR core competency and the upcoming 35-milligram NOx standard is the most stringent in the world. We view challenging emission standards as a strong barrier to entry in our most important markets. To meet the 35-milligram mandate, we will introduce 2 all new proprietary engine platforms. These are by far the most advanced powertrains in our history, simultaneously improving emissions, fuel economy and durability. And as you can see from the images, these programs are in the final phase of development. proving their capabilities from the Arctic Circle to Death Valley and beyond. Over the last 15 years, PACCAR powertrain has systemically driven a 40% improvement in fuel economy, bringing down operating costs for our customers. The EPA has walked back CO2-based regulatory standards, but [indiscernible] mile per gallon base requirements remain in place. These will take a final step in 2027. Our new engines will meet this final step without requiring electrification. Our new proprietary engines will continue our proud tradition of improving fuel economy to drive value for our customers. So shifting to pure battery electric trucks. We're now 4 years into producing and selling BEVs and benefiting from the lessons learned of delivering real product to real customers. Our lineup has expanded to 15 market and application-specific models with 2 more coming this year. Just like diesel, one size does not fit all in electric trucks. Our lineup covers Class 6 through 8 in the U.S. and Europe. Applications vary from regional delivery to vocational configurations like dump trucks and refuse vehicles. Our solutions are tailored to the deployment needs of our customers and deliver turnkey with charging if needed. As noted earlier, the DAF XD and XF Electric just won the 2026 International Truck of the Year Award. It's the industry's most prestigious vehicle level honor. DAF won the award because it delivers exceptional efficiency and a remarkably refined driving experience. It's a high-end car like experience, and it's absolutely class leading. But what's important about this driveline which coordinates 2 electric motors, harmoniously with a 3-speed transmission is that it's a globally an engineered solution. This driveline will be used for all future BEV solutions. Engineered once with scale enabled by multiple applications. AI tools are proliferating through all phases and functions and product development. Our new diesel engines are feature and technology rich. They have simply become too complex for a human to optimize. Engineers use AI to automate the development and calibration process delivering emissions and fuel economy that was never before possible. Agent-based tools accelerate HMI development by automatically generating code, test cases and design variations from natural language requirements. And quality is improved with AI in the loop verification, ensuring early defect detection, automated root cause finding and even generating corrective paths for the engineer. These are just a few of the examples where AI is enhancing PACCAR's [indiscernible]. So Level 4 autonomy may be the ultimate application of AI in the trucking industry. PACCAR maintains its leadership position as we watch the industry move closer to scaled applications. The underlying technologies have matured, and the AI drivers continue to expand their features and operating domains. We are seeing more commercial traction as it becomes clear that technology is no longer always 5 years away. The PACCAR Autonomous vehicle platform plays a central role in the advancement of autonomy. We maintain a multi-partner strategy, including on- and off-highway solutions, and we continue to be impressed with Aurora, our lead partner on the AVP. PACCAR engineers and produces the proprietary vehicle systems that enable scale for AAV developers. While our service and parts networks deliver the support and uptime these applications require in the field. So let's take a look at some of our vehicles in action. [Presentation]

So autonomy is a long journey, and this slide explains why we're on it. On the left, we stack the major cost drivers of operating a truck at scale. So in rough terms, we see around $0.65 a mile of value creation. When 25% of Class 8 miles are driven autonomously roughly $25 billion of value will be created annually. Market dynamics will ultimately determine how this will be divided between the AAV driver, the truck maker, the fleet and the shipper. But in addition to this new recurring revenue, autonomous trucking is really good for our traditional profit pools, more truck content, higher value service, more proprietary parts and more miles driven. The autonomous era will be great for PACCAR. So with that, I'll say thank you, and I'd like to welcome Kevin Baney.

Thank you, John, and good morning. It's great to see everyone here in person. I'm Kevin Baney, PACCAR President, and I'll be covering parts and financial services. The top question you asked that I will answer is how does PACCAR continue to maintain long-term parts growth. Let's review the opportunity. Shown on the left, the total addressable retail parts market in North America is $45 billion, and PACCAR currently has 15% market share. Moving to the right, the addressable market in Europe and the rest of the world where PACCAR operates is $25 billion and PACCAR currently has 13% share. The combined market is $70 billion. If PACCAR gains just 5 percentage points over the next 5 years in the combined markets, so just 1 percentage point a year, that is $3.5 billion incremental dealer retail part sales by the end of 2030. And we definitely want a bigger piece of the buy. Parts performance for sales, profit and gross margin during the last 15 years is shown as 5-year averages with sales in green, profit in yellow and gross margin above the columns. These results highlight the strong growth during all 3 periods with acceleration over the last 5 years with sales of $6.9 billion, profit of $1.5 billion and gross margin of $30 million 4%. Big congratulations to the entire parts team around the world for achieving these strong results. The formula for achieving the strong parts growth is made up of 3 pillars: first, ease of doing business means parts are available when and where customers need them. Second, with product segmentation, we provide a full range of proprietary and all makes parts. Third is the use of AI-driven technology to provide customer-focused solutions to make it easier to do business with PACCAR. Ease of doing business starts with the foundation of having a strong global distribution network. Over the past 10 years, we've significantly expanded our footprint to support growing customer demand. With the recent opening of the new parts distribution center in Calgary, we operate 21 PDCs, representing a 31% growth over the decade. Across the map, you can also see our extensive dealer and TRP store presence. With 2,400 locations worldwide, our network has grown 33% and expanding access points for customers and strengthening our reach in every major market. Ease of doing business is delivering the right part to the right place at the right time. For the right part, our PDC network operates at world-class quality. We achieved 99.9% shipping accuracy, which means the parts are in stock to meet customer demand. For the right place, our managed dealer inventory program keeps the right parts on the shelf. 92% of orders are now auto accepted with dealers relying on our expertise and AI-driven material optimization algorithms. And for the right time, our dedication to speed to market means 70% of shipments arrive within 24 hours, supporting faster repairs higher uptime and a seamless customer experience. Together, these capabilities make PACCAR the easiest and most reliable business partner. And these results are why dealers trust us to manage their inventory, and why we have such high customer loyalty. PACCAR Parts has a robust product segmentation strategy designed to deliver the right part for the right market. At the foundation, vendor brands provide customers access to widely recognized competitively priced parts. Shown in the middle, TRP all-makes brands offers quality parts for all makes vehicles and deliver strong value for owners of older trucks. And at the top of the portfolio, PACCAR proprietary parts offers customers the assurance of factory equivalent components built to the same standards as original production. We continue to release proprietary content, as shown by the new truck models and powertrain in the background. Those of you with us today will have the opportunity to see the new Kenworth vocational High Horsepower T880 shown on the left; and the Peterbilt iconic 589 shown on the right after the plant tour. PACCAR has a very disciplined process to patent new truck and powertrain parts to increase and protect our proprietary content from being copied by others in the market. I want to highlight 3 areas where we use AI to strengthen our technology solutions. The first is using AI to optimize material management across the global distribution network to strengthen our managed dealer inventory program to ensure parts are available when and where needed. Now 5 years ago, MDA auto accept was only 42%, now 92%. So I'd say it's working. The second area is connected truck analytics that provides real-time insight into vehicle health and traffic patterns. And I'll show an example of this in a couple of slides. The third area is performance-based prognostics that deliver targeted service and maintenance recommendations. This increases uptime, improves decision-making and elevates the customer experience across our network. The continued growth in parts as a result of the ongoing focus in investments in these 3 pillars, ease of doing business, product segmentation, an AI-driven technology. Now we're going to review PACCAR's share of the market opportunity, and I'm going to split it between the first and second owner. And I'm going to focus on North America. The addressable parts market is $45 billion, split $12 billion with first owner and $33 billion with second owner. Moving to the right. First owners typically operate their trucks years 1 through 4 and spend $8,000 per truck annually on parts. There's approximately 1.6 million first owner trucks in the market. PACCAR has 21% share of this $12 billion parts opportunity. Second owners operate their trucks 5 to 12 years and spend approximately $12,000 per truck annually on parts. There's approximately 2.7 million second owner trucks in the market and PACCAR has 13% of this $33 billion parts opportunity. So I can already tell by your facial expressions, give me some facial expressions that you can see the opportunity. We've already done really well with first owner loyalty of that $12 billion opportunity and the opportunity is to grow really with the larger second owner in that $33 billion. In the strategy to grow share with second owners, we'll continue to expand the distribution network in target locations where second owners go for parts and service. We already have an established PACCAR TRP all-makes brand as well as vendor branded parts, both well positioned to grow with second owners. We're expanding PACCAR engine service capabilities to provide broader access to service tools and processes to extend the network servicing PACCAR engines for second owners. And trucks have been connected since 2015, and we've been developing connected customer solutions that are best in class for the first owners that will also apply for second owners. So this is another way to visually see the parts opportunity for both the first and second owners. The green shows parts consumption for the overall truck through the first and second owner, and the second owners keep their trucks longer, and they just consume more parts, and powertrain parts are the largest mix of part sales through this life cycle. There are over 380,000 PACCAR engines operating in trucks that are past year 5. So they're in that 5 to 12 years and naturally consume more wear-related parts as they age through the cycle. [indiscernible] mentioned trucks have been connected since 2015, and we've been using connected truck data to provide higher levels of customer service. Recent improvements in data analytics and AI tools are making it easier to leverage connected truck data to reach second owners and provide them the same level of customer service as with first owners. Now I'm going to show a brief video of Kenworth and Peterbilt trucks running during the month in the U.S. and Canada with it ending with the total network traffic for the month. Just take a look. So that ending as the total network traffic for the month, and it represents 1.5 petabytes of data. Now as anybody in the room heard that term petabyte. So that's a 1 with 15 zeroes or maybe closer to term is 1,000 terabytes or maybe some of us can relate to 320,000 DVDs worth of data. So imagine the power of this connected data combined with agentic AI to reach more customers. We continue to invest in the parts business and the 3 pillars for growth are in place, ease of doing business, product segmentation and AI-driven technology -- we have demonstrated accelerated parts growth over the last 15 years and have achieved strong market share with first owners by providing them best-in-class customer service. Check. We will leverage these pillars as a foundation to target second owners to increase PACCAR share of this $33 billion parts opportunity. Check Mate. PACCAR Financial is an industry-leading financial services provider operating in 26 countries on 4 continents as shown in green, providing captive financing with tailored solutions increases truck market share at Peterbilt, Kenworth and DAF. Bundling financing, parts and service with the truck sale also enhances total PACCAR value. We also support the growth of our dealer network by providing inventory financing and business expansion loans. PACCAR Financial Services offers a full range of finance products that provide a strong competitive advantage. We have excellent access to customers through close relationships with the truck divisions and dealers. The online services platform is considered best-in-class with industry-leading e-contract and e-signature functionality. PACCAR's excellent credit rating and strong balance sheet allows us to offer competitive interest rates to customers. and we can maximize resale values through the network of used truck retail centers in the U.S. and Europe. PACCAR Financial Services consistently deliver superior return on assets when compared to peer companies. Over the past 5 years, PACCAR Financial shown in green, has outperformed the peer group every year with average return on assets of 2.6%. And last year, PACCAR's return on assets was 47% higher than the peer group average. PACCAR achieved strong parts and finance growth over the last 15 years. The global parts opportunity in the markets we operate is $70 billion, and we will continue to make investments to grow our share. The future is bright, and I hope you feel the passion. When we do the right things to take care of our customers, we will continue to grow. These 5 actions provide a nice PACCAR Financial and part summary. Thank you. And I'll now turn it over to Brice.

Good morning, everyone. I'm Brice Poplawski, PACCAR's Senior Vice President and Chief Financial Officer. PACCAR profitably -- PACCAR's profitability reflects the industry-leading product quality, financial discipline and continuous innovation. In 2025, PACCAR celebrated a 120-year history with superior financial performance, including 87 years of consecutive net income and 85 years of consecutively paying a dividend. For the year, our strong financial performance was highlighted by revenue of $28.4 billion, adjusted net income of $2.6 billion and 144,200 trucks delivered. PACCAR's increased its regular quarterly dividend by 8% per year on average over the last 10 years. Summarized here is our business outlook for PACCAR's first quarter and full year 2026. Overall market conditions for the year are mostly positive and ones in which PACCAR can perform well in. First quarter deliveries are expected to be around 33,000 units with gross margins in the 12.5% to 13% range. Part sales will grow 2% to 4% and financial service performance is expected to remain strong. For the year, parts sales growth will be between 4% and 8%. Capital expenditures will be $725 million to $775 million and R&D spending at $450 million to $500 million. The market sizes for the U.S. and Canada 230,000 to 270,000 units and for Europe, 280,000 to 320,000 units. This guidance for the first quarter and the full year has not changed since our first quarter earnings call a couple of weeks ago. PACCAR's balance sheet matches the premium quality of our trucks. The company has no manufacturing debt and a healthy cash balance. This supports our excellent A+ A1 credit ratings and the ability to fund future R&D, capital investments, and dividends from operating cash flows. Financial service assets were about $23 billion and approximately 51% of the balance sheet. Continuing with the market trough and peak comparisons like Preston showed earlier, this slide compares our truck parts and other gross margin dollars. Starting on the left, the market trough of 2020, gross margins were $2.1 billion, and they grew 70% to over $3.5 billion last year. On the market peak side, gross margins were $3.6 billion in 2019 and grew 80% to over $6.4 billion in 2023, impressive growth. This slide shows PACCAR's Truck, Parts and Other operating profit and margin percentage over the last 15 years. Profits are the green bars with margin percentages, the yellow lines. and taking a longer view as PACCAR likes to do, the white lines show 5-year averages for margin percentage. During the last 5 years, operating margin percentage has averaged 12%, solid growth from the 10% and the 9% over the prior 5-year averages. And the margin dollar averages are also showing nice growth at over $3.4 billion in the last 5 years from about $2 billion and $1.5 billion in the prior periods. PACCAR's profitability is benefiting from investments in new truck models, good global performance and continued strong parts growth. PACCAR generates excellent cash flows from operations. Operating cash flows grew at an annual average rate of 7% over the last 15 years and was $4.4 billion last year. Due to PACCAR's strong cash flow and balance sheet, PACCAR regular quarterly dividend shown in green, have increased steadily over the last 10 years to a record $1.32 per share in 2025. PACCAR has also paid an annual dividend each of the last 10 years. Total dividends declared were $2.72 per share and $1.4 billion last year. Over the past 10 years, on average, PACCAR has increased its total dividend at a compound annual growth rate of 11%. PACCAR SG&A as a percent of revenue has ranged from 1.8% to 2.8% over the last decade and is significantly lower than our peers. This is a testament to PACCAR's lean and efficient organization, strong financial discipline and fully independent dealer network. PACCAR has a very effective capital allocation strategy. We made capital investments in the business to drive future growth, following a disciplined process, emphasizing high ROI projects. In 2025, PACCAR's dividend yield was about 3%, which is almost double the average yield over the last decade. PACCAR has a preference to return capital as dividends rather than share repurchases. The company returns approximately 50% of net income each year in total dividends. PACCAR continuously evaluate strategic merger and acquisition opportunities. and is highly disciplined in our screening and evaluation of potential targets. And finally, the company has a fully funded pension plan, which all of our employees greatly appreciate. PACCAR's investments in capital projects in R&D in 2025 of about $1.2 billion was almost double the investments we made in 2016. And over this period, capital investments in R&D totaled $9.3 billion for 2026. Total R&D and capital investments are projected at $1.2 billion. This reflects investments in our next-generation clean diesel and electric powertrains and increased manufacturing capacity to support higher market shares and truck markets. These investments will also support future growth. PACCAR is an industry leader in the financial performance when compared to industrial peers. Shown here are 3 key measurements PACCAR uses to gauge our results. Starting on the upper right, PACCAR had the highest average return on invested capital, achieving returns of 55%. On the lower right, total -- cumulative total shareholder return over the '22 to '24 period, PACCAR had the highest return at over 100%. And on the lower left, PACCAR had the third best return on sales over the last 3 years. This is industry-leading financial performance that PACCAR is proud to achieve. PACCAR's continue to grow profitably. We continue to gain share in the markets in which we operate. Our disciplined capital investment strategy allows us to invest in high ROI projects to develop new products, and improve our factory efficiency and flexibility. And the growth in our parts and finance businesses has put a new higher floor on profitability throughout every part of the business cycle. PACCAR is the leading industrial company. We have demonstrated improved cycle-over-cycle performance and our advanced manufacturing strategy is highly flexible. PACCAR has and will continue to invest in the right technologies, and we have and we will continue to demonstrate robust growth in our parts and financial services businesses. All of these actions covered today will drive excellent profitability and PACCAR is well positioned for the future. Thank you very much, and that concludes our prepared comments. And now we would like to take a quick break and then we will take questions from those here in attendance. Thank you. [Break]

So we thought that after we gave you guys a presentation and quiet was the room. So we thought then we would take the opportunity to do the Q&A with the people that are remote also -- that's great. And then Ken has a mic and test as a mic and they can just wander them around and what kind of take as many as we have time for. So with that, however you guys dig it up that way. We're good.

Jerry Revich, Wells Fargo Securities. I want to ask 2 questions. One, profit per truck has increased nicely cycle over cycle. We're in a bit of an uncertain environment where competitive pricing actions are less clear. Can you gentlemen and team talk about where you see the profit per unit heading longer term. And obviously, that embeds a competitive assumption there. So how do you think about that? And separately, for the parts business. Can you just unpack the leading-edge technology that you have now in terms of predictive analytics? How much higher could the market share on the first owner go to. And the second owner opportunity sounds really compelling, really interesting, but it feels like there's an opportunity on the first owner side with all the trials that you've done in terms of predictive analytics and how much higher could that market share go even on the first owner side.

How about I take the first part, you take the second part. -- you guys jump in or Brice, I want to jump in too. But if I generally think about this, I think about the cycle-over-cycle profitability increase. part of it has been because of new trucks that we've introduced and the margins we're getting to those trucks because they are better value for our customer. Part of it is because of the parts and finance company growth that we're getting. All those are factoring in. I think if you look at 2025, it was a very unique moment because we had a dynamic regulatory environment that we're operating from within. We had a soft freight market in the truckload carriers market. So those 2 things you put them together. It made it pretty strong headwinds in terms of how we are approaching the year and it was happening almost in real time as we experienced it, right, the tariff challenges came in early in the year and then changed again late in the year, that's kind of unusual. The other part of it is regulatory. And regulatory was uncertain through the year with many people thinking there wouldn't be a 35-milligram standard. With those things behind us now, stable on tariffs, we think, stable on regulatory environment and an improving freight market for the truckload carriers with spot rates up, loads up, then it feels like we should have an opportunity to deliver in 20 strengthening going towards that peak-over-peak strengthening model. what the final rules are for 2017 in terms of useful life and warranty, John that are to be determined. But you put all that together in '26 should be better, which will drive up cycle-over-cycle per truck performance improvements. And then part of it, obviously, is the parts business, which Kevin can address.

Yes. So I'm going to paraphrase a little bit, but everybody saw the $70 billion opportunity that we have, and then I use North America to split it between first owner and second owner. And your question was, can we continue to grow the share with the first owner and absolutely, we feel like the investments that we've made over time with the first owner been able to, one, build a strong distribution network around the world make sure that we can get the right parts to the right place at the right time. And then as we -- as I talked about, the AI of being able to leverage connected truck, the key with is we're providing excellent customer service and so when you think of customers go in for whatever level of service and they identify 1, 2, 3 extra things, the fact that we have those parts in stock and be able to take care of that customer we can continue to grow that share. And part of it with the prognostics is we can start monitoring. We are already monitoring engine performance and so we can proactively reach out to the dealer and customer when we need to see their truck in for service. And the more that, that customer feels connected to the OE around us monitoring their service, we're going to continue to gain more of that first owner loyalty. When we talk about then the opportunity to get more share with the second owner, we will -- when we get out to the lab, we'll talk about our connected truck platform. Every truck has been connected for 15 years. We continue to make improvements with that platform. One of the things we're identifying is being able to develop applications to host on that platform to be able to reach the second owner and provide that same level of service. One is trucks need to stay connected and then two, to be able to provide value because they tend to go elsewhere for their parts and service beyond the dealership as those trucks get into years 5 through 12. And so staying connected with that customer and with those trucks and knowing what their parts and service patterns are and then be able to provide that same level of service, about 99.9%, being able to manage dealer inventory and that high level customer service that we've done for the first owner start applying that to the second owner.

And then maybe I could just add Volume is always our friend, as you guys know well. Our best results in the financial history of our companies when we had the most record trucks delivered and that leads to better absorption in our factories, better pricing power we have over the customers. And also the parks are growing as well. So as we continue to produce more and more trucks, our parks will be growing. That provides a great platform for our parts business and an excellent opportunity. So we always take a long-term view, as we said before, and I think we expect to see improvement in net income per truck as we go forward. Yes.

Jerry, North America for parts, I think, was 15%. Europe was 13%. And then you said if you gained 1 point per year, that would be $3.5 billion in revenues for parts in 2030, correct? I think. But -- so my question is, can you help us understand what your market share was 5 years ago within North America and Europe to see if the 1 point per year is reasonable? And then I guess my second question, within that $3.5 billion, what's contemplated between like the first customer and the second customer because, obviously, there's a different -- in terms of penetration because obviously, there's a different revenue opportunity with the first customer and the second customer on parts aftermarket. So that's my first question. Sorry.

So that's right. $45 billion in North America, we had 15% share, 13% share of Europe. -- it has grown relatively steady over time. We've seen the -- I showed the 3, 5-year averages. So it's going faster in the last 5 years than it was the previous 5 years, which was kind of the basis for why just did the 1 percentage point per year. I also would say the reason we feel more confident is because of the tools that we developed, we'll talk connected truck when we go out to the lab because I think it's better to just walk through where we see the benefits of that connected platform and how it relates to parts growth. And then your second?

What's contemplated in that 3.5% versus first customer versus like second customer penetration? Is it changed? Does it change at all?

Yes. I would -- just in my mental math, I was thinking more like 60-40 first owner because we've done so well with First or loyalty is that growth. Even in the last few years with the softer parts market, we think as the market continue to strengthen that we'll see that grow. So I just mentally had that about 60-40. But the other thing just I should have even mentioned it when Jerry was talking was that we have 380,000 of our PACCAR engines that have crossed that 5-year mark that provides tremendous growth opportunity because there's nobody better than PACCAR to be able to service those PACCAR trucks with the PACCAR engines entered as well.

Okay. I guess just my second question just more broadly. I think in 2024, you were helpful in helping us understand like profitability per region and heavy versus medium, like I think you said last time the new products in Europe were double of what the old product was you talked about market share in medium duty and North America now being comparable to like North America, so just where the changes in profitability were by region and sort of product line. Is there any notable changes -- I mean relative to 2 years ago, adjusting for cycle? Because the one thing I did notice your market share in Europe is down, which I'm surprised given the new product launch you had years ago. So there's a lot in there.

Yes. I'll just start with a couple of general terms. It's -- the profit is relatively consistent. Two things that we've seen is, let's say, growth in rest of world, right? We continue to do well in Brazil and the DAF product line has been added to, I think, since we last met Australia and more recently in Mexico. So we still continue to see growth around the world. and then just our medium-duty product line, again, similar to heavy-duty when we launched all new products, a medium-duty product line for Kenworth and Peterbilt continue to do really well. And then Laura showed the Kenworth T880 high horsepower, both divisions, market share leader and vocational as continues to perform strong for PACCAR. In Europe. So the -- you mentioned the market share is yes. So that's where I was going to go. Yes, PACCAR DAF was the only OE to refresh the product line, complete refresh in '21. And so we are confident it outperforms fuel economy benefits from just interior space, drivability. And so we're maintaining our premium position in Europe as it's gotten competitive elsewhere.

Rob Wertheimer, Melias. I found the upside to parts to be the most surprising, I mean, in some ways, astonishing how much room you have to go. And so my first question is North America in the first owner. Is that gap because of engine? It seems not because the engine parts stream probably comes in after. But to what do you attribute the fact that your OE share is higher than your part share still after years of part success? And then I guess you touched on where you have more upside, but connectivity, I assume, will drive kind of more engagement throughout that. And I wonder if you could sort of talk about that.

Yes. I mean you touched on it is there's 2 things. One is first owners tend to come back to the dealer and included in warranty. There's less of war-related parts and more filters and things like that in that first year 1 through 4. And then as you get into the 5, just again, more years and sheer volume of components. That's why I wanted to highlight the 8,000 versus 12,000 in the parts spend opportunity that a customer typically spends first owner versus second.

Is the market share being below your OE share in North America, though? Is that just because you're still building out capability to serve? Or is that because they can buy a filter anywhere there's no major I'm just trying to kind of think about the upside there.

Yes, there's still -- when we think of the competition, you've got OEs and then you've got the WDs, the wholesale distributors. And so that's why you'll tend to see share different than what market share is, is because it's a bigger competitive pool.

In fact, there's going to be some offset there, right, for what Kevin just said is for the truck sale, you have it for the part sale, there's a choice in there. Your second part of your comment about connectivity is the key to tying those more closely together because the more value creation we have in our new connected truck platform, and the easier it is for us to provide that value of part right place, right time, like next-day, same-day delivery for parts and prognostics of parts and being able to engage directly with the fleet or the customer allows us to increase that share, which is where our confidence in growth comes from.

Angel Castillo with Morgan Stanley. I wanted to go back to the margin discussion, particularly on the parts side. So very impressive performance over the last few years. But as we think about going forward and continuing to grow that business, particularly on the second owner, where maybe TRP and some of these other parts of what you're providing might have a different margin structure. Can you talk about some of the push and pull of where ultimately you see gross margins headed for the parts business over time? Is that dilutive to margins? And are there other areas that may be more than offset that to continue to grow gross margins?

Yes. Great question. The way I think about it is if we can grow that share of the pie overall at that revenue growth that we talked about, I'd say margin is second. But I say that at the same time, say that as we focus on, yes, there's more I come back to those engines that are in that year 5 through 12 that needs service. Those come at a higher margin to help offset the growth in the all makes brands.

There's another piece there, which is also volume, right, and you get leverage on the assets that you have. So you have your 21 distribution centers. If you're shipping more through them, you're able to inputs lower margin on a gross margin standpoint, you get better leverage off of them.

And you would expect that if there's -- even if there is a difference in margin between an OE part patented part and an all makes part, they're still going to be accretive to overall TPO margin.

Helpful. And maybe switching gears a little bit to the capacity. So you've added some capacity. As you think about shifting or the shift that you've already seen of local-for-local maybe moving some more production from Canada or Mexico to silicone and Denton. Can you talk about the capacity of these 2 facilities to meet kind of peak demand, if we think about exiting the year toward a stronger, robust year, -- can they meet that with the capacity expansions? Or do you feel that there would be incremental need given the production shifts?

Very simple answer, yes, they can meet the demand.

Jeff Kauffman from Vertical Research Partners. -- kind of a longer-term question on connectivity we were talking about it 5 or 10 years ago when these platforms started rolling out. I think autonomy was just a twinkle in everybody's eye back then. Can you talk about how connectivity has evolved and kind of really what's driving it now? And I remember 4, 5 years ago, you said, "Hey, I think connectivity can be its own division, own profit center on item. Has that thinking evolved? Is it more of an enabler for other businesses? Or can connectivity be its own business unit basically?

Yes, that's right. We did talk about that. We still think about it that way. If you go back 5 years, you think about the typical -- let's just use a fleet customer. They would buy the truck, they put it in service, and then it would get all of the telematics hardware installed and then connected. Fast forward a couple of years, we provide the telematics hardware, but they still provide whatever display they use for multiple services. Now fast forward, and we think about as it's a connected truck platform. where all of that is OE driven. Then on the telematics side is there's the number of players you've seen some come and go over the years, but there's always 4 to 5 key telematics providers -- we also see that the fastest growing through AI is that third-party app developers are -- have been looking for a platform to be able to host content. And that's what we see as really evolving that we'll talk about and has a relevance to parts growth is that the biggest thing when trucks. Telematics has tended to be around fleets, midsize, large-sized fleets, smaller customers tend not to go to those telematic providers. They get individual services. as these third-party app developers, they can develop bespoke services that becomes available to a broader population of customers, the smaller customers. The second thing is as trucks move from first owner into second owner, unless there's value there, the second owner tends not to keep the truck connected. We now have the ability through a connected platform add that value not only to first but second owner, trucks stay connected, and that gives us that opportunity, as Preston said, to connect the dots between the providing parts and service to a customer that has a connected truck.

So simple answer, yes, it can be a separate profit. The next layer into it is it also feeds into all the other parts of the business. So it does feed into the parts growth. It feeds into the financial services growth it feeds into how we take care of the customers and have a tighter relationship with them, which extends not just at point of sale, but through first owner and second on her life. So it's -- tentacles reach everywhere, Jeff.

Kyle Menges from Citi. I wanted to ask on the MX engine, just with EPA 27 getting pretty close. I'm curious just how you're thinking about the cost and performance and we've heard rumblings on, I guess, varying costs and maybe technologies being deployed by you versus competitors. So I would love to hear just how you think the MX is being positioned? And then just secondly, MX engine penetration has stalled out a little bit just as a percent of your truck builds, could EPA '27, do you think be a catalyst to increase that penetration?

Sure. Let me start with MX in the 2027 engine families. 35 -- the EPA right now has indicated that they will have introduced some flexibilities to the previously announced regulatory mandates. Those flexibilities are likely to be around warranty and full useful life at a minimum. They have indicated also that they will hold 35 milligrams as the numerical standard for criteria emissions -- that -- depending on how they roll those out and we expect that at the end of March, it will dramatically affect what the cost of -- to the customer is of new engine families. No matter how you slice it, fully complying with 35 milligrams is a massive technical challenge, and it does require new equipment. There are multiple approaches to it. They all have some level of pros and cons to them. But we're very happy with the robustness of our path that we're taking. We'll have more about that later in the year and specifics on the engine. But we have a tremendous track record in emissions compliance and frankly, integrity of that -- of meeting the emissions intervals, and we continue to do. We intend to maintain that through the launch of this engine. And again, look forward to this engine as a significant barrier to entry into our markets and a competitive advantage.

And I would just add to that, that we maintain an excellent relationship with Cummins. I mean the partnership has never been stronger in my memory. So great relationship with them, great development opportunities with them. that's working well for us even now. And we do think that in the years upcoming, the platforms that John teased to you will be opportunities for growth for us.

Steve Fisher, UBS. Just a follow-up on that 2027 question. It was really interesting to see in your slides and videos how AI is being used by you in the quality inspection. And so I'm assuming that warranty experience after you roll out these products is going to be very important. So I'm curious how you are using AI to target that particular rollout? And is there any particular metric on warranty experience that you can anticipate from here relative to prior rollouts. That's the first long question. The second one would be on autonomy. And I'm curious how you're thinking about the timing of commercialization of autonomy has changed over the past couple of years?

So let me start with your second question first. Our standard answer on, I'll call it, the commercialization and the adoption curve on autonomy is -- it continues to be when it's ready. Because it's -- we feel it's somewhat irresponsible to try to predict that and set development goals on delivering that until we want to see that is there. before it goes. You can see that the underlying technologies around us in the robotaxi world, you can see the progress of the individual developers and where they are and since overlay robotaxi to this, and you get a sense that it's getting very real very quickly. And we also operate in the Permian Basin right now under a different set of situations that don't require the same level of fail operational because of the speeds. Autonomy is here. It's pulling loads without anybody in the truck every day.

So it's starting to commercialize with your latest example, right? We have sold trucks with into an autonomous application without drivers, so that's commercialization, just a tip of it. We want to be careful, right? You look at the car industry, there have been a lot of paints and moves. And I think that we don't want to be the tip of the spear in that case. We want to prioritize safety and effectiveness of the capability while we develop it, also different than the car industry is that the partnerships we have with like Aurora Stack, Kodiak, we need to watch their development curves, too, and see how they play in this space and come along with that. And then as John and team have developed an autonomous vehicle platform that can integrate those different drivers. It gives us a space that I think is unique. And that, again, the make, build, buy, partner approach to things, allows us to be participative without it being like the kind of capital raises that say, Waymo is doing, and it allows us to watch technology, be ready when it's there and commercialize it to our advantage when that time happens. But there's no reason to pick dates, right? Technology should develop when it's safe when it's ready, when it's regulated and when there's an understanding of the litigation that comes along with it. So that's part 2 of your question, right? Do you want to get your part 1 of your question was engine introductions and how do we think about the use of AI in developing product, right? Is that a fair summary?

We've launched over the -- even the last 2 years, really an explosion in our ability to monitor product in the field and prognosticate understand failure modes and prognosticate when things are -- what's happening in the engine down at the component level. It's been a wonderful journey, actually. That will continue. That will change the way we roll out and launch engines. We -- how you monitor and how you keep a new engine customer up at all -- under all circumstances. So actually really look forward to the new era and the capabilities that are here now that we're using today, and we'll continue those into the new engines.

And I highlighted the inspection in the plant with the AI monitor inspection. So we should get better assembly quality. We have opportunities as we go in as said, on infant care with monitoring for insight. And so there we are. insight into any early issues so that we can get them early and AI will gives us insights into all of that. So warranty departments are using it. assembly manufacturing operations are using it. And of course, they're using it in development as well. .

We just think about from a software standpoint, the ability to run hardware in the loop, software in the loop capabilities using AI algorithms where you can have the model developed by the agent and then run those systems in place repetitively so you can test case way better than we used to be able to do. That's just a for instance of how you drive down warranty costs. So it is a real thing and it is today.

So could you spend a little bit more time fleshing out your flexible manufacturing road map? And if you can talk about how that is changing your profit per truck?

So over the last several years, as we talked about last night, and we've really been on this journey to add AGVs and other flexible manufacturing capabilities into our plants. That has given us the ability to build more models, more configurations, more efficiently and effectively on the line. We continue to build that out. It was a real help for us this last year as we decided that we were interested in our best interest to do the move around local for local, move medium duty into U.S. plants. . How it continues? It's really an ongoing evolution. We keep finding new technologies come out. They become more scalable. They become more affordable. They become more usable and flexible for our operations, and we'll continue to deploy those as they make sense into our operations. And of course, all of that does lead to being more efficient, being higher quality and will enhance margins throughout.

So think -- another way to think of it is the journey of efficient manufacturing is not new. We've been working on that journey forever. The difference between automotive and truck or at least our trucks are their customized bespoke is your word, right? And so if they're customized, then you need to have flexible manufacturing. We've always had that. But it's been more labor dependent in the past. Like, for example, you would use human beings to paint chassis because a chassis could have 7 different suspensions, 5 different transmissions, 15 different driveline links, and you couldn't make the robot actually get in and see exactly what's going on. But a recent example, it was in one of our videos, is [indiscernible] just introduced robotic chassis paint because we now have the digital capability of the model around the chassis, and we can now paint almost the entire chassis without human interaction. So it's an efficiency gain. It allows us to keep the customization. That's just like an efficiency. The benefit of that is then you can say, well, before you were building only T680s, let's say, at [indiscernible]. And now with that digital capability, you can bring in a medium duty to that plant and work it with the same technology. So the technology gives you flexibility and efficiency simultaneously. We see ourselves always on that journey, right? This is not something we started a year ago. It's something the team has been working on -- aggressively working on. We saw a milestone of [indiscernible] in the end of last year where we could move the trucks around seamlessly, and we can share that with you because you can kind of understand that and then we'll see that journey carrying forward over the coming years.

Great. Then second question on the new engine platform and you guys are teasing -- so just a clarification. So is this in addition to your prior generation MX engines? Or is this something brand new. And then you talked about a 40% efficiency improvement, I think, over the last like 20 years. Is that sort of run rate the way we should think about the efficiency of these next-generation engines?

Yes, starting with the second one, the internal combustion engine, despite being 126 years old, the diesel cycle combustion engine is a pretty miraculous thing, and the efficiency gains that have been eked out over time continue to improve. We'll watch that continue to advance with hybridization. We'll watch -- it's not done yet. I'll say that. We are on, I'll call it, conventional technologies experiencing diminishing returns. But again, features like hybridization, all that will take it to a different level. Your other question on the variety of engines that we produce and how we are fortunate to have extremely flexible engine manufacturing facilities. If you've had the chance to visit our Mississippi plant, we are capable of making all variants of engines through time. So we -- the 11 and 13 -- MX-11 MX-13 will continue. They will continue for select markets. But when you make the transition to 35 milligrams and the -- again, the standards right now have full use of life requirements that are extreme, and those will carry forward on the new engine families.

So we'll have flexibility, but the new engines that we're working both alone and in partnership with will be really game-changing in terms of effectiveness and how we produce them efficiently, kind of a fun thing to look forward to. Good to have things to look forward to.

Michael Feniger for Bank of America. Everyone I realize message is higher highs. I get that. And net income will be higher next cycle. I'm just kind of curious to put a finer point on it. can we see higher highs on the gross margin side? Obviously, 2023 in the slides you guys showed, the peak, there was a lot of pricing in there. I'm just curious with some of the layers you guys provided with local-for-local manufacturing and parts and new products. Are those margins just out of reach? Or do you think that's more cyclical? So just kind of curious to put that in context when we're thinking about cycle-over-cycle?

I think it's a great question. I think if you just been sitting here to December of 2022, could we have predicted what 2023 is going to look like? Probably not. So to ask us to go on record of what it's going to be in the future. I think you don't -- we don't know all the confluences that happen into it. If we have a confluence again, of factors, call that tariff advantage, call that market strength, call it, supplier limitations. And yes, they can happen again. if it's more abated than that, more moderated than that, then maybe there's moments like that, that are hard to get back to the absolute truck margin side of it. But maybe as we grow the parts business overall over time, like Kevin has described, it results in a total TPO margin that approaches those things.

And of course, if the markets are stronger, that always helps us as well because we are well capacitized for higher hires, more capacity allows us to produce more trucks and get more pricing power, as I said before. So that will do a lot for us. So it's possible we could do better, but we obviously don't give that kind of guidance. But we're excited for the future with all the things we showed you today. Yes.

And just lastly, I mean it seems like there has been now this view that we will see some prebuy. I'm sure you guys are working with suppliers to get ahead of that. I mean, is the view that it robs from 2027? Or do you see a view where even with a pre-buy, which usually robs from that year and you see a little bit of a let down the next year? Can we actually keep marching higher on production in 2017, even with an emission standards change, which usually you don't kind of see?

I think that just by the very definition of saying a prebuy, you're taking a truck out of '27 and putting it into '26. So what you're really asking is, is it likely that the market strengthening will continue for the year beyond '26 rather than does pre-buy affect because by definition, yes, it affects it. But if the markets continue to be strong, then we can have a good 2027. So if the economy is strong, if the trucking economy is -- continues to go forward, if the changes or finalization of the rules, in the NPRM around warranty and useful life are moderated, then there's no reason to think we couldn't have a very good 2027. It obviously does depend on how anxious customers get in 2026 and how significant the prebuy is in terms of what it does to how much pull ahead is there. And then pre-buys going to be different. They can be a month or they can be a couple of quarters. So I think there's a lot of uncertainty around how those will play still at this point. And I think that's where a lot of -- not just your focus, but our customers' focus is to, it's like what's going to happen in the coming 3 quarters of the year because Q1 is effectively behind us, everybody, right? And so now it's a function of what's going to happen, how quick does Q2 turn on? And what does it look like?

And if the year finishes around our midpoint of our guidance, that's around a replacement cycle. And so that's another normal year.

This is Tami Zakaria from JPMorgan. I wanted to follow up on engines. Correct me if I'm wrong, I think about 1/3 of your bills now have PACCAR engines. How do you expect the mix of that to trend over time? Because you said you want to gain share in North America, right, like some mid-30%. So do you have capacity in engines to drive that mix over time as you gain share?

Yes. W do have the capacity.

The 1/3 of the mix or expect that to go. Is there like a target to go to?

Yes. The way we look at it is, right, we want to provide a good portfolio of engines for the customers, and that's what we're doing today. And that lets them have choice around horsepower to markets depending on vocational otherwise. But with the new engines, we would expect that they will increase share, yes. And we can support that in our factories.

Got it. So I wanted to ask that gross profit question in a different way. hoping to get a different answer, more detailed answer. I think, Preston, in one of your slides, you had 2014 versus 2025 comparisons on similar number of deliveries. In 2014, your gross margin was 13-ish. You ended 2025 with 13 and change. As you look to the next 5 to 10 years, should you expect -- should we expect gross margin to remain at those levels on similar builds? Or is there a way to structurally improve that 13 and change to something higher, even if builds stay at these levels?

Super question, right? So think about what 2025 was, right? Yes, you're right in the margin comparatives of the years. But 2025, we experienced most of the year with a unique environment in a tariff world where it was thousands and thousands of dollars that we had to absorb as a truck manufacturer compared to our peers. I don't think we've ever had that. It certainly didn't match up to the prior cycle. So that's a unique difference. Then if you look at the general cycle over cycle margins that we've shown over time, they do go up, and they should continue to go up because, one, obviously, parts is accretive. We spent a lot of time sharing the parts story and how that helpful. right now it's moved in terms of total profitability. And so that should mean that margins will go higher in cycles.

Laura, I'm wondering if we can talk about factory productivity. So in the past, you folks have targeted 5% to 7% productivity improvement, reduction in labor hours per unit. How much of a runway do you have going forward to continue to drive that? Is there an opportunity for an acceleration given the new technologies that you're showing us at the factories and potentially use of AI for quality, et cetera. Could that actually accelerate for you folks going forward?

I think there's always opportunity to improve efficiency as we gain more skills. We design trucks. With that in mind, we deploy new technologies. So I would say that continuing along the path of our historical path makes a lot of sense because we were also doing those things in the past. Can it accelerate, really, that's going to depend on how we deploy, how we think about AI, how we think about that flexible manufacturing and where do we decide to make investments as we look at our trade-offs and where we invest our CapEx and R&D.

And Jerry, I think A couple of years ago, we wouldn't have said the ideal state for flexible manufacturing was to rearrange production from Canada back to the U.S. vice versa, right? There was other things. You go back 5, 6 years ago, we were thinking about if regulation stayed full speed ahead, the need to build battery electric trucks in our current factories as we look towards autonomy, was really providing the flexibility to handle all of our product configurations. We now have the strong added benefit of the flexibility of moving product lines. And so I think those are those efficiency will continue to get, as Laura said, but it's that flexibility to really accommodate anything that's happening in the environment around us that's allowed us to pivot and quickly adapt that's really a strength for us now.

Think about we don't know -- John showed you an idea of the mix of EV, hybrid EV and diesel powertrains in the future. And building those in the same line is a huge efficiency gain compared to building a separate stand-alone facility where you need a separate EV facility. We don't know what the next regulations are going to be around EVs. We know what they stated to be in Europe. So having flexibility to build them in a single factory, superefficient, supereffective. Like our view of electrification is we want to create models that are economically viable, independent of regulation. That's the holy grail, right? If you can get hybrid trucks to be more efficient than diesel trucks then our customers will buy hybrid trucks. If you can make EVs more efficient, then they'll buy EVs. They're just looking for total cost of ownership optimization. Our factories need to have that flexibility. So as those technologies move along, we can build them where we need to and we don't say, "Oh, we need to spend another $500 million on a brand-new factory. The benefit of what we've done is we don't have to take that kind of approach, and that's the efficiency gains.

Can I ask separately on the parts side, Kevin, in terms of to deliver the goals that you folks laid out for us, what kind of investment do we need from the dealer group? Do we need to have a meaningful number of new smaller locations? Do we need assets invested to go from $20 billion to some number that's meaningfully higher what do we need to see from the dealer group to enable the type of revenue capture that you outlined?

Yes, I think it's a very consistent when I showed the distribution network, not only our investments in PDCs, but also dealer locations and TRP stores, it's just more of that. One of the benefits of that map I showed with the connected trucks running over the month, we can look at that through a day, time of day, see where all the traffic patterns. In the past, dealers used to use registration data to go, should I expand? Should I add a new location? Today, we have the connected truck data. We can give them real-time information to help them with, are there any white spots or do we need to grow the capacity out of current locations. And so they consistently are making the investment. So that's why I said, foundationally, we have got the network and the distribution. So as we grow the opportunity its parts, it's about expanding the relationship and leveraging the connected truck is to know where those second owners operate to continue more of those foundational investments with our dealer network. And we feel strongly we've got the best dealer network in the world.

And we were just with them last week and they're putting in record levels of capital into those businesses, and that does support the parts growth thesis.

Great. Steve Fisher, UBS. Just another question about margins, but maybe limited to the 2026 rest of year outlook. So as you sit here, I won't ask you for a number, but maybe a directional trend. I mean as you sit here today, are we thinking that as volume builds over the course of the year, that and price cost dynamics play out? Do you think Q1 is the sort of the low point on margins? Or does it still depend on what you're seeing from the competitor strategies around pricing?

I would say it does depend on what the competitors do, obviously. There's some impact on that. But I think we do feel like Q1 should be an acceleration from Q1.

And certainly, we're also expecting more volume, as we said before. So that always helps us as well. And the parts growth is going to be accelerating. All those other factors that should help us do better.

Right. A couple of big picture questions. Maybe this is actually slightly related to Steve's question, but Obviously, historically, you guys have been the premium product. You sell at a 10%-ish premium to everybody else. But clearly, you now have some benefit relative to your manufacturing footprint relative to others. So I'm curious as we go forward, is it more important to you to maintain that 10% sort of premium positioning in the market? Or I noticed Brice earlier said something about the importance of the installed base growing I feel like you kind of have a choice to make. You can grow your installed base more quickly in this scenario or you can maintain your premium pricing. And I'm curious how you think about that going forward?

I think our ambition is to have both and it's some balance between the 2. And I think it's not so precise as to say that we're ambitious to gain only share at the cost of margin or only margin at the cost of share. We watch the market. It's a daily discussion about where we're going. It depends on our supply base and what they can provide through the course of the year. It depends on the amount of energy in the market. And so I think it's hard to really give you a specific answer, except that you can see that our long-term view, which is how we think right, less focused on what's going to happen in Q2 of this year. We're focused on the strategy of a successful company that is a leading industrial that will grow share and margin over time. That's really the goal. And so that doesn't play out in moments that plays out in years and in a management team and an entire team at PACCAR within the network of letting growth accelerate gradually. And so I don't think we don't want -- I don't think I know we don't want one or the other. I know we want and expect to achieve both over time.

Okay. Fair enough. And unrelated, but I'm curious, again, you talked about the fact that the rollback of this endangerment clause won't change your life at all. But 1 of the potential outcomes here is that it may be possible to make a less fuel economic -- sorry, is that a word? It's possible to downgrade the technology and sell a cheaper truck at a cheaper price that doesn't get as good fuel economy. It's possible that some of your competitors may choose to do that. And I'm curious how you think about that because, again, if you're going to be the premium producer, maybe you want to have the best fuel economy. But if you want to make sure you're relevant to all competitors, you may have to provide a similar product. How do you think about that? .

I can do a swing and then John can feel free to add. But effectively, Fuel costs are so much of a percent of operation for our customers that without great fuel economy, class-leading fuel economy, you won't be in that premium position. I mean, if you made that technology trade off and went that far backwards, I think the total cost of ownership would suffer greatly. When you think about the acquisitional cost as a percentage of total operating cost, it's much lower than fuel.

Yes. I think if you know and love your customer endangerment has nothing to do with fuel economy. It's all greenhouse gas.

Yes. And just when Laura showed the AI with the truck configurator. there are so many different combinations of options and option combinations. When we were in greenhouse gas Phase 1, Phase 2 and then the pending Phase 3, it was really about not a different truck it's more about the combination of options that go on each individual customer to meet whatever their need is. As Preston said, all of them are after fuel economy improvement. So it's really those right combination of options, and that's where we're able to leverage to really dial in per customer the right configuration.

And that's why the administration has it right, right? From a truck industry standpoint, they don't need to regulate the GHG. We're going to do this because it's fuel economy based. And so that lets the market make the right decisions for itself instead of sending standards that may or may not be most efficient for the economy that we all live in. But if they just say, in our case, where you're motivated by the economics, then they'll work out well because we'll produce the most efficient, lowest GHG highest fuel economy, trucks. They get that. All right. Ken, our boss is telling us that we're out of time. So we would like to say such a sincere thank you for all of you that joined us this morning. And for those that are sticking around for the next part of this, fantastic. Appreciate the questions. Love the dialogue, really fun to have smart people asking us questions, and we look forward to some more time with you as we go, but we'll end the formal session of the meeting. Thank you all very much.