PACCAR Inc (PCAR) Earnings Call Transcript & Summary

Good morning, and welcome to PACCAR's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's call is being recorded, and 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, and welcome to PACCAR's Second Quarter 2026 Earnings Conference Call. All lines will be in listen only mode. My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Preston Feight, Chief Executive Officer; Kevin Baney, President; and Brice Poplawski, Senior Vice President and Chief Financial Officer. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings and the Investor Relations page of paccar.com. I would now like to introduce [ Resi ].

Thanks, Ken. Good morning, everyone. In the second quarter, PACCAR's outstanding employees did an excellent job of increasing production to provide our customers with highest quality trucks and transportation solutions in the industry. Their hard work, high performance and dedication is enabling PACCAR to continue increasing build rates in our factories around the world. PACCAR's second quarter revenues were $7.5 billion, and net income was $752 million, an increase of 24% from the first quarter. These results were driven by strong truck division performance. PACCAR Parts performed well and achieved record quarterly revenues of $1.75 billion and quarterly pretax income of $417 million. PACCAR Financial also performed well, achieving pretax income of $124 million. Now looking at this year's U.S. and Canadian heavy truck market. The U.S. economy is growing and the truck market is strengthening as freight rates have increased and regulatory clarity has been provided. First half retail sales were 105,000 trucks, and we expect that the second half could be around 145,000, resulting in a full year market size of around 250,000 units. In Europe, the economy is growing modestly and the truck market is healthy. We project the 2026 European [ above ] 16-tonne market size to be around 310,000 trucks. [ DoT's ] premium trucks are providing customers with the latest technology and the best operating efficiency. This year's South American above 16-tonne market where DAF trucks are desired by customers for their durability and advanced technology is expected to be in the range of 100,000 to 110,000 vehicles. In the second quarter, PACCAR's truck deliveries increased from 33,000 to 38,700. Third quarter deliveries are estimated to grow and be around 42,000 as build rate increases are partially offset by the normal European summer shutdown period. PACCAR's truck parts and other second quarter gross margins increased from 13.1% to 14.4% due to very good overall performance. Third quarter margins are forecast to be a strong 14.5% and then further increase in the fourth quarter. PACCAR's exceptional range of trucks, compelling parts business, industry-leading financial services and customer-focused product development strategy, position the company well for an excellent second half of 2026 and [ the ] future. Kevin will now provide an update on PACCAR Parts, Financial Services and other business highlights. Kevin?

Thank you, Preston. PACCAR Parts achieved record second quarter revenues of $1.75 billion and good profits of $417 million. Gross margins increased to 29.8%. Increasing truck utilization is beginning to lead to more parts and service activity and we expect higher parts sales growth in the second half. Revenue from PACCAR Parts Fleet Services Program grew 8% in the second quarter, which is an indicator that customers are beginning to increase parts purchases. For the full year, we estimate parts sales growth in the range of 3% to 5%. PACCAR Financial Services pretax income was a robust $124 million. Their high performance is a result of steady finance margins and strengthening used truck markets. Earlier this month, the EPA clarified a key [ NOx-related ] emissions regulation. The clarification extends the time line to introduce 35-milligram NOx engines. Next year, customers will be able to buy the current generation of engines with an associated nonconformance fee. This will be beneficial for customers as it will ensure new technology is fully validated before being purchased by customers. It is also likely to have a positive impact on the size and strength of next year's truck market. This year, PACCAR is planning capital investments in the range of $700 million to $750 million and R&D expenditures in the range of $450 million to $480 million. PACCAR is investing in customer-focused technology and innovation projects, including advanced flexible manufacturing that enhances efficient [ local ] for local production, the development of next-generation clean diesel engines, industry-leading hybrid and electric powertrains and integrated vehicle -- connected vehicle services. We are looking forward to the success that our customers, dealers [ and ] PACCAR will experience in the coming quarters and years. We are now pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of Steve Volkmann from Jefferies.

Thank you. Good morning, everyone. I'm wondering if we can dive in on the gross margin, I think this quarter came in a bit stronger than you had expected. What are the moving parts that would explain that?

Sure. There's a couple of things. Thanks for the question. Probably one of the things is volume of trucks was higher. And then most significantly, I think our local-for-local production is benefiting PACCAR. I also think that the team did a fantastic job in cost [ controls ] or price [ versus ] cost was favorable for us, even more than we thought it would be. So that was also a positive. Those are the biggest majorities of what influenced it. And as I said, local-for-local production provides some tariff benefits to us.

Okay. Great. And what are you seeing in the market relative to pricing because you have a little bit more, I guess, local-for-local than some of your competitors. Are you seeing overall pricing kind of coming up in the market, which gives you some opportunity?

Yes. I think what's happening in the general market is our customers are starting to [ experienced ] better operating conditions for themselves. Spot rates are up 20%, contract rates are up 6.5%. So we're seeing favorability for how they're operating their businesses. I think the driver pool has become a little bit more constrained, which is helping them realize operating benefits. And I think we all share in that together. So we've seen some favorability in terms of how we're able to price trucks as we look forward.

Your next question comes from the line of Jerry Revich from Wells Fargo.

I thought the profit per truck performance was especially strong in the quarter. I'm wondering was there any i.e., refund benefit or anything along those lines that contributed to the really strong cost improvement?

I think if you look at that performance, it was largely driven from a net price cost benefit. And the biggest part of that was really the team's operating effectiveness and good warranty performance by the team, efficiencies to the local-for-local, but we did have a net tariff benefit. We had some tariffs, we have to pay, of course, with the raw material stuff, and then we had some offset tariffs, but the net was -- the bigger part of it was really operating strength.

Is it possible just to quantify the refund that you saw in the quarter, just to put a finer point on the run rate profit per truck?

No, we didn't put that out. And we think that it [ will ] remain to together to think that the tariff position we had in the second quarter will look similar to the third quarter.

That's really great to hear. And then what we have been hearing until the [ EPA's ] due ruling was that you folks for the fourth quarter delivery were pulling back discounts. And so the price realization was set to prove by over $5,000 in the fourth quarter versus the third quarter. Could you just [ update ] is that still happening considering the more phased approach to the EPA '27 rollout?

Well, I think the EPA has done a very nice job in paying attention to what the industry's needs are. I appreciate the work the administration has done in helping make sure we put fully validated products out into the marketplace. So it's been nice to work with the EPA and the customers and the administration to put a government business relationship in place that work is working well. I think what they did is they took not all of the pre-buy, but they kind of smooth it, and I think it creates a stronger position for 2027 to be a good market for the industry. And so I think that's kind of how we experience in that. And if it's a good market for our customers, then it tends to be a good market for us as well.

Your next question comes from the line of Tami Zakaria from JPMorgan.

Good morning. Congrats on excellent results. Two questions. The first one is on gross margin guide for the third quarter. It seems like you're expecting somewhat sequentially flattish gross margin despite deliveries being higher and North America probably being a higher mix given the shutdowns in Europe. So what underpins that margin guide? Why wouldn't margins be better sequentially? Is there any cost headwind you're expecting in the third quarter that you didn't have in the second quarter?

Great question, Tami. Thanks for asking. There's a couple of things that factor. One you're fully aware of, right, which is that as truck increases, it has a ratio mix to parts and that increase has an impact. So that's why that's around 14.5%. And there also happens to be in the third quarter where probably the mix of our actual trucks we're building is shifting a little bit. So maybe a little less occasional, a little bit more fleet trucks that we're building. So put those two things together and we stay with the strong margin. But the nice thing is with the higher build, we see profit increasing in the quarter and continuing to strengthen through the year.

Got it. That is helpful. And then my second question is on the [ NOx ] compliant engine. If I remember correctly, you expected that to be, call it, [ 8 ] to 10,000 more expensive than a noncompliant one. But with the NCPs that have been announced, it seems like the fine could be lower than the cost of a compliant engine. Just wanted to know if that's what if that's how you interpret it? And if so, how could that impact your customer behavior next year when the EPA of regulation goes into effect?

Tami, thanks for the second question. Good question. I think a lot of information came out just as recently as [ July ]9 on that when EPA made the announcement. It's still preliminary. It's a notice of proposed [ rulemaking ]. So there's a comment period that we're in. So things could even change from here. We'll have to see what that looks like. We probably won't get a final answer too much later in the year. But the way it's currently proposed is we would expect to see NCPs running at something like $6,000 to $7,000 range per truck. And as you noted, the cost of fully compliant 35-milligram engines would likely be higher than that. But I think a lot of it went into the discussion was the desire to make sure that the engines from all the manufacturers and engine companies were fully validated and the customers had enough time with them. So that was a big portion of what happened here. So I think the result of that is, as shared earlier, means that the end of the year will improve, and then I think it bodes well for a good 2027 operating condition for the customers and for us.

Your next question comes from the line of Rob Wertheimer from Melius Research.

Preston, you just touched on this, I think maybe Kevin did earlier, but the EPA shift or proposed rule may benefit 2027 a bit. And my question is a bit of a soft one, but when you talk to customers now, are people [ prebuying ] or do they just need trucks. There's a couple of things that may be tightened up fleet dynamics. And so I'm curious about maybe it's a soft question, but like what people are buying for. And then in the '27, those comments are around continued prebuy or more just that people have confidence in the engine and are shying away from it?

Yes, sure. Good question. Good to think through that a little bit. I think part of what's happening is they've been in a tough operating conditions. Our customers may of [ them ] have been in [ tough ] operating conditions for a few years now. That meant they've been careful with capital. They've probably got trucks longer than they would have wanted to. And you can see that, especially as a pronounced first half of this year. We really showed up in 105,000 trucks of retail. I think that now what's happening is they're trying to get back into their normal operating models. The trucks we're building today are the most fuel-efficient trucks we've ever built. So they're very helpful to the customers to operate them. The driver environment is the best it's ever been. The [ engine ] forming the best they've ever performed. So we have a great product line about there. And I think that since they have the operating capital to use, they'd like to be using those trucks since they're just starting to do that. it seems like it's going to ramp through the second half, like I said, probably 145,000 retail second half. And then I think we should expect a very healthy market in '27.

Okay. And then just the EPA, does that advantage any of your competitors more [ through ] of credit. Is that any headwind to market share or price in '27, I'll stop there.

Actually, I think that the -- maybe the situation is very leveling now and maybe to our advantage a little bit in that the NCPs are allowing everybody to make sure we get the right products out there validated so the customers get the experience with the products, they get the experience with our products and the quality of product we're able to introduce in a more gradual way versus it being step changed. But the fine level, if you look at the shape of the curve for the fines, for most manufacturers, they may be all manufacturers as it's currently written, the fine is going to be in that 6,000 to 7,000 range if they choose to offer today's products. And so that kind of levels it out also.

Your next question comes from the line of David Raso from Evercore ISI.

Your comments about '27, can you take us through your thoughts right now when you're speaking to your suppliers about the cadence 4Q into 1Q? And then second question on the parts business. Can you help us get a little more comfort with the parts growth exiting '26? Obviously, the back half of the year has to step up a little bit. Just trying to think that through and not to give '27 parts guidance, but just how to think about that growth rate exiting '26 as we think about '27.

Thanks, David. I'll take the first one, and then Kevin can cover the [ part ] one. We can add anything you want to the first [ 2 ] The quarterly cadence of the market is, as I kind of was just describing with Rob, is I really see that the market is ramping up, we're certainly fall through the third quarter, mostly full for the year, probably like 90% full for the year, even as we're ramping up production at a rate that's as quick as is reasonable to do. So that's kind of limiting the market size a little bit right now. So we will sell out of build slots probably in the next month or [ 2 ] here. And as we're out of build slots, then I think there will be carryover into 2027. And then I think because of the way the EPA implemented this approach, it will allow people to have the product they want next year, which I think they'll be in a good operating condition. And so it will help the cadence of the year next year start strong and probably be strong through the year.

And just to add to what Preston said, PACCAR was the first to announce build rate increases earlier in the year. And so a lot of strong communication with the supply base on the rate of increase throughout the year. So I feel pretty good about the support we're getting at the elevated build levels. And then on the parts side, David, the parts will grow at a faster rate in the second half based on the strength of the truck market. Capacity has come out, utilization has increased, freight rates have increased, we're seeing customers buying more parts now, a good indicator is that the larger customers are buying through our fleet services program. We've seen an 8% increase quarter-over-quarter. And then also Europe is running strong. And so as we see the stronger truck market second half of this year and into next year, we're confident with the parts growth.

Your next question comes from the line of Chad Dillard from Bernstein.

A question for you on EPA '27. So noncompliant is about $6,000 to $7,000. If you did comply with [ 3 ]5 milligrams, plus $10,000 assuming the EPA rules hold, how does that change your product strategy? So will you stick with the 200-milligram product and just pass that extra cost on the customers. Or are you sticking with going as planned with the 35-milligram product?

Great question. We are planning on selling the current product to our customers. That's the engagement we've had with many, many customers is that that's their preferred approach is to ease into this thing. So both for our excellent PACCAR engines and our partners engines [ Cummins ], and the plan is to be in 2026 selling those engines. And then getting our customers' experience with the 35-milligram engines as the year progresses. But as you noted, if the numbers stay where they are and at [ 6,000 to 7,000 ], there's still an advantage for them. in taking the current product. So it's kind of we think the year shapes up, which is, I think, favorable for the industry. I think it's a great approach for the industry.

Okay. Great. And second question is just coming back to tariffs and just to be clear, the [ EPA ] refunds, was there anything in 2Q or through the rest of the year? And then secondly, assuming the rules stay where they are today? How do you think about the year-on-year comps as we're trying to think through the bridge to 2027 for tariffs?

Yes. I think that the tariff situation has become a little bit more clear, Chad, in the [ 232 ] is durable. There doesn't seem to be any real challenge to that. I think it is favorable for PACCAR in that our teams, as we shared previously, but I was -- I've been in all our factories just in the last month, and I just can't tell you how cool it is to see those great people building every model of truck in the factories in Ohio and in Texas in a way that's supportive to the approach of the administration of building local for local. So a great job on that. That gives us a stable tariff operating environment. I think -- so looking at that. And yes, there's a little bit [ EPA ] benefit in 2, but that will carry forward in 3 and the bigger effect of tariffs really ends up being the 232 as you look forward into next year.