PACCAR Inc.

Good morning and welcome to PACCAR's second quarter 2021 earnings conference call. All lines will be in a listen-only mode until the question and answer session. Today's call is being recorded, and if anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACR's Director of Investor Relations, and joining me this morning are Preston Fite, Chief Executive Officer, Harry Skippers, President and Chief Financial Officer, and Michael Barkley, Senior Vice President and Controller. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties. including general economic and competitive conditions that may affect expected results. For additional information, please see our SEC filings and the investor relations page at paccar.com. I would now like to introduce Preston Fite.

Preston Fite Hello, everyone. It's good to be on the call with all of you. Harry Skiplers, Michael Barkley, and I will update you on our second quarter results and business highlights. First and foremost, I appreciate our outstanding employees around the world. for providing excellent trucks and transportation solutions to our customers. I'd also like to thank PACCAR's fantastic dealers and suppliers for their support. PACCAR achieved very good quarterly revenues and net income in the second quarter of 2021. PACCAR's results reflect quarterly sales and profit records at PACCAR Parts and PACCAR Financial Services. The economies and freight markets continue to be robust in all of PACCAR's geographic markets. and demand for PACCAR's premium trucks is strong. PACCAR's second quarter sales and financial services revenues were $5.8 billion, and second quarter net income was $493 million. PACCAR parts achieved record quarterly revenues of $1.2 billion and record pre-tax profits of $266 million. PACCAR Financial achieved record pre-tax income of $107 million, and I would just like to take a moment to recognize these wonderful achievements by our great team. So looking at product, 2021 is the biggest year of new truck introductions in PACCAR's history. The most recent truck introduction was in June when DOF launched the XF, XG, and XG+. These DOF trucks are game changing. DOF is the first manufacturer to utilize the new European regulations allowing for a longer cab. And the regulations enabled DOF's engineers to design an aerodynamically optimized truck that provides up to 10% greater fuel efficiency and an equal reduction in greenhouse gas emissions. Technology enhancements include a new powertrain, new digital mirrors, digital dash displays, and a full suite of advanced driver assistance systems. The new models provide drivers a new level of luxury and comfort, and there is great customer excitement for the new trucks. and this is being reflected in strong orders. Production start is in October. The next generation Peterbilt 579 and Kenworth T680 began production in May. These new trucks feature enhanced aerodynamics and powertrains that deliver up to 7% higher fuel efficiency, industry leading LED headlights, advanced driver assistance systems, and a state-of-the-art interior with a configurable digital display. So in addition to launching the new Class 8 trucks, this month Kenworth and Peterbilt began production of their new medium-duty truck lineup. These vehicles have an 8-inch wider cab, best-in-class visibility for enhanced safety, and a premium interior with configurable dash displays. The new medium-duty trucks feature the Packard 8-speed automatic transmission. And we're seeing excellent customer demand for these new Peterbilt and Kenworth vehicles. PACCAR's industry-leading zero-emissions battery electric trucks are now in production with 60 vehicles in customer operations in Europe and North America. And we've received orders for over 450 battery electric trucks and are working closely with our customers and our dealers as we move forward with these exciting zero-emissions product offerings. During the second quarter, PACCAR enhanced its autonomous truck development partnership with Aurora by becoming a minority investor in their planned public offering. The PACCAR-AURORA partnership continues to make progress in developing a Level 4 autonomous solution. Looking at the truck markets, US and Canada Class 8 industry retail sales are estimated to be in a range of 260,000 to 280,000 vehicles. Kenworth and Peterbilt market share was 29.4% in the first half. In Europe, truck industry registrations in the above 16-ton market are estimated to be in a range of 270,000 to 290,000 vehicles. and DOF's year-to-date market share is 15.7%. The South American above 16-ton market is projected to be in a range of 100 to 110,000 trucks, and DOF Brazil's above 16-ton market share through June was 5.7%. As has been discussed in recent months, industry truck production has been tempered by the undersupply of semiconductor chips. Kenworth, Peterbilt, and DOF had a good quarter and delivered 40,100 trucks with an additional 6,500 awaiting key components. While it's very dynamic, we currently anticipate supplier constraints improving towards the end of this year. PACCAR continues to advance its industry-leading environmental focus with our products and in our factories. PACCAR is committed to achieving science-based carbon reduction targets, and PACCAR continues to receive high rankings for its environmental leadership. These are really exciting times for PACCAR as we create our future, And Harry Skippers will now provide an update on Packard Parts, Packard Financial Services, and other business highlights. Thank you. Harry?

Thanks, Preston. Packard Parts had another outstanding quarter, achieving record revenues of $1.2 billion compared to $823 million for the second quarter of last year. Parts pre-tax profits were a record $266 million compared to $152 million in the same period last year. Parts gross margins were a robust 28.2%. Packer parts benefited from strong freight demand and truck utilization, investments in e-commerce technology and distribution capacity. Strategically located PDCs reduced delivery times and increased customer uptime. E-commerce part sales increased 56% in the second quarter. compared to the same quarter last year. Becker is continuing its investments in world-class distribution by opening a new distribution center in Louisville, Kentucky next year. We expect third-quarter part sales to be similar to the strong second quarter. Becker Financial Services earned record pre-tax income of $107 million, reflecting strong portfolio performance a robust used truck demand. We expect third quarter Pekka Financial results to be in line with the excellent second quarter. Pekka Financial is increasing its retail used truck center capacity worldwide, which enhances margins. A new Pekka Financial used truck facility is under construction in Madrid, Spain. Kenworth and Peterbilt truck resale values come out at 10 to 20 percent premium over competitors' trucks. TECR has invested $7.3 billion in new vehicle programs, enhanced facilities, and new technologies during the past decade. This includes the investment of $1 billion for the new DAF truck range and expanded factories. Capital expenditures for the year are projected to be $550 to $600 million, and research and development expenses are estimated to be $340 to $360 million. Packer is investing in zero emissions and ultra-clean diesel powertrains, advanced driver assistance and autonomous driving systems, connected vehicle services, and enhanced production and distribution facilities. Second quarter, truck parts and other close margins were 13.5%. Customer demand is strong. and Duff, Kenworth, and Peterbilt are sold out for the year. Depending on the supply of materials, third quarter global truck production and gross margins could be similar to the second quarter. The recently introduced Duff, Kenworth, and Peterbilt truck models provide Packard the newest and most exciting product lineup in company history. These new trucks will support our customers, dealers, and our success in the coming years. Thank you. We'd be pleased to answer your questions.

Operator?

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press the pound key. Your first question will come from Jerry Revich with Goldman Sachs. Please proceed.

Yes, hi. Good morning, everyone. I'm wondering if you could just talk about with the new product lineup that you have rolled out globally, do you have a higher proportion of common platforms and core components in the platform today compared to what we would have been looking at under prior generation products? And if you could just talk about the implications of product development going forward, given the timing overlap of the product rollouts globally this year? Thanks.

Hey, Jerry, that is a fun question. We could talk a long time about it, but I'll keep it brief for you. Yeah, we have been able to globally make sure that we're leveraging our core competencies in software development and in some of the electronics capabilities for the vehicles around the world. So between Doff, Kenworth, and Peterbilt, we take the best approaches and apply them, and that shows up in the way some of the vehicle functionality is, which is just, I've got to tell you, it's really fun. I was able to drive the new Doff a few weeks ago. It was over in Europe, and the truck is amazing. And I think obviously I'm subjectively biased, but we had a bunch of our dealers in it, and they got to see it, and everybody's just thrilled with it. So we're seeing just a beautiful new truck there in Europe, and the same can be said for the trucks in North America. We are, you know, there's more commonality between a Kenworth and a Peterbilt in terms of the chassis design there. So we use best practices to make sure we provide the best ride and capabilities. And those trucks are equally just fantastic to be in. So, yep, we're using our best practices and getting global leverage as we do our designs.

Terrific. And then, you know, you're off to strong bookings for your electric vehicles. I'm wondering if you just talk about Over what timeframe do you plan to produce the electric vehicles that you spoke about in backlog? Can you just quantify to what extent you've been successful in layering on charging stations and other expanded services? Is there a revenue number associated with the unit number that you might be willing to share with us?

I would say that the orders are coming in. The 450 is just a moment in time. We're getting new orders every day. We had a good order from Amazon yesterday. a couple days ago in Europe for battery electric vehicles that we've used in the UK. So we're getting this around the world and they'll be built as the orders come in. Some of the orders are multi-year. They can take a few years because there's high quantities. But we anticipate the market just continuing to evolve, grow over the years. So it starts in the hundreds as we've shared before and we see it moving to the thousands as that happens. And our team at Packer Parts is doing a great job of rolling out charging stations and being supportive to our customers and our dealers the infrastructure needs that they have, so we've taken a holistic approach there and see these as good opportunities for PACCAR to grow its business beyond just the provision of product there.

And lastly, Harry, you spoke about expectations for similar production and gross margins. In the third quarter, can you talk about how you expect the supply chain to look into the fourth quarter? What are you hearing from the supply base? that far out? Do you think our inventory of uncompleted trucks declines as we go through the year?

Like we said, Jerry, there's a lot of uncertainty around the supply base, and the deliveries in the third quarter and beyond, a lot of that will depend on the ability of the supply base to deliver, especially in the semiconductor area.

I appreciate the discussion. Thanks.

You bet. Have a good day.

Your next question will come from Anne Digen with J.P. Morgan.

Hi. Thank you. You know, if you could expand on those last comments a little bit, I think we'd appreciate it. The puts and takes on the gross margin going into Q3, seasonally Q3 will be weaker than Q2 just on plant shutdowns, et cetera, in Europe. However, you know, you've got all this inventory built, and should you be able to receive components, perhaps deliveries are higher, though we don't get the absorption because they're already built. So I'm trying to really understand the puts and takes because you seemed kind of hesitant when you said that gross margins and performance might be similar in Q3 to Q2. So please expand on that in any way, shape, or form that you can.

Sure, and happy to take a swing at that for you. You understand the market really well, and we have excellent demand. As we said, we're sold out through the year in all our markets. So with this great demand, great market, need for trucks around the world, really, customers are looking for trucks as quick as they can get them. And we're building them as quick as we can get them. And so we had a good second quarter in our deliveries at 40,000. Obviously, you can do the math. There's several thousand sitting there that are waiting at component. And as we get the components, which is unclear in the semiconductor front, we complete the trucks and get them to our customers. So I wish we could give you more clarity on how that semiconductor supply is going to proceed through the third and fourth quarter, but we just don't have any more than that right now.

But just for clarification, when you ship those trucks after you get the semiconductor, you've already gotten the absorption of building those products. They're just sitting at the end of the line waiting for – That is correct, Anne.

So, of course, the absorption is already taken. And when we deliver and ship the truck, that's when we record the gross margin on the truck.

Right. Exactly. And then on the parts and the Finco businesses, you had given us the full year guide for parts. You'd expected it to be up about 15% to 18%. I'm assuming with your revision today, you're calling for more like 18% to 20% now for the full year. And FinCo, you said performance will be similar in Q3 to Q2. Is there any reason to believe that FinCo couldn't continue to perform at this level into year-end also?

So the parts that we're expecting the full year to be an increase about 20% to 22%. Okay.

And for the finance company, the $107 million in the second quarter was a record outstanding result. And if we look at the current market dynamics with strong U-stroke markets and excellent payment behavior by all our customers, strong portfolio, we expect that business to run at that level for the next quarter, and that's a pretty good run right now.

I think there's a good run rate. I'm just trying to figure out the model. And just real finally, real quick, just dealer inventories right now versus where they ought to be?

Well, the dealer inventories are limited, which will extend the market also. We have about 1.6 months of inventory at the dealers, and I think the industry is 1.9 or 2. So it's less than we'd like it to be, of course, but that does bode well for a strong extended demand cycle.

Okay, thank you. I'll get back in line. Appreciate it. You bet.

Your next question will come from Stephen Volkovich with Jefferies. Please proceed.

Hi. Good afternoon here. Good morning there, guys.

Hello, Steve.

Hi. So a couple quick ones. Preston, your industry commentary, does that factor in these supply chain issues, and that's kind of your best guess, or is that more of a number that would be kind of a high side and then, you know, supplier issues might cause it to be lower than that.

I would say that we, we tried to factor in everything into those numbers. So that two 60 to two 80 in North America, the reason it shifts down a little bit is because of the supply side provision, um, with the demand we have, it's, it's really what the throttle is on the, on the business right now.

Okay. Super. And then, um, With respect to all these new truck launches that you kind of went through, I guess the bottom line question is, you know, do you expect these products to be kind of higher margin than the products that they're replacing?

Well, we think that we set out to design products that are great for our customers, you know, and with the kind of fuel efficiency, the driver comforts, the feature capabilities that they all provide to the customers, we think they'll want to buy them. And that should be good for PACCAR and good for the customers.

all right maybe the final quick one just any commentary on pricing i mean i know things are sort of sold out when do you start taking orders for 22 and is there any reason not to assume that the pricing wouldn't be more robust as you start to do that we are taking pricing for 2022 and um you know we had if you just look at our our order intake has been very strong

And so we're seeing how that's progressing through the market and working on, you know, raw materials pricing into those models and just moving forward thoughtfully into 2022 as we take those orders. And we do expect the new trucks to be a bigger percentage of our build in the second and next year, and that'll be good for everyone.

Got it. Thank you.

Your next question will come from David Rassa with Evercore.

Hi. Thank you. I was thinking about pricing for the rest of the year. When you mention you're sold out for the rest of the year, does that speak to then pricing is pretty well set on your deliveries for the rest of the year, or is there an ability to adjust pricing for any further shipments this year?

So it's largely set, but I would tell you that these have been unusual times, and so we've adjusted pricing as necessary to match into raw materials pricing, and that's kind of the way we've approached the market.

Okay, so still some flexibility despite the backlog is sort of spoken for for the rest of the year. But limited versus historical, you wouldn't usually adjust the backlog historically.

Yeah, what I would say is we're working really closely with the customers to get them the trucks they need as quickly as we can. And I think they understand, we understand that that's taking extra efforts right now, and so we're applying those efforts.

And when it comes to the 6,500 red-tagged trucks waiting for a component, Of those, do you expect those to ship, a large majority of those would ship in the third quarter? Or because that's the greatest pinch point, when we think about, say, potentially flat deliveries 2Q to 3Q, they might not include a lot of those 6,500. I think we're all just trying to get a feel for some of the overhead absorption issues with shipping already built trucks or not in the near term.

Yeah, I would tell you that there's a constant dynamic there. You know, we've had some trucks that we built minus component, and we received a batch of components for those and have shipped those out, only to find ourselves in different circumstances with, you know, like a Malaysia COVID outbreak, which then causes a constraint of a different component. So it's pretty dynamic and hard to really talk about which trucks ship when by quarter. All right.

Thank you very much. I appreciate it. Sure, you bet. Have a good day.

Your next question will come from Nicole DeBlaze with Deutsche Bank.

Yeah, thanks. Hi, guys. Hey, Nicole. Maybe just a clarification on the third quarter production guidance. So have you guys, do you plan on taking your usual, you know, plant shutdown seasonally in Europe? And I'm just trying to think through, like, Q&Q production by region.

So we do plan to take our European shutdown. In fact, we're in the midst of it now. It started this week. And I don't know if there's anything else you want to add to thinking about regionally? No. I don't think there's any other regional vagarities that I'd add into it.

Okay. So you're down Q and Q then and maybe the other two regions up a little bit Q and Q to compensate for that to get you to flat overall?

I would say it's really more about which components we get when, and that's really what's driving those deliveries by region.

Okay. Okay. Understood. And then maybe just to elaborate a little bit on David's point, So if you think about the pricing that you guys realized in the quarter, which I know we'll all see when the 10Q is filed, but did you have a pinch at the margin line from price-cost, and what is the expectation for how that progresses into 3Q?

So when you see the 10Q, Nicole, you'll see that pricing was up 2% to 3% compared to last year. And then, of course, that resulted in margin improvement compared to last year. But if you look at it more on a sequential basis, then I would say that we've been able to increase prices to cover cost increases. And I think that's what gives us the margins as we know them in the second quarter. And that's a similar assumption if we look at the third quarter.

Got it. Okay, that's really helpful. And then I'll just squeeze one more in. Could you just comment a little bit on what you're seeing with respect to used truck pricing, like the magnitude of the growth?

Well, I mean, it's grown quite a bit, obviously. In the year-over-year in North America, it's grown in the 40-something percent. In Europe, it's grown double digits also. And so we've had great growth in our used truck pricing. There's a limited supply of used trucks. I mean, obviously, the Packer products command a premium in that space, and it's an even more precious premium right now. So we think that as long as supply is limited, then there will be a good opportunity for our team selling used trucks and getting customers the ability to move freight.

Got it. Thanks. I'll pass it along.

Your next question will come from Joel Tiss with BMO. Please proceed.

Hey, guys. How's it going?

Really good, Joel. How are you doing?

Hanging in there. Is this automated cab factory in Europe? Is that a new template for what you can do around the world, or is that more just building on what you already have in place in terms of the footprint?

Well, Joel, it really is a new approach. It's an evolutionary approach, but it's a new approach. The factory is amazing. We hope to get you over there soon to be able to see it. We were just there a few weeks ago, and... All I can say is wow. When you look at the level of robotics that we've applied to bring the highest degrees of quality and capability in putting those trucks together, it's really fantastic, state-of-the-art factory, and it brings a new level of, I'd say, competence into our manufacturing operations.

And I think what everyone's asking, and I'm wondering too, can you give us some of the pieces to raise your kind of structural incremental margins? They've been kind of stuck in this 12 to 14 percent range for a while. And I just wondered, everyone keeps asking, maybe it's electric, maybe it's automation, maybe it's pricing. Can you give us a little sense of maybe just some of the things you're thinking about internally that could structurally push those margins higher in the next five years?

Yeah, sure. You're happy to. You look at the parts business, and again, that team is just doing a fantastic job. And the focus there is to continue growing. And they're able to do that because they really think about what the customer's needs are and what the dealer's needs are. So they're putting systems in place that enable a really world-class delivery of parts in the same day more and more frequently. And so that's an area of growth opportunity as we look at it. The finance company is a great foundational growth opportunity for us as well. The new trucks, we'd be really remiss to not talk about how the new trucks are going to help to grow the business over time. You mentioned other things like alternative powertrains, zero emissions vehicles, that's a great opportunity for PACCAR where we're already putting ourselves in a leadership position in terms of order intake. And so that not just the sale of the trucks, but the support of the trucks in the field, battery electric charging stations, battery energy management, fleet management help, those are skills that we can provide. We see embedded software and connected trucks being an opportunity for growth in the future. Obviously, we have this relationship with autonomous vehicle producers, and namely Aurora, that's an opportunity as we go forward and increasing utilization of safety systems like that. So there is a whole plethora of great opportunities for PACCAR to grow as we move forward in the future.

Well, that's excellent. Thank you so much.

Yeah, you bet.

Our next question will come from Rob Wertheimer with Milius Research.

Hey, good morning, everyone. Hey, Rob. My question, I guess, I think I have two on electric. One is, you obviously noted your three competitors announced an alignment on charging in Europe. And I don't know whether you specifically comment on your thoughts on doing that with that alliance. But maybe more broadly, what is the role for an OEM in trying to prep, if any, you know, to prep infrastructure for some of these changes that are coming and the infrastructure isn't necessarily there? I'll stop there.

Okay. Well, that's a good line of thinking there. You know, they did make that announcement. We are rolling out our infrastructure system. And so basically what everybody's trying to do in the all OEMs, car and truck, are trying to create an infrastructure that's usable by each other, and that's what theirs would be. So usable by all our products. At the same time, we're also rolling out our capabilities into the dealers and with the customers. Obviously, with each electric vehicle in the early phases before range is unlimited, they're going to be largely used in a return to base. kind of an operating style, which means when you buy a truck, you're probably looking at a charging station also. And the integration of the truck and the charging station, how that system works together, is a core competency that we bring to our customers and we'll share with our customers. So we see that as kind of an avenue forward. So there's some symbiotic relationship with all the OEMs, but there's also this unique capability that PACCAR has in bringing the right battery energy management and the right kind of system to a customer.

That's a very helpful answer. You're not kind of sitting passively by letting others do this. You're involving yourselves in a different way where you think it's more valuable. Okay. Yeah, exactly. May I ask on your electric truck orders, are those mostly medium duty or is there heavy? Can you say anything about the – you mentioned return to base. Anything about the routes or the base or the duty cycles, the vehicle configuration that is currently attracting attention? And I will stop there. Thank you.

Yeah, sure. Sure. The orders have been spread out. There have been medium-duty orders, been heavy-duty orders in kind of the pickup and delivery space, and there's also been refuse kinds of trucks that we've taken good orders from. So, again, anywhere where urban applications where you're running 200 miles and you're coming back at night so you have time to recharge, those are the right spots for the battery electric systems today, and we're doing that in Europe and in North America. Thank you. You bet. Have a good day.

Your next question will come from Jamie Cook with Credit Suisse. Please proceed.

Hi, good afternoon or good morning to you. I guess a couple questions. One, I've been in, you know, while the truck margins are coming in a little lower because of the supply chain inefficiencies, the parts margins have continued to progress and seem like this year we'll be at a record new level. So I'm wondering if gross margin structurally in parts can be higher and that's what we're missing and how much runway you have to go there And then my second question is, you know, understanding you probably don't want to talk about next year, but as you think about the order book and then some of the inefficiencies that we're seeing, you know, in 2021, do you think there's a setup for next year for incremental margins, you know, if the industry forecasts are right to potentially be better in 2022 versus in 2021?

Jamie, I'll let Michael talk about the first part of it, and then I'll kind of come into the second.

Thank you. The margins – are benefiting from the higher volume. We get to spread that over the fixed cost base, if you will, so we get volume leverage out of the much higher volume that we're enjoying right now. Plus, there has been decent pricing because there's been strong demand that's been able to at least keep pace with the cost increases that we're seeing on the raw materials side.

And then as we look at 2022, we see that as this, you know, operations can flow steadily, put it that way, then that should be a great opportunity for us as well, right? The production efficiencies return at higher levels. We expect the market will be strong next year, and that should be good for PACCAR.

Okay. And then, sorry, one last follow-up question. It sounds like from your prepared remarks, you guys were having, you know, good success with the, you know, automatic, with the transmission with ZS, your new partnership there. So can you just give a little more color there what you're seeing on adoption rates with the ZF transmission and how you think penetration, how to think about penetration, I guess, over the next 12 months and over the longer term with that product line? Thank you.

You know, I don't know the exact number of percentage take breaks on it. I know it's been pretty high and growing as people get to experience with it. So I can't give you a numeric answer. I can just tell you that in being in the vehicle a lot, and driving it and talking to customers about it, it's working really, really well. And we expect that just to continue to increase.

Okay, thank you. Your next question will come from Chad Dillard with Bernstein.

Hi, good morning, guys.

Good morning, afternoon.

So I just wanted to go back to supply chain challenges. So can you just give a little bit more color to Beyond semis, can you talk about where other components are in short supply? Has the breadth of the component shortage grown? And if you can, just talk about the month-over-month cadence. Did things get better or worse as you progressed through the second quarter?

Chad, I'd love to be able to give you more, but we've given you just about everything we can on explaining where we're at with supply base and that there's a degree of uncertainty that you can see in every manufacturer's report write-ups. We have that same kind of uncertainty working through our system. And if I could tell you more and do more, I would. But we're going to continue to operate this business in a world-class fashion. And as we get the parts, we can put them in the trucks and get them to the customers as quickly as we can.

Got it. And maybe you can just give us a sense for how much less you need to spend on promotional discounting, just given the really strong environment. Are you at 50% of typical spend levels, 20%? Just trying to think through. If the demand environment remains strong, can you actually pull up a little bit more of that marketing expense?

Well, we don't really have a marketing expense associated with promotional discounting in the way we build the order, and I think that our products do a great job of selling themselves.

I don't know if you had anything else to add. Our sales expenses are part of our SG&A, and as you've been able to see, our SG&A has been pretty – stable going from the first to the second quarter, and that's the kind of level we expect the raised DNA to stay at. We've got tight cost controls, good budget discipline, and we'll continue to do so.

Great. Thanks. I'll pass it on.

All right.

Your next question will come from Ross Gilardi with Bank of America.

Hey, there. Thanks for taking my question. Hey, Ross. Have you guys disclosed how big your Aurora stake is? If it's been out in articles and your filings, I missed it. I apologize. But do you have anything you could share?

No, Ross, we haven't disclosed that. This is Ken. And Aurora hasn't either. I don't think any of the pipe investors have disclosed the amount.

Our thinking around it was to make sure that we just had a strong partnership with them. And the real focus is our developing of a PACCAR-specific autonomous vehicle platform. that will work with Aurora, but can also work with others. And that's where our focus has been. And they've turned into a great partner. We've been riding around in the autonomous trucks with them, and there's great progress being made on that, on the development of an L4 system.

And then, sorry for another price-cost question, but I'm just trying to think of this more at a high level. I mean, you know, cost push aside, recognizing that you're raising prices to offset cost inflation, and over time you'll probably be successful doing that. Why doesn't there seem to be more, if any, structural pricing power in the commercial vehicle industry when you have all of these new products, you have all this new technology, it creates enormous cost and productivity benefits for the fleet, you have a tight used equipment market, you're sold out. Why can't the industry, and you probably don't want to speak for the industry, let's just say, why can't FACAR just steadily raise prices 2% to 3%, whatever the number is, every year, regardless of what is happening with costs, given the amount of value that your new products are bringing?

You know, I guess you're right. We wouldn't want to talk for the industry and tell you that that we are constantly working on providing industry-leading margins, and we do that. And I think our results show that, and we're going to keep doing that in a good way. And as we bring out these new products, we do expect that they will provide, again, benefits to the customer and PACCAR. And that's kind of the model we work with, is to stay as the best company there is.

But, I mean, at the end of the day, I mean, are you just pushing more to just, you know, take market share, grow the installed base, and therefore you see improved margins via the parts business because you're selling more content in the aftermarket. There's got to be some type of strategy there. It just seems like the focus is much more on driving volumes and share than on pricing itself. Realizing, I get that you have the best margins in the industry, but But it would just seem that maybe this is more of a comment than a question. And I welcome your further thoughts. Just why do you raise prices?

Yeah, I think you said it, right? You said we have the best margins in the industry, and we do. And we continue to work on that. And we continue to grow our business around the world geographically. We continue to make these great investments, which are good for our customers. You continue to see the growth that comes along with it through the parts business, the finance company. I mean, PACCAR is really doing a great job, and we're going to keep doing that.

All right, Preston. And then just the last part of it, just pricing for your EVs in the broad spectrum of, you know, you've got all these new entrants in the market. You've got a lot of new vehicles that are coming out. You're one of the first, if not the first. But where are you on pricing relative to everyone else? And can you comment at all, what do you think happens to, of pricing for some of your core vehicles over the next three to five years as penetration really starts to grow?

Our margins for the EVs are kind of comparable to diesel powertrain margins, so those are looking really good. The market's obviously a market that's emerging. It's not mature, so there's a lot of dynamics around battery costs continuing to come down. There's government grants and subsidies that come along with some of these projects, be they battery electric or hydrogen fuel cell. So it's a pretty dynamic world, and our focus is on achieving high-quality margins and high-quality trucks for our customers in the zero emissions space.

Okay. Thanks very much.

You bet. Have a good day.

Your next question will come from Felix Boshin with Raymond James.

Hey. Morning, everybody.

Howdy. How you doing?

Good. Hey, I was hoping to touch on the new product launches for just a quick second. Correct me if I'm wrong, but I think you mentioned about 10% fuel efficiency improvement in Europe that should start production in a couple of months. And then I think I heard 7% on Peterbilt and Kenworth. Can you help us understand how good that is from an upgrade perspective, maybe versus prior fuel efficiency increases and sort of historical model changes?

Sure. That's a good way to think of it. The first thing is double-digit changes in Europe where speeds are more like 100 kilometers an hour, 80 kilometers an hour for trucks is wow. I mean, getting that kind of improvement is just amazing. And the DOF team did such a fantastic job. And one of the reasons they were able to do such a good job is they worked closely with the government there in defining what the shape of a vehicle can be. And so the government allowed a different shape of a vehicle, and DOF is the first OEM, and the only one that's announced to do so so far, of being able to bring out a cab that meets this new shape, which is more aerodynamic. So just fantastic effort by the team at DOF in bringing that truck out. And it doesn't just create aerodynamic benefit, but the interior and the visibility of this truck are just amazing. And I would also say that, you know, from being a A user of the truck, if you get in the truck and you're driving it just the way it feels, it's really, really quiet. Like I would say quieter than a 5 Series BMW when you're running down the highway. It's just fantastic. And then if you use the sleeper compartment of it, it's got all kinds of creature comforts and luxury for the drivers. And so it's just a beautiful product. that delivers this double-digit fuel economy. And in characterizing it against other programs, you might think 5% is a lot. That's how we would look at it. It's a 5% change in fuel economy. It's a big change in fuel economy. So for them to get 10, just amazing. And same thing for the Kenworth and the Peterbilt teams getting 7% on these next generation 579s and 680s. They just did a great job of bringing everything they could to the table. And that's obviously got a big impact on lowering operating costs for our customers. So these trucks are going to set the mark for the industry.

Yeah, and I appreciate that. And that's kind of where I was trying to go with it. You know, from an OPEX perspective, a 10% improvement year feels like a very big deal. If you could indulge me and maybe characterize how you think this would impact multi-year truck demand, if indeed upgrade features are maybe higher, And then in that same vein, I guess where I'm coming from, I understand the near-term focus on margins, given all of the temporary noise and the numbers. But if demand does stay elevated for longer, is there anything structural in the model why margins should not move sort of in tandem with that prolonged demand? Any color kind of would be appreciated.

I think your second comment is right. They should move in tandem with it. And I would say that you're right in that new products coming out that make the operating costs lower for a customer is cycle independent. They want to lower their operating costs is what they use to be competitive. So buying new DAWs, Peterbilt's and Kenworth's is how they win that game. It's how they keep their drivers most happy. And so, yeah, that's good for the business. And that will extend the cycle for them.

Yeah, the biggest cost to operate a truck is the driver, but fuel is a good second. And if you can cut the fuel bill by 7% or 10%, that's huge. I think 10% is the highest reduction that Duff has seen in its entire history. And reducing that, like I said, the fuel bill by 10% makes any of our customers a lot more competitive. So they're looking forward to getting those new trucks.

Appreciate the help. I'll leave it there. Great.

Your next question will come from Matt Elcott with Cowan. Please proceed.

Hello, thank you for taking my question. My first question, just a quick one. You guys are now the only U.S.-based Class 8 truck manufacturer. Do you think this could in any way help you competitively in the U.S. Class 8 market one return?

I don't know. We're proud of who we are. We're proud to be a great company. We love our Kenworth and Peterbilt operations here in Mexico, our DOF in Europe, our DOF in Brazil. So We feel like we represent the markets where we operate really well, have great relationships with our customers and dealers in those markets, and that's how we think about the world.

Okay, got it. And then my next question is more on the vertical integration front. With next year looking like a strong production year and with you guys and other OEMs allocating investment dollars, along a whole host of new technologies as well as core operations. Do you think you might do less vertical integration of, of engines at least, uh, next year?

You know, I don't think of it that way at all. Um, no, I think that we're making the investments where, where they make sense on a volume standpoint. We're continuing to grow our pack, our engine business, um, obviously still 60% of our sales or power trains are our engine. around the world, and we continue just making the right investments to bring the best products to the customer. It's elegant and it's simple. We just want the best things for our customers. That will be good for PACCAR. And so our R&D and our thinking is to vertically integrate where it makes sense, partner with others where it makes sense, and make sure that brings the best products out to our people using them.

Great. Thank you very much.

You bet.

Your next question will come from Jeff Kaufman with Vertical Research Partners. Please proceed with your question.

Thank you very much, and congratulations on the quarter. Thank you. You know, a big topic out there is raw material parts inflation, and I think we've talked about some of the challenges on the chip side and the supply chain and getting the trucks out. But, you know, I was really kind of impressed that the gross margins were what they were this quarter and Could you give us a feel for are you seeing inflation in your supply chain? When will that start to hit and flow through, and are we offsetting that with price? Are we offsetting that with anything? I just kind of want to get a sense because some of the other OEMs we've spoken to are kind of citing that, but I didn't see it in your numbers.

Yeah, we are seeing inflation, of course, and raw material costs have gone up. but we're baking that into our pricing when we price new trucks to our customers, and that's how we deal with that.

Okay, so you wouldn't tell us, you know, brace for gross margins to come down a little on inflation in the second half. You feel like you're containing it in terms of what you're seeing in the market right now.

Yeah, that's probably the best way to think about it.

Okay, great. Well, congratulations. Thank you.

Your next question is a follow-up from David Rasso with Evercore. Please proceed.

Hi, thank you. My question is on the duration of the cycle. I mean, given this is a pretty unique supply constraint moment, your conversations with some of your largest customers, the larger fleets, what are they laying out for you when you try to look out, you know, a year or two, you know, thinking about potential growth or not beyond 22, and maybe a different conversation in Europe than in North America, just trying to digest that. you're having to go back to key customers and, you know, understandably maybe you can't provide them everything they want today. How is that impacting their thought on their truck needs over the next, you know, call it 18 to 30 months?

Sure. I think, you know, one of the things to think about is trucks are, as we talked about a lot in this call, becoming more and more efficient. And so I think their percentage of how they'll haul freight in the future, beyond 18 and 30 months even, is that they will continue to take a a vast majority of the freight hauled around Europe, North America, around the world, actually. So trucking is in a really good position for the world. Our customers are doing a fantastic job of becoming more efficient, but the demand is really, really high. And so we and they, I'd say, expect that there will be a strong market certainly through next year, which ties you to the 18 months. Beyond that, it's harder to say. But in essence, they're doing really well right now. They have all the freight that they can haul. And the business is doing really well. So together, everybody's doing fine.

And when you think of the capacity in the industry, I mean, there's pinch points today. But when folks try to think about how much the industry could build next year, and then obviously that sets the bogey up for can you grow off of that in 23, understanding it's hard to analyze exactly some of the chip issues, when those will be resolved, and so forth. But just as a framework, how do you think about build capacity today? for next year versus this year, just so we have a sense of if you served all the demand, how much could demand, you know, production grow next year?

Sure. I don't want to kind of comment on other people's capacities. What I'll tell you is that we have sufficient capacity in all of our markets to go up substantially and to meet the demand that's needed. And so we're looking forward to that as we get through this supply base issues. And we just look forward to the operation running really smoothly and building a lot of trucks next year.

And last quick one on 3Q versus 2Q. The shutdowns that you would normally take in 3Q, given the dynamics out there, are those shutdowns still intended to take place?

The shutdown we take in Europe is taking place, indeed. It is. Okay. Thank you very much. Appreciate the time. You bet. Have a good day.

Your next question is also a follow-up from Ann Digen with J.P. Morgan.

Yeah, just building on David's question a little bit, you know, we saw cancellations spike last month, you know, maybe an industry problem or whatever. But can you talk a little bit about what you're seeing in terms of cancellations out there? And, you know, is there any risk that customers just say too late or too expensive or whatever? I've decided I don't need my trucks after all. If you could just give us some color on what you're seeing on the cancellation side, I'd appreciate it.

Yeah, Ann, I can't speak well to the industry. We are not seeing that. I can tell you that our order board has been solid. We aren't seeing cancellations. I think that probably has to do with the great product we're putting out, but that's not a factor right now. We're seeing excellent demand and really, really strong requests for more and more product from us.

But on the other hand, you do like to tell us what your share of orders was last quarter, or at least in the first half of the year, and what your share of backlog is. So maybe we could get at least that from you.

Sure, happily. We had 42% of the orders in the first half of the year.

And what's your share of the backlog then?

You know, I don't know that number off the top of my head. I can tell you is that as we see that kind of order intake, it's higher than our market share. And so things are in really good position from us from supporting the customers from an order intake and demand standpoint.

Our share of the backlog at the end of June was 36%. There you go.

Okay. Great. Thank you.

Yeah, you bet. Have a good day, Ann.

Thank you. At this time, there are no other questions in queue. Are there any additional remarks from the company?

Sure. I'd just like to close by thanking everyone for the discussion today. I think that the key points for us as we look at the business is there is really strong demand in order intake, as we just covered. We have fantastic new trucks all around the world. The finance team is setting records and has great momentum in their business. The parts team is just killing it. It's an industry-leading team. They're bringing in new technology and customer focus. and they really are going to keep driving record success. And so I'm just so proud of everyone at PACCAR and the great work they're doing, and we look forward to talking to all of you soon. And with that, we'll conclude and say thank you.

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

You may now disconnect.