PACCAR Inc.

Good morning and welcome to PACCAR's second quarter 2022 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, PACCAR'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.

Good morning. Harry Skippers, Michael Barkley, and I will update you on our second quarter financial results and business highlights. I truly appreciate PACCAR's outstanding employees around the world who continue to deliver excellent results in the highest quality trucks and transportation solutions. PACCAR achieved record revenues and net income in the second quarter. PACCAR's revenues increased 23% to $7,160,000,000. Net income increased 45% to $720,000,000. PACCAR parts second quarter revenues increased by 18% to a record $1.43 billion. Parts pre-tax profits were a record $353 million, 32% higher than the same period last year. Truck parts and other gross margins expanded to 14.4% in the second quarter, compared to 13.5% in the second quarter of last year. Packard's increased vehicle production, new lineup of premium trucks, and strong aftermarket parts business drove the higher gross margins. Packard Financial had an excellent quarter, increasing year-over-year pre-tax income by 36% to $144 million due to its high-quality portfolio and strong used truck results. PACCAR is an industry leader in diesel and zero-emissions powertrains, autonomous trucks, and next-generation connected services. PACCAR's best-in-class new trucks, its new clean diesel and electric powertrain lineup, and its ongoing research and development programs provide our customers with the right products and technology to help them optimize their operations. The entire PACCAR team has done an excellent job of working with our suppliers to manage supply-based shortages, and we have been able to gradually increase daily truck production. In the US economy, unemployment remains low, GDP is estimated to grow, and industrial production is projected to expand. Based on this favorable operating environment, we estimate the U.S. and Canadian Class VIII market to be in the range of 260,000 to 290,000 trucks. The European and U.K. economies are also growing, with Eurozone unemployment at low levels. The 2022 European truck market is expected to be in the range of 270,000 to 300,000 trucks. Looking at PACCAR's operating environment, Our new generation of trucks in Europe and North America are providing our customers the benefit of owning the most desirable and most efficient trucks in the industry. Great tonnage remains at great levels. We're sold out for the year, and the first quarter is beginning to fill in nicely. With fleet age up and truck utilization high, we anticipate continued strong demand for Packard parts, trucks, and financial services. Thank you. Harry Skippers will now provide an update on Packard Parts, Packard Financial Services, and other business highlights. Harry?

Thanks, Preston. Packard delivered 47,000 trucks during the second quarter, a 9% increase over the first quarter. We estimate third quarter deliveries to be in the range of 44,000 to 48,000 trucks. As higher daily build rates increase, will be offset by the normal summer shutdown EDDAF in Europe. Truck parts and other gross margins increased to 14.4% in the second quarter. We anticipate third quarter gross margins to be in the 14.5% to 15% range, reflecting a continued strong performance of packer parts and a favorable mix of new truck models in production. Packer Parts had an outstanding second quarter, with parts gross margins of 30%. Customers' increased truck utilization and higher average fleet age have contributed to Packer Parts' record results. Packer Parts' outstanding performance is driven by an expanding network of 18 parts distribution centers, 2,200 dealer locations, 250 independent TRP stores, as well as technologies like managed dealer inventory and innovative e-commerce systems. Becker is continuing its investments in the parts business by opening a new distribution center in Louisville, Kentucky this quarter. Becker Financial Services benefited in the second quarter from high used truck prices and excellent portfolio quality. Revenues were $373 million in the second quarter. Pre-tax income was $144 million, 36% higher than last year. Demand continues to be strong for Pekka pre-owned vehicles as customers appreciate and are willing to pay a premium for their superior reliability and durability. Pekka Financial has been increasing its network of retail used truck centers and is opening a used truck retail center in Madrid, Spain this year. These facilities sell used trucks at retail prices, which contributes to higher profits. Packer has invested $7.3 billion in new and expanded facilities, innovative products, and new technologies during the past decade. These investments have created the newest and most impressive lineup of trucks in the industry and will contribute to excellent shareholder returns for many years. Packer's after-tax return on invested capital improved to an industry-leading 23% in the first half of this year. Capital expenditures are projected to be $425 to $475 million this year, and research and development expenses are estimated to be $330 to $350 million. Packer's exciting new line of trucks and transportation solutions, efficient R&D and capital investments, strong aftermarket parts and financial services business, and flexible operating structure position the company for a bright future. Thank you. We'd be pleased to answer your questions.

Thank you. To signal for a question, please press star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. Please state your name and company before posing your question. Again, press star 1 at this time to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal.

We'll take our first question.

Caller, your line is open. If you would please check your mute button.

Hi, this is from Bernstein. First question for you is just on your gross margin trajectory. If I look, you know, cycle to cycle, you know, last time we had like around 1,000 build with 2014, and I think you guys were doing around, I guess, 30% margins. And, you know, if we fast forward to where we are today, it looks like we're heading for like a 14.5% run rate. Just kind of curious about just like the cycle over cycle durability. And then secondly, just like how to think about the evolution of margins as we go through the back end of the year. And any early comments you can give on your thoughts, at least like going to one queue given that you are taking orders right now.

Sure. On behalf to take the question, I feel like things are going really well for the company. As we shared in the commentary, the new trucks are performing really well in the market in Europe and in North America. That performance is helping our customers perform better, providing excellent fuel economy for them, and the result of that is an improvement in margins. That is really the fundamental underlying principle for increase in truck margins. I'd also share that our parts team is doing a great job. They set another record in the first quarter. We expect continued strong performance in the second quarter, I should say. We expect continued strong performance throughout the year for them because they Fleets have aged and utilizations are at high levels, which is driving parts performance. So we do expect to see continued improvement in margins for some time.

And then just a second question on parts. Just how to think about the year-on-year growth for EQ as well as just how to think about margins on that.

Terry, you want to offer commentary?

Sure. We expect parts sales to continue to be strong in the third quarter. probably similar to the second quarter, which would be up 12% to 14% from the third quarter last year.

Thank you.

You bet.

We'll move on to our next question.

Hey, good morning, everybody. It's Rob Wertheimer, Emilius Research. Good morning. Are you guys there? Yeah, great.

Yeah, we're here.

So two quick questions. Thanks. um one is just could you update i mean the results were great the margins uh look very strong uh obviously some tailwind from parts as you noted could you update us on where you stand on price versus inflation is there continued you know catch up from price and i don't know if you make any comments on truck pricing how far it was up for you guys uh in the quarter michael you want to share any thoughts on that

We had good price realization during the quarter that kept pace a little bit more than kept pace with our cost increases.

Okay, perfect. The second one, a little bit bigger picture, Europe, if you're a customer in Europe, I suppose you have a lot of different things you could choose to worry about with energy security and so forth. I'm curious whether knowing maybe your orders are capped by supply chain or whatever, just what your mood from your customers in Europe is, and is there any sign of impending downturn there? Thank you.

You bet. Well, our European business is doing fantastic right now. The new trucks that we introduced are really delivering for our customers. They are an increasing percentage of our build. They were roughly 50% in the second quarter and increasing in the third quarter. Demand is exceptionally strong for those products. They're the only trucks that meet the new masses and dimensions regulations in Europe, which provides great driver comfort. They operate in a premium position in the market, and they're doing a fantastic job. So I think that what we see is continued strong demand in Europe. Freight is moving effectively, and we think it will continue to do so.

Thank you. You bet.

We'll move on to our next caller.

Hi, good morning. Jamie Cook, can you hear me?

Hey, Jamie, we can hear you.

Hi. I guess two questions. First of all, great performance in the quarter. You talked about the new products being about 50% of build in the second quarter. I think that was specific to Europe. Can you comment on where those build rates are in terms of new products for the U.S.? I guess that's my first question. And then my second question, you know, just given... the deflationary pressures that could be facing us in the back half of the year into 2023, your confidence level and being able to maintain the pricing levels that you have today, just given your new product introductions. Do you think you can maintain the list price increases that you have out there?

Well, let's start with the first one, which is the North American new products, the medium-duty product. It was on a brand-new platform, and the heavy-duty product for the new 579 and T680. We've completed those transitions in North America now, and you're right to note that it's a European product that's continuing to increase. So that's good news for all of us, as we'll take build rates up with the new products continually. They're being exceptionally well-received by our customers. And then as far as the commentary on pricing is, we feel like because we've got the right products in the marketplace – and that they're the best products delivering thousands of dollars per truck per year in fuel economy savings, that our customers will continue to want to buy those trucks from us. And so we think that the pricing model will stay intact.

I guess a follow-up question, if I could. Again, just given the new product introductions and just performance from your perspective, What do we need to see in the market to get your truck gross profit margin sort of back to the pre sort of COVID 11-ish, you know, 11 and 12% margin?

I think every market stands on its own. As you would be well aware and know, and we've talked about in the past, right, there have been supply challenges. And we've put a priority on making sure that we get the most trucks out for our customers that we could. So that has been a thing that we've dealt with really effectively. Great congratulations to our team and our suppliers for working through that and continuing to work through that. But our focus has been on getting the right trucks out to our customers and making the transition to the new products. And we think that looking forward, we'll see continued growth, as Terry noted in the comments.

Thank you.

We'll take our next question.

Yes, hi, good morning and good afternoon. This is Jerry Revich at Goldman Sachs.

Hi, Jerry.

Hi. On your parts business, it's really interesting, you know, over the past five years, you folks have taken up margins by over a point per year, and I'm wondering as we look at the parts business over the next couple of years, as your engine field population grows, is that level of margin expansion sustainable two, three, four years out? Can you just talk about the moving pieces there, if you don't mind.

Like you said, Jerry, the parts margins have improved very nicely at record levels of around 30% now. A lot of that is driven by the increasing success of the Packer engine. And as that population grows and the engines get older and get into more maintenance work, that should be a tailwind for parts margins in the future as well.

I think that what Harry said makes complete sense, and I would just add to it the opportunity of what the parts team is doing from a technology standpoint and how effective they are at capturing an increasing percentage of the market is also helpful to us in improving margins. So the systems they're employing, the technology they're employing can put us at the top of the class in terms of how we support customers.

Super. And then, you know, just to follow up to Jamie's question, in terms of labor hours per unit on trucks, now that you've dealt with the toughest part of the supply chain challenges, are you back on trendline levels of labor hours per unit, or is there more efficiency gains on that normalization in the next couple of quarters for us to think about?

You know, I think that it's a great comment, and I think what we've seen is, again, the focus on getting trucks through to our customers, and that continues to be our focus. We are not back to our optimized efficiencies, but very darn efficient, I think, from a standpoint of how we're producing the new trucks and what they're bringing. We're going to continue to make sure we build as many trucks as we can, and that's really our first priority.

And lastly, obviously, Europe is a big region. Can you just talk about differences in order trends by your major countries, anything that you would point out in terms of any differences in order intake rates over the past couple of months?

Maybe, Harry, you want to offer something on that? Yeah, sure. As we noted in the press release, market share in Europe has grown to 17.5%. A lot of those gains have come out of the I'd say bigger markets like Germany, France, and Spain, where we had opportunity to grow. And it's really, really, really exciting to see that in the first half year, those countries came through, and Dove has done really well in those markets. So that's been a big part of the success.

Terrific. Thanks.

And we'll move on to our next caller.

Thanks. Good morning. It's Steve Fisher from UBS. Curious how you're thinking about the seasonality. Good morning. Curious how you're thinking about the seasonality of EPS this year because typically Q3 would be lower than Q2 due to those European shutdowns and then Q4 picks up again. Do you think Q2 was sort of the typical peak of EPS for the year or do you think there's enough pent-up production and and mixed benefits and parts strength that we could see something even better than this as we get towards the end part of the year.

Yeah, I think that we feel like the business is running really well, that the teams have done a great job in the second quarter. We look forward to the third quarter. As Harry talked about, we think truck part and other margins are going to increase in the third quarter. You noted the fewer build days in the third quarter in Europe, but all in all, I feel like the business is running quite well and will do so in the third quarter as well.

Okay, and then looking out to 2023, how are you deciding kind of when to fully open up the order books and how far out are you comfortable with pricing decisions at this point?

So as you said and what we shared with you is we have begun to fill our orders for the first quarter of next year. Some of those end up being full-year contracts. We see really strong interest from the customers and so we're having good progress in order intake. I'd say that as I think about it more macroscopically, as we shared, right, fleet age is up 10% or 15%. Truck utilization is very high. Freight tonnage and volumes are at very high levels. We think those set up the market for a strong future for truck sales.

Okay. Thank you very much.

And we'll move to our next question.

Good morning. This is Matt Alcott from Cowan. I think the inventory only grew $10 million sequentially in the quarter, which is way less than the increases of the last two quarters. Is this mainly a result of a lot fewer trucks waiting for parts? Do you think this whole red tag truck issue is largely behind us as the trip shortage eases and the supply chain improves?

Michael, you want to share some thoughts on that? Well, we did experience a reduction in the number of trucks that were offline during the quarter. So we had good sequential improvement in that. We also, you know, the currency weakness also had an impact on reducing our inventories which you know we'll see how that goes as the year progresses but there's that impact as well to think about okay and then any supply chain update would be helpful sure i'd say the as we mentioned the supply chain and our team have done a fantastic job really of finding solutions and

enabling us to increase our daily build rate through the last quarter. And so while we're not complete and through the supply chain limitations, we think that that probably actually contributes to a strong truck cycle for a long period of time.

Great. Thank you very much.

Thank you. And we'll move on to our next question.

Hi. It's Steve Folkman at Jefferies.

Good morning, good afternoon.

Can you guys hear me? Good morning, good afternoon. So just a couple quick follow-ups, if I may. Excuse me, what was the currency impact on the second quarter, maybe on sales?

Yeah, the impact on sales was about $270 million negative, and the impact on net income was about $25 million compared to last year for the quarter.

Great, thanks. And then maybe similarly, I think Harry, you mentioned in your comments that high used truck prices were a benefit for Finco income. How much was that kind of gain on sale stuff? How much did that contribute?

I don't have the number readily available, Steve, but it was a nice benefit to the results of the finance company, both in the first and second quarter. And we expect the used truck market to remain strong. and the finance company also to perform very, very solid in the third quarter.

Okay. I guess where I'm going with that is at some point, I suppose used truck prices will kind of normalize, but at the same time, you guys are doing a lot to improve your used truck marketing and so forth. And I'm just curious, maybe as we think out into 23, when and if used truck prices kind of normalize, Would that be a bit of a headwind for you, or do you think you'll be able to kind of keep this higher level of sales because of the way you're marketing the used trucks?

The used truck sales facilities that we've added, Steve, will definitely benefit the finance company next year and many years thereafter. It allows us to sell more trucks at retail prices to end customers, which is good for the finance company's profitability.

Great, okay, thank you.

And we'll take our next question.

Great, good morning, guys. This is Dylan coming from Morgan Stanley. Just wanted to ask first on R&D. I know you guys took that back a bit this quarter. I was just curious if that was more reflective of your ability to actually spend the money in terms of any kind of supply chain issues, if that was a more conscious pullback on your side.

No, it's not necessarily a pullback on the R&D. If you look at the Second quarter, the lower R&D, I would say that the majority of that is, again, due to currency, a weaker euro. Our outlook for the year means that we're going to be spending R&D at record levels. So we feel very good about the money we're spending, the projects we're developing, and the technologies that will be coming to customers.

Got it. Thanks, Harry. Then maybe just one on the battery electric side. I know you guys have been planning to take up production as the year has kind of progressed. I would just be curious if you can kind of give an update around the supply chain situation on the battery side, whether or not procurement of packs, cells, et cetera, has kind of improved through the year, or if there's any kind of color you can give on how that build rate path has progressed.

You bet. I think that where we sit with that is we have seven truck models in production now around the world that are battery electric and zero emissions product lines, which is fantastic. We've secured supply for the batteries and systems we need, batteries specifically, for the coming years, and we continue to work with our partners as we ramp up our production. So we're seeing that growth quarter over quarter. And as we've shared a few times, we expect that this year will be in the hundreds of units, and then over the coming years that will grow into the thousands of units. And we see just a steady progression there as our technology comes to market. Gotcha. Thank you. You bet.

And we'll take our next question.

Yes. Hi, this is Mike Fenniger from Banks America. Just two quick questions. At your investor day, you flagged how we should expect order rates to be constrained over the next few months as OEMs are managing production closely. And the old rule of thumb is 250K SAR is kind of like the replacement level demand for trucks. And that's kind of where orders have been if we look at the last 12 months. Do you think orders would get weaker in the next few months before they get stronger? And is that rule of thumb, that replacement level demand, do you feel like that's added date? Do you think that's maybe now higher than it was in the past?

Well, first of all, I think this has been an uncommon couple years, and I think trying to put too much math into order intakes is a difficult thing to get accurate. What I would talk about is that the year sold out, there was obviously some – pause for everyone in terms of strong order intake because everyone to see what the market was going to be and what the supply of capabilities were going to be. We've now are closer to 2023. And so we're taking, we've opened the order books more fully and we're taking orders and demand is strong for that. Um, I would expect to see order intake increase now for the, for the coming time.

Great. And I, I recognize that the spot market is not the entire freight market. Yet there are worries with spot freight rates down on a year-over-year basis, potential impact on future trucker profitability on that. How should we view that weakness in spot? Is that not an accurate portrayal of the U.S. truck market in your view? Do you feel like it's misleading given the strength you pointed to in other data points? Just love to get PACCAR's view on how we should kind of interpret some of the weakness in the last few months on the spot freight market. Thank you.

Sure, great question. I think that we probably overemphasize the significance of the spot market. It's 10 to 20% of the total market in range, and it's really the part that deals with the tips of anything. It's a good leading indicator maybe, but what I would suggest is that spot contracts are quite robust. Spot rates are down from extremely high levels, and normal contracts, truckload contracts and other, are doing very well and that rates are actually increasing in that area. Combine all those factors with strong freight tonnage and you should expect to see a good truck market for some time.

We'll move on to our next question.

Hey, thanks. It's Scott Group from Wolf Research. A couple things I just want to follow up on. It wasn't clear to me if you feel like you still need to be limiting orders for 23. And then, Harry, you had a comment that your used truck is still really good and don't expect any impact on Finco results. Are you not seeing any sort of pressure in used truck like the overall market is starting to see the last couple months? You wouldn't expect to see any sort of sequential drop-off?

We did see that used truck prices came down a little bit in the second quarter compared to the first quarter. In North America, that is. But used truck prices are still more than 60% compared to the same quarter last year. So that's what we call a really strong used truck market for us.

And did you have a first question, Seth?

Yeah, hi, guys. Nicole DeBlades from Deutsche Bank.

Hi, Nicole.

Hello. Maybe just going back to the question asked earlier on red-tagged inventory to kind of tie things up there. I think last quarter when we were on this earnings call, you guys said that red-tagged trucks were kind of in the low $3,000 range. When we talk about sequential improvement, to what extent have they improved? How close are we to getting that number towards zero?

Good question. The number will never go to zero because there's always trucks that are being final delivered, I would say. So we never look for the number to be zero. But what we have seen is an improvement from the low 3,000s into the high 2,000s. And so we see that sequential improvement, and we hope that that sequential improvement will continue.

Okay, got it. That's helpful. And then... We've gotten through a lot of the questions here, talked a lot about the US and Europe, but I guess what are you seeing with respect to order rates in the rest of world? Any change in the trend that you had been seeing things kind of pretty strong over the past few quarters?

I'd share that if you look at South America, our team down there is doing a really great job in South America and specifically in Brazil. We've grown market share considerably. We've had strong order intake. The trucks are performing very well for the customers. We've established ourselves as a premium brand in Brazil. And it feels like a great market for us. In Mexico, we're doing well also. So Europe, North America, South America, Australia is doing well. I'm having a fantastic year there as well.

Thanks. I'll pass it on.

Thank you. And we'll go to our next question.

Hey, everybody. It's Jeff Kaufman at Vertical Research Partners. Good afternoon.

Hello, Jeff.

Hey, quick question on raw materials and raw material costs. Pretty inflated in the second quarter, still somewhat inflated, but steel, aluminum, almost any raw material you look at has been coming down pretty sharp over the last four to six weeks. Could you remind us kind of how long it takes raw materials to work through inventory and become part of the P&L? And I guess kind of the cost you're running through your P&L, you know, when were those raw materials acquired and what we're seeing now in terms of the change in the markets? Is that something that's going to be more of an early 23 change in cost of goods sold? Is it probably a little later this year? I'd just love a little insight on that.

Well, we don't really break the model out that way to think about it in terms of, you know, sequential timing of that. It obviously depends on which materials in the trucks. You bring up the comment of which is, you know, we have seen in the last several weeks some softening in materials prices, but from very, very high levels. And so we continue to include that in our conversations with customers as we price the trucks.

It's one of the elements that goes into the cost of a truck, like labor is and efficiency is, and The new truck models are, so there's many elements that go into the pricing for trucks.

So I should think about it as the pricing will follow the cost.

That's a good general rule, Jeff. We agree.

In general. Wonderful. That's my question. Thank you, guys.

All right. Thank you, and we'll move to our next question.

Hi, thank you so much. This is Tammy Zakaria from JP Morgan. Thanks for taking my questions. I have a couple of quick ones. So my first question is, is there any risk to production in the third or fourth quarter, given what we're hearing about a potential gas shortage in Europe? Are you preparing for any disruptions? Should there be any?

Well, on that topic, Tammy, I would say that, you know, those conversations are always ongoing. What we've seen in the last five months since the Ukraine conflict started is that the countries have done a great job of continuing to have supply. Um, Packer has done very well in that timeframe and we think that we'll continue to do well as we look forward.

Got it. Super helpful. And, uh, so this is my second question is more of a macro question. So I think Preston, you, you just mentioned a contract free market is actually increasing. But what we are hearing from retailers is that there's an inventory overhang and slowing consumer demand. So what do you think is really driving the contract freight market that is going up now?

I think that the most fundamental thing is the economy is very large and at a very large level and is probably going to continue to be. So I think that anything that 75% of what gets delivered in this country is done through trucks, and ours are the most desirable trucks. So I kind of expect that as the car market is strong, as housing is strong, as consumer goods, even if it moderates, is at high levels, then there's a lot of freight that's going to need to be hauled. And so that creates a strong market dynamic for us.

Got it.

Thank you so much.

We'll take our next question. Caller, your line is open. Please check your mute button.

Sorry, Tim Fine here from Citi. Sorry about this clunky exchange. Preston, the first question I had was just with respect to the, from a truck perspective, the margins, and we talked a lot about price versus material cost, but is there a way to quantify what sort of impact you've experienced just from the standpoint of from factory efficiency or, I guess in this case, inefficiencies over the last several quarters from more of a stop start and or a slower than normal build rate? Is there a way to kind of quantify what that drag has been? And then presumably that becomes more of a tailwind in 23?

Well, I think, no, there's not really an easy way to do that or a necessary way to do that. I think what we look at is the improvement in margins that we've realized year-over-year and sequentially and the continued improvement in margin that we're forecasting out into the future and think that that kind of takes the whole macro picture of pricing, cost, and efficiency into play and shows you that we see things going in the right direction.

All right. And then back to the comment on foreign exchange. If we just use where the dollar settled at the start of the quarter, is there a way maybe Michael can help just a ballpark figure? I know there's multiple cross-currency impacts, but just dollar, euro, or what we should think about from the standpoint of a second half headwind, either top end or bottom line, just if the dollar stayed at current levels?

Yeah, I mean, I think, you know, what happened in Q2 is probably a it would be a similar effect to what you see in Q3 and Q4. Last year's currency was already dropping in Q3 and Q4 last year, so there's multiple cross-currents there, but directionally it would be similar probably to Q2.

Okay, understood. Thank you.

We'll take our next question.

Hi, this is John Joyner with the Bank of Montreal. Hello.

Hey. So, and maybe you touched on this already, but you've done an excellent job of controlling, I guess, equipment-related SG&A dollars, particularly in light of the strong sales. So, I guess, what has been driving your success here?

Well, you have to give all the credit in the world to the entire team at PACCAR. We have a focus on excellence and a focus on efficiency and operating well, and they have delivered fantastic performance in that area.

Okay. Thank you. And then maybe just one more. On your outlook, kind of maybe if you can talk about beyond this year or at least give some, you know, at least directionally in terms of capital expenditures, I mean, do you kind of anticipate those picking up or staying at similar levels or maybe even declining from here? I mean, I would assume that you would, you know, you would be, you know, continually investing back into the businesses and, you know, particularly with new technologies and such. But if you can give any color there, that would be helpful.

Sure. We've obviously last year and through the start of this year been introducing new products and At the same time, we're working on some really exciting new technology projects in both the battery electric space, hydrogen fuel cell space, connected vehicle space, and autonomous space. So we see that we have a great future set of product portfolios that we're working on that will deliver continued great results for the future.

Okay, fantastic. Thank you so much.

We'll take our next question.

Hey, this is Felix from Raymond James.

Hey Felix.

Hey, I just have one question, I guess two parts, but you mentioned earlier in the call that the new model transition in North America is largely complete. I'm curious if you could talk about the uptake on the pack car transmission for the medium duty lineup, maybe what percent of builds have them. And then similarly, if you could update us on what percent of your heavy duty builds in North America now carrying MX engine. That's really it for me.

Sure thing. As we think about it, we have been able to grow over the years. Our proprietary powertrain, that continues to grow. Our MX engine performance or percentages in the U.S. is now right around 40%. The low 40% is what we'd expect to see through the year. And the transmission that we introduced in the medium duty, the automated PACCAR transmission, has done a great job. I don't have the numbers in front of you in terms of percentages, but it is definitely growing.

We'll move on to our next caller.

David Rasso from Evercore ISI. I was curious, with the new models, and assume the majority of Europe is new model, what is the margin differential with the new models out in the U.S., Canada, versus your European business? Thank you.

Hey, David, we don't break that out. We think that what we've been able to do is transition the Doff, Kenworth, and Peterbilt brands to these new models, and we definitely see that as an advantage for our customers. As we said, each truck can save them several thousand dollars per year in operating costs. And then, of course, as we mentioned, that's really good for the company, but we haven't differentiated those margins.

Could you at least answer, has the gap changed with the new models?

Well, I mean, I think, yes, it has, right? We've seen improved margin from them because they're delivering benefit to our customers. And so it's a win-win situation.

I meant the gap between U.S., Canada, and Europe. Has it changed with the new models out?

I think that there's several factors that go into that, and one of those is market strength. And we have seen increasingly strong markets in Europe. So that's to an advantage. And then the new trucks are definitely – performing really well so i would directionally the margin question of europe improving yeah great margins in europe all right thank you very much i appreciate it you bet and as a final reminder star one at this time for questions we'll take our next question hey it's scott group from wolf again i don't know what happened can you guys hear me now we sure can

Okay, great. So one of my thoughts was just it wasn't clear to me if you guys are still in a place where you need to be limiting orders for 2023.

No, I wouldn't think of us as being limiting orders for 2023. I think that there's a normal cadence to how fleets buy and how the market goes. So it's really just the start of that season. And That's what you're kind of seeing is an uptick in order intake as we move through the calendar year.

Okay. And then I just want to ask a bigger picture question. So you guys are talking about gross margins of 14.5% to 15%. We haven't been above 15% since 2016. So as you think about price and costs and units and just your crystal ball, does third quarter – feel like it's about as good as it gets from a gross margin standpoint, or would you think you could build on that into next year?

I would say that we've had a fantastic team of people working really hard around the business to deliver the great results that we, as we shared, we think that the third quarter looks fantastic as well, and we think that there's a great business going forward.

Okay, and then if I can, just one last to follow up with that. So, The last time you guys were at high 14% kind of gross margins, margins for truck were right around 11%. Next time you get back to a high 14%, 15% gross margin, you think that the operating margins, the EBIT margins should be better, worse, similar with that 11% that you had last time?

Yeah, I think like Preston said, we will continue to deliver good margins. I think the outlook for the company is excellent. Demand is strong. The new products are doing well. We're in an excellent position to deliver very, very good margins for next quarter and going forward.

Okay. All right. Thank you, guys.

There are no further questions. I'll turn it back to our presenters for any additional or closing comments.

We'd like to thank everyone for joining the call, and thank you, operator.

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