PACCAR Inc.

Good morning and welcome to PACCAR's second quarter 2023 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 any objections, they can 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, Perry Skippers, President and Chief Financial Officer, and Bryce Poplosky, 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.

Hey, good morning. Harry Skippers, Bryce Poplosky, Ken Hastings, and I will update you on our second quarter financial results and business highlights. I'll start by saying thank you to PACCAR's great employees who continue to deliver excellent results and provide our customers with the best trucks and transportation solutions in the world. PACCAR achieved record revenues and net income in the second quarter due to its excellent portfolio of new trucks, robust aftermarket parts business, healthy financial services performance, and continued strong market demand. PACCAR's revenues increased 24% to $8.9 billion. Net income increased 70% to $1.22 billion. PACCAR Parts' second quarter revenues increased by more than 11% to $1.6 billion. Parts' pre-tax profits were $419 million, 19% higher than the second quarter of last year. Truck, parts, and other gross margins were excellent in the second quarter at 18.8%, up from 14.4% in the same period last year. PACCAR is delivering structurally higher margins as a result of our investments in the industry-leading new range of premium trucks, our sophisticated and successful aftermarket parts business, and as a result of our overall global growth. PACCAR's innovative research and development programs and partnerships provide our customers with the right products and technology to help them optimize their operations. During the second quarter, we were pleased to announce the expansion of our strategic partnership with Toyota to develop and bring to market zero emissions hydrogen fuel cell powered Peterbilt and Kenworth trucks. PACCAR's powertrain portfolio of hydrogen fuel cell, hydrogen combustion, battery electric, and clean diesel technologies position the company and our customers for an excellent future. Packer Financial also had an excellent quarter, achieving profits of $145 million due to its high-quality portfolio and positive used truck results. Looking at the truck market, industry build has been gradually increasing this year, and in the US and Canada, We estimate the Class VIII market to be in the range of 290,000 to 320,000 trucks. The 2023 European truck market is expected to be in a range of 300,000 to 330,000 units. We project the South American above-16-ton truck market to be in a range of 105,000 to 115,000 vehicles this year. South America is an important region for PACCAR's geographic growth. DAF Brazil has done an excellent job growing market share since we opened the business 10 years ago, achieving a record 9.2% share in the first six months of this year. As we look forward to the rest of this year and 2024, the truck markets are expected to remain healthy, and PACCAR will continue to deliver excellent performance. Harry Skippers will now provide an update on PACCAR parts, PACCAR financial services, and other business highlights.

Thanks, Preston. Brekker delivered 51,900 trucks during the second quarter. Supply chain is improving, though occasional supplier shortages still limit production. We estimate third quarter deliveries to be in the range of 48,000 to 52,000 trucks. The third quarter delivery estimate reflects the normal summer shutdown in Europe. Packer achieved strong truck, parts, and other growth margins of 18.8% in the second quarter. We estimate third quarter growth margins to be in the 18 to 19% range, reflecting continued high-level performance of Packer's truck and parts business. Packer parts achieved strong second quarter growth margins of 31.6%. the parts business continued its track record of high sales and profit growth, with quarterly sales growing by 11% and profits by 19% compared to the same period last year. Pekka Parts' focus on expanding its customer base and providing a full range of technology-enabled transportation solutions is driving its excellent results. In the last five years, annual part sales have grown by 73%, and parts profits have increased by 136%. The consistent performance of parts as a high-growth, high-margin business is structurally beneficial to Packard. Third-quarter part sales are expected to increase 6% to 8% compared to the same period last year. Packard Parts' growth is supported by a network of 18 distribution centers, more than 2,000 dealer locations and 250 independent GRP stores, as well as technologies like managed dealer inventory and innovative e-commerce systems. Pekka Parts continues to expand and will open a new distribution center in Laasbach, Germany next year. Each new distribution center increases the number of dealers and customers benefiting from receiving parts on the same or next day. Pekka Financial Services' second quarter pre-tax income was a solid $145 million. The financial services business benefited from excellent portfolio quality and good used truck results. Used truck prices have moderated but are historically strong. With its larger portfolio and superb credit quality, Becker Financial is having another very good year. Becker has invested $7.5 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 performance for many years. Becker's author tax return on invested capital improved to an industry-leading 35% in the first half of the year, up from 22% in the same period last year. Capital expenditures are projected to be $625 to $675 million this year, and research and development expenses are estimated to be $400 to $430 million. Packard's industry-leading truck lineup, highly efficient manufacturing operations, best-in-class parts and financial services businesses, and the continued development of advanced technologies position the company well for today and for the future. Thank you. We'd be pleased to answer your questions.

Thank you. As a reminder, if anyone would like to register a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. And when preparing to ask your question, please ensure you are unmuted locally. So that's star followed by one on your telephone keypad to register a question. Our first question today is from Steve Volkman from Jefferies. Steve, please go ahead, your line is open.

Great. Thank you guys for the question. Preston, since you brought it up, I'm curious if you might be willing to provide any additional thoughts on 2024, you know, being a robust year. Do you guys have orders for 24? And, you know, how much visibility and how much confidence do you have that 2024, you know, can be a robust year?

Steve, it's good to talk to you. Thanks for the question. I'd start by saying being full for 2023 right now is a great place to be operating from. The markets continue to be healthy for us around the world. And what we see is that we have great conversations going on with our customers. And so we're having great conversations around what the trucks are going to be and their order needs are going to be for next year. There's some sectors out there that are exceptionally good. That's LTL, vocational, and otherwise. and demand is expected to be strong.

Okay, maybe I'll pivot again on 24, but if 24 were to be a down year in any amount, you talked about sort of structurally higher margins. I'm curious how you guys think the decremental margins would look if there was a decrement.

Well, Steve, you know we don't provide 2024 guidance in this call. I think you do hit upon a really good point, though, which is the structural improvements of PACCAR compared to a few years ago are significant. The product investments we've made, the industry-leading trucks we have in Europe that are significantly outperforming, the growth we have in South America, which is significant, the new medium-duty products in North America, and the fact that PACCAR Parts is doing such a great job with being a high-margin, high-growth, technology-driven transportation solutions provider for our customers, all of those things contribute to a great future. Got it.

Thank you, guys. You bet. Have a good day.

Thank you. Our next question is from Tammy Zakaria from JPMorgan. Tammy, please go ahead. Your line is open.

Hi, good morning. Thank you so much for taking my questions. So my first question is, since your order books are full for this year, like you said, you probably have visibility into fourth quarter deliveries as well. So should the fourth quarter deliveries be sequentially better than the third quarter or possibly the highest delivery quarter of the year? Or how should we think about 4Q versus 3Q?

Yeah, what I would think about is the second half, Tammy, and the second half being a strong second half with the full backlog. You know, you have some differences in the markets in Q3 and Q4. In Q3, Europe has its summer shutdowns, so that affects things. In North America, in Q4, there's more holidays as well. But in general, we will be trying to increase build. We still continue to look at the market as being somewhat constrained in terms of supply base. That periodically affects us and everyone else, and so that may have a pacing item on the deliveries in Q4.

Got it. Thank you. And then can you comment on what was the price realization for trucks and parts in the second quarter? And do you expect price realization to sequentially decline in the back half?

I'll let Harry kind of talk about that one. Pricing for trucks in the second quarter was up 15%. We saw significant cost increases too in the order of magnitude of 9% for trucks. And then for parts, cost increases were a little higher, but more than offset by price increases for parts of around 13%.

Any comments on the back, housing pricing outlook?

No, with all the new products and the structural improvements that Preston just explained, I think we're in a good position to maintain our pricing discipline.

And I think Harry shared that we expect margins of 18 to 19 percent in Q3, and I think that's kind of a testament of how we see the price-cost analysis going.

Perfect. Thank you.

You bet.

Have a good day.

Thank you. Our next question is from Chad Dillard from Bernstein. Chad, please go ahead. You're line is open.

Hi. Good morning, guys. So, as you look, as you think about price costs over the next 12 months, and also contemplate the pullback we've seen in raw material costs, do you think the market's strong enough for you to actually increase that price-cost spread? Or do you think you'll need to give some back to try to understand how you're thinking about managing that balance?

I guess we don't spend as much time thinking about it in those terms. We continue to think about it in terms of the relationships we have with our customers, the strength of the product performance, and the value that provides to the customer. As we've shared before, the new trucks are providing at least 7% improvement in fuel economy, which is bringing thousands and thousands of dollars of benefit to our customers. They're the trucks that the drivers want. And so I think our customers make a good decision around trying to buy the best product for their operations, which are PACCAR's products, and that gives us a good pricing position as a premium brand in the market. Cost, well, cost is something that, you know, you get to follow as much as us and we look at the world around us and see some movement in cost in positive ways and still labor pressures on the other side of it. So it's a little bit ambiguous.

Got it. Okay. Just a second question. So there are some industry forecasts are calling for something on the order of like a 15% cut to production in the coming year and I'm certainly not holding you to that, but how should we think about your ability to grow your parts business in such an environment?

I think the parts business is growing for several reasons. One is because our ability to get parts to our customers in the same day or next day has changed a lot. So we are the desired place to go for parts for people. I think the application of technology by our team has been an enabler as well. We make sure that our dealers have the right parts that they need in support. And I think that understanding our customers' needs is how we think about it. So PARTS is really a transportation solutions provider, which makes them the go-to source for customers. And we think we're the leader in that space, and that helps us grow the business through all parts of the coming years.

Great. Thank you. You bet.

Thank you. Our next question comes from Rob Wertheimer from Mellius Research. Rob, please go ahead. Your line is open.

Thank you. Good morning, you guys.

I guess just a mechanical question on how you typically open orders for the year forward. Are you still holding back at all just on other uncertainty? And then a real market-based question on vocational trucks, whether You expect or have already seen some of the strength that may come with the infrastructure bill or general construction appearing there, and whether there are any constraints on that market growth from bodybuilding or other capacity issues. Thank you.

Yeah, so the first question on how we think about the order book. We have close relationships with our customers, and those relationships carry on all the time. So some customers want to place orders already and want multi-year orders, and we deal with those customers on a case-by-case basis. We try not to get ahead of ourselves in general pricing release before we understand what the world is going to look like a little bit in 2024. So the next quarter or so, that will start to free up. In terms of the locational market, When we think about that, it is exceptionally strong right now. There is a limitation from the bodybuilder standpoint. They're trying to build as many bodies as they can. We're building as many vocational trucks as we can, and we think we're at the beginning of that. So we think that that will continue for quite some time as investments into America are continuing.

Got it. Thank you. You bet.

Thank you. Our next question today comes from David Ratto from Evercore ISI. David, please go ahead. Your line is open.

Hi. Thank you for the time. The parts business, the third quarter, the up 7% midpoint, I'm just trying to get a sense of the volume baked in. The first quarter, pricing was up 15% in parts. You had a little bit of currency drag, so volumes were up a little. The second quarter, given that price comment, I'm not sure volume was up at all in parts. The third quarter, I'm just getting a sense of the volume. Are the volumes assumed down in the third quarter year over year, and then you have the price to get back to 7% total?

The 6% to 8% growth in the third quarter, what you have to take into account, David, is that last year we saw very strong growth in parts, especially in the third quarter. And with this 6% to 8% growth, we expect the year to be 10% to 13% higher than last year, which is excellent and above our long-term average.

Okay, so that implies the fourth quarter is up at least similar to the third. But again, I know it's tough comp, just so I kind of understand the volume price issue. Is the slowdown mostly volume going a bit negative, or is there something about the pricing? I'm just trying to understand that cadence. All right. between volume and price so I can better understand how to model the margins.

I wouldn't call it a slowdown, David. I think the parts business is growing 6% to 8% in the quarter, 10% to 13% for the year. That's an excellent performance by the entire Packer Parts team.

Yeah, I'm not refuting it. I'm just trying to get a sense of the volume versus price that you're thinking about the rest of the year. That's all. And the up seven, is that all volume? all price or is it volume down and price up to more than negate the volume decline? I'm just trying to get that split.

Of course, it's a combination of volume and price.

Yeah, if you're trying to get it in the macro, David, maybe you could look at it and say, like, there was a lot of pent-up pressure for parts and getting inventories right into people's businesses, dealerships, customers. I think some of that has been met on the parts side of the business, not on the truck side, really. And now that's kind of the flow that we're looking at going forward. that's fair okay so we're just sort of normalizing the parts after heavy last year kind of stocking and and then by the end of the year you're hopefully bouncing on the parts is that sort of the idea i would i guess if we say it differently as harry said i think aptly that we see the growth being steady growth over the full year with just a six to eight percent third quarter in it and then growth again next year so the business is doing tremendously well

Okay, thank you. And one follow-up, on the order books for 24, are we looking to do that a quarter or six months at a time like we've done recently, or more return to a more traditional open up for the full year? Thank you.

I think what we'll do is we'll look at the first part of the year and decide what the first part of the year looks like and release like that as we get into the general pricing.

Okay, I appreciate it. Thank you. You bet.

Thank you. Our next question is from Jamie Cook from Credit Suisse. Jamie, please go ahead. Your line is open.

Hi. Good morning. Nice quarter. I guess just two questions. One, I know you're full on production for 2023 and that's limited to some degree by supply chain constraints still. Can you talk to sort of where delivery for the year or in the back half if supply chain was back to more normalized levels? I'm wondering you know, potentially is that a tailwind to 2024, you know, if supply chain gets back to normal share because we've underserved the market. And then my second question, can you just, I know you had some, you know, nice market share gains in South America. Could you just give a, you know, broad view on what your market share is relative to the order book, if it's improved and sort of what markets potentially next year and assuming the downturn happens, Where would be the biggest opportunity for PACR to gain market share? Thank you.

So the first part of your question, Jamie, good talking with you, is really around, I do think that the supply constraints continue at some modest level, and that modest level does provide a tailwind to the market in 2024. I agree with you. I think on the second side of your question, I don't know, maybe Harry has thoughts on it or something like that, but...

Well, I think market share, we've been building as many trucks in the first half of this year as we can around the world. And so market share is the result of that. And yet we've seen strong market share growth in South America. We expect further growth opportunities there. Market shares in North America and Europe have had a slow start of the year. But as we progress during the year, we expect growth opportunities across the world.

Yeah, to add into it, I would say, like, you know, our build percentage is increasing. And as our build percentage increases, which has been supply constraint, then our market share grows. And we see nothing but strong demand for the products. So it's really just about being able to satiate that demand. And that's just going to take us some time to get the build out.

Thank you.

You bet.

Thank you. Our next question today is from Stephen Fisher from UBS. Stephen, please go ahead. Your line is open.

Great. Thanks. Good morning. So within your 18% to 19% Q3 gross margin forecast, can you just help us with some of the underlying factors there? I assume the European shutdown will be a headwind. Does that mean kind of mix of parts versus trucks is a tailwind that offsets that, or the mix from new models is still a tailwind? Or are there other factors to consider? Maybe you could just help us with a little bit of buildup of how that kind of stays in that range.

You know, I think it's pretty steady performance between parts and trucks in Q3 from Q2, which I think kind of lays into what we're seeing in the market, which is a strong market with strong performance, and that's happening on the truck and parts side, and we see that continuing.

I would echo that. If I look at the third quarter, it's probably just a continuation of what we've seen in the second quarter.

Okay. That's helpful. And then you had in the release about the expansion of Chillicothe. I guess in terms of capacity needs how are you planning for 2025 and 2026 there's some talk about this being sort of a record north american upcycle how are you thinking about that and and how do you think the rest of the supply chain is is preparing for this are there going to be kind of capacity strains if if this demand cycle plays out uh with that pre-buy as people are thinking

Yeah, I would say that what we're doing in Chillicothe is what we do all the time, which is making investments into our facilities to increase capacity and efficiencies. It's just a good example of it in Chillicothe. And that 105,000 square foot building expansion we did there just helps us get more product out and even increases a level of high quality to a next level up. From a build-out standpoint, that's just what we do. Like I said, we're doing it there. We're making investments in Columbus. We're making investments in Mexico. really all around the world, in South America. So we see the growth of PACCAR in the long term, and so we want to make sure that we're prepared for that with the factories. From a supply-based standpoint, we have great suppliers. We work closely with them to make sure that they have the capacity. Obviously, they've had unusual circumstances in the past couple years. I'd expect some normalization there, and we'll continue to work closely with them to make sure that they can provide the product we need.

Okay. Thank you very much.

You bet.

Thank you. Our next question today comes from Tim Sign from Citigroup. Tim, please go ahead. Your line is open.

Great. Thank you. Good morning. Yeah, Preston, it's just, I guess, yet another one on the parts business. And I know this will be a North American focus, but I'm just curious, you know, if you listen to some of the public truckload companies that have reported, I mean, they've seen some pretty significant you know, a lot of pressure just in terms of utilization and pressure on profitability. I'm just curious, you know, a lot of the discussion was just on positive messaging that you're kind of conveying, but any warning signs that you're seeing or hearing from either your large fleet customers or your dealers in terms of, you know, sometimes when you get pressure on profitability, you may get some you know, maintenance intervals that get pushed out or rebuilds that get extended or what have you. I'm just curious if there's been any signs of that or is it just they're chugging right through that and it's, you know, the business is not feeling that. I'm just curious, it's kind of real time, what you're hearing from the team specific to your truckload customers.

Sure, great question. Good to think about it in that broad term. You know, I think from a truckload carrier standpoint, You've heard their comments and their earnings calls, as have we, and in our relationships with them, and they've come through, I think, a tough few months for them in terms of utilization and rates, but they also kind of will say that they maybe have seen the bottom of it, and things are starting to show signs of improvement in that truckload carrier. But that's not the whole market. We also see the LTL market continuing to be strong, and we see the vocational market continuing to be strong, as well as medium duty. So from a total business standpoint, we see this steady, strong position that we're in, and we expect that to continue. And then that may even be aided as the truckload carriers see improvement in their businesses in the coming quarters. Got it.

Okay. That makes sense. And then just within your truck order board and within the backlog, is there, you know, historically PACCAR, again, more North American-oriented question, but pretty well balanced, you know, certainly at least against some of your OEM peers across, you know, small, mid, large size fleets. Is the order board and kind of how the deliveries have played out, are you seeing more, has that shifted more towards your big large fleets or I guess your large fleets this year? And what, you know, what do you think about the investment appetite for your small to mid-sized carriers as you think about 24?

You know, I think of it, I think it's more representative of the first way you kind of came at the market through the vocational and truckload and over-the-road carriers versus vocational rather than the small mid-large. I think that there's variance within that small mid-large sector. Got it. Okay. Very good.

Thank you.

Thank you. Our next question comes from Nicole DeBlaise from Deutsche Bank. Nicole, please go ahead. Your line is open.

Yeah, thanks for the question. Maybe just starting with your 3Q delivery outlook down at the midpoint a little bit, Q on Q. Is that 100% driven by European holidays, so you're effectively projecting U.S. production flat to up in the third quarter?

That is correct, Nicole. And Europe has a three-week summer shutdown every year. It takes three weeks of production out. And some of that is offset by higher production in other parts of the world.

Okay. Okay. Understood. And then, you know, in the spirit of the expanded relationship with Toyota on the hydrogen fuel cell side, can you just talk a little bit about the level of customer demand that you're actually hearing for hydrogen fuel cell trucks at this point?

Yeah, that's a great question. It's one that the customers are trying to understand the choices out in front of them, right? With regulations coming, they'd like to know whether they're going to be using clean diesel, whether hydrogen infrastructure is going to develop, whether they can use hydrogen combustion, hydrogen fuel cells, or battery electric. It seems like it'll be some combination of both for a while or some all of the above for a while. And so I think there is quite a bit of an interest on behalf of Peter Bolton Kenworth and this Toyota fuel cell project. And we've got strong inquiries and orders for that already. And I would expect people will explore that. Obviously, they're trying to balance this total cost of ownership for all the different technologies. And it's early days, and I think that they're trying to learn right now more than they're trying to convert.

Thanks. I'll pass it on.

Thank you. Our next question is from Jerry Rivich from Goldman Sachs. Jerry, please go ahead. Your line is open.

Thank you. Good morning and good afternoon. Preston, I wonder if I could ask, your profit per truck now stands at $18,000 in prior cycles. It hasn't gotten above $10,000. Can you just talk about what's driven that acceleration? Because you've always had the premium brand in the market. It feels like you're getting a higher return on the incremental fuel efficiency improvements and automation. I'm wondering if you could just maybe help us understand how much of that improvement is those areas versus improved competitive discipline, and how are you thinking about opportunities from here on the next set of product development platforms that you folks have set up on the roadmap?

Thanks for the question. I do think that what the investments we've made over the past several years are paying off. They're paying off in a bunch of different markets. They're paying off in the fact that within DOF in Europe, we have the only truck that complies with masses and dimensions that's fully compliant with that. It provides great aerodynamic benefit, great driver benefit. We're able to sell it at a higher price and provide better profitability for ourselves because the customers get a benefit in that fuel economy. Similarly, at Kenworth and Peterbilt, the new T680 and 579 are doing a great job of providing the industry's leading fuel economy for our customers. And then the new medium duty products that we launched give us a different level of profitability in the medium duty space and customer benefits as well. So all of those things kind of are taking our profitability to a structurally improved level. And South America, I should add, is also a business growth area for us where that's contributing. So we see that these are sustainable long-term advantages. And then to the second part of your question about future, well, we couldn't be more excited than we are about the investments we have going forward. There's a whole suite of things that we're working on right now that I think will just continue to set the standard in terms of premium trucks and transportation solutions.

Super. And then, you know, from an SG&A standpoint, any one-off pieces in the quarter, really interesting to see. SG&A down as much as it was sequentially and flat year-over-year given the top line growth. How should we be thinking about the SG&A leverage off of this 2Q base?

We continue to control our SG&A expenses very tightly. That's how we run the business. So we've seen some increases here and there, but it's offset by being more efficient elsewhere and a Very controlled SG&A spending level going forward is what you're going to expect from this.

Thanks, Harry. And then just last one in the prepared remarks you spoke about, the new facilities improving, dealer on-time deliveries and ability to stock. Where do dealer inventories of your A runners stand today versus a year ago as it fared as soon? service levels are up versus a year ago and inventories are up at your dealer's level for the high volume runners.

Yeah, I think that that's a fair observation is that a year ago things were pretty tight and constrained in terms of parts inventory and that's been maybe ameliorated to some percentage. So that's helping people get their service done in a more quick way, which is good for our customers, which is what we're always out for.

And parts inventories have gone up, of course, as we sell more. net inventory turns at regular levels in the second quarter. So continue to have the inventory that we need to satisfy our customers.

And it helps us as we grow our overall share of the parts business.

Perfect. Thank you.

Thank you. Our next question is from Matt Elcott from Cowan & Co. Matt, please go ahead. Your line is open.

Good morning and good afternoon. Thank you. Just a quick follow-up on Europe. You guys obviously have a technology advantage over the last few quarters there, but is the outlook in Europe primarily driven by technology? Because the European economy does face some challenges broadly, and that's being reflected in freight at times, at least on the intermodal side, on the rail intermodal side.

I think it's I think what you're saying is that you can imagine the European economy has maybe felt like the mount kilometers are down a little bit year over year, and we recognize that, but we do think that the new truck is performing so well that that's to our advantage in Europe.

Okay. And then another follow-up on the hydrogen side with Toyota Fuel Cell. You guys have been somewhat of the opinion that hydrogen ice engines could be, you know, one of the most viable bridges to whatever technology we coalesce around long term. Do you still think that or is the Toyota fuel cell partnership, you know, does it market a change?

No, I think that we do still think it can be a solution. I think that it depends upon regulatory allowance. Like in Europe, hydrogen ice is allowed as a zero emissions product. That's not determined yet. In the North American space, it has to be still discussed with the agencies. Again, we think that there is efficiencies of fuel cells and different efficiencies with hydrogen ice and different ones for battery electric. So I think it's important that we explore and work through all of those and figure out what the best total cost of ownership is for our customers, because that's really what we're driving for. And that's the level of the conversation right now. I think it's a bit early to make a call on which one's going to be right. We do think that diesel engines will be a significant part of that for the years to come.

Got it. And just one final clarification. I know supply chain disruptions have eased materially in recent quarters, but is there a way to gauge how far we still are from pre-COVID levels and if you guys see a line of sight into getting back to those levels next year?

I don't know if there's a way to gauge it. I would say the suppliers are doing a pretty good job of trying to work through it as quickly as they can and trying to increase their capacity and satisfy the market. Nobody wants to do it more than them or us, and so together we're working through that. I keep seeing this improvement. It's far better than it was a couple quarters ago, and we expect it will be better in the quarters to come. Great. Thank you very much.

Thank you. Our next question is from Jeff Kaufman from Vertical Research Partners. Jeff, please go ahead. Your line is open.

Thank you very much. Hi, guys. Just wanted to get clarity on one item, and then I want to go back to the zero emission vehicles and a follow-up there. For Packard Financial, it looks like the fleet was up about 2%, but assets were up about 6% versus first quarter. Could you help me understand that differential?

The average sales prices of trucks have gone up quite a bit over the last couple of years. We said earlier during the call, in the second quarter, pricing was at 15%. So even with 2% growth in the total fleet for Packard Financial, the total assets grow with the higher prices per truck as well, of course.

All right. Thanks, Harry. And secondly, talking about the new emission vehicles, I had a chance to see the new truck at ACT Expo. And I was asking, well, are people putting in orders, and when would you deliver to market? And I was told, oh, yeah, you can put it in order today, but we're probably looking at a 2025-ish timeframe. And I just want to kind of follow up on that. The electric vehicle push was aggressive. It feels like some folks are pulling back over challenges with the charging infrastructure and what have you. You answered the earlier question, what are you seeing on fuel cell, but can you give us an idea of of when that truck is likely to be available and maybe kind of update what's going on with customers on the battery electric side?

Well, sure. Happy to do that. So 2024 is when we think we'll be putting fuel cell trucks out there with the Toyota project. So that's, we've already done 11 of them in the market. That was our first fleets that we did last year. And now we're kind of just finishing up what will be a higher volume run. We expect that to be in the hundreds still. It's kind of what I'd expect in the fuel cell level. Your comments on people pulling back or not, we see still strong interest on EV, battery electric EV, but there is an infrastructure thing that needs to be worked through as a society. What our position is, is PACCAR will have the best products, whether they're battery electric, diesel, hydrogen fuel cell, hydrogen combustion, we'll have that entire suite available, and then we'll be ready for the market. So we work closely with the regulatory agencies to support them and work with our customers to support them. It puts us in a great position for the future. We could not be more excited about the kinds of technologies and what that does for PACCAR's future and how we'll perform.

Awesome. Thank you.

You bet.

Thank you. Our next question is from Michael Senega from Bank of America. Michael, please go ahead. Your line is open.

Thank you. Preston, are you seeing anything in the truck market in terms of the way freight moves or your customers' purchasing patterns that maybe suggest a normal traditional replacement cycle is higher than what we've observed historically? Are fleet operators trying to keep a younger fleet or any other trends that maybe what we normally think is replacement demand, if the market returns there, is actually higher given some changes in the freight and the transportation market?

You're right. I do think it will be higher than maybe people used to think of it. But more importantly to me is the fact that the trucks that are being produced, specifically by PACCAR, are providing operating cost advantages, which helps people want to renew their fleet at a sooner level. If you get a 7% benefit in fuel economy from a new Peterbilt or Kenworth or a DAF in Europe, the value is so high that you just want to replace the truck. Plus, the driver satisfaction is higher. And it's just a good business decision. So I think we see those turns happening more frequently.

Helpful. And you mentioned earlier in the call how used truck values have moderated yet still high on a historical basis. Do you find the spread between new truck pricing and your used truck pricing wider than normal? Or is the moderation in used truck values more of just a normalization of production? Curious how you're kind of seeing that used values playing out in the second half of this year.

about normalization of used truck prices. If we compare back to a year ago, used truck prices were extremely high and probably not even healthy for the market. I think in the meantime, used truck prices have come down to very normal levels. And our company, it's the finance company that sells the used trucks. And we've built out a network of 13 used truck centers that help us to sell more used trucks to retail customers at a premium price. So even at a slightly moderated used truck pricing levels, the finance company continues to do well and is able to sell the used trucks that we get back at profit levels.

Thank you. You bet.

Thank you. As a final reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad now. We have no further questions, so I'd like to hand back for any closing remarks.

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

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.