PACCAR Inc.

Good morning and welcome to PACCAR's second quarter 2026 earnings conference call. All lines will be in the 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 and welcome to PACCAR's second quarter 2026 earnings conference call. All lines will be in listen-only mode. My name is Ken Hastings, PACR's Director of Investor Relations, and joining me this morning are Preston Feight, Chief Executive Officer, Kevin Baney, President, and Brice Poplawski, Senior Vice President and Chief Financial Officer. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings and the investor relations page of PACCAR.com. I would now like to introduce Preston Feight.

Hey, thanks, Ken. Good morning, everyone. In the second quarter, PACCAR's outstanding employees did an excellent job of increasing production, to provide our customers with the highest quality trucks and transportation solutions in the industry. Their hard work, high performance, and dedication is enabling PACCAR to continue increasing build rates in our factories around the world. PACCAR's second quarter revenues were $7.5 billion and net income was $752 million, an increase of 24% from the first quarter. These results were driven by strong truck division performance. Packard Parts performed well and achieved record quarterly revenues of $1.75 billion and quarterly pre-tax income of $417 million. Packard Financial also performed well, achieving pre-tax income of $124 million. Now, looking at this year's U.S. and Canadian heavy truck market. The US economy is growing and the truck market is strengthening as freight rates have increased and regulatory clarity has been provided. First half retail sales were 105,000 trucks and we expect that the second half could be around 145,000 resulting in a full year market size of around 250,000 units. In Europe, the economy is growing modestly and the truck market is healthy. We project the 2025 European above 16 ton market size to be around 310,000 trucks. Doff's premium trucks are providing customers with the latest technology and the best operating efficiency. This year's South American above 16 ton market, where Doff trucks are desired by customers for their durability and advanced technology, is expected to be in the range of 100 to 110,000 vehicles. In the second quarter, PACCAR's truck deliveries increased from 33,000 to 38,700. Third quarter deliveries are estimated to grow and be around 42,000 as build rate increases are partially offset by the normal European summer shutdown period. PACCAR's truck, parts, and other second quarter gross margins increased from 13.1% to 14.4% due to very good overall performance. Kevin Baney, Lily Ley, Brice Poplawski, Mark Pigott Kevin?

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

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question. And if you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Steve Volkman from Jefferies. Steve, your line is open. Please go ahead.

Thank you. Good morning, everyone.

Hi, Steve.

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

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

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

Yeah, I think what's happening in the general market is our customers are starting to experience better operating conditions for themselves. Spot rates are up 20%. Great. Thank you, guys. You bet. Have a great day, Steve.

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

Yes, good morning. Good afternoon, everybody. I thought the profit per truck performance was especially strong in the quarter. I'm wondering, was there any IEPA refund benefit or anything along those lines that contributed to the really strong cost improvement?

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

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

No, we didn't put that out and we think that it'll remain strong. So we think that the tariff position we had in the second quarter will look similar to the third quarter.

That's really great to hear. And then, you know, what we had been hearing until the EPA's new ruling was that you folks for the fourth quarter deliveries were pulling back Thank you for joining us today.

It's been nice to work with the ATA and the customers and the administration to put a government-business relationship in place that is working well. I think what they did is they took not all of the pre-buy, but they kind of smoothed it, and I think it creates a stronger position for 2027 to be a good market for the industry. And so I think that's kind of how we experience in that, and if it's a good market for our customers, then it tends to be a good market for us as well. Thank you. You bet. Have a great day.

Your next question comes from the line of Tammy Zakaria from JP Morgan. Please go ahead.

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

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

Got it. That is helpful. And then my second question is on the NOX compliant engines. If I remember correctly, you expected that to be probably $8,000 to $10,000 more expensive than a non-compliant one. But with the NCPs that have been announced, it seems like the fine could be lower than the cost of a compliant engine. Just wanted to know if that's how you interpreted it, and if so, How could that impact your customer behavior next year when the EPA NOPS regulation goes into effect?

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

Thank you.

Great.

Your next question comes from the line of Rob Wertheimer from Milius Research. Please go ahead.

Thank you. Preston, you just touched on this. I think maybe Kevin did earlier, but the EPA shift or proposed rule may benefit 2027 a bit. And my question is a bit of a soft one, but when you talk to customers now, are people pre-buying or do they just need trucks? You know, there's a couple of things that maybe tighten up fleet dynamics. And so I'm curious about, you know, maybe it's a soft question, but like what people are buying for. And then into 27, those comments are around a continued pre-buy or more just that people have confidence in the engine and aren't shying away from it. Thank you.

Yeah, sure. Good question. Good to think through that a little bit. I think part of what's happening is they've been in a tough operating condition. Our customers may have been in a tough operating condition for a few years now. That meant they've been careful with capital. They've probably kept trucks longer than they would have wanted to. And you can see that, especially as a pronounced first half of this year, where it really showed up in 105,000 trucks of retail. I think that now what's happening is they're trying to get back into their normal operating models. The trucks we're building today are the most fuel-efficient trucks we've ever built, so they're very helpful to the customers to operate them. The driver environment is the best it's ever been. The engines are performing the best they've ever performed. So we have a great product lineup out there, and I think that since they have the operating capital to use, they'd like to be using those trucks. Since they're just starting to do that, it seems like it's going to ramp through the second half, like I said, probably 145,000 retail second half, and then I think we should expect a very healthy market in 2017.

Okay, thank you. And then just the EPA, does that advantage any of your competitors more through sort of credits? Is that any headwind to market share or price in 27? I'll stop there. Thanks.

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

Your next question comes from the line of David Rasso from Evercore ISI. Please go ahead.

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

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

Parts will grow at a faster rate in the second half based on the strength of the truck market. Capacity has come out. Utilization has increased. Freight rates have increased. We're seeing customers buying more parts now. A good indicator is that the larger customers are buying through our fleet services program. We've seen an 8% increase quarter over quarter. Also, Europe is running strong. As we see the The stronger truck market, second half of this year and into next year, we're confident with the parts growth. Thank you.

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

Hey, good afternoon, guys. Hey, Chad, though. Question for you on EPA 27. So the non-compliance is about $6,000 to $7,000. If you did comply with 35 milligrams, it's plus $10,000. So assuming the EPA rules hold, how does that change your product strategy? So will you stick with the 200 milligram product and just pass that extra cost on the customers? Or are you sticking with going as planned with the 35 milligram product?

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

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

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

Thank you.

Great.

Your next question comes from the line of Kyle Menges from Citigroup. Please hold. Please go ahead.

Great. Thank you. I was hoping just if we could hone in on margins a little bit, maybe as we get into 2027. I mean, you sound a little bit more confident in volumes and then easing into the new truck platform, I guess, in 2027, new engine platform. And I'm just curious how you're thinking about margin ramifications, maybe as you start with selling 2026 engines in the first half. and many more. Thank you.

should do great. And we think that, again, the allowance to sell the current model of your products throughout next year, which is a distinct possibility of what we'll do with an introduction of 2027, feels really good. I feel like it's the right approach and should be positive, Kyle.

Got it. And then also on parts, I mean, it sounds like maybe some of the larger fleet customers contributing more to the parts demand this year. So just curious as you see the over-the-road market come back and maybe a recovery become more broad-based and see more demand pick up from small and mid-sized fleets, just how to think about parts margins maybe as that mix within the customer-based shifts a little bit. I mean, I would imagine maybe small, mid-sized fleets, they'd be buying more TRP parts, which I think come at a lower margin. So just how to think about that.

Yeah, Kyle. So the reference to the fleet services was a good indicator for the large fleets, but we're also seeing the increase in the small to midsize as well. And it's just a reflection of the utilization picking up across the industry. So that's good. We're also seeing an increase in our TRP part sales as well. So I think those are all strong indicators of improved part sales. And then just on the margin side, you know, we still have the newest truck platforms in the industry with strong proprietary content, the engine business as well. And so I think we talked earlier calls about the focus on service only required maintenance. And as the truck side improves, I think we'll just see all indications improve on the part side as well.

Paul, thank you. Great.

Your next question comes from the line of Jamie Cook from Truist Securities. Please go ahead.

Hi. Good morning. Your time and congrats on a nice quarter. I guess my first question, the delivery surprised to the upside relative to your guide, but US and Canada was down, which I guess I was surprised by. I think you implied every region should be up. you know what's driving that and within the 42,000 deliveries in the third quarter what are you expecting for U.S. and Canada and I guess Preston it sort of dovetails into the margins because the margins were very impressive with U.S. and Canada down I always thought that was one of your more profitable regions so correct me if I'm wrong and then I guess my second question on the third quarter margins you mentioned mixed like a little more fleet a little less vocational can you just help us understand what you're seeing across TL, LTL, and vocational in terms of the order book, and is fleet being higher just a function of demand improving there, or is there something more negative happening on the vocational side? Thanks. I know there was a lot in there.

Wow, Jamie. That was a lot. Let me try to work from the back of it to the front. You're right. There is some mixed shift, and it's not about really anything other than the fleets and the truckload carriers increasing their demand in the months we're in now and looking forward. So that's probably the biggest thing that's affecting the margin there. And then from a build mix standpoint, if I just take it more generically, I would say that we did have a few hundred trucks that we didn't even deliver in the U.S. There's probably a difference in the U.S. that we saw just from some supplier constraints that we're starting to experience as the market ramps up. And so we think those will come through in the quarter, and we do expect healthy demand improvement or not even demand, but delivery improvement in the U.S. markets. and then we had good European performance. The team did a great job there in the quarter and so I think you put the strong U.S. performance, the increasing truck market in the U.S., the strong European performance, they were all factors in it. They all came together well and we think that'll continue.

Thank you.

Yeah, you bet. If I missed something there, feel free to jump in on that because there was a lot.

You did a great job. I'm good. Thanks.

All right. Take care, Jamie.

Your next question comes from the line of Stephen Fisher from UBS. Please go ahead.

Thanks. Good morning. Just on the U.S.-Canada retail outlook, sounds like you're centering around $250,000 there. Just curious, with half the year to go, just why not narrow the range at all? Are there still scenarios where you think you could reasonably say either the $230,000 or the $270,000 end?

You know, I think that we left it that way, but it's really calling a midpoint at 250. I think the question still centers out around inventory and what happens with inventory and that, because I think we have a great understanding of what build's going to be, and now it's just what happens with inventory.

Okay, makes sense. And then, I'm not sure if I missed it, but on the parts side, relative to that new 3% to 5% range for the year Q3, Are we thinking that it will sort of be at the low end of that three to five or somewhere in between? Anything specific if I missed it on Q3 guide for parts?

Yeah, we didn't provide Q3 guide, but what I'll add is that we did see sequential growth in the Q2 as we went through the quarter. And so that's why I just called it the three to five for the second half. We'll see growth continue throughout the back half of the year.

But I don't think we think it's at the low side of that range. I think we think it's at the high side of that range.

Okay, perfect. Thank you.

Your next question comes from the line of Angel Castillo from Morgan Stanley. Please go ahead.

Hi, good afternoon. Thanks for taking my question. Preston, I just wanted to go back to the discussion around the EPA 27. I think the 2027 dynamic for unit sales makes sense, but specifically to the ability to use credits to sell or to offset some of the NCPs. Just curious, you know, why wouldn't that, I guess, create the ability for some competitors to ultimately sell the current engine at no incremental penalty and then maybe, you know, to the extent that there is any implications of that, I guess, what are the impacts on potential for passing through price next year on the new engine or just competitive dynamics on price?

Yeah, Angel, I don't tend to want to talk about what other competitors are going to do from their strategies. I can just kind of see what the public qualifications are out there, and I know where people's engines are qualified. And so what we see is if the engines are qualified at today's level, then the penalties are going to be in that $6,000 to $7,000 range for kind of everybody.

Please hold, we are experiencing technical difficulties. Please stand by while we address the issue.

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Jade, can you hear us?

Jade, can you hear us?

Yes. Thank you all for standing by. We will now resume the broadcast.

So, Angel, if you're still there, I hope you could hear the answer. If not, let me know and we'll come back through it.

Jade, why don't we go to the next question and Angel can get back in queue if he wants to do that again.

Can you hear me? Yep, we got you.

Hey, Ken? Yeah, go ahead.

Oh, perfect. All right, thank you. Yeah, I guess just maybe switching gears a little bit, wanted to ask a separate one, a little bit bigger picture and more technology. I guess I noticed one of your partners, Aurora, had launched, you know, a second generation hardware and driverless freight routes with a different OEM partner. So just could Just give us an update on how some of your partnerships with OROC here are progressing, how you see that evolving over time, just any kind of plans here to start kind of approving driverless operations or just what your strategic kind of approach here is going to be on some of those autonomous innovation.

Yeah, PACCAR is developing its autonomous vehicle platform. We're really happy with the progress we're making in that. We have good partners. and Aurora and Stack and Kodiak and the others that we work with. So we feel good about the progress we are making on that. It's significant. We have no plans to take the driver out at this point in time.

Understood. Thank you.

Your next question comes from the line of Scott Group from Wolf Research. Please go ahead. Hey, thanks.

Afternoon. All we keep hearing from truckers is supply-driven cycle. Rates are going up a lot, but demand sort of stable, drivers, fewer drivers. Does that change the way you think about what an up cycle could look like in terms of where orders and builds can go? Are you hearing about fleet growth, or do you think that's less likely now in this sort of supply-driven tightening?

Yeah, great question. I think that if you just look at it in general, while freight tonnage index is increasing only modestly, it's at a high level. So it's not as if there's not a lot of freight being hauled out there. And I think with the GDP growth that the U.S. is experiencing, that's positive because as we all know, over 70% of the freight is moved by trucks. So as the economy grows, the truck grows. And I think that the reshoring and local for local efforts that are happening in the industrial base right now are good for trucks and especially good for PACCAR. so I think all of those things give us confidence in where the where the market should head towards in the coming year or two here.

Okay and then just lastly I've got one very short term and then one longer term. Mechanically if someone placed in a that in their mind was a pre-buy for delivery in 26 like are they able to now push that to 27 are you seeing that and then maybe just my longer term like thought like as we enter an up cycle like Where do you think ultimately gross margins can get to relative to where they've been in prior cycles?

Yeah, I think, you know, what we think is that there was many people thought that there would be a huge pre-buy at the end of the year, and I think that What we kind of expect now is with the smart positioning that the EPA did, it'll be just a continued improved cycle through the balance of the year with a stronger 2027 and not much drop-off. And that feels pretty positive to me. And as far as the margins longer term, I think we've done a good job of investing in the right products so that our team has produced the best trucks that can be built. And I think we're building in the right locations. So that's also positive for margin. And we feel good about the company's Thank you. You bet.

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

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

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