Paccar (PCAR) Q2 2026 earnings call transcript

I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead. Good morning and welcome to PACCAR's second-quarter 2026 earnings conference call. All lines will be in listen only mode. My name is Ken Hastings, PACCAR's Director of Investor Relations, and joining me this morning are President Fight, Chief Executive Officer Kevin Baney, President and Bryce Popoloski, Senior Vice President and Chief Financial Officer. Certain information presented today will be forward-looking and involve risk sentences 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 President Fight.

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 dollars and that income was 752 million, an increase of 24 percent from the first quarter.

These results were driven by strong truck division performance. PACCAR parts performed well and achieved record quarterly revenues of 1.75 billion dollars and quarterly pre-tax income of 417 million. PACCAR financial also performed well achieving pre-tax income of 124 million dollars.

Now, looking at this year's US 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 2025th European above 16 ton market size to be around 310,000 trucks. Dost 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 percent to 14.4 percent due to very good overall performance.

Third quarter margins are forecast to be a strong 14.5 percent and then further increase in the fourth quarter. PACCAR's exceptional range of trucks compelling parts business, industry leading financial services and customer focused product development strategy positioned the company well for an excellent second half of 2026 and future. Kevin will now provide an update on PACCAR parts financial services and other business highlights. Kevin.

Thank you Preston. PACCAR parts achieved record second quarter revenues of $1.75 billion and good profits of $417 million. Gross margins increased to 29.8 percent. 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 percent 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 three to five percent. 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 dollars and R&D expenditures in the range of 450 to 480 million.

PACCAR is investing in customer focus 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.

Hi Steve.

Sure. There's a couple of things. Thanks for the question. Probably one of the things is volume of trucks was higher and then most significantly I think our local for local production is benefiting PACR. I also think that the team did a fantastic job and cost controls or 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 provide some tariff benefits to us.

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%, contract rates are up six and a half percent so we're seeing favorability for how they're operating their businesses. I have become a little bit more constrained which is helping them realize operating benefits and I think we all share in that together so we've seen some some favorability in terms of how we're able to price trucks as we look forward.

Have a great day Steve.

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, efficiency for the local for local but we did have a net tariff benefit. We had some tariffs so 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.

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

I think the EPA is in a very nice job in paying attention to what the industry's needs are. I appreciate the work the administration has done in helping make sure we put fully validated products out into the marketplace so it's been nice to work with the ATA and the customers and the administration to put a government business relationship in place that work is working well.

I think what they did is they took not all of the pre-buy but they kind of smooth it and I think it creates a stronger position for 2027 to be a good market for the industry and so I think that's kind of how we experience in that and if it's a good market for our customers then it tends to be a good market for us as well.

You bet.

You know, the great question, Tammy, thanks for asking. There's a couple things to factor one you're fully aware of, right, which is that as truck increases it has a ratio mixed 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 we're probably the mix of our actual trucks we're building is shifting a little bit. So maybe a little less locational, 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.

Good question. I think a lot of information came out just as recently as July 9th on that when the EPA and 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 too much later in the year. But the way it's currently proposed is we would expect to see NCPs running at something like six 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. So I think the result of that is as shared earlier means that the end of the year will improve. And then I think it bodes well for a good 2027 operating condition for the customers and for us.

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 give them a better 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, we're 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 environments, the best it's ever been, the engine performing, the best they've ever performed.

So we have a great product line about there. And I think that since they have the operating capital to use, they'd like to be using those trucks. Since they're just starting to do that, it seems like it's going to ramp through this second half. Like I said, probably 145,000 retail second half. And then I think we should expect a very healthy market in 27.

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

And so that kind of levels it out also.

Thanks, David. I'll take the first one and then Kevin can cover the parts one. We can add anything you want. So 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 markets ramping up were 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 they'll be carry over into 2027.

And then I think because of the way the EPA implemented this approach, it'll allow people to have the product they want next year, which I think they'll be in a good operating condition. And so it'll help the cadence of the year next year start strong and probably be strong through the year.

And just to add to what Preston said, Packer was the first to announce build rate increases earlier in the year. And so a lot of strong communication with the supply base on the rate of increase throughout the year. So feel pretty good about the support we're getting at the elevated build levels. And then on the part side, David, the parts will grow at a faster rate in the second half based on the strength of the truck market. You know, capacities come out, utilization is increased, freight rates have increased. We're seeing customers buying more parts now. A good indicator is that the larger customers are buying through a fleet services program. We've seen an 8% increase quarter over quarter.

And then also Europe is running strong. And so as we see the stronger truck market, second half of this year and into next year, we were confident with the parts growth.

So will you stick with the 200 milligrams product and just pass that extra cost on the customers? Or are you thinking with going as planned with a 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 PACR engines and our partner's engines Cummins, and 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 at 6,000 to 7,000, they're 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.

Yeah, I think that the tariff situation has become a little bit more clear, Chad, and that 232 is durable. There doesn't seem to be any real challenge to that. I think it is favorable for PACR in that our teams, as we shared previously, but I've been in all of 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 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.

Yeah, I think that the NCPs that will be out there are fees that will be paid to the government. So that's a straight pass through for us. And that's how we would look at that. So it really shouldn't have any effect on margin. We're not going to try to make a profit on those penalties. That's just a pass through. But we think the strength of the market will be good for PACR in the 2027, should do great. And we think that the, again, the allowance to sell the current model of your products throughout next year, which is a distinct possibly what we'll do with an introduction of 2027, feels really good. It really gets the right approach and should be positive, Kyle.

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 mid-sized 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, 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.

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 in the in the months we're in now and looking forward. So that's probably the biggest thing that's affecting the margin there and that from a build mixed 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 US. That's probably a difference in the US. So 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 US 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 US performance, the increasing truck market in the US, the strong European performance. They were all factors in it. They all came together well. And we think that will continue.

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

All right. Take care, Jamie.

Are there still scenarios where you think you could reasonably say either the 230 or the 270 N? 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 is going to be. And now it's just what happens with inventory.

Yeah, we didn't provide Q3 guide, but seeing 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 3 to 5 for the second half. I think 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 the high side of that range.

Preston, I just wanted to go back to the discussion around the EPA 27. I think the 27 dynamic for Unit 12 makes sense, but specifically to the ability to use credits to sell or to get 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 to 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 six to seven thousand range for kind of everybody.

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.

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

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 US 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 pack R. So I think all of those things give us confidence in where the market should head towards in the coming year or two here.

And then just lastly, I've got one very short term and then one longer term. Mechanically, if someone placed in a, that near 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 too relative to where they've been in prior cycles? Yeah, I think, you know, what we think is that there was many of 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 maneuver, 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, you know, 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 short, mid and long-term performance. Thank you. You bet.

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