PACCAR Inc (NASDAQ:PCAR) Q2 2023 Earnings Call Transcript

PACCAR Inc (NASDAQ:PCAR) Q2 2023 Earnings Call Transcript July 25, 2023

PACCAR Inc beats earnings expectations. Reported EPS is $2.33, expectations were $2.18.

Operator: Good morning and welcome to PACCAR’s Second Quarter 2023 Earnings Conference Call. All lines have been in a listen-only mode until the question-and-answer session. Today’s call is being recorded and if anyone has any objection, 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.

Ken Hastings: 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 Feight, Chief Executive Officer; Harrie Schippers, President and Chief Financial Officer; and Brice Poplawski, 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 Feight.

Preston Feight: Hey, good morning. Harrie Schippers, Brice Poplawski, 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’ pretax 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’re 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. PACCAR 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 that Class 8 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 tonne 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 Brasil 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. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Harrie Schippers: Thanks, Preston. PACCAR 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. PACCAR achieved strong truck, parts and other gross margins of 18.8% in the second quarter. We estimate third quarter gross margins to be in the 18% to 19% range, reflecting continued high-level performance of PACCAR’s Truck and Parts business. PACCAR Parts achieved strong second quarter gross 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.

PACCAR Parts is focused 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 Parts 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 PACCAR. Third quarter Parts sales are expected to increase 6% to 8% compared to the same period last year. PACCAR Parts’ growth is supported by a network of 18 distribution centers, more than 2,000 dealer locations and 250 independent TRP stores, as well as technologies like managed dealer inventory and innovative e-commerce systems. PACCAR Parts continues to expand and will open a new distribution center in Massbach, Germany next year.

Each new distribution center increases the number of dealers and customers benefiting from receiving parts on the same or next day. PACCAR Financial Services second quarter pretax 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, PACCAR Financial is having another very good year. PACCAR 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 line-up of trucks in the industry and will contribute to excellent performance for many years.

PACCAR’s after 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 million to $675 million this year, and research and development expenses are estimated to be $400 million to $430 million. PACCAR’s industry-leading truck line-up, 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.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today is from Steve Volkmann from Jefferies. Steve, please go ahead. Your line is open.

Steve Volkmann: 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?

Preston Feight: Well, 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 are some sectors out there that are exceptionally good. That’s LTL, vocational and otherwise, and demand is expected to be strong.

Steve Volkmann: 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?

Preston Feight: Well, Steve, you know we don’t provide 2024 guidance in this call. And I think you do hit up on a really good point, though, which is the structural improvements of PACCAR compared to a few years ago are significant, right. The product investments we’ve made; 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.

Steve Volkmann: Got it. Thank you, guys.

Preston Feight: You bet. Have a good day.

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

Tami Zakaria: 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?

Preston Feight: Yeah. What I would think about is the second half, Tami, 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, and Q3 in 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.

Tami Zakaria: 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?

Preston Feight: I’ll let Harrie kind of talk about that one.

Harrie Schippers: Pricing for trucks in the second quarter was up 15%. We saw significant cost increases still 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%.

Tami Zakaria: And any comments –

Harrie Schippers: So with that –

Tami Zakaria: On the back half in pricing outlook?

Harrie Schippers: 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.

Preston Feight: And I think Harrie shared that you know we expect margins of 18% to 19% in Q3, and I think that’s kind of a testament of how we see the price-cost analysis going.

Tami Zakaria: Perfect. Thank you.

Preston Feight: You bet. Have a good day.

Operator: Thank you. Our next question is from Chad Dillard from Bernstein. Chad, please go ahead. Your line is open.

Chad Dillard: Hi, good morning, guys. So as you look – as you think about price-cost over say the next 12 months and also contemplate the pullback we’ve seen in raw material costs, do you think the market is strong enough for you to actually increase that price-cost spread? Or do you think you’ll need to get them back to understand how you’re thinking about you know managing that balance?

Preston Feight: 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. Like as we’ve shared before, the new trucks are providing you know at least 7% improvement in fuel economy, which is bringing thousands and thousands of dollars of benefit to our customers, there’s the trucks that these 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 costs in positive ways and still labor pressures on the other side of it. So it’s a little bit ambiguous.

Chad Dillard: Got it. Okay. And just second question. So there are some industry forecasts are calling for something on the order of like a 15% cut of production in the coming year, and I’m certainly not you know holding it to that. But, how should we think about your ability to grow your Parts business in such an environment?

Preston Feight: I think the Parts business is growing for several reasons. One is it’s 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, like we make sure that our dealers have the right parts that they need and 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.

Chad Dillard: Okay, thank you.

Preston Feight: You bet.

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

Rob Wertheimer: Thank you. Good morning, guys.

Preston Feight: Hi, Rob.

Rob Wertheimer: Just a mechanical question on how you typically open orders for the year forward? Are you still holding back at all just on containing 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 body building or other capacity issues? Thank you.

Preston Feight: Yeah. So the first question on how we think about the order book. And 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 multiyear 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 vocational market, I think about that, it is exceptionally strong right now. There is a limitation on – 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.

Rob Wertheimer: Got it. Thank you.

Preston Feight: You bet.

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

David Raso: 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, right, pricing was up 15% in Parts. You had a little bit of currency drag, so you know 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 giving you 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?

Harrie Schippers: So the 6% to 8% growth in the third quarter, what you have to take into account, David, is that last year, we saw a 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.

David Raso: Okay. So that implies the fourth quarter is up only 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 between volume and price so I can better understand how to model the margins.

Harrie Schippers: I wouldn’t call it a slowdown, David. I think with 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 PACCAR Parts’ team.

David Raso: Yeah, I’m not refuting. 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. In the up 7%, is that 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.

Harrie Schippers: Sure. Of course, it’s a combination of volume and price.

Preston Feight: 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. And 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.

David Raso: That’s fair. Okay. So we’re just sort of normalizing the Parts after heavy last year kind of stocking. And then by the end of the year, you’re hopefully balanced here on the Parts? Is that sort of the idea?

Preston Feight: I guess we say it differently and say that as Harrie said, I think aptly that you see the growth being steady growth over the full year with just a 6% to 8% third quarter in it. And then growth again next year. So, the business is doing tremendously well.

David Raso: 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 you know open up for the full year? Thank you.

Preston Feight: 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.

David Raso: Okay. I appreciate it. Thank you.

Preston Feight: You bet.

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

Jamie Cook: 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 you know 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 I mean if markets – if supply chain gets back to normal share, because we’ve underserved the market? And then my second question, can you just give – I know you had some you know nice market share gains in South America. Could you just give 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 down – assuming the downturn has happened, where would be the biggest opportunity for PACCAR to gain market share? Thank you.

Preston Feight: 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 Harrie has thoughts on it or something like that. But –

Harrie Schippers: 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 a result of that. And yeah, 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.

Preston Feight: 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-constrained, then our market share grows. And we see nothing but strong demand for the products. So it’s really just about being to associate that demand, and that’s just going to take us some time to get the build out.

Jamie Cook: Thank you.

Preston Feight: You bet.

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

Steven Fisher: 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. So 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? What – 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.

Preston Feight: You know I think it’s pretty steady performance between Parts and Trucks in Q3 from Q2, I mean 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.

Harrie Schippers: 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.

Steven Fisher: 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 up cycle. How are you thinking about that? And how do you think the rest of the supply chain is preparing for this? Are there going to be kind of capacity strength if this demand cycle plays out with that pre-buy as people are thinking?

Preston Feight: 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 the 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 base 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 of 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.

Steven Fisher: Okay, thank you very much.

Preston Feight: You bet.

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

Tim Thein: Great, thank you. Good morning. Yeah, Preston, it’s just, I guess, yet another one on the Parts business, and I think you 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 – 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 the 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 maintenance intervals that get pushed out or a rebuild 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 that 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.

Preston Feight: Sure. Great question. Good to think about it in that broad term. You know I think from a truckload carrier standpoint, you heard their comments in 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 there may be 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.

Tim Thein: Got it, okay. And that makes sense. And then just within your truck order board 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-sized fleets. Is the order board and kind of the – how the deliveries have played out, are you seeing more – has that shifted more towards your big large fleets or I guess you know large fleet this year? And what do you think about the investment appetite for your small to mid-sized carriers as you think about ‘24?

Preston Feight: 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.

Tim Thein: Got it. Okay.

Preston Feight: Very good. Thank you.

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

Nicole DeBlase: 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 a 100% driven by European holidays, so you’re effectively projecting US production flat to up in the third quarter?

Harrie Schippers: That is correct, Nicole. And Europe that has a 3-week summer shutdown every year. It takes three weeks of production out. And some of that is offset by higher production in all the parts of the world.

Nicole DeBlase: 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?

Preston Feight: Yeah. That’s a – it’s a great question. It’s one that the customers are trying to understand the choices out in front of them, right, with the 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 will 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 Peterbilt and Kenworth and the 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.

Nicole DeBlase: Thanks. I’ll pass it on.

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

Jerry Revich: Thank you. Good morning and good afternoon. Preston, I wonder if I could ask, you know your profit per truck now stands at $18,000 you know in prior cycles. It hasn’t gotten above $10,000. Can you just talk about what’s driven that acceleration? Because you know 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 in 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 road map?

Preston Feight: Sure. Thanks for the question. I do think that what the investments we’ve made over the past several years are paying off. I mean are paying off in a bunch of different markets. So paying off in the fact that within DAF in Europe, we have the only truck that complies with mass and dimensions is 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.

Jerry Revich: 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?

Harrie Schippers: Yeah 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 us.

Jerry Revich: Thanks, Harrie. And then just last one. In the prepared remarks, you spoke about the new facilities improving, your dealer on-time deliveries and ability to stock. Where do dealer inventories of your, you know A runners stand today versus a year ago? Is it fair to assume service levels are up versus a year ago and inventories are up at your dealers’ level for the high-volume runners?

Preston Feight: Yeah, I think that that’s – it’s a fair observation 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.

Harrie Schippers: And Parts inventories have gone up, of course, as we sell more. Net-net, inventory turns were at record levels in the second quarter. So continue to have the inventory that we need to satisfy our customers.

Preston Feight: And it’s helped us as we grow our overall share of the Parts business.

Jerry Revich: Great, thank you.

Operator: Thank you. Our next question is from Matt Elkott from Cowen & Co. Matt, please go ahead. Your line is open.

Matt Elkott: Good morning and good afternoon and 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 you know some challenges broadly, and that’s being reflected in freight at times, at least on the intermodal side – on the rail and intermodal side.

Preston Feight: I think is that – I think what you’re saying is that you can imagine the European economy has maybe – has felt like the mouth 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.

Matt Elkott: Okay. And then follow – 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?

Preston Feight: 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. And we think it’s a bit early to make a call on which one is going to be right. We do think that diesel engines will be a significant part of that for the years to come.

Matt Elkott: Got it. Yeah and just one final clarification. I know supply chain disruptions have eased generally 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 you know next year?

Preston Feight: 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 meet the – satisfy the market. Nobody wants to do it more than them or us. And so together, we’re working through that. And I keep seeing this improvement. It’s far better than it was a couple of quarters ago, and we expect it will be better in the quarters to come.

Matt Elkott: Great. Thank you very much.

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

Jeff Kauffman: Thank you very much. Hi guys. Just wanted to get [technical difficulty] already on one item, and then I want to go back to the zero emission vehicles and a follow-up there. For PACCAR 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?

Harrie Schippers: 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 PACCAR Financial, the total assets grow with the higher prices per truck as well, of course.

Jeff Kauffman: All right. Thanks, Harrie. 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 the 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 challenge of 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 when that truck is likely to be available? And maybe kind of update what’s going on with customers on the battery electric side?

Preston Feight: 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 would expect on 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 and 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.

Jeff Kauffman: Awesome. Thank you.

Preston Feight: You bet.

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

Michael Feniger: 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? It’s 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?

Preston Feight: 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.

Michael Feniger: 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?

Harrie Schippers: Talk 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.

Michael Feniger: Thank you.

Harrie Schippers: You bet.

Operator: Thank you. [Operator Instructions] We have no further questions. I would like to hand back for any closing remarks.

Ken Hastings: We’d like to thank everyone for joining the call, and thank you, operator.

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