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Good morning, and welcome to PACCAR's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] 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, PACCAR'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 [ Resi ].

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 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. PACCAR Parts performed well and achieved record quarterly revenues of $1.75 billion and quarterly pretax income of $417 million. PACCAR Financial also performed well, achieving pretax income of $124 million.

Now looking at this year's U.S. and Canadian heavy truck market. The U.S. 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 2026 European [ above ] 16-tonne market size to be around 310,000 trucks.

[ DoT's ] premium trucks are providing customers with the latest technology and the best operating efficiency. This year's South American above 16-tonne market where DAF trucks are desired by customers for their durability and advanced technology is expected to be in the range of 100,000 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. Third quarter margins are forecast to be a strong 14.5% 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, position the company well for an excellent second half of 2026 and [ the ] 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%. Increasing truck utilization is beginning to lead to more parts and service activity and we expect higher parts 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 parts sales growth in the range of 3% to 5%. PACCAR Financial Services pretax 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 time line to introduce 35-milligram NOx engines.

Next year, customers will be able to buy the current generation of engines with an associated nonconformance fee. This will be beneficial for customers as it will ensure new technology is fully validated before being purchased by customers. It is 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 million to $750 million and R&D expenditures in the range of $450 million 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 powertrains 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.

[Operator Instructions] Your first question comes from the line of Steve Volkmann from Jefferies.

Thank you. Good morning, everyone. 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 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 PACCAR. I also think that the team did a fantastic job in cost [ controls ] or price [ versus ] cost was favorable for us, even more than we thought it would be. So that was also a 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, local-for-local than some of your competitors. Are you seeing overall pricing kind of coming up in the market, which gives you some opportunity?

Yes. I think what's happening in the general market is our customers are starting to [ experienced ] better operating conditions for themselves. Spot rates are up 20%, contract rates are up 6.5%. So we're seeing favorability for how they're operating their businesses. I think the driver pool has 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 favorability in terms of how we're able to price trucks as we look forward.

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

I thought the profit per truck performance was especially strong in the quarter. I'm wondering was there any i.e., refund benefit or anything along those lines that contributed to the really strong cost improvement?

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

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 [ will ] remain to together to 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 what we have been hearing until the [ EPA's ] due ruling was that you folks for the fourth quarter delivery were pulling back discounts. And so the price realization was set to prove by over $5,000 in the fourth quarter versus the third quarter. Could you just [ update ] is that still happening considering the more phased approach to the EPA '27 rollout?

Well, I think the EPA has done 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 EPA 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.

Your next question comes from the line of Tami Zakaria from JPMorgan.

Good morning. Congrats on excellent results. Two questions. The first one is on gross margin guide for the third quarter. It seems like you're expecting somewhat sequentially flattish gross margin 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 margins be better sequentially? Is there any cost headwind you're expecting in the third quarter that you didn't have in the second quarter?

Great question, Tami. Thanks for asking. There's a couple of things that 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 that'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 occasional, 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 engine. If I remember correctly, you expected that to be, call it, [ 8 ] to 10,000 more expensive than a noncompliant 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 what if that's how you interpret it? And if so, how could that impact your customer behavior next year when the EPA of regulation goes into effect?

Tami, thanks for the second question. Good question. I think a lot of information came out just as recently as [ July ]9 on that when EPA made the announcement. It's still preliminary. It's a notice of proposed [ rulemaking ]. So there's 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 $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 it 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. So 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.

Your next question comes from the line of Rob Wertheimer from Melius Research.

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 [ prebuying ] or do they just need trucks. There's a couple of things that may be tightened up fleet dynamics.

And so I'm curious about maybe it's a soft question, but like what people are buying for. And then in the '27, those comments are around continued prebuy or more just that people have confidence in the engine and are shying away from it?

Yes, 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 conditions. Our customers may of [ them ] have been in [ tough ] operating conditions for a few years now. That meant they've been careful with capital. They've probably got trucks longer than they would have wanted to. And you can see that, especially as a pronounced first half of this year.

We 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 [ engine ] forming 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 the second half, like I said, probably 145,000 retail second half. And then I think we should expect a very healthy market in '27.

Okay. And then just the EPA, does that advantage any of your competitors more [ through ] of credit. Is that any headwind to market share or price in '27, I'll stop there.

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 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, they may be 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.

Your next question comes from the line of David Raso from Evercore ISI.

Your comments 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.

Thanks, David. I'll take the first one, and then Kevin can cover the [ part ] one. We can add anything you want to the first [ 2 ] The quarterly cadence of the market is, as I kind of was just describing with Rob, is I really see that the market is ramping up, we're certainly fall 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 [ 2 ] here. And as we're out of build slots, then I think there will be carryover into 2027. And then I think because of the way the EPA implemented this approach, it will allow people to have the product they want next year, which I think they'll be in a good operating condition. And so it will 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, PACCAR 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 I feel pretty good about the support we're getting at the elevated build levels.

And then on the parts side, David, the 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. 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're confident with the parts growth.

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

A question for you on EPA '27. So noncompliant is about $6,000 to $7,000. If you did comply with [ 3 ]5 milligrams, plus $10,000 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 partners engines [ Cummins ], and the plan is to be in 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 ], there's still an advantage for them. in taking the current product. So it's kind of 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 is just coming back to tariffs and just to be clear, the [ EPA ] refunds, 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 you think about the year-on-year comps as we're trying to think through the bridge to 2027 for tariffs?

Yes. I think that the tariff situation has become a little bit more clear, Chad, in 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 was -- 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 a great job on that. That gives us a stable tariff operating environment. I think -- so looking at that. And yes, there's a little bit [ EPA ] benefit in 2, but that will carry forward in 3 and the bigger effect of tariffs really ends up being the 232 as you look forward into next year.

Your next question comes from the line of Kyle Menges from Citigroup.

Great. 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 of next year but then start to produce on the new engines and just how to think about margin impact as you do that.

Yes, I think that the NCPs that will be out there are fees that will be paid not to the manufacturer 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 PACCAR in the 2027 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, what we'll do with an introduction of 2027 feels really good. [ peeling ] 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 seeing more demand pick up from small and midsized fleets, just how to think about [ parts ], margins maybe as that mix within the customer base shifts a little bit. I mean, I would imagine maybe small, midsized fleets, they'd be buying more TRP parts, which I think come at a lower margin. So just how to think about that?

Yes, 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, we still have the newest truck platforms in the industry with strong proprietary content, the engine business as well. And so I think we had talked earlier call is about to focus on [ service-only ] required maintenance. And as the truck side improves, I think we'll just see all indications improve on the parts side as well.

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

Congrats on a nice quarter. I guess my first question, the delivery surprised to the upside relative to your guide, but U.S. and Canada was down, which I guess I was surprised by. I think you implied every region should be up. So 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 pressing 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 mix, like a little more fleet, a little less vocational. Could you just help us understand what you're seeing across [ TL ], [ LTL ] and vocational in terms of like 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. I know there was a lot in there.

Wow, Jamie, that was a lot. Tried to work from the back of it to the front. You're right, there is some mix 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, you 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. It'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 will continue.

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

Your next question comes from the line of Steven Fisher from UBS.

Just on the U.S. Canada retail outlook. It 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 ] or the [ $270 ].

I think that we left it that way, but it's really calling the midpoint of [ $250 ] million. I think the question still centers out around inventory and what happens with inventory in 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.

Okay. Makes sense. And then I'm not sure if I missed it 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 3% to 5% or somewhere in between? Anything specific if I missed it on Q3 guide for parts?

Yes, we didn't provide Q3 guide, but [ same ] 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 to the [ high ] side of that range.

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

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, 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 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?

Yes. 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 that [ 6,000 to 7,000 ] range for kind of everybody. And of course, people...

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

Jade, can you hear?

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.

We -- 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?

Yes, we got you. Ken?

Yes, go ahead.

Perfect. Yes, I guess just maybe switching gears a little bit. I wanted to ask a separate one. A little bit bigger picture and more technology. I guess I noticed one of your partners [ already ] had launched a second-generation hardware and driverless freight routes with the different OEM partners.

Just give us an update on how some of your partnerships with [ a care are ] progressing, how you see that evolving over time? Just any kind of plans here to start kind of approving [ labels ] operations or just what your strategic kind of approach here is going to be on some of those autonomous innovation.

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

Your next question comes from the line of Scott Group from Wolfe Research.

So all we keep [ here ] from truckers is supply-driven cycle, rates are going up a lot, but demand sort of stable drivers, fewer drivers. Has that changed 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? And the sort of supply-driven tightening?

Yes, it's a great question. I think that if you 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 [ fee ] 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 market should head towards in the coming year or [ here ].

Okay. And then just lastly, I've got one very short term and then one longer term. Mechanically, if someone placed in [ their ] mind was a prebuy 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?

Yes. I think what we think is that the -- there was many people thought that there would be a huge prebuy 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 will 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 them 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.

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.

Good morning. I am Mark Pigott, Executive Chairman of PACCAR. I'd like to call the 2026 Annual Meeting of PACCAR stockholders to order. To begin, please note the meeting protocol set forth on the back of your program. Congratulations to all PACCAR employees for achieving very good results last year. Thank you for your dedication, your ingenuity and hard work that has enabled the company to grow and prosper. I'm proud of you. The following individuals have been appointed to serve as inspectors of election. Quin Koplitz, Adam Stewart, and Michelle Wang for PACCAR; and Jennifer Leno for Equiniti.

The voting polls, which close at 10:50 a.m. If you haven't voted and you need a voting form, please raise your hand and the ushers can give you one. The Corporate Secretary advises me that we do have a quorum for this meeting with approximately 91% of the shares eligible to vote represented in person or by proxy. I'd like to recognize the company's independent auditing firm, EY. Please stand as your name is read. Heath Cruikshank and Chris Anger, PACCAR's global Audit Partner and Managing Partner. Thank you.

I'd like to introduce the directors of the company. Please stand as your name is read. Pierre Breber, retired Chief Financial Officer, Chevron; Dame Alison Carnwath, Senior Adviser, Evercore Partners; Preston Feight, Chief Executive Officer, PACCAR; Kirk Hachigian, retired CEO and Chairman, JELD-WEN; Brice Hill, Chief Financial Officer, Applied Materials; Barbara Hulit, Senior Managing Director, Blackstone; John Pigott, Partner, Beta Business Ventures; Luiz Pretti, former Chief Executive Officer, Cargill Brasil; Ganesh Ramaswamy, Chief Executive Officer, Southwire Company; Dr. Dietmar Scheiter, Managing Director, JOKALOU, Dietmar is a new director from Germany; Mark Schulz, President and Chief Executive Officer, M.A. Schultz and Associates and PACCAR's Lead Director; and I too am a Director.

Will the Secretary please officially place in nomination the directors are standing for election.

Mr. Chairman, the Board of Directors of PACCAR Inc. has placed in nomination the 12 individuals named in the proxy statement dated March 18, 2026. Thank you.

Thank you, Mike. This morning, we have 3 presentations. I will discuss the company's 2025 financial results and the major events that occurred during the year. Preston Feight, PACCAR's CEO, will discuss how PACCAR's truck, finance and parts organizations delivered excellent results last year as well as review the company's exciting investments in new products and technologies. Kevin Baney, PACCAR's President, will review PACCAR's strong balance sheet, PACCAR Financial Services business and review our first quarter results.

My father, Chuck Pigott, passed away earlier this year at the wonderful age of 96 years old. Chuck was President and CEO of PACCAR from 1965 to 1996. The legacy of his leadership is a strong and growing PACCAR and a tradition of quality and innovation that continues to benefit our shareholders, employees and customers.

Let's take a moment and bow our heads. As Chuck would say, let's get on with the business. Trucks move over 70% of all the goods in the regions in which we operate. PACCAR's business segments are commercial vehicles, financial services, aftermarket support, powertrain and information technology. Each makes a valuable contribution to the company's success and to the global economy. PACCAR is celebrating 121 years of success this year and has delivered an impressive 87 consecutive years of profitability. PACCAR is 1 of only 13 public companies in the Fortune 500 to achieve that milestone. In addition, PACCAR has paid a dividend every year since 1941.

In 2025, PACCAR achieved its fifth best year ever with revenues of $28.4 billion and net income of $2.4 billion. PACCAR successfully navigated an uncertain world of fluctuating tariffs, supply shortages and engine emission regulatory guidelines. Notable highlights include generating $4.4 billion of operating cash flow and achieving a record $19.3 billion of stockholder equity. The company increased its regular quarterly dividend by 13% last year and paid an extra dividend of $1.40 per share in January of this year. All in all, a very good year. This slide highlights PACCAR's financial results for the last 10 years and illustrates how the company has performed in all phases of the economic cycle.

As you look at this slide, it's impressive to note that PACCAR has emerged stronger and achieved higher levels of revenue and profitability in every business cycle. The current world of higher fuel prices highlights the benefits of PACCAR's fuel-efficient vehicles, which our customers enjoy. PACCAR has grown due to the contribution of its excellent employees, our customers and dealers and by being the innovation leader in the premium segment of the industry. The excellent financial results generated by PACCAR over many years are reflected in its growing market value. Shown here is the market capitalization of global vehicle manufacturers and other companies in 2015 and at year-end 2025.

PACCAR's market value has more than tripled in the last 10 years. You can be proud that PACCAR is recognized as 1 of the leading and most valuable automotive companies and technology companies in the world. Take a moment to take a look at that slide. Takes 30,000 dedicated employees to make that happen and 2,000 great dealers and thousands and thousands of customers.

Shown here are the truck markets for the U.S. and Canada, Europe and South America. The U.S. and Canada Class 8 truck market is expected to be in the range of 230,000 to 270,000 units this year. The European truck market is expected to be in the range of 280,000 to 320,000 units. South America's heavy-duty truck market is projected to be in the range of 100,000 to 110,000 trucks. Congratulations to Kenworth and Peterbilt for achieving Class 8 market share of 30% last year. Customers recognize the industry-leading quality and low total cost of ownership of Kenworth and Peterbilt trucks.

Pictured are the Kenworth T680, T880 and the Peterbilt Model 579 and 567. Kenworth and Peterbilt achieved medium-duty market share of 15.9% last year. Pictured are the Kenworth T280 and the Peterbilt Model 220. In Europe, DAF achieved heavy-duty market share of 13.5% last year. PACCAR is proud and I hope you are also that the DAF Electric XF and XD won the International Truck of the Year 2026. DAF is the only European truck manufacturer that has won 3 Truck of the Year awards in 5 years. That's saying something. DAF Brasil achieved market share of 8.6% last year. DAF Brasil is exporting trucks to Chile, Peru and Colombia and is expanding its factory to meet growing demand in South America.

PACCAR has supported communities in which our employees live and work for over 100 years. I'm proud of the company's proactive and generous donations of over $260 million that are delivering important benefits for the medical research, social services, education, and the arts. And you can see it, we do it all over the world. Preston Feight, PACCAR's CEO, updates you on the company's success.

Thank you, Mark. Good morning, everyone. So good to be with you all. PACCAR has a comprehensive portfolio of industry-leading trucks. These include the Kenworth medium and heavy-duty vehicles that are shown on the left, the DAF trucks in the middle, and the Peterbilt medium and heavy trucks shown on the right. These vehicles are creating excellent performance for our customers and for our shareholders. PACCAR's global team uses their capability and talent to create trucks that are produced in our excellent factories located in countries around the world. The sales, financial services and parts teams provide our complete set of transportation solutions to our dealers and our customers. And I'm so proud of everyone at PACCAR for their excellent performance. We have a great team.

Shown here are the industry-leading Kenworth T680 and the T880. The T680 on the left provides customers the best fuel economy and elegant styling. The T880 on the right is the premier vocational offering in the industry. These trucks are the premium choices for customers and drivers everywhere. Here's the outstanding Peterbilt 579 and 589 trucks. The 579 on the left provides Peterbilt dealers and customers, class-leading performance and is a favorite truck of fleets all across North America. The new model 589 on the right with its classic styling, LED lighting and its state-of-the-art 2.1-meter wide premium cab is the truck of choice for proud owners everywhere.

Later this year, Kenworth and Peterbilt are introducing fully-integrated connected truck platforms. Shown here are the digital displays and how they're beautifully integrated into the luxurious and state-of-the-art Kenworth and Peterbilt vehicles. The platforms will provide always-on connectivity for our customers and will reduce their cost of operation by enabling PACCAR to deliver over-the-air performance updates and a wide variety of business applications that are designed to meet each customer's needs. Pictured here are the full lineup of DAF vehicles that begin with the medium-duty truck shown on the left, include the flagship heavy trucks in the middle and a full range of electric vehicles shown on the right.

These excellent trucks are sold in Europe, Australia, South America, Taiwan, Mexico and many other markets around the world. PACCAR continues its global leadership in the development of zero emissions vehicles. We're selling a wide range of battery electric vehicles in the heavy and medium-duty markets of Europe and North America. This broad range of trucks is designed to meet our customers' needs as well as reinforce PACCAR's environmental leadership and readiness for the future. Over the past 5 years, PACCAR has invested almost $5 billion in new products, facilities and technologies. A few of those strategic investments are shown here. On the top left, PACCAR has created Flexible Production Factories like the one shown in Denton, Texas.

Our Flexible Factories enable us to optimally adjust to market demands and the dynamic world of regulatory and tariff changes. On the top right is Chillicothe's new robotic chassis paint factory that increases quality and efficiency. On the bottom left, Diesel engines are the primary powertrain of choice for PACCAR's customers and PACCAR's investments in clean diesel engines will ensure it continues its powertrain leadership. And on the bottom right, PACCAR Parts in Europe is building a new distribution center in France to provide more customers with same-day parts delivery. PACCAR's technology is driving the future. We're making strategic investments in zero emissions technology, are creating industry-leading connected truck platforms, are developing autonomous vehicles, and are using artificial intelligence to enhance efficiency.

All of these technologies are being developed to support our customers' needs and to create success for the company today as well as in the years to come. PACCAR's heavy-duty market share has grown over the past 10 years. In South America, share has grown to around 8%. European share has been steady. Australian share has grown to 27.7%. And in North America, heavy-duty share has grown to over 30%. PACCAR Parts and our dealers support our customers around the world. PACCAR's 21 distribution centers in 12 countries as shown by the yellow dots. PACCAR Parts delivered over 3.1 million shipments to Kenworth, Peterbilt and DAF dealer locations in 2025. In 2016, PACCAR Parts global revenue was $3 billion and has now increased to $6.9 billion. The revenue more than doubling in 10 years is a testament to PACCAR Parts technology that provides the right part to the right place at the right time for our customers.

Along with revenues, PACCAR Parts profits have grown. Since 2016, pretax profits have increased at an average rate of 13% per year, growing from $544 million to $1.7 billion in 2025. Alongside PACCAR, our independent dealers are also making investments. In 2025, Kenworth, Peterbilt and DAF dealers invested over $660 million to provide our customers with world-class support. Shown here are 4 beautiful new dealerships located in Ohio, Indiana, Brazil and Germany. Since 2016, PACCAR's global revenue has grown in North America, which is shown in green, Europe in red, and the rest of the world shown in yellow. PACCAR's investments have resulted in revenues growing from $17 billion in 2016 to $28.4 billion in 2025.

PACCAR's growth has resulted in strong cycle-over-cycle financial performance. Since 2016, as shown on the top left, revenue has grown by 6% per year. Net income on the top right has grown 18% per year. This reflects increased profits from each PACCAR division. Total asset growth of 9% per year in the bottom left reflects the strategic investments that PACCAR has made in its products and its facilities. And shown in the bottom right, a substantial portion of the earnings has been reinvested in the business, increasing stockholders' equity by 12% per year to a record $19.3 billion. This is excellent performance for PACCAR and its shareholders. Thank you very much. I'd now like to introduce Kevin Baney, PACCAR's President. Kevin?

Thank you, Preston, and good morning. It's great to be here with you today as President. It is my first presentation at the shareholder meeting. I'm celebrating 32 years with PACCAR. I started my career in engineering at Peterbilt, I then transferred to Kenworth where I became General Manager. And during the last 2 years, I've spent a lot of time with the DAF team in Europe. PACCAR's excellent credit rating of A+ reflects 87 consecutive years of profitability, a strong balance sheet and excellent cash flow. PACCAR is in the top 3% of the over 1,000 U.S. nonfinancial companies rated by Standard & Poor's. PACCAR's high credit rating supports the profitable growth of our financial services business. PACCAR's net profit as a percent of revenues shown in green, has been best in class during the last 10 years. This reflects the premium value of PACCAR's products and exceptional operating efficiency.

PACCAR achieved an industry-leading after-tax return on revenues of 8.4% last year, an excellent achievement. PACCAR's return on invested capital has averaged a best-in-class 47% over the last 5 years. This reflects our strong working capital management and prudent investments for the long term. Our high performance is a real competitive advantage and is appreciated by investors. Our balance sheet is a pillar of strength with $9.3 billion in cash and $19.3 billion in stockholders' equity. Manufacturing assets increased to $12.3 billion. Financial services assets of $22.8 billion reflect more trucks in the portfolio and a successful increase in dealer floor plan participation.

The company has no manufacturing debt and has record stockholders' equity. PACCAR's stockholder equity has almost tripled since 2016 and is currently $19.3 billion. $13.7 billion of the equity is invested in our manufacturing and aftermarket parts business. The remaining $5.6 billion is invested in financial services. PACCAR's financial strength enables the company to invest in new products and provides the foundation to support our long-term growth initiatives. Last year, the company generated excellent operating cash flow of $4.4 billion. The strong cash flow enables the company to invest in new products and services and pay dividends to our stockholders.

PACCAR's regular dividend, shown in green, totaled $694 million last year. Total dividends declared, which includes year-end dividend, shown in red, were $1.4 billion. PACCAR has declared $12.6 billion in dividends during the last decade. PACCAR Financial Services provides financing and leasing options for our customers. With 19 locations, PACCAR Financial offers an extensive suite of services in 26 countries on 4 continents. PACCAR Financial earned $485 million in pretax profit last year. Total assets increased to $21.3 billion. PACCAR Financial provided financing for 27% of the new Kenworth, Peterbilt and DAF trucks sold last year. Dealers and customers appreciate our industry-leading technology and full line of financial products.

PACCAR sold 17,200 used trucks worldwide across the network of 13 Used Truck Centers. The PACCAR leasing fleet finished last year with 38,300 trucks. PacLease has a service network of 682 locations in North America, Europe and Australia, has assets that totaled $3.3 billion. I'm pleased to present PACCAR's first quarter results. Total PACCAR revenues were $6,777 million. Net income was $605 million with earnings per share of $1.15. Thank you.

Kevin, good job on your first presentation. I've been doing this 34 years, and it only gets better. It's a good group to work with. You got to love this group. Would the Company Secretary please present the results of stockholder voting.

Mr. Chairman, a preliminary report of the inspectors of elections indicates that on Item 1, stockholders approved the election of the 12 nominees for director. On Item 2, stockholders approved an advisory resolution on executive compensation. On Item 3, stockholders approved an advisory vote on the ratification of the company's independent auditors. Thank you.

Thank you, Mike. The meeting is concluded. We have 4 videos today. The first video highlights the growing success of PACCAR Parts worldwide. The second video shows the impressive history of Peterbilt. The third video explores PACCAR's leadership in AI. And the fourth video shares the love and affection that our customers have for their Kenworth vehicles. Enjoy.

[Presentation]

Wonderful meeting. At this time, I'm pleased to answer your questions or you can just enjoy the wonderful exhibits and our great employees. Okay. Thank you for being at the PACCAR Annual Meeting. See you next year.

Good morning, and welcome to PACCAR's First Quarter 2026 Earnings Conference Call. [Operator Instructions]

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, Packers Director of Investor Relations. Mr. Hast, please go ahead.

Good morning, and welcome, everyone. My name is Ken Hastings, PACCAR'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. 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 that may affect expected results. For additional information, please see our SEC filings at the Investor Relations page of PACCAR.

I would now like to introduce Preston Feight.

Thanks, Ken. Good morning, everyone. In the first quarter, PACCAR's outstanding employees did an excellent job providing our customers with the highest quality trucks and transportation solutions in the industry. I really appreciate their hard work, their high performance, and dedication as we increase build rates in our factories all around the world.

PACCAR achieved revenues of $6.8 billion and net income of $605 million in the first quarter. These results were generated by strong PACCAR parts and financial services results as well as solid growth in the truck businesses. PACCAR Parts achieved quarterly revenues of $1.7 billion and quarterly pretax income of $402 million. PACCAR Financial had a strong quarter, achieving pretax income of $116 million.

Looking at this year's U.S. and Canadian truck market, we estimate it to be in a range of 230,000 to 270,000 units. The market is strengthening as driver and fleet capacity becomes limited and customers begin to realize higher freight rates. This is somewhat moderated by fuel and other operating cost volatility.

In the first quarter, Kenworth launched a new C580 heavy-duty vocational truck. This large multi-axle model was introduced at the CONEXPO trade show and is a unique super heavy-duty truck used in severe service applications around the world. We project the 2026 European above 16-tonne market size to be in a range of 280,000 to 320,000. DAF's premium aerodynamic trucks provide customers with the latest technology, and best operating efficiency.

As mentioned on the January earnings call, DAF XF and XD Electric vehicles won the International Truck of the Year 2026 honor. In the first quarter, DAF extended its EV leadership by introducing new flagship XG and XG+ electric vehicles. In addition, the XF Electric earned another award the 2026 Eco-Friendly Truck of the Year in Spain. This year's South American above where DAF trucks are desired by customers for their durability and advanced technology is expected to be in a range of 100,000 to 110,000 vehicles.

In the first quarter, PACCAR delivered 33,100 trucks. And in the second quarter, will deliver an estimated 37,000 to 38,000 vehicles. PACCAR's Truck, Parts and Other gross margins increased from 12% to 13.1% in the first quarter due to improved truck segment performance.

Second quarter margins are forecast to expand to around 13.5% as global production volumes increase. We anticipate continued performance improvements in the second half of the year as our customers benefit from our local-for-local manufacturing strategy, experienced better operating conditions and purchased trucks in front of the coming 2027 emissions change.

PACCAR's exceptional range of trucks, compelling parts business, industry-leading financial services and advanced technology strategy position the company well for an excellent future.

Kevin will now provide an update on PACCAR Parts, Financial Services and other business highlights. Kevin?

Thanks, Preston. PACCAR Parts achieved first quarter revenues of $1.7 billion and profits of $402 million. Gross margins were 29.6%. Best Rate parts sales to grow by about 3% in the second quarter and be in the range of 3% to 6% for the full year. PACCAR Parts has 21 parts distribution centers worldwide and has plans to expand its global distribution network in TRP stores.

As mentioned at our recent Analyst Day, we continue to see great opportunities for broad-based parts growth and look forward to realizing that opportunity in partnership with our outstanding dealer network. PACCAR Financial Services pretax income was a robust $116 million. The continued strong performance is a result of solid asset growth, improving margins and the used truck market that is beginning to strengthen.

This year, we're planning capital investments in the range of $725 million to $775 million and R&D expenses in the range of $450 million to $500 million. As we continue to invest in key technology and innovation projects. These include advanced flexible manufacturing technologies, next-generation powertrains PACCAR's autonomous vehicle platform and integrated connected vehicle services. We are excited for the growth PACCAR will experience in the coming quarters and years. We are now pleased to answer your questions.

[Operator Instructions]

Your first question comes from the line of Michael Feniger of Bank of America.

Just on the parts guidance. Maybe you guys can just unpack what did you see in the quarter? It feels like a slower start I'd love if we could just start there of what you're seeing in the parts side, how we're looking so far for -- through Q2 and how we should think about that in the back half with orders starting to pick up and be better than expected.

Yes, Michael, this is Kevin. I'll start with the parts side. So with fleet consolidations and the higher fuel prices that's impacted, let's say, operating cost volatility. That's resulted in the parts market remaining soft. And so as we see as customers start to get healthy, we'll talk a little bit more about the truck market side, but as customers start to get healthy, we'll see the parts market get healthier with that as well. And so just for the full year guidance for the 3% to 6%, we see that accelerating through the rest of the year.

And just on the -- my last question, just on the gross margin, $13.5 the pickup versus 31% in Q1. Just should we still think that gross margin sequentially walk up through the year as build rates recover? Is there a pricing expectation that, that could also get better as well given your comments that the U.S. markets continue to strengthen. Just kind of curious how we should think about as you build through the year and what number we might be exiting the year as we're starting to see some strength in freight rates, even excluding fuel right now?

Michael, thanks for the question. This is Preston, it's good to tell you I think you talked about a few things in there that we're seeing is we do see the increasing volumes. I'm really pleased with how the factories have been able to, again, create local for local manufacturing capability in America.

We see the volumes increasing, as we said, the 37,000 and 38,000 in the second quarter. That's on the basis of build rates that we've already put in place. So teams have done a really good job of that. And we see some of that margin growth coming from that volume, partially offset a little bit by the price of energy, steel, aluminum, the raw material pricing in there. So there is that not quite sure customers have seen the full effect of tariffs yet. But we feel really good about the cadence throughout the year as the market and our customers get healthy, and we see accelerating sequentially.

Maria, let's go to the next question.

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

I'm wondering if you just talk about the really strong profit per truck that you folks delivered in the quarter, so it would lower Parts contribution, you folks still exceeded the guidance range. So it looks like your profit per truck was up to about 5,300 to 2,900 last quarter. Can we just unpack that, how much of that was better cost execution versus mix and any other moving pieces as we think about the profile heading into the rest of the year?

Yes. Jerry, thanks for the comments. I appreciate them. They're nice well stated. We did have price cost advantage in the quarter sequentially. So we saw ourselves up over percent in price cost, which is good. I think the teams are doing a really good job of focusing on the market we're in. So being price careful to see if we can make sure that we get our percentage of the market. In fact, we saw that in terms of our percentage of market build.

So in the first quarter, we built 31.8% of the market, which is very favorable. -- in a good position to be in. And so we're balancing that growth with price/cost favorability.

Super. And then as we look at the backlog, how much more favorable is price cost based on what's in backlog versus what we saw in the first quarter?

Well, we think we'll have favorability as we look forward into the second quarter. Obviously, we're looking at our volumes going up appreciably. We're really full through the second quarter, and we have good visibility into the third and the fourth quarter.

Okay. Super. And just one last one, just to calibrate expectations around orders over the balance of the year. We're hearing that there's just limited number of build slots available that might hamper orders over the next couple of quarters versus underlying demand? Is that the case for uses, what proportion of your build slots are already spoken for the next 3 quarters?

Yes. Like I said, as we have -- we're full in Q2 were a majority full in Q3, Q4. I'm not sure I recognize the commentary about people not having slot that sounds more like a marketing scheme.

Fair enough.

Your next question comes from the line of Tami Zakaria of JPMorgan.

My first question is on the Symtet metal tariffs that went into effect in early April, does that change your view on what would be the tariff impact, especially for aftermarket parts versus the last time you spoke? Or is it basically doesn't -- does it not change the tariff headwind that you expected?

Tami, it's good to hear from you. It doesn't really have a lot of impact for us because of the truck-specific 232 has specific offsets and it applies mostly to those materials. So there's some moderate impact but not significant.

Understood. That's helpful. And -- just following up on what Jerry was asking. Maybe I wanted to ask it in a different way. So based on third-party data, orders have been very strong year-to-date. You kept your U.S./Canada outlook unchanged. Does this outlook include the year-to-date strength in orders, meaning do you expect orders to moderate as we go through the year? And as we get close to the NOx time line? Or is your view shaped by supply chain rather than demand?

I think our view is shaped by the fact that the first quarter really didn't have a high cadence to it. So if the first quarter ran at something around or a little under $200,000 that in order for it to come to the midpoint at 250, there's going to have to be already a rapid toleration. And we have a great supply base, but they also need to be able to spin up their operations. So the rate of increase quarter-over-quarter as we probably informs the total market size.

Your next question comes from the line of Rob Wertheimer of Melius.

Is there any visible impact of the war in the Middle East on confidence or demand or orders in Europe?

What we've seen is -- I think it's a really good word to use confidence in demand Rob. And I would say that confidence -- yes, I think people are paying attention to and trying to discern what it might mean in the general economy, of course. I would say from a demand standpoint, we've seen less impact. We've seen continued good order intake throughout the last couple of months. So less of a show there.

Perfect. And if I can just ask, I mean, I think we chatted about this once, but the rise of electric trucks in China has been very sharp. And maybe for geopolitical reasons. Could you talk about your own experience? And do you see strong demand from comers? Is there a crossover on total cost of ownership yet on some age classes, models, whatever? And how do you see that shape at rest.

Kevin, why don't you share some thoughts?

Yes. So Rob, you mentioned Europe. And so the geopolitical has had an impact on the fuel prices and the cost of diesel is a bigger percent of the operating cost for customers in Europe. So there's been a lot more discussion about battery electric trucks in Europe. And as we said, DAF just won International Truck of the Year with the DOF XS and XD Electric. They just expanded their product range.

So in a really good position to address the growing customer demand about battery electric trucks in Europe, and we're well positioned against the competition. We've had a lot of competitors over time, and I think we're really well positioned with a great product line.

And I would say, Kevin, I had a chance to drive that XD truck of the year -- it's amazing. It's just a really wonderful truck to be in. So it's going to be great for our customers, and it just launched in the recent months. If you look at the U.S. it might inform a little bit differently, I think without subsidies, than doing widespread adoption is probably less likely. There can be markets where it makes sense.

Certainly, in urban environments, there could be places where EVs make sense, and we look forward to -- we just launched a couple of new medium-duty models for -- can worth and Peterbilt. So we have those regional delivery EVs, which is where the market makes the most sense in America.

Your next question comes from the line of David Raso of Evercore ISI.

The question relates to trying to understand your operating leverage in the truck business, particularly. It looks like you came back to the gross margin for truck must have been around 6.9%, something like that in the first quarter. So sequentially, the truck revenues went up $11 million, but your gross profit went up $73 million.

And I'm just making sure we understand was there anything in the first quarter about reversal of old tariffs that you could take the benefit with Ibagon? I know we already had Truck 232 already in, but just making sure that's a clean -- that kind of strength in gross profit growth on only $11 million of revenue. I mean I appreciate U.S. Canada as a percent of the shipments was a lot bigger this quarter than last quarter, so maybe that's part of it. But can you walk us through that gross margin improvement in truck on really no revenue increase?

Yes. David, you always do such a good job with your numbers and you continue to do that as you kind of get it right is that we had somewhere above 7% for our truck margin -- and that came largely because the teams did a really good job, so in these best-in-class products and then the leverage we got off of the volume helped us as well. So the price cost advantages contributed to that. Bryce, anything you'd add to that?

Yes. We also had, I'll call it, favorable product mix, selling more of the Kenworth and Peterbilt brand. At the year-end, they're more lower because of the holiday shutdown season and then, of course, off at the end of the year, usually has a few units that they're getting done on their fleets that they hold an inventory. So a little bit of a favorable mix effect and where we're selling the trucks as well helped us.

And we didn't record any increase for EPA related to EPA.

So summary of all that, David, to you is a very clean quarter, nothing to put or take out of it.

That then begs the question for the next quarter where your truck revenue could be up, call it, $600 million. Rough numbers, you would think then the gross margin impact could be a little more significant than going up only 40 bps at the company level. And I apologize, I think maybe earlier you mentioned parts gross margins for 2Q. I don't think you called out anything particularly negative, but maybe I didn't hear it correctly.

So again, I'm just trying to understand that impressive performance 4Q to 1Q, but then to seems a lot more muted despite this is the quarter you get a bigger revenue move?

Yes. Well, let's see what the quarter is. We kind of gave you the 13.5% is our midpoint guidance for our margin look. -- we do see the volume being a good thing. I did mention earlier in the call that our build percentage has increased in the market in North America. So we're a 31.8% of a build percentage. And I also see that pricing remains competitive as our customers are just beginning to experience an acceleration in their end markets. So there's a competitive price point out there in the market that's contributing also. And so those are kind of the key factors that informed the second quarter.

Yes. David, 1 other comment probably worth making we guided 3% growth in parts. Obviously, the truck volume will be much greater than 3% going up by 7,000 trucks, 60,000 trucks. So you have a negative, if you want to call it, price mix effect, it also dampens the total margin percent.

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

As you think about the prebuy likely to hit later this year, what are your plans for the number of shifts or build flow maybe compared to like where you are today or on a year-on-year basis? I guess like what I'm trying to get at is like how quickly could you ramp that up? -- versus where you are today, if you got a little bit more visibility into the durability of demand?

We have great operations teams. I think they've demonstrated that not just in the past year, but over the decades. -- and they continue to be able to move up quickly. So I think it's more about what the supply base and order board and how quick they have visibility to it. So it's about a hiring cadence across the industry that will probably inform how quick it can go up.

but I feel very confident in our team's ability to add the people and the capacity we need to support the market in any market size.

Got it. And can you talk about how industry price and behavior has changed versus the start of the year? Are some of the nondomestic producers starting to price for tariffs?

Well, I think you'd have to ask them the question of how they're thinking about their pricing scheme. They're better informed on that than we are. We do see a competitive market out there right now. We do see the fact that our customers, as I said, are just starting to see improvement raw material pricing is high. So there is still those things that are putting into it.

But I think we're at the beginning of what feels like an acceleration considering that the first quarter build was just a -- just under 200,000 and last year was low. So if you think about the average market being 267,000 units, there's going to be some replacement demand and there's going to be some strengthening financial performance, and those are both going to be good for us in the near and midterm for the business.

Your next question comes from the line of Steve Backman of Jefferies.

We are not able to hear you, I wonder if you're on mute.

Yes, I was. I'm just figuring out this asking a few decades of, sorry about that. So I'll start again. You guys are get at managing supply chain is probably the best at that, and we have a big ramp, I guess, in the second half this year. And we're starting to hear some early signs that there might be some constraints in things like memory chips and sometimes some people are even worried about aluminum supply.

I'm just curious if there's anything on your radar that you're watching that could actually constrain us in this kind of second half build that we're all expecting?

Yes. Great question, Steve. Thanks for jumping back in and taking the time with it. I think that the thing that informs right now in supply chain is really how much energy-related exposure people have to supply of materials and what that might do to their cost as 1 factor. And in the second, as I said previously, is the higher cadence of people and getting them trained up to speed in a sustainable manner for our suppliers to be ready for the ramp up and build.

Got it. Okay. So nothing specific yet standing out. And then maybe can you just comment, Preston, about the mix that you're seeing relative to vocational versus over the road, I guess, maybe in terms of how the second half is going to ramp up?

It's been pretty uniform. We've seen over the road companies getting their recovery now with spot rates up double digit. -- maybe even up to 20%. We've seen contract rates improving. So that's helping our truckload carriers. The vocational market continues to be solid as well as the LTL. So we're seeing work coming in from kind of all sides as people want to make sure that they have their fleet in the right spot for the year and next year.

Your next question comes from the line of Kyle Menges of Citigroup.

I just wanted to go back to some of the comments you made on gross margin, and it sounds like you're expecting improvement maybe quarter-over-quarter as we move throughout the rest of the year. And just I understand volume is a big piece of that, but -- how are you thinking about pricing momentum? And what are you seeing as we get to the second quarter and into the second half? And how do you -- how are you thinking about price/cost as well for the rest of the year?

Yes. Well, I think the year is a long way is what we typically think about for this discussion is really the next quarter. And I would say that we expect to have a price cost favorability in the quarter. I think how that gets informed is again based upon what the market asked for and how raw material pricing finishes up for us.

So we'll watch carefully how that raw material pricing moves through the year. Obviously, there's some volatility in the market in general, and that will have a consequence. But we do expect to see favorability throughout the year.

Helpful. And then we are getting pretty close now to the new EPA mandate. Just curious how the new engine is performing out in the market and if you guys think that it will be ready in time.

Yes, Kyle, thanks for that question. I think Paccar's team does a great job of having the right engines for our customers and -- so we are really pleased with the engine development programs that are ongoing right now, both for us and we're watching how it's going with our -- with Cummins. Obviously, it was a great partner for us.

We look forward to seeing how the implementation rolls through for everyone. -- but I feel great confidence in our teams and what we'll deliver.

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

A nice quarter. I guess my first question, Preston, if you could talk to, as we think through the second half of the year and I guess, throughout the cycle, what the setup for PACCAR is in terms of incremental margins. I mean, last cycle, you delivered above-average incremental margins with a lot of the new product launches that came into the market. This cycle, we have the Section 232 benefit. Market share opportunity. I'm just wondering how you'll balance the 2. Should we think of the normalized incremental margins of like 15% to 20% or above that?

And then I guess my second question, can you just talk to sort of channel inventory where PACCAR sitting versus its peers and whether it's peers have made any progress on destocking some of the inflated inventory in the channel?

Let's start with your inventory question, Jamie. I think if you look at our inventory, we feel like it's in very good shape. That's kind of around just under 3 months, 2.8 months, and that compares to 2.2 months back in December. So we've been able to get at least a little bit of inventory back into the market, which feels healthy.

I think the industry overall has a higher percentage of inventory I think over 4 months. So that's kind of the lay of the land from an inventory standpoint. PACCAR feel like we're in really good shape there. Dealers have been able to get a few trucks on the lot and get ready to go. Obviously, inventory for us is affected by our 0% vocational share. So people getting bodies put on trucks as an influencing factor there.

And then if you just think back to the -- your first question was on margin and how we see that developing, we see margin being favorable, and we see that our build percentage at 31.8% in the first quarter is good for our performance and good for our customers really get trucks for us being full in the second quarter means that we feel good about the position we're in.

Your next question comes from the line of Steven Fisher of UBS.

I just wanted to clarify your answer on the parts acceleration that you expect in the second half. And you mentioned about clients is starting to get healthier. But I think you also mentioned about fuel having an impact in Q1. So I was hoping you could just give us a little more color on what you're expecting that's going to drive the acceleration do you still need to see freight rates continue to rise? Do you need to see fuel costs falling? Is it just more about getting more trucks on the road? Do you need freight shipments to be picking up? Just curious kind of what will drive that acceleration?

Yes. You said a lot there, but it's a little bit of all of that, right? As we see the increase of the truck orders. So as more trucks are on the road, and we see our customers' business improve, we see that on the parts side. I mentioned earlier the increased fuel and the operating cost volatility because customers still focus on required maintenance. And so they have delayed their optional parts purchases.

So we see both the volume as well as the mix improving, and that leads to the acceleration through the year. So we see as the truck market improves, we see the parts market follow that.

Okay. That's very helpful. And then I guess, to what extent have you had any discussions with your customers about the first part of 2027 planning and really just trying to make sure I understand how you're characterizing the expected pickup in the second half of this year, whether it's really a kind of a prebuy or just a buy.

I know it's maybe a little bit early to talk about 2027, but I guess a prebuy implies a pull forward. So I guess it seems like it could be a relevant part of the discussion right now. Just curious how you would frame that.

I like the way you framed it, Steve. I think that prebuy versus buy I think there's a little bit of both going on, honestly. I think that there's some buy going on because of the demand that the customers are getting healthy and once they're fleet aged to come back to where they want it. So that's a bit of the buy side. And I think on the prebuy side, obviously, there's a cost impact to a 35-milligram engine, and I think they're sensitive to that.

And so I think there's some of the people that are looking at putting orders in front of it. So both of those are influencing the year looking into 2027, I think we'll see how the year ileostomies the full year retail looks like and build looks like, and that will probably give some information about what '27 will look like?

Yes. Just to add is the combo of the buy versus prebuys, the second half of the year is pretty well balanced in terms of the fill between the third and fourth quarter. If it was more weighted to a prebuy, would see that demand towards the higher in the end of the year, but we see a really nice balance in both fourth quarter.

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

Maybe I've missed this, but I wanted to go back to the EPA dynamic. I guess, as the EPA actually formalized the low NOx emissions rule that are communicated I guess, back at the end of last year. And does that have any bearing on the ability of the industry to ultimately launch and move forward with these engines that meet the kind of latest low NOx standard?

And likewise, I guess any implications on the customer's ability to I guess, to move forward with any orders or potential pre-buy. Just curious if that's -- where we're at on that. And if we don't have any formalized kind of releases there, I guess, if you have any insights as to when we might be able to get that?

I think the formalized release that they've made, Angel, is that it will be a 35-milligram standard come 2027, that's the law. And that's the there's not any kind of modification expected to that in terms of it being a 35-milligram standard for new engines in 2027 and the parameters around that, I think, are things that they will have to contemplate or are contemplating based on customer and market feedback.

Got it. And then I wanted to go back to maybe the margin discussion. Could you, I guess, just give us the shipments number that your deliveries guidance you provided for 2Q, could you give that by region, specifically, how much you expect U.S. and Canada versus Europe? And then if we could kind of revisit the 13.5% gross profit margins, I get you mentioned, I think, a little bit more uplift from trucks maybe is a little bit of a mixed drag on the overall and why you don't see that kind of incremental step change in 2Q versus 1Q.

But I guess I wasn't entirely clear to me if there's any other drags beyond that that keep it from being more of a material step change quarter-over-quarter just given the so.

Yes. Just take the question in saying that we expect in Q2 volumes are up around the world, pretty much in every market. So we've had build rate increases everywhere. And so that's what's driving the total increase in volume. And I think we've kind of spent quite a bit of time already describing that 13.5% being volume-based improvement as well as slight price cost with still pressure on pricing in the market as tariffs maybe haven't been fully rolled through.

Also PACCAR performing really well in terms of getting share of buildup.

Your next question comes from the line of Lewis Merrick of PNB Parabis.

We've heard about customers potentially pushing back their delivery dates for trucks. I'm just wondering, are you seeing any evidence of this occurring?

No, I don't recognize that in our backlog. We have not seen any of that.

Okay. To clear. And just quickly on the tariff topic. Could we get your latest understanding on when we could expect the previous was 3.75% SLP credit to be applied.

Well, it's fairly well defined for the truck side of the 232 and so now it's about when we can apply for them and get them back, and we would expect that to be in the not distant future.

Your next question comes from the line of Scott Group of Wolfe Research.

So on that prebuy versus buy sort of discussion from earlier, do you have a sense on the buy part of it? How much of that is sort of growth fleet plans, fleet growth plans or just sort of pent-up replacement? And to the extent that there's just more replacement, do you think as we start replacing more after aging the fleet, does that naturally pressure some of the parts growth?

I think that what's going on is that you kind of said the words in the buy side of it, there's this -- it's been a tough little for some of our customers. And now they have the opportunity, hopefully, where they'll be -- we'll see better financial performance, which is enabling them to allocate capital to trucks. -- keeping their fleet at a reasonable age is good for them, and it's also good for them from an operating cost standpoint when they're buying the Kenworth, Peterbilt or DAF trucks, they're getting a highly efficient truck into the fleet.

So they're taking out something that has lower fuel economy from past and now is the best fuel economy possible for them. So it's a good operating performance benefit. But it's kind of a tie of their financial performance and then the truck replacement cycle that they're trying to keep up with.

Okay. And then maybe just lastly, orders have doubled year-to-date versus what they were doing a year ago. And you're still talking about a competitive pricing environment. Why do you think we're not seeing a bigger or faster improvement in pricing?

Well, I think that the orders are sometimes around multiyear things and there's some projections on orders. And I think orders isn't the cleanest thing to measure. I think it's probably a more clean measure to look at what's happening in the industry through build. And if you look at Bill, that gives you a clean indicator of where things are.

So the cleanest way to look at is build and retail. If you build it your retail at orders don't necessarily for everyone come through the same way with build in Q1. We feel good about the position. And we do still think that there are some orders left in the second half to be had.

Your next question comes from the line of Steve Volkmann of Jefferies.

I figured it out this time. Just a quick follow-up.

I wanted to hit that off. So -- just a quick follow-up. I know you guys give sort of average prices in the 10-Q. I'm just curious if you might have those available for truck and parts, if not, I'll wait for the Q.

For the first quarter compared to the first quarter last year, you'll see price up 2%. And you'll see our cost, unfortunately, is up higher than that. So that made our margins down in Truck segment -- and then price on the heart side was up 6%..

But I think if you look at sequentially, you'd see price was roughly flat. Cost was down sequentially for truck, more than 1% and sequentially for parts, price was up a couple percent and cost was only up 1%.

Your next question comes from the line of Tim Thein of Raymond James.

I'll just start the first question is just on the customer mix. within the backlog and how that may or may not be influencing the truck margins. And so I'm just thinking, Preston on the on-highway side, at least in North America, you've always skewed more towards the small and midsized fleets, perhaps not as much today as you once did years ago. But presumably that some of the WIP the fluctuations we've seen in diesel costs can sometimes hit those smaller carriers a bit harder.

So I'm just curious if that's not the only factor, but essentially the punch line is, is there a mix view within how you're filling the backlog between some of those large mega fleets versus your historical kind of bread-and-butter small fleet.

Tim, I think that it's an interesting concept gives me a little thought, but I don't really think that it's significant in terms of that. I think we've kind of got a broad mix of customers that are buying trucks right now. I agree with your thought that the fuel surcharges are maybe more cash impactful to the smaller customers, while they, in fact, everyone to be more sensitive to it. but I don't think it's really informing what's going on. I think it's just that we're seeing the beginning of a market recovery.

We're seeing things starting to improve for most all of our customers. They're starting to get better rates. They're starting to buy more trucks. And so I think it positions PACCAR well for the next coming period of time, right, for the next quarter and beyond for the year and beyond for a strengthening market and strengthening performance.

Okay. And maybe another 1 relevant for this deep in the queue. But it relates to the lease and rental customers. Sometimes, we think about them being they can be a bit of like a canary in the coal mine when truckload markets inflect. You start to see a pull on lease and rental fleets. I'm just looking at the pathway fleet I guess similar to what you would see in some of the big publicly traded lease rental guys has been declining quite a bit over the past few years.

I'm just curious if you're starting to maybe see any change in terms of utilization or aspirations to maybe reverse that and start expanding the Paccar Lease fleet? Just anyway, just kind of what, if any, clues you're picking up from that cohort of your customer base?

We're seeing a little bit of increase in the utilization, but also another indicator would be the used truck market. and we're seeing price utilization and volume demand starting to strengthen as well. So I think between the beginnings of the increase on both of those factors is just another indication that we're starting to see the market starting to see the market improve.

There are no other questions in the queue at this time. Are there any additional remarks from the company?

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

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

Good morning. My name is Ken Hastings. I'm PACCAR's Director of Investor Relations. We'd like to welcome everyone to PACCAR's 2026 Investor Conference. We have an excellent day planned with the first couple of hours being presentations and Q&A. The webcast playback and slides will be available at paccar.com shortly after the meeting. 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 the most recent information about PACCAR, please see our SEC filings on the Investor Relations page of paccar.com.

I would now like to introduce PACCAR's Chief Executive Officer, Preston Feight.

Well, how many times we got to have dinner in a working manufacturing plant while the people are building trucks? I think that's a testament to the leadership team and their ability to engage us, let us sit in their plant and then kind of show off the cleanliness of how PACCAR runs its operations and its plants and the quality of the people. I tell you the sidebar conversations with some of the workers was the pride that they get to have you in their plant. The relationship is great. And so they're pleased that you were there. Hope it was fun for you. I think I was as excited as all of you, maybe more excited than I'm kind of a nerdy engineer that likes this stuff.

David Raso and I were just having a brief conversation about the headlines today in the Wall Street Journal, Trump to repeal landmark climate findings and huge regulatory rollback, irrelevant to what we're talking about today. It means it's greenhouse gas related. And so the impact to what we're doing today is kind of [indiscernible] for our plans, and John will share more about regulations upcoming anyways.

So today, it's going to be really fun because we'll share information on our strong cycle-over-cycle performance and what it's looked like for us. We'll talk about the leadership team here and all the great people we have that you'll hear from today, and they will review the various parts of the business. So as you look at it, our leadership team wakes up every day thinking about how we're going to build trucks and transportation solutions so that we can make our customers' businesses more successful.

Shown here in order of presentation are the 5 members of the PACCAR executive team who are sharing information today. Laura Bloch is PACCAR's Senior Vice President. She has responsibility for Kenworth, Global Purchasing, Dynacraft and supplier quality. John Rich is Executive Vice President and Chief Technology Officer with responsibility for Peterbilt, PACCAR Powertrain globally, ITD, Global Electronics and Technology. Kevin Baney is PACCAR's President. He's responsible for DAF, PACCAR Parts, PACCAR Financial Services and Investor Relations; and Brice Poplawski is PACCAR's Senior Vice President and Chief Financial Officer, who also has responsibility for global manufacturing. Together, this group has over 150 years of experience. And I think you're going to enjoy hearing from each of them and their unique perspectives on our business.

So all of us in the leadership team wake up every day thinking about how do we develop trucks and transportation solutions that drive the world to a better future. In order to do this most effectively, we focus on understanding our customers' needs and helping them to deliver the essential items that support the communities where we all live and work. The trucks we build today are 20x cleaner and 40% more fuel efficient than they were 20 years ago. That's significant. It's a really big accomplishment for PACCAR.

And we're just getting started. We have an excellent growth plan that will ensure PACCARs, our dealers, our customers and our shareholders' future success. As noted on the bottom of the slide, the foundational elements of PACCAR's strong 121-year young culture are the pursuit of quality, the implementation of leading edge applicable technologies and a drive for continuous innovation. These attributes are part of PACCAR's unique culture of excellence.

I'm humbled to be working with PACCAR's global team who have a sharp focus on creating premium trucks, optimizing transportation solutions, are pursuing market expansions and are using advanced manufacturing. These elements, plus many others, continuously drive our profitable growth plans.

To begin with, I thought I'd share a video with you that captures how our culture of excellence feeds out to our customers and how it's always not just about the science and the math and the financials So please enjoy.

[Presentation]

We're going to talk about numbers today. So there's plenty of time for that in the world. But I think it is important to think about what the trucks do for people in the world, and that's kind of what we're trying to demonstrate there. It's not far off of right. I know people that run second-generation businesses that use our trucks depend upon us. And it's fun to be part of an industry that is actually making the world a better place. So I hope you enjoyed it.

PACCAR is structurally stronger. Shown here is a comparison of PACCAR's performance from 2014 to 2025. Pick those years because they are years where we built a similar number of trucks. The financial comparison shows that revenues grew from $19 billion to over $28 billion, so around a 50% increase. Income increased from $1.4 billion to $2.6 billion, an 86% increase. Return on revenue increased from 7.2% to 9.3%, while the inherently cycle-over-cycle strong Parts and Financial Services businesses have grown from 43% of profit to 71%, effectively dampening cyclicality, impressive changes that demonstrate structural strength.

PACCAR Parts and Financial Services growth over the past 20 years provides new levels of profitability to our overall business. Parts has grown from $244 million in profits in 2005 to nearly $1.7 billion in 2025. Financial services has grown from $200 million to nearly $500 million in the same period. These businesses provide excellent cash flow and profit throughout the cycles. They also support future truck sales as customers and dealers become fully integrated into the PACCAR ecosystem of transportation solutions.

The performance of the company in trough markets and peak markets is demonstrated here. On the left side of the slide is PACCAR's adjusted net income from the previous market trough in 2020 compared to the most recent one in 2025. Earnings doubled in that period from $1.3 billion to $2.6 billion. To the right, you can see PACCAR's profit during the last 2 market peaks of 2019 and 2023. Profitability again more than doubled from $2.4 billion to $5 billion. Cycle over cycle, PACCAR is stronger and well positioned to continue this growth as we look to the future.

Another compelling metric is PACCAR's 5-year average net income per truck produced. This number has nearly doubled from just over $9,500 per truck to $18,000 per truck. Our excellent lineup of trucks and engines are the foundation of this performance. Parts and Financial Service growth is also instrumental. PACCAR's advanced and efficient manufacturing strategy is contributing to increasing profits. And our unique local-for-local production capability positions PACCAR for flexibility and low-cost manufacturing that is optimized around the market's tariff operating environment.

Over the past 5 years, PACCAR has invested over $5 billion in facilities and products. This money has been used to create flexible manufacturing capability in our factories, like those that are here in the room saw last night, build new parts distribution centers, invest in new clean combustion engines, build new connected vehicle solutions, design a state-of-the-art autonomous truck platform and develop zero emissions vehicles. These investments have resulted in PACCAR having the world's most modern and most efficient lineup of trucks and powertrains as well as world-class parts and financial services businesses.

Our investments in technology are positioned and have positioned PACCAR to drive the future to even higher levels of performance. Our portfolio of industry-leading zero emissions vehicles puts PACCAR in an excellent position as the world transitions to a low-carbon future. Our connected services create value for our customers in the form of advanced telematics and prognostic solutions that provide new profit streams for PACCAR. Our autonomous vehicle platform and partnership position place PACCAR in the autonomous vehicle leadership status, and it allows PACCAR to optimize how we go to market with autonomy in the future.

As said last night and today, our advanced manufacturing strategy allows PACCAR to optimize efficiency and flexibility in our factories while building customized bespoke trucks. PACCAR is taking a leadership role in the utilization of AI in our organizations. For example, we use it in manufacturing to create the flexible factories you see. We use it in our parts business to create advanced and efficient materials management that provides our dealers and our customers at the right part at the right place and at the right time. And we use it in internal development to enable faster, more efficient processes throughout PACCAR.

Now let's show you a quick little fun video of AI highlighting PACCAR's approach.

[Presentation]

Well, I think it was 1964 when Bob Dillon saying times there are changing. And I think we're all living in that space right now of times changing. And we're embracing it. We're enjoying it, and we're finding the benefits of it, which is pretty important. PACCAR is continuing its broad-based global leadership. On the top left, we earned an A score from the CDP in 2025, which places us in the top 4% of reporting companies from around the world. In the top right, PACCAR is a leader in operational safety, consistently achieving a best-in-class OSHA safety score. In the bottom right, 90% of our trucks components are recyclable, and we continue further enhancing recyclability.

In the bottom left, PACCAR has achieved the highest level of fuel economy and the lowest level of GHG emissions in our history, which reduces expenses for our customers and benefits society through the reduction of carbon emissions. PACCAR is rigorously pursuing best-in-class long-term performance. And as you look at the bottom left in fuel efficiency and greenhouse gas with today's announcements, the reason it's not so significant for us is because fuel economy and GHG are tied one-to-one for each other, and we are always pursuing optimized fuel economy, so we will always pursue lowest GHG. It's an economic benefit for our customers, so they go hand in hand.

PACCAR and each of us as leaders care about the people and our communities. To that end, since 1951, the foundation of PACCAR has contributed over $250 million to education, social services and the arts. PACCAR donates generously in locations where our employees live and work all around the world. In 2025, the foundation approved over $10 million in grants to many different organizations, a few of which are listed on the screen. And I do think that a significant part of our cultural success is to care deeply about our people and the communities in which we operate.

Our independent network of 2,400 DAF, Kenworth and Peterbilt dealers are another of our valuable assets. They provide a strong competitive moat to our business that is not easily replicated. And though it doesn't appear on our balance sheet, our dealers represent an estimated $20 billion asset that provides significant value to our customers as well as our business model. All of this leads to best-in-class return on invested capital. PACCAR's high technology, high-margin, asset-light business model as well as our discipline in capital allocation enables us to produce the highest returns on invested capital. In 2024, PACCAR's ROIC was a record 55.5%. This leadership is not a lucky break. Over the past 5 years, PACCAR has consistently outperformed all our peers in the truck sector as well as many other well-known industrial companies. PACCAR's performance is best in class. And PACCAR is continuing to grow net income profitably.

We're gaining share in the markets where we operate. Our capital and R&D strategy allows us to invest in high ROI projects to develop new products and improve operating effectiveness and efficiencies and the growth in our parts and financial services businesses have put a new higher floor on profitability throughout every part of the business cycle. So throughout this presentation, you'll hear us share more with you about why PACCAR is the leading industrial company. We've demonstrated improved cycle-over-cycle performance. Our advanced manufacturing strategy creates the world's best factories. PACCAR has and will continue to invest in the right technologies that provide premium trucks and transportation solutions for our customers. And we have and will continue to demonstrate robust growth in our parts and financial services businesses. All of this is enabling PACCAR to be optimally positioned to deliver excellent profitability for the next 5 years and beyond. Thank you.

Laura, I look forward to hearing what you're going to share about our great products as well as our manufacturing strategy. So over to you.

Thank you, President. Good morning. I'm Laura Bloch, Senior Vice President. This morning, I'm going to cover PACCAR's products and advanced manufacturing strategy. PACCAR is a global technology company that provides premium transportation solutions with industry-leading trucks, powertrains and support services that deliver outstanding performance and value to our customers, operating around the world under these brands. Our core truck brands, our Kenworth, Peterbilt and DAF. One of the reasons that PACCAR delivers cycle-over-cycle performance improvements are our outstanding products. In the following slides, I'll show you the comprehensive truck product lines for each of the truck brands as well as a few products launched since we last met. .

The truck lineup on this slide shows Kenworth's complete product line with the medium-duty and heavy-duty trucks shown along the top, 0 emissions trucks shown below on the left and vocational trucks on the right. Altogether, this is the most capable truck lineup in the industry. Kenworth recently launched T880 high horsepower delivers a new level of power in our vocational portfolio, featuring enhanced cooling capacity, and rugged styling that sets it apart from its peers. The T880s enables our customers on the record, heavy haul and dove truck space to tackle any job. Peterbilt started this year with the newest and widest lineup in their 87-year history. 2025 saw the announcement of a new electric heavy and medium-duty models, including the industry's first electric vocational specific truck, the Model 567 EV, and Denton now produces all of Peterbilt trucks models for the U.S. market.

Since we last met, Peterbilt began delivering the new Model 589, which is based on the latest cab platform, leveraging the most advanced driver comfort and technology. The 589 represents Peterbilt's premium brand and the extreme customer loyalty in the traditional heavy-duty truck segment. The 589 is the aspirational truck that leads the owner-operator market. Since its launch, Peterbilt has produced over 12,0589s.

This is DAF's lineup. From the spacious DAF XG to the DAF XD on the top and including the new XG and XGs Electric launching this year along the bottom. DAF has the most advanced and broadest lineup in its history. Shown here adopts new XD and XF electric trucks that in November were awarded the prestigious International Truck of the Year award. This is the third time in 5 years that DAF has won this award, an unprecedented accomplishment. Whisper quiet, a great driving dynamic and the cabin of absolute luxury.

Rounding out with a few of our great products from around the world, highlighted here are the Kenworth vocational model in Mexico and over the road truck in Australia, a DAF mining truck available in the Andean region and DAF XF Off-road operating in demanding conditions in Brazil. This chart shows PACCAR's heavy-duty market share. In South America on the left, Europe and Australia in the middle and North America on the right. From 2005 and of 2015 and 2025. The red line highlights our midterm goal for each market. In South America, where we began the period with share under 3%. With the opening of DAF Brazil, we've grown from there to 7.7% in 2025.

PACCAR's share in Europe remained steady while increasing truck margin dollars. In Australia, we've grown from 24% share in 2005, up to 27.7% share last year. Finally, PACCAR's combined North America share increased from 24% in 2005 to 30.4% in 2025. PACCAR's approach to market share is to pursue profitable growth in every market in which we operate. We operate best-in-class operations. Last year, we achieved an outstanding 1.36 average OSHA score. We also delivered best-in-class quality. Our investments have increased our capacity by 17% over the past 3 years. We gained efficiency with the deployment of Industry 5.0 and Vision AI technology. and we increased our flexibility by investing in plant local-for-local production.

Our market share expansion is driven by strategic capital deployment in manufacturing operations. The projects shown here are examples of recent facility enhancements PACCAR has deployed $800 million over the past 5 years to increase operational flexibility across our manufacturing footprint. These capital expenditures deliver compounding benefits. -- enhanced workplace safety and product quality, expanded production capacity and improved operational efficiency, all contributing directly to margin expansion. The following video highlights these facility enhancements and their operational impact.

[Presentation]

All of our stakeholders. Recent operations efforts have enhanced our local-for-local production. PACCAR is optimally positioned for Section 232 tariffs moving to a build local-for-local strategy. Prior to Section 232 from March through November, U.S. PACCAR production was exposed to tariffs on non-US MCA components as well as steel and aluminum tariffs. Meanwhile, trucks assembled in Canada and Mexico, including most competitor vehicles, qualified for USMCA and had minimal tariff impact. With the Section 232 finding, taking advantage of our North American manufacturing base, we have shifted to build production to the U.S. for U.S. sold trucks. Medium-duty trucks previously built in St. Torres, Canada, were moved to Kenworth Chile coffee and Peterbilt Denton. In addition, low cab forward refuse trucks previously built in Mexico for the U.S. are now being produced in Denton. Post the Section 232 finding, we are positioned to significantly benefit from the tariff offset program. In all, we expect more than 50% relief on our tariff exposure.

While our competitors importing into the U.S. are now subject to new tariffs, Section 232 enhances our position in the market and the value of our manufacturing footprint. We are accelerating towards 2030, deploying AI throughout our processes. Our new AI-driven specification tool ensures customers get the best truck for their application with option content recommendations. In truck build, vision tools ensure high-quality wells and verify paint color match. At the end of line, trucks are scanned to guarantee that all of the specified content has been correctly installed on the cab. These are just a few examples of where AI technology is supporting our sales and operations teams.

Our global brands, manufacturing footprint and advanced manufacturing capabilities uniquely position PACCAR to win profitable share in the coming years.

Thank you. I'd like to introduce John Rich.

All right. Thank you, Laura, and good morning. I'm John Rich, PACCAR Executive Vice President and CTO. PACCAR's business model, has been tested over multiple technology transitions. And we have always succeeded by letting our customers job to be done, drive our technology decisions. PACCAR's development model is well suited to manage through an operating environment with a high degree of uncertainty. We build or commit resources once there's high volume, technology stability and a compelling proprietary business opportunity. We partner selectively in emerging technologies with uncertain volumes and high development costs. And we choose to buy where volumes remain low or where there's a high degree of regulatory risk or other uncertainties.

This approach allows us to develop premium products while maintaining the industry's benchmark capital efficiency and expense ratios. And with this model, technology and regulatory shifts has served to strengthen the quality of our business over time. So much has changed in the past year, but our powertrain strategy has not. Clean and efficient internal combustion engines remain the core of our lineup. In time, our proprietary engines will be complemented by hybrid electric solutions. Battery electric trucks remain the pragmatic 0 emission solution, and we continue to expand offerings where the use case is appropriate.

We continue to investigate hydrogen solutions, including fuel cells and hydrogen combustion, but we have not committed capital to these applications. This slide is a summary of the latest status of emissions and fuel economy in the United States and Europe. Clearly, a lot has changed over the last year and even a little bit this morning. While there's no delay in the 35-milligram NOx standards for '27, the EPA may relax requirements and warranty -- around warranty and full useful life. We'll know a little bit more at the end of March. The standard remains extremely challenging, and the required technology will add to the transaction price of a new truck.

What has changed significantly is the elimination of greenhouse gas Phase III and California's unique programs for NOx and 0 emission vehicles. As you saw in this morning's journal, the new administration seeks to resend the CO2 endangerment findings. Note this all have no impact on 2027 NOx is as a purely a greenhouse gas play.

Now in Europe, on the other hand, not much has changed at all. regulatory requirements remain stable. NOx will reduce with Euro VI regulations, in 2029, while greenhouse gas takes a sizable step change in 2030. So this is a global view of how we expect 0 emissions adoption to affect our powertrain mix through the end of the decade. This transition will be shaped by regulations, infrastructure and cost of ownership. Adoption rates will now differ substantially by region. And as we approach 2030. We start to see 0 emissions and hybrid vehicles take more -- a more meaningful share of our European business. In the same time frame, we do not expect substantial zero-emission share penetration in North America.

In all markets, we still expect strong demand for diesel-based solutions. So with this in mind, let's dive a little bit deeper into the different components of our strategy. So diesel as you know, moves to the world today. And we believe clean, efficient diesel solutions will continue to have an important place in the heavy-duty market for the foreseeable future. proprietary engines, our PACCAR core competency and the upcoming 35-milligram NOx standard is the most stringent in the world. We view challenging emission standards as a strong barrier to entry in our most important markets. To meet the 35-milligram mandate, we will introduce 2 all new proprietary engine platforms. These are by far the most advanced powertrains in our history, simultaneously improving emissions, fuel economy and durability. And as you can see from the images, these programs are in the final phase of development. proving their capabilities from the Arctic Circle to Death Valley and beyond.

Over the last 15 years, PACCAR powertrain has systemically driven a 40% improvement in fuel economy, bringing down operating costs for our customers. The EPA has walked back CO2-based regulatory standards, but [indiscernible] mile per gallon base requirements remain in place. These will take a final step in 2027. Our new engines will meet this final step without requiring electrification. Our new proprietary engines will continue our proud tradition of improving fuel economy to drive value for our customers.

So shifting to pure battery electric trucks. We're now 4 years into producing and selling BEVs and benefiting from the lessons learned of delivering real product to real customers. Our lineup has expanded to 15 market and application-specific models with 2 more coming this year. Just like diesel, one size does not fit all in electric trucks. Our lineup covers Class 6 through 8 in the U.S. and Europe. Applications vary from regional delivery to vocational configurations like dump trucks and refuse vehicles. Our solutions are tailored to the deployment needs of our customers and deliver turnkey with charging if needed.

As noted earlier, the DAF XD and XF Electric just won the 2026 International Truck of the Year Award. It's the industry's most prestigious vehicle level honor. DAF won the award because it delivers exceptional efficiency and a remarkably refined driving experience. It's a high-end car like experience, and it's absolutely class leading. But what's important about this driveline which coordinates 2 electric motors, harmoniously with a 3-speed transmission is that it's a globally an engineered solution. This driveline will be used for all future BEV solutions. Engineered once with scale enabled by multiple applications.

AI tools are proliferating through all phases and functions and product development. Our new diesel engines are feature and technology rich. They have simply become too complex for a human to optimize. Engineers use AI to automate the development and calibration process delivering emissions and fuel economy that was never before possible. Agent-based tools accelerate HMI development by automatically generating code, test cases and design variations from natural language requirements. And quality is improved with AI in the loop verification, ensuring early defect detection, automated root cause finding and even generating corrective paths for the engineer. These are just a few of the examples where AI is enhancing PACCAR's [indiscernible].

So Level 4 autonomy may be the ultimate application of AI in the trucking industry. PACCAR maintains its leadership position as we watch the industry move closer to scaled applications. The underlying technologies have matured, and the AI drivers continue to expand their features and operating domains. We are seeing more commercial traction as it becomes clear that technology is no longer always 5 years away. The PACCAR Autonomous vehicle platform plays a central role in the advancement of autonomy. We maintain a multi-partner strategy, including on- and off-highway solutions, and we continue to be impressed with Aurora, our lead partner on the AVP. PACCAR engineers and produces the proprietary vehicle systems that enable scale for AAV developers. While our service and parts networks deliver the support and uptime these applications require in the field.

So let's take a look at some of our vehicles in action.

[Presentation]

So autonomy is a long journey, and this slide explains why we're on it. On the left, we stack the major cost drivers of operating a truck at scale. So in rough terms, we see around $0.65 a mile of value creation. When 25% of Class 8 miles are driven autonomously roughly $25 billion of value will be created annually. Market dynamics will ultimately determine how this will be divided between the AAV driver, the truck maker, the fleet and the shipper. But in addition to this new recurring revenue, autonomous trucking is really good for our traditional profit pools, more truck content, higher value service, more proprietary parts and more miles driven. The autonomous era will be great for PACCAR. So with that, I'll say thank you, and I'd like to welcome Kevin Baney.

Thank you, John, and good morning. It's great to see everyone here in person. I'm Kevin Baney, PACCAR President, and I'll be covering parts and financial services. The top question you asked that I will answer is how does PACCAR continue to maintain long-term parts growth. Let's review the opportunity. Shown on the left, the total addressable retail parts market in North America is $45 billion, and PACCAR currently has 15% market share. Moving to the right, the addressable market in Europe and the rest of the world where PACCAR operates is $25 billion and PACCAR currently has 13% share. The combined market is $70 billion. If PACCAR gains just 5 percentage points over the next 5 years in the combined markets, so just 1 percentage point a year, that is $3.5 billion incremental dealer retail part sales by the end of 2030. And we definitely want a bigger piece of the buy.

Parts performance for sales, profit and gross margin during the last 15 years is shown as 5-year averages with sales in green, profit in yellow and gross margin above the columns. These results highlight the strong growth during all 3 periods with acceleration over the last 5 years with sales of $6.9 billion, profit of $1.5 billion and gross margin of $30 million 4%. Big congratulations to the entire parts team around the world for achieving these strong results.

The formula for achieving the strong parts growth is made up of 3 pillars: first, ease of doing business means parts are available when and where customers need them. Second, with product segmentation, we provide a full range of proprietary and all makes parts. Third is the use of AI-driven technology to provide customer-focused solutions to make it easier to do business with PACCAR. Ease of doing business starts with the foundation of having a strong global distribution network. Over the past 10 years, we've significantly expanded our footprint to support growing customer demand. With the recent opening of the new parts distribution center in Calgary, we operate 21 PDCs, representing a 31% growth over the decade. Across the map, you can also see our extensive dealer and TRP store presence. With 2,400 locations worldwide, our network has grown 33% and expanding access points for customers and strengthening our reach in every major market.

Ease of doing business is delivering the right part to the right place at the right time. For the right part, our PDC network operates at world-class quality. We achieved 99.9% shipping accuracy, which means the parts are in stock to meet customer demand. For the right place, our managed dealer inventory program keeps the right parts on the shelf. 92% of orders are now auto accepted with dealers relying on our expertise and AI-driven material optimization algorithms. And for the right time, our dedication to speed to market means 70% of shipments arrive within 24 hours, supporting faster repairs higher uptime and a seamless customer experience. Together, these capabilities make PACCAR the easiest and most reliable business partner. And these results are why dealers trust us to manage their inventory, and why we have such high customer loyalty.

PACCAR Parts has a robust product segmentation strategy designed to deliver the right part for the right market. At the foundation, vendor brands provide customers access to widely recognized competitively priced parts. Shown in the middle, TRP all-makes brands offers quality parts for all makes vehicles and deliver strong value for owners of older trucks. And at the top of the portfolio, PACCAR proprietary parts offers customers the assurance of factory equivalent components built to the same standards as original production.

We continue to release proprietary content, as shown by the new truck models and powertrain in the background. Those of you with us today will have the opportunity to see the new Kenworth vocational High Horsepower T880 shown on the left; and the Peterbilt iconic 589 shown on the right after the plant tour. PACCAR has a very disciplined process to patent new truck and powertrain parts to increase and protect our proprietary content from being copied by others in the market.

I want to highlight 3 areas where we use AI to strengthen our technology solutions. The first is using AI to optimize material management across the global distribution network to strengthen our managed dealer inventory program to ensure parts are available when and where needed. Now 5 years ago, MDA auto accept was only 42%, now 92%. So I'd say it's working. The second area is connected truck analytics that provides real-time insight into vehicle health and traffic patterns. And I'll show an example of this in a couple of slides.

The third area is performance-based prognostics that deliver targeted service and maintenance recommendations. This increases uptime, improves decision-making and elevates the customer experience across our network. The continued growth in parts as a result of the ongoing focus in investments in these 3 pillars, ease of doing business, product segmentation, an AI-driven technology. Now we're going to review PACCAR's share of the market opportunity, and I'm going to split it between the first and second owner.

And I'm going to focus on North America. The addressable parts market is $45 billion, split $12 billion with first owner and $33 billion with second owner. Moving to the right. First owners typically operate their trucks years 1 through 4 and spend $8,000 per truck annually on parts. There's approximately 1.6 million first owner trucks in the market. PACCAR has 21% share of this $12 billion parts opportunity. Second owners operate their trucks 5 to 12 years and spend approximately $12,000 per truck annually on parts. There's approximately 2.7 million second owner trucks in the market and PACCAR has 13% of this $33 billion parts opportunity. So I can already tell by your facial expressions, give me some facial expressions that you can see the opportunity. We've already done really well with first owner loyalty of that $12 billion opportunity and the opportunity is to grow really with the larger second owner in that $33 billion.

In the strategy to grow share with second owners, we'll continue to expand the distribution network in target locations where second owners go for parts and service. We already have an established PACCAR TRP all-makes brand as well as vendor branded parts, both well positioned to grow with second owners. We're expanding PACCAR engine service capabilities to provide broader access to service tools and processes to extend the network servicing PACCAR engines for second owners. And trucks have been connected since 2015, and we've been developing connected customer solutions that are best in class for the first owners that will also apply for second owners.

So this is another way to visually see the parts opportunity for both the first and second owners. The green shows parts consumption for the overall truck through the first and second owner, and the second owners keep their trucks longer, and they just consume more parts, and powertrain parts are the largest mix of part sales through this life cycle. There are over 380,000 PACCAR engines operating in trucks that are past year 5. So they're in that 5 to 12 years and naturally consume more wear-related parts as they age through the cycle. [indiscernible] mentioned trucks have been connected since 2015, and we've been using connected truck data to provide higher levels of customer service.

Recent improvements in data analytics and AI tools are making it easier to leverage connected truck data to reach second owners and provide them the same level of customer service as with first owners. Now I'm going to show a brief video of Kenworth and Peterbilt trucks running during the month in the U.S. and Canada with it ending with the total network traffic for the month. Just take a look.

So that ending as the total network traffic for the month, and it represents 1.5 petabytes of data. Now as anybody in the room heard that term petabyte. So that's a 1 with 15 zeroes or maybe closer to term is 1,000 terabytes or maybe some of us can relate to 320,000 DVDs worth of data. So imagine the power of this connected data combined with agentic AI to reach more customers.

We continue to invest in the parts business and the 3 pillars for growth are in place, ease of doing business, product segmentation and AI-driven technology -- we have demonstrated accelerated parts growth over the last 15 years and have achieved strong market share with first owners by providing them best-in-class customer service. Check. We will leverage these pillars as a foundation to target second owners to increase PACCAR share of this $33 billion parts opportunity. Check Mate.

PACCAR Financial is an industry-leading financial services provider operating in 26 countries on 4 continents as shown in green, providing captive financing with tailored solutions increases truck market share at Peterbilt, Kenworth and DAF. Bundling financing, parts and service with the truck sale also enhances total PACCAR value. We also support the growth of our dealer network by providing inventory financing and business expansion loans. PACCAR Financial Services offers a full range of finance products that provide a strong competitive advantage. We have excellent access to customers through close relationships with the truck divisions and dealers. The online services platform is considered best-in-class with industry-leading e-contract and e-signature functionality.

PACCAR's excellent credit rating and strong balance sheet allows us to offer competitive interest rates to customers. and we can maximize resale values through the network of used truck retail centers in the U.S. and Europe.

PACCAR Financial Services consistently deliver superior return on assets when compared to peer companies. Over the past 5 years, PACCAR Financial shown in green, has outperformed the peer group every year with average return on assets of 2.6%. And last year, PACCAR's return on assets was 47% higher than the peer group average.

PACCAR achieved strong parts and finance growth over the last 15 years. The global parts opportunity in the markets we operate is $70 billion, and we will continue to make investments to grow our share. The future is bright, and I hope you feel the passion. When we do the right things to take care of our customers, we will continue to grow. These 5 actions provide a nice PACCAR Financial and part summary.

Thank you. And I'll now turn it over to Brice.

Good morning, everyone. I'm Brice Poplawski, PACCAR's Senior Vice President and Chief Financial Officer. PACCAR profitably -- PACCAR's profitability reflects the industry-leading product quality, financial discipline and continuous innovation. In 2025, PACCAR celebrated a 120-year history with superior financial performance, including 87 years of consecutive net income and 85 years of consecutively paying a dividend. For the year, our strong financial performance was highlighted by revenue of $28.4 billion, adjusted net income of $2.6 billion and 144,200 trucks delivered. PACCAR's increased its regular quarterly dividend by 8% per year on average over the last 10 years.

Summarized here is our business outlook for PACCAR's first quarter and full year 2026. Overall market conditions for the year are mostly positive and ones in which PACCAR can perform well in. First quarter deliveries are expected to be around 33,000 units with gross margins in the 12.5% to 13% range. Part sales will grow 2% to 4% and financial service performance is expected to remain strong. For the year, parts sales growth will be between 4% and 8%. Capital expenditures will be $725 million to $775 million and R&D spending at $450 million to $500 million.

The market sizes for the U.S. and Canada 230,000 to 270,000 units and for Europe, 280,000 to 320,000 units. This guidance for the first quarter and the full year has not changed since our first quarter earnings call a couple of weeks ago.

PACCAR's balance sheet matches the premium quality of our trucks. The company has no manufacturing debt and a healthy cash balance. This supports our excellent A+ A1 credit ratings and the ability to fund future R&D, capital investments, and dividends from operating cash flows. Financial service assets were about $23 billion and approximately 51% of the balance sheet.

Continuing with the market trough and peak comparisons like Preston showed earlier, this slide compares our truck parts and other gross margin dollars. Starting on the left, the market trough of 2020, gross margins were $2.1 billion, and they grew 70% to over $3.5 billion last year. On the market peak side, gross margins were $3.6 billion in 2019 and grew 80% to over $6.4 billion in 2023, impressive growth.

This slide shows PACCAR's Truck, Parts and Other operating profit and margin percentage over the last 15 years. Profits are the green bars with margin percentages, the yellow lines. and taking a longer view as PACCAR likes to do, the white lines show 5-year averages for margin percentage. During the last 5 years, operating margin percentage has averaged 12%, solid growth from the 10% and the 9% over the prior 5-year averages. And the margin dollar averages are also showing nice growth at over $3.4 billion in the last 5 years from about $2 billion and $1.5 billion in the prior periods. PACCAR's profitability is benefiting from investments in new truck models, good global performance and continued strong parts growth.

PACCAR generates excellent cash flows from operations. Operating cash flows grew at an annual average rate of 7% over the last 15 years and was $4.4 billion last year. Due to PACCAR's strong cash flow and balance sheet, PACCAR regular quarterly dividend shown in green, have increased steadily over the last 10 years to a record $1.32 per share in 2025. PACCAR has also paid an annual dividend each of the last 10 years. Total dividends declared were $2.72 per share and $1.4 billion last year. Over the past 10 years, on average, PACCAR has increased its total dividend at a compound annual growth rate of 11%.

PACCAR SG&A as a percent of revenue has ranged from 1.8% to 2.8% over the last decade and is significantly lower than our peers. This is a testament to PACCAR's lean and efficient organization, strong financial discipline and fully independent dealer network. PACCAR has a very effective capital allocation strategy. We made capital investments in the business to drive future growth, following a disciplined process, emphasizing high ROI projects. In 2025, PACCAR's dividend yield was about 3%, which is almost double the average yield over the last decade.

PACCAR has a preference to return capital as dividends rather than share repurchases. The company returns approximately 50% of net income each year in total dividends. PACCAR continuously evaluate strategic merger and acquisition opportunities. and is highly disciplined in our screening and evaluation of potential targets. And finally, the company has a fully funded pension plan, which all of our employees greatly appreciate. PACCAR's investments in capital projects in R&D in 2025 of about $1.2 billion was almost double the investments we made in 2016. And over this period, capital investments in R&D totaled $9.3 billion for 2026. Total R&D and capital investments are projected at $1.2 billion. This reflects investments in our next-generation clean diesel and electric powertrains and increased manufacturing capacity to support higher market shares and truck markets. These investments will also support future growth.

PACCAR is an industry leader in the financial performance when compared to industrial peers. Shown here are 3 key measurements PACCAR uses to gauge our results. Starting on the upper right, PACCAR had the highest average return on invested capital, achieving returns of 55%. On the lower right, total -- cumulative total shareholder return over the '22 to '24 period, PACCAR had the highest return at over 100%. And on the lower left, PACCAR had the third best return on sales over the last 3 years. This is industry-leading financial performance that PACCAR is proud to achieve.

PACCAR's continue to grow profitably. We continue to gain share in the markets in which we operate. Our disciplined capital investment strategy allows us to invest in high ROI projects to develop new products, and improve our factory efficiency and flexibility. And the growth in our parts and finance businesses has put a new higher floor on profitability throughout every part of the business cycle.

PACCAR is the leading industrial company. We have demonstrated improved cycle-over-cycle performance and our advanced manufacturing strategy is highly flexible. PACCAR has and will continue to invest in the right technologies, and we have and we will continue to demonstrate robust growth in our parts and financial services businesses. All of these actions covered today will drive excellent profitability and PACCAR is well positioned for the future.

Thank you very much, and that concludes our prepared comments. And now we would like to take a quick break and then we will take questions from those here in attendance. Thank you.

[Break]

So we thought that after we gave you guys a presentation and quiet was the room. So we thought then we would take the opportunity to do the Q&A with the people that are remote also -- that's great. And then Ken has a mic and test as a mic and they can just wander them around and what kind of take as many as we have time for. So with that, however you guys dig it up that way. We're good.

Jerry Revich, Wells Fargo Securities. I want to ask 2 questions. One, profit per truck has increased nicely cycle over cycle. We're in a bit of an uncertain environment where competitive pricing actions are less clear. Can you gentlemen and team talk about where you see the profit per unit heading longer term. And obviously, that embeds a competitive assumption there. So how do you think about that? And separately, for the parts business. Can you just unpack the leading-edge technology that you have now in terms of predictive analytics? How much higher could the market share on the first owner go to.

And the second owner opportunity sounds really compelling, really interesting, but it feels like there's an opportunity on the first owner side with all the trials that you've done in terms of predictive analytics and how much higher could that market share go even on the first owner side.

How about I take the first part, you take the second part. -- you guys jump in or Brice, I want to jump in too. But if I generally think about this, I think about the cycle-over-cycle profitability increase. part of it has been because of new trucks that we've introduced and the margins we're getting to those trucks because they are better value for our customer. Part of it is because of the parts and finance company growth that we're getting. All those are factoring in. I think if you look at 2025, it was a very unique moment because we had a dynamic regulatory environment that we're operating from within. We had a soft freight market in the truckload carriers market. So those 2 things you put them together. It made it pretty strong headwinds in terms of how we are approaching the year and it was happening almost in real time as we experienced it, right, the tariff challenges came in early in the year and then changed again late in the year, that's kind of unusual.

The other part of it is regulatory. And regulatory was uncertain through the year with many people thinking there wouldn't be a 35-milligram standard. With those things behind us now, stable on tariffs, we think, stable on regulatory environment and an improving freight market for the truckload carriers with spot rates up, loads up, then it feels like we should have an opportunity to deliver in 20 strengthening going towards that peak-over-peak strengthening model. what the final rules are for 2017 in terms of useful life and warranty, John that are to be determined. But you put all that together in '26 should be better, which will drive up cycle-over-cycle per truck performance improvements. And then part of it, obviously, is the parts business, which Kevin can address.

Yes. So I'm going to paraphrase a little bit, but everybody saw the $70 billion opportunity that we have, and then I use North America to split it between first owner and second owner. And your question was, can we continue to grow the share with the first owner and absolutely, we feel like the investments that we've made over time with the first owner been able to, one, build a strong distribution network around the world make sure that we can get the right parts to the right place at the right time. And then as we -- as I talked about, the AI of being able to leverage connected truck, the key with is we're providing excellent customer service and so when you think of customers go in for whatever level of service and they identify 1, 2, 3 extra things, the fact that we have those parts in stock and be able to take care of that customer we can continue to grow that share. And part of it with the prognostics is we can start monitoring. We are already monitoring engine performance and so we can proactively reach out to the dealer and customer when we need to see their truck in for service.

And the more that, that customer feels connected to the OE around us monitoring their service, we're going to continue to gain more of that first owner loyalty. When we talk about then the opportunity to get more share with the second owner, we will -- when we get out to the lab, we'll talk about our connected truck platform. Every truck has been connected for 15 years. We continue to make improvements with that platform. One of the things we're identifying is being able to develop applications to host on that platform to be able to reach the second owner and provide that same level of service.

One is trucks need to stay connected and then two, to be able to provide value because they tend to go elsewhere for their parts and service beyond the dealership as those trucks get into years 5 through 12. And so staying connected with that customer and with those trucks and knowing what their parts and service patterns are and then be able to provide that same level of service, about 99.9%, being able to manage dealer inventory and that high level customer service that we've done for the first owner start applying that to the second owner.

And then maybe I could just add Volume is always our friend, as you guys know well. Our best results in the financial history of our companies when we had the most record trucks delivered and that leads to better absorption in our factories, better pricing power we have over the customers. And also the parks are growing as well. So as we continue to produce more and more trucks, our parks will be growing. That provides a great platform for our parts business and an excellent opportunity. So we always take a long-term view, as we said before, and I think we expect to see improvement in net income per truck as we go forward. Yes.

Jerry, North America for parts, I think, was 15%. Europe was 13%. And then you said if you gained 1 point per year, that would be $3.5 billion in revenues for parts in 2030, correct? I think. But -- so my question is, can you help us understand what your market share was 5 years ago within North America and Europe to see if the 1 point per year is reasonable? And then I guess my second question, within that $3.5 billion, what's contemplated between like the first customer and the second customer because, obviously, there's a different -- in terms of penetration because obviously, there's a different revenue opportunity with the first customer and the second customer on parts aftermarket. So that's my first question. Sorry.

So that's right. $45 billion in North America, we had 15% share, 13% share of Europe. -- it has grown relatively steady over time. We've seen the -- I showed the 3, 5-year averages. So it's going faster in the last 5 years than it was the previous 5 years, which was kind of the basis for why just did the 1 percentage point per year. I also would say the reason we feel more confident is because of the tools that we developed, we'll talk connected truck when we go out to the lab because I think it's better to just walk through where we see the benefits of that connected platform and how it relates to parts growth. And then your second?

What's contemplated in that 3.5% versus first customer versus like second customer penetration? Is it changed? Does it change at all?

Yes. I would -- just in my mental math, I was thinking more like 60-40 first owner because we've done so well with First or loyalty is that growth. Even in the last few years with the softer parts market, we think as the market continue to strengthen that we'll see that grow. So I just mentally had that about 60-40. But the other thing just I should have even mentioned it when Jerry was talking was that we have 380,000 of our PACCAR engines that have crossed that 5-year mark that provides tremendous growth opportunity because there's nobody better than PACCAR to be able to service those PACCAR trucks with the PACCAR engines entered as well.

Okay. I guess just my second question just more broadly. I think in 2024, you were helpful in helping us understand like profitability per region and heavy versus medium, like I think you said last time the new products in Europe were double of what the old product was you talked about market share in medium duty and North America now being comparable to like North America, so just where the changes in profitability were by region and sort of product line. Is there any notable changes -- I mean relative to 2 years ago, adjusting for cycle? Because the one thing I did notice your market share in Europe is down, which I'm surprised given the new product launch you had years ago. So there's a lot in there.

Yes. I'll just start with a couple of general terms. It's -- the profit is relatively consistent. Two things that we've seen is, let's say, growth in rest of world, right? We continue to do well in Brazil and the DAF product line has been added to, I think, since we last met Australia and more recently in Mexico. So we still continue to see growth around the world. and then just our medium-duty product line, again, similar to heavy-duty when we launched all new products, a medium-duty product line for Kenworth and Peterbilt continue to do really well. And then Laura showed the Kenworth T880 high horsepower, both divisions, market share leader and vocational as continues to perform strong for PACCAR.

In Europe. So the -- you mentioned the market share is yes. So that's where I was going to go. Yes, PACCAR DAF was the only OE to refresh the product line, complete refresh in '21. And so we are confident it outperforms fuel economy benefits from just interior space, drivability. And so we're maintaining our premium position in Europe as it's gotten competitive elsewhere.

Rob Wertheimer, Melias. I found the upside to parts to be the most surprising, I mean, in some ways, astonishing how much room you have to go. And so my first question is North America in the first owner. Is that gap because of engine? It seems not because the engine parts stream probably comes in after. But to what do you attribute the fact that your OE share is higher than your part share still after years of part success? And then I guess you touched on where you have more upside, but connectivity, I assume, will drive kind of more engagement throughout that. And I wonder if you could sort of talk about that.

Yes. I mean you touched on it is there's 2 things. One is first owners tend to come back to the dealer and included in warranty. There's less of war-related parts and more filters and things like that in that first year 1 through 4. And then as you get into the 5, just again, more years and sheer volume of components. That's why I wanted to highlight the 8,000 versus 12,000 in the parts spend opportunity that a customer typically spends first owner versus second.

Is the market share being below your OE share in North America, though? Is that just because you're still building out capability to serve? Or is that because they can buy a filter anywhere there's no major I'm just trying to kind of think about the upside there.

Yes, there's still -- when we think of the competition, you've got OEs and then you've got the WDs, the wholesale distributors. And so that's why you'll tend to see share different than what market share is, is because it's a bigger competitive pool.

In fact, there's going to be some offset there, right, for what Kevin just said is for the truck sale, you have it for the part sale, there's a choice in there. Your second part of your comment about connectivity is the key to tying those more closely together because the more value creation we have in our new connected truck platform, and the easier it is for us to provide that value of part right place, right time, like next-day, same-day delivery for parts and prognostics of parts and being able to engage directly with the fleet or the customer allows us to increase that share, which is where our confidence in growth comes from.

Angel Castillo with Morgan Stanley. I wanted to go back to the margin discussion, particularly on the parts side. So very impressive performance over the last few years. But as we think about going forward and continuing to grow that business, particularly on the second owner, where maybe TRP and some of these other parts of what you're providing might have a different margin structure. Can you talk about some of the push and pull of where ultimately you see gross margins headed for the parts business over time? Is that dilutive to margins? And are there other areas that may be more than offset that to continue to grow gross margins?

Yes. Great question. The way I think about it is if we can grow that share of the pie overall at that revenue growth that we talked about, I'd say margin is second. But I say that at the same time, say that as we focus on, yes, there's more I come back to those engines that are in that year 5 through 12 that needs service. Those come at a higher margin to help offset the growth in the all makes brands.

There's another piece there, which is also volume, right, and you get leverage on the assets that you have. So you have your 21 distribution centers. If you're shipping more through them, you're able to inputs lower margin on a gross margin standpoint, you get better leverage off of them.

And you would expect that if there's -- even if there is a difference in margin between an OE part patented part and an all makes part, they're still going to be accretive to overall TPO margin.

Helpful. And maybe switching gears a little bit to the capacity. So you've added some capacity. As you think about shifting or the shift that you've already seen of local-for-local maybe moving some more production from Canada or Mexico to silicone and Denton. Can you talk about the capacity of these 2 facilities to meet kind of peak demand, if we think about exiting the year toward a stronger, robust year, -- can they meet that with the capacity expansions? Or do you feel that there would be incremental need given the production shifts?

Very simple answer, yes, they can meet the demand.

Jeff Kauffman from Vertical Research Partners. -- kind of a longer-term question on connectivity we were talking about it 5 or 10 years ago when these platforms started rolling out. I think autonomy was just a twinkle in everybody's eye back then. Can you talk about how connectivity has evolved and kind of really what's driving it now? And I remember 4, 5 years ago, you said, "Hey, I think connectivity can be its own division, own profit center on item. Has that thinking evolved? Is it more of an enabler for other businesses? Or can connectivity be its own business unit basically?

Yes, that's right. We did talk about that. We still think about it that way. If you go back 5 years, you think about the typical -- let's just use a fleet customer. They would buy the truck, they put it in service, and then it would get all of the telematics hardware installed and then connected. Fast forward a couple of years, we provide the telematics hardware, but they still provide whatever display they use for multiple services. Now fast forward, and we think about as it's a connected truck platform. where all of that is OE driven. Then on the telematics side is there's the number of players you've seen some come and go over the years, but there's always 4 to 5 key telematics providers -- we also see that the fastest growing through AI is that third-party app developers are -- have been looking for a platform to be able to host content. And that's what we see as really evolving that we'll talk about and has a relevance to parts growth is that the biggest thing when trucks.

Telematics has tended to be around fleets, midsize, large-sized fleets, smaller customers tend not to go to those telematic providers. They get individual services. as these third-party app developers, they can develop bespoke services that becomes available to a broader population of customers, the smaller customers.

The second thing is as trucks move from first owner into second owner, unless there's value there, the second owner tends not to keep the truck connected. We now have the ability through a connected platform add that value not only to first but second owner, trucks stay connected, and that gives us that opportunity, as Preston said, to connect the dots between the providing parts and service to a customer that has a connected truck.

So simple answer, yes, it can be a separate profit. The next layer into it is it also feeds into all the other parts of the business. So it does feed into the parts growth. It feeds into the financial services growth it feeds into how we take care of the customers and have a tighter relationship with them, which extends not just at point of sale, but through first owner and second on her life. So it's -- tentacles reach everywhere, Jeff.

Kyle Menges from Citi. I wanted to ask on the MX engine, just with EPA 27 getting pretty close. I'm curious just how you're thinking about the cost and performance and we've heard rumblings on, I guess, varying costs and maybe technologies being deployed by you versus competitors. So I would love to hear just how you think the MX is being positioned?

And then just secondly, MX engine penetration has stalled out a little bit just as a percent of your truck builds, could EPA '27, do you think be a catalyst to increase that penetration?

Sure. Let me start with MX in the 2027 engine families. 35 -- the EPA right now has indicated that they will have introduced some flexibilities to the previously announced regulatory mandates. Those flexibilities are likely to be around warranty and full useful life at a minimum. They have indicated also that they will hold 35 milligrams as the numerical standard for criteria emissions -- that -- depending on how they roll those out and we expect that at the end of March, it will dramatically affect what the cost of -- to the customer is of new engine families. No matter how you slice it, fully complying with 35 milligrams is a massive technical challenge, and it does require new equipment. There are multiple approaches to it. They all have some level of pros and cons to them. But we're very happy with the robustness of our path that we're taking. We'll have more about that later in the year and specifics on the engine. But we have a tremendous track record in emissions compliance and frankly, integrity of that -- of meeting the emissions intervals, and we continue to do. We intend to maintain that through the launch of this engine. And again, look forward to this engine as a significant barrier to entry into our markets and a competitive advantage.

And I would just add to that, that we maintain an excellent relationship with Cummins. I mean the partnership has never been stronger in my memory. So great relationship with them, great development opportunities with them. that's working well for us even now. And we do think that in the years upcoming, the platforms that John teased to you will be opportunities for growth for us.

Steve Fisher, UBS. Just a follow-up on that 2027 question. It was really interesting to see in your slides and videos how AI is being used by you in the quality inspection. And so I'm assuming that warranty experience after you roll out these products is going to be very important. So I'm curious how you are using AI to target that particular rollout? And is there any particular metric on warranty experience that you can anticipate from here relative to prior rollouts. That's the first long question.

The second one would be on autonomy. And I'm curious how you're thinking about the timing of commercialization of autonomy has changed over the past couple of years?

So let me start with your second question first. Our standard answer on, I'll call it, the commercialization and the adoption curve on autonomy is -- it continues to be when it's ready. Because it's -- we feel it's somewhat irresponsible to try to predict that and set development goals on delivering that until we want to see that is there. before it goes. You can see that the underlying technologies around us in the robotaxi world, you can see the progress of the individual developers and where they are and since overlay robotaxi to this, and you get a sense that it's getting very real very quickly. And we also operate in the Permian Basin right now under a different set of situations that don't require the same level of fail operational because of the speeds. Autonomy is here. It's pulling loads without anybody in the truck every day.

So it's starting to commercialize with your latest example, right? We have sold trucks with into an autonomous application without drivers, so that's commercialization, just a tip of it. We want to be careful, right? You look at the car industry, there have been a lot of paints and moves. And I think that we don't want to be the tip of the spear in that case. We want to prioritize safety and effectiveness of the capability while we develop it, also different than the car industry is that the partnerships we have with like Aurora Stack, Kodiak, we need to watch their development curves, too, and see how they play in this space and come along with that. And then as John and team have developed an autonomous vehicle platform that can integrate those different drivers. It gives us a space that I think is unique. And that, again, the make, build, buy, partner approach to things, allows us to be participative without it being like the kind of capital raises that say, Waymo is doing, and it allows us to watch technology, be ready when it's there and commercialize it to our advantage when that time happens.

But there's no reason to pick dates, right? Technology should develop when it's safe when it's ready, when it's regulated and when there's an understanding of the litigation that comes along with it. So that's part 2 of your question, right? Do you want to get your part 1 of your question was engine introductions and how do we think about the use of AI in developing product, right? Is that a fair summary?

We've launched over the -- even the last 2 years, really an explosion in our ability to monitor product in the field and prognosticate understand failure modes and prognosticate when things are -- what's happening in the engine down at the component level. It's been a wonderful journey, actually. That will continue. That will change the way we roll out and launch engines. We -- how you monitor and how you keep a new engine customer up at all -- under all circumstances. So actually really look forward to the new era and the capabilities that are here now that we're using today, and we'll continue those into the new engines.

And I highlighted the inspection in the plant with the AI monitor inspection. So we should get better assembly quality. We have opportunities as we go in as said, on infant care with monitoring for insight. And so there we are. insight into any early issues so that we can get them early and AI will gives us insights into all of that. So warranty departments are using it. assembly manufacturing operations are using it. And of course, they're using it in development as well. .

We just think about from a software standpoint, the ability to run hardware in the loop, software in the loop capabilities using AI algorithms where you can have the model developed by the agent and then run those systems in place repetitively so you can test case way better than we used to be able to do. That's just a for instance of how you drive down warranty costs. So it is a real thing and it is today.

So could you spend a little bit more time fleshing out your flexible manufacturing road map? And if you can talk about how that is changing your profit per truck?

So over the last several years, as we talked about last night, and we've really been on this journey to add AGVs and other flexible manufacturing capabilities into our plants. That has given us the ability to build more models, more configurations, more efficiently and effectively on the line. We continue to build that out. It was a real help for us this last year as we decided that we were interested in our best interest to do the move around local for local, move medium duty into U.S. plants. .

How it continues? It's really an ongoing evolution. We keep finding new technologies come out. They become more scalable. They become more affordable. They become more usable and flexible for our operations, and we'll continue to deploy those as they make sense into our operations. And of course, all of that does lead to being more efficient, being higher quality and will enhance margins throughout.

So think -- another way to think of it is the journey of efficient manufacturing is not new. We've been working on that journey forever. The difference between automotive and truck or at least our trucks are their customized bespoke is your word, right? And so if they're customized, then you need to have flexible manufacturing. We've always had that. But it's been more labor dependent in the past. Like, for example, you would use human beings to paint chassis because a chassis could have 7 different suspensions, 5 different transmissions, 15 different driveline links, and you couldn't make the robot actually get in and see exactly what's going on. But a recent example, it was in one of our videos, is [indiscernible] just introduced robotic chassis paint because we now have the digital capability of the model around the chassis, and we can now paint almost the entire chassis without human interaction.

So it's an efficiency gain. It allows us to keep the customization. That's just like an efficiency. The benefit of that is then you can say, well, before you were building only T680s, let's say, at [indiscernible]. And now with that digital capability, you can bring in a medium duty to that plant and work it with the same technology. So the technology gives you flexibility and efficiency simultaneously. We see ourselves always on that journey, right? This is not something we started a year ago. It's something the team has been working on -- aggressively working on. We saw a milestone of [indiscernible] in the end of last year where we could move the trucks around seamlessly, and we can share that with you because you can kind of understand that and then we'll see that journey carrying forward over the coming years.

Great. Then second question on the new engine platform and you guys are teasing -- so just a clarification. So is this in addition to your prior generation MX engines? Or is this something brand new. And then you talked about a 40% efficiency improvement, I think, over the last like 20 years. Is that sort of run rate the way we should think about the efficiency of these next-generation engines?

Yes, starting with the second one, the internal combustion engine, despite being 126 years old, the diesel cycle combustion engine is a pretty miraculous thing, and the efficiency gains that have been eked out over time continue to improve. We'll watch that continue to advance with hybridization. We'll watch -- it's not done yet. I'll say that. We are on, I'll call it, conventional technologies experiencing diminishing returns. But again, features like hybridization, all that will take it to a different level.

Your other question on the variety of engines that we produce and how we are fortunate to have extremely flexible engine manufacturing facilities. If you've had the chance to visit our Mississippi plant, we are capable of making all variants of engines through time. So we -- the 11 and 13 -- MX-11 MX-13 will continue. They will continue for select markets. But when you make the transition to 35 milligrams and the -- again, the standards right now have full use of life requirements that are extreme, and those will carry forward on the new engine families.

So we'll have flexibility, but the new engines that we're working both alone and in partnership with will be really game-changing in terms of effectiveness and how we produce them efficiently, kind of a fun thing to look forward to. Good to have things to look forward to.

Michael Feniger for Bank of America. Everyone I realize message is higher highs. I get that. And net income will be higher next cycle. I'm just kind of curious to put a finer point on it. can we see higher highs on the gross margin side? Obviously, 2023 in the slides you guys showed, the peak, there was a lot of pricing in there. I'm just curious with some of the layers you guys provided with local-for-local manufacturing and parts and new products. Are those margins just out of reach? Or do you think that's more cyclical? So just kind of curious to put that in context when we're thinking about cycle-over-cycle?

I think it's a great question. I think if you just been sitting here to December of 2022, could we have predicted what 2023 is going to look like? Probably not. So to ask us to go on record of what it's going to be in the future. I think you don't -- we don't know all the confluences that happen into it. If we have a confluence again, of factors, call that tariff advantage, call that market strength, call it, supplier limitations. And yes, they can happen again. if it's more abated than that, more moderated than that, then maybe there's moments like that, that are hard to get back to the absolute truck margin side of it. But maybe as we grow the parts business overall over time, like Kevin has described, it results in a total TPO margin that approaches those things.

And of course, if the markets are stronger, that always helps us as well because we are well capacitized for higher hires, more capacity allows us to produce more trucks and get more pricing power, as I said before. So that will do a lot for us. So it's possible we could do better, but we obviously don't give that kind of guidance. But we're excited for the future with all the things we showed you today. Yes.

And just lastly, I mean it seems like there has been now this view that we will see some prebuy. I'm sure you guys are working with suppliers to get ahead of that. I mean, is the view that it robs from 2027? Or do you see a view where even with a pre-buy, which usually robs from that year and you see a little bit of a let down the next year? Can we actually keep marching higher on production in 2017, even with an emission standards change, which usually you don't kind of see?

I think that just by the very definition of saying a prebuy, you're taking a truck out of '27 and putting it into '26. So what you're really asking is, is it likely that the market strengthening will continue for the year beyond '26 rather than does pre-buy affect because by definition, yes, it affects it. But if the markets continue to be strong, then we can have a good 2027. So if the economy is strong, if the trucking economy is -- continues to go forward, if the changes or finalization of the rules, in the NPRM around warranty and useful life are moderated, then there's no reason to think we couldn't have a very good 2027. It obviously does depend on how anxious customers get in 2026 and how significant the prebuy is in terms of what it does to how much pull ahead is there.

And then pre-buys going to be different. They can be a month or they can be a couple of quarters. So I think there's a lot of uncertainty around how those will play still at this point. And I think that's where a lot of -- not just your focus, but our customers' focus is to, it's like what's going to happen in the coming 3 quarters of the year because Q1 is effectively behind us, everybody, right? And so now it's a function of what's going to happen, how quick does Q2 turn on? And what does it look like?

And if the year finishes around our midpoint of our guidance, that's around a replacement cycle. And so that's another normal year.

This is Tami Zakaria from JPMorgan. I wanted to follow up on engines. Correct me if I'm wrong, I think about 1/3 of your bills now have PACCAR engines. How do you expect the mix of that to trend over time? Because you said you want to gain share in North America, right, like some mid-30%. So do you have capacity in engines to drive that mix over time as you gain share?

Yes. W do have the capacity.

The 1/3 of the mix or expect that to go. Is there like a target to go to?

Yes. The way we look at it is, right, we want to provide a good portfolio of engines for the customers, and that's what we're doing today. And that lets them have choice around horsepower to markets depending on vocational otherwise. But with the new engines, we would expect that they will increase share, yes. And we can support that in our factories.

Got it. So I wanted to ask that gross profit question in a different way. hoping to get a different answer, more detailed answer. I think, Preston, in one of your slides, you had 2014 versus 2025 comparisons on similar number of deliveries. In 2014, your gross margin was 13-ish. You ended 2025 with 13 and change. As you look to the next 5 to 10 years, should you expect -- should we expect gross margin to remain at those levels on similar builds? Or is there a way to structurally improve that 13 and change to something higher, even if builds stay at these levels?

Super question, right? So think about what 2025 was, right? Yes, you're right in the margin comparatives of the years. But 2025, we experienced most of the year with a unique environment in a tariff world where it was thousands and thousands of dollars that we had to absorb as a truck manufacturer compared to our peers. I don't think we've ever had that. It certainly didn't match up to the prior cycle. So that's a unique difference. Then if you look at the general cycle over cycle margins that we've shown over time, they do go up, and they should continue to go up because, one, obviously, parts is accretive. We spent a lot of time sharing the parts story and how that helpful. right now it's moved in terms of total profitability. And so that should mean that margins will go higher in cycles.

Laura, I'm wondering if we can talk about factory productivity. So in the past, you folks have targeted 5% to 7% productivity improvement, reduction in labor hours per unit. How much of a runway do you have going forward to continue to drive that? Is there an opportunity for an acceleration given the new technologies that you're showing us at the factories and potentially use of AI for quality, et cetera. Could that actually accelerate for you folks going forward?

I think there's always opportunity to improve efficiency as we gain more skills. We design trucks. With that in mind, we deploy new technologies. So I would say that continuing along the path of our historical path makes a lot of sense because we were also doing those things in the past. Can it accelerate, really, that's going to depend on how we deploy, how we think about AI, how we think about that flexible manufacturing and where do we decide to make investments as we look at our trade-offs and where we invest our CapEx and R&D.

And Jerry, I think A couple of years ago, we wouldn't have said the ideal state for flexible manufacturing was to rearrange production from Canada back to the U.S. vice versa, right? There was other things. You go back 5, 6 years ago, we were thinking about if regulation stayed full speed ahead, the need to build battery electric trucks in our current factories as we look towards autonomy, was really providing the flexibility to handle all of our product configurations. We now have the strong added benefit of the flexibility of moving product lines. And so I think those are those efficiency will continue to get, as Laura said, but it's that flexibility to really accommodate anything that's happening in the environment around us that's allowed us to pivot and quickly adapt that's really a strength for us now.

Think about we don't know -- John showed you an idea of the mix of EV, hybrid EV and diesel powertrains in the future. And building those in the same line is a huge efficiency gain compared to building a separate stand-alone facility where you need a separate EV facility. We don't know what the next regulations are going to be around EVs. We know what they stated to be in Europe. So having flexibility to build them in a single factory, superefficient, supereffective. Like our view of electrification is we want to create models that are economically viable, independent of regulation. That's the holy grail, right? If you can get hybrid trucks to be more efficient than diesel trucks then our customers will buy hybrid trucks. If you can make EVs more efficient, then they'll buy EVs. They're just looking for total cost of ownership optimization.

Our factories need to have that flexibility. So as those technologies move along, we can build them where we need to and we don't say, "Oh, we need to spend another $500 million on a brand-new factory. The benefit of what we've done is we don't have to take that kind of approach, and that's the efficiency gains.

Can I ask separately on the parts side, Kevin, in terms of to deliver the goals that you folks laid out for us, what kind of investment do we need from the dealer group? Do we need to have a meaningful number of new smaller locations? Do we need assets invested to go from $20 billion to some number that's meaningfully higher what do we need to see from the dealer group to enable the type of revenue capture that you outlined?

Yes, I think it's a very consistent when I showed the distribution network, not only our investments in PDCs, but also dealer locations and TRP stores, it's just more of that. One of the benefits of that map I showed with the connected trucks running over the month, we can look at that through a day, time of day, see where all the traffic patterns. In the past, dealers used to use registration data to go, should I expand? Should I add a new location? Today, we have the connected truck data. We can give them real-time information to help them with, are there any white spots or do we need to grow the capacity out of current locations. And so they consistently are making the investment. So that's why I said, foundationally, we have got the network and the distribution. So as we grow the opportunity its parts, it's about expanding the relationship and leveraging the connected truck is to know where those second owners operate to continue more of those foundational investments with our dealer network. And we feel strongly we've got the best dealer network in the world.

And we were just with them last week and they're putting in record levels of capital into those businesses, and that does support the parts growth thesis.

Great. Steve Fisher, UBS. Just another question about margins, but maybe limited to the 2026 rest of year outlook. So as you sit here, I won't ask you for a number, but maybe a directional trend. I mean as you sit here today, are we thinking that as volume builds over the course of the year, that and price cost dynamics play out? Do you think Q1 is the sort of the low point on margins? Or does it still depend on what you're seeing from the competitor strategies around pricing?

I would say it does depend on what the competitors do, obviously. There's some impact on that. But I think we do feel like Q1 should be an acceleration from Q1.

And certainly, we're also expecting more volume, as we said before. So that always helps us as well. And the parts growth is going to be accelerating. All those other factors that should help us do better.

Right. A couple of big picture questions. Maybe this is actually slightly related to Steve's question, but Obviously, historically, you guys have been the premium product. You sell at a 10%-ish premium to everybody else. But clearly, you now have some benefit relative to your manufacturing footprint relative to others. So I'm curious as we go forward, is it more important to you to maintain that 10% sort of premium positioning in the market? Or I noticed Brice earlier said something about the importance of the installed base growing I feel like you kind of have a choice to make. You can grow your installed base more quickly in this scenario or you can maintain your premium pricing. And I'm curious how you think about that going forward?

I think our ambition is to have both and it's some balance between the 2. And I think it's not so precise as to say that we're ambitious to gain only share at the cost of margin or only margin at the cost of share. We watch the market. It's a daily discussion about where we're going. It depends on our supply base and what they can provide through the course of the year. It depends on the amount of energy in the market. And so I think it's hard to really give you a specific answer, except that you can see that our long-term view, which is how we think right, less focused on what's going to happen in Q2 of this year. We're focused on the strategy of a successful company that is a leading industrial that will grow share and margin over time. That's really the goal. And so that doesn't play out in moments that plays out in years and in a management team and an entire team at PACCAR within the network of letting growth accelerate gradually. And so I don't think we don't want -- I don't think I know we don't want one or the other. I know we want and expect to achieve both over time.

Okay. Fair enough. And unrelated, but I'm curious, again, you talked about the fact that the rollback of this endangerment clause won't change your life at all. But 1 of the potential outcomes here is that it may be possible to make a less fuel economic -- sorry, is that a word? It's possible to downgrade the technology and sell a cheaper truck at a cheaper price that doesn't get as good fuel economy. It's possible that some of your competitors may choose to do that. And I'm curious how you think about that because, again, if you're going to be the premium producer, maybe you want to have the best fuel economy. But if you want to make sure you're relevant to all competitors, you may have to provide a similar product. How do you think about that? .

I can do a swing and then John can feel free to add. But effectively, Fuel costs are so much of a percent of operation for our customers that without great fuel economy, class-leading fuel economy, you won't be in that premium position. I mean, if you made that technology trade off and went that far backwards, I think the total cost of ownership would suffer greatly. When you think about the acquisitional cost as a percentage of total operating cost, it's much lower than fuel.

Yes. I think if you know and love your customer endangerment has nothing to do with fuel economy. It's all greenhouse gas.

Yes. And just when Laura showed the AI with the truck configurator. there are so many different combinations of options and option combinations. When we were in greenhouse gas Phase 1, Phase 2 and then the pending Phase 3, it was really about not a different truck it's more about the combination of options that go on each individual customer to meet whatever their need is. As Preston said, all of them are after fuel economy improvement. So it's really those right combination of options, and that's where we're able to leverage to really dial in per customer the right configuration.

And that's why the administration has it right, right? From a truck industry standpoint, they don't need to regulate the GHG. We're going to do this because it's fuel economy based. And so that lets the market make the right decisions for itself instead of sending standards that may or may not be most efficient for the economy that we all live in. But if they just say, in our case, where you're motivated by the economics, then they'll work out well because we'll produce the most efficient, lowest GHG highest fuel economy, trucks. They get that.

All right. Ken, our boss is telling us that we're out of time. So we would like to say such a sincere thank you for all of you that joined us this morning. And for those that are sticking around for the next part of this, fantastic. Appreciate the questions. Love the dialogue, really fun to have smart people asking us questions, and we look forward to some more time with you as we go, but we'll end the formal session of the meeting. Thank you all very much.

Good morning, and welcome to PACCAR's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning, and welcome, everyone. My name is Ken Hastings, PACCAR'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.

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 that may affect expected results. For additional information, please see our SEC filings in the Investor Relations page of paccar.com.

I would now like to introduce Preston Feight.

Good morning. Kevin Baney, Brice Poplawski, Ken Hastings, and I will update you on our very good fourth quarter and full year 2025 results as well as other business highlights. PACCAR's fourth quarter revenues were $6.8 billion and net income was $557 million. In 2025, PACCAR achieved annual revenues of $28.4 billion and adjusted net income of $2.64 billion, which is the fourth highest profit year in company history and the 87th consecutive year of profits.

Adjusted after-tax return on revenue was 9.3%. I'm proud of PACCAR's outstanding employees, who delivered these results by providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR Parts and PACCAR Financial Services each achieved quarterly and annual revenue records. PACCAR Parts and Financial Services represent an increasing percentage of the overall business, and contribute to PACCAR's structurally stronger performance.

2025 was a dynamic year in the North American truck industry with soft freight markets, tariffs and emissions policy uncertainties. In this environment, Kenworth and Peterbilt made strong contribution to PACCAR's results.

Importantly, we ended last year with tariff and emissions clarity. The Section 232 truck tariff policy that became effective on November 1 provides advantages to PACCAR, who produces trucks in the United States, Canada and Mexico for each local market. I'm proud of PACCAR's excellent team, who have created this cost-effective, flexible and robust manufacturing strategy.

In late 2025, it was confirmed that the 35-milligram EPA27 NOx limit will go into effect in January of next year. This brings clarity to the market and helps customers make their buying decisions. PACCAR is wonderfully positioned for these changes with the newest lineup of trucks and engines that are the most efficient and highest quality in the industry.

Last year, U.S. and Canadian Class 8 truck retail sales were 233,000 units and Kenworth and Peterbilt delivered a market share of 30%. The U.S. economy is projected to expand this year, the less-than-truckload and vocational truck sector, where Peterbilt and Kenworth are the market leaders, are steady.

The Truckload segment is beginning to accelerate with industry customer demand and spot rates picking up in December. The 2026 U.S. and Canadian Class 8 truck market is forecast to be in a range of 230,000 to 270,000 vehicles as economic growth, regulatory and tariff clarity and improving freight conditions are poised to improve customer demand. In Europe, DAF trucks have a competitive advantage in the market, with their innovative aerodynamic design that features the largest and most luxurious cab interior and the best powertrain choices. In recognition of this, the DAF team earned the prestigious International Truck of the Year Award for the DAF XF and XD electric trucks. It's noteworthy that this is the third time in 5 years that DAF has won this award.

In 2025, the European above 16-tonne truck market was 298,000 units. This year, the European economy is forecast to grow modestly, and we expect the above 16-tonne truck market to be in the range of 280,000 to 320,000 registrations. In addition to the excellent businesses in Europe and Brazil, DAF is also expanding in the Andean region of South America.

Last year, the South American above 16-tonne market was 115,000 vehicles and is expected to be in the range of 100,000 to 110,000 trucks this year.

Other 2025 business highlights included PACCAR earning the elite A rating from Climate Disclosure Project for its environmental performance, DAF being honored as the Fleet Truck of the Year in the U.K., DAF, Kenworth and Peterbilt introducing the next generation of battery electric trucks, PACCAR completing a new engine remanufacturing facility in Mississippi, and Kenworth completing a new chassis paint facility in Ohio.

The PACCAR delivered 32,900 trucks in the fourth quarter and deliveries are forecast to be at a comparable level in the first quarter of 2026. Fourth quarter Truck, Parts and Other gross margins were 12%, and we estimate that first quarter gross margins will increase to 12.5% to 13%. We look forward to 2026 being a year of accelerated growth for our customers, dealers and PACCAR. Kevin Baney will now provide an update on PACCAR Parts, financial services as well as other business highlights. Kevin?

Thank you, Preston. In 2025, PACCAR declared dividends of $2.72 per share, including a year-end dividend of $1.40 per share. This resulted in a dividend yield of nearly 3%. PACCAR has paid a dividend for a significant 84 consecutive years.

Last year, PACCAR Parts annual revenues increased by 3% to a record $6.9 billion and pretax profits were a strong $1.67 billion. Fourth quarter revenues increased 4% to a record $1.7 billion with pretax profits of $415 million. PACCAR Parts performance reflects the benefits of investments in connectivity and Agentic AI that increase vehicle uptime and enhance the success of our customers.

PACCAR Parts is continuing to expand, and now has 21 distribution centers worldwide, including a new distribution center in Calgary. This new PDC enhances parts availability, and delivery times to Canadian dealers and customers.

Parts aftermarket. Parts business provides strong profitability through all phases of the business cycle. We estimate parts sales to grow by 4% to 8% this year, with growth accelerating as the year progresses. Last year, PACCAR Financial Services achieved record annual revenues of $2.2 billion and annual pretax income grew 11% to $485 million.

Fourth quarter revenues were a record $569 million and quarterly pretax income grew 10% to $115 million. PACCAR Financial provides the highest quality service in the market and makes it easy for customers to do business with PACCAR through the use of technology in the credit application and loan servicing process.

PACCAR Financial increased market share to 27%, a growth of 2 percentage points when compared to 2024. Capital project investments last year were $728 million, while research and development investments were $446 million. This year, we are planning capital investments in the range of $725 million to $775 million and R&D expenses in the range of $450 million to $500 million.

This year's investments on key technology and innovation projects include the creation of next-generation clean diesel, hybrid and alternative powertrains, battery cells, integrated connected vehicle services, flexible manufacturing capabilities, PACCAR's autonomous vehicle platform and advanced driver assist systems. PACCAR's independent Kenworth, Peterbilt and DAF dealers consistently invest in their businesses, enhancing our industry-leading distribution network, and they make a significant contribution to PACCAR's long-term success.

PACCAR is looking forward to a great year in 2026. Thank you. We'd be pleased to answer your questions.

[Operator Instructions] First question comes from David Raso with Evercore ISI.

I was just curious, can you walk us through the margin improvement you expect from 4Q to 1Q despite the flat deliveries?

4Q to 1Q, the thinking is, David, is a lot to unpack there, but one of thing you look at in fourth quarter is we had the 232 going into effect. Obviously, that went into effect November 1, say, the month, we had higher tariffs. So that happened in there. The other thing that wasn't significant is our manufacturing teams in the fourth quarter did a really great job of being able to convert the factories over to build trucks local for local. So for example, Chillicothe and Denton are now building the medium-duty trucks. And in Canada, we're able to build all of the product lines, principally for Canada.

So that's a lot of adjustment in schedules during the fourth quarter, which had some impact on margins, and as we look forward, we get a full quarter in quarter 1 of margins that are benefiting from the 232 tariff. There's the clarity of NOx 27, which happens. So I think that's starting to have some improvement.

Order intake has been very good, very strong in December and through January. So we're seeing some uptick in terms of customer demand, which is good for our business as well. And that's what's driving up the margin 12.5% to 13% in Q1 compared to the 12% in Q4.

And that last point about orders, I would have thought maybe the build sequentially could be up. What's the translation from those orders into when you expect to produce those trucks?

Yes. I mean, I think you know the cadence of it is a lot of orders at the end of the year come in as fleets that are spread delivery throughout the year. So that's a little bit of what I think everybody saw in the fourth quarter. And then what we're seeing now is a little bit more close in terms of order intake, but it's allowing us to build up our backlog a little bit, increased visibility a little bit. And then that's what's going to translate into higher build in the outer quarters.

And lastly, to quantify a little bit 4Q to 1Q. Can you give us some sense of the price/cost dynamic in truck in the fourth quarter, and maybe how to frame it with the Section 232 benefits for 1Q?

Yes, I think you can see favorability coming in Q1 compared to Q4 in price cost, most significantly is cost reductions that we would expect to see. And again, doing that comparison of the work our factories did, that has some cost impact in the fourth quarter in terms of getting the right trucks in the right places. And then again, we get the benefit of 232 in Q1. So it gets a lot more stable in that for a net positive price cost on truck. Brice, you had something.

Yes, we also had a higher level of overtime in the fourth quarter because of the events that Preston spoke to. And getting all the trucks out at the end of the year, our employees did a fantastic job getting all the trucks out that our customers so desperately want to have. So we felt really good about that. That should not be recurring in the first quarter either.

We now turn to Jerry Revich with Wells Fargo.

Kevin, congratulations. I'm wondering if you could just talk about what you're seeing in the performance of your aftermarket business in January by region. It feels like there's an uptick in Europe, in particular, that's playing out. But I'm wondering if you could just provide the context you just provided on orders for aftermarket Europe and U.S., please?

Yes. Sure, Jerry. So forecast for Q1 is 3% growth year-over-year. Team did a great job, let's say, in a soft parts market with record sales growth for last year and definitely for the fourth quarter. And what we are seeing is a soft part market customers, really are focused on required maintenance. And so we saw a mix shift towards that. We've got great AI agentic tools to help identify that and not only get that mix shift in our distribution centers, but also out with the dealers. And so we've got a forecast of 4% to 8% growth for this year. And we'll see that definitely, as we see the truck side accelerate through the year, we'll see that on the parts side as well.

Super. And then in Europe, specifically.

Yes, split in -- yes, that's what I was about to say. And then just the split in region is, I think, it will be consistent in North America as well as Europe.

Very interesting. And then can we just double click on Europe a little bit. So production was really high in the quarter versus normal seasonality and you took up your outlook for Europe. Can you just expand on what you're seeing in terms of -- is it a particular set of countries that are driving the demand acceleration for you folks in Europe? Or how broad is the activity improvement?

Yes. The market finished at -- I'll focus on heavy duty at 297,000 and so relatively strong market for Europe. No specific focus on any given region. Obviously, depending on where you are in Europe, some markets are stronger than others. We continue to focus on premium trucks. Preston said, we are recognized as Fleet Truck of the Year in the U.K., International Truck of the Year for the DOF XF and XD, and so we just -- we took the market up because we see similar strong market this year as well.

Good summary. And lastly, can I ask on Section 232 as that starts to impact your competitors, how are you thinking about market share versus unit profitability from a PACCAR standpoint, as we look back historically, you folks have targeted improving unit profitability cycle over cycle. And so as we're thinking about the benefits from the rebate program as well as chatter out there for $9,000 type price increases. Can you just provide a PACCAR perspective on where you see unit profitability going and how you folks are thinking about market share versus profitability given Section 232 even is the playing field for you folks?

Yes. I think the last statement you made is really instructive because throughout 2025, there was a bit of a disadvantage. And now I think we anticipate that to be an advantage. It doesn't come through quickly, right? It's a competitive world out there. So in the first quarter, many of our competitors haven't taken that to the market, those tariff cuts to the market yet, which keeps things in a bit of a very competitive state, maintains that dynamic nature we were talking about in our commentary, but through the year, we feel good about our opportunity to gain in terms of margin and market share as the year progresses and things stabilize out. Because it does seem stable now, and because our teams have done such a good job getting the local-for-local manufacturing, there really should be an opportunity for us in both categories.

We now turn to Robert Wertheimer with Melius Research.

I'm so sorry. Just following up on Jerry's, the cycle margins and where your kind of competitive and production position sits in North America now versus in the past? Is there any reason to think as things normalize over the next year or 2 or 3 that your truck margins should be anything different from average, whether higher or lower? And I have one follow-up.

I would say, Rob, that predicting out 1, 2, 3 years in the operating environment we're in is a little bit challenging in terms of what things are going to look like. There's a USMCA negotiation that's going to take place probably later this year, so it will be instructive to look at that. So I think that could have an impact on how margins feel.

What I think we're focused on is making sure that the trucks we're providing have the greatest value to our customers. And to that end, as you know, right, we have the newest lineup of trucks out there, and one of the things that we're now focusing on is how we're going to be able to help our customers be more profitable through the use of the Agentic AI that Kevin mentioned, but also maybe more generally in connected truck data.

So our ability to have connected every truck be connected and gather like petabytes of data from our trucks and then use that data to provide customer value is significant in the coming years. So that's what we can control, and that's where our focus is, because high-quality trucks, lowest cost of ownership, highest reliability and new transportation solutions for our customers would help them be more successful.

Interesting. I look forward to hear more about that. And then just a quick one. Did you mention your European market share for the year?

Yes. I hadn't yet, Rob, but it was 13.5% on the heavy-duty side.

Perfect. I'll have a bunch of questions for you shortly, and thank you very much.

We now turn to Steven Fisher with UBS.

Just wanted to confirm some of the production dynamics in the quarter, the 15,000 in U.S. and Canada, I thought I heard you say that maybe that was affected by sort of shifting local for local. How much of -- I guess, was the 15,000 less than what you expected. How did that compare? How much of that, if you could break it out, was tied to sort of shifting that production plans around? Or was there anything else going on in the quarter?

Yes, I think it's not what we expected.

Can you hear me?

Yes, we can. Can you hear us?

Okay. Yes, sure.

Yes. So that 15,000 is kind of right where we thought it would be right in the range of where we thought it would be. Europe probably delivered a few more, maybe North America, a little less. But what we really saw is a cadence change through the quarter and a cadence change continuing through the first quarter of stronger order intake, the ability for the truck plans, as we mentioned -- team mentioned, because I'm so proud of them, but for them to be able to keep the build going while they were doing this transition to build was really impressive.

So if there was anything, a few hundred units might have been varied in there where they were working through bringing in trucks out of Mexico, bringing in trucks out of Canada and bringing that flexibility and then the team in Canada flexing into a wide variety of model mixes built in Sainte. There are some inefficiencies in that, but their ability to manage that was significant and really impressive. And so I don't think we're too surprised at all by it. What we feel good about is the stability we have going forward and how that's going to be helpful to the build cadence through the 2026 calendar year.

Okay. That's helpful. And then, I guess translating that into then the first quarter flat, can you just give us sort of the regional color there directionally for U.S. and -- U.S., Canada versus Europe?

Yes. We see U.S., Canada up some and then Europe down a little bit as the higher deliveries in the fourth quarter at year-end in Europe.

We now turn to Angel Castillo with Morgan Stanley.

Just wanted to unpack a little bit more on the order uptick. You noted the continuation of maybe some of that into January. We saw a strong December order data. So could you just expand on maybe the shape of the strength in January? And just maybe any details on what percentage of your order book or order slots are now filled for kind of 1Q and 2Q.

And then maybe just related to that, like if you could expand on just the areas where you're seeing the uptick in orders, is there any kind of particular pockets, whether it's vocational or is it more related to EPA prebuy? Like what are you hearing in terms of the strength in those orders?

Yes. I think as you articulated the numbers for December, you know those order intakes, I'd say January continued in that same level of cadence of significant overbuild rate order intake. Some spread delivery there as you talked about fleets that are kind of putting in their buying decisions, but also some things that are closer in, as you mentioned, vocational, and we're seeing some significant orders from bodybuilders coming into our mix now so they can replenish their inventory for 2026 and then a steadiness in the LTL market. So it's kind of a mixture. You articulated that well, and that's what we see.

So strong order intake kind of across the board, which is helping us grow those backlogs, which is going to be positive for the year. And then I would say, I may add is in Q1 were mostly full. And then as you know, we'll look at Q2 as we get to the next earnings call.

That's very helpful. And then maybe just along those lines, on the North America truck outlook for the year, I guess, U.S. and Canada, can you just expand a little bit. So you raised Europe and South America, but it sounds like the level of orders here is pretty robust, but you got the North America unit outlook unchanged. How should we read that? Is there any nuances to what you're seeing maybe whether it's market share shifts or that this positions you may be better for -- or the industry better for the top end of the range we have provided. How should we kind of take that into context, given the unchanged guides for the industry?

Well, I think the truth is, our unchanged is higher than maybe like ACT was previously. So we feel -- we felt good about 2026. We still feel good about 2026. And so there's really no change from our positive sense of what's going to come through the year and the fact that it's going to be a year of acceleration for us, and acceleration sequentially is what we'd expect to see through the year.

Our next question comes from Scott Group with Wolfe Research.

So when truck rates start moving higher, we tend to see more truck orders. It feels like some of the reason why truck rates are going higher right now is that there's fewer drivers and the government is focused on nondomicile and things like that. If this is more of a supply-driven cycle with fewer drivers, how do you think about what that means for truck orders and this cycle going forward?

Yes. I think it's a great point, Scott. And you -- obviously, you're dialed in on what's going on there, but if there are fewer drivers that maybe aren't meeting the legal requirements, those drivers probably are working on the lower side of the contract rates and the spot rate businesses. And then what you see is those more established carriers tend to have probably somewhat higher rates. The fact that there's fewer that low side drivers enables them to probably command a better rate positioning. I think there's some of that going on right now. Obviously, as they get better rate positioning, their profitability will hopefully improve and then that will drive their ability to have better cash flow and purchase more trucks.

And then a similar question. When you -- this order pick up, do you have a sense, is this more replacement? Or is there any growth? And if it is sort of more replacement, I don't know, just thoughts on how you see the used truck market evolving over the course of the year.

Yes. I think in the used truck space, it's kind of an interesting kind of read through to me is, we think that as the year goes on, used trucks should become more valuable, simply because of things are shaping out in the marketplace, even into next year. So it should be positive right now. There's been a little bit of a downtick in used trucks because some of those buyers might be the people that are being affected by the CDL enforcement rules. And those might have been the buyers for the used truck. So there's a temporary moment there.

And also, I think we've still seen the finishing up of rationalization of fleets that we're going to be in the business and make it through this cycle versus those that are leaving the business. So all of that kind of put in, you would expect to see the number of delinquencies diminish as the year progresses as fleet profitability has come up and then use truck pricing follow that.

And just so I understand your point about use being more valuable. Is that a sort of comment around EPA27 and big increases in new truck prices coming next year?

Exactly. Yes, that's part of the same part of it.

Yes. We saw a 4% increase in used truck values year-over-year, and we expect that to continue to increase for that reason.

We now turn to Chad Dillard with Bernstein.

I want to spend some time on Parts' gross margin. So first of all, fourth quarter, what was it? And then how do you think about that scaling in '266 as that business reaccelerates?

Yes, Chad, this is Kevin. So fourth quarter was 29.5%. And as I mentioned, in a soft parts market, I'd say that's -- it's pretty good results. And again, team is doing a great job providing excellent customer service, getting right parts at the right place, right time. And so in a soft parts market, customers are really focused on required maintenance. And so we were able to address that shift, and what we're forecasting going forward is kind of a rebalancing of that mix as the market improves and a higher take on proprietary parts.

Got it. That's helpful. And then just really quickly on inventories. Can you just give us an update on where PACCAR is versus the market? And then just in terms of truck pricing, how are you thinking about that evolving as you go through '26?

Sure. If we look at the industry inventory, I think the industry inventory for Class 8 is 3.2 months and PACCAR is at 2.2 months. So we feel like we're in an optimal spot on our inventory positioning. And that at least for us, we would expect build registrations to be fairly aligned this year. So that gives us a good opportunity as well. And we're starting to see that, like we're starting to see dealers come in with stock orders. And as we mentioned previously, body builders want to have their spots put in. So that's the way we see inventory and its relationship to our build.

Our next question comes from Jamie Cook with Truist.

Nice quarter. I guess, my first question, understanding your retail sales forecast for North America, and now that we have more clarity on EPA 2027. Obviously, markets appear better versus where we were. But Preston, to what degree are you concerned the supply chain can't ramp if things really do improve? And where would those bottlenecks be? And how are you handling that? And then my second question, which is my guess is you won't answer, but I'm going to try, the revenues were better, deliveries were better, your gross margins were in line with your forecast, but you said it was hurt by your shift in manufacturing local for local. Is there any way you'll quantify what that impact was in the fourth quarter?

Yes. So your second question, you're right. You understand it. It was significant. I'm not going to give you a number because there's a lot of gray in that number. So I'd be taking a number that has multiple inputs to it. Say that it was a significant impact to us, and it is one that we don't expect to carry forward as we look into the future quarters. from a bottlenecks of supplier standpoint? And does that have an impact on the year. I feel like that's something that our customers are going to need to think about. We have great relationships with our suppliers.

We've given them our forecast, and we've given them that cadence of sequential growth and acceleration through the year and our expectations of our build. So they're aware of it. That helps them, right? So having a good plan helps them. But it does mean that if we get into a third, fourth quarter, where build is significantly higher than it puts stress on their systems as well. And we've been through the cycle, you just articulated it. There comes a point where if the ramp is too significant, it becomes bounded. We don't see that yet, but we don't rule out that, that could happen in the second half of the year as well. And if that's what happens, then that's typically when price accelerates.

Our next question comes from Stephen Volkmann with Jefferies.

I wanted to stick with the 27 NOx thing. Have you guys communicated to your customers, and maybe even if you're willing to, to us, what the price increase associated with that will be?

We've talked in generalities. And the reason we speak to generalities, just because I think the EPA has done a very good job of trying to let people know there would be 35 milligrams, but they also have stated that they're looking at useful life and warranty and what those impacts would be on cost. So those could still be subject to change.

In general, I think the best number is to use like a plus or minus on $10,000. That's what we've been talking to customers about. It gives them a range to think about. so they can kind of plan in with a new technology and a $10,000 increase does it mean they want to shift their buying pattern around?

Great. That's helpful. And then this is -- almost coming back to Jamie's question. But -- so presumably, there'll be some sort of a prebuy as we get toward the end of the year. I think you guys have been in that camp for a while now. But if the demand were stronger, would you be willing to flex up to meet it? Or does the fact that 27 probably sort of comes back down fairly quickly post the change mean that it's sort of your appetite for building a lot in the second half is more limited?

We serve our customers. And so if our customers are asking us for trucks, we do everything in our power to get them trucks.

We now turn to Kyle Menges with Citi.

I wanted to follow up on the last question. I guess, more -- not as much on the customer side, but just from the standpoint of the potential of dealers stocking up, you may be willing to carry a little bit more inventory in the 2027. You made a comment that you're seeing dealers ordering stock trucks right now. So it would be helpful to just hear about how you're thinking of the potential for dealer stocking, and I guess, risk of an inventory overhang exiting 2026?

Well, I mean, I think the statement of an inventory overhang has a negative connotation to it to me. And I'm not sure that if they had inventory going into 2027, that would be necessarily too big of a problem. I think that it's a little early to predict what the fourth quarter is going to look like because as I said, we have to see what the rules end up being from the EPA. I do think there will be an acceleration through the year. That seems obviously starting to happen to me. How big that is and how significant it is at the year-end, I think that's a lot of speculation that we can't really get to yet.

Got it. And then just on the Parts guidance, the 4% to 8% and starting the first quarter at plus 3%, just, how much visibility do you have to that ramp going from 3 to, I guess, plus 7% or 8% as we move throughout 2026? And just what are the key drivers of that acceleration in growth?

Kyle, the key drivers are just the anticipated demand as we go through the year with the market. We've had, if you look at last year, it was a relatively soft market throughout the year. And so just with customers accelerating, putting trucks back into service. We just were anticipating kind of a steady growth as we go through the year.

The other thing to maybe think of as tariffs should be a favorability in the parts side just like there on the truck side as you look at the year.

[Operator Instructions] We now turn to Tami Zakaria with JPMorgan.

First question is on the tariff-related surcharges or price increases you talked about last year. Are you rolling back some of those price increases or surcharges given that Section 232 eases some of the tariff cost burdens for you now?

Yes. Tami, we are. We've got rid of tariff surcharges for 2026. So they sit in there in terms of what our actuals are because remember, IEPA is still sitting out there as a tariff cost for everyone that needs to be clarified still, but we are seeing some price slide in Q1 expectation, but more than offset by cost. So that gives us a positive in price cost.

Understood. That's super helpful. And as a follow-up, I wanted to understand the first quarter gross margin guide a little better. Did you see at any point in the fourth quarter the gross margin rate being in that 12.5% to 13% range, meaning, is it fair to assume that you exited 4Q at a 12.5% to 13% range, and that's what you're expecting for the full quarter in the first quarter, given deliveries would be similar.

Yes. I think what you're insinuating is are we seeing sequential improvement in margin by month, and we don't break it out that way, but in general, yes, we're seeing improvement in margin as we go sequentially even within quarters.

Our next question comes from Jeff Kauffman with Vertical Research Partners.

Congratulations. I just wanted to think a little bit about -- I just wanted to think a little bit about margin opportunity or market share opportunity in 2026. We've been speaking with some trucking companies that have said even now, they still can't really put in orders for freightliners or internationals because post the 232 tariffs, they're not really certain what those prices are. So you talked about the shift post 232 and how that's an advantage for you.

What are your customers telling you about their ability to those that have, say, more than one nameplate, more than just Kenworth and Peterbilt on their fleet, because we've seen the uptick in truck purchasing. And to your point, that could be a combination of, okay, we got EPA clarity, we got 232 clarity on our domestic produced trucks, but our understanding is, your customers are still having trouble putting in orders for their non-U.S.-built trucks post 232. So could there be a bigger opportunity for market share for you? And then when will you get some more certainty on that?

Yes. I think you must be talking to the same people we're talking to, because I think they would like to have that clarity as well in terms of what pricing is going to be from some of our competitors, and that will certainly find its way into the market in the coming months. We've been able to give them clarity from our standpoint, I think it's helpful. And so we feel like we should be able to meet their demand when they're ready to make those decisions, which should be good for us through the year, both, I think, from a market share standpoint and a margin standpoint.

So just to follow up on that. The increased confidence you're seeing with their customers, and I know ACT Research just put the pre-buy back into their numbers. How much of this do you feel is increased confidence in the environment versus maybe just increased clarity on what's going on with EPA?

Yes, I think it's both. I think that the clarity is helpful, but without the confidence in the freight markets without the rate increases and without increased profitability for the carriers, the 40% of the truckload carriers being in the market, they need those things in order to be more than just tariff and regulatory clarity.

So I do think it's a both thing. And I think that's where we're at the point where we have tariff clarity. We have regulatory clarity happening, but I think we're just in the beginning parts of having the truckload carrier profitability return. So that has to continue to evolve, which will be positive for the year when that happens.

And our final question comes from Michael Feniger with Bank of America.

You guys touched on the price versus cost trending more favorably in Q1 versus Q4, it's mostly on the cost side, you commented on pricing is a little soft in Q1. You pointed out how competitors have not fully taken into tariff cost to market. We're hearing commentary out there on discounts. How do you see pricing in Q1 to beyond Q1 kind of playing out through the year as we start to get closer to that prebuy?

I think that's what's going to be telling is once there's price clarity from everybody in the market and the tariffs are affected into things, it's going to be -- and there will be some costs that come along, and I think that's where price will start to become a favorable factor through the year.

All right. And when we think, is there a rule of thumb we should think about your cost of goods sold? How much is raw materials, what we should be watching, what the lag is there?

Yes. This is Brice. Our -- the material in our product is the vast majority. It's 80%, 85%. So labor and overhead are the remainder. So it materials mean a lot in our pricing.

Fair enough. And look, you guys have an Analyst Day in a few weeks. I remember at the 2022 Investor Day, there was just a lot of focus from investors if PACCAR can drive higher margin cycle over cycle, and you clearly delivered that in 2023 with strong profitability. Now as we're coming off this Investor Day in a few weeks, early innings of this -- we're hoping the new truck cycle, do you think we can see higher cycle-over-cycle profitability that continue? What are some of the factors we should be thinking about as we're assessing the profitability as we're moving to this next recovering truck cycle?

Yes. Thanks for the commentary first of all, and then the question because the commentary is great. I think it's absolutely objectively true, cycle-over-cycle performance that teams have delivered is really significant and outstanding. We'll share more of that in the Investor Day. And then as we look to the future, we feel great about the opportunities in front of us. It's not just trucks and it's not just parts, it's not just financial services, but we think there's other new opportunities coming towards us in terms of how we support our customers with advanced transportation solutions, data, connectivity and the interplay of all of those. So those are all positive for the business looking forward. So we feel great about not just this year but the future and look forward to seeing many of you in Denton.

There are no other questions in the queue at this time. Are there any additional remarks from the company?

We'd like to thank everyone for joining the call, and we look forward to the upcoming Analyst Day on February 10. Please keep an eye on the PACCAR Investor Relations page for a link to the webcast. Thanks again.

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

Good morning, and welcome to PACCAR's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. And if anyone has an objection, they should disconnect at this time. I'd now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Preston Feight, Chief Executive Officer; Kevin Baney, Executive Vice President; and Brice Poplawski, Senior Vice President and CFO.

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 that may affect expected results. For additional information, please see our SEC filings at the Investor Relations page at paccar.com. I would now like to introduce Preston Feight.

Thank you, Ken, and good morning, everyone. Kevin, Brice, Ken and I will update you on our good third quarter financial results and business highlights.

I'd like to start by thanking our wonderful employees who deliver PACCAR's high-quality trucks and transportation solutions to our customers all around the world. And I'm especially appreciative of their efforts in these dynamic market conditions. PACCAR delivered good revenues and net income in the third quarter of 2025. Peterbilt, Kenworth and DAF Trucks contributed to the good results.

PACCAR Parts and PACCAR Financial Services continued to deliver excellent performance and strong profits. PACCAR achieved revenues of $6.7 billion and net income of $590 million. PACCAR Parts achieved record quarterly revenues of $1.72 billion and excellent quarterly pretax income of $410 million. Parts revenue grew 4% in the quarter compared to the same period last year.

PACCAR Financial also had a very good quarter, achieving pretax income of $126 million. We estimate this year's U.S. and Canadian Class 8 market to be in a range of 230,000 to 245,000 trucks and next year to be in the range of 230,000 to 270,000 Customer demand in the less-than-truckload and vocational segments is good. The truckload market continues to have uncertainty. Next year's U.S. and Canadian truck market could be higher than this year as we realize clarity around tariffs, emissions policy and potential improvements in the freight market.

In Europe, the DAF XF truck was honored as the Fleet Truck of the Year in the U.K. due to its best-in-class fuel efficiency and driver comfort. We project this year's European above 16-tonne market to be in a range of 275,000 to 295,000 vehicles. The 2026 market is expected to be in the range of 270,000 to 300,000. We estimate this year's South American above 16-tonne truck market to be in the range of 95,000 to 105,000 vehicles and in a similar range next year.

PACCAR's premium trucks are performing well for customers in South America, especially in the important Brazilian market. PACCAR delivered 31,900 trucks during the third quarter and anticipates delivering around 32,000 in the fourth quarter. More production days in Europe will be offset by fewer production days due to normal holidays in North America.

PACCAR's Truck, Parts and Other gross margins were 12.5% in the third quarter. Margins were affected by the August steel and aluminum tariff increases and the tariff costs on trucks that were built in the United States. Looking ahead, fourth quarter margins could be around 12% as tariffs peak in October. However, the new Section 232 on medium and heavy trucks that will become effective November 1 will be good for PACCAR's customers as it will reduce tariff costs and bring clarity to the market.

PACCAR is proud to produce over 90% of its U.S. sold trucks in Texas, Ohio and Washington. We look forward to improving market conditions, tariff costs that will begin to reduce as we head towards the end of the year and PACCAR's continued strong performance.

Kevin Baney will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Kevin?

Thank you, Preston. PACCAR Parts achieved gross margins of 29.5% and record third quarter revenue of $1.72 billion. Third quarter parts sales grew by a healthy 4% compared to the same period last year with similar growth expected in the fourth quarter. PACCAR Parts continues to grow by investing in capacity and services.

PACCAR Parts is focused on delivering the right part to the right place at the right time to provide industry-leading support for our customers. PACCAR Parts will open a new 180,000 square foot parts distribution center in Calgary next year to bring faster delivery times to dealers and customers in the region.

PACCAR will be opening a new engine remanufacturing center in Columbus, Mississippi next year to provide our customers with high-quality rebuilt engines. PACCAR Financial Services pretax income was a robust $126 million, 18% growth over the $107 million reported a year earlier. This reflects the high-quality portfolio and improving used truck results. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt and DAF used trucks.

PACCAR is building another used truck center in Warsaw, Poland, which will open this year. PACCAR used trucks sell at a premium. Similar to PACCAR Parts, PACCAR Financial provides steady foundational profitability during all phases of the business cycle. This year's capital expenditures are projected to be between $750 million and $775 million, and research and development expenses will be $450 million to $465 million.

Next year, we estimate the company will invest $725 million to $775 million in capital projects and $450 million to $500 million in research and development expenses. Key technology and innovation investments include next-generation clean diesel and alternative powertrains, advanced driver assistance systems and integrated connected vehicle services. PACCAR is also investing in its truck and engine factories to support long-term growth as well as our customers and dealers' success. PACCAR's industry-leading trucks, expanding parts business, best-in-class financial services and advanced technology strategy position the company for an excellent future. We are pleased to answer your questions.

[Operator Instructions] first question comes from Rob Wertheimer with Melius Research.

I had a couple of questions around 232, I guess that's no surprise. But I wonder if you're able to give any thoughts on whether it improves your competitive position or not, given production of some of your competitors, but then given perhaps they have exemptions. And then how does the rebate -- how and when does the rebate flow through financials?

Rob, I kind of thought we might hear some questions around 232. And as you're aware, it came out Friday afternoon, late afternoon here, and we've been spending a lot of time with it. We said in the commentary that 232 will be good for our customers, PACCAR's customers. It will be good for the fact that we manufacture our trucks in Texas, Ohio and Washington, and it should improve our competitive position as we look forward into next year.

It will take a little bit of time for it to fully implement. So as we shared, like tariffs are really peaking for us in the fourth quarter -- in October of the fourth quarter. And then as 232 implements November 1, there's kind of a qualifying period for the components that are involved in it. So it will become gradually more and more effective throughout the quarter. And probably by the time we get to the first part of the year, we should have great stability around it. So all feels very good and should help our competitive position.

That's helpful. And then how do you think about pricing? There's been a lot of uncertainty. I don't think you immediately hit your customers with some of the tariff-led price increases. Now that there's clarity, the price increases start to offset that in the new year? Or any commentary around that, and I'll stop.

So as we think about it, it's a competitive world out there, and we don't operate alone in it. But we feel very good about the trucks that we're producing right now, the best trucks we've ever produced in our history, best fuel economy, best reliability, great engine performance. So we're happy with how that's going. And I think that our customers appreciate the stability in the market right now with how emissions haven't changed in a while. So the trucks they're getting are moneymakers for them.

And as we kind of think about pricing through the year of next year, I think that there will be some opportunities for us as the year progresses. We said that the LTL market, less than truckload, market remains good, vocational market remains good. And then I think the truckload sector has been in a tough spot for, gosh, 30 months plus. And I think that they are using the equipment. So that bodes well for the fact that they'll get back under replacement cycles. And as they get back under replacement cycles, it's going to create demand in the market, which is obviously good for pricing.

We now turn to David Raso with Evercore ISI. [Operator Instructions]

I was curious, underpinning the North American growth outlook, I was just curious, you mentioned last quarter about some bonus depreciation order potential. Just curious, what are you hearing from the customer base to underpin that growth? I know you mentioned replacement demand and so forth. But just curious the conversations that you're having when it comes to any sense of timing and when you think your orders will start to reflect the ability to grow in '26?

Brice, why don't you offer some comments on how that looks, and then I'll come at that from a customer standpoint.

Sure. So our price, we expect to continue to grow. We'll get -- we'll benefit from the effects of the tariff, of course, and our pricing competitiveness. And we believe that the Big, Beautiful Bill, as we said in the third quarter, is going to provide incentives, and we have programs around encouraging our customers to take advantage of that 100% bonus depreciation. We think that will help spur some demand here in the fourth quarter.

And then David, what we're getting from customers is it's very mixed from a customer standpoint, right? If your operating conditions are positive, like in the vocational market or the LTL market, I think you're looking to take advantage of that. And those are customers that are ordering for the fourth quarter. I think there's obviously in the truckload sector, some people are still finding challenges there. And so they're less likely to take advantage of it now. But I think there is this growing sense of the momentum has to pick up in terms of truck orders because 2026 will have, as the law is written right now, a 35-milligram NOx standard. And so I think as trucks age, a 35-milligram NOx standard is in front of them and now they have clarity of tariffs, there's a lot of reasons for people to start to think about allocating their capital to truck purchases.

I wanted to follow up on the NOx issue. We know where the current situation is, but obviously, there's thought that it might be changed. Is there a deadline of some kind that you feel like the EPA has to communicate what exactly is happening for '27 when it comes to your supply chain and so forth? Just so we have a sense of timing. It's obviously the general assumption out there that they're not going to keep the current regulation going to 0.35.

Yes. I don't know how that assumption has been formed by people. From our standpoint, we approach this in saying we are prepared for the 35-milligram NOx standard. We've got our teams working great on it with some new products that have come out in support of it. We're ready to go with it. That is the law, right? So our best approach is the law is the law until the law changes. As time passes, it makes it harder and harder to change the standard back to 200 milligram, could happen though, right?

I think that we are very comfortable supporting a 200-milligram standard as well because we have products that are available today that can support the 200-milligram standard. We are all sensitive to the fact that as more time passes, it puts additional burden on the supply base. But I think PACCAR has a great relationship with our suppliers, and we could handle that change. And if that's what's best for the industry, then we will align clearly with that.

And lastly, the cadence of the clarification on the deliveries for the fourth quarter being roughly flat. Any color you can provide geographically sequentially would be great.

Yes. I think we said in the commentary that fourth quarter North America has more holidays in it. So you can kind of think of North American holidays being taking away some of the volume. Europe is less holidays. So you kind of see a shift there into European volume for fourth quarter. We're -- somebody will ask this, but we're roughly 60%, 70% full in our order book for the fourth quarter. And so that kind of lets us kind of indicate how the quarter is filling in, and that's how we got to our similar quantities of deliveries for the fourth quarter.

We now turn to Jeff Kauffman with Vertical Research Partners.

I just want to focus on a follow-up, I guess, on Rob's question on Section 232. I know everybody is still figuring this out. But in terms of the rebate amount, how is that going to compare when you're at full speed versus what you're costing out on the tariffs on parts and steel and aluminum. And you mentioned that, that's going to ramp up through the fourth quarter. I guess, is that more a rebate to the customer that lowers the price to the customer? Is that a rebate to the company? How do those economics flow?

Well, I mean, the way we can keep it in simple terms, so we don't turn this into a primer on the 232 because it's really complicated. But I would say that the 232 fact sheets out there, it's really good. I applaud Commerce and The White House for putting out a clear document that's helpful in articulating what the game plan is and why the game plan is useful. To keep it at the highest level, I would say that as parts qualify into 232, that's when we expect we can apply the rebate to them.

So parts coming out of Mexico and it's deemed to be acceptable to be part of 232, you let them know that it becomes acceptable or not acceptable, and that's why you start to realize a reduced tariff cost as you head through the quarter. Obviously, the effective date is November 1, but it will take time for those parts to be qualified. And so that's why we indicated that it could take through until the first of the year to see the full benefit and impact of that.

And the first part of that question, when this is fully ramped up, how will that approximately net against the incremental tariff costs you're facing?

Yes, -- it's going to bring it down. We haven't netted out a specific number. And obviously, it's going to be something that we started the tariff discussion saying, hey, we're in this together with our customers and our suppliers and our dealers, and that will be the same situation we face as we move forward. It will be hopefully some benefit to everybody in terms of our dealers, our customers, PACCAR, our suppliers, that we should have kind of some positive momentum out of this. The quantification of it remains to be seen.

Our next question comes from Michael Feniger with Bank of America.

Just Preston, I know this has been getting a lot of attention on Section 232. Just to be clear, so we have some understanding, do you believe with the adjustments in the Section 232 implementation we saw, do you believe PACCAR now has a clear cost advantage as a U.S. manufacturer? Or does this just even the playing field on the cost side with your peers when we saw there was a disadvantage obviously, early year. So does this just even it out? Or do you feel like it gives you a clear cost advantage as a major U.S. manufacturer for the U.S. market?

Michael, that's a great question. I appreciate you highlighting the fact that our team did a really good job for the past several months dealing with the cost disadvantage, an unintended cost disadvantage. So the fact that our market share is 30.3% for Peterbilt and Kenworth right now is just a credit to the teams at those divisions and to the manufacturing teams and pretty much everybody in PACCAR that operated from that tough position.

As we look forward, we, of course, don't know what our competitors' cost structure is. So it's really hard to estimate that and probably should avoid doing so. What I would rather do is say that I think it helps PACCAR significantly, and that should be good for our customers and PACCAR. And I think it gives us a competitive leg up from where we've been.

And just my second question to squeeze it in. Just there's been commentary [ on parts ] that Parts, there's been some deferrals there. I know you hit your -- what you guys were forecasting at 4%. Just what are you seeing underlying on the Parts side? And can Parts margins, do you think start to expand in 2026 on a year-over-year basis? What do we need to see in the market for us to kind of see that start to expand on a year-over-year and to get Parts moving? Because I know it's -- the underlying market has been a little bit challenging there.

Yes, Mike, this is Kevin. I'll take that one. So similar to Truck, the Parts business was definitely impacted by tariffs as well as the overall soft truck market. Price did cover cost. So when we look at the margin impact, it was really a mix shift. We saw that a shift in proprietary versus all makes and also a little bit of region impact by fewer days in Europe. And I'll just reinforce, there's still tremendous opportunity for growth. Parts team did a great job providing parts and programs to provide excellent customer service during a soft market. So a really nice job with the revenue growth. And we continue to invest in distribution. Our dealers are continuing to invest in locations and service capacity. And so yes, we see there's definitely opportunity for future growth.

And everything Kevin said is just 100% right. And then you have the opportunity that 232 is also advantageous to components. And so that will help us in a price cost looking forward.

We now turn to Angel Castillo with Morgan Stanley.

I was hoping we could just go back to the tariff discussion a little bit more. You had mentioned, I think, in 3Q, that was a $75 million headwind. With tariff headwinds kind of peaking out here in October and the ramp-up in the rebates, can you just quantify for us exactly how much of a tariff headwind you anticipate to be baked into the fourth quarter? And as you look at the gross profit margin moving from 12.5% to 12%, is that entirely due to tariff ramp-up? Or are there any other factors there that we should consider?

We think mostly about tariff ramp-up. As we said and you just articulated, right, October doesn't have any reduction. So it's kind of a peak tariff for us in that first part of fourth quarter. And then we're still understanding what the cadence is going to be for how the tariffs feather off for us through the course of November, December. But that's the single biggest impact right now. And I think as we look at it, so you go from a $75 million third quarter, we saw that on slate to increase in the fourth quarter. But with the 232, we see that coming down. And by the time we get to the December time frame, January time frame, we'll start to see improvement -- marked improvement, we anticipate.

That's very helpful. And then as we think about next year, I understand that EPA 27, there's still a lot of uncertainty around that. I guess in terms of your outlook for North America, for U.S. and Canada, are you assuming any kind of prebuy still related to EPA 27 in that?

So we gave a 230,000 to 270,000 market, and the reason we gave that significant range is because I think there's some uncertainty in how quick the truckload sector recovers. Is it sometime in the first quarter to take a little bit. I think we also are anticipating that the 35-milligram law is what's going to be there. And if it changes, that would obviously take away some prebuy and that would put us more towards the 230,000, 240,000, 250,000 side of that category versus if the 35-milligram standard stays in place, it's more like the 250,000, 260,000, 270,000 and maybe even higher. So we kind of see that as being a significant factor in how the market shapes up next year, and we look forward to clarity when it happens. But in the meantime, the clarity is 35 milligrams.

We now turn to Tim Thein with Raymond James.

Just following up on the comment earlier with respect to the Parts business pricing covered variable costs. I perhaps missed it, but did you give a comment just with respect to pricing that you realized in the Truck business in the third quarter and then maybe your expectations for the fourth?

Go ahead, Brice.

Sure. For the third quarter compared to last year's third quarter, our pricing was down 1.3% and the costs were up 4.6% for a negative 5.9% there. And obviously, tariffs played a big role in that number.

Well, sequentially, it was 1.6%. And I think what we think is favorability should start to be achieved as we move forward.

Got it. Okay. And then Preston, maybe just as I think about potential early indicators of maybe a bottoming, I think historically, we would look at what the behavior and what the lease and rental customers are doing and seeing in their business. You have a good lens into that just given PacLease. So I'm just curious what you're seeing in that business with respect to utilization and I would agree that, that could be an important thing to watch as a potential turning point.

Yes, it's a good question. I think that utilization is a key factor. And for PacLease, it's healthy right now. So I think that they're starting to see these places of opportunity, and we'll watch that closely along with all the other indicators, right? Certainly, as you well understand, there's many, many things that go into the make of a truck market. That's one of them, and utilization is healthy.

Our next question comes from Jamie Cook with Truist.

Two quarters -- sorry, 2 questions. One, Preston, can you just speak to since Section 232 has been announced, obviously, I'm sure you've had a lot of conversations with your customers. What are they saying to you in terms of like potential incremental market share? And I'm just wondering, as you think about your plants in Denton and Chillicothe, like just capacity you have or where market share could go until you'd have to think about investment.

I'm assuming you have a lot of runway for market share, but just sort of some thoughts there. And then I guess my second question, I mean, it sounds like you think the 12% gross margin in the fourth quarter, like that should be the trough for margins for PACCAR even assuming a flat market next year just with the benefit from Section 232 and tariffs mitigating and potentially the market being flat to up next year. So it sounds like -- I don't want to put words in your mouth, but you can probably grow earnings next year, but I'll let you chew on that and see if I can get any reaction out of you.

Jamie, you're fun. Let's do the first question, which you said, do we think we can gain share and how do we think about capacity in our factories. And one of the things I'm really pleased with our manufacturing team over the last couple of years is we've made these big investments into the factory so that we have capacity to handle. What ends up happening is quarterly swings and build. We talk about full years, but things really happen over a couple of quarters of max build rates. So we're aware of that. We've made investments in paint facilities, automatic vehicles to move parts around inside the truck plants, great work with our suppliers and their investments in the capacity that they have.

So we feel like we can gain share, and we feel like we have the capacity to support gaining share in the coming time frame. I mentioned it earlier in the call, right, we invested in products. So we have the newest and best-performing products in the industry. We've invested in our operations teams. So we have the best manufacturing capacities, highest quality products with plenty of capacity to handle share growth. So I feel really well positioned as we head to next year.

And that does lead to your second question, I guess, of saying if 12% is the plus or minus now, what are you thinking next year is going to be or even the fourth quarter phasing. Now I'd say, as we said, with tariffs peaking in October, we do think that the cadence through the quarter on a month-by-month basis will be positive trending and then we anticipate that being true through next year, right? So if the market was at a midpoint 250,000, we feel like that bodes well for our earnings growth and our margin growth.

Our next question comes from Tami Zakaria with JPMorgan.

Apologies, but one more question on Section 232. It seems like the 3.75% value of the truck to offset tariffs extends through 2030, which gives some time to plan ahead. How are you thinking about your parts and component sourcing with that time line in mind, do you plan to expand footprint, bring stuff here in the U.S.? Any thoughts on how you're thinking about that 2030 time line?

Well, I think that we feel very good about the supply base and how they've positioned right now. And we do think that there'll probably be some reflection in the coming weeks for people to think about where their production setups are and where they're going to position themselves. And I think it's a little bit too early to be commenting on what they're going to actually do in terms of where they might adjust capacity into the different markets since it's just a few days old, but we are starting those conversations and look forward to working with our suppliers as we figure out where they're going to position component growth.

Got it. If I could ask one more. I think you have this huge advantage of building -- over 90% of trucks here versus some of your peers, they make elsewhere. So this seems like a huge advantage. And so when you think about this offset and the pricing you've taken, is there any plan to give back any of this pricing as some of these tariff headwinds are offset in order to gain share for the long term? Is that sort of a strategy you might consider?

Well, Tami, you're really smart and you ask great questions, and you can understand how we think about margin, price, market share, and it's not an either/or thing, right? You're always, as a company, trying to provide great trucks, great transportation solutions for your customer and then be paid fairly for them. And nothing is different in the environment we're in today than that, right? We want to keep providing these great trucks and transportation solutions. And as we do that, we think our customers are happy to pay us fairly for them. As cost goes down, that should bring some benefit to them, and that should bring some market share opportunity to us, we hope.

We now turn to Chad Dillard with Bernstein.

So on an industry level, how are you thinking about the supply and demand balance of trucks actually in the fleet? And how much excess capacity is out there? How long does it take to clear? And is this embedded in your '26 industry outlook?

It's a really interesting question. It's really hard to give you anything specific, Chad. If we think about it right now, there's sufficient capacity that's sitting out there in the industry right now at the current build rates, you can understand that clearly. The question really remains how quickly does the market adjust and where does it adjust from? When do people start to think that 35 milligrams is what's going to happen in the NOx standard? When do our customers in the truckload sector, which represent 40% of the market, start to feel some confidence that they're able to get rates. And I think it's really hard to handicap what that's going to be, the timing for that.

But again, it's been a long tough period for the truckload carriers. And at some point, those -- that equipment has to be replaced. And I think they're starting to feel that need. So I think there'll be some lift there. It will probably start gradually and then it will accelerate as the year goes on and people define their needs. So capacity exists for us in our factories and with our suppliers, we're working closely with them to make sure we can build the trucks our customers want. We think it could be a pretty good-looking 2026.

Got it. And then along that same line, you're talking about how customers are keeping the trucks a little longer. Any early thoughts on the parts business as we think about 2026? How should we think about the growth profile for that business?

Chad, this is Kevin. We think about it the same way we have. The truck park has been at elevated levels over the years and so that creates tremendous growth opportunity for us. I already mentioned the continued investments we're making. The Parts team is doing a great job providing tailored programs. We're leveraging AI to get smarter about providing our right part to the right place at the right time. And so we see next year as just a continuation of the great work the team has done.

Yes. And if I could just add on top of that, the fact that the retail market in the U.S. is still negative is an overhang. At some point, that will turn. So we're growing in a market that is negative is a really good tribute to our group and to PACCAR Parts, and we think that provides a lot of opportunity for us in the next year.

Our next question comes from Kyle Menges with Citigroup.

I was hoping if you could just talk a little bit about demand you're seeing maybe just into the first half of next year and contextualizing that with your order book so far for the fourth quarter, 60% to 70% full. I guess how would that compare to "normal" fill rate at this point in the year for the fourth quarter and how that's informing your views of demand into the first half next year?

And then would be helpful to hear your comments on inventory and any need for destocking. And I think in particular, in the vocational market, at least the industry data suggests inventories are really high. So it would be helpful to hear your thoughts there on any need for destocking in that market.

Yes. I think we feel like from an inventory standpoint, the industry is in a position where it's like 4 months of industry inventory. That's down from 4.2 months the last time we spoke in July. So it's improving from an industry standpoint. And from a Kenworth, Peterbilt standpoint, we are at 2.8 months, which is a very healthy level for us. So we feel quite good about that. It doesn't feel like -- we obviously have a high vocational share, market leaders in the vocational segment. So that says we have more inventory getting bodies on it. And so 2.8 months for us, it feels really healthy, which kind of leads back to your first question about order intake and what's the market doing.

We don't have an excess amount of inventory. So we're 60% to 70% full. We'll head into what a typical -- typically, in late October and November, we get into capital allocation for the major truckload carriers, and we'll get a look at what their buying plans are for the year. Those discussions are always ongoing, but they really kind of begin to cement up in the fourth quarter, and we look forward to having those conversations with them. And I think that we'll see the first half start to fill in reasonably well now that we have clarity around tariffs as people get their hands around what the law is of 35 milligrams and appreciate that it really is a good time to buy trucks for them and probably the right time for them to buy trucks so they can keep their fleet age where they want it.

Got it. And then just a follow-up on an earlier question. It does sound like with Section 232 and the rebates that you'll see, it sounds like you might be passing some of those savings on to the customer. Curious how that might look? Is that simplistically just taking off the existing tariff surcharges, which I think were around $3,500 to $4,000 per truck in Class 8? Is it just kind of simplistically taking those surcharges off? Like how should we be thinking about that?

Well, I mean, what we've said before is the tariffs are still peaked in October and then they're going to come down from there in a process through the fourth quarter. So we are looking at that. I think that our intention is to get away from a tariff discussion with customers now that we have stability, and we can just integrate into pricing and discuss the price of these great trucks for the customer and get away from the tariff statement now that we have stability. So that will be helpful to everybody inside of our customer base is to not have to think about what we had -- you referenced $3,500 to $4,000 of tariff surcharges. We can move away from that kind of discussion and just get into truck pricing again since there's clarity and stability.

[Operator Instructions] We now turn to Avi Jaroslawicz with UBS.

I think you said the order books for Q4 are about 60% to 70% full. Is that pretty uniform by region? Or are there any that are notably off of that point?

Yes, that's a great question. It is actually pretty uniform by region right now. So we've seen the European market have strong order intake, and we're seeing that 67% full there as well as in North America.

Okay. And if I could follow that up. Assuming that we don't hear anything new [indiscernible] on the NOx rules, when are customers telling you that they might start prebuying? Could that be in the first half? Or is anybody saying that they would expect to do that in the first half? Or would that really be more a second half story?

I think they're buying decisions. These are really smart people, our customers. And so they're thinking about all the inputs, not just the one. I think it has a heavy influence on them to contemplate the 35 milligrams and whether or not they need to think about pulling ahead, but they're also looking at their fundamentals of freight and rates. They're looking at, is there a stable operating environment, which the Commerce Department of the White House did a great job of providing for them now. And so I think all of those are the factors.

And I would kind of -- I kind of think that they will start to really have a lot of interest here in the fourth quarter of what their 2026 buying plan is. And probably by the time we're in the first quarter, they're going to be needing to react to it if it stays at 35.

We now turn to Scott Group with Wolfe Research.

This is Cole on for Scott. Just back to Section 232 a little bit. I heard earlier in the call, you mentioned that pricing increased 1.6% sequentially in the quarter and that momentum should kind of continue. But then in the same breath, you're kind of talking to the fact that you want to help out your customer. Maybe help like situate us there. Are the tariff surcharges effectively going to go away, but core pricing should continue to move higher? Just any way to help us wrap our head around that.

Yes. I think that -- Yes, it's a great question, actually. It's an interesting dynamic right now. Surcharges really only exist at moments of inflection where there's some unique factors sitting into there and hence, the reason for the surcharges that we had. That point of inflection is now passed, and we have stability. So it allows us to probably get rid of the tariff surcharge and go back to normal pricing discussions with our customers. And obviously, providing premium trucks and transportation solutions allows us to kind of make sure that we have fair pricing to them, good for them, good for us. And obviously, as we see cost change should be somewhat favorable, we both should benefit from it. So we see that as a great opportunity for PACCAR and our customers to have a strong finish to the year and an even stronger 2026.

And last quarter, you mentioned that 3Q gross margins would be, I think the math was roughly 14%, excluding tariff costs. Is that a good way to think about 1Q as we hit run rate as rebates kind of offset some of the tariff costs? Or is there any other way to think about how margins should build through 4Q and into 1Q when we hit run rate?

Yes. I think we actually said around 13%. And then what we've said is tariffs peaking in the fourth quarter, declining throughout the fourth quarter will allow us to see growth as we get into, say, the December time frame and then continued improvement into the first quarter of 2026.

There are no other questions in the queue at this time. Are there any additional remarks from the company?

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

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