PACCAR Inc (PCAR) Earnings Call Transcript & Summary

Good morning, and welcome to PACCAR's Third 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.

Thank you, Joel, and good morning, 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 and the Investor Relations page of 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 PACCAR's excellent third quarter financial results and business highlights. I'd like to start by thanking our wonderful employees all around the world who did a fantastic job of providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR delivered excellent revenues of $7.94 billion and net income of $847.5 million in the third quarter. This is 19% revenue growth and 44% profit growth compared to the same period last year. PACCAR Parts had record quarterly revenues of $1.78 billion and PACCAR Financial Services $138 million in profit was an increase of 9.4% compared to the same period last year. We estimate this year's U.S. and Canadian Class A markets to be in a range of 240,000 to 260,000 trucks and next year to grow and be in a range of 240,000 to 280,000. The U.S. and Canadian truck market is being driven by economic growth, continued investments in infrastructure and the general freight market recovery. In Europe, we project this year's above 16-ton market to be in a range of 300,000 to 320,000 units, and in a similar range for 2027. This represents continued truck replacement in a region with steady economic growth. We estimate this year's South American above 16-ton truck market to be in the range of 100,000 to 105,000 vehicles and next year to be up slightly and in the range of 105,000 to 115,000 trucks. PACCAR's premium trucks are performing very well for customers throughout all of Latin America. Based on strong customer orders, PACCAR increased deliveries to 40,100 trucks in the third quarter. Delivery volume will increase in the fourth quarter as suppliers become more able to ramp up their production to meet continued strong customer demand. Fourth quarter deliveries are anticipated to increase and be in the range of 41,000 to 43,000. PACCAR's third quarter trucks, part and other gross margins were strong 14.5%. Fourth quarter gross margin should remain high and again, be in the range of 14% to 15%. We look forward to a strong finish to this year and another very good year in 2027 as our customers benefit from PACCAR's excellent trucks and new transportation solutions. Kevin Baney will now provide an update on PACCAR Parts, Financial Services and other business highlights.

Thank you, Preston. PACCAR Parts achieved record third quarter revenue of $1.78 billion. This record is a result of investments in parts distribution growth of the TRP all-makes brand expanding transportation solutions and increasing dealer retail locations. We anticipate continued growth in the fourth quarter. PACCAR Financial Services pretax income was robust $138 million with 9.4% year-over-year growth. These excellent results reflect stable finance margins and higher used truck pricing. Similar to PACCAR Parts, PACCAR Financial provides steady foundational profitability during all phases of the business cycle. Last week, at the American Trucking Association's Truck Conference PACCAR proudly introduced its next-generation transportation solutions platform called PACCAR Connect. This system provides a state-of-the-art technology platform in a beautifully integrated vehicle display. PACCAR Connect has the ability to bring together fleet telematic systems, PACCAR truck data customer-specific productivity applications, Apple Car Play and electronic driver logs into a fully integrated system. This system will serve as a unifying platform that will enhance customer productivity and create new revenue streams for PACCAR. This year's capital expenditures are projected to be between $650 million and $700 million, and research and development expenses will be $440 million to $460 million. In 2027, we estimate the company will invest $650 million to $700 million in capital projects and $460 million to $500 million in research and development expenses. Key technology and innovation investments include next-generation clean diesel, hybrid and battery electric powertrain, selling the parts business, enhancing manufacturing capabilities and expanding the connected vehicle offerings. PACCAR's industry-leading trucks, best-in-class parts and financial services businesses and advanced technology strategy position the company for an excellent future. We are pleased to answer your questions.

[Operator Instructions] Your first question is from Steve Volkmann with Jefferies.

So a couple of quick ones here for me, and I'll pass it on. One, firstly, I think you mentioned that you expected sort of supply chain to kind of catch up. And I think your deliveries this quarter might have been slightly less than what you had projected. Are you seeing supply chain constraints that are limiting that, or was that just kind of normal variability?

Yes, Steve. This was a nice observation. Our deliveries in the third quarter, 40,100 were somewhat affected by supply constraints. And as their we and others are building more trucks. I think the suppliers are trying to get up to speed on that. And so that's the kind of what affected Q3 and what we think is improving in Q4 with the guide to 41,000 to 43,000 trucks. But we're working closely with our suppliers to make sure they get the parts to us, and we can build trucks. It makes it a lot easier to build the trucks and we got the parts.

Okay. That makes sense. And then the second one, I'm curious how you're sort of thinking about or how you're even interacting with customers relative to '27 now? Because I'm imagining, but please correct me if I'm wrong, that it's actually hard to sort of price trucks for '27 when we don't know the NCPs yet. And so that probably makes it hard to take orders are you taking orders for '27? And if so, can you provide any color as to sort of what people are actually ordering relative to engine?

Steve, that's great. So we made the observation of it's easier to build trucks that we got parts and it's easier to price trucks if you know the cost. And I think that the government is doing a very nice job actually of looking at the 2027 emissions regulations and figure out how they should are able to set the NCP levels. As you noted, they're not finalized yet. And I think that does give some customers pause about what their price will be. So we've had excellent discussions with our customers. We know them for many years. And ATA was a great opportunity to sit with a lot of them and talk about what their needs are for 2027. And I think they feel everyone we met with feels like they would like to keep buying the 200-milligram engines so they have time to prove out the technology of the new engines, the lower NOx engines. And so I think they are starting to place their orders. We're seeing good inquiry and increasing order intake. But obviously, that will likely increase as we have certainty around NCPs.

Your next question is from Jerry Revich with Wells Fargo.

I'm wondering if you could just talk about the lead indicators that you're tracking for the parts business. What do you expect the outlook to over the next couple of quarters normally, you folks have some visibility a couple of quarters out, given contract rates are moving higher. I'm wondering if you could just give an update on how you're thinking about the cadence.

Jerry, this is Kevin. As we look at the parts business, right now, all our parts market team has done a great job increasing volume, growing share. Share is one of those things that we measure. And right now with customers have elevated operating costs, they've got higher diesel prices, they've got an increased number of unseated trucks. And so they're focused on really required maintenance at this point. And so we spend a lot of time working with them, one of our key things we look at is our share of wallet with our customers, and we've been able to grow share and increase while the elevated costs and as things return to more normal conditions for them, we anticipate to keep growing.

And when do you think that will be based on what you're hearing, do you expect an acceleration exiting the fourth quarter, or is it possible to get a sense, Kevin?

Yes. We anticipate continued growth in the fourth quarter, and we have been able to grow share. And so that's a key metric for us. I think we really provide ease of doing business with our customers. And so we continue to grow the revenue with them gain share and anticipate that to continue.

Super. And can I ask the margin outlook 14% to 15% for the fourth quarter what we're hearing is really good pricing for fourth quarter delivery slots and a sequential improvement from third quarter pricing. So does the margin outlook embed some of the uncertainty on the parts side versus improved profit per unit on the truck side, or can we just unpack the push and the pull there, if you don't mind?

Yes, sure. I think a simple way to think about it is when we're building trucks and we have to deliver or build them without all the parts or it's a cost adder in that. So that has some impact to price cost in the quarter as we think it might occur. Obviously, we're doing everything we can to minimize that. I think the parts team is, as Kevin said, doing a great job of getting the market share gains, margin growth. So we feel positive about how they're doing. And then I think as we look at our pricing power, it has been good with our customers. There is a strong demand for the 200-milligram engines, which I think carries into 2027 as well. So it feels pretty positive from that standpoint. It's really just about those efficiencies that we have to deal with in the fourth quarter. And I think the other part of it is, it's always a function of there's a lag factor between pricing a truck and your backlog. And so that sits into the factors as well.

Your next question is from Tami Zakaria with JPMorgan.

I'll have -- I'll ask one question today. So I heard you comment about some delays in how customers are trying to -- or there's delays in how they're trying to decide what to order next year. But as you are part of those discussions, are you getting a sense that customers are looking to buy the noncompliant engines and planning to pay a penalty on it, or is there willingness to adopt a compliant platform even if it comes with a higher cost. So any color on what -- which to customers are leaning towards at the moment?

Sure. I think one of the things I'd start with, Tami, is to say that we have very good visibility right now. Obviously, the year is full, and we're filling the first quarter. So that's a pretty positive position to begin with. I think the customers are beginning to order, but it's just the beginning of that when they would expect the fleet to be thinking about their capital allocations for next year. So that's kind of a part one of your commentary. And then I would share in it. We've said this a lot is like -- we have not met with the customer. So every customer we meet with is much more interested in proven stable technology that they've had time to vet in their operations. And so they're asking for us to deliver to them trucks with the 200-milligram and an NCP because that makes their operations smoother compared to introducing new technology from any manufacturer that they haven't had enough time with. And so that's kind of where the world sits right now.

Your next question is from Rob Wertheimer with Melius Research.

I think Kevin mentioned half a dozen things that could affect parts margin, which was down a little bit year-over-year this quarter from mix maybe people delaying some purchases to investments. I wonder if you could just break that down? And is there any kind of price competition that's led to lower margin, or is it other factors?

Rob, it's just primarily mix right now due to the elevated operating costs that we see with the customers. We've got great trucks with a lot of proprietary content. The engine business, I mentioned the connected. So really see as the customers' operating conditions improve, we see a nice balance of that mix back between all makes and proprietary.

And Rob, I'd just add on, as Kevin said, and echo it in different ways. I think about the way the enforcement of CDLs went in 2026 and they pulled a lot of trucks out of service. So if the trucks pulled out of a service and they're sitting against the wall, if you will, then that means that there's less miles driven on some of those newer trucks. So it's just postponing parts purchases. We think that will come back, obviously, and that's kind of what Kevin said with high fuel prices being the other factor. So that's just kind of the way the market is running, and I'm so pleased with what the team has been able to do in terms of growing the parts business in a market which is kind of constrained. So they've done a really nice job in that factor.

All right. And if I may sneak in another one. You mentioned a couple of times the launch of PACCAR Connect, and potentially even new revenue streams that might come out of it. But what are the biggest kind of pain points or whatever you want to call it that your customers are feeling that might be solved by this? And how does that evolve over time? I'll stop there.

Yes. Thanks, Rob. Great question. We're really excited about this. The product is really cool. I don't know if you had a chance to see it, but if you get in one of the new Peterbilt or Kenworth trucks with the integrated system I mean what you end up with in today's world is people install third party, third-party telematics systems into their truck, which requires getting into the dash, cutting things, installing hardware, and this eliminates the need to do that. So step one is it gives us PACCAR an opportunity on the hardware side because now we're doing that work for the customer in a much more integrated factory direct manner. So they're all going to be excited about that. We hear that from them. And then you think they get the choice of the telematics system they want to put in as we're doing this as a kind of an open source system, kind of like and -- you can do it to an iOS on your phone, an operating system on your phone, where you can add applications that can be bespoke to a customer, specific to a customer or they can be PACCAR applications. And those applications can be revenue accretive for PACCAR. They're also really beneficial to our customers. When you think about how it builds into the parts business in the future, as we understand what the truck is doing, it gives us the opportunity to do predictive maintenance on the truck or directed towards our dealerships. So integrating our businesses with our customers in a way that's beneficial over their profitability and ours feels like just an exciting time.

Yes. Well, I'll just add to it. It allows us to stay connected longer with the customer. through their operating cycle. And so these are doing business around the parts business will really help.

Your next question is from Lewis Merrick with BNB Paribas.

Just one from my side. A quick one on tariffs. Are you able to confirm there was still some one-off benefit from tariffs during the quarter, and if so, how much should we expect there to be further one-off benefit coming in 4Q? And is 1Q then the point where we sort of get to a clean sort of point from a tariff perspective?

Lewis, what we've seen is there's been -- the tariffs have gotten a little more stable. We've still seen tariff costs that we incur as we're importing. We had some benefits as well, but it's really not been material to the results of our performance. And so that's just kind of in the mix.

Okay. So just to be clear, there wasn't any sort of one-off benefit in 3Q?

No, it's kind of like just it's continuing as we sort through the tariff process and work with the suppliers and work with the government and try to get clarification on it.

Yes. This is Brice. Comparable -- I think we mentioned in the second quarter as well during the call, comparable kind of activity.

Your next question is from David Raso with Evercore ISI.

You used to speak to gross margins as the third quarter guide and then further increases in the fourth quarter. Just so we're clear, the change in now the third to fourth quarter gross margins are more flattish as a base case. Is that more because the truck margins are going to grow sequentially the way you would have thought due to the supplier related inefficiencies? Or is it also related to the parts margins being less than you thought? Then I just had a quick follow-up on truck margins more broadly.

Yes, David, good to talk to you. I would say that your first comment is more accurate than your second comment, and that it's just the cost of production right now is having some impact. We are seeing great truck pricing, but it is just that uncertainty there.

That's what I wanted to back into the second question. So the profitability per truck was the highest since the fourth quarter '24, and you did it with 3,800 less trucks delivered, right? So it appears very impressive. You did have more U.S. Canada mix this quarter than back then. Price/cost was negative back then. I'm not sure if you commented if price cost was still positive this quarter like last. So maybe you can confirm that. But I think we're all just trying to level set. All right, maybe the supplier issue doesn't extend it to '27, but what do I do with the fourth quarter margin as a launch pad thinking about I know there's a lot in there with penalty revenues on the trucks in '27, and how that dampens the margin. But again, just trying to think through this margin performance and how to think about the fourth quarter launch for '27 thoughts.

Yes. David, like usual, you give these great questions. It's fun to talk with you. And you bring up a very important point as you think back it just a year ago in September of 2025 net income was $590 million. In this quarter, it's $847 million. So the teams have just done a fantastic job each quarter increasing total profitability. And they've done that through truck pricing and through disciplined operating performance like PACCAR always does. And it sets us up really well for the future, it puts us in a very strong position to look forward into things. Obviously, the more stable the market is and the more clean the production costs are, the easier it gets for us. I think you asked or you mentioned, which I think was kind of an ask about price cost and price costs remain favorable in the quarter.

That was mostly due to -- on the price side, the favorable price realization we're getting on our truck price.

I guess I asked the question without asking you for guidance for '27 truck margins. Would you look at this fourth quarter then with the drag of maybe pass-through revenues with not much margin on the assuming less supplier issues? Just how would you want us to think about '27 truck margins versus this third, fourth quarter kind of run rate?

Yes, great. That's a great way to think about it. If you think about 2027, we're calling the market up, and we're doing that without having the certainty of what the cost structure will be in 2027, which means we're pretty bullish, remain our bullish position on 2027. We think that any of the uncertainty will show up in the first part of the year, and then clarity will be through the second, third and fourth quarter. And then as we get towards the end of the year, we would expect it to even strengthen. So I think our general sense is the uncertainty will dissipate and the market will become stronger as the year passes.

Your next question is from Chad Dillard with Bernstein.