The paragraph is an introduction to PACCAR's First Quarter 2025 Earnings Conference Call. Ken Hastings, the Director of Investor Relations, introduces the executives present, including CEO Preston Feight, President and CFO Harrie Schippers, Executive Vice President Kevin Baney, and Vice President and Controller Brice Poplawski. Preston Feight acknowledges Harrie Schippers' upcoming retirement after a 39-year career and announces leadership changes with promotions for Kevin Baney and Brice Poplawski. The paragraph also expresses gratitude to PACCAR employees for their dedication to quality.

In the first quarter, PACCAR experienced strong financial performance, with $7.4 billion in revenues and an adjusted net income of $770 million. PACCAR Parts reported record revenues of $1.7 billion and pretax income of $427 million, while PACCAR Financial saw a 6% increase in pretax income to $121 million. The North American truck market faces economic uncertainties and new tariffs, while DAF trucks continue to perform well in Europe and South America. PACCAR delivered 40,100 trucks in the first quarter and forecast delivering 37,000 to 39,000 in the second quarter. Margins faced pressure due to tariffs, with expectations of 13% to 14% in the second quarter. Increased customer demand is anticipated in the latter half of the year as policy and emissions regulations stabilize.

PACCAR is well-positioned for future success through its strong performance across various sectors. The company's first-quarter adjusted net income was $770 million, excluding a $265 million provision for EU civil litigation settlements, which they are actively resolving. PACCAR Parts achieved record revenues with excellent margins and anticipates continued growth, benefiting from data connectivity in their fleet. With 20 distribution centers globally, they are expanding their network. PACCAR Financial Services also reported strong pre-tax income of $121 million, reflecting portfolio growth and strong credit quality. The used truck market is improving, and PACCAR is expanding its used truck centers, enhancing profitability across business cycles.

In 2025, PACCAR plans to invest $700 million to $800 million in capital investments and $450 million to $480 million in R&D, focusing on technology and innovation projects like next-generation powertrains and connected vehicle services. The company is expanding manufacturing capacity, including enhancing the DAF factory in Brazil, a new engine remanufacturing facility in Mississippi, and expanding their Technical Center in Washington. Preston Feight, in his last earnings call, reflects on his career with PACCAR. During the Q&A, Chad Dillard of Bernstein inquires about the guidance for gross margins considering incremental tariff costs, to which Preston responds with uncertainty surrounding tariff policies, highlighting a recent Section 232 investigation specifically related to medium and heavy-duty trucks.

The paragraph discusses an open comment period ending in mid-May related to policy revisions affecting truck production costs. The outcome is uncertain but could impact the company's Q2 and future performance, despite American-based manufacturing. Components from international suppliers might be affected, adding to the uncertainty. Preston Feight comments on the stable vocational market and pressure on truckload carriers. Charles Dillard asks about vocational market contributions, to which Feight responds positively. Jamie Cook of Truist inquires about a margin disappointment despite expected delivery figures, seeking further explanation.

The paragraph discusses several issues related to truck pricing and inventory levels. It mentions that margins were affected by increased input costs, with truck prices remaining mostly flat due to tariffs that impacted costs but not for a full quarter. The speaker explains that while pricing tariffs into customer trucks is an ongoing process, relationships and backlog management limit immediate price adjustments. They also express concern about elevated inventory levels in the industry and how it might affect orders. Lastly, they acknowledge the contributions of Harrie Schippers and congratulate Brice on his new role.

In the paragraph, Preston Feight discusses how the company is adjusting its pricing to align with tariffs, noting that this process takes time and depends on potential changes in the tariffs themselves. Jamie Cook asks whether the company has implemented a 4% to 7% price increase, which Feight confirms is accurate. He explains that the timing of price increases varies based on when they are announced, planned, and how existing backlogs affect them. Feight then addresses a question about inventory levels, stating that while the industry average for Class 8 trucks is about four months, their company is at 3.1 months. He feels even more comfortable with their inventory levels given that they handle many vocational trucks, which take longer to be put into service. Finally, Michael Feniger from Bank of America indicates appreciation for the discussion as he prepares to ask his question.

Preston Feight discusses the implications of potential changes to EPA emissions standards, particularly focusing on the greenhouse gas (GHG) and nitrogen oxide (NOx) regulations set for 2027. He explains that while adjustments to GHG standards, such as reducing electric vehicle requirements, might not significantly impact vehicle production costs, stricter NOx standards could increase costs due to the necessity of additional hardware for compliance. The conversation underscores the company's strategic considerations in balancing compliance with future regulations while managing costs in a soft truck market.

The government is considering adjusting the NOx standard from 200 milligrams to 335 milligrams. PACCAR has invested in clean diesel technology and is prepared for any changes, with engines that meet both current and potential future standards. This adaptability ensures PACCAR is ready for any market changes dictated by government decisions, affecting product costs in 2027. In a follow-up, Michael Feniger asks about parts growth and margins. Harrie Schippers responds positively, noting that the parts team achieved over 30% margins despite a soft market, and expects continued growth between 2% and 4% for the year.

In this paragraph, Tami Zakaria from JPMorgan questions PACCAR executives about the potential impact of Section 232 tariffs on their second-quarter gross margin guidance, which is projected at 13% to 14%. Preston Feight, one of the executives, clarifies that the guidance is based on current tariffs. The potential adjustments from new tariffs could affect foreign and U.S.-made trucks and components, but the specifics are uncertain. Harrie Schippers suggests that any impact from these changes might be less negative or possibly even positive.

In the paragraph, Tami Zakaria and Rob Wertheimer are inquiring about the impact of tariffs and tax on the parts business, specifically regarding international sourcing versus local production. Preston Feight and Harrie Schippers explain that while some parts are sourced internationally and may be affected by tariffs, they can quickly adjust prices to manage cost increases, which minimizes margin impact. They also mention that a significant portion of their parts are made in the U.S. Rob Wertheimer asks about the Section 232 tariff investigation and whether it benefits the company because they manufacture more trucks domestically compared to some competitors. Preston Feight responds that the situation could potentially benefit both the company and the industry.

In the paragraph, Rob Wertheimer asks about the company's approach to pricing and managing orders in the context of fluctuating tariffs and potential supply chain issues, questioning the impact on margins. Preston Feight responds that while there is no simple answer due to the dynamic nature of the situation, the company is actively managing these challenges by considering various factors like tariff structures, backlog protection, and component pricing. He highlights the importance of collaboration with suppliers and the involvement of skilled individuals in navigating these complexities.

The paragraph features a discussion between Stephen Volkmann from Jefferies and company executives Preston Feight and Harrie Schippers. Volkmann inquires about the impact of tariffs on gross margins and whether they will be the lowest in the second quarter with potential improvement later in the year as pricing adjusts. Feight acknowledges the uncertainty of the economic and tariff situation, making future predictions challenging, but expresses optimism that the market will strengthen in the second half of the year, which could lead to improved margins. Schippers adds that manufacturing trucks in the U.S. for the U.S. market is beneficial. Volkmann also raises a question about potential prebuys ahead of emission changes.

The paragraph features a conversation about potential impacts of Section 232 tariffs on truck purchases and the implications of regulatory changes to NOx standards. Preston Feight explains that there isn't likely to be a pre-buy situation regarding Section 232 because trucks are built for specific customers, and it concerns tariffs on non-U.S. built trucks and their components. He mentions that changes in NOx emission standards could affect truck costs and buyer patterns, particularly adjustments from 200-milligram to 35-milligram engines by 2027. This uncertainty might influence customer behavior before 2026, as current laws might change, but the company is prepared for either standard. The dialogue concludes with a transition to the next speaker, Steven Fisher from UBS.

The paragraph is a discussion between Preston Feight and Steven Fisher about business visibility and expectations from the second to fourth quarters. Feight mentions that they have a normal market cycle pattern, with substantial order backlog through Q2 and taking orders for Q3 and Q4. Both North America and Europe are experiencing similar backlog conditions. Customers are cautious due to uncertainties like buying patterns and tariff policies, although there is demand for their efficient, low-operating-cost trucks. Fisher asks about anticipated growth in parts and other improvements for the year's second half. Feight believes that, despite low rates, there is significant freight activity (measured in ton miles), suggesting potential improvements.

The paragraph discusses the current state of the truck market, highlighting the efficiency and desirability of new trucks, particularly as older models accumulate more miles. There is positive movement in the U.S. used truck market, presenting opportunities for fleet renewal, particularly with PACCAR premium trucks known for their good residual value. Steven Fisher acknowledges Preston Feight's comments before a question from David Raso of Evercore is addressed. Raso inquires about the alignment of production and retail deliveries for the second quarter and the full year. Preston Feight responds, indicating that production and retail are well-aligned, with no significant changes expected, especially for the second quarter, and this general stability applies to the full year.

The paragraph contains a discussion about the financial impact of tariffs on a company's revenue and gross profit margins. David Raso is analyzing a sequential decrease in revenue and gross profit and questions whether the second quarter is experiencing a full impact from tariffs, without yet reaping the potential benefits from pricing actions planned to counteract this. Preston Feight responds, confirming that the sequential change is due to the full impact of tariffs not yet being compensated by pricing adjustments. He suggests that with stable tariff policies, future alignment of price and cost should improve. The conversation then shifts to another analyst, Angel Castillo, who asks how much of the contraction in gross profit margins is due to volume versus the tariff impact.

Preston Feight discusses the impact of tariffs on truck deliveries and regional market performance for the second quarter. North America and Europe are expected to see flat deliveries, while Mexico faces a slowdown due to trade discussions. In terms of mitigating tariff-related challenges, the company remains focused on cost management and strategic investments. Despite uncertainties, they plan to continue investing in their product and business plans over the next five years, as these are expected to yield strong returns for customers, the company, and shareholders.

In this discussion, Preston Feight addresses questions about managing costs amidst tariff impacts. He highlights the company's collaboration with suppliers to ensure components are USMCA compliant, which helps reduce tariff effects. This involves working with first, second, and third-tier suppliers. Feight expresses confidence in their cost management programs and the potential to mitigate costs. Later, Kyle Menges from Citi inquires about the company's gross margin for the quarter and the guidance for the second quarter, particularly focusing on the persistence of cost inflation in raw materials, components, labor, and other areas. Feight acknowledges the concern but does not provide specific details in this segment.

The paragraph discusses the financial outlook and operational performance for the company's first and second quarters. The company has explained that gross margins from Q1 to Q2 have been impacted mainly by costs, particularly tariffs. Harrie Schippers mentions that other cost elements are stable, with good productivity and cost reduction efforts in place, leading to smooth production across factories. Kyle Menges asks about the expected 2% to 4% growth in parts for Q2 despite subdued deliveries and freight activities; Harrie Schippers attributes this to price increases aiding revenue growth. The paragraph concludes with Timothy Thein from Raymond James inquiring about potential changes to the company's North American footprint due to tariffs, specifically regarding output in Canada and Mexico.

The paragraph features Preston Feight addressing a question about North American production capacity and market size considerations. He emphasizes that their manufacturing footprint in North America is well-positioned, with key truck plants in Denton, Texas; Chillicothe, Ohio; and Renton, Washington, catering mainly to the U.S. market, as well as a plant in Mexico that serves the Mexican market. Feight expresses confidence in the strategic investments made in these facilities, highlighting the skilled workforce and enhanced efficiencies. He asserts that the capital investments are designed for long-term benefits, focusing on producing better, cleaner, and more efficient trucks, regardless of short-term market fluctuations.

In the conversation, Timothy Thein asks Preston Feight about PACCAR's expectations for the medium-duty market size in 2025, which Feight confirms as 90,000 to 100,000 units, unchanged from previous forecasts. Jerry Revich from Goldman Sachs then questions the impact of tariffs on PACCAR's profitability per truck, noting a $5,000 drop in profit from the second to fourth quarters. He inquires if upcoming pricing improvements will offset this loss in the third quarter. Feight acknowledges the potential impact of pricing but indicates it is difficult to predict third-quarter outcomes without clarity on future tariff policies.

In the paragraph, there is a discussion about the flexibility and efficiency of truck production amidst changing tariffs and potential impacts. Preston Feight acknowledges the current production setup's efficiency, expressing no plans to alter it, despite having the flexibility to do so. Jeff Kauffman comments on the resilience of truck demand, suggesting that despite uncertainties like tariffs or EPA considerations, long-term truck demand is unlikely to decline, as freight needs to be moved and trucks are essential wear-and-tear items. Feight agrees, emphasizing the ongoing importance of trucks for freight in America and the increasing efficiency of new trucks, projecting consistent demand and growth in market share due to their product and dealer quality.

In this discussion, Preston Feight addresses questions from Scott Group regarding delivery guidance and regional market expectations. Feight indicates a flat market in the U.S. and Europe, with significant changes coming from Mexico. When asked about cost and price impacts for Q2, Feight expects some price increases but highlights potential cost increases due to tariff structures. Scott inquires whether the challenges are due to timing or pricing power. Feight emphasizes that the principal issue for the quarter is related to timing rather than a lack of pricing power.

The paragraph indicates that there were no additional questions during PACCAR's earnings call. Ken Hastings thanked the participants and the operator. The operator then concluded the call and instructed participants to disconnect their lines.

This summary was generated with AI and may contain some inaccuracies.