Q2 2024 Paccar Inc Earnings Call

Participants

Ken Hastings; IR; Paccar Inc

R. Feight; Chief Executive Officer, Director; Paccar Inc

Harrie Schippers; President, Chief Financial Officer; Paccar Inc

Stephen Volkmann; Analyst; Jefferies

Steven Fisher; Analyst; UBS

Tami Zakaria; Analyst; JPMorgan

Angel Castillo; Analyst; Morgan Stanley & Co. LLC

Jamie Cook; Analyst; Truist Securities

David Raso; Analyst; Evercore ISI

Jerry Revich; Analyst; Goldman Sachs & Company, Inc.

Chad Dillard; Analyst; Bernstein

Rob Wertheimer; Analyst; Melius Research

Nicole DeBlase; Analyst; Deutsche Bank

Kyle Menges; Analyst; Citi

Scott Group; Analyst; Wolfe Research

Michael Feniger; Analyst; BofA Global Research (US)

Jeff Kauffman; Analyst; Vertical Research Partners

Miguel Borrega; Analyst; BNP Paribas Exane

Tim Thein; Analyst; Raymond James

Presentation

Operator

Good morning, and welcome to PACCAR's second-quarter 2024 earnings conference call. (Operator Instructions)
I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Ken Hastings

Good morning. We would like to welcome those listening by phone and those on the webcast.
My name is Ken Hastings, PACCAR's Director of Investor Relations. And joining me this morning are Preston Feight, Chief Executive Officer; Harrie Schippers, President and Chief Financial Officer; and Brice Poplawski, Vice President and Controller.
As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings and the Investor Relations page at paccar.com.
I would now like to introduce Preston Feight.

R. Feight

Well, good morning. Harrie, Brice, Kent, and I will update you on our excellent second-quarter financial results and business highlights. I'd like to start by saying thank you to PACCAR's great employees who provide our customers with the best trucks and transportation solutions in the world. They are really an impressive group of people.
PACCAR's excellent revenues of $8.8 billion and net income of $1.12 billion were due to the strong performance of truck and parts operations around the world. PACCAR Parts' second-quarter revenues increased to $1.7 billion. Parts pre-tax profits were $414 million with 30.3% gross margin. PACCAR Financial achieved good pre-tax income of $111 million. And truck, parts, and other gross margins were a very strong 18% in the second quarter.
Looking at the US and Canadian truck market, the vocational segment, where Peterbilt and Kenworth are the market leaders, remain strong with continued infrastructure investments. The less-than-truckload market is also performing well while being offset by a truckload segment where rates remain soft.
Kenworth and Peterbilt's first-half share grew significantly to 31.5%, up from 27.7% in the same period last year. We estimate this year's US and Canadian Class 8 market to be in a range of 240,000 to 280,000 trucks.
Demand for medium-duty trucks continues to be strong. Kenworth and Peterbilt have increased their medium-duty market share in the first six months this year to 17.3%, compared to 12.8% in the same period last year.
In Europe, economies in the truck market are softer this year. DAF's premium new trucks provide customers with the latest technology and the best operating efficiency. We project the 2024 European above 16-ton market to be in a range of 260,000 to 300,000 trucks.
South America is a region of PACCAR's geographic growth. DAF Brazil increased market share to 10.3% in the first six months of this year compared to 9.2% a year ago. DAF trucks are highly desired by customers in South America.
Over the last few quarters, we've been updating you on the progress of a battery joint venture that PACCAR formed with Cummins, Daimler Truck, and EVE Energy. This joint venture, named Amplify Cell Technologies, will produce state-of-the-art batteries that are specifically designed for commercial vehicle duty cycles. Amplify Cell Technologies began construction of the new factory in the second quarter.
PACCAR continues to demonstrate strong performance through all phases of the business cycle and is expanding its global manufacturing capacity as we are excited about the future.
Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Harrie?

Harrie Schippers

Thanks, Preston.
PACCAR delivered 48,400 trucks and achieved excellent truck parts and other gross margins of 18% in the second quarter. We estimate third-quarter deliveries to be around 43,000 to 44,000 trucks, with strong truck parts and other gross margins of around 17%. The third-quarter delivery estimate reflects normal truck markets and the regular summer production shutdown in Europe.
PACCAR Parts achieved excellent second-quarter gross margins of 30.3%. Parts quarterly sales grew by 4% compared to the same period last year and is expected to grow around 4% for the rest of this year. PACCAR Parts' focus on expanding its customer base and providing a full range of transportation solutions is enabling solid revenue growth in a softer after-sales market.
PACCAR Parts opened a new distribution center in the country of Colombia in the second quarter and will open another distribution center in Germany later this year. Each new distribution center increases the number of dealers and customers benefiting from receiving parts on the same or next day.
PACCAR Financials is having another good year. PACCAR Financial Services second-quarter pre-tax income was $111 million, reflecting its high-quality portfolio and normal used truck markets. PACCAR achieved an industry-leading return on invested capital of 27% in the first half of this year.
In 2024, we're projecting R&D expenses in the range of $460 million to $480 million as we continue to invest in key technology and innovation projects. These include a full suite of high-quality clean diesel and zero-emission powertrains, innovative advanced driver assistance systems, and new connected vehicle services that enhance our customers' operational efficiency.
PACCAR is planning capital investments in the range of $725 million to $775 million this year as we continue expanding manufacturing capacity at our factories in Europe, the United States, Mexico, Brazil, and Australia. These investments are supporting PACCAR's growth, as well as our customers' success. PACCAR's investments in its industry-leading truck lineup, efficient manufacturing capacity, best-in-class parts and financial services businesses, and the continued development of advanced technologies position the company well for today and for the future.
Thank you. We'd be pleased to answer your questions.

Question and Answer Session

Operator

(Operator Instructions) Stephen Volkmann, Jefferies.

Stephen Volkmann

Hi. Good morning, gentlemen. Thank you for taking the question.
The question is -- appreciate it. The question actually is kind of around your sort of R&D and CapEx ramps that we're seeing. It strikes me that probably one of the key things that I would worry about would be if there's a potential that the various emission regulations actually change with a change in government. And I'm assuming you guys must have some good connections in Washington. And certainly not asking you to pontificate on the outcome of this, but is there a risk in your mind that the target moves here and that you actually may have to do something different than what you're currently doing relative to these regulations?

R. Feight

Sure, good question. Thanks for taking the time to ask it. I'd start by saying that the reason our R&D and CapEx expenses are moving upward is because we have a lot of really good projects to work on. They come in the form of technology related to emissions, but also just improvements in operating efficiency of trucks and transportation solutions we can provide to our customers. So when we have a good set of projects, we invest in them, and that's what we're doing right now.
Regarding the changes in emissions regulations, we don't have the answer to that. And what we do think is it's unlikely and that it won't change the total number of trucks PACCAR delivers over a few year period of time. It might just shift the timing of those.

Stephen Volkmann

Okay, great. And can you speak broadly to how much capacity you're adding across the system with these various investments?

R. Feight

We've shared with you previously that our intention is to grow our market share. And so what we're doing is getting capacity in line with that, so that if we see peak market conditions that are kind of similar to what we saw in 2023 that we can grow market share in those markets as well. So you could think of it as like a 10% to 15%, in some case, increase in capacity.

Stephen Volkmann

Great. Thank you. I'll pass it on.

Operator

Steven Fisher, UBS.

Steven Fisher

Thanks for taking the question, and good morning. Just wanted to unpack the Q3 expected 17% truck parts and other margins a little bit. Can you just give us a sense of how much of a factor, if there's any, perhaps one-time costs in there, any pricing changes or pressure, any mix from trucks versus parts in there? I would have thought that might be a little more supportive. Just any way to unpack that 17% a little bit.

R. Feight

Well, I would start by saying, remember, in Q3, there's a typical holiday season in Europe that takes a few thousand units out which has some impact to it. I'd also say that as we look at the truckload sector, our customers' rates are remaining low and I think that has some opportunity of impact for pricing and cost balance in the third quarter as well. But there's no big one-time thing sitting in there.

Steven Fisher

Okay. And then maybe on the parts margin, specifically in the quarter, can you talk about what drove the negative incrementals this quarter and what maybe you're expecting for Q3 and Q4? It was just a surprising takedown. Just kind of wondering if this is maybe a more broader correction after a strong period of the cycle. Or is there maybe just any sort of one-time dynamic?

R. Feight

I think what you look at is the comps are really strong from last year when the market was just constrained by supply. And now it's not, so I think everybody's participating in the truck and parts market. I think the team is just doing a fantastic job. I mean 30.3% parts margins are very strong and continue to be strong, so we think that we'll see improvement in those as time comes along again.
But obviously, we're making sure that we keep our share of the market. And I would kind of remind that the after-sales market is down this year, and so parts growing in a down after-sales environment is a testament to their great abilities.

Harrie Schippers

And still achieving margins above 30%.

Steven Fisher

Okay. Thank you very much.

Operator

Tami Zakaria, JPMorgan.

Tami Zakaria

Hi, everyone. Thank you so much. So I think, Preston, I just heard you say -- hi. So I think I just heard you say that Q3, typically, Europe sees some seasonal shutdown. And over the last few years, we've seen fourth-quarter deliveries actually a bit higher than the third quarter. Is that how we should be thinking about this year as well?

R. Feight

No. I think what we'd say in the previous years is you can look at a lot more other factors driving things. There was timing of deliveries. I mean, there's the term that you all like to use, the red tags of a period of a couple years ago. So I think you have to say we're in a more normal operating environment right now. And normal feels healthy and good, but you'd expect the Q3 deliveries to be in that 43,000 to 44,000 range.

Tami Zakaria

Got it. That's helpful. And then my second question is I think you tweaked lower the US-Canada outlook by about 10,000 units. What are some of the pockets of strength versus weakness? What I'm trying to understand is which category within that bucket weakened in the last few months that drove you to reduce the outlook?

R. Feight

Sure, Tami. Good question to think about the totality of the market. What we see is like the vocational market remains strong for us. We still have a lot of demand for our market-leading trucks for Peterbilt and Kenworth in that space. The LTL market remains healthy with kind of a normal cadence to it.
But I think our customers in the truckload sector are still seeing spot rates at low levels and contract rates at low levels. And maybe that's the part that there might have been an expectation of starting to lift off the bottom at this point for them.

Tami Zakaria

Got it. Okay, great. Thank you.

Operator

Angel Castillo, Morgan Stanley.

Angel Castillo

Hi. Good morning. Thanks for taking my question.
I just wanted to go back to the comment about price cost and perhaps -- hi, Preston -- just the price cost comment around the parts segment, if we could kind of expand on that more broadly for trucks, parts, and the full kind of equipment business. Just curious if price cost is going to be a little bit more negative or under pressure across just the broader business. And your comment around maintaining share in the parts business, how should we think about that as it pertains to pricing strategy both in parts, but also any kind of weakness in trucks as well and pricing strategy there?

Harrie Schippers

Price cost in the second quarter for trucks, price was up slightly less than 1%, cost was up slightly more than 1%, so pretty much in balance. If you look at the parts business, price was up 3%, cost was up 5%, so a little bit more margin pressure there as we saw in the 30.3% gross margin for parts, but a really nice performance if you take into account that the overall aftermarket parts market was smaller, especially in the US and Canada this year.

R. Feight

Yeah. Just kind of what Harrie said, Angel, I think the fact that our after-sales parts team is growing in a market that's declining, that our truck division and Peterbilt and Kenworth are growing market share in a market that's smaller last year is just a testament to the high-quality products and transportation solutions the team's providing. And I think it's just showing up there.

Angel Castillo

That's very helpful. And maybe just to kind of continue down that path, just in terms of your order book fill rate for the third quarter and fourth quarter, can you just talk about the level of visibility that you have beyond maybe as we think about even heading into the fourth quarter in orders? Yeah, just any comments there.

R. Feight

Sure. Happy to do that, Angel. If you look at the third quarter, we have a few openings left in the third quarter, but we're substantially full for the quarter, and in the fourth quarter, we're over half full.
So obviously, as we said before, the vocational segment is the place where they have the greatest strength, and then the LTL market, less than truckload market. And then the truckload carriers, I think, are trying to decide what their cadence is going to be for the balance of the year.

Angel Castillo

Very helpful. Thank you.

Operator

Jamie Cook, Truist.

Jamie Cook

Hi. Good morning. I guess just two questions. Back to, I mean, your orders, I think -- or sorry, your deliveries were 48,400 relative to your expectation of 48,000. So a little ahead, but your margin was at the lower end of your targeted range of 18% to 18.5%. So was there anything else impacting the margin besides the price cost sort of headwind that you just spoke to? I'm just wondering if there's anything else unusual on that. And then do you expect price cost to continue to be negative into the fourth quarter?
And then, I guess, my follow-up question on Europe, I think your deliveries are down 30% for the first half relative to your industry retail sales forecast of down 13% to down 22%. So why are we underperforming, or it implies you're underperforming the market at least, in the first half of the year? Just any color on that. Thank you.

R. Feight

Sure, Jamie. I think that was actually three questions, but it's good to hear from you and nice to get the questions from you.
If you look at any other commentary around the 48,400 and the 18%, there's not really anything different that we'd share on that. It's kind of exactly what we thought would happen. Obviously, the industry had a supplier who had an issue in Mexico in the quarter and we kind of had to manage through that, so I think that we managed through. Our teams did a fantastic job working with the supplier who did a great job recovering, and that allowed us to get to that 48,400 number. So kudos to the suppliers, kudos to our teams and our ops teams for getting that sorted out, and that led to the strong performance.
I think you could say that the trend from Q1 to Q2 and to Q3 should be similar in that we'll have price and cost challenges sitting in front of us with that implied in the 70%. And again, the reason is I think we're looking at the truckload carriers and watching how they're making their decisions right now and seeing where they go from there, but that being offset by strong vocational and LTL markets and a very good performing medium-duty truck. So the trucks are performing well; it's just the underlying basis of contract rates, I'd say.
And then maybe, Harrie, any commentary on trends in the EU?

Harrie Schippers

Yeah. In Europe, volumes were down 30%, as you mentioned, Jamie. Especially in Central and Eastern Europe, where DAF is strong, the market is softening and so DAF is working through that. We continue to benefit from our new DAF, which has the best fuel economy in this industry, and it's positioned in a premium pricing position. So we'll continue to benefit from that, but yeah, weaker Central and Eastern European markets do have an impact on DAF a little bit more than proportional for Europe in general.

R. Feight

And I think, Harrie, you said it, but I'd just reemphasize the fact that the pricing discipline of the team is very good right now.

Jamie Cook

Thank you. I appreciate the color.

Operator

David Raso, Evercore ISI.

David Raso

Hi. Thank you for the time. I was just curious, your conversations with customers regarding the potential or already putting in motion plans for a pre-buy, has the tone of the conversation changed at all with the last month of what we've seen politically?
And then I just have a quick follow-up on US-Canada, call it North America, inventory. I know you're looking to gain share and you've gained share already this year, but I'm just trying to be thoughtful about going into '25, the inventory in the industry is a bit elevated, the backlog to build is pushing below 4. So just how do you see your inventory exiting '24 into '25? And again, circle back if you can to the question about the pre-buy.

R. Feight

Yeah, sure. So David, pre-buy, we're spending a lot of time with our customers. I don't think there's been any change in their assumptions. The EP rules are sitting out there already. I think they'll probably remain out there. It's easy to hypothesize they wouldn't, but I think that's speculative.
And so I think they're trying to figure out what their buying plans will be in '25 and then into '26, but I don't think there's any change in assumption right now. I think trucks are being well used, there is a lot of freight being moved out there, so trucks are being healthily consumed and they'll need a replacement at some point.
I'd also say that from an inventory standpoint, the industry's at like 3.9 months of retail sales, and PACCAR's at a very healthy 3.3 months. So as we're seeing our market share gain, we feel like our inventory's in really good shape. And I would add to that the fact that we have such a high vocational share that's also contributing to where our inventory levels are at. So things feel quite good for us in terms of inventory with the share growth we're realizing.

David Raso

And can I just follow up on that comment on vocational? Obviously, it's a strength for PACCAR. Are you looking at the vocational market where you're having, say, better visibility into '25 already, just given a key supplier that's maybe limiting a little bit? How many vocationals you can sell? How should we think about vocational into '25 versus, obviously, we all can think through a pre-buy or not, but the vocational in particular? Thank you.

R. Feight

Yeah, you bet. I think that with the infrastructure spending that's just getting -- really going in the US and the amount of, call it, reshoring that seems to be happening, that bodes well for a strong vocational market for a while. And there have been supply constraints in the inventory or in the vocational side of the market, so I think that we see steady strength for quite a period of time.

David Raso

All right. Thank you.

Operator

Jerry Revich, Goldman Sachs.

Jerry Revich

Yes. Hi. Good morning, everyone. I just wanted to ask on warranties -- hi, Preston. On warranties, you folks had put up really good margin for the past couple of years while paying for higher warranty costs that were out of period. Where do we stand now? Are your warranty accrual rates starting to come down? Are we starting to see that tailwind playing out in the numbers?

Harrie Schippers

Yeah. Good observation, Jerry. Warranty costs have been developing very favorable, and it reflects the excellent trucks that we're currently building and that customers are experiencing. So yeah, that's moving into the right direction.

Jerry Revich

And Harrie, can I ask the cost number, if I heard right, for parts was up 5% year over year. What drove that and what's the outlook for cost per unit for your parts business if we see it continuing at this 5% rate? Is it fair to think about pricing re-accelerating to recoup that for the parts business?

Harrie Schippers

No. I think for the pricing, I said pricing was up 3% and costs were up 5%, and we expect to continue to see favorable pricing developments as we move through the year.

R. Feight

Yeah. I think as we look forward in the parts side, maybe specifically, we would start to see some improvement in price versus cost in the outer quarter.

Jerry Revich

So was it just the one-off related to a supplier issue that you spoke about earlier, or was that just on the OEM side? I'm just wondering how broad-based is the inflation that we saw in the quarter versus just transitory?

Harrie Schippers

No, the 5% cost increase is broad-based. It's inflation, and the parts business is a little different than the trucking business. But the price versus cost reflects the softer after-sales market in North America mainly that we talked about earlier during the call.

Jerry Revich

Got it. Super. And lastly, I'm wondering if you could just update us on the performance of your trucks in California that are on the new emissions specs. What's been the fuel economy and broader performance since you've rolled out the new engines?

R. Feight

So the California market has taken a bit of a pause and a breath, I think, as the Advanced Clean Fleet, Advanced Clean Truck rules have come into place. The market has slowed down. I'd say that we are the only ones that have developed an engine that I'm aware of, an engine that is fully compliant. And so that engine is just entering the market because there was a lot of carryover from last year there. But that engine is entering the market, and it will be an early look at technology for 2027. And we're really pleased to be leading the way into that.

Jerry Revich

Yeah. Super. Thank you.

Operator

Chad Dillard, Bernstein.

Chad Dillard

Hi. Good morning, guys. So got a -- this is a hard question. So if you compare the truck industry today to what it was, let's say, five years ago, how has the industry's ability to hold on to price changed? That's the first part. And then second, if it comes to it, is PACCAR willing to seize truck market share if it means holding the line on price?

R. Feight

So that's a great -- I love your first question in there. And thinking about the truck market today and the ability -- I think that the market has access to great PACCAR products that are providing a lower total cost of ownership today, more than any point in history. And so these trucks are helping our operators be more successful, our customers be more successful. And I think that's contributing to a structurally stronger PACCAR, where we're able to realize better margins cycle over cycle.
And we're doing that. And I think the same is true on our transportation solutions and our PACCAR Parts businesses, where we're able to get more and more parts to our customers in the same day, which is highly valuable to them, which is also helpful to them. So I think that that's why the structurally stronger business is working so well.

Harrie Schippers

The one thing -- or one of the things that drives this, Chad, is also the legislation on greenhouse gas reductions. So over the last five, eight years, we've been improving greenhouse gas emissions, which means fuel economy improvement for our customers. So it means that if you buy a new truck today compared to five years ago, you'll get a truck with 10%, 15% better fuel economy. And that's creating a lot of value for our customers.

Chad Dillard

Got you. And then the second part, I mean, if it comes to it, is PACCAR willing to seize truck market share if it means holding the line on price?

R. Feight

Well, what I look at right now is I think the team's done a fantastic job of looking at the share growth that we're realizing right now. I mean, we've gone from 27.7% last year to 31.5% this year and delivered 18% gross margins in the second quarter. I'm really proud of what they're doing in keeping both in balance.

Chad Dillard

Got it. Okay, thank you. That's all for me.

Operator

Rob Wertheimer, Melius Research.

Rob Wertheimer

Thank you. Preston, I wonder if you can expand on the comments -- the share performance is remarkable. I know there's probably a mixed benefit on vocational versus sleeper cabs or whatever, but it seems like it's probably more than that and more broad-based. So I wonder if you just have any comments to help with the sustainability of that or what's driven it aside from jet products?

R. Feight

Yeah, sure. I think that over the last few years, as we've shared often with you, we've invested in new product upgrades. We've spent wisely in our research and development efforts, and the trucks out there are performing exceptionally well for our customers. And that's contributing to the share growth.
I also think we have a fantastic dealer network who's doing a good job of taking care of our customers. And as I just mentioned, the parts organization is also a fantastic support, and we offer great financial services. I don't think you can say it's one or the other. It's all of them that are structurally helping us.
And then the additive to that is, as you said, a strong vocational market where we're the market leader is helpful as well. And we see that also in the medium-duty side. It's not just the heavy-duty side, but we introduced a new product and we've grown significantly with that new product and really supportive of our customers' businesses.
And Harrie, anything you'd add?

Harrie Schippers

The last two or three years, I think we were also held back by supplier capacity. And now, with the supply base easing up, we get the opportunity to grow market share, and that's what we're doing with the great new products.

Rob Wertheimer

[Also in the mix a little bit]. Okay, that makes sense. If I may, on the battery JV, it's still a ways out I know and the market's still going to develop. But do you have any thoughts on the ramp and offtake of the batteries? I don't know whether it's clear to you whether that'll be largely medium-duty or whether you're still introducing products that will absorb those batteries or just any comments on where the evolution of that is, and I'll stop there. Thank you.

R. Feight

Good question, and I think it's what we're all trying to understand in the future. It's part of the reason we did this in a joint venture is we wanted to develop batteries that were optimized for the commercial vehicle market and had a great cost position for them, so we had the most competitive products out there. So we get scale here, but we also get benefits of cost.
The primary applications will start, I think, and return to base, so that could be medium-duty or pickup and delivery, where trucks' total cost of ownership could be positive with a battery operation, but you can keep your charging in a local area. I think that will be kind of how we thought about the offtake, and it'll take, I think, significantly more time before this would translate into an over-the-road solution. But we can use this battery factory to serve other markets as well. It's not just out to be North America, and I think it was proving to be a good decision the way we structured it.

Rob Wertheimer

Thank you.

Operator

Nicole DeBlase, Deutsche Bank.

Nicole DeBlase

Yeah. Thanks for the question, guys. I guess maybe just starting with the 3Q delivery outlook. So I know we've got the usual production shutdown in Europe, which has an impact of a few thousand units. Does that imply that US and Canada is kind of flat to down slightly from a delivery perspective?

R. Feight

I think I would look at it, Nicole, as saying that that's half of the total delivery shift between 2Q and Q3, and then the other is market.

Harrie Schippers

Market in North America.

R. Feight

Market in North America adjustments that I would say are reflecting in that.

Nicole DeBlase

Okay, got it. That's clear. Thank you. And then sorry to belabor the point on price; I know you guys have had this question like a million different ways. But is there a risk within the truck segment only that pricing could potentially go negative in the back half? Or is that not what you guys would expect to see?

Harrie Schippers

So we gave guidance for the third quarter with an excellent 17% gross margin. Fourth quarter, we'll talk about that during the next call, Nicole.

R. Feight

Yeah. I think I would look at it also in saying that while prices is feeling effective, the market, you could also say that costs might have some opportunity, but just not as much as price right now. And so I think, as you said, we talked about the Q3 gets less clear at Q4, but we'll definitely update you in the next call.

Nicole DeBlase

Got it. Thank you, guys.

Operator

Kyle Menges, Citigroup.

Kyle Menges

Hi. Thank you. I just wanted to clarify the parts growth outlook, 4% in the back half of the year. Should we think about that as a guide for 4% growth in 3Q and then another 4% year-over-year growth in 4Q?

Harrie Schippers

That sounds about right.

Kyle Menges

Okay. And then I'm curious, how much does the opening of some of these distribution centers impact that growth outlook?

Harrie Schippers

I think they support the growth. It's not if you add a distribution center that it automatically results in parts growth, but it gives us a proximity and capacity for parts and better delivery performance that benefits our dealers and customers. So it definitely supports the growth, but it's not the only thing that drives the parts sales.

R. Feight

Yeah. I think exactly what Harrie said, I'd echo the fact that these investments are strategic and long term in thinking. They just build a better support system for our customers and our ability to get same-day deliveries, which contributes to the long-term success and performance of the parts team.

Kyle Menges

Great. Thank you.

Operator

Scott Group, Wolfe Research.

Scott Group

Hey. Thanks, guys. So I think you said you were roughly 50% sold out for fourth quarter. Do you have any just perspective, what's normal at this point of the year? Is that 50% about right or not? And then as you start, at some point, selling trucks for '25, any directional color on price for the '25 trucks?

R. Feight

Yeah. I mean, 50% full for 4Q, this time of year is extremely normal. So if you went back over the longest term, this is right in the wheelhouse of normal. And that's what we see in the market, too. We see kind of a very normal, successful market where PACCAR can perform well. And I think that it's too early to talk about 2025 pricing.

Scott Group

Okay. And then just quickly, any color on used truck pricing and how you see that trending in the back half of the year?

R. Feight

Yeah, sure. Harrie?

Harrie Schippers

Yeah. Used truck prices have come down to more normal levels. And especially in North America, with inventories also at normal levels, we expect that to continue in the second half of this year.

Scott Group

Meaning you think that they continue to trend lower or you think they sort of stabilize from here?

Harrie Schippers

I would expect them to stabilize from here for the US and Canada.

Scott Group

Okay, helpful. Thank you, guys.

Operator

Michael Feniger, Bank of America Merrill Lynch.

Michael Feniger

Yes. Hi, everyone. Thanks for squeezing me in.
Just, Preston, you mentioned, obviously, rates have been softer on the truckload segment. Contract rates are at low levels. It sounds like when you listen to the public players, there's overcapacity there. I'm just curious, do you feel like that can improve in a quarter or two? Or does that take more time to kind of work through that overcapacity based on your experience with cycles? It sounds like there's confidence on the vocational side into 2025. I'm just curious if we think that softness could kind of bleed into 2025 on that particular side of the market.

R. Feight

Yeah, I think we're going to -- Michael, it's a good question. I think we'll have to watch and see what that is. I think it's obviously not that easy to predict it. There's a lot of factors that go into it. So I think that our focus is on making sure that we gain our share of whatever the market size is, which teams are really demonstrating success in doing with great products. But knowing the cadence for when that might turn, I think you'd think in a couple of quarters might be a good way to think of it, plus or minus.

Michael Feniger

Fair enough. And Preston, I know there's so many questions on the pre-buy, I mean, you guys are investing and make sure you have capacity. We'll be there. It sounds like others are, too. I'm curious, roughly, when a customer needs to place an order to secure slots ahead of the EPA 27.
Is there just anything we should be aware of ahead of this emission standards change compared to others? Can fleets wait for the second half of '25 or early '26 to place an order and secure a truck? Or does that start to cut it too close? I'm just curious how we should kind of think about that in the context of other emission change or changes.

R. Feight

I would look at it and say that we have a long history in the industry of having these emissions changes. And I think when they bring cost into the market, then people want to buy their product sooner. I think we'll see the same kind of approach here. How far forward that'll trend, I think, depends on too many factors to kind of weigh in on it.

Michael Feniger

Thank you.

Operator

Jeff Kauffman, Vertical Research Partners.

Jeff Kauffman

Thank you very much, and good afternoon. A lot of my questions have been -- hey -- asked at this point, so let me dig back into one that Rob Wertheimer asked. The market share gains are fantastic, and you guys have a great product lineup and I know that's driving it. But out of the 380 basis points of market share that you improved, if you had to guess, I mean, how much of it was we're dominant in categories that are outgrowing the market versus we've got new product and we're taking share from other products in the existing market?

R. Feight

Well, that's a fun question, Jeff, and I wish I knew the answer to it. But I would say that the two things you've characterized are probably the dominant characteristics of why the share gain is coming, great products, and then I think are strong sectors where PACCAR's the leader. So I don't know if it's necessary to kind of put percentages on them. I think we just say that it's nice to see both performing so well.

Jeff Kauffman

I thought I'd ask if you had a view. Well, congratulations. Thank you.

Operator

Miguel Borrega, BNP Paribas.

Miguel Borrega

Hi. Good afternoon, everyone. Thanks for taking my question.
The first one, just wondering about the competitive environment in Europe, where the market is obviously weaker. Traditionally, that would lead to some price pressure. Are you seeing any of that today? Are you seeing any attempt of discount in any segment in particular? Do you see weaker from a pricing perspective? That's my first question.

Harrie Schippers

The market in Europe is down. And you're right, we're seeing some pricing pressure there. But I think the team does a really nice job in keeping the premium position of the new DAF in Europe, and we'll continue to do so.

Miguel Borrega

Thank you. That's very good. And then secondly, just in terms of the mix, can you give us some color whether the mix from a regional perspective was a positive or negative contributor to the margin, with Brazil rebounding, Europe substantially down, but the US and Canada up? Can you help us understand the different moving parts, some kind of color?

Harrie Schippers

I don't think the geographical mix has a big impact on our overall margin. I think all the regions are performing really well at this point in the cycle.

R. Feight

I think one of the things you can see that's really helpful to us is the strength in South America, and Brazil specifically, another place where market share has grown significantly. So that's grown with good margin performance also. Obviously not as big as the US and Europe, but it is a contributor in a positive way. So I think, as Harrie said, all the teams are doing a good job of keeping the balances right and pleased with the performance it's delivering.

Miguel Borrega

Thank you very much.

Operator

Tim Thein, Raymond James.

Tim Thein

Great. Thank you. Preston, the first question I had was just how you're thinking about managing this outlook as you think about a softer -- softening in the back half of this year, and potentially that leads into 2025, who knows. But then looking beyond that, we know at some point, assuming legislations go as planned, we're going to be looking at maybe the largest market ever.
So coming off a period where the supply chain has kind of been whipped around and struggled to ramp up, how do you kind of -- and it's not just a PACCAR question, but how does the industry kind of balance those two forces where you have to respond to conditions in the near term, but with also not jeopardizing yours and the supply chain's ability to ultimately then ramp back up? How do you kind of thread that needle?

R. Feight

Yeah, Tim, I think it's a very good question. And obviously, you know PACCAR quite well, and our approach is a long-term strategic view of the market. We're in it for the long term. We're here to support our customers. We keep making smart investments which are good for the long term. And so we aren't quite as concerned about an outlook of what the market might be in a quarter.
We're just going to keep doing the right things and gradually growing our share and increasing the performance of our products for our customers and growing the business. And that's the way it works out for us. And as we started the call with, Harrie mentioned making investments in capital and products that support future growth, and we're going to continue to doing that in the wisest way possible.

Tim Thein

Got it. Okay. And then the comment earlier just on the -- looking to the order board and specifically in the fourth quarter, that call it 50% fold that you mentioned, a lot of airtime here on pricing. But I'm just curious in terms of the composition of the backlog, obviously that can influence or have an impact on the price realization.
And so again, not specifically, but in terms of the mix between fleet versus retail, any sense for, I mean, obviously a year ago, you couldn't get trucks now, inventories are a bit heavy. So I'm guessing that has flipped. Is that a factor in this price discussion in terms of just the composition of the orders and who the ultimate end buyers are?

R. Feight

Well, I think that we've kind of hit that a couple of ways in this call, and I would say that the vocational market continues to be solid. And so with that strength, that's good for us. Our inventory at 3.3 months, compared to industry at 3.9, feels quite healthy and appropriate given the share gains we're making.
And then I think the mixture where truck and other things come in is there's some timing associated with that. We're sitting here in late July now. Fleets tend to enter into this a little bit later over the next couple months. They'll get more clarity on what their capital allocation plans are for the next year, and then we'll see what that balance looks like in the fourth quarter.

Tim Thein

Got it. Okay. All right. Thank you, Preston.

Operator

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

Ken Hastings

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

Operator

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