Good morning, and welcome to PACCAR’s Second Quarter 2020 Earnings Conference Call. All lines will be in a listen-only mode until the question-and-answer session. 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. 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 Michael Barkley, Senior Vice President and Controller. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. For additional information, please see our SEC filings and the Investor Relations page of paccar.com. I would now like to introduce Preston Feight.

Good morning. Harrie Schippers, Michael Barkley and I will update you on our second quarter results and business highlights. First and foremost, I appreciate and I’m thankful for our outstanding employees who during this dynamic time have kept their highest priority on health and safety. PACCAR employees kept this focus while delivering excellent production and distribution performance in support of our customers’ businesses. PACCAR achieved good quarterly revenues and net income in the second quarter of 2020. PACCAR’s results reflect limited truck production and aftermarket sales early in the quarter that was associated with COVID-19. Global demand and production and aftermarket sales steadily strengthened throughout the quarter. PACCAR’s second quarter sales and financial services revenues were $3.1 billion, and second quarter net income was $148 million. PACCAR delivered 18,100 trucks during the second quarter. PACCAR Parts achieved quarterly revenues of $824 million and pretax profits of $152 million. Truck, Parts and Other gross margins were 9.6%. PACCAR Financial achieved pretax income of $56 million. The U.S. and Canada Class 8 truck market is rebounding. Class 8 truck industry orders in June were 28% higher than June last year. Customers realize the benefits of low fuel costs and in many sectors, experienced increased freight volumes and improved pricing as the quarter progressed. We estimate Class 8 industry retail sales in the U.S. and Canada to be in a range of 160,000 to 190,000 trucks this year. Kenworth and Peterbilt market share is at 29.6% year-to-date, 0.5 point higher than the first half of last year. In Europe, monthly orders for DAF trucks also increased as the quarter progressed. European truck industry registrations in the above 16-tonne market are estimated to be in a range of 190,000 to 220,000 vehicles. DAF year-to-date share is 15.8%. The South American above 16-tonne market is…

Thanks, Preston. PACCAR continues to provide excellent operating cash flow for reinvestment in future growth and distributions to stockholders. Last week, the PACCAR Board of Directors announced a regular quarterly dividend of $0.32 per share. PACCAR has a strong balance sheet with $4.2 billion of cash and marketable securities, no manufacturing debt and an A+/A1 credit rating. PACCAR Parts achieved quarterly revenues of $824 million, and pretax profits were $152 million. Many customers deferred truck maintenance during April and May’s economic uncertainty. In June, parts demand recovered nicely and is returning to normal levels. To drive growth, PACCAR has made consistent investments in parts distribution capacity and customer-focused technologies. PACCAR Parts opened two new parts distribution centers this year, one in Ponta Grossa, Brazil, and the other one in Las Vegas. PACCAR Parts has also made significant investments in its e-commerce platform, which is benefiting our customers and dealers. PACCAR Financial Services second quarter revenues were $360 million, and pretax income improved from $48 million in the first quarter to $56 million in the second quarter, reflecting strong portfolio performance. Used truck results were stable quarter-on-quarter. PACCAR Financial is increasing our retail used truck center capacity worldwide, which enhances margins. PACCAR Financial recently opened used trucks centers in Denton, Texas and in Prague, Czech Republic, and plans to open another facility in Madrid, Spain. Kenworth and Peterbilt truck resale values commanded 10% to 15% premium over the competition. We have rigorously aligned costs to this year’s market conditions. SG&A was reduced by 33% to $94 million in the second quarter. We are maintaining our R&D and capital investments forecast as we continue to invest in new aerodynamic truck models and advanced powertrain technology. Research and development expenses are expected to be in the range of $265 million to $295 million this year. And capital investments are projected to be in the range of $525 million to $575 million. Customer demand and higher order intake will result in increased production during the third quarter. Third quarter Truck, Parts and Other gross margins are estimated to be in the range of 12% to 13%. Thank you. We’d be pleased to answer your questions.

[Operator Instructions] Our first question comes from Jamie Cook with Credit Suisse. Your line is now open.

Hi, good morning. A nice quarter. I guess my first question, one, I think you just said you expected production to be up in the third quarter. Is there any way you could sort of give more color in how we think about that by region? I guess, would be my first question, which would be helpful. And then my second question, can you just sort of speak to channel inventory for the industry and where PACCAR sits with regards to channel inventory? Thank you.

Hey Jamie, good to hear from you. Thanks for taking the time. Start with your first question on truck production for the third quarter first. We saw steadily increasing production through the second quarter and that really is a result of the good freight market that’s out there right now. In fact, if you think about freight, you can think about the levels we’re operating at are kind of similar to the beginning of 2018. So really solid levels of freight going on in the world. Our customers are profitable, fuel prices are low and activity continues to be high. And that’s carrying our build up into the third quarter, as Harrie mentioned, and we obviously build to customer orders. So that’s a good thing. If I kind of look at your second question and think about where we are relative to the industry. Through the second quarter, it was nice because retail sales outpaced build by about 10,000 units for the first half of the year. And that means that inventory, retail build are all well matched up right now. And we feel good about our position because we have about 33% of the orders in the first half of the year. I feel like we’re in a good position right now. We’ve good backlog, good visibility, and we’re substantially full through the third quarter and taking orders in the fourth quarter and into the first part of next year.

And sorry, one last question. Just – you commented about the Parts sales. They improved throughout the quarter. Is there any way you can help us with the cadence of the improvement like how did Parts sales year-over-year exit in the month of June relative to where we started off, and I’ll get back in queue after that. Thank you.

So Parts sales in June were, I think, about 6% below June of 2019. So we saw some nice improvement throughout the quarter.

Thanks so much.

You bet.

Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is now open.

Yes, thanks. Good morning.

Good morning.

I just wanted to start on a little bit more on order trends in June, the color around U.S. and Canada was really helpful. But could you guys characterize what you’re also seeing in Europe? Have you also seen a significant improvement in the later part of the quarter?

Yes, that’s great. Thanks for the follow-up on that. We did see Europe also increase its order intake through the course of the quarter and we’re getting good order intake in Europe as well. And we’ve increased build, along with that order intake in Europe, and we have good visibility. In fact, we’re really full in Europe through the third quarter.

Like Preston said, also in Europe, customer activity continues to be good. A couple of days ago, the month statistic for Germany came out and the number of kilometers driven on German motorways for which Germany collects taxes was only down 4% compared to a year ago. So it means that 96% of the miles were driven the same as last year.

Our next question comes from Ann Duignan with J.P. Morgan. Your line is now open.

Yes. Hi, good morning. Maybe you could talk about market share in Europe, DAF at 15.8% year-to-date. I think that was comparable to 16.7% a year ago. And then longer-term, if I look at everything that’s happening in Europe with the Green Deal and all of the news in the last couple of days about their push towards hydrogen, I noticed that neither DAF nor PACCAR are a member of the Hydrogen Council or the Hydrogen Initiative in Europe. So can you talk about DAF’s strategy for fuel cells and hydrogen in Europe? I know you talked a lot about the EV strategy, but a little bit more longer term, can you talk about what – how they might react to a hydrogen environment? Thank you.

Yes. Good to talk to you, Ann. From a market share standpoint in Europe, we look at that, and we have pretty good market share. We’ve got good order intake. What we see is the relative positioning has been the shape of the market in Europe. During the COVID event, some countries were closed down longer, deliveries were delayed and different countries at different sizes of the market. So some of it is just cyclicality and timing of that as we see the market right now. When we look into the zero emissions vehicles, specifically around hydrogen, I’ll – let me kind of characterize PACCAR’s strategy there. We have a three-pronged strategy, which is really – first have to have the technologies, and that can be battery, electric and hydrogen fuel cells we come down the line. So we have great technology. Our teams are on top of all of the capabilities and are developing these vehicles. I’m really proud of the engineering teams and R&D teams around PACCAR that have done just a fantastic job of having us in that leadership position. So that’s one element is just being aware of the technology and having it on vehicles. Second element that’s going to be critical to that is having good distribution when it comes to market. So a dealer network that works really well. PACCAR obviously is very proud of our relationship with our dealers and they’re best in the world and do a great job. And so having the ability to sell and support, take care of our customers, that’s a big deal. And then the third part of being able to have electric vehicles or hydrogen fuel cell vehicles is you have to have flexible manufacturing capabilities so that you can combined not just zero emissions but clean diesel technologies and run them down the same line, so you can maintain efficiencies and be profitable in that way. And in PACCAR’s case, we have actual factories that exist and can build vehicles. So that’s kind of nice. And I would say that specific to hydrogen fuel cells, where your question was really pointed to. We mentioned in our disclosures that we have 10 trucks we’re putting into operations in the Ports of L.A., they happen to be Kenworth T680s, but we have a global approach technology, and we can use DAF, Kenworth and Peterbilt, leverage each other’s capabilities. So it’s really – that’s just where we’re starting right now, but they can be applied in Europe when the time is right.

Great. Thank you for that. And can you just maybe then expand on the 10 trucks that are going to L.A.? How long does it take once you put trucks, these 10 trucks into pilot testing or whatever? What are the time lines? And what kind of time frame should we be thinking about before these trucks would actually be commercialized? I’m just trying to get a sense of what needs to happen to go from 10 trucks to commercialization? Thank you.

Sure. Happy to do that. The trucks that we’re putting in the ports, some of them are already gathering miles. And those trucks are in a partnership with Toyota, it’s a fuel cell provider there. That’s going really well as well as Shell from an energy hydrogen provider. The time to production, commercialization, there’s a cost element to that, which has to come into play. Hydrogen is $12 or $13 per kilogram. And in order for it to be really efficient from a commercialization standpoint, it needs to be in the $2 or $3 per kilogram range. So that’s a little bit. There needs to be infrastructure put in place as well. And then the cost of fuel cells needs to come down. So we don’t see that as something that’s a near-term commercialization. We see that as a 5 to 10-year kind of a window where it might play itself into the market.

And that was a North America response, not to Europe? Or do you feel the same in Europe.

That was same in Europe. That response is really a global response. The economics work the same way.

Okay. I’ll leave it there and follow-up offline. Thank you.

You bet. Good to talk to you again.

Our next question comes from Stephen Volkmann with Jefferies. Your line is now open.

Hi, good morning, guys.

Hey, good morning, Stephen.

Maybe we can go back to Parts. I think you said sort of the exit rate in June was down about 6%. Do you kind of foresee us getting back to flat or even growth in the second half in the Parts business?

Yes. That would be kind of a fair way to characterize it. Stephen, it’s obviously going to depend on how freight goes as trucks move, parts move. And so we’ve seen good truck movements. So we anticipate good parts movement. And we’ve got a – the team has done a great job of developing our capabilities, continuing to develop our capabilities. They’ve put in place a new e-commerce system, which makes it even easier for customers to get parts the same-day or next day. We’ve just launched two new PDCs, one in Las Vegas, Nevada and the other one in Ponta Grossa, Brazil, which makes it having the right parts and the right locations even better. And so yes, between the general economic state and our fantastic team in the Parts division, we do expect the second half to look really good.

Okay. Great, thanks. And then maybe a little more broadly, you’ve done a really pretty amazing job, I think, with decremental margins in the Truck business, considering how low production was in the quarter. And I know you talked, Preston, about some of the cost actions that you’ve taken. I’m curious as things start to rebound in the second half and presumably into 2021. Is there any reason to think that your incremental margin might be higher than the historical kind of 15%, 20%? Or is the stuff that you’ve done more kind of temporary and we should just kind of think of the history as being a good guide?

Fun conversation to have. We always think about cost control and we’re rigorous in that application, and the team did a great job, did a great job in a really dynamic time in this quarter. Controlling the cost, while still working on the really important projects we have going on. And so we made the right progress on the cool things that we’re going be introducing in the coming years. And as far as its relationship to incremental margins, we’ll watch how the market goes as we look into the out phase and see where that goes. And some of the stuff is structural and some of it is depending on what we want to spend the money on and where there’s a good return.

Understood. Okay, thanks.

Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Yes. Hi, good morning, everyone.

Hey, good morning.

I’m wondering if you could just expand on your fuel cell supplier strategy. So obviously, you’re working with Toyota on consideration of 10 trucks. Do you view that as the structure going forward where you would have a single fuel cell supplier? Or how do you see that evolving? And are there any different configurations that we should be thinking about, whether we’re talking about trucks in Europe versus U.S. versus different fuel cell type applications that might lend itself to a different engineering design? Can you just expand on those points, please?

Going to turn the engineer me on, Jerry. To say that it’s early days on these technologies right now as far as their readiness for commercialization. So the most important thing for us is to be abreast, involved with, partnered with great companies like we have our great relationship with the current supply base and watching how it develops. There’ll be some invention. There’ll be some cost downs during the coming few years. And our goal is to make sure that we’re in a position to provide our customers the lowest operating cost vehicles whenever the market is ready for them, when there’s infrastructure, when there’s regulation and when the technology is ready. And so it’s early days, and we feel like we’re really on top of it, and we’re focused on a plan that is actionable and buildable.

Okay. So we’ll stay tuned. And in terms of – out of your cost performance, what really stands out is the SG&A reduction, in particular. Can you just talk about how many – how much of that was driven by furloughs or on that item specifically, I think you addressed the gross margin performance previously, but can you talk about how much of the SG&A reduction stays with us here as production recovers?

Some of it was furlough, some of it was structural.

And some of it was travel, too. So as we see production and activity levels go up in the third and fourth quarters, I – some of this will be sustainable, and some of the activity levels will be higher. So…

Okay. And then lastly, can you just comment on your material cost performance in the quarter given all the moving pieces on the supply chain? Were you able to achieve net benefit from lower parts – lower input costs? Or did that get eaten up by airfreight?

No, it was relatively flat. There was puts and takes in all those areas on as we came back up in production.

Okay. Appreciate the discussion. Thanks.

Our next question comes from Ross Gilardi with Bank of America. Your line is now open.

Hey, good morning, everybody.

Hey, good morning.

I just was going to go back to just the near term truck delivery outlook. I said a little bit of hesitation for you guys to provide too much guidance there, realizing there’s still a lot of uncertainty, but can you help us at all? I mean are we looking at a 10% increase Q2 to Q3, a 50% increase? Like should we think about it kind of getting halfway back to where you were in Q1? And just how is the normal seasonality going to be impacted by COVID? Where you have the normal summer shutdowns in Europe, for example? And any other color you can provide there would be really helpful.

Yes. Yes, happy to. If you look at Europe, we’ll have our normal summer shutdowns that began last week or this week. So we have that going on right now. And in general, we – as we’ve said, we will build the trucks to order. We’re substantially full through the third quarter. So that gives you some kind of clarity of what’s going on there. We’re seeing – taking build rate increases where they make sense to take them. And I think like the whole world, we’re watching how the situation develops and customers are looking at how the situation develops. So providing too much beyond that feels a little bit early.

Okay, got it. Maybe, Preston, just I’d love to hear your thoughts just – and how you’re thinking about it from a planning perspective, just the shape of the cycle from here? I mean, it’s – obviously, you saw a nice improvement off of the extreme loads in April as the quarter progressed. But do you think we’re in a real V-shape recovery here? Or did we just see a kind of a sharp bounce off the bottom and perhaps headed for several years of kind of below replacement demand environment as the fleet ages and just everybody out there deals with a lot of uncertainty. Just general thoughts on that will be really interesting.

Well, I think the easiest thing for us to do is watch how the truck market is doing, watch how freight is being hauled, watch housing starts, auto industry and a lot of activity in the auto industry right now. Housing starts are strong right now. And the general economy seems to be gathering momentum and rebounding. The shape of that curve, I don’t know. I don’t know that it’s so simple to characterize that way. But we feel good with the way our customers are succeeding. And as customers are succeeding and hauling freight and there’s movement in the world, then that’s good for PACCAR.

Okay. Thanks a lot.

Our next question comes from Andy Casey with Wells Fargo. Your line is now open.

Good morning and afternoon, everybody.

Good morning and afternoon, Andy.

A lot has been answered already. But in the – looking back at the quarter, you had Truck revenue modestly outperformed volume. Could you comment on if that was pricing mix or something else?

We’re having a hard time thinking about what your question really is. Can you kind of give us another spin at that?

Yes. The Truck volumes were down about 100 basis points more than revenue on the Truck segment. And I’m just wondering, given you probably had some currency headwinds what the main drivers were?

There was a little bit of currency headwinds, but that’s not material. Maybe it’s in the market mix or the product mix, I didn’t look into the detail of that, yes, okay.

Okay. Okay. Thanks, Harrie. And then switching back to the zero emissions powertrain discussions, primarily on this timing for hydrogen. A lot of market excitement out there, but it doesn’t really sound like your expectation in terms of when that technology could potentially impact the market change too much relative to what you said last year. Is that correct?

I think you’re accurate. That’s correct. We think there’s a lot of long-term promise for hydrogen, but it’s long-term promise.

Okay. Okay. Thank you very much.

You bet. Good day.

Our next question comes from David Raso with Evercore ISI. Your line is now open.

Thanks for taking my question. I’m trying to better understand the third quarter gross margin guide, based on the midpoints implying a better gross margin in the first quarter. And I know there was the $50 million engine hit to the first quarter. But just trying to triangulate volume versus gross margin. I mean the first quarter had over 38,000 deliveries. This quarter just had 18,000. To have the third quarter gross margin above the first quarter when you ship the 38,000, I’m just trying to understand somewhat implicitly, I mean, the number that should be above 30,000 units. But even then, you would still need pretty strong mix be within the geographies, the type of trucks. And of course, you highlighted Parts should do relatively well. Can you just put all that together, just some sense of a better gross margin in the third quarter than one quarter. But again, you’re not even half of the trucks that you delivered in the first quarter, in the second quarter. So we’re all just trying to get a sense of, I mean, is it 30,000 deliveries, 35,000, because obviously, it’s impressive if you can have that higher gross margin with that much less volume delivered 3Q versus 1Q.

Well, I mean, you did a great job of characterizing it, actually, David. I mean think about the second quarter, five of 12 weeks were down, we’ve returned to normal build rates now. So build rates are steady and growing, as we said. And at good levels and two shift operations. And we would see the third quarter looking a lot more like the first quarter in terms of volumes. And the Parts business is strong and strengthening. And so those things together are as you put them together, get you to that 12% to 13% gross margin range. Feel good about the third quarter.

That’s helpful. Okay. Because it kind of dovetails into the question of you can tell about the wholesale receivables coming in, your dealers destocked well. But your own inventory didn’t go down much, right, which, to me, indicated you must have some confidence on your builds for the third quarter, and your comment right there does suggest that there’s a big ramp.

Yes, you’re correct.

Okay. That’s all, just checking. I appreciate it. Thank you.

Yes, we’re growing the inventory through into the – because we’re growing the build, strong relationship.

Terrific. Thank you.

You bet.

Our next question comes from Steven Fisher with UBS. Your line is now open.

Thanks. Good morning, guys. I just wanted to ask about the finco a little bit more. Wondering if you could talk about the – how much of the $25 million year-over-year decline in the profitability was a function of higher credit provisions versus lower used truck values. I think you said the used trucks were stable, but I wasn’t sure if that was a pricing comment in particular.

The used trucks being stabilize quarter-over-quarter. So if we compare to the second quarter of last year, used trucks results were down as a result of lower used truck prices in general. We’ve been adding used trucks centers, as we discussed. And although used truck prices are down, we do get a 10% to 15% premium for our used trucks. And the credit loss reserve has a small impact also compared to last year credit losses were up $4 million and interest yields and spreads were down a little bit, too. Although we have a very strong portfolio currently with a very healthy mix of A and B customers and really low past dues, which remains well below 1%.

Okay. That’s helpful. And then could you just talk about the supply chain? How close to full production and delivery rates, would you say they’re running now? And are there any spots that you’re kind of still keeping an eye on for any concerns?

Our suppliers are doing really well. Everybody that in this industry has done a fantastic job of responding through the last quarter and putting in good safety and health and safety protocols. Those are in place, and the supply base is doing a great job of providing products.

Okay. Thank you.

Our next question comes from the line of Tim Thein with Citigroup. Your line is now open.

Thank you. Good morning. The first question is just on the Truck gross margins. Are you able to give us any color as to where you were exiting June? Just from a margin perspective, obviously, the quarter, I’m sure I had quite a bit of variability in it. Can you segment that precisely in terms of where – again, where you exited June from a gross margin standpoint?

Harrie?

Yes. Obviously, June was better than the second quarter average as we were ramping up production again and getting back to close to normal build in Trucks and close to normal sales in Parts. So yes, June was – ended the quarter strong.

Okay. All right. And then maybe just on Parts, and I’m curious if kind of a similar question, just from a standpoint of mix and maybe what that – you talked about the pause in activity and some fleets deferring maintenance, which is fairly intuitive. I’m guessing you probably had fewer engine overhauls in the quarter as well. Is that – does mix enough margins, do you expect that to improve in the second half noticeably? Or is it just kind of leverage with the improvement in revenues that you’re forecasting?

Of course, Parts margins are higher than Truck margins. And if Parts stay higher than Trucks, that has a favorable effect on the overall margin. And we saw that in the second quarter, could happen later this year, too.

Okay. The question here is more just Parts specific, i.e., did you sell the margins on the sales in the first half with of Parts? Is it a lower, is it less favorable mix because of just the type and the nature of the products sold or not – is that not a meaningful factor?

I think we understand your question. No, no. I think that wasn’t significant as far as proprietary versus all makes Parts mixture, it might have been a little impact, but it was much more about the deferring of maintenance and just what happened in April and early May with our dealers and what our customers are doing in watching the uncertainty and then they rebounded through that and have accelerated out of that.

Got it. Okay. And then just last one, Harrie or Michael, maybe just quick modeling one. The step down in D&A from the first quarter, should second half look more like the first or the second quarter from a D&A expense standpoint?

D&A? What do you mean by D&A?

Depreciation and amortization was $70 million in the first quarter, went to like $51 million or $52 million.

Yes. We have a lot of depreciation is on a unit to production basis. And so when production goes down, the depreciation necessarily follows. And so as production goes up, you’d expect that to go up some as well.

Okay. Very good. Thank you.

Our next question comes from the line of Adam Uhlman with Cleveland Research. Your line is now open.

Hi. Good morning, good afternoon, everyone. I was wondering if we could speak some more about European truck fundamentals. I guess you noted that used truck pricing was stable here in the U.S. Could you expand on what’s happening over in Europe and how these truck inventories look? And then I’ll wrap with a second question into it. I guess you mentioned that Europe orders improve through the quarter. But I’m not sure if that means that we’ve actually gotten to year-over-year growth like we saw in the U.S. Maybe you can just touch on that first.

Sure. The European market is, as Harrie said, anything, the good thing to think about is that mount mileage and it’s off slightly from last year’s very high levels. And so it continues to be good. Order intake continues to be strong in Europe. I think that as we think about some markets, they’re just opened up in the last 30 days where border travel and things were allowed. And so they’re still finding their way into that. Deliveries are still happening into the Eastern European countries. And we see strengthening throughout the European market. And that’s just a – there’s a little bit of – it was an unstable period there for a couple of months, and now it’s stabilizing and strengthening, and that’s what we’re seeing happening.

Do you get the sense that there was kind of demand that we’ve refilled now and there could be a step back? Or are there any indicators that you look at within the order books that give you confidence that there’s sustainability to it?

Yes. I think we have a high degree of confidence that the order book is well matched to our production rates and that we see good order intake. As I said, we’re effectively full through the third quarter in Europe, which is great. Good visibility. Orders continue to come in. And we continue to look at the business just smoothly accelerating.

Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Hi, everybody. I had two questions, if I may. The first one, maybe it’s a little bit of a soft ball, but your op margin was really remarkable in a quarter with maybe maximum disruption, I suppose, just on volumes and also just what you had to do with workforce and so forth. Obviously, versus 2009, you did better. And obviously, Parts are one sort of a long-term success story. Is there anything else you’d highlight that’s sort of structurally different that allowed you to perform so well this quarter? And then I had a strategic one to follow-up.

Sure, let’s start with that one. And I think we’re really proud of the team throughout PACCAR. They did a great job of treating every cost is variable, always do and did this time as well. And you mentioned too – you mentioned Parts is an important part of the business, which has grown and provides great stability and capability for our company. And the finance company also is another leg of that, which has a great job of having great new business volumes that came in through the course of the quarter. Good spreads on the business. They operate really well and a fantastic part of PACCAR’s team.

Okay. Okay. That’s helpful. I want to follow-up off-line in a couple of other things. But just one big picture strategic, you obviously got hydrogen, electric, autonomous, a lot of different technology streams that you’ve been as you do using the supply chain to sort of leverage and evaluate and so forth. And you saw one of your competitors partner up more closely with TuSimple. Can you give us a sense of the time frame on when big strategic decisions might be made? Do we have to worry about announcements like that? Or do you think on each of those different streams, hydrogen, electric, autonomous, we’re two or three or four years away from critical points? Maybe just give us a sense of how much to worry when or think about when things like that happen?

Sure. Happy to do that. I think the key to keep in mind is the customer at the end of the day is interested in the lowest total cost of operation. That’s what the trucking companies like to think about. That’s what they’re trying to deliver. And they’re doing that, and they’ll use zero emissions vehicles, whether they’re battery electric or hydrogen fuel cells to do that. And so what we do is evaluate those technologies, develop those technologies and bring them to market as soon as they’re ready and commercially the right answer or regulations ask us to bring them to market. We think that’s – they develop iteratively. We’re always making those strategic decisions about which way things will go. We continue to develop zero emissions vehicles while we develop clean diesel at the same time because that’s going to be the mode of power for the coming years, primary mode of power for the coming years. And then on autonomy, it’s a great technology. We have strong partnerships with a lot of autonomous vehicle companies. We have developed autonomous vehicles. If you look around at the space, and you’ll see that a vast majority of the vehicles that are operating in L4 modes in trial are Peterbilts and Kenworths and DAFs. And so we’ll watch that technology and when it’s ready, we’ll bring it to our customers.

Okay. Thank you.

Our next question comes from the line of Rob Salmon with Wolfe Research. Your line is now open.

Thanks. And I guess to piggyback a little bit in terms of some of the Parts questions a little bit earlier. In the Q, I think you had noted that Parts is down about 6% in last month. Could you give us a sense of kind of what the exit rate as we left June and then what we’re seeing kind of early in July from a Parts revenue standpoint? Has that inflected positive at this point? Or is it still down on a year-over-year basis?

And Parts is really returning to normal right now. I mean, as Harrie characterized it, right? It’s recovered nicely. It’s strengthening. And the easy way to think about it is as trucks move, they use parts and trucks are moving. So Parts are getting used. And our team is doing a great job of supporting the customers and kind of very much return to the strong normal.

That’s helpful. And we’ve seen a real nice kind of uptick in terms of spot demand and a lot of load indicators. Also, we’ve seen a nice improvement in the U.S. with regard to contracted volumes with the truckers. Have you seen an improvement kind of in the month of June and into July from a used truck performance with regard to the price realization that you guys are seeing? Or is that – was that pretty stable kind of throughout the – throughout 2Q and into July thus far?

Yes. We had great volume in June for used truck sales, both in Europe and in the U.S. and Canadian markets. So that was good. What we’re seeing is some green shoots in terms of the pricing in the used truck market right now, and that’s positive.

I appreciate the time.

Our next question comes from the line of Joe O’Dea with Vertical Research. Your line is now open. Joe O’Dea: Good morning, everyone. Just one question on new technologies and specifically, the battery electric that you plan to have in production next year. How do you envision sort of going to market with those? Are you comfortable leasing those vehicles? Is that something that you’re primarily looking not to carry on your books, just given early stages, uncertainty on residuals, trying to understand how you think about selling them?

Yes. Fun to talk with you about that. I mean we think the EVs that come into production next year could be leased or purchased, both are available PacLease, as you know, they’re celebrating their 40th anniversary into the great leasing operation. So we can run them through PacLease, and we can also have the customers purchase them. When we bring something to market, we have confidence in its performance, and we do with the electric vehicles when we bring them out. The price point is obviously, at this stage of the development. And next year will be higher than diesel. But I think people are interested in seeing what that technology feels like in their fleets. And then obviously, we have regulations coming in the 2024, 2025 time frame where some markets will need the electric vehicles. And so that’s what’s going to bring some gradual increase in demand. Joe O’Dea: And from a regional perspective, the 2020 launch is for both Europe and North America?

Correct. We’re developing trucks for both Europe and North America in 2021. Joe O’Dea: Got it. Thanks very much.

Our next question comes from the line of Courtney Yakavonis with Morgan Stanley. Your line is now open.

Hi, thanks for the question, guys. Just following up on Joe’s question, when we’re thinking about – I think a lot of your comments about the kind of the modest growth has come from the demand side. But can you help us understand what are the bottlenecks in terms of switching your lines to battery electric from an investment perspective in the factory? Are you taking a diesel line and just switching it to battery? Or is it more complex than that? And what’s the length of time? And I guess, if demand ends up surprising to the positive, how quickly can you ramp those production levels on battery electric and then same question for hydrogen acknowledging that, that’s a little bit of a longer time out.

Courtney, good to talk to you. From a demand standpoint and from a flexible manufacturing standpoint, it is really important to note, you’ve been to many of our factories that when you look at PACCAR’s factories, we build the order, they’re custom trucks, they can be configured with various displacements of diesel engines or different numbers of axles and et cetera and et cetera. And our teams and our operations teams do a great job of being able to integrate different designs on to our main line. That’s one of the real core talents that PACCAR has. And electric vehicles will be the same kind of thing. We’ll be mounting them on our lines and whether it’s the batteries, the electric motors, capabilities will all be mounted online. And we have flexible lines that can accommodate that in low and high volume. So we’re prepared. It’s really nice to have actual factories that are able to build trucks. And we can do that today, and we’ll be able to accommodate all the demand in the future.

Okay. Thanks. That’s helpful. And then just on the Parts, you mentioned that your e-commerce sales increased, I think, 20% in the first half. Can you just comment a little bit on what customers were purchasing? Was that mostly dealers? Or was it customers you haven’t historically been exposed to, I think you’ve done a good job kind of broadening the reach of your Parts business over time. I’m just curious if this is another avenue or if it’s really just been replacing existing Parts customers?

It is – it’s a mixture of both, Courtney, it’s some dealers, some customer orders. It’s a great system that gives them that flexibility to get what they want and to see the related parts whenever they need to. It makes it a little bit quicker to receive the parts, but it’s all parts of the business. So there’s some replacement, and there’s some new demand that comes from it as well.

Okay, great. And then just lastly, you talked about the strength in orders in June in both the U.S. and Europe. Can you just comment on which customers are you seeing coming back first? I think last quarter, you talked a lot about vocational being strong. Is that still what’s driving the order book at this point? Are you seeing kind of some of those core TL customers come back?

It’s pretty broad. I mean the customers coming back are broad right now. It’s some of the bigger customers in the various sectors. That are continuing to use trucks, so they’ll need to replace trucks. They might have postponed to buy for a quarter, but now they’re ordering. The vocational market continues to be strong, and we’re doing really well in medium duty. So all kind of seems to be growing equivalently right now.

Okay, great. Thank you.

[Operator Instructions] Our next question comes from the line of Jeff Kauffman with Loop Capital Markets. Your line is now line open.

Thank you very much and congratulations. I was kind of curious, are your customers asking you for anything different these days? I mean we’ve pulled back from the abyss, but there’s a lot of P&L pressure in the industry. There’s a lot of struggling carriers out there still. What’s changing in terms of what customers are asking for in the vehicles?

Yes. I think it’s easier to say what’s constant and what’s constant is they want great trucks. They want premium products that support their brands, help them operate efficiently in their businesses, lowest total cost of operation. So great fuel efficiency, and they want a truck they’re proud of. And that’s DAF, and Peterbilt and Kenworth and makes their drivers happy, and that’s an important part of their operations. So I think those fundamentals stay right with us right now. We’re happy to provide those great trucks.

Granted. But in terms of options, packages in terms of things people want to see on the truck, is any of that changing with the customers or no, not really?

I think you could see there’s been an increase in the past several years of safety systems as people want to see just the continued availability of ADAS kinds of features, Level 1 features growing towards Level 2. So that’s something that’s come along.

All right. Well, that’s my question. Thank you very much.

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, operator.

Thanks to everyone. Have a great day.

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