Paccar Inc (PCAR) — Q3 2020 Earnings Call Transcript

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.

Hey, good morning. Harrie Schippers, Michael Barkley, and I will update you on our excellent third quarter results and business highlights. First and foremost, I appreciate our outstanding PACCAR employees. They have continued to focus on staying safe and healthy while delivering the highest quality trucks, advanced powertrains, and transportation solutions to our customers. PACCAR achieved strong revenues and net income in the third quarter. PACCAR's quarterly truck deliveries doubled to 36,000 vehicles compared to the second quarter of this year. PACCAR's quarterly sales and financial services revenues were $4.9 billion and third quarter net income was $386 million. PACCAR Parts achieved quarterly revenues of over $1 billion and pretax profits of $210 million exceeding the strong third quarter of last year. Truck, Parts, and Other gross margins increased to 12.8%. PACCAR Financial achieved robust new financing business and pretax income of $56 million. U.S. and Canada Class 8 truck industry orders through September were 18% higher in the same period last year. PACCAR expects fourth quarter deliveries to be 10% higher than the third quarter as build rates increase in all markets. The fourth quarter will have fewer build days in North America and more build days in Europe. Fourth quarter Truck, Parts, and Other gross margins are estimated to be in a range of 12% to 13%. We have raised our 2020 market size estimates in North America, Europe, and South America. We estimate Class 8 industry retail sales in the U.S. and Canada to be in a range of 190,000 to 210,000 trucks this year. Peterbilt and Kenworth have achieved 29.7% market share through September compared to 29.2% for the same period last year. For 2021, the U.S. economy is expected to grow about 4% and we estimate U.S. and Canadian Class 8 truck market to be in the range of 210,000 to 250,000 vehicles. In Europe, truck industry registrations in the above 16-tonne market are estimated to be in a range of 210,000 to 230,000 vehicles this year. DAF has achieved a market share of 16.1% through September this year. European economies are projected to grow about 5% next year, and we expect truck registrations to increase to a range of 230,000 to 270,000 units. The South American above 16-tonne market is projected to be in a range of 95,000 to 105,000 units next year. DAF Brazil introduced a new XF truck in the third quarter, which has been well received by our customers. In the Brazilian above 40-tonne segment where DAF competes, DAF market share through September increased to a record 9.3%. PACCAR's zero emissions vehicle programs continue to move forward. We've begun accepting orders for industry-leading battery electric trucks that will serve the medium duty, regional haul, and refuse markets in Europe and North America. Production of these trucks will begin next year. Vehicle charging stations will be available through PACCAR Parts. We're pleased to share that PACCAR, Kenworth, Peterbilt, PACCAR Parts and Dynacraft were each recognized as a Top Company for Women to Work for in Transportation by the Women in Trucking Association. We were honored for an excellent working environment and company culture that supports gender diversity. PACCAR is committed to hiring and promoting the most talented people in the world and we know that the best people represent the diversity present in the global community. Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services, and other business highlights. Thank you.

Thanks Preston. PACCAR continues to provide excellent operating cash flow for reinvestment in future growth and distributions to stockholders. Last month, the PACCAR Board of Directors announced a regular quarterly dividend of $0.32 per share. PACCAR Parts achieved quarterly revenues of $1.02 billion and pre-tax profits of $210 million. PACCAR Parts benefited from the economic recovery, high truck utilization, a growing global distribution network and investments in our state-of-the-art e-commerce platform. E-commerce is PACCAR Parts fastest growing business. PACCAR Financial Services third quarter revenues were $398 million and pre-tax income was $56 million. These results reflect strong portfolio performance, low past dues and record used truck sales. Robust used truck sales led to a reduction in used truck inventory. PACCAR Financial is increasing its used truck sample capacity worldwide, which enhances margins. PACCAR Financial recently opened used truck centers in Lyon, France, Denton, Texas, and Prague, Czech Republic, and plans to open another facility in Madrid, Spain next year. PACCAR's truck resale values command a premium over the competition. Research and development expenses are expected to be in a range of $270 million to $280 million this year. Net capital investments are projected to be in a range of $570 million to $600 million. In 2021, we're planning for R&D expenses of $330 million to $360 million and capital investments of $575 million to $625 million. PACCAR is investing for long-term growth in new truck models, low emission diesel and zero emissions powertrain technologies, advanced driver assistance systems and connected services. And finally, our independent Kenworth, Peterbilt and DAF dealers continue to provide outstanding support to our customers. Our dealers are well capitalized, and have invested $2.6 billion in their businesses in the last 10 years, making a significant contribution to PACCAR's success. Thank you. We'd be pleased to answer your questions.

Yes, thanks. Good morning guys and good afternoon guys. I guess maybe starting with the outlook for 4Q. I know you guys said that you expect build rates to increase across all markets? Is there any way that you could kind of characterize the level of growth that you're seeing in North America versus Europe, given the element of build days?

Yes, great comments, Nicole. You already captured part of the answer in talking about build days, but we have seen increases in build rates throughout the third quarter, and more than doubling from the second quarter. The fourth quarter, we'll also see increases in build rates, daily build rates in all markets. And then from a total delivery standpoint, we'd expect to see a higher number of deliveries in Europe, because of the build mix there where we have more build days in Europe compared to the third quarter where there's a holiday shutdown. But all markets are seeing increases in build rates as you see, with the strong order intake we've been seeing.

Got it. Okay, that makes sense. And then just one more on Europe. I mean, obviously we're all seeing the headlines with respect to COVID cases ramping up just curious what you guys have seen, most recently with respect to order activity from customers, whether that's been impacted by COVID?

True. Well obviously, we read the same news you do and we watch the increase in COVID cases. But our customers have really been providing strong order intake for the excellent trucks that we make. We haven't seen any hesitation in orders in recent times that has come up. And our factories are doing a great job of making sure that health and safety is the most important thing that we focus on each and every day. So we're able to build trucks in a safe and effective way and order intake remains strong.

Hi, I have a question about the battery electric trucks you plan to introduce next year. Are you currently accepting orders for them? I'm asking because there seems to be a belief that these trucks may have lower future parts sales compared to clean diesel trucks. Does this align with your expectations? Additionally, could you explain how you plan to approach pricing, considering the potential reduced revenue from parts in the future? Should we expect you to aim for a higher margin upfront? Any insights you could provide would be helpful.

Good, thanks. Well your first comment about whether we're accepting orders? We are accepting orders with Peterbilt, Kenworth and DAF; we're taking orders for the trucks. We expect to be in production next year. The trucks we're actually providing them to customers already and doing test work with our customers. We're working on battery technology as well as hydrogen fuel cell technology. And in fact, just from a fun thing to share, last week, Kenworth and Peterbilt took a hydrogen fuel cell truck and a battery electric truck. Kenworth was the hydrogen fuel cell. Peterbilt was a battery electric and they drove them up, by its peak all the way to the summit. So the programs are progressing along nicely. The teams are having a lot of fun developing excellent products. And we're looking forward to that market developing, it is early days. And so from a standpoint of how many orders it could be in the hundreds. When we look at your question of parts sales, and what we think looking forward, I think there's going to be plenty of parts that go along with electric vehicles for a while. And one way to think about it is the cost of a battery pack is pretty significant; it's a contributing factor to a cost of an electric vehicle. And somewhere in a lifetime a battery pack could be replaced. They also have the same suspension components, the same steering components, and they will have wear items just like every other truck does. So I think that the pricing of how we'll do that, will be based on cost and good margins and Harrie?

In addition to the trucks, that we will also be selling chargers, and also the chargers will need replacement parts.

So the total of all of that I think is that, I don't think it's going to be disruptive to our model. It could even be helpful to our model for the coming period of time.

Yes. Maybe just sort of sticking with that but broadening it out a little bit. Sometimes I get questions around just how do you view kind of R&D spending for the next few years and some people seem to think maybe others are spending more, I know your business model is a little bit more outsourced, a little bit more partner driven. But maybe you can just talk about, how we should view your level of R&D spending over the next few years as we kind of make this transition?

We consistently ensure that we invest wisely in the opportunities available to us. Our track record shows that we’ve made strong investments that benefit our customers. We always approach this from the customer perspective. Right now, I am more excited than ever about the products we are launching in the next year or two, and also for the five-year strategy we have planned, which includes an impressive range of products. As Harrie indicated, our spending might see a slight increase, with an estimated $330 million to $360 million allocated for R&D next year. However, our primary goal is to ensure our customers receive the best trucks, transportation solutions, and parts available. The current situation has never been better.

Okay. All right. Thanks for that. And then just a quick follow-up. I appreciate your initial views on 2021. I'm just curious, relative to kind of inventories. I know your guys aren't big on inventories. But would you expect to produce more next year than whatever the retail sales can turns out to be? Or would you sort of produce in line with that do you think?

Let me just start with where we're at now, there's two-and-a-half months of industry inventory out there and PACCAR came up with about 2.2 months. And so when I look at that, I think about what the order intake looks like build rates intake, I think it'll be roughly in line. Could be a little bit more production but not too much.

Maybe we'll stay on the EV topic. If you look out five years, do you have an expectation that you can share EVs as a percentage of either Class 8 or Class 6, 7 production?

Sure. We think is the way this market is going to develop, processes is going to be hundreds kind of next year. And then we'll get to a point in 2024 and 2025, where there's some regulatory requirements for production. And by that time, we should see ourselves in the thousands, low thousands. And it'll obviously depend on what kind of regulatory environment develops throughout Europe, or California. And what we want to make sure we have is the products are ready to go and the most reliable and capable products and so that's the path that we're on. So we'll be ready. If there's ready for thousands or stages of hundreds and if it was good, tens of thousands, we'll be prepared for that.

So low thousands in 2024, 2025 on a 250,000 replacement market you're talking like 1% of the market by then?

Yes.

Okay. And how about Class 8 versus 6, 7, certainly in battery up until now has been a bigger tactical challenge. But of course, we're working on hydrogen fuel cell as well. So what are your thoughts there?

So thinking is there, as you mentioned, well, Ross, it'll be medium duty in urban environments where trucks return back to a fixed location, fixed operation is an easy place for adoption to begin. But if there are places like in Europe, where cities might not allow a diesel truck in, then that'll mean regional haul trucks could end up being battery electric. And then as fuel cells become viable and commercially relevant, then they could play a role, also. So I think right now, what we're doing is making sure that we look at the range of full capabilities and technology choices out there and integrating them in an effective way for our customers.

Got it. And then can you talk a little bit about just how you see the shape of the cycle evolving next couple of years with the explosion of e-commerce not that e-commerce is a new thing. But clearly, we're all seeing that the numbers for e-commerce and kind of where I'm thinking of it, if North America Class 8 replacement is normally 225,000 to 250,000, are we at a higher number now because of the environment we're in? And then also on top of that, is there any motivation for the company to move down market into the light duty space to capitalize on where the growth in things like delivery vans and last mile?

Well, I think that as e-commerce comes along, it's not going to affect the fact that people consume on an individual basis, the same amount of goods, it's maybe it's how those goods are delivered, but they'll still be manufacturing and distribution. And I don't think that'll fundamentally or structurally change anyway from a Class 6 through 8 market. I would share that; we have some amazing products in that Class 6 market space right now with our cab over products here in North America. It's also the market leader in the UK for that cab over LF. And we have some really neat products we're developing to fill in and continue to develop the medium duty space for ourselves in the coming years.

Hi, good morning. I guess two questions. My first question, as we think about 2021, can you talk about your confidence level in terms of market outgrowth, whether it be on the Parts side, market share on truck, or the 11 and 13 liter engine, just how we should think about that as markets recover? And then my second question, can you comment was there any sort of mixer or pricing dynamics in the third quarter? What you saw in that front? Thank you.

To begin with, we currently hold a market share of 29.7% in the U.S. and Canada year-to-date, which is up from 29.2%. This reflects solid growth in our market share. Our MX engines, particularly the 11-liter and 13-liter models, are performing exceptionally well, accounting for 100% of their engine volume in Europe and 41% in North America. This performance is contributing positively to our results.

From a pricing point of view, the pricing in the third quarter was more or less slightly down like 0.5% or so. But pretty good performance in terms of pricing, given the current market dynamics.

And that's compared to a very strong 2019.

Thank you. I have a few follow-up questions. In Financial Services, the interest expense was higher than we anticipated. Could you clarify that line item and what was included? Were there any anomalies, and should we consider those rates as a guide for the future?

In the third quarter, we achieved a record number of used truck sales, and the associated costs are reflected in that line item. The results for used trucks were favorable compared to last year, although they were quite similar to the second quarter. Overall, the finance company is performing very well. We experienced low credit losses, with past dues at just 0.6% at the end of the third quarter. Our portfolio consists of A and B credits, and customers are consistently paying their bills. The finance company is doing exceptionally well.

But are you saying that if that was a higher expense than the last couple of quarters, that you're recording a loss on each sale of used trucks and so more used truck sales means a higher loss or a higher expense?

Yes, like in the second quarter results on used trucks were unfavorable. It was nice to see that the used truck inventory came down during the third quarter. So that's going to be good going forward.

And we're starting to see that in some of these trucks areas where people are looking for great products they're starting to see pricing increases. And Peterbilt, Kenworth, DAF they continue to provide a premium resale value in our used trucks business compared to the competition.

Yes, but if everybody used prices are down, it's kind of relative to summit?

We get a premium on the used trucks, but we're not the only ones in the used truck market.

Exactly. And then can you just explain a little bit more or talk a little bit more about the e-commerce business in Parts and give us a little bit more color what's going on there, you highlighted it in your opening comments, I'd like to hear more. Thank you.

It’s Preston here. I mean; we've had e-commerce for a long time. But our PACCAR Parts team did a fantastic job of creating a real user friendly, easy to use for customers and dealers e-commerce system that just makes ordering easier. But it also makes related parts easier. So that it's quite simple to go in and find, if you buy a filter for something, it might also point you towards another component. So the team has done a great job of making a very easy user interface. And we've seen significant growth in the amount of e-commerce we're doing so fast, it is the fastest growing part of our Parts business as people transition there. So that's really nice. But also just give a shout out to the Parts team for the way they're engaging with the dealers on auto accept for dealer inventory stocking. So they're doing a fantastic job on that front, too. And I think both those things, plus the support of how the team is supporting our customers is leading to their growth.

We should consider the future of that business in terms of two opportunities: first, the potential for more customers to engage with e-commerce, and second, the possibility of increased spending per customer. Is this the correct way to approach it? I'll leave it at that.

Great word, again. I agree with you, yes.

What really jumped out this quarter was your SG&A performance like you mentioned, production nearly doubled your SG&A was up just 7% sequentially. How should we think about the SG&A run rate from here, any cost that we should think about is coming back in better times? Or is this a situation where we're actually going to be able to run rate this level of SG&A going forward?

Well, I think the team has done a fantastic job of cost control as always right. We look at everything we do and spend where it's necessary. So I think there will be some modest increases as we get into the fourth quarter. Just for example, if you think about travel, right getting anywhere internationally has been relatively limited. So when that opens up, or as travel reopens, that will become a possibility for SG&A increases.

Good morning. Just want to follow up on David Raso's question but more in the near-term rather than 2021. The margins in Q4 sounds like on the 10% increase in deliveries but the flat margin. Can you just talk about what some of the puts and takes in the near-term are in within that keeping the margin flat on higher volume?

We think that that 12% to 13% is good margin performance for where we're sitting in the market sizes that we're dealing with. But just a couple of the puts and takes us in the fourth quarter, there are more build days in Europe compared to North America. And there's a mix shift in and as trucks increase compared to parts. And so those are two factors that weigh into that fourth quarter margin. But we still believe that, our focus is on providing industry's best operating margins and we expect to do so.

Okay, that's helpful. And then just curious, how much is timing within the order books shifting around right now and in what direction? I'm wondering to what extent you're seeing orders either getting accelerated or getting pushed out. I imagine there might be some different dynamics within some of the different end markets that you're serving be it on highway or vocational construction, et cetera. I'm curious where it all nets out if you're seeing people actually wanting trucks earlier, or if you're trying to push them out, a lot of people are pushing that a little further.

All we see is nothing really related to push-outs right now. And what we see is that the trucking economy is doing pretty well in most of its sectors. So the refrigerated carriers are doing well. The housing people and supportive vocational markets are doing well. The consumer goods markets are doing well. This is true for both Europe and North America and people have been running their trucks at a below replacement value or replacement market size for a year. And so the opportunity is that they're ready for the actual and performing high-fuel efficiency, high reliability trucks that we're building now. And so there's no real push-outs happening is people that are ordering to support their businesses, which are doing really well.

Any accelerations?

Yes, there's been growth in orders as obviously the last quarter or so. And it continues to be appropriate to the market sizes that we're sitting in.

Can you elaborate on your strategy for providing charging infrastructure for battery electric vehicles? Specifically, I would like to know the scope of investment needed to reach the low thousands you mentioned for 2024. Is the cost included in the price for consumers, or is this an investment PACCAR will need to make to scale the market?

When considering charging, it's important to understand that you typically need one charger for each vehicle, or potentially one for every two vehicles, based on your operational needs. As the number of vehicles grows, we will develop the necessary infrastructure. Our dealerships are effectively preparing for this shift in the industry, and we will work closely with customers who operate locally. Furthermore, there will be a broader development of charging stations. To give you an idea, the cost to install a charging infrastructure station is generally around $150,000 to $200,000. This is an investment that customers will need to make, and PACCAR Parts is currently selling these products, while our financial partners are providing support. We've effectively created a comprehensive model for customers as we enter this new opportunity.

Got it. That's helpful. And then can you just provide color on the engine parts mix versus other parts of the business in the quarter? And how close are we to seeing an inflection point where your engine sold several years ago actually start consuming more Parts? And how do you think about that from like a gross margin mix perspective as we look towards the next year?

I believe we have made significant progress since we first entered the North American market in 2010. We have gone through a build cycle, and while we have repeat customers, we are experiencing growth in the engine business, which also leads to a strong return from parts.

And it's fair to say that the engine parts business has grown faster than an average Parts business. So we do get benefits from that going forward soon.

It's encouraging to see the Parts revenue turn positive this quarter. Could you provide some insight into the trends there? I believe you mentioned that in June, the revenue was down mid-single digits. Should we interpret that as September seeing an increase in the mid to high single digits? Is that an accurate way to assess the growth?

Yes, that's correct. September was on a per day basis was up 4% compared to last year. So we've seen continued positive momentum through the quarter.

Thank you. I'm returning to the financials of the Finco business. It seems you've addressed some inventory issues. Should we anticipate an increase in margin moving forward? Do you believe it can return to the 20% margin range next year?

It was really good to see the used truck inventory compound and selling a lot of used trucks. But a lot of the used truck performance will depend on what the used truck market does in general. And PACCAR Trucks get a nice premium. But we're also dependent on what our competitors are doing in the same marketplace.

Could you please provide some insight on whether the increased capital expenditures will involve investments in your suppliers and discuss the current state of the supply chain? Sure. I'll happily take that one on and say that, our supply chains did a really good job as we've managed through the last couple of quarters, very dynamic. They've done a good job of pulling, as we're watching the build rates go up across the world, they're supporting that very well. They're focused on health and safety for their employees too and the supply base is in good shape. And so that continues to be one of our great partnerships is working with them and making sure they're ready as we go. As far as investments, we don't have anything specifically earmarked or called out in terms of investments and suppliers.

Good morning and good afternoon. If I may ask a question on the – go back about Class 8 build cycle. I think after the initial COVID shutdowns, we saw a number of dynamics emerge, lower fuel prices, lower interest rates, and maybe truck insurance premiums not as bad as they had been feared given lower claims for insurance company? Are we effectively basically pulling forward the cyclical expansion in Class 8 orders in North America and we could see somewhat of a moderation once we regain some sort of a post-COVID normalcy?

I believe we just finished the third quarter, which was positive. However, we see significant potential for the markets to steadily improve, depending on the overall economic conditions. In relation to insurance, we focus on ensuring that our trucks are equipped with the latest safety technologies to support low rates and provide our customers with features like vision systems and Lane Departure, which help keep both our clients and the public safe. That is our primary focus. Nonetheless, I think it's still a bit early to consider this as being at its peak, given that we've only had a month or two of positive results.

Yes, that's a fair point. And just one last quick question. Do you guys have any manufacturing facilities anywhere around the world that are currently at a higher risk of operational disruptions related to the ebbs and flows of shutdowns and re-shutdowns in COVID transmission?

That's a good question. We spend a lot of time as a company making sure that health and safety is the number one, two and three priority for us and all of our factories compare best practices, and all of them are operating in a safe healthy way. And so I don't see any greater risk in one place or the other because of the great job, the operations teams have done around the world.

So my question is just on the Vocational segment, we've seen obviously COVID has done uncertain things to municipal budgets around the country. And then construction equipment has been a little bit weak. I don't know if you have an opinion on whether municipalities or related customers are more cautious in their purchasing or whether that recovery is proceeding along with everything else in trucks and maybe a similar question for dumping are there similar related markets to construction. Thanks.

What we've seen is, we're the leader in those segments, with our great Peterbilt and Kenworth products, DAF products great job of our customers, and I would say the vocational market seems to be doing quite well. It's one of the places where people are spending money on their homes or putting index doing whatever they're doing. And so there's a lot of shipment of goods, for home improvement. There's a lot of construction, still continuing housing starts are strong. And so I think the sector is really doing pretty well. There's oil and gas is down. But in general, the total sector is doing really well.

Hi, everyone. First question, it's good to hear that pricing has been pretty stable through the disruption this year. I'm interested in how you're thinking about the pricing opportunity next year as those builds start to open up in the order book, whether or not at a below replacement demand type of outlook, you see an opportunity to get price or if you think it's going to be more of a flattish kind of environment?

I think people's pricing expectations are always that we would like to see our trucks continue to provide great service. And as our trucks provide great service and low operating costs, they create a pricing premium for the PACCAR products. And that's kind of the way we think about it, relative to this quarter. And we'll see how the market develops as we look forward.

Good morning or afternoon. I wanted to revisit what you mentioned at the start regarding the order rates in North America. Can you share the order intake for Europe in the third quarter compared to last year?

Orders in Europe was 6% compared to the third quarter of last year.

Okay, great. That's helpful. Thanks. And then, I guess more broadly on, we talked earlier about some of the key R&D spend going up into next year. I was wondering if you could spend some time talking about some key programs that would be new and different, that are of meaningful size, that are getting folded into the budget. And I assume some of the spend next year is also catch-up from this year, if you can maybe you mentioned that a little more, because it is a relatively big increase relative to this year, I'm just trying to get at what that normalized rate would be over the medium term?

We have some exciting truck programs currently underway that will continue to develop next year. We look forward to sharing those with you at the appropriate time. Additionally, we are working on engine development programs for our high-performing diesel engines worldwide. Furthermore, we are focused on efforts related to autonomy, connectivity, and electrification. These areas represent the majority of the work we have planned for next year and the years to come.

Hey, good morning and good afternoon. A few kind of follow-up questions related to the fourth quarter gross margin outlook. Are you guys baking in kind of a similar aftermarket sales growth rate as you were seeing in September for the fourth quarter? Or is something different kind of baked in, related to your outlook?

The 12% to 13% gross margin, as Preston said, is that we're achieving the best margins in the industry. And we're expected to be in that range despite a mix of more truck and are these more truck growth, the Parts growth. I think you should seeing Parts as being the same a little bit up compared to last year in the fourth quarter.

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

Maybe just following-up on that question. Could you just share with us how to think about the sequential increase in deliveries between U.S. and Canada versus Europe for the fourth quarter?

Well, one way to think of it is that Harrie outlined it really well is think about the build days, what I would rather say is, there's build rates, daily build rates are going up in all markets in fairly good manners. And we think that that could continue. And so that's the easiest way to think about it without getting conflicted about the number of build days in the quarter. So build rates are up, markets are improving, trucks are doing really well. And we think we've got a good look at the future coming towards us.

Okay, I understand. Regarding the growth in Parts, you mentioned that it is expected to be slightly higher in the fourth quarter and noted the significant amount of deferred maintenance that has been addressed. Do you believe that most of that is now resolved, with not much left to catch up on? Additionally, could you provide an update on the e-commerce platform, which you mentioned was up 20% in the first half of the year? Are you still seeing those growth levels in the third quarter and entering the fourth?

The current state of the Parts business reflects a strong truckload market across the country, with vocational markets also performing well. When trucks are operational, they require parts, which is a significant factor contributing to the success of the Parts business. Additionally, our excellent distribution capabilities have allowed us to capture an increasing share of the market. The team is excelling not only in proprietary parts but also with all-make parts, including TRP brands globally, which is further driving growth. Furthermore, our e-commerce initiatives have been exceptional, making it easier for customers to purchase parts through PACCAR. The team's focus remains on simplifying processes for our customers and delivering effective transportation solutions.

Got you, that's helpful. And then just lastly, just a follow-up to the comments about the Toyota-Hino partnership, can you just help us kind of understand what we're thinking about hydrogen fuel cell trucks? How much of it is the design of the truck versus the fuel cell provider that really is going to dictate the difference in performance just based on the different prototypes that you have out there? And are you guys also considering other fuel cell providers in addition to Toyota?

Sure, I would think about it is the fuel cells a critical part of the business, the truck is a critical part of the business, the integration of the two is a critical part of the business. Supporting them in the field is a critical part of the business, the distribution, all that matters. And so we're paying attention to all elements of that. And I guess to your other questions. Yes, we’re always looking for the great partners to work with. Toyota is a great partner for us in developing these hydrogen fuel cell products. And it's not an exclusive thing and it'll need, the hydrogen fuel cell market will need a lot of players and a lot of volume to make it commercially viable. So it's accretive to our business model with them.

We’d like to thank everyone for joining the call and thank you, operator.