Paccar Inc

NASDAQ:PCAR

Q3-2025 Earnings Call

[Operator]

Good morning, and welcome to PACCAR's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. And if anyone has an objection, they should disconnect at this time. I'd now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

[Ken Hastings, executive]

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; Kevin Baney, Executive Vice President; and Brice Poplawski, Senior Vice President and CFO.

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 at the Investor Relations page at paccar.com. I would now like to introduce Preston Feight.

[R. Feight, executive]

Thank you, Ken, and good morning, everyone. Kevin, Brice, Ken and I will update you on our good third quarter financial results and business highlights.

I'd like to start by thanking our wonderful employees who deliver PACCAR's high-quality trucks and transportation solutions to our customers all around the world. And I'm especially appreciative of their efforts in these dynamic market conditions. PACCAR delivered good revenues and net income in the third quarter of 2025. Peterbilt, Kenworth and DAF Trucks contributed to the good results.

PACCAR Parts and PACCAR Financial Services continued to deliver excellent performance and strong profits. PACCAR achieved revenues of $6.7 billion and net income of $590 million. PACCAR Parts achieved record quarterly revenues of $1.72 billion and excellent quarterly pretax income of $410 million. Parts revenue grew 4% in the quarter compared to the same period last year.

PACCAR Financial also had a very good quarter, achieving pretax income of $126 million. We estimate this year's U.S. and Canadian Class 8 market to be in a range of 230,000 to 245,000 trucks and next year to be in the range of 230,000 to 270,000 Customer demand in the less-than-truckload and vocational segments is good. The truckload market continues to have uncertainty. Next year's U.S. and Canadian truck market could be higher than this year as we realize clarity around tariffs, emissions policy and potential improvements in the freight market.

In Europe, the DAF XF truck was honored as the Fleet Truck of the Year in the U.K. due to its best-in-class fuel efficiency and driver comfort. We project this year's European above 16-tonne market to be in a range of 275,000 to 295,000 vehicles. The 2026 market is expected to be in the range of 270,000 to 300,000. We estimate this year's South American above 16-tonne truck market to be in the range of 95,000 to 105,000 vehicles and in a similar range next year.

PACCAR's premium trucks are performing well for customers in South America, especially in the important Brazilian market. PACCAR delivered 31,900 trucks during the third quarter and anticipates delivering around 32,000 in the fourth quarter. More production days in Europe will be offset by fewer production days due to normal holidays in North America.

PACCAR's Truck, Parts and Other gross margins were 12.5% in the third quarter. Margins were affected by the August steel and aluminum tariff increases and the tariff costs on trucks that were built in the United States. Looking ahead, fourth quarter margins could be around 12% as tariffs peak in October. However, the new Section 232 on medium and heavy trucks that will become effective November 1 will be good for PACCAR's customers as it will reduce tariff costs and bring clarity to the market.

PACCAR is proud to produce over 90% of its U.S. sold trucks in Texas, Ohio and Washington. We look forward to improving market conditions, tariff costs that will begin to reduce as we head towards the end of the year and PACCAR's continued strong performance.

Kevin Baney will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights. Kevin?

[Kevin Baney, executive]

Thank you, Preston. PACCAR Parts achieved gross margins of 29.5% and record third quarter revenue of $1.72 billion. Third quarter parts sales grew by a healthy 4% compared to the same period last year with similar growth expected in the fourth quarter. PACCAR Parts continues to grow by investing in capacity and services.

PACCAR Parts is focused on delivering the right part to the right place at the right time to provide industry-leading support for our customers. PACCAR Parts will open a new 180,000 square foot parts distribution center in Calgary next year to bring faster delivery times to dealers and customers in the region.

PACCAR will be opening a new engine remanufacturing center in Columbus, Mississippi next year to provide our customers with high-quality rebuilt engines. PACCAR Financial Services pretax income was a robust $126 million, 18% growth over the $107 million reported a year earlier. This reflects the high-quality portfolio and improving used truck results. PACCAR Financial operates 13 used truck centers around the world to support the sale of premium Kenworth, Peterbilt and DAF used trucks.

PACCAR is building another used truck center in Warsaw, Poland, which will open this year. PACCAR used trucks sell at a premium. Similar to PACCAR Parts, PACCAR Financial provides steady foundational profitability during all phases of the business cycle. This year's capital expenditures are projected to be between $750 million and $775 million, and research and development expenses will be $450 million to $465 million.

Next year, we estimate the company will invest $725 million to $775 million in capital projects and $450 million to $500 million in research and development expenses. Key technology and innovation investments include next-generation clean diesel and alternative powertrains, advanced driver assistance systems and integrated connected vehicle services. PACCAR is also investing in its truck and engine factories to support long-term growth as well as our customers and dealers' success. PACCAR's industry-leading trucks, expanding parts business, best-in-class financial services and advanced technology strategy position the company for an excellent future. We are pleased to answer your questions.

[Operator]

[Operator Instructions] first question comes from Rob Wertheimer with Melius Research.

[Robert Wertheimer, analyst]

I had a couple of questions around 232, I guess that's no surprise. But I wonder if you're able to give any thoughts on whether it improves your competitive position or not, given production of some of your competitors, but then given perhaps they have exemptions. And then how does the rebate -- how and when does the rebate flow through financials?

[R. Feight, executive]

Rob, I kind of thought we might hear some questions around 232. And as you're aware, it came out Friday afternoon, late afternoon here, and we've been spending a lot of time with it. We said in the commentary that 232 will be good for our customers, PACCAR's customers. It will be good for the fact that we manufacture our trucks in Texas, Ohio and Washington, and it should improve our competitive position as we look forward into next year.

It will take a little bit of time for it to fully implement. So as we shared, like tariffs are really peaking for us in the fourth quarter -- in October of the fourth quarter. And then as 232 implements November 1, there's kind of a qualifying period for the components that are involved in it. So it will become gradually more and more effective throughout the quarter. And probably by the time we get to the first part of the year, we should have great stability around it. So all feels very good and should help our competitive position.

[Robert Wertheimer, analyst]

That's helpful. And then how do you think about pricing? There's been a lot of uncertainty. I don't think you immediately hit your customers with some of the tariff-led price increases. Now that there's clarity, the price increases start to offset that in the new year? Or any commentary around that, and I'll stop.

[R. Feight, executive]

So as we think about it, it's a competitive world out there, and we don't operate alone in it. But we feel very good about the trucks that we're producing right now, the best trucks we've ever produced in our history, best fuel economy, best reliability, great engine performance. So we're happy with how that's going. And I think that our customers appreciate the stability in the market right now with how emissions haven't changed in a while. So the trucks they're getting are moneymakers for them.

And as we kind of think about pricing through the year of next year, I think that there will be some opportunities for us as the year progresses. We said that the LTL market, less than truckload, market remains good, vocational market remains good. And then I think the truckload sector has been in a tough spot for, gosh, 30 months plus. And I think that they are using the equipment. So that bodes well for the fact that they'll get back under replacement cycles. And as they get back under replacement cycles, it's going to create demand in the market, which is obviously good for pricing.

[Operator]

We now turn to David Raso with Evercore ISI. [Operator Instructions]

[David Raso, analyst]

I was curious, underpinning the North American growth outlook, I was just curious, you mentioned last quarter about some bonus depreciation order potential. Just curious, what are you hearing from the customer base to underpin that growth? I know you mentioned replacement demand and so forth. But just curious the conversations that you're having when it comes to any sense of timing and when you think your orders will start to reflect the ability to grow in '26?

[R. Feight, executive]

Brice, why don't you offer some comments on how that looks, and then I'll come at that from a customer standpoint.

[Brice Poplawski, executive]

Sure. So our price, we expect to continue to grow. We'll get -- we'll benefit from the effects of the tariff, of course, and our pricing competitiveness. And we believe that the Big, Beautiful Bill, as we said in the third quarter, is going to provide incentives, and we have programs around encouraging our customers to take advantage of that 100% bonus depreciation. We think that will help spur some demand here in the fourth quarter.

[R. Feight, executive]

And then David, what we're getting from customers is it's very mixed from a customer standpoint, right? If your operating conditions are positive, like in the vocational market or the LTL market, I think you're looking to take advantage of that. And those are customers that are ordering for the fourth quarter. I think there's obviously in the truckload sector, some people are still finding challenges there. And so they're less likely to take advantage of it now. But I think there is this growing sense of the momentum has to pick up in terms of truck orders because 2026 will have, as the law is written right now, a 35-milligram NOx standard. And so I think as trucks age, a 35-milligram NOx standard is in front of them and now they have clarity of tariffs, there's a lot of reasons for people to start to think about allocating their capital to truck purchases.

[David Raso, analyst]

I wanted to follow up on the NOx issue. We know where the current situation is, but obviously, there's thought that it might be changed. Is there a deadline of some kind that you feel like the EPA has to communicate what exactly is happening for '27 when it comes to your supply chain and so forth? Just so we have a sense of timing. It's obviously the general assumption out there that they're not going to keep the current regulation going to 0.35.

[R. Feight, executive]

Yes. I don't know how that assumption has been formed by people. From our standpoint, we approach this in saying we are prepared for the 35-milligram NOx standard. We've got our teams working great on it with some new products that have come out in support of it. We're ready to go with it. That is the law, right? So our best approach is the law is the law until the law changes. As time passes, it makes it harder and harder to change the standard back to 200 milligram, could happen though, right?

I think that we are very comfortable supporting a 200-milligram standard as well because we have products that are available today that can support the 200-milligram standard. We are all sensitive to the fact that as more time passes, it puts additional burden on the supply base. But I think PACCAR has a great relationship with our suppliers, and we could handle that change. And if that's what's best for the industry, then we will align clearly with that.

[David Raso, analyst]

And lastly, the cadence of the clarification on the deliveries for the fourth quarter being roughly flat. Any color you can provide geographically sequentially would be great.

[R. Feight, executive]

Yes. I think we said in the commentary that fourth quarter North America has more holidays in it. So you can kind of think of North American holidays being taking away some of the volume. Europe is less holidays. So you kind of see a shift there into European volume for fourth quarter. We're -- somebody will ask this, but we're roughly 60%, 70% full in our order book for the fourth quarter. And so that kind of lets us kind of indicate how the quarter is filling in, and that's how we got to our similar quantities of deliveries for the fourth quarter.

[Operator]

We now turn to Jeff Kauffman with Vertical Research Partners.

[Jeffrey Kauffman, analyst]

I just want to focus on a follow-up, I guess, on Rob's question on Section 232. I know everybody is still figuring this out. But in terms of the rebate amount, how is that going to compare when you're at full speed versus what you're costing out on the tariffs on parts and steel and aluminum. And you mentioned that, that's going to ramp up through the fourth quarter. I guess, is that more a rebate to the customer that lowers the price to the customer? Is that a rebate to the company? How do those economics flow?

[R. Feight, executive]

Well, I mean, the way we can keep it in simple terms, so we don't turn this into a primer on the 232 because it's really complicated. But I would say that the 232 fact sheets out there, it's really good. I applaud Commerce and The White House for putting out a clear document that's helpful in articulating what the game plan is and why the game plan is useful. To keep it at the highest level, I would say that as parts qualify into 232, that's when we expect we can apply the rebate to them.

So parts coming out of Mexico and it's deemed to be acceptable to be part of 232, you let them know that it becomes acceptable or not acceptable, and that's why you start to realize a reduced tariff cost as you head through the quarter. Obviously, the effective date is November 1, but it will take time for those parts to be qualified. And so that's why we indicated that it could take through until the first of the year to see the full benefit and impact of that.

[Jeffrey Kauffman, analyst]

And the first part of that question, when this is fully ramped up, how will that approximately net against the incremental tariff costs you're facing?

[R. Feight, executive]

Yes, -- it's going to bring it down. We haven't netted out a specific number. And obviously, it's going to be something that we started the tariff discussion saying, hey, we're in this together with our customers and our suppliers and our dealers, and that will be the same situation we face as we move forward. It will be hopefully some benefit to everybody in terms of our dealers, our customers, PACCAR, our suppliers, that we should have kind of some positive momentum out of this. The quantification of it remains to be seen.

[Operator]

Our next question comes from Michael Feniger with Bank of America.

[Michael Feniger, analyst]

Just Preston, I know this has been getting a lot of attention on Section 232. Just to be clear, so we have some understanding, do you believe with the adjustments in the Section 232 implementation we saw, do you believe PACCAR now has a clear cost advantage as a U.S. manufacturer? Or does this just even the playing field on the cost side with your peers when we saw there was a disadvantage obviously, early year. So does this just even it out? Or do you feel like it gives you a clear cost advantage as a major U.S. manufacturer for the U.S. market?

[R. Feight, executive]

Michael, that's a great question. I appreciate you highlighting the fact that our team did a really good job for the past several months dealing with the cost disadvantage, an unintended cost disadvantage. So the fact that our market share is 30.3% for Peterbilt and Kenworth right now is just a credit to the teams at those divisions and to the manufacturing teams and pretty much everybody in PACCAR that operated from that tough position.

As we look forward, we, of course, don't know what our competitors' cost structure is. So it's really hard to estimate that and probably should avoid doing so. What I would rather do is say that I think it helps PACCAR significantly, and that should be good for our customers and PACCAR. And I think it gives us a competitive leg up from where we've been.

[Michael Feniger, analyst]

And just my second question to squeeze it in. Just there's been commentary [ on parts ] that Parts, there's been some deferrals there. I know you hit your -- what you guys were forecasting at 4%. Just what are you seeing underlying on the Parts side? And can Parts margins, do you think start to expand in 2026 on a year-over-year basis? What do we need to see in the market for us to kind of see that start to expand on a year-over-year and to get Parts moving? Because I know it's -- the underlying market has been a little bit challenging there.

[Kevin Baney, executive]

Yes, Mike, this is Kevin. I'll take that one. So similar to Truck, the Parts business was definitely impacted by tariffs as well as the overall soft truck market. Price did cover cost. So when we look at the margin impact, it was really a mix shift. We saw that a shift in proprietary versus all makes and also a little bit of region impact by fewer days in Europe. And I'll just reinforce, there's still tremendous opportunity for growth. Parts team did a great job providing parts and programs to provide excellent customer service during a soft market. So a really nice job with the revenue growth. And we continue to invest in distribution. Our dealers are continuing to invest in locations and service capacity. And so yes, we see there's definitely opportunity for future growth.

[R. Feight, executive]

And everything Kevin said is just 100% right. And then you have the opportunity that 232 is also advantageous to components. And so that will help us in a price cost looking forward.

[Operator]

We now turn to Angel Castillo with Morgan Stanley.

[Angel Castillo Malpica, analyst]

I was hoping we could just go back to the tariff discussion a little bit more. You had mentioned, I think, in 3Q, that was a $75 million headwind. With tariff headwinds kind of peaking out here in October and the ramp-up in the rebates, can you just quantify for us exactly how much of a tariff headwind you anticipate to be baked into the fourth quarter? And as you look at the gross profit margin moving from 12.5% to 12%, is that entirely due to tariff ramp-up? Or are there any other factors there that we should consider?

[R. Feight, executive]

We think mostly about tariff ramp-up. As we said and you just articulated, right, October doesn't have any reduction. So it's kind of a peak tariff for us in that first part of fourth quarter. And then we're still understanding what the cadence is going to be for how the tariffs feather off for us through the course of November, December. But that's the single biggest impact right now. And I think as we look at it, so you go from a $75 million third quarter, we saw that on slate to increase in the fourth quarter. But with the 232, we see that coming down. And by the time we get to the December time frame, January time frame, we'll start to see improvement -- marked improvement, we anticipate.

[Angel Castillo Malpica, analyst]

That's very helpful. And then as we think about next year, I understand that EPA 27, there's still a lot of uncertainty around that. I guess in terms of your outlook for North America, for U.S. and Canada, are you assuming any kind of prebuy still related to EPA 27 in that?

[R. Feight, executive]

So we gave a 230,000 to 270,000 market, and the reason we gave that significant range is because I think there's some uncertainty in how quick the truckload sector recovers. Is it sometime in the first quarter to take a little bit. I think we also are anticipating that the 35-milligram law is what's going to be there. And if it changes, that would obviously take away some prebuy and that would put us more towards the 230,000, 240,000, 250,000 side of that category versus if the 35-milligram standard stays in place, it's more like the 250,000, 260,000, 270,000 and maybe even higher. So we kind of see that as being a significant factor in how the market shapes up next year, and we look forward to clarity when it happens. But in the meantime, the clarity is 35 milligrams.

[Operator]

We now turn to Tim Thein with Raymond James.

[Timothy Thein, analyst]

Just following up on the comment earlier with respect to the Parts business pricing covered variable costs. I perhaps missed it, but did you give a comment just with respect to pricing that you realized in the Truck business in the third quarter and then maybe your expectations for the fourth?

[R. Feight, executive]

Go ahead, Brice.

[Brice Poplawski, executive]

Sure. For the third quarter compared to last year's third quarter, our pricing was down 1.3% and the costs were up 4.6% for a negative 5.9% there. And obviously, tariffs played a big role in that number.

[R. Feight, executive]

Well, sequentially, it was 1.6%. And I think what we think is favorability should start to be achieved as we move forward.

[Timothy Thein, analyst]

Got it. Okay. And then Preston, maybe just as I think about potential early indicators of maybe a bottoming, I think historically, we would look at what the behavior and what the lease and rental customers are doing and seeing in their business. You have a good lens into that just given PacLease. So I'm just curious what you're seeing in that business with respect to utilization and I would agree that, that could be an important thing to watch as a potential turning point.

[R. Feight, executive]

Yes, it's a good question. I think that utilization is a key factor. And for PacLease, it's healthy right now. So I think that they're starting to see these places of opportunity, and we'll watch that closely along with all the other indicators, right? Certainly, as you well understand, there's many, many things that go into the make of a truck market. That's one of them, and utilization is healthy.

[Operator]

Our next question comes from Jamie Cook with Truist.

[Jamie Cook, analyst]

Two quarters -- sorry, 2 questions. One, Preston, can you just speak to since Section 232 has been announced, obviously, I'm sure you've had a lot of conversations with your customers. What are they saying to you in terms of like potential incremental market share? And I'm just wondering, as you think about your plants in Denton and Chillicothe, like just capacity you have or where market share could go until you'd have to think about investment.

I'm assuming you have a lot of runway for market share, but just sort of some thoughts there. And then I guess my second question, I mean, it sounds like you think the 12% gross margin in the fourth quarter, like that should be the trough for margins for PACCAR even assuming a flat market next year just with the benefit from Section 232 and tariffs mitigating and potentially the market being flat to up next year. So it sounds like -- I don't want to put words in your mouth, but you can probably grow earnings next year, but I'll let you chew on that and see if I can get any reaction out of you.

[R. Feight, executive]

Jamie, you're fun. Let's do the first question, which you said, do we think we can gain share and how do we think about capacity in our factories. And one of the things I'm really pleased with our manufacturing team over the last couple of years is we've made these big investments into the factory so that we have capacity to handle. What ends up happening is quarterly swings and build. We talk about full years, but things really happen over a couple of quarters of max build rates. So we're aware of that. We've made investments in paint facilities, automatic vehicles to move parts around inside the truck plants, great work with our suppliers and their investments in the capacity that they have.

So we feel like we can gain share, and we feel like we have the capacity to support gaining share in the coming time frame. I mentioned it earlier in the call, right, we invested in products. So we have the newest and best-performing products in the industry. We've invested in our operations teams. So we have the best manufacturing capacities, highest quality products with plenty of capacity to handle share growth. So I feel really well positioned as we head to next year.

And that does lead to your second question, I guess, of saying if 12% is the plus or minus now, what are you thinking next year is going to be or even the fourth quarter phasing. Now I'd say, as we said, with tariffs peaking in October, we do think that the cadence through the quarter on a month-by-month basis will be positive trending and then we anticipate that being true through next year, right? So if the market was at a midpoint 250,000, we feel like that bodes well for our earnings growth and our margin growth.

[Operator]

Our next question comes from Tami Zakaria with JPMorgan.

[Tami Zakaria, analyst]

Apologies, but one more question on Section 232. It seems like the 3.75% value of the truck to offset tariffs extends through 2030, which gives some time to plan ahead. How are you thinking about your parts and component sourcing with that time line in mind, do you plan to expand footprint, bring stuff here in the U.S.? Any thoughts on how you're thinking about that 2030 time line?

[R. Feight, executive]

Well, I think that we feel very good about the supply base and how they've positioned right now. And we do think that there'll probably be some reflection in the coming weeks for people to think about where their production setups are and where they're going to position themselves. And I think it's a little bit too early to be commenting on what they're going to actually do in terms of where they might adjust capacity into the different markets since it's just a few days old, but we are starting those conversations and look forward to working with our suppliers as we figure out where they're going to position component growth.

[Tami Zakaria, analyst]

Got it. If I could ask one more. I think you have this huge advantage of building -- over 90% of trucks here versus some of your peers, they make elsewhere. So this seems like a huge advantage. And so when you think about this offset and the pricing you've taken, is there any plan to give back any of this pricing as some of these tariff headwinds are offset in order to gain share for the long term? Is that sort of a strategy you might consider?

[R. Feight, executive]

Well, Tami, you're really smart and you ask great questions, and you can understand how we think about margin, price, market share, and it's not an either/or thing, right? You're always, as a company, trying to provide great trucks, great transportation solutions for your customer and then be paid fairly for them. And nothing is different in the environment we're in today than that, right? We want to keep providing these great trucks and transportation solutions. And as we do that, we think our customers are happy to pay us fairly for them. As cost goes down, that should bring some benefit to them, and that should bring some market share opportunity to us, we hope.

[Operator]

We now turn to Chad Dillard with Bernstein.

[Charles Albert Dillard, analyst]

So on an industry level, how are you thinking about the supply and demand balance of trucks actually in the fleet? And how much excess capacity is out there? How long does it take to clear? And is this embedded in your '26 industry outlook?

[R. Feight, executive]

It's a really interesting question. It's really hard to give you anything specific, Chad. If we think about it right now, there's sufficient capacity that's sitting out there in the industry right now at the current build rates, you can understand that clearly. The question really remains how quickly does the market adjust and where does it adjust from? When do people start to think that 35 milligrams is what's going to happen in the NOx standard? When do our customers in the truckload sector, which represent 40% of the market, start to feel some confidence that they're able to get rates. And I think it's really hard to handicap what that's going to be, the timing for that.

But again, it's been a long tough period for the truckload carriers. And at some point, those -- that equipment has to be replaced. And I think they're starting to feel that need. So I think there'll be some lift there. It will probably start gradually and then it will accelerate as the year goes on and people define their needs. So capacity exists for us in our factories and with our suppliers, we're working closely with them to make sure we can build the trucks our customers want. We think it could be a pretty good-looking 2026.

[Charles Albert Dillard, analyst]

Got it. And then along that same line, you're talking about how customers are keeping the trucks a little longer. Any early thoughts on the parts business as we think about 2026? How should we think about the growth profile for that business?

[Kevin Baney, executive]

Chad, this is Kevin. We think about it the same way we have. The truck park has been at elevated levels over the years and so that creates tremendous growth opportunity for us. I already mentioned the continued investments we're making. The Parts team is doing a great job providing tailored programs. We're leveraging AI to get smarter about providing our right part to the right place at the right time. And so we see next year as just a continuation of the great work the team has done.

[Brice Poplawski, executive]

Yes. And if I could just add on top of that, the fact that the retail market in the U.S. is still negative is an overhang. At some point, that will turn. So we're growing in a market that is negative is a really good tribute to our group and to PACCAR Parts, and we think that provides a lot of opportunity for us in the next year.

[Operator]

Our next question comes from Kyle Menges with Citigroup.

[Kyle Menges, analyst]

I was hoping if you could just talk a little bit about demand you're seeing maybe just into the first half of next year and contextualizing that with your order book so far for the fourth quarter, 60% to 70% full. I guess how would that compare to "normal" fill rate at this point in the year for the fourth quarter and how that's informing your views of demand into the first half next year?

And then would be helpful to hear your comments on inventory and any need for destocking. And I think in particular, in the vocational market, at least the industry data suggests inventories are really high. So it would be helpful to hear your thoughts there on any need for destocking in that market.

[R. Feight, executive]

Yes. I think we feel like from an inventory standpoint, the industry is in a position where it's like 4 months of industry inventory. That's down from 4.2 months the last time we spoke in July. So it's improving from an industry standpoint. And from a Kenworth, Peterbilt standpoint, we are at 2.8 months, which is a very healthy level for us. So we feel quite good about that. It doesn't feel like -- we obviously have a high vocational share, market leaders in the vocational segment. So that says we have more inventory getting bodies on it. And so 2.8 months for us, it feels really healthy, which kind of leads back to your first question about order intake and what's the market doing.

We don't have an excess amount of inventory. So we're 60% to 70% full. We'll head into what a typical -- typically, in late October and November, we get into capital allocation for the major truckload carriers, and we'll get a look at what their buying plans are for the year. Those discussions are always ongoing, but they really kind of begin to cement up in the fourth quarter, and we look forward to having those conversations with them. And I think that we'll see the first half start to fill in reasonably well now that we have clarity around tariffs as people get their hands around what the law is of 35 milligrams and appreciate that it really is a good time to buy trucks for them and probably the right time for them to buy trucks so they can keep their fleet age where they want it.

[Kyle Menges, analyst]

Got it. And then just a follow-up on an earlier question. It does sound like with Section 232 and the rebates that you'll see, it sounds like you might be passing some of those savings on to the customer. Curious how that might look? Is that simplistically just taking off the existing tariff surcharges, which I think were around $3,500 to $4,000 per truck in Class 8? Is it just kind of simplistically taking those surcharges off? Like how should we be thinking about that?

[R. Feight, executive]

Well, I mean, what we've said before is the tariffs are still peaked in October and then they're going to come down from there in a process through the fourth quarter. So we are looking at that. I think that our intention is to get away from a tariff discussion with customers now that we have stability, and we can just integrate into pricing and discuss the price of these great trucks for the customer and get away from the tariff statement now that we have stability. So that will be helpful to everybody inside of our customer base is to not have to think about what we had -- you referenced $3,500 to $4,000 of tariff surcharges. We can move away from that kind of discussion and just get into truck pricing again since there's clarity and stability.

[Operator]

[Operator Instructions] We now turn to Avi Jaroslawicz with UBS.

[Avinatan Jaroslawicz, analyst]

I think you said the order books for Q4 are about 60% to 70% full. Is that pretty uniform by region? Or are there any that are notably off of that point?

[R. Feight, executive]

Yes, that's a great question. It is actually pretty uniform by region right now. So we've seen the European market have strong order intake, and we're seeing that 67% full there as well as in North America.

[Avinatan Jaroslawicz, analyst]

Okay. And if I could follow that up. Assuming that we don't hear anything new [indiscernible] on the NOx rules, when are customers telling you that they might start prebuying? Could that be in the first half? Or is anybody saying that they would expect to do that in the first half? Or would that really be more a second half story?

[R. Feight, executive]

I think they're buying decisions. These are really smart people, our customers. And so they're thinking about all the inputs, not just the one. I think it has a heavy influence on them to contemplate the 35 milligrams and whether or not they need to think about pulling ahead, but they're also looking at their fundamentals of freight and rates. They're looking at, is there a stable operating environment, which the Commerce Department of the White House did a great job of providing for them now. And so I think all of those are the factors.

And I would kind of -- I kind of think that they will start to really have a lot of interest here in the fourth quarter of what their 2026 buying plan is. And probably by the time we're in the first quarter, they're going to be needing to react to it if it stays at 35.

[Operator]

We now turn to Scott Group with Wolfe Research.

[Cole Couzens, analyst]

This is Cole on for Scott. Just back to Section 232 a little bit. I heard earlier in the call, you mentioned that pricing increased 1.6% sequentially in the quarter and that momentum should kind of continue. But then in the same breath, you're kind of talking to the fact that you want to help out your customer. Maybe help like situate us there. Are the tariff surcharges effectively going to go away, but core pricing should continue to move higher? Just any way to help us wrap our head around that.

[R. Feight, executive]

Yes. I think that -- Yes, it's a great question, actually. It's an interesting dynamic right now. Surcharges really only exist at moments of inflection where there's some unique factors sitting into there and hence, the reason for the surcharges that we had. That point of inflection is now passed, and we have stability. So it allows us to probably get rid of the tariff surcharge and go back to normal pricing discussions with our customers. And obviously, providing premium trucks and transportation solutions allows us to kind of make sure that we have fair pricing to them, good for them, good for us. And obviously, as we see cost change should be somewhat favorable, we both should benefit from it. So we see that as a great opportunity for PACCAR and our customers to have a strong finish to the year and an even stronger 2026.

[Cole Couzens, analyst]

And last quarter, you mentioned that 3Q gross margins would be, I think the math was roughly 14%, excluding tariff costs. Is that a good way to think about 1Q as we hit run rate as rebates kind of offset some of the tariff costs? Or is there any other way to think about how margins should build through 4Q and into 1Q when we hit run rate?

[R. Feight, executive]

Yes. I think we actually said around 13%. And then what we've said is tariffs peaking in the fourth quarter, declining throughout the fourth quarter will allow us to see growth as we get into, say, the December time frame and then continued improvement into the first quarter of 2026.

[Operator]

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

[Ken Hastings, executive]

I'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.