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Paccar Inc (NASDAQ:PCAR)
Q2 2020 Earnings Call
Jul 21, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to PACCAR's Second Quarter 2020Earnings Conference Call.

[Operator Instructions]

I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Ken Hastings -- Director of Investor Relations

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.

Preston Feight -- Chief Executive Officer

Well, 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 have 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 pre-tax profits of $152 million. Truck, Parts and Other gross margins were 9.6%. PACCAR Financial achieved pre-tax 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 realized 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 projected to be in a range of 60,000 to 80,000 trucks in 2020. In the Brazilian above 40-tonne segment, where DAF competes, DAF market share through June increased to a record 9.1%, up 3 percentage points from last year. In all regions, our market estimates assume that economies continue to gradually reopen, but could be revised if there are returns to lockdown conditions.

We are excited about Kenworth, Peterbilt and DAF's leadership in zero emissions powertrain programs. To date, we have deployed over 60 battery electric, hybrid and hydrogen-powered trucks. DAF, Peterbilt and Kenworth have battery electric vehicles operating in North America and in Europe. These vehicles are placed with customers in local and regional delivery, refuse collection and port applications. We expect that these customer segments will be the first to adopt battery electric technology because they typically operate in the city and return home every day for recharging.

PACCAR is simultaneously developing hydrogen fuel cell-powered vehicles and has built 10 Kenworth T680s for customers in the Port of Los Angeles. In the longer term, hydrogen could be promising for long-haul applications, due to its high energy density and its relatively fast refueling times. PACCAR will begin production of battery electric trucks next year. Volumes are expected to grow gradually as the cost of batteries decreases, charging infrastructure is expanded and regulations drive customer adoption of these technologies. PACCAR is a leader in zero emissions vehicles.

Harrie Schippers will now provide an update on PACCAR Parts, PACCAR Financial Services and other business highlights.

Harrie C.A.M. Schippers -- President and Chief Financial Officer

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 pre-tax 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 pre-tax 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 truck 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 a 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 a range of $265 million to $295 million this year and capital investments are projected to be in a 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 a range of 12% to 13%.

Thank you. We'd be pleased to answer your questions.

Questions and Answers:

Operator

[Operator Instructions]

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

Jamie Cook -- Credit Suisse -- Analyst

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.

Preston Feight -- Chief Executive Officer

Hey, Jamie, good to hear from you. Thanks for taking the time. To start with your first question on truck production for the third quarter, first. We saw a 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, and 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. And we feel like we're in a good position right now. We have 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.

Jamie Cook -- Credit Suisse -- Analyst

And sorry, one last question, just you commented about the part sales. They improved throughout the quarter. Is there any way you can help us with the cadence of the improvement like how did part 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.

Harrie C.A.M. Schippers -- President and Chief Financial Officer

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

Jamie Cook -- Credit Suisse -- Analyst

Thanks so much.

Preston Feight -- Chief Executive Officer

You bet.

Operator

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

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah, thanks. Good morning.

Preston Feight -- Chief Executive Officer

Good morning.

Nicole DeBlase -- Deutsche Bank -- Analyst

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?

Preston Feight -- Chief Executive Officer

Yeah, 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 it’s -- we're getting good order intake in Europe as well. And we've increased build along with that order intake in Europe and we got good visibility. In fact, we're really full in Europe during the third quarter.

Harrie C.A.M. Schippers -- President and Chief Financial Officer

Like Preston said, also in Europe, customer activity continues to be good. Couple of days ago, the month statistic for Germany came up 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.

Operator

Our next question comes from Ann Duignan with JPMorgan. Your line is open.

Ann Duignan -- JPMorgan -- Analyst

Yeah, 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 toward 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 the DAF's strategy for fuel cells and hydrogen in Europe. I know you talked a lot about their EV strategy, but a little bit more longer term, can you talk about how they might react to a hydrogen environment? Thank you.

Preston Feight -- Chief Executive Officer

Yeah. 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 would see as 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 have different sizes of the market. So some of it's just cyclicality and timing of that, as we see the market right now.

When we look into the zero emissions vehicles, specifically around hydrogen, let me kind of characterize PACCAR's strategy there. We have a three-pronged strategy, which is really, first, we've to have the technologies; and that can be battery electric and hydrogen fuel cells will 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 am really proud of the engineering teams and R&D teams around PACCAR that have done just this fantastic job of having us in that leadership position. So, that's one element. It's 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, the 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 that you have to have flexible manufacturing capability, so that you can combine 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 that we're putting into operations in the ports of LA. They happen to be Kenworth T680s. But we have a global approach to 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.

Ann Duignan -- JPMorgan -- Analyst

Great. Thank you for that. And can you just maybe then expand on the 10 trucks that are going to LA? How long does it take once you put trucks, these 10 trucks into pilot testing and whatever, what are the timelines 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.

Preston Feight -- Chief Executive Officer

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 as a fuel-cell provider there and that's going really well, as well as Shell, from an energy hydrogen provider. The time to production, commercialization, there is 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 five year to 10 year kind of a window, where it might play itself into the market.

Ann Duignan -- JPMorgan -- Analyst

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

Preston Feight -- Chief Executive Officer

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

Ann Duignan -- JPMorgan -- Analyst

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

Preston Feight -- Chief Executive Officer

You bet. Good, talking to you, Ann.

Ann Duignan -- JPMorgan -- Analyst

Yeah, me too.

Operator

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

Stephen Volkmann -- Jefferies -- Analyst

Hi, good morning guys.

Preston Feight -- Chief Executive Officer

Hey, good morning, Steven.

Stephen Volkmann -- Jefferies -- Analyst

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?

Preston Feight -- Chief Executive Officer

Yeah. That would be a, 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 movement. 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 put in place the new e-commerce system, which makes it even easier for customers to get truck, get parts the same day or next day.

We've just launched the 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, yeah between the general economic state and our fantastic team in the Parts division, we do expect the second half to look really good.

Stephen Volkmann -- Jefferies -- Analyst

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've 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 '21, 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?

Preston Feight -- Chief Executive Officer

Fun conversation to have. We always think about cost control and we were 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 costs, 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 to be introducing in the coming years. And as far as this relationship to incremental margins, we'll watch how the market goes as we look into the out phase and see where that goes. Some of the stuff is structural and some of it is depending on what we want to spend the money on or where there's good return.

Stephen Volkmann -- Jefferies -- Analyst

Understood. Okay, thanks.

Operator

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

Jerry Revich -- Goldman Sachs -- Analyst

Yes, hi, good morning everyone.

Preston Feight -- Chief Executive Officer

Hey, good morning.

Jerry Revich -- Goldman Sachs -- Analyst

I'm wondering if you could just expand on your fuel cell supplier strategy? So, obviously you're working with Toyota on this iteration 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?

Preston Feight -- Chief Executive Officer

Wow, going to turn the engineer in 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 will 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 is infrastructure, when there is 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.

Jerry Revich -- Goldman Sachs -- Analyst

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 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?

Preston Feight -- Chief Executive Officer

Some of it was furloughs, some of it was structural and…

Harrie C.A.M. Schippers -- President and Chief Financial Officer

…some of that 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.

Jerry Revich -- Goldman Sachs -- Analyst

Okay. And then lastly, can you just comment on your material cost performance in the quarter, given all the moving pieces, the supply chain where you were able to achieve net benefit from lower parts, lower input costs or did they get eaten up by air freight?

Preston Feight -- Chief Executive Officer

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

Jerry Revich -- Goldman Sachs -- Analyst

Okay. I appreciate the discussion. Thanks.

Preston Feight -- Chief Executive Officer

Have a great day.

Operator

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

Ross Gilardi -- Bank of America -- Analyst

Hey, good morning everybody.

Preston Feight -- Chief Executive Officer

Hey, good morning.

Ross Gilardi -- Bank of America -- Analyst

I just was going to go back to just at the near-term truck delivery outlook. I sense 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 out at all, I mean, are we looking at a 10% increase Q2 to Q3 or a 50% increase? Should we think about it kind of getting halfway back to where you were in Q1 and just how the normal seasonality going to be impacted by COVID, will you have the the normal summer shutdowns in Europe, for example? And any other color you could provide there, would be really helpful.

Preston Feight -- Chief Executive Officer

Yeah, happy to. Look at Europe, we have our normal summer shutdowns that began last week or this week. So, we have that going on right now. And in general, as we 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 -- we're 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 little bit early.

Ross Gilardi -- Bank of America -- Analyst

Okay, got it. Maybe Preston, just I'd love to hear your thoughts -- just 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 lows in April as the quarter progressed. But do you think we're in a real V-shaped 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 a lot of uncertainty. Just general thoughts on that would be really interesting?

Preston Feight -- Chief Executive Officer

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. 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 customer is succeeding and hauling freight and there is movement in the world, then that's good for PACCAR.

Ross Gilardi -- Bank of America -- Analyst

Okay, thanks a lot.

Operator

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

Andy Casey -- Wells Fargo -- Analyst

Good morning and afternoon, everybody.

Preston Feight -- Chief Executive Officer

Good morning and afternoon, Andy.

Andy Casey -- Wells Fargo -- Analyst

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

Preston Feight -- Chief Executive Officer

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

Andy Casey -- Wells Fargo -- Analyst

Yeah. 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?

Harrie C.A.M. Schippers -- President and Chief Financial Officer

It was a little bit of currency headwinds, but that's not material. Maybe it's in the market mix sort of product mix, I didn't look into the detail of that.

Andy Casey -- Wells Fargo -- Analyst

Okay, okay. Thanks, Harrie. And then, switching back to the zero emissions powertrain discussions, primarily on this timing for hydrogen, 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 to much relative to what you said last year. Is that correct?

Preston Feight -- Chief Executive Officer

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.

Andy Casey -- Wells Fargo -- Analyst

Okay. Thank you very much.

Preston Feight -- Chief Executive Officer

You bet. Good day.

Operator

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

David Raso -- Evercore ISI -- Analyst

Hi, thanks for taking my question. I'm trying to better understand the third quarter gross margin guide. Based of the midpoint is 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 shipped 38,000, I'm just trying to understand somewhat implicitly, I mean, the number. It should be above 30,000 units. But even then, you would still need pretty strong mix 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 third quarter than one quarter? But again, you're not even half of the trucks that you delivered in the first quarter and 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.

Preston Feight -- Chief Executive Officer

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, 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, as you put them together, get you to that 12% to 13% gross margin range. Feel good about the third quarter.

David Raso -- Evercore ISI -- Analyst

That's helpful. Okay because it kind of dovetails into the question of you can tell about the wholesale receivables coming in, your dealers de-stocked 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 is a big ramp.

Preston Feight -- Chief Executive Officer

Yeah. [Speech overlap]

David Raso -- Evercore ISI -- Analyst

Okay. That's all. I was just check checking.

Preston Feight -- Chief Executive Officer

Yeah, you're correct.

David Raso -- Evercore ISI -- Analyst

All right. I would appreciate it. Thank you.

Preston Feight -- Chief Executive Officer

Yeah, we're growing the inventory through into this, because we're growing build, strong relationship.

David Raso -- Evercore ISI -- Analyst

Terrific. Thank you.

Preston Feight -- Chief Executive Officer

You bet.

Operator

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

Steven Fisher -- UBS -- Analyst

Thanks, good morning guys.

Preston Feight -- Chief Executive Officer

Good morning.

Steven Fisher -- UBS -- Analyst

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 that used trucks were stable. And I wasn't sure, if that was a pricing comment, in particular?

Harrie C.A.M. Schippers -- President and Chief Financial Officer

The used truck is being stable 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 truck centers as we discussed. And although used truck prices are down, we do get a 10% to 15% premium for our used trucks. And 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%.

Steven Fisher -- UBS -- Analyst

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?

Preston Feight -- Chief Executive Officer

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

Steven Fisher -- UBS -- Analyst

Okay, thank you.

Preston Feight -- Chief Executive Officer

You bet.

Operator

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

Tim Thein -- Citigroup -- Analyst

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, had quite a bit of variability in it. Can you segment that precisely in terms of again where you exited June from a gross margin standpoint?

Preston Feight -- Chief Executive Officer

Harrie..

Harrie C.A.M. Schippers -- President and Chief Financial Officer

Yeah. 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 ended the quarter strong.

Tim Thein -- Citigroup -- Analyst

Okay. All right. And then, maybe just on Parts and I'm curious, kind of a similar question just from the standpoint of mix and maybe what that -- I know 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 -- there's mix and there's margins, do you expect that to improve in the second half noticeably or is it just kind of leveraged with the improvement in revenue. Is that you are forecasting?

Harrie C.A.M. Schippers -- President and Chief Financial Officer

Yeah. Of course, Parts margins are higher than Truck margins. And if Parts stayed 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.

Tim Thein -- Citigroup -- Analyst

Okay. The question, Harrie, 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 the less favorable mix because of just the type and the nature of the products sold or is that not a meaningful factor?

Preston Feight -- Chief Executive Officer

I think we understand your question. I think that wasn't significant as far as the proprietary versus all makes Parts mixture 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. They have accelerated out of that.

Tim Thein -- Citigroup -- Analyst

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 the second half look more like the first or the second quarter from a D&A expense standpoint?

Michael T. Barkley -- Senior Vice President and Controller

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

Tim Thein -- Citigroup -- Analyst

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

Michael T. Barkley -- Senior Vice President and Controller

Yeah. We have a lot of depreciation. It's on a units of production basis. And so, when production goes down, the depreciation necessarily follow. So, as production goes up, you would expect that to go up some as well.

Tim Thein -- Citigroup -- Analyst

Okay, very good. Thank you.

Operator

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

Adam Uhlman -- Cleveland Research -- Analyst

Hi, good morning. Good afternoon, everyone.

Preston Feight -- Chief Executive Officer

Good morning, good afternoon.

Adam Uhlman -- Cleveland Research -- Analyst

I was wondering, if you 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 used truck inventory is looked. And then I will wrap a second question into it. I guess, you mentioned that Europe orders improved through the quarter, but I'm not sure if that means that we've actually gotten year-over-year growth like we saw in the U.S. Maybe you can just touch on that, first. Thanks.

Preston Feight -- Chief Executive Officer

Sure. The European market is, as Harrie said, the good thing to think about is that [Indecipherable] 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, the markets there just opened up in the last 30 days, where border travel and things were allowed. And so, they are 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 -- there's a little bit -- 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.

Adam Uhlman -- Cleveland Research -- Analyst

Do you get the sense that there was kind of demand that we 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 is sustainability to it.

Preston Feight -- Chief Executive Officer

Yeah. 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.

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

Hi to everybody. I had two questions, if I may. First one, maybe it's a little bit of a softball. 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 '09, you did better. And obviously, Parts are one sort of 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.

Preston Feight -- Chief Executive Officer

Sure. Let's start with that one. And I think we're really proud of the team throughout PACCAR. They did great job of treating every cost as variable, always do and did this time as well. And you mentioned Parts as 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. A fantastic part of PACCAR's team.

Rob Wertheimer -- Melius Research -- Analyst

Okay. Okay, that's helpful. I might want to follow-up offline on a couple of other things. But just one big picture strategic, you've 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 when 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 a sense of how much to worry or think about when things like that happen?

Preston Feight -- Chief Executive Officer

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 will 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, 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.

Rob Wertheimer -- Melius Research -- Analyst

Okay, thank you.

Preston Feight -- Chief Executive Officer

You bet.

Operator

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

Rob Salmon -- Wolfe Research -- Analyst

Thanks. I guess to piggyback a little bit in terms of some of the Parts questions a little bit earlier in the queue. I think you had noted that Parts was 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?

Preston Feight -- Chief Executive Officer

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.

Rob Salmon -- Wolfe Research -- Analyst

That's helpful. 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 end of July from a used truck performance with regard to the price realization that you guys are seeing or was that pretty stable kind of throughout the -- throughout 2Q and into July thus far?

Preston Feight -- Chief Executive Officer

Yeah, we had great volume in June for used truck sales, both in Europe and in the U.S. and Canadian markets. 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.

Rob Salmon -- Wolfe Research -- Analyst

Appreciate your time.

Preston Feight -- Chief Executive Officer

You bet.

Operator

Our next question comes from the line of Joe O'Dea with Vertical Research. Your line is now open.

Joe O'Dea -- Vertical Research -- Analyst

Hi, good morning everyone.

Preston Feight -- Chief Executive Officer

Good morning.

Joe O'Dea -- Vertical Research -- Analyst

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?

Preston Feight -- Chief Executive Officer

Yeah. 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, are celebrating their 40th anniversary. And they have 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 the stage of the development, and next year, it 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 '24, '25 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 -- Vertical Research -- Analyst

And from a regional perspective, the 2020 launch is for both Europe and North America?

Preston Feight -- Chief Executive Officer

Correct. We're developing trucks for both Europe and North America in 2021.

Joe O'Dea -- Vertical Research -- Analyst

Got it. Thanks very much.

Preston Feight -- Chief Executive Officer

You bet.

Operator

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

Courtney Yakavonis -- Morgan Stanley -- Analyst

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?

Preston Feight -- Chief Executive Officer

Courtney, good to talk to you. From a demand standpoint and from a flexible manufacturing standpoint, it is really important to note --that you've been to many of our factories -- that when you look at PACCAR's factories, we build the orders, they’re custom trucks that can be configured with various displacements of diesel engines or different numbers of axles and etc. and etc. And our teams and our operations teams do a great job of being able to integrate different designs on to our mainline. That's one of the real core talents that PACCAR has. And electric vehicles will be the same kind of thing. We will be mounting them on our lines, whether it's the batteries, the electric motors, capabilities will all be mounted on line. 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.

Courtney Yakavonis -- Morgan Stanley -- Analyst

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?

Preston Feight -- Chief Executive Officer

It's a mixture of both, Courtney. Some dealers, some customer orders. It's a great system that gives on 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 is some new demand that comes from it as well.

Courtney Yakavonis -- Morgan Stanley -- Analyst

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 or are you seeing kind of some of those core TL customers come back?

Preston Feight -- Chief Executive Officer

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 will need to replace trucks and 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.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Okay. Great thank you.

Preston Feight -- Chief Executive Officer

You bet.

Operator

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

Jeff Kauffman -- Loop Capital Markets -- Analyst

Thank you very much and congratulations.

Preston Feight -- Chief Executive Officer

Hey, thank you.

Jeff Kauffman -- Loop Capital Markets -- Analyst

I'm just 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?

Preston Feight -- Chief Executive Officer

I think it's easier to say what's constant. And what's constant is they want great trucks, they want the 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 the truck they're proud of, and that's DAF and Peterbilt and Kenworth that makes their drivers happy and that's an important part of their operation. So I think those fundamentals stay right with us right now. We're happy to provide those great trucks.

Jeff Kauffman -- Loop Capital Markets -- Analyst

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?

Preston Feight -- Chief Executive Officer

I think you could say 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.

Jeff Kauffman -- Loop Capital Markets -- Analyst

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

Preston Feight -- Chief Executive Officer

You bet. Have a great day.

Operator

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

Ken Hastings -- Director of Investor Relations

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

Preston Feight -- Chief Executive Officer

Thanks to everyone. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Ken Hastings -- Director of Investor Relations

Preston Feight -- Chief Executive Officer

Harrie C.A.M. Schippers -- President and Chief Financial Officer

Michael T. Barkley -- Senior Vice President and Controller

Jamie Cook -- Credit Suisse -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Ann Duignan -- JPMorgan -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Ross Gilardi -- Bank of America -- Analyst

Andy Casey -- Wells Fargo -- Analyst

David Raso -- Evercore ISI -- Analyst

Steven Fisher -- UBS -- Analyst

Tim Thein -- Citigroup -- Analyst

Adam Uhlman -- Cleveland Research -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Rob Salmon -- Wolfe Research -- Analyst

Joe O'Dea -- Vertical Research -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

Jeff Kauffman -- Loop Capital Markets -- Analyst

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