Custom Truck One Source, Inc. Price & Performance (CTOS)

Thank you. Before we begin, would like to remind you that management's commentary and responses to questions on today's call may include forward looking statements, which by their nature are uncertain and outside of the company's control. Although these forward looking statements are based on management's current expectations and beliefs, actual results may differ materially For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of the company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non GAAP financial measures to discussed during the call in the press release we issued yesterday afternoon. That press release and our fourth quarter investor presentation are posted on the Investor Relations section of our website. We filed our twenty twenty four ten ks with the SEC yesterday afternoon. Today's discussion of our results of operations for Custom Truck OneSource Inc. Or Custom Truck is presented on a historical basis as of or for the three and twelve months ended 12/30/2024, in prior periods. Joining me today are Ryan McNonigal, CEO and Chris Eppergecie, CFO. I will now turn the call over to Ryan. Thank you, Brian, and welcome everyone to today's call.

Custom Truck ended 2024 on a very positive note. Our ERS and APS segments benefited from strong improvement in utility related demand that we saw in the third quarter which continued through the end of the year. TES had a record quarter in Q4 and record year exceeding $1,000,000,000 in annual sales for the first time. Last year's performance highlights the resilience of our end markets and our ability to adapt to meet customers' needs in a rapidly changing business We feel that our performance in Q4 sets us up well that we anticipate in 2025, Our Q4 results show that the recovery that we experienced in our T and D end markets in Q3 continued through the end of the year. We saw sequential improvements in our two main rental KPIs, average OEC on rent and average utilization. These trends align with our utility contractor customers expectations of sustained and increased activity through the end of last year in which they expect to continue into 2025. About 55% of our total revenue comes from the utility end market. Which includes both transmission and distribution work. We are witnessing significant growth in electricity demand, driven by AI driven data center development, grid upgrades and investments, in electrification trends.

Recent industry reports project a 24% to 29% increase in U. S. Electricity demand by 02/1935. Nearly double the previous forecast. These trends provide strong tailwinds for our future growth. We view transmission line mile completions and IOU rate case approvals as key indicators of utility end market demand. Our recent trends and customer interactions confirm that the conditions in the utility end market are continuing to normalize. We continue to see attractive rental demand across our utility and other primary end markets as well. Infrastructure, rail and telecom. Which positions us well for a strong start to the year and supports our outlook for ERS for 2025. Chris will detail our ERS segment performance, but I'd like to highlight some key trends. Average OEC on rent for Q4 was over $1,200,000,000 a 12% sequential quarterly increase. In addition, average utilization for Q4 was just under 79%. A five seventy basis points sequential improvement versus Q3. In Q4, rental revenue was up 15% versus Q3, the second consecutive quarter of sequential growth in rental revenue a first since 2022. With the recovery in our transmission equipment utilization we continue to see mid-70s below 80% utilization rates, across most of our fleet and end markets, demonstrating the long term resilience of our markets.

The uptick in rental activity in customer optimism also boosted rental asset sales. Marking the third consecutive quarter of sequential improvement with Q4 up 13% from Q3 We continue to leverage the recent strength in ERS to selectively invest in our rental fleet. At the end of Q4, our total OEC was just over $1,500,000,000 our highest quarter end level and up nearly $22,000,000 the quarter, We've continued to invest during Q1 to ensure we have adequate equipment to meet current and projected rental demand. In June of this year, we This new branch highlights our confidence in the strength of the rental market. Through our investment in both our rental fleet and expanded physical presence, we believe we are well positioned to capitalize on the anticipated growth in 2025 and beyond. As we expected, Q4 was our strongest quarter of the year for our TES segment. Which saw a record quarterly revenue of over $300,000,000 up 18% sequentially and up 3% compared to Q4 of twenty twenty three. Full year TES revenue exceeded $1,000,000,000 for the first time. Which was up almost 7% versus 2023 following almost 29% growth in 2023. We saw very strong demand from our forestry or vet largely as a result of several utilities awarding contracts to many of our customers.

Segment gross margin was up 45 basis points on a sequential basis but down year over year. Impacted by mix and improved inventory levels across the broader industry. We anticipate this will begin to normalize later in the year. While we did deliver a very strong Q4, we did see some hesitation from our customers to buy, especially in November. We think high interest rates, in some level of caution on the economy influenced this. As such, we are closely watching our order intake. In Q4, we saw a 35% increase in net orders Compared to Q4 last year, and that trend is continuing so far in 2025. During Q4, our focused efforts to manage our inventory levels resulted in a significant reduction in inventory of more than $150,000,000 versus the end of Q3 and more than $170,000,000 from peak levels at the August. We expect to continue to reduce our inventory levels this year to a more normalized level. We are confident that we have sufficient inventory to meet strong customer demand for new equipment as well as to grow our fleet to meet rental demand in our core end markets. We continue to monitor developments involving tariffs. In 2024, approximately 30% of our total purchases came from Mexico and Canada.

Primarily from our chassis and key attachment providers. We are working closely with our suppliers in both countries as well as our steel and aluminum suppliers to develop plans to be able to continue to support our customers and minimize the impact of tariffs on our operations. Additionally, we are monitoring upcoming chassis emission regulations from CARB in the EPA as well as any potential changes to those regulations under the new administration. The entire TES team continues to perform exceptionally well and we are proud of the business we have built. During Q4, we closed on a sale leaseback transaction on eight of our own properties for net proceeds of over $52,000,000 which we used to reduce borrowings under the ABL and to repay other debt. We view this transaction as an attractive opportunity to unlock the value of certain of our own real estate and to reduce our leverage. Additionally, in January of this year, we in Platinum Equity jointly purchased all of Energy Capital Partners remaining CITAS shares at a price of $4 per share. We felt it was an attractive opportunity to purchase a significant number of CITAS shares at a meaningful discount to the market price.

With respect to our 2025 guidance, we do expect this year to be a year of growth across all three of our business segments. While Chris will provide more details, For 2025, we expect total revenue of between $1,970,000,000 and $2,060,000,000 and project adjusted EBITDA between $370,000,000 and $390,000,000 We will continue to focus on working capital management, and free cash flow generation. Which will allow us to make progress towards meeting our three times net leverage target. In closing, our business outlook remains strong. Driven by long term sustained end market demand buoyed by megatrends and a strong competitive advantage that sets us apart Our multi decade relationships with strategic suppliers and our long tenured and diversified customer base will continue to be keys to our success We are committed to to continuing our investment and growing our industry leading specialty rental fleet ensuring that we remain at the forefront of the markets we serve. Additionally, our focus on continuous improvement projects throughout our business will help us maintain operational excellence. I continue to have the highest degree of confidence in the custom truck team and want to thank everyone for their hard work and dedication that helped us navigate last year's challenges in the utility end market.

As we begin this year on a stronger footing, we are confident that our current combined with strong market tailwinds will drive our expected double digit adjusted EBITDA growth across our consolidated business in 2025. We look forward to updating you on our progress on next quarter's call. With that, I will turn it over to Chris to discuss our fourth quarter results in detail. Thanks, Ryan. For the fourth quarter, we generated $521,000,000 of revenue $168,000,000 of adjusted gross profit, $102,000,000 of adjusted EBITDA All of our rental segment KPIs improved in the quarter both on a sequential and a year over year basis. Average utilization of the rental fleet for Q4 was just under 79% compared to 73% in Q3 and under 78% in Q4 of the prior year. Average OEC on rent in the quarter increased to over 1,200,000,000.0 compared to under $1,100,000,000 in Q3 and $1,160,000,000 in Q4 of twenty twenty three, While late December saw the typical seasonal decrease in OEC on rent utilization so far in Q1, we have seen the expected rebound in both measures which currently stand at more than $1,190,000,000 over 78% respectively. The ERS segment had $172,000,000 of revenue in Q4, down from $185,000,000 in Q4 of twenty twenty three.

However, given the sustained improvements in utilization average OEC on rent in the quarter, rental revenue was up 15% sequentially. In addition, increased overall demand for equipment helped drive the 13% sequential improvement rental asset sales as well. Both trends resulted in overall revenue growth for the ERS segment increasing for the third straight quarter. Adjusted gross profit for ERS was $105,000,000 for Q4 down marginally from $107,000,000 in Q4 of twenty twenty three, but up 20% sequentially. Adjusted gross margin for ERS was 61% in the quarter, up from 58% in both Q3 and the same period last year. For Q4, we maintained margins in the expected range of the low to mid-seventy percent range for rental revenue Con rent yield was over 38% for the quarter, up slightly from Q3 Net rental CapEx in Q4 was $71,000,000 and our fleet age improved slightly to three point two years. Our OE seeing the rental fleet ended the year at $1,520,000,000 up $60,000,000 versus year end 2023, and up $22,000,000 versus the end of Q3. We expect to continue to invest in the fleet this year and expect to grow our OEC by mid single digits percentage versus the end of 2024.

As we always do, we will adjust our CapEx plans throughout the year to reflect our customers' demand to both rent equipment and purchase used equipment of our fleet. In the TES segment, we sold $3.00 $8,000,000 of equipment in Q4, a quarterly record and an increase of 3% compared to Q3 of the previous year and a more than 18% increase sequentially Total PES revenue for the year was $1,100,000,000 the first time annual TES sales exceeded $1,000,000,000 Gross margin in the segment was 16.6% for the quarter down from Q4 twenty twenty three, but up 45 basis points from the previous quarter. For 2024, PES gross margin was just under 17% in line with our expected margin range for the segment. TES gross margin continues to be impacted by mix and improved inventory levels across the broader industry. TES new sales backlog moderated in the quarter ending the year at just under $370,000,000 Strong levels of production and new equipment sales in the quarter allowed us to make headway towards reducing our backlog to a more normalized level which currently stands at more than four months of annual TES sales. Consistent with our targeted historical average of four to six months.

Net orders improved in Q4 to $280,000,000 up over 90% on a sequential basis up 35% compared to Q4 of twenty twenty three. We've continued to see strong order flow so far in 2025 with backlog currently sitting at $445,000,000 up more than 20% since year end. That combined with ongoing feedback from our customers regarding their equipment needs for 2025 provides us with confidence that we will continue to see revenue growth in TES. Our strong and longstanding relationships with our chassis, body and attachment vendors continue to be an important driver of our record TES production. Our current level of inventory positions us well to meet our production fleet growth and sales goals for the year. Our APS business posted revenue $41,000,000 in the quarter up more than 6% from 11% sequentially. Adjusted gross profit margin in the segment more than 29% for Q4, slightly lower than Q4 of twenty twenty three but up substantially compared to Q2 Q3 of twenty twenty four. Overall, in Q4, the APS business was impacted by an increase in rentals of tools, and accessories which were positively impacted by the improved fundamentals in the utility end market. Borrowings under our ABL at the end 2024 were $583,000,000 a decrease of $45,000,000 versus the end of Q3 As Ryan mentioned, we closed on a sales leaseback transaction on eight of our own properties in Q4 resulting in more than $52,000,000 of net proceeds which we used to reduce outstandings under our ABL and to repay other debt.

In addition, during Q4, we began to see the benefit of our inventory management efforts which resulted in an inventory reduction of more than $150,000,000 in Q4 more than $120,000,000 in reduced balances under our floor plan lines. We expect to continue to reduce our inventory this year which should contribute to lower balances on our floor plan lines well as reduced borrowings on the ABL. As of year end, we have $364,000,000 available and over $158,000,000 of suppressed availability under the ABL. With 2024 adjusted EBITDA of $340,000,000 we finished 2024 with net leverage of 4.5 times. We expect that reduced inventory levels and floor plan balances as well as our returning to growth and the impact of lower interest rates will all contribute to increased levered free cash flow generation in 2025 which we intend to use to reduce our net leverage. Achieving net leverage below three times remains a primary and important goal for us and one that we expect to achieve sometime in fiscal twenty twenty six. Our initial 2025 guidance for our segments is as follows. We expect ERS revenue of between $6.66 $90,000,000 TES revenue in the range of $1,160,000,000 to $1,210,000,000 and APS revenue between 151 hundred and $60,000,000 This results in total revenue in the range of $1,970,000,000 to $2,060,000,000 We are projecting adjusted EBITDA in a range of $370,000,000 to $390,000,000 and net rental CapEx of just under $200,000,000 In addition, as we have begun to make progress on unwinding our significant strategic investment in inventory over the last three years, we expect to generate meaningful leverage free cash flow in 2025 setting a target of $50,000,000 to $100,000,000 Given our projected adjusted EBITDA growth and free cash generation, we expect to make progress in fiscal twenty twenty five towards our stated goal to achieve a net leverage ratio of below three times with a target to get below four times by the end of this fiscal year.

In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite the demand weakness we experienced for most of last year in certain utility markets, we continue to be optimistic about the long term demand drivers in our industry and our ability to return to double digit adjusted EBITDA growth this year. With that, I will turn it over to the operator to open the line for questions. [indiscernible] Our first question will come from the line of Justin Robert W. Baird.

Great. Good morning, everybody. I guess my first question I wanted to I think I asked something similar last quarter, but I'm still struggling with it in terms of the TES revenue guidance. Your forecast here is for I guess, 12.5% growth at the midpoint. But when we look at the backlog, it's down $300,000,000 year over year, almost 50%. And even with the the $445,000,000 that you called out as kind of where you're sitting today, it's still down 35% year over year.

So I'm just trying to understand the confidence why there's such a wide disconnect from where the backlog is versus the forecast and the visibility you have to have those CES orders come in? Yes, Justin, good to hear from you and always happy to talk through it with you. But a couple of things. One, I think as we've talked about normalized backlog for us is four to six months is what we've talked about. Really since being public. And so we're coming off elevated backlog was which goes back to kind of some of what we talked about a year ago, really eighteen months ago. At this point. So what we're watching closely, Justin, are orders and we're seeing kind of net orders, as I said in my kind of prepared remarks, are up in the fourth quarter and we're seeing that trend continue. In Q1. And so that's kind of our bottoms up build. On where revenue growth is. If you look at kind of the history 7% growth last year, you saw 29% growth in 2023. And so it's continuing to trend that way. And when we look at addressable market, It's There is a lot of opportunity for us to continue to grow share in all of the end markets we serve.

So that's our bottoms up build based on customers and we've tried to provide some range there. You're right kind of on the midpoint, I think the lower end of that growth is still high single digits, low double digit growth. And so I think that's where our confidence is in the number that we've put out. And Justin, this is Chris. Maybe just one other data point just to use some of the data you're using If you look at Q3 of 'twenty three and Q3 of 'twenty four going into the fourth quarter, the backlog was down $400,000,000 year over year. But we still posted growth and had our best quarter ever on TES. I think we had growth of roughly So there's not a direct correlation there, I think that you're trying to make with the backlog. [indiscernible] second point I guess helps because I guess otherwise I would think of it as a headwind because coming off of having such a elongated months of backlog would have kind of given you artificially high revenue, but maybe that correlation doesn't come out that way. I guess my second question is just In thinking about the seasonality, of your guidance for the year, I think usually the first half spend kind of 45% of your revenue and EBITDA, second is 55%.

But '24 had certainly a softer first half start. So I guess I was just curious in terms of the growth cadence Now that the transmission spend has kind of come back, if that becomes more balanced this year or if that still is kind of a the relative seasonality that you're thinking Yes, Justin, as we look at it, we actually expect to have it similar again this year. I think this year finished just off of that 40 five-fifty five It could be slightly less than the 40 five-sixty more than the 55, but plus or minus 1% or 2%, it's going to be similar 45%, 55% split between the first half, second half, both on revenue and EBITDA. Okay. And then maybe one final one before I jump back in the queue. Just on the cash proceeds from the sale leaseback, I just had made a lot sense to do that. And it's good to see the free cash coming in. I'm just curious how that translates into I guess savings on your lease expense for 25 and does that show up as kind of a reduction in interest expense or does it run through as a branch cost and gross margin?

Just trying to understand a little bit better too. Yes. Actually, Justin, it will actually be an incremental lease expense. And so we sold those eight properties and are leasing them back. And so to answer your question, it will be roughly $4,500,000 to $5,000,000 a year of a headwind, which is baked into our guidance. And the majority of that will show up in cost of goods sold.

A small portion of it will show up in SG and A, but the split is roughly eightytwenty. Okay, all right. So mostly in cost. Thank you. I'll jump in. Thanks, Justin.

Our next question will come from the line of Scott Schneeberger with Oppenheimer. Please go ahead.

Thank you.

Good morning. Hi, guys. Hey, good morning.

Good morning, Hey, it's Daniel on for Scott. Thank you for taking our question here. Could we start on margin? You mentioned the headwind on cost of goods sold, but Chris, could you please go through the puts and the takes on margin in 2025? And also provide some perspective of what the assumptions what the impacts from the tariffs you have assumed across the financial statements? Yes. I'll start on margins and I'll let Ryan add some color on tariffs. Our margin targets continue to be relatively consistent. [indiscernible] still low to mid kind of 70% margins and it'll fluctuate based on OEC on rent and repair and maintenance Custom in any particular quarter, but that I think the range is low. 70% to mid-seventy percent kind of range.

On used equipment sales, kind of in the mid-20s has been our target. And then on TES, we've said kind of mid teens. It's going to be higher in some quarters could be slightly lower, but on average kind of a mid teens margin profile.

Daniel, I'll take care of us. But look, there's two things I think as you're thinking about CTAS are important, right? One is kind of the natural hedge that's built into the business, which really comes from two parts, right? First is the rental fleet. We've got $1,500,000,000 in the rental fleet. It's young. It's three point just over 3.1 years old, I think is our average age now. So you've got some built in hedge just from the capital that's already deployed there. And then the second part of that is inventory. So we talked about the decline saw in inventory, which is important. We're glad we demonstrated that in the fourth quarter, but we still have just over $1,000,000,000 of inventory on the balance sheet. And so you've got some built in hedge as we think about how we manage that inventory. In 2025. And then the last piece is, we're working closely with our suppliers. So we do we do receive chassis and some of our attachments from both Mexico and Canada. And so we're working closely with our suppliers and we think we'll be able to mitigate the majority of the cost increase we have underwritten a little bit of cost increase right in our P and L. But we think we'll be able to manage through and mitigate the majority of the cost increase as we're heading into 2025.

And obviously, this is all happening in real time. So we're adjusting kind of as necessary. And prioritizing obviously making sure we can take care of our customers. Got it. Thank you.

On On rental yield, How do you think about the outlook there, the pricing environment overall? And when do you see that? Inflect on a year on year basis? Yes. No, it's a good question. And look, we think it will hold to continue to improve as we head into 2025. So obviously, as the as the business environment improves, we're selective and how we are able to increase price. And so we'll do so and have taken some of those actions in 2025 already.

So I think thinking about holding to slightly improving in 2025 should be consistent with what we're assuming for this year.

Got it. Thank you. And final one for me. I mean, I know PS covered early, but I'm curious on the infrastructure build benefit. Where do you think we stand? I mean, you have seen some benefit, but where do you think we stand on the curve there from seeing those funds flow and impact your business? Yes. I still think it's I early. I do think there is some benefit, right, that we're seeing in from the IIJA in particular. So we are seeing some benefit there and I think it's kind of mid innings would be how I would describe it at this point. So I think it's I do think it's it is a continued tailwind for us heading into 2025. Got it. Thanks so much.

Our next question will come from the line of Tammy Zakaria with JPMorgan.

Hey, good morning. Thank you so much. [indiscernible] it's great to see utilization. I think you said moved up to 78% quarter to date. Could you just provide some color what what the progression of that could look like that's embedded in the full year guide?

Yeah. I'll start and maybe Chris can give some more [indiscernible] performed well in Q4, right? There's always a little bit of a slowdown that happens kind of at the very end of the year, but we are seeing utilization continue to hold. In that range. So we talked about kind of that high 70s to low 80s range. Which feels like what we'll be able to deliver this year. And so I would say most importantly, for our utility customers in particular, we're seeing both transmission and distribution kind of return to what I'd call more normal utilization levels, which are in that range.

Got it. Okay. Understood. So the guidance that's somewhere between high-seventy to low-eighty. So it could move up to low-eighty at some point [indiscernible] Yes. Normally, look, in normal years, yes, see a little bit of an increase in the spring.

And a little bit of an increase in the fall. And at this point, we would expect that that would continue. We're hearing a lot of our customers are talking about very good demand on the transmission side. Right now, projects that are underway where more equipment is needed here in the coming weeks and months And so I think that's what would drive utilization a bit higher in our business.

Understood. That's very helpful. And one quick for modeling question. I think I heard you say $45.55 is the between one half and second half. So within one half, is it would it be right to model one key sort of the low point of the year and then you see gradual improvement?

Yes, that would be accurate.

And we had a really strong fourth quarter in Q4 for our new sales. We would expect it to start a little bit slower in Q1. So in your modeling, year over year Q1, could be down slightly to up slightly versus Q1 of last year and then that will help you get to Q2 But we expect that 45 to yeah, 45, 55, maybe slightly less than 45, maybe slightly more than 55.

Great. Thank you. Thanks, Tammy.

Question will come from the line of Brian Brophy with Stifel. Please go ahead.

Hey, guys. This is Andrew on for Brian Burkey. Thank you for taking my question. Custom quarter you gave us an emergency restoration is there anything you can provide us on that this quarter?

Yes, it's a good question. Look, we're still seeing of the benefits. There is still work happening on the East Coast. Right now, we're seeing some benefits in The Carolinas. From that and then are obviously seeing some demand for equipment out west as well for some of the fires in California. So I would say that it was less than it was in the fourth quarter. But there still is some benefit. And I think some of it has as more rebuilding happens, I think that's where kind of the breadth of our product offering will again benefit from offering some of the heavier, especially vocational trucks in particular. So I do think there is some benefit. I think it's less than it was in Q4 But in Q3, but it's not sorry, it's not we haven't quantified it because I don't think it's overly significant right now.

And then I was wondering how you're thinking about real estate property sales going forward sounded like this was something you're continuing to evaluate passion, unlock value elsewhere Is this something we should expect more of in the future And if so, any idea on, I think, value of properties you're looking at or timing or potential proceeds? Thank you.

Yes.

That's a good question. No, that was the majority of the properties that we own. And so no, I don't think it's something that we would plan to do again in the future. It just felt like it was the right time be able to unlock some of the value in that real estate. And yet still have really long leases in place to be able to to be able to use those properties for the foreseeable future.

Thank you.

And that will conclude our question and answer session. I will now hand the call back over to Ryan McMonagle for any closing remarks.

Great. Thanks everyone for your time today and for your interest in Custom Truck. We look forward to speaking with you on our next quarterly earnings call. In the meantime, please don't hesitate to reach out with any questions. Thank you again and have a great day.