Conference Transcript - CTOS 2026-05-05

Scott Schneeberger, Analyst — Oppenheimer

Good morning, everyone. I'm Scott Schneeberger, Senior Industrial Services Analyst at Oppenheimer. Thank you all for joining us today. It's my pleasure to have from Custom Truck OneSource CEO Ryan McModigle, CFO Chris Epergisi, Vice President of Investor Relations Brian Perman, here to speak on the company's investment story. Custom Truck OneSource is one of the largest providers of specialty equipment rental, such as bucket trucks, parts, tools, accessories and services to the electric utility transmission and distribution market, telecommunications and rail as well, all in North America with a differentiated one stop shop business model. The company's coast to coast rental fleet of more than 10,000 units includes aerial devices, boom trucks, cranes, digger derricks, pressure drills, stringing gear, high rail equipment, repair parts, tools and accessories. We will be using today a fireside chat format where I'll ask management some high-level questions up front, get us an overview of the business. Later in the session, I'll pivot to questions asked by you from the audience. So with that, I'm going to jump right in. First question, gentlemen. Could you please provide an overview of your portfolio of special rental fleet offerings and highlight their respective asset characteristics, such as asset life, rental durations, and fleet age?

Ryan McMonigle, CEO

Thanks, Scott. Thanks for having us, as always. We love telling the custom truck story. But sure, we'll jump right into what we call the SER, especially the equipment rental segment of the business. But as you mentioned, it's just over 10,000 units. So it's about 10,400 units today. it's about $1.66 billion of capital, which is the largest that it's been. And about 75% of the fleet is utility equipment. So that's primarily focused on the T&D in market. So think about that as some of the things that you mentioned, bucket trucks and digger derricks, which are used on power lines, and then boom trucks, pulling and stringing gear in particular. The 25% of the fleet is what we call more specialty equipment. So things like vacuum trucks, things like specialty new dump trucks, heavy hull tractors, water trucks, roll-off trucks. So that type of equipment. Overall today, Scott DeFleet is about 81. In Q1, it was 81.4% utilized from a time utilization perspective. We said that's increased at the beginning of Q2. And then the average piece of equipment stays out for about between 12 and 13 months. It's near the higher end of that right now. um and uh so we're really happy obviously with the duration that that a piece of equipment does stay out and then as you mentioned the fleet is under three years old today so we think it's one of the youngest fleets if not the youngest specialty rental fleet out there and that feels like a really good spot relative to a useful life and obviously it depends on the specific piece of equipment but in that 10 to 15 year range uh from a useful life perspective so really happy with the composition of the fleet and the performance of the fleet too, which we'll get into right now a little bit later.

Scott Schneeberger, Analyst — Oppenheimer

Great. Thanks. Custom trucks has a unique one-stop shop business model. If you could please discuss how you're differentiated via your integrated production capabilities and broad offering of rental sales and aftermarket parts and services. Thanks.

Ryan McMonigle, CEO

Yep. No. And so I just spoke about the SER, especially the equipment rental segment. We also have what we are now now referring to as STEM or specialty truck equipment and manufacturing. You know, we believe that we're the number one upfitter of specialty trucks. And certainly when you think about the breadth of product offering that we have, we think that really is a competitive boat for us. It's all predicated on first great partners. So we'll partner with kind of our chassis OEMs, with Freightliner or Peterbilt. We'll partner with our attachment OEMs, names like a Terex or Tornado, who's now owned by Toro or Galbraith, who's owned by Wastequip, are some examples of that. And then where it makes sense, we will build our own equipment as well. So we do that through our Load King brand. Started out as heavy haul trailers. We've moved that, and then we acquired the crane business from Terex. And now we build our own boom trucks and crossover cranes as well. And then we've started to build dump bodies and water tanks and backyard machines as well. And so to me, we go through a typical buy versus build. We love our partners. Those are important to who we are as custom truck. But where it makes sense, we'll build that equipment too. So we have that integrated production capacity where we put our trucks together. And then we have 41 locations now across the U.S. and Canada where we take care of our customers. So whether they want to rent equipment or purchase equipment or they just want to bring their truck back in for service, We take care of that through our locations across the U.S. and Canada. And for us, that's what we think really makes us unique is we will take care of the customer however they want to consume equipment. We have great relationships with our customers and then a really diverse customer base. So today, no customer is more than 4% of our total revenue. And then we have really longstanding relationships with the customers that we serve each and every day. Excellent. Thanks for that.

Scott Schneeberger, Analyst — Oppenheimer

Let's go next to end markets. If you can just share an overview of the end markets you serve, maybe delve into the mixes also of each in the breakout. Thanks so much.

Ryan McMonigle, CEO

We talk about two primary end markets. The first is T&D. T&D, or transmission and distribution, is our largest end market. So it's about 60% of our overall revenue. As I mentioned in our SER segment, our equipment and rental segment, it's about 75% of revenue. And so that's where we're primarily serving utility contractors. We do rent to some power producers and IOUs as well. But that's where we talk about, obviously, grid modernization, data centers, electrification, a lot of really good trends there. We think we really are kind of that pick and shovel opportunity to invest in what's happening in that space. So I think that's that's our largest in market. And then infrastructure more broadly is about 40 percent of revenue in there. We include waste. We include rail. We include telecom are all some of those in markets of those three. Waste is the largest of those three for us. And then more broadly, kind of roads and bridges. And so regardless of, you know, all of those in markets, right, are mission critical in markets. And so we like that about it. And obviously, that's been intentional on how we put the business together and how we how we focused on products that we think have really compare, really compelling in market dynamics for sure.

Scott Schneeberger, Analyst — Oppenheimer

Excellent. Thanks. So rental of late has been particularly strong. Not much of that is due to power generation associated with data center development. And kind of a follow up I'll put to you at the same time. What are you seeing from other drivers such as utility grid upgrades and or manufacturing onshore? Thanks. Yeah.

Ryan McMonigle, CEO

We see all those as really good tailwinds for transmission and distribution work. It's tough to allocate exactly how much of demand is coming from data centers. I think data centers are driving a lot of the transmission work that is being done across the country, and that's what is really good work for us. so we're seeing major project starts continue to pick up we've seen that so far in 2026 we're talking with customers about major product major project starts into 2027 as well and so feel really good about that you obviously hear that from our public companies when you look at quanta and nyr and mas tech and century group and look at their backlogs and how they're talking about that so i think that that's really strong for us from a demand standpoint on the transmission side of things. And then for distribution, you know, we're seeing steady demand as IOUs continue to release more work under their MSA agreements. And so those are, you know, those are the two primary drivers that we're tracking. Ultimately, the use of a lot of that is for data center development, you know, but we call that really a secondary driver of what's really strong about transmission and distribution right now. So we think it's going to continue to be a powerful catalyst, certainly for several years to come. As you think about kind of the backlog that our customers are reporting, as you think about how transmission cycles generally are multi-year cycles, and then just the backlogging data center work that has to be done as well.

Scott Schneeberger, Analyst — Oppenheimer

Thanks. How is that visibility now versus how it's been in the past, particularly with the addition of some of these larger projects?

Ryan McMonigle, CEO

Yeah, I'd say it's improving, Scott. As we like to say rental. It's, it's, you know, it's what, what have you done for me lately or what do you need tomorrow generally? But I would say that is certainly improving as you think about these transmission projects. I mentioned that we're now, our team is now quoting projects out into the start dates out into 2027 and even some into late 2027. And so, you know, I think we would say that that the visibility on the transmission side of things in particular is as good as it's been in a really long time. And so we think that, you know, it's, I think, why we have a bullish call on transmission and the utility and market more broadly.

Scott Schneeberger, Analyst — Oppenheimer

Excellent. Thanks. Let's talk now about the backlog. The perspective on that, how that compares to historical time periods in this very solid demand environment, you're in?

Ryan McMonigle, CEO

Yeah, it's getting back into what we historically have said is kind of the normal range for backlog. So certainly over the last 11 years that I've been here, we've talked about four to six months really is where backlog generally sits. Obviously, it peaked kind of post-COVID and a lot of the supply chain challenges right after COVID, you know, it peaked. And so it was at very elevated levels for a while. We saw it decline through 2025, and then it's been building back so far at the end of 2025 and into 2026. So it's at four and a half months as of the end of Q1. We said on our earnings call that it had increased so far in Q2 as well. But I feel really good that the backlog was up over $70 million during Q1. And so we feel like it's in a good spot. We feel like supply chain is in a good spot. And so it's getting back into what I would say is a more normal level for us, which is, to your point, Scott, it's a good indicator of demand. The demand seems to be healthy right now. Clearly, T&D is very strong. You know, and then we're seeing demand in our in our infrastructure and vocational product categories continue to improve as well.

Scott Schneeberger, Analyst — Oppenheimer

Thanks. I'm curious. You know, we're now a year past Liberation Day and the onset of this this tariff atmosphere. And also, there's obviously a war in the Middle East. How are these global issues impacting the business at this point, if you're seeing anything?

Ryan McMonigle, CEO

Yeah, I'm going to maybe split it into two thoughts. So the first is really on our cost structure. I'd say our team has done a very good job managing kind of the impact of tariffs. So I think we've talked about on a call, a previous quarterly call, that it was about a $10 to $15 million increase in overall spend. So on north of $1.5 billion of spend, it's about 1% in aggregate that it impacted us in different parts of the business. And so I think the team has done a very good job at obviously managing that overall cost. Some of the new changes recently, we're continuing to work through, and there will be some cost increases that we're dealing with. But again, it'll be minimal from an overall cost perspective. And so I think feel good about how we're managing it directly. where we're seeing a little bit of impact and we've said it now for a couple of quarters and I would put the war in the Middle East and maybe some of the impact on diesel fuel cost in particular is some of our smaller customers are now starting to just say we're gonna we're just gonna pause for a little bit we know that we need a new truck but maybe we'll keep keep our oldest truck running for a little bit longer before we make that CapEx decision to purchase a new truck and so I'd say that theme, which is kind of tariff-related, kind of an interest rate, what they perceive as high interest rate environment-related, and now is a little bit of kind of a high cost of diesel. We're seeing that show up. It's why in Q1, we said third-party sales grew by about 5%. So it's good growth. It's very strong on T&D, but, you know, that's really impacting the smaller vocational truck buyer more than anything. They know they need the truck, the work's there. It's just, when am I going to make the decision to buy? And so I think that's something that we're watching closely. Scott is how that materializes. It's not really impacting our large customers. They seem to be moving forward with projects and moving forward with purchase decisions. It's just really that smaller customer that we're continuing to watch closely.

Scott Schneeberger, Analyst — Oppenheimer

All right. Thanks. Let's talk a little bit of price now. OEC on rent yields trended favorably in recent quarters. I think it inflected positive in fourth quarter, accelerating first quarter. Please discuss the current pricing environment across your primary asset classes, as well as any impacts from mix. And then I'll follow up with another pricing question at a moment.

Christopher J. Eperjesy, CFO

Yeah, Scott, I'll take that one. As we've said historically, we think the sweet spot is high 30s to low 40s on ORY. So maybe to answer the last part of your question first, it could get again into the low 40s. So we do think that's realistic. If you look over the last couple of quarters, as you mentioned, it was up 40 basis points from Q4 to Q1 and up, I think, 70 or 80 basis points from Q3. And so we've been making progress and living still in that space. I think the way I'd characterize the pricing environment is it continues to remain constructive, particularly as Ryan was talking about, as you look at the transmission in T&D assets. We also did take a pricing, we did take pricing in December, roughly on average 5%. And I think, you know, that, you know, that typically takes that 13 months that Ryan was saying that assets are typically churning. And so we'll continue to see that, you know, through the end of this year and into the beginning of next year, see that come through. So I think the way I'd characterize it is really our strategy is, you know, discipline market-based pricing, good asset level returns, but not necessarily chasing utilization, you know, at the expense of margin or customer relationships. So, you know, we think it's certainly in a much better position than it was last year. And you're seeing that come through in margins and on rent yield.

Scott Schneeberger, Analyst — Oppenheimer

Chris, can you discuss the competitive environment for pricing and how that factors into your strategy?

Christopher J. Eperjesy, CFO

Yeah, I'll start and I'll let Ryan add, you know, clearly it's a competitive environment. There is pricing pressure. You know, the fact that, you know, utilization is high helps somewhat on that because there is a lot of demand from the product. But it certainly continues to be a very competitive market out there. But, Ryan, anything you'd add on that one?

Ryan McMonigle, CEO

No, I'd say it's the same way you're seeing. And it depends a little bit by region and by type of asset, too, Scott. And so, look, I think the depth of our relationships with our customers certainly helps us understand kind of what's going on in the market. And as Chris said, we'll do what makes the most sense for the business.

Scott Schneeberger, Analyst — Oppenheimer

Thanks. And then just kind of another strategic question. Rental and sales, it's a decision on your part where you're going to allocate resources. How do you think about that? What would be the mix of both these business lines of rental sales that you'd like ideally? And how do you balance it? What are the considerations you have to make to balance it?

Christopher J. Eperjesy, CFO

Yeah, I think I would start with saying we're not really capital constrained. So I feel like we're able to invest in both of the businesses. As we said on the rental side, for this year, we're going to invest roughly $150 to $170 million in net rental CapEx, so gross CapEx less the proceeds from the sales. And then if you look at our non-rental CapEx, we had guided $40 million to $50 million, and I would estimate two-thirds to three-quarters of that really relates to the STEM or the manufacturing side of the business. And, you know, we're not capacity-constrained on that side. And so, you know, as we see demand continue to grow, there is the potential, you know, that we would continue to invest or further invest on the rental side. You know, our guidance has been mid-single digits in terms of OEC growth. You know, as we look at the business, obviously, we reported, you know, north of 50% SCR for the rental business EBITDA margin. So, obviously, that's really attractive returns. And, you know, certainly we're prioritizing, you know, investing in the fleet right now. But I don't, we don't feel like we're capital constrained and we have the ability to invest in both of those businesses.

Scott Schneeberger, Analyst — Oppenheimer

Thanks. We go to EBITDA now. You increased the guidance on the most recent earnings call. And just kind of curious, it was on maintained revenue guidance, but it sounds like you're doing quite well and you have a strong demand environment. So just considerations for each of those on why you maintain one, increase the other, and then with some thought to the cost and profit lines, any productivity improvements and cost management in the quarter that you'd like to call out or discuss, as well as any opportunities looking forward?

Christopher J. Eperjesy, CFO

Yeah. So I think the way I would describe Q1 is, you know, clearly we had meaningful operating leverage in that revenue grew 9%. Well, adjusted EBITDA grew 33%. Certainly there's some mix in there. We did see significant growth year over year. I think it was just south of 20% on rental revenue, which obviously carries very high margins. And so we felt comfortable moving up the EBITDA with that mix shift and just seeing what we're seeing on the rental side, but still felt comfortable with the ranges we gave on the revenue side. You know, certainly the rental business or SER benefited from strong utilization, higher OECN rent. We did see, you know, we're continuing to see the benefit of the price increase in mix. And then as you touched on, you know, across the business, whether it's on the manufacturing side or in operations, and as Ryan touched on, it's kind of an offset to tariffs. You know, we've definitely been looking at our cost structure and, you know, taking opportunities to manage that where we can. STEM, you know, we have continued to see improved margins there. So we're closer to 16% now. We said, you know, on the third-party new sales, our targeted range is between 15% and 18%. We think we can continue to make some progress there the second half of the year. But, you know, across the board, you know, we think continued execution on, you know, the rental business, which is really driving a lot of the growth, manufacturing productivity, you know, continuing to have discipline around our SG&A, and then, you know, some of the unlock that we can get from floor plan expense by continuing to make progress on the working capital side.

Scott Schneeberger, Analyst — Oppenheimer

Great, thanks. Let's talk now about, you have a relatively young fleet and been managing it recently, discuss how you can let it age and correspondingly, you know, lower CapEx to accelerate free cash flow while still being competitive in the market with the rental offerings that you have? Thanks.

Christopher J. Eperjesy, CFO

Yeah. And so we talked about this year. Well, maybe I'll go back to last year first. So last year, our net capex into the rental fleet was $250 million, which was about a $60 million increase over 2024. This year, we feel like we can pull back on some of the maintenance capex because, you know, as we've talked about four years ago, our rental fleet was a little over four years. We finished last year at 2.9. It aged slightly, just under three at the end of Q1. And so, you know, that's going to unlock, you know, between 80 and $100 million in terms of net investment in the fleet. But we don't think will impact growth. You know, as we've said, we'll grow the overall OEC by mid-single digits. And we feel like, you know, it's the right thing to do and that we'll be able to unlock some free cash flow there. You know, I think Ryan touched on it earlier, you know, the sweet spot, we think, you know, we think we continue to age the fleet a little bit. And so really just reducing the maintenance capex, but at the same time, continue to provide some incremental free cash flow and grow the fleet. So, you know, some growth capex as well.

Scott Schneeberger, Analyst — Oppenheimer

Great. What is the free cash flow outlook? And can you just talk about the drivers a little bit more beyond what you mentioned here and just how you think about it long term as well?

Christopher J. Eperjesy, CFO

Yeah, so there's really three, I would say, main drivers. So clearly year over year EBITDA growth. If you just take the midpoint of our guidance, that would be roughly $45 million of incremental EBITDA. The other two big buckets are the one I just talked about. So the reduction in the net investment in the rental fleet while still growing it, that could unlock 80 to 100 million year over year. And then the last one would be further progress on our inventory reduction. And so we finished last year at, you know, just a little over seven and a half months of inventory on hand. Our target is to get below six months. We've said this year in terms of gross inventory, a reduction of, you know, over a hundred million dollars on our gross inventory. Now that is going to be offset by the floor plan that would be paid off on that. And that typically is 75 to 85% of that a hundred million. And so that would unlock, you know, let's call it 20 million. And so really, it's going to be the combination of those three that are going to get us to our targeted free, you know, levered free cash flow target of over $50 million, which would be an increase of roughly 130 million year over year.

Scott Schneeberger, Analyst — Oppenheimer

Thanks. And then just let's talk about uses of capital and balance sheet management. Please address your capital allocation priorities as you balance deleveraging the balance sheet with other objectives.

Christopher J. Eperjesy, CFO

Yeah, if you look back, I think year over year, our leverage has come down from our peak of 4.8. We're now just over 4. You know, we've targeted to get meaningfully below 4 by the end of this year and then to get below 3 by the end of next year. And so deleveraging really is our priority. and it's, you know, the last question or the last conversation we just had in terms of generating free cash flow, using that free cash flow to pay down debt. And so, you know, I think the path to getting below three is going to be a combination of both. It's going to be continued EBIT expansion, but also generating, you know, that incremental free cash flow and paying down debt. You know, I would not anticipate any large M&A, you know, we'll continue to look for some of the tuck-ins that we've done over the past couple of years, but I wouldn't expect us to be doing anything large there. So it'll continue to be managing working capital, optimizing our investment in our rental fleet, continued expansion on EBITDA growth, and then using that free cash flow that we're going to generate to pay down our debt and get below three times by the end of next year.

Scott Schneeberger, Analyst — Oppenheimer

Excellent. Thanks. All right. That's all I had for the prepared questions. Just give me a moment to check on questions. Okay. So, yeah, so a question on size of customer. Sounds like there's a lot of large project activity that's driving demand. What are you seeing from smaller customers? And I guess just my add-on is compare and contrast just this large and small customer demand environment at the moment.

Ryan McMonigle, CEO

Yeah. So I'd say transmission right now maybe is skewing towards some of the larger projects, which are typically being done by larger customers. So I think that that certainly is happening. There are plenty, though, of small customers. Maybe they're doing maintenance work on transmission lines who are looking to rent, you know, a smaller number of kind of tall pocket trucks. So that continues to be the case. On the rental side, we're seeing really good demand. On the distribution side for rental, we're seeing good demand for both large and small customers as well. And then in the STEM segment in particular, I'd say large customers are still planning on kind of their orders, are still planning. A few of those customers are starting to talk about 2027 pre-buying, what that might mean from their chassis needs for the balance of this year. And then, as I mentioned earlier, where we're just watching things closely is where tariff or interest rates are now kind of what's going on in the Middle East, where that seems to be influencing decisions are in our smaller customers who are maybe delaying their purchase decision. We're watching that closely because a lot of the backlog, a lot of the increase in backlog that we've seen has come from our smaller customers. so they know they need the equipment. They're just kind of making their decision as to when they're going to take the equipment. You know, so that hopefully is some color on what we're seeing between large and small customers overall.

Scott Schneeberger, Analyst — Oppenheimer

Thanks. All right, we got another. What is the long-term growth profile of the business on a steady-state basis, and what type of margins do you expect this business to achieve?

Christopher J. Eperjesy, CFO

Yeah, go ahead, Chris. In terms of the margins, you know, we've given broad kind of guidance by the different segments. So if you look at the rental business in terms of the rental revenue, you know, low to mid-70s is kind of the long-term through a cycle margin that we've given in terms of adjusted gross profit on the new sales to third-party side, 15 to 18. We're kind of living, you know, closer to 16 right now. And then if you look at the used sales, you know, it depends on the business, but, you know, that's going to be kind of in the low to mid-20s kind of range. In terms of the segment EBITDA margins, you know, we've reported this quarter adjusted EBITDA margins for the SDR segment of 50%, right around 10% for STEM. You know, I think there's room for expansion clearly on the STEM margin. And I think we're comfortable in kind of that high 40s, low 50s range for the rental business.

Ryan McMonigle, CEO

And then maybe just hit the growth side. You know, I think we've obviously we've guided high single digit, low double digit growth for this year. And I think those are pretty good proxies. We obviously have not given guidance for 27 or forward. But when you just think about kind of the in markets that we're playing into, I think there's been some intentionality in choosing those in markets because we think they have pretty compelling growth dynamics. So in our new IR deck that's out, we talked about some of the expectation for IOU CapEx and some of the T&D demand that we're seeing, which is kind of that high single-digit, low double-digit, depending on what part of that you're playing into. And so I think those are realistic growth targets as we think about what custom truck can look like in the years ahead.

Scott Schneeberger, Analyst — Oppenheimer

Okay. The last one I have in here. How do you select amongst your suppliers? Please describe your supply chains. I mean, this business has had some issues with that in the past, going back about three or four years. So my follow-on is just how are the supply chains right now and how are the supplier relationships?

Ryan McMonigle, CEO

Yeah, we think ultimately our customers choose what type of equipment they want. And then we think we have the best kind of lineup of suppliers in the industry, which take care of what our customers want. And so, as I mentioned, I think the supplier relationships are very strong. Right now, on the chassis side and on the attachment side, we'll bring Load King in when we need to. Maybe if we can't get enough of some sort of product kind of on the back end, we'll think about where to build that as well. And then, Scott, you're right, attachment and chassis supply available is really hard back in kind of the late 22, 23, really into early 24 time period. And so I think, you know, we've learned a lot to be able to dual source where it makes sense on things like our body suppliers, which were constrained for a period of time as well. So I think the status of the supply chain is in much better shape than it was a few years ago.

Scott Schneeberger, Analyst — Oppenheimer

And, you know, I think we feel like we're in a good position to be able to deliver on the growth that we've talked about this year in 26 and certainly as we think about 2027 as well. excellent well guys i think uh we have a minute or two left but i think i'm going to wrap it up there that's all the questions i see in the queue um but great job with a great overview got a good sense of the business um anything uh final you'd like to add or do you think we covered pretty much it for the viewers yeah i think you did a great job so thanks scott for continuing to giving us the opportunity to tell the story so we appreciate it excellent nice job telling it uh i'm glad to see the demand environment's quite strong. Looks like it's going to persist. So I'm looking forward to seeing what you guys produce financially over the course of 26. With that, everyone, let's go ahead and wrap it up. Thanks, viewers. We appreciate you as well.