Earnings Call Transcript - CTOS Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for joining us. My name is Colby, and I will be your conference operator today. I would like to welcome you to the Custom Truck One Source Inc. Third Quarter 2025 Earnings Conference Call. I will now turn the call over to your host, Brian Perman. Please proceed, sir.

Brian Perman, Host

Thank you. Before we begin, we 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 discussed during the call in the press release we issued yesterday afternoon. That press release and our third-quarter investor presentation are posted on the Investor Relations section of our website. We filed our third-quarter 2025 10-Q with the SEC yesterday afternoon. Today's discussion of our results of operations for Custom Truck One Source Inc., or Custom Truck, is presented on a historical basis as of or for the three months ended September 30, 2025, and prior periods. Joining me today are Ryan McMonagle, CEO; and Chris Eperjesy, CFO. I will now turn the call over to Ryan.

Ryan McMonagle, CEO

Thank you, Brian, and welcome, everyone, to today's call. Building on our momentum from the second quarter, Custom Truck had a strong third quarter, delivering 20% adjusted EBITDA growth and 8% revenue growth versus Q3 2024. Third-quarter performance was characterized by continued solid fundamental demand in our core T&D markets and excellent execution by our team, leading to strong results in both our ERS and TES segments and overall year-over-year revenue growth for the quarter. Custom Truck powers the people who strengthen and build our nation's infrastructure. Our trucks are used to build and maintain the grid on a daily basis. Our steady business activity and strong intra-quarter order flow continue to reinforce our optimism about achieving our expected growth targets in 2025. As a result, we are reaffirming our previous fiscal 2025 revenue and adjusted EBITDA guidance. While Chris will discuss our segment's performance in greater detail, I'd like to highlight some key trends. In ERS, our utility contractor customers continue to see sustained and increased levels of activity, which they expect to persist for the foreseeable future, driven largely by spending tied to unprecedented secular growth and electricity demand. As several recent articles highlight, the real bottleneck in the AI build-out is electricity. Current industry projections estimate that total T&D CapEx among U.S. investor-owned utilities for the five-year period from 2025 to 2029 will be approximately $600 billion. The overall annual growth rate of spending is expected to be almost 10% with transmission spending expected to grow at more than 15% annually through 2029. We feel these trends in the utility end market have been among the key factors driving the growth in our OEC on rents over the last year and position us well for 2026. For the third quarter, average OEC on rent was more than $1.26 billion, a 17% year-over-year increase. We ended the third quarter with over $1.3 billion of OEC on rent and have continued to see growth so far in the fourth quarter. Average utilization in the quarter was just over 79%, up more than 600 basis points versus Q3 of last year and the highest level in more than two years. We continue to see mid-70% to mid-80% utilization rates across most of our fleet, demonstrating the long-term resilience of our end markets. These trends drove a year-over-year increase in rental revenue of 18% in the quarter, with total ERS segment revenue up more than 12% versus Q3 of last year. Because of the sustained strong demand, we decided in the quarter to accelerate rental fleet CapEx, which Chris will discuss in more detail. We believe this spending will position us well for continued growth in 2026. At the end of Q3, our total OEC was just over $1.62 billion, our highest quarter-end level ever. Coming off near-record segment sales last quarter, TES continued to see good sales performance in the third quarter, posting year-over-year growth of 6% and year-to-date growth of 8.5% versus the first three quarters of last year. While our backlog was down in the quarter, we continue to see strong intra-quarter order flow, particularly among our local and regional customers. This reflects the current availability of equipment broadly in the market, which decreases the need for customers to place orders far in advance. Signed orders in the quarter from this portion of our customer base were up more than 40% year-over-year, driving overall order growth of over 30%. With the supply of certain vocational vehicles remaining at elevated levels across the market, segment gross margin was down slightly in Q3 compared to the prior quarter. However, it remained within our expected range of 15% to 18%. Overall, our current pace of orders and the continued strong demand for vocational vehicles across our end markets combined to provide us with confidence in our outlook for TES for the rest of the year. We continue to believe that accelerated depreciation provisions contained in the recent federal spending and tax bill will benefit Custom Truck, particularly for sales of used and new vehicles in the fourth quarter. Since the end of the third quarter, we've seen this reflected in our backlog, which has grown so far in the fourth quarter to over $350 million. With respect to the tariff landscape, we continue to feel that as a result of our mitigation actions taken earlier this year, the tariffs will have a limited direct cost impact on our business this year. However, we continue to hear about hesitancy related to new equipment purchase decisions from some of our customers as a result of economic uncertainty, continued high interest rates, and the overall inflationary pricing environment to which the tariffs have contributed. We are reaffirming our full-year 2025 guidance. Our strong year-to-date results, our robust order flow, and resilient end-market demand continue to drive our expected growth across our consolidated business this year. Despite some volatility in the macro environment, our business outlook remains positive. Long-term sustained end-market demand, buoyed by secular megatrends, and our ability to provide exceptional execution on behalf of our customers set us apart from our competition. Our multi-decade relationships with strategic suppliers and our long-tenured and diversified customer base will continue to be key to our success. 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 achieve these results this quarter. We look forward to updating everyone on our progress on next quarter's call. With that, I'll turn it over to Chris to discuss our third-quarter results in detail.

Christopher Eperjesy, CFO

Thanks, Ryan. For the third quarter, we generated $482 million of revenue, $156 million of adjusted gross profit, and $96 million of adjusted EBITDA, up 8%, 13%, and 20%, respectively, versus Q3 of 2024. On a year-over-year basis, all our rental segment KPIs improved in the quarter. Average utilization of the rental fleet for Q3 was over 79% compared to 73% in Q3 of the prior year. Average OEC on rent in the quarter was over $1.26 billion compared to under $1.1 billion in Q3 of 2024. Both metrics so far in Q4 are higher than the averages we experienced in Q3, currently standing at more than $1.3 billion and over 80%, respectively. As of today, OEC on rent is up more than $180 million or 15% versus a year ago. The ERS segment had $169 million of revenue in Q3, up more than 12% from $151 million in Q3 of 2024. Rental revenue was up meaningfully on a year-over-year basis, showing 18% growth. Rental asset sales were essentially flat and are up 20% year-to-date compared to the first three quarters of last year. Segment adjusted gross profit was $104 million for Q3, up 19% from Q3 of last year. Adjusted gross margin for ERS was 62% in the quarter, more than 370 basis points higher versus the same period last year, driven by a higher mix of rental revenue as well as improved rental margins of almost 76% and sustained rental asset sales margins in the mid-20% range. On-rent yield was 38.2% for the quarter, down slightly from Q3 of last year, but still within our expected upper 30% to lower 40% range. Net rental CapEx in Q3 was $79 million, and our fleet age is just below 3 years. Our OEC in the rental fleet ended the quarter at over $1.62 billion, up almost $130 million versus the end of Q3 2024 and up more than $60 million in the quarter, reflecting our strategic investment given the strong demand environment we continue to experience across our primary end markets, particularly in T&D. We expect to continue to invest in the fleet in the fourth quarter, resulting in high single-digit percentage OEC growth versus the end of 2024, which is higher than previously expected. In the TES segment, coming off near-record sales in Q2, we sold $275 million of equipment in Q3, up 6% year-over-year. Gross margin in the segment in Q3 was 15%, down from Q3 2024. We expect TES gross margins to improve in the coming quarters as supply of vocational equipment in the market comes more into balance, reducing some of the pricing pressure we've seen this year. PES new sales backlog decreased by $55 million in the quarter, driven by continued strong sales activity. At 3 months of LTM TES sales, our TES backlog is slightly below our targeted historical average range. However, net orders in Q3 remained strong at $220 million, up more than 24% compared to Q3 of 2024. So far in Q4, which is historically our highest quarter of PES sales, we've continued to see strong order flow and our backlog has grown to over $350 million. That, combined with the ongoing feedback from our customers regarding their equipment needs for the remainder of the year, provides us with confidence that we will see strong revenue growth in TES this year, but we do believe it will be closer to the low end of our guidance range. Our strong and long-standing relationships with our chassis, body, and attachment vendors continue to be an important driver of TES production. Our current level of inventory positions us well to meet our production, fleet growth, and sales goals for the year as well as help mitigate any impact from tariffs. Our APS business posted revenue of $38 million in the quarter, up 3% compared to Q3 of last year. Adjusted gross margin in the segment was over 26% for Q3, up both year-over-year and sequentially. Our year-to-date adjusted gross margin in APS remains in our expected mid-20% range. Borrowings under our ABL at the end of Q3 were $708 million, an increase of $38 million versus the end of Q2, largely to fund both rental and non-rental CapEx and certain other working capital needs. As of the end of Q3, we had $238 million available and over $230 million of suppressed availability under the ABL, resulting in substantial liquidity for the company. With LTM adjusted EBITDA of $365 million, we finished Q3 with net leverage of 4.53x, a sequential improvement. We did make progress on our planned inventory reduction with inventory down almost $54 million in the quarter. This contributed to a reduction in our floor plan balances of almost $57 million. We continue to expect to reduce our inventory in Q4 and into next year, which should contribute to lower balances on our floor plan lines as well as reduced borrowings on the ABL. However, given the strong demand environment that we are expecting to continue into 2026 and beyond, we now expect to reduce our inventory by $125 million to $150 million compared to the level at the end of last year. We intend to use our levered free cash flow to reduce our net leverage and to continue to target a level of below 3x. This remains a primary and important goal for us and one that we expect to achieve by the end of fiscal 2026. We are reiterating our previous 2025 guidance with total revenue in the range of $1.97 billion to $2.06 billion and adjusted EBITDA in the range of $370 million to $390 million. However, given the sustained rental demand in ERS, we now plan to invest more than previously expected in our rental fleet this year, resulting in net rental CapEx of approximately $250 million. In addition, we expect our non-rental CapEx to be higher this year as well as we have taken the opportunity to fund some additional production and manufacturing improvements at our Kansas City location, which should result in expanded production capacity and better position us for growth across our segments. While our segment guidance remains unchanged, we do expect ERS to finish the year with revenues in the upper half of our $660 million to $690 million range and TES to finish the year with revenues closer to the lower end of the $1.16 billion to $1.21 billion range. The extent of the benefit we get from our customer spending on new and used equipment as a result of the accelerated depreciation provisions is likely to be a key determining factor as to where in our guidance ranges we end up for both ERS and TES. As a result of higher-than-expected rental and non-rental CapEx, as well as the decrease in our planned inventory reduction, we now expect our levered free cash flow to be less than our previous $50 million target. However, we are confident that the incremental CapEx will yield strong returns that will result in higher sustained levels of levered free cash flow going forward. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite some macroeconomic uncertainty this year, our year-to-date results and the continued strong fundamentals of our end markets allow us to be optimistic about the long-term demand drivers in our industry and our ability to produce double-digit adjusted EBITDA growth this year. With that, I will turn it over to the operator to open the line for questions.

Operator, Operator

Your first question comes from the line of Scott Schneeberger from Oppenheimer.

Daniel Hultberg, Analyst

It's Daniel on for Scott. So it seems like momentum is really strong here. Can you guys please elaborate on the visibility you feel you have for 2026 to sustain this momentum, please?

Ryan McMonagle, CEO

Sure. Yes. Good to hear from you, Daniel, and thanks for the question. Yes, we're seeing really good demand in the utility sector and transmission and distribution. And as we talked about on the call in our remarks, we're seeing demand increase, especially around transmission, in particular. So as everybody is hearing, it does feel like we're heading into a strong cycle of transmission demand. And so the decisions that we made in Q3 were to invest more into the rental fleet. Some of that will carry into Q4 as well. And we think that's what sets us up really well for 2026. So we said on the call that OEC on rent averaged $1.26 billion for the quarter. It finished the quarter at $1.3 billion and has continued to grow into October. So utilization on rental is back into the 80% range at this point. And so that's, I think, why we're really comfortable with the impact of that heading into 2026.

Daniel Hultberg, Analyst

Got it. Honing in on ERS and OEC on rent yield. Could you discuss how you think about that going forward and how you feel about the pricing environment?

Ryan McMonagle, CEO

Yes. We've guided, obviously, high 30s to low 40s from an on-rent yield perspective, Daniel. And we've seen yield increase a bit in September and into October versus what we averaged for the quarter. So we've seen that as a positive thing. Obviously, two things in play there, right? One is as we shift more towards transmission, slightly higher yield that we've talked about. And so I would expect that to continue a bit. And then as utilization increases, we've been able to take advantage of some pricing opportunities where it makes sense. Obviously, we have to price to the market. We have to be competitive in the market. And so that's obviously what we're dealing with on a day-to-day basis. But I think it should be in the range that we've guided to, and I would expect that it would increase a bit from where it was in Q3 of this year.

Operator, Operator

Your next question comes from the line of Justin Hauke from R.W. Baird.

Justin Hauke, Analyst

I guess I wanted to ask a little bit about the cash flow. I appreciate all the color on the uptick in the CapEx to kind of capitalize on the growth that you're seeing. But maybe just a little bit more clarification on the inventory reduction and the timing of that. You said kind of into '26 to get that down by the $125 million to $150 million from year-end '24. Just trying to think about what that means? Is that more second half of '26? I just don't know how long this kind of elevated CapEx is going to be before those inventory levels start coming down. And then maybe the corollary to that would be just on the free cash flow guidance saying the levered being under the $50 million. I guess it's been kind of a use of cash all year. I'm just trying to think about the fourth quarter and do you expect to kind of continue to use cash in Q4? Or will that be a cash inflow quarter?

Christopher Eperjesy, CFO

Yes, thank you, Justin. This is Chris. I may not have been clear earlier. The reduction of $125 million to $150 million compared to the beginning of the year is expected to happen by the end of this year. For Q3, we anticipate a decline of only $14 million or $15 million. Therefore, you should expect an additional reduction of $110 million to $135 million in Q4. Last summer, we mentioned that our whole goods inventory was just under 11 months, and now it's just under 8 months. We aim to reduce it to six months by the end of next fiscal year, which aligns with our targets into 2026. I do expect that we will generate free cash flow in the fourth quarter, but due to additional investment in the rental fleet and the timing of inventory reductions, we won't see any significant free cash flow for the entire year.

Justin Hauke, Analyst

Okay. Okay. And I guess just on the non-rental CapEx, the uptick on the production capabilities, can you quantify just kind of how much that is as we kind of think about, I don't know, the difference for next year versus that investment?

Christopher Eperjesy, CFO

Yes. The answer is that we are expanding some of our capabilities at our Kansas City campus. This will have an impact in the range of $10 million to $15 million, primarily related to land development and installing equipment in those facilities. Moving forward, I expect our non-rental capital expenditures to remain similar to historical levels, which have been between $25 million and $40 million.

Operator, Operator

Your next question comes from the line of Naim Kaplan from Deutsche Bank.

Naim Kaplan, Analyst

This is Naim Kaplan on for Nicole DeBlase. So I was wondering what was the latest on your utility T&D customers' ability to execute projects? I know you kind of touched on this, but just like to have a little bit of elaboration. And it seems like also the industry is back on track after delays in 2024 and 2025, basically. Is that kind of the right way to think about it that we're back on track?

Ryan McMonagle, CEO

Yes, I think that's a great perspective. We have seen distribution really increase throughout the year, and it is in a very good position regarding utilization and the demand for new equipment. Additionally, transmission is rising significantly, especially as it typically does in the fall. This is where we've focused our investments, and it appears that there are strong tailwinds for transmission projects that are currently in progress and under construction, which will continue to require our equipment. So, I would say we're back to normal and seeing ongoing improvements on the transmission front.

Naim Kaplan, Analyst

Okay. Perfect. And can you provide more color on the drivers of the 30% organic growth in PES? And maybe if you could touch on the customer types as well. And then on the backlog, was that only down year-over-year due to like a prior year comp because you had some past due backlog last year?

Christopher Eperjesy, CFO

I'll address the second question. Could you please repeat your first question? I don't believe we caught the percentage you mentioned. Regarding the backlog, we've indicated that we're not primarily driven by backlog but rather by orders. Historically, we've continued to achieve growth, posting 30% new sales growth last year and 7% in the previous year. So far this year, we've seen nearly 9% growth. During this time, our backlog has decreased by almost $600 million, yet we've consistently posted growth quarter after quarter. Ryan mentioned in his remarks that we've observed a backlog increase of over 25% in the first three weeks of October, bringing us close to $360 million in backlog. We're optimistic about the guidance we're providing and the overall health of our new sales business. Please clarify your first question for us.

Ryan McMonagle, CEO

I think you were mentioning the 30% intra-quarter order growth. Is that what you're referring to?

Naim Kaplan, Analyst

Yes, within TES. I'm pretty sure what you had in the release.

Ryan McMonagle, CEO

Yes, we just wanted to ensure you're asking the right question. In addition to our backlog, we are closely monitoring how orders are coming in throughout the quarter, and we have good visibility on this. There is a significant increase—30% in signed orders when comparing Q3 of '25 to Q3 of 2024. This gives us confidence in the growth we anticipate for Q4, alongside the 8.5% growth we've experienced year-to-date in the TES segment. We are tracking intra-quarter order flow in real-time, and that is what we wanted to communicate. This is why we are comfortable with the full-year projections we've discussed for TES.

Naim Kaplan, Analyst

Okay. Very helpful. And just to follow up on that, if I may. Any details on the customer type?

Ryan McMonagle, CEO

Yes, we are experiencing strong demand in the utility segment, particularly from our utility and forestry contractors. While there is some hesitation in certain infrastructure markets, such as refuse and dump trucks due to increased inventory, we still see a solid mix of both large national and smaller customers. Overall, there is no significant shift, although we are noticing a slight increase in demand for T&D while infrastructure demand is a bit softer.

Operator, Operator

Your next question comes from the line of Brian Brophy from Stifel.

Brian Brophy, Analyst

You touched on this a little bit, but hoping to get a little bit more color. Hoping you can give us an update on what you're seeing from a large transmission pipeline perspective. What's the latest you're hearing from your customers regarding to when some of these large projects that have been discussed are going to come to fruition?

Ryan McMonagle, CEO

We are definitely noticing strong demand, Brian. There has been a significant increase in our transmission utilization late in the third quarter and into the fourth quarter, which is contributing to the growth we mentioned in the call. We also have strong expectations for 2026. There are several specific projects currently underway that are fueling this demand, along with additional floating projects planned for early 2026. This strong demand has led us to make more capital expenditures, including expanding our rental fleet to better meet customer needs.

Operator, Operator

Your next question comes from the line of Mike Shlisky from D.A. Davidson.

Michael Shlisky, Analyst

Can we back up a couple of questions? You had mentioned some comments about the infrastructure sector and how that's going. Can you maybe kind of round it out by just talking a few senses on how it's going in the telecom world and in rail as well?

Ryan McMonagle, CEO

Yes, we're experiencing growth across the board, which is significant to highlight. The strongest growth is in transmission and distribution due to current developments in that area. In telecom and rail, we're seeing some activity increase, although these areas account for less than 5% of our total revenue. We're noticing growth in rail and a lot of discussions and quotations happening in telecom. I anticipate that this momentum will continue into the fourth quarter and through 2026. Overall, it's a positive growth trend, especially in transmission and distribution. However, in categories like dump trucks, water trucks, and some refuse products where competition is tougher, we're seeing slower growth.

Michael Shlisky, Analyst

Got it. And then turning to T&D, you start to see headlines from some data center operators as they build the data center, they're also building or contracting for energy production assets either close by, on site, a few miles away, not a long grid connection as far as distance is concerned, I guess. Not all of the data centers, but some of them are trying to co-locate the energy. Does Custom Truck still play a role in a project like that? Does it accelerate the pipeline opportunities when people are just saying we can't wait for the utilities go to build at least on our own infrastructure. Does it have an impact on pricing and margins when you have a project where it's much closer to the data center than others?

Ryan McMonagle, CEO

Yes, it's a great question, Mike. And I think the way we're thinking about it is it is very good overall demand for T&D for us, right? And so to me, it feels like there's a lot of generation that's coming online that in some cases, it's temporary generation, too. And so to me, that's why I think we're getting comfortable that there should be a sustained period of long demand here. So in some cases, it's temporary generation, right, to get the data center up and then the expectation is the utility will come back through and bring a transmission line or a substation or whatever is needed, right, for that particular project. And that's where I think it feels like it's going to be good sustained demand for Custom Truck and for our trucks in both of those cases.

Michael Shlisky, Analyst

Got it. And then, Chris, can I give some more comments on your CapEx plan that you put out here for the rest of '25? Is any of this pull forward from '26? I'm trying to figure out, is there a point where you pause in the CapEx kind of harvest what you've got and pay down some more debt at some point?

Christopher Eperjesy, CFO

The answer is yes. As you know, the age of our fleet had been a little over 4 years about 3 or 4 years ago. We are now around 2.9 years. This has required an investment of approximately $0.5 billion to $600 million over time. The short answer to your question is that we should start to see some improved free cash flow, especially as we are able to reduce some of that net investment.

Michael Shlisky, Analyst

Great. Chris, can I just follow up there? You had said you were once 4 years. I think you were a little bit above 4 years depending on how far back you kind of Nesco and so forth. How far would you take it? Like I guess I'm curious where the competition is with their average age? And how close would you get to the competition while still being the newest. I'm trying to figure out how long you might be able to let your assets for if you were to try to find a way to harvest some cash flow.

Ryan McMonagle, CEO

Yes, that's a great question. While there isn't much data available, we believe we have the youngest utility rental fleet in the market. You're right, there is potential for us to age our fleet. Currently, our average age is under 3 years, around 2.9, which is a significant improvement from just a few years ago when it was over 4 years. This gives us a comfortable range to work within while allowing our fleet to mature, which can help generate cash flow. I think this is a solid range to consider as we maintain a strong-performing fleet that meets customer needs and remains competitive in terms of average age.

Operator, Operator

There are no further questions in queue. I'd like to turn the conference back over to Ryan McMonagle for any closing remarks.

Ryan McMonagle, CEO

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

Operator, Operator

This concludes today's conference call. You may now disconnect.