Earnings Call Transcript - CTOS Q1 2021

Operator, Operator

Good evening, and welcome to Custom Truck One Source's First Quarter 2021 Earnings Conference Call. Please note, this conference call is being recorded. After today's market close, Custom Truck issued a press release announcing Nesco's first quarter results available on Custom Truck's Investor Relations website at investors.customtruck.com. Management's comments on today's call regarding first quarter results will pertain to the premerger performance of Nesco. I would like to remind you that management's commentary and responses to questions on today's conference 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.

Fredrick Ross, CEO

Thank you, everyone, for joining us on Custom Truck's first quarter earnings call. I'd like to extend a special welcome to the employees, customers, and investors of Nesco. We completed the transformational combination of Custom Truck with Nesco on April 1st, creating a leading one-stop shop provider of specialty equipment, serving attractive and growing end markets. Our timing is favorable, following unprecedented disruption from a global pandemic with our industry now entering a recovery phase, benefiting from pent-up demand, powerful secular growth drivers, and further potential tailwinds with proposed infrastructure legislation. I'll focus the majority of my remarks today on the merger and compelling opportunities it created. I will then turn the call to Ryan McMonagle, our President and Chief Operating Officer, to provide an update on the positive industry trends we are seeing, our merger integration, and our plans to drive further growth. And then Brad Meader, our Chief Financial Officer, will briefly review the first quarter results. We are extremely excited to be bringing these two companies together. Both Custom Truck and Nesco have strong teams that performed very well during the years past pandemic, keeping their focus on business operations and taking care of customers. We are energized and acting with tremendous collaborative spirit as we integrate these two great companies. As I have gotten to know the Nesco organization better, my respect has only grown for the quality of their team and the impressive operations they've built over the years. Both organizations are already learning from one another, leveraging best practices and targeting significant growth and cost synergies. As we unlock the enormous potential of the combined enterprise, I would especially like to call out the contributions and proven adaptability of all Custom Truck and Nesco employees as we work through this transition. 2020 was a challenging year for everyone that required tremendous adaptability due to COVID, and both teams proved resilient. Our given similar cultures has made it easy to arrive at a guiding principle beyond all of our decisions, and our focus is quite simple: take care of our customers. This has been true through COVID, and it's been true now as we join forces to provide even better service in the future.

Ryan McMonagle, President and COO

Thank you, Fred. Customer demand and the industry outlook are robust. Customers eager to play catch-up following COVID project delays were strong renters and buyers of whole goods during the first quarter. Rental demand is also strong, with both legacy Custom Truck and legacy Nesco fleets achieving over 78% utilization during the first quarter and seeing further utilization gains into the second quarter. Our customers are communicating that there is pent-up demand and a need to make up last year's project delays, and they increasingly feel well prepared to operate safely. So far this quarter, we have continued to see increases in equipment on rent and unit sales as new projects are being started by our customers. At its core, our role is to provide, repair, and maintain specialty equipment for essential utility, telecom, and other critical projects. The proposed infrastructure bill could add additional tailwinds as the recovery accelerates, with $100 billion dedicated to the electric grid, $100 billion to the broadband network, and $174 billion to increase reliance on electric vehicles. Spending on new construction that would utilize our equipment could see a significant boost. Even prior to any proposed infrastructure bill, industry fundamentals are strong. The power outages in Texas earlier this year highlight the need for upgrades to our nation's transmission and distribution systems in a highly publicized way.

Bradley Meader, CFO

Thanks, Ryan. Good evening, everyone. As mentioned at the opening of the call, with the transaction closing after the end of Q1, our discussion of financial performance at this time is limited to Nesco. Custom Truck's first quarter results are currently being reviewed with our external auditor, and we will release those as soon as they're available.

Scott Schneeberger, Analyst

For my first question, I'd like to ask just, it sounds like from your comments, there's nice momentum from March into April and now May. Just curious if you could delve into the end markets a little bit and what you're seeing, maybe contrast with the past few quarters as well since it looks like we've had a progression during the pandemic to better? And then one last part to this question, given that there was a little mix dynamic between transmission and distribution in the quarter for Nesco, if you could just speak to the trend you're seeing those two vis-a-vis each other as we're moving into the second quarter and looking to the summer season?

Fredrick Ross, CEO

Sure. I'll start by saying, you're right. We have seen very good trends coming out of Q1 into Q2. I'd highlight maybe a couple of numbers that we previously mentioned. But utilization for the quarter was just over 78%. And as we said, it finished north of 82% in March, and we're seeing that trend continue into Q2. And I think, Scott, your question is right, because it highlights really strong demand in all four of our end markets. So we are seeing good demand on both the transmission and distribution side of things. There are several new projects that have been announced on the transmission side, where we are seeing equipment out on rent. And on the distribution side, we are seeing really good demand for both rental and for sales. I would highlight telecom as well. Scott, we're seeing 5G materializing, so we're seeing good demand for rental equipment there, and we're receiving a lot of requests to purchase equipment too. Rail is continuing to perform very well. Additionally, I'd highlight infrastructure. We are not assuming that there's an infrastructure bill passed as we talk about the balance of this year, but we would think that it would be a very strong tailwind if it were to pass. As we look at backlog on some of our specialty vocational equipment, in particular, we're seeing a lot of demand there also.

Scott Schneeberger, Analyst

Excellent. Yes, I did hear the commentary on the utilization. Sounds good. I also heard you speak that it sounds like all asset classes regardless of size or absolute level of rental are seeing rates improve. So that's good to hear. And correct me if I'm wrong, but I think that's what you said.

Fredrick Ross, CEO

Sure. Yes. No, I'd echo your comment on the cost side, right? We're feeling really good about the $50 million plan that we've committed to. We think we're ahead of plan in terms of what we realized this year. Yes, we are seeing early wins on the revenue side also, Scott. So we've seen some really quick wins of selling whole goods to some of Nesco's legacy customers. We've also seen good cross-selling into the PTA equipment. We're happy with the progress on both of those initiatives, and we already have some wins on the board on both sides, which we feel really good about 45 days into the integration.

Scott Schneeberger, Analyst

Great. Glad to hear that. I'm just going to sneak one more in here, and it's on the integration. There are a lot of systems that need to be combined, the ERP, the rental system, so the CRM. Just if you could give us an update on how that's going? Any issues you may be seeing arising? Or is it seamless and you're tracking well and on plan on that front?

Bradley Meader, CFO

Yes, Scott, this is Brad. We are tracking on plan or ahead of plan. We're in kind of the middle of the rollout from the legacy custom sites. It's going incredibly smoothly. I got to give a lot of credit to our IT and back office teams for making that work really across the organization and in starting to develop the plans to bring in the Nesco team. We should have their rental ops in our rental system in the next couple of months and then the balance towards the end of the year heading into Q1 of next year. So certainly on plan with our expectations and all going well as of right now.

Stefanos Crist, Analyst

First, you touched on rental rates a little bit. Could you go into a little more detail there and how you expect those to trend going forward?

Fredrick Ross, CEO

Yes. We did see, on a combined fleet basis, rate growth in the quarter. I mean the demand right now is very, very strong. It creates a good environment for us to drive price. So we've seen month-on-month that rate going up across the asset categories, whether it's distribution or transmission. We're also seeing from a pricing standpoint on sales, the same thing. So we expect to see that continue through Q2, given the demand and supply dynamic that exists right now.

Stefanos Crist, Analyst

Great. And then in terms of CapEx, could you maybe go over CapEx goals over the next two years? And then also how much of CapEx is dedicated towards the PTA segment?

Bradley Meader, CFO

I'd say from a core rental, what we have talked about before, during the proxy kind of pre-close was a fleet net maintenance CapEx number of $50 million to $70 million, somewhat dictated by customer buyouts. We're defining that as the OEC we're putting in less the proceeds. So that's one component. From a growth standpoint, our base case right now, we're running mid- to upper single-digit growth. We think that the market demand will be above that, though, and we'll look at making sure that we're making a prudent investment where rates are good, and utilization is good. I could see us going a bit above that if the demand stays where it is right now. For the PTA segment, the investment on rental there is probably going to be in the low millions range, consistent with where it has been in the past. It's still something that as a team we are bringing together. When we think about the integration piece, we see a lot of upside, right, from PTA and bringing that to the Custom Truck Group is certainly going to change that investment need, and we're still evaluating that right now.

Operator, Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Fred Ross for any closing remarks.

Fredrick Ross, CEO

Thank you. Well, this concludes our call today. Thanks, everyone, for the 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. Good night.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.