Custom Truck One Source, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Acknowledged the impact of recent storms in Florida, Georgia, and North Carolina, committing to supporting recovery efforts.
• Noted continued improvement in rental KPIs with OEC on rent over $1.2 billion and utilization over 79% in Q4.
• ERS rental revenue increased 5% quarter-over-quarter, and rental asset sales were up 21% quarter-over-quarter. OEC on rent reached the highest quarter-end level.
• TES saw 13% year-over-year revenue growth, with net orders up 21% year-over-year. Anticipated gross margin normalization in 2025.
• Highlighted inventory investment positioned to meet demand, with monitoring of upcoming chassis emission regulations from CARB and the EPA.
• Emphasized selective investment in the rental fleet, noting the fleet is larger, younger, with higher OEC on rent and stronger on-rent yield.

Segment Performance

• ERS Segment: Q3 2024 revenue was $150 million, down from $167 million in Q3 2023. Rental revenue increased 5% sequentially. Rental asset sales were up 21% quarter-over-quarter. OEC on rent ended Q3 at $1.49 billion, the highest quarter-end level. ERS revenue contributed approximately 33.5% of total revenue.
• TES Segment: Q3 2024 revenue was $260 million, up 13% year-over-year. Year-to-date revenue was up 8%. Net orders were up 21% year-over-year. Gross margin was down due to mix and industry inventory trends. TES revenue contributed about 58.2% of total revenue.
• APS Segment: Q3 2024 revenue was $36 million, with a margin of 23%. It was impacted by lower tool rentals and higher materials costs. APS revenue contributed approximately 8.05% of total revenue.

Guidance

• Adjusted ERS revenue guidance was lowered by $25 million to the range of $610 million to $625 million.
• Adjusted TES revenue guidance was lowered by $75 million to the range of $1.05 billion to $1.115 billion.
• APS revenue guidance was affirmed at the range of $140 million to $150 million.
• Total revenue is expected to be in the range of $1.8 billion to $1.89 billion, with adjusted EBITDA projected to be in the range of $340 million to $350 million.
• Net leverage is expected to be flat to a modest decrease by the end of the fiscal year, with a goal to achieve a net leverage ratio below 3 times in 2025.

Risks

• Rate pressure impacting on-rent yield due to the mix of equipment and the broader market environment.
• Inventory levels affecting margins and borrowings.
• Regulatory changes (e.g., CARB, EPA) and interest rate sensitivity posing challenges to the business.

Question and Answer

Q: Can you provide more comments on what's been holding back the used market, and do you think the issues will be done with by the end of the fourth quarter?

A: Ryan said they're seeing good sequential growth in the used market, with some pricing pressure, and expects improvement in the fourth quarter, noting interest rates could help.

Q: Do you think 79% or 80% fleet utilization is where you want to be, and how to keep things in a reasonable range?

A: Ryan said high 70s is a good spot to maintain, using fleet size and pricing to manage, with underlying demand returning as expected.

Q: Any comments on Class 8 vocational truck orders and pre buy?

A: Ryan said there's no significant pre buy planned for early 2025, with good availability from OEMs and inventory expected to normalize.

Q: How does the TES segment contribute to double-digit adjusted EBITDA growth in 2025?

A: Ryan said they're still seeing growth on the TES side, with backlog normalized, and demand continuing despite mix and pricing pressure.

Q: Comments on ERS segment QoQ growth and OEC on rent?

A: Chris said ERS guidance midpoint is flat year-over-year, high end up a couple points, driven by OEC on rent rise and sequential rental sales growth.

Q: Thoughts on telecom within TES and its strength?

A: Ryan said telecom is a small segment, but they're seeing more activity, larger orders, and market share growth.

Q: How are you thinking about growth CapEx and OEC growth for next year?

A: Ryan said they're working on formal guidance, with mid-single digits fleet growth expected, watching T&D market trends.

Q: Comments on APS gross margin and parts?

A: Chris said mix and cost impacts are affecting APS gross margin, with a mid-20s margin expected, prioritizing the service network.