Custom Truck One Source Inc

NYSE:CTOS

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Custom Truck One Source Inc. Fourth Quarter and Full Year 2024 Earnings Conference Call. [Operator Instructions].



I would now like to turn the conference over to Brian Perman, Vice President of Investor Relations. Please go ahead.

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 fourth quarter investor presentation are posted on the Investor Relations section of our website. We filed our 2024 10-K 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 3 and 12 months ended December 30, 2024, and prior periods.



Joining me today are Ryan McMonagle, CEO; and Chris Eperjesy, 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 the 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 billion 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 environment. We feel that our performance in Q4 sets us up well for the return to growth that we anticipate in 2025.



Our Q4 results show that the recovery that we experienced in our T&D end markets in Q3 continued through the end of the year. We saw sequential improvements in our 2 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 and 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 and electrification trends. Recent industry reports project a 24% to 29% increase in U.S. electricity demand by 2035, 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 $1.2 billion, a 12% sequential quarterly increase. In addition, average utilization for Q4 was just under 79%, a 570 basis point 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 to low 80% utilization rates across most of our fleet and end markets, demonstrating the long-term resilience of our markets. The uptick in rental activity and 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 $1.5 billion, our highest quarter end level and up nearly $22 million in 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 expect to open a new branch in Portland, Oregon. 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 million, up 18% sequentially and up 3% compared to Q4 of 2023. Full year TES revenue exceeded $1 billion 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 vegetation management customers at the end of the year, 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 and 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 million versus the end of Q3 and more than $170 million from peak levels at the end of 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 and 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 8 of our own properties for net proceeds of over $52 million; 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 owned real estate and to reduce our leverage.



Additionally, in January of this year, we and Platinum Equity jointly purchased all of Energy Capital Partners' remaining CTOS shares at a price of $4 per share. We felt it was an attractive opportunity to purchase a significant number of CTOS 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 3 of our business segments. While Chris will provide more details, for 2025, we expect total revenue of between $1.97 billion and $2.06 billion, and project adjusted EBITDA between $370 million and $390 million.



We will continue to focus on working capital management and free cash flow generation, which will allow us to make progress towards meeting our 3x 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 continuing our investment in 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 activity levels, 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 million of revenue, $168 million of adjusted gross profit and $102 million 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 $1.2 billion compared to under $1.1 billion in Q3 and $1.16 billion in Q4 of 2023. While late December saw the typical seasonal decrease in OEC on rent and utilization, so far in Q1, we have seen the expected rebound in both measures, which currently stand at more than $1.19 billion and over 78%, respectively.



The ERS segment had $172 million of revenue in Q4, down from $185 million in Q4 of 2023. However, given the sustained improvements in utilization and 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 in 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 million for Q4, down marginally from $107 million in Q4 of 2023, 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-70% range for rental revenue and mid- to high 20% range for rental asset sales.



On-rent yield was over 38% for the quarter, up slightly from Q3. Net rental CapEx in Q4 was $71 million, and our fleet age improved slightly to 3.2 years. Our OEC in the rental fleet ended the year at $1.52 billion, up $60 million versus year-end 2023 and up $22 million 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 out of our fleet. In the TES segment, we sold $308 million 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 from Q3. Total TES revenue for the year was $1.1 billion, the first-time annual TES sales exceeded $1 billion.



Gross margin in the segment was 16.6% for the quarter, down from Q4 2023, but up 45 basis points from the previous quarter. For 2024, TES 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 million. 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 million, up over 90% on a sequential basis and up 35% compared to Q4 of 2023. We've continued to see strong order flow so far in 2025 with backlog currently sitting at $445 million, 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 long-standing 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 of $41 million in the quarter, up more than 6% from Q4 of the previous year and up 11% sequentially. Adjusted gross profit margin in the segment was more than 29% for Q4, slightly lower than Q4 of 2023, but up substantially compared to Q2 and Q3 of 2024.



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 of 2024 were $583 million, a decrease of $45 million versus the end of Q3. As Ryan mentioned, we closed on a sale leaseback transaction on eight of our own properties in Q4, resulting in more than $52 million 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 benefits of our inventory management efforts, which resulted in an inventory reduction of more than $150 million in Q4 and more than $120 million 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 as well as reduced borrowings on the ABL. As of year-end, we have $364 million available and over $158 million of suppressed availability under the ABL.



With 2024 adjusted EBITDA of $340 million, we finished 2024 with net leverage of 4.5x. 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 3x remains a primary and important goal for us and one that we expect to achieve sometime in fiscal 2026. Our initial 2025 guidance for our segments is as follows: we expect ERS revenue of between $660 million and $690 million; TES revenue in the range of $1.16 billion to $1.21 billion; and APS revenue of between $150 million and $160 million.



This results in total revenue in the range of $1.97 billion to $2.06 billion. We are projecting adjusted EBITDA in the range of $370 million to $390 million and net rental CapEx of just under $200 million. 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 levered free cash flow in 2025, setting a target of $50 million to $100 million.



Given our projected adjusted EBITDA growth and free cash generation, we expect to make progress in fiscal 2025 towards our stated goal to achieve a net leverage ratio of below 3x with a target to get below 4x 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. Operator?

[Operator Instructions] Our first question will come from the line of Justin Hauke with Robert W. Baird.

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 million year-over-year, almost 50%. And even with the $445 million 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 on why there's such a wide disconnect from where the backlog is versus the forecast and the visibility you have to have those TES orders come in.

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 kind of 4 to 6 months is what we've talked about, really since being public. And so, we're coming off the elevated backlog, which goes back to kind of some of what we talked about a year ago, really 18 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 of TES growth, too, you saw 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 markets, there is a lot of opportunity for us to continue to grow our 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 '23 and Q3 of '24 going into the fourth quarter, the backlog was down $400 million year-over-year, but we still posted growth and had our best quarter ever on TES. I think we had growth of roughly 3%. And so, there's not a direct correlation there. I think that you're trying to make with the backlog.

Yes. Okay. All right. Yes, that second point, I guess, helps because I guess, otherwise, I would think of it as a headwind because coming off of having such an elongated month of backlog would have kind of given you artificially high revenue, but maybe that correlation doesn't come out that way. I guess maybe my second question is just in thinking about the seasonality of your guidance for the year, I think usually, the first half spends kind of 45% of your revenue and EBITDA, second half 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 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 45-55. It could be slightly less than the $45 million, slightly more than the $55 million, but plus or minus 1% or 2%, it's going to be a similar 45-55 split between the first half, and 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, obviously, that made a lot of 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 in gross margin? Just trying to understand that a little bit better, too.

Yes. Actually, Justin, it will actually be an incremental lease expense. And so, we sold those 8 properties and are leasing them back. And so, to answer your question, it will be roughly $4.5 million to $5 million a year of a headwind, which is baked into our guidance. And the majority of that will show up in the cost of goods sold. A small portion of it will show up in SG&A, but the split is roughly 80-20.

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

It's Dan on for Scott. Could we start on margin? You mentioned the headwind on the 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 or what the impact 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 than what we said in the past. And so, I'll take them one by one. On the rental side, still low to mid kind of 70% margins, and it will fluctuate based on what we see on rent and repair and maintenance costs in any particular quarter, but I think the range is low 70% to mid-70% 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, it could be slightly lower, but on average, kind of a mid-teens margin profile.

Dan, I'll take tariffs. But look, there are 2 things, I think, that as you're thinking about CTOS are important, right? One is kind of the natural hedge that's built into the business, which really comes from 2 parts, right? First is the rental fleet. So, we've got $1.5 billion in the rental fleet. It's young. It's 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 we saw in inventory, which is important. We're glad we demonstrated that in the fourth quarter, but we still have just over $1 billion 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 receive chassis in 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&L, but we think we'll be able to manage through and mitigate the majority of the cost increase as we're heading into '25. 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. On rental yield, improved sequentially. 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 business environment improves, we're selective in 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 '25 should be consistent with what we're assuming for this year.

Got it. And final one for me. I mean I know PS was covered earlier, but I'm curious on the infrastructure bill 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 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 is a continued tailwind for us heading into 2025.

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

So it's great to see utilization. I think you said moved up to 7%, 8% quarter-to-date. Could you just provide some color what the progression of that could look like that's embedded in the full year guide?

Yes. I'll start and maybe Chris can give some more specifics. But Tami, you're right, the utilization 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 70s to low 80s. So, it could move up to low 80s at some point during the year.

Yes. It normally, look, in normal years, yes, you 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 modeling question. I think I heard you say 45-55 is the split between one half and second half. So, within one half, is it, would it be right to model 1Q 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 and 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, yes, 45%, 55%, maybe slightly less than 45%, maybe slightly more than 55% second half of the year.

And our next question will come from the line of Brian Brophy with Stifel.

This is Andrew on for Brian Brophy. Last quarter, you gave us an estimate of how much of a benefit there was from emergency restoration. Is there anything you can provide us on that this quarter?

Yes, it's a good question. Look, we're still seeing some 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, as more rebuilding happens, I think that's where kind of the breadth of our product offering will have been, 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 in Q3, but it's not, we haven't quantified it because I don't think it's overly significant right now.

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

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. We just felt like it was the right time to 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 use those properties for the foreseeable future.

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. And in the meantime, please don't hesitate to reach out with any questions. Thank you again, and have a great day.

This concludes today's meeting. You may now disconnect.