Custom Truck One Source - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue grew 2.7% year over year to $422.2M, but fell sequentially from Q4 due to seasonality; adjusted EBITDA declined 5.1% YoY to $73.4M as TES margins and used sales mix pressured profitability, while ERS fundamentals (utilization, OEC on rent) stayed strong.
• ERS delivered double‑digit revenue growth (+13% YoY) on higher utilization (77.7%, +440 bps YoY) and 13% higher average OEC on rent; TES sales were modestly down YoY with gross margin at 15.1% amid pricing pressure and mix, though net orders and backlog improved sequentially.
• Management reaffirmed full‑year 2025 guidance (Revenue: $1.97B–$2.06B; Adjusted EBITDA: $370M–$390M; LFCF target: $50M–$100M) and reiterated plans to grow the rental fleet mid‑single digits and reduce net leverage in 2025; wording on YE leverage shifted from “below 4x” (Q4) to “meaningful reduction,” with CFO noting high‑end FCF could get net leverage close to or slightly below 4x.
• Stock reaction catalysts: reaffirmed full‑year guide, visible ERS momentum (utilization, OEC, rental demand), backlog/order strength carrying into Q2, and tariff‑mitigation/inventory unwind path supporting LFCF; offset by TES margin pressure, higher interest expense, and removal of explicit YE <4x leverage target.

What Went Well and What Went Wrong

What Went Well

• ERS strength: rental revenue +9.4% YoY; utilization 77.7% (+440 bps YoY); average OEC on rent +13% YoY; ERS total revenue +13% YoY; management: “strong results in both our ERS and TES segments… average utilization… up 440 bps versus Q1 last year”.
• Backlog and order momentum: TES new sales backlog rose to $420.1M (+22% vs Q4) with sequential order strength (record March and strong April), supporting 2025 TES growth confidence.
• Reaffirmed 2025 outlook with targeted $50–$100M levered FCF and rental fleet growth mid‑single digits; CEO: “we are reaffirming our 2025 guidance” and “expect to generate meaningful free cash flow in 2025”.

What Went Wrong

• Profitability pressure: gross profit down 5.7% YoY to $85.5M; adjusted EBITDA down 5.1% YoY to $73.4M; net loss widened to $(17.8)M; drivers included lower gross profit, higher variable-rate interest and floorplan costs.
• TES margin pressure and pricing: TES revenue −3.1% YoY; gross margin 15.1% (down YoY) due to mix and industry inventory levels; APS gross profit down on higher material costs.
• Leverage higher sequentially: net leverage rose to 4.80x (from 4.55x at YE), with total debt $1.618B and cash $5.4M; explicit YE “below 4x” leverage target removed, though CFO still targets meaningful reduction with potential to approach ~4x at high‑end FCF.

Transcript

Speaker 3

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Custom Truck One Source first quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I will now turn the call over to your host today, Brian Perman, Vice President of Investor Relations for Custom Truck. Please go ahead.

Speaker 4

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 risk 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 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 first quarter investor presentation are posted on the investor relations section of our website. We filed our first quarter 2025 10-Q with the SEC yesterday afternoon.

Today's discussion of our results of operations for Custom Truck One Source, or Custom Truck, is presented on a historical basis as of or for the three months ended March 31, 2025, and prior periods. Joining me today are Ryan McMonagle, CEO, and Chris Eperjesy, CFO. I will now turn the call over to Ryan.

Speaker 1

Thank you, Brian, and welcome everyone to today's call. Custom Truck's strong financial performance at the end of last year carried over into the first quarter of this year, driven by solid fundamentals across our primary end markets. Demand in our core T&D markets remained robust, leading to strong results in both our ERS and TES segments and overall year-over-year revenue growth for the quarter. While evolving U.S. tariff policies have introduced greater economic uncertainty, our ongoing engagement with customers, coupled with our steady business activity and strong order flow, reinforces our cautious 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 ERS segment's performance in greater detail, I'd like to highlight some key trends.

Our utility contractor customers continue to see sustained and increased levels of activity, which they expect to persist at least through the end of 2025, driven largely by unprecedented secular growth in electricity demand and the need for substantial maintenance spending. The strong rental demand in the utility end market and across our other primary end markets resulted in average OEC on rent for Q1 of over $1.2 billion, a 13% year-over-year increase. Average utilization in the quarter was just under 78%, up 440 basis points versus Q1 of last year. We continue to see mid-70s to low-80s utilization rates across most of our fleet, demonstrating the long-term resilience of our end markets. These trends resulted in significant year-over-year increases in both rental revenue and rental asset sales, driving total ERS segment revenue up 13% versus Q1 of last year.

We continue to leverage the sustained rental demand in ERS to selectively invest in our rental fleet. At the end of Q1, our total OEC was just under $1.55 billion, our highest quarter-end level ever. We plan to continue to invest throughout the year to ensure we have adequate equipment to meet current and projected rental demand. TES saw good sales performance in the quarter, as well as significant year-over-year net order growth, with backlog increasing by over $51 million in the quarter, or 14%. Additionally, we experienced monthly sequential sales growth in February and March, ending with our strongest March in the history of the company. Segment gross margin continues to be under some pressure, impacted by mix and improved inventory levels across the broader industry. As we stated last quarter, we anticipate this will begin to normalize later in the year.

We continue to see some hesitancy from our smaller customers to purchase vehicles who, in some cases, are choosing to rent a vehicle instead. Continued high interest rates and caution regarding the economy resulting from changing U.S. tariff policy appear to be the primary factors influencing this. Despite these trends, our strong order flow and the growth in our backlog in the first quarter, which has continued so far into Q2, provide us with confidence in our outlook for TES for the full year. Tariffs remain an area of focus for us, and we continuously monitor real-time changes in U.S. policy to assess their potential impact on our operations. Many of the goods we purchase from our vendors are either not currently or are not expected to be subject to specific tariffs targeting certain products or regions.

Additionally, we believe that our existing whole goods inventory will sufficiently support our production needs in the near and medium term. Some OEMs have begun shifting portions of cross-border production for select products back to the U.S. where feasible. Other suppliers have introduced incentives tied to non-tariff pricing, a strategy we have leveraged as we tactically pulled forward some inventory purchases during the first quarter, resulting in a modest rise in our inventory levels. We believe that our proactive mitigation strategies will largely shield us from significant disruption to our operations this year. Should increased economic uncertainty deter some customers from committing to substantial capital investment for vehicle purchases, our rental fleet serves as an additional hedge to meet their equipment needs. Regarding upcoming chassis emission regulations from CARB and the EPA, we continue to monitor any potential changes to those regulations under the new administration.

Our current guidance for TES is not conditioned on any prebuy ahead of changes in emission standards from either regulatory body. We are reaffirming our full-year 2025 guidance. Our first quarter results, our strong order flow, and resilient end market demand continue to drive our expected growth across our consolidated business this year. Despite some of the challenges in the macro environment that have occurred so far this year, our business outlook remains positive. Long-term sustained end market demand, buoyed by secular megatrends and our ability to execute on behalf of our customers, sets us apart from our competition. Our multi-decade relationship with strategic suppliers, our long-tenured and diversified customer base, will continue to be keys 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 get us to where we are today. We look forward to updating you on our progress on next quarter's call. With that, I'll turn it over to Chris to discuss our first quarter results in detail.

Speaker 0

Thanks, Ryan. For the first quarter, we generated $422 million of revenue, $136 million of adjusted gross profit, and $73 million of adjusted EBITDA. On a year-over-year basis, all our rental segment KPIs improved in the quarter. Average utilization of the rental fleet from Q1 was just under 78% compared to 73% in Q1 of the prior year. Average OEC on rent in the quarter was over $1.2 billion compared to under $1.1 billion in Q1 of 2023. Both metrics so far in Q2 are consistent with the averages we experienced in Q1, currently standing at more than $1.2 billion and approximately 78%, respectively. As of today, OEC on rent is up almost $160 million, more than 15% versus a year ago. The ERS segment had $154 million of revenue in Q1, up more than 13% from $136 million in Q1 of 2023.

Both rental revenue and rental asset sales were up meaningfully on a year-over-year basis, showing 9% and 26% growth, respectively. Adjusted gross profit for ERS was $93 million for Q1, up 13% from Q1 of last year. Adjusted gross margin for ERS was 60% in the quarter, essentially flat versus the same period last year. For Q1, we maintained margins in the expected range of the low to mid-70% range for rental revenue and the mid to high 20% range for rental asset sales. On-rent yield was over 38% for the quarter, essentially flat on a sequential quarterly basis. Net rental CapEx in Q1 was $60 million, and our fleet age improved slightly to 3.1 years.

OEC on the rental fleet ended the quarter at $1.55 billion, up $95 million versus the end of Q1 2024, and up $33 million in the quarter, reflecting our strategic investment in the rental fleet given the strong demand environment we continue to experience across our primary end markets. We expect to continue to invest in the fleet this year and expect to grow our OEC by mid-single digits % 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 $232 million of equipment in Q1, down marginally compared to Q1 of the previous year.

However, as Ryan mentioned, we saw double-digit sequential growth in February and March, and we ended the quarter with our highest level of equipment sales for March ever. Gross margin in the segment in Q1 was 15.1%, down from Q1 2024, but in line with our expected margin range for the segment of 15%-18%. TES gross margin continues to be impacted by mix and improved inventory levels across the broader industry. We do expect TES gross margins to improve later this year. TES new sales backlog increased by $51 million, or 14% in the quarter, ending at just over $420 million. At just under five months of LPM TES sales, our TES backlog is within our targeted historical average of four to six months. Net orders improved to $284 million in Q1, a sequential improvement and up more than 220% compared to Q1 of 2024.

We've continued to see strong sales and order flow so far in Q2, with record April sales consistent with March levels and continued growth in our backlog since the end of Q1. That combined with ongoing feedback from our customers regarding their equipment needs for 2025 provides us with confidence that we will see the expected revenue growth in TES this year. 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 the impact of new tariffs. Our APS business posted revenue of $35 million in the quarter, flat compared to Q1 of the previous year.

Adjusted gross profit margin in the segment was 22% for Q1, down compared to Q1 2024, mainly as a result of continued higher costs of materials, product mix, and lower third-party service work in the quarter. Borrowings under our ABL at the end of Q1 were $655 million, an increase of $73 million versus the end of Q4, largely to fund the approximately $33 million purchase of the ECP shares in January, as well as for increased rental equipment CapEx and certain other working capital needs. As of the end of Q1, we had $290 million available and over $161 million of suppressed availability under the ABL. With LTM adjusted EBITDA of $336 million, we finished Q1 with net leverage of 4.8 times.

Despite the tactical pull forward of some of our inventory purchases into Q1, we expect to reduce our inventory by the end of the year, which should contribute to lower balances on our floor plan lines, as well as reduced borrowings on the ABL. We intend to use our leverage-free cash flow this year to reduce our net leverage and continue to target a level of below three times. This remains a primary and important goal for us and the 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-$2.06 billion, adjusted EBITDA in the range of $370 million-$390 million, and net rental CapEx of just under $200 million. Our segment guidance also remains unchanged.

We continue to expect to generate meaningful leverage-free cash flow in 2025, setting a target of $50 million-$100 million, and to deliver a meaningful reduction in our net leverage by the end of the fiscal year. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite the impact that the changing U.S. tariff policy has had on the 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 lines for questions. Operator.

Speaker 3

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will kindly ask that you please limit your questions to one and one follow-up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nicole DeBlase with Deutsche Bank. Please go ahead.

Hi, good morning. This is Nayan Kaplan on for Nicole DeBlase. Thank you for taking my question. I was wondering, what gives you conviction in the acceleration in revenue growth that you've embedded throughout the rest of the year, growing 3% in the first quarter? If you could add some color to that, that'd be helpful.

Speaker 1

Yeah. Thanks for the question and good to talk to you. I really think it's important to think about the ERS segment and the TES segment with different drivers there. In ERS, you saw 13% revenue growth in the quarter in Q1. If you remember last year, Q2 was softened for us from a rental revenue standpoint. That's not the trend that we're seeing. We're seeing rental OEC on rent stay strong. I think we're seeing good demand there, and we are seeing good demand for rental asset sales too. Customers asking to buy equipment out of the fleet. Feel good about the underlying drivers there. Obviously, we've been investing in the fleet. That's because we're seeing demand and customers are asking for more equipment. Feel good on the ERS side.

The TES side, we talked about the fact that the quarter started slow. January and February were slow. March was actually our best March ever in the history of CTOS. We're seeing that trend continue. The data I point you to would be our backlog. Backlog grew by over $50 million in the quarter. We saw order flow certainly continue to pick up in the back half of the quarter as well. I think those are the primary reasons. As you know, our business is generally also, the sales business in particular is generally much stronger in the second half of the year.

Got it. One follow-up, if I may. The slides mentioned demand in infrastructure end markets remains pretty strong and continues to show the benefits of the federal IJA spending. As vocational vehicle demand has been driving TES, does the IJA pause by the Trump administration not pose any issue? We believe it was resumed or the courts were challenging it. Does that create questions for customers to potentially delay projects?

We're not seeing it come through when we look at things like backlog and in all of our conversations with customers. We're not seeing that to be the case at this point. One of the things that is unique about our model, though, too, is that our customers can pivot into renting equipment. I think that's where some of the value of CTOS you also see in the pivoting to rental. Yes, it has a different revenue profile, but a different revenue and margin profile. We still can take care of the customer even if they decide to pivot towards renting instead of selling, instead of purchasing.

Got it. Thank you very much. I'll pass it on.

Thanks.

Speaker 3

Your next question comes from the line of Tammy Zakaria with JP Morgan. Please go ahead.

Hey, guys. This is Allan Fowler on for Tammy. Thanks for taking the question. Yeah. On the tariff side, you mentioned working with vendors to sort of minimize the impact from changing the U.S. regional product tax policy. You guys had that inventory bump up in the first quarter. Just confirming that $26 million was all tax-related or driven. If you could provide more color on the kinds of agreements you're working on with vendors to mitigate that tax exposure, whether that's renegotiating pricing or shifting sourcing, if you could provide some additional color, that'd be much appreciated. Thanks.

Speaker 1

Yeah. No, happy to. It's a great question in an area we spend a lot of time thinking about. I think we're in a good position overall as it relates to tariffs and really from managing the cost side, right, of tariffs. As we talked about on kind of our previous call, our exposure is primarily in Canada and Mexico, where we do have product coming in. I think as we talked about last time, it's primarily around chassis in particular as well. We've done a couple of things there. We have great relationships with our chassis suppliers who I think we've been spending a lot of time with. As Chris mentioned, we did and will continue to pull forward some chassis inventory in particular to make sure that we are receiving that before price increases are passed through.

Where we are getting some price increase, which is what's happening kind of in the chassis market, I think we're comfortable that we'll be able to manage that cost increase with, obviously, how we build the trucks and then where it makes sense from a pricing perspective also.

Got it. Thanks. One follow-up, if I may. You sort of reaffirmed plans to unwind inventory by year-end. How should we sort of think about that as we head towards the rest of the year? Is that more linear or sort of more back half-weighted on that?

Just so we could not hear the full question, just to make sure we understand it, was your question our confidence about reducing inventory by the end of the year?

Yes. Would that be more linear or would it be more second-half-weighted, the reduction on the inventory?

It is going to be more second-half-weighted. As I mentioned, we have brought forward some of our inventory purchases. You saw it in Q1. You will see a little bit more of that in Q2 as well. It will be second-half-weighted for sure.

Understood. Thanks. I'll pass it on.

Speaker 3

Our next question comes from the line of Brian Brophy with Stifel. Please go ahead.

Hey, guys. This is Andrew on for Brian. Thank you for taking my question. I just had one on the ERS business. I'm wondering how rental rates tracked in the first quarter and then how you're thinking about rental rates in the ERS business for 2025.

Speaker 1

Yeah. It's a great question. We actually saw, I think in the numbers we reported, you saw that on-rent yield was basically flat to where it was in the last quarter. I think that's a pretty good guide, right, for how the balance of the year will play out. Where there's opportunity to increase rate, we are doing that. That will take a little bit of time, right, to flow through the P&L. I think thinking about on-rent yield where it is to getting back up 100 basis points or so is probably about right as you think about what the impact of price will be for the rest of the year in ERS.

Secondly, on TES gross margins, I'm wondering how you're thinking about how those might track for the remainder of the year. Yeah. Thanks.

Yeah. Our general guidance has been kind of in a range of 15-18% on a quarterly basis. That could be, clearly, there could be mixed impact, customer impact quarter by quarter, but we're still targeting that same kind of range in the range of 15-18%.

Thank you.

Speaker 3

As a reminder to ask a question, simply press star one on your telephone keypad. Your next question comes from Justin Hock with Baird. Please go ahead.

Hi. It's Rohan on for Justin. You've had two good quarters of orders, but we still saw TES revenues down in this quarter. How quickly do orders convert to sales revenue? Is it a one-month conversion? Is it a three-month conversion? Just a bit more color on that.

Speaker 1

Yeah. It's a great question. It just depends by product category is the answer to that. There are some that do convert kind of in the month where we carry stock inventory and so we're able to convert quickly. There are others where lead times can be kind of three to six months at this point when you think about kind of supply chain and what our lead times are on chassis and attachments. I think it just depends by product category. You're right. We use orders as a good proxy for what's coming in the next quarter. I think that was some of the guidance we were trying to give around Q2 too, thinking about the fact that I think we mentioned a strong April as well.

I think on average, you can assume a couple of months, right, so probably three to four months is probably a decent average. The answer is it really depends by product category.

Thank you. You guys reiterated the $50-$100 million free cash flow guide despite the inventory investment. We also noticed that you kind of removed your target leverage of below 4 by year-end. How should we be thinking about year-end leverage, and do you have a new target by year-end if it is not 4.0?

Yeah. This is Chris. Our target is clearly to have meaningful movement from where we finished this quarter. If we hit the high end of that range, we can get close to that 4 or slightly lower than 4. That is the way I really answer it is we are going to make meaningful movement. We will get close to 4. If we hit the high end of that target, the $100 million, we could get close to or below that 4.

Thank you, guys.

Speaker 3

I think there are no further questions at this time. I will now turn the call back over to Ryan McMonagle for closing remarks.

Speaker 1

Great. Thanks, Tina. 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. In the meantime, please do not hesitate to reach out with any questions. Thank you again and have a good day.

Speaker 3

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.