Q1 2024 Earnings Summary
- Significant pent-up demand in the utility end markets, driven by data centers, AI, electrification, and grid upgrades, suggests strong growth potential for CTOS. These macro factors are even more compelling, and while projects have been delayed, they are expected to begin later this year and continue into 2025 and 2026.
- CTOS has a sales backlog of over 6 months, providing good visibility into future revenue. Their one-stop-shop model and inventory position enable them to meet the just-in-time delivery needs of utility contractors, positioning the company well for when demand picks up.
- The company anticipates meaningful growth in the ERS segment in Q3 and Q4, with expected improvements in utilization rates and increased on-rent Original Equipment Cost (OEC). Despite current utilization in the low 70% range, which is strong compared to industry standards, there is potential for utilization to improve to the mid-70% as demand returns.
- Custom Truck One Source lowered its ERS segment revenue guidance by $50 million, reflecting near-term challenges in the utility end market that are expected to persist through the fiscal year.
- Fleet utilization decreased from mid-80% to the low-70% range, indicating reduced demand in their rental business and contributing to lower revenues.
- Sales of used units in the ERS segment came in lower than expected, with the company experiencing pricing pressure in the used equipment market, highlighting weaker demand and potential impact on margins.
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ERS Segment Guidance and Outlook
Q: How should we model ERS segment revenue for the next quarters?
A: Management lowered the ERS segment guidance by $50 million. They suggest modeling a modest step-up in Q2, with more meaningful increases in Q3 and Q4. Growth in the second half is expected due to seasonality and anticipated increases in equipment on rent. -
Drivers of Utility Market Improvement
Q: What will drive improvement in utilities end market?
A: Improvement is driven by pent-up demand for data centers, AI, electrification, and grid upgrades. Delays are due to customer supply chain challenges and regulatory hurdles, not dependent on a Fed rate cut. As IOUs finalize CapEx plans and regulatory issues are resolved, projects are expected to pick up. -
Project Delays vs. Cancellations
Q: Are utility projects being delayed or canceled?
A: Projects are being delayed, not canceled. The work still needs to be done, and macro factors remain strong. Management expects projects to begin later this year and continue into 2025 and 2026. -
Fleet Utilization Rates
Q: What is the expected fleet utilization going forward?
A: Current fleet utilization is in the low 70% range, down from mid 80% last year. Management aims for a mid 70% utilization rate as a steady state, which is strong compared to industry norms. -
Used Equipment Sales Performance
Q: Did used equipment sales meet expectations?
A: Used equipment sales came in lower than expected. Despite some pricing pressure, they are still generating good residual values and gross profit. The prior year's Q1 was unusually high, making for a tough comparison. -
Customer Lead Times
Q: Do customers require long lead times for rentals?
A: Most utility contractor customers require just-in-time delivery for rentals. On the sales side, there's a backlog of over 6 months, providing good visibility. -
Acquisition Details
Q: How significant are the recent acquisitions?
A: The recent acquisitions were modest, with the first costing $1.4 million. The second acquisition occurred after Q1 and isn't reflected in the cash flow yet.