Q3 2024 Earnings Summary
- Strong recovery in rental demand: Rental fleet utilization has improved significantly, currently exceeding 79%, and is expected to remain in the high 70s to low 80s, indicating robust demand returning in line with expectations for 2025. , ,
- Positive outlook in Transmission and Distribution (T&D) markets: The company is experiencing encouraging trends in the T&D end market, planning for mid-single-digit fleet growth in 2025, supported by underlying demand drivers. ,
- Anticipated growth in TES segment in 2025: Despite backlog normalization to historical levels, the company expects the TES segment to continue growing in 2025, driven by sustained customer demand. ,
- The company's APS segment is experiencing lower gross margins due to increased costs and an unfavorable mix, with management expecting gross margins to remain in the mid-20% range into 2025.
- There is pricing pressure in both the rental and TES segments, impacting margins and potentially affecting profitability. Management noted that on-rent yield is down and TES gross margins are affected by mix and competitive pressures.
- The TES segment's backlog has decreased to a normalized level of 4 to 6 months of sales, down from higher levels previously, which may signal a potential slowdown in future sales growth.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total Revenue | FY 2024 | $1.8B – $1.98B | $1.8B – $1.89B | lowered |
ERS Segment | FY 2024 | $610M – $640M | $610M – $625M | lowered |
TES Segment | FY 2024 | $1.05B – $1.19B | $1.05B – $1.115B | lowered |
APS Segment | FY 2024 | $140M – $150M | $140M – $150M | no change |
Adjusted EBITDA | FY 2024 | $340M – $375M | $340M – $350M | lowered |
Levered Free Cash Flow | FY 2024 | Positive but less than $100M | no current guidance | no current guidance |
Net Leverage Ratio | FY 2024 | no prior guidance | Expected to remain flat to a modest decrease (<3×) | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Rental fleet utilization & demand | Utilization trended lower than historical highs (e.g., ~72% in Q2 vs. ~82% prior year), though showed some signs of recovery. | Improved to over 79% exit rate, attributed to increased demand and storm restoration work. Average utilization was ~73%. | Gradual improvement from prior quarters |
T&D market dynamics | Discussed delays and supply chain headwinds but consistently cited long-term growth from electrification and AI data centers. | Highlighted improving conditions; AI-driven demand, onshoring, and electrification expected to lift T&D work into 2025. | Continued optimism despite earlier challenges |
APS segment margin pressures | Margins hovered in low to mid-20% range, impacted by utility softness and higher material costs. | Adjusted gross margin at 23%, pressured by mix and decreased tool rentals, but expected in mid-20s range. | Stable but pressured margins |
ERS segment performance & guidance | Lowered revenue guidance in Q1 and Q2 due to utility end market delays; sequential revenue swings observed. | Revenue down YoY but improving sequentially. Guidance top end reduced again to $610–$625M, utilization improved. | Modest sequential gains but guidance trimmed |
TES segment backlog & growth | Backlog moderated from peak >12 months to ~5.5–6 months; strong revenue growth fueled by infrastructure demand. | Backlog at just under $400M (~4.5 months), with TES sales up 13% YoY. Gross margin dipped slightly due to mix. | Backlog normalized; continued sales growth |
Pricing pressure (rental & TES) | Rental rates were largely flat, TES margins within expected range; some used-equipment pricing pressure noted. | Heightened pricing pressure in rental yields and TES margins, reflecting broader market inventory build. | Increased competitive pressure |
Used equipment sales & pricing | Volatile quarterly sales; some pricing pressure in Q1 despite decent gross profit. | Good demand but ongoing pricing pressure. Anticipate Q4 improvement, though sensitive to interest rates. | Growing yet pressured market |
AI, data centers, electrification | Cited as major drivers for future T&D upgrades, with strong demand forecasts. | Significant tailwinds from AI-driven data center demand; up to 29% increase in U.S. electricity use by 2035. | Heightened optimism around these growth drivers |
Net leverage & financial flexibility | Ended Q2 at ~4.1×; focus on pushing below 3.5×–3.0×, used ABL and floor plan facilities to manage liquidity. | Net leverage ~4.4×; ABL upsized to $950M; aiming under 3× longer term, supported by lower inventory and higher free cash flow. | Slight uptick in leverage but plan to reduce |
Curbing growth CapEx | Pulled back on utility-focused CapEx in Q2; flexible approach in Q1; moderate mid-single-digit OEC growth in 2024 from Q4 guidance. | Continuing to scale back growth CapEx due to recent utility softness, though able to pivot fleet if demand returns. | Cautious capital spending stance |
Strong free cash flow in 2024 | Targeted >$100M, but Q2 suggested lower FCF than initially planned; Q1 reaffirmed $100M+. | Expecting higher levered FCF from lower inventory, to reduce leverage; remain focused on improving working capital. | Positive outlook though target may be revised |
Delays & headwinds in utility/T&D projects | Short-term disruptions from regulatory, supply chain, and financing issues; confidence in long-term backlog. | Seeing improvements, but some remaining project delays in TES orders; full recovery likely into 2025. | Gradual resolution of prior headwinds |
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2025 Growth and TES Outlook
Q: What drives double-digit EBITDA growth in 2025?
A: Management expects double-digit adjusted EBITDA growth in 2025, driven by continued growth in the TES segment. Despite a normalized backlog in the 4 to 6 month range, they anticipate growth, with Q4 being a growth quarter for TES. They believe 2025 is shaping up positively for TES. -
Fleet Utilization Levels
Q: Is 79% fleet utilization acceptable?
A: Management is pleased that fleet utilization has returned to the high 70s and has held into October. They consider the high 70s to low 80s a good range to maintain, using levers like fleet size and pricing to keep utilization there. They are optimistic about demand implications for 2025. -
CapEx and OEC Growth Plans
Q: Thoughts on growth CapEx and OEC for next year?
A: They find it encouraging that the T&D market is coming back and are planning for mid-single-digit fleet growth in 2025. While formal guidance will be provided in March, they view the underlying demand drivers as positive heading into 2025. -
Used Market Dynamics
Q: What's affecting the used equipment market?
A: There is demand in the used market with good sequential growth, but there is some pricing pressure. Q4 is typically the biggest quarter for buying, and they expect improvement. The used market is sensitive to interest rates, so as rates continue to lower, it will be a positive trend. -
Operating Rental Yield Decline
Q: Why are rental rates lower?
A: The decline in Operating Rental Yield is due to a mix shift in equipment going out on rent. Distribution equipment has a lower yield compared to vocational equipment. Changes in customer mix also affect yields. These shifts occur throughout the year. -
ERS Segment Growth Outlook
Q: What underpins the 27% QoQ ERS growth in Q4?
A: The growth is driven by a significant rise in OEC on rent at the end of Q3, which has continued into October. Additionally, Q4 is typically strong for rental sales, and they anticipate sequential growth in rental sales as well. -
Telecom Segment Outlook
Q: What's happening in telecom within TES?
A: While telecom is less than 5% of revenue, they are seeing increased activity with larger orders on both rental and sales sides. Some growth is from market share gains. -
APS Gross Margin Trends
Q: Why did gross margin in parts decline?
A: The decline is due to mix and increased overall costs. They recommend modeling gross margins in the mid-20% to high-20% range. They continue to prioritize their service network to keep the fleet operational over third-party service, which affects margins. -
Class 8 Truck Demand and Pre-buy
Q: Is Custom Truck part of strong Class 8 orders?
A: Custom Truck is not planning a significant pre-buy in early 2025 and is seeing good availability with partners. They are monitoring when pre-buy will begin and expect inventory levels to normalize in early 2025.