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    Custom Truck One Source Inc (CTOS)

    Q4 2023 Earnings Summary

    Reported on Feb 9, 2025 (After Market Close)
    Pre-Earnings Price$6.21Last close (Mar 7, 2024)
    Post-Earnings Price$5.86Open (Mar 8, 2024)
    Price Change
    $-0.35(-5.64%)

    What went well

    • Strong Free Cash Flow Generation Expected in 2024: The company anticipates generating more than $100 million in levered free cash flow in 2024 due to unwinding net working capital investments made in previous years.
    • Robust Demand in TES Segment Driven by Infrastructure Spending: Increased infrastructure spending is driving strong growth in the TES segment, with 21% growth for Q4 and 29% growth for the full year 2023. This trend is continuing into early 2024, supported by infrastructure funds starting to show up in backlog.
    • Significant Long-Term Demand Expected in Transmission Market: Despite current delays in transmission projects due to regulatory approvals, supply chain issues, and interest rates, the company expects significant tailwinds in the transmission end market as issues get resolved later in 2024 and into 2025, contributing to future growth. Long-term demand indicators remain strong, and once projects begin, demand for rental equipment is expected to be significant.

    What went wrong

    • Delays in transmission projects due to supply chain issues, regulatory approvals, and high interest rates are causing headwinds in the ERS segment, potentially impacting revenue growth in 2024.
    • Decreasing utilization rates in the rental fleet from 80.4% in Q3 to 77.6% in Q4, and expected to drop to around 75% in Q1, may indicate weakening demand in key markets.
    • The TES backlog is decreasing, which could signal slowing demand in this segment. Despite delivering over $200 million of additional TES revenue, backlog decreased by about $60 million to $65 million.

    Q&A Summary

    1. Transmission Slowdown & Recovery Timing
      Q: What's causing transmission slowdown; recovery outlook?
      A: Management explained that the slowdown in transmission is due to timing issues. Factors include regulatory approvals, supply chain delays, and cost of funds. Many projects are expected to begin later this year, leading to strong demand for an extended period. Other end markets, such as infrastructure and distribution, continue to perform well.

    2. 2024 CapEx and Fleet Growth
      Q: How are you thinking about 2024 CapEx and fleet growth?
      A: They plan to grow net OEC by mid-single digits in 2024, with gross CapEx similar to this year, targeting around $400 million. This includes approximately $75-80 million of growth CapEx.

    3. Free Cash Flow and Inventory Unwinding
      Q: What's driving the $100 million free cash flow outlook?
      A: The company expects to unwind prior inventory investments as the year progresses, improving net working capital and driving strong free cash flow of $100 million in 2024. This is due to earlier strategic decisions to invest in inventory anticipating demand.

    4. TES Backlog and Demand Trends
      Q: Will TES backlog normalize or stay elevated in 2024?
      A: Despite delivering over $200 million of additional TES revenue, backlog only decreased by about $60-65 million year-on-year. Strong order volume continues, and while backlog may decrease further, demand remains robust. Historical lead times are 4-6 months, but may not return to that level by year-end.

    5. Utilization Rates Expectations
      Q: What's the expected utilization trend for 2024?
      A: Utilization rates decreased to just below 75% at the end of the year and are currently around that level. They expect utilization to build in the spring, level off in summer, and increase into Q3 and early Q4, following typical seasonal patterns.

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