Custom Truck One Source, Inc. (NYSE:CTOS) Q1 2024 Earnings Call Transcript May 3, 2024
Custom Truck One Source, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by and welcome to Custom Truck One Source’s First Quarter 2024 Earnings Conference Call. Please note, this conference call is being recorded. I’d like to hand the conference call over to your host for today, Brian Perman, Vice President of Investor Relations for Custom Truck One Source. Please go ahead.
Brian Perman: 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 today. That press release and our quarterly investor presentation are posted on the Investor Relations section of our website.
We filed our first quarter 2024 10-Q with the SEC this 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 three months ended March 31, 2024 and prior periods. Joining me today are Ryan McMonagle, CEO and Chris Eperjesy, CFO. I will now turn the call over to Ryan.
Ryan McMonagle: Thanks Brian and welcome everyone to today’s call. Custom Truck continues to see robust demand in our infrastructure, rail and telecom end markets, which all contributed to strong performance in our TES segment in Q1, and helped the segment delivered double digit revenue growth for the sixth consecutive quarter. As we discussed on last quarter’s call, our core T&D markets continue to have favorable macro demand drivers, namely data center investment, electrification and required grid upgrades. However, these markets have been meaningfully impacted in the short term and specifically in Q1, as supply chain issues, regulatory approval and ownership and funding details contributed to project delays, resulting in lower rental revenue and rental asset sales in the quarter.
Overall, we delivered revenue of $411 million in Q1. We continue to believe that the slowdown in the utility end market is temporary and anticipate a return to growth later this year and heading into 2025. Despite the current headwinds affecting transmission and distribution, our team continues to execute well and to demonstrate the value of our business model with our ability to pivot between product categories and between selling and renting equipment as the markets dictate. Our TES segment delivered 15% revenue growth in the quarter versus Q1 of last year, keeping us on track to meet our 2024 revenue guidance for the segment. We’ve seen growth across the board in the TES segment, which we have been able to meet as product availability has improved and certainly led by increased spend in our infrastructure, telecom and rail end markets.
Segment gross margin saw a 170 basis point improvement versus Q1 of 2023, which highlights the continued strong demand environment, as well as the progress the team has made in continuous improvement in our production capabilities. The entire TES team performed extremely well and continues to deliver production near record levels, something the entire organization is very proud of. As we’ve discussed previously, our significant inventory investment last year has positioned us to meet the continued resilient customer demand for new equipment sales, as well as allow us to quickly serve our customers rental and rental asset sales needs, when demand returns to our core utility end markets. We are closely following the upcoming chassis emission regulations and are well positioned for the anticipated demand increase, resulting from the change in emission standards, that is coming between now and 2027.
In our infrastructure end market, we continue to experience high levels of demand for certain products, like our specialty dump trucks, roll off trucks, hydro excavators and water trucks, which supports our belief that demand is beginning to be positively impacted by the early stages of the deployment of federal infrastructure investment and Jobs Act dollars for infrastructure projects. As we’ve discussed before, approximately 60% of our revenue comes from the utility end market, which includes both distribution and transmission work. We continue to see favorable increases in electricity load growth driven by manufacturing on-shoring, AI data center development and the current electrification trends. The amount of incremental power and grid enhancements required to meet this forecasted load growth, as well as the deferred maintenance that is required on our aging grid, creates significant demand momentum in the sector.
Transmission line development and regional interconnection continue to be the bottlenecks in meeting this future energy demand, and there is a significant backlog of transmission projects that are ready to go. As I said earlier, work on these projects is advancing slowly as supply chain, regulatory approval and ownership and funding details get resolved, but provide strong tailwinds for future growth across the entire business. Chris will walk through the details of the performance of our ERS segment, which continue to see strong utilization rates in the mid-70% to high-80% range for all end markets other than the transmission portion of utility. Our rental CapEx plan for the rest of the year reflects investment in our fleet to meet demand across our in-markets, with a focus on those sectors where we are seeing particular strength.
We are confident that the tailwinds that support the ERS segment are robust and will continue to provide significant growth in the years ahead. The breadth of our vehicle product offering and our ability to meet customers’ rental and sales needs uniquely positions Custom Truck to capitalize on the future tailwinds created by the sustained demand, particularly as these transmission projects advance. We continue to invest in geographic markets where Custom Truck is underrepresented and which we believe offer compelling long-term growth opportunities for our business. In addition to the new branch openings in Casa Grande, Arizona, Sacramento, California, and Salt Lake City, Utah that we discussed on last quarter’s call, we subsequently announce two small acquisitions.
First, we acquired SOS Fleet Services in Alexandria, Louisiana, which strengthens our presence in the Gulf Coast region. We also acquired the business of AMD Maintenance and Repair on Long Island, New York, which significantly expands our presence and service capacity in the greater New York City metro area. We’d like to welcome the employees of both businesses to the Custom Truck family. These recent branch openings and acquisitions brings our location count to 40, up from 35 at the end of Q3 last year. We expect all these locations to be fully operational later this year. With respect to our 2024 guidance, while we continue to have confidence in the long-term strength of our end markets and the continued execution by our teams to profitably grow our business, our updated outlook reflects the risks associated with the near-term challenges for our rental customers in the T&D sector, resulting primarily from the delay in transmission projects and lower rental use sales demand, which we now expect could persist through the balance of the fiscal year.
As such, we are lowering our revenue guidance for ERS by $50 million to $680 to $710 million. Regarding TES, supply chain improvements, healthy inventory levels, and continued strong backlog levels continue to improve our ability to produce and deliver even more units in 2024. As a result, we are reaffirming our revenue guidance for TES of $1.115 to $1.255 billion, which reflects another year of double-digit revenue growth, as well as our revenue guidance for APS of 155 to $165 million. Consolidated revenue guidance is now $1.95 to $2.13 billion. Given these changes, we are also lowering our adjusted EBITDA guidance range to $400 to $440 million. While we are reducing our consolidated revenue and adjusted EBITDA guidance for the year, we continue to focus on generating meaningful free cash flow in 2024 and are reaffirming our target to generate more than $100 million of levered free cash flow.
In closing, I continue to have the highest degree of confidence in the entire Custom Truck team and our ability to navigate the current softness in the utility end market and to deliver profitable growth and long-term value to our shareholders. With that, I’m going to turn it over to Chris to talk through the details of our first quarter results.
Chris Eperjesy: Thanks, Ryan. For the first quarter we generated $411 million of revenue, $134 million of adjusted gross profit and $77 million of adjusted EBITDA. Our first quarter results were significantly impacted by a decline in average utilization of the rental fleet to just over 73% from almost 84% in Q1 of last year, which was historically higher than our average levels. In addition, average OEC on rent in the quarter was $1.07 billion, down from $1.21 billion in Q1 of 2023. These declines reflect the impact of the slowdown in transmission utilization that continued in the quarter, which Ryan mentioned. On-rent yield was 40.5% for the quarter compared to 39.6% for Q1 of 2023. Given the trends in utilization and average OEC on-rent, the ERS segment had $136 million of revenue in Q1, down from the all time quarterly record of $206 million in Q1 of last year.
Adjusted gross profit for ERS was $82 million for Q1, down from $106 million in Q1 of 2023. Adjusted gross profit margin was 60% in the quarter, up from 51% in Q1 of last year, largely because rental revenue, which has a higher margin associated with it in rental equipment sales comprised a larger percentage of total ERS revenue in this quarter than in Q1 of 2023. We continue to invest strategically in our rental fleet and sell certain age assets in the first quarter and our fleet age remains steady at three and half years. Net rental CapEx in Q1 was $15 million. Our OEC and the rental fleet ended the quarter at $1.45 billion, down marginally versus the end of Q1 of last year. We expect to continue to invest in the fleet in 2024, but have the flexibility to pivot our CapEx spending plans in 2024 depending on the trends we’re seeing in our end markets.
In the TES segment, we sold $240 million of equipment in the quarter, a 15% increase compared to Q1 of last year and a record for the first fiscal quarter. Gross margin in the segment was 18% for the quarter and approximately 170 basis points improvement versus Q1 of 2023, which we attribute to the ongoing production efficiencies resulting from our high level of production, as well as an improved mix related to higher specialty and vocational truck sales. In line with our expectations, TES backlog continued to moderate, ending the quarter at just under $538 million. Record levels of production and continued strong new equipment sales in the quarter allowed us to make headway toward reducing our backlog to a more normalized level, which currently stands at more than six months of TES sales.
This is down from a peak of more than 12 months in early 2023, but still above our historical average of four to six months. Our strong and longstanding relationships with our chassis, body, and attachment vendors continue to be an important driver of our record TES production. Our intentional inventory build throughout 2023 and into 2024 position us well to meet our production, fleet growth, and sales goals for 2024 and beyond. Our APS business posted revenue of over $35 million in the quarter, down slightly from $37 million in Q1 of last year. Adjusted gross profit margin in the segment was 26% for Q1, down from a little over 27% in Q1 of last year. Overall in Q1, the APS business was impacted by a decrease in rentals of tools and accessories, which were affected by the utility end market softness.
Borrowings under our ABL at the end of Q1 were $552 million flat versus the end of last quarter. As of March 31st, we had $195 million available and approximately $332 million of suppressed availability under the ABL with the ability to upsize that facility. With LTM adjusted EBITDA of $399 million, we finished Q1 with net leverage of 3.79 times , achieving net leverage below three times remains a primary and important goal. However, given year-to-date performance and our current expectation for the rest of the year, we expect to achieve net leverage of less than 3.5 times by the end of the fiscal year. With respect to our guidance, what we expect 2024 to be another year of growth. Given the current conditions and the utility markets, we continue to expect TDS to be the primary growth driver for 2024.
We believe our Europe segment will continue to experience near-term pressure in demand, in the utility market as a result of supply chain, regulatory and financing factors affecting the timing of job starts. These headwinds in our utility end-markets are driving lower OEC on rent in our core ERS segment. We now expect to grow our rental fleet, based on net OEC by low-single digits versus the mid-to-high-single digits, we discussed on our last call. Regarding TES supply chain improvements, healthy inventory levels and historically high backlog levels continue to improve our ability to produce and deliver even more units in 2024. As a result, we are reaffirming our 2024 revenue guidance for TES which reflects another year of double-digit revenue growth.
Our outlook for our APS segment remains unchanged, while this all combines to reduce our consolidated revenue and adjusted EBITDA guidance for the year. We continue to focus on generating meaningful free cash flow this year and are reaffirming our target to generate more than $100 million of levered free cash flow in 2024. Updated guidance for our segments is as follows. We expect ERS revenue of between $680 million to $710 million. TES revenue still in the range of $1.115 billion to $1.255 billion and APS revenue of between $155 million and $165 million this results in total revenue in the range of $1.95 billion to $2.13 billion or growth of 5% to 14% versus 2023. We are projecting adjusted EBITDA in the range of $400 to $440 million. In closing, I want to echo Ryan’s comments regarding our continued strong business outlook.
Despite some temporary demand weakness in certain utility markets, we continue to be optimistic about the long-term demand drivers in our Industry and our ability to deliver strong revenue and adjusted EBITDA growth to hold or expand margins, to produce significant levered free cash flow and to reduce leverage all while providing the highest levels of service to our customers. With that, I’ll turn it over to the operator, to open the lines for questions.
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