Q3 2021 Custom Truck One Source Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcomed accustomed truck one sources third quarter 2021 earnings conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
Nope just call US call is being recorded I would now like to have the conference call over to your host today, Brian carbon Vice President of Investor Relations for custom truck.
Thank you and good afternoon before we begin we would like to remind you that managements commentary and responses to questions. On today's call may include forward looking statements, which by their nature are uncertain and outside of the companies.
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 the actual results to differ please refer to the risk factors section of the company's filings with the SEC. Additionally.
Additionally, please note that you can find reconciliation of the historical non-GAAP financial measures discussed during the call and the press release issued today. The press release, we issued this afternoon and the presentation for todays call are posted on the Investor Relations section of our website.
We will be filing our 2021, the third quarter 10-Q with the SEC next Monday November 15th today's discussion of our results of operations for custom truck one source ink or custom truck is presented on a historical basis as those or for the three months ended September 30th 2021 and prior periods.
While I reported results can only include custom truck one source LP for the period since the merger date April 1st we have presented it and we will be discussing today pro forma combined results as if <unk> and custom truck. It operated together for all periods. We believe such combined information is useful to compare it held the combined company has performed overtime joining.
Joining me today are Fred Ross, CEO, Brian Mcmonagle, President and CEO and bread meters CFO I will now turn the call over to Fred.
Thanks, Brian I'd like to welcome everyone to the company's third quarter 2021 earnings call. This.
This marks the second quarter with custom trucking mesko operating as a combined company.
The investment thesis on bringing the to accomplish together continues to be realized with the integration progressing ahead of schedule and contributing significantly to the strong operating results. We achieved this past quarter.
I'd like to thank all of our employees customers and suppliers, who continue to support our business and uphold our cultural core values.
Turning to our financial results are strong Q3 results highlight the incredible performance of our team demonstrated the continued strength divorced strategically selected markets on a pro forma basis compared to Q3 last year are combined revenue was up 18% and adjusted EBITDA was up 23rd.
R. T. Es business continued to perform had very strong levels with backlogs growing to a record $338 million up by 52% versus to end of Q2 this year.
R E. R. S business continues to perform very well with utilization increasing to 81.4% for the for the quarter up from $73 for for the Q3 last year and 80.9 Q2 of 2021.
In addition, we continue to implement a new rental pricing strategy would try and we'll discuss in more details.
As we discussed on last quarter's call.
Our high utilization supports further growth in the fleet to the meat the straw rental demand.
We made good progress in the third quarter growing the fleet by $33 million, despite well known supply chain limitations.
We continue to capitalize on the benefits of our scale that are strong supplier relations to mitigate these issues.
Are strong results reflect our unique and longest stablish business model, which focuses our efforts on and markets that are resilient through the economic cycle.
All of our end markets currently exhibited very strong tailwinds.
Our one stop shop, all provides us to speak to market need to meet our customers rental and sales demands.
Providing us with the maximum opportunity to capture customer share of wallet can achieve very strong returns on capital.
Synergies from the merger of help improve both our segment margin at our market share and.
In addition are strong balance sheet and solid free cash flow provide us the resources to selectively invest additional capital and opportunities that are accretive to the business and create long term shareholder value I cannot be more excited about the future prospects for custom truck.
Before I turn it over to Ryan I would like to make take a moment to talk about the ESG and custom truck.
As we look to 2022 and start to move beyond the integration, who will use those core values shared across our entire organization as a basis for developing our environmental social and governance strategies.
DSG will become a central aspect to our corporate culture, and we know that is important to our stakeholders customers partners across our business.
My objective is for custom truck to become a leader in our industry as it relates to these important issues and we look forward to updating you as our strategies take shape with that I will turn it over to Ryan.
Thanks for adding good afternoon, everyone first I want to echo spreads comments regarding the continued tremendous efforts of our employees, who delivered both significant progress towards the integration as well as strong financial results. This past quarter I'll start by spending a few minutes, providing additional color on some of the key aspects of our third.
Quarter performance overall demand remains robust and each of our strategically selected for primary and markets.
Transmission and distribution or T&D telecom rail and infrastructure, we continue to focus on these markets because they provide strong long term growth opportunities and are far less cyclical than other truck related to end markets last week's passing of the infrastructure Bill by Congress as a real positive for art.
And markets, which should see the benefit for more than $400 billion of additional spending from the bill as we mentioned previously with customer backlogs already quite substantial our view is that this spending will take some time to materialise, resulting in an extension of our already positive multiyear outlook and further.
Lengthening our current business fundamentals.
Pricing trends across our end markets continue to be favorable reflecting strong demand and the continued implementation of our tier greenall pricing strategy from a key performance metrics perspective, Fred already mentioned are improving rental fleet utilization and growth and new sales backlog. In addition, we drove <unk>.
Arjun expansion as well as an increase in our Osce on rent and Andre yields for the third quarter, Brad will cover these in greater detail.
As Fred noted the underlying fundamentals of are selected and markets continue to be incredibly strong today with industry supply chain issues presenting the only significant limitation to our ability to meet customer demand. We believe that we are seeing the advantage of our one stop shop approach to taking care of customers are position is the law.
<unk> independent distributor vocational trucks in the us and our nationwide network allows us to meet our customers rental purchase and service needs anywhere in the country.
Our purchasing scale for both our own rental fleet and sold units allows us to produce units of the cost well below our competition and the fact that we continue to carry inventory to both sell and rent has allowed us to continue to deliver on customer demands for equipment or scale and our one stop shop business model.
Result in superior unit economics that allow us to increase our share of customer wallet and to deliver best in class returns for both the rental and sales.
The revenue growth, we have experienced in recent quarters exceeds overall market growth offering evidence of our growing market share.
Supply chain issues in certain inflationary pressures continued to affect our business.
While both issues are notable they have not had a dramatic impact on our business to date. However, they are causing us as well as our competition to not be fully able to take advantage of current and market demand and.
In the past, we have discussed how our ability to hold inventory of truck chassis and bodies affords us considerable flexibility and provides a meaningful advantage of our competition. It has also allowed us to continue to meet a significant portion of customer demand, we entered the year with $380 million of new equipment.
Inventory.
As of the end of Q3 are new equipment inventory decreased to $250 million as our suppliers have curtailed production and delayed deliveries. We are actively managing our inventory and continuing to work with suppliers to address this ongoing issue.
We are optimistic that by working closely with our chassis an attachment partners, we will come through this in a very strong relative position.
Given these issues and continued strong customer demand, we have taken opportunities both to pass through certain cost increases to our customers as well as to implement reasonable price increases our goal is to expand margins where possible while being mindful of the inflationary environment that our customers are operating in and ensuring that.
We continue to take the long view and maintaining strong customer relationships.
From an integration perspective, the combination of the two companies continues to progress ahead of plan.
The teams have worked tirelessly to integrate the companies and make the transition as seamless as possible for both our suppliers and customers.
While most of the integration has occurred already next year will see the completion of the final aspects, including systems integration, we continue to targets $40 million of annual run rate synergies by the end of 2021 and.
$55 million in total and currently anticipate that the cost to achieve the synergies should be less than the $50 million originally announced.
These initiatives allow us to achieve the anticipated profitability gains expected from the combination as well as to counter the ongoing inflationary pressures.
Focusing on M&A briefly we continue to selectively consider expansion into underserved areas of both the U S and Canada over the coming quarters, we will look to increase our growth and market share through a combination of both strategic acquisitions and greenfield sites.
Such a measured expansion will benefit all three of our business segments.
S Es and Aps.
In summary, we are very proud of the results delivered and.
In our second quarter as an integrated company.
The Tailwinds, we are experiencing in our end markets are positive customer demand for our equipment remains very strong we're seeing the benefits of our one stop shop business model, we are executing well even with the supply chain pressures, we're experiencing and the integration is in a good spot. We know we wouldn't be able to deliver these.
Results were it not for the efforts of all of our employees, who are working tirelessly together to take care of our customers and I'd like to extend a sincere thank you to them.
I will now turn it over to Brett.
Thanks, Ryan Good afternoon, everyone Q3 was another excellent quarter total revenue was 357 million up 18% first pro forma Q3 last year adjusted EBITDA was $84 million, which is an improvement of 20% versus pro forma Q3 last year and up 20% versus last.
Quarter.
Reported net loss for the quarter was $20 million a significant improvement over Q2, which in that quarter included the impacts of certain charges transaction related costs and impacts of purchase accounting.
Pro forma gross profit, excluding rental depreciation was $123 million and adjusted gross margin for the quarter was 34, 4% compared to $26, 4% for Q2 this year.
The sequential margin improvement was primarily driven by the change in revenue mix with rental accounting for 31% of revenue this quarter, 26% for Q2. This year. In addition, Q2 margins were negatively impacted by one time reserve charges totaling $8 million, which did not occur again in Q3.
SG&A was $49 million or 13.6% of revenues, which includes $5 million a share based compensation expense.
Drilling down to the segment results are era business saw pick up in performance in the quarter, largely resulting from the growth of our rental fleet as well as improve utilization and on rent yield.
Demand for additional rental equipment remains strong as evidenced by the fact that we added a gross $75 million to the fleet in the quarter, which is offset by the sale $43 million in oeec.
Gross adds in Q2 were 55 million the increase in Capex was in line with the previously discussed expectation that the pace of Capex will increase in the second half of this year as a summer seasonal slowdown ended and utility contractors ramped up transmission work.
Fred reference are strong utilization for the quarter, which is 81, 4% up from 73, 4% for Q3 of last year and up from 89% for the last quarter.
I would highlight that utilization in September with just under 85% and we haven't seen that pullback yet so far in queue for.
Average oeec on rent was also up more than $121 million over the same period last year and on rent yield was 38% for the quarter up slightly from the 37, 6% in Q2 of this year.
On rent yield improvements continued to be driven largely by the rollout of our new tiered pricing strategy, which really started to take hold in September the on rent yielded September was up to 39%.
As we mentioned previously it will take time for all of our contracts to turn it over and for us to realize the full long term opportunities from the strategy.
All of these factors combined to push rental revenue, excluding asset sales of 11% sequentially versus last quarter. The increased verse Q3 last year is 11% as combined rental revenue was 95 million, including $43 million for <unk> and $52 million from customer truck.
Drs gross profit, excluding depreciation grew 34% versus Q2.
Margins continued to be impacted by higher freight costs, most of what you've been able to pass through to customers as well as the deferred maintenance over the legacy Enesco fleet, we've seen a repair and maintenance costs start to decline, but this will continue to be a bit of a headwind through Q4.
Overall Urs continued to see the benefit of scale created by the merger further bolstered by the strong underlying and market fundamentals that Ryan discussed.
Es performance was strong again in the third quarter with revenues of $190 million down about 12% versus Q2, as we started to see the negative impact of supply chain issues and.
In addition, the decline in sales was driven in part by our decision to allocate more inventory for rental fleet over sales activity as well as the fact that the third quarter seasonally slower than the second quarter compared to Q3 last year revenue was up 37% as combined revenues, whereas $139 million, including $6 million from <unk> and 100.
$33 million from custom truck.
While revenue was down quarter over quarter, our sales activity continues to be extremely strong with backlog growing by 52% sequentially.
Growth continues to be very broad based across our product portfolio. We believe tes growth reflects growing demand for equipment as well as strong market share gains and our strong pricing discipline.
We have been successful encountering inflationary pressures through the implementation of process efficiency initiatives put in place. During Q2. In addition to passing through any net cost increases to our customers.
Overall, we're very happy with the performance of the Tes business last quarter and are working hard to overcome the macro pressures currently impacting the business and to take full advantage of market demand.
R. Aps business posted revenue of $35 million compared to $32 million in Q2, and Q3 of last year combined revenue was $34 million, including $15 million from nasco in $19 million from legacy coast in truck.
Gross margin, excluding rental depreciation was 28% a significant improvement from 12% in queue to.
This improvement reflects the benefit of a reset go to market strategy that we developed for the ABS business as well as the fact that we are moving closer to completing the deferred maintenance on the desk a fleet.
We continue to believe that Aps presents an opportunity for us to capture a larger share of our customers wallet and strengthen our position with customers and suppliers alike.
While this quarter reflects good progress to date, we are dedicated to providing the resources necessary to execute a strong profitable business plan.
In addition to strong revenue and adjust EBIT growth, we continue to focus on maintaining a strong liquidity position and improving leverage while at the same time investing in the rental fleet.
We increased the borrowings under the ABL by $20 million in the quarter driven by increased capex spending with the outstanding balance ending at $405 million, we still have $337 million available under the ABL and the ability to upsize the facility if needed.
Leverage leveraged currently standard for three times, which is a slight improvement from Q2 as.
As we've previously discussed approximately three times leverage remains a goal of ours. We will also look to make incremental investments and prudent acquisitions. If we believe they create long term shareholder value.
With respect to the outlook for full year 2021 based on the year to date performance current backlog and our outlook for the rental fleet, where reiterating previous guidance. We still expect combined FY 21 revenue to be finished around $1.5 billion.
And adjusted EBITDA to be in the range of $320 million to $340 million. It's important to note. Our adjusted EBITDA outlook excludes the negative impact of the 8 million reserve charges taken in queue too.
In closing I wanted to Echo Fred's in Rives comments regarding the exceptional performance our team delivered while managing through the integration and effectively navigating the many challenges that have impacted our suppliers and customers alike. We've built a great foundation to profitably grow the business and with the powerful Tailwinds on our end markets were truly excited about that.
Clear path for shareholder value creation.
With that I'll turn it over to the operator to open the line for questions.
Okay.
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Yeah.
Our first question is coming from the line is Stefan Okay with C. J all security. Please go ahead.
Hey, good evening, thanks for taking my questions.
Savings desk.
So first we called out the sales of equipment declining sequentially due to more focused on increasing the rental fleet.
But sales backlog increased substantially during the quarter so how.
How should we think about demand and sales and rental are you seeing any meaningful ship there from your customers.
We are seeing really strong demand for both.
So we're seeing we're seeing a rental business continue continue to maintain really high utilization is we talked about on the call, we're adding assets to that fleet.
We are also seeing demand purchase equipment.
So we're obviously as we said on the call where where we can we're shifting people towards her and all but at the end of the day. It's by we think to one stop shop business model wins, because we can sell and rent the equivalent to them.
Great. Thanks.
And then can you give us a little more detail on the aftermarket parts and services.
What the business reset entails and.
What you're doing there.
Sure a couple of things at highlight one as we as Brad mentioned in the comments and his comments.
We've been focusing on profitability. So that's been pushing two parts of that business. So one is one is the rental side of that business, which is renting renting blocks.
And then also renting our OEM manufactured parts so.
It's been focusing on that business and then we've spent a decent amount of time, just getting the cost structure aligned which has been a bit of a pricing exercise to make sure we're pricing.
Pricing products appropriately and then.
Making some optimization those from the from the overall footprint and how we've been managing that business. So you're starting to see some of the benefits and the numbers we showed.
Today, and then we were feeling.
Optimistic about that that segment in that business opportunity going forward.
Perfect. Thanks, and then if I could squeeze in one more.
You mentioned M&A a couple of times.
When we think about M&A should we think about smaller tuck ins or are there any bigger acquisitions that.
You could see out there.
Yeah, I think it's I think it's mostly smaller tuck ins.
We're obviously always open to anything that that makes sense or a strategic.
But at this point, we're starting to think about.
We've talked about in the past how do we continue to expand the footprint.
And those would generally be smaller tuck in type acquisitions.
Perfect.
Wrapped in thanks for taking my questions.
Thanks.
As a reminder to read this.
There for a question. Please press one four.
Our next question is coming from the lineup Scott session birds with opera Heimer and company. Please go ahead.
Thank you good afternoon.
I did see in the slide deck, some reference to how the infrastructure Bill.
May affect the end market to the business, but if you could please jess.
Highlight added perhaps a little bit elaboration on higher positioning for that thank you.
I think.
That most stirred as futuristic but with the markets to there are market segments are so strong.
It's not really going to have a short term effect that the long term effect, we believe will be there, especially with the five G and everything that's going on there so.
But currently honestly the markets are hot enough that it really wouldn't matter right now.
So.
But I do believe that it will continue it will just continue.
Our our ability to to operate at higher levels for longer periods of time as that starts to roll out.
Thanks, So probably not going to see any spike I know it would be too soon you know in the next quarter too but.
You're just looking for solid steady growth without a spike in the future. If this is just more confidence in that trajectory.
Okay, absolutely so and I do think it will raise it will go up but it's not going to be.
A hockey stick, it's going to be a nice gradual uptick.
[noise] guidance understood Scott.
Maybe.
The.
Yes, the supply chain was referenced by you all last quarter as being a bit disruptive and you touched upon it again in this call.
How do you see that going forward should you be okay in future quarters might we see the potential whoring.
Disruption in the future.
Level of confidence with regard to that getting back on track for you all thank you.
I believe that we are going to come through this just fine we have a number of long term relationships and we're pivoting in multiple directions to get everything that we need.
Which.
It certainly is a challenge, but it's a challenge that that our team is accepting and working well with that I feel real good that we'll be able to continue to have growth both in rental and sales.
But it certainly is a challenge.
Understood and.
And just a couple more from me if I could on.
Parts and accessories was a bit tricky last quarter.
Looks like that's getting back on track.
And.
Crossrail has always been discussed as an opportunity there too early to discuss seeing anything on that front or or are you feeling like it's starting to materialize. Thanks.
Yeah, I think it's still early days Scott I think we're seeing we're seeing some wins.
Legacy Nasco PTA customers now being able to buy equipment. So we are seeing that we're starting to see that.
From a whole good sales standpoint, and then we've seen some early wins on cross selling PTA kits.
But still very early days from across sell perspective.
Okay. Thanks, and then lastly from me.
Yeah, it's good to hear and Capex is going up obviously, a solid demanding byre-man just curious how we should be thinking if that's going to have any impact on your outlook for free cash well, we just passed on cash generation. Thank you.
Yeah Scott.
I think you will Q.
Q3.
Is typically and it kind of our expectation for this year was going to be the high spin quarter.
They're so cute for seasonally is always a little bit software just you head into December so I think you'll see.
Positive cash flow.
In Q4, and then therefore for the year, we'd still be in the positive from that standpoint, as we head into next year again, I think we'll continue to look to invest in the fleet again, we understand and trying to strike the right balance between investing in the business and free cash flow generation you also run into kind of what.
We talked about from the supply chain is somewhat of a limiting factor, we're still focusing certainly on hitting the revenue or the fleet targets.
But this is the available inventory to add is somewhat of a governor they're allowing us enter to also to generate cash.
But I don't think given the fact that we ramp of Q3, that's in line with expectations I don't think it changes our outlook for the.
The investment or kind of cash flow for the balance of this year or for next year either.
Okay sounds good thank you very much.
Thanks, Scott Thanks, Scott.
And our next question is kind of come the line.
<unk> one track and he is with Dutch. Please go ahead.
Okay.
Hey, guys nice job this quarter.
Just say.
Taking a look here I think the uptick in utilization here is there sort of a theoretical Max we can think about in terms of utilization.
And do you feel that you might be coming up on that or if you can comment on that I appreciate it.
Yeah, I mean, the way that we've always thought about it is.
If your AD kind of 85 made it easier at theoretical Max frankly, if you're kind of in the even the low 80 year, there and starting to Miss some demand. So we believe that were there. That's why we're looking to add more equipment to the fleet.
Can you continue to meet that demand, but yes, I would say that the mid eighties.
You are kind of there, which is where as I noted in my comments September is where we finished.
I guess, that's good to hear.
High class problem, the hand, I guess.
Just.
Adam.
On the M&A crime here, just whether it's tuck ins or something broader but.
Is there any opportunity here may be ways to further integrate your business, whether it's through other manufacturing abilities.
You see care or where should we be thinking in terms of kind of targets there.
Yeah, I think we've we've always said we focus first on that geographic footprints footprint expansion and then continuing to add to the rental fleet. So I think that will be our focus in the past we have made some what I'll call more manufacturing acquisitions and you'll get the.
The low king trailer business that we acquired or the claim business that we acquired so we will look at those.
But I think it's definitely focused on geographic footprint expansion in rental fleet expansion at this point.
Gotcha.
And then just lastly, ultimately how do you think about liquidity.
Sort of a level that you're comfortable with.
Make sure they are able to fund working capital next year and such.
Yeah from.
From a liquidity standpoint, we look at the business and into your points Fitsville and working capital. It is not working capital cash intensive business, our inventory, we're able to fund with floor plan.
We have.
Sufficient capacity enter those facilities to grow inventory quite substantial if we needed to without running into any problems.
So consumption of cash there isn't that mid teens. So from liquidity standpoint, I think we're in a really good spot again, we have.
More than sufficient my opinion availability under the ABL cash on the balance sheet, we can always upside the ABL to given where the borrowing basis.
So from available liquidity I think we're in a really really good spot to capitalize and invest both in rental as well as do M&A, if we need to.
Without putting additional stress on the business.
Good to hear and it's good to see that these averaging coming through.
Good luck going forward. Thanks.
Thank you. Thank you I appreciate it.
There are no further questions at this time I will now turn the call back to you. Please continue.
Sorry closing remarks.
That concludes our call for call for today. Thanks, everyone for your interest in custom truck. We look forward to speaking with you on our next quarterly earnings call in the meantime, please don't hesitate to reach out with any questions. Thank you again.
That does conclude the conference call for today, we thank you for your participation and we ask that you. Please disconnect your lines.
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