Q3 2022 Custom Truck One Source Inc Earnings Call
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Greetings and welcome to the custom truck one source, Inc. Third quarter 'twenty to choose earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Brian Coleman. Thank you Mr. Perlman you may begin.
Thank you and good afternoon before we begin we'd 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.
Okay.
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 and the press release issued today.
Press release, we issued this afternoon and the presentation for today's call are posted on the Investor Relations section of our website.
We'll be filing our third quarter 2022, 10-Q with the SEC. This evening.
Today's discussion of our results of operations for custom truck one sourcing for custom truck is presented on an historical basis as of or for the three months ended September 32022, and prior periods. While our reported results can only include custom truck one source L. P for the periods since the April one 2021 merger date, we've presented and will be <unk>.
Cussing today pro forma combined results as if nasco and accustomed trucks get operated together for all periods.
We believe such combined information is useful to compare how the combined company has performed over time.
Joining me today are Fred Ross, CEO , Brian Mcmonagle, President and COO and Chris <unk> CFO I will now turn the call over to Fred.
Thanks, Brian and welcome everyone today's call I'd like to begin by thanking all of our employees customers and suppliers.
Port our business that are helping us navigate the challenges our industry continues to face.
The entire team continues to work tirelessly to maintain record levels of production. So we can fulfill our goals of providing unrivaled service to our customers growing our market share and creating value for our shareholders.
Compared to the prior year quarter, we delivered strong gross profits and adjusted EBITDA gains as well as modest revenue growth.
We delivered $91 $6 million of adjusted EBITDA up 9% versus the prior year, while at the same time Q3 revenue was up slightly versus Q3 of 2021.
Supply chain issues continue to impact us in the third quarter, but we were able to deploy $97 million into our rental fleet in the quarter, which is the most since the merger.
Supply chain challenges impacted new equipment sales, which unfortunately did not see the sequential growth that we expected while our supply chain continues to improve issues remained remain and we are working diligently to end. The year ahead into 2023 on a much improved footing.
Our <unk> business continues to perform very well with utilization increased by 100 basis points for the quarter and by 250 basis points compared to Q3 of 2021.
Our <unk> business continues to see very strong demand with backlog growing to a record of $709 million more than two times, what it was a year ago strong demand for both rental and new sales provide us the opportunity to focus on improving profitability through margin expansion.
Finally, we remain well capitalized and are focused on reducing our net leverage which Chris will discuss later.
Our third quarter results provided continued momentum for us for Q4, and a very solid foundation as we've been looking forward towards next year. They reflect the realization of the benefits of our one stop shop business model on our focus on end markets that consistently exhibits strong underlying fundamentals and are less six.
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While our outlook for the rest of the year is tempered by the continued impact of global supply chain issues and inflation. We are confident that our team will continue to navigate these effectively.
During the last quarter of the year, we expect to see continued strong revenue.
Adjusted EBITDA margin growth across business segments.
With that I will turn it over to Ryan.
Thanks, Fred and good afternoon, everyone first I want to Echo Fred's comments regarding the tremendous efforts of our employees, who helped us deliver another solid quarter.
Demand remains very strong in each of our strategically selected for primary end markets T&D Telecom rail and infrastructure we.
We continue to believe that these markets offer compelling long term growth opportunities well in excess of GDP and should should for the foreseeable future.
This can be seen in our reported backlog as of the utility and telecom contractors, our largest customer base, which continue to be extremely strong and at or near record levels. We see this reflected in both our <unk> backlog, which grew by more than $45 million or 7% in Q3 and then the.
The performance of our rental fleet as well as Fred mentioned, we added $97 million to our rental fleet in the quarter. The most we've added since the merger in early 2021, we are seeing utilization continue to improve for the quarter utilization averaged 83, 8%, but we ended the quarter north of 87%.
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Additionally, we are experiencing very strong demand from our customers to purchase assets in the rental fleet, which we see as a positive indicator for sustained strong demand.
Given the level of assets, we added to the rental fleet in Q3.
Which has continued in Q4.
We anticipate being able to sell more of the aged equipment in the rental fleet during the fourth quarter.
Pricing across our end markets continues to hold steady, reflecting strong demand and our focus on driving margin expansion across our largest segments. We continue to put new assets out on rent at higher rates than our fleet average.
Continued industry supply chain remains the only significant headwind to our ability to meet customer demand. We continue to experience intermittent issues receiving adequate supply of the major inputs for our trucks, which impacted our ability to deliver product to our customers during Q3.
However, as Fred already mentioned production in the third quarter remained near historically high levels overall, our inventory increased by $20 million versus Q2, which we see as a positive indicator and positions us well as we finished the year.
Through the strong vendor management efforts of our team we continue to experience an increase in the inventory flows from our suppliers with deliveries up more than 28% during Q3 compared to Q3 last year and up 40% year to date versus last year.
We remain on target to add more gross capex to the rental fleet in the second half of this year than we did in the first half.
Despite the improvement in the supply chain challenges, we've been discussing over the past several quarters, we fell short of our goal of continued quarter over quarter revenue growth in tes.
We remain dedicated to returning to both sequential quarterly and year over year revenue growth in tes in the fourth quarter.
We continue to experience wage inflation consistent with the rest of the market as well as higher cost for some of our production inputs. We are passing through certain input cost increases to our customers and implementing reasonable price increases where possible.
From a strategic perspective, we remain focused on optimizing our production and how we deliver service to our customers. Our goal of producing continued strong revenue gross margin and adjusted EBITDA growth and increasing shareholder value now define how we run our business as we look ahead to the fourth quarter ended.
Next year, we believe that favorable end market tailwind robust customer demand improving supply chain and continued solid execution by our team all position us to achieve these goals, while supply chain challenges and inflation remain obstacles.
We look to fully take advantage of these growth opportunities. We currently have unprecedented demand for rental asset purchases that we will benefit from in the fourth quarter and we expect this to continue into fiscal 2023, we know our employees are the key to delivering financial results and unmatched customer service as demonstrated.
In the third quarter and I'd like to extend a sincere. Thank you to them I will now turn it over to Chris.
Thanks Ryan.
As Fred and Ryan have indicated Q3 was another strong quarter. Despite the supply chain challenges, we continue to face.
Total revenue of $358 million was up slightly compared to Q3 2021. Despite these issues total revenue in Q3 decreased by 1% sequentially compared to Q2 <unk>.
Adjusted EBITDA was $92 million, a 9% improvement compared to pro forma Q3 2021 results.
Year to date 2022, adjusted EBITDA is up 18% compared to the pro forma year to date period in 2021.
Net loss for the quarter was $2 4 million.
Gross profit excluding rental depreciation was $131 million, representing an adjusted gross margin for the quarter of 36, 6% up 220 basis points from 34, 4% for Q3, 2021, and up 175 basis points from last quarter the gross.
Margin improvement continues to be driven by favorable segment mix and our strategic focus on pricing across all of our revenue segments.
SG&A was $50 million for Q3 were 13, 9% of revenues, which is up slightly versus Q2, but in line with the expectations, we set forth earlier in the year.
Turning to our segment results Fred referenced our continued strong utilization within our <unk> segment for the quarter, which was 84% up from 81% for Q through Q3, 2021, and up 100 basis points compared to last quarter.
Despite the supply chain challenges average OFC on rent increased by more than $32 million compared to the previous quarter.
On rent yield was just under 39% for the quarter, which was slightly lower than Q2, mainly as a result of mix and up from 38% for Q3 2021.
Our <unk> ended Q3 at $143 billion.
Up by more than $29 million in the quarter, we will continue to invest heavily in the fleet in the fourth quarter.
For Q3, Urs rental revenue was $112 million, a three 6% increase versus Q2.
Equipment sales for the quarter were $37 million essentially flat from Q2.
<unk> gross profit excluding rental depreciation was $95 million for Q3 up 9% from Q2 and adjusted gross margin improved to 63, 6%.
Disappointingly tes revenues of $174 million were down 4% sequentially from $181 million in Q2. As this segment continues to take the brunt of the impact from supply chain issues.
Despite the lower revenues in the quarter gross profit increased marginally in Q3, resulting in a gross margin of 15, 7% up from 15% in Q2.
Our sales activity continues to be extremely strong with backlog growing by 7% sequentially from Q2 to $709 million and this strength was very broad based across our product portfolio.
Supply chain issues, resulting in near term headwinds to our ability to fully take advantage of the strong demand. We believe the continued growth in our <unk> sales backlog reflects growing demand for equipment indicative of our strong market share gains and our pricing discipline.
We have been successful encountering inflationary pressures through the implementation of ongoing production efficiency initiatives. In addition to gaining favorable price increases with our customers.
As this quarter's <unk> results show, we are confident we will be able to hold or improve margins over the coming quarters, even with elevated levels of inflation.
Our EPS business posted revenue of $35 million down 2% compared to Q2 gross profit margin in the segment was negatively impacted by higher labor and facility costs as well as shifts in product mix.
Maintaining a strong liquidity position and improving leverage remain priorities for us as do investing in the rental fleet and pursuing selective strategic growth through M&A.
Pursuant to our previously announced stock repurchase program, we purchased $2 $4 million of our stock in the open market during the quarter during.
During the quarter, we increased the borrowings under our ABL by $12 million with the outstanding balance ending at $447 million mainly.
Mainly to fund a portion of our working capital investments at September 30, we have $300 million available in $127 million of suppressed availability under the ABL with the ability to upsize the facility.
With the LTM adjusted EBITDA of $364 million. We finished Q3 with net leverage of 377 times, which is an improvement of almost a turn since the close of the transaction and down slightly from last quarter.
Approximately three times leverage remains our goal and the one we will likely achieve later in 2023.
We will continue to seek to make incremental investments and prudent acquisitions. When we believe that create long term shareholder value.
With respect to our 2022 outlook based on year to date results current backlog and our outlook for the rental fleet. We are adjusting our guidance as follows we expect <unk> revenue of $650 million to $690 million TTS revenue of $720 million to $750 million.
In Aps revenue of 135 million to $145 million.
This results in total revenue of 150 5 billion to $1 585 billion.
We are projecting adjusted EBITDA of 385 million to $395 million, which is within our previously provided guidance range.
And as Ryan noted previously we will benefit from strong demand in the fourth quarter for rental asset purchases, particularly of older equipment in the rental fleet that will favorably impact our results and partially offset the supply chain headwinds that continue to impact the TTS segment.
In closing I want to Echo Fred's and Ryan's comments regarding our strong performance. Despite ongoing challenges we have executed a transformational integration with nasco delivered double digit adjusted EBITDA growth expanded margins and in an inflationary environment reduced leveraged and continued to deliver the highest levels of customer service.
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With that I will turn it over to the operator to open the line for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question is from Nicole <unk> of Deutsche Bank. Please go ahead.
Yes, thanks, good afternoon guys.
Hi, Nicole how are you clinical hello. Thanks.
Thank you. So I guess, maybe just starting with utilization comment that you made saying that we exited the quarter you exited the quarter around 87% is the assumption that that 87% and can kind of sustain through <unk> or could you talk a little bit about the utilization thats baked into the outlook.
Yes, that's a great question.
Yes, we did we did exit September at 87% and we've seen we've seen that hold strong so far in the fourth quarter.
Typically utilization peaks.
Sometime in October early November and then it will it will decline a bit in after Thanksgiving and then to enter into the holidays.
So we would expect that it would come back down to kind of more historical.
Historical normal average for the fourth quarter, so in that kind of low to mid eighties.
B, what we'd expect for the year.
Got it and then just with respect to the Capex outlook.
But what I would just wasn't clear on are you guys actually raising the amount of capex gross capex that youre expecting to spend or is it just second half stronger than first half as per your prior expectation.
It's the latter it's yes second half stronger than the first half so I think.
Q4 will probably come in a little lighter than Q3.
And from a gross Capex perspective.
It will still be strong so second half will be meeting them.
The first half of this year.
Okay perfect. Thanks, I'll pass it on.
Thanks Nicole.
The next question is from Justin Hauke of date. Please go ahead.
Yes, hi, I apologize for the background noise here.
I guess.
I guess my question is on the Ges business I mean, the revenue has been sequentially kind of in this $1 70 to 180 range for the last.
Year.
The guidance is implying I guess at the midpoint like around $2 15 somewhere in there for the fourth quarter, 20% growth I'm just.
Obviously, the backlog is there and the demand is there, but just in the visibility that you have.
Halfway through the quarter here in terms of the deliveries on the sales side would be helpful.
Yes, youre right on kind of historical.
Performance.
But things are trending well so far in the fourth quarter.
And that's why that's why that's the number that we've had to bring guidance down.
Today and on the last call. So it is it is where the risk is of just what are we able to put out but we're trying to be sure kind of the best information, we have with how how the supply chain allows us to deliver but you're right demand is continues to build in as strong you saw the backlog build in the third quarter and it's even building.
Still in October so we're seeing really good demand trends, it's just what we're able to get out.
Yes.
Okay.
I guess the second question is on the positive side the margins were strong here, particularly in the rental business.
I know previously you were talking about the price contribution on an new fleet that was going out was up in the.
The 10% range I'm, just curious if that's trended higher.
Seems like it's offsetting maybe your cost inputs here and Youre able to recover some margins that maybe just some commentary there.
Sure, Yes, new.
Rates on new things going out are still kind of in that in that range. Justin So it's still trending kind of double digits above where the overall fleet is averaging so we're seeing that trend.
And when utilization is increasing we're putting a lot of assets out what is happening. Though is we're also seeing the duration of assets.
Increase and so some of the assets that have been out are not are not churning as much but yes, we're still seeing good opportunity when it comes to comes to rate and obviously as the market as the market dictates, where we're trying to add as many assets as we can into the rental fleet.
Okay.
Okay, Great I'll leave it there thank you.
Thanks.
Our next question is from Stefan of Chris.
J a securities. Please go ahead.
Hi, Thanks for taking our questions.
Could you just talk about free cash flow expectations for the year end and just in terms of working capital as well. Thanks.
Yes. This is Chris.
In terms of free cash so I guess I'll focus on Levered free cash flow. If you look through the first three quarters I think year to date, if you adjust out for the high rail acquisition were right around zero.
I would point out that as we're at free cash flow Levered free cash flow zero, but we've been able to cover pretty significant investment in the rental fleet I think in the third quarter alone. It was a net of $60 million of Capex net of any proceeds we had for.
For the year, we expect to be able to be positive from a levered free cash flow standpoint.
So we should see that flow through in Q4 in terms of networking capital you've seen we've invested significantly in particular in inventory, that's partially offset by some of that being on floor plan.
But we really think that to some of Ryan's comments, thats really going to set us up well as we enter Q1 and Q2 of.
Next year, you'll remember last year, our inventory levels were at rather low levels and that created some constraint as we entered the year and so.
Expect it will have some of that investment as we exit the year, but it's going to set us up well for the first half of next year.
Got it thanks.
Another one for you Chris.
On the timing of the last call you were just getting started.
Can you just talk about your time, so far accustomed track anything youre seeing that you'd like to improve on or any changes.
Thank you Matt.
So I'd now counting months instead of days some two five months at this point no.
The way I would describe it as I did a lot of diligence before I joined and all of the things I loved about the company or our <unk>.
Being true I mean, I love the end markets I love the positioning of the company I Love what Fred the business that he has created and giving me an opportunity to be a part of like any business, there's always opportunities for improvement, especially as you've grown quickly and going through the challenges of being a public company and Thats kind of my background I think that's an area where I can help.
But in terms of the story and the strategy that you've heard exactly what brought me here so no.
Pearls of wisdom today, but just I guess a confidence in our reassurance that all the things you guys think about the business is why I'm here and I really like what I've seen so far.
Great. Thanks for taking my questions.
Yes.
Thank you Stefano.
Our next question is from Noelle Dilts of Stifel. Please go ahead.
Hi, Thanks, I wanted to dig into E. R. S a little bit looking at implied fourth quarter guidance.
That's about.
A 38% increase over our revenue levels in kind of average revenue levels in the first three quarters.
So im assuming most of that is coming from.
From.
Rental equipment sales, but could you just help us kind of understand again, what's giving you the confidence in that strong fourth quarter gentlemen.
Sure.
This is Ryan I'll start and credit risk can certainly add in but you are right. We think and we mentioned it in some of our prepared remarks about.
The demand, we're seeing about fourth quarter buyouts of two things are going on one we've got really strong demand from the customer for that equipment, which we see is just a really good indicator of sustained demand heading into next year and then two as we've been able to increase what we've been able to deploy into the rental fleet, so that $97 million of gross capex.
So we talked about this quarter.
We're comfortable being able to take out some of the older equipment that we've talked about for the last several quarters. So so we're seeing really strong demand for it and we think it makes sense with the amount of Capex, we are able to put into the last.
Last quarter in Q3, and then that we're planning for this quarter in Q4.
Right.
Oh I'm sorry go ahead.
Now, it's going to stay and then again it just.
It's just an indication on.
Our customer base wont spend capex, if they don't believe that they are in a good position to get the return on it.
And so it's mostly.
Distribution and we don't see any end in sight.
To that business.
Again, we like selling our older equipment off to get into the newer equipment.
Okay, Yes.
I understand.
Dynamics I guess.
Don't know if you can give us any guidance here, but I'm, assuming you're kind of paying more for the newer equipment than you would've been in the past.
Can you give us a sense of sort of where rental fleet units, you think will wind up sort of heading into heading into 'twenty. Three I am just trying to get a sense as you know.
Sort of how we should think about the fleet size and growth potential heading into next year.
So a couple of things in there right. So we've talked <unk>.
Talked about right.
Increasing right on rental units or some of that will offset the ink.
From an input cost standpoint, so you are right the cost of a unit today is kind of.
Mid single digits higher than it was in years past, just because of inflation and what we're what we're receiving from our OEM partners. There. So we but we're comfortable that price can offset that and we're also putting as we add new assets were putting those out at the higher rates. So there is a good trade.
That happens there.
In the fourth quarter from account standpoint, I don't have a perfect number to give you there, but we're expecting a significant al.
<unk> of equipment, which is which is kind of your comment. The first question you asked and then as I said, we will see gross capex that will be.
Less than it was in the third quarter, but still significant.
And so I think it will be.
You will be about the same rate from from a just looking at the fourth quarter alone from what's coming out to what's going in but some of that will just be resolved.
Not until December so we think about exactly what pieces are coming out.
The other thing to remember is the.
Cost of R&M goes down substantially on the new equipment and the older equipment always cost more money to maintain and it's easy it's easy to replace that older equipment with new equipment that we're not chasing and repairing.
Good point thank you.
Yeah.
And last question is from Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much good afternoon.
I'm curious can we delve into the supply chain issues, a little bit more could.
Could you speak to obviously to impacting tes, the most but could you kind of give us a little insight into each of the segments, how it's impacting.
<unk>.
It remains persistent there've been points of optimism from you all this year that it would improve and it seems like that Hasnt panned out so just thoughts on.
Has it improved.
Or are we still mired in niche or for a good bit longer. Thanks.
Yes, I'll give you a couple of numbers on that but I can give you some more color to Scott but.
But look in flow it has improved but it hasn't improved as fast as we.
Expected certainly this time last year.
But it is improving right. So a couple of things inventory is up $140 million.
Today at the end of the third quarter than it was at the beginning of the year. So we are seeing more inflows on the quarter inflows were up.
Just under 30% kind of Q3 versus Q3 last year and I think year to date inflows have been up about 40%. So we are seeing more product come in which is to chris's comment earlier, it's why we're feeling good about how it will set us up for next year. The challenge continues to be having all of the things we need.
Need to build a completed unit and Thats what were dealing with now so in certain situations. We've got chassis, we have better inflows the chassis and other situations. We've got the attachment but were waiting on the right chassis that would match with it and so that's what that's that's been the.
Made it challenging to predict exactly what we're going to be able to build in the quarter, but macro it is getting better we are seeing more inflows and I think its setting us up.
Reasonably well kind of heading into Q1 next year in 'twenty three truck the truck side has gotten quite a bit better.
It really excited on where we're at in the product that we're getting now.
And it's more small parts, they're holding us back versus the big parts, which is a big deal because a lot of times, we can flex on the small parts or come up with different ideas that could that can work in lieu of.
But I'm Super excited on where we're at and how we're set up to go into the to go into the first quarter of next year, but.
This was the most trucks I've seen in a while.
And the most attachments so.
I'm really bullish on it I feel really good about it and it is getting here do we wish it would have got here a month earlier or two months earlier sure.
But we are getting it.
Is coming in now.
It sounds like it's it's not one or two or three items. It sounds like its various that is.
Issue and it sounds like it's getting better for you.
Are there any particular parts.
That are that.
Don't have clarity.
And are still uncertain and then just one more after that but.
Just a follow up there.
It's really again, it's smaller pieces may be its a cylinder here or pumps or valves or something versus the major components read that you really can't you can't change anything.
If the digger doesn't get here the dump body doesn't get here. There is nothing you can do about it. So these are smaller parts that it still takes to put the truck together with and that's why you've seen.
Again, our inventory has grown because all of those bigger pieces are now showing up which is going to allow us to build the trucks out so again.
It's happening again wish it was earlier, but pretty happy with where it is today actually pretty excited about where it is today.
Great. Thanks, and then just on.
In.
<unk> it sounds like youll be selling a lot of H units in the fourth quarter and I think I just heard you say a lot of that will be determined in December so it sounds like it's still on the come.
How will that how do you anticipate pricing to be and margin on those.
Those use suite sales.
You sound confident but any any commentary there and.
As we've discussed before but is there a concern maybe if you can't get the Capex you have on the order and you sell too much that you might be very capacity constrained heading into the new year.
Just touch on that as well and that's all from me. Thank you.
Sure, Yes, I'll start Scott, but it's a good question and I think we're seeing high residual values right now so we feel like it is a good time.
To continue to sell some of the used equipment out of the fleet. So there is because the demand environment is so strong we're seeing good residual values. There so feel comfortable with that and kind of how we're modeling margin.
<unk> flowing through there and then.
Look where we are comfortable with our Capex plans as we're heading into next year or two and so we are.
We believe.
The optimism that Fred just talked about we feel good about what we'll be able to put in in this quarter and what we'll be able to add to the fleet heading into next year as well.
Okay.
Thanks very much.
Thanks Scott.
Yes.
Ladies and gentlemen, we have reached the end of the question and answer session and I would now like to turn the call back over to say cross closing comments. Please go ahead Sir.
Okay.
Thanks, Thanks, everyone for the time today and your interest in custom truck. We look forward to speaking with you on our next quarterly earnings call and in the meantime, please don't hesitate to reach out with any questions. Thank you again.
That concludes today's conference. Thank you for joining US you may now disconnect your lines.
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Sure.
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