Custom Truck One Source Inc. Q1 2023 Earnings Call
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Ladies and gentlemen, thank extending by and welcome to custom truck one sources first quarter 2023 earnings conference call.
Please note this conference call is being recorded.
I would now like to hand, the conference call a virtual hosts today, Brian Pearlman, Vice President of Investor Relations for custom truck. Thank you. Sir Please go ahead.
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.
For a discussion of some of the factors that could cause actual results to differ please refer to the risk factors section of the Companys 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, we issued today.
The press release, we issued this afternoon in our quarterly Investor presentation are posted on the Investor Relations section of our website.
We followed our first quarter 2023, 10-Q with the SEC This afternoon.
Today's discussion of our results of operations for custom truck one source ink or custom truck is presented on an historical basis as of or for the three months ended March 31, 2023 and prior periods join.
Joining me today are Ryan Mcmonagle, CEO , and Chris <unk> CFO I will now turn the call over to Ryan.
Thanks, Brian and welcome everyone to today's call I'd like to begin by thanking all of our employees customers and suppliers, who continue to support our business and helped us deliver such a strong quarter.
The entire custom truck team continues to work tirelessly to maintain record levels of production, enabling us to grow our rental fleet to meet continued strong demand for new equipment and to fulfill our goal of providing unrivaled service to our customers.
For the first quarter of the year, we delivered strong year over year revenue adjusted gross profit and adjusted EBITDA growth, we generated $452 million of revenue $150 million of adjusted gross profit and $105 million of adjusted EBITDA in Q1 up 23.
<unk>, 16% and 15% respectively versus Q1 2022.
Overall demand remains very strong in each of our strategically selected primary end markets utility or T&D telecom rail and infrastructure.
These markets offer compelling long term growth opportunities well in excess of GDP, which we believe should continue for the foreseeable future.
The reported backlogs of the utility and telecom contractors, our largest customer base continue to be good proxies for this sustained growth and remain at or near record levels. We see continued strong demand and our new sales backlog and in the performance of our rental fleet.
Additionally, in the first quarter, we continued to experience strong demand from our customers to purchase assets in the rental fleet. We see all of these as positive leading indicators for sustained future demand.
Rental utilization in the <unk> segment remains near record high levels, and we continue to focus on rental pricing and the amount of time. It takes to turn a piece of equipment and make it available to go back on rent both of which positively impacted adjusted gross margin.
Investment of $109 million into the rental fleet and sales of certain aged assets in Q1 resulted in the reduction of our fleet age to under three seven years, which we believe remains the youngest in the industry. As we stated on last quarters call. We expect to continue to aggressively invest.
In the fleet for the remainder of the year.
In the <unk> segment, we sold $209 million of equipment in the quarter, a 25% increase compared to Q1 2022.
Additionally, our backlog grew by more than $100 million in the quarter or more than 13% versus the end of 2022, our backlog is up 46% versus the end of Q1 last year.
These results point to continued strong demand for new equipment. We are proud of the relationships, we have with our chassis body and attachment vendors and we continue to work closely with them to address supply chain issues as they arise.
Progress in this area resulted in our inventory growing by $118 million in the quarter, which we see as a positive indicator of improving supply chain conditions and positions us well to meet our production fleet growth and sales goals for the remainder of the year.
Strategically we remain focused on investing in and optimizing our production capacity to ensure that we deliver the product and service levels, our customers expect from us.
In Kansas City, Missouri, we acquired approximately 60 acres adjacent to our facility.
And are in the process of bringing more than 200000 square feet of manufacturing production and PTA warehouse capacity online.
And Union Grove, Wisconsin, we are investing to nearly double production capacity.
These investments, which we expect to be complete in the second half of the year will ensure that we have sufficient capacity to meet our growth targets for both our rental fleet and new equipment sales.
As well as be a catalyst for growth and our Aps segment.
As we look ahead to the rest of the year, we believe that our first quarter results favorable end market tailwind robust customer demand and improving supply chain dynamics and continued outstanding execution by our team.
Ill provide custom truck with the momentum to deliver strong revenue adjusted gross profit and adjusted EBITDA growth while.
While Chris will discuss our 2023 outlook in greater detail based on year to date performance and the outlook for the remainder of the year. We are increasing our projected total revenue range to $1 63, five to $1 $75 $5 billion and our adjusted EBITDA range to 400.
20% to $440 million.
In closing we know our employees are the key to delivering the exceptional financial results and unmatched customer service. We saw in the first quarter and I'd like to extend a sincere. Thank you to them I will now turn it over to Chris.
Thanks Ryan.
Ryan indicated Q1 was a very strong quarter end market demand remained strong resulting in total revenue of $452 million up 23% compared to Q1 2020 to adjust.
Adjusted gross profit was $150 million up 16% compared to Q1 2022, resulting in an adjusted gross margin for the quarter of 33, 2%.
Adjusted EBITDA was $105 million, a 15% improvement compared to Q1 2022, adjusted gross profit and adjusted EBITDA growth lag revenue growth largely as a result of segment revenue mix.
While all of our segments experienced year over year growth rental asset sales in tes revenue, which have a lower gross margin associated with them comprise 67% of total revenue in Q1 2023.
62% in Q1 2022.
SG&A was $57 million for Q1 or 13% of revenues an improvement versus 15% in Q1 2022.
Net income for the quarter was $13 $8 million.
A $17 1 million increase from Q1, 2022, and the second consecutive quarter of positive net income.
Turning to our segment results Ryan referenced our continued strong utilization within our <unk> segment for the quarter, which was almost 84% up from under 83% for Q1 2022.
Average always see on rent increased by more than $95 million compared to Q1 2022.
<unk> yield was 39, 6% for the quarter compared to 39, 1% for Q1 2022.
Are always see in the rental fleet ended the quarter at 146 billion.
Up $93 million versus Q1 2022.
As Ryan mentioned consistent with our expectation of continued strong investment in our rental fleet, we deployed $109 million of new equipment into our rental fleet in the quarter and we expect to continue to invest heavily in the fleet for the remainder of 2023.
For Q1, Urs rental revenue was $114 million, an increase of 8% versus Q1 2022.
In line with our comments from the last two quarters regarding strong demand from our customers for rental asset purchases.
Used equipment sales for the quarter were a record $92 million up more than 55% versus Q1, 2022 and up more than 17% from last quarter.
<unk> adjusted gross profit was $106 million for Q1 up 9% from Q1 2022.
Adjusted gross margin was 51, 4% a decrease from Q1 2022, largely as a result of revenue mix as rental asset sales comprised 45% of total <unk> revenue in the first quarter of this year versus 36% in Q1 2022.
Rental adjusted gross margin continued to be strong at 74, 5%.
CES saw another strong quarter with revenues of $209 million.
Which were up almost 25% from Q1 2022.
This segment continues to benefit from record backlog continued strong inventory flows and record levels of production.
Gross profit increased by more than 43% in the quarter compared to Q1 2022 gross.
Gross margin for the quarter was 16% up from 14% in Q1 2022.
Our sales activity continues to be extremely strong with backlog growing by more than $100 million or 13% sequentially from Q4 to $855 million.
The growth in our backlog was very broad based across our product portfolio.
We believe the continued growth in the <unk> sales black backlog reflects growing demand for equipment indicative of our favorable end market dynamics are strong market share gains and our pricing discipline.
We have been successful encountering inflationary pressures through the implementation of ongoing production efficiency initiatives as well as maintaining pricing discipline, including passing through vendor surcharges.
As this quarter's <unk> results show, we are confident we will be able to hold margins at or above the average we experience for all of 2022 over the coming quarters, even with elevated levels of inflation.
Our Aps business posted revenue of $37 million up 10% versus Q1 2022.
Adjusted gross profit margin in the segment improved to 27, 2% in Q1.
Within the Aps segment parts and service revenue was up more than 8% compared to Q1 2022.
Maintaining a strong liquidity position and improving our leverage remains priorities for us as to investing in the rental fleet, expanding our footprint and pursuing selective strategic growth through M&A.
Since initiating our stock repurchase program in the third quarter of last year, we have repurchased approximately $12 million of our stock.
We increased borrowings under our ABL by more than $24 million, mainly to fund working capital as we replenish inventory and ramp up production to meet demand with the outstanding balance at the end of Q1 at $462 million.
As of March 31, we had $285 million available and $245 million of suppressed availability under the ABL with the ability to upsize the facility.
With the LTM adjusted EBITDA of $407 million. We finished Q1 with net leverage of three four times an improvement of almost one two turns since the close of the transaction with <unk> in April 2021, and down from just over three five times last quarter.
Achieving leverage below three times remains our target and one that we believe we can achieve by the end of fiscal 2023.
We'll continue to seek to make incremental investments and prudent acquisitions, when we believe that create long term shareholder value.
With respect to our 2023 outlook, we believe <unk> will continue to benefit from strong demand from our rental customers as well as for purchases of rental fleet units, particularly older equipment for the rest of the year.
We also expect to further grow our net always see by mid to high single digits.
Regarding tes supply chain improvements improved inventory levels and record backlog levels should improve our ability to produce and deliver more units in the coming quarters.
We are providing updated guidance for our segments as follows we expect <unk> revenue of between 670 $710 million.
Revenue in the range of $820 million to $890 million in EPS revenue of between 145 and $155 million.
As Ryan mentioned previously this results in total revenue in the range of $1 635 to $1 $75 5 billion and we are projecting adjusted EBITDA from $420 million to $440 million.
In closing I want to Echo Ryan's comments regarding our continued strong performance.
As we've moved into the third year of our successful combination with Nasco, we continue to deliver strong revenue and adjusted EBITDA growth expanded margins and an inflationary environment and reduced leverage all while providing the highest levels of service to our customers.
With that I will turn it over to the operator to open the lines for questions operator.
Thank you.
We'll now be conducting a question and answer session.
If you would like to ask a question. Please press Star then one on your telephone keypad, a confirmation tone will indicate your line you said in the question queue.
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One moment, please while we poll for questions.
The first question is from Mike <unk>.
Davidson Davidson. Please go ahead.
Good afternoon, and thank you for taking my question.
Can we start off with just a question on.
On utilization.
I guess Im wondering what is the directional outlook on.
And in addition from this point.
Passenger vehicles up into Q3, Q, even with you.
I'm curious where that pattern will continue here in 2023.
Yeah, Hey, Mike it's good to hear from you.
I would say that utilization is remaining strong.
And I think Youre right that there typically is some increase in Q2.
And then Q end of Q3 is normally strong kind of after we come out of.
The hottest part of the summer.
So we would expect a similar type trend, we're happy that utilization in Q1 of this year was more than 100 basis points.
Head of where it was in Q1 of last year.
Feeling good about it.
Utilization in the overall rental fleet.
Super and then give.
The improved EBITDA outlook I was curious.
This is for Chris.
If you still plan to be below three.
It will be at or possibly even below three <unk> leverage ended the year at this point.
Yes, Mike I would say, we're still targeting three X and kind of as I said at the end of the year, it's really dependent upon what we're seeing in terms of whether there is opportunity in terms of our investment in the rental fleet, but right now all signs would indicate that we that's still our plan to be below three <unk> by the end of the fiscal year.
So Brian maybe one last one for me just about the backlog.
I'm curious.
Can you update us on what you think is the more normalized like how many months of backlog would you prefer to have.
Given.
For us the <unk>.
Eric that is today, but what is the correct number.
As far as months go ahead.
Eventually bring us down to overtime.
Yeah. That's a good question I think.
It will depend on supply chain right. So while supply chain is significantly improving the fact that it's still grew by $100 million in the quarter.
We see is just an incredibly good sign in terms of how strong demand is.
If you look at historical if you look as far back as we've reported quarterly and you look at that as kind of a months and months of backlog. If you want to think about that in months.
Historically, it's been I'd say closer to five or six months.
Is where.
Where we'd like to see it and you can kind of run that math, it's been as low as four and kind of in that in that range in the past.
But again as long as there's continues to be strong demand, which is what we're seeing across all the end markets will continue to work through the backlog.
As quickly as we can.
We saw even in the month of March which was which was a very strong month for us we saw backlog build even in that month and so for US. We're just reading it is still really strong demand signals from our customers across all of the all of the end markets that we're serving right now.
Okay, Great I appreciate the discussion I'll pass it along.
Thanks, Mike.
The next question is from Tami Zakaria of Jpmorgan. Please go ahead.
Hi, Thank you so much for taking my question.
I have a couple of questions. The first one is on <unk>.
On rent yields it was up nicely 60 basis points.
Is that 39, 6% a good run rate for the next three quarters or how should we think about that number.
Yes, Tammy I think we said at year end.
The best estimate to use for this year is that we're going to maintain at that level.
So, it's a pretty pretty much.
The next three quarters should be in that range or should we expect some up and down because of seasonality.
Yes.
Tammy Theres always a little bit of variability in it just because this as utilization is increasing and actually has a bit of a negative impact on the on rate yield calc and then as utilizations decreasing it has a positive impact so there's always going to be a little bit of room around there, but I think youre thinking about it right that were up.
Over over last Q1, and I think so feel good there. We are we do expect we did take some price increases at the beginning of the year and those as you know those will take some time to work all the way through.
Our rail contracts. So we do think that there is some continued increase in price.
It will show up in the business as well over the next couple of quarters.
Got it very helpful. And then my second question is on equipment sales.
It seems like.
Just wanted the Tes segment using the midpoint of your guide by about 20 million I think.
But the first quarter came in well above what we were modeling.
So from a modeling perspective.
Was that a pull forward in the quest for that or.
Should we think about the next few quarter in terms of sequential growth in the TSS segment.
Yeah tell me the way I would think about it is it.
Probably didn't come in.
As high versus our expectations as it did versus yours and so that's why we've taken up the guidance the $20 million both on the bottom and the top end of the range.
Yes.
I, probably wouldn't add more than that in terms of what our expectations are for the balance of the year, but we've had two quarters in a row with record new equipment sales demand continues to be strong as we've talked about inventory levels are in a very good position. We saw the demand. Obviously, so we certainly expect to continue to see.
Pretty significant new equipment sales I would say the first half of this year.
It was a comp to last year, where we did have some of the challenges around inventory and obviously the second half of the year last year that started to loosen up some and so we did have a pretty significant Q4.
Is it fair to say that your key segments scale.
Could have been hiring back probably supply chain kind of held it back.
Station.
I look I think the supply chain is continuing to improve right. So I think that is why you see the Q1 on Q1, how significant the increase was in terms of.
New equipment sales Q1 on Q1.
And so we are seeing it improve but yes, we're still seeing backlog build.
<unk> been to Mikes question before years Tammy at some point, we would expect months on hand is start to decrease in terms of backlog. So yes.
Yes, if there had been more supply chain.
Would have been able to deliver more trucks theres no question about that but things are certainly looking up and are improving.
Youre seeing in the results that we're reporting.
Okay fantastic. Thank you.
Thanks Tammy.
The next question is from Justin Hauke of Robert W. Baird. Please go ahead.
Okay, Yeah, good evening guys.
Obviously, the revenue was really strong here.
Yes <unk>.
Margin mix that you guys talked about I don't know that everyone fully appreciates that.
There's a sales component that runs through that and how sensitive your margins are to that so.
Maybe you could just.
Give us some rough math on what the margin impact was from the sales being 45% of revenue in that segment versus kind of 36% last year given that.
At least at a segment level your margins are.
Rental or like three times, what they are in sales. So I'm imagining that that you'd really diluted the margins versus maybe a like for like basis.
Yes, and maybe I can expand a little bit on that as we as we said in our.
In our introductory comments the mix.
First quarter this year versus first quarter last year shifted from $64 36 last year, so 64% for rental revenue and 36% for equipment sales. This year, it was 55% and 45%.
The margins are much higher on rental revenue versus equipment sales.
We mentioned that overall margins adjusted gross profit came down from 58.
Up to 51% or just under 59% to 51% that was largely driven by that mix because we overall, we continue to see margins.
Actually where we expected them to be.
We said at the end of last year, a good guide for this year is.
As we came out of the year, we felt like for the full year, we can exceed our segment margins for 2023 versus 2022.
Okay, I mean, just because it.
Obviously, we can't we can't break that out, but it kind of sounds like maybe on a like for like basis. If you. If you could break out the rental and the sales component.
<unk> segment margins are maybe above what they would be last year.
Sure.
Is that would that be fair.
I would say, they're consistent with where the margins were for the sub segments. Okay.
There could be some mix within each of those that could from quarter to quarter impact those margins. Okay fair enough. We also have.
Justin you also have to remember that the margin on the used equipment sales so impacted by its an accounting margin. So it depends on the age of what's being sold and so it depends on on how depreciated. It isn't so that may shift quarter to quarter, depending on how.
On the on how the.
The age of the equipment, that's being sold within within IRS.
Yes, no fair enough.
I guess my my second question is just as it relates to the guide and obviously, you don't give quarterly but you'd.
You'd kind of talked about going into this quarter that EBITDA growth was maybe it would be in the mid single digits. It was up 15%.
So obviously that was strong in the first quarter you talked about.
The mix.
For the year being $45 55, first half versus second half weighted in terms of the EBITDA.
And I guess, if you do the math.
At the midpoint of your guidance that imply QQ EBITDA at around $88 million.
The street numbers that are out there around $97 million. So I guess just.
Maybe square that asking kind of what you're thinking about <unk> and seasonality.
Yes.
That could be at a little bit narrow range in the $55 45, $55 $45 55 second half 45 first half the way I would look at it is there is some seasonality built into the quarters. We also just had two of the strongest quarters or the strongest quarters, we've ever had in terms of rental asset sales as well as <unk>.
New equipment sales so there could be.
There's going to be some of that impact potentially in Q2. So the way I would look at it is we would expect high.
High single digit probably 10% ish kind of range increase year over year from.
<unk> EBITDA and would still expect that $55 45, maybe a little bit narrower than that totaled.
Okay.
Much.
There are no further questions at this time I would like.
To turn the floor back over to Brian Mcmanus for closing comments.
Thanks, Irene Thanks, everyone for your 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 take care.
Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.
Okay.
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