Q2 2023 Custom Truck One Source Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to custom truck one sorry second quarter 2023 earnings Conference call. Please note that this conference call is being recorded I would like to hand, the conference over to your host today, Brian Pearlman, Vice President of Investor.
Relations for custom Chuck. Please go ahead.
Thank you and good afternoon 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.
<unk> 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.
Goal of providing unrivaled service to our customers.
For the second quarter of the year, we delivered strong year over year revenue adjusted gross profit and adjusted EBITDA growth with.
We generated $457 million of revenue $154 million of adjusted gross profit and $103 million of adjusted EBITDA in Q2 of.
26%, 22% and 21% respectively versus Q2, 2022.
Our second quarter results align with our expectations that our business. This year would reflect the benefits of moderating inflation improved supply chain performance and continued operational excellence.
Demand remains strong in each of our strategically selected end markets utility or T&D Telecom rail and infrastructure. These markets continue to offer compelling long term growth opportunities well in excess of G. D. P, which we believe should continue for the foreseeable future the reported backlogs.
The utility and telecom contractors, our largest customer base continued to be good proxies for this sustained growth and remain at or near record levels. We.
We see continued strong demand in our own new sales backlog and in the performance of the rental fleet.
Additionally, in the second 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.
The rental segment experienced 16% revenue growth year over year.
We continue to see strong demand for rental equipment, and we remain focused 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 impact adjusted gross margin.
In the quarter utilization finished at just under 82%, which is historically very strong we experienced a decline in utility distribution equipment utilization, which we believe is temporary and primarily related to our customer supply chain delays.
We continue to invest in our rental fleet and sell certain aged assets. This resulted in the reduction of our fleet age to under 3.6 years, which we believe remains the youngest in the industry we expect.
To continue to invest in the fleet for the remainder of the year as demand remains robust.
And the T. S segment, we sold $251 million of equipment in the quarter, a 39% increase compared to Q2 2022, and the highest level of quarterly sales in the Companys history. Additionally.
Additionally, gross margin improved significantly versus Q2 of last year, and our backlog continued to grow ending the quarter at $864 million up 30% versus a year ago and up modestly versus the end of Q1.
As we continue to achieve record T S sales and production levels, we should experience slower growth in our backlog, which we expect will eventually return to a more normalized level. This past quarter's T. S results.
Point to continued strong demand for new equipment. We are proud of the relationships, we have with our chassis body and attachment of vendors and we continue to work closely with them to address supply chain issues as they arise.
We continue to see an increase in equipment availability from our chassis and attachment suppliers, which positions us well to meet our production fleet growth and sales goals for the remainder of the year and beyond.
Strategically we remain focused on investing in and optimizing our production capacity and service footprint to ensure that we deliver the product and service levels, our customers expect from us on.
On last quarters call, we discussed the expansion projects at our Kansas City, Missouri, and Union Grove, Wisconsin locations.
The work at the Union Grove location is complete and the new capacity is largely online while the expansion in Kansas City is expected to be complete later this year. These investments 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 in our Aps segment.
As we look ahead to the rest of the year, we believe that our first half results favorable end market tailwind robust customer demand improving supply chain dynamics and continued outstanding execution by our team all provide custom truck with the momentum to deliver strong revenue.
Adjusted gross profit and adjusted EBITDA growth, 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 guidance range to $1 $725 billion to $1.83 billion and our adjusted EBITDA range to $425 million to $445 million.
In closing we know our employees are the key to delivering the unequalled customer service and outstanding financial results, we saw in the second quarter.
Like to extend a sincere thank you to them I will now turn it over to Chris.
Thanks, Brian .
Q2 was another very strong quarter end market demand remained strong, resulting in total revenue of $457 million or 26% compared to Q2 2022.
Adjusted gross profit was $154 million up 22% compared to Q2 2022, resulting in an adjusted gross margin for the quarter of 34%.
Adjusted EBITDA was $103 million or 21% improvement compared to Q2 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 average gross margin associated with them than our equipment rental business comprised 66% of total revenue in Q2 2023 versus 60% in Q2 2022.
SG&A was $58 million for Q2, or 12, 7% of revenues an improvement versus 13, 5% in Q2 2022.
Net income for the quarter was $11 $6 million the third consecutive quarter of positive net income.
Ryan referenced our continued strong performance within our <unk> segment for the quarter utilization was just under 82% and average always see on rent increased by more than $53 million compared to Q2 2022.
Rent yield was over 40% for the quarter compared to just over 39% for Q2 2022.
We continue to see the benefits from previously announced pricing actions implemented since the beginning of last year.
Are always see in the rental fleet ended the quarter at $147 billion up by $68 million versus Q2 2022.
Consistent with our expectation we had continued strong investment in our rental fleet this quarter with a net capex of $50 million, we expect to continue to invest in the fleet during the second half of the year.
For Q2, your rental revenue was $118 million, a 9% increase versus Q2 2022.
Used equipment sales for Q2 remained strong at $51 million up more than 36% versus Q2 2022.
<unk> adjusted gross profit was $97 million for Q2 up 12% from Q2 2022.
Adjusted gross margin was 57, 8% in the quarter more than 640 basis point sequential improvement from Q1 as rental revenue comprised a larger percentage of total U S revenue in Q2 than in Q1.
CES saw another record quarter with revenues of $251 million, which were up almost 39% from Q2 2022.
This segment continues to benefit from record backlog continued strong inventory flows and record levels of production gross profit increased by more than 69% in the quarter compared to Q2 2022.
Gross margin for the quarter was over 18% an improvement of over 330 basis points from Q2 2022.
The improvement in Tes gross margin reflects the implementation of ongoing production efficiency initiatives as well as maintaining pricing discipline.
Our sales and order activity continues to be strong with backlog growing in the quarter to $864 million, which is 30% higher than at the end of Q2 2022.
We believe the continued growth in the TTS sales backlog reflects sustained long term demand for equipment indicative of our favorable end market dynamics are strong market share gains and our pricing discipline.
As this quarter's tes 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 EPS business posted revenue of $37 million up 4% versus Q2 2022.
Adjusted gross profit margin in the segment improved to 29, 5% in Q2.
Maintaining a strong liquidity position and improving leverage remain priorities for us as do investing in the rental fleet, expanding our geographic 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 $15 million of our stock.
During the second quarter, we increased borrowings under our ABL by more than $30 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 Q2 at $492 million.
As of June 30, we had $255 million available in nearly $300 million of suppressed availability under the ABL with the ability to upsize the facility.
With LTM adjusted EBITDA of $425 million. We finished Q2 with net leverage of three three times and improvement of one three turns since the close of the transaction with Nasco in April 2021, and down from just over three four times last quarter.
Achieving net leverage below three times remains our target and the one that we believe we can achieve by the end of fiscal 2023, even while continuing to grow our rental fleet to expand our production capacity and to invest in working capital for future growth.
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 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 continue to expect to further grow our net always see by mid to high single digits. This year.
Regarding tes, continuing supply chain improvements improved inventory levels and record backlog levels should improve our ability to produce and deliver more units than previously expected in the coming quarters.
As a result of our improved outlook, we are updating guidance for our segments. As follows we expect Urs revenue of between 707 hundred $35 million Ges revenue in the range of $880 million to $940 million in EPS revenue of between 145 and 100.
$55 million.
As Brian mentioned previously this results in total revenue in the range of $1 75 to $1 eight $3 billion and we are projecting adjusted EBITDA from $425 million to $445 million.
In closing I want to Echo Brian's comments regarding our continued strong performance as we've moved into the third year of our successful combination with Nasco, we continued to deliver strong revenue and adjusted EBITDA growth to hold or expand margins in an inflationary environment and to reduce 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 line for questions operator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
That tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any Keith did withdraw your question. Please press Star then two.
The first question comes from my children's ski with D. A data. Please go ahead.
Yes, Hello, good afternoon, and thanks for taking my questions.
Hey, Mike.
Go back.
Yeah, Hi, there if you go back in.
And explain again utilization being down quarter over quarter I wasn't sure I caught this location will be just gets a little more detail Jim sorry that customers just didn't have the supply chain. So the things that they put on to them.
Equipment.
Or just I guess I would normally expect it to be a little bit warmer outside it was higher.
Vision.
I mean.
Okay.
Amit narrative as to why it went down quarter over quarter again.
Sure Yeah, Mike It's Ryan good to talk to you you are right utilization did decline a touch from Q1 to Q2, it's still kind of a very strong levels of 81, 7% for the second quarter.
Normally there is just a touch of seasonality in the second quarter, two so thats a pretty normal decline that we see and what we did see.
This year as the us.
Some of the distribution equipment, we saw utilization fall a bit and distribution equipment. We're seeing it return now later in the later into August So we're seeing that pick back up in the explanation. We hear from customers is really around availability of their supply chain. So things like transformers in particular, so I think it's a onetime issue.
Q and it will continue to come back and again, it's at 81, 7% which is if.
If we hadn't been running in the mid eighties, we would say is as good as it gets really from a utilization standpoint, we still feel really good about it and then we expect transmission equipment will pick up kind of the year Hot comment transmission will pick up here as the heap breaks and as some.
Some of the new transmission work begins which typically happens right. After the end of the summer.
Got it.
Thanks for that I wanted to turn to truck chassis supply.
Yes.
The broader class eight outlook for 2024.
Truck production is still down and that includes both location and cargo.
Cargo being down, but it sounds like you've got such great.
That was in your end markets that will see a vocational trucks be up.
That's what you'd like it to be I guess could you give us some thoughts as to how you feel about China supply for next year.
The trajectory of where things are going now continue on through the next couple of quarters.
Yes, it's a great question.
We're we're still seeing constrained supply chain right. So it's not it's not wide open that we are able to receive as many chassis as we'd like but we are seeing our chassis flow increase so that's why you see.
TTS revenue in particular is up as much as it is in the first half of the year.
You're also seeing that we've deployed more capital into the rental fleet in the first half of the year or two because truck supply chain is up I guess, where we.
We look forward a little bit is when when we're able to deliver the growth that we have in tes.
See backlog continue to grow.
From the beginning of the year and even even quarter on quarter.
We think demand will obviously remain very strong into next year and right now in our conversations with our chassis partners.
We're anticipating that we should see more chassis next year, how many more chassis is still what is somewhat to be determined.
And we do think it will still be.
Constrained supply chain, but we do think that we'll see a larger allocation heading into next year as well.
Okay. Thank you so much and I'll pass it along.
Thanks, Mike.
The next question comes from Tom exactly right Jamie.
J P. Morgan. Please go ahead.
Hi, Thank you so much for taking my question.
So my first question is youre ending.
We see came in somewhat below what we were modeling and you're expecting mid to high single digit growth for the year can you help us understand are you expecting to scale back equipment sales versus the first quarter first half or accelerate asset purchases to get to that Amit.
High single digit percent number.
Yes, Hi, Tami. This is Chris as he said it would be mid to high single digits. That's still is our plan, we still expect to get there.
It somewhat flexible in terms of gross capex versus.
Some of the sales and so there could be some movement I think previously we've given guidance.
<unk> expect to spend for over $400 million of gross rental capex.
Still our plan and is still our plan to grow the mid to high single digits.
Got it that's helpful. And then the other question I have the on rent yield.
Is that you saw a sequential tick up is that mostly pricing benefit flowing through should we expect this to continue to tick up until you lap some of these price increases.
I think Thats fair, yes that would be fair to say.
Okay. So we should be modeling like sequential growth in <unk> as well.
It came in.
It's Ryan it takes it takes about a year for the whole fleet to turn in terms of new pricing and obviously it depends on utilization and some specifics, but yes, I think right now we're still seeing.
The benefits of price flow through in terms of that on rent yield metric. So we think it will continue to pick up a bit.
In the second half of the year.
Got it thank you so much.
Thanks.
The next question comes from Justin Hauke with Robert W. Baird. Please go ahead.
Yeah, good evening everybody.
I wanted to ask about the Crs segment guidance for the second half, which is implying even at the high end kind of flat revenue growth for the second half.
That that segment is always hard to kind of model because it's got the rental component and then the sales component and I know you had some kind of unusual sales activity last year that makes you know some difficult comps in there, but maybe just thinking about the.
The seasonality between <unk> and <unk> and <unk>.
I guess, how we should think about maybe the sales component of that business in particular.
I think you summarized it pretty well.
It is going to be a tough comp versus last year, we talked a little bit about the utilization.
A decrease in utilization we saw at the end of the quarter leading into Q3.
And so there are some components there that clearly are little more difficult to predict in particular, the rental asset sales.
But I think you summarized it pretty well in terms of our thinking.
Okay.
Any comment on just the the sequencing of <unk> versus <unk> in terms of the difficulty of the comps.
I don't think we expect we talked early in the year in terms of how the year typically plays out our expectation coming into the year in both revenue and EBITDA was 45 55 split we think that's narrowed somewhat first half versus second half.
Q4 tends to be the strongest we expect we continue to expect that to be the case.
I don't think any updated guidance there in terms of what our expectations are.
Okay.
And then I guess my second question is just on the free cash flow.
You know one of the biggest drags that you've had year to date has been the inventory investment on the working capital side, which which makes sense.
You know that's steadily increased you know really every quarter sequentially and it makes sense because you're growing but is that is that a release of a free cash flow in the back half as you know maybe some of the.
Really high sales activity kind of moderates or I'm, just trying to understand what the moving pieces are for free cash flow in the second half.
Yes, we certainly would expect in Q4 that you would see that.
We're in a position where with all the growth we're happy to have the chassis. We're happy to have the attachment. So it's a situation where just 18 months ago. We are in a much different position. So we feel very good about the level of inventory. We have certainly as we look out to 2024, but to your comment we should definitely see improved cash flow in the second half of the year.
In Q4.
Okay, great. Thank you.
Yeah.
The next question comes from.
Gotcha, Okay with Oppenheimer. Please go ahead.
Thank you good afternoon.
If we could can we talk about the guidance increase Chris about.
What what.
Was the outperformance in the second quarter that you that you've factored and then and then what were your consideration in the back half I think a lot about the prior question.
Gotten at this point, but can you can you tie it altogether about how you factored in the second half guidance, particularly with regard to EBITDA. Thanks.
Yeah, maybe just start on revenue we've seen a significant improvement in terms of our inventory flow, which has allowed us as Brian talked about certainly to have record quarters on new equipment.
Sales and deliveries and so we expect that to continue the second half of the year. So that's part of it you saw a pretty significant increase in the revenue. There. We've continued to see strong utilization of strong demand for rental asset sales. So we took that into account.
The reason you're not seeing it all flow through the EBITDA is because we're also seeing with the increased inventory with higher rates increased costs with respect to floor plan.
There's a little bit of a not the float that you might've expected and Thats why youre seeing the $5 million on the lower end top end on EBITDA, but a little bit higher on the revenue.
On the higher revenue and higher EBITDA range, it would be higher commissions and higher bonuses paid and so we took all that into account as we updated the guidance.
Okay, Thanks and.
Could you could you talk a little bit about our.
Rental versus sales decisions as you being.
Being the supply chain, albeit up a good bit.
Just how you're how you're feeling that it sounds like you're feeling good about getting what you want most of what you want maybe not all of what you want.
In the back half of this year, maybe a comment on that and then on how youre allocating sales versus rental.
A decision process there thanks.
Yes.
Scott It's Ryan. It's you are right, we are seeing an improvement right and so we're able to able to increase rental or we see what we're putting into the fleet, which is what you see relative to last year I think it is.
It's about a $50 million increase versus last year on a year to date basis.
And then that's why we're able to sell because we're selling into so much backlog too. So we're look we obviously want allocated $1 two rental asset kind of on the margin, where we can but right now it's just about taking care of the customer and even with.
Kind of the pace of new sales that we realized really in the last two months or so.
Over the last two quarters were still seeing backlog grow right. So there is still more demand out there that we're trying to we're trying to the best we can to take care of both.
And obviously you do that prudently and we will continue to do that and in.
In the back half of the year as well.
Yeah.
Hi, Thanks, one more for me if I could.
Could you just address your primary end market.
What youre seeing good and bad and as a as a kind of a one b part.
Question are you seeing any associated with the infrastructure bill yet it doesn't seem like the funds are flowing so there's a lot of project allocation.
What what are you seeing on that thanks.
Yes.
Great question, we're still seeing really good demand on transmission and distribution.
Hearing more about transmission jobs that are being awarded.
So still really good kind of macro landscape that we're playing into and we're seeing a lot of distribution work that needs to be done.
The only.
The constraint that we're hearing about now is their supply chain, so as they're waiting for.
Transformers or conductor.
It's just taking time to get that equipment to be able to work so.
That's the only constraint that we're hearing we think that's temporary but that's that's the constraint that we're hearing.
When we look at positive indicators, and we mentioned that we're still seeing strong <unk> buyouts.
Real asset buyouts in both of those categories. So we take that as a really positive indicators and we're continuing to see that into the beginning of Q3.
And so we're seeing a good a good dynamic there, which we certainly feel like there is a bullish run that will continue on both sides on transmission and distribution, which is the largest end market and then related to the IRS question.
I would agree with what you said that we are hearing about dollars being allocated.
We are having some discussions now and seeing in our backlog, maybe a little bit on the vocational side of things. So some of the specialty dump trucks.
That type of equipment, we are starting to see some of that that we think is IRA related but I would say that it's very little revenue.
Still at this point, but we're starting to see a little bit of it show up in backlog. So we think that's again just more more tailwind.
<unk> backlog will continue to perform well and why we'll be able to deploy capital.
Into the rental fleet as well.
Okay. Thank you.
The next question comes from Nicole the place with Deutsche Bank. Please go ahead.
Yeah. Thanks for the question good afternoon guys.
Yeah.
Hi, Nicole.
Hi, maybe just starting with a follow up on the utilization discussion so with that I guess delays that youre seeing with distribution do you think that that's a quick factor, where you kind of see utilization kind of snapback in the second half or do you think it will take time for that to kind of work its way through.
Yes, I think it will gradually improve.
We think you have two dynamics, playing there you'll have distribution kind of gradually improve which is what we're already seeing.
In.
So far in the third quarter and then.
On the transmission side Youll see the pick up that normally happens that we are still anticipating for later this summer early fall and so youll see both of those continue to pick up like we normally see in the third quarter.
Okay got it.
Then with respect to the <unk> backlog can you just speak to where lead times stand now and it does have come down at all.
Yeah.
We.
So total backlog.
Where it is.
Is almost four quarters, even looking at kind of where the Q2 sales number was so it is still higher than we would we would have expected more than it would be historically, maybe I'll say that.
And we are seeing lead times continue to push so we are.
Largely on the order for.
A good portion of next year when it comes to our.
Our key attachment suppliers and the same is true on chassis as we're talking about full year allocations and and just waiting on final numbers.
To begin to put those those units on order too. So so again it depends by product category.
In the aggregate we saw backlog build.
And the majority of product categories build in the second quarter. There were a few that we saw some modest declines but those were those were already in product categories, where backlog is elevated.
So we're still seeing.
Really good overall demand across all the product categories.
Got it I'll pass it on thank you.
Thanks Nicole.
Once again, if you have a question. Please press Star then one.
The next question comes from Tim Thein with Citigroup. Please go ahead.
Yeah, great. Thank you.
Maybe just one quick one on <unk>.
Your telecom customers I'm, just curious the bay.
There's been a lot in the press surrounding potential lead cable issue and I'm just curious if that.
Who knows what the potential costs, if any could be more.
Remove or removal.
Luiz cables I mean is that you do you think that impacts in all their their capital decisions as they.
Kind of ponder what good could be a bigger outlay does that impact nasco in any way do you think are just TBD.
Tim I'd say TBD.
Telecom is less than 5% of revenue and backlog is still there and we've still been delivering.
So it's not it's not anything that's come up in any significant way in any of our conversations with our customers, but obviously, it's in the news. So we're watching it closely but it's nothing that's gone up to this point.
Yeah, Okay, I appreciate that the significance or lack up to you guys. I'm just curious if that if that bleeds into other areas of the business but.
And let me just just on that the <unk> backlog and given the growth there and given out log and extend is it too early to.
In terms of your discussions with suppliers.
As you look into 'twenty four presumably.
That the uncertainty around inflationary cost pressures.
<unk> have abated, but how how are you approaching that in terms of how you price these new orders relative to our backlog that.
To extend and and just making sure you're you.
Keeping that in the question relates to basically the gross profit in the backlog.
How you're approaching those pricing decisions and what I would imagine is still kind of an uncertain.
Cost backdrop. Thanks.
Yes, you are right, we're still still working closely with suppliers in terms of understanding cost right. So.
So that we can price appropriately, but I think we've mentioned it a few calls ago, but we have the ability to reprice the backlog as we need to and so when we see significant so we were using our best estimates, we're communicating that to the customers, but when we see a significant price increase come through.
We're obviously.
Going back to our customers and in talking through that with them. So it's something we're very aware of.
And we will continue to manage managed closely.
Got it alright, thank you.
Sure.
Thanks, Tim.
This concludes the question and answer session I would like to turn the conference back over to Ryan Mcmahon Eckel for any closing remarks.
Please call thanks, everyone for your time.
Oh.
Thank you 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.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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