Q4 2023 Custom Truck One Source Inc Earnings Call
Good afternoon at this time I would like to welcome everyone to the custom shop, One source, Inc. Fourth quarter and full year 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time seems refreshed star followed by the number one on your telephone keypad.
He would like to withdraw your question So again press star one.
I would now like to turn the conference over to Brian. Please go ahead.
Thank you.
Before we begin we would like to remind you that management's commentary and responses to questions. On today's call may include forward looking statements, which by their nature are uncertain and outside of the company's control.
Although these forward looking statements are based on management's current expectations and beliefs actual results may differ materially.
For a discussion of some of the factors that could cause actual results to differ please refer to the risk factors section company's filings with the SEC.
Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release, we issued today that press release and our quarterly Investor presentation are posted on the Investor Relations section of our website.
We filed our 2023 10-K with the SEC this afternoon.
Today's discussion of our results of operations for Hudson truck, one source ink or custom truck is presented on a historical basis as of for the three months ended December 31, 2023 and prior periods.
Joining me today are Ryan Mcdonald, CEO, and Chris <unk> CFO I will now turn the call over to her.
Thanks, Brian and welcome everyone to today's call customer Trust business continued to perform well in Q4, delivering revenue of $522 million, representing a 7% increase compared to Q4 of 2022, and our highest quarter revenue ever.
We finished the year with total revenue of $1 86 $5 billion at the top end of our guidance range and up 19% versus 2022.
I'm very proud of the efforts of our team to deliver another record setting year, we continue to demonstrate the value of our business model with our ability to pivot between product categories in between selling and renting equipment as the markets dictate.
Our tes segment delivered 21% revenue growth in the quarter versus the previous year in 2009% growth for the full year well ahead of both consensus estimates for the segment and our guidance for the year, we delivered record levels of Tes revenue and also saw gross margin improvement of 150 basis points.
Highlighting the continued strong demand environment as well as the progress. The team has made in continuous improvement in our production capabilities. The entire tes team performed extremely well and our production team delivered the fourth consecutive quarter of record production for which I am extremely grateful as.
As we discussed on several calls we made the decision during 2023 to invest in significant inventory growth to ensure that we can meet customer demand heading into 2020 for.
Growth in the Tes segment was led by growth in our infrastructure end market, which represents about 24% total revenues.
We continue to experience high levels of demand for certain products like our specialty dump trucks roll off trucks hydro excavators and water trucks. We believe we are in the early stages of the deployment of federal infrastructure investment and jobs Act dollars for infrastructure projects, which is beginning to positively impact demand.
We are well positioned heading into 2024 to continue to meet customer demand in all the product categories. We serve.
Approximately 60% of our revenue comes from the utility end market, which includes both distribution and transmission work. We are seeing significant forecasted increases in electricity load growth in the U S.
Which is being driven by a high level of data center development and by continued electrification trends.
The amount of the incremental power and grid enhancements required to meet the expected load growth as well as the deferred maintenance is required on our aging grid create significant demand momentum in this sector.
Transmission line development and regional interconnection continues to be the bottlenecks in meeting this future energy demand.
There is a significant backlog of transmission projects that are ready to go. However work on these projects is advancing slowly as supply chain regulatory approval and ownership and funding details get resolved.
We believe we are at the forefront of the energy transition that is currently mandated in California, and soon will be required and varying degrees of nine additional states.
Custom truck is an array of fully functional electric class seven and class eight trucks to serve multiple end markets, including bucket trucks and digger derricks.
Dump trucks refuse trucks and tractors to serve the EV demands of our customers. We continue to work with our OEM partners Peterbilt and Downhaul Motors with whom we have developed the majority of these trucks to ensure that our customers transition to EV as timely inefficient. Additionally, we are seeing continued early adoption of our <unk>.
<unk>, which is being used to electric repower, our trucks attachments, while on the job site.
Significantly reducing the amount of time the engine must be an idling and burning diesel fuel.
Chris will walk through the details of the performance of our Ers segment, which continued to see strong rental rates two experienced strong operational performance and to perform at historically high levels of utilization for the majority of our fiscal year.
In the fourth quarter, we expected more transmission work to be underway that occurred as a result, we saw lower utilization than we originally expected.
But consistent with what we communicated to you in November.
As I mentioned previously we are confident that the tailwind to support this segment of our business are robust and will continue to provide significant growth in the years ahead.
Some of the delays currently impacting the large transmission projects begin to get resolved, we believe the breath of our vehicle product offerings and our ability to meet our customers' rental and sales needs uniquely positioned custom trucks to capitalize on the future tailwind created by the sustained demand.
Particularly as these transmission projects advance.
We will continue to invest in geographic markets, where custom truck is currently under represented and which we believe offer compelling long term growth opportunities for our business.
As we've discussed previously we know that the Western U S is one such area I am proud to announce that we recently closed on the purchase of an existing facility in Casa Grande, Arizona to serve as an initial production hub for our southwest expansion.
We will also be opening two new <unk>.
One in Sacramento, and one in Salt Lake City to capitalize on the growth, we see out west and to be able to better serve our customers. We expect all of these locations to be fully operational later this year.
As we think about our 2024 guidance, we are going to be conservative on the degree of transmission uplift that we expect in 2024 and will provide updates on how transmission continues to develop throughout the year.
Despite that uncertainty, we anticipate that 2024 will be another year of growth for custom trucks and that we will eclipsed $2 billion of total revenue.
While Chris will provide additional details later, we are providing initial revenue guidance of two to $2 one 8 billion.
And are projecting adjusted EBITDA in the range of $440 million to $470 million.
Additionally, we are committed to demonstrating our ability to generate compelling cash flow during 2024, which will allow us to meet our three times net leverage target and to continue to invest in our growth.
With that I'm going to turn it over to Chris to talk through the details of our fourth quarter results that contributed to our record setting 2023.
Thanks, Ryan for the fourth quarter, we delivered solid year over year revenue adjusted gross profit and adjusted EBITDA growth, we generated $522 million of revenue $171 million of adjusted gross profit and $118 million of adjusted EBITDA in Q4.
For all of 2023, we generated $1 86, 5 billion in revenue $625 million of adjusted gross profit.
$427 million of adjusted EBITDA up, 19%, 13% and 9% respectively versus 2022.
Adjusted gross profit and adjusted EBITDA growth lag revenue growth in 2023, primarily due to 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 that our equipment rental business comprised 67% of total revenue in 2023 versus <unk>, 62% in 2022.
SG&A was $59 million in Q4, or 11, 4% of revenues an improvement versus 12% in Q4 2022.
For all of 2023, SG&A was 12, 4% of revenues, an approximate 100 basis point improvement compared to 2022.
Net income for the quarter was over $16 million the fifth consecutive quarter of positive net income and $51 million for all of 2023 up 30% versus 2022.
Full year diluted earnings per share were up more than 30% year over year.
The RF segment experienced 10% growth for the full year, ending the year with $726 million of revenue the middle of our guidance range.
Adjusted gross profit for <unk> was $107 million for Q4 and $409 million for all of 2023 up 3% from 2022.
Adjusted gross margin was 58% in the quarter and 56% for the full year down from 2022, largely because rental revenue comprised a smaller percentage of total IRS revenue compared to rental equipment sales in 2023, then in 2022.
In the quarter average utilization of the rental fleet was just under 78% was over 80% for all of 2023, which is historically still very strong despite some of the headwinds Brian discussed.
Net yield was over 41% for the quarter was over 40% for all of 2023 compared to just over 39% for 2022.
The year over year improvements highlight the continued benefits from our previously announced pricing actions implemented since the beginning of 2022.
We continue to invest strategically in our rental fleet and sell certain <unk> assets in the fourth quarter, which kept our fleet age steady at three five years.
Net rental Capex in Q4 was $22 million.
And $135 million for the full year.
Are always see in the rental fleet ended the year at 146 billion essentially.
Essentially flat with the end of 2022.
We expect to continue to invest in the fleet in 2024, but have the flexibility to pivot our capex spending plans in 2024, depending on the trends we're seeing in our end markets.
And the Tes segment, we sold a record $299 million of equipment in the quarter and just under $1 billion for the year.
99% increase compared to all of 2022.
As Ryan mentioned Tes finished above the high end of our 2023 revenue guidance range.
Gross margin in the segment was just under 18% in Q4 for the full year Tes gross margin was approximately 150 basis points higher which we attribute to the ongoing production efficiencies, resulting from our high level of production as well as an improved mix related to our higher specialty and vocational truck sales.
In line with our expectations Tes backlog continued to moderate ending the quarter at just under $690 million.
Record levels of both production and new equipment sales in the quarter allowed us to make headway toward reducing our backlog to a more normalized level, which currently stands at more than eight months of tes sales down from a peak of more than 12 months in early 2023, but well above our historical average of four to six months.
Our strong and long standing relationships with our chassis body and attachment vendors continue to be an important driver of our record results are intentional inventory build throughout 2023 positions us well to meet our production fleet growth and sales goals for 2024, our Aps business.
<unk> revenue of $38 million in the quarter and $149 million for the full year up 5% versus 2022 and in the middle of our guidance range year over year growth was consistent for both parts and service and rental revenue within Aps at 5% to 6% each the.
The adjusted gross profit margin in the segment finished the year strong at over 30% for Q4 and 29% for the full year fully in line with our expectations.
Since initiating our stock repurchase program in the third quarter of 2022, we have repurchased approximately $49 $5 million of our stock through the end of 2023, including just under $19 million in the fourth quarter.
We will maintain the flexibility to repurchase our stock when the market price provides a compelling opportunity to create long term value for our shareholders.
Borrowings under our ABL at the end of 2023 were $552 million up versus the end of Q3 as we continued to invest in working capital during the quarter.
As of December 31, we had $195 million available and approximately $324 million of suppressed availability under the ABL with the ability to upsize the facility.
With LTM adjusted EBITDA of $427 million. We finished 2023 with net leverage of three five times an improvement of one one turns since the close of the transaction with Nasco in April 2021, and up slightly from last quarter.
Achieving net leverage below three times remains a primary and important goal and that one we expect to achieve in 2024 to.
The delay in achieving this target was primarily as a result of continued strategic investment in working capital our 2023 adjusted EBITDA being at the lower end of our guidance range and the level of share repurchase activity last year.
With respect to our guidance, we expect 2024 to be another year of growth. We believe tes will continue to benefit from good demand and our strong backlog entering the year.
We believe the IRS outlook from our rental customers for long term demand and growth remains strong as Brian previously mentioned, we are currently experiencing some near term headwinds and our utility end markets largely related to our customer supply chain issues and the timing of the commencement of certain transmission projects, which is driving lower OSB.
On rent and our core T&D markets.
As these markets recover and grow in 2024, we expect to further grow our rental fleet based on net always see by mid single digits.
Regarding tes supply chain improvements healthy inventory levels exiting 2023, and a historically high backlog levels, we will continue to improve our ability to produce and deliver even more units in 2024 than we did in 2023.
After a year of significant strategic investment in inventory levels in 2023, we expect to generate meaningful free cash flow in 2024, setting a target to generate more than $100 million of levered free cash flow and to deliver a net leverage ratio of less than three times by the end of the fiscal year or two.
24 outlook reflects the long term strength of our end markets and the continued focus of our teams to profitably grow our business.
As Brian mentioned earlier, we continue the expansion of our geographic footprint opening several new locations out west better positioning the company for future growth and exceptional customer service, we are providing guidance for our segments. As follows we expect ers revenue of between 730 and $760 million.
Tes revenue in the range of 1115 to one to $5 5 billion.
And Acs revenue of between 155 and $165 million. This results in total revenue in the range of $2 billion to $2, one $8 billion up.
Up approximately 7% to 17% versus 2023.
We are projecting adjusted EBITDA in the range of $440 million to $470 million up approximately 3% to 10% compared to 2023.
In closing I want to Echo Brian's comments regarding our continued strong performance. Despite some unforeseen volatility in certain utility markets. 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.
For our customers.
With that I will turn it over to the operator to open the line for questions operator.
The floor is now open for your questions. So I'll ask a question. This time. Please press Star then the number one on your telephone keypad.
So we're kind of pause for just a moment to compile the Q&A roster.
Okay.
And our first question comes from the line of Scott <unk>.
Burger from Oppenheimer. Please go ahead.
Thank you very much good afternoon, everyone.
Guys I guess just.
Jumping in on on the near term headwinds in the utility end market can you talk us through a little bit more of your of your customer conversations what youre hearing what youre seeing there.
And it sounds like you are with this guidance in the mid single digits growing the rental fleet.
We see that you feel that there is going to be recovery and there is some some confidence there. So if you could just elaborate on what youre hearing from customers.
That we pull out of this pickup in it and it drives further and it drives improvement later in the year.
Sure Scott good to hear from you and yes happy to address it.
And Youre right at.
It feels very much like it's just a timing issue here. So I mean, if you look at kind of any macro trend of how much transmission has to be done and the number of projects that are what what some some consolidators call kind of ready to go it's significant and it will be a significant boost and if you look at all the macro underlying drive.
Or is around data centers and electrification and just and just grid upgrades that have to happen. We feel like it is significant and then talking with customers. It's just a timing issue I think a lot of people are thinking later this year.
Many of those jobs will begin.
And then it will be very good demand for an extended period of time when they do begin so everyone seems to be talking about timing later this year and we've got the equipment ready to go but as we as we mentioned in on the November call and certainly we just we just referenced again, we are seeing a little bit of a slowdown.
Now from a from a transmission utilization standpoint, and it's and it seems to be specific to transmission.
All of the other end markets are continuing to perform very well, which is what we noted and saw the tes side of the business certainly in the infrastructure side in the vocational side and then even.
Distribution distribution utilization is still saying.
And a very good level as well.
Hi, Thanks, Thanks for that just kind of a follow up on that and then I have one other but.
Our days in your earlier, Marc you mentioned.
Early infrastructure Bill rollout I just one.
Delving, a little bit more there.
Anecdotally, what you're what you're seeing on that front with regard to that stimulus.
Yeah look I think we're starting to see it we're seeing it more on the infrastructure side. So for us that shows up in dump trucks and water trucks and roll offs in some of our hydro excavators.
And yes, I think we're starting to see some of those dollars flow.
Would say when we talk to our customers there and certainly when we listen to some of the other.
So some of the other companies in this space, we're saying, maybe it's maybe 15, 15% to 20% kind of those funds are starting to show up in backlog and that certainly is an area that we're seeing continued really strong demand.
Scott and so that was a big big driver of why.
Tes had such a strong fourth quarter, when you think about 21% growth for the quarter and 29% growth for the full year there.
And we're continuing to see that type of trend.
Here, even in the even in January in January and into February as well on the on the tes side of the business.
Thanks, I appreciate it and last one for me and then I'll turn it over probably more for Chris but it's.
With regard to the free cash flow outlook of $100 million.
It sounds sounds good it sounds like a strong bounce back.
What I'm really looking to delve into here is our inventory levels and just kind of the progression the work through there.
Just going a layer deeper layer deeper and.
And a sense of.
Why why that why that guidance number one level of confidence.
Yes, Scott I think we had said a number of times throughout the year that we really were strategically making the decision to invest in inventory because we saw the demand coming and so we feel comfortable that we're going to have an opportunity here as the year progresses.
While some of that investment and so certainly.
As we look at.
Levered or Unlevered free cash flow there was a significant investment this year and last year this year being in 'twenty, three and last year being in 'twenty two.
We think in terms of net working capital will be able to unwind some of that in 'twenty four.
So that will be a big driver of it.
Got it thanks very much.
Thanks, Scott Thanks, Scott.
Our next question comes from the line of Nicole <unk> with.
Deutsche Bank.
Please go ahead.
Yes, thanks, good evening guys.
Hi, Nicole clinical.
Can we just talk a little bit about your expectations for tes backlog. It makes sense that it ticked down to supply chain is normalizing I guess is your expectation that you could possibly exit 2024 with a more normalized lead time and.
Amount of backlog or do you think that backlog will remain elevated based on what youre seeing in the supply chain.
That's a great question look we.
We delivered.
Over $200 million of additional revenue on the Tes segment. This year. So the fact that backlog really year on year, just came down what about $60 million 65.
We're really happy with that so we are still seeing very good order volume.
And so I think that will continue.
But I wouldn't be surprised if backlog still comes down a bit we've said I've said historically that four to six months is where where it has been historically.
I don't know that I have a reason to think it will be all the way down to that by the end of the year, but we're still seeing really good order flow. We are still seeing really good demand here even through the first two months of 2024.
And I think that demand will just continue to hold.
Okay got it. Thank you and then with respect to Capex. How are you guys thinking about 'twenty score on both replacement capex as well as growth Capex.
Yes, I think we said in our prepared remarks, Nicole our expectation is we'll grow.
Net <unk> will grow OCC by a net.
Mid single digits this year and our gross Capex number is going to be similar to this year and that we're targeting in that $400 million range.
So 5%.
If you pick the minute of mid single digit Youre looking at a net $75 million to $80 million of.
Growth Capex.
Very helpful. Thank you I'll pass it on.
Thanks. Thanks.
Our next question comes from the line of Justin Hauke with Robert Baird.
Go ahead.
Yeah, great. Thanks for taking my questions.
I guess I wanted to go back to the transmission market and the demand levels there.
Has there been a shift I mean are you seeing that clients are asking more to buy the equipment.
Rather than rent given the demand visibility that they see and so maybe that's part of what's.
Driving.
The fleet.
Elevation rate down a little bit on the rental side as people are opting to buy it and hold it for longer.
I think one of the dynamics you guys talked about we need firsthand in the public markets was the rental was kind of on trade and there was.
And an opportunity for that to be a greater usage of fleet. So I guess I would just ask for an update on that.
Yes, it's a great question.
You are right, we have said and we'll continue to say as we see people buy it's a good indicator of long term demand transmission, probably is a bit of an exception. There transmission. This is primarily significantly rented.
We don't sell a lot of the transmission equipment.
That we that we consume that we buy from our vendors that we put together.
So it is it is a heavily rented product so maybe a little bit different dynamic there just because of the use case of that equipment.
So it's we're not seeing that dynamic and it really does feel like it's just timing right of win win the projects begin.
And that seems to be consistent with all of our conversations with customers and certainly a lot of the.
Industry is talking about right now as well so but it's a great question and it is true in other in other product categories. It's something we watch closely we talk a lot about when the RPI buyouts happened when buyouts happened from the rental fleet. That's a good indicator of long term demand you saw those levels that were high in the fourth quarter. So.
We're still all signs are still very good kind of long term demand. That's just a short term.
Indicator of when the transmission work really begins.
Okay.
On that basis I mean.
The utilization level, the 77 six year quarter.
You guys ended <unk> at $8, four and I think kind of the expectation for <unk> is even with those you were going to kind of hold in that range and obviously it came down a little bit so.
That still is a high utilization rate I guess.
Versus history, but.
You gave the.
The fleet growth, but what's your expectation for kind of utilization rates throughout the year.
Are they more like 75% are they more like 80.
Just kind of trend line, where you expect them to go.
Yes, it's a great question and you're right. It contained that that is a high a high utilization. If you look in historical context, we did see it continue to come down at the end of the year and so we.
We are back to kind of that 75 is the average we were just below 75 kind of a day end of the year and Thats, where we are currently at the beginning of Q1, and we'll expect that to kind of follow the same type of line that it typically follows which means that should build.
Some in the spring a level off of business Summer and then continue to build.
Into the end of Q3, and the beginning of Q4 to kind of follow that just general flow, but yes, I think somewhere around that 75 is probably.
A good spot to think about it.
Okay, all right I'll leave it there. Thank you guys.
Thanks, a lot.
Okay.
Our next question comes from the line of Tami Zakaria with Jpmorgan. Please go ahead.
Hi, how are you.
Hi, Sam.
Hi.
So my first question is I, just wanted to get a sense of how you're thinking about the cadence.
Throughout the four quarters typically I think you've mentioned in the past EBIT.
Call it 45% in the first half and the.
The remaining in the second half so should we think.
About the guide in terms of typical or historical seasonality or any any seasonality to think about as we model the timeframe for.
Yes, Jamie this is Chris.
I think the $45 55 generally still holds.
I do think what we're going to see certainly it holds for revenue I think as Brian was just talking about kind of what we expect to see this year in ers, which is more of a historical norm versus what we saw maybe in 'twenty three or certainly in 'twenty two is that.
Theres, probably it would be a little bit.
Ryder range, probably first half second half on EBITDA.
So, it's probably a little less than 45, and a little more than 55% on EBITDA by $45 55 in revenue.
Got it Okay got it that is very helpful. And then for the E. R. S segment I think you mentioned a few times some slowdown in transmission work caused by your customer supply chain delays just wanted to get a sense of what exactly is this delay is it funding.
Is it availability of some other recruitment or they're just waiting for the fed rates to get caught out what exactly is this sublet and delay or.
What's exactly driving this delay.
No. That's a great question and I would tell you, yes, yes, and yes right. So the conversation we're having is all all three of those tami that some of it is a regulatory approval right and so they are waiting on some rate increases to be passed through.
Through their regulatory bodies some of it is supply chain right. So we're still waiting on.
Some superstructure or structure or.
Transformers to be available and then some is just the cost of funds issue, which I think they are waiting on.
No waiting on interest rates. So it feels like it's all three Tammy.
It feels like there's a lot that's ready to go so as each of those break we anticipate there'll be.
It will be a great tailwind.
As they begin later this year and into 2025.
Got it okay. Thank you so much.
Got it thank you.
No further questions at this time, Brian I will turn the call back over to you.
Great. 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. Thanks, again and have a good evening.