Q1 2024 Custom Truck One Source Inc Earnings Call

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Custom Truck One Source's first quarter 2024 earnings conference call. Please note, this conference call is being recorded. I'd like to hand the conference call over to your host for today, Brian Perman, Vice President of Investor Relations for Custom Truck OneSource. Please go ahead.

Ladies and gentlemen, thank you for standing by and welcome to custom truck one sources first quarter 2024 earnings conference call.

Operator: Please note this conference call is being recorded.

Brian Perman: I'd like to hand, the conference call over to your host for today, Brian Permian.

Brian Perman: Vice President of Investor Relations for custom truck one source.

Brian Perman: Please go ahead.

Brian Perman: 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 discussion of some of the factors that could cause actual results to differ, please refer to the risk factor section of the company's filings with the SEC.

Brian Perman: 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.

Brian Perman: These forward looking statements are based on management's current expectations and beliefs actual results may differ materially.

Brian Perman: 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.

Brian Perman: 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 that press release and our quarterly Investor presentation are posted on the Investor Relations section of our website we.

Brian Perman: We filed our first quarter 2024, 10-Q with the SEC This afternoon.

Brian Perman: Today's discussion of our results of operations for custom truck one source ink or put some truck is presented on a historical basis as of for the three months ended March 31, 2024 and prior periods.

Brian Perman: 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 first quarter 2024 10-Q with the SEC this afternoon.

Brian Perman: Joining me today are Ryan Mcmonagle, CEO and Chris <unk> CFO.

Brian Perman: Now I'll turn the call over to Ryan.

Brian Perman: Yeah.

Brian Perman: Today's discussion of our results of operations for Custom Truck One Source, Inc. or Custom Truck is presented on an historical basis as of or for the three months ended March 31st, 2024 and prior periods. Joining me today are Ryan McMonagle, CEO, and Chris Eperjesy, CFO. I will now turn the call over to Ryan.

Speaker Change: Thanks, Brian and welcome everyone to today's call.

Ryan McMonagle: Thanks, Brian, and welcome everyone to today's call. Custom Truck continues to see robust demand in our infrastructure, rail, and telecom markets, which all contributed to strong performance in our TES segment in Q1 and helped the segment deliver double-digit revenue growth for the sixth consecutive quarter. As we discussed on last quarter's call, our core T&D markets continue to have favorable macro demand drivers, namely data center investment, electrification, and required grid upgrades.

Ryan McMonagle: Custom truck continues to see robust demand in our infrastructure rail and telecom end markets, which all contributed to strong performance in our Ges segment in Q1 and helped the segment delivered double digit revenue growth for the sixth consecutive quarter.

Ryan McMonagle: As we discussed on last quarter's call our core T&D markets continue to have favorable macro demand drivers.

Ryan McMonagle: <unk> data center investment electrification and required grid upgrades.

Ryan McMonagle: However, these markets have been meaningfully impacted in the short term and specifically in Q1, as supply chain issues, regulatory approval, and ownership and funding details contributed to project delays, resulting in lower rental revenue and rental asset sales in the quarter. Overall, we delivered revenue of $411 million in Q1.

Ryan McMonagle: However, these markets have been meaningfully impacted in the short term and specifically in Q1 as supply chain issues regulatory approval and ownership and funding details contributed the project delays.

Ryan McMonagle: <unk> and lower rental revenue and rental asset sales in the quarter.

Ryan McMonagle: Overall, we delivered revenue of $411 million in Q1.

Ryan McMonagle: We continue to believe that the slowdown in the utility and market is temporary and anticipate a return to growth later this year and heading into 2025. Despite the current headwinds affecting transmission and distribution, our team continues to execute well and to demonstrate the value of our business model with our ability to pivot between product categories and between selling and renting equipment as the markets dictate. Our TES segment delivered 15% revenue growth in the quarter versus Q1 of last year, keeping us on track to meet our 2024 revenue guidance for the second quarter. We've seen growth across the board in the TES segment, which we have been able to meet as product availability has improved, and certainly led by increased spend in our infrastructure, telecom, and rail markets.

Ryan McMonagle: We continue to believe that the slowdown in the utility end market is temporary and anticipate a return to growth later this year and heading into 2025.

Ryan McMonagle: Despite the current headwinds affecting transmission and distribution our team continues to execute well and to demonstrate the value of our business model with our ability to pivot between product categories and between selling and renting equipment as the markets dictate.

Ryan McMonagle: Our tes segment delivered 15% revenue growth in the quarter versus Q1 of last year.

Ryan McMonagle: Keeping us on track to meet our 2020 for revenue guidance for the segment.

Ryan McMonagle: We've seen growth across the board in the Tes segment, which we have been able to meet as product availability has improved and certainly led by increased spend in our infrastructure telecom and rail end markets.

Ryan McMonagle: Segment Gross Margin saw a 170 basis point improvement versus Q1 of 2023, which highlights the continued strong demand environment, as well as the progress the team has made in continuous improvement in our production capability. The entire TES team performed extremely well and continues to deliver production near record levels, something the entire organization is very proud of.

Ryan McMonagle: Segment gross margin saw a 170 basis point improvement versus Q1 of 2023, which highlights the continued strong demand environment as well as the progress. The team has made in continuous improvement in our production capabilities.

Ryan McMonagle: The entire <unk> team performed extremely well and continues to deliver production near record levels something the entire organization is very proud of.

Ryan McMonagle: As we've discussed previously, our significant inventory investment last year has positioned us to meet the continued resilient customer demand for new equipment sales, as well as allow us to quickly serve our customers' rental and rental asset sales needs when demand returns to our core utility in the market. We are closely following the upcoming chassis emission regulations and are well positioned for the anticipated demand increase resulting from the change in emission standards that is coming between now and 2027.

Ryan McMonagle: As we've discussed previously our significant inventory investment last year has positioned us to meet the continued resilient customer demand for new equipment sales.

Ryan McMonagle: As well as allow us to quickly serve our customers rental and rental asset sales needs when demand returns to our core utility end market.

Ryan McMonagle: We are closely following the upcoming chassis emission regulations and are well positioned for the anticipated demand increase resulting from the change in emission standards that is coming between now and 2027.

Ryan McMonagle: In our infrastructure market, we continue to experience high levels of demand for certain products, like our specialty dump trucks, roll-off trucks, hydro excavators, and water trucks, which supports our belief that demand is beginning to be positively impacted by the early stages of the deployment of federal infrastructure investment and jobs act dollars for infrastructure projects. As we've discussed before, approximately 60% of our revenue comes from the utility and market, which includes both distribution and transmission work.

Ryan McMonagle: In our infrastructure end market, we continue to experience high levels of demand for certain products like our specialty dump trucks roll off trucks hydro excavators and water trucks.

Ryan McMonagle: Which supports our belief that demand is beginning to be positively impacted by the early stages of the deployment of federal infrastructure investment and jobs Act dollars for infrastructure projects.

Ryan McMonagle: As we've discussed before approximately 60% of our revenue comes from the utility end market, which includes both distribution and transmission work.

Ryan McMonagle: We continue to see favorable increases in electricity load growth driven by manufacturing onshoring, AI data center development, and the current electrification trend. The amount of incremental power and grid enhancements required to meet this forecasted load growth, as well as the deferred maintenance that is required on our aging grid, creates significant demand momentum in the sector. However, transmission line development and regional interconnection continue to be the bottlenecks in meeting this future energy demand.

Ryan McMonagle: We continue to see favorable increases in electricity load growth driven by manufacturing Onshoring AI data center development and the current electrification trends.

Ryan McMonagle: The amount of incremental power and grid enhancements required to meet this forecasted load growth as well as the deferred maintenance that is required on our aging grid create significant demand momentum in this sector.

Ryan McMonagle: Transmission line development and regional interconnection continues to be the bottlenecks in meeting this future energy demand and there is a significant backlog of transmission projects that are ready to go.

Ryan McMonagle: And there is a significant backlog of transmission projects that are ready to go. As I said earlier, work on these projects is advancing slowly as supply chain, regulatory approval, and ownership and funding details get resolved, but they provide strong tailwinds for future growth across the entire business. Chris will walk through the details of our ERS segment, which continued to see strong utilization rates in the mid-70% to high-80% range for all in markets other than the transmission portion of utility.

Ryan McMonagle: As I said earlier work on these projects is advancing slowly as supply chain regulatory approval and ownership in funding details get resolved, but provides a strong tailwind for future growth across the entire business.

Ryan McMonagle: Chris will walk through the details of the performance of our IRS segment, which continued to see strong utilization rates in the mid 70% to high 80% range for all end markets other than the transmission portion of utility.

Ryan McMonagle: Our rental CapEx plan for the rest of the year reflects investment in our fleet to meet demand across our end markets, with a focus on those sectors where we are seeing particular strengths. We are confident that the tailwinds that support the ERS segment are robust and will continue to provide significant growth in the years ahead. The breadth of our vehicle product offering and our ability to meet customers' rental and sales needs uniquely positions custom truck to capitalize on the future tailwinds created by sustained demand, particularly as these transmission projects advance.

Ryan McMonagle: Our rental Capex plan for the rest of the year reflects investment in our fleet to meet demand across our end markets with a focus on those sectors, where we're seeing particular strength.

Ryan McMonagle: We are confident that the tailwind that support the IRS segment are robust and we will continue to provide significant growth in the years ahead.

Ryan McMonagle: The breadth of our vehicle product offering and our ability to meet customers' rental and sales needs uniquely positions custom truck.

Ryan McMonagle: To capitalize on the future tailwind created by the sustained demand, particularly as these transmission projects advance.

Ryan McMonagle: We continue to invest in geographic markets where custom truck is underrepresented, which we believe offer compelling long-term growth opportunities for our business. In addition to the new branch openings in Casa Grande, Arizona, Sacramento, California, and Salt Lake City, Utah, that we discussed on last quarter's call, we subsequently announced two small acquisitions. First, we acquired SOS Fleet Services in Alexandria, Louisiana, which strengthens our presence in the Gulf Coast region. We also acquired the business of AMD Maintenance and Repair on Long Island, New York, which significantly expands our presence and service capacity in the greater New York City metro area. We'd like to welcome the employees of both businesses to the Custom Truck family.

Ryan McMonagle: We continue to invest in geographic markets, where custom truck is under represented and which we believe offer compelling long term growth opportunities for our business.

Ryan McMonagle: These recent branch openings and acquisitions bring our location count to 40, up from 35 at the end of Q3 last year. We expect all these locations to be fully operational later this year. With respect to our 2024 guidance, while we continue to have confidence in the long-term strength of our end markets and the continued execution by our teams to profitably grow our business, our updated outlook reflects the risks associated with the near-term challenges for our rental customers in the T&D sector. Resulting primarily from the delay in the transmission project and lower rental use sales demand, which we now expect could persist through the balance of the fiscal year.

Ryan McMonagle: In addition to the new branch openings, and Casa Grande, Arizona, Sacramento, California, and Salt Lake City, Utah that we discussed on last quarter's call. We subsequently announced two small acquisitions first we acquired Sos fleet services in Alexandria, Louisiana, which strengthens.

Ryan McMonagle: Our presence in the Gulf Coast region.

Ryan McMonagle: We also acquired the business of AMD maintenance and repair on long Island, New York, which significantly expands our presence and service capacity in the Greater New York City Metro area.

Ryan McMonagle: Wed like to welcome the employees of both businesses to the custom truck family.

Ryan McMonagle: These recent branch openings and acquisitions brings our location count to 40% up from 35 at the end of Q3 last year. We expect all of these locations to be fully operational later this year.

Ryan McMonagle: With respect to our 2024 guidance, while we continue to have confidence in the long term strength of our end markets and the continued execution by our teams to profitably grow our business.

Ryan McMonagle: Our updated outlook reflects the risks associated with the near term challenges for our rental customers in the TMT sector.

Ryan McMonagle: Resulting primarily from the delay in transmission projects and lower rental used sales demand.

Ryan McMonagle: Which we now expect could persist through the balance of the fiscal year.

Ryan McMonagle: As such, we are lowering our revenue guidance for ERS by $50 million to $680 to $710 million. Regarding TES, Supply chain improvements, healthy inventory levels, and continued strong backlog levels continue to improve our ability to produce and deliver even more units in 2024. As a result, we are reaffirming our revenue guidance for TES of $1.115 to $1.255 billion, which reflects another year of double-digit revenue growth, as well as our revenue guidance for APS of $155 to $165 million. Consolidated revenue guidance is now $1.95 to $2.13 billion.

Ryan McMonagle: As such we are lowering our revenue guidance for IRS by $50 million to $680 to $710 million.

Ryan McMonagle: Regarding tes supply chain improvements healthy inventory levels and continued strong backlog levels.

Ryan McMonagle: Continue to improve our ability to produce and deliver even more units in 2024.

Ryan McMonagle: As a result, we are reaffirming our revenue guidance for Tes of 1115 to one to $5 5 billion, which reflects another year of double digit revenue growth as well as our revenue guidance for EPS of 155 to one.

Ryan McMonagle: $165 million.

Ryan McMonagle: Consolidated revenue guidance is now $1 95 to $2 one $3 billion.

Ryan McMonagle: Given these changes we are also lowering our adjusted EBITDA guidance range to $400 million to $440 million.

Ryan McMonagle: While we are reducing our consolidated revenue and adjusted EBITDA guidance for the year.

Ryan McMonagle: We continue to focus on generating meaningful free cash flow in 2024 and are reaffirming our target to generate more than $100 million of levered free cash flow.

Ryan McMonagle: In closing I continue to have the highest degree of confidence in the entire custom truck team and our ability to navigate the current softness in the utility end market and to deliver profitable growth and long term value to our shareholders with that I am going to turn it over to Chris to talk.

Ryan McMonagle: Given these changes, we are also lowering our adjusted EBITDA guidance range to $400 to $440 million. While we are reducing our consolidated revenue and adjusted EBITDA guidance for the year, we continue to focus on generating meaningful free cash flow in 2024 and are reaffirming our target to generate more than $100 million of levered free cash flow. In closing, I continue to have the highest degree of confidence in the entire custom truck team and our ability to navigate the current softness in the utility and market and to deliver profitable growth and long-term value to our shareholders. With that, I'm going to turn it over to Chris to talk through the details of our first quarter.

Chris: Through the details of our first quarter results.

Christopher J. Eperjesy: Thanks, Ryan. For the first quarter, we generated $411 million in revenue, $134 million in adjusted gross profit, and $77 million in adjusted EBITDA. Our first quarter results were significantly impacted by a decline in average utilization of the rental fleet to just over 73% from almost 84% in Q1 of last year, which was historically higher than our average level. In addition, average OECN rent in the quarter was $1.07 billion, down from $1.21 billion in Q1 of 2023.

Chris: Thanks, Brian for the first quarter, we generated $411 million of revenue $134 million of adjusted gross profit and $77 million of adjusted EBITDA.

Christopher J. Eperjesy: Our first quarter results were significantly impacted by a decline in average utilization of the rental fleet to just over 73% from almost 84% in Q1 of last year, which was historically higher than our average levels in.

Christopher J. Eperjesy: In addition average always see on rent in the quarter was $1.07 billion.

Christopher J. Eperjesy: Down from $1 billion to $1 billion in Q1 of 2023.

Christopher J. Eperjesy: These declines reflect the impact of the slowdown in transmission utilization that continued in the quarter, which Ryan mentioned. On rent, the deal was 40.5% for the quarter compared to 39.6% for Q1 of 2023. Given the trends in utilization and average OEC on rent, the ERS segment had $136 million of revenue in Q1, down from the all-time quarterly record of $206 million in Q1 of last year. Adjusted gross profit for ERS was $82 million for Q1, down from $106 million in Q1 of 2023.

Christopher J. Eperjesy: These declines reflect the impact of the slowdown in transmission utilization that continued in the quarter, which Brian mentioned.

Christopher J. Eperjesy: On rent yield was 45% for the quarter compared to 39, 6% for Q1 of 2023.

Christopher J. Eperjesy: Given the trends in utilization and average OEM rent.

Christopher J. Eperjesy: The RF segment had $136 million of revenue in Q1 down from the all time quarterly record of $206 million in Q1 of last year.

Christopher J. Eperjesy: Adjusted gross profit for IRS was $82 million for Q1 down from $106 million in Q1 of 2023.

Christopher J. Eperjesy: Adjusted gross profit margin was 60% in the quarter, up from 51% in Q1 of last year, largely because rental revenue, which has a higher margin associated with it and rental equipment sales, comprised a larger percentage of total ERS revenue in this quarter than in Q1 of 2023. We continue to invest strategically in our rental fleet and sell certain age assets in the first quarter, and our fleet age remains steady at three and a half years. The net rental capex in Q1 was $15 million.

Christopher J. Eperjesy: Adjusted gross profit margin was 60% in the quarter up from 51% in Q1 of last year, largely because rental revenue, which has a higher margin associated with it and rental equipment sales comprised a larger percentage of total IRS revenue in this quarter than in Q1 of 2023.

Christopher J. Eperjesy: We continue to invest strategically in our rental fleet and sell certain assets in the first quarter and our fleet age remains steady at three and a half years.

Christopher J. Eperjesy: Net rental Capex in Q1 was $15 million.

Christopher J. Eperjesy: Our OEC and the rental fleet ended the quarter at $1.45 billion, down marginally versus the end of Q1 of last year. 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 market. In the TES segment, we sold $240 million of equipment in the quarter, a 15% increase compared to Q1 of last year and a record for the first fiscal quarter.

Christopher J. Eperjesy: Are always see in the rental fleet ended the quarter at 145 billion.

Christopher J. Eperjesy: Down marginally versus the end of Q1 of last year.

Christopher J. Eperjesy: 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.

Christopher J. Eperjesy: In the <unk> segment, we sold $240 million of equipment in the quarter, a 15% increase compared to Q1 of last year and a record for the first fiscal quarter.

Christopher J. Eperjesy: Gross margin in the segment was 18% for the quarter and approximately 170 basis points improvement versus Q1 of 2023, which we attribute to the ongoing production efficiencies resulting from our high level of production, as well as an improved mix related to higher specialty and vocational truck sales.

Christopher J. Eperjesy: Gross margin in the segment was 18% for the quarter and approximately 170 basis points improvement versus Q1 of 2023, which we attribute to the ongoing production efficiencies, resulting from our high level of production as well as an improved mix related to higher specialty and vocational truck sales.

Christopher J. Eperjesy: In line with our expectations, TES's backlog continued to moderate, ending the quarter at just under $538 million. Record levels of production and continued strong 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 six months of TES sales. This is down from a peak of more than 12 months in early 2023 but still 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 TES production.

Christopher J. Eperjesy: In line with our expectations CES backlog continued to moderate ending the quarter at just under $538 million.

Christopher J. Eperjesy: Our record levels of production and continued strong 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 six months of <unk> sales.

Christopher J. Eperjesy: This is down from a peak of more than 12 months in early 2023, but still above our historical average of 4% to six months.

Christopher J. Eperjesy: Our strong and long standing relationships with our chassis body and attachment vendors continue to be an important driver of our record <unk> production.

Christopher J. Eperjesy: Our intentional inventory build throughout 2023 and into 2024 positions us well to meet our production, fleet growth, and sales goals for 2024 and beyond. Our APS business posted revenue of over $35 million in the quarter, down slightly from $37 million in Q1 of last year. Adjusted gross profit margin in the segment was 26% for Q1, down from a little over 27% in Q1 of last year. Overall, in Q1, the APS business was impacted by a decrease in rentals of tools and accessories, which were affected by the utility and market softness.

Christopher J. Eperjesy: Our intentional inventory build throughout 2023 and into 2024 position us well to meet our production fleet growth and sales goals for 2024 and beyond.

Christopher J. Eperjesy: Borrowings under our ABL at the end of Q1 were $552 million, flat versus the end of last quarter. As of March 31st, we had $195 million available and approximately $332 million of suppressed availability under the ABL with the ability to upsize the facility. With LTM adjusted EBIT of $399 million, we finished Q1 with net leverage of 3.79 times. Achieving net leverage below three times remains a primary and important goal.

Christopher J. Eperjesy: As of March 31, we had $195 million available and approximately $332 million of suppressed availability under the ABL with the ability to upsize the facility.

Christopher J. Eperjesy: With LTM adjusted EBITDA of $399 million, we finished Q1 with net leverage of three 709 times achieved.

Christopher J. Eperjesy: Achieving net leverage below three times remains a primary and important goal. However, given year to date performance and our current expectation for the rest of the year, we expect to achieve net leverage of less than three five times by the end of the fiscal year.

Christopher J. Eperjesy: However, given year-to-date performance and our current expectation for the rest of the year, we expect to achieve net leverage of less than 3.5 times by the end of the fiscal year. With respect to our guidance, while we expect 2024 to be another year of growth, given the current conditions and the utility markets, we continue to expect TES to be the primary growth driver for 2024. We believe our ERS segment will continue to experience near-term pressure and demand in the utility market as a result of supply chain, regulatory, and financing factors affecting the timing of job starts. These headwinds in our utility end markets are driving lower OEC on rent in our core ERS segment.

Christopher J. Eperjesy: We now expect to grow our rental fleet based on net OEC by low single digits versus the mid to high single digits we discussed on our last call regarding TES. Supply chain improvements, healthy inventory levels, and historically high backlog levels continue to improve our ability to produce and deliver even more units in 2024. As a result, we are reaffirming our 2024 revenue guidance for TES, which reflects another year of double-digit revenue growth.

Christopher J. Eperjesy: Our outlook for our APS segment remains unchanged. While this all combines to reduce our consolidated revenue and adjusted EBITDA guidance for the year, we continue to focus on generating meaningful free cash flow this year and are reaffirming our target to generate more than $100 million of leveraged free cash flow in 2024. Updated guidance for our segments is as follows. We expect IRS revenue of between $680 million and $710 million. TES revenue is still in the range of $1.115 billion to $1.255 billion, and APS revenue is between $155 and $165 million.

Christopher J. Eperjesy: This results in total revenue in the range of $1.95 to $2.13 billion, or growth of 5% to 14% versus 2023. We are projecting adjusted EBIT in the range of $400 to $440 million. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite some temporary demand weakness in certain utility markets, we continue to be optimistic about the long-term demand drivers in our industry and our ability to deliver strong revenue and adjusted EBITDA growth to hold or expand margins, to produce significant leveraged free cash flow, and to reduce leverage, all while providing the highest levels of service to our customers. With that, we'll turn it over to the operator to open the lines for questions.

Operator: Ladies and gentlemen, we will now begin the question and answer session. In order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Justin Hauke with Baird. Please go ahead.

Justin P. Hauke: Yeah, hi, good afternoon, everyone. So I guess, hi. I guess I wanted to start, you know, just what, what has changed, I guess, in terms of the utility, your, your, your, your, your customers' communication since the kind of beginning of March. I mean, Is it a whole bunch of project delays, or I guess I'm just curious how that conversation kind of developed over the last several weeks. And then I guess the second part of the question is, you know, even with the ERS guidance taken down here, I mean, assuming that 2Q is still going to be, you know, pretty negative revenue decline, it's implying the back half of the year has pretty strong growth, like, you know, high single digits, if not closer to 10. And I guess just the visibility you have this far out to kind of have that embedded assumption.

Ryan McMonagle: Yeah, good. Justin, thanks for the questions, and I'm happy to talk through them. But I'll start with the first question of really how the message is with our customers. I think that it will continue to see good macro trends.

Ryan McMonagle: So they know the work is there. We're just not, they're just not starting the work yet. And so that message is continuing, still talking about opportunity later in the second half of 24, which is kind of a lead to your second question. There is that as well, Justin, but still know that the work is there. There's just this temporary delay in the work starting, you know, which is most prevalent on the transmission side and shows up on most of the transmission equipment that we sell but is also showing up in the first quarter from some of the rental asset dispositions that we had some of the rental asset sales that we had in the first quarter.

Ryan McMonagle: And so we are expecting that. And then, you know, that also does imply some growth and, you know, OVC on rent or rental revenue for us, which is based on our conversations with customers. I will say that our conversations are getting more specific about when equipment is going to be going out, versus kind of general comments about it; it should pick up later this year. So I think that gives us some positive indications of why things are going to improve in the second half of the year.

Ryan McMonagle: I guess, I mean, how much lead time do your customers typically have, like if they're going to start a job in three months, do they need to rent it now, or are they kind of just in time to live there?

Ryan McMonagle: Yeah, I mean, our typical customers are the utility contractor, the utility contractor, and certainly when you get into some of the smaller utility contractors, they're just in time delivery. You know, so that's where it's important to have availability. That's where we think the one-stop shop model really allows us to keep inventory. Obviously, we have underutilized rental equipment right now, and it's ready to go. We've got a position where we think it makes sense to be positioned and where our customers are asking for it to be positioned.

Speaker Change: Yes, I mean, our typical customers the utility contractor utility contractors and certainly when you get into some of the smaller utility contractors are just in time delivery.

Ryan McMonagle: So that's where it's important to have availability, that's where we think the one stop shop model really allows us to keep inventory, obviously, we have underutilized rental equipment right now.

Ryan McMonagle: It's ready to go we've got a position, where we think it makes sense to be positioned and where our customers are asking for it to be positioned but it is on the rental side of the business. It is much more just in time on the sales side of the business, we do have backlog.

Ryan McMonagle: But it is, on the rental side of the business, it is much more just in time. On the sale side of the business, we do have a backlog that is still sitting north of six months. It gives us some good visibility on that side of the business.

Ryan McMonagle: That is still sitting north of six months that gives us some good visibility on that side of the business.

Christopher J. Eperjesy: Okay, and then my final question here before I jump back in, it looks like the purchase price in the cash flow, at least for these two acquisitions, was pretty modest. Was some of that, you know, I guess kind of an asset purchase where it showed up in the CapEx, or I'm just trying to understand kind of the size of these two locations.

Speaker Change: Okay, and then I guess my final question here before I jump back in the it looks like the purchase price and the and the cash flow at least was pretty modest for these two acquisitions.

Christopher J. Eperjesy: With some of that.

Christopher J. Eperjesy: Yeah, no, you said this is Chris, Justin, you said it right. And so it shows up in the acquisition of business there. Although I would point out that this is only the first acquisition; the second acquisition occurred post the end of Q1. So that would just be the first acquisition you're seeing there, the $1.4 million. Okay, okay.

Christopher J. Eperjesy: Yes, I know you said this is Chris just and you said it right and so it shows up in the acquisition of business there although.

Christopher J. Eperjesy: Although I would point out that is only the first acquisition in the second acquisition occurred post the end of Q1.

Christopher J. Eperjesy: So that would just be the first acquisition Youre seeing there is a $1 $4 million.

Justin P. Hauke: Okay. Okay. All right. Well, I'll jump back to you then, I guess. Thank you. Thanks, Justin.

Christopher J. Eperjesy: Okay. Okay.

Christopher J. Eperjesy: Alright.

Speaker Change: Ill jump back here, then I guess thank you.

Joseph: Thanks Joseph.

Operator: Your next question comes from the line of Tami Zakaria with JP Morgan.

Justin P. Hauke: Your next question comes from the line of Tami Zakaria with Jpmorgan.

Tami Zakaria: Please go ahead.

Tami Zakaria: Hi, good afternoon. Thank you so much.

Tami Zakaria: Hi, good afternoon, and thank you so much.

Tami Zakaria: By about 15 minutes theme.

Tami Zakaria: So my first question is on the ERS segment guide you loaded by about 15 million, it seems. So that would suggest, you know, there's been a use of vector RAM for the rest of the year versus the first quarter performance. So, am I thinking it right in terms of modeling that, you know, two cues should see a notable step up, and then three cues sort of stay similar and then again another step up in the fourth quarter?

Speaker Change: That one we'll get.

Tami Zakaria: Or is it more like two-cue doesn't see that much of an acceleration, but then the back half sees a notable step up? So, if you could just give some color on how to think about the next three quarters for ERS.

Tami Zakaria: These are notable.

Christopher J. Eperjesy: Yeah, this is Chris and Tami. In our guidance, you should assume a more modest step up in Q2 and then a more meaningful step up in Q3 and then into Q4, again, this is kind of what you, how you should model that.

Tami Zakaria: Got it. Okay, that's helpful. And then, going back to the previous question that was asked, I want to ask it in a different way.

Tami Zakaria: So you expect the utilities and the market to improve, you know, as you head into 2025. But is the expectation for an improvement in the utilities and the market predicated on, you know, a Fed rate cut? Or is there something else that makes you, or maybe the supply chain getting better or something? What is going to drive the pickup in the

Ryan McMonagle: Yeah, it's a great question, Tami, and I'm happy to talk about it. But I think there is so much pent-up demand in the space overall for the work to be done. So it's really more of what caused the short-term dip from a CapEx spin perspective. When you think about data centers, when we think about AI as kind of a new short-term demand driver, when we think about electrification, when we think about grid upgrades, to me, those are all clear long-term macro demand drivers that are all really compelling for why T&D makes sense. We're managing through the short-term blip.

Ryan McMonagle: We really do think it is a combination of some of our customer supply chain challenges. What I mean by that is making sure they have all of the supplies needed to build the power lines in the case of transmission work. That might be generators. It might be superstructure.

Ryan McMonagle: It might be all sorts of things, right, that are needed, but they want to make sure those are all in place before they send crews to work. A lot of those are supplied by the power producer or the IOU in many cases. And so we've got that dynamic. And then we've got regulatory approvals that seem to be holding up. And obviously, there's a lot of press out there right now with what the Department of Energy is doing and what FERC is trying to do to try to accelerate approvals of some of these lines.

Ryan McMonagle: Approvals of some of these lines I think that will be an unlock as those improve those obviously take time that regulatory process takes time, but I think those are the biggest two and then the third would be as Io use finalized capex plans and as they make their decisions on rate base increases and then as they make their decisions on how that capex will be spent between <unk>.

Ryan McMonagle: So that will be an unlockable as those improve. Those obviously take time. That regulatory process takes time, but I think those are the biggest two. And then the third would be as IOUs finalize CapEx plans and as they make their decisions on rate-based increases, and then as they make their decisions on how that CapEx will be spent between transmission and distribution, that's also kind of the final unlock for us as those plans are finalized and as that CapEx dollar is spent. That's the work that our customers, utility contractors, are primarily doing. And so I think it's an unlock of all three of those.

Ryan McMonagle: Transmission and distribution, that's also kind of the final unlock for us.

Ryan McMonagle: Those as those plans are finalized and as that Capex dollars spent that's the work that our customers utility contractors are primarily doing.

Ryan McMonagle: And so I think it's an unlock all three of those.

Tami Zakaria: Got it. Okay. Thank you.

Speaker Change: Got it okay. Thank you.

Speaker Change: Thanks Tammy.

Operator: As a reminder, if you would like to ask a question, press star followed by the number on your telephone keypad. Your next question comes from the line of Michael Shlisky with D.A. Davidson Companies.

Speaker Change: As a reminder, if you'd like to ask a question.

Michael Shlisky: Press Star followed by the one on your telephone keypad.

Michael Shlisky: Your next question comes from the line of Michael <unk> with.

Michael Shlisky: With da Davidson companies.

Michael Shlisky: Please go ahead.

Michael Shlisky: Yes, hi, good afternoon, and thanks for taking my question. [inaudible] I want to ask you about ERS first. Did the sales of used units in ERS surprise you at all? And can you maybe share if pricing was a driver in this course result at all?

Michael Shlisky: Yes, hi, good afternoon, and thanks for taking my questions.

Speaker Change: No problem.

Michael Shlisky: Wanted to ask on IRS first.

Michael Shlisky: Sales of <unk>.

Michael Shlisky: Of used units in the IRS surprise you at all and can you maybe share if pricing was a driver in.

Michael Shlisky: In this quarters results at all.

Ryan McMonagle: Yeah, it did come in lower than we expected. And some of that is just a function of when our customers are deploying their CapEx and when they expect to buy. So it did come in lower than we expected. For the assets that we sold, we still saw very good residual values.

Speaker Change: Yes, it did come in lower than we expected and saw.

Ryan McMonagle: Some of that is just a function of as our customers are deploying their capex and when they expect to buy so it did come in lower than expected.

Ryan McMonagle: The assets that we sold we still saw.

Ryan McMonagle: Very good residual values.

Ryan McMonagle: But in the used equipment market right now, yes, we are seeing some pricing pressure on there, but we're still able to sell and generate kind of compelling gross profit. But Mike, yes, it absolutely came in lower than we expected for the year. And as we've talked about in the past, that's always the hardest part of our business to forecast. And so we're going to continue to refine how we do that and get better at it. But yes, it did come in lower than expected to answer your question.

Ryan McMonagle: But in the used equipment market right now, yes, we are seeing some.

Ryan McMonagle: Some pricing pressure.

Ryan McMonagle: On there, but we're still.

Ryan McMonagle: To sell and generate kind of compelling gross profit, but Mike yes. It absolutely came in lower than we expected.

Ryan McMonagle: In the year and as we've talked about in the past that's always the hardest part of our business to forecast.

Ryan McMonagle: And so we're going to continue to refine how we do that and get better at it but.

Ryan McMonagle: But yes, it did come in lower than expected to answer your question. Mike. This is Chris maybe just a little more color there.

Christopher J. Eperjesy: And Mike, this is Chris. Maybe just a little more color there. You know, the comp year-over-year was going to be a tough one. If you look back at Q1 of last year, which tends to be more of a softer quarter, it actually was our highest quarter by, I think, 40 percent in terms of magnitude. And so it was a very unusual Q1 of last year; some demand moved from Q4 of 22 into Q1 of 23.

Christopher J. Eperjesy: The comp year over year was going to be a tough one and if you look back at Q1 of last year, which tends to be more of a softer quarter. It actually is our highest quarter by I think 40% in terms of magnitude and so it was a very unusual Q1 of last year as some demand moved from Q4 of 'twenty two.

Speaker Change: In Q1 of 'twenty, three and so we were going to have a tough comp and we knew that that was clearly wasn't in the cards to be at that level. So it wasn't really tough comp. We don't have the same kind of comp situation in Q2.

Christopher J. Eperjesy: And so we were going to have a tough comp, and we knew that it clearly wasn't in the cards to be at that level. So, you know, it was a really tough comp. We don't have the same kind of comp situation in Q2.

Speaker Change: Okay got it got it.

Michael Shlisky: Okay, got it. Also, the projects that you're tracking, are they being pushed out on the calendar, or do you have a sense that they're being canceled? And I guess I'm just trying to figure out whether we need to be increasing our end of 24 or probably our 25 numbers by what may not have hit the P&L this quarter or the last couple of quarters, or if we just have to adjust even for the end of this year for things that are being pushed out.

Speaker Change: Also wanted to touch on.

Michael Shlisky: Our projects that you're tracking.

Michael Shlisky: Being pushed out on the calendar or do you have a sense.

Michael Shlisky: There are some that are being canceled.

Michael Shlisky: I'm, just trying to kind of figure out whether we need to be increasing our end of 'twenty four or probably our 25 numbers.

Michael Shlisky: You may not hit the P&L this quarter or last couple of quarters.

Michael Shlisky: Or if we just have to adjust even even for the end of the end of this year for things that are being pushed out or just pushed to 'twenty five and then 25 get pushed to 2006 and so on just sort of a sense as to what's what's not being put in the ground today.

Michael Shlisky: Or does 24 get pushed to 25, and then 25 gets pushed to 26, and so on? Just sort of a sense as to what's not being put in the ground today, kind of over what period should that revenue eventually come in?

Michael Shlisky: What period.

Michael Shlisky: Should that revenue eventually again.

Ryan McMonagle: Yep, that's a great question. And we are not hearing of cancellations. We're hearing of delays. And so, and I think it's an important question, right?

Ryan McMonagle: Yep, no, it's great.

Speaker Change: Yes, no. It's a great question and we are not hearing of cancellations. We're hearing of delays and so I think it's an important question right. So that will push the work still has to be done the macro factors are still what they are in fact I would argue the macro forecasts have even gotten more compelling.

Ryan McMonagle: So that will push us. The work still has to be done. The macro factors are still what they are. In fact, I would argue the macro forecasts have even gotten more compelling. But the work in the short term is just getting pushed out. And when I listen to what our customers are saying, and even listen to some of the other public companies in the space, it seems consistent that the expectation is that later this year, those changes will begin, and they should carry well into 2025 and even 2026.

Ryan McMonagle: But the work in the short term is just getting pushed and when I listen to what our customers are saying and even listen to some of the other public companies in the space. It seems consistent that the expectation is later this year those will began and they should carry well into into 'twenty five and even into 2020.

Ryan McMonagle: Six.

Michael Shlisky: Okay. Maybe one last one for me.

Ryan McMonagle: Okay.

Ryan McMonagle: <unk>.

Speaker Change: One last one from me can you maybe update us on the cadence of.

Speaker Change: <unk> utilization as we go through the rest of the year and maybe can you update us on at this point, where do you think is the kind of sweet spot utilization has it changed at all given recent developments or you still feel pretty confident maybe it's in the seventeens or high Seventeens, where you can get your best results.

Ryan McMonagle: Can you update us on the cadence of fleet utilization as we go through the rest of the year? And maybe can you update us on, at this point, what do you think is the kind of sweet spot for utilization? Has it changed at all given recent developments, or do you still feel pretty confident maybe it's in the 70s or high 70s where you can get your best results?

Ryan McMonagle: Yeah, I'll start, and Chris can give some more color on Caden's mic. But yeah, but yeah, look, I think it's an important question. Because, you know, we talked about last year, we were running kind of very high utilization numbers when we were running in the mid 80s or even in the upper 80s. So even even in a quarter like this quarter, we're running, you know, in the low 70s from a utilization standpoint, which is very good in the grand scheme of rental businesses.

Speaker Change: Yes, I'll start and Chris can give some more color on cadence, Mike, but yes, but yes look I think it's an important question.

Ryan McMonagle: As we talked about last year, we were running kind of <unk>.

Ryan McMonagle: Very high utilization numbers, when we were running in the mid <unk> or even in the upper <unk>, so even even in a quarter like this quarter we're running.

Ryan McMonagle: In the low <unk> from a utilization standpoint, which is which is very good in the grand scheme of rental businesses. If you look across our broader portfolio of rental it is meaningfully down from where we ran in Q1 of 2023.

Ryan McMonagle: If you look across a broader portfolio of rental properties, it is meaningfully down from where we ran in Q1 of 2023. But Mike, I think you're right; it's still running in the mid 70s, which is certainly where we should shoot for and can achieve as you think about steady state. And so there's a little bit of this is we're just comping off very hard utilization numbers that we talked about a year ago, and we talked about, you know, 18 months ago, as well.

Ryan McMonagle: Mike I think you are right, it's still running in the mid Seventy's is certainly where we should shoot for and can achieve as you think about steady state and so there is a little bit of this is we're just comping up very hard utilization numbers.

Ryan McMonagle: We talked about a year ago, we talked about 18 months ago as.

Ryan McMonagle: As well so there is a bit of that that we're dealing with so even when we're seeing this delay and.

Ryan McMonagle: And so there is a bit of that that we're dealing with. So even when we're seeing this delay, and the rental fleet is, you know, you were seeing this delay, and we're seeing this slowdown on the transmission side of things. And yet, the entire rental fleet is still running in the low 70s. In the grand scheme of historical performance, that's still not a bad number; it's still a good number. And in the grand scheme of rental businesses more holistically, you know, it's still a very compelling kind of lower end that we're on.

Ryan McMonagle: The rental fleet.

Ryan McMonagle: We're seeing this delay and we're seeing the slowdown on the transmission side of things and yet the entire rental fleet is still running in the low seventies and the Grand scheme of historical performance, it's still not a bad number it's still a good number and in the Grand scheme of rental businesses more holistically, it's still a very compelling kind of lower end that we're running towards rate.

Christopher J. Eperjesy: Great. And again, the cadence, Chris, if you wouldn't mind giving us a little bit of that. Unknown Attendee Yeah, I guess so. I guess, you know, obviously, it's hard to predict on some of the variables that Ryan just went through. But, you know, clearly on the high end of our EBITDA range, we would expect to see a more meaningful increase in OEC on rent as we progress through the end of the year. On the lower end, we'd see a more modest increase.

Speaker Change: And again, the cadence, Chris if you wouldn't mind, giving us a little bit of an update.

Christopher J. Eperjesy: Yes.

Speaker Change: Thank you.

Speaker Change: I would guess.

Speaker Change: Obviously, it's hard to predict on some of the variables that Ryan just went through but clearly on the high end of our EBITDA range, we would expect to see more meaningful increase in OCC on rent as we progressed through the end of the year the lower end, we'd see a more modest increase.

Speaker Change: And so I think I'd leave it at that in terms of any guidance, we want to give.

Ryan McMonagle: We will pause for just a moment to compile the Q&A roster. There are no further questions at this time. I will now turn the call back over to Ryan McMonagle for closing remarks. Please go ahead.

Christopher J. Eperjesy: And so I think I'd leave it at that, in terms of any guidance we want to give. Okay, thanks. I'll pass it along. As a reminder, if you would like to ask a question, press star followed by the number on your telephone keypad.

Christopher J. Eperjesy: As a reminder, if you'd like to ask a question press star followed by the one on your telephone keypad.

Ryan McMonagle: Pause for just a moment to compile the Q&A roster.

Ryan McMonagle: There are no further questions at this time I will now turn the call back over to Ryan Macdonald.

Ryan McMonagle: Thanks, everyone, for your time today and your interest in Custom Truck. We look forward to speaking with you on the next quarterly earnings call. And in the meantime, please don't hesitate to reach out with any questions. Thank you again.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.

Operator: [music].

Operator: Yes.

Operator: [music].

Operator: Yes.