Q2 2024 Custom Truck One Source Inc Earnings Call

[inaudible] music music music music music music

Speaker Change: Ladies and gentlemen, thank you for standing by, and welcome to Custom Truck One, SOURCE's second 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 today, Brian Perman, Vice President of Investor Relations for Custom Truck.

Unknown Speaker: Vice President of Investor Relations for Custom Truck.

Speaker Change: Please go ahead.

Speaker Change: Thank you. Before we begin, we'd like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control.

Speaker Change: Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially.

Speaker Change: 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.

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

Speaker Change: 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.

Speaker Change: That press release and our quarterly investor presentation are posted on the investor relations section of our website. We filed our second quarter 2024 10-Q with the SEC this afternoon.

Speaker Change: Today's discussion of our results of operations, Custom Truck One Source, Inc., or Custom Truck, is presented on a historical basis as of or for the three months ended June 30, 2024, and prior periods.

Speaker Change: Joining me today are Ryan McMonagle, CEO , and Chris Eperjesy, CFO . I will now turn the call over to Ryan.

Unknown Speaker: Since we closed the combination of Custom Truck and Nesco about three and a half years ago, our management team and our employees have all worked tirelessly to combine the two businesses, which supports our belief that overall demand within TES is being 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 in-market, which includes both transmission and distribution work.

Ryan McMonagle: Thanks, Brian , and welcome, everyone, to today's call. Since we closed the combination of Custom Truck and NESCO about three and a half years ago, our management team and our employees have all worked tirelessly to combine the two businesses.

Speaker Change: to pursue an aggressive growth strategy through substantial investment in the business and to grow our production operations.

Speaker Change: All while providing unparalleled service to our customers.

Speaker Change: We have achieved these goals against the backdrop of strong secular tailwinds driving robust demand in our end markets, as well as the impact of COVID and its subsequent effect on the global supply chain.

Speaker Change: Since merging the two businesses, we have added more than $393 million of revenue and more than $85 million of adjusted EBITDA on an LTM basis.

Speaker Change: While we delivered sequential revenue and adjusted EBITDA growth in the second quarter, we are not satisfied with our financial results in the first half of the year. And we know that they are not indicative of the earnings potential of our overall business.

Speaker Change: We continue to see healthy demand in our infrastructure, rail, and telecom end markets.

Speaker Change: High levels of demand for certain products like our specialty dump trucks, roll-off trucks, hydro excavators, and water trucks.

Speaker Change: supports our belief that overall demand within TES is being positively impacted by the early stages of the deployment of federal infrastructure investment and Jobs Act dollars for infrastructure projects.

Unknown Speaker: We continue to observe significant growth in electricity demand driven by manufacturing on-shoring, AI-driven data center development, and current electrification trends, as well as the deferred maintenance that is required on the country's aging grid, which can be seen in the low number of transmission line miles completed. Once these issues get resolved, the forecasted load growth demand provides strong tailwinds for future growth across our entire business. While these trends impacted our results in the second quarter, we believe they will normalize, and we expect them to improve in the second half of the year and into 2025.

Speaker Change: Transmission line development and regional interconnection continue to be the bottlenecks in meeting this future energy demand.

Speaker Change: And there is a significant backlog of transmission projects that are ready to go. However, the utility markets have been meaningfully impacted in recent quarters, as supply chain issues, continued high interest rates, and regulatory approval delays have all contributed to project delays.

Speaker Change: Once these issues get resolved, the forecasted load growth demand provides strong tailwinds for future growth across our entire business.

Speaker Change: Additionally, we have seen and our customers have confirmed a broad-based slowdown in construction spending around electric distribution resulting from lower IOU CapEx and maintenance spend management.

Speaker Change: Our TES segment delivered sequential revenue growth of more than 3% in the quarter, and revenue is up 6% year-to-date versus the same period in 2023, after more than 30% year-over-year growth in the first six months of last year.

Speaker Change: As I just mentioned, growth in the TES segment has been led by increased spending in our infrastructure, telecom, and rail-in markets, resulting in net orders in the quarter showing an improvement versus Q1.

Speaker Change: While segment gross margin is down slightly, both year-over-year and sequentially, it remains within our expected range and represents a substantial improvement since the close of the combination with NESCO.

Speaker Change: We continue to closely follow 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.

Speaker Change: The entire TES team continues to perform extremely well and to deliver production near record levels.

Speaker Change: We are actively tracking transmission project starts, IOU rate-based approvals, and are in regular communication with our customers about their expectations for the remainder of 2024 and 2025.

Speaker Change: Based on this we have growing confidence that the slowdown in the utility and market is indeed temporary and should begin to reverse itself in the next few quarters.

Speaker Change: Our rental CAPEX plan for the second half of the year reflects investment in our fleet to meet demand across our end markets with a focus on those sectors where we see continued strength, particularly in our specialty vocational trucks.

Unknown Speaker: We are confident that the secular demand drivers that support the ERS segment are robust and will continue to provide significant growth in the years ahead. Our updated outlook reflects the risks associated with the near-term challenges for our rental customers in the utility sector. We are also lowering our revenue guidance for APS by $15 million to $140 to $150 million.

Speaker Change: We are confident that the secular demand drivers that support the ERS segment are robust and will continue to provide significant growth in the years ahead.

Speaker Change: The breadth of our vehicle product offering and our ability to meet customers' rental and sales needs uniquely positions Custom Trucks.

Speaker Change: to capitalize on the future tailwinds created by the sustained demand, particularly as certain delayed transmission projects advance.

Speaker Change: 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,

Speaker Change: Our updated outlook reflects the risks associated with the near-term challenges for our rental customers in the utility sector.

Speaker Change: which have been deeper and more prolonged than we anticipated and which we expect will persist through the balance of the fiscal year. As such, we are lowering our revenue guidance for ERS by $70 million to $610 to $640 million.

Speaker Change: Regarding TES, supply chain improvements, healthy inventory levels, and continued strong backlog levels, continue to improve our ability to produce and deliver more units in 2024 than in 2023.

Speaker Change: However, persistently high interest rates and uncertainty over the upcoming election are impacting our smaller customers' purchase decisions.

Speaker Change: As a result, we are lowering our revenue guidance for TES by $65 million to $1.05 to $1.19 billion.

Speaker Change: Consolidated revenue guidance is now 1.8 to 1.98 billion dollars. Given these changes, we are lowering our adjusted EBITDA guidance range to 340 to 375 million dollars.

Speaker Change: While we are reducing our consolidated revenue and adjusted EBITDA guidance for the year, we continue to focus on generating positive free cash flow in 2024, but expect to generate less levered free cash flow than our previous $100 million target.

Speaker Change: 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.

Unknown Speaker: relative to last year, our second quarter results were significantly impacted by a decline in average utilization of the rental fleet to just under 72% from almost 82% in Q2 of last year. While rental revenue was down marginally on a sequential basis, Adjusted gross margin was more than 60% in the quarter, up from just under 58% in the same period last year, largely because rental revenue, which has a higher margin associated with it than rental equipment sales, comprised a larger percentage of total ERS revenue in this quarter than in Q2 2023. Net orders improved sequentially versus Q1 of this year at just under $190 million. Our strong and long-standing relationships with our chassis, body, and attachment vendors continue to be an important driver of our record TES production.

Speaker Change: Relative to last year, our second quarter results were significantly impacted by a decline in average utilization of the rental fleet to just under 72% from almost 82% in Q2 of last year.

Speaker Change: In addition, average OECN rent in the quarter was $1.04 billion, down from just over $1.2 billion in Q2 of 2023.

Speaker Change: These declines reflect the impact of the slowdown in utility utilization that continued in the quarter, which Ryan mentioned.

Ryan McMonagle: Unrent yield was 40% for the quarter, essentially flat compared to Q2 of 2023.

Speaker Change: Given the trends in utilization and average OEC on rent, the ERS segment had $138 million of revenue in Q2, down from $169 million in Q2 of last year.

Speaker Change: While rental revenue was down marginally on a sequential basis,

Speaker Change: rental sales were up 15% sequentially, resulting in overall revenue growth for the ERS segment versus Q1. Adjusted gross profit for ERS was $83 million for Q2, down from $97 million in Q2 of 2023.

Speaker Change: Adjusted gross margin was more than 60% in the quarter, up from just under 58% in the same period last year, largely because rental revenue, which has a higher margin associated with it than rental equipment sales, comprised a larger percentage of total ERS revenue in this quarter than in Q2 2023.

Speaker Change: We continue to invest strategically in our rental fleet and sell certain age assets in the quarter and our fleet age improved slightly to 3.4 years in the quarter.

Speaker Change: Net rental capex in Q2 was $50 million. Our OEC and the rental fleet ended the quarter at $1.46 billion, down marginally versus the end of Q2 of last year, but up sequentially versus the end of Q1 this year.

Speaker Change: We expect to continue to invest in the fleet in 2024 but have lowered our expected growth capex given the trends we're seeing in the utility and market.

Speaker Change: In the TES segment, we sold $248 million of equipment in the quarter, down 1% compared to Q2 of last year, but up more than 3% sequentially from the last quarter.

Speaker Change: TES backlog continued to moderate, ending the quarter at just under $480 million.

Speaker Change: Net orders improved sequentially versus Q1 of this year at just under $190 million.

Speaker Change: Strong levels of production and new equipment sales in the quarter allowed us to make headway towards reducing our backlog to a more normalized level, which currently stands at more than five and a half months of LTM TES sales.

Speaker Change: This is down from a peak of more than 12 months in early 2023 and consistent with our targeted historical average of four to six months.

Speaker Change: Our strong and long-standing relationships with our chassis, body, and attachment vendors continue to be an important driver of our record TES production.

Unknown Speaker: 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 $37 million in the quarter, down slightly from Q2 of last year. Borrowings under our ABL at the end of Q1 were $587 million, an increase of $35 million versus the end of last quarter, primarily as a result of the increase in inventory and the lower than anticipated adjusted EBITDA performance in the quarter.

Speaker Change: 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.

Speaker Change: Our APS business posted revenue of $37 million in the quarter, down slightly from Q2 of last year.

Speaker Change: Adjusted gross profit margin in this segment was 22% for Q2. Overall, in Q2, the APS business was impacted by a decrease in rentals of tools and accessories, which were affected by the previously discussed utility and market softness, as well as higher material costs.

Speaker Change: Borrowings under our ABL at the end of Q1 were 587 million dollars, an increase of 35 million dollars versus the end of last quarter, primarily as a result of the increase in inventory and the lower than anticipated adjusted EBITDA performance in the quarter.

Unknown Speaker: We expect to begin to see a meaningful reduction in inventory levels at the end of this fiscal year and into next year, which should contribute to reducing the borrowings on the ABL. We also expect our rental fleet based on OEC to be flat this year versus the low single-digit growth we discussed on last quarter's call. We expect ERS revenue of between 610 and $640 million. In closing, I want to echo Ryan's comments regarding our continued strong business outlook.

Speaker Change: We expect to begin to see a meaningful reduction in inventory levels at the end of this fiscal year and into next year, which should contribute to reducing the borrowings on the ABL.

Speaker Change: As of June 30th, we had approximately $160 million available and $328 million of suppressed availability under the ABL with the ability to upsize the facility.

Speaker Change: With LTM Adjusted EBIT of $376 million, we finished Q2 with net leverage of 4.1 times. Achieving net leverage below three times remains a primary and important goal.

Speaker Change: With respect to our guidance, given the current conditions in the utility markets, we continue to expect TES to be the primary growth driver for 2024.

Speaker Change: We believe our ERS segment will continue to experience near-term pressure and demand in the utility market as a result of regulatory approval delays and financing and supply chain factors affecting the timing of job starts.

Speaker Change: As a result, we are lowering our ERS revenue guidance by $70 million.

Speaker Change: We also expect a rental fleet based on OEC to be flat this year versus the low single-digit growth we discussed on last quarter's call.

Speaker Change: Regarding TES, supply chain improvements and healthy inventory and backlog levels continue to improve our ability to produce and deliver more units in 2024 than in 2023.

Speaker Change: However, we are experiencing a bit of a reduction in demand from our smaller regional customers who are choosing to delay purchase decisions until later this year as a result of their expectation of lower interest rates.

Speaker Change: We are also reducing our revenue guidance for our APS segment by $15 million, reflecting the softness in the utility end market.

Speaker Change: While this all combines to reduce our consolidated revenue and adjusted EBITDA guidance for the year, we continue to focus on generating positive leveraged free cash flow this year, but expect it to be lower than the $100 million we detailed on our last call.

Speaker Change: We expect ERS revenue of between $610 and $640 million.

Speaker Change: TES revenue in the range of 1.05 to 1.19 billion dollars and APS revenue of between 140 and 150 million dollars. This results in total revenue in the range of 1.8 to 1.98 billion dollars.

Speaker Change: We are projecting adjusted EBITDA in a range of $340 million to $375 million.

Speaker Change: 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 return to strong revenue and adjusted EBITDA growth next year.

Unknown Speaker: 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 return to strong revenue and adjusted EBITDA growth next year. With that, I will turn it over to the operator to open the lines for questions.

Speaker Change: With that, I will turn it over to the operator to open the lines for questions.

Operator: If you'd like to ask a question, please press star followed by the number one on your telephone key. Your first question comes from the line of Justin Hauke with Robert W. Baird.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.

Speaker Change: If you would like to ask a question, please press star followed by the number one on your telephone keypad.

Justin Hauke: Great. Good afternoon, guys. I appreciate you taking the call here. I guess it's not overly surprising to see the slowness given, you know, what some of your customers have been reporting and some of the utilities have been saying about the kind of ongoing weakness in 2Q. But I would be curious.

Speaker Change: Please go ahead.

Speaker Change: Great, good afternoon guys. I appreciate you taking the call here. I guess not overly surprising to see the slowness given what some of your

Speaker Change: Customer's been reporting and some of the utilities have been saying about the kind of ongoing weakness in 2Q, but I would be curious

Speaker Change: Just a little more color on that. Is it geographic-based? What's driving that? Just anything you can give us on that.

Speaker Change: Yeah, happy to do it. And thanks. Thanks for the question, Justin. But, um, yeah, I'll give you maybe

OEC: for us OEC on Zoom.

Speaker Change: is up just over $30 million already in July . So we are seeing it come back and it's coming back primarily in utility. So I think that's where we're

Unknown Speaker: seems to be consistent with what we're watching from an expected line mile start standpoint as well as on the transmission side. So I think that's where we have, you know, I'd say a favorable vehicle in the back half and certainly a positive vehicle heading into 2025 on the transmission side.

Speaker Change: Seems to be consistent with what we're watching from an expected nine-mile start standpoint as well on the transmission side, so I think that's where we have

Unknown Speaker: Distribution is a little bit of a different story. Distribution is where we, you know, we're saying that it's, you know, as we said in our comments up front, that it seems to be normalizing, you know, but that's where there's been a bit of a tick down, which really is, is seems to be consistent with our conversations now with IOUs as well, because they're thinking about, you know, how they're planning their O&M spend and their CapEx spend.

Unknown Speaker: And then the impact, the other big piece for us to understand is the impact that they've experienced from inflation on some of these core products, whether it's transformers or conductors or even kind of the cost of third-party labor for them. So hopefully that helps. I'm happy to go into more detail if we can, if we can provide anything else.

Speaker Change: or even kind of the cost of third-party labor for them. So, hopefully that helps. I'm happy to go into more detail if we can provide anything else.

Speaker Change: Yeah, I mean, maybe just, I mean, what's the lead time, you know, to turn around, you know, equipment rental on some of this work? I mean, is it, you know, they call you up and it's there next week? Do they need a month's notice? I'm just, you know, trying to kind of see what

Unknown Speaker: Yeah, it's great. It always depends is the answer there, but we have some activity that's immediate that we're quoting and shipping now, which is why I made that comment about OEC on rent that's already up so far in July. And then there's some that is still planning for later this fall. So it's a mix, but we're starting to see some of the pickup there already.

Speaker Change: It always depends is the answer there. But we have some activity that's immediate that we're quoting and shipping now, which is why I made that comment about OEC on rent that's already up.

Speaker Change: so far in July , and then there's some that is still planning for still later this fall. So it's a mix, but we're starting to see some of the pickup there already.

Unknown Speaker: Um, and then I guess, you know, the

Speaker Change: And then I guess, you know, the

Speaker Change: I know previously kind of the year-end target for a live bridge was around three and a half times.

Speaker Change: Yeah, hi Justin, it's Chris. We're not expecting it to meaningfully move versus where we are. We do think...

Chris Eperjesy: You know, so we should start to see the impact of some of that networking capital on block at the end of the year and then certainly more significantly next year. But I wouldn't model any significant reduction from the current leverage levels.

Justin: You know, it would be a modest decrease, but it certainly won't get to the three and a half.

Unknown Speaker: Yeah, it's just a dedicated line that we have for Ford just to have that flexibility. Terms are favorable. I believe there's a free floor planning period which I think is described in the queue, and originally, it was a 30 million dollar line, and I think we, I think we just recently increased that, I think to 42, so it's just to have additional flexibility. Historically, we had done it on the PNC line. We just separated it out into a dedicated Ford line. Okay, all right.

Speaker Change: Unknown Speaker, the terms are favorable. I believe there's a free floor.

Justin: described in the queue. And originally it was a $30 million line. And I think we, I think we just recently increased that, I think to 42. So it's just to have additional flexibility.

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

Tami Zakaria: Hey, thank you so much for the time. So a couple of questions, given the demand weakness. And so as we think about next year, should we model more of a catch-up, so bigger than usual, CAPEX, or not? Basically, I'm trying to understand how should we think about CAPEX in 2025 if your expectation right now is that demand is eventually going to rebound.

Speaker Change: Please go ahead.

Speaker Change: Basically, I'm trying to understand how should we think about CAPEX in 2025 if your expectation right now is that demand is eventually going to rebound.

Speaker Change: Yeah, it's a great, Tami, it's good to talk to you, and it's a great question, and, you know, it is one of the beauties of the models that we can quickly pivot, right? So when things are coming slower than we expected, like what we've talked about, you know, we can hold back on deploying some of that CapEx.

Speaker Change: I, you know, we haven't provided guidance for 25 yet, I, you know, I would expect it would be kind of a returning to normal, you know, where we talked, you know, at some of the levels that we've talked about in the past.

Justin: You know, but if demand comes back faster, we certainly can react to that and grow the fleet more quickly. But, you know, we haven't provided guidance, but would expect something along those lines would be about where we settle for 2025.

Speaker Change: Understood. That is helpful. And then quickly, I'm sorry if I missed it, but rental rate growth. Can you can you speak to what you're expecting for rental rate growth through the rest of the year and what it was in the second quarter?

Unknown Speaker: For rental rate growth through the rest of the year and what it was in the second quarter.

Unknown Speaker: Yeah, you know, in terms of what we see on rent yield, you know, it's been in that 40 to 41% range for four or five quarters now, I wouldn't expect it to be materially different. You know, so if you're modeling it, I think it's going to be kind of in line with where it's been.

Speaker Change: Yeah, you know, in terms of our OEC on rent yield, you know, it's been in that 40 to 41% range.

Speaker Change: I think going back four or five quarters now, I wouldn't expect it to materially be different. You know, so if you're modeling it, I think it's going to be kind of in line with where it's been.

Unknown Speaker: That's what I'm trying to understand. Like, did rental rates go up in the quarter?

Unknown Speaker: And is it expected to be flat for the remainder of the year?

Unknown Speaker: I wouldn't expect it to materialize.

Speaker Change: And is it expected to be flat for the remainder of the year?

Speaker Change: I wouldn't expect it to materially move, no.

Speaker Change: be in line with where it's been.

Operator: The next question comes from the line of Mike Shlisky with VA Davidson. Please go ahead.

Speaker Change: Your next question comes from the line of Mike Shlisky with VA Davidson.

Michael Shlisky: Hi, good afternoon. Thanks for calling me. Hi there. Thanks for taking my questions.

Speaker Change: Please go ahead.

Mike Shlisky: Hi, good afternoon. Thanks for... Hi there. Thanks for taking my questions.

Unknown Speaker: You mentioned in your release and in your comments that some customers are waiting for the election to make any decisions, I think it was mainly on purchasing. Unknown Attendee. Unknown Speaker. And is there a real difference, you think, in... Yeah, I'll look for T&D maintenance activity with the other party in the White House.

Mike Schliske: Do you mention in your release and in your comments that some customers are waiting for the election to make any decisions? I think it was mainly on purchasing.

Speaker Change: Does your fourth quarter or your first quarter 25 results kind of depend on on who wins?

Speaker Change: And is there a real difference, you think, in, uh...

Speaker Change: Yeah, I'll look for T&D maintenance activity.

Justin: with the other party in the White House.

Speaker Change: As kind of expected rate cuts have not occurred, I think a lot of our smaller customers are waiting on those rate decreases to happen, and therefore expect their borrowing costs to be down. So I think that's a piece, and then we are hearing

Speaker Change: that from those same customers, what's there the kind of the smaller contractors that we service.

Speaker Change: I think they're just waiting on some certainty around the election, certainly no strong view one way or the other with regards to results there, but I think there's just certainty around it. And two things I'd point you to.

Speaker Change: Typically, the fourth quarter is always our strongest sales quarter, so that is kind of normal for us.

Speaker Change: And certainly when we look back on prior election years, that seems to have been what's happened, where we've seen a meaningful uptick in the fourth quarter, kind of after the election. So that's what it's based on, you know, not anything about who might win, kind of given the current environment.

Unknown Speaker: Got it. Also, can you walk us through the CapEx plan and the idea of potentially holding off on investing for some period of time if you haven't had things out in the field? on rent that haven't been used as much. I'd be curious why you wouldn't want to go a half year or a year older in your asset base if there's no real difference in how it might look or perform because it hasn't been used.

Unknown Speaker: Got it. Also, can you walk us through the CapEx plan and the idea of potentially holding off on investing for some period of time? If you haven't had things out in the field,

Unknown Speaker: on rent that haven't been used as much. I'd be curious why you wouldn't want to go a half year or a year older in your in your asset base if there's no real difference in how it might look or perform because it hasn't been used.

Unknown Speaker: Yeah, I think the thought of holding back on some capital expenditures is for growth capital expenditures there, Mike. So you're right, we've been continuing to keep the age of the fleet about, you know, about where it's been. I think the age of the fleet today is just under three and a half years. So it's continuing to hold there.

Unknown Speaker: Yeah, I think the thought on holding back on some CapEx is for growth CapEx there, Mike. So, you're right, we've been continuing to keep the age of the fleet, you know, about, you know, about where it's been. I think the age of the fleet today is just under three and a half years, so it's continuing to hold there. It's, you know, where we'll flex from a CapEx perspective is on growth CapEx.

Unknown Speaker: It's, you know, where we'll flex from a capex perspective on growth capex. And that's what the comment was about. If we're not seeing a meaningful uptick in utility demand, we won't invest more heavily there to grow that part of the segment. You know, and so there'll still be some swapping or some maintenance, you know, some replacement that does happen in that segment. And then where there are opportunities, we will continue to invest to grow where we're seeing that now is really around some of the specialty vocational trucks. So that's been a more meaningful portion of the additions that we've made this year, which I think is an encouraging sign as we think about 2025 and beyond.

Unknown Speaker: You know, and so there'll still be some swapping or some maintenance, you know, some replacement that does happen in that segment. And then where there are opportunities, we will continue to invest to grow. Where we're seeing that now is really around some of the specially vocational trucks.

Unknown Speaker: So that's been a more meaningful portion of the additions that we've made this year, you know, which I think is an encouraging sign as you think about 2025 and beyond.

Speaker Change: Okay. And then maybe lastly, and I'm sorry for the very, very basic question, but I think I'd like to hear it from you on an earnings call here. Is there a world where data centers can get all the power that they need, EVs can get all the power that they need, given the growth rates that are expected of these?

Speaker Change: Yeah, no, I think that's and to me it's it's the unlock some of those things that I think will be a great tailwind.

Unknown Speaker: some of these other things like AI data centers, you know, coming online and obviously electrification. So those are the great tailwinds. We know that we'll be able to take advantage of them. It's just when they come. And as we've said, we're seeing it now start to build in the latter half of this year and feel

Speaker Change: Okay, thanks. I'll pass it along.

Speaker Change: Yeah, thanks. Good afternoon. Appreciate you taking my question here. So just on TES, gross margins were a little bit lower than a year ago. Is there anything to call out specifically there, or is this just kind of in the range of normal? And then how should we be thinking about those margins here in the back half?

Unknown Speaker: Okay, thank you. That's helpful. And then kind of more of a housekeeping modeling item, the equipment sales within ERS obviously have been kind of volatile in the past couple of quarters. How should we be thinking about revenues there in the back?

Unknown Speaker: other rental asset sales that we pull out of the fleet.

Speaker Change: eight, nine, ten quarters. I think we've averaged in a quarter around $60 million a quarter, and I think the last two quarters have averaged about $35 million, so we would expect to see some meaningful growth in the second half of the year.

Unknown Speaker: I hope that answered your question. Yeah, and the only thing I'll add, Brian, is that the fourth quarter is normally the biggest, and there are a lot of different reasons for that. But that's historically been the case. So some pick up in the third quarter and then a bigger list in the fourth quarter would be normal, more normal.

Unknown Speaker: I hope that answered your question. Yeah, and the only thing I'll add, Brian, too, is the fourth quarter is normally the biggest and, you know, which is, which, there's a lot of different reasons for that, but that's historically has been, has been the case. So some pick up in the third quarter and then a bigger lift in the fourth quarter should be, would be normal, more normal.

Unknown Speaker: I appreciate it. Very helpful. I will pass it on.

Unknown Speaker: Thanks.

Unknown Speaker: Good afternoon, Nicole.

Unknown Speaker: Maybe just starting with the revised guidance does still embed a half-on-half step-up in EBITDA in the second half, so just trying to get a sense of to what extent you guys feel like you've de-risked the guidance for the push-outs that you've seen in utility relative to embedding a step-up since you've seen a recovery in July.

Unknown Speaker: Yeah, you know, we feel comfortable with the range. Obviously, you know, there's different things have to happen in terms of getting to the top of the range. You know, we talked about the fact that we've seen a pretty meaningful increase in OEC on rent in the month of July; I think we're up close to 35 million basis points on utilization. You'd have to see a trend like that continue to get to the high end of our range.

Unknown Speaker: she's seen a recovery in July.

Unknown Speaker: You know, certainly that's not what we're modeling internally, but that's what it would take to get there. You know, as Ryan just touched on, Q4 is always our strongest quarter. I think the last three years, it's ranged from just under 20% to almost 40% higher than any other quarter or average of the first three quarters. We would expect to see a similar phenomenon this year as well. I think one difference is, you know, if we get past the election, if there are some rate cuts, if some of the regulatory and funding issues are solved, you know, clearly, we have the inventory, which would have been a constraint in the past, just given some supply chain issues that we will not have now, including finished product. And so that also could be a potential tailwind as we look at, you know, being able to get closer to the higher end of the range.

Unknown Speaker: Certainly, that's not what we're modeling internally, but that's what it would take to get there. As Ryan just touched on, Q4 is always our strongest quarter. I think the last three years, it's ranged from just under 20% to almost 40%.

Unknown Speaker: if we get past the election, if there are some rate cuts.

Unknown Speaker: And so that also could be a potential tailwind as we look at, you know, being able to get closer to the higher end of the range.

Unknown Speaker: So maybe I could kind of just finish that off, like does that mean that the low end of the range doesn't really embed a recovery at all, and it's just kind of a normal half on half seasonal EBITDA uplift, am I interpreting that correctly?

Unknown Speaker: Yeah, I mean, I think, yeah, I think in terms of magnitude, certainly the seasonal fourth quarter strength is going to be a part of it. We are expecting to see sequential improvement in Q3, although somewhat moderate, so, you know, mid, low to mid single-digit kind of growth on revenue and EBITDA in the third quarter. And so a lot of the growth that we're expecting is going to come in the fourth quarter.

Unknown Speaker: Although, you know, somewhat moderate, so mid, low to mid single-digit kind of growth on revenue in EBITDA in the third quarter, and so a lot of the growth that we're expecting is going to come in the fourth quarter. And then...

Unknown Speaker: And then, you know, the OEC on rent, we are expecting to see some recovery; it's just the magnitude. So the lower end would be a much more modest recovery on OEC on rent, and the higher end would be more accelerated, you know, kind of the trend we saw in July.

Unknown Speaker: You know, the OEC on rent, we are expecting to see some recovery, it's just the magnitude. So the lower end, you know, would be a much more modest recovery on OEC on rent and the higher end would be a more accelerated, you know, kind of the trend we've seen in July.

Unknown Speaker: Okay, I got it. Thank you. That's helpful.

Unknown Speaker: And then just on the APS business, gross margins contracted quite a bit year on year. It definitely came in lower than our expectations. Anything going on there, and how should we think about the rest of the year?

Unknown Speaker: Um, there's, you know, I think in our comments, we talked about the fact that rental was down, and we're continuing to prioritize the rental fleet over third-party service. And so both of those would have a negative impact on margins. You know, there are some cost increases that we're seeing there as well. So I wouldn't model anything significant there, you know. I think we're going to see some of the same things we've seen in the first half. There could be a slight improvement in the second half.

Unknown Speaker: There's, you know, I think in our comments we talked about the fact that rental was down. We're continuing to prioritize the rental fleet over third-party service, and so both of those would have a negative impact.

Unknown Speaker: on margins, you know, there is some cost increases that we're seeing there as well, so I wouldn't model anything significant there, you know, I think we're going to see

Unknown Speaker: And, Nicole, we probably should have even guided a little bit better there, but part of the APS business is a block rental business, which is highly correlated with transmission. So, you know, which is obviously very high from a gross margin percentage standpoint. So, you know, that's a portion of that business that has been, you know, that has been weaker in the first half of the year, which is impacting margin there as well. I got it.

Unknown Speaker: Some of the same of what we've seen in the first half there could be a slight Improvement in the second half and Nicole we probably should have even guided a little bit better there but part of the APS business is is a

Unknown Speaker: Got it. Thanks. I'll pass it on.

Unknown Speaker: block rental business, which is highly correlated with transmission. So, you know, which is obviously very high from a gross margin percentage standpoint. So, you know, that's a portion of that business that has, you know, that has been weak during the first half of the year. So, which is impacting margin there as well.

Ryan McMonagle: I'll now turn the call back over to Ryan McMonagle for his closing remarks.

Ryan McMonagle: Got it. Thanks. I'll pass it on.

Ryan McMonagle: I'll now turn the call back over to Ryan McMonagle for closing remarks.

Ryan McMonagle: Great. Thanks, everyone, for your time today and your interest in custom trucking. 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.

Ryan McMonagle: Great, 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.

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

Operator: Thank you again and have a good evening.

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

Operator: A film by Christopher Eperjesy Written by Christopher Eperjesy Directed by Ryan McMonagle Cinematography by Christopher Eperjesy A film by Christopher Eperjesy Filmed by Christopher Eperjesy Edited by Christopher Eperjesy