Q1 2025 Custom Truck One Source Inc Earnings Call
Thank you for standing by my name is Gina and I will be your conference operator today at this time I would like to welcome everyone to the custom truck one source incorporated first quarter 'twenty to 'twenty five earnings conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
Brian Pearlman: I'll now hand, the call over to your host today, Brian Pearlman, Vice President of Investor Relations for custom trucks.
Please go ahead.
Speaker Change: 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.
Speaker Change: Although these forward looking statements are based on management's current expectations and beliefs actual results may differ materially.
Speaker Change: For a discussion of some of the risk factors that could cause actual results to differ please refer to the risk factors section of the company's filings with the SEC.
Speaker Change: Additionally, please note you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release, we issued yesterday afternoon.
Speaker Change: Press release in our first quarter Investor presentation are posted on the Investor Relations section of our website.
Speaker Change: We followed our first quarter 2025, 10-Q with the SEC yesterday afternoon.
Speaker Change: Today's discussion of our results of operations for custom truck one source of ink or custom truck is presented on an historical basis as of for the three months ended March 31, 2025 and prior periods.
Speaker Change: Joining me today are Ryan Mcmonagle, CEO, Chris that franchisee CFO I will now turn the call over right.
Speaker Change: Thank you, Brian and welcome everyone to today's call custom trucks strong financial performance at the end of last year carried over into the first quarter of this year driven by solid fundamentals across our primary end markets.
Speaker Change: And in our core T&D markets remained robust leading to strong results in both our E. R. S E T S segments, and overall year over year revenue growth for the quarter.
Speaker Change: While evolving U S tariff policies have introduced greater economic uncertainty, our ongoing engagement with customers coupled with our steady business activity and strong order flow reinforces our cautious optimism about achieving our expected growth targets in 2025.
Speaker Change: As a result, we are reaffirming our previous fiscal 2025 revenue and adjusted EBITDA guidance.
Speaker Change: While Chris will discuss our E. R. S segment's performance in greater detail I'd like to highlight some key trends are utility contractor customers continue to see sustained and increased levels of activity, which they expect to persist at least through the end of 2025.
Speaker Change: Driven largely by unprecedented secular growth in electricity demand and the need for substantial maintenance spending.
Speaker Change: The strong rental demand in the utility end market and across our other primary end markets resulted in average OCC on rent for Q1 of over $1 2 billion up 13% year over year increase.
Speaker Change: Average utilization in the quarter was just under 78% up 440 basis points versus Q1 of last year.
Speaker Change: We continue to see mid Seventy's to low 80% utilization rates across most of our fleet demonstrating the long term resilience of our end markets.
Speaker Change: These trends resulted in significant year over year increases in both rental revenue and rental asset sales.
Speaker Change: Driving total Ers segment revenue up 13% versus Q1 of last year, we continue to leverage the sustained rental demand in E. R. S.
Speaker Change: To selectively invest in our rental fleet at the end of Q1, our total OFC was just under 155 billion, our highest quarter end level ever we plan to continue to invest throughout the year to ensure we have adequate equipment to meet current and projected rental demand.
Speaker Change: CES saw good sales performance in the quarter as well as significant year over year net order growth with backlog, increasing by over $51 million in the quarter or 14%.
Speaker Change: Additionally, we experienced monthly sequential sales growth in February and March ending with our strongest March in the history of the company.
Speaker Change: Segment gross margin continues to be under some pressure impacted by mix and improved inventory levels across the broader industry. As we stated last quarter. We anticipate this will begin to normalize later in the year.
Speaker Change: We continue to see some hesitancy from our smaller customers to purchase vehicles.
Speaker Change: In some cases are choosing to rent a vehicle instead.
Speaker Change: Continued high interest rates and caution regarding the economy, resulting from changing U S tariff policy.
Speaker Change: Here to be the primary factors influencing this despite these trends are strong order flow and the growth in our backlog in the first quarter, which has continued so far into Q2 provide us with confidence in our outlook for <unk> for the full year.
Speaker Change: Tariffs remain an area of focus for us.
Speaker Change: We continuously monitor real time changes in U S policy to assess their potential impact on our operations. Many of the goods. We purchased from our vendors are either not currently or are not expected to be subject to specific tariffs targeting certain products or regions. Additionally.
Speaker Change: Additionally, we believe that our existing whole goods inventory will sufficiently support our production needs in the near and medium term.
Speaker Change: Some Oems have begun shifting portions of cross border production for select products back to the U S where feasible.
Speaker Change: Other suppliers have introduced incentives tied to non tariff pricing our strategy, we have leveraged as we tactically pull forward some inventory purchases during the first quarter, resulting in a modest rise in our inventory levels. We.
Speaker Change: We believe that our proactive mitigation strategies will largely shield us from significant disruption to our operations this year.
Speaker Change: And increased economic uncertainty deter some customers from committing to substantial capital investment for vehicle purchases, our rental fleet services and additional hedge to meet their equipment needs regarding upcoming chassis emission regulations from carb and the EPA, we continue to monitor any potential.
Speaker Change: Changes to those regulations under the New administration, our current guidance for Ges is not conditioned on any pre buy ahead of changes in emission standards from either a regulatory body.
Speaker Change: We are reaffirming our full year 2025 guidance, our first quarter results, our strong order flow in resilient and market demand continued to drive our expected growth across our consolidated business. This year.
Speaker Change: Despite some of the challenges in the macro environment that have occurred so far this year our business outlook remains positive.
Speaker Change: Long term sustained end market demand.
Speaker Change: Lead by secular megatrends in our ability to execute on behalf of our customers sets us apart from our competition.
Speaker Change: Our multi decade relationships with strategic suppliers are long tenured and diversified customer base will continue to be keys to our success.
Speaker Change: I continue to have the highest degree of confidence in the custom truck team and want to thank everyone for their hard work and dedication that helped get us to where we are today. We look forward to updating you on our progress on next quarter's call with that I'll turn it over to Chris to discuss our first quarter results in detail.
Chris: Thanks, Ryan for the first quarter, we generated $422 million of revenue $136 million of adjusted gross profit and $73 million of adjusted EBITDA.
Chris: On a year over year basis, all our rental segment Kpis improved in the quarter average utilization of the rental fleet from Q1 was just under 78% compared to 73% in Q1 of the prior year.
Chris: Average always see on rent in the quarter was over $1 2 billion.
Impaired to under $1 1 billion in Q1 of 2020 for.
Chris: Both metrics so far in Q2 are consistent with the averages we experienced in Q1 currently stand to get more than $1 2 billion.
Chris: And approximately 78% respectively.
Chris: As of today, what we see on rent is up almost $160 million more than 15% versus a year ago.
Chris: The RF segment had $154 million of revenue in Q1 up more than 13% from $136 million in Q1 of 2024.
Chris: With rental revenue rental asset sales were up meaningfully on a year over year basis, showing 9% and 26% growth respectively.
Chris: Adjusted gross profit for <unk> was $93 million for Q1 up 13% from Q1 of last year.
Chris: Adjusted gross margin for <unk> was 60% in the quarter essentially flat versus the same period last year.
Chris: For Q1, we maintain margins in the expected range of the low to mid 70% range for rental revenue in the mid to high 20% range for rental asset sales.
Chris: <unk> yield was over 38% for the quarter essentially flat on a sequential quarterly basis.
Net rental Capex in Q1 was $60 million and our fleet age improved slightly to three one years.
Chris: But what we see in the rental fleet ended the quarter at 155 billion.
Chris: Up $95 million versus the end of Q1, 2024, and up $33 million in the quarter, reflecting our strategic investment in the rental fleet given the strong demand environment, we continue to experience across our primary end markets.
Chris: We expect to continue to invest in the fleet this year and expect to grow our OCC by mid single digits percentage versus the end of 2024.
Chris: As we always do we will adjust our capex plans throughout the year to reflect our customers' demand to both rent equipment and purchased used equipment out of our fleet.
Chris: In the Tes segment, we sold $232 million of equipment in Q1 down marginally compared to Q1 of the previous year.
Chris: However, as Ryan mentioned, we saw double digit sequential growth in February and March and we ended the quarter with our highest level of equipment sales for March ever.
Chris: Gross margin in the segment in Q1 was 15, 1% down from Q1 2024, but in line with our expected margin range for this segment of 15% to 18%.
Chris: <unk> gross margin continues to be impacted by mix and improved inventory levels across the broader industry. We do expect EES gross margins to improve later this year.
Chris: CES, new sales backlog increased by $51 million or 14% in the quarter ending at just over $420 million.
Chris: At just under five months of LTM sales, our <unk> backlog is within our targeted historical average of four to six months.
Chris: Net orders improved to $284 million in Q1, a sequential improvement and up more than 220% compared to Q1 of 2024.
Chris: We continued to see strong sales and order flow. So far in Q2 with record April sales consistent with March levels and continued growth in our backlog since the end of Q1.
Chris: That combined with ongoing feedback from our customers regarding their equipment needs for 2025 provide us with confidence that we will see the expected revenue growth in <unk> this year.
Chris: Our strong and long standing relationships with our chassis body and attachment vendors continue to be an important driver of <unk> production.
Chris: Our current level of inventory positions us well to meet our production fleet growth and sales goals for the year as well as help mitigate the impact of new tariffs are.
Chris: Our Aps business posted revenue of $35 million in the quarter flat compared to Q1 of the previous year.
Chris: <unk> gross profit margin in the segment was 22% for Q1 down compared to Q1 2024, mainly as a result of continued higher cost of materials product mix and lower third party service work in the quarter.
Chris: Borrowings under our ABL at the end of Q1 were $655 million, an increase of $73 million versus the end of Q4 largely to fund the approximately $33 million purchase of the ECP shares in January as well as for increased rental equipment capex in certain other working capital needs.
Chris: As of the end of Q1, we had $290 million available in over $161 million of suppressed availability under the ABL with LTM adjusted EBIT of $336 million. We finished Q1 with net leverage of four eight times. Despite the tactical pull forward of some of our inventory purchases into Q1.
Chris: We expect to reduce our inventory by the end of the year, which should contribute to lower balances on our floor plan lines as well as reduced borrowings on the ABL, we intend to use our levered free cash flow this year to reduce our net leverage and continue to target a level of below three times.
Chris: This remains a primary and important goal for us and the one that we expect to achieve by the end of fiscal 2026.
Chris: We are reiterating our previous 2025 guidance with total revenue in the range of $1 97 billion to $2.06 billion.
Chris: Adjusted EBITDA in the range of $370 million to $390 million and net rental capex of just under $200 million.
Chris: Our segment guidance also remains unchanged, we continue to expect to generate meaningful levered free cash flow in 2025, setting a target of $50 million to $100 million and to deliver a meaningful reduction in our net leverage by the end of the fiscal year.
Brian Pearlman: In closing I want to Echo Brian's comments regarding our continued strong business outlook.
Brian Pearlman: Despite the impact of the changing U S. Tariff policy has had on the markets. We continue to be optimistic about the long term demand drivers in our industry and our ability to return to double digit adjusted EBITDA growth this year.
Brian Pearlman: With that I will turn it over to the operator open the lines for questions operator.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we will kindly ask that you. Please limit your questions to one.
Brian Pearlman: One follow up.
Brian Pearlman: Pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Nicole <unk> with Deutsche Bank. Please go ahead.
Erin Kaplan: Hi, Good morning. This is an iron Kaplan on for Nicole <unk>. Thank you for taking my question.
Speaker Change: So.
Speaker Change: I was wondering what gives you conviction and the acceleration in revenue growth that you've embedded throughout the rest of the year growing 3% in the first quarter or so.
Speaker Change: Maybe if you could add some color to that that would be helpful.
Speaker Change: Yes.
Speaker Change: For the question and good to talk to you, but I really think it's important to think about the <unk> segment in the <unk> segment.
Speaker Change: With different drivers there, but in the IRS right you saw 13% revenue growth.
Speaker Change: Quarter in Q1.
Speaker Change: And if you remember last year Q2 was softened for us from a rental revenue standpoint, and so that's not the trend that we're seeing we're seeing rental always generally stay strong. So I think we're seeing good demand there and we are seeing good demand for rental asset sales to some customers asking to buy equipment out of the fleet. So.
Speaker Change: Good about the underlying drivers there and obviously we've been investing in the fleet, that's because we're seeing demand and customers are asking for more equipment.
Speaker Change: Good on the ERP side, and then the <unk> side.
Speaker Change: You talked about the fact that the quarter started slow January and February were slow March was actually are our best March.
Speaker Change: Ever in the history of <unk>, and we're seeing that trend continue and the data I'd point, you to would be our backlog so backlog grew by over over $50 million in the quarter.
Speaker Change: <unk> order flow certainly continue to pick up.
Speaker Change: And the in the back half of the quarter as well so I think that that's that those are the.
Speaker Change: The primary reasons and then as you know our business is generally also.
Speaker Change: The sales business in particular is generally much stronger in the second half of the year.
Speaker Change: Got it.
Speaker Change: 101 follow up if I may.
Speaker Change: The slides mentioned demand in infrastructure end markets remains pretty strong and continues to show the benefits of the federal spending so as vocational vehicle demand has been driving key as does the Iga pause by the Trump administration.
Speaker Change: Not pose any issue we believe it was resumed in ore and of course, we're challenging it and.
But does that great questions for customers to potentially delay projects.
Speaker Change: We're not seeing it.
Speaker Change: Come through when we look at things like backlog and then all of our conversations with customers. So.
Speaker Change: We're not seeing that to be the case at this point.
Speaker Change: One of the things that is unique about our model, though too is that our customers can visit into renting equipment and so I think thats, where some of the value of <unk> <unk> you also see in that.
Speaker Change: Pivoting to rental yes, it has a different revenue profile, but a different revenue and margin profile.
Speaker Change: We still can take care of the customer even if they decide to pivot towards renting and set a solid set of purchasing.
Speaker Change: Got it thank you very much I'll pass it on.
Speaker Change: Thanks.
Speaker Change: And your next question comes from the line of Tami Zakaria with Jpmorgan. Please go ahead.
Speaker Change: Hey, guys. This is Adam <unk> on for Jeremy Thanks for taking the question.
Speaker Change: Yes on the tariff side, you mentioned, Brooklyn vendors to sort of minimize the impact.
Speaker Change: From changes in the U S municipal bond tap policy.
Speaker Change: You guys had that inventory bump up in the first quarter, just confirming that $26 million.
Speaker Change: With all tariff related or driven.
Speaker Change: And if you can provide sort of more color on certain kinds of agreements here work out with vendors to sort of mitigate that type of exposure. So that's renegotiate pricing are shifting sourcing.
Speaker Change: If you could provide some additional color there would be much appreciated. Thanks.
Speaker Change: Yes, happy to and it's a great question.
Speaker Change: And an area we spend a lot of time thinking about but I think we're in a good position overall as it relates to tariffs and really from a managing the cost side of tariff. So as we talked about on kind of our previous call.
Speaker Change: Our exposure is primarily in Canada, and Mexico, where we do have products coming in and I think as we talked about last time, it's primarily around chassis in particular as well.
Speaker Change: So we've done a couple of things there we have great relationships with our chassis suppliers, who I think we've been spending a lot of time with and then as Chris mentioned, we did we did and we will continue to pull forward.
Speaker Change: Some chassis inventory in particular.
Speaker Change: To make sure that we're receiving that before.
Speaker Change: Price increases are pass through and then where we are getting some price increase which is what's happening kind of in the chassis market I think we're comfortable that we'll be able to manage that cost increase.
Speaker Change: With obviously, how we build the trucks and then where it makes sense from a pricing perspective also.
Speaker Change: Got it thanks, and one follow up if I can.
Speaker Change: May you sort of reaffirmed plans to unwind unnecessary by year end.
Speaker Change: How should we think about that as we head towards the rest of the year is that more of like linear or sort of more back half weighted on that.
Speaker Change: Just some we couldnt hear the full question just to make sure. We understand it was it was your question our confidence about reducing inventory by the end of the year.
Speaker Change: Yes.
Speaker Change: Would that be more linear or would it be more of a second half weighted the reduction on the inventory.
Speaker Change: It's going to be it is going to come more it is going to be more second half weighted and as I mentioned, where we brought forward. Some of our inventory purchases you saw in Q1, Youll see a little bit more of that in Q2.
Speaker Change: As well so it will be second half weighted for sure.
Speaker Change: But as the effects of ethanol.
Brian Pearlman: Our next question comes from the line of Brian <unk> with Stifel. Please go ahead.
Brian Pearlman: Hey, guys. This is Andrew on for Brian. Thank you for taking my question.
Brian Pearlman: One on the IRS business I'm wondering how rental rates tracked in the first quarter and then how youre thinking about rental rates.
Brian Pearlman: In the RF business for the for 2025.
Brian Pearlman: Yes, it's a great question, we actually saw I think in the numbers. We reported you saw that on rent yield was basically flat to where it was in the last quarter.
Brian Pearlman: And I'm.
Brian Pearlman: So I think Thats, a pretty good guide for how the balance of the year will play out where there is opportunity to increase rate, we're doing that and that will take a little bit of time to flow through the P&L, but I think thinking about on rent yield where it is to be getting back up to 100 basis points or so is probably about right as you think about.
Brian Pearlman: What the impact of price will be for the rest of the year in <unk>.
Brian Pearlman: And then secondly on Tes gross margins.
Brian Pearlman: Wondering how youre thinking about how those might track for the remainder of the year.
Brian Pearlman:
Brian Pearlman: Yes. Thanks.
Speaker Change: Yeah, our general guidance has been kind of in a range of 15% to 18%.
Speaker Change: On a quarterly basis that can be clearly there could be mix impact customer impact quarter by quarter, but we're still targeting that same kind of range.
Speaker Change: In the range of 15% to 18%.
Thank you.
Speaker Change: As a reminder to ask a question simply press star one on your telephone keypad and your next question comes from Justin Hauke with Baird. Please go ahead.
Speaker Change: Hi, as Ron on for Justin you've had two good quarters.
Speaker Change: Of orders, but we still saw a TTS revenues down in this quarter, how quickly do orders convert to sales revenue of one month's conversion is it a three months conversion just a bit more color on that.
Speaker Change: Yes, it's a great question. It just depends by product category is the answer to that so there are some that do convert kind of in the month, where we where we carry stock inventory and so we're able to convert quickly there are others, where lead times can be the kind of three to six months at this point when you think about kind of supply chain and what are lead times on chassis in the attachments. So I think it just did.
Speaker Change: Pins by product category.
Speaker Change: But youre right, we use orders as a good proxy for what's coming in the next quarter.
Speaker Change: I think some of the guidance, we're trying to give.
Speaker Change: Around Q2 to thinking about in fact, I think you mentioned a strong April as.
Speaker Change: As well, so but I think on average you can assume.
Speaker Change: A couple of months' rates are probably three to four months is probably a decent average, but the answer is it really depends by product category.
Speaker Change: Thank you and then you guys reiterated the $50 million to $100 million free cash flow guide. Despite the inventory investment, but we also noticed that you kind of remove to your target leverage of below four by year end, how should we be thinking how should we be thinking about year end leverage and do you have a new target by year end, if it's not.
Speaker Change: For now.
Chris: Yes. This is Chris.
Speaker Change: Our target is clearly to have meaningful movement from where we finished this quarter.
Speaker Change: If we hit the high end of that range, we can get close to that four slightly lower than four.
Speaker Change: So thats the way I can really answer it is we're going to make meaningful movement will get close before if we hit the high high end of that target the $100 million, we could get close to or below therefore.
Speaker Change: Thank you guys.
Speaker Change: There are no further questions at this time.
Speaker Change: I will now turn the call back over to Ryan Mcmahon Nichols for closing remarks.
Speaker Change: Great. Thanks, Tina Thanks, everyone for your time today and your interest in custom truck. We look forward to speaking with you on our next quarterly earnings call and in the meantime, please don't hesitate to reach out with any questions. Thank you again and have a good day.
Speaker Change: Yes.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you for all for joining you may now disconnect.
Speaker Change: Are we out of the conference.
Speaker Change: We are.
Speaker Change: Okay. Thanks for your help today, we really appreciate it.
Speaker Change: You're welcome.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.