Custom Truck One Source, Inc. (CTOS) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Custom Truck One source's Third Quarter 2026 Earnings Conference Call. Please note, this conference call is being recorded. I would now like to hand the conference over to your host today, Brian Perman, Vice President of Investor Relations for Custom Truck One Source.

Thank you, operator, and good morning. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ please refer to the Risk Factors section of the company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release we issued yesterday after the market closed. That press release and our third quarter investor presentation are posted on the Investor Relations section of our website. Yesterday afternoon, we also filed our third quarter 2026 10-Q with the SEC. Today's discussion of our results of operations for Custom Truck One Source Inc. or Custom Truck, is presented on a historical basis as of or for the 3 months ended September 30, 2026 in prior periods. Joining me today are Ryan McMonagle, CEO; and Christopher Eperjesy, CFO. I will now turn the call over to Ryan.

Thanks, Brian, and good morning, everyone. Custom Truck delivered another strong quarter led by record performance in our rental business. Third quarter adjusted EBITDA was $111 million, up 16% year-over-year, and adjusted EBITDA was up 24% through the first 9 months. SER Segment revenue was up 18% and STEM segment revenue was up 8% year-over-year. Consolidated revenue finished at $495 million of -- on the strength of these results, we are raising our full year adjusted EBITDA guidance for the third time this year. SER continues to deliver consistently strong performance. Driven by record demand in the transmission and distribution or T&D markets. Our rental fleet averaged 81.5% utilization during the third quarter, up 220 basis points from Q3 of last year. This was supported by record levels of OEC on rent, which averaged just under $1.4 billion in Q3, up more than 10% year-over-year. So far in Q4, both measures have remained quite strong, with OEC on rent currently greater than $1.5 billion and utilization surpassing 84%. As I said last quarter, we believe that we are in the early stages of what could be a once-in-a-generation transmission demand super cycle, which are SCR third quarter results support. We ended the third quarter with total OEC of over $1.76 billion, up almost $86 million in the quarter and the highest quarter end level in our history. The continued investment in our rental fleet reflects sustained record level demand and supports our expected continued growth in SCR for the remainder of the year and into 2027. Given the additional growth CapEx in our fleet year-to-date, our average fleet age is just under 3 years old which we continue to believe is 1 of the youngest fleets in the industry and positions us well to support our customers' needs across the country. I want to spend a minute on capital allocation because it was the most important decision we made this quarter. Demand from our transmission customers, much of it tied to long duration projects has continued to build beyond what our original fleet plan assumed. We chose to meet that demand. We are raising our 2026 net rental fleet investment to $210 million to $230 million, with the incremental dollars going into long-term transmission rentals and high-return specialty products, and we directed STEM production capacity to our own fleet to get these units on rent faster. These are the highest return dollars we can deploy. Rental gross margins were nearly 79% in the quarter in on-rent yield was over 39%. The trade-off is timing, levered free cash flow this year will now be slightly positive rather than the more than $50 million we had expected and most of the earnings from these units arrive in 2027. To size that, at today's rental rates and utilization, roughly $60 million of fleet generates approximately $20 million of annualized revenue and $15 million of annualized adjusted EBITDA. So the incremental units we are adding this year should be a meaningful contributor in 2027 with only a modest contribution in 2026, given delivery timing. Even with that investment, net leverage fell to 3.7x this quarter, down sequentially from Q2, and we remain committed to getting below 3x in 2027. Our trucks and equipment continue to power the people who strengthen and build critical infrastructure in the U.S. and Canada. The market has been focused on the durability of demand in T&D and our ability to convert improving rental KPIs into earnings and deleveraging, and we believe our trending results over recent quarters speak directly to that. bidding activity in ongoing conversations with our customers lead us to believe that these conditions will persist into the fourth quarter and beyond. Our STEM segment had a solid quarter, with strong order flow, third quarter orders were up 22% year-over-year, even as third-party deliveries were affected by timing. For Q3, overall STEM revenue was up more than 8% and while third-party revenue, excluding sales to our SCR segment was down 5% versus Q3 of 2025. I Third-party revenue in the quarter was impacted by our strategic decision to prioritize additional investment in the rental fleet to take advantage of current and anticipated rental demand. As we noted in August, certain third-party new equipment sales were delivered in the second quarter rather than in the second half, which also weighs on the third quarter comparison. Additionally, STEM saw more than $20 million of delayed new equipment sales in Q3, resulting from a chassis vendor recall as well as the need to repair damage to some of our vehicle inventory from a hailstorm at our Kansas City facility during the quarter. Excluding these delayed deliveries, STEM third-party revenue would have been up year-over-year. We believe these are short-term timing issues and that the sales will be recognized in the fourth quarter. We continue to have a high degree of confidence in our STEM business and are affirming our STEM revenue guidance for 2026. The New sales order backlog ended the third quarter at $342 million, up $19 million from the end of Q2 and up 22% year-over-year. Intra-quarter order flow remained strong in Q3 and our backlog has grown so far in Q4. We continue to see strong sales demand in the utility end market focused on both transmission and distribution equipment. In the infrastructure end market, we have seen less growth. However, third quarter orders grew strongly in several categories. And together with our ongoing conversations with our customers and the pace of bidding activity, this gives us the confidence to expect another year of growth in third-party customer revenue for STEM. With respect to the EPA 27 NOx emission regulations, Little has changed since the EPA introduced its proposed changes to the rules in early July. Given our current inventory position, the chassis prebuy actions we have already taken and our strong relationships with our chassis OEM partners, we continue to believe that CTOS is well positioned to navigate the impact of the upcoming emission standard changes. Given our strong year-to-date performance, robust conditions in the T&D end markets and our outlook for the rest of the year, we are raising our full year 2026 consolidated adjusted EBITDA guidance for the third time this year and now expect a range of $447.5 million to $460 million. We are also raising our SCR segment revenue guidance to $870 million to $890 million and are affirming our previous consolidated revenue guidance in the range of $2.1 billion to $2.2 billion. Long-term sustained in-market demand boomed by secular megatrends combined with our ability to provide exceptional execution on behalf of our customers sets us apart from our competition. Our long-standing relationships with our strategic suppliers and customers continue to be the keys to our success. 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 deliver our strong results in the third quarter. We look forward to updating everyone soon. With that, I'll turn it over to Chris to walk through the numbers in more detail.

Thanks, Ryan, and good morning, everyone. I'll start with consolidated results for the quarter, then discuss segment performance. our balance sheet, liquidity and leverage; and finally, our updated 2026 outlook. Our third quarter 2026 results reflect strong operating performance across the business and record rental fundamentals particularly in our T&D end markets. For the third quarter, total revenue was $495 million, and adjusted EBITDA was $111 million representing 3% and 16% growth, respectively, versus Q3 2025. Adjusted EBITDA margin was 22.4%, up roughly 250 basis points year-over-year our fourth consecutive quarter above 20%. On a GAAP basis, third quarter net income was over $2 million or $0.01 per diluted share compared with a net loss of just under $6 million a year ago. Year-to-date, net income is almost $9 million versus a net loss of just under $52 million in the same period last year. About $11 million of that year-over-year improvement reflects a favorable income tax swing a $2 million benefit this year, which includes a discrete benefit from a reduction in our valuation allowance versus roughly $9 million of tax expense in the prior year period. The balance was driven by higher operating income and lower interest expense. Turning to our segments. SCR delivered record results in Q3 with total revenue of $223 million up 18% versus Q3 2025, driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Rental revenue of $153 million grew 20% year-over-year, and rental equipment sales grew 14%. RPO activity in Q3 remained strong highlighting the continued robust demand for our equipment. Third-party revenue, excluding intersegment sales, was $212 million in the quarter, up 16% year-over-year. Segment adjusted EBITDA of $122 million was up approximately 23% year-over-year with segment adjusted EBITDA margin of 54.6% and up almost 220 basis points versus Q3 2025. Our key rental KPIs and SER remain very strong and have expectations in Q3 and continuing the momentum we've experienced in recent quarters. In Q3, utilization averaged 81.5%, up 220 basis points versus Q3 of last year. Average OEC on rent in the quarter was over $1.39 billion, up more than $132 million or more than 10% versus the same period in 2025. On rent yield in the third quarter was 39.4%, flat sequentially and up 120 basis points year-over-year. On rent yield remains within our targeted upper 30s to low 40s percent range and we continue to see opportunities for rate improvement as transmission mix grows and pricing discipline holds. Our historically strong rental KPIs reflect both increased rental activity and the continued scaling of our fleet to meet demand. Adjusted rental gross margin was approximately 79% in the quarter, above the mid-70s range we discussed last quarter, reflecting high utilization, the continued flow-through from our December price increase and our focus on controlling costs. Net rental CapEx in Q3 was $114 million, and our fleet age at quarter end was just under 3 years, a modest decrease from the end of last quarter driven by our increased growth CapEx. Our OEC in the rental fleet ended the quarter at over $1.76 billion, up more than $140 million versus the end of Q3 2025 and by almost $86 million sequentially. The increase reflects strategic and disciplined fleet investment in the face of strong demand, particularly in T&D. In STEM, third quarter total revenue was $442 million, up 8% year-over-year. Third-party revenue, excluding sales to our SCR segment, was $283 million, down 5% versus Q3 of 2025. As Ryan mentioned, sales to third parties were down year-over-year as we chose to strategically prioritize our production for additional investment in the rental fleet to take advantage of current and anticipated rental demand. As we noted last quarter, certain third-party new equipment sales were delivered in the second quarter rather than in the second half, which also weighs on the third quarter comparison. In addition, sales were negatively impacted by more than $20 million of sales delayed by a chassis vendor recall as well as the need to repair damage to some of our vehicle inventory from a hailstorm that occurred during the quarter. We believe these events represent temporary timing issues and that the delayed sales will be completed in the fourth quarter. Stem segment adjusted EBITDA was $37 million and segment adjusted EBITDA margin was 8.3% in the quarter. Recall that our 2025 segment adjusted EBITDA does not include any margin on intersegment sales, while 2026 segment adjusted EBITDA does. STEM gross margin in the quarter was slightly lower, largely as a result of mix. Our new sales backlog ended Q3 at $342 million, up $19 million sequentially and at 3.8 months, just below our targeted range of 4 to 6 months of new equipment sales. We've seen strong order growth so far in Q4 and our backlog currently stands at almost $400 million. Turning to the balance sheet and liquidity. With LTM adjusted EBITDA of $446 million and net debt of $1.65 billion, we finished Q3 with net leverage of 3.7x. This represents a sequential quarterly improvement of 0.15 turns and more than a 0.8 turn improvement versus the end of Q3 2025. Notably, net debt is essentially flat year-over-year even as we have grown our rental fleet by more than $140 million of OEC. Availability under our ABL was $234 million as of September 30 and based on our borrowing base, we have just under $290 million of additional availability that we could potentially access via our existing facilities. Inventory ended the third quarter at $1.016 billion, down $26 million from the end of the second quarter. The increase in our inventory during the first half of this year was largely planned, reflecting chassis and whole goods positioning ahead of scheduled second half deliveries. As we prepare for our expected growth in 2027 and chassis receipts under our previously discussed prebuy program ahead of 2027 emissions regulations, we now expect year-end 2026 inventory month on hand to be approximately flat with year-end 2025. With respect to our 2026 guidance, the demand environment across our key end markets remains very strong. For our SCR segment, demand for equipment serving the T&D markets remains at record levels, led by transmission demand. Total average OEC on rent was up more than $132 million year-over-year in the third quarter, driven by transmission, further penetration of the vocational rental market where we see on rent increased approximately $45 million year-over-year and is expected to provide incremental growth. We expect our key rental KPIs to remain strong in Q4 with the typical seasonal reduction around the holidays. For STEM, we expect fourth quarter third-party new sales to increase at a mid- to high teens rate year-over-year as the deliveries that were delayed in the third quarter are completed. STEM sales expectations are supported by continued strong customer demand, improving product availability and lead times and relationships with key customers and chassis and attachment suppliers. Our order backlog trends support this. Turning to the cash flow and capital allocation. Through the first 9 months, levered free cash flow was approximately $4 million, an improvement of about $79 million versus the prior year period. Given the demand trends in our T&D markets, we are increasing our 2026 net rental fleet investment to $210 million to $230 million about $35 million above the midpoint of our prior range, which corresponds to gross fleet investment of approximately $400 million to $430 million. The incremental spending is concentrated in long-term transmission rentals and high-return specialty products and support high single-digit ending OEC growth this year. Even with this increase, net fleet investment remains below the more than $250 million we invested in 2025. Rental equipment we add today earns an on-rent yield near 40% and rental gross margins in the high 70s. As a result of the additional fleet investment, together with year-end inventory months on hand that we now expect to be roughly flat with last year, we now expect 2026 levered free cash flow to be slightly positive compared to our prior expectation of more than $50 million. Both our investments in 2027 earnings. As Ryan noted, the incremental fleet alone represents roughly $15 million of annualized adjusted EBITDA once fully on rent. We expect to finish 2026 with net leverage well below 4x, and we continue to target below 3x in 2027, driven by adjusted EBITDA growth and improved levered free cash flow resulting from lower net fleet investment and reduced inventory levels in 2027. We're affirming our 2026 consolidated revenue guidance of $2.1 billion to $2.2 billion or year-over-year growth of 8% to 13%. Given the strong environment in the T&D end markets and overall strength across both of our segments, we are raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $447.5 million to $460 million, resulting in year-over-year growth of 17% to 20%. We still expect nonrental CapEx of $40 million to $50 million. We are increasing our SER revenue guidance for 2026 as well, projecting a range of $870 million to $890 million. We continue to project STEM revenue of $1.63 billion to $1.7 billion with STEM third-party new sales revenue growth of 3% to 10%. Overall, stem sales are expected to be down marginally to up 3%, with results now expected towards the upper end of that range is higher than planned intersegment sales to support our rental fleet growth, supplement third-party growth. For the fourth quarter, we expect consolidated revenue and adjusted EBITDA to be up both sequentially and year-over-year. So far in the fourth quarter, our OEC on rent is significantly above prior year levels. We expect both OECM rent and utilization to grow sequentially. On a consolidated basis, the fourth quarter remains our historically strongest quarter. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite broader macroeconomic uncertainty, recent results and end market fundamentals support our confidence in the long-term demand drivers and our ability to deliver 17% to 20% adjusted EBITDA growth this year. With LTM adjusted EBITDA now about $446 million, we currently expect another year of double-digit adjusted EBITDA growth in 2027. We will provide full 2027 guidance when we report fourth quarter results early next year. With that, operator, we can open the line for questions.

[Operator Instructions] Your first question comes from the line of Michael Shlisky with D.A. Davidson. Your line is open. Please go ahead.

Can we start with your comments, Ryan, on the utilization in the current quarter? I think you mentioned it exceeded 84% at this point of the year. But do you expect that to come down and kind of be more normalized in that low that you've seen by the end of the quarter as the assets that you're trying to roll out, I would assume still have some ways to go for the rest of the quarter here. Or do you think A4 was actually okay and maybe at the high end of that sweet spot range?

Yes, it's a good question, Michael, there's 2 things, I think, that are really worth highlighting. One, we're seeing -- it generally increases this time of the year. So really late October into November really is 1 that we'll continue to build, and that's what we're seeing currently. So that's trending. But the demand for transmission, Mike, right now is so strong. that certainly, as we're talking internally, I think there will be some customers who decide to keep equipment rather than returning it, which is what normally happens during the holidays. Just because it may not be available for them after the holidays. And so I think it will -- and I think Chris made a comment that it will slow down a little bit into December, but we think it will not be a significant into the end of the year just because the demand environment right there might get so good that I think people don't will lose some of that transmission here in particular.

Got it. Great. And then your comment that you've made all along here about really good demand. It sounds like it's both transmission and distribution. Is a lot of that really still depends on data centers in the AI and various communities? Or is it really the other drivers that you've had, which are just ongoing grid hardening and maintenance and expansion for everyday activity is not limited to 2 data centers. I guess I'm kind of curious, are you getting any pushback or anyone saying, we're going to be holding off a little bit of that data set activity late 2026 to '27 as communities speak out actually passes, et cetera? Or are you still seeing -- just trying to max from the older drivers?

Yes, we're still seeing -- it's a great question. And we're still seeing good growth, Mike. And so I think you're right. As we've talked about in the past, -- it's we're not data center specific that when a new data center is announced, somehow that drives incremental demand for specific CTOS equipment. It's much more that that's just the consumer of power. And so I think a lot of what we're seeing right now, we would be talking about even if it was just the grid upgrade and some of the modernization it was happening certainly, data centers are consumer power. So that's a very good thing for us. But we are seeing a lot -- we have our own construction trackers that we're tracking on the transmission side as we talk to our customers, they're all talking about new projects that are going into construction. There's obviously a lot of line upgrades that are happening right now. And then you're correct, Distribution is also in a very good spot. Right now, and we're seeing rate cases continue to be approved. And so we're seeing when we look forward with our own forecasting, it feels like '27 and really into '28, it will continue to be a very strong demand environment. which should benefit custom truck and certainly with some of the other macro dynamics going on will benefit the rental fleet in particular.

Got it. And maybe the last 1 for me. The impact from the hail storm. I was curious rebethat was covered by any kind of assurance hits going to be the fourth quarter. And then even the product recall, you have to actually send back or did they have your tech take care of the call? And are you going to be paid for that as well? .

Yes, Mike, this is Chris. In terms of the hailstorm in the big picture, it was relatively immaterial. And yes, it's covered by insurance. We had a $1 million deductible on our policy, and it did go GA, but not much above that. And on the second one, we're working with the dealers to get the repairs done and the OEM is covering those costs. .

And again, we think both of those will kind of unwind here in the fourth quarter.

Your next question comes from the line of Manish Somaiya with Cantor Fitzgerald.

Ryan, Chris, Brian and the team, my first question is on SCR margins, which were quite impressive this quarter at 54.6%. And -- how should we think about those margins as we move ahead is the mid-50 the right normalized range? Or is this sort of a temporary blip? Maybe if we can start there.

Yes, Mike. It's -- or sorry, Manish, it's Chris. If you look back, I think we've been living kind of in that low to mid-50s for the past few quarters. I would expect that we can continue to live there. There may be some upside, a little bit of upside there. But the answer is yes. I think modeling kind of in the low to mid-50s is a reasonable number.

A lot of them in is would just be a function of mix to between core rental revenue and then what assets are sold out of the rental fleet. And so -- so that would -- that's really...

Okay. And then I think on the pricing front sorry, Ryan, I don't know if I interrupted on something. [Technical Difficulty] The line just going to cut off a little bit. Okay. Sorry. On the pricing that we had at 39.4%, again, despite all the growth that you had on the fleet side, maybe if you can just give us a sense on what you're seeing what the opportunity is for higher pricing as we go into '27. I think you guys have alluded to the fact that the transmission markets are quite strong as we move into '27 and into '28 as well. But again, just trying to understand what the flexibility might be on the pricing front with the strong demand.

Yes. I think there should -- I think it should be a good demand environment. And so that means it should be a pricing opportunity. I think we're seeing the price increase that we actually took last December, continue to roll through. we're seeing some of the benefit of transmission is typically a higher rate or higher on-readyield. So we're seeing some positive mix that way. And then yes, I would expect as we start to think about guidance into '27 that there will be the opportunity to increase price. Some of that will be to take care of some of the cost increases, right, that we're seeing from our suppliers heading into '27, but it should be an opportunity to increase price as well. .

And just on the infrastructure markets. The transport bill, I guess, is still out there pending some permanency and then on the telecom side, I think you did kind of mention bed that could potentially help that market. So perhaps if you can just give us your sense as to you're thinking about the transportation bill, those markets plus potentially the positive impact from beat as we kind of look ahead?

Yes. It's -- look, infrastructure transmission and distribution has been incredibly strong, right? And I think that's certainly what we're seeing, and that shows up more in our rental fleet as we talked about. On the infrastructure side, specifically, we're seeing some pockets of growth, some things like our dump truck and water truck and some of our heavy haul tractor and trailer product categories are really beginning to pick up. Some of that is related to more data center construction. So there's some positive from data center construction we haven't seen a big lift yet from bad. As you know, telecom is a small part of our business, but we have not seen that materialize yet in any significant list. .

Right. And then just lastly, on the leverage metrics that you laid out for '27 below 3x in '27. How should we think about the deleveraging as far as the mix between EBITDA growth and debt pay down. For modeling purposes, is it safe to assume sort of like a 50-50 type scenario?

This is Chris again. We haven't really given specific guidance for next year yet, and we will come out of Q4. So we have given a little bit of guidance indicating that we're going to have double-digit EBITDA growth next year. But the answer to your question is it will be a combination of both. Certainly, there's going to be a part of the deleveraging that comes from that double-digit EBITDA growth, but we're also going to continue to focus on generating free cash flow and paying down debt. So it will be a combination of Boston coming out of Q4, we'll give a lot more granularity on kind of the path to get there.

Your next question comes from the line of Scott Schneeberger with Oppenheimer & Co.