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spk04: Ladies and gentlemen, thank you for standing by and welcome to Custom Truck OneSource Second Quarter 2023 Earnings Conference Call. Please note that this conference call is being recorded. I would like to hand the conference over to your host today, Brian Perman, Vice President of Investor Relations for Custom Truck. Please go ahead.
spk06: Thank you and good afternoon. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For discussion of some of the factors that could cause actual results to differ, please refer to the risk factor section of the company's filings with the SEC. 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. The press release we issued this afternoon and our quarterly investor presentation are posted on the investor relations section of our website. We filed our second quarter 2023 10Q with the SEC this afternoon. Today's discussion of our results of operations for Custom Truck OneSource Inc. or Custom Truck is presented on an historical basis as of or for the three months ended June 30th, 2023, in prior periods. Joining me today are Ryan McMoneagle, CEO, and Chris Epperjesse, CFO. Owen, I'll turn the call over to Ryan.
spk07: Thanks, Brian, and welcome, everyone, to today's call. I'd like to begin by thanking all of our employees, customers, and suppliers who continue to support our business and help us deliver another strong quarter. The entire custom truck team continues to deliver record levels of production, which enables us to continue to grow our rental fleet, to meet continued strong demand for new equipment and to fulfill our goal of providing unrivaled service to our customers. For the second quarter of the year, we delivered strong year over year revenue, adjusted gross profit and adjusted EBITDA growth. We generated $457 million of revenue, $154 million of adjusted gross profit, and $103 million of adjusted EBITDA in Q2, up 26%, 22%, and 21%, respectively, versus Q2 2022. Our second quarter results align with our expectations that our business this year would reflect the benefits of moderating inflation, improved supply chain performance, and continued operational excellence. Demand remains strong in each of our strategically selected end markets, utility or T&D, telecom, rail, and infrastructure. These markets continue to offer compelling long-term growth opportunities well in excess of GDP, which we believe should continue for the foreseeable future. The reported backlogs of the utility and telecom contractors, our largest customer base, continue to be good proxies for this sustained growth. and remain at or near record levels. We see continued strong demand in our own new sales backlog and in the performance of the rental fleet. Additionally, in the second quarter, we continue to experience strong demand from our customers to purchase assets in the rental fleet. We see all of these as positive leading indicators for sustained future demand. The rental segment experienced 16% revenue growth year over year. We continue to see strong demand for rental equipment, and we remain focused on rental pricing and the amount of time it takes to turn a piece of equipment and make it available to go back on rent, both of which positively impact adjusted gross margin. In the quarter, utilization finished at just under 82%, which is historically very strong. We experienced a decline in utility distribution equipment utilization, which we believe is temporary, and primarily related to our customer supply chain delays. We continue to invest in our rental fleet and sell certain aged assets. This resulted in the reduction of our fleet age to under 3.6 years, which we believe remains the youngest in the industry. We expect to continue to invest in the fleet for the remainder of the year as demand remains robust. In the TES segment, we sold $251 million of equipment in the quarter, a 39% increase compared to Q2 2022, and the highest level of quarterly sales in the company's history. Additionally, gross margin improved significantly versus Q2 of last year, and our backlog continued to grow, ending the quarter at $864 million, up 30% versus a year ago, and up modestly versus the end of Q1. As we continue to achieve record TES sales and production levels, we should experience slower growth in our backlog, which we expect will eventually return to a more normalized level. This past quarter's TES results point to continued strong demand for new equipment. We are proud of the relationships we have with our chassis, body, and attachment vendors, and we continue to work closely with them to address supply chain issues as they arise. We continue to see an increase in equipment availability from our chassis and attachment suppliers, which positions us well to meet our production fleet growth and sales goals for the remainder of the year and beyond. Strategically, we remain focused on investing in and optimizing our production capacity and service footprint to ensure that we deliver the product and service levels our customers expect from us. On last quarter's call, we discussed the expansion projects that are Kansas City, Missouri and Union Grove, Wisconsin locations. The work at the Union Grove location is complete and the new capacity is largely online, while the expansion in Kansas City is expected to be complete later this year. These investments will ensure that we have sufficient capacity to meet our growth targets for both our rental fleet and new equipment sales, as well as be a catalyst for growth in our APS segments. As we look ahead to the rest of the year, we believe that our first half results, favorable in-market tailwinds, robust customer demand, improving supply chain dynamics, and continued outstanding execution by our team all provide Custom Truck with the momentum to deliver strong revenue, adjusted gross profit, and adjusted EBITDA growth. While Chris will discuss our 2023 outlook in greater detail, based on year-to-date performance and the outlook for the remainder of the year, We are increasing our projected total revenue guidance range to $1.725 to $1.83 billion, and our adjusted EBITDA range to $425 to $445 million. In closing, we know our employees are the key to delivering the unequaled customer service and outstanding financial results we saw in the second quarter, and I'd like to extend a sincere thank you to them. I will now turn it over to Chris.
spk08: Thanks, Ryan. Q2 was another very strong quarter. End market demand remained strong, resulting in total revenue of $457 million, up 26% compared to Q2 2022. Adjusted gross profit was $154 million, up 22% compared to Q2 2022, resulting in an adjusted gross margin for the quarter of 34%. Adjusted EBITDA was $103 million, a 21% improvement compared to Q2 2022. Adjusted gross profit and adjusted EBITDA growth lag revenue growth largely as a result of segment revenue mix. While all of our segments experienced year-over-year growth, rental asset sales and TES revenue, which have a lower average gross margin associated with them than our equipment rental business, comprise 66% of total revenue in Q2 2023, versus 60% in Q2 2022. SG&A was $58 million for Q2, or 12.7% of revenues, an improvement versus 13.5% in Q2 2022. Net income for the quarter was $11.6 million, the third consecutive quarter of positive net income. Ryan referenced our continued strong performance within our ERS segment for the quarter, utilization was just under 82%, and average OEC on rent increased by more than $53 million compared to Q2 2022. On-rent yield was over 40% for the quarter compared to just over 39% for Q2 2022. We continue to see the benefits from previously announced pricing actions implemented since the beginning of last year. Our OEC and the rental fleet ended the quarter at $1.47 billion, up by $68 million versus Q2 2022. Consistent with our expectation, we had continued strong investment in our rental fleet this quarter with a net capex of $50 million. We expect to continue to invest in the fleet during the second half of the year. For Q2, ERS rental revenue was $118 million, a 9% increase versus Q2 2022. ERS used equipment sales for Q2 remained strong at $51 million, up more than 36% versus Q2 2022. ERS adjusted gross profit was $97 million for Q2, up 12% from Q2 2022. Adjusted gross margin was 57.8% in the quarter, and more than 640 basis points of sequential improvement from Q1 2022. as rental revenue comprised a larger percentage of total ERS revenue in Q2 than in Q1. TEF saw another record quarter with revenues of $251 million, which were up almost 39% from Q2 2022. This segment continues to benefit from record backlog, continued strong inventory flows, and record levels of production. Gross profit increased by more than 69% in the quarter compared to Q2 2022. Gross margin for the quarter was over 18%, an improvement of over 330 basis points from Q2 2022. The improvement in PES gross margin reflects the implementation of ongoing production efficiency initiatives, as well as maintaining pricing discipline. Our sales and order activity continues to be strong. with backlog growing in the quarter to $864 million, which is 30% higher than at the end of Q2 2022. We believe the continued growth and the TES sales backlog reflects sustained long-term demand for equipment, indicative of our favorable end market dynamics, our strong market share gains, and our pricing discipline. As this quarter's TES results show, we are confident we will be able to hold margins at or above the average we experienced for all of 2022 over the coming quarters, even with elevated levels of inflation. Our APS business posted revenue of $37 million, up 4% versus Q2 2022. Adjusted gross profit margin in the segment improved to 29.5% in Q2. Maintaining a strong liquidity position and improving leverage remain priorities for us, as do investing in the rental fleet, expanding our geographic footprint, and pursuing selective strategic growth through M&A. Since initiating our stock repurchase program in the third quarter of last year, we have repurchased approximately $15 million of our stock. During the second quarter, we increased borrowings under our ABL by more than $30 million, mainly to fund working capital as we replenish inventory and ramp up production to meet demand with the outstanding balance at the end of Q2 at $492 million. As of June 30th, we had $255 million available and nearly $300 million of suppressed availability under the ABL with the ability to upsize the facility. With LTM adjusted EBITDA of $425 million, we finished Q2 with net leverage of 3.3 times an improvement of 1.3 turns since the close of the transaction with Nesco in April 2021, and down from just over 3.4 times last quarter. Achieving net leverage below three times remains our target and the one that we believe we can achieve by the end of fiscal 2023, even while continuing to grow our rental fleet, to expand our production capacity, and to invest in working capital for future growth. We will continue to seek to make incremental investments and prudent acquisitions when we believe they create long-term shareholder value. With respect to our 2023 outlook, we believe ERS will continue to benefit from strong demand from our rental customers as well as for purchases of rental fleet units, particularly older equipment, for the rest of the year. We continue to expect to further grow our net OEC by mid to high single digits this year. Regarding TES, Continuing supply chain improvements, improved inventory levels, and record backlog levels should improve our ability to produce and deliver more units than previously expected in the coming quarters. As a result of our improved outlook, we are updating guidance for our segments as follows. We expect ERS revenue of between $700 and $735 million, TES revenue in the range of $880 to $940 million, and APS revenue of between $145 and $155 million. As Ryan mentioned previously, this results in total revenue in the range of $1.725 to $1.83 billion, and we are projecting adjusted EBITDA from $425 to $445 million. In closing, I want to echo Ryan's comments regarding our continued strong performance. As we've moved into the third year of our successful combination with Nesco, we continue to deliver strong revenue and adjusted EBITDA growth to hold or expand margins in an inflationary environment and to reduce leverage, all while providing the highest levels of service to our customers. With that, I will turn it over to the operator to open the line for questions. Operator?
spk04: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from Mike Shelinsky with DA Data. Please go ahead.
spk05: Yes, hello, good afternoon, and thanks for taking my questions. First, let's go back. Hello? Yeah, hi there. Can you go back and explain again the utilization being down quarter over quarter? I wasn't sure I caught the frustration. Let me just get a little more detail. Did you imply that the customers just didn't have the supply chain for the things that they put onto the equipment? Or I guess I would only expect it to be a little bit warmer outside so there's higher utilization. Just a little more of a... of a narrative as to why it went down quarter to quarter, I guess.
spk07: Sure. Yeah, Mike, it's Ryan. Good to talk to you. You're right. Utilization did decline a touch from Q1 to Q2. It's still kind of at very strong levels at 81.7% for the second quarter. Normally, there is just a touch of seasonality in the second quarter, too. So that's a pretty normal decline that we see. And then what we did see this year is that some of the distribution equipment, we saw utilization fall a bit in distribution equipment. We're seeing it return now later into August. So we're seeing it pick back up. And the explanation we're hearing from customers is really around availability of their supply chain so things like transformers in particular. So I think it's a one-time issue and it will continue to come back and again it's at 81.7 percent which is you know if we hadn't been running you know in the mid 80s we would say is as good as it gets really from a utilization standpoint so still feel really good about it and then we expect transmission equipment will pick up kind of your hot comment transmission We'll pick up here as the heat breaks and as some of the new transmission work begins, which typically happens right after the end of the summer.
spk05: Got it. Thanks for that. I wanted to turn to truck chassis supply. You know, the broader Class 8 outlook for 2024 for truck production is still down, and that includes both vocational and cargo. I don't understand cargo being down, but it sounds like you've got such great tailwinds in your end markets that will see vocational trucks be up, at least that's what you'd like it to be. I guess could you give us some thoughts as to how you feel about chassis supply for next year if the trajectory of where things are going now continue for the next couple of quarters?
spk07: Yeah, it's a great question. We're still seeing constrained supply chain. So it's not wide open that we're able to receive as many chassis as we'd like. But we are seeing our chassis flow increase. So it's why you see TES revenue in particular is up as much as it is in the first half of the year. And you're also seeing that we've deployed more capital into the rental fleet in the first half of the year too because truck supply chain is up. I guess where we Where we look forward a little bit is when we're able to deliver the growth that we have in TES and see backlog continue to grow from the beginning of the year and even quarter on quarter. We think demand will obviously remain very strong in the next year. And right now in our conversations with our chassis partners, we're anticipating that we should see more chassis next year. How many more chassis is still what is somewhat to be determined, and we do think it will still be a constrained supply chain, but we do think that we'll see a larger allocation heading into next year as well.
spk03: Okay, thank you so much. I'll pass them along. Thanks, Mike.
spk04: The next question comes from Tammy Zacharia with JP Morgan. Please go ahead.
spk01: Hi, thank you so much for taking my questions. So my first question is, your ending OEC came in somewhat below what we were modeling, and you're expecting mid to high single digit growth for the year. So can you help us understand, are you expecting to scale back equipment sales versus the first quarter, the first half, or accelerate asset purchases to get to that mid to high single digit percent number?
spk08: Yeah. Hi, Tammy. This is Chris. You know, as he said, it would be mid to high single digits. That still is our plan. We still expect to get there. You know, we're somewhat flexible in terms of, you know, gross capex versus, you know, some of the sales. And so there could be some movement. I think previously we've given guidance. We expect to spend over $400 million on gross rental capex. That's still our plan. And it's still our plan to grow the mid to high single digits.
spk01: Got it. That's helpful. And then the other question I have, on rent yield, you saw a sequential take up. Is that mostly pricing benefits flowing through? Should we expect this to continue to take up until you lap some of these price increases?
spk08: I think that's fair. Yes, that would be fair to say, Tammy.
spk01: Okay, so we should be modeling like sequential growth in 3Q and 4Q as well?
spk07: It takes about a year for the whole fleet to turn in terms of new pricing and obviously depends on utilization and some specifics. But yeah, I think right now we're still seeing kind of the benefits of price flow through in terms of that on-rent yield metric. So we think it will continue to pick up a bit in the second half of the year.
spk01: Got it. Thank you so much.
spk03: Thanks.
spk04: The next question comes from Justin Hawk with Robert W. Baird. Please go ahead.
spk11: Good evening, everybody. I wanted to ask about the ERS segment guidance for the second half, which is implying, you know, even at the high end kind of flat revenue growth for the second half. And, you know, that segment's always hard to kind of model because it's got the rental component and then the sales component of it. And I know you had some kind of unusual sales activity last year that makes, you know, some difficult comps in there. But maybe just think about the – the seasonality between 3Q and 4Q and, you know, I guess how we should think about maybe the sales component of that business in particular.
spk08: I think you summarized it pretty well. You know, it is going to be a tough comp versus last year. We talked a little bit about the utilization, the decrease in utilization we saw at the end of the quarter leading into Q3. You know, and so there are some components there that, you know, clearly are a little more difficult to predict, in particular the rental asset sales. But I think you summarized it pretty well in terms of our thinking.
spk11: Okay. Any comment on just the sequencing of 3Q versus 4Q in terms of the difficulty in the comps?
spk08: You know, I don't think we expect, you know, we talked early in the year in terms of how the year typically plays out. Our expectation coming into the year, both revenue and EBITDA was 45-55 split. We think that's narrowed somewhat, first half versus second half. Q4 tends to be the strongest. We continue to expect that to be the case. So I don't think any updated guidance there in terms of what our expectations are. Okay.
spk11: And then I guess my second question is just on the free cash flow issue. you know, one of the biggest drags that you've had here to date has been the inventory investments on the working capital side, which makes sense. You know, that's steadily increased, you know, really every quarter sequentially, and it makes sense because you're growing, but is that a release of free cash flow in the back half as, you know, maybe some of the really high sales activity kind of moderates? Or I'm just trying to understand what the moving pieces are for free cash flow in the second half.
spk08: Yeah, we certainly would expect in Q4 that you would see that. You know, we're in a position where with all the growth, you know, we're happy to have the chassis, we're happy to have the attachments. So it's a situation where, you know, just 18 months ago, we were in a much different position. So we feel very good about the level of inventory we have, certainly as we look out to 2024. But to your comment, we should definitely see improved cash flow in the second half of the year, and certainly in Q4.
spk03: Okay, great. Thank you.
spk04: The next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.
spk09: Thank you. Good afternoon. If we could, can we talk about the guidance increase, Chris, about what... was the outperformance in second quarter that you factored, and then what were your considerations in the back half? I think a lot of the prior questions have gotten at this point, but can you tie it all together about how you factored in the second half guidance, particularly with regard to EBITDA? Thanks.
spk08: Yeah, maybe just start on revenue. We've seen a significant improvement in terms of our inventory flow which has allowed us, as Ryan talked about, certainly to have record quarters on new equipment sales and deliveries. And so we expect that to continue the second half of the year. So that's part of it. You saw a pretty significant increase on the revenue there. We've continued to see strong utilization, strong demand for rental asset sales. So we took that into account. The reason you're not seeing it all flow through EBITDA is because we're also seeing with the increased inventory and with higher rates, increased costs with respect to floor plan. And so that there's a little bit of a, you know, not the flow through you might have expected. And that's why you're seeing the 5 million on the lower and top end on EBITDA and a little bit higher on the revenue, you know, and on the higher revenue and higher EBITDA range, it would be higher commissions and higher bonuses paid. And so we took all that into account as we updated the guidance.
spk09: Okay, thanks. And, um, Could you talk a little bit about rental versus sales decisions as you are seeing the supply chain open up a good bit? Just how you're feeling. It sounds like you're feeling good about getting what you want, most of what you want, maybe not all of what you want in the back half of this year. Maybe a comment on that. And then on how you're allocating sales versus rental, the decision process there. Thanks.
spk07: Yeah, it's Scott. It's Ryan. You're right. We are seeing improvement, right? And so we're able to increase rental OEC, what we're putting into the fleet, which is what you see relative to last year. I think it's about a $50 million increase versus last year on a year-to-date basis. And then that's why we're able to sell because we're selling into so much backlog too. So we are, look, we obviously will allocate a dollar to a rental asset kind of on the margin where we can, but right now it's just about taking care of the customer. And even with, you know, kind of the pace of new sales that we've realized really in the last two months, or sorry, the last two quarters, we're still seeing backlog grow, right? So there is still more demand out there that we're trying to, we're trying the best we can to take care of both. and obviously do that prudently, and we'll continue to do that in the back half of the year as well.
spk09: All right, thanks, Ryan. One more for me, if I could. Could you just address your primary end market, what you're seeing, good and bad, and as kind of a 1B part of the question, are you seeing anything associated with the infrastructure bill yet. It doesn't seem like the funds are flowing, so there's a lot of project allocation. What are you seeing on that group? Thanks.
spk07: Yep, and great question. We're still seeing really good demand on transmission and distribution. We're hearing more about transmission jobs that are being awarded. We are still a really good macro landscape that we're playing into, and we're seeing a lot of distribution work that needs to be done. The only constraint that we're hearing about now is their supply chain, so as they're waiting for transformers or conductor, it's just taking time to get that equipment to be able to work. That's the only constraint that we're hearing. We think that's temporary, but that's a constraint that we're hearing. When we look at positive indicators, we mentioned that we're still seeing strong RPO buyouts, real asset buyouts in both of those categories. We take that as a really positive indicator and we're continuing to see that into the beginning of Q3. a good dynamic there, which we certainly feel like there's a bullish run that will continue on both sides on transmission and distribution, which is the largest in market. And then related to the IRA question, I would agree with what you said, that we are hearing about dollars being allocated. We are having some discussions now and seeing in our backlog maybe a little bit on the vocational side of things. So some of the specialty dump trucks and that type of equipment. We're starting to see some of that that we think is IRA-related, but I would say that it's very little revenue still at this point, but we're starting to see a little bit of it show up in backlog. So we think that's, again, just more tailwind for why backlog will continue to perform well and why we'll be able to deploy capital into the rental fleet as well.
spk03: Okay, thank you.
spk04: The next question comes from Nicole DeBlaise with Deutsche Bank. Please go ahead.
spk00: Yeah, thanks for the question. Good afternoon, guys.
spk03: Hi, Nicole.
spk00: Hi. Maybe just starting with a follow-up on the utilization discussion. So with the, I guess, delays that you're seeing with distribution, do you think that that's a quick factor where you kind of see utilization kind of snap back in the second half, or do you think it will take time for that to kind of work its way through?
spk07: Yeah, I think it will gradually improve. You know, we think you'll have two dynamics playing there. You'll have distribution kind of gradually improve, which is what we're already seeing in, you know, so far in the third quarter. And then on the transmission side, you'll see the pickup that normally happens that we are still anticipating for later this summer, early fall. And so you'll see both of those continue to pick up like we normally see in the third quarter.
spk00: Okay, got it. And then with respect to the TES backlog, can you just speak to where lead times stand now and if those have come down at all?
spk07: So total backlog, where it is, is almost four quarters, even looking at kind of where the Q2 sales number was. So, you know, it is still higher than we would have expected or than it would be historically. Maybe I'll say that. And we are seeing lead times continue to push. So we're... largely on order for a good portion of next year when it comes to our key attachment suppliers. And the same is true on chassis as we're talking about full year allocations and just waiting on final numbers to begin to put those units on order too. So again, it depends by product category. And in the aggregate, we saw backlog build in the majority of product categories built in the second quarter. There were a few that we saw some modest declines, but those were already in product categories where backlog is elevated. So we're still seeing really good overall demand across all the product categories.
spk00: Got it. I'll pass it on.
spk04: Thank you.
spk03: Thanks, Nicole.
spk04: Once again, if you have a question, please press star, then one. The next question comes from Tim Thain with Citigroup. Please go ahead.
spk10: Yeah, great. Thank you. Maybe just one quick one on your telecom customers. I'm just curious if they, certainly there's been a lot in the press around the potential lead cable issue, and I'm just curious if that, And who knows what the potential cost, if any, could be to remove or remediate these cables. I mean, do you think that impacts at all their capital decisions as they kind of ponder what could be a bigger outlay? Does that impact Nesco in any way, do you think, or just TBD?
spk07: Tim, I'd say TVD. You know, telecom is less than 5% of revenue, and backlog is still there, and we've still been delivering. So it's not anything that's come up in any significant way in any of our conversations with our customers, but obviously it's in the news, so we're watching it closely, but it's nothing that's come up to this point.
spk10: Yeah, okay. No, I appreciate the significance or lack of to you guys. I'm just curious if that bleeds into other areas of the business. But I feel good as much. And maybe just on the TES backlog and, you know, given the growth there and given how long it extends, is it too early in terms of your discussions with suppliers? You know, as you look into 24, presumably – you know, the uncertainty around inflationary cost pressures, I would imagine, have abated. But how are you approaching that in terms of how you price these new orders relative to a backlog that, you know, continues to extend and just making sure you're keeping the – the question relates to basically, you know, the gross profit, the backlog, and how you're approaching those pricing decisions and what I would imagine is still kind of an uncertain cost backdrop. Thanks.
spk07: Yeah, you're right. We're still working closely with suppliers in terms of understanding costs so that we can price appropriately. But I think we mentioned it a few calls ago, but we have the ability to reprice the backlog as we need to. And so when we see significant, so we're using our best estimates, we're communicating that to the customers, but when we see a significant price increase come through, you know, we're obviously going back to our customers and talking through that with them. So it's something we're very aware of and we'll continue to manage closely.
spk03: Got it. All right. Thank you. Thanks, Tim.
spk04: This concludes the question and answer session. I would like to turn the conference back over to Ryan McMonagle for any closing remarks.
spk07: Please go ahead. 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.
spk04: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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