Custom Truck One Source, Inc.

Ladies and gentlemen, thank you for standing by and welcome to custom truck one sources, 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 permanent vice president of investor relations for custom truck. Please go ahead.

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. 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 gap financial measures discussed during the call in the press release we issued today. That press release in 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. Today's discussion of our results of operations custom truck one source Inc or custom truck is presented on a historical basis as of before the three months ended June 30th 2024 and prior periods. Joining me today are Ryan McManigal CEO and Chris effort Jesse CFO. I will now turn the call over to Ryan.

Thanks, Brian and welcome everyone to today's call. Since we close 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. To pursue an aggressive growth strategy through substantial investment in the business and to grow our production operation. All while providing unparalleled service to our customers. 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 cobit and its subsequent effect on the global supply chain. Since merging the two businesses, we have added more than three hundred and ninety three million dollars of revenue and more than eighty five million dollars of adjusted EBITDA on an LTM basis. 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. We continue to see healthy demand in our infrastructure rail and telecom in markets, which all contributed to continued strong performance in our TES segment in Q2. High levels of demand for certain products, like our specialty dump trucks, roll off trucks, hydro excavators and water trucks 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 back dollars for infrastructure projects. As we've discussed before, approximately sixty percent of our revenue comes from the utility end market, which includes both transmission and distribution work. We continue to observe significant growth in electricity demand driven by manufacturing, on shoring, AI driven data center development, current electrification trends, as well as the deferred maintenance that is required on the country's aging grid. Transmission line development and regional interconnection continue to be the bottlenecks in meeting this future energy demand. 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, 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. Additionally, we have seen in our customers have confirmed a broad based slowdown in construction spending around electric distribution resulting from lower IOU capex and maintenance spend management. While these trends impacted our results in the second quarter, we believe these will normalize and expect them to improve in the second half of the year and into 2025. Our TEF 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. As I just mentioned, growth in the TEF segment has been led by increased spending in our infrastructure, telecom and rail and markets, resulting in net orders in the quarter showing an improvement versus Q1. 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. Our significant inventory investment last year has positioned us to meet the continued strong customer demand for new equipment sales. And also allows us to grow our fleet to quickly serve our customers rental and rental assets sales needs when demand returns to our core utility in market. 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. The entire TEF team continues to perform extremely well and to deliver production near record levels, something the entire organization is very proud of. Chris will walk through the details of the performance of our ERS segment, which continue to see strong utilization rates in the mid 70 to high 80% range for all in markets, other than the transmission portion of utility. 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. 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. We are already seeing signs of improvement in our ERS segment so far in the third quarter, particularly in fleet utilization and OEC on rent. 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. 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. The breadth of our vehicle product offering and our ability to meet customers rental and sales needs uniquely positions custom trucks to capitalize on the future tailwinds created by the sustained demand, particularly a certain delayed transmission projects advance. With respect to our 2024 guidance, while we continue to have confidence in the long term strength of our end markets and the continued execution by our teams to profitably grow our business. Our updated outlook reflects the risks associated with the near term challenges for our rental customers in the utility sector. Which have been deeper and more prolonged than we anticipated in 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 dollars to 610 to 640 million dollars. 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. However, persistently high interest rates and uncertainty over the upcoming election are impacting our smaller customers purchase decisions. As a result, we are lowering our revenue guidance for TES by 65 million dollars to 1.05 to 1.19 billion dollars. The midpoint of which reflects another year of double digit revenue growth. We are also lowering our revenue guidance for APS by 15 million dollars to 140 to 150 million dollars. 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. 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 dollar target. 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 in market and to deliver profitable growth and long term value to our shareholders. With that, I'm going to turn it over to Chris to talk through the details of our first quarter results.

Thanks, Ryan. For the first quarter, we generated 423 million dollars of revenue, 134 million dollars of adjusted gross profit and 80 million dollars of adjusted EBITDA. 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. In addition, average OECN rent in the quarter was 1.04 billion dollars, down from just over 1.2 billion dollars in Q2 of 2023. These declines reflect the impact of the slowdown in utility utilization that continued in the quarter, which Ryan mentioned. Unrent yield was 40% for the quarter, essentially flat compared to Q2 of 2023. Given the trends in utilization and average OECN rent, the ERS segment had 138 million dollars of revenue in Q2, down from 169 million in Q2 of last year. While rental revenue was down marginally on a sequential basis, 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 dollars for Q2, down from 97 million dollars in Q2 of 2023. 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. 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. Net rental capbacks in Q2 was 50 million dollars. Our OECN in the rental fleet ended the quarter at 1.46 billion dollars, down marginally versus the end of Q2 of last year, but up sequentially versus the end of Q1 this year. We expect to continue to invest in the fleet in 2024, but have lowered our expected growth capbacks given the trends we're seeing in the utility end market. In the TES segment, we sold 248 million dollars of equipment in the quarter, down 1% compared to Q2 of last year, but up more than 3% sequentially from the last quarter. Gross margin in the segment was .1% for the quarter, down from Q2 2023, but in line with our expected margin range for the segment. TES backlog continued to moderate, ending the quarter at just under 480 million dollars. Net orders improved sequentially versus Q1 of this year at just under 190 million dollars. 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. 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. Our strong and long standing relationships with our chassis, body, and attachment vendors continue to be an important driver of our record TES production. 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 dollars in the quarter, down slightly from Q2 of last year. Adjusted gross profit margin in the 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. 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. 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. As of June 30th, we had approximately 160 million dollars available and 328 million dollars of suppressed availability under the ABL with the ability to upsize the facility. With LTM adjusted EBITDA of 376 million dollars, we finished Q2 with net leverage of 4.1 times. Achieving net leverage below three times remains a primary and important goal. 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. 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. These headwinds in our utility end markets are driving lower OEC on rent in our core ERS segment that will continue for the remainder of the year. As a result, we are lowering our ERS revenue guidance by 70 million dollars. 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. 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. 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. As a result, we are reducing our 2024 revenue guidance for TES by 65 million dollars, which still reflects another year of double-digit revenue growth in the middle of the range. We are also reducing our revenue guidance for our APS segment by 15 million dollars, reflecting the softness in the utility end market. While this all combines to reduce our consolidated revenue and adjusted EBITDA guidance for the year, we continue to focus on generating positive levered free cash flow this year, but expect it to be lower than the 100 million dollars we detailed on our last call. Updated guidance for our segments is as follows. We expect ERS revenue of between 610 and 640 million dollars. 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. We are projecting adjusted EBITDA in a range of 340 million to 375 million dollars. 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. With that, I will turn it over to the operator to open the lines for questions.

Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Justin Hoke with Robert W. Baird. Please go ahead.

Great. Good afternoon, guys. Appreciate you taking the call here. I guess not overly surprising to see the slowness given what some of your customers have been reporting and some of the utilities have been saying about the ongoing weakness in 2Q. But I would be curious if you could elaborate a little bit more on the anecdotal comments you gave about some of your core utility T&D markets coming back so far in 3Q. Just a little more color on that. Is it geographic based? What's driving that? Just anything you can give us on that?

Yeah, happy to do it. Thanks for the question, Justin. But I'll give you maybe kind of an initial cut from what we're seeing already in July and then maybe give you some more commentary to around it. We're seeing, for us, OECN 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 taking starting to see some positive trends there. So I think that's important, which obviously improves utilization. So utilization is up by about 200 basis points already. So I think that's some of kind of the immediate facts that we're seeing. And when we really segregate transmission versus distribution, Justin, transmission, you know, what we're seeing for the back half is we're seeing a lot more quoting activity now. It's starting to happen, which is a good leading indicator for us. Seems to be consistent with what we're watching from an expected line mile start standpoint as well on the transmission side. So I think that's where we have, you know, I'd say a favorable VECU on the back half and certainly a positive VECU heading into 2025 on the transmission side. Distribution is a little bit of a different story. Distribution is where we, you know, we're saying that, 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 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. 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 conductor 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.

Yeah, I mean, maybe just, I mean, what's the lead time, you know, to turn around, you know, to include the rinse 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 notice? I'm just, you know, trying to kind of see what that increase in activity, how long that trickles into actually getting fleet out the door.

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 OVC on rent that's already up so far in July. And then there's some that is still planning for so later this fall. So it's a mix, but we're starting to see some of the pickup there

already. OK, and then I guess, you know, the the comment about the free cash flow being levered, free cash flow being less than 100 million that you guys were talking about before. I know previously kind of a year end target for leverage was around three and a half times. With the lower cash flow and the lower EBITDA contribution here, what are you kind of thinking? You know, that we would be able to back in, I guess, to what you're thinking for cash flow. Where do you think you had the balance sheet this year?

Yeah. Hi, Justin. It's Chris. We're not expecting it to meaningfully move versus where we are. We do think, you know, as we get towards year end, we're going to start to see some of that inventory start to turn. We've obviously been focusing a lot on our incoming receipts. You know, so we should start to see the impact of some of that networking capital unlock 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. You know, it will be a modest decrease, but we certainly won't get to the three and a half.

And just if I could scoot in one more quick one, it looked like in the 10 Q, you guys had a new floor financing plan with Ford. Correct. Give a little more detail on that.

Yeah, it's just it's a dedicated line that we have for Ford just to have that flexibility. You know, terms are favorable. I believe there's a free floor planning period, which I think is described in the Q. And originally it was a 30 million dollar line. And 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. Good to know. Okay. I will go back in the queue then let others ask questions and I jump back after.

Thank you. Thanks, Justin.

The next question comes from the line of Tammy Zuccaria with JP Morgan. Please go ahead.

Hey, thank you so much. For for the time. So a couple of questions. The first one is I think your gross rental capex is expected to be down this year. 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. 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.

Yeah, it's a great Tammy. It's good to talk in. It's a great question. And, you know, that it is one of the beauties of the model that we can quickly pivot. Right. So when things are going coming slower than we expected, like what we've talked about, you know, we can hold back on deploying some of that capex. You know, we haven't provided guidance for 25 yet. I would expect it would be kind of a returning to normal. You know, we've talked, you know, at some of the levels that we've talked about in the past. 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 haven't provided guidance, but would expect something along those lines would be about about where we settle for 2025.

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?

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

Yeah, but that's helpful. But I was more wondering about the rental rate inflation. If that that's what I'm trying to understand. Like, did rental rates go up in the quarter?

No, they've been relatively flat for the past few quarters.

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

I wouldn't expect it to materially move.

No. Got it. Thank you. In line with

where it's been.

Yeah. The next question comes from the line of Mike Schlisky with VA Davidson. Please go ahead.

Hi, good afternoon. Thanks for. Hi there. Thanks for taking my questions. You mentioned in your release and in your comments that some customers are waiting for the election to make any decisions. I think that's mainly on purchasing. Does your fourth quarter or your first quarter 25 results kind of depend on who wins? And is there a real difference, you think, in the outlook for T&D maintenance activity with other party in the White House?

Mike, good

to talk to you. And certainly we're not making any assumption about who wins. I think the comment was really around two things there 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 from those same customers who are the kind of the smaller contractors that we service, you know, I think they're just waiting on some certainty around the election. Certainly not no strong view when we're the other with regards to results there, but I think there's just certainty around it. And two things I'd point you to, you know, typically the fourth quarter is always our strongest sales quarter. So that is kind of normal for us. 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.

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 it was no real difference in how it might look or perform because it hasn't been used.

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 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. And that's what the comment was about. You know, 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, 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, you know, which I think is an encouraging sign as you think about 2025 and beyond.

Okay. And then maybe lastly, and I'm sorry for the very, very basic question, but I think I'd like to hear 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, you know, given the growth rates that are expected of these two areas in the future and AI as well as a corollary there. Is there a world in which all these things can get the power they need without using custom truck at a much higher level than they are today, either utilization or more lead assets?

Not the way we see it, Mike, for sure. So no,

I think, yeah. No, I think that's, and to me, it's the unlock some of those things that I think will be a great tailwind for our business. We believe that they will come, certainly all conversations point that way, but we're just waiting for those things to happen, you know, which is both kind of an increase in the transmission line while complete that needs to occur. And then obviously the additional investment as you're thinking about 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 optimistic about where 2025 will be, you know, for both sides, for

both the rental fleet and for the sales side of our business.

Okay,

thanks. I'll pass you on. The next question comes from Brian. Please go ahead.

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?

Yeah, Brian, this is Chris Upperdussey. You know, we've kind of guided coming into the year kind of in that 16 to 18% range. And I know that's a lot of expectations, you know, Q1 and then also Q2 of last year were two of the best quarters we've ever had. So we wouldn't model anything different than kind of where we've been at in that you know, 16 and a half to 18% range is going to be pretty consistent.

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 here the past couple of quarters. How should we be thinking about revenue there in the back half?

It is the most volatile of our segments and within the ERS segment is the rental asset sales, just given that, you know, there's RPO sales, which are the customer's right to purchase a unit that's on rent. And then there's other assets that get sold off of rent. And then we also have other rental asset sales that we pull out of the fleet. And so it is typically the hardest one to predict. And then there's accounting, there's accounting convention, there was sales type lease accounting that can somewhat change those figures that makes it difficult to predict. Having said all that, certainly the first two quarters were unusually low. If you go back and look at what we've done over the past eight, nine, 10 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 saw some meaningful growth in the second half of the year. I hope that answered your question.

Yeah. And the only thing I'll add, Brian, to 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

would be, would be normal, more normal. Appreciate it.

Very good. The next question comes from the line of Nicole DeBlaze with Birchbank. Please go ahead.

Yeah. Thanks. Good afternoon,

guys. Good

afternoon, Nicole.

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 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.

Yeah. You know, we feel comfortable with the range, obviously. You know, there's different things that have to happen in terms of getting to the top of the range. You know, we talked about the fact that we've seen pretty meaningful increase in OEC on rent in the month of July. I think we're up close to 35 million, 200 basis points on utilization. You'd have to see a trend like that continue to get to the high end of our range. 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 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.

So maybe if 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 uplift? Am I interpreting that correctly?

Yeah, I mean, I think yes, 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, you know, somewhat moderate. So 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. And then, 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.

Okay, got it. Thank you. That's helpful. And then just on the APS business, there are the growth margins contracted quite a bit year on year, definitely came in lower than our expectations. Anything going on there and how to think about the rest of the year?

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 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 some of the same of what we've seen in the first half, there could be a slight improvement in the second half.

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, that's a portion of that business that has, you know, that has been weaker in the first half of the year. So which is impacting margin there as well.

Got it. Thanks. I'll pass it on.

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

Great. Thanks everyone for your time today and your interest in CustomFrock. We look forward to speaking with you on the next quarterly earnings call. And in the meantime, please don't to reach out with any questions. Thank you again and have a good evening.

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