Custom Truck One Source, Inc.

Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the Custom Truck OneSource Inc. Third Quarter 2025 Earning Conference Call. All lines are in place on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question at any time, Press star 1 again. Thank you. I'd like to turn the call over to your host today, to Brian Perman. Sir, you may begin.

Thank you. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. 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 This 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 afternoon. That press release and our third quarter investor presentation are posted on the investor relations section of our website. We filed our third quarter 2025 10Q with the SEC yesterday afternoon. Today's discussion of our results of operations for Custom Truck OneSource Inc. or Custom Truck is presented on a historical basis as of or for the three months ended September 30th, 2025 and prior periods. Joining me today are Ryan McMoneagle, CEO, and Chris Effergesi, CFO. I will now turn the call over to Ryan. Thank you, Brian, and welcome everyone to today's call. Building on our momentum from the second quarter, Custom Truck had a strong third quarter, delivering 20% adjusted EBITDA growth and 8% revenue growth versus Q3 2024. Third quarter performance was characterized by continued solid fundamental demand in our core T&D markets and excellent execution by our team, leading to strong results in both our ERF and TES segments and overall year-over-year revenue growth for the quarter. Custom Truck powers the people who strengthen and build our nation's infrastructure. Our trucks are used to build and maintain the grid on a daily basis. Our steady business activity and strong intra-quarter order flow continue to reinforce our optimism about achieving our expected growth targets in 2025. As a result, we are reaffirming our previous fiscal 2025 revenue and adjusted EBITDA guidance. While Chris will discuss our segment's performance in greater detail, I'd like to highlight some key trends. In ERS, our utility contractor customers continue to see sustained and increased levels of activity, which they expect to persist for the foreseeable future. driven largely by spending tied to unprecedented secular growth and electricity demand. As several recent articles highlight, the real bottleneck in the AI build-out is electricity. Current industry projections estimate that total T&D capex among U.S. investor-owned utilities for the five-year period from 2025 to 2029 would be approximately $600 billion. The overall annual growth rate of spending is expected to be almost 10%, with transmission spending expected to grow at more than 15% annually through 2029. We feel these trends in the utility end market have been among the key factors driving the growth in our OEC on rents over the last year, and positioned us well for 2026. For the third quarter, Average OEC on rent was more than $1.26 billion, a 17% year-over-year increase. We ended the third quarter with over $1.3 billion of OEC on rent and have continued to see growth so far in the fourth quarter. Average utilization in the quarter was just over 79%, up more than 600 basis points versus Q3 of last year, and the highest level in more than two years. We continue to see mid-70% to mid-80% utilization rates across most of our fleets, demonstrating the long-term resilience of our end markets. These trends drove a year-over-year increase in rental revenue of 18% in the quarter, with total ERS segment revenue of more than 12% versus Q3 of last year. Because of the sustained strong demand We decided in the quarter to accelerate rental fleet CapEx, which Chris will discuss in more detail. We believe this spending will position us well for continued growth in 2026. At the end of Q3, our total OEC was just over $1.62 billion, our highest quarter end level ever. Coming off near record segment sales last quarter, TES continued to see good sales performance in the third quarter, posting year-over-year growth of 6% and year-to-date growth of 8.5% versus the first three quarters of last year. While our backlog was down in the quarter, we continued to see strong intra-quarter order flow, particularly among our local and regional customers. This reflects the current availability of equipment broadly in the market, which decreases the need for customers to place orders far in advance. Signed orders in the quarter from this portion of our customer base were up more than 40% year over year, driving overall order growth of over 30%. With the supply of certain vocational vehicles remaining at elevated levels across the market, Segment gross margin was down slightly in Q3 compared to the prior quarter. However, it remained within our expected range of 15% to 18%. Overall, our current pace of orders and the continued strong demand for vocational vehicles across our end markets combined to provide us with confidence in our outlook for TES for the rest of the year. We continue to believe that accelerated depreciation provisions contained in the recent federal spending and tax bill will benefit custom trucks, particularly for sales of used and new vehicles in the fourth quarter. Since the end of the third quarter, we've seen this reflected in our backlog, which has grown so far in the fourth quarter to over $350 million. With respect to the tariff landscape, we continue to feel that as a result of our mitigation actions taken earlier this year, the tariffs will have a limited direct cost impact on our business this year. However, we continue to hear about hesitancy related to new equipment purchase decisions from some of our customers as a result of economic uncertainty, continued high interest rates, and the overall inflationary pricing environment. to which the tariffs have contributed. We are reaffirming our full year 2025 guidance. Our strong year-to-date results, our robust order flow, and resilient in-market demand continue to drive our expected growth across our consolidated business this year. Despite some volatility in the macro environment, our business outlook remains positive. Long-term sustained in-market demand buoyed by secular megatrends and our ability to provide exceptional execution on behalf of our customers set us apart from our competition. Our multi-decade relationships with strategic suppliers and our long-tenured and diversified customer base will continue to be key to our success. I continue to have the highest degree of confidence in the customs team and want to thank everyone for their hard work and dedication that helped achieve these results this quarter. We look forward to updating everyone on our progress on next quarter's call. With that, I'll turn it over to Chris to discuss our third quarter results in detail.

Thanks, Ryan. For the third quarter, we generated $482 million of revenue, $156 million of adjusted gross profit, and $96 million of adjusted EBITDA. up 8%, 13%, and 20% respectively versus Q3 of 2024. On a year-over-year basis, all our rental segment KPIs improved in the quarter. Average utilization of the rental fleet for Q3 was over 79% compared to 73% in Q3 of the prior year. Average OECN rent in the quarter was over $1.26 billion compared to under $1.1 billion in Q3 of 2024. Both metrics so far in Q4 are higher than the averages we experienced in Q3, currently standing at more than $1.3 billion and over 80% respectively. As of today, OECN rent is up more than $180 million, or 15%, versus a year ago. The ERS segment had $169 million of revenue in Q3, up more than 12%, from $151 million in Q3 of 2024. Rental revenue was up meaningfully on a year-over-year basis showing 18% growth. Rental asset sales were essentially flat and are up 20% year-to-date compared to the first three quarters of last year. Segment adjusted gross profit was $104 million for Q3, up 19% from Q3 of last year. Adjusted gross margin for ERS was 62% in the quarter, more than 370 basis points higher versus the same period last year, driven by a higher mix of rental revenue, as well as improved rental margins of almost 76% and sustained rental asset sales margins in the mid 20% range. Unrent yield was 38.2% for the quarter, down slightly from Q3 of last year, but still within our expected upper 30% to lower 40% range. Net rental CapEx in Q3 was $79 million, and our fleet age is just below three years. Our OEC and the rental fleet ended the quarter at over $1.62 billion, up almost $130 million versus the end of Q3 2024, and up more than $60 million in the quarter, reflecting our strategic investment given the strong demand environment we continue to experience across our primary end markets, particularly in T&D. We expect to continue to invest in the fleet in the fourth quarter, resulting in high single-digit percentage OEC growth versus the end of 2024, which is higher than previously expected. In the TES segment, coming off near record sales in Q2, we sold $275 million of equipment in Q3, up 6% year-over-year. Gross margin in the segment in Q3 was 15%, down from Q3 2024. We expect TES gross margins to improve in the coming quarters as supply of vocational equipment in the market comes more into balance, reducing some of the pricing pressure we've seen this year. TES new sales backlog decreased by $55 million in the quarter, driven by continued strong sales activity. At three months of LPM TES sales, our TES backlog is slightly below our targeted historical average range. However, net orders in Q3 remain strong at $220 million, up more than 24% compared to Q3 of 2024. So far in Q4, which is historically our highest quarter of PES sales, we've continued to see strong order flow and our backlog has grown to over $350 million. That, combined with the ongoing feedback from our customers regarding their equipment needs for the remainder of the year, provides us with confidence that we will see strong revenue growth in TES this year, but we do believe it will be closer to the low end of our guidance range. Our strong and long standing relationships with our chassis, body and attachment vendors continue to be an important driver of TES production. Our current level of inventory positions as well to meet our production, fleet growth and sales goals for the year, as well as help mitigate any impact from tariffs. Our APS business posted revenue $38 million in the quarter, up 3% compared to Q3 of last year. Adjusted gross margin in the segment was over 26% for Q3, up both year-over-year and sequentially. Our year-to-date adjusted gross margin in APS remains in our expected mid-20% range. Borrowings under our ABL at the end of Q3 were $708 million. an increase of $38 million versus the end of Q2, largely to fund both rental and non-rental CapEx and certain other working capital needs. As of the end of Q3, we had $238 million available and over $230 million of suppressed availability under the ABL, resulting in substantial liquidity for the company. With LTM adjusted EBITDA of $365 million, we finished Q3 with net leverage of 4.53 times the sequential improvement. We did make progress on our planned inventory reduction, with inventory down almost $54 million in the quarter. This contributed to a reduction in our floor plan balances of almost $57 million. We continue to expect to reduce our inventory in Q4 and into next year, which should contribute to lower balances on our floor plan lines, as well as reduced borrowings on the ABL. However, given the strong demand environment that we are expecting to continue into 2026 and beyond, we now expect to reduce our inventory by $125 million to $150 million compared to the level at the end of last year. We intend to use our leveraged free cash flow to reduce our net leverage and to continue to target a level of below three times. This remains a primary and important goal for us and one that we expect to achieve by the end of fiscal 2026. We are reiterating our previous 2025 guidance with total revenue in the range of $1.97 to $2.06 billion and adjusted EBITDA in the range of $370 to $390 million. However, given the sustained rental demand in ERS, we now plan to invest more than previously expected in our rental fleet this year, resulting in net rental capex of approximately $250 million. In addition, We expect our non-rental CapEx to be higher this year as well, as we have taken the opportunity to fund some additional production and manufacturing improvements at our Kansas City location, which should result in expanded production capacity and better position us for growth across our segments. While our segment guidance remains unchanged, we do expect ERS to finish the year with revenues in the upper half of our $660 to $690 million range, and TES to finish the year with revenues closer to the lower end of the $1.16 to $1.21 billion range. The extent of the benefit we get from our customer spending on new and used equipment as a result of the accelerated depreciation provisions is likely to be a key determining factor as to where in our guidance ranges we end up for both ERS and TES. As a result of higher than expected rental and non-rental CapEx, as well as a decrease in our planned inventory reduction, we now expect our levered free cash flow to be less than our previous $50 million target. However, we are confident that the incremental CapEx will yield strong returns that will result in higher sustained levels of levered free cash flow going forward. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite some macroeconomic uncertainty this year, Our year-to-date results and the continued strong fundamentals of our end markets allow us to be optimistic about the long-term demand drivers in our industry and our ability to produce double-digit adjusted EBITDA growth this year. With that, I will turn it over to the operator to open the line for questions. Operator?