Custom Truck One Source (CTOS) Earnings Call Transcript & Summary

I think this is the last panel for the morning sessions before we all break out to lunch. Here, we have representing Custom Truck One Source, we have Ryan and Chris from the team. And please, if anyone in the audience has any question, please raise your hand, we'll get a mic over to you.

And with that, we'll kick it off to Ryan and Chris to kind of just give us an overview of Custom Truck One Source and kind of recent developments.

Sure. Abe, thanks for having us, and we appreciate you all coming. We love telling the Custom Truck One Source story. But when we talk about just kind of a broad overview, we love to talk about our business on what we call the one-stop shop of taking care of our customers. And really, as we get into it, there really are 2 fundamental businesses in there. One is the specialty rental fleet. So we have about 10,000 trucks in our specialty rental fleet today. And then the truck upfitting business, where we manufacture and upfit trucks as well. So as you think about Custom Truck, there really are 4 primary end markets, and we'll get into those end markets. But the first is utility. Utility represents about 55% of our revenue today. So that's both transmission and distribution work that indexes higher to the rental fleet, as we get into the discussion, we'll talk more about. And then infrastructure is just under 30% of our revenue today for us, that talks about roads and bridges, nonresidential construction and then refuse are the primary pieces that we put in the infrastructure category. And then telecom and rail are each just under 5% of our revenue. And so those are our 4 primary end markets, and we'll get into those, but there's really strong demand, especially in T&D right now that we'll spend more time talking about. So -- but the business continues to perform. It's -- we've had a very strong 2025. Obviously, we're public, so we trade on the New York Stock Exchange as CTOS. And we'll get more into it, but I thought that would be a good intro.

Perfect. Maybe let's start high-level end markets. Obviously, everyone sees the headlines about AI, data centers, utility. Kind of what do you -- what's your view on the end market there? And how durable is that growth kind of looking out into the future? And kind of what are you seeing there?

Yes. We -- it certainly is durable, right, would be how I'd answer that question. And we see good growth there. I think if you look at most of the industry analysts that can be aggregators of information on IOU CapEx spend, calling for kind of high single-digit growth rates for the next 4 or 5 years. And that seems to be split. That distribution is kind of in that 8% range, give or take 1%, and then transmission is in the low to mid-teens from a growth rate perspective as you look at some of the latest reports. I always talk about T&D as 3 really good tailwinds. The first is just the grid upgrade that has to happen. So the age of the grid is certainly aging. There's a lot of infrastructure investment that has to happen in the grid regardless of what's going on just as population grows. The second was electrification. Electrification was a really hot theme maybe 2 or 3 years ago. I would say that it slowed down. It still is a good demand driver for our customers, the utility contractors that we serve. And then the third is data center. So for us, data center is just a very good demand driver for the grid. It means we need more power. It means more transmission lines have to be built. There's going to be more generation that's required, obviously, to power that. And that all is great work for our customers, the utility contractors that we take care of every day. But it feels like really, really strong demand. I would say the distribution kind of bottomed in Q2 of last year and has really been growing since really the 4th of July of last year. And then transmission has really begun to pick up like it normally does in the fall. So that's been -- it's been very active in the fall. There have been some new lines that have been announced. And for us, that means more trucks that have been -- that have gone out on rent for those new transmission lines.

So it sounds like we're kind of in this early stage of this really large secular growth. You said T&D is skewed more towards rental. I guess, how do you think about rental penetration rates? And kind of what differences do you see there between customer types or type of job?

Yes. So for Custom Truck, about 70% of our rental fleet skews towards transmission and distribution or towards utility. So that's the heavier skew. When we talk about the universal rental fleet, we say that it's 25% to 30% penetrated. So when you compare that to GenRent, there's still a long way to run on that side of the business. And there's a couple of dimensions to think about when you think about utility and you talk about utility rental. The first is by customer. So utility contractors generally rent about 50% of their fleet. That seems to be the historic norm as you look over time. It feels like some of the large contractors will pivot between skewing more towards renting and then skewing more towards owning. And so that's where the one-stop model really came from, as we said, "Hey, let's get comfortable with the economics of both selling a truck and renting a truck." And we are comfortable with both of those, and "let's be able to pivot between those 2." But as -- but 50% seems to be the average for a utility contractor. So as more work is outsourced, that means there's more rental that happens. IOUs and power producers generally do not rent a lot of their equipment. They purchase a lot of their equipment. But as contractors perform more of the work, that helps kind of the universal fleet. And then the other data point I'd give you is that rental skews more towards transmission gear than it does distribution gear. So as you're entering kind of periods of good transmission growth, that also is generally a good tailwind for the rental fleet just because of the specialty nature of that type of equipment.

So it seems like we have 2 tailwinds that should be benefiting your rental segment for the next, however, a number of years?

That's right. Yes. Rental has been performing very well, really since it troughed in Q2, beginning of Q3 last year and distribution came back first, and now transmission is performing well. And yes, I do think it should be a good tailwind as we head into 2026.

Maybe focusing on the other side of your business, your Truck and Equipment Sales business, TES, what impacts are you seeing from whether it's government actions, including tariffs, EPA rulings? And then how have you kind of look to mitigate that potential cost or those additional costs?

Yes, it's a great question, and there's a lot to unpack and you think about where government has played there. On the good side, right, a lot of the federal stimulus has been good, right, for that side of the business. And I think that's been a positive. Obviously, all the recent tariff and EPA announcements have been real headwinds, right, on that side of the business. So tariff has been uncertainty for a lot of those contractors of just waiting to -- just taking a wait-and-see approach to make sure they understand what's going on in the market before they're ready to make a purchase decision. And so that's been something that we've been dealing with on the non-T&D side of things. The EPA mandate is a really interesting one. And there's some new rulings that came out even last week that they're going to stick with the EPA mandate for 2027, but they're going to now modify kind of how it's applied or how it's interpreted. And so we're still waiting on that ruling. But I would say the impact of tariffs have been a cost increase. We've -- the team has done a great job of managing the cost increase. And so it has not been significant to Custom Truck. Where we've had to, we've been able to pass through those cost increases to our customers where we can and where that makes sense. And so we've been able to mitigate those, but it's worked out to about 1% to 2% of our overall spend. And so we've been able to manage that, we think, really well on the tariff side. The EPA mandate seems to be creating a bit of confusion or a wait-and-see approach in California, in particular. And so we see that kind of in our sales volumes out there and in our customers' willingness to buy right now, where they're waiting to see kind of how it all plays out just because of the cost increase and how the EPA mandate will be implemented. As I said, the EPA last week said that they're going to keep the low NOx regulation for 2027 engines. But I think we're still waiting on clarifying what exactly that means. And I think there's some discussions around the warranty period, which is the big driver of the cost increase and how that's going to play through that. We're still waiting for their final ruling there. And I think the impact to us has just been some wait-and-see approach from some of those customers in particular.

Do you get the sense from speaking with customers that when that is clarified, that will almost release? I mean, I guess you also have -- One Big Beautiful Bill has also been a potential tailwind. How does that kind of factor into what you're thinking?

Yes. I think demand is still -- trucks are still being used, so there will be an increase, right, that comes, right, when kind of the EPA mandate in California is clarified. And then you're right, the One Big Beautiful Bill is a very good tailwind for us. And who that really impacts the most are our small contractors. So if you run a 5 dump truck fleet, the One Big Beautiful Bill and accelerated depreciation often means that December is the busiest month from a sales perspective just because people are choosing to take advantage of accelerated depreciation and not pay taxes, which is a good tailwind for us, obviously.

There is an aspect of that inventory balance kind of how you've been able to mitigate the tariff. Can you update us there and kind of how you expect inventory to trend looking to the end of the year and maybe even into the following year?

Yes. As we entered this year, we -- over the past couple of years, we had gone long on inventory. We thought it was the right thing to do, especially when there was some of the supply chain constraints. And so ultimately, this year, we had given guidance that we'd get $200 million of our whole goods inventory down. So we started the year at about $1.50 billion. That would have got us to about $850 million. As the year has progressed, given some of the pull forward on some of the tariff buy, we kind of pulled back a little bit on that and said that we're now looking closer to $125 million to $150 million reduction in the gross inventory. It's important to note that our inventory, typically 80% to 85% of our whole goods inventory is floor planned. And so if we reduce inventory by $100 million, we're really unlocking $15 million to $20 million of pure cash, but it would have an offsetting favorability on our EBITDA because we treat floor plan expense as a hit against our EBITDA. So this year, by the end of the year, $125 million to $150 million gross inventory reduction. We think there's still some opportunity to reduce that next year. We've set a target to get about 6 months of our whole goods inventory on hand. I think we finished the last quarter at a little over 7.5 -- roughly 7.5 months. So we'll continue that journey as we head into 2026.

Maybe one more item on there. I know you're doing a Kansas City $10 million to $15 million incremental investment. What does that enable? And why now?

Yes. So our largest capital investment every year, obviously, is our rental fleet, roughly $400 million gross, $200 million net. Non-rental CapEx typically ranges $25 million to $50 million. This really was just an opportunity for some property that became available that was adjacent to our property. Our largest site by far is our Kansas City campus. And so we made the decision to add as we look out and see some of the demand that Ryan talked about to really have the flexibility for that incremental capacity there on the Kansas City campus.

Maybe another aspect of CapEx. And this kind of falls up on the rental side with T&D. Rental CapEx, I believe, at year-end, you kind of increased expectations for 2025 by $50 million. What's the driver of that incremental? Is that a pull forward? Or is that just what you're kind of seeing in the end markets out there?

Yes. And so when we started this year, we gave guidance as we do at the beginning of every year that roughly -- we'd have roughly $400 million of gross rental CapEx, net between $180 million and $200 million. And so the net is we sell the assets that we pull out of the fleet. As the year has gone on, Ryan touched a little bit about, demand has really come back strong. It started last year in the second half of the year with distribution, and that has just continued this year. And so we troughed at utilization of roughly 70% end of Q2, beginning in Q3 last year. We've now -- coming out of Q3, we indicated that we're now in the 80s. And just the demand that we're seeing, we felt it was a good use of capital to go ahead and increase our investment this year by $25 million to $50 million in terms of the net investment. You could argue potentially it's a pull forward, just given the demand we're seeing because we do think we'll pull back a little bit on the net investment in 2026 to unlock some free cash flow. But it really was driven by demand, the demand we're seeing.

That's promising. That's a good type of CapEx growth. Leverage today, I mean, we're at a fixed income conference, 4.5x today. What's your longer-term goal? Or what's your goal at the end of '26? And kind of what levers are you going to pull in order to reach that goal?

Yes. As a publicly traded company, we hear quite often at the equity conferences that magical 3x leverage, and we take it seriously. And so our goal is to get to 3x. We think we'll meaningfully make movement here in Q4 and then through next year to get there, but it really will take probably to 2027 to get to that 3x leverage. The levers are really some of the things we talked about. So we've -- as you look back over the past 4 years, we've invested heavily in our rental fleet. We've aged it from a little over 4 years to a little under 3 years. That's required a net investment over the past 4 years of between $700 million and $750 million. We do think we're in a position now where we could age the fleet and unlock some of that cash flow as we move forward. So I think that's going to be one of the levers. Clearly, we're seeing growth, and so we'll see some growth in EBITDA that's going to help there as well. And I think the continued journey on the net working capital, in particular, the inventory unlock is going to be another component. So really those 3.

Can you frame how you think about your ABL and the availability there? And then how you think about what's the optimal level that you kind of want to keep on that?

Yes. At the end of the last quarter, I think we were right just above $700 million on the $950 million. I think we had a couple of hundred million of suppressed availability. So we feel very comfortable where we are from a liquidity standpoint. As we were just talking about, I think we're now going to see the unlock of free cash flow. So we will use the free cash flow to pay down the ABL on that journey to get to 3x leverage. In terms of M&A, which I think is a natural related question, I wouldn't anticipate any meaningful transformative M&A of size. I do think we'll continue to look strategically and do small geographic expansion type acquisitions, but I wouldn't expect anything meaningful there.

We're in December, kind of closer to year-end. I'm not asking for anything quantitative, although if you want to give it, that would be great. As we kind of look from 2025 into 2026, qualitatively what are like good guys, bad guys, new items, items that won't repeat? Just give us like a super high level, like how we're kind of thinking about how we should kind of frame the upcoming year.

Yes. I mean we talked a lot about the demand. The demand tailwinds that we're seeing, we think are going to continue into next year. T&D has come back strong. Ryan often talks about, especially on the transmission side, those are long-term projects. And so those projects are starting now and will continue. And so we expect to see that demand. We've talked about the Big Beautiful Bill. There's going to be an impact here at year-end. The interest rate environment has improved and hopefully will continue to improve. And so I think from a demand environment, everything we see is strong. We have the capacity. We've talked about some of the investments we've made in our Kansas City campus. We've done some things out west in the Phoenix area. And so we feel like we have the capacity to really be able to serve that demand. And so when I look at risk, it really is going to come down to execution and really making sure that we capitalize on the demand that we're seeing. But I'll let Ryan add any incremental color he may have.

No, I think you hit most of it. It feels like T&D is in a really good spot, right, heading into 2026. It will be interesting to see kind of some tariff certainty or clarity maybe is better and just as interest rates continue to move down, if that spurs a little more demand on the infrastructure side, which I think would be good. And then the interest rate piece and Chris talked about bringing overall inventory down, I think is a good tailwind for 2026 when you think about the floor plan expense and kind of how that impacts the P&L. So -- but no, but I think he hit the points.

Are there any other levers to think about on the EBITDA margin side?

Yes. So we'll talk a little bit about price, right? I think any time you're going into a good demand environment, certainly on the rental side, there's the opportunity to understand price. So we think that heading into 2026, we should have some opportunity to increase price. Obviously, that -- a lot of that will be used to just offset the cost increases that we're seeing from tariffs, but then we do think there should be some positive leverage there on the price side. And then there are a lot of CI, continuous improvement initiatives that are in play on our upfitting and manufacturing side, too, that we should be able to begin to think about can we get back to expanding margin on the TES side right now.

Maybe taking more of a strategic look kind of at the company as a whole. In the corporate world, we've seen a lot of spin-offs, breakups. There seems to be like -- it's been a trend kind of what we've been seeing. I guess how do you think about the manufacturing and the rental business kind of being together today? Does it have to be together? Can it be separated?

Yes. It's a great question, and it's a question we have kind of responded to a lot more lately. The history of Custom Truck is that the business is -- it was valuable to have the 2 businesses put together because our customer, utility contractors would often pivot between renting a truck and purchasing a truck from us. As we've grown and now that we're the size that we are, I think we certainly have begun to entertain the idea of maybe there's a cleaner way to explain the business, to talk about the specialty rental fleet on one side, where there's plenty of pure public company comps just on the rental side of the business. And then to talk about the truck upfitting business that's now of scale, right? It's north of $1 billion of third-party sales. And then if you were to think about the rental fleet as a customer, all of a sudden, it becomes $1.5 billion of revenue that you would have on the upfitting or sales side of the business. And so to me, that's now of scale or I think it can stand on its own. It can support kind of growth at that level. So it's a discussion that we have a lot more of. There would be pure-play comps to think about Federal Signal or Douglas Dynamics or an Alamo Group are often the names that are mentioned in that discussion. And then you would have more of a United Rentals or WillScot or Ashtead Group on the specialty rental side of things as well. So it's a discussion we've had a lot more. I think we've said if that was the right direction, we've thought through a little bit of how would you execute that. I think we're comfortable we can do it. Where it -- where we're still spending time is like how do you take care of the customer, right? And that's where the business really started by taking care of the utility contractors and what would that look like and how would we do that well and make sure it's not disruptive to the customer.

Are there potential dissynergies that are in there away from maybe another corporate office? And certainly, quoting you, too.

Not many. I mean, not many as you think all the way through it. You've got to think about how you take care of customers, that's really the biggest and how would you make sure you service them and still work together, right, in some capacity. As you think about the branch network, there's 40 locations around the country. There are really 5, 7, if I include our manufacturing locations that are primarily upfitting and the rest are primarily -- and there's a few that do both, primarily service locations that are servicing the rental fleet in particular. So we thought through what that could look like if that was the direction we chose to go.

One area, I guess we haven't talked about really much yet is the aftermarket parts and service. I guess, how do you see that fitting in between those 2 aspects and over those -- the other 2 segments?

Yes, it's obviously important, right? And there's portions of the aftermarket business or PTA, Parts, Tools and Accessories business that primarily is a service offering to our rental customers. So that would obviously stick close to that rental side of the business. And then otherwise, we really would say that the location would dictate how we would handle that. So it's important for our sales customers to make sure that we can service their trucks. And so to me, that's an area that we know we can invest further in. And so there's an opportunity to invest further there. And then keeping the rental fleet up and running has been a big -- has been the #1 priority of our branch network. And so that would obviously continue to happen on that side of the business.

I mean you kind of brought up like various I guess, like when you say public market comps in each of the businesses. I mean, if I were just to do simple math and apply slap on EBITDA, there seems to be a disconnect here. I guess, how do you think about that disconnect? How do you kind of start to highlight it out there and to really maybe close that gap?

Yes. Yes, it's a great question, and we talk about that a lot certainly as a public company, but whatever multiple you want to use on either side of the business, I would argue, is higher than obviously where we trade today. So there's just some, okay, let's explain the business and make sure people understand the asset intensity of the rental business, but the higher EBITDA margin or adjusted gross margin on that side of the business and how that looks compelling. And then there is the free cash flow generation, but lower gross margin that you see on the truck sales side of the business. Both of those is pure plays, I think, trade at a higher multiple than where we trade today. And then the other big online that's important in there to think about is, right now, when we put $400 million into the rental fleet, which was the gross CapEx number that Chris used, we transfer that to the rental fleet at cost. So if you really were to think about it as 2, you would transfer that to the rental fleet at margin and everybody can use whatever margin they want to assume there, but kind of our standard margin is that mid-teens margin. So all of a sudden, there's $60 million, give or take, of additional gross profit or EBITDA that would exist when you think about the 2 businesses as a stand-alone. So to me, those are the 2 big unlocks. You've got to think through the capital structure of what that would look like. One of the things we talk about a lot now is our leverage levels, which are high for a public company. We're very comfortable with them from running the business day to day, but that's something that you'd have to think about that. And then obviously, the other big piece is the shareholder base that we talk about. So Platinum, who has been a great partner and as who put the deal together is still the majority owner. They own 70% of the shares outstanding. And so have been a great partner, too. So you've got to think through kind of those lenses as well to really begin to unlock the valuation side of the story.

Right. So that actually leads me to my next question. It's Platinum owns 70%, a little bit unusual for a public company. I guess remind us how they got involved and how they ended up owning 70% and maybe the obvious follow-on is what's their ultimate goal here?

Yes, they've been a great partner, and they love kind of the in-market exposure in the business, right, that we're building here. But just to reset, they invested in April of 2021. So 4.5 years ago, they invested at $5 a share. That's where they invested with the thesis of what I describe it as a traditional LBO of the previously Blackstone-owned portfolio company that was Custom Truck One Source. Their vision was to do an LBO with that business, but then to also merge it with Nesco. Nesco had been owned by Energy Capital Partners and went through a de-SPAC transaction back in 2019. And so that was the public entity that existed at the time. So in April of '21, Platinum wrote a $750 million check, and then we raised $140 million pipe as well with the vision of putting those 2 businesses together. And so -- and that's what we did. That was our thesis. It was about $1.3 billion of revenue in 2021. It will be about $2 billion of revenue this year. So there's been very good growth kind of over that story. EBITDA has gone from $290 million to $380 million at our midpoint for this year. And so there's been very good growth over that time period. And I think that's -- Platinum's view is great business, executing well. We love the end-market exposure. We love the asset intensity of rental. We love kind of how it all fits together, but we've been frustrated with how the share price has performed given the business -- from their perspective, the business has performed much better. So I always say Platinum, they're capitalists, they will figure out how to kind of monetize their investment, right? That's the business that they're in. And there's lots of options and lots of ways to think through what that could look like.

So I know there's a fixed income conference, but obviously, you have shareholders as well, equity shareholder away from Platinum. I guess what's the feedback that you usually get? Or like what do you think is kind of preventing you from realizing what you should -- what you think you should deserve on the open market? What's the #1 or 2 feedback you get?

The number -- two things we talk about on the equity side are where we've been talking leverage, right, is number one. And the Platinum overhang in their ownership position is number two. And so those are things we just talked through. So those to me are the 2 biggest. Obviously, the way we get -- we improve leverage. Chris talked about kind of the deleveraging activities that are in play and will continue into 2026. And so I think we're thinking through that. The one other thing I would add is just generating free cash flow. Like we have -- Chris talked about it, but we have invested so heavily in the rental fleet to bring the age of the rental fleet down as we think about heading into 2026, that's the other big piece for us is how do we age the fleet just a little bit and use that as a significant lever to deliver free cash flow.

We're at like 4.5x. End of next year, it sounds like we're deleveraging another turn or so kind of closer to what public market investors kind of hope for as something with a 3 handle. Is that a fair statement?

Yes, fair statement.

That's a fair statement. Yes.

Okay. Great. We have about -- near the end of the time. Are there any other questions out there in the audience? Please?

No, I think the former. I think you could definitely -- they're 2 -- as Ryan described, they're 2 very different businesses. I think the TES or the new sales -- the sales business is -- generates more free cash flow. We've been investing heavily in the rental fleet. I think you would definitely get 2 businesses that would have leverage profiles that would match those businesses. And so certainly, I think that would be doable. Not sure if you'd add anything.

No.

Any other questions out there? I mean with that, we've kind of reached the end of the time. Do you have any closing thoughts, important items I didn't touch on, emphasize or key messages for bondholders?

No, I think you hit it. Thank you for having us, Abe, and it's been a great conference.

Great. And please, everyone, let's thank Ryan and Chris for talking about Customer Truck One Source.

Thanks, everyone. Appreciate it.