Custom Truck One Source (CTOS) Q3 Earnings call transcript Oct 31, 2024

In the third quarter of 2024, Custom Truck One Source (CTOS) reported positive trends in their rental KPIs and saw significant improvements in their utility end market. The company's focus on operational efficiency and strategic investments in rental fleet have positioned them well for a strong fourth quarter and a promising start to 2025.

Improving Market Trends

Custom Truck One Source reported a significant improvement in their rental KPIs, with OEC on rent over $145 million higher and utilization more than 800 basis points above where they exited Q2. These positive trends are expected to persist through Q4, as utility and telecom contractor customers anticipate increased activity in the second half of the year and into 2025.

Utility Market Outlook

The utility end market, which accounts for approximately 60% of CTOS's revenue, has shown signs of improvement, driven by increased electricity demand. Factors such as AI-driven data center development, manufacturing onshoring, and electrification trends are expected to provide strong tailwinds for future growth. Additionally, transmission line mile completions and IOU rate case approvals are seen as key indicators of utility end market demand, which the company expects to improve as supply chain issues resolve and interest rates moderate.

Rental Fleet and Revenue Growth

CTOS's rental segment experienced sequential growth in rental revenue, up 5% from Q2, and OEC on rent improved significantly, reaching over $1.2 billion. This growth is attributed to the recovery in transmission equipment utilization and the positive impact of storm restoration work. The company also reported a 21% sequential improvement in rental asset sales, driven by strong customer demand and strategic investments in the rental fleet. These trends are expected to continue into Q4 and beyond, supporting the company's goal of delivering double-digit adjusted EBITDA growth in 2025.

Challenges and Future Outlook

Despite the positive trends, CTOS faces challenges such as rate pressure and inventory management. The company is working to address these challenges and expects to continue investing in its rental fleet to meet customer demand and maintain a competitive edge. Looking ahead, CTOS remains optimistic about the long-term demand drivers in the industry and is confident in its ability to return to double-digit adjusted EBITDA growth in 2025.

Investor Q&A

During the Q&A session, key questions were raised regarding the used market, fleet utilization, and Class 8 vocational truck demand patterns. The management provided insightful responses, highlighting their strategic focus on maintaining a high 70s to low 80s utilization rate and anticipating growth in the TES segment in 2025. They also addressed investor concerns about ERS segment growth and the impact of inventory levels on their financial performance.

Overall, Custom Truck One Source's earnings call highlighted their resilience in navigating market challenges and their commitment to strategic investments in fleet and customer service. With a strong focus on operational efficiency and a positive outlook for the utility end market, CTOS is well-positioned to capitalize on the growth opportunities ahead.