Release Date: October 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Custom Truck One Source Inc (CTOS, Financial) reported a significant improvement in rental KPIs, with OEC on rent over $1.2 billion and utilization rates over 79%, indicating strong demand.
- The company experienced robust demand across all four end markets: utility, infrastructure, rail, and telecom, positioning it well for a strong Q4 and a promising start to 2025.
- Custom Truck One Source Inc (CTOS) saw a 21% sequential improvement in rental asset sales, marking the second consecutive quarter of growth.
- The TES segment reported a 13% revenue growth compared to Q3 last year, with strong demand in infrastructure, rail, telecom, and utility end markets.
- The company is well-prepared for anticipated demand increases due to upcoming chassis emission regulations, with strategic inventory investments positioning it to meet customer demand.
Negative Points
- The ERS segment experienced a year-over-year decline in revenue, with a decrease in average utilization of the rental fleet from almost 79% to just over 73%.
- Custom Truck One Source Inc (CTOS) faced rate pressure impacting on-rent yield, driven by both the mix of equipment rented and the broader market environment.
- Segment gross margin for TES was down sequentially and year-over-year, impacted by mix and improved inventory levels across the broader industry.
- The company reduced the top end of its ERS and TES revenue guidance due to continued softness in used equipment sales and delayed customer purchase decisions.
- Borrowings under the ABL facility increased by $41 million due to higher inventory levels and lower-than-anticipated adjusted EBITDA performance.
Q & A Highlights
Q: Can you provide comments on the used market? Is it pricing or volumes affecting the business?
A: Ryan McMonagle, CEO: We are seeing demand in the used market with sequential growth. There is some pricing pressure, but we expect improvement in Q4, which is typically a strong quarter. Interest rate sensitivity is a factor, and as rates lower, it should benefit the used market.
Q: What are your thoughts on fleet utilization? Is 79% to 80% where you want to be?
A: Ryan McMonagle, CEO: High 70s to low 80s is a good spot for utilization. We are seeing demand return as expected, and we aim to maintain this range using fleet size and pricing adjustments. The underlying business demand is strong, which bodes well for 2025.
Q: Can you discuss the Class 8 vocational truck demand patterns? Are you seeing a pre-buy trend?
A: Ryan McMonagle, CEO: We have good availability heading into 2025. A pre-buy dynamic may emerge later in 2025. We are not planning a significant pre-buy at the start of 2025, and we expect inventory levels to normalize.
Q: How do you expect to achieve double-digit adjusted EBITDA growth in 2025 given the current backlog and sales pressure?
A: Ryan McMonagle, CEO: We anticipate growth in the TES segment despite backlog normalization. Historically, a four-to-six-month backlog has supported growth. We expect Q4 to be a growth quarter for TES, and 2025 is shaping up positively.
Q: What is driving the lower on-rent yield (ORY) rates?
A: Ryan McMonagle, CEO: The lower ORY is due to the mix of equipment on rent and customer base. Distribution equipment has a lower ORY compared to vocational equipment. Market conditions and inventory levels also contribute to pricing pressure.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
