8-K: Custom Truck One Source Reports Mixed Q3 Results, Updates Full-Year Guidance

Custom Truck One Source reported a net loss for the third quarter of 2024, but saw sequential improvements in net income and a slight increase in Adjusted EBITDA, while also updating its full-year guidance.

Summary

• Custom Truck One Source (CTOS) announced its financial results for the third quarter of 2024, showing a total revenue of $447.2 million, a 5.7% increase compared to the second quarter of 2024.
• Gross profit reached $91.8 million, a 2.9% increase from the previous quarter, while adjusted gross profit was $137.8 million, also up by 2.9%.
• The company reported a net loss of $17.4 million, which is an improvement of $7.1 million compared to the second quarter's loss.
• Adjusted EBITDA was $80.2 million, a slight 0.2% increase from the previous quarter.
• Average OEC on rent increased by $38 million, or 3.6%, compared to the second quarter.
• CTOS upsized its ABL revolving credit facility by $200 million to $950 million, extending the maturity to 2029.
• The company's sales backlog has normalized to just under five months, within the desired range of four to six months.
• CTOS has updated its full-year revenue guidance to $1.8 billion to $1.89 billion and Adjusted EBITDA guidance to $340 million to $350 million.
• The company expects a return to double-digit Adjusted EBITDA growth in 2025 and anticipates generating positive levered free cash flow and improved leverage.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positive signs like sequential improvements and increased OEC on rent, the net loss, reduced guidance, and year-over-year declines in key metrics temper the overall outlook.

Positives

• The company experienced sequential improvement in net income and a slight increase in Adjusted EBITDA.
• There was a significant increase in OEC on rent by over $200 million since the end of the second quarter.
• The sales backlog has returned to a more normalized level within the desired range.
• The company upsized its ABL revolving credit facility, providing more financial flexibility.
• CTOS anticipates a return to double-digit Adjusted EBITDA growth in 2025.
• The company expects to generate meaningful positive levered free cash flow and deliver improved leverage in the future.

Negatives

• The company reported a net loss of $17.4 million for the third quarter of 2024.
• Rental revenue decreased by 8.4% compared to the third quarter of 2023.
• Adjusted EBITDA decreased by 19.9% compared to the third quarter of 2023.
• The company is experiencing some softness in the sale of used equipment.
• The company has lowered the top end of its revenue outlook for both the ERS and TES segments.
• APS gross margin was negatively impacted by lower levels of tools and accessories rentals and higher costs of materials.

Risks

• The company faces risks related to increases in labor costs and the inability to obtain raw materials.
• Competition in the equipment dealership and rental industries could impact performance.
• The sales order backlog may not be indicative of future revenues.
• Macroeconomic conditions and unfavorable conditions in the capital and credit markets could affect the company.
• Changes in interest rates could increase debt service obligations.
• Disruptions to information technology systems could adversely affect operating results.
• The company is subject to complex laws and regulations, including environmental and safety regulations.
• There is a risk of material weakness in internal control over financial reporting.
• The company is subject to a series of risks related to climate change.

Future Outlook

The company has updated its full-year revenue guidance to $1.8 billion to $1.89 billion and Adjusted EBITDA guidance to $340 million to $350 million. CTOS anticipates a return to double-digit Adjusted EBITDA growth in 2025 and expects to generate positive levered free cash flow and improved leverage.

Management Comments

• Ryan McMonagle, Chief Executive Officer of CTOS, stated that the core T&D markets experienced a slowdown, but this decline has proven to be temporary.
• McMonagle also noted that the company is optimistic about fiscal 2025 and believes they are well-positioned to benefit from secular tailwinds.
• McMonagle added that the sales backlog has returned to a more normalized level.
• McMonagle stated that the company continues to anticipate a return to double-digit Adjusted EBITDA growth in 2025.

Industry Context

The company operates in the specialty equipment market, serving the electric utility, telecom, rail, forestry, and waste management sectors. The results reflect a temporary slowdown in the core T&D markets, but the company is seeing improvements and expects to benefit from long-term trends such as AI and data center investments, electrification, and utility grid upgrades.

Comparison to Industry Standards

• While specific competitor data is not provided in the document, CTOS's performance can be compared to other companies in the specialty equipment rental and sales industry, such as United Rentals (URI) and Herc Rentals (HRI).
• CTOS's focus on infrastructure-related end markets aligns with broader industry trends, where demand is driven by infrastructure upgrades and maintenance.
• The company's backlog of just under five months is within its desired range, indicating a healthy level of demand and efficient supply chain management, which is a key metric for companies in this sector.
• The increase in OEC on rent by over $200 million since the end of the second quarter is a positive sign, suggesting strong demand for their rental equipment, which is a key driver of revenue for companies like United Rentals and Herc Rentals.
• The company's net leverage ratio of 4.44x is a key metric that investors will compare to industry benchmarks and the leverage ratios of competitors.

Stakeholder Impact

• Shareholders may be concerned about the net loss and reduced guidance, but encouraged by the long-term growth prospects.
• Employees may be affected by any potential cost-cutting measures or changes in business strategy.
• Customers may benefit from the company's continued investment in its rental fleet and equipment offerings.
• Suppliers may be impacted by any changes in the company's purchasing patterns.
• Creditors will be monitoring the company's debt levels and leverage ratios.

Next Steps

• The company will hold a conference call on October 31, 2024, to discuss the third quarter results.
• The company will continue to focus on working capital management initiatives to improve leverage.
• The company expects to see a return to double-digit Adjusted EBITDA growth in 2025.

Key Dates

Keywords

equipment rental, truck sales, infrastructure, EBITDA, revenue, financial results, OEC, backlog, credit facility, net loss