8-K: Custom Truck One Source Reports Record Full-Year 2023 Results Despite Late-Year Pressures

Custom Truck One Source announced record full-year 2023 revenue and adjusted EBITDA, despite experiencing some end-market pressures in the second half of the year.

Summary

• Custom Truck One Source reported a total revenue of $521.8 million for the fourth quarter of 2023 and $1,865.1 million for the full year, driven by strong demand across its end markets.
• The company's gross profit for the fourth quarter was $126.8 million, a slight decrease of 1.2% compared to the same period in 2022, while the full-year gross profit reached $454.3 million, an 18.4% increase year-over-year.
• Adjusted gross profit for the quarter was $171.1 million, a 1.2% increase, and the full-year adjusted gross profit was $624.9 million, a 12.5% increase compared to 2022.
• Net income for the fourth quarter decreased to $16.1 million, compared to $30.9 million in 2022, but the full-year net income increased to $50.7 million, up from $38.9 million in 2022.
• Adjusted EBITDA for the fourth quarter was $118.4 million, compared to $124.5 million in 2022, while the full-year adjusted EBITDA was $426.9 million, an 8.6% increase year-over-year.
• The Truck and Equipment Sales (TES) segment saw a 29% revenue growth in 2023, and the Equipment Rental Solutions (ERS) segment experienced a 10% year-over-year revenue growth.
• The company's sales order backlog was $688.6 million at the end of the fourth quarter, a decrease from the previous quarter and the same period in 2022.
• CTOS is targeting to generate more than $100 million of levered free cash flow in 2024 and achieve a net leverage ratio of less than 3.0 times by the end of the fiscal year.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong full-year results and a positive 2024 outlook, but there are some concerns about near-term headwinds and a decrease in fourth-quarter profitability. The company's focus on deleveraging and free cash flow generation is a positive sign.

Positives

• The company achieved record full-year revenue and adjusted EBITDA.
• The TES and ERS segments showed strong revenue growth for the year.
• The company is targeting significant free cash flow generation and deleveraging in 2024.
• CTOS has a strong sales order backlog entering 2024.
• The company's fleet is well-positioned with an average age of 3.5 years.
• The company is experiencing strong demand from customers across all primary end-markets and in all three business segments.

Negatives

• Fourth-quarter gross profit decreased slightly by 1.2% compared to the same period in 2022.
• Net income for the fourth quarter decreased by $14.8 million compared to the fourth quarter of 2022.
• Adjusted EBITDA for the fourth quarter decreased compared to the same period in 2022.
• Fleet utilization declined to 77.6% in the fourth quarter of 2023, down from 86.3% in the fourth quarter of 2022.
• The company experienced a decrease in average OEC on rent due to lower utilization.
• The company's net income was negatively impacted by higher interest expense on variable-rate debt and variable-rate floorplan liabilities.

Risks

• The company is experiencing near-term headwinds in the utility end markets due to customer supply chain issues and delays in transmission projects.
• There are risks associated with continued challenges for rental customers, particularly in the T&D sector, which could persist through a large portion of the fiscal year.
• The company's net income is sensitive to changes in interest rates due to variable-rate debt.
• The company's sales order backlog may not be indicative of future revenue.
• The company is subject to various risks related to climate change and sustainability initiatives.
• The company is subject to complex laws and regulations, including environmental and safety regulations.

Future Outlook

The company expects 2024 to be another year of growth, with continued strong demand in the TES segment and long-term growth in the ERS segment. They anticipate some near-term headwinds in the utility end markets but expect these to recover. The company is targeting to generate more than $100 million of levered free cash flow and achieve a net leverage ratio of less than 3.0 times by the end of the fiscal year.

Management Comments

• Ryan McMonagle, Chief Executive Officer of CTOS, stated that the entire team was instrumental in achieving record vehicle production this year.
• McMonagle also mentioned that they continue to see strong demand from customers across all primary end-markets and in all three business segments.
• McMonagle added that a strong focus on capital allocation this year will allow them to pursue their growth strategy and to deliver free cash flow generation and continued deleveraging.
• McMonagle noted that the 2024 outlook reflects the long-term strength of their end markets and the continued focus by their teams to profitably grow their business.

Industry Context

This announcement reflects the ongoing demand for specialty equipment in the electric utility, telecom, and rail sectors. The company's focus on growth and deleveraging aligns with broader industry trends of improving financial health and capitalizing on infrastructure investments. The company's performance is also impacted by supply chain issues and regulatory bottlenecks, which are common challenges in the current environment.

Comparison to Industry Standards

• While specific competitor data is not provided in this document, CTOS's revenue growth of 18.6% for the full year is a strong result compared to the broader industrial equipment sector, which has seen varied growth rates depending on specific sub-sectors.
• The company's adjusted EBITDA growth of 8.6% is a positive indicator of operational efficiency, but the decrease in fourth-quarter adjusted EBITDA suggests potential challenges in maintaining profitability in the short term.
• The fleet utilization rate of 77.6% in the fourth quarter is below the company's historical performance and may indicate a need for improved asset management or market adjustments.
• The company's target to generate over $100 million in levered free cash flow and reduce its net leverage ratio to below 3.0 by the end of 2024 is a positive sign of financial discipline and aligns with industry best practices for capital management.
• Companies like United Rentals (URI) and Herc Rentals (HRI) are key competitors in the equipment rental space, and CTOS's performance should be benchmarked against their results to assess relative market positioning and operational effectiveness.

Stakeholder Impact

• Shareholders can expect continued growth and deleveraging efforts, which should create long-term value.
• Employees will be instrumental in achieving the company's growth targets.
• Customers can expect continued strong demand and service from the company.
• Suppliers will benefit from the company's continued growth and production.
• Creditors will see a reduction in the company's net leverage ratio.

Next Steps

• The company will focus on capital allocation to pursue its growth strategy.
• The company will work to deliver free cash flow generation and continued deleveraging.
• The company will continue to monitor and address the near-term headwinds in the utility end markets.
• The company will focus on growing its rental fleet based on net OEC by mid-single digits in 2024.
• The company will continue to improve its ability to produce and deliver more units in 2024.

Key Dates

Keywords

specialty equipment, electric utility, telecom, rail, infrastructure, equipment rental, truck sales, aftermarket parts, adjusted EBITDA, revenue, fleet utilization, net leverage