Custom Truck One Source, Inc. (NYSE:CTOS) Q1 2023 Earnings Call Transcript May 13, 2023
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Custom Truck One Sources First Quarter 2023 Earnings Conference Call. Please note this conference call is being recorded. I would now like to hand the conference call over to your host today, Brian Peman, Vice President of Investor Relations for Custom Truck. Thank you, sir. Please go ahead.
Brian Peman: Thank you, and good afternoon. Before we begin, we would like to remind you that management’s commentary and responses to questions on today’s call may include forward-looking statements, which, by their nature, are uncertain and outside of the company’s control. Although these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of the company’s filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release we issued today.
The press release we issued this afternoon and our quarterly investor presentation are posted on the Investor Relations section of our website. We filed our first quarter 2023 10-Q with the SEC this afternoon. Today’s discussion of our results of operations for Custom Truck One Source Inc., or Custom Truck is presented on a historical basis as of or for the three months ended March 31, 2023, and prior periods. Joining me today are Ryan McMonagle, CEO; and Chris Eperjesy, CFO. I will now turn the call over to Ryan.
Ryan McMonagle: Thanks, Brian, and welcome, everyone, to today’s call. I’d like to begin by thanking all of our employees, customers and suppliers who continue to support our business and helped us deliver such a strong quarter. The entire custom truck team continues to work tirelessly to maintain record levels of production, enabling us to grow our rental fleet to meet continued strong demand for new equipment and to fulfill our goal of providing unrivaled service to our customers. For the first quarter of the year, we delivered strong year-over-year revenue, adjusted gross profit and adjusted EBITDA growth. We generated $452 million of revenue, $150 million of adjusted gross profit and $105 million of adjusted EBITDA in Q1, up 23%, 16% and 15%, respectively, versus Q1 2022.
Overall demand remains very strong in each of our strategically selected primary end markets, utility or T&D, telecom, rail and infrastructure. These markets offer compelling long-term growth opportunities well in excess of GDP, which we believe should continue for the foreseeable future. The reported backlogs of the utility and telecom contractors, our largest customer base, continue to be good proxies for this sustained growth and remain at or near record levels. We see continued strong demand in our new sales backlog and in the performance of the rental fleet. Additionally, in the first quarter, we continued to experience strong demand from our customers to purchase assets in the rental fleet. We see all of these as positive leading indicators for sustained future demand.
Rental utilization in the ERS segment remains near record high levels, and we continue to focus on rental pricing and the amount of time it takes to turn a piece of equipment and make it available to go back on rent, both of which positively impact adjusted gross margin, investment of $109 million into the rental fleet and sales of certain aged assets in Q1 resulted in the reduction of our fleet age to under 3.7 years, which we believe remains the youngest in the industry. As we stated on last quarter’s call, we expect to continue to aggressively invest in the fleet for the remainder of the year. In the TES segment, we sold $209 million of equipment in the quarter, a 25% increase compared to Q1 2022. Additionally, our backlog grew by more than $100 million in the quarter or more than 13% versus the end of 2022.
Our backlog is up 46% versus the end of Q1 last year. These results point to continued strong demand for new equipment. We are proud of the relationships we have with our chassis, body and attachment vendors, and we continue to work closely with them to address supply chain issues as they arise. Progress in this area resulted in our inventory growing by $118 million in the quarter, which we see as a positive indicator of improving supply chain conditions and positions us well to meet our production fleet growth and sales goals for the remainder of the year. Strategically, we remain focused on investing in and optimizing our production capacity to ensure that we deliver the product and service levels our customers expect from us. In Kansas City, Missouri, we acquired approximately 60 acres adjacent to our facility and are in the process of bringing more than 200,000 square feet of manufacturing, production and PTA warehouse capacity online.
In Union Grove, Wisconsin, we are investing to nearly double production capacity. These investments, which we expect to be complete in the second half of the year will ensure that we have sufficient capacity to meet our growth targets for both our rental fleet and new equipment sales as well as be a catalyst for growth in our APS segment. As we look ahead to the rest of the year, we believe that our first quarter results, favorable end market tailwinds, robust customer demand, improving supply chain dynamics and continued outstanding execution by our team, all provide Custom Truck with the momentum to deliver strong revenue, adjusted gross profit and adjusted EBITDA growth. While Chris will discuss our 2023 outlook in greater detail, based on year-to-date performance and the outlook for the remainder of the year, we are increasing our projected total revenue range to $1.635 billion to $1.755 billion and our adjusted EBITDA range to $420 million to $440 million.
In closing, we know our employees are the key to delivering the exceptional financial results and unmatched customer service we saw in the first quarter. and I’d like to extend a sincere thank you to them. I will now turn it over to Chris.
Chris Eperjesy: Thanks, Ryan. As Ryan indicated, Q1 was a very strong quarter. End market demand remained strong, resulting in total revenue of $452 million, up 23% compared to Q1 2022. Adjusted gross profit was $150 million, up 16% compared to Q1 2022, resulting in an adjusted gross margin for the quarter of 33.2%. Adjusted EBITDA was $105 million, a 15% improvement compared to Q1 2022. Adjusted gross profit and adjusted EBITDA growth lagged revenue growth largely as a result of segment revenue mix. While all of our segments experienced year-over-year growth, rental asset sales and TES revenue, which have a lower gross margin associated with them, comprised 67% of total revenue in Q1 2023 versus 62% in Q1 2022. SG&A was $57 million for Q1 or 13% of revenues, an improvement versus 15% in Q1 2022.
Net income for the quarter was $13.8 million, a $17.1 million increase from Q1 2022 and the second consecutive quarter of positive net income. Turning to our segment results. Ryan referenced our continued strong utilization within our ERS segment for the quarter, which was almost 84%, up from 83% for Q1 2022. Average OEC on rent increased by more than $95 million compared to Q1 2022. On rent yield was 39.6% for the quarter compared to 39.1% for Q1 2022. Our OEC in the rental fleet ended the quarter at $1.46 billion, up $93 million versus Q1 2022. As Ryan mentioned, consistent with our expectation of continued strong investment in our rental fleet, we deployed $109 million of new equipment into our rental fleet in the quarter, and we expect to continue to invest heavily in the fleet for the remainder of 2023.
For Q1, ERS rental revenue was $114 million, an increase of 8% versus Q1 2022. In line with our comments from the last two quarters regarding strong demand from our customers for rental asset purchases, ERS used equipment sales for the quarter were a record $92 million, up more than 55% versus Q1 2022 and up more than 17% from last quarter. ERS adjusted gross profit was $106 million for Q1, up 9% from Q1 2022. Adjusted gross margin was 51.4%, a decrease from Q1 2022, largely as a result of revenue mix as rental asset sales comprised 45% of total ERS revenue in the first quarter of this year versus 36% in Q1 2022. Rental adjusted gross margin continued to be strong at 74.5%. TES saw another strong quarter with revenues of $209 million, which were up almost 25% from Q1 2022.
This segment continues to benefit from record backlog, continued strong inventory flows and record levels of production. Gross profit increased by more than 43% in the quarter compared to Q1 2022. Gross margin for the quarter was 16%, up from 14% in Q1 2022. Our sales activity continues to be extremely strong with backlog growing by more than $100 million or 13% sequentially from Q4 to $855 million. The growth in our backlog was very broad-based across our product portfolio. We believe the continued growth in the TES sales backlog reflects growing demand for equipment, indicative of our favorable end market dynamics, our strong market share gains and our pricing discipline. We have been successful in countering inflationary pressures through the implementation of ongoing production efficiency initiatives as well as maintaining pricing discipline, including passing through vendor surcharges.
As this quarter’s TES results show, we are confident we will be able to hold margins at or above the average we experienced for all of 2022 over the coming quarters, even with elevated levels of inflation. Our APS business posted revenue of $37 million, up 10% versus Q1 2022. Adjusted gross profit margin in the segment improved to 27.2% in Q1. Within the APS segment, parts and service revenue was up more than 8% compared to Q1 2022. Maintaining a strong liquidity position and improving our leverage remains priorities for us as to investing in the rental fleet, expanding our footprint and pursuing selective strategic growth through M&A. Since initiating our stock repurchase program in the third quarter of last year, we have repurchased approximately $12 million of our stock.
We increased borrowings under our ABL by more than $24 million, mainly to fund working capital as we replenish inventory and ramp up production to meet demand with the outstanding balance at the end of Q1 at $462 million. As of March 31, we had $285 million available and $245 million of suppressed availability under the ABL with the ability to upsize the facility. With the LTM adjusted EBITDA of $407 million, we finished Q1 with net leverage of 3.4x, an improvement of almost 1.2 turns since the close of the transaction with NASCO in April 2021 and down from just over 3.5 times last quarter. Achieving leverage below 3x remains our target and one that we believe we can achieve by the end of fiscal 2023. We will continue to seek to make incremental investments and prudent acquisitions when we believe they create long-term shareholder value.
With respect to our 2023 outlook, we believe ERS will continue to benefit from strong demand from our rental customers as well as for purchases of rental fleet units, particularly older equipment for the rest of the year. We also expect to further grow our net OEC by mid to high single digits. Regarding TES, supply chain improvements, improved inventory levels and record backlog levels should improve our ability to produce and deliver more units in the coming quarters. We are providing updated guidance for our segments as follows: We expect ERS revenue of between $670 million and $710 million, TES revenue in the range of $820 million to $890 million and APS revenue of between $145 million and $155 million. As Ryan mentioned previously, this results in total revenue in the range of $1.635 billion to $1.755 billion, and we are projecting adjusted EBITDA from $420 million to $440 million.
In closing, I want to echo Ryan’s comments regarding our continued strong performance. As we’ve moved into the third year of our successful combination with NESCO, we continue to deliver strong revenue and adjusted EBITDA growth, expanded margins in an inflationary environment and reduced leverage, all while providing the highest levels of service to our customers. With that, I will turn it over to the operator to open the lines for questions. Operator?
Q&A Session
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Operator: [Operator Instructions] The first question is from Mike Shlisky of D.A. Davidson.
Operator: The next question is from Tami Zakaria of JPMorgan.
Operator: The next question is from Justin Hauke of Robert W. Baird.
Operator: There are no further questions at this time. I would like to turn the floor back over to Ryan McMonagle for closing comments.
Ryan McMonagle: Thanks, Irene. Thanks, everyone, for your time today and your interest in Custom Truck. We look forward to speaking with you on our next quarterly earnings call. And in the meantime, please don’t hesitate to reach out with any questions. Thank you, again. Take care.
Operator: Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.
