Custom Truck One Source, Inc. Third Quarter 2026 Earnings Conference Call - CUSTOM TRUCK ONE SOURCE INC

Financial Performance:

• Consolidated revenue reached $495 million in Q3 2026, a 3% year-over-year increase; Adjusted EBITDA was $111 million, up 16% YoY, with a margin of 22.4% (up 250 bps YoY).
• Year-to-date adjusted EBITDA increased 24%; GAAP net income improved from a $6 million loss to $1 million (1 cent/share) in Q3, with YTD net income at nearly $9 million.
• SER segment revenue rose 18% to $223 million with segment-adjusted EBITDA of $122 million (54.6% margin); STEM segment revenue grew 8% to $442 million with segment-adjusted EBITDA of $37 million (8.3% margin).
• Leverage ratios improved to 3.7x net debt/EBITDA, down sequentially from Q2 and 0.8x lower than Q3 2025; Net debt remained flat YoY at $1.65 billion despite a $140 million fleet increase.
• Levered free cash flow for the first nine months was approximately $4 million, an improvement of $79 million YoY; Rental gross margins averaged 79% and on-rent yield was 39.4%.
• Capital allocation prioritized fleet growth: Net rental fleet investment raised to $210–$230 million for 2026, with average fleet age under three years.

Guidance and Future Outlook:

• Full-year 2026 adjusted EBITDA guidance raised to $447.5–$460 million (up 17–20% YoY), marking the third raise this year; Consolidated revenue guidance affirmed at $2.1–$2.2 billion.
• SER revenue guidance increased to $870–$890 million; STEM revenue guidance affirmed at $1.63–$1.7 billion.
• Management anticipates double-digit adjusted EBITDA growth in 2027, driven by new fleet deployments and deleveraging, targeting net leverage below 3.0x by year-end 2027.
• Q4 expectations include sequential and year-over-year growth in both revenue and EBITDA, with OEC on rent currently exceeding $1.5 billion and utilization surpassing 84%.
• Long-term outlook remains positive for transmission and distribution (T&D) markets through 2028, fueled by grid hardening, maintenance, and data center power demand.

Business Segments and Product Lines:

• SER (Specialty Equipment Rental): Delivered record performance driven by T&D demand; utilization averaged 81.5% (up 220 bps YoY); OEC on rent exceeded $1.76 billion at quarter-end; RPO (Ready to Rent) activity remains robust.
• STEM (Specialty Truck & Equipment Manufacturing): Strong order flow with Q3 orders up 22% YoY; new sales backlog reached $342 million (up 22% YoY); strategic decision to divert production capacity to internal fleet investment impacted third-party new sales.
• Fleet Investment: Incremental spending focused on long-term transmission rentals and high-return specialty products; roughly $60 million of new fleet is expected to generate $15 million in annualized adjusted EBITDA.
• Product Availability: Chassis pre-buy initiatives executed to navigate upcoming EPA 2027 NOx emission regulations; strong relationships with OEM partners maintained.

Market and Competitive Landscape:

• T&D markets exhibit "once-in-a-generation" demand supercycle characteristics, with visibility extending into 2028 due to new construction projects and regulatory-driven upgrades.
• STEM infrastructure market showing mixed but improving trends; specific categories like dump trucks, water trucks, and heavy-haul tractors gaining traction.
• Data centers remain a key driver of power consumption and associated infrastructure demand, though growth is attributed to broader grid modernization rather than specific AI project pipelines.
• Management notes strong bidding activity and customer conversations indicating persistent demand; backlog trends support confidence in continued third-party revenue growth for STEM.

Risks and Challenges:

• Temporary Disruptions: STEM third-party revenue negatively impacted by $20 million in delayed sales due to a chassis vendor recall and hailstorm damage at the Kansas City facility; management expects these to be recognized in Q4.
• Capital Intensity: Increased fleet investment shifts free cash flow timing, resulting in slightly positive (rather than highly positive) 2026 levered free cash flow as earnings from new units arrive primarily in 2027.
• Regulatory Compliance: EPA 2027 NOx emission standards present potential inventory and pricing adjustments, though management believes the company is well-positioned via pre-buy actions and OEM relationships.
• Macroeconomic Uncertainty: While specific data center pushback was not observed, broader macroeconomic and regulatory election outcomes remain factors in long-term demand forecasting.

Management Commentary and Tone:

• Management expressed high confidence and optimism, characterizing the current environment as a sustained secular supercycle in transmission demand.
• Tone was decisive regarding capital allocation, emphasizing that investing in the rental fleet now is critical to capturing high-return opportunities and securing market share.
• CEO Ryan McMonigle highlighted the strategic trade-off of current CapEx for future earnings, asserting that the fleet investment supports a path to deleveraging and double-digit growth in 2027.
• CFO Chris Eppert detailed disciplined cost control and efficient SG&A management as key enablers of margin expansion.

Analyst Questions and Answers:

• Utilization: Utilization is trending up (surpassing 84%) and expected to remain strong into Q4, as customers prefer retaining equipment due to tight availability rather than returning assets for holidays.
• Margins: SER margins in the mid-50s are considered the normalized range, supported by mix shifts and price increases rolling through; pricing flexibility remains positive for 2027.
• STEM Drivers: Backlog growth supports STEM revenue; delayed deliveries from the recall and hailstorm are temporary, with the majority of units delivered in October.
• Data Center Impact: Demand is driven by general grid hardening and maintenance, with data centers acting as significant power consumers rather than specific equipment drivers.
• Deleveraging Path: Achieving <3.0x leverage will result from a combination of double-digit EBITDA growth and debt paydown via improved free cash flow in 2027.
• Q4 Revenue Bridge: Q4 revenue guidance assumes strong STEM delivery completion (reversing delays) and steady SER rental performance, with some variance in equipment sales timing.

Other Key Points:

• Insurance Recovery: The hailstorm damage was largely covered by insurance with a $1 million deductible; the chassis vendor recall costs are being covered by the OEM.
• Inventory Management: Inventory months on hand are expected to remain flat year-over-year at year-end 2026 due to planned positioning for 2027 emissions compliance.
• Q4 Seasonality: Q4 remains the company's historically strongest quarter; OEC on rent has grown to over $1.5 billion in the current quarter compared to $1.39 billion in Q3.
• Long-Term Visibility: Management cites increased visibility on project start dates (some 2027–2028) as a primary reason for the aggressive fleet investment decision.