Custom Truck One Source, Inc. (NYSE:CTOS) is a leading specialty equipment provider serving the electric utility transmission and distribution, telecommunications, rail, forestry, waste management, and other infrastructure-related industries in North America. The company's diverse product offerings and integrated business model have positioned it as a trusted partner for customers seeking tailored solutions with short lead times.

Financials

In the first quarter of 2024, Custom Truck reported revenue of $411.3 million, a decrease of 9.0% compared to the same period in 2023. The company's net income for the full year 2023 was $50.7 million, and its annual revenue was $1.87 billion. However, the company's operating cash flow and free cash flow for the full year 2023 were negative, at -$147.4 million and -$553.6 million, respectively.

The company's performance in the first quarter of 2024 was significantly impacted by a decline in average utilization of the rental fleet to just over 73%, down from almost 84% in the first quarter of 2023. This decline was primarily driven by the slowdown in the utility transmission and distribution (T&D) market, which accounts for a significant portion of the company's revenue. The average OEC (original equipment cost) on rent also decreased from $1.21 billion in the first quarter of 2023 to $1.07 billion in the first quarter of 2024.

Segment Performance

Despite the challenges in the utility T&D market, Custom Truck's Truck and Equipment Sales (TES) segment delivered a strong performance, with a 15% increase in revenue compared to the first quarter of 2023. The company's Aftermarket Parts and Services (APS) segment, however, saw a slight decrease in revenue due to the decline in rentals of tools and accessories affected by the utility end-market softness.

Risks and Challenges

The company's management has attributed the temporary slowdown in the utility T&D market to supply chain issues, regulatory approval delays, and financing and ownership details that are affecting the timing of project starts. However, they remain confident in the long-term growth prospects of the industry, citing favorable macro trends such as data center investment, electrification, and required grid upgrades.

Outlook

To address the near-term challenges in the utility T&D market, Custom Truck has adjusted its guidance for the Equipment Rental Solutions (ERS) segment, lowering the revenue guidance to $680 million to $710 million, down from the previous range of $730 million to $760 million. The company has also lowered its consolidated revenue guidance to $1.95 billion to $2.13 billion and its adjusted EBITDA guidance to $400 million to $440 million.

Despite the reduced guidance, Custom Truck remains focused on generating meaningful free cash flow in 2024 and is reaffirming its target to generate more than $100 million of levered free cash flow. The company's strong balance sheet, with $195 million available and approximately $332 million of suppressed availability under its ABL facility, provides it with the financial flexibility to navigate the current market conditions.

Geographic Breakdown

In terms of geographic breakdown, the majority of Custom Truck's revenue is generated in the United States, with $397.7 million (96.7%) of revenue in the first quarter of 2024 coming from the U.S. market, and the remaining $13.6 million (3.3%) coming from Canada.

Long-Term Growth Prospects

Looking ahead, Custom Truck is well-positioned to capitalize on the long-term growth opportunities in its end markets. The company's integrated business model, which includes rental, sales, and aftermarket services, allows it to pivot between product categories and between selling and renting equipment as market conditions dictate.

Furthermore, Custom Truck's strategic investments in geographic expansion, including the recent acquisitions and new branch openings, are expected to strengthen its presence and service capacity in key markets. The company's focus on continuous improvement in its production capabilities and its ability to meet customer demand through its well-stocked inventory also position it for success.

Conclusion

While Custom Truck is navigating temporary headwinds in the utility T&D market, the company's diversified business model, strong customer relationships, and long-term growth prospects in its end markets make it a compelling investment opportunity. Investors should closely monitor the company's progress in addressing the near-term challenges and its ability to capitalize on the anticipated recovery in the utility T&D market and the broader infrastructure spending environment.