Custom Truck One Source (CTOS) Q2 2026 earnings call transcript

Thank you operator and good morning. 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 Factor section of the company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-gap financial measures discussed during the call and the press release we issued yesterday after the market closed. That press release and our second quarter investor presentation are posted on the Investor Relations section of our website.

Yesterday afternoon, we also filed our second quarter 2026-10Q with the SEC. 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 June 30th, 2026 in prior periods. Also a reminder that beginning last quarter, our financial recording now reflects our two new reportable segments, Specialty Equipment Rentals, or SCR, and Specialty Truck Equipment and Manufacturing, or STEM. While our 2026 results in our earnings press release and SEC filing reflect the application of intersection pricing and margins, as per accounting requirements for intersection sales, the segment results for 2025 reflect the intersection sales with no margin as no intersection agreement was in place in the period.

For an illustrative comparison of what the 2025 results would have been had intersection sales been reflected with the appropriate gross margin and had other internal accounting policies been in place at the time, police city appendix of the Q2 Investor presentation posted on our Investor Relations website. Joining me today are Ryan McMonagall, CEO, and Christopher Jesse CFO. I will now turn the call over to Ryan.

Thanks, Brian, and good morning, everyone. We delivered record revenue in the second quarter, having a strong first half, driven by continued strong momentum in our court and markets, and outstanding execution by our team. In the second quarter, we generated revenue of $563 million in adjusted EBITDA of $117 million, up 10% and 25% year over year, respectively. Our Specialty Equipment rental segment continues to deliver consistently strong performance, driven by sustained and growing demand in the transmission and distribution, or T&D markets. Our rental fleet averaged 81.6% utilization during the quarter, up 400 basis points from Q2 of last year. This was supported by continued robust levels of OEC on rent, which averaged $1.37 billion in Q2, up 13% year over year.

So far in Q3, both measures have continued to show year over year growth. We believe that we are in the early stages of what could be a once in a generation transmission demand super cycle. We ended the quarter with total OEC of $1.68 billion, the highest quarter in level in our history, which will support our expected continued growth in SER revenues in the second half of this year.

Also, our average fleet age is just over three years old, which we believe is one of the youngest fleets in the industry, and positions us well to support our customers' needs across the country. Our trucks and equipment continue to power the people who strengthen and build critical infrastructure in the US and Canada. The market has been focused on the durability of demand in T&D and our ability to convert improving rental KPIs into earnings and cash flow. And we believe our trending results over recent quarters speak directly to that.

Bidding activity and ongoing conversations with our customers lead us to believe that these conditions will persist through the remainder of 2026 and beyond. Our specialty truck equipment and manufacturing segment had record performance in the second quarter, with equipment sales reaching an all-time quarterly high for the company and reflecting continued healthy in-market demand and order flow. For Q2, STEM revenue, excluding sales to our SER segment, was up 5% versus Q2 of 2025, which at the time was a record for non-forthquarter equipment sales. New sales order backlog ended the second quarter at $322 million, down $89 million from the end of Q1 on record Q2 deliveries. Despite the decrease in our backlog in Q2, intra-quarter order flow remains strong and our backlog has grown so far in Q3.

We continue to see strong sales demand in the utility and market, especially focused on transmission equipment. In the infrastructure and market, we have seen less growth, but our ongoing conversations with our customers and the pace of bidding and our order activity combined to provide us with the confidence to expect another year of growth and third-party customer revenue for STEM.

With respect to the EPA 27 NOx emission regulations, the EPA introduced its proposed changes to the rules in early July, which maintained the 2027 NOx standards while adding non-conformance penalty provisions. The regulations are expected to be finalized later this year. Given our current inventory position, the chassis pre-buy actions we have already taken and our strong relationships with our chassis OEM partners, we believe CTAS is well positioned to navigate the impact of the upcoming emission standards changes. Given our strong year-to-day performance, robust conditions in the T&D and markets, and our outlook for the rest of the year, we are increasing our previous full-year 2026 consolidated revenue and adjusted EBITDA outlooks.

We expect consolidated revenue in the range of $2.1 to $2.2 billion and adjusted EBITDA in the range of $437.5 to $455 million. Long-term sustained in-market demand, buoyed by secular megatrends, combined with our ability to provide exceptional execution on behalf of our customers, sets us apart from our competition. Our long-standing relationships with our strategic suppliers and customers continue to be keys to our success. I continue to have the highest degree of confidence in the custom truck team and want to thank everyone for their hard work and dedication that helped achieve our extraordinary results in the second quarter. We look forward to updating everyone soon.

With that, I'll turn it over to Chris to walk through the numbers in more detail.

Thanks Ryan, and good morning everyone. I'll start with the consolidated results for the quarter, then discuss segment performance, our balance sheet, liquidity, and leverage, and finally our updated 2026 outlook. Our second quarter 2026 results reflect stronger operating performance across the business and improved rental fundamentals, particularly in our T&D and markets. For the second quarter, total revenue was $563 million and adjusted EBITDA was $117 million, representing 10% and 25% growth respectively versus Q2 2025. On a gap basis, second quarter net income was $10 million or $0.05 per diluted share, compared with a net loss of $28 million a year ago, bringing first half net income to $6 million. About $19 million of that year-over-year improvement reflects a favorable income tax swing as the prior year quarter carried a tax expense related to an adjustment in our estimated effective tax rate.

The balance was driven by higher operating income. Turning to our segments in SER, second quarter third-party revenue, excluding inner segment sales, was $219 million, up 20% year-over-year driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Rental sales activity benefited from an increase in RPO activity in Q2 versus the same period last year. Segment adjusted EBITDA of $117 million was up 26% year-over-year, with segment adjusted EBITDA margin of 53% up more than 700 basis points versus Q2 2025. Our key rental KPIs in SER remained quite strong in Q2, continuing the momentum we've experienced in recent quarters. In Q2, utilization averaged 81.6% up 400 basis points versus Q2 2025.

Average OEC on rent in the quarter was $1.37 billion, up almost $160 million or 13% versus the same period in 2025. On-rent yield in the second quarter was 39.4% reflecting both sequential and year-over-year increases for the quarter. On-rent yield remained within our targeted upper 30s to low 40s percent range, and we continued to see opportunities for rate improvement as transmission mix grows and pricing discipline holds. Our historically strong rental KPIs reflect both increased rental activity and the continued scaling of our fleet to meet demand. Net rental CapEx and Q2 was $36 million and our fleet age at quarter end was just over three years. A modest increase from the end of last quarter, which is consistent with our plan to reduce maintenance CapEx and age the fleet somewhat this year.

Our OEC in the rental fleet ended the quarter at almost $1.68 billion up approximately $120 million versus the end of Q2 2025 and by almost 24 million sequentially. The increase reflects disciplined fleet investment in the face of strong demand, particularly in T&D. While we expect to continue to invest in the fleet in 2026, our plan decrease in maintenance CapEx in 2026 compared to 2025 should contribute to increased free cash flow generation this year versus last year. In STEM, second quarter third party revenue was $345 million, a quarterly record in up 5% versus Q2 2025, which previously represented our highest non-fourth quarter revenue in our history. STEM segment adjusted EBITDA was $37 million and segment adjusted EBITDA margin was 8.5% in the quarter.

Recall that our 2025 segment adjusted EBITDA does not include any margin on inner segment sales while 2026 segment adjusted EBITDA does. STEM gross margins in the quarter were slightly lower as a result of increased sales to national accounts, which tend to carry modestly lower margins. Our new sales backlog ended Q2 at $322 million, down $89 million sequentially on record Q2 deliveries and at approximately three and a half months just below our targeted range of four to six months of new sales.

June quoting activity increased 26% year over year, supporting expected growth in our order intake in the second half. We've seen strong order growth so far in Q3 and our backlog currently stands at more than $340 million.

Turning to the balance sheet liquidity with LTM adjusted EBITDA more than $431 million and net debt of $1.66 billion. We finished Q2 with net leverage of 3.85 times. This represents a sequential quarterly improvement of 0.17 turns and more than a 0.8 turn improvement versus the end of Q2 2025. Availability under our ABL was $229 million as of June 30th. Based on our borrowing base, we have more than $240 million of additional availability that we can potentially access via our existing facility. Free cashflow generation and deleveraging remain key focus areas for us. The increase in our inventory during the first half was largely planned, reflecting chassis and whole goods positioning ahead of scheduled second half deliveries together with the chassis pre-buy actions Ryan discussed.

Even with that increase, we expect to reduce inventory and floor plan balances during the second half of 2026, which should support improved free cashflow generation. Through the first half of the year, leverage free cashflow improved by approximately $40 million versus the prior year period. With respect to our 2026 guidance, the demand environment across our key markets remains very strong. We expect the STEM segment to continue to benefit from an overall favorable macro demand environment, as well as our strong relationship with our key customers and chassis and attachment suppliers. Our order backlog supports this. In our SCR segment, what we see on rent and utilization reached historically high levels in the second half of fiscal 2025 and consistent with our year to date results, we expect those levels to continue building sequentially in the second half of 2026.

Demand for our equipment that serves the T&D utility markets continues at record levels, and we expect a vocational rental market to provide incremental growth as we further penetrate this expanding end market. Given our young fleet age, we continue to expect to be able to significantly reduce our overall investment in our rental fleet in 2026 versus 2025 while continuing to generate growth. The small increase in our fleet age to just over three years in the second quarter reflects us. However, giving demand trends in our T&D end markets, we plan to modestly increase our net investment in our rental fleet from our previous estimate, and now expect a range of $170 million to $200 million, which supports mid-single-digit net what we see growth this year.

This represents a meaningful reduction from over $250 million in net fleet CapEx in 2025. After prior year's investments in inventory, driven by the strong demand environment, we expect to continue making progress on further net working capital improvements in 2026 as we continue on our path of reducing inventory levels on hand or target level of below six months. As a result, we continue to expect to generate more than $50 million of lever free cash flow and reduce our net leverage ratio to meaning fleet below four times by year end 2026 while progressing towards our three times net leverage target in 2027. Our increased 2026 revenue guidance reflects consolidated revenue in the range of 2.1 to 2.2 billion dollars or year over year growth of 8% to 13%.

Given the strong environment in the T&D end markets and overall strength across both of our segments, we are also raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $437.5 to $455 million resulting in year-over-year growth of 14 to 19%. We still expect non-rental CapEx of $40 million to $50 million. We are increasing our segment guidance for 2026 as well. We are projecting of $1.63 to $1.7 billion with STEM third-party new sales revenue growth of 3 to 10%.

Overall STEM sales are expected to be down marginally to up 3% with the variance attributable solely to a year-over-year reduction in inner segment sales due to lower SCR maintenance rental CapEx spending this year. For the third quarter, we expect consolidated revenue in adjusted EBITDA to be up year-over-year, though modestly below second quarter levels. A portion of our second quarter new and used equipment deliveries, including RPO buyouts, had been planned for the second half.

That timing shifted results between quarters but did not reduce the full-year expectations reflected in the ranges we raised today. Our rental business enters the third quarter with OEC on rent and utilization above prior year levels. We expect both to grow sequentially with year-over-year growth rates naturally moderating from here as we lap a second half of 2025 that posted the largest increase in OEC on rent in our history. The fourth quarter remains our historically strongest quarter.

In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite broader macroeconomic uncertainty, recent results and end market fundamentals support our confidence in the long-term demand drivers and our ability to deliver meaningful adjusted EBITDA growth this year.

With that operator, we can open the line for questions.

I can repeat the question. She was asking, this is Chris, she was asking about the cadence Q2, Q3, first half, second half. And so I think the way I'd answer that's what is typically in Q2 and Q3, we have seen historically some push forwards and push out. So to quantify the net is a little more challenging. But maybe just to give you a little bit of color, what we're expecting in Q3, if you look back last year, we saw Q3 growth of roughly 20% EBITDA year over year. What we're expecting this year is we're expecting both revenue and EBITDA to grow kind of high signal digit percentage range while coming in below the second quarter levels that we mentioned really, which just reflects the delivery and IPO buyouts that's shifted into Q2 from the second half.

And then historically, we've given guidance of the split first half, second half, which has been anywhere 45 to 47% first half, and then 55 to kind of 57% in this second half of the year. This year, we think because of that pull forward in just the timing of last year's ramp up on OEC on rent in the second half of the year, that is likely to be more of a 48, 52% kind of split, is our seasonally strongest border and we'd expect that to continue to be the same this year.

It's a good question, Mike. We saw converted orders up kind of in that low single digits range and then orders or quotes were up in the double digit range. And so this is kind of a good leaning indicator for the backup.

Yeah. It's an interesting one to work through and it still feels like some of the regulation is still being finalized. But I think the non-performance penalties have been announced and we're estimating those are in kind of the $4,500 to $7,000 range depending on spec and obviously a few of the factors in there. And that's to continue running on the same engines that we're running on today. And so we've taken the position, Mike, as you know, that let's buy forward a little bit, just the economics of non-performance penalty to us, makes sense to carry more inventory heading into 2027. And then, obviously, the ferocity engine that is most impacted is the L9 engine, which is shifting to the X10 engine from Cummins.

And so we're watching that. We're watching that closely and Cummins is now saying we'll be in full production on the X10 later in Q3 of next year. So we're watching how that plays through, but yes, it's going to be a cost increase for our customers and we're obviously doing everything we can to mitigate that heading into 27.

Yep. We're working on all those markets. So those are areas where there's clearly opportunity to grow. And so we're not expecting any other openings this year. And so those would be in the years ahead. And that would be fairly consistent without getting into a couple of locations this year.

Thanks, Mike. Good to talk to you.

You know, in some of our prepared comments, we mentioned that infrastructure side of things would be more directly impacted by some of those federal spending dollars. We have yet to see that pick up in a meaningful way. And so I would expect it, you know, as those dollars are released, it's kind of a future benefit later this year, really in the next year, that we would begin to see some of those, some of those dollars really impact backlog and ultimately our revenue.

I think that low 80s is a good spot to live, right? You know, and I think a couple things are benefiting that, right? You mentioned the few days which I think is positive. And then certainly you're heading into a transmission cycle. Those projects are generally longer duration projects, you know, which should benefit utilization, you know, kind of where it is or even climbing into the into the fall, which is generally what happens in our business.

Good to talk to you.

Yeah, I'll let Chris start maybe on the seasonality, Justin, then I can give you some commentary on what's driving it.

Yeah, Justin, it's hard to quantify because there would have been pull forward and push out last year as well. And so I don't want to give a gross number when it really should be in that number. But, you know, it was tens of millions, I guess, between both new sales and new sales. But again, last year, there would have been a similar pull forward related to some of their chat, some of the pre-tariff to get ahead of the tariff pre-buy last year. And I'll let Ryan answer the second part.

Yeah, and then Justin, we've talked about this in the past certainly when, you know, several years ago when the business was performing well, but we see kind of that, some of that pre-buy is just a good indicator of the long-term demand. So some of that showed up and Chris mentioned some of those sides, some of that showed up our rental asset sales line. And that was customers who wanted to go ahead and have their equipment in term. And so, you know, we take that as a good indicator of future demands as well.

You know, sitting here today, that is still our target. You know, I think more importantly, we still feel comfortable. We'll be above the 50 million of levered pre-cash flow, you know, how that comes, you know, even a growth versus networking capital versus other, you know, potential cash flow triggers, you know, they're kind of moving parts. But I think we still, you know, feel like there's a path to get the numbers that you just quoted.

Ryan, I very much appreciate the transition demand super cycle phrase coined. I'd like to dig in a little bit there. Could you talk, maybe pick us a little bit deeper about what is driving in transmission, you know, what you're seeing there, how sustainable is it, why cleaning it, a super cycle, and then maybe some digging into just some other verticals that are very strong. Are you seeing a lot of data center and obviously transmission related and enabling a power tide to it, just a bit digging in more to the end markets. Thanks. Yeah, no, good to talk to Scott. And you're happy to do that. There's a couple of things I think that were really blazered.

And on one is obviously a lot of our customer, what our customers are saying to both our public company customers and kind of what they've reported even in this quarter and how they're talking about it. But maybe more importantly for us is what our kind of day-to-day conversations are with those customers. And so there's a lot of planning going on for new lines that are beginning, that are being prepared, that are being designed, and that the equipment is beginning to be staged. And so for us, that's really kind of that indicator of, hey, this is a long-term cycle, so it's projects that don't begin until 2027 and going into 2028 as well. And so I think that's where the tone of the conversation has changed meaningfully.

So we obviously that's what we're listening to most closely. A lot of kind of the industry aggregators of what's going on with line models, it completes and expected starts. Obviously it's strong and it's purging there as well. So I'd say that's kind of the fundamental thing, Scott, that really gives us comfort that this is the beginning, early innings, beginning of a very long cycle here, which generally is how transmission plays if you look back historically as well. So I'd say that's certainly where the strongest is. And then to ask about some of the other end markets distribution is still good. It does feel like maybe there are some IOU dollars shifting from distribution to transmission to meet the demand that we're seeing in the short term.

And then you're right, Scott, things like data centers are a they're a good tailwind. They're a good tailwind for us, but not fundamentally we're striving kind of the growth that we're seeing in the TNDM market.

I'll start and Chris can kind of give some historical perspective too. But look, Scott, two things are going on right now. There's obviously when there's strong demand, you know, where we obviously want to be competitive and price and take price kind of where we can. The other dynamic that we've talked about too is as transmission picks up, right? It's generally at a higher on rent yield than distribution. And so you're seeing a little bit of that impact in our business today as we talk about this transmission, super cycle of this period right that we're going into. So I think we talked about on the Q1 call, we took price up about 5%. And obviously the way that gets applied is it's not just a peanut butter spread.

But we took price up about 5% at the very end of last year, beginning of this year.

Chris, you want to add anything else? No, probably the only other thing I would add, you know, is we've talked about kind of wanting to live in that 15 to 18% range on new sales. You know, we're at the lower end of that range right now and largely that was driven in this quarter, really high volume with some mixed, larger customers and then some product mix. But we still feel comfortable that we can live in that range and get certainly towards the higher end of that range as demand continues to be strong in the next year.

I can start. You know, we've lived in that mid 70% kind of gross margin range, certainly on the rental side, which we think is a good spot. You know, we typically have said we want to be in the kind of low to mid 70s and we're at the higher end of that range. You know, I guess the way the answer is we think that's sustainable. You know, there could be some upside there, but we feel really comfortable kind of where we're living right now in that mid 70s percent range.

Thank you.

I will now turn the call back to CEO Ryan McMonagle for closing remarks. Thanks, everyone, for your time today and your interest in custom truck. We appreciate the continued engagement and look forward to updating you next quarter. In the meantime, please don't hesitate to reach out with any questions. Thank you again and have a great day. This concludes today's call. Thank you for attending. You may now disconnect.