Custom Truck One Source, Inc. Q3 FY2026 earnings call

• Record Rental Performance: SER delivered record results driven by unprecedented demand in Transmission & Distribution (T&D) markets. Utilization averaged 81.5%, up 220 basis points year-over-year, with On-Equipment Capital (OEC) on rent averaging nearly $1.4 billion, up over 10%.
• Strategic Fleet Investment: Management raised the 2026 net rental fleet investment guidance to $210-$230 million to meet long-duration transmission project demand. This decision shifts capital allocation toward high-return specialty products, accepting a timing trade-off where earnings impact will be more significant in 2027 than 2026.
• STEM Operational Headwinds: STEM third-party revenue was negatively impacted by $20+ million in delayed deliveries caused by a chassis vendor recall and hailstorm damage at the Kansas City facility. These are viewed as temporary timing issues expected to resolve in Q4.
• Market Dynamics: The company describes the current T&D environment as a "once-in-a-generation" super cycle, supported by grid hardening, maintenance, and data center power consumption. Demand visibility extends into 2027 and 2028.
• Margin Expansion: Adjusted rental gross margins were nearly 79%, benefiting from high utilization, December price increases rolling through, and disciplined SG&A management. SER adjusted EBITDA margin reached 54.6%.
• Balance Sheet Health: Net leverage decreased to 3.7x, down sequentially from Q2. The company remains committed to achieving leverage below 3.0x by 2027.

SER (Specialty Equipment Rental): Revenue reached $223 million, an 18% year-over-year increase. This segment generated $153 million in rental revenue (up 20%) and $70 million in rental equipment sales (up 14%). SER contributed approximately 45% of consolidated revenue. Segment-adjusted EBITDA was $122 million, representing a 54.6% margin.

STEM (Sales, Training, and Maintenance): Total revenue was $442 million, up 8% year-over-year. However, third-party revenue (excluding intersegment sales to SER) was $283 million, down 5% due to strategic prioritization of fleet investment and timing delays from a chassis vendor recall and hailstorm damage. STEM contributed approximately 55% of consolidated revenue. Segment-adjusted EBITDA was $37 million with an 8.3% margin.

• Full-Year 2026 Consolidated Adjusted EBITDA: Raised for the third time this year to a range of $447.5 million to $460 million (previously lower), reflecting 17%-20% year-over-year growth.
• Full-Year 2026 SER Revenue: Raised to a range of $870 million to $890 million, driven by strong T&D demand.
• Full-Year 2026 Consolidated Revenue: Affirmed at $2.1 billion to $2.2 billion, representing 8%-13% year-over-year growth.
• Full-Year 2026 STEM Revenue: Affirmed at $1.63 billion to $1.7 billion. STEM third-party new sales revenue is expected to grow 3%-10%.
• Capital Expenditures: 2026 net rental fleet investment increased to $210-$230 million. Non-rental capex is projected at $40-$50 million.
• Free Cash Flow: Levered free cash flow for 2026 is now expected to be slightly positive, revised down from the previous expectation of >$50 million due to higher fleet investments.
• 2027 Outlook: Management expects double-digit adjusted EBITDA growth in 2027 and targets net leverage below 3.0x. Full 2027 guidance will be provided in Q4 results.

• Execution Risk on Fleet Investment: The aggressive increase in fleet spending ($210-$230M) relies on sustained high utilization and rental yields. If demand softens or projects are delayed, the return on incremental capital could be lower than expected, impacting near-term free cash flow.
• Regulatory Changes (EPA 2027): Upcoming NOx emission regulations pose potential supply chain and inventory risks. While management believes they are well-positioned via pre-buy actions, changes in rule finalization could disrupt chassis availability or increase costs.
• Operational Disruptions: Recent events such as the chassis vendor recall and severe weather (hailstorm) caused significant delivery delays and inventory damage, highlighting vulnerabilities in supply chain logistics and physical asset protection.
• Macroeconomic and Political Uncertainty: While current demand is strong, broader macroeconomic conditions, election outcomes, and potential policy shifts regarding infrastructure spending (e.g., transport bills, BEAD program) could alter customer confidence and project timelines.
• Interest Rate and Financing Costs: Although leverage is decreasing, continued reliance on debt financing for fleet expansion exposes the company to interest rate fluctuations, which could impact net income and free cash flow generation.

Q: Analyst asked if Q4 utilization would normalize to low-80s or stay above 84% given holiday seasonality, and whether demand drivers are primarily data centers or traditional grid hardening. / A: CEO stated utilization trends upward into late October/November. Unlike typical years, customers may retain gear post-holidays due to fear of unavailability. Demand is broad-based across grid modernization and data centers; while data centers consume power, CTAS benefits from the resulting grid upgrades rather than direct data center construction.