Custom Truck One Source (CTOS) Q4 2024: Rental Utilization Climbs to 79%, Driving Recovery Momentum Into 2025
Custom Truck One Source demonstrated a strong operational rebound in Q4 2024, with rental fleet utilization nearing 79% and sequential revenue growth across key segments. The company’s strategic focus on rental fleet expansion and inventory reduction sets a foundation for mid-single-digit rental fleet growth and double-digit adjusted EBITDA growth in 2025. Sustained demand in utility infrastructure and vocational markets underpins a confident outlook despite lingering macroeconomic headwinds.
Summary
- Rental Demand Recovery: Sequential improvements in rental utilization and equipment on rent signal normalization in utility and infrastructure markets.
- Inventory and Capital Discipline: Significant inventory reduction and sale-leaseback transaction enhance liquidity and deleverage balance sheet.
- Growth Outlook Anchored in Market Tailwinds: Strong order intake and backlog support projected mid-single-digit rental fleet growth and adjusted EBITDA expansion in 2025.
Business Overview
Custom Truck One Source (CTOS) is a leading provider of specialty equipment, parts, tools, and services primarily serving electric utility transmission and distribution, telecommunications, rail, and other infrastructure markets across North America. The company operates through three segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS), generating revenue via rental fees, equipment sales, and service parts sales.
Performance Analysis
In Q4 2024, CTOS reported total revenue of $520.7 million, flat year-over-year but up 16.4% sequentially from Q3. Rental revenue increased 4.3% year-over-year to $125.5 million, driven by stronger transmission and distribution (T&D) activity. Equipment sales declined slightly by 2.1% year-over-year but surged 18% sequentially, with TES segment achieving record quarterly revenue above $300 million and surpassing $1 billion in annual sales for the first time.
Adjusted EBITDA rose 27.2% sequentially to $102 million, reflecting operational leverage from increased rental utilization and improved rental asset sales. The ERS segment saw a 15% sequential rise in rental revenue and a 13% increase in rental asset sales, while average original equipment cost (OEC) on rent climbed 11.9% sequentially to over $1.2 billion. Fleet utilization improved by 7.8 percentage points sequentially to just under 79%, the highest since Q3 2023, signaling a sustained recovery in rental demand.
- Sequential Rental Utilization Growth: Utilization improvement to nearly 79% reflects normalization in utility and vocational equipment demand.
- Inventory Reduction Impact: Inventory declined by over $150 million in Q4, aiding working capital management and supporting free cash flow generation.
- TES Backlog Normalization: TES backlog decreased 46% year-over-year to $369 million, aligning with historical norms, while net orders increased 35% year-over-year.
Despite a full-year net loss of $28.7 million, the quarterly net income of $27.6 million was bolstered by a $23.5 million gain from a sale-leaseback transaction on eight properties, which also contributed to debt reduction. Adjusted EBITDA for the full year declined 20.4% from 2023, reflecting the challenging first half of 2024, but the Q4 results demonstrate a clear operational turnaround heading into 2025.
Executive Commentary
"Our Q4 results show that the recovery that we experienced in our T&D markets in Q3 continued through the end of the year. Average OEC on rent for Q4 was over $1.2 billion, a 12% sequential increase, and average utilization was just under 79%, a 570 basis point sequential improvement. We believe these trends position us well for growth in 2025."
Ryan McDonigal, Chief Executive Officer
"Adjusted EBITDA was $102 million in Q4, up 27% sequentially. Our inventory reduction of more than $150 million and sale-leaseback proceeds allowed us to reduce borrowings and improve liquidity. We expect to grow our rental fleet by mid-single digits in 2025 and target adjusted EBITDA between $370 and $390 million."
Chris Epperjesse, Chief Financial Officer
Strategic Positioning
1. Strengthening Rental Fleet and Utilization
CTOS’s rental fleet, with an original equipment cost of $1.52 billion and an average age of 3.2 years, is positioned to capitalize on improving demand. Sequential increases in average OEC on rent and utilization underscore a recovering rental market, particularly in the utility and vocational segments. The company plans to invest selectively in fleet expansion during 2025, targeting mid-single-digit growth in net rental fleet OEC.
2. TES Segment Growth and Backlog Normalization
The TES segment achieved record quarterly and annual revenue, surpassing $1 billion in 2024. While backlog declined 46% year-over-year to approximately $369 million, this aligns with CTOS’s historical four-to-six-month backlog target. Strong net orders, up 35% year-over-year and continuing in 2025, indicate robust demand, particularly from forestry and utility customers. This positions TES for sustained revenue growth despite the backlog moderation.
3. Inventory Management and Working Capital Optimization
CTOS made significant progress reducing inventory by over $150 million in Q4, a critical step to unwinding prior strategic inventory buildup and improving cash flow. This reduction supports lower floor plan liabilities and borrowings under the asset-based lending facility. The company expects continued inventory normalization in 2025, enhancing liquidity and enabling deleveraging efforts.
4. Financial Discipline and Debt Reduction Initiatives
The sale-leaseback transaction generated net proceeds of approximately $52.5 million, used to repay debt and reduce borrowings under the senior secured credit facility. This move unlocks real estate value while retaining operational use through leasing. CTOS targets reducing net leverage ratio below four times by year-end 2025 and below three times by 2026, supported by expected free cash flow generation of $50 to $100 million.
5. Navigating Tariffs and Regulatory Environment
With 30% of purchases sourced from Mexico and Canada, CTOS is actively working with suppliers to mitigate tariff impacts and manage chassis emission regulations from CARB and EPA. The company has underwritten modest cost increases but expects to largely offset tariff-related pressures through supplier collaboration and operational adjustments.
Key Considerations
CTOS’s Q4 results reflect an operational rebound anchored by improving rental fleet utilization and strong TES demand, but several factors warrant attention:
- Seasonal Demand Patterns: The company expects a typical 45-55% revenue split between first and second half of 2025, with Q1 potentially softer before gradual improvement.
- Rental Yield Stability: Rental yield is anticipated to hold or slightly improve in 2025, supported by selective pricing actions and sustained demand.
- Order Intake Monitoring: While backlog has normalized, rising net orders provide confidence in TES revenue growth, though the company remains cautious on macroeconomic uncertainties.
- Capital Expenditure Flexibility: CTOS plans net rental capital expenditures just under $200 million in 2025, with adjustments based on rental demand and used equipment sales.
- Leverage Reduction Path: Progress on inventory and free cash flow generation is critical to achieving leverage targets and financial flexibility.
Risks
CTOS faces risks from macroeconomic headwinds including high interest rates impacting customer purchasing decisions, potential tariff escalations affecting supply chain costs, and regulatory changes in emissions standards. Additionally, fluctuations in utility infrastructure spending and seasonal demand variability could affect rental utilization and sales. The company’s ability to execute inventory reduction and debt deleveraging initiatives will be key to managing financial risk.
Forward Outlook
For Q1 2025, CTOS expects a modest sequential rebound in rental utilization and equipment on rent, with revenue growth tempered by seasonal softness. Full-year 2025 guidance includes:
- Total revenue between $1.97 billion and $2.06 billion
- Adjusted EBITDA from $370 million to $390 million
Segment revenue outlook for 2025 is:
- ERS: $660 million to $690 million
- TES: $1.16 billion to $1.21 billion
- APS: $150 million to $160 million
The company anticipates mid-single-digit growth in rental fleet OEC and plans to generate $50 million to $100 million in levered free cash flow to support leverage reduction efforts.
Takeaways
CTOS’s Q4 2024 earnings reveal a business transitioning from a challenging first half to a recovery phase, driven by improving rental utilization and strong TES demand. Key takeaways include:
- Rental Recovery Momentum: Sequential increases in rental utilization and OEC on rent validate the return of utility and vocational equipment demand, setting a foundation for growth in 2025.
- Inventory and Balance Sheet Management: Significant inventory reduction and a strategic sale-leaseback transaction enhance liquidity and support the company’s deleveraging path.
- TES Growth Despite Backlog Normalization: Robust net orders and backlog aligned with historical norms support TES revenue growth, mitigating concerns over backlog decline.
Conclusion
Custom Truck One Source’s Q4 results demonstrate operational resilience and strategic execution amid a complex market environment. Sequential improvements in rental metrics and TES performance, coupled with disciplined inventory and financial management, position the company for a return to growth and margin expansion in 2025. Investors should monitor rental utilization trends, TES order flow, and leverage reduction progress as key indicators of sustained momentum.
Industry Read-Through
CTOS’s recovery in rental utilization and normalized TES backlog reflect broader trends in the specialty equipment and infrastructure sectors, where utility grid upgrades, electrification, and data center expansion drive demand. The company’s inventory management and balance sheet initiatives underscore the importance of working capital discipline in capital-intensive industries facing supply chain and macroeconomic uncertainties. Other industry participants may similarly benefit from focusing on rental fleet optimization and supply chain resilience to navigate evolving market dynamics.