Custom Truck One Source (NYSE:CTOS) reported second-quarter financial results on Tuesday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

Custom Truck One Source reported record revenue of $563 million and adjusted EBITDA of $117 million for Q2 2026, representing 10% and 25% growth year over year, respectively.

The Specialty Equipment Rentals (SER) segment showed strong performance with a 20% increase in third-party revenue year over year, driven by high demand in transmission and distribution markets.

The company increased its full-year 2026 guidance, projecting consolidated revenue between $2.1 to $2.2 billion and adjusted EBITDA between $437.5 to $455 million, citing robust demand and strong execution.

The Specialty Truck Equipment and Manufacturing (STEM) segment achieved a quarterly revenue record with a 5% year-over-year increase, despite a decrease in backlog due to record Q2 deliveries.

Management expressed confidence in navigating upcoming EPA emission regulations and reported strong order flow and healthy demand, particularly in the utility end market.

The company plans to continue investing in its rental fleet while reducing maintenance capex, aiming for increased free cash flow and a reduction in net leverage by the end of 2026.

Full Transcript

Brian, Investor Relations

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 Factors section of the Company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in 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 10-Q with the SEC. Today's discussion of our results of operations for Custom Truck One Source, or Custom Truck One Source, is presented on a historical basis as of or for the three months ended June 30, 2026 and prior periods. Also a reminder that beginning last quarter, our financial reporting now reflects our two new reportable segments, Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing, or STEM.

While our 2026 results in our earnings press release and SEC filing reflect the application of intersegment pricing and margins as per accounting requirements for intersegment sales, the segment results for 2025 reflect the intersegment sales with no margin as no intersegment agreement was in place in the period. For an illustrative comparison of what the 2025 results would have been had intersegment sales been reflected with the appropriate GR and had other internal accounting policies been in place at the time, please see the appendix of the Q2 investor presentation posted on our Investor Relations website.

Joining me today are Ryan McMonigle, CEO, and Chris Epergese, CFO. I will now turn the call over to Ryan.

Ryan McMonigle, CEO

Thanks, Brian, and good morning, everyone. We delivered record revenue in the second quarter, capping a strong first half driven by continued strong momentum in our core end markets and outstanding execution by our team. In the second quarter we generated revenue of $563 million and adjusted EBITDA of $117 million, up 10% and 25% year over year, respectively. Our Specialty Equipment Rentals 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-end 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 U.S. 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-fourth quarter 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 end market, especially focused on transmission equipment. In the infrastructure end market we have seen less growth, but our ongoing conversations with our customers and the pace of bidding and our order activity combine to provide us with the confidence to expect another year of growth in third-party customer revenue for STEM.

With respect to the EPA 2027 NOx emission regulations, the EPA introduced its proposed changes to the rules in early July, which maintain 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 CTOS is well positioned to navigate the impact of the upcoming emission standards changes.

Given our strong year-to-date performance, robust conditions in the T&D end 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 One Source 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.

Chris Epergese, CFO

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 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 GAAP 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 intersegment 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 continue 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 in 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 planned 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 and up 5% versus Q2 of 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 intersegment 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 and liquidity, with LTM adjusted EBITDA of 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 and, based on our borrowing base, we have more than $240 million of additional availability that we can potentially access via our existing facility. Free cash flow 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 cash flow generation. Through the first half of the year, levered free cash flow improved by approximately $40 million versus the prior-year period. With respect to our 2026 guidance, the demand environment across our key end 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 SER segment, OEC 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 the 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 this. However, given 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 OEC growth this year.

This represents a meaningful reduction from over $250 million in net fleet capex in 2025. After prior years' 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 to our target level of below six months. As a result, we continue to expect to generate more than $50 million of levered free cash flow and reduce our net leverage ratio to meaningfully below 4 times by year-end 2026 while progressing towards our 3 times net leverage target in 2027.

Our increased 2026 revenue guidance reflects consolidated revenue in the range of $2.1 to $2.2 billion, 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 SER revenue of $850 to $875 million and STEM revenue 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 intersegment sales due to lower SER maintenance rental capex spending this year. For the third quarter, we expect consolidated revenue and 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.

OPERATOR

We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question is from Sweta Rakhecha from Cantor Fitzgerald.

Your line is now open. Please go ahead.

Sweta Rakhecha, Analyst at Cantor Fitzgerald

Hi, good morning, Ryan and Chris. Here on behalf of Manish, congrats on the great quarter. My first question is on the quarterly cadence. Given that you've indicated that third-party new equipment sales and used equipment sales and RPO buyouts have shifted from the second half into 2Q, can you help us quantify the revenue and the adjusted EBITDA that is being pulled forward and clarify how much of it came from Q3 versus Q4?

OPERATOR

Hi there, Brian. Just making sure you are unmuted on your end. We are currently experiencing some technical difficulties. One moment while we deal with these difficulties. Thank you so much.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.