Custom Truck One Source (CTOS) Q1 2025: ERS Revenue Climbs 13% as Rental Demand Drives Fleet Expansion
ERS segment momentum and TES backlog expansion propelled Custom Truck’s Q1, with resilient utility and infrastructure demand supporting both rental and sales activity. Tariff and emission regulation risks remain contained near-term, while inventory build and leverage targets signal a back-half weighted cash flow story. Management’s reaffirmed guidance hinges on continued execution in both core segments as macro and regulatory crosscurrents intensify.
Summary
- Rental Fleet Investment Accelerates: Record OEC and rising utilization reflect robust utility end-market demand.
- TES Backlog Surges: Sequential order strength and $51 million backlog growth point to improved sales visibility.
- Leverage and Inventory Under Scrutiny: Net leverage remains elevated, with inventory reduction and cash flow delivery weighted to the second half.
Performance Analysis
Custom Truck One Source delivered a mixed but strategically constructive Q1, with consolidated revenue growth anchored by the Equipment Rental Solutions (ERS) segment’s 13% year-over-year increase. ERS benefited from surging rental demand among utility contractors, driving average OEC (original equipment cost, a measure of rental fleet value) on rent above $1.2 billion and utilization up 440 basis points to just under 78%. Rental asset sales also contributed, rising 26% YoY as customers opted to purchase used equipment. Adjusted gross margin in ERS remained stable at 60%, supporting segment profitability.
The Truck and Equipment Sales (TES) segment posted flat revenue compared to the prior year, but sequential sales acceleration in February and March, culminating in a record March, signaled improving momentum. TES backlog grew by $51 million, or 14%, ending the quarter at over $420 million—within the company’s targeted range of four to six months of sales coverage. Gross margin in TES dipped to 15.1%, pressured by product mix and industry-wide inventory normalization, but remained within management’s guided range.
- ERS Utilization and Fleet Size Expand: Both metrics hit new highs, with OEC at $1.55 billion and utilization near 78%.
- TES Orders and Backlog Build: Net orders up over 220% YoY, supporting revenue growth outlook for the remainder of 2025.
- Inventory and Leverage Creep Up: Tactical inventory build to mitigate tariff risk and support TES growth drove higher borrowings; net leverage ended Q1 at 4.8x.
Overall, the quarter’s results reinforce the durability of Custom Truck’s end-market demand, but execution on inventory unwinding and cash flow improvement will be critical in the coming quarters.
Executive Commentary
"Demand in our core T&D markets remained robust, leading to strong results in both our ERS and TES segments and overall year-over-year revenue growth for the quarter... Our ongoing engagement with customers, coupled with our steady business activity and strong order flow, reinforces our cautious optimism about achieving our expected growth targets in 2025."
Ryan McMoneagle, CEO
"We intend to use our levered free cash flow this year to reduce our net leverage and continue to target a level of below three times. This remains a primary and important goal for us and the one that we expect to achieve by the end of fiscal 2026."
Chris Epperjesse, CFO
Strategic Positioning
1. Rental-Led Model Anchors Resilience
ERS, Custom Truck’s rental segment, continues to act as a stabilizer in volatile macro conditions. Management’s willingness to expand the fleet amid robust utility and infrastructure demand underscores confidence in long-term secular tailwinds. High utilization and customer willingness to rent in lieu of purchasing provide a buffer against capital spending hesitancy, especially among smaller customers facing higher interest rates.
2. TES Orderbook and Sales Momentum
TES, the equipment sales business, showed sequential sales improvement and backlog growth, driven by both infrastructure demand and a rebound in customer ordering patterns. Backlog at over $420 million supports visibility, while management’s commentary suggests order conversion timing varies by product, with a rough three to four month average lag from order to revenue recognition.
3. Proactive Tariff and Inventory Management
Tariff mitigation strategies included inventory pull-forward and supplier negotiations, with the company leveraging vendor incentives and shifting sourcing where feasible. While this led to a temporary inventory build, management expects normalization in the second half. Exposure remains most acute in chassis sourced from Canada and Mexico, but the company’s diverse supply base and inventory position are expected to shield near-term production.
4. Leverage and Cash Flow as Key Watchpoints
Net leverage at 4.8x remains above long-term targets, with management reiterating its focus on deleveraging through free cash flow generation. Inventory reduction and improved working capital discipline are central to this plan, but the cadence is expected to be back-half weighted, making delivery in H2 a critical investor focus.
Key Considerations
This quarter highlighted both the resilience and the operational complexity of Custom Truck’s model, as the company balanced robust demand with macro and regulatory headwinds. Investors should monitor the following:
Key Considerations:
- Rental Demand Durability: Sustained utility and infrastructure activity is driving rental fleet expansion, but any slowdown could impact utilization and asset sales.
- TES Backlog Conversion: The pace at which backlog turns into revenue will determine whether sales momentum persists into the second half.
- Tariff and Regulatory Flexibility: Proactive sourcing and inventory strategies are mitigating near-term risk, but policy shifts or supply chain bottlenecks remain a wildcard.
- Leverage Reduction Trajectory: Achieving sub-four times leverage depends on timely inventory unwinding and cash flow execution, especially as capex remains elevated.
Risks
Custom Truck faces several material risks, including potential demand softening if utility or infrastructure spending slows, execution risk around inventory normalization, and uncertainty from evolving U.S. tariff and emission regulations. Elevated leverage restricts flexibility, and any delay in cash flow improvement could pressure balance sheet targets. Analyst questions highlighted the importance of TES order conversion timing and the need for visible progress on leverage reduction.
Forward Outlook
For Q2 and the full year 2025, Custom Truck reaffirmed guidance:
- Total revenue of $1.97 billion to $2.06 billion
- Adjusted EBITDA of $370 million to $390 million
- Net rental CapEx just under $200 million
- Free cash flow of $50 million to $100 million
Management expects ERS rental demand and TES backlog to support growth, with inventory reduction and leverage improvement weighted to the second half. Tariff and regulatory risk remain under close watch, but are not expected to disrupt operations in 2025.
Takeaways
Custom Truck’s Q1 results highlight a business capitalizing on secular demand trends in utility and infrastructure, but also wrestling with inventory and leverage management as macro uncertainty persists.
- ERS Strength: The rental segment’s utilization and fleet investment reinforce Custom Truck’s value proposition as a flexible equipment provider in a volatile market.
- TES Orderbook Critical: Backlog growth and order conversion will be the key swing factor for revenue and margin delivery in coming quarters.
- Second Half Execution: Inventory normalization, cash flow generation, and leverage progress are all back-end loaded, raising the stakes for H2 delivery.
Conclusion
Custom Truck enters the remainder of 2025 with strong demand signals and a robust rental platform, but faces a balancing act between capitalizing on growth and delivering on leverage and cash flow promises. Execution on inventory and order conversion will be pivotal for sustaining investor confidence.
Industry Read-Through
Custom Truck’s Q1 validates ongoing strength in utility and infrastructure end-markets, with rental models gaining share as customers seek flexibility amid macro and regulatory uncertainty. Tariff mitigation and inventory management are rising in importance across industrial distribution and specialty rental peers, signaling an industry-wide pivot toward supply chain agility. Leverage and working capital discipline will be increasingly scrutinized, especially for capital-intensive models as interest rates and policy risks remain elevated.