Custom Truck One Source (CTOS) Q1 2026: Rental Utilization Rises 370bps, Driving Margin Expansion
Custom Truck One Source’s first quarter delivered record revenue and EBITDA, propelled by sharp rental utilization gains and margin expansion in both core segments. Rental fleet investment discipline and robust order backlog signal continued cash flow improvement and support a confident full-year outlook. Management’s tone and segment-level execution suggest sustainable momentum, with sector tailwinds from infrastructure and utility demand.
Summary
- Rental Utilization Surge: Fleet utilization and yield improvements fueled margin gains and strong cash generation signals.
- Backlog and Productivity: Order backlog growth and cost control drove margin expansion in manufacturing.
- Outlook Anchored in Demand: Management’s guidance raise and commentary point to durable end-market strength.
Performance Analysis
CTOS posted record first-quarter revenue and a step-change in adjusted EBITDA, underpinned by broad-based demand across its two new reporting segments, Specialty Equipment Rentals (SER) and Specialty Truck Equipment and Manufacturing (STEM). SER, which now accounts for a significant portion of consolidated profitability, saw third-party revenue climb 16 percent year-over-year, with segment EBITDA margin jumping 415 basis points to 51.5 percent. This performance was driven by a combination of higher rental rates, a rental fleet utilization increase to 81.4 percent, and sustained growth in Original Equipment Cost (OEC) on rent.
STEM, the manufacturing and sales segment, delivered 5 percent revenue growth excluding intersegment sales, with parts and service revenue up nearly 17 percent. Margin improvement in STEM was notable, attributed to ongoing cost-out initiatives and production efficiency gains. The segment’s order backlog reached $411 million, up 23 percent sequentially, with continued strength into Q2. On the balance sheet, net leverage improved sequentially and year-over-year, while inventory remains elevated but is expected to decline, supporting free cash flow generation targets. Management’s capital discipline was evident in a planned reduction of maintenance capex and a deliberate aging of the fleet to below three years.
- Rental KPIs Drive Profitability: Utilization and OEC on rent both hit historic highs, supporting robust EBITDA conversion.
- Margin Expansion from Mix and Cost Control: Higher-yield transmission rentals and STEM productivity initiatives offset pricing pressures.
- Backlog and Order Flow Resilience: Backlog growth and healthy bidding activity support a constructive outlook for both segments.
Overall, Custom Truck’s Q1 results demonstrate a business model leveraging both scale and operational flexibility, with strong momentum in rental and manufacturing segments supporting a confident full-year trajectory.
Executive Commentary
"2026 is off to a great start as we delivered record first quarter revenue driven by continued strong momentum in our core end markets and excellent execution by our team. The key driver of our performance in the quarter was continued strength in our specialty equipment rentals segment, as the improvement we experienced throughout last year in the transmission and distribution markets continued into Q1."
Ryan McMoneagle, Chief Executive Officer
"Our first quarter 2026 results reflect stronger operating performance across the business and improved rental fundamentals, particularly in our T&D end markets. Segment adjusted EBITDA of $105 million was up 23% year over year, with segment adjusted EBITDA margin in Q1 of 51.5%, up more than 415 basis points versus Q1 2025."
Chris Epperjesse, Chief Financial Officer
Strategic Positioning
1. Rental Platform Scale and Mix Optimization
Custom Truck’s SER segment is leveraging fleet scale and targeted capex to maximize utilization and yield. The business is intentionally aging its young fleet to unlock cash flow, while maintaining a competitive edge with average fleet age under three years—well ahead of peers, according to management’s customer feedback. Rental pricing discipline and mix shift toward higher-yield transmission projects continue to drive margin expansion.
2. Manufacturing Backlog and Small Customer Penetration
STEM’s order backlog surged, with the majority of growth from local and regional customers, underscoring the segment’s diversified demand base and resilience against macro volatility. Productivity initiatives and cost control are translating backlog into higher gross margins, while order activity in utility and forestry remains strong.
3. Capital Allocation and Balance Sheet Deleveraging
Management is executing a capital-light strategy for 2026, reducing maintenance capex and targeting net rental fleet growth in the mid-single digits. This approach is expected to drive over $50 million in levered free cash flow and reduce net leverage below four times by year-end, progressing toward a three times target in 2027.
4. Navigating Regulatory and Supply Chain Complexity
The company is proactively managing supply chain risks and regulatory changes, including Section 232 tariffs and the EPA’s 2027 emission standards. Inventory positioning and strong OEM relationships are cited as key mitigants, with management confident in navigating potential bottlenecks.
Key Considerations
Custom Truck’s first quarter reflects a business benefiting from secular infrastructure and utility demand, but also one that is actively managing through industry volatility and regulatory headwinds. Execution on fleet discipline, backlog conversion, and cost management are central to the investment case.
Key Considerations:
- Rental Yield and Pricing Discipline: Recent 5 percent price increase is flowing through yields, with further upside as mix shifts to higher-yield projects.
- Backlog Strength and Customer Mix: Small customer order growth provides diversification, while utility and forestry drive backlog resilience.
- Inventory and Working Capital: Inventory remains above target, but management expects a reduction below six months by year-end, unlocking working capital.
- Regulatory and Supply Chain Readiness: Proactive positioning for EPA 2027 and tariff impacts limits near-term disruption risk.
Risks
Risks center on macroeconomic volatility, regulatory developments, and supply chain bottlenecks, particularly in chassis and transmission equipment. While management is confident about demand durability and supply chain readiness, any material disruption or cost inflation could pressure margins or delay backlog conversion. Conservative guidance reflects awareness of tough Q2 comps and ongoing sector uncertainties.
Forward Outlook
For Q2 2026, Custom Truck expects:
- Continued high rental utilization and OEC on rent, though facing a tougher comp due to last year’s record new equipment sales.
- Year-over-year adjusted EBITDA growth, with margin expansion driven by rental mix and productivity gains.
For full-year 2026, management affirmed guidance:
- Revenue of $2.005 billion to $2.12 billion
- Adjusted EBITDA raised to $415 million to $440 million
Management highlighted several factors that support the outlook:
- Strong T&D and vocational rental demand
- Progress on inventory reduction and working capital unlock
Takeaways
Custom Truck’s Q1 results underscore a business with strong operational momentum, effective cost management, and a constructive demand environment.
- Rental-Driven Margin Expansion: Utilization and yield gains are translating into higher profitability and cash flow.
- Order Backlog and Segment Diversification: Robust backlog and small customer growth position STEM for sustained performance.
- Watch for Fleet Age and Capex Discipline: Management’s approach to aging the fleet and reducing maintenance capex is a key lever for free cash flow in 2026.
Conclusion
CTOS enters the remainder of 2026 with record rental metrics, a robust backlog, and clear levers for margin and cash flow improvement. Execution on fleet and inventory discipline, combined with end-market tailwinds, positions the company for sustained outperformance—though vigilance is warranted around regulatory and supply chain risks.
Industry Read-Through
CTOS’s results reinforce the strength and durability of infrastructure and utility end-market demand for specialty rental and manufacturing peers. Record utilization and backlog growth signal sector-wide tailwinds, especially for companies exposed to transmission and distribution (T&D) projects. Management’s focus on fleet age, inventory reduction, and productivity will likely be echoed across the industry as companies seek to balance growth with free cash flow and regulatory readiness ahead of EPA 2027.