Custom Truck One Source (CTOS) Q2 2025: ERS Utilization Rises 600bps, Unlocking Rental Margin Leverage
ERS fleet utilization surged nearly 600 basis points year over year, propelling strong rental revenue and margin leverage. Custom Truck One Source’s Q2 results showcased robust end-market demand, disciplined fleet investment, and resilience to tariff headwinds. Management reaffirmed full-year guidance as backlog normalization and strong order flow signal durable growth into the second half.
Summary
- Rental Demand Outpaces Supply: Fleet utilization and on-rent asset levels both set new highs, supporting ongoing capex deployment.
- Backlog Normalization Amid Record Sales: TES backlog fell, but order flow and local customer momentum offset headline softness.
- Tariff and Regulatory Risks Contained: Proactive inventory management and legislative clarity limit cost exposure this year.
Performance Analysis
Custom Truck One Source delivered a standout quarter, with revenue up 21 percent and adjusted EBITDA rising 17 percent year over year. The Equipment Rental Solutions (ERS) segment, which serves utility contractors and infrastructure end markets, saw average utilization climb to just under 78 percent, up nearly 600 basis points from last year and above Q1 levels. ERS on-rent original equipment cost (OEC, the total value of rental fleet deployed) exceeded $1.2 billion, reflecting a 16 percent year-over-year increase and driving both rental revenue and rental asset sales sharply higher.
In the Truck and Equipment Sales (TES) segment, sales reached $303 million, up more than 22 percent year over year and over 30 percent sequentially. TES achieved two consecutive months of $100 million-plus sales for the first time in company history, although backlog declined due to the strong sales pace. Notably, signed orders from local and regional customers rose 45 percent year over year, helping sustain robust order activity despite backlog normalization. Gross margin in TES improved sequentially, and management anticipates further margin expansion in the second half.
- ERS Utilization Surge: Fleet utilization approached 78 percent, up almost 600 basis points, underscoring end-market strength.
- TES Sales Milestones: Back-to-back $100 million months and 22 percent sales growth, with backlog now tracking historical norms.
- Leverage and Cash Flow Focus: Net leverage improved to 4.66 times, with management targeting sub-3.0x by end of 2026 through free cash flow deployment.
APS (Aftermarket Parts & Service) contributed steady growth, with revenue up 3 percent and gross margin expanding to 26 percent. Across all segments, execution on fleet investment and inventory positioning supported both current results and future flexibility.
Executive Commentary
"Demand in our core T&D markets remained robust, leading to strong results in both our ERS and TES segments and overall sequential and year over year revenue growth for the quarter. ... The strong rental demand in the utility end market and across our other primary end markets resulted in average OEC on rent for Q2 of over $1.2 billion, a 16% year over year increase. Average utilization in the quarter was just under 78%, up almost 600 basis points versus Q2 of last year and up sequentially as well."
Ryan McMonigal, CEO
"As of today, OECN rent is up more than $160 million or more than 15% versus a year ago. ... We intend to use our leveraged 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 one that we expect to achieve by the end of fiscal 2026."
Chris Eppert, CFO
Strategic Positioning
1. Rental Fleet Investment and Utilization Discipline
Custom Truck continues to expand its rental fleet, ending Q2 with a record $1.56 billion in OEC. Management is targeting mid-single digit OEC growth for the remainder of the year, balancing capex with dynamic customer demand. Utilization rates in the mid 70s to mid 80s across most of the fleet demonstrate strong asset efficiency, while selective investment supports both near-term and future growth.
2. TES Backlog Management and Order Flow Dynamics
TES backlog declined by $85 million in Q2, reflecting accelerated sales but not a demand shortfall. Management emphasized that order flow—especially from local and regional customers—remains robust, with signed orders up nearly 35 percent year over year. Backlog now sits at four months of trailing TES sales, within historical norms, and is expected to grow again in Q3 as order activity remains strong.
3. Navigating Tariff and Regulatory Volatility
Tariff exposure is minimal for 2025, thanks to proactive inventory purchases and vendor management. Management expects any cost impact to be limited to the second half and manageable into 2026. Recent legislative clarity—such as the revocation of California’s CARB emissions waivers—has reduced regulatory uncertainty, with no anticipated pre-buy activity or margin disruption in TES from emissions standards changes.
4. Leverage Reduction and Free Cash Flow Allocation
Reducing net leverage remains a top priority. Despite front-loaded inventory purchases, management expects to generate over $50 million in leverage free cash flow this year, targeting net leverage below 3.0x by end of 2026. Inventory reduction initiatives and disciplined capex will be key levers, with the ABL (asset-based lending facility) providing ample liquidity for operational flexibility.
Key Considerations
Q2 results highlight Custom Truck’s ability to capitalize on secular infrastructure demand while navigating macro and policy volatility. The company’s end-market exposure, customer diversity, and operational discipline underpin its growth trajectory, but investors must watch for shifts in order flow and regulatory environment as potential inflection points.
Key Considerations:
- Secular Tailwinds Drive Resilience: Utility and infrastructure spending continues to underpin demand across core segments.
- Order Flow vs. Backlog Dynamics: TES backlog normalization is offset by strong local/regional order wins and record sales cadence.
- Tariff and Regulatory Mitigation: Proactive inventory and legislative clarity limit near-term margin risk, but 2026 remains a watchpoint.
- Leverage Trajectory and Capital Allocation: Free cash flow deployment toward net leverage reduction is central to the investment case.
- Margin Normalization in TES: Sequential improvement sets the stage for second-half expansion, but mix and pricing must be monitored.
Risks
Key risks include potential softening in utility or infrastructure demand, especially if macro conditions deteriorate or project delays emerge. Tariff escalation or regulatory shifts—particularly regarding emissions standards—could impact cost structure or demand patterns in 2026 and beyond. Elevated leverage, while improving, leaves less room for error if cash flow underperforms or working capital unwinds more slowly than planned.
Forward Outlook
For Q3 2025, Custom Truck expects:
- ERS and TES segment KPIs to remain at or above Q2 average levels
- Continued strong order flow and backlog growth in TES
For full-year 2025, management reaffirmed guidance:
- Total revenue of $1.97 billion to $2.06 billion
- Adjusted EBITDA of $370 million to $390 million
- Net rental capex of approximately $200 million
Management cited robust end-market fundamentals and record intra-quarter order flow as reasons for confidence in achieving double-digit adjusted EBITDA growth. Key drivers for the remainder of the year include:
- Maintaining high utilization and asset efficiency in ERS
- Margin expansion in TES as mix and pricing normalize
Takeaways
Custom Truck’s Q2 underscores the power of fleet utilization discipline, end-market resilience, and proactive risk management.
- Utilization and Order Flow Anchor Growth: Record ERS utilization and robust TES order wins signal durable demand and margin leverage.
- Proactive Risk Mitigation: Inventory and vendor management have contained tariff and regulatory headwinds, supporting margin stability.
- Leverage Reduction Remains Critical: Execution on free cash flow and inventory unwind will be key to achieving sub-3.0x leverage by 2026.
Conclusion
Custom Truck One Source delivered a quarter marked by operational execution, demand resilience, and strategic fleet investment. With backlog normalization offset by strong order flow and proactive risk management, the company remains well-positioned to capitalize on infrastructure tailwinds while steadily reducing leverage and supporting margin expansion.
Industry Read-Through
CTOS’s results reaffirm secular demand for utility and infrastructure equipment, with fleet utilization and order flow serving as leading indicators for the rental and vocational vehicle sectors. Backlog normalization across the industry may not signal softening demand if order flow and local customer activity remain robust. Proactive inventory and regulatory risk management are emerging as must-haves for equipment rental and distribution peers, especially as tariff and emissions policy volatility persists into 2026. Margin discipline and capital allocation toward leverage reduction will likely be central themes for the sector as growth opportunities continue but macro risks linger.