Custom Truck One Source (CTOS) Q3 2025: OEC on Rent Up 17%, Fueling 2026 Growth Visibility
Custom Truck One Source extended its rental fleet momentum in Q3, with OEC on rent surging 17% and utilization topping 79%, signaling robust demand across utility transmission and distribution end markets. Management’s decision to accelerate fleet CapEx and maintain a younger fleet profile underscores confidence in sustained sector tailwinds into 2026. Investors should watch for the interplay between elevated CapEx, inventory reduction cadence, and the durability of secular growth drivers as the company navigates a dynamic macro and competitive landscape.
Summary
- Transmission and Distribution Tailwinds: Accelerated rental fleet investment reflects conviction in multi-year utility sector demand.
- Rental Utilization at Multi-Year Highs: Fleet utilization exceeded 79%, supporting pricing and margin strength.
- 2026 Positioned for Growth: Order flow, backlog, and OEC on rent signal continued expansion into next year.
Performance Analysis
CTOS delivered 8% revenue growth and 20% adjusted EBITDA growth year-over-year, driven by sustained rental demand and solid execution in both Equipment Rental Solutions (ERS) and Truck and Equipment Sales (TES) segments. The ERS segment, which serves utility contractors and infrastructure customers, saw revenue climb over 12% with rental revenue up 18%, underpinned by a 17% rise in average original equipment cost (OEC) on rent and utilization reaching its highest level in more than two years. Adjusted gross margin for ERS expanded to 62%, supported by a favorable mix and improved rental yields.
TES sales grew 6% year-over-year, with order flow from local and regional customers surging over 40%. Although TES gross margins dipped amid elevated market supply, they remained within the expected range of 15% to 18%. The APS (Aftermarket Parts & Service) division posted modest revenue growth and margin improvement, reinforcing the multi-segment strength. Net rental CapEx was elevated at $79 million in Q3, reflecting proactive investment to capture ongoing demand, while inventory reduction efforts contributed to improved liquidity and reduced floor plan balances.
- Rental Mix Drives Margin Expansion: Rental revenue mix and higher rental margins pushed ERS gross margin up 370 basis points.
- Inventory Reduction Progress: Inventory fell nearly $54 million, with further reductions targeted by year-end to support cash flow.
- Liquidity and Leverage Management: Substantial liquidity ($238 million available) and sequential net leverage improvement to 4.53x, with a path toward sub-3x by end of 2026.
Despite macro headwinds and selective customer hesitancy, Custom Truck’s diversified segment performance and capital allocation discipline provide a foundation for continued growth and margin resilience.
Executive Commentary
"Our steady business activity and strong intra-quarter order flow continue to reinforce our optimism about achieving our expected growth targets in 2025. As a result, we are reaffirming our previous fiscal 2025 revenue and adjusted EBITDA guidance."
Ryan McMoneagle, Chief Executive Officer
"We expect to continue to invest in the fleet in the fourth quarter, resulting in high single-digit percentage OEC growth versus the end of 2024, which is higher than previously expected."
Chris Effergesi, Chief Financial Officer
Strategic Positioning
1. Utility Sector Megatrends Anchor Growth
CTOS is directly exposed to secular growth in U.S. electricity transmission and distribution (T&D), with industry projections for nearly $600 billion of T&D capex from 2025 to 2029. Transmission spending is expected to grow at more than 15% annually, creating a powerful demand environment for specialized rental equipment. Management’s focus on T&D rental fleet investment positions CTOS to capture this wave of infrastructure modernization.
2. Fleet Age and Utilization as Competitive Levers
By maintaining a fleet age below three years, CTOS delivers higher reliability and utilization, supporting rental yields and customer retention. The company’s willingness to allow the fleet to age back toward four years over time provides flexibility to moderate CapEx and generate cash flow, especially as near-term demand is harvested.
3. Order Flow and Backlog Dynamics
TES segment order flow from regional customers surged over 40% year-over-year, and overall order growth exceeded 30%, even as backlog fluctuated due to faster equipment availability. The company’s real-time order monitoring and diversified customer base reduce reliance on long-dated backlog, enabling agility in production and sales planning.
4. Capital Allocation Balances Growth and Deleveraging
Elevated CapEx in both rental and non-rental categories reflects management’s conviction in end-market demand, but also delays the return to meaningful free cash flow. Inventory reduction remains a key lever for improving liquidity and reducing leverage, with targets for $125 million to $150 million reduction by year-end and further improvements into 2026.
5. Margin Management Amid Industry Cyclicality
TES gross margin compression was managed within expectations, while ERS margin expansion was achieved through mix and pricing discipline. The ability to flex pricing in response to utilization and market conditions will be critical as competitive intensity and customer caution ebb and flow with macro uncertainty.
Key Considerations
CTOS’s Q3 results and commentary highlight a business at the intersection of secular utility investment and cyclical equipment markets, requiring dynamic capital allocation and operational agility.
Key Considerations:
- Secular Utility Demand: Multi-year T&D capex surge underpins sustained equipment rental and sales growth.
- CapEx Versus Cash Flow Tradeoff: Accelerated investment supports growth but delays near-term free cash flow realization.
- Inventory Management as a Cash Lever: Inventory reduction is key to improving liquidity and supporting deleveraging targets.
- Order Flow Visibility: Real-time monitoring of intra-quarter orders provides early signals for demand inflection points.
- End-Market Diversification: While utility and forestry are robust, infrastructure and certain vocational categories show softer demand, requiring ongoing portfolio balance.
Risks
Macro uncertainty, persistent high interest rates, and inflationary pressures could dampen customer equipment purchases, especially in non-utility sectors. Elevated CapEx and delayed free cash flow generation heighten sensitivity to any demand slowdown or project delays. Competitive fleet aging and pricing pressure, along with tariff-related cost impacts, remain ongoing watchpoints. Customer hesitancy tied to economic conditions and potential project pauses (as seen with specific transmission projects) could create quarter-to-quarter volatility.
Forward Outlook
For Q4 2025, Custom Truck guided to:
- Continued high single-digit OEC growth in rental fleet
- Strong TES order flow, with Q4 historically the highest sales quarter
For full-year 2025, management reaffirmed guidance:
- Total revenue: $1.97 to $2.06 billion
- Adjusted EBITDA: $370 to $390 million
Management highlighted several factors that will shape results:
- Benefit from accelerated depreciation provisions in federal spending and tax legislation
- TES expected to finish at the low end of guidance, ERS at the upper end
Takeaways
Custom Truck’s Q3 performance validates its positioning as a beneficiary of long-term utility infrastructure investment, with rental fleet utilization and OEC growth driving near-term results and 2026 visibility.
- Rental Fleet Investment Yields Results: OEC on rent and utilization gains support sustained margin and revenue growth, reinforcing the strategic rationale for elevated CapEx.
- Order Flow Outpaces Backlog Volatility: Real-time order growth and diversified customer mix offset the impact of lower backlog, keeping TES sales momentum intact.
- 2026 Visibility Hinges on Utility Cycle: Investors should monitor the durability of T&D demand and the company’s ability to balance fleet age, CapEx, and cash flow as the cycle matures.
Conclusion
CTOS enters the final quarter of 2025 with strong operational metrics, robust demand signals, and a clear strategy to capitalize on utility sector megatrends. The balance between growth investment and cash flow discipline will define the company’s risk-reward profile as it navigates evolving macro and industry dynamics.
Industry Read-Through
CTOS’s results reinforce the powerful secular tailwind in U.S. T&D infrastructure, with utility capex cycles driving sustained demand for specialized rental equipment and vocational vehicles. Peers in rental, equipment manufacturing, and utility supply chains should anticipate continued pricing power and utilization gains, but must also manage capital allocation and inventory risk as the cycle matures. Companies exposed to non-utility infrastructure should be alert to softer demand and pricing headwinds, while those with exposure to data center and renewable energy projects may benefit from incremental equipment demand as grid buildout accelerates.