Custom Truck One Source (CTOS) Q4 2025: Rental Utilization Hits 84% as Backlog Climbs 20%
Custom Truck One Source capped 2025 with record rental utilization and a sharply higher sales backlog, signaling durable demand in core infrastructure markets. Management’s 2026 guidance and segment realignment underscore confidence in continued growth and improved capital efficiency. Investors should watch fleet aging, backlog conversion, and pricing discipline as the company pivots to a two-segment structure and targets free cash flow acceleration.
Summary
- Rental Utilization Peaks: Fleet utilization reached a multi-year high, reflecting strong T&D market demand.
- Backlog and Orders Accelerate: TES sales backlog and net orders both rose double digits, supporting growth visibility.
- Capital Efficiency Focus: Lower capex and inventory targets position CTOS for improved free cash flow in 2026.
Performance Analysis
Custom Truck One Source delivered record revenue and adjusted EBITDA for both Q4 and the full year 2025, driven by exceptional performance in its rental business and improved operational discipline. The rental segment, anchored by transmission and distribution (T&D) market demand, saw utilization average just under 84% in Q4, a level not seen in nearly three years. Average original equipment cost (OEC) on rent climbed 14% year-over-year, reflecting both strong customer demand and the company’s strategic fleet investments.
While the TES (equipment sales) segment experienced a year-over-year revenue decline in Q4 due to customer purchase timing and deferred deliveries, full-year TES revenue still set a record. Gross margins improved sequentially in both rental and sales, with pricing pressure in TES easing as inventory levels normalized. Management highlighted a $100 million reduction in inventory, contributing to lower working capital needs, and a quarter-turn improvement in net leverage. Segment realignment and targeted capex cuts are expected to further support free cash flow in 2026.
- Rental Metrics Surge: Utilization and on-rent yield both expanded, with Q4 utilization up 470 basis points YoY.
- TES Backlog Grows: Sales order backlog rose 20% sequentially to $335 million, now at $370 million early in 2026.
- SG&A Discipline: Overhead costs declined in Q4, with management signaling only modest growth ahead.
Overall, CTOS enters 2026 with strong momentum in core end markets, a younger fleet, and a clear plan to boost capital efficiency as it transitions to a new segment structure.
Executive Commentary
"We delivered a strong finish to 2025 with record quarterly revenue driven by continued momentum in our core end markets and strong execution by our team."
Ryan McMonigle, Chief Executive Officer
"We finished the year with net leverage of 4.3 times. This represents an improvement of almost a quarter turn from the end of 2024 and a half turn from quarter end high of 4.8 times at the end of Q1 2025... We expect to generate more than 50 million dollars of leverage free cash flow and reduce our net leverage ratio to meaningfully below four times by the end of fiscal 2026."
Chris Deferge, Chief Financial Officer
Strategic Positioning
1. Rental Business Resilience
CTOS’s rental business, focused on specialty equipment for T&D and infrastructure, is the company’s earnings engine. Fleet utilization hit a cycle peak, and management expects sustained high-70s to low-80s utilization as normal, supported by a de-aged fleet (average 2.9 years). Pricing discipline and rate improvement opportunities remain, with on-rent yield in the upper 30s to low 40s percent range.
2. TES Segment Growth and Backlog Visibility
The TES segment, Custom Truck’s equipment sales business, ended the year with its highest annual revenue ever and a growing backlog. Net order growth of 21% in Q4 and a 20% sequential backlog increase to $370 million early in 2026 provide forward visibility. Management cited strong local and regional customer activity and expects continued growth, aided by a new HIAP partnership (truck-mounted cranes and forklifts) and expanded aftermarket service initiatives.
3. Capital Allocation and Efficiency
2026 strategy emphasizes capital efficiency: net rental capex will drop to $150-170 million (from $250 million in 2025), inventory is targeted below six months on hand, and free cash flow is set to inflect positively. The company will allow some natural fleet aging, with no expected negative impact on margin or utilization, leveraging the fleet’s current youth.
4. Segment Realignment for Transparency
CTOS will shift from three to two reporting segments in Q1 2026—Specialty Equipment Rentals (SER) and Specialty Truck Equipment and Manufacturing (STEM)—to better reflect business economics and align with capital allocation. This move is designed to enhance investor clarity and comparability with peers, with no associated restructuring costs.
5. Margin Management and Pricing Power
Gross margin in TES improved sequentially as pricing pressure eased, and ERS rental margins hit multi-year highs (78% in Q4). Management expects to maintain TES margins within a 15-18% range and ERS rental margins in the mid-70s percent range, with upside if utilization and pricing trends persist.
Key Considerations
CTOS’s quarter was defined by sustained rental demand, backlog growth, and a disciplined approach to capital deployment and reporting transparency. As the company pivots to a two-segment structure, investors should focus on the following:
Key Considerations:
- Rental Demand Durability: T&D and vocational markets remain robust, with utilization and yield metrics at multi-year highs.
- Backlog Conversion Pace: TES backlog and net orders support growth, but watch for delivery timing and customer deferrals.
- Free Cash Flow Inflection: Lower capex and inventory targets position CTOS for improved cash generation and deleveraging.
- Segment Realignment Impact: The shift to SER and STEM segments will clarify capital intensity and margin profiles for investors.
- Aftermarket Expansion: Investments in parts and service capacity aim to grow high-margin, recurring revenue streams post-sale.
Risks
Key risks include potential softening in infrastructure or vocational end markets, customer purchase deferrals, and macroeconomic uncertainty that could impact order trends or pricing power. Regulatory changes such as EPA 2027 emissions standards could also shift customer buying patterns, though management has not seen material impact yet. Execution risk exists around backlog conversion and maintaining margin discipline as the fleet ages and capex is reduced.
Forward Outlook
For Q1 2026, CTOS expects:
- Top-line revenue up mid to high single digits year-over-year
- EBITDA up double digits year-over-year, led by rental
For full-year 2026, management guided:
- Revenue: $2.005 to $2.12 billion
- Adjusted EBITDA: $410 to $435 million
- Net rental capex: $150-170 million
- Free cash flow: $50+ million, with net leverage below 4x
Management highlighted:
- Continued strong T&D and vocational market demand
- TES backlog and order activity supporting growth targets
- Segment realignment to enhance transparency and comparability
Takeaways
CTOS exits 2025 with exceptional rental utilization, a record sales backlog, and a young fleet, positioning the company for growth and improved capital returns in 2026.
- Rental Utilization and Backlog Signal Strength: High utilization and growing backlog reinforce demand durability in T&D and infrastructure.
- Capital Efficiency and Margin Management: Lower capex, inventory, and SG&A support free cash flow, while margin discipline remains a focus as fleet ages.
- Future Watchpoints: Investors should monitor TES backlog conversion, pricing trends, and the impact of segment realignment on transparency and valuation.
Conclusion
Custom Truck One Source delivered on its core rental and sales growth drivers in Q4 and 2025, setting up for another year of expansion and improved capital returns. The transition to a two-segment structure and focus on cash generation mark a strategic evolution that will be key for investors to track in 2026.
Industry Read-Through
CTOS’s strong rental utilization and backlog growth provide a positive read-through for specialty equipment rental peers and suppliers exposed to North American infrastructure, utility, and vocational markets. Resilient T&D demand and improving pricing conditions suggest ongoing multi-year infrastructure tailwinds, while the company’s focus on capital efficiency and aftermarket expansion echoes broader industry moves toward higher-margin, recurring revenue streams. Peers should note the move to segment realignment for reporting clarity and the discipline in managing fleet age and capex as ways to unlock value in capital-intensive rental and equipment businesses.