CTOS Q1 Earnings Call: Revenue Miss Offset by Optimism for Full Year Growth

Heavy equipment distributor Custom Truck One Source (NYSE: CTOS) fell short of the market’s revenue expectations in Q1 CY2025 as sales rose 2.7% year on year to $422.2 million. On the other hand, the company’s full-year revenue guidance of $2.02 billion at the midpoint came in 2.1% above analysts’ estimates. Its non-GAAP loss of $0.08 per share was 67% below analysts’ consensus estimates.

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StockStory’s Take

Custom Truck One Source’s first quarter results reflected mixed trends across its core end markets. Management emphasized that demand remained resilient in its rental segment, with CEO Ryan McMonagle highlighting a 13% year-over-year revenue increase in Equipment Rental Solutions (ERS) and record-high equipment on rent. However, the Truck and Equipment Sales (TES) segment experienced a slower start, only showing momentum late in the quarter. Management cited strong order flow and backlog growth as key supports for its outlook, while also acknowledging ongoing margin pressure due to product mix and industry-wide inventory improvements.

Looking ahead, management reaffirmed its full-year revenue and EBITDA guidance, citing secular growth in electricity demand, ongoing federal infrastructure spending, and robust customer activity in core utility markets as drivers. CFO Christopher Eperjesy and CEO McMonagle stated that proactive inventory management and supplier strategies are expected to mitigate the impact of tariffs and regulatory shifts. However, management expressed caution regarding macroeconomic uncertainty and noted that inventory reduction will be weighted toward the second half of the year.

Key Insights from Management’s Remarks

Custom Truck One Source’s management attributed the quarter’s performance to continued rental demand, increased backlog, and proactive inventory moves in response to tariffs and regulatory shifts.

• Rental Demand Resilience: The ERS segment posted strong year-over-year revenue growth and utilization rates, driven by sustained activity among utility contractors and robust demand for fleet rentals.
• Backlog and Order Growth: TES segment backlog increased by 14% and net orders grew over 220% year-over-year, with record sales in March and positive order trends continuing into Q2, signaling improving sales momentum.
• Tariff Mitigation Strategies: Management detailed steps to manage exposure to changing U.S. tariffs, including pulling forward inventory purchases and working with suppliers to secure favorable pricing or shift production to the U.S. where practical.
• Segment Margin Pressures: TES and Aftermarket Parts and Service (ATS) segments saw gross margin compression due to product mix and higher material costs; management anticipates margin normalization later in the year as inventory and sales mix stabilize.
• Inventory and Cash Flow Focus: Inventory levels rose as part of a tactical response to external risks, but management plans for reductions in the second half of the year to support free cash flow and leverage targets.

Drivers of Future Performance

Management’s outlook for 2025 is centered around sustained demand in core utility markets, proactive risk mitigation, and ongoing investment in fleet and inventory management.

• Utility Market Strength: Secular trends in electricity demand and infrastructure spending are expected to drive continued activity in the ERS segment, supporting both rental and sales growth.
• Tariff and Regulation Response: Strategies to manage tariff impacts and regulatory changes, including inventory pulls and supplier engagement, are designed to limit cost inflation and operational disruption.
• Cash Flow and Leverage Discipline: The company expects to reduce inventory in the second half of the year, which management believes will support positive free cash flow generation and progress toward its leverage reduction goals.

Top Analyst Questions

• Nicole Sheree (Deutsche Bank): Asked about the drivers of anticipated revenue acceleration. CEO McMonagle cited strong ERS demand and a growing TES backlog as supportive factors for improved performance in later quarters.
• Nicole Sheree (Deutsche Bank): Inquired about the impact of potential infrastructure project pauses. Management stated they have not seen delays reflected in customer orders or backlog, and highlighted customers' ability to pivot between rental and purchase.
• Tami Zakaria (JPMorgan): Sought clarification on tariff-related inventory moves. CEO McMonagle explained that forward inventory purchases were focused on mitigating expected chassis price increases and that supplier relationships are key to managing cost impacts.
• Tami Zakaria (JPMorgan): Asked about the timing of inventory reduction. Management replied that most reductions are expected in the second half of the year, following current elevated inventory levels.
• Brian Brophy (Stifel): Questioned rental rate trends and TES margin outlook. CFO Eperjesy indicated rental rates remain stable and that TES margins are expected to remain within the 15–18% range, with improvement projected as the year progresses.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) whether Custom Truck One Source can maintain high utilization and order flow in ERS and TES, (2) signs of margin stabilization as inventory and product mix normalize, and (3) the company’s progress in reducing inventory and net leverage as planned. The impact of evolving U.S. tariff and regulatory policies will also be a key area of focus.

Custom Truck One Source currently trades at a forward P/E ratio of 63.8×. In the wake of earnings, is it a buy or sell? The answer lies in our free research report.

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