Hello and welcome to the Custom Truck One Source Fourth Quarter 2021 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Brian Perman, Vice President, Investor Relations. Please go ahead, sir.

Thank you and good afternoon. Before we begin, we would like to remind you that management’s commentary and responses to questions on today’s call may include forward-looking statements, which by their nature are uncertain and outside of the company’s control. Although these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of the company’s filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release issued today. The press release we issued this afternoon and the presentation for today’s call, are posted on the Investor Relations section of our website. We will be filing our 2021 10-K with the SEC next week. Today’s discussion of our results of operations for Custom Truck One Source Inc., or Custom Truck, is presented on a historical basis as of or for the 3 months and the full year ended December 31, 2021 and prior periods. While our reported results can only include Custom Truck One Source LP for the period since the April 1, 2021 merger date, we have presented and will be discussing today pro forma combined results as if Nesco and Custom Truck had operated together for all periods. We believe such combined information is useful to compare how the combined company has performed over time. Joining me today are Fred Ross, CEO; Ryan McMonagle, President and COO; and Brad Meader, CFO. I will now turn the call over to Fred.

Thanks, Brian. I’d like to welcome everyone to today’s call. As we report on our first fiscal year operating as a combined company, it is clear that the combination of Nesco and Custom Truck has been successful. With the integration of the business largely complete, we can further focus on providing unparalleled service to our customers, growing our market share and delivering value creation to our shareholders. I’d like to thank all of our employees, customers, suppliers, who supported our business, particularly given some of the challenges our industry has faced for the last 2 years. Strong Q4 and full year results highlight the incredible performance by our team. Looking at Q4 on a pro forma basis compared to the prior year quarter, adjusted EBITDA was up 15% despite slightly lower revenues. On a full year basis, adjusted EBITDA was up 13% when you fully adjust for the inventory and accounts receivable reserve charges that we noted during Q2 of 2021. Q4 revenue declined less than $1 million compared to the previous quarter and $49 million versus Q4 of 2020. This decline reflects the impact of continued supply chain issues, particularly on new equipment sales in the early part of the quarter. Our ERS business continues to perform very well with utilization increases increasing to 83.7% for the quarter, up from 78.2% for Q4 of 2020 and 81.4% in Q3 of 2021. Our TES business continues to see very strong demand, with backlog growing to a record of $412 million, up by 22% just since the end of Q3 and 169% since the end of 2020. Strong demand for both rental and new sales has provided us the opportunity to push price up an appropriate degree. Those price increases, coupled with the fantastic job our team has done to control…

Thanks, Fred and good afternoon everyone. First, I want to echo Fred’s comments regarding the continued tremendous efforts of our employees who achieved the integration of the businesses, while delivering strong financial results last year. Overall, demand remains robust in each of our strategically selected four primary end-markets: transmission and distribution or T&D, telecom, rail and infrastructure. We continue to focus on these markets, because they provide strong long-term growth opportunities well in excess of GDP and are far less cyclical than other truck-related end markets. This is reflected in the growing backlogs of the utility and telecom contractors, which represent a significant portion of our customer base. Passing of the Infrastructure Bill last year bolsters and extends the demand cycle and further strengthens our overall business fundamentals. Pricing trends across our end-markets continue to outpace inflation, reflecting strong demand and the continued implementation of our tiered rental pricing strategy. From a key performance metrics perspective, in addition to our improved rental fleet utilization and growth in new sales backlog, on a sequential basis, we continue to drive margin expansion as well as increase our OEC on rent. On-rent yield continues to improve, rising to 39.4% for the quarter, up from 37% at the time of the merger. The underlying fundamentals for our selected end markets continue to be incredibly strong today with industry supply chain issues presenting the only significant limitation to our ability to meet customer demand. Over recent quarters, we have experienced intermittent issues receiving adequate supply of the major inputs for our trucks, namely chassis, attachments and bodies. This certainly impacted our ability to deliver product to our customers and grow the rental fleet at our desired pace during Q4. We did experience some improvement in inventory levels late in the quarter, with whole good inventory…

Thanks, Ryan and good afternoon everyone. As Fred and Ryan have indicated, Q4 was another strong quarter. While total revenue of $356 million was down 12% versus pro forma Q4 2020 as a result of supply chain-driven drop in new sales, full year revenue of $1.48 billion was up 9% versus pro forma 2020. Despite the year-over-year decrease in Q4 total revenue, adjusted EBITDA was $96 million, a 15% improvement versus pro forma Q4 2020 and up 13% versus last quarter. Pro forma adjusted EBITDA for 2021 was $323 million, which includes approximately $10 million of charges taken in Q2, which we discussed in our previous calls. Without these charges, pro forma adjusted EBITDA for ‘21 would have been $333 million versus $295 million in 2020, a 13% improvement. Our 2021 pro forma adjusted EBITDA is above the midpoint of the guidance we previously provided. Reported net loss for the quarter was $3.7 million, an improvement of almost $17 million versus Q3. Pro forma gross profit, excluding rental depreciation, was $125 million and adjusted gross margin for the quarter was 35.1%, up nicely compared to 34.4% for Q3. The sequential margin improvement was primarily driven by the continued focus on pricing across our revenue segments and a slight change in revenue mix, with rentals accounting for 32% of revenue this quarter versus 31% for Q3. Pro forma gross profit, excluding rental depreciation, was $462 million for the full year, a 9% increase versus 2020. SG&A was $44 million for Q4 or 12.3% of revenues, which includes $4.6 million of share-based compensation expense. Turning to our segment results. Fred referenced our strong utilization within our ERS segment for the quarter, which was 83.7%, up from 70.2% for Q4 2020 and up from 81.4% for Q3 2021. Average OEC on rent was…

Thank you. [Operator Instructions] Our first question today is coming from Justin Hauke from Baird. Your lien is now live.

Great. Good afternoon, everyone. Thanks for the rundown here. I have a couple – let me ask a couple here and then I might jump back in. But I guess maybe the first question, just in TES, the backlog obviously was really strong. But you noted the revenue decline that was there. I’m just curious, was the backlog increase of function – I mean, were the orders up strongly as well or is it just that you weren’t able to deliver some of that inventory and so the backlog’s continuing to increase?

Orders were up as well. So it was a very strong quarter from an order perspective also. And then it’s – the supply chain is what’s just constraining our ability to deliver right now in Q4.

Okay. And then, I guess, the next one, just thinking about the ‘22 guide and specifically the margins. I know this year, you guys had sort of elevated repair and maintenance expense mostly on the Nesco side. I just was curious if you could kind of define maybe how much of a margin lift that is in 2022, just to kind of think about an area of support that might be able to help those margins expand.

Yes. I think it’s something that we felt certainly through most of ‘22. But I’d say when you look at our Q4 margin, and if you really break it down kind of just on core rental, right, we’re in 76%, 77% just on core rental. I think that is a good level now. And I think margin expansion will happen not so much from a decrease in R&M going into next year because, again, I think we stabilized that in Q4, but more as the pricing improvement continues to make its way through our – the revenue stream.

Okay. That’s helpful. And I guess my last one here before I turn it over. Just staying on the guidance, but how much revenue are you assuming from HiRail in 2022, roughly?

In ‘22, I mean, the HiRail business is heavily on rental. So it’s not going to have as much of an impact on the overall revenue stream, but it’s $15 million-ish around there, I think, in next year.

Okay, thanks. I will turn it over.

Thank you. Your next question is coming from Scott Schneeberger from Oppenheimer. Your line is now live.

Thanks very much. Good afternoon. Could we just talk a little bit about what you’re seeing in each of the end markets that you serve from a demand perspective and kind of compare and contrasting demand and also where the supply chain issues are affecting you with regard to the end market a little bit more relative to the customer wants and needs? Thanks.

Sure. Yes, I’ll start, Scott. Good to talk to you. We’re seeing really strong demand in all four of the end markets that we talk about. So, T&D, we are seeing demand continue to increase there. You see that in the backlog, some of the reported backlog, some of the publicly traded utility contractors. So we’re seeing good growth there. We’re seeing strong demand on telecom. We’re continuing to see that. We’re seeing that continue to hold both on the contractor side and some of the telecom providers also. And then we are seeing rail grow. Obviously, now with the addition of HiRail, we’re seeing some more opportunities to both rent and sell equipment on the railroad side. And then more broadly, in infrastructure, we’re seeing robust demand there, too. So we’re seeing really strong demand. And those are areas, too, where we feel like the infrastructure bill has not had any impact yet, right? We anticipate that will – those will start to be projects where people will be coming for – asking for equipment really at the very end of this year or really heading into 2023. So – and then, Scott, from a supply chain perspective. We mentioned in our comments that we actually saw whole goods inventory grow into the end of the year. We are seeing it continue to build slightly so far in 2022. So that’s – those are positives. But Scott, it’s really just the match of the chassis and the attachment showing up at the right time at the same time for us to be able to build. So it’s – we are seeing improvements for sure, but we think that will continue to improve later this year.

Thank you. Just if we could talk to about your ability to price and how your interactions with customers are on that? Are they understanding in the environment? How are you approaching the cost or the price increases? And then it sounds like the portfolio is not turning as fast due to the supply chain constraints in and out in shore, but an ability to get completed product to the customer. So is that – that delays the pricing increase to cover inflation. Is that – you mentioned it should be stronger in the back half of the year. I’m just curious if you could delve in a little bit more on how the how that pricing is going. And you mentioned in your guidance, you feel confident that you’ve covered inflationary pressures. Just if you could provide a little bit more support on how you’re doing that? Thanks.

Yes, Scott, this is Brad. And I think there is a lot of kind of questions embedded in there. And I will start with the churn comment and going to turn it over to Fred in terms of customer reaction in those conversations. But on the churn comment, yes, we have seen the contract churn start to slow a little bit. And what I will attribute it to is the demand is so strong, supply is so tight, where a contractor, historically, if we had a project gap of 60 days, 90 days, maybe even longer, he would turn a piece of equipment back in, take it back out when he needs it. They are holding those now just out of fear that they won’t be able to give the equipment, which is real. Now, there is a benefit to that in the – to the extent that we are not touching the equipment and we are incurring the R&M and holding utilization. So, if a unit comes back, it takes us 25 days roughly to turn a piece and get it back on rent and then we incur the R&M expense without the revenue flowing through in that. So, while we are not seeing the price increase, there is some benefit to us by slowing the churn just because it does extend the duration in that R&M cost. But we do think that at some point, all the contracts are going to have to turn, right. And that’s where they will – it will just take a little bit longer than we had anticipated getting next year. When you look at the growth on rate and look at our ROI, I think the majority of the price increases come through, because it’s kind of the low-hanging fruit, right. So, if you compare Q2 to Q4 for ORI, we are up like 6.5%, 7%. We have said before we were pushing high singles to low doubles, so we are over halfway there, but still more room to come. But I will turn it to Fred in terms of kind of market reaction to price increase on sales and backlog.

So, the market is accepting all of the price increases without any problem. Everybody is living in the same – we are all living in the same world. They see everything, every day, whether it’s cars, trucks or fuel, it doesn’t really seem to matter. As far as – our customers are mostly happy to get the equipment. Because of our relationships, we believe we are getting far more equipment than our competitors are and our customers understand that, look, they are going to have to pay more money. We are not gigging anybody. We are just passing on the fair amount and we are not really getting any pushback. As a matter of fact, I think they are just happy to get it. And so we don’t believe that we will have any trouble continuing to be able to expand the margin when it makes sense and pass on any of the increases and still continue to build our backlog. We know that we are able to pick up a lot of – we have been able to pick up more and more employees because our competition doesn’t have the trucks or the equipment to build them, and we are getting them. Now, it’s going to – and it will get even better as the weeks and months go by to hopefully to be normalized by the end of the year.

Alright. Thanks guys and I appreciate that, Fred. You actually have covered what I was going to follow-up within that answer. I am going to sneak one more in if I may, and that would be on M&A appetite. So, you did HiRail and you alluded and, I think in the prepared remarks or maybe in the release that more to come is certainly a possibility. Can you just talk to what areas you would see potential M&A this year and size? And what’s embedded in that question is, how much are you willing to move the leverage needle in the current environment if the right opportunity presents itself. Just curious how you weigh that factor? Thanks.

Sure, Scott, it’s Ryan. I will start and then I will let Brad finish on leverage. But we will still be opportunistic. So, as we talked about, we think there is a couple of places that make sense as we expand our footprint and as we continue to grow the rental side of the business, too. So, we will still be opportunistic, but these are small transactions that I would say are a similar size to HiRail from an overall dollar standpoint. And I don’t think that it will increase leverage much, right, on the transactions that we are looking at.

Yes. I mean most of the opportunities that we are evaluating are – we will be able to pick them up, I think at attractive multiples than where we are leverage-wise right now. It won’t move the needle very much at all. All of it would really do, I think in our opinion, is slow the progression. I don’t think it takes leverage up, again, based on the target list that we have at this point.

Got it. Thanks. I appreciate it guys.

Thanks. Our next question is coming from Noelle Dilts from Stifel. Your line is now live.

Congrats on the strong year. I was hoping that you could discuss just how you are thinking about CapEx for the year. I recognize that a lot of that is probably dependent on how the supply chain, sort of, if it eases. But could you just speak to how you are thinking about sort of the range of potential investments? Thanks.

Yes. Noelle, this is Brad. Thanks for joining us. From a CapEx standpoint, I think our view on ‘22 will be consistent with what we said our longer term goal is, in that from a fleet growth standpoint, targeting that mid to upper-single digit number. So, the fleet size today is about $1.4 billion. So, growth CapEx, call it, again, $70 million to $100 million. And then from a replacement standpoint, I think the net spend there is similar size, right. I think we are targeting fleet churn or turnover kind of in the mid-teens to keep in line with our 5-year to 7-year hold on most of the assets. But to your point, right, it is very heavily dependent upon supply chain and timing. And I think that you could see plus or minus a few points there, depending on when things come in. But I feel – I think we – as we are sitting here today, feel pretty comfortable. As we look at supply chain, I do think CapEx spend – now the whole lot different than we saw in 2021 is going to be back half weighted just because we do think the supply chain is a bit disrupted here in the first half. And then as that improves, we will look to ramp up the CapEx spend as we get into Q3, Q4, hopefully, in the later stages of Q2. But at this point, call it, more back half weighted.

Okay. Great. And then utilization here, you have talked about theoretical max being in the mid-80s, getting to that point. Could you just maybe speak to how you are thinking about the sustainability of utilization into the early part of next year and how that trends, again, with potentially some supply chain easing? Thanks.

Yes. I will start and then I will lend it to Ryan for any additional comments. But we finished – in Q4, we were kind of 83%, 84% for the quarter, which to your point, is getting nearer what we believe to be a theoretical max. Given the demand where it is right now and really kind of the exceptional performance that our team is putting through in the field to keep the assets up and running and turned, right. We are not seeing much of a pullback. Q4 for us this past year was the strongest Q4 utilization we, Ryan, Fred, myself have seen since we have been here. And Q1 didn’t slowdown either. You normally see a December dip that really didn’t happen. So, we have started out of the gate pretty strong in Q1. We don’t see much of a pullback happening and at this point aren’t anticipating those traditional seasonal dips like we have in the past.

Okay. Thanks very much.

Thanks. Our next question today is coming from Stefanos Crist from CJS Securities. Your line is now live.

Hey guys. Thanks for taking my questions. Can we talk a little bit more about HiRail? What about that acquisition was attractive to you? And maybe as you have been dealing with the acquisition, any unknown synergies or challenges you have run into?

Yes. The acquisition is going well. I would say what was interesting for us is really two things. One, we have been looking in Eastern Canada. So, we like the idea of having a footprint in Eastern Canada and we like the rail sector. So for us, those were the two reasons that I think it made a lot of sense. We are really impressed with the team up there and the relationships they have with their customers. And from an integration standpoint, I think it’s going well. I think we feel good about the opportunity now to sell product into some of that customer base and then also to grow more broadly kind of the Canadian opportunity for Custom Truck more broadly. So, we are feeling really good about things so far.

Yes. From a synergy standpoint, I mean it was a small deal, and it was family held. They ran it pretty lean. So, from a cost standpoint, not a lot of synergy opportunity, where we see the upside, they are different in some ways in combining Nesco and CTOS is the revenue portion where they were really focused on a certain product category, somewhat limited in their ability to expand that from capital and then need to look at the customer base. It’s some of the existing customer base we have, but their relationships that we have come to find out are extremely deep, which we think will just represent more revenue upside with some of those customers.

Great. And then just touching on the guidance for 2022, I guess can you talk about what kind of growth in the fleet you are expecting there? And if supply chain issues were to persist throughout the end of the year, do you think you will still be able to hit that guidance?

Yes. I would say from a fleet standpoint, the midpoint there assumes kind of that mid-single – low to mid-single digit growth fleet-wise. On the upper end, you are kind of getting to that 7% to 8%, 9% growth is what’s assumed in there. If the supply chain stays where it is exactly today, I think that the – it could be a bit challenging. We see a lot of opportunity there still from pricing. As Ryan mentioned, we are seeing some green shoots from the supply side. So, there is improvement. I think we have appropriately sized kind of the range, the EBITDA range, to reflect some downside – further downside risk on supply chain or limited improvement based on kind of what we are seeing right now. So, again, we could get surprised, but I think we feel very comfortable with the guidance ranges that we put out there.

Perfect. Thanks guys.

[Operator Instructions] We have reached the end of our question-and-answer session. I would like to turn the floor back over for any further or closing comments.

Well, that concludes our call today. Thanks, everyone, for the interest in Custom Truck. We look forward to speaking with you on our next quarterly earnings call. In the meantime, please don’t hesitate to reach out with any questions. Thank you.

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.