Good afternoon. At this time, I would like to welcome everyone to the Custom Truck One Source, Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Brian. Please go ahead.

Thank you. 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 we issued today. That press release and our quarterly investor presentation are posted on the Investor Relations section of our website. We filed our 2023 10-K with the SEC this afternoon. 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 three months ended December 31, 2023 and prior periods. Joining me today are Ryan McMonagle, CEO, and Chris Eperjesy, CFO. I will now turn the call over to Ryan.

Thanks, Brian, and welcome, everyone, to today's call. Custom Truck's business continued to perform well in Q4, delivering revenue of $522 million, representing a 7% increase compared to Q4 of 2022 and our highest quarter revenue ever. We finished the year with total revenue of $1.865 billion at the top end of our guidance range and up 19% versus 2022. I'm very proud of the efforts of our team to deliver another record setting year. We continue to demonstrate the value of our business model with our ability to pivot between product categories and between selling and renting equipment as the markets dictate. Our TES segment delivered 21% revenue growth in the quarter versus the previous year and 29% growth for the full year, well ahead of both consensus estimates for the segment and our guidance for the year. We delivered record levels of TES revenue and also saw gross margin improvement of 150 basis points, highlighting the continued strong demand environment as well as the progress the team has made in continuous improvement in our production capabilities. The entire TES team performed extremely well and our production team delivered the fourth consecutive quarter of record production, for which I am extremely grateful. As we discussed on several calls, we made the decision during 2023, to invest in significant inventory growth to ensure that we could meet customer demand heading into 2024. Growth in the TES segment was led by growth in our infrastructure end market, which represents about 24% of total revenues. We continue to experience high levels of demand for certain products like our specialty dump trucks, roll off trucks, hydro excavators, and water trucks. We believe we're in the early stages of the deployment of Federal Infrastructure Investment and Jobs Act dollars for infrastructure projects, which is…

Thanks, Ryan. For the fourth quarter, we delivered solid year-over-year revenue, adjusted gross profit and adjusted EBITDA growth. We generated $522 million of revenue, $171 million of adjusted gross profit, and $118 million of adjusted EBITDA in Q4. For all of 2023, we generated $1.865 billion of revenue, $625 million of adjusted gross profit, and $427 million of adjusted EBITDA, up 19%, 13% and 9%, respectively versus 2022. Adjusted gross profit and adjusted EBITDA growth lagged revenue growth in 2023, primarily due to segment revenue mix. While all of our segments experienced year-over-year growth, rental asset sales and TES revenue, which have a lower average gross margin associated with them than our equipment rental business, comprise 67% of total revenue in 2023 versus 62% in 2022. SG&A was $59 million in Q4, or 11.4% of revenues, an improvement versus 12% in Q4 2022. For all of 2023, SG&A was 12.4% of revenues and approximate 100 basis point improvement compared to 2022. Net income for the quarter was over $16 million, the fifth consecutive quarter of positive net income and $51 million for all of 2023, up 30% versus 2022. Full year diluted earnings per share were up more than 30% year-over-year. The ERS segment experienced 10% growth for the full year, ending the year with $726 million of revenue, the middle of our guidance range. Adjusted gross profit for ERS was $107 million for Q4 and $409 million for all of 2023, up 3% from 2022. Adjusted gross margin was 58% in the quarter and 56% for the full year, down from 2022, largely because rental revenue comprised a smaller percentage of total ERS revenue compared to rental equipment sales in 2023 than in 2022. In the quarter, average utilization of the rental fleet was just under 78% and was…

Yes. The floor is now open for your questions. [Operator Instructions]. And our first question comes from the line of Scott Schneeberger from Oppenheimer. Please go ahead.

Thank you very much. Good afternoon, everyone. Guys, I guess just jumping in on the near-term headwinds in the utility end markets. Can you talk us through a little bit more of your customer conversations, what you're hearing, what you're seeing there, and it sounds like you with this guidance in the mid-single-digits growing the rental fleet net OEC that you feel that there's going to be a recovery and there's some confidence there. So if you could just elaborate on what you're hearing from customers that we pull out of this hiccup and it drives improvement later in the year. Thanks.

Sure, Scott, good to hear from you. And yes, happy to address it. And you're right; it feels very much like it's just a timing issue. Here so, I mean, if you look at kind of any macro trend of how much transmission has to be done and the number of projects that are what some consolidators call kind of ready to go, it's significant and it will be a significant boost. And if you look at all the macro underlying drivers around data centers and electrification and just grid upgrades that have to happen, we feel like it is significant. And in talking with customers, it's just a timing issue. I think a lot of people are thinking later this year. Many of those jobs will begin and that it will be very good demand for an extended period of time when they do begin. So everyone seems to be talking about timing later this year and we've got the equipment ready to go. But as we mentioned on the November call, and certainly we just referenced again, we are seeing a little bit of a slowdown now from a transmission utilization standpoint, and it seems to be specific to transmission, all of the other end markets are continuing to perform very well, which is what we noted and saw on the TES side of the business, certainly in the infrastructure side and the vocational side. And then even distribution, utilization is still staying in a very good level as well.

All right. Thanks -- thanks for that. Just kind of a follow-up on that, and then I'll have one other. But the follow-up is in your early remarks, Ryan; you mentioned early infrastructure bill rollout. I just wanted to delve in a little bit more there, anecdotally what you're seeing on that front with regard to that stimulus. Thanks.

Yes. I -- look, I think we're starting to see it. We're seeing it more on the infrastructure side. So for us, that shows up in dump trucks and water trucks and roll offs and some of our hydro excavators. And yes, I think we're starting to see some of those dollars flow. We would say when we talk to our customers there, and certainly when we listen to some of the other companies in the space. We're saying maybe it's maybe 15% to 20% kind of those funds are starting to show up in backlog. And that certainly is an area that we're seeing continued really strong demand, Scott, and so that was a big driver of why TES had such a strong fourth quarter, when you think about 21% growth for the quarter and 29% growth for the full year there. And we're continuing to see that type of trend here even in January and into February as well on the TES side of the business.

Thanks. Appreciate it. Last one for me, and then I'll turn it over. Probably more for Chris. But with regard to the free cash flow outlook, $100 million it sounds good, it sounds like a strong bounce back. I think what I'm really looking to delve into here is inventory levels and just kind of the progression, the work through there, just going a layer deeper and a sense of why that guidance number and level of confidence. Thanks.

Yes. Scott, I think we have said a number of times throughout the year that we really were strategically making the decision to invest in inventory because we saw the demand coming. And so we feel comfortable that we're going to have an opportunity here as the year progresses to unwind some of that investment. And so certainly as we look at levered or unlevered free cash flow, there was a significant investment this year and last year, this year being 2023 and last year being 2022, that we think in terms of networking capital, we'll be able to unwind some of that in 2024. So that will be a big driver of it.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please go ahead.

Can we just talk a little bit about your expectations for TES backlog? Makes sense that it ticked down since supply chain is normalizing. I guess is your expectation that you could possibly exit 2024 with a more normalized lead time and amount of backlog, or do you think that backlog will remain elevated based on what you're seeing in the supply chain?

That's a great question. Look, we delivered almost over $200 million of additional revenue on the TES segment this year. So the fact that backlog really year-on-year just came down, what about $60 million, $65 million. We're really happy with that. So we are still seeing very good order volume. And so I think that will continue. But I wouldn't be surprised if backlog still comes down a bit. We said -- I've said historically that four to six months is where it has been historically. I don't know that I have a reason to think it will be all the way down to that by the end of the year. But we're still seeing really good order flow. We're still seeing really good demand here, even for the first two months of 2024. And I think that demand will just continue to hold.

Okay. Got it. Thank you. And then with respect to CapEx, how are you guys thinking about 2024 on both replacement CapEx as well as growth CapEx?

Yes. I think we said in our prepared remarks, Nicole, our expectation is we'll grow net OEC or we'll grow OEC by a net mid-single-digits this year. And our gross CapEx number is going to be similar to this year in that we're targeting in that $400 million range. So 5% if I picked the mid-single-digit you're looking at a net $75 million, $80 million of growth CapEx.

Our next question comes from the line of Justin Hauke with Robert W. Baird. Please go ahead.

Yes, great. Thanks for taking my questions. I guess I wanted to go back to the transmission market and the demand levels there. Has there been a shift? I mean, are you seeing that clients are asking more to buy the equipment rather than rent it, given the demand visibility that they see? And so maybe that's part of what's driving the fleet utilization rate down a little bit on the rental side is people are opting to buy it and hold it for longer. I think one of the dynamics you guys talked about when you first came to the public markets was that rental was kind of untraded and there was an opportunity for that to be a greater usage of fleet. So I guess I would just ask for an update on that.

Yes, a great question. And you're right. We've said, and we'll continue to say as we see people buy, it's a good indicator of long-term demand. Transmission probably is a bit of an exception there. Transmission is primarily significantly rented. So we don't sell a lot of the transmission equipment that we consume, that we buy from our vendors that we put together. So it is a heavily rented product. So it may be a little bit different dynamic there just because of the use case of that, that equipment. So it's -- we're not seeing that dynamic. And it really does feel like it's just timing right of when the projects begin. And that seems to be consistent with all of our conversations with customers and certainly what a lot of the industry is talking about right now as well. So -- but it's a great question and it is true in other product categories. It's something we watch closely. We talk a lot about when RPO buyouts happen or when buyouts happen from the rental fleet. That's a good indicator of long-term demand. You saw those levels that were high in the fourth quarter. So we're still -- all signs are still very good kind of long-term demand. It's just a short-term indicator of when the transmission work really begins.

Okay. On that basis, I mean the utilization level, the 77.6% fourth quarter, you guys ended 3Q at 80.4%. And I think kind of the expectation for 4Q is even with this, you were going to kind of hold in that range and obviously came down a little bit. So I think that still is a high utilization rate, I guess, versus history. But what -- you gave the fleet growth. But what's your expectation for kind of utilization rates throughout the year and are they more like 75%, are they more like 80%? Just kind of trend line where you expect them to go?

Yes, it's a great question, and you're right. I think that is a high utilization, if you look in historical context. We did see it continue to come down at the end of the year. And so we are back to kind of that, if 75% is the average, we were just below 75% kind of at the end of the year, and that's where we are kind of currently at the beginning of Q1. And we'll expect that to kind of follow the same type of line that it typically follows, which means it should build some in the spring, level off a bit in the summer, and then continue to build into the end of Q3 and the beginning of Q4 to kind of follow that general flow. But yes, I think somewhere around that 75% is probably a good spot to think about it.

Our next question comes from the line of Tami Zakaria with JPMorgan. Please go ahead.

Hi. So my first question is, I just wanted to get a sense of how you're thinking about the cadence throughout the four quarters. Typically, I think you've mentioned in the past, EBITDA is called it 45% in the first half and the remaining in the second half. So should we think about the guide in terms of typical or historical seasonality or any seasonality's to think about as we model 2024?

Yes. Tami, this is Chris. I think the 45%, 55% generally still holds. I do think what we're going to see, certainly it holds for revenue. I think, as Ryan was just talking about kind of what we expect to see this year in ERS, which is more of a historical norm versus what we saw maybe in 2023 or certainly in 2022 is that probably -- it'd be a little bit wider range, probably first half, second half on EBITDA. So it's probably a little less than 45% and a little more than 55% on EBITDA, but 45%, 55% on revenue.

Got it. Okay. Got it. That is very helpful. And then for the ERS segment, I think you've mentioned a few times some slowdown in transmission work caused by your customers supply chain delays. Just wanted to get a sense, what exactly is this delay? Is it funding or is it availability of some other equipment? Or they're just waiting for the Fed rates to get cut? What exactly is this supply chain delay? Or what's exactly driving this delay?

Yes. No, it's a great question, and I would tell you. Yes, yes, and yes, right? So the conversation we're having is all three of those, Tami that some of it is regulatory approval, right, and so they're waiting on some rate increases to be passed kind of through their regulatory bodies. Some of it is supply chain, right? So we're still waiting on some superstructure, structure or transformers to be available, and then some is just a cost of funds issue, which I think they're waiting on interest rates. So it feels like it's all three, Tami. It feels like there's a lot that's ready to go. And so as each of those, break, we anticipate that it will be a great tailwind as they begin later this year and into 2025.

No further questions at this time. Brian, I'll turn the call back over to you.

Great. Thanks, everyone, for your time today and your interest in Custom Truck. We look forward to speaking with you on our next quarterly earnings call. And in the meantime, please don't hesitate to reach out with any questions. Thanks again, and have a good evening.