Hey, everyone. For anyone that doesn't know me, my name is James Kayler. I've been at B of A for over 20 years. I cover a lot of stuff, including home building, building products, and equipment rental companies, which brings us here today. Super excited and grateful to have Custom Truck with us again this year. Thank you, Ryan, for coming. We have Ryan McMonagle, the president and CEO. I sort of have an outline of we're going to do just fireside chat style. I have an outline, but we'll leave plenty of time in the end. So thank you for coming, Ryan.
Yeah, of course. Thank you for having us, as always. So we appreciate it.
Given that we're not going to do a sort of a big overview, I do think for anyone sort of new or just revisiting the story, CTOS is a bit of a different animal than some of the GenRent or other names was kind of a specialty focus. Maybe we can just start quickly with a sort of overview of the business and sort of your focus markets.
Sure. You know, we say that we're a one-stop shop for vocational trucks, and so for us, that really means we do two things really well, so we have a large rental fleet. So the rental fleet for us is about $1.6 billion of assets tied up in the rental fleet, and then we have a sales business where we sell new and used trucks, and so that's all predicated on what we call kind of an integrated production capability, so we'll buy a bare chassis from a Peterbilt or a Freightliner, and we'll turn it into a thing, so whether it's going to be a bucket truck or a digger derrick or a dump truck or a water truck, all those are things that we build, and so we do that really in four primary end markets, so our largest end market is utility.
So transmission and distribution accounts for about 60% of our revenue. Infrastructure accounts for just under 25% of our revenue. And then rail and telecom each count for about 5% of just under 5% of revenue. So those are our four primary end markets that we talk about. And then we primarily serve the contractors in those markets. So utility contractors, names like Quanta or a MasTec or an MYR Group or Centuri are all large customers of ours. And so we take care of their equipment. We believe that they like to consume equipment both by renting equipment and purchasing equipment. And so I think that's why we operate the way that we do, that we build trucks, and then we will either sell trucks to those customers or we'll rent trucks to our rental fleet as well.
Excellent. Very good overview and good jumping-off point. So maybe later in the conversation, we'll get into more sort of recent trends and some of the sort of near-term puts and takes. But can we just kind of from a big-picture perspective, can you kind of just give us the 60,000-feet view on sort of what are the major drivers for your business for end market demand? And then I guess if there is a substitution effect that you think is sort of still driving the industry?
Sure. So I always start with kind of our four primary end markets. And since utility is the biggest, we'll spend some time there. But if you think about transmission and you think about distribution, those two end markets, if we're going to kind of get a little more granular, James, are different in terms of what the ultimate drivers are. For transmission, we watch kind of line miles or expected projects closely. And so there's a lot of data out there on expected line mile completes and what projects have been approved. There's obviously a very long regulatory approval process on a lot of these projects because they're going between regions. And so I think that's certainly a big dynamic. But as you think about transmission, that's something that we're watching closely.
And then on the distribution side, we look a lot at rate case approvals and what's going on kind of with the power producers in each market. And so I think that's certainly a big piece of it. If I zoom out a little bit and go back up to 60,000 feet and you think about utility, you've got aging infrastructure that is a big part of what we do. So there's a lot of discussion around how much the grid needs to be invested in just from a base load perspective that I think is a big driver. Certainly, as you think about electrification, and I'm sure we'll spend more time talking about that, if we're going to move towards a more electrified kind of environment, that is a big driver for us. And then the new dynamic that's out there, too, is really around data center demand.
As data center demand increases, obviously, that's a lot more work for our customers to ensure that the power is available to those data centers. And so I think that really is good underlying demand for us. And then you can layer on top of that, and this will really hit the infrastructure side. You think about some of the federal stimulus that's out there. For us, it's the IIJA bill is the most kind of directly relevant bill there, too, as you think about federal stimulus that supports the utility side of the business and the infrastructure side of the business as well. So those would be kind of the big macro things that I would mention. And I know we'll talk about some of those in more detail here in a minute.
Excellent. Very good. In terms of do you have a sense—and it's probably not granular data—but do you have a sense for your customers what percentage of their fleet they own versus are renting from you or competitors? And sort of how has that—what does that trend look like, and where do you think that's going?
Yep. No, I'll give you maybe two data points there. So we think that for our customers that our customers generally rent about 50% of their equipment. So they own about 50% of the equipment, and then they rent about 50% of equipment. We say if you kind of pull back out, and that's for utility contractors, if you pull back out, we say that kind of the universal fleet, when I'm talking about utility in particular here, is closer to 25%-30% penetrated from a rental perspective. And so the dynamic there is that IOUs or power producers are primarily purchasers of their equipment. So they own the majority of their equipment. The utility contractors, we estimate, rent about 50% of their equipment.
And so as IOUs are outsourcing more work to contractors, we think that is a good tailwind for kind of the universal kind of rental fleet if we're going to kind of pull all the way out and think about a macro view of things. And so those would be the two data points that I'd anchor on in terms of some of the trend that we're seeing there.
Very good. So you touched a bit in terms of on the transmission side, there's a lot of regulatory hurdles. I think that's a great transition. I think probably universally through this conference, people are going to be trying to figure out what the new incoming presidential and congressional administrations, what that means, how the world's going to change over the next four years. Maybe you can just sort of lay out what you think the major, I guess, focus points are for your business, where things could change, and any sort of initial thoughts on any sort of opportunities and/or headwinds?
That's why we're here, James. We're waiting for you to tell us. No, I think we're certainly in a wait-and-see mode. There's a couple of things that I think are most relevant to our business that we think about. We think that we think most importantly that just getting to a decision, right, I think has been good. And I think it will continue to be good for our business and for the business environment more broadly. But there's two really pieces of regulation that we're watching closely. One is electrification and what happens there with the EPA and some of the mandate there. And so there's a lot of regulation that's coming around chassis electrification and around EPA standards in terms of nitrous oxide, so low NOx regulations that are coming from the EPA.
There's really CARB, which is California Air Resources Board, and their expectations for 2025, which is that customers will have to buy one electric vehicle before they can then buy, depends on the OEM that we're talking about here, but generally speaking, about six internal combustion engine vehicles in California and in five other states that have adopted CARB and kind of their standards in terms of electric vehicle and electric vehicle sales in those markets. I think that's one thing that we're watching. The second thing that's coming kind of.
Not to interrupt. Just to sort of clarify that point a bit, would CARB be, is it a benefit to your business because it will, or is it a headwind because your customers would have to buy one electric?
I think it is a headwind for the industry, but I think it is a benefit to CTOS. That's how I would answer that. So I think there's not enough electric vehicles for our customers to be able to procure trucks kind of at that ratio of one to six because in the heavy-duty space, there's not a lot of options that are electric chassis that are truly functional. I think CTOS can benefit because, as you know, James, we have a model of carrying inventory. And so we believe that we'll have the ability to sell the inventory that we have on the ground now at the end of this year into California next year based on how the regulation is written. So I think there's an opportunity. We see that as an opportunity to be able to sell equipment into California.
I think it's just a lot of confusion and understanding kind of how that regulation will play out and will the new administration delay the implementation of that regulation, which I think is an open question. And then the bigger piece there that I think will have some ramifications will be the EPA and how they participate in that. The EPA in 2027 has a standard on nitrous oxide and the amount of nitrous oxide that a chassis can produce. And so there's two dynamics there. There's the nitrous oxide dynamic, which certainly the industry is talking about a $25,000 increase in the cost of a chassis. In 2027, what generally happens if that regulation stays in place is that there's a pre-buy. That will be good for business in late 2025 and certainly into 2026 leading into that pre-buy.
And so I think that will be a dynamic that we're watching. And then the EPA in 2027 also has a standard on a percentage of new trucks that are electric vehicles as well. And so we'll see kind of if that regulation holds. So it's really the percent of electric vehicles that's important that we're watching. And then there's the Low NOx standard as well. And I think it will be decided. We're curious to watch if both of those regulations from a federal standpoint come into effect in 2027, or is there a chance that one or some portion of it will be delayed later, longer than 2027? So I'd say that's the first piece is kind of the environmental and EPA component. The second piece that we're watching in the near term is what's going on with tariffs in particular.
For us, we have very little that comes in from China. It's not really a Chinese tariff discussion for us, but we're watching some of what Trump has been saying lately about Canada and Mexico. Certainly, Canada and Mexico are where a lot of our chassis are built. About 20% of our buy annually comes from Mexico, and about 10%, just under 10%, comes from Canada. That's where Freightliner has a large manufacturing facility in Mexico. Peterbilt manufactures their Class 7 chassis in Canada. That's something that we're watching closely as well.
Very good. Maybe just a little more on sort of high level, and then we can dig in more specifically on the business. But we've touched on this earlier, but maybe on some of these sort of big-picture drivers. You mentioned electrification, data centers. I mean, these are having such massive impact on all sort of construction and all these industries. What are the major drivers? Maybe you can just even just kind of bring it down to what a new data center is being built. When is CTOS product being used? How much equipment is how much demand of a demand driver is that? And sort of what does that timeline look like as data center, as the AI data center build-out really ramps up over the next, presumably, three to five years?
Yeah. Our equipment is primarily used to power the data center. So as you're thinking about taking power from a substation to a data center, that's really where our equipment is used. So I put James data centers in kind of the good kind of just macro trends that are impacting the industry more broadly. So I think that's certainly a big piece. The bigger piece for us is as new transmission lines are being built. And so a lot of the discussion going on right now is how many additional miles of transmission lines are needed to move power kind of within kind of each of the regions across the US. And I think that's probably the bigger driver for us, James, as you really think about the unlock of more transmission lines because those are longer duration projects and are a more significant spend for us.
So I think that's really the transmission piece. And then on the distribution side, it's really a lot of grid upgrades that are happening. So the idea of being able to power if everybody here is going to have an electric vehicle kind of in our home, the amount of power that would be needed to be pulled into all of our homes is significant. And so I think that's just a good tailwind. So we think about, but we track closely line miles of transmission that are being completed. And then we're tracking closely what's going on with rate cases from a distribution standpoint just to understand kind of where is there more capital that's being deployed for maintenance purposes when it comes to the local grid. And those two things are two things that we're tracking closely. Both of those have great tailwinds now.
It's been interesting because utilization, and we'll get to this, has been down, was down for us at the beginning of this year. As we said in our last earnings call, it's increased here in the third quarter. So there really was a bit of a slowdown on the transmission side in particular for some of the work. And that's really around regulatory approval and waiting for some of these projects to start. And so when we think about the future, I think there's a lot of growth. There's a lot of pent-up demand in terms of new projects coming online on the transmission side. And then there's a meaningful amount of CapEx to be spent when we think about distribution in particular.
Very good. And that's a great transition. As you mentioned, utilization was a little bit softer in 2024. And kind of it seems that you've already seen a bit of inflection there. But maybe to start, we touched on this. Maybe to start a little bit, you can just kind of walk through sort of where those areas of softness were, what you think the drivers were. You brought the guidance down marginally last quarter, I think even to 4% at the midpoint. And then we can talk about sort of what the path forward looks like.
Sure. Yeah. No, and I think as you look over the history of Custom Truck and even before it being public, utilization has always lived kind of between a band of kind of the high 60 from a time utilization standpoint, from the high 60s from a percent standpoint. We used to say that theoretical max utilization was 80%. We ran above 80% for several quarters during late 2022 and 2023. But we've always generally lived between that band of, I'll call it 70% for round numbers and 80% from an upper bound. And so as you think about troughs in our business, it's one of the things that I love about the Custom Truck model and how it compares to other rental businesses is that there's just not a lot of volatility when you think about those bounds from a utilization perspective.
And so you look back at COVID, you look back to late 2015, early 2016, which was when FERC Order 1000 was being implemented around transmission work. We saw utilization for the month fall to the high 60s. For the quarter, it was in the low 70s. And so that's what we saw really in Q1 and Q2 of this year as well. We said in our call that for the third quarter, utilization was 73%, but ended the quarter back in the high 70s. And so utilization has returned to what I would call a very healthy level and certainly one that I think generates very compelling return profiles on the asset level and is good for kind of the overall financial performance of the business. But I think when you really understand the drivers, there was a slowdown in transmission.
So we saw transmission utilization fall, and that really was dependent on new transmission projects. And when they are starting and when they were expected to start, if you listen to the commentary of a lot of our customers, they were expecting things to start to get better at the second half of this year. And certainly, they're optimistic about what their pipelines look like for 2025. That's what we're seeing on the transmission side. And then on the distribution side, again, we're watching kind of rate cases and how those approvals are being approved kind of within a region. And that seems to be trending in the right direction right now as well.
Very good. And on the call, I mean, not just theoretical. I think you said in October, OEC on rent was up pretty meaningfully, like up 20%. And I don't know if that was from average in the quarter, but. And you mentioned there was a bit of a weather impact, the storm impact, but then a lot of that was just sort of the core underlying business. I mean, you could just talk about what changed to drive that increase in OEC on rent.
Yeah. OEC on rent was up $200 million, so the rental fleet is just over a billion five, just under a billion six in terms of overall size. The rental fleet and OEC on rent grew by $200 million in the quarter, so we saw a big increase in OEC on rent from the beginning of the quarter to the end of the quarter to when we reported in October, and so we saw a meaningful pickup there, and we said that about 20%-30% of that increase, so $40-$60 million of the $200 million was related to storm work, and so generally, what happens in a storm is that a lot of trucks rush to kind of wherever the storm impacted, in this case, Florida and North Carolina in particular, and quickly work to kind of get the power back on.
And then a contractor is awarded the job afterwards to make all of the repairs to the lines. And so what we saw during the storm was that the equipment that we put out to customers to go work on the storm is still out today. And so it's still being used to repair, to make the repairs that are necessary in those markets. So $200 million increase, 20%-30% was related to storm, which means 70%-80% was not related to storm, was just related to kind of demand that we're seeing already in those end markets. So transmission projects going on out west, we're seeing a lot of distribution activity and some resiliency planning that's happening in the southeast in particular already. So those were already happening. And then the storm on top of that was additional demand for our equipment.
Yep. That sounds like good leading indicators there. And then just on pricing, so can you just talk a little bit about maybe the longer-term trend in pricing then with some of the softness in utilization that you saw? If you saw any softness in pricing, what are your expectations for pricing for rates going forward?
Yeah, it's a great question. We increased price in 2022 by 10%. We increased price in 2023 by 6%. And this year in 2024, we did not increase price. And so I think when you see softening from a utilization perspective, we did not see an opportunity to increase price. So I mean, I think the market is efficient that way. And so but we also haven't seen a significant pullback from a rate perspective or a pricing perspective either on the other side. So feel good about where price is. We talk about on-rent yields that have been in the high 30s% to low 40s% from a percentage standpoint. And I think that which is how we talk about price. And I think staying in that range seems to make sense.
I think it feels achievable when we think about 2025 and starting to look forward just a little bit.
Very good. Maybe just a couple of others just to think about sort of in the last, I guess, three plus four or five years, there's been a lot of money invested in, I think, in the fleet and growing the business. How do we think about sort of maintenance CapEx? And on a go-forward basis, is there still an opportunity to lean into growing that fleet, or are you moving into more of sort of a harvesting phase from a cash flow perspective?
Yeah, that's a great question. We still see opportunity to grow. It's one of the things we love about kind of the T&D markets, both on the sales side of the business and on the rental side of the business. So we still see opportunity to grow. We've guided toward kind of mid-singles from a growth CapEx perspective, mid-single-digit growth CapEx. So that works out to kind of high teens to $100 million of growth CapEx a year. It feels very achievable when you think about the fleet. And then, James, the way we think about maintenance CapEx is we think about net maintenance CapEx. And so for us, generally speaking, the last few years, we've replaced about $300 million of the fleet. But when we sell those assets, we're generating about $200 million of proceeds.
So we talk about a net maintenance CapEx number of about $100 million a year to keep the size of the fleet the same. Obviously, the way we've done that the last couple of years, you've seen the age of the fleet decrease. So you've seen where our fleet age now is down to 3.2 years old. And so I think that is kind of an important status. You're thinking about, certainly from a credit perspective, that there is the ability to age the fleet as well, which obviously generates more cash if you choose to age the fleet over time. But if you think about net maintenance CapEx, it's really that $100 million number is about right and certainly seems to have been what we've used the last few years.
But with that, we've lowered the age of the fleet, which means at some point we could choose to age the fleet if that's the right decision.
Yeah, and then just so thinking about capital allocation, obviously, I think investing internally is a big source. How about, I mean, obviously the company was formed through a pretty large M&A transaction, but are there other M&A opportunities that you think are out there? And then I guess that kind of we can sort of link that to where you think the sort of long-term target on leverage is, sort of, I guess, the balance between internal growth, M&A, debt reduction, and any equity repurchase if that was on the table.
Yep. No, we think we've got to be prudent in how we think about allocating between those. And obviously, given that we're public and publicly traded now, I think the focus on debt reduction has been our number one priority. So three times leverage seems to be the right target for us as a public company. We're obviously comfortable operating at a higher leverage level and certainly did that previously when we were owned by private equity. But three times leverage seems to be the right target for us as a public company. When the deal got put together back in 2021, we were at 4.6 times levered. We did lower leverage down to about 3.3 times leverage in Q3 of last year. And then today we're at 4.4 times leverage. So it has increased. That's been investing in the fleet.
And it's been the fact that EBITDA has declined year- over- year as well. So that will turn as we think about heading back into 2025. But I think the priority for us is always a balance between those, but it's certainly kind of lowering the leverage level. We love to invest in the rental fleet. I think spending $70-$100 million a year on growth CapEx is a great use of capital. I think we're generating kind of unlevered ROICs in that high teens to 20% range, which to me is a great way to think about capital deployment. And then we've chosen to be opportunistic about M&A. So M&A for us this year is two small tuck-in acquisitions, which was adding a location in Louisiana and another location in Long Island.
And so those are creative transactions for us and are great ways to build out our footprint. So I think we've been opportunistic on that type of M&A and then thinking about more transformational, larger M&A. There are some targets, but they just haven't been a priority for us right now.
Very good. I guess with a couple of minutes left, I think on the call, you talked about being able to grow EBITDA double digit next year. Sort of what are the pieces that get you there in terms of rental versus sale of equipment and how much is dependent on stuff that you already know or on sort of pickup in T&D activity from here?
Yeah. Yeah. Look, I think clearly we're seeing growth in both of our primary segments on the rental side and on the sale side. And so you're already seeing some of those fundamentals on the rental fleet just as utilization has returned to that mid- to high-70s% range. I think that a lot of that growth will drive the type of growth we're talking about for next year. So I think that's one big piece. We do continue to see good growth on the sale side of the business. And then the other piece, James, too, is as we're lowering our inventory levels, as you know, we expense floor plan interest as an expense against EBITDA.
And so as interest rates come down and as our floor plan, as the amount of inventory that we carry decreases, that will be the third lever that we'll use to deliver that double-digit EBITDA growth that we talked about on the last call.
Excellent. We have a little less than two minutes. Any questions in the audience? Don't be shy. Oh, there's one.
Yeah. Again, it's certainly not a priority in the near term. But I think certainly where the deal was announced, [audio distortion ] .
Yeah. Do your new equipment sales generally track what you're seeing in your rental business, or is there any kind of outliers or places you're seeing better performance?
Yeah, that's a good question. New equipment sales, so I said 60% of our revenue comes from utility. About 70% of our rental fleet is utility gear. So new equipment sales index a little bit more towards the vocational side of the business. So things like specialty dump trucks, vac trucks, water trucks, roll-off trucks are where we're seeing more new sales demand right now. So I'd say it skews slightly more towards infrastructure, and the rental fleet skews slightly more towards utility side. Yeah.
Is going into your rental fleet versus to outside sales?
Yeah, it's a good question. It's about a third of the. An easy way to think about it is that we're putting about 1/3 of the equipment into the rental fleet and then selling about 2/3.
All right. Well, they added that buzzer this year. We just got it.
Seriously. We got it done.
Under the buzzer. Thank you, Nate. Thank you all for joining us. Thank you, Ryan. Really appreciate it. Hope everyone has a great conference.
Thank you.
All right. That's great. Thank you.
Thank you.
Appreciate it.