Ladies and gentlemen, thank you for standing by, and welcome to Custom Truck One Source's third quarter 2026 earnings conference call. Please note this conference call is being recorded. I would now like to hand the conference over to your host today, Brian Perman, Vice President of Investor Relations for Custom Truck One Source.
Thank you, operator, and good morning. 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 Factor 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 yesterday after the market close. That press release and our third quarter investor presentation are posted on the investor relations section of our website. Yesterday afternoon, we also filed our third quarter 2026 10-Q with the SEC.
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 September 30th, 2026, 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 good morning, everyone. Custom Truck delivered another strong quarter, led by record performance in our rental business. Third-quarter adjusted EBITDA was $111 million, up 16% year-over-year, and adjusted EBITDA is up 24% through the first nine months. SER segment revenue was up 18%, and STEM segment revenue was up 8% year-over-year. Consolidated revenue finished at $495 million, up 3%. On the strength of these results, we are raising our full-year adjusted EBITDA guidance for the third time this year. SER continues to deliver consistently strong performance, driven by record demand in the transmission and distribution, or T&D, markets. Our rental fleet averaged 81.5% utilization during the third quarter, up 220 basis points from Q3 of last year. This was supported by record levels of OEC on rent, which averaged just under $1.4 billion in Q3, up more than 10% year-over-year.
So far in Q4, both measures have remained quite strong, with OEC on rent currently greater than $1.5 billion and utilization surpassing 84%. As I said last quarter, we believe that we are in the early stages of what could be a once-in-a-generation transmission demand super cycle, which our SER third-quarter results support. We ended the third quarter with total OEC of over $1.76 billion, up almost $86 million in the quarter and the highest quarter end level in our history. The continued investment in our rental fleet reflects sustained record-level demand and supports our expected continued growth in SER for the remainder of the year and into 2027.
Given the additional growth CapEx in our fleet year to date, our average fleet age is just under three years old, which we continue to believe is one of the youngest fleets in the industry and positions us well to support our customers' needs across the country. I want to spend a minute on capital allocation because it was the most important decision we made this quarter. Demand from our transmission customers, much of it tied to long-duration projects, has continued to build beyond what our original fleet plan assumed. We chose to meet that demand. We are raising our 2026 net rental fleet investment to $210 million-$230 million, with the incremental dollars going into long-term transmission rentals and high-return specialty products. We directed STEM production capacity to our own fleet to get these units on rent faster. These are the highest return dollars we can deploy.
Rental gross margins were nearly 79% in the quarter, and on-rent yield was over 39%. The trade-off is timing. Levered free cash flow this year will now be slightly positive rather than the more than $50 million we had expected, and most of the earnings from these units arrive in 2027. To size that, at today's rental rates and utilization, roughly $60 million of fleet generates approximately $20 million of annualized revenue and $15 million of annualized adjusted EBITDA. So the incremental units we are adding this year should be a meaningful contributor in 2027 with only a modest contribution in 2026, given delivery timing. Even with that investment, net leverage fell to 3.7 x this quarter, down sequentially from Q2, and we remain committed to getting below 3x in 2027.
Our trucks and equipment continue to power the people who strengthen and build critical infrastructure in the U.S. and Canada. The market has been focused on the durability of demand in T&D and our ability to convert improving rental KPIs into earnings and de-leveraging. We believe our trending results over recent quarters speak directly to that. Bidding activity and ongoing conversations with our customers lead us to believe that these conditions will persist into the fourth quarter and beyond. Our STEM segment had a solid quarter. With strong order flow, third quarter orders were up 22% year-over-year, even as third-party deliveries were affected by timing. For Q3, overall STEM revenue was up more than 8%, while third-party revenue, excluding sales to our SER segment, was down 5% versus Q3 of 2025.
Third-party revenue in the quarter was impacted by our strategic decision to prioritize additional investment in the rental fleet to take advantage of current and anticipated rental demand. As we noted in August, certain third-party new equipment sales were delivered in the second quarter rather than in the second half, which also weighs on the third-quarter comparison. Additionally, STEM saw more than $20 million of delayed new equipment sales in Q3, resulting from a chassis vendor recall, as well as the need to repair damage to some of our vehicle inventory from a hailstorm at our Kansas City facility during the quarter. Excluding these delayed deliveries, STEM third-party revenue would've been up year-over-year. We believe these are short-term timing issues and that these sales will be recognized in the fourth quarter.
We continue to have a high degree of confidence in our STEM business and are affirming our STEM revenue guidance for 2026. New sales order backlog ended the third quarter at $342 million, up $19 million from the end of Q2 and up 22% year-over-year. Intra-quarter order flow remained strong in Q3, and our backlog has grown so far in Q4. We continue to see strong sales demand in the utility end-market focused on both transmission and distribution equipment. In the infrastructure end-market, we have seen less growth. However, third-quarter orders grew strongly in several categories, and together with our ongoing conversations with our customers and the pace of bidding activity, this gives us the confidence to expect another year of growth in third-party customer revenue for STEM.
With respect to the EPA 27 NOx emission regulations, little has changed since the EPA introduced its proposed changes to the rules in early July. Given our current inventory position, the chassis pre-buy actions we have already taken, and our strong relationships with our chassis OEM partners, we continue to believe that CTOS is well-positioned to navigate the impact of the upcoming emissions standards changes. Given our strong year-to-date performance, robust conditions in the T&D end markets, and our outlook for the rest of the year, we are raising our full year 2026 consolidated adjusted EBITDA guidance for the third time this year and now expect a range of $447.5 million - $460 million. We are also raising our SER segment revenue guidance to $870 million - $890 million and are affirming our previous consolidated revenue guidance in the range of $2.1 billion - $2.2 billion.
Long-term sustained end-market demand buoyed by secular mega trends, combined with our ability to provide exceptional execution on behalf of our customers, sets us apart from our competition. Our longstanding relationships with our strategic suppliers and customers continue to be the keys to our success. I continue to have the highest degree of confidence in the Custom Truck team and want to thank everyone for their hard work and dedication that helped deliver our strong results in the third quarter. We look forward to updating everyone soon. With that, I'll turn it over to Chris to walk through the numbers in more detail.
Thanks, Ryan, and good morning, everyone. I will start with consolidated results for the quarter, then discuss segment performance, our balance sheet liquidity and leverage, and finally, our updated 2026 outlook. Our third quarter 2026 results reflect strong operating performance across the business and record rental fundamentals, particularly in our T&D end markets. For the third quarter, total revenue was $495 million and adjusted EBITDA was $111 million, representing 3% and 16% growth, respectively, versus Q3 2025. Adjusted EBITDA margin was 22.4%, up roughly 250 basis points year-over-year and our fourth consecutive quarter above 20%. On a GAAP basis, third quarter net income was over $2 million, or $0.01 per diluted share, compared with a net loss of just under $6 million a year ago.
Year-to-date, net income is almost $9 million versus a net loss of just under $52 million in the same period last year. About $11 million of that year-over-year improvement reflects a favorable income tax swing, a $2 million benefit this year, which includes a discrete benefit from a reduction in our valuation allowance, versus roughly $9 million of tax expense in the prior year period. The balance was driven by higher operating income and lower interest expense. Turning to our segments, SER delivered record results in Q3, with total revenue of $223 million, up 18% versus Q3 2025, driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Rental revenue of $153 million grew 20% year-over-year, and rental equipment sales grew 14%. RPO activity in Q3 remained strong, highlighting the continued robust demand for our equipment.
Third-party revenue, excluding inter-segment sales, was $212 million in the quarter, up 16% year-over-year. Segment adjusted EBITDA of $122 million was up approximately 23% year-over-year, with segment adjusted EBITDA margin of 54.6%, up almost 220 basis points versus Q3 2025. Our key rental KPIs in SER remained very strong and ahead of expectations in Q3, continuing the momentum we have experienced in recent quarters. In Q3, utilization averaged 81.5%, up 220 basis points versus Q3 of last year. Average OEC on rent in the quarter was over $1.39 billion, up more than $132 million or more than 10% versus the same period in 2025. On-rent yield in the third quarter was 39.4%, flat sequentially, and up 120 basis points year-over-year.
On-rent yield remains within our targeted upper 30%s to low 40%s range, and we continue to see opportunities for rate improvement as transmission mix grows and pricing discipline holds. Our historically strong rental KPIs reflect both increased rental activity and the continued scaling of our fleet to meet demand. Adjusted rental gross margin was approximately 79% in the quarter above the mid-70%s range we discussed last quarter, reflecting high utilization that continued flow-through from our December price increase and our focus on controlling cost. Net rental CapEx in Q3 was $114 million, and our fleet age at quarter end was just under three years, a modest decrease from the end of last quarter, driven by our increased growth CapEx. Our OEC in the rental fleet ended the quarter at over $1.76 billion, up more than $140 million versus the end of Q3 2025, and by almost $86 million sequentially.
The increase reflects strategic and disciplined fleet investment in the face of strong demand, particularly in T&D. In STEM, third quarter total revenue was $442 million, up 8% year- over- year. Third-party revenue, excluding sales to our SER segment, was $283 million, down 5% versus Q3 of 2025. As Ryan mentioned, sales to third parties were down year- over- year as we chose to strategically prioritize our production for additional investment in the rental fleet to take advantage of current and anticipated rental demand. As we noted last quarter, certain third-party new equipment sales were delivered in the second quarter rather than in the second half, which also weighs on the third quarter comparison.
In addition, sales were negatively impacted by more than $20 million of sales delayed by a chassis recall, as well as the need to repair damage to some of our vehicle inventory from a hailstorm that occurred during the quarter. We believe these events represent temporary timing issues, and that the delayed sales will be completed in the fourth quarter. STEM segment adjusted EBITDA was $37 million, and segment adjusted EBITDA margin was 8.3% in the quarter. Recall that our 2025 segment adjusted EBITDA does not include any margin on inter-segment sales, while 2026 segment adjusted EBITDA does. STEM gross margin in the quarter was slightly lower, largely as a result of mix. Our new sales backlog ended Q3 at $342 million, up $19 million sequentially, and at 3.8 months, just below our targeted range of four to six months of new equipment sales.
We've seen strong order growth so far in Q4, and our backlog currently stands at almost $400 million. Turning to the balance sheet and liquidity, with LTM adjusted EBITDA of $446 million and net debt of $1.65 billion, we finished Q3 with net leverage of 3.7 x. This represents a sequential quarterly improvement of 0.15 turns and more than a 0.8 turn improvement versus the end of Q3 2025. Notably, net debt is essentially flat year- over- year, even as we have grown our rental fleet by more than $140 million of OEC. Availability under our ABL was $234 million as of September 30th, and based on our borrowing base, we have just under $290 million of additional availability that we could potentially access via our existing facility. Inventory ended the third quarter at $1.016 billion, down $26 million from the end of the second quarter.
The increase in our inventory during the first half of this year was largely planned, reflecting chassis and whole goods positioning ahead of scheduled second half deliveries. As we prepare for our expected growth in 2027 and chassis receipts under our previously discussed pre-buy program ahead of 2027 emissions regulations, we now expect year-end 2026 inventory months on hand to be approximately flat with year-end 2025. With respect to our 2026 guidance, the demand environment across our key end markets remains very strong. For our SER segment, demand for equipment serving the T&D markets remains at record levels, led by transmission demand. Total average OEC on rent was up more than $132 million year- over- year in the third quarter, driven by transmission. Further penetration of the vocational rental market, where OEC on rent increased approximately $45 million year- over- year, is expected to provide incremental growth.
We expect our key rental KPIs to remain strong in Q4 with the typical seasonal reduction around the holidays. For STEM, we expect fourth quarter third-party new sales to increase at a mid to high teens rate year-over-year as the deliveries that were delayed in the third quarter are completed. STEM sales expectations are supported by continued strong customer demand, improving product availability and lead times, and relationships with key customers and chassis and attachment suppliers. Our order backlog trends support this. Turning to the cash flow and capital allocation, through the first nine months, levered free cash flow was approximately $4 million, an improvement of about $79 million versus the prior year period.
Given the demand trends in our T&D end markets, we are increasing our 2026 net rental fleet investment to $210 million-$230 million, about $35 million above the midpoint of our prior range, which corresponds to gross fleet investment of approximately $400 million-$430 million. The incremental spending is concentrated in long-term transmission rentals and high return specialty products and supports high single digit ending OEC growth this year. Even with this increase, net fleet investment remains below the more than $250 million we invested in 2025. Rental equipment we add today earns an on-rent yield near 40% at rental gross margins in the high 70s.
As a result of the additional fleet investment, together with year-end inventory months on hand that we now expect to be roughly flat with last year, we now expect 2026 levered free cash flow to be slightly positive compared to our prior expectation of more than $50 million. Both are investments in 2027 earnings. As Ryan noted, the incremental fleet alone represents roughly $15 million of annualized adjusted EBITDA once fully on rent. We expect to finish 2026 with net leverage well below 4x , and we continue to target below 3x in 2027, driven by adjusted EBITDA growth and improved levered free cash flow resulting from lower net fleet investment and reduced inventory levels in 2027. We're affirming our 2026 consolidated revenue guidance of $2.1 billion-$2.2 billion, or year-over-year growth of 8%-13%.
Given the strong environment in the T&D end markets and overall strength across both of our segments, we are raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $447.5 million-$460 million, resulting in year-over-year growth of 17%-20%. We still expect non-rental CapEx of $40 million-$50 million. We are increasing our SER revenue guidance for 2026 as well, projecting a range of $870 million-$890 million. We continue to project STEM revenue of $1.63 billion-$1.7 billion, with STEM third-party new sales revenue growth of 3%-10%. Overall STEM sales are expected to be down marginally to up 3%, with results now expected toward the upper end of that range as higher-than-planned intersegment sales to support our rental fleet growth supplement third-party growth.
For the fourth quarter, we expect consolidated revenue and adjusted EBITDA to be up both sequentially and year-over-year. So far in the fourth quarter, our OEC on rent is significantly above prior year levels. We expect both OEC on rent and utilization to grow sequentially. On a consolidated basis, the fourth quarter remains our historically strongest quarter. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite broader macroeconomic uncertainty, recent results and end market fundamentals support our confidence in the long-term demand drivers and our ability to deliver 17%-20% adjusted EBITDA growth this year. With LTM adjusted EBITDA now above $446 million, we currently expect another year of double-digit adjusted EBITDA growth in 2027. We will provide full 2027 guidance when we report fourth quarter results early next year. With that, operator, we can open the line for questions.
We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Michael Shlisky with D.A. Davidson. Your line is open. Please go ahead.
Good morning, and thanks for taking my questions.
Hi, Mike.
Good morning.
Hey there, guys. Can we start with your comments, Ryan, on the utilization in the current quarter? I think you mentioned it exceeded 84% at this point of the year. Do you expect that to come down and kind of be more normalized in that low 80%s that you're seeing by the end of the quarter as the assets that you're trying to roll out, I would assume, still have some ways to go for the rest of the quarter here? Or do you think that 84% is actually okay, and maybe at the high end of that sweet spot range?
Yeah, it's a good question, Mike, and there's two things I think that are really worth highlighting. One, it generally increases this time of year. So really, late October into November really is when it will continue to build, and that's what we're seeing currently. So that's trending. But the demand for transmission, Mike, right now is so strong that certainly as we're talking internally, I think there will be some customers who decide to keep equipment rather than returning it, which is what normally happens during the holidays, just because it may not be available for them after the holidays.
I think it will, and I think Chris made the comment that it will slow down a little bit into December, but we think it will not be as significant into the end of the year just because the demand environment right there, Mike, is so good, that I think people don't want to lose some of that transmission gear in particular.
Got it. Great. Then your comment that you've made all along here about a really good demand, sounds like in both transmission and distribution. Is a lot of that really still pinned on data centers and AI in various communities, or is it really the older drivers that you've had, which are just ongoing grid hardening and maintenance and expansion for everyday activities not related to data centers? I guess I'm kind of curious, are you getting any pushback or anyone saying, "We're going to be holding off a little bit on that data center related activity," late 2026 to 2027 as communities speak out as Election Day passes, et cetera, or are you still seeing strong demand from the older drivers?
Yeah, it's a great question, and we're still seeing good growth, Mike. I think you're right. As we've talked about in the past, we're not data center specific, that when a new data center is announced, somehow that drives incremental demand for specific CTOS equipment. It's much more that that's just a big consumer of power. I think a lot of what we're seeing right now, we would be talking about even if it was just the grid upgrade and some of the modernization that was happening. Certainly, data centers are a consumer of power, and that's a very good thing for us. But we're seeing a lot. We have our own construction trackers that we're tracking on the transmission side. As we talk to our customers, they're all talking about new projects that are going into construction.
There's obviously a lot of line upgrades that are happening right now. You're correct, distribution is also in a very good spot right now, and we're seeing rate cases continue to be approved. We're seeing, when we look forward with our own forecasting, it feels like 2027 and really into 2028, it will continue to be a very strong demand environment, which should benefit Custom Truck and certainly with some of the other macro dynamics going on, will benefit the rental fleet, in particular.
Got it. Maybe the last one from me. The impact from the hailstorm, I was curious whether that was covered by any kind of insurance or is going to be in the fourth quarter. Even the chassis recall, do you have to actually send trucks back, or did they have your techs take care of the recall? Are you going to be paid for that as well?
Yeah, Mike, this is Chris. In terms of the hailstorm, in the big picture, it was relatively immaterial, and yes, it's covered by insurance. We had a $1 million deductible on our policy, and it did go above that, but not much above that. On the second one, we're working with the dealers to get the repairs done, and the OEM is covering those costs. Again, we think both of those will kind of unwind here in the fourth quarter.
Great. I appreciate the answers. I will pass it along.
Thanks, Mike.
Your next question comes from the line of Manish Somaiya with Cantor Fitzgerald. Your line is open. Please go ahead.
Thank you. Good morning, Ryan.
Good morning.
Chris, Brian, and the team. My first question is on SER margins, which were quite impressive this quarter at 54.6%. How should we think about those margins as we move ahead? Is the mid-50s the right normalized range, or is this sort of a temporary blip? Maybe if we can start there.
Yeah, Manish, it's Chris. If you look back, I think we've been living kind of in that low to mid-50s for the past few quarters. I would expect that we can continue to live there. There may be some upside, a little bit of upside there. But the answer is yes, I think modeling kind of in the low to mid-50s is a reasonable number.
A lot of that, Manish, would just be a function of mix too, between core rental revenue and then what assets are sold out of the rental fleet. So that's really probably the only.
Okay. Then I think on the pricing front, sorry, Ryan, I do not know if I interrupted on something. The line just kind of cut off a little bit.
No, you are good.
Okay, sorry. On the pricing that we had at 39.4%, again, despite all the growth that you had on the fleet side, maybe if you can just give us a sense on what you are seeing, what the opportunity is for higher pricing as we go into 2027. I think you guys have alluded to the fact that the Transmission markets are quite strong as we move into 2027 and into 2028 as well. But, again, just trying to understand what the flexibility might be on the pricing front with the strong demand.
Yeah, I think it should be a good demand environment, and so that means that there should be a pricing opportunity. I think we are seeing the price increase that we actually took last December continue to roll through. We are seeing some of the benefit of transmission as typically a higher rate or higher on-rent yield. And then, yes, I would expect as we start to think about guidance into 2027, that there will be the opportunity to increase price. Some of that will be to take care of some of the cost increases, right, that we are seeing from our suppliers heading into 2027. But it should be an opportunity to increase price as well.
Just on the infrastructure markets, the transport bill, I guess, is still out there pending some permanency. On the telecom side, I think you did kind of mention BEAD that could potentially help that market. Perhaps if you can just give us your sense as to how you're thinking about the transportation bill, those markets, plus potentially the positive impact from BEAD as we look ahead.
Yeah. Look, infrastructure transmission and distribution has been incredibly strong. I think that's certainly what we're seeing, and that shows up more in our rental fleet as we talked about. On the infrastructure side specifically, we're seeing some pockets of growth. Some things like our dump truck and water truck and some of our heavy haul tractor and trailer product categories are really beginning to pick up. Some of that is related to more data center construction. So there's some positive from data center construction. We haven't seen a big lift yet from BEAD. As you know, telecom is a small part of our business. But we have not seen that materialize yet in any significant way.
Right. Just lastly, on the leverage metrics that you laid out for 2027, below 3x in 2027. How should we think about the de-leveraging as far as the mix between EBITDA growth and debt paydown? For modeling purposes, is it safe to assume sort of like a 50/50 type scenario?
This is Chris again. We haven't really given specific guidance for next year yet, and we will coming out of Q4. So we have given a little bit of guidance indicating that we're going to have double-digit EBITDA growth next year. But the answer to your question is it'll be a combination of both. Certainly there's going to be a part of the de-leveraging that comes from that double-digit EBITDA growth, but we're also going to continue to focus on generating free cash flow and paying down debt. So it'll be a combination of both. Coming out of Q4, we'll give a lot more granularity on kind of the path to get there.
Okay. Well, thank you so much, guys. Congrats.
Thank you.
Thank you.
Your next question comes from the line of Scott Schneeberger with Oppenheimer & Co. Your line is open. Please go ahead.
Hey, guys. Good morning. It's Daniel in for Scott. Thank you for taking our question. I'm curious, could you please provide some color on the drivers of the backlog for STEM and how we should think about STEM generally as it pertains to that as we look into next year, as it pertains to the double-digit adjusted EBITDA growth? A little bit more color around the outlook for STEM, please. Thank you.
Yeah. As we talked about, we saw backlog and order conversion both increase in the quarter, which to us is a positive indicator heading into Q4, which is typically the biggest quarter generally for STEM. I think you'll see good growth there. Then I think year to date STEM third-party revenue is up. I think it's like 1.5% if I'm not mistaken. If you think about overall revenue year to date, it's up 5%, which includes adding the assets into the rental fleet. I think it will look similar as you're starting to think about what next year can look like. We see opportunities to grow. We'll obviously be thoughtful on how we invest in the rental fleet. But I think that mid-single-digit growth is why we've continued to hold the guide from a STEM revenue perspective as well.
Got it. Thank you. Also as we think about the pull-forward effect here from the fleet investment. It makes sense given the growth alignment you are seeing. But as we think about the pull-forward impact on CapEx and free cash flow into this year that could catch up next year, how should we think about the magnitude of that, please? Thank you.
I'll start and Chris can add some color. But yeah, I mentioned in my comments that it was about $60 million is what we were talking about in terms of sizing that. You can think about that as a meaningful portion of the levered free cash flow we would have generated otherwise. Then we've tried to quantify that for you, too. I think I said about $15 million of annualized EBITDA. To me, that's a pretty easy payback scenario as you start to think about 2027 and think about a 3x leverage target on that incremental EBITDA, then obviously the cash flow that generates next year, too. But I think that's probably the right way to think about sizing it. It should be additional growth for the SER and for the rental fleet heading into 2027.
That would help quantify some of the cash impact as well.
Yeah. Probably the only other things I'd add is if you think about it year-over-year, the rental fleet is up about $150 million. Leverage is down about 0.8 x, and we've been able to do that with slightly positive levered free cash flow. I think we feel like it was a really good investment to set us up for next year as Ryan just kind of laid out the impact in 2027.
Got it. Thank you. Final one from me. I know the deck mentioned disciplined SG&A management in the SER segment. Could you guys please elaborate on that if there's any nuances we should think about? Thank you.
No, I think it's just an area that we've continued to stay focused on is let's be efficient with how we're spending SG&A. The teams have done a great job from a footprint perspective, and then obviously from a managing kind of the overall cost perspective as well. I think we feel like we're well-positioned heading into the last quarter and heading into 2027 as well.
Got it. Thanks, guys. Congrats.
Thanks, Daniel.
Your next question comes from the line of Brian Brophy with Stifel. Your line is open. Please go ahead.
Yeah, thanks. Good morning, everybody. Appreciate you taking the question. Curious how far out some of the large transmission projects are that you're talking with customers currently, and what you would typically see in a more normalized demand environment. Thanks.
Yeah. I think that's why we say it's such a great demand environment, Brian, is because the dynamic has certainly changed. We're talking about projects obviously now that are starting in 2027, and some that are even starting in 2028, and that's just a new dynamic. For us, generally, it's about projects that are starting in the next few weeks, or maybe it's months in advance. That's I think why we made the decision to invest additional capital into the rental fleet too, is that when we're making that investment, it's for projects that are imminent, that we're deploying that capital right away. I feel really good about that. The visibility forward has continued to stay very strong, which is why I think we're as optimistic about the growth we're seeing in 2027 and even into 2028 as well.
Yeah, I appreciate it. That's very helpful. I guess just on the $20 million that was deferred in the quarter in STEM. How much of that has already been delivered here in October versus how much are you expecting later in the quarter? Thanks.
Yeah, I think the majority has already been delivered. It's obviously as we're working through some of the recall issues, which, as Chris mentioned, the OEM and the dealer are both helping us daily with that to work through those issues. We're able to deliver those trucks. I think the majority of it has been delivered, and the rest will finish over the rest of the quarter.
I appreciate it. I'll pass it on. Thanks, guys.
Thanks, Brian.
Thanks, Brian.
Your next question comes from the line of Naim Kaplan with Deutsche Bank. Your line is open. Please go ahead.
Hi, good morning. Thanks for taking my question. On the line for Nicole DeBlase. The first one, you described the current transmission market as potentially a once in a generation cycle. Just wondering maybe if we can get a view into the customer conversations, maybe what's changed most meaningfully with respect to those customer conversations, let's say the past six months or so?
Yeah. I think it's two things. It's a great question, and I think it's why we're as optimistic as we are, and obviously why we made the investment that we did. There's an increase in both new projects. We're seeing new projects that are going into construction. I think a lot of that is some of the regulatory changes we're starting to see the benefits of, and that will continue to accelerate. Then we're seeing some of the maintenance work on those lines also happening, too. I think it's a combination of both. I think as we listen to our customers, they're saying the same thing, that their backlogs are increasing, that their expectations for 2027 and 2028 are increasing as well. Then when we track the data ourselves from the publicly available sources, that's what you're seeing.
The forecast continue to increase every time we do a data poll. I think it's why we're as optimistic as we are that this will continue for the foreseeable future.
All right. That's very helpful. Then looking at 4Q. If you do the bridge, full year guidance implies $560 million - $580 million revenue, $120 million or so, $130 million - $135 million adjusted EBITDA in 4Q. Just trying to maybe get a better understanding of the key assumptions behind the range, particularly around STEM delivery timing and the SER utilization.
Yeah. This is Chris. That is one of the challenges we always have in Q4 is what's going to ship in the fourth quarter on the STEM side, because things can pull forward from January, things can push out to Q1. Then on the SER side, we have pretty good visibility as Ryan walked through on the rental side, what's a little bit more challenging is the rental asset sales where either the customer has a right to buy a unit or comes to us and wants to buy a unit. That's why we've left a little bit of a range in our guidance is because those variables are difficult to predict. Sitting here today, I think our commentary on the rental side is we're seeing good utilization, good OEC on rent. It's now over $1.5 billion Q3, I think on average it was $1.394 billion, $1.395 billion.
We have continued to see growth. But overall, I think we feel very good overall about the business, certainly on the rental side. That is why we have kept a narrower range, but still a reasonable range to take into account some of those variables that could either pull in or push out, certainly on the STEM side.
Okay, great. That is helpful. I will pass it on.
Thanks.
Your next question comes from the line of Justin Hauke with Baird. Your line is open. Please go ahead.
Oh, great. I guess I just wanted to ask, one, on the free cash flow as we look into next year. Obviously, I think it makes sense the pull forward on the CapEx and the returns you outlined. That is obvious, but you did reiterate the 3x levered by the end of 2027, and I guess, I do not know what double-digit EBITDA growth means necessarily, but it would imply that there still is, I think, a pretty meaningful free cash flow to drive that. I guess the question is, I think part of the opportunity for you guys has been that you have a lot of excess fleet that you can deploy. I am curious about your thinking for next year. If you continue to see this strong growth, what keeps the CapEx from having to continue to be a factor there to support that? Thanks.
Yeah, it's a great question. I'll start. I'll let Chris chime in. Justin, I think you got three things that we like to talk about there. One, you're going to have an increased EBITDA rate and the cash flow that that generates. I think you'll see the benefit of that heading into 2027. We'll continue to work on net working capital. Here, we talked about, Chris mentioned some of the strategic investments we've made to get in front on chassis heading into 2027. I think some of that we should benefit from heading into 2027. Then you're right, as the fleet grows, as we think about CapEx into next year, I think there's just the opportunity to continue to use the fleet to generate cash as well. As Chris mentioned, it'll be a mix of EBITDA growth. As we've said, double digit.
We'll give more firm guidance on where in double digit, obviously, that growth will come from. Then you're right, that implies some amount of free cash flow, which would be more consistent with what we originally said for 2026. Obviously, with some of the growth that we're seeing from Eaton, I think you get kind of right there.
Okay. That's helpful. That's all from me for right now. Thank you.
Great. Thanks, Justin.
There are no further questions at this time. I will now turn the call back to CEO, Ryan McMonagle, for closing remarks.
Thanks everyone for your time today and your interest in Custom Truck. We appreciate the continued engagement and look forward to updating you next quarter. In the meantime, please don't hesitate to reach out with any questions. Thank you again, and have a great day.
This concludes today's call. Thank you for attending. You may now disconnect.