Custom Truck One Source Inc Stock

Ladies and gentlemen, thank you for standing by, and welcome to Custom Truck One Source's Second Quarter 2026 Earnings Conference Call. Please note, this conference call is being recorded.

I would now like to hand the conference call 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 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 yesterday after the market closed. That press release and our second quarter investor presentation are posted on the Investor Relations section of our website.

Yesterday afternoon, we also filed our second 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 3 months ended June 30, 2026, and prior periods.

Also a reminder that beginning last quarter, our financial reporting now reflects our 2 new reportable segments: Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing, or STEM. While our 2026 results in our earnings press release and SEC filing reflect the application of intersegment pricing and margins as per accounting requirements for intersegment sales, the segment results for 2025 reflect the intersegment sales with no margin as no intersegment agreement was in place in the period. For an illustrative comparison of what the 2025 results would have been had intersegment sales been reflected with the appropriate gross margin and had other internal accounting policies been in place at the time, please see the appendix of the Q2 investor presentation posted on our Investor Relations website.

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. We delivered record revenue in the second quarter, capping a strong first half, driven by continued strong momentum in our core end markets and outstanding execution by our team.

In the second quarter, we generated revenue of $563 million and adjusted EBITDA of $117 million, up 10% and 25% year-over-year, respectively. Our Specialty Equipment Rental segment continues to deliver consistently strong performance, driven by sustained and growing demand in the transmission and distribution or T&D markets.

Our rental fleet averaged 81.6% utilization during the quarter, up 400 basis points from Q2 of last year. This was supported by continued robust levels of OEC on rent, which averaged $1.37 billion in Q2, up 13% year-over-year. So far in Q3, both measures have continued to show year-over-year growth. We believe that we are in the early stages of what could be a once-in-a-generation transmission demand super cycle.

We ended the quarter with total OEC of $1.68 billion, the highest quarter end level in our history, which will support our expected continued growth in SER revenues in the second half of this year. Also, our average fleet age is just over 3 years old, which we believe is one of the youngest fleets in the industry, and positions us well to support our customers' needs across the country.

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 cash flow, and 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 through the remainder of 2026 and beyond. Our Specialty Truck Equipment and Manufacturing segment had record performance in the second quarter, with equipment sales reaching an all-time quarterly high for the company and reflecting continued healthy end market demand and order flow.

For Q2, STEM revenue, excluding sales to our SER segment, was up 5% versus Q2 of 2025, which at the time was a record for non-fourth quarter equipment sales. New sales order backlog ended the second quarter at $322 million, down $89 million from the end of Q1 on record Q2 deliveries. Despite the decrease in our backlog in Q2, intra-quarter order flow remains strong, and our backlog has grown so far in Q3. We continue to see strong sales demand in the utility end market, especially focused on transmission equipment.

In the infrastructure end market, we have seen less growth, but our ongoing conversations with our customers and the pace of bidding and our order activity combined to provide us with the confidence to expect another year of growth in third-party customer revenue for STEM.

With respect to the EPA '27 NOx emission regulations, the EPA introduced its proposed changes to the rules in early July, which maintained the 2027 NOx standards while adding non-conformance penalty provisions. The regulations are expected to be finalized later this year.

Given our current inventory position, the chassis prebuy actions we have already taken and our strong relationships with our chassis OEM partners, we believe CTOS is well positioned to navigate the impact of the upcoming emission 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 increasing our previous full year 2026 consolidated revenue and adjusted EBITDA outlooks. We expect consolidated revenue in the range of $2.1 billion to $2.2 billion and adjusted EBITDA in the range of $437.5 million to $455 million.

Long-term sustained end market demand buoyed by secular megatrends, combined with our ability to provide exceptional execution on behalf of our customers, sets us apart from our competition.

Our long-standing relationships with our strategic suppliers and customers continue to be 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 achieve our extraordinary results in the second 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'll start with the consolidated results for the quarter, then discuss segment performance, our balance sheet, liquidity and leverage and finally, our updated 2026 outlook.

Our second quarter 2026 results reflect stronger operating performance across the business and improved rental fundamentals, particularly in our T&D end markets. For the second quarter, total revenue was $563 million and adjusted EBITDA was $117 million, representing 10% and 25% growth, respectively, versus Q2 2025.

On a GAAP basis, second quarter net income was $10 million or $0.05 per diluted share compared with a net loss of $28 million a year ago, bringing first half net income to $6 million. About $19 million of that year-over-year improvement reflects a favorable income tax swing as the prior year quarter carried a tax expense related to an adjustment in our estimated effective tax rate. The balance was driven by higher operating income.

Turning to our segments. In SER, second quarter third-party revenue, excluding intersegment sales, was $219 million, up 20% year-over-year, driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Rental sales activity benefited from an increase in RPO activity in Q2 versus the same period last year. Segment adjusted EBITDA of $117 million was up 26% year-over-year, with segment adjusted EBITDA margin of 53%, up more than 700 basis points versus Q2 2025.

Our key rental KPIs in SER remained quite strong in Q2, continuing the momentum we've experienced in recent quarters. In Q2, utilization averaged 81.6%, up 400 basis points versus Q2 2025. Average OEC on rent in the quarter was $1.37 billion, up almost $160 million or 13% versus the same period in 2025.

On-rent yield in the second quarter was 39.4%, reflecting both sequential and year-over-year increases for the quarter. On-rent yield remained within our targeted upper 30s to low 40s percent 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.

Net rental CapEx in Q2 was $36 million, and our fleet age at quarter end was just over 3 years, a modest increase from the end of last quarter, which is consistent with our plan to reduce maintenance CapEx and age the fleet somewhat this year.

Our OEC in the rental fleet ended the quarter at almost $1.68 billion, up approximately $120 million versus the end of Q2 2025 and by almost $24 million sequentially. The increase reflects disciplined fleet investment in the face of strong demand, particularly in T&D. While we expect to continue to invest in the fleet in 2026, our planned decrease in maintenance CapEx in 2026 compared to 2025, should contribute to increased free cash flow generation this year versus last year.

In STEM, second quarter third-party revenue was $345 million, a quarterly record and up 5% versus Q2 of 2025, which previously represented our highest non-fourth quarter revenue in our history. STEM segment adjusted EBITDA was $37 million and segment adjusted EBITDA margin was 8.5% in the quarter. Recall that our 2025 segment adjusted EBITDA does not include any margin on intersegment sales, while 2026 segment adjusted EBITDA does.

STEM gross margins in the quarter were slightly lower as a result of increased sales to national accounts, which tend to carry modestly lower margins. Our new sales backlog ended Q2 at $322 million, down $89 million sequentially on record Q2 deliveries at approximately 3.5 months, just below our targeted range of 4 to 6 months of new sales.

June quoting activity increased 26% year-over-year, supporting expected growth in our order intake in the second half. We've seen strong order growth so far in Q3, and our backlog currently stands at more than $340 million.

Turning to the balance sheet and liquidity. With LTM adjusted EBITDA of more than $431 million and net debt of $1.66 billion, we finished Q2 with net leverage of 3.85x. This represents a sequential quarterly improvement of 0.17 turns and more than a 0.8 turn improvement versus the end of Q2 2025.

Availability under our ABL was $229 million as of June 30. And based on our borrowing base, we have more than $240 million of additional availability that we can potentially access via our existing facility.

Free cash flow generation and deleveraging remain key focus areas for us. The increase in our inventory during the first half was largely planned, reflecting chassis and whole goods positioning ahead of scheduled second half deliveries together with the chassis prebuy actions Ryan discussed. Even with that increase, we expect to reduce inventory and floor plan balances during the second half of 2026, which should support improved free cash flow generation. Through the first half of the year, levered free cash flow improved by approximately $40 million versus the prior year period.

With respect to our 2026 guidance, the demand environment across our key end markets remains very strong. We expect the STEM segment to continue to benefit from an overall favorable macro demand environment as well as our strong relationship with our key customers and chassis and attachment suppliers. Our order backlog supports this.

In our SER segment, what we see on rent and utilization reached historically high levels in the second half of fiscal 2025, and consistent with our year-to-date results, we expect those levels to continue building sequentially in the second half of 2026.

Demand for our equipment that serves the T&D utility markets continues at record levels, and we expect the vocational rental market to provide incremental growth as we further penetrate this expanding end market.

Given our young fleet age, we continue to expect to be able to significantly reduce our overall investment in our rental fleet in 2026 versus 2025, while continuing to generate growth. The small increase in our fleet age to just over 3 years in the second quarter reflects this. However, given demand trends in our T&D end markets, we plan to modestly increase our net investment in our rental fleet from our previous estimate and now expect a range of $170 million to $200 million, which supports mid-single-digit net OEC growth this year. This represents a meaningful reduction from over $250 million in net fleet CapEx in 2025.

After prior year's investments in inventory, driven by the strong demand environment, we expect to continue making progress on further net working capital improvements in 2026, as we continue on our path of reducing inventory levels on hand to our target level of below 6 months. As a result, we continue to expect to generate more than $50 million of levered free cash flow and reduce our net leverage ratio to meaningfully below 4x by year-end 2026, while progressing towards our 3x net leverage target in 2027. Our increased 2026 revenue guidance reflects consolidated revenue in the range of $2.1 billion to $2.2 billion or year-over-year growth of 8% to 13%.

Given the strong environment in the T&D end markets and overall strength across both of our segments, we are also raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $437.5 million to $455 million, resulting in year-over-year growth of 14% to 19%. We still expect non-rental CapEx of $40 million to $50 million. We are increasing our segment guidance for 2026 as well.

We are projecting SER revenue of $850 million to $875 million and STEM revenue of $1.63 billion to $1.7 billion, with STEM third-party new sales revenue growth of 3% to 10%. Overall STEM sales are expected to be down marginally to up 3%, with the variance attributable solely to a year-over-year reduction in intersegment sales due to lower SER maintenance rental CapEx spending this year.

For the third quarter, we expect consolidated revenue and adjusted EBITDA to be up year-over-year, though modestly below second quarter levels. A portion of our second quarter new and used equipment deliveries, including RPO buyouts, have been planned for the second half. That timing shifted results between quarters but did not reduce the full year expectations reflected in the ranges we raised today.

Our rental business enters the third quarter with OEC on rent and utilization above prior year levels. We expect both to grow sequentially with year-over-year growth rates naturally moderating from here as we lap a second half of 2025, that posted the largest increase in OEC on rent in our history. 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 meaningful adjusted EBITDA growth this year.

With that, operator, we can open the line for questions.

[Operator Instructions] Our first question is from Swetha Rakhecha from Cantor Fitzgerald.

Ryan and Chris, Swetha here on behalf of Manish. Congrats on the great quarter.

My first question is on the quarterly cadence given that you've indicated that third-party new equipment sales and used equipment sales and RPO buyouts have shifted from the second half into 2Q. Can you help us quantify the revenue and the adjusted EBITDA that is being pulled forward and clarify how much of it came from 3Q versus 4Q?

[Technical Difficulty]

Brian, just making sure you're unmuted on your end. We are currently experiencing some technical difficulties. One moment while we deal with these difficulties.

Everybody, thank you so much for standing by while we dealt with those technical difficulties. We are back in the Q&A portion.

Just a reminder that the question is from Swetha Rakhecha from Cantor Fitzgerald. Swetha, if you could just ask your question one more time, so we could get the Q&A portion rolling.

She's not able to, I can repeat the question. Basically, she was asking -- this is Chris. She was asking about the cadence, Q2, Q3, first half, second half.

And so I think the way I'd answer that, Swetha, is typically -- especially in Q2 and Q3, we have seen historically some push forwards and pushouts. So to quantify the net is a little more challenging. But maybe just to give you a little bit of color, what we're expecting in Q3 -- if you look back last year, we saw Q3 growth of roughly 20% EBITDA year-over-year. What we're expecting this year is we're expecting both revenue and EBITDA to grow kind of high single-digit percentage range, while coming in below the second quarter levels that we had mentioned, really, which just reflects the delivery and RPO buyouts that shifted into Q2 from the second half.

And then historically, we've given guidance of the split first half, second half, which has been anywhere 45% to 47% first half and then 55% to kind of 57% in the second half of the year. This year, we think because of that pull forward and just the timing of last year's ramp-up on OEC on rent in the second half of the year that it's likely to be more of a 48%, 52% kind of split, first half, 48%, second half, 52%. And then looking at Q4, that typically is our seasonally strongest quarter, and we'd expect that to continue to be the same this year.

Your next question comes from Michael Shlisky with D.A. Davidson & Co.

Can you hear me okay?

Yes, we can hear you. Good to talk to you.

Because I couldn't hear you for a few moments there. Okay. You had mentioned intra-quarter order flow was strong. Perhaps I missed this, but could you maybe just share with us how much were orders up year-over-year in the STEM segment, whether they were put in the backlog or they made through within the quarter?

Yes. It's a good question, Mike. We saw converted orders up kind of in that low single digits range and then orders or quotes were up in the double-digit range. And so it's kind of a good leading indicator for the back half of the year.

Got you. And I also wanted to ask about the emissions standard changes. I mean, basically, your customers aren't really hauling freight. They're not looking to be out on the road 12 hours a day driving around. Do you consider the recent changes really just an inflation item that you need to pass along? And if so, I mean, have the customers had a really negative reaction to the fact that because of things that are out of your control, you're going to have to raise prices a bit?

Yes, it's an interesting one to work through, and it still feels like some of the regulation is still being finalized. But I think the non-conformance penalties have been announced, and we're estimating those are in kind of the $4,500 to $7,000 range depending on spec and obviously, a few of the factors in there. And that's to continue running on the same engines, right, that we're running on today.

And so we've taken the position, Mike, as you know, that let's buy forward a little bit, just the economics of the non-conformance penalty to us makes sense to carry more inventory heading into 2027. And then obviously, for us, the engine that is most impacted is the L9 engine, which is shifting to the X10 engine from Cummins. And so we're watching that closely and Cummins is now saying they'll be in full production on the X10 later in Q3 of next year. So we're watching how that plays through. But yes, it's going to be a cost increase for our customers, and we're obviously doing everything we can to mitigate that heading into '27.

And maybe lastly, just the map in the slide deck, how close are you to opening up some of those lesser served markets right now, like the New York, New Jersey Metro area, the Carolinas, et cetera, the other items that you mentioned on the slide deck. I did see an opening in the Northwest. What might be next on the calendar for you for your footprint here?

Yes, we're working on all those markets. So that's -- those are areas where there's clearly opportunity to grow. And so I don't -- we're not expecting any other openings this year. And so those would be kind of in the years ahead. And that would be fairly consistent with how we guided a couple of locations -- opening a couple of locations this year.

Your next question is from Naim Kaplan with Deutsche Bank.

This is Naim on for Nicole DeBlase. So my first question, you've consistently highlighted that your long-term demand is underpinned by major federal funding packages, including the IIJA, the IRA and the CHIPS Act. So given that we're getting later into 2026, can you describe how these federal dollars are translating into actual order flow? What percentage of the $322 million STEM backlog or SER booking pipeline directly tied to projects receiving federal subsidies or grants? And in which fiscal year do you project the legislative tailwinds could reach their peak contribution to top line growth?

Yes. Good question, and I'll try to answer it with maybe kind of broad comments about our end market demand. So we're seeing -- right now, we're seeing really strong demand in transmission and distribution. I would argue that is less kind of backstopped by some of the federal funding programs. Obviously, there are some grants and approvals that are going on out there. So I'd say those are less directly impacted by federal spending dollars. They are impacted by some of the regulatory improvements, right, that we're seeing on that side of the business. And so I think that's where we're seeing really strong demand right now.

In some of our prepared comments, we mentioned the infrastructure side of things, which would be more directly impacted by some of those federal spending dollars. We have yet to see that pick up in a meaningful way. And so I would expect that as those dollars are released, it's kind of a future benefit later this year or really into next year that we would begin to see some of those dollars really impact backlog and ultimately our revenue.

Got it. That is helpful. And then one question on SER, if I may. So SER average fleet utilization reached 81.6%. So this utilization is at the very high end of your historical target ranges with a young average fleet of about 3 years, is 81% to 82% sustainable run rate in the supply environment? Or should we model a normalization back down to like the high 70s as you raise net rental CapEx -- as you raise net rental CapEx brings new fleet online in the second half?

Yes, I think that low 80s is a good spot to live, right? And I think a couple of things are benefiting that, right? You mentioned the fleet days, which I think is a positive. And then certainly, as you're heading into a transmission cycle, those projects are generally longer duration projects, which should benefit utilization kind of where it is or even climbing into the fall, which is generally what happens in our business.

Your next question is from Justin Hauke from Baird.

Yes. I guess, Chris, you kind of answered this question with the seasonality, but I was just wondering if you could quantify the pull forward of orders that you saw in 2Q that were expected in 3Q? And then I guess maybe a broader question is just -- is some of that people converting from what would otherwise have been a rental and they want to own equipment ahead of kind of long-term visibility? Or what's driving that?

Yes. I'll let Chris start maybe on the seasonality, Justin, and then I can give you some commentary on what's driving it.

Yes, Justin, it's hard to quantify because there would have been pull forward and push out last year as well. And so I don't want to give a gross number when it really should be a net number. But it was tens of millions, I guess, between both new sales and used sales. But again, last year, there would have been a similar pull forward related to some of the prebuy pre-tariff to get ahead of the tariff prebuy last year.

I'll let Ryan answer the second part.

Yes. And then, Justin, we've talked about this in the past and certainly when -- several years ago when the business was performing well. But we see kind of that -- some of that prebuy is just a good indicator of long-term demand. So some of that showed up and Chris mentioned some of those sides, but some of that showed up in our rental asset sales line. And that was customers who wanted to go ahead and have their equipment for the long term. And so that's -- you take that as a good indicator of future as well.

Great. And I guess my second question, I apologize if you gave this number, I didn't hear it. But obviously, the levered free cash flow guidance isn't changed, but you did talk about holding the inventories up or I guess, investing a little bit more there. They were up sequentially. Are you still expecting kind of $100 million of inventory benefit for the year? And I think on a working capital basis, I think it was supposed to be closer to $30 million to $40 million. I'm just trying to see if there was any change in kind of the inventory expectations.

Sitting here today, that is still our target. I think more importantly, we still feel comfortable we'll be above the $50 million of levered free cash flow. How that comes EBITDA growth versus net working capital versus other potential cash flow triggers, they're kind of moving parts, but I think we still feel like there's a path to get the numbers that you just quoted.

Your next question is from Scott Schneeberger from Oppenheimer.

Congratulations on the strong quarter. Ryan, I very much appreciate the transition demand super cycle phrase coined. I'd like to dig in a little bit there. Could you talk, maybe take us a little bit deeper about what is driving in transmission, what you're seeing there? How sustainable is it? Why coining it a super cycle? And then maybe some digging into some other verticals that are very strong. Are you seeing a lot of data center and obviously, transmission-related enabling of power tied to it? Just a bit digging in more to the end markets.

Yes. No, good to talk to you, Scott, and yes, happy to do that. There's a couple of things I think that we're really lasered in on. One is obviously a lot of our customer -- what our customers are saying, so both our public company customers and kind of what they've reported even in this quarter and how they're talking about it. But maybe more importantly for us is what our kind of day-to-day conversations are with those customers. And so there's a lot of planning going on for new lines that are beginning, that are being prepared, that are being designed, and the equipment is beginning to be staged. And so for us, that's really kind of that indicator of, hey, this is a long-term cycle.

So it's projects that don't begin until 2027 and going into 2028 as well. And so I think that's where the tone of the conversation has changed meaningfully. So we -- obviously, that's what we're listening to most closely. A lot of kind of the industry aggregators of what's going on with line miles and completes and expected starts, obviously, is strong, it's encouraging there as well.

So I'd say that's kind of the fundamental thing, Scott, that really gives us comfort that this is the beginning or early innings, beginnings of a very long cycle here, which generally is how transmission plays if you look back historically as well.

So I'd say that's certainly where the strongest is. And then to ask about some of the other end markets, distribution is still good. It does feel like maybe there are some IOU dollars shifting from distribution to transmission to meet the demand that we're seeing in the short term.

And then you're right, Scott, things like data centers are -- they are a good tailwind. They're a good tailwind for us, but not fundamentally what's driving kind of the growth that we're seeing in the T&D end market.

I appreciate that, Ryan. And then can we talk a little bit about pricing? Obviously, a lot of dynamics impacting how pricing is right now, how it is going to be going forward. OEC yield on rent has been accelerating in each of the quarters in the first half, coming into some tougher comps and obviously, engine changes into next year. Can you just speak about appetite of the customers on taking pricing? It seems like it's pretty good right now, and there's understanding of cost pressure. But just where you think that can go over, let's say, the next 2 to 6 quarters, please?

Yes, I'll start, and Chris can kind of give some historical perspective, too. But look, Scott, 2 things are going on right now. There's obviously, when there's strong demand, we obviously want to be competitive in price and take price kind of where we can.

The other dynamic that we've talked about, too, is as transmission picks up, right, it's generally at a higher on-rent yield than distribution. And so you're seeing a little bit of that impact in our business today as we talk about this transmission super cycle period, right, that we're going into. So I think we talked about on the Q1 call, we took price up about 5%. And obviously, the way that gets applied is it's not just a peanut butter spread, but we took price up about 5% at the very end of last year, beginning of this year.

Chris, do you want to add anything else?

No, probably the only other thing I would add is we've talked about kind of wanting to live in that 15% to 18% range on new sales. We're at the lower end of that range right now. And largely, that was driven in this quarter, really high volume with some mix to larger customers and then some product mix, but we still feel comfortable that we can within that range and get certainly towards the higher end of that range as demand continues to be strong in the next year.

And just following on that, how important a driver is it of margin expansion? And what do you see as the primary drivers of margin expansion in the SER segment? That's all.

I can start. We've lived in that mid-70% kind of gross margin range, certainly on the rental side, which we think is a good spot. We typically have said we want to be in the kind of low to mid-70s, and we're at the higher end of that range. I guess, the way I'd answer it is we think that's sustainable. There could be some upside there, but we feel really comfortable kind of where we're living right now in that mid-70s percent range.

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.

Hello, everyone. Thank you for joining us, and welcome to Custom Truck One Source, Inc.'s First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Brian Perman, Vice President, Investor Relations. Brian, please go ahead.

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 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 yesterday after the market close. That press release and our first quarter investor presentation are posted on the Investor Relations section of our website. Yesterday afternoon, we also filed our first 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 3 months ended March 31, 2026, and prior periods. Also, a reminder that beginning this quarter, our financial reporting reflects our 2 new operating segments. Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing or STEM. While our 2026 results in our earnings press release and SEC filing reflect the application of intersegment pricing and margins, as per accounting requirements for intersegment sales, the segment results for 2025 reflect the intersegment sales with no margin as no intersegment agreement was in place in the period.

For an illustrative comparison of what the 2025 results would have been had intersegment sales been reflected with the appropriate gross margin and had other internal accounting policies been in place at the time, please see the appendix of the Q1 investor presentation posted on our Investor Relations website. Also, certain data in the appendix of the investor deck for Q1 and Q2 2025 for our STEM segment was corrected to reflect an internal error. Full year 2025 STEM results were not impacted by the change.

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. 2026 is off to a great start as we delivered record first quarter revenue, driven by continued strong momentum in our core end markets and excellent execution by our team. In the first quarter, we generated revenue of $462 million and adjusted EBITDA of $98 million, up more than 9% and 33% year-over-year. The key driver of our performance in the quarter was continued strength in our Specialty Equipment Rentals segment as the improvement we experienced throughout last year in the transmission and distribution markets continued into Q1.

Our rental fleet averaged 81.4% utilization during the quarter, up 370 basis points from Q1 of last year. This was supported by continued robust levels of OEC on rent, which averaged $1.34 billion in Q1, up 12% year-over-year. So far in Q2, both measures have continued to strengthen with utilization and OEC on rent currently trending above our first quarter averages. We ended the quarter with total OEC of $1.66 billion, the highest quarter end level in our history, which will support our expectation for continued growth in SER revenues this year. Also, the average age of our fleet is less than 3 years old, which we believe is one of the youngest fleets in the industry and positions us well to support our customers.

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 cash flow. And 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 throughout 2026 and beyond.

Performance of our Specialty Truck and Equipment Manufacturing segment in the first quarter was strong, reflecting continued healthy end market demand and order flow. For Q1, STEM revenue, excluding sales to our SER segment, were up 5% year-over-year. We also saw gross margin expand in the quarter, driven by significant cost out and productivity improvements led by our production team. New sales order backlog ended the first quarter at $411 million, up more than $76 million or 23% from the end of Q4.

Our backlog has continued to grow so far in Q2. As we've noted in prior periods, backlog can move quarter-to-quarter with delivery timing and production schedules, so we also focus on order activity and conversion. We saw strong year-over-year net order growth of 13% in Q1, with particular strength coming from our local and regional customers. Despite slower growth in the infrastructure end market, the continued strength in order growth and our ongoing conversations with our customers provide us with the confidence to expect another year of growth in STEM, not including intersegment sales to our SER segment.

CTOS is well positioned with our young rental fleet, current inventory positions and strong relationships with our chassis OEM partners to navigate the impact of the EPA's 2027 emission standards. We are affirming our previous full year 2026 revenue outlook, which we updated earlier this month solely to reflect our new segment reporting with no change to consolidated guidance. We expect consolidated revenue in the range of $2.005 billion to $2.12 billion. Given strong conditions in the T&D end markets, we are raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $415 million to $440 million.

Despite some macroeconomic volatility, we continue to be optimistic about our business. Long-term sustained end market demand is buoyed by secular megatrends and our ability to provide exceptional execution on behalf of our customers sets us apart from our competition. Our long-standing relationships with our strategic suppliers and customers continue to be 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 achieve our strong results in the first 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'll start with the consolidated results for the quarter, then discuss segment performance, our balance sheet, liquidity and leverage and finally, our 2026 outlook.

Before I begin, I would like to expand somewhat on Brian's comments in his introduction about our segment reporting. As a reminder, because of reporting guidelines for segment reporting, the segment data included in our earnings press release for periods prior to January 1 of this year are not fully comparable to the current year data, largely because 2025 results disclosed in our press release do not include any margin on intersegment sales.

In the appendix of the deck we posted on our Investor Relations site in early April, we included reconciliations of our historical 2024 and 2025 quarterly segment data in an attempt solely to illustrate what those results would have been had our new segment reporting accounting and intersegment sales and margin agreements been in place at such time. The appendix of our first quarter 2026 investor presentation includes our segment data for 2026 as presented in our earnings press release with additional adjustments shown so revenues and expenses are presented on the same basis as our 2025 as-adjusted results.

For illustrative purposes, we provide a comparison of the as-adjusted data for Q1 2025 and Q1 2026. All year-over-year comparisons in my portion of the call are based on the figures in our earnings press release. To the extent you have any questions, please do not hesitate to reach out to Brian in Investor Relations.

Our first quarter 2026 results reflect stronger operating performance across the business and improved rental fundamentals, particularly in our T&D end markets. For the first quarter, total revenue was $462 million and adjusted EBITDA was $98 million, representing 9% and 33% growth, respectively, versus Q1 2025.

Turning to our segments in SER. First quarter third-party revenue, excluding intersegment sales, was $194 million, up 16% year-over-year, driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Segment adjusted EBITDA of $105 million was up 23% year-over-year, with segment adjusted EBITDA margin in Q1 of 51.5%, up more than 415 basis points versus Q1 2025. Our key rental KPIs in SER remained quite strong in Q1, continuing the momentum we experienced in 2025. In Q1, utilization averaged 81.4%, up 370 basis points versus Q1 2025. Average OEC on rent in the quarter was $1.34 billion, up more than $141 million or 12% versus the same period in 2025.

On-rent yield in the first quarter was 38.9%, reflecting both sequential quarterly and year-over-year increases. On rent yield remained within our targeted upper 30s to low 40% range, and we continue to see opportunities for rate improvement as transmission mix grows and pricing discipline holds. Our current historically strong rental KPIs reflect both increased rental activity and the continued scaling of our fleet to meet demand.

Net rental CapEx in Q1 was more than $49 million, and our fleet age at quarter end was just under 3 years, a modest increase from the end of last quarter, which is consistent with our plan to reduce maintenance CapEx and age the fleet somewhat this year. Our OEC in the rental fleet ended the quarter at almost $1.66 billion, up more than $107 million versus the end of Q1 2025 and up more than $18 million in the quarter. The increase reflects disciplined fleet investment against strong demand, particularly in T&D.

While we expect to continue to invest in the fleet in 2026, our planned decrease in maintenance CapEx in 2026 compared to 2025 should contribute to increased free cash flow generation this year. In STEM, first quarter third-party revenue was $268 million, up 5% year-over-year, comprising equipment sales growth of more than 4% and parts sales and service revenue growth of almost 17%. STEM segment adjusted EBITDA was $33 million and segment adjusted EBITDA margin was 9% in the quarter. Recall that our 2025 segment adjusted EBITDA does not include any margin on intersegment sales, while 2026 segment adjusted EBITDA does.

STEM margin gains in the quarter were driven by significant cost out and productivity improvements led by our production team. Importantly, our new sales backlog ended Q1 at $411 million, up more than $76 million sequentially and within our expected range of roughly 4 to 6 months. We've continued to see strong order growth so far in Q2 2026, and our backlog currently stands at more than $425 million.

Turning to the balance sheet and liquidity. With LTM adjusted EBITDA of more than $408 million and net debt of $1.65 billion, we finished Q1 with net leverage of slightly more than 4x. This represents an approximately 30 basis point sequential improvement and approximately 80 basis points versus Q1 2025. Availability under our ABL was $257 million as of March 31. And based on our borrowing base, we have more than $190 million of additional availability that we can potentially access by upsizing our existing facility.

Free cash flow generation and deleveraging remain key focus areas for us. Our inventory increase during the first quarter reflects seasonal order flow. Even with that increase, we expect to reduce inventory and floor plan balances over the balance of 2026, which should support improved free cash flow generation.

With respect to our 2026 guidance, the macro demand across our key end markets remains very strong. We expect the STEM segment to continue to benefit from an overall favorable macro demand environment as well as strong relationships with our key customers and chassis and attachment suppliers. Our strong order backlog supports this.

In our SER segment, OEC on rent and utilization reached historically high levels in the second half of fiscal 2025. And consistent with our Q1 results, we expect this trend to continue in 2026. Demand for our equipment that serves the T&D utility markets continues at record levels, and we expect the vocational rental market to provide incremental growth as we further penetrate this expanding end market.

We finished 2025 with the average age of our fleet at just over 2.9 years, down by more than a year since the beginning of fiscal 2022. As a result, we expect to be able to significantly reduce our overall investment in our rental fleet in 2026 while continuing to generate growth. Our increase in fleet age to just under 3 years in the first quarter reflects this. We expect to grow our rental fleet based on net OEC by mid-single digits in 2026 with a net investment in our rental fleet of approximately $150 million to $170 million, a meaningful reduction from our $250 million in 2025.

After prior year's investments in inventory, driven by the strong demand environment, we expect to continue making progress on further net working capital improvements in 2026 as we continue on our path of reducing inventory months on hand to our targeted range of below 6 months. As a result, we expect to generate more than $50 million of levered free cash flow and reduce our net leverage ratio to meaningfully below 4x by the end of fiscal 2026 while progressing towards our 3x net leverage target in 2027.

Our affirmed 2026 revenue guidance reflects total revenue in the range of $2.005 billion to $2.12 billion. Given conditions in the T&D end markets, we are raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $415 million to $440 million, resulting in year-over-year revenue growth of 3% to 9% and adjusted EBITDA growth of 8% to 15%.

We still expect non-rental CapEx of $40 million to $50 million. Our segment guidance for 2026 remains unchanged. We are projecting SER revenue of $835 million to $870 million and STEM revenue of $1.58 billion to $1.655 billion, with STEM third-party revenue growth of 3% to 10%. Overall STEM sales, including intersegment sales, are expected to be flat to slightly down solely as a result of the expected reduction in SER maintenance rental CapEx this year. Despite Q2 of 2025 being a tough comp given the near record level of new equipment sales in the quarter, given current trends, we do expect to show year-over-year growth in adjusted EBITDA in Q2.

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 meaningful adjusted EBITDA growth this year.

With that, operator, we can open the line for questions.

[Operator Instructions] Your first question comes from Michael Shlisky of D.A. Davidson & Co.

Maybe starting off with the tariff question. Any worries you have on the recent changes to the Section 232 tariffs, either on recent quotes you've made recently or on what's in your backlog? Can you compare what the OEMs are saying on chassis pricing because of the tariffs compared to what you may be seeing from the body or back part of the truck that you're building?

Yes. Mike, good to talk to you and great question. I think we're in a pretty good spot when it comes to our tariffs, as we've talked about, obviously, having inventory on the ground puts us in a good position. We are seeing a little bit of tariff exposure on some of our bodies because of 232. And -- but I think the team has done a good job of managing that. And so I feel like we're well positioned. And then OEMs, as we're talking with OEMs that it is a discussion, but the bigger discussion right now seems to be giving orders for them heading into 2027. So I think we're in a good spot overall, Mike.

Okay. Great. And then your metric of the average age being at roughly 3 years, that's up for the first time in quite some time. Can you maybe comment on how far ahead of the second place player are you on average age? I'm kind of wondering how much can you age the fleet and still be reasonably ahead of the peers and have a great-looking fleet? Is there a very big cash piece that you could be getting if you, let's say, a half year or a year? Or would you kind of still be in front of your larger peers on the fleet side?

Yes, it's a great question. And there's not great data on the other fleets and age of fleet. So it's more just based on feel and what we hear from our customers in particular. But I'll give you this data point. I think when we put the businesses together back in 2021, the average age of the fleet was just about 4 years. So we're about a year younger than we were then. And I think the business performed well at that age, too. So I think that's kind of the band that we've talked about. We've been as low as 2.9. We're still under 3. And 4 years ago, we were about just under 4 years old. And so that feels like a good band. And you're right, there's real cash generation in there as you think about it. But most important, as you know, it's taking -- taking care of the customer and making sure we give them the product that they need to keep them working and to provide for what our trucks do.

Your next question comes from Daniel Hultberg with Oppenheimer & Co.

Congrats on the quarter. I want to hone in on margin a little bit. I mean, obviously, the rental revenue growth is strong, and that is higher margin. But you also mentioned productivity improvement, and I see in the deck as effective cost management. So could you please elaborate on that and what you're doing on the cost side to drive margin here as well as how it pertains to the guidance increase?

Yes. Great question. And the team -- thanks for asking that question, too. The team has done a great job of just managing through our overall cost structure. So there's been a lot of efforts underway by our production team to drive productivity improvement. And I think we're seeing kind of the benefits of that. And then as we've talked about on a few prior calls, we continue to evaluate our overall cost structure. And so the team has done a good job to just rightsize the cost structure for us really as it comes to our production efforts, which is why you see the expansion in STEM gross margin in particular.

Got it. And then on OEC yield, I mean, inflected last quarter, up 40 basis points year-on-year this quarter. Could you speak to the pricing environment and the opportunity there and kind of like what is embedded in the guidance as it is?

Sure. I think, Daniel, we talked about on the last call that we took a price increase on the rental side of the business in December of last year. It was about a 5% price increase that we took in December. And so some of that is what's flowing through the on-rent yield number that you see. And then the other thing that's flowing through there is mix. So as we've talked about that transmission is coming on very strong, that's at a higher yield than distribution. And so just because of the type of equipment that we're renting there. And so I think that's been influencing yield as well.

So the price, as we've talked about in the past, price takes a full year, right, to cycle through the fleet just because of the way that we increase price, which is only as new equipment goes out on rent. And then the mix impact will be a little bit of a function of how strong transmission stays, which is what we expect over the balance of 2026.

And Daniel, maybe just -- this is Chris. Maybe just to add a little bit. As part of your question was about guidance, and we raised the EBITDA guidance really because, as Ryan was touching on, the rental business is outperforming. But then also he just touched on some of the operating execution that is happening. So it really is a combination of those 2, the mix and the operating execution and not so much anything on the top line in terms of a more aggressive top line assumption.

Your next question comes from Justin Hauke with Baird.

I guess I just wanted to drill into the EBITDA guidance, the increase a little bit more. I mean it's great to see. Obviously, we're always looking for more. But I mean, if I look at the quarter, you guys were thinking EBITDA would be up kind of 10% plus and you meaningfully beat that. So you're kind of like $10 million to $15 million ahead of what you were guiding to, you raised by $5 million. So I'm just curious, I mean, is that conservatism? Is that anything that was maybe a onetime pull forward in the quarter that was unusually strong? Or just kind of how to think about how the $5 million factored into that raise?

Yes, Justin, this is Chris. If you look at Q1, Q1 of last year was going to be our easiest comp. And so I think our actual guidance said that we are going to be up double digits. I don't think we necessarily banded what we thought that was going to be. Clearly, rental continues to outperform. I think what we see on rent is up $160 million, $170 million through the first 4 months of this year. And so we're continuing to see that strong performance. And so really, it is that mix that's driving it. But as you look at Q2, you're going to see the exact opposite. That's a pretty tough comp for us.

We talked about this last year on the call. We had 2 months within the quarter that had new sales, third-party new sales above $110 million, and those were the only 2 months outside of the December that were ever above $100 million. And so it's going to be a much tougher comp here in Q2. And we're just -- I don't know that I would say we're being conservative, but we're certainly being prudent. We felt it was the right thing to do to increase our guidance. But we feel comfortable in that $415 million to $440 million range. We'll adjust it as the year goes on if it makes sense to do so.

Okay. Fair enough. I guess my next question, we've been seeing a lot more articles about like political pushback on data centers and some of these projects kind of getting pushed out. And I know your direct exposure to data centers is pretty modest, but the impact to some of these interconnect T&D projects and things like that. I'm just curious if you're seeing anything where there's -- that's having a discernible impact or if that's just kind of noise in the market in terms of people procuring things in anticipation of that work?

Yes. It's a great question. We're still seeing strong demand from our customers for equipment. So when you look at, obviously, public company sentiment and reported backlog, it's still continuing to increase. And then our conversations with our customers are still bullish on additional transmission work that has not yet started, which is a good tailwind for us. And then as we kind of look at the macro factors or the macro reporting around line miles and service and what's coming online, it still feels like that's continuing to be very positive. So I would say the specific noise around data center doesn't seem to be impacting our customers and the work that they are planning to start over the coming quarters and years.

Your next question comes from the line of Naim Kaplan with Deutsche Bank.

On for Nicole DeBlase. So first question, just wondering, given the substantial macroeconomic assumptions underpinning your T&D outlook. So specifically, you mentioned 23% expected CAGR in data center power demand. How much of this impending infrastructure wave is already actively reflected in the quoting pipeline? And are there specific specialized equipment categories that you foresee could have industry-wide supply chain shortages?

Yes, it's a good question. And I'll maybe speak broadly about transmission specific. We are seeing the demand for transmission equipment continue to pick up. It is not back to the highest levels that it's been over the past several years, but it is continuing to pick up. And conversations that we're having with our customers suggests that, that will continue to increase, right, for the foreseeable -- certainly for the balance of 2026 and starting to talk about 2027 at this point. So I don't think there is any product category at this point that we're saying, hey, there could be an issue, right, with availability of equipment. But it continues to be favorable, and I'd say bullish, right, as we're thinking about transmission in particular.

Okay. That is helpful. And then in SER, you mentioned the rental business is performing very strong with OEC on rent, utilization and gross margins all continuing to perform ahead of expectations in 2026. So just like wondering why you wouldn't raise the guide there? Is there maybe some conservatism?

Yes. I think it's just being thoughtful on -- as Chris talked about some of how we're thinking about it overall is some of it is strong performance on pricing and operating leverage and some of those dynamics. And so I think we just want to be thoughtful heading into the next 9 months of the year.

And maybe just to add a little bit there. And so when I said it was ahead of expectations, the comparison was versus last year. And then really ahead of expectations, I think, is really on the margin front and so EBITDA generated. And that's why I think we felt comfortable taking up the EBITDA guide, but leaving the revenue kind of revenue range where it is for now.

Your next question comes from the line of Brian Brophy with Stifel.

Congrats on the nice quarter. I guess I just want to ask about bidding activity. You mentioned it's quite healthy in your opening comments. Just maybe any more color on what you're seeing there.

Yes. It's -- thanks for the question and good to talk to you. But it's robust is probably a fair way to say it. For us, bidding activity happens most on the transmission side of things. And so there are several specific projects that are in process where we're bidding on those and are waiting on awards to be made. And so I think that it continues to remain robust, and we think it should be well positioned for the rest of '26 and heading into 2027.

And then on the new equipment side, last year, there was some discussion on some pricing pressure that you were seeing. It doesn't appear that you guys mentioned that this quarter. But just curious the latest you're seeing on the pricing front on the new equipment side.

Yes. I think compared to this time last year, certainly, it's more stable. There certainly still is some pressure. Ryan touched a little bit on the cost improvement and productivity initiatives we've had that have benefited somewhat on margin and we've been able to offset some of that pressure. But I think the way I would characterize it is it's certainly a lot more stable than it was this time last year.

Your next question comes from the line of Manish Somaiya with Cantor Fitzgerald.

It's Manish. So two questions. First is on STEM. Can we just talk about how we should think about the normalized margins for STEM? And then just related to that, the backlog was up nicely on a sequential basis. If you can just talk about what's driving that? What are the conversations like with your customers? And really more importantly, what's the customer composition like? Because obviously, you do have a lot of small customers. So obviously, with the macro environment, I wanted to get a feel for what that backlog segmentation look like?

Yes. This is Chris. I'll start on the margin. Historically, we've given guidance on the biggest component of the STEM sales, certainly, the external sales is going to be our third-party new sales. And we've given guidance in the 15% to 18% range. A couple of years ago, we were pushing that 18% and even slightly higher. This past year, we were closer to the 15%. We've seen that go up now here in the last couple of quarters, and we're living closer to 16%. So I think that still is a good range in that 15% to 18%. We're probably going to live closer to the 16% to 17% range this year. But I think that's the best way to model it.

And then, Manish, the way to think about backlog, and it's a great question, is we are seeing -- we actually saw the biggest pickup in backlog in our small customers. So we break them into kind of our local and regional customers in particular. And so that's actually where we did see the biggest increase. in backlog. So I think on that side, that's the customer side. And then from a product standpoint, look, utility is very strong. And so we did see a pickup in backlog in our utility and forestry segment kind of more broadly with those small customers. And then where we've still seen less of a pickup is on the infrastructure side of things. So still in the waste segment and dump truck segment, we have not seen a significant pickup yet in backlog. So I hope that helps.

Your next question comes from the line of Tami Zakaria with JPMorgan.

So question on the STEM segment. The backlog saw impressive growth. Can you speak to how much of the backlog is for 2026 versus beyond that?

Yes, it's a great question and good to talk to you, Tami. Yes, the far majority of it is -- will be for 2026 deliveries. Very little at this point that we would not be able to deliver in 2026.

Understood. And because you resegmented your disclosures, I'm just curious, of the $415 million to $440 million EBITDA guide that you have for the year, could you speak to what would be the mix from the 2 segments, SER versus STEM in that full year number?

Tami, this is Chris. We don't give guidance for the segment EBITDAs. But if you look at the prior year, you can get a relatively comparable mix. Certainly, given the guidance we've given this year, there may be a little bit of a shift towards SER. But I would look at what we disclosed on April 1, and you can use that as a proxy.

That's super helpful. If I can ask one last question...

One other point I'd want to make. As you do that, remember that you're going to have the 2 segment adjusted EBITDAs, which are going to be a higher number than our guidance because you have to take into account the corporate unallocated costs, which is -- which also you'll be able to find in that April 1 presentation.

Understood. That's very helpful. And one last one. The debt paydown target by 3 turns leverage by next year, do you expect any debt paydown? Or this is all coming from EBITDA growth?

It will be both. This year, we guided...

Any debt paydown this year?

Yes. We guided levered free cash flow north of $50 million. That would all be used to pay down debt.

Your next question comes from the line of Abe Landa with Bank of America.

Just one quick housekeeping. I know last year within your STEM segment, it doesn't include margins. Kind of on that intersegment sales. I guess if we were to look at it from an apples-to-apples perspective, what would that change have been?

I don't have the figure right off the top of my head. But if you look in the April 1 presentation that we put out there on our website and as well as the one we just posted, I think, last night, that information is in there.

Okay. And then I guess just shifting gears to just the general environment. Obviously, a lot of data centers, a lot more of that generation is on site. Are you seeing that impact demand in any way, whether mix or actual absolute level of demand? And maybe how that shift and just the general data center build-out is impacting buy versus rent decisions by utilities, contractors, et cetera?

Yes, it's a great question. And I would say, generally, it is not impacting our demand. And so it's something we watch, but it's not anything significant that is impacting kind of our business directly.

And it's not impacting that buy versus that...

Not significantly. As we've talked about in the past, transmission is often rented just because of the nature of the equipment. Distribution is more commonly bought and rented. And so no real significant shift from the type of work that's being done that's impacting buy versus rent.

And then lastly, just -- I know you -- wondering if you could provide -- I know longer term, you're saying that inventory levels are going to be below 6 months by year-end. I guess, could you give a number or what that number is today and how you expect that to trend during the year? And do you expect this EPA 2027 rules to have any impact on that? And then just overall -- kind of related to that overall on working capital, like what are you assuming for working capital for the year with that inventory reduction being offset by revenue growth?

Yes, this is Chris. What we've said with respect to inventory is, I think we're somewhere north of 7, probably closer to 7.5 months right now. It is typical, if you look back over the past 4 or 5 years to see an increase in Q1, just kind of seasonal timing and getting ready for the second half of the year. And so that this year is pretty consistent with that. And I would say we're only slightly higher than kind of our expectation for this time of year. And I would say less than $10 million higher than we had kind of forecasted coming into the year. And so we had given some guidance that we'd expect to get north of $100 million year-over-year out of inventory as part of our working capital initiative this year.

And I would just point out that, that $100 million doesn't translate to $100 million of cash because between 75% and 80% of the inventory is floor plan. And so typically, if you reduce inventory by $100 million, you may get $20 million of cash. And so that would be the working capital component of it. And so that's the way I would look at it. So in terms of our guide of levered free cash flow of $50 million for the year, you're probably going to get between $30 million and $40 million of working capital.

And then, let me just hit EPA '27 because it's a good question. I think we're in a really good spot, and there's three things that I would like to highlight when we talk about the impact. One is the age of the fleet. I think having 10,000 pieces in our fleet that are under 3 years, I think it positions us really well for kind of the changes that are coming with the new engines. I think having inventory on the ground, so Chris mentioned we're just over 7, 7.5 now and being at 6 months at the end of the year, I think we'll be well positioned with kind of current model year chassis heading into next year.

And then I think the last, which you can't underestimate is just the strength of the relationship with our chassis OEM partners and our dealers. And I think we're very well positioned as we continue to watch how the mandate comes through and what some of the final rulings are from the EPA around the warranty and some of the questions that are still open. So I think we're in a good spot heading into next year to address it.

Your next question comes from the line of Manish Somaiya with Cantor Fitzgerald. [Operator Instructions]

Can you hear me?

Yes, we can hear you.

Okay. Wonderful. So maybe, Ryan, if you can just talk about some of the bottlenecks that could slow execution despite strong end markets. That's question one. And then maybe, Chris, I know you touched on cash flow a little bit, but I'm still trying to figure out what gives you -- or I guess, what's going to take over the next 1 or 2 quarters for you guys to raise free cash flow outlook?

Sure. Manish, I'll start with just bottlenecks. I think we're in a good spot. We're obviously watching our supply chain closely. As transmission seems to be very strong right now, that's working closely with our suppliers. So on the back end, that's Terex, who's our largest supplier on the transmission side and then some of our pulling and stringing suppliers as well. And then obviously working closely with our chassis suppliers also. So those are typically larger trucks, typically all-wheel drive axles, so 6x6 and 4x4 chassis. And so I think it's just making sure that, that supply chain continues to perform, which it is currently, but that would be where the bottleneck would come if a bottleneck were to show up. And then I'll let Chris take the cash flow.

Yes. On the free cash flow, we talked a little bit about 3 major areas which are going to drive it. Obviously, if you take the midpoint of our EBITDA guidance, that's going to be up $40 million, $45 million year-over-year. We also talked about the rental CapEx. The investment last year was a net investment. So growth CapEx, maintenance CapEx, less the proceeds from the sales. We had roughly $250 million last year. And we said it's going to be meaningfully less than that this year, in particular, on the maintenance CapEx side, roughly $100 million less. And then the inventory that we were just talking about, the bulk of that is going to come in the second half. And typically, our best free cash flow period is Q4. And so those are going to be the three main drivers: incremental EBITDA, lower net rental CapEx and then some of the working capital unlock that I just talked about. Those will be the three main drivers.

There are no further questions at this time. We've reached the end of the Q&A session. I will now turn the call back to 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.

Good morning, everyone, and welcome to Custom Truck One Source's business resegmentation webinar. I would now like to turn the call over to Brian Perman, Vice President, Investor Relations. 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 our quarterly earnings press releases and investor presentations. Those as well as the slides being used for this webinar are posted on the Events and Presentations page of our Investor Relations website. 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 to all of you, and welcome to our webinar today. Today really is about explaining our updated 2-segment reporting framework. As we talked about on our earnings call for Q4, we are moving to 2 reportable segments. We will start to report that way effective Q1 of 2026 this year, which means that we've really begun to operate that way effective January 1 of this year. So -- and we believe this now reflects how we run and evaluate the overall business.

The 2 segments, as we mentioned previously: are SER or Specialty Equipment Rental, which really is the majority of our legacy ERS segment, plus a portion of our APS segment; and then the second segment is STEM or Specialty Truck Equipment and Manufacturing, which is our legacy TES segment, including a portion of our legacy APS segment. The big difference that you'll see in our new segment reporting is that the segment financials will reflect intersegment revenue and margin. You'll see that for 2025, that would have added $465 million of revenue and $75 million of gross profit to the STEM segment. Next slide, please.

Our previous APS activity remains integral to who we are as a company and integral to our business, but APS will now no longer be reported as a stand-alone segment. For illustrative purposes, we have provided our historical results, which will be recast as if we have made these changes effective January 1, 2024, to provide you all 2 years of historical numbers for illustrative purposes.

And then the big change that you'll see is that we are allocating direct SG&A to the segments to the SER, Specialty Equipment Rental segment and the STEM or the Specialty Truck Equipment and Manufacturing segment as well. And so because of that, we'll now show you segment level reporting down to segment adjusted EBITDA, rather than historically, it was adjusted gross profit or gross profit. And you'll see that for fiscal year 2025, we would have shown $384 million of segment adjusted EBITDA for our SER segment. And we would have showed $134 million of segment adjusted EBITDA for our STEM segment. Both really are impressive segments that standalone -- that can stand alone on their own.

The other thing I want to highlight, and it's important is that there is no impact to our consolidated GAAP results, either on a historical basis or going forward. And I think that's important for you to remember and to understand. Next slide, please.

Why are we doing this now? I think this has been an important page to talk about. and something we've been talking about internally. But we believe that this structure aligns both our external reporting with our internal decision-making. So this is how we are managing the overall business. It's how we're managing internal performance of the business, and we think that is certainly important to communicate with some of the changes that we've communicated over the past several quarters. And then we believe that this provides clear separation between our Rental business and our Sales and Manufacturing business as well.

And we think for our investors, we think it will improve visibility into margin profile, into EBITDA profile and into the capital intensity of each segment. As you know, the Specialty Equipment and Rental segment has high adjusted gross margin. It has high EBITDA margin percentages, but is much more capital intensive as a segment. And that compares to STEM, our Specialty Truck Equipment and Manufacturing segment that has lower adjusted gross margin, lower EBITDA margin percentages, but is much less capital intensive.

And so we feel like that enhances overall investor transparency. It improves peer comparability and allows each of the segments really to stand on their own and highlight their own strong performance, all while continuing to take care of the customer as one company. And we think that really is important, right, for you to understand. Nothing is changing in terms of how we go to market, but we want to make sure that we're providing better transparency and comparability to our investors. Next slide, please.

And so what's not changing? I think this is important is that our core accounting policies remain unchanged. From a financial perspective, only intersegment accounting is changing, which is meaningful, but has 0 impact on our consolidated financial results. So there's no change to consolidated free cash flow, net leverage or our capital allocation strategy. And then as I mentioned, there is no change to our customer strategy or our go-to-market approach to take care of the customer, which is what we know that we do incredibly well. And so we believe this will provide better transparency on how we run the overall business.

And with that, I'm going to hand it over to Chris to walk through several more details.

Thanks, Ryan. Slide 7 shows the migration from the legacy ERS, TES and APS presentation to the new SER and STEM framework. Conceptually, SER captures the rental-oriented economics of the enterprise, while STEM captures the sales, manufacturing and sales-led aftermarket economics. You'll also see that the revenue mix looks modestly different under the new structure because the as-adjusted segment view includes intersegment sales before elimination. That is why the new mix percentages are not directly comparable to the legacy segment mix percentages shown on the left side of the page. And so you'll see here, ERS was 36%, TES was 56%, APS was 8%. And under the new segment format, it's a 2/3, 1/3 split, 2/3 STEM, 1/3 SER. You can go to the next slide.

This slide outlines the key operating metrics we will continue to provide under the new segment structure. And so for SER, we will continue to emphasize the rental metrics investors already know well. So utilization, OEC on rent, on-rent yield, fleet CapEx, fleet size and age and asset level returns. And for STEM, we will continue to focus on revenue by category, backlog and net order trends. Both segments will include revenue disclosure, gross profit information and segment adjusted EBITDA, which gives a more complete view of segment level performance after direct SG&A allocations.

On Slide 9, so APS is not going away. That's important to note. It is being integrated into the 2 segments where the economics naturally belong. Rental-related parts, tools, accessories and service work that support the CTOS rental fleet or rental-led customer relationships move into SER and sales-led aftermarket activity, retail parts and longer cycle support tied to equipment sales moves into STEM. And so that creates -- we think that creates a cleaner mapping between the revenue stream, the customer relationship and the economics of the business activity being evaluated. But again, it is important to note that APS is no longer going to be presented as a stand-alone segment.

On Slide 10, not all of the costs are going to be pushed nor should they be pushed into the operating segments. Approximately $99 million of shared corporate expenses for the full year 2025 will remain in a corporate and eliminations column, you'll see in the appendices in the various financial recasted information we're presenting. Those are enterprise-level functions such as technology, finance, HR, legal, safety, executive compensation, corporate insurance, corporate development and real estate support. And we believe keeping those expenses outside the operating segments really preserves a cleaner view of direct segment economics while still providing the full transparency in the consolidated bridge.

On Slide 11, beginning in 2026, intersegment transactions will be reflected using a consistent cost-plus methodology aligned with the economics of the transaction. Used equipment that will be transferred from SER to STEM will carry a 10% gross margin and new equipment sold from STEM into SER's rental fleet will carry a 16% gross margin. The examples on the slide illustrate how those mechanics work. These entries matter for segment presentation, but they are fully eliminated on consolidation. Just as importantly, on-rent yield and used rental sale margin metrics will continue to be presented on a consolidated post-elimination basis, so those KPIs remain historically comparable.

On Slide 12, and this distinction is important. In our 2026 SEC filings, the 2025 comparative segment information will reflect the historical activity reclassified into SER and STEM, but it will not reflect the full gross margin presentation on intersegment sales. Separately, the appendix in this presentation provides an unaudited illustrative, as adjusted view showing what 2024 and 2025 would have looked like if the 2026 intersegment accounting framework had been in effect in those periods.

Said another way, the SEC comparative footnotes show reclassification, while the appendix shows the transfer pricing overlay. That is why we believe the appendix is useful, but it should not be confused with a restatement. And so as we move forward, we will, on a quarterly basis, be presenting in our investor deck some of that information that will help you bridge the difference there, especially as it relates to intercompany and intersegment activity.

On Slide 13, our fourth quarter and full year 2025 results were the last results reported under the legacy 3-segment structure. Beginning with the first quarter 2026 reporting, we will use the new 2-segment framework that we're discussing today. Through fourth quarter of 2026 reporting, we will continue to provide the reconciliation and bridge materials needed for the comparability. That should give investors a clean transition period to refresh their models. Beginning with Q1 2026, our guidance will also be presented using the new framework, including consolidated revenue and adjusted EBITDA ranges, segment revenue ranges, OEC growth, gross and net rental CapEx ranges, free cash flow and leverage targets.

On Slide 14, the key message here on this slide is that our consolidated 2026 outlook is unchanged from what we communicated with fourth quarter 2025 earnings. We continue to expect consolidated revenue of $2.005 billion to $2.12 billion and adjusted EBITDA of $410 million to $435 million. However, within that outlook, SER is expected to benefit from continued healthy utilization and OEC on rent trends, supported by demand from our transmission and distribution customers. We expect gross rental fleet investment of $340 million to $360 million and net rental CapEx of approximately $150 million to $170 million.

For STEM, the headline segment growth rate is impacted by lower expected intersegment fleet-related activity as net rental CapEx comes down year-over-year as we discussed on our fourth quarter earnings call. That is why total STEM revenue appears muted. Importantly, third-party STEM revenue is expected to grow between 3% and 10%. We also continue to expect at least $50 million of levered free cash flow and remain focused on deleveraging with net leverage meaningfully below 4x by the end of 2026 and our 3x target expected sometime in 2027.

With that, I'll turn it back over to Ryan.

Great. Thanks, Chris. And look, there's just a couple of things I want to highlight before we go -- we open to Q&A. And I think the first is, look, this change is -- reflects a deliberate intent on our part to transition from 3 segments to 2. We believe that's designed to better align with how we operate the business today. The operated structure really mirrors the evolution of our operating model, and we believe it also helps simplify how we tell the story to the market, and we believe that makes it easier to understand how the business performs.

The 2-segment framework creates a clear distinction between our 2 core growth platforms, Specialty Equipment Rental and Specialty Truck Equipment and Manufacturing. And it also allows us to better reflect the different margin profile and capital intensity of each segment.

From a performance standpoint, the new structure provides cleaner line of sight into the underlying performance drivers. It provides greater transparency for external stakeholders evaluating growth and profitability. What's important is that we continue to have proven leadership aligned to each of these segments. We have clear accountability. And one of the things that makes Custom Truck so unique is we have deep domain expertise in these categories. This will ensure continuity. It ensures proven execution and strong ownership of each segment as we deliver on the priorities that we've communicated to you.

And then finally, we think it's important to emphasize what's not changing. There's no change to our corporate strategy, no change to our capital allocation priorities or our go-to-market approach or our segment leadership structure. This is truly just an evolution of how we organize and then how we communicate our business. So it is not a change in strategic direction.

And so with that, I'll hand it back to Brian to talk about what's in the appendix before we open up for Q&A.

Thanks, Ryan. Sure. Just a quick note on the appendix. The first few pages contain a glossary of some of our KPIs and financial measures, just to remind everybody about the definitions of the terms that we use. And as Chris and Ryan both mentioned, the rest of the appendix contain reconciliations of our previous 3 segment reporting to our new 2 segment reporting, showing the adjustments for the split of APS between the 2 new segments as well as intersegment sales and margin. We show this for every quarter and for the full year for both 2024 and 2025. And as we mentioned a few times, these are shown for illustrative purposes only and are not intended to be a restatement of any prior results. Obviously, if you have any questions on those numbers, you can -- please feel free to reach out to me.

I think with that, Regina, we'd like to open the line to questions.

[Operator Instructions] And there appear to be no questions at this time. I'll hand the call back to Ryan for any concluding remarks.

Great. Thanks. Thanks, everyone, for joining us today on our webinar. We appreciate your interest in Custom Truck. And we look forward to visiting with you here on our Q1 earnings call here in a few weeks. And again, if you have any questions about what we've communicated today, please don't hesitate to reach out. Have a great day, and thank you.

This will conclude today's call. Thank you all for joining. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Custom Truck One Source's Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note, this conference call is being recorded. I would now like to hand the conference call 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 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 this morning.

That press release and our fourth quarter investor presentation are posted on the Investor Relations section of our website. This morning, we also filed our 2025 10-K 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 3 months and year ended December 31, 2025, 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. We delivered a strong finish to 2025 with record quarterly revenue driven by continued momentum in our core end markets and strong execution by our team.

In the fourth quarter, we generated revenue of $528 million, adjusted EBITDA was $121 million, up more than 18% year-over-year. For the full year 2025, we saw record revenue of $1.944 billion, up 8% and adjusted EBITDA was $384 million, up 13% compared to 2024 and ahead of the midpoint of our guidance. The key driver of our performance in the quarter was continued strength in our rental business as the improvements we saw in the third quarter in the transmission and distribution markets continued into Q4.

Our rental fleet averaged just under 84% utilization during the quarter, the highest in almost 3 years, supported by continued growth in OEC on rent. Average OEC on rent in Q4 was just under $1.4 billion, up 14% year-over-year. During Q4, both utilization and OEC on rent reached historically high levels. While we saw the anticipated seasonal slowdown in both measures in December, so far in 2026, both have rebounded as expected with utilization currently at approximately 82% and OEC on rent well above the year-end level.

We ended the year with total OEC of $1.64 billion, the highest quarter end level in our history, supporting our expectation for continued growth in our rental business. 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 cash flow. And we believe our Q4 results speak directly to that.

Bidding activity and ongoing conversations with our customers lead us to believe that these conditions will persist through 2026 and beyond. While TES performance in the fourth quarter was below our expectations, end market demand is healthy and order activity remains strong. While TES saw sequential revenue growth in the quarter, revenue was down 8% year-over-year, primarily due to our customers pulling forward capital spending to earlier in the year in anticipation of potential tariffs and price increases and an atypical year-end dynamic in which some customers deferred deliveries into 2026. Additionally, we did not fully experience the anticipated lift in spending of our customers taking advantage of the accelerated depreciation provisions in last year's federal tax and spending bill. Despite those facts, TES finished the year with revenue of $1.1 billion, up 4% for the full year and our highest annual level ever. New sales order backlog ended the year at $335 million, up more than $55 million or 20% from Q3. Our backlog has continued to grow so far in 2026 and as of yesterday, stands at around $370 million. As we've noted in prior periods, backlog can move quarter-to-quarter with delivery timing and production schedules, so we also focus on order activity and conversion.

We saw strong year-over-year net order growth of 21% in Q4, driven by year-over-year growth of 12% in orders won during the quarter, with particular strength coming from local and regional customers. Despite slower growth in the infrastructure end market, the continued strength in order growth and our ongoing conversations with our customers provide us with the confidence to expect another year of growth in TES. This confidence is increased by our recently announced strategic partnership with Hiab, a manufacturer of truck-mounted cranes and forklifts.

This partnership strengthens our ability to serve customers across multiple end markets while supporting our long-term growth strategy. It broadens our product portfolio, enhances our service capabilities and allows us to deliver more complete solutions in key markets we already serve, such as building supply, forestry and rail. In addition, this year, to better support our TES customers post sale and grow our parts and service revenue, we are investing in a focused initiative to expand our aftermarket service capacity. This effort, which will impact multiple locations in our existing branch network, will ensure that our TES customers continue to get the high level of post-sale service that they have come to expect from Custom Truck. Both the Hiab partnership and our expanded parts and service offering highlight our commitment to continuing to invest in TES and position our sales business to grow its presence and market share and to strengthen our connection with our customers.

Before I turn it over to Chris, I want to highlight a few items related to 2026. First, beginning with the quarter ending March 31, 2026, we will move from our current 3 segment reporting and we will report results under 2 segments: Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing or STEM. This change aligns our segment reporting with how we currently evaluate the business and provides enhanced transparency to investors with a clear basis of comparison to the industry peers of each of our primary businesses.

We plan to provide additional details prior to reporting Q1 2026 earnings, including recasting historical financials and our 2026 guidance to align with the new reporting structure. Second, we are providing our full year 2026 outlook. We expect revenue in the range of $2.005 billion to $2.12 billion and adjusted EBITDA in the range of $410 million to $435 million. Chris will provide additional details in a few minutes. Our 2026 guidance reflects our continued optimism about our business as long-term sustained end market demand buoyed by secular megatrends and our ability to provide exceptional execution on behalf of our customers set us apart from our competition.

Our long-standing relationships with our strategic suppliers and customers continue to be key 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 achieve our strong results in 2025. 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'll start with consolidated results for the quarter and full year, then discuss segment performance, our balance sheet, liquidity and leverage and finally, our 2026 outlook. Our fourth quarter and full year 2025 results reflect stronger operating performance across the business and improved rental fundamentals, particularly in our T&D end markets. For the fourth quarter, total revenue was $528 million and adjusted EBITDA was $121 million.

For the full year, record revenue of $1.944 billion was 8% ahead of 2024, and adjusted EBITDA was $384 million, a year-over-year increase of 13%. Before I move to the segments, a quick note on our GAAP results. For the fourth quarter, GAAP net income was approximately $21 million and for the full year, GAAP net loss was approximately $31 million. Year-over-year comparability on net income was impacted by the $23.5 million gain on a sale-leaseback transaction in the fourth quarter of 2024. Excluding that prior year sale leaseback gain, underlying net income improved meaningfully year-over-year, reflecting higher gross profit, disciplined SG&A management and lower interest expense.

Turning to our segments. In ERS, fourth quarter revenue was $207 million, up 20% versus the same period last year, driven by strong double-digit growth in both rental revenue and rental sales activity. For the full year, ERS saw 17% year-over-year revenue growth. We finished 2025 with rental adjusted gross margin and rental sales gross margin at the highest quarterly levels of the year, allowing ERS to grow its adjusted gross margin for the year despite a less favorable mix of rental and rental sales.

The strong performance in ERS in the fourth quarter and for the full year was driven by significant improvement in our key rental KPIs throughout the year. In Q4, utilization averaged 83.6%, up approximately 470 basis points versus Q4 2024. Average OEC on rent in the quarter was $1.38 billion, up $166 million or 14% versus the same period in 2024. For the year, average utilization and OEC on rent were up more than 500 basis points and 14%, respectively.

On-rent yield in the fourth quarter was 38.7%, reflecting both sequential quarterly and year-over-year increases. On rent yield remained within our targeted upper 30s to low 40s range, and we continue to see opportunities for rate improvement as transmission mix grows and pricing discipline holds. Our improved metrics throughout 2025 reflect both increased rental activity and the continued scaling of our fleet to meet demand.

Net rental CapEx in Q4 was more than $40 million, and our fleet age at year-end was just over 2.9 years. Our OEC in the rental fleet ended the year at almost $1.64 billion, up more than $120 million versus the end of 2024 and up $15 million in the quarter. The growth in OEC reflects our strategic investment given the strong demand environment we continue to experience across our primary end markets, particularly in T&D. While we expect to continue to invest in the fleet in 2026, we expect maintenance CapEx to be lower in 2026 compared to 2025, which should contribute to increased free cash flow generation this year.

In TES, fourth quarter equipment sales were $284 million. As Ryan noted, the year-over-year decline primarily reflects purchase timing, including equipment purchases pulled forward earlier in the year and continued pricing pressure on certain truck sales. While quarterly revenue was down versus the fourth quarter of 2024, full year TES revenue was up 4% and set a new annual record. Gross margin in the segment was 15.6% in Q4, the highest quarter of the year and up from 15% in Q3. The improvement reflects our expectation that market pricing pressure would ease somewhat in the second half of the year and as inventory levels began to come more into balance.

Importantly, our new sales backlog ended Q4 at $335 million, up more than $55 million sequentially and within our expected range of roughly 4 to 6 months. We've continued to see strong order growth so far in 2026, and our backlog currently stands at approximately $370 million, up more than 10% since year-end.

In APS, the fourth quarter revenue was $37 million. Gross margin remained stable at 27%. Full year APS gross margin was just under 24%, a year-over-year improvement of almost 120 basis points.

Turning to the balance sheet and liquidity. With 2025 adjusted EBITDA of $384 million and net debt of $1.65 billion, we finished the year with net leverage of 4.3x. This represents an improvement of almost a quarter turn from the end of 2024 and a half turn from quarter end high of 4.8x at the end of Q1 2025. Availability under our ABL was $248 million as of December 31. And based on our borrowing base, we have more than $200 million of additional availability that we can potentially access by upsizing our existing facility.

Free cash flow generation and deleveraging remain key focus areas for us. We made tangible progress in the fourth quarter. Inventory declined by more than $100 million during Q4, which supports lower working capital needs and lower interest expense on our variable rate floor plan liabilities over time. We expect to continue to reduce inventory and floor plan balances in 2026, which will contribute to free cash flow generation. With respect to our 2026 guidance, the macro demand environment across our key end markets remains very strong. We expect the TES segment to continue to benefit from a favorable macro demand environment as well as our strong relationships with our key customers and chassis and attachment suppliers.

Our strong order backlog supports this. In our ERS segment, OEC on rent and utilization reached historically high levels in the second half of fiscal 2025, and we expect this trend to continue in 2026. Demand for our equipment that serves the T&D utility markets continues at record levels, and we expect the vocational rental market to provide incremental growth as we further penetrate this expanding end market.

We finished 2025 with an average age of our fleet at just over 2.9 years, down more than a year since the beginning of fiscal 2022. As a result, we expect to be able to significantly reduce our overall investment in our rental fleet in 2026 while continuing to generate growth. We expect to grow our rental fleet based on net OEC by mid-single digits in 2026 with a net investment in our rental fleet of approximately $150 million to $170 million, a meaningful reduction from over $250 million in 2025.

After prior year's investments in inventory, driven by the strong demand environment, we expect to continue to make progress on further net working capital improvements in 2026 as we continue on our path of reducing inventory months on hand to our targeted range of below 6 months. As a result, we expect to generate more than $50 million of levered free cash flow and reduce our net leverage ratio to meaningfully below 4x by the end of fiscal 2026, while progressing toward our 3x net leverage target in 2027.

Our initial 2026 guidance reflects total revenue in the range of $2.005 billion to $2.12 billion and adjusted EBITDA in the range of $410 million to $435 million, resulting in year-over-year revenue growth of 3% to 9% and adjusted EBITDA growth of 7% to 13%. We expect non-rental CapEx of $40 million to $50 million. Our segment guidance for 2026 is as follows: we are projecting ERS revenue of $725 million to $760 million, TES revenue of $1.125 billion to $1.2 billion and APS revenue of $155 million to $160.

Finally, as Ryan mentioned, beginning in Q1 2026, we will report our results under 2 reportable segments: Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing or STEM. Upon implementation, the new SER segment will consist of our historical ERS segment and a portion of our historical APS segment and the new STEM segment will consist of our historical TES segment and a portion of our historical APS segment.

We will also begin reflecting intercompany activity between the 2 segments, which will ultimately be eliminated in consolidation. This new segment reporting reflects how we currently manage the business and how we allocate resources, and we believe this new presentation better reflects the positioning of Custom Truck strategies and operations portfolio. In early April, we will provide more information, including a recasting of certain historical financial information to align with and provide comparability to the new 2-segment reporting going forward.

We also will recast our guidance based on new 2-segment reporting at that time. We believe our new segment realignment will better reflect key economic drivers, capital intensity and margin profiles of the respective new segments as well as align our external reporting with how management allocates capital and evaluates performance. In addition, we believe this change will allow us to provide a clearer picture of the true earnings potential of each segment. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite significant macroeconomic uncertainty last year, our 2025 results and the continued strong fundamentals of our end markets allow us to be optimistic about the long-term demand drivers in our industry and our ability to produce significant adjusted EBITDA growth this year. With that, operator, we can open up the lines for questions.

[Operator Instructions] Your first question today comes from the line of Scott Schneeberger from Oppenheimer.

This is Daniel on for Scott. Regarding the guidance, what do you expect to see in the market to achieve the high end of that range? And what could be potential upside drivers?

Yes. Daniel, good to talk to you. And look, I think our guidance is really an indication of what we see happening in the market right now. So we're seeing really strong T&D demand, Daniel. So I think the high end would be that continuing or improving kind of throughout the year. And then I think it would be some of the vocational market or the infrastructure market seeing a pickup. So we're starting to see some positive trends so far this year, but I think that would be picking up even further. And obviously, any of the kind of political or economic uncertainty that's out there right now, obviously, if that calms or there's less of that, that would, I think, be a positive tailwind for us as well.

Got it. OEC on rent yield inflected to year-over-year expansion in the fourth quarter. How do you view the pricing environment and pricing as a contributor on that on a go-forward basis?

Yes. We're seeing good demand there, Daniel. So you're right, it did inflect. But it's a positive. I think OEC on rent was up meaningfully versus where it was this time last year, last Q4 of 2024. And so we're seeing the opportunity to increase price. Obviously, there's some inflation coming through there in terms of the cost of adding new assets into the rental fleet. But we did pass some price increases through at the beginning of the year, at the end of last year, beginning of this year. So starting to see some of that, some of that you see in the numbers that Chris reported in terms of on-rent yield as well.

Your next question comes from the line of Mike Shlisky from D.A. Davidson.

The 84% almost you saw in 4Q for utilization, multiyear high, but you've always said it sounds like a little bit above what you used to call your sweet spot and around 80%. Operationally, have you gotten to a point where you can sustainably keep at 84% and be able to serve customers properly? And given that you're not going to be investing as much in '26 in new assets, just give us a sense as to how you're going to balance the availability of assets and what looks like to be a little bit higher utilization going forward?

Yes. Mike, good to talk to you, and thanks for the question. I'd say this, I think the team has done a great job of executing -- on the execution side of keeping the fleet up and running. And so I think we're really proud of how the team is performing there. I would still say the right way to think about normalized levels is that high 70s to low 80s. As you know, kind of that Q4 is generally when utilization peaks just because of all the transmission equipment that's going out after the summer. And so that's what we saw really at the beginning of Q4.

And so I think the team has done a good job. I think execution is important. I think, as you know, we have de-aged the fleet. So the fleet is now under 3 years. I think we said 2.9 years is the age of the fleet. And so obviously, that helps from keeping utilization high standpoint. And so I think we're in a good position heading into Q1. I mentioned in my comments that we're back at about 82%, it is where we are now from a utilization perspective. And again, that's a very strong level from an overall utilization perspective.

And being where you are now and maybe just through most of the first quarter here, have you seen any onetime storm impacts in the Northeast and parts of the country that saw some big time snow and some of the cloud drains and down power lines, et cetera? Or was it very much a T&D-focused everyday business?

Yes. I'd say it's the latter. T&D-focused everyday business. We're seeing strong demand in transmission right now. And then I'd say good continued demand on the distribution side of things.

And then lastly from my end, some quarters, you give us a sense of first half versus second half, how you might be earning if there's any unusual seasonality in any given quarter of the year. Anything you can comment on 2026, first half, second half, anything being pulled forward in the first quarter, et cetera?

Yes, Mike, this is Chris. I think historically, we've talked about kind of the first half, second half split being on the revenue side, mid to, let's say, high 40% first half and then low 50s, kind of mid-50s second half of the year. Similar on EBITDA. EBITDA is a little more, I would say, a broader spread. So mid-40s to kind of mid-50s in the second half of the year on the EBITDA side.

Just to give a little bit of color for Q1, we do expect it to be a strong quarter. I think directionally, we think top line revenue will be up kind of mid- to high single digits. And EBITDA, we think, will be up double digits year-over-year. And based on Ryan's comments, it's going to be -- a big driver of that clearly is going to be our rental business. So I would index higher on rental versus new sales, but we think it's going to be a strong first quarter.

Your next question comes from the line of Justin Hauke from Robert W. Baird.

I guess I just wanted to -- and I appreciate, as always, the commentary about the orders being the driver of the TES segment. But I guess if I just look at, I guess, the backlog where you were a year ago, you did -- you had $370 million of backlog, you did $1.1 billion. Backlog is a little bit lower. I guess, in February, it's probably about flattish, but you're looking for pretty good growth there. So I was just thinking about the order trends and given the pull forward in demand that you saw in '25, maybe just talk about the cadence of how you expect the TES segment to perform throughout the year and just the confidence behind it.

Justin, good to talk to you, and thanks for the question. Look, I think 4% growth for the year, I think we feel good kind of with that number for last year for 2025. You're right, the leading number that we're watching, and there's 2 numbers that we're watching. One is backlog. So it was up sequentially. It was up sequentially from Q3 to Q4, up 20% -- and then the number that I watch closely is orders won. So orders won in the quarter were up 12% versus last fourth quarter. And so I think that's a positive indicator.

And then as we've talked about, sitting here as of yesterday, I think we gave guidance that backlog was up to $370 million. So it's back right to that 4 months on hand number, which is broad guidance that I think we've given in the past. And so I think that's that plus obviously, how the first 2 months are shaping up are where we have some comfort in the growth range that we provided, which I think is 3% to 9% growth for the segment. And I think that feels pretty good.

Do remember, last year, we saw Q2 was a very big quarter for us last year because of -- we felt it was that real big pull forward from some of the tariff activity. So I would think about smoothing it out a little bit. But I don't know, Chris, if you want to give any more color on quarters and TES in particular.

No, I think Ryan nailed it. We did have -- I think we mentioned in Q2 that we had 2 months that were above $100 million, which was the first non-December months that were. So as you are looking at how this year is going to play out, certainly, Q2 of this past year was much stronger than what would typically happen for the reasons Brian just kind of laid out.

Okay. Yes. So yes, so 2Q, a little bit of a headwind, probably 3Q and 4Q, maybe a little bit of a benefit just from smoothing that out, I guess, would be the summary?

Yes.

I guess my next question, I think one of the other factors you were kind of thinking about in the past for demand in '26 on the sales side was some of the emission standards that we were going to be hitting in '27 that looks like those have kind of been pushed back. I'm just curious if that's something that you're seeing as any deferrals on that side or anything from the emission standards?

Yes. It's a great question, and we're still watching it. The EPA mandate 2027 is still in play. I think we're still waiting on more clarity around the warranty component of that in particular, still. So I think if you look at the order boards from some of the OEMs, especially around Class 8 chassis at the beginning of this year, I think they would say that they're seeing some prebuy activity from some of the over-the-road customers. I would say we haven't seen a lot of it yet. There could be a little bit of an uptick this year from prebuy. But we feel like we're in a great position with our chassis OEM suppliers, got good inventory on the ground. And then we just have such good relationships with those OEMs that we feel like we'll be able to continue to get the chassis that we need to meet demand from our customers.

Your next question comes from the line of Nicole DeBlase from Stifel.

From Deutsche Bank. This is Naim Kaplan on for Nicole DeBlase. I don't know what happened to her. You continue to speak about the strength of vocational. So kind of just like wondering what gives you confidence in that sustainability and any part of occasional in particular that's standing out?

Yes. I would say we're seeing good strength in transmission and distribution in particular. So I think that's where we're seeing good demand. which obviously is into our forestry business as well right now. So I think we're seeing really good demand there. I think we did make the mention that we didn't see as big of a pre -- we didn't see as big of a year-end buy, excuse me, in some of the vocational categories. So dump trucks, water trucks, service trucks roll-offs, a lot of those are where we normally see a big year-end buy where we did not see that happen last year. We're seeing decent order uptick in those categories.

And so I think that's where we have some level of confidence that, that will improve heading into 2026. But I think the broad theme of transmission and distribution, which, as you know, is 55% to 60% of our overall revenue is certainly where we're seeing the strongest demand right now.

Okay. That's helpful. And then on gross margins, so they were up year-over-year in ERS, but down in TRS relative to prior year. So do you have any color on that and maybe the outlook for those segments in 2026 in terms of gross margins?

Yes. This is Chris. I'll start. We've kind of given an indication -- I think I heard you ask about PES, so I just want to make sure. We've given kind of guidance that our range is to be within a 15% to 18% gross margin range over kind of a cycle. We -- throughout the year, we talked about the pricing pressure that there was more product available out there. So we were seeing some of that.

And so we were at the lower end of that range. We started out the year at just over 15% and Q3 was 15%, but then we did see about a 60 basis point increase here in Q4 to 15.6%. And I think the way to continue to think about it is we're going to target to stay within that range and do everything we can on the cost side and where opportunistically we can take pricing, we will. But no specific guidance to give other than the guidance we've given to stay within that narrow range.

And the same question on ERS as well.

So ERS, just focusing on rental, we talked about low to mid kind of 70% adjusted gross profit range. We are much stronger than that in Q4. I think it's the highest it's been in some time, certainly over the past couple of years at 78%. That really was driven by high utilization, lower repair and maintenance relative to the size of the fleet. And so we would expect with this higher level of utilization that we should be able to continue to stay in that mid-70% plus range. And then on the used equipment side, we've been in that roughly mid-20s to high 20s range and don't expect it to be any different than that on a go-forward basis.

Your next question comes from the line of Brian Brophy from Stifel.

I guess with net CapEx coming down this year, curious how much you expect to age the fleet by as a result? And how much runway is there to continue to age the fleet after this year?

Yes. Great question, and good, Brophy. Look, I think the fleet is young right now at 2.9 years. And so we think there is the ability to age the fleet. If you -- months, I think, would be the right guidance, not years with kind of the activity of this year. And the fleet being so young at 2.9 years, I think there's plenty of room to be able to age it. So I think it's in a good spot. And we've talked about Chris' guidance was lowering the maintenance CapEx component, still being able to grow the fleet overall in 2026. And so you're right that there will be some aging. I don't -- we don't expect it to have a meaningful impact in gross margin or utilization performance of the fleet. And so we think it's a good time to do that with the demand environment as strong as it is right now.

Yes. And I think another way to characterize it is if you look at over the last 4 years, on average, it's been about 0.4 of a year to 0.3 years kind of de-aging of the fleet each year. I think the important point is it won't de-age -- we won't be continuing to de-age. So that's really where we're picking up the bulk of the kind of net investment this year.

Understood. That's helpful. And then any color on what drove SG&A lower relative to a year ago in the fourth quarter? And how are you guys thinking about SG&A this year?

Yes. No, we have been taking a closer look at SG&A and where possible, being -- I'm trying to think of the best way to describe it. We certainly have made in certain places some cuts. We're certainly looking at controlling our spending everywhere we can. The way I would look at 2026 is modest growth, so low single-digit type of growth. And so I wouldn't expect there to be any material increase year-over-year.

[Operator Instructions] Your next question comes from the line of Abe Landa from Bank of America.

Maybe just first on the inventory levels have been kind of moving lower. How much lower do you kind of expect it to be this year? What's the potential impact on the floor plan? And then maybe how much current month on hand do you have?

I'll start. So we finished the year at $930 million. I think our net investment in inventory, which is the way we look at it. So we look at inventory less the floor plan payables was about $275 million. We've given guidance that on our whole goods inventory side, which is the vast majority of our inventory. Our target is to get below 6x, which we think we can get close to that by the end of this year, which would be roughly another $100 million, maybe a little bit more than that, but roughly $100 million of gross inventory. And then typically, the way we think about that is 50% to 30% of that would flow through to the net inventory number as we pay down the floor plan of, call it, 70% to 85% of the value of the inventory. And so it would probably provide between $25 million and $50 million of net working capital pickup in 2026.

That's very helpful. And then maybe a question on the resegmentation. I guess, why today? Is there any sort of like structure or any cost actions that need to be -- that are associated with it? And I guess, lastly, like is there anything we should read into the resegmentation about maybe like the future of Custom Truck One storage, whether it's 1 or 2 entities?

I wouldn't read anything into it. Currently, this year, this is the way we're managing the business. We think it will provide a little bit better clarity to investors in terms of how they look at the business because they are 2 very unique businesses with different investment profiles. One is a little more asset intensive, one is a little bit asset-light.

Margin profiles are different. And the APS segment really is supportive of those 2 different segments. And if you look on the ERS side, it really is supporting, keeping the rental fleet up and running. And so we just felt like today, we're running the business really as these 2 segments, and we think it makes more sense to report that way.

And there's no associated costs with the...

Certainly nothing to do with the resegmentation. We certainly are always looking at our cost structure in any given year. We have continuous improvement and other initiatives that we do. But I wouldn't say there's anything specifically related to the resegmentation. We always look at our sites. We rationalize sites, we add sites. That, I would say, is not directly correlated with the resegmentation.

And that concludes our question-and-answer session. I will now turn the call back over to 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.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

I think this is the last panel for the morning sessions before we all break out to lunch. Here, we have representing Custom Truck One Source, we have Ryan and Chris from the team. And please, if anyone in the audience has any question, please raise your hand, we'll get a mic over to you.

And with that, we'll kick it off to Ryan and Chris to kind of just give us an overview of Custom Truck One Source and kind of recent developments.

Sure. Abe, thanks for having us, and we appreciate you all coming. We love telling the Custom Truck One Source story. But when we talk about just kind of a broad overview, we love to talk about our business on what we call the one-stop shop of taking care of our customers. And really, as we get into it, there really are 2 fundamental businesses in there. One is the specialty rental fleet. So we have about 10,000 trucks in our specialty rental fleet today. And then the truck upfitting business, where we manufacture and upfit trucks as well.

So as you think about Custom Truck, there really are 4 primary end markets, and we'll get into those end markets. But the first is utility. Utility represents about 55% of our revenue today. So that's both transmission and distribution work that indexes higher to the rental fleet, as we get into the discussion, we'll talk more about. And then infrastructure is just under 30% of our revenue today for us, that talks about roads and bridges, nonresidential construction and then refuse are the primary pieces that we put in the infrastructure category. And then telecom and rail are each just under 5% of our revenue. And so those are our 4 primary end markets, and we'll get into those, but there's really strong demand, especially in T&D right now that we'll spend more time talking about.

So -- but the business continues to perform. It's -- we've had a very strong 2025. Obviously, we're public, so we trade on the New York Stock Exchange as CTOS. And we'll get more into it, but I thought that would be a good intro.

Perfect. Maybe let's start high-level end markets. Obviously, everyone sees the headlines about AI, data centers, utility. Kind of what do you -- what's your view on the end market there? And how durable is that growth kind of looking out into the future? And kind of what are you seeing there?

Yes. We -- it certainly is durable, right, would be how I'd answer that question. And we see good growth there. I think if you look at most of the industry analysts that can be aggregators of information on IOU CapEx spend, calling for kind of high single-digit growth rates for the next 4 or 5 years. And that seems to be split. That distribution is kind of in that 8% range, give or take 1%, and then transmission is in the low to mid-teens from a growth rate perspective as you look at some of the latest reports.

I always talk about T&D as 3 really good tailwinds. The first is just the grid upgrade that has to happen. So the age of the grid is certainly aging. There's a lot of infrastructure investment that has to happen in the grid regardless of what's going on just as population grows. The second was electrification. Electrification was a really hot theme maybe 2 or 3 years ago. I would say that it slowed down. It still is a good demand driver for our customers, the utility contractors that we serve. And then the third is data center.

So for us, data center is just a very good demand driver for the grid. It means we need more power. It means more transmission lines have to be built. There's going to be more generation that's required, obviously, to power that. And that all is great work for our customers, the utility contractors that we take care of every day. But it feels like really, really strong demand. I would say the distribution kind of bottomed in Q2 of last year and has really been growing since really the 4th of July of last year. And then transmission has really begun to pick up like it normally does in the fall. So that's been -- it's been very active in the fall. There have been some new lines that have been announced. And for us, that means more trucks that have been -- that have gone out on rent for those new transmission lines.

So it sounds like we're kind of in this early stage of this really large secular growth. You said T&D is skewed more towards rental. I guess, how do you think about rental penetration rates? And kind of what differences do you see there between customer types or type of job?

Yes. So for Custom Truck, about 70% of our rental fleet skews towards transmission and distribution or towards utility. So that's the heavier skew. When we talk about the universal rental fleet, we say that it's 25% to 30% penetrated. So when you compare that to GenRent, there's still a long way to run on that side of the business.

And there's a couple of dimensions to think about when you think about utility and you talk about utility rental. The first is by customer. So utility contractors generally rent about 50% of their fleet. That seems to be the historic norm as you look over time. It feels like some of the large contractors will pivot between skewing more towards renting and then skewing more towards owning. And so that's where the one-stop model really came from, as we said, "Hey, let's get comfortable with the economics of both selling a truck and renting a truck." And we are comfortable with both of those, and "let's be able to pivot between those 2." But as -- but 50% seems to be the average for a utility contractor.

So as more work is outsourced, that means there's more rental that happens. IOUs and power producers generally do not rent a lot of their equipment. They purchase a lot of their equipment. But as contractors perform more of the work, that helps kind of the universal fleet.

And then the other data point I'd give you is that rental skews more towards transmission gear than it does distribution gear. So as you're entering kind of periods of good transmission growth, that also is generally a good tailwind for the rental fleet just because of the specialty nature of that type of equipment.

So it seems like we have 2 tailwinds that should be benefiting your rental segment for the next, however, a number of years?

That's right. Yes. Rental has been performing very well, really since it troughed in Q2, beginning of Q3 last year and distribution came back first, and now transmission is performing well. And yes, I do think it should be a good tailwind as we head into 2026.

Maybe focusing on the other side of your business, your Truck and Equipment Sales business, TES, what impacts are you seeing from whether it's government actions, including tariffs, EPA rulings? And then how have you kind of look to mitigate that potential cost or those additional costs?

Yes, it's a great question, and there's a lot to unpack and you think about where government has played there. On the good side, right, a lot of the federal stimulus has been good, right, for that side of the business. And I think that's been a positive. Obviously, all the recent tariff and EPA announcements have been real headwinds, right, on that side of the business. So tariff has been uncertainty for a lot of those contractors of just waiting to -- just taking a wait-and-see approach to make sure they understand what's going on in the market before they're ready to make a purchase decision. And so that's been something that we've been dealing with on the non-T&D side of things.

The EPA mandate is a really interesting one. And there's some new rulings that came out even last week that they're going to stick with the EPA mandate for 2027, but they're going to now modify kind of how it's applied or how it's interpreted. And so we're still waiting on that ruling. But I would say the impact of tariffs have been a cost increase. We've -- the team has done a great job of managing the cost increase. And so it has not been significant to Custom Truck. Where we've had to, we've been able to pass through those cost increases to our customers where we can and where that makes sense. And so we've been able to mitigate those, but it's worked out to about 1% to 2% of our overall spend. And so we've been able to manage that, we think, really well on the tariff side.

The EPA mandate seems to be creating a bit of confusion or a wait-and-see approach in California, in particular. And so we see that kind of in our sales volumes out there and in our customers' willingness to buy right now, where they're waiting to see kind of how it all plays out just because of the cost increase and how the EPA mandate will be implemented. As I said, the EPA last week said that they're going to keep the low NOx regulation for 2027 engines. But I think we're still waiting on clarifying what exactly that means. And I think there's some discussions around the warranty period, which is the big driver of the cost increase and how that's going to play through that. We're still waiting for their final ruling there. And I think the impact to us has just been some wait-and-see approach from some of those customers in particular.

Do you get the sense from speaking with customers that when that is clarified, that will almost release? I mean, I guess you also have -- One Big Beautiful Bill has also been a potential tailwind. How does that kind of factor into what you're thinking?

Yes. I think demand is still -- trucks are still being used, so there will be an increase, right, that comes, right, when kind of the EPA mandate in California is clarified. And then you're right, the One Big Beautiful Bill is a very good tailwind for us. And who that really impacts the most are our small contractors. So if you run a 5 dump truck fleet, the One Big Beautiful Bill and accelerated depreciation often means that December is the busiest month from a sales perspective just because people are choosing to take advantage of accelerated depreciation and not pay taxes, which is a good tailwind for us, obviously.

There is an aspect of that inventory balance kind of how you've been able to mitigate the tariff. Can you update us there and kind of how you expect inventory to trend looking to the end of the year and maybe even into the following year?

Yes. As we entered this year, we -- over the past couple of years, we had gone long on inventory. We thought it was the right thing to do, especially when there was some of the supply chain constraints. And so ultimately, this year, we had given guidance that we'd get $200 million of our whole goods inventory down. So we started the year at about $1.50 billion. That would have got us to about $850 million. As the year has progressed, given some of the pull forward on some of the tariff buy, we kind of pulled back a little bit on that and said that we're now looking closer to $125 million to $150 million reduction in the gross inventory.

It's important to note that our inventory, typically 80% to 85% of our whole goods inventory is floor planned. And so if we reduce inventory by $100 million, we're really unlocking $15 million to $20 million of pure cash, but it would have an offsetting favorability on our EBITDA because we treat floor plan expense as a hit against our EBITDA. So this year, by the end of the year, $125 million to $150 million gross inventory reduction. We think there's still some opportunity to reduce that next year. We've set a target to get about 6 months of our whole goods inventory on hand. I think we finished the last quarter at a little over 7.5 -- roughly 7.5 months. So we'll continue that journey as we head into 2026.

Maybe one more item on there. I know you're doing a Kansas City $10 million to $15 million incremental investment. What does that enable? And why now?

Yes. So our largest capital investment every year, obviously, is our rental fleet, roughly $400 million gross, $200 million net. Non-rental CapEx typically ranges $25 million to $50 million. This really was just an opportunity for some property that became available that was adjacent to our property. Our largest site by far is our Kansas City campus. And so we made the decision to add as we look out and see some of the demand that Ryan talked about to really have the flexibility for that incremental capacity there on the Kansas City campus.

Maybe another aspect of CapEx. And this kind of falls up on the rental side with T&D. Rental CapEx, I believe, at year-end, you kind of increased expectations for 2025 by $50 million. What's the driver of that incremental? Is that a pull forward? Or is that just what you're kind of seeing in the end markets out there?

Yes. And so when we started this year, we gave guidance as we do at the beginning of every year that roughly -- we'd have roughly $400 million of gross rental CapEx, net between $180 million and $200 million. And so the net is we sell the assets that we pull out of the fleet. As the year has gone on, Ryan touched a little bit about, demand has really come back strong. It started last year in the second half of the year with distribution, and that has just continued this year. And so we troughed at utilization of roughly 70% end of Q2, beginning in Q3 last year. We've now -- coming out of Q3, we indicated that we're now in the 80s. And just the demand that we're seeing, we felt it was a good use of capital to go ahead and increase our investment this year by $25 million to $50 million in terms of the net investment.

You could argue potentially it's a pull forward, just given the demand we're seeing because we do think we'll pull back a little bit on the net investment in 2026 to unlock some free cash flow. But it really was driven by demand, the demand we're seeing.

That's promising. That's a good type of CapEx growth. Leverage today, I mean, we're at a fixed income conference, 4.5x today. What's your longer-term goal? Or what's your goal at the end of '26? And kind of what levers are you going to pull in order to reach that goal?

Yes. As a publicly traded company, we hear quite often at the equity conferences that magical 3x leverage, and we take it seriously. And so our goal is to get to 3x. We think we'll meaningfully make movement here in Q4 and then through next year to get there, but it really will take probably to 2027 to get to that 3x leverage. The levers are really some of the things we talked about.

So we've -- as you look back over the past 4 years, we've invested heavily in our rental fleet. We've aged it from a little over 4 years to a little under 3 years. That's required a net investment over the past 4 years of between $700 million and $750 million. We do think we're in a position now where we could age the fleet and unlock some of that cash flow as we move forward. So I think that's going to be one of the levers. Clearly, we're seeing growth, and so we'll see some growth in EBITDA that's going to help there as well. And I think the continued journey on the net working capital, in particular, the inventory unlock is going to be another component. So really those 3.

Can you frame how you think about your ABL and the availability there? And then how you think about what's the optimal level that you kind of want to keep on that?

Yes. At the end of the last quarter, I think we were right just above $700 million on the $950 million. I think we had a couple of hundred million of suppressed availability. So we feel very comfortable where we are from a liquidity standpoint. As we were just talking about, I think we're now going to see the unlock of free cash flow. So we will use the free cash flow to pay down the ABL on that journey to get to 3x leverage.

In terms of M&A, which I think is a natural related question, I wouldn't anticipate any meaningful transformative M&A of size. I do think we'll continue to look strategically and do small geographic expansion type acquisitions, but I wouldn't expect anything meaningful there.

We're in December, kind of closer to year-end. I'm not asking for anything quantitative, although if you want to give it, that would be great. As we kind of look from 2025 into 2026, qualitatively what are like good guys, bad guys, new items, items that won't repeat? Just give us like a super high level, like how we're kind of thinking about how we should kind of frame the upcoming year.

Yes. I mean we talked a lot about the demand. The demand tailwinds that we're seeing, we think are going to continue into next year. T&D has come back strong. Ryan often talks about, especially on the transmission side, those are long-term projects. And so those projects are starting now and will continue. And so we expect to see that demand. We've talked about the Big Beautiful Bill. There's going to be an impact here at year-end. The interest rate environment has improved and hopefully will continue to improve. And so I think from a demand environment, everything we see is strong.

We have the capacity. We've talked about some of the investments we've made in our Kansas City campus. We've done some things out west in the Phoenix area. And so we feel like we have the capacity to really be able to serve that demand. And so when I look at risk, it really is going to come down to execution and really making sure that we capitalize on the demand that we're seeing. But I'll let Ryan add any incremental color he may have.

No, I think you hit most of it. It feels like T&D is in a really good spot, right, heading into 2026. It will be interesting to see kind of some tariff certainty or clarity maybe is better and just as interest rates continue to move down, if that spurs a little more demand on the infrastructure side, which I think would be good. And then the interest rate piece and Chris talked about bringing overall inventory down, I think is a good tailwind for 2026 when you think about the floor plan expense and kind of how that impacts the P&L. So -- but no, but I think he hit the points.

Are there any other levers to think about on the EBITDA margin side?

Yes. So we'll talk a little bit about price, right? I think any time you're going into a good demand environment, certainly on the rental side, there's the opportunity to understand price. So we think that heading into 2026, we should have some opportunity to increase price. Obviously, that -- a lot of that will be used to just offset the cost increases that we're seeing from tariffs, but then we do think there should be some positive leverage there on the price side. And then there are a lot of CI, continuous improvement initiatives that are in play on our upfitting and manufacturing side, too, that we should be able to begin to think about can we get back to expanding margin on the TES side right now.

Maybe taking more of a strategic look kind of at the company as a whole. In the corporate world, we've seen a lot of spin-offs, breakups. There seems to be like -- it's been a trend kind of what we've been seeing. I guess how do you think about the manufacturing and the rental business kind of being together today? Does it have to be together? Can it be separated?

Yes. It's a great question, and it's a question we have kind of responded to a lot more lately. The history of Custom Truck is that the business is -- it was valuable to have the 2 businesses put together because our customer, utility contractors would often pivot between renting a truck and purchasing a truck from us.

As we've grown and now that we're the size that we are, I think we certainly have begun to entertain the idea of maybe there's a cleaner way to explain the business, to talk about the specialty rental fleet on one side, where there's plenty of pure public company comps just on the rental side of the business. And then to talk about the truck upfitting business that's now of scale, right? It's north of $1 billion of third-party sales. And then if you were to think about the rental fleet as a customer, all of a sudden, it becomes $1.5 billion of revenue that you would have on the upfitting or sales side of the business. And so to me, that's now of scale or I think it can stand on its own. It can support kind of growth at that level. So it's a discussion that we have a lot more of.

There would be pure-play comps to think about Federal Signal or Douglas Dynamics or an Alamo Group are often the names that are mentioned in that discussion. And then you would have more of a United Rentals or WillScot or Ashtead Group on the specialty rental side of things as well. So it's a discussion we've had a lot more. I think we've said if that was the right direction, we've thought through a little bit of how would you execute that. I think we're comfortable we can do it.

Where it -- where we're still spending time is like how do you take care of the customer, right? And that's where the business really started by taking care of the utility contractors and what would that look like and how would we do that well and make sure it's not disruptive to the customer.

Are there potential dissynergies that are in there away from maybe another corporate office? And certainly, quoting you, too.

Not many. I mean, not many as you think all the way through it. You've got to think about how you take care of customers, that's really the biggest and how would you make sure you service them and still work together, right, in some capacity. As you think about the branch network, there's 40 locations around the country. There are really 5, 7, if I include our manufacturing locations that are primarily upfitting and the rest are primarily -- and there's a few that do both, primarily service locations that are servicing the rental fleet in particular. So we thought through what that could look like if that was the direction we chose to go.

One area, I guess we haven't talked about really much yet is the aftermarket parts and service. I guess, how do you see that fitting in between those 2 aspects and over those -- the other 2 segments?

Yes, it's obviously important, right? And there's portions of the aftermarket business or PTA, Parts, Tools and Accessories business that primarily is a service offering to our rental customers. So that would obviously stick close to that rental side of the business. And then otherwise, we really would say that the location would dictate how we would handle that. So it's important for our sales customers to make sure that we can service their trucks. And so to me, that's an area that we know we can invest further in. And so there's an opportunity to invest further there. And then keeping the rental fleet up and running has been a big -- has been the #1 priority of our branch network. And so that would obviously continue to happen on that side of the business.

I mean you kind of brought up like various I guess, like when you say public market comps in each of the businesses. I mean, if I were just to do simple math and apply slap on EBITDA, there seems to be a disconnect here. I guess, how do you think about that disconnect? How do you kind of start to highlight it out there and to really maybe close that gap?

Yes. Yes, it's a great question, and we talk about that a lot certainly as a public company, but whatever multiple you want to use on either side of the business, I would argue, is higher than obviously where we trade today. So there's just some, okay, let's explain the business and make sure people understand the asset intensity of the rental business, but the higher EBITDA margin or adjusted gross margin on that side of the business and how that looks compelling. And then there is the free cash flow generation, but lower gross margin that you see on the truck sales side of the business. Both of those is pure plays, I think, trade at a higher multiple than where we trade today.

And then the other big online that's important in there to think about is, right now, when we put $400 million into the rental fleet, which was the gross CapEx number that Chris used, we transfer that to the rental fleet at cost. So if you really were to think about it as 2, you would transfer that to the rental fleet at margin and everybody can use whatever margin they want to assume there, but kind of our standard margin is that mid-teens margin. So all of a sudden, there's $60 million, give or take, of additional gross profit or EBITDA that would exist when you think about the 2 businesses as a stand-alone.

So to me, those are the 2 big unlocks. You've got to think through the capital structure of what that would look like. One of the things we talk about a lot now is our leverage levels, which are high for a public company. We're very comfortable with them from running the business day to day, but that's something that you'd have to think about that. And then obviously, the other big piece is the shareholder base that we talk about. So Platinum, who has been a great partner and as who put the deal together is still the majority owner. They own 70% of the shares outstanding. And so have been a great partner, too. So you've got to think through kind of those lenses as well to really begin to unlock the valuation side of the story.

Right. So that actually leads me to my next question. It's Platinum owns 70%, a little bit unusual for a public company. I guess remind us how they got involved and how they ended up owning 70% and maybe the obvious follow-on is what's their ultimate goal here?

Yes, they've been a great partner, and they love kind of the in-market exposure in the business, right, that we're building here. But just to reset, they invested in April of 2021. So 4.5 years ago, they invested at $5 a share. That's where they invested with the thesis of what I describe it as a traditional LBO of the previously Blackstone-owned portfolio company that was Custom Truck One Source. Their vision was to do an LBO with that business, but then to also merge it with Nesco. Nesco had been owned by Energy Capital Partners and went through a de-SPAC transaction back in 2019. And so that was the public entity that existed at the time.

So in April of '21, Platinum wrote a $750 million check, and then we raised $140 million pipe as well with the vision of putting those 2 businesses together. And so -- and that's what we did. That was our thesis. It was about $1.3 billion of revenue in 2021. It will be about $2 billion of revenue this year. So there's been very good growth kind of over that story. EBITDA has gone from $290 million to $380 million at our midpoint for this year. And so there's been very good growth over that time period.

And I think that's -- Platinum's view is great business, executing well. We love the end-market exposure. We love the asset intensity of rental. We love kind of how it all fits together, but we've been frustrated with how the share price has performed given the business -- from their perspective, the business has performed much better. So I always say Platinum, they're capitalists, they will figure out how to kind of monetize their investment, right? That's the business that they're in. And there's lots of options and lots of ways to think through what that could look like.

So I know there's a fixed income conference, but obviously, you have shareholders as well, equity shareholder away from Platinum. I guess what's the feedback that you usually get? Or like what do you think is kind of preventing you from realizing what you should -- what you think you should deserve on the open market? What's the #1 or 2 feedback you get?

The number -- two things we talk about on the equity side are where we've been talking leverage, right, is number one. And the Platinum overhang in their ownership position is number two. And so those are things we just talked through. So those to me are the 2 biggest. Obviously, the way we get -- we improve leverage. Chris talked about kind of the deleveraging activities that are in play and will continue into 2026. And so I think we're thinking through that.

The one other thing I would add is just generating free cash flow. Like we have -- Chris talked about it, but we have invested so heavily in the rental fleet to bring the age of the rental fleet down as we think about heading into 2026, that's the other big piece for us is how do we age the fleet just a little bit and use that as a significant lever to deliver free cash flow.

We're at like 4.5x. End of next year, it sounds like we're deleveraging another turn or so kind of closer to what public market investors kind of hope for as something with a 3 handle. Is that a fair statement?

Yes, fair statement.

That's a fair statement. Yes.

Okay. Great. We have about -- near the end of the time. Are there any other questions out there in the audience? Please?

No, I think the former. I think you could definitely -- they're 2 -- as Ryan described, they're 2 very different businesses. I think the TES or the new sales -- the sales business is -- generates more free cash flow. We've been investing heavily in the rental fleet. I think you would definitely get 2 businesses that would have leverage profiles that would match those businesses. And so certainly, I think that would be doable. Not sure if you'd add anything.

No.

Any other questions out there? I mean with that, we've kind of reached the end of the time. Do you have any closing thoughts, important items I didn't touch on, emphasize or key messages for bondholders?

No, I think you hit it. Thank you for having us, Abe, and it's been a great conference.

Great. And please, everyone, let's thank Ryan and Chris for talking about Customer Truck One Source.

Thanks, everyone. Appreciate it.

Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the Custom Truck One Source Inc. Third Quarter 2025 Earnings Conference Call [Operator Instructions] I'd like to turn the call over to your host today to Brian Perman. Sir, you may begin.

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 yesterday afternoon. That press release and our third quarter investor presentation are posted on the Investor Relations section of our website. We filed our third quarter 2025 10-Q with the SEC yesterday 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 3 months ended September 30, 2025, and prior periods. Joining me today are Ryan McMonagle, CEO; and Chris Eperjesy, CFO. I will now turn the call over to Ryan.

Thank you, Brian, and welcome, everyone, to today's call. Building on our momentum from the second quarter, Custom Truck had a strong third quarter, delivering 20% adjusted EBITDA growth and 8% revenue growth versus Q3 2024. Third quarter performance was characterized by continued solid fundamental demand in our core T&D markets and excellent execution by our team, leading to strong results in both our ERS and TES segments and overall year-over-year revenue growth for the quarter.

Custom Truck powers the people who strengthen and build our nation's infrastructure. Our trucks are used to build and maintain the grid on a daily basis. Our steady business activity and strong intra-quarter order flow continue to reinforce our optimism about achieving our expected growth targets in 2025. As a result, we are reaffirming our previous fiscal 2025 revenue and adjusted EBITDA guidance.

While Chris will discuss our segment's performance in greater detail, I'd like to highlight some key trends. In ERS, our utility contractor customers continue to see sustained and increased levels of activity, which they expect to persist for the foreseeable future, driven largely by spending tied to unprecedented secular growth and electricity demand. As several recent articles highlight, the real bottleneck in the AI build-out is electricity.

Current industry projections estimate that total T&D CapEx among U.S. investor-owned utilities for the 5-year period from 2025 to 2029 will be approximately $600 billion. The overall annual growth rate of spending is expected to be almost 10% with transmission spending expected to grow at more than 15% annually through 2029. We feel these trends in the utility end market have been among the key factors driving the growth in our OEC on rents over the last year and position us well for 2026.

For the third quarter, average OEC on rent was more than $1.26 billion, a 17% year-over-year increase. We ended the third quarter with over $1.3 billion of OEC on rent and have continued to see growth so far in the fourth quarter. Average utilization in the quarter was just over 79%, up more than 600 basis points versus Q3 of last year and the highest level in more than 2 years. We continue to see mid-70% to mid-80% utilization rates across most of our fleet, demonstrating the long-term resilience of our end markets. These trends drove a year-over-year increase in rental revenue of 18% in the quarter, with total ERS segment revenue up more than 12% versus Q3 of last year.

Because of the sustained strong demand, we decided in the quarter to accelerate rental fleet CapEx, which Chris will discuss in more detail. We believe this spending will position us well for continued growth in 2026. At the end of Q3, our total OEC was just over $1.62 billion, our highest quarter end level ever. Coming off near record segment sales last quarter, TES continued to see good sales performance in the third quarter, posting year-over-year growth of 6% and year-to-date growth of 8.5% versus the first 3 quarters of last year.

While our backlog was down in the quarter, we continue to see strong intra-quarter order flow, particularly among our local and regional customers. This reflects the current availability of equipment broadly in the market, which decreases the need for customers to place orders far in advance. Signed orders in the quarter from this portion of our customer base were up more than 40% year-over-year, driving overall order growth of over 30%. With the supply of certain vocational vehicles remaining at elevated levels across the market, segment gross margin was down slightly in Q3 compared to the prior quarter. However, it remained within our expected range of 15% to 18%.

Overall, our current pace of orders and the continued strong demand for vocational vehicles across our end markets combined to provide us with confidence in our outlook for TES for the rest of the year. We continue to believe that accelerated depreciation provisions contained in the recent federal spending and tax bill will benefit Custom Truck, particularly for sales of used and new vehicles in the fourth quarter. Since the end of the third quarter, we've seen this reflected in our backlog, which has grown so far in the fourth quarter to over $350 million. With respect to the tariff landscape, we continue to feel that as a result of our mitigation actions taken earlier this year, the tariffs will have a limited direct cost impact on our business this year.

However, we continue to hear about hesitancy related to new equipment purchase decisions from some of our customers as a result of economic uncertainty, continued high interest rates and the overall inflationary pricing environment to which the tariffs have contributed. We are reaffirming our full year 2025 guidance. Our strong year-to-date results, our robust order flow and resilient end market demand continue to drive our expected growth across our consolidated business this year. Despite some volatility in the macro environment, our business outlook remains positive.

Long-term sustained end market demand, buoyed by secular megatrends and our ability to provide exceptional execution on behalf of our customers set us apart from our competition. Our multi-decade relationships with strategic suppliers and our long-tenured and diversified customer base will continue to be key 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 achieve these results this quarter. We look forward to updating everyone on our progress on next quarter's call. With that, I'll turn it over to Chris to discuss our third quarter results in detail.

Thanks, Ryan. For the third quarter, we generated $482 million of revenue, $156 million of adjusted gross profit and $96 million of adjusted EBITDA, up 8%, 13% and 20%, respectively, versus Q3 of 2024. On a year-over-year basis, all our rental segment KPIs improved in the quarter. Average utilization of the rental fleet for Q3 was over 79% compared to 73% in Q3 of the prior year. Average OEC on rent in the quarter was over $1.26 billion compared to under $1.1 billion in Q3 of 2024. Both metrics so far in Q4 are higher than the averages we experienced in Q3, currently standing at more than $1.3 billion and over 80%, respectively.

As of today, OEC on rent is up more than $180 million or 15% versus a year ago. The ERS segment had $169 million of revenue in Q3, up more than 12% from $151 million in Q3 of 2024. Rental revenue was up meaningfully on a year-over-year basis, showing 18% growth. Rental asset sales were essentially flat and are up 20% year-to-date compared to the first 3 quarters of last year.

Segment adjusted gross profit was $104 million for Q3, up 19% from Q3 of last year. Adjusted gross margin for ERS was 62% in the quarter, more than 370 basis points higher versus the same period last year, driven by a higher mix of rental revenue as well as improved rental margins of almost 76% and sustained rental asset sales margins in the mid-20% range. On-rent yield was 38.2% for the quarter, down slightly from Q3 of last year, but still within our expected upper 30% to lower 40% range.

Net rental CapEx in Q3 was $79 million, and our fleet age is just below 3 years. Our OEC in the rental fleet ended the quarter at over $1.62 billion, up almost $130 million versus the end of Q3 2024 and up more than $60 million in the quarter, reflecting our strategic investment given the strong demand environment we continue to experience across our primary end markets, particularly in T&D. We expect to continue to invest in the fleet in the fourth quarter, resulting in high single-digit percentage OEC growth versus the end of 2024, which is higher than previously expected.

In the TES segment, coming off near record sales in Q2, we sold $275 million of equipment in Q3, up 6% year-over-year. Gross margin in the segment in Q3 was 15%, down from Q3 2024. We expect TES gross margins to improve in the coming quarters as supply of vocational equipment in the market comes more into balance, reducing some of the pricing pressure we've seen this year. PES new sales backlog decreased by $55 million in the quarter, driven by continued strong sales activity.

At 3 months of LTM TES sales, our TES backlog is slightly below our targeted historical average range. However, net orders in Q3 remained strong at $220 million, up more than 24% compared to Q3 of 2024. So far in Q4, which is historically our highest quarter of PES sales, we've continued to see strong order flow and our backlog has grown to over $350 million. That, combined with the ongoing feedback from our customers regarding their equipment needs for the remainder of the year, provides us with confidence that we will see strong revenue growth in TES this year, but we do believe it will be closer to the low end of our guidance range.

Our strong and long-standing relationships with our chassis, body and attachment vendors continue to be an important driver of TES production. Our current level of inventory positions us well to meet our production, fleet growth and sales goals for the year as well as help mitigate any impact from tariffs. Our APS business posted revenue of $38 million in the quarter, up 3% compared to Q3 of last year. Adjusted gross margin in the segment was over 26% for Q3, up both year-over-year and sequentially.

Our year-to-date adjusted gross margin in APS remains in our expected mid-20% range. Borrowings under our ABL at the end of Q3 were $708 million, an increase of $38 million versus the end of Q2, largely to fund both rental and non-rental CapEx and certain other working capital needs. As of the end of Q3, we had $238 million available and over $230 million of suppressed availability under the ABL, resulting in substantial liquidity for the company. With LTM adjusted EBITDA of $365 million, we finished Q3 with net leverage of 4.53x, a sequential improvement. We did make progress on our planned inventory reduction with inventory down almost $54 million in the quarter.

This contributed to a reduction in our floor plan balances of almost $57 million. We continue to expect to reduce our inventory in Q4 and into next year, which should contribute to lower balances on our floor plan lines as well as reduced borrowings on the ABL. However, given the strong demand environment that we are expecting to continue into 2026 and beyond, we now expect to reduce our inventory by $125 million to $150 million compared to the level at the end of last year. We intend to use our levered free cash flow to reduce our net leverage and to continue to target a level of below 3x. This remains a primary and important goal for us and one that we expect to achieve by the end of fiscal 2026. We are reiterating our previous 2025 guidance with total revenue in the range of $1.97 billion to $2.06 billion and adjusted EBITDA in the range of $370 million to $390 million.

However, given the sustained rental demand in ERS, we now plan to invest more than previously expected in our rental fleet this year, resulting in net rental CapEx of approximately $250 million. In addition, we expect our non-rental CapEx to be higher this year as well as we have taken the opportunity to fund some additional production and manufacturing improvements at our Kansas City location, which should result in expanded production capacity and better position us for growth across our segments. While our segment guidance remains unchanged, we do expect ERS to finish the year with revenues in the upper half of our $660 million to $690 million range and TES to finish the year with revenues closer to the lower end of the $1.16 billion to $1.21 billion range.

The extent of the benefit we get from our customer spending on new and used equipment as a result of the accelerated depreciation provisions is likely to be a key determining factor as to where in our guidance ranges we end up for both ERS and TES. As a result of higher-than-expected rental and non-rental CapEx, as well as the decrease in our planned inventory reduction, we now expect our levered free cash flow to be less than our previous $50 million target. However, we are confident that the incremental CapEx will yield strong returns that will result in higher sustained levels of levered free cash flow going forward.

In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite some macroeconomic uncertainty this year, our year-to-date results and the continued strong fundamentals of our end markets allow us to be optimistic about the long-term demand drivers in our industry and our ability to produce double-digit adjusted EBITDA growth this year. With that, I will turn it over to the operator to open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Scott Schneeberger from Oppenheimer.

It's Daniel on for Scott. So it seems like momentum is really strong here. Can you guys please elaborate on the visibility you feel you have for 2026 to sustain this momentum, please?

Sure. Yes. Good to hear from you, Daniel, and thanks for the question. Yes, we're seeing really good demand in the utility sector and transmission and distribution. And as we talked about on the call in our remarks, we're seeing demand increase, especially around transmission, in particular. So as everybody is hearing, it does feel like we're heading into a strong cycle of transmission demand. And so that's the decisions that we made in Q3 were to invest more into the rental fleet. Some of that will carry into Q4 as well. And we think that's what sets us up really well for 2026.

So we said on the call that OEC on rent averaged $1.26 billion for the quarter. It finished the quarter at $1.3 billion and has continued to grow into October. So utilization on rental is back into the 80 -- is north of 80% at this point. And so that's, I think, why we're really comfortable with the impact of that heading into 2026.

Got it. Honing in on ERS and OEC on rent yield. Could you discuss how you think about that going forward and how you feel about the pricing environment?

Yes. We've guided, obviously, high 30s to low 40s from an on-rent yield perspective, Daniel. And we've seen yield increase a bit in September and into October versus what we averaged for the quarter. So we've seen that as a positive thing. Obviously, 2 things in play there, right? One is as we shift more towards transmission, slightly higher yield that we've talked about. And so I would expect that to continue a bit.

And then as utilization increases, we've been able to take advantage of some pricing opportunities where it makes sense. Obviously, we have to price to the market. We have to be competitive in the market. And so that's obviously what we're dealing with on a day-to-day basis. But I think it should be in the range that we've guided to, and we -- I would expect that it would increase a bit from where we -- where it was in Q3 of this year.

Your next question comes from the line of Justin Hauke from R.W. Baird.

I guess I wanted to ask a little bit about the cash flow. I appreciate all the color on the uptick in the CapEx to kind of capitalize on the growth that you're seeing. But maybe just a little bit more clarification on the inventory reduction and the timing of that. You said kind of into '26 to get that down by the $125 million to $150 million from year-end '24. Just trying to think about what that means? Is that more second half of '26?

I just don't know how long this kind of elevated CapEx is going to be before those inventory levels start coming down. And then maybe the corollary to that would be just on the free cash flow guidance saying the levered being under the $50 million. I guess it's been kind of a use of cash all year. I'm just trying to think about the fourth quarter and do you expect to kind of continue to use cash in 4Q? Or will that be a cash inflow quarter?

Yes. Thanks, Justin. This is Chris. And maybe I wasn't clear. So the $125 million to $150 million reduction versus the start of the year will occur by the end of this year. And so we do expect to see -- I think through Q3, I think we're only down $14 million or $15 million. So you should expect another $110 million to -- I guess, it would be $135 million of further reduction in Q4. And so I think at peak last summer, we said we were just under 11 months of whole goods inventory on hand.

I think now we're just under 8. We've set a target of trying to get to 6. I think the into and beyond into 2026 relates to getting that further -- getting down to 6 months by the end of next fiscal year. And so I do expect we'll generate free cash flow in the fourth quarter, but it's -- given the incremental investment in the rental fleet and the timing of some of that inventory reduction, we're not going to have -- for the full year, we won't have any meaningful free cash flow.

Okay. Okay. And I guess just on the non-rental CapEx, the uptick on the production capabilities, can you quantify just kind of how much that is as we kind of think about, I don't know, the difference for next year versus that investment?

Yes. So I mean the answer is it really is just expanding some of our capabilities here in our KC campus. And I would think of it in the magnitude of $10 million to $15 million kind of impact, and it really is land building and putting some equipment in those facilities. And so I think we -- next year, we get back. I think historically, we've been $25 million to $40 million of non-rental CapEx. I think it will be -- continue to be similar as we move forward.

Your next question comes from the line of Naim Kaplan from Deutsche Bank.

This is Naim Kaplan on for Nicole DeBlase. So I was wondering what was the latest on your utility T&D customers' ability to execute projects? I know you kind of touched on this, but just like to have a little bit of elaboration. And it seems like also the industry is back on track after delays in 2024 and 2025, basically. Is that kind of the right way to think about it that we're back on track?

Yes. I think that's a great way to think about it. I think we're seeing -- we've seen distribution really pick up throughout the year. And I think it's back in a very good spot from a utilization and from a demand to purchase new equipment. And then we're seeing transmission pick up. It's been a significant pickup as it normally is in the fall. And obviously, that's what we've been investing into. And it feels like that it's got very good tailwinds behind it when it comes to transmission projects that are in process and under construction and will continue to need our equipment. So yes, I'd say it's back to normal and continuing to improve on the transmission side.

Okay. Perfect. And can you provide more color on the drivers of the 30% organic growth in PES? And maybe if you could touch on the customer types as well. And then on the backlog, was that only down year-over-year due to like a prior year comp because you had some past due backlog last year?

Yes. I'll take the second question. And you may have to repeat the first -- your first question because I don't think we heard -- you gave a percentage that I don't think we're familiar with. But on the backlog, we've said historically, we're not really a backlog-driven business. We're in kind of an order-driven business. And if you go back and look at the history, we've continued to post -- in '23, we posted 30% new sales growth last year, 7%. This year, on a year-to-date basis, almost 9%.

And in that period, the backlog has come down almost $600 million, and we've continued to post growth quarter after quarter. Ryan did talk about in his prepared remarks, we have seen the backlog grow almost 25% -- or a little over 25% here in the first 3 weeks of October. So we're back close to $360 million of backlog. So we're feeling really good about kind of the guidance we're giving and overall, just the health of the new sales business. But if you could just clarify the first question for us.

I think -- was it the -- you're talking about 30% intra-quarter order growth. Is that what you're referring to?

Yes, within TES. I'm pretty sure what you had in the release.

Yes. No, that's -- we just wanted to make sure you're asking the right question. The thing that -- in addition to backlog, what we're watching really closely and what we have good visibility to is how orders are coming in within the quarter. And so there's a meaningful -- so we're -- that 30% is an increase in signed orders when we compare Q3 of '25 to Q3 of 2024.

And I think that's where we're feeling comfortable about the growth we expect in Q4 and obviously, the performance, the 8.5% growth we've seen year-to-date in the TES segment. So in addition to backlog, we're watching kind of the intra-quarter order flow kind of in a real-time basis, and that's what we wanted to share with you all, too. But that's why I think we have comfort in the full year number that we've talked about for TES.

Okay. Very helpful. And just to follow up on that, if I may. Any details on the customer type?

Yes. We're seeing -- it's a good -- we are seeing really strong demand in the utility segment. So that's both our utility contractors and our forestry contractors, where we're seeing really strong demand. As we talked about some in the comments, we're seeing a bit more hesitation in some of the infrastructure end markets, things like refuse and some of our dump truck where there's a bit more inventory in the market that we talked about in the prepared remarks.

But I'd say there's still a good mix of our large national customers and our smaller customers as well. And so no significant shift there other than maybe skewing a little bit more towards T&D where we're seeing a stronger demand and infrastructure is a little bit softer from a demand perspective.

Your next question comes from the line of Brian Brophy from Stifel.

You touched on this a little bit, but hoping to get a little bit more color. Hoping you can give us an update on what you're seeing from a large transmission pipeline perspective. What's the latest you're hearing from your customers regarding to when some of these large projects that have been discussed are going to come to fruition?

Yes. We're seeing good demand there, Brian, for sure. And so we have seen a meaningful uptick in our transmission utilization late in the third quarter and into the fourth quarter. So I think that's driving a lot of the increase that we talked about on the call. And I think we have strong expectations for 2026 there as well. There are a couple of very specific projects, right, that are in process now that are driving that demand.

And then there's a lot of floating going on, too, that is for early 2026 also. So really good demand there. I think that's where we -- the comment that we made some additional CapEx investment, that's where we did add to the rental fleet to grow that part of the rental fleet further because we're seeing the good demand that our customers are talking about.

Okay. And then just to touch on one project in particular, I wanted to ask on GreenLink. Obviously, it's been discussed as a project you guys have been involved with, and we saw some headlines intra-quarter regarding a pause in activity. It doesn't seem like it's impacting your fourth quarter based on some of the comments you made. But just maybe any updated thoughts you can provide on this project and if we could see an impact this quarter?

Yes. No, it's still been -- it's not impacting the fourth quarter. We're still seeing good demand on transmission. I think that's what's always interesting when you get into these strong transmission cycles is I think customers don't want to return gear because they know that they may not see it again too. So I think it should not be an impact in our fourth quarter. And that transmission sector, as I said, is staying very strong from an overall utilization perspective.

Your next question comes from the line of Mike Shlisky from D.A. Davidson.

Can we back up a couple of questions? You had mentioned some comments about the infrastructure sector and how that's going. Can you maybe kind of round it out by just talking a few senses on how it's going in the telecom world and in rail as well?

Yes. I think we're seeing -- look, across the board, we're seeing growth, right? And so I think that's important to say. We're seeing the strongest growth in transmission and distribution, just given what's going on there. So we are -- within telecom and rail, we're seeing some activity pick up. As you know, telecom and rail are less than 5% of our revenue. So we're seeing some growth in rail.

We're seeing telecom, a lot of discussion and a lot of quoting happening. I expect that should pick up some in the fourth quarter and then into 2026 as well. But overall, it's growth. The strongest growth is in transmission and distribution. And then just where there's more competition from an inventory perspective in things like dump trucks or water trucks or some of our refuse product categories, we're seeing less growth or is the right way to say it, Mike.

Got it. And then turning to T&D, you start to see headlines from some data center operators as they build the data center, they're also building or contracting for energy production assets either close by, on site, a few miles away, not a long grid connection as far as distance is concerned, I guess.

Not all of the data centers, but some of them are trying to co-locate the energy. Does custom trucks still play a role in a project like that? Does it accelerate the pipeline opportunities when people are just saying we can't wait for the utilities go to build at least on our own infrastructure. Does have an impact on pricing and margins when you have a project where it's much closer to the data center than others?

Yes, it's a great question, Mike. And I think the way we're thinking about it is it is very good overall demand, right, for T&D for us, right? And so to me, it feels like there's a lot of generation that's coming online that in some cases, it's temporary generation, too. And so to me, that's why I think we're getting comfortable that there should be a sustained period of long demand here.

So in some cases, it's temporary generation, right, to get the data center up and then the expectation is the utility will come back through and bring a transmission line or a substation or whatever is needed, right, for that particular project. And that's where I think it feels like it's going to be good sustained demand for custom truck and for our trucks in both of those cases.

Got it. And then, Chris, can I give some more comments on your -- on the CapEx plan that you put out here for the rest of '25. Is any of this pull forward from '26? I'm trying to figure out, is there a point where you pause in the CapEx kind of harvest what you've got and pay down some more debt at some point?

The answer is yes. As you know, we -- the age of our fleet going back 3 or 4 years ago was a little over 4 years. We're now, I think, at 2.9 or right around 2.9 years. So that's $0.5 billion, $600 million investment to do that over time. And -- but the short answer to your question is we should start to see some improved free cash flow, certainly as we're able to pull back on some of that net investment.

Great. Chris, can I just follow up there? You had said you were once 4 years. I think you were a little bit above 4 years depending on how far back you kind of Nesco and so forth. How far would you take it? Like I guess I'm curious where the competition is with their average age? And how close would you get to the competition while still being the newest. I'm trying to figure out how long you might be able to let your assets for if you were to try to find a way to harvest some cash flow.

Yes, it's a great question. And look, it's -- there's not great data out there, but we do think that we are the youngest fleet, the youngest utility rental fleet that's out there. And so you're right, Mike, there is the ability to age it. And so to me, if you kind of use the bounds of where we are today of under 3, 2.9 or whatever the exact number is right now, and you think about the fact that we were over 4 just a few years ago, to me, that's a pretty good band that you can live in and allow to age -- and allow ourselves to age our fleet and therefore, generate cash flow that way.

So I'd give you that as a pretty good band to think about and still have a very strong performing fleet where we take care of the customer and are very competitive from an overall age perspective.

And I appreciate you've got a lot of opportunities coming in, so I don't want to issue your balance. So -- anyways I appreciate [indiscernible] a lot.

[Operator Instructions] There are no further questions in queue. I'd like to turn the conference back over to Ryan McMonagle for any closing remarks.

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. Thank you again, and have a good day.

This concludes today's conference call. You may now disconnect.