Beyond Data Centers: The Heavy Machinery Powering AI

The AI boom isn't just about chips and data centers, it's also about the trucks and heavy equipment needed to build the infrastructure. One company is seeing that demand firsthand with strong quarterly numbers coming in. Joining us now is Ryan McMonigle, CEO of Custom Truck OneSource. Thank you so much for being here today, Ryan. Justine, thanks for having us. I love talking about Custom Truck. Of course. Yeah, we're so excited to learn more. So for people who don't really know much about the company, tell us a little bit about what you do and who's really using your equipment. Sure. Yeah, no, we, we provide the specialized trucks and equipment that companies need to build and maintain critical infrastructure. And so whether that means building a new transmission line, restoring power after a storm kind of impacts the power in our neighborhood, or we're upgrading the railroads, right? It's, those are all things that we do. And so we're providing the equipment that our, that crews need to make all those things happen each and every day. Yeah, it really seems like you're in pretty much every sector in some way or another here, which might be part of what's led to some of these strong numbers we're seeing, right? You just reported a strong quarter with rental revenue up quite a bit. So talk to us about what's driving that growth specifically right now. Sure, no, absolutely. So yeah, there really are two segments that we serve. The first is utility, so transmission and distribution. That's about 60% of our revenue today. And then the other is infrastructure more broadly. So that's about 40% of our revenue today. And you're right, we had a great quarter, really because of two things, demand around transmission and distribution, utility kind of more broadly, just continues to be incredibly robust. Right now, that's first kind of grid hardening and what needs to happen to upgrade. The grid that I'm sure we'll talk about, and then of course things like reshoring are a big part of that, electrification is really driving that activity, and then of course data centers are just all reasons that we need more power and we need to make the investments into the grid to make sure that we have the power that we need. Speaking of that power, again, so much power needed to make these data centers run, to make the AI run, right? So again, everyone is talking about this AI boom, but building the data centers is a lot more than just the computers themselves. So talk to us a little bit about how that boom is really creating business for you. Yeah, absolutely. So yeah, you're right, Justine. It's not just about chips and obviously what's going into the data center. None of that works without power. And so that's really where our customers, the utility contractors thrive, right? So whether that's new transmission lines that are getting built to make sure that the power is in the right place, or it's the substation investments that are happening, or even just the distribution investments that are happening, that's really what our equipment is used for. So it's used to power those crews. Those crews need our equipment. To make sure the data centers have power, in that case, to make sure that our homes have power if we're talking about electric vehicles, and just even more broadly to make sure that the power comes on after a storm. And so it's our equipment that we're providing to the crews who are doing that work each and every day. And I think that's why we're seeing so much demand. Yeah, I mean, it seems like that demand really, again, stretches across so many different sectors, so many different areas here. And speaking of the AI boom and the data centers, though, there has been some talk of will this boom continue and for how long? Especially, we just saw Democrats win control of the Senate and the House in the midterms. There's some talk of maybe some of these data centers and some of this build-out slowing down potentially. Does any of that worry you or cause any anxiety to the company? Or do you think, you know, we have enough going on across our other sectors that. Really, we have nothing to worry about right now. Yeah, maybe I'll answer both of those. But I think we feel like we're in a really good spot with what's happening in utility more broadly. So for us, again, we never track when a new data center gets built and we go chase that data center and put trucks into that market. It's more broadly as we're thinking about all of the transmission lines that are being approved to be built. And so we always start with the utility and their CapEx budgets, which are continuing to grow. And then we're tracking both. Uh, uh, transmission lines that are being built and that's where I think we, we see lots of backlog, uh, that's coming that are in construction today and that will be in construction in the months and years ahead. And then we're also tracking what's happening with rate cases more broadly, you know, and as that impacts what's happening kind of in a local market. And so, so we feel really good about there, about what's happening. We are only investing and adding more assets to our rental fleet when there's immediate need. And so I think we feel really good with the demand environment right today. And then you're right. You know, utility is about 60% of our revenue. There's 40% of our revenue that's more broadly telecommunications or road and bridge. And those all have good tailwinds behind them as well. Yeah, and in thinking about some of your customers here, right, talk to us a little bit about them renting equipment versus buying it, how that kind of changes your model and the business there and that kind of renting, buying, kind of how all of that works when it comes to this industry that a lot of our viewers might not know a lot about. Sure. Yeah, it's a great question. And I think if you think about the history of how the business started, it really started out as an equipment dealer. And I think what we realized is we really wanted to become an equipment solutions provider for our customers. And so that means we have our rental fleet. You're right. So our rental fleet today is about 11,000 trucks. It's $1.8 billion that we've invested there. And that allows us to take advantage of kind of immediate demand. And that's really what is very strong today. So things like our... Our utilization today was 81% in the quarter. It's climbed to 84% already in October. And so we're seeing really good demand on that side of the business. And then we wanted to make sure our solution means that a customer never has to go anywhere else but to Custom Truck. And so we sell new and used trucks. We'll sell more than a billion dollars of new trucks this year. And then we also offer service and parts and support through our 40 locations across the country. And so our solve is that customers at times will go heavy into renting equipment. Other times they'll want to buy equipment. And if we have that entire suite of solutions for our customers, they never have to leave custom truck. And I think that's why we've been able to deliver the growth that we have over the last several quarters. Yeah, having all of those solutions available to customers is so important, especially as you look to the future here. I mean, you have demand for projects that won't even get started until 2027 or 2028 even. So how far out do you think this infrastructure boom is really going to go? I mean, it seems like years in the future already. Yeah, it's it's that's I think where we get really excited. So we feel like we're still in the very early early innings of this transmission build out that's happening. And so we have more visibility into projects than we ever have. And so I think it's it's not only are the capital dollars there from the utilities, but now projects are being approved and are now starting to go into construction. And these you're right, Justine, are multi-year projects. So we have we are talking about projects now that are starting in 2027 and 2028. And then we'll run for several years. And I think it's why we're as optimistic and bullish as we are about the future of the infrastructure build-out and what that means specifically for custom truck and the trucks that our customers will need to make that happen. Yeah, I mean, it seems like there's so much growth happening right now and in the months and years ahead. But how do you balance investing in all of this equipment that it seems like you are needing, that you are using, but while also keeping debt under control and kind of keeping everything in check there? Yeah, it's a great question. It's something we obviously, we talk about internally a lot. And I think that's where having both the rental fleet and the ability to sell equipment is really important, right? And so there's times when rental demand is really strong, which is what we're going through right now. And so in the quarter, we announced that we were investing $60 million more into the rental fleet to take advantage of some of the demand that we were seeing. Those are dollars we deploy, and those trucks go on rent kind of right away. And so I think we see that as a big opportunity, and that's certainly kind of the environment that we're living in right now. But you're right. We manage that by also making sure that we're deleveraging. So as a public company, it's important. We've announced that we'll have leverage under three times by the end of next year, and I think we're well on our way to get there. And so that's kind of the delicate balance between deploying capital into our rental fleet, which obviously drives. EBITDA and drives EBITDA growth, which is important, but at the same time generating free cash flow to make sure that we're deleveraging as well. That balance is so important as you look to the future. Again, looking to 2027, what do you think is the biggest growth driver for Custom Truck OneSource? Do you think, is it really this kind of excitement over AI and grid upgrades and all of that, or is it really just the broader infrastructure boom that you're most excited about as you move into next year? Yeah, I think we have a great base load of just broad infrastructure investment that's happening, right? And so I would put grid modernization and some of the onshoring and some of the electrification trends that are occurring as really a great base load. And then we think of AI really as something that just accelerates the pace of growth. And so we feel like we've got a really good baseload. We've been very intentional about serving the utility in market and then the infrastructure in market more broadly, just because we feel like those are really resilient in markets to serve. And then obviously having AI on top of that, we think is why we're certainly comfortable talking about double digit EBITDA growth into 2027. And then we feel very optimistic about the future as well. Well, we appreciate you being here and walking us through all of your numbers so far and what is going to be happening the rest of this year and into the next couple of years as well. Ryan McMoneagle, CEO of Custom Truck OneSource. Thank you so much for being here today. Thanks so much for having us. Thank you.