Alta Equipment Group Inc. Q1 FY2024 Earnings Call

Good afternoon and thank you for attending the Alta Equipment Group First Quarter 2024 Earnings Conference Call. My name is Bethany and I'll be your moderator for today's call. I will now turn the call over to Jason Dammeyer, Director of SEC Reporting and Technical Accounting with Alta Equipment Group.

Thank you, Bethany. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's first quarter 2024 financial results was issued this afternoon and is posted on our website along with a presentation designed to assist you in understanding the company's results. On the call with me today are Ryan Greenawalt, our Chairman and CEO; and Tony Colucci, our Chief Financial Officer. For today's call, management will first provide a review of our first quarter 2024 financial results. We will begin with some prepared remarks before we open the call for your questions. Please proceed to Slide 2. Before we get started, I'd like to remind everyone that this conference call may contain certain forward-looking statements, including statements about future financial results, our business strategy and financial outlook, achievements of the company, and other non-historical statements as described in our press release. These forward-looking statements are subject to both known and unknown risks, uncertainties, and assumptions, including those related to Alta's growth, market opportunities, and general economic and business conditions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our press release that was issued today. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's press release and can be found on our website at investors.altaequipment.com. I will now turn the call over to Ryan.

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. I will begin with a quick overview of our first quarter results, then provide a current assessment of the business conditions in our end user markets. Tony Colucci will then walk through a detailed analysis regarding our financial and operating performance for the quarter and our outlook for the balance of 2024. There is an earnings presentation available for today's call that both Tony and I will be referencing. Our results for the quarter, consistent with historical patterns, were impacted by seasonal factors, particularly winter weather affecting our Construction Equipment segment in Northern regions. Despite this, we achieved $441.6 million in revenue, up $20.9 million year-over-year, driven by continued strength in our markets. Our combined product support and rental revenues grew organically by $6.3 million, reflecting the sustained high levels of activity and equipment utilization in our regions. Notably, our equipment sales margins were impacted by a shift in revenue mix, which Tony will further explain in his prepared remarks. While new equipment sales and margins may face challenges from market dynamics, we remain focused on leveraging our dealership capabilities and value proposition to capture market share. Slides 5 through 7 of today's investor presentation highlight the strength of the product support and rental businesses within the core dealership platform for both construction and material handling, showcasing the resilience of the business model. Looking forward, we are optimistic about the construction end markets, the backlog of work, and activity levels that our customers indicate continued strength for our product support and rental business lines. Industry indicators are favorable for our end market demand. Non-residential starts are forecast to increase in 2024, and state transportation budgets are up double-digits in our Midwest and Florida markets year-over-year. Federal infrastructure and mega projects are still accelerating, providing long-term opportunities across our geographic footprint. In our Material Handling business, we have solid visibility based on our current customer backlog. Our diverse end markets offer opportunities across numerous verticals. Full year 2024 global lift truck market unit volumes are projected to remain strong compared to pre-pandemic levels, but decrease moderately from a year ago. We are excited about the commitment Hyster-Yale is making to drive innovation in the product portfolio and market leadership regarding technological innovation. We are working closely with them on initiatives like advancing fuel cell vehicles at major ports and zero-emission battery-powered terminal tractors for use in our mineral transportation hubs. We are also collaborating with the Hyster-Yale dealer network and implementing wide-scale technology enhancements such as operator assist systems and vehicle automation for improved safety and efficiency. We believe we are positioned to drive additional market share in our markets given our strategic footprint and the strength of the Hyster-Yale product portfolio. Our M&A activity since our public offering underscores the success of our growth strategy with 16 strategic acquisitions at accretive valuation multiples. We remain committed to pursuing accretive transactions that complement our core business and enhance long-term shareholder value. We continue to expand our geographic reach and product portfolio within existing business segments by leveraging strong OEM relationships and forging partnerships with new OEMs that meet our criteria. Furthermore, we are exploring new business segments in tangential or complementary equipment markets. The opportunity to electrify the medium-duty over-the-road truck fleet over the next decade is substantial, driven by the convergence of market demand and legislative mandates for zero tailpipe emissions. We are actively exploring ways to position ourselves at the forefront of this transformative trend, leveraging our expertise and resources. The transition to electric vehicles for medium-duty commercial vehicles draws a compelling parallel to the evolution of electric forklifts over the last 50 years. Initially, electric forklifts faced skepticism and challenges similar to those now encountered by medium-duty EVs, such as concerns over performance, run time, and upfront costs. However, advancements in technology and growing environmental awareness gradually transformed the forklift industry. Over time, electric forklifts gained acceptance due to their efficiency, lower operating costs, reduced emissions, and improved battery technology. As technology continues to advance and the infrastructure develops, we anticipate a parallel trajectory for medium-duty EVs, ultimately leading to widespread adoption and integration into the transportation ecosystem. In summary, while the first quarter was challenging, we are extremely optimistic that our business is poised for a successful 2024, especially with better visibility into the year. Thank you for your continued support and confidence in our company's strategy. Now I'll turn it over to Tony for a detailed analysis of our financial and operating performance.

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our first quarter 2024 financial results. I trust that you and your families are looking forward to summer as we all are here at Alta. Before I begin, I want to thank my 3,000 Alta teammates for their hard work in the first quarter, which, given weather and operating conditions, took focus, perseverance, and commitment to our customers and to one another to navigate. Thank you. My remarks today will focus on two primary areas. First, I'll be presenting our first quarter results, which were naturally affected by the seasonal impact of winter weather on the construction business in our northern regions, but nevertheless, saw continued revenue growth and strengthened our product support and our rental offerings. I will also provide details on the equipment revenue mix shift year-over-year, which impacted our equipment gross margins in Q1 on a consolidated basis. I'll also discuss specifics of how our core business segments performed well in the quarter, and our headwinds experienced at Ecoverse and Peaklogix, two of our subsidiaries impacted the quarter on a comparative basis. Second, I'll discuss our outlook for the remainder of the year, including current insights into some of our activity-based KPIs as we turn the seasonality corner in April. Before I get to my talking points, it should be noted that I will be referencing slides from our investor presentation throughout the call today. I'd encourage everyone on today's call to review our presentation and our 10-Q, which is available on our Investor Relations website at altg.com. Before I get into the first quarter performance, again, as I mentioned, the construction segment in our northern geographies is subject to weather constraints in Q1, which makes the sequential comparison of Q4 2023 difficult to Q1 2024. With that said, for the first portion of my prepared remarks and in line with Slides 10 through 19 in the earnings deck, the first quarter performance is as follows: For the quarter, the company achieved record Q1 revenue of $441.6 million, up $21 million, or 5% versus Q1 of last year. Embedded in the $441.6 million of revenue is a $14.7 million or 6% organic sales increase in our core material handling and construction segments, making for a comparatively strong quarter in our core business against a record level comparative. Specifically, rental revenue increased 7.1% organically for the quarter in our core business segments. Our product support businesses once again grew $3.2 million organically in the quarter amidst the difficult operating environment. To fully understand the quarter, it's necessary to break down the business segment by segment. First, our Material Handling segment, excluding Peaklogix and more on Peak in a moment, had strong organic revenue growth of 11.8% in the quarter. Specifically, new and used equipment sales were up an impressive 23% versus last year as new lift truck equipment availability, specifically from Hyster-Yale, was improved year-over-year. Additionally, rental revenue was up 5% – a notable 5% year over year. Our product support business lines were relatively flat versus Q1 of 2023 as more prep and delivery of the increased level of new equipment led to more non-billable time in Q1 2024 when compared to Q1 2023. From a gross margin perspective in the Material Handling segment, again, ex-Peaklogix, equipment parts and service gross margins were all improved or stable versus last year. Notably, when you take Peaklogix out of the equation, new equipment sales gross margins were stable despite an increase in the equipment supply in the market, leading to a more competitive pricing environment year-over-year. To focus briefly on Peaklogix, first, recall that Peaklogix is a subsidiary company in our Material Handling segment that designs, builds, and implements automated warehouse solutions for end markets up and down the material handling spectrum. Strategically, Peak provides our sales force and our material handling customer base with high-end automation solutions that our core lift truck business does not. Peak, as we've mentioned previously, was incredibly active and highly profitable post-pandemic as customers took advantage of financing large long-term CapEx projects at attractive interest rates. As we moved further away from the pandemic and as interest rates rose, Peak's customers have been more reluctant to take on large automation projects. From a comparative perspective, in Q1 of 2023, Peak was still working off of 2021 and 2022 backlog, leading to an unprecedented level of sales and EBITDA for Ecoverse. With Q1 of 2023 as context, the same restocking dynamic was not apparent in the first quarter of 2024 as Ecoverse's sub-dealers were sitting on a normalized level of equipment. Ecoverse's revenues were down $13.9 million for the quarter, and given its 25% equipment margin profile, its year-over-year performance led to a headwind for the enterprise of approximately $4 million of EBITDA versus Q1 of 2023. With the segment performance in mind and I would refer participants to the adjusted EBITDA bridge on Slide 13 of our presentation, on a consolidated basis, we realized $34.1 million of adjusted EBITDA for the quarter, which is down $6.7 million from the adjusted level in 2023. Our core businesses outperformed Q1 2023, while the aforementioned dynamics around Ecoverse and Peak served as the primary headwinds for our business in the first quarter. That said we expect each of the impacting factors listed on Slide 13, which challenged Q1 performance to become less impactful on a relative basis for the remainder of the year, which is a good segue into guidance and a discussion on our outlook for the remainder of the year. First, I would reiterate Slide 7, which is a window into our daily activity, specifically as it relates to rental utilization and labor productivity. Our rental fleet is experiencing its natural seasonality as we head further into the construction season and labor productivity has held stable at high levels. These KPIs provide technical support to the anecdotal conversations that we are having with our customers daily, which is that they are busy. This customer activity should bode well for our product support and rental revenue lines for the foreseeable future. When it comes to Ecoverse, which was the biggest driver of the EBITDA variance for the quarter, we believe that Q1's performance is isolated and timing-related and not a signal for the future. In fact, Ecoverse produced almost $7 million of revenue in April versus $12.8 million for the entirety of Q1. We remain excited about Ecoverse, its business model, and its prospects going forward. Relative to Peaklogix, we believe that this business unit will remain challenged as long as the current interest rate environment holds. But similar to Ecoverse, we believe in the long-term synergies between Peak and our core lift truck business. Lastly, investors should keep in mind that the two businesses acquired in Q4 of 2023, Burris and Ault, are both seasonal businesses housed in our Construction segment. EBITDA from both of those businesses will be heavily weighted to the remainder of the year versus Q1. In summary, we remain bullish about our prospects for the fiscal year 2024. Given Q1 performance and the current competitive new equipment environment, we are adjusting the top end of our adjusted EBITDA guidance for the year from $217.5 million to $212.5 million while keeping the $207.5 million floor of the range in place for 2024. In closing, I want to once again thank my Alta teammates for again rising to the operating challenges that Q1 presented our business. Your teamwork and dedication are infectious. Thank you for your time and attention. I will turn it back over to the operator for Q&A.

Our first question comes from Matt Summerville with D.A. Davidson. Please go ahead.

Thank you. I have a couple of questions. First, if you could create a chart similar to Chart 13 regarding the upper end of your guidance, what would the green bars look like for those that might be performing better? Additionally, can you categorize where the downside is originating from, such as Peak, Ecoverse, and other items you mentioned? This would help us understand the overall impact on the full year EBITDA guidance in terms of order of magnitude.

Matt, it's Tony. I wanted to address that Ecoverse was the main factor behind the variance this quarter. We noted an impact of $4.3 million for the first quarter on Slide 13. We believe the comparisons for Ecoverse will become easier for the rest of the year. They generated roughly $7 million in revenue in April, marking a solid start for Q2. Similarly, Peaklogix is experiencing similar dynamics as they are affected by a customer base that is sensitive to interest rates, particularly with significant capital expenditure projects. They likely began to feel these effects in Q2 of last year. As the comparisons become easier, we anticipate that the headwinds affecting Q1 will not persist in the upcoming quarters. Regarding Slide 13, we typically account for interest on showroom-ready floor plans within EBITDA. This has become more challenging in the latter half of 2023, but that comparison will also improve. In terms of our core businesses, we are optimistic about Material Handling, which saw a strong quarter with a 23% year-over-year increase in equipment sales on an organic basis. This performance aligns with our expectations. For the construction sector, we believe the acquisition of Ault and Burris will start to positively impact EBITDA from Q2 through Q4, as we absorbed their fixed costs in the first quarter. A potential headwind we’re monitoring, which slightly impacted Q1 relative to our expectations, is construction equipment sales. Many comparisons have highlighted pricing dynamics in the market and dealer channels being well-stocked, even while the end markets remain fundamentally strong. Therefore, our focus for guidance adjustments will primarily be on construction equipment sales. However, we remain very optimistic about rental parts and service for the rest of the year in our core business areas.

Thank you for that detail. Maybe just a quick follow-up on parts and service. Growth there organically decelerated a bit. I know you called out maybe a little bit of some weather-related challenges. But what's your full year expectation for organic growth in parts and service? And then maybe can you comment on what you're seeing in terms of rental rates as well as utilization levels versus a year ago? Thank you.

Sure, Matt. In the first quarter, we observed rental rates increasing by low single digits, possibly mid-single digits. Year-over-year, utilization of our rental equipment has remained strong. Our fleet size grew, but in terms of rental revenue, we performed well compared to last year. Overall, rental revenue exceeded the low single-digit growth rate, indicating we have more dollars on rent due to an increase in our construction rental business. Regarding product support, especially in our construction segment, we expected to see a modest increase in organic growth year-over-year, combining parts and service. We would be disappointed if that number didn't reach high single digits or low double digits. Material Handling's growth might be slightly lower due to its dynamics and maturity. The mild winter contributed to fewer cold start issues and reduced repairs needed for snow removal activities. I hope that provides clarity on our expectations. We aim for high single digits in combined growth.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.

Thank you for taking my questions today. This is more just on a broad market end market. Look, could you give a little bit more color just in terms of megaproject dynamics? And have you seen any notable change in the pace for going into mega projects? And importantly, any update on pricing on that particular end market? Thank you.

This is Ryan. I can address that. In terms of megaprojects, we find the situation to be stable without significant changes in pricing. Generally, as we've mentioned, these projects create long-term demand. Our contractors, who may be working on a megaproject, are indirectly connected to us since our equipment is used by customers involved at potential megaproject sites. We have some anecdotal evidence that our customers are engaged in these projects. This situation provides them with confidence in the longevity of their work. We continue to hear from customers participating in these long-term, multiyear projects that they effectively extend the construction cycle. However, we must keep in mind that the construction supply chain has limited resources, particularly when it comes to labor. There is a finite amount of labor available to operate the equipment we supply for these projects. I hope that provides some useful insights.

Yes. Well, with that visibility and with your Construction Equipment segment, there has been a negative mix. But there is margin expansion opportunity for that segment. With that increased consistent visibility with megaprojects, I mean, presumably, that would help with better pricing and which would be supportive of margin growth. I mean, is that something you are seeing in the market right now?

I think when we think about margin growth in our construction business, it's a mix toward product support, meaning parts and service revenue versus selling equipment to contractors that might be working on a megaproject. So to the extent one of our customer's needs equipment to be on a megaproject, we love it, obviously. But it's all in the end game of driving field population, whether that field population makes its way to a private non-res project or a large megaproject. Frankly, sometimes we're not sure because contractors are working on both all kinds of things. And again, in the vein of just our Gillette model where we're putting razors out in the field and we want to sell the blades.

Thank you. Our next question comes from the line of Alex Rygiel with B. Riley. Please go ahead.

Thank you and good evening, gentlemen. A couple of quick questions here. First, equipment sales in the quarter were stronger than I had expected. And this should be a positive trend, kind of confirming the success of building that field population, just one of your core goals. But it doesn't take into consideration pricing volume mix. So can you talk a bit about volume growth and directionally, how you think about volume growth through the remainder of the year?

Thank you for the question, Alex. To address your inquiry thoroughly, it's essential to look at each segment individually. In the first quarter, our core Material Handling and lift truck business experienced a 23% year-over-year increase in volume growth on an organic basis, largely driven by new equipment, particularly Hyster-Yale. Historically, we have noted that margins on forklifts tend to be on the lower end compared to our overall portfolio regarding gross margin when selling equipment. This situation may bode well for future product support as we believe we are capturing market share with our increased volumes in Material Handling, which is encouraging for what lies ahead. We anticipate delivering more Material Handling equipment in 2024 compared to 2023, and our start has been promising. However, this also puts pressure on gross margins relatively. Factors from Peak during the quarter further impacted this. In terms of construction volume, equipment usage remains robust, and our service call intake is either stable or growing as the season progresses. We utilize a rent-to-sell model, so if volumes shift from our balance sheet to customers, it could indicate a preference to rent over buying, possibly due to reasons like interest rates or elections. This trend could pressure new equipment volumes, prompting us to expand our rental purchase options fleet. The challenge then evolves into a pricing competition to maintain our market share, where OEM support becomes crucial for our dealer network, particularly with Volvo. They have historically assisted us in preserving margins. However, we did experience some margin pressure in Q1, which we expect to persist. As mentioned by Ryan, our goal is to maintain our market share and offer value, particularly in uptime related to our service department. Regarding Master Distribution, we see the current situation as an anomaly. Ecoverse has positive initiatives in its end markets, particularly in recycling. Given the surge in Q1 of 2023, it's challenging to predict whether they will reach that same volume level again. Nonetheless, we aim to sustain EBITDA through pricing increases and rising parts sales, looking to maintain our position in Master Distribution by year-end. It's a lengthy response, Alex, but I divided it into three segments for clarity.

That's helpful. And then any chance you can comment on the P&L impact of the difficult weather and if this is recoverable in kind of the second quarter? Or is it just lost?

Yes, I believe that is partly why we lowered our guidance. We felt the upper end of the range was likely unattainable based on our Q1 performance. The weather is difficult to assess, and our service margins in construction decreased compared to last year, which I think is partly due to weather issues. We had technicians in our Construction business who were ready for winter conditions and snow removal, but a mild winter meant that much of that work didn't occur. The soft ground also had an impact. While that's a starting point for analysis, it's challenging for us to quantify the year-over-year effects of weather.

Thank you.

Thanks, Alex.

Thank you. Our next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.

Thank you very much. Many of my questions have already been addressed, but I have a few more. I wanted to revisit the demand for both new and used construction equipment. There are a couple of points I want to discuss. If you look at the recent calls from companies like Caterpillar and CNH, both indicate that the North American market appears to be flat to slightly declining in the low single digits. Additionally, I've spoken with several smaller, specialty equipment manufacturers, and they have indeed noticed some impact due to interest rates. Nevertheless, according to them and others I've talked to, the demand for projects is present. Government funding is available, projects have been approved, and there is a need for equipment purchases. The current pause is mainly due to the rapid changes in interest rates and the associated uncertainty. However, the underlying demand suggests that the equipment will ultimately need to be deployed. Given this backdrop and the commentary from Caterpillar and CNH, can we assume that Alta's new and used equipment volume will likely remain flat to down for 2024?

So Ted, I'll take that one, and Ryan, if you've got any comments. I would say I'm going to start off by just saying that we think that the demand part of the equation remains pretty stable for the balance of this year. What we're describing is basically, you've got all the dealer channel is full. We aren't competing with the OEMs; we're competing with the other dealers, the CAT dealers, and the tier dealers. Today, we're all selling from full rental fleets, full inventory. That's going to impact how aggressive the marketplace is. So for us to hold share in this market, even with the demand backdrop, it's going to potentially be hard for us to hold margins at the same time.

It's the delivery, yes, the supply chain broke free and now you've got all the inventories normalizing at the same time.

Okay. Jumping over to Material Handling. I mean you kind of got that answer for me anyway. But one of the nuances within Hyster-Yale is that a lot of the backlog that they've been kind of pushing through and starting to deliver has been on the larger end, kind of a higher margin product. Is that the case in terms of the stuff that's starting to flow through your P&L? And then when you get into kind of bigger systems versus our units versus smaller units, is there a better margin profile for them for you as a distributor? Or is that not the case?

Ted, this is Ryan again. The margin profile by product category is going to be more related to how specialized and how the competitive environment is for it. The largest by volume type of machine in our construction equipment business is excavators, and it's also the most competitive. Excavators by unit volume.

Yes, he was mentioning Hyster-Yale, but...

I'm talking about Hyster-Yale Material Handling.

Yes, regarding Material Handling, what I can share about our relationship with Hyster-Yale is that they introduced a new narrow aisle product a couple of years ago, but supply chain issues have hindered the market's ability to bring it to customers. I want to emphasize that we are gaining ground in the Class II narrow-aisle product line, which is becoming a more significant part of our business. When it comes to larger trucks, Alta has consistently been a leading player in the Midwest with high-capacity trucks. Overall, the margin profile between the two is fairly similar. However, I would note that our focus is certainly starting to shift towards Class II due to some innovations and the expansion of Hyster-Yale's product portfolio.

Okay. And then my final comment, which is a question, is that I'm just going to defend you from yourself. You all have entered the call with a somewhat downbeat tone. I mean maybe I talked to you too much, Tony. But when I consider the guidance and my model against consensus, I noticed that I was already below the low end of your range. The consensus also appears to be at the low end of your range. So give yourselves a break – don't be too hard on yourselves. Your quarter was great, and your outlook doesn't concern me.

Thank you, Ted. Yes, that's definitely not what we want to message. We feel good about the remainder of the year.

Thank you. Our next question comes from the line of Steve Hansen with Raymond James. Please go ahead.

Yes. Thanks guys. Most of the questions have been answered. But I did want to circle back on the competitive commentary and just the broader channel inventories being relatively full here. I mean, how do you feel about your own inventory and the ability to work that down through the next couple of quarters in order to free up some cash? And how do you think about that in the broader context of the balance sheet? There hasn't been much discussion on the balance sheet today. But just trying to get a broader sense for how you want to manage through this environment.

The balance sheet has remained stable, with only minor changes in the rental fleet, inventory, and accounts receivable. This stability is why we haven't emphasized it. Liquidity is strong and leverage is at the midpoint of our guidance. In regards to inventory, we aim for about two turns in our Construction business and slightly more than that in our Material Handling sector for new equipment. In Material Handling, we typically serve large Fortune 500 companies, and purchases are made well in advance, which involves some preparation and delivery time. After that, the fleets are delivered and invoiced. On the Construction side, our inventory levels are good, though I could see them increasing slightly as we coordinate deliveries with manufacturers. Overall, we have sufficient equipment on hand to maintain our current levels without significant reductions or increases. We believe we are well-positioned to keep turning at the rates mentioned and proceed from there.

Okay. That's helpful. Thanks. And then just wanted to go back. I think it might have been Ryan's comment earlier about the most competitive aspects of the market being in excavators. But I mean, just as a broader sweep, it sounds like the construction side has been more competitive. Are there specific lanes or verticals where you're seeing the most competition? And just curious if that's filtering into that rental side on the same vertical or not?

The competition that we're seeing is in the heavy construction. So the heart of the line Volvo products, large wheel loaders, large excavators, articulated, 40-ton articulated dump trucks. I think maybe less so on the compact end of the market.

There are no additional questions waiting at this time. I would like to pass the conference back to Ryan Greenawalt, CEO with Alta Equipment Group for any closing remarks.

Thank you for joining us today. That concludes the call.

That concludes today's conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.