Alta Equipment Group Inc. Q4 FY2024 Earnings Call

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

Thank you, Joule. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's fourth quarter and full year 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 fourth quarter and full year 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'd like to start by expressing my gratitude to our employees, customers, and shareholders for their continued trust and confidence. Despite a complex macroeconomic environment in 2024, Alta Equipment Group remains steadfast in executing our strategy, reinforcing our position as a leader in the heavy and industrial equipment sector. I'll begin today with a high-level overview of our fourth quarter and full year results before sharing insights on the current business environment and our strategic outlook for 2025. Following my remarks, our CFO Tony Colucci will walk through the financial details, including our cash flow, performance, and outlook for the year ahead. 2024 was a year of resilience and disciplined execution amidst challenging market conditions. The impact of higher interest rates, an oversupplied equipment market, and the election year uncertainty weighed on market demand across key end markets. Despite these headwinds, our diversified business model helped us navigate market volatility and maintain revenue levels comparable to last year. For the full year, total revenue held steady at approximately $1.9 billion, underscoring the resilience of our dealership model and the enduring strength of our product support business. In the fourth quarter, revenue declined 4.5% year-over-year to $498.1 million, reflecting broader market trends. However, sequential growth over Q3 suggests a post-election rebound. Adjusted EBITDA for the year reached $168.3 million, a testament to our disciplined cost management and proactive strategies in optimizing our rental fleet and working capital. Entering the year, we faced a 2026 maturity wall on our ABL and high yield bond. In June, we proactively addressed this by successfully raising $500 million in senior second lien bonds, refinancing our senior debt and extending maturities to 2029. This strategic move strengthened our balance sheet, enhanced liquidity, and secured patient capital to support the business through the cycle, ensuring financial flexibility as we navigate the current market environment. I’ll now talk about our business segments, starting with construction equipment. The construction equipment sector faced a challenging year, impacted by industry-wide oversupply, tightening credit conditions, and a slowdown in private non-residential construction activity. While infrastructure projects provided some stability, overall demand remained subdued. However, market dynamics varied significantly by region. The northern markets, particularly the Great Lakes area, saw steeper industry sales declines with double-digit contractions year-over-year. In contrast, Florida experienced a downturn but fared better than the national average, highlighting the localized nature of the CE market and the diverse demand drivers across geographies. In 2024, new and used equipment sales in our CE segment saw a 10.2% decline organically, a reduction of over $60 million, reflecting these macroeconomic challenges. However, organic product support revenues increased 3.7% year-over-year driven by stronger service rate utilization. The backlog of federal infrastructure spending under the IIJA program remains a long-term catalyst with significant funds still to be deployed. Additionally, state DOT budgets in key Alta regions including Florida, the Northeast, and the Midwest remain elevated, reinforcing demand for heavy equipment rentals and service. Our master distribution felt a similar headwind in 2024 as supply-demand imbalances and broader economic uncertainty weighed on sales. That said, we see momentum building. Channel partners are reporting stronger utilization and increased sales of environmental and specialty machines, setting the stage for growth in 2025. As the market adjusts to an equipment oversupply, we are confident that supply-demand imbalance will normalize by mid-year 2025, creating a healthier environment for new equipment sales. Additionally, our rent-to-sell strategy continues to be a critical tool in optimizing fleet utilization and balance sheet efficiency. Now turning to the material handling segment. The material handling segment also faced headwinds primarily due to the moderation of backlog driven growth. The North American lift truck market experienced a decline in new order bookings as the industry worked through record backlogs accumulated in prior years. As a result, while deliveries were strong, net new orders slowed, impacting future sales velocity. Alta's material handling revenue remained stable at $687.4 million for the year, a 0.9% increase from 2023 supported by sustained product support growth and stable equipment margins. However, pricing pressure, particularly in the used equipment market, presented challenges. Our warehouse solutions business also saw softness reflecting cautious capital spending from large logistics and distribution customers. Despite these challenges, the long-term outlook for material handling remains strong. The continued growth of e-commerce, increased adoption of automation, and the transition to Class 3 electric equipment create opportunities for Alta. Our investment in warehouse automation, fleet electrification, and enhanced service offerings position us to capitalize on these trends in the market. Now turning to the electric vehicle segment, I want to provide an update on the current status of our e-Mobility business. While recent industry developments have led to questions about the broader adoption of battery electric vehicles and fuel cell electric vehicles, we continue to see steady momentum in key markets. For example, major transportation hubs are making long-term commitments to hydrogen-powered fleets, reinforcing hydrogen's viability for high utilization applications. That said, challenges remain particularly around charging and fueling infrastructure cost competitiveness and supply chain constraints. As we evaluate opportunities in this space, our focus remains on ensuring we align with technologies that provide real-world value to our customers while maintaining a disciplined approach to investing in emerging solutions. Now to 2025 operational initiatives. As we enter 2025, we remain focused on three key priorities. First, operational efficiency, enhancing profitability through cost optimization, streamlining SG&A, and improving fleet utilization. Second, disciplined capital allocation. We successfully reduced net debt by over $60 million in the second half of 2024 through rental fleet right-sizing and working capital. Our $20 million share repurchase program remains active, and we will deploy capital opportunistically based on market conditions. And third, strategic growth in M&A similar to 2024, we are taking a more opportunistic stance to acquisitions in 2025, prioritizing high-margin recurring business lines with a focus on expanding our geographic footprint of exclusive distribution rights for world-class products. In closing, despite market challenges, Alta remains well-positioned for long-term success. Our differentiated business model, disciplined execution, and customer-centric approach provide a solid foundation for growth. The fundamentals of our industry remain intact, and we are confident that our strategic priorities will enable us to navigate short-term uncertainties while driving long-term shareholder value. Now I'll turn it over to Tony for a detailed analysis of our financial and operating performance.

Thank you, Ryan. Good evening everyone and thank you for your interest in Alta Equipment Group and our fourth quarter and full year 2024 financial results. I want to express my gratitude to all my teammates at Alta for their dedication to our business and customers during a unique 2024. I appreciate your commitment to one another and to Alta's guiding principles. My remarks today will cover four key areas. First, I'll briefly present our fourth quarter results. Second, I'll comment on our full year 2024 results, focusing on key themes and factors that contributed to the year-on-year reduction in EBITDA. Third, I will provide guidance for 2025 adjusted EBITDA and discuss the underlying assumptions. Lastly, I will recapitulate our cash flow profile, explaining how our rent-to-sell business model enables consistent cash flow throughout the cycle, as demonstrated by the 2023 and 2024 comparisons. I will reference slides from our investor presentation throughout today’s call, and I encourage everyone to review our presentation and 10K, available on our investor relations website. To start with the prepared remarks and as shown in slides 10 to 12 in the earnings deck, let's look at our fourth quarter performance. For the quarter, the company reported revenue of $498.1 million, boosted by a notable $69 million sequential increase in equipment sales compared to Q3, reflecting a rebound in equipment markets post-election. Although this increase was a relief after the first three quarters, gross margins on equipment sales were under pressure due to ongoing market supply issues. Given the demand increase, we made prudent inventory choices, accepting lower-than-average margins on some used equipment, which we don't anticipate repeating. While equipment sales exceeded our expectations, part service and rental revenues fell short for the quarter as rental equipment returned to our yards sooner than anticipated due to mild fall weather, allowing contractors to complete jobs ahead of winter. Additionally, with the rise in equipment demand, we strategically offloaded rental fleet primarily in our rent-to-sell categories, selling to customers who were previously renting, which negatively impacted rental revenues and EBITDA for the quarter. Furthermore, our product support departments underperformed, which we attribute more to timing rather than structural issues, as the midweek holiday schedule affected the productivity of our technicians and customers, leading to fewer work days compared to previous years. On the cost side, our expense optimization initiatives, started earlier in the year, began to show results, contributing to a sequential reduction in SG&A expenses realized in Q4, equating to approximately $8 million annually. In summary, we recorded $40.7 million of Adjusted EBITDA for the quarter. Moving on to our full fiscal year 2024 financial results, the company achieved $1.88 billion in revenue, nearly flat compared to 2023. On the adjusted EBITDA line, we reached $168.3 million this year, down from $201 million pro forma in 2023, resulting in an estimated $33 million gap. The main reasons for this gap are simple; first, we sold less equipment in 2024 due to market conditions, particularly in our construction and master distribution segments, resulting in a $100 million reduction in new and used equipment volumes, which impacted EBITDA by roughly $13 million. Second, the market supply overhang and competitive deal environment compressed gross margins on equipment sales, leading to approximately $24 million impact on EBITDA. These two factors caused a total impact of $37 million, which was partially offset by our cost optimization efforts and variable cost relief on lower sales volume, totaling about $7 million for the year. Therefore, the decrease in our adjusted EBITDA was nearly entirely attributable to supply-demand dynamics and macroeconomic factors in the construction equipment markets this year, reflecting how the business adapted to these challenges. Regarding our balance sheet at year-end, we finished the quarter with around $330 million in cash and available credit, providing us with ample liquidity for future business conditions. At the end of Q2, we anticipated a need to reduce our fleet by $40 million to $50 million due to the changing demand environment, and I’m pleased to report we achieved this goal, reducing our fleet by $45 million and paying down $61 million in debt in the second half of 2024. Now, on to 2025 adjusted EBITDA guidance included in today’s earnings release. We expect to report $175 million to $190 million of adjusted EBITDA for the full year 2025. Notably, this guidance does not include aggressive assumptions regarding equipment sales growth, especially in the construction segment. Nevertheless, we anticipate better volumes in our material handling and master distribution segments and improved gross margins, which we estimate will positively influence EBITDA by $7 million. It is important to remember that a 100 basis point increase in gross margin on a billion dollars of equipment translates to about $7 million in incremental EBITDA for Alta. Additionally, we expect organic growth in product support revenues and increased efficiency stemming from technician productivity efforts starting in 2024, projecting an incremental $9 million of EBITDA from product support. Moreover, cost-saving initiatives from 2024 will yield another $4 million in 2025, with minimal growth expectations in rental as we prioritize utilization over aggressive rate increases. While general inflationary pressures may pose a challenge, we remain confident in our business model and long-term prospects, and the team at Alta is committed to executing this plan and returning to a more profitable growth path in 2025. To conclude, I want to thank my teammates at Alta for their commitment throughout 2024; you have embodied our guiding principles in a challenging environment, and I’m proud of your efforts. To our shareholders, we value your confidence and look forward to enhancing shareholder value in 2025. Thank you for your time, and I will now turn it back to the operator for Q&A.

Thank you. The first question is from Matt Summerville with DA Davidson. Your line is now open.

Hi there. You've got Canyon Hayes on for Matt Summerville tonight. Thanks for taking our questions. You had already moved it to a different degree in the guidance. I just wanted to double click a little bit on the equipment sales volume. What's the sort of underlying assumption for price capture imbued in that guide? And kind of along that lines, what are the base assumptions within each of all those markets? Should we assume this guidance assumes that inflection in any degree or any help there as far as underlying growth rates would be helpful?

Yes, Canyon, we are looking at it segment by segment. It's crucial for everyone on the call to grasp the impact of 2024, starting with the construction segment. As Ryan pointed out, markets like Florida and upstate New York saw declines of 10% to 15%, and Illinois experienced a 20% drop just in equipment sales. Understanding this downside impact is essential to appreciate what the guidance represents. In the construction equipment segment, we aren't making bold predictions about the market size in 2025 compared to 2024. However, we believe that as the supply overhang diminishes in the first half, we will be more competitive in terms of market share. Even if the markets decline slightly in 2024, we expect to maintain at least flat performance because we may recover some market share. Regarding material handling, we anticipate modest low single-digit growth. We have about half a year of backlog, some of which may be at risk in the latter half of the year, but we expect stronger bookings in that period. In terms of master distribution, we've returned to an average of the last two years, focusing on an asset-light master distribution agreement model. We're projecting sales there based on a blend of 2023 and 2024 figures, leading to a 20% year-on-year increase. However, the nominal dollar amounts are relatively small due to the segment's size, which forms the basis of our guidance.

Great, thank you. And with balance sheet leverage at 4:7, how should we think about kind of immediate actions and prioritizations to bring that leverage lower and maybe what you're thinking about ending the year out on the leverage profile. Thanks.

Yes, sure. I think we did a lot throughout the second half in terms of being mindful of the leverage, and I think of leverage on a nominal dollar basis sometimes versus just the leverage ratio. If you look at Slide 15, sorry, 15 in our deck, a year ago we would have been sitting at mid-threes and now we're mid-fours. And that gets to the rent-to-sell sort of model that I laid out for investors here, which means that the leverage ratio can be fleeting, but we worked hard to kind of take care of the nominal leverage. So to get the leverage ratio down, we'll continue to pour cash flows against debt as they come in and be mindful of the leverage. We have no grand intentions to grow the fleet, rent-to-sell or rent-to-rent this year. And so there should be some cash left over to pay down nominal debt. How EBITDA plays out. We've given you kind of our prognostication there and so we're hopeful that we can have some accretion on the leverage ratio. I would also point out for investors that we've provided a new slide on tangible asset coverage in slide 16. That is another way to think about the leverage profile of the business where we believe that the debt is covered by over $250 million on a fair market value basis.

Great, thanks for the detail.

Thank you. The next question is from Steven Ramsey with Thompson Research Group. Your line is now open.

Hi, good evening. Wanted to start on the product support operating expenses moves. Maybe can you clarify how much you have already done in that area to make those business lines more efficient? How much of a guide is based on what you've done versus what you plan to do in 2025?

Yes, Steven, I think of it in two ways. The cost-out of the $8 million that was more fixed cost, sort of administration expenses. So I would say that that's done. But on the let's just say the first kind of wave, if you will, is done. The rest that's left in product support is sort of embedded in the guide and has started in earnest probably in Q4. And then we expect to realize some gains in 2025 related to technician productivity. And this is where things like training, rework, non-billable time, and just being more efficient or productive with every hour and price realization that is all yet still out there I would say. And that's one of the bars that's in our bridge here in the slide deck. That would be bar number three parts and service efficiency. So that's a go get for us in 2025.

Okay, that's great. And then wanted to think about for construction customers purchasing equipment, how you think that unfolds in 2025. Do you think the key lever there is optimism around market activity? Clearly that's somewhat tied to interest rates or do you think it's more about borrowing rates being more conducive to purchasing or, I'm sure it's a mix of both. But curious how you're assessing that backdrop.

Even. I'll weigh in. Maybe Ryan might have a thought here. I think so much of what we saw and observed in 2024 was what we believe to be kind of sentiment-driven uncertainty related to the election and that's gone. And we saw the pop that we were kind of expecting in the fourth quarter relative to our customer base committing to capital assets. Now whether it continues in the face of additional uncertainty with what's going on tariff wise, etc., is creating a bit of a cloud. What I would say is what we're observing in our construction segment is sort of a tale of two customer bases. One is those that are DOT infrastructure based are not as much tied to the cycle or interest rates. Those projects are fully funded. We feel pretty bullish about that side of our construction business. Whereas on the private non-res projects, that's where the pressure sort of continues.

All right, and then last one for me, I'm curious your take on the warehouse solutions business. Maybe the context of where it stands versus the prior peak and then what your outlook on this business is for 2025?

Good evening Steven. This is Ryan. I'll take this one. Relative to the prior peak, we think that we can get back there in the next probably 12 months just through organic growth. We are excited about that business segment. We know that that market is forecasted to nearly triple by the end of the decade. And we believe that it could be a powerful part of our platform. As you know, our material handling customers embrace automation. So we're committed to it. We think long-term we can really grow that business both on an organic and potentially an M&A basis. And our near-term goal is to kind of get back to that peak level from previous years.

Yes, Steve, just to maybe weigh into you, we're not going to, we won't give guidance on peak logic specifically, but we've got kind of a reinvigoration and a renewed kind of stance on that business, and we're in it for the long haul.

Thank you.

Thank you. The next question is from Ted Jackson with Northland Securities. Your line is now open.

Thanks. My questions have all been basically answered, but I was curious, Tony, and this could just be, something wrong with my model, but did you do any reclassifications of anything so restatements of anything in the from in historic periods just because things in my model aren't footing. And when I go back into.

Ted, we broke out rent-to-sell, rent-to-sell gain. I'm sorry, rent-to-sell CapEx and proceeds between investing and operating cash flows and we broke those out from rent-to-rent. So there's now two lines where there used to be one and that may be.

I saw that.

But my like...

No, I know, but so. But it's nothing that would change like your historic net income on any given period. Because my fourth quarter fits and when I look at the first three quarters of it, it flips and then, but it doesn't. Okay. All right, well, that answers it for me. Thanks.

Thanks, Ted.

Thank you. There are no further questions.

I think, operator, that would conclude the analyst questions and we can conclude the call here. Thank you everybody for joining and we look forward to talking to you all after Q1.

Thank you. Good evening.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.