Earnings Call Transcript - ALTG Q3 2024

Operator, Operator

Good afternoon, and thank you for attending the Alta Equipment Group Third Quarter 2024 Earnings Conference Call. My name is Elliot, 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 Dammeyer, Director of SEC Reporting and Technical Accounting

Thank you, Elliot. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's third 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 third 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 nonhistorical 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.

Ryan Greenawalt, CEO

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. I will begin with a quick overview of our third quarter results, then provide a current assessment of the business conditions in our end-user markets. Tony Colucci will then present a more detailed analysis of our financial and operating performance for the quarter and our outlook for the balance of 2024. But before we dive in, I want to take a moment to recognize and extend our thoughts to our Florida team members who have been impacted by Hurricanes Helen and Milton. We know this has been a challenging time, and your resilience and dedication are inspiring. We're committed to standing by you every step of the way as you navigate the recovery process. Now to my prepared remarks. Like many other industrial companies, our third quarter results continue to be impacted by the ongoing uncertainty in our end-user markets, particularly regarding customers' commitment to capital investments in purchasing new equipment. This dynamic has been most impactful in our Construction Equipment segment, where new and used equipment revenues decreased by $44.5 million or 29.5% on an organic basis. Many customers put capital investments on hold in the third quarter while they awaited election outcomes and more clarity on interest rates. However, post-election, sentiment has already improved, and we anticipate that customers will deploy capital more broadly in the fourth quarter and into 2025. During the third quarter, we also saw positive impacts from our business optimization initiatives as we reduced general and administrative expenses compared to earlier in the year. Despite a difficult revenue quarter, we are proud of the progress made with our balance sheet, reducing rental fleet and working capital, which allowed us to deleverage by nearly $40 million in the quarter. While the equipment sales market has been disappointing in 2024, our dealership model with diverse revenue streams has shielded our business from market cyclicality. Our rent-to-sell approach to the equipment rental market also enabled us to react quickly, selling off lightly used fleet and rightsizing our balance sheet efficiently. I will now talk about segment performance. In our Construction Equipment segment, revenues declined as demand softened, leading to a drop in new and used equipment sales. Rental revenue also decreased in this segment based on lower-than-expected physical utilization of equipment. Product support revenues held up and were boosted by additional technician headcount and higher market rates for labor. In the Material Handling segment, revenue saw a modest increase largely due to progress on a substantial sales backlog. Product support continued to grow with service revenues rising, which helped mitigate pressures from a highly competitive market. Despite these competitive pressures, we continue to capture market share, thanks in part to the market positioning of our product portfolio and our lead time advantage in certain product models. Collectively from all segments, our high-margin product support business continues to perform strongly with revenue increasing 7.8% to $140.2 million. This demonstrates the stability our dealership model provides, ensuring that our business remains resilient even amidst fluctuations in the equipment market. Turning to e-mobility. We have an exciting update regarding process progress in this segment, specifically our efforts to commercialize hydrogen fuel cell electric vehicles. We are excited to share that Alta has delivered Nikola fuel cell EV trucks to DHL, marking a significant advancement in our electrification strategy. Alta is providing these vehicles to DHL on a turnkey full-service lease. The first fuel cell electric vehicles, or FCEVs, have been deployed in Illinois, complementing the battery electric vehicles we already have operating in the Chicagoland area. Our product will be serviced out of our Calumet City, Illinois facility, ensuring top-notch maintenance and uptime. Turning to future outlook. Looking ahead to 2025, we expect a normalization in the oversupply of new equipment in the first half of the year, and construction equipment spending to be supported by easing interest rates and more favorable lending conditions. Infrastructure-related project pipelines are strong, and state DOT budgets are expected to remain elevated. The recent election outcome may further drive near-term demand for construction equipment fueled by anticipated infrastructure investments and favorable policies. Additionally, the administration's proposed tax cuts, regulatory reductions, and incentives for domestic manufacturing could prompt businesses to expand facilities. The opportunities in our material handling business remain favorable. We are confident that our strong relationship with Hyster, Yale, unmatched product support capabilities, and resilient diversified end markets will enable us to capture further market share in 2025. We are particularly focused on increasing our share of the electrified product classes where we maintain a competitive advantage in lead times. Additionally, we expect our e-mobility business to gain further traction as customers begin to shift to electrify their vehicle fleets. We currently have a sales backlog of approximately $20 million, with most of that expected to convert in the next six months. Now I'd like to elaborate on our strategic focus. At Alta Equipment Group, our success and sustainability are powered by a purpose-driven culture that aligns with our strategic vision. Our focus is centered on three key areas: one, optimizing our business; two, delighting our customers; and three, developing and retaining top talent. Our guiding principles, invest in the best, passion for excellence, mutual respect, one team, and customers for life continue to shape our leadership and operations. They are the foundation of our purpose-driven culture and the key to achieving sustainable growth and shareholder value. To further support our shareholders and in line with our positive outlook for 2025, our Board of Directors has expanded our share buyback program to $20 million, which we will deploy if opportunistic dislocations between the company's long-term value and share price arise. In conclusion, while 2024 has presented its challenges, the dedication of our nearly 3,000 employees to our core principles has been unwavering. I'm incredibly proud of their commitment, which has been instrumental in navigating this tough market. As we look to 2025, we remain focused on executing our strategy, fostering a culture of trust and excellence, and positioning Alta Equipment Group for long-term success. Now I'll turn it over to Tony for a detailed analysis of our financial and operating performance.

Tony Colucci, CFO

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our third quarter 2024 financial results. Before I begin, I want to acknowledge the effect of Hurricane Haline and Milton, which affected our Alta family and valued customers in Florida, as well as Hyster, Yale, and our sister dealers in North Carolina. Your resilience and commitment to one another, your communities, and to our business is inspiring, and our thoughts and full support continue to be with all of you through the rebuilding process. My remarks today will focus on three areas. First, I'll be presenting our third quarter results as our performance lagged expectations as we saw the equipment sales and rental environment deteriorate compared to Q2. Second, I'll reference key balance sheet movements in the quarter, which counterbalanced a challenged quarter on the P&L and is indicative of our business model's ability to efficiently flex in a difficult market. As part of that commentary, I'll update investors on our efforts to optimize the business from a fleet and cost perspective as we head towards year-end. Lastly, I'll update our adjusted EBITDA guidance range for 2024 and in doing so, present a pro forma benchmark financial profile for the business and discuss what needs to happen relative to our 2024 performance for us to achieve this target profile. 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. With that said, for the first portion of my prepared remarks and as presented in Slides 11 to 16 on the earnings deck, third quarter performance. For the quarter, the company recorded revenue of $448.8 million, which is down $17.4 million versus Q3 of last year and down $39.3 million sequentially against Q2, with the majority of that miss coming from the new and used equipment sales line. Embedded in the $448.8 million of revenue for the quarter is product support revenue of $140.2 million. Despite challenges on the new equipment sales line, importantly, we continue to realize organic growth in our high-margin parts and service departments with that figure increasing 4% year-over-year. To close out the revenue lines, as it relates to our rental business, we saw rental revenues of $53.7 million for the quarter, which was effectively flat versus last year and flat sequentially versus Q2. Breaking down the segments, our Material Handling segment was effectively flat year-over-year at approximately $170 million of revenue for the quarter as we navigated a depressed equipment sales market and continued to work through a notable equipment sales backlog. Importantly, material handling equipment sales margins have held up relatively well versus last year despite the increase in lift truck supply in the market. Additionally, product support revenues increased 3.5% year-over-year, while rental revenue held relatively flat. Notably, segment level income from operations for the third quarter came in at $7.1 million. On to the Construction segment. We achieved $262.3 million in revenue for the quarter, representing a decrease of $41.4 million organically when compared to last year. Despite continued organic growth in parts and service and increasing gross margins in product support, we continue to lag our prior year numbers and expectations on equipment sales as those sales were down $40.6 million versus last year on an organic basis and down $31.8 million sequentially versus Q2 2024. We continue to see our small to mid-sized contractor customer base reluctant to spend on new equipment in the face of the election and interest rate macro backdrop, with the most acute impact affecting our September results. Lastly, as it relates to the construction rental fleet, rental revenues were effectively flat versus last year and sequentially versus Q2. Notably, the history of our construction business suggests that Q3 rental revenue typically outpaces Q2, a phenomenon that we did not see play itself out this past quarter. In the Master Distribution segment, we achieved total revenues of $18.2 million, which came in slightly higher than last year, and gross margin outperformed last year's number by $800,000. While the segment continues to lag last year's pace year-to-date, the performance in the third quarter suggests that we are back to par year-over-year and look forward to getting back on the growth track in this segment in 2025. All told, on a consolidated basis, we realized $43.2 million of adjusted EBITDA for the quarter, which is down $7.8 million from the adjusted level of third quarter 2023. On a trailing 12-month basis, adjusted pro forma EBITDA is now $178 million, which converts into $91.7 million of pro forma economic EBIT, or the company's version of steady-state unlevered free cash flow. In summary, new and used equipment sales and physical utilization in our rental fleet, primarily concentrated in our Construction segment, underperformed sequentially versus Q2 and relative to our internal expectations for the quarter. As a mitigating factor, our product support business once again proved its resilience and acted as a protective element against a volatile equipment sales line and continued to grow organically in the quarter. Now for the second portion of my prepared remarks. Despite a tough quarter for the P&L and what is a difficult-to-predict spot market for construction equipment, we view our cash flow and balance sheet performance as a net positive for the quarter. As depicted on Slide 19 and in line with plans that we've discussed previously, we were able to react to a depressed demand environment by reducing the rental fleet by $18.2 million and optimizing working capital during the quarter, both of which led to us paying down funded debt by $39 million in the quarter. Additionally, after two quarters of SG&A expenses at approximately $115 million per quarter, we saw that number come in at approximately $111 million in Q3, indicative of management's focus on our optimization efforts centered on the right products, right people, and right customers. Lastly, and also as depicted on Slide 19, I wanted to note for investors that we have been responsible with our capital deployment in 2024, given business conditions. As noted in previous calls and in line with our flexible business model, after spending $75.9 million of growth capital on the rental fleet in 2023, we have not grown the fleet in 2024, effectively preserving cash flows to pay down debt and not overly speculate on long-term rental demand for heavy equipment. With all that said, from a leverage ratio perspective, despite a challenged numerator for the quarter in terms of adjusted EBITDA, our progress on the denominator funded debt allowed us to keep our leverage ratio intact, as that metric came in at 4.6x trailing 12 months adjusted EBITDA as of September 30. Investors should keep in mind that as quickly as our leverage ratio has increased in 2024, it can reverse just as quickly in the future. Additionally, investors should note that our debt is covered by tangible assets, mainly in the money rental fleet and parts inventory. While our EBITDA can ebb and flow quarter-to-quarter, asset coverage on the balance sheet is less volatile. And to that end, management estimates that at the end of Q3, the company had an estimated $1 billion of tangible assets at fair market value to cover its $820 million in net debt. Lastly, on the balance sheet for the quarter, we ended the quarter with an extremely comfortable $320 million of liquidity, which provides for maximum flexibility to operate the business in any macro environment that may be out ahead of us. Now for the last portion of my prepared remarks, I'll discuss our final update to guidance for fiscal year 2024 and provide a high-level target financial profile for the business on what we believe is an achievable state. In terms of the guide, we now expect to report between $170 million to $175 million of adjusted EBITDA for the full year 2024. A few observations here. First, with Q3 coming in below expectations, a reduction to the full year guide was justified, as we have achieved $127.6 million in adjusted EBITDA through the first three quarters of 2024. Effectively, given the new annual guide range, on the low end, we are expecting a repeat of Q3's $43.2 million of adjusted EBITDA, and on the high end, something closer to $50 million in Q4. As has been the case the entire year, the variation in that number lies primarily on the hard-to-predict equipment sales line in our Construction segment. While the early signs of Q4 are encouraging from an equipment sales perspective, any perceived pickup in equipment sales versus Q3 will likely be offset by our normal seasonal pullback in rental revenue. In summary, given these competing factors, we are effectively guiding to a $43 million to $48 million of adjusted EBITDA in Q4, which in turn yields $170 million to $175 million of adjusted EBITDA for the fiscal year 2024. With that guidance in mind and in referencing Slide 21, I want to provide investors and analysts with a pro forma view of what we believe is a target financial profile for the business at $2 billion in revenue, just to reset context given the underperformance of 2024. To be clear, we haven't concluded our budgeting process for 2025, so this slide and commentary should not be construed as guidance, but as a North Star for what we believe the financial picture of the business looks like in an optimized state at $2 billion in revenue. You will note that Slide 21 suggests, one, EBITDA of $200 million, a level that we have achieved on a pro forma basis historically; two, a 67% conversion rate on economic EBIT, which assumes a leaner fleet and a normalized used equipment pricing environment. This 67% conversion rate is again a level that has been achieved by the business historically. Three, cash interest of $65 million, which assumes no further deleveraging and interest rates holding at current levels. And lastly, investors should note at the bottom of the slide, which leaves $65 million of return to the common equity holder. Again, this isn't meant to be guidance for 2025. But when we think about what we have built over the past five years and what we're striving for at a high level, this is the target, which has gotten away from us in 2024. Now the question is, what are the factors that will again allow us to achieve this level of performance? Broadly, and as we look back on 2024, it's three major things. One, our estimate suggests that the 2024 equipment markets, which impacted both volume and gross margins on sales, cost the business approximately $20 million of EBITDA. To the extent we can recover any portion of this volume and GP on equipment sales in 2025, it would be a tailwind to our $172.5 million 2024 EBITDA and get us closer to the targeted profile. Two, our product support departments, while continuing to modestly grow on an organic basis, have underperformed internal forecasts and are on pace to achieve mid-single-digit growth in 2024. Annually and historically, our target has been to grow product support revenues by at least 10%. That said, even if one were to apply an inflationary figure on our approximately $560 million of annual product support revenue at a 50% plus gross margin, the math suggests another $10 million of EBITDA tailwind to the $172.5 million 2024 EBITDA number and again, gets us closer to the target profile. Lastly, we have and will continue to be focused on the SG&A line. And as we saw progress of this in Q3, as we've noted here today. Again, continual focus on this line will only act as another tailwind to bridge the gap between our performance in 2024 and the targeted profile we are aspiring to, which brings me to 2025. As a foundational comment, our business has not met our expectations in 2024. And specifically, we, as well as many others in and around our industry, overestimated customer demand for equipment, and it's now clear, underestimated the impact of the uncertainty around the U.S. election and interest rates would have on customer sentiment. That said, the election is over, and interest rates are on the downtrend. As Ryan mentioned, sentiment already appears to have shifted in the past week, and there are long-term tailwinds in each of our business segments that suggest a reversion back to our historic growth path could be in order in 2025. In that outcome, history will suggest that 2024 was a pause for our customers and not a hard stop. And if experiences our guide, things can turn as quickly for us in 2025 as they moved against us in 2024. In closing, I would say that we remain bullish about our long-term prospects at Alta and are confident in our enduring business model. And we look forward to operating in a more clear environment in 2025. In the meantime, Ryan and I wish all of our 3,000 teammates and all of you listening tonight a safe, healthy, and happy holiday season. Thank you for your time and attention, and I'll now turn it back over to the operator for Q&A.

Operator, Operator

Thank you. The first question comes from Matt Summerville with D.A. Davidson. Your line is open. Please go ahead.

Canyon Hayes, Analyst

Hey, there. You've got Canyon Hayes on for Matt Summerville today. Thanks for taking the questions. So I kind of wanted to start initially in the equipment sales. If we could maybe get a little bit more color on product lines, geographies, sort of where the weakness is stemming from, if it's broad-based and maybe how that has changed since we talked last three months ago? Thanks.

Tony Colucci, CFO

Canyon, it's Tony. I don't know that much has changed relative to geography in terms of impact. If we look at our construction business, Michigan and Florida are the two larger geographies just relative to the others. And I would just say that the downturn or the deterioration in equipment sales was more acute than, of course, we expected and what trend was as we saw in Q2. But it would be both of those regions that were responsible for driving the majority of the year-over-year variance.

Canyon Hayes, Analyst

Okay. Thank you. When we think about Alta returning back to kind of targeted leverage ranges, should we think about an increase in the denominator or EBITDA? Or would there be kind of a larger decrease in the amount of actual sort of debt on the balance sheet? And kind of to that question, how much more cash do you think could be pulled from the fleet? And is there an ability to do M&A that's kind of accretive to the leverage profile of these kind of market valuations? Thanks.

Tony Colucci, CFO

I think we've taken those in reverse. I do think that we can do accretive M&A, like we've done historically here this time last year when we did the Alta deal. I think we can do accretive M&A even at these current trading prices for Alta. Whether or not they're leverage accretive or not, I guess I would answer the same way, given where our leverage profile is, sellers' willingness to perhaps accept some equity, I think we can be accretive to do M&A that way. So I don't think anything changes there. Your comment or your question on numerator-denominator, I think what we said that we would be able to do or be focused on at the end of Q2 was reducing the fleet and in used equipment somewhere between $30 million and $50 million. We got to $18 million in the quarter here. I would expect us to stay on pace there. We are actively continuing to sort of pare back the fleet to try to hit our numerator and denominator metrics when it comes to financial utilization, where we want to be trading in the mid-30s on that metric. And so we'll be focused on the denominator. Certainly, at some point, Canyon, as we talked about in our target financial profile, we need the numerator to participate here in getting leverage kind of back in line. So it's a combination of both. And I wouldn't pick one or the other, but we're focused on both.

Canyon Hayes, Analyst

Thank you.

Operator, Operator

We now turn to Steven Ramsey with Thompson Research Group. Your line is open. Please go ahead.

Steven Ramsey, Analyst

Good evening. I would like to get your insights regarding the pro forma financial profile. We have trailing 12-month revenue at $1.9 billion with an EBITDA margin just above 9%, and we are looking at a profile of $2 billion with an implied 10% EBITDA margin. My first question is about the comparison to previous years. In 2022 and 2023, we observed lower pro forma revenue, but the EBITDA margin exceeded 10%. In the targeted pro forma profile, the margin remains similar or slightly lower, although rental revenue may be down, combined with a higher level of economic EBIT. I'm interested in understanding the factors that differentiate the current pro forma profile from the previous couple of years leading up to the pause in 2024.

Tony Colucci, CFO

I think, Steve, where I would go is just a more capital-efficient business relative to those prior years. So if you think about rental revenue, just rent-to-rent revenue and the EBITDA margins, our margins are no different in that department than some of the larger rental houses, right, which trade 50% or higher, let's say, on an EBITDA margin basis. But it's capital intense, right, the rental business. And so we've never really gotten too caught up in our EBITDA margin, more focused on capital efficiency. So despite it maybe being higher historically, what we're trying to paint a picture of is we want to be more dealership than rental house. We want to be more capital efficient than we've been historically. So it's a different 10% EBITDA-wise, and more of it is pushing to the bottom line and versus maybe getting reinvested into the business. And so that would be the difference. It's not meant to be taken as, hey, we're going to be less profitable. It's actually the opposite where we want to be more dealership, less rental house and be more capital efficient.

Steven Ramsey, Analyst

Okay, that's great information. I wanted to clarify the $4 million reduction in G&A for the third quarter compared to the first half. Is this reduction expected to remain in Q4 and 2025? Should we expect to see some growth in your operating expenses, especially since you anticipate sequential sales growth as well? This was a key point that came up in the last Q&A.

Tony Colucci, CFO

Yes. Clearly, it's SG&A, obviously, which has the selling element to it. When I compare quarters, our Q3 here on the top line was similar to Q1. And we're down, as you mentioned, if you compare Q1 to Q3, $4 million on that line item. I think, Steve, we have implemented a few things to get rid of some fixed costs here, where the majority of that will stick. That said, and the other thing to point out, we did note an uptick here in October, and we feel like we're optimistic here about Q4. And so commissions to the sales team are likely up. So it's a long way maybe of saying we expect the majority of that to stick, but maybe not all of it, as we head to Q4 here.

Steven Ramsey, Analyst

Okay. That's helpful. And I'll stop there. Thanks.

Operator, Operator

Our next question comes from Ted Jackson with Northland Securities. Your line is open. Please go ahead.

Ted Jackson, Analyst

Thanks very much. So my first question for you is going to shift over to the material handling world. If you listen to the Hyster, Yale call, they talk about the demand for, I guess, you call bookings for lift trucks in 2025. And the forecast is for them to actually be down through '25 with really a soft, call it, first half of '25 and then a pickup in the second half of the year. And I granted they're an equipment OEM, you're a distributor. But can you sort of, I don't know, cascade that and explain maybe why that might not be the same forecast for Alta as it is for Hyster, Yale?

Tony Colucci, CFO

Yes. Hey, Ted, I'll take maybe the front end of that. This is Tony and then let Ryan weigh in. There's obviously this lag, right, between what they're kind of forecasting for '25 and our view. The other element of it is just the ability to take share on the ground as well as Allied products, right? Hyster, Yale is obviously a major partner of ours, but it's not the entirety of the Material Handling business. What we read in their comments, what I would say is we have a good six to eight months of backlog that gives us some bullishness to say we can at least stay flat relative to the '23 performance, let's say, through the first half of the year. And then I think what Hyster, Yale mentioned is that they expect bookings to kind of start to come back midyear. At that point, I think lead times will shorten more than they are now. So when I read their call, they kind of were expecting a flat 2025 in North America. I think they've got some other challenges throughout the globe. But we're not forecasting anything probably other than a flat year in equipment sales for Hyster, Yale for '25. Primarily in terms of our backlog...

Ryan Greenawalt, CEO

Yes, in fairness to them, they believe that the backlog should help them bridge to a point where orders increase. However, the end market has clearly weakened recently, and similar to most heavy equipment markets, many are remaining cautious in the near term.

Tony Colucci, CFO

The comment that resonated with me, Ted, is that the bookings they are currently making are taking up their production slots towards the end of 2025. Obviously, the delivery to the actual customers would extend beyond that for us, suggesting that we might be looking at 2026.

Ryan Greenawalt, CEO

Ted, this is Ryan. Tony mentioned it, but I think it's also important to just highlight that we're North America-centric, and they commented that they see a stable market in North America for next year, offsetting tougher areas.

Ted Jackson, Analyst

Okay. Shifting over to really more of the construction side. Hurricanes, if I recall, typically have a bit of a demand push for Alta. When you look at what's happening for you with regards to the fourth quarter, how much of that do you think might be driven by the impact from the hurricanes within the Southeast?

Ryan Greenawalt, CEO

Ted, first and foremost, we need to consider the human element, which has been quite challenging. Recently, in our Florida business, we've noticed an immediate increase in the demand for compact equipment, particularly small wheel loaders and skid steers for cleanup efforts. Generally, this leads to a temporary rise in rental demand for these types of units. While this could indicate some long-term demand growth, it is likely not significant in the overall context of our business. Although we did see a quick uptick in compact equipment usage, there is nothing substantial to report.

Ted Jackson, Analyst

Okay. My third and final question shifts to SG&A to clarify the response from the previous questioner. Regarding SG&A in the fourth quarter, you have reduced it significantly, but what I understand is that you're not expecting it to return to the previous levels of around $114 million to $115 million. However, it’s reasonable to anticipate some sequential growth in your operating expenses, especially since you expect to see sequential sales growth as well. This was the main point conveyed during the last Q&A.

Tony Colucci, CFO

I believe that's accurate. If we don't anticipate it but were to repeat Q3 at the lower end, I would expect a similar figure, possibly slightly lower as we continue to achieve cost savings from the $110 million. On the positive side, if we add another $40 million or $50 million in revenue, which seems feasible, most of that would come from the equipment line, for which we would be paying commissions around $1 million, depending on a certain level of gross profit. So when Steve inquired about how much of that is likely to persist, my response regarding the majority of the $4 million refers to where I derived this estimate, indicating that around $2 million is likely to stick, with some variability on the remainder.

Ted Jackson, Analyst

Okay. All right. That was crystal clear. So thanks very much for taking my questions.

Tony Colucci, CFO

Thanks, Ted.

Operator, Operator

Our next question comes from Min Cho with B. Riley Securities. Your line is open. Please go ahead.

Min Cho, Analyst

Hey there. Good evening gentlemen. Just a couple of questions here. First, in terms…

Ryan Greenawalt, CEO

Hey, Min.

Min Cho, Analyst

Yes, can you hear me?

Ryan Greenawalt, CEO

Yes, we've got you.

Min Cho, Analyst

In regards to your product support business, it's clear that it showed significant growth. Could we discuss the year-over-year headcount growth? How has the hiring and retention process for your tech team been progressing?

Tony Colucci, CFO

I'll take the number side of it. Ryan can talk just maybe more strategically. We're up headcount-wise versus the beginning of the year. What I would say is we're focused on being as efficient as possible with the technicians that we've had. We've talked about right products, right people. And so we are up. It's a nominal number. But Ryan, do you want to talk briefly just about the environment?

Ryan Greenawalt, CEO

The environment has been challenging. Over the last couple of years, we've witnessed unionization efforts in the Midwest and experienced wage pressures. One way we are addressing these challenges is by leveraging our scale. We have full-time recruiters and are actively bringing in apprentices in the trades. This proactive approach helps us stay ahead of the demand, and we are successfully onboarding technicians every day. However, it remains a difficult environment, and the shortage of skilled tradespeople is more pronounced than ever.

Min Cho, Analyst

Yes. Okay. Just turning over to your e-mobility business. So it sounds like a nice kind of deal here with DHL. Now, as of last quarter, I thought backlog stood at $25 million, and now it looks like it's closer to $20 million. Did we lose something? Or was there some revenue this quarter that burned through? And just any update you can give in terms of the Harbinger relationship?

Tony Colucci, CFO

I'll address the initial part and leave the Harbinger details for Ryan. We did generate some revenue, which was under $1 million in the quarter, and we also lost some revenue, let’s say around $1 million. However, the rest is not completely gone but likely delayed. Our experience shows that these are lengthy sales cycles, particularly regarding charging infrastructure and the administration needed to secure vouchers for customers. Therefore, I view the additional amount as being postponed rather than canceled. The $20 million is associated with specific customers. It's just a matter of navigating some administrative tasks and infrastructure for charging, after which we can move forward with that pipeline. Would you like to discuss the Harbinger now?

Ryan Greenawalt, CEO

Yes. On the Harbinger side, there's not a lot more to report since last quarter. It's a start-up product. We have broad coverage for them in our territories where we operate. We're excited that in 2025, we'll be bringing online a facility here in Metro Detroit, where we'll be able to demo the vans and medium-duty trucks and start building towards deliveries in the second half of next year.

Min Cho, Analyst

Okay. And then just finally, a question on just your material handling business. Can you talk a little bit about, was there any change in terms of some of your market trends? Any of them get softer during the quarter or have improved and maybe not even in the third quarter but kind of looking out into the fourth quarter?

Ryan Greenawalt, CEO

I want to highlight something you mentioned regarding optimization and the alignment of the right people with the right products. Year-to-date, our service revenues have increased by 150 basis points, reflecting our efficiency with the technicians we employ. This is important for analysts and investors to note. Regarding material handling, the automotive sector within our legacy Material Handling segment has faced challenges, particularly this quarter more than in the first half, which has affected our parts revenue and slightly impacted the service side as well. This is a key area we are monitoring.

Min Cho, Analyst

Okay. Great. Thank you.

Ryan Greenawalt, CEO

Thank you.

Operator, Operator

We now turn to Steve Hansen with Raymond James. Your line is open. Please go ahead.

Steven Hansen, Analyst

I would like to focus on the construction market first. What are your thoughts on the pricing environment for both new and used equipment, and how do you see this affecting the remainder of the year and next year in relation to your target profile?

Tony Colucci, CFO

Steve, this is Tony. I believe we have identified the bottom level in terms of pricing. If you examine our margins quarter-over-quarter, they were around 12%. So, I think we've reached a stable point regarding pricing. We are still noticing competitors engaging in strategies that we will not follow in certain regions and product categories. However, it appears to me that we have hit the bottom. Ryan mentioned in his prepared remarks and in the press release that we likely have about six months to address the excess supply, which aligns with several industry benchmarks. Therefore, it seems that an improvement in margins may be on the horizon. I hope this provides you with some valuable insight.

Steven Hansen, Analyst

Yes. No, that's helpful. And maybe as a follow-up to that then, I know last quarter or maybe the quarter prior, you started to talk about some of the more aggressive behavior on the competing OEs. Have you seen the incentive programs change out there, pull back at all in reflection of perhaps this demand increase that's out there? Or is it still too early to see any indication on conditions getting more favorable from a competitive standpoint?

Tony Colucci, CFO

We have observed that some of the OEMs we work with are becoming more proactive with their financing and leasing programs, which has been positively received by our sales team. However, it's possible that these OEMs are just now aligning with current market conditions. We are happy to see these programs being introduced by our OEM partners, but it's still premature to determine how they will affect us. Looking ahead, we believe that the outlook for equipment sales and construction at Alta is improving, especially with the election behind us and gaining more clarity on interest rate trends, in contrast to our current concerns regarding pricing.

Steven Hansen, Analyst

No, that's helpful. Thank you. And just maybe a follow-up. I might have missed it earlier, I apologize because I dropped. But how do you feel about current inventory levels as it stands today? I know in past quarters, you said you felt more comfortable. But as you think about sort of rightsizing the fleet in rental and even in your new equipment side, I mean, how are you feeling about the ability to generate some excess cash flow here to pay down additional debt? Thanks.

Tony Colucci, CFO

Yes, we are pleased with our execution in Q3. We successfully reduced our funded debt by nearly $40 million, aided by a decrease in used equipment and the removal of $18 million in acquisition costs from our rental fleet. I believe we can maintain this momentum in the rental fleet and potentially free up another $20 million by year-end. We will let market conditions guide us as we continue to optimize and become more capital efficient with our rental fleet. Historically, Q4 has been a strong quarter for working capital. However, we still have room for improvement regarding our rental fleet size. Compared to similar companies, we've managed our inventory supply well, maintaining reasonable turnover without significant issues. Overall, I'm satisfied with our year-to-date performance, but there is still work to be done to unlock an additional $20 million or $30 million in the fourth quarter.

Steven Hansen, Analyst

Appreciate the color. Thanks.

Operator, Operator

We have no further questions. I'll now hand back to Ryan Greenawalt for any final remarks.

Ryan Greenawalt, CEO

No further remarks from management. That will conclude the call. Thank you.

Operator, Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.