Good afternoon and thank you for attending the Alta Equipment Group Third Quarter 2023 Earnings Conference Call. My name is Matt and I’ll be your moderator for today’s call. I will now turn the call over to Jason Dammeyer, Director, SEC Reporting and Technical Accounting with Alta Equipment Group.

Thank you, Matt. Good afternoon, everyone and thank you for joining us today. A press release detailing Alta’s third quarter 2023 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 2023 financial results. We will begin with some prepared remarks before we open the call for your questions. 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. Before I begin, I want to recognize our employees because without their hard work and dedication, our continued record performance would not be possible. Also, in light of the recent tragedy that has struck Lewiston, Maine, where we have long operated, we want to extend our heartfelt condolences to all those affected by the senseless act of violence. Our thoughts and prayers are with the victims, their families and all members of the community who are grappling with the profound pain and loss. I will now begin with a quick review of our third quarter financial highlights. These are found on Slide 5 of the presentation made available on our website. Demand in our end user markets remained solid. Total revenue increased 15.1% year-over-year to $466.2 million. Construction and Materials Handling revenues increased to $282 million and $168.6 million, respectively. New and used equipment sales grew 20.7% to $253.6 million. Product support revenues increased 12.1% year-over-year with parts sales increasing to $69.5 million and service revenues increasing to $60.6 million. We continue to increase our field population. And at quarter end, we had more than 1,300 factory trained technicians. As a result of our solid performance in our major business segments, which includes contributions from our acquisitions as well as organic growth, adjusted EBITDA grew 15.9% to $51 million. Despite the macroeconomic environment, we continue to see strong demand in the diversified markets we serve. I would like to highlight the resiliency of our Construction segment, especially in Florida, which has experienced tremendous growth. Our Construction segment, despite its name, has a myriad of applications that extend far beyond road, commercial or housing projects. The investments we’ve made have brought relationships and capabilities that extend into scrap…

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our third quarter 2023 financial results. Before I begin, I want to welcome our new team members from Burris Equipment in Illinois and Ault Industries in Canada to the Alta family. The senior leadership team is excited to build upon the legacy of each of those great companies, and we look forward to a bright future together as one team. My remarks today will focus on three areas. First, I’ll be presenting our third quarter results, which continue to outpace historical comps as our business continues to benefit from increased equipment availability in the face of strong end market demand and organic growth in our high-margin product support business. I’ll also briefly touch on the increase to our adjusted EBITDA guidance for fiscal year 2023. Second, I’ll walk through the economics on each of the two aforementioned Q4 acquisitions, Burris and Ault, and their overall impact on the financial profile of the business. Lastly, I’ll be presenting a recap of the past 4 years and contrast who Alta is today versus who we were at our IPO in February of 2020. As part of that discussion, I’ll summarize notable return on capital metrics over the past 4 years. 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 10 to 14 in the earnings deck, third quarter performance. For the quarter, the company recorded $466 million – revenue of $466…

Thank you. [Operator Instructions] The first question is from the line of Alex Rygiel with B. Riley. Your line is now open.

Good evening, gentlemen. Great quarter. Congrats.

Thanks, Alex. Good evening.

Good evening, Ryan and Tony. So as we approach 2024, can you talk a bit about your order book, how that might have changed over the last few months? And what customers are saying about higher interest rates and how they could impact purchase plans in 2024? And then any other kind of general thoughts on organic growth outlook for 2024?

Sure, Alex. This is Tony. I’m assuming when you say order book, you mean kind of on the customer side sales backlog, correct, versus our own order book with purchasing equipment?

Yes. Correct.

So we – yes, we have – the Construction segment, Alex, is a little bit more of you need to have the inventory on the ground, which is why you’re seeing such good results here recently in that segment on equipment sales versus having large backlogs like the Material Handling side, where you’ve got large customers buying fleets by the dozens, if not the hundreds. On the Material Handling side, we will go into 2024 with, what I would say is, a record backlog in terms of forklift customers and material handling equipment. And we have yet to see a material amount of cancellations related to factors that you just described inflation, interest rates, so on and so forth. So we feel really good about kind of visibility on equipment sales in Material Handling. And as we go around our different regions on the Construction side, it’s still hard to point to an end market or a contractor base that doesn’t have large backlogs of work, whether it be in the commercial side, aggregates and mining, as Ryan mentioned, or even – or more specifically, I should say, DOT work. And we made a point of highlighting that specifically as DOT budgets have kind of wrapped up for the year, they’re up 14%, 15% in the markets that we’re in. And so we feel pretty good about just sentiment headed into ‘24 on the equipment side. Certainly, that can change if – especially in the Construction segment, if macroeconomic factors change. When it comes to the more annuitized revenue streams as we head to ‘24, we’ve – I’ve been here 9 years. I don’t think that we’ve ever not grown parts and service 10% organically or at least high single digits on that line, and I think we would expect the same headed into next year as we try to kind of harvest a lot of the revenue that’s out there from the increased equipment that we’ve sold in ‘23 here. So yes, I think that’s how I’d leave that one.

And then, Ryan, I was intrigued by some of your comments on the specialty equipment side, definitely sounds like you’re going to be through M&A and organic methods growing that business a lot quicker. Can you talk a bit about that and a little bit more about the generally higher margins that you capture in that business?

Sure. Alex, the sort of rule of thumb is that the more commoditized the market, the lower – the more competitive the landscape and the lower your margins are going to be. So the margins are going to be higher because there’s less competition. It’s more engineered towards a specific application, which makes it a narrower playing field in terms of the competitive landscape. And then the other comment that I made was just about sort of the product support yield on that type of equipment. So if you imagine what the equipment is doing, handling heavy material aggregate, basically stone, it’s chewing up the parts and it has a very high product support yield on the equipment.

Alex, the way I would think about – you’re referencing Ault here, A-U-L-T, and the specialized equipment that they represent very much akin to Ecoverse in terms of the specialized sort of niche products that are used in pretty difficult applications, as you can imagine, crushing rock and stone. And yes, you can command a good margin on those products. And Ault income statement will look a lot like Ecoverse’s from a margin perspective because of that.

Very helpful. Thank you very much.

Thanks.

Thank you for your question. Next question is from the line of Matt Summerville with D.A. Davidson. Your line is now open.

Thanks. Couple of questions. Can you maybe talk about what you’re seeing in terms of new and used equipment pricing and what your thought is heading into ‘24 there? And then also, can you touch on rental rates and what you’re seeing in rental fleet utilization? And again, any high level into next year would be helpful there. And then I have a follow-up.

Sure, Matt. This is Tony. I think that if you – I’ll take those in buckets here, new equipment, we continue to see, I would just say, inflationary level, CPI level kind of increases. And what I always try to emphasize there is we just try to hold our margins ultimately. And you can see in this quarter is no different. I think we ended the quarter at 16% on new and used combined for the quarter. And so we have that – we get to sit kind of in between the OEM and the customer, but nothing really to speak up beyond typical what you’re seeing in inflation for new equipment. I will say that on used equipment, we’re not unlike the rest of the industry, a lot of the industry publications are seeing moderation or even decreasing in certain segments – product segments of the kind of Construction and Material Handling portfolio of products. So definitely have seen some moderation that way. Some of the industry publications that are out there based on auction pricing. And we like to use auctions kind of as our last resort, meaning we’d rather retail used equipment, but we definitely have seen some moderation that way as well. And I would expect that both of those things on new and used to continue, not sort of in any sort of material way but the trends may be to continue into ‘24. On the utilization side, we are always striving for 35% to 40%, 35-ish we can earn a good return on financial utilization. And so I think annualized, we’re running about $200 million on the rent-to-rent line on a $580-ish million fleet, it’s roughly 35%. And that’s kind of where we want to be. We’ve got – and we want to always try to drive that as high as possible. Rates – rental rates, I think we published in the deck today that were up 6% versus last year. And so as we saw in ‘21 and ‘22, sort of double-digit level, mid-teens, even in some categories, rental rate increases, we’ve seen moderation there. So it’s a long answer to your question, Matt, but I think moderation will continue into ‘24. And we’re just going to stick to our KPIs on equipment turns. We’ll scale the rental fleet appropriately relative to demand. We talked a lot about a rent to sell approach where we think we can scale that rental fleet back quickly if needed. And we’re constantly turning it anyway. So hopefully, that helps.

No, I appreciate the comprehensive answer. And then maybe if you guys can just spend a minute talking about some of your other end markets, obviously, construction is a big important one, but some of your – more of your material handling facing end markets. What are you seeing in warehousing, logistics, automotive, etcetera, etcetera? And then are you seeing any sort of canaries, if you will, at this point? Thank you.

Matt, I’ll take that one. This one is Ryan. On the Material Handling side, we have a pretty diverse end market exposure, which has some reasonable pockets of concentration. In the Midwest, it’s heavier manufacturing. We just saw the conclusion of the UAW strike, which is good news. It didn’t – it really wasn’t much of an impact on the business. There were some plants in our territory that were affected, but we’re happy that everything looks like it’s moving along in terms of that labor dispute. And the market for autos, we think it will be stable next year. There’s been a lot of turmoil and just disruption with the move towards electromobility, but we’re seeing that generally our area of the country is benefiting from that as we see new plants coming online for batteries, old plants converted to new lines and new products. So just speaking about manufacturing, we think it’s stable demand going into next year. On the warehousing and distribution side, a similar story. That business tends to follow the density of the market. So the population density tends to have the areas like New York City, Boston, Chicago, Detroit, all have heavy exposure to the warehousing and logistics markets. And the only thing that we’re seeing there is a little bit of a softening as it relates to the engineered solutions, the warehouse automation. We’re seeing projects, as we commented on last quarter, taking a little bit longer to get through the sales cycle. And this is an area we do think is somewhat more related to interest rates as it’s less discretionary. With our forklift fleets, they come up for renewal, and it’s a pretty formulaic renewal process that those are sticky accounts. With the warehousing market, they’re more discretionary investments that are based on an ROI and we’re seeing interest rates potentially having an effect there. And then another major market for us on the Material Handling side is food and beverage, that seeing no slowdown there. And then in the Northeast, in particular, the chemical and medical type of end markets where those also appear very stable and poised for growth next year.

Thank you, guys.

Next question is from the line of Steve Hansen with Raymond James. Your line is now open.

Yes, guys. Thank for the time. Maybe a first one on the balance sheet. Just curious where you are in that inventory journey that you described with the supply chains loosening up? How much further do you feel like you have to go? And what do you think the optimized level will be achieved?

We feel like we’re right kind of in the strike zone, Steve. We try to target two turns on new and used equipment, maybe a little bit quicker than that, actually on used. And we feel like we’re kind of right in the strike zone of that KPI. You always want to try to do better. We’ll never get back to the levels where we’re turning our new equipment 3x and 4x and maybe even 5x a year as we did through the supply chain issues. But I wouldn’t expect that to moderate a whole lot or to reduce a whole lot more. I would expect us to kind of just settle and maybe bounce around kind of where we’re at the year today. I think Hyster-Yale has been pretty upfront with some of their issues. We still have a lot of backlog, as I mentioned on that side of the house, and so to the extent that they’re able to increase production and deliver, we actually may see a little bit of an increase from here. But all told, I think we’re stabilized on the inventory level.

Okay. That’s helpful. Thanks, Tony. And you referenced a fairly attractive multiple in one of your recent purchases. I’d just be curious to know how you feel like seller expectations have been shifting, if at all, given some of the macro backdrop, high rate environment, etcetera? It sounds like there’s still accretive deals to be done, but has there been any major shifting – shift in that sort of seller expectation side?

No, Steve, there really hasn’t. And that goes – it’s not just this last quarter or this last year. I think I’ve been with the company 9 years and there’s – these companies will always trade in a certain range and that range is accretive to Alta. These are usually single-line dealerships that are in a specific territory not the platform that Alta is. Maybe have a specific end market that they’re concentrated in. And so the multiples are a little bit lighter than certainly where we would feel fair value would be at. But no, the answer to that is no. I think we still think that we can execute on $15 million of EBITDA a year at 4 to 5x. And sometimes, we can find deals that are better than that in this instance we did.

That’s great. And maybe just one last one, if I could sneak it in, is just around the buyback and how you feel the value of the stock today. I think you referenced it in some of your remarks earlier around the market cap and the valuation. But just how do you feel about that relative opportunity for capital allocation relative to the growth opportunities you might still have on your plate as well? Thanks.

Yes. Steve, so we’ve always triangulated all the data points on the buyback, which would be our leverage and liquidity levels, the M&A pipeline and what the multiples are there, as I just referenced. And obviously, some of the strategic elements of the M&A pipeline. These business – some of these businesses that we’re buying come up once in a generation or two generations or three in the case of Burris Equipment. I think Burris was in the same family for something like 80 years. And so we try to weigh all of those. And as the stock slips, obviously, it becomes more attractive relative to potentially the M&A pipeline or using capital elsewhere. But we’re also mindful of where we’re at kind of in the leverage cycle here and maybe preserving liquidity. So we – I mean, to be clear, we – my remarks were for a reason, we don’t want to part ways with capital at the levels that we’re at today, which is why you saw kind of the Ault deal – Ault, A-U-L-T, deal struck at a higher price. We wanted to – we negotiated a floor on what we are willing to part ways with on our stock. And so yes, that’s kind of how we position that answer.

That’s good color. I appreciate it. Thanks, guys.

Thanks. Thank you for your question. Next question is from the line of Ted Jackson with Northland Securities. Your line is now open.

Thank you very much. Congratulations on the quarter. Yes, I got a – most of my questions were asked, but a couple. I’d like to circle to the Pennsylvania opportunity just because it’s kind of unique in terms of at least my experience with Alta. Can you – was there no – I guess the question is, was there no like CASE presence in that region would be kind of one sort of thing like how do they come into play? And then when you put a new location in, how long does it take for you – first of all, what’s the investment for, you, say, a typical location than you’re greenfielding it? And then how long does it take for a location like that to hit stride in terms of where it’s actually performing at the metrics that you would want it to perform at? And that would be my first question.

Thanks, Ted. This is Ryan. I’ll take part of that, and then I think Tony will probably fill in some color on that. So first of all, we typically shy away from opportunities you would deem with greenfield, where we’re going into a territory and trying to carve out share for a manufacturer who’s not already there. You can’t create new demand and all you’re doing is bringing in product that potentially competes in a mature market, and it’s very difficult. And that’s not what this is. Here, we have a dealer that has decided to part ways or it’s been, I guess, mutual that they are going to part ways with the CASE relationship and they’re pivoting to a different manufacturer, and they have had some historical success in that market, and there’s an existing field population that today is being left unserved and unsupported. And this deal for us is being underwritten on the strength of that field population and what we know a field population will yield in the way of parts and service and supporting a headcount of technicians. So how quickly we can ramp up is going to be dependent on how quickly we can attach on to that customer base and take care of them with their existing equipment and preserve the goodwill that’s there with the CASE brand and with that customer base. As a point of reference, we’ve resurrected territories for OEMs in the past and our legacy business here in Michigan, the oldest part of our Construction Equipment business, started with negligible market share and very little field population. And it was about a 3-year ramp-up to being a $100 million business and having sustainable market share. That’s sort of what we’re forecasting for this business over the near-term without any further territorial expansion. With the territory we have and with the field population that’s there, we expect to be able to ramp up to that level over the next 3 years. And that could be further I guess, stimulated by other M&A opportunities or other brands that would be ancillary, allied lines that we could bring in, but that’s kind of the strategy. And then Tony, do you have anything on just sort of...

I think I agree with Ryan, it’s probably – it’s at least 3 years, Ted, before you have any sort of material. I think in this instance, given it’s a pretty cold start here, we do have – we’ll be stepping into some parts revenue, but we’ve got to ramp up technicians, the facilities effectively just starting new here. These were existing facilities that we’ll step into the lease with. But CASE has really been a good partner here and understands that this is going to take some time. But as Ryan mentioned, we’re sort of used to this situation, and we’re looking forward to it. In terms of capital, Ted, it’s an immaterial kind of amount. We’ve got some soft costs, right, just starting to maybe with some sales leaders and people in the branches, but nothing of any sort of material outlay. Eventually, we will start to build a rental fleet out there. But again, I don’t expect anything material for several years.

So if I understanding what you said. So the first, you’re taking over leases from this dealer that’s walking away from CASE? And is that going to be the first two locations that you referenced? And then once you kind of get those stood up, then there’s growth opportunity for you within the region just because you have this whole region, and that will be sort of a longer-term build out, if you would? Is that what I’m hearing from you?

Correct. Correct. We’re starting with two locations where we stepped into the leases, and there’s other locations kind of to be had. That we expect to...

Will you bring some of the employee base from those dealers along? Like when you need to get technicians because they’re so hard to get. I mean will there be at least kind of a base level of talent, if you would, that’s already there that comes along with this? Or is that something you have to go out and get?

There’s a base level of talent that the other dealer clearly had that was technicians working on CASE. This is very much in its infancy as it was just kind of announced publicly today, Ted. And so we’ll be working on kind of building out the team in the coming weeks. So today, we’re starting anew, but there’s talent out there and we have to kind of go after.

So no, I mean, it sounds pretty cool, actually. And honestly, I don’t know if there’s a press release out because I know in the earnings release you referenced it, but I didn’t see it on any newsfeed or on your press release before the call started. Going on to just my next question, just kind of talking about the electric side of the Alta house, if you would, you were – you announced some of your first Nikola truck sales last quarter. Just maybe an update with regards to kind of where that stands, I think you felt like there was room for more unit sales by the end of this fiscal year. And then I know the longer-term that one of the – where the business becomes interesting is maybe less on the battery side and more on the hydrogen side and just maybe a longer-term discussion of where that – how that’s developing also. And that would be it for me. Thanks.

Yes. This is Ryan. I’ll take that. So Nikola just had their earnings call, I think, last week. And there’s not a whole lot more to report than what was announced in that call in terms of how the recall is being supported. We did have an initial fleet installation that unfortunately is part of that recall and we’re still navigating that. It’s expected that that – those units will be back in customer hands in Q1 of next year as they work through the battery issue. And then you kind of teed it right up for me, Ted, that we think that in our region, and just in terms of Class 8 in general, longer haul and heavier duty trucking, it’s going to be an application more suited for fuel cells. And we’re excited about the product. Nikola has officially launched the product. It’s being heavily demonstrated, especially right now in California, where there’s more readily supply of gas. But we’re very excited about it, and we’re poised for this opportunity. We’ve been supporting auto manufacturing with fuel cell-powered forklifts for years now. We actually deliver gas for one of the major OEMs in the auto industry, and we’re poised to have our gas solution be part of our services going forward. So more on that to come. It’s still early stages, but we’re really excited about the direction Nikola is headed with the product, and we’ll be eager to get these trucks back on the road next quarter.

Thank you for your question. Next question is from the line of Steve Ramsey with Thompson Research Group. Your line is now open.

Hi, good evening. Maybe to start with the Burris acquisition, solid EBITDA margin, 11% ish, it looks like. Can you talk to how Burris compares to your existing margin profile in the state? And if there is much of a difference, what accounts for that gap? And then maybe lastly, will Burris require much investment in the next couple of years to raise the financial performance of that business even further?

Sure, Steve. Thanks for the question. To be clear, Burris – so Burris is in the state, it’s in Illinois, $4.5 million of EBITDA and $40 million of revenue kind of mimics our profile. Burris is – the revenue streams are more heavily weighted to rental versus, let’s say, a dealership like Ault and I’ll talk to Ault in a second here, which means rental is obviously CapEx intensive, which is why we present economic EBIT and refer to that so often. I believe we picked up about a $20 million rental fleet in the Burris acquisition. And as Ryan mentioned, they’re doing a lot of compact rentals. So turf and ag specialists, smaller skid steers, smaller construction equipment, etcetera. So I would classify Burris’ revenue mix and sort of capital intensity very akin to Alta’s business in the rest of the U.S. here on the construction side specifically. With Ault, up in Canada, the business model is not one that’s rental model. They may do very short run, what we would call, RPOs, rental purchase options, because this is large crushing and screening equipment, which typically has to get on site and maybe run for a few weeks or a couple of months where buyers want to make sure that they can – things are running well and commit to the asset. But this is not a long-term rental model where you’re holding assets and running them for 5 and 10 years or anything, frankly, beyond a year. So the cash flows – the Ault cash flows, $50 million in sales, $8 million, give or take, of EBITDA, and almost I think $5 million of that falls to the bottom line. So not capital intensive, reminds me a lot of our Ecoverse from a capital intensity perspective. I believe $12 million of the $50 million is parts revenue, which is, as you know, we love, comes in at a really high margin, probably $4 million or $5 million of service and then the rest is just equipment sales. So it’s a dealership profile business with hardly any rental aspects and should be a really good cash-generative business for us going forward.

Excellent. That’s helpful. And then looking at material and handling parts and service gross margins, combined be up nicely, again, for the second consecutive quarter, can you talk to the reasons for that improvement? And is that something that can be sustainable going forward?

It definitely could be sustainable to take the back end of the – or the back half of that question first. I think we’ve taken over a few regions where we’ve noticed just some inefficiencies in non-billable time. And so we’ve implemented some of our processes and procedures. And then of course, you’re always kind of looking at the rate that are you at market? Or is there room there? And I think what you’re seeing there, Steve, is just kind of us running our playbook from a KPI perspective, driving efficiencies. And yes, I do think you’ll see that continue.

Okay. Excellent. And then one last one for me. I think this has been alluded to. The rental fleet continues to grow and rates are higher, but then fleet availability is improving as well. Thinking about that juxtaposition. Are customers still judging the rent versus buy decision in a similar way now to prior years?

I think the – well in prior years, there wasn’t – there was this decision that had to get made between, frankly, us and the customer, meaning did we want to part ways with a rental asset. And that was predicated on what rates are we getting out in the market? How did that rate convert into returns on invested capital for that bespoke piece of equipment? And so in previous years, we were holding back maybe and saying, look, we need to hold this because we can’t find another one or we’re not sure we’re going to get another one for some time, whether – whoever the OEM was. And so as things have loosened up, I think the decision has become more natural from a history, let’s just say, pre-COVID, where a customer’s decision is more predicated on their own backlog and whether they want to commit to an asset or do they just need an asset to maybe finish a job or supplement their existing fleet because they’re pushing relative to some deadline or something that they have. So I think it’s become much more natural in terms of the buy versus rent decision. And we will be prepared for both, as I always say, is we’d rather have our rent-to-sell fleet out on a customer’s balance sheet or a bank’s balance sheet and reap the rewards of parts and service in most instances. But customer preference sort of requires us to be renting lightly used equipment as well. So we’ll be prepared for both, Steve, with the ultimate goal of driving field population.

That’s helpful color. Thank you.

Thank you for your question. Thanks, Steve. There are currently no additional questions waiting at this time. So I’ll pass the call back to the management team for any closing remarks.

Thank you, everybody, for attending our Q3 earnings call. And as I mentioned, happy upcoming holiday season to everybody. Thank you.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.