Alta Equipment Group Inc. (NYSE:ALTG) Q3 2023 Earnings Call Transcript

Alta Equipment Group Inc. (NYSE:ALTG) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: 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.

Jason Dammeyer: 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.

Ryan Greenawalt: 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 and demolition markets, large-scale aggregate and mining operations, power generation, turf and maintenance and the list only goes on from there. We are focused on further expansion of this segment going forward. We are happy to see supply chains continue to improve. Demand for our material handling equipment also remained strong. Our backlog remains at a record level and customer sentiment remains favorable.

In terms of our growth strategy, it is evident we are executing upon our objectives. On October 13, we closed our purchase of Burris Equipment Company, a premier supplier of compact construction and turf equipment with 3 locations in Illinois. Growth in the highly fragmented compact segment of the construction equipment market continues to outpace other segments. This acquisition gives us further coverage and market penetration in the metro Chicago market and brings with it a talented group of experts in the region with long-standing customer relationships. In our second transaction of the quarter, on November 2, we acquired Ault Industries, a privately held Canadian equipment distributor with locations in Ontario and Quebec. This is Alta’s first investment in Canada for our Construction Equipment segment.

Alta has built a high-performing equipment dealership in the aggregate and mining space, a growing end market in that region. This deal meets several of our strategic objectives for growth. First, we are gaining exclusivity with a portfolio of top-performing OEMs with an existing installed base and the potential to grow in a market poised for growth and highly correlated to infrastructure investment. Second, equipment for this segment is highly engineered and specialized to unique end markets, allowing for greater margins on equipment sales. Lastly, the heavy-duty nature of the crushing and screening process creates a steady stream of product support revenue through periodic maintenance and sales of replacement parts and repair services. This business is poised for further organic growth and will likely benefit from our M&A strategy going forward.

These transactions are immediately accretive. Since our public offering in 2020, we have added $537 million in total revenue and $65 million in adjusted EBITDA. We have expanded our dealership network as well as entered new end user markets, and we’ll continue to follow this strategic path as evidenced by these recent transactions. Our platform also gives us access to significant organic opportunities. As announced today, we are excited to now enter the Central and Western Pennsylvania market where we will operate as CASE Power & Equipment of Pennsylvania, initially serving Pittsburgh and surrounding areas through two strategically planned locations in Cranberry Township and Delmont with plans to further expand into Central Pennsylvania in 2024.

Serving general construction, infrastructure and residential and nonresidential construction contractors, both locations will sell and service the full lineup of CASE heavy, compact and subcompact equipment and attachments as well as provide for complementary services, including captive financing, planned maintenance solutions, telematics and parts support. Alta’s demonstrated success in supporting OEMs through dealer succession and consolidation issues made this dealer appointment possible and further demonstrates the power of our dealership platform and the value we bring to our OEM partners. Lastly, I’d like to again touch on Alta’s corporate culture. As a company, we strive every day to foster a culture of empowerment, accountability and opportunity, and we rally around the shared purpose, delivering trust that makes a difference.

I want to again thank our employees for delivering trust to our customers, our business partners and to our valued shareholders. Our shared purpose is the foundation of our commitment to these key areas. Our commitment to environmental sustainability, including a focused strategy to drive customer adoption and commercial viability of various electromobility solutions, the safety of our employees and technicians and the dedicated and inclusive culture that we continue to develop each day. In closing, I’d like to thank the Alta team for all your hard work in delivering another solid quarter. And I’ll now turn the call over to Tony Colucci, our CFO.

Tony Colucci: 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 million, which is up $61 million versus Q3 of last year. Embedded in the $466 million of revenue for the quarter is a near 10%, $38 million organic increase over Q3 2022, making for a comparatively strong quarter against increasingly more difficult comps. Specifically, equipment sales increased $43 million for the quarter to $282 million, which will ultimately bode well for future incremental product support revenues. To that end, year-to-date, we’ve now placed approximately $149 million more equipment into field population when compared to the first 3 quarters of 2022.

Moving on to our product support business lines. In spite of the quarterly comp hurdles getting more difficult, product support revenues were up $14 million versus last year as we continue to realize organic growth in our high-margin parts and service departments year-over-year. To close out the revenue lines as it relates to our rental business, we saw the natural and expected increase versus Q2 as rental revenues hit $54 million for the quarter, up approximately $4 million from last quarter as Q3 typically represents the strongest quarter of the year for rental in our Northern regions. From an EBITDA perspective, we realized $51 million in adjusted EBITDA for the quarter, which is up $7 million from the adjusted level of second quarter ‘22 and up $3.5 million on a pro forma basis, a function of our organic growth and realization of operating leverage when compared to last year.

On a trailing 12 basis, we achieved $184.4 million of adjusted EBITDA, which converted into $127.4 million of economic EBIT, our version of unlevered free cash flow for approximately 70% conversion rate on EBITDA. Lastly, on EBITDA, and as mentioned in today’s press release, given the year-to-date performance, our expectations for a solid Q4 and the 2 acquisitions that were closed this quarter, we are raising guidance to a range of $187 million to $192 million of adjusted EBITDA for fiscal year 2023. On to cash flows. As depicted on Slide 13 of our investor deck, on a pro forma basis, the business is generating just above $81 million in annualized levered free cash flow to common equity prior to growth CapEx, a metric we view as akin to normalized economic earnings available to common equity holders.

More on this metric later. Moving on to the balance sheet. We ended the quarter with approximately $207 million in availability on our revolving line of credit facility with $36 million suppressed and total leverage came in at roughly 3.9x 2023 adjusted EBITDA. In summary, both leverage and liquidity came in at level similar to last quarter. Lastly, on the balance sheet, I wanted to note the quarter-over-quarter flattening in our inventory levels as we ended Q3 with $493 million of inventory versus $498 million of inventory at the end of Q2. As mentioned in previous calls, as equipment supply chains began to normalize at the end of 2022, Alta, like many other industry participants, saw an unprecedented level of inventory replenishment in the first half of ‘23, which put pressure on working capital and led to redeployment of floor plan lines.

As I mentioned last quarter, we expected the pace of this replenishment to moderate significantly in the second half of the year, and we have seen just that in Q3. Currently, we feel comfortable that we are now back within normal range of inventory levels given both our history and our benchmark KPIs on expected equipment turnover. Moving on to the second portion of my prepared remarks, some financial commentary on the two acquisitions we recently closed on, Burris and Ault. In October, we completed our acquisition of Burris Equipment. This acquisition adds an incremental $40 million of revenue and approximately $4.5 million of incremental adjusted EBITDA on an annualized basis. As Ryan mentioned, this acquisition adds important infrastructure and talent for our compact equipment segment in metropolitan Chicago.

At a total purchase price of $14 million, the 3.1x deal is immediately accretive to shareholders and to our leverage profile. On November 1, we completed our acquisition of Ault Industries with operations in Montreal and Toronto. This acquisition adds an incremental $50 million of revenue and close to $8 million of incremental adjusted EBITDA on an annualized basis in U.S. dollars. As noted, the acquisition represents our first investment in Canada in our CE segment and aligns us with a market-leading crushing and screening equipment OEM. In terms of structure, the $35 million purchase price, net of excess working capital, was cut into $22.3 million in cash at close, a $2.2 million 3-year seller note and $10.5 million of ALTG stock, which importantly was valued at $13 a share and that’s over a 5-year time frame.

The vesting in seller shares mimics the tenor of our new partners employment agreement as it was important to us that sellers were fully aligned and incentivized with our vision going forward. This structure ensures a true partnership and is immediately accretive to Alta shareholders. And like Burris, is accretive to our leverage profile. Now for the final portion of my prepared remarks, I’d like to recap where the company stands today versus where we were just 4 years ago at our IPO in February of 2020. In our view, the numbers are impressive and reflect the commitment of our employees and our culture and a relentless pursuit when it comes to the execution of the plan we laid out for investors at the beginning of 2020. As depicted on Slide 19, we have now formally doubled the size of our business since the IPO based on multiple data points.

As you can see, we’ve gone from $900 million in revenue to over $1.8 billion, gone from operating in 43 locations to 85 and increased EBITDA from $94 million to $189 million at the midpoint of our new guidance range. Additionally, we’ve gone from 1,700 to approximately 3,000 team members and from 850 to over 1,300 skilled mechanics. And we’ve gone from operating in 10 states to 15 states in the U.S. and the 2 major provinces in Canada in all 3 of our major segments. So the results speak for themselves, and we’re so proud of the team in these accomplishments. And the growth has come through both organic investments and via strategic acquisitions. To that end, and I reference Slide 20, we believe that we’ve been good investors along the way.

When we deploy capital, we are hyper focused on generating appropriate returns on invested capital for our business. And as presented on Slide 20, our economic EBIT yield, which is our version of ROIC on both M&A and organic investments have been impressive over the past 4 years. All told, we’ve deployed $432 million of capital since the IPO and have earned a 14.5% return on the capital deployed. I would also note for investors that our executive comp program’s most heavily weighted metric is economic EBIT yield, or ROIC. In the end, Alta’s senior management is highly incentivized to drive returns on investment, which ultimately fully aligns us with shareholders. With both the performance since the IPO and historic returns in mind, at the bottom of Slide 19, you will note what we view as a disconnect between our performance since the IPO and our market cap today.

As a reference point, and as previously mentioned, the company is now generating $81 million of free cash flow to equity on an annual basis or approximately $2.50 per share. This compares to $0.74 per share on this metric at the time of the IPO. So in summary, we have grown this metric 3.5x in 4 years with minimal dilution along the way. The reverse side of this metric is to say that Alta’s equity now trades at 25% free cash flow to equity versus the 7% on that metric at the IPO. While we understand the uncontrollable ebbs and flows of the equity markets, we are highly cognizant of the disconnect for what we believe to be fair value for our equity. And as we head into 2024, we will be laser focused on creating more of our own capacity to grow by optimizing existing cash flow streams and being strategic and opportunistic with capital, as we have demonstrated over the past 4 years.

In closing, I’d like to thank my Alta colleagues for a great Q3. I’m looking forward to a strong finish to the year in the coming weeks, and I wish all of Alta’s employees, our customers and OEMs and our shareholders a happy upcoming holiday season. Thank you for your time and attention, and I will turn it back over to the operator for Q&A.

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Q&A Session

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

Alex Rygiel: Good evening, gentlemen. Great quarter. Congrats.

Tony Colucci: Thanks, Alex. Good evening.

Alex Rygiel: 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?

Tony Colucci: 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?

Alex Rygiel: Yes. Correct.

Tony Colucci: 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.

Alex Rygiel: 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?

Ryan Greenawalt: 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.

Tony Colucci: 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.

Alex Rygiel: Very helpful. Thank you very much.

Tony Colucci: Thanks.

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

Matt Summerville: 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.

Tony Colucci: 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.

Matt Summerville: 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.