Alta Equipment Group Inc. (NYSE:ALTG) Q1 2023 Earnings Call Transcript May 12, 2023

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

Jason Dammeyer: Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta’s first quarter 2023 financial results was issued this afternoon and is posted on our website, along with the 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 the first quarter 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. For those following along with the slide presentation, I will begin on slide 3. First, I will discuss our first quarter business highlights, our unique operating model and the demand in our end-user markets. Lastly, I will provide an update regarding the solid execution upon our growth strategy. Tony will detail our first quarter financial results. So I just want to highlight our first quarter accomplishments, so we can get into the Q&A session as quickly as possible, after which I have a few parting comments. Our business is off to a solid start this year, with revenues increasing $89 million to $420.7 million, which included strong organic growth, as well as contributions from our acquisitions.

Construction and material handling revenue increased $233.1 million and $164.8 million respectively and our newest segment master distribution contributed the other $26.7 million in the quarter. As a result adjusted, EBITDA grew 36% to $40.8 million versus a year ago. Our business model is versatile and resilient and we are unique in the breadth of our product offerings, the scale of our addressable market and the defensiveness of our market position. Our focus is on driving and sustaining long-term equipment field population and aftermarket support penetration to an increasingly diversified customer base. At the end of the first quarter, we had nearly 1,200 skilled revenue-producing technicians, which is substantially greater than even the largest pure-play equipment rental businesses.

Even during periods of challenging economic conditions and downturns and construction cycles, our business remains resilient, due to the scarcity of product support personnel and resources in the major markets where we compete. In short, customers buy and rent from the businesses most equipped to handle their most immediate service challenges. This is where Alta thrives and is the spirit of our service mantra. Uptime matters. Now for a quick update on the business segments. In the Material Handling segment, long term trends towards warehouse and logistical automation persists and Alta is well positioned for this growth opportunity. We continue to see the benefits of our newly increased market footprint, which now includes Eastern Canada and the sales synergies evident between the traditional forklift dealership model, anchored by exclusive distribution rights and the Engineered Products business, where we are unrestricted geographically, but benefit from the significant infrastructure and sales coverage that comes with the integrated model.

We estimate that we cover over 20% of the North American lift truck market with our exclusive rights dealership business and can cover North America and beyond, through peak logics and the affiliated Material Handling products. The construction equipment segment is benefiting from infrastructure and other governmental legislation. Our Florida operations are performing well, helped in part by significant growth in nonresidential construction projects and significant states spending on infrastructure. Furthermore, the state has announced a multi-billion dollar Everglades restoration project, which aligns well with our equipment product portfolio of large articulated dump trucks, excavators and other earthmoving equipment. We are continuing to benefit from pent-up demand for services in the Florida market and our appetite to grow that technician headcount and parts and service sales in the region have been met with enthusiasm by our customers.

Along with growth in our core Volvo Construction Equipment business, we are benefiting from the expanded product portfolio and investment in branch infrastructure. Our E-Mobility business is well positioned to seize on opportunities across a broad range of products and services. And similar to our core business, we have anchored the segment on exclusive distribution rights in key markets. Here, we are utilizing our existing branch infrastructure to support the product launch while limiting fixed cost exposure and improving market acceptance and viability. In parallel, we’re building an in-house team of integrators and a portfolio of ancillary products to assist our customers in navigating and executing on the transition away from fossil fuels for transportation.

This quarter we are reporting on our newly created master distribution segment, which Tony will describe in greater detail during his commentary. The segment is currently comprised of the Ecoverse business, which we acquired in November of 2022. Ecoverse has exclusive rights to distribute in the US and Canada for Doppstadt, a premier line of recycling solutions along with several other manufacturers of specialty recycling equipment. The recycling equipment market in the United States has been experiencing growth driven by various factors including increased environmental awareness governmental regulations and the need for more efficient waste management practices. Recycling equipment used in solid waste management can include shredders, balers, compactors, sorting systems, conveyors and other machinery designed to process and recycle different types of waste materials.

These equipment types are used in recycling facilities waste management companies, municipalities and other organizations involved in the recycling and waste management industry. The recycling industry is still in its infancy and is expected to grow to a multi-billion dollar per year industry by the end of the decade. We’re excited about the organic growth opportunity in this segment and the potential to apply the master distribution business model to future opportunities in other specialty end markets. From a strategic perspective, all of the major tenants hold true from our debut as a public company three years ago. We have a unique platform to grow and consolidate in adjacent markets with significant barriers to entry and long-term growth prospects.

We have a disciplined approach to M&A and fertile prospecting conditions. And we have a proven and repeatable execution and integration process led by a seasoned team of industry veterans. All this momentum has given us the confidence to increase adjusted EBITDA guidance. Lastly, I’d like to quickly 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 a 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. We believe that a purpose-filled organization will be 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 electro mobility solutions, the safety of our employees and technicians and the dedicated and inclusive culture that we have created and continued develop with each day. In closing, I’d like to thank the Alta team for all your hard work and delivering a solid start to 2023. I’ll now turn the call over to Tony, our CFO.

Tony Colucci: Thanks Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our first quarter 2023 financial results. I trust that you and your families are looking forward to a great summer as we all are here at Alta. Before I began, I want to thank my 2800 Alta teammates, which now span from Illinois to Maine and from Canada to Florida on a great first quarter as you have set the footing for another remarkable year here at Alta. Thank you for your continued focus and commitment to our customers and to each other. My remarks today will focus on three primary areas. First, I’ll be presenting our first quarter results, which we are pleased with as our business benefited from increased equipment availability and a high level of demand for our products and services.

Additionally, I’ll present for the first time, the results of our master distribution segment, which encompasses our new Ecoverse business unit. Second, I want to briefly revisit our field population base business model and present our view on the long-term impacts of what was a record Q1 in equipment sales for the business. As part of that discussion, I’ll update investors on the financial operating leverage we continue to realize and how our larger field population bodes well for future operating leverage. Lastly, I’ll touch briefly on our prospects for the remainder of the year and how that impacted our decision to raise our 2023 adjusted EBITDA guidance. Before I get to my talking points, it should be noted that I’ll be referencing slides from our earnings presentation throughout the call today.

I’d encourage everyone on today’s call to review our presentation and our 10-Q, which is available on our Investor Relations website at altg.com. Before I get into the first quarter performance, a quick reminder to investors on the seasonal elements of our business, specifically the construction segment in our northern geographies, are subject to weather constraints in Q1, which makes the sequential comparison of Q1 to Q4 difficult. Thus, the more appropriate comparison for Q1 2023 is Q1 2022. And on a year-over-year comparison, we outperformed on just about every key metric. With that said, for the first portion of my prepared remarks and in line with slides 10 through 16 in the investor’s presentation, first quarter performance. For the quarter, the company recorded revenue of $420 million, which is a great — $421 million, which is a great start to the year considering the seasonality I just mentioned, and it’s up almost $90 million versus Q1 of last year.

Embedded in the $421 million of revenue for the quarter is a 16.2% organic sales increase over Q1 2022, making for a comparatively strong quarter. Specifically, new and used equipment sales increased 45% for the quarter to $220 million, far and away a record level of Q1 equipment sales for the business and in fact, a quarter that compares favorably to our less seasonal sales equivalent quarters historically. With equipment supply chain issues abating, we are seeing a more normalized environment in terms of equipment deliveries and having the additional equipment supply in the face of a strong demand backdrop is refreshing for our customers and our sales teams. And this quarter’s equipment sales result was a simple reflection of matching supply and demand.

Moving on to our product support business lines, we continue to realize impressive organic growth in our parts and service departments in both segments, with that figure increasing an impressive 15.3% in the Material Handling segment, and 22.3% in the Construction segment year-over-year. To close out the revenue lines, as it relates to our rental business, we continued to realize organic growth in both segments as well with rental revenues increasing 6.6% on a consolidated basis year-over-year primarily the result of a favorable rate environment for heavy equipment. From an EBITDA perspective, we realized $40.8 million in adjusted EBITDA for the quarter, which is up $10.8 million from the adjusted level of first quarter 2022. On a trailing 12 basis, we achieved $178.6 million of adjusted pro forma EBITDA, which converted into a $127 million of economic EBIT, or unlevered free cash flow for a 71% conversion rate on EBITDA.

Additionally, on a GAAP basis, income from operations was $12.1 million for the quarter, up $7.5 million versus last year. Lastly, and as depicted on Slide 13 of our investor deck, on an adjusted pro forma basis, the business is generating just above $77 million in annualized levered free cash to common equity prior to growth CapEx. In our view, this metric is indicative of economic earnings associated with driving equity value for shareholders. Before I move on to the balance sheet, I wanted to present to investors the financial performance for our new segment, Master Distribution, which was presented separately in our 10-Q filed earlier today. As I mentioned earlier, Ecoverse, which was acquired in Q4 is the first business unit in our asset-light Master Distribution segment, and it’s off to a great start.

For its inaugural quarter, the segment posted an impressive $23.5 million in equipment sales, $2.9 million in parts sales, which yielded $4.2 million in GAAP income from operations. Investors should keep in mind that, Ecoverse’s sales, which are primarily weighted to selling equipment to its sub dealers are more heavily weighted to the first half with an additional emphasis on the first quarter of the calendar year. As we’ve mentioned previously, to investors when we acquired Ecoverse, we believe strongly in the capital efficiency and return on investment profile of the Master Distribution business model and Ecoverse proved us right in their first quarter as part of Alta Equipment Group. Thank you to our new family at Ecoverse, and we look forward to continued strength in that segment for many years to come.

Before I move on a quick check-in on the balance sheet as of quarter end. And in line with previous periods, we ended the quarter with approximately $220 million in unsuppressed availability on our revolving line of credit. And total leverage came in at roughly 3.6 times 2023 adjusted EBITDA at the midpoint of our guidance. Now moving on to the second area of my prepared remarks, I’d like to quickly revisit our business model and our view on the long-term impacts of what was a record Q1 in equipment sales. As Ryan and I have mentioned many times and in parallel with other dealership base businesses, our business model and our long-term financial success is heavily predicated on how large our serviceable field population is. In simple terms, the larger the serviceable field population, the more high margin product support revenues the company is able to realize in the future.

This business model is depicted graphically on Slide 14 of our investor presentation. As you can see on this slide, on a long-term average product support revenues have averaged approximately 50% of our field population sales. . Now with that business model as the backdrop, the obvious first obstacle that kick up that earnings cycle is to expand our field population by selling more equipment than we have historically. And our sales team supported by our OEM’s ability to deliver product did a tremendous job of increasing our serviceable field population in the first quarter of ’23 when compared to last year to the tune of $60 million of incremental equipment sales. And if you do the math, that incremental gain of $60 million in the quarter should yield approximately $30 million of incremental annualized parts and service revenue over the long run.

In summary, we are excited about the level of Q1 2023 equipment sales means for our future product support prospects, and we hope to rinse and repeat this success in the coming quarters and for years to come. Before I move on the guidance, I wanted to follow-up on my remarks from our last call and provide an update on the operating leverage we continue to realize in Q1 of 2023, as we continue to push more nominal gross profit on top of our existing cost infrastructure. I would point investors to Slide 15 of our investor presentation to highlight the point. As you can see on the slide we realized an incremental $31 million of adjusted gross profit in Q1 23 when compared to last year, which led to an incremental $10 million of adjusted operating income for the quarter, which is 30% on an incremental basis versus 20% on a stand-alone basis for the quarter.

This is the definition of creating operating leverage. Understanding that some of the operating leverage was related to the increase in equipment sales for the quarter, as discussed earlier, make no mistake that the field population model and the organic increase in product support revenues year-over-year have a notable influence in driving this operating leverage. Finally, for the last part of my prepared remarks, I would like to discuss the increase in our 2023 adjusted EBITDA guidance which was included in today’s earnings release. From a nominal perspective, we’ve taken the guide up $3 million in both sides of the range. So the updated guidance now $180 million to $188 million of adjusted EBITDA for fiscal 2023. A couple of points to make here.

First, our guidance has always been more heavily weighted to known variables versus unknown in terms of revenue lines, where we have the most visibility. And for our business those revenue lines are parts and service. And we are bullish that those lines will continue to grow for the foreseeable future. Simply put, our product support revenue set the bedrock for our guidance calculation. Second, as mentioned previously new equipment sales which can ebb and flow quarter to quarter based on a variety of factors were definitely flowing in the first quarter. And our product availability headed into Q2 gives us confidence for the foreseeable future on equipment sales. Lastly, while in the north the kickoff to our rental season was slightly delayed due to a difficult April weather wise, we remain confident that rental utilization and rates will be solid when we put the final touches on 2023 as a whole.

In closing, I want to once again thank my Alta teammates for a great start to the year. We’re as committed to our strategy and our ability to execute on that strategy as we’ve ever been. And we look forward to a great 2023 for our employees, our business partners and for ALTG shareholders. Thanks for your time and attention. And I will turn it back over to the operator for Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question is from Matt Summerville with DA Davidson. Your line is now open.

Operator: Our next question is from Alex Rygiel with B. Riley. Your line is now open.

Operator: Our next question comes from Ted Jackson with Northland Securities. Your line is now open.

Operator: Our next question is from Bryan Fast with Raymond James. Your line is now open.

Operator: There are no more questions. So I’ll pass the call back over to the management team for closing remarks.

Ryan Greenawalt: Thank you. In closing, I’d like to reflect back on our three years as a public company. We have navigated a global pandemic, historic supply chain disruptions and a rising interest rate environment. Through this Alta’s team executed flawlessly on our growth strategy and our commitment to servicing our customers at the highest level. As we look to the future, we see tremendous opportunity to build meaningful scale and operating leverage for the business and with it long-term value for our shareholders. I want to say thank you to all my team, Alta teammates for a truly phenomenal performance and thank you to our shareholders for your continued support. And that concludes the call. Thank you.