Alta Equipment Group Inc (ALTG) 2022 Q1 法說會逐字稿

Good afternoon, and thank you for attending the Alta Equipment Group first-quarter 2022 earnings conference call. My name is Florien, and I will 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.

Thank you, Florien. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's first-quarter 2022 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 opportunity, 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. Description 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.

Our first-quarter results reflect the ongoing strength in all the end-user markets we serve and continue to validate our unique and flexible business model.

I will discuss some of our first-quarter financial highlights and the encouraging industry trends and will, then, provide an update regarding the solid execution upon our growth strategy, including the M&A environment. Tony will then provide a more in-depth review of our first-quarter results.

Beginning with the top line, total revenues increased 23.4% or $62.9 million to $331.7 million in the first quarter. The dedicated Alta team continues to be laser focused on operational excellence. And as a result, the year-over-year improvement was driven by both organic and acquisition-related growth.

Our construction and material handling segments produced significant year-over-year revenue growth on a combined basis. In fact, all our business segments delivered better results from the year-ago quarter as the favorable business environment in all our end-user markets continues to be favorable despite ongoing supply chain issues and other economic headwinds.

Keep in mind the first quarter is historically the weakest period of the year due to seasonality issues, and we are now into the peak period of activity in our markets.

Based on first-quarter performance, we continue to maintain our adjusted EBITDA guide range of $137 million to $142 million for 2022, which would be a 16% increase at the midpoint over 2021 results.

Let me now provide a few observations on market conditions.

Our current visibility regarding demand across all our end-user markets and regions remains extremely positive. Customer sentiment is very high, and there are no signs that project activity is decelerating anytime in the near term. Key industry indicators also support these takeaways and our belief that the current upcycle will continue for some time.

Our track record on the topic -- our operating performance reflects these trends well. Demand for new and used equipment and rental equipment has eclipsed pre-pandemic peak levels, and backlogs now continue to hover at record levels.

For example, our organic physical rental fleet utilization was up more than 5 percentage points from a year ago, and rates on rental equipment have also substantially improved. With more fleet on job sites, our product support business is also benefiting from higher-margin parts and service revenue streams.

The recently passed Bipartisan Infrastructure Bill should also be an incremental benefit to our business at some point in the future. Overall, we are operating in a fundamentally robust expansion cycle and are focused on leveraging these opportunistic conditions to grow our business and increase profitability.

In terms of our growth strategy, it remained intensely focused on continuing our positive achievements from last year into 2022, which included six acquisitions that added $152 million in revenue and $15.2 million in adjusted EBITDA.

Our goal is increasing our scale and improving profitability. As we have demonstrated, this includes continuing to leverage our flexible business model, improving operational excellence throughout our entire organization, adding new OEMs and expanding existing relationships to broaden our equipment portfolio, increasing our end-market diversification and our density within each region, expanding into new states and markets that present solid growth opportunities, and continuing to execute on a robust pipeline of strategic and accretive M&A opportunities.

Our track record on the topic of M&A should speak for itself. We take a disciplined approach to acquisitions that will not -- and will not pursue an opportunity that does not fit our strategic and financial criteria. We have a solid balance sheet to support our expansion initiatives. And we are confident that we can continue to grow through acquisitions and further scale our business for continued growth in 2022.

Our entrance into the commercial electrical -- electric vehicle industry in partnership with Nikola is representative of expanding our product and service portfolio, and this initiative is progressing very well. While we don't expect this venture to be a material contributor to our results in 2022, it puts us in an excellent position to be an EV truck market leader in some of the densest truck markets in the country as commercial uptake of electric vehicles accelerates.

Our team has been conducting product demonstrations, and we are working closely with Nikola and prospective customers on several late-stage sales opportunities.

Lastly, we continue to structure our leadership team to drive future success for our business. In early April, we announced the appointment of Craig Brubaker as Chief Operating Officer, a new position at the company.

Craig joined Alta in 1995 after completing his BS in mechanical engineering. As Chief Operating Officer, Craig will lead integrations of acquired businesses, share best practices across the operating units, and drive operational efficiencies and controls across the enterprise. Craig brings a great history of success and strong operational experience to this expanded role. And we look forward to the contributions he will continue to make as part of the Alta family.

In closing, we are excited about our opportunities in 2022 and working very hard on improving long-term shareholder value.

Thank you to the entire Alta team once again, and I will now turn the call over to Tony.

Thanks, Ryan. Good evening, everyone. And thank you for your interest in Alta Equipment Group and our first-quarter 2022 financial results. I trust that you and your families are safe and healthy, and looking forward to summer, as we all are here at Alta.

My remarks today will focus on three areas. First, I'll be presenting our first-quarter results, which we are pleased with, as our business continues to be positioned well in the current business climate as we continue to experience high levels of demand for our products and services across all geographies and end markets.

Second, I'll be highlighting our material handling segment's first-quarter performance as, historically, this segment has been Alta's pillar of strength from a capital efficiency and profitability perspective. Lastly, I'll reiterate our thoughts around our 2022 adjusted EBITDA guidance, which we reaffirmed in our press release earlier today.

Before I dig in, it should be noted that there are some slides in our presentation, which was released prior to our call, that presents our first-quarter numbers in greater detail than what I will discuss here today. I 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.

For the first portion of my prepared remarks -- first-quarter performance.

Before I get into the numbers, a quick reminder to investors on the seasonal elements of our business. Specifically, the construction segment in the northern geographies are subject to weather constraints in Q1, which makes a sequential comparison of Q1 to Q4 difficult. Thus, the more appropriate comparison for Q1 2022 is Q1 2021. And on a year-over-year comparison, we outperformed just about every key metric.

Now, as it relates to the numbers, for the quarter, the company recorded revenue of $331.7 million, which is a good start to the year, considering the seasonality I just mentioned. Historically, a strong Q1 in our business is a leading indicator for a full year of solid performance. Embedded in the $331.7 million of revenue for the quarter is a 12.2% organic sales increase over Q1 2021, making for a comparatively sound quarter.

Similar to the theme of 2021, we saw continued strength in equipment sales, especially as it relates to used equipment and rental disposals, as rental equipment sales for the quarter came in at approximately $41 million. Importantly, as it relates to our product support business lines, we continue to realize organic growth in our parts and service departments in both segments, with that figure increasing an impressive 18.8% in the material handling segment and 10.2% in the construction segment year over year.

Additionally, as it relates to our rental business, we continue to realize organic growth in both segments as well, with rental revenues increasing 15.3% in the material handling segment and 11.5% in the construction segment year over year. Importantly, and in line with our expectations, we drove higher rental revenue while effectively holding our rental fleet size flat in Q1 when compared to year-end.

This was a result of three factors: one, an increasing rental rate environment; two, an increase in the physical utilization of our rental fleet; and three, a prudent approach to our fleet size and a focus on product categories that drive attractive returns on investment.

From an EBITDA perspective, we realized $30 million in adjusted EBITDA for the quarter, which is up $3.1 million from the adjusted level of the first quarter 2021. On a trailing 12 basis, we achieved $137.2 million of adjusted pro forma EBITDA, which converts into $82 million of economic EBIT or under levered free cash flow for a 60% conversion rate on EBITDA.

As I mentioned on our Q4 call, we expect to drive this free cash flow conversion metric higher in 2022, which we ultimately did in the first quarter. Increases on this metric are a function of driving utilization in the rental fleet, organic growth in our high-margin product support departments, and organic growth from profitable asset-light business units, such as PeakLogix.

Lastly, and as depicted on slide 14 of our investor deck, on an adjusted pro forma basis, the business is generating just above $67 million in annual unlevered -- sorry, annual levered free cash flow to common equity prior to growth CapEx. In our view, this metric is indicative of economic earnings associated with driving equity value for shareholders.

A quick update on the balance sheet and our credit profile as of year-end -- quarter-end. We ended the quarter with approximately $250 million in unsuppressed availability on our revolving line of credit and total leverage came in at roughly 3.5 times 2022 adjusted EBITDA -- certainly comfortable positions from both metrics.

Now, moving to the second area of my prepared remarks, I'd like to highlight our material handling segment and its performance in the first quarter.

First, as the foundational element of our business, historically, the material handling segment has been Alta's pillar of strength in terms of cash -- its cash flow profile, which has been built over decades of strong market share for Hyster-Yale in key metro markets, which include Detroit, Chicago, Boston, and more recently, New York City. This historic strength in market share in these dense urban areas yields a large addressable field population, which then leads to recurring cash flows from our high-margin product support departments.

I would point investors to slide 17 of our deck, which presents several key performance indicators for the segment in Q1, which include $5.2 million of reported operating income for the quarter, a 110% fixed-cost absorption rate, and an estimated 20% annual return on invested capital deployed.

While the material handling segment provides Alta with reliable cash flows, the segment's reliability should not dilute the view of its opportunity for growth. As the industry at large is experiencing record levels of demand and secular tailwinds in warehousing, e-commerce, logistics -- suggests there is no immediate end in sight.

I'll share a few points that support this view.

Point number one. It's estimated that the US currently has approximately 10 billion square feet of warehouse space, with a projected need of another one billion by 2025.

Point number two. The US warehouse vacancy rate is currently at a record low of 3.4%, and lease rates for warehouse space are up 16% since Q1 2021.

Point number three. The amount of lift truck orders in North America for the five years prior to 2021 range from 240,000 units to 285,000 units annually. In 2021, that figure was nearly double, coming in at 458,000 units. And the beginning of 2022 on this metric suggests continued strength.

Point number four. Over 70% of US lift truck market is now electric, indicating warehouse distribution in 3PLs are continuing their upward trajectory, primarily due to the growth in e-commerce.

Lastly, approximately 15% of the warehousing sector uses some form of automation in their warehouse. Industry estimates suggest that, out of necessity, the number of warehouses using automation in their operation is expected to increase 50% by 2025. In our view, these metrics point to strong industry tailwinds that our business will take advantage of as we go forward.

And on the last two points, as it relates to electrification and automation, we intend to lead and not follow. The strategic investments we made with the acquisition of PeakLogix and ScottTech positions our material handling business at the center of the technological advancement trend in the material handling industry.

Internally, we are deliberately focusing on assisting customers to better manage three key operational inputs: labor, energy, and space. This is messaged through our less-is-more mantra. This mantra, coupled with our capability to deliver real-time solutions to customers that want to electrify and automate, will solidify this segment as Alta's pillar of strength for years to come.

Congratulations to our teammates in the material handling segment on a great start to 2022.

In closing, given our first-quarter results, we are reaffirming our annual adjusted EBITDA guidance of $137 million to $142 million for fiscal 2022. As all of the elements we discussed last quarter, tailwinds and headwinds alike remain in place today, as we believe the current landscape will allow us to confidently execute on our business plan and drive returns for Alta's shareholders over the remainder of 2022.

Thank you for your time and attention. And I'll turn it back over to the operator for Q&A.

(Operator Instructions) Matt Summerville, D.A. Davidson.

Hi, Ryan and Tony. This is Will, on for Matt Summerville today.

Hi, Will.

Good evening. I want to ask you first about the aftermarket growth. It's still double digits in the first quarter. And I'm trying to learn a little bit more. What is the breakdown approximately between the price component and the volume component of that growth rate? And bigger picture, what does the pricing power of that aftermarket business look like, especially in the kind of market we're seeing today?

Yeah, Will, I'll take that one. When we -- we have to break it into the segments. But roughly, I mentioned on my prepared remarks, almost 19% organic growth in product support and material handling and then 10% in construction. I think when you look at the components, right, price and quantity, they're both trending in the right direction.

Parts -- and then you have to think about parts and service. And what I would say is, when we look at parts specifically, we really are off to a good start specifically in the material handling business, where we're seeing upticks in over the counterparts. We believe that this is related to the aging of the field population that's out there, given that equipment -- new equipment supply is suffering, as we've talked about historically.

And so I would say that the price increases 50% at the high end of the organic growth that we're seeing and probably, something much less than that in the material handling business. Because, again, we're just seeing a lot of volume on the counter. So roughly, I would say, Will, 50% on the high end is pricing versus quantity.

Okay, great. Thank you. And then I want to ask you about your recent appointment of the Chief Operating Officer in the business. Just trying to learn -- what was the reasoning and your thinking behind creating that position? And ultimately, how does it free up responsibilities on yours, Tony, and Ryan's part to focus on other areas of business?

Will, I'll take that. This is Ryan Greenawalt.

So Craig has been with us since the beginning of his career. And you could think of this new appointment as expanding his role to be a corporate role in an enterprise-wide role. So he's functioning in much the same set of responsibilities, but now expanded across the construction vertical and also, the new vertical for electric vehicle.

So we're taking our best practices and that thought leadership of how to run dealerships and now applying it to the whole enterprise, looking for areas that we can drive efficiency and standardization.

In terms of how it affects Tony's and my day-to-day responsibilities, not a whole lot. It's pulling, basically, one of our executives out of the operating company more into a corporate role so -- in expanding that role within the organization.

Understood. Well, congrats on finding what seems to be a great internal candidate for that job. I'll get back in queue. Thank you.

Thank you, Will.

Thanks, Will.

Alex Rygiel, B. Riley.

Thank you. Good evening, gentlemen, and a really nice quarter. A couple quick questions here. Your commentary was obviously very bullish -- strong end-user markets, good demand visibility. But why only reiterate EBITDA guidance in light of such strong commentary?

You know, Alex, we -- I mentioned at the tail end of the -- of my remarks there -- and we feel the same way we did a month or so ago when we built the guidance -- that the upside to the guidance is really going to be predicated -- really two factors.

One is, it's going to be predicated on those equipment lines, specifically the delivery of new equipment, which we're still seeing a lot of volatility in the supply chain. So it's just -- it's hard for us to increase the guidance at this point because it's sort of out of our control in terms of taking delivery. I think the bullishness that you -- stop there for a second.

The second point on the increase, organically, is related to product support. And that is something we think we can't control. We're off to a good start. I think we probably need another quarter of being able to see the growth here on that piece. But I keep coming back to the first point where the upside to the guidance is going to be directly correlated to the equipment line items.

I think the bullishness that you're -- that we were trying to convey is more about this -- the demand versus what might manifest itself on the P&L here this year. And so that was what we were trying to articulate with the bullishness just in terms of what we're seeing on the ground and what we're hearing from customers.

Okay, that's helpful. And then as it relates to Nikola, can you go into a little bit more detail maybe on how that's developing, when we might see the first couple of sales? Any other commentary or thoughts as it relates to the intermediate or longer-term outlook for that relationship and other relationships in the EV market?

Alex, this is Ryan. I think we would reiterate that we're going to be somewhere in the neighborhood of 10% of Nikola's volume. We are actively working on what we describe as late-stage sales opportunities. And so an announcement of an order could be imminent. We can't really speak beyond that because the prospects are wanting us to be confidential as they pursue emerging technologies.

That is helpful. And then, lastly, Tony, can you maybe comment on -- how do you think about interest rate risk and how you manage that risk across your cap structure?

Sure. When I think about interest rates, I go right down the list here, from short-term liquidity to the back into capital structure -- short-term liquidity with our floor plan lines, which are usually tied to some index rate -- used to be LIBOR; now, SOFR -- where we're paying a spread over an index rate.

Typically, as we've discussed before, those floor plan lines are subsidized by OEMs. And given the amount of -- for some period of time -- and given the amount of churns that we're experiencing in our inventory that's on the floor plan lines, there's really not a lot of risk in increasing interest rates relative to the floor plan that would manifest itself into being materially impactful to the P&L.

The -- and I'll go backwards a little bit here. The bond, obviously, fixed the back end of the capital structure. And we are at 5 5/8% on that bond that we launched just over a year ago today. And so we feel good that that bond -- that interest rate is locked in here for the next four years, which leaves the middle piece -- which is the draw on the ABL loan -- where we were drawn, I think, $110 million, $120 million here at quarter-end.

Very -- again, we're low in terms of our utilization and our leverage profile relative to generating -- going up the grid pricing wise. So that $110 million, $120 million is really all that's floating. At the moment, we are constantly thinking about what to do with that piece and whether to hedge a little bit. But again, I think we're talking about any material impact.

Holistically, we think that our business model suggests that we can pass some of these along -- whether inflation, higher interest rates, so on and so forth -- that we can pass some of these higher costs along to customers in the form of just increased pricing. So it's how we think about it.

Very helpful. Thank you very much.

Thanks, Alex.

Bryan Fast, Raymond James.

Yeah, thanks. Good afternoon, guys. As you see price increases from your suppliers, has there been any issues in passing those on to customers?

What I would say, Bryan, is really thinking about, again, breaking that down into the verticals and then into the business line.

So if you're just thinking about equipment -- which is the headliner here -- equipment sales, I think, when on the material handling side of the business, I would say, there's some customers where, when there's price increases that come through, if they're not fixed with the OEM in terms of the backlog, where -- one of two things happens.

They either accept it, and they move along; or they potentially could cancel the order. I think what's important to mention here is all of this decision making that customers are making is relative to the other guy, right, so relative to our competition. And so what we're paying attention to is pricing relative to the competition.

What we've seen today is we have seen some customers drop out of the backlog because they're opportunistic and maybe can find some equipment elsewhere. But for the most part, I think we're seeing some stickiness.

One of the other things that's on our mind, to Alex's point, is the increase in interest rates. So typically, our customers are financing through an operating lease or some loan, their fleet buyer or their equipment buyer. And so that lease payment is really what we are trying to sell to customers, and so increase in pricing sometimes won't necessarily move the needle a ton on the lease payment. And so I would say, by and large, we're able to either -- we've been able to pass it along thus far.

And then when it comes to the rest of the P&L, any pricing increases that we've seen in parts, we've been able to pass along -- certainly, we've been able to pass along increase that we've seen in market relative to rental rates. And so in the areas of our business where we're cash-flow intensive, where they mean a lot to our EBITDA -- parts, service, and rental -- we absolutely are able to pass it along to the customers. Equipment is a little bit more difficult to triangulate on.

Okay, fair enough. That's (multiple speakers) --

I would just add that when we talk about it being more difficult, we're talking about new equipment.

Right. Yeah.

Because used -- the market is very liquid, and then pricing is real time.

What I would say too, Bryan, is -- just to highlight -- if you -- when you dig into the Q here, you'll notice that gross margins are used in -- new and used equipment line is up across the board and, in particular, in our construction business, primarily because we've been able to -- if we have the iron, we're able to drive margin on sales.

And on the material handling side, we're seeing increased margins in new equipment -- new and used equipment, primarily -- we constantly focus on Hyster-Yale, but the reality is that line -- that gross margin is expanding because of PeakLogix and ScottTech, where we're selling value-added equipment, projects that have higher margins.

Okay, fair enough. Thanks. And then, I guess, we saw nice build in inventory during the quarter. How comfortable are you with the current inventory levels as you think about meeting that robust demand? And then I know you had some commentary there, but are you seeing any improvement in supply chain just relative -- maybe even to the last two months when you last had the call?

I'll take the second part of that call first. This is Ryan. I would say, that across the board, not any significant improvement. But there is an area that we see an opportunistic -- an opportunity. And it's that -- the fastest growing part of the material handling segment today is the warehouse segment.

And we are positioned competitively in terms of lead times. The leading brands are out nearly twice as long as us on lead times for that segment of equipment, which is something we're trying to take advantage of.

And Bryan, to your -- to the first part of your question, yes, I think we saw something along $40 million, $50 million of build on the inventory line, which is actually, historically, this -- first quarter is when we take delivery of new equipment as we head into the sales season, specifically in our construction business. So that was actually good to see from the low levels that we ended the year at.

So we were pleased to see the increase in inventory. Breaking out the segments, we certainly would like to see -- we'd like to be holding more in the material handling business. Because we know we can generate revenue if we can get it delivered and prepped and out to customers.

And then on the construction side, I would say, we feel pretty comfortable in that that side of the house becomes a mix. What type of equipment do you have relative to demand? And that's where some of the volatility where we see fits and starts to the supply chain come into play. And relative to Alex's question on guidance, that's where we just -- we have less visibility on right now.

Okay, great. I appreciate the color, guys. Thanks.

Thank you, Bryan.

Matt Summerville, D.A. Davidson.

Thank you for taking my follow-up. This is Will Jellison again. I want to zoom in on the service line item and that business. It looks like that business, historically, has generated gross margins in the low to mid-60 percentage range. And those got a little bit soft during 2021 and stand here today just below 60%. So can you talk about what is the path forward to getting that gross margin level back to that historical low to mid-60 percentage range?

Yeah, Will, thanks for that. A couple things. There's not -- number one, there's nothing -- this is more just kind of a function of each -- something that's going on in each of the segments.

What I would point out is, in the material handling business, if you look into the Q, you'll notice that, specifically at Hilo -- which is one of the acquisitions that we did -- we had an accounting -- a shift of mapping of costs because of the way that their system was working. And so in the material handling segment, this quarter, we saw 60% gross margins, which is what we could expect -- low 60s -- going forward.

And so we -- but a lot of that has to do with just the accounting for technician time and not being able to apply it to work orders in our New York business's old system. So there's really no real business impact there.

And then on the construction -- in the construction vertical, some of the businesses that we've purchased have a lower gross margin here versus our existing business. So that's impacting the line a little bit. And then we did see in Q1 some -- a little bit of pressure from a warranty perspective.

I think this has come up previously. The more -- number one, the more the mix of our revenue heads to warranty. Warranty work is lower margin. But we are experiencing less margin than we had historically in terms of recovering warranty on claims. So I don't think it's anything existential that's going on. It's not indicative of our ability to pass cost along. It's -- some of these just more nuanced areas of the business.

What I would say, too, is the construction business in Q1 did 56%; in Q4, it was 50%. Q4 is typically a really high non-billable month with holidays -- Q1, similarly, with technician training. In the winter months, we experienced a little bit more non-billable. So I would expect that those numbers continue to ramp up here back to that 60% level.

Understood. That's great. Thank you.

And then, lastly, I'd love to get an update on what you're observing in the acquisition market, and whether or not there have been any noticeable changes since we last got on the phone at the end of March.

This is Ryan. I don't think there are noticeable changes. There's still a landscape with a lot of sellers out there. The motivations for family businesses to sell still are the same. And we're continuing to pursue a very active pipeline.

Perfect. Thank you.

There are currently no further questions waiting at this time. This concludes the Alta Equipment Group first-quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.