Q2 2023 Alta Equipment Group Inc Earnings Call
Yeah.
Good afternoon, and thank you for attending the Alta equipment Group second 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 <unk> director of 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 <unk> second 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 result on the call with me today are Ryan Greenwald of chairman.
And CEO and Tony <unk>, our Chief Financial Officer for today's call management will first provide a review of our second quarter 2023 financial results. We will begin with some prepared remarks before we open the call for your questions. Please proceed to slide two.
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 <unk> growth market opportunities and general economic and business condition.
We have based these forward looking statements largely on a expectation 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 any forward looking statements are discussed in our reports filed with the SEC, including our press release that was issued today.
During this call we made at 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 that all take equipment Dot com.
I'll now turn the call over to Ryan.
Thank you Jason Good afternoon, everyone and thank you for joining us today.
First I will discuss our second quarter financial highlights and current business conditions and will then provide an update on our growth strategy and current M&A pipeline.
But before I begin I want to recognize our employees because without their hard work and dedication our continued strong performance would not be possible.
I'll begin with a quick review of our second quarter financial highlights total revenue increased 15, 2% to $468 4 million a record for our business. The increase was attributable to construction revenue of $281 5 million in material handling revenue of $169 1 million. We also.
<unk> benefited from our newest segment Master distribution, which contributed $21 4 million in revenue.
Our E mobility business is gaining traction generating $3 $1 million in revenue for the quarter, which represents our first significant sales of nickel as trade Bev tractors, and we expect additional orders throughout the balance of this year.
Lastly, we achieved organic revenue growth of 11, 2% year to date as well as the significant contributions from our acquisitions as a result, adjusted EBITDA grew 25% to $49 9 million compared to a year ago.
Before I discuss business conditions in forward trends, let me provide a few brief comments on our business model and segment trends as a reminder, our business. Our 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 driving aftermarket support penetration to an increasingly diversified customer base.
At the end of the second quarter, we had approximately <unk> hundred factory trained and certified revenue producing technicians.
Trends in our material handling segment remained positive throughout all of our major end user markets, including manufacturing biotech government food and beverage automotive manufacturing and others are exclusive hyster Yale territory, which now includes eastern Canada covers the densest population region in North America and provides.
Access to a very diverse group of industries and end markets for our products, we continue to benefit from the sales synergies with the <unk> business.
And have the capabilities in house to solve our customers' most complex material handling needs.
One important aspect of our strategy in the material handling segment is to bring our full suite of products and services from the most mature markets into our new regions. This includes integrating in house capabilities, such as industrial tire distribution.
Industrial battery distribution and maintenance engineer.
Engineered products and safety and operator training to name a few.
We also assemble a portfolio of allied and specialty equipment lines that are appropriate for the specific end markets within each region.
Our construction equipment segment continues to benefit from both high nonresidential demand as well as infrastructure and other federal and state governmental legislation and all our operating regions in the northeast specifically, we are seeing positive impacts due to onshoring projects like chip and EBIT related battery and other facilities or <unk>.
<unk> operations remain particularly strong with phosphate mining is a significant business and there we are heavily embedded with the largest producer in the state.
Projects related to Dod spending and wetlands restoration are also strong markets for us and will continue for years to come as a result demand for our heavy Volvo earthmoving equipment in both new and used specifically articulated hauler trucks and excavators is particularly high both of these equipment categories have seen double digit growth in <unk>.
Unit volume in the Florida market year over year.
We remain excited about growth opportunities for the <unk> business, which reports within our newly created Master distribution segment. The recycling equipment market will continue to experience significant growth driven by several factors, including increased focus on sustainable waste management practices regulatory mandates and resource scarcity.
Advancements in recycling technology has significantly enhanced the efficiency and effectiveness of reclamation efforts state of the art sorting and separation technologies facilitate the reclamation of a broader array of materials intensifying the need for specialized recycling equipment, while still in its infancy forecasts indicate this could be a multibillion dollar industry.
In the future.
Lastly, our E mobility business is beginning to gain some traction as noted by the Nikola orders and revenue contribution during the second quarter.
The Illinois based customer purchased a fleet of battery electric semi trucks and the network of Chargers to support the fleet the customer as a food producer and invested in the fleet to distribute to their customers using zero tailpipe emissions vehicles. We are already hearing enthusiastic demand for the hydrogen fuel cell powered <unk> semi which will be available late this year.
<unk> and.
Importantly, our exclusive Nikola territory mirrors, our footprint within the U S, allowing us to market the product to <unk> existing customers throughout the country.
We are excited about the prospect of putting our nearly 40 years of experience, helping customers convert their fleets away from fossil fuels and internal combustion engines to work in the vast market for heavy duty and long haul commercial vehicles.
Now let me provide a few brief comments on current and forward looking business conditions.
One of the most important indicators as feedback from customers and their sentiment is strong for the balance of this year and into next year. We're also pleased that supply chain constraints have eased, allowing inventory levels to return to more normalized levels, resulting in higher new and used equipment sales, which will yield high margin parts and service business overtime.
Federal initiatives will also extend the cycle with approximately a trillion dollars estimated over the next decade, many state dot budgets, where we operate are forecasting significant increases in fiscal 2024. For example, Florida recently released its fiscal 2020 for moving forward projects too aggressive to address more than 20.
Gen related infrastructure projects across the state with total spending of over $7 billion over the next four years.
In terms of our growth strategy. The pipeline remains strong for accretive acquisitions, we have added $446 million in total revenue and $53 3 million and adjusted EBITDA. Since we went public in 2020.
We have expanded our dealership network as well as entering into new end user markets and we'll continue to follow this strategic path, 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.
And as we have demonstrated we are executing these transactions at attractive multiples.
Lastly, I'd like to again touch on Altice corporate culture.
As a company, we strive everyday 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 electro mobility solutions, the safety of our employees and technicians and the dedicated an inclusive culture that we continue to develop with each day.
In closing I'd like to thank the Altra team for all your hard work in delivering another solid quarter.
Now ill turn the call over to Tony our CFO .
Thanks, Ryan and good evening, everyone and thank you for your interest in Ultra equipment group and our second quarter 2023 financial results.
Before I begin I want to acknowledge two first half acquisitions and welcome to the Altra family, our new team members from <unk> material handling and battery shop of New England.
The senior leadership team is committed to building upon the legacy of each of those respective companies and we look forward to earning your trust.
My remarks today will focus on four key areas first I'll be presenting our second quarter results, which we are pleased with as our business benefited from increased equipment availability and continued organic growth in our product support business second we have previously referenced with investors our rent to sell approach to the market in our construction segment.
And I thought it would be helpful to flesh that model out for investors in a more detailed way to that and I'll be presenting a unit level case study of the rent sell model as we use this approach to help drive equipment field population and future product support revenues.
Third I'll provide an update on the balance sheet as of June 30th as part of that discussion I'll be referencing the positive enhancements, we've made to our credit facilities in Q2.
Lastly, I'll touch briefly on the secondary common stock offering that closed in late July and provide our perspective on that deal.
Before I get to my talking points. It should be noted that I'll be referencing slides from our investor presentation throughout the call today at.
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 <unk> Dot com with that said for the first portion of my prepared remarks and is presented in slides 10 to 13 in the earnings deck second quarter performance for the quarter The company recorded.
$468 million of revenue, which is up $61 million versus Q2 of last year and $47 million from last quarter.
Embedded in the $468 million of revenue for the quarter is at $29 million organic increase over Q2, 2022, making for a comparatively strong quarter, specifically equipment sales increased $35 million for the quarter to $288 million, which as discussed last quarter, we will ultimate.
Bode well for future incremental product support revenues.
To that end year to date, we have now placed approximately $90 million more equipment into field population when compared to the first half of 2022.
Moving onto our product support business lines in spite of the quarterly comp hurdle is getting more difficult. We continue to realize organic growth in our parts and service departments with that figure increasing it at 12% in material handling segment and 10% in the construction segment year over year.
To close out the revenue lines as it relates to our rental business. We saw the natural unexpected seasonal increase versus Q1 as rental revenues at $50 million for the quarter up $6 $5 million from last quarter.
Additionally, rental revenues increased 6% organically on a consolidated basis, primarily the result of a favorable rate environment for our equipment.
From an <unk> from an EBITDA perspective, we realized $49 9 million and adjusted EBITDA for the quarter, which is up $8 $5 million from the adjusted level of the second quarter 2022.
On a trailing 12 basis, we achieved $177 million of adjusted EBITDA, which converted into $129 million of economic EBIT. Our version of Unlevered free cash flow before growth Capex.
Lastly, on EBITDA and as mentioned in today's press release, given Q2s performance, we are reiterating guidance of $180 million to $188 million of adjusted EBITDA for fiscal year 2023.
Two final metrics on the quarter.
As depicted on slide 13 of the Investor deck on a pro forma basis. The business is generating just above $75 million in annualized levered free cash flow to common equity.
And as presented on Slide 15 as noted in the Q1 earnings call. We continue to realize financial operating leverage on a cash basis in the quarter.
Each incremental dollar of cash gross profits generated in 2023 year to date yielded 30 of adjusted operating income versus the 21 realized in the first half of 2022.
Now for the second portion of my prepared remarks, as I mentioned at the open I wanted to present, a unit level economics view of what we referred to as a rent to sell approach to the equipment market in our construction segment before I present, the model I'd remind investors that <unk> focus is on building best in class equipment dealerships by dry.
<unk> market share for our represented products and increasing customer owned equipment field population.
As highlighted in our materials last quarter, when we are able to put more equipment in the field, we know with a strong degree of certainty given the exclusive elements of the dealership model that the incremental field population will be get higher margin customer support revenues in the future.
Additionally, and importantly, there is demand and in some cases, a strong preference amongst our customers for lightly used equipment in fact by various industry metrics certain heavy equipment product categories in certain heavy equipment product categories, approximately 70% of customer purchases are sourced from <unk>.
<unk> owned rental fleets given this industry dynamic in our field population based business model the rent to sell approach to the market allows for us to create different price points. We're lightly used equipment in our rental fleet, which ultimately can fulfill fulfill customer demand from.
From an economics perspective, I would point investors to slide 14 to summarize example depicted here you can see that we purchased this unit new for $400000 on January one of 2021 rented the piece for 2000 $14000 a month for 11 of the 18 months it was in our fleet.
We then sold the unit on September 32022 for $340000.
As you can see in the bottom right of the slide in terms of the washout economics on the unit in total over the 18 month period. The unit earned a 17% return on invested capital and this is prior to any aftermarkets parts aftermarket parts and service opportunity on the unit post sale, which we know to be accretive.
Now this is simply one example of many variations of the rentals sell model can play out as iterations can differ by product type holding period, OEM geography et cetera, but overall this flexible sales model led to an incremental $60 million of equipment's sold year to date in the construction segment.
The dynamics of the rent to sell model is also why we focus on economic EBIT, which removes the gain on sale and depreciation elements of the calculation.
In summary.
This example plays itself out day to day and quarter to quarter in our business and again allows us to create lightly used equipment at various ages and price points to meet customer demand and ultimately carve out our fair share of equipment field population versus the competition.
Now for the third portion of my prepared remarks, I'd like to highlight some of the important elements of the upsizing of the credit facilities, which closed at the end of Q2 and do a quick check in on the balance sheet as of 631st the Upsizing on June 28, the company amended its credit agreement that had four primary aspects to it first we.
<unk> $55 million worth of an expansion option on our ABL facility, taking that facility to $485 million from the previous $430 million.
The amendment provided for an additional $65 million expansion option on the ABL facility.
$550 million should we see the need to pursue additional capacity in the future.
Third we were able to increase the floor plan facility by $10 million, which funds new equipment from from Oems that don't have captive finance partners.
This portion of the amendment included an incremental $20 million expansion option to fund future growth.
Fourth the amendment provided for an increase the amount of OEM captive floor plan financing allowed for on the balance sheet, which has become increasingly more important that supply chains have normalized as it is imperative that we have enough floor plan financing in place, which funds readily available equipment for our customers.
From our perspective. This amendment represents a positive outcome for the company and for shareholders as it allows the company to access previous suppressed availability on our line of credit as our borrowing base collateral has grown in concert with the business as a whole we view the expansion this expansion as a vote of confidence from our lending partners on our business plan our team.
And our end markets.
The balance sheet, given the upsizing, we ended the quarter with approximately $200 million in availability on our revolving line of credit with only 15 million suppressed.
Total leverage came in at roughly three eight times 2023, adjusted EBITDA is used inventory and rental fleet levels have increased given seasonality and the normalization of the supply chain that I mentioned to supply of equipment that I previously mentioned.
Finally for the last portion of my prepared remarks, I would like to give a few thoughts on the secondary offering that was closed in July for one of our large shareholders.
To reset for investors B Riley, who provided the platform and supported our vision of becoming a public company has been a large shareholder as a function of our IPO in early 2020.
Last month, we were happy to support a secondary common stock offering of approximately third of B Riley holdings and Alta.
We view this transaction is beneficial for shareholders as the offering was dispersed to a diverse set of primarily new investors and ultimately increased lpg's float and liquidity in the stock.
In closing I'd like to thank my <unk> colleagues for a great first half of 2023, our customers and Oems for their belief in our team and our shareholders.
And our shareholders for their support and confidence.
Thank you for your time and attention and I will turn it back over to the operator for Q&A.
Okay.
If you would like to ask a question. Please the star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two.
Again to ask a question press Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question well quality of briefly as questions. They registered.
The first question is from the line of Matt Summerville with D. A Davidson your line is now open.
Thanks, a couple questions first with respect to can you maybe talk about what youre seeing with rental utilization rates now versus maybe a year ago or a quarter ago, and similarly, what rental rate pricing looks like now.
Versus maybe a year ago.
Just as a follow up here and I'll jump to that rental rates sound like Theyre strong what sort of utilization rate would you have to hit on the downside from where you're at now before rental rates start heading in the other direction and then I have a follow up.
Sure, Matt Hey, this is Tony I'll take that.
What we have we have grown our fleet.
Not dissimilar from other kind of rental houses and our competition is supply chain. So let loose.
With the dearth of the dearth of equipment that we've had to deal with as an industry. The last couple of years.
Here's that everybody is kind of starting to normalize and right size and so what that does.
Just mathematically is if youre not able to get that fleet.
The additional fleet out.
Your physical utilization somewhat somewhat call. It dollar utilization, we call it physical utilization, which would just mathematically go down it doesn't mean that you have less fleet on rent.
But youre physical utilization as a percentage of your total fleet would go down and I don't think we're alone, but we have seen.
That percentage go down.
We have seen kind of the amount of equipment on rent.
Sort of flatten out a little bit now some of that is because we've grown the fleet in.
Sometimes it takes a little while to for that fleet to become available to customers and get it out on rent and then certainly you are not going to see the full impact of that piece of equipment for for several months to a year.
And so that's what's happening kind of physical utilization wise again.
We feel pretty strongly about the back half of the year and just customer sentiment as a whole. The other thing that I would say is we have new equipment and used equipment.
That as Ryan mentioned moving out of here in record levels and so.
You have to think of the market as a whole I talked about our rent to sell model and we're moving a lot of new equipment onto customer balance sheets as well so.
From a revenue perspective, I think our materials would mentioned, we and I mentioned on the call we've seen a 6% increase.
When we look back back to last year, I don't think thats outside of what <unk> seen in the broader rental markets from from others.
And we would.
Expect that to.
If you look at that 6%, it's definitely down from the growth levels. We've seen over the last couple of years 'twenty, one 'twenty two double digit sort of year on year increases and so seeing that sort of moderating and I would I would expect that that.
That level that kind of either hold or continue to moderate towards the back half of the year.
Got it.
Yes.
As a follow up I was wondering if you could.
Spend a minute just given your comments Ryan.
E Mail.
Industrial and the eco versus realize you need both of those businesses.
Less than a year, but what kind of pro forma organic growth are you seeing off of those businesses, which.
Obviously, you have a nice market share opportunity you've highlighted before up in eastern Canada, you have sort of a secular play with respect to <unk> in general and then maybe layer in some additional commentary.
Maybe the revenue run rate of the peak logic business and how the backlog specifically looks in warehousing and logistics projects for you guys. Thank you.
I'm going to take the back end of that Alex and then maybe I'll turn it over to Ryan to serve.
Sort of form up the the opportunity for us and why.
And <unk> I would say that eco versus we're still we're still in the beginning stages.
They had a great first quarter.
Mentioned, the seasonality there last quarter, but there's no reason to.
Not expect organic growth from either of those companies, but Ryan is the kind of the wide thing or more kind of top of mind in terms of share.
Our opportunity what I would say on the peak logic side is.
There was a there was a theory of activity coming out of Covid for for automation and logistics and E Commerce warehousing, so on and so forth, we have seen that moderate a bit.
As Covid has gotten further and further.
In the rearview.
Our backlog is coming down in that business.
And I.
I think the other thing to think about relative to the peak logics businesses.
These are large capex projects for customers and what we have heard.
The sales cycle, taking a little bit longer given interest rates.
From customers in that business may be taking a pause on.
On <unk>.
Capex spending for a large retrofit of a warehouse so.
Anyway, we are seeing a little bit of moderation kind of in the end markets there.
Sure So you'd asked about what both <unk> and eco versus organic growth.
Start with why it.
And just to frame up how we're thinking about the growth in that market.
As we've said in the past and were underwriting an acquisition.
We get a lot more excited about deals that theres that market already there field population and that we can go penetrate the aftermarket opportunity.
Sometimes the most significant growth opportunities that will come from the deals that take longer to materialize, but it's when there is an opportunity to grow share within a region.
And the opportunity in eastern Canada, as an organic double of revenues over the next several years.
The way to think about it is that we need to double the market share in that region to do the job that hyster Yale expects of us.
That brand should command of the market, we should be able to double market share and we should be able to bring in the rest of the portfolio identified some of the other areas that we bring along with it an opportunity like.
Why.
We'll bring in our tire business, our battery business, all allied products and.
Just a function of how long it will take us to get there, but today I would estimate that in the next three years, we should be able to double that business in revenues, that's kind of the goal and there could be an M&A component to it as well, but there is certainly an opportunity to just do that through organic growth.
And then on the eco versus side.
The organic growth there is going to come from two areas. One is just the natural growth of the recycling market, which is very nascent and we expect to.
We have significant growth over the next decade, and we have a great product.
Core product adopt stat brand will benefit from the growth of that market that there'll be more applications for their machines in recycling in particular.
The other area for growth is to find new partners, New OEM partners to distribute within the <unk> business model and we're excited about that as well that's going to take a little bit longer to put together, but there is there's a real need for master distribution in categories of equipment that are very.
Technologically advanced and niche specialized markets that are small addressable markets, but very specialized and there we're already in conversation with several.
Specialty line manufacturers about expanding the the eco versus business to take on additional vendors. So the other thing within the master distribution and the reason that we defined a new segment as we think that there are other.
And markets or other segments of the market that will invite a master distribution type relationship as well that may not fit within <unk>, but that will fit within the alt a platform and allow us to utilize.
Our strength in parts distribution in.
Product distribution.
And just to put a number on that one it's too early.
<unk>.
We're really excited about how we've come out of the gates with the business.
Nice start to the year, but too early to kind of paint.
Pin it down to an organic growth rate.
Got it thanks guys.
Okay.
Thanks, Matt.
Thank you for your question.
Next question is from the line of Alex <unk> with <unk>.
Your line is now open.
Thank you good evening gentlemen.
Quick questions here.
First the M&A pipeline.
Haven't been that active year to date.
I guess my question to you is.
Our sellers' asking unreasonable prices.
Or is it really just kind of.
Timing here as it relates to your success with M&A this year.
Alex This is Ryan I'll take that one.
Thanks for the question there is really no different than the backdrop for that.
The M&A opportunity the reasons for.
The consolidation opportunity are intact, there arent enough.
Consolidators Oems have too many dealers that are undercapitalized under managed and this is a very active pipeline I wouldn't read into.
The transaction the lack of a transaction recently that there is.
Driving up opportunity or anything like that so no I would say no change in kind of what we're willing to pay or how we think about valuations or the expectations in the market and really no change in terms of how fertile the backdrop as I would say it's.
More than ever the phone rings in where we've always spent a lot of our efforts prospecting for the right opportunities and the right strategy now we spend a lot of time.
Looking at new opportunities that otherwise, we wouldn't have seen so.
Really excited just about the continued.
Strategy there.
And then recently Hyster Yale talked about a very very strong.
Backlog.
That should.
Extend their activity well into 2024, but they did reference a little bit of a softness in order activity. So I was wondering if you could discuss your order activity in your order backlog.
All right.
Would say.
Alex.
One is just to follow up on the previous question, we expect to be active this year, yet M&A wise and I would I would note.
And we did two relatively small transactions.
Sometimes.
The small ones sort of get the big ones just given relationships.
So on and so forth but.
The answer to your question on the.
Im sorry, Alex. Please can you repeat the question sorry about that.
Yes, order backlog and order activity Oh, yes, sorry.
Yes.
I would say that our we would mimic what <unk> is saying I think.
We saw a very strong backlog that takes us well into 2024 at this point.
There are certain product categories that continue to kind of be.
Problematic.
When it comes to lead times I.
I think what hyster Yale was referencing is bookings and I think as Ryan has said publicly here. The last couple of last couple of quarters is.
Similar to what I just mentioned on peak logics you had this.
Through Covid this massive run up in bookings.
As people were trying to pull forward demand and thought that the.
The whole world is going to be.
Running on e-commerce and so.
You had I don't know, 50% gains in bookings as an industry.
Kind of versus historic norms, and I think all you're seeing is that moderating again back down from these.
These massive peak levels.
Very helpful. Thank you very much.
Okay.
Thank you for your question.
The next question is from the line of Ted Jackson with Northland. Your line is now open.
Thank you very much congratulations on a very solid quarter.
Thanks, Ed.
I'm going to.
Focus on a couple of things.
Things, just focusing on kind of balance sheet, and capex and free cash flow.
Youre building inventory it makes sense now like you haven't flagged it or not but.
Given where we are in terms of inventory.
The current quarter can I ask you kind of what do you think the peak for inventory will be when you are let's call it formally normalized.
And what's the dollar amount on the balance sheet and Alan will it take for you to get there.
Yes, I would say, we're pretty close here Ted one is we're in the middle of kind of the season. When you think about the end of Q2.
From a construction perspective right in the north.
As we we.
And this previously but as a public company. We started we went right into Covid.
And then the supply chain issues that really haven't been able to show the public market is kind of a normal ebb and flow of inventory until now.
So.
We would expect to kind of stay at or near these levels and potentially come down from here.
As we head towards towards the back half of the year and rather than think about a nominal kind of number because as always we continue to grow we'd like to we want to take more share.
Sure for OEM, so on and so forth to put some numbers to it Ted on an annualized kind of turnover basis, new and used equipment.
If you roll back the clock 12 to 18 months ago. We've been we were at three turns of new and used equipment and we've kind of come down to a more normalized too.
And so we and then you could you could do the same thing the same math with parts inventory, where we were in the high twos, we've kind of normalized now down to two and so we wouldn't want to get too far but well below. These levels. These are kind of our benchmark levels that we would like to to.
To stay at so if the nominal dollars goes up it's because we are growing.
And.
But we want to kind of stay in this two to turn.
Area.
For not go below it.
Okay. Okay.
Similar question with regards to rental equipment <unk> been adding to the fleet.
Sure.
Do you at.
On a net basis cop 370 million bucks of rental equipment this quarter.
Does that go and one of the things that come out of a lot of calls I've listened to people I've talked to the earn in the rental business is that defining that as the cost of capital and goes higher with higher interest rates that.
They are finding thats actually.
Driving I guess, you would say incremental demand or basically people. They don't have the capex budget to buy or they rent until they actually have the cat budget to buy it so.
With that kind of a backdrop I guess the question is are you seeing that kind of phenomenon than kind of where do you see you are taking your rental fleet as we go forward.
Yes ill take that in a couple of different pieces, but when we think about.
I mentioned, the $50 million of rent to rent revenue for the quarter were sitting I think somewhere around 95 for for the year and then we have about $566 million.
Original equipment value and so when you sort of annualize the 90 $395 million.
You get somewhere around call it 190.
Issue of rent to rent revenue on an OE see a 566, which puts us north of 30% financial utilization, which is kind of right in line with what we've always kind of messy.
Message, where we're we'd like to play into and so.
Yes, we have grown the fleet.
We're up we're up roughly up about 10% on that.
At OFC figure for the year, so 516 to $5 66.
I'd mentioned that what I touched on on the call is our rent to sell model.
As opposed to the public rental houses.
<unk> and <unk>, where they have very bespoke capex plans of growing their fleet and then holding all of that equipment on the balance sheet for some elongated period of time, that's not our model for two thirds to three quarters of the fleet, which means.
We can we can DP fleet very quickly through the rent to sell model and so.
In terms of the last point that interest rates having.
Having a bearing on that.
The buy versus rent equipment.
I would say that we're sort of agnostic to the answer to that question because.
We are turning so much new equipment.
And so people are still committing to assets. Despite the run up in interest rates.
And and not kind of pouring into poring into rental and kind of leaving new equipment behind I think there's so much pent up demand for new equipment.
Contractors talk about all the end markets macro drivers they've been waiting for this new equipment.
In certain cases over a year maybe more.
So im not sure Im.
We would be a little bit agnostic to answer that question on interest rates impacting rent versus buy.
Yes, I just asked these questions because with the.
A good problem to have but as you as you are normalizing out the inventory and you're growing the rental fleet to meet demand. It's basically taking your free cash flow numbers down substantially and at some point, if you normalize out that inventory and that rental equipment the demand for it or whatever you want to say it kind of becomes a little table the cash generation.
One of the business really starts to show itself I'm, just trying to kind of understand when I can expect that we can expect to see you have introduced 24, it could be a pretty good year for you in terms of cash generation.
Yes, my last outside of M&A I would say outside first of all I agree with you Ted outside of M&A potentially.
Where we would eat up some some some capacity there.
I would agree with you that things will normalize we've had to invest in the balance sheet.
Working capital equipment, because we were just bereft of things like parts right relative to history, and so that I agree with you is kind of we would expect to normalize over the next 12 to 18 months.
Got it and I think you'll get rewarded for it.
And acquisitions aren't necessarily that you seemed to do pretty good job with them.
My last question is just around the Nikola Niccolo. However, you pronounce it I don't really know.
I assume that that revenue find its way in your material handling segment I just wanted to confirm that and then kind of just maybe.
<unk>.
The level Youll, Kate you're capable of.
Impressive.
Put up the revenue numbers, you did kind of pipeline of business outlook for rest of the year and 'twenty four.
I mean, there's clearly some issues with regards to the.
The going concern of the company and kind of maybe a little discussion around that too as it relates to.
Your.
Ability to grow that business on a go forward basis and.
That's my last question. Thanks.
Thanks, Ted ill take the front. This is Tony I'll take the front end and the back end of that question and I'll leave it to Ryan to talk about just demand as we see it throughout the rest of the year and going forward. So.
The revenue itself is in our corporate segment.
It's an offset against some intercompany elimination so until the EV segment.
The business I should say really starts to get material.
We will sort of be reporting out the revenue numbers like we mentioned in our.
We'll be reporting it in the Qs and as we did here is through the press release.
But the segment itself will be kind of house inside the corporate.
The corporate segment for now.
The back end of your question.
We.
We're cheerleaders for Nikola we think we obviously.
Our working with them and we were encouraged that the latest kind of news in terms of some of the steps that they're taking further with regard to their their cash flows or the cash burn and their balance sheet.
But we would leave it to for you to talk to them about just kind of some of the.
Some of the other things that you mentioned relative to going concern, but we were pleased with kind of the some of the more recent activity out of that but go ahead Ryan.
What I would say just in terms of our expectation is that this is the beginning of <unk>.
Being able to show incremental growth every quarter.
One of the themes over the last couple of years has been the bottleneck of.
Making retail deliveries of these vehicles.
Due to the lack of.
Charging infrastructure.
Some of the bottleneck that happens in working with the utilities to get that infrastructure installed as we sit here today.
Many late later stage sales opportunities and we expect to be able to report.
Additional deliveries every quarter going forward.
One thing that we're really excited about is.
Niko Niko a strategy of being <unk>.
<unk> train that powertrain agnostic because these are all electric powertrains, but fuel agnostic in terms of whether theyre battery electric vehicles or fuel cell powered electric vehicles. The way that we think about the distinction is that hydrogen fuel cell powered will be for the longer haul and heavier duty applications you could think of.
The fuel cell is a range extender.
And the training and just being up to speed to support this product there's a lot of.
Synergies that will happen with the way that they're going to market in this manner. So we're really excited about the product. We just had demonstration day in Detroit, where we had several big customers out to demo the truck.
I actually had the hydrogen fuel cell truck on site and.
Sure.
Super helpful that we see deliveries this year of the hydrogen truck, that's where the market for our footprint in the country with the heavy exposure in the north than with some of the major thoroughfares.
Terms of transportation routes, we think theres going to be a lot of excitement and we're already hearing about the longer range hydrogen truck.
So as Tony said specifics about <unk>.
Health I think should go to them, but in terms of what we see we couldnt be more excited about the opportunity and we maintain that this is our most significant organic growth opportunity in the business today.
Great.
And I'm, just going to throw in a shameless plug to say I look forward to seeing you all on September 19th and Minneapolis at the Northland Securities Investors Conference and if anybody wants to see these guys in person. Please com.
I appreciate it that we will see you there.
Thank you for your question.
The next question is from the line of Steve Hansen with Raymond James Your line is now open.
Yeah, guys. Thanks for the time.
Just wanted to go back to the M&A environment, a little bit here you.
You described a number of different opportunities it sounds like the pipeline is still relatively rich, but as their focus areas that youre really looking at how are you really trying to prioritize these different opportunities in terms of capital allocation.
From the opportunity set just given that the platform is so diverse how youre really targeting our priority exert deals any commentary around that would be helpful.
Sure. So thank you for highlighting that we're capital allocation because the way that we think about it our best deal is the one that we.
We onboard technicians and Theres, a robust aftermarket reoccurring revenue stream with the business.
So the.
The way that we sort of rank opportunities opportunities within our existing footprint are very attractive because they are often.
Synergies, both on the cost and sales side within the existing business.
Call those infill opportunities and there are several that we're looking at today.
Just broader theme as we cover and we've mentioned this before just a very dense population and economic region of North America and we.
We benefit from that but what we also are cognizant of is the trend towards things moving south and so we love our Florida construction business that could maybe be a theme is that we look for more opportunities down south as we as we grow our footprint.
And then.
Our Canadian investment, which was more recent is another huge opportunity with Ontario, and Quebec. The major population centers of Eastern Canada, We've got infrastructure in Montreal, and Toronto, We're excited to potentially do infill acquisitions in other segments of our strategy in the Canadian <unk>.
Market as well.
Yes, I think.
Just to pile on there Steve.
We always ranked kind of.
Existing relationships with Oems that we have to take.
Incremental territory for them.
And we're fans of exclusive rights.
We want to be a dealership first and foremost and so exclusive rights with Oems that we know and we can grow with I would say go to go to the.
The top of the list and then new Oems.
That we think we can establish.
Our relationship with also good at the top of voice.
That's helpful guys I appreciate that and then as a follow up sorry, excuse me just on the supply chain availability you referenced it getting better I was just trying to understand a bit more in terms of where you still have some constraints.
And how you see those playing out from.
And the inventory harmonization standpoint, because you've also referenced inventory high coming back down. So there is a certain areas of the business, where the OEM availability has really gotten that much better or are you still seeing challenges small versus medium large equipment et cetera.
Yes, I would say Steve are in our construction segment.
Volvo is.
A major OEM.
We have a host of others, just large sort of.
Multinational names that we are seeing more progress there.
See more normalization there.
Then we have maybe in some of the more niche areas of the material handling forklift segment. So we're still seeing some longer lead times.
For certain classes of equipment and I think.
<unk> been fairly public with with.
Some of the issues that they've had things are normalizing for them as Alex pointed out they've had a very strong kind of.
Last quarter.
But what I would say.
There is still certain product categories in the material handling space.
Are probably causing the most acute acute issues, but when we look at this overall, Steve. We're light years ahead of where we were last year or 18 months ago. At this time. These are more kind of I would classify as nuisance things versus anything material from a supply chain perspective at this point.
Okay very helpful. Thanks.
Thank you for your question.
There are no additional questions waiting at this time that will conclude the conference call. Thank you for your participation you may now disconnect your lines.
There are no additional questions waiting at this time that will conclude the conference call. Thank you for your business.