ALTG - NYSE

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 Dammeyer, Director, SEC Reporting and Technical Accounting with Alta Equipment Group.

Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's second 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 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 2. 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 update 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 the 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. 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 will 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 and Material Handling revenue of $169.1 million. We also 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 Nikola's TRE 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 20.5% to $49.9 million compared to a year ago. Before I discuss business conditions and 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 1,300 factory-trained and certified revenue-producing technicians. Trends in our Material Handling segment remained positive throughout all our major end-user markets, including manufacturing, biotech, government, food and beverage, automotive manufacturing and others. Our exclusive Hyster-Yale territory, which now includes Eastern Canada, covers the densest population region in North America and provides access to a diverse group of industries and end markets for our products. We continue to benefit from the sales synergies with the PeakLogix 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, engineered products and safety and operator training, to name a few. We also assembled 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 non-residential demand as well as infrastructure and other federal and state governmental legislation in all our operating regions. In the Northeast, specifically, we are seeing positive impacts due to onshoring projects like chip and EV-related battery and other facilities. Our Florida operations remained particularly strong, with phosphate mining as a significant business, and there, we are heavily embedded with the largest producer in the state. Projects related to DOT 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, both new and used, specifically articulated hauler trucks and excavators is particularly high. Both of these equipment categories have seen double-digit growth in unit volume in the Florida market year-over-year. We remain excited about growth opportunities for the Ecoverse 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 have 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 is 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 Nikola semi, which will be available late this year. Importantly, our exclusive Nikola territory mirrors our footprint within the U.S., allowing us to market the product to Alta's 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 is 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 over time. Federal initiatives will also extend the cycle with approximately $1 trillion estimated over the next decade. Many state DOT budgets where we operate are forecasting significant increases in fiscal year 2024. For example, Florida recently released its fiscal 2024 Moving Forward project to address more than 20 congestion-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 in 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 Alta's corporate culture. As a company, we strive every day to foster a culture of empowerment, accountability and opportunity, and we rally around the shared purpose, delivering trust that makes a difference. I want to again thank our employees for delivering trust to our customers, our business partners and to our valued shareholders. Our shared purpose is the foundation of our commitment to these key areas: our commitment to environmental sustainability, including a focused strategy to drive customer adoption and commercial viability of various electro-mobility solutions; the safety of our employees and technicians; and the dedicated and inclusive culture that we continue to develop with each day. In closing, I'd like to thank the Alta team for all your hard work in delivering another solid quarter. I'll now turn the call over to Tony, our CFO.

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our second quarter 2023 financial results. Before I begin, I want to acknowledge two first half acquisitions and welcome to the Alta family our new team members from M&G Materials 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 end, I'll be presenting a unit-level case study of the rent-to-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 30. As part of that discussion, I'll be referencing the positive enhancements we 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. I'd encourage everyone on today's call to review our presentation and our 10-Q, which is available on our Investor Relations website at altg.com. With that said, for the first portion of my prepared remarks, and as presented in Slides 10 to 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 a $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, will ultimately bode well for future incremental product support revenues. To that end, year-to-date, we've now placed approximately $90 million more equipment into field population when compared to the first half of 2022. Moving on to our product support business lines. In spite of the quarterly comp hurdles getting more difficult, we continue to realize organic growth in our parts and service departments, with that figure increasing at 12% in the 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 and expected seasonal increase versus Q1 as rental revenues hit $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 EBITDA perspective, we realized $49.9 million in 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 Q2's 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 $0.30 of adjusted operating income versus the $0.21 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 refer to as our rent-to-sell approach to the equipment market in our Construction segment. Before I present the model, I'd remind investors that Alta's focus is on building best-in-class equipment dealerships by driving 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 beget 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 dealer-owned rental fleets. Given this industry dynamic and our field population-based business model, the rent-to-sell approach in the market allows for us to create different price points for lightly used equipment in our rental fleet, which ultimately can fulfill customer demand. From an economics perspective, I would point investors to Slide 14, and to summarize the example depicted here, you can see that we purchased this unit new for $400,000 on January 1 of 2021, rented the piece for $14,000 a month for 11 of the 18 months it was in our fleet. We then sold the unit on September 30, 2022, for $340,000. 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 aftermarket part and service opportunity on the unit post sale, which we know to be accretive. Now this is simply one example of many variations of how the rent-to-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 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 grade 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 6/30. First, the upsizing. On June 28, the company amended its credit agreements that had four primary aspects to it. First, we exercised $55 million worth of an expansion option on our ABL facility, taking that facility to $485 million from the previous $430 million. Second, the amendment provided for an additional $65 million expansion option on the ABL facility to $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 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 in the amount of OEM captive floor plan financing allowed for on the balance sheet, which has become increasingly more important as supply chains have normalized, as it's 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 the line of credit, as our borrowing base collateral has grown in concert with the business as a whole. We view this expansion as a vote of confidence from our lending partners on our business plan, our team and our end markets. On to 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 3.8x 2023 adjusted EBITDA as used inventory and rental fleet levels have increased given seasonality and the normalization of the supply plan that I mentioned -- the supply of equipment that I previously mentioned. Finally, for the last portion of my prepared remarks, I'd like to give a few thoughts on the secondary offering that was closed in July from one of our large shareholders. First, 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 a third of B. Riley's holdings in Alta. We view this transaction as beneficial for shareholders as the offering was dispersed to a diverse set of primarily new investors and ultimately increased ALTG's float and liquidity in the stock. In closing, I'd like to thank my Alta colleagues for a great first half of 2023, our customers and OEMs for their belief in our team 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.

[Operator Instructions] The first question is from the line of Matt Summerville with D.A. Davidson. Your line is now open.

Thanks. A couple of questions. First, with respect to -- can you maybe talk about what you're 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? And then just as a follow-up or an adjunct to that, rental rates sound like they're 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. We have grown our fleet, not dissimilar from other kind of rental houses and our competition as supply chains have let loose with the dearth of equipment that we've had to deal with as an industry the last couple of years. It appears that everybody is kind of starting to normalize and right-size. And so what that does, just mathematically is, if you're not able to get that fleet -- the additional fleet out, your physical utilization, some would call it dollar utilization, we call it physical utilization, would just mathematically go down. It doesn't mean that you have less fleet on rent, but your 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 and 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're not going to see the full impact of that piece of equipment 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 on to customer balance sheets as well. So, from a rate perspective, I think our materials would mention, we -- and I mentioned on the call, we've seen a 6% sort of increase when we look back to last year. I don't think that's outside of what you've seen in the broader rental markets 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, '21, '22, double-digit sort of year-on-year increases. And so seeing that sort of moderating, and I would expect that level to kind of either hold or continue to moderate towards the back half of the year.

Got it. And then as a follow-up, I was wondering if you could -- I want to spend a minute, just given your comments, Ryan, on Yale Industrial and then Ecoverse. Realizing you've owned those businesses for less than a year, but what kind of pro forma organic growth are you seeing off of those businesses, which -- you obviously have a nice market share opportunity, you've highlighted before up in Eastern Canada. You have sort of a secular play with respect to Ecoverse in general. And then, maybe layer in some additional commentary on maybe the revenue run rate of the PeakLogix 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 sort of form up the opportunity for us at YIT and Ecoverse. I would say that Ecoverse we're still in the beginning kind of stages. They had a great first quarter. We mentioned the seasonality there last quarter, but there's no reason to not expect organic growth from either of those companies. But Ryan has kind of the YIT thing more kind of top of mind in terms of share or opportunity. What I would say on the PeakLogix side is, there was a theory of activity coming out of COVID 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 think the other thing to think about relative to the PeakLogix business is, these are large CapEx projects for customers. And what we have heard is that the sales cycle taking a little bit longer, given interest rates from customers in that business, maybe taking a pause on 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. Do you want to talk to YIT?

Sure. So you'd asked about both YIT and Ecoverse organic growth. I'll start with YIT and just to frame up how we're thinking about the growth in that market. As we've said in the past, we're underwriting an acquisition. We get a lot more excited about deals that there's a market already there, field population and that we can go penetrate the aftermarket opportunity. Sometimes the most significant growth opportunities, though, come from the deals that take longer to materialize, but it's when there's an opportunity to grow share within a region. And the opportunity in Eastern Canada is 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, what 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. I identified some of the other areas that we bring along with -- in an opportunity like YIT where we'll bring in our tire business, our battery business, all of the allied products. And it's just a function of how long it'll 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's certainly an opportunity to just to do that through organic growth. And then on the Ecoverse 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 have significant growth over the next decade. And we have a great product that's -- the core product, the Doppstadt 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 Ecoverse business model. And we're excited about that as well. That's going to take a little bit longer to put together. But 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 Ecoverse business to take on additional vendors. So, the other thing within the Master Distribution, the reason that we defined a new segment is we think that there are other end markets or other segments of the market that will invite a Master Distribution type relationship as well that may not fit within Ecoverse, but that will fit within the Alta platform and allow us to utilize our strength in parts distribution and product distribution. And just to put a number on that one, it's too early there. We're really excited about the -- how we've come out of the gates with the business. It's a nice start to the year, but it's too early to kind of pin it down to an organic growth rate.

Got it. Thanks, guys.

Thanks, Matt.

Thank you for your question. Next question is from the line of Alex Rygiel with B. Riley. Your line is now open.

Thank you. Good evening, gentlemen. A few quick questions here. First, the M&A pipeline haven't been that active year-to-date. So, I guess my question to you is, are 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, and thanks for the question. There's really no difference in the backdrop for the M&A opportunity. The reasons for the consolidation opportunity are intact. There aren't 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's a drying up opportunity or anything like that. So I would say no change in 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 is. 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 and your order backlog?

I would say, Alex, one is just a follow-up on the previous question, we expect to be active this year yet M&A-wise. And I would note, we did two relatively small transactions, and sometimes the small ones sort of beget the big ones, just given relationships so on and so forth. But the answer to your question on the -- I'm sorry, Alex, please, can you repeat the question? Sorry about that.

Yes. Order backlog and order activity?

Yes, sorry. Yes, I would say that our -- we would mimic what Hyster-Yale was 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 to get when it comes to lead times. I think what Hyster-Yale was referencing is bookings. And I think, as Ryan has said publicly here the last couple of quarters is similar to what I just mentioned on PeakLogix. You had this -- through COVID, this massive run-up in bookings as people were trying to pull forward demand and thought that the whole world was 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 massive peak levels.

Very helpful. Thank you very much.

Thank you for your question. 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, Ted.

I'm going to focus on a couple of things just focusing on kind of balance sheet and CapEx and free cash flow. I mean, you're building inventory, it makes sense. It's not like you haven't flagged it or not. But given where we are in terms of inventory in the current quarter, can I ask you kind of what do you think the peak for inventory will be when you're, let's call it, formally normalized? Like kind of what's the dollar amount on the balance sheet? And how long 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 the season when you think about the end of Q2 from just a construction perspective, right, in the north. As we -- as I've mentioned this previously, but as a public company, we started, we were right into COVID and then the supply chain issues really haven't been able to show the public markets kind of a normal ebb and flow of inventory until now. And so, we would expect to kind of stay at or near these levels and potentially come down from here as we head towards the back half of the year. And rather than think about a nominal kind of number, because as we continue to grow, we like to -- we want to take more share for OEMs, 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, 18 months ago, we've been -- we were at 3 turns of new and used equipment, and we've kind of come down to a more normalized 2 turns. And so, we -- and then you could do the same thing -- the same math with parts inventory where we're in the high 2s turn, we've kind of normalized now down to 2 turns. And so, we wouldn't want to get too far below these levels. These are kind of our benchmark levels that we would like to stay at. So, if the nominal dollars goes up, it's because we're growing and that -- but we want to kind of stay in this 2-turn area for -- and not go below it.

Okay. Similar question with regards to rental equipment. I mean, you've been adding to the fleet your -- you add, on a net basis, call it, $370 million of rental equipment this quarter. Where does that go? And I mean, one of the things that's come out of a lot of calls I've listened to people I've talked to that are in the rental business is that finding that as the cost of capital goes higher with higher interest rates that -- they're finding that's actually driving, I guess, you would say, incremental demand or basically people -- they don't have the CapEx budget to buy, so they rent until they actually have the CapEx budget to buy it. I mean, so with that kind of a backdrop, I guess the question is, are you seeing that kind of phenomenon? And then kind of where do you see you're taking your rental fleet as we go forward?

Yes, Ted, I'll just 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. We're sitting, I think, somewhere around $95 million for the year. And then we have about $566 million of original equipment value. And so, when you sort of annualize the $93 million -- $95 million, you get somewhere around, call it, $190-ish million of rent-to-rent revenue on an OEC of $566 million, which puts us north of 30% financial utilization, which is kind of right in line with what we've always kind of messaged where we'd like to play into. And so, yes, we have grown the fleet. It's -- we're roughly up about 10% on that OEC figure for the year, so $516 million to $566 million. I would mention that what I touched on, on the call is our rent-to-sell model, so as opposed to the public rental houses like URI and H&E 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 or three-quarters of the fleet, which means we can de-fleet very quickly through the rent-to-sell model. And so, in terms of the last point, interest rates having a bearing on the buy versus rent equipment, I would say that we're sort of agnostic to the answer to that question, because we're turning so much new equipment. And so, people are still committing to assets despite the run up in interest rates and not kind of pouring 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. And so, I'm not sure. I'm -- 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 -- I mean, it's a good problem to have. But as you're 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, kind of becomes a little [stable] (ph), the cash generation of the business really starts to show itself. And I'm just trying to understand when I can expect that -- we can expect to see that happen? Because it seems like '24 could be a pretty good year for you in terms of cash generation.

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 capacity there, I would agree with you that things will normalize. We've had to invest in the balance sheet and 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.

Go on. I think you'll get rewarded for it. And acquisitions aren't necessarily bad. You seem to do a pretty good job with them. My last question is just around the Nikola, or Nikola, however you pronounce it, I don't really know. I assume that, that revenue finds its way in your Material Handling segment. I just want to confirm that. And then kind of just maybe to the level you're capable of -- I mean, that's impressive to put up the revenue numbers you did, kind of pipeline of business, outlook for rest of the year and '24. I mean, there's clearly some issues with regards to the going concern of the company. Kind of maybe a little discussion around that too as it relates to your ability to grow that business on a go-forward basis. That's my last question. Thanks.

I'll take the front -- this is Tony. I'll take the front end and the back end of that question. 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 and it's an offset against some intercompany elimination. So, until the EV segment -- the EV business, I should say, really starts to get material, we'll sort of be reporting out the revenue numbers like we mentioned in -- well, we'll be reporting it in the Qs and as we did here through the press release. But the segment itself will be housed inside the corporate segment for now. The back end of your question, we're cheerleaders for Nikola. We think we obviously are working with them and we were encouraged that the latest kind of news in terms of some of the steps that they're taking for their -- with regard to their cash flows or their cash burn and their balance sheet. But we would leave it to -- for you to talk to them about just 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 them. But go ahead, Ryan.

Yes. What I would say just in terms of -- our expectation is that this is the beginning of 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 just due to the lack of charging infrastructure and some of the bottlenecks that happens in working with the utilities to get that infrastructure installed. As we sit here today, we have many 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 Nikola's strategy of being powertrain -- not powertrain agnostic because these are all electric powertrains, but fuel agnostic in terms of whether they're 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 as 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 a demonstration day in Detroit where we had several big customers out to demo the truck. We actually had the hydrogen fuel cell truck onsite. And we're super hopeful 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 and with some of the major thoroughfares in terms of transportation routes. We think there's going to be a lot of excitement and we're already hearing it about the longer-range hydrogen truck. So, as Tony said, specifics about Nikola's health, I think, you should go to them. But in terms of what we see, we couldn't be more excited about the opportunity and we maintain that this is our most significant organic growth opportunity in the business today.

Great. Well, thanks. And I'm just going to throw in a shameless plug to say I look forward to seeing you all on September 19 in Minneapolis at the Northland Securities Investors Conference. And if anybody wants to see these guys in-person, please come.

I appreciate it, Ted. We'll see you there.

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

Hi, guys. Thanks for the time. Just wanted to go back to the M&A environment a little bit here. You described a number of different opportunities. It sounds like the pipeline is still relatively rich. But is there focus areas that you're really looking at? How are you really trying to prioritize these different opportunities in terms of best capital allocation from the opportunity set? Just given that the platform is so diverse, how you're really targeting or prioritizing certain deals? Any commentary on that would be helpful.

Sure. So, thank you for highlighting the word capital allocation, because the way that we think about it, our best deal is the one that -- we onboard technicians and there's a robust aftermarket reoccurring revenue stream with the business. So, the way that we rank opportunities, opportunities within our existing footprint are very attractive because there are often synergies, both on the cost and sales side within -- with the existing business. We call those infill opportunities and there are several that we're looking at today. The other just broader theme is we cover, and we've mentioned this before, just a very dense population and economic region of North America, and 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 as that we look for more opportunities down south 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, in Toronto. We're excited to potentially do infill acquisitions and other segments of our strategy in the Canadian market as well.

Yes. I think maybe just to pile on there, Steve. We would -- we always rank existing relationships with OEMs that we have to take incremental territory for them. And we're fans of exclusive rights, right? 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 the top of the list and then new OEMs that we think we can establish a relationship with, also go to the top of the list.

That's helpful, guys, and I appreciate that. And just 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 an inventory normalization standpoint. Because you've also referenced inventory high and coming back down. So, is there certain areas of the business where the OEM availability has really gotten that much better, or you're still seeing challenges small versus medium, large equipment, et cetera?

Yes. I would say, Steve, in our Construction segment where Volvo is a major OEM, and we have a host of others, just large sort of multinational names that we are seeing more progress there, we've seen more normalization there than 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 Hyster-Yale has been fairly public with some of the issues that they've had. Things are normalizing for them. As Alex had pointed out, they've had a very strong kind of last quarter. But what I would say is there's still certain product categories in the Material Handling space that are probably causing the most 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.