ALTG - NYSE

Good afternoon, and thank you for attending the Alta Equipment Group Third Quarter 2025 Earnings Conference Call. My name is Harry, and I'll be your moderator for today's call. I will now turn the call over to Jason Dammeyer, Vice President of Accounting and Reporting with Alta Equipment Group. Please go ahead.

Thank you, Harry. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's third quarter 2025 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 third quarter 2025 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 nonhistorical statements as described in our press release. These forward-looking statements are subject to both known and unknown risks, uncertainties and assumptions, including those related to Alta's growth, market opportunities and general economic and business conditions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our press release that was issued today. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's press release and can be found on our website at investors.altaequipment.com. I will now turn the call over to Ryan.

Thank you, Jason, and good afternoon, everyone. I appreciate you joining us to review Alta Equipment Group's third quarter 2025 results. I'll begin with an overview of our performance, highlight trends across our business segments and share why we're optimistic headed into Q4 and 2026. Our team once again demonstrated focus and discipline through what remains a turbulent macro environment. Despite persistent headwinds related to tariffs, manufacturing softness and customer caution, Alta employees continue to perform exceptionally well, demonstrating our culture of accountability, customer focus and operational excellence. While equipment sales were challenged this quarter, the underlying tone of demand improved steadily through September and into October, which turned out to be our strongest month of the year for new equipment sales, predominantly within our Construction Equipment segment. Our Construction Equipment sales in October alone topped $75 million, which is nearly 60% of our entire equipment sales in Q3. With that, we believe the pattern witnessed in the third quarter reflected a shift rather than an indication of softness as customers seemingly elected to push purchases from Q3 into Q4 as they awaited more definite signals on interest rate direction and year-end tax benefits under the One Big Beautiful Bill Act. That timing dynamic, coupled with greater confidence in backlogs and financing sets the stage for what we believe is the beginning of a fleet replenishment cycle. As we sit here today, our backlog in Material Handling remains over the $100 million mark, helping to provide visibility for the next several quarters. Even with muted volumes during the quarter, productivity and cash flow remained resilient. SG&A is down roughly $25 million year-to-date, driven by structural cost savings, improved efficiency and a disciplined execution. Those efficiencies are now embedded in our run rate and provide for operating leverage as the market rebounds. Turning the focus now to our Construction segment. Our Construction Equipment segment performed admirably given continued tightness in private capital spending. Demand from customers tied to long-term fully funded infrastructure work remains strong. In Florida, permitting activity on large DOT and Corps of Engineers projects has accelerated, translating to greater deliveries early in Q4. In Michigan, the legislature's record $2 billion road and bridge funding package is already driving new bid activity and multiyear visibility. These are durable tailwinds that reinforce our position as a key equipment partner on essential public works projects. Taken together with rate relief and the tax incentives of the Big Beautiful Bill, we see construction entering a healthier demand phase. Industry data suggests we're bottomed -- we've bottomed in the general purpose construction markets throughout our various APRs, positioning Alta for growth as replenishment gains momentum in 2026. In this regard, we've prepared a new slide this quarter, Slide 7, which shows the industry volume disconnect we've experienced from our regional norms, specifically in the last few years. We believe a reversion to normal industry levels in our APR can quickly return some of the volume losses we've experienced. And given some of the tailwinds we see, the environment is prepared for a rebound. Turning over to our Material Handling segment. Industry volumes have also exhibited multiyear softness as illustrated on Slide 7. Material Handling revenue was essentially flat year-over-year. The Midwest and Canadian markets remain soft, primarily due to automotive and general manufacturing weakness. In contrast, our food and beverage and distribution customers continue to perform well. We're seeing early signs of recovery in automotive demand, the ongoing -- sorry, automotive demand, the ongoing reindustrialization of U.S. key regions, particularly the Great Lakes Mega region is creating powerful long-duration demand tailwinds across Alta's end markets. As manufacturers, logistics, operators and infrastructure investors expand capacity in these high-growth corridors, the need for reliable material handling, construction and power solutions continue to rise. Nowhere is this more evident than in the power and utility sector where investment in grid modernization, renewable integration and data center infrastructure is accelerating. Alta is uniquely positioned to capitalize on this trend, combining our deep regional footprint, OEM partnerships and product support capabilities to serve the expanding industrial base and the critical infrastructure that underpins it. During the quarter, we completed the divestiture of our Dock and Door division, another deliberate step in sharpening our portfolio and focusing resources on our core dealership operations. This transaction reflects our commitment to capital discipline and reinvestment in higher return areas of the business. Alta's business optimization efforts are centered on strengthening the company's flywheel, delivering the right product to the right customer executed by the right people, while deepening the resilience and profitability of our core operations. Through disciplined execution, we are streamlining workflows, sharpening accountability and improving customer cost to serve across every business line. Product Support remains the engine of Alta's value creation model, driving reoccurring revenue and lifetime customer relationships through best-in-class parts, service and rental solutions. At the same time, we are refining our product portfolio to concentrate capital and talent around the brands, segments and geographies that align most directly with Alta's long-term strategy and OEM partnerships. Together, these actions form a cohesive approach to business optimization, reinforcing operational excellence, advancing our unified strategy and accelerating the virtuous cycle of customer intimacy and sustainable growth. In closing, as we enter the fourth quarter, we're seeing tangible signs of recovery across our business. Deferred demand from the third quarter is now flowing into the pipeline, supported by a steady acceleration in infrastructure and public works funding across our key markets. At the same time, recent interest rate reductions and the incentives introduced under the One Big Beautiful Bill are beginning to restore contractor confidence, creating a more constructive environment for capital investment and sustained customer activity heading into year-end. In short, we believe this -- the industry is turning the corner, and Alta is exceptionally well positioned to capture that upswing. Before turning it over to Tony, I want to thank all 2,800 members of team Alta for their focus, execution and commitment to our purpose of delivering trust that makes a difference. Your resilience and customer dedication continue to define who we are and how we win. With that, I'll hand it over to Tony Colucci to walk through the financials in more detail.

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our third quarter 2025 financial results. Before getting into the quarter, I want to begin by recognizing our employees, customers and partners for their support in Q3. Our business model is resilient, but it takes commitment, collaboration and trusting partnerships to execute on that resiliency day-to-day. Thank you to all. My remarks today will focus on 3 key areas. First, I'll present our third quarter financial results, which reflect a challenged equipment sales and rental environment overall, although we believe some of these challenges may be dissipating. As part of that discussion, I'll give a brief financial overview of the quarter for each of our 3 segments. Lastly, I'll touch on the balance sheet and cash flows for the quarter. Second, I'll be presenting what we believe to be the company's bridge back to $200 million of EBITDA and the factors impacting that bridge. Lastly, I'll discuss our expectations for the remainder of the year on both adjusted EBITDA and free cash flow before rent-to-sell decisioning. Throughout my remarks, I'll be referencing information presented on Slides 10 through 21 in our earnings deck. I encourage everyone to follow along with the presentation and review our 10-Q, both available on our Investor Relations website at altg.com. First, for the quarter, the company recorded revenue of $422.6 million, a 5.8% organic reduction versus last year. Revenues retreated sequentially in the quarter, mainly on equipment sales. However, Product Support remained steady and was up sequentially versus Q2 as I'll remind investors that our parts and service departments continue to act as an annuitized and stable cash flow stream in what is clearly a volatile equipment sales environment. As it relates to equipment sales, as mentioned, we believe that similar to last year, customers pushed off capital spending in Q3 for more clarity on interest rates and their own business' annual performance relative to the tax incentives available in the Big Beautiful Bill. Both of those factors, we believe, helped drive our highest equipment sales number of the year in October and provides a tailwind for Q4 equipment sales overall. Lastly, rental revenues are down $5.3 million year-over-year, but up $2.1 million sequentially, with the year-over-year decrease largely related to our strategic decision to reduce the size of our rent-to-sell fleet as we focus on better utilization and ultimately enhance returns on investment in rental fleet. Now focusing in on the segments for the quarter. First, Material Handling. As mentioned previously and as presented on Slide 11, new and used equipment in our Material Handling segment were down a modest $1.6 million year-over-year. But notably, the line was up on a sequential basis. As despite industry bookings for new forklifts continuing to run below historic norms, we have been able to keep pace with the prior year through selling allied lines and tariff-free used equipment to our customer base. Also important to note, and as Ryan mentioned, that despite demand challenges for the industry, Alta continues to carry a healthy backlog of equipment, over $100 million worth of new allied and used equipment into Q4. In terms of Product Support revenues, while we continue to run behind last year's pace in parts and service, most predominantly in our Midwest and Canadian geographies, I mentioned on our Q2 call that we believe that we have found a bottom in these departments, and that dynamic played out in Q3 as Product Support revenues in material handling outpaced the second quarter by nearly 4%. As noted on Slide 11, adjusted EBITDA was up year-over-year and sequentially versus Q2, coming in at $17.5 million in Q3 for the segment. On to our Construction segment and as highlighted on Slide 12. As a precursor to my comments, I would reset for investors that equipment sales in our CE segment can be and have historically been volatile, especially when compared to equipment sales in our Material Handling segment and certainly when compared to our other revenue streams. This volatility has certainly been evident in both 2024 and 2025 as macro factors such as interest rates, tax laws, election fears, tariff and trade policy uncertainty and customer backlog and local funding can all impact the CE customers -- CE segment customers' decisioning on when to purchase a piece of equipment. With that as a backdrop, we saw equipment sales in our CE segment drop $18.7 million versus last year Q3. That said, based on what we saw in October, we believe Q3 will be an anomaly as customers pushed ahead decisioning in Q4 given the expectations for interest rate reductions and year-end tax plan. Lastly, on equipment sales from a new and used equipment gross margin perspective, while we continue to run below historic level gross margins on new and used equipment, gross margins on new and used equipment were up slightly on a sequential basis, a hopeful sign that supply and demand dynamics in the marketplace are normalizing and that we may have found a bottom on this metric. On to Product Support, which grew roughly 3% year-over-year in the Construction segment and where we continue to outperform internal profitability metrics. Further to that point, as presented on Slide 14, while the segment stand-alone EBITDA is down $2.4 million year-to-date, the mix of the $75 million of EBITDA in 2025 is of a higher quality versus '24. Specifically, while 2024's EBITDA was more heavily weighted to opportunistic rental equipment sales and related gains, 2025's EBITDA is more -- been more heavily weighted to perpetual profitability gains in the form of increased gross margins and product support as well as a reduced SG&A load. This realignment from less consistent equipment sales to more reliable recurring product support profitability creates a more resilient and capital-efficient business going forward. Lastly, from a segment perspective, Master Distribution, which houses our Ecoverse business. The story for the quarter continues to be tariff related as nearly all of the segment's key metrics have been negatively impacted year-over-year. That said, a stabilizing trade environment between the U.S. and the EU and mitigating measures in the form of pricing actions and OEM risk sharing to best maneuver through this situation have been largely implemented, and we expect will take further hold and bear fruit in Q4. Overall, we are cautiously optimistic that the worst of the trade-related impacts on the segment in 2025 are now behind us. In summary, for the quarter, the company generated $41.7 million of adjusted EBITDA, a slight reduction versus last year on a pro forma basis and mainly driven by reduced episodic equipment sales in our CE segment. Lastly and notably, as we focus on driving ROIC, the company was able to realize nearly the same level of EBITDA year-over-year on a leaner balance sheet as the gross book value of our rental fleet is down nearly $30 million year-over-year. In terms of cash flows, and I'm referencing Slide 16, for the quarter, free cash flow before rent to sell decisioning was approximately $25 million for the quarter and stands at roughly $80 million year-to-date. To quickly check in on the balance sheet as of September 30 and as depicted on Slide 17, we ended the quarter with approximately $265 million of cash and availability on our revolving line of credit facility, plenty of capacity in term to navigate the business in this climate. Before closing my comments on the quarter, I'd like to quickly address the impact of Big Beautiful Bill had on the company's income statement in Q3. First, holistically, the company views the enactment of the Big Beautiful Bill as a net positive for both the company and for our customers. From the company's perspective, the effective removal of the interest rate -- the interest expense limitation in the Big Beautiful Bill will save the company cash taxes in the future and over time, will enhance our liquidity position. That said, given the reduction in the interest limitation, we had to take a notable onetime noncash income tax expense to establish a valuation allowance against our net operating loss assets. For clarity, this onetime expense has no impact on the company's operations, its cash liquidity position or its financing capacity. We welcome the benefits of the Big Beautiful Bill for both us and our customers going forward. Moving on to the second portion of my prepared remarks. The company's view on the potential bridge back to $200 million of EBITDA and the factors impacting that bridge. As presented on Slide 7 and as discussed earlier by Ryan, equipment values in our regions in each of our major segments have been depressed in recent years when compared to industry norms and in the case of our CE segment in the face of increased state and federal DOT spending in recent years. To illustrate the financial impact of Slide 7 and the reversion to the norm on equipment volumes and a few other elements, we present the EBITDA bridge on Slide 20. First, the starting point of the EBITDA bridge is our current midpoint of the FY 2025 adjusted EBITDA guidance. Next, the first step in the bridge is the incremental EBITDA created given Alta's current market share if equipment volumes simply revert back to historic norms. Note that this element represents $17 million in EBITDA in the bridge. Next, the second step of the bridge is related to a reversion of the norm on gross profit margins on equipment sales. As we've discussed on many calls recently, there has been an oversupply of equipment in the market -- in the equipment markets for nearly 2 year now -- 2 years now, which has led to an unprecedented competitive pricing environment that ultimately depressed equipment sales margins. The $10 million of EBITDA in this step represents a reversion to the norm on gross margins associated with the normalized level of equipment sales. Next, the third level of the bridge is related to Ecoverse, a business unit that in 2025 has experienced an outside level of impact from tariffs given its business model. The abrupt and blunt impact of the tariffs on this business can't be overstated. As a master distributor of environmental processing equipment that is sourced from Europe, Ecoverse relies on a constant flow of equipment and parts from that region and historically has not held a lot of stock inventory. Thus, the quick implementation of the tariffs was difficult to navigate and the time line on mitigation efforts had a longer tenor than keeping up with the marketplace. Thus, sales were impacted and margins quickly eroded. That said, since the outset of the tariffs, our team at Ecoverse has been effectively and actively working on mitigation efforts, which included supply chain resourcing, target pricing increases and supplier cost sharing. We believe these mitigation efforts are largely in place and the road back to Ecoverse contributing to the enterprise from an EBITDA perspective is ahead of us. Thus, the $7 million EBITDA step here. Next, we believe strongly that PeakLogix, our systems integration and warehouse automation business will revert to historic norms as interest rates come off their highs and CapEx projects get greenlighted for automation projects at customers within our material handling footprint. Thus, the $3 million reversion to the norm for PeakLogix in this column. Lastly, the $7 million negative EBITDA in the last step of the bridge is simply the incremental costs associated with the steps -- with steps 1 and 2 in the bridge. Overall, we believe the $30 million bridge on Slide 20 presents a simplistic -- presents simplistic hard evidence that a reversion to the norm in terms of industry equipment sales volumes and margins and a normal operating environment for both the Ecoverse and Peak provide for a logical path back to the company's target of $200 million of EBITDA. Moving on to the final portion of my prepared remarks, adjusted EBITDA and free cash flow before rent-to-sell decisioning for 2025. First, in terms of our adjusted EBITDA guidance for the year, we now expect to report between $168 million to $172 million of adjusted EBITDA for the fiscal year 2020 (sic) [ 2025 ] . Notably, the updated range implies a better sequential Q4 versus Q3. Lastly, despite the reduction in the guidance on adjusted EBITDA, we are effectively holding our guidance on free cash flow before rent-to-sell decisioning, which is again presented on Slide 21. As a reminder, free cash flow before rent to sell is a metric that we believe appropriately measures the true free cash flow generation capacity of the business in a steady state and removes the impact of the decisions we make with our rent-to-sell fleet. Overall, we expect free cash flow before rent-to-sell decisioning to be between $105 million and $110 million for the fiscal year 2025. In closing, I would say that we remain bullish about our partnerships, our employees and the long-term prospects at Alta and are confident in our enduring business model. Ryan and I would like to wish all of our 2,800 teammates and all of you listening tonight a healthy and happy holiday season. 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 today will be from the line of Liam Burke with B. Riley Securities.

Can we talk about Construction Equipment? It sounds like based on equipment sales for October that, that business, some of the roadblocks that have been slowing the business like funding of projects, availability of labor seems to have moved to the side and you'd anticipate at least an early upswing in that business, both from a sales and a margin perspective. Is that the right way to look at it?

I think, Liam, you said it well. From a sales perspective, I think we're -- as I mentioned, on the margin thing, we're cautiously optimistic. But from a sales perspective, certainly, we think exactly along the lines of how you described that October could be a harbinger of things to come.

Okay. But what would be the gating factor? I'm looking at your gross margins year-over-year were flat. I think Tony called out that they were up sequentially. What's to stop that movement to sort of move it back to their historic levels?

Liam, I think this is the first time we've been up sequentially. And so the messaging here is, hopefully, we've -- in several quarters, if not years. So hopefully, maybe we found a bottom. We continue to see some flattening in used equipment prices. But overall, we still think that the marketplace in construction equipment is still generally oversupplied. And until that oversupply or that overhang kind of fully mitigates itself, I think we'll continue to see gross margins at these levels. Now it has been dissipating in terms of the overhang. We have seen pricing kind of firm. And so it would follow that, we could see an upswing there in the coming year or so.

Okay. And then just quickly on Materials Handling. You highlighted some of the stronger pockets of the business, particularly food and beverage. And are you seeing any kind of movement on the manufacturing front? I know inshoring is going to be a long-term cycle, but are you seeing any lift on the traditional manufacturing side?

Go ahead, Ryan.

I'll take that one. This is Ryan. I think the lift we're seeing is more related to the replenishment cycle getting extended out than it is, the market demand being driven by -- the demand side of the equation is still -- has some pressure. And it's -- we think it's a near-term issue related to the tariff impact, in particular, on autos and the implications for the portfolio, the shift to EVs that was happening largely in the Michigan APR and in the northern part of our territory. There's some rationalization happening right now that's taking product out of the market in pockets. But what we're seeing is the fleet replenishments are back on track. Things that were delayed are back on track. We saw one of our biggest POs in that sector ever come through last quarter. So it's helping build the backlog and keep it what we're calling stable. But the longer-term trend, we think, is very bullish for our regions that -- we have a workforce that knows how to build things, and we have now policy that's going to encourage more to happen in our geographic footprint.

[Operator Instructions] And the next question today will be from the line of Steven Ramsey with Thompson Research Group.

I wanted to continue that line of thought on Material Handling, the backlog being over $100 million. Maybe I heard you say you described it as stable. Maybe can you put that in context of the first half of the year, the backlog size where it was a year ago. But part of my thought process is sales have been increasing sequentially off of the Q1 levels. You talked about a great order in the prior quarter. Is this reducing the backlog? Or are there more orders filling it back up?

Yes. Steven, I'll take a shot at that. This is Tony. Just to clarify Ryan's comment there, the PO that he referenced is not going to be impactful for '25 here. It's more of a long-term kind of opportunity. Anyway, I believe we started in Material Handling, we started the year with $125 million of backlog. We're in the low $100s million here, as we mentioned. And so we have had some burn off of the backlog. As we mentioned last quarter, when we think of backlog, we're not just thinking of our Hyster-Yale new lift trucks, part-of-the-line lift trucks. We've got allied lines that we do very well with. And then used equipment, which given tariffs, there's an opportunity to really move used equipment from a pricing and competitive perspective. And so I think the burn off is, for us, less about maybe demand, which has been tepid and more about lead times from the factory coming down in terms of Hyster-Yale just being able to deliver more quickly given their production levels. So I would just say that the backlog is not down necessarily at Alta because of a massive decrease, although it's down, but more so just the lead times impacting it.

Okay. That's good. That's helpful context. And one more on material handling, parts and service gross margin very strong despite the flattish revenue. Can you talk about what drove that and how you think about the gross margin for the aftermarket and material handling going forward?

Yes. I think, Steven, in some of our regions, we have midyear increases from a pricing perspective. Certainly, some of the things we've talked about in terms of focusing on the right products and reducing non-billable labor can impact that as well. So those are some of the things that would impact service margins here in the third quarter. The way that we think about it over the long term in terms of modeling is taking a longer-term kind of view on margins. And if you look at it over the long term, the margins remain pretty stable.

Okay. Helpful. And then in Construction Equipment, I wanted to hear some of the nuance where parts sales were barely up while services grew mid-single digit. Can you talk about the delta between those lines and if that had -- or how that impacted the strong margin of that revenue line in the segment?

You know, Steve, that is probably just -- sometimes they don't move necessarily in conjunction with one another, depending on over-the-counter sales at the branches and how they move versus field service as an example. I don't know that I would draw any correlation or story that service was up relative to parts.

Okay. That's helpful. And then last one for me. On the divestiture of Docks and Doors unit, I guess, kind of why now at this point, given still keeping PeakLogix, maybe there wasn't synergy between the businesses necessarily. But why now? And then secondly, I may have missed it in the prepared comments, if that was an impact to the 2025 EBITDA guide?

Sure, Steve. I'll take the -- I'll go in reverse. Very minimal impact on the EBITDA guide. That business probably less than $1 million of EBITDA on an annual basis. I think on the Dock and Door strategically, and Ryan can weigh in, too. But overall -- recall, we did one acquisition several years ago of a Dock and Door business in Boston. The rest of that business or the majority of that business was inherited through an acquisition of the Hyster-Yale dealer in New York City. And so as we have kind of done a strategic review on all of the different business lines that we're in and trying to drive synergies between those, what our core business is with the Hyster-Yale products and what is the Dock and Door business, the more we looked at it, the more we thought that this would be better off in somebody else's hands, that was just focused on it. The other thing I would add is don't draw any parallels between what PeakLogix does and what Dock and Door does, very different kind of offerings, if you will, and go-to-market strategies, customers, et cetera. So anything else to add there?

I think that's well said. It's around -- the moat around the business, we prefer the exclusive rights, and there's more aftermarket yield on selling vehicles than selling [indiscernible]