Alta Equipment Group Inc.

Good afternoon, and thank you for attending the Alta Equipment Group second quarter 2024 earnings conference call. My name is Joel, and I will be your moderator for today's call. I will now turn the call over to Jason Dammeier, Director of SEC Reporting and Technical Accounting with Alta Equipment Group. Jason, you may proceed.

Thank you, Joel. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's second quarter 2024 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 results. On the call with me today are Ryan Greenewalt, 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 2024 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 altered 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.altayequipment.com. I will now turn the call over to Ryan.

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. I will begin with a quick overview of our second quarter results, then provide a current assessment of the business conditions and our end-user markets. Tony Colucci will then present a more detailed analysis of our financial and operating performance for the quarter and our outlook for the balance of 2024. Overall, our business rebounded well this quarter from the seasonally challenged first quarter and in the face of moderating market environment for new equipment sales. For the quarter, total revenues increased 46.5 million sequentially to 488.1 million in Q2 from 441.6 million in Q1. For the second quarter, the business achieved adjusted EBITDA 50.3 million, which is up 16.2 million versus Q1. Notably, our product support business performed well in this moderating environment as we continue to achieve organic growth on increased field population with revenues increasing to a record of 144.2 million and increase of 13.2 million from a year ago. Additionally, our material handling segment also continued on its steady path of profitable growth as we progressively execute on a solid sales backlog and gain market share in strategic regions and product categories throughout our footprint. We also saw a rebound in our master distribution segment, as revenue in the quarter was $16.7 million versus $12.8 million in the first quarter. While we benefited from our return to normal seasonality in a strong quarter from our material handling segment and our product support business lines, market unit volumes in our construction equipment segment remained under pressure due to uncertainty regarding interest rates and the election outcome, especially affecting small to midsize contractors. Let me now discuss our business in greater detail by operating segment. Revenues for our construction equipment segments increased to $294.9 million from $281.5 million a year ago, but were offset by lower new equipment sales and compressed equipment gross margins. There is an oversupply of equipment in the market, both in dealer inventory across the entire channel and in excess supply from the OEMs, given the significant market volume declines relative to previous years. The increased supply of machinery is resulting in price degradation, especially with heavier earth moving machines in the most competitive markets like Florida. Across our geographic footprint, the market is down nearly 9% year over year on a unit volume basis, with the Great Lakes region experiencing even steeper declines. We are seeing some benefit of our geographic diversity as certain markets like New York State and Florida will benefit from their greater mix of large-scale projects that have allowed larger contractors to stay more insulated from economic volatility and keep those markets relatively buoyant, propping up steady demand for the higher end of ALSA's product offering. The higher capacity equipment categories are where we see the most acute pricing pressure and also the steepest volume declines. Despite the industry returning to a more normalized environment after years of significant growth, we continue to remain positive about our position in the marketplace. We are focused on optimizing our fleet and continuing to build the annuitized revenue streams coming through the repair of our continuously expanding field population. Revenue for our material handling segment increased to $175.6 million from $169.1 million a year ago and was primarily driven by an increase in service revenue. The North American lift truck market saw a significant decline in Q2 2024 with factory bookings down sharply from peak levels. What we are observing is the continued normalization of the North American forklift industry from the extreme market dislocation brought on by the pandemic. Despite the reduction in bookings, we continue to benefit from the market positioning of our product portfolio from a lead time and product differentiation perspective and have been capturing market share despite the declines in industry bookings. We expect shipments to remain strong through 2024, extending into 2025, and we continue to focus on making market share gains, especially in the electrified product classes where we maintain a lead time advantage relative to the competition. As part of our growth strategy, we are actively exploring new business segments in tangential or complementary equipment markets that align well with our expertise and resources embedded in the dealership model. While we have previously discussed this significant opportunity to provide and support an electrified medium duty over the road truck fleet, this initiative is gaining momentum as we enter the back half of this year. To that end, I'm pleased to report that Alta eMobility has entered into an agreement to represent Harbinger as an authorized dealer in support of the launch of their new electric medium duty truck lineup. The territory assignment includes dense urban markets, including Southern California, and overlap significantly with our existing footprint in the population-dense Great Lakes, Northeast, and Florida regions where we intend to leverage our existing branch infrastructure. Our initial focus will be on the medium-duty electrified Class IV through VI commercial vehicle segment. The market opportunity bears strong resemblance to the evolution of our electric forklift market over the last 50 years. Like lift trucks, medium-duty fleets are geographically contained, easing the rollout of charging infrastructure. As technology continues to advance and the necessary infrastructure develops, we anticipate widespread adoption and integration into the transportation ecosystem. In May, we signed an agreement with Mail Management Services, a top 15 carrier providing dedicated service transportation services for the United States Postal Service, to source 20 Harbinger Class 6 electric box trucks to update their fleet. Updating their fleet with the new electric powertrain technology will enable Mail Management Services to directly assist the U.S. Postal Service with achieving its carbon footprint goals. ALTA is handling all aspects of the vehicle transaction, specifying and installing the charging platform, as well as providing a web-based fleet management system. Mail Management Services partnered with ALTA because of our proven approach to assess, define, execute, and maintain electrified fleets. While the inclusion of Harbinger With the inclusion of Harbinger to the portfolio and the traction gained with new customers in the quarter, we now have approximately 25 million in sales backlog in the e-mobility business, and we expect the majority of that backlog to convert to revenue in the second half of 2024. In summary, despite what we believe to be temporary demand headwinds, our long-term outlook remains positive as we believe the next few years will represent an extended cycle for non-residential construction. Project pipelines are significant and federal infrastructure spending continues to accelerate. Further, many of these projects are multi-year endeavors and fall into our geographic footprint. State DOT spending also remains elevated. Overall, we believe growth opportunities will persist as our dealership model has distinct advantages through a variety of market conditions. To close, we remain focused on selling our industry-leading dealership capabilities to expand our market share and grow our product support business. Cost optimization is a high priority and includes assessing SG&A spending, rationalizing the size of our rental fleet, and other initiatives to streamline our business. I sincerely want to thank all our dedicated employees for their commitment to the success of our business. I also want to thank our customers, OEMs, and shareholders for your continued support and confidence in our company's strategy. Now I'll turn it over to Tony for a detailed analysis of our financial and operating performance.

Thanks, Ryan. Good evening, everyone. Thank you for your interest in Alta Equipment Group and our second quarter 2024 financial results. Before I begin, I want to thank my Alta colleagues for their commitment and hard work during the quarter as we transition the business from the difficult operating conditions of the winter season to our busy summer months. You lead with our guiding principles daily, providing our customers with best-in-class products and service capabilities, which ultimately keep their businesses in motion. Thank you. My remarks today will focus on four key areas. First, I'll be presenting our second quarter results as our performance ramped as expected from the seasonally impacted Q1 and continues to transition in a moderating macro environment. Second, I'll briefly recap the refinancing that occurred in Q2 and update investors on our current balance sheet position. Third, I'd like to present two new slides that we've added to our investor deck on our customer and market exposure. And lastly, I'll discuss the updated adjusted EBITDA guidance range for 2024, which was noted in the press release today. Before I get to my talking points, it should be noted that I will 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 11 to 13 in the earnings deck, second quarter performance. For the quarter, the company recorded revenue of $488.1 million, which is up $19.7 million versus Q2 of last year and up $46.5 million sequentially against Q1. Embedded in the $488.1 million of revenue for the quarter is a record amount of product support revenue as parts of service combined for $144.2 million in the quarter. Despite challenges on the new equipment sales line, we continue to realize organic growth in our parts and service departments, with that figure increasing at 6.2% 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 $53.7 million for the quarter, up $5.2 million from last quarter. Breaking down the segments briefly, Once again, we saw a strong performance from our material handling segment as equipment sales margins have held up relative to last, sales and margins have held up relative to last year. And we continue to push the pace on part service and rental lines year over year as those three line items were up a combined $4.3 million on an organic basis for the quarter. Notably, segment level income before tax improved in the second quarter, beating last year's quarter by $1.8 million. On to construction. Despite continued organic growth in parts service and rental revenue and increased gross margins and product support, we continue to lag our prior year numbers on new and used equipment sales as those sales were down $14.7 million versus last year on an organic basis and gross margins on new and used equipment sales while flat versus Q1 were down 270 basis points year over year. We specifically noted moderating or delayed demand from our small to mid-sized contractor customer base and the impact of an oversupplied competitive equipment market, which once again impacted new and used equipment performance in the quarter. Additionally, as it relates to the construction rental fleet, despite the increase in rental revenue versus last year, we were expecting better physical utilization in the quarter and will be focused on optimizing the fleet in the coming quarters as we position the balance sheet and the fleet for success heading into 2025. In the master distribution segment, as expected, while Q2 outperformed the disappointing Q1 by $3.9 million in revenue and $800,000 in gross margin, the segment continues to lag last year's pace as the interest rate environment and a stocked up dealer channel continues to impact throughput to end users in the environmental processing markets. All told, on a consolidated basis, we realized $50.3 million in adjusted EBITDA for the quarter, which is up $400,000 from the adjusted level of the second quarter of 2023. On a trailing 12 basis, adjusted pro forma EBITDA is now $188.8 million, which converted into $105.2 million of economic EBIT. As the gap between sales proceeds from rental fleet sales and the original cost of equipment widens and is impacting cash on cash returns, our rent to sell product categories in summary for the second quarter we are proud of the way the business bounced back from a difficult q1 and while we continue to see growth and stability in our product support business lines our new and used equipment sales have been impacted we think temporarily when compared to last year small to mid-sized customers in the spot equipment market are taking a wait-and-see approach to making additional capital investments in their businesses additionally The gut of new equipment supply on the market has led to, in our opinion, a lack of discipline in certain product categories and regions on construction equipment pricing, which has impacted our gross margins and volumes in the quarter. Important to note, and this gets to the diversity of our revenue streams, that while some customers take a wait-and-see approach to the next purchase, this dynamic will help to buoy our product support department as ours continue to accrue to accrue on the aging customer equipment. Lastly, it should be noted that we're able to manage new and used inventories appropriately for the quarter, as that line item on the balance sheet was reduced by $7.1 million versus Q1, indicative of our focus to stick to our equipment inventory turnover KPIs in the face of a transitioning demand backdrop and oversupplied OEMs. Now, for the second portion of my prepared remarks, I wanted to briefly comment on the refinance of our first and second lien credit facilities that occurred mid-second quarter. First, we were able to amend and extend our first lien ABL facility from $485 million to $520 million, and importantly, extend the facility's maturity from 2025 to 2029. Additionally, we were able to increase the size of our floor plan financing facility by $20 million and make other necessary enhancements to our first lien credit agreement given the growth in our business over the past few years. Second, we sold $500 million in 9% second lien senior secured notes maturing in 2029, proceeds of which were used to pay off the $315 million in notes that were effectively set to mature at 12-31-25 and to enhance liquidity on the balance sheet. Importantly, investors should note that the new notes, similar to the old, have no current restricted financial covenants on the business, allowing for max operating flexibility. Effectively, this refinance of the first and second lead positions on our balance sheet pushed out an $870 million maturity wall from 12-31-25 to mid-2029 and generated approximately $150 million of liquidity for the business. As it relates to credit metrics for the quarter, given the fees and OID associated with the refinance, and the updated reduced EBITDA guidance, our leverage ratio was 4.4 times 2024 forward EBITDA as of June 30, a level that we expect is temporary and manageable as we focus to pare down on underutilized inventory and reduce rent to self-lead categories in the second half. From a liquidity perspective, given the refinance, the business now has approximately $300 million in liquidity on the ABL revolver as of June 30. providing for plenty of flexibility to continue and execute in any macro environment that lies ahead. For the third portion of my prepared remarks, I'd like to point investors to slides 26 and 27 of our investor deck, which present an analytical estimate of the breakdown of Ulta's revenues by end market segment. A couple of notes on the slides. First, our end market diversification is something we have always been proud of and have spoken to in the past, and I'm now pleased to be able to provide investors with more specifics on that diversity. As you will see in the slides, the overall theme is that despite the names of our segments, material handling and construction, which monikers relate to the type of products sold in those verticals, our vast customer base and product offerings take us to an enviable position on the diversification of our end markets. As an example, on slide 26 in the material handling segment, investors will note that one, The largest end market for the segment is the defensive food and beverage category, which accounts for an estimated 15% of the segment's revenue. Two, beyond food and beverage, the next 70% of our material handling revenue comes from 16 distinct sick code categories that each have multiple subcategories and range from automotive manufacturing to medical supplies distribution, to municipalities and education, to chemical and paper manufacturing, to wholesale and retail distribution and logistics, to name a few. On the construction segment on slide 27, a couple of notes here. One, road builders and contracts tied to infrastructure spending represents a healthy cross-section of our customer base and should help provide stability for years to come, giving all the things that play in that arena. Two, our industrial roots in the Midwest are evident and reflected in the categories such as manufacturing, scrap, and demolition. Note that a combined 18% of the construction segment revenue is coming from what are effectively municipalities and utilities. And four, a combined 14% of our business is related to agriculture and forestry and aggregate mining, with the bulk of that exposure coming from our latest acquisition of Alt in Canada. In summary, we believe our end market diversification is an advantage for us, both from a risk mitigation and commercial perspective as our teams are constantly gaining insights, sharing ideas, and ultimately cross-selling our products and solutions offerings across a wide spectrum of end markets. Now, for the last portion of my prepared remarks, I want to present our insights on our updated EBITDA guidance for 2024. In terms of the number, we now expect to report $190 to $200 million of adjusted EBITDA for the full year 2024. A few observations. headwinds. As many industry participants have noted, deliveries of new construction equipment to customers in North America is down meaningfully in the first half of 2024, which runs counter to expectations of a flat to modest growth year in equipment sales when we entered 2024. As mentioned, we've seen this impact most acutely with our small and midsize contractor customers, and as the references to higher interest rates and uncertainty surrounding the election have gotten more pronounced as the year has gone on. The dip in the market has impacted the new and used equipment line in the construction segment and at Ecoverse more than our internal risk adjusted models expected, and we suspect pressure will continue to be evident in the second half of 24. Additionally, the oversupply of equipment in the construction markets has led to compressed gross margins in new equipment. As mentioned previously, we have observed what we termed to be undisciplined competitive pricing in certain product categories and regions. It follows that to compete and hold the valuable share that we've earned over the years, we've had to accept skinnier than historic margins on equipment deals. Again, this margin compression has outpaced our risk adjusted internal models, and we suspect the pressure to continue so long as the overhang in supply in the industry persists. Lastly, the two above factors have led to less than anticipated utilization of our rental fleet, and despite the seasonal ramp And the seasonal rampant Q2, while notable, wasn't as steep as we expected and out of line with the size fleet we were carrying. That said, given our rent-to-sell business model, specifically in the construction segment, we expect to quickly right-size the fleet in the coming quarters and to get back in line with our utilization targets and the demand for rental fleet in our markets. Now, some tailwinds as we head to the second half. First, our material handling segment has had a good first half of 2024 And we expect to have a strong second half and continue to sell as we continue to sell out of a solid backlog and take market share and key geographies and product classes. Additionally, we expect the peak logic business to ramp as interest rates come in. In fact, recent activity at peak supports this thesis. Second, as Ryan mentioned, we're expecting notable revenue from the mobility segment in the second half of 24 as the work associated with credentialing ourselves and developing relationship with commercial EV and charging OEMs in the over-the-road space starts to bear fruit. Lastly, given some of the challenges we faced on the revenue and gross margin lines in the first half of 24, we've taken proactive measures to manage down our overhead costs and are actively looking for ways to automate and drive costs out of the business, which will help the business in the second half of the year and over the long term. In closing, I would say that we remain bullish about our long-term prospects at Ulta and that we believe some of the current dynamics in the market today could prove to be transitory. In the meantime, Ryan and I and our 3,000 teammates look forward to the challenge in front of us in the second half of 24, which will be one focused on winning new customers and market share gains to help offset a potentially weaker macro environment, creating new revenue streams and emerging business lines like e-mobility and cost and fleet optimization to position the business for further success as we look forward to a strong 2025. Thanks for your time and attention, and I'll turn it back over to the operator for Q&A.

Absolutely. We will now begin the Q&A session. If you'd like to ask a question at this time, please dial star 1 on your telephone keypad. If for any reason you would like to remove that question, please dial star 2. We'll pause here briefly as questions are generated in the queue. The first question is from the line of Matt Somerville with DA Davidson. Your line is now open.

Hi there. You've got Kenny and Hazon from Matt Somerville today. Hey, I was wondering if we could maybe get a little bit more detail. Oh, hi. Good, thanks. I was wondering if we could get a little bit more detail on the reduction in the EBITDA guidance, maybe a bridge down to the new midpoint, maybe rank order some of the drivers that were included in the commentary.

Yeah, I mean, you could almost directly correlate the reduction to the commentary, the vast majority of the reduction, I should say, to the commentary on new and used equipment in the construction segment primarily. This is primarily a spot market that we participate in against large, you know, other OEMs like Caterpillar, John Deere, Komatsu, et cetera. the reduction in sales overall, just demand going down in that small to mid-sized contractor base, and then the margins related to that equipment is the primary driver. Beyond that, I think it would be, you know, two A and B would be eco versus performance. In the second quarter, we had a nice April, then we saw a pullback kind of In the back half of the quarter, if you will, and also just our rental fleet utilization and expecting to do a little bit more there. So, those, that's kind of how I would rank the, the, the items that cause the. The guidance to come down great.

Thanks.

Thank you. The next question is from the line of Steve Hansen with Raymond James. Your line is now open.

Oh, yeah, I got to say, I just wanted to dig back into the same question on the guide is a certain product categories. It sounds like small to medium sized contractors or so the customer. But is it shovels? Is it the truck? Where are you seeing the most pressure? Is it broad based? And is it is it across your entire territory or is it more focused on certain certain states?

Steve, I'll take that one. You know, I think Brian mentioned in his remarks, the Midwest states have been impacted just from a broad demand perspective versus, let's say, Florida. As you know, Florida is a massive equipment market. So that being down has been probably the biggest impact for us. I would just say Florida and Michigan have primarily the most impacted here from the demand side. In terms of the, you know, what categories impacted, I would say that from a margin perspective and a pricing perspective, it would be the big heavy stuff. So articulated dump trucks, 40 ton articulated dump trucks down in Florida where we're seeing, you know, some of this pricing discipline ERODE ON THOSE LARGER PRODUCT CATEGORIES. WE HAVE SEEN A SLIGHT PULLBACK IN YEAR OVER YEAR AND MAYBE MORE OF THE COMPACT LINES BUT THAT'S MUCH MORE MUTED THAN WHAT I WOULD SAY IS GOING ON IN THE HEAVY CATEGORIES. IF THAT HOPEFULLY THAT HELPS.

YEAH I KNOW THAT'S VERY HELPFUL AND ARE YOU SEEING THE OE'S RESPOND THEN FROM SORT OF A FINANCING AND INCENTIVE PROGRAM I PRESUME IS THAT PART OF IT AND JUST A RELATED POINT IS HOW DOES THE How did the inventory stack look for you guys as it stands today? How much do you need to lean down, if at all?

Yeah, I'll take that one, Steve, and maybe allow Ryan to talk about the OEs and their participation pricing-wise and how that's impactful. In terms of the fleet size, we're very close to our turns. As I mentioned, on new and used equipment, we were able to reduce in the quarter, and I think that's That's a really strong kind of statement for the team here is we really try to stick to our two turns on new inventory, used inventory, et cetera. So we're actually down on new and used. The rental fleet is where I would say we've got the most opportunity. I think that's probably $30 to $50 million where we'd like to maybe pare back on a $600 million fleet here in the next several quarters, let's say. And there's probably a little bit more than that in the used department. We've got some aged fleet. And if you think about, you know, turning out of the rental fleet, I think the number was something like $60 million year to date that we were able to kind of reduce. So the key is just matching supply and demand, being mindful of what we're ordering and taking from the OEs. And we'll snap right back into where we want to be with the fleet and on the balance sheet in the next several quarters, so long as, you know, demand stays buoyed, or at least to the levels that it is. But, Ryan, do you want to talk about pricing?

Sure. So the relationship between the dealer and the OEMs as it relates to pricing has never been more, you know, important in times like this. You've got an overstocked dealer channel. And every deal is competitive, so it's an active dialogue with the various manufacturers we represent. And it plays into one of the comments Tony made about some of the lack of discipline that we're seeing in the market. We see some opportunistic and undisciplined pricing happening where we might see some erratic swings in the near term on share, as OEMs do some kind of crazy things to try to get their product into the marketplace.

That's helpful call, I think. Appreciate it.

Thank you. The next question is from the line of Steven Ramsey with Thompson Research Group. Your line is now open.

Hi, good evening. I wanted to think about construction demand moderating yet in the construction equipment segment after market support revenue grew. Looks like about 15% well above the total co-result. Maybe a couple things there. First, what was the organic change of construction equipment parts and services? And then secondly, if the market stays weak in the second half, the installed base age is a bit you know maybe some offset with lower utilization of what's out there but do you expect the parking service business to be exceptionally strong with that kind of backdrop steve i think i think we saw some of that i mean our product support business in the face of you know just to give you some numbers the construction business um

and this is in the MD&A of our 10Q, the construction segment organically was down $14.7 million or 10% in the new and used equipment line. Now we were able to offset some of that by having an additional or an incremental $4 million sold out of the rental fleet. So let's just call it $10 million down year over year on an organic basis, which would be something in the high single digits in terms of equipment sales. But I think what we will ultimately see as the fleet ages, similar to what we saw when there was a big replenishment in 2023. Prior to that, we benefited from supply chain issues, benefited from a product support perspective. Now that the replenishment happened in a big way last year, there's a lot of new equipment out there that in the early stages of that equipment being a field population, they're They haven't broke down yet. They're not kind of in their prime product support days. But you're right overall that it's utilization, which, by the way, we've got a slide in our presentation that suggests utilization of equipment or customer equipment by virtue of the service calls. There's even some industry data out there that suggests that utilization is pretty much flat to maybe down low single digits in terms of customer equipment. That's all good for us, and we'll keep our – Are parts and service operations busy? So I may have missed a piece of your question, so happy to circle back there, Steve, but go ahead.

No, that was helpful commentary. Maybe an add-on question to that topic. With good utilization in the parts and service department for the construction equipment segments, How does that work pricing-wise? Is this a favorable pricing environment for the parts and service revenue line?

Steve, what I would say there is it always is. And that gets right back to the labor situation that is more structural than anything in the country in terms of, you know, just the lack of skilled labor. So, you know, we've been able to push pricing along year over year, some of the gains that you see relative to just activity or related to our ability to push along pricing increases to our customers. So I wouldn't necessarily tie it to utilization in terms of the price of the service. That's more directly correlated with kind of the dearth of skilled labor that's out there.

Okay. That's helpful. And then maybe to understand the construction customer sentiment a little bit better, Less willingness, obviously, to purchase new and used equipment. Are they letting fleet age in anticipation of better demand, or can you tell if they are selling some of that fleet? And maybe tying it to the rental segment, what is customer willingness to purchase your lightly used rental fleet in this kind of environment?

I think it's still strong. We sold $36.3 million out of our fleet, which is up versus last year, and probably, I don't have it in front of me, but I think up versus Q1. And so they're still buying the lightly used fleet. We're still getting good margins on the lightly used fleet. And that's just part of our business model from a field population perspective. I think what I would say sentiment-wise, Steve, is The customers appear to be busy on projects. They have backlog. And we keep getting the same refrain. And as I mentioned, it's like that refrain has gotten more pronounced as we've gone through the back half of the second quarter, specifically where customers are just saying, look, I'm going to grind it out here until I see lower interest rates. I'm going to keep maybe my older piece of equipment. until after the election when I know more about, you know, future tax ramifications of buying capital equipment. I think it's those two primary factors that are driving customer sentiment in the non-res, if you will, the smaller end of non-res space.

Great. That's all an alpha color. Appreciate it.

Thank you. The next question is from the line of Alex Regal with B. Riley. Your line is now open.

Thank you, gentlemen. A couple quick questions here. We spent a good amount of time here talking about the small and medium-sized contractors that are soft right now, but, you know, kind of in the aggregate, I think that's probably a smaller percentage of your total company revenue. Maybe we can talk a little bit about some of the stronger end markets that you're seeing. And, Tony, thank you for these great slides on 27 and 28. But maybe you can run through a couple of those end markets and talk to you some of the stronger ones.

Sure. Yeah. I think, Alex, just to maybe circle to the buy segment, you know, food and beverage distribution is you know, just consistent, I would say, consistently strong. And so, you know, that seems to be, you know, just a stalwart, if you will. Warehousing and logistics is moving just fine. There's a fair amount of medical supplies. Again, that we really haven't seen, you know, any sort of pullback or heard of, you know, facilities shutting down. I would say automotive, Um, again, it is a little bit maybe tepid, um, but, but also, you know, where, where maybe there's not enough, uh, as many cars coming off the line, but recall that for us, like, as long as, uh, facilities are still open, we sort of embed into the, the facility spend of, of our customers on the, on the material handling side. And so, um, we really haven't seen anything of no in the material handling side that I would say. has pulled back and I would say it's all pretty stable and steady. On the construction equipment side, I think aggregate and mining up in Canada, the alt deal, I would point to that as strong. I still think some of the landscaping and that market and compact equipment is strong. I think it's the weaknesses on some of the site development for mid-sized maybe commercial projects. The big road customers that we have without naming names are all very busy, maybe hesitant to buy, but all very busy and strong. So all the infrastructure spend, the customers are busy and strong, but that doesn't mean that they're going to pull the trigger on equipment. That could be a variety of other factors, pricing of the equipment. interest rate, prognostications, election, et cetera. So, you know, it's really still difficult other than that mid-size sort of site development contractor. Everybody else is busy. They're just, they're not buying equipment in the same level as they've done historically.

That's helpful. And then as you think about right-sizing your rental fleet, How might you redeploy that capital?

I think what we would do, Alex, is throw it right at the revolving debt. And that's the first priority here. We like to think that our rental fleet is sort of directly correlated with the debt load. And it's, in our minds, a little bit temporary, right? We're turning out of that rental fleet in a significant way in our construction business. long way to answer your question, but we would want to put that right against the desk.

Thank you very much.

Thank you. The next question is from the line of Ted Jackson with Northland Securities. Your line is now open.

Thank you very much. Good evening, guys.

Hey, Ted.

My first question is actually around material handling. Hyster Yale reported yesterday and had their call today. They did actually offer a more subdued outlook with regards to the truck market for the second half of the year, talking about that things were slowing down faster than they expected. And then as they got into that discussion, made some commentary with regards to 2025, that for them to be able to, you know, kind of, you know, I'd call it meet their sort of longer term goals that they would need to see themselves take more market share than they currently would envision. So taking all that and applying it to, you know, the world as it relates to you, When you think about the material handling business in, you know, High Street, Yale, I mean, kind of like, you know, I mean, I know it's probably the most important part of that business, but maybe can you scale it within regards to the aggregate of your material handling business and then kind of talk a bit about, you know, what you're seeing with regards to a pipeline of activity as we, as you look into 2025? That's my first question.

And I would just, I can scale it. I know Ryan may have some comments on this one, but, um, you know, the Heister Yale, it's a significant portion of the material handling business that at last check, it's, you know, 60, 70 cents on the dollar. Um, if you, if you, um, kind of go backwards and think about that X peak logics, it's a significant relationship. It's a relationship that we're, we're very proud of. And, and, and, uh, So anyway, that's just scaling it, right? Do you want to talk about kind of the market and taking share?

Sure. So I guess the first thing is that the volatility that you're seeing in terms of industry bookings is not felt as acutely on the ground as a dealer. The field population that's out there being used is more static than that. Yeah, that's what we tried to dimension a little bit on the comments is that we're seeing a normalization and we're seeing the market come back to a more reasonable level. But for us, the fleets that are out there are the fleets that are coming up for renewal and that are a lot of them long-term legacy accounts that just are kind of, they're stable and they renew. And fleets are on replenishment cycles from three to five years, depending on usage and Um, on the ground as a dealer, you don't see the same volatility that you do as a manufacturer with, you know, the, the big, uh, you know, the, the, the flows in terms of the big orders coming in. So that's one way, I guess I would dimension it. Um, you know, it's, it's our flagship OEM on the, on the material handling side that the other revenue that goes through the dealership model or allied lines, you know, it's, we don't have any other brand of kind of heart of the line, uh, forklift trucks. And, um, we do think that we, you know, we've had a couple of quarters where we've mentioned that we think we're well positioned to take share, uh, in this choppy environment. We've got some product features that we're, we're excited about. And then just the shift overall of, of, uh, the growth of the narrow aisle and the electric side of the forklift, uh, industry, um, Hysteria is well positioned for that. And, uh, uh, that'll remain a focus. And, um, we don't, you know, we, we, We look at the business on the stability of that product support revenue and the headcount of our mechanics. And we think that we'll continue to see organic growth in that business kind of across all regions.

Ted, I would just maybe put a sub-bullet to that and maybe go a step further. We have taken share this year in a down bookings market. And this is a good thing because, and it's directly correlated to some of the product innovations that Hyster Yale has put out there over the last couple of years, specifically in the wear, you know, applicable in the warehouse and logistics, sort of narrow aisle products, if you will, where these are very helpful when we're trying to, you know, take conquest accounts in Chicago and Toronto. We still have those two markets specifically, still represent two of our biggest organic growth opportunities. And so we're actually excited about how share has moved for our business. And all those bookings that we have a greater share of will ship next year, probably, given backlogs. And so to me, some of the volatility, as Ryan said, in the bookings number, especially given the snaps back and forth after COVID. That bookings number can be big. And as Ryan said, in the end for us, it's a little bit more muted because of the field population and because we're kind of on the back end of all of the production.

Okay. My next question ties into an earlier question with regards to the guidance. And you'd made a comment with regards to ECOVR saying that, you know, it started the second quarter strong in April and then kind of faded out. You did actually show a nice pop in revenue there nonetheless, you know, I mean, 16 million across the whole segment. When you look at, you know, given the fact that the business faded as you went through the second quarter and you think about the back half of the year, Do you think you'll be able to grow that business year over year in the second half of 24? Or has the softness that you saw as you exited the second quarter carried forward and lead you to believe that you might see that business decline on an annualized basis in the second half? I have one question after that.

Ted, I think, you know, given the performance in Q2, I think it'll be very difficult for Ecoverse to kind of repeat what they did in 23. Keep in mind Ecoverse is selling to both yellow iron and then aggregate and mining sort of dealers, some of which are, you know, handle competitive lines relative to Ulta on the earth moving side of the house. And they're stocked up. And so end market's busy in terms of mulching material processors. Somebody that's cultivating organic material. These people are busy. They're just not committing to assets. I would say, though, that There could be, and we saw this in 2016, a really strong November and December on capital equipment as the election sort of went past us. And so that absolutely I could see maybe unlock some things for Ecoverse, but not something that we're expecting to happen.

Okay. And then my last question is really on the finance side of the few, Tony, and that's thinking about working capital, you know, and actually there's an accounting question here as well. But, you know, given the fact that, you know, you're thinking, you're talking about bringing down, you know, the rental fleet and, you know, I assume with a lack of better term, a lower end market demand outlook that we would see inventories go down as well. Is it fair to assume that we should see some solid free cash flow generation in the back half of this year. And then how would we think about that? Usually the first half of the year is a little more challenging for you on a free cash flow basis. But how would we think about that as you go through the first part of 25? And then my kind of accounting question is, when I look at your balance sheet, the inventory from the beginning of the year is down 16, 17 million. But on the cash flow statement, it's like $100 million plus use of cash. And what am I missing with the disconnect between those two line items from the cash flow statement and the balance sheet? That's kind of a side note question. And that's it for me.

I'll take those in reverse, Ted. If you've got to account for the non-cash transfers at the bottom of the cash flow statement, they kind of tie back to the inventory. lines it's just the way that uh kind of gap accounting works um so you're right uh inventories are down um but we we account for the the transfers that go into the rental fleet as a reduction to inventory um net uh net if you will on the on the uh sheet versus the cash flow statement um your first question on uh working capital yeah the the first half is always more difficult um in terms of working capital investment. If I look at last year, our working capital investment for the first half of the year was something like $43 million in the first half of the year, net working capital. And we ended the year something like $15 million, $16 million in slide 14 of our investor presentation. So yeah, we invested 50 million and we ended through the first half of 23 end of the year at $16 million of investment. We're kind of on the same pace, meaning we should be able to generate some gains here from a working capital perspective over the back half of the year. And Ted had mentioned that that's his last question, so turn it over to the operator to close the call.

Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.