Alta Equipment Group Inc.

Good afternoon and thank you for attending the ALTA Equipment Group third quarter 2024 earnings conference call. My name is Elliot and I'll be your moderator for today's call. I'll now turn the call over to Jason Danmire, Director of SEC Reporting and Technical Accounting with ALTA Equipment Group.

Thank you Elliot. Good afternoon everyone and thank you for joining us today. A press release detailing ALTA's third 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 third 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 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 conditions and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to 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 .altaequipment.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 third quarter results, then provide a current assessment of the business conditions in 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. But before we dive in, I want to take a moment to recognize and extend our thoughts to our Florida team members who have been impacted by hurricanes Helene and Milton. We know this has been a challenging time and your resilience and dedication are inspiring. We're committed to standing by you every step of the way as you navigate the recovery process. Now to my prepared remarks. Like many other industrial companies, our third quarter results continue to be impacted by the ongoing uncertainty in our end-user markets, particularly regarding customers' commitment to capital investments and purchasing new equipment. This dynamic has been most impactful in our construction equipment segment, where new and used equipment revenues decreased by 44.5 million or .5% on an organic basis. Many customers put capital investments on hold in the third quarter while they awaited election outcomes and more clarity on interest rates. However, post-election, sentiment has already improved and we anticipate that customers will deploy capital more broadly in the fourth quarter and into 2025. During the third quarter, we also saw positive impacts from our business optimization initiatives as we reduced general and administrative expenses when compared to earlier in the year. Despite a difficult revenue quarter, we are proud of the progress made with our balance sheet, reducing rental fleet and working capital, which allowed us to de-leverage by nearly 40 million in the quarter. While the equipment sales market has been disappointing in 2024, our dealership model with diverse revenue streams has shielded our business from market cyclicality. Our -to-sell approach to the equipment rental market also enabled us to react quickly, selling off lightly used fleet and right-sizing our balance sheet efficiently. I will now talk about segment performance. In our construction equipment segment, revenues declined as demand softened, leading to a drop in new and used equipment sales. Rental revenue also decreased in this segment based on lower than expected physical utilization of equipment. Product support revenues held up and was boosted by additional technician headcount and higher market rates for labor. In the material handling segment, revenue saw a modest increase largely due to progress on a substantial sales backlog. Product support continued to grow with service revenues rising, which helped mitigate pressures from a highly competitive market. Despite these competitive pressures, we continued to capture market share thanks in parts to the market positioning of our product portfolio and our lead-time advantage in certain product models. Collectively from all segments, our high-margin product support business continues to perform strongly with revenue increasing .8% to $140.2 million. This demonstrates the stability of our dealership model that our dealership model provides, ensuring that our business remains resilient even amidst fluctuations in the equipment market. Turning to e-mobility, we have an exciting update regarding process progress in this segment, specifically our efforts to commercialize hydrogen fuel cell electric vehicles. We are excited to share that ALTA has delivered Nikola fuel cell EV trucks to DHL, marking a significant advancement in our electrification strategy. ALTA is providing these vehicles to DHL on a turnkey, full-service lease. The first fuel cell electric vehicles, or FCEVs, have been deployed in Illinois, complementing the battery electric vehicles we already have operating in the Chicagoland area. Our product will be serviced out of our Calumet City, Illinois facility, ensuring top-notch maintenance and uptime. Turning to future outlook. Looking ahead to 2025, we expect a normalization in the oversupply of new equipment in the first half of the year and construction equipment spending to be supported by easing interest rates and more favorable lending conditions. Infrastructure-related project pipelines are strong and state DOT budgets are expected to remain elevated. The recent election outcome may further drive near-term demand for construction equipment fueled by anticipated infrastructure investments and favorable policies. Additionally, the administration's proposed tax cuts, regulatory reductions, and incentives for domestic manufacturing could prompt businesses to expand facilities. The opportunities in our material handling business remain favorable. We are confident that our strong relationship with Hyster Yale, unmatched product support capabilities, and resilient, diversified end markets will enable us to capture further market share in 2025. We are particularly focused on increasing our share of the electrified product classes where we maintain a competitive advantage in lead times. Additionally, we expect our e-mobility business to gain further traction as customers begin the shift to electrify their vehicle fleets. We currently have a sales backlog of approximately $20 million, with most of that expected to convert in the next six months. Now, I'd like to elaborate on our strategic focus. At Alta Equipment Group, our success in sustainability are powered by a purpose-driven culture that aligns with our strategic vision. Our focus is centered on three key areas. One, optimizing our business. Two, delighting our customers. And three, developing and retaining top talent. Our guiding principles, invest in the best, passion for excellence, mutual respect, one team, and customers for life continue to shape our leadership and operations. They are the foundation of our purpose-driven culture and the key to achieving sustainable growth and shareholder value. To further support our shareholders, and in line with our positive outlook for 2025, our Board of Directors has expanded our Share Buy Back program to $20 million, which we will deploy if opportunistic dislocations between the company's long-term value and share price arise. In conclusion, while 2024 has presented its challenges, the dedication of our nearly 3,000 employees to our core principles has been unwavering. I'm incredibly proud of their commitment, which has been instrumental in navigating this tough market. As we look to 2025, we remain focused on executing our strategy, fostering a culture of trust and excellence, and positioning Alta Equipment Group for long-term success. Now, I'll turn it over to Tony for a detailed analysis of our financial and operating performance.

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our third quarter of 2024 financial results. Before I begin, I want to tell you about the impact of Hurricane Celine and Milton, which affected our Alta family and valued customers in Florida, as well as Hyster Yale and our sister dealers in North Carolina. Your resilience and commitment to one another, your communities, and to our business is inspiring, and our thoughts and full support continue to be with all of you through the rebuilding process. My remarks today will focus on three areas. First, I'll be presenting our third quarter results as our performance lagged expectations as we saw the equipment sales and rental environment deteriorate versus Q2. Second, I'll reference key balance sheet movements in the quarter, which counterbalance the challenge quarter on the P&L and is indicative of our business model's ability to efficiently flex in a difficult market. As part of that commentary, I'll update investors on our efforts to optimize the business from a fleet and cost perspective as we head towards year end. Lastly, I'll update our adjusted EBITDA guidance range for 2024, and in doing so, present a pro forma benchmark financial profile for the business and discuss what needs to happen relative to our 2024 performance for us to achieve this target profile. 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 NR10Q, which is available on our investor relations website at ALTG.com. With that said, for the first portion of my prepared remarks, and it's presented in slides 11 to 16 on the earnings deck, third quarter performance. For the quarter, the company recorded revenue of $448.8 million, which is down $17.4 million versus Q3 of last year, and down $39.3 million sequentially against Q2, with the majority of that miss coming from the new and used equipment sales line. Embedded in the $448.8 million of revenue for the quarter is product support revenue of $140.2 million. Despite challenges on the new equipment sales line, importantly, we continue to realize organic growth in our high margin parts of service departments, with that figure increasing 4% year over year. To close out the revenue lines, as it relates to our rental business, we saw rental revenues of $53.7 million for the quarter, which was effectively flat versus last year, and flat sequentially versus Q2. Breaking down the segments, our material handling segment was effectively flat year over year at approximately $170 million of revenue for the quarter, as we navigated depressed equipment sales market and continue to work through notable equipment sales backlog. Importantly, material handling equipment sales margins have held up relatively well versus last year, despite the increase of lift truck supply in the market. Additionally, product support revenues increased .5% year over year, while rental revenue held relatively flat. Notably, segment level income from operations for the third quarter came in at $7.1 million. On to the construction segment. We achieved $262.3 million in revenue for the quarter, representing a decrease of $41.4 million organically when compared to last year. Despite continued organic growth in parts of service and increasing gross margins and product We continued to lag our prior numbers and expectations on equipment sales, as those sales were down $40.6 million versus last year on an organic basis, and down $31.8 million sequentially versus Q2 2024. We continue to see our small to mid-size contractor customer base reluctant to spend on new equipment in the face of the election and interest rate macro backdrop. With the most acute impact affecting our September results. Lastly, as it relates to the construction rental fleet, rental revenues were effectively flat versus last year and sequentially versus Q2. Notably, the history of our construction business suggests that Q3 rental revenue typically outpaces Q2, a phenomenon that we did not see play itself out this past quarter. In the master distribution segment, we achieved total revenues of $18.2 million, which came in slightly higher than last year. In gross margin outperformed last year's number by $800,000. While the segment continues to lag last year's pace year to date, the performance in the third quarter suggests that we are back to par year over year and look forward to getting back on the growth track in this segment in 2025. All told, on a consolidated basis, we realized $43.2 million of adjusted EBITDA for the quarter, which is down $7.8 million from the adjusted level of third quarter 2023. On a trailing 12-month basis, adjusted pro forma EBITDA is now $178 million, which converts into $91.7 million of pro forma economic EBIT, or the company's version of steady state unlevered free cash flow. In summary, new and used equipment sales and physical utilization in our rental fleet, primarily concentrated in our construction segment, underperformed sequentially versus Q2 and relative to our internal expectations for the quarter. As a mitigating factor, our product support business once again proved its resilience and acted as a protective element against a volatile equipment sales line and continued to grow organically in the quarter. Now for the second portion of my prepared remarks. Despite a tough quarter for the P&L and what is difficult to predict spot market for construction equipment, we view our cash flow and balance sheet performance as a net positive for the quarter. As depicted on slide 19, and in line with plans that we've discussed previously, we were able to react to a depressed demand environment by reducing rental fleet by $18.2 million and optimize working capital during the quarter, both of which led to us paying down funded debt by $39 million in the quarter. Additionally, after two quarters of SG&A expenses at approximately $115 million per quarter, we saw that number come in at approximately $111 million in Q3, indicative of management's focus on our optimization efforts centered on the right products, right people, and right customers. Lastly, and also as depicted on slide 19, I wanted to note for investors that we have been responsible with our capital deployment in 2024 given business conditions. As noted in previous calls, and in line with our flexible business model, after spending $75.9 million of growth capital on the rental fleet in 2023, we have not grown the fleet in 2024, effectively preserving cash flows to pay down debt and not overly speculate on long-term rental demand for heavy equipment. With all that said, from a leverage ratio perspective, despite a challenge numerator for the quarter in terms of adjusted EBITDA, our progress on the denominator, funded debt, allowed us to keep our leverage ratio intact as that metric came in at 4.6 times trailing 12 months adjusted EBITDA as of 9.30. Investors should keep in mind that as quickly as our leverage ratio has increased in 2024, it can reverse just as quickly in the future. Additionally, investors should note that our debt is covered by tangible assets, mainly in the money rental fleet and parts inventory. While our EBITDA can have been flow quarter to quarter, asset coverage on the balance sheet is less volatile, and to that end, management estimates that at the end of Q3, the company had an estimated billion dollars of tangible assets at fair market value to cover its $820 million in net debt. Lastly, on the balance sheet for the quarter, we ended the quarter with an extremely comfortable $320 million of liquidity, which provides for maximum flexibility to operate the business in any macro environment that may be out of head of us. Now, for the last portion of my prepared remarks, I'll discuss our final update to guidance for fiscal year 2024 and provide a high-level target financial profile for the business on what we believe is an achievable state. In terms of the guide, we now expect to report between $170 million to $175 million of adjusted EBITDA for the full year 2024. A few observations here. First, with Q3 coming in below expectations, a reduction to the full year guide was justified as we have achieved $127.6 million in adjusted EBITDA through the first three quarters of 2024. Effectively, given the new annual guide range, on the low end, we are expecting a repeat of Q3's $43.2 million of adjusted EBITDA, and on the high end, something closer to $50 million in Q4. As has been the case the entire year, the variation in that number lies primarily on the -to-predict equipment sales line in our construction segment. While the early signs of Q4 are encouraging from an equipment sales perspective, any perceived pickup in equipment sales versus Q3 will likely be offset by our normal seasonal pullback in rental revenue. In summary, given these competing factors, we are effectively guiding to $43 to $48 million of adjusted EBITDA in Q4, which in turn yields $170 to $175 million of adjusted EBITDA for the fiscal year 2024. With that guidance in mind and in referencing slide 21, I want to provide investors and analysts with a pro forma view of what we believe is the target financial profile for the business at $2 billion in revenue, just to reset context given the underperformance of 2024. To be clear, we haven't concluded our budgeting process for 2025, so this slide in common area should not be considered as guidance, but as a north star for what we believe the financial picture of the business looks like in an optimized state at $2 billion in revenue. You will note that slide 21 suggests, one, EBITDA of $200 million, a level that we have achieved on a pro forma basis historically. Two, a 67% conversion rate on economic EBIT, which assumes a leaner fleet and a normalized used equipment pricing environment. The 67% conversion rate is at a level that has been achieved by the business historically. Three, cash interest of $65 million, which assumes no further deleveraging and interest rates holding at current levels. And lastly, investors should note at the bottom of the slide, which leaves $65 million of return to the common equity holder. Again, this isn't meant to be guidance for 2025, but when we think about what we've built over the past five years and what we're striving for at a high level, this is the target, which has gotten away from us in 2024. Now, the question is, what are the factors that will again allow us to achieve this level of performance? Broadly, and as we look back on 2024, it's three major things. One, our estimates suggest that the 2024 equipment markets, which impacted both volume and gross margins on sales, cost the business approximately $20 million to the extent we can recover any portion of this volume in GP on equipment sales in 2025, it would be a tailwind to our $172.5 million 2024 EBITDA and get us closer to the targeted profile. Two, our product support departments, while continuing to modestly grow on an organic basis, have underperformed internal forecasts and are on pace to achieve single-digit growth in 2024. Annually and historically, our target has been to grow product support revenues by at least 10%. That said, even if one were to apply an inflationary figure on our approximately $560 million of annual product support revenue at a 50% plus gross margin, the math suggests another $10 million of EBITDA tailwind, $172.5 million 2024 EBITDA number, and again gets us closer to the target profile. Lastly, we have and will continue to be focused on the FD&A line. And as we saw progress of this in Q3, as we have saw progress of this in Q3, as we've noted here today, again, continual focus on this line will only act as another tailwind to bridge the gap between our performance in 2024 and the targeted profile we are spriding Which brings me to 2025. As a foundational comment, our business has not met our expectations in 2024 and specifically we, as well as many others in and around our industry, overestimated customer demand for equipment. And it's now clear, underestimated the impact of the uncertainty around the U.S. election and interest rates would have on customer sentiment. That said, the election is over and interest rates are on the downtrend. As Ryan mentioned, sentiment already appears to have shifted in the past week and there are long-term tailwinds in each of our business segments that suggest a reversion back to our historic growth path could be in order in 2025. In that outcome, history will suggest that 2024 was a pause for our customers and not a hard stop And if experience is our guide, things can turn as quickly for us in 2025 as they moved against us in 2024. In closing, I would say that we remain bullish about our long-term prospects at ALTA and are confident in our enduring business model. We look forward to operating in a more clear environment in 2025. In the meantime, Ryan and I wish all of our 3,000 teammates and all of you listening tonight a safe, healthy and happy holiday season. Thank you for your time and attention and I'll now turn it back over to the operator for Q&A.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from Matt Somerville with DA Davidson. Your line is open. Please go ahead.

Hey there. You've got Canyon Hayes on for Matt Somerville today. Thanks for taking the questions. So I kind of wanted to start initially in the equipment sales. If we could maybe get a little bit more color on product lines, geographies, sort of where the weakness is stemming from, if it's broad based and maybe how that has changed since we talked the last three months ago.

Thanks. Hey Canyon. It's Tony. I don't know that much has changed relative to geography in terms of impact. You know, if we look at our construction business, Michigan and Florida are the two larger geographies just relative to the others. And I would just say that the downturn or the deterioration in equipment sales was more acute than of course we expected and what trend was as we saw in Q2. But it would be both of those regions that were, that drove up the majority of the year over year variance. Okay. Thank you. And it would be, I would say too, it would be more the heavy equipment lines versus maybe some of the smaller compact product categories just to answer your question.

Yeah. Great. Appreciate it. When we think about ALTA returning back to kind of targeted leverage ranges, should we think about an increase in the denominator or EBITDA or would there be an increase in the amount of cash that could be pulled from the sleep? I mean, I think there could be kind of a larger decrease in the amount of actual sort of down the balance sheet. And kind of to that question, how much more cash do you think could be pulled from the sleep? And is there an ability to do M&A that's kind of accretive to the leverage profile of these kind of market valuations?

Thanks. I think we're taking those in reverse. I do think that we can do a creative M&A getting like we've done historically here this time last year when we did the ALT deal. I think we can do a creative M&A even at these current kind of trading prices for ALTA. Whether not they're leverage accretive or not, I guess I would answer the same way. Given where our leverage profile is, seller's sort of willingness maybe to take some equity, I think we can be accretive to do M&A that way. So I don't think anything changes there. Your comment or your question on numerator, denominator, I think what we said that we would be able to do or be focused on at the end of Q2 was reducing the fleet and then use the equipment somewhere between 30 and 50 million dollars. We've got to 18 in the quarter here. I would expect this to stay on pace there. We are actively continue to sort of pare back the fleet to try to hit our numerator and denominator metrics when it comes to financial utilization. Where we want to be trading in the mid 30s on that metric. So we'll be focused on the denominator. Certainly at some point Canyon, as we talked about in kind of our target financial profile, we need the numerator to participate here in getting leverage kind of back in line. So it's a combination of both. And I wouldn't pick one or the other, but we're focused on both.

Thank

you. We now turn to Stephen Ramsey with Thompson Research Group. Your line is open. Please go ahead.

Good evening. I wanted to get some perspective from you around the context of the pro forma financial profile. Given really 12 month revenue, 1.9 billion with an EBITDA margin just above 9%. And this profile of 2 billion at an implied 10% EBITDA margin. So I guess maybe the first question looking back in time, 2022 and 2023 pro forma lower revenue yet EBITDA margin exceeded 10% with the targeted pro forma profile. The margin similar to slightly lower yet the rental fleet maybe a bit lower yet also a higher level of economic EBIT. So I'm curious the puts and takes of how you see the business as different on that pro forma profile versus looking back at the couple years leading up to the pause year of 2024.

I think Steve, where I would go is just more capital efficient business relative to those prior years. So if you think about rental revenue, just rent to rent revenue in the EBITDA margins, our margins are no different in that department than some of the larger rental houses, right? Which trade 50% or higher, let's say, on an EBITDA margin basis. But it's capital intense, right? The rental business. And so we've never really gotten too caught up in our EBITDA margin more focused on capital efficiency. So despite it maybe being higher historically, I think what we're trying to paint a picture of, we want to be more dealership than rental house. We want to be more capital efficient than we've been historically. So it's a different 10% EBITDA wise and that more of it's pushing to the bottom line versus maybe getting reinvested into the business. And so that would be the difference. It's not meant to be taken as, hey, we're going to be less profitable. It's actually the opposite where we want to be more dealership, less rental house, and be more capital efficient.

Okay. That's great. That's great, Coler. That's helpful. And then on the GNA reduction of $4 million in the third quarter versus the first half, I wanted to clarify, is that expected to stick in Q4 and in 2025? Or basically, is it fair to annualize that at a $15 or $16 million range? Or how should we think about that?

Yeah, clearly, it's SG&A, obviously, which has the selling element to it. When I compare quarters, our Q3 here on the top line was similar to Q1. And we're down, as you mentioned, if you compare Q1 to Q3, $4 million bucks on that line item. I think, Steve, we have implemented a few things to get rid of some fixed costs here, where the majority of that will stick. That said, and the other thing to point out, we did note an uptick here in October, and we feel like we're optimistic here about Q4. And so commissions to the sales team are likely up. So it's a long way, maybe, of saying we expect the majority of that to stick, but maybe not all of it as we had to Q4 here.

Okay.

Okay.

That's helpful, and I'll stop there.

Thanks. Our next question comes from Ted Jackson with Northland Securities. Your line is open. Please go ahead.

Thanks very much. So my first question with you is going to shift over to the material handling world. If you listen to the Heister Yale call, then they talk about the demand for, I guess you call bookings for lift trucks in 2025. And the forecast is for them to actually be down through 25 with really a soft, call it first half of 25, and then a pickup in the second half of the year. And I granted, you know, they're an equipment OEM, you're a distributor, but can you sort of, you know, I don't know, cascade that and explain maybe why that might not be the same forecast for ALTA as it is for Heister Yale?

Yeah. Hey, Ted, I'll take maybe the front end of that. This is Tony, and then what Brian weigh in. There's obviously this lag, right, between what they're kind of forecasting for 25 and then our view. The other element of it is just the ability to take share on the ground as well as allied products, right? Heister Yale is obviously a major partner of ours, but it's not the entirety of the material handling business. What we read the comments, what I would say is we have a good six to eight months of backlog that give us some bullishness to say we can at least stay flat relative to the 23 performance, let's say through the first half of the year. And then I think what Heister Yale mentioned is that they expect bookings to kind of start to come back mid-year. And at that point, I think lead times will be more shorter than they are now. So, you know, when I read their call, they kind of were expecting a flat 2025 in North America. I think they've got some other challenges throughout the globe. But we're not forecasting anything probably other than a flat year in equipment sales for Heister Yale for 25.

Okay. Merely

because of our backlog.

Yeah. I mean, well, I mean, in fairness to them, they feel that the backlog should be able to allow them to sort of bridge over to where orders pick up. But nonetheless, you know, it's like, yeah, I mean, you look at the end market and, you know, it's clearly softened here now and it's like most heavy equipment markets. You know, everyone's kind of side on the side lines in the comment.

The comment that stuck with me, Ted, is that they're the bookings they're taking right now are production slot taking up production slots toward the end of 25. And obviously the delivery to the actual customers would push beyond that. Right for us. So now you're talking about potentially getting into 26. This is Ryan, Tony mentioned

it, but I think it's also important to highlight the that were North America centric and they commented that they see a stable market in North America for next year offsetting, you know, tougher areas.

Okay. Shifting over to is really more the construction side. You know, hurricanes, if I recall, typically have a bit of a demand push for Alta. When you look at what's happening for you with regards to fourth quarter, how much of that do you think might be driven by the impact from the hurricanes within, you know, the Southeast?

Ted, what we end up, first of all, the human elements that the human element, you know, that which is first and foremost, and we both made comments about just kind of how difficult that that's been. What ends up happening and what we've seen here recently in our Florida business is an uptake of compact equipment. Kind of almost, almost, you know, immediately as people are, you know, usually using small wheel loaders and skid steers to kind of clean up. We'll usually see an impact in rental, maybe of those types of units. I would say in the broad scheme of things, it adds maybe some elements of demand over the long run, but immaterial probably overall. When we think about that business, but we did see compact equipment pick up almost immediately, but nothing material that, you know, we should be noting, I guess.

Okay. And then my third and final question, just shifting over to SG&A to make sure I understood the answer from the previous questioner. On SG&A, when I think about four quarter, you have brought it all down, but what you're saying is, you know, you probably, you're not, like, it's not like you're going back to whatever it was, 114, 115 million, but it's fair to expect to see some sequential growth within your OPEC, given the fact that you expect to see sales be up sequentially also. That's pretty much the message that was came through at the last Q&A.

I think that's right. I think if, you know, if, obviously, if we don't expect to, but if we, on the low end, as I mentioned, if we repeat Q3, I would expect a similar number, maybe down a little bit as we continue to kind of realize cost savings from the 110. On the upside, right, if we layer on another $40 million of revenue or $50 million of revenue, which could be achievable, a majority of that would be coming from the equipment line, which now you're paying commissions on to the tune of maybe a million bucks or something like that, given a certain level of GP. So when Steve asked the question, you know, how much do you expect that to stick, and I said the majority of that $4 million, that's kind of where I was getting it, $2 million sticks, and maybe there's some variance on the rest of it.

Okay. All right. That was crystal clear. So thanks very much for taking my questions.

Thanks, Ted. Our next question. Our next question comes from Min Cho with V Riley Securities. Your line is open. Please go ahead.

Hey there. Good evening, gentlemen. Just a couple of questions here. First, interns. Yeah. Can you hear me?

Yeah. We've got you.

Okay. Thank you. In terms of your product support business, obviously that was up nicely. Can we talk a little bit about headcount growth kind of on a year of your basis and how the, you know, how that process has been looking and hiring and retaining your techs?

I'll take the numbers side of it. Ryan can talk just maybe more strategically. We're up headcount wise versus the beginning of the year. You know, what I would say is we're focused on as being as efficient as possible with the technicians that we've had. We've talked about right products, right people. And so we are up. It's a nominal number. But, Ryan, do you want to talk more briefly just about the environment?

The environment has been challenging. Over the last couple of years, we've seen unionization efforts in the Midwest. We've seen wage pressures. But, you know, it's a way that one of the, I guess, defenses against that is it is a way that we use our scale to our advantage. We have full-time recruiters. We're actively apprenticing in the trades. So we're staying out in front of the demand. And we are, you know, successfully onboarding technicians every day. But it is the dearth of individuals in the skilled trades has never been more acute than it is today.

Yeah. Okay. Just turning over to your question, Ryan, about the .H.L. and the mobility business. So sounds like a nice kind of deal here with .H.L. Now, as of last quarter, I thought backlogs to the 25 million. And now it looks like it's closer to 20. Did we lose something or was there some revenue this quarter that burned through? And just any update you can give in terms of the harbinger relationship?

I'll take the front end of that and leave the harbinger for Ryan. I mean, we did have some, we did have revenue is less than a million bucks in the quarter, but we did have some revenue that ate away. Obviously, let's just call it a million bucks worth of that. The rest of it is not gone, but probably been pushed out. These, what we are finding is these are long sort of sales cycles here, especially as it relates to charging infrastructure, administration associated with getting vouchers squared away for customers. And so that extra five, I would think of it as just getting pushed out versus getting canceled. But the $20 million has customers' names associated with it. It's just a matter of getting through some of the administration and then the infrastructure for, from a charging perspective. And we'll be able to execute on that pipeline. You want to take the harbinger?

Yeah, on the harbinger side, there's not a lot more to report since last quarter. It's a startup product. We have broad coverage for them in our territories where we operate. And we're excited that in 2025, we'll be bringing online a facility here in Metro Detroit where we'll be able to demo the truck, bring customers in to see, sorry, the vans and medium duty trucks, and start building towards deliveries in the second half of next year.

Okay. And then just finally a question on just your material handling business. Can you talk a little bit about, was there any change in terms of some of your market trends? Any of them get softer during the quarter or have improved? And maybe not even in the third quarter, but kind of looking out into the fourth quarter.

One of the, what comes to mind, and Min, I want to just make sure I point something out that you referenced here. Some of the optimization that I was talking about when we were saying right people, right products, I do want to point out that year to date, our service revenues are up 150, sorry, our service revenue gross margin is up 150 basis points, which is indicative of us being as efficient as possible with the technicians that we have. So I just, I wanted to point that out for analysts and investors. Your question on material handling, the one end market that does come to mind, and I think this is probably not a surprise, but the automotive business in our legacy material handling segment has been challenged, I think more so this quarter than it has in the first half. And we're seeing that impact in parts revenue and a little bit on the service side as well. So that is one end market that we've got our eye on.

Okay, great. Thank you.

Thanks, man. Thank

you. Now it turns to Steve Hansen with Raymond James. Your line is open. Please go ahead.

Oh, yes, good. Thanks for the time. Wonderful to see on the construction market here first of all, how do you feel about pricing backdrops for new equipment and perhaps used and the impact on that into the balance of the year and into next year as well as you think about your target profile?

Steve, this is Tony. I think we found kind of the level here at the at the bottom end in terms of pricing. If you look at our margins, kind of quarter over quarter, they were in again, but something like 12%. So I feel like we found kind of the bottom in terms of pricing. We still are observing kind of competitors doing some things that we won't participate in in some geographies and in some product categories, but it feels to me as though the remarks that and in his quote in the press release that we felt like we still have probably six months to work through the excess supply and by a lot of kind of industry benchmarks that's kind of suggesting the case here. So I think before maybe we see an uptick potentially in margin. So hopefully that gives you some perspective there.

Yeah, I know that's helpful. Thank you. Maybe the follow up to that then I know last quarter maybe I started talking about some of the more aggressive behavior on the competing OEs. You know, have you even seen the incentive programs change out there, pull back at all in the section of the practice demand increases out there or is it still too early to see any indication on conditions getting more favorable from a competitive standpoint?

You know what we have seen is some of the OEMs that we represent getting a and with financing programs and leasing programs. So that's been well received by the sales team here. But I think that and that's good for Ulta, but I think that's just maybe some of these OEMs catching up to the market with in that regard. So we are pleased to see some of these kind of programs come out from our OEMs. I think it's still too early Steve to prognosticate on how that's going to impact us. I think that the future here for equipment sales and construction for Ulta is going to be brighter primarily because of having the election behind us, a little bit more clarity on an interest rate trend versus what we're concerned with in pricing at this point if that makes sense.

No, that's helpful. Thank you. And just maybe a follow up, I might have missed it earlier, I apologize for the drop, but how do you feel about current inventory levels as it stands today? I know in past quarters you said you felt more comfortable, but as you think about the right sizing, the fleet and rental and even in your new equipment side, I mean how are you feeling about the ability to generate some excess cash flow here to pay down additional debt?

Thanks. Yeah, I think we're pleased with the way that we executed in Q3 as we noted. We were able to pay down almost $40 million of funded debt on the backs of some decrease in used equipment as well as $18 million of acquisition costs gone from the rental fleet. So as I mentioned earlier, I think we can keep that pace up in the rental fleet and squeeze, let's say another $20 million out of the rental fleet here before the end of the year. And then we're going to let the market kind of decay as we keep kind of paring back and as I mentioned to Steve, be more capital efficient with our rental fleet. Q4 is typically, if you look back last year, typically a really strong quarter on the working capital as well. So it's a long way of saying we're not there yet with where we want to be in terms of our rental fleet size. I think we've managed, when I look out across the landscape at maybe some of the comparable companies that are out there, I think we've managed this inventory supply thing about as good as anybody, keeping our turns relatively in line and not letting it get too far away from us. So I'm pleased with the performance kind of year to date, but we've got more to do there to squeeze, let's say another $20-30 million out of it in the fourth quarter.

Appreciate the call, guys. Thanks.

Q5. We have no further questions. I'll now hand back to Ryan Greenewalt for any final remarks.

Q6. No further remarks from management. That'll conclude the call. Thank you.

Q7. Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.