Alta Equipment Group Inc. (ALTG) Earnings Call Transcript & Summary

[Audio Gap] We have the CEO, Ryan Greenawalt; as well as CFO, Tony Colucci here with us and thought I would quickly give an intro on TRG and then get to the good stuff, which is Alta Equipment and spend our time there. But TRG, we're a sell-side research and consulting firm focused on companies and stakeholders across the value chain of North America construction and industrial activity. We try to go narrow and deep. As part of this Fireside Chat series, which we started this year, it's part of helping companies' buy-side clients, understand trends and dynamics in this world. And so happy to have Alta here as part of that. Alta Equipment is a company I cover. I think this is a compelling and underappreciated business by investors. And with the stock down at this price, I think this is a great time to be interested in the name as buying opportunity. I think this decline is unwarranted. And so why do I say that? My perspective in brief, is that Alta has a unique razor and blade model in the construction equipment industry. They sell equipment at lower margin. And then in the following years -- many years, provide the parts and services that keep that equipment working well for its owners. That aftermarket revenue stream has very high margins. And this product support revenue has an intrinsically good organic business with almost built-in organic revenue growth as the equipment in the field gets used and it ages. Also, Alta is an advantaged acquirer of other equipment dealers, supplementing that organic growth, and this equipment dealership industry is massive and fragmented. And in my perspective, they've done a great job of this over the past few years. I would say one -- real quickly an important distinction from Alta to the equipment rental companies, which we'll get into further, Alta has a large rental fleet of its own, but there are some key differences to the way Alta does that versus others. And I think that makes it -- I think that's a positive attribute of the story. So we'll get into all of this and more. Ryan and Tony, again, great to have you.

So let me start with the core strengths of the model as an equipment dealer with defined territories of service, you've compared it to auto dealers to a degree. I know there's limits to that comparison. But maybe talk about the intrinsically good attributes of the business that don't change from your perspective. And maybe as you discuss it, think about what investors maybe don't understand or think about clearly on these kind of intrinsic strengths of Alta's model?

Sure. Steven, I'll kick us off. This is Ryan Greenawalt and I'm the CEO. And it's important to understand that Alta is -- we're unique in so much as we're a public consolidator in a space. It is really a private network of dealerships. The business model is really -- you need to contrast it with the known public companies that are active in construction equipment or obviously the rental houses. And our business has some features that are really different. It is more of the dealership model. The original equipment manufacturers in our industry and in the adjacent industries that we are participating, not just construction equipment, but material handling equipment, over-the-road, some of the specialty equipment. They go to market with private dealer networks because dealers are really good at one thing, and that's keeping the equipment up and running, making -- engineering great products and having the right features for the market, that's the job of the OEM, but the dealer really plays a role in recruiting and retaining and training the technical talent that's needed to keep all of this machinery up and running. So we've always sort of referred to our model as the Gillette model, you give away the razor to sell to the blades, just the razors happen to be sometimes $0.5 million machines. And we don't give them away, but we make a lot more of our margin on the parts and service piece of the business. One of our benchmarks is a head count of skilled trades in the business. And the ratio that we're aiming for is for half of our people to be skilled trades. That would be in sharp contrast, again, to like a pure-play rental house where more of the people are out there selling the service versus actually out there working on the rental equipment. One of the features about the rental -- the dealership business model is the dexterity of the cost structure of the model. You can see how we perform through down cycles. We got a real acute test of that, right, as we went public 4 years ago when we had COVID hit and navigated some of the northern territories where our markets were kind of shut down. And the tool that we deployed was the same one we do in down cycles, and we really had to rightsize for some all the personnel. Given that it was such a short disruption in the business, we did that through furloughs versus longer-term layoffs. But we were able to demonstrate that you can really cut costs quickly. And then you can also ramp it back up quickly. The cost structure of just the people is -- obviously, it's infinitely variable and as the business picks up, you bring back the people that you can and then you start recruiting in the industry. The thesis around our M&A strategy has really been that there aren't enough consolidators in these markets for what's a really fragmented network. And part of the reason for that is that the OEMs historically -- and it's almost an exclusively forbidden in our industry that they really don't want private equity control of their dealerships. They're okay with public because they see it as a perpetual capital base and not disruptive, but they really don't want private equity-type funds owning their dealerships because they know that they're going to be in process to sell every few years, and that's not their -- really their aim. So Tony, maybe you want to fill in a little bit more on some of the features of the dealership model. I wanted to kind of contrast a little bit with the rental houses and then also make sure that it's understood that this is kind of a unique opportunity to invest in a market that's mostly closed. We go to market to compete against every day, the Cat dealer network, the dealer-to-dealer network. On the material handling side, Crown and Raymond and Toyota, which are closed, just like we are. And private equity, the public markets really can't participate in these industries outside of a couple of unique opportunities like Alta.

Thanks, Ryan. Yes, I would just -- I think you nailed it. I would maybe just put shine light on two things. One is we often get asked by investors what is the moat around Alta? Or is there a moat around Alta's business? And just to put bright lines on that, one of the moats is -- and just to be clear, we have exclusive rights to territories for our OEMs, which means on the Material Handling segment, right, we have two segments that maybe we'll get into here today. But on the Material Handling segment, that means for Hyster-Yale, which is our major OEM on that side of the business, that there is no Hyster-Yale competition in our areas of responsibility, which include major metro markets. When you think of forklifts, our major markets are Illinois, Michigan, New York, including the city, all of New England and more recently, Ontario and Quebec. And so large logistics hubs where if somebody -- if a customer wants a Hyster-Yale product for all intents and purposes, they've got to come through us. And more importantly, if they want product support, OEM parts, factory-trained mechanics, software that is close to the network they've got to come through us. So that would be kind of moat #1, I guess. The other thing just to highlight is, I think one of the things that gets maybe misunderstood about Alta is that the -- we are embedded into our customers' sort of operations, meaning that a lot of our equipment, we would call production assets. So think of a quarry or a mine that has a wheel loader or a crushing piece of crushing equipment that's literally -- its production drives revenue for our customers, which means it needs to be up and running, and then we fall right back to what Ryan said about our skilled mechanics in the labor component. And so that's all to say we are much more embedded into our customers' OpEx line in their financials than probably their CapEx line. Certainly, when we sell equipment, that's a CapEx for a customer, but that's only half of our revenue. The rest of it would be sort of embedded into the OpEx line. Some of that OpEx revenue for us, if you will, is contractual, maintenance and -- preventative maintenance and guaranteed maintenance agreements that have a tender to them. So anyway, Steven, I'll pause there, but just wonder weighing with those two things.

No, that's excellent. I appreciate that for both of you. So a key pillar of my bullish stance on Alta is that you're perfectly positioned for the reindustrialization of America as a scaled dealer of both material handling and construction equipment, serving kind of the build-out of the facilities -- industrial facilities and then eventually the operations of the facilities. So maybe share a bit on the legacy focus that Alta has had in material handling kind of how and why that came to be? And then how you've evolved meaningfully into the construction equipment market. And do you think that construction equipment is kind of the bulk of sales growth in the next few years?

Great question. And I'll give you some historical perspective. This was a family business that I grew up in and left for a career in financial services and came back with a vision of what the business could be, and it was to emulate other private companies I'd seen out there that were much larger than us and operating across multiple verticals in terms of the dealerships they held. So one of our -- our sister dealers on the West Coast, Papé Group was a Hyster dealer back then. Today, I have no idea how big they are, but this is 15 years ago, they were over $2 billion in sales, and had Deere, Kenworth and Hyster-Yale as kind of their verticals that they had addressed. And I came back to this family business with really wanting to emulate that strategy. And Volvo was the first entree into that construction market with the legacy business starting 40 years ago was Yale forklifts in Michigan. And we had carved out a dominant position in Michigan with the Yale forklift brand with a heavy emphasis on going after the automotive manufacturing in partnership with Yale. They had -- these are accounts that we've had for decades and have tied up with the big three. And we do really well with the Tier 1, Tier 2 suppliers as well, really kind of that position Hyster and now Yale. And now Hyster is the dominant brands for auto manufacturing in the U.S. And it teed up an opportunity for us to be one of those consolidators with Hyster-Yale. So when I came into the business in 2008, there were 70 ownership groups. They are now under 30, and they have socialized wanting to get it down under 15 -- 12 to 15 dealers in the country. With that consolidation, what it's done for us has taken us from a market that's about 20,000 lift trucks a year sold in Michigan historically to covering roughly 20% of the North American market that's been as high as 300,000 units, is settling in at more about 0.25 million units kind of coming off the peaks of COVID. This business is all about aftermarket. So it's density of markets, where the trucks are going to be sold and where they're going to operate, is where your opportunity is to build out of product support business. And so you can kind of -- the denser the market, the more we've got concentration of branches and personnel who are out there repairing the units every day.

Steven, I would add -- kind of maybe tie a rope, if you will, to your theme there on the reindustrialization. Those can only be tailwinds. That theme can only be tailwinds for Alta. If you think about what Ryan just said on manufacturing, the Hyster-Yale product line, is sort of always been a high market share player in the manufacturing space. We're starting to see, I would say, green shoots of that in this -- the reindustrialization in Upstate New York and in Michigan, obviously, where there's new manufacturing facilities. And so our material handling businesses is just embedded in the day-to-day movement of goods in the country. And to the extent there's more manufacturing, I actually think that Hyster-Yale would take an outside position in that space. And then our Construction Equipment segment to me is construction equipment in name only. It's actually -- it's used in all sorts of applications. So you mentioned -- and just industrial, we have a lot of equipment deployed specifically in our Northern Midwest regions in scrap and demo -- of steelmaking in these types of kind of old industrial applications where folks need wheel loaders and material handlers and excavators, et cetera. So -- and then that's not to even get to kind of some of the infrastructure things that are going on in the country where our equipment is specifically used for bridge building, road building, aggregate and mining applications, et cetera.

That's helpful. So Construction Equipment has grown just as a percentage of sales in the past few years as you've made more acquisitions there, organic growth as well. How do you view kind of the trajectory of the Construction Equipment segment over time. And within that, how do you view the competitive positioning of Alta's dealers versus a Cat or Deere as you talked about and kind of the big players versus smaller players in gaining share there?

I could take the front end just on kind of growth, Ryan, and organic growth in construction. And then if you want to take the back end on the competitive landscape there with Cat and Deere. You know, Steven, I think it's important for investors to understand that where we are in our history with our Construction Equipment segment versus Material Handling per se. So Ryan mentioned in Material Handling, his family got started in the '80s. We're a dominant player in Michigan, north of probably 30% share of the overall market in Michigan. It wouldn't be appropriate for us to say we think we can grow that business 15% a year because we sort of dominate. Do we have pockets of the Material Handling business like Toronto and Montreal, where we think we can grow at that pace, yes, we can. But the New England would be another example in the material handling business, where we did an acquisition of NITCO 5 years ago, they've been in business for 50 years. They're a dominant player, et cetera. The construction business relative to those -- the material handling business, where we've been at it for 30 years, 50 years, wherever the case may be, in certain geographies like Upstate New York, as an example, we've really only been able to unveil the playbook for 3 years as we've taken share for Volvo. And so Florida for 4 years, the list kind of goes on. Illinois for really -- for all intents and purposes, 5 years. And so we're much more kind of in our infancy in the construction side. And as we sort of unveil the Alta playbook and frankly, start to take it to the competitors that Ryan will talk to in a second, our oldest geography is in Michigan here on the construction side, where we started with probably 6 -- $60 million in revenue, 7 mechanics, 8 mechanics in 2010. That business is north of several hundred million dollars and now has 90 mechanics, right? And nothing happened in the meantime, by the way, in terms of a new product launch by Volvo. It was all on the backs of Alta that drove that share and drove that growth. So we're just getting -- now it took us 10 years to sort of unveil that. And I think what you're seeing here over the last couple of years is the organic growth should be coming from the construction business, because that's where we're a little bit younger, still unveiling the playbook. Parts and service growth is a KPI that we're monitoring very closely because that's indicative of the playbook sort of working in that segment. And so we would expect that sort of -- we would expect that sort of outside growth specifically when it comes to parts, service and rental to be in construction relative to material handling because of sort of the infancy, if you will, that we have on that side. So Ryan, do you want to take the competitive discussion there?

Sure. And I'll start with -- so first of all, our relationship with Hyster-Yale is a little bit different. They have a broader portfolio that covers everything that you need in the world of forklifts. They're Class 1 through 5. They have it all. They've got all the capacities we need. There -- in terms of the warehousing market, they're #3 or #4 player behind, Crown and Raymond are kind of the dominant players. Those are specialty products that they've really carved out a niche as the market leaders. When it comes to sit-down forklifts, kind of our heart of the line, they're #1 or #2 player depending on the category. Toyota is the -- and Cat are the -- Cat-branded forklifts, which are actually Mitsubishi, but we don't need to get into all that. Those are the main competitors on the rider forklifts. And Hyster-Yale it's between the 2 brands, it's about a 20% player nationally. And we cover 20% of the U.S. market for them. And so we're the second largest Hyster-Yale dealer in the world. Our aim is to be the largest, but what we can't do with Hyster-Yale is go into an area of the country where we're not a Hyster-Yale dealer and buy a competing forklift dealership and compete against our sister or brother dealer. So contrasting that with construction equipment, Volvo covers really 3 or 4 categories of a -- category that has dozens of types of machinery that's considered in that category. Volvo's our are flagship partner. Their main categories that they're successful in are the articulated hauler, big dump trucks, excavators, so think of like bigger shovels, and wheel loaders and then some specialty equipment for paving. The main competitor there -- the competitors, the lineup is going to be Caterpillar, Deere and Komatsu kind of in that order. What's -- these are -- those networks are completely closed. So -- and if you're in -- a Cat dealer, a Deere dealer or a Komatsu dealer, you really can't -- well, I take that back on Komatsu. But Deere and Cat have been really exclusive, where they've had some legacy issues with Deere having -- dealers having other brands. They're really trying to force that right now. And that's actually spurring some activity for us, some consolidation opportunity. With the Volvo brand, we're not precluded from having dealerships that are non-Volvo in other areas. There's clear precedent, our contract allows for it. And frankly, we wouldn't sign a contract that didn't allow out for it because Volvo doesn't have enough of the categories covered with their product portfolio. So part of our strategy is to go into a market and augment the Volvo brand with other lines of equipment that meet the needs of the end markets that are in that geography. And that depends on the region. In Michigan, that product portfolio to the allied lines, we call them might differ from what you need in Florida. We're here, we're trying to go after scrap demolition and steel. And in Florida, we're going after citrus groves and potash mining. Just as an example. So the idea is that we're building out a portfolio of equipment to compete in the local market for the types of end market exposure that you have with anchor earthmoving brand, which for us today is Volvo in most of our markets. When you think about the opportunity to grow that, it's to rinse and repeat and be a consolidator for other OEMs, who outside of Cat and Deere are open to having discussions with companies like Alta as a consolidator. So the first non-Volvo APRs we have are Ohio, where we have DEVELON, the Korean brand of earthmoving. It used to be Doosan and then in the Northeast, we have only JCB earthmoving, which really is into main line. So that business, it looks a little bit different. It's tailored more towards serving the rental houses, which use some of that iron and also landscaping and smaller applications for earthmoving. And then the one that we're most excited about, we think we have just a ton of opportunity to be a partner and consolidator as the new case territory, which we announced last year. So we're case in Western PA. They do have some -- they have some succession issues and some [ concerns ], some issues where they have dealers that have other brands they really don't want that. So hopefully, that gives an idea of kind of the landscape of competitive, but also how we see playing the map. Well, if you go into an area like -- let's just take the Great Plains. You would not want to necessarily be the forklift dealer in the Great Plains, but you'd love to be an ag dealer whereas the Chicago land, you want to have the forklift line. It's not so important to have maybe some of the other agriculture line. So what we're really trying to think about how to fill in the map strategically with OEM relationships that we can scale with and that there's a concentration of business in the areas that we decided to work with them.

That's excellent. That's a great overview. I wanted to shift to the aftermarket business or product support revenue, different terms for the two-line items of parts and service revenue. Maybe first, you talked about skilled labor being a major advantage there because there's not much of it. You guys have successfully grow that headcount. What advantages does that bring for you? And do you see that market changing favorably or continued trends of tightness there?

I would say that we expect continued tightness because there just aren't enough young people coming into skilled trades. I think it's starting to change a little bit. But continued tightness for the next several years, and we flipped the script a little bit on that and think that that's actually a competitive advantage for us because at our scale, we have some things that the local family-owned dealers don't have. We've got a full-time recruiting department. They're focused on building our relationships with trade schools and helping us recruit from adjacent industries, which is a big part of our recruiting is -- recruiting out of the automotive industry into our material handling or into our construction job roles. So that's I guess the way I would answer it is we've been navigating tight -- the technical talent markets for most of our existence, and we've figured out how to make that a competitive advantage. Right now, we've got -- there's a demographic headwind. We've got too many people aging out of the technical trades, and we've had to really be strategic about making sure that we can keep our head count where it needs to be.

Steven, I would just also add that, that last check, we're probably -- our recruiting, as Ryan mentioned is -- recruiting is a lifestyle, is like what we like to stay here. Our branch managers are bonused on their relationship with local trade schools, universities. We've got tuition reimbursement programs throughout our footprint, partnerships across -- just to attract that new talent. There's also something to be said about retention, and so we are putting our technicians in the best possible position to be successful, at least in our minds, which means getting them the tools that they need, literally, the tools that they need, putting them in a late model van or truck to get their job, supporting their careers in terms of training. So our technical training would be -- there's layers to it, right, where somebody can make more money as they get certified on different applications. Think of high-voltage applications for commercial EVs, for instance, as we move into that segment where -- and so we support all of that training. And so at last check, we're probably 10% to 15% turnover in our attrition in our technician base, which if you look at some of the other industries around us, like automotive, for instance, I think that's more in like the 30s, whether they're turning over at that rate. And probably half of our attrition is actually retirements. So it's not like people are leaving because they're leaving for another opportunity. And so we really like to focus -- health and safety as a part of that as well, which is a major focus of ours. So that's I want to point to the retention piece, too, because it's much easy. We think it's expensive to have turnover and recruit and we'd rather just keep our guys.

Right, right. And maybe can you talk about the aftermarket revenue stream in good times and bad? Does it differ much, how do equipment owners think about buying new versus maintaining old? I mean, part of the reason I'm asking is the general outlook for non-res construction is positive again in 2024, but maybe at lower growth rates broadly than the past couple of years. So does that even change the trajectory of your aftermarket revenue stream much?

I'll give an example, Steven. And you really have to kind of go segment by segment, but in Material Handling, what we know from '08 and '09 where Alta was just a forklift business, highly levered in automotive in Southeast Michigan. The new equipment line was down 50%, '09 to -- sorry, '08 to '09. Parts and service or what we would deem product support down 10% to 15%, respectively. So much more -- and that gets back to some of the contractual arrangements. GM, Chrysler went bankrupt, and Ford was obviously struggling as well. But that business -- as long as there's activity in the facility, the maintenance will get done. And so it would take a large shock to me in the material handling space to have any real material impact to the product support into that business. And by the way, our largest end market now in material handling is food and beverage. And so you would have to have facilities really start to shut down. As I mentioned, we get embedded -- that product support revenue line gets embedded into the OpEx and almost like the facility spend of -- and so you'd have to have facilities starting to shut down, I think, to impact the product support into the business and material handling. On the construction side, as you mentioned, that's a little bit more of time and materials. When we build out, there's less contractual arrangements. We do have them, but they're just less pervasive in that segment. And I do think it would take a protracted reduction in the utilization of equipment in the field for that to be impacted. And so some of the tailwinds that you mentioned about, non-res, some of the things you talked about -- we talked about earlier here with reindustrialization and manufacturing facilities. All of those things, I think, point toward modest increases or certainly not any decreases of utilization. And I would also point out that with telematics and big data, we actually get to monitor some of that utilization on our customers' fleets. And we made a point to say at the end of Q1, that all of the utilization statistics are holding up just fine.

That's helpful. And thinking about -- kind of shifting to the financial statements and understanding how this filters out financial. I mean since 2020, when you IPO-ed, doubled revenue, doubled locations, more than doubled EBITDA. Cash flow metrics have been strong. Acquisitions have been part of this growth as well. It's required some debt, but in my view, pretty modest when looking at cash flow generation and yet stock down a slight bit from its opening price at around $10. So with that perspective, let's start with what part of the story do you think investors are most skeptical of or maybe don't fully understand? Is it the debt structure, cycle concerns, maybe kind of your perspective on investors' perspective?

Yes, sure. I'll take the finance side of that and then pass it to Ryan. We have a unique business model to -- certainly, our financials don't look exactly like other equipment companies, and hopefully, if we do anything today, we juxtapose kind of the business model versus the URIs or the H&Es. Their business is rent to rent, what we would call rent-to-rent, which is buy an asset, hold it for 10 years and try to earn a return by renting that asset over 10 years. Our business is a dealership that is in rental because the customer demands that were in rental in the industry demands were in rental. And 2/3, 3/4 of our $600 million rental fleet is in what we call rent-to-sell categories of equipment. And to answer your question specifically, Steven, it's unique, and it takes investors a little bit of time to understand the cash flows of the business and that rent-to-sell model, where effectively, we're over-depreciating assets early on in their life to create different price points of equipment, then turn. So we have probably $400 million of equipment in this rent-to-sell category. And if you just think of cash accounting versus accrual, we're buying an asset where -- for whatever it is, $100,000, let's say, we're holding it for 2 years, generating revenue on it, bringing cash in and then selling it. And so $400 million worth of our fleet is in those categories, and that has something like a 20-month life, right, extremely young. If you were to compare the life of our fleet versus the URIs of the world, it would be much younger because we're turning. The reason why we do that is customers on the construction side are very sophisticated, and they look for specific vintages of equipment with certain amount of hours on them. So we will get calls that -- from a customer that says, do you have a 2000 hour 2021 EC350, right, which is an excavator. If you only have new equipment, you can't fill that order. If Caterpillar is going to market, as I just suggested, they have that piece at that hours in that vintage, they get to fill the order, they get the fill population and then more importantly, they get the product support thereafter. And so I would just -- once investors understand that model and sort of carve it out and just look at the dealership, cash flows, and by the way, that rental fleet supports a lot of the debt, as you've understood, Steven, and when we have coverage on that debt just because we have -- it's all kind of covered in assets. At any rate, I think that's something that once investors understand the cash flows of the business, they sort of remove the fog of the rent-to-sell model and understand that it's all for field population purposes. People get it. But it's unique, and it takes a little bit more understanding than just maybe what is a more simplistic in my mind, rental model. So Ryan, I don't know if it's just investor sentiment overall, if you want to maybe touch on that?

Yes. I think one thing to maybe highlight is that there's -- there can be a disconnect between the OEMs performance on a quarter-to-quarter basis and how their dealers are performing. So there's been sort of these headliners that the OEMs have restocked the dealers and now are going to have to decelerate their production, and that's putting kind of headline risk on the whole sector. For us, that -- we're selling to our customers every day, and it's this -- I think Tony really described the model really well. But for us, it's all about building that field population. And we've got a lot of flexibility and dexterity in how we deliver that to the end user. But at the end of the day, there's a certain amount of equipment being used in our end markets on a kind of an ongoing static basis, and that yields a lot of product support business. I think that's the biggest thing to understand. There's a reason the Gillette model works. And in the forklift side, it's the Gillette model, we take really skinny margins to get those lift trucks out and make all our money in repair. On the heavy equipment side, we didn't make up the game. It's been this way for 70 years. Probably the Caterpillar dealers have kind of set the standard that they let the customers use their balance sheet to try out Cat equipment to ultimately get it sold into the market because they've got that engine of the product support, that flywheel. We know that in our market -- just the Cat dealer in Michigan sells $0.25 billion of parts and service, just to put it in perspective. It's just -- it's a massive addressable market. And that's what we're trying to build out as a network of technicians that are out there servicing best-in-class products.

Is there an optimal window of time from when a piece of construction equipment gets sold to win that product support revenue, as that kind of peak levels? Is it 3 years later, 6 years later? Or do you think about it as hours used? However you want to talk to that?

Steven, I would say the first thing you caught is -- from a dealer's perspective, is, you want it out of warranty, right, so that we're billing at full rates. And so like a piece of Volvo equipment, typically, there's a 3-year warranty if the customer buys extended warranty, but that's typically the case. I would say that 3- to 10-year window, which is probably -- we think of it more on hours. So think of 10,000 hours on a piece of heavy equipment like 100,000 miles on a car. That's kind of like its first life. It doesn't mean it's dead, but there's probably some larger repairs that need to get done. So I would say the window there, sweet spot would be 3,000 to 8,000, 3,000 to 10,000 hours.

Okay. Yes. That's helpful. So then kind of tying the financial picture together a little bit further, I believe that your leverage versus pro forma 2024 EBITDA maybe just under 4x. How do you view your ability to deleverage the levers you can pull, clearly, floor plan as part of that, and that's not quite definitely different than just debt on a pure basis. So maybe think about cash usage and levers in 2024?

Sure. Just one clarifier to your comment there. We use floor plan from OEMs, much like an auto dealer for those familiar with the auto dealer model. These are captive finance companies like a Volvo Financial, Hyster-Yale Financial, where we're using highly subsidized, effectively long-term payables, if you will. But these are lines of credit that we get from our OEMs where we can hold equipment -- stock equipment for 90 -- anywhere from 90 to probably 360 days. Kubota Financial actually is pretty much best-in-class. They give you a year free before they start charging your interest. But we do not count that as part of our debt stack, and we burdened EBITDA just to be sort of intellectually parallel, if you will, with any cost of that floor plan. So that's kind of the first position of our -- in our balance sheet. The leverage then comes thereafter. And Steven, yes, we're floating right around 4x here coming out of Q1. That's the higher end of the range that Ryan and I have quoted since we went public. The reason that we're maybe more comfortable than the rental houses targets probably 2 to 3, and the reason we're more comfortable higher is two reasons. One is we have the product support business and the cash flows that we think are more -- what we know are more annuitized than rental cash flows over the cycle. And so that gives us a little bit more appetite for debt. The second thing is, I mentioned earlier, the rent-to-sell model. A large portion of our debt is directly associated with carrying very young equipment that's turning. Alta turned out of $155 million of $600 million of rental fleet last year. So nearly 25% -- or 25% of our fleet we turned out of, if you were to -- and brought in new, right? So it's turning, meaning we could pretty quickly delever if we chose to reduce the size of the rental fleet. And so for this year, as opposed to last year, when you think about use of capital, I keep calling 2023 as a great replenishment. It wasn't just for Alta, it was for the entire industry. We added $100 million to our inventory. We added another $100 million into our rental fleet as we were waiting for supply to come back online to replenish. We won't have to do that this year in terms of that level of replenishment. And so we are kind of in an optimized mode right now. And if we're able to hold the size of the rental fleet on a steady-state basis, there should be $50-some-odd million that we can, just on an organic basis, throw it at the debt. And we also want to be mindful of the stock price as well, and we have a buyback program that's out there that's been approved. And then we're always thinking about the M&A side of things. So it's a balance in terms of capital allocation. But the way that we're set up every day is to pay down debt from a treasury perspective, and that would be the first place that cash flows would go for right now.

That's great. And then EBITDA margin has just been running around 10% the past few years. Maybe you're thinking about both kind of 2024 and beyond because in 2017 to 2019, it ran 12% to 13%. Maybe kind of bridge where you think 2024 lens in that picture and where it can go over time as you continue to scale up that product support revenue and maybe lever off the cost of being a public company, which you didn't have in that prior time frame?

Yes. EBITDA margin can be a little bit misleading for our business. So I'll just caveat with that. You're right, we have traded in the 10% range. I would expect us to be in that range this year to answer your question. Because of the dealership model and probably what you're seeing there in terms of the EBITDA margin coming down over the last couple of years, as we talked about very early on in this conversation, construction is becoming a bigger part of the mix. And in that construction business, a bigger part of the revenue mix is equipment, which is not parts and service and the higher margin. And so you have a mix issue, I think, relative to the run-up from '19 through what you see today. The other piece of EBITDA margin that I want to just make sure I mentioned, rental houses have an EBITDA margin in the 50s, right? Our rental business has an EBITDA margin in the 50s, it gets disguised, if you're not kind of digging in granularly because of the dealership model. And so what we're focused on is organic growth in parts and service, utilization of the rental fleet, just like the rental houses. What I'd like to see over a long period of time, again, not quarter-to-quarter because of the equipment, the equipment line can really screw up the mix and selling a lot of equipment as we've talked about, can be a really good thing. It could put pressure on EBITDA margins like it did in Q1 here. But over time, that can be a good thing. I'd like to see us trade over time, Steven, closer to the 12% range as we mature, just to answer your question.

That's great. That's helpful. Maybe in closing, and you both have kind of alluded to the choppiness of new equipment sales on the total financial picture. But your internal focus is growing that product support revenue. You saw the great replenishment, as you said, more OEM deliveries. In the past couple of years, it seems like supply chains have normalized as well. So maybe that kind of helps smooth out a little bit to a degree in the next couple of years. But what are you guys focused on internally, aside from investors looking at quarterly financials and maybe getting over worked on things. Internally, growing that product support revenue, thinking about serving that equipment that's been sold and hits the 3-year mark or 4-year mark over the next couple of years? I mean, what is your internal focus as you build up the Alta business organically and then acquisitions come along that maybe supplements that?

I can take the part of that. So you used the word focus, and that's probably the keyword is that with all of the M&A, we've done, I think, 16 acquisitions or 17 since going public, each of these family businesses has some component of it that's been undermanaged or lacked supervision. And so we've got a lot to optimize. And so we've got all -- through the campaign of growth, we've inherited some brands that need to be rationalized and focusing so that we can deliver a best-in-class service experience for the customer and make sure that whatever product we're representing that they have a great experience with it and that we can be as efficient as possible in delivering that service. So kind of a rationalization, none of our major brands, but kind of going through the allied lines region by region and making sure that anything that we're representing and trying to service out in the field that it's part -- there's a coherent strategy behind it.

I would also add, Steven, just maybe it's obvious, but I'll say it anyway, that, yes, we're always focused on product support, adding technicians. You don't get to do that, though, unless you're taking share or growing the field population. And so hyper focused in certain areas like Canada on the material handling side, where we took over an underperformer there, massive opportunity for us in Canada to probably double, if not triple the size of the business that we bought there. But it takes sales prowess. It takes getting on the street and getting in front of customers and presenting the Hyster-Yale product portfolio. And that takes time, and we're unveiling that playbook. But I would say that's also something that we're sort of laser-focused on as Ryan said, making sure we got the right brands and then driving as much share as possible, and then hiring technicians and harvesting all of the hard work that it took to get that field population out there.

Well, excellent. And this has all been excellent color on the business, on the story kind of over time and kind of in the current times. And I think you've helped us think about the key factors to value creation. I don't know if there's anything else you want to close with to make sure is understood or considered by investors?

One thing I would throw there is that we looked at adjacent markets that we can operate in leveraging our existing infrastructure, what other types of products can we distribute through this platform. And we're really excited about the EV segment. We gave that some air cover on the last earnings call. Medium-duty commercial EVs are ready for electrification, they're already here. And what we see as a parallel to what's happened with the forklift industry over the last 40 years. This went from being a marginal part of the lift truck market to the majority in a few decades. And we think we're really well positioned to be part of that as a truck dealer. That's a market that we want to cover, and we've got some exciting relationships that are just getting started, but this could be material over time.

Right. And all additional to the core strengths you talked about.

That's right.

Well, good stuff. Thank you both Ryan and Tony, for joining. Helpful color on the business and the industry and the advantages you have. So I'm happy to talk with anyone about the name, Ryan and Tony also open to discussions as well and have been helpful -- helping me and our clients understanding the business. So thank you again, guys, and have a great rest of the week, and thank you, everyone, for joining.

Thank you for hosting, Steven, and thanks for your interest and all the attendees. Take care.

Thank you, Steven and thanks, everybody.

You bet. Bye.