Alta Equipment Group - Q1 2024

Transcript

Operator (participant)

Good afternoon, and thank you for attending the Alta Equipment Group First Quarter 2024 Earnings Conference Call. My name is Bethany, and I will be your moderator for today's call. I will now turn the call over to Jason Dammeyer, Director of SEC Reporting and Technical Accounting with Alta Equipment Group.

Jason Dammeyer (Director of SEC Reporting and Technical Accounting)

Thank you, Bethany. Good afternoon, everyone, and thank you for joining us today. A press release detailing Alta's first 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 Greenawalt, our Chairman and CEO, and Tony Colucci, our Chief Financial Officer. For today's call, management will first provide a review of our first 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 condition, and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our press release that was issued today. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP-to-non-GAAP measures is included in today's press release and can be found on our website at investors.altaequipment.com.

I will now turn the call over to Ryan.

Ryan Greenawalt (Chairman and CEO)

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. I will begin with a quick overview of our first quarter results, then provide a current assessment of the business conditions in our end-user markets. Tony Colucci will then walk through a detailed analysis regarding our financial and operating performance for the quarter and our outlook for the balance of 2024. There is an earnings presentation available for today's call that both Tony and I will be referencing. Our results for the quarter, consistent with historical patterns, were impacted by seasonal factors, particularly winter weather affecting our Construction Equipment segment in northern regions. Despite this, we achieved $441.6 million in revenue, up $20.9 million year-over-year, driven by continued strength in our markets.

Our combined product support and rental revenues grew organically by $6.3 million, reflecting the sustained high levels of activity and equipment utilization in our regions. Notably, our equipment sales margins were impacted by a shift in revenue mix, which Tony will further explain in his prepared remarks. While new equipment sales and margins may face challenges from market dynamics, we remain focused on leveraging our dealership capabilities and value proposition to capture market share. Slides five through seven of today's investor presentation highlight the strength of the product support and rental businesses within the core dealership platform for both Construction and Material Handling, highlighting the resilience of the business model. Looking forward, we are optimistic about the construction end markets, the backlog of work and activity levels that our customers indicate continued strength for our product support and rental business lines. Industry indicators are favorable for our end market demand.

Non-residential starts are forecast to increase in 2024, and state transportation budgets are up double digits in our Midwest and Florida markets year-over-year. Federal infrastructure and mega projects are still accelerating, providing long-term opportunities across our geographic footprint. In our Material Handling business, we have solid visibility based on our current customer backlog. Our diverse end markets offer opportunities across numerous verticals. Full year 2024 global lift truck market unit volumes are projected to remain strong compared to pre-pandemic levels but decrease moderately from a year ago. We are very excited about the commitment Hyster-Yale is making to driving innovation in the product portfolio and market leadership with regards to technological innovation. We are working closely with them on initiatives like advancing fuel cell vehicles at major ports and zero-emission battery-powered terminal tractors for use in intermittent transportation hubs.

We are also collaborating along with the Hyster-Yale dealer network and implementing widescale technology enhancements such as operator-assist systems and vehicle automation for improved safety and efficiency. We believe we are positioned to drive additional market share in our markets given our strategic footprint and the strength of the Hyster-Yale product portfolio. Our M&A activity since our public offering underscores the success of our growth strategy, with 16 strategic acquisitions at accretive valuation multiples. We remain committed to pursuing accretive transactions that complement our core business and enhance long-term shareholder value. We continue to expand our geographic reach and product portfolio within existing business segments by leveraging strong OEM relationships and forging partnerships with new OEMs that meet our criteria. Furthermore, we are exploring new business segments in tangential or complementary equipment markets.

The opportunity to electrify the medium-duty over-the-road truck fleet over the next decade is substantial, driven by the convergence of market demand and legislative mandates for zero-tailpipe emissions. We are actively exploring ways to position ourselves at the forefront of this transformative trend, leveraging our expertise and resources. The transition to electric vehicles for medium-duty commercial vehicles draws a compelling parallel to the evolution of the electric forklifts over the last 50 years. Initially, electric forklifts faced skepticism and challenges similar to those now encountered by medium-duty EVs, such as concerns over performance, runtime, and upfront costs. However, advancements in technology and growing environmental awareness gradually transformed the forklift industry. Over time, electric forklifts gained acceptance due to their efficiency, lower operating costs, reduced emissions, and improved battery technology.

As technology continues to advance, the infrastructure develops, we anticipate a parallel trajectory for medium-duty EVs, ultimately leading to widespread adoption and integration into the transportation ecosystem. In summary, while the first quarter was challenging, we are extremely optimistic that our business is poised for a successful 2024, especially with better visibility into the year. Thank you 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.

Tony Colucci (CFO)

Thanks, Ryan. Good evening, everyone, and thank you for your interest in Alta Equipment Group and our first quarter 2024 financial results. I trust that you and your families are looking forward to summer as we all are here at Alta. Before I begin, I want to thank my 3,000 Alta teammates for their hard work in the first quarter, which, given weather and operating conditions, took focus, perseverance, and commitment to our customers and to one another to navigate. Thank you. My remarks today will focus on two primary areas. First, I'll be presenting our first quarter results, which were naturally affected by the seasonal impact of winter weather on the Construction business in our northern regions, but nevertheless saw continued revenue growth and strength in our product support and our rental offerings.

I will also provide details on the equipment revenue mix shift year-over-year, which impacted our equipment gross margins in Q1 on a consolidated basis. I'll also discuss specifics of how our core business segments performed well in the quarter and how headwinds experienced at Ecoverse and PeakLogix, two of our subsidiaries, impacted the quarter on a comparative basis. Second, I'll discuss our outlook for the remainder of the year, including current insights into some of our activity-based KPIs as we turn the seasonality corner in April. 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.

Before I get into the first quarter performance, again, as I mentioned, the Construction segment in our northern geographies is subject to weather constraints in Q1, which makes the sequential comparison of Q4 2023 difficult to Q1 2024. With that said, for the first portion of my prepared remarks, and in line with slides 10 through 19 in the earnings deck, first quarter performance. For the quarter, the company achieved record Q1 revenue of $441.6 million, up $21 million, or 5% versus Q1 of last year. Embedded in the $441.6 million of revenue is a $14.7 million, or 6%, organic sales increase in our core Material Handling and Construction segments, making for a comparatively strong quarter in our core business against a record-level comparative. Specifically, rental revenue increased 7.1% organically for the quarter in our core business segments.

Our product support businesses once again grew $3.2 million organically in the quarter amidst the difficult operating environment. To fully understand the quarter, it's necessary to break down the business segment by segment. First, our Material Handling segment, excluding PeakLogix, and more on Peak in a minute, had strong organic revenue growth of 11.8% in the quarter. Specifically, new and used equipment sales were up an impressive 23% versus last year as new lift truck equipment availability, specifically from Hyster-Yale, was improved year over year. Additionally, rental revenue was up a notable 5% year over year. Our product support business lines were relatively flat versus Q1 of 2023 as more prep and delivery of the increased level of new equipment led to more non-billable time in Q1 2024 when compared to Q1 2023.

From a gross margin perspective in the Material Handling segment, again, ex-PeakLogix, equipment parts and service gross margins were all improved or stable versus last year. Notably, when you take PeakLogix out of the equation, new equipment sales gross margins were stable despite an increase of the equipment supply in the market, making for an overall more competitive pricing environment year-over-year. To focus briefly on PeakLogix. First, recall that PeakLogix is a subsidiary company in our Material Handling segment that designs, builds, and implements automated warehouse solutions for end markets up and down the Material Handling spectrum. Strategically, PeakLogix provides our salesforce and our Material Handling customer base with high-end automation solutions that our core lift truck business does not.

Peak, as we've mentioned previously, was incredibly active and highly profitable post-pandemic as customers took advantage of financing what are larger long-term CapEx projects at attractive interest rates. Given employment levels and the work-from-home movement, automation at customer sites became more of a necessity versus a choice. As we moved further away from the pandemic as interest rates rose, Peak's customers have been more reluctant to take on large automation projects. From a comparative perspective, in Q1 of 2023, Peak was still working off of 2021 and 2022 backlog related to the aforementioned tailwinds that have dissipated in the current climate. In terms of impact, Peak was down approximately $9 million of revenue year-over-year and at roughly 30% gross margins. One can do the math on the impact EBITDA for the quarter.

To summarize the Material Handling segment, our core lift truck business, which makes up 93% of the revenues in our Material Handling segment, is off to a positive start for the year, while Peak underperformed, impacting the segment overall on a comparative basis. Onto the Construction segment. From a revenue perspective, against a difficult comp, especially as it relates to equipment sales, the segment was up $6.6 million of revenue and experienced organic growth on each revenue line as equipment sales, parts, service, and rental all contributed to the growth in the quarter. Notably, rental revenue was up nearly 8%, and our product support lines increased approximately 6% organically despite a challenging weather environment. From a gross margin perspective, the Construction segment saw a year-over-year reduction in margin as we navigate a competitive new equipment environment driven by the increased supply in the market compared to last year.

Nonetheless, and notably, our rental disposal margins held strong at nearly 28% for the quarter. Onto the Master Distribution segment, which houses our Ecoverse subsidiary. To understand Ecoverse's performance for the quarter, it's important to understand its business model. First, recall that Ecoverse has master distribution rights for the United States and Canada through exclusive agreements with several European OEMs that manufacture high-end environmental processing equipment. As a master distributor, Ecoverse sells equipment it purchases from the OEMs to a subdealer network that it manages through contractual agreements for various designated territories throughout North America. Ecoverse's OEMs were no different than equipment OEMs around the world in terms of the supply chain challenges that afflicted the delivery of new equipment to dealers since the pandemic.

As I've noted previously and as it relates to our core business, 2023 was the great replenishment when it comes to equipment dealers restocking their inventories to normal pre-pandemic levels. In particular, the first quarter of 2023 spoke for a big portion of the great replenishment, and Ecoverse's subdealers were no different as they restocked their yards with Ecoverse's equipment in Q1 of 2023, leading to an unprecedented level of sales and EBITDA for Ecoverse. With Q1 of 2023 as context, the same restocking dynamic was not apparent in the first quarter of 2024 as Ecoverse's subdealers were sitting on a normalized level of equipment. All told, Ecoverse's revenues were down $13.9 million for the quarter, and given its 25% equipment margin profile, its year-over-year performance led to a headwind for the enterprise of approximately $4 million of EBITDA versus Q1 of 2023.

More on why we think this quarter is not indicative of the future for Ecoverse in a moment. With the segment performance in mind, and I would refer participants to the adjusted EBITDA bridge on slide 13 of our presentation, on a consolidated basis, we realized $34.1 million of adjusted EBITDA for the quarter, which is down $6.7 million from the adjusted level in 2023. As discussed and as presented in slide 13 of our presentation, our core businesses outperformed Q1 2023, while the aforementioned dynamics surrounding Ecoverse and Peak served as the primary headwinds for our business in the first quarter.

That said, we expect each of the impacting factors listed on slide 13, which challenged Q1 performance, to become less impactful on a relative basis for the remainder of the year, which is a good segue into guidance and a discussion on our outlook for the remainder of the year. First, I would reiterate slide seven, which is a window into our daily activity, specifically as it relates to rental utilization and labor productivity. As you will see on slide seven, our rental fleet is experiencing its natural seasonality as we head further into the construction season, and labor productivity is held stable at high levels. Simply put, these KPIs provide technical support to the anecdotal conversations that we are having with our customers daily, which is that they are busy. This customer activity should bode well for our product support and rental revenue lines for the foreseeable future.

When it comes to Ecoverse, which was the biggest driver of the EBITDA variance for the quarter, we believe that Q1's performance is isolated and timing-related and not a signal for the future. In fact, Ecoverse produced almost $7 million of revenue in April versus $12.8 million for the entirety of Q1. We remain excited about Ecoverse, its business model, and its prospects going forward. Relative to PeakLogix, we believe that that business unit will remain challenged so long as the current interest rate environment holds, but similar to Ecoverse, believe in the long-term synergies between PeakLogix and our core lift truck business. Lastly, investors should keep in mind that the two businesses acquired in Q4 of 2023, Burris and Ault, are both seasonal businesses housed in our Construction segment, and EBITDA from both of those businesses will be heavily weighted to the remainder of the year versus Q1.

In summary, we remain bullish about our prospects for the fiscal year 2024. With that commentary as context, given Q1 performance and the current competitive new equipment environment, we are adjusting the top end of our adjusted EBITDA guidance for the year from $217.5 million to $212.5 million, while keeping the $207.5 million floor of the range in place for 2024. In closing, I want to once again thank my Alta teammates for, again, rising to the operating challenges that Q1 presented our business. Your teamwork, dedication is infectious, and it is the core of what makes Alta Equipment Group special. Thank you for your time and attention, and I will turn it back over to the operator for Q&A.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. Our first question comes from the line of Matt Summerville with D.A. Davidson. Please go ahead.

Matt Summerville (Managing Director and Senior Research Analyst)

Thanks. A couple of questions. First, if you were to put together a chart similar to chart 13 with respect to the top-end walkdown on guidance, what would the green bars look like that are maybe doing better? And then, I guess, can you kind of bucket where the downside ends up coming from between Peak, between Ecoverse, some of the other items you talked about? Just help us understand kind of order of magnitude the impact puts and takes on the full-year EBITDA guidance.

Tony Colucci (CFO)

Hey, Matt, it's Tony. I think what we were trying to what I was trying to address is that, as I mentioned, Ecoverse, right, which was the biggest driver of the variance in the quarter. We have the impacts for the first quarter on slide 13, $4.3 million. We think that the comps for Ecoverse get easier, number one, for the rest of the year. And as I mentioned, they did $7 million, give or take, in April. So off to a relatively good start here for Q2. Similarly, PeakLogix would have the same sort of sentiment, I guess, or dynamics surrounding it as they became more impacted by the elements of having a customer base sensitive to interest rates, again, large CapEx projects, etc. They would have started to feel that impact in Q2 of last year.

So I think, one, is the comps get easier, which means the headwind that impacted Q1, in our mind, won't be there in the quarters going forward. Relative to the last thing on slide 13, as you know, we always burden EBITDA with interest on floor plan, new showroom-ready floor plan. Obviously, that became more of an issue toward the latter half of 2023, and the comp there gets easier as well. Relative to the core businesses, we feel good about Material Handling. We had a strong quarter, as I mentioned, something 23% year-over-year equipment sales on an organic basis in the core Material Handling business. So we feel like that's on trend.

Construction, we didn't necessarily the acquisition, sort of if you're looking at it on a pro forma basis, Ault and Burris, their EBITDA will really start to kick in now kind of thing, Q2 through Q4, while we were absorbing their fixed cost in kind of the first quarter. What I will say is if there is a headwind we have our eye on and that impacted Q1 a little bit relative to expectations, it's Construction Equipment sales. I think a lot of the comp set has been out discussing the pricing dynamics in the market, dealer channels being stocked up, but also while end markets are still strong fundamentally.

So if we've got our eye on anything relative to the guidance, it's Construction Equipment sales that provide the variable, but we feel really good about rental parts and service over the remainder of the year in our core businesses.

Matt Summerville (Managing Director and Senior Research Analyst)

Thank you for that detail. Maybe just a quick follow-up on parts and service. Growth there. Organically decelerated a bit. I know you called out maybe a little bit of some weather-related challenges, but what's your full-year expectation for organic growth in parts and service? And then maybe can you comment on what you're seeing in terms of rental rates as well as utilization levels versus a year ago? Thank you.

Tony Colucci (CFO)

Sure. Matt, I think what we saw in rental rates is probably low single digits, maybe to mid-single digits in the first quarter here. Utilization on a and we provided that, by the way, in terms of just equipment on rent. And you can back into kind of physical utilization or dollar utilization based on the size of our fleet. But I think that held up pretty well year-over-year. The fleet was bigger, but in terms of dollars on rent, we held up pretty well year-over-year. Rental revenue, just all told, was up more than that sort of low single digits rate, which means we just had more dollars on rent because I think the number was 8% in our construction business. Rent-to-rent business was up. So that's rental.

In terms of product support, we've messaged that we, especially in our Construction business, that there's so much build population that's a little bit more in its infancy in certain markets than our Material Handling business. We would be disappointed if we didn't see low double digits, high singles on that number in terms of product support combined, parts and service combined, organic growth year-over-year. Material Handling will be a little bit more muted in that, just given kind of just the dynamic and the maturity around that business. So yeah, it did. I think part of what we saw relative to the mild winter was less cold start issues, less repairs around snow removal kind of activity, right? Somebody maybe impairs a piece of equipment because of snow removal. And so some of that impacted Q1.

Hopefully, that helps, Matt, in terms of just where we expect to be. We'd like to be high single digits kind of on a combined basis here.

Matt Summerville (Managing Director and Senior Research Analyst)

Understood. Thanks, Tony.

Operator (participant)

Thank you.

Tony Colucci (CFO)

Sure.

Operator (participant)

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.

Kathryn Thompson (Partner and CEO)

Hi. Thank you for taking my questions today. This is just on a broad end market look. Could you give a little bit more color just in terms of mega project dynamics? And have you seen any notable change in the pace for going into mega projects and, importantly, any update on pricing on that particular end market? Thank you.

Ryan Greenawalt (Chairman and CEO)

This is Ryan. I'll take that. I would say that relative to what we see mega projects, it's stable. We don't see any big changes in pricing, per se.

Tony Colucci (CFO)

I think the projects in general, as we've said, Kathryn, is kind of it creates longer-term demand where our contractors who might be working on a mega project, if you will, we're always once removed. Our equipment's being used by customers, which then are using the equipment on a potential mega project site. And we have anecdotal evidence that we know our customers are on some of these projects. But what it does is it gives them confidence that they're going to be busy for longer. And we continue to hear that from customers that maybe are on these projects, that these are long-term, multi-year projects that kind of create what Ryan has termed kind of adding innings to the game in terms of any sort of potential construction cycle.

What we keep saying is there's only so much resources in the construction supply chain, and you come back to the labor element of things. There's only so much labor that can actually get into some of the equipment that we sell our customers to execute on these projects. Anyway, hopefully, that's helpful commentary.

Kathryn Thompson (Partner and CEO)

Yeah. Well, with that visibility and with your Construction Equipment segment, it has been a negative mix, but there is margin expansion opportunity for that segment. With that increased consistent visibility with mega projects, presumably, that would help with better pricing, which would be supportive of margin growth. I mean, is that something you are seeing in the market right now?

Ryan Greenawalt (Chairman and CEO)

I think when we think about margin growth in our Construction business, it's a mix toward product support, meaning parts and service revenue, versus selling equipment to contractors that might be working on a mega project. So to the extent one of our customers needs equipment to be on a mega project, we'd love it, obviously. But it's all in the end game of driving field population, whether that field population makes its way to a private non-res project or a large mega project. Frankly, sometimes we're not sure because contractors are working on all kinds of things. And again, in the vein of just our Gillette model where we're putting razors out in the field, and we want to sell the blades.

Kathryn Thompson (Partner and CEO)

Yep. Exactly. And that was the point I was getting to, exactly. Thank you very much.

Ryan Greenawalt (Chairman and CEO)

Great. Thank you, Kathryn.

Operator (participant)

Thank you. Our next question comes from the line of Alex Rygiel with B. Riley. Please go ahead.

Alex Rygiel (Senior Managing Director)

Thank you. Good evening, gentlemen. A couple of quick questions here. First, equipment sales in a quarter were stronger than I had expected. This should be a positive trend, kind of confirming success of building that field population, just one of your core goals. It doesn't take into consideration price and volume mix. Can you talk a bit about volume growth and directionally how you think about volume growth through the remainder of the year?

Tony Colucci (CFO)

Hey, Alex. It's Tony. Thanks for the question. I think what you saw in Q1, and this is where I tried to provide as much detail on each segment, but to answer your question appropriately, you really got to go segment by segment. Volume growth in Q1 relative to our core Material Handling quarter lift truck business for sure was up 23%. I think the number was year-over-year on an organic basis, mainly on the backs of just new equipment and specifically Hyster-Yale. What we have messaged historically is margins on forklifts historically have been on the lower end if we look at our entire portfolio in terms of just gross margin selling equipment. Does it bode well down the road for additional product support?

We like to think we're taking share when our volumes are up in Material Handling, which, again, will bode well for the future. So we expect to deliver more Material Handling equipment in 2024 than we did in 2023. And I think that we're off to a good start. What that does, though, is it does put pressure on gross margin sort of on a relative basis. And then when we have what went on at PeakLogix in the quarter, it further sort of impacts things. But that's how I would kind of mention or answer the question on Material Handling. Construction volume, as we see, we have a lot of we know that equipment's being utilized. Our service call intake is stable or growing as we get into the season here. Rental equipment, remember, Alex, we've kind of got this rent-to-sell model.

And so, to the extent that volumes off of our balance sheet and onto a customer's maybe wanes a little bit, it could mean that customers are, for whatever reason, interest rates, election, choosing to rent versus buy. I think we could see an element of that that might put pressure on new equipment volumes where maybe we're having to rent or grow our RPO fleet, if you will, rental purchase options. And the challenge there becomes it really becomes a pricing battle to hold share. And that's when the OEMs are so important in terms of supporting the dealer network. And for us, that's Volvo, no surprise. And historically, they've been supportive in helping us hold margin. But nonetheless, I think we saw some of that pressure in Q1, and we would expect that to continue.

But as Ryan mentioned in his remarks, we intend to hold share and sell value, which at the end of the day is uptime related to your service department. On the master distribution side, we think we believe that it's an anomaly. I think Ecoverse has a lot of great things going on with its end markets and recycling and so forth. In terms of their volume, given the surge that was Q1 of 2023, I think it's difficult to say that they'll match the same level of volume in that segment. But we intend to kind of hold the EBITDA through pricing gains and things like this, increase part sales, and hold the EBITDA on master distribution, hopefully, when we look back at the end of the year. So long answer, Alex, but three segments to kind of break that up to.

Alex Rygiel (Senior Managing Director)

It's helpful. And then any chance you can comment on the P&L impact of the difficult weather and if this is recoverable in kind of the second quarter, or is it just lost?

Tony Colucci (CFO)

Yeah. I think that's probably part of the reason why, Alex, we adjusted our guidance down. We felt like the top end of the range probably wasn't achievable given the Q1 performance. The weather's tough to calibrate. I think some of it you could our service margins in Construction were down year-over-year. And some of it, I think, is related to weather, just as we've had technicians in our Construction business that maybe were prepared for the snow season and cold starts and, again, snow removal-related damage work that never really happened given the mild winter. And then you just have just soft ground that also impacted. So that would be the first place I would go. But it's really hard for us to kind of put a number on year-over-year weather sort of impacts.

Alex Rygiel (Senior Managing Director)

Thank you.

Tony Colucci (CFO)

Thanks, Alex.

Operator (participant)

Thank you. Our next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Thanks very much. A lot of my stuff has been asked, but I've got a few more. I want to circle back, if you would, into the construction new and used equipment demand. There's a couple of things I want to unpack here. One of them is if you listen to, say, the Caterpillar call or the CNH calls related to construction. Both of those companies essentially look for the North American market or the America's market, North American market, to be flat to down and low single digits. Then behind that, there's a number of smaller, more specialty equipment manufacturers that I've had discussions with. And they've definitely seen a little an impact in terms of some of the booking stuff from interest rates.

But the fact of the matter, according to them and everyone else I talk to, is that the demand in terms of projects is there. I mean, the government funding's been put in place. These projects have been gotten the go-ahead, and the equipment is needed to be purchased. And the pause is just because there's been a rapid change in terms of interest rates and the outlook for them, and it's created some uncertainty, which you would think if the demand is there, regardless, at some point, that equipment has to be put into the field.

So where I'm going with it is with that as a backdrop and kind of with regards to the commentary from CAT and CNH in particular, I mean, is it fair to assume that when we look at just the new and used equipment volume for Alta, that we should see something at least similar, something essentially flat to down for 2024?

Tony Colucci (CFO)

No, Ted, I'll take that one. And Ryan, if you've got any comments.

Ryan Greenawalt (Chairman and CEO)

I was just going to start off by just saying that we think that the demand part of the equation remains pretty stable for the balance of this year. But what we're describing is basically you've got all the dealer channel is full. And we aren't competing with the OEMs. We're competing with the other dealers, the CAT dealers, the Deere dealers. And today, we're all selling from full rental fleets, full inventory. And that's going to impact how aggressive the marketplace is. So for us to hold share in this market, even with the demand backdrop, it's going to potentially be hard for us to hold margins at the same time.

Tony Colucci (CFO)

I would just say.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Okay. But it's not a unit volume. It's not a unit volume situation. This is, you're concerned with regards to pricing and margin.

Tony Colucci (CFO)

It's a bulge in the deliveries. Yeah. The supply chain broke free, and now you've got all the inventories are normalizing at the same time.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Okay. Jumping over to Material Handling, I mean, you kind of got that answered for me anyway. But one of the nuances within Hyster-Yale is that a lot of the backlog that they've been kind of pushing through and starting to deliver has been on the larger end, kind of a higher-margined product. Is that the case in terms of the stuff that's starting to flow through your P&L? And then when you get into kind of bigger systems versus our units versus smaller units, is there a better margin profile for them for you as a distributor, or is that not the case?

Ryan Greenawalt (Chairman and CEO)

Ted, this is Ryan again. The margin profile by product category is going to be more related to how specialized and how the competitive environment for it. So the largest by volume type of machine in our Construction Equipment business is excavators. And it's also the most competitive excavators by unit volume.

Tony Colucci (CFO)

Yeah. He was mentioning Hyster-Yale, but.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

I'm talking about the mix and Material Handling.

Ryan Greenawalt (Chairman and CEO)

Yeah. Material handling. Ted, what I can say about our mix relative to Hyster-Yale came out with a new narrow aisle product a couple of years ago. Supply chain issues sort of delayed, let's say, the market's ability to kind of well, there was delayed deliveries, frankly, on that class of product. What I will say is we're making headway into that Class II narrow aisle product line, and it's becoming a bigger mix of our business. I think in terms of big trucks, Alta has always been a dominant force specifically in our Midwest geographies with larger, high-capacity trucks. The margin profile between the two is relatively the same overall. But I would say our mix is definitely starting to shift toward the Class II because of some of the innovations and broadening of the product portfolio at Hyster-Yale. Yeah.

Tony Colucci (CFO)

Ted, now that I understand your question, what I was saying holds true for large trucks within the Hyster-Yale world. So there's less competition. We hold higher margin, generally speaking, than the heart of the line product.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Okay. Okay. And then my final comment, which was in the question, is I'm just going to defend you from yourself. You guys came in here a little contrite with really kind of a downbeat tone. And I mean, maybe I talked to you too much, Tony, but when I look at the guidance and I look at least my model against consensus, I mean, I was kind of below the low end of your range anyway. And the consensus, when I look at it, is at the low end of your range. So give yourself a little, don't beat yourself up so much. I guess that's all I'm saying. Your quarter was great, and the outlook doesn't throw me off. Okay?

Ryan Greenawalt (Chairman and CEO)

Thank you. Thanks.

Tony Colucci (CFO)

Thank you, Ted. Yeah. Certainly, that's not what we want to message. We feel good about the remainder of the year. But thanks, Ted.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Okay.

Operator (participant)

Thank you. Our next question comes from the line of Steve Hansen with Raymond James. Please go ahead.

Steve Hansen (Managing Director and Equity Analyst of Transportation and Agribusiness)

Yeah. Thanks, guys. Most of the questions have been answered, but I did want to circle back on the competitive commentary and just the broader channel inventories being relatively full here. I mean, how do you feel about your own inventories and the ability to work that down through the next couple of quarters in order to free up some cash? And how do you think about that in the broader context of the balance sheet? There hasn't been much discussion on the balance sheet today, but just trying to get a broader sense for how you want to manage through this environment.

Tony Colucci (CFO)

Yeah. Thanks, Steve. The balance sheet was relatively stable, which is quarter over quarter. I think inventory moves to the rental fleet and inventory and AR in general, which is why we didn't focus on it. Liquidity is still in a good position. Leverage holding at the midpoint of our guidance. But on your question relative to inventory, we try to target two turns of inventory, maybe a little bit less than that in our Construction business, and maybe a turn higher than that in our Material Handling business on new equipment. And remember, Steve, that Material Handling, it's a little bit of you're not buying for stock. These are large fleets that are going to Fortune 500 companies that are purchased well in advance.

So there's a little bit of prep and delivery time in our shops on the Material Handling side, but then the fleets are gone and delivered and invoiced. So the bigger impact to your question is on the Construction side. We think we're at a good level inventory-wise. I could see it spiking up maybe a little bit more from where we're at from here as we work through with manufacturers to take delivery. But we think we've got enough equipment on the balance sheet right now to kind of hold steady. So I guess what I'm saying is I don't see any large reduction. I don't see any large kind of increase. We feel like we're in a good spot to keep turning at the levels that I mentioned and just go from here.

Steve Hansen (Managing Director and Equity Analyst of Transportation and Agribusiness)

Okay. That's helpful. Thanks. And just wanted to go back. I think it might have been Ryan was commenting earlier about the most competitive aspects of the market being in excavators. But I mean, just as a broader sweep, it sounds like the Construction side has been more competitive. Are there specific lanes or verticals where you're seeing the most competition? And just curious if that's filtering into that rental side on the same vertical or not.

Ryan Greenawalt (Chairman and CEO)

The competition that we're seeing is in the heavy construction. So the heart of the line, Volvo products, large wheel loaders, large excavators, 40 ton articulated dump trucks, I think maybe less so on the compact end of the market.

Steve Hansen (Managing Director and Equity Analyst of Transportation and Agribusiness)

Very helpful. Thanks.

Operator (participant)

Thank you. There are no additional questions waiting at this time. I would like to pass the conference back to Ryan Greenawalt, CEO with Alta Equipment Group, for any closing remarks.

Ryan Greenawalt (Chairman and CEO)

Thank you for joining us tonight. That concludes the call.

Operator (participant)

That concludes today's conference call. I hope you all enjoy the rest of your day. You may now disconnect your line.