Executives
David J. Meyer – Chairman of the Board & Chief Executive Officer
Peter J. Christianson – President, Chief Financial Officer & Director
Analysts
Robert J. Evans – Craig-Hallum Capital
Robert McCarthy – Robert W. Baird & Co.
Cliff Walsh – Julius Bear
Titan Machinery, Inc. (TITN) F3Q07 Earnings Call January 11, 2008 9:00 AM ET
Operator
Good morning ladies and gentleman thank you for standing by. Welcome to the Titan Machinery, Inc. third quarter 2007 financial results conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, January 11, 2008. I would now like to turn the conference over to Mr. John Mills. Please go ahead sir.
John Mills
Good morning ladies and gentlemen and welcome to the Titan Machinery third quarter conference call. On the call today from the company are Mr. David Meyer, Chairman & Chief Executive Officer and Mr. Peter Christianson, President & Chief Financial Officer. By now everyone should have access to the third quarter earnings release for the period ending October 31, 2007 which went out this morning at approximately 6:00 am eastern time. If you have not received the release it is available on the investor relations portion of Titan’s website atwww.TitanMachinery.com. This call is being webcast and a replay will be available on the company’s website as well.
Before we begin we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking and management may make additional forward looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed on them. These statements are based on current expectations of management and involve inherent risks and uncertainties including those identified in the risk factor section of Titan’s registration statement on Form S1 filed with the SEC in connection with its initial public offering. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward looking statements. Titan assumes no obligation to update any forward-looking projections that may be made in today’s release or call.
With that, I’d like to turn the call over to the company’s chairman and CEO Mr. David Meyer. Go ahead David.
David J. Meyer
Good morning everyone and thank you for joining us today. This has been a very exciting time for us with our recent IPO and we’re pleased to be sharing our strong results with you today. I had the pleasure of discussing our story with many of you during our road show in November and December and before we get too far into our results I wanted to thank you for your interest and investment in Titan.
On today’s call I will provide some highlights of our third quarter results and a brief overview of our company. Then, Peter will review the financial results of the quarter in more detail and provide fourth quarter guidance as well as a preliminary look for our next fiscal year. I will then provide some closing remarks and we will open up the calls to take your questions.
Because this is our first earnings conference call as a publicly traded company I am particularly pleased to report to our new stockholders that Titan achieved strong results in the fiscal third quarter ending October 31, 2007. Revenue for the third quarter increased 67% to $132 million due to our organic growth and acquisitions. Our operating income increased over 100% to $6 million with operating margins improving 25% compared to the same period last year. We are pleased with the results and based on our compelling business model, long term agricultural forecast, advantageous store locations and significant organic growth and acquisition opportunities we believe we will continue to achieve strong growth and long term shareholder value.
Titan Machinery has a successful 27 year operating history and with 38 dealerships and two outlet stores we owner operate what we believe is one of the largest networks of full service agricultural and construction equipment stores in North America. Positioned in the upper mid west we offer our customers the leading brands of agricultural and construction equipment including CaselH agricultural equipment, New Holland agricultural, Case construction and New Holland construction.
The agricultural equipment and parts we sell and service include machinery attachments for uses ranging from large scale farming to home and garden use. In the construction side of the business we offer heavy construction and light industrial machinery for commercial and residential construction, road and highway construction and mining applications as well.
For the past 27 years we have set ourselves apart and achieved our leading position due to strong competitive advantages which include the following: first, we have a tremendous market. We are truly a one stop shop by providing equipment and part sales, repair and maintenance services as well as rental function in each store location. For the past 27 yeas we have carved out a footprint of a contiguous ag stores in the RiverValley extending to the highly product areas of South Dakota, southern Minnesota and Iowa. This strong ag market combined with the diversification of the construction equipment stores gives us both the ability and growth opportunity for years to come.
Second, our mix of equipment and reoccurring parts and service sales enable us to operate effectively throughout different economic cycles enables us to take some of the seasonality out of our business model. As an example, our reoccurring revenue from repair and maintenance and parts sales comprises of approximately half of our gross margin contribution in the prior year.
Third, because of the way we have structured our strong store operating model we truly are an integral part of each community in which our stores are located. We impart a leadership and share best practices throughout our organization while realizing efficiencies and leverages at the corporate level. It has always been our premise that great customer service is created through accountable store employees who are supported by centralized administrative, finance and marketing functions. By managing our business as a network of independent stores supported by a centralized shared resource group we ensure coordination of the entire enterprise and offer tremendous scale while promoting long term customer and employee relation shifts at the store level.
Lastly, because of the model and our position as one of the largest networks of full service agriculture and construction businesses our scales enable us to offer our customers a great variety of equipment and better maintenance, parts availability and superior service throughout the year. The strength I have just described has always been keys to our success to date and have always positioned us to take advantage of the long term growth opportunities ahead of us.
In addition to the company’s specific strengths I have just described Titan Machinery is benefiting from a favorable market environment. First, we are competing in a very large fragment in a growing market. In 2006 revenue from farm and garden equipment dealers were $55 billion and constructions was even larger at $72 billion for 2006 so we have a lot of room for growth. Second, US farm balance sheets are the strongest they have been since the last 50s. Overseas demands for US agricultural products and the growing demand generated by the bio fuel industry have created higher commodity prices and strong farm incomes. We expect these trends to continue for many years ahead. Third, technology is driving demand for new farm equipment and services. With the annual average net farm income expected to increase significantly over the next 10 years farmers are going to upgrade equipment to make sure they have the best technology to optimize crop yields and minimize costs. Technology is playing a growing role in crop utilization which creates a great opportunity for Titan because this technology requires additional technical skills and resources from a dealer to support. And, due to the highly skilled and highly trained staff we are positioned to take advantage of this great opportunity. We finally take advantage of this large market we are addressing and improve financial strengthen of our customers through both organic growth as well as through growths through acquisitions.
Over the last three years acquisitions have attributed more than half of Titan’s revenue growth. We believe acquisitions will continue to be a great opportunity in the foreseeable future. As we see it we have only begun to realize the potential of our market lead and position and we are very excited about our long term opportunities.
But, before I get into more detail about future growth opportunities I would like to turn over the call to our president & CFO Peter Christiansen to review our financial results for the three and nine month periods ending October 31, 2007. Peter?
Peter J. Christianson
I’m going to review our three and nine month results in more detail and then I’ll discuss our fourth quarter outlook and our preliminary outlook for the full year ending January 31, 2009. Our overall revenue for the third quarter ending October 31, 2007 increased 67% to $132 million from revenue of $79 million from the third quarter of the prior year. Revenue from equipment sales increased 78% to $103 million from $58 million in the third quarter last year. Our parts sales increased 42% to $18 million in the quarter compared to $13 million in the same period a year ago. Revenue generated from our services business increased to $7.9 million versus $5.9 million last year. This gives us a sales mix of 78% for equipment and 20% for the after sales product support parts and service part of our business.
Same store sales had an increase of $18.9 million over the third quarter of the prior year representing a growth of 24%. Now, when we look at same store sales we know that’s important but we’re very sensitive to remember that our sales mix has an effect on our margin so that as we see same store sales we have to keep in mind the sales mix can affect our operating margins. With that said, our gross profit margin for the third quarter was 15.4% of sales compared to 16.7 of sales for the third quarter last year. This expected slight decrease is a result of a higher percentage of our revenue coming from our equipment sales which is the lowest margin portion of our business.
During a strong agricultural environment as we’re seeing now farmers tend to buy more equipment and although our gross margins are lower are revenue is higher resulting in a higher gross profit contribution and a better bottom line. If the agriculture economy is not as strong we’ll sell less equipment but we’ll generate more revenue in parts and services which is a higher margin business important to our model.
Our operating expenses as a percent of net sales were 10.9% in the third quarter versus 13.2% in the third quarter of the prior year. This 230 basis point improvement is due to our increased revenue and the strength of our business model. As a result our operating income improved to $6 million and we achieved an operating margin of 4.5% versus $2.8 million and an operating margin of 3.6% in the third quarter last year. Net income for the third quarter was $2.7 million or $0.36 per diluted share compared to net income in the third quarter last year of $.8 million or $0.13 per diluted share.
Now, for the nine month period ended October 31, 2007 sales rose 42.8% to $297.8 million from $208 million during the same period last year. Looking at our bottom line for the nine month period our net income doubled to $4.9 million or $0.72 per diluted share compared to net income of $2.3 million or $0.36 per diluted share in the same period last year. Same store sales had an increase of $33.5 million over the nine month period of the prior year representing a growth of 18.2%.
Now, I’d like to turn to a few key components on our balance sheet. Our total inventories amount to $146 million at the end of the third quarter up from $106 million at the end of the third quarter last year. The increase in our inventory is attributable to having six more dealerships in our network compared to the same period last year and also our positioning for the market. We believe our inventory and access to inventory positions us well to support our sales growth for the foreseeable future.
As you know, on December 11, 2007 we completed an initial public offering at $8.50 per share and raised approximately $42 million in net proceeds. The net proceeds to the company from this offering are being used to reduce our outstanding indebtedness and to fund future acquisitions of dealerships as well as for working capital and general corporate purposes. At October 31, 2007 our subordinated debt was $16.8 million and we recently used the proceeds from our IPO to pay of $9.4 million of this debt and converted $6.4 million of debt into 2.3 million common shares.
Now, turning to our outlook; we anticipate the revenue for the fourth quarter ending January 31, 2008 will increase by approximately 50 to 60% as compared to the same period a year ago in other words, the $127 to $135 million range. Earning per diluted share for the fourth quarter I expected it to be in the range of $0.01 to $0.03 per diluted share which includes a one time IPO related debt conversion and retirement cost of $3.8 million or $0.20 per diluted share. When we exclude these costs we expect earnings per diluted share to be in the range of $0.21 to $0.23 for the fourth quarter. Weighted average shares for diluted earnings per share in the fourth quarter ending January 31, 2008 are estimated to be approximately 11.2 million shares. The increase from prior periods primarily resulted from the issuance of shares in our IPO.
Now for the fiscal year ending January 31st, 2008 the company expects revenue in the range of $425 to $433 million and earnings per diluted share in the range of $0.61 to $0.63 cents. Excluding the IPO costs outlined above the earnings per diluted share are expected to be in the range of $0.89 to $0.91. Weighted average shares used to calculate the diluted earnings per share for the fiscal year ending January 31, 2008 are estimated to be approximately 8.3 million shares.
Due to the timing of our initial public offering and reporting at fiscal third quarter results we are going to provide a preliminary revenue and earnings outlook for the full fiscal year ending January 31, 2009. Going forward we expect to only provide full year outlook for the upcoming year when we report the fourth quarter results. For the fiscal year ending January 31, 2009 in our preliminary outlook we expect revenue of $530 to $590 in that range, million dollars and earnings per diluted share in the range of $0.77 to $0.82. Fully diluted shares outstanding for the fiscal year ending January 31, 2009 are estimated to be approximately 3.8 million shares. Now, I will go into further detail with our fourth quarter earnings results but again with the timing of our registration we felt that we wanted to give a preliminary outlook on 2009 for you folks so that we could get you up to speed and further comments will follow later.
Now I would like to turn the call back over to David for closing comments.
David J. Meyer
We are pleased with our results for the third quarter. We are confident that we can execute our growth opportunities for the many reason I outlined earlier. As we prepare to enter fiscal year 2009 we will continue to grow our business by broadening our customer base and leveraging our business skills to support new and existing customers. Before we take your questions I would like to conclude by thanking our employees for our achievements to date and thanking our valued customers for there continued support. We appreciate the support of CNH. We are excited about our future and look forward to delivering long term value to our stock holders. Operator we are now ready for questions and answer portion of the call.
Question-and-Answer Session
Operator
We will now begin the question and answer session. (Operator Instructions) Our first question comes from Bob Evans from Craig-Hallum Capital. Please go ahead sir.
Robert J. Evans – Craig-Hallum Capital
My question is your same store sales accelerated significantly in Q3 versus the first half of the year? Can you give us a little bit more color in terms of why that was and a little bit more color on the business environment?
Peter J. Christianson
We are experiencing a strong market within our agricultural industry right now and as we see that usually where that will show itself is on equipment sales and because of the transaction sizes they will accentuate our same store sales growth versus the after market sales of part and service.
Robert J. Evans – Craig-Hallum Capital
I assume your Q4 guidance is assuming that to continue in terms of where you same store sales might be?
Peter J. Christianson
We did factor that in when we put together our outlook for our fourth quarter, yes.
Robert J. Evans – Craig-Hallum Capital
Do you happen to have with you what were the same store sales a year ago in Q3? I don’t think you had mentioned that and for that matter if you happen to have it handy Q4 as well?
Peter J. Christianson
I don’t have that right here but I can try and get that and get back to you on that.
Robert J. Evans – Craig-Hallum Capital
No that would be fine. A couple of also detail items in your guidance from fiscal 2009 how much stock interest expense are you assuming in that ballpark?
Pete
I am not exactly sure that I understand the question. What exactly do you mean by stock interest?
Robert J. Evans – Craig-Hallum Capital
I am sorry. Stock compensation expense. Your stock options expense.
Pete
Part of the calculation to get to our weighted average shares is that we do have a very small amount that is calculated in there that we recognize for the options that are with the employee plans that we have, very insignificant.
Robert J. Evans – Craig-Hallum Capital
Also cap ex can you give us a ballpark idea for cap ex for fiscal 2009?
Peter J. Christianson
Like I say the best preliminary outlook that I wanted to talk about was our revenue and earnings but for models I guess the cap ex is a very small metric as we see our business, as we measure our business. We are looking at cap ex of $3 to $3.5 million for 2009. And, like I say this is a preliminary outlook but we felt like we really need to do this for all of you to have that, because otherwise it would be too late to weight.
Robert J. Evans – Craig-Hallum Capital
Can you give us a little bit of color as it relates to the acquisition pipeline in terms of opportunities since you have now gone public have you seen that accelerate? If you can give us a little bit more color in terms of how your pipeline looks?
David J. Meyer
Well right now there is a full pipeline out there and really this goes back probably the last several years here if you look at the aging group that dealer principals out there you know you look at the lack of succession in this industry that we have a full pipeline and we are managing that and working very closely with CNH and so that growth strategy, we’re working hand-in-hand here in doing some pretty detailed analysis of the timing of the acquisitions, the right number of acquisitions that fit into our model. It’s a full pipeline. We are looking out for several years. We think we are on the front end of a big wave of consolidation in this industry and we are excited about the opportunities.
Peter J. Christianson
I would like to just interject something here. When I was talking about our preliminary output ending for the fiscal year January 31st, 2009 and told you about the fully diluted shares outstanding as of January 31st 2009, I said 3.8 million shares for the share the share count it is 13.8 million shares and I just want to clarify that for everybody on the call.
Operator
Our next question comes from Robert McCarthy with Robert W. Baird. Please go ahead.
Robert McCarthy - Robert W. Baird
I have got a couple of things that I want to ask you about. First off in your results for the quarter you benefited on the top line, by I think it was $16 million dollars from a lease program I presume run by CNH. Could you talk about that? Talk about the prospects that that would affect results going forward.
Peter J. Christianson
Well, from time to time we have seen programs like this where we can get together with our main vendor which is CaseIH and we put together a lease program on a series of tractors. This has been something that has happened in the past and could happen going forward. We have to assess where the market is at and what the program is that is available.
Robert McCarthy - Robert W. Bair
Has there been a comparable program run during the current fourth quarter?
Peter J. Christianson
Are you talking about prior years?
Robert McCarthy - Robert W. Bair
No I am talking about, this was an impact in your October quarter, right?
Peter J. Christianson
When I give the results for the fourth quarter we had put some of that into our calculation as part of those results, you are right.
Robert McCarthy - Robert W. Bair
In the same store, yes, I reinforce what we just heard Bob comment on the very impressive same store sales number even without that program. Agricultural versus construction I assume the number was stronger yet in the farm equipment dealers?
Peter J. Christianson
Yes, the farm equipment has been stronger, very, very strong; a lot of strength in the farm equipment business. You look at the commodity prices. [Inaudible] We are fortunate in the construction in our market is effected by, you take western North Dakota, you take both agriculture but then you also have these oil, the coal mining, wind part going into it. If you really look, I saw some specifics the other day if you look at the housing market compared to the negative trend throughout the United States. You look at Bismarck, Fargo, Sioux Falls, Rapid City where we have construction stores where actually increases in not only resales but in new housing starts in those markets. So, we are fortunate in that the Midwest have somewhat of a different mechanism in the construction source, so we’re seeing a steady business and we are not seeing the downturn you see in the other parts of the United States in the construction business.
Robert McCarthy - Robert W. Bair
So can you tell us what kind of same store sales growth you had in the construction side?
Peter J. Christianson
We do not look at our business that way we are looking at our entire machinery business.
Robert McCarthy - Robert W. Bair
Okay but it was positive? Is that what I here you saying.
Peter J. Christianson
Like I said, we’ve got stores where the two of them are all the same stores so it is not possible. We are not playing that out.
Robert McCarthy - Robert W. Bair
I see. Okay, well thank you for that. In your outlook for FY09 have you included any acquisitions that you have not yet made?
Peter J. Christianson
Yes, we do have that as part of our. This is a very similar trend, our historical results at Titan is that our company, we have been building this company on both organic growth and growth through acquisitions and that same exact formula is what we use when looking forward into 2009 to come up with our preliminary outlook for you.
Robert McCarthy - Robert W. Bair
Can you share with us roughly what kind of same stores sells growth you are assuming in your forecast for FY09.
Peter J. Christianson
Right now what we want to do for this preliminary outlook, we just wanted to give you some type of feel for what range we look at for our revenue side of business and our earnings side. Really right now I would feel more comfortable looking at that after our fourth quarter results are out.
Robert McCarthy - Robert W. Bair
Fair enough. Lastly I thought you made a very interesting; I think David actually made the comment that you - no actually maybe it was you Peter, talking about inventory. Inventory is up in part because you are trying to position yourself for a healthy market and I think you made the comment along the lines, “We have ongoing good access to inventory.” It is fairly well understood, I think in a market demand for combines, large tractors is very strong as prompted one of the other manufactures to make comments about how far out their own productions schedules are sold out. Do you have any issues in securing supply of products so that you can meet customer needs?
Peter J. Christianson
Well, right now we have been looking at forecasting this going back the last six or nine months and we have put orders in the order bank so that we would have inventory to sell. And, at the same time we were very successful in the fourth quarter with pre-selling where we have actually sold equipment that will be delivered in the first and second quarters of this year out there. What we need to be is very aggressive out there with our sales force. We think we have an excellent group of sales people and the customers are very aware of this. There is going to be a lot of activity out there to get the deals made and get the deals locked in. We will continue to work with CNH to make sure that we have the orders on hand to supply our needs.
Robert McCarthy - Robert W. Bair
I wonder Peter do you have a number for what acquisitions that you have completed in the last 12 months have contributed to revenue in the quarter?
Peter J. Christianson
In the quarter - I have to look at that Bob.
Robert McCarthy - Robert W. Bair
While you are looking that up let me also ask about the two most recent well, really the last acquisition that you all announced the Avoca Greenfield dealers that brought $34 million of revenue. Is there anything unusual there in terms of recent sales results or perspective sales results? What I am getting at is the $34 million really a pretty clean number? There was nothing wildly unusual that inflated it as we look back and then going forward is this – you’ve had situations in the past where you’ve bought businesses that were severally over inventoried and you get a short tem pop from liquidating that inventory. Again, I think most people understand that is why your same store sales statistics focuses on businesses that you have owned for at least two years. Is there a prospect for something like that happening in this relatively larger acquisition?
Peter J. Christianson
I think that what is important to look at here is that you know we see that acquisition as mirroring what we are doing with our other stores at Titan. That falls into a very standard market that we are used to marketing in. We have other stores that same market environment and what we have just talked about with our fourth quarter results and what we are looking at, I think it is fair to say that that store should be in a similar trend to what we have been doing.
Robert McCarthy - Robert W. Bair
While you are looking for that acquisition number, let me follow up on a separate comment that I don’t know if I heard it made on the call but it does appear in the queue - reference to growing market share. Could you talk a little bit about that? Where you are seeing that happen and how sustainable you think it is?
Peter J. Christianson
First Robert I just want to get with you - I don’t have the acquisition revenue on the quarter but I do have it for the nine months and the acquisition contributed $39.7 million or 44.5% of the increase. So does that help you there?
Robert McCarthy - Robert W. Bair
Yes it does, thank you Peter. Then the question about market share.
David J. Meyer
To comment on that question, you know we have always been very aggressive at our dealerships and wanting to grow our share. We like the margins we see from the parts and service business and we know to get that future revenue stream we need to be successful getting market shares. [Inaudible] we were very successful and a magnum lease program; we did that. We thought we had a situation here where we had a lot of customers were going to have some tax issues this year and we put that together so that they could take advantage of that and because of lease payments are deductible. So, the things we are doing in our stores from the way we manage our sales people, our demonstrations, and our field days. We are very happy with our product line we have from CashIH from now, New Holland and the construction side both Case construction and Holland construction.
We have got a lot of things in place here and we are very focused on market share and we know that to be successful this long term we need to be continually growing the shares. I think throughout our whole company we are passionate on that. We have a lot of things in place and we have got a lot of incentives within our folks to grow shares. We feel very confident that we can continue to do that.
Robert McCarthy - Robert W. Bair
Last question I was surprised to see the news about the Titan truck center. Could you talk about your decision process there and whether you have any plans to expand on that initiative? Or is this kind of a one shot deal?
Peter J. Christianson
The Titan truck center is located in Moorhead and what we have is a large percentage of our customer base all of our farm customers and our construction contractors use these large trucks and they use the same engine and drive line very similar to what we have on the big equipment that we service. So, essentially we are just bolting that on to one of our dealer locations. We have already been operating the service side of this business, we have already been operating that historically out of a store that we have down in South Dakota and Watertown and we have it in a store that we did through acquisition in Crookston. Really we have been doing this and it is something where we can provide more full coverage on service for our customer base and at the same time get operating leverage from what we are doing already in our parts and service side of our business. We felt that because of this being in a bigger metro area in the Moorhead location then we just essentially branded it where we called it truck center but essentially it is just an extension of the dealership that is already existing there
Robert McCarthy - Robert W. Bair
We may see you do more of this as you leverage the existing assets that you have in place?
Peter J. Christianson
We have been doing it in these stores and but we are not, the truck center is not selling new trucks right now.
Robert McCarthy - Robert W. Bair
I understand. Outside of maybe signage and promotion is there any other significant incremental cost required to add this to a dealers capabilities?
Peter J. Christianson
No there really isn’t. With all of our dealerships we need to keep track of how many square feet we have per technician. One last thing on the branding of that, in that particular instance with this store in Moorhead it is right along the freeway or interstate and in order for us we do have some drive by traffic that we can just get at for incremental business and there is just a lot of these people that need DOT inspections as well as our customers. So to give them just a little more identity we have that capability there instead of just calling it Titan Machinery, we also called our truck service bay we call that the truck center. Do we have one more question?
Operator
Our next question comes from Cliff Walsh from Julius Bear. Please go ahead sir.
Cliff Walsh – Julius Bear
I just have one quick question on guidance for fiscal 2009 did you include potential acquisitions in that number or is that just existing branches at this point.
David J. Meyer
That number did include potential acquisitions mirroring our historical trend of what we have been doing.
Operator
We have no additional questions at this time. I will go ahead and turn it back to you.
David J. Meyer
Thank you for your participation today and we are looking forward to sharing the progress with you next quarter. As a reminder we will be attending the ICR consumer conference next week and we hope to see many of you there. With that that will be the end of our call today. Thank you.
Operator
Ladies and gentlemen this concludes the Titan Machinery INC. third quarter 2007 financial results financial call. If you would like to listen to a replay of today’s conference please dial 1-800-406-7325. Thank you for using ATT and you may now disconnect.
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