Titan Machinery, Inc. F2Q10 (Qtr End 07/31/09) Earnings Call Transcript

| About: Titan Machinery (TITN)
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Titan Machinery, Inc. (NASDAQ:TITN) F2Q10 Earnings Call September 9, 2009 8:30 AM ET

Executives

John Mills – Integrated Corporate Relations

David Meyer - Chairman and Chief Executive Officer

Peter Christianson - President and Chief Financial Officer

Mark Kalvoda - Chief Accounting Officer

Analysts

Bob Evans - Craig-Hallum Capital

Rick Nelson – Stephens Inc

Chris Weltzer – Robert W. Baird

Brent Rystrom – [Inaudible]

Paul Mammola – Sidoti & Company

Operator

(Operator Instructions) Welcome to the Titan Machinery Second Quarter Fiscal 2010 Conference Call. I will now hand the conference over to John Mills.

John Mills

Welcome to Titan Machinery Second Quarter Conference Call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer and Peter Christianson, President and Chief Financial Officer, and Mark Kalvoda, Chief Accounting Officer.

By now everyone should have access to the earnings release for the fiscal second quarter ending July 31, 2009, which went out this morning at approximately 7:00 am Eastern time. If you have not received the release it is available on the Investor Relations portion of Titan’s website at TitanMachinery.com. This call is being webcast and a replay will be available on the company’s website as well.

In addition, we are providing a slide presentation to accompany today’s prepared remarks. We suggest you access the presentation now by going to Titan’s website and clicking on the Investor Relations tab and the presentation is directly below the webcast information in the middle of the page.

Before we begin we’d like to remind everyone that the prepared remarks contain forward looking statements 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 upon them.

These statements are based on current expectations of management and involve inherent risks and uncertainties including those identified in the risk factors section of Titan's most recently filed 10-K. 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.

David Meyer

On today’s call I will provide highlights of our second quarter, discuss some of the recent acquisitions, and provide a general update on our business. Then Peter will review the financial results for the second quarter in more detail. I will then provide some closing remarks and we will open up the call to take questions.

As John mentioned, to help you follow today’s prepared remarks we’ve provided a slide presentation which you can access on the investor relations portion of our website at TitanMachinery.com. If you click on the Investor Relations tab on the right side of the page you will see the presentation directly below the webcast in the middle of the page. I will pause for a few moments to allow you to access the presentation on your website.

I am pleased to report solid second quarter results for Titan Machinery. Turning to slide two, we have an overview of the quarter. Revenue for our second quarter increased to $193 million up 43% from $135 million in the second quarter of last year. Our gross profit for the quarter was up approximately 42% to $36 million compared to a gross profit of $25 million in the comparable period last year. Our pre-tax income for the quarter was $8.2 million compared to $5.6 million last year. We achieved earnings per diluted share of $0.27 in the second quarter compared to $0.19 per share last year.

Turning to slide three you see our first six month results. Revenue for the first half of fiscal 2010 increased 25% to $360 million in the first half of last year. Our gross profit for the first six months of fiscal 2010 was $65 million up 29% from $50 million in the prior year period. Our pre-tax income for the first half of fiscal 2010 was $11.3 million. Our diluted earnings per share for the first six months of 2010 was $0.37 and 17.9 million weighted average diluted shares compared to $0.43 per diluted shares on 15.5 million shares in the prior year period. It is important to note that our weighted average share count increased 16% compared to last year due to our 2008 follow on offering.

Turning to slide four, based on our second quarter results and outlook for the remainder of the year, we are reiterating our full year revenue and net income fiscal 2010 guidance. Our revenue outlook for fiscal 2010 is a range of $750 to $790 million. We anticipate achieving net income between $16.6 and $18.7 million and earnings per share between $0.92 and $1.04. Weighted average diluted shares outstanding used for calculating fiscal 2010 earnings per share guidance will increase 7.1% to 18 million shares compared to 16.8 million shares in fiscal 2009 due to our 2008 follow on offering.

Peter will provide additional information on our same store sales results, year to date and anticipated annual same stores sales exhortations in a moment.

To put our guidance into perspective, turning to slide five, which is a net income analysis for a five year time period, you can see that we experienced a strong year in fiscal 2009 as our business benefited from the record setting AG economy. Fiscal 2010 guidance is in line with our long term trend line, growing the business through long term organic and acquired business unit growth. I would like to go over a few key factors that are important when evaluating our second quarter results and modeling our business for the second half of fiscal 2010.

On slide six you can see our earnings per share seasonality over the last couple of years. As we have said in the past we measure our results on an annual as opposed to a quarterly basis as revenue can shift from one quarter into another based on a number of factors including when our customers are buying equipment, the weather patterns, manufacturing, pricing on programming, equipment availability, and when our customers decide to have their equipment serviced. This year the second quarter represented a larger percentage of earnings reflecting the more traditional seasonality to our business.

I would like to briefly discuss a couple factors impacting our second quarter. As you may recall from our last call, our first quarter results were impacted by the well publicized flooding in the Red River Valley. During the flooding our customers were protecting their farm sites. As expected, we have since seen patterns normalize in this region and revenue return to a more traditional seasonality to our business.

Additionally, while our construction equipment storage did not see as dramatic of a decline as the overall industry numbers, our CE storage are experiencing softness in their business given the current macro economic environment. With our CE dealership acquisitions during fiscal 2009 in Iowa, Nebraska, Montana, and Wyoming we have increased our presence in the construction industry which we expect to be up approximately 20% of our long term revenue mix compared to 12% in fiscal 2009. We are currently integrating our recent construction acquisitions into our Titan operating model which we believe will benefit our business in the long term.

In addition to strong organic growth in the second quarter our year over year revenue reflects our solid revenue growth from acquisitions. Slide seven shows our strong acquisition activity over the past several years. We reiterate why we have previously mentioned we have identified a three to five year acquisition pipeline to support 10% to 15% expected annual acquisition growth. Year to date in fiscal 2010 we have closed on four acquisitions and opened one new store.

Let me now review our two most recent acquisitions which generated approximately $3.5 million in revenue and their most recently completed fiscal years. First we acquired Valley Equipment a Case IH brand agriculture equipment dealership with one store in Mayville, North Dakota. Located in the Red River Valley, Mayville is a progressive agriculture community with highly productive soils and is strategically located between our Grand Forks and Arthur stores.

In August we closed on the acquisition of Lickness Bros. Implement, Co. with one store in Britton, South Dakota. This also is a Case IH brand agriculture equipment dealership. Lickness Bros. Implement Co. is strategically located in the fertile James River Valley between our Lisbon, North Dakota and Aberdeen, South Dakota stores.

Both of these acquisitions lie between existing Titan locations and are very good examples of our strategic tuck in acquisitions allowing us to gain operating leverage and improve our continuous footprint. Our team is doing an excellent job of implementing our Titan operating model in these new stores. Importantly, CNH continues to support our acquisition efforts and we look forward to continuing to capitalize on acquisition opportunities in the months ahead.

Now I would like to spend a moment discussing the environment in which we are currently operating. Turning to slide eight, the AG equipment industry in the US is still strong. While there has been much discussion about forecasting the decline in farm income in 2009 it is important to note that cash crop producers are performing better then the other segments of agriculture. Crop cash receipts are forecasted to be $165 billion which is the second highest on record.

As you know, 2008 was an unusually good year for the AG industry and we are now seeing farmers return to their traditional buying patterns. That said, farmers continue to have strong balance sheets and the capital available to invest in equipment. In addition, there continues to be ample availability of financing for AG equipment and our customers are not having any problem receiving credit when they desire to finance equipment. Our customers continue to have multiple sources to receive financing.

CNH Capital continues to provide an array of attractive equipment finance and lease options. There are several local and regional banks in our markets that are very healthy and continue to provide capital for land, operating expenses and equipment purchases. Another large player in AG financing is the National Farm Credit System. With federally guaranteed funds, St. Paul headquartered AgriBank capitalizes a 15 state network of local farm credit service associations, such as AG Country, AG Direct, and AG Star.

In summary, we expect another good year for our AG business due to the strong farm fundamentals. As we anticipated the strength of our AG business was partially offset by the continued softness in the construction equipment sales and rental fleet utilization. Keep in mind that the regions in which most of our CE stores are located are not dependent strictly on housing sector. The influence of infrastructure, energy, mining, AG and commercial growth in our markets have tempered the effects of the recession on our construction equipment business.

While we are cautiously optimistic that the overall construction industry will begin to improve over the next 12 months, it would be still some time until improvements are fully reflected in our results. While the current economic environment is temporarily affecting the business we are confident that the construction equipment stores will be an important contributor to the growth of Titan Machinery brand and our top and bottom line performance in the long term.

In calendar 2009 both our AG and CE businesses stand to benefit from the $250,000 second year deprecation allowed for the purchases under Section 179, along with the expanded 50% bonus depreciation allowed in the recently enacted American Recovery and Reinvestment Act of 2009. These are excellent incentives for our customers who purchase equipment in the current calendar year.

In summary, we are pleased with our solid performance in the second quarter and first half of fiscal 2010 and we remain confident in our ability to continue to deliver on strong results.

With that I will now turn the call over to Peter.

Peter Christianson

Turning to slide nine, our total revenue for the second quarter ended July 31, 2009, was $193.2 million. Our increase in revenue from all three of our main revenue sources was up from 37% to 45% compared to the same period last year, reflecting our strong organic and acquisition growth. As you may recall, in addition to discussing our three primary revenue streams, last quarter we also discussed what is referred to as our other revenue stream on our income statement. Our revenue from this category increased 48% to $4 million in the second quarter of fiscal 2010 from $2.7 million in the second quarter of the prior year.

On slide 10 our gross profit for the quarter increased to $36 million compared to gross profit of $25.4 million for the same period last year. Gross profit from our reoccurring parts and service revenue contributed 54% of overall gross profit for fiscal second quarter of 2010 which is the same as in the second quarter last year.

Gross margins in the quarter were 18.6% compared to 18.8% in the second quarter a year ago. Our overall gross margins were impacted by our lower year over year gross margins from our other revenue category which is comprised primarily of revenue generated from our rental business. Gross margins for this category decreased to 18.9% in the second quarter of fiscal 2010 compared to 28.9% in the prior year quarter.

Let me provide some color on this change. The lower results are driven by a larger rental fleet in the construction stores that were purchased last year combined with a soft construction environment. Adequate sizing of our rental fleet and maximization of rental fleet utilization are primary objectives for us.

Our operating expenses as a percentage of net sales decreased 60 basis points to 13.8% in the second quarter versus 14.4% in the second quarter of the prior year, which reflects improved fixed operating expense utilization due to increased sales. Pre-tax income improved $8.2 million or 4.3% of revenue compared to $5.6 million or 4.2% of revenue in the second quarter of last year.

Net income for the fiscal second quarter of 2010 was $4.9 million an increase of 46% compared to net income of $3.3 million in the second quarter last year. Earnings per diluted share for fiscal second quarter 2010 were $0.27 on approximately 18 million shares outstanding compared to $0.19 per diluted share on approximately 17.2 million shares outstanding.

Now turning to our first six months results. On slide 11 our total revenue for the first six months of fiscal 2010 increased to $359.5 million compared to $287.5 million in the first half of last year. Our revenue from the higher margin parts and service sales grew more then equipment revenue during the first six months of fiscal 2010 demonstrating the stability of our reoccurring parts and service revenue.

On slide 12 gross profit in the first half of fiscal 2010 increased to $64.5 million compared to $50 million last year. Gross margins improved 50 basis points to 17.9% compared to 17.4% in the first six months of last year, reflecting the strong increase in our higher margin parts and service revenue and partially offset from our lower margin other revenue category. Gross profit from our reoccurring parts and service revenue contributed 55% of overall gross profit for fiscal second quarter 2009 compared to 50% in the first half of last year.

Our operating expenses as a percent of net sales were 14.2% in the first six months of fiscal 2010 versus 13.1% in the prior year period. The increase in operating expenses as a percentage of revenue was in line with our expectations and was driven by additional costs associated with the construction store acquisitions. Construction stores have higher operating expenses as a percent of revenue compared to AG stores.

Pre-tax income was $11.3 million or 3.1% of revenue, flat with revenue of $11.3 million or 3.9% of revenue in the second quarter of last year. Earnings per diluted share for the first six months of fiscal 2010 were $0.37 on approximately 17.9 million shares outstanding compared to $0.43 per diluted share on approximately 15.5 million shares outstanding in the same period last year. The 15.6% increase in share counts is due to the company’s May 2008 follow on offering.

Slide 13 shows our same store sales results for the second quarter and first six months of fiscal 2010. For the second quarter, our same store sales increased 20.2% reflecting the strength of our AG business and a return to a more traditional business cycle as David talked about on slide six. For the first six months of fiscal 2010 our same store sales increased 3.5% reflecting stronger first half AG store sales then anticipated.

As we have pointed out in previously calls, based on the different margin levels of our revenue stream and the stability of our higher margin parts and service business, we believe the best metric to measure our organic growth is same store gross profit. For the second quarter our same store gross profit increased 18.8% year over year to $28.6 million from $24.1 million in the second quarter of fiscal 2009. For the first six months of fiscal 2010 same store gross profit increased 6.2% compared to the 3.5% increase in same store sales to $51.2 million from $48.2 million in the first half of fiscal 2009.

For modeling purposes its worth noting that 26 locations are not included in our second quarter same store analysis and 27 locations are not included in our first six month same store sales analysis. We calculate same store sales by including stores which were with Titan for the entire period which we’re comparing to. The only other stores which were part of Titan for the entire three months of the second quarter of fiscal 2009 are the ones which are included in our second quarter same store comparison.

When thinking about our same store sales numbers for the third and fourth quarters it is important to remember that starting in the third quarter of fiscal 2010 the six construction dealerships from our Midland acquisition will be included in our same stores sales. As we have said, our AG stores our outperforming our construction dealerships and adding the six construction dealerships to our same store sales results will have a negative impact on our quarterly same store sales performance.

Turning to slide 14, this slide provides an update on our revenue modeling used for our fiscal 2010 revenue guidance. Our original 2010 revenue guidance included same store sales modeled with a 10% decrease. Based on our stronger than anticipated six month comps of +3.5% we’re updating our same store modeling to reflect a 5% annual decrease.

We’re reiterating our original fiscal 2010 revenue guidance of $750 to $790 million based on the expected improvement in same store sales revenue being offset by the less than anticipated revenue from last year’s 15 construction acquisition stores due to the continued construction industry downturn and also the timing of current year acquisition revenue.

On slide 15, we give an overview of our balance sheet highlights. We continue to have a very strong balance sheet with cash and cash equivalents of approximately $86 million or approximately $4.80 per share in cash to pursue future acquisitions and fund working capital and general corporate purposes.

Our inventories totaled $348 million at July 31, 2009, compared to $292 million at the end of our first quarter and $243 million at the end of fiscal 2009. The increase in inventory is primarily the result of purchasing to meet the needs of our expected equipment sales in fiscal 2010 and the return to a normal inventory stocking cycle.

In addition, CNH has provided us with interest free floorplan financing on new equipment we recently purchased and our interest bearing inventory has actually declined since the beginning of the year. In fiscal 2010 we are taking advantage of favorable inventory terms and our strong cash position to build our inventory to support our business plan and reach our market share goals.

Working capital at the end of the second quarter fiscal 2010 was $153 million. As of July 31, 2009, we had $106 million available of our $365 million total floorplan lines of credit. Additionally, we maintained a $25 million operating line of credit with $24.7 million available. Long term debt including current maturities and advances was $40 million at the end of the second quarter of fiscal 2010; $13.9 million of our long term debt is to finance our increased capitalized rental fleet. In summary, we continue to have a strong balance sheet leaving us well positioned for the long term growth of our business.

Slide 16 gives an overview of our cash flow statement. When we evaluate our business we look at our cash flow related to inventory net of floorplan activity which is reported our statement of cash flow as both operating and financing activities. When considering floorplan our first six months of fiscal 2010 net cash flow used for our seasonal increase of inventories is $7 million. This cyclical cash requirement illustrates the importance of our strong cash position on our balance sheet.

On our statement of cash flow the GAAP reported net cash used for operating activities was $27.4 million primarily due to our increase in inventory. We believe including the non-manufacturer floorplan proceeds and the advances on contracts in transit as part of our operating cash flow better reflects the net cash flow of our operations. Net cash provided by operating activities during the first six months of fiscal 2010 was approximately $0.5 million in line with our seasonal expectations.

Now I’ll turn the call back over to David for closing comments.

David Meyer

We believe our strong performance in a very challenging economy is a testament to our strong operating model and leadership position in our industry. We are benefiting from the strong agriculture environment and our diversified revenue streams as well as our reputation of providing farmers with the best value and selection of equipment and parts as well as superior service. We look forward to continuing to deliver solid results and meet our full year goals.

Before we take your questions I’d like to conclude by thanking our employees for all their hard work and thank our valued customers for their continued support. Operator we are now ready for the question and answer period of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Evans - Craig-Hallum Capital

Bob Evans - Craig-Hallum Capital

Can you comment on how much of your inventory is non-interest bearing as of the end of the quarter?

Peter Christianson

Our interest bearing inventory as of the end of the quarter was 30%. In relation to where our interest bearing inventory as of the end of the second quarter was 30% versus 35% as of January 31st.

Bob Evans - Craig-Hallum Capital

You said 30% is interest bearing?

Peter Christianson

Yes.

Bob Evans - Craig-Hallum Capital

Your debt level bumped up a little bit sequentially from Q1 to Q2. I want to make sure I understand the reason for that.

Peter Christianson

We just went to a more traditional financing arrangement where we have a five year term debt with Bremer Bank on our fixed assets. That was $15 million.

Bob Evans - Craig-Hallum Capital

How will that flow through as we look at the second half? Can you give us a sense of how the cash flow, going back to the more traditional model, how will you pay that down? I’m trying to get a sense of cash flow for the second half.

Peter Christianson

There’s a five year term on that. Its straight amortization on that.

Bob Evans - Craig-Hallum Capital

USDA came out with comments not long ago as early farm receipts and then costs being higher for the farmer. Can you maybe talk about that, maybe what you’re seeing in the marketplace in terms of farmer income and maybe put a little bit more clarity on it in terms of your market.

David Meyer

If you look at our market where it’s predominantly production agriculture, heavy in your grains, your corn and soybeans and wheat, if you actually look at the forecast of $165 billion for crop cash receipts, if you eliminate the livestock and dairy out of that, if you just strictly look at the crop cash receipts $165 billion that’s the second highest level ever in history right now. It’s a little bit off from last year but still it’s the second highest level ever. We think in our area here where its predominantly large production agriculture we’re a little buffered from what you’re seeing from those numbers for all of North America it includes hogs, cattle, dairy and some of the different diversified crops.

Bob Evans - Craig-Hallum Capital

How about the input costs, have you seen, would you say the USDA is accurate there or would you say its more, are you seeing a little greater margins in your region?

David Meyer

We’re seeing some big drops in fertilizer costs; you’re definitely seeing some drops in some of the energy type things, the fuel costs. I’d say you’re seeing land prices seems to be maintaining and they’re holding steady which is actually pretty much bodes well for disposable income or the ability to purchase that the customers have. Cash, rents, and it looks like land prices were pretty stable. The fertilizer is a big one and that’s decreasing.

Also I think a lot of these growers are picking up some efficiencies through some of the things that technology is bringing to the table which bodes well for what we’re selling. Fuel efficient engines, some of the GPS technology and some of the efficiencies out there they have in the new technology.

Bob Evans - Craig-Hallum Capital

Acquisitions, you’ve maybe been a little less aggressive this year then last year. Can you give us, has anything changed in the marketplace or give us your lay of the land in terms of acquisition pipeline and what you’re seeing.

David Meyer

We really don’t see any change at all. We’re aggressively out there doing acquisitions, there’s a lot of interest amongst the dealers. I think you need to go back when you look at the demographics of what’s boding well for acquisitions dealer age, increase sophistication of equipment, the capital requirements right now, the increased level of management is taking and really the benefits of our operating model to go out and to acquire these dealerships. A lot of it what you’re looking at is timing right now. We have done a number of acquisitions and there’s quite a bit in the pipeline but it’s just a matter of timing what you’re looking at right now.

Operator

Your next question comes from Rick Nelson – Stephens Inc

Rick Nelson – Stephens Inc

About the floorplan line which I know renewed in August. Can you tell us about the terms?

Peter Christianson

We renewed our floorplan line with CNH in addition to that we have increased our floorplan that we have available to us from GE Capital. We have an arrangement with CNH Capital with different steps of interest based on our level of finance that we do with them. There’s a $300 million total wholesale facility that’s available and the base $25 million is at a lower rate and the amount that we finance above the $25 million is at a little higher rate on that. When we look at that and we combine that with our other wholesale floorplan available from us with all the wholesale floorplan facility really what we’re looking at is probably about a 20% difference in our interest costs on a going forward basis.

Rick Nelson – Stephens Inc

Are the terms disclosed in the Q?

Peter Christianson

On the CNH line there would be but not on our other miscellaneous ones. The take away on it is that we have increased our amount of wholesale credit that we have available to us and we don’t really have a material increase in the cost of that wholesale credit and we’ll manage that to get maximal operating leverage out of what we’re doing with our financing on our inventory.

Rick Nelson – Stephens Inc

I’d like to also ask about the construction side of the business, how that is performing relative to your expectations and what does the guidance assume about that business going forward. I think in the first quarter you indicated construction stores were $0.04 to $0.05 alludive to EPS if you could comment on second quarter, what the outlook is there.

Peter Christianson

Looking at that really if you go that slide 14 that’s kind of the reason why we put that together was because of the fact that, like David talked about AG economy in our area is still remaining strong and we’ve been able to deliver a +3.5% on our same store comps. Those comps do include what we call our core construction stores which were the stores in North Dakota and South Dakota and on the western side of Minnesota. Those stores are still all of our construction stores are running in a soft industry.

As you’re aware there’s a headwind in that industry and so that’s why I thought it would be a good thing for us to break this out on a slide where we updated our same store modeling so that we went to a 5% decline instead of a 10%. Yet we reiterated our 2010 revenue guidance and maintained that guidance and that’s based on the fact that even though we’re experiencing these positive results on our AG side of our business that is being offset by what’s happening on the construction industry.

Rick Nelson – Stephens Inc

I could see that with six month same store sales up 3.5% the full year guide now calls for a 5% decline. Is that something you’re actually seeing in the business today or is it your desire to be more conservative with the guidance.

Peter Christianson

What ends up happening is that you have your six stores from the Midland acquisition coming in and being included in our same store quarterly sales comparison. As you have more of the effect of the construction stores into all of our numbers that’s what’s going to moderate this thing rather then maintaining it at that +3.5%. We feel confident in reiterating our annual guidance and think that the strength on our AG side of our business is going to offset any of the softness that we’re currently experiencing on the construction stores and that should put us in to the end of this fiscal year and we anticipate then looking at next year where we’ll take another look at the construction industry in fiscal 2011.

Rick Nelson – Stephens Inc

Could you comment on the delusion to EPS from construction in the second quarter and what your expectations are for the year?

Peter Christianson

We haven’t been breaking that out in our guidance but last call we talked about $0.04 to $0.05 and that will continue on that same trend that we’ve experienced in the first half of the year will continue in the second half of the year.

Rick Nelson – Stephens Inc

The second quarter was similar on the $0.04 to $0.05?

Peter Christianson

We’ve been experiencing the same trend line throughout the year. Probably the second quarter had a little bit less of a drag on it then what the first quarter had but definitely what’s happening is that the strength in our AG business is offsetting the softness in our construction business.

Rick Nelson – Stephens Inc

The inventory growth, you’re up 89% I think the implied revenue growth at the midpoint is 2% growth, the factors again driving that increase were tough, and you had depleted inventories a year ago and interest free deals available this year.

Peter Christianson

Basically that’s what’s driving this is that we’re trending back towards more of a traditional inventory stocking cycle. Like we had said on our first call that we anticipated the inventory to go up at the end of our second quarter and I’m pretty comfortable with the idea that the inventory now should trend down because of the fact that we’re stocking this inventory to support our sales plan for fiscal 2010 on the third and fourth quarters. We are returning more traditionally where a year ago you had this extreme demand and it was a global demand where some of this equipment was going overseas out of the plants and now we’re returning more to that traditional shipping cycle and to the interest free period related with that.

Rick Nelson – Stephens Inc

The year over year growth rate should moderate in third quarter and again in the fourth quarter?

Peter Christianson

Yes, that’s what we anticipate.

Operator

Your next question comes from Chris Weltzer – Robert W. Baird

Chris Weltzer – Robert W. Baird

I’m wondering if you could give us an update on what you’re seeing in the used equipment pricing environment now that demand might be starting to plateau a little bit on the AG side.

David Meyer

We haven’t seen any big changes on the AG side at all in the equipment price. Tractors still seem to be a good demand for good late model tractors. Combine new sales have been up. If you look at the industry numbers over the last six months it’s been way up which if they’re up you’re going to have that higher level of used coming into the system. Yes there’s a good demand for these late used model combines and talking to our stores our store managers and watching our pricing we haven’t seen any deviation from standard pricing trends.

Chris Weltzer – Robert W. Baird

Your comment about timing of acquisition activity this year. Is that something that is seller driven, are you consciously focusing more effort on the construction dealerships you bought last year or is it just sort of the random travails of trying to do acquisitions in this environment?

David Meyer

When we look at the operation of our stores, our acquisitions you’re almost looking at two, you’ve got different teams of things working on different things. Concurrently we’re building up our stores; we’re improving our stores at the same time we’re doing acquisitions. I guess what we’re looking at is doing methodical quarter after quarter acquisitions. Like last year, we forecast a certain number of acquisitions.

We really outpaced that because the opportunities came up and we capitalized on them and we don’t want to rush anything, we want to be real methodic about it, we want to do a good job. We want to take acquisitions that are part of our strategic plan. We’re very interested in contiguous acquisitions and I think we’ve been doing a real good job of that, we’re managing those and we’re conscious of the price and also we want to get these done.

Like I said, there’s a good pipeline out there and we’re not interested in saying we’re going to do this many this month, we just want to do them in a good way, we want to plan them out and we are cautious of the pricing on them. They out there and we’re not just going to rush them and pay more of a price just to get them done. We’re going to do this in the context that they allow us to do them in.

Chris Weltzer – Robert W. Baird

Not a function of seller’s expectations changing or sellers getting more cautious?

David Meyer

No, I don’t think so. If anything all the dealers had really good years last year. We looked at a lot of financial statements at a lot of our prospective acquisitions and I don’t think I’ve seen one that didn’t have a record year in last year’s fiscal year. Many of them are following that same trend this year. Their motivation sometimes to sell when they’re making this kind of money they’re not as motivated because they say let’s just run it one more year. They’re still out there so like I said earlier it’s more a function of timing.

Chris Weltzer – Robert W. Baird

Could you give us a little color on what types of equipment are driving the increased inventory, is it broad based, are there particular categories where you’re getting more favorable financing terms or better deals?

David Meyer

I’d say right now if you look at the big part of our business its four-wheel drive tractors, its combines, and its combine headers and roll crop tractors, those are the big three product groups. We forecast our sales for this year and order the inventories to support our sales so we can meet our plan.

Operator

Your next question comes from Brent Rystrom – [Inaudible]

Brent Rystrom – [Inaudible]

For comp guidance in the third and four quarters do you have any updates specifically on what you’re looking for the third and fourth quarters?

Peter Christianson

On slide 14 we talk about that we’re going to model a 5% annual decline. Now in the third quarter you’ll see the stores from the Midland complex that we bought at the end of our second quarter last year, you’ll see them coming online and those same store comps will be negative relative to what we’ve been seeing on the AG side so that’s going to change that a little bit.

Brent Rystrom – [Inaudible]

Previously I had been modeling 3Q at -10% and to get to the -5% I’m going to have to bump that more into a negative teen comp. Does that sound rationale?

Peter Christianson

What I’m saying is that the comps that we’re going to see coming in from our AG stores we’re going to have negative comps coming in on the CE stores. It’s an annual decline that we’re looking at.

Brent Rystrom – [Inaudible]

What I’m wondering specifically third and fourth quarter would you weight a worse comp in the third quarter, fourth quarter, would it be heavier to the fourth quarter for a tougher comp?

Peter Christianson

We really don’t get into quarterly guidance on our comps going forward. We look at our business like our producers and our contractors, we look at our business on an annual basis and we feel comfortable and that’s why I wanted to share that with everyone that when we look at our business and we talk about our annual fiscal 2010 revenue guidance I just kind of wanted to update you on the fact that we went into this and we were guiding towards a -10% same store comps.

We’re updating that modeling because of the fact that we’re delivering stronger results on the AG side we are updating that so we’re changing that to a -5% but wanted to share with all of you when you’re modeling this that one of the things that you have to keep in mind is we have the annualization of last year’s acquisition stores which are also driving part of our revenue and our results for fiscal 2010.

Most of those acquisition stores from last year are not included in the same store comp and so those are because they’re construction stores they’re running less then we anticipated and so what’s going to happen is the strength from our AG stores is getting offset somewhat by our CE stores but we’re still comfortable with reiterating our fiscal 2010 guidance on an annual basis.

Brent Rystrom – [Inaudible]

In the second half of the year do you anticipate your AG comps will be positive and your CE comps will be the negative component and the net will be a negative?

Peter Christianson

That’s what’s been trending in the first half of the year. You could read that into it because of the fact that the construction industry is softer. I would add that I’m pretty confident that we won’t see the construction industry get much weaker then what it is and that we’ve kind of hit the bottom side of that cycle. That’s what we anticipate but still the industry is facing a headwind. For the last half of the year we anticipate the AG business to remain strong and the construction is kind of where it’s at right now.

Brent Rystrom – [Inaudible]

By remaining strong you’re saying you expect positive comps in the AG business in the second half?

Peter Christianson

That’s what we’ve seen in the first half.

Brent Rystrom – [Inaudible]

The comps in the first half next year I would assume that as you cycle through 12 months of the CE that you’re going to have tougher comps in the first half of ’11 and then they should get better in the second half?

Peter Christianson

We’ll talk about that next year on our call when we give our fiscal 2011 guidance.

Brent Rystrom – [Inaudible]

Year end target for inventories obviously up 89% is not something that you’re going to do at the end of the year, do you think its going to be up proportionate relative to the sales, and should it be up a little bit faster then sales?

Peter Christianson

We’ll see how the stocking goes. What I would say is that when I was talking with Rick earlier that we saw this anticipated jolt in our inventory levels because of the fact they were returning to a more traditional stocking cycle. We see the inventory now trending down because of the fact that we ordered this to support our 2010 levels, the back half of our year.

We will end up with a higher inventory level then what we had a the end of fiscal 2009 and basically that’s because of the fact that at the end of fiscal 2009 in January the entire industry was at the lowest stocking levels I think it had ever been at. Essentially the pipeline was empty and now we’re returning more to a traditional stocking level and we’re managing that with our interest free terms.

Brent Rystrom – [Inaudible]

Have you seen any difference in comps by state? I keep hearing North Dakota kind of having difficult harvest conditions.

Peter Christianson

We don’t really break it out that way. Just in general what we see happening is on the AG side we had the flooding up in the Red River Valley which that had a negative impact on the comps for the first quarter, now returning more to a normal production cycle. We’ll see what happens with the weather now this fall, that’s why we always keep talking about looking at it on an annual basis because now we’re really going into the harvest portion of our production cycle.

In the harvest portion again we need to look at the weather and how that will allow them to take that crop off. If it’s friendly to them and they can get it off quickly or if they have to fight for it and that can actually move our revenue and we can’t predict the weather, that’s why we have this geographic diversification where we can go all the way from the Canadian border all the way down into Iowa. Somewhere along there they’re going to be getting going on harvest.

Brent Rystrom – [Inaudible]

I talked to some guys from AG Star and evidently they’ve gone out with a call internally to pull back on equipment and land financing. Have you sent hat from any of the other land banks?

David Meyer

Right now I haven’t heard of anybody out there that has good credit right now that’s been turned down. Like in any business if you have some marginal operators I’m sure they’re going to be conservative. For the most part the growers, a lot of the people out there that 20% of their growers are buying 80% of the new equipment, I’d say for the most part their balance sheets are in the shape that they can get credit from a number of sources like we talked earlier and we don’t see that as a problem right now.

Operator

Your next question comes from Paul Mammola – Sidoti & Company

Paul Mammola – Sidoti & Company

Given the volatility in commodity prices right now, I think particularly in corn, I think we’re getting towards maybe a concerning profitability level there. Has that impacted orders for maybe some of the heavier equipment for the back half of the year. Have you seen any cancellations for combines or anything like that?

David Meyer

You have to look back and we’ve been in this business for over 30 years and it is a cyclical business. The one thing that happens in all the cycles, all the land does get farmed. Whether corn is $3.00 a bushel or corn is $4.50 or $5.00 a bushel the same number of bushels go through the combine. When you look at our business mix where we’ve got close to half our margin dollars are coming from our product support, parts and service side of the business and that’s driven on use, we try to think that we’re somewhat insulated from these fluctuations in the commodity market.

If you look at right now we’re at the second highest level of farm cash receipts on the production agriculture crops it bodes well for our business. If you look at a 10 year trend line or a five year trend line they’re far above higher then average. What you need to look at is marketing opportunities that our growers, some growers they take the crop and I think there’s maybe a fallacy out there that crop goes right off the combine and into the elevator and gets sold at that price that day.

People need to understand a lot of the crop is forward contracted in advance. Growers are picking their marketing opportunities and they’ll sell 5% of their crop at this price, maybe another 5% at another. As they do this prior to the production of the crop and as the crop is in its growing stages. There are other growers out there that every year harvest their crop, put the crop in the bin and then they look at their marketing opportunities after the fact and their balance sheets in the shape right now that they can do that.

The big important thing I think is that they get the bushels and as you see the crop development out there I see good bushels, we had great wheat crops, the corn and soybean crops are developing really well. We’ve got good moisture situations this year in places that didn’t have. There are a lot of things that impact this thing but I wouldn’t just look at the price at this day.

When you start seeing corn north of $3.00 I feel our growers are probably making money there if you see this wheat north of $4.50 or $5.00 they’re making money, soy beans probably north of $8.00 to $8.50 they’re making money. We’ve seen conditions a lot worse in our day and farmer’s balance sheets are in great shape. There have been some great pricing opportunities.

If you look back in that May, early June timeframe most of the corn contract are up there between $4.25 and $4.50. You had wheat contracts approaching $7.00 and you had soybeans up in the $11.00 to $12.00 market. The good marketers out there, these growers are really understanding, many of them do, on the marketing side of their business they’re going to continue to make money.

Paul Mammola – Sidoti & Company

You saw a big rental number this quarter. Do you expect that to continue just on seasonality into 3Q or is there something else in there in 2Q or that you consider one time? From a revenue perspective not really profitability.

Peter Christianson

The revenue perspective is related to us bringing on these new construction stores with last year’s 15 construction stores that we acquired. In the construction equipment business rental is a much bigger portion of that and so we’ll continue to see rental revenue. However, we are analyzing that part of our business because of the increase in our rental fleet and we’re going to optimize that utilization and if that means that we decrease the size of our fleet to do that that’s what we’ll do. That would have an impact on that revenue as we go forward.

Paul Mammola – Sidoti & Company

Do you have any sense or evidence that you might be taking share from say and RDO or a Butler Machinery in the parts service and used departments?

David Meyer

If you look at the different brands out there whether it is John Deere or if you look at the AGCO, CAT or the Case IH you tend to get that parts and service business to support the price for your brand. Depending on what the Parker is out in the field you’re going to continue. That really bodes well for us continuing to grow our market share and to grow the Parker equipment out in the field and then what you do is subsequent years then you’re going to get the parts and service business from that.

Very seldom you’re going to see the Red equipment going into the John Deere shop or the John Deere equipment going into the Red Shop, you don’t typically see that. You’re increasing your products and services business, its going to be a function of the parker and equipment and your success in growing share in previous years is going to come back and give you that long term parts and service business from that equipment that’s in the field.

Operator

There are no further questions. I would no like to hand the call back to David Meyer for any closing remarks.

David Meyer

Thank you for listening on our call today and we look forward to updating you on our fiscal 2010 progress on our third quarter call in December. Also, we’ll be attending a few conferences in the back half of calendar year 2009 so we hope to see you there. Have a good day everybody and thank you.

Operator

This concludes the conference call. Thank you for participating. You may now disconnect.

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