Titan Machinery's (TITN) CEO David Meyer on Q3 2015 Results - Earnings Call Transcript

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Titan Machinery Inc. (NASDAQ:TITN) Q3 2015 Earnings Conference Call December 9, 2014 8:30 AM ET


John Mills - ICR, IR

David Meyer - Chairman and CEO

Peter Christianson - President

Mark Kalvoda - CFO


Rick Nelson - Stephens

Larry De Maria - William Blair

Tyler Etten - Piper Jaffray

Joe Mondillo - Sidoti

Mig Dobre - Robert Baird

Steve Dyer - Craig Hallum Capital Group


Good day and welcome to the Titan Machinery’s Third Quarter Fiscal Year 2015 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

John Mills

Thank you. Good morning, ladies and gentlemen. Welcome to the Titan Machinery third quarter fiscal 2015 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; Peter Christianson, President; and Mark Kalvoda, Chief Financial Officer.

By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2014, which went out this morning at approximately 6:45 a.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Titan's Web site at titanmachinery.com. This call is being webcast, and a replay will be available on the company's Web site as well.

In addition, we are providing a presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's Web site and clicking on the Investor Relations tab. 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. The 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 Factor section of Titan's most recently filed annual report on Form 10-K.

These risk factors contain 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 statement that may be made in today's release or call.

Lastly, due to the number of participants on the call today, we ask that you keep your question period to one or two questions and then rejoin the queue. We expect the call will last approximately 45 minutes.

David Meyer will provide highlights for the Company's third quarter results and a general update on the Company's business and Peter Christianson will discuss the Company's international overview and segment operating results. And next, Mark Kalvoda will discuss the Company’s financial results in more detail and the fiscal 2015 annual revenue, net income, earnings per share guidance and non-GAAP operating cash flow guidance ranges, along with outlook and modeling assumptions. At the conclusion of our prepared remarks, we will open the call to take your questions.

Now, I'd like to introduce the Company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

David Meyer

Thank you, John. Good morning everyone. Welcome to our third quarter fiscal 2015 earnings conference call. As John mentioned, to help you follow in today’s prepared remarks we provided a slide presentation which you can access on Investor Relations portions of our Web site at titanmachinery.com

If you turn to Slide 3, you’ll see our third quarter financial results. Revenue of $493 million, primarily reflecting lower agricultural equipment sales in North America. Adjusted pretax income was $6.2 million and adjusted earnings per diluted share was $0.14. On today’s call, we will discuss the ongoing headwinds we are facing in our agricultural segment and the improvements in our construction business. We will also provide an update on our international segment discussing the challenges in these markets as well as an update on our initiatives we’re implementing to improve this segment of our business. Mark will provide an update on the progress we are making in our inventory reduction plan as well as a revised annual fiscal 2015 guidance. Now I’d like to provide some color for you today on our agriculture and construction industries in which we operate. Peter will provide color on the industry within our international segment.

On Slide 4 is an overview of the agriculture industry. The Ag industry and our footprint had favorable conditions to complete the fall harvest. In many markets yields were higher than grower expectations. November wise we report lower corn production estimates for the year from its prior projection, however the current estimate continues to be for record corn production this year and large forecasted ending stocks which reflected in the recent lower commodity prices. USDA report which was updated at the end of November adjusted a projected net farm income to be down 23.4% in calendar year 2014 from their previous estimate for calendar year 2014 of net farm income being down 13.8%.

Well this is the lowest estimate since 2010, it is still above the previous 10 year average. A primary driver of the lower net farm income is a projected decline in crop cash receipts. However while stock producers continue to experience favorable economic conditions with low fee prices and higher market prices.

As a result of the lower commodity prices, less end user demand is pressuring used equipment prices and compressing margins in the marketplace. We remain committed to moving our used equipments through the retail channel reflected in our $54 million year-to-date reduction in used equipment inventory.

On a positive note high crop yields, favorable interest rates and a strong livestock sector will provide support to year-end business.

As of today bonus depreciation has expired in Section 179 depreciation deduction has been reduced to $25,000 per year. However an extension of both bonus depreciation and Section 179 has passed the halls and is now in the center for approval. We expect this legislation to be voted on in the coming weeks.

In summary the agriculture industry remains -- continues to face a number of headwinds including lower projected net farm income and lower corn and soybean prices. As we have discussed on prior calls, this has impacted farmer settlement and resulted in lower farmer spending for equipment and has in turn impacted our finical performance.

We remain confident in the long-term agriculture industry’s outlook as farmers continue to carry strong balance sheets and the underlying demand for commodities rebuilds. We’re focused on managing the controllable aspects of our business including our inventory levels and operating expense structure due to current industry headwinds.

Now I would like to turn to the construction segment of our business. On Slide 5, we provide an overview of the construction industry and our markets. We continue to experience improving industry conditions in our markets and are pleased to report another quarter of improved financial results for the segment of our business.

As the overall economic environment gradually improves provided support for increased construction activity, a driver for our business. Although we are improving our results at a forward pace year-over-year due to higher comps during the back half of next year. Offsetting a portion of the macro-industry improvements is the impact of lower oil prices on the level of energy activity in oil producing markets. As an example we are experiencing reduced rental activity related to oil exploration as a result of lower oil prices.

The housing industry continues to rebound with permits increasing in our footprint which is a positive indicator for medium and light equipment product offerings. Similar to our Ag segment last year our construction equipment is transitioning to tier-4 final pricing on its new product offerings. A small portion of our new product has this pricing now but the majority of the transition volume was projected through first quarter and second quarters of next year.

The industry continues to experience improvement in used construction equipment pricing in many regions from North America, the favorable pricing environment is resulting higher equipment margins. Potential extension of bonus depreciation and Section 179 depreciation will also impact the construction industry. We believe the approval of these tax incentives will benefit construction customers due to the strong year they are currently experiencing.

Over all we are pleased with results of our realignment implemented during the first quarter and second quarter of this year, however we continue to look for ways to grow revenue and efficiently manage our inventory and rental fleet while aligning expenses with industry trends.

Now I’d like to turn the call over to Peter Christianson, our President to discuss the progress we’re making with the recently implemented initiatives in our international segment, as well an update on our agriculture construction and international operating segments. Peter.

Peter Christianson

Thanks David. On Slide 6, we have an overview of the industry in our international segment which includes stores in Bulgaria, Romania, Serbia and Ukraine. The fall crop harvest has been completed and the winter crops are in good condition throughout the majority of our footprint. However lower global commodity prices and the tight credit environment continue to impact customers in all of our international markets. These factors have led to higher industry wide equipment inventory levels, resulting in equipment margin pressure as we strive to achieve our revenue targets in this segment.

Offsetting some of the challenges the European Union’s Subvention Funds are becoming available in some of our markets, with Romania having access to these funds in the third quarter of this year. The new government in Bulgaria is providing stability to that market and we anticipate Bulgaria to have access to the Subvention Fund in calendar year 2015. As you may recall, the subvention funds are monies of the European Union has budgeted over a five year period to support investment in agricultural production in the developing markets of Eastern Europe, providing up to 50% of the cost of qualifying new equivalent purchases.

In Ukraine, the geopolitical and financial turmoil continue to negatively impact our customers and operations. Limited credit availability, rising interest rates and the devaluation of the local currency are affecting all businesses throughout the country. Although the Ukrainian farmers have had good yield this year, they are limited in their ability to finance purchases of equipment.

On slide seven, we have an update of the important key initiatives we spoke about on our second quarter call and are implementing to improve our international results and account for the current environment in this segment. We have identified the actions to support these initiatives and expect to realize approximately $7 million in cost savings through expense reduction and lower floor plan interest expense.

In addition, we expect to reduce our inventory $35 million as a result of these initiatives. On the right side of this slide, you will see when these different initiatives are expected to be or have been implemented.

We are currently implementing improved inventory management procedures throughout our European operations. We have our centralized inventory procurement process in place which enables us to better control and forecast inventory requirements to support our revenue forecast. In addition, we are transitioning our information, our inventory information to our U.S. ERP platform to improve visibility and better integrate our inventory process.

Finally, we are standardizing our machine specifications on all new orders which will enable us to better leverage our inventory across our European markets. We continue to delay shipments of unsold equipment into the Ukrainian market given the current environment in this region. Once the customer purchases a piece of equipment, we ship it from Western Europe into Ukraine.

In addition to lowering our inventory levels with improved inventory management, we plan to further reduce floor plan expense by implementing Western European based equipment inventory warehousing. This will allow us to decrease finance cost versus in country inventory financing for countries that have higher floor plan cost compared to Western Europe. We have identified sites and anticipate our first shipments to arrive in the second quarter of next year.

In the third quarter we identified the actions required to implement our expense reduction initiative and began reducing headcount and implementing expense austerity measures throughout our European operations. We have completed a headcount reduction of 81 people and other cost reduction measures during the fourth quarter and we anticipate realizing the benefit from these reductions in the first quarter of fiscal year 2016. This will better align our expense structure with the existing market conditions. We have delayed capital expenditures particularly in Ukraine in light of the challenging operating environment.

We continue to grow our parts and service business as we implement our western style of after sales product support and customers become more aware of our level of support. The regions in our international footprint represent some of the most productive agricultural land in the world, while our financial results continue to be impacted by the conditions I discussed we are encouraged that our third quarter results represent an improvement over the second quarter. By implementing these key initiatives, we expect to improve results next year. As a reminder, our international segment is seasonally slower in the fourth quarter and doesn't experience the year-end sales activity as we do in North America.

On slide eight, you will see an overview of our segment results for the third quarter. Agricultural sales were $346 million a decrease of 24.6%, reflecting the headwind David discussed earlier. We generated Ag pre-tax income of $5.2 million compared to $16.7 million in the prior year period. Primary factors impacting our Ag segment results were lower equipment sales and margins. Our operating expenses decreased on an absolute basis compared to the same period a year ago but are higher as a percentage of sales due to lower equipment sales. Given the current market conditions we are evaluating our current expense structure to support a lower volume of equipment sales.

Turning to our construction segment, we are encouraged by the improvements in the quarter. Our revenue was a $110 million which is slightly higher than the previous year and reflects higher same store sales resulting from improvements in the industry and the positive impact of operational initiatives we have implemented. The higher revenue was achieved despite a lower store count compared to the prior year.

We achieved pre-tax profit of 0.1 million for our construction segment a significant improvement over a pretax loss of 3.4 million in the same period last year. The improved results primarily reflect stronger equipment margins along with the initial benefits of cost savings from our realignment implemented earlier this fiscal year. We remain confident that the construction segment of our business will be an important long term contributor to our overall growth of profitability.

In the third quarter of fiscal 2015 our international revenue was $53 million which is a 32.5% increase compared to the prior year period. The increase was primarily driven by strong performance in our Romanian operations. Our adjusted pre-tax loss was $0.9 million compared to a pre-tax loss of $1 million in the prior year period. Additional Floorplan cost related to higher inventory levels and increases in operating expenses will offset the increase in revenue. Adjusted pre-tax loss excludes $0.5 million re-measurement charge from the balance sheet impact of the Ukrainian Hryvnia devaluation.

Turning to slide 9 you will see our segment results for the first nine months of fiscal 2015. Ag revenue was $1 billion a decrease of 14.6% compared to the same period last year. And adjusted pre-tax income decrease to $14.6 million reflecting the headwind discussed earlier.

Construction segment revenue improved 12% and adjusted pre-tax loss which excludes to our closing cost of $2.3 million decrease to $3.4 million a significant improvement over a pre-tax loss of $11.6 in the first nine months of last year. Our international revenue increased 18% to $127 million and our adjusted pre-tax loss was $6.9 million compared to a pre-tax loss of $1.4 million in the prior year period. In addition to the factors that impacted our third quarter results our nine months results reflect the cost of our European operations center which opened in the first quarter this year and the impact of market conditions in Bulgaria and Ukraine. The adjusted pre-tax loss excludes the $4.9 million re-measurement charge from the balance sheet impact of the Ukrainian Hryvnia devaluation.

Turning to slide 10 this shows our same store results for the third quarter of fiscal 2015. Our overall same stores sales decreased 14.1%. The agricultural same stores sales decreased to 23.8% reflects the industry headwinds David discussed earlier.

Our third quarter fiscal 2015 construction same stores sales increased 10.7% highlighting the benefits of our initiatives we implemented last year as well as the overall industry improvement. Our international same stores sales increased 33.9% primarily reflecting the strong performance of our Romanian operation.

For the third quarter of fiscal 2015 overall same store growth profit decreased 6.5% compared to the prior year. The Ag segment same stores gross profit decreased 18.7% as a result of the decline in the same stores sales primarily reflecting lower equipment sales and margin partially offset by the stability of our higher margin parts and service business.

The 24.3% improvement in the construction segment same store gross profit reflects the growth in same stores sales and was also driven by improvements in gross profit margin for construction equipment.

Regarding international the same store gross profit increased 26% primarily reflecting higher equipment sales partially offset by lower equipment margins in order to achieve the sales results in the quarter.

On slide 11 you’ll see our same store results for the first nine months. Total company same stores sales decreased 6.6% and total company same store gross profit decreased 2%. Ag same stores sales decreased 14.3% while construction same stores sales increased 20.3% in the first nine months of fiscal 2015. Our international same stores sales increased 22.3%. The change in Ag and construction same store gross profits primarily reflect the change in revenue for each segment. International same store gross profit increased 10.1%, impacted by lower equipment margin.

For modeling purposes it is important to remember to that we calculate same store sales by including stores that were with Titan for the entire period of both fiscal years which we are comparing. In other words only stores that were part of Titan for the entire three months of the third quarter of fiscal 2014 and the third quarter of fiscal 2015 are included in the third quarter same store comparison. The stores which were closed in the first quarter of fiscal 2015 are also excluded from this year’s same store sales calculation for both periods reported.

In the third quarter of fiscal 2015 a total of nine locations were not included in our third quarter same-store results, consisting of two Ag locations and seven construction stores. And for the first nine months of fiscal 2015, a total of 13 stores were not included, consisting of two Ag locations, nine construction locations and two international locations.

Now, I’ll turn the call over to Mark Kalvoda our CFO to review results in more detail, provide an update on our reduction in inventory and fiscal 2015 guidance. Mark?

Mark Kalvoda

Thanks Peter. Turning to Slide 12, our total revenue for the fiscal 2015 third quarter was $493 million a decrease of 16.1% compared to last year. Equipment sales decreased 22.2% quarter over quarter reflecting the Ag headwinds David discussed in his remarks, partially offset by improvements in construction and growth in our international business. Our part sales were essentially flat in the quarter, while service revenue increased 4.3%. Overall, we are pleased with the stability of our parts and service business in the face of a challenging Ag environment.

Our rental and other revenue increased 7.7% in the third quarter, reflecting an increase in rentals of inventory, primarily from heavy industrial units such as scrapers, cranes and excavators which are not part of our designated rental fleet. This was partially offset by a decrease in our rental fleet dollar utilization to 33.6% for the current quarter compared to 36.9% in the same period last year. The decreased utilization was partially due to the lower oil prices affecting rental demand in our oil producing markets as well as lost rental revenues due to the repositioning of rental equipment from recent store closings as part of our construction realignment implemented earlier this year.

On Slide 13, our gross profit for the quarter was $85 million and our gross profit margin was 17.2%, an increase of 130 basis points compared to the same quarter last year. The margin increase is due to a favorable shift in product mix as our higher margin parts, service and rental and other are a larger part of our gross profit. The improvement in gross margins despite lower revenue reflects the stability of our parts and service business, which is increasingly important during the current soft period in the Ag cycle.

Our operating expenses as a percentage of revenue in the third quarter of fiscal 2015 were 14.1% compared to 12.7% for the same quarter last year. The increase in operating expenses as a percentage of revenue was primarily due to the deleveraging of our fixed expenses as total revenue decreased from the prior year. The deleveraging more than offset the reduction in expenses resulting from the construction realignment we implemented earlier this year. We remain focused on opportunities to reduce our overall operating expenses and believe the cost saving initiatives we implemented in our international segment will be fully in place for fiscal 2016 results.

In the third quarter of fiscal 2015, we recognized a $500,000 charge from the balance sheet re-measurement impact of the third quarter currency devaluation in Ukraine. During the third quarter, we reduced our re-measurement exposure by engaging a natural hedge which partially protects us against further devaluation of the Ukrainian currency. Floorplan and other interest expense increased 40 basis points as a percentage of revenue, which is primarily due to higher interest bearing equipment inventory and rates particularly in our international segment. It is important to note that as we reduce our inventory shipments from suppliers in the final quarter of this year, our mix of non-interest bearing, new inventory will be a smaller percentage of our overall inventory. Inventory reduction in fiscal 2015 is one of our company’s key initiatives which I will address more in a moment.

Our adjusted earnings per diluted share was $0.14 for the third quarter of fiscal 2015, which excludes charges of $0.03 per share of the Ukrainian re-measurement cost. We believe that the presentation of non-GAAP diluted earnings per share is relevant as it provides a measurement of earnings on activities we consider to occur in the ordinary course of business. The adjusted diluted earnings per share of $0.14 compares to EPS of $0.27 per diluted share in the third quarter of last year.

Turning to Slide 14, here you’ll see an overview of our nine months revenue results. Total revenue decreased 7.1% compared to the first nine months of the prior year, reflecting lower equipment sales partially offset by higher parts, service and rental and other revenue in the first nine months of fiscal 2015.

On Slide 15, our first nine months gross profit was $240 million a 4.3% decrease versus the prior year period. Our gross profit margin increased 50 basis points to 17% primarily reflecting the shift in sales mix to our higher margin parts and service business, partially offset by lower Ag equipment margins.

Operating expenses were 14.7% of revenue compared to 14.1% in the same period last year primarily reflecting a deleveraging of fixed expenses I spoke to you earlier. In the first nine months of fiscal 2015 we recognized a 7.9 million charge consisting of realignment costs of $3 million and $4.9 million from the balance sheet re-measurement impact of the Ukrainian currency devaluation. Our adjusted diluted earnings per share was $0.11 for the first nine months of fiscal 2015. This excludes $0.33 per share of store closing and re-measurement costs.

At the end of our slide presentation we have included a reconciliation table to help illustrate the adjustments to our GAAP results.

Turning to Slide 16, here we provide an overview of our balance sheet highlights at the end of the third quarter. We had cash of $110 million as of October 31, 2014. Our third quarter equipment inventory decreased to $933 million compared to equipment inventory of $939 million as of January 31, 2014. The inventory change includes an increase of new equipment of $48 million and a decrease of used equipment of $54 million from the end of fiscal 2014.

On the next slide I will talk about our inventory reduction initiative for fiscal 2015. Our rental fleet assets at the end of the third quarter were $151 million which is up from $145 million at the end of fiscal 2014. We expect minor deflating in the fourth quarter and therefore anticipate ending the year with a similar fleet level compared to last year. As of October 31, 2014 we had $761 million of outstanding floorplan payables on $1.2 billion of floorplan lines of credit.

Effective October 31, our floorplan credit facilities with our bank syndicate and [C&H] [ph] were amended. Historically our loan agreements have continued to evolve and meet the changes in our business.

Turning to Slide 17, I would like to provide an update on our company equipment inventory initiatives. Similar to what we have provided on our last earnings call, you will see a chart outlining our equipment inventory position for the last five years. On the right side of the graph is the targeted year-end equipment inventory for fiscal 2015 representing a $200 million reduction in inventory compared to the end of fiscal 2014.

Previously we had forecasted a reduction of $250 million for fiscal 2015, our new target reflex the lower than anticipated third quarter revenue and our revised remaining outlook for fiscal 2015. Solid trend line on the graph represents a $109 million inventory reduction achieved in the third quarter compared to the same period last year. The dash trend line on the graph represents the forecasted $200 million decrease in the fourth quarter inventory compared to the same period last year.

As I mentioned on our call last time to achieve this year’s target we have significantly reduced current orders for equipment from our suppliers. This factor and our ability to achieve forecasted sales are the drivers of our inventory reduction plan. This slide also breaks out the level of used equipment versus new equipment in our equipment inventory. Year to date we have been able to reduce our used inventory by $54 million despite the headwinds in the Ag industry demonstrating our process and commitment to manage our used inventory.

Slide 18, gives an overview of our cash flow statement for the first nine months of fiscal 2015. When we evaluate our business look at our cash flow related to the equipment inventory net of financing activities. With both manufacturers and other sources including non-manufacturer floorplan notes payable which are reported on our statement of cash flow as both operating and financing activities?

When considering our non-manufacturer floor plan proceeds, non-GAAP net cash provided by inventories was $12.3 million in the nine months period of fiscal 2015. Our GAAP cash used for inventories was $2.4 million. In our statement of cash flows, the GAAP reported net cash used for operating activities for the period was $82.5 million. We believe including all equipment inventory financing as part of our operating cash flow better reflects the net cash flow of our operations. Making these adjustments, our non-GAAP adjusted net cash provided by operating activities was $700,000.

Throughout this fiscal year, we are focusing on improving our non-GAAP operating cash flow. Despite the fact that the industry conditions have put pressure on our results, we continue to expect to achieve improved cash flow from operating activities in fiscal 2015 as we execute on our inventory reduction plan.

Slide 19 shows our fiscal 2015 annual guidance. As David stated, we are revising our annual outlook. We now expect revenue to be in the range of $1.85 billion to $2 billion compared to our previous range of $1.9 billion to $2.1 billion. A decline from our prior range primarily reflects lower Ag equipment revenue than we anticipated. We expect adjusted net income attributable to common stockholders to be in the range of $2.1 million to $6.4 million compared to its previous range of $6.4 million to $12.7 million.

We expected adjusted earnings per diluted share to be in the range of $0.10 to $0.30, compared to the previous range of $0.30 to $0.60, based on estimated weighted average diluted common shares outstanding of 21.1 million. On a GAAP basis, we now expect a net loss attributable to common stockholders to be in the range of $500,000 to $4.8 million, compared to the previous range of breakeven to 6.3 million GAAP net income.

We expect GAAP loss per diluted share to be in the range of $0.02 to $0.23 compared to the previous range of breakeven to $0.30 GAAP income per diluted share. GAAP net income and earnings per diluted share guidance includes the impact of the $3.4 million pre-tax charge or $0.10 per diluted share associated with the company's store closing cost as well as $4.9 million or $0.23 per diluted share associated with the remeasurement cost.

For the full year, we expect adjusted cash flow from operations to be in the range of $40 million to $60 million compared to our previous range of $50 million to $70 million. The reduction of our range is due to the anticipated lower earnings expectation as well as a revised outlook for equipment inventory reduction.

Modeling assumptions supporting our guidance are as follows. We expect our Ag same-store sales to decrease 15% to 20%. This primarily reflects lower anticipated results from our equipment revenue as well as a slight decrease in our parts and service revenue due to a reduction in preventative maintenance as a result of the headwind David discussed earlier.

We expect our construction same store sales to be in the range of 17% to 22% and we expect our international same store sales to be in the range of 10% to 20%. Our equipment margins modeling assumption for the full year is now projected to be in the range of 8% to 8.5% from the previous range of 8.1% to 8.6%. The slight decrease is due to expectations in our Ag segment.

We are now modeling annual rental dollar utilization to be in the range of 28% to 30% compared to the previous range of 30% to 33%. The expected decrease is reflecting the lower rental activity coming from our location servicing, the oil market as well as a slow utilization ramp up related to the rental fleet relocated from our closed stores.

This concludes the prepared comments for our call. Operator, we are now ready for the question- and-answer session of our call.

Question-and-Answer Session


[Operator Instructions]. And we will take our first question Rick Nelson with Stephens.

Rick Nelson

To ask about the margin pressures in the equipment category sequentially and year-over-year, it sounds like constructions margins are better it appears as if the Ag segment and if you could comment on what’s happening with new and used equipment margins in Ag.

Mark Kalvoda

Hi Rick, Mark here. Yes the pressure is definitely much more so on the Ag side. If you recall last year construction was experiencing kind of a glut in the market of equipment inventory. It rebounded nicely from those levels and on the Ag side as were we’re seeing more of an oversupply of inventory out there in the market today. And it's much more on the used side currently than on the new. The margins is being maintained fairly well on the new. But the used is where we are experiencing margin compression.

Rick Nelson

Thanks for that color Mark. The guidance for equipment margins appears to be a pick up from the third quarter and the year to date, can you just how you rationalize those inventory reduction plan with higher margins in the fourth quarter and equipment.

Mark Kalvoda

Well as you know throughout the year we do a lower of cost per market break down on a monthly basis. So as the market has come down, we're adjusting our used inventory throughout the year not any one particular quarter at all. And typically there might be a little bit of a pickup in the fourth quarter, there is not much in there but that has to do with some year-end manufacturing [indiscernible] that typically get chewed up in the fourth quarter which caused a little bit of strength in that fourth quarter.

Rick Nelson

Thank you for that. Also I would like to ask, you are sitting on a big, big pile of cash $110 million in cash, [indiscernible] trading below tangible book value. Your appetite for buying your own stock back versus borrowing others and as a valuations in the private market meaningful discounts to their tangible book value.

Peter Christianson

Well Rick we constantly have discussions with our board regarding our capital allocations and we continue to evaluate all options on an ongoing basis. And we understand your question pretty well.


And we’ll take our next question from Larry De Maria with William Blair.

Larry De Maria

Hey thanks. Good morning. Couple of things, you did Ag profits about 14 in change million and [indiscernible] this for the quarter. How do we think of your Ag dealers now in terms how many are actually losing money I know we tend to look at the total enterprise. I am curious how many stores are making up those profits versus how many are losing money at this point?

Peter Christianson

Well don’t break that out Larry but we do have some stores that are performing very well and we continue, we have some non performing stores with specific interest and more resources at those stores from a number of fronts. So we don’t break that out by store.

Larry De Maria

But is it a handful of stores making money and vast majority of Ag stores are now losing money? How do we think about that because that’s obviously relevant if we go into next year?

Peter Christianson

I would say we have a good number of our stores are doing very well.

Larry De Maria

Okay and then on the used inventory expect to be flat in Q4. I guess normally I think it would potentially even move up given the volume of trade-ins, and year to date it's down 54 million. Are we assuming that the value declines that the volume equipment goes up and just curious about this for example the $54 million decline? How much is volume versus how much is lower actually used prices and how you are carrying it given the way Mark just said lower of cost to market and then how long does it take for the inventory in the field not just yours but the industry to work through with this. Do you think it gets concluded by next year or couple of quarters or in other words how long will it take for the industry towards the inventory and is lower inventory value more a function of a lower price or volume?

Peter Christianson

There is a lot to ask there Larry. So I will try and take part of it. So one of the questions I think you asked is how we’re going to maintain kind of a flat used inventory leveling for the fourth quarter. A lot of that is as opposed to like previous years we’ve done a lot of more roles at the end of the year in previous years where we’ve taken in a lot of used inventory, a lot of used trades. We expect that to be down so the amount of incoming use is going to be quite a bit less than what we’ve had in the past. And we do expect to diligently continue to move through the used inventory as well to aggressively selling it out there in the market. As far as like number of units, I wasn’t sure if you’re asking about new, used.

Larry De Maria

[Indiscernible] the $54 million decline year-to-date, how much of that is volume? How much of that is the price of the used, so in other words, the actual volume of your used inventory may not account that much, but are you writing down the price enough, is that why it’s going down?

Peter Christianson

It’s a combination of both, but it’s more so on the number of units side than it is on the price side. But the pricing certainly has come down of the valuation, per unit has come down, because of what I alluded to earlier on the lower of cost and market adjustments that we’ve had. But more of it’s on the number of units.

Larry De Maria

That’s what I figured. And then just for you guys, how long -- I know your work into the inventory has been challenging, but what do you think about the industry inventory and particularly in your region obviously? But broader, how long will it take for the industry to wind down this inventory? And is it in a very similar situation to you guys? And that’s all thanks.

Peter Christianson

Well you’re seeing different inventory levels out there and then different competitors have different issues. We’ve been working pretty hard on this probably going back almost 18 months now, we feel good about certain segments. We feel pretty good about used combined inventory, so as you see less new being sold you’re definitely going to have these as Mark said less used coming in.

Some of these customers that were possibly buying late model used equipments are buying new equipment now with the economy trade now to move them back to used equipment, so just to get back into that somewhat of a normal cycle is what we’re going into and be probably less [indiscernible] more late model used buyers out there and that moved some of these little guys in new buyers and I think it will be managed through the system, I believe all of the used industry are going to do somewhat similar actions Larry.


Our next question comes from Tyler Etten with Piper Jaffray.

Tyler Etten

First, what is your timing expectations for Section 179? And is that factored into the $200 million reduction in inventory for the fourth quarter?

David Meyer

I think when we put our guidance together for the fourth quarter, we did -- are forecasting for the fourth quarter. We did anticipate everything that we can as we anticipated that it would come through at the backend of this year and would be available here for the end of December. That being said, as we’ve said in the past we don’t think it’s a huge factor out there. We think it’s more based on the profitability of our customers rather than specifically some of these tax incentives out there, but it would be part -- it is kind of part of what we’ve put in there for our forecast for our EPS range as well as our inventory reduction estimates.

Tyler Etten

And do you guys have any expectations for that next year?

David Meyer

We’ll come out with our forecast for next year on our fourth quarter call. No comments from us at this time.

Tyler Etten

And then last question would be, what do you think -- how bad do you think the slowdown on rental would be because of the oil pipeline and oil exploration slowdown because of energy prices?

Peter Christianson

Well, if you look at the oil impact our stores, we’ve got a pretty diversified footprint and also we’re probably impacted probably at 10% of our stores and of that it’s still a fairly fast pace is going on in the oil exploration. So I mean it’s got some impact, but I would not say it's significant.


Our next question comes from Joe Mondillo with Sidoti.

Joe Mondillo

So my first question just regarding the construction segment. And I just wanted to clarify -- so the year-over-year same-store sales did slowdown and you dropped your same-store sales guidance for the year. On top of that from the second quarter to the third quarter, despite seeing year-over-year improvements in profitability, we saw flatness sequentially. So just wondering, is that all due to the rental? Or was there some disappointment on the new construction sales as well?

David Meyer

I think part of it is, if you look at the comps from last year, the same-store increases in the first half of the year last year were negative down to the tune of 6%, 7% and they flipped a positive in the third and fourth quarter. So a part of it I think we’re up against tougher comps. And there is some of this impact with some of our stores. Now, it’s about four of our stores that are up here in the Bakken that have more of that oil play, a little bit down in Colorado maybe, but its four stores. So that is part of the reason why we pulled it down, but again it’s only about 10% of our stores and the construction side that’s being affected by the lower oil.

Joe Mondillo

So what about the sequential flatness in terms of profitability? Because that was my biggest surprise and I know you guys were expecting to be profitable for the year, probably unlikely at this point given what you saw on the third quarter. So in terms of the third quarter not really seeing that strength that you usually see in the third quarter on a profitability wise, can you comment more on that?

David Meyer

Yes we did expect a little more and I think part of it was in that rental that came in less than anticipated. When we do our rental fleet the depreciation on our rental fleet during the year is seasonally adjusted, so there is a heavier load of depreciation that happens in the third quarter because of higher expectations on the fleet. So that was certainly part of the drag on a third quarter and why it wasn’t sequentially better than the second quarter for the construction segment.

Joe Mondillo

And then just on the Ag side of the business, wondering, so the overall macro assumption is that acreage is going to be down by 4 million or 5 million acres next year. In terms of your footprint, what are you guys looking at? Where your footprint is in terms of acreage planted next year?

David Meyer

Well I actually think we see acreage going up, there was quite a bit of [indiscernible] this year in some of our markets and then in addition to that there is a lot of CRP acres that are going out of CRP and back in their production. So we actually see increased acres in majority of our footprint.

Joe Mondillo

So overall acreage in the country will be down mostly likely but you’re saying within your footprint acreage should be up.

David Meyer

Typically all the land gets farmed, so there has been -- land has been broke up, as land has been taken out of [indiscernible] during the production, the CRP coming up and you may see some shifts between away from corn and other crops and things like that but overall I believe that production is going to be up due to predominantly a lot of land coming out of CRPs and also some pretty favorable weather conditions in the fall and stuff and the moisture situations to minimize some of these preventive plant acres.

Joe Mondillo

And does that production match up with what USDA is projecting?

David Meyer

Well I guess it's probably a little early in the game for that but I believe that we’ve seen in our footprint which we’re pretty close to that acres are going to be up.


Our next question comes from Mig Dobre with Robert Baird.

Mig Dobre

It’s Mig Dobre actually. Mark this question is for you may be you can help me understand the math here. But when I look at your rental business guidance you lowered the utilization goal by 250 basis points at the midpoint. Running rough math here this is basically $4 million worth of rental revenue. This is a pretty big swing, and I am trying to understand how much of this is directly related to energy versus some of the inefficiencies that you mentioned earlier because you also say that only 10% of the stores are exposed to energy. So in theory this shouldn’t be that big of an impact yet the numbers work out the way it is.

Mark Kalvoda

Yes, so as I mentioned on the call, what we talked about was relocating of our fleet, so when we closed these stores earlier in the year and there was a little bit of a tail on this that it still kind of helped the second quarter yet as contracts were still out there on this rental fleet. But as we move these fleets to our other locations, there was some what I would call kind of dead time in there where there wasn’t the utilization as we repositioned them into other markets.

I don’t have the breakdown of like how much each one contributed to that, but I would say both of them were notable in creating that assumption change on a rental fleet utilization.

Mig Dobre

Sorry to push you on this, something has changed within the past quarter that led to this adjustment in guidance. You knew that you shut down stores and you’re going to have to relocate equipment when you issued the guidance previously, so was it something new that occurred in terms of relocating this equipment or what changed?

Mark Kalvoda

So I think part of it was certainly the oil thing changed, there is a significant decrease in oil and therefore some of the activity in oil that definitely happened after we gave guidance a quarter ago. And the other thing perhaps we underestimated some of this dead time as we reposition these assets, these rental fleet assets in some of our other locations. So it’s really the combination.

Mig Dobre

Then if we are to switch over to Ag, just broadly speaking as I see you cut your inventory reduction target and I guess I am trying to figure out here as to why that is the case because my understanding is that if you really wanted to, you could move inventory by simply reducing prices, so I am presuming that you are trying not to do that, which I am wondering does this shift earnings risk to next year? How do you think about inventory reduction going forward and what that implies for next year?

David Meyer

Well I'd say, I think a lot of that's coming from possibly the new side of the business is just reflected in what we saw in some of our decreases in revenues that we had earlier anticipated that weren't there in the third quarter, so a lot of it you can see where we are making strong strides on the used with $50 million some decrease that we have done on used. So we are trying to at the same time reduce inventory but then also realize realistic margin structure.

Mig Dobre

Then last question from me and I don't know if you want to answer this or not but John Deere basically called out North American Ag declines in the 25% to 30% range as we look into '15. And I guess I am wondering do you have reason to think otherwise given your -- what you know of your end markets in your geographic exposure.

David Meyer

Well I think there are some pretty smart people out there making some of these forecast from all of the manufacturers I think they are pretty well aligned. So I think definitely when you see pullback in commodity prices, you know they have rebounded a little bit though. I think these manufacturers and their modal of inventory is in this pipeline now and what was produced in the fourth quarter, and they probably have pretty realistic expectations but I also believe that as you see the business as they get into the first two three quarters of the year that I think there is some flexible built schedule that can be adjusted on that but I think going into this year, I think we have to take appreciation for what the OEMs are seeing on their forecast and manage our business accordingly.


Our last question comes from Steve Dyer with Craig Hallum Capital Group.

Greg Palm

Hey good morning it's Greg Palm on for Steve, thanks for taking our questions. Following up on the margin pressure in Q3, just curious what the impact of those monthly write downs you paid were versus just more addressed inventory sell down? A little color would be helpful. Thanks.

David Meyer

Yes, we don't disclose the specific numbers involved there but I think I commented in the past, in a typical part of this cycle our new equipment margins would be higher than our used. I am sorry, our used would be higher than the new and given some of these lower custom market right downs it is pulling that the used below what the new is out there. So I mean it's definitely a part of what's creating the lower equipment margins out there.

Greg Palm

And then not little early but qualitatively, how should be thinking about inventory levels for fiscal year '16.

David Meyer

Well I think for the starting point of it, you can see where we are going to end this year given our $200 million reduction and there is some of the expectations by the OEMs out there and everything like that and if that comes to fruition I would say that we'd pull our inventory down even further than where we are ending it this year. So it would certainly average much less than what we averaged this year as far as our overall inventory levels. And we'd probably be going down in total inventory as we go throughout the year.

Greg Palm

Okay. And then just last one curious what you are hearing from the OEMs, what is C&H doing to help you guys, is there any incentives there for cash? Thanks.

Peter Christianson

Well I think if you see some of these publicized on the used equipment side, I see some really attractive financing programs, interest free periods of time and also aggressively targeting the used equipment out there from the financing side to get us to the pipeline. So I guess again C&H is definitely wants to be competitive in the marketplace and focused on gaining market share and helping the dealers move their inventories through the pipeline.

David Meyer

Okay. That's the end of the question. So I want to thank you everyone for your interest in Titan and we look forward to update you on our progress on our next call. Have a good day.


That concludes today's conference. Thank you for your participation.

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