Titan Machinery Inc (TITN) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Titan Machinery Inc. third quarter 2007 financial results conference call.

(OPERATOR INSTRUCTIONS)

This conference is being recorded today, January 11, 2008.

I would now like to turn the conference over to Mr. John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery third quarter conference call. On the call today from the Company are Mr. David Meyer, Chairman and Chief Executive Officer, and Mr. Peter Christianson, President and Chief Financial Officer.

By now, everyone should have access to the third quarter earnings release for the period ending October 31, 2007, which went out this morning at approximately 6 a.m. 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. Before we begin, we would 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 on them. These statements are based on current expectations of management and involve inherent risks and uncertainty, including those identified in the risk factors section of Titan's registration statement on Form S-1, filed with the SEC in connection with its initial public offering.

These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Titan assumes no obligation to update any forward-looking projections that may be made in today's release or call.

And, with that, I'd like to turn the call over to the Company's Chairman and CEO, Mr. David Meyer.

Go ahead, David.

Thank you, John. Good morning, everyone, and thank you for joining us today. This has been a very exciting time for us, with our recent IPO, and we are pleased to be sharing our strong results with you today. I had the pleasure of discussing our story with many of you during our road show in November and December and before we get too far in our results, I want to thank you for your interest and investment in Titan.

On today's call, I will provide some highlights of our third-quarter results and a brief overview of our Company. Then, Peter will review the financial results of the quarter in more detail and provide fourth quarter guidance, as well as a preliminary look for our next fiscal year.

I will then provide some closing remarks and we will open up the call to take your questions. Because this is our first earnings conference call as a publicly traded company, I am particularly pleased to report to our new stockholders that Titan achieved strong results in the fiscal third quarter ending October 31, 2007. Revenue for the third quarter increased 67% to $132 million due to organic growth and acquisitions. And our operating income increased over 100% to $6 million, with operating margins improving 25% compared to the same period last year.

We are pleased with the results and based on our compelling business model, long-term agricultural forecast, advantageous store locations and significant organic growth and acquisition opportunities we believe we will continue to achieve strong growth and long-term shareholder value.

Titan Machinery has a successful 27-year operating history and with 38 dealerships and two outlet stores, we own and operate what we believe is one of the largest networks of full-service agricultural and construction equipment stores in North America. Positioned in the upper Midwest, we offer our customers the leading brands of agricultural and construction equipment, including CaseIH agricultural equipment, New Holland Agriculture, Case Construction and New Holland Construction.

The agricultural equipment and parts we sell and service include machinery and attachments for uses ranging from large-scale farming to home and garden use. On the construction side of the business, we offer heavy construction and light industrial machinery for commercial and residential construction, and highway construction and mining applications as well.

Over the past 27 years, we have set ourselves apart and achieved our leading position due to strong competitive advantages, which include the following. First, we have a tremendous market. We are truly a one stop shop by providing equipment and parts sales, repair and maintenance services, as well as rental function in each store location.

Over the past 27 years, we have carved out a footprint of contiguous ag stores in the Red River Valley, extending to the highly productive areas of South Dakota, southern Minnesota and Iowa. This strong ag market, combined with the diversification of the construction equipment stores gives us both stability and growth opportunity for years to come.

Second, our mix of equipment and recurring parts and service sales enable us to operate effectively throughout different economic cycles and enables us to take some of the seasonality out of our business model. As an example, our recurring revenue from repair and maintenance and parts sales comprised approximately half of our gross margin contribution in the prior year.

Third, because of the way we have structured our strong store operating model, we truly are an integral part of each community in which our stores are located. We empower leadership and share best practices throughout our organization while realizing efficiencies and leverages at the corporate level.

It has always been our premise that great customer service is created through accountable store employees who are supported by centralized administrative, finance and marketing functions. By managing our business as a network of independent stores supported by a centralized shared resource group, we ensure coordination of the entire enterprise and offer tremendous scale while providing long-term customer and employee relationships at the store level.

Lastly, because of the model and our position as one of the largest networks of full-service agriculture and construction businesses, our scale enables us to offer customers a great variety of equipment and better maintenance, parts availability and superior service throughout the year. The strengths I have just described have always been keys to our success to date and have always positioned us to take advantage of the long-term growth opportunities ahead of us.

In addition to the Company-specific strengths I have just described, Titan Machinery is benefiting from a variable market environment. First, we are competing in a very large, fragmented and growing market. In 2006, revenue from farm and garden equipment dealers were $55 billion and construction was even larger, at $72 billion for 2006, so we have a lot of room for growth.

Second, U.S. farm balance sheets are the strongest they have been since the late '50s. Overseas demand for U.S. agricultural products and the growing demand created by the biofuels industry have created higher commodity prices and strong farm income. We expect these trends to continue for many years ahead.

Third, technology is driving demand for new farm equipment and services. With the annual average net farm income expected to increase significantly over the next 10 years, farmers are going to upgrade equipment to make sure they have the best technology to optimize crop yields and minimize costs. Technology is playing a growing rule in crop optimization, which creates a great opportunity for Titan because this technology requires additional technical skills and resources from a dealer to support.

And due to a highly skilled and trained staff, we are positioned to take advantage of this great opportunity. We're trying to take advantage of this large market we are addressing and the improved financial strength of our customers through both organic growth, as well as through growth through acquisitions. Over the last three years, acquisitions have contributed more than half of Titan's annual revenue growth. We believe acquisitions will continue to be a great opportunity for us in the foreseeable future.

As we see it, we have only begun to realize the potential of our market-leading position and we are very excited about our long-term opportunities. But before I get into more detail about future growth opportunities, I would like to turn over the call to our President and CFO, Peter Christianson, to review our financial results for the three and nine-month periods ending October 31, 2007.

Peter?

Thanks, David. I'm going to review our three and nine-month results in more detail, and then I'll discuss our fourth quarter outlook and our preliminary outlook for the full year ending January 31, 2009. Our overall revenue for the third quarter ended October 31, 2007, increased 67% to $132 million from revenue of $79 million for the third quarter of the prior year. Revenue from equipment sales increased 78% to $103 million from $58 million in the third quarter last year.

Our part sales increased 42% to $18 million in the quarter, compared to $13 million in the same period a year ago. Revenue generated from our services business increased to $7.9 million versus $5.9 million last year. This gives us a sales mix of 78% for equipment and 20% for the after-sales product support parts and service part of our business.

Same-store sales had an increase of $18.9 million over the third quarter of the prior year, representing a growth of 24%. Now, when we look at same-store sales, we know that's important, but we're very sensitive to remember that our sales mix has an effect on our margin, so that as we see same-store sales we have to keep in mind the sales mix can affect our operating margins.

With that said, our gross profit margin for the third quarter was 15.4% of sales, compared to 16.7% of sales for the third quarter last year. This expected slight decrease is a result of a higher percentage of our revenue coming from our equipment sales, which is the lowest-margin portion of our business.

During a strong agricultural environment, as we're seeing now, farmers tend to buy more equipment, and although our gross margins are lower, our revenue is higher, resulting in a higher gross profit contribution and a better bottom line. If the agricultural economy is not as strong, we'll sell less equipment, but we'll generate more revenue in parts and services, which is a higher-margin business, important to our model.

Our operating expenses as a percent of net sales were 10.9% in the third quarter, versus 13.2% in the third quarter of the prior year. This 230 basis point improvement is due to our increased revenue and the strength of our business model.

As a result, our operating income improved to $6 million and we achieved an operating margin of 4.5% versus $2.8 million and an operating margin of 3.6% in the third quarter of last year. Net income for the third quarter was $2.7 million, or $0.36 per diluted share, compared to net income in the third quarter of last year of $0.8 million or $0.13 per diluted share.

Now, for the nine-month period ended October 31, 2007, sales rose 42.8% to $297.8 million, from $208 million during the same nine-month period last year. Looking at our bottom line for the nine-month period, our net income doubled to $4.9 million, or $0.72 per diluted share, compared to net income of $2.3 million, or $0.36 per diluted share in the same period last year. Same-store sales had an increase of $33.5 million over the nine-month period of the prior year, representing a growth of 18.2%.

Now I'd like to turn to a few key components on our balance sheet. Our total inventories amounted to $146 million at the end of the third quarter, up from $106 million at the end of the third quarter of last year. The increase in our inventory is attributable to having six more dealerships in our network compared to the same period last year and also our positioning for the market. We believe our inventory and access to inventory positions us well to support our sales growth for the foreseeable future.

As you know, on December 11, 2007, we completed an initial public offering at $8.50 per share and raised approximately $42 million in net proceeds. The net proceeds for the Company from this offering are being used to reduce our outstanding indebtedness and to fund future acquisitions of dealerships, as well as for working capital and general corporate purposes.

At October 31, 2007, our subordinated debt was $16.8 million, and we recently used the proceeds from our IPO to pay off $9.4 million of this debt and converted $6.4 million of debt into 2.3 million common shares.

Now turning to our outlook, we anticipate the revenue for the fourth quarter ending January 31, 2008 will increase by approximately 50% to 60%, as compared to the same period a year ago. In other words, to $127 million to $135 million range.

Earnings per diluted share for the fourth quarter are expected to be in the range of $0.01 to $0.03 per diluted share, which includes a one-time IPO-related debt conversion and retirement cost of $3.8 million or $0.20 per diluted share. When we exclude these costs, we expect earnings per diluted share to be in the range to $0.21 to $0.23 for the fourth quarter.

Weighted average shares for diluted earnings per share in the fourth quarter, ending January 31, 2008, are estimated to be approximately 11.2 million shares. The increase from prior periods primarily resulted from the issuance of shares in our IPO.

Now, for the fiscal year ending January 31, 2008, the Company expects revenue in the range of $425 million to $433 million and earnings per diluted share in the range from $0.61 to $0.63. Excluding the IPO costs outlined above, the earnings per diluted share are expected to be in the range of $0.89 to $0.91. Weighted average shares used to calculate the diluted earnings per share for the fiscal year ending January 31, 2008, are estimated to be approximately 8.3 million shares.

Due to the timing of our initial public offering and reporting of fiscal third quarter results, we're going to provide a preliminary revenue and earnings outlook for the full fiscal year ending January 31st of 2009. Now, going forward, we expect to only provide full-year outlook for the upcoming year when we report the fourth quarter results.

For the fiscal year ending January 31, 2009, our preliminary outlook -- in our preliminary outlook, we expect revenue of $530 million to $590 million, in that range, and earnings per diluted share in the range of $0.77 to $0.82. Fully diluted shares outstanding for the fiscal year ended January 31, 2009, are estimated to be approximately 3.8 million shares.

Now, I'll go into further detail with our fourth quarter earnings results, but again, with the timing of our registration, we felt that we wanted to give a preliminary outlook on '09 for you folks so that we could get you up to speed, and further comments will come later.

Now I'd like to turn the call back over to David for closing comments.

Thanks, Peter. We are pleased with our results for the third quarter. We are confident we can execute our growth opportunities for the many reasons I outlined earlier. As we prepare to enter fiscal 2009, we will continue to grow our business by broadening our customer base and leveraging our business scale to support new and existing customers.

Before we take your questions, I would like to conclude by thanking our employees for our achievements to date and thanking our valued customers for their continued support. We appreciate the support of CNH, are excited about our future and look forward to delivering long-term value to our stockholders.

Operators, we are now ready for the questions and answer portion of the call.

Thank you, sir. (OPERATOR INSTRUCTIONS)

Our first question comes from Bob Evans from Craig Hallum Capital. Please go ahead, sir.

Good morning, Dave and Peter. Great results. The question is your same-store sales accelerated significantly in Q3 versus the first half of the year. Can you give us a little bit more color in terms of why that was and a little bit more color around the business environment?

Well, we're experiencing a strong market within our agricultural industry right now and as we see that, usually where that will show itself is on equipment sales and because of the transaction size, they'll accentuate our same-store sales growth versus the aftermarket sales of parts and service.

Okay, and I assume your Q4 guidance is assuming that to continue in terms of where your same-store sales might be?

We did factor that in when we put together our outlook for our fourth quarter, yes.

And do you happen to have with you the -- what was the same-store sales a year ago in Q3? I don't think you had mentioned that. And for that matter, if you happen to have it handy, Q4 as well?

I don't have that right here. I can try and get that and get back to you on that.

No, that would be fine. A couple of also detail items. In your guidance for fiscal '09, how much stock interest expense are you assuming in that, ballpark?

I'm not exactly sure I understand the question. What do you mean by stock interest?

I'm sorry. Stock compensation expense. I mean your stock options expense.

Part of the calculation to get to our weighted average shares is that we do have a very small amount that's calculated in there that we recognize for the options that are with the employee plans that we have. Very insignificant.

Thanks, and also CapEx. Can you give us a ballpark idea for CapEx for fiscal '09?

Yes, like I say, the best preliminary outlook that I wanted to talk about was our revenue and earnings, but for models, I guess the CapEx is a very small metric, as we see our business, as we measure our business. We look at a CapEx of $3 million to $3.5 million for '09.

Okay.

Like I say, this is a preliminary outlook, but we felt that we really needed to do this for all of you to have that, because otherwise it would be too late to wait.

No, no. Appreciate that. And could you give us a little bit of color as it relates to the acquisition pipeline in terms of opportunities? Since you've now gone public, have you seen that accelerate, or if you can give us a little bit more color in terms of how your pipeline looks?

Well, right now, there's a full pipeline out there, and really this goes back probably to the last several years here. If you look at the aging group of dealer principals out there, you look at lack of success in this industry, that we've got a full pipeline and we're managing that and working very closely with CNH and so that our growth strategy, we're working hand in hand here into doing some pretty detailed analysis of the timing of the acquisitions, the right number of acquisitions that fit into our model.

So, yes, it's a full pipeline. We're looking out for several years here of we think we're on the front end of a big wave of consolidation in this industry. And we're excited about the opportunities.

Okay, thank you. I'll let others ask questions.

I'd like to just interject something here. When I was talking about our preliminary outlook for the fiscal year ending January 31, 2009, and told you about the fully diluted shares outstanding as of January 31, 2009, I said 3.8 million shares for the share count. It's 13.8 million shares. I just want to clarify that for everybody on the call.

Next question.

Our next question comes from Robert McCarthy from Robert W. Baird. Please go ahead, sir.

Good morning, guys.

Good morning.

Let's see, I've got a couple of things I want to ask you about. First off, in your results for the quarter, you benefited on the top line by I believe it was $16 million by a lease program, I presume run by CNH. Could you talk about that, talk about the prospects that that would affect results going forward?

Well, from time to time we've seen programs like this where we can get together with our main vendor, which is CaseIH, and we put together a lease program on a series of tractors and this has been something that's happened in the past and it could happen going forward. We have to assess where the market is at and what the program is that's available.

Is there -- excuse me. Has there been a comparable program run during the current fourth quarter?

Peter Christianson Are you talking about prior years?

No, no. I'm talking about -- I mean, this was an impact in your October quarter, right?

And when I gave the results for the fourth quarter, we had put some of that into our calculation as part of those results. You're right.

Okay, all right, very good. In the same-store -- yes, I'd reinforce what we just heard Bob comment on, the very impressive same-store sales number, even without that program. Agricultural versus construction, I assume the number was stronger yet in the farm equipment dealers.

Yes, the farm equipment has been stronger, very strong, a lot of strength in the farm equipment business. You look at the commodity prices, the [gross yields]

Oh, sure.

-- and stuff. We're fortunate in the construction business in our market is affected by -- you take western North Dakota, you take both agricultural, but then you also have the oil, the coal mining, the wind power going into it. So if you really look, I saw some statistics the other day that if you look at the housing market, compared to the negative trend throughout the United States, you look at Bismarck, Fargo, Sioux Falls, Rapid City, where we have construction stores, whre actually increases in not only resale, but new housing starts in those markets.

So we're fortunate that in the Midwest we have somewhat of a different metrics in the construction store, so we're seeing steady business. We're not seeing the downturn you're seeing in other parts of the United States in the construction business.

So can you tell us what kind of same-store sales growth you had in the construction side?

We do not look at our business that way. We're looking at our entire machinery business.

Okay, but it was positive is what I hear you saying.

We've got stores where the two of them are all the same store, so it's not possible. We're not splitting that out.

Oh, I see. Okay, all right, well, thank you for that.

In your outlook for FY '09, have you included any acquisitions that you have not yet made?

Yes, we do have that as part of our -- this is a very similar trend to our historical results at Titan, is our Company, we've been building this Company on both organic growth and growth through acquisitions and that same exact formula is what we use looking forward into '09 to come up with our preliminary outlook for you.

Absolutely understand that. Can you share with us roughly what kind of same-store sales growth you're assuming in your forecast for FY '09?

Right now what we want to do for just this preliminary outlook was we just wanted to give you some type of feel for what range we look at for our revenue side of our business and our earnings side, and really right now I'd feel more comfortable looking at that after our fourth quarter results are out.

Fair enough. Lastly, I thought you made a very interesting -- I think David actually made the comment that you -- maybe it was you, Peter, talking about inventory, that inventory is up in part because you're trying to position yourself for a healthy market, and I think you made the comment along the lines of and we have ongoing good access to inventory.

It's fairly well understood I think in the market that demand for combines, large tractors, is very strong, has prompted one of the other manufacturers to make comments about how far out their own production schedules are sold out. Do you have any issues in securing supply of product so that you can meet customer needs?

Well, right now, we've been looking at those forecasts and this going back the last six to nine months and we've put orders in the order bank so that we'd have inventory to sell. At the same time, we've been very successful in the fourth quarter of pre-selling, where we've actually sold equipment that will be delivered in the first, second quarters of this year out there.

So what we need to be is very aggressive out there with our sales force. We think we've got an excellent group of salespeople and the customers are very aware of this, so there's going to be a lot of activity out there to get the deals made, get the deals locked in, and we'll continue to work with CNH in making sure we've got the orders on hand to supply our needs.

Okay, very good. I'll let somebody else go. Thank you.

(OPERATOR INSTRUCTIONS)

We have a follow-up question from Mr. Robert McCarthy. Please go ahead.

I can do better than that. I've got a couple more. First, I wonder, Peter, do you have a number for what acquisitions you completed in the last 12 months have contributed to revenue in the quarter?

In the quarter, I'd have to look at that, Bob.

Okay, while you're looking that up, let me also ask about the two most recent -- well, really, the last acquisition that you all announced, the Avoca Greenfield dealers that brought $34 million of revenue. Is there anything unusual there in terms of either recent sales results or prospective sales results? What I'm getting at is the $34 million a pretty clean number? There was nothing wildly unusual that inflated it as we look back?

And then, going forward, is this one of these -- you've had situations in the past where you bought businesses that were severely over-inventoried and you get a short-term pop from liquidating that inventory. I think most people understand that's why your same-store sales statistic focuses on businesses that you've owned for at least two years. Is there the prospect of something like that happening at this relatively larger acquisition?

I think that what's important to look at here is that we see that acquisition as mirroring what we're doing with our other stores at Titan. That falls into a very standard market that we're used to operating in. We have other stores in that same market environment, and what we've just talked about with our fourth-quarter results and what we're looking at, I think that it's fair to say that that store should be in a similar trend to what we've been doing.

Okay, and while you're looking for that acquisition number, let me follow up on a separate comment that I don't know if I heard it made on the call, but it does appear in the Q, reference to growing market share. Could you talk a little bit about that, where you're seeing that happen and how sustainable you think it is?

First, Robert, I just want to get with you, I don't have the acquisition revenue on the quarter, but I do have that for the nine months.

Okay.

And the acquisitions contributed $39.7 million, or 44.5% of the increase. So does that help you there?

Yes, it does. Thank you, Peter. And then the question about market share?

To comment on that question, we've always been very aggressive at our dealerships and wanting to grow share. We like the margins we see for the parts and service business. We know to get that future revenue stream, we need to be successful in getting market share. So you alluded a little bit that we were very successful in a Magnum lease program. We did that.

We thought we had a situation here where we had a lot of our customers were going to have some tax issues this year, and we put that together here so they could take advantage of that, because the lease payments are lease payment deductible. So we're going to through our things we're doing in our stores, from the way we manage our salespeople, demonstrations, our field days, we're very happy with the product line that we have from CNH, from CaseIH, New Holland on the construction side, both the Case Construction, New Holland Construction.

So we've got a lot of things in place here and we're very focused on market share, and we know to be successful this long term, we need to continue growing the share. So I think throughout our whole Company, we're passionate on that. We've got a lot of things in place and we've got a lot of incentives within our folks to grow share. So we feel very confident we can continue to do that.

Thank you for that, David. Last question, I was surprised to see the news about the Titan Truck Center. Could you talk about your decision process there and whether you have any plans to expand on that initiative, or is this kind of a one-shot deal?

The Titan Truck Center is located in Moorhead, and what we have is a large percentage of our customer base, all of our farm customers and our construction contractors use these large trucks and they use the same engine and drive lines, very similar to what we have on the big equipment that we service. And so essentially we're just bolting that onto one of our dealer locations. We already have been operating these -- the service side of this business, we've already been operating that historically out of a store that we have down in South Dakota in Watertown and we have it in a store that we did through acquisition in Crookston.

So, really, we've been doing this and it's something where we can provide more full coverage on service for our customer base, and at the same time get operating leverage from what we're doing already in our parts and service side of our business. We felt that because of this being in a bigger metro area in the Moorhead location, then we just essentially branded it where we called it Truck Center, but essentially it's an extension of the dealership that is already existing there.

Ah, okay. All right. So we may see you do more of this as you leverage the existing assets that you have in place.

We have been doing it in these stores, but we're not -- the Truck Center is not selling new trucks right now.

Oh, I understand. Outside of maybe signage and some promotion, is there any other significant incremental cost required to add this to a dealer's capabilities?

No, there really isn't. With all of our dealerships we need to keep track of how many square feet we have per technician. But one last thing on the branding of that. In that particular instance, with the store in Moorhead, it's right along the freeway, the interstate. And in order for us -- we do have some drive-by traffic that we can just get as incremental business, and there's just a lot of these people that need DOT inspections, as well as our customers. So, to give them just a little more identity, we have that capability there, instead of just calling it Titan Machinery, we also called our truck service bay, we call that the Truck Center.

Yes, like it. Okay, thanks, guys.

One more question.

Our next question comes from Cliff Walsh from Julius Baer.

Please go ahead, sir.

Good morning. Just have one quick question on guidance for fiscal 2009. Did you include potential acquisitions in that number, or is that just existing branches at this point?

That number did include potential acquisitions, mirroring our historical trends of what we've been doing.

Okay, great. Thank you very much.

Any more questions out there?

We have no additional questions at this time, so I'll go ahead and turn it back to you.

Okay, thank you for your participation today and we're looking forward to sharing the progress with you next quarter. As a reminder, we will be attending the ICR consumer conference next week, and we hope to see many of you there. So, with that, that'll be the end of our call today.

Thank you.

Ladies and gentlemen, this concludes the Titan Machinery Inc., third quarter 2007 financial results conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325. Thank you for using ACT, and you may now disconnect.