Titan Machinery Inc (TITN) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Titan Machinery First Quarter Fiscal 2010 Conference Call on the 9th of June 2009. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions.

(Operator Instructions)

I will now hand the call over to John Mills. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's First Quarter Conference Call. On the call today, from the Company, are David Meyer, Chairman and Chief Executive Officer, 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 first quarter ending April 30, 2009, which went out this morning at approximately 6 a.m. Eastern Time. If you have not received a 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're 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 will 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 risk and uncertainties, including those identified in the risk factor section of Titan's most recently filed 10-K and 10-Q. 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 welcome to our First Quarter 2010 Conference Call. On today's call, I will provide highlights of our first-quarter results, discuss some of the recent acquisitions, and provide a general update on our business. Then, Peter will review the financial results for the first quarter in more detail. I will then provide some closing remarks, and we'll open up the call to take questions.

As John mentioned, to help you follow today's prepared remarks, we 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 website in the middle of the page. I will pause for a few moments to allow you to access the presentation on our website.

I am pleased to report solid first-quarter results for Titan Machinery. Turning to slide two, we have an overview of the quarter. Revenue for the first quarter increased to $166 million, up 9% from $153 million in the first quarter of last year. Our gross profit for the quarter was up approximately 16%, to $29 million, compared to a gross profit of $25 million in the comparable period last year.

Our pre-tax income for the quarter was $3 million, compared to $5.7 million last year. We achieved earnings per diluted share of $0.10 in the quarter, compared to $0.24 last year. It's important to note that our weighted-average share count increased 29%, compared to the last year, due to our 2008 follow-on offering.

Turning to slide three, based on our first-quarter results and outlook for the remainder of the year, we are reiterating our first-year revenue and net income, fiscal 2010 guidance. As a reminder, our revenue outlook for fiscal 2010 is a range of $750 million to $790 million, and we expect same-store sales to have decreased approximately 10%.

We anticipate achieving net income between $16.6 million 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 the fiscal 2009, due to our 2008 follow-on offering.

To put our guidance in perspective, turning to slide four, 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 we experienced last year. Fiscal 2010 guidance is in line with our long-term trend line, growing the business through long-term organic and acquired business-unit growth.

Peter will give more color on the different elements of our first-quarter financial performance, but I would like to go over a few key factors that are important to keep in front of mind, when evaluating our first-quarter results.

As those of you who have followed our story for a while now, revenue can shift from one quarter to 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 applies to both our agricultural and construction businesses.

On slide five, you can see our earnings per share seasonality over the past couple of years. In a traditional year, the first quarter is the seasonally weakest for our business. However, as you can recall, the first quarter of fiscal 2009 was exceptionally strong. In addition to the record-setting commodity market we experienced a year ago, the first quarter of last year also benefited from weather patterns in our markets, delaying planning an extra few weeks, which gave our customers more opportunity to invest in their equipment.

This moved some revenue that we would have generated in the second quarter, into the first quarter of last year, underscoring why we believe it is important to evaluate our financial results on an annual, as opposed to a quarterly basis, and sometimes making year-over-year or quarterly comparisons difficult.

I would like to briefly discuss a couple factors impacting our most recent quarter. During the first quarter of fiscal 2010, our revenue was impacted by the well-publicized flooding experienced in the Red River Valley, as our customers were protecting their farm sites from floodwaters, and they were unable to purchase equipment, parts and services during the flooding.

We are now seeing the return to normal buying trends in the second quarter, as conditions improve in this region. Additionally, while our construction-equipment stores did not see as dramatic of a decline as the overall industry's numbers, our CE stores are experiencing softness in their business, given the current macroeconomic environment.

With our CE dealership acquisitions during fiscal 2009 in Iowa, Nebraska, Montana and Wyoming, we have doubled our presence in the construction industry up to approximately 20% to 22% of annual revenue in fiscal 2010, from 12% in fiscal 2009. We are taking advantage of the slowdown in the construction-equipment industry to integrate our recent construction acquisitions into our Titan operating model, which will certainly benefit our business in the long term.

Our year-over-year revenue increased as a result of our solid revenue growth from acquisitions. Slide six shows our strong acquisition activity over the past several years. To reiterate what we have said in the past, we have identified a three-to-five-year acquisition pipeline to support 10% to 15% annual acquisition growth.

Year-to-date in fiscal 2010, we have closed on two acquisitions and opened one new store. First, we acquired Winger Implement, a New Holland Brand Agricultural dealership in Winger, Minnesota. Winger is strategically located between our Ada, Crookston and Thief River Falls locations on the edge of the Red River Valley in northwest Minnesota.

And, second, we closed on the acquisition of the farm equipment business of Arthur Mercantile, a Case IH Brand agricultural-equipment dealership in Arthur, North Dakota. This is the oldest Ag equipment dealership in North Dakota, and is located in the fertile Red River Valley farmland, which is considered to be some of the finest and best farmland in North America.

On May 1st, we opened a new Case construction-equipment dealership in Minot, North Dakota. They expect this store to benefit from a number of growth opportunities, including wind power, coal, mining, natural gas and oil exploration and extraction, related to the Bakken Formation. A Case CE store in Minot has been part of Titan's long-term plan, and we are very pleased with this new location.

Our three newest dealerships provide great synergies with our existing geography, and we are continuing to do an excellent job integrating our new stores into our existing network, and implementing the Titan operating model of offering customers superior service, technical expertise, selection and value. CNH continues to support our acquisition efforts, and we look forward to continuing to capitalize on acquisition opportunities in the months ahead.

Turning to slide seven, you can see that there is a very large market for our products and services. The Ag and construction-equipment dealer market in our regional market is $18 billion. Titan Machinery is one of the very few consolidators in the area, and because of our scalable strong-store model, solid balance sheet and proven track record of market performance, we are well positioned to capitalize on this acquisition opportunity through steady and discipline the acquisition of Ag and CE dealerships.

Now, I would like to spend time discussing the environment in which we are currently operating. Here, in slide eight, the Ag-equipment industry in the US is still strong. Crop cash receipts, which are the key driver of large tractor and combine sales are expected to decline from a record of $181 billion in 2008, to $163 billion this year.

Though this is almost a 10% decline, cash receipts are still at the second-highest level ever. 2008 was an unusually good year for the US Ag industry. Expanded acreage, exceptionally high yields, and our record high crop prices, all at the same time, resulted in record crop cash receipts, net farm income, and thus record farm-equipment sales.

Even though farmers are returning to their traditional buying habits, they continue to have strong balance sheets on a historical basis, and commodity prices are still strong compared to historical standards, and are strengthened further through the current planting season. Importantly, 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.

CNH Capital continues to provide an array of attractive equipment finance and lease options. In addition, the local and regional banks in our markets 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. The National Farm Credit System was established in 1916 to ensure a permanent source of reliable and competitive capital to the agricultural industry. With federally guaranteed funds, St. Paul headquartered Agribank capitalizes a 15-state network of local farm-credit service associations, such as AgCountry, AgDirect and AgStar. For generations, Farm Credit Association has been an integral part of local communities, and a stable financing source for agriculture.

In summary, we expect another good year for our Ag business, due to the strong farm fundamentals. As expected, the strength of our Ag business was partially offset by the continued softness in the construction-equipment sales and rental fleet utilization. As you are aware, the CE industry continues to be under pressure due to the challenging economy.

We are pleased with the measures taken to lift this industry -- banks have lowered interest rates to record low levels, the government has authorized the stimulus program, and the credit is becoming to flow again.

These measures are beginning to have some impact on the economy, such as the increase in consumer-confidence index, improvement in the number of pending homes sold, and the recent announcement of a slight reduction in the number of unsold new homes, in terms of months of supply, but it will take time to see a meaningful recovery.

As we pointed out in the last earnings-release call, fortunately the region in which most of our CE stores are located are not dependent strictly on the 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.

We are pleased with improvements we are making in our recently acquired construction dealerships. Even though the current economic environment is temporarily affecting this business, we are confident that the construction-equipment stores will be an important contributor to 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 first-year depreciation allowed for 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 calendar year. In summary, we are very comfortable with our start to fiscal 2010, and believe we are well positioned to achieve our full-year goals.

And with that, I will now turn the call over to Peter.

Thanks, David. Turning to slide nine -- our total revenue for the first quarter ended April 30, 2009, was $166.3 million. It was primarily made up of the following three sources. Revenue from equipment sales increased to $124.9 million, from $120.9 million in the first quarter of last year. Our parts sales increased to $26.4 million in the quarter, compared to $21.5 million in the same period a year ago.

Revenue generated from our services business increased to $12.5 million versus $8.9 million last year. In previous quarters, we have only discussed these three revenue streams. However, I'd also like to highlight what is referred to as our other revenue stream on our income statement, which is comprised primarily of revenue generated from our Rental business.

Our revenue from this category increased 105%, to $2.5 million in the first quarter of fiscal 2010, from $1.2 million in the first quarter of the prior year. Although this is still a small percentage of our total sales, the lower margins associated with this category had a $0.02 per share negative impact on our bottom line, which I will go into in a moment. On slide ten, our gross profit for the quarter increased to $28.5 million, compared to gross profit of $24.6 million.

Our gross margins in the quarter improved 100 basis points, to 17.1%, compared to 16.1% in the first quarter a year ago, primarily due to a change in our sales mix to an increased percentage of revenue generated from the higher-margin parts-and-service business.

Gross profit from our recurring parts and service revenue contributed 55% of overall gross profit for fiscal first quarter of 2009, compared to 46% in the first quarter last year. The improvements in our overall gross margins were less than we anticipated, due to lower year-over-year gross margins from our other revenue category that I mentioned earlier. Gross margin for this category decreased to 5.9% in the first quarter of fiscal 2010, compared to 30.1% in the prior-year quarter.

Let me provide some color on this change. As David mentioned, we now operate a greater number of construction dealerships than we did last year, and these CE dealerships do significantly more rental business than our Ag dealerships. The rental business in the first quarter was seasonally slow due to winter weather and the challenging economy. But it still carried the same fixed depreciation costs since we owned the rental fleet, resulting in lower rental gross margins for the first quarter.

We're confident that our rental utilization will reach typical seasonal usage, with rental revenues outpacing depreciation expense through the construction season, to meet the annual rental utilization built into fiscal 2010 guidance.

Our operating expenses were in line with our expectations and, as a percentage of net sales, were 14.8% in the first quarter, versus 11.9% in the first quarter of the prior year. The increase in operating expenses as a percent of revenue was driven by additional costs associated with acquisitions, such as compensation, rent and depreciation.

Our first-quarter 2010 revenue represented a lower percent of annual revenue, compared to our extremely strong first quarter of 2009. And, therefore, the higher percentage of operating expenses was expected, and is included in our fiscal 2010 guidance. Pre-tax income was $3 million, or 1.8% of revenue, compared to $5.7 million, or 3.7% of revenue in the first quarter of last year.

Net income for the first quarter of 2010 was $1.8 million, compared to net income of $3.4 million in the first quarter of last year. Earnings per diluted share for the first quarter of 2010 were $0.10, on approximately 7.9 million shares outstanding, compared to $0.24 per share on approximately 13.9 million shares outstanding. The 29% increase in shares outstanding is due to our May 2008 follow-on offering.

Slide 11 shows our first-quarter same-store sales decreased 9.2%, which was slightly better than our expectations of a decline of 10%. When considering our same-store sales, it is important to remember that our same-store sales for fiscal 2009 first quarter were extremely strong, and increased 37%, due to a historically stronger-than-normal agriculture sector last year.

As we pointed out in previous 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 first quarter, our same-store gross profit decreased 5.3% year-over-year, compared to the 9.2% decline in same-store sales, to $23.3 million, down from $24.6 million in the first quarter of 2009. Again, this decrease was expected, and was due to the unusually strong Ag-equipment sales during the first quarter of last year.

For modeling purposes, it is worth noting that 22 locations are not included in our first-quarter same-store analysis. We calculate same-store sales by including stores which were with Titan for the entire period which we are comparing to. So only the stores which were part of Titan for the entire three months of the first quarter of fiscal 2009 are the ones which are included in our same-store comparison.

On slide 12, 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 $79 million, or $4.41 per share in cash to pursue future acquisitions and fund working capital and general corporate purposes.

Our inventories totaled $292 million at April 30, 2009, compared to $243 million at the end of our last fiscal year. The increase in inventory is primarily the result of purchasing to meet the needs of our expected equipment sales in fiscal 2010. In addition, CNH provided us with interest-free floor-plan financing on the new equipment we recently purchased, and our interest-bearing inventory has actually declined since the beginning of the year.

Reflecting the return to a normal inventory stocking cycle, we believe inventory in the first quarter -- we built inventory in the first quarter, and will continue to do so in the second quarter of this fiscal year, to support our stronger seasonal sales in the third and fourth quarter. In fiscal 2010, we're 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 first quarter of fiscal 2010 was $144 million, as of April 31, 2009. We had $115 million available of our $321 million of total floor-plan lines of credit. Additionally, we maintained a $25 million operating line of credit, with $24.75 million available. Long-term debt, including current maturities was $27 million at the end of the first quarter of fiscal 2010. $19.7 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 13 is an overview of our cash-flow statement. When we evaluate our business, we look at our cash flow related to inventory, net of floor-plan activity, which is reported on our statement of cash flow as both operating and financing activities.

When considering floor plan, our first-quarter net cash flow used for our seasonal increase in inventories is $9.4 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 $21.4 million, primarily due to our increase in inventories.

We believe including the non-manufacture floor-plan proceeds as part of our operating cash flow better reflects the net cash flow of our operations. Net cash used for operating activities during the first quarter was approximately $7.9 million, in line with our seasonal expectations.

Now, I'll turn the call back to David, for closing comments.

Thanks, Peter. We are pleased with our overall first-quarter performance in a very challenging economy, and believe it is a testament to our strong operating model and growth objectives. We have a unique business model, with a wide range of margins and our different revenue streams.

When modeling our company, close attention needs to be made to our revenue mix and timing of our revenues through the different stages of our customers' annual business-production cycle. Agricultural is very strong, and with our robust acquisition pipeline, we are looking forward to another successful year for Titan Machinery. Before we take your questions, I'd like to conclude by thanking our employees for 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.

Thank you, sir.

(Operator Instructions)

Thank you. The first question is from Bob Evans, from Craig-Hallum Capital. Please go ahead.

Good morning, and thanks for taking my question. First, a detail item -- can you comment or give us some clarification -- how much of your debt was -- floor-plan debt is interest-bearing right now -- ballpark?

We haven't broken that out in the past, Bob, but, as we said in the call here, we've been building our inventories, and we've been doing that primarily with interest-free floor-planning.

Okay. What has that ratio historically been? I guess I'm just trying to get a ballpark sense.

Historically, I'd say you're looking at probably 60%.

Is non-interest?

Yes.

Okay.

60% to 70%.

Okay. And then you had mentioned an impact from the Red River flooding. I know it's difficult to totally define how much that impact was, but can you give us any sense of what that might have been from the quarter, either from a revenue or an earnings standpoint?

Probably $0.01 to $0.02 on an earnings standpoint, per share.

Okay. And a similar question -- I think you had commented that you had bought -- and, obviously, in the last year, you bought a couple more major construction dealerships and that business has been weaker and more seasonal.

Can you give us a little bit more color in terms of how that business operates from an expense structure -- because it seems like the expenses are a little bit higher as a percentage of sales, and maybe what the EPS impact there would have been in the quarter?

Yes, Bob, as we had said in the call, here, with the acquisitions that we made in Iowa and Nebraska mid-year last year, and then the acquisitions of the construction stores in Montana and Wyoming, we have a lot higher mix of our business -- it's about double this year in the construction industry.

And two things go with that. First of all, the construction industry is experiencing a strong headwind. We knew that. We think, long term, that it's a good business -- it's a good diversification for us. And at the same time, we realize that, historically, our construction dealerships have run with a higher operating expense as a percentage of sales -- they run with a higher expense than the Ag stores.

So with the increase in those stores, we see a higher percentage of expense as a percentage of sales. Looking at the drag to our earnings from the construction stores for our first quarter, we're probably looking at about $0.05 -- $0.04 to $0.05 drag because of the construction industry.

Okay. Okay, thank you. And can you comment -- as it relates to the Ag business, can you comment further in terms of -- it sounds like the overall macro backdrop remains positive -- is getting better. But can you give us a sense of -- how are your inventories? How's -- what are you seeing for demand? Can you kind of compare it to what you've seen historically, and last year?

Well, I think, on the Ag side, what's happened is -- it was a pretty challenging macroeconomic development, as you look through -- probably starting in the last November to December, through this year. I mean, a lot of the growers -- they pick up the paper or turn on the radio -- it's a lot of negativity on there.

So even though the basic fundamentals are really good right now, and you've seen a -- actually, a strengthening of the commodity market, I think there's been a little bit of a wait and see attitude. And you get the crop in, and you combine that with the floods we were having up in River Valley; I think there's been a little bit of a wait and see.

So, we're returning to more of a traditional -- where the growers like to get their crop in, see what's growing and have a little bit more of a visibility of the pricing, and then it tends to be the -- a stronger third and fourth quarter. And it looks like we're seeing that hold true through this fiscal year end right now.

Okay. And how should we view Q2 of this year, versus Q1? I know, last year, it was reversed because of an unusually high Q1, but I would assume that we should see a much stronger Q2. Is that fair to say?

Well, I think you're going to see Q2 is stronger than Q1. And then, in this traditional model -- then the third and fourth quarter is even stronger than your first and second quarters.

Okay.

And you might go back to the pie chart -- and we've got a pretty good graph showing that -- if you look at the red bar in that -- in slide number five.

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

Thank you. The next question is from Chris Weltzer from Robert W. Baird & Co. Please go ahead.

Good morning, guys.

Good morning, Chris.

I was wondering -- you talked about getting a lot of this buildup in inventory from -- with interest-free terms from, presumably, CNH. Can you talk about, one, how long those terms last, and then sort of square that with the cash-flow statement highlights you had, where the proceeds from manufacturer floor plan were actually relatively small, relative to the non-manufacturer floor plan, which I would imagine does bear interest?

Two things -- first of all, not all of the non-manufacturer floor-plan proceeds are interest-bearing. And, secondly, when you look at that slide, we wanted to have the net inventory changed so that that number tied right out to our cash-flow statement.

But what's important to realize about that number is that the new inventory proceeds have been netted out against the increase in inventory. And so, what I guess that means is that when you look at our balance sheet, we had an increase -- a total increase in inventories this quarter of $49 million.

Yes.

And we went from $243 million to $292 million. And so, in reality, what we're looking at is an inventory net cash flow $9.4 million, to have $49 million increase in our total inventories. And that's pretty in line with our historical trends, where we see a net investment in that inventory, at the dealer level, of about 15% to 20%. And so there's a lot of interest-free floor plan that had come into that number that's netted out on the inventory change on our cash-flow statement.

I see. And, then, the terms are how long -- the inventory financing lasts?

The terms vary. They will go anywhere from four months interest-free to -- all the way until the end of the calendar year. And, basically, what that does is that puts us in a position so that we can work hand-in-hand with our manufacturer, and they can level load their production out of their plant. And, at the same time, we can have the inventories to support our sales plan for the third and fourth quarter of our fiscal year.

Right. Okay, so it sounds like the terms have gotten better relative to last year, in other words?

Yes. Last year, we had an extremely strong demand on all of the agricultural equipment and it wasn't just in North America, it was globally. And, this year, we're seeing it so that we're returning back to more of a traditional inventory-stocking cycle; so much more in line with what we've been used to, historically.

Do you get the sense that your primary competitors are in sort of the same boat -- that floor-plan terms are getting better and inventories, industry-wide, are increasing? Or, do you think this is a CNH-specific initiative?

It's hard to exactly say exactly what the competitors are doing. I know I've -- we've seen some inventory that's coming from the rest of the world, coming back into North America. And exactly what kind of terms they're giving their dealers -- we're not sure on that.

But one more comment on inventory, too, is as you look at a lot of our lots in December, the pipeline was probably at a 20-year low on inventory levels. We'd receive phone calls from growers asking if we were closing stores because there were no new combines and no new tractors out front.

So, we're just basically restocking our -- with the very -- with a prudent amount of equipment for display and demonstration purposes. And if you take our total inventory and divide it by our number of stores, we're in great shape right now.

Okay. And, then, you talked a little bit more, I guess, negatively, on the Construction Equipment businesses this quarter, it seems. Can we imply that your outlook has, perhaps, gotten a little worse on the construction side?

No. We reiterated our annual guidance. And I guess what we all need to realize is that we have a higher percentage of our business in the construction industry. And, historically, we know that, at least, in our region -- that we've seen the first two quarters of the year be a lot weaker, you might say, and the last half of the year be stronger on the construction-equipment business and that's what's playing out.

Okay. And then, last question -- did your Parts and Services businesses generate positive same-store sales growth in the quarter? And, I mean, would that be your expectation for the year?

One of them -- the Parts was slightly off and the Service was up.

And you would -- what's your -- how are you thinking about those two businesses for the year?

Well, we've given an annual guidance number of 10% same-store decline across all revenues. And our Service and Parts business, traditionally, is more stable than the whole goods.

Okay. Thank you, guys.

Thank you. The next question is from Paul Mammola from Sidoti & Company. Please go ahead.

Hi. Good morning, guys.

Morning, Paul.

Have you -- or has CNH offered any promotional pricing or discounting to you at this point, for machinery?

Well, CNH has been very aggressive -- we have some good interest options. We're aggressively going after the marketplace. I think it's consistent with their model here, of getting a higher market share of Case IH equipment and New Holland equipment out in the marketplace and they're doing a good job of that.

Right. So if I understand correctly, it's been more from a financing standpoint than a price discount, correct?

Well, I wouldn't necessarily say that. All the manufacturers have this bucket of programming dollars that they look at, either on a monthly or quarterly basis and that bucket can be a combination of cash discounts, rebates, financing -- maybe free attachments. There'll be a combination of a number of those things.

So I think all the manufacturers, to be as competitive as they can in the marketplace, and be as creative in their marketing -- is they want to mix those up and, necessarily -- one shoe doesn't fit all. There might be -- a certain market in North America might like financing, and another market may have more higher-price trades, and maybe a cash discount be more [accruable].

So, you see a few variables in there, and a little bit of flexibility at the discretion of the dealership of which direction to go there.

Okay. That's very helpful. When you say -- or, in the release, it said that you expect operating margins to increase for the rest of the year. Does that imply that there is a plan to reduce operating expenses, or is that just more sales-leverage based?

That's more sales-leverage based.

Okay. Obviously, some good information about the construction stores -- how is the foot traffic, specifically -- obviously, it's early -- but at the Minot store? And do you see yourselves potentially trying to set up around some of the other domestic shale-drilling areas?

Well, when we look at a -- this Minot -- and this has been in our long-term plans -- if you look at our -- we've got the Bismarck, North Dakota store, and then you have the Billings store and there is a lot of geography in between those two stores. And as you get closer to the mining and the recent discovery of this Bakken Formation, we would -- we need to get closer. Our competitions all have locations in Minot.

So we had an opportunity where we were able to -- it's been difficult not only to find a facility -- locations in Minot, but also the pricing of them. And this is a really recent acquisition too, so it's early to tell, but we were able to find a great location, great facility -- staff it with people. And so, it really gets us closer to one of the hottest, I'd say, construction markets we can see in the region. So, we think that's a real plus.

Okay. And, then, finally, you mentioned price. Do you still see near-term opportunities for acquisitions in the same price range in terms of one-times assets, or have you picked the so-called low-hanging fruit, at this point?

Oh, no. We really haven't seen a lot of change in the pricing of these equipment dealerships and we're optimistic that's going to hang in like that, through the balance of the year.

Okay. Thanks for your time.

Thank you. The next question is from David Fondrie from Heartland. Please go ahead.

Yes. Good morning.

Morning.

Good morning, David.

I wonder if you could give us just a little more flavor on the Red River Valley -- the weather, how that's impacted, particularly, the just-completed quarter. Everything I read is that the weather, still, has been pretty weak in your traditional trade area, and it's delayed planting. But give us a little bit of an update on what you're seeing, and how much that shifted, potentially, sales out of the first quarter, into the second quarter, compared to last year.

Well, the first thing we need to look at -- is you have to go back. And when we were actually running -- going through this flood -- the Red River Valley, unlike other parts of the United States is that, maybe, you have a little more rolling terrain.

When it floods in Red River Valley, it is so flat, and the Red River Valley is so wide, and there are so many tributaries that flow into that, that that just covers a huge area, where, actually, literally, farmers are taking rowboats in and out of their farmsteads.

A lot of the farmsteads are diked up. And, just a little history and geography -- the Red River flows north, up into Hudson Bay -- one of the few rivers that does that. Well, as our -- we're finding out in the southern Red River Valley -- it's still frozen up North. So, historically, this area can flood. And a lot of our farmers are used to that. It delays things.

And once the weather warms up and everything thaws out -- but during that period of time, many of our employees, almost all of our customers -- they were looking out over their own farmsteads. They're sandbagging, they're taking rowboats in and out of their farmstead.

A lot of our employees are either helping customers out or taking care of their own homes. So, it was really a distraction. And it just -- it took away from business. That normally doesn't happen to this degree. This was the highest amount of water in Red River Valley in history, so -- and it's all concentrated in one area.

So this is one reason why it's really good -- this happened in the Red River Valley, but this is just a testimonial to our geographical diversification and our large footprint, because even though we're behind up here in the Red River Valley -- Iowa has had a great planting year of -- corn is up and ahead of the time. Nebraska is up -- southern South Dakota, southern Minnesota.

So, we're seeing great crop progress there. But as I'm looking out the window right now, the corn is up and it's growing. The wheat stands are looking really good. Soybeans are coming up. So, with some sunshine and normal weather -- last year was delayed and the crop caught up, and we had record yields. So we're hoping the same thing is going to follow through on this year.

Okay. And, then, any sense of how much -- any sense of any equipment shortages? You mentioned that, last year your lots were pretty thin. Have there been any types of equipment that have been in short supply from CNH?

I'd say the biggest challenge we're seeing right now would be planting and seeding equipment, and some tillage equipment is probably in the shorter supply -- self-propelled sprayers are pretty tight. We've seen some models of four-wheel drive tractors have been tight.

But pretty much -- there are some new models, here. We've got -- that were introduced this year, some with some CVD transmissions. Some of these things are a little bit slow coming out of the chute. But, for the most part, availability is quite a bit better than it was last year.

And, then, lastly, can you break down, in relative percentage, your rental pool of Ag versus CE, or is it all construction equipment?

Well, if you take our long-term capitalized fleet, we virtually don't have any Ag equipment in our long-term capitalized fleet. That's pretty much unique to the construction-equipment business.

Okay. Thank you very much.

Thank you.

(Operator Instructions)

And the next question is from Rick Nelson of Stephens, Inc. Please go ahead.

Thank you, and good morning.

Good morning, Rick.

Follow up on the construction side of the business -- you mentioned it was a $0.05 drag in the first quarter. How should we think about that into Q2, and your expectations built in for the full-year guide?

Well, Rick, we don't give quarterly guidance. But, definitely, when we look at our Construction business, based on what we've seen historically in our own construction stores, the first and second quarters are weaker on the construction industry and the third and fourth quarters seem to be stronger.

And so, we still have kept with our full annual fiscal guidance. We're reiterating what we were at before. So, we believe that this construction thing -- the second half of the year -- that we can make -- that that business will come around.

And just to follow up, also, on the EPS seasonality chart that you -- page five -- it appears as if you have easy comparisons here in Q2. And you mentioned that conditions have improved in the early going of the second quarter -- wondering how the construction side would fit into that seasonality chart.

Well, two things, Rick. First of all, it's important to remember, on the Construction business, that they're just getting going now and in Q2, they're going to get cranked up. And part of the seasonality, with our Construction business, is relative to this whole rental fleet, where we don't get the utilization until they really get into their contractor season.

In addition to that, I do think that, based on what we've seen historically with our Construction business, that we'll see the Construction business drag on our second quarter, relative to what our seasonality analysis is, which was based on, like, 88% or better of Ag sales.

All right. Can you quantify how sales are tracking in the early going of the second quarter?

It's really too early to give much of an outlook on that, because of the fact that, in both our Construction and our Ag businesses, the majority of sales happen in the last week of the month. It's just something that is common in the industry, where a lot of the programming dollars and a lot of the retail programs that are available to the customers all have a month-end deadline. And so, we just see a lot of that business being moved in the last week of the month.

And so, right now, with us being mid -- in the early part of June, and having all of July ahead of us, I think I'd be premature to give too much color to that.

Okay. Thank you for that. Also, the floor-plan line comes up for renewal this summer, any updated thoughts there?

Yes, we have an annual renewal date in August on that. And we see that as going -- as it has historically, where we'll get together with those folks; we'll negotiate a rate. And it looks like the interest rates in the current environment -- it should be that we'd have a good rate. And so, we see the level of it remaining constant, and it should just be an annual renewal.

Thank you very much, and good luck.

Thank you.

Thank you. And we now have a follow-up question from Bob Evans, of Craig-Hallum Capital. Please go ahead.

Hello, again. Can you comment a little bit further on the acquisition pipeline? I think you had said pricing remained relatively the same. Can you comment in terms of how things have either kind of improved or not over the last few months in terms of interest of people looking to be acquired, and kind of what you're looking at?

Well, I think there's a number of phenomena that are taking place right now. First of all, we're looking at a fully fragmented, aged dealer group out there. There's a lack of succession.

One thing about the capital gains -- I think a lot of these -- people that that have one foot in the retirement type dealer principals are really -- looking at this 15% capital-gain rate possibly going away at some point in time, here. So, that's going to drive a lot of acquisitions.

Another thing is I think that a commercial credit -- when some of these dealers are going around, doing their loan renewals, too -- there could be a little bit of a change from what they were used to historically, in the past. And you see inventory levels building around the country. I think that's going to drive some consolidations.

And the whole level of sophistication of not only the equipment, but the business is driving a lot of acquisitions. So, really, I see no change. In fact, a little bit, probably -- a little bit stronger interest in Titan Machinery for some of these dealerships that are looking at a succession plan for their employees and their customers and their dealer location.

And, so, given that, how do you look at your acquisitions and how you roll them out? Is it more of a function of trying to make sure that you're rolling them out in a way that you can manage them, or trying to hit certain geographic areas strategically or --? Can you give us a little bit more color?

Well, I think what you've seen is -- historically, in the past -- that real methodically, quarter after quarter, we're announcing these acquisitions. And we want to do it so that -- in line with our fiscal plan. I think what -- our track record in the past -- I think you can see what we do. And I see no change in that, going ahead -- it's just real consistent and methodical growth through acquisitions.

Okay. All right, thank you.

Thank you. There are no further questions. I'd like to hand the call back to David Meyer. Please go ahead.

Well, thanks for attending our call today. And as a reminder, we'll be attending the Craig-Hallum Conference on June 11th. We look forward to updating you on our fiscal 2010 progress on our second-quarter call in September.

So that concludes our call. Thank you, everyone.

And this does conclude the Titan Machinery First Quarter Fiscal 2010 Conference Call. Thank you for participating. You may now disconnect.