Titan Machinery Inc (TITN) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Titan Machinery Incorporated Third Quarter Fiscal 2010 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Mills with ICR. Please go ahead, sir.

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

By now, everyone should have access to the Earnings Release for the fiscal third quarter ending October 31, 2009, which went out this morning at approximately 7:00 a.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Titan's website at www.titanmachinery.com. This call is being webcast, and a replay will be available on the Company's website, as well.

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

Before we begin, we 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 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 10-K.

These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in the 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 would 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 third quarter 2010 conference call. On today's call, I will provide highlights of our third 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 third quarter and first nine months of fiscal 2010 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 www.titanmachinery.com. If you click on the Investor Relations tab on the right side of the page, you will see the presentation directly below the webcast in the middle of the page. I will pause for a few moments to allow you to access the presentation on your website.

I am pleased to report solid third quarter results for Titan Machinery. Turning to slide two, we have an overview of the quarter. Revenues for the third quarter increased to $227 million, up 6% from $214 million in the third quarter of last year, driven by acquisitions and partially offset by the challenging construction market as compared to last year. Our gross profit for the quarter was up approximately 6% to $39.6 million, compared to a gross profit of $37.3 million in the comparable period last year.

Our pretax income for the quarter was $9.7 million, compared to $13.9 million last year. We achieved earnings per diluted share of $0.32 in the third quarter, compared to $0.45 per share last year. Peter will go into more detail about the quarterly results and same-store comparisons. But I think it is important to keep in mind that we face very tough year-over-year comparisons for the quarter.

Third quarter of fiscal 2009 was extremely strong, as our third quarter 2009 revenue increased 62% over the third quarter of 2008. Our results in the prior-year period reflect an unusually strong ag environment, including record commodity prices. Also, it's important to note that the decrease in pretax income reflects our increased concentration on construction stores and this year's third quarter results, which have generated lower sales and higher operating expenses due to the continued challenging construction market.

Turning to slide three, you see our first nine month results. Revenue for the first nine months of fiscal 2010 increased 17% to $587 million, compared to $501 million in the first nine months of last year. Our gross profit for the first nine months of fiscal 2010 was $104 million, up 19% from $87 million in the prior year period. Our pretax income for the first nine months of fiscal 2010 was $21 million.

Diluted earnings per share for the first nine months of 2010 was $0.69 and $18 million weighted average diluted shares, compared to $0.91 per diluted shares on $16.4 million shares in the prior-year period. It is important to note that our weighted average share count increased approximately 10% compared to last year due to our 2008 fall on offering.

Slide four shows our updated annual guidance. We are raising our revenue range for the full year ending January 31, 2010. We now expect to achieve revenue in the range of $770 million to $800 million, compared to the previous range of $750 million to $790 million. This increase is due to our continued strong ag business, which is partially offset by a continued weakness in construction.

Turning to our earnings, we are narrowing our expected net income range from the previous range of $16.6 million to $18.7 million to a range of $16.6 million to $17.6 million. This narrows our earnings per diluted share range to $0.92 to $0.98 per share, compared to our previous range of $0.92 to a $1.40. The net income range is based on strength in our ag business, being offset by the lower results related to the overall challenging construction industry.

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

On slide six, the blue graph represents last year, and the red graph represents the historical average. This chart demonstrates the seasonality of our earnings per share over the last couple of years. As we have said in the past, we measure our results on an annual as opposed to a quarterly basis, as revenue can shift from one quarter into another based on a number of factors, including weather patterns. This year reflects some more traditional seasonality of our business, whereas last year we experienced an extremely strong third quarter, as our third quarter of fiscal 2009 represented over 40% of our full-year earnings per share.

On slide seven, the map represents our construction equipment footprint. The orange states represent the fiscal year 2009 construction acquisition stores, and yellow states represent our core locations. However, the current year's depressed sales and the (inaudible) fee are having a negative impact to our revenue and operating expenses as a percent of revenue. In spite of these short-term challenges, you see these stores create a whole additional platform of growth for our company in the same contiguous geographic footprint, in which we are operating our agricultural stores.

Keep in mind that the regions in which most of our CE stores are located are not dependent strictly on the housing sector. The influence of an infrastructure, energy, mining, agriculture and commercial growth in our markets have tempered the effects of the recession on our construction equipment business. Based on some positive indicators and locations we have near the Bakken Formation, which is one of North America's largest discovered oil deposits, we are cautiously optimistic that the construction industry will begin to improve over the next year.

However, there will be some time until improvements in the industry are fully reflected in our results. While the current economic environment is temporarily affecting the business, we are confident that the construction equipment stores will be an important contributor to the growth of Titan machinery brand and our top and bottom-line performance in the long-term.

On slide eight, you can see that for fiscal 2010 we have closed on six acquisitions and opened one new store. Let me now review our two most recent acquisitions which, combined, generated approximately $27.3 million in revenue in our most recently completed fiscal years. These acquisitions closed in our fiscal fourth quarter, so they are not included in the third quarter results. First, we acquired Oskaloosa Implement Company, which consists of two Case IH brand agriculture equipment dealerships located in Pella and Oskaloosa, Iowa.

And as of most recent fiscal year ended December 31, 2008, the two dealerships generated revenue of $16.8 million. We also closed on the acquisition Valley Farm Equipment with one Case IH brand agriculture equipment dealership in Milbank, South Dakota. And as of most recent fiscal year ended February 28, 2009, Valley Farm Equipment generated revenues of approximately $10.5 million.

Both of these acquisitions are strong additions to our net worth. Our team is continuing to do an excellent job of implementing our Titan operating model in these new stores. We have an excellent and longstanding relationship with CNH, who continues to support our acquisition efforts. We look forward to continuing to capitalize on acquisition opportunities in the months ahead and further solidifying our position as the leading CNH dealership in North America.

Now, I would like to spend a moment discussing the environment in which we currently are operating. Turning to slide nine, I would like to reiterate that the ag equipment industry in the United States continues to be strong. It is important to note that the US farm cash receipts have trended upward over the past 10 years, which has resulted in the current strength of the agricultural industry.

In addition, revenue components of the current farm bill provide the customers with ongoing stability through crop insurance and higher levels of revenue safety nets. As a result, farmers are continuing to invest in machinery, either to purchase new or used equipment or to buy parts and service for their machines.

We expect year-end buying to be strong, as both our ag and CE businesses stand to benefit from the $250,000 first-year depreciation allowed for the purchases under Section 179, along with the expanded 50% bonus depreciation allowed in the American Recovery and Reinvestment Act of 2009. These are excellent incentives for our customers who purchase equipment in the current calendar year.

Turning to slide 10, you can see some of the different options our customers have to receive financing. Our customers are typically not facing difficulty receiving credit when they decide to finance equipment. CNH capital continues to provide an array of attractive equipment finance and lease options. There are also several local and regional banks in our markets that we believe are very healthy and continue to provide capital for land, operating expenses, and equipment purchases to our growers.

Another important player in ag financing is the National Farm Credit System. With federally-guaranteed funds, the National Farm Credit System provides federally-guaranteed funds to ensure a permanent source of reliable and competitive capital to the agricultural industry.

In summary, as we look toward the last quarter of fiscal 2010 and into fiscal 2011, we have confidence that there is ample credit available for our customers to finance equipment. Overall, we are pleased with our business in the third quarter and first nine months of the year, and are confident in our ability to continue delivering solid results in the remainder of fiscal 2010. With that, I would like to turn the call over to Peter and review our financial results in more detail. Peter?

Thanks, David. Turning to slide 11, our total revenue for the fiscal 2010 third quarter was $227 million. We experience increases in all three of our main revenue streams. Equipment sales increased 3.2%. Part sales increased 10.6%. And service sales increased 23%. As David mentioned, it is important to note that our sales in the third quarter of last year were extremely strong and increased 62%. This created a very tough sales comparison for the third quarter of this year.

On slide 12, our gross profit for the quarter increased to $39.6 million, compared to gross profit of $37.3 million for the same period last year. Gross margins in the quarter were 17.4%, compared to 17.5% in the third quarter a year ago. Even though gross margin in our parts and service businesses were up, lower equipment margins due to tough comparison of a record environment last year accounted for the change.

Our operating expenses as a percentage of net sales increased to 12.2% in the third quarter versus 10.8% in the third quarter of the prior year. This increase in operating expenses as a percent of revenue was primarily driven by the larger concentration of construction stores, which experienced lower sales in the current quarter, resulting in a lower fixed operating expense utilization as a percent of sales compared to the previous year.

To give you more color on our operating expenses, our CE operating expenses as a percent of revenue last year were 14.6%, and our CE operating expenses for this year were 24.2% of revenue. Pretax income was $9.7 million or 4.3% of revenue, compared to $13.9 million or 6.5% of revenue in the third quarter of last year. The compression in our pretax margin was a result of the higher operating expenses just discussed and increased interest expense.

The increase in interest expense was primarily driven by higher floor plan notes and an increase in our interest rate associated with those notes. Net income for the fiscal third quarter of 2010 was $5.7 million, compared to net income of $8.2 million in the third quarter last year. Earnings per diluted share for fiscal third quarter 2010 were $0.32, compared to $0.45 per diluted share.

Now turning to our first nine months results, on slide 13, our total revenue for the first nine months of fiscal 2010 increased to $586.5 million, compared to $501.4 million in the first nine months of last year. Our revenue from the higher margin parts and service sales grew more than equipment revenue during the first nine months of fiscal 2010, demonstrating the stability of our reoccurring parts and service revenue.

On slide 14, gross profit in the first nine months of fiscal 2010 increased to $104.1 million, compared to $87.4 million last year. Gross margins improved 40 basis points to 7.8%, compared to -- they grew to 17.8%, compared to 17.4% in the first nine months of last year, reflecting the strong increase in our higher margin parts and service revenue, partially offset from our lower margin Other Revenue category. Gross profit from our recurring parts and service revenue contributed 54% of overall gross profit for the first nine months of fiscal 2009, compared to 48% in the first nine months of last year.

Our operating expenses as a percent of net sales were 13.5% in the first nine months of fiscal 2010 versus 12.1% in the prior-year period. Again, the increase in operating expenses as a percentage of revenue was in line with our expectations, and was driven by the lower sales of the construction stores. And the comparison is further impacted by higher sales in the first nine months of fiscal 2009 that resulted in improved fixed operating expense utilization as a percent of sales in the first nine months of fiscal 2009.

Pretax margin was 3.6% of revenue, compared to 5.0% of revenue in the third quarter of last year. Earnings per diluted share for the first nine months of fiscal 2010 were $0.69 on approximately 18 million shares outstanding, compared to $0.91 per diluted share on approximately 16.4 million shares outstanding in the same period last year. The 9.8% increase in share comp was due to our May 2008 follow-on offering.

Slide 15 shows our same-store sales results for the third quarter and first nine months of fiscal 2010. For the third quarter our same-store sales decreased 5.7%, in line with our expectations. When evaluating this comparison, it is worth noting that our same-store sales in the third quarter of fiscal 2009 increased 25.3%.

Our current quarter's results reflect a return to a more traditional business cycle. For the first nine months of fiscal 2010, our same-store sales were essentially flat, decreasing 0.3%. Based on the different margin levels of our revenue stream, we believe same-store gross profit is another useful measure for our business. For the third quarter, our same-store gross profit decreased 6.1% year-over-year to $34.6 million from $36.9 million in the third quarter of fiscal 2009.

For the first nine months of fiscal 2010, same-store gross profit increased 1.4% to $83.1 million from $82 million in the first nine months of fiscal 2009. For modeling purposes, it's worth noting that 20 locations are not included in our third quarter same-store analysis. And 28 locations are not included in our first nine month same-store sales analysis.

We calculate same-store sales by including stores that were with Titan for the entire period to which we are comparing. In other words, the only stores that were part of Titan for the entire three months of the third quarter of fiscal 2009 are the ones that are included in our third quarter same-store comparison.

Turning to slide 16, this slide provides an update on our revenue modeling used for our fiscal 2010 revenue guidance. Last quarter, we updated our same-store sales guidance for a 5% decrease for the year. Now, we expect our same-store sales for the year to be approximately flat based on our year-to-date results of our stronger ag same-store sales being offset by our construction store sales. We are raising our original fiscal 2010 revenue guidance of $750 million to $790 million to a range of $770 million to $800 million based on the expected improvement in same-store sales, revenue, and increased visibility into our annual expectations.

On slide 17, 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 $82 million, or approximately $4.57 per share in cash, to pursue future acquisitions and fund working capital and general corporate purposes.

Last year's extremely strong global ag equipment market reduced inventories to very low levels, reflected in our fiscal 2009 year-end inventory levels. Our fiscal 2010 inventory is returning to historical stocking levels to support our forecasted sales. Our inventories totaled $357 million on October 31, 2009, compared to $348 million at the end of our second quarter and $243 million at the end of fiscal 2009. The increase in inventory is primarily the result of purchasing to meet the needs of our future equipment sales and support our market share goals. In addition, CNH continues to provide us with interest-free floor plan financing on new equipment.

In fiscal 2010, we are taking advantage of favorable inventory terms and our strong cash position to support our business plan and reach our market share goals. Working capital at the end of the third quarter of fiscal 2010 was $156 million. Long-term debt, including current maturities and advances, was $33 million at the end of the third quarter of fiscal 2010.

As of October 31, 2009, we had $97 million available of our $365 million total floor plan lines of credit. In addition, we have a loan agreement with Bremer National Bank, which provides for a $25 million revolving operating line, of which the entire $25 million is available. In summary, we continue to have a strong balance sheet enabling us to invest in our business and growth as we see fit.

Slide 18 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 nine months of fiscal 2010 net cash flow use for our seasonal increase in inventories is $11.2 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 $33.1 million, primarily due to our increase in inventory. We believe, including the non-manufacturer floor plan proceeds and the advances on contracts and transit as part of our operating cash flow, better reflects the net cash flow of our operations.

Making these adjustments, the net cash provided by operating activities during the first nine months of fiscal 2010 was approximately $1.9 million, in line with our seasonal expectations. A reconciliation of this non-GAAP measure is contained in the slide show, which is posted on our website. Now, I will turn the call back over to David for closing comments.

Thanks, Peter. We are pleased that we were able to deliver top-line growth and solid bottom-line results in a challenging economy. We believe this is a testament to our strong Titan operating model. Over the course of last year, we have made several key acquisitions and continue to develop a great brand and leadership position in our industry.

We look forward to continuing to deliver strong results and achieving our full-year goals. Before we take your questions, I'd like to conclude by thanking our employees for all their hard work, and thank our valued customers for their continued support. Operator, we are now ready for the question and answer period of the call.

(Operator Instructions). And our first question will come from Bob Evans with Craig-Hallum Capital.

Good morning, everyone. And thanks for taking my call and my questions. First, can you comment or give us a little bit more detail as it relates to the construction versus ag business in Q3? Can you give us a sense either on the same-store sales or just general sales trends, perhaps, how much ag was up versus construction being down?

Well, like we said in our call, Bob, our first nine months of the year and even the third quarter, we have had a good strong ag equipment business. The construction is in a challenging industry right now, and we are looking that thing being off 35% on sales. And so that's what's really driving this, like we talked about in the call, the underutilization of our expense structure.

And so that gives a little bit of color for what we see happening. And, you know, on past calls we've talked about a $0.04 or $0.05 drag on our earnings from the construction side of our business. And that $0.05, maybe $0.06, in the third quarter holds true.

Okay. So, you are saying on a quarterly basis?

Yes.

Okay. And the down 35%, are you saying that's same-store sales or just kind-of overall construction?

Well, I'm speaking more to our business. And by that, what I mean is because we have such a high portion of our construction business based on stores which were acquired last year, it's hard for us to only talk about our same-store. We've experienced more stable sales in our core stores that we showed you on the map. And we have experienced less strength in our acquisition stores. But, you know, we really -- today, I just look at our equipment business as a total number looking at about 35% overall. But, again, our core stores have been operating better than our acquisition stores, and we see that as an opportunity to improve on their financial results.

Okay. So that 35% is all construction stores, regardless of when they were acquired?

Yes. I'll give you some color on that of the break-out. And you can see with our numbers coming in flat for the year that, although our construction business really this year is going to come in at under 20% because of the compressed sales levels and our ag business is going to be up around that 85%, that the sales were up enough on the construction to keep our whole business running on about a flat basis.

Sure. Could you say what same-store sales for ag would have been net of construction or ballpark it?

We haven't really figured -- I guess I'm not really ready to comment on that. But I just wanted to give you some color to let you know that the construction business, when we looked at that, was about 35%. And, you know, most of our acquisitions this year, Bob, have been on the ag side of the business. So we have to factor the timing and the revenue contribution from them into our agricultural business.

But it would be fair to say that the ag sales were positive for Q3 and for the year without construction?

Yes. We've experienced a strong ag economy.

Okay. And then can you talk a little bit more, either Peter or Dave, as it relates to the broader macro -- talk about the harvest, which was late, but appeared to have come in well in your region? And I know you have a slide there that talks about farm income. There's a lot of headlines and debates as it relates to farm income being down versus '08, but on a historical basis probably still pretty good. Just give us some thoughts in terms of how things are setting up at the end of the year here going into '10.

Well the harvest has been very slow; three, four weeks behind the whole time. They were doing things in November they should have been doing in October. And so that's been the way it's been the whole year. But as the end result, we are hearing some fairly good yield results. I mean, I think for the most part most of the farmers are pretty happy. You know, a high percentage of the crop is put into the bins.

We are seeing some resilience, I think, in some of the markets. I think soybeans have been holding up really well on the pricing and stuff. So, I think the whole macro economy is pretty good. In some areas, we are hearing actual record crops. I mean, if you look at some of our stores in western Iowa and some here in Nebraska, you are just hearing some really highly above-average yields out there.

So, overall, I think even though it was a very challenging year from the beginning of the planting season all through the end, these growers, they have really persevered and really put some exclamation point on the importance of having late-model reliable equipment because there were some really challenging situations that are out there; you know, combining in the mud and the frozen stall from the snow and the cold weather. And growers have good equipment and have the resources.

They've got -- the crop often have been in great shape. And, overall I think over most of our markets, I think right now most guys are sitting in the back taking a deep breath and are pretty happy from what they are seeing.

Okay. So is that -- how is that setting up for current equipment sale trends and going into '10?

Well, we are going to give more comment on '10 when we give our fourth quarter call and give guidance for the next year. But, like I said before, this need for equipment and your ability to get the crop in and off on a timely basis really makes the importance and the value of these equipment dealerships to these growers out there and the need for late-model reliable productive equipment.

Okay. Thank you. I'll let others ask.

Okay. We'll move forward and take our next question from Rick Nelson with Stephens Investment Research.

Thank you, and good morning. Can you tell us what your revenue forecast assumes about same-store growth in the fourth quarter, and maybe if we could take a look at the ag side and the construction side separately?

We aren't breaking out the ag and the construction on the same-store sales. But, really in order to make this come out where we are looking at the year right now, year-to-date we are looking at a same stores sales change of negative 0.3% for the first nine months. And it's going to be in that 5% to 8% range for same-store sales in the fourth quarter.

That's down 5% to 8%, Peter?

That will be up.

Up 5% to 8%?

Yes. And I would say that, based on our modeling, that's going to bring us out for the 12 months being at about flat. And when you talk about the difference between the ag business and the construction business, what we have seen for the year so far, like I was mentioning earlier on the calls, about a 35% down on our overall construction business with that being stronger compressed on the acquisition stores versus the stores that were our core stores. So it wouldn't be that strong on our same-store analysis.

Got you. All of the construction stores are not in same-store? Is that right?

That's correct, Rick. The stores which are not in the same -- we will not have any of the Iowa, Nebraska stores included for our 12-month same-store sales. They are included on our quarterly one this quarter because they came on board during part way through the second quarter of last year. And the stores for Wyoming and Montana came on board on December 31, so they will not be included in our same-store analysis for the 12-month same-store for fiscal 2010 at all. They will start being included for next year.

Thank you for that color. Can you also comment on inventory growth? I'm calculating 51% year-over-year. Compared to the mid-point of your revenue guidance, it looks like 5% revenue growth.

Well, a couple of things on that, Rick. First of all, when we look at our business from an historical perspective, last year with that global demand our inventory turns were up measurably. And the inventory levels nationally and for us at Titan were at record lows.

The pipeline was essentially empty because of the global demand on the equipment. And we're seeing that channel coming back to being more of a traditional stocking level. And if you look at our same-store sales -- excuse me.

If you look at our overall business growth for the first nine months, it's about 17%. And so a portion of that inventory growth is just tied to our business being larger by 17%. A portion of it is just taking us back within the bandwidth of what we look at as a historical inventory stocking level. And, finally, there is a portion of that growth that is relative to our acquisitions. We have done six acquisitions and one new store opening.

So taken collectively, that gives you what our growth is. And we see that, so that it will support -- it's critically important for us to keep increasing and improving our market share. And one of the ways we do that is we have this equipment available. A great example of that was this fall now when we had abnormal harvest conditions, they were very tough harvest conditions, and we did have situations where people looked at their situation and their production on their farm.

And they made a decision on the spot that said, "If you've got this machine ready, I'll take it." And so we feel comfortable with our inventory. We will be monitoring it. And we incentivize our -- all of our field marketers are incentive-strong on getting their market share goals, and also on us managing that inventory so that we can keep it as efficient of a turn as possible.

Then that margin pressure that we see here in the equipment segment, is that on the ag side, as well as on the construction side? Or what is driving that, new or used?

I would say that the number one driver on the margin compression is primarily -- the compression is on a comparative basis to the prior year, and last year we had an extremely strong market. And the way that we have our compensation for all of our field marketers, they will maximize their margins. And we were able to capitalize on that really strong market with a strong demand.

And so, basically, we had really strong margins last year. And when we look at this year and we do a comp compared to last year, that's really what's weighing in on this, Rick. And we do have a compression, some compression, on our margins in the construction market just due to the fact that that's in a challenging environment.

Any commentary on the acquisition pipeline? Do you intend to stay in contiguous markets? And where you see pricing and maybe pricing on the most recent acquisitions, any changes there?

Okay. First of all, we like this upper Midwest, this contiguous market, that currently is in our footprint. And there is a full, a very robust pipeline of continued acquisition opportunities in this upper Midwest footprint. So that's where we are focusing on right now. We continue to have discipline in our acquisition pricing. I don't think you are going to see much deviation at all in the pricing from what we have done over the last several years. So that still remains in line.

One thing of note here, too, we do have a 15% capital gains tax currently this year and into next year. If nothing happens at all with legislation, that's going to go up to 20%. So, that's weighing pretty heavily on a lot of these sellers.

So, we're just -- I think there's some timing involved here in some of these acquisitions with a robust pipeline. Many of these dealers are having a good year this year financially. But we've got these demographics of age, lack of succession, and the increased amount of sophistication still continuing to drive this pipeline. And we're very busy managing all of these acquisition candidates right now.

Great. Thanks a lot. And good luck, guys.

Thank you.

Our next question comes from Paul Mammola with Sidoti & Company.

Hi. Good morning, everyone.

Good morning, Paul.

Given the late harvest that you talked about, David, did you see the spillover of some parts and service revenue into November? Is that fair to say?

There's two kinds of parts and service business we typically see. When the growers are in the field and they break down, then we're out doing the parts and service business. So we're pretty much at their beck and call. And when there's down time, we're 7/24 keeping them up in the field. And so that extended that period of time into November.

Then what we've been very successful at all our stores is what we call our off-season uptime maintenance program, where we do some pretty sophisticated inspections on tractors and combines. We're bringing them in, and give recommendations for further repairs. So that business is going to be delayed. And (inaudible), you see a lot of your maintenance, your preventative maintenance, a lot of your repairs on combines. You know, you're looking at a lot of your wear items getting replaced in that off-season maintenance program.

So, what we did, we saw a little bit longer period of time where we had the in the field repairs that went longer. But then our off-season maintenance is going to start later. So the end result is not a measurable change from what we're going to see normally.

Okay. Fair enough. I guess, what are your thoughts on expanding overall profitability of parts and service? Are there other ways to expand that business in your eyes right now?

Well, we've got continuing efforts on the service department to increase efficiencies, productivity. We're measuring all of our techs on their hours billed divided by hours reported, their efficiencies. And they are compensated and incentivized on that. So we continue to watch out. We continue to make sure that it's the billable hours that we are getting into the shops. From a marketing standpoint, like I say, these uptime inspection programs have been a real bell ringer for us.

This pursuit in farming, this whole segment here where you have got the GPS equipment that's steering the equipment in your precision farming, that's a big plus to your after-sales product support. As we increase our market share with machine population, it's going to give you a higher [park], which is going to increase your parts and service business in all of your stores. So we see increased market share levels. That's driving that business.

We continue to on the parts side of the business be creative with our marketing, the promotions, the cross-selling. We've got a lot of things going. We've got some really sharp people that are driving this business at all our stores. So, yes, that's a continued effort. And I think we're good at that. If you look at our past, I think that's something that Titan can really hang their hat on, really the good job and the satisfaction that we have with our customers stemming from our really solid parts and service departments in all our stores.

Okay. Great. And then, Peter, there is a higher sales number for rental in the Other category in the quarter but lower margin. Is that just rates are down, I would assume?

Yes. We have improved that as our -- as this fiscal year has gone on, we have been resizing our rental fleet. And that was primarily in the acquisition stores on the construction side of the business. That Other Revenue category, that's primarily made up of our rental revenue. And with our expansion into those four states last year, we inherited the rental fleets that they had on hand. And what we've been doing then is we've been incorporating them into our operating model and resizing that fleet so that we can get the proper utilization. So we've seen improvement on that as the year has been going along.

Okay. And then, finally, on the floor plan financing, is 70% of that still non-interest bearing?

Not quite. It's just about that much. It's probably around 67%. About two-thirds of it is new equipment, and one-third is used equipment.

Okay. Thanks for your time.

Thanks, Paul.

We'll take our next question from Brent Rystrom with Feltl & Company.

Thank you. A couple of quick questions for you; you had just mentioned that on the inventory breakdown, is that the primary driver of the change in the floor plan interest financing?

It's two things, Brent. It's both the amount of inventory that we have on interest bearing, and it's also a change in the rates.

Okay. And how did the rates change, if you can characterize that?

The rates went up, and they changed from a year ago. They have gone from overall blended rates of about 5.2% to 6%, 6.8% this year.

Okay.

That's kind-of in line with the fact that we re-upped our floor plan lines, and that's a blended rate.

Okay. I talked to both AgStar and Bremer this week, and not regards to your credit, but just talking to them relative to the farm credits. And both AgStar and Bremer are telling me that they are pulling back credit for both land and machinery. Is that something that CNH, in your opinion, can pick up as other lenders pull back?

Well, I think what we're seeing out there, if you take these growers in the upper Midwest, these top-level, these growers -- there are probably -- there's 20% of these growers out there that are probably growing 80% of their crops in production agriculture. In visiting with these farmers and visiting with the lenders myself, there is actually a lot of competition between the lenders to get their business between the Farm Credit boys, the local banks, the regional banks, and CNH capital. I mean, CNH capital will not turn down a loan to these people at all. But, actually, the rest of these bankers are actually fighting for their business. Their balance sheets are in great shape.

So, even though you might be seeing somewhat of a pullback, I think the growers in our markets and the ones with these balance sheets and the ones that have exhibited over the last period of time their ability to pay down debt and they have excellent credit ratings, like I say, there is a lot of competition to get their business. And they are seeing good rates, and there's a lot of people really going after them for their financing business.

Okay. Looking at milk prices getting back up into that $15.00 per 100 weight, I know your central Minnesota, some of your eastern, particularly South Dakota, stores benefit from the dairy business. Are you seeing something positive coming out that milk equilibrium getting that to breakeven?

This diary is not a big part of our business in our markets. It's a very small part. And anything that can help our industry anywhere is going to be positive. But milk prices in dairy is just a real minimal part of our business. Like I said, the majority of our business, our large full drivers combines and our roll crop tractors is affected from cash crop production agriculture.

Okay. And then you had mentioned that Iowa and Nebraska had seen record deals, record crops. As a percentage of your sales, how much your sales come out of Iowa and Nebraska on the ag side?

We don't break that out that way. And that was just an example where we are seeing above-average yields up in North Dakota, South Dakota, across our entire footprint. There are good above-average yields on corn and bean crop throughout our footprint.

Okay. From a test weight perspective, I'm hearing the test weights are coming in real poor. Any thoughts on that, as far as the yield and why the test weights are poor?

The earlier test weights were poor. The corn was wet. And it typically will have a lower test weight. But as the harvest has been delayed and the crop has had some time to natural dry, those test weights have been improving right along. And the moisture content of the crop has been coming down, which both of those are good positives for our end users. In addition to that, a lot of them when they take the crop off, as they will dry it or whatever, if you natural dry it, that will also improve your test weight.

Okay. Any comments on comps in the first half of next year? I would assume it's likely to be a positive comp first quarter, maybe a negative comp second, maybe even third quarter.

We will be giving our outlook on our next call. And then we'll have better visibility into how that looks. And we look at our business on an annual production cycle, like our customers. But we're going to give you an update on that with our next call.

All right. Okay. EPS; any update on that for next year?

Like I just said --

Right. So, no color for next year.

We give all of our guidance and our outlook on our fourth quarter earnings call. Then we will have good visibility and we'll be happy to share that with you and give you some color on that one when we do that call.

All right. Thank you.

Thanks, Brent.

Thanks.

And we'll go ahead and take our next question from George Gaspar with The Gaspar Report.

Yes. Good morning to everyone. I was going to ask you some questions on the construction side of the business. Can you hone in on the number of store distribution centers that would distribute to oil patch activity? And what level of total construction revenue, can you give us some thought process on that, is generated from oil patch activity?

We haven't been breaking it out specifically where we break it out dedicated to the oil or energy industry versus the mining industry. And we haven't broken out our revenue that way. But we do have several stores over in and around the Bakken Formation. We just did a new store opening in Minot, North Dakota.

We are getting activity from that over in Bismarck. Rapid City does have some of that, and Billings. And so there is just a lot of activity relative to the oil industry. And we see that as probably being one of the first things that's turning for us relative to our construction business.

Okay. We'll move forward to our next question. It will come from Robert McCarthy with Robert W. Baird.

Good morning, guys. Can you hear me?

Good morning, Rob.

Good morning. How are you?

Good. It's good to hear from you. It's cold up here in North Dakota.

Thanks. It's good to be heard. Maybe I missed this. Maybe I'm just a little slow. But why did you lower your forecast for net income for the year?

Our forecast, really what we did is we narrowed our range. We are still within our original range that we gave you. And, really, when you look at our nine-month results and you see how this is tracking, the takeaway on it is that is our revenues are coming in a little stronger than we thought. We revised that on our same-store sales now so that we're coming in flat versus an original modeling at 10% down. That's reflective of our strong ag equipment business.

But at the same time, we have had a pull or a drag on our earnings coming out of the construction business that we are in. And that's primarily just being driven around the lack of sales. They're experiencing 35% off on the sales, which is industry-wide. You see a lot of reports where they are talking 50% to 60% down.

Our footprint, we are not experiencing that strong of a downturn. But based on those two things, we felt comfortable in narrowing that range for you. And, at the same time, in line with what happened for the first nine months, we felt like we'd raise our revenue guidance.

I'm still confused, Peter. I mean, the construction business is the less profitable business for you. Your outlook for that business has weakened. I mean, I hear you saying that that business is turning out a little weaker than you expected. Yet you're expecting -- the upside potential that you saw and profitability is not there. So, I mean, is it the profitability of the construction stores is so weak because of the sales levels being below expectations that it's overcoming what I would expect to be a positive effect of shifting more mix to ag?

I guess that what I would say is that we have the results in for first nine months, Rob. And looking at where we're at with our nine month results in and seeing at how our revenues are coming in versus what our earnings are on those revenues, I think that's reflective of a strong ag business. And that's being offset by this challenging industry that we're in on the construction. And we have a bigger exposure to that.

We feel good about our construction stores. And when we showed you that slide with our construction equipment footprint, we feel like we put together a material market for us long-term. And as that industry turns, we are going to capitalize on it. But going back to your question, when we look at where we're at with our ag business and what we're doing through the first nine months, we felt comfortable in raising our guidance the way we did on our revenue and narrowing the range for you within our original range, but narrowing it on our earnings to just give you a better visibility in how we see the year coming out.

Okay. Okay. Can you talk a little bit about -- you know, you were helpful with your chart on seasonality and understanding that this year is a little more normal relative to past years. But within -- I mean, excepting that situation and the programs that you ran last year, etcetera, what's happening to equipment deliveries because of the late harvest? Did it cause people to postpone taking delivery of equipment? Or did it -- or was the effect more that it created more business for you? I'm not -- in other words, have we shifted some revenue out of the third quarter into the fourth?

Rob, when we look at it today, of course until we're done with our fourth quarter we will have full visibility on all the effects. To-date what we've seen is that we were -- we came in with our third quarter right in line with what our expectations were. And so it would appear as though no measurable change from one to the other when we look at that slide that shows you the red bars on the graph more of a historical seasonality split. This quarter fell right in line with that.

And, arguably, you could say with the harvest, that delayed people making a lot of their equipment purchases. But, at the same time, with the delayed harvest some of the customers were looking at that and saying, "I'd better invest now and get that extra machine in the field so that I can take this crop off." And so today with the visibility that we have, we are not seeing a measurable change.

Okay. So we don't think the late harvest influenced overall whether people took deliveries in the current quarter or the fourth quarter?

It doesn't appear that way.

Okay. That's interesting. But it should, I would think, help you incrementally a little bit on the parts and service side in the fourth quarter, shouldn't it?

Well, David spoke to that earlier. And we're going to watch that. We're going to gain visibility as the quarter unfolds here. But it is important to remember that historically, we're going back 10 years ago, it used to be that these equipment stores when it was either in the spring planting season or in the fall harvest season, we were way overly booked for our service and parts departments.

What we have migrated to, which has been extremely successful for our end users, is we've migrated to these preventative maintenance programs. And one of the things that those do, not only are they good for our customers, but what they really do is they allow us to optimize our parts and service business in the off season so that we can schedule all that preventative maintenance. And we schedule that so that we can level load our workload in our service departments.

So, as soon as they are done with the harvest -- let's say the harvest would get done in October. As soon as they are done with the harvest, we're bringing these machines in immediately. And we're starting in on our winter maintenance specials, our preventative specials. And we stay busy with that all throughout the off season. So, we're not [knowing] that there is a measurable change.

That's a great strategy. But are you saying that you don't think the late harvest has any influence on your parts and service business?

Right now we are still gaining visibility because they're still finishing the harvest. But we don't see a measurable shifting right now.

Nor any kind of increased demand?

The way that we'll be able to measure the increased demand is once we have all the numbers in for the fourth quarter to see what the total annual numbers came in at, and that's why we look at it on an annual basis. And until we gain the visibility on this quarter, it's hard to make a definitive answer for that question. But right now it appears that our workloads in our service departments and in our parts departments are going along pretty steady, as we anticipated when we put together our annual plan and put that into our annual guidance.

Okay. Earlier on the call, you talked about average interest rate on floor planning going from 5.2% to 6.8%. Is that as a weighted average? Is that a weighted average calculated on the total credit availability? Or is that an average that was calculated on what you had outstanding at the end of the quarter?

Yes, this is Mark, Rob. That's a simple average over the course of the quarter, this quarter of fiscal 2010 compared to 2009.

I see. And am I not correct in that your floor plan rate increased for the quarter from CNH?

Yes. That's correct.

Okay. And so that would suggest that it's not fully incorporated in the 6.8% average?

Well, it is. The rate changed for us towards the beginning of the -- September 1, toward the beginning of the quarter. We do see some opportunity with some other borrowings, as well, where we can keep that rate relatively stable going forward.

Well, that's great. Okay. Now, we've talked about availability of credit to the farmer. But on a related question, has the cost of credit to the farmer gone up by, would you guess, I mean, would you estimate roughly a comparable amount, a couple of percentage points?

No. I think right now the retail credit seems to be still very competitive. And we haven't seen a big deviation in rates from the retail side of business. But, as you're aware of being in this industry for so long, floor plan credit rates right now is probably the most undesirable type of financing for your banks and your major lending people out there. And that's right now you're seeing the highest rates on floor plan financing, I think, in most of your capital markets, Rob.

Yes All right. You talked about the idea of inventory being up to serving larger footprint and a larger business. But within that, I noticed that your used equipment has almost doubled since the beginning of the year. Now, granted the base that you are measuring something against influences a calculation like that. But, forgive me, it does seem like a significant expansion in used equipment inventories.

It would -- your new equipment inventories came down a little bit in the quarter. Would you tend to support the explanation you were talking about last quarter that you needed to have the inventory to satisfy demand? But can you talk about the fairly dramatic growth since the beginning of the year in used equipment and where you -- are you happy with it here, and what you intend to try to do about it?

Yes. What we see is the real typical cycle at our sales cycle of our business. And what we did is we returned to our historical stocking levels throughout the year because of the availability of equipment from our manufacturer. And very expected is that as we push the new inventory through the sales cycle that then turns into used, which is very standard this time of the year. And then we are looking at moving that used through the channel before or up to next year's planting season.

And so lots of these customers, even though they're buying throughout the year, and now we are, when they get the harvest done, we're in the off season where they do a lot of their equipment rearranging. And so what we'll do is we had our new go down, and we have our used in line so that we will be able to put that through our system. And we aggressively market that used equipment.

So, we should expect to see that number come down at the end of the coming quarter?

We don't get that specific on it because of the fact we look at our business more typically on an annual cycle. And, what we need to look at is how we are going to manage our overall inventory. And the split between the new and used is really driven by where we're at on a timing of the sales cycle.

So, if the new is going faster, then the use will go up. If the new is not going as fast, then the used will come down.

Okay. So your --

It's all the timing throughout our annual, we call it our annual wholegood management cycle. And we don't have the visibility 100% to say definitively if it would go up or down at the end. But we look at our overall inventory levels. And then within that overall parameter, we need to look at our timing and our wholegood cycle to see if our new is down and our used is up, or if our new is up and our used is down.

So, if used equipment inventories increase further in the fourth quarter you won't be surprised nor will you be unhappy?

Correct. I look at our overall inventory levels.

Okay.

Just to add a little more color on this, too, is we're seeing on a lot of these late model tractors, these roll crop tractors (inaudible), there's still really a strong demand and some shortages in a lot of models on those. And Case IH or CNH, you know, what they did is they shifted some of their marketing dollars throughout this last quarter and offered growers up to two years interest-free financing on used combines.

So they're really stepping up to the plate. And they understand they are not going to sell any more new equipment when dealers have used equipment. So, they pretty much made their commitment to the dealer organization out there that they're going to provide the marketing tools and financing to make sure that this used equipment gets cleared out of the lot. So, we think we are in line with the manufacturer. And, like I said, there's still some real good demand for certain models of used late-model equipment, used equipment.

Thanks for the color, David. That's very helpful. Would you guess on average that used ag equipment prices are up or down?

I would say they're probably pretty flat.

Okay.

But we have seen some real strengthening in some of them. I mean, there was a very large auction sale that just happened down in South Dakota here last week. And a lot of this used stuff was off the charts. I mean, it was really a strong sale. But I'd say it's basically flat.

Okay. And I'm sorry. Humor me one more question simply because we get this question from a lot of investors. As you have seen pressure on the ability to grow the equipment business, let's assume that that gets extended into next year. Let's assume that farmers buy less in the equipment and the construction cycle doesn't turn.

Do you have the ability or the intention to accelerate your acquisition activity to -- if 2010 was a little bit of a pothole, would you try to accelerate what you're doing on the acquisition front to try to help cover that? Or are you committed to maintaining only the steady pace that you've been working on?

Well, I think, to comment a little bit on this acquisition, we're a growth Company. A lot of our growth is coming through acquisitions. So let's just go back to last year and look. Here we had record profits, record income, very strong ag economy. And what do we do? We did almost $200 million of revenues through acquisitions.

We about doubled what we forecasted into acquisitions in a really strong economy. So, we're going to continue look at acquisitions. But I'll guarantee you one thing. If we see a softening of this equipment business, we're going to have acquisitions coming up. It's like drinking off of a fire hose. So, just basically the environment out there and the position and the age of lot of these [dealerships] right now, if their business starts tightening a little bit, we're going to have an extreme number of acquisitions coming at us, Rob.

So, I think it will be a little bit of a self-correcting thing out there right now. But, like I say, we continue to be very aggressive on acquisitions. And we're networking. We're talking to a lot of people. We're laying on the trap (inaudible) on in a lot of different markets, and we are working with a lot of fellows. So, we're just going to do acquisitions regardless of the environment and economy. And, like I say, what we did last year is a pretty good evidence of that. We are going to continue to do that. But I'll you what. There's going to be more and more opportunities of acquisitions if this thing tightens up a little bit.

Okay. Thanks, guys.

Thanks.

Okay. At this time, I'd like to turn the conference back over to Mr. David Meyer for any additional or closing remarks.

Okay. I want to thank you all for listening to our call today. I wish you all a happy and healthy holiday season. And we look forward to discussing our year-end results with you in April. Goodbye.

Thank you, sir. That does conclude today's teleconference. We thank you all for your participation.