Titan Machinery Inc (TITN) 2010 Q4 法說會逐字稿

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

Thank you. Good morning, ladies and gentlemen, and welcome to our 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 fiscal fourth quarter ending January 31, 2010, 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 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 which will accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the investor relations tab, and the presentation is directly below the webcast information in the middle of the page.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed on 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, which was filed this morning.

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'll 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 fourth 2010 conference call. On today's call I will provide an overview of our fourth quarter results, provide a general update on our business environment, and then our strategy for fiscal 2011, including recent acquisitions. Then Peter will review the financial results for the fourth quarter and full year fiscal 2010 in more detail, provide our fiscal 2011 outlook. I will then provide some closing remarks and will open up the call to take questions.

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

Now turning to slide two, we have an overview of the fourth quarter. We are pleased with our top line growth we achieved for the fourth quarter, which exceeded our expectations. However, our net income was lower than we previously expected, primarily due to the results of our construction business segment. As you see in our press release and on this slide, this quarter we are introducing segment reporting for our agricultural and construction businesses in order to provide more insight into each of our segments and our business overall performance.

Overall revenue for the fourth quarter increased to $252 million, up 34%. Looking at our results by segment, revenue generated from our agricultural business in the fourth quarter increased 33% to $227 million, primarily driven by organic growth. Revenue generated from our construction business increased 39% to $32 million, driven by our prior year acquisitions.

Our pretax income for the quarter was $6 million, up 13%. Pretax income for our agriculture business was $8.2 million, and pretax loss for our construction business was $2.3 million. Despite the weakness in our construction business, we achieved earnings per diluted share of $0.19 in the fourth quarter, compared to $0.18 per share last year.

Turning to slide three, you see our full year results. Revenue for the full year fiscal 2010 increased 22% to $839 million. Revenue from our agricultural segment increased 20% to $751 million, and revenue from our construction segment was $116 million, a 32% increase, reflecting our increased footprint in the construction segment.

Our pretax income for fiscal 2010 was $27 million. Our segment results will enable you to better understand results for fiscal 2010. Looking at our pretax income by segment, our agriculture business generated a pretax income of $36.1 million in fiscal 2010, and our construction business generated a pretax loss of $6.8 million in fiscal 2010. Diluted earnings per share for fiscal 2010 were $0.88.

On slide four, you can see we added nine additional stores in fiscal 2010. Seven of these stores are ag acquisitions, and two of these stores were new store openings, comprised of an ag dealership in Albert Lea, Minnesota, and a construction dealership in Minot, North Dakota.

Let me now review our two most recent acquisitions, both of which closed early in the fourth quarter of 2010. Combined, these acquisitions generated approximately $27.3 million in revenue in our most recently reported fiscal years. First, we acquired Oskaloosa Implement Company, which consists of two Case IH brand and agriculture equipment dealerships located in Pella and Oskaloosa, Iowa.

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

In addition to recent acquisitions during the fourth quarter, we opened a new ag equipment dealership in Albert Lea, Minnesota, which represents a new market for Titan Machinery. The area surrounding Albert Lea in southern Minnesota and northern Iowa have consistently produced large industry unit sales resulting from generations of prosperous farms that are operating on highly productive loam soils. We are excited about the opportunities for this store.

Yesterday we announced that we entered into a purchase agreement to acquire Hubbard Implement in Iowa Falls, Iowa. Hubbard is a Case IH brand agriculture equipment dealership and is well situated in the fertile farmland in central Iowa and is strategically located contiguous to Titan Machinery's existing locations in Grundy Center and Waverly, Iowa. In its most recent reported fiscal year, Hubbard Implement generated revenues of approximately $7.9 million. The acquisition is expected to close on or around June 1 of this year.

Now I would like to update you on our segment industries. On slide five you can see that the US farm cash receipts have trended upward for the past 10 years, which has resulted in the current strength of our agricultural industry. Farmers continue to enjoy balance sheets, which we feel will continue in -- with their current strength with the USDA forecast of year over year increase in gross farm receipts.

Our customers continue to have many different options to receive financing, and we have not seen that our customers face difficulties 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 the farm credit affiliates in our markets that we believe are really very healthy and continue to provide capital for land, operating expense, and equipment purchases.

An interesting event taking place in our industry is the January 1, 2011, Tier 4 emissions requirements for tractors. We expect this result -- we expect this to result in an increased level of demand for the remaining inventories of current Tier 3 models, which will drive the sales of current models throughout the end of this year. We're also excited about the anticipated new technologies to increase the operating efficiencies associated with the Tier 4 tractor rollouts forecast for January, 2011, which we believe will create pre-sell activity in Q4 of our current calendar year.

On our construction side of the business, it is important to keep in mind that the regions in which most of our construction 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, which was reflected in our last year's results, with our comp store sales down 20% and the industry being down much more.

As we look into 2011 and beyond, we are confident that the construction equipment stores will be an important contributor to the growth of Titan Machinery brands in our top and bottom line performance.

A bright light in our construction business is the oil boom created by oil activity in northwest North Dakota, which has doubled in the past three years, surging to 80 million barrels in 2009. North Dakota is now the country's fourth largest oil producer, behind Texas, Alaska, and California.

Now I would like to take a moment to -- and discuss our strategy for 2011. On the ag side of our business, we plan to continue improving organic same store results, and we believe we will be able to continue acquiring additional locations throughout the year. Turning to our construction segment, one of our primary goals is to improve our top and bottom line results in this business. Although we believe we have seen a bottom in the construction equipment industry, we have taken several key actions that we believe will drive improved results for our construction business in this fiscal year.

Turning to slide six, you will see an outline of some of these steps we have taken. First, we right sized our rental fleet. Our rental fleet has been under utilized over the past year and had a negative impact on our margins. Second, we made some key improvements in our construction segment personnel. We are closing an underperforming CE, Columbia Falls, located in a Kalispell, Montana, market. Not only does this market have overall low industry unit potential, it is primarily a residential construction market, which is currently significantly overbuilt.

Lastly, we are working diligently to fully implement our Titan's strong store operating model in the construction equipment dealerships we acquired in fiscal 2009. If you look on slide seven, the map represents our construction equipment footprint. The gold states represent the fiscal year 2009 construction acquisition stores, and the blue states represent our core locations. Last year our group of core CE locations were profitable, significantly outperforming our more recently acquired stores. As we fully integrate our operating model into our acquired stores, we anticipate improvement in the results in line with historical improvements of our core locations.

It is important to remember that the price we paid for these acquired dealerships took into account the challenging environment and continue to represent the opportunity for a strong return on our investment in the construction equipment business. Strategically, we believe acquiring these stores were right, long-term decisions. We believe our current construction store base has the potential to generate strong earnings growth. While any improvements in the overall industry would certainly benefit our results, we believe the steps we have taken to manage the controlled aspects with (inaudible) will enable us to generate improved results, even if the overall industry does not improve.

Regarding future acquisitions, we continue to see a long runway of potential ag and construction acquisition candidates in the Upper Midwest. We are currently in discussions with a number of single store and multi store dealership groups. In addition to the current high level of industry consolidation, we are seeing increased seller activity in 2010, which we will -- which we believe is due to the current 15% capital gains rate that is legislated to change in 2011.

In summary, as we begin fiscal 2011, we are confident in our ability to continue delivering solid results. We believe that our ag business will remain strong, and we are confident that the changes we made to our construction business will result in improvements and profitability to that area of our business. With that, I would like to turn the call over to Peter to review our financial results in more detail and provide you fiscal 2011 guidance. Peter?

Thanks, David. Turning to slide eight, our total revenue for the fiscal 2010 fourth quarter was $252.3 million. We experienced increases in all three of our main revenue streams. Equipment sales increased 32.7%, parts sales increased 38%, and service sales increased 28.9%. The abnormal harvest during the quarter had an adverse effect on our service revenue, which contributed to our less than anticipated earnings per share.

On slide nine, our gross profit for the quarter increased 13.8% to $37 million, which is less than our revenue growth of 34%, reflecting lower gross profit margins. Our change in gross margins reflects lower equipment margins due to lower manufacturer program incentives, last year's tight equipment supplies, and a return to a more traditional supply condition.

Our operating expenses, as a percentage of net sales, decreased 200 basis points to 11.8% in the fourth quarter versus 13.8% in the fourth quarter of the prior year. This is driven by the higher ag sales in the fourth quarter, generating greater fixed operating expense utilization.

Our pretax income was $6 million, or 2.4% of revenue, compared to $5.4 million, or 2.8% of revenue in the fourth quarter of last year. The compression in our pretax margin reflects the previously mentioned lower gross profit margins. Net income for the fiscal fourth quarter 2010 was $3.4 million compared to net income of $3.2 million in the fourth quarter last year. Earnings per diluted share for fiscal fourth quarter 2010 were $0.19 compared to $0.18 per diluted share.

Now turning to our full year results. On slide 10, our total revenue for fiscal 2010 increased to $838.8 million compared to $690.4 million in fiscal 2009. Our equipment growth lagged our parts and service revenue, primarily due to a weak construction equipment market.

On slide 11, gross profit for fiscal 2010 increased to $141.1 million. Gross margins in fiscal 2010 were 16.8% compared to 17.4% in fiscal 2009. Our reoccurring parts and services businesses contributed 52% of gross profit in fiscal 2010 compared to 46% in fiscal 2009. As was the case during our fourth quarter, our change in gross margins was primarily due to lower equipment margins and a decrease in margins for our other category, which includes our construction rental equipment, due to a lower utilization of our rental fleet that resulted from a weak construction industry in the year.

Our operating expenses, as a percent of net sales, were 13% in fiscal 2010 versus 12.6% in prior year period. This increase in operating expenses as a percent of revenue was primarily driven by the larger concentration of construction stores in fiscal 2010, which have higher operating expenses as a percentage of revenue as well as a lower revenue in fiscal 2010 as compared to fiscal 2009, due to the challenging construction environment.

Pretax income was $27 million compared to $30.5 million. On a segment basis, our ag pretax income was $36.1 million, and we had a pretax loss from our construction segment of $6.8 million. Our pretax margin was 3.2% compared to 4.4 % of revenue in last year. This change was primarily driven by our lower gross margins.

Earnings per diluted share for fiscal 2010 were $0.88, on approximately 18 million shares outstanding, compared to $1.08 per diluted share on approximately 16.8 million shares outstanding in the same period last year. The 7.1% increase in share count was due to our May 2008 follow-on offering.

Slide 12 shows our same store sales results for the fourth quarter of fiscal 2010. Our same store sales increased 22.1%, which exceeded our expectations. Looking at same store sales by segment, our ag stores' same store sales increased 25.1%, driven by strong equipment sales, while our construction same store sales declined 1.9%, reflecting the weak construction market.

Based on the different margin levels of our revenue stream, we believe the same store gross profit is the most useful measure for our business. For the fourth quarter, our same store gross profit increased 4% year over year. Our ag dealership same store gross profit increased 7.7%, reflecting our lower equipment margins, while our construction same store gross profit decreased 16%, reflecting compressed equipment margins.

Turning to slide 13, you can see our full year same store comparisons. Our overall same store sales increased 4.9% in fiscal 2010, ahead of our most recent expectations of flat same store sales comparisons for the year. Ag same store sales increased 8.2%, while our construction same store sales decreased 26.8%, reflecting the challenging environment for our construction business. It is important to remember that although our construction business was down 26%, the national construction industry was down a much -- to a much greater percent.

Turning to same store gross profit, our overall Company's same store gross profit increased 1.7%, with ag increasing 3% and construction decreasing 9.4%. When reviewing same store comparisons, I would like to remind you that our group of core construction locations was profitable, outperforming our more recently acquired construction stores.

For modeling purposes, it's important to recall that we calculate same store sales by including stores that were with Titan for the entire period to which we're comparing. In other words, the only stores that were part of Titan for the entire three months of the fourth quarter of fiscal 2009 are the ones that are included in our fourth quarter same store comparison. A total of 19 locations were not included in our fourth quarter same store results, nine ag stores and 10 construction stores. For full year results, 31 locations are not included, 14 ag stores and 17 construction stores.

On slide 14, 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 $76 million, or approximately $4.23 per share in cash, to pursue future acquisitions and fund working capital and general corporate purposes.

As we have discussed on previous calls, fiscal 2009's extremely strong global equipment market reduced inventories to very low levels, which is reflected in our fiscal 2009 year-end inventory levels. Our fiscal 2010 inventory returned to historical stocking levels to support our forecasted sales and ensure we are maximizing our business. Our inventories decreased to $349 million at January 31, 2010, compared to $357 million at the end of our third quarter and $243 million at the end of fiscal 2009. We expect our inventory levels throughout fiscal 2010 to be similar to our level at the end of fiscal 2010. This level will support our expected sales throughout the year in market share goals.

Working capital at the end of 2010 was $159 million. Long-term debt, including current maturities and advances, was $29 million at the end of fiscal 2010. As of January 31, 2010, we had $107 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 opportunities as we see fit.

Slide 15 gives 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 fiscal 2010 net cash flow used for our seasonal increase in inventories is $13.5 million. This cyclical cash requirement illustrates the importance of our strong cash position on our balance sheet.

On our cash -- on our statement of cash flow, the GAAP reported net cash used for operating activities was $47.7 million, primarily due to our increase in inventory. We believe including the non-manufacturer floor plan proceeds and the advances in contracts in 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 fiscal 2010 was approximately $4.5 million. A reconciliation of this non-GAAP measure is contained in this slide show, which is posted on our website.

Turning to slide 16, you'll see our full year fiscal 2011 outlook. For the year, our revenue outlook is in the range of $920 million to $900 million -- $980 million. We expect to generate net income between [$16.7 million and $18.5 million] (corrected by company after the call) and earnings per share of $0.92 to $1.02 based on 18.1 million weighted average diluted share count.

When modeling our business for the 2011 forecast, we expect our ag same store growth to be in the range of flat to 5% growth. We expect our construction same store growth to be in the range of 15% to 20%. We also expect a 50% reduction in our construction loss.

In addition to our annual guidance, I'd like to provide some color on our fiscal 2011 first quarter. This quarter is historically a seasonally soft quarter, and we expect this quarter to be similar to the previous year. It is important to remember that weather does affect our quarterly results, and this is why we provide annual guidance.

Turning to slide 17, you see our net income analysis for the past six years. Based on our outlook for fiscal 2011, our bottom line will continue to grow at a steady pace. Following an extremely strong year in fiscal 2009, fiscal 2010 results and fiscal 2011 projections are in line with our long-term net income trend. Now I'll turn the call back over to David for closing comments.

Thanks, Peter. We are pleased that we were able to deliver top line growth in a challenging construction environment. We believe this is a testament to our strong Titan operating model. In fiscal 2010, we made several key acquisitions and further established Titan Machinery as the leader in the industry. As I stated earlier, we continue to see a long runway of potential ag and construction acquisition candidates.

As we enter fiscal 2011, we believe the improvements we are implementing in our construction business will enable us to achieve improvements in this business segment and enable us to achieve top and bottom line growth in 2011.

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 questions and answer period of the call.

Certainly. (Operator Instructions) Our first question comes from Bob Evans with Craig-Hallum Capital.

Good morning, and thanks for taking my questions. First, just -- Peter, on your last comment on the Q1 guidance, saying similar to last year, I assume you're talking about earnings versus revenue.

Right. I'm talking about earnings. Yes.

Because, obviously, your guidance for the year is up a fair amount. Can you give us some sense of how we should think about revenue, Q1 this year versus last year, or sequentially, I think you were down last year around 12% or so.

Yes. I'll tell you what. I will come back to that, Bob.

Okay.

All right?

That's fine.

I'll give you some color on that. I just want to get a kind of a range.

Okay. Sure. The other thing is, under guidance, can you comment [on], your $920 million to $980 million, how much of that assumes -- or how much acquisition revenue is assumed in that?

Well, you know, Bob, on our modeling, what we do is we model in how much we look at our same store sales, and we thought we would be able to give you a lot more insight by going to segment reporting, and --

Okay.

So given the modeling that we put out there, I think you can pretty well come up with the acquisition being the final piece of our revenue, and you need to remember, on the acquisition, as you're calculating it in the model, that there's two parts of the acquisition revenue. One of them is the annualization of last year's stores that we acquired, and then the other one is the new store acquisitions for this year. And the new store acquisitions for this year, that's kind of dependent a little bit on our timing.

Right.

So if you go back and look at last year, we've got the list of the stores that we did, and when we do our press releases, we give their historical revenue, and you've got the timing throughout the year, and so I think you can pretty well back into that.

Okay. Fair enough. I guess, going through your guidance, it would assume that -- I mean, I haven't done all the math yet, but it would assume, I think, that gross margins are -- remain somewhat depressed. Is that true? I mean, given the revenue guidance and the fact that you're going to have construction, I think you said, a reduction in the loss by 50%, which is around, I think, $0.12 a share, it would appear that you're still looking for depressed gross margins, and I'm just wondering for kind of color on that.

Well, the color that I'd give you is that what you've got to keep in mind when you talk about our equipment margins is that 2009 was an extremely strong year, and we had the tightest global supplies that we'd had in recent histories on equipment sales, and so, really, when you look at how we ended up for this year, we ended up a year -- with an annual 10.1% equipment margin versus last year's at 11.5%.

That 10.1% is much more in line with what our historical equipment margins have been, and for modeling purposes, we used that number from last year -- we were in that range, because we think that represents more of the historical results, and that's why we say we're kind of back to a traditional supply side of a competitive selling environment.

Okay. And can you just talk a bit more on gross margin in terms of the biggest -- I just want to make sure I'm clear on what the biggest impacts were in Q4 this year, say, versus Q4 last year -- the biggest buckets of difference.

Could you repeat that again, Bob?

Sure. The biggest buckets of difference between -- of Q4 gross margin this year versus last year.

Oh.

I know dealer incentives, I believe, are part of it, but if you can --

Right.

Elaborate on the two or three things that are the biggest change.

Yes. Yes. You bet, Bob. The biggest thing, when you look at it quarter over quarter basis is that some of the manufacturers have annual program incentives, and they fall into the fourth quarter. And if you recall, last year on our fourth quarter call, we had a large manufacturer incentive that entered into our pricing on our equipment margins, and this year we didn't realize that.

We also this year are returning, like I said, to much more of a traditional selling environment where there's the traditional supply, and it's just more competitive, so you have that return to the historical equipment margin. So about -- just about half of that difference is incentive pricing on whole goods, and then the remainder of that would be the competitive nature of the environment that we were in going into the fourth quarter. I guess what I'd add to that is that we did maintain our sales velocity. We were able to keep that revenue stream rolling and capture the sales.

Okay. Thank you. Final question on the business side. Dave, you had mentioned Tier 4 emissions standards is -- should be strong for the industry. Can you elaborate on that?

Yes, I'll take that one, Bob. This is a pretty major change that we haven't seen for a long time in our industry, and with the Tier 4, there's some -- by our customers there's an anticipated price increase, that may come with the Tier 4 emissions, would be January 1, 2011. So with that, understanding that, I think, there's a high level of satisfaction with the current engines in our tractors and the fact that unknown -- this change in the unknown -- with change and the fact they like what they have right now, and they know what the price is right now.

They don't know what the price of the 2011 is going to be with the Tier 4. This is going to drive business with these Tier -- current Tier 3 models in the ground, so we think that from now to the end of the year there's going to be a big demand for the existing Tier 3 engines.

Now in the same time, from what I'm reading and learning about the Tier 4 engines, with the new technology, the increased efficiencies, you'll have another group of customers that will be lining up for those and take advantage of the Q4 presell programs to lock in those engines and those tractors that will basically be produced in the first quarter of calendar year 2011. So it's kind of a win-win, and it's an exciting time in our industry, and if you do some reading on this, there's a lot of jockeying going around between John Deere and Case IH and New Holland. The CNH engine family is going to come out with the SCR technology as opposed to the -- Deere's been talking about the EGR technology.

So it's going to be interesting. We think we've got the best solution to Tier 4 emissions, and we're looking forward to selling and retailing all the existing Tier 3 models this year, then also the opportunities with, like, the increased efficiencies coming out with the Tier 4 engines in calendar year 2011.

Okay. Thank you.

Bob, just for a little color on the revenue in the fourth -- or in the first quarter, that would be following the same range of what we were looking at last year, along with the earnings.

You're saying sequentially, down 11% -- 12%, you mean? Or -- I'm not sure what you're saying.

What I'm saying is that last year we had in that vicinity of about 19%, 20% of our revenue split out in the first quarter.

Okay. All right. Thank you.

(Operator Instructions). And our next question comes from Paul Mammola with Sidoti & Company.

Hi. Good morning. Peter, on -- first on the shifting of some of the parts and service revenue associated with the late harvest, I guess. Where does that land? Would it be in the next quarter, or could you see some of these guys bring combines in maybe in the summer?

Well, Paul, we talked about it a little on our last quarterly earnings call, and the question then was do you feel like that parts and service business, because of that abnormal harvest, was that going to be pushed into the fourth quarter? And at the time, we really didn't have good visibility to it, because the harvest wasn't done, and in fact, lots of the harvest was just finishing up here within the last month.

And so, really, what's happened, as we've gone forward now, and we do have our results in for the fourth quarter, as I talked about in our script was that we didn't realize that service -- the parts thing, it seems like, kind of tracked on about with our anticipation of what should happen, but the service side of the equation never did come in and could very easily just never happen.

So that we would just -- looking at our results for the fiscal year ending in January, we would have just not realized that piece of our revenue stream of that service, because of the fact that they didn't get their crops harvested at all -- to the extent they didn't get them out, we didn't get a chance to work on those machines. So that's what we see happening. We think we're pretty well done with the -- in the fourth quarter, that our parts tracked about right, and our service was off -- didn't come in as we anticipated it, and we really don't know -- we don't -- we're not really banking on a lot of that being -- coming back to us in the first quarter.

Okay. Understood. You talked a little bit about Columbia Falls. Are there any charges in the fourth quarter or first quarter associated with closing down that store?

This is Mark Kalvoda here. We didn't -- we just announced the closing of it, so we didn't have any fourth quarter charges, and we will -- we do anticipate some first or second quarter charges, but they will be relatively immaterial.

Okay. And if I can take you back to guidance, I mean, would it be fair to call it conservative to the extent that while we understand that you're pulling in the gross margin in terms of equipment sales, that if you lessen the pretax drag from CE -- I mean, that's almost $0.20 right there, and if you have ag up 5%, again, understanding the gross margin drag, I would expect maybe you guys, if things go according to plan, could end up in the $1.05 to $1.15 rate. So, I mean, I guess the question is could you call what you put out there initially conservative?

We like to give you the best outlook that we can in our business, and just exactly like I showed on the slide looking at our outlook, Paul, we model our business on -- between 0% and 5% on our same store on the ag side and 15% to 20% on the construction side, and we did use that equipment margin assumption based on more of the historical equipment margin levels, and we feel like we've probably given you a good -- that our guidance is giving you a good insight on what our expectations are.

Okay. Thanks for your time, guys.

You bet.

Our next question comes from Rick Nelson with Stephens Inc.

Thank you. Good morning, guys.

Morning, Rick.

Morning, Rick.

I'd like to ask you about the CEs out of the house and the guidance you're providing for 15% to 20% same store relative the reduction and the loss. What, I guess, gives you comfort in the recovery in that business in the new year?

Well, the -- I'll take kind of the first part of that answer, and then David can follow on. But one of the things is that we have worked very diligently over the last 12 months to fully integrate our Titan operating model into those stores, and what we've seen is that -- we did the same thing in the core stores that we have in the Dakotas and took them from being unprofitable stores to being profitable, and we grew the revenues, and we grew the margins.

And what we see is our compensation and our operating model drives increased revenues, and we feel confident that we're going to be able to get results because of the implementation of our model in and of itself. In addition to that, David can comment on the industry and the effect that we see on that.

Bob, we've -- we buy some used equipment -- some distressed used equipment from the East Coast, West Coast, and down in the South and bring it back into our markets, which are a little stronger than the rest of the industry, and we've seen an uptick in that used equipment pricing, somewhere between that 5% and 15%, just in the last two months. So that tells me that we've seen a bottoming out, and we're starting to see some upward trends.

And you have to keep in mind, for those recent acquisitions that we did in our last fiscal year, in Iowa and Nebraska and Montana and Wyoming, we bought those at fairly conservative prices, so just as a small term turnabout, we're going to see a fairly high return on our investment on that. So it doesn't take much of a turnabout concerning that the price we bought those deployed assets, so we think as things bottom out, we see some opportunities.

We made some comments on the oil business in northwest North Dakota and also the fact that in most of our markets, we have the ag influence, the energy, the mining, it's somewhat tempered from the rest of the construction business in North America. So we're -- we think this is going to take a few years to completely get back on board, but we think we've hit the bottom, and it's starting to move the other direction.

Thank you for that color. If I could also ask you about the pipeline, given the recovery you see in the construction side of the business, your preference for ag versus construction, in terms of acquisitions.

Well, we think there's some good opportunities right now in construction equipment store acquisitions, and if there happens to be one available that was strategic to us, I guess worth seeing if you can buy some of these at the bottom of the market, and the long-term projections look good, long-term, for construction, we're not going to shy away from those. At the same time, though, we feel really good about ag store acquisitions right now. I'm talking to a number of people right now. We've got some single stores. We've got some multi store groups in a lot of different geographies in the Upper Midwest.

This 15% capital gain that we have this year is going to really weigh heavily on a lot of these sellers, and we're getting a lot of momentum picking up right now, because they're watching the calendar and the clock, and a lot of these ag stores are making really good money right now, but they also -- this 15% capital gain is really important to them, and a lot of the fundamentals that's really driving acquisitions in this industry -- the lack of succession, the increased sophistication of the equipment, the huge barriers of entry, some of the increased capital needs out there. They're still strong, and like I say, I'm talking to just a lot of people -- a lot of dealers of a lot of different size dealerships on acquisitions right now.

Given that pipeline, Dave, how much revenue do you think you could absorb? I know your target is 10% to 15%, but given those dynamics you referred to, could you swallow more than that, and would CNH approve more than that?

Well, first of all, for our -- the people we have in place in Titan and our transition team and our training people and our ability to go into the stores and bring them on board to our model, we've put a lot of investment and a lot of resources into that group of people. So we really -- we feel confident that we can do a number of acquisitions, sometimes even concurrent with each other, multi acquisitions even at one time, and I think we've got the internal resources here to make that happen and do it very effectively.

We contend to --continue to work hand in hand with CNH. As you understand the industry, the manufacturers know there is going to be consolidation taking place. You look at a lot of the things that Titan has done when they've gone in and done acquisitions, our past track record with very satisfied customers, our -- we're able to retain the employees [at that].

We're growing market share. We're investing in facilities, so like I say, we continue to meet regularly with the CNH folks and really growth -- manage our growth hand in hand with both the Case IH and the New Holland -- the Case construction and the New Holland construction people. So we continue to anticipate moving ahead, similar in the fashion what we've done in the past.

Thanks. If I could ask one more on same store revenue, how you see that unfolding as the progresses. I know you've got more construction stores coming into same store sales early this year. Is that, in fact, additive early in the year, or do you see that more of a second half recovery or --?

Well, when you talk about same store sales, it's important to realize that all of our construction stores will be included in that right now, because the final acquisitions were closed, I believe, at 12-31. It was December of 2009, so we'll include those stores in -- for the full year, Rick, and that was part of that forecast assumption that we made when said the 15% to 20%. And I correct myself. Those last acquisitions were in December of 2008.

Okay. So they were all in the fourth quarter -- the construction stores?

Yes. Yes. So they'll be part of our same store calculation for the entire year.

And was that also the case in the fourth quarter?

The Midland acquisition in Iowa and Nebraska, though, that happened earlier in 2008. That was more midyear 2008, Rick. And then the Montana-Wyoming was December of 2008 in the fourth quarter.

Okay.

They would not have been included in (inaudible).

Do you have more store -- more construction rolling in to comps in the first quarter than you had in the fourth quarter?

Yes, that's correct, Rick.

And this 15% to 20% same store lift you're looking for from construction, how do you see the cadence of that during the year?

Well, we're really not going to that level on our outlook, Rick, but one of the things that's important is that we now have had all those acquisition stores for a full 12 months, so we've got our operating model pretty well completely integrated into them, and so that's why we see kind of a full year effect on that uplift coming through there.

Got you. Okay. Thanks a lot, and good luck.

Thank you.

Our next question comes from Jeff Osher with Harvest Capital.

Yes, hey, Peter, maybe just to try to condense some of the questions you've received, just simply put, if revenues at the midpoint of your range -- call it $960 million. If you grow revenues, year over year, something closer to $300 million, the contribution margin would effectively be nil if you're able to recapture half of your construction loss -- call it $3.4 million.

That gets you on the $15.7 million you did of net income in fiscal '10. That gets you -- if you recapture $3.4 million, that gets you closer to $19 million or the high end of your net income guidance, and that assumes no incremental -- the incremental revenue has a 0% contribution margin. So maybe you can just help people, and me, specifically, reconcile that.

Well, you went through a lot of stuff there, and I guess (inaudible).

Let me simplify it. If you did $15.7 million of net income in fiscal '10, and you pick up $3.4 million from the construction loss, that gets you to $19 million right there. Okay? Your revenue guidance is, for incremental, call it $300 million. On the incremental revenue guidance -- or just call it $250 million of incremental guidance on the top line --

I think the first thing you have to change in your assumptions is when you talk about the $3.4 million, and you're taking that into all these calculations, that's pretax that you're talking versus after tax. And the other thing is that when we give the range, you were saying -- I think you just made a misstatement or whatever. You were saying an additional $300 million or something, and I don't know where that came from.

$250 million, call it.

I don't know what -- if you take it from the range and you looked at our total sales this year coming in at where they were at, I don't know where that $250 million is (inaudible).

Call it --

It was $838 million this year, and the midpoint -- if you're going to use the midpoint, it's $960 million, so that's --

Sorry. I was looking off of '09. Call it on a $110 million.

Yes. Yes.

Call if $110 million, assume zero contribution line.

Yes, I can tell you this, that if you do go through and do the math, and just be sure you don't get yourself confused between pretax and after tax, that we've given the assumptions, and I'm sure that if you work that through your model, it'll work.

So the $6.8 million you quoted for fiscal '10, you're telling us now that was pretax for the construction loss?

It was pretax. That's correct.

Pretax.

Our segment reporting is before eliminations and before tax.

Okay. Thank you.

You bet.

(Operator Instructions). Our next question comes from Robert McCarthy with Robert W. Baird.

Morning, guys. Can you hear me okay?

Morning, Rob.

Morning, Rob.

Morning. Can I first ask you about your rental fleet liquidation? I gather that that generated revenue in the fourth quarter. Is that right?

What we did was when we -- you're speaking to when we right sized our rental fleet?

Yes.

We did that primarily in the first quarter and the third quarter.

Okay, so no impact in the fourth?

Correct. That's right, Rob, and to the extent that we did that, in lots of instances -- well, what we do is we didn't reclassify that from being part of our capitalized rental fleet over into being our inventory held for resale.

Right.

We don't necessarily have that -- like -- we aren't doing it, because it's presold. We are just saying that we're going to use the discipline when we manage our rental fleets, so that we're going to have a fleet that's right size so that we can drive the right utilization, and that also did contribute to our inventory on the construction side of the business.

Yes.

On that, too, just to make you aware, that rental fleet, too is -- we inherited that from that Montana-Wyoming acquisition, so in January, we recognized that right away, and we started making -- that's not something from our core stores. It's more from these acquiring stores that we did a year ago.

Oh, of course. I was just trying to understand whether it had any impact on fourth quarter gross margin or not.

No.

The actions that you're taking to reduce your losses on the construction side of the business. I gather that one way to measure the savings that you expect -- it's half of the loss from this year. How much of that would be the benefit from closing the store? What does that save you?

Well, that store probably would be looking at about $600,000 in pretax.

Okay. Thanks. That -- it just gives us a sense of how big the challenge will be to accomplish the rest of what you're trying --

Yes, it was about $600,000, Rob, and again, just to reiterate again that those were all pretax numbers for our -- when we turn our business on a segment basis.

Oh, of course. Of course. On the improvement in CE personnel that you're referring to, this is really just moving new Titan trained people into running the acquired businesses, right?

Well, what we have been doing is we've been really strongly recruiting people, as we see that we need talent right now. You can imagine with the construction industry being where it's at on its cycle, there are a lot of very qualified people out in the marketplace, and we felt like this is the time for us to really look at who we have in these acquisition stores and make sure that we recruit the topnotch people. So we've been doing that in the last 12 months.

But we're -- are we -- we're primarily talking, I gather, about, like, store managers and sales managers?

We're talking about store managers. We brought some machine control specialists in with the GPS precision aspects of the business. We found some really good people on that side. We've got some department managers at some of the stores we've got and also two region managers that we've done. So pretty intensive -- and most of this has taken place in the new acquired footprint.

Of course. Okay, great. Well, maybe we'll talk a little bit more about that offline. You made an interesting remark, Peter, when you were talking about inventory levels. You said that you thought they would stay roughly flat through the year, because you're up to more normal levels, I gathered.

If the market is going to be strong enough to drive 15% to 20% improvement in CE same store sales growth, obviously, then you're not going to fill that kind of growth from inventory. I mean, I guess what I'm trying to get to is I'm surprised that you believe you need to carry this level of inventory to support this level of sales. Could you just talk about that a little, Peter?

Well, that's -- we're comfortable with where we're at with how much inventory we're carrying, and of course, we all need to remember that still 80%, or thereabout -- last year it was about 85% of our business was ag related.

Yes.

And we looked at what the stocking levels are relative to that and how that has kind of gotten back in more of a traditional stocking cycle, and good point you bring up on the construction segment of our business. Our inventory turn is not what where we would like it to be.

We don't -- we haven't broken that out, but it isn't where we would like it to be on the construction segment, and so when we talk about improving our sales, we think that's going to drive us into a lot better inventory turn on the construction side of the business, and so we're pretty comfortable with how we see that rolling out through the year.

Okay. So that makes sense, because I understand your construction same store sales growth really would benefit from sales that are specific to Titan and your ability to take -- to generate sales in your territory. What do you think the underlying growth rate for the industry is going to be, compared with you're up 15% to 20%?

Well, like David spoke to that earlier was that we think that the construction business is on the bottom side of its cycle?

Yes.

And really, what we wanted to do was we wanted to take actions that David went over on our action plan, so that we felt we can influence our results on our same store sales, regardless of the industry, and we really feel like we model 15% to 20%, and if the industry stays flat, we're still -- we want to do 15% to 20% to hit our plan.

So it's fair to -- if I quote you as saying you're assuming the industry will be flat, that would be okay with you.

We don't really know for sure, but right now, the things that we see, it looks like it's probably flat, and maybe if there's any uptick to it, it could be in the back half of the year, but everybody is still kind of looking to see how that's going to roll out.

All right. So a source of potential upside. And what are you expecting in terms of pricing for the current year? Generally stable, or do you think you can get some price in the kind of markets we're in?

On both the construction and ag side, or just the construction side?

Yes, and new versus used. Yes, please talk about where -- what you're seeing, David.

Well, I think we're seeing a little bit of an uptick in the used construction values.

Okay.

As far as the new construction values, I don't see that we're going to be able to get much more pricing out of this market right now. It's still very competitive. There seems to be a little bit of a glut of machinery out there.

Okay.

I see the manufacturers on an under producing retail. So that all tells me that you're not going to see a lot of pricing there, so I think our main thing would be is to minimize interest bearing inventory, try to liquidate as much of our existing inventory that we have right now, and increase the turns, and increase the velocity of the equipment through on the construction side.

Yes.

Now, as on the ag side now, we still see, on certain levels, on some used tractors and stuff, there's still a high demand for good late model equipment. I see a definite interest by a lot of customers to get their hands on some of this late model Tier 3 type engines, so that became -- remains very stable in that business. There still remains a lot of competition between CNH, Case IH, and New Holland companies and John Deere out there.

Yes.

So I continue -- I think this competition, I think, is going to keep that business sales fairly stable, and other than what the effects of this Tier 4 and the changes coming there with the model year 2011 models, then that will be for the fourth quarter of this calendar year. Then the actual Tier 3 -- 4 engines that are going to be produced after January 1, that's going to add a little bit of dimension out there that could have some increased pricing because of the Tier 4 technology.

Yes, I thought you might go there. And Peter, in your segment breakdown, at the end of the release, where you report income and loss before taxes for agriculture and construction, there's a line for shared resources, the expenses that aren't being allocated out to the segments, and in the fourth quarter, that number was down considerably from the prior year.

As a matter of fact, really doesn't look like -- anything like a run rate when you consider that the full year number was a little above $2 million. So I'm kind of wondering if there's something that you got a little help from in the fourth quarter to offset some of the expenses.

Yes, this is Mark.

Yes, Mark.

I'll take that. So, yes, it was down this year versus last year on these unallocated expenses, and what happened in the current year is we did have a manufacturer financing incentive, if you look on our other income line, that did come through that we didn't pass down to the stores.

Okay.

So that didn't go out to the segment. So the benefit of that stayed at the shared resource center.

Is it fair to say, then, that the difference between the two -- the number from this year and the number from last year is a rough estimate of how much larger those incentive payments were in this year's fourth quarter?

It would be somewhat larger than that. The difference -- if we hadn't had it, the shared resource number for this year would have been somewhat higher.

Okay. That's -- I assume so. And I'm sorry to go on and on, but I really want to ask one more. The -- there's a lot of debate, as I'm sure you're aware, in the marketplace about SCR versus EGR, and for us laymen out here, it seems that the need to actually have some inventory of urea, even though it's a relatively small amount, and the complication of making sure that you've always got some in the track or et cetera would be an distinct negative compared to EGR. So I gather that Cummins and Case IH are talking about some offsetting benefits, and I kind of wonder if you could talk about that a little bit.

Well, I'm sure there's a lot of people on this phone -- we start talking about EGR and SCR, they're going to be a little bit lost here, so I'll just try to simplify this as much as I can. Your SCR -- what they're doing is they're adding a compound to the exhaust, and actually, if you look at the over road semi trucks, they're experiencing this right now.

So all the over the road semi trucks out there, for the most part, are running the SCR technology, so they've got a tank of -- we'll call urea, that they -- when they go to the fuel stop, and they fill their tank up with fuel, they put in urea, which gets used at about a 2% rate.

Right.

So for every 100 gallons of fuel they're using, they're using two gallons of this urea, and at most of the truck stops, they have this urea there, so it's not a big issue, but what they are seeing is they're seeing, probably, a 4% to 6% savings in fuel economy. So that much more offsets what this cost of urea is, and that's very simple. There's not a lot -- it's an add-on outside the engine. It's -- it doesn't -- there's not a lot of R&D involved with that, and it's a pretty easy entry into the marketplace, and that's the direction that CNH is going.

Now, on the other hand, with the EGR, what that is doing is it's -- they need to cool the temperature of the exhaust down and have filters after the fact to catch these particles. All of a sudden there, you're talking about major internal changes to the engine in order to do this, and if you take the off-road equipment, as compared to the semi trucks -- if you take a combine or a large four wheel drive tractor, and you need to cool down that exhaust, all of a sudden you're talking about bigger radiators.

You're talking about horsepower losses. You're talking about a lot of issues there that are going to take horsepower, it's going to increase your fuel consumption. You're looking at some of these byproducts here that could be even a fire hazard out there when you start getting these particles.

So we really think that this SCR technology is the way to go, and I actually think that people with the EGR are really going to struggle with that. I feel really confident that CNH is making the right direction with the SCR technology.

All right. Thanks for that, David, and I appreciate you taking all of our questions.

And our final caller is Brent Rystrom with Feltl and Company.

Hi. I just, thankfully, got a few brief questions for you. The -- what were your goals for the ag and construction equipment segment when you talk about the fourth quarter missing on the construction side? Was your miss in the quarter entirely there, or was there a miss on your segment goals for agriculture as well?

Yes, it was on both sides of the business, Brent. Our equipment margins came in a little less than what we'd anticipated. We were able to exceed on our revenue. I -- as you're very well aware, on the ag side of the business, there's just a tremendous amount of year-end buying from our customers at the end of December.

Yes.

And so what happened -- and it shows in the numbers -- is what happened was we were able to capture sales, and we exceeded our expectation on the revenue side, but the market would only allow X amount of pricing in there, and so that's reflected in our equipment margins. At the same time, we would have liked to have picked up a little bit more on our construction, we thought maybe with some year-end buying there, but it fell a little behind -- not much.

As you know, we poll a lot of dealers, and when we did our poll in January, a lot of the dealers -- and most of the dealers we poll are independents, and they told us that the fourth quarter sales, literally half or a little over half the business -- and their fourth quarter ends typically in December -- came as that year-end tax buying -- tax related buying. And basically, the tone coming out of the fourth quarter, and again, a December quarter, was that conditions were pretty sloppy, and it was just a lot of quarter-end.

Since then, on subsequent polls, what we're hearing from people, if you X out the weather impact -- just the brutal January, February, people just not doing anything -- as you know, I was in your dealerships down in Iowa in January, and you couldn't even walk in the parking lots. They were covered with ice. X out that -- sales trends have actually been improving, kind of, the last two months or so. Would you say that's reasonable, compared to was in that fourth quarter kind of tone?

Well, our fourth quarter we -- like I say, we exceeded our revenue expectations, and when we model this year and we talk about our first quarter, we felt that our first quarter is traditionally our softest quarter, and that's why (inaudible).

Understand that seasonally. What I'm wondering is --

But I wanted to give you a little color on our first quarter and just let you know that we see it kind of tracking like what last year did, and last year --

Okay, and so --

Say, Brent, if you look at what the manufacturers forecast last December for the first quarter, even into calendar year 2010, I think that the first quarter industry results and comments (inaudible) 100 horsepower plus tractors has far exceeded what even the manufacturers anticipated back in December.

That's what I'm kind of seeing is it kind of felt like that things were going to get kind of sloppy here in the first quarter, but maybe, oddly enough, they firmed -- obviously, not necessarily hugely firmed. But my point is that what felt like it was going to fall off the cliff kind of remember, post the year term, businesses may be stabilized a bit.

Yes, and I think the industry numbers are holding true, and I see -- if I hear what John Deere is saying, what CNH is saying, they're increasing production to meet the increased demand out there. So -- and like we said in our call, there's a number of factors -- the farmers' strong balance sheets, the demand for Tier 3 engines. I think a lot of these things are -- and if you look at the USDA, they're talking about an increase of gross [farmers' seeds], up from last year levels.

So I think the combination of a lot of -- we've seen a strengthening in the livestock markets, and I think a lot of this corn that was in the fields is now coming off, too, and all of a sudden, some of these farmers have a lot more money to spend. So there's a lot of positives out there.

Cash is finally coming in. Combine sales. Any thoughts on recent things there? Again, in one of our recent surveys, we're kind of seeing that peak up as probably the area where people are most concerned with dealers. Any thoughts on combine sales relative to overall sales?

Well, there again, the industry is up on combine sales, and we're getting combine business. There's some new models out there. Like, again, definitely an interest out there from tractors and combines to grow the business, and traditionally, that gets to be a little more of a seasonal business. I think a lot of growers like to see their crop come out of the ground and see where the markets are at and some things like that.

And there's also -- you're seeing places -- probably some deliveries that where units are actually -- the deals are actually made in the fourth quarter back in November, December, and they're being delivered now, too. You're starting to see some of that. The presale business that the deliveries are actually being made, and that's being reflected in some of the industry numbers.

A couple quick last few questions. 2010 comps you guys did phenomenal compared to the industry. What drove that? What was the big driver that pushed your sales above what the industry was doing? On the ag side?

Well, I think we tracked not too far off of the industry, and if there were -- if there was a differentiating factor, it probably would be the aggressive nature of our processes in our Titan operating model, where the way that we comp our field marketers and just the way our whole system is set up with this strong store operating model, that would be a differentiator in helping us achieve that.

Then final quick question. The 0% to 5% comps for the ag side, the 15% to 20% -- I would assume you'd sequentially kind of build that, or do you see that kind of straight-line across the year in -- for each segment?

Well, we don't -- no one has total visibility to that, but as -- when we look at our business, really, what we're going to do -- we gave you some color on the first quarter on this call, and we'll update you on our next earnings call and look at how this weather pattern plays into our customers' production cycle, because that can influence this thing as far as how the buying habits -- which quarter they fall into, and we'll keep you updated on that.

And how is the weather pattern, because when I drive across central Minnesota and Wisconsin and northern Iowa, I'm seeing a lot of field work that wasn't getting done last year at this time, so I'm assuming you guys are wetter on your Dakota side?

Well, I think -- right now I think most of these farmers are way ahead of where they were last year right now.

Even in the Dakotas?

Right.

Okay.

Fields are drying off. There's some wheat getting planted right now. I think if you look down in -- a lot of the corn is -- in southwest Iowa, a lot of the corn is already in the ground. I think it's --

And you look at like the yield planting and stuff -- it's 37%, 38% versus 7% last year, so you've got huge, huge favorable trends there.

It's in good shape.

All right. Well, thanks, guys.

Thanks, Brent.

And that does conclude our question and answer session. For closing remarks, I'd like to turn the call back over to our speakers.

Okay. Thank you for listening to our call today. We look forward to speaking to you again when we report our first quarter results in June. And as I say again, we're -- we'll -- any calls or any questions or something, make sure you get a hold of us, and we'd be happy to talk to you, and have a great day.

Thank you. That does conclude today's conference. Thank you for joining.