Titan Machinery Inc (TITN) 2011 Q1 法說會逐字稿

Good day and welcome to the Titan Machinery first-quarter fiscal 2011 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 Titan Machinery's first-quarter conference call. On the call today from the Company are David Meyer, Chairman and Chief Executive Officer, and Peter Christianson, President and Chief Financial Officer.

By now everyone should have access to the earnings release for the fiscal first quarter ending April 30, 2010, which went out this morning at approximately 7 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 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. 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 factors 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 any forward-looking statements. Titan assumes no obligation to update any forward-looking projections that may be made in today's release or call.

Lastly, due to the number of participants on the conference call today we ask that you keep your question period to one to two questions and then rejoin the queue.

With that I will turn the call over to the Company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our first-quarter fiscal 2011 conference call.

On today's call I will provide highlights of our first-quarter results, discuss our most recent acquisition, and provide a general update on our business. Then Peter will review the financial results for the first quarter in more detail. I will then provide some closing remarks and we will open up the call to take questions.

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

On slide two you will see our first-quarter 2011 results as well as our full-year fiscal 2011 outlook. Overall we are pleased with our first-quarter results of $205.5 million in revenue and earnings per diluted share of $0.09.

Based on these first-quarter results and our outlook for the remainder of the year, we are reiterating our annual revenue and earnings per share guidance. We continue to expect to generate between $920 million and $980 million. Our net income is expected to be in the range of $16.7 million and $18.5 million resulting in earnings per diluted share in the range of $0.92 to $1.02.

We are also reaffirming our Ag same-store growth to be in the range of flat to 5% growth and Construction same-store growth to be in the range of 15% to 20%. Peter will add additional comments on the same-store sales comps later on in the call.

Regarding our acquisition activity, last week we announced that we closed on the acquisition of Hubbard Implement in Iowa Falls, Iowa. Hubbard is a Case IH brand agricultural equipment dealership in Central Iowa and strategically located contiguous to our existing locations in Grundy Center and Waverly, Iowa. In their most recent reported fiscal year Hubbard Implement generated revenues of approximately $7.9 million. The acquisition closed on June 1.

Regarding future acquisitions, we continue to see a healthy acquisition pipeline of potential agricultural and construction acquisition candidates in the upper Midwest. We are currently in the discussions with a number of single-store dealerships as well as larger multi-store dealerships complexes and are confident these acquisitions will support our annual acquisition revenue growth rate. Also, we believe the year-end and the 15% capital gains tax rate will support increased acquisition activity in the back half of calendar year 2010.

Now I would like to update you on our industry segments. On slide three we outline an update on the Ag industry. In our region farmers have experienced favorable spring planting conditions which are creating the potential for large crop yields in this year's production cycle. Current crop prices are slightly lower due to a number of factors including the seasonality within the 10-year US farm cash receipts trend.

Offsetting the slightly lower prices on lower input costs including low prices for glyphosate herbicide, fertilizer, and diesel. Producers' balance sheets remain strong and provide the producer with continued access to credit.

On the tax side of the business the $250,000 Section 179 depreciation tax incentive has been extended through December 31 of this year.

As we mentioned on our last call, starting January 1, 2011, Tier 4 emission requirements are in effect for our tractors. We expect this will 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 the year. We are also excited about the anticipated 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.

In summary, we believe fiscal 2011 will be another strong year for our Ag business. We expect to achieve solid, organic growth in this segment as well as capitalize on appropriate opportunities to acquire additional Ag dealerships this year.

Now turning to the Construction segment of the business on slide four, we have outlined an overview on the construction industry and our market. Our contractors are experiencing stronger spring 2010 backlogs compared to spring 2009 backlogs. As an example, we are seeing increased activity in the Bakken oil formation which is within our Titan footprint. The oil [well] activity in northwest North Dakota, which has doubled in the past three years, has increased to 80 million barrels in 2009. North Dakota is now the country's fourth-largest oil producer behind Texas, Alaska, and California.

Another positive sign is that auction houses are seeing early signs of used equipment values firming reflecting increased demand. On the construction manufacturers' side of the business manufactures are beginning to see order backlogs increasing.

While we believe that we have seen a bottom in the construction equipment industry, we are making the appropriate adjustments to our business to drive improved top- and bottom-line results for our Construction business in this fiscal year. On our last call we announced our Construction business action plan. We are pleased with the initial positive impact of our action plan on our first-quarter results. We are confident that as the full impact of these changes are realized we will achieve year-over-year improvements in our construction operating results for the current fiscal year.

Turning to slide five, I would like to review the four key elements of our Construction business action plan. First, we right-sized our rental fleet. Our rental fleet was underutilized over the past year and had a negative impact on our margins. This improvement is reflected in the gross margin of our other gross margin category in the first quarter.

Second, we have made some key improvements in our Construction segment personnel. Third, in the first quarter we closed an underperforming construction equipment store in Columbia Falls located in the Kalispell, Montana, market. Not only does this market have overall lows, the industry unit potential is primarily a residential construction market which is currently significantly overbuilt.

Lastly, we are working diligently to fully implement our Titan strong store operating model in the construction equipment dealerships we acquired in fiscal 2009. If you look on slide six, the map represents our construction equipment footprint. The gold states represent the fiscal year of 2009 construction acquisition stores and the blue states represent our core Dakota locations.

I would like to point out that our core stores in the Dakotas were unprofitable when we acquired them. Last year this group of core construction equipment locations were profitable, significantly outperforming our more recently acquired stores. We are confident that we can make our more recently acquired stores improve their performance similar to our core store performance.

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.

We believe our current construction store base has the potential to generate strong earnings. While any improvements in the overall industry would certainly benefit our results, we believe the steps we have taken to manage the controlled aspects of our business will enable us to generate improved results even if we do not see improvements in the industry. We are confident that the construction stores will be an important contributor to the growth of Titan Machinery brands in our top- and bottom-line performance.

In summary, we are off to a good start in fiscal 2011. We are confident that our Ag business will continue to perform well and we expect the changes we are making to our construction segment will have a positive effect on our business in both the short and long terms.

Also during the past month, we have successfully integrated our two corporate facilities into one. Now all of our back office support is located in the new corporate headquarters which will improve efficiencies and provide room for future growth.

With that I would like to turn the call over to Peter to review our financial results in more detail. Peter?

Thanks, David. Turning to slide seven, our total revenue for fiscal 2011 first quarter was $205.5 million. We experienced increases in all three of our main revenue streams. Importantly, our Parts and Service sales increased to 33% reflecting the spring harvest carryover crops from the 2009 product cycle.

On slide eight our gross profit for the quarter increased 20.8% to $34.4 million due to acquisitions and organic growth. Our increase in gross profit was less than our revenue growth of 23.5% reflecting a small decline in our overall gross profit margins from 17.1% last year to 16.8% this year. The decrease in gross profit margin was primarily due to equipment margins declining from 10.1% to 9% on a year-over-year basis.

Our first-quarter equipment gross margin was similar to our fourth-quarter fiscal 2010 margins and is reflective of the increase in equipment supply in the marketplace and resulting pricing pressures. We continue to use a 10% equipment margin assumption in our annual forecast based on the anticipated effects from the change to Tier 4 technology at the beginning of calendar year 2011. We believe the demand for the Tier 3 technology for the second half of this fiscal year will keep us in line with our equipment margin modeling assumptions.

In addition, there are annual manufactured incentives for maintaining and growing market share as well as the long-term downstream revenues created from the parts and service sales associated with the increased equipment sales. The equipment margin was mostly offset by the increased mix of our higher-margin Parts and Service business.

Our operating expenses as a percentage of net sales, which included $120,000 in one-time exit costs associated with the closing of the Columbia Falls store, improved 30 basis points to 14.5% in the first quarter versus 14.8% in the first quarter of the prior year reflecting better expense utilization due to our increased revenue.

Our first-quarter pretax income margin was 50 points lower this year compared to last year. Our pretax margin was impacted by higher floorplan interest expense as a result of increased floorplan notes payable balances and higher interest rates compared to the same period last year.

I would like to give you some color on our increased floorplan interest which was primarily the result of higher interest-bearing construction, floorplan notes payable due to last year's decreased sales throughout the construction industry.

Historically our construction business has had approximately 50% of its floorplan notes interest bearing. Beginning last year our percentage of interest-bearing floorplan notes began to increase with the back half of fiscal 2010 having approximately 77% of construction floorplan notes interest bearing. Our fiscal 2011 forecast modeling took this higher beginning interest-bearing floorplan balance into consideration and we anticipate a reduction in the back half of this year due to our increased construction equipment revenues.

In addition to our higher balance of interest-bearing floorplan notes, our higher interest rate contributed approximately $400,000 to our floorplan interest expense. Our current rates are reflective of the previous disruption in credit markets. We are in the process of renegotiating rates in a more stable credit environment and are confident we will realize a reduction in our floorplan interest rates.

Earnings per diluted share for fiscal first quarter 2011 were $0.09, in line with our fiscal 2011 expectations.

Now turning to slide nine, you will see an overview of our segment results. Our Ag segment had strong revenue growth driven by both organic and acquisition growth. Our Ag pretax income was down as a result of our equipment margins and floorplan interest expense. Our construction segment had a significant increase in revenue from organic growth and from our new store open in Minot, North Dakota, near the Bakken oil formation.

Our Construction segment loss was flat compared to last year primarily due to the increased floorplan interest which we have previously discussed. This increased interest offset our improved gross profits as a result of our higher construction equipment revenues. We are confident that by continuing to achieve operating improvements in our construction segment and increasing our revenue we will lower our floorplan interest expense in the second half of this year and will enable us to achieve our forecast assumptions of a 50% reduction in our construction segment loss.

Slide 10 shows our same-store sales results for the first quarter of fiscal 2011. Our overall same-store sales increased 13.9%, slightly ahead of annual expectations.

Looking at same-store sales by segment, our Ag stores same-store sales increased 12.7% driven by strong equipment sales and our Construction same-store sales increased 21.5%, reflecting the initial positive impact of our construction business action plan.

Based on the different margin levels of our revenue stream we believe that same-store gross profit is the most useful measure for our business. For the first quarter overall same-store gross profits increased 12.3% year-over-year with our Ag same-store gross profit increasing by 10.3% and our construction same-store gross profit increasing 24.8%. Our construction same-store gross profit increase was higher than our construction same-store sales increase reflecting the improvement from our other income driven by the right-sizing of our rental fleet.

For modeling purposes it's important to recall that we calculate same-store sales buying 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 this entire three months of the first quarter of fiscal 2010 and fiscal quarter of fiscal 2011 are the ones that are included in the first-quarter same-store comparison. A total of 10 locations were not included in our first-quarter same-store results, eight Ag stores and two Construction stores.

On slide 11 we give an overview of our balance sheet highlights at the end of the first quarter of fiscal 2011. We continue to have a very strong balance sheet with cash and cash equivalents of approximately $81 million or $4.50 per fully diluted share in cash to pursue future acquisitions and fund working capital and general corporate purposes.

Our inventory was up $5 million year to date of which new equipment inventory was up $12 million and used equipment was down $10 million. Parts and service inventory was up $3 million. We are comfortable with our inventory levels which will support our expected sales and our market share goals throughout the year.

Working capital at the end of the first quarter fiscal 2011 was $158 million. Long-term debt including current maturities and advances was $28 million at the end of the first quarter, down $1 million. As of April 30, 2010, we had $108 million available of our $365 million total floorplan lines of credit.

In addition, we have a loan agreement with Bremer National Bank which provides for a $25 million revolving operating line of credit 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.

Slide 12 gives an overview of our cash flow statement. Although this is not a significant impact this quarter, when we evaluate our business we look at our cash flow related to inventory net of floorplan activities which is reported on our statement of cash flow as both operating and financing activities. When considering non-manufactured floorplan our first-quarter fiscal 2011 net cash flow from inventories was a positive $6.6 million.

On our statement of cash flow the GAAP reported net cash provided by operating activities was $8.3 million. We believe including the non-manufactured floorplan proceeds and the advances in contracts and transits as part of our operating cash flow better reflects the net cash flow of our operations. Making these adjustments, the positive net cash provided by operating activities during the quarter was approximately $8.4 million, a reconciliation of this non-GAAP measure as contained in this slide which is posted on our website.

With that I would like to turn the call back over to David for final remarks.

Thanks, Peter. We are pleased with how we began fiscal 2011. We are confident we can build off this positive momentum to deliver another strong year and meet our annual revenue and net income goals. Our Ag business remains strong and we will continue to focus on executing on our action plan to drive improved results for our construction business.

We also expect to make a few additional strategic acquisitions which will further solidify our position as a leader in our space.

Before we take your questions I would 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) Bob Evans, Craig-Hallum Capital.

Good morning and thanks for taking my questions. First, on gross margins can you elaborate? On the equipment side I believe you said your target was 10% in your models. Can you give us a sense of a little bit more granularity in terms of why you are comfortable with that and maybe why things were down in Q1 relative to that target?

Yes, Bob, this is Peter. Our Q1 margins were in line with what we had in our fourth quarter and they continued on at that 9% range. Really what we think, Bob, is that when we get into this third quarter and fourth quarter we are going to be seeing more and more of the effects of the demand coming through our systems from this change to Tier 4 technology.

We feel like there is going to be a considerable amount of our customer base that are going to want those Tier 3 tractors. And already we are seeing restricted supply. So we feel like -- the way that we run our business is we think we will capture that additional margin as we have that increase in demand for that product and a limited supply of it.

So when you say you have got a 10% kind of target you are saying for the year? So then you are, I assume, expecting second-half gross margins to be a little bit higher to blend, to allow to blend to come on to 10%?

Correct.

Okay, okay. And then a question on the ERP costs. Can you give a sense of how much you incurred this quarter and ballpark what you are looking at for the year?

Really what flowed through to the P&L wasn't a real material amount this quarter, Bob. A lot of the costs associated with that are capitalized.

Okay. Is that true of the year as well?

There will be some as we go into this next quarter now because of the cost of training our people on the roll-off.

Okay. All right, thanks. I will let others ask questions.

Brent Rystrom, Feltl & Company.

Thank you for taking my questions. From the construction equipment side can you give a little bit more color as far as was the rebound in the business fairly broad-based in that footprint or was it more focused on the Bakken? A little color on that.

It was pretty broad. We have seen improvements in Iowa down in through there and probably more on the eastern side of our footprint than on the western side.

So a little counterintuitive actually, kind of encouraging. From the perspective of the floorplan interest, you had mentioned lower -- improving rates in the second half of the year. Can you give us a little more thought on that?

I know it's probably difficult to predict what you are trying to negotiate but are we looking at savings of a couple hundred thousand a quarter, $0.5 million a quarter?

Brent, what we are doing is we are exploring a lot of different debt options out there right now. And as I think everybody is aware there is some pretty economically priced debt out there right now.

So we are in the middle of -- been working on this for probably the last six to eight months and we are getting down to the final stages. So we are seeing some evidence of some, like I say, some very attractive rates out there and we are just trying to incorporate some of them into our capitalization model.

And as a quick follow-up as my final thought there then, would that be -- are you looking at the term that is more than just a year?

Well, we definitely -- we can't really comment on that but we are going to look what is the best rates and the best lock for the best interests of our shareholders.

All right. Thank you.

Paul Mammola, Sidoti & Co.

Good morning, everyone. Can you give us a sense of what is holding operating expenses flat quarter to quarter despite the revenue decline?

What do you mean by revenue decline?

Well, I mean I guess in terms of variable costs considering that 4Q to 1Q, right, you go from $253 million in sales to $205 million and your operating expenses stay in the $29 million or [29.8] range. So I am just trying to understand how should we think about the rest of the year given that revenue should go up and we are already starting at a high base operating expense wise?

Well, most of our expense structure is relatively fixed and it's basically just the difference in the commission associated with the sales that is variable.

Okay. So I guess asked another way, why don't you get more leverage in the construction equipment business with same-store sales up, what, 30% but the drag is still $1.9 million? I guess I am trying to understand why that doesn't lessen as sales go up.

I think the answer is the floorplan interest that we talked about on the call. Our floorplan interest we modeled it where we knew we were coming into it with a higher level of that in the beginning of the year and that is really what you are looking at on your expense profile.

Okay. And then finally, I think last quarter we talked about lower dealer incentives and it was kind of a wait-and-see as the year progresses. Anything changed there?

No, really there isn't. The annual, or excuse me, the manufacturer incentives are on an annual basis and so it's pretty much no change since our last call.

Okay, thanks for your time.

Robert McCarthy, Robert W. Baird.

Morning, everybody. I just want to follow-up, that last question I thought it was a really good question. Compared with the fourth quarter your first-quarter revenue was down by about 25% and your SG&A expenses or operating expenses -- this is, Peter, excluding the floorplan interest -- we are roughly flat at [$29.8 million]. So I hear you saying higher fixed cost elements, maybe some costs associated with the move, maybe some temporary costs associated with ERP. Can you help us? The number is a little higher than we thought too.

I think that -- I don't think that the move had a big impact on our expenses. And I think it's just the seasonality of how our expenses are coming into our statement, Rob.

Just to give you color on that the move did not have an impact on our quarterly expenses and shouldn't have an impact in our second quarter as well.

Okay. As we look back at history, typically this number rises through the year and so there is no reason to think of it any differently this year I assume? Talking about the operating expense line, right?

Right, right.

Okay. My two questions were, one, can you tell us where you were at the end of the quarter in terms of a proportion of floorplan payables that were interest bearing? And what your target is for the end of the year?

Yes, we have that in our queue. Our non-interest-bearing floorplan as of April 30 was 54% with the interest-bearing portion of that at 46%. And that is being driven a little bit higher, like I talked about on the call where we have 73% of that is interest-bearing floorplan notes on the construction side of the business. So that is higher than normal and we want to manage that down, Rob.

Does that mean that of the strong growth that you are seeing in construction that the core Case product is generating the highest growth? Or do you have the higher interest-bearing receivables specifically because the growth so far is stronger in the secondary line that you carry this year?

Well, Rob, our dealerships are very pure towards the Case equipment line. That makes up the majority of our revenue and so really our interest-bearing floorplan is across the board. Like I say, the majority of our business is built on Case construction equipment so that is really what is driving our metrics.

And I would add that the percentage of interest-bearing floorplan notes that balance did improve from January 31 until April 30.

Yes, I see that. And then my other question was just simply to make sure we know how we are calibrated relative to you. Understand that you can't talk about the specific terms of a credit agreement that you are in the process of negotiating, but have you already built some improvement from rates into your unchanged guidance?

Yes, what we built into our modeling was our assumption on overall interest expense for the year. Rob, we have several different ways of looking at different options available for us to improve that rate and we are diligently after all of them. This is something that we need to get done.

Okay. But you have assumed some sort of a least-case improvement in the guidance?

Yes, there is some in that guidance, Rob. Thank you.

All right. Just to make sure that we understand where you are at. Okay, great. Thank you. I will get back in line.

Rick Nelson, Stephens.

Thank you and good morning. I would like to hear about the losses from the closed store in Columbia Falls and is there a potential for additional store closings in that Construction segment?

Well, right now depending on what happens with some facility exposure -- we did our best estimates. As far as additional in the construction equipment business right now we think that we feel pretty comfortable with our existing number of stores and the markets that we are in today. And mostly working on putting our Titan operating model and just improving those stores despite whatever happens in the macroeconomic conditions on the construction side.

What was the loss in Columbia Falls last year?

We didn't disclose that separately, Rick, but it was definitely running at a loss. We feel that making that decision to close that store in that market and taking the expense is the right thing as part of our action plan.

Got you. Also, Peter, I would like to follow-up on the ERP implementation, how that is progressing.

That is progressing well, Rick. We put our back office financials on our new ERP last September and have been operating on that. Now what we are doing is we are doing our test in our pilot store currently this month. We will watch the pilot store and we will continue to roll out so that our goal is to have the ERP completely rolled out at the store level by the end of this fiscal year.

Great, thanks.

Bob Evans, Craig-Hallum.

Dave, can you talk a little bit more on the acquisition pipeline? Are you seeing movement because of the tax changes that are coming at the end of the year and do you expect to be more aggressive here in terms of opportunities and securing them over the balance of the year?

We have a number of potential sellers; the demographics are still remain much the same. There is people looking at getting into retirement, you have got some age issues, you have got some succession issues at some of these dealerships. There has been some awful good income made by a lot of these dealerships.

And maybe people that were thinking about selling their dealership two years ago or last year -- it was this hold on for one more year type thing. Because from what all I am seeing is the financial results of a lot of these independent dealers out there have been very excellent and they have been improving. They improved in 2008, they improved in 2009. Then again this first half of 2010 are good.

So we are seeing a lot of situations where people are holding on and at the same time they understand that we have 15% capital gain this year and this is the last year to have that. So there is a lot of balance to say, hey, let's hold on as long as we can and at the same time, we want to be able to, any gain we may have, to be able to take advantage of 15% rather than a 20% or higher rate potential for next year.

And at the same time, we are very insistent on keeping the discipline on our pricing. So we are balancing all these. But to answer your question, we do look at -- I am working with a number of acquisition candidates. Some of these we have been in discussions for for a long period of time and I would say towards the end of this year, you are going to see a lot of activity on our front based on the combination of the (inaudible), timing getting out, age of these sellers and also to capitalize in on this the last year of a 50% capital gain.

Okay. And back to the segment analysis on construction, to ask it a different way, the loss that you had -- segment loss that you had this quarter on construction; can you allocate or give us a ballpark idea of how much of that was from floorplan expense?

On breaking out the floorplan between Construction and Ag, we haven't given that breakout but here let's look --.

Just trying to -- I don't need to know exactly but I am just trying to get a ballpark sense of magnitude. Again kind of --.

It's around half million. It's right in that area.

Again, because I think we are all trying to figure out given the nice improvement in same-store sales and, frankly, even better improvement in gross profit dollars in Construction why there wouldn't be more positive operating leverage in that segment?

Well, a share of it was the floorplan interest at $500,000 to $600,000. Then as we keep going through the year what we have in our model, you know, is you have the seasonality in the sales cycle on the Construction side of the business. Traditionally the first quarter is not the strongest quarter in our Construction business so we feel really good about having a good start to our year.

We are very diligently working on executing this action plan so that we can deliver these results. It's really important for our company.

Okay. All right, thank you.

(Operator Instructions) Robert McCarthy, Robert W. Baird.

Thanks for taking another couple questions, gentlemen. Your rental fleet utilization is improving as you have been downsizing the absolute size of the rental fleet. Can you give us an idea where your utilization is now and where it was?

It has improved. I guess what we look at is at a minimum we like to see the thing improving up to around that 20% to 25% to achieve breakeven status. Our goal of a lot of the utilization is in that 50% range going forward.

Now one thing you have to keep in mind, Rob, is when we look at our utilization we improved it on a year-over-year basis but one thing that is really important is the first quarter, again, has really seasonality on our rental utilization that being a full quarter. When we get into our second and third quarters that is when our job backlogs for our contractors really build and we see an improvement in that utilization even further.

Okay. And so if I -- extrapolating a little bit you think you might be close to being right-sized to be breakeven on the rental fleet. Once that happens then we start seeing some leverage from sales on the top line?

No, Rob, we feel like we have right-sized our rental fleet and that this year we are not going to be running our rental fleet business at a breakeven. We will be running it on a profitable basis. We feel comfortable because last year with our action plan we took measures to right-size that fleet so that we would get it a line so we could support a profitable utilization rate. We don't want to run our rental fleet at breakeven.

Okay, very good. On the pricing issues that you are seeing that are a drag on margin, I assume that as we compare with last year's numbers you are talking about construction equipment? Or are we talking about an unchanged construction environment and less positive contribution from Ag?

Right now the effect on the equipment margins is more on the Ag side and that is a little bit more traditional when you have this increased supply. There is an increased equipment availability out here and what we want to do is we want to make sure that we diligently protect our market share that is so important for our downstream revenue long term on that high-margin part of our business on the Parts and Service.

So we are out there and we are taking our percentage of the market in sales and that gross margin is whatever the marketplace will allow us to take. We feel like that Tier 3 is going to give us an opportunity again to probably capitalize on an increased demand with a limited supply.

So is it primarily a new equipment issue, Peter, compared with used equipment?

Really, Rob, we look as that as one and the same because of the fact it's all determined on how you book in. When you make a transaction and you take in a trade machine with the residual value it's all in how you book that into your system. You can make that so that it shows the new being a lower margin and the used the higher or you can put it in with the opposite effect.

So we really look -- when we look at our business we look at it on the overall equipment margins.

A point you have made many times before. I should have been paying more attention. Okay, that is what I had. Thanks.

Paul Mammola, Sidoti.

Just a couple of follow-ups on CNH. It seems like high horsepower tractor and combine sales are off to a better-than-expected start this year. Do you think that CNH's strategy to underproduce the retail channel could affect their competitive position in North America this year?

Well, CNH is definitely ramping up production in line with the increased industry numbers in the first quarter so we are seeing an increased amount of production coming from CNH. So they are definitely focused on their market share in North America and they are going to gear up their production in line to meet their market share goal as a company.

So we are seeing that -- early on in January this year I think we saw evidence of really increased industry members and then I believe CNH has reacted accordingly to keep pace in production as much as possible with the leadtimes that are affected.

Okay, that is good to hear. The other question I had on CNH was, Dave, I think we had talked about it a couple of months back, but as you have evaluated is there any affect on you guys from Fiat spinning out CNH?

Well, from every word that I get from the executive management team at CNH it's business as usual. That this is more of the behind-the-scene type activity that is going to take place; it's not going to effect what is happening in the marketplace. So I think long term I am very confident in the management team and what they are going to do for the best interest of the Company and the dealers and the customers out there.

So I think this is going to be a positive when all is said and done to have this industrial group and to be focused on that type of business in separation from the automobile business. So I am looking at this as going to be a positive and I am looking forward to seeing what the results are.

I am sure as we watch and see how this develops throughout the year I think it's going to be interesting and in the best interests of the strong brands that CNH has.

Okay, great. Thanks again.

Brent Rystrom, Feltl & Company.

Kind of an esoteric question for you but driving around looking at dealerships I have noticed, not at your dealerships but at like Midwest Machinery, Red's down in Iowa, Arnold's kind of in central and southern Minnesota, kind of a build up of forage harvesting and windrower type equipment. And for some reason you guys seem to don't have that issue.

Have you guys noticed something in the market that hit that particular segment?

Well, it's pretty obvious here we are coming off of a couple of years of pretty depressed dairy and livestock prices. All of a sudden I think if you look at some of the -- especially cows right now are really taking an uptick here in the last quarter. You will still see the volatility in the dairy.

So I think in some of those markets you have talked about there are fairly high in the self-propelled forage harvester business. They have really taken some big hits on the dairy which Titan hasn't been that big a player in that market.

Okay, so just a market positioning as opposed to something strategic you did different?

Right you see a lot of focus in our dealerships on the tractors and the combine business. Even though we do play in that market and stuff, we have done a lot of things internally I think on the bailer and the windrower and the hay equipment business to try to turn that price and get it through our system.

But like I say you just have to take it in the size of that product offering is, as far as our total offering, I would say we are much more dominant on the large tractors, four wheel drives, and combines.

Okay. And then on the Ag side on the used equipment, I know you had cautioned that you were worried about -- the big thing you wanted to watch was where margins were on the used equipment. Just from my observation perspective from auctions and going to dealers it seems like the used margins seem to be kind of upticking a bit actually right now.

Yes, I think we saw in some of these earlier sales, these farm sales -- I think tractors still seem to be maintaining and doing a good job on tractors. But we continually have to be careful on all of our used. I think we have a lot of built-in checks and balances and trigger points internally in the way we compensate our people to keep the used turning through the system ramped in beyond the market and to turn it.

So like I say, that is the biggest part of this business is moving the used. I think we are good at that but we have got a lot of built-in things in our systems and processes to ensure that we are moving the used through the system.

As a final question, as we model the used tractor equipment specifically through the year should it be building now and then coming down a bit late summer and then building again in the fall? How would that typically build in the course of a year?

What happens is we are delivering equipment into the first quarter. New equipment you have those trades and ideally you like to get those trades delivered into that spring work time period.

Then there is other used tractors. Some are used for livestock that happens the mid-year and then towards the end of the year you are going to see quite a bit of activity with the remainder of the Tier 3 engines, which we will take trades. But what we anticipate may happen is some of these late-model Tier 3 engines are actually going to see some strong resale values because of the fact that they have got the Tier 3 engines in them and that their customers are very accustomed to that tractor, those models, and the performance of those tractors and the reliability.

So we think we are going to continue to have a strong tractor sales, especially the late models with the Tier 3 engines.

Okay. Thanks, guys.

That does conclude today's question-and-answer session. At this time I would like to turn the conference back over to David Meyer for closing remarks.

Thank you for listening to our call today. We look forward to speaking to you again when we report our second-quarter results in September. With that, everyone have a great day today. Good bye.

Once again that does conclude today's conference. Thank you for joining.