Titan Machinery Inc (TITN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen; thank you for standing by. Welcome to today's Titan Machinery Inc. second-quarter fiscal 2011 earnings conference call. At this time all participants are in a listen-only mode. Following the formal remarks we will conduct a question-and-answer session; instructions will be provided at that time. Hosting today's conference will be John Mills, with ICR. As a reminder, today's conference is being recorded and now I would like to turn the conference to Mr. Mills. Please go ahead, sir.

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

By now everyone should have access to the earnings release for the fiscal second quarter ending July 31, 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're providing a slide presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the investor relations tab. 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 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 or two questions and then rejoin the queue. With that I'll turn the call over to be Company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our second-quarter fiscal 2011 conference call. On today's call I will provide highlights of our second-quarter results, discuss our reiterated fiscal 2011 guidance and provide a general update on our business. Then Peter will review the financial results of the second 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 our website.

On slide 2 you will see our fiscal second-quarter 2011 results as well as year-to-date results. Our revenue for the second quarter was $209.7 million and our pretax income was $4.6 million and we earned $0.15 per diluted share. Looking at our results for the first half of the year, our revenue was $415.1 million; pretax income was $7.2 million and we earned $0.24 per diluted share.

We are pleased with the progress of our business for both the second quarter and the first six months of fiscal 2011. Our agricultural equipment revenue was higher and margins were slightly lower than the prior year quarter due to competitive pricing which put pressure on our overall gross margins compared to the second quarter of last year. With that said, we view it as a positive indicator that we are consistently growing our topline revenue.

In addition, we believe our seasonally high second half of the year and improvements in our Construction Business have us well-positioned to achieve our guidance this year. Based on our year-to-date results and our outlook for the remainder of the year, we are reiterating our annual revenue and earnings per share guidance.

Turning to slide 3, you will see that we continue to expect to generate between $920 million and $980 million in revenues. Our net income is expected to be in the range of $16.7 million to $18.5 million resulting in earnings per diluted share in the range of $0.92 to $1.02. Peter will provide additional information on our modeling assumptions related to our annual guidance.

Regarding acquisitions, in the second quarter we closed on the acquisition of Hubbard Implement, an agricultural equipment dealership and Iowa Falls, Iowa. We continue to see a healthy acquisition pipeline of potential agricultural and construction acquisition candidates in the upper Midwest. It is important to remember that historically we have delivered on growth from acquisitions while maintaining pricing discipline.

There will be timing fluctuations in closing of acquisitions as we continue to make selective acquisition choices. We are currently in discussions with a number of single store dealerships as well as larger multi-store dealerships and are confident these acquisitions will support our annual acquisition revenue growth rate. Also, we believe the year-end change in the 15% capital gains tax rate will support increased acquisition activity in the fourth quarter of calendar year 2010. Now I would like to update you on our industry segments.

On slide 4, we outline an update on our Agriculture industry. In our region, producers are experiencing favorable yield reports across our footprint in the upper Midwest and the wet conditions in a few of our regions during the second quarter did not have a material effect on our sales. Also, there has been a decrease in global supply coupled with a strong demand which lead to increased agricultural revenue for our producers.

Crop prices have experienced a rally during the last four months and producers have an opportunity to lock in price increases for calendar year 2011 which provides a positive outlook for the second half of this year as well as calendar year 2011. The combination of good to excellent crop yields, better pricing, lower input costs and ample access to credit support increased producer profitability in our outlook for the back half of this year.

Regarding equipment, as we mentioned on our last call, starting January 1, 2011, Tier 4 emission requirements will take 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 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 rollout forecasts for first quarter of 2011, which we believe will create pre sell activities in Q4 of our current calendar year.

On the tax side of the business, the $250,000 section 179 Depreciation Tax Incentive has been this extended through December 31 of this year. Taken in conjunction with the belief that calendar 2010 will be a high farm income year, we believe many producers will be more motivated to complete their purchases by year end.

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

Now turning to the Construction segment of the business on slide 5, we have outlined an overview on the Construction industry and our market. We are experiencing strength across many of our regions due to a number of factors. As an example, we are seeing increased activity in the Bakken oil formation which is within our Titan footprint in North Dakota and Montana.

North Dakota is now the fourth largest oil-producing state behind Texas, California and Alaska. This has a multiplier effect on our economy as there is need for additional infrastructure, expanding housing starts as well as other support industries.

We're also seeing increased purchasing from agriculture producers for our Construction equipment. Recent equipment auctions have confirmed our belief of used construction equipment values firming over the last six months. We believe this is due to customers reinvesting in equipment after the downsizing of the North American equipment fleet that took place last year. We continue to execute on our Construction Business Action Plan which we discussed on our last conference call.

We are pleased with the initial positive impact of our Action Plan on our second-quarter results. The four key elements to our plan are -- number one, rightsizing our rental fleet; number two, improving key personnel; number three, closing of an underperforming store; and number four, we are working diligently to fully implement our Titan store operating model in the construction equipment dealerships we acquired in fiscal 2009.

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 controllable aspects of our business will enable us to generate improved results even if we do not see improvements in the industry.

We are pleased with the sales growth for this segment. 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.

While Peter will discuss the same-store sales in a moment, I would like to highlight that our Construction segment's second-quarter same-store sales increased 18.7% and prior to the prior-year period. This improvement underscores our successful execution on these initiatives in the first half of the year. Also, we are confident that we are on track to reduce or construction loss by 50% this year compared to the last year due to our increasing sales and our anticipated reduction on floorplan expense.

In summary, our solid sales results indicate that demand for our products remains strong and we look forward to continuing our long-standing tradition of providing our agricultural and construction equipment customers with superior offerings and service. 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 6. Our total revenue for fiscal 2011 second quarter grew 8.5% to $209.7 million compared to the same period last year. Once again we experienced increases in all three of our main revenue streams.

Turning to slide 7, our gross profit for the quarter was $36 million, flat compared to last year. Our gross profit margin declined to 17.2% from 18.6% last year. The decrease in our gross profit margin was primarily due to lower equipment margins declining 1.4% on a year-over-year basis reflective of the competitive pricing pressure. However, our second-quarter equipment gross margin improved to 9.7% from 9% in our first quarter.

Our service margins were lower this quarter due to seasonality and to higher labor costs of sales related to the investment in new technicians through headcount additions, internship programs and service training during this period.

Our operating expenses as a percentage of net sales in the second quarter of fiscal 2011 were essentially flat at 13.9% compared to 13.8% last year. Our second-quarter pretax income margin was 210 basis points lower this year compared to last year.

In addition to the lower equipment and service margins, 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. Our higher balance of interest-bearing floorplan notes contributed about $500,000 of additional floorplan expense.

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. Our higher interest rates contributed approximately $480,000 to our floorplan interest expense.

Our current rates are reflective of the previous construction and credit market. 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 in the fourth quarter of fiscal 2011. Earnings per diluted share for fiscal second quarter 2011 were $0.15.

Turning to slide 8, you'll see our revenue for the first six months of the year. We generated $415.1 million in sales for the first half of fiscal 2011 which represents a 15.5% increase compared to the first half of last year. The increase was driven by both organic and acquisition growth. All three of our revenue streams contributed to this growth.

On slide 9, our gross profit for the first six months of fiscal 2011 increased 9.2% to $70.5 million. Our gross profit margin declined 90 basis points to 17% primarily driven by lower equipment margins. Operating expenses were flat at 14.2% and in line with our expectations. Additionally, higher floorplan interest expense pressured our pretax margins which declined 140 basis points versus the comparable period last year to 1.7% for the first six months of fiscal 2011.

Now turning to slide 10. You'll see an overview of our segment results for the second quarter. Our Agriculture segment revenue growth was primarily driven by acquisition growth. Our Agriculture pretax income was down compared to the same period last year as a result of our lower equipment margins and higher floorplan interest expense.

Turning to our Construction segment, we are pleased with the 18.7% sales growth, which is primarily due to organic growth and highlights the execution of the Construction Business Action Plan. Our Construction segment loss includes $92,000 related to the closing of our Columbia Falls construction store. Included in the results was increased floorplan interest which offset our improved gross profit as a result of higher construction equipment revenues.

We're 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. We expect to achieve our target of a 50% reduction in our Construction segment loss. I'd like to point out that during the back half of fiscal 2010 we lost approximately $4.1 million on the construction side of our business and we believe we are well positioned to reduce this loss.

Slide 11 shows our segment results for the first six months of the year. Our increased agriculture sales reflect both acquisition growth and strong organic growth. Our Construction segment sales reflect strong organic growth. The pretax income was impacted by the factors previously discussed.

Turning to slide 12, this shows our same-store sales results for the second quarter of fiscal 2011. Our overall same-store sales increased 3.4%. It's important to remember that we had a very strong same-store sales increase last year of over 20%.

For the second quarter, overall same-store gross profit decreased 4.3% year over year with our agriculture same-store gross profit decreasing 7% and our construction same-store gross profit increasing 7.8%. Our same-store gross profits are down primarily due to margin compression in this quarter.

Slide 13 shows our same-store results for the first six months. Our overall same-store sales increased 7.9%. Our agriculture same-store sales increased 6.4% and our Construction same-store sales increased 16.3%. Overall, same-store gross profit decreased 2.9%. Our Agriculture same-store gross profit increased 0.8% while our Construction same-store gross profit increased 13.3%.

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 are comparing. In other words, the only stores that were part of Titan for this entire three months of the second quarter of fiscal 2010 and second quarter of fiscal 2011 are the ones that are included in the second-quarter same-store comparison.

A total of nine locations were not included in our second-quarter same-store results, eight Agriculture stores and one Construction store. And a total of 11 locations were not included in the first six months, nine Agriculture stores and two Construction stores.

On slide 14 we are giving an overview of our modeling assumptions for the full-year forecast. As David mentioned earlier, we are reiterating our fiscal year 2011 forecast. I'd like to provide some color on our modeling assumptions that support this forecast.

Originally, we had modeled Agriculture same-store growth at flat to up 5%. With our increased visibility we've increased our same-store sales expectations to a range of 3% to 8% growth. We're confident we'll have a strong second half in the Agriculture segment of our business. Our 15% to 20% same-store growth for the Construction segment is on track through the first six months of the year and we believe we'll remain in this range for the remainder of the year.

A few of the factors contributing to our targeted 50% improvement in our Construction segment loss is a reduction in our floorplan interest expense in the second half of this year and leveraging our operating expense over increased annual sales volume in this segment.

Equipment sales have been tracking strong through the first six months of this year, but our equipment margins have been compressed due to competitive pricing pressure. Originally we had modeled our business with 10% equipment margins for the year, but now with increased visibility we expect equipment margins for the year of approximately 9.5%.

It's important to remember that our year-to-date equipment margin of 9.3% does not include any of the manufacturer incentive programs that we have historically received during the second half of the year. We feel our view of the agriculture and construction industry for the back half of this year is in line with published forecasts for the large manufacturers.

On slide 15, we give an overview of our balance sheet highlights at the end of the second quarter of fiscal 2011. We continue to have a very strong balance sheet with cash and cash equivalents of approximately $61 million or $3.40 per fully diluted share in cash to pursue future acquisitions and fund working capital and general corporate purposes.

To support our seasonally stronger back half of the year, we increased our inventory $72 million year-to-date, of which new Agriculture equipment inventory was up $63 million and used Agriculture equipment was up $6 million. Construction equipment inventory was down $1 million. Parts and service inventory was up $4 million.

We've increased our Agriculture inventory levels to support our annual sales plan, which is weighted to be back half of the year, and feel confident that with the introduction of Tier 4 technology in 2011, and the high farm income levels, we are positioned correctly for the second half of our fiscal year.

Working capital at the end of the second quarter fiscal of 2011 was $156 million. Long-term debt, including current maturities on advances, was $33 million at the end of the second quarter. As of July 31, 2010, we had $82 million available of our $400 million total floorplan lines of credit. We recently increased our floorplan line from $365 million to $400 million.

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 16 gives an overview of our cash flow statement for the first six months of fiscal 2011. 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-manufacturer floorplan proceeds, our first six months of fiscal 2011 net cash flow from inventories was a negative $5.6 million. On our statement of cash flows, the GAAP reported net cash used for operating activities was $30.1 million. We believe including the non-manufacturer floorplan proceeds and the advances in contracts and transit as part of our operating cash flow better reflects the net cash flow of our operation.

Making these adjustments the net cash used for operating activities during the first six months was approximately $7.1 million. A reconciliation of this non-GAAP measure is contained in this slide which is posted on our website. With that I'd like to turn the call back over to David for final remarks.

Thanks, Peter. Overall, we are pleased with the direction of our business and our performance in the first half of fiscal 2011 and are confident that we can achieve our annual top- and bottom-line goals. The operating environment for our Agriculture customers remains favorable and reports of crop conditions on our key markets are extremely positive.

We also will continue to focus on executing on our action plan to drive improved results for our Construction business. Before we take your questions, I would like to conclude by thanking our employees for all of 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). Brent Rystrom, Feltl.

Good morning. Just a couple quick questions for you. Looking through your inventory, you're pretty light on new product, particularly the larger product. I'm curious as to the inventory supply situation with CNH. I know they had under planned kind of where the market was for the first half of the year. Are you seeing them come back aggressively with supply here in the back half?

Brent, good morning, and as we went through the -- like the first half of the year, we saw month after month scheduled price increases and CNH is definitely producing to the industry and to the market. So we're going to continue to see -- market share is a big item not only for CNH, but also for the dealers. So we continue to see aggressive production schedules to meet the industry and also to meet the dealer demand. So yes, I'm very confident we're going to have the product that we need to hit our revenue and share targets.

And then I'm curious if you're seeing -- we've been talking to a few of the banks and financial companies serving particularly the upper Midwest, like AgStar and some of the other ag thanks and we're hearing discussions of much higher applications for credit for capital equipment than your comps are implying. Some of the banks are talking about fourth-quarter applications for capital equipment credit being up 20%, 25% over last year. Any thoughts on that?

Well, like we said in our comments here, we think there's going to be a lot of income end of this year. Not only have we seen some strengthening of the commodity prices and you could possibly have commodities not only from calendar year 2009 but also 2010 sold in this calendar year which could create some tax situations for some of our customers.

So that -- we've got the section 179 with the $250,000. There are some people buying the Tier 3 engines in this year, so I think there's a lot of planning going on with our customers and they're working with their bankers.

And I think some of the -- where some of these loans have gone in the agricultural community in the past, maybe by a handshake type of deal, now a little bit more formal loan requests, we're seeing the i's dotted and the t's crossed, so you're probably seeing some -- a little bit more formalized loan applications, so that may be part of that, Brent.

Great, thank you much. I'll hop back in the queue.

Paul Mammola, Sidoti & Company.

Hi, good morning, everyone. If we get -- starting Construction equipment -- I guess I'm curious, is the incremental interest expense the only piece that is muting the sales growth there? Is there some other cost that's also mixed in that's preventing any leverage in that segment?

Well, we've had strong same-store sales in the first six months and what is important to remember is that loss that we had in the back half of the year last year. And in that business we think that we're well positioned to reduce that significantly in the back half of the year.

And the other thing you do need to keep in mind is when we look at extra expenses in the first half of the year. We have put $212,000 in for our closing of the Columbia Falls store. It was part of our Construction Business Action Plan, so that would be one of the additional items.

Okay, so I guess asked differently, if you were just to compare 2Q this year versus 2Q last year, I mean the loss is similar, sales are up substantially. Is the only difference -- or is the (inaudible) the incremental margin that should be there really just the interest expense or is there something else in cost, 2Q to 2Q?

We were looking at -- when we look at it that way, Paul, about half of that is due to interest expense and the other half is in our operating expense which includes the $212,000 for the Columbia Falls store closing.

Okay, understood. On the ag side, can you give us a sense of how sales have trended in August, September. I guess I'm curious, has the inventory build in 2Q paid off or is it too soon to tell?

Well, right now we've got some pretty favorable -- we had a great wheat crop out there (inaudible) markets, we're seeing some development -- I talked to a grower the other day and I said, hey, how's your crop right now if we had a freeze right now? And they're saying right now the crop is pretty mature in most of our markets.

So it's way ahead of last year. We're in great shape from a weather standpoint. So there are a lot of positives out there right now, so we're tracking in line with our expectations and I think everything seems pretty positive from what I can see from both a crop development and a pricing standpoint.

Okay, and then to follow up on something, Peter, I think you said in the prepared remarks -- I think you said dealer incentives are not factored in for the back half of the year. Is it to imply that they're not there or you just don't have them factored into your forecast?

Paul, what I brought up in my prepared remarks was the fact that given the fact that we're tracking at 9.3% on our equipment margins for the first half of the year and that we're modeling at 9.5% -- just to give you some comfort in the 9.5%, I just wanted to make sure that everyone understood that we don't include any of those manufacturer's incentives as part of our gross margin in the front half of our year.

Because we received those in the back half of the year, and we do have some of those factored into our model but we don't have all of them because as we talked about on previous calls, there are certain different levels of performance that those incentives are attached to and we know that we get kind of a base amount of those, but there's a lot of variability to that. The important thing is to remember that all of that happens in the second half of the year.

Okay, got it. Thanks for your time.

Rick Nelson, Stephens Inc.

Thank you and good morning. I'd like to follow up on the refinancing of your floorplan line, where you stand with that and what sort of rate we might be looking at.

Yes, our average rate right now, kind of a weighted average because we have different rates with the different floorplan arrangements that we have between CNH and GE Capital and Agricredit and Wells Fargo. Kind of the average on that for the first $150 million is about 5.9%, Rick. And what we're working on is a deal for renegotiating that and I'm really not in a position to discuss to any greater detail on who or how, but we anticipate reducing exposure to that rate pretty significantly in the back half of this year, primarily in the fourth quarter.

And, Peter, is that built into your guidance for the halving of the construction losses? I know you mentioned floorplan interest was one of the drivers?

What we did is we built in our reduced exposure to how much floorplan we were going to have just because of the fact, Rick, that I mentioned in my prepared remarks that traditionally we've gone at about a 50% run rate on our interest-bearing floorplan percentage on the Construction segment. And that last year in the back half of the year that jumped up in the 70s, and it went as high as 77%.

We've seen that come down now by the end of our second quarter. And so when we did our assumptions we just modeled the thing that with the increase in the sales that we're getting that we would be reducing the amount of floorplan interest that was exposed to interest-bearing.

Okay, thank you for that. If I could ask just one more on the acquisition pipeline with the new cap gains rate coming, it sounds like things are pretty full there. How fast do you think CNH would let you grow if the opportunity were there?

Well, right now, we've I think demonstrated that we've been an excellent distribution partner for CNH as we go out and buy underperforming dealerships and (inaudible) grow share. So CNH has brought a lot of our acquisition targets to us, Rick, and so right now we're working hand-in-hand with CNH and as far as all of these acquisition targets, where the leads are in the marketplace, we have quarterly meetings with them to discuss our growth strategy and we have both long-term and short-term plans for this.

So it's one of these deals, I think, that we don't want to draw a line in the stand and say this is what this is and what -- where this -- I think is look at -- have selective acquisition targets out there, be opportunistic with these things and work hand-in-hand with our manufacturer to do the best job we can and pick really choice acquisition targets out there, Rick.

Thank you. Good luck.

(Operator Instructions). Chris Weltzer, Robert W. Baird.

Good morning, guys. I'm wondering if you could talk a little bit about how CNH is handling the changeover from Tier 3 tractors to Tier 4. When does availability of Tier 3 machines go away and is that really what's driving some of this inventory increase we're seeing now?

Well, what we're seeing here is the final production for Tier 3 engines was scheduled through the calendar year 2010, the fourth quarter. You may see a little bit of overlap depending if there are some excess engines. (inaudible) this involves some of these trade-offs for some of these carbon credits you may see a little bit of this trickle into the first quarter of 2011 for some Tier 3 engines.

Now we're already seeing some Tier 4 starting to show up in certain models, so you're going to see this transition take place in the fourth quarter of 2010 and then into the first couple of months in the calendar year 2011. So for the most part we've seen the end of Tier 3 engines being produced here; in the next few months it's going to be end gate of that.

So that's been a really good engine, these Tier 3 engines. We've had a lot of customers that have liked the productivity and the reliability of those engines. And so we're going to see -- now at the same time if we're seeing some of these Tier 4 engines out there that you're seeing fuel savings on or you're seeing some decreased operating costs and we've had a lot of seminars and meetings for our customers here.

You're seeing at all of these major farms shows out there that there's a lot of interest at all the manufacturers' booths regarding this Tier 4 technology, so you're going to see a lot of farmers wanting to pre buy some of these Tier 4 engines just because of the huge savings out there on the fuel side.

So, the second part of your question is say which direction CNH is going, they're likely to go with the go SCR technology on the high horse powered tractor, which you do see that big -- economies or fuel savings with the SCR as opposed to the EGR technology.

Oh, right, right, right. And are you going to be selling diesel emission fluid? Is there going to be some investment required for that infrastructure?

That's a real minimal expense, they call it DEF fluid and a lot of your filling stations now you're seeing, because they're utilizing that, and a high percentage of the over-the-road semis that have been sold recently. So no, that's going to be pretty simple to handle that. I think if you look at the growers out there and what they do on their farms for chemicals and diesel fuel and some of this -- it will be a pretty easy step to handle that DEF fluid.

Okay, and just trying to put sort of a rough box around it. Roughly what percent of your equipment sales are products that are going to be impacted by the changeover at the start of 2011? In other words, the tractor side?

Well, tractors, you're going to probably look at somewhere between one-third to a half of our business is going to involve tractors. Now another note, this is all going to take place for combines in calendar year 2011. Now some of the same things are happening. I believe there are enough carbon credits out there right now so that they could delay the combine changeover next year.

So over the next two years you're going to see pretty much all our major products are going to be involved in this Tier 4 technology. Keep in mind now, this is just the first step. 2014 there's going to be much more stringent requirements of the Tier 4 technology too, so this is an interim step right now.

Okay, and then last question -- last call you talked about operating expenses probably sort of rising modestly through the year, did a little bit better than that in the second quarter. Can you talk about how you think the second half of the year is going to play out from an operating expense perspective?

I think it will track in line with our historical -- basically the second half -- what we see is we see much higher revenues and a large percentage of our operating expenses are basically fixed. So that's where we get a lot of leverage in the second -- in the back half of our year.

Right, but we would -- when you say a normal seasonal pattern, that would be for operating expenses to increase modestly in the second half of the year?

To give a little bit of color on it, when we get that increased operating leverage it would be about 2% lower in the back half of the year.

I'm sorry, what would be 2% lower?

The operating expenses as a percentage of sales.

Oh, as a percent, got it. Okay. Thank you, guys.

Because of the increased leverage on our higher revenue base in the back half of the year.

Got it. Thank you.

Tom Varesh, M Partners.

I good morning. I just have one question. If I'm thinking about the Iowa region in particular, we've heard about the positives with respect to the crop, but what are the risks that are facing in the crop given the wetness that they had in June and July? And what are the possible implications for Titan into your forecast in the back half of the year?

Well, in traveling around Iowa and pulling a lot of our store managers in Iowa, we're seeing a large part of Iowa -- even though there was plenty of rainfall -- it takes rainfall to get good yields. And now one thing about the landscape in Iowa, it's predominately fairly rolling country and all the land in Iowa is tiled, so you're seeing -- a high percentage of the land in Iowa is tiled.

So you're seeing a lot of your creeks are full, you've got your rivers are full, you're maybe seeing your real low bottom land might be a little bit wet, but overall, you've got some pretty good growing conditions in Iowa and you're going to see some good yields. I know the USDA is going to be coming out with some reports here later this week.

Right now they're talking about this 164.8 bushel acre average. There are some prospects that say that make them down a little bit. But I'll tell you, from all of my talking to my salespeople and our growers in Iowa; I think they're fairly happy with their yield prospects for this year. And one thing you have to keep in mind when you talk about flood coverage and you hear some of the news and stuff, a lot of that has to do with your cities and your areas where these rivers congregate.

But really what effect that has out there in the country on this rolling ground that's tiled is it's little and you do need moisture in order to get these really high yields and (inaudible) a big chunk of our markets out there with this added participation. We're seeing some exceptionally strong yields in areas that typically are probably a little bit short of rainfall.

So overall I'd say in our markets, this weather has been above average I guess or conducive to growing really good crops right now. (Multiple speakers) another thing to keep in mind too a little bit, when we get this wet harvest, that tends to make more of a demand for our equipment -- equipment with tracks on it, duels. These customers that tend to -- more green carts, it tends to be a little bit better for our business if things are a little bit stressed. But overall, I think the crops look pretty good in our regions.

Okay, thank you.

(Operator Instructions). Brent Rystrom.

Yes, just a quick question. As far as EPS thoughts for the back half of the year, I would assume a lot of this stuff is going to impact, as you discussed, the fourth quarter relatively favorably. Would you expect the fourth quarter to have seasonally maybe a little more profit importance than it has historically?

Yes, it would have a little bit more than historically. We just have so many different factors entering into that fourth quarter with that year-end buying with the Section 179 tax depreciation and this Tier 4 technology coming on line in the first quarter of calendar year 2011, so there will be a little bit more significance in the fourth quarter.

Great. Thank you, guys.

We have no other questions at this time. I'd like to turn it back to our presenters for any additional or closing remarks.

Well, I want to thank everybody for listening to our call today. We look forward to speaking with you again when we report our third-quarter results in December and everyone have a very good day today.

Thank you. That does conclude today's conference. Thank you all for your participation.