Titan Machinery Inc (TITN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's Titan Machinery Inc. third-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. (Operator Instructions). 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 over to Mr. Mills. Please go ahead, sir.

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

By now, everyone should have access to the earnings release for the fiscal third quarter ending October 31, 2010, which went out this morning at approximately 7AM 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 call today, we ask that you keep your question period to one or two questions and then rejoin the queue. David Meyer will provide highlights of the Company's third-quarter results, discuss our increased fiscal 2011 revenue and earnings per share guidance range, and provide a general update on our business. Then, Mark Kalvoda will review our financial results in more detail, and Peter will discuss our segment operating results and outlook modeling assumptions. And we will then open up the call to take your questions.

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

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

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 our website.

On slide 2, you will see our fiscal third-quarter 2011 results, as well as year-to-date results. Our revenue for the third quarter was $311.3 million, our pretax income was $12.8 million, and we earned $0.42 per diluted share.

Looking at our results for the first time nine months of the year, our revenue was $726.4 million, pretax income was $20 million, and we earned $0.66 per diluted share. We are pleased with our third-quarter and year-to-date results. Our top line benefited from strong organic growth in both our agricultural and construction segments. Our ag business was driven by a continuation of strong operating environment for our farmers and the demand for Tier 3 equipment. We were also encouraged by the improvements in our construction business results, which underscore successful execution on our construction business action plan.

Now I would like to update you on our industry segments. On slide 3, we outline an update for our agricultural industry. We continue to be excited by the momentum and outlook for the ag industry.

In the key harvest months, we experienced very favorable harvest conditions and crop yield reports in the upper Midwest. In addition, our producers' fall tillage and field preparation has them well positioned for favorable planning conditions in spring 2011.

Following a dip in farm cash receipts and farmers' net income last calendar year, USDA is projecting solid increases in cash receipts and farm net income in calendar year 2010, and the industry expects continued increases in cash receipts for calendar year 2011.

Regarding equipment, continued producer profit and ample access to credit is driving demand for Tier 3 inventories, as well as presell over a Tier 4 product. As we mentioned on our previous calls, starting the first quarter of calendar year 2011, Tier 4 emissions requirements will take effect for our tractors that have 175-horsepower engines and above and for four-wheel-drive tractors. For combine emission requirements, it is projected for the fourth quarter of calendar year 2011, in conjunction with 2012 model year rollouts. For engines below 175 horsepower, the dates vary throughout the first half of 2011.

On the tax side of the business, the Section 179 depreciation tax incentive has been raised to $500,000 from $250,000 and extended through December 31 of this year. Also, 50% bonus depreciation tax incentives are available through December 31, 2010. Taken in conjunction with the belief that calendar year 2010 will be a high farm income year, we believe many producers will be motivated to complete their purchases by year end.

In summary, fiscal 2011 will be another strong year for our agricultural business and should support our increased full-year outlook.

Now, turning to the construction segment of the business, on slide 4, we have outlined an overview on the construction industry in our market. We are experiencing an improvement across many of our regions due to a number of factors, including the oil industry. As many of you are aware, our stores are capitalizing on the Bakken, Three Forks, and recently discovered Tyler oil formations, which are all within our CE footprints in the Dakotas 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 it increases the need for additional infrastructure, expansion of new housing, as well as other support industries.

Other factors influencing Titan's construction segment is the lower unemployment rate in the upper Midwest relative to the national average, and the increased farm cash receipts in the Titan footprint.

Early indicators suggest an improvement in the construction industry. These include increasing used equipment auction values, increasing demand for rental equipment, and increasing manufactured backlogs. We continue to execute on our Construction Business Action Plan, which we discussed on our previous conference calls this year. The four key elements to our plan are right-sizing our rental fleet, improving key personnel, closing an underperforming store, and working diligently to fully implement our Titan store operating model in the construction equipment dealerships we acquired in fiscal 2009.

Although the construction industry appears to be improving, we have taken the necessary steps to manage to the controllable aspects of the business to ensure that we will be successful regardless of industry conditions. These factors and our continued execution of our construction business plan contributed to our strong construction revenue growth this quarter.

Based on these industry overviews, our year-to-date results and our operating outlook for the final quarter of the year, we are raising our revenue and earnings per share guidance range for the full year ending January 31, 2011.

Turning to slide 5, you will see that we now expect to achieve revenue for the full year ending January 31, 2011, in a range of $970 million to $1.02 billion compared to the previous range of $920 million to $980 million.

Earnings per diluted share is now expected to be in the range of $0.95 to $1.03 compared to previous guidance of earnings per diluted share in the range of $0.92 to $1.02.

Regarding acquisitions, on slide 6, we've highlighted our recent acquisition announced earlier this week. This acquisition includes six dealerships that offer one or more of the Case IH, New Holland Agricultural and New Holland Construction brands. These dealerships are located in Grand Island, Kearney, Lexington, Holdrege, Hastings, and North Platte, Nebraska.

The acquisition is expected to close on or around December 31, 2010. The deal structure is consistent with previous acquisitions, and we expect this acquisition to be accretive to earnings in fiscal 2012.

Fairbanks International was started by the Fairbanks family in 1910 and has been selling equipment for over a century. The six dealerships are well situated along the I-80 corridor in Nebraska, which is some of the most productive agricultural land in the world. They're strategically located on top of the Ogallala Aquifer, one of the world's largest aquifers, provides irrigation resources resulting in concentration [in a tense] agriculture, high yields and diversification through all weather cycles.

The Fairbanks acquisition marks Titan Machinery's first agricultural dealerships in Nebraska and complements our construction equipment dealerships already existing in Omaha and Lincoln, Nebraska. In its most recent reported fiscal year ending December 31, 2009, Fairbanks International generated revenues of approximately $85 million.

Strategically, we are optimistic about the long-term growth opportunities in Nebraska. I have personally known the Fairbanks family for over two decades, and I see many similarities in our operations and business philosophies. They have created and implemented the leading-edge product support best practices that have become standards in the industry, and we are excited to bring the expertise and talented group of employees to be part of the Titan Machinery team.

Upon the closing of this acquisition, our network will consist of 77 dealerships in North Dakota, South Dakota, Iowa, Minnesota, Montana, Nebraska and Wyoming. We continue to see a healthy acquisition pipeline of both agricultural and construction dealerships throughout the entire upper Midwest. And we will continue to make selective and strategic acquisition choices. CNH has been a strong supporter of our acquisition efforts, and we are thankful to be associated with this well-run organization representing such powerful brands.

I would also like to mention that this morning we filed an 8-K to announce our intention to file a universal shelf registration statement on a Form S-3. The offering of securities to be covered by the shelf registration statement is designed to provide us with a greater flexibility to take advantage of financing opportunities, acquisitions and other business opportunities when and if these opportunities arise.

If and when the shelf registration statement is declared effective, it will allow us from time to time to offer and sell up to $250 million of equity and debt securities. Our announcement today is not an offer of any securities for sale, and we currently have no specific plans to offer securities covered by the registration statement, nor are we required to offer the securities in the future.

In summary, the third quarter was a strong performance on all fronts for our business. We are pleased with the growth of both of our segments, which is supported by encouraging industry trends. In addition, we continue to make internal improvements to ensure we remain on the path of profitable, long-term growth. We're looking forward to continuing to capitalize on the opportunity ahead of us by providing our agricultural and construction equipment customers with superior offerings and service.

With that, I would like to turn the call over to Mark Kalvoda, our Chief Accounting Officer.

Thanks, David. Turning to slide 7, our total revenue for fiscal 2011 third quarter grew 37.1% to $331.3 million compared to the same period last year. Increased revenue from all three of our main revenue streams continues to drive our quarter-over-quarter growth.

Turning to slide 8, our gross profit for the quarter was $48 million, a 21.2% increase compared to the prior-year quarter. Our gross profit margin declined to 15.4% from 17.4% last year.

The change in the gross profit margin was primarily due to equipment margins declining 1.9% compared to the same period last year. The equipment margins reflect the competitive pricing pressure and the timing of an annual manufacturer incentive program, which was recognized in the third quarter of fiscal 2010, but not recognized in the third quarter of fiscal 2011. The incentive program date moved to December this year compared to October last year.

In the fourth quarter, we anticipate the equipment margin to improve compared to the third quarter as a result of the incentive program previously mentioned, continued equipment demand, and a tightening in the supply of equipment to be sold.

We improved our operating expenses as a percentage of net sales in the third quarter of fiscal 2011. Expenses decreased to 10.5% of sales compared to 12.2% last year. This 1.7% improvement reflects our ability to leverage fixed operating costs across higher revenues. As an example, our construction operating expenses were 18.4% of construction revenue compared to 24.2% in the prior-year quarter.

Our pretax margins are relatively flat comparing this quarter to the same period last year.

Earnings per diluted share for fiscal third-quarter 2011 increased 31% to $0.42 compared to $0.32 in the third quarter last year.

Turning to slide 9, you will see our revenue for the first nine months of the year. We generated $726.4 million in sales for the first nine months of fiscal 2011, which represents a 23.9% increase compared to the first nine months 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 10, our gross profit for the first nine months of fiscal 2011 increased 13.8% to $118.5 million. Our gross profit margin declined 150 basis points to 16.3%, primarily driven by lower equipment margins as a result of the same reasons I mentioned when discussing our quarter results.

Operating expenses improved 90 basis points to 12.6% of sales. Our pretax margins reflect the change in lower gross profit margin and the improvement in our operating expenses as a percent of sales.

Turning to slide 11, we give an overview of our balance sheet highlights at the end of the third quarter of fiscal 2011. We continue to have a very strong balance sheet, with cash and cash equivalents of approximately $66 million or $3.63 per diluted -- per fully diluted share in cash to pursue future acquisitions and fund working capital and general corporate purposes.

Our inventory is up $82 million year to date to support our annual sales plan. I would like to provide more color on our inventory.

For the year-to-date comparison, new agriculture equipment inventory was $54 million -- was up $54 million, and used agriculture equipment was up $16 million, supporting our strong back half of fiscal 2011 demand.

Construction equipment inventory was up $7 million, with new equipment up $9 million and used equipment down $2 million, supporting our strong organic growth in our construction segment. Our parts and service inventory was up $5 million, reflecting our strong third-quarter revenue growth. In light of the tightening in the supply of equipment inventory, we feel confident in our inventory strategy.

Working capital at the end of the third quarter of fiscal 2011 was $160.2 million. As of October 31, 2010, we had $155.2 million available of our $475 million total discretionary floorplan lines of credit. Additionally, at quarter end, we had no amounts outstanding under our $25 million operating line of credit.

As previously announced, we entered into a new credit agreement on October 31, 2010, arranged by Wells Fargo Bank, with a syndicate of lenders consisting of Wells Fargo Bank, Bank of America, CoBank, U.S. Bank, Bank of the West and Bremer Bank. The new credit agreement became effective November 2 and provides for an aggregate $225 million financing commitment by the lenders, consisting of an aggregate floorplan financing commitment of $175 million and an aggregate working capital commitment of $50 million.

Slide 12 gives an overview of our senior secured credit facility. Borrowings under the new credit facility will carry an effective interest rate equal to LIBOR plus an applicable margin of 1.5% to 2% per annum based on our consolidated leverage ratio. The floorplan facility may be used to advance up to 90% of the value of eligible new equipment inventory plus 85% of the value of eligible used equipment inventory.

The working capital facility may be used to advance up to 80% of our eligible accounts, 85% of the value of our eligible rental equipment, 75% of our eligible parts and attachments inventory, plus 50% of our eligible work-in-process inventory.

In conjunction with entering into the new credit agreement, we repaid in full all floorplan outstanding under our wholesale financing agreement with GE Commercial Distribution Finance Corporation. Overall, we are very pleased with the terms of this agreement, as it will enable us to lower our borrowing costs beginning in the fourth quarter of this fiscal year. We expect to achieve annual borrowing cost savings of $0.10 to $0.12 per diluted share. Our ability to attain this lower cost of borrowing is a reflection of our strong balance sheet and fiscal discipline.

Slide 13 gives an overview of our cash flow statement for the first nine 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 the statement of cash flow as both operating and financing activities.

When considering nonmanufacturer floorplan proceeds, our first nine months of fiscal 2011 net cash flow used for inventories was $9 million. On our statement of cash flows, the GAAP reported net cash used for operating activities was $41.3 million. We believe including nonmanufacturer floorplan proceeds and the advances on contracts in transit as part of our operating cash flow better reflects the net cash of our operation.

Making these adjustments, the net cast generated from operating activities during the first nine months was approximately $3.8 million. A reconciliation of this non-GAAP measure is contained in this slide, which is posted on our website.

Now I would like to turn the call over to Peter to discuss our agriculture and construction operating segments in more detail and review our outlook. Peter?

Thanks, Mark. Now, turning to slide 14, you will see an overview of our segment results for the third quarter. We are pleased with the improvement in both segments. Our ag sales growth of 37.3% was driven by the favorable operating environment for our customers this fall and weak comparable comps in the third quarter of last year. This sales growth, coupled with the lower fixed operating costs, enabled us to offset gross margin pressure, higher floorplan expense, and improve our ag pretax income by 18%.

Beginning in the fourth quarter of fiscal 2011, we expect our ag pretax income margin to benefit from improved equipment gross margins due to increased equipment demand, the tightening of equipment supply, and the annual manufacturer incentive program expected to be realized in the fourth quarter, as well as lower floorplan interest expenses due to the new credit facility.

Turning to our construction segment, we are pleased with the 36% sales growth, which is primarily due to organic growth and highlights the continued execution of our Construction Business Action Plan. We also reduced our pretax loss by $1.6 million this quarter. Our construction segment loss includes an additional $121,000 related to the closing of our Columbia Falls construction store. So excluding this nonrecurring cost, we would have been very close to breakeven in the quarter on a pretax basis.

Our operating improvements for our construction segment combined with lower rates associated with our new credit agreement keep us on track to meet our target of a 50% reduction in our construction segment loss.

I would 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 just as we did in the third quarter, we expect our fourth-quarter results to show an improvement in our construction operating results compared to the same period last year.

We believe we are on the right path to returning this business to profitable growth.

Slide 15 shows our segment results for the first nine months of the year. Our increased agricultural sales reflect both acquisition growth and strong organic growth. Our construction segment sales primarily reflect strong organic growth. The pretax agriculture income was impacted primarily by pressure on equipment margins. And the improvement in our construction pretax loss was primarily reflective of our strong organic revenue growth.

Turning to slide 16, this shows our same-store sales results for the third quarter of fiscal 2011. Our overall same-store sales increased 29.8%, highlighting strong year-over-year improvement in both segments. Our ag same-store sales increased 29.5%, and construction increased 32.5%.

The improved agriculture same-store sales are reflective of this year's positive agriculture environment. Our construction same-store sales primarily reflect the continued implementation of the Titan operating model into acquired dealerships.

For the third quarter, overall same-store gross profit increased 15.3% year over year, with our agriculture same-store gross profit increasing 12% and our construction same-store gross profit increasing significantly by 35%.

Slide 17 shows our same-store results of 16.2% increase for the first nine months, reflecting the stronger than anticipated agriculture sales and the strong construction sales, in line with our forecast.

Agriculture gross profit increased on a dollar basis despite the pressure on equipment margins. Construction's gross profit increased in line with our sales growth.

For modeling purposes, it's important to recall 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 third quarter of fiscal 2010 and third quarter of fiscal 2011 are the ones that are included in the third-quarter same-store comparison.

A total of eight locations were not included in our third-quarter same-store results, six agriculture stores and two construction stores. And a total of 12 locations were not included in the first nine months, nine agriculture stores and three construction stores.

On slide 18, we're giving an overview of our modeling assumptions for the full-year forecast. As David mentioned earlier, we are raising our fiscal year 2011 revenue and earnings per share guidance range. I would like to provide some color on our modeling assumptions that support this forecast.

On our second-quarter conference call, we increased our agriculture same-store sales expectations to a range of 3% to 8% growth. Based on increased visibility, we are raising our agriculture annual same-store sales to a range of 12% to 17%. Our 15% to 20% annual same-store growth for the construction segment is on track through the first nine months of the year and we believe will remain in this range for the remainder of the year.

A few of the factors contributing to our targeted 50% reduction in our construction segment loss is the leveraging of our operating expense over increased annual sales volume in this segment and the reduction of our floorplan interest expense in the back half of this year due to the new credit agreement we entered into on October 31.

Agriculture equipment sales have been tracking strong through the first nine months of this year, but our equipment margins have been compressed. During the second quarter, we have modeled our business with 9.5% equipment margins for the year. Now, with increased visibility of year-to-date equipment margins of 8.9% and anticipated stronger fourth-quarter margins, we expect equipment margins for the year of approximately 9.3%.

Based on these modeling assumptions, we are raising our full-year fiscal 2011 revenue and earnings per share guidance. We now expect to achieve a revenue in the range of $970 million to $1.02 billion compared to the previous range of $920 million to $980 million. Earnings per diluted share is now expected to be in the range of $0.95 to $1.03 compared to previous guidance of earnings per diluted share range of $0.92 to $1.02.

Overall, we are pleased with the direction of our business and our performance in the first nine months of fiscal 2011. We are confident that we will achieve our increased annual top- and bottom-line goals, and we are excited about our prospects for fiscal 2012. The operating environment for our agriculture customer remains favorable, and farmers continue to enjoy healthy balance sheets.

Importantly, I'm very pleased with the diligent execution on our Construction Business Action Plan by our employees. And we have made several operating improvements that will enable us to capitalize on the robust opportunities of this market.

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). Brent Rystrom, Feltl.

Congratulations on a great quarter. A couple of quick questions for you. I'm actually hearing some pretty robust comments, not necessarily tightening in the orders yet, but I'm hearing pretty favorable reactions from CNH dealers on their ability to sell their Tier 4 engines versus Deere. Any thoughts on that?

Well, this SCR technology is really good technology in the fact that you're going back to the efficiency of these engines without the Tier 2 emission standards out there, which had to somewhat detune these engines a little bit. So with the efficiencies we're seeing out there and the performance of these engines as compared to that EGR, where you're having to heat up the exhaust and some of the negativity about that, we think that's a real positive.

And the biggest thing, I think it's the best stepping stone until you see what these are in the 2004 requirements, are going to be much healthier requirements than what we're seeing today. And if you look in the truck industry, where you're seeing a high percentage of this technology, this SCR technology running these high-horsepower over-the-road semi trucks, this really adds to the validity of our SCR technology over the EGR technology.

Okay. Then also, out of curiosity, David, I'm talking to a lot of dealers, doing a dealer survey right now as far as their expectations for next year. And I'm hearing that you've been out and about talking to a lot of people. I'm assuming that acquisition pipeline comment is pretty robust.

Right. The same demographic supply is out there right now. We're seeing this increased sophistication out there. The marketplace, there's a lack of succession out there, a lot of dealers wanting to go into retirement. So we are seeing the same momentum that we've been experiencing, and we're on this front end of what I think is a major consolidation taking place in this industry.

Thanks. I'll jump back in the queue.

Steve Dyer, Craig-Hallum.

Congratulations on a good quarter. Just wondering if your guidance, your new upwardly revised guidance, reflects any contribution from the Fairbanks acquisition. Obviously, it would just be the month of January, but is any of that included or are you just waiting for that to close before doing anything?

Well, like David suggested, you know, we're looking at that transaction closing on December 31. So there's just a minimal contribution coming in the month of January.

Okay. But that minimal contribution is assumed in your guidance?

Yes, it is.

Okay. And then just as it relates to your Tier 3, Tier 4 inventory, any color you could give us, just sort of -- you're obviously positioned really well. I've heard of a lot of shortages in the industry, but you don't seem to be having any problem getting equipment. How much Tier 3 versus Tier 4, if you can comment on that at all -- are you comfortable with where you are sitting from an inventory standpoint?

Well, you can see that our inventory numbers are up because we were anticipating this. And there's an excellent demand for Tier 3. So I think we are right on plan, and we are looking at reducing a large chunk of our inventory in this month of December. But the good thing is, we are seeing some good presell activity with a Tier 4 project for next year.

So there is no Tier 4 on hand today, so what we are selling and through the end of this calendar year is going to be Tier 3 units. And we will start seeing sales of the Tier 4 in the next year. And also, there's a good demand for some of these late-model Tier 3 engines. So, then, just so everybody knows, October, we're going to see this same thing will happen all over again on combines.

And that was my last question. What percentage of your business is combines, and sort of what do you expect from a prebuy standpoint next year?

We still are working on all of our presell on that, and we really haven't broken out the combines specifically, but the combines are a major portion of our agriculture segment of our business. There's just a lot of combine usage through the Iowa -- all across our footprint.

Okay, great. I'll hop back in the queue. Thanks.

Tom Varesh, M Partners.

Can you -- you talked about the manufacturer sale and incentives that are currently going on through to the end of this year. Can you talk about maybe what impact you think that's having on current sales and margins and if there will be any impact in future quarters as a result of what you are seeing now as a result of the sale?

Well, first thing I would point out is that the annual performance incentives, the manufacturers that have been offering that for several years, so this is nothing new just this year. What Mark talked about was -- you know, it kind of backs up the whole concept that we always talk about, the fact that we look at our business on an annual basis.

And this is a great example, where the manufacturer incentive programs used to have an end date in October. They used to end October 31. And this year, the program was redated so that it ends on December 31. So therefore, you're seeing a little different in the timing of how that falls against our quarterly result.

But at the end of the day, our annual performance, year in and year out, these incentive programs have been there. And your question asks about what effect it has on future orders or anything. I would say that, basically, it's business as usual, where this is an annual performance incentive program. It seems like it's been here every year. It will continue. And that's the business we're in.

We are -- we talked about on previous calls, that our results reflect the fact that we are aggressively out here trying to gain market share, and we feel good about that. That's how we're going to create these downstream after-sales product support revenues. And those are over half of our gross margin as a contribution. You need to build that market share. So we think that we feel comfortable about aggressively going after that. And I think our results reflect that.

I guess maybe if I ask that a different way, because this was a strong quarter, I think stronger than what I was expecting and what I think the consensus was expecting. Given that strength -- or are you seeing more strength as a result of this sale and with the last of the Tier 3 engines that are in inventory versus what you would have otherwise seen in previous years? I understand the sales have always taken place, but are you seeing particularly stronger sales this year that might impact future sales?

I guess what I would be -- first, what I would point out to you is that in my comments, I did point out to everyone that third quarter last year, we had lower comps. If you recall, we had very, very challenging harvest conditions, and that had an impact on our business.

And so, again, it gets back to this idea of looking at our business on an annual basis. This year, we had favorable harvest conditions, and the overall ag economy has seen recent strength. And so with that said, all of those are contributing factors to what our results are this quarter.

Okay. One last question. Was the acquisition paid for all in cash?

You know, we don't report that. I guess what I would say is that the deal is structured consistent with what we've done historically. And when we have the deal completed, we will have that included in our statement of cash flows.

Rick Nelson, Stephens.

To follow up on the revenue guidance for the year, it assumes more modest growth in the fourth quarter. I think I'm calculating 6% revenue growth at the midpoint and 16% at the high end. And this quarter, you were up 37%, year to date up 24%. Is that more moderate growth something you are actually seeing at this point, or just a desire to be conservative?

Well, I guess one thing that we always need to talk about is when we talk about our growth in the third quarter, we're putting that, we're benchmarking that up against very -- lower comps from last year. So we don't want that to mislead us. And if you look at our year-to-date same-store sales, this is pretty much in line with that. And so we just kind of feel pretty confident about modeling our business in line with what our annual results have been.

Thank you for that. I'd also like to follow up on the inventory situation. We hear things are very tight on equipment. But yet, we did see these margin pressures in the quarter. Can you elaborate on what's happening on the new equipment margin side, as well as the used side?

Yes, one thing I think that is important to remember is that we've talked before that a lot of these new machines that we are now selling into the marketplace have new technology embedded into them. We talk about these GPS precision machine controls. And we have increased capacities.

And one of the things I think that you will find is that when you look at the industry reports, there's a lot of this increase in sales that's reflective of the higher price of the technology that we're selling versus the actual volume of units.

And what ends up happening in the marketplace, Rick, is that the marketplace allows our salespeople to get so many dollars per transaction, you may say. And so if you keep the dollars relatively stable year over year, but the technology and the capacity in the machines you're selling goes up, as a percentage of sales, it's going to look like you've got some equipment margin compression. But at the end of the day, the dollars that you are getting, which is what was reflected in our operating results, the dollars you are getting are stable.

So that's one of the phenomena we've been seeing. And in addition to that, it's a competitive marketplace out there, and everyone is fighting for their market share.

Got you. Okay. Thank you.

Robert McCarthy, Robert W. Baird.

Not to beat a dead horse, but I do want to follow up on this equipment gross margin discussion because I'm -- just like Rick asked, if we have such strong market conditions, both in terms of volume growth as being reported by trade association, the numbers have been huge the last few months on a year-over-year basis.

So we have real strong volume growth. We have tight supply. I hear you on the increased feature content of tractors, etc. But you're not going to -- presumably, that pressure, downward pressure on margin created by that dynamic has to end someplace.

So, I guess I'm just asking you again, what are we looking at in terms of an apples-to-apples margin comparison? If I take the incentive payments out of last year's equipment margins, were your gross margins still down compared with last year in the quarter?

Well, I guess to give a little bit of color on it, if you look at some of the recent industry results on year-to-date results, from what we did here, the industry has shown like 6% increase on the year-to-date results, 6% growth on your [pull-to-ride] units and about 3% on combine units. And actually, the two-wheel-drives are flat to down a little.

And so what I guess I'm saying is that that phenomena of this increased features and increased price that goes along with that capacity and feature build-in is pretty strong.

The other thing that I would comment on, Robert, is really, if you look at our numbers historically or whatever, we did have a couple of strong years where we averaged about 10.8% the two previous years. If you take the five years previous to that, the average equipment gross margin was 9.2%.

So, there is some historical background on this where, when you're running in that 9%, 9.5% range, that's not too far off. And one of the things that we are experiencing is, of course, with that increase in the price relative to the capacity and features of the equipment, then of course that's leveraging our expenses over more revenue dollars. So the expenses as a percentage are going down relatively comparison to what your margin yield is. So when you look at our operating margin, at the end of the day, it's within two-tenths.

Does that -- Peter, does this translate into, since your positioning is that margins are really kind of normal now, and they were inflated previously, does that mean that we should think about this -- is it something in the low 9s as a good -- the place where we ought to start with our projections for next year?

Well, right now, with the visibility that we have, we've seen this year's run rate, what we're looking at modeling this year at about 9.3%. So, we wouldn't be deviating a lot from that going forward with the visibility we have now. And of course, we're going to definitely update that to you on our fourth-quarter earnings call. But I think what you suggest, as far as looking at this thing in the mid-9s on our equipment margins, today, that's the way we're looking at.

Yes, okay. And in terms of the progression on inventory, I'm pretty sure I heard, so please confirm and help, that you expect overall absolute inventory levels, adjusted for Fairbanks and any other acquisitions that you might do before the end of the fiscal year, but you expect that inventory levels will decline from the third-quarter level as you feel seasonally really strong equipment demand in your fourth quarter.

We're fairly confident that if we hit our revenue targets and the success at the stores, that we are going to have these low inventory levels, as you've suggested.

Okay. All right, very good. I'll get back in line. Thank you.

(Operator Instructions). Brent Rystrom.

A couple of quick questions. Getting at one of the questions earlier about the incentive programs, how they might be held to you, do you guys know that TractorHouse magazine?

Yes.

Yes.

You know, it's the trade magazine as far as selling inventory. When I go back to the November 6, 2009, issue, I see all sorts of incentives as far as no interest, no payments, that sort of thing. Obviously, you're anniversarying against that as well. So I would assume, basically, even though there's incentives, on a relative basis, they're not near what they were a year earlier.

Well, Brent, we're probably talking about two different things here. The manufacturers on a month-to-month basis always have some type of retail incentives out there to move inventory and gain market share and do what they think they need to do in the marketplace. So that's some of those ongoing monthly, month-after-month, quarter-after-quarter incentives. As an example, right now, we're offering 24-month interest-free on our used combines from Case IH. That's an example of one of those. So that's different than this other (multiple speakers)

But last year, you had no interest on new equipment in many of your programs. Is that not the case? Because just looking at the November 6, 2009, issue, there are basically a lot of data in there as far as no interest on Case/New Holland new tractors and combines.

We have some interest waiver programs currently today on some new equipment out there.

(multiple speakers), okay. So they're just not showing up in your ads. Okay.

There's this bucket of programming dollars which could be cash incentives. There could be interest-free programs. There could be certain lease programs. So there's just an array of these month-after-month, quarter-after-quarter marketing incentives. Now, don't get that confused with this -- we're going to call this the annual volume discount and (multiple speakers) --

I understand.

-- which is a one-time deal, then.

I understand the difference. I understand on the --

But right now, I would say right now, CNH, both Case IH and New Holland are very aggressive in the marketplace, and they're very aggressive on these interest and these variable programs very consistently. They're being very aggressive in the marketplace.

Great. Just different kind of tack -- you know, I know you guys like to look at farmer receipts. I'd like to talk more about farmer income. And when you look going both this year and next year, obviously, receipts are going to be up, but farmer income is going to be up substantially. Green farmer income is going to be up almost exponentially.

I would imagine that makes you feel pretty good about next year. When you look at the futures on corn, soybeans and wheat right now, it looks like [when you're traded], you're looking at another 25% to 35% income growth next year. Any thoughts on how that might play? I know you're not giving guidance on next year, but obviously that's going to make you feel pretty good.

Well, I know a number of growers have contracted out their 2011 crops. Some have contracted their 2012 crop at these attractive prices. One factor not a lot of people realize, though, that we talked about these favorable harvest conditions this year, but there was very minimal drying costs for most of the corn crop in the majority of our markets.

And another thing that affect -- if you drive around the country and look at the amount of fall tillage work that's been done and some of the fieldwork that growers haven't been able to get to for a couple of years and the position these fields are in going into next year's planting season is really looking at some really high-potential yield for next year, just the fact that so much work got done this fall. And so most of the growers are pretty ecstatic out there in the position they're in, from not only the commodity pricing, but where they are in their farming operations and their field conditions.

Thanks, guys.

Robert McCarthy.

I wanted to see if we can talk a little bit about Fairbanks, since it's so recent. A couple things spring to mind. First, the $85 million revenue figure is of course a bit dated. Would it be appropriate for us to assume that that business has seen something comparable to the same kind of same-store sales growth that Titan has been putting up this year?

Well, there's business for this current year [that are] still going on in those dealerships, and my talking to the owners, and they're looking at the activity at those stores, from my perception, from a high level of watching what's going on, I would say business is very vibrant in those markets.

As you are aware, it's a high level of irrigation. So what you are seeing is some excellent yields. So you take those yields times this level of commodity prices, it's pretty inevitable that that's a great economic condition down along that I-80 corridor and that area of irrigation along the Ogallala Aquifer.

So you are saying that they're actually having a stronger year than Titan has been having?

I'm not going to comment. I don't really have those numbers. Like I'm saying, the year isn't over with yet, Rob. So, but --

We always give the last complete fiscal year results that we have on any acquisition because those results we know have been reviewed and everything. And right now, it's just a little premature for us to comment on what's there --

I'm just looking for a little color, Peter. I mean, it was 12 months ago.

Yes, and so I guess what I would say is that Nebraska, like all the rest of the states, is experiencing the same backdrop for the agriculture economy as what we are in the rest of the Titan footprint. Now, if that relates specifically to the exact same-store results as what we're doing, we can't comment on that. But definitely, they are seeing stronger commodity prices and they've have a favorable harvest condition. And so, things should be positive in Nebraska.

Okay. That's helpful. Thank you, Peter. And then the other thing that sort of jumped out at me is that they, apparently in at least one location, and maybe you can help us here, distribute -- are dealers for AGCO ag equipment and for Bobcat construction equipment. And of course, both of those companies make products that compete directly with products offered by Case and New Holland.

So, interesting to me that they had that mix in the first place, but my question really goes to, is the $85 million number, for example, a reliable number for us to think about? Will you be able to maintain these dealership positions with these competing brands, nothing force you to exit them?

Rob, you're kind of going down a road here where there's some pretty confidential discussions going on with all the various manufacturers that you talked about. So we're going to be out there to support the customers and to support the products in the field and to grow the market share.

You're aware that we are a fairly large distributor for all the CNH brands, and that's been a good brand for us. But then, we also understand that there's certain product segments and certain short lines and different products that companies have and own there, that we need to support those products also in those markets.

So I would say that we could probably give a little more color on that when we get the deal closed, when we have some of the final contract discussions completed with the manufacturers. And we have our fourth-quarter earnings call, then we will have a better -- give you a little bit better color on what the ongoing outlooks, not only for the locations and the brand locations and what the brand strategy is going to be going ahead.

Okay. And can you give us some kind of color on what their mix of ag versus construction equipment is?

It's less than -- I would say less than 5% of that business is construction. So it's predominantly an agricultural market there.

Okay, very good. And then, my last question was, I just wanted to confirm the previous guidance that you had out there from last quarter. I don't recall; did it include some element in anticipation of the new credit facility? Or is the new credit facility -- was not in that guidance and is only in the new guidance?

It had some of the new credit facility factored into that, Rob. We've been working on this thing for a year. So we fully anticipated that we would have the deal put together by our fourth quarter.

Steve Dyer.

One last question from me. I'm hearing chatter that Deere is restricting the orders for the new Tier 4 equipment, not kind of rapidly taking as many orders as they can. Have you heard anything about that? And is there any evidence that that's helping you guys?

Well, I listened to Deere's last earnings call, and it sounded like they had 2500 8R tractors pretty much already presold. So I think they're aggressive in the marketplace, and from what I can tell, they've got some dealers and there's a big demand for equipment. And they're going to produce to demand.

So I would say it's the competition as usual, and we're just going to have to go to the marketplace with the same passion we always have. And if one of the manufacturers [tend to] cut back their production, it's really hard to comment on that because with the presell mentalities and the delivery dates and some of the timing, there's just a lot of things going on here. But it appears to me that Deere is going to have a lot of production out there for the first half of the year, from what I can glean out of their earnings release.

Okay, understood. Thanks, guys.

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back over to management for closing or additional remarks.

Okay. Thank you for listening to our call today. We look forward to speaking with you again after the new year, and have a great day, everyone.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.