Titan Machinery Inc (TITN) 2012 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 2012 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 for you to queue up for questions. Hosting today's conference will be John Mills with ICR. As a reminder today's conference is being recorded. I would like to now turn the conference to John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. 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 Operating Officer, and Mark Kalvoda, Chief Financial Officer.

By now, everyone should have access to the earnings release for the fiscal second-quarter ended July 31, 2011, which went out this morning at approximately 6.45 AM 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 risk 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 statements 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. The call will last approximately 45 minutes. David Meyer will provide highlights of the Company's second-quarter results, and a general update on our business, and review our recent acquisitions, then Mark Kalvoda will review the financial results in more detail, and Peter Christianson will discuss our segment operating results, and our increased fiscal 2012 annual revenue and earnings per share guidance range, along with our outlook modeling assumptions. Then we will open the call to take your questions. Now, I'd like to open up the call to the Company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you John. Good morning, everyone. Welcome to our second quarter of fiscal 2012 conference call. As John mentioned, to help you follow today's prepared remarks, we have 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.

On slide 2, you will see our fiscal second-quarter 2012 results. Our revenue for the second quarter was $310.8 million, our pretax income was $10.4 million, and we earned $0.30 per diluted share. For the first 6 months of fiscal 2012, our revenue was $629 million, our pretax income was $22.6 million, and we earned $0.69 per diluted share. We are pleased with the performance of our business in the first half of the year, as both organic and acquired growth contributed to our improved results. We are continuing to benefit from the strong agricultural equipment market. Crop conditions are generally favorable in our markets and global grain supplies are tightening, which positions farmers in Titan's footprint to have another strong year.

In addition, we are encouraged by improvements in the construction industry as well as the positive impact from our internal improvements to this segment for our business. Year-to-date, we have made solid progress on expanding our footprint, as we completed 7 strategic acquisitions, including expanded exposure to the Bakken and Three Forks formations, with the additional of another construction store.

On slide 3 you will see, we're raising our revenue, net income, and diluted earnings per share guidance range, based on increased visibility for the remainder of the year. Revenue is now anticipated in the range of $1.33 billion to $1.405 billion. We now expect income to be in the range of $31.8 million to $33.9 million. This translates to diluted earnings per share in the range of $1.56 to $1.66, based on 20.4 million weighted average diluted shares outstanding.

Now, I'd like to provide some color on each of the industries that are key to our business. On slide 4, we provide an overview of our agricultural industry. There continues to be many favorable factors that should benefit our agricultural business. Since our last call, we have increased visibility in the current year crop conditions both nationally, and in our Titan footprint. Nationally, there's a smaller crop forecasted for this year. However, in our footprint, we have relatively favorable conditions.

The drought conditions in many regions has not affected our footprint. In our markets, we have some of the best crop conditions in the country, and this, coupled with tightening grain supplies bode well for our customers. Overall, we continue to see strength in the ag industry across all sectors, live stock, low crop and small grains, all sectors are positive. The low projected ending global stocks continue to support favorable pricing through calendar year 2012, giving our customers a strong marketing opportunity for calendar 2011 and 2012 crops.

Last week, the USDA released updated net farm income estimates for 2011. They estimate a 31% increase compared to calendar year 2010, which is up from their previous estimate of an approximate 20% increase, reflecting the strength in our ag industry. The $500,000 Section 179 and 100% bonus depreciation tax incentives are available to our ag and construction customers through December 31, 2011. It is important to remember that these tax incentives will not be eliminated for calendar year 2012, but will continue with the section 179 tax incentives at $125,000 and a bonus depreciation at 50% available in 2012. With the accelerated depreciation in recent years, our customers have very little basis left in their equipment, and will factor this into their buying decisions in calendar year 2012, as they look for ways to offset future income. In summary, we are excited to be participating in a very robust agricultural economy, and are well-positioned to capitalize on the opportunities presented by it.

Now turning to the construction segment of our business on slide 5, we have outlined an overview of the construction industry in our markets. Regional flooding and subsequent clean-up continues to create demand for our construction equipment, as private businesses and government agencies work to minimize and remove the damage from these floods. Our agricultural customers continued to drive demand for our construction equipment to use in their farming operations, including feed lots, material handling and land maintenance.

Our business is also benefiting from increased energy industry activities. As many of you are aware, several of our states are capitalizing on the Bakken, Three Forks, and Tyler oil formations, which were all within our CE footprint in the Dakotas and, Montana. Recently, we opened a new Case construction equipment dealership in Dickinson, North Dakota, located in Western part of the state. This dealership is well-positioned to benefit from the increased oil industry activity in this region. The oil industry activity in our markets 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 in addition to drilling, exploration, extraction and transportation of oil.

Several key indicators are highlighted and equipment in the improvement in the construction equipment industry. There's a tight supply of both new and used equipment, reflecting the strong demand in the market. In addition, our rental revenue has more than doubled compared to the last year, reflecting increased rental demand. We have been growing our rental fleet and our rental gross profits, and expect this to continue to contribute to the construction segment results. Even though there are many positive factors influencing our construction segment, residential housing starts are relatively flat in our footprint, due to the existing inventory of homes. We expect this trend to continue through calendar year 2012.

We will be well-positioned to capitalize on this opportunity once it improves. Given these factors, combined with our expanded construction business footprint, we are very excited about the long-term prospects of this segment of our business. In the first half of the year, we have generated over $1 million in pretax income from our construction business. We are optimistic that we will maintain profitability for this segment in the back half of fiscal 2012, and continue to improve earnings leverage in this segment of our business. The improvement in this segment of our business is the primary reason for increased guidance.

We are continuing to make great progress in expanding our footprint and executing on our long-term strategy by making strategic acquisitions, as well as opening new stores and markets where we see demand. Slide 6 outlines our acquisition activity and store growth activity. In the second quarter, we completed 2 acquisitions, consisting of 6 construction dealerships. Thus far in the third quarter of fiscal 2012, we have completed 2 acquisitions consisting of 2 agricultural dealerships, and we opened 1 new construction store.

Let me now provide some color on these acquisitions. On May 13, we completed the acquisition of Carlson Tractor & Equipment with New Holland and CE locations in the Minneapolis suburbs of Rosemount and Rogers. We are excited about gaining entry into this large metro area and solidifying our New Holland CE business in the state of, Minnesota. On May 31, we completed the acquisition of St. Joseph Equipment, construction equipment business. This consists of 4 Case construction equipment locations in Shakopee, Hermantown and Elk River, Minnesota, and La Crosse, Wisconsin.

This marks our entry into the state of Wisconsin, making it the eighth state of our dealerships. In addition, with this acquisition, we now have the exclusive Case construction contract for our existing 8-state footprint, including the entire state of Minnesota and 11 counties in Western Wisconsin. Also in the second quarter, we consolidated our Belgrade, Montana operations into the recently acquired ABC Rental Bozeman store. This will improve our efficiencies as the ABC store in Bozeman is more strategically located to serve this market. We recognized consolidation costs of about $0.01 per diluted share in the second quarter.

Now turning to our activity thus far in the third quarter, we opened a new Case construction equipment dealership in Dickinson, North Dakota on August 1, 2011. Located in Western North Dakota, this dealership is well-positioned to benefit from the numerous factors that are supporting the favorable construction equipment market in this region including energy, agriculture, government surpluses, infrastructure investment and low unemployment rates. We also consolidated our dealership in Elk River, Minnesota into our recently-acquired Rogers location. We do not anticipate recognizing any material costs associated with this consolidation.

On September 2, we completed our 2 acquisitions of Virgl Implement and Victors Inc., which collectively consists of agricultural equipment locations in Wahoo and Fremont, Nebraska. The dealerships are situated among what we believe is some of the world's most productive agriculture land. Both dealerships benefit from proximity to the Ogallala aquifers that provides irrigation resources, resulting in a concentration of intense agriculture, high yields and diversification through all weather cycles. We continue to see a healthy acquisition pipeline of both agriculture and construction dealerships throughout the entire Midwest, and will continue to make selective and strategic acquisition choices. CNH has been a strong supporter of our acquisition efforts, we are thankful to be associated with this well-run organization, representing such powerful brands.

In summary, we are pleased with our performance in the first half of the year. We continue to execute on all fronts, achieving organic and acquired growth for both segments of our business. We remain on track to deliver another record year for Titan Machinery. Now, I'd like to turn the call over to Mark Kalvoda, our Chief Financial Officer, to review our financials in greater detail.

Thanks, David. Turning to slide 7, our total revenue for the fiscal 2012 second quarter grew 48.3% to $310.8 million, with approximately 58% from organic growth and 42% from acquisition growth. All 3 of our main revenue sources contributed equally to this strong growth. It is important to remember that the increased equipment sales volume has a long-term positive impact on our parts and service revenue. We achieved operating leverage as our parts and service gross profits grow and absorb additional fixed operating expenses of the dealerships, providing recurring revenue and earnings stability to our store unit model.

On slide 8, our gross profit for the quarter increased 54.9% to $55.9 million, reflecting higher revenue and higher gross profit margin. Our gross profit margin was 18% compared to 17.2% for the same quarter last year. This 80 basis point increase is primarily due to higher gross profit margins from our rental business, due to higher utilization of our rental fleet, as well as increased margin in our service business. Our operating expense as a percentage of net sales in the second quarter of fiscal 2012 was 14.2%, compared to 13.9%. This increase reflects higher expenses, primarily related to the construction business.

These include overhead related to our rental business that we expanded during the second quarter, and consolidation expenses related to our Belgrade location, which we completed during the second quarter. It is important to keep in mind that although there are higher expenses as a percent of rental revenues, the higher rental gross profits more than offset the additional operating expenses. Our pretax margins improved to 3.3%, which represents a 110 basis point improvement over the second quarter of last year.

The improvement reflects our increased gross profit margin and the positive impact of lower floor plan interest expense from our new credit agreement, which began in the fourth quarter of our last fiscal year. Earnings per diluted share for 2012's fiscal second quarter increased to $0.30, compared to $0.15 in the second quarter of last year. For modeling purposes, keep in mind that our weighted average diluted shares outstanding increased 15% to $20.8 million, primarily due to our May follow-on offering.

Turning to slide 9, for the first 6 months of fiscal 2012, our revenue increased 51.5% to $629 million. Organic growth represented 63% of the total revenue growth and acquisitions contributed 37%. All 3 of our main revenue sources contributed to that increase, with equipment providing the largest increase, reflecting our strong market demand.

On slide 10, our gross profit margin was 17.3% for the first half of fiscal 2012, an increase of 30 basis points compared to the same period last year. In the first 6 months of fiscal 2012, our operating expenses as a percentage of revenue decreased 90 basis points to 13.3%, due to improved fixed operating costs leverage across higher revenues. Pretax margins improved 190 basis points to 3.6%, primarily due to higher gross profit margin, operating leverage and lower floor plan expenses as I discussed earlier. Earnings per diluted share were $0.69 in the first 6 months of fiscal 2012, compared to $0.24 in the same period last year. Turning to slide 11, we provide an overview of our balance sheet highlights at the end of the second quarter. We have cash and cash equivalents of $102 million, our inventory of $625 million, up $193 million since the end of last year.

I would like to provide some additional color on this increase in inventory. Our new inventory is up $187 million, while our used inventory is down $9 million, and we had $15 million increase in work-in-process and parts inventory. This is in-line with our annual retail sales plan, and supports us achieving our annual guidance. In addition, our inventory balance at the end of the second quarter includes $51 million of additional inventory from our acquisitions during the first 6 months of fiscal 2012. Working capital at the end of the second quarter of fiscal 2012 was $215 million. As of July 31, 2011, we had $90 million available of our $550 million total discretionary floorplan lines of credit.

Slide 12 gives an overview of our cash flow statement for second quarter of fiscal 2012. 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 floor plan proceeds in the first 6 months of fiscal 2012, our net cash used for inventories was $21.7 million.

On our statement of cash flows, the GAAP reported net cash used for operating activities was $76.9 million. We believe including the non-manufacturer floorplan proceeds and the advances on contracts in transit as part of our operating cash flow, better reflects the net cash flow of our operations. Making these adjustments, the net cash used for operating activities during the first 6 month of fiscal 2012 was approximately $3.1 million. A reconciliation of this non-GAAP measure is contained in slide 12, which is posted on our website as part of this presentation.

Now, I would like to turn the call over to Peter to discuss our agriculture and construction operating segments in more detail, and to provide additional color on our increased fiscal 2012 annual guidance. Peter?

Thanks Mark. Now turning to slide 13, you will see an overview of our segment results for the second quarter. We are pleased with the improvement in both segments. Agricultural sales were $266.4 million, driven by acquisitions and strong organic growth, due to the favorable ag economy for our customers in the second quarter. We generated ag pretax income of $10.9 million, primarily due to higher sales and lower floorplan interest expense, partially offset by lower equipment margins resulting from the normal seasonal activity of our business.

Turning to our construction segment, we're pleased with the strong sales growth, which was driven by acquired growth and strong organic growth. Our construction sales increased 65.2% to $59.8 million, underscoring the improved construction equipment market and ongoing operational improvements. We generated pretax income of $576,000, compared to a pretax loss of $852,000 last year, a significant improvement. This reflects higher revenue and improved gross margins for our rental category, due to increased utilization of our rental fleet. Also, our pretax income benefited from lower floorplan interest expense. Partially offsetting these positive factors was $0.4 million in exit costs, associated primarily with the consolidation of our Belgrade location.

Slide 14 shows our segment results for the first 6 months of fiscal 2012. Our agricultural revenue increased 52.5% to $553.3 million, and our pretax income increased to $23.9 million, driven by the same factors I discussed above for our second-quarter results. Our construction revenue increased 52.2% in the first half of fiscal 2012, compared to the same period last year. We generated pretax income for our construction business of $1.2 million, compared to a pretax loss of $2.8 million in the same period last year. We are very pleased with the year-to-date contribution of our construction business, and are confident that we will continue to generate solid results for this segment in the back half of fiscal 2012.

Turning to slide 15, this shows our same-store results for the second quarter of fiscal 2012. Our overall same-store sales increased 28.2%, highlighting strong year over year improvements in both segments. The improved agricultural same-store sales are reflective of lower comps during this period last year, and the current agriculture economy. Our construction same-store sales increase underscores our operational improvements in this segment, and the improved construction equipment market. For the second quarter of fiscal 2012, overall same-store gross profit increased 29.6% year over year. Improvements in ag gross profits were driven by the revenue increase, partially offset by lower ag equipment margins, as I mentioned earlier. Construction same-store gross profit improvements reflect the higher revenue, as well as improved gross profit margin for the rental business.

Slide 16 shows our same-store results for the first 6 months of fiscal 2012. Our overall same-store sales increased 32.5%, compared to the same period last year, driven by increased same-store sales for both business segments. In the first 6 months of fiscal 2012, our overall same-store gross profit increased 30.2%. Our ag same-store gross profit increased 24.8%, and our construction same-store gross profit increased 53.4%.

For modeling purposes, it is important to remember that we calculate same-store sales by including stores that were with Titan for the entire period, and which we are comparing. In other words, only stores that were part of Titan for the entire 3 months of the second quarter of fiscal 2011, and the second quarter of fiscal 2012, are included in the second quarter same-store comparison. In the second quarter, a total of 20 locations were not included in our second-quarter same-store results, consisting of 10 agricultural stores and 10 construction stores. In the first 6 months of fiscal 2012, 20 locations also are not included, also consisting of 10 agricultural and 10 construction stores.

Now turning to slide 17, you'll see our fiscal 2012 annual guidance. As David mentioned, we are increasing our revenue, net income, and earnings per diluted share guidance range. We're now anticipating achieving revenue for the full year ending January 31, 2012, in the range of $1.33 billion to $1.405 billion, compared to our previous estimate of $1.31 billion to $1.385 billion. Net income is now expected to be in the range of $31.8 million to $33.9 million, increased from the previous net income range of $31.2 million to $33.3 million.

Our increased net income range equates to an earnings per diluted share range of $1.56 to $1.66, based on estimated weighted average diluted shares outstanding of 20.4 million. We do not provide quarterly guidance, but for those of you that model our business on a quarterly basis, you should model approximately 21.2 million weighted average diluted shares outstanding for the third and fourth quarters.

When modeling our business for fiscal year 2012 forecast, we expect our same-store growth to be higher than our previous forecast. We've increased our ag same store sales growth by 3% to be in the range of 8% to 13%, compared to the previous guidance of 5% to 10%. We expect our construction same-store annual growth to be in the range of 18% to 23%, compared to the previous guidance of 12% to 18%. Although this year we experienced much stronger same-store sales in the second quarter, for both our ag and construction segments, it is important to remember that we had very high second-half fiscal of 2011 same-store sales. Our annual increase is comping a very strong second-half same-store sales growth last year, 35.4% for our agricultural segment and 40.7% for our construction segment.

Due to the seasonal nature of our business, equipment margins fluctuate throughout the year, we continue to expect our annual equipment margins to be approximately 9.8%. This is one of the reasons why we look at it business on an annual basis. Based on the continued improvements in our construction segment, we now expect to achieve profitability of approximately $2 million on an annual basis in this segment. As you recall, on our last conference call, we were modeling an improvement of $4.4 million to achieve $1 million of annual profit. Based on our second-quarter results, including costs associated with the consolidation of the Belgrade location, we're now modeling $5.4 million annual improvement in earnings. We look forward to earnings leverage in this segment of our business, as we capitalize on the opportunities in this market going forward. Before we take your questions, I'd 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.

Thank you. (Operator Instructions) We will first go to Steve Dyer of Craig-Hallum.

Thank you. Good morning, guys.

Good morning.

Mark, you went through, you broke out inventory by used and new, and then also kind of the change year-over-year. I missed that, could you repeat that?

Yes. Steve, our inventory, up from the end of last fiscal year, fiscal 2011, was up $193 million. Of that, new equipment alone was up $187 million. Our used inventory was actually down during that time period.

By $9 million, right, did I get that number correct?

Right, used was down $9 million, and then our WIP and parts are up $12 million.

Okay. Then, I'm wondering if you could comment a little bit on operating expenses, the $44 million was I think a bit higher than I had modeled both in raw numbers and as a percentage of revenue. Was there anything kind of unusual in that, or how should we think about that, maybe as a percentage of sales going forward?

Yes, looking at it as a percentage of sales, the reason why it's up a little bit from last year is, with our rental fleets now, and our rental business, so we've been focusing on that rental business, and you can see the on the sales side, and on the margins coming through on that, there is some additional overhead associated with that. That additional overhead is rolling up through that operating expense line. So that is -- in that overhead, an example of that is just, we are adding people to support that rental growth. So that is something that will be there going forward. Also, more of the one-time thing that I kind of pointed as well is the closing of that Belgrade facility. That created more of a one-time charge.

Okay. That's helpful. And then I know you guys don't give quarterly guidance, but as you look at the back half of the year, do you have some sense, maybe either on a percentage basis or just qualitatively, whether you expect your October quarter or your January quarter, how those two might relate to each other, in terms of which one might be larger?

Historically, the third quarter has been a little bit stronger than the fourth quarter, but what's really, you've got to keep in mind on that, and that's why we always talk about our business on an annual basis, is just that the weather plays such a factor in this, Steve. If we get a really favorable harvest and things go well, it seems like they can have more time to buy earlier. And that can really change where your revenue falls between the third and fourth quarter. But if you just strictly look at it historically, we've had a pretty strong -- both the third and fourth, our back half is the strongest half of our year and probably it has been a little bit stronger on the third quarter than the fourth.

Okay. I will hop back in the queue. Nice quarter, thanks.

Thank you.

Our next question comes from Brent Rystrom with Feltl.

Thank you, and good morning as well.

Good morning, Brent.

How are you guys?

Good.

Quick question, looking at your guidance for the back half of the year, and then looking at the inventory build, the inventory build would imply that you're going to have a pretty -- your same-store inventories looks like they're up 30% or so. And usually that's a pretty good indicator for favorable comps going forward, not necessarily directionally accurate, but -- directionally accurate, but not specific. My question would be, your guidance of 8% to 13% ag comps implies that you're going to have to have a negative quarter of comps, which I would assume that you're thinking is going to be the fourth quarter, because you're up against the 41, 42. I would assume comps in the ag sector probably stayed positive in the third quarter, I'm just wondering if you have any comments on that?

That's pretty much in line with what we're modeling. Our fourth quarter last year was extremely large, and again, we have to look at how the weather plays into that. I would point out that when you look at our inventory, first of all, we are comfortable with where we are at. We purposely have got this new machinery on hand. We know that with the tax incentives that we need to have that, so that we can actually deliver it to our end users. But important to remember, is at the end of our fiscal year last year, we did that acquisition in Nebraska, and we are a lot larger company than we were a year ago. So we've got a lot bigger numbers to hit to achieve our annual guidance, Brent, and I think the fact that our inventory build is on the new and not the used, we feel pretty confident in where we are at on our stocking, and where we are at, relative to our sales cycle.

I'm not saying I view it as a negative, I actually view it as a positive, but my question, my thought is, I'm wondering if your guidance, you feel your guidance for the back half of the year is unduly -- it seems remarkably conservative, given the inventory build.

I think when you work through your model that you're going to find out that even to achieve our numbers that we are talking about on our revenue, we're going to need additional inventory coming in here. We feel pretty good about that, and you are right, that when you model the back half of the year, we are standing pretty steady with what our guidance was with our previous call, we did see improvements in our construction segment, and felt like we would place the guidance primarily based on what's going on in that segment of the business. But the year is kind of coming in, pretty well in line with what we think on the ag side, given the fact that we do have some strong comps in the back half of the year.

Final question, and then I'll hop back in the queue as well is, looking at, thinking about how late things were planted this year, everybody was assuming we're going to have a pretty late harvest. When you drive around now in most of your region, the corn is pretty much fired off well over the height of the year. The beans are yellowing off pretty aggressively right now. I'm guessing actually the surprise coming this fall is going to be, the harvest is going to be pretty much on time, not necessarily early, but it certainly is not going to be as late as people were thinking. Does that have any impact in what you're thinking about, third quarter versus fourth?

It could be good for the third quarter, but the harvest hasn't started yet, and we are all very well aware that the weather patterns can change. But it's setting up right now, it's given us a good reprieve here the last three, four weeks, the weather pattern has been working in our favor, and we like that. And hopefully it will stay, so that our customers have got their crops so they can get it harvested in a good fashion.

Thank you.

Our next question comes from Rick Nelson of Stephens.

Thank you. Good morning.

Good morning, Rick.

I wanted to ask you about equipment margins in the quarter. We saw a decline sequentially and year-over-year at 9.3%, and you are guiding to 9.8% for the year. If you can comment on what's happening with new and used margins, and how you see the back-end of the year developing?

Rick, Mark here. Just overall, equipment margins tend to be seasonal in nature, and it kind of jumps around somewhat quarter-to-quarter. Just looking at last year, last year, over the four quarters, it ranged anywhere from 8.3% up to 11%, so it does tend to bounce around from quarter to quarter. With that, we are comfortable and still projecting that 9.8% total for the year. Some of that kind of bouncing around that you have is just some of the timing of some of the manufacturer programs throughout the year. But again, we feel confident of the 9.8% for the year on equipment margins.

Okay. Also, I'd like to follow up on the inventory levels. We are hearing about tight supply in the industry, if demand exceeds your guidance, do you think there is enough product to satisfy that demand?

We've done a good job Rick, of getting our orders into the system, we are getting some good slotting. We are getting some good traction on our pre-sales. We've got some good inventory on hand right now. I believe the manufacturers we do business with are aggressive in their production levels and their forecasting, they're real optimistic.

We are having really good success in our Tier 4 products that we have right now, so we think we're going to get a lot of inventory. I think a little bit's going to be a function of how much ending inventory we're going to have. Right now, we're budgeting some ending inventory, we have a few issues of getting some inventory, we may not have as much going into next year, which isn't all bad, but at the same time, we feel confident that our guidance and our revenue guidance, and the inventory we can get to hit those numbers for this fiscal year.

And who do you think, Dave, is winning the market share battle here in Tier 4, CNH or John Deere?

If you look at, our market share, as it's progressed through the year here, we are gaining share in all those major categories right now, and our customers like the performance of these Tier 4 engines and the fuel economy they are seeing on our Tier 4 engines. We are confident that we've got the right ride and the right horses with that SCR technology right now.

Thanks, and good luck.

Thinks, Rick.

(Operator Instructions) We will go next to Chris Weltzer of Robert W. Baird.

Good morning, guys.

Good morning, Chris.

Parts and service, both revenue and margins came in a little bit stronger than at least we were expecting, curious how they performed relative to your expectations, whether some of the strength in the quarter was just a timing weather issue, or whether you think we can build on particularly the gross margin levels in places like service as the year goes forward?

This is Peter, and they came in a little bit stronger than what we had thought, but we still want to keep an eye on the annual numbers that we look at, because there is some fluctuation and we like to see that trend where it's succeeding by a little bit, rather than the other way around, and so we feel pretty good about the parts and service side of the business.

Absolutely. Okay, that makes sense. Can you give us a little color on how the business performed in August? Have you seen any tangible impact from all the market gyrations and other uncertainties floating around?

Really, we are still in process, the ag side of the business is really keyed on the annual production cycle. That's what our customers are looking at, and as you follow the commodity markets, for what they are being paid for our production, that of course has been strengthening, unlike the rest, like the stock market and everything else. So our users are just really focused on getting this harvest in, and like David talked about in his comments, we feel that our footprint in our markets, our crop is probably in better shape than most of the rest of the crop in North America. So we really haven't seen that kind of an effect directly correlating to our end users.

Okay. Thanks. And then can you talk a little bit about conditions in the combine market, at least industry sales have started to sort of tail off year-over-year in your second quarter, there's been talk of elevated used inventories in the channel. Just your thoughts, what are you guys seeing?

In our business right now, what we saw in the last quarter, that we actually increased our combine business, we increased our share, at the same time, we reduced our used inventory, so our marketing plans, our departments, some of the things we're doing, we are doing a great job of both increasing the new business and decreasing the used. Now, when you look at these national, these industry numbers here for this last quarter, and what you are seeing, you've got huge droughts down in the southern part of the United States, you've got some flooding issues in other markets and stuff, so you are seeing in our region and our footprint, you are actually seeing increased combine business, but if you look at the whole of North America, you are seeing some decreased numbers because you've got some real tough conditions in a good part of the United States, and we're fortunate to have good crops and good sales, and very positive markets in our footprint.

Got it. Okay, thanks guys.

Thank you.

Our next question will come from Heiko Ihle of Gabelli.

Thanks so much for taking my questions. Talking about the additional, or potential additional acquisitions, can you provide some color on the asking prices, and prices paid for additional dealerships with the current market conditions that are out there? I know you've mentioned in the past that goodwill tends to be fairly small, but has anything in that changed?

No, we continue to keep pricing discipline in these acquisitions. There's a lot of opportunities out there in acquisitions, both in the agricultural and the construction front, so I think if you go back and review what we've done, we've maintained discipline in this pricing. We don't have a gun to our head in any of these acquisitions right now, and one positive drum out there you'll see is right now we've got 15% capital gain this year and that's going to be extended into next year, and that's driving a lot of interest in some of these potential sellers out there. Nothing is changing these demographics. We're looking at the increased sophistication of business. We're looking at the aging dealer group. There's a lot of factors out there that are really driving this consolidation in this industry right now, and we're really focused on maintaining this pricing discipline.

Sounds fair. Thank you very much.

We'll take a follow-up question from Brent Rystrom of Feltl.

A couple of quick questions. On the combines, when do the new Tier 4 engines start shipping? Is that January?

I don't know if it is going to quite hit January, Brent. Right now, I'm hearing it could be sometime in Q1 of the calendar year 2012. They are still working on a few things there, but it is going to be right in that timeframe.

And is it a safe assumption, do you think, that it is going to have the similar productivity fuel efficiency advantages over the competing primary brand, that you have in tractors?

Right, we're going to put this SCR technology in these combines and it is basically, you're looking at the same engine, so you're going to see pretty much relatively the same efficiency and the same increased performance in these engines.

Now, did CNH recently say that the Tier 4 technology they are using with SCR is going to be enough to make the next set of Tier 4 in 2014, they won't have to add an EGR-type technology?

They have not exactly said on this, I don't think we have total clear visibility, but I have to believe that they're working on it, and they've it made a lot of progress on it--.

I think about a week and a half ago, they actually quietly said that the SCR is going to be their only technology needed for their Tier 4 final.

That's good news.

All right. That's it, thanks, guys.

Thanks.

We will go next to Tom Varesh of M Partners.

Good morning, guys.

Good morning.

If I'm looking at the construction side of the business, can you maybe shed some more light in terms of what's different now versus a year or two ago, on the construction side of things in your area, especially given sort of the national and the global macro news, and renewed recessionary fears that we are hearing, seemingly on a daily basis?

Several things, just specifically looking at our construction business, a couple of the primary drivers on our results are that we are able to leverage more revenues to our expenses. We've grown the business, and then how does that relate to revenue growth, and also, where we are growing our rental business, those are two key drivers in our results. But then, how that relates to the rest of the country, and why is that happening here, one of the things is, we have this whole Bakken oil formation and the other formations around it, and there's a tremendous amount of activity and business that we are gaining out of that.

That's a big driver, and then there's quite a bit of demand that is coming out of this ag side of the market, like David talked about, where they're using this equipment for feed lots and their land maintenance and just a lot of things. So our region, our footprint that we are in kind of in the Midwest hasn't been as closely linked to what you're hearing about on a national basis, and that's what is showing through with our results.

Do you see that continuing, though? Especially if the US slips back into recession?

Yes, what we are looking at is, there is just a huge investment going on long-term doing -- investing in all of the things that it takes to develop the whole oil formations that are out in the western part of North Dakota, and now they're going down into Wyoming and eastern side of Montana, and that's not going away anytime soon. In addition to that, we've had a lot of different activity around this whole flooding issue, and that's not done. They are still having to clean up and just a story this morning in the news in North Dakota here on all the different activities going on at the Minot to recover from that flood, and all the rebuilding that's going on, and that happened all the way down the Missouri River chain.

So I think for what we see in the near-term future that we think that's going to continue here, and in addition to that, you kind of had this talk coming out of Washington, the possibility of this infrastructure investment that they are looking at on that for job creation. We only have so long of visibility, but it sure looks like the markets that we are in with the influence of ag, the influence of energy, and some of the activity around the flooding, that we see it continuing like our guidance the same.

Perfect. All right, thank you very much. That's all I have.

The final question will come from Jeff Bernstein of AH Lisanti.

Hi.

Good morning, Jeff.

Can you hear me?

Yes.

Hi, guys. So just a quick question on the rental and other lines. Revenue up pretty strongly sequentially, and the profitability was very strong there. I'm assuming that's because of expansion of the rental fleet. Can you just talk to what the further outlook is there, and how we should be modeling that?

Yes. We definitely have expanded our rental fleet. And we see a great opportunity to participate in that rental business in our markets. We already have the investment in the brick-and-mortar, where we have these stores out in these regional centers, and so now we can put that rental activity into those stores and that contribution basically flows through. Now they are some expenses associated with running that part of the business, Mark talked about that in his comments, but for us, we see this continuing, and we will expand that somewhat, going forward.

Okay, thank you.

I'd like to turn the conference back to our presenters for any additional or closing remarks.

Okay, thank you for listening to our call today. We are looking to speak to you again in a few months, and have a good day, everybody.

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