Titan Machinery Inc (TITN) 2013 Q3 法說會逐字稿

Good day everyone and welcome to today's Titan Machinery Incorporated third quarter fiscal 2013 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 given at that time for you to queue up for questions. Hosting today's conference will be John Mills of ICR. As a reminder, today's conference is being recorded and now I would like to turn the conference over to Mr. John Mills. Please go ahead, sir.

Thank you. Good morning ladies and gentlemen, and welcome to Titan Machinery's third quarter earnings 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 third quarter ended October 31, 2012, 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. The 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 and subsequent 10-Qs. 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 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 third-quarter results, a general update on the Company's business and review the Company's recent acquisitions. Then, Mark Kalvoda will review the financial results in more detail, and Peter Christianson will discuss the Company's segment operating results and its fiscal 2013 annual revenue, net income and earnings per share guidance ranges, along with its outlook modeling assumptions. Then, we will open the call to take your questions. Now, I would like to open the call to the Company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our third quarter of fiscal 2013 earnings 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'll see the presentation directly below the webcast in the middle of the page.

On slide 2, you will see our third quarter and first nine months of fiscal 2013 results. Our revenue for the third quarter was $582.1 million, our pre-tax income was $23.8 million, and we earned $0.66 per diluted share. For the first nine months of this fiscal year, we generated $1.4 billion of revenue, our pre-tax income was $44.9 million, and we earned $1.27 per diluted share. On our call today, we will discuss the Company's continued topline growth, driven by organic and acquired growth across both our Agriculture and Construction segments. For our Ag business, despite this year's drought that impacted customer sentiment earlier in the year, this quarter, we were successful in improving our margins and leveraged fixed expenses to increase our pre-tax income. For our Construction business, we continue to grow our topline revenue. However, on today's call, we will discuss some factors that are affecting our bottom-line results for this segment. In addition, we will discuss our current equipment inventory levels and equipment inventory strategy going forward. We are raising our fiscal year 2013 revenue guidance range and reiterating our earnings per share guidance range. Peter will provide additional information on this during his prepared remarks.

Now, I would like to provide some color on each of our industries that our key to our business. On slide 3, we provide an overview of our Agricultural industry. Despite this year's highly publicized drought, the sentiment of our farmers has improved through the third quarter. Producers enjoyed an early harvest this growing season, providing them with plenty of time to prepare fields for the calendar year 2013 growing season as well as lowering their current year harvest costs. This year's final yields exceeded the previous lowered customer expectations before harvest. Higher commodity prices are creating an increased return on investment for our producers, allowing improvements which will enhance future yield potential. The lower projected 2012 US crop carryover is supporting higher commodity prices, providing a strong market for our customers' 2012 and 2013 crop production. Crop insurance proceeds supplemented reduced yields and USDA is projecting net farm income for calendar year 2012 to be $114 billion, which is well above the 10-year average net farm income.

We anticipate increase in 2013 planted acres as a higher percentage of available land will be utilized for crop production. As an example, acres in the Conservation Reserve Program are returning to crop production after not being utilized for over 20 years. Also, with the low field moisture levels, many areas previously too wet to farm can now be in production. The Section 179 and 50% Bonus Depreciation tax incentives through December 31, 2012, are a positive factor for equipment sales through the end of the calendar year.

I'll turn to the Construction segment of our business. On slide 4, we provide an overview of the Construction industry and our markets. Titan's footprint includes one of the highest growth energy production regions in the US, which will provide us with the long-term demand for construction equipment we supply. Our Construction business continues to benefit from this increased energy industry activity in our region including coal, natural gas and oil. North Dakota has now become the second-largest oil production state in the United States. As many of you are aware, several of the states in our footprint are capitalizing on the Bakken, Three Forks, Niobrara and Tyler oil formations. With our recent acquisition of a number of Colorado construction locations, we have expanded our exposure to the Niobrara formation in eastern Colorado and Wyoming.

Our Agricultural customers continue to drive demand for our construction equipment to use in their farming operations including feedlots, material handling, land improvement and land maintenance. This year's early harvest provided increased opportunity for land improvement projects. This year's increased US housing starts reflect a recovery in the housing industry which is coming off a 30-year low. Low mortgage interest rates, increasing employment and a near-record low inventory of new homes will likely lead to an improvement in housing starts in 2013 as well.

We continue to see growth in rental equipment demand which is aligned with industry forecasts. Peter will update you on the status of this additional growth platform for our Company. Even though we are seeing improved demand in parts of our Construction segment, the slower than expected economic recovery continues to impact the entire US Construction industry. Industry equipment inventories have increased year-over-year at both the dealer and manufacturer levels. Peter will update you on all these factors impacting our Construction segment in his remarks.

Turning to slide 5, you will see our recent acquisitions and store opening activities. We are continuing to expand our US and international Titan Machinery footprint through strategic acquisitions as well as selective new store openings across our Agricultural Retail, Construction Retail, Rental and International growth platforms. Subsequent to the end of the third quarter of fiscal 2013, we completed an acquisition consisting of three Agricultural dealerships in Nebraska and an acquisition consisting of two Construction dealerships in Arizona which marked our first dealership in the state. We also recently entered into an agreement to acquire an Agricultural dealership in Serbia which complements our locations in Romania and Bulgaria. We also have received approval to distribute CaseIH Agricultural projects -- products in the Ukraine. And we look forward to opening our first locations in this country during the fourth quarter of fiscal 2013 and further capitalizing on the opportunity in Eastern Europe. We have added locations across all of our growth platforms this year -- Ag Retail, Construction Retail, Rental and International distribution.

We are pleased with our acquisitions to date. And we remain focused on expanding our footprint through selective acquisitions and store openings in our existing and contiguous [foot] markets as well as evaluating opportunities for future growth abroad. Now, I would 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 6, our total revenue for the fiscal 2013 third quarter grew 37.6% to $582.1 million, with approximately 64% from organic growth and 36% from acquisition growth. All of our revenue sources contributed to this quarter-over-quarter increase. Our revenue growth reflects higher sales in both our Agriculture and Construction segments. Our sales mix was weighted more towards equipment revenue this quarter, and was reflected in our overall gross profit margins. Although our rental and other revenue stream grew 25%, we anticipated a larger increase from this revenue source. Peter will comment further on the impact of this less than anticipated revenue growth from our rental business in our Construction segment results.

On slide 7, our gross profit for the quarter increased 27.1% to $94.1 million, reflecting higher revenue. Our gross profit margin was 16.2% compared to 17.5% for the same quarter last year. As I mentioned on the previous slide, gross margins were impacted by a change in sales mix in which our higher-margin parts and service business made up a lower percentage of our total gross profit. It's important to note that our equipment margins improved to 9.2% for the third quarter from 8.8% in the second quarter of fiscal 2013. Third quarter Ag equipment margins year-over-year improvement offset lower construction equipment margins. Our overall third-quarter equipment margins were in line with our expectations and support our full-year equipment margins modeling assumption of 9.3%.

Our operating expenses as a percentage of net sales in the third quarter of fiscal 2013 were 11% compared to 11.8% for the same quarter last year. This reflects our operating leverage across higher revenues. Our overall interest expense increased approximately 40 basis points. While floorplan interest expense increased as a dollar amount, it was relatively flat as a percentage of sales. Our other interest expense increased $2.6 million to $2.9 million which accounts for the 40 basis point increase. This other interest increase is primarily due to our April 2012 convertible debt offering. Our pre-tax margin was 4.1% compared to 5% in the third quarter of last year. The quarter-over-quarter decline primarily reflected the lower gross margin percentage as a result of the change in sales mix in addition to the increase in other interest expense as I just discussed. Earnings per diluted share for the fiscal 2013 third quarter were $0.66 compared to $0.61 in the third quarter of last year.

Slide 8 shows our results for the first nine months of fiscal 2013. Our revenue increased to $1.41 billion, which is a 34.4% increase compared to the same period last year. Again, all four of our revenue streams -- equipment, parts, service, and rental and other contributed to this growth.

On slide 9, our gross profit for the first nine months of fiscal 2013 increased 28.6% to $234.8 million, reflecting our higher sales for the first nine months of the year. Our gross profit margin was down 80 basis points, primarily reflecting lower equipment margins. Overall interest expense increased 50 basis points, which reflects higher floorplan interest as a percent of sales due to increased levels of interest-bearing inventory as well as higher other expense due to the convertible debt offering. Our pre-tax margin for the first nine months of fiscal 2013 was 3.2% compared to 4.2% for the same period last year, with the decrease being primarily attributable to lower equipment margins and higher interest expense. Earnings per diluted share were $1.27 compared to $1.31.

Turning to slide 10, we provide an overview of our balance sheet highlights at the end of the third quarter of fiscal 2013. We had cash and cash equivalents of $115.7 million as of October 31, 2012. Our inventory level was $1.05 billion as of October 31, 2012, compared to $748 million as of January 31, 2012. Of the $300 million inventory increase, $57 million was from acquisitions; new inventory, including acquisitions, increased $281 million from the end of fiscal 2012; and our used equipment inventory, including acquisitions, remained flat with a slight decrease of $1 million on the end of fiscal 2012. I will provide an overview of our equipment inventory with the next slide. We increased our rental fleet assets to $105 million compared to $62 million at the end of last year. This is in line with our strategic growth plans for the rental business. As of October 31, 2012, we had $189 million available on our $925 million floorplan lines of credit. The $925 million reflects a $125 million increase in our floorplan lines, which became effective in October.

Turning to slide 11, I would like to provide an update on our inventory levels. Consistent with what we projected on our last conference call, we saw equipment inventory levels increase during the third quarter. You will notice that the increase occurred in new equipment inventory, which is reflected in the blue bar while used inventory, noted by the red bar, continues to remain flat. We remain disciplined in the management of our used equipment inventory as we hold market fluctuation risk associated with this inventory. We have increased our new equipment inventory levels through the third quarter positioning us well for our seasonally strongest equipment sales quarter of the year. It is important to remember that approximately 50% of this new equipment inventory is financed with manufacturer non-interest-bearing terms. In addition, this inventory availability is critical as our customers need to take physical possession of the equipment to qualify for the Section 179 and 50% Bonus Depreciation available to them through December of the current year.

As we stated on our second quarter call, with the increase in inventory levels and shorter production lead times in both the Agricultural and Construction industries, we are changing our inventory strategy to increase our inventory turns. The primary component of this strategy will be pre-sell marketing of new equipment. It is important to remember that many of our production slots were locked in 12 months ago prior to the change of market conditions. And we projected our new inventory levels to peak in the third quarter and forecasted our equipment inventory to decrease in the fourth quarter, as reflected on slide 11. We anticipate a $75 million decrease in equipment inventories, excluding fourth-quarter acquisitions by fiscal year end. Our inventory management strategy supports our long-term financial goal of achieving a 3 time inventory turnover.

Slide 12 gives an overview of our cash flow statement for the first nine months of fiscal 2013. When we evaluate our business, we look at our cash flow related to the equipment inventory net of financing activities, with both manufacturers and other sources, including non-manufacturer floorplan notes payable and convertible notes, which are reported on our statement of cash flow as both operating and financing activities. Until deployed on future growth opportunities, our temporary use of the portion of the proceeds from our convertible debt was to reduce our floorplan notes payable balances, resulting in a higher level of equity in our equipment inventory than we have historically maintained. We use this adjustment to maintain a constant level of historical equity in our equipment inventory at 15%.

When considering a non-manufacturer floorplan proceeds, and the impact of our convertible note proceeds on our equipment inventory financing, in the first nine months of fiscal 2013, our non-GAAP net cash used for inventories was $55 million. In our statement of cash flows, the GAAP reported net cash used for operating activities for the first nine months of fiscal 2013 was $172.7 million. We believe including all equipment inventory financing as part of our operating cash flow better reflects the net cash flow of our operations. Making these adjustments, our non-GAAP adjusted cash used for operating activities during the first nine months of fiscal 2013 was $32.9 million. As our inventory turnover improves, this will have a positive effect on our operating cash flow.

Now, I would like to turn the call over to Peter to discuss the Agriculture and Construction operating segments in more detail and to discuss our fiscal 2013 annual guidance. Peter?

Thanks, Mark. I will now turn to slide 13. You'll see an overview of our segment results for the third quarter. Agricultural sales were $503.5 million, up 39.2%, driven by acquisitions and organic growth. We generated Ag pre-tax income of $26.1 million, an increase of 29.9% compared to the prior-year period. The improvement in pre-tax income primarily reflects higher equipment sales, partially offset by increased floorplan interest expense.

Turning to our Construction segment, our revenue increased to $94.9 million, up 22.5%, which reflected strong acquired growth, organic growth and the expansion of our rental business. Construction segment pre-tax income decreased to $0.5 million from $3.3 million in the prior-year quarter. The decrease in pre-tax income is primarily the result of three factors. The first factor is lower equipment margins driven by increased industry equipment inventory availability and the associated pricing pressure, especially in metro areas. Additionally, we anticipated more aggressive rental revenues as we ramp-up this growth platform of our business. The additional rental revenues drive significantly higher margins as the primary costs associated with the rental fleet have already been recognized. Finally, our Construction pre-tax income was impacted by increased interest expense associated with our rental fleet and higher floorplan expenses. In summary, we continue to grow the Construction segment of our business. And although the operating margins are less than anticipated, we are confident this segment of our business represents significant future earnings leverage as we implement our inventory strategy, increase our rental utilization, and integrate our acquisitions into the Titan operating model.

Slide 14 shows our first nine-months segment overview. Our Ag revenue increased 31.2% in the first nine months of fiscal 2013 compared to the first nine months of last year. Our pre-tax income increased 15.9%. As you may recall, our Ag pre-tax income was impacted in the second fiscal quarter by the drought which pressured our equipment margins. Our Construction revenue increased 49.8% in the first nine months of fiscal 2013 to $271.7 million, as we continue to expand this segment of our business through organic and acquired growth as well as rental growth. And the lower pre-tax income reflects the factors I mentioned in our quarterly overview.

Turning to slide 15, this shows our same-store results for the third quarter of fiscal 2013. Our overall same-store sales increased 24.5%, highlighting year-over-year improvements in both segments. The improved Agricultural same-store sales increase of 26.4% for the third quarter of fiscal 2013 highlights our ability to continue to grow organically despite the weather-related challenges earlier this year. Our third-quarter fiscal 2013 Construction same-store sales increased 15.2%, reflecting the continuing recovery of the construction industry in our markets as well as our initiative to expand our rental business. For the third quarter of fiscal 2013, overall same-store gross profit increased 16.4% year-over-year, primarily reflecting higher sales. Our same-store sales growth outpaced our same-store gross profit growth, due primarily to the lower equipment margins we discussed earlier.

Slide 16 shows our same-store results for the first nine months of fiscal 2013. Our same-store sales increased 19.2% and our same-store gross profit increased 14.8%. 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 in which we are comparing. In other words, only stores that were a part of Titan for the entire three months of the third quarter of fiscal 2012 and the third quarter of fiscal 2013 are included in the third quarter same-store comparison. In the third quarter of fiscal 2013, a total of 24 locations were not included in our third-quarter same-store results consisting of 19 Agricultural stores and 5 Construction stores. For the first nine months of fiscal 2013, a total of 33 locations were not included, consisting of 21 Agricultural stores and 12 Construction stores.

Slide 17 shows our fiscal 2013 annual guidance. As David said, we're raising our previously issued revenue guidance range and reiterating our earnings per share range. We expect fiscal 2013 revenue to be in a range of $2 billion to $2.15 billion from the previous range of $1.95 billion to $2.1 billion. We expect our annual net income attributable to common stockholders to be in the range of $44.1 million to $48.3 million, resulting in an earnings per diluted share range of $2.10 to $2.30, based on an estimated average diluted common shares outstanding of 21 million shares.

Our modeling assumptions supporting our guidance are as follows -- we are raising our Ag same-store sales to be in the range of 6% to 11%, compared to the previous range of 3% to 8%; and we are maintaining our Construction same-store annual growth to be in the range of 18% to 23%. It is important to note that our comps in the fourth quarter of last year were 38.1% for our Ag segment and 61.1% for our Construction segment. We are maintaining our equipment margins modeling assumption to be approximately 9.3% for the year. This equipment margin assumption is within the range of equipment margins for the past three years, which have fluctuated from 8.3% to 11.1%.

Before we take your questions, I would like to conclude by thanking our employees for all of their hard work and thank our valued customers for their continued support. Operator, we're now ready for the question-and-answer period of the call.

Thank you.

(Operator Instructions)

We'll pause for a moment. Michael Cox, Piper Jaffray.

Congratulations on the nice quarter, guys. My first question is on the rental business and you talked about trying to boost the utilization rates in that segment. Could you maybe give us a little more color around what your initiatives are internally to try and drive those utilization rates higher? And then a follow-up to that is what incremental investments do you intend to make as you look ahead to next year to continue to build that fleet or are you content where you are today? Thanks.

Yes, thanks. This is Peter. When we talk about our rental business, on our previous calls, we have been sharing with you that we want to grow that growth platform for our business. We've been increasing our rental fleet and as we have done that, we put the people in place to drive that business and ramp-up that revenue. It's just a matter of timing as we grow that fleet revenue and we increase the utilization. As far as our investment going into next year, we will grow that part of our business and we'll update you with the exact amount that we anticipate on that on our next call when we give our annual guidance for our outlook for fiscal year 2014.

Thanks. If I could maybe ask one last question here, as you shift more to a pre-sale marketing type program, could you maybe talk a little bit about how your customers have responded to that? And how your [pre-sale] have tracked those to your expectations?

Well, that's a -- it's not a new phenomenon and our customers are fairly used to that. The nice thing they like about that, it gives them the latest technology. Many times they combine multi-unit purposes so they can maximize their buying power by doing -- they can plan their business so it's a good program. I mean, we have a large percent of our business, we do pre-sale, but as much as we can expand that in the future, and I think, basically, our customers like to do business that way.

Steve Dyer, Craig-Hallum.

Just was wondering, historically in the third or fourth quarter of each year, you have, and I don't know how you'd categorize it but incentives that come back from CNH regarding hitting certain incentive levels. Do you expect that this year? And if so, how do we think about that in the context of gross margin?

Yes, Steve, this is Peter. We built that into our modeling assumptions. And you could look at our historical results and get a trend line on that based on what we've done historically and then build that into your model with our gross margin assumption on our equipment.

Okay, and then as it relates to Section 179, what are you hearing from farmers and dealers and so forth in terms of how is it impacting activity relative to Q4 of this year? And then how would you anticipate it would impact next year, if at all?

Well, first of all, most of our customers, on the Ag side of the business, made a lot of money this year. So they are looking at ways that they can -- anything they can do from the tax side of the business and depreciation is a good one, so that's definitely driving business right now. As we look ahead, I think everybody has to understand that, right now, most of our customers have very little depreciation basis in their entire fleet. So we look at a fairly long runway, we like the [accelerated] for this year but long term, there's a long runway to just get back to normal depreciation levels for most of our customers and their entire fleet.

Okay, and then last question and I will hop back in the queue. Europe, what are you seeing in the early days in Eastern Europe and any additional color there?

We continue to expand our footprint over in Eastern Europe. You will see on our financial statement where we're doing that profitably. Right now, our -- one of our big initiatives is, we have the distribution rights in Ukraine so we're at looking at opening up additional locations now in the fourth quarter and first quarter, and continue to build that out. We're working with training the employees and implementing some of our operating strategy and tactics that we have in North America and bringing that over to Eastern Europe on the product support side of the business.

Rick Nelson, Stephens.

I'm excited about the quarter. Dave, can you talk about the acquisition pipeline, where you see the most opportunity in the year ahead as -- at the US, Eastern Europe, Ag or Construction?

Well, you can see like what we did this year and what we've done the acquisitions in all four of those segments of our business. I look at that to continue next year so, as you can see what we did this year, we made five really nice Ag acquisitions in Nebraska, Imperial and McCook earlier in the year, Grand Island, Broken Bow, and Ord, so we like that with the irrigation we have from Ogallala Aquifer. So there are some nice acquisition targets out there. We want to continue and I think we did a good job what we did this year. Construction sites, if you look at the [last] Construction markets, very large markets, we have the Phoenix market, the Denver market so we are being pretty selective. We're making acquisitions that make sense and we anticipate to continue to do that in the future.

Has the drought increased the opportunity in the valuations? I'm wondering how they compare to what you have done historically?

I don't think the drought has really affected the acquisition pipeline. I think it goes back to the same demographic that you are looking at is, is you're looking at an aging dealer principal group out there. You are looking the increased system of sophistication to run these businesses, lack of succession in Many cases, the huge capital requirements, I think those are really weighing into it way more than anything else.

Got you. Thanks a lot, and good luck.

Brent Rystrom, Feltl and Company.

Just a couple of questions. The fourth quarter, as we're going around looking at dealers, it looks like you guys are off to a [torrid pace] as far as tradage for that new equipment. Would you care to comment on how the fourth quarter is progressing so far?

Can you repeat that? We didn't catch all. Can you repeat the question, Brent?

Sure. Sure. As I'm visiting your dealerships and others, it looks like the fourth quarter is off to a very fast start. And I've seen lots and lots of trade-in activity, lots of new equipment leaving your lots. I'm curious if you would care to comment on how you feel the fourth quarter has started?

Well, we really can't comment on the fourth quarter right now but if, at all, the income that our customers made this year, which we've talked about on the call here, higher yields than expected throughout the year. We've had really strong commodity prices out there. Historically, it's a big quarter, so I mean, there's nothing out there. Take a look at what is happening, some of the land sales recently, Rick -- I mean, Brent, will give you a good idea of the buying power that our customers have out there right now. I know it's a lot of really big positives.

It helps when debt for farmers is only 11% of their assets right now from a --

(multiple speakers) -- great shape.

Yes, from a simplistic perspective, talking to grain elevators, talking to a lot of people in the grain channel, they think farmers are going to be liquid on this year's crop at record for early types. So the complete sell-through of the crop at a lot of regions might be done by March, three or four months earlier than normal. Do you feel that the substantial cash coming in earlier than normal could have favorable implications for your first half of next year?

Well, I think that these growers are -- they're pretty sophisticated business people out there right now and just because they have cash, and they've got a lot of borrowing power Their balance sheets are in great shape. So just because they have that cash, I don't think necessarily it means that -- and they're going to manage their assets. They're going to manage their liquidity but I think they've got great buying power and they're going to continue to, I think, buy equipment on normal channels. And just because they happen to have a bunch of extra cash, I don't anticipate somebody doing something frivolous out there but I think it's good. I think the fact that they have cash, they've got great balance sheets bodes well for that segment.

Thanks, guys. I will jump back in the queue.

Neil Frohnapple, Northcoast Research.

Congrats on a nice quarter. The equipment gross margins were better than we anticipated in the quarter, and were more flat year-over-year. The full-year guidance of 9.3% implies, I believe, a sub-10% performance in the fourth quarter which would be over 100 basis points throughout over the year. So just curious on what you expect to change in the fourth quarter or if you are just being conservative in light of the environment, particularly on the Construction side?

Yes, for our fourth quarter, Neil, we're -- this is Mark, we are expecting to get it to balance out to about that 9.3%, it's right around the 10%. And that fourth-quarter, that's when we have true-ups on some of those incentives that typically happen and with that strong fourth-quarter equipment sales quarter, that also does that typically bring a little bit stronger margins in that fourth quarter. So we're not anticipating anything, I think, unusual in that quarter and it's going to balance out to around that 9.3% is what our expectation is for the year.

Okay, I was guess I was just trying to understand the -- you guys were flat year over year in the third quarter but now you're expecting a 100 basis point decline in the fourth. I'm just wondering if maybe those incentives are less than normal, if there's anything funny going on but doesn't sound that way?

No, no, but the other thing we mentioned during the call, too, is that CE is running lower than the -- Construction side is running lower than what has happened, especially compared to the prior year, so with that balances out the percent in the fourth quarter as well, bringing it down.

Okay. And have used equipment prices stabilized in your markets or are you still experiencing price declines in both Construction and Ag, if you can comment there?

Well, I think we saw a real stabilization of that throughout the third quarter and in fact, there's -- in certain [miles], it's fairly strong.

Brian Sponheimer, Gabelli & Company.

You have a -- your primary vendor is going through a consolidation right now with its parent. Do you foresee any changes to your business, maybe it's your financing terms as a result of the consolidation of CNH and the Fiat Industrial?

Right now we're seeing businesses as usual. I think all this -- it's got a be a huge positive to be associated with the world's third largest capital goods provider, which has got to be a real positive out there. So but it's business as usual.

Okay, and just beyond that, I guess there's a flip side to a pre-buy in December. What changes to normal seasonality do you see early next year if some of your customers take hold of equipment in December?

We see pretty stable business next year, if you know -- similar to what we've seen historically. One thing we look forward to is we've got some really nice new model introductions on [Crew] Cab Quad Track, CVT transmission, and our Magnum-type tractors so from that, definitely a good demand for those products as availability becomes larger on those.

Mig Dobre, Robert W. Baird.

I was wondering, can you comment directionally on where you see inventory heading next year and maybe also give us a little color on pre-sale? What you've done, for instance, in pre-sales in the current fiscal year versus what you expect to do next year?

Well, we commented, Mig, on our inventory strategy where we're trying to go more towards the pre-sale and drive that inventory turn more in line with our long-term financial goal of a 3 time turn. Mark gave some color on that earlier.

Right, but, so I'm trying to clarify here. Are we talking inventory coming down next year? I'm wondering if you can comment at all as to say, for instance, what percentage of sales have been done on a pre-sale basis in the past versus the way you're looking at this statistic going forward? What your goals would be there?

When you talk about pre-sales, it's -- basically what that means is that you are ordering a piece of machinery that you don't have on your lot that you get shipped in the future period of time. And there's periods that you're -- where the customers like to do that and get that ahead. So that can sometimes range from ordering something you may get in 60 days or it could be something that you get in six months or seven months. But the nice thing about when you talk about turns and a pre-sale, basically when you get something in and you sell it for it right away, you have to book it right away that's basically infinite terms on that group of equipment.

So besides good business, another nice aspect of that is that you've got exposure to that used piece for that many more months that you can sell that even before the newer piece arrives. So that's the positive attributes to that. So as you look at a percent -- we really don't break out the percent of the business from a competitive standpoint of pre-sales. That amount of business is continuing to increase. It's good business. We don't see any change in that taking place. I think customers like it -- manufacturers like it.

I think the total industry is moving in that direction so with that, you are going to see our inventories, we feel, start decreasing because there's no need to really stock that. Actually, if you're going to really do a good job pre-selling you don't want a lot of inventory on your lots because it's -- then all of a sudden, you have to try to sell what's on hand when we order it so we want to keep moving that amount of equipment we have on hand down.

And with these long lead times we had, if we go back into the last 2011, 2010, I mean with long lead times, shortages of equipment, to hit our revenue numbers, we really needed this level of equipment on hand. Now, as we are seeing more equipment availability, a little shorter lead times, more emphasis on pre-sale, we think we're going to have a lot -- better turns, less inventory on hand and basically, it's something our customers like, our stores like it. It's just a win-win for everybody.

I see. Thank you. And my last question is on Construction. Your press release mentions improvement in the fourth quarter but we know that fourth quarter is a seasonally soft quarter. So I am wondering, what is it that you expect to drive the improvement here? Are you looking at adjusting the cost base at all there? Thank you.

We are just looking at how the modeling what our sales level activity is going to be and then we do have this rental business that we been growing as well, Mig.

Tom Varesh, M Partners.

To the extent that the harvest wrapped up early this year, do you feel or is there any indication that there was some sales that would otherwise have appeared in Q4 pulled into Q3 and how do you see that impacting Q4?

Well, from what I could tell in Q3, our customers, they did not get a day off. I mean, they were out there in the combines and their tractors. I mean, if you drive across the country, I have never seen these fields in this good of condition. And from what I'm hearing from most of our people, it was hard to get them, the customers, to sell. They just wanted to get done.

They wanted to get their crop in the bin; they wanted to get their crop off; they wanted to get the tillers work done; they wanted -- they had a lot of work to do on some of their fields and they were really focused up until freeze-up to get that done which was -- basically takes you through the third quarter. So, I don't think they took a lot of time to think about buying machinery as much as they thought about -- let's just get our fieldwork done, so I wouldn't put a lot into that.

Okay. Do you have any indication as to whether or not that Bonus Depreciation Program or some form of it is going to be extended or continue into the next calendar year?

Boy, a good question. I mean there's -- we talk about the fiscal cliff and all that. I mean, there's a lot of things being bounced around on a number of fronts. So I mean, I've got no idea but like I said earlier, whether they come with something accelerated, they do or not, our customers have very little depreciation basis left in their equipment right now due to the fact that we've had so much accelerated depreciation the last three to four years. So regardless if they come with something accelerated or not next year, our customers need to get their depreciation basis back up to their normal levels. Their bankers are telling them that, their tax advisors are telling them that so we think we've got a long runway to get back to normal levels regardless of what happens on that next year.

Brent Rystrom.

Yes, just a couple of quick follow-ups. Can you give us some thoughts on the European markets? When we think about modeling those locations, when I look at historically, how your locations have grown in the US, should they experience similar growth? Should the growth be faster because it's off a smaller relative base? How should we think about growth in Europe?

Well, Brent, this is Peter. First, what I would point out is that we think that they are going to have a stronger growth opportunity for us because they're developing markets. But I just would mention to keep in mind that they still are a very small part of our overall business. And so the impact on our overall business isn't that large. And then finally, what I would point out is that in each different country, there are different -- it is different maturity of the distribution network. So, for instance, in Bulgaria, we got involved and that distribution network was fully established. In Romania, we opened new locations this past year and now we're going to be opening new ones in Ukraine.

So there is different levels of growth that are within different countries. Finally, Brent, when we talk about the Eastern European business, one thing that I would say that is important to think about when we are modeling that, is that over in that part of the world, first of all, they have somewhat higher equipment margins. Secondly, they have a much lower percentage of their sales mix that is related to their parts and service business. We want to grow that parts and service business but the current situation is that they have a lower percentage of their mix coming from parts and service.

Great. That's very helpful and then final question, did Redwood Falls Supercenter, did that open in the third quarter?

Yes, we are just moving into that as we speak right now so let's just make (inaudible) switch right now. Great-looking location there.

Yes, great, great spot. And Iowa Falls, when is that going to open?

We should see that open up some time, I would say, second or third quarter of next year.

All right. Super. Thank you, guys. Great job.

Mr. Mills, I'll turn the conference over to you for any additional or closing comments.

All right. Thank you for your interest in Titan and we look forward to updating you on our progress on our year-end call next year. We'll also be attending a number of investor events and look forward to seeing you during the next few months. Have a good day, everybody.

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