Titan Machinery Inc (TITN) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen; thank you for standing by. Welcome to today's Titan Machinery Inc. fourth-quarter fiscal year 2013 earnings conference call. At this time all participants are in a listen-only mode. Following the formal remarks they 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 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 fourth-quarter and full-year fiscal 2013 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 fourth quarter and full year ended January 31, 2013 which went out this morning at approximately 6.45 a.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Titan's website at TitanMachinery.com.

This call is being webcast and a replay will be available on the Company's website as well. In addition, we are providing a slide presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the Investor Relations tab. The presentation is directly below the webcast information in the middle of the page.

Before we begin we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. 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 fourth-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 2014 annual revenue, net income, 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 fourth-quarter and full-year 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 will see the presentation directly below the webcast in the middle of the page.

On slide 2 you will see our fourth-quarter and full-year fiscal 2013 results. Our revenue for the fourth quarter was $784.5 million, our pre-tax income was $25.8 million, and we earned $0.73 per diluted share. For the full fiscal year we exceeded the top end of our guidance and generated $2.2 billion of revenue, our pre-tax income was $70.7 million and we earned $2 per diluted share.

On our call today we will discuss the Company's continued top-line growth driven by organic and acquired growth across both our agriculture and construction segments. For our ag business, despite last year's drought that impacted customer sentiment and pressured our margins, we grew our full year ag pretax income by 13% in fiscal 2013 compared to fiscal 2012.

For our construction business we continue to grow our top-line revenue; however, our bottom-line results for this segment were impacted by the cost of expanding our network, difficult industry conditions as well as falling short on our operational targets. On today's call we will discuss some of the factors that are affecting our bottom-line results for this segment as well as some of the steps we are taking to improve the profitability of this business in fiscal 2014.

In addition, Mark will discuss the progress we achieved with our overall Company inventory strategy to increase equipment turns. We ended the year with a notable reduction in inventory compared to the third quarter of fiscal 2013. Finally, Peter will discuss our initial guidance and modeling assumptions for our fiscal 2014.

Now I would like to provide some color on each of our industries that are key to our business. On slide 3 we provide an overview of our agriculture industry. In our production footprint we are experiencing a delayed spring planting due to snow and cold/cool weather. In addition, the western corn belt is starting the production cycle with low subsoil moisture levels which factor into farmer sentiment in view of their potential yields.

Regarding our Eastern European footprint, winter crops are in excellent condition, however they are experiencing delayed spring planting similar to our North American footprint. We anticipate an 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 large projected corn production in the US has pressured current commodity prices during the past few weeks. Even though corn prices are still high on a historical basis, we believe the lower calendar 2013 prices compared to last year may have an impact on customer sentiment during the first half of this year.

Farmers will benefit from the US Farm Program which has extended for calendar 2013 growing season. In addition, the Section 179 accelerated depreciation deduction was increased to $500,000 and the 50% bonus depreciation tax incentive was extended through December 31, 2013. These are positive factors for equipment sales this calendar year.

The USDA is projecting net farm income for calendar year 2013 to be $128 billion, which is well above the 10-year average net farm income and is an increase compared to calendar year 2012. US days projected income is based on trendline crop yield estimates. 2013 growing conditions may impact the actual 2013 yields.

Slide 4 is an overview of the current drought conditions in the United States. As you can see, drought conditions have moved north into much of Titan's footprint. With the depleted soil moisture conditions going into planting season 2013 yields are dependent on timely rains.

The potential reduction of total bushels may result in higher commodity prices in the back half of this year, but at this time the producers on our footprint don't know if they will be affected by the potential decrease in yields. Potential volatility in 2013 commodity prices combined with the unknown 2013 rainfall in our markets may lead to a wait and see sentiment during the first half of the year.

Now I will turn to the construction segment of our business. On slide 5 we provide an overview of the construction industry in our markets. Titan's footprint continues to be driven by these solid ag economy as well the strong energy production activity in our region including oil, natural gas and coal. The ongoing buildout of the Bakken, adjacent oil reserves and related infrastructure should create a significant long-term demand for construction equipment in our footprint.

Calendar year 2012's increased US housing starts from projected calendar year 2013 US housing permits reflect gradual recovery in the housing industry which is coming off a 30-year low. We are optimistic that this trend will persist throughout the current year; however, the weak economic recovery continues to impact the overall growth of the construction industry.

We continue to see growth in rental equipment demand which is aligned with industry forecasts. Even though we are seeing improved rental demand, it is important to remember that in areas of our northern construction footprint our fourth quarter and first quarters are historically seasonally softer utilization periods due to the winter conditions.

Excess industry equipment inventories are likely to decrease through the first half of calendar year 2013 until they are in line with end user demand. Peter will provide additional commentary on factors impacting our construction segment results in his remarks.

Turning to slide 6, you will see a summary of our acquisitions and new store openings in fiscal 2013. We completed eight acquisitions consisting of 20 dealerships and opened four new locations. We added locations across all growth platforms which include agricultural retail, construction retail, rental and international. In fiscal 2013 we also received approval to distribute Case (inaudible) agricultural [projects] in the Ukraine and we contracted with CNH to distribute Case Construction equipment in both Romania and Bulgaria.

Subsequent to the end of fiscal 2013 we completed two acquisitions consisting of two construction dealership locations in the United States. One acquisition was in Arizona, further expanding our presence in the state following an acquisition we made in the fourth quarter of fiscal 2013. The second acquisition was in New Mexico marking our first dealership in the state. We now have a contiguous Case Construction footprint from Mexico to the Canadian border.

Geographically we now have one of the largest construction equipment distribution footprints in North America. This strategic expansion represents a meaningful investment during the past few years including fiscal 2013, but we believe this positions us for structural growth in revenue and operating profits as this industry recovers and we improve operations across our footprint.

Internationally we are now fully operational in Bulgaria, Romania and Serbia. In regards to our Ukrainian initiatives, we opened our initial dealer facilities in Kiev earlier this month. In fiscal 2014 we will continue to build out our distribution network in the assigned regions of the Ukraine and establish a European operations center in Vienna, Austria.

Now that we have achieved our targeted construction segment footprint, rather than aggressive construction store acquisitions, for the immediate future we are focused on improving operations, growing our rental business and achieving financial targets for this segment. We will continue to evaluate selective acquisitions and store openings in our ag segment in North America and internationally.

We look forward to reporting to you our progress throughout this year on our acquisition strategy. 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 7, our total revenue for the fiscal 2013 fourth-quarter grew 29.2% to $784.5 million with approximately 67% from organic growth and 33% from acquisition growth. All of our revenue sources contributed to this quarter-over-quarter increase.

The 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. Additionally, a lower rental utilization rate drove lower than expected rental revenue. Peter will discuss this in more detail in a few moments.

On slide 8, our gross profit for the quarter increased 12.6% to $104.5 million, reflecting higher revenue. Our gross profit margin was 13.3% compared to 15.3% for the same quarter last year. The decrease in our gross margins was primarily due to sales mix and lower equipment margins.

As I mentioned on the previous slide, we experienced a change in sales mix as our higher-margin parts and service business made up a lower percentage of our total gross profit. The fourth quarter equipment margins of 9.5% were in line with our previous guidance but were lower than the prior year quarter's equipment margin of 11%. These lower quarter-over-quarter margins were impacted by a competitive environment where industry inventory levels continue to overhang the market.

Our operating expenses as a percentage of net sales in the fourth quarter of fiscal 2013 were 9.2% compared to 9.9% for the same quarter last year. This reflects our operating leverage across higher revenues. Our overall interest expense increased approximately 30 basis points. As a percentage of sales our floorplan interest expense was relatively flat, but our other interest expense increased 30 basis points as a result of our April 2012 convertible debt offering.

Our pre-tax margin was 3.3% compared to 4.9% in the fourth quarter of last year. The quarter-over-quarter decline primarily reflects lower gross margin as a result of the change in sales mix and lower quarter-over-quarter equipment margins. Earnings per diluted share for the fiscal 2013 fourth quarter were $0.73 compared to $0.84 in the fourth quarter of last year.

Slide 9 shows our results for the full year of fiscal 2013. Our revenue increased to $2.2 billion which is a 32.5% increase compared to last year. Again, all four of our revenue streams -- equipment, parts, service and rental and other -- contributed to this growth.

On slide 10, our gross profit for fiscal 2013 increased 23.2% to $339.4 million reflecting our higher sales for the year. Our gross profit margin was down 120 basis points primarily reflecting lower equipment margins. Operating expenses improved 50 basis points to 11.2% from 11.7% in the previous year-over-year period. The improvement reflects our operating leverage across higher revenues.

Overall interest expense increased 40 basis points which reflects higher floorplan interest as a percent of sales due to the increased levels of the interest-bearing inventory throughout the year as well as higher other expense due to the convertible debt offering. Our pre-tax margin for fiscal 2013 was 3.2% compared to 4.4% last year with the decrease being primarily attributable to lower equipment margins and higher interest expense. Earnings per diluted share were $2 compared to $2.18.

Turning to slide 11, we provide an overview of our balance sheet highlights at the end of fiscal 2013. We had cash and cash equivalents of $124.4 million as of January 31, 2013. Our inventory level was $929 million as of the end of fiscal 2013 compared to $748 million as of the end of fiscal 2012.

Of the $181 million inventory increase, $85 million from was from acquisitions; new inventory including acquisitions increased $97 million from the end of fiscal 2012; and our used equipment inventory including acquisitions increased $56 million from the end of fiscal 2012.

It is important to note that our inventory decreased from $1.05 billion at October 31, 2012 reflecting execution of our inventory management strategy. We increased our rental fleet assets to $106 million compared to $62 million at the end of fiscal year 2012. As of January 31, 2013 we had $307 million available on our $1 billion floorplan lines of credit.

Slide 12 provides an overview of our Company's equipment inventory levels on a quarterly basis. On our last conference call we shared our inventory strategy to move towards a three times turn of our inventory. We exceeded our year-end target for equipment inventory levels by decreasing inventory by $127 million. As you can see from the graph, historically inventory has remained flat from the third to the fourth quarters.

We will continue to focus on our inventory strategy in fiscal 2014; however, it is important to remember that our inventory levels increase during the front half of the year to support our back half sales volume. We will also focus on pre-sale marketing of new equipment to increase our inventory turns.

Slide 13 gives an overview of our cash flow statement for 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 offering 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 our non-manufacturer floorplan proceeds and the impact of our convertible note proceeds on our equipment inventory financing in fiscal 2013 our non-GAAP net cash used for inventories was $35.6 million. In our statement of cash flows the GAAP reported net cash used for operating activities for fiscal 2013 was $115.3 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 for fiscal 2013 was $1.2 million. Due to our inventory management strategy and our anticipated inventory turns we expect our non-GAAP adjusted cash flow from operating activities to be positive in fiscal year 2014.

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 2014 annual guidance. Peter?

Thanks, Mark. On slide 14 you will see an overview of our segment results for the fourth quarter. Agricultural sales were $699.4 million, up 32.9%, driven by acquisitions and organic growth. We generated ag pre-tax income of $32.8 million, an increase of 7.8% compared to the prior year period. Improvement in pre-tax income primarily reflects higher equipment sales partially offset by lower equipment margins and increased floorplan interest expense, as Mark mentioned earlier. Our ag results were in line with our expectations.

Turning to our construction segment, our revenue increased to $108.6 million, up 11.1%, which reflected acquired growth and organic growth. Construction segment pre-tax loss was $5.5 million compared to a pre-tax income of $1 million in the prior year quarter. Our construction pre-tax results were less than we anticipated by approximately $7 million or approximately $0.20 per diluted share.

The results reflect us missing certain operating targets for this segment due to a number of factors. The majority of the miss was due to less than anticipated rental revenues. The additional rental revenues drive significantly higher margins as the primary costs associated with the rental fleet have already been recognized. An additional factor is lower equipment margins driven by an increased industry equipment inventory availability and the associated competitive pricing pressure especially in metro areas.

The construction segment operating expenses reflect an increased cost of expanding the network by seven locations in fiscal 2013. These recent acquisitions have a materially higher percentage of expenses relative to low sales volume. Finally, our construction pre-tax income was impacted by increased floorplan interest expense associated with our higher inventory levels.

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 improve operating margins going forward. I will discuss certain steps that we are taking to improve our construction business' profitability.

Slide 15 shows our full-year segment overview. Our ag revenue increased 31.8% in fiscal 2013 to $1.9 billion. Our ag pre-tax income increased 12.6%. As you may recall, our pre-tax income was impacted by pressure on equipment margins. Our ag segment delivered results in line with our revised full-year guidance.

Our construction revenue increased 36.2% in fiscal 2013 to $380.3 million as we continue to expand this segment of our business through organic and acquired growth as well as rental growth. Pre-tax loss for our construction segment in fiscal 2013 was $4.7 million compared to pre-tax income of $5.5 million in fiscal 2012.

Our full-year results were affected by the industry wide pressure on equipment margins, the cost of expanding our dealer network, the cost associated with ramping up the rental business and increased interest expense. We believe as the market turns around we will be in a good position to capitalize on the opportunity this segment represents; however, it is important that we improve our execution of operations.

To improve our overall construction operating results we are focusing on several key initiatives to drive this business in fiscal 2014 which are outlined on slide 16.

First, we are focused on increasing the utilization of our rental fleet. We plan to improve our dollar utilization rate from 31% to 35%. We are starting fiscal 2014 with rental account managers in place and the fleet mix to support this initiative.

Second, we are making the required personnel changes in management and store staff to support our improved execution of our operating targets.

Third, we are focusing on increasing the sales volume per location, especially in our newly acquired stores by implementing the Titan operating model.

Fourth, we need to leverage operating expenses where possible.

And lastly, we are focusing on improving inventory turns which will result in lower floorplan interest expense.

We believe that successful execution on these key initiatives will lead to significant improvements in our construction segment profitability in fiscal 2014. Long-term we remain confident that our construction segment will be an integral component of our structural growth.

Now turning to slide 17, this shows our same-store results for the fourth quarter of fiscal 2013. Our overall same-store sales increased 19.6% reflecting year-over-year improvements in both segments. The agricultural same-store sales increase of 22.6% for the fourth quarter of fiscal 2013 highlights our ability to continue to grow organically and underscores the overall strength of the ag industry.

Our fourth-quarter fiscal 2013 construction same-store sales increased 2.7%. The modest increase reflects the overall weakness in the industry and challenging comps in our fourth quarter of last year as comps were 61.1% for our construction segment last year.

For the fourth quarter of fiscal year 2013 overall same-store gross profit increased 4.1% over the same quarter last year as higher same-store gross profit for our ag segment offset lower same-store gross profit for construction. Our overall same-store sales growth outpaced our same-store sales gross profit growth primarily due to lower equipment margins we discussed earlier.

Slide 18 shows our same-store results for fiscal 2013. Our same-store sales increased 19.3%. Our ag same-store sales for the year was also 19.3%, which exceeded our expectations and highlights the strength of our industry and our execution with this business. Our construction same-store sales were 19.6%, in line with our expectations. Our annual same-store gross profit increased 11.2% reflecting the impact from lower equipment margins we discussed earlier.

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 fourth quarter of fiscal 2012 and the fourth quarter of fiscal 2013 are included in the fourth-quarter same-store comparison.

In the fourth quarter of fiscal 2013 a total of 28 locations were not included in our fourth-quarter same-store results consisting of 21 agricultural stores and seven construction stores. For the full fiscal 2013 year a total of 40 locations were not included consisting of 26 agricultural stores and 14 construction stores.

Slide 19 shows our fiscal 2014 annual guidance. We expect fiscal 2014 revenue to be in a range of $2.35 billion to $2.55 billion. We expect our annual net income attributable to common stockholders to be in the range of $42.8 million to $49.2 million resulting in earnings per diluted share range of $2 to $2.30 based on an estimated average diluted common shares outstanding of 21.4 million shares.

The range of our fiscal 2014 outlook reflects the uncertainty we see in our business today. The potential impact of the drought and volatility in commodity prices in our ag sector, and the level of improvement in our construction segment, are reflected in our wider earnings per share range.

Our modeling assumptions supporting our guidance are as follows. We expect our ag same-store sales to be in the range of 0% to 5%. We are expecting our construction same-store annual growth to be in the range of 10% to 15%. Our equipment margins modeling assumption for the full year is in the range of 9% to 9.5%. We are modeling annual rental dollar utilization in the range of 34% to 36%.

It is important to remember that utilization fluctuates throughout the year. The first and fourth quarters are seasonally software rental periods and have lower utilization.

Now I would like to provide some color to our first quarter. On slide 20 is a first-quarter seasonality analysis. We are modeling this year to be much more weighted towards the back half of fiscal 2014 as the first quarter is expected to be impacted by the factors discussed earlier in our guidance, as well as an increased influence of our international business on total Company results.

The developing markets in Eastern Europe have a higher percentage of revenue coming from equipment sales compared to parts and service. So, operating results are stronger in the second and primarily third quarters when equipment sales are stronger.

The top graph shows the historical trend of first-quarter revenue as a percentage of annual revenue. We anticipate first-quarter revenue to fall within that range and be approximately 20% of fiscal 2014 annual revenue. The lower graph shows the historical trend of first-quarter pre-tax profit as a percentage of annual pre-tax profit.

Based on our visibility and the factors impacting the first half of our operating results, we anticipate the first-quarter pre-tax profit to be in the range of 8% to 9% of our pre-tax profit for fiscal 2014. For closing remarks I would like to turn the call back to David.

Thanks, Peter. Before we take your questions and answers I want to express our confidence in our business model, North American and Eastern European footprint and the quality of our dedicated employee group at all levels of our Company. We continue to see a long runway of consolidation in the farm equipment distribution channel.

Last December on our Q3 earnings call we were confident in reiterating our annual guidance and I don't want the excellent execution of our ag segment to be overshadowed by the disappointing year-end performance of our construction segment. I want you to be assured we are focused on the construction equipment business and are putting the changes in place to make our construction equipment stores long-term strong contributors to the success of our Company.

Operator, we are now ready for the question-and-answer period for the call.

(Operator Instructions). Michael Cox, Piper Jaffray.

Good morning. Thanks, guys. My questions pertain to the construction segment and on rental in particular. Given the challenges that you have had in getting that utilization up, I question why you embed a 35% utilization rate into your guidance. Or maybe the question is what gives you the confidence or the visibility that you can achieve that target this year?

Michael, as you recall, last year we really started on our initiative to build into that business and it really affected us in the front half of the year as we ramped up the fleet. That had a big impact on our annual utilization and so we came in with an annual utilization last year at 31%. And so we were confident we could improve that utilization to 35% on an annual basis going forward for fiscal 2014.

We have recruited the rental account managers, they are in place out on our markets and we have been fleet in place. So we felt that we could raise that utilization by 4% -- to the 35% is the midrange of 34% to 36%.

Right. I guess my follow-up question is on the M&A strategy, considering the profit challenges that you faced in construction, why continue to invest in buying dealerships prior to getting the model really figured out?

Michael, this is Dave here. We have some really good performing construction stores, so really what this did is -- I think this solidified our footprint. We have got this contiguous footprint now from the Mexican border to the Canadian border. This gives us the scale that I think we can really go in and make that investment and do the job it's going to take in that sector.

So fundamentally it is a strong business and we've got some good people here and we are being opportunistic I think and it is another growth platform out there right now. And we are confident that -- like I said, it is a fundamentally -- the construction store model is a fundamentally strong producer, it historically has been, and that is what we are going to do in our Company.

Okay, thanks.

Rick Nelson, Stephens.

(Technical difficulty) guidance and the assumptions that that would make about the construction segment profitability?

Could you repeat that, Rick? We couldn't hear you.

The new EPS guidance of $2 to $2.30, I am curious what that assumes about the profitability of the construction segment. I see the same store sales guidance you are providing, but --.

Yes, Rick; Mark here. What we have in our guidance for this next year in that range is we do assume that we are going to get back to a low level of profitability on the CE side of the business. We do have to keep in mind that there is more seasonality on that construction business, especially with the rental fleet, and that second and third quarters are kind of the bigger quarters for that business.

Got you. And then a follow-up on construction equipment, margin pressures that you talked about in that segment. If you could provide some more color there as to what is happening in new and used and maybe what the absolute levels of margins are in construction and what sort of year-over-year declines we saw.

I can give some color on the overall positioning in the industry and the pressure on the margins. Industry wide there was a build on inventory both at the manufacturer and the dealership levels. And they came into this year and were still working on getting that level down in line with end-user demand. And so, we see that probably the front half of this year that is going to continue to have pressure on our equipment margins in that segment. Relative to the -- go ahead.

I know you're guiding the consolidated margin at the midpoint to be about the same as it was this past fiscal year. I guess my question is what that assumes about construction pressures in the first half and then fully offset in the second half?

Rick, Mark here again. Overall our equipment margins ended at like 9.3% this year and the midpoint of that range that Peter talked about was right around that 9.3%, 9.25% if you take the exact midpoint. And between construction and ag we really don't break it out, but essentially we are saying similar margins baked into our guidance for the next year on equipment margins for the overall business.

Okay. Thanks and good luck.

Mig Dobre, Robert W. Baird.

Good morning, gentlemen. I guess my first question is on parts and services where I understand you guys highlighted some mix issues in equipment and the rental fleet. But I guess that does not impact parts and services. And yet even as we are seeing revenue growth on a year-over-year basis in parts and services, gross margins were lower in both categories.

So I'm trying to understand exactly what the dynamics are there, because my impression from looking at the numbers is that the pressure on the gross margin in parts and services is primarily owed to construction. Is that the case? What are we looking at here?

Well, on the parts side of the business, Mig, you have got a couple of things impacting that and that is that we had a higher percentage of more of the GPS equipment and other attachments that we sell through our revenues stream as parts. And these attachments and GPS equipment have lower margins than the standard after sale replacement parts that you put into driveline components.

So, that does have an impact on our margin on parts. In addition to that, we did have a reduction in our -- in some of our parts ordering discounts which also had an impact in the back half of fiscal 2014.

Regarding the service margins, actually if you look at it year over year they were up two-tenths of a percent and on a quarterly basis they were slightly down quarter over quarter. And that can be impacted by what happens with some of our preventative winter maintenance programs and what the mix of the service is as well.

Okay. Well then, sticking with the topic, looking at your guidance -- as I see it the guidance implies incremental net margins. So when I'm looking at your net income guidance that would be meaningfully below current levels when we are looking at where you are guiding the top-line.

Yet, I look at the equipment margin guidance, that seems to be pretty much in line with what you have done in 2012. And you were talking about rental utilization improving which should provide you with high incremental margins on those additional revenues.

The only thing that I can deduce is that parts and service incremental margins should be much lower in fiscal 2014. And I am wondering why is that the case. Do you see the mix issues that you have had in the back half of the current fiscal year continuing or how should we think about that?

Mark here again. So when you are talking -- I think you are talking about our pre-tax net margin and if you take the midpoint of the guidance it is coming down just a hair, it's going down from about 3.2% down to 3.1%.

And what we are kind of putting into the guidance is with ag same-store sales in that 2.5% range, kind of the midpoint of that 0% to 5%, we are not getting a lot of growth on that parts, service and equipment and there is some operating expense increase happening there. But for the most part it is staying -- what we are really modeling is about a flat pre-tax net margin business for next year.

Well, I understand that and I find that frankly to be a little bit surprising considering the amount of top-line growth that you are guiding to.

Well, a lot of that top-line growth that we are guiding to is annualization of like last year acquisitions and there's obviously some new year acquisitions in that guidance and that comes with operating expenses with it as well. They generally don't perform right away at the level of our average stores -- our average Titan stores.

And we talked about some of these metro area stores that we picked up last year, even early this year, that wouldn't be performing at the level of our average Titan store out there.

All right, thank you. I will jump back in the queue.

Brent Rystrom, Feltl.

Just a couple of quick thoughts. So from a simplistic perspective, Mark, if you see the CE business getting back to a slight profit, that implies about a $5 million pre-tax swing or about a $0.14 EPS swing which is basically your midpoint. What is going on in the ag business that is making that in your minds on a base case flat?

Well, right now I think you looked out there right now at the drought map that we provided in a slide. So from the first half out there there is a tendency I think for a lot of our customers -- a little bit of a wait and see attitude, the potential volatility of the commodities. So a lot of this is really going to be driven by weather, potential yields and what that does to the commodity.

So I can say there is an overall wait and see type attitude out there. So -- and that sentiment out there could have some negative pressure on those margins out there. So I think basically the balance sheets of our customers are good. I think that the basic health of this industry is good out there right now. But we are coming through some kind of a real interesting situation with the weather phenomenon.

And from a simplistic perspective does that imply then that inventories might build again in the first quarter given that you are now more cautious in the first half?

Well, we typically build inventories and there is some tightness in certain models out there right now even today. So yes, we typically build those inventories looking for (multiple speakers).

But what I'm asking, is it more than you would have expected previously?

No, I don't think so. I think we have some ongoing inventory initiatives out there I think and, like we talked about, three times turns some things like that. So I think inventories are very much under control and we're doing it on a very planned basis. So I'm looking at that 0% to 5% growth on the ag side.

And then my final question would be on late planting. I was just up in North Dakota -- Bismarck, (inaudible), Fargo sort of thing through Minnesota and Wisconsin, it looks like there's going to be a lot of late planting. When you look at North Dakota specifically all the net increase [makers] this year in the United States is technically coming to North Dakota.

If there is a shift where we are not able to get corn as aggressively in North Dakota as we think, is there in your mind an operational impact that would have on you if that was forced to shift heavier to beans or some other crop?

I don't think so, Brett. I think where you are seeing -- I think there has been a lot of discussions through -- some of these increased corn acres are going into more marginal lands out there, whether it be in the Southeast or reference North Dakota out there.

So with that I think if that gets switched over to soybeans I don't see a problem with that. You also have this insurance component out there in addition to that. So I don't see it from a standpoint of our business, I don't think that is really going to affect whether they grow wheat beans or soybeans necessarily like that, so (multiple speakers).

You are saying they might -- technically they could opt to go preventive plantings if they were corn acres -- designated corn acres for insurance. But theoretically (multiple speakers) does that hurt you because then you wouldn't have all the service because the equipment wouldn't be working?

No, and I think if you look in our key, if you really -- look in the key areas where Titan's markets are, in North Dakota where we are we have got a history of raising corn, soybeans and row crops in our markets. And if you really look at where these additional corn acres are going into, we are typically in the eastern third of the state and the southeastern part of the state where historically there has been a lot of row crops, corn and soybeans planted.

A lot of these increased acres are going up into the northern part of the state or northwestern part of the state where Titan -- we don't have ag dealerships, we have construction dealerships but we don't have ag dealerships in those markets.

Larry De Maria, William Blair.

Good morning. Thank you. I was just curious, used inventory was up, even on the new cane down it looks like. Is that as a result of just tax from buying which increased the trade-ins and the used? And how do you think about pricing on the used side should -- and should the pricing be okay into the spring and should the used side come down?

Larry, this is Peter and our used is in line with the sales cycle. What we did is we converted -- you can see on that inventory graph where we really reduced our new materially from our third quarter to our fourth quarter. We exceeded that target that we had talked about on our last call and most of that new sale results in used trade-ins.

And our used inventory historically always goes up coming in of our fourth-quarter results and the used inventory levels didn't go up anywhere near how much the new went down. So it is in line with our sales cycle and we have taken that into consideration. What we see as inventory values, they have been pretty stable now, but that is all part of our modeling when we talk about our equipment margins.

Okay, so used values you are saying are stable. Are they set to improve into the spring? Or now given the drought cautiousness, potential for a drought or adverse weather anyway, do you guys expect the used equipment to soften up? Because I think that was obviously a factor in some of the weakness late last year.

Well, the thing is, right now it's, like David talked about, a little bit of a wait and see attitude where we have got our used equipment on hand and we will see how the weather goes as we go forward and how it affects all the different production areas in the United States. So what impact does that have on the total crop production, but with what we see right now we feel good about our used.

Okay, good. And then the second question, I think as recently as a conference in January you reaffirmed your longer-term targets of 20% to 25% EPS growth; two years in a row those are set to not get hit unless something changes this year. How do we think about those targets? Are they still relevant? Is it a fundamentally different story now where we have to wait for construction to mature? Can you just give us some color and some confidence in the longer term?

Well, I think when we switch gears and we start talking about the longer term it would be fair to start looking at a longer-term horizon, you could look at what we have done since we have been a public company and I think we have delivered results that have been exceeding what we talked about on long-term objectives.

Short-term we can have things that happened, as with any business, where we hit challenges along the way as we strive to grow our business. But we feel like we have delivered the results and we feel confident that long-term we can live with those objectives that we have been putting out.

Then when we will we start to get back towards those longer-term goals in your view? Is it a 2015 event or sooner if things happen -- go the right way? Because I'm (multiple speakers).

I guess there are two ways to look at that. First of all, it is much easier to talk about what our track record has been and demonstrate how we have executed and we give our outlook for our Company on an annual basis.

And we really don't comment in particular on periods ahead of that other than that when we look at our business and we look at the runway we have for acquisition growth and what we have been able to do organically that we feel like long-term we can hit those objectives that we have discussed with you.

Okay, thanks. Good luck this year.

Steve Dyer, Craig-Hallum.

Thanks, good morning. Most of mine have been answered. Just one. Dave, you touched on the insurance issue. Is there a deadline at which seed must be in the ground to qualify for crop insurance?

Yes, there are deadlines on it, Steve; there are multiple components of that insurance there. But I think most of our growers feel that is going to be a good safety net for them this year.

What is point to be the safety net?

The insurance program.

But is part of it or all of it at risk if they can't get I think corn I think May 25 is my understanding, if the seed is not in the ground you don't qualify for part or some of that, is that right?

I don't have the exact specifics of the farm program. There are some preventive plant -- there are different -- like I said, there are different components of the farm program.

But in general the longer you go into the spring without planting the higher the risk that you won't be able to take that insurance, is that right?

I guess I don't know the exact details of that. I mean you have to look in the USDA and some of the crop insurance stuff there, Steve. But what I have seen is that's a long ways out there I mean -- and there are a lot of -- our growers have a number of different crop options as they get through the time periods out there.

And with the equipment they have today and their productivity and stuff, once the weather straightens out and gets going there are a lot of crops that are going to get planted in a very short period of time. So -- but there is definitely a safety net involved with the farm program whether it be preventive plant or crop insurance so either way they are going to be covered.

They've got a lot of options out to them there. But there again, I have been in this business for a lot of years and it is tough and it is just very -- I'd don't know if I can ever see a year where they actually weren't able to farm. So I mean, like I say, I give a lot of credit to our growers out there. They have got the management, the equipment and they've got the make it happen type attitudes and they just get the job done and so I am confident.

I mean this is not -- if you look historically back, to have snow on the ground in April and some rain and stuff like that, that is not unusual. We have just had a couple of really early springs that kind of spoiled everybody. But if you look over a period of years back, I mean this is not unreasonable.

And in fact I think a lot of farmers look at if they start planting corn towards the end of April or the April 25, in North Dakota anyway, it is kind of an optimal yield date. But we have seen some awful good corn crops where corn has gotten planted the first week of May, stuff like that too, so -- seed varieties, the technologies out there, the size of equipment, you can get a lot done in a heck of a hurry.

Okay, that is all I have. Thanks.

Neil Frohnapple, Northcoast Research.

Just a couple of quick follow-ups on the rental business. So the rental utilization guidance this year of 34% to 36%, where does rental utilization longer term really need to get to to ramp up profitability? If we look at one of your larger competitors in the rental business, their dollar utilization was low 40% in the fourth quarter.

So just trying to understand -- to get to your 5% to 6% pre-tax construction equipment margin target longer-term do we need to see utilization move from call it 35% this year to high 30%, low 40%? I mean how should we think about that?

Well, without mentioning names there are other people that are in the rental business that have rental fleets that have the same mix that we do. This whole utilization area, it is based on your fleet mix. And as you get into lighter, smaller rental pieces that, as an example, for consumer use, they get a much higher utilization than you do as you go up to larger pieces of equipment, as an example a large crane.

So it is all about your fleet mix, that has got a big thing to do with it. And with where we are positioning our fleet and where we target our customer base, we are looking at the 35% utilization because we are going to have a fleet that does have a focus pointing towards dirt moving in the dirt business on the heavier side of the fleet mix.

And at a 35% utilization you can create a 50% gross margin business. So this would be a strong contributor to helping us to get to our goal on our operating margins. So this is long-term; in that range we are not too far off now.

Okay, so the 35% is running on all cylinders then. And yes, there could maybe be some improvements, but we shouldn't see that given your guy's mix, to pop into the 40% range or anything like that?

No, we are not looking at that anytime soon. We feel like you know -- like you said, if we get into 35% utilization range that that is kind of -- with our mix that is kind of where we are going to be at.

Okay, and the two construction dealerships you just acquired, do you plan on investing in the rental business at these locations or as you guys have done at the other acquired CE dealerships recently?

Correct. That is one of our main drivers. If you look at the size of the rental market in the Denver market, which was a recent acquisition, the Phoenix market, the Albuquerque market -- huge rental markets there and that was one of our main drivers of going into those markets. Not only it is a big rental business, but the acquisition economics -- I think just long term really a lot of potential in those, especially in the rental business.

Okay. And then just final one for me -- can you speak directionally to your net CapEx plans for the rental business in FY '14? Should that be a source of cash then for your business this year?

We are going to continue to expand our rental fleet and with the visibility we have now it could be a $40 million investment in the fleet. But we are going to assess that as we go and we get better visibility into a lot of these new larger markets like what David talked about. And so we will be looking at that throughout the year.

Great. Thanks, guys.

Tom Varesh, M Partners.

My question is on inventory and the comment that we should expect or typically we have seen inventory increase in the first half of the year to support sales in the second half. But given the level of inventory that you do have and I think the focus remains on reducing that overall level of inventory. Why are you taking on new equipment in the first half of the year?

If you look at our Company on a historical basis and you would run the seasonality graph line each year, that is what happens in the business. You need to get your news sales supported by your inventory level so that you can deliver those new machines in the back half of the year.

David talked about the fact that they did increase -- in the United States they increased the Section 179 depreciation to $500,000 and also the bonus depreciation. All of that is predicated by us having -- physically having the unit on hand. So it has always been seasonally that what we have done is we have grown that inventory in the front half of the year to support the back half.

Now with that said, we are still focusing on our inventory management strategy. We still want to drive that inventory turn and increase that and move towards that three-time turn. So that is something that we will keep on working on, but everyone needs to remember that throughout the year there is seasonality in those levels.

Okay, thank you. That is it for me.

Brian Sponheimer, Gabelli & Co.

Good morning. Thanks for taking my call. I want to stay on the inventory management side and specifically your last comment about bonus depreciation and the need to have inventory on hand. What is your sense that longer term there is some demand that is just being artificially propped up by some of these incentives? And as you are looking longer-term is that a potential headwind for you on the growth side?

No, we think there is long-term demand out there. If you looked at the technology out there and the equipment, the increased productivity, the increased yield, lighter planters, some of the spacings in row crops -- it is just this continual demand for the equipment.

Also what we are seeing is just phenomenal fuel economy savings right now with these new Tier IV engines that are out there right now which I think is going to drive this -- purchasers in here to get the more fuel-efficient engines. I just recently read some stuff, you are starting to see some of these drones being used in the farming communities. There is just a lot of technology stuff out there that you are seeing coming on the marketplace.

So there are always going to be some incentives out there. There is always going to be the return on investment they get for better yields, better productivity and that has continually driven our business out there. And there are a lot of really interesting products out there on the horizon I think that are going to keep that ongoing demand out there.

All right, thanks. If I could ask just one more -- what is your sense about the pricing environment with some of your competition and their own inventory? How long do you think that this inventory bubble is going to need to work itself through the system?

Are you talking about ag or construction now?

On the ag side.

On the ag side, I think it is a competitive environment out there, but I don't see a lot of strange things happening out there as far as pricing is concerned. I think everybody is out there -- I think they are making money out there but everybody is fighting for marketshare.

But I don't see anything being driven by manufacturers or anything that is anything out of the ordinary right now. In fact, you almost sense that there is just a little bit of stability starting to take place in the pricing out there.

Thank you very much.

That does conclude our question-and-answer session. Mr. Meyer, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you to everyone for your interest in Titan and we look forward to updating you on our progress on our next call. We will also be attending a number of investor events and look forward to seeing you during the next few months. Have a good day.

That does conclude today's teleconference. We thank you all for your participation.