Titan Machinery Inc (TITN) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Titan Machinery first quarter fiscal year 2014 earnings conference call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. Hosting today's conference will be John Mills of ICR. As a reminder, today's conference is being recorded. Now, I would like to turn the conference over to host, Mr. John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's first quarter fiscal 2014 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 first quarter ended April 30, 2013, which went out this morning at approximately 6.45AM Eastern time. If you've 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 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-Q. 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 first 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 the 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 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 first quarter of fiscal 2014 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 first quarter fiscal 2014 results. Our revenue for the first quarter was $441.7 million, a 4.7% increase over the last year's first quarter. However, this year's first quarter revenue is approximately $50 million less than we anticipated. Pre-tax loss was $1 million which is approximately $7 million less of pre-tax income than we anticipated.

As we stated in our preliminary results release two weeks ago, both our Agriculture and Construction segments were impacted by the abnormally late spring weather, which extended through the end of our first quarter. For Agriculture segment, weather conditions have normalized and the planting progress has improved. We expect revenue that was delayed in the first quarter will be realized through the year because we believe the revenue impact was primarily a timing issue. As a result, we continue to expect sales growth in fiscal 2014 and we are reiterating our annual revenue guidance that we issued on our fourth quarter end of fiscal 2013 conference call.

In addition to the weather, our Construction segment was impacted by the challenging conditions in this industry and the cost of expanding our network. As we discussed on our last conference call, we're focused on a number of key initiatives to improve our Construction segment business. Peter will review these in detail during his remarks, but I want to emphasize that we expect these initiatives to drive improved top and bottom line results throughout the remainder of this year.

Now, I'd 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 agricultural industry. As I mentioned, in our production footprint, we experienced delayed planting due to abnormally late spring weather. And in addition to the wait-and-see customer sentiment that we discussed on our fourth-quarter call, this impacted all three of our Ag revenue sources, equipment, parts, and service. However, during May, we did experience favorable weather and significant rainfall throughout our ag footprint which allowed most of the acres in our production footprint to be planted and reduced drought concerns.

Regarding our Eastern European footprint, crops are in excellent condition and the delays due to late spring planting have greatly improved in the past month. Initial USDA forecasts projected large corn production in the US for 2013 which pressured commodity prices. Offsetting some of this pressure, in this week's crop progress report, the USDA announced that 91% of US corn acres have been planted, down from the 95% five-year average adjusting a possible reduction in planted corn acres. Congress is nearing completion of the new five-year farm bill and we are anticipating a final vote in the fall of 2013. Completing the new farm program will give farmers better visibility to their business going forward. In addition, the $500,000 Section 179 accelerated depreciation deduction, which has increased from $250,000 a year ago, and the 50% bonus depreciation tax incentive are extended through December 31 of 2013. These are positive factors for equipment sales this calendar year.

The USDA is projecting net farm income for calendar year 2013 to be at $128 billion, which is well above the 10-year net farm income average and an increase compared to calendar year 2012. We believe the forecast of net farm income supports our annual outlook. However, it's important to realize that we may continue to experience a wait-and-see sentiment in the first half of the calendar year, to a potential volatility in 2013 commodity prices, combined with the need for timely rainfalls in our market.

Now, I'd like to turn to the Construction segment of our business. On Slide 4, we provide an overview of the construction industry and our markets. The abnormally delayed spring weather prevented construction activity, which impacted equipment, parts, and service revenue. The weak economic recovery continues to impact the construction industry, and excess industry equipment inventories are likely to continue through the first half of calendar year 2013 until they are in line with the end-user demand. Peter will provide additional commentary on factors impacting our Construction segment results in his remarks.

With our expanded distribution and large geographical footprint, there are different drivers within the 11 state geography we cover. This diversification demonstrates one of the positives we achieved through scale. In the upper Midwest, the strong ag economy and ongoing build out of the Bakken adjacent oil reserves and related infrastructure continues to support the construction industry. In the Southwest, a strong increase in year-to-date housing permits reflects the recovery in the housing industry, which is driving the construction industry. First quarter housing permits in our Southwestern footprint increased 37%, compared to a 23% year-over-year national increase and a 9% increase in the remainder of our footprint.

We continue to see growth in rental equipment demand which is aligned with industry forecast. Our first quarter rental demand was in line with our expectations. Our utilization rate improved in the first quarter compared to last year. It is important to remember that our first quarter is softer historically due to winter conditions in the northern regions of our footprint.

Turning to Slide 5, you will see a summary of our acquisitions and a new store opening thus far in fiscal 2014. In the first quarter, we opened our first dealership facilities in Ukraine. We now have operations in four countries in the Black Sea region of Eastern Europe. This year we are focusing on the build out of our distribution network in the [assigned] regions of Ukraine and establishing a European operations center in Vienna, Austria. In addition, we have completed two construction acquisitions in the United States. Both acquisitions helped establish our presence in the Southwest. One acquisition was in Arizona, which was our second acquisition in the state, and we had an additional acquisition in New Mexico.

As you can see on the map, showing the states we have the locations in, we now have a contiguous Case Construction footprint from Mexico to the Canadian border. Geographically, we have one of the largest construction equipment distribution footprints in North America. This strategic expansion represents a meaningful investment, and we believe this is a structural component for our Company's long-term growth strategy, as the construction industry recovers and we improve operations across our footprint. Now that we've expanded our construction segment footprint, for the immediate future, we are focusing on improving operations, growing our rental business, and achieving financial targets for this segment. We will continue to evaluate selective acquisitions and store openings on an opportunistic basis, both domestically and internationally.

Now, I'd like to turn the call over to Mark Kalvoda, our Chief Financial Officer, to review our financials in greater detail.

Thanks, David. Turning to Slide 6, our total revenue for the fiscal 2014 first quarter grew 4.7% to $441.7 million, reflecting growth from acquisitions, a strong revenue increase in our International segment, partially offset by negative same-store sales in both North American segments, due to delayed spring weather, combined with cautionary agriculture customer sentiment and the challenging construction industry conditions as David mentioned. All of our revenue sources increased quarter-over-quarter, with the largest percentage growth occurring in our rental and other category. This increase was primarily due to a larger rental fleet and a slightly higher utilization rate.

On Slide 7, our gross profit for the quarter increased 5% to $73.9 million, reflecting higher revenue. Our gross profit margin was 16.7%, flat compared to the same quarter last year. The first quarter equipment margin of 9.2%, was in line with our annual guidance but slightly lower than prior year quarter's equipment margin of 9.4%. Our operating expenses as a percentage of net sales in the first quarter of fiscal 2014 were 15.6%, compared to 13% for the same quarter last year. The increase in operating expenses as a percentage of revenue reflects lower fixed operating cost leverage. This 260 basis point increase was primarily a result of negative same-store sales due to weather and higher expenses associated with the construction stores acquired in fiscal 2013 and the first quarter of fiscal 2014. These recently acquired stores are currently operating at a much higher operating expense ratio than our average Titan construction stores because of the acquired run rate of lower revenue, as they are underperforming in the markets where they are located. We expect operating expenses as a percentage of sales to benefit from our anticipated sales growth in coming quarters and improve our pre-tax margins.

Our overall interest expense increased 60 basis points. As a percentage of sales, our floorplan interest expense increased 10 basis points and our other interest expense increased 50 basis points, as a result of our April 2012 convertible debt offering. Our pre-tax loss was $1 million, or a pre-tax margin of negative 0.2% compared to pre-tax income of $12.4 million and a pre-tax margin of 2.9% in the first quarter of last year. The quarter-over-quarter decline primarily reflects the lower than expected revenue in equipment, parts, and service and a lower pre-tax margin from the construction acquisition stores I mentioned earlier. Loss per diluted share for the fiscal 2014 first quarter was $0.02, compared to earnings per diluted share of $0.36 in the first quarter of last year.

Turning to Slide 8, we provide an overview of our balance sheet highlights at the end of first quarter of fiscal 2014. We had cash of $114.3 million as of April 30, 2013. Our inventory level was $1 billion as of the end of the first quarter, compared to $929 million as of the end of fiscal 2013. Of the $71 million inventory increase, approximately $22.1 million was from acquisitions. New inventory, including acquisitions, increased $66 million from the end of fiscal 2013. And our used equipment inventory, including acquisitions, decreased $2 million from the end of fiscal 2013.

On Slide 9, I will provide additional color on our equipment inventory. We increased our rental fleet assets to $137 million compared to $106 million at the end of fiscal year 2013 to support our expansion of this growth platform. The fleet increase was primarily in our newly expanded footprint in Colorado, New Mexico, and Arizona. As of April 30, 2013, we had $205 million available on our $975 million floorplan lines of credit.

Slide 9 provides an updated overview of our Company's equipment inventory levels on a quarterly basis. This year's first quarter increase in inventory was primarily due to our less-than-anticipated equipment sales in the quarter that I mentioned earlier. The adjusted inventory levels for April on the graph demonstrate the impact on our actual inventory levels as a result of lower first quarter sales. Our actual change in inventory was similar to last year's quarterly change. Had we achieved our targeted sales for the first quarter, we would have reduced our seasonal increase compared to the prior-year period, reflecting progress on our long-term strategy to achieve our target of a three-time inventory turn. We will continue to focus on our inventory strategy in fiscal 2014. However, it is important to remember that our inventory levels typically increase during the front half of the year to support our back half sales volume. With our improved inventory management, we expect fiscal 2014 second and third quarters to have a lower percentage increase from the first quarter than what we experienced last year over those same quarters.

Slide 10 gives an overview of our cash flow statement for the first quarter of fiscal 2014. 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, which are reported on our statement of cash flow as both operating and financing activities. When considering our non-manufacturer floorplan proceeds, our non-GAAP net cash used for inventories was $28.4 million in the first quarter of fiscal 2014. Our GAAP net cash use for inventories was $42.3 million in the first quarter of fiscal 2014. In our statement of cash flows, the GAAP reported net cash use for operating activities for the first quarter was $6.3 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 use for operating activities was $2.1 million.

Now, I would like to turn the call over to Peter, to discuss the Agriculture, Construction, and International operating segments in more detail and to discuss our fiscal 2014 annual guidance. Peter?

Thanks, Mark. On Slide 11, you'll see an overview of our segment results for the first quarter. Agricultural sales were $360.3 million, up 1.9%. This growth was driven by acquisitions and was offset by negative same-store sales results in the quarter. We generated Ag pre-tax income of $8 million, compared to $14.7 million in the prior period. As Mark and David mentioned, our Ag business was impacted by abnormally late spring weather which affected sales from all three of our revenue sources, equipment, parts, and service. The reduced sales drove our lower pretax income.

Turning to our Construction segment, our revenue was $82.8 million, up 1.5%, which reflects acquisition growth, offset by negative same-store sales. The abnormally late spring weather, in addition to the challenging industry conditions, lead to less-than-anticipated revenue for our equipment, parts, and service. Our rental business performed as expected in the first quarter. The pre-tax loss of $6.5 million was primarily the result of low revenue and pressure on equipment margins. In addition, our Construction pre-tax income was impacted by increased floorplan interest expense. Although we have not achieved our operating targets, we believe this segment of our business represents significant future earnings leverage, as we are able to improve operating margins going forward. I will review our key initiatives to improve this segment of our business in a moment.

Beginning with the first quarter of this year, we are now segmenting our International results. We are establishing our operations in this market and believe our International business represents an additional structural component of our long-term growth strategy. In the first quarter of fiscal 2014, our International revenue was $27.7 million, a 367.6% increase compared to the prior-year period. This increase reflects the acquisitions and new store openings made in fiscal 2013 and the first quarter of fiscal 2014 to establish our international presence, as well as higher same-store sales for our dealerships that have been in our network for the full year. Our pre-tax loss for International, including the start-up cost for the Ukraine operations, was $0.5 million, compared to $0.4 million in the same quarter last year. It's important to remember that the seasonality of this market is different than the North American markets. The first and fourth quarters are seasonally softer and the second and third quarters are stronger.

Now turning to Slide 12. I'd like to provide an update on key initiatives we're focusing on to improve our Construction business in fiscal 2014. First, we're focused on increasing utilization of our rental fleet. Our target for dollar utilization improvement is to increase the annual rate to 35% from 31%. We're on track with this improvement and despite the recent challenging Q1 weather, our utilization rate improved to 23.4%, compared to 22.5% for the same period last year. We recently hired a senior manager of rental operations to drive this business.

Second, we are recruiting and hiring key operations managers to support our improved execution of our operating targets. Third, we're focusing on increasing the sales volume per location to leverage operating expenses and drive operating margins. We're expanding our retail sales force for better market coverage with added personnel to increase our focus on government and major accounts sales. We've created an additional sales region dedicated to the Bakken area for increased focus. We've expanded our rental fleet $31 million to $137 million to drive rental revenue. Lastly, we're focusing on improving inventory turns which will result in lower floorplan interest expense. In Q1, we reduced our construction equipment inventory by $30 million. We believe the successful execution on these key initiatives will lead to significant improvements in our Construction segment profitability in fiscal 2014 and will position us to participate when the industry begins to recover.

Turning to Slide 13, this shows our same-store results for the first quarter of fiscal 2014. Our overall same-store sales decreased 5.1%. The Agriculture same-store sales decrease of 6.4% was due to the unfavorable weather conditions and its impact on our customer sentiment. Our first quarter fiscal 2014 Construction same-store sales decreased 7.1%, reflecting the weather, as well as challenging industry conditions. Our International same-store sales increased 149%. This improvement underscores the potential of the operations of our acquired international business location and gives us confidence in our long-term potential in the international market. For the first quarter of 2014, overall same-store gross profit decreased 4.2%, compared to the same quarter last year, in line with our 5.1% same-store sales decrease.

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 part of Titan for the entire three months of the first quarter of fiscal 2013 and the first quarter of fiscal 2014 are included in the first quarter same-store comparisons. In the first quarter of fiscal 2014, a total of 23 locations were not included in our first quarter same-store results, consisting of 6 Agricultural stores, 8 Construction stores, and 9 International locations.

Slide 14 shows our fiscal 2014 annual guidance. We are reiterating our recently updated annual guidance. Our revenue guidance remains unchanged from what we outlined on our fourth quarter conference call. We continue to expect fiscal 2014 revenue to be in a range of $2.35 billion to $2.55 billion. As you recall, we believe the first quarter Ag segment revenue shortfall was more of a timing issue and will be recovered later in the year. We expect our annual net income attributable to common stockholders to be in the range of $36.4 million to $42.8 million, resulting in an earnings per diluted share range of $1.70 to $2.00, based on estimated average diluted common shares outstanding of 21.4 million shares. Our recently updated earnings range primarily reflects the lower operating results from our Construction segment.

Our modeling assumptions supporting our guidance are as follows. We continue to expect our Ag same-store sales to be in the range of 0% to 5%. We are revising our construction same-store annual growth to be in the range of 0% to 5% from the previous range of 10% to 15%. Our equipment margins modeling assumption for the full year is in the range of 9% to 9.5%. We're modeling annual rental dollar utilization in the range of 34% to 36%. It is important to remember that utilization fluctuates throughout the year. We are entering our seasonally stronger second and third quarters.

This concludes the prepared comments for our call. Operator, we are now ready for question-and-answer session of our call.

(Operator Instructions)

We'll take our first question comes from Mig Dobre with Robert Baird.

Good morning, gentlemen. My first question is on the rental business. I'm trying to understand a couple of things. First, you added $31 million to the rental fleet in the first quarter. I'm trying to understand, when you add to the rental fleet, does that flows through your Construction segment as equipment sales?

No. No. Mig, this is Mark. It doesn't go through. It's a transfer to our fixed assets. And then the rental sales coming from those fixed assets, from that fleet, show up in the Construction segment. But, no retail sales for putting that into our fleet.

Okay. It's a follow-up to that. I'm trying to understand exactly why does that you continue adding to the fleet if the fleet is already underutilized. Because, I'm looking, for instance, at your utilization of 23.4% and your goals, if I look at that full-year guidance of 34% to 36% for the full year, would imply a very meaningful ramp in utilization as the year is progressing. Can you help me understand the dynamic there? Why, for instance, not take some of the equipment that you currently have and maybe send it to locations where you think it's needed or could be better utilized?

Yes, Mig, there's a definite seasonality to our rental business. For instance, last year for the full year, we achieved 31% utilization, which is below our expectations for the full year but well above what we experienced in the first quarter of last year of 22.5%. So, the seasonality of the rental fleet really comes in, the high seasonality comes in, in the second and third quarters, where we expect to achieve higher than that 35%, especially in our third quarter.

Great. Last one for me before I jump back in the queue. I'm glad to see the International segment starting to be broken out. I'm just wondering can you give us any color on your revenue margin expectations that are factored into your top line and earnings guidance for the year?

For our International segment, we haven't provided individual guidance or we haven't provided modeling assumptions on the International side yet. It's a much smaller segment of ours right now. We'll look at that going forward. For last year, our full year was about $72 million in International sales. And we do expect a meaningful increase from that, as we bring Ukraine on board and we get a full year out of our Bulgarian operations.

Do expect to be above breakeven for the year?

Yes.

Okay. Thank you. Very helpful.

To add onto that a little bit, there is a seasonality, as Peter mentioned. There is seasonality in the profitability of that International business, as well, where second and third quarters are much more profitable quarters than first quarter in that International segment.

We'll take our next question from Brent Rystrom with Feltl.

Actually, Mark, as a follow-on to that, you and I exchanged emails a couple months back about some special financing that [Deere] were putting in to some of those markets. Did you see an impact from that on your business there?

This is Peter. We continue to grow that business over in the international region and from time to time, the different manufacturers will come out and they'll have additional programs on the finance side to facilitate retail sales. That's back and forth in the market, Brent. So, we are aware of those dynamics in the market and we feel like we can grow our business over there, based on bringing in some of our Titan operating model metrics and working on the stronger parts and service side.

Great. And then two quick questions. How do guys feel about second quarter comp expectations for the two main segments? Do you feel you'll see your recovery in either or both to breakeven to positive? Do think one or both could still be negative?

From the Construction side first, because of some seasonality improvements, we do see improvements in the operating results. But we don't expect any kind of meaningful profitability until we get into our third quarter.

Mark, what I'm asking is on comps, do you think comp expectations will stay negative or comp performance will stay negative? Or do you think it will approach breakeven or positive?

From a same-store sale perspective, yes. We expect that weather definitely impacted our first-quarter equipment sales which is the largest part of our sales. We expect that to improve and become positive in the second quarter.

For both segments, [CE] and Agriculture?

Correct.

All right. And final question. Refresh our memory. It looks like we have a similar level of wheat acres lost in North Dakota this year. Can you remind us, in 2011, when we had proportionally, almost the same reduction in acres, how your business in North Dakota performed that year?

Our business performed pretty well in 2011 but in our markets, first of all, the year-over-year model of small grain or wheat by the acre are gradually being replaced by corn and soybean acres. In many cases, they're going to be shifted to soybean if the season gets late, Brent.

We're talking 30% of the wheat acres in North Dakota [that we] lost this year which is about what happened in 2011. So I was just curious if --

If you look at the state of North Dakota, where the majority of the Titan Machinery dealerships are, they're in the Red River Valley or the southern part of the state. We don't have ag locations up basically in the North and the Northwest or even the predominant wheat countries. We're looking at mostly a corn and soybean market in our footprint.

Thanks, guys.

We'll take our next question from Rick Nelson with Stephens.

Good morning. I'd like to ask you about the strategies that you discussed to improve the profitability in the Construction segment, how quick, how you think that will swing that segment to profitability?

Well, we see those improvements contributing to each one of our quarterly results. Of course, you do still factor in the seasonality on the construction industry, where you've got the second and third quarters being seasonally stronger quarters. We see those contributing throughout the year, as we bring some of these initiatives online. I talked about recruiting and hiring key operational managers and they're getting in our Titan operating model and we've expand our retail sales force. So, we see those things coming on throughout the remainder of the year, Rick.

Okay. And the acquisition pipeline, I'm wondering if you're seeing more willing sellers on the ag and the construction side given some of the pressures there. Might we see an accelerated acquisition pace developing?

Rick, as I said in my comments here right now, on the construction side of the business, we're focused right now on the operations of our current footprint. I would not say we're aggressively looking at construction acquisitions at this time.

The other hand, I would say that ag acquisitions, I'd say it's a normal pace out there. There's a number of potential acquisitions out there and I'd say I don't see any change in the ag acquisitions from what we have in previous years. We continue to be discussing with potential sellers on the ag side of the business.

Finally, if I could ask, when you think the industry supplies on the construction side would come more into line with the underlying demand?

I would say it's going to take a couple quarters, here. A little bit depends on what the manufacturers, where they produce according to retail. But I would say you're going to definitely take the majority of this year to get this thing where I feel it's in line.

Got it. Okay. Thanks a lot and good luck.

We'll take our next question from Neil Frohnapple with Northcoast Research.

Hi, good morning, guys. Can you provides some more granularity on what really changed in your Construction end markets to warrant the 10% reduction in your Construction same-store sales forecast? Are there any particular end markets that are deteriorating? Or is it more of a function that we're a few more months into the year and the outlook just doesn't look as robust as it did previously?

First of all, I'm not sure if we're going to get that revenue back that we lost in the first quarter. I think that's going to drive a lot of it, as opposed to the ag business. I think that's a lot of the timing and we're looking at our customers' annual production cycle. But, we may not get that first quarter back from the construction side so I think that's driving a lot of that. Plus, we still have fairly weak economy on the construction side of the business, the overall general economy.

Okay. Got it. Mark, I think you started to discuss when you think you can get the Construction segment back to breakeven. I think you mentioned maybe the fiscal third quarter. If you could just clarify that, as you guys continue to make improvements there and if the seasonality helps the business as we move through the year.

Our third quarter, with the size of our fleet and the utilization we're expecting, and just the overall seasonality in the third quarter, third quarter is really where we're expecting it to get into that profitability.

Great. And then one final one. You mentioned operating expenses of newly acquired CE stores are higher than corporate average. I would imagine that would be the case throughout the time that you guys have made CE acquisitions. Can you just give us a sense for how long it takes to improve market share and get the operating expenses as a percentage of revenue down to corporate averages? Or is there something different about these two that could preclude you guys from doing so?

I'll comment on the numbers somewhat as far as the operating expense. First of all, we brought on a number of these this past year. If I remember right, I think we brought on like eight construction stores in the past year. When we brought those on, they were lower performing stores, as far as a market share goes. And the other thing is, on these construction stores, they are in urban areas where there are higher occupancy costs, higher operating expenses overall, than a typical ag store. So, the combination of higher expenses and a lower performing market store is what's driving that.

Great. Thank you very much, guys.

We'll take our next question from Michael Cox with Piper Jaffray.

My first question's on the rental side of the business. Your guidance assumes a fairly significant improvement in the rental utilization. I'd say it's maybe more pronounced than what we saw in Q1. My curiosity is, what sort of visibility do you have into driving that level of improvement in rental utilization? And does being at the lower bound of your guidance of 34% to 36% put you at the lower end of your earnings guidance? And conversely, if you're at the upper bound of that, does that put you at the upper end of your earnings guidance, in terms of what sort of sensitivity that has, the model?

First of all, just looking back, I will provide some historical perspective as far as that utilization. The utilization that we experienced last year, in the first quarter, we had that 22.5%. That ramped up to just over 30% in the second quarter and up as high as 41% in the third quarter, and then to 28.4%, to get the average of 31%. Again, with us being in the northern footprint, a good part of that rental fleet in the northern footprint here, it really ramps up in those summer quarters.

As far as sensitivity to the overall results, I don't have an exact number for you. I think that we gave the range of 34% to 36% utilization. I'd have to look at it a little closer, I guess, to look at that sensitivity on that 2% utilization.

Okay. I guess maybe if I could rephrase the first question. Your utilization was up 100 basis points year-over-year in Q1 from 22% to 23% and your guidance assumes going from 31% up to 35% at the midpoint. So, 400 basis points. My question is, what sort of visibility do you have into driving a more pronounced improvement in utilization over the next two seasonally stronger quarters?

One of the things that we certainly felt impacted our first quarter was some of that weather impact in the first quarter. That's also holding back some of that utilization.

In addition to that, if you recall last year, we were just ramping up our business and brought that online. The rental revenues came in less than anticipated last year as we ramped the business up. We've got a lot of these account managers and the people in place now, so that's why we're modeling improving that rental utilizations. We've got the people in place and we've got the fleets on the ground.

Okay. That's helpful. Beside with the change in expectations, in construction in particular, have you adjusted your order patterns for the balance of the year, so that inventory levels can be worked lower, even absent of a significant improvement in the construction side of the business?

I think right now, if you look at all our store managers and our stores our there, they're really focused on their inventory. They're focused on their profitability targets, and they're doing things the things to get this type of result at each location. I think we've got a number of steps we put into place. I think everybody's really focused and we're optimistic. I think we're going to see some improved results, as we get into the third quarter.

Okay. Thanks.

We'll take our next question from Steve Dyer with Craig-Hallum.

Thanks, good morning. I don't want to beat the construction thing to death, but just curious, from a bigger picture level and I realize the economy and the rebound hasn't been robust. But certainly the levels, particularly of residential construction and so forth, haven't been worse than last year. Your business is off pretty markedly from last year. So, is there something else going on there, just in terms of your footprint specifically? Last year you had a pretty respectable year in the Construction segment. What's changed year-over-year?

Well, I think some of this, again, is timing. In the first quarter and some of the weather things, that's the first thing you have to look at. Again, we're optimistic, especially on this rental piece. If you look at demand, what we're seeing down in the Denver and the Phoenix markets and some of the housing starts, and some of these markets that have been soft the last couple of years, I think are starting to pick up. To add to that, we still have some really solid strength in our energy areas, in the Bakken specifically. I think with most of it, Steve, is it's going to be the timing of that first quarter. And there is an oversupply of inventory out there, which will probably have a negative effect on some of our margins in that first quarter.

Okay. Then, another question. How should we think about floorplan interest, in light of the rising rates that we've started to see? And depending on how that shakes out going forward, what impact would that have on that line?

We don't expect any meaningful increase in the interest rates on our floorplan lines. We are not expect anything like that. Because of this lower first quarter, we do expect the sales to come back on the ag side later in the year. But since we are carrying that inventory for a longer period of time, because of higher inventory levels earlier in the year, we do expect our overall floorplan interest expense to increase, but more based on inventory levels as opposed to increases in interest rate.

Okay. And then floorplan was down quarter-over-quarter quite a bit, despite inventory not being down that much. Is that just shifting around on how you finance some of it?

No. I think some of it is just older inventory that is out of the system and some of the newer stuff still being non-interest-bearing. Our interest-bearing percentage is a little lower this quarter than last quarter.

All right. Thanks, guys.

We'll take our next question from Larry De Maria with William Blair.

Thanks, good morning. Can you discuss, maybe -- you touch on it a little bit here and there -- the used and new equipment prices, how they've changed, how they're holding up, and how that change is factored into your guidance?

I'll comment a little bit on the industry factors we see on pricing right now and then I will let Mark follow-up on some of the guidance numbers. First of all, as I think everybody's aware, through both the ag and construction industry, there's been the introduction of the Tier 4 component, which is definitely adding to the pricing. It's Tier 4B now, is the next round of it. With each of these additions of more Tier 4 engines into the industry, and this is all manufacturers, you're seeing definitely increases in pricing, due to that stuff. So, I think that's helped stabilize a little bit of the used pricing. We see strength in both the ag and the construction side on the used pricing, especially tractors on the ag side. That all continues to be really healthy. Mark, I'll let you comment on the impact on guidance there.

We still have that range out there of 9% to 9.5% on equipment margins. Fine-tuning of the models, I'd say it's a little weaker on the construction side and stronger on the ag side. But, still within that 9% to 9.5% range that we indicated.

Okay. Following up on the Tier 4B, what do expect for the new equipment? How much more is that going to cost farmers and then are you going to able to capture [and commit from] that pricing on top of the Tier 4 cost?

Just some numbers out there. It's going to vary by product a little bit. You are going to see somewhere in the 5% to 10% with maybe 8% being the midpoint, just depending on which models and where they are in the evolution of those engine technologies.

Okay. Same-store sales for ag, as far as fine-tuning of the model, are we assuming down fourth quarter on the tough comp? Or should we assume they're up the remainder of the year after weaker first quarter?

We talk about our outlook on an annual basis and with the seasonality that's involved, the revenue can shift from quarter to quarter. We will comment on that as we get more visibility and we get closer to the fourth quarter. It's just so seasonal based on weather patterns that we like to give you how we model our business. But we look at it on an annual basis just the way our customers run their businesses on an annual production cycle.

As of right now, we shouldn't assume that every quarter from here is up at this point? Based on your guidance?

I think fourth quarter, there's some tougher comps that we have for the last couple years. So, that would be a little tougher to get as positive in.

Sure. Thanks. Moving to the final question. We noticed a share counts creeping up. Can you just explain why that's moving higher? I would think that maybe this should be more constrained, given the softer start to the year on the incentive comp. Is there really something else behind that?

No. I don't think there's any kind of meaningful increase in the share count.

You go from 20.9 million to over 21 million.

Our diluted shares outstanding last year, first quarter, was 20.962 million and at the end of the first quarter this year it's 20.854 million.

Right. But the full-year guidance says 21.4 million, which implies it's obviously higher as we go through the year. I'm just trying to figure out what's driving that higher through the year.

There's outstanding options where there's some dilution based on assumed stock prices. There's restricted shares, so a small level of increase, we think is reasonable to model in there.

Okay. All right. Thanks.

(Operator Instructions).

We'll take our next question from Mig Dobre with Robert Baird.

Thanks for taking my follow-up, guys. I saw the line here in the slides that you hired a senior manager of rental operations. Maybe you can talk a little bit more about the recruiting efforts that you currently have ongoing. Some background maybe on this person would be helpful.

Understanding that we think this is going to be a really good growth platform for us, we've got a fellow with significant experience in the industry. He came from a former public company. He had managed a fleet similar to the size of us, both from the renting of equipment. We put a pretty extensive search out and I think we've got a high-quality individual, strong on the logistics side of it. The detail side, I think is important in this business, just to complement the strength we see. If you look at the disciplines and the pricing out there in the industry right now and what some of the other large rental companies are doing, we just want to make sure we had a really good person in here to align us to, we think, what are the opportunities.

Okay. Last one is on inventory. I'm trying to understand something here. What exactly are your expectations for inventory progression through the year? Where do expect to see inventories, say, at the end of fiscal '14? Do expect them to be flat or down year-over-year, excluding any acquisitions that you might make between now and the end of the year? Or have your expectations changed and you still expect it to be up?

Over all, as we explained on the call, we expect the increase to be less for the next couple quarters, because of our lower sales that happened in the first quarter. But, we do expect it to drop off nicely in the fourth quarter, similar to last year.

Just to be clear, do you expect inventories to be up or down at the end of fiscal '14 on a year-over-year basis?

Right now, we're expecting them to be down, overall.

Okay. Thank you very much.

We'll take our next question from Larry De Maria with William Blair.

Just a quick follow-up. You guys obviously gave some good color by constructions markets and how you think they're going to improve. I'm just curious about when you look around in your region, what is the inventory like at this point in that the channel, not just yours, obviously, but the industry? How close to being right-sized do feel the inventory? That's number one. Number two, obviously, you're doing a lot of strategic initiatives on the construct side, mostly aimed at driving revenue. Are there any things you guys are doing to cut the operating costs? Just curious if there's anything there. Because it looks like there's a lot of hiring to drive revenue, but I'm not sure if there's anything on cost side you're doing. Thanks.

First of all, on the inventory, I think that there's a lot of inventory and I think a lot of the manufacturers overproduced last year. So, I think you're going to see inventory throughout the balance of this year and it's going to take a while to get this through the system. It's going to be competitive. It's, like I say, an ample supply of inventory out there.

From an expense reduction, we're always looking at ways we can cut the expenses, but right now, our biggest challenge out there on our construction side is to get to the scale so we get the leverage of our fixed expenses out there. We're not even close right now to getting that type of scale. We think we need to be (inaudible). As you do acquisitions and sometimes you're acquiring stores that have some opportunities out there on the growth side, and maybe they've been pretty flat in growth for a number of years. Typically, that's what we end up with acquisitions. If you look at our track record, over the construction stores we purchase going back to 2003, 2004, we've got a really good pattern of growing the revenue. Them your expense as a percentage of revenue really start going down. We want to do that with these newly acquired acquisitions. We think we're in some really, really nice markets and the markets are improving out there. Really, it is a function of scale and revenue, right now, at this point. There is absolutely no fluff out there at all, other than some of the major operating initiatives (inaudible) cut interest expense on floorplan, things like that, that are normal course. Like I say, we're really going after the revenue right now in those stores.

Okay. Got it. That makes a lot of sense. Thanks a lot. Good luck this year, guys.

That does conclude today's question-and-answer session. I would now like to turn the conference over to David Meyer, CEO and Chairman.

Thank you for your interest in Titan and we look forward to updating you on our progress on our next call. 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.

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