Titan Machinery Inc (TITN) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to today's Titan Machinery Inc. third-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. And now I would like to turn the conference is over to Mr. John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's third-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 Mark Kalvoda, Chief Financial Officer.

By now everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2013 which went out this morning at approximately 6.45 AM Eastern Time. If you have not received the release it is available on the Investor Relations portion of Titan's website at TitanMachinery.com.

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

Before we begin we'd 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. These risk factors containing more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call.

Lastly, due to the number of participants on the call today, we ask that you keep your question period to one or two questions and then rejoin the queue. The call will last approximately 45 minutes; David Meyer will provide highlights of the Company's third-quarter results, a general update on the Company's business. 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 and earnings per share guidance ranges along with its outlook modeling assumptions. Then we will open the call to take your questions.

Now I'd like to introduce the Company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our third-quarter of fiscal 2014 earnings conference call. As John mentioned, to help you follow today's prepared remarks we've provided a slide presentation which you can access on the Investor Relations portion of our website at TitanMachinery.com. If you click on the Investor Relations tab on the right side of the page you'll see the presentation directly below the webcast in the middle of the page.

If you turn to slide 2 you will see our third-quarter fiscal 2014 results. Our revenue for the third quarter was $588 million, a slight increase compared to the same period last year. Our sales for the quarter reflect the challenges in the Agricultural and Construction industries which we have discussed on previous calls and we'll update on today's call.

Pre-tax income was $10.1 million and our earnings per share were $0.27. While our higher margin parts and service business performed well in the third quarter, this was offset by lower equipment sales and lower equipment margins due to pricing pressure in both industries.

On today's call we will review the performance of each of our segments. In addition, we will discuss Agricultural equipment sales, the strength of our parts and service recurring revenue and equipment margin pressure that is affecting our industry. We will update you on our equipment inventory strategy and discuss revised fiscal 2014 guidance and modeling assumptions.

Now I would like to provide some more color on each of our industries that are key to our business. On slide 3 we provide an overview of our Agricultural industry. In our footprint anticipated annual crop production has been impacted by several factors. As we discussed on our last call, 52% of US corn and soybean preventative planting occurred in Titan Machinery's footprint, reducing our production by 2.6 million acres. Also our fall harvest is now completed with most field preparation completed as well.

Regarding our Eastern European footprint, favorable fall conditions allowed our customers to complete their harvest and allowed them to plant their fall crops. USDA forecasts are projecting large crop carryover approximately 1.9 billion bushels of corn and 170 million bushels of soybean for 2013 which is reflected in lower global commodity prices. It is important to understand that the Eastern Corn Belt, which is outside of Titan Machinery's footprint, drove the higher production yields in the US and our footprint in the Western Corn Belt produced average crop yields.

A new US farm program has been in the legislative process since the beginning of the year. Many people were expecting a final vote earlier this year; however, the final plan is unclear at this time and the final vote has not been set as of today. Completing the new farm program will give farmers better visibility to plan their business going forward. As a reminder, the current production year is covered by the existing farm program.

The Ag equipment industry is experiencing price increases in advance of Tier 4 final pricing which is affecting overall equipment sales and is also compressing our equipment margins as we have not been able to realize full pricing in all transactions across all product offerings. The industry continues to experience pressure on used equipment prices as a result of the lower commodity prices and the current plentiful supply of used equipment in the industry. We continue to focus on managing our used equipment inventory.

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 conditions in the third quarter were very similar to the second quarter as the sluggish economic recovery continues to impact the Construction industry. Excess equipment inventories continue to impact the industry through the third quarter and are expected to continue into the first half of calendar year 2014. Until industry inventories are in line with end-user demand we will experience compressed equipment margins.

With our expanded distribution and large geographic footprint there are different drivers within the 11 state geography we cover. This diversification demonstrates one of the positives we achieve through scale. In the Upper Midwest Agricultural activity and the ongoing buildout of the Bakken adjacent oil reserves and related infrastructure continue to support the Construction industry.

The positive third-quarter Construction same-store comps we achieved are reflective of some early signs of improvement in our core CE equipment offerings. An increase in year-to-date housing permits reflect a recovery in the housing industry which has been at historic low levels. Third-quarter housing permits throughout the majority of our footprint are up year over year, which is an early indicator of demand for our medium and light equipment product offerings.

We continue to see growth in rental equipment demand which is aligned with industry forecasts. In fiscal 2014 we have increased the size of our rental fleet by 41% to capture a larger percent of this opportunity throughout our footprint.

Now turning to slide 5, I'd like to provide an update on our Construction segment. The initiatives we outlined on our second-quarter earnings call to improve our Construction business are now in place. They include -- we established organization platforms to leverage specific expertise across our distribution footprint. We made key personnel changes which included new hires to oversee Construction operations as well as new senior managers for our aggregate, rental and industrial and government organizational platforms along with major account managers. We are implementing a process to improve utilization of our expanded rental fleet, as I previously mentioned, we increased our fleet by 41%. We are focused on increasing sales volume per location to leverage operating expenses and drive operating margins. Lastly, improving inventory management by adding centralized oversight and control.

As we enter our fourth quarter we're beginning to see early signs that these initiatives are starting to have positive effects on our Construction segment. These include our same-store sales increase of 6.4% in the third quarter. We continue to improve our inventory position in our Construction segment. We believe with the organization in place to be well-positioned in fiscal 2015.

While we are not satisfied with our recent results, we are confident in our long-term outlook. We have a proven operating model and a well-established footprint of Agriculture and Construction dealerships in the US as well as International presence in Eastern Europe. Now I would like to turn the call over to Mark Kalvoda, our Chief Financial Officer, to review our financials in greater detail.

Thanks, David. Turning to slide 6, our total revenue for the fiscal 2014 third quarter increased slightly to $588 million. The 3.2% decrease in overall equipment sales from our Agriculture, Construction and International businesses was primarily due to the industry headwinds that David just discussed. The equipment decrease was fully offset by the strength in our recurring parts and service revenue. We also grew rental revenue on a quarter-over-quarter basis due to our expanded rental fleet.

On slide 7 our gross profit for the quarter decreased slightly to $93.6 million. Our gross profit margin was 15.9%, a decrease of 30 basis points compared to the same quarter last year. The decrease was primarily driven by equipment margin of 7.9% which was below our expectations due to industry conditions impacting both new and used equipment margins. This was a 130 basis point decline from equipment margins of 9.2% in the third quarter of last year.

Also impacting gross margin was a lower utilization on our rental fleet compared to the prior year. Lower equipment and rental margins were substantially offset by a shift in gross profit mix to our higher margin reoccurring parts and service business. Gross profit from parts and service for the third quarter of fiscal 2014 was 55% of overall gross profit compared to 47% in the third quarter of last year. This performance illustrates the stability and reoccurring aspect of our parts and service business in a softer equipment market.

Our operating expenses as a percentage of net sales in the third quarter of fiscal 2014 were 12.7% compared to 11% for the same quarter last year. The increase in operating expenses as a percentage of revenue primarily reflects lower fixed operating cost leverage due to lower same-store sales for our Agriculture segment, higher expenses related to expanding our Construction and International distribution networks as well as higher occupancy costs associated with facility improvements to support growth of our higher margin parts and service business.

Our overall interest expense increased 30 basis points which was driven by higher equipment inventory levels. Peter will be discussing our inventory strategy in more detail later in the call.

Our pre-tax income was $10.1 million or a pre-tax margin of 1.7% compared to pre-tax income of $23.8 million and a pre-tax margin of 4.1% in the third quarter of last year. The quarter-over-quarter decline primarily reflects lower Company equipment sales and margins as well as higher operating and interest expenses.

Earnings per diluted share for fiscal 2014 third quarter was $0.27 compared to earnings per diluted share of $0.66 in the third quarter of last year. Our effective tax rate for the third quarter was 42.8% and we are expecting it to be approximately 41.6% for the fourth quarter. The increase in our effective tax rate is due to projected losses in our lower taxed entities in Europe.

On slide 8 you will see our results for the first nine months of fiscal 2014. Our revenue in the first nine months of fiscal 2014 was $1.52 billion, an increase of 7.3% compared to the same period last year reflecting growth in all for revenue streams for this period.

Turning to slide 9, our gross profit in the first nine months of fiscal 2014 increased 6.9% to $251.1 million. Our gross margin was 16.5%, down 10 basis points from the comparable period last year as lower equipment margins were primarily offset by a shift in mix, higher parts and service revenue. Our operating expenses increased 170 basis points primarily reflecting the factors I discussed earlier. In the first nine months of fiscal 2014 our earnings per share was $0.43 compared to $1.27 in the same period last year.

Turning to slide 10, we provide an overview of our balance sheet highlights at the end of the third quarter of fiscal 2014. We had cash of $113.4 million as of October 31, 2013. Our inventory level was $1.2 billion as of the end of the third quarter compared to $929 million as of the end of fiscal 2013. Of the $247 million inventory increase approximately $44.5 million was from acquisitions, new inventory including acquisitions increased $215.8 million from the end of fiscal 2013.

And our used equipment inventory, including acquisitions, increased $7.9 million from the end of fiscal 2013. Peter will provide additional color on our equipment inventory. Our rental fleet assets at the end of the third quarter were $149 million, which is up $43 million compared to the end of fiscal year 2013, but remained consistent with our second quarter. The fleet increase from the end of fiscal 2013 was primarily in our newly expanded footprint in Colorado, New Mexico and Arizona. As of October 31, 2013, we had $160 million available on our $1.05 billion floor plan lines of credit.

Slide 11 gives an overview of our cash flow statement for the third 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 floor plan notes payable which are reported on our statement of cash flow as both operating and financing activities.

When considering our non-manufacture floor plan to proceeds our non-GAAP net cash used for inventories was $41 million in the first nine months of fiscal 2014. Our GAAP cash used for inventories was $287.4 million in the first nine months of fiscal 2014.

In our statement of cash flows the GAAP reported net cash used for operating activities for the first nine months was $107.3 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 was $12 million.

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

Thanks, Mark. On slide 12 you will see an overview of our segment results for the third quarter. Agricultural sales were $459 million, a decline of 4.1%. We generated Ag pre-tax income of $10.1 million compared to $23.8 million in the prior year period. As David and Mark mentioned, the primary factors impacting our Ag segment results were lower equipment sales and margins.

Turning to our Construction segment, our revenue was $109.9 million, up 15.8%, which reflects higher same-store sales as well as acquisition growth. Industry conditions remain challenging for this segment of our business which created pricing pressure compressing our equipment margins. The pre-tax loss of $3.1 million was primarily the result of lower margins and increased expenses associated with recent acquisitions. As David commented we are executing on our key initiatives to improve this segment of our business.

In the third quarter of fiscal 2014 our International revenue was $40.3 million, a 42.7% increase compared to the prior year period. This increase reflects the acquisitions and new store openings. Our pre-tax loss for International was $1 million compared to a pre-tax income of $1.4 million in the same quarter last year, reflecting costs associated with building our distribution network and ramping up operations.

It's important to keep in mind that our International business is still in the development stage and we are establishing our International operations and believe this business represents an additional structural component of our long-term growth strategy.

Now turning to slide 13, you will see our segment results for the first nine months of the year. Ag revenue growth represents acquisition growth. The decrease in our Ag pre-tax income reflects our lower equipment margins previously mentioned and an increase in our floor plan interest expense.

Our Construction segment revenues represent acquisition growth offsetting negative same-store sales growth for the nine-month period. Construction - loss reflects lower equipment margins and higher rental and floor plan interest expense in addition to the increased expenses associated with our recent Construction acquisitions.

Our International segment nine-month results reflect the same factors I mentioned regarding our third-quarter segment overview.

Turning to slide 14, this shows our same-store results for the third quarter of fiscal 2014. Our overall same-store sales decreased 4.5%. The Agricultural same-store sales decrease of 6.5% reflects the industry headwinds David discussed earlier as well as strong prior year same-store comps of 26.4%.

Our third-quarter fiscal 2014 Construction same-store sales increased 6.4% reversing the trend in the first half of this year showing early signs of the impact of our key initiatives that David discussed.

Our International same-store sales decreased 6.9% reflecting the impact of lower global commodity prices. The lower commodity prices resulted in lower farm income for the crops sold this year and also resulted in the delay of a portion of the sale of crops as farmers wait to market their crop.

For the third quarter of fiscal 2014 overall same-store gross profit decreased 5.4%. This declined in each segment primarily reflects the lower equipment margins as discussed earlier.

Slide 15 shows our same-store results for the first nine months of fiscal 2014. First nine-month same-store sales decreased 1.7% compared to the prior year period and same-store gross profit decreased 0.9%.

For modeling purposes it is important to remember that we calculate same-store sales by including stores that were with Titan for the entire period and which we are comparing. In other words, only stores that were a part of Titan for the entire three months of the third quarter of fiscal 2013 and the third quarter of fiscal 2014 are included in the third quarter same-store comparison.

In the third quarter of fiscal 2014 a total of nine locations were not included in our third-quarter same-store results consisting of three Agricultural stores, four Construction stores and two International locations. For the first nine months of fiscal 2014 a total of 23 locations were not included and our first nine months same-store results. Consisting of six Agriculture stores, eight Construction stores and nine International locations.

Turning to slide 16, I'd like to provide an update on our equipment inventory strategy. Moving from left to right on the graph you are seeing the inventory level at the end of the last five years. Next are the inventory levels for each quarter of this year including our projected year-end inventory level. Finally on the right side of the graph is the targeted your end inventory for fiscal 2015, representing a $250 million reduction in inventory excluding acquisitions and new store openings compared to the end of this fiscal year.

Although our projected inventory decrease will be approximately $90 million in the fourth quarter from third-quarter levels we did not achieve results in line with our long-term strategy this year. Orders placed during the first half of this fiscal year combined with unanticipated lower same-store sales in the back half of this year impacted our projected year-end inventory levels.

Given our visibility into the current market conditions and our current inventory levels, we are in a position to affect our ordering process, promote pre-sale activity and aggressively marketed our used equipment to achieve our targeted reduction of $250 million by the end of fiscal 2015. Demonstrating a significant change in inventory stocking levels. We believe this reduction in equipment inventory levels will put us on track to achieve our long-term inventory goal of a three-time turn as well as improving our cash flow and strengthening our balance sheet.

Slide 17 shows our fiscal 2014 annual guidance. Given the fact is we discussed in our prepared remarks we are updating our annual -- we are updating our annual revenue net income and earnings per share guidance. We now expect fiscal 2014 revenue to be in a range of $2.15 billion to $2.35 billion. We expect our annual net income attributable to common stockholders to be in the range of $11.6 million to $15.8 million, resulting in earnings per diluted share range of $0.55 to $0.75 -- based on an estimated average diluted common shares outstanding of 21.1 million shares.

It's important to remember that historically our fourth quarter is our largest equipment revenue quarter and, given the market conditions we have experienced this year, it's harder to predict year-end buying activity from our customers which has a meaningful impact on our fourth-quarter results.

Our modeling assumptions supporting our guidance are as follows, we expect our Ag same-store sales to be in the range of negative 10% to negative 5% compared to previous guidance of negative 2% to positive 3%. We are maintaining our Construction same-store annual growth to be in the range of negative 2% to positive 3%. Our equipment margins modeling assumption for the full year are now projected to be in the range of 8% to 8.5% compared to the previous range of 8.6% to 9.1%.

We are modeling annual rental dollar utilization to be approximately 30% which is within our previous range of 30% to 32%. This concludes the prepared comments for our call. Operator, we are now ready for the question-and-answer session of our call.

(Operator Instructions). Steve Dyer, Craig-Hallum.

Just curious if you could talk a little bit about the acquisition environment. I know that has always been kind of a key part of the strategy. Given the tougher environment are you seeing any change whether it be in valuations or availability of dealerships and has your philosophy about that changed at all?

Well right now, Steve, we are really focusing on improving the operations at our stores. There is definitely I see an increased pace of discussions of the dealer principals out there. So we think long-term we have got a big opportunity, a long runway of acquisitions out there. There has been some pricing throughout this year, some of these acquisitions have been going at some pricing a little higher than we are comfortable with.

So we want to make sure we keep discipline and that pricing. So, like I say, we really focus our efforts as of late just really on the improvement of our stores and really watching for future opportunities here on the acquisition front which we feel is coming ahead - I.E. -- we will definitely be there.

Okay, if I could focus on the Construction side. Rental utilization, sort of expectations there I think have been bumped down a little bit the last two quarters. Is that a function of kind of a higher denominator, in other words, buying more rental equipment to rent? Or is there something else structurally there that is kind of giving you trouble in terms of getting that utilization up?

Yes, I think our rental utilization, if you look at it, it is down a little bit from last year, down a little bit from what we expected. And it really has to do with the push that we put in this year we increased it about $45 million. We put that all -- most of it down and that Southwest region, we are new to that area and it's really just a function of being kind of new to that area and not getting the full utilization that we kind of initially expected in that footprint. But we believe long-term it is a real good area for rental for us and we will do well.

Do you see materially different utilization rates there versus some of your more established locations?

Yes, because of the ramp up that is going on down there it is lower than what our others are currently. But it is ramping up.

Okay, and then lastly for me and I will hop back in the queue. Operating expenses continue to tick higher even in light of the kind of challenging top line. Is there -- is a lot about fixed are sort of what levers do you have that you could pull there assuming that this remains a little bit tough for a while?

We're looking at -- we continue to be looking at ways to improve our operating margin, Steve. And we will be looking very closely at our expenses as we move forward and give updating to you on that on our next call.

Okay, thanks.

Brett Wong, Piper Jaffray.

First, I would like to just get into the inventory a little bit. You expect a significant decline in fiscal 2015 and I was wondering if you could provide some more color on what aggressively marketing your equipment would be and how that impacts pricing and margins.

Well, we have been aggressively marketing our used equipment now. And we want to continue doing that, as well as getting a stronger presale campaign. And like I mentioned in our comments, that we now know what the market conditions are and we can affect our ordering of inventory going into the cycle.

If you look at a year ago and you look at what the commodity level pricing was coming into this fiscal year 2014, the market was completely different where the leveling -- where the level of commodities were at versus where we are at today. And so, we can affect our ordering bank coming into this next year's cycle. So we feel confident we will achieve that target of reducing our inventory $250 million.

And I guess do you expect that reduction to come at the expense of pricing at all?

Well, the more that we can achieve success with our presale, that will help us with our margins. And as we increase velocity on the inventory that should help us with margins as well.

Okay, thanks. And then looking at your parts and services with a softer equipment market out there, do you expect parts and services to continue to grow as a percent of revenue kind of looking forward?

We have talked about that being a rather stable revenue source for us. And it has proven out that way this year. And so, as we look forward we see that remaining rather stable going forward.

Okay, thanks. And just one last one for me. On the rental utilization do you think that the current rental utilization rate is a good run rate moving forward? And if not where do you see that going and around when should we expect higher rates?

I think -- so at 30% this year what we are talking about, I think going forward we should see some improvement next year. Our target, which we kind of started the year out talking about, was around that 35%. So I think somewhere between that 30% to 35% is certainly where we would be targeting for next year.

Excellent, thanks a lot, guys.

Rick Nelson, Stephens.

I would like to follow up on the equipment margin pressures. If you could provide some color as to where the more severe pressures are occurring, Ag, Construction and then is it new or used equipment?

Well, Rick, to start with on the Construction side, I think it is been pretty well discussed here in the last couple quarters that from an industry standpoint it's an over abundance of equipment I think there is a lot of competitive pressures to move that through the system. And probably more on at the new side of the business than it is on the used side. We see actually a little bit of a strengthening on the used side and the Construction side.

But if you turn over to the Ag side, as the manufacturers have been rolling out the Tier 4 technology and your high horsepower tractors and combines, significant price increases and we are just finding it very difficult to pass -- get the full price realizations from our customers considering the size of those price increases.

So I think at the same time we are trying to balance growing market share, aggressive revenue at the same time maintaining these margins and putting this -- these price increases into the marketplace. So I would say that is going to be on the new side.

Actually on the used side of the business I think the Ag economy is still good out there and we are seeing fairly stable used equipment prices especially on tractors. But there is a lot of used equipment out there that needs to be put through the channel. So to increase the turns and velocity on used stuff we may sacrifice slight margins on their to move it through the system on the you side of the business, especially used combines.

Got you, thanks for that color. Also interested in the inventory decline that you are targeting for next year, what does that assume about overall demand I guess in both segments, same-store revenue -- would that be expected to be down given the revenue or given the inventory decline?

Well we are not prepared to give guidance for revenues on our fiscal 2015 yet, but I think (inaudible) the case if you look out there and look at some of the manufacturers and what they are projecting for North America sales in the big equipment and stuff, we are going to watch that and spend a lot of time and really forecast, but really want to put our inventory in line with what we think the market is going to do next year and we could really give -- our plan is to give you a full guidance on that on our first quarter -- our year-end earnings call in April.

Okay, got you. And the depreciation reduction going away at year end, if that goes as scheduled how do you see that affecting the fourth quarter? Any pull forward? And what might happen related to that next year?

Well, we are not sure what is going to be out there for next year as a year ago we didn't know what we were going to have this year. A lot of this stuff was announced after the end of the year. So I think there is still yet to see from that, Rick. But I think the nice thing is there is a lot of income carry forward into this year from last year for a lot of our Ag producers.

So my challenge with our stores is some pretty good activity going on right now both from I think there is a good year for most of the farmers this year and in addition those are some nice tax incentives this year. What we're going to have next year we will find out, but regardless there is not a lot of basis left on a lot of our customers' equipment right now because of four, five years of this accelerated depreciation.

So we think there is a number of years ahead of us just to build that basis up in their equipment fleet. And if you talk to most of these producers, they're lenders, they're tax people, they really want to be at full basis in most of their equipment. So we think that is going to be a positive for many years and front of us.

Good. Hey, thanks a lot. And good luck.

Peter Prattas, Cantor Fitzgerald.

You have been hurt by a number of things this year of course, weather being one of them as well as the inventories and Tier 4 and whatnot. I'm just wondering from your perspective, can you rank for me which ones you think have been more pervasive for you and rank perhaps which ones you think will turn around for the better in the next little while?

Well to start with, I think one of our biggest challenges is we acquired a number of Construction equipment dealerships in some really big markets that are pretty much a big total rebuild. And so we are in the middle of that. So I mean I think we have really put a good organization in place, some really good improvements, some good people out to those stores. So I think that that is been a really big challenge.

But I think we've got some huge opportunities on the Construction side of the business. So I guess talk about Ag a little bit, definitely if you looked at where commodity prices were at the beginning of the year and where they are today especially corn, from a sentiment standpoint of our growers, that is a big item.

So if you add that at the same time you have seen the pricing with Tier 4 -- Tier 4 be -- going through the channel if you add the two of those together, yes, that is a little bit of a headwind in that sector even though overall, Agriculture is pretty good right now. Between the combination of those two right now, it is just a little bump in the road.

Okay. And then just my last question. Despite the challenges in your footprint, it is been a pretty decent year for Ag equipment across most of the US. So presumably we are going to have a bit of headwinds with lower crop prices heading into next year. I'm just wondering, how do you alter your strategy I guess in a softening demand environment.

Well you know, the first thing is that we really need to take a really hard look at the inventory as you are moving from what conceivably you could call what we have had is a seller's market for the last couple of three years, migrate into -- could be a buyer's market.

So to really expand the amount of presale out there, we think to really accelerate the used equipment turns out there in the system is one, we are in control of our orders out there so you really want to -- on-time manufacturing or get those shipments in as close as you can to the -- the date you need them, have locked up customers on those deals with the unit comes in. You might want to call that pre-sale. And also have the trades presold ahead of time.

So probably adding a little more central control and oversight in the whole inventory process which we pretty much have in place right now today. So between the combination of all of those and just really manage the business and really focus on the used equipment turns, focused on not paying interest on any new equipment. If you can focus on those measures, we can be very successful as it migrates into what you might want to call a buyer's market out there.

Okay, thanks for that.

Mig Dobre, Robert W. Baird.

I guess my first question is on presale, you highlight that as something that should help drive inventories a little bit lower. My understanding is that usually you need the OEM to help you with some incentives. Are you starting to see CNH get a little more aggressive in that end?

Well, I think they have been, Mig. Still, I think if you look at all throughout the industry I think they have been. So I think in our conversation with the manufacturer and stuff, I think that is definitely going to be a big driver as we are going ahead and I think it is good business.

And the nice thing about it is our customers like that. They get the latest machinery, the latest technology. And so, I think it's one of these deals it is a win-win for the distributor, it is a win-win for the manufacturer and it is a win-win for the customer. So yes, I definitely think that is going to be a big part of our business going ahead.

Sure, but I mean, correct me if I am wrong, but we are talking about discounting, to some extent, this equipment if it is presold rather than bought off the lot, right. So how does that jive with the price increases that they are trying to put through for the Tier 4 final? That is the part that I'm struggling with a little bit.

Well, I think that everybody is aware that the manufacturers come out with marketing incentives on both inventory units and units on presale. So it depends on how you structure this.

But regardless, without -- depending on what the manufacturer does, us as a dealership and how we manage our salespeople and how we manage our customers and how we approach the marketplace the same way, is -- and we've got -- a number of our stores are very, very good at this, not only pre-selling that new piece of equipment, also the next trade and sometimes the trade after that even before that new piece gets shipped.

So I think identifying these best practices, these stores are really successful at doing that, leveraging across all our stores. And at the same time you understand that as you talk about new models and a lot of the technology and some of the improvements, whether it be fuel economy, whether it be different cabs or it be different kinds of GPS systems, some of these things come with the newer models. But with that the manufacturers do put presale incentives out there for both the customer and the dealers to enhance that presale business.

Okay. Then if I may ask a question about service. As I look at the last three quarters we've seen some year-over-year margin compression in each one of these quarters. And I understand that weather can sometimes play a part of it. But can you give us a little more color here on service margins and how we should be thinking about service margins going forward?

Yes, Mig, Mark here. Just kind of looking back, the quarter is 64%; last year we ended the year 64%, 64%. I mean if there was -- when you look before that it is actually increasing somewhat. We don't -- that has been fairly stable for us, we don't see any kind of -- it may blip up and down a little bit within -- between the quarters, but overall that service margin has been very stable for us and we believe it will be stable going forward.

Okay, and last for me is an on International, which I recognize as being a big opportunity, but also we're starting to see Ukraine becoming increasingly volatile from a political standpoint. How are you managing this risk? And given the events over there, how are you thinking about scaling your investment going forward?

Well, we are keeping a close eye on what is happening over there, Mig, and of course the biggest industry in Ukraine is Agriculture. And so, whichever direction this ultimately goes, whether it is towards the European Union or towards the Russian trading block, in any event they're going to need to have -- or they will have Agriculture as their primary industry. And we need to watch that closely.

And we are still in the early stages of our investment in Ukraine. So what I mean by that is we have operating facilities in Kiev and we are online to do a store opening in the [Bonita] the region. We haven't started anything in the other regions which we have been given as territory. So we'll keep a close eye on what is happening with those events to see the ramifications of that on our business.

Thank you and good luck.

Neil Frohnapple, Longbow Research.

Understanding you haven't given guidance yet for 2015, but can you just help us directionally? I mean do you guys believe this year is the earnings trough and will you be able to offset potential end market weakness next year with Company specific initiatives and improved CD profitability? I mean can you just help us out directionally?

Really we will be talking about that on our next call, on our fourth-quarter call when we give an update on what we see. As we gain better visibility into what we see coming into fiscal 2015 we will share those comments with you on our next call.

Okay, great. And then looking at the equipment gross margin, 7.9% in the quarter, are you guys confident that this is the bottom given the market conditions? Or do you think there could be a little bit further deterioration if Ag equipment sales continue to worsen from here?

Well, I think just, again, not talking about next year but just going into the fourth quarter. So we have given that range of 8% to 8.5% and year to date we are at like 8.4%. So we see some tough margins here still in the fourth quarter of this year. And again, as Peter said, as we get out into our fourth quarter call we will comment on next year.

Okay. And then just another question maybe for you, Mark. With regard to the higher operating expenses you guys have been calling out with regard to the newly acquired acquisitions and I think, Mark, you had mentioned about upgrading facilities for parts and service. Are you guys running out of capacity there in some of your facilities? And just trying to get an understanding of when are some of these expenses going to be behind us or is this kind of the new run rate of the business?

So a couple different pieces to that operating expense especially when you were looking at it as a percent of sales. So one piece is just what I'd call operational deleveraging. So if your same stores are going down you have got the fixed expenses that you are now are a higher percent of the sales that are out there. So that in an environment where your same stores are going down you're going to see expenses as a percent of sales, everything else equal, going up.

A couple other things, we talked about these new stores coming on. We have brought on a lot of these Construction stores, low-volume Construction stores in the past year and a half. As they pick up sales, and we are starting to see them do that, as they pick up sales and their expenses as a percent of sales go down because their sales are driving up, that should actually help us and go the other direction.

As far as facility improvements, I think there are always some opportunities out there with certain stores, certain dealerships that are kind of -- they could use more capacity as far as bigger shops and things like that. But I think that will ramp down a little bit here into the next year as we kind of look at our CapEx budget. But year over year, and again this is to support that parts and service business we are not afraid of investing in that higher margin recurring revenue side of our business. Hopefully that (multiple speakers).

Great, thanks for the color. Yes, thank you.

Tom Varesh, M Partners.

In Canada Rocky Mountain dealership that sells CNH equipment has experienced similar challenges as to the ones you guys are. However, what we have seen appear is the main competitor has not experienced any of those challenges. Is there anything happening at the OEM level, whether it is from a product perspective or from a marketing program perspective, that is hindering what you guys are doing at the dealership level?

No, I don't think so. I think if you look at the product side of the business, at the end of the day that is really what is going to drive your business. I think a lot of people in the industry will argue that our actual full combine is probably the premier combine out there in the marketplace. Four-wheel-drive tractors again our quad track, there is nothing out there that is going to rival that in the marketplace.

(Inaudible) I think we've got some things coming just recent introduction of that real crop four-wheel-drive tractor from CaseIH, huge excitement about that from our customers. Recently introduced CBP transmission in our high horsepower row crop tractors, we're talking about tracks in our roll crop tractors which we don't have right now. But we are going to see that.

I think I've projected we are going to see some of those models out towards the end of calendar year 2014. So from a product standpoint great products out there. So not really, I wouldn't say that. I think we are representing really good products out there in the marketplace and great product and parts and service and have some really good heritage legacies with the brands and some very loyal customers, Tom.

Is there anything from a program standpoint that may not be different at a CNH level but is the competition doing anything differently that is adding increased pressure? I'm just trying to reconcile why like Titan and Rocky Machinery are having trouble in this marketplace versus service that represents your main competitor who isn't. Just wondering if there is anything program wise or -- I mean you are saying there is nothing on the product side so is there anything from an OEM program standpoint of that is impacting sales?

No, I wouldn't say that. It is kind of a funny year this year because the different manufacturers and their timing of the rollout of their Tier 4 final, even their Tier 4 and what quarter, what month that happened in, what the build was prior to some of this Tier 4 be and some of those things.

So we don't know what exactly the competition is doing out there, we can't see it. All I know is that we are comfortable with our products and our relationship with our manufacturers I think is good. But this has been a funny year if you really looked at what quarter and what manufacturer shipped and what type of build in what month and I would say this is a little bit of a one off the year to simply because of the variability and the different timing of the rollouts of the Tier 4 technology and the models and the price increases with those different various models. It is definitely a unique year for that. Probably unprecedented, really.

Okay. One last question for me then. You mentioned you expect to see the inventory -- industry wide inventory issues last into the next calendar year. Do you have a sense for -- and I mean it's not something I'm going to hold you to -- but is it like a middle of the year story that you project the industry might right size? Is it towards the end of the year whenever you get to the seasonally strong fourth quarter, what are your thoughts on the industry wide inventory issue?

Well, just to clarify what we are talking about, those comments were made in regards to our Construction equipment industry. And I think it is fairly well discussed both from the manufacturer's standpoint throughout the year that there was an overbuild of equipment on a Construction site in calendar year 2013. And throughout this year the major competitors have been liquidating that equipment in the marketplace.

So we think there is still going to be a little bit of hangover into next year. But I think we're starting to see the end of the tunnel on that where pretty soon the supply is pretty much right sized with the demand. And as we see some slight demand improvement which we are seeing in that business, I think we are just a little overhang on that and I think that is starting to right size here. And so to answer your question, we think earlier than later.

Perfect. Thank you very much.

Larry De Maria, William Blair.

Just curious first off on -- in your territory specifically how you are thinking about or how your customers are thinking about planting intentions for next year in terms of crops and acreage? Obviously it is still early clearly, but I'm sure you're having discussions already. And then I know you -- I think we've taken out about 2.5 or 6 million acres for the prevent plan. So that would be the first question, thanks.

Well, I think it is a little early to tell exactly what the growing (inaudible). Some of the growers, they are locked into their rotations, what they have been doing, and they are going to be locked into some of their seed purchases and some of those things. But one thing that has happened though, there's been a lot more land put into production, either land coming out of CRP or land improvement. So we are seeing that across our footprint, but there are definitely more acres being farmed, which I think is a positive for us.

But as far as the majority of the crops you see on our markets are either going to be corn or soybean. So it just depends on how they mix that and how that is going to be -- have they go ahead and the next year with that and what they are going to be able to contract. Actually obviously right now the soybean is a little bit more attractive than corn.

But you're going to go back and forth there and we do have some specialty crops in our markets. I know in Red River Valley you've got sugar beets, you've got the edible beans, you have got some of the small grain crops and some of our more northern markets. But regardless I think these guys will figure out there are some awful good marketers out there, are customers there getting pretty smart, so I am sure they are going to figure this out.

Okay I guess -- thank you, that is helpful. Because I guess what we're trying to understand is are we going to recoup some of the preventative to plant acres but we might lose some acres because of the crop economics and we might shift to soybeans. So net-net in your territory would you expect an increase in acreage or a decrease so maybe neutral? And then if it is more soy versus corn is that better or worse in terms of mix and your aftermarket?

Well, first of all, like I said earlier, I think there is a lot more land getting farmed because of land coming out of CRP and also you are seeing the land improvement taking place you are seeing tiling, you are seeing a lot of things going on to really improve this land so you can farm more It.

So some of the problems last year, it was just wet. I think from that standpoint I think a lot of that land that they couldn't farm last spring right now they were able to go in and do tillage work to it and unless we see just 100 inches of snow or some really, really wet spring right away in the springtime, it looks like they're going to be able to farm a lot of that land that was put into plant last year.

So a combination of being able to farm that and also the land that is coming out of CRP and also from the land improvement there, yes, there is going to be a lot of acres being farmed in the last year (inaudible). I don't see a big difference between corn and soybeans, there's probably some, a little more wear parts maybe and the corn thing drags on it will fall a little longer. But other than that I think we are going to see some type of normal mix and I think that'd -- we are pretty much neutral to that.

Okay, that is very helpful. Thank you. Specifically on the order boards, maybe you could just touch on some of the big buckets, I guess mostly on the Ag side, where they might be year over year, big, buckets, and help us balance whether or not part of an Ag downturn versus your area specific weakness because of the issues obviously that are going on and then also the cadence of the Tier 4 product launches for you guys?

Can you remind us when the availability of that equipment is? And if you are maybe gaining share for you have an advantage versus losing share where your chief competitor, Deere, is obviously staggering the tractor roll out.

You are asking an awful lot there. But right now with the inventory we have on hand right now we think we have got some attractively priced equipment in a good mix going into the first half of next year. So there is a certain level of presale consistent with previous years.

But it's going to be really difficult to break out the different buckets that (inaudible) our manufacturer along with our main competitors all Tier 4 be final is going to be rolled out next year from what I -- but different quarters within the year. But I think we're in good shape with our current inventory for the first half of the year.

Okay. And then finally I guess, you talked about' I guess maybe being back to the market for dealers. Has your capital allocation strategy changed at all given what is going on in the market? Or it sounds like maybe people are coming in the market more than the dealers and you haven't -- you either (inaudible) more at an opportunity over the next year or two to maybe buy more dealers as the price gets better for you?

I think -- we are a growth Company and I think part of our model is to have liquidity and the balance sheet so we can do acquisitions. And I think nothing has changed there and we are in a good position going ahead.

Okay. Thank you very much. Good luck.

Joe Mondillo, Sidoti & Company.

So I have a question just related to the equipment margins. And I know we have covered this, but I'm just wondering what you sort of see normalized equipment margins when inventories finally normalize. And do you think we can see expanding margins next year if we see flat to down sales?

Well, I think just to kind of go back historically, I think we have seen it anywhere from that low 8% to up in the 11%, so I think somewhere in the middle there I guess is what you could kind of call a normal margin on the equipment side.

I think there is just -- when you have a changing market -- when you have got a changing market where you are bringing in your used equipment and the market goes down you have got some pressure on that equipment at the price that you brought it in at.

So if you go into -- get to more stable markets, whether it is just flat or if it picks up and goes the other direction, that is where you see some of that momentum change in that equipment number -- or in that margin number. So, and then as far as next year we will provide that guidance and what we see specifically for next year in April.

So I guess what I'm trying to get at is you guys are obviously taking a pretty good chop at your inventory. I imagine a lot of the rest of the inventory is going to be doing the same thing if not doing it already. Do you think that in that case that we end up seeing pricing bottoming around now and we actually see maybe an expansion in margin next year even with sort of flattish sales?

I think, again, with fourth quarter -- we can comment on fourth quarter and, there again, with the guidance we put out there it would infer that there would be some additional pressure on the equipment margins in the quarter. And going into next year we will see obviously fourth-quarter is our largest equipment quarter for us, we will see what comes out of that and as we gain visibility after we get through that busy sales cycle for us we will have some better outlook and disability on next year.

Okay, so you are only willing to comment on the next two months?

On our fourth quarter, yes.

Okay. So I guess my next question had to do with the floor plan interest. Given what you are expecting to take inventory down next year, how do you look at that floor plan interest? I know there is some moving parts within that. Do you think we can get down -- back down to fiscal 2013 levels in the floor plan interest or any insight on that?

Yes, so obviously with the inventory levels coming down that would be a positive for it. And like you said, there are other factors in there, obviously rates, and there is -- our floor plans are based on LIBOR for the most part. And then kind of the non-interest-bearing percentage.

So I would expect our non-interest-bearing percentage maybe to come down a little bit as we slow down what is coming in from a procurement side. And we will see what happens with rates. But overall with the balance going down, as we stated, $250 million from our year-end projection, it will be a positive to our floor plan interest expense. And a meaningful positive.

Okay. And then lastly, I think we were all expecting and the third quarter to be the best quarter for the Construction. I know you have mentioned several things that have been weighing on that. Compared to the second quarter where you saw a smaller loss, what weighed on -- specifically weighed on the third quarter more so to create that larger loss sequentially?

Yes, what -- so third-quarter, looking at it over last year and even the second quarter somewhat is just continued pressure on the margins, on the equipment margins. And some of it is just working through some aged inventory as well to get our inventory in the shape that we want it for next year.

So those are some of the pressures, by far you saw sales starting to pick up, utilization was a little bit off kind of what we expected on the rental fleet, but equipment margins were the bigger driver of what happened in our third quarter. And some of that of course is the industry headwinds that are still out there on that side of the business that is compressing those margins.

So did pricing decline sequentially because I'm just looking at the -- it seems like rental sales overall increased sequentially. So I would think that would help drive profitability.

Yes, so you are kind of talking two different things. On the rental side, we do have a seasonal high in the third quarter and expect a seasonal high utilization in the third quarter, which we did achieve. But we thought it would even be higher than that and then when we do our depreciation on those pieces of equipment we estimate the amount of use that is going to happen throughout the year and we adjust the depreciation accordingly.

So there was a higher depreciation tax or however you want to say it, higher depreciation charge that went through in the third quarter on higher expectation of utilization. So that you will see the margin compress somewhat on that rental fleet. But as far as equipment goes, equipment margins on the retail side, yes, there was further compression that we experienced on our equipment margins in the third quarter over what we experienced in the second quarter.

All right, perfect. Thank you.

At this time I would like to turn it back to our speakers.

All right, thank you, everybody, for your participation on the call today and your interest in Titan. And we look forward to updating you on our progress on our next call. Have a good day, everybody.

And this concludes today's conference. Thank you for your participation.