Titan Machinery Inc (TITN) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Titan Machinery Inc. fourth-quarter fiscal year 2014 earnings conference call. (Operator Instructions). Hosting today's conference will be John Mills of ICR. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Mr. John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen and welcome to Titan Machinery's fourth-quarter 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 fourth quarter ended January 31, 2014, which went out this morning at approximately 6:45 AM Eastern time. If you have not received the release, it is available on the Investor Relations portion of Titan's website at titanmachinery.com. This call is being webcast and a replay will be available on the Company's website as well. In addition, we are providing a slide presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the Investor Relations tab. The presentation is directly below the webcast information in the middle of the page.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of management and involve inherent risk and uncertainties, including those identified in the Risk Factors section of Titan's most recently filed 10-K. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call.

Lastly, due to the number of participants on the call today, we ask that you keep your question period to one or two questions and then rejoin the queue. The call will last approximately 45 minutes. David Meyer will provide highlights of the Company's fourth-quarter results and a general update on the Company's business. Then Peter Christianson will discuss the Company's international overview and segment operating results. Mark Kalvoda will discuss the Company's financial results in more detail and its fiscal 2015 annual revenue, net income, earnings-per-share guidance and non-GAAP operating cash flow ranges, along with an outlook and 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 fourth-quarter and full-year 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.

If you start and turn to slide 2, you see our fourth-quarter and full-year fiscal 2014 results. Our revenue for the fourth quarter of $709 million was in line with our expectations, reflecting lower equipment sales due to the challenges in our industries, which we have discussed on previous calls. Our adjusted pretax income, excluding our non-cash impairment charges of $10 million, exceeded our expectations and was $12.8 million. Our adjusted earnings per share were $0.35. In addition, we exceeded our $90 million inventory reduction target that we discussed on our third-quarter earnings call and we reduced our inventory by $102 million in the fourth quarter of fiscal 2014. This is an important step in positioning our business to achieve much stronger cash flow from operations in coming quarters.

For the full year of fiscal 2014, we reported revenue of $2.23 billion, which is in line with our guidance range given on our last earnings call. Our full-year adjusted pretax income was $28.4 million and adjusted earnings per share was $0.78, which exceeded our previously issued guidance when excluding the non-cash charges I just mentioned. Mark will provide additional detail on our financial results later in the call.

Turning to slide 3, lists the discussion points for today's call. First of all, we discussed some of the headwinds facing the agriculture industry. In addition, we will discuss the first-quarter realignment and store consolidation primarily relating to our construction business. Mark will discuss our non-cash impairment charges. We will update you on our equipment inventory strategy for the current year and discuss our fiscal 2015 guidance and modeling assumptions, which include a significant increase in our non-GAAP operating cash flow.

Now I'd like to provide some more color on each of our agriculture and construction industries. On slide 4, we provide an overview of our agriculture industry. In our footprint, spring planting is expected to be on schedule and we are entering the planting season with adequate moisture levels. Also, the USDA is forecasting the planted acres of corn, soybeans and wheat are expected to increase approximately 3% in our footprint primarily due to the acres taken out of production last year as part of the preventive plant program. We are seeing some farmers split a portion of their (inaudible) from corn to soybeans and/or wheat.

USDA projected higher ending stocks as reflected in lower global commodity prices. The lower commodity prices are also affecting the USDA projected net farm income to be down 27% in calendar year 2014. Our fiscal year 2015 modeling assumptions take into consideration these industry headwinds and the associated impact on our agriculture equipment sales. The ag equipment industry has and will continue to experience price increases in advance of tier 4 final pricing, which is affecting overall equipment sales and is also compressing our equipment margins. The industry continues to experience pressure on used equipment prices as a result of the lower commodity prices and the current supply of used equipment in the industry.

Turning to the legislative side of the industry, a new US farm bill is now in place and this reduces some of the uncertainty surrounding many aspects of our agriculture customers' business. Bonus depreciation has expired and the Section 179 depreciation deduction has been reduced to $25,000. Right now, these tax items are in committee and we expect them to be addressed later in the year.

Although we are facing some near-term headwinds, it is important to remember our customers continue to benefit from low interest rates and their balance sheets remain very strong. We are confident in the long-term strength of the agriculture industry and the increasing global demand for agricultural production.

Now I'd like to turn to the construction segment of our business. On slide 5, we provide an overview of the construction industry on our markets. We are seeing signs that the overall economic environment is gradually improving, providing support for increased construction activity in fiscal year 2015. The severe winter weather in our footprint actually benefited our parts and service and rental revenue. Short-term rates continue to be very favorable and overall construction inventory levels are improving and getting closer to being in line with end-user demand.

In the upper Midwest, agricultural activity and the ongoing buildout of the Bakken and adjacent oil reserves and related infrastructure continues to support the construction industry. Housing permits earlier this calendar year are pointing to improving housing construction in many of our regions throughout the 11 state footprint, which is a positive indicator for demand for our medium and light equipment product offerings.

The positive fourth-quarter construction same-store comps we achieved are reflective of some early signs of improvement in our markets and we continue to see growth in rental equipment demand, which is aligned with industry forecasts. We enter fiscal 2015 with a larger rental fleet and with our recent alignment we announced today, we believe we will improve our utilization throughout the year. Lastly, the industry is experiencing improvement in used construction equipment pricing in many regions throughout North America.

Now turning to slide 6, I'd like to discuss our construction realignment we announced this morning. In order to better position our construction and rental business in certain markets, we made the strategic decision to reduce our construction-related headcount by approximately 12%, primarily through the consolidation and closure of seven construction stores located in Bozeman, Big Sky and Helena, Montana; Cheyenne, Wyoming; Clear Lake, Iowa; Flagstaff, Arizona; and Rosemount, Minnesota. We are positioning our rental fleet in hubs centered in large rental markets providing better selection for our customers, internal efficiencies and increased utilization of our rental fleet. In addition, we are consolidating one ag store in Oskaloosa, Iowa into an existing Titan dealership nearby. We are also making staff reductions at other dealerships and reducing our shared resource staff as part of rightsizing our business.

Overall, the realignment, combined with other staff reductions, will amount to approximately 4.5% of our total headcount. The closing and severance costs are anticipated to be approximately $4.2 million pretax, or $0.12 per share and will be recognized in the first quarter of fiscal 2015. We are confident that the realignment and consolidation that we are implementing will position our construction segment for improved pretax profits and will lead to stronger performance in our construction business. On a pro forma basis, excluding the one-time construction charges, we anticipate realizing approximately $0.12 per share in fiscal year 2015 in realignment savings.

Turning to slide 7, based on our first-quarter realignment and the fiscal year 2014 key initiatives we have implemented during the past year, we expect significant improvement in our construction segment's results in fiscal 2015. First, we are confident we have the key personnel in place with the experience and leadership to drive the business. The key personnel changes included new hires to oversee construction operations, as well as new senior managers for our aggregate, rental, industrial and government organizational platforms, along with strategic account managers. We expect to capitalize on positive sentiment in the construction industry and drive revenue growth through our organizational platforms focused on each different area of our markets. In addition, we have increased salesforce to grow market share and revenue in each of our locations. We have a centralized inventory team in place and with the improved centralized inventory management, we expect to lower inventory levels and improve our equipment margins.

We believe our realignment will drive operating leverage through increased utilization of our rental fleet from our newly implemented rental hubs I just described. The realignment and removal of underperforming stores will increase sales per location and reduce fixed costs. While we have not been satisfied with the recent overall performance of our construction business, we have seen signs that we are moving in the right direction and we believe this realignment will position our business for stronger results. In the fourth quarter, we achieved positive same-store sales of 2.7% and we expect much stronger same-store sales in fiscal 2015.

In fiscal 2015, we continue to look for opportunistic acquisitions. Subsequent to the end of the fiscal 2014, we opened two new dealerships, one in Ukraine and one in Romania. These represent our 15th and 16th locations in Eastern Europe. Although these are fairly small investments, we are confident in the current and long-term importance of agriculture in these regions.

While fiscal 2014 was a challenging year, we are making the appropriate improvements to our business that will generate significant cash flow in fiscal 2015 and continue to deliver superior service to our customers throughout our footprint as we have for many years. And now I'd like to turn the call over to Peter Christianson, our President, to discuss the agriculture, construction and international operating segments in more detail. Peter?

Thanks, David. On slide 8, we have an overview of our international segment, which includes stores in Bulgaria, Romania, Serbia and Ukraine. Farmers have been able to begin early spring planting resulting from the milder winter that most of Eastern Europe experienced. The mild winter also provided favorable conditions for winter crops in these markets. Current moisture levels are adequate to support crop development at this stage of the production cycle. Just like farmers in North America, lower global commodity prices are impacting our international customers as well. Our customers in Bulgaria and Romania may receive an extra benefit during the second half of this year from the European Union subvention funds, which provide subsidies for the purchase of equipment. We have not added this into our international projections, but this could be a meaningful benefit for those two countries' operating results.

Based on many factors, including the growing awareness of our superior customer service and availability of equipment in the countries we operate, we expect our stores in Romania, Bulgaria and Serbia to achieve growth and improved operating results in fiscal 2015. Our European operations center in Vienna, Austria is now in place. This investment will provide leadership and continuity to operations and begin to consolidate back-office functions from the different countries such as IT, accounting and inventory management. This additional cost of building out our distribution network will be more than offset as we ramp up the volume of business in this segment.

On slide 9, we are providing an update on our stores in the Ukraine. It is important to understand that although Ukraine represents a significant growth opportunity for Titan, it represents less than 2% of fiscal 2014 revenue. The current geopolitical and financial uncertainty is negatively impacting our customers and our operations. Our customers are experiencing reduced credit availability for crop inputs, as well as equipment purchases. Rising interest rates and the devaluation of the local currency are affecting all businesses throughout the country. Even considering these factors, our customers are proceeding with spring planting to start the crop production cycle. Potential economic investment packages from the West to Ukraine could improve the financial climate during the back half of the year.

On the bottom half of the slide, we have a map of where our Titan markets are located in Ukraine. As you can see from the map, we are located in the center of the country and most of the geopolitical uncertainty is located in the Crimea region, as well as the eastern portion of the country. We do not believe our assets in Ukraine are in jeopardy.

On slide 10, you'll see an overview of our segment results for the fourth quarter. Agriculture sales were $578.9 million, a decline of 14.9%. We generated ag pretax income of $25.1 million compared to $33.7 million in the prior year period. The primary factors impacting our ag segment results were lower equipment sales and/or equipment margins compared to the same period last year.

Turning to our construction segment, our revenue was $115.2 million, up 6.1%, which reflects higher same-store sales, as well as acquisition growth. Industry conditions are improving for this segment of our business; however, challenges still remain. The impairment charge we took in the fourth quarter, which Mark will discuss in more detail, had an $8.2 million impact on our construction pretax income. Our adjusted pretax loss for the construction segment, excluding this impairment charge, was $8.2 million in the fourth quarter of fiscal 2014 compared to a loss of $5.5 million in the same period last year. As David outlined, we have made adjustments to this segment of our business and believe that the realignment and consolidations we have made position our business for improvements in pre-tax results in the future.

In the fourth quarter of fiscal 2014, our international revenue was $38 million, a 102.8% increase compared to the prior year period. This increase reflects the acquisitions and new store openings, as well as an improvement in same-store sales. The non-cash impairment charge in the fourth quarter had a $1.8 million impact on our international pre-tax results. Our adjusted pretax loss for international, excluding this $1.8 million charge, was $2.3 million compared to $0.9 million in the same quarter last year reflecting higher floorplan interest and costs associated with building out our distribution network, including startup of our European operations center in Vienna, Austria and ramping up in-country operations.

Now turning to slide 11, you'll see our segment results for the full year. The ag revenue decline reflects lower same-store sales due to the challenges in the industry that David discussed. The decrease in our ag pretax income reflects lower equipment sales and margins combined with the additional operating expenses from annualizing our fiscal 2013 acquisitions, as well as an increase in our floorplan interest expense due to higher equipment inventory levels.

Our construction segment revenues represent acquisition growth offsetting negative same-store sales results for the full year. Construction segment pretax loss adjusted for the $8.2 million non-cash impairment charge was $19.8 million, reflecting lower equipment margins and higher rental and floorplan interest expense in addition to the increased expenses associated with our recent construction acquisition. Our international segment full-year results reflect the same factors I mentioned regarding our fourth-quarter segment overview. It is important to keep in mind that our international business is still in the development stage and although there are costs associated with establishing our international operations, we believe this business represents a structural component of our long-term growth strategy.

Now turning to slide 12, this shows our same-store results for the fourth quarter of fiscal 2014. Our overall same-store sales decreased 12.1%. The agricultural same-store sales decrease of 15% reflects the industry headwinds David discussed earlier, as well as strong prior year same-store comps of 22.6%. Our fourth-quarter fiscal 2014 construction same-store sales increased 2.7%. Our international same-store sales increased 12.3%.

For the fourth quarter of fiscal 2014, overall same-store gross profit decreased 9.8%. This decline reflects lower same-store gross profit for ag and international partially offset by an increase in construction. Our international gross profit reflects the impact of lower equipment margins primarily due to lower commodity prices.

Slide 13 shows our same-store results for fiscal 2014. Same-store sales decreased 6.2% compared to last year and same-store gross profit decreased 4.3%. For modeling purposes, it is important to remember that we calculate same-store sales by including stores that were with Titan for the entire period in which we are comparing. In other words, only stores that were a part of Titan for the entire three months of the fourth quarter of fiscal 2013 and the fourth quarter of fiscal 2014 are included in the fourth-quarter same-store comparison.

In the fourth quarter of fiscal 2014, a total of four locations were not included in our fourth-quarter same-store results consisting of two construction stores and two international locations. No ag locations were excluded from the fourth quarter. For the full-year fiscal 2014, a total of 23 locations were not included in the same-store results consisting of six agriculture stores, eight construction stores and nine international locations. Now I'll turn the call over to Mark Kalvoda, our CFO, to review results in more detail, provide an update on our reduction in inventory and fiscal 2015 guidance.

Thanks, Peter. Turning to slide 14, our total revenue for the fiscal 2014 fourth quarter was $708.6 million, a decline of 9.7% compared to last year. The 13.4% decrease in overall equipment sales reflects lower agriculture sales primarily due to lower commodity prices being realized by our customers partially offset by an increase in construction sales and higher international sales.

Our parts and service business performed well in the quarter, increasing 14.7% and 6.9% respectively, demonstrating the strength and stability of the recurring revenue from this area of our business. We also grew rental revenue on a quarter-over-quarter basis due to our expanded rental fleet.

On slide 15, our gross profit for the quarter was $97 million. Our gross profit margin was 13.7%, an increase of 40 basis points compared to the same quarter last year. The increase reflects the shift in gross profit mix to our higher-margin recurring parts and service business partially offset by lower equipment margins, which declined to 8.7% compared to 9.5% in the prior year period.

Our operating expenses as a percentage of net sales in the fourth quarter of fiscal 2014 were 10.9% compared to 9.2% 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 negative same-store sales in 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. As David outlined, the realignment announced this morning will improve our cost structure as we enter fiscal 2015.

In the fourth quarter of fiscal 2014, we recognized a non-cash impairment charge of $10 million pretax, or $6.1 million after-tax, primarily related to goodwill and other intangible assets associated with certain underperforming dealerships in the construction and international segments. A number of the stores that contributed to this writedown are being closed in the realignment we announced today. This non-cash writedown removes all goodwill on our balance sheet related to our construction segment and nearly all goodwill related to our international segment. We do not believe this event will be re-occurring and that is why we have provided adjusted pre and post-tax results, excluding these non-cash expenses, so you can view our business on a going-forward basis.

Our overall interest expense increased 30 basis points, which was driven by higher equipment inventory levels compared to last year. We have reduced our equipment inventory levels in the fourth quarter and expect to continue to reduce these levels in fiscal 2015. I will speak more to this in a moment.

Adjusted diluted earnings per share of $0.35 for fourth quarter of fiscal 2014 excludes $0.37 per share of non-cash charges and compares to $0.73 per diluted share in the fourth quarter last year. The non-cash items in the fourth quarter consist of the impairment charge that I just mentioned of $6.1 million after-tax, as well as a tax valuation allowance of $1.7 million on certain deferred tax assets of our international dealerships for a total non-cash adjustment to our net income attributable to common stockholders of $7.8 million. The deferred tax assets were generated by net operating loss carryforwards in our (technical difficulty) segment. Some of our international dealerships have generated losses to date and accounting rules require us to reserve against the future use of these deferred tax assets. This tax allowance increases our provision for income taxes, which increased our full-year effective tax rate of 56%. At the end of our slide presentation, we have included a reconciliation table to help illustrate the adjustments we are making to our GAAP results.

On slide 16, you will see our results for the full-year fiscal 2014. Our revenue was $2.23 billion, an increase of 1.3% compared to last year. Increases in parts, service and rental was partially offset by lower equipment sales for the year.

Turning to slide 17, our gross profit in the fiscal 2014 increased 2.6% to $384.1 million. Our gross margin was 15.6%, an increase of 20 basis points from last year, as lower equipment margins were offset by a shift in mix to higher parts and service revenue. Our operating expenses increased 190 basis points primarily reflecting the factors I discussed earlier. Our GAAP earnings per share in fiscal 2014 were $0.41. Excluding the previously mentioned non-cash charges from GAAP earnings, our adjusted earnings per share is $0.78.

Turning to slide 18, we provide an overview of our balance sheet highlights at the end of fiscal 2014. We had cash of $74.2 million as of January 31, 2014. At the end of the fourth quarter, our equity position in our equipment inventory was 20.1% compared to 15.7% as of January 31, 2013. A higher equity position means less cash and lower floorplan payables on our balance sheet.

During the fourth quarter, we reduced our equipment inventory level by $102 million, which exceeded our expectations stated on the December earnings call. This reduction in our equipment inventory resulted in our overall inventory level of $1.080 billion compared to $929 million as of the end of fiscal 2013. Of the $147 million inventory increase, approximately $40.5 million was from acquisitions. New inventory, including acquisitions, increased $33.3 million from the end of fiscal 2013 and our used equipment inventory, including acquisitions, increased $88.1 million from the end of fiscal 2013. Our increased used equipment inventory level is the result of new equipment sales and corresponding trade-ins, which are seasonally higher in the fourth quarter.

Our rental fleet assets at the end of the fourth quarter were $145 million, which is up $39 million compared to the end of fiscal year 2013. The fleet increase from the end of fiscal 2013 was primarily in our newly expanded footprint in Colorado, New Mexico and Arizona. We do not expect a significant increase in our rental fleet during fiscal 2015.

As of January 31, 2014, we had $411 million available on our $1.2 billion floorplan lines of credit. It is important to remember that we look at our floorplan lines of credit as payables based on their terms instead of looking at them as debt. The floorplan balances are directly related to our inventory, which is a current asset and at any time approximately half of our floorplan is non-interest-bearing.

Turning to slide 19, I'd like to provide an update on our equipment inventory strategy. Similar to what we provided on our last earnings call, you will see a chart outlining our equipment inventory position for the last five years. We told you on the last call that we expected to reduce inventory by approximately $90 million from the third quarter to fourth quarter. We exceeded this target and achieved a reduction of $102 million in the fourth quarter. On the right side of the graph is the targeted year-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.

To provide some color on how we expect to achieve the equipment inventory reduction in fiscal 2015, we see a slight increase in inventory levels during the first half of the year, but not the ramp in inventory levels we have had in previous years. We anticipate our inventory levels to begin decreasing in the third quarter to meet our year-end target.

Slide 20 gives an overview of our cash flow statement for 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 $123.4 million in the fiscal 2014. Our GAAP cash used for inventories was $182.4 million in fiscal 2014.

In our statement of cash flows, the GAAP reported net cash used for operating activities for fiscal 2014 was $82.2 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 $50.8 million. This $50.8 million use of cash was negatively impacted by increasing our equity in our equipment inventory, as I mentioned earlier. Looking forward, we are focused on improving our non-GAAP operating cash flow and as we execute on our inventory reduction targets, we are confident that we are positioned to achieve improved cash flow from operations in fiscal 2015.

Slide 21 shows our fiscal 2015 annual guidance. We expect fiscal 2015 revenue to be in the range of $1.95 billion to $2.15 billion. As a result of the construction segment realignment, we anticipate recording a non-cash $4.2 million pretax charge, or $0.12 per diluted share in the first quarter of fiscal 2015. For modeling purposes, excluding the realignment charge, the pro forma benefit of the realignment and store consolidations we are implementing is expected to be $0.12 per share for fiscal 2015. We expect our annual adjusted net income attributable to common stockholders to be in the range of $14.8 million to $21.1 million resulting in earnings per diluted share range of $0.70 to $1 based on an estimated average diluted common shares outstanding of 21.1 million shares. On a GAAP basis, including the realignment charge, we expect net income of $12.2 million to $18.6 million, or earnings per diluted share in the range of $0.58 to $0.88.

For fiscal 2015, we are introducing a new guidance metric, non-GAAP cash flow from operations. On the previous slide, I provided you with this measure on an actual results basis, but now we will use this metric to provide insight into our anticipated cash flow for the coming year. For the full year, we expect non-GAAP cash flow from operations in the range of $60 million to $80 million, which represents an improvement of $111 million to $131 million compared to non-GAAP cash flow from operations of negative $50.8 million in fiscal 2014. The primary driver of this improvement is expected to be a $250 million reduction in inventory in fiscal 2015.

The modeling assumptions supporting our guidance are as follows. We expect our ag same-store sales to be negative 10% to 15%; our construction same-store sales to be in the range of positive 10% to 15%. This year, we are also introducing international same-store sales. The international segment is a small component of our overall business and can vary significantly from quarter to quarter because of its small base of stores. The international same-store sales included in our guidance is a range of positive 5% to 10%. Our equipment margin modeling assumption for the full year is projected to be in the range of 8.3% to 8.8%, which is similar to last year. We are modeling annual rental dollar utilization to be in the range of 32% to 34%. As a reminder, there is seasonality in our utilization and generally the winter season has lower utilization than the other seasons of the year. This concludes the prepared comments for our call. Operator, we are now ready for the question-and-answer session of our call.

(Operator Instructions). Michael Cox, Piper Jaffray.

Good morning, this is Amanda Durow on for Michael Cox. My first question is thanks for the detail on the inventory management. Can you please provide more color on how you are going to be achieving the lower inventory for fiscal 2015?

Well, for fiscal 2015, a big part of it is just on the -- we are looking at what the projections are and we are adjusting the procurement side of it. As you can see on the chart, a good amount of the reduction is coming in the new equipment inventory. So we are adjusting our procurement based on what we are seeing in fiscal 2015 to be from a sales perspective.

Okay. And then a follow-up to that. Have you increased or intend to increase any machinery writeoffs?

We do a lower of cost to market on our used equipment on a regular basis; we perform it every month. It is required by GAAP. We haven't -- we don't see anything unusual there at this time. We believe we are staying on top of it as we look at market conditions on a monthly basis.

Thanks so much for taking my questions.

Steve Dyer, Craig-Hallum.

Thanks. Good morning, gentlemen.

Good morning.

Just as you step back and you kind of look at the big picture, what is your sense as to the OEMs' reaction to commodity prices and the slowdown? Is your sense that they are adjusting their expectations and production accordingly? How are you feeling about sort of the incentive level, etc.?

I think the manufacturers are -- I think they are being careful as we go through the year. The first half of the year, you're typically going to see a number of presales that get delivered from sales that were actually made in the preceding year, but I'm sure they are keeping some flexibility for what they are going to do in their third and fourth-quarter production levels. As you probably noticed, CNH made a recent announcement of a 200 headcount reduction in their Grand Island plant. I believe Deere earlier made an announcement of a 150 headcount reduction in one of their Waterloo plants. So I think they are trying to get ahead of this a little bit, but, at the same time, I'm sure they are conscious of their revenues and want to keep a certain amount of expense leverage across their factories and their fixed expenses and to keep the production rolling.

Yes, okay. And then with respect to your used inventory, that jumped pretty significantly even though you brought the overall number down. Is that a level you are comfortable with or how are you thinking about used versus demand right now?

Well, I think as everybody saw our revenue numbers for the fourth quarter ended up really strong and so that was from a lot of sales of newer machinery, which results in some trades. So as we go through the year here, that used number is going to come down. We feel comfortable with the used that we traded in and with some of the pricing, some of the tier 4 B introductions that are happening right now, we feel good about our ability to lower that used. And basically this is like a normal cycle, trade in the new at the end of the year and then sell the used through Q1, Q2 and Q3.

A lot of your competitors that we've talked to kind of throughout the last six months have in some cases just stopped taking trades at all. Are you just having to be more selective with it, or what is sort of your strategy as to how you think about kind of the trade-off between new and used?

I don't think that is the case at all, the stop taking days. I think what you probably saw is a phenomenon happening over the last two or three years is there probably became more what we will call one-year rolls where people that normally maybe traded every three years started to trade every year. And actually what happened is some of the customers that were actually buyers for late-model used equipment, they flipped and started buying new which took a used buyer out of the market and also brought in another piece of used equipment.

So I believe we are going to get back to a more normalized where there will be less one-year rolls. It will get back to some normal trading sequences that the customers are used to. And I think we are seeing some of that happening. As you mentioned, some of the competitors, I've heard a lot of chatter out there the fact that yes, there is probably going to be some of this less one-year rolls going on out there.

Got it. And then Mark kind of alluded to the construction realignment as being not recurring. Is this sort of what you feel like you have to do right now, or is this -- I guess anything more to come here, given kind of the losses on that side of the business? Or do you feel like this sort of adequately addresses the issue?

We've spent a lot of time analyzing the business, looking at our organization, and we wanted to make a one-time adjustment and that is what we did here. We continue to look at the effectiveness of all our stores and all our positions in our Company, but right now we feel comfortable -- we are taking this into August -- the momentum seems to be changing in the construction business. So we feel comfortable where we today in that segment.

Okay, thanks, guys.

Mig Dobre, Robert W. Baird.

Hey, good morning, gentlemen.

Good morning.

I guess I want to stick with construction here. So over the past year or so, we have seen several initiatives from you guys in trying to address issues in this business. This is obviously the most significant. I guess from a big picture standpoint, what is the strategy and long-term vision for this business? How do you intend to expand it or do you intend to expand it further?

Well, when you mean expanding on -- we are anticipating significant same-store growth increases, especially with some of these activities (technical difficulty) we just put in place. The comment on the earlier question, some of these changes we took place, they take time to develop and we are seeing the fruits of our labors I think right now. We are seeing a benefit from some of the things we put into place last summer, last fall. We made some major organizational changes with our ag group, our rental group, our government group, our industrial equipment group, putting major and strategic account managers across our footprint. Those are really starting to pay off (technical difficulty) feel optimistic going ahead in our construction.

But are you saying that M&A is still a focus, construction M&A is still a focus for you?

As we've said on a couple of our calls last year, right now, we are more focused on operational improvements in the construction stores and we are not aggressively going after construction acquisitions. That is not to say we are going to exclude those, but right now we have been focused on the operational improvements.

Okay. Then, Mark, this is more a question for you, if you would. I am trying to clarify a small accounting issue. When I am looking at the statement of cash flow, I am seeing a net transfer of assets to property, plant and equipment. Is this related to the rental fleet?

Yes, yes. So much of our rental fleet that we have, it is coming from our inventory. So it is coming from our inventory going into our rental fleet, so it shows up as a non-cash item on our statement of cash flow.

Okay. And how exactly do you account for margins or profitability of any kind for that inventory? Is it a cost, is it markup?

No. When the inventory moves into our rental fleet, it goes over at cost. There is no markup, there is no sales recognized. It simply goes into our PP&E fixed asset and it is depreciated as it is being used in our rental fleet.

Very well. Thank you. And the last question for me is really on the margin side and equipment. You are guiding for fairly flattish margins even though obviously there is some challenges with used equipment prices and you are expecting a revenue decline. What sort of assumptions are you using in this guidance? Are you assuming stabilization in used equipment prices improvement or how should I think about that?

I think the first thing I think is looking at it by segment. I think we'd see some strengthening there. Some of the assumption there is some strengthening on the construction side as we get into a better environment there and then offsetting that a little bit I think is going to be some of the continued pressure on the used equipment margins on the ag side. So those are kind of (multiple speakers).

Is that going to be enough for construction to actually be able to offset ag given the size differential?

Yes. So what that would allude to is that we expect a bigger pickup on the construction side than what the ag side decline would be and because of the sheer size of ag being larger, the construction side is offsetting that.

Thank you very much. Good luck, guys.

Neil Frohnapple, Longbow Research.

Hey, good morning, guys. The construction segment growth of 10% to 15% in FY 2015, it is a sizable acceleration from 2% to 3% same-store sales growth you guys achieved in the fourth quarter. So does the stepup include market share gains or is it all underlying end-market growth and then how do you think about -- with the construction segment consolidation, how do you think that impacts revenue this year? Have you guys had conversations with customers regarding this and you think you can retain all that?

Okay, to answer your first question, within the construction -- you are going to see certain segments of the construction industry that the industry is showing those type of gains, but I would say you are going to see a lot of [arguing] not only from the industry, which so far has been tracking up for the first quarter. In addition to that, we feel that our share levels, that we have got a lot of upside potential to grow share, especially a lot of these new startup (inaudible) that we've invested in over the last two years. We are starting to see that share improvement across our stores that we've been putting the investment into.

Okay, so it does assume a little bit of a stepup in share then?

Right, right. But also the industry is tracking very strong so far this year.

Neil, and I think your other -- this is Mark -- your other question was on the consolidation and how that affects kind of our assumptions.

Yes, do you guys have a lot of (multiple speakers)?

Yes, the consolidation (multiple speakers).

I'm sorry; do you guys have a lot of walk-in business?

When we consolidate those stores, the assumption that we made in our modeling is we will capture a lot of the sales that occurred at the location that is being closed and neighboring locations. So those are in our same-store assumption numbers. So that is -- lifting is part of that 10% to 15% increase on the construction side.

Got it. Thanks. And then, Mark, does your guidance -- or just a clarification. Does the $0.70 to $1 EPS guidance include the $0.12 benefit from restructuring actions?

It does include the benefit going forward. It does not include the charge, the one-time charge that will occur in Q1.

Okay, great. And then just last one from me, I appreciate you guys taking the time. Does the guidance imply that the construction segment gets back to breakeven in FY 2015 with restructuring actions you are taking and the top-line growth expected or is it just more you anticipate to moderate the losses, so to speak?

With the guidance that we are putting out there, it would get us back to a breakeven on the construction side.

Great. Thanks very much, guys.

Larry De Maria, William Blair.

Thanks. Good morning, everybody. If I heard you guys right, I missed part of it, but the transfer from inventory to PP&E was all rental, I believe and that was originally intended to be sold, if I am correct. What was the number in the fourth quarter, I guess, first of all and is there more of that to occur?

Well -- so first of all, as far as more of it to occur, we will always look at opportunities to kind of pull from our inventory if we need that item in our fleet. But we indicated on the call that we are not expecting our fleet to materially change this next year to grow it significantly. Offhand, I don't know what fourth-quarter number is. It wasn't significant because our fleet amount didn't change much. In fact, I think it actually went down a little bit in the fourth quarter. But, yes, we bring out of our inventory whatever we feel that we can rent and we can make a good margin and make a good business model out of renting and out of our rental fleet. We look at -- if it's in our retail inventory, we look at pulling it from there first and if we don't have it there, we would look at procuring it from the outside.

Okay. Just because it was a big number in the third quarter, it was up by 200%, but you are saying your $100 million inventory reduction in the fourth quarter probably had no impact of transferring assets from inventory to PP&E in the fourth quarter?

That's correct. Very little, if any, of that movement was from transferring to our rental fleet.

Was there a reason why it was big in the third quarter?

Back in the second and third quarter is when we built up our fleet primarily in that Southwest part of our footprint, the expanded footprint in Arizona, New Mexico, Colorado markets. That is where we built and that is when we built up that rental fleet.

Okay. That's helpful. Thanks, Mark. Then secondly, commodity prices have moved up. We've gotten a farm bill. There seems to be a little bit more stability than maybe some of the concerns we had three, six months ago. Is this being reflected at all in farmers' sentiment in your guys' opinion? Also, obviously, the weather we don't know yet, but is there any change in sentiment in the farmers given that we've got the farm bill. Commodity prices have poked their heads up because we have a smaller carryout or is this still a -- they are kind of more in the retrenching mode and not likely to change much given obviously what your guidance is?

I think the farmers sentiment overall is business as usual. They are fairly pragmatic and I think they are good business people. So I think they go about their business and they look at the land improvement, how they can increase their yields, what machinery can give them better productivity and expense management. So they continue to do that and I believe they're looking more at this commodity over a long -- over the long haul and not reacting to every little weather, but it's early to tell. I think the market is going to be driven by weather a lot going ahead, but this definitely -- in the first quarter, I think we are seeing some real resiliency in the market and some good gains. So it is a positive, but like I say they are pretty pragmatic people, pragmatic and go about their business and you are not seeing these real high and lows I don't believe right now.

Okay, thanks. And then finally, I think you mentioned that used prices have improved. I'm just curious how you are baking that into your numbers and how you -- if you could just give some more color there and then also obviously on the new prices because we know that CNH has reported positive pricing, but you guys have had maybe a harder time with the new equipment pricing. So maybe just give a little bit more color on the overall pricing given the market is in transition and there's a lot of inventory out there and what is going on please?

So let's first talk about on the construction side of the business, you are seeing used equipment getting back to the pricing levels we were between the big downturn in 2008 and 2009, so some of those 2007 levels. So that is a positive on the construction side, some real strengthening in used prices. On the ag side of the business, as we watch the wholesale sales, there is going to be situations where some of those -- there has been some pullback in certain prices, but in the next week in a different sale, you are going to see good prices. Tend to see some --maybe some of the older machines or actually not -- actually getting better pricing on some of them, some of the late models used is just maybe a little more depressed.

But like I say, this time of year on certain products, I mean there are seasonal products out there. Like I say, we are still early in the game as what the weather is going to do this year, but I'd say we are not seeing any major changes on the ag side of the business and it tends to change depending on where you are in geography, which region you are in and what the products are. Tractors, older tractors especially still seem pretty good and combines like we have always said on all our calls, that is where the risk seems to be, but yet there has been some bright spots on combines here and there so.

Okay. (multiple speakers).

Does that help?

That's helpful. Thank you very much. Good luck.

Joe Mondillo, Sidoti & Company.

Hi, good morning, guys. My first question related to the construction part of the business. I know we've talked about this a little bit, but just trying to get an understanding on why the profitability has actually been getting worse on a year-over-year perspective over the last couple quarters. And I say that because it seems like the rental fleet growth, you are seeing maybe 20% type growth, construct -- new equipment maybe sort of flattish and the total base is higher from a year ago. So what are the factors that are weighing on that segment and how does that turn around going forward?

Well, if you look at the pace of our acquisitions, we had a lot of recent acquisitions in that 2010, 2011, 2012 timeframe and with those acquisitions, I'll say we bought some -- probably some of these stores were underperforming in the market. I'll say some of them are fixer-uppers, so we have been investing in those dealerships to get them to the revenue size or the scale that we need and we think would be long-term profitable in those markets. So we have been investing in the businesses and as a result, understanding that they were real small players in many of their markets, they were not getting the type of returns that we think are acceptable and that in addition with the investment that we are putting into them, we have had the negative financial results. And we think we have been through a lot of that. In addition, I think last year there was a lot of publicity on the fact that the manufacturers probably overproduced the market in 2012 and a lot of that carried into 2013 calendar year and we experienced that in addition to what we were investing in those new lease and acquisitions.

Okay. So for the most part, it sounds like you are comfortable saying that things are sort of in place going forward and we should not see additional investments and maybe some of the stores that you were seeing trouble with you are consolidating. So as of right now, you feel comfortable going forward that you shouldn't see any additional sort of costs related to the stuff. We are in a good spot going forward, is that correct?

We feel very comfortable with our locations, the markets we are in. We are really excited about the people we have put in place, what we have in there for store managers, our executive team, our VP of construction, the people we have in our strategic accounts area, industrial equipment, what we are doing on centralized inventory management, our aggregate, our rental. Across the board, we've just spent a lot of effort, a lot of time and we have got quality people, good locations and good people at the store. So definitely have a high level of confidence that you are going to see big contributions from our construction going ahead and definitely we are going to be in the black this year in my opinion and there is even an outside chance maybe we could outperform our expectations. So I think everything -- we are very confident.

Okay. And it sounds like you are pretty confident given the fact, with the headcount reduction and the fact that you should see decent growth this year, that getting above breakeven is a possibility. How confident are you in that?

Well, we are very confident in the breakeven and that is where we are giving our guidance. But like in our business, we are always optimistic and if we have stretch goals or targets, we are always trying to do better, but we are giving guidance on breakeven.

Okay. And then just lastly the dynamic between new equipment and rental sales in that business, I don't know if you want to quantify sort of what your expectations are, but if you can just at least qualitatively sort of describe what you are expecting versus last year, whether it is an acceleration on both sides of those businesses. I assume you are expecting rental to continue to stay stronger than new equipment, but any color there would be helpful as well.

Yes, this is Mark. The color I'd provide on that is, first of all, on the rental -- so we kind of indicated we are not planning any significant growth in our fleet, so around that $145 million figuring -- we indicated also in our guidance a 33% utilization. So that would imply rental revenues right around that $50 million specifically coming from the fleet. So some improvement or some increase there, but that is driven more by utilization than additional fleet.

And as to your question on new equipment sales, I think just based on what we indicated for the guidance, 10% to 15% on the revenue side, or the same-store sales side for construction, that gives you a pretty good range. New equipment is making up a pretty good chunk of that construction same-store sale number. So new would be in that range of that 10% to 15%.

Okay, great. Thanks a lot.

Joe Edelstein, Stephens Inc.

Hi, good morning. Thanks for taking my question. I would like to just come back and revisit on the M&A topic. And I know that you are focusing more so today on the operations side, but I am curious if your strategy might change going forward at all. Would you look to improve your network density to further improve results and get some efficiencies or perhaps as, David, you were just indicating, the construction performance that we've seen has really been more of a function of the industry dynamics and you do feel pretty good about where you are today and you'll just continue on with your M&A strategy and in finding opportunities and adding new markets.

So to comment on your density question, if you look historically, the construction equipment industry has consolidated into your -- we'll call them larger metropolitan areas or regional trade centers. Happen to be that some of our recent acquisitions when we acquired them had some stores in some of these smaller markets and for the most part, those are the ones we consolidated. So we think we are into the markets now, typical of what the industry consolidated to a number of years ago on the construction side of the business.

On the ag side of the business, you see we made one announcement. We had two stores 18 miles apart. We consolidated those into one store in Oskaloosa into our Pella, Iowa -- from Oskaloosa, Iowa into Pella, Iowa. So we made that consolidation. And also on the ag industry, if you go back to the 1980s, early part of the 1990s, there was a major consolidation in the ag dealership. In some markets today, there is one dealership where if you went back to say 1980, there could have been 15 dealerships of the same brand in that same marketplace. So that industry has consolidated. If you look at our revenue at our ag stores, we think we are in good shape. We are getting good expense utilization, so we feel good about that. And as far as future acquisitions on the ag side of the business, we are continuing to look at opportunistic acquisitions on the ag side.

Okay, great. That is very helpful. (multiple speakers).

(multiple speakers) your questions (inaudible).

Yes, it does. Thank you. And if I could also then just ask another question related to inventories and you have made some progress there, but that total inventory level is still higher than a year ago and it's contributing to the higher floorplan interest expense. I was curious though what percent of your inventory today was on a non-interest-bearing account and would you expect similar support from the OEMs going forward or would that just be something for us to keep an eye on there?

Yes, our interest-bearing inventory is at about 55%, not quite 55%, so it is right around that 50% that we saw. Now what is baked into our guidance for this next year is there would be a little higher percent interest-bearing as we decreased inventory because it is less new coming in, so that will have an impact and that is embedded in our numbers.

Okay, great. Thanks for taking my questions.

Tom Varesh, M Partners.

Good morning, guys. I just want to understand the mechanics of the relationship with the OEM in terms of the stores you have closed. If at some point down the road, I'm thinking of maybe in the Flagstaff location or around Bozeman, if the OEM determines they want a location there, do you have a right of first refusal on that or are they -- is there some amount of time that has to pass before they can award that region to someone else?

Well, first of all, Tom, we have ongoing discussions with the manufacturer. We are talking about the markets, the market size, our ability to cover them. So we (inaudible) into this hand-in-hand with our manufacturers making them fully aware of what our intentions were. I think what is important is the fact that ongoing share, our ability to service those markets also with mobile service trucks, we have parts drop-offs, sales of field marketers actually working that marketplace, that actually if there are customers -- like I said, the construction industry consolidated years ago and when you look at where most of the competitors' footprints and they are in the larger metropolitan areas where you have got the resources there, the expertise, the technology, the store hours, the techs and like I say with the parts drop-offs and the communication channels we have today and the mobile service trucks.

And another thing to keep in mind is if you look at the contractors and many times their operations are not only multi-state, multi-geographies and multi-markets, so they are very attuned to find out where the local -- the closest person is that can service their equipment and really what we like about this is the scale, it works much better not only from parts inventory stocking, to be able to meet your -- to meet or exceed your customers' expectations in every area of the business happens and you have scale in large revenue operations and the fact that even attracting good quality employees.

So definitely, we are doing this hand-in-hand with the manufacturers. And we talked about these markets and like I say, in a real small market, the probability of someone wanting to go into a 50-unit, 100-unit, an-80 unit market is very remote and then I believe our relationship with our suppliers is to the point where if they really did feel there was a location necessary in that market to say the industry really, really improved, whatever, definitely there would be proactive conversations with us in advance.

Okay, great. That's it for me. Thank you.

We have no further questions. At this time, I would like to turn the call back over to Mr. David Meyer for any closing comments.

I want to thank everybody for being on the call today and look forward to updating you on our progress on our next call. Have a good day, everybody.

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