Titan Machinery Inc (TITN) 2015 Q2 法說會逐字稿

Good day and welcome to the Titan Machinery second-quarter FY15 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

Thank you. Good morning ladies and gentlemen. Welcome to Titan Machinery's second-quarter FY15 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 second quarter ended July 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're providing a 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 our 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 risk and uncertainties including those identified in the risk factors section of Titan's most recently filed annual report on form 10-K.

These risk factors contain 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.

And 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 second-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.

And next Mark Kalvoda will discuss the Company's financial results in more detail in the FY15 annual revenue net income earnings-per-share guidance and non-GAAP operating cash flow guidance ranges along with outlook and modeling assumptions. At the conclusion of our prepared remarks 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 second-quarter FY15 earnings conference call.

As John mentioned to help you follow today's prepared remarks we will provide a slide presentation which you can access on the investor relations portions of our website at titanmachinery.com. If you turn to slide 2 you will see our second-quarter financial results.

Revenue was $451 million primarily reflecting lower agricultural equipment sales, more than offsetting improvements in construction sales. Adjusted pretax income, which excludes certain items, was $3.3 million, and adjusted earnings per diluted share was $0.04.

On today's call we will discuss the headwinds we are facing in our agricultural segment, the improvements in our construction business, the challenges we face in our international segment, and the initiatives we are putting in place to address this part of our business. Mark will provide an update on our inventory reduction plan, which is on schedule, as well as our updated annual FY15 guidance.

Now I would like to provide some more color for you today on the agriculture and construction industries in which we operate. Peter will provide color on the industry within our international segment.

On slide 3 is an overview of the agriculture industry. The primary headwind facing the egg industry are lower commodity prices reflecting the above-average yields for corn and soybean production in North America and the resulting increase in projected ending stocks.

The recent WASDE report reiterated the estimate for record corn production this year. We are experiencing normal yields in the northern footprint and above average yields in our southern footprint.

In the most recent report, which was updated at the end of August, the USDA adjusted the projected net farm income to be down 13.8% in calendar year 2014 from the previous estimate for calendar year 2014 of net farm income being down 27%. The projected change in farm income primarily reflects the increased strength in the livestock industry along with projected increase in crop yields.

The ag equipment industry continues to experience price increases as most units being shipped from manufacturers have price increases as a result of Tier 4 technology affecting overall equipment sales and compressing industry equipment margins. We continue to believe our Tier 4 technology is the most efficient solution to achieve new emission standards for our customers.

As a result of the lower commodity prices, lower end user demand is pressuring used equipment prices and compressing margins. Currently bonus depreciation is expired and section 179 depreciation deduction has been reduced to $25,000 per year. We anticipate these tax items to be addressed after the November election.

In summary, the agriculture industry continues to face a number of headwinds, including lower projected net farm income and lower corn and soybean prices. This has impacted farmers' sentiment and resulted in lower farm spending for equipment as well as a more cautious spending on parts and services.

While this has impacted our financial results in the quarter, we remain confident in the long term agriculture industry outlook as farmers continue to carry strong balance sheets and the underlying demand for commodities rebuilds. We remain focused on managing the controllable aspects of our business with the current industry headwinds.

Now I'd like to turn to our construction segment of the business. On slide 4 we provide an overview of the construction industry and our markets.

We are experiencing improving industry conditions in our markets. The overall economic environment continues to strengthen, providing support for increased construction activity throughout the current fiscal year.

There are multiple large commercial projects underway in our footprint which are contributing to equipment demand in metro markets. Construction equipment inventory levels continue to improve and are getting closer to end-user demand.

In the upper Midwest the agriculture and energy activity continues to support the industry. Along with the ongoing build out of the Bakken and adjacent oil and gas reserves in the Dakotas, we are now seeing significant investment in similar energy activity expanding to Wyoming and Colorado.

The housing industry is rebounding with permits increasing across our footprint, which is a positive indicator of our medium and light equipment product offerings. We expect growth in the rental equipment demand in our footprint to be aligned with industry forecasts of approximately 10% growth in calendar year 2014, which is being fueled by factors I just mentioned.

The industry is experiencing improvement in used construction equipment pricing reflecting an increased demand in many regions throughout North America. In addition to the improving industry, we have completed our construction segment realignment during the second quarter, and you can see from our second-quarter results these changes are having a positive impact on our business returning this segment to profitability.

Lastly I want to update you on our inventory reduction initiatives. We have made progress over the last nine months to position our Company to achieve our inventory targets the end of FY15. Mark will provide greater detail on our progress during his remarks.

Before I turn the call over to Peter, I want to take a moment to discuss acquisitions. We will continue to look to capitalize on opportunities that we believe will benefit our long-term growth and profitability. In our earnings release today we announced the acquisition of Midland Equipment consisting of one Case IH agriculture equipment store in Wayne, Nebraska, which expands our agricultural presence in the state as an adjacent to our existing markets in Anthon and Kingsley, Iowa.

Now I'd like to turn the call over to Peter Christiansen, our President, to discuss the agricultural, construction, and international operating segments in more detail. Peter?

Thanks, David. On slide 5 we have an overview of the industry in our international segment, which includes stores in Bulgaria, Romania, Serbia, and Ukraine. The cereal grain harvest has been completed and fall row crops are in good condition throughout the majority of our footprint.

Our Bulgarian customers experienced an extremely challenging cereal grain harvest due to prolonged rainfall and flooding in many of the agricultural regions. This has resulted in low crop quality, reduced yields, and negative farmer sentiment.

Due to weaker balance sheets of our international customers compared to North American farmers, lower global commodity prices are impacting international customers more than farmers in North America. The weak economic financial conditions present in our international footprint are impacting our customers as they are experiencing a much tighter credit environment throughout Eastern Europe and Ukraine. These factors have led to higher industry-wide equipment levels in our international market resulting in equipment margin pressure as we strive to achieve our revenue targets.

In Ukraine the current geopolitical and financial turmoil is negatively impacting our customers and operations. Limited credit availability, rising interest rates, and the devaluation of the local currency are affecting all businesses throughout the country. Although the Ukrainian farmers have a decent crop coming this year, they are limited in their ability to finance purchases of equipment.

On slide 6 we have outlined important key initiatives that we are implementing to improve our international results and account for the current environment in this segment. We are currently implementing improved inventory management procedures throughout our European operations.

We have recently centralized our inventory procurement process. By centralizing our procurement, we are able to better control and forecast inventory requirements to support our revenue forecast.

We are standardizing our machine specifications which will enable us to better leverage our inventory across our European markets. We are delaying any further shipment of unsold equipment into the Ukrainian market given the environment in this region.

Once a customer purchase a piece of equipment we ship it from Western Europe into Ukraine. In the back half of this year we are transitioning our inventory information to our US IP platform to improve visibility and better integrate our inventory process.

In addition to lowering our inventory levels with improved inventory management, we plan to further reduce floorplan interest expense by implementing an Austrian equipment inventory warehousing program. This will allow us to decrease finance costs versus in-country inventory financing for countries that have higher financing costs compared to Austria.

We expect to increase our parts and service business as we implement our western-style of after sales product support and customers become more aware of our level of support. Finally, we have begun taking steps to reduce overall expenses through reduced headcount and our implementing expense austerity measures throughout our European operations. This will better align our expense structure with the existing market conditions.

We have delayed capital expenditures, particularly in Ukraine in light of the challenging operating environment. The regions in our international footprint represent some of the most productive agricultural land in the world, and by implementing these key initiatives we expect to improve results beginning in the back half of this year. On slide 7 you'll see an overview of our segment results for the second quarter.

Agricultural sales were $314 million, a decrease of 14.5%, reflecting the headwinds David discussed earlier. We generated ag pretax -- ag adjusted pretax income of $5.4 million, compared to $9.8 million in the prior-year period. The primary factors impacting our ag segment results were lower sales and deleveraging of fixed expenses.

Turning to our construction segment, we are encouraged by the improvements in the quarter. Our revenue was $114 million, up 15.9%, which reflects higher same-store sales resulting from improvements in the industry and the positive impact of operational initiatives we have implemented.

We achieved a small pretax -- a small adjusted pretax profit for our construction segment, an improvement from a pretax loss of $1.7 million in the same period last year. The improved results primarily reflect higher revenue and stronger equipment margins along with the initial benefits of cost savings from our realignment implemented last quarter. We recorded a $0.1 million in realignment costs in the second quarter.

As David mentioned earlier, industry conditions are encouraging, and combined with our initiatives we are well-positioned for continuing improvements in the second half of the year. We remain confident that the construction segment of our business will be an important long-term contributor to our overall growth and profitability. In the second quarter of FY15 our international revenue was $43.6 million, which is a 9.3% increase compared to the prior-year period.

Our adjusted pretax loss was $3.7 million, compared to a pretax income of $0.1 million in the prior-year period. The adjusted loss was primarily due to lower equipment margins, increased operating expenses, and higher floorplan expense.

Most of these factors reflect the negative impact of the Ukrainian results and the expense of the European operating center which did not open until the second half of FY14. Adjusted pretax loss excludes a $1.3 million remeasurement charge from the balance sheet impact of the Ukrainian hryvnia devaluation which Mark will provide more color around in his remarks.

Turning to slide 8, you will see our segment results for the first six months of FY15. Ag revenue was $667 million, a decrease of 8.4% compared to the same period last year. And pretax income decreased to $9.5 million reflecting the same headwinds discussed earlier.

Construction segment revenue improved 19.1%, and adjusted pretax loss, which excludes store closing costs of $3.4 million, improved to $3.5 million, a significant improvement over a pretax loss of $8.2 million in the first six months of last year. Our international revenue increased 9.3% to $73.9 million, and adjusted pretax loss increased to $6 million, compared to a pretax loss of $0.4 million in the prior-year period.

Similar factors that impacted our second-quarter results are reflected in our six-month results. The adjusted pretax loss excludes a $4.4 million remeasurement charge from the balance sheet impact of the Ukrainian hryvnia devaluation.

Turning to slide 9, this shows our same-store results for the second quarter of FY15. Our overall same-store sales decreased 5.6%. The agricultural same-store sales decrease of 15.1% reflects the industry headwinds David discussed earlier.

Our second-quarter FY15 construction same-store sales increased 26.5%, highlighting the benefits of our initiatives we implemented last year as well as the overall industry improvement. Our international same-store sales increased 9.6%.

For the second quarter of FY15 overall same-store gross profit was flat compared to the same period last year. The ag segment same-store gross profit declined 5.8% as a result of the decline in same-store sales primarily reflecting lower equipment sales.

The 16.8% improvement in the construction segment same-store gross profit reflects the growth in same-store sales primarily driven by higher equipment sales. Regarding international, same-store gross profit declined 8.9% primarily reflecting lower equipment margins. We experienced lower equipment margins in order to achieve sales results in the quarter.

On slide 10 you will see our same-store results for the first six months. Total Company same-store sales declined 1.4% and total Company gross profit increased 1.3%.

Ag same-store sales declined 8.3%, while construction same-store sales improved 26% in the first half of FY15. Our international same-store sales increased 11.7%.

The change in ag and construction same-store gross profits primarily reflect the change in revenues for each segment. International same-store gross profit increased 4.5%, as higher same-store gross profit in the first quarter offset the decrease in the second quarter when industry conditions increased pressure on margins.

For modeling purposes it's important to remember that we calculate same-store sales by including stores that were with Titan for the entire period of both fiscal years which we are comparing. In other words only stores that were part of Titan for the entire three months of the second quarter of FY14 and the second quarter of FY15 are included in the second quarter same-store comparison.

The stores which were closed in the first quarter of FY15 are also excluded from this year's same-store sales calculation for both periods reported. In the second quarter of FY15 a total of eight locations were not included in our second-quarter same-store results, consisting of one ag location and seven construction stores. And for the first six months of FY15, a total of 12 stores were not included, consisting of one ag location, nine construction locations, and two international locations.

Now I will turn the call over to Mark Kalvoda, our CFO, to review results in more detail, provide an update on our reduction in inventory, and FY15 guidance. Mark?

Thank you, Peter. Turning to slide 11, our total revenue for the FY15 first quarter was $451 million, a decrease of 7.6% compared to last year. Equipment sales decreased 10.7% quarter over quarter reflecting the ag headwinds David discussed in his remarks, partially offset by improvements in construction and growth in our international business.

Our parts and service business was also pressured in the quarter as parts sales were flat and service revenue declined 3.6%. These results were primarily due to lower ag parts and service sales, which were impacted as ag customers are being cautious with product support spending given the conservative sentiment within the industry. Our rental and other revenue increased 13.7% in the second quarter, reflecting our expanded rental fleet, a slight increase in our rental fleet dollar utilization to 29.6% for the quarter compared to 29.2% in the prior-year quarter, along with positive industry trends for construction.

On slide 12 our gross profit for the quarter was $79.7 million, and our gross profit margin was 17.7%, an increase of 60 basis points compared to the same quarter last year. The margin increase is due to a favorable shift in product mix as our higher margin parts, service, and rental and other make up a larger portion of our gross profit.

Our operating expenses as a percentage of revenue in the second quarter of FY15 were 15.1% compared to 14.4% for the same quarter last year. The increase in operating expenses as a percentage of revenue is primarily due to the deleveraging of our fixed expenses as total revenue decreased from the prior year.

Equipment sales, the more cyclical aspect of our business, were the main driver of our lower revenue. We remain focused on opportunities to reduce our overall operating expenses.

In the second quarter of 2015 we recognized a $1.4 million charge consisting of the previously disclosed realignment costs of $100,000 and $1.3 million from the balance sheet remeasurement impact of the Ukrainian currency devaluation. This remeasurement cost was primarily due to the loss in value of our prepaid value-added tax asset, or VAT asset, in Ukraine. This loss in value was the result of the National Bank of Ukraine terminating the currency peg of the Ukrainian currency, the hryvnia, to the US dollar.

Since the February decoupling through the end of our fiscal second quarter the hryvnia has devalued approximately 48% reflecting the effect of economic and political turmoil present in the country.

Regarding the store closing costs associated with our construction realignment, we do not expect to incur additional charges in the second half of the year. Floorplan and other interest expense increased 50 basis points as a percent of revenue, which is primarily due to higher interest-bearing equipment inventory.

It is important to note that as we reduce our inventory shipments from suppliers in the back half of this year, our mix of non-interest bearing new inventory will be a smaller percent of our overall inventory. Inventory reduction in FY15 is one of our Company's key initiatives, which I will address more in a moment.

Our adjusted earnings per diluted share was $0.04 for the second quarter of FY15, which excludes charges of $0.07 per share consisting of Ukrainian remeasurement costs and store closing charges. We believe that the presentation of non-GAAP diluted EPS is relevant as it provides a measurement of earnings on activities we consider to occur in the ordinary course of business. The adjusted diluted EPS of $0.04 compares to EPS of $0.18 per diluted share in the second quarter of last year.

Turning to slide 13 you will see an overview of our six-month results. Total revenue decreased 1.4% compared to the first half of the prior year, reflecting lower equipment sales partially offset by higher parts, service, and rental and other revenue in the first half of FY15.

On slide 14 our first six-month gross profit was $156 million, a 1.2% decrease versus the prior year period. Our gross profit margin increased 10 basis points to 17% primarily reflecting the shift in sales mix to our higher-margin parts and service partially offset by lower ag equipment margins.

Operating expenses were 15.2% of revenue compared to 14.9% in the same period last year reflecting the deleveraging I spoke to earlier. In the first six months of 2015 we recognized a $7.4 million charge consisting of realignment costs of $3 million and $4.4 million from the balance sheet remeasurement impact of the Ukrainian currency devaluation.

After we reported our first-quarter results, we concluded that the treatment of our prepaid VAT asset in Ukraine as a non-monetary asset should be classified and accounted for as a monetary asset and remeasured from Ukrainian hryvnia to US dollars using the current rate as opposed to the historical rate used for non-monetary assets. The result of this change in classification of this asset coupled with the significant devaluation of the Ukrainian hryvnia added $4.4 million of remeasurement costs to our first six months and adjusted our first quarter results by $2.3 million.

The correction of this charge is reflected in our six-month result. We have taken steps to mitigate foreign currency fluctuation losses.

Our adjusted diluted loss per diluted share was $0.03 for the six months of FY15. This excludes $0.10 per share of store closing costs, the majority of which was recognized in the first quarter.

It also excludes $0.21 in costs associated with the $4.4 million balance sheet remeasurement of the Ukrainian currency devaluation. It is important to understand that the $4.4 million cost has a larger impact on our EPS due to the fact that we do not record a tax benefit related to this cost as we have an income tax valuation allowance against our losses in Ukraine.

In the first six months of FY14 earnings per diluted share was $0.16. 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.

Turning to slide 15, here we provide an overview of our balance sheet highlights at the end of the second quarter. We had cash of $89.7 million as of July 31, 2014.

We ended the second quarter with equipment inventory of $996.3 million, in line with our expectations, compared to $939.3 million as of January 31, 2014. The inventory change includes an increase of new equipment of $90.9 million and a decrease of used equipment of $33.9 million from the end of FY14.

On the next slide I will talk about our inventory reduction initiative for FY15. Our rental fleet assets at the end of the second quarter were $150.8 million, which is up slightly from $145 million at the end of FY14. We do not expect a significant increase in our rental fleet for the remainder of the year. As of July 31, 2014, we had $850.3 million of outstanding floor plan payables on $1.2 billion of floorplan lines of credit.

Turning to slide 16, I would like to provide an update on our Company equipment inventory initiative. Similar to what we had provided on our last earnings call, you will see a chart outlining our equipment inventory position for the past five years. On the right side of the graph is the targeted year-end equipment inventory for FY15 representing a $250 million reduction in inventory, excluding acquisitions and new store openings, compared to the end of FY14.

Our second-quarter ending inventory is up slightly, which is consistent with our expectations stated on our last call. As a result of our equipment inventory reduction plan, this year we are modeling a decrease in our third-quarter inventory level compared to last year's third quarter inventory increase.

To achieve this year's target we have reduced our current orders for equipment from suppliers by approximately $400 million compared to this time last year. This is the primary driver of our inventory reductions in the back half of this year.

Our planned decrease in inventory and expected increase in cash flow over the second half of the year will continue to strengthen our financial position with our lenders. Our bankers are very aware of the status of our operations and related covenants. Over the four year period of our bank syndicate relationship, our loan agreement has continued to evolve to meet the changes in our business, and we believe this will continue to be the case in the future.

Slide 17 gives an overview of our cash flow statement for the first six months of FY15. 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 floor plan proceeds, non-GAAP net cash provided by inventories was $31.9 million in the second quarter of FY15. Our GAAP cash used for inventories was $68.3 million.

In our statement of cash flows the GAAP reported net cash used for operating activities for the period was $79.4 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 net cash provided by operating activities was $21.4 million.

Throughout this fiscal year we are focusing on improving our non-GAAP operating cash flow. As we execute on our inventory reduction plan, we are confident we are positioned to achieve improved cash flow from operating activities in FY15.

Slide 18 shows our FY15 annual guidance. As David stated we are revising our annual outlook. We now expect revenue to be in the range of $1.9 billion to $2.1 billion compared to our previous range of $1.95 billion to $2.15 billion. The decline primarily reflects lower ag and international revenue.

We expect adjusted net income attributable to common stockholders to be in the range of $6.4 million to $12.7 million compared to the previous range of $14.8 million to $21.1 million. We expect adjusted earnings per diluted share to be in the range of $0.30 to $0.60 compared to the previous range of $0.70 to $1, based on our estimated weighted average diluted common shares outstanding of 21.1 million. The revision to our adjusted earnings per share was primarily due to lower expectations within our ag segment which are reflected in our modeling assumptions.

On a GAAP basis we now expect net income attributable to common stockholders to be in the range of breakeven to $6.3 million compared to the previous range of $12.5 million to $18.8 million. And GAAP earnings per diluted share to be in the range of zero to $0.30 compared to the previous range of $0.59 to $0.89.

GAAP net income and earnings per diluted share guidance includes the impact of the $3.4 million pretax charge, or $0.10 per diluted share, associated with the Company's store closing costs as well as $4.4 million, or $0.21 per diluted share, associated with remeasurement costs. For the full year we expect adjusted cash flow from operations to be in the range of $50 million to $70 million compared to our previous range of $60 million to $80 million.

The reduction of our range is due to the anticipated lower earnings expectations. Our inventory reduction plan is on schedule and is expected to be the primary driver in achieving our cash flow guidance for the year.

Modeling assumptions supporting our guidance are as follows. We expect our ag same-store sales to decrease 12% to 17%. This revised range includes lower anticipated results from our equipment revenue as well as our parts and service revenue due to the headwinds David discussed earlier.

From the time we provided our original outlook for FY15 in April, cash corn prices have declined approximately 33%, reflecting the projected increase in ending stocks. We are increasing our construction same-store sales to be in the range of 20% to 25% compared to the previous range of positive 15% to 20%. And we are decreasing our international same-store sales to now be in the range of breakeven to positive 5%, compared to the previous range of positive 5% to 10%.

Our equipment margins modeling assumption for the full year is now projected to be in the range of 8.1% to 8.6% from the previous range of 8.3% to 8.8%. We are now modeling annual rental dollar utilization to be in the range of 30% to 33%, compared to the previous range of 32% to 34%.

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

Certainly.

(Operator Instructions)

Rick Nelson, Stephens.

I'd like to ask you about the guidance and what it might assume about international results in the back half of the year and your commitment to international operations especially the Ukraine?

Rick, this is Peter. Regarding the guidance for our back half of the year, we're looking at the international segment and we're looking at reducing our operating loss by half.

Our front half was a $6 million loss and we're looking at reducing that to $3 million. Regarding the Ukraine, we're doing -- we're taking measures that we can to mitigate any exposure as we get through the turmoil that they've got going on in that part of the country.

I guess I would remind you that our regions that we operate in are in the center of the country. And so we still will continue business there.

Got you. And how about kept equipment margins, we saw some expansion year-over-year as well as sequentially. Is that in the construction segment where that's occurring?

I know your guidance is calling for flat to down equipment margins for the year. If you could comment on the quarter, what's driving that?

Sure Rick, this is Mark. It was up quarter over quarter. Still down for the six-month period versus six-month period last year.

The strength primarily came from the construction side of the business. There was a little bit of strength on the ag side, but we do not have that modeled in for the rest of the year.

As you indicated we've adjusted down slightly our total equipment margins for the full year. Though some strength in the current quarter primarily on construction, little bit on ag but we pulled down those assumptions for the full year

Thanks for that. Finally if I could ask about your appetite for acquisitions versus other alternatives. You're sitting on a nice cash position, it sounds like cash is going to be building and the capital allocation priorities are --

Rick, we're constantly in discussions with our board regarding our capital allocations. We evaluate all options on an ongoing basis. You can see we just did one I think was a pretty strategic and accretive acquisition in Wayne, Nebraska but we'll continue to look at all options going ahead.

Would that include stock buybacks? Your stock is trending pretty big discount to tangible book.

Like I said we're going to continue to evaluate all options, Rick.

Very good. Thanks a lot and good luck.

Mig Dobre, Robert W. Baird.

Good morning, guys, thanks for taking my question. Maybe a little bit of clarification, Mark, as to why the guidance on rental utilization has ticked down in spite of the construction business being pretty good and commentary being quite positive.

First of all I'll just comment a little bit. We continue to work on our fleet mix matching the specific units to the market. I think we have some opportunities there.

Mark, you could maybe just comment on specific numbers there.

Our rental utilization, obviously it's tracking a little below what we expected. That's why we made the adjustment. Compared to the prior year we're pretty much on target.

But as you know -- or we're pretty much comparable to the prior year. But as you know we ended the year at around that 30% to 31% utilization. So I think it's a combination of what we've experienced for the first six months and obviously looking ahead to what we anticipate in the next couple quarters.

You're not trying to tell us that there is maybe still an execution issue here that we have to worry about? You're saying it's simply end market expectations that are being adjusted?

Fleet mix is the main driver on the utilization. We are still learning about the market demands in each one of the different larger markets where we've got our fleet located, Mig.

I'll move on here. Just for the floorplan interest question if you would. I remember you commenting that you expected the floorplan interest expense to be in FY15 somewhat similar to FY14. Is that still your expectation for the full year?

No Mig, it's actually tracking a little bit higher now than what we anticipated. Some of it is due to some of our international operations. We had some rate increases in Ukraine specifically as some of the turmoil unfolded over there in the last quarter.

So I think some of the rates involved there and the lack of -- the lower sales having a higher, resulting in higher inventory specifically overseas. That is interest-bearing at these higher rates is causing that to be up a little bit, up somewhat from what we experienced last year. So that's one of the changes in assumptions as well that's driving the revised earnings-per-share guidance.

I appreciate that. And the last one for me is maybe a little clarification on the parts and service business. From what I recall planted acres were actually pretty decent this year in your footprint and yet you commented on this business maybe facing some headwinds.

How do you think about this business going forward? What do we need to see happen in order for this business to continue growing? Is it that we need growth in planted acres or is it that we just need meaningful shift in farmer sentiment?

The first thing that drives your parts and service business is it a park of equipment you have in your market. As we continue to maintain and grow share that's important to long-term parts and service business.

Our customers always have decisions at what level they're going to put the parts and service in machines. Obviously if they have situations where they've got downtime and they're both trying to get their fix they're going to do what it's going to take, but sometimes on their proactive preventive maintenance they've got different levels that they're going to do.

So sometimes if there is little bit of a negative sentiment or a wait-and-see they may say instead of spending $8,000 to $10,000 on a combine repair maybe they'll say this part will run one more year, maybe they'll spend that $5000 number. We're just seeing a little bit of that right now and some this could be a little bit timing issues. But basically it's the park that you've got in your markets and then we'll continue to do the marketing and some of the initiatives we have to keep driving that business because it's an important part of our business and we like it and we're good at it.

Thank you.

Neil Frohnapple, Longbow Research.

Just wanted a follow up to an earlier question and spend a little bit more time on the reduced equipment margin outlook for the full year. You are running about 8.5% year to date and you typically seen an uptick in the fourth quarter due to manufacturer volume incentives. Are you being conservative or was there further pressure at the end of the quarter and into August that's giving you a little bit of caution here?

I think the first thing is that we are really focused on our inventory reductions and I guess what we're going to look at is if it takes a dip into the margin just a little bit to make sure we're hitting our inventory targets by the end of the year, we want to make sure we're prepared to do that.

Great. And then given the pressure on used equipment prices you have called out, is there any risk to abnormal inventory write-downs in future quarters?

We've been taking proactive steps going back probably to the beginning of the year, so some of that is reflected in our current results. I think we feel pretty confident where we are today in the guidance that we're giving you.

I think maybe to expand on that, when we talk about pressure in our used equipment margins, that's including some of these write-downs that we continue to have on a regular basis. We have monthly write-downs on our lower of cost to market that we experience even in good years. That's reflected in our current numbers as well as our full-year guidance on our equipment margins.

Thanks very much, guys.

Steve Dyer, Craig Hallum.

Good morning, guys, thanks. Just to be clear there are monthly mark-to-market lower cost to market reductions here? It's not subject to an annual impairment test or anything like that? This is happening on an ongoing basis?

We value our inventory at lower of cost or market. We're required to for GAAP so we do that on a monthly basis. That's correct.

Okay. And then as you look forward out past this year, if corn stays in this range, which is not necessarily unusual if you're looking historically, how do things play out? Taking into consideration the age of the fleet, et cetera, is it your opinion that farmer input prices get rerated down based on where corn is and it's not necessarily a farm income or farm revenue number but more of a farm profitability number that starts to turn up next year because input prices are down?

Because it's my understanding that the reason that it's largely or partially unprofitable for them this year is input prices are -- were still based on much higher grain prices. What are your thoughts beyond this year if corn hangs around here?

Obviously there will be some industry adjustments out there. I believe that manufacturers will probably reduce some supply in line with demand.

I think we all have to understand that there probably are some costs that the manufacturers due to the Tier 4 technology that's out that's baked into some of this equipment. I think we have to just keep reminding ourselves of the strong balance sheets our growers have right now.

We continue to have record low interest rates. We still have that global demand for protein in the developing nations. Their standard of living as they continue to improve are going to see increased exports.

We got the long-term population growth. We still have to understand we've got 30% or 40% of our corn crops still going into ethanol production. So I think the long-term prospects are good, but obviously there'll be some type of correction in the industry if this level of commodity stays there for an extended period of time.

Okay, great. Thanks, guys.

Brett Wong, Piper Jaffray.

Hi guys, thanks for taking my questions. First I wanted to ask what you're doing in terms of trade-ins and how that impacts your intentions for used equipment inventory?

As we evaluate and do the appraisals on a trade-in we're definitely cognizant of where the market is today, where we think it's going to be in the two, three months from now, and so I think all our stores and all our salespeople that are trading these machines in will focus on maximizing margins and minimizing our days of inventory and pricing equipment accordingly.

Any impact or reluctance to take trade-ins?

When you say that you're going to probably see a little bit of a trend where I believe over the last three, four years and this strong bull run we've had there are some growers that migrated to annual rolls where they'd trade their whole fleet off every year. Or maybe if you roll the clock back five, six years ago maybe they did that every three years, every five years.

I think you're going to see a lesser amount of these one year rolls. In addition there's probably some growers out there that for a long period of time they'd buy one-year-old trades, two-year-old trades and they maybe moved up to a brand new trade.

Ideally we'd like to shift some of those growers back to take that one and two-year-old trade. I think you'll see those two phenomena taking place.

Thanks. And then just wondering you're talking about equipment margins historically, specifically in ag and how bad have they gotten in past down cycles?

Will you repeat that question?

I'm trying to get an idea on ag equipment margins and how bad you've seen equipment margins get in past down cycles.

I think we go back and we're at some of the lower levels that I've certainty seen since I've been here with Titan for over the past seven years. What you have is when you have big adjustments in the industry where total industry units are down quite a bit, that's where you see some of this what we just talked about before, some of this lower of cost or market where you're adjusting this -- you're used to current pricing out there where you experience more of a drop off in compression in your used margins at that time.

If you remain at that level, like the level today just even going into the next year, you don't have some of those same pressures on your margins that you do have. I think to answer your question we're at some of the lower levels that we've seen in the past.

Great. Thanks a lot, guys.

Joe Munda, Sidoti & Company.

Good morning, guys.

Good morning, Joe.

Question on the floorplan interest. I was wondering if you could give us what your expectation for the year is now?

Nick asked about that earlier, Joe. Last year we were at about $16.8 million in floorplan interest expense. I just indicated I think last time I indicated it was going to be right around that, and at this point I'd say it's going to be up somewhat from that call it $2 million, $2.5 million.

Primarily the reason for that is in Europe with the lack of sales or the lower sales than anticipated primarily in Ukraine and some of the higher rates associated with that inventory because of the -- and that floorplan because of the conditions over there, that's causing our overall floorplan interest expense to be higher than what we originally anticipated. That of course is baked into our current guidance that we're putting out there for the year.

Okay, right. And then that's expected to climb in the third quarter and then fall on the inventory reduction in the fourth quarter? Is that correct?

Yes, it would be pretty similar in the third quarter and then down a little bit there in the fourth. Yes.

Okay. And then of the $250 million of inventory reduction, is most of that at this point in time interest bearing?

I would say it's a combination of both. If you look on the chart on that inventory slide you can see a lot of it is in the new, pretty much all of it is in the new because as we sell the new we get the trade-in and we get the used in.

I would say it's a greater percentage of it being -- well at this point it's a greater percent still being non-interest bearing. But what does happen is anything that still has a non-interest bearing term on it with the new that does flip into the used for a period of time into that trade-in. We can get the benefit on some of that.

But all that being said, Joe, we said in our remarks is that overall we're going to have a higher percentage that's interest bearing going forward. So even as inventory comes down that percentage overall is going higher, which isn't resulting in significant floorplan savings in the current year. Going back to the following year, but not current.

I was going to ask looking out to next year, how do you anticipate that to play out within the year in terms of that interest and how does that -- in terms of managing the inventory how does that effect everything?

We're staging ourselves pretty well to achieve a much better turn for the next year, with getting our inventory to this $250 million down target by the end of the year. That should bode well to have fresh inventory and have overall improvements on your non-interest bearing as a percent of your total inventory out there. Yes, it should bode well for us for next year.

Okay. And lastly on the last conference call you stated that you expect the construction segment to reach profitability this year, but you're also reducing the rental utilization. So wondering if you could just give us your thoughts on that comment that you made on the last conference call?

I think it's a combination of a couple of things I think kind of gets you to the same answer. We did bring down rental utilization, but we did bring up overall sales which is primarily driven by the equipment sales. The combination of the two offset each other somewhat and I think what we talked about before is still in play.

Thanks a lot.

Larry De Maria, William Blair.

Good morning, guys. Can you help us delineate OE versus used profits for ag? What's the mix like and the differential like in margins and if you're profitable in both?

Can you repeat that question, Larry?

I was just trying to delineate OE versus used profits for ag. What's the margin differential like between the two and if you're profitable in both?

There's margin on both new and used, Larry. It's basically a function of how you book the used trade-ins in. There's growth margin in both areas.

And typically used is higher than new I believe, right? And that would still be the case presumably?

Yes. Typically in a normal environment you would have used that would be higher. But in a market where things are adjusting downward somewhat you've got that risk to the valuation on the used where we're taking some of this lower of cost or market, and that is currently causing our used equipment margins to be lower than the new.

Okay. Got it. A few follow ups then.

Can you remind us whose pricing for valuation purposes they equipment for this monthly lower of cost or market calculations? If I recall there's a regional manager. Is that right or is there another mechanism for that?

We've got a fairly comprehensive appraisal valuation process. Then we have some centralized management that -- a check and balance through that.

And then we've got some built in mechanical processes which we feel are fairly conservative. We think we've got a number of checks and balances and oversight and central oversight so on a continued basis like I say we're trying to drive turns and days of inventory, not to mention that from an incentive standpoint for our salespeople the fewer days in inventory the better the commissions are. So I think we've got a number of initiatives and built in processes to ensure that integrity of that number.

Okay. And then just a couple final things. Just curious what is -- thank you for that -- CNH doing to help you move the inventory? Are they offering new incentives or cash help to move some of the stuff? And if there are issues on obviously on the wells line which doesn't seem to be the case now, does CNH coming in and help you out there?

And then finally depreciation section 179, I assume you guys are modeling that. It does not come back. But do you think there is pent-up demand for some equipment if it does come back into the end of the year? Some people are waiting for it?

You got three questions here. The answer to the first one is CNH has been very good about providing the necessary pricing and programming line with the market conditions to be competitive out there. So I think as you can see there is advertised interest-free and low rate interest and some things like that, and specific programs targeted at certain markets out there. So yes, I think we've got a good partner with CNH there.

There again as we said in our call we've got a really good working relationship with our bank and our bank syndicate and we're real positive of that. We also have a good working relationship with the folks at CNH Industrial Capital. Between the two of them we're really confident in the capitalization of our Company and also our ability to secure long-term financing on that.

Your third question, you want to repeat that again, Larry?

Just about the depreciation in section 179. I guess obviously in your guidance you assume that it does not come back I believe. Just curious in your talks and checks in the field do you think there is some pent-up demand if it does come back that some customers will come to market and utilize it if it does come back say post elections?

One phenomenon you saw there's a lot of grain that the customers actually sold into this calendar year, so they're going to have some tax exposure. So definitely if those tax incentives come back which in our conversations with a lot of the politicians it looks like there's a fairly strong sentiment that they will.

There are definitely going to be some people, farmers out there that are going to need some tax write-offs and we're being conservative in our approach at that, but I think that you're going to see some end of the year buying base if that does happen. Because there are definitely some tax issues, not to mention there's some grain that got sold at higher prices this year that was forward contracted. So between what got rolled into this year from last year plus the forward contracting there is definitely going to be farmers looking for some tax write-offs.

Right. And that can help you move some of the inventory into year end. But your inventory reduction targets do not reflect if that comes back, right? Or they do?

No, we're going at this what we have today and a very conservative outlook. So that would just be a plus if that happened.

Understood. Thanks very much and good luck.

That's the end of the questions. I want to thank you for your interest in Titan and we look forward to updating you on our progress on our next call. Have a good day everybody.

That concludes today's conference call. We thank you for your participation.