Titan Machinery Inc (TITN) 2015 Q3 法說會逐字稿

Good day, and welcome to the Titan Machinery third-quarter FY15 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 third-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 third quarter ended October 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 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. 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, involve inherent risks 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 statement 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. We expect the call to last approximately 45 minutes.

David Meyer will provide highlights of the Company's third-quarter results and regional update on the Company's business. And 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 and 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 the 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 third-quarter FY15 earnings conference call.

As John mentioned, to help you follow on today's prepared remarks, we provided a slide presentation, which you can access on the Investor Relations portion of our website at TitanMachinery.com. If you turn to slide 3, you will see our third-quarter financial results.

Revenue of $493 million, primarily reflecting more agricultural equipment sales in North America. Adjusted pretax income was $6.2 million, and adjusted earnings per diluted share was $0.14.

On today's call we will discuss the ongoing headwinds we are facing in our agriculture segment and improvements in our construction business. We will also provide an update on our international segment, discussing the challenges of these markets as well as an update on our initiatives we are implementing to improve this segment of our business. Mark will provide an update on the progress we're making in our inventory reduction plan, as well as a revised annual FY15 guidance.

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

On slide 4 is an overview of the agriculture industry. The ag industry in our footprint had favorable conditions to complete the fall harvest. In many markets, yields were higher than grower expectations.

The November WASDE report lowered corn production estimates for the year from its prior projection. However, the current estimate continues to be for record corn production this year and a large forecasted of ending stocks, which are reflected in the recent lower commodity prices.

USDA report, which was updated at the end of November, adjusted a projected net farm income to be down 23.4% in calendar year 2014, from their previous estimate for calendar year 2014 of net farm income being down 13.8%. While this is the lowest estimate since 2010, it is still above the previous ten-year average.

A primary driver of the lowered net farm income is the projected decline in crop cash receipts. However, livestock producers continue to experience favorable economic conditions with lower feed prices and high market prices.

As a result of the lower commodity prices, less end-user demand is pressuring used equipment prices and compressing margins in the marketplace. We remain committed to moving our used equipment through the retail channel, reflected in our $54 million year-to-date reduction in used equipment inventory.

On a positive note, high crop yields, favorable interest rates, and a strong livestock sector will provide support to year-end business. As of today, Bonus Depreciation has expired and Section 179 depreciation deduction has been reduced to $25,000 per year. However, an extension of both Bonus Depreciation and Section 179 has passed the House and is now in the Senate for approval. We expect this legislation to be voted on in the coming week.

In summary, the agriculture industry remains -- continues to face a number of headwinds, including lower projected net farm income and lower corn and soybean prices. As we have discussed on prior calls, this has impacted farmer sentiment and resulted in lower farmer spending for equipment and has, in turn, impacted our financial performance.

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 are focused on managing the controllable aspects of our business, including our inventory levels and operating expense structure through the current industry headwinds.

Now, I'd like to turn to the construction segment of our business. On slide 5, we provide an overview of the construction industry and our markets. We continue to experience improving industry conditions in our markets and are pleased to report another quarter of improved financial results for this segment of our business.

As the overall economic environment gradually improves, it provides support for increased construction activity, a driver for our business. Although we are improving our results, it is at a slower pace, year-over-year, due to higher comps during the back half of this year.

Offsetting a portion of the macro industry improvements is the impact of lower oil prices on the level of energy activity in our oil-producing markets. As an example, we are experiencing reduced rental activity related to oil expiration as a result of lower oil prices.

The housing industry continued to rebound, with permits increasing in our footprint, which is a positive indicator for medium and light equipment product offerings. Similar to our ag segment last year, our construction equipment is transitioning to Tier 4 final pricing on its new product offerings. A small portion of our new product has this pricing now, but the majority of the transition volume was projected for first and second quarters of next year.

The industry continues to experience improvement in used construction equipment pricing in many regions throughout North America. The favorable pricing environment is resulting in higher equipment margins.

Potential extension of Bonus Depreciation and Section 179 depreciation will also impact the construction industry. We believe the approval of these tax incentives will benefit construction customers, due to the strong year they are currently experiencing.

Overall, we are pleased with the results of our realignment implemented during the first and second quarter of this year. However, we continue to look for ways to grow revenue and efficiently manage our inventory and rental fleet while aligning expenses with industry trends.

Now, I'd like to turn the call over to Peter Christianson, our President, to discuss the progress we are making with the recently implemented initiatives in our international segment as well as an update on our agriculture, construction, and international operating segments. Peter?

Thanks, David.

On slide 6, we have an overview of the industry in our international segment, which includes stores in Bulgaria, Romania, Serbia, and Ukraine. The fall crop harvest has been completed, and the winter crops are in good condition throughout the majority of our footprint.

However, lower global commodity prices and the tight credit environment continue to impact customers in all of our international markets. These factors have led to higher industry-wide equipment inventory levels, resulting in equipment margin pressure as we strive to achieve our revenue targets in this segment.

Offsetting some of the challenges, the European Union subvention funds are becoming available in some of our markets, with Romania having access to these funds in the third quarter of this year. The new government in Bulgaria is providing stability to that market, and we anticipate Bulgaria to have access to the subvention fund in calendar year 2015. As you may recall, the subvention funds are monies the European Union has budgeted over a 5-year period to support investment in agriculture production in the developing markets of Eastern Europe, providing up to 50% of the cost of qualifying new equipment purchases.

In Ukraine, the geopolitical and financial turmoil continue to negatively impact 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 had good yields this year, they are limited in their ability to finance purchases of equipment.

On slide 7, we have an update of the important key initiatives we spoke about on our second-quarter call and are implementing to improve our international results and account for the current environment in this segment. We have identified the actions to support these initiatives and expect to realize approximately $7 million in cost savings through expense reduction and lower floorplan interest expense.

In addition, we expect to reduce our inventory $35 million as a result of these initiatives. On the right side of this slide, you will see when these different initiatives are expected to be, or have been, implemented.

We are currently implementing improved inventory management procedures throughout our European operations. We have our centralized inventory procurement process in place, which enables us to better control and forecast inventory requirements to support our revenue forecast.

In addition, we are transitioning our information -- our inventory information -- to our US [ERP] platform to improve visibility and better integrate our inventory process. Finally, we're standardizing our machine specifications on all new orders, which will enable us to better leverage our inventory across our European markets.

We continue to delay shipments of unsold equipment into the Ukrainian market, given the current environment in this region. Once the customer purchases a piece of equipment, we ship it from Western Europe into Ukraine.

In addition to lowering our inventory levels with improved inventory management, we plan to further reduce floorplan expense by implementing Western European-based equipment inventory warehousing. This will allow us to decrease finance costs, versus in-country inventory financing, for countries that have higher floorplan costs compared to western Europe. We have identified sites and anticipate our first shipments to arrive in the second quarter of next year.

In the third quarter, we identified the actions required to implement our expense reduction initiative and began reducing headcount and implementing expense austerity measures throughout our European operations. We have completed the headcount reduction of 81 people and other cost reduction measures during the fourth quarter, and we anticipate realizing the benefit from these reductions in the first quarter of FY16. 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. We continue to grow 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.

The regions in our international footprint represent some of the most productive agricultural land in the world. While our financial results continue to be impacted by the conditions I discussed, we are encouraged that our third-quarter results represent an improvement over the second quarter. By implementing these key initiatives, we expect to improve results next year. As a reminder, our international segment is seasonally slower in the fourth quarter and doesn't experience the year-end sales activity as we do in North America.

On slide 8, you'll see an overview of our segment results for the third quarter. Agricultural sales were $346 million, a decrease of 24.6%, reflecting the headwinds David discussed earlier.

We generated ag pretax income of $5.2 million, compared to $16.7 million in the prior-year period. The primary factors impacting our ag segment results were lower equipment sales and margins.

Our operating expenses decreased on an absolute basis compared to the same period a year ago, but are higher as a percentage of sales, due to lower equipment sales. Given the current market conditions, we are evaluating our current expense structure to support a lower volume of equipment sales.

Turning to our construction segment, we are encouraged by the improvements in the quarter. Our revenue was $110 million, which is slightly higher than the previous year, and reflects higher same-store sales resulting from improvements in the industry and the positive impact of operational initiatives we have implemented. The higher revenue was achieved despite a lower store count compared to the prior year.

We achieved pretax profit of $0.1 million for our construction segment, a significant improvement over a pretax loss of $3.4 million in the same period last year. The improved results primarily reflect stronger equipment margins along with the initial benefits of cost savings from our realignment implemented earlier this fiscal 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 third quarter of FY15, our international revenue was $53 million, which is a 32.5% increase compared to the prior-year period. The increase was primarily driven by strong performance in our Romanian operations.

Our adjusted pretax loss was $0.9 million, compared to a pretax loss of $1 million in the prior-year period. Adjusted -- excuse me -- additional floorplan costs related to higher inventory levels and the increases in operating expenses will offset the increase in revenue. Adjusted pretax loss excludes $0.5 million remeasurement charge from the balance sheet impact of the Ukrainian Hryvnia devaluation.

Turning to slide 9, you'll see our segment results for the first nine months of FY15. Ag revenue was $1 billion, a decrease of 14.6% compared to the same period last year. And adjusted pretax income decreased to $14.6 million, reflecting the same headwinds discussed earlier.

Construction segment revenue improved 12%. And adjusted pretax loss, which excludes store closing costs of $2.3 million, decreased to $3.4 million, a significant improvement over pretax loss of $11.6 million in the first nine months of last year.

Our international revenue increased 18% to $127 million. And our adjusted pretax loss was $6.9 million, compared to a pretax loss of $1.4 million in the prior-year period.

In addition to the factors that impacted our third-quarter results, our nine months results reflect the cost of our European operations center, which opened in the first quarter this year, and the impact of market conditions in Bulgaria and Ukraine. The adjusted pretax loss excludes the $4.9 million remeasurement charge from the balance sheet impact of the Ukrainian Hryvnia devaluation.

Turning to slide 10. This shows our same-store results for the third quarter of FY15. Our overall same-store sales decreased 14.1%.

The agricultural same-store sales decrease of 23.8% reflects the industry headwinds David discussed earlier. Our third-quarter FY15 construction same-store sales increased 10.7%, highlighting the benefits of our initiatives we had implemented last year, as well as the overall industry improvement. Our international same-store sales increased 33.9%, primarily reflecting strong performance of our Romanian operations.

For the third quarter of FY15, overall same-store gross profit decreased 6.5%, compared to the prior year. The ag segment same-store gross profit decreased 18.7% as a result of the decline in the same-store sales, primarily reflecting lower equipment sales and margins, partially offset by the stability of our higher-margin parts and service business. The 24.3% improvement in the construction segment same-store gross profit reflects the growth in same-store sales and was also driven by improvement in gross profit margin for construction equipment.

Regarding international, the same-store gross profit increased 26%, primarily reflecting higher equipment sales, partially offset by lower equipment margins in order to achieve the sales results in the quarter.

On slide 11, you'll see our same-store results for the first nine months. Total Company same-store sales decreased 6.6%. And total Company same-store gross profit decreased 2%.

Ag same-store sales decreased 14.3%, while construction same-store sales increased 20.3% in the first nine months of FY15. Our international same-store sales increased 22.3%. The change in ag and construction same-store gross profit primarily reflects the change in revenues for each segment. International same-store gross profit increased 10.1%, impacted by lower equipment margins.

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 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 third quarter of FY14 and the third quarter of FY15 are included in the third quarter same-store comparison. The stores which where closed in the first quarter of FY15, are also excluded from this year's same-store sales calculations for both periods reported.

In the third quarter of FY15, a total of nine locations were not included in the third quarter same-store results, consisting of two ag locations and seven construction stores. And for the first nine months of 2015, a total of 13 stores were not included, consisting of 2 ag locations, 9 construction locations, and 2 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 FY15 guidance. Mark?

Thanks, Peter.

Turn to slide 12. Our total revenue for the FY15 third quarter was $493 million, a decrease of 16.1% compared to last year. Equipment sales decreased 22.2% 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 sales were essentially flat in the quarter, while service revenue increased 4.3%. Overall, we are pleased with the stability of our parts and service business in the face of a challenging ag environment.

Our rental and other revenue increased 7.7% in the third quarter, reflecting an increase in rentals of inventory, primarily from heavy industrial unit such as scrapers, cranes and excavators, which are not part of our designated rental fleet. This was partially offset by a decrease in our rental fleet dollar utilization, to 33.6% for the current quarter, compared to 36.9% in the same period last year. The decreased utilization was partially due to the lower oil prices affecting rental demand in our oil-producing markets as well as lost rental revenues due to the repositioning of rental equipment from recent store closings as part of our construction realignment implemented earlier this year.

On slide 13, our gross profit for the quarter was $85 million, and our gross profit margin was 17.2%, an increase of 130 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 are a larger part of our growth profit. The improvement in gross margins, despite lower revenue, reflects the stability of our parts and service business, which is increasingly important, during the current soft period in the ag cycle.

Our operating expenses, as a percentage of revenue in the third quarter of FY15, were 14.1%, compared to 12.7% for the same quarter last year. The increase in operating expenses as a percentage of revenue was primarily due to the deleveraging of our fixed expenses as total revenue decreased from the prior year. The deleveraging more than offset the reduction in expenses resulting from the construction realignment we implemented earlier this year. We remain focused on opportunities to reduce our overall operating expenses and believe the cost-saving initiatives we implemented in our international segment will be fully in place for FY16 results.

In the third quarter of FY15, we recognized a $500,000 charge from the balance sheet remeasurement impact of the third quarter currency devaluation in Ukraine. During the third quarter, we reduced our remeasurement exposure by engaging a natural hedge, which partially protects us against further devaluation of the Ukrainian currency.

Floorplan and other interest expense increased 40 basis points as a percentage of revenue, which is primarily due to higher interest-bearing equipment inventory and rates, particularly in our international segment. It's important to note that as we reduce our inventory shipments from suppliers in the final quarter of this year, our mix of non-interest-bearing new inventory will be a smaller percentage 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 $0.14 for the third quarter of FY15, which excludes charges of $0.03 per share of the Ukrainian remeasurement cost. We believe that the presentation of non-GAAP diluted earnings per share is relevant, as it provides a measurement of earnings on activities we considered to occur in the ordinary course of business. The adjusted diluted earnings per share of $0.14 compares to EPS of $0.27 per diluted share in the third quarter of last year.

Turning to slide 14. Here, you will see an overview of our nine months revenue results. Total revenue decreased 7.1% compared to the first nine months of the prior year, reflecting lower equipment sales partially offset by higher parts, service, and rental, and other revenue in the first nine months of FY15.

On slide 15, our first nine months gross profit was $240 million, a 4.3% decrease versus the prior-year period. Our gross profit margin increased 50 basis points to 17%, primarily reflecting the shift in sales mix to our higher-margin parts and service business, partially offset by lower ag equipment margins.

Operating expenses were 14.7% of revenue, compared to 14.1% in the same period last year, primarily reflecting the deleveraging of fixed expenses I spoke to earlier. In the first nine months of FY15, we recognized a $7.9 million charge consisting of realignment costs of $3 million and $4.9 million on the balance sheet remeasurement impact of the Ukrainian currency devaluation.

Our adjusted diluted earnings per share was $0.11 for the first nine months of FY15. This excludes $0.33 per share of store closing and remeasurement costs. At the end of our slide presentation, we have included a reconciliation table to help illustrate the adjustments to our GAAP results.

Turning to slide 16. Here, we provide an overview of our balance sheet highlights at the end of the third quarter. We had cash of $110 million as of October 31, 2014.

Our third-quarter equipment inventory decreased to $933 million, compared to equipment inventory of $939 million as of January 31, 2014. The inventory change includes an increase of new equipment of $48 million and a decrease of used equipment of $54 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 third quarter were $151 million, which is up from $145 at the end of FY14. We expect minor [de-fleeting] in the fourth quarter and, therefore, anticipate ending the year with a similar fleet level compared to last year.

As of October 31, 2014, we had $761 million of outstanding floorplan payables on $1.2 billion of floorplan lines of credit. Effective October 31, our floorplan credit facilities with our bank syndicate and CNH were amended. Historically, our loan agreements have continued to evolve to meet the changes in our business.

Turning to slide 17. I would like to provide an update on our Company equipment inventory initiatives. Similar to what we have provided on our last earnings call, you will see a chart outlining our equipment inventory position for the last five years. On the right side of the graph is the targeted year-end equipment inventory for FY15, representing a $200 million reduction in inventory compared to the end of FY14.

Previously, we had forecasted reduction of $250 million for FY15. Our new target reflects the lower than anticipated third-quarter revenue and our revised remaining outlook for FY15.

Solid trend line on the graph represents a $109 million inventory reduction achieved in the third quarter, compared to the same period last year. The dashed trend line on the graph represents the forecasted $200 million decrease in the fourth quarter inventory, compared to the same period last year.

As I mentioned on our call last time, to achieve this year's target, we have significantly reduced current orders for equipment from our suppliers. This factor and our ability to achieve forecasted sales are the drivers of our inventory reduction plan.

This slide also breaks out the level of used equipment versus new equipment and our equipment inventory. Year-to-date, we have been able to reduce our used inventory by $54 million despite the headwinds in the ag industry, demonstrating our process and commitment to manage our used inventory.

Slide 18 gives an overview of our cash flow statement for the first nine 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 floorplan proceeds, non-GAAP net cash provided by inventories was $12.3 million in the nine-month period of FY15. Our GAAP cash used for inventories was $2.4 million.

In our statement of cash flows, the GAAP reported net cash used for operating activities for the period was $82.5 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 $700,000.

Throughout this fiscal year, we are focusing on improving our non-GAAP operating cash flow. Despite the fact that the industry conditions have put pressure on our results, we continue to expect to achieve improved cash flow from operating activities in FY15 as we execute on our inventory reduction plan.

Slide 19 shows our FY15 annual guidance. As David stated, we are revising our annual outlook. We now expect revenue to be in the range of $1.85 billion to $2 billion, compared to our previous range of $1.9 billion to $2.1 billion. The decline from our prior range primarily reflects lower ag equipment revenue than we anticipated.

We expect adjusted net income attributable to common stockholders to be in the range of $2.1 million to $6.4 million, compared to its previous range of $6.4 million to $12.7 million. We expect adjusted earnings per diluted share to be in the range of $0.10 to $0.30, compared to the previous range of $0.30 to $0.60, based on estimated weighted average diluted common of shares outstanding of 21.1 million.

On a GAAP basis, we now expect a net loss attributable to common stockholders, to be in the range of $500,000 to $4.8 million, compared to the previous range of breakeven to $6.3 million GAAP net income. We expect GAAP loss per diluted share to be in the range of $0.02 to $0.23, compared to the previous range of breakeven to $0.30 GAAP income per diluted share.

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 $4.9 million, or $0.23 per diluted share, associated with the remeasurement costs.

For the full year, we expect adjusted cash flow from operations to be in the range of $40 million to $60 million, compared to our previous our previous range of $50 million to $70 million. The reduction of our range is due to the anticipated lower earnings expectations, as well as our revised outlook for equipment inventory reduction.

Modeling assumptions supporting our guidance are as follows. We expect our ag same-store sales to decrease 15% to 20%. This primarily reflects lower anticipated results from our equipment revenue as well as a slight decrease in our parts and service revenue, due to a reduction in preventative maintenance as a result of the headwinds David discussed earlier. We expect our construction same-store sales to be in the range of 17% to 22%, and we expect our international same-store sales to be in the range of 10% to 20%.

Our equipment margins modeling assumption for the full year is now projected to be in the range of 8% to 8.5%, from the previous range of 8.1% to 8.6%. The slight decrease is due to expectations in our ag segment.

We are now modeling annual rental dollar utilization to be in the range of 28% to 30%, compared to the previous range of 30% to 33%. The expected decrease is reflecting the lower rental activity coming from our locations servicing the oil markets as well as a slow utilization ramp up related to the rental fleet relocated from our closed stores.

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

(Operator Instructions)

Rick Nelson, Stephens.

To ask about the margin pressures in the equipment category, sequentially and year-over-year. It sounds like construction margins are better, so it appears as if it could be Ag segment. If you could comment on what's happening with new and used equipment margins in Ag?

Yes. Hello, Rick. Mark here.

Yes. The pressure is much more so on the Ag side. If you recall last year, construction was experiencing a glut in the market of equipment inventory. It's rebounded nicely from those levels.

And on the Ag side is where we are seeing more of an oversupply of inventory out there in the market, today. It's much more on the used side, currently, than on the new. The margins are being maintained fairly well on the new, but the used is where we are experiencing margin compression.

Great. Thanks for that color, Mark.

The guidance for equipment margins appears to be a pickup from the third quarter and the year to date. I'm curious how you rationalize those inventory reduction plans with the higher margins on the fourth-quarter in equipment?

We'll, as you know, throughout the year, we do a lower-of-cost-to-market write-down on a monthly basis. So as the market has come down, we are adjusting our used inventory throughout the year -- not in any one particular quarter, at all.

Typically, it might be a little bit of a pickup in the fourth quarter. There's not much in there. But that has to do with some year-end manufacturing incentives that typically get trued up in the fourth quarter, which causes a little bit of strength in that fourth quarter.

Thank you for that.

Also, I'd like to ask. You're sitting on a great big pile of cash, $110 million in cash. Your stock is trading below tangible book value. Your appetite for buying your own stock back versus acquiring others. And are the valuations in the private market meaningful discounts to their tangible book value?

Well, Rick, we constantly have discussions with our Board regarding our capital allocations. And we continue to evaluate all options on an ongoing basis. We understand your question pretty well.

Okay. Thanks for that. All right, good luck.

Larry De Maria, William Blair.

A couple of things. (inaudible) the ag profits of about $14 million and change and [$5 million] (Inaudible) to the quarter. How do we think of your ag dealers now, in terms of how many are actually losing money?

I know we tend to look at the total enterprise. I'm curious how may many stores are making up those profits versus how many are losing money at this point?

Well, we don't break that out, Larry. But we do have some stores that are performing very well. We continue -- if we have some nonperforming stores, we're putting specific interest and more resources at those stores for a number of fronts. But we don't break that out by store.

But is it a handful of stores making money, and the vast majority of ag stores are now losing money? How do we think about that? Because that's obviously relevant as we go into next year with further declines.

I would say a good number of our stores are doing very well.

Okay. On the used inventory, expected to be flat in Q4. Normally, I think it would potentially even move up, given the volume of trade-ins. And year to date, it's down $54 million. Are we assuming that the value declines but the volume equipment goes up?

And just curious about this -- for example -- the $54 million decline. How much is volume versus how much is lower, actually used prices and how you're carrying it, given the way Mark just said -- the lower-of-cost-to-market?

And then how long did it take for the inventory in the field -- not just yours, but the industry -- to be able to work through? Do you think it gets concluded by next year or a couple of quarters? In other words, how long will it take for the industry to work through the inventory? And is the lower inventory value more a function of the lower price or volume?

Yes. There's a lot asked there, Larry. I'll try and take part of it.

One of the questions I think you asked is how we're going to maintain a flat used inventory level into the fourth quarter. A lot of that is -- as opposed to previous years -- we've done a lot more rolls at the end of the year in previous years, where we've taken in a lot of used inventory, a lot of used trades. We expect that to be down. So the amount of income used is going to be quite a bit less than what we've had in the past. We do expect to diligently continue to move through the used inventory, as well, through aggressively selling it out there in the market.

As far as like a number of units, I wasn't sure if you are asking about new, used? (Multiple speakers)

Mark, for the $54 million decline year to date, how much of that is volume? How much of that is the price of the used? In other words, the actual volume of your used inventory may not have gone down that much. But are you writing down the price enough? Is that why it's going down?

It's a combination of both. But it's more so on the number of units side than it is on the price side. But the pricing certainly has come down in the valuation. Per-unit has come down because of what I alluded to earlier on the lower-of-cost-to-market adjustments that we've had. But more of it's on the number of units.

Okay. That's what I figured.

Then just for you -- how long -- I know you're working through your inventory, and it's been challenging. When you think about the industry inventory -- particularly in your region, obviously, but broader -- how long will it take for the industry to wind down this inventory? Is it in a very similar situation to you? That's all. Thanks.

We'll, you're seeing different inventory levels out there, and different competitors have different issues. We've been working pretty hard on this, probably going back almost 18 months now. We feel good about certain segments. We feel pretty good about our used combine inventories. So as you see less new being sold, you definitely will have, as Mark said, less used coming in.

Some of these customers that were possibly buying late-model used equipment started buying new equipment. Now with the economics right now, to move them back to used equipment. So just to get back into that, somewhat of a normal cycle, is what we are going into. And it'd be probably less rolls, more late-model used buyers out there, and not moving so many of those guys to new buyers. And I think it will be managed through the system. I believe all dealers in the industry are going to do somewhat similar actions, Larry.

Okay. Thanks.

Tyler Etten, Piper Jaffray.

Just a couple of questions for you today. First, what is your timing expectation for Section 179? And is that factored into the $200 million reduction in inventory for the fourth quarter?

I think, when we put our guidance together for the fourth quarter or forecasting for the fourth quarter, we did anticipate everything that we earned as we kind of anticipated that it would come through at the back end of this year and would be available here for the end of December. That being said, as we've said in the past, we don't think it's a huge factor out there. We think it's more based on the profitability of our customers, rather than specifically some of these tax incentives out there. But it is part of what we put in there for our forecast for our EPS range, as well as our inventory reduction estimates.

Okay. Do you have any expectations for that next year?

We'll come out with our forecast for next year on our fourth-quarter call. No comment from us at this time.

Okay.

Last question would be -- what do you think -- how bad do think the slowdown on rental would be because of the oil pipeline and oil exploration slowdown because of energy prices?

Well, if you look at the oil impact to our stores, we've got a pretty diversified footprint. So we're probably impacted probably at 10% of our stores. Other than that, it's still a fairly fast pace that's going on in the oil exploration. It's got some impact, but I would not say significant.

All right. Great. Thanks.

Joe Mondillo, Sidoti.

My first question is regarding the Construction segment, and I just wanted to clarify. So the year-over-year same-store sales did slow down, and you dropped your same-store sales guidance for the year. On top of that, from the second quarter to the third quarter, despite seeing year-over-year improvements and profitability, we saw flatness sequentially.

So just wondering, is that all due to the rental? Or was there some disappointment on the new construction sales as well?

I think part of it is, if you look at the comps from last year, the same store increases in the first half of the year last year were negative, down to the tune of 6%, 7%. And they flipped to positive in the third and fourth quarter. So part of it, I think, we're up against tougher comps.

There is some of this impact with some of our stores. It's about four of our stores that are up in the Bakken that have more of that oil play. A little bit down in Colorado, maybe. But it's four stores. That is part of the reason why we pulled it down. Again, it's only about 10% of our stores on the construction side that are being affected by the lower oil.

Okay.

What about the sequential flatness in terms of profitability? Because that was my biggest surprise. I know you were expecting to be profitable for the year -- probably unlikely at this point, given what you saw in the third quarter. So in terms of third quarter not really seeing that strength that you usually see in the third quarter on a profitability-wise -- can you comment more on that?

Yes. You know, we did expect a little more. I think part of it was in that rental that came in less than anticipated. When we do the depreciation on our rental fleet during the year, it's seasonally adjusted; so there is a heavier load of depreciation that happens in the third quarter because of higher expectations on the fleet. So that was certainly part of the drag on our third-quarter and why it wasn't sequentially better than the second quarter for the Construction segment.

Okay. Then, on the Ag side of the business, the overall macro assumption is that acreage is going to be down by 4 million or 5 million acres next year. In terms of your footprint, what are you looking at where your footprint is, in terms of acreage planted, next year?

I actually think we see acreage going up. There was quite a bit of (Inaudible) this year in some of our markets. In addition to that, there are a lot of CRP acres that are going out of CRP and back into production. So we actually see increased acres as the majority of our footprint.

So overall, acreage in the country will be down most likely. But you're saying within your footprint, acreage should be up.

No. Typically, all the land gets farmed. So there's been land that has been broken up. There has been land that has been taken out of hay and pasture in the production. There is a CRP coming out.

You may see some shifts away from corn and other crops and things like that. But overall, I believe the production is going to be up, due to predominantly a lot of land coming out of CRP. And also, some pretty favorable weather conditions in the fall and stuff and the moisture situations to minimize some of this prevented plant acres.

Okay. And does that production match up with what USDA is projecting?

Boy, I guess -- you know, it's probably a little early in the game for that. I believe that we've seen, in our footprint -- which we're pretty close to -- that acreage is going to be up.

Okay. All right, thanks a lot.

Mig Dobre, Robert Baird.

Mark, this question is for you. Maybe you can help me understand the math here.

When I look at your rental business guidance, you lowered the utilization goal by 250 basis points at the midpoint. Running rough math here, this is basically $4 million worth of rental revenue.

This is a pretty big swing. And I'm trying to understand how much of this is directly related to energy versus some of the inefficiencies that you mentioned earlier. Because, you also say that only 10% of the stores are exposed to energy. So in theory, this shouldn't be that big of an impact. Yet, the numbers work out to where it is.

Yes. As I mentioned on the call, what we talked about was the relocating of our fleet. So when we closed these stores earlier in the year -- and there's a little bit of a tail on this, that it still helped the second quarter, yet, as contracts were still out there on this rental fleet. But, as we moved these fleets to our other locations, there was some, what I would call dead time in there, where there wasn't the utilization, as we repositioned them into other markets.

I don't have the breakdown of like how much each one contributed to that. But I would say both of them were notable in creating that assumption change on our rental fleet utilization.

I see.

Sorry to push you on this. Something has changed within the past quarter that led to this adjustment in guidance. You knew that you shut down stores, and you were going to have to relocate equipment when you issued the guidance previously.

So was it something new that occurred, in terms of relocating this equipment? Or what changed?

Yes. I think part of it was, certainly, the oil thing changed. There was a significant decrease in the oil and, therefore, some of the activity in oil. That definitely happened after we gave guidance a quarter ago.

The other thing -- and perhaps we underestimated some of this dead time as we repositioned these rental fleet assets in some of our other locations. So it's really the combination of the two.

All right.

If we are to switch over to Ag, just broadly speaking, as I see it, you cut your inventory reduction target. I'm trying to figure out, here, as to why that is the case. Because my understanding is that if you really wanted to, you could move inventory by simply reducing prices.

So, I'm presuming that you are trying not to do that. Which, I'm wondering -- does this shift earnings risk to next year? How do you think about inventory reduction going forward and what that implies for next year?

I'd say, Mig, I think a lot of that's coming from, possibly, the new side of the business -- is just reflected in what we saw in some of our decreases in revenues that we had earlier anticipated that weren't there in the third quarter. So a lot of it is new.

You can see that we're making strong strides on the used, with the $50 million some decrease that we've done on the used. We're trying to, at the same time, reduce inventory, but then also realize a realistic margin structure.

All right.

Then last question from me, and I don't know if you want to answer this or not. But John Deere basically called out North American Ag declines in the 25% to 30% range as we look into 2015. I'm wondering, do you have reason to think otherwise, given what you know of your end markets and your geographic exposure?

Well, I think there's some pretty smart people out there making some of these forecasts from all the manufacturers. I think they're all pretty well aligned. So I think definitely, when you see pull back in commodity prices, even though they have rebounded a little bit, I think these manufacturers are -- and the amount of inventory that's in the pipeline now and what was produced in the fourth quarter -- they probably have pretty realistic expectations.

But I also believe, as you see the business is we're getting into the first two, three quarters of the year, that I think there's some flexible build schedules that could be adjusted on that. I think going into this year, I think we have to take a further appreciation for what the OEMs are seeing on their forecasts. And look at that and manage our business accordingly.

I appreciate it. Good luck.

Steve Dyer, Craig-Hallum Capital Group.

It's Greg Palm on for Steve. Thanks for taking our questions.

Following up on the margin pressure in Q3, just curious what the impact of those monthly write-downs you take were versus just the more aggressive inventory sell-down. Any color would be helpful. Thanks.

Yes. We don't disclose the specific numbers involved there. But I think I commented in the past, in it's typical part of the cycle, our new equipment margins would be higher than our used. I'm sorry, our used would be higher than the new. And given some of these lower-cost-to-market write-downs, it is pulling the used below what the new is out there. So it's definitely a part of what's creating the lower equipment margins out there.

I know it's a little early, but qualitatively, how should we take be thinking about inventory levels for FY16?

Well, I think for the starting point of it, you can see where we're going to end this year, given our $200 million reduction. You just heard some of the expectations by the OEMs out there and everything like that. If that comes to fruition, I would say that we'd pull our inventory down even further than where we're ending it this year.

So it would certainly average much less than what we averaged this year, as far as our overall inventory levels. We'd probably be going down in total inventory, as we go throughout the year.

Okay.

Last one. Curious what you're hearing from the OEMs. What is CNH doing to help you with any incentives or cash? Thanks.

I think that you see some of these publicized -- on used equipment side, I see some really attractive financing programs, interest-free periods of time. So aggressively targeting the used equipment out there from the financing side to get it through the pipeline. Again, CNH definitely wants to be competitive in the marketplace and focused on gaining market share and helping the dealers move their inventory through the pipeline.

Are you good, Steve?

Yes. That's all for us. Thanks.

Okay. That's the end of the questions.

I want to thank everyone for your interest in Titan, and look forward to updating you on our progress on our next call. Have a good day.

That concludes today's conference. Thank you for your participation.