Titan Machinery Inc (TITN) 2015 Q4 法說會逐字稿

Good day, everyone. Welcome to the Titan Machinery, Incorporated, fourth-quarter FY15 earnings conference call.

As a reminder, today's call is being recorded.

At this time, I'd 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 the Titan Machinery fourth-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 fourth quarter ended January 31, 2015, 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 under the events and presentation tab.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. The statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them.

These statements are based on current expectations of management, and involve inherent risks and uncertainties, including those identified in the risk factors section of Titan's most recently filed 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.

Please note that during today's call, we'll discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Titan's ongoing results of operation, particularly when comparing underlying results from period to period. We have included reconciliation of these non-GAAP measures for today's release, and have provided as much detail as possible on any addendums that are added back.

Lastly, due to the number of participants on today's call, we ask that you keep your question period to one or two questions, and then rejoin the queue. The call will last approximately 45 minutes.

David Meyer will provide highlights of the Company's fourth-quarter results, and the 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, and the FY16 annual modeling assumptions. At the conclusion of the prepared remarks, we will open the call to take your questions.

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

Thank you, John. Good morning, everyone. Welcome to our fourth-quarter FY15 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we've provided a slide presentation, which you can access on the Investor Relations portions of our website at titanmachinery.com.

If you turn to slide 3, you will see our fourth-quarter financial results, which came in as expected in our pre-release a few weeks ago. Revenue was $491 million, primarily reflecting lower agricultural equipment sales in North America. The adjusted pre-tax loss was $5 million, and adjusted loss per diluted share was $0.20.

For the full year, we generated revenue of $1.9 billion. Our adjusted operating cash flow was $82 million. Adjusted pre-tax income was $2.3 million. The adjusted loss per diluted share was $0.09. Mark will provide additional color on our financial results later in the release.

For the fourth quarter and full year, our financial results were impacted by ongoing headwinds in the ag industry. Throughout the year, in order to help us navigate the challenging environment, we focused on managing the controllable aspects of our Business. We reduced our inventory by $168 million, which enabled us to significantly improve our cash flow from operations, which we will review later in our remarks.

Slide 4 lists the discussion points for today's call. First, we will discuss the challenges we are facing in our agricultural segment, as well as provide an update on the construction industry. Next, we will review our realignment plan that we announced last month. Peter will also provide an update on our international segment, discussing the challenges in these markets, as well as an update on our initiatives we began implementing last year to improve this segment of our Business. Mark will review financial results, and will provide an update on progress we continue to make with reducing our inventory, as well as modeling assumptions for FY16.

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 5 is an overview of the agriculture industry. Spring planting is expected to be on schedule, however, we are currently experiencing low moisture levels in the majority of our footprint. Timely rains will be required to support ongoing crop development.

The USDA recently reported prospective planting for this year, and it reflected lower corn acres, with an increase in soybean acres and other crops. Commodity prices continue to reflect the increased ending stocks as a result of last year's large crop.

The USDA report, which was updated in February, projects calendar-year 2015 net farm income to be $73.6 billion, which represents a 31.8% decrease from projected net farm income in calendar 2014 of $108 billion. The 2015 net farm income projections reflect an expected continued decline in crop cash receipts, and a slight decrease of livestock cash receipts. We believe this lower projected net farm income will pressure overall new and used equipment revenues in the ag industry. The lower net farm income continues to impact farmers' spending, resulting in a lower end-user demand that continues to affect used equipment prices, and compress margins.

Bonus depreciation and Section 179 were reinstated at the end of the calendar year of 2014. However, because of the late reinstatement, many farmers were not able to take full advantage of this tax incentive. Bonus depreciation expired as of December 31, 2014, and Section 179 was reduced to $25,000. There is currently legislation in progress to increase Section 179 on a permanent basis.

In summary, the agriculture industry continues to face a number of headwinds, including lower projected net farm income as the result of lower commodity prices. We believe that we have taken the appropriate steps to navigate through the current climate, and position our Business for improved long-term results. We are focused on managing the controllable aspects of our Business, including inventory levels and operating expense structure. We remain confident in the long term of agriculture industry outlook, as farmers continue to carry strong balance sheets, and the underlying macro trends are projected to continue driving long-term demand for agriculture commodities.

Now I would like to turn to the construction segment of our Business. On slide 6, we provide an overview of the construction industry and our markets. We are currently experiencing an improvement in our metro markets, reflecting increased residential and commercial activity. The strength of the livestock markets continues to support construction equipment sales activity in our agricultural-driven markets, which we anticipate to be flat year over year.

The recent decrease in oil and gas pricing is causing lower sales and rental activity in our energy markets. In calendar-year 2014, the housing industry experienced an increase in housing permits in our footprint, which is a positive indicator for medium- and light-equipment product offerings. We expect this trend to continue in calendar-year 2015, but at a reduced growth rate.

Similar to our ag segment last year, our construction equipment is transitioning to Tier 4 pricing on its new product offerings. A small portion of our new product has this pricing now, but the majority of the transition volume is projected to continue throughout FY16. We believe the rollout of Tier 4 throughout the industry is a positive for the Company, due to the competitive advantage of CNH Industrial's Tier 4 technology.

There is continued strength in used construction equipment pricing throughout the industry. The favorable pricing environment is resulting in higher equipment margins. As I mentioned in our ag industry overview, the late reinstatement of bonus depreciation and Section 179 was late in the year, minimizing the potential positive impact to our fourth-quarter construction equipment sales. Overall, we made meaningful improvements with our construction business operating results in FY15, and remain focused on continuing to improve our construction segment sales and profitability as we enter FY16.

Slide 7 provides an overview of our recently announced realignment plan, which better aligns our business cost structure in certain markets. First, we reduced our headcount by approximately 14%. This includes headcount reductions at stores in each segment, as well as at our shared resource center. We also closed three ag stores, and one construction store.

We expect the headcount reductions will generate a pro forma benefit of approximately $20 million, or $0.56 a share, in FY16. In addition, we restructured certain employee compensation plans to better align pay with performance. For modeling purposes, it is important to note that the realignment costs associated with the headcount reduction and store closings are estimated to total approximately $2 million, of which $0.1 million was recognized in the fourth quarter of FY15, and $1.9 million, or $0.05 per diluted share, is expected to be recognized in the first quarter of FY16.

With the implementation of our realignment, we are confident we are taking the right steps to manage through the current ag climate, and improve the cost structure of our Business. We believe that this, combined with further inventory reductions, and the recently implemented initiatives for our international segment, positions our Business for improved operational and long-term financial performance.

Now I would 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 provide an update on our agriculture, construction and international operating segments. Peter?

Thanks, David.

On slide 8, we have an overview of the industry in our international segment, which includes stores in Bulgaria, Romania, Serbia and Ukraine. Spring planting is under way and on schedule in all of our markets, with the exception of Bulgaria experiencing some delays due to early rains. All of our international markets have adequate moisture to begin the 2015 growing season.

Lower global commodity prices continue to impact customers in all of our international markets, which is reflected in reduced farmer spending. This has also 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 beginning in the third quarter of FY15. We anticipate Bulgaria to have access to the subvention funds beginning in the second quarter of FY16. As you may recall, the subvention funds are monies the European Union has budgeted over a five-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, continued geopolitical and financial turmoil are negatively impacting our customers and operations. Limited credit availability, rising interest rates, and the further devaluation of the local currency are affecting all businesses throughout the country. Although the Ukrainian farmers had good yields in calendar 2014, they are limited in their ability to finance purchases of equipment, and purchase crop inputs for calendar-year 2015.

As we discussed on our third-quarter earnings call, we outlined $7 million of annual cost savings initiatives in our international segment to better align costs with current market conditions. The majority of these initiatives have been implemented, and we anticipate the $7 million of cost savings will be reflected in our FY16 financial results.

On slide 9, you'll see an overview of our segment results for the fourth quarter. Agriculture sales were $360 million, a decrease of 37.9%, reflecting the headwinds David discussed earlier. We generated ag adjusted pre-tax income of $2.8 million, compared to $25.1 million in the prior year period. Primary factors impacting our ag segment results were lower equipment sales and used equipment margins.

Our operating expenses decreased on an absolute basis compared to the same period a year ago, but were higher as a percent of sales due to the lower equipment sales. Following the realignment, we believe we now have an improved cost structure in place, given the current market conditions.

Turning to our construction segment, our revenue was $109 million, which is 5.2% lower than that in the prior year period. The slight improvement in same-store sales was offset by the lower store count. Adjusted pre-tax loss for our construction segment was $4.7 million, an improvement from an adjusted pre-tax loss of $8.2 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 fourth quarter of FY15, our international revenue was $39.1 million, which is a 2.9% increase compared to the prior year period. Our adjusted pre-tax loss was $3.5 million, compared to an adjusted pre-tax loss of $2.3 million in the prior year period. The slight increase in revenue was more than offset by reduced equipment margins and increased operating expenses. We expect the cost savings from the initiatives I previously mentioned will begin to benefit our results in the first quarter of FY16. Adjusted pre-tax loss excludes a $0.8-million remeasurement charge from the balance sheet impact of the Ukrainian hryvnia devaluation.

Turning to slide 10, you'll see our segment results for the full year of FY15. Agriculture revenue was $1.37 billion, a decrease of 22.3% compared to the same period last year. And adjusted pre-tax income decreased to $17.4 million, reflecting the same headwinds discussed earlier.

Construction segment revenue improved 7.1%. And adjusted pre-tax loss, which excludes store closing costs of $2.6 million, decreased to $8 million, a significant improvement over an adjusted pre-tax loss of $19.8 million last year.

Our international revenue increased 14% to $166 million. And our adjusted pre-tax loss was $10.5 million, compared to an adjusted pre-tax loss of $3.8 million in the prior year period.

In addition to the factors that impacted our fourth-quarter results, our full-year results reflect the annual cost of our European operations center which opened in the second half of FY14, and the impact of challenging market conditions in Bulgaria and Ukraine. The adjusted pre-tax loss excludes a $5.8-million remeasurement charge from the balance-sheet impact of the Ukrainian hryvnia devaluation.

Turning to slide 11, this shows our same-store results for the fourth quarter of FY15. Our overall same-store sales decreased 29.4%, primarily reflecting a 37.6% decrease in ag same-store sales. This was partially offset by same-store sales growth in our construction and international segments.

For the fourth quarter of FY15, overall same-store gross profit decreased 28.3% compared to the prior year. The ag segment same-store gross profit decreased 39.3%, reflecting lower equipment margins, offset by a favorable change in mix to higher-margin parts and service. The 13.9% improvement in the construction segment same-store gross profit reflects the growth in same-store sales, as well as improvements in gross profit margin for construction equipment. Regarding international, same-store gross profit decreased 12.4%, primarily reflecting lower equipment margins.

On slide 12, you'll see our same-store results for the full year. Total Company same-store sales decreased 14.1%, and total Company same-store gross profit decreased 9.3%. Ag same-store sales decreased 22%, while construction same-store sales increased 14.9% in FY15. Our international same-store sales increased 21.8%.

The same factors that affected the fourth-quarter same-store gross profits in ag and construction also impacted our full-year same-store gross profits. International full-year same-store gross profit increased 11.8%, which reflects increased sales, partially offset by lower equipment 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 fourth quarter of FY14 and the fourth quarter of FY15 are included in the fourth-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 calculations for both periods reported.

In the fourth quarter of FY15, a total of nine locations were not included in our fourth-quarter same-store results, consisting of two ag locations and seven construction stores. For the full year of FY15, a total of 13 stores were not included, consisting of two ag locations, nine construction locations, and two 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 other key balance-sheet items, and to discuss our FY16 modeling assumptions. Mark?

Thanks, Peter.

Turning to slide 13: Our total revenue for the FY15 fourth quarter was $491 million, a decrease of 30.8% compared to last year. Equipment sales decreased 33.7% quarter over quarter, primarily reflecting the ag headwinds David discussed in his remarks. Our parts sales decreased 17.5% in the quarter, while service revenue decreased 19.6%. This quarter's softness in parts and service is primarily attributed to a decreased amount of customer preventative maintenance, as well as reduced service business associated with the pre-delivery of sold new equipment.

Our rental and other revenue decreased 8.1% in the fourth quarter, primarily due to the lower utilization of our rental fleet. Our rental fleet dollar utilization was 24.5% for the current quarter, compared to 28.7% 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.

On slide 14: Our gross profit for the quarter was $68 million, and our gross profit margin was 13.9%, an increase of 20 basis points compared to the same quarter last year. The improvement in gross margin was due to higher-margin parts and service mix compared to the prior year period, partially offset by a decrease in equipment margins of 90 basis points.

Our operating expenses as a percentage of revenue in the fourth quarter of FY15 was 13.2%, compared to 10.9% for the same quarter last year, even though we had decreased our operating expense by $12.3 million or 15.9%. 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.

We are focused on reducing our overall operating expenses. And I believe the cost-saving initiatives we implemented in the first quarter of FY16 as part of our realignment plan, combined with the previously implemented initiatives in our international segment, will enable us to better align our operating expenses to the expected market conditions in FY16.

In the fourth quarter of FY15, we recognized a $31-million non-cash charge, primarily related to impairment of goodwill and other intangible assets within the ag segment. In addition, we also recorded a $1.3-million charge from the balance-sheet remeasurement impact of the fourth-quarter currency devaluation in Ukraine, as well as certain realignment costs. As a reminder, in the fourth quarter of FY14 we recognized a non-cash charge of $10 million, primarily related to the impairment of goodwill and other intangible assets within the construction and international segments.

Floorplan and other interest expense increased 60 basis points as a percent of revenue, which is primarily due to lower revenue, higher interest rates, and higher percent of floorplan that is interest-bearing. In the fourth quarter of FY15, interest-bearing floorplan was 75% of overall floorplan, compared to 56% this period last year. This increase is due to a reduced level of new inventory shipments from our suppliers, which initially carry non-interest-bearing terms. It is important to note that we significantly reduced our inventory level in FY15. We anticipate a reduction in our floorplan interest expense in FY16.

Beginning this quarter, we are also reporting our adjusted EBITDA. We calculate adjusted EBITDA by including our floorplan interest expense, and excluding non-recurring items such as remeasurements, impairments, and realignment costs, as we believe this reflects the ongoing operations of our Business.

For the fourth quarter of FY15, we generated adjusted EBITDA of $6.4 million, which compares to $23.9 million in the fourth quarter of last year. You can find a reconciliation of adjusted EBITDA on slide 22.

Our adjusted loss per diluted share was $0.20 for the fourth quarter of FY15, which excludes certain non-GAAP items, as outlined in the reconciliation table on slide 22. This compares to adjusted earnings per diluted share of $0.35 in the fourth quarter last year.

Turning to slide 15: You will see an overview of our full-year revenue results. Total revenue decreased 14.7% compared to last year, primarily driven by lower equipment sales. Over the course of the full year, our parts and service remained relatively stable, as parts were down 2% and service was down 1.2%.

On slide 16, our full-year gross profit was $308 million, an 11.4% decrease compared to the prior year period. Our gross profit margin increased 60 basis points to 16.2%, primarily reflecting the shift in sales mix to our higher parts -- higher-margin parts and service business, partially offset by lower ag equipment margins. Operating expenses were 14.4% of revenue, compared to 13.1% [in the same period last year, primarily reflecting deleveraging of fixed expenses I spoke to earlier]. In FY15, we recognized a $40.6-million charge, consisting of a $31.2-million impairment charge related to goodwill and intangibles, realignment costs of $3.6 million, and $5.8 million from the balance-sheet remeasurement impact of the Ukrainian currency devaluation.

Our adjusted diluted loss per share was $0.09. This excludes $1.42 per share for charges primarily associated with the impairment of intangible assets, realignment costs, and Ukrainian currency remeasurement. Even though we recognized positive adjusted pre-tax earnings, our adjusted diluted earnings per share reflects a loss due to the recognition of a full reserve against current year net operating losses in our international segment, and the inability to use such losses to reduce our US income tax liability. At the end of our slide presentation, we have included a reconciliation table to help illustrate the adjustments to our GAAP numbers.

Turning to slide 17: Here we provide an overview of our balance-sheet highlights at the end of the year. In light of the headwinds we are currently facing from the ag industry, improving our balance sheet was, and remains, one of our key areas of focus. We had cash of $128 million as of January 31, 2015.

Our equipment inventory decreased to $772 million, compared to equipment inventory of $939 million as of January 31, 2014. The inventory change includes a decrease in new equipment of $126.3 million, and a decrease in used equipment of $41.5 million from the end of FY14. This includes inventory amounts classified on our balance sheet as held-for-sale, which are held in stores in markets Titan is exiting. In a few minutes, I will provide an update on our inventory reduction in FY15, and our anticipated reduction in FY16.

Our rental fleet assets at the end of the fourth quarter were $148 million, which is relatively flat compared to $145 million at the end of FY14. We anticipate maintaining a similar fleet size for FY16.

As of January 31, 2015, we had $627 million of outstanding floorplan payables, on $1.2 billion of floorplan lines of credit. We recently amended our bank syndicate credit facility, and we are in compliance with all financial covenants of our credit facilities, effective for the period ended January 31, 2015. We reduced our total discretionary floorplan lines of credit to $1.1 billion in April 2015, reflecting lower current and expected equipment inventory levels. The reduced floorplan levels, combined with the lower long-term debt at the end of FY15, has improved our total liabilities to tangible net worth to 2.6 as of January 31, 2015, from 3.1 as of the end of the prior year period. I'll provide some additional commentary on this metric in a moment.

Slide 18 gives an overview of our cash flow statement for 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 $55.3 million in FY15. Our GAAP cash provided by inventories was $171.6 million.

In our statement of cash flows, the GAAP reported net cash provided by operating activities for the period was $41.1 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 $82.2 million.

We successfully improved our non-GAAP operating cash flow for FY15 through a reduction in equipment inventory and working capital. We are pleased with our ability to generate strong cash flow, despite the fact that the industry conditions have put pressure on our earnings. Going forward, we plan to use a portion of our cash balance and cash flow from operations in FY16 to reduce inventory financing, and continue to delever our balance sheet.

Turning to slide 19: I would like to provide an update on our Company equipment inventory initiative. Similar to what we have provided in the past, you will see a chart outlining our equipment inventory position for the last four years, as well as our ending inventory target for FY16 The chart shows that we reduced year-end equipment inventory for FY15 by $168 million compared to the end of FY14. This is represented by the solid trend line.

The amount of our inventory reduction for FY15 represents a significant improvement, but was short of our previous goal due to the lower-than-anticipated fourth-quarter equipment sales. We anticipate a further $150-million reduction of equipment inventory in FY16, and expect the quarterly inventory stocking trend to be similar to that of FY15, with most of the reduction occurring in the fourth quarter. We were able to decrease our used inventory in FY15, and we will continue to focus on moving used equipment in FY16.

Turning to slide 20: You will see a chart showing our total-liabilities-to-tangible-net-worth ratio over the past four years. This chart shows a notable improvement in this ratio from a high of 3.3 in the second quarter of FY15, to 2.6 at the end of FY15. Based on a consistent level of tangible net worth, we expect to further reduce the ratio to approximately 1.9 at the end of FY16. The improvement in our FY16 total-liabilities-to-tangible-net-worth ratio primarily reflects our anticipated cash generation, and the use of this cash to reduce inventory financing that I spoke about previously. Given the current market conditions, particularly in the ag sector, we believe using a portion of our cash to delever our balance sheet positions the Company to capitalize on long-term opportunities.

Slide 21 shows our FY16 annual modeling assumptions. Given the recent market fluctuations, we have decided to provide a number of modeling assumptions, rather than specific total Company outlook ranges for revenue and earnings per share. The Company believes these significant modeling assumptions will provide investors with the necessary information regarding anticipated business trends affecting our financial results.

Our modeling assumptions for FY16 are as follows. We expect our ag same-store sales to decrease 20% to 25%. This primarily reflects the lower anticipated results from our [ag] equipment revenue, as well as slight decrease in our parts and service revenue. We expect both our construction and the international same-store sales to be flat.

Modeling assumption for equipment margins for the full year is projected to be in the range of 7.7% to 8.3%. We expect to be profitable on an adjusted diluted earnings per share basis for FY16.

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

Thank you, sir.

(Operator Instructions)

Our first question from Rick Nelson with Stephens.

Thanks. Good morning. Dave, I'd like to ask you about your appetite for acquisitions at this point? I'm sure you're getting more calls, how you're responding to those? Do you keep your powder dry here for awhile, or do you in fact, step up during this downturn?

Well, Rick, right now, our main focus right now is the realignment, the expense reduction, our reducing of inventory, and growing cash. And we think there is going to be -- down the road, there's going to be some consolidation, but we think our ability to really do a good job with that is, going to be dependent on really getting our balance sheet and our position, so we can really capitalize on these opportunities.

So you think the opportunities might be better down the road than it might be today?

I believe so.

And curious also, how much of your construction revenue is tied to the energy sector, and whether you expect that business to be profitable in the current year?

I think overall, we've talked before in the Bakken specifically, there is four of our stores that reach out to that -- the Bakken market there. And then, we have some down in Colorado, in some energy areas there as well. I think if you look at it in total, it's probably around 10% of what the -- what makes up the construction segment. So it's definitely a meaningful portion, but there's -- we've got other areas there as well in that segment of our business.

Got you. Okay, that's it. Thanks a lot, and good luck.

Next we'll go to Brett Wong with Piper Jaffrey.

Hi, guys. Thanks a lot for taking my questions. I appreciate it. First, I was wondering if you can kind of talk to the inventory expectations. One, you're kind of classifying the held-for-sale here now, and you had mentioned that that's around, excluding the inventory markets you plan to exit.

Can you provide a little more color around that classification? And then ultimately, as you look at used equipment through this year some, and the expectation to reduce those inventory levels, what are you thinking, and how are you going to be able to do that? And looking at this chart, it doesn't seem like there's expectations of too much of a reduction in use, mostly coming from new.

Yes, so I think first of all, there's a lot kind of asked there. Hopefully, I'll hit on all of it. I think, first of all, yes, it's important, on this held-for-sale, on these assets held-for-sale, for these like I said on the call, these are for -- there's inventory, there's other assets that are included in that particular classification. So these are in stores where we're looking to exit those particular markets.

So what we didn't want to do is, is we didn't want to take credit for any kind of classification change. So if you look at specifically on the balance sheet for inventory, it may look like we reduced it by more than $168 million.

But there is some inventory that's in this -- in that category on the balance sheet, so we didn't want to take credit for that. So the $168 million represents the full amount of inventory, kind of regardless of whether it's in the inventory line, or in that assets held-for-sale.

For next year, we anticipate reducing that roughly approximately around that $150 million, and that of course, is kind of dependent on hitting those revenue targets. We gave those by segments to you, so if we surpass that, we may be able to do better than that.

If we don't surpass it, we may fall short of it somewhat. But $150 million is based on the assumptions that we've put out there.

Regarding used -- I think you asked about used as well. Used is always a little more difficult to continue to kind of chew down. You can see we've kind of methodically moved that down throughout the year.

There was a little bit up in our fiscal fourth quarter for FY15, and we constantly have that conversion of new to used that we always have to address as well. So it's always easier to move the new down quicker, than it is the used because you can just kind of stop ordering the new, where the used, you continue to generate with selling the new.

Hopefully, that answers -- anything I missed there, Brett?

No, no, that's great. Sorry to throw so many question at you at once. I appreciate that, and just one last one for me. Just wondering if you're seeing any impact from the weakness in dairy or pork? You mentioned that livestock continues to be good, but just wondering if you're seeing any impact there?

No, there --we have not seen -- I mean, in our markets, that's not a big driver, so it hasn't been significant there.

Okay, great. Thanks a lot, guys.

Next we'll take a question from Mig Dobre with Robert Baird.

Good morning, everyone. Just sort of going back to the rental fleet. You mentioned only about 10% of it is exposed to energy, but dollar utilization was off 400 basis points year-over-year. And you mentioned in your prepared remarks, that a lot of that had to do with energy. So the impact to me seems pretty significant.

When I'm looking at your other segment, how should we think about not only the top line here, but margin? Because margin has contracted significantly in the fourth quarter, and I am wondering why isn't this level a better run rate going forward, or is it?

So Dave may want to add on to it. But first of all, so when I responded that 10%, I was looking at total revenue. I would say, there is a little bit higher component there on -- from rental in that energy area, specifically in the Bakken.

Yes, and the rental utilization was off. It was lower than what we had anticipated. It was off, like you said 4% versus the prior year.

A lot of that has to do with the Bakken there. As far as going forward, and the connection with margin. Certainly, if the utilization is down, you've got the fixed expense there with the depreciation, and the margins will contract there as well.

So that's certainly how some of the math works with the lower utilization. You have to recall -- we are down 4% from last year, but the fourth quarter and first quarter tend to be the lowest utilization quarters that we have on that rental fleet.

Well, yes, but since we're talking about year-over-year numbers here that -- we don't have some sort of weather or a seasonality impact to it. And I'm wondering if oil prices do not recover and activity is what it is, why shouldn't we think that utilization is going to be down 400 basis points year-over-year for the full year? Is there a reason to think otherwise?

A couple things here, Mig. First of all, if you look at the snowpack and the Upper Midwest this year, there basically wasn't any, and that contributes to -- a lot of our customers out there, rent quite a bit of equipment for snow removal, and there just wasn't any of that. And then, like Mark said, that we do have a disproportional amount of equipment associated with oil in those oil markets.

Now we're moving that. And as we, in the comments, we said we are seeing a big improvement in the metropolitan areas. So we're moving a lot of that machinery into those markets.

So a combination of the snow, and then the mix in those markets, and that [disproportional high amount especially] with oil, that it came back -- it came at us fairly rapidly. But I think they've done a good job of starting to move that equipment around here, in the last two quarters or so.

That's helpful. Thank you, and moving to parts and service. I for one, was a little surprised with the top line swing here in both areas, and you mentioned some deferrals. And from my perspective, I'm wondering whether or not it's fair to assume just a slight decline in this business, as we're thinking about FY16? I'm really wondering why we wouldn't see frankly, something closer to a double-digit decline, just based on the fourth quarter performance alone?

I think -- so for the whole year this year, it ended up relatively flat. I think it was down 1% or 2% on both parts and service. The winter months where you get into that fourth quarter, it's more reliant on some of that preventive maintenance.

So I think it's more reliant on the preventive maintenance, and it's more reliant on what we call that pre-delivery inspection, with a lot of the new going out in that fourth quarter. So if new is down quite a bit, and kind of that off-season where that preventive maintenance is big, it's more heavily impacting the fourth quarter than what we would impact some of the other quarters, which has the harvest in it and the plant in it. So yes, we don't believe it's going to be down near to the level that it was down in the fourth quarter for next year.

Yes, that makes sense. And then last question for me is on international, looking to clarify a couple of things here. You're talking about flat revenue.

I'm wondering what FX assumption is embedded in here? So what are you actually saying about volume? And then as we're looking at pretax income, we saw an $11 million loss in FY15, $7 million of cost savings that you talked about. So is it fair to think that we could be looking at something below $5 million in terms of pretax loss for FY16?

So I'll address that, the first part of that question on the FX.

First of all, so when you're close to a breakeven in the overall results over there, the FX doesn't have a big impact, in that the revenues gross profit is coming over at a -- so the Euro has weakened recently for instance. The revenues are going come over less, gross profit is going to come over less, but the expenses will come over less as well. So it doesn't have a real big impact on a close to a breakeven business scenario.

The other thing is, in Ukraine which is one of our bigger markets that we're in over there, the functional currency that we use over there is actually the US dollar. So the exchange rates coming over in the P&L, it won't have a big impact.

But I'm -- when we're talking about volume, and I'm sorry if I don't understand this. I am trying to figure out if you're actually guiding for flat volume in international, or if you're guiding for volume growth excluding top line FX impact?

I would say that it's relatively flat to maybe up a little bit is what we're guiding for as far as volume.

And the pretax margin?

Pretax margin we don't give individual -- by segment, we don't give profitability. But we would, based on flat sales and improving the expense structure, it would be improved from last year on an adjusted basis.

Okay. Thank you.

(Operator Instructions)

Okay, we'll go now to Joe Mondillo with Sidoti & Company.

Hi, guys. Good morning.

Good morning, Joe.

Regarding the international segment, I am not sure if I heard the answer to one of the last questions which was, if you saw $11 million or $12 million loss in FY15, and you're looking for a $7 million of savings, does that translate into sort of a $5 million loss? Apologize if I missed your answer to that.

Yes, that would be the assumption, if everything else was held constant. Flat sales and improved expenses by $7 million, yes, it would be somewhere around $3 million loss.

Okay. My question regarding -- just to jump on that in terms of international. You've lost pretax roughly over $20 million the last two years. You're looking for another loss this year.

I am just wondering, in terms of an investment like this, at what point in time would you guys feel like maybe we should put on the brakes and sort of bail temporarily, as opposed to continue to pushing forward, and just accruing these losses?

Well, when we assess our international operations, we have made an investment into the distribution footprint that we have on the ground there, and we have inventory and assets that are there. And so, we continue to evaluate that.

But for instance in the Ukraine, we are selling down on the amount of inventory that we have in country, and holding other inventory outside of the Ukraine. And so, we have to evaluate that, but there is an ongoing operation there, and we haven't been expanding the footprint, but we just evaluate that on an ongoing basis.

Okay. And in terms of the construction side of the business, outside of your oil and gas, you haven't touched much on that. You talked about how oil and gas has weighed on the overall business. But outside of oil and gas, how has that been trending?

Well, as we commented, we're seeing an uptick in used equipment valuations, and the margins in used, and the industry seems much healthier. In your large metro areas, there's just a lot of activity. If you go through a lot of these markets, you're seeing investment, you're seeing all kinds of building activity.

You're seeing cranes on top of buildings, you're just seeing commercial. You're seeing apartments, you're seeing hotels. You're seeing major industrials, you're seeing stadiums. You are just seeing a lot of activity in these metro markets, so that's a real positive.

The livestock piece, of which we have a lot of markets, that's been up positive to that sector. So outside of the energy piece, it's actually a fairly healthy industry right now.

Okay. And then, just lastly, Mark in terms of the floor plan interest expense. I was wondering if you could -- you gave us the average for the quarter. Wondering what that interest expense was trending at on a run rate at the end of the quarter, and what the interest bearing as a percent -- in terms of that 75%, what was that at the end of the quarter?

That's what it was -- at the end of the quarter, that's what I was referring to is the 75%.

Oh, okay (multiple speakers).

Yes, and as far as trending, so its been down now for the last couple quarters. July was kind of our peak there in our second quarter, and it's come down. I'm sorry -- it did go up a little bit in October.

Its been down from October. And I would anticipate that to continue to come down -- as fourth quarter was our big inventory reduction. Certainly, a portion of that was interest-bearing floor plan. So I would continue to expect a reduction to occur throughout FY16.

Right. So I guess what I was getting at, was that considering that you did reduce a lot of inventory in the fourth quarter, I would imagine that $5.1 million number, which was an average interest over the quarter, at the end of the quarter, I would imagine that the run rate was lower than the $5.1 million. So I was wondering if you had that number, that run rate at the end of the quarter on hand?

Oh no. I mean, I do, but we don't -- I don't give it by month or anything like that. But you're right. I mean, it would have started trailing down toward the end of the quarter as we sold inventory, and particularly in our December month. But, yes, so I mean, it is trending down.

Okay. Okay, thanks.

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

Hi, thanks. Sorry about that before. First, a clarification. If I heard you correct, we should expect inventory to go up, before it goes down this year? And also the cadence of adjusted profits?

Obviously, you said for full year, you expect adjusted profits to be positive. Do we start off with losses, and get profitable through the year, or do we expect the adjusted profits all year?

Yes. So you're correct, that with the cadence that we had in the inventory throughout the year last year, we would expect a small, some degree of increase here for the first, maybe second quarter. And then, starting to drop off third, and substantially in the fourth.

Regarding profitability by quarter, we don't give quarterly guidance. But for the first quarter, it will be our most difficult quarter, from a revenue standpoint. And it's before -- we've got tougher comps -- last year, it fell off quite a bit more in the third and fourth quarters last year.

So first quarter will fall off, and then we'll get some of that -- more of that parts and service into the spring and harvest, then we'll get more parts and service. So tougher in first quarter, better second, and third should be good, And then fourth quarter is kind of dependent on that equipment revenue coming in.

Okay, that's good. Thank you. And then, and just wanted to this -- getting a little bit further into the pricing pressure you are seeing on new and used, if you could delineate the two for us? How it's trending, give some color there? And then, are we expecting down pricing year-over-year for new and used in this fiscal year?

Well, first of all, we're seeing some fairly good stability in the new pricing out there, which actually benefits some of the late model used out there. So we looked at this, and actually beginning, I would say in calendar year -- in the third quarter of calendar year 2013, we really started addressing this used equipment, trying to get out in front of it.

So I think we were a little bit ahead of the game, and have been really proactive in trying to get this used inventory in line with the markets for both a pricing and a level standpoint, and I think we've been successful at that. So I think you're going to see some pressure.

Some of the lower end use seems to be good demand for that, and holding its prices pretty well. There again, and you take that fairly new equipment, that tends to be somewhat aligned with where -- what the new is so, then you've got that area in between. So yes, there is going to be pressure, and there is less demand for used, that does affect price.

So like I said, that's part of the business. I think we've done a good job of managing it, and understanding that. But as we saw less new, then also there's less used trade-ins coming in.

So we feel pretty good of the position we're in. We think we're in better shape than most of the industry is on that, and we've done a pretty good job and we expect to be able to manage through this next year with that, Larry.

Okay. That's helpful. Thank you. So I guess what I'm trying to get towards also is, is there any kind of industry discounting? So if you guys think you are in better shape than some of the other competitors out there? What is the reaction? Is there discounting, trying to get bulk sales, and are we seeing any kind of shifts in market share because of the competitive nature?

Well, again, there -- I think you're seeing some pretty good stability out there on the new side, which is a positive. And I think if you follow the main suppliers of farm equipment, you see what they're doing with some headcount reductions, and what they're talking about, their production levels. So I think that bodes well for keeping some stability in that new pricing.

So what you see out there is a typical marketing with the -- whether it be leasing or financing or some of those type of things out there, which is typical in all of the cycles. But no, I would say, you are seeing some real good stability on the pricing side.

Okay. So it sounds like it's still pretty rational, yes. And then, people aren't using price to try to shift market share at all at this point?

No, correct. Right. I think we're going out with the value of the product. Some of the new model introductions out there, some of the advantages we're seeing with some of the Tier 4 technology and the engines and the fuel economies.

And on the planter side, you are seeing some of the technology improvements. The joint venture with precision and Monsanto I think is a positive.

So you're seeing some of these things that is going to drive the business more so than just price. And I think that's a real positive, because it does, it really helps that late model use pricing out there.

Right. And at this point, are you guys [specing] any -- seeing these planters with precision planting implements or controls on them yet?

Well, I think you have to look at their announcement and their timing of introducing these models as we go along. But yes, its definitely, it's part of our [portfolio], now that we have got access to the precision, which is a real positive out there with our growers.

Okay. Thank you.

Unfortunately, that's all the time we have for questions today. So I would like to turn it back over to our speakers for any closing remarks.

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

That does conclude today's conference. We thank everyone again for their participation.