Titan Machinery Inc (TITN) 2016 Q2 法說會逐字稿

Good day and welcome to the Titan Machinery Incorporated second-quarter FY16 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Mills of ICR. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to the Titan Machinery second-quarter FY16 earnings conference call. On the call today from the Company are David Meyer, Chairman and Chief Executive Officer; and Mark Kalvoda, Chief Financial Officer.

By now everyone should have access to the earnings release for the fiscal second quarter ended July 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 www.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.

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 will 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 two questions and then rejoin the queue. The call will last approximately 45 minutes. David Meyer will provide highlights of the Company's second-quarter results and a general update on the Company's business, and then Mark Kalvoda will discuss the Company's financial results and the FY16 annual modeling assumptions. At the conclusion of our prepared remarks we will open up 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 second-quarter FY16 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we've provided a slide presentation which you can access on the Investor Relations portion of our website at www.titanmachinery.com.

If you turn to slide 3, you will see our second-quarter financial results. Revenue was $334 million, primarily reflecting lower agricultural equipment sales in North America as the segment continues to pace industry headwinds. We substantially completed the implementation of our previously announced realignment plan, and our second-quarter results benefited from cost structures that are better aligned with current sales volumes. We generated adjusted EBITDA of $9.8 million, and adjusted pretax loss was $500,000. These results were in line with our expectations and reflect the challenges in our agricultural business as well as pressuring results -- resulting from lower oil prices at a number of our construction locations and the positive results from our international business.

On today's call, I will provide an industry overview for each of our business segments. Mark will review financial results for the second quarter and first half of the year and discuss the status of our inventory reduction plan for FY16. We will then conclude with an update of our modeling assumptions for FY16.

Now I would like to provide some more color for you today on the agriculture and construction industries and international markets in which we operate. On slide 4 is an overview of the agriculture industry. We are experiencing good crop conditions in the majority of our footprint with yields projected to be better in the Western Corn Belt as compared to the Eastern Corn Belt.

The August WASDE report increased projected 2015 crop yields and raised the 2015/2016 projected inning stock which is reflected in lower commodity prices. A few weeks ago, the USDA updated its calendar year 2015 net farm income estimate. They now expect income to be down approximately 36% from last year compared to its previous estimate of a 31.8% reduction of net farm income.

The 2015 net farm income projection reflects a decline in crop cash receipts compared to last year led by a decline in corn of $7 billion. That continues to be a relative strength in the livestock sector. The lower net farm income continues to generate negative sentiment in the market and impact farmer spending, resulting in low end-user demand and high industry supply which reduces equipment sales volume, affects used equipment prices and compresses margins.

In summary, the agricultural industry continues to face a number of headwinds, and our near-term focus is to manage the controllable aspects of our business. Our realignment plan implemented at the beginning of this fiscal year has us positioned to deliver profitability on a non-GAAP basis this current fiscal year. Long-term, we remain very confident in our outlook for the Ag industry. Farmers who are being cautious with their spending today continue to carry strong balance sheets, and global trends indicate a strong long-term demand for agriculture commodities.

Now I would like to turn to the construction segment of our business. On slide 5, we provide an overview of the construction industry and our markets. Overall, construction industry demand is less than previously expected, reflecting the low commodity prices in both energy and agriculture partially offset by the continued demand for residential construction. The lower oil prices are negatively impacting both our equipment sales and rental. It's important to note that as the demand decreased in the energy markets, the industry began redistributing rental fleets and equipment inventory to surrounding regions. The result of this is not only lower demand in the energy markets, but also increased fleet size and inventory levels in other regions of Titan's footprint.

The challenges I spoke to in the agriculture industry overview are reducing demand from our agricultural customers for construction equipment such as equipment used for land improvements, grain and material handling. Residential construction continues to be positive in our markets, primarily driven by the stronger residential demand coming from our larger Metro markets. We believe new equipment inventory levels are trending up due to less new equipment demand than previously anticipated by the industry.

Despite the higher levels of new equipment, we are still experiencing strength in used construction equipment pricing throughout our footprint. The favorable pricing environment is resulting in higher used equipment margins. In summary, while we faced some challenges for our construction business, the real alignment and cost reduction initiatives we implemented have proven to be effective as industry conditions in our footprint have impacted our revenue and we have been able to maintain the stable pretax results in the segment. We expect that our construction business will be an important part of our long-term profitable growth.

On slide 6, we have an overview of the industry in our international segment consisting of Bulgaria, Romania, Serbia which are located in the Balkan region, and the Ukrainian market. This cereal grain harvest has been completed in our footprint with yields above the five-year average. Hot dry weather in late July and August, primarily in the Balkan region, has impacted fall crop development with an anticipated reduction in crop yields.

Similar to North America, lower global commodity prices are impacting customer sentiment and income in all our international markets which is reflected in reduced farmer spending. Offsetting some of the challenges, the European Union subvention funds are available in Romanian and Bulgarian markets. As you may recall, the subvention funds are monies the European Union has budgeted to support the investment in agriculture production in developing markets of Eastern Europe providing 50% to 70% of the cost of qualifying new equipment purchases.

Ukraine continues to experience a very challenging market environment. Limited credit availability and high interest rates are affecting all business throughout the country. However, the local currency remained stable during the second quarter. Equipment purchases continue to be restricted in the country due to limited credit availability to our customers. We are experiencing more demand for our parts and service businesses as customers need to maintain and repair their existing equipment fleet. It's important to note that machine used in the Ukraine for growing season is much higher than in North America, which is a key driver of our high-margin parts and service revenue on an annual basis.

I will now turn the call over to Mark to review our financial results, inventory reduction plan and modeling assumptions in more detail.

Thanks, David. Turning to slide 7, our total revenue for the FY16 second quarter was $334 million, a decrease of 25.9% compared to last year, primarily due to the lower same-store sales in the Ag and construction segments which reflect the challenges in both segments David previously mentioned and strong year-over-year comparisons in the construction segment. The decline in equipment sales of 31% quarter over quarter was higher than the overall decrease in revenues as equipment revenues are more affected by the current market conditions compared to our more stable and higher-margin parts and service business.

Our parts revenue decreased 12% in the quarter, and service revenue decreased 14.6%, primarily driven by the decrease in our Ag segment. The lower parts and service revenue in the Ag segment was the result of a decreased amount of customer preventative maintenance as well as reduced service business associated with the predelivery of sold, new equipment.

Our rental and other revenue decreased 16.8% in the second quarter, primarily due to the lower utilization and a reduced rental fleet rate reflecting the lower activity in our energy producing markets and the fleet relocation to the surrounding regions as David discussed earlier. Our rental fleet dollar utilization was 26% for the current quarter compared to 29.6% in the same period last year. In addition to the lower utilization, we reduced our fleet by $10.9 million in the current year.

On slide 8, our gross profit for the quarter was $62 million compared to $80 million in the same quarter last year, primarily reflecting the lower revenue I just discussed. Our gross profit margin was 18.6%, an increase of 90 basis points compared to the same quarter last year. The improvement in gross margin was due to a change in gross profit mix to our higher margin parts and service business compared to the prior-year period, partially offset by a decrease in equipment margins of 40 basis points.

Our operating expenses as a percentage of revenue in the second quarter of FY16 was 16.6% compared to 15.1% for the same quarter last year. The increase in operating expenses as a percentage of revenue was due to the deleveraging of our fixed expenses as total revenue decreased from the prior year. Although our operating expenses as a percentage of revenue increased, we decreased our operating expenses by $12.4 million or 18.3% primarily reflecting the impact of our first-quarter FY16 and FY15 realignments and the initiatives implemented in our international segment last year. We have reduced overall operating expenses to better align our cost structure with the current market conditions.

There was no notable impact from our non-GAAP adjustments in the current quarter. In the prior-year period, we recorded non-GAAP adjustments totaling $1.5 million, which included realignment and store closing costs of $200,000 and a Ukraine remeasurement expense of $1.3 million. Floorplan and other interest expense increased 40 basis points as a percent of revenue but decreased $763,000 or 9% on an absolute dollar basis. This reflects a decrease in our average interest-bearing inventory in the second quarter of FY16 which was partially offset by higher interest rates.

For the second quarter of FY16, we generated adjusted EBITDA of $9.8 million which compares to $14.9 million in the second quarter of last year. We calculate adjusted EBITDA by including our floorplan interest expense and excluding nonrecurring items such as remeasurement, impairment and realignment costs as we believe this better reflects the ongoing operations of our business. For the second quarter, we had a $500,000 adjusted pretax loss and our adjusted earnings per diluted share was breakeven. The difference in the pretax loss and breakeven earnings per share is due to the current-quarter income from international operations not being tax affected because of past net operating loss reserves. This compares to adjusted earnings per diluted share of $0.04 in the second quarter last year.

At the end of our slide presentation, we have included a reconciliation table to help illustrate the adjustments to our GAAP results. On slide 9, we have provided a six-month revenue analysis. The year-over-year changes for the six-month revenue analysis are similar to what I discussed for our second quarter.

On slide 10, you will see that our first six months results have similar year-over-year changes I discussed for our second quarter, the only notable difference being the non-GAAP adjustments. In the first six months of FY16, we recognized a $4.1 million charge primarily consisting of realignment costs of $1.5 million and $2.1 million from the balance sheet remeasurement impact of the Ukrainian currency devaluation. This compares to the $7.8 million non-GAAP adjustments for the first six months of the prior year, which consists of $3.4 million of realignment costs and $4.4 million of Ukraine currency measurement. Our adjusted diluted loss per share was $0.14 for the first six months of FY16 compared to an adjusted diluted loss per share of $0.03 in the prior-year period.

On slide 11, you will see an overview of our segment results for the second quarter. Agricultural sales were $209 million, a decrease of 31.5%, primarily reflecting a 29.9% decrease in Ag same-store sales which were impacted by the headwinds David discussed earlier. Our Ag segment had an adjusted pretax loss of $2.5 million compared to an adjusted pretax income of $6.6 million in the prior-year period. The primary factor impacting our Ag segment results were lower equipment sales and equipment margins due to less demand and an oversupply of equipment in the Ag industry. Ag segment pretax loss includes the benefit of our lower operating expenses, primarily reflecting cost savings associated with our realignment plan.

Turning to our construction segment, our revenue was $81 million, a decrease of 20% primarily reflecting a 17.8% decrease in construction same-store sales which were impacted by the factors discussed earlier. Adjusted pretax loss for our construction segment was $1 million compared to adjusted pretax loss of $400,000 in the same period last year.

In the second quarter of FY16, our international revenue was $43 million which was 0.4% decrease, in line with our international same-store sales which were down 0.4% compared to the prior-year period. Our adjusted pretax income was $1 million, a significant improvement compared to adjusted pretax loss of $3.7 million in the prior-year period, reflecting higher gross profit margins, lower operating expenses as a result of our cost savings initiatives implemented last year and lower floorplan interest expense due to reduced levels of equipment inventory.

On slide 12, we provide a six-month segment review. The factors impacting year-over-year changes for the six-month segment results are similar to what I discussed for the second quarter. Regarding six-month same-store sales, Ag same-store sales decreased 29.3% while construction same-store sales decreased 12.2% and our international same-store sales increased 3.7%. For modeling purposes, it's important to remember that we calculate same-store sales by including stores that were with Titan for the entire period of both fiscal years which we are comparing.

In other words, only stores that were part of Titan for the entire three months of the second quarter of FY15 and the second quarter of FY16 are included in the second quarter same-store comparison. The stores which were closed in the first quarter of FY16 are also excluded from this year's same-store sales calculation for both periods reported. In the second quarter of FY16, a total of six stores were not included in our second-quarter same-store sales consisting of four Ag stores and two construction stores. And for the first six months of FY16, a total of 14 stores were not included consisting of five Ag stores and nine construction stores.

Turning to slide 13, here we provide an overview of our balance sheet highlights at the end of the second quarter. As we have stated on prior calls in light of the headwinds we are currently facing in the Ag industry, improving our balance sheet remains one of our key areas of focus. We had cash of $95 million as of July 31, 2015. As we have discussed on prior earnings calls, we are using a portion of our cash to reduce interest-bearing floorplan payable and other debt to deleverage our balance sheet.

Our equipment inventory as of July 31, 2015 was $774 million, a decrease of 22% compared to our equipment inventory of $996 million as of July 31, 2014. The inventory change includes a decrease in new equipment of $209 million and a decrease in used equipment of $13 million from the end of the second quarter of FY15. In a few minutes, I will provide an update on our anticipated full-year inventory reduction for FY16.

Our rental fleet assets at the end of the second quarter were $137 million compared to $148 million at the end of FY15. A portion of this reduction was related to the de-fleeting in stores impacted by energy-related activity. As of July 31, 2015, we had $622 million of outstanding floorplan payables on $1 billion of floorplan lines of credit. Total liabilities to tangible net worth improved to 2.5 as of July 31, 2015 from 3.3 as of July 31, 2014. The year-over-year reduction in inventory and associated lower levels of floorplan payables at the end of our fiscal second quarter of 2016 improved our total liabilities to tangible net worth ratio.

Slide 14 provides an overview of our cash flow statement for the first six months of FY16. The GAAP reported cash flow from operating activities for the period was $185.6 million, primarily reflecting proceeds from manufacturer of floorplan financing of inventory. We believe including all equivalent inventory financing including non-manufacture floorplan activity as part of our operating cash flow better reflects the net cash flow of our operations.

In addition, as I mentioned earlier, we are using a portion of our operating cash flow and cash in our balance sheet to reduce our floorplan payables and other debt. Our adjustment for non-manufacturer floorplan net payments shows a reduction of $191 million. We monitor interest rates and manufacture incentive programs on inventory and the associated various floorplan credit facilities on a continual basis. During the second quarter, we utilized additional manufacturer floorplan on our inventory tied to manufacturing incentive programs which resulted in reduced, non-manufacturer inventory financing.

To accurately reflect cash from operating activities, we are adjusting our cash flow to reflect a constant equity in our equipment inventory. By providing this adjustment, we are able to show cash from operating activities exclusive of changes in equipment financing decisions. The equity in our equipment inventory increased 1.3 percentage points during the six-month period and represents a $9.8 million use of cash. In line with our cash strategy, we will continue to increase our equity and equipment inventory as we generate operating cash flow. Making these adjustments, our adjusted cash flow provided by operating activities was $4.7 million for the six months ended July 31, 2015.

Turning to slide 15, I would like to provide an update on our equipment inventory. Similar to what we provided in the past you will see a chart outlining our equipment inventory position for the last four years as well as our first two fiscal quarters and ending inventory target for FY16. We continue to anticipate a $150 million reduction of our equipment inventory in FY16. When you look at last year's quarterly equipment inventory level, you will notice a trend of increasing quarterly inventory compared to and essentially flat inventory trend through the first two quarters of this year. We expect a continued decrease in equipment inventory during the third and fourth quarters resulting in a stronger balance sheet.

Turning to slide 16, 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 its ratio from a high of 3.3 in the second quarter of FY15 to 2.5 at the end of the current quarter. Based on a consistent level of tangible net worth, we continue to expect further to reduce the ratio to approximately 1.9 at the end of FY16. We expect the timing of this decrease to closely track with the anticipated equipment inventory reduction primarily occurring in the fourth quarter. Given the current market conditions, particularly in the Ag sector, we believe it is prudent to delever our balance sheet in order to best position the Company to capitalize on long-term opportunities.

Slide 17 shows our FY16 annual modeling assumptions. We are updating the modeling assumptions that we previously provided. We continue to expect our Ag same-store sales to decrease 20% to 25%. This primarily reflects lower anticipated results from our equipment revenue and to a lesser extent a decrease in our parts and service revenue.

We now expect both our construction same-store sales and international same-store sales to be flat to down 5%. Although first-half Ag and construction same-store sales were below our annual modeling assumptions, it is important to remember that Ag and construction faced stronger year-over-year comps for the first half of FY16. We continue to model equipment margins for the full year to be in the range of 7.7% to 8.3% and expect to be profitable on an adjusted diluted EPS basis for FY16.

While market conditions remain challenging, we continue to manage the controllable aspects of our Company that include the cost reductions we have implemented: continued equipment inventory reductions, improvements in our international segment and total liabilities to tangible net worth improvement.

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

(Operator Instructions)

Steve Dyer, Craig-Hallum.

As you look at your inventory reduction, the vast majority of that comes from new with used levels have been pretty much flat for the last probably about three years. Is this just a comfortable level of used inventory across your network or is that stuff that's tough to move at this point? Maybe a little color on the balance there.

Steve, we've had some pretty aggressive retailing of our new equipment, and there's a high percentage of new sales that involved a trade-in. So as you see this accelerated new retail and full dollars of newer, then you're going to have that much use so there's always going to be a lag. As used keeps coming down, at some point time then used will track with that. But we need to get the new down to certain level, then there's a lag time then the used come in right after that.

That's helpful. Just as you look across your store network either construction or Ag, are there any additional rooms there for -- room for rationalization, et cetera? Or are you at a level where you think this is good given the demand environment?

We continue to evaluate that all the time. I think we put a lot of thought into what we did this spring, and we feel pretty comfortable where it is today. As I say, we continue to evaluate that on ongoing businesses as the industry continues to consolidate.

Okay, I will hop back in the queue, thanks.

Rick Nelson, Stephens.

Can you remind me where you sit with the debt covenants? I believe there's some pretax requirements.

Sure, Rick. Mark here. Our pretax was on an adjusted pretax basis for the second quarter to date, it was $9 million was the covenant, $9 million loss on a pretax adjusted basis. And where we came in was at about a $6.8 million, just under a $7 million pretax [loss]. Going forward for the third quarter on a nine-month basis, it's a profit of $1 million. And by the end of the year again on adjusted pretax basis, the covenant is $10 million, pretax.

So if my math is correct, you need an $8.7 million pretax profit in the third quarter to remain compliant and then obviously $10 million for the year. How do you feel about your ability to renegotiate those covenants if need be?

I think, first of all, going into the back half of the year, we feel pretty good given in the third quarter we've got some -- it's a seasonally strong period for some aspect of all of our segments of our business. We've got the harvest, which draws -- just brings in a lots of parts and service which is that high-margin business that happens in the third quarter which helps profitability greatly as well as on the construction side, rental. That's the peak for our rental business. And as you know, any incremental dollar through rental revenue generates a lot of profit, 85% of it typically goes to the bottom line. In international with their harvest over there as well, they tend to have a strong third quarter as well. So we are moving into a seasonally strong period. That being said, if we do run into any type of challenges with the covenant, as in the past, we've successfully negotiated that with the banks. And with some of the balance sheet strengthening that we're doing and the deleveraging, that makes those conversations much easier to have.

Got you. Thanks a lot and good luck.

Brent Rystrom, Feltl.

A quick question on the inventory. If you draw down by $150 million and you've got 20% equity in it, that implies another $30 million of cash on the balance sheet all other things being equal by the end of the year?

Yes, that's correct. As we said, we're going to take the cash and create more equity into the inventory that we do have on the books. Yes, that's looking at it from an apples to apples basis, that would be correct.

From an overview perspective, over the last year you've talked about trying to change your customer, your agriculture customer buying patterns where you want to shift more purchases to product that's either pre-ordered or sold while it's either being manufactured or in transit. Can you give us an update on your progress on that topic?

We continue -- we think that presell long-term that's the best go to market strategy. I don't think it's a matter of changing our customers. I think we've got to make sure that we understand what they're buying needs are and what their need for their farm operations.

I think you are going to see a trend away from some of these one-year rolls where customers are trading the whole fleets off. I think we saw that when there was a big demand for equipment especially the used. We were able to do some of that. From an industry standpoint, I think you saw an increase in that. You would probably go back to customers owning their equipment for two or three years and you're getting the trade cycle more back to a normal situation. I think there's some customers that bought late model used over the last couple of years. They maybe switched to a new piece. I think they're going to go back and buy a late model used again. I think you will see some of those trends from an economic standpoint really driven by customer needs for their operation and looking at better economics. I think you will see those trends go back to a more normal situation.

One quick follow-up on that. Does Case allow you to do one year rolls?

It's up to us. They don't control that. We control that as a detail, so it's totally up to us. I think there is room in the marketplace for some of those. I think it has to be managed though.

Neil Frohnapple, Longbow Research.

Within the construction segment, you called that industry new equipment inventory levels are increasing. Do you think this will be short-lived, or do you think this could start negatively impacting used equipment pricing which you guys continue to indicate remains strong?

There continues to be positives. We are seeing especially in the Metro markets in some of our larger markets, for example the Phoenix markets, Denver markets. We are seeing some residential housing starts, so there are some real positives out there. From an industry standpoint, we are seeing what the price of oil coming down that is affecting the industry. At the same time, investment in infrastructure, the residential, some of the commercial that's going on seems to temper that a little bit. So I think there's a little bit of wait-and-see, but I don't think it's going to be drastic. But again, I think the industry is off a little bit more than everybody anticipated at the beginning of the year. I wouldn't say it's something that's alarming at this point.

Okay, great. Mark, the decline in dollar utilization within the rental business, were rental rates really down year over year, and if so, are you able to quantify the magnitude or was decline mainly time utilization driven and moving fleet around?

For us, it's by far the time utilization. Our pricing has remained relatively constant. Each region it might be just a little bit different, but overall pricing has remained relatively constant and a drag on a dollar utilization is coming from time utilization down.

Okay, and then just a quick follow up. The decrease in the size of your rental fleet. Is the rental fleet right sized now, or do you anticipate further reducing the size of the fleet in the coming quarters?

I think what we see for right now is we are constantly monitoring it based on the situation that we see out there in our markets. For the time being, think we've got it pretty close to where we need it to be. With that, there will always be some level of de-fleeting but then fleeting back up. For the most part, this is the size of fleet that we are expecting for the remainder of the year.

Mig Dobre, Robert Baird.

When I'm looking at your guidance, you brought down same-store sales just slightly in construction and international. The other assumptions are pretty much the same, so wondering what gives here in order for you to maintain a profitability assumption. And maybe related to this, Mark, how should we think about the SG&A run rate to the back half of the year? That number continues to surprise me positively in terms of what you were able to do on a cost side.

Like you said, there hasn't been a lot of changes. We did tweak down both construction. It's a little softer given some of the energy situation and international with some of the weather over there affecting that fall harvest. I guess our assumptions really haven't changed too much from operating expense standpoint. It does get a little bit higher in the back half of the year I believe just due to some of the variable expenses like commission with higher level of equipment sales going on. So if you adjust that variable expense and look at where the first half of the year, more so maybe even the second quarter on some of those more fixed expenses, that should get you close by the end of the year.

I'm looking to clarify here. If I'm looking at SG&A, your average was about $56 million for the last six months per quarter. You're saying there is going to be a seasonal uptick in the back half, but can you help us in terms of understanding the magnitude?

I would say from that average of $56 million, it's a relatively small uptick for the back quarters. And it's driven by that higher commission expense, within $2 million, $3 million, $4 million, something like that for the last two quarters.

That's helpful. My second question, it has to do with price progression through the quarter. What we've heard is when corn spiked earlier in the year, that really started to have a positive impact on used Ag prices. Have you guys seen any of that? Is that part of the reason why we are seeing pretty strong gross margin and equipment this quarter? And now that corn has given up a lot of those gains, are we starting to see softness creep back in?

There was some optimism towards the end of June, first part of July on some of these used equipment. I think right now even though there is a little bit of a spike there, I think the full year there's been a level of conservatism by both our Ag customers and the Ag lenders out there carrying through. We're considering to look at that, it is not -- we're not being over optimistic that anything is going to happen from the price side, so just manage our business aligned with commodity prices where we are seeing them today. The positive out there is that the crops and our footprint right now Nebraska, Iowa, North, South Dakota, Minnesota really look good. I think that's a positive and you see some of the older equipment is actually having some pretty good strength in the pricing. New equipment pricing -- there's some discipline in that. Like I say, I think the main thing is not to get over optimistic that we are going to see any big jumps in prices and manage this business under this current level of commodities.

Joe Mondillo, Sidoti and Company.

I had a question regarding the agriculture segments. In the last two quarters of last year, could you remind me why the pretax earnings fell sequentially in the third and fourth quarter? And do you anticipate that same trend this year?

Last year, a big driver of what happened on Ag was the same-store sales as the lower corn prices really took hold. Our third quarter last year same-store sales for our Ag segment was off 24%. For the fourth quarter, it was off about 38%. These are some of those easier comps that we're talking about when we're talking about the back half of the year.

In regards to revenues, yes, with those easier comps in the back half of the year and with realignments, particularly this last realignment that took place, we don't expect earnings to have that falloff in earnings like we did last year within the segment. We've gotten the expenses down, and we don't expect as much of a decrease in that revenue reduction.

In regards to the fourth quarter, you go back a few years. Fourth quarter used to be our strongest quarter. We don't see that as much anymore because of that fourth quarter was heavily reliant on equipment sales. With equipment sales being that most volatile piece that's off right now, we don't see that being the most profitable quarter. That's shifted to that third quarter with the harvest in there and the parts and service associated with that harvest. Hopefully that helps, Joe.

That was very helpful. Just a second question regarding the construction segment and the guidance that you provided. It still seems like -- it sounds like the second quarter came in below your expectations. You tweaked the guidance down a little bit in terms of same-store sales. Having said that, the same-store sales guidance still implies it looks like a relatively pretty strong rebound in the back half of the year if I'm doing the math correctly. Are you anticipating any inflection point here going into the back half? Because it looks like you are looking for a pretty good rebound in regard to the same-store sales.

Here again, it's similar to what we just talked about in the Ag side where last year those first two quarters were very difficult comps for the construction segment. They were both around 25%, 26% same-store sale comps last year in the first and second quarter. You get to the back half of the year where it was at about 11% last year in the third quarter and about 3% in the fourth quarter. So much easier comps, and again it's a higher seasonal period, third-quarter being good rental activity, a lot of construction jobs going on in the fourth quarter being better from an equipment standpoint with year-end buying. The inflection is just much easier comps compared to the prior year combined with some of those realignment adjustments that we had earlier in the year.

It still seems like you have to get to -- I think if I'm doing the math correctly -- a 10% growth rate to get to the high end of the flat same-store sales for the year.

I think my numbers show a little bit lower than that, but we've got that zero to 5% down. So I think you are a little high on that.

But to get to the 0%, you need at least mid to high single digits same-store sales growth as opposed to the 10% to 12% decline that we saw in the first half of the year.

We would need positive same-store sales to get to that.

Tyler Etten, Piper Jaffray.

I was just wondering, given the difficulty with grain prices not cooperating with farmers, how long do you think it will be before we see a more normalized industry wide inventory workdown?

When you talk about normalized, I believe the production you're going to start seeing coming from manufacturers is going to be somewhat consistent with the commodity prices and projections of a more normalized situation. I think it's a matter of moving existing inventory on hand and then making sure our orders are less than retail and so we can get our new machinery and used machinery to level what we feel is in that normal situation.

With used pricing, you guys obviously have a lag in the used equipment and have to deal with trade-ins. Where are we sitting on used pricing compared to last year in terms of a percent basis?

I think last year we saw the big change. We bought a lot of used equipment in the year before that, six to nine months before that. That's where we saw -- we started seeing a lot of compression on the used equipment. What we have now has gone through a period where we had lower corn prices for quite some time and lower expected net farm income. So I think that's -- it's running its course unless we take another level down here in some of the commodity prices. I think it's where we are at is I think we're starting to trend better from a year ago just because we've gone through a good part of the cycle. So if the cycle trends down from lower levels from where it's at today, we could see some additional pain, maybe more than last year, but if it stays relatively steady, we should be on the back side of that.

Larry DeMaria, William Blair. That question has been withdrawn and we have no further questions. I would now like to turn the conference back over to Management for any additional or closing remarks.

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

This concludes today's conference. Thank you for your participation. You may now disconnect.