Titan Machinery Inc (TITN) 2016 Q3 法說會逐字稿

Good day and welcome to the Titan Machinery Incorporated third-quarter FY16 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 the Titan Machinery third-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 third quarter ended October 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. The presentation is directly below the webcast information in the middle of the page.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them. These statements are based on current expectations of management and involve inherent 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 a reconciliation of these non-GAAP measures for today's release and have provided as much detail as possible on any adjustments 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 third-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 third-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 a quick overview of our third-quarter financial results. Revenue was $345 million, primarily reflecting lower agricultural equipment sales in North America as this segment continues to face industry headwinds. Those are also impacted by lower than anticipated revenue contribution from our parts and services business.

Farmers throughout our key market experienced very favorable harvest conditions, which resulted in a relatively fast harvest requiring minimal equipment repairs. Our third-quarter sales were also impacted by lower construction sales, resulting from lower oil prices and reduced demand for construction equipment from agricultural customers.

As we navigate the challenging business environment, we have focused on managing our expenses and other controllable aspects of our business. Our third-quarter results benefited from a cost structure that is better aligned with current sales volumes, reflecting the implementation of our previously announced realignment plan.

We generated adjusted EBITDA of $17.5 million, and adjusted pretax income was $6.9 million, an improvement compared to $6.2 million in the third quarter of last fiscal year. Lower operating and interest expenses enable us to increase our adjusted diluted earnings per share to $0.20 in the third quarter of FY16.

On today's call, I will provide an industry overview for each of our business segments. Mark will review financial results for the third quarter and first nine months of the year and update you on the status of our inventory reduction plan and balance sheet deleveraging progress for FY16. We will then conclude with an update of our modeling assumptions for FY16.

I'd 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.

Crop conditions for the fall harvest were good across our key markets, and as I stated earlier, the harvest was relatively quick and easy for most of our customers, which required minimal equipment repairs. The favorable fall conditions enabled our customers to finish their fall fuel preparations, which positions them well for spring planting. With these ideal fall conditions, many of our growers experienced significantly less drying, tillage and harvest related cost.

Yields across our footprint were average to above average, and in some markets, our customers reported record yields. These excellent yields combined with the lower harvest cost will benefit our customers' current-year probability and balance sheet. While we do not expect strong buyer demand in the near-term quarters, the ongoing financial health and balance sheet strength of our farmer customer provides stability in our markets and long-term opportunities for equipment purchases.

Lower commodity prices throughout the industry continue to adversely impact our end-user demand, which is reflected in the most recent USDA projected net farm income. Last week, the USDA updated its calendar year 2015 net farm income estimate; they now expect income to be down approximately 38% from last year compared to its previous estimate of a 36% reduction in net farm income. This is the second straight year of a material decline in net farm income since 2014 decreased 27% compared to 2013.

The 2015 net farm income projection reflects a decline in crop cash receipts compared to last year, led by a decline in corn of approximately $8.6 billion. In addition, livestock cash receipts are expected to be down 12% on a year-over-year basis. The lower net farm income continues to generate negative sentiment in the market, which has impacted farmer spending, resulting in low end-user demand and high industry supply, which reduces equipment, sales volume, affects used equipment prices and compresses margin.

Legislation is currently pending on Section 179 and bonus depreciation. Similar to last year, we anticipate that if it's passed, it may be finalized too late in the year to materially benefit our fourth-quarter equipment revenue. In summary, the agricultural industry faces a number of headwinds, and our near-term focus is on cost containment and inventory reduction to best position our business and infrastructure for current industry conditions.

Our financial results reflect the benefit of our realignment plan and inventory reduction plan. Long-term, we remain very confident in our outlook for the ag industry.

Although farmers are operating with a cautious sentiment in the environment, they continue to carry strong balance sheets, and global trends indicate a long-term demand for agricultural commodities. We will be well positioned to return to growth when improvements to the ag cycle begin.

Now I'd like to turn the call to construct a segment of our business. On slide 5, we provide an overview of the construction industry and our markets.

Overall, construction industry conditions remain challenging in our market and continue to be impacted by lower oil prices and reduced construction demand from agricultural customers. Year-over-year oil prices have dropped by approximately 42%, which is negatively impacting both our equipment sales and rental.

As I discussed on our previous earnings call, earlier this year, the recruitment industry began redistributing rental fleet and equipment inventory to surrounding regions. The ongoing result of this does not only lower the demand in the industry market, but also margin pressure has resulted in 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 industry new equipment inventory levels are trending up due to the less new equipment demand than previously anticipated by the industry. Similar to what I discussed on our ag industry overview, we also do not anticipate Section 179 and bonus depreciation to materially benefit our fourth-quarter construction equipment revenue.

In summary, while our construction businesses continue to be impacted by industry headwinds, we improved year-over-year construction pretax income in the third quarter, which highlights the positive impact from our realignment and other cost-saving initiatives. We've improved our cost structure, and long-term we feel good about our construction footprint, which has us well positioned for future 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. The fall harvest has been completed in our footprint with reduced yields due to late-season hot dry weather primarily in the Balkan region. The winter wheat and canola crops which are planted in the fall are also impacted by the dry conditions and potentially could have lower yields next year.

Similar to North America, lower global commodity prices are impacting customer sentiment and income in all international markets, which is reflected in reduced equipment demand. Offsetting some of the challenges, the European Union subvention funds are available in the Romanian and Bulgarian markets.

As you may recall, the subvention funds are monies the European Union has budgeted to support investment in agricultural production in developing markets of Eastern Europe, providing a 50% to 70% of the cost of qualifying new equipment purchases. Ukraine continues toe experience a challenged marketing environment. High interest rates and limited credit availability continue to impact end-user demand. The local currency remained relatively stable in the third quarter.

We continue to experience demand for our parts and service business as customers need to maintain and repair their existing equipment fleet. It is important to note that machine usage in Ukraine for growing season is much higher than in North America, which is a key driver of higher margin parts and service revenue on an annual basis.

Our international segment pretax income improvements reflect the benefits of steps taken to improve profitability, including reducing our operating expenses, lowering our equipment inventories which will reduce our (inaudible) interest expense. This enables us to offset lower international revenue and achieve international pretax income for the third quarter.

Before I turn the call over to Mark to review our financial results, inventory reduction plan and modeling assumptions in more detail, I'd like to personally thank all of our employees for your efforts, hard work, dedication and ongoing ability to meet the needs of our customers. Mark?

Thanks, David. Turning to slide 7, our total revenue for the FY16 third quarter was $345 million, a decrease of 30% 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.

Equipment sales declined 37.2% quarter over quarter. Equipment sales reflect the impact of the lower net farm income and conservative customer sentiment that David previously discussed.

Our parts revenue decreased 8.5% in the quarter, and service revenue decreased 19.6%. These declines were greater than we anticipated and were primarily due to the relatively early and easy harvest, which required less repairs by farmers across the upper Midwest. In addition, we continue to experience lower warranty and predelivery service work as a result of lower equipment sales.

Our rental and other revenue decreased 19.7% in the third quarter, primarily due to the lower utilization and a reduced rental fleet, reflecting the lower activity in our energy producing markets and in the industry fleet relocation to the surrounding regions as David discussed earlier. Our rental fleet dollar utilization was 29.6% for the current quarter compared to 33.6% in the same period last year. In addition to the lower utilization, we reduced our fleet by $13.5 million compared to the end of the same quarter last year.

On slide 8, our gross profit for the quarter was $67 million compared to $85 million in the same quarter last year, primarily reflecting the lower revenue I just discussed. Our gross profit margin was 19.5%, an increase of 230 basis points compared to the same quarter last year.

The improvement in gross margin was due to a larger percent of revenue coming from our higher-margin parts business compared to the prior year period, as well as an increase in equipment margins of 70 basis points due to reduced volatility of commodity prices compared to the prior-year period. As you may recall, last year during the second and third quarter, corn experienced a sharp price decline which pressured our equipment margin.

Our operating expenses as a percentage of revenue in the third quarter of FY16 was 15.5% compared to 14.1% for the same quarter last year. Although our operating expenses as a percentage of revenue increased due to the lower revenues in the current quarter, we decreased our operating expenses by $16 million or 23% on an absolute dollar basis, primarily reflecting the impact of our first-quarter FY16 realignment and other initiatives including our international segment cost reduction implemented during the fourth quarter of last year. Our reduced operating expenses better align our cost structure with the current market conditions.

In the third quarter, we recorded non-GAAP adjustments of $1.2 million, which primarily reflects the $1 million write-off of debt issuance cost associated with amending our credit facility. In the prior-year period, we recorded non-GAAP adjustments of $0.5 million which related to Ukraine remeasurement expenses.

Floorplan and other interest expense as a percent of revenue increased 70 basis points due to the lower revenue in the current quarter decreased $1.4 million or 16% on an absolute dollar basis, excluding the $1 million write-off of debt issuance costs. This reflects a decrease in our average interest-bearing inventory and a reduction in our long-term debt as compared to the third quarter of last year.

For the third quarter of FY16, we generated adjusted EBITDA of $17.5 million, which compares to $19 million in the third 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 third quarter, we recorded adjusted net income of $4.2 million or adjusted earnings per diluted share of $0.20. This compares to adjusted net income of $2.9 million or adjusted earnings per diluted share of $0.14 in the third quarter last year.

The increase in adjusted net income and earnings per share reflects the benefit of our reduced operating expenses, as well as progress on our inventory reduction plan, which has lowered our floorplan interest expense. 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, you will see an overview of our segment results for the third quarter. For your reference, we have included a slide in the appendix of our presentation that provides more detail on same-store sales and same-store gross profit, which are primary factors of our segment results.

Agricultural sales were $411 million, a decrease of 38.1%, primarily reflecting a 37.4% decrease in ag same-store sales which were impacted by the headwinds David discussed earlier. Our ag segment had an adjusted pretax income of $4.3 million compared to an adjusted pretax income of $6.1 million in the prior-year period. The ag segment results reflect lower equipment sales as well as lower parts and service revenue due to the early and fast fall harvest, partially offset by improved equipment margins, reduced operating expense and lower floorplan interest expense.

Turning to our construction segment, our revenue was $87 million, a decrease of 11.4%, primarily reflecting an 8.3% decrease in construction same-store sales, which were impacted by the factors we discussed earlier. Adjusted pretax income for our construction segment was $1.3 million compared to breakeven in the same period last year. The construction segment results reflect our reduction in operating expenses, partially offset by lower overall revenue.

In the third quarter of FY16, our international revenue was $47 million, which was a 12.6% decrease. Our international revenue was negatively impacted by the euro to US dollar exchange rate difference and by lower commodity prices.

Our adjusted pretax income was $0.5 million, an improvement compared to adjusted pretax loss of $0.9 million in the prior-year period, reflecting reduced operating expenses as a result of our cost savings initiatives and benefit of the euro to US dollar exchange rate. In addition, the improved results reflect lower floorplan interest expense due to reduced levels of equipment inventory.

On slide 10, we've provided a nine-month revenue analysis. The year-over-year changes for the nine-month revenue analysis are similar to what I discussed for our third quarter. As you can see, our high-margin parts and service perform better year over year than compared to our equipment revenue.

On slide 11, you also see that our first nine months results have similar year-over-year changes that I discussed for our third quarter. A notable difference is the non-GAAP adjustments. In the first nine months of FY16, we recognized a $5.4 million adjustment compared to an $8.3 million non-GAAP adjustment for the first nine months of the prior year. Our adjusted diluted earnings per share was $0.06 for the first nine months of FY16 compared to an adjusted diluted earnings per share of $0.11 in the prior-year period.

On slide 12, we provide a nine-month segment overview. The factors impacting year-over-year changes to the nine-month segment results are similar to what I discussed for the third quarter.

Regarding nine-month same-store sales, ag same-store sales decreased 32% -- 32.1% while construction same-store sales decreased 10.8% and our international same-store sales decreased 3.2%. 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.

Turning to slide 13, here we provide an overview of our balance sheet highlights at the end of the third quarter. As we have stated on prior calls, in light of the headwinds we are currently facing, improving our balance sheet remains one of our key areas of focus. And we are pleased with the progress we have made in the first nine months of FY16.

We had cash of $78 million as of October 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 October 31, 2015 was $716 million, a decrease of $217 million or 23% compared to our equipment inventory of $933 million as of October 31, 2014. The inventory change includes a decrease in new equipment of $200 million and a decrease in used equipment of $17 million from the end the third 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 third quarter were $138 million compared to $151 million for the end of the same period last year. A portion of this reduction was related to the de-fleeting in stores impacted by a reduction in energy-related activity.

As of October 31, 2015, we had $549 million of outstanding floorplan payables on $1 billion of floorplan lines of credit. In the third quarter, we amended our $362 million credit facility with a group of banks led by Wells Fargo. The new credit facility reduced interest rates and provides for a secured credit facility in an amount up to $350 million consisting of $275 million floorplan facility and a $75 million working capital revolving credit facility.

In addition, the amended credit agreement removed certain financial covenants. We feel comfortable that we will be in compliance with the agreement for the foreseeable future.

Total liabilities to tangible net worth improved to 2.2 as of October 31, 2015 from 3.2 as of October 31, 2014. The year-over-year reduction in inventory and associated lower levels of floorplan payables at the end of our fiscal third quarter of 2016 improved our total liabilities to tangible net worth ratio.

Slide 2014 provides an overview of our cash flow statements for the first nine months of FY16. The GAAP reported cash flow from operating activities for the period was $198.8 million, primarily reflecting proceeds from manufacturer of floorplan financing of inventory. We believe including all equipment inventory financing including non-manufacturer 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 $201 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 began to utilize 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 adjust our cash flow to reflect the constant equity in our equipment inventory. By providing this adjustment, we are able to show cash from operating activities exclusive of changes in equipment inventory financing decisions.

The equity in our equipment inventory increased 5 percentage points during the nine-month period and represents a $35.4 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 and reduce interest-bearing floorplan payable. Taking these adjustments, our adjusted cash flow provided by operating activities was $32.9 million for the nine-month period ending October 31, 2015, a $48 million improvement compared to the same period last year.

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 three fiscal quarters and ending inventory target for FY16.

We continue to anticipate a $150 million reduction of equipment inventory in FY16. As you can see, we reduced our inventory in the third quarter, and we expect a continued decrease in equipment inventory during the fourth quarter 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 as well as our first three fiscal quarters and ending target for FY16. Given the current market conditions, we believe it is prudent to delever our balance sheet in order to best position the Company to capitalize on long-term opportunities.

This chart shows a notable improvement in this ratio from a high of 3.3 in the second quarter of FY15 to 2.2 at the end of the current quarter. Based on a consistent level of tangible net worth, we continue to expect to further reduce the ratio to approximately 1.9 at the end of the FY16 as we decrease our inventory and associated floorplan payable.

Slide 17 shows our FY16 annual modeling assumptions. We are updating the modeling assumptions that we previously provided. As David discussed, industry conditions are more challenging than we had anticipated.

We now expect our ag same-store sales to decrease 28% to 33% compared to our previous assumption of a decrease of 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 our construction same-store sales to decrease 8% to 13% compared to our previous assumption of flat to down 5%. We are modeling international same-store sales to be the same as previously expected, flat to down 5%. We continue to model equipment margins for the full year to be in the range of 7.7% to 8.3%.

Due to a more challenging environment than previously expected, we believe we will have an annual loss in FY16 on an adjusted diluted earnings per share basis despite an expected improvement in the fourth-quarter FY16 results over the fourth quarter of FY15. We remain focused on taking necessary steps to manage through the challenging operating environment. In the fourth quarter of FY16 and next fiscal year, we will continue to benefit from our improved cost structure, ongoing inventory reduction which will continue to generate strong adjusted cash flow as well as other actions that we have taken over the past year designed to improved the performance of our overall business.

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

Thank you.

(Operator Instructions)

Steve Dyer, Craig-Hallum Capital Group.

It is Greg Palm on for Steve today. Thanks for taking our questions.

Maybe just starting out with a general question on the environment, ag has been weak for some time, and everyone is trying to figure out how far we are from the bottom. Anything changing in terms of sentiment or order patterns as you talk to your partners, and what are you hearing from your customer base?

Our customers, obviously even in the good times sometimes the farmer customer is always paying too much taxes or this or that. But overall, we are fortunate I think in a lot of our markets to have really good deals this year. When you are putting the bushels in, I think there are some positives there.

But I think they're really spending some hard time looking at the balance sheet and looking at their capitalization, looking at their debt and working with their bankers sorting through this, doing projections for next year and then acting like business people. But like I said in my comments on their balance sheet spend, it still remains strong, they got some good bushels this year and I think it is just navigate through this year.

So I don't see a big change right now. Overall I think they have had some good years under their belt, and I think overall as a group they feel pretty good about things.

Okay. Good color.

And as it relates the realignment plan, you've done a great job given the current environment. Is there still room for additional cuts, or is this a good level given where we are at in the environment?

Well, we continually look at our expenses on an ongoing basis, we look at our footprint optimization, and I think that is important and in an ongoing effort. And definitely I think there are some things we can do and probably need to do.

Okay. Thanks. I will hop back in the queue.

Rick Nelson, Stephens.

Can you talk about the amended credit agreement and what it means in terms of covenants, particularly that pretax income requirement? I think that the old covenant was $10 million?

Yes. So overall, two major points about the new credit facility. One is what you are asking about in the covenant, and with this new line of credit, it doesn't have any what I would call direct financial covenants. So there is no pretax income covenant, the $10 million covenant is no longer in place under this agreement.

The only thing it does contain is a springing fixed charge coverage ratio if we finance at a higher level of borrowing base, which we are well below today. That fixed-charge coverage ratio is 1.1, and think we need to maintain at greater than 1.1, which we are well over today. But again, that is only in a springing situation.

Secondly, the other big thing is just lower interest rates. It's just about, not quite, but just about 100 basis points lower interest rates than what we had in our previous agreement.

Thanks for that, Mark. What are the signs that you would look to in the center to start acquiring other stores during this downturn?

Given our focus on quality ag acquisitions that are accretive to earnings, we continue to take a long-term view on investing in high potential ag markets. And in this environment, we anticipate favorable pricing on our acquisitions. We think there is going to be another round of user consolidations, but today we're focused on strengthening our balance sheet and operating improvements which position us well as future acquisition growth opportunities, Rick.

Okay. Got you. Thanks and good luck.

Mig Dobre, Robert W. Baird.

Good morning. So John Deere just very recently called for North American industry volumes -- in ag, that is -- to be down 15% to 20% next year and real crop where you, arguably speaking, have a little more exposure to be down well above that.

So I'm looking to see what your thoughts are versus Deere's at this point, and back to a question that was already asked. If Deere's assessment of the next year is correct, then how are you thinking about the cost structure, and how should we be thinking about your ability to pull cost levers into next year?

First of all, we haven't given -- we are not going to give guidance for next year. We typically do our forecast after our Q4 year-end earnings release. So in talking about our business, since we did much of our rightsizing in the first and second quarter of the current fiscal year end right now, in our next fiscal year, will see a full 12-month benefit in 2017 from some the rightsizing we did this year.

So that is going to help. As I told Rick, as we continue to look at our store optimization and expenses on an ongoing basis, but another big item is we're boosting our inventories down we expect floorplan interest to be down next year over this year too, which is going to be a big item.

Okay. But you are not in a position to give us a sense whether or not you expect ag to be under continued pressure in 2016, or not at this point?

If you listen to what the OEMs say, and if you look at where the commodity price is, Mig, their hasn't been a lot that has changed in the business out there. So you probably answered that question to yourself here.

Right. I understand you are not providing guidance, but we're at the point of the year where I think this is really the salient question, because the fourth quarter I would argue is perhaps less important to investors at this point. That is why I'm asking it basically.

I think I glean what you probably heard from the two OEMs, but when you look at our business, we've got that service component in there which helps a lot, which is a little bit of a differentiator.

Okay. I appreciate that. And then my follow-up is, I'm trying to understand the change in guidance that you have provided.

Just based on my own model, it seems to me like most of the change was related to the third quarter itself in terms of the top line. Am I interpreting this correctly, and if that is the case, why wouldn't some of the weakness that was evident the third quarter slip into the fourth, as well?

That is not the case. Certainly what is in our guidance and our new modeling assumptions has some weakness baked into it for the fourth quarter as well, not only the third quarter, but the fourth quarter, as well. I think maybe we did expect a stronger third quarter than what we had even though I think it was real close to consensus out there.

From a bottom-line standpoint, we did expect a stronger third quarter than what we -- what came out this morning, what we announced this morning. It's particularly due to some of that what was shorter in the parts and service side than what we had initially expected. So we are expecting, or what is built into this these assumptions is some softness in Q4, as well, compared to what we had originally expected.

All right. Thank you.

Neil Frohnapple, Longbow Research.

I believe you indicated that used construction equipment pricing remains strong. Is this still the case, or is pricing starting to slide with some of the declines in equipment sales?

Yes, I guess as we look at that, I would say we took away the word strong. We don't see there's a lot of degregation in there, but I would say it is holding fairly consistent.

Okay. And then you also mentioned new construction equipment inventory levels are continuing to increase. Is this within specific categories, or is it more broad-based?

I would say it is broad-based, but I think the equipment is affected by the commodities -- oil, mining, I think you will see higher levels in those types of equipment.

All right. I will pass it off then.

Brent Rystrom, Feltl.

Yes, thank you. Quick couple of questions for you. A little bit of history.

We're in a very strong El Nino right now. And the last time we were in a strong El Nino was 2009, and in 2009 to 2010, we experienced very rough crop conditions in Eastern Europe, similar to what you are talking about now. The rough crop conditions in Africa and rough crop conditions in Australia, all of which are happening now.

And that set up the following year a multi-year cycle of reduced grain supplies. So from a simplistic perspective, can you recollect in calendar year 2009 going to 2010 how your business reacted to that?

As I remember, it has been a few years ago, but I thought we saw some pretty good turns in our Business, and I think there was some positives, but I cannot tell you exactly --

I looked it up this morning, David. At the time in early 2010, Deere was guiding to substantially negative North American deliveries of equipment, and by the end of the year, they were seeing substantial increases in equipment sales.

If we were in a situation where this El Nino causes the crops to be hit the way they look to be hit and then it is followed by a strong La Nina, which is typically very likely when you have a strong El Nino, which tends to bring hotter and drier weather to North America and to South America, would you guess that the commodity outlook might finally hit bottom and maybe poised for some improvement if those situations played out like they have in the past?

Well a couple of things here, Brent. First of all, I think there is a fairly tight supply. So one major weather event in the world could be positive for commodity prices. But I think as we model our Business going into the next year, we need to model on current level of commodities, reduce our inventories, build cash, and really put us in position so if that does happen we can really capitalize on that.

All right. And I'm not disagreeing with that. I'm just curious for your thoughts on what might happen.

So when I look at your guidance for the fourth quarter, particularly in the agricultural division, it appears that comps in the fourth quarter could be anywhere from comparable to the third quarter in that minus 30% to high 30%s to somewhere in the 20%s and with the midpoint some place around 26%. Is there something you are seeing that tells you that sequentially we should be seeing a flat to improving comp, or is it at just at this point a best guess?

I think one of the things to take a look at is just last year, last year it being down, meaning the ag division down 38% in the fourth quarter, where the third quarter was down 24% -- both down quite a bit. But certainly what I would say would be a little easier comps there in the fourth quarter that we are comping against is probably one of the biggest things to look at.

And I think we're relatively on the same page, and we've made some comments on the Section 179 and bonus depreciation, where that is not going to influence things or we don't believe it's going to influence things any differently than it did last year. I think it just goes back to a little bit more of an easier comp to the prior year.

Great. Thanks.

Brett Wong, Piper Jaffray.

Just wanted to dig into the inventory a little bit. Just wondering if your third-quarter reduction was what you expected and if you could talk to what gives you confidence you will achieve your reiterated goal or target by year end.

Yes. It probably wasn't quite as good as what we expected and driving that would have been the lower sales, less than certainly what we had anticipated. I think what gives us the confidence and to your understanding that we can still maintain or hit the $150 million reduction is when we started out the year with some of the modeling assumptions, we didn't put a procurement plan in place to necessarily support all of that revenue for the year.

With some the shorter lead times with the OEMs out of there, we had a little bit more flexibility in our procurement cycle there. So we did hold off on procuring some of that in the event that things were softer than what we did.

That being said, I think to hit this $150 million by the end of the year, we will have to hit these modeling assumptions that are out there now. If we don't, we could fall a little short of that $150 million, but if we hit it, we feel like we're in good shape. If we hit those modeling assumptions, we feel look we are in good shape to hit that $150 million.

Okay. That's great color. Thanks. And I know you are not providing guidance for FY17 yet, but just wondering what you are thinking about inventory reduction next year and how you are going to continue to reduce the plan and are you going to really limit the new equipment that you take from your OEM partners.

Yes. I think going into next year, so if the scenario is right, we know what the OEMs have put out there today, that certainly gives us the opportunity to reduce inventories further into next year as we continue to try to move toward a three-time turn overall in our equipment inventory. But I would say even if it was more of a flattish type scenario, I think there is still some opportunity to take that inventory down into the next year.

Okay. Great. And then I'm just talking about the margins a little bit. You talked to improved equipment margins.

Can you just speak a little bit about what is driving that and really your expectations as we look into the fourth quarter? Obviously you reiterated your guidance range. Just wondering if you are seeing this improved margin, why not adjust that range?

Well, I think the improved margin, if you look the improved margin over last year is more to do with last year 's third-quarter margin, which was significantly pressured. Our margin last year was 7.5% in the quarter, and that had dropped quite a bit from what the first and second quarter was last year. During that time, as we commented on the call, that corn prices had significantly reduced in the second- and third-quarter time frame, and we had more pressure in our use with some of our lower of cost of market adjustments that we had.

The 8.2% that we experienced in the current quarter is sequentially pretty much in line with our second quarter. So I think to anticipate something like that and something similar to that will get us right at the middle of that range that we put out there at the midpoint of 8%. So I think we are set up well to continue on more of that sequential type margin rather than what we saw in the third quarter last year.

Okay. Great. Thanks, Mark.

And then just one more from me. You mentioned the available EU subvention funds helping to drive equipment demand in Romania and Bulgaria. Is that actually helping, or are the micro conditions really outweighing what you are seeing there?

Yes that is definitely helping. That is a big shot in the arm, and that has brought some people to the table to purchase equipment that they would not have done that previously.

Great. And have you seen an increase in demand in that region recently compared to earlier in the year?

Yes. I think so. Like we have said, the whole world is facing this level of commodity prices that are out there.

But I think some of the stability in the Ukraine has helped. So definitely the parts and service group business we are getting, Ukraine is helpful. So I think you can see that number overall is I think the overall stability and things are starting to smooth out in that region for us.

Great. Thank you.

Joe Mondello, Sidoti & Company.

I'm wondering if I could just take another stab at the cost structure aspect and how you're thinking about the business headed into next year. It sounds like you are not willing to really talk about it, but I'm just wondering are you in the midst of trying to figure that out, or are you happy with where things are given the adjustments that you made earlier this year?

No. I think we certainly have done a lot, and we've taken down our expenses on the nine-month $42 million. So, I think with that over the prior year -- less than the prior year.

But I think that being said, I think what we are seeing is that there is still some opportunity. We believe if the market does go down and there is less revenues -- less sales to be had next year, there is still some opportunity now.

We're not going to elaborate on what any of that is or what that means. But I think it is helpful for you to know that there is still some opportunity to decrease expenses for next year if the environment stays difficult or gets even more challenging.

Okay. And so that brings me to my follow-up which would be related to what the OEMs are saying. It sounds like you are waiting for further deterioration to happen.

And so I'm just trying to understand from your point of view in terms of a dealership, I know the OEMs are a different model and they are different business and they see different things. But from your point of view, do you wait until you start to see it or do say at this point in time it seems like next year is pretty safe to say it is going to be down at least high single digits if not double digits? Are you starting to put those plans in place right now, or is it a wait and see?

I think regardless -- obviously our same-store for the quarter and for a few quarters in a row, same-store has been going down. So I'm not sure what you mean by waiting for something, but we --

For further deterioration. I'm just saying waiting for further deterioration as opposed to -- it seems like you are expecting flattish sales next year and if things deteriorate next year for another year, then we will make the move to go ahead with --

Yes, I think what you are thinking about is some big announcement or something like that. That realignment plan that we communicated indicated about $20 million in savings as we talked about. And we are down $42 million in a nine-month period, so it doesn't stop at a realignment plan. We continue to adjust our operating expenses daily, and we don't announce big adjustments or anything. We continue to bring down expenses daily, and we're not waiting for anything to happen to do that.

Okay. And then just lastly, in terms of Deere's expectation of equipment being down 15% to 20% in North America, do you have any different view of that, just given your defined concentration in the northern Midwest area as opposed to the entire North America area? Does it change your -- is your environment or your geographic region better or more well positioned or less well positioned in regard to that 15% to 20% down on equipment?

Our footprint probably tends to mirror -- other than we've got some really small tractors there on the East Coast and the West Coast, so we're probably not -- when you talk about tractor sales, maybe don't participate in that much. But as far as the row crop type area where corn- and bean-type farmers in the upper Midwest, which is I think a big part of all of the OEMs' business, I think we are fairly well distributed with that.

And if you look at the western part of our ag markets, we've got some diversified crop livestock, so we're participating in that type of business too. I just have to repeat the fact though that when you look at our Business and to some extent parts, but really our biggest sense is our ability to have that service -- high-margin service business, that is not going to be reflected in what they are talking about.

Okay. All right. Thank you.

Larry De Maria, William Blair.

Related to construction, two questions. What do you think about the highway bill? Could that have an impact to you in your territory? And secondly, as far as reallocation equipment in the oil basins, is there still an overhang in your territory for construction equipment that needs to be moved around, or is that largely complete?

First of all on the highway bill, that magnitude of federal spending is definitely have a positive impact on the feed business -- the whole industry. It is hard to say right now how much, but I think we are well positioned to benefit from that. And I read something this morning too, I think they will add some crop insurance, which will probably help us on the ag side a little bit too on part of that bill.

Just if you drive up into the Bakken area, all lots of all colors I think you will see some overhanging, Larry. I think we've been trying to move that stuff around ourselves, but there is a little bit of a overhang left up there if you drive around and take a look. I don't think it is any one color or another. All the lots have some equipment.

It's been moving out of there, but it is also been moving into some adjacent markets. In Minneapolis, St. Paul, Des Moines and Omaha and Denver, Billings, it will be going every which direction too, which is going to impact, like we said earlier, the whole industry with a little bit of overhang

Okay. That's really good. Thank you. And looking at the ag side, just a few quick ones.

Maybe can discuss specifically your order board year-over-year. Also the Precision Planting acquisition by Deere, how that might impact you, given you are integrated with those guys now. And then finally on pricing, obviously Deere said plus 2% next year, seems hard for that to hold up, so what are you seeing on new equipment pricing that will give us confidence that a forecast like that would be good for you guys and any others?

I will try to answer those. First of all on pricing, I think for our business to see that type of discipline from the OEMs, I think it is good because it helps keep the value of used equipment up. And I think that benefits us long-term.

So I think I'm fine with that, and I think that is good for the industry. It's not a big price increase we talked about, but I think it add some stability in the new pricing and with some discipline in that and that just follows through on the whole users market, which is good.

As far as the planter business and the Precision, I think you are aware that our supplier had an arrangement with Precision over a year ago, which is being reflecting in some of the new planter models being introduced. So I think you are going to see, from a technology standpoint industry wide, I think some commonality and just a positive towards some of the technology development you are seeing in that planter business. So I think we are in good shape with our planter models that we have to sell.

But you wouldn't expect that to change given that Deere is going to own that business?

It's pretty hard to comment, but I think there is agreements out there, and I think a lot of things in place. And if you look a little closer, you will probably find some other OEMs that also have some arrangements with the precision also.

So I think it looks to be fairly industry-wide.

Great. And the final thing was just specifically your year-over-year order boards, curious how they are looking if you look at them year over year.

From a competitive standpoint on that Larry, I don't think we want to talk about that right now.

Okay. Thanks. Good luck.

Okay. That's the end of the questions, so 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. We thank you for your participation. You may now disconnect.