Titan Machinery Inc (TITN) 2017 Q1 法說會逐字稿

Good day, and welcome to the Titan Machinery Incorporated first-quarter FY17 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, and welcome to the Titan Machinery first-quarter FY17 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 first quarter ended April 30, 2016, which went out this morning at approximately 6:45 AM Eastern time. If you've not received the release, it is available on the Investor Relations portion of Titan's website at titanmachinery.com.

This call is being webcast and a replay will be available on the Company's website as well. In addition, we're providing a presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the Investor Relations tab. The presentation is directly below the webcast information in the middle of the page.

Before we begin, we'd 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 risk and uncertainties, including those identified in the risk factors section of Titan's most recently filed annual report on Form 10-K. These risk factors contain more detailed discussion of factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as may be required by applicable law, 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 reconciliations of these non-GAAP financial measures in today's release and have provided information regarding the adjustments that are added back or excluded in these non-GAAP financial measures.

Lastly, due to the number of participants we expect 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 first quarter results and a general update on the Company's business. And then Mark Kalvoda will discuss the Company's financial results and FY17 annual modeling assumptions. At the conclusion of our prepared remarks, we will open to take your questions.

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

Thank you, John. Good morning, everyone. Welcome to our first-quarter FY17 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we provided a slide presentation which you can access on the Investor Relations portion of our website at titanmachinery.com.

If you turn to slide 3, you will see an overview of our first-quarter financial results, which were in line with our expectations. Revenue was $285 million, primarily reflecting the continued industry headwinds in the agriculture segment. Adjusted pretax loss was $7.5 million, or $0.21 per diluted share, primarily due to the decline in revenue.

As we navigate this challenging business environment, we're focused on managing our expenses and other controllable aspects of our business. We decreased our operating expenses and floorplan interest expense in the quarter and reduced our overall equipment inventory, which included a 7.8% reduction in used equipment inventory. We are ahead of schedule in the marketing of our aged inventory, having sold $25 million of $74 million targeted aged equipment inventory in the first quarter of FY17, which exceeded our first-quarter target of $22 million.

Also during the first quarter, we bought back $30 million or 20% of total outstanding senior convertible notes using $25 million in cash, resulting in the recognition of a pretax gain of $2 million during the quarter. We were able to effect this repurchase as a result of positive cash flow in FY16 from inventory reduction and improvements made to our cost structure. This debt retirement is in line with our strategy to use positive cash flow for delevering our balance sheet and better position our Company for future opportunities.

On today's call I'll provide an industry overview for each of our business segments. Mark will review the financial results for the first quarter of FY17 and update you on the status of our expanded inventory reduction plan that includes the marketing of certain aged equipment inventory to alternative channels rather than our normal retail channels. He will then conclude with a review of our modeling assumptions for FY17.

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. Since we spoke with you only six weeks ago, there have not been a lot of new developments or changes in the industry as we operate. On slide 4 is an overview of the agriculture industry. Spring planting for our agricultural market is on schedule, with timely rains required for early crop development. The USDA recently reported prospective planning for this year and is reflected our combined increase of corn and soybean acres with a decrease in wheat and other crops. The May WASDE report is expecting continued pressure on commodity pricing for the 2016/2017 new crop year. However, the recent uptick in commodity prices, particularly in soybeans, offered our customers an opportunity to market some of last year's crop and to lock in prices on a portion of their current crop at favorable prices compared to earlier this year.

USDA report, which was updated in February, projects calendar year 2016 net farm income to be $54.8 billion, which represents a 3% decrease from projected net farm income in calendar 2015, and a 43% decrease from the five-year average. We believe the continued lower projected net farm income will result in continued low end-user demand for new and used equipment. In addition, high industry supply will continue to pressure equipment prices and compress margins.

For the past few years, because of the late reinstatement of Section 179 and bonus depreciation, many farmers were unable to plan their equipment purchases in order to take full advantage of these tax incentives. This year, farmers know that Section 179 and bonus depreciation are in place, and this will benefit many farmers and their purchasing decisions. As a reminder, Section 179 accelerated depreciation was made permanent at $500,000 per year and bonus depreciation was extended through 2019.

In summary, the agricultural industry continues to face a number of headwinds and we are in the early stage of the annual production cycle. We believe that we have taken the appropriate steps to navigate through the current climate and we'll be well-positioned when the industry recovers. We are focused on managing the controllable aspects of our business including inventory and debt levels as well as operating expenses. We remain confident in the long-term agricultural industry as farmers continue to carry strong balance sheets and the underlying macro trends are projected to continue driving long-term demand for agricultural 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. Recently, oil prices have improved off of very low levels. However, despite this improvement, equipment and rental demand continues to remain at reduced levels. In addition, lower net farm income is impacting purchases of construction equipment by customers in the agriculture industry. Offsetting some of the lower energy and agriculture demand is improved residential, commercial, and transportation infrastructure activity. Our footprint is experiencing stronger demand in large metro areas and improved rental demand in these areas is partially offsetting the impact from reduced energy activity. We have seen new construction equipment inventory levels beginning to stabilize as demand and production decisions by manufacturers are enabling new inventory levels to be in line with anticipated demand.

As I mentioned in our ag industry overview, the reinstatement of Section 179 on a permanent basis and the extension of bonus depreciation at the end of the calendar year 2015, should help the construction equipment customers plan their purchasing decisions throughout the year. As we stated on our previous call, we believe our construction segment revenue will be flat in FY17, with improved profitability as we benefit from the operating of the inventory initiatives we have put in place.

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. Our customers have completed their spring planting and overall crop progress is on schedule with adequate moisture levels to support early crop development. Low global commodity prices continue to impact customer's [sediment] and income in all of our international market similar to North America. Offsetting the low commodity prices and resulting farm income, the European Union subvention funds, which support the purchase of equipment, continue to be anticipated in the Romanian and Bulgarian markets. Although we expect these funds will be released this year, they are not yet available to our customers.

The Ukraine market continues to experience challenging geopolitical and financial conditions. High interest rates and restricted credit availability are impacting end-user demand for equipment purchases. Local currency is trending weaker versus the US dollar, adding financial pressure on the end users. We continue to see a steady demand for parts and service to repair existing equipment and expect that to continue for the foreseeable future.

We're pleased with the operational improvement in our international segment during the first quarter of FY17, as we made significant bottom-line improvements in our seasonally weakest quarter. These improvements position us for full-year profitability in FY17 in this segment of our business. Even though we continue to face headwinds in many areas of our business, first-quarter financial results were in line with our expectations and we are on track to achieve our $100 million inventory reduction goal and modeling assumptions for FY17.

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

Thanks, David.

Turning to slide 7, our total revenue for the FY17 first quarter was $285 million, a decrease of 19.3% compared to last year, primarily driven by a decrease in agriculture equipment revenue. As we have said before, our higher margin parts and service revenue are more stable during a challenging environment. Equipment sales declined 24.5% compared to the same period last year. Equipment sales reflect the impact of continued industry headwinds that David discussed. Our parts revenue decreased 6.5% in the quarter and service revenue decreased 5.8%. The decline in this quarter's parts and service revenue were primarily attributed to a decreased amount of customer preventative maintenance and continued lower warranty and predelivery service work as a result of lower new equipment sales. Rental and other revenue decreased 16.7% in the first quarter, primarily due to lower demand in the oil production areas and a reduction in inventory equipment rentals. Our rental fleet dollar utilization increased slightly to 19.7% for the current quarter, compared to 19.1% in the same period last year.

On slide 8, our gross profit for the quarter was $54 million, compared to $60 million in the same quarter last year, primarily reflecting the lower revenue I just discussed. Our gross profit margin was 18.8%, an increase of 117 basis points compared to the same quarter last year. The improvement in gross margin was mainly due to a change in gross profit mix to our higher margin parts and service business, as well as an increase in equipment margins of 60 basis points due to an increase in construction and international equipment margins.

Our operating expenses as a percentage of revenue in the first quarter of FY17 was 19.1%, compared to 16.2% for the same quarter last year. Although our operating expenses as a percentage of revenue increased due to lower revenues in the current quarter, we decreased our operating expenses by $2.6 million, or 4.6%, on an absolute dollar basis.

In the first quarter, we had non-GAAP adjustments of $1.7 million on a pretax basis, which primarily reflects the $2.1 million gain on the repurchase of our senior convertible notes, partially offset by realignment and remeasurement costs. Adjusted floorplan and other interest expense as a percent of revenue increased 20 basis points due to lower revenue in the current quarter, a decreased $1 million or 13% on an absolute dollar basis, reflecting a decrease in our average interest-bearing inventory compared to the first quarter of last year.

For the first quarter of FY17, we generated adjusted EBITDA of $1.7 million, which compares to $5.1 million in the first quarter of last year. We calculate adjusted EBITDA by including our floorplan interest expense and excluding nonrecurring items such as the gain on the repurchase of the senior convertible notes. Our adjusted loss per diluted share was $0.21 for the first quarter of FY17, which excludes non-GAAP adjustments as outlined in the reconciliation table in the appendix of the slide presentation. This compares to adjusted loss per diluted share of $0.13 in the first quarter of last year.

On slide 9, you will see an overview of our segment results for the first quarter of FY17. For your reference, we have included a slide in the appendix of our presentation that provides more detail on the same-store sales and same-store gross profit, which are primary factors of our segment results. Agricultural sales were $179 million, a decrease of 25.5% reflecting a 25.1% decrease in ag same-store sales, which primarily resulted from a decrease in equipment revenue impacted by the continued industry headwinds. Our ag segment had an adjusted pretax loss of $3.9 million, compared to an adjusted pretax loss of $0.4 million in the prior-year period.

Turning to our construction segment, our revenue was $78 million, a decrease of 3.9%, primarily reflecting a 2.9% decrease in construction same-store sales, which were impacted by the factors discussed earlier. Adjusted pretax loss for our construction segment was $2 million, compared to a $2.9 million loss in the same period last year. The construction segment results primarily reflect the reduction in operating expenses and floorplan interest expense.

In the first quarter of FY17, our international revenue was $28 million, which was a 12.8% decrease. The first quarter is a seasonally low-revenue quarter and we continue to anticipate achieving flat revenue on a full-year basis. Our adjusted pretax loss was $0.3 million, an improvement compared to adjusted pretax loss of $2.3 million in the prior-year period, primarily reflecting reduced floorplan interest expense and improved equipment margins.

Turning to slide 10, here we provide an overview of our balance sheet highlights at the end of the first quarter. As we have stated on prior calls, in light of the prolonged headwinds we face in our agriculture and construction segments, we continue to focus on improving our balance sheet. We're pleased with the progress we have made and our momentum as we proceed in FY17. We had cash of $64 million as of April 30, 2016. Our equipment inventory as of April 30, was $585 million, a decrease of $6 million from January 31, 2016, which reflects a $20.9 million or 7.8% decrease in used equipment inventory, partially offset by a seasonal increase of new equipment inventory of $15 million. In a few minutes, I will provide an update on our inventory reduction outlook for FY17.

Our rental fleet assets at the end of the first quarter were $134 million, compared to $138 million for the end of the fourth quarter of 2016. We anticipate maintaining a similar to slightly smaller fleet size throughout FY17. The Company had $446.3 million outstanding floorplan payables on $1 billion total discretionary floorplan lines of credit as of April 30, 2016, compared to $444.8 million outstanding as of January 31, 2016.

In April 2016, we repurchased $30.1 million of our senior convertible notes with $25 million in cash, resulting in the recognition of a pretax gain of $2.1 million in the first quarter of FY17. This gain is not considered in the modeling assumptions that I will discuss in a few minutes. This debt reduction improved our ratio of total liabilities to tangible net worth to 2.0 as of April 30, 2016, from 2.1 as of January 31, 2016.

Slide 11 provides an overview of our cash flow statement for the first three months of FY17. The GAAP reported cash used for operating activities for the period was $24.9 million, primarily reflecting a change in the mix of manufacturer versus non-manufacturer floorplan financing and reduction in our inventories. As part of our adjusted operating cash flow, we include all equipment inventory financing, including non-manufacturer floorplan activity. Our net change in non-manufacturer floorplan payable shows an increase of $25 million. To accurately reflect cash from operating activities, we adjust 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 inventory financing decisions. The equity in our inventory decreased 1% during the three-month period and represents a $6 million source of cash. Making these adjustments, our adjusted cash flow used for operating activities was $5.8 million for the three-month period ending April 30, 2016. We anticipate generating positive cash flow in FY17, primarily due to our inventory reduction plan, and plan to use a portion of this cash to reduce our floorplan payables and other debt.

Slide 12 provides an update on the status of our expanded marketing plan of aged inventory that was discussed on our fourth-quarter call. Given the significant decline in end-user demand for our equipment inventory, and the challenging market conditions in both ag and construction, we identified certain aged pieces of equipment totaling $74 million that we began marketing through alternative channels. The graph on this slide provides the beginning amount of aged inventory included in the expanded marketing plan, and the remaining amount of inventory at the end of the first quarter, which shows our progress of reducing this inventory. During the quarter, we sold $25 million, or approximately 34% of our planned marketing of aged inventory, exceeding our target of $22 million. The reduction in inventory is reflected on the chart as the top right portion of each product category. The majority of the decrease during the quarter was driven by aged used ag equipment and discontinued Terex product. We're confident we will continue to successfully market this equipment through alternative channels as planned. We will continue to provide quarterly updates on our progress throughout the year on the status of this reduction plan.

Turning to slide 13, I would like to provide an update on our long-term equipment inventory initiative. Similar to what we provided in the past, you will see a chart outlining our ending equipment inventory position for five years, including our ending inventory target for FY17. The chart shows that we reduced our equipment inventory in the first quarter of FY17 by $6 million, which reflects a $21 million, or 7.8%, decrease in used equipment inventory, partially offset by a seasonal increase of new equipment inventory of $15 million. We are on track to achieve our goal of $100 million reduction of equipment inventory in FY17, and expect a quarterly inventory stocking trend to be similar to that of FY16, with most of the reduction occurring in the back half of the year, and particularly in the fourth quarter. By the end of FY17, we expect to have reduced our equipment inventory by approximately $450 million, or 48%, compared to the end of FY14, which represents a major improvement in the strength of our balance sheet.

Turning to slide 14, you will see a chart showing our total liabilities to tangible net worth ratio for five years, including our ending target for FY17 and our progress through the first quarter. Given the current market conditions, particularly in the ag sector, we believe it is in our best interest to delever our balance sheet and reduce our interest expense, which we believe will position our Company to capitalize on long-term opportunities. This ratio strengthened in the first quarter compared to year end and we expect continued improvement throughout FY17.

Slide 15 shows our FY17 annual modeling assumptions. We are reiterating the modeling assumptions that we previously provided on our fourth-quarter call. We expect our ag same-store sales to be down 13% to 18%. This primarily reflects the lower anticipated results from our equipment revenue as well as a slight decrease in our parts and service revenue. Although our first quarter results are below these modeling assumptions, we expect to be facing softer comps in the back half of this year. We expect both our construction and international same store sales to be flat. Our modeling assumption for equipment margins for the full year is projected to be in the range of 7.7% to 8.3%. This range reflects continued margin pressure from the industry headwinds we discussed earlier on the call. We expect adjusted diluted EPS to range from a slight loss to breakeven for FY17. This assumption does not include the $2.1 million pretax gain we recognized in the first quarter of FY17 from the repurchase of our senior convertible notes.

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

(Operator Instructions)

We'll go first to Steve Dyer with Craig-Hallum.

Thanks. Good morning, guys.

Good morning, Steve.

Just as it relates to commodity prices, beans have obviously been extremely strong, corn popping up above $4, which I know you have said is always a little bit of a psychological level. Do feel like, I guess anecdotally, that, that's helping sentiment at all or just too early and not enough yet?

Well, I think we're little bit early, but definitely, soybeans, what we've seen it spike anywhere from $1.50 to $2 range here in the last few months. I think that's definitely been a positive. It allowed some of our growers to sell last year's crop and also to lock in some prices for the current year. So I think that's all positive.

But at the end of the day, I believe what the farmer's profits are going to be this year, whether it's going to be a combination of yield, some of their expenses, what they end up. The marketing at the final end of the year and what all that looks like it's going to change probably be the direction they're going to be getting from a lot of other lenders, it's going to drive a lot of the purchase decisions. But definitely, where we are today in commodity prices compared to where we were a few months ago, definitely in much better shape.

Very good. And then you touched on the lenders. What sort of -- I think historically, lenders were willing to lend more based on net worth and balance sheet. And now, it seems more like it's based on near term income statement and maybe that's causing a little bit of an impediment. Would you agree and are you still seeing that? Is it pretty tight?

I think the bankers are sitting down and they're during their pro forma of projections for the year and if they're somewhere around breakeven, slight loss, slight gain, I think the recommendation to the banker to say hey, why don't you sit back and wait, be a little bit more cautious. I know they know they need to purchase fertilizer, chemical, fuel and some of those things. But maybe not equipment [come] purchase can wait a year or maybe they by a used piece instead of a new piece and some of those decisions.

There's a group of customers out there that -- and I think a big part of these projections are going to bother. Are you paying cash/rent, do you own your land, what's your land cost? That's a big variable between different farms out there. But there are a certain group of farmers with really strong balance sheets, maybe they own all their land, maybe they've got really good rental arrangements involved out there and under this environment, might take a cheap interest that they buy some machinery right now. So, you've got both [pieces]. I think both from the bankers standpoint, that the recommendation is to hunker down a little bit, be careful, be cautious and see how your year turns out. That's the story I'm hearing most of the time.

Yes, okay. And just a quick modeling question. Operating expenses were I think a touch higher than I was modeling this quarter. How do you directionally anticipate that number to track throughout the year?

I think what we talked about earlier is that we had some big initiatives last year, which brought down last year's operating expenses in our FY16. So overall, we're not expecting any kind of big decline. We do expect it to come down some during the year compared to last year. But not significantly.

So I think if you look at last year's numbers, it's going to be pretty close in line to maybe down a little bit from the quarters of last year. Similar to what we saw here in first quarter. Actually the first quarter will probably have a little more of a decline because some of those initiatives went into place part way through the quarter last year. So we had a little bit more of a bump there.

Got it. Okay. Thanks, guys.

And we'll go next to Tyler Etten with Piper Jaffray.

Good morning, guys.

Good morning, Tyler.

I was wondering if we could talk about the used equipment that has been moving in the first (inaudible) through the spring. We've heard that it's been actually doing a little bit better than expected, specifically in combines. Is that where you guys were seeing is you guys worked down your used equipment? I guess any color around that would be great.

Well, I think what you're seeing is some of the first generation trades the late model whether it be four wheel drives or high horsepower [roll-type] tractors. Combines, that's the market that is the most challenged. Some of it is third or fourth generation. Some of the 10, 15 year or older tractors have actually probably seen some uptick, some shortage in certain models and they've actually been pretty resilient.

I'd say overall, you're seeing decreased demand for equipment and you're seeing a fairly large supply out there, which tends to have a negative impact on pricing. So even though you see little spots here where you might see something that resold pretty well, I think overall, it's a challenging environment out there and probably more inventory than there are buyers. So I would say it's not totally as optimistic as what everybody's talking about.

Is the auction activity slowed down a bit or is it still up above normal and is making it more difficult to market your guys' equipment?

No, I think that's staying relatively stable. You're seeing some retirement sales and you're seeing a few more of those start to pop up. Actually, we've been doing pretty well in some of these real large -- then this whole -- all these online auctions, which is a fairly new go-to-market strategy. I think there's plenty of inventory on that. It all comes down to what the auction standpoint, what type of risk to seller or how big a hurry they are in trying to move the equipment.

So I think as far as if you look at all the equipment dealers, there's some pretty good staying power out there. And I think there's an incentive for all dealers to try to maintain their equity and their equipment to get the value on it and get it moved at a relatively good level of margins. So I think that a sentiment amongst dealers out there.

Okay. Great. That's helpful. Switching gears a little bit. If you could talk about your international guidance or what you're seeing in that market a little bit? We're down double digits to start the year and is there something that you're seeing in that market that gives you confidence that, that market will improve as we progress through the year?

I think the thing to kind of keep in mind with the international is that first quarter is the seasonal low quarter from a revenue standpoint. So to gauge the year off of the first quarter I think is not the right thing to do.

So we talked a little bit about some of the subvention funds. We do expect those to kick in for a couple of the countries during the year. They weren't in place for the first quarter. So if for whatever reason, if they don't kick in, we'd probably -- it will be a struggle to hit that flat revenue. But we do anticipate those coming in. And the critical quarters for that international segment is going to be in that Q2, Q3 time frame.

Got it. Yes, this is definitely a low quarter and hard to gauge the year off of that. And then just one more if I can? You guys talk about strong balance sheets as many companies have throughout the years. Do you think that those strong balance sheets have been compromised a bit with the tightening credit throughout the ag lenders and other forms of financing? And just to gauge what that impact is to those balance sheets and if they are actually as strong as a year ago?

Well probably the biggest asset you're seeing on the part of the balance sheets is their land. And I think any decrease, so you're really going to have to watch land values. So I think any decrease in land values is probably going to have the biggest impact on that. I think it's been pretty well documented and pretty well tracked out there so you're seeing some pressure on land prices but not to the extent where I think if overall, the balance sheets are in still pretty good shape. But I'd say that's one area in we have to continue to watch and monitor the land prices.

All right. I'll pass it along. Thanks, guys.

We'll go next to Neil Frohnapple from Longbow Research.

Hi. Good morning, guys. Could you just talk more about the year-over-year improvement in the equipment gross margins in the quarter in light of the excess supply you alluded to earlier, David? Is the improvement primary driven on the used side where maybe you did not have as many write-downs this quarter following the actions you took in Q4?

I think the bigger thing is looking at it by segment. The construction, we had more strength in the construction and equipment margin compared to the first quarter of last year. And then as well as international. International, we did have some lower equipment margins in that first quarter, so the comp was easier there. That drug down last year's a little bit. But it was more so, I would say, by segment where we saw the differences there rather than by a new versus used.

And then Mark, would it be fair to say then that ag margins were down year over year then?

Yes, I would say, yes, ag is still on that downward slope given the demand out there, the level of demand out there. But the other segments more than offset that in the first quarter.

All right. And then, could you talk about the outlook for parts and service revenue for this year? Would you expect to continue to see these mid single-digit declines due to the less customer preventative maintenance program spending and lower predelivery service work you called out again? Just any more color you can provide there would be helpful on what you would expect for these businesses for the remainder of the year?

Yes, I think overall, I think for the year, that percent down is probably close. We talked about on the ag side that we expect some level of decline. I think when you talk quarters, I think we could see maybe a little bit more positive in that Q3.

If you recall last year with some of the favorable harvest conditions that happened, I think we did miss out on some parts and service opportunities there. So if we have more of a normal harvest, that third quarter could be something a little bit less than favorable than that. But for the most part, I think for the year, the first quarter here was probably, it was in line with what we were expecting and probably a good indication for the year.

Great. Thanks very much. I'll pass it on.

(Operator Instructions)

We'll go next to Mig Dobre with Robert Baird.

Yes, good morning, everyone. So sticking with that equipment margin question. I'm trying to figure out if you can provide us any perspective on how used equipment prices have been trending through the quarter, first quarter versus fourth quarter? Have things to some extent stabilized somewhat? Are they continuing to erode? Because again, you're up 60 basis points on a year-over-year basis.

Right, I think that 60 basis points. So if you look at our quarters, the unusual one was that first quarter last year where it was relatively low. But as far as certainly, that fourth quarter that we had last year, was impacted by a number of different things primarily that write-down that we had. But also, we had some, what I would call, some alternative channels selling that we did within the fourth quarter as well that brought that down. So that one's a hard one to even look at.

So if you look at the numbers, certainly, there's improvement quarter over quarter. But I think going back to like the third quarter of last year, it's relatively stable compared to that. As the year progresses, we still, like we said, anticipate in that range. So we're at the bottom end of that range right now with the first quarter. Do we expect to hang around that, maybe strengthen just a little bit toward the end of the year.

I appreciate that. And the thing that I'm wondering about is whether or not at this point you really have your used equipment on the books at the right valuation? And when I'm looking as to the $25 million worth of items that you marketed this quarter, aged inventory, I'm wondering what margin have you made on those products specifically? Is it in line with the segment or is it below?

Yes, I'd say for the most part it was in line. We marked it down to achieve some level of reasonable margin on it. And I think it hasn't materially affected it one way or the another. It wasn't a big factor in that margin improvement that you're looking at year over year. The bigger factor is that the quarter of last year, the first quarter of last year, was unusually low.

I see. And then maybe the last question for me, can you give us any perspective on how OEM incentives, have changed out there? We've certainly heard the OEMs discuss this on their earnings calls. But from your perspective, leasing versus other types of incentives or financing out there, anything you can provide is helpful.

Well, there's definitely an interest by some of the growers for leasing. It's off balance sheet, it's a shorter term commitment, so we are seeing some from the OEM, some leasing type programs or offerings out there. At the same time, I think if you talk about incentives, I think some things are really common out there are it's lower interest rates, interest free type programs.

But I think you're seeing a lot of these programs from the OEMs attributed either to the leasing or the financing side, which tends to hold up the used equipment value. So I think that's the direction we're seeing from an incentive standpoint towards the financing side of the business, whether it's a retail installment contract or whether it's a lease and we're seeing some of each.

And just to be clear, Dave, are you seeing OEMs more willing to participate in used equipment leasing providing support for that to clear the channel?

I think the OEMs, they know that dealers need to clear out their existing used so that they can take in more used. So, if they want to continue to sell more new machinery, they're very interested and they track very closely the level of used and the age of the used on the dealers lot. So, yes, they're definitely, I think we've hand-in-hand the manufacturers and dealers need to really focus on moving the used out of the channel so we can turn around and sell more new and trade in more used.

Thank you.

And we'll go next to Joe Mondillo with Sidoti & Company.

Hi. Good morning, guys. I was wondering if you could address the competitive landscape? Just how distressed do you think your competition is and in addition to that, do you think there is opportunity this year at all in terms of acquisitions?

As far as a competitive landscape, I think if you look at most of the OEMs and what they talk about, we're looking at this positive price realization and I think that's a good situation. It tends to hold up the new pricing in that and the used tends to follow that. So I think that's good.

But from a competitive standpoint, the different OEMs may look at how they deal with the lease business and the residuals and the level of residuals and the amount of dealer guarantees and residuals. The one thing that we're very careful about on our end of it from the dealer standpoint is that we don't have exposure to residual guarantees and type (inaudible) right now, so we're really clean from that aspect. So I feel good about that. So that's just a little bit color on the competitive landscape. I know that there's two main basically market players in North America, and we're competing everyday and I think both the OEMs are trying to go out and help the dealers move used through the system.

With that, talking about the acquisition landscape out there, I think there's starting to be some discussions. I know amongst dealers, what their succession plans are, what their strategy is, what their exit strategies are, all that type of thing, there's ongoing discussions with that. Right now, we're opportunistic I think on our acquisitions. Right now, our main focus is on the business on our hand, our inventory reduction, profitability in our existing locations, expense management. I think that's our primary focus right now. But with that too, we still stay engaged in the network development, working with our and talking to our dealer peers out there and what's going on the long term succession exit strategies for some of these existing dealerships out there.

So just to reply to that. What is your high-level thinking regarding the transition from this defensive strategy within this downturn? We're now in the third year into this downturn, managing the inventory to more of a growth strategy given the massive improvement in the balance sheet, stabilization in crop prices. By the end of this year, the ag revenue declines should have slowed significantly barring any fallout again in the industry overall. How are you thinking about transitioning into more of a growth strategy and what is your timing and thinking about all that?

Well, first of all, I think time is on our side. I think as time goes on, the acquisition opportunities are become more attractive. With that said, I guess, we want to see that three times turn on our new and used inventory and get to that level, get the profitability in our existing locations and on all three of our segments to a level that we think that we are comfortable and we've got our sites. And I think we've got the plans in place to get there.

So I think it's all going to tie in together. The timing of the acquisitions, our inventory reduction targets and some of the things we've done on the expense side, I think it's all going to work together. And I think long term, there's some great opportunities out there for Titan Machinery.

So just last lastly, related to the same topic, what kind of metrics do you look at for that transition? Do you want to see agriculture, the revenue declines to transition to more of a stable environment, which potentially could be later this year, early next year? Or are you looking at industry metrics? How do you base your inventory management regarding all of this? What kind of things are you actually looking for that we can think about to think about this transition to more of a growth strategy?

Well first of all, I think we're going to focus on things we can control. We can control our inventory. We can control our expenses. If you look at the macro-agro economy where the current commodity prices are in there. I don't think we're sitting here being optimists today that we may not see much change in that for the foreseeable future. So we have to manage our business under the different climate and if I do that, I believe that we're going to have growth opportunities both from an organic side and acquisition side. But I think that we need to manage the elements that are under our control. That's inventory, that's expenses, it's growing that high margin parts and service business and I think those are what's important to our success.

Okay, thanks. Appreciate it, taking my questions.

At this time, I would like turn the call back to David Meyer, CEO of Titan Machinery.

It looks like that's the end of the questions. Thank you for your interest in Titan and we look forward to updating you on our progress on our next call. Have a good day.

This does conclude today's conference. We thank you for your participation. You may now disconnect.