Titan Machinery Inc (TITN) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Titan Machinery second-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. Welcome to the Titan Machinery second-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 second quarter ended July 31, 2016, which went out this morning at approximately 6:45 AM Eastern Time. If you have not received the release, it is available in the investor relations portion of Titan's website at TitanMachinery.com. This call is being webcast, and a replay will be available on the Company's website as well.

In addition, we are providing a presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the investor relations tab. The presentation is directly below the webcast information in the middle of the page.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, and Management may make additional forward-looking statements in response your questions. The statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of management, and involve inherent risks and uncertainties, including those identified in the risk factor 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. Except as may be required by 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 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 operations, particularly when comparing underlying results from period to period. We've included a reconciliation 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 on the call today, we ask that you keep your question period to two questions, and then rejoin the queue. The call will last about 45 minutes. David Meyer will provide highlights of the Company's second-quarter results and a general update on the Company's business, and then Mark Kalvoda will discuss the Company's financial results and the FY17 annual modeling assumptions. At the conclusion of our prepared remarks, we will open up the call to take your questions.

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

Thank you, John. Good morning, everyone. Welcome to our second-quarter 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'll see an overview of our second-quarter financial results. Revenue was $278 million, primarily reflecting the continued industry headwinds in the agriculture segment. Adjusted pretax loss was $4.5 million, and our adjusted loss per diluted share was $0.12.

The second quarter was impacted by the challenging agriculture market conditions that we have discussed on prior calls. In addition, recently projected record corn and soybean yields are driving commodity prices lower, which is resulting in our customers' continued cautious spending patterns, particularly in equipment. We remain focused on managing the controllable aspects of our business, including reducing our inventory, improving our balance sheet, receiving positive operating cash flow for FY17 and managing our expenses.

On today's call, I'll provide an industry overview for each of our business segments. Mark will review financial results on the second quarter for FY17 and update you on the status of our expanded inventory reduction plan. We will then conclude with a review of our revised modeling assumptions for FY17.

Now I'd like to provide color for you on the agriculture and construction industries in the international markets in which we operate. On slide 4 is an overview of the agriculture industry. Regarding current market production conditions, fall row crop progress is on schedule, and the majority of our customers are experiencing favorable growing conditions in our footprint, with above average yields anticipated.

Although earlier weather predictions this year indicated the possibility of a La Nina weather pattern negatively impacting crop yields and improved commodity prices, as the growing season progressed, most of our country's major corn and soybean growing areas received timely rains and favorable growing conditions. This improved yield outlook was reflective of the August 2016 WASDE Report, which projected increased yields in corn and soybeans, with a record crop anticipated, which is leading to large increases in expected crop carryovers, adding pressure to commodity pricing and creating weaker customer sentiment.

The chart at the bottom of the page provides some additional insights into the current US agricultural market. Current corn, soybeans and wheat prices are well-below their five-year averages, and projected net farm income for this year was 43% below the five-year average.

We're managing through this environment by focusing on our cash flow, reducing our inventory levels and deleveraging our balance sheet. As I mentioned on our previous call, 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 agriculture equipment customers plan their purchasing decisions throughout the year. Now I'd like to turn to the Construction segment of our business.

On slide 5, we provide an overview of the construction industry in our markets. Unlike many geographic markets in the US, in Titan's Midwest footprint, energy and agriculture are important contributing factors to construction activity, in addition to residential commercial and transportation infrastructure.

Equipment and rental demand remained low in energy markets, due to continued depressed oil prices. Rental equipment continues to be relocated to surrounding regions, which is creating a competitive rental market and keeping rental rates low in many of our locations in the upper Midwest. Lower net farm income continues to reduce the demand for construction equipment by customers in the agriculture industry.

Activity in residential, commercial and transportation infrastructure is maintaining current levels in metro markets. The competitive rental market is pushing rental rates in our footprint.

However, we continue to believe our construction segment revenue will be flat in FY17, with improved operating results compared to last year as we benefit from the operating and inventory initiatives we have put in place. 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.

On slide 6, we have an overview of the industry in our international segments, consisting of Bulgaria, Romania, Serbia, which are located in the Balkan region, and the Ukrainian market. Our customers have completed the cereal grain harvest with above-average yields, and they are experiencing overall favorable fall crop conditions, with anticipated good yields. Low global commodity prices continue to impact customer sentiment and income in our international markets.

The European Union's subvention funds, which support the purchase of equipment in Romania and Bulgaria, are not anticipated to release until FY18. This is a multi-year program, and in some years, the timing of the release of funds may not occur until the beginning of the next year. The Ukraine market remains challenging, but is stabilizing with high interest rates, and restricted credit continues, but the local currency has stabilized against the US dollar.

There have not been any major changes in the geopolitical landscape, and customers are adjusting to the current market dynamics. This is slowly improving equipment demand, as purchases have been delayed over the previous 2.5 years. We continue to see steady demand for parts and service to repair existing equipment.

In summary, even though we continue to face challenges in industries we do business in, over the past couple of years, we have made significant improvements to our cost structure and balance sheet, including the repurchase of senior convertible notes in the first quarter of this year. We are confident we will achieve positive cash flow for the year, and are on track to achieve our $100 million inventory reduction goal.

We continue to take the necessary steps to weather the current environment and improve our balance sheet to position us for long-term financial performance and capitalize on future opportunities. I will now turn the call over to Mark to review our financial results, inventory reduction plan and modeling assumptions in more detail.

Thanks, David. Turning to slide 7, our total revenue for the FY17 second quarter was $278 million, a decrease of 16.7% compared to last year, primarily driven by a decrease in agriculture equipment revenue. We have said before, our higher-margin parts and service revenue are more stable than our equipment revenue during a challenging environment.

Equipment sales declined 21.6% compared to the same period last year. Equipment sales reflect the impact of continued industry headwinds that David discussed.

Our parts revenue decreased 6% in the quarter, and service revenue decreased 4.7%. The decline in this quarter's parts and service revenue were primarily attributable to a decreased amount of customer preventative maintenance, and continued lower warranty and pre-delivery service work as a result of lower new equipment sales.

Our rental and other revenue decreased 15.6% in the second quarter, primarily due to lower demand in the oil production areas and a reduction in inventory equipment rentals. Our rental fleet dollar utilization decreased slightly to 25.3% for the current quarter compared to 26% in the same period last year.

On slide 8, our gross profit for the quarter was $53 million compared to $62 million in the same quarter last year, primarily reflecting the lower revenue I just discussed. Our gross profit margin was 19%, an increase of 40 basis points compared to the same quarter last year.

The improvement in gross margin was due to a change in gross profit mix through our higher-margin parts and service business, partially offset by a decrease in equipment margins of 90 basis points. We remain focused on reducing our used inventory despite difficult market conditions, and believe this discipline approach to the used inventory reduction, although pressuring our equipment margins, will create positive cash flow in FY17, and better-positions us for the current environment.

Our operating expenses decreased by $3.9 million or 7% to $51.5 million for the second quarter. As a percentage of revenue, operating expenses in the second quarter of FY17 were 18.5% compared to 16.6% for the same quarter last year, reflecting the impact of lower revenue this year. Floorplan and other interest expense decreased $1.5 million or 18.8% to $6.6 million in the second quarter of this year, reflecting a decrease in our average interest-bearing inventory compared to the second quarter of last year.

As well as interest expense savings resulting from the repurchase of senior convertible notes in the first quarter of this year. For the second quarter of FY17, we generated adjusted EBITDA of $4.7 million, which compares to $9.8 million in the second quarter of last year. We calculate adjusted EBITDA by including our floorplan interest expense and excluding nonrecurring items.

Our adjusted loss per diluted share was $0.12 for the second quarter of FY17. This compares to breakeven results in the second quarter of last year.

On slide 9, you will see an overview of our segment results for the second quarter of FY17. 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 $154 million, a decrease of 26.6%, reflecting a 26.4% decrease in Ag same-store sales, which primarily resulted from a decrease in equipment revenue impacted by the factors David discussed earlier. Our Ag segment had an adjusted pretax loss of $4.3 million compared to an adjusted pretax loss of $2.5 million in the prior-year period.

Turning to our Construction segment, our revenue was $83 million, an increase of 2.1%, primarily reflecting a 2.2% increase in Construction same-store sales. We generated adjusted pretax income for our Construction segment of $0.6 million compared to $1 million loss in the same period last year.

The improvements in our Construction segment results reflect the reduction in operating expenses and lower floorplan interest expense as a result of our reduced inventory level. We are especially pleased with our improvements given the fact that the industry conditions remain challenging, particularly for our stores in the oil production area.

In the second quarter of FY17, our International revenue was $41 million, which was a 4.3% decrease, reflecting lower equipment revenue, primarily due to lower commodity prices in our markets. Our adjusted pretax loss was $0.2 million compared to adjusted pretax income of $1 million in the prior-year period.

Turning to slide 10, you see our first six months results. Total revenue decreased 18.1% compared to the same period last year, primarily due to lower equipment sales of 23.1%. Year to date, parts were down 6.3%, service was down 5.3%, and rental and other was down 16.1%. The six-month results reflect similar trends to those of our second quarter.

Turning to slide 11, our first six months gross profit was $106.5 million, a 13.1% decrease compared to the prior year, primarily reflecting lower revenue. A gross margin increase of 110 basis points is due to a change in gross profit mix through our higher-margin parts and service that I previously discussed.

Our operating expenses decreased $6.5 million or 5.8% to $106 million. As a percentage of revenue in the first six months, operating expenses were 18.8% compared to 16.4%, reflecting the lower revenue.

Adjusted floorplan and other interest expense decreased $2.6 million or 16.1% to $13.4 million in the first six months, reflecting a decrease in our average interest-bearing inventory compared to the first six months of last year. As well as interest expense savings resulting from the repurchase of senior convertible notes in the first quarter of this year.

Our non-GAAP adjustments in the first six months of FY17 primarily reflect the gain on the repurchase of our senior convertible notes, and in FY16, primarily reflect re-measurement and realignment costs. Year to date, we generated adjusted EBITDA of $6.4 million and adjusted loss per diluted share of $0.33.

On slide 12, we provide our segment overview for the six-month period. Overall, revenue decreased 18.1% and adjusted pretax income was down 132%. At the segment level, lower Ag revenue led to reduced adjusted pretax income. We were able to more than offset lower revenue in the Construction and International segments, primarily with lower floorplan and operating expenses, resulting in improved adjusted pretax loss in these segments.

Turning to slide 13, here we provide an overview of our balance sheet highlights at the end of the second quarter. As we have stated on prior calls, in light of the prolonged headwinds we face in our Agriculture and Construction segments, one of our key areas of focus is improving our balance sheet, and we're pleased with the progress we have made to date. We had cash of $51 million as of July 31, 2016.

Our equipment inventory as of July 31, 2016 was $583 million, a decrease of $8.5 million from January 31, 2016, which reflects a $39.2 million or 14.6% decrease in used equipment inventory, partially offset by a seasonal increase of new equipment inventory of $30.6 million. In a few minutes, I will provide a progress update on our inventory reduction outlook for FY17.

Our rental fleet assets at the end of the second quarter were $135 million compared to $138 million at the end of our fourth period of FY16. We plan to reduce our fleet size throughout the remainder of FY17 to approximately $125 million, based on the lower rental demand we are experiencing in our footprint.

We had $430.8 million outstanding floorplan payables on $1 billion total discretionary floorplan lines of credit as of July 31, 2016. Subsequent to the end of our second quarter, we reduced our discretionary floorplan lines of credit by $85 million to reflect our lower inventory levels. We improved our ratio of total liability to tangible net worth to 2.0 as of July 31, 2016, from 2.1 as of January 31, 2016.

Slide 14 provides an overview of our cash flow statement for the first six months of FY17. The GAAP reported cash flow provided by operating activities for the period was $60.4 million, primarily reflecting a change in the mix of manufacturer versus non-manufacturer floorplan financing. As part of our adjusted cash flow provided by operating activities, we include all equipment inventory financing, including non-manufacturer floorplan activity.

Our net change in non-manufacturer floorplan payable shows a decrease of $67 million. To accurately reflect cash flow provided by 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 flow provided by operating activities exclusive of changes in equipment inventory financing decisions.

The equity in our equipment inventory increased 1.3% during the six-month period, and represents a $7.5 million source of cash. Making these adjustments, our adjusted cash flow provided by operating activities was $1.1 million for the six-month period ending July 31, 2016. We anticipate increased positive cash flow in the last six months of FY17, primarily due to our inventory reduction plan, and we expect to use a portion of this cash to reduce our floorplan payables or other debt.

Slide 15 provides an update on the status of our expanded marketing plan of $74 million of aged inventory that we previously discussed. The graph on this slide provides the beginning amount of aged inventory to be marketed through alternative channels and the remaining amount of unsold inventory, which shows our progress of reducing this inventory. During the first six months FY17, we sold $45 million or approximately 61% of our planned marketing of aged inventory, exceeding our target by $13 million or 40%.

The reduction in inventory is reflected on the chart at the top white portion of each product category. We are confident we will continue to successfully market this equipment through alternative channels within the original timeline. We will continue to provide quarterly updates on our progress throughout the year on the status of this reduction plan.

Turning to slide 16, I would like to provide an update on our long-term equipment inventory initiative. Similar to what we've 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 six months of FY17 by $9 million, which reflects a $39 million or 14.6% decrease in used equipment inventory, partially offset by a seasonal increase of new equipment inventory of $31 million.

The second quarter reflects the sixth consecutive quarter of reduction in our used inventory. We are on track to achieve our goal of a $100 million reduction of equipment inventory in FY17, and expect the 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 continue to 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 17, 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 second quarter. Given the current market conditions, particularly in the Ag sector, we believe it is in our best interest to de-lever 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 half of the year, and we expect continued improvement throughout FY17.

Slide 18 shows our FY17 annual modeling assumptions. We're updating the modeling assumptions that we previously provided, based on our increased visibility to current market conditions. We are changing our Ag same-store sales to be down 17% to 22% compared to our previous range of 13% to 18%.

The change reflects a more conservative customer sentiment in the market due to lower commodity prices as a result of projected record crops. Although our first six months results are below this range of modeling assumptions, we are facing softer comps in the back half of this year. We continue to expect our construction same-store sales to be flat, despite a very competitive rental market, which we anticipate will negatively impact rental revenue and margins -- which is a higher-margin revenue stream.

We're updating our International same-store sales modeling assumptions to be down 7% to 12% compared to our previous assumption of flat same-store sales. This change primarily reflects the EU's subvention funds no longer being anticipated this year. We now expect these funds to be available in FY18.

Our modeling assumption for equipment margins for the full year is projected to be in the range of 7.2% to 7.8% compared to the previous range of 7.7% to 8.3%. This new range reflects continued margin pressure from the industry headwinds we discussed and our focus on reducing used equipment inventory in this environment. We expect adjusted diluted EPS loss in the second half of FY17 to be less than the loss we experienced during the first half of the year.

This assumption does not include the $2.1 million of pretax gain we recognized in the first quarter of FY17 and 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.

Thank you.

(Operator Instructions)

We will go to Steve Dyer of Craig-Hallum.

Good morning. Thanks for taking my question.

Good morning, Steve.

Question on gross margin parts and services. I noticed it was down quarter over quarter. Is that just based on a lower revenue base, or is that a trend that, for whatever reason, you would expect to see going through the rest of the year?

The actual margin percentage was pretty much in line with historical -- a little bit softer. But for the most part, the decreased amount in gross profit from those areas, it's from the lower revenue. And I would say that what happened in the second quarter was very similar to what happened, as far as the revenue amount being off, very similar to what happened in the first quarter, and is probably representative for the full year.

Okay. And then I noticed in the release you talked about 19, or you listed 19 European dealerships, and I think previously it was always sort of 17. Did I read that right, and is that an area in which you are investing? Or sort of what's your thought on strategy there?

What we did in some stronger markets we had -- for the Ukraine, we opened up a facility in the Zhitomir region. See, originally, we were assigned four oblasts. We had Vinnitsa and the Kiev Oblasts. And then because of some of those geopolitical situations, we did not put brick-and-mortar in the Zhitomir region, and we did that. Also in Romania, in a pretty strong agricultural area in the southwest part of the country, in Craiova, just a couple of planned -- really, not real material, but I think to add value to our customer from a location standpoint.

Okay, got it. And then Mark, I noticed floorplan was up a little bit quarter over quarter, despite inventory being down. Is that just based on the mix of equity? Or would you expect that to continue ticking down throughout the year, or is this kind of a good level?

We would expect it to come down. It really didn't come down in the second quarter, because we did use some of our cash and we went into our floorplan lines a little bit because of the convertible debt that we repurchased during the quarter. So for that $25 million that we used for that, we did go into our lines a little bit. But we would expect that to come down as we progress through the back half of the year, where we will have the majority of our inventory reduction for the year.

Got it. Okay, thanks, I will hop back in queue.

We will go next to Rick Nelson with Stephens. Please go ahead.

Thanks, good morning. Dave, what are the signposts that we should be looking for, for the demand environment here to bottom out? And is there a commodities pricing level with corn or soybeans that you think the farmers would come back into the stores?

I guess the prices we should be looking at, I think that it's probably similar to what we saw, probably in late May and early June, where we saw some spikes for some of the weather threats from La Nina. At those levels, we started to see a resurgence of activity. But I would say, at the later standpoint, you're probably around that -- $4 is not a futures price, but the elevator price around that $4 corn. And somewhere in that $12 -- a little north of $12 in the soybean range seems to be -- you know, sparks increased interest.

Thanks for that color. Also, the inventory reduction, you made some progress, this quarter down $7 million. I know it's a back-half inventory reduction plan. But as we look to third quarter, what sort of inventory levels do you think you'll have?

Well, the trend would be down. And we should be able to continue to move down, and particularly in the used inventory. But of that full target of $100 million, the majority of it will come in the fourth quarter. But definitely you'll see some inventory reduction in our third quarter.

Similar magnitude as what we found 2Q or --?

I would say, if you look back to the trending that we had last year, where Q2 went down in Q3, it would be similar to that, maybe even a little bit better than that in the current year.

Thanks, and good luck.

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

Hi, good morning, guys.

Hi, Joe.

In terms of the adjustments made to the gross margins, I'm just wondering how much of that is related to the pricing on the aged inventory reduction plan? If you take that out, where would your sort of, I guess, maybe more normalized-type gross margins be?

The units that were in the identified aged equipment group, it continues to be in line with what our expectations were. So that isn't materially impacting our equipment margins for the quarter, or any reason for our changing the overall guidance that we are providing, or modeling assumption on equipment margins. The big change both for the quarter and for the year is really, particularly in the Ag segment, as we remain diligent in moving our used in the face of a more difficult environment out there, with commodity prices coming down. So it's more driven by the ag retail units than it is on those re-marketing items, that bucket of inventory.

Okay. And regarding the aged inventory plan, you're ahead of schedule in terms of the plan, and you put in your slide 15 what the plan was for the third, fourth and first quarter of next year. Are we expecting $74 million still? Or if you use what you have already done and then add those next three quarters in terms of your plan, you'd be above that, closer to $90 million?

Right. So the plan to be that we would still hit that $74 million. We always have some level of where we might take some items to an alternative marketing channel. But as far as this initiative, the $74 million is what it is. So essentially in Q3 and Q4, we expect to have something lower than what we're showing out there for the plan, because we are ahead of schedule. But in the end, we will still plan on going through Q1 of next year, because there's some seasonal items in there, and we anticipate selling that full $74 million in this plan by the end of Q1 next year.

Okay. And then just lastly, in terms of your cost structure, particularly SG&A line, I noticed that it declined sequentially, but that's occurred in the last couple years. I don't know if there's a seasonality aspect of that? Or could you just talk about what you're doing with cost, and how you're thinking about that regarding where we are in the cycle and the challenges that you're seeing?

Yes, I think last year, what caused the sequential decrease was the large initiative that we had that we announced at the beginning of the year, that really took place toward the end of Q1. But you saw the sequential improvement in Q2 last year. This year I would say it's just more of -- I think I started the year talking about smaller initiatives, not big-hitter-type initiatives out there, but a number of smaller ones that continue to break down operating expense to a smaller degree.

So last year was the large initiative that took place, that helped out Q2 over Q1. This year, it's just smaller initiatives. And somewhat with lower -- we've got some variable costs in there, particularly with commissions that also came down in Q2 with some lower revenue.

Okay, great, thanks a lot.

We will go next to Tyler Etten with Piper Jaffray.

Hey, guys, thanks for taking my questions, I appreciate it. With continued overhang in used inventory -- and new inventory, in your guys' case -- has there been any pressure from CNH to take on new equipment, like the 2017 models?

Well, what we do is, we operate within a long-term plan, based on what we anticipate, kind of a joint agreement of what we see the industry doing, you know, what type of level of inventory it's going take to remain at a certain level of share within the forecasted industry. So we continue to work-in-hand with them, and review that on an ongoing basis, and match incoming shipments with forecasted sales in a very planned method.

All right, thanks for that. And I guess that some dealers, and even some of the OEMs, have talked about used pricing kind of bottoming through the summer. With the outlook of the crop being above-average yields, and potentially grain prices moving lower or staying lower for another year, do you believe that used pricing is still at risk going forward over the next 12 months?

There has been good discipline on the new pricing, so some of this is stair-step down. There is decreased demand for the used equipment out there, and there is an oversupply -- it's overhang out there -- which is starting to come down and get in line with that. So I believe as long as we continue to see this discipline on the new side of the business and we see these good yields that we're going to see, we've got -- I think most people are pretty smart about their inventories. My belief is, we're going to see some stabilization of that.

But what you have to realize, though, is that there's going to be some lease returns coming back into the marketplace. There is an overhang now, but I believe, as an industry, everybody is focused on moving those levels down to get to a more stable market -- which we're going to see somewhere in the near future. I think a lot of the heavy lifting has been done, and we're getting close to where we're going to get to that stabilization point.

Okay, great, that's helpful. And then just one more, if I may, and then I will jump back in queue. Switching gears to construction, with oil improving from the -- or bouncing off the lows and kind of hanging between this $40 to $50 band, has there been an improvement in customer demand, or just in customer sentiment, given the somewhat rebound? Or I guess, any sort of color around what they're thinking, is great. Thanks.

There is some activity, but it's just basically fairly stable. You're not seeing any big improvements. A lot of the oil services companies, they've got equipment, they own equipment, and now they're starting to utilize what they have. But it's nothing really that triggers some big demand. And we're seeing decreased demand for rental in those markets, and we're continuing to move rental inventory out of those markets and into other markets.

Got it. Thank you.

(Operator Instructions)

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

Good morning, everyone, it's Joe Grabowski on today for Mig. I wanted to ask about the quality of the new and used inventory that you currently have that wasn't part of the write-down in the fourth quarter. And when you kind of look at the quality of that inventory, are you still confident that you won't need to take an inventory write-down in the fourth quarter this year?

Right. So yes, I would say it continues to get better. We're focused on moving the [aged]piece of that -- what we have for that retail inventory. We don't expect another write-down such as the one that we did in the fourth quarter. Of course, in our regular margins, in the margin assumption that we provided, there's always some level of lower cost to market, especially in an environment where revenues are decreasing. So there is some pricing pressure, particularly on the used. But no, we wouldn't expect -- unless there's anything drastic, some other drastic thing that we're not seeing right now, we wouldn't expect another large write-down to occur.

Okay, great, thanks. And then can you give us any update on some of the initial reads on the early-order programs, how they are progressing?

Well, right now, we're, from a seasonal standpoint, pre-harvest side here, I'd say were very early in the game. And I think the biggest focus is the retail -- existing inventories on hand, at this point in time.

Okay. And then last question. You gave guidance for second-half EPS being better than first-half. But the last couple years, Q3 has been pretty solidly profitable. So I was wondering if you could give any guidance on progression of EPS, Q3 versus Q4?

Well, Q3 -- especially in recent years, Q3 benefits by the harvest that goes on, and more construction activity. Also for international, it's a higher-activity quarter than what you have at the end of the year. But what used to happen -- you could go back to the very strong retail years of equipment -- that really buoyed the fourth quarter. Well, obviously we don't have that as much anymore.

So all that being said, we would definitely expect third quarter to be more profitable because of that mix difference where you've got the parts, service and rental that is stronger in that third quarter. So we would anticipate third quarter being better than that fourth quarter.

Okay, great. Thanks for taking my questions.

That does conclude our question-and-answer session. At this time, I'll turn the call back over to David Meyer, CEO of Titan Machinery, for any additional or closing remarks.

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

And that does conclude today's conference. Thank you for your participation.