Titan Machinery Inc (TITN) 2017 Q3 法說會逐字稿

Good day, and welcome to the Titan Machinery Inc. third-quarter FY17 conference call. Today's call is being recorded. At this time, I'd like to turn it over to Mr. John Mills of ICR. Please go ahead.

Great, thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery third-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 third quarter ended October 31, 2016, which went out this morning at approximately 6:45 AM Eastern time. If you have not received the release, it is available on the investor relations portion of Titan's website, at TitanMachinery.com. This call is being webcast and 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 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 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 the 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 will be discussing 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 in the 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.

The call will last approximately 45 minutes. At the conclusion of our prepared remarks, we will open the call to take your questions. Lastly, due to the number of participants on today's call, we ask that you keep your question period to two questions, and then please rejoin the queue.

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

Thank you, John. Good morning, everyone. Welcome to our third-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 third-quarter financial results. Revenue was $332 million, primarily reflecting the continued industry challenges in the agriculture segment. Adjusted pretax loss was $700,000, and our adjusted loss per diluted share was $0.01.

During the third quarter, our agriculture customers realized high crop yields and despite continued low commodity prices, the yields improved customer settlement, which created an opportunity to increase equipment sales. We took this opportunity to accelerate our used equipment reduction efforts, by aggressively reselling our used equipment inventory during the third quarter.

While this temporarily affected our overall equipment margins in the quarter, we are pleased with our reduction of used equipment inventory, which was down $47 million or 20% in the third quarter on a sequential basis, and down a total of 32% in the first nine months of FY17. We now expect to exceed our previous year FY17 inventory reduction goal by 25%, and end this fiscal year with $125 million reduction in equipment inventory.

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 of our FY17, and update you on the status for our expanded inventory reduction plan. We will then conclude with a review of our updated modeling assumptions for FY17. Now, I would like to provide color for you on the agriculture and construction industries, and international markets in which we operate.

On slide 4 is an overview of the agriculture industry. Regarding current market production conditions, fall harvest is now completed, and the majority of our customers experienced above-average yields. Weather conditions this fall were favorable for harvest, and allowed fall field preparation to be finishing a timely manner, leaving farmers well-positioned for spring planting.

The November 2016 WASDE report reflected record yields in corn and soybeans, which is leading to large increases in expected crop carryovers, and continuing to pressure commodity pricing. The industry oversupply of equipment, combined with the impact of low commodity prices is creating a competitive pricing environment, which is pressuring equipment margins.

The chart at the bottom of the page provides some additional insight into the current US agriculture market. Current corn, soybeans and wheat prices are well below their five-year averages, and projected net farm income for this year is 29% below the five-year average.

We are managing through this environment by focusing on cash generation, reducing our inventory levels, and deleveraging our balance sheet. The reinstatement of section 179 on a permanent basis, and the extension of bonus depreciation at the end of calendar year 2015, should help agriculture equipment customers plan their purchasing decisions in the fourth quarter.

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. Many of the factors we have talked about on our last earnings call continue to influence the industry in our footprint.

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. As we mentioned on our previous call, equipment and rental demand remained low in energy markets, with rental equipment being relocated to surrounding regions.

The ag industry challenges I just mentioned continue 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.

Competitive industry pricing pressure is impacting equipment and rental margins 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. The reinstatement of section 179 on a permanent basis, and the extension of bonus depreciation at the end of calendar year 2015 should help construction equipment customers plan their purchasing decisions in the fourth quarter.

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 the fall harvest with above-average yields. They are experiencing overall favorable crop conditions for their winter crops.

As you will recall, in the international markets we operate, winter crops, consisting primarily of winter wheat and canola, are planted in the early fall, and harvested in early summer. Global commodity prices continued to impact customer settlement and income in our international markets.

The Ukraine market remains challenging, but is showing early signs of improving. Although the market still has high interest rates and restricted credit availability, the local currency continues to be relatively stable 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, as we begin the final quarter of FY17 and look toward next year, we're confident we are taking the right steps to position our business for long-term profitable growth, as we continue to execute on our initiatives to improve our balance sheet and generate cash flow from operating activities. I will now turn the call over to Mark to review our financial results, the success we're having with our inventory reduction plan, and finally, he will update you on our modeling assumptions.

Thanks, David. Turning to slide 7, our total revenue for the FY17 third quarter was $332 million, a decrease of 3.7% compared to last year, reflecting the challenging ag industry conditions that David just discussed.

Equipment sales declined 1.6%, compared to the same period last year. In the third quarter, ag customer segment was boosted as a result of harvesting high-yielding crops. We used this opportunity to more aggressively drive sales of our used equipment.

Our parts revenue decreased 6.2% in the quarter, and service revenue decreased 1%, reflecting similar trends we experienced in the first half of the year. Our rental and other revenue decreased 20.1% in the third quarter, primarily due to lower demand in the oil production areas, and a reduction in inventory equipment rentals. Our rental fleet dollar utilization decreased to 28.4% for the current quarter, compared to 29.6% in the same period last year.

Slide 8, our gross profit for the quarter was $58 million, compared to $67 million in the same quarter last year. Our gross profit margin was 17.6%, a decrease of 190 basis points compared to the same quarter last year. The decline in gross profit and gross margin was primarily due to a decrease in equipment margins of 300 basis points, resulting from our aggressive pricing and retailing of used equipment inventories to accelerate our used inventory reduction efforts in the third quarter of FY17.

The notable increase of used equipment sales also created a higher mix of used versus new revenue in our total equipment sales, contributing to the compressed equipment and overall gross profit margins, as used margins are lower than new, given the current ag environment. We are pleased with our success of reducing our used inventory, despite difficult market conditions.

This enabled us to generate positive operating cash flow, and better positions us for the current environment. Our operating expenses were relatively flat at $53 million for the third quarter. As a percentage of revenue, operating expenses in the third quarter of FY17 were 16%, compared to 15.5% for the same quarter last year, reflecting the impact of lower revenue.

Floor plan and other interest expense decreased $3.1 million or 36% to $5.5 million in the third quarter of this year. Our floor plan and other interest expense improvements reflects a decrease in our average interest-bearing inventory, compared to the third quarter of last year, a $1 million gain on the repurchase of $24.2 million of senior convertible notes, and the interest expense savings resulting from the repurchase of these notes in both September and April of this year.

In the third quarter of FY17, our adjusted net loss, including non-controlling interest, was $200,000 compared to adjusted net income, including non-controlling interest, of $4.3 million for the third quarter of FY16. For the third quarter of FY17 we generated adjusted EBITDA of $9.5 million, which compares to $17.5 million in the third quarter of last year.

We calculate adjusted EBITDA by including our floor plan interest expense, and excluding nonrecurring items. Our adjusted loss per diluted share was $0.01 for the third quarter of FY17. This compares to adjusted earnings per share of $0.20 in the third quarter of last year.

On slide 9, you will see an overview of our segment results for the third 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.

Agricultural sales were $206 million, a decrease of 2.7%, which is better than we previously expected, primarily due to our increase in used equipment sales. Our ag segment had an adjusted pretax loss of $2.3 million, compared to adjusted pretax income of $4.1 million in the prior-year period, primarily reflecting equipment gross margin pressure due to the aggressive retail of used equipment.

Turning to our construction segment, our revenue was $81 million, a decrease of 7.2%. We generated adjusted pretax income for our construction segment of $100,000, compared to $1.5 million in the same period last year. The decline in segment results is primarily due to the impact of the competitive pricing environment in equipment and rental that David discussed earlier, partially offset by a decrease in floor plan interest expense.

In the third quarter of FY17 our international revenue was $46 million, which is relatively flat compared to the prior-year period. Our adjusted pretax income was $600,000, compared to adjusted pretax income of $500,000 in the prior-year period.

Turning to slide 10, you see our first nine-month results. Total revenue decreased 13.3% compared to the same period last year, primarily due to lower equipment sales of 16.3%.

Year to date, parts were down 6.2%, service was down 3.8%, and rental and other was down 17.7%. The nine-month results for parts, service and rental reflect similar overall trends to those in our third quarter. Equipment sales for the nine months are down more compared to the third quarter, due to our aggressive retailing of used equipment in that three-month period.

Turning to slide 11, our first nine-month gross profit was $165 million, a 13% decrease compared to the prior year, primarily reflecting lower revenues and lower equipment gross margin. Our total gross margin was flat, as lower equipment margin was offset by the increased proportion of our sales coming from our higher-margin parts and service businesses.

Our operating expenses decreased $6.9 million or 4.1% to $159 million. As a percentage of revenue in the first nine months, operating expenses were 17.8% compared to 16.2%, reflecting the lower revenue. Floor plan and other interest expense decreased $8.4 million or 33.4% to $16.8 million in the first nine months, reflecting similar factors affecting our third-quarter results. Year to date, we have generated adjusted EBITDA of $15.8 million, and adjusted loss per diluted share of $0.36.

On slide 12, we provide our segment overview for the nine-month period. Overall revenue decreased 13.3%, and our adjusted pretax loss was $12.6 million. At the segment level, lower ag revenue and equipment margins led to reduced adjusted pretax income.

In the construction segment, we were able to more than offset lower revenue, primarily with lower floor plan and operating expenses, resulting in improved adjusted pretax results. Lower revenues in our international segment were primarily offset by lower floor plan interest expense.

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 prolonged headwinds we face in our agriculture and construction segments, one of our key areas of focus is improving our balance sheet, and we are pleased with the progress we have made to date.

We had cash of $52 million as of October 31, 2016. Our equipment inventory at the end of the quarter was $514 million, a decrease of $77 million from January 31, 2016, which reflects an $86 million or 32% decrease in used equipment inventory, partially offset by an increase of new equipment inventory of $8.5 million.

As we have said earlier, we increased sales of our used equipment in the third quarter, and now expect to reduce our inventory in FY17 by more than what we had previously planned. In a few minutes, I will provide some additional color around this.

Our rental fleet assets at the end of the third quarter were $131 million, compared to $138 million at the end of the fourth quarter of FY16. We plan to reduce our fleet size through the remainder of FY17 to approximately $125 million, based on the lower rental demand we are experiencing in our footprint. We had $372 million outstanding floor plan payables, on $856 million total discretionary floor plan lines of credit as of October 31, 2016.

In the third quarter, we reduced our discretionary floor plan lines of credit by $85 million to reflect our lower inventory levels. We have repurchased over $54 million of our convertible notes year to date, with $46 million of cash, reflecting a 15% discount, and a $3.1 million pretax gain, with $1 million recognized in the third quarter. These repurchases amounted to over 35% of the original $150 million notes.

Slide 14 provides an overview of our cash flow statement for the first nine months of FY17. The GAAP reported cash flow provided by operating activities for the period was $74 million, primarily reflecting the reduction in inventories.

As part of our adjusted cash flow provided by operating activities, include all equipment inventory financing, including non-manufacturer floor plan activity. Our net change in non-manufacturer floor plan payable amounted to a decrease of $55 million.

To accurately reflect cash flow provided by 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 flow provided by operating activities, exclusive of changes in equipment inventory financing decisions.

The equity in our equipment inventory increased 2.8% during the nine-month period, and represents a $14.5 million adjustment to our cash flow provided by operating activities. Making these adjustments, our adjusted cash flow provided by operating activities was $34 million for the nine-month period ending October 31, 2016, compared to $33 million for the same period last year.

Slide 15 provides an update on the status of our expanded marketing plan of our $74 million of aged inventory. 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 nine months of FY17, we sold $61 million, or approximately 83% of our planned marketing of aged inventory, and are currently ahead of our original target by over 20%. The reduction in inventory is reflected on the graph at the top white portion of each product category. We're confident we will continue to successfully market this equipment through alternative channels within the original timeline.

Turning to slide 16, I would like to provide an update on our long term equipment inventory initiative. Similar to what we have 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 nine months of FY17 by $77 million, which reflects and $86 million or 32% decrease in used equipment inventory, partially offset by an increase in new equipment inventory of $8 million. The third quarter reflects the seventh straight quarter of reduction in our used inventory.

Primarily due to the reduced used equipment inventory levels in the third quarter, we are now on track to exceed our goal of $100 million reduction of equipment inventory in FY17, and now expect to reduce equipment inventory by $125 million, which includes continued reductions in fourth quarter. At the end of FY17, we now expect to have reduced our equipment inventory at approximately $475 million or 50% compared to the end of FY14, which has improved our position in the current environment.

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 third quarter. This ratio improved in the first nine months of the year from 2.1 to 1.8, and we expect continued improvement in the fourth quarter of FY17. 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 interest expense, which will position our Company to capitalize on long-term opportunities.

Slide 18 shows our FY17 annual modeling assumptions. We are updating the modeling assumptions, reflecting our year-to-date results, and increased visibility to current market conditions. We now believe our ag same store sales to be better than previously expected.

We're changing our ag same store sales to be down 13% to 18% compared to the previous range of 17% to 22%. This improvement reflects our third-quarter aggressive retailing of used equipment.

We continue to expect our construction same-store sales to be flat, despite a very competitive market environment. We continue to anticipate international same-store sales to be down 7% to 12%.

Our modeling assumption for equipment margins for the full year is now projected to be in the range of 6.2% to 6.8%, compared to the previous range of 7.2% to 7.8%. This updated range reflects the lower equipment margins realized in the third quarter.

We continue to expect our non-GAAP adjusted diluted loss per share in the second half of FY17 to be less than the loss we experienced during the first half of the year. Operator, we are now ready for the question-and-answer session of our call.

(Operator Instructions)

Steve Dyer, Craig-Hallum.

As you look into your FY18 or calendar 2017, Deere last week was talking about ag and turf being down negative 5 to negative 10, does that generally feel like what sentiment is shaping up as at the moment, or do you see any reason based on your footprint, et cetera, to be better or worse than that?

I would say that's probably consistent with our thinking.

Okay. And given that, when you get to the end of this inventory reduction plan, right around Q1 of FY18, do you feel like -- do you feel good about where your inventory levels are there, both new and used, or do you feel like there's potentially more to do there next year from a cash flow standpoint?

I think if what Deere is suggesting for next year holds true, I think there is still some level of opportunity for us to decrease our inventories. We look at things from a 3 time turn, for sure 2.5 time turn, but even at the levels that we are ending the year, given our new projections down $125 million, it still leaves us some opportunity to further take down inventory, generate cash, and still be not quite at that targeted level of turns of 2.5 to 3 times.

Okay. I will hop back in queue, thanks.

Rick Nelson, Stephens.

You have made great progress of reducing the used equipment inventory. As I look at slide 16, it looks like that improvement comes to an end in the fourth quarter, with the inventory coming down in the new but stable in used.

Rick, I think it's a couple of things. I think one of the things is we're not anticipating being as aggressive as we were in the third quarter in the fourth quarter, on some of that used inventory that we have. And therefore, we do expect some of the margins to come back on their equipment margin.

But secondarily, in the fourth quarters, typically where we have a higher percentage of new equipment sales, and as you know, all those new equipment sales we have generally produce, we procure used inventory on trades at that time. So we generally don't see a lot of improvement in the fourth quarter on our used. Now, it is turning over, we are selling used and also taking in used, so we're getting fresh used as part of that inventory balance, as well.

Got it. So you do expect some uptick in the margin in the fourth quarter in the used category?

I'd say overall in our equipment margins, we expect higher in the fourth quarter compared to the third, yes.

And the values at the auction, how are they coming in relative to the reserve that you took initially, for that inventory?

I think actually, they are coming in as expected. I don't think there's -- that's certainly not any of the reason for the margin decrease. It's definitely on the aggressive retailing that we had on our used that we had in inventory. So it continues to come in as we expected, and not having a major impact on our overall equipment margins.

Okay, got it. Good to know. Thanks, and good luck.

Mig Dobre, Baird.

Just first, maybe a little bit of color on your guidance for equipment margins in the fourth quarter. We are talking about a really wide range here. Just rough math, you are talking anywhere between 5% and 7.2% equipment margins. So I understand that things are going to get better sequentially from the third quarter, but I'm trying to get your sense for the puts and takes as to what puts us at 5%, what puts us at 7%?

Well, I think you can look back to, first quarter was relatively high, given the environment we're in at 7.9%. I think we're talking about going back closer to what happened in second quarter, which is around 7.2%. Right around that range, to maybe a little bit lower than that in the fourth quarter, is what we are thinking.

I see, okay. And I guess going back to the Deere question and their outlook, if that comes to be, how do you think about your equipment margins in an environment like that?

I think that would be showing, is that holds true, if you were down that 5% to 10%, that's more stabilization in the equipment sales than we have seen in the last three years here. So that should provide some help to our overall equipment margins. And on top of that, just with our inventory being in a healthier position entering the year, that should also provide some lift in the equipment margins, going into next year.

So if I understand this correctly, you are saying that equipment margins are going to be up versus FY17?

Given those factors, if that holds true, where we see some more stabilization and we're only down 5% to 10% compared to where -- we've been down much higher than that. You've got to remember, when we give our range for the ag segment, that includes parts and service, which is more stable, so the equipment is actually down quite a bit more than that. So yes, that stabilization would help generate stronger equipment margins for us.

Okay. If you will allow me one last question, we haven't talked about parts and service, and we have seen declines here now for seven, eight consecutive quarters. How do you think about this business going forward if say, blended acres remained flat next year?

I think we are starting to see a little stabilization there. We are not down as much as we were last year. Again, with new equipment maybe, and that is the most volatile part of our business from a revenue standpoint, but if that starts stabilizing, we have not as much drag, if you will, on some of that PDI that we've talked about in the past, some of that warranty work that we get through our parts and service. That starts to not cause as much pressure on that parts and service business.

I do think some offset and some of the preventative maintenance should start improving somewhat. As the equipment becomes older in the field out there, and farmers are less likely to continue to prolong some of their maintenance on their equipment. So I think it sets up for some good stabilization in that year over year. So not continuing to have declines in parts and service.

Great, thank you.

Joe Mondillo, Sidoti & Company.

Also, I had a question regarding pricing as well, in terms of the equipment margins. Just wondering, is there any way you can quantify what your normalized equipment margins would be, if you weren't so aggressive on the used equipment pricing? And also in relation to that, Deere has talked for a couple quarters now, how their used equipment pricing has been relatively stable, so I'm just wondering if you could comment on that. Are you just taking more of an aggressive stance to try to work out your inventory, or just wondering what your thoughts are on that?

I would say we did take an aggressive position in the quarter to move more. I think as we indicated, we exceeded our revenue expectation, and that was because we did get aggressive on the used.

As far as quantifying it, I think a relatively easy way to quantify it is looking at our margin for the quarter, the equipment margin. And if it would've been, if we wouldn't have been as aggressive, it probably would have been more similar to what we had in that Q2 timeframe for equipment margins.

Okay, and in relation to that, so if you weren't so aggressive and margins were, call it low 7% range, are you still able to get improvement, do you think next year? Or is it the year-over-year improvement because you're just not going to be as aggressively as discounting next year?

Again, I think that some of it has to go back to what's the overall assumption for next year and we will be talking more detail about that as we get into our next call. But certainly, with the inventory, the health of our inventory going into this next year, gives us an advantage over how we entered this past year. The market continues to trend down. That works against us somewhat, but certainly the structural thing that we have in place right now is healthier inventory entering next year than what we did this past year.

Okay, and then one just last question if you will. Your guidance for the construction segment implies a pretty decent improvement in the fourth quarter. I'm not sure if you mentioned that in your prepared commentary. My apologies if you did, but just wondering if you could comment why you think you're going to see such a big improvement in the fourth quarter, and if that's not a one-off type thing, are you anticipating this strength to continue into FY18?

With construction, going into the fourth quarter, you look at the last three quarters that we had in our same-store sales we were down a little bit Q1, up a little bit Q2, and then down a little bit more at 7.7% in Q3. This would imply that it's going back to something closer to what we just had in Q2 and being up somewhat.

I mean, it's a difficult environment out there. I think we're doing a lot of good things in our construction segment. We're going to have to do good things to hit that, but to be up single digits over the last year in this environment I think is doable with some of the efforts we're making on our construction segment of our business.

Okay, thanks a lot. Appreciate it.

Neil Frohnapple, Longbow Research.

Was hoping you could provide more granularity on the lower rent fleet dollar utilization. What's going on in that business? I would have thought the worst would certainly be behind at this point, and you would have anniversaried some of the lower volumes, and a little surprised you're continuing to reduce the fleet. So any thoughts there? Are rental rates just declining more than previously expected, or just anything you can help us out with there would be great.

It was down a little bit for the quarter, and year to date I think we're relatively flat on rental utilization. We still have, I know there's been discussion about rig counts out there, and maybe some improvement on the energy side, we are not seeing that so much in the Bakken. I think more of that is happening down in the Texas and some of the oil fields down there.

So we're certainly not seeing any lift here. I think there's still some level of lower activity happening. There may be some opportunity for that to increase here, if oil prices stabilize further, and hopefully go up some more.

I think what's affecting us is, when we push this inventory and we move it to some of the surrounding markets, we are seeing continually more pressure in those areas. It's aggressive competition that's happening from others that are moving equipment out of energy areas, and into these surrounding areas. Pricing is under pressure, and that's part of the dollar utilization that is coming down.

So I think, and when we talk about our fleet going down, we are not talking about big dollars here. I think we are projecting another $5 million or so here to come down in original equipment costs, and it's really getting it to where we can be more efficient and have that higher dollar utilization coming out of the fleet that we do have in service.

Okay, that's helpful, Mark. Thanks for that. And then, could you just comment on what drove the uptick in operating expenses sequentially? Gross profit for equipment sales were down, I realize that parts and service gross profit were up, so maybe there's a variable component there. But how should we think about operating expenses for the fourth quarter?

There is nothing, I would say, nothing material that stood out in that. I think we put initiatives in place last year during the year that helped benefit, and a lot of that anniversaried by the end of the third quarter. I think that's part of it.

The other part of it is some of the level of commission, even though we didn't sell, we didn't get much of a profit out of some of these used pieces that went for the quarter, we did have some commissions to make sure we move the equipment during the quarter. So I think the combination of those two are the biggest factors.

Okay, thanks very much.

Brent Rystrom, Feltl.

Just a couple quick questions. A lot of the OE suppliers are saying that Deere is losing reasonably good market share to Case. So when we think about guidance for minus 5 to minus 10 next year, do you see a reason that you should do better than that, given that situation, or are you just comfortable at this point seeing what you are seeing?

Just for competitive reasons, we really don't disclose the market share, and talk of that, how we're doing compared to the other OEMs. So we stay away from that if we can.

Okay. From a big picture perspective, if we're in the position now where the, I think it's reasonable to say after years of minus 20, 30, 40-type declines, we're probably close to a bottom. How should we think about your plans for the next year or two, when it comes to cash utilization?

Are you going to look at strategically starting to expand the business? Are you going to look at, if you do, strategically expanding the business geographically, or within the existing footprint? Are you thinking about primarily expanding in the domestic agriculture segment, or where are you with that construction in the international as far as expansion? Can you give us an overview on that?

First of all, to remind everybody, we did reduce our convertible debt by $50 million. Given the challenging industry conditions, we believe it's best to use our cash to delever our balance sheet, at this time, and I think we have been doing a good job of doing that, Brent.

We're keeping a steady level of equipment equity, which I think is important in this environment. We're really setting ourselves up for long term opportunities for different options on capital allocation. One, we're talking about doing acquisitions, and I think there are going to be some opportunities.

Again, we still have some more left on the convert that's out there. Our Board, we continue to evaluate buying back convert, what we discussed potential stock buyback, that's a topic we talked about. So I think they're all on the table, and we just have to keep progressing, and grow that cash from our delever on our balance sheet from moving our used, and at that point in time, I think we have some really good options out there, and we've got a lot of faith in our management team and our Board to pick the right decisions there.

So specifically, those options, looking at agriculture, construction and international, where do you see the greatest focus? And is it an overwhelming focus, or are you going to grow the three businesses proportionally? How do you think about that, when that time comes?

I think we're going to have more visibility on that. We just had an election, and I think we're going to see there's a lot of things on the table out there, many speculative, but I think we have to give this a little bit of time out there. We definitely have to watch what's going to start happening with the trends in the commodity prices, and what's going to happen in the near term for ag, and infrastructure investment, what that's going to amount to.

I think we need to start -- we've had some really good stability and we've got a great team internationally, to see where that progresses, and I think it's difficult to really forecast that at this point in time. I think there's going to be a little more visibility on some things six months from now, Brent, and like I say, what is important now is I think to really get a solid balance sheet, and to have the cash and I think there's going to be a number of opportunities.

Thank you.

Brett Wong, Piper Jaffray.

Thanks for taking my questions. I just wanted to, one, ask ag in general, for farmers in the US next year, how are you viewing grain cash receipts?

Right now our growers, I would say if you look at corn for example, at the elevator, it's less than $3, and I would say, most cases depending on what their land costs, are they are probably losing money at that. So that's not a good situation.

I think there's been some more stability in soybean prices, which I think is better. So overall I think that's a little bit of the situation of the have and have-nots out there, there's record deals in a lot of our footprint which is good, and I think some of the growers to advantage of some selling opportunities last May and June. Corn got a little closer to $4 during that timeframe.

So I think marketing is going to be a big part of that, but definitely at these levels, I think a lot of these growers out there are going to be struggling at this break even level, or having positive cash flows in our operations. So I think we have to be considering that, in the way we model our business.

Okay. And for next year, as you look at the ag environment, do you think grain cash receipts are going to be flat to where they are, are they going to be down, are they going to be up?

If I had the answer to that, there is some real volatility out there. I guess that's going to be a tough call. I guess right now, we're modeling our business to say that we are not going to see much movement in commodity prices through calendar year 2017.

So I think that's the best way to approach it. If the commodity prices get better than that, that's going to be to our advantage, but I think we need to model this under the assumption that we're going to have pretty stable commodity prices for the next near term.

Okay, that's helpful. And the picture that you just painted David, about the farmer continuing to struggle, are you expecting to see any increase foreclosures as farmers struggle to break even, and how that might impact your business and ag in general?

We're starting to see some farmer auction sales, which we haven't seen a quite a few years. Some of these are retirement sales, and I would say there's probably some of the farmers making decision to get out of the business. Whether that is driven by their bank or not, it's hard to tell, but we are seeing a little bit of an uptick of farmer sales out there, going on, and I think we will continue to see some level of those as we go into next year.

Do you think that level is going to increase going into next year in terms of farmers going through more bankruptcies?

No. I think right now, farmers' balance sheets are for the most part, are pretty strong. I think if you go back even two years ago, I think their conversations with the bankers are pretty conservative, so I say for the most part, they are in the position that to survive this.

We still have a low interest rate environment out there. If you look at where some of the land sales have been taken place at, they've been fairly stable, down somewhat, but fairly stable. For the most part I would say the general health of the ag producer out there, both is your production quarter, corn, beans production, agriculture and also your livestock market for the most part are pretty healthy from what's happened over the last five, six years.

Okay, that's really helpful David. Thanks and just one last one for me, just wondering if you talk to your international business and expectations that you have next year compared to this year?

I think we will talk more about FY18 on our next call, but again, I think some of the structural things that we have done internationally sets us up well for the next year, regardless of what revenue levels due and by that the level of inventory and the expense level that we have over there. So I think we've got some good structural things going into the year. So regardless of the revenue side, we should see good results from the business.

Great, thanks so much.

Larry De Maria, William Blair.

Obviously, we're seeing a rally in oil today, but regardless, I'm curious about the relocation of equipment for the energy markets. You talked about it a little bit, but is that something that you imagine will be under pressure through all or most of next year? In other words, all else being equal, when did this market get closer to equilibrium, in terms of the excess inventory that moved around from the oil basins to other areas that is affecting the overall market?

I think this has been going on for some time. So if oil prices, let's just say if oil prices stay where they are at today and don't move much, I do think it starts working out in those surrounding areas, somewhat.

I think others are deflating some as well, overall. And I think that helps take out some of the availability of the rental fleet, and will help pricing down the road and overall dollar utilization, or utilization of fleet. So I think with stable oil prices from here and not any other factors that are influencing, whether it is res or non-res or different types of activity, I think it does lead to a little bit less pressure going into next year.

Okay, but all else being equal, the market overall, I'm curious how much excess inventory is there still in the market? Is there very much, or would we work through most of that been around and then the market can stay flat at this point?

I think the fleet, I think is still working through that a little bit. If you're referring to overall equipment inventories, retail inventory, I think there is some of that too, but all else being equal with more time, you start working through that some more. So I don't see any big, with everything stable like what we are talking about, there wouldn't be any big change, but I think with time, you do get some less pressure, as you work through that.

All right thanks and then just switching gears on the ag side, what do you think your competition on the used market front, and where do you stand versus them? Obviously you accelerated your sales in the last quarter. Was that to get ahead of the competition, or is everyone doing that? And do they still have excess levels similar to you, or are they in better shape, worse shape, or how do you think about it?

I think as an overall industry, if you drive around and look at equipment dealers lots, whether it be red, green, yellow, there's a lot of inventory sitting on the lots, Larry, so it's a pretty challenging market out there. I'd say you've got more inventory than there are buyers right now, so that tends to make it very competitive out there. So we feel good about our inventory. We want to get ahead of the volume, like you said.

And in addition to that, there is some lease returns coming back into the channel, not only in our Q4, but you're going to see them all through next year. So I think the better shape we can get our inventory in, I think as Mark talked to earlier, that creates more opportunity for margins as we go ahead in our new and used inventory, and that's where we want to get into that position as quickly as we can.

So the lease returns will happen for a while. Okay. That's good. As the last thing, the buyers of equipment now, are they typically -- of the used equipment, are they typically the buyers that would be buying new equipment? In other words, if we move towards the replacement cycle I'm just curious if that gets pushed out because most of the guys, farmers that would be buying new equipment have just replaced with used at this point?

I think there are some previously new equipment buyers that are looking at some late model used. There is awful nice late model used out there and some of this equipment has advanced a lot in the last two, three years. Higher horsepower, more technology, more sophistication.

I think as farmers start looking at their assets on their business and their business model, and if they can buy a two-year-old or three-year-old piece of machinery that a higher person runs and is going to do the same job for them, and save them a lot of productivity, and yes, I would say definitely they are going to look at that used and we are more motivated to sell that used piece also.

Okay. Thanks very much. Good luck.

Joel Tiss, BMO.

Everything has been all, pretty much about the short term. I just wondered if you take a step back and you look at your peak earnings in the last cycle, and can you talk a little bit about some of the structural changes that you have made, and what that would do to potential peak earnings 10 years from now, or whenever we get to a brighter period?

I think some of the structural things that we have done, you don't see it as much this year, in what we've done with operating expenses, but certainly last year, in taking down our operating expenses $52 million, $53 million was significant, a good chunk of that. Some of it was variable, but a good chunk of that was structural in nature, which sets us up well going forward.

The other big item of course is inventory levels, with lower and more efficient asset utilization inventory category, that should allow better margins, equipment margins overall, and of course, lower levels of interest financing costs associated with that, as well. So I think those are some of the bigger items. I think there are some good things done, certainly on the construction side, and in international we are seeing signs of turning on those, as far as operating those segments.

In the last peak that we had, those cylinders weren't firing on all cylinders there, in those two segments. So that should help us get to -- back to similar, we talk about peak, it's on revenues, having about a 5% pretax as a percent of revenue. And I think with some of the structural things and some of the improvements specifically on the other segments, meaning construction and international, sets us up well to achieve that type of target as we move down the road a few years.

At this time, I'd like to turn it back to David Meyer for closing remarks.

Okay. Thank you everybody for your questions and your interest in Titan Machinery, and we look forward to updating you on our progress on our next call. Have a good day, everyone.

That concludes today's conference. We thank you for your participation. You may now disconnect.