Titan Machinery Inc (TITN) 2018 Q4 法說會逐字稿

Good day, and welcome to the Titan Machinery Inc.'s Fourth Quarter Fiscal 2018 and Full Year Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

Great. Thank you. Good morning, ladies and gentlemen. Welcome to Titan Machinery Fourth Quarter Fiscal 2018 Earnings Conference Call. On the call today from the company are David Meyer, Chairman and CEO; and Mark Kalvoda, Chief Financial Officer.

By now, everyone should have access to the earnings release for the fiscal fourth quarter ended January 31, 2018, which went out this morning at approximately 6:45 a.m. Eastern Time. If you have not received the release, it is available on the Investor Relations tab of Titan's website at ir.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 the IR tab on Titan's website, and you can click on the Events and Presentations button and it'll take you to the presentation.

You'll see on Slide 2 of the presentation our safe harbor statement. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These forward-looking 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 a 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'll 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 financial performance, particularly, when comparing underlying results from period to period. We have included reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures in today's release.

The call today will last about 45 minutes and at the conclusion of our prepared remarks, we will open the call 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 fourth quarter fiscal 2018 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 tab of our website at ir.titanmachinery.com. On today's call, I will provide a summary of our results and then an overview for each of our business segments. Mark will then review financial results for the fourth quarter of fiscal 2018 and conclude with review of our updated modeling assumptions.

If you turn to the Slide 4, you will see an overview of our fourth quarter and full year financial results. Our fourth quarter revenue was up 7% to $340 million compared to the same period last year, with adjusted pretax loss of $2 million versus a $9.6 million loss in the prior year. For the full year, we generated revenue of $1.2 billion, which was about even with last year. Our adjusted net cash flow provided by operating activities was $45.6 million and our adjusted pretax loss was $2.2 million versus a loss of $22.3 million for the prior year. In the fourth quarter and full year, our results primarily reflect the stabilization of domestic new and used equipment demand coupled with our improving operating structure. Throughout fiscal 2018, we worked to align inventories and reduce structural expenses to match the current market environment. We successfully completed our restructuring plan in the fourth quarter by reducing operating expenses by approximately $20 million on an annual basis. We have established a foundation for improved profitability at current levels of demand which will accelerate as our markets gain strength.

I will now provide additional detail for our 3 operating segments: our domestic Agriculture and Construction segments and our International segment.

On Slide 5 is an overview of our domestic Agriculture segment. In the fourth quarter, we saw better-than-expected yields translate into improved replacement demand that grew our equipment revenues versus the same quarter of the prior fiscal year. Overall parts and service sales saw a modest decline, driven primarily by store closures, which were part of the previously announced restructuring plan. However, our store level and centralized expense reductions are creating improved efficiencies and increased profitability. We don't anticipate major positive changes to Ag market fundamentals for the year ahead. Crop prices are expected to remain within current ranges. Net farm income is expected to decrease another 6.7% from 2017 to its lowest point since 2006. And we are currently experiencing abnormally dry conditions across most of our footprint. The possibility of Ag-related reprisals to U.S. trade tariffs creates additional uncertainty that may further delay and/or decrease investments by our customers. Producer response to these challenges will vary but higher yields, improved productivity and greater cost-effectiveness will be primary areas of grower focus. We are well positioned with new and late model used equipment inventories, with flexible purchase and leasing options. We will increase our investment in parts and service support, while also choose extended the duty cycles of their existing equipment. And we are investing in precision Ag solutions to help customers with mixed fleets, use field and equipment data to achieve better yields and higher profitability.

Turning to Slide 6. You will see an overview of our domestic Construction segment. Fiscal 2018 revenues finished down 7.3% from fiscal 2017, consistent with our expectations. We have continued to see pockets of growth in our major metros as well as modest rental growth driven by an increase in rent-to-own contracts. Although, we are seeing increase in energy-related projects driven by improving oil prices, our Midwest footprint continues to be challenged by the prolonged Ag recession and modest local government spending.

Continued economic growth, increased infrastructure spending and oil prices at/or above current levels will provide a solid foundation for construction growth in our territory and fiscal 2019. We are favorably positioned with on-hand inventory and the product support capacity to meet this demand. We continue to implement the operational improvements to take further advantage of an improved construction equipment environment.

On Slide 7, we have an overview of our International segment, including territories within the Eastern European countries of Bulgaria, Romania, Serbia and Ukraine. Overall, demand for Ag equipment exceeded our expectations throughout the year. The business (inaudible) climate has been strong across our Eastern European territory and the same has been true for crop yields. Growers have been rewarded for their investments in modern equipment and they have responded with increased demand for high-horsepower machinery and a growing interest in precision agriculture to achieve even better returns. The ongoing availability of EU funds and tax incentives in Romania and ready customer financing in Ukraine have accelerated sales in these 2 markets. We have accordingly continued our footprint build-out and increased our equipment inventories to meet these growing demands.

Along with the heightened equipment demand, our customers increasingly require improved product support for their upgraded fleets, especially service expertise and parts availability. We have responded on both fronts. We are on-boarding and conducting additional product support training from senior leadership to frontline technicians. We are also working diligently to analyze and optimize our parts inventories to reduce customers' downtime. Our strategy remains to build a field population of customer machines and to simultaneously invest in the capacity and capabilities required to capitalize on the higher-margin, downstream product support. We're investing now in our future profitable growth.

In summary, we have a wide mix of market conditions across our 3 segments. Domestic Ag has stabilized, but several key causes for grower uncertainty remain. Construction fundamentals are improving and we are targeting our operational improvements to maximize this opportunity. And we have invested more aggressively to match rapid International growth to meet both current equipment demand and future products support needs.

Finally, I wanted to thank the Titan team, in both United States and Europe, for your commitment to our customers and our company. As our customers head into the planting season or a new year of construction projects, they will be turning to you as their expert team to keep them running productively and cost effectively. I'm confident you will exceed their expectations while we work to build an even stronger Titan Machinery.

Now I would like to turn the call over to Mark Kalvoda, our Chief Financial Officer, to discuss our financials. Go ahead, Mark.

Thanks, David.

Turning to Slide 8. Our total revenue for the fiscal 2018 fourth quarter was $340 million, an increase of 6.9% compared to last year. Equipment sales increased 11.3% quarter-over-quarter, driven by increases in equipment sales across all 3 of our business segments. The increase in equipment revenue was slightly offset by our parts and service revenue, which decreased 6.6% and 5.4%, respectively. Our parts and service business was negatively impacted by our store closings associated with our fiscal 2018 restructuring plan. Our rental and other revenue increased 7.3% in the fourth quarter, primarily due to an increase in inventory rentals in our Construction segment. Our rental fleet dollar utilization was roughly flat year-over-year at 22.8% for the current quarter compared to 22.7% in the same period last year.

On Slide 9, our gross profit for the quarter increased by 6.7% to $52 million and our gross profit margin remained relatively flat at 15.3% compared to 15.4% as the impact of higher equipment margins was offset by a change in our gross profit mix, which included a higher percentage of equipment revenue compared to higher-margin parts and service revenue.

Our operating expenses decreased by $1.9 million to $50.3 million for the fourth quarter of fiscal 2018, which was largely the result of cost savings achieved from our 2018 restructuring plan, somewhat offset by higher levels of commission expense on increased gross profits from equipment sales.

We have essentially completed our restructuring plan in the fourth quarter. Overall, we improved our operating expense margin by 170 basis points in the fourth quarter as compared to the same period last year. This lower expense base will be in place for all of fiscal 2019.

Floorplan and other interest expense decreased $1.5 million or 29.6% compared to the same period last year, which is primarily due to a decrease in our average interest-bearing equipment inventory levels and a reduction in the outstanding balance of our senior convertible notes.

For the fourth quarter of fiscal 2018, adjusted EBITDA was $6 million. This represents an increase of $10 million compared to the fourth quarter of last year. You can find a reconciliation of adjusted EBITDA in the appendix to the slide presentation.

In the fourth quarter of fiscal 2018, our adjusted net loss including noncontrolling interest was $2.1 million compared to adjusted net loss including noncontrolling interest of $6.6 million for the fourth quarter of 2017. The adjusted figure for fourth quarter 2018 excludes a gain of $1.8 million that occurred as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, and a $2.4 million net benefit related to our income tax valuation allowance. For the fourth quarter of fiscal 2017, the adjusted amount also excludes a charge of $1.7 million, which reflects noncash charges, primarily related to the impairment of long-lived assets within the Agriculture and Construction segments, offset by a gain on insurance recoveries.

Our adjusted loss per diluted share was $0.10 for the fourth quarter of fiscal 2018, which excludes certain non-GAAP items and noncash tax benefit that I just mentioned of the $0.20 per share, as outlined in the reconciliation table in the appendix to the slide presentation. This compares to an adjusted loss per diluted share of $0.31 in the fourth quarter last year.

At the bottom of the page, you will see our absorption rate, which is a metric that reflects the ability of our parts, service and rental gross profits to absorb fixed operating cost. Our absorption for the fourth quarter of fiscal 2018 improved to 72.4% compared to 70.7%, due to a reduction in our fixed operating costs and lower floorplan interest expense.

On Slide 10, you will see an overview of our segment results for the quarter. Agriculture sales were up 2.1% compared to the prior year period, which is notable considering the closure of 13 Ag stores earlier this year, associated with our restructuring plan. Ag-adjusted pretax income improved significantly to $2 million for the quarter compared to an adjusted pretax loss last year of $4.8 million. The improvement in our adjusted Ag segment pretax income is primarily the result of our lower operating expenses, increased equipment margins and lower floorplan interest expense. As mentioned earlier, the lower expenses were the result of our restructuring plan and our improved equipment margins and lower floorplan interest expense were primarily due to our improved inventory position.

Construction segment sales increased 5% compared to the prior year. Adjusted pretax loss for our Construction segment was $2.6 million compared to an adjusted pretax loss of $3 million in the same period last year.

In the fourth quarter of fiscal 2018, our International revenue was $49 million, which is a 39.4% increase compared to the prior year period. Growth in our international markets exceeded our expectations and continues to be driven by the availability of EU subvention funds in certain markets, positive crop conditions and the ongoing build-out of our distribution footprint. Our adjusted pretax loss in the fourth quarter was $1.1 million compared to an adjusted pretax loss of $100,000 in the prior year period. This decrease was a result of increased expenses, partially due to ramp-up costs associated with the opening of additional stores as well as achieving a reduced level of year-end manufacturing incentives as compared to the prior year.

Turning to Slide 11. You will see an overview of our full year revenue results. Total revenue was flat compared to last year, as a slight improvement in equipment revenues was offset by lower parts and service revenues. For the full fiscal year, equipment revenues were up 0.9%, parts were down 4.9%, service was down 5.4% and rental and other was up 1.7%.

On Slide 12, our full year gross profit was $215 million, a 0.7% increase compared to the prior year period. Our gross profit margin increased 30 basis points to 17.9%, despite a higher mix of equipment revenue compared to that of higher-margin parts, service and rental revenue. We were able to achieve this increase due to the higher margins on our equipment revenues.

Operating expenses declined by $8.2 million or 3.9% for the full year of fiscal 2018 compared to the prior year period. Operating expenses, as a percentage of revenue, were 16.9% compared to 17.4% in the same period last year. The decrease in operating expenses, as a percent of revenue, was primarily due to the cost savings resulting from our restructuring plan.

Floorplan and other interest expense decreased $8.4 million or 34.4%, reflecting the decrease in our average interest-bearing inventory and lower levels of convertible debt in fiscal 2018.

For the full year of fiscal 2018, our adjusted net loss including noncontrolling interest was $2.7 million compared to adjusted net loss including noncontrolling interest of $14.2 million for the full year of fiscal 2017. Our adjusted loss per diluted share was $0.12 for fiscal 2018 compared to adjusted loss per diluted share of $0.65 in the prior year.

These adjusted figures exclude certain non-GAAP items as outlined in the reconciliation table in the appendix to the slide presentation.

As a reminder, our adjusted diluted loss per share of $0.12 in fiscal year 2018 excludes $10.5 million of restructuring expenses associated with our restructuring plan, which was partially offset by the $4.2 million tax benefits related to the tax act and adjustments to our income tax valuation allowances that were realized in the fourth quarter of fiscal 2018.

Our absorption for fiscal 2018 improved to 79.1% compared to 77.7% for the prior year period.

Turning to slide 13. We provide our segment results for the full year fiscal 2018. Ag revenue decreased 6.1% and Construction revenue decreased 7.3% compared to the same period last year. These decreases were partially due to store closures associated with our fiscal 2018 restructuring and the prior year expanded marketing of aged equipment inventory. Ag-adjusted pretax income was $3.4 million compared to adjusted pretax loss of $15.3 million last year. In Construction, adjusted pretax loss was $4.7 million compared to an adjusted pretax loss of $4.3 million last year. Our International revenue increased 39% and our adjusted pretax income increased to $2.3 million compared to $100,000 last year.

Turning to Slide 14. Here we provide an overview of our balance sheet highlights at the end of the year. We had cash of $53 million as of January 31, 2018. Our equipment inventory was essentially flat versus the prior year at $400 million, with a $19 million decrease in used equipment, substantially offsetting an increase in new equipment inventory. We'll provide more on our inventory position in a few minutes. Our rental fleet assets at the end of the fourth quarter remained relatively flat at $123 million compared to $124 million at the end of fiscal 2017. We plan to reduce our fleet to around $115 million, as we focus on improving our utilization results in fiscal 2019.

As of January 31, 2018, we had $247 million of outstanding floorplan payables on $728 million of floorplan lines of credit. We have ample capacity in our credit lines to handle our equipment financing needs. We continue to maintain a healthy total liabilities to tangible net worth ratio of 1.4 and have retired a total of $84 million or 56% of our senior convertible notes since the beginning of fiscal 2017. As of January 31, 2018, the remaining face value outstanding amount of senior convertible notes was $65.6 million.

Slide 15 provides an overview of our operating cash flows for fiscal years 2018 and 2017. The GAAP reported cash provided by operating activities for fiscal 2018 was $96 million, primarily reflecting changes in inventory, net of related changes in manufacture floorplan payables balances. As part of our adjusted cash flow provided by operating activities, we include all equipment inventory financing, including nonmanufacturer floorplan activity. Our adjustment for nonmanufacturer floorplan payables for fiscal 2018 amounted to a reduction of $39 million. We also adjust our cash flow to reflect the constant equity in our equipment inventory. This enables us to show cash flow provided by operating activities, exclusive of changes in equipment inventory financing decisions. The equity in our equipment inventory decreased 2.9% to 38.2% as of the end of fiscal 2018, from 41.1% as of the end of fiscal 2017, and represents a $12 million use of cash. Making these adjustments, our adjusted net cash provided by operating activities was $46 million for the full year fiscal 2018, compared to $89 million for our prior fiscal year. A higher adjusted net cash provided by operating activities in the prior year was due to the significant inventory reduction, driven primarily from our aggressive pricing in retail and used equipment in fiscal 2017.

Turning to Slide 16. I would like to provide an update on our equipment inventory. This chart outlines our ending equipment inventory position for prior 5 fiscal years, including our ending inventory for fiscal 2018. The chart shows a year-end fiscal 2018 equipment inventory position of $400 million, which represents a slight increase of $4 million compared to the end of fiscal 2017. The Q4 bar for fiscal year 2018 shows we achieved a notable decrease in our new equipment inventory from the prior quarter, which, in turn, brought in trade-ins and increased our used equipment inventory in the current quarter. We are very happy with our progress on improving our inventory position over the past 4 years. Since fiscal 2014, we've reduced our total inventory by nearly 60% to significantly improve our balance sheet amid this prolonged trough in the agriculture cycle.

At fiscal year-end 2018, our inventory turns have now moved up to a 1.7x turn on flat revenues, versus a 1.3x turn at the end of 2017. This is reflected in the black line on the chart. In fiscal 2019, we are focused on driving inventory turns higher in the coming years through a prudent approach to inventory management and driving higher sales through our expert team operating model.

Slide 17 shows our fiscal 2019 annual modeling assumptions. Consistent with our practice of providing segment-level revenues, equipment margin and diluted EPS modeling assumptions for the year, we are providing the following forecast for fiscal year 2019. We expect our Ag segment revenues to be flat to up 5% and our Construction segment sales to be in the range of 3% to 8%. If our revenues meet these expectations, it will be the first growth in revenue in 6 years for our Agriculture segment and 4 years for our Construction segment, marking milestone stabilization and, perhaps, some long-awaited improvement in business cycles that have been burdened by low commodity prices. We also expect our International segment sales to be flat to up 5%, following fiscal 2018 segment sales growth of 39%. Our modeling assumptions for equipment margins for the full year is projected to be in the range of 7.8% to 8.3%. This range reflects further improvement in our equipment margins from fiscal 2018's margin of 7.6%. And finally, as a result of these modeling assumptions, we expect diluted earnings per share to be in the range of $0.35 to $0.55. We are applying an annual consolidated effective tax rate of 28% on generating this EPS range. The lower rate is the result of the recently enacted tax legislation, combined with certain expectations on the mix of domestic and foreign profit and loss as well as expected profit and loss by country within our International segment. Our consolidated effective tax rate is subject to this profit and loss mix changing and is exacerbated by the fact that we have valuation allowances within certain tax jurisdictions. I also want to stress that this is an annual effective tax rate. Our effective tax rate on a quarterly basis may vary by quarter as profit and loss mix fluctuates due to seasonality within these various tax jurisdictions. We will update you on our income tax expectations as we progress through the year on future calls.

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

(Operator Instructions) We'll take our first caller, Steve Dyer with Craig-Hallum.

Within Ag it sounds like it did last quarter like Ag is getting very modestly better, despite the fact that corn prices remain pretty depressed and farm income is expected to be down again. What, I guess, sort of are you getting from a farm sentiment perspective with corn here? I mean, is it just sort of after 5 years, we need to start buying a little bit of equipment again? Or how would you, sort of, frame that up going forward?

Well I think there's a real cautious optimism out there, Steve. We're quoting deals. This replacement demand is real as evidenced by what happened in our fourth quarter. So I think that's positive. I think we're going to look at from the grower's standpoint, it's been pretty impressive trend of yield increases, which I think has given them that ability to take advantages of some of this replacement demand. So I think there's cautious optimism, but I think the growers are really like -- we talked about focused on productivity, they're talking about what they can do to yield increases and how they could manage the cost side of their business. And I think you'll continue to see that at this current level of commodity prices.

Okay. International, obviously, had an impressive year this last year and your guidance is for more of a low flattish to modestly up here. Is that conservatism on your part or lack of visibility, or just tough comp and don't think you can do something, sort of, that good again?

Yes. Like we said those kind of 39% increases last year, if we can maintain and improve on that a little bit and at the same time, see some bottom line improvement, I think we'd be happy with that. Because that is a big year-over-year increase and -- but sort of continue that momentum would really be good.

Yes. And then I guess lastly, floorplan interest was down nicely. Would you assume sort of a continued mix benefit from that on a noninterest-bearing perspective this next year?

I think there is a couple of things happening with our floorplan payables and the related interest expense. What drove some of that benefit in the fourth quarter was that significant cash generation we had from pulling down our inventories here in the fourth quarter. That should help us as we start out the year. But offsetting that, somewhat, is also some of the higher rates that are out there, with the rate increases that have been out there from a rate standpoint. It's going to offset it somewhat. So I think as we go forward, we'll see some level of lower floorplan interest expense, but not to the tune of the decreases that we've seen in the last couple of years, as we're not going to have as much inventory reduction and also the offsetting of higher rates on our floorplan.

(Operator Instructions) Our next question will come from Mig Dobre with R.W. Baird.

I want to talk about parts and service, if I may. I am wondering, what exactly -- how are you thinking about this business into fiscal '19 and, kind of, what's embedded in your outlook? I mean, we've seen 4 years of declines in parts and service. And I'm wondering how you're thinking about this business, not only near term but as you look out maybe 2 to 3 years, because I would imagine the fleet is older than it was, call it, 3 or 4 years.

Yes. Good question, Mig. I think as we're looking at -- so first of all the answer to the first fiscal '19 and kind of what's in our resumption there, I think first thing you have to remember is we closed stores partway through the year last year, and we're going to have that headwind, if you will, throughout, certainly, the first quarter and partially into the second quarter. So I think what's embedded in our numbers is some softness there in parts and service to continue, and we've, kind of, been seeing it around that 5%, 6% here for the last couple of quarters. That will likely continue into the first part of the year next year. But as we anniversary those closures and some of the things that you mentioned that were -- the fleet is getting older out there, I think that will start offsetting and we will start getting into positive territory from our parts and service expectation. The other thing is -- that does help us is, we have less headwinds, if you will, on some of the PDI with the higher level of growth or having -- being in a growth position now in our new equipment sales or our overall sales growth. That will supply some service business and as well in warranties providing parts and service with a higher level or not going down like we have been the last 4, 5 years in revenue helps those -- moderate some of those pressures on our parts and service business. So I think down for that first part of the year and then it should start coming back to a positive in the latter half of the year. And then the second part of the question was asking going forward. And I think even more so we have some of those challenges behind us as far as the lower level of PDI and warranty work. And -- but a lot of this, of course, still is predicated in the farm or having some -- our customers having cash and having decent years here, where they will not skimp, if you will, or cut back on some of their parts and service and maintenance of their fleet that they have out there. So barring having cash crunch situation, we should see some tailwinds in that business going forward, in that part of our business going forward.

Can you, maybe, parse out if we're looking at fourth quarter, parts was down 6.6%, service was down 5.4%. How much of this decline was related to store closures? So essentially, how was the core business operating?

Yes. If you actually look at it on a -- like a same-store basis, our parts and service was actually up a little bit. But remember some of that is due to, we call, reverse cannibalization on those closed stores. We did -- our team did a very good job of taking care of those customers in those areas where we closed stores. So we did benefit in our same-store numbers from those closed stores. I think -- so if you look at it everything walks together, which is -- it's hard to parse out. But I think, overall, I would say that, that, call it, 5% to 6%, pretty much, all of that was due to the closed stores. And we'd be on an even basis if we didn't have those closed stores affecting our number.

So just so that I'm clear on this, I understand that you're saying you're going to have, sort of, similar headwinds in the front half of '19. But do think you can get enough growth in the back half of '19 to have this business flat for the year?

I think so. I think so. Yes. I mean, time will tell, but I think we're in a good position to, for the full year, grow parts and service, overall.

All right. And then lastly, for me. How are you thinking about inventories for fiscal '19, new and used? And when I'm looking at your Ag guidance up 0% to 5%, not a lot of growth here. If I'm extrapolating what I've seen year-to-date in large Ag equipment retail sales, it looks like frankly, there's more growth than what you're guiding to, why the conservatism? Just give us some color there.

So I think the first part of your question as far as inventories. We didn't provide any kind of formal target, public target here this year. What we're really moving toward now is that turn and focusing on that equipment turn. That growing from the 1.3 to 1.7 was a nice move for us this last year. Going forward, we've talked before about getting to that 2.5, as high as maybe up to 3 in certain areas of our business. So that 2.5, 3x turn, I think we're going to keep progressing towards that. But I think for this next year, given the inventory levels that we're starting the year out at, we don't anticipate any major moves. I think, it will come down, but we don't expect any major moves in equipment inventory. So that's kind of some color on the inventory levels. As far as the -- what we're looking at as far as guidance there, the 0% to 5%, it is probably a little less than some of the OEMs, what they're talking about out there. We just had a big finish to our year where we had strong revenues, particularly on our Ag side, which we took into consideration for how we're going to improve over that next year. So I think that may have brought ours down a little bit. I think there's also with the OEMs they've got -- certain OEMs, they consider Canada as part of their numbers that they're providing out there. So I think you have to take that into consideration as well. So we think that 0% to 5% is a prudent number to, kind of, guide for this year and what we're planning our business around.

Our next question will come from Larry De Maria with William Blair.

Question. Just curious what kind of price increases you're expecting to come down to Titan OEMs? And what is your ability to kind of push those forward through your customers, given the material cost inflation and the tariffs that we're seeing that have caused higher cost of equipment. So I'm curious to hear your overall thoughts there.

Well it's a little early in the game just after the steel tariff announcement, actually the impact that's going to have, Larry, so we're kind of waiting to see. But typically we've been experiencing the 2% to 3% annual increases. And so unless that -- the impact that steel tariff has a major impacts and they're going to pass that on, hopefully, we're going to be not too much higher that level and as we typically do is, our ability to pass that on, I think, we can. If anything, it probably helps our current used inventory to help move that through the system. So that's a positive to all that, but if you look over the last 10 to 15 years, you'll only just been studied year-over-year price increases and they continue to get past into the system. So I'm thinking a little bit more wait and see of the impact of the steel tariffs on the equipment cost.

Okay. So nothing's been coming down from the OEMs yet in terms of price increase and things like that and you think it's -- or it seems to be manageable and agree it should help the used, I guess, yes?

I agree. I think it's manageable. And like I said, it's early in the game yet and we haven't seen anything as a reaction to that yet.

Okay. And then just second question, just when you're talking to your customers and the dealers and stuff, what is the level of concern on trade and potential for tariffs, which seems to me to be overblown, but who knows? Is that an issue with farmers now and your customers as they're thinking about into having a planting season and buying equipment in the spring? And secondly, are they also thinking about buying equipments because of the tax rates that are now in place? Or does that just mean that they have the next 5 years to use tax breaks so they will use it whenever they want to?

Yes, I think the tax breaks are probably a little bit less of the concern at their current level of income. So if you look out what's going on out there right now, I think, ongoing NAFTA discussions, we don't have a finalized farm program yet. Where we're going to head with the RFS standards and what's going to happen with the RINs credits is out there and then the potential retaliation to these tariffs. So yes, I think that is, just in the last few weeks, definitely weighing on their decisions and the timing of their decisions out there. So I think, I've been to a few of these different farm meetings and organizational stuff and the word volatility comes up a lot and yes, so they're definitely looking at that and really trying to manage through this. And they're typically, I think, I want to say, a little more cautious and that's how we're thinking as a company also.

So it's safe to say that in your 0% to 5% guidance, you're incorporating a little bit of, maybe, concern around some of these issues that are out there like the tariffs and trade negotiations that could cause some volatility? And you're thinking that, that could cause some weakness or? I'm just trying to undistracted if we actually really think this is going to actually move the needle one way or another to think mentally maybe a little bit more cautious?

No I think this is more based on just where the current fundamentals are in the commodity prices right now. We're seeing like farm income down 6.7% year-over-year, so what's going to really change things. So I think we're more looking at we can stand and continue in this trough as to where it's been. We see some stabilization but we don't see anything out there to say it's going to get any better out there. So -- but some positives like over the last, say, 3 to 4 weeks, I'd say there's been definitely uptick in soybean prices and I'd say a lot of the on-hand -- significant amount of the on-hand beans in the storage, I think, have been probably liquidated from the farmer standpoint. So I think that's -- they're going to the season I think with fairly low levels of on-hand beans, which I think is going to be good. And we've got to keep thinking what's the yield out there. And I think the yields have really year-over-year keep getting better out there, but the part of this underlying some of our guidance is based on really what's the farmer's ability to work with their lenders to get the financing available and the willingness of the lenders to make large capital purchases with some of this uncertainty out there. So I think that's the bottom line. I think that's really what falls into is what the lenders are telling the growers about how -- where they -- how aggressive they want to get on CapEx from the farm standpoint.

Understood. And the last question and I'll hang up. 199A, that seems like it is sorted out. Is that an issue going forward? And is that something your customers talk about? Or just your final thoughts on 199A and if that goes away right now.

Yes, I think, for the most part, just some of the what recently just happened with that is, it's -- I think, they were basically resend us a little bit, so there's going to be some winners and some losers, but I don't think there's going to near as disparity as it was back in January and February. Now they retroactively go back to the first year and stuff, but I think it's -- so I think the amount of impact it's going to have is going to be probably fairly minimal each way, but there always going to be some depending on your level of income and where you're sitting as far as, do you sell [the crops], or don't you sell the crops , I think there are going to be a few winners, to some degree one way or the other. And I think our growers are kind of sorting through that right now.

Now I'd like to turn it back over to Mr. David Meyer for any additional or closing remarks.

Okay. Well thank everybody for taking your time today and your questions and answers, and we look forward to update you on our progress on our next call. So have a good day, everybody.

That does conclude today's conference. We thank everyone, again, for their participation.