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Earnings call: Titan Machinery faces downturn in Q2 fiscal 2025

Published 11/26/2024, 08:28 PM
TITN
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Titan Machinery Inc. (NASDAQ:TITN), a leading provider of agricultural and construction equipment, reported a challenging second quarter for fiscal year 2025, with a decline in revenue and a shift to a net loss position. The company's performance was impacted by a softening demand for agricultural equipment, driven by lower commodity prices, high interest rates, and varied growing conditions. Despite these challenges, Titan Machinery is implementing aggressive inventory management strategies and focusing on its parts and service business to navigate the downturn.

Key Takeaways

  • Titan Machinery's total revenue dropped to $633.7 million, marking a 1.4% decrease from the previous year.
  • The company reported a GAAP net loss of $4.3 million, a significant downturn from the net income of $31.3 million in the prior year.
  • Gross profit margin saw a contraction of 310 basis points, settling at 17.7%.
  • Sales in the agriculture, construction, and Europe segments all experienced declines, while Australia segment sales remained steady.
  • Inventory reduction is a key focus, with a target to decrease from $1.3 billion to around $900 million.
  • Full-year guidance indicates a decrease in domestic agriculture revenue and Europe segment revenue, with construction revenue expected to remain flat.

Company Outlook

  • Titan Machinery expects its service business to grow in the high single digits.
  • The company provided adjusted diluted earnings per share guidance, projecting a range from breakeven to $0.50 for the full year.

Bearish Highlights

  • The agriculture segment sales decreased by 9.6%.
  • The Europe segment experienced a 24.8% decrease in sales.

Bullish Highlights

  • Titan Machinery is focusing on improving inventory management and parts and service business.
  • The company is developing technician recruitment strategies and maintaining customer care to differentiate itself positively in the market.

Misses

  • Same-store sales saw a significant decrease of 12.5%.
  • Equipment margins are expected to be around 540 basis points lower in the latter half of the year.

Q&A Highlights

  • President and CEO Brian Knutson emphasized the company's commitment to delivering long-term value to shareholders and navigating the cycle effectively.
  • CFO Bo Larsen expressed confidence that the company's decisive actions on inventory management will mitigate the impact of the current cycle on performance.
  • Knutson also highlighted the importance of downtime for customers and the company's success in partnering with them to address this issue.

In summary, Titan Machinery is facing a tough period due to external economic factors affecting the demand for its products. However, the company is actively taking steps to manage its inventory and focus on service and parts business to weather the current market conditions. Management remains optimistic about their strategies shortening the duration of the downturn and continuing to deliver value to shareholders.

Full transcript - Titan Machinery Inc (TITN) Q2 2025:

Conference Operator: Greetings, and welcome to Titan Machinery Inc. 2nd Quarter Fiscal 2025 Earnings Call. At this As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Sonnich. Thank you.

You may begin.

Jeff Sonnich, Investor Relations, Titan Machinery: Thank you. Welcome to Titan Machinery's Q2 fiscal 'twenty five earnings conference call. On today's call from the company are Brian Knutson, President and CEO and Bo Larsen, CFO. By now, everyone should have access to the earnings release dated July 31, 2024. If you've not received the release, it's 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're providing a presentation to accompany today's prepared remarks, which can also be found on Titan's Investor Relations website directly below the webcast information in the middle of the page. We'd like to remind everyone that the prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions. Those statements do not guarantee future performance and therefore undue reliance should be placed upon them. These forward looking statements are based on management's current expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Titan's most recently filed annual report on Form 10 ks.

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 may 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 financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of these non GAAP financial measures to their most comparable GAAP financial measures in today's release and presentation.

At the conclusion of our prepared remarks, we'll open the call to take your questions. And with that, I'd now like to introduce the company's President and CEO, Mr. Brian Knudson. Brian, please go ahead.

Brian Knutson, President and CEO, Titan Machinery: Our 2nd quarter performance and our near term outlook. Then I will pass the call to Beau for his financial review and incremental thoughts on our modeling assumptions for the remainder of the year. As we shared 2 weeks ago in our Q2 pre announcement, the agriculture equipment industry is adjusting to the softening demand as agriculture fundamentals have materially weakened driven by the anticipated decrease in net farm income and sustained higher interest rates. The decrease in net farm income is largely being driven by significantly lower commodity prices for most key cash crops in our footprint, which have steadily declined since the beginning of the year. These elements combined with mixed growing conditions across our footprint are negatively impacting farmer sentiment and have manifested in lower retail demand for equipment purchases.

Through this period of softening demand, we have shifted to a much more proactive and aggressive approach as we actively work to reduce inventory to targeted levels, especially on the used equipment side, while in turn reducing floorplan interest expense. This strategy requires compression to our near term equipment margins. However, the actions we are implementing will inherently shorten the impact on our performance during this period of lower demand and will accelerate our return to a more normalized margin profile as the industry cycle progresses. As we navigate the current cycle, it's worth highlighting the significant differences from the last downturn, which underscore the improved health and preparedness of the entire sector. Unlike the previous cycle, we are seeing a coordinated proactive approach to inventory management across the industry by both dealers and the OEMs.

At Titan, we are particularly focused on efficiently aligning inventory with demand by carefully analyzing market trends, adjusting pricing strategies and working closely with our suppliers on financing terms for our customers. The result of these collective actions will not only reduce inventory, but will also reduce our interest expense. Importantly, I would like to drive home that it is the early recognition and quick implementation of these strategies that mark a significant adjustment in our approach relative to previous cycles. While inventory levels in terms of absolute dollars are currently higher than we want them to be, On a units per store basis, it is important to note that we have significantly less inventory than we did heading into the last downturn. At the end of the second quarter, we had an average of approximately 8.9 $1,000,000 of inventory per store.

This is up approximately 6% from the high watermark of the prior cycle. However, as I mentioned, we have significantly less units per store as OEM price increases over the past decade have been substantial. For example, the cost of a 4 wheel drive tractor is up approximately 80% since the last downturn. Another key difference between this cycle and last is that industry fundamentals heading into the cycle are much healthier. Farmers entered this cycle coming up consecutive years with excellent profitability and stronger balance sheets further bolstered by more favorable land values providing them some buffer against the current headwinds.

Secondly, please recall the supply chain disruptions that severely limited OEM production volumes over the past 2 years. In aggregate, these production levels were closer to that of mid cycle averages. Thus, the fleet age in North America continues to support replacement purchases as we progress through the cycle. Thirdly, and as I mentioned earlier, both dealers and OEMs are aligned and aggressively managing inventory levels to demand and are being more proactive earlier in the downturn. 4th, as mentioned on previous calls, we do not have short term lease returns, which further exacerbated the impact of the last cycle.

And finally, I would note that precision agriculture solutions were not as developed in the previous cycle and that today's solutions are helping farmers garner higher returns in their operations further supporting future equipment investment. While inventory remains our primary focus, we are also taking decisive actions to control costs and grow the other areas of our business. We continue to lean into our customer care strategy to fuel our reoccurring high margin parts and service businesses. This is an area where we believe we can not only drive growth this year, but more importantly create long term sustainable growth. These factors combined with the efficiencies and process improvements we've integrated since the last downturn will undoubtedly enhance our ability to compress the impacts of this cycle.

That said, we know that to achieve through cycle performance of our optimized business, it is imperative that we reach targeted inventory levels as quickly as possible. Now I'd like to change gears and provide an update on crop conditions within our footprint. As previously mentioned, there has been abnormally wide variations in growing conditions within each of our regions. In North America, significant spring rainfall delayed the planting season and in some cases fields were too wet to plant altogether or did get planted then drowned out and did not recover. Overall in North America, all of this will lead to widely varying yields from even one store to another.

In Australia, plentiful rainfall in some areas of our footprint is leading to an exceptional crop, while other areas are experiencing drought conditions and those areas are looking to produce average to below average yields. In Europe, Romania and Bulgaria continue to be negatively impacted by severe drought conditions, whereas conditions are overall much better in Germany and Ukraine, and we're looking to produce average to above average yields. Finally, regarding our construction business environment, we believe underlying industry fundamentals have moderated somewhat off of recent highs due to the extended period of higher financing costs and uncertainty around the economy. However, our revenue outlook for our construction segment is stable versus the prior year and is supported by equipment availability and new product introductions from our suppliers. In closing, I want to reiterate that we are taking decisive actions to navigate this cycle effectively and we remain committed to delivering long term value to our shareholders and to providing best in class service to our customers.

I want to sincerely thank our employees for their hard work and dedication to support our customers during these more challenging times. Their efforts have been crucial to the success of our customer care strategy and I'm highly confident that with our lessons learned from the previous cycle combined with the actions we have taken which have made us a stronger company and the actions we are now taking will ensure we can effectively navigate through this downturn. With that, I will turn the call over to Beau for his financial review.

Bo Larsen, CFO, Titan Machinery: Thanks, Brian. Good morning, everyone. Starting with our consolidated results for the fiscal 2025 Q2, Total (EPA:TTEF) revenue was $633,700,000 a decrease of 1.4% compared to the prior year period. Underlying this performance was a same store sales decrease of 12.5% driven by lower demand for equipment purchases due to the expected decline of net farm income this growing season. This was largely offset by the acquisition of O'Connor's that we completed in October 2023.

Gross profit for the Q2 was $112,000,000 and gross profit margin contracted by 3 10 basis points year over year to 17.7%, driven primarily by lower equipment margins resulting from higher levels of inventory across the industries we serve and our proactive stance on managing our inventory down to targeted levels as Brian discussed earlier. Operating expenses were $95,200,000 for the Q2 of fiscal 2025 compared to $88,800,000 in the prior year period. The year over year increase of 7.2% was led by acquisitions that we've executed in the last 12 months. This year's Q2 operating expenses also included a $1,500,000 non cash impairment expense related to certain assets in our European segment. Floorplan and other interest expense was $13,000,000 as compared to $3,700,000 for the Q2 of fiscal 2024, with the increase led by a higher level of interest bearing inventory, including the usage of existing floorplan capacity to finance the O'Connor's acquisition.

GAAP reported net loss for the Q2 of fiscal 2025 was $4,300,000 or $0.19 loss per diluted share and compares to last year's Q2 net income of $31,300,000 or $1.38 per diluted share. The current quarter's reported net income includes $11,200,000 or $0.36 per diluted share impact related to the onetime non cash sales leaseback financing expense we incurred in the quarter. Excluding this impact, net income on an adjusted basis was $4,000,000 or $0.17 per diluted share. Reported net income for this year's Q2 also includes a $2,700,000 gain related to the completion of a new market tax credit program, which was anticipated and included in our forecast throughout the year. As we mentioned previously, the lease accounting expense reflects our entering into agreement for the future purchase of 13 of our lease facilities on expiration of the current leases.

The purchase closing date for each leased facility will occur on or before expiration of the respective lease, all of which expire over the next several years through calendar year 2030. While the initial impact of this purchase agreement temporarily reduces GAAP reported earnings, This is a non cash expense and I'd like to emphasize that the transaction is financially strategic and supports the company's long term customer care strategy by investing in facilities and shop space required for continued growth in our high margin parts and service businesses. Now turning to a brief overview of our segment results for the Q2. In our Agriculture segment, sales decreased 9.6% to $424,000,000 which included a same store sales decline of 11.2 percent in the 2nd quarter. Agriculture segment adjusted pretax income was $6,700,000 and compared to $33,000,000 in the Q2 of the prior year.

This adjusted figure excludes $6,100,000 of non cash sales leaseback financing expense that I mentioned previously. The underlying year over year decrease in profitability reflects the softer retail demand environment, which manifested in lower equipment sales, lower equipment margins, higher inventory levels and higher floorplan interest expense. In our construction segment, same store sales declined 3.2 percent to $80,200,000 versus an increase of 18.5% in the prior year. We are generally seeing year over year stability in this segment. However, supply chain catch up has driven inventory levels higher for both the construction industry as a whole and for Titan.

So we are proactively managing inventory down the targeted levels and are seeing margin compression in this segment as well. Adjusted pretax income for the segment was $200,000 which compares to pretax income of $5,200,000 in the Q2 of the prior year. This adjusted figure excludes $5,100,000 of non cash sales leaseback financing expense that I mentioned previously. In our Europe segment, sales decreased 24.8 percent to $68,100,000 which included a same store sales decline of 27.7% versus 15.9% growth in the prior year. Severe drought conditions in Eastern Europe started to impact retail demand in the back half of last year.

These subdued demand levels have persisted through the first half of fiscal twenty twenty five and we expect that to continue through the rest of this fiscal year. Pretax loss for the segment was $2,300,000 which compares to $5,600,000 income in the Q2 of fiscal 2024. The current year Q2 results for Europe include approximately $1,500,000 of non cash impairment expense related to certain assets. Excluding these impacts, pre tax loss for the segment was $800,000 in the 2nd quarter. The underlying year over year decrease in profitability reflects similar dynamics as I just mentioned with our domestic Ag segment regarding the softer retail demand environment, higher inventory levels and higher floorplan interest expense.

In our Australia segment, sales were $61,300,000 and pretax income was $1,400,000 This segment is facing very similar customer and customer dynamics as our domestic ag segment, but with a substantial mix of presales, which is helping maintain sales figures similar to the prior year comparative period, which was pre acquisition. Now on to our balance sheet and inventory position. We had cash of $31,000,000 and adjusted debt to tangible net worth ratio of 1.8 times as of July 31, which is well below our bank covenant of 3.5 times. Regarding inventory, we believe that our equipment inventory level has recently peaked at approximately $1,300,000 This aligns with our expectation from the beginning of the year regarding the normalization of lead times from our OEM partners and the timing of order arrivals. We expect to begin demonstrating the results of our inventory reduction actions in the back half of this year with inventories moving modestly lower in the second half of this fiscal year before we realize more substantial decreases in fiscal 2026.

With that, I'll finish by reviewing our fiscal 2025 full year guidance, which we recently updated concurrent with our pre announcement on October 15 to account for our Q2 performance, our latest view on industry environment and to account for the one time non cash sales leaseback financing expense we recognized in the Q2. Current market conditions characterized by lower commodity prices, sustained high interest rates and mix growing conditions across our footprint have negatively impacted farmer sentiment. This resulted in noticeably softer retail demand in the Q2 compared to the expectations we shared during our Q1 earnings call. Given the current backdrop, we now see these more subdued demand levels persisting throughout the rest of the fiscal year. As such, for domestic agriculture, our revenue assumption is in the range of down 5% to 10%, which includes the full year contribution from our Scotts Supply acquisition, which closed in January of 2024.

For the Europe segment, our assumption is for revenue to be down 12% to 17%. And for the Australia segment, we expect fiscal 2025 revenue to be in the range of $230,000,000 to $250,000,000 Each of these segment assumptions reflects the more challenging environment we're facing, partially offset by our efforts to stimulate demand. Despite these headwinds, we expect we will continue to see growth in our service business in the high single digit range for the full fiscal year. For the construction segment, our updated assumption is for revenue to be flattish in the range of down 2.5% to up 2.5%, which similarly reflects a more cautious outlook than our prior assumptions given the overall macroeconomic environment, but generally stable compared to the prior year. Now for some broader commentary.

From a gross margin perspective, we remain committed to improving our inventory position, particularly in used equipment. Given the excess supply of inventory in the channel and softer equipment demand, we are now building in expectations for further equipment margin compression such that our updated assumptions for consolidated equipment margins are approximately 540 basis points lower in the back half of this year as compared to the back half of last fiscal year. For comparison, consolidated equipment margins were approximately 3.30 basis points lower in the first half of this year compared to the first half of last fiscal year. We now anticipate equipment margins for our domestic ag business to approach the historical lows we realized in fiscal years 2016 2017. While this will impact our short term performance, we believe this approach to managing inventory will shorten the duration of this downturn compared to the previous cycle.

Regarding operating expenses, we are focused on implementing cost controls where we can, optimizing resources and being vigilant with any headcount decisions. Our guidance now implies operating expenses to be about 14.4% of our revised sales outlook. Moving to interest expense. Given our revised revenue expectations and the commensurate impact on inventory levels that we are working to improve, we are incurring higher floorplan interest expense than previously anticipated. Although we continue to expect that improved interest returns will provide a tailwind for interest expense in the back half of the year, we believe this benefit will be more than offset by the industry dynamics at play and it will take more substantial decreases in inventory as we progress through next fiscal year before we begin to see more normalized levels of floorplan interest expense.

Our assumption for floorplan and other interest expense for the full year is now approximately $47,000,000 and compares to approximately $21,000,000 in fiscal 2024. Taking all of these factors into account, our guidance for fiscal 2025 GAAP diluted earnings per share contemplates a range between a loss of $0.36 to earnings of $0.14 On an adjusted basis, excluding the $0.36 noncash impact of the sales leaseback financing expense recognized in the Q2, which was not originally contemplated in our modeling assumptions, we expect adjusted diluted earnings per share to be in the range of breakeven to $0.50 We believe the decisive actions we are taking with respect to managing inventory will help shorten the impact of this cycle on our performance, potentially accelerating to our return of a more normalized margin profile and that is what we are focused on delivering. This concludes our prepared comments. Operator, we are now ready for the question and answer session of our call.

Conference Operator: Thank you. We will now be conducting a question and answer session. Our first question comes from Ted Jackson from Northland Securities. Please proceed.

Ted Jackson, Analyst, Northland Securities: Thanks very much. Two questions. My first question is just with regards to ag spending and seasonality. When you look at the second half of 'twenty four, do you think that it's likely that we will still see some level of flush or spend in the Q4 as is typical in a typical kind of seasonal pattern? Or are you thinking that the market is so challenged that we will not see that kind of seasonal flush that we typically get?

That's my first question.

Brian Knutson, President and CEO, Titan Machinery: Thank you, Ted, and good morning. Yes, so we're still anticipating 4th quarter spending here by farmers and contractors as they see how the year shaped up, meet with their accountants. And as we go back to those varied crop conditions that we talked about, certain areas of our footprint, if you look in the western half of South Dakota, all throughout Nebraska, pockets of Minnesota and North Dakota and Iowa, there's really, really good yields. So those farmers, even with the subdued prices, will have some spending needs as well and we'll be looking to update some equipment. Also because of the supply constraints that we had, a lot of those growers weren't able to update certain equipment the past couple of years.

So those growers that do get the yields, we will see some traditional good purchasing from them, but subdued to the levels that we've got in the modeling here. So I think the trend, the timing patterns will be very similar, but just yes, definitely lower than normal purchases here in the towards the end of the year.

Bo Larsen, CFO, Titan Machinery: Yes. So as you take a look at the guidance and then look at the back half of the year in terms of what's implied, as he said, seasonality is very similar there. So if you drill down to our domestic Ag business specifically, we've got full year total equipment sales being down about 11%. In the first half of the year, that was down about 4%. But again, we were coming into the year with a lot of presales there, right?

So we're essentially applying about a 15% decrease in the back half of the year, which is a little bit more of a decrease than we saw in the Q2, but not significantly. So kind of stabilized at this point in terms of year over year comps, but the cyclicality and timing of purchases remains.

Ted Jackson, Analyst, Northland Securities: Okay. My next question is just on inventory. And so, actually, I thought it was good news to hear that you think you're at peak inventory and you'll start to see that come down and with it accelerating in '25. When you look into your crystal ball, and I'm sure it's sharp and clear like a high definition television, when do you think you can get your inventory to what would be a normalized level visavis demand? Is that something that we could expect to see before we get by the second half of twenty twenty five?

Or is that something that's going to take longer? Then actually do I have one more behind this?

Brian Knutson, President and CEO, Titan Machinery: Yes. I'll let Bo take that one, Ted. But maybe just to set the stage, a couple of points that are now working into our rearview mirror is Leading up to this, you look at just the unprecedented confluence of abnormal factors that came together to lead to this inventory spike, driven by the COVID supply chain issues, the plant strike at CNH, which all led to record long lead times. And really in my nearly 2 dozen years of doing this, the most unpredictable order boards over the past 18 months or more that we had. So now we have much more clear order boards, shorter lead times.

And secondly, we have not placed an order for inventory stock in over 6 months. However, what we've been facing in the end of last year, all throughout this year is finished working through those orders that in many cases were placed back in 2022. And so we are now just starting to receive the last of those orders. So now we can actually start to plan the business accordingly. And the task at hand is very clear now as we just have to work through what we've got and we don't have any more of these old orders if you will that were placed before things started changing coming in to deal with and work through.

Bo Larsen, CFO, Titan Machinery: Yes. And then maybe a little bit more color. So as I talked about in the opening comments, we're at about $1,300,000,000 in total equipment inventory. Roughly speaking, call it $900,000,000 would be a good targeted level. That would assume about a 2.5 times turn on the domestic side and then there's some regional differences in terms of how that shakes.

But so call that about a $400,000,000 difference. As we look through the rest of the year, working towards executing on and achieving close toward $100,000,000 decrease for the year, leaving about $300,000,000 to go. We'll have to provide more commentary at the end of the year in terms of what next year really looks like. But I mean the idea to be able to get to those targeted levels by the end of next fiscal year, I think is a good base point for us. And just as a comparison looking back in history, if we went back to the last downturn in FY 2014, so at the end of FY 2014, by the time we got to FY 2016, we drove an inventory reduction of about $350,000,000 so about $50,000,000 less than we're talking about here.

And what we're talking about doing is being more proactive, right, in driving that $50,000,000 incremental change in an 18 month period of time instead of a 24 month period of time. So, yes, it's something that we've done in the past since we know the playbook to execute and that's the guidance I would give you today and we'll certainly provide more color on that as we progress through this year and then as we set the stage for guidance for next year.

Ted Jackson, Analyst, Northland Securities: Okay. And I'm going to just skip my last question. It's irrelevant. Thanks for the time. Talk to you soon.

Conference Operator: Our next question comes from Mig Dobre from Baird. Please proceed.

Mig Dobre, Analyst, Baird: Good morning. I guess I'd like to maybe just start with a couple of points of clarification about the quarter itself. So two items here. If I'm looking at the margins in rental and other, the gross margin there was quite a bit lower than what we had in the prior year. And I'm trying to understand what's happening with that sub segment and how you see that progressing going forward?

And also related to the quarter, we've seen a higher level of other expense. I think it's north of $7,000,000 if I'm not mistaken. And I'm kind of curious as to what that line item is specifically and how that plays out in the back half?

Bo Larsen, CFO, Titan Machinery: Yes. No, I appreciate the question and the chance to clarify that. That $7,000,000 is essentially for all intents and purposes. It's the net of the $11,200,000 sales leaseback expense netted against that $3,500,000 new market tax credit completion. So that gets you to that $7,000,000 And really there shouldn't be a significant amount of activity in that account otherwise.

So that's what you're seeing there. From a margin perspective on the rental and other side, I mean, I would say probably similar to what you've seen elsewhere, rental fleet utilization is certainly down for us this year. It's something that we're focused on in managing fleet size. And we would expect that to persist through the back half of this year. Again, we're doing similar things to what you've heard others in the industry.

We'll probably work to manage the fleet down somewhat as we finish developing our outlook as we get into next year as well.

Mig Dobre, Analyst, Baird: And why is it that your utilization is down in rental? Can you maybe remind me if you've experienced a significant increase in fleet? Or are there other factors here?

Brian Knutson, President and CEO, Titan Machinery: Our fleet is basically flat. So it's purely a function of the physical utilization MIG. So just and that tied directly to the softening in the construction industry, softening in residential and warehouse and some of the areas other areas that especially our rental business really plays. Good news about the rental sector for us is it can be a very high margin business and very much a function of utilization. So a slight dip in utilization can lead to a pretty big swing in margin and vice versa.

So just really got to keep pushing and keep the machines out there working on the job sites. But that's what you'll typically see when there's a softening. Our contractor customers have their core fleets. And when things really swing up quicker or stronger economy, that's where they really rent. And then as it softens, they pull back in and use their core fleets.

And so I think you're seeing some similar swings with the Uniteds in some belts of the world.

Bo Larsen, CFO, Titan Machinery: So that and I think you pretty much got it covered there. But underlying that right is the rental is largely a construction business and our rental fleet size is about $80,000,000 and it's pretty much flat.

Mig Dobre, Analyst, Baird: Very helpful. Maybe going back to the equipment inventory discussion, appreciate the color in terms of how you see progression down $100,000,000 in the back half and then more work to do in fiscal 'twenty six. But I'm sort of curious as to why we're only seeing $100,000,000 of inventory decline here. Can you maybe help me understand what's going on with the shipment that you're getting from the OEM in the back half of this year? And related to this, the margin compression, as you talked about, is pretty notable on a relatively small inventory decline.

What is it that you actually have to do to generate this inventory decline such as it is in the back half of fiscal twenty twenty five?

Bo Larsen, CFO, Titan Machinery: Yes. So in terms of I'll make sure that we address both of those points, right. But in terms of how this plays out, right, is at the beginning of the year, we talked about the orders that we had placed going back in time. Brian earlier mentioned on the extension and then compression lead time. So I think we're all familiar with that.

But in March, if you go back and listen to the call, we talked about projecting forward based on receiving those orders that we had already replaced, inventory increases in Q1 and Q2 and then we'd start to see an inventory decrease in the back half of the year. The first half of the year pretty much played out how we had expected despite the revenue miss. Back half of the year, right, we're going to finish in the Q3, we're going to finish receiving kind of the rest of the orders that were placed previously. And then you really start to see that tail off. So what we'll be doing, right, is we'll be selling through that new equipment that we've received in the first half of the year and Q3, a lot of which is pre sold, but you got to receive it and deliver it.

Once you receive in that new, you sell it, you get a used trade in. Once you sell that used, you get a used trade in, right? So there's a bit of an effect where we'll see our new whole goods decrease more substantially than the numbers we're prescribing here, but we're going to see that partially offset by an increase in used equipment, which is typical for us as you move into a downward portion of the cycle, right? And then for the next 2 years that used sales will be a larger portion of our equipment mix as you work through that and then get everything normalized and back to targeted levels. So that's exactly how it's going to play out and there's a bit of a 2 stage effect to that.

And that sort of also answers why don't you see a more prescribed decrease in the back half of the year. Well, going into the year, we would have, right? But certainly our latest guidance has taken quite a bit of sales out of the back half of the year. So assuming that new outlook, that's why you're not seeing a larger decrease.

Brian Knutson, President and CEO, Titan Machinery: Yes. It's interesting. Well, I would just add to it's a function of the lead times very much as well. So we were dealing with unprecedented record long lead times. And so as I mentioned, Mig, you just got to you also we also have to work through these orders that have been coming in all year since you shut the faucet off.

So basically add that to it. And that's what's all baked into our modeling and we've got all of our inventory aggressively priced and that's also baked in that's in the modeling the margin modeling as well. So we feel positioned very well to hit the task at hand and hit our timeline goals that we have. And to your point, and unfortunately because of those long lead times and the orders that all add to that that come in after we've started down this path, it just takes longer than we all want.

Mig Dobre, Analyst, Baird: That being the case as we're looking at calendar 2025 or in your case your fiscal 2026, you're basically saying that the bulk of your inventory normalization is going to occur then, right? So it's going to occur next year. But you're already experiencing pretty significant margin pressure this year in the back half of twenty twenty five. So I guess the question is, if most of the destock is happening in fiscal twenty twenty six, should investors expect further margin compression in twenty twenty six because frankly that's where most of your destock is actually going to happen?

Bo Larsen, CFO, Titan Machinery: Yes. I think that dynamics we'll have in terms of needing to work targeted inventory down what we have in the back half of the year persists into next year, right? But the biggest move that's going to make in terms of the decrease in inventory is actually going to be less coming in at the top. So I think we'll see similar right now, and we're not providing guidance for next year. But right now, what I would prescribe is margins we're seeing in the back half of the year, base cases assume that those carry forward into next year until we shall we see more of that inventory decline.

But generally speaking, I would suggest it would be similar to what we're guiding to as opposed to more compressed. And again, we're going to see a lot of the inventory decline next year come on the back of simply less substantially less inventory coming our way. And we'll really be focusing on that same population of used equipment, a good portion of which we'll already have in our inventory and priced right here before we exit the year.

Mig Dobre, Analyst, Baird: Okay. Last question for me. In terms of the orders that you're placing today with the OEM, given the circumstances of the industry that we already covered here, are any of these orders that are for your inventory or do you actually have a customer name associated with each one of these orders that you're placing? And again, these are orders that you place them today for future delivery sometime into fiscal 'twenty six or whenever?

Brian Knutson, President and CEO, Titan Machinery: Very much a customer name. An extremely minimal amount, Mig, of stock units for loaner purposes to keep customers going and some demo units, but much, much less than any other year we would do. So the great majority of them are all pre sell customer name. We're just not ordering units for stock or display or for the walk in sale. Any of the stock units we're ordering are extremely limited and very intentional again with the purpose of keeping customers going.

Bo Larsen, CFO, Titan Machinery: Yes. And I mean I think you heard that clearly and you asked a good clarifying question. I just to emphasize that right. We're absolutely still focused on generating presale activity and that's what we always want to be leading on. So we're going to continue to place pre sell orders that have a customer's name on them and we have been throughout the year.

And it was as Brian mentioned and then you're asking about here, it's the stock side of things that we really pulled back on and there's little to no activity there. And all of that kind of comes together right in the stock is what you get targeted and will take down as we progress through the next 18 months.

Brian Knutson, President and CEO, Titan Machinery: And then Mig, I'll just go back to one more thing on your margin question. Really a function of orders coming in as come baked up against the inventory reduction targets. And so if you look at what we've done and what we've got baked into the back half of this year, we've been outpacing the industry and we've needed to because of those legacy orders that are coming in. And so as we transition into next year, because we haven't placed these stock orders and we don't have those legacy orders coming at us to deal with, we can now start to sell in line with the industry and also not have that margin pressure that we have from outpacing the industry and still work our inventories down further.

Mig Dobre, Analyst, Baird: Understood. Thank you for taking my questions.

Brian Knutson, President and CEO, Titan Machinery: Thank you, Mig.

Conference Operator: Our next question comes from Ben Klieve from Lake Street Capital Markets. Please proceed.

Ben Klieve, Analyst, Lake Street Capital Markets: Thanks for taking my questions. A couple from me. First of all, one more on the equipment margin front. You talked about kind of an explicit focus on your inventory control being one of the contributing factors to margin compression. I'm wondering if you can kind of talk about the range of equipment margins from maybe those categories that you are kind of almost intentionally driving down in the current environment to on the high end the categories that are much more balanced from a supply demand perspective, perhaps from the precision side.

Is the range of margins in equipment materially expanding? Is that high end staying firm? Or are you seeing compression really across the board throughout your product line?

Brian Knutson, President and CEO, Titan Machinery: Yes. Sure. Thanks, Ben. It is generally across the board on the equipment. However, again, I go back to it's a function of which specific product categories we're a little longer on is where we're being more aggressive to outpace the market.

So depending on to what degree we need to outpace the market to reduce those faster, there is a little more margin compression in those categories. And then typically your higher cash crop products would have a lower margin percentage, but higher dollar ticket items, so higher dollars overall. And then 3rd is just there are still again, I go back to the amount of inventory in any category. So there are still some products that were really underproduced that are still in demand and still seeing some decent margins on some of those product categories. So we're being very prescriptive on that.

And again, really looking at every product category, every bucket and being more aggressive certainly in some areas than others depending on how quickly we

Bo Larsen, CFO, Titan Machinery: need to outpace the market here. And you

Brian Knutson, President and CEO, Titan Machinery: were asking a little bit on the

Bo Larsen, CFO, Titan Machinery: and profitability for farmers is something that is a net positive in terms of driving purchasing decisions. And we see really good take rates on that. Relative dollars wise to the whole good equipment themselves, you don't necessarily see it as much in what we're talking about here. But it's absolutely a positive factor and it's something that's going to continue to grow as we progress over the next several years, just like all the OEMs have alluded to.

Ben Klieve, Analyst, Lake Street Capital Markets: Very good. Okay. That's very helpful. And then one other one for me, it's good to see you still being so optimistic about the state of the service business. I'm wondering in this kind of weak ag environment here, kind of what the impact of this ag economy is on that business, both in terms of are you seeing farmers in any way less compelled to outsource service?

And does this is this at all a benefit for you in securing much needed labor given the challenging environment that individuals are facing kind of throughout the ag economy?

Brian Knutson, President and CEO, Titan Machinery: Yes and yes. So, yes, Ben, it's certainly their mindset and their bankers' mindset is to spend as little as possible right now. So they are not wanting to do as much in repairs. However, they're certainly mindful of the stakes are so high. The planting windows and the harvest windows are so short.

On construction side. The job sites, one piece of equipment goes down, can tie everything up and the deadlines and the penalties. And so again, downtime is so expensive for them and they get that. And we've really done a great job partnering with our customers and they really see the value in us working with them on that. So that combined with for quite a few years now, we have not been able to keep up in our shops and that's why we've had such a push to add technicians.

So even if it falls off a little bit, our shops are still generally really full across the board. And then 3rd, as the general economy has tightened and you've seen some changes in the job markets and the unemployment rates and so on. That has helped. We are getting some additional applicants. You combine that with the actions that we're doing at Titan, we've got the 1st ever diesel camp program, which has been huge success, 1st internship program in our industry.

We've got our student tech sponsorship program that's been we pioneered, that's been industry leading that's led to about 80 new technicians for us this year. We've got the 1st ever accredited federal apprenticeship program in our industry, which we're getting a lot of good candidates in there. And so we're really starting to see some of the fruits of our labor there and that's been our biggest constraint to our service revenues. So we feel optimistic again about that being a long term growth initiative for us. And again, the customers just really see the value of it because the downtime is so critical.

Ben Klieve, Analyst, Lake Street Capital Markets: Got it. Very helpful. Very good. Well, I appreciate you taking my questions. Best of luck here in the back half of the fiscal year and I'll get back in queue.

Thanks, Ben.

Conference Operator: Our next question comes from Alex Rygiel from B. Riley Securities. Please proceed.

Min, Analyst, B. Riley Securities: Hi, there. Good morning. This is actually Min on for Alex.

Bo Larsen, CFO, Titan Machinery: Hi, Min.

Min, Analyst, B. Riley Securities: Just a couple of quick questions. Hi, there. Just first, I know that this will probably come out in the queue, but what was the average rate on your floor plan financing in the quarter?

Bo Larsen, CFO, Titan Machinery: Yes. I mean, it's roughly 7.5%.

Min, Analyst, B. Riley Securities: Okay. And also just given that you're the largest CNH kind of dealership, do they provide you or have they in the past provide you with any additional concessions in a down market like extending the non interest bearing timeframe or just anything there? I know you guys have obviously a strong relationship with them.

Brian Knutson, President and CEO, Titan Machinery: Yes. CNH certainly wants to see their dealers healthy and to see their dealers be able to perform through this down cycle and be able to reinvest in the business and again stay strong and profitable and healthy. So, yes, they certainly partner with us where they can and help us out with exactly the levers that you mentioned are good examples things like helping with floor plan interest or extended terms and partnering together on financing programs etcetera.

Bo Larsen, CFO, Titan Machinery: Yes. And ultimately big picture, right? The win win is to get inventory sold through and manage production. So demand is good. I think everybody is focused on.

So we were also living earlier in the comments, a lot of focus on and providing financing for customers to drive that pull through, which is really what we want.

Min, Analyst, B. Riley Securities: Excellent. Also in terms of your cost cutting initiatives, I understand that you've cut a lot of costs since the last downturn. But can you quantify how much cost you're looking to take out maybe in this fiscal year or the next? And are you considering any divestitures at this point?

Bo Larsen, CFO, Titan Machinery: Yes. So from an overall expense perspective, if you set Australia to the side, we will have our forecast assumes about 2% increase in OpEx year over year, about $8,000,000 and that still even includes our Scottsupply acquisition and we're up which added a couple of $1,000,000 So generally speaking, we're saying we're flat year over year. When you think about our cost structure, so much of our OpEx is people. And our people aren't focused on producing equipment, right, which is decreasing. Our people are focused on selling the equipment that we have and providing the customer service and support.

So we have some different dynamics at play than the OEMs do. And we want to make sure that we're maintaining that staff. But certainly, we're got a sharp pencil. Any discretionary spending has certainly been whittled down and we'll continue to keep a tight eye on that. Hiring, we're also looking at very closely and generally speaking managing headcount down somewhat as we progress through say the next 18 months, again depending on where the industry continues to go.

But not no big moves there. We'll give better guidance on OpEx for next year as we get through the rest of this year. But that kind of lays the groundwork for you on what we're focused on. And I just wouldn't expect some drastic change there. We need to continue to drive.

We're seeing that high single digit growth in our service department. We need to continue to lean into our people in order to get that done. And so that's what I would say on operating expenses.

Min, Analyst, B. Riley Securities: Okay. No, that definitely makes sense. And then also can you just remind us what percentage of your construction segment revenue comes from non agriculture related sales and

Brian Knutson, President and CEO, Titan Machinery: rentals? It's just over half.

Min, Analyst, B. Riley Securities: Okay. And that's obviously the segment where you're still seeing some stability and hopefully some growth kind of going into fiscal 2026, given all the infrastructure spending that hopefully will kind of start at that point? Yes. All right. That's it for me.

Thank you very much. Thanks.

Conference Operator: Our next question comes from Steve Dyer from Craig Hallum. Please proceed.

Matthew Robb, Analyst, Craig Hallum: Hi, guys. This is Matthew Robb on for Steve. Just one question on the P and S business. Thanks for the color on the service growth. Is that just second half or is that for fiscal year 2025?

And then secondly, any outlook for the parts business?

Bo Larsen, CFO, Titan Machinery: Yes. So, no, I mean, we saw good service growth in the first half of this year as well. And so second half is a bit of a repeat of what we saw. And just to clarify as well, right, those growth assumptions more of the same store basis. So Australia obviously adds their own component as well.

So now I mean it's everything we've been building up on and talking about customer care strategy. It's driving increase in service tax. It's the focus on providing best in class customer service and support. It's the people that we have in the field. It's making sure that we have the right parts.

It's everything that the company has been working on for years that will continue to pay dividends for the long term. And then that's what we're really excited about regardless of where you're at in the cycle, what we'll be able to deliver for our customers and then ultimately what that means for our shareholders as we go forward.

Brian Knutson, President and CEO, Titan Machinery: Yes. It was kind of a good affirmation to see recently one of our competitors has laid out that one of their top three initiatives is on the parts side and especially to increase their fill rates and have the parts in the right place at the right time. And that's actually exactly the one of the components of our customer care strategy that we've been aggressively going after here for quite a few years now, and we're really starting to see the fruits of that. And as I look at the industry numbers, our counter fill percentages are higher than what has been laid out. And so industry leading there and that's our customers are really seeing the benefits of that too.

So it's starting to pay off, starting to get a reputation for having the right part and having the parts on hand for them and competitive pricing too.

Matthew Robb, Analyst, Craig Hallum: Okay. Thanks, guys.

Conference Operator: This concludes our question and answer session. I would like to turn the floor back to management for closing remarks.

Brian Knutson, President and CEO, Titan Machinery: Thank you for your interest in Titan and we look forward to updating you with our progress on our next call. Have a great day everyone.

Conference Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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