U.S. Markets closed

Edited Transcript of TITN earnings conference call or presentation 29-Aug-19 12:30pm GMT

Q2 2020 Titan Machinery Inc Earnings Call

WEST FARGO Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Titan Machinery Inc earnings conference call or presentation Thursday, August 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Joseph Meyer

Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO

* Mark P. Kalvoda

Titan Machinery Inc. - CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Lawrence Tighe De Maria

William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Nicholas Todd Zangler

Stephens Inc., Research Division - Senior Research Associate

* Steven Lee Dyer

Craig-Hallum Capital Group LLC, Research Division - Co-President & Senior Research Analyst

* John Mills

ICR, LLC - Partner

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, welcome to the Titan Machinery Inc. Second Quarter Fiscal 2020 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, John Mills, Managing Partner of ICR. Mr. Mills, you may begin.

--------------------------------------------------------------------------------

John Mills, ICR, LLC - Partner [2]

--------------------------------------------------------------------------------

Great. Thank you. Good morning, everyone. And welcome to Titan Machinery Second Quarter Fiscal 2020 Earnings Conference Call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; and Mark Kalvoda, Chief Financial Officer.

By now everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2019, which went out this morning at approximately 6:45 a.m. Eastern time. If you've not received the release, it is available on the Investor Relations page 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. You may access the presentation now by going to Titan's website at ir.titanmachinery.com.

The presentation is available directly below the webcast information in the middle of the page.

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. These 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 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 directly comparable GAAP financial measures in today's release.

The call will last approximately 45 minutes. 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.

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [3]

--------------------------------------------------------------------------------

Thank you, John. Good morning, everyone. Welcome to our second quarter fiscal 2020 earnings conference call.

On today's call, I'll provide a summary of our results, and then an overview for each of our business segments. Mark will then review financial results for the second quarter of fiscal 2020 and conclude by reviewing our updated modeling assumptions for fiscal 2020.

If you turn to Slide 3, you'll see an overview of our second quarter financial results. Our second quarter revenue was $315 million with the adjusted pretax income of $9.1 million and adjusted earnings per diluted share of $0.31.

We generated solid top line and bottom line results during the fiscal second quarter by achieving healthy growth in our Agriculture and Construction segments despite challenging industry conditions that continue to persist.

We're particularly pleased with strong continued increases in our higher-margin parts and service businesses, which grew double digits in the quarter. These results were slightly offset by our International segment, which I will discuss shortly.

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

On Slide 4 is an overview of our domestic Agriculture segment. As we pointed out on our Q1 earnings call, across most of our ag footprint, our farmer customers experienced some abnormally late, cold and wet spring. This caused delayed planting, and in some cases, farmers elected a prevented plant option.

For the crops that did get planted, some were planted in less-than-ideal conditions, which combined with the reduced yield potential of late planted crops and the acres lost to the mid season heavy rains, we anticipate lower overall corn and soybean yields.

The good news is that most of the Western Corn Belt fared better than the Eastern Corn Belt from a spring planting perspective.

Summer growing conditions have been favorable in most of Titan Machinery's footprint. With the late planting, corn and soybeans are going to need heat, sunshine and later-than-normal freeze dates to reach maturity and yield potential.

The uncertainty of the end of growing season frost dates along with the negative grain prices resulting from ongoing trade issues are weighing heavily on farmer sentiment.

On a positive note, the strong corn prices we saw in June and July allowed farmers the opportunity to sell carryover crop and market portions of current year crop.

In addition, USDA is starting to make payments to farmers under round 2 of the Market Facilitation Program announced in 2019, which will be an added shot in the arm for most of our farmer customers.

Replacement demand and technology are catalysts for new equipment sales, and we're reporting improved parts and service revenues as the age and hours of our customers' fleets are continuing to grow.

Margins from the aftermarket parts and services businesses are integral to our business model and creates sustainability through the macroeconomic cycles and interruptions to the business.

We're experiencing demand for quality used equipment and we're seeing continued stability in used equipment values.

Turning to Slide 5. You'll see an overview of our domestic Construction segment. The strong economy continues to positively impact the Construction Equipment industry. Stable oil prices have spurred demand for Construction equipment for oil-related activity.

Federal state and municipal infrastructure projects are creating work for large construction contractors and smaller subcontractors.

While we are seeing stronger demand in the metro areas, the rural construction equipment markets continue to be negatively impacted by the depressed farm commodity prices.

We continue to target our farmer customers as an outlet for used Construction equipment. Our rental business continues to support our CE bottom line and the operational improvements we have been implementing in our Construction stores are producing results as evidenced by our year-over-year second quarter and first half improvements to our top and bottom line results.

We're confident in our full-year assumption that Construction revenue will be up 5% to 10% and expect a continued improvement in our bottom line performance.

On Slide 6, we have an overview of our International segment, including our markets within the countries of Bulgaria, Germany, Romania, Serbia and Ukraine. We experienced a pullback in the revenues in the International segment in the second quarter, which we attribute to farmer concerns over softening European economies, the impact of Brexit, weather issues in some markets and volatility in commodity prices due to trade issues and growing global supplies.

While most of the late-season crops are experiencing favorable growing weather, early-season crops experience excessive moisture in the Balkans, especially in Romania, with record heat and dryer weather to the north.

Our Germany business is experiencing some carry over from last year's drought-related poor yields. Weather in the Ukraine has been favorable to both the early-season grain crops and late-season corn, soybeans and sunflower crops.

We were disappointed with our second quarter International segment performance but continue to focus on our aftermarket parts and service business as we look for opportunities in connection with the fall harvest as customers continue to invest in modern farm equipment in these developing countries.

Before I turn the call over to Mark, I want to comment on the increase in North America ag dealer M&A activity. We are fully engaged in the pursuit of quality North American ag acquisition opportunities as ag dealership ownership continues to consolidate.

I want to thank all our employees for their efforts in executing the solid second quarter.

Our operating model allows us to operate profitably under difficult industry conditions, and we are well positioned to leverage our business as industry conditions improve.

Now I would like to turn the call over to Mark to review our financial results in more detail.

--------------------------------------------------------------------------------

Mark P. Kalvoda, Titan Machinery Inc. - CFO & Treasurer [4]

--------------------------------------------------------------------------------

Thanks, David. Turning to Slide 7. We generated total revenue of $315 million for the fiscal 2020 second quarter, an increase of 6% compared to last year. Our revenue increase was primarily the result of an increase in our Agriculture and Construction segments, which increased 9.1% and 8.4%, respectively.

While the Equipment category achieved double-digit revenue growth in each of these segments, the performance of our service business was the highlight of the quarter, which grew 15.5% on a consolidated basis.

Our parts revenues were up 6.7% and our rental and other revenue was down slightly compared to the same period last year. Rental and other revenue was down primarily due to a smaller average rental fleet, which was offset by a slightly higher dollar utilization of 25.5% for the current quarter compared to 25.2% in the same period last year.

We were pleased with the quarterly revenue increase in our parts and service businesses. Approximately 2% to 3% of the increase is from our AGRAM acquisition completed in the third quarter of last fiscal year with the balance of the revenue growth resulting from our increased focus in these areas and the customer fleet that is continuing to age.

On Slide 8. Our gross profit of $64 million for the quarter was an increase of 8.7% compared to the same period last year, primarily driven by higher revenues. Gross profit margin increased by 50 basis points to 20.3% versus the prior year period due primarily to a shift in gross profit mix toward our higher-margin service business.

Our operating expenses increased by $7.3 million to $55 million for the second quarter of fiscal 2020. The increase was primarily the result of higher International segment operating expenses resulting from our AGRAM acquisition, ERP transition costs incurred in the quarter and increased cost associated with supporting increased activity levels in our Agriculture and Construction segments.

The ERP transition costs along with the decrease in Equipment revenue in our International segment that negatively affected our ability to leverage our fixed operating costs within the segment contributed to an increase in our operating expenses as a percentage of revenue from 16% in the second quarter last year to 17.4% in the second quarter of fiscal 2020.

Floorplan and other interest expense decreased 42.9% to $2.4 million in the second quarter of fiscal 2020 compared to $4.2 million in the same quarter last year. Most of the decrease was due to lower interest expense resulting from the May 1, 2019 retirement of the remaining balance of our convertible notes.

In the second quarter of fiscal 2020, our adjusted net income grew 9.5% to $6.9 million compared to adjusted income of $6.3 million in the prior year. Our adjusted earnings per diluted share for the quarter was $0.31 compared to $0.28 in the second quarter of last year. In the second quarter of fiscal 2020, adjusted EBITDA was $15.8 million compared to $16.8 million in the second quarter of last year. You can find a reconciliation of adjusted net income, EPS and EBITDA to their most directly comparable GAAP amounts in the appendix to this slide presentation.

On Slide 9, you'll see an overview of our segment results for the second quarter of fiscal year 2020. Agriculture revenues were $166 million, an increase of 9.1%. We carried the sales momentum we generated in the first quarter through the second quarter despite ongoing industry headwinds and uncertainties. Revenue increases were achieved across equipment parts and services sales. The increased revenue drove a 19.2% increase in pretax income to $6.2 million for the quarter compared to $5.2 million in the prior year period.

Turning to our Construction segment. Revenue increased 8.4% to $84 million compared to the prior year period, driven by increases in our equipment, parts and service businesses. The segment's adjusted pretax income improved by $1 million to $1.3 million in the second quarter of fiscal 2020. This marks the fourth consecutive quarter of increased quarter-over-quarter top and bottom line results in this segment, as we continue to drive towards profitability within this segment.

In the second quarter of fiscal 2020, our International segment revenue was $65 million, a decrease of 3.7% compared to the same quarter last year. The revenue decrease was the result of a 19.8% decrease in same-store sales, partially offset by the revenue contribution from our AGRAM acquisition, which closed in the third quarter of last fiscal year.

Income before income taxes for the second quarter of fiscal 2020 was $500,000 compared to $3.9 million in the second quarter last year. We were up against the tough quarterly comp in this segment with revenues increasing 29.4% in the prior year second quarter. However, segment revenues for the second quarter fiscal 2020 still came in below our expectations as the difficult industry conditions that David discussed earlier weighed on our customers' equipment purchase decisions.

As we have previously highlighted, our International business contains a lower mix of parts and service revenue as compared to our domestic business. As a result, fluctuations in equipment revenues will have a larger impact on profitability, which is what we are seeing in the current quarter on down equipment revenues.

Turning to Slide 10. You see our first 6 months results. Total revenue increased 9.7% compared to the same period last year. First 6 months equipment sales increased 10%, parts increased 8.6%, service revenue increased 15% and rental and other revenue was essentially flat.

Turning to Slide 11. Our gross profit for the first 6 months was $118 million, a 10.7% increase compared to the same period last year. Our gross profit margin increased by 20 basis points year-over-year to 19.9% for the first 6 months of fiscal 2020. We realized the small improvement in our gross profit margin primarily due to a change in gross profit mix with a higher percentage of our revenue coming from our service business.

Our operating expenses increased by $13.1 million or 13.8% for the first 6 months of fiscal 2020 to $107 million. As a percentage of revenue, these expenses were 18.1% of revenue compared to 17.4% in the period -- prior year period. The drivers of this expense increase were similar to what I discussed for the second quarter.

Floorplan and other interest expense decreased $2.7 million or 35.5% to $4.9 million in the first 6 months, largely due to the interest expense savings resulting from our repurchases and full repayment of our senior convertible notes, as well as the decrease in our average interest-bearing inventory compared to the first 6 months of fiscal 2019.

Our adjusted diluted earnings per share was $0.33 for the first 6 months of fiscal 2020 compared to $0.21 in the prior year period.

On Slide 12, we provide our segment overview for the 6-month period. Overall, our adjusted pretax income was $9.8 million for the first 6 months of fiscal 2020 compared to $7 million in the same period last year. This improvement is primarily the result of higher revenues across all our segments, combined with gross margin improvement in Agriculture and Construction and lower floorplan and other interest expense.

These results were partially offset by higher overall operating expenses as well as reduced contribution from our International segment.

On Slide 13, we provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2020.

We had cash of $50 million as of July 31, 2019. Our equipment inventory at the end of the second quarter was $547 million, an increase of $130 million from January 31, 2019, reflecting a $152 million increase in new equipment partially offset by a $22 million decrease in used equipment. Equipment inventory turns were flat year-over-year at 1.7.

I will provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the second quarter increased to $118 million compared to $111 million at the end of fiscal 2019. The increase of fleet size before our seasonal busy period would still anticipate our fleet size will decrease to around $110 million by the end of the current fiscal year.

As of July 31, 2019, we had $452 million of total floorplan lines of credit. We continue to have ample capacity in our credit lines to handle our equipment finance needs.

Our total liabilities to tangible net worth ratio is a healthy 2.1. This ratio continues to be impacted by the adoption of the new lease accounting standard, which went into place in the first quarter this year and will continue to influence the comparisons for the balance of fiscal 2020.

Importantly, the ratio of 2.1 is well below 3.5, which is the leverage covenant required of our larger bank facilities. We expect this ratio to strengthen as our normal equipment inventory destocking occurs in the back half of the year.

As a reminder on May 1, 2019, we repaid the outstanding principal balance on our convertible note using cash on hand and borrowings under our existing lines of credit. Significant cash generation over the past few years allowed us to repay these notes in full without having to replace them with another long-term debt instrument. With the retirement of this debt behind us and our expectation of another good year of cash generation, we are in a solid liquidity position during this period of volatility and uncertainty within the largest segment of our business.

Turning to Slide 14. We'll provide some additional information on our equipment inventory.

Consistent with the expectations that we provided last quarter, we experienced continual seasonal stocking of new equipment inventory and sequentially flat used inventory levels in the second quarter. The amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide.

We continue to maximize our noninterest bearing terms from our suppliers. The percentage of our noninterest bearing inventory to our total equipment inventory is reflected in the black line of the graph. As an example, in the current quarter, we had total equipment inventory of $547 million, of which $269 million or 49% was noninterest bearing.

In fiscal 2017, the chart demonstrates increasing levels of noninterest bearing percentages within our equipment inventory. The primary driver of this improvement is the reduced aging of our inventory as a result of our ongoing life cycle management efforts as more of our inventory remains under noninterest -- under interest-free terms from our suppliers. This improvement has been the primary reason for the reduction in our floorplan interest expense over the past few years.

At this point, we believe we have hit our seasonal peak in our level of equipment inventory. We expect to reduce inventories throughout the next 2 quarters of the fiscal year, which will result in significant cash generation.

Slide 15 provides an overview of our cash flows from operating activities for the first 6 months of fiscal 2020. The GAAP reported cash flow used for operating activities for the period were $6.3 million. As part of our adjusted cash flow used for operating activities, we include all equipment inventory financing, including non-manufacturer floorplan activity. Our adjustment for non-manufacturer floorplan payables was $50 million for the first 6 months of fiscal 2020.

We also adjust our cash flow to reflect a constant equity in our equipment inventory, which enables us to evaluate operating cash flows exclusive of changes in equipment inventory financing decisions.

The equity in our equipment inventory decreased to 17.4% during the 6-month period ended July 31, 2019, and the adjustment for our constant equity in equipment inventory represents a $93 million use of cash.

The decrease in equity in our inventory is primarily due to the seasonal stocking of new equipment inventories in the first half of the fiscal year and higher level of floorplan financing available on such inventories as well as borrowing more on our floorplan lines in connection with the repayment of our outstanding balance of our convertible notes, which occurred on May 1.

After all adjustments, our adjusted cash flow used for operating activities was $49 million for the first 6 months ended July 31, 2019, compared to $36 million for the same period last year.

As I just mentioned on the previous slide, we expect cash generation to begin in our fiscal third quarter as we begin our seasonal destocking of equipment inventory and enter our most profitable quarter of the year.

Slide 16 shows our updated fiscal 2020 annual modeling assumptions. We're updating our revenue modeling assumption for our Agriculture and International segments, but are maintaining our estimates for Construction at up 5% to 10%.

Our updated Agriculture segment assumption is for growth of 2% to 7% versus our previous expectation of flat primarily reflecting the relative strength we experienced during the first half of the year and despite the ongoing uncertainties remaining for the rest of the year.

Our updated International segment assumption is also for growth of 2% to 7% versus growth of 10% to 15% previously, reflecting the challenging environment we are facing in our International markets.

While we are disappointed with the deceleration in growth within our International segment, our domestic business is performing well with profitable growth in our ag segment and continued growth and improvement initiatives driving our Construction segment towards sustained profitability.

Given these offsetting factors, we continue to expect adjusted diluted earnings per share to be in the range of $0.75 to $0.95 for fiscal 2020.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Steve Dyer, Craig-Hallum.

--------------------------------------------------------------------------------

Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Co-President & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So the strength in your ag outlook going forward, I'm just, kind of, curious, obviously, corn was well above $4 a bushel here for quite a while earlier this year. How much of the benefit you guys think you saw from that? Or is it just more of the yields might not be as bad due to flooding as initially feared? Or sort of what's driving that more optimistic outlook in ag?

--------------------------------------------------------------------------------

Mark P. Kalvoda, Titan Machinery Inc. - CFO & Treasurer [3]

--------------------------------------------------------------------------------

Steve, this is Mark. The outlook -- the change in the outlook that we had really just implies about flattish results for the back half of the year. It's really just the increases because of that -- in that range is because we're up 9% in the first half of the year. It's just with those factors that you mentioned, these frost dates, trade war, commodity prices, all of the above, all those variables and uncertainties out there in the industry were leading the back half of year at flat, and that's implied in that range of the 2% to 7%.

--------------------------------------------------------------------------------

Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Co-President & Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. Got it. Service was really strong in the quarter, up 16% year-over-year. What drove that strength specifically? What are you seeing there?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [5]

--------------------------------------------------------------------------------

Well, this is Dave, Steve. So if you remember last fall was a longer drought on harvests and some real demanding conditions. Crops were being calm line weighing in December with frozen, muddy, snowy conditions. And these conditions are tough on equipment, and we've been putting some good parts and services work into that equipment of getting ready for not only the spring planting but also the harvest season, we're continuing to -- we're working on combines.

So as indicated by parts and service growths in the first half of the year, that's been a good plus for that. I think to look at there's going to be probably a little bit less acres harvested because of the preventative plant and some of the drowned out.

But our equipment -- fleet continues to age more hours and we're seeing just a lot of demand in our service departments as this fleet continues to get more hours and age on it.

--------------------------------------------------------------------------------

Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Co-President & Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And then Dave, you've talked more recently about the M&A environment and your desire to sort of stoke that up again. Balance sheet and inventories has come a long way. You guys are in a good spot. What's the thought there going forward, given all the uncertainty with trade wars and everything?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [7]

--------------------------------------------------------------------------------

Well, I think there is some really nice dealer potential acquisitions. Owners are -- they're getting aged, looking for a succession solution. And also, I think we want to take this opportunity right now, and I think, there's some good opportunities out there, and we're really seeing that pickup. So I've spent a lot of time on that. And also, I think, that's long term to be able to getting some good markets with large industry potential is going to be good for Titan long term.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question is from Larry De Maria, William Blair.

--------------------------------------------------------------------------------

Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [9]

--------------------------------------------------------------------------------

Just going back to the point of looking for flattish second half. You guys also made the point that farmers had sold some when, obviously, market surged earlier this year, and that they're going to get [MS 2] payments, prevented plant payments, et cetera. So why have -- is there just a conservative outlook into the second half, given the uncertainties? Or are we not expecting farmers to allocate some of that cash off the taxes into the end of the year?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [10]

--------------------------------------------------------------------------------

Well, I think, Larry you really need to look at soybean prices right now. And I'd say, the current levels of soybeans may have been that for a while. They're probably losing money right now at these current prices. So it's going to be really difficult. It's a -- high percentage of our customers' crops are soybeans in most of our markets, so that's really been hard.

So granularity, yes, I think, it's a real positive that late June or early July, a lot of our growers emptied out of their bills with all their carryover crop, was able to contract some of this year's crop. So -- but I do think that's been offset somewhat by the soybean prices.

And I think the biggest thing too is there's going to be a big wait and see as to when the first killing frost date's going to hit. And I think that's really worrying everybody now. And that's why we really going to need to watch the weather to the month of September. And that's going to make a big impact on yield, farmer income, kind of a make or break year this year, so I think there's a big wait and see, not only with our growers but also with the ag lenders out there.

--------------------------------------------------------------------------------

Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [11]

--------------------------------------------------------------------------------

Okay. I understand. And as we start to think about into next year, (inaudible) but are you guys already starting to take orders and build an order book for planters into next year? So kind of curious how an initial look on orders of the seasonal stuff that maybe would give a hint about what's going to happen next year are shaping up?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [12]

--------------------------------------------------------------------------------

Yes. There's -- even things were a little bit delayed this year. We're -- yes, there's definitely around [coiling] going on. There's interest. All that activity for presale business going into the next year, not only planters but also some of the high horsepower tractors and combines, all that stuff. But then again, I think, a lot of growers before they really pull trigger on some of that, they're going to want to see what their yields are going to be this year and if the crop reaches maturity.

--------------------------------------------------------------------------------

Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [13]

--------------------------------------------------------------------------------

Okay. So it's not really enough to tell you directionally what's going on about the coiling stuff is and what not is fairly...

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [14]

--------------------------------------------------------------------------------

Yes, the replacement demand's real and with some of the technology and some of the productivity equipment right now, the customers -- there's a big interest in the equipment out there. And then -- so the fleet's getting aged, it's getting more hours on it. We've got a great planter with all the precision and stuff. And some of the big planter buyers, people are excited. They just want to make sure that they're doing this hand-in-hand with their bankers and they know what their yields are and that if it fits their basically their abilities to pay off the notes on those big equipment purchases.

--------------------------------------------------------------------------------

Lawrence Tighe De Maria, William Blair & Company L.L.C., Research Division - Co-Group Head of Global Industrial Infrastructure [15]

--------------------------------------------------------------------------------

Got you. And if I can ask one follow-up question. Farmers are speaking out. Deere's giving way JDLink for free for the next 5 years with all new large ag equipment. So just curious about the uptake that you guys are seeing with Farmers Edge and climate engagement. Now that you guys are offering that, are you seeing real uptake from that? Or is there wait and see? And how are farmers kind of reacting to some of the data management things that are out there right now?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [16]

--------------------------------------------------------------------------------

Well, precision farming has become mainstream with all our growers out there now. So there's been a conversation about a tractor, a combine or a planter that doesn't involve either precision or technology or digital connectivity, all other subjects. So Case IH is leading edge in technology out there right now. Guidance systems for our tractors and combines; Harvest Command, that's a big combine feature; they have high-speed precision planters with their variable speed prescription capabilities; the industry-leading AFS Soil Command, which is real unique with the sensors they're provided; and even seedbed, AIM's Command and the Raven Hawkeye technology and the self-propelled sprayers. Our AFS Connect is providing that telematic connectivity.

And then as you've talked about the Farmers Edge, that's really an exciting offering. They have the integrated digital platform for both their current and legacy equipment. That CAN bus functionality in that -- in the Farmers Edge, that's really attractive. If you got mixed fleet and legacy units, that will make them all working.

And if you're at Farm Progress Show too, you probably saw all the excitement around the introduction of that AFS Connect Magnum tractor, that flagship row crop tractor for Case IH. So yes that's definitely -- all this technology and the fact that replacement demand tied together, that's really driving the interest of our customers right now.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question is from Mig Dobre, Baird.

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [18]

--------------------------------------------------------------------------------

David. I'm just looking for a little more perspective from you because there are so many crosscurrents here. And I'm kind of our wondering what you're hearing from your large farm customers. Like what's really driving purchased decisions and sentiments here? Is it that -- is the commodity prices that they're focused on? Is it these facilitation programs from the USDA? Is it something else like technology? And I'm asking that because, I mean, obviously, you're talking about higher commodity prices earlier in the summer. That situation changed pretty dramatically with the recent WASDE report. So I'm trying to understand if essentially we need to prepare ourselves for sort of a different environment going forward? Or if there are other factors here that might be supporting demand?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [19]

--------------------------------------------------------------------------------

Well, I think, some of the main factors are the customers need modern, up-to-date, reliable equipment, right? And I feel like their cost, probably their equipment, they're going to find that they need to trade that equipment on 3-year cycle, maybe it's a 5-year cycle. We continue to be in the low interest rate environment. I think that's going to continue. We've been seeing good yield trends but also the tax aspect of it. And we talked a little bit earlier about -- there was some pretty significant amounts of commodities, I believe, sold in late June or early July, could potentially trigger some tax buying, that's kind of needed from them. So I think it's a combination of taxes and the machinery and all that they need on their farm to get the job done.

So the Market Facilitation Program, I think, it's going to be a shot in the arm. But it's not that big in the whole scheme of things. So I guess, if we're going to probably put them in order, it's taxes, it's the technology out there and what that's going to do for productivity and yield increases, the commodity prices are going to weigh in. And there's a little more bounce in all of our growers steps back in June, July when that corn was in that $4 range. They tune that new technology and then -- and definitely it's the replacement demand.

So yes, I think there's a lot of anticipation for the August 12 WASDE report out there and -- because I think many of our growers thought that the July USDA report did not reflect the total impact of prevented plant acres, the drowned out acres and the lots of yield potential from the late planted crops, not to mention the difficulty of forecasting yields with the potential crops not reaching maturity due to normal early frost dates.

So I don't know if you're aware or not, Mig, but last week, Pro Farmer finished their annual farm tour and they reported that last Friday the results of their tour and they toured the states of Ohio, Indiana, Illinois, Iowa and Nebraska, Minnesota and South Dakota. So in their analysis, when all got said and done, they picked the U.S. corn production this year at an average of like -- it was 13.358 billion bushels. That's compared to that 13.9 billion bushels the USDA did back in -- on that August 12 report.

And that reflects sort of national corn average of a 163.3 bushels an acre compared to that 169 that the USDA did. So that's a pretty big difference. Will that or will that not impact price once you guys get into harvest, but I think, that's a big question out there. So there's a lot of time that has to heat up here between -- in the 1st of October, but I think a lot of our growers are looking for no frost until October 1 and ideally between the 10th and 15th of October will be better, so we're really getting these a lot chilled weather dates and that's what a lot of our growers are doing.

So like you said, there are a lot of variables out there, a lot of moving pieces. But at the end of the day, it's going to be about price and their ability to make the profit on the farm and that's really going to be driven by some of these actual production numbers and global supplies and our ability to export ethanol use. There's just a lot of variables out there. So I hope I covered most of them for you.

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [20]

--------------------------------------------------------------------------------

No, that was great color. And I would agree with you that healthy skepticism ought to be -- [disappoint] on that recent WASDE report. But as far as your outlook is concerned, what I'm trying to understand here is do you feel that given what's happened with prices earlier in the year and the marketing that farmers might have done, you have enough visibility in this flattish back half outlook? Or does your outlook embed some kind of recovery in commodity prices or other factors that we need to be aware of?

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [21]

--------------------------------------------------------------------------------

I think we're thinking that we don't see anything that's really going to drive soybean prices a lot higher right now or at least in the near term, I mean. So we're not factoring that in. I think, we did factor a little bit that hey, there was a pretty good shot in the arm with that -- when corn got for a $4 for a pretty good period of time that allowed not only to selling the carryover crop plus also to lock in some of this year's crop. We did take that into consideration.

We have to remember too is we're going after some really low industry numbers. So -- and look at the last 4 years, I mean, this -- it's like it hasn't been wonderful out there. So to hit those industry numbers like we've been used to, I mean, that's not going to take a lot.

So we think of those industry numbers based on some of the market activities that happen early year all the continued yield trends.

So barring, I guess, we did not figure in really early frosting however some type of normal-to-later frost dates, which we've been getting in the last few years, I think we feel really good about our numbers. But like I said, we're coming out off of some really low industry numbers in the last 2, 3 years. And that's, kind of, what we're basing it all off from.

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [22]

--------------------------------------------------------------------------------

Okay. A couple of more questions from me. I want to talk a little bit about SG&A. It came in little higher than we expected in -- I remember, I think, Mark mentioning that you guys were thinking SG&A would be relatively flattish sequentially Q2 versus Q1. So I'm wondering what the moving pieces were in the quarter if there were any inefficiencies related to ERP or anything else we need to be aware of? And how do you think about SG&A for the full year?

--------------------------------------------------------------------------------

Mark P. Kalvoda, Titan Machinery Inc. - CFO & Treasurer [23]

--------------------------------------------------------------------------------

Yes. So I kind of mentioned some of the reasons or some of the items that affected the ERP for the quarter. It was higher this quarter than last quarter, but it's just kind of ramping up. There is nothing new expected there.

There's about $1.7 million in the number for that. Again, just as a reminder, AGRAM was in this year. It was not in last year and second quarter. We start seeing apples-to-apples in that third quarter.

As far as -- so we did say flat, or I did mention relatively flat Q1, Q2. If you just look at the adjusted expenses, so that's excluding the ERP cost, it is about $52 million in the first quarter, $53 million here in the second quarter, I think just over $53 million in the second quarter.

So it did come up a little bit. But I guess, not too terribly bad as we look forward. And this is where I indicated before, there will be a rise sequentially here in third, fourth quarter just because of the higher level of activity and some of the seasonality that those quarters see, call it a couple 2 million, 3 million higher in those quarters. And if you look back, it won't be as much of -- and I'm talking on an adjusted expense basis, excluding those ERP items. But then if you look back to last year, you won't see as much of a growth because you have AGRAM now in the prior year quarters.

--------------------------------------------------------------------------------

Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [24]

--------------------------------------------------------------------------------

Got it. Understood. Lastly, on inventories, you are talking about bringing that number down in the back half. Seasonally that makes sense. I guess, in your plan, how do you contemplate exiting fiscal '20 from an inventory standpoint? Maybe you can give us perspective year-over-year, say, exiting fiscal '20 versus exiting fiscal '19, that'd be really helpful.

--------------------------------------------------------------------------------

Mark P. Kalvoda, Titan Machinery Inc. - CFO & Treasurer [25]

--------------------------------------------------------------------------------

Yes. So we've -- I mentioned, we've hit our seasonal peak that believe would be the best seasonal peak here at around $550 million.

I think pulling that down, we could take it down, a good $100 million, $125 million, that would probably take us a little bit above last year, I think we're around $420 million last year. So of course this is excluding any acquisitions that may happen.

So I think a little bit up maybe from last year but down a good $100 million, $125 million from here. And maybe just to comment, the inventory here, again, especially domestically is very good. You can see that in some of that noninterest-bearing inventory percentages. With the lower expectations on International from a sales standpoint, we're going to be monitoring those inventories closely as we adjust to those lower levels of revenue. But for the most part overall, we're sitting fine with inventory. And yes, expected to come down close but probably a little bit more than where we ended the year last year.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our final question is from Rick Nelson, Stephens.

--------------------------------------------------------------------------------

Nicholas Todd Zangler, Stephens Inc., Research Division - Senior Research Associate [27]

--------------------------------------------------------------------------------

Nick Zangler on for Rick here. I'll focus on the International segment. I know this segment typically fluctuates quarter-to-quarter, and you had a strong positive comp in the first quarter followed up with the negative comp in the second. But can you just -- can you talk through the back half of the year from an International perspective any tailwinds you might see? And I know you listed quite a few headwinds. But can you talk about how you expect those to persist going through the back half of the year?

--------------------------------------------------------------------------------

Mark P. Kalvoda, Titan Machinery Inc. - CFO & Treasurer [28]

--------------------------------------------------------------------------------

Yes. So I think as we look in the back half of the year, maybe it's still little bit talking about the first half, and David mentioned some of this. But from a market standpoint, Romania was -- had some very tough comps, Ukraine had some tough comps to last year. That's what drove some of that higher sales growth, that same-store sales growth that you referred to in Q2, in particular.

But those are 2 markets that we do expect both of those to moderate some going forward. In Romania, there was the weather that was impacting the small grains crop and the results of the no subvention funds, we don't see that changing, so that headwind will be there.

But the weather was more conducive to some of the row crops over there and some of the fall harvesting. So we do expect some of those headwinds to alleviate somewhat in Romania. And Ukraine just kind of had a slower start to the year, and we do expect some improvement there as we move into the back half of the year.

Germany, it's -- we felt was accretive last year. We expect it to be accretive this year but it is starting out slow as well and not hitting its stride yet. Germany, I think, just the longer we get past the integration bringing them on, the better it is and the further we get away from some of those poor drought conditions that we had at the end of last year that's still affecting some of our customers' ability or desire to purchase equipment this year. So the further we get away from that and have some reasonable weather over there, that will help that.

That being said, it's a difficult market, I think, for anybody to predict. It is for us over there. And with the assumptions that we have out there with that 2% to 7%, from a same-stores sales standpoint, it is relatively flat at this point for the back half of the year. And given some of these upticks here we expect to hit that. And we did have some particularly good third quarter last year that will be hard to match. But we do expect some seasonal uptick here in Q3 versus what we just saw in Q2. So hopefully that helped some I think.

--------------------------------------------------------------------------------

Nicholas Todd Zangler, Stephens Inc., Research Division - Senior Research Associate [29]

--------------------------------------------------------------------------------

Sure. Understood. And then I guess, taking that into consideration the inventory positioning that you mentioned from International perspective, full year equipment margins on a consolidated basis, do we still think that 11% is attainable? Or any fluctuation from potentially hitting that target?

--------------------------------------------------------------------------------

Mark P. Kalvoda, Titan Machinery Inc. - CFO & Treasurer [30]

--------------------------------------------------------------------------------

Yes. I think the 11%, at this point, is going to be tough given that we're at about that year-to-date, so far I think 10.9% year-to-date. And Q4 is generally a softer quarter. I do think fourth quarter is the quarter where we have opportunities better than last year. But I think all of that said and done, I think we'll probably end up somewhere in between where we ended up last year at that 10.6% and that, kind of, 11% long term -- longer-term target, if you will. So it's more likely we won't hit 11%, but somewhere in between where we ended up last year in that 11%.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

We have reached the end of the question-and-answer session. I'll now turn the call back over to David Meyer for closing remarks.

--------------------------------------------------------------------------------

David Joseph Meyer, Titan Machinery Inc. - Co-Founder, Chairman of Board & CEO [32]

--------------------------------------------------------------------------------

Okay. Thank you, everybody for being on the call today. And thanks for your interest in Titan Machinery. And we look forward to update you on our progress on our next call. So have a good day, everyone.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.