Titan Machinery Inc. (TITN) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Titan Machinery Inc. Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] Hosting today's conference will be John Mills with ICR. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Mr. John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Titan Machinery's Second Quarter Earnings Conference Call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; Peter Christianson, President and Chief Operating 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, 2012, which went out this morning at approximately 6:45 a.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Titan's website at titanmachinery.com. This call is being webcast, and a replay will be available on the company's website as well. In addition, we are providing a slide presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website and clicking on the Investor Relations tab. The presentation is directly below the webcast information in the middle of the page. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Titan's most recently filed 10-K and subsequent 10-Q. 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. Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call. [Operator Instructions] The call will last approximately 45 minutes. David Meyer will provide highlights of the company's second quarter results, a general update on our business and review our recent acquisitions. Then Mark Kalvoda will review the financial results in more detail, and Peter Christianson will discuss our segment operating results and our fiscal 2013 annual revenue, net income and earnings per share guidance range along with our outlook modeling assumptions. Then we will open the call to take your questions. Now I'd like to open up the call to the company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our second quarter of fiscal 2013 earnings conference call. As John mentioned, to help you followed today's prepared remarks, we have provided a slide presentation which you can access on the Investor Relations portion on our website at www.titanmachinery.com. If you click on the Investor Relations tab on the right side of the page, you will see the presentation directly below the webcast in the middle of the page. Turning to Slide 2. You'll see our fiscal second quarter 2013 results. The revenue for the second quarter was $410.1 million. Our pretax income was $8.8 million, and we earned $0.25 per diluted share. On the call today, we will discuss the company's continued top line growth driven by organic and acquired growth across both our Agricultural and Construction segments. The teams and our dealerships have done a tremendous job in executing sales. We'll also discuss the impact of the highly publicized drought in and around our regions. Peter will provide an overview on our Ag and Construction margins and the factors impacting them in each segment. In addition, we will discuss our inventory levels and inventory strategy going forward. Now I would like to provide some color on each of our industries that are key to our business. On Slide 3, we provided an overview of our agricultural industry. While the drought conditions are certainly important and at the forefront of everyone's mind when we are considering the ag industry in the United States, I'd like to highlight to you, overall, the operating environment, the farmers continue to be strong. Current crop conditions allow producers to have an early harvest this growing season, providing them plenty of time to prepare the fields for the calendar year 2013 growing season. The current field conditions lower the harvest cost of this year's crop. We're also seeing a higher percentage of available land being utilized for crop production. It's important to point out that even though we have low field moisture levels, timely rains on most of our footprint allow better crop development in other areas of the drought-stricken Midwest. Higher commodity prices are creating an increased return on investment for our producers' land improvement which will enhance future yield potential. The highly publicized drought reduced U.S. crop yields and forecasted crop carryover, which are driving higher calendar year 2012 commodity prices. Based on the increased commodity prices and supplemental crop insurance proceeds, USDA has increased its projected net farm income for calendar year 2012 to $122 billion, an increased level over 2011 record net farm income. Even though our agriculture customers experienced strengthening commodity prices midway through our second quarter, severe drought conditions in the Midwest negatively impacted near-term customer settlement, which is reflected in our second quarter equipment margins. Now I'll turn into the Construction segment of our business. On Slide 4, we provided an overview of the construction industry in our markets. Construction business continues to benefit from increased energy industry activity in our region, including coal and natural gas and oil. North Dakota has now become the second-largest oil production state in the United States. As many of you are aware, several of the states in our footprint are capitalized on the Bakken, Three Forks and Tyler Oil formations. In addition, recent oilfield exploration suggests that the Bakken formation may extend as far west as the Rocky Mountain Front in Montana. With our recent acquisition of the Colorado construction locations, we'll expand our exposure to the Niobrara formation in Eastern Colorado and Wyoming. Our agricultural customers continue to drive demand for our construction equipment to use in their farming operations, including feedlots, material handling, land improvement and land maintenance. General equipment demand continues to support rental revenue in line with our long-term growth strategy. Sluggish economic growth continues to impact the construction industry recovery in some of the larger metro areas of our recent acquisitions. Public spending continues to delay the other segments of the construction industry as well. Industry equipment inventories have increased year-over-year at both the dealer and manufacturer levels. These factors generated a competitive retail equipment market where we were able to maintain sales activity but experienced a compression in our overall equipment margins and, in particular, our used equipment margins. Turning to Slide 5. You'll see our quarterly acquisitions and store opening activities. We're continuing to expand the Titan Machinery footprint in both our core upper Midwest market and in Eastern Europe through strategic acquisitions as well as selective new store openings across our Agricultural Retail, Construction Retail and International growth platforms. In the second quarter of fiscal 2013, we completed 1 acquisition consisting of 2 agricultural dealerships in Nebraska, opened a new construction dealership in Windsor, Colorado and 2 new agricultural dealerships locations in Romania. In addition, the company received approval from CNH to distribute Case Construction Equipment in both Romania and Bulgaria. We are pleased with our acquisitions to date, and we remain focused on expanding our footprint through selective acquisitions and store openings in our existing and continuous markets as well as in evaluating opportunities for future growth abroad. In summary, while the second quarter was challenging due to the historic drought, as we enter the second half of our fiscal year, we are confident in our initial revenue forecast due to strong agricultural balance sheets, crop insurance, record crop prices, continued strong energy activity and rental demand in our construction markets. Now I'd like to turn the call over to Mark Kalvoda, our Chief Financial Officer, to review our financials in greater detail.

Thanks, David. Turning to Slide 6. Our total revenue for the fiscal 2013 second quarter grew 31.9% to $410.1 million, approximately 44% from organic growth and 56% from acquisition growth. All of our revenue sources contributed to this quarter-over-quarter increase. Our revenue growth reflects higher sales in both our Agriculture and Construction segments and especially benefited from the improved construction spending in our markets. The 42.8% growth in our rental business is a result of our strategic acquisitions and ramp-up of this growth platform. Our sales mix was weighted more towards equipment revenue this quarter and was reflected in our overall gross profit margins. On Slide 7, our gross profit for the quarter increased 26% to $70.4 million, reflecting higher revenue. Our gross profit margin was 17.2% compared to 18% for the same quarter last year. As I mentioned on the previous slide, gross margins were impacted by a change in sales mix in which our higher-margin Parts and Service business made up a lower percentage of our total gross profit as well as a decrease in equipment margins, which Peter will discuss in more detail shortly. Our operating expenses as a percentage of net sales in the second quarter of fiscal 2013 were 13.8% compared to 14.2% for the same quarter last year. This reflected our operating leverage across higher revenues, which offset the operating expenses associated with the rental business in our Construction segment. Our interest expense and floorplan expense increased approximately 80 basis points. This reflected our increased levels of interest-bearing equipment inventory and rental fleet. The interest expense associated with our April 2012 convertible debt offering contributed approximately 55 basis points of the increase. Our pretax margin was 2.1% compared to 3.3% in the second quarter of last year. Quarter-over-quarter decline primarily reflected lower equipment margins and the increase in floorplan and other interest expense I just discussed. Earnings per diluted share for 2013 fiscal second quarter were $0.25 compared to $0.30 in the second quarter of last year. Slide 8 shows our results for the first 6 months of fiscal 2013. Our revenue increased to $831.8 million, which is a 32.2% increase compared to the same period last year. Again, all 4 of our revenue streams, equipment, parts, service and rental and other, contributed to this growth, with the ramp-up of our rental business having the largest increase. On Slide 9, our gross profit for the first 6 months of fiscal 2013 increased 29.6% to $140.8 million, reflecting our higher sales for the first half of the year. Our gross profit margin was down 40 basis points, primarily reflecting the equipment margins I previously discussed. Interest expense, including floorplan expense and other, increased 60 basis points, of which approximately 1/2 was from the convertible debt. Our pretax margins for the first 6 months of fiscal 2013 was 2.5% compared to 3.6% for the same period last year, the decrease being attributed to the same factors I discussed for the second quarter. Earnings per diluted share were $0.60 compared to $0.69. Turning to Slide 10. We provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2013. We have cash and cash equivalents of $126.5 million. Our inventory level was $938 million as of July 31, 2012 compared to $748 million as of January 31, 2012. Of the $190 million inventory increase, $40 million was from acquisitions. New inventory including acquisitions increased $181 million in the end of fiscal 2012 to support our forecasted equipment sales. Our used equipment inventory including acquisitions decreased $8 million from the end of fiscal 2012. We increased our rental fleet assets to $106 million compared to $62 million at the end of last year, in line with our strategic growth plans for the rental business. As of July 31, 2012, we had $162 million available on our $800 million floorplan lines of credit. Turning to Slide 11. I would like to provide some additional color on our inventory levels. This graph shows our equipment inventory, quarterly stocking levels and our sales for the last 3 years. We have maintained a relatively consistent inventory churn during this period to support our aggressive sales growth in the markets we operate in. The equipment inventory is in 2 groups. New inventory is represented by the blue bar and used inventory by the red bar. Given the fact that market fluctuations connected with used inventory is the responsibility of the dealership, we have maintained a prudent approach with the management of our used equipment inventory, which is reflected in the graph. We have been disciplined to move used inventory through the market in a timely manner and continue to do so. The equipment margins were impacted this quarter as we maintained sales in the face of conservative customer sentiment. New inventory values are supported by manufacturer retail programs, and so the primary risk of the dealer on the new equipment inventory is the carrying cost, which is reflected in our floorplan interest expense. It's important to remember that approximately 50% of new inventory is financed with manufacturer non-interest-bearing terms. As you can see, for the last 3 years, we have been growing our new inventory stocking level more aggressively than our used inventory, positioning us to take advantage of market conditions that we experienced in the fourth quarter of last year. In light of the increase in inventory levels and shorter production lead times in both the agriculture and construction industries, we are changing our inventory strategy going forward to increase our inventory turns. The primary component of this strategy will be presell marketing of new equipment. It is important to remember that many of our production slots -- lots were locked in 12 months ago, prior to the change of market condition, and we will see our new inventory levels peak in the third quarter prior to our forecasted inventory decrease in the fourth quarter. Our inventory strategy has always been to stock new equipment efficiently for the fourth quarter as our customers need physical possession of the inventory to qualify for year-end tax incentives. Our inventory management strategy supports our long-term financial goal of achieving 3x inventory turns. Slide 12 gives an overview of our cash flow statement for the first 6 months of fiscal 2013. When we evaluate our business, we look at our cash flow related to equipment inventory net of financing activities, at both manufacturers and other sources, including non-manufacturer floorplan notes payable and convertible notes, which are reported on our statement of cash flow as both operating and financing activities. Until deployed on future growth opportunities, the temporary use of a portion of the proceeds from our convertible debt is to reduce our floorplan notes payable balances, resulting in a higher level of equity in our equipment inventory than we have historically maintained. We use this adjustment to maintain a constant level of historical equity in our equipment inventory at 15%. When considering non-manufacturer floorplan proceeds and the impact of our convertible note proceeds on our equipment inventory financing in the first half of fiscal 2013, our non-GAAP inventory net cash used for inventories was $35.9 million. In our statement of cash flows, the GAAP reported net cash used for operating activities for the first 6 months of fiscal 2013 was $93.3 million. We believe including all equipment inventory financing as part of our operating cash flow better reflects net cash flow of our operations. Making these adjustments, our non-GAAP adjusted cash used for operating activities during the first 6 months of fiscal 2013 was $33.2 million. Now I would like to turn the call over to Peter to discuss our Agriculture and Construction operating segments in more detail and to discuss our fiscal 2013 annual guidance. Peter?

Thanks, Mark. Now turning to Slide 13. You'll see an overview of our segment results for the second quarter. Agricultural sales were $336.5 million, up 26.3%, driven by acquisitions and organic growth. We generated an Ag pretax income of $10.6 million, a slight decrease, 3.3%, compared to the prior year period. This decrease in pretax income in spite of our revenue growth reflected the impact of drought conditions, which created a more cautious customer sentiment and increased used equipment pressure from severe drought areas. We maintained our equipment sales levels but experienced lower equipment margins. Our pretax income was also affected by an increase in floorplan interest expense, primarily reflecting our increased new equipment inventory levels. Turning to our Construction segment. Our revenue increased to $95.3 million, up 59.3%, which reflected strong acquired growth, organic growth and the expansion of our rental business. We're ramping up this segment of our business and are pleased with the top line growth, but the sluggish economic recovery in metro areas and public spending have pressured our equipment margins. The second quarter pretax income also reflected higher rental fleet and floorplan interest expenses. Slide 14 shows our year-to-date segment overview. Our Ag revenue increased 25.9% in the first 6 months of fiscal 2013 compared to the first 6 months of last year. Our Ag pretax income primarily reflected the impact of the drought on the second quarter results, as discussed previously. Our Construction revenue increased 70.1% in the first 6 months of fiscal 2013 to $176.9 million as we continued to expand this segment of our business through organic and acquired growth as well as rental growth. The breakeven pretax income reflects the factors I mentioned in our quarterly overview. We remain confident this segment of our business will be a meaningful contributor to our bottom line during the second half of this year. Turning to Slide 15. This shows our same-store results for the second quarter of fiscal 2013. Our overall same-store sales increased 14.5%, highlighting year-over-year improvements in both segments, particularly for the Construction business. Improved Agricultural same-store sales increase of 11% for the second quarter of fiscal 2013 highlights our ability to continue to grow organically despite the weather-related challenges. Our second quarter fiscal 2013 Construction same-store sales increased 33%. The second quarter of fiscal 2013 overall same-store gross profit increased 10.3% year-over-year, primarily reflecting sales mix and margins. Slide 16 shows our same-store results for the first 6 months of fiscal 2013. Our same-store sales increased 15.1%, and our same-store gross profit increased 13.2%. Six months same-store results for each segment show the increase in gross profit was more in line with the growth in revenue as sales mix was less of a factor on a year-to-date basis. For modeling purposes, it's important to remember that we calculate same-store sales by including stores that were with Titan for the entire period in which we're comparing. In other words, only stores that were part of Titan for the entire 3 months of the second quarter of fiscal 2012 and the second quarter of fiscal 2013 are included in the second quarter same-store comparison. In the second quarter of fiscal 2013, a total of 29 locations were not included in our second quarter same-store results, consisting of 18 agricultural stores and 11 construction stores. For the first 6 months of fiscal 2013, a total of 32 locations were not included, consisting of 20 agricultural stores and 12 construction stores. Slide 17 shows our updated fiscal 2013 annual guidance. As David said, we are reiterating our previously issued revenue guidance range of $1.95 billion to $2.1 billion. We now expect our annual net income attributable to common stockholders to be in the range of $44.3 million to $48.5 million, resulting in earnings per diluted share range of $2.10 to $2.30, based on an estimated weighted average diluted common shares outstanding of 21.1 million. Our updated modeling assumptions reporting our guidance are as follows. We're maintaining our Ag same-store sales to be in the range of 3% to 8%, and we're maintaining our construction same-store annual growth to be in the range of 18% to 23%. It's important to note that although our same-store sales are ahead of this range for the first half of the year, we have extremely strong comps in the back half of the year, primarily in the fourth quarter. We're still modeling positive same-store comps for the second half of this year. Due to the more competitive pricing environment and increased equipment availability, we're now modeling our equipment margins to be approximately 9.3% for the year compared to our previous guidance of 10.4% equipment margins. It's important to note that over the last 3 years, our equipment margins have fluctuated from 8.3% to 11.1%, and we are well within our historical equipment margin range. On Slide 18, you'll see our historical net income growth. Fiscal 2012 was an extremely strong year, and we almost doubled our net income, well ahead of our initial net income guidance. This fiscal year, assuming the midpoint of our range, our net income will be essentially flat compared to last year but still above our trend line growth. We'll continue to execute on our organic and acquisition growth strategies and look forward to a robust second half of the year. Before we take your questions, I'd like to conclude by thanking our employees for all of their hard work and thank our valued customers for their continued support. Operator, we're now ready for the question-and-answer period of the call.

[Operator Instructions] And we'll hear from Michael Cox with Piper Jaffray.

My first question, do you view this new inventory strategy as sort of a short-term fix as the industry works through higher used equipment inventory? Or is this part of a longer-term strategy that you expect to maintain even once used equipment inventory levels do come down? And then how do your customers respond to this? And then my second or follow-up question is assuming we do get used inventory levels worked down by end of the calendar year, is it reasonable to expect that equipment margins could bounce back to the 10% level next year?

Yes. When we talk about equipment, when Mark had the inventory analysis on Slide 11, what's important is that we've maintained our very disciplined approach to our used equipment inventory. And when we talk about our inventory management strategy, in the past 4 years, there's been a strong demand on new equipment. And so we've had a strategy of having an increased stocking level to support our aggressive sales growth. And if you recall, last fourth quarter, by having that equipment on hand and available for those customers, with those tax incentives, those year-end tax incentives required the customer to have possession and have the equipment available for use in their operations. That's been an important part of our stocking strategy on new. Now our used, if you look at that graph, you can see that that's been running almost level. We've kept that right around that $200 million mark and continue to have that go through the channel. Looking at it and asking the question is it short-term fix or is it long term, ever since our IPO, we've always talked about our financial objectives, and one of those is long-term, we see a 3-time inventory turn. And so this is really in line with a long-term goal of ours, and we see with some of the increased equipment availability from the manufacturers on both the Ag side and the Construction side that we can get to that and we can work with our customers and we can work on using presell as one of our major factors on achieving that goal.

And on the second, the follow-up question there, assuming that, I guess, maybe it isn't a used equipment issue, then, but as you work down these inventory levels and you boost your presell activity, is it reasonable to assume that margins can bounce back to the 10% level that you were talking about just a few months ago as you look ahead to next year?

Yes. Like I mentioned in the call, we've seen our equipment margins fluctuate anywhere from 8.3 to up in that 11 range. So 10% is well within that range.

And next, we'll move to Robert McCarthy with Robert W. Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: This is Mick Dobre sitting in for Rob McCarthy. I guess my first question is really trying to clarify something on the net income guidance. According to my math here, your guidance implies roughly $34 million of net income in the second half, which I guess if I take the midpoint of the revenue guidance, that would amount to about 2.8% net margin, about 130 basis points expansion versus the first half. And if we look historically, while margins naturally expand on higher seasonal volume, this appears to be a more robust expansion second half versus the first half than what we typically have seen in the past. And I guess I'm wondering, given the pricing issues, competitive issues that you mentioned, what sort of gives you the confidence that such margin expansion can occur in the second half of this year?

Well, when we model our business and we look at the back half of the year, once you get your higher volume in your second half, we can see our way to an expansion on that margin. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Right. But this expansion appears to be a little bit more than what we've typically seen seasonally. That's why I'm wondering if there's something specific that you're doing or that you're expecting to materialize in the second half other than just normal seasonality.

Yes, one of the things -- this is Mark. One of the things just with the rental business, that Rental business provides more of a lift than kind of the average retail business out there. As we build up the utilization in that rental fleet, that will certainly help as well as -- in the back half of the year, we typically see those expanded margins on the equipment margins. And with that, the rental business just being a bigger, a larger business this year, you're going to see more of an impact from that this year. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: I see. And then looking at Construction specifically, can you also maybe give us a little bit of color for how the equipment sale portion versus the rental portion has been progressing, and how is sort of pricing in one versus the other also looking? Trying to get a better sense for what is really driving the margin change in this business.

Well, we're bringing our rental fleet onstream. And we saw an increase in that in our second quarter as we ramped that business up. And we did have some pressure on our equipment margins in the Construction side of the business.

Next, we'll move to Rick Nelson with Stephens.

I'd just like to follow up on the equipment margins in the quarter, the 8.8% compared to 9.3%. If you could give us more color on what was happening with both used and new and as a follow-up, how you reconcile the guide of 9.3% that's sequential improvement with the inventory reduction strategies that you have in place.

Yes, Rick, Mark here. The decrease of that 0.5% for the quarter, that mostly came in due to the used margins. We had more pressure on the used margins side, and that kind of came across both the Ag and Construction segments. So that's the primary driver here. There was some pressure on new as well, but it primarily came through the used.

And then the sequential improvement that you're modeling or is implied in the guidance, the 9.3%. How do we bridge from the 8.8% this quarter to that 9.3% for the full year?

Traditionally, we have higher margins in the back half of our year, Rick. And so we're just following -- our historical modeling, we see the back half having a little bit of margins.

Even with the inventory reduction strategy that you...

Well, I think it's important to remember when you talk about inventory reduction strategy, it's primarily focused on our new inventory. And the market impact on our new is supported with the retail programs from the manufacturer. And so essentially, what happens is as we migrate more towards a presell, you just have less stocking inventory coming in, which then moves your inventory turn. Our used levels have stayed flat, and so we keep that in line. And like Mark talked about, we're looking at our third quarter with that inventory level peaking out because of the fact that we've got stuff that's in the channel, and that's going to be coming through. But as we migrate to a stronger presell, we feel like we're going to be able to achieve our goals.

Got you. And those volume incentives typically come in the fourth quarter?

That's right. Yes, just looking -- like last year. Last year, first half of the year was like a 9.9% compared to a 10.3%, a 0.4% improvement. And it's similar to what we're expecting this year, what we have modeled this year, where it was 9.1% for the first half and about 9.5% for the back half.

And next, we'll move on to Neil Frohnapple with Northcoast Research.

You maintained your Ag same-store sales growth in the 3% to 8% range for the full year. But has customer sentiment for new equipment purchases been unaffected from the drought? And really any color on discussions with farmers around their CapEx strategies for calendar year 2013 would be helpful.

Well, when you take -- like we've talked about, when you take this drought like we've had, for a large number of acres, there's definitely some negativity in the settlement. But in the same breath, as we talked about, some of the crops and some of our markets with the timely rains, we're actually better than a lot of the Midwest are. So if you compound the crops we are getting and you look at these commodity prices, in that corn in that $7.05 to $8 range and, at times, even a little higher than that. But right now, I think we're looking at that $17 bean deal. Wheat approaching the $10. I mean, those are just absolute record commodity prices. So at the same time we're seeing some droughts in some areas, we're also seeing some really high commodity prices. And then in addition to that, there's a supplemental crop insurance that's out there. So from an income standpoint, we're kind of balancing this, some of the settlement in some markets, but then other places, business is just really strong, and farmers are making a lot of money. So it's kind of a balancing act there.

So would you expect that to drive higher equipment sales in calendar year 2013, then?

Well, we're not -- we're going to -- we'll comment on 2013 when we get to our guidance for next year. But right now, there's just a lot of positives in the market, especially on the Ag side. And look at the -- USDA upped their estimate, what, $122 billion. That's over a record back in 2011.

Okay. And then finally, do you expect the drought to negatively impact Parts and Service revenue or margins for the remainder of the year due to reduction in crop yields?

It's somewhat early to tell on that. We are seeing -- like David has talked about in the beginning of the call, we're seeing field conditions where this harvest is coming on really early this year. And so they're going to be able to go out and get that crop off. But historically, what's happened is when our customers have had the opportunity to get that done, they continue to keep on working in those fields and keep on doing things to make it so that they can optimize where they're positioning themselves coming into the next calendar year. So they're getting going on the harvest up here. And we see that when that would be completed, they would continue to use that equipment and do -- apply fertilizer and land improvements and just keep working those fields.

[Operator Instructions] Next, we'll move to Steve Dyer with Craig Hallum.

Could you just maybe walk us through the mechanics on the crop insurance checks, when they get cut, when they're in farmers hands? If I understand it correctly, we need to wait kind of through end of October, early November to price the corn again to determine sort of the level of the checks. Any color there as to when farmers may get them?

Well, it is later in the year. And there's some different programs there, and it really depends on which programs the grower has selected to use. But a thing to keep in mind is it's both a function of the price of commodities when they plant their crop and then also the price when they come off. And both of those, they were good this spring and also good this fall. So they'll know in the fourth quarter, but all of the results are -- from a lot of the indications out there right now, it's going to be substantially higher than last year and sort of be a big chunk of their income this year. So it's all totally positive on that insurance front.

Okay. Would you expect that CNH will have to get a little bit more active just in terms of taking some of the margin hit? I realize it was, certainly mostly, it seems like, focused on used. But are they going to have to, I think, make it a little bit easier for you here given the weather?

Well, the CNH has been very aggressive and very supportive. And if you read some of the industry advertisers out there, interest-free program, there's a lot of marketing activities, many driven by CNH, to help dealers move their used combine out to be aggressive on the new equipment front. So I think they have been, Steve. And you have to -- one thing you have to keep in mind that most of the machinery we sell now is all Tier 4 machinery, and there is some pretty substantial cost associated with the Tier 4 throughout the industry. So our challenge is to take and trying to pass on as much of that Tier 4 increase as we can in the marketplace. But it was a definitely hit throughout our whole industry on the Tier 4 by all manufacturers to recover some of the costs association with this Tier 4 out there. But CNH has been very aggressive, very supportive and really been a good partner out there from marketing efforts and pricing efforts on our equipment.

Okay. And then finally, I know kind of Q3, Q4 is always tough to call in terms of the cadence there. Given the early harvest, would you expect Q3 could be a little stronger than normal this year? Or is Q4 still the big one in your mind?

Yes. We don't give the quarterly guidance basically because of the impact that the weather conditions can have. But Steve, historically, the fourth quarter has been a little stronger. Last year, it was quite a bit stronger. And I think we could see this thing kind of coming in line a little bit more with the historical trends where we still will see it where the fourth quarter is stronger.

We'll move on to Tom Varesh with M Partners.

Can you maybe expand more on where the margin pressure was coming from in the quarter? Like what's the competitive pricing environment like? And who's sort of driving those prices?

Well, as we talked to you a number of times on our call here is that this pressure has been coming from the used side of the business. So what you have to understand here is all of a sudden, we've got big chunks of some pretty high crop production areas in the Midwest that was totally impacted by drought where maybe customers won't even take their combine out of their shed. Now we don't like to see this happening anywhere in the United States, but it's definitely well publicized. If you look at some of these markets in Indiana, Illinois, wherever, there may not even be any combines used right now. So what happens is with the Internet today and there's all kinds of information [indiscernible] a lot of access to this. Also now there's a lot of both farmers and dealers trying to unload their used equipment in some of these really devastated drought areas. And that's very visible to all the customers. So that tends to drive down the pricing on all used equipment. So we want to be proactive, get our used equipment to the chute, maintain this prudent used equipment management. But really, that's where we saw the margins. And we're basically -- what we're effective at is if your customers have visibility to what they can buy used combines or used tractor for in Illinois, that's going to affect what we can get for used combined tractors. And so really what's happening is this equipment that's moving throughout this channel, and it moves pretty well with the semis and the Internet and all that, it tends to have an effect on our used markets -- or used margins. So what we did is we took a proactive conservative approach, and the results are, as you can see, is our used equipment's in great shape. And that's where it's coming from.

Okay. My second question, and I'm not necessarily looking for guidance here, but is there any fear that you've seen and will see sales from next year being pulled into this year, given the deals that may be out there on the used side or on the new side?

Well, not necessarily. It's too early to tell on that right now. I know there's going to be some business this year because at this level of commodity prices, I believe most of the growers, if they have corn or soybeans in their bins, that got marketed into this year's market. Then you add that into the crop insurance, you add it into the current commodity prices on their existing crop this year. There may be 2 crops marketed in 1 year, and there are still some tax incentives out there. So that's why we're pretty bullish on our fourth quarter. Now at the same time, though, from an equipment availability standpoint, there is -- like back in May, June, there's a lot of the -- November and December slots were already gone and used up. So some of the farmers, if they want certain models or certain piece of machinery, they're going to have to -- we're going to have to order those now and get them into the first quarter of calendar year 2013. So there's going to be your normal build flow of business into next year just for the fact that it's not available anymore in 2012.

And that is all the time we have for questions. At this time, I would like to turn the call over to management for any additional or closing remarks.

Well, thank you, everyone, for your interest in Titan, and we're looking forward to update you on our progress on our next call in December. We will also be attending a number of investor events and look forward to seeing you during the next few months. Have a good day.

And that will conclude today's call. We thank you for your participation.