Titan Machinery Inc. (TITN) Q1 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Titan Machinery, First Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] Hosting today's conference will be John Mills of ICR. As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to your host, Mr. John Mills. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's First Quarter Fiscal 2014 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 first quarter ended April 30, 2013, which went out this morning at approximately 6:45 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 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 risk 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. Lastly, due to the number of participants on the call today, we ask that you keep your question period to 1 or 2 questions and then rejoin the queue. The call will last approximately 45 minutes. David Meyer will provide highlights of the company's first quarter results, a general update on the company's business and review the company's recent acquisitions, then Mark Kalvoda will review the financial results in more detail and Peter Christianson will discuss the company's segment operating results and its fiscal 2014 annual revenue, net income, earnings per share guidance ranges, along with its outlook modeling assumptions. Then we will open the call to take your questions. Now I'd like to open the call to the company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our first quarter of fiscal 2014 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we have provided a slide presentation which you can access on the Investor Relations portion of our website at titanmachinery.com. If you click on the Investor Relations tab on the right side of the page, you'll see the presentation directly below the webcast in the middle of the page. On Slide 2, you'll see our first quarter fiscal 2014 results. Our revenue for the first quarter was $441.7 million, a 4.7% increase over last year's first quarter. However, this year's first quarter revenue was approximately $50 million less than we anticipated. Pretax loss was $1 million, which is approximately $7 million less of pretax income than we anticipated. As we stated in our preliminary results released 2 weeks ago, both our Agriculture and Construction segments were impacted by the abnormally late spring weather which extended through the end of our first quarter. For our Agriculture segment, weather condition has normalized and the planting progress has improved. We expect revenues that was delayed in the first quarter will be realized through the year because we believe the revenue impact was primarily a timing issue. As a result, we continue to expect sales growth in fiscal 2014, and we are reiterating our annual revenue guidance that we issued on our fourth quarter end of fiscal 2013 conference call. In addition to the weather, our Construction segment was impacted by the challenging conditions in this industry and the cost of expanding our network. As we discussed on our last conference call, we are focused on a number of key initiatives to improve our Construction segment business. Peter will review these in detail during his remarks, but I want to emphasize that we expect these initiatives to drive improved top and bottom line results throughout the remainder of this year. Now I'd like to provide some color on each of our industries that are key to our business. On Slide 3, we provide an overview of our agricultural industry. As I mentioned in our production footprint, we experienced delayed planting due to abnormally late spring weather. And in addition to the wait-and-see customer settlement that we discussed on our fourth quarter call, this impacted all 3 of our Ag revenue sources: Equipment, Parts and Service. However, during May, we did experience favorable weather and significant rainfall throughout our ag footprint, which allowed most of the acres in our production footprint to be planted and reduced drought concerns. Regarding our Eastern European footprint, crops are in excellent condition and the delays due to the late spring planting have greatly improved in the past month. Initial USDA forecasts projected large corn production in the U.S. for 2013, which pressured commodity prices. Offsetting some of this pressure in this week's crop progress report, the USDA announced that 91% of U.S. corn acres have been planted, down from the 95% 5-year average, suggesting a possible reduction in planted corn acres. Congress is nearing completion of the new 5-year Farm Bill. We are anticipating a final vote in the fall of 2013. Completing the new farm program will give farmers better visibility through their business going forward. In addition, the $500,000 Section 179 accelerated depreciation deduction, which has increased from $250,000 a year ago, and the 50% bonus depreciation tax incentive, are extended through December 31, 2013. These are positive factors for equipment sales this calendar year. The USDA is projecting net farm income for calendar year 2013 to be at $128 billion, which is well above the 10-year net farm income average as an increase compared to calendar year 2012. We believe the forecasted net farm income supports our annual outlook. However, it's important to realize that we may continue to experience a wait-and-see sentiment in the first half of the calendar year to a potential volatility in 2013 commodity prices, combined with the need for timely rainfalls in our markets. Now I'd like to turn to the Construction segment of our business. On Slide 4, we provided an overview of the construction industry and our markets. The abnormally delayed spring weather prevented construction activity, which impacted Equipment, Parts and Service revenue. The weak economic recovery continues to impact the construction industry, and excess industry equipment inventories are likely to continue through the first half of calendar year 2013 until they are in line with the end user demand. Peter will provide additional commentary on factors impacting our Construction segment results in his remarks. With our expanded distribution and large geographical footprint, there are different drivers within the 11-state geography we cover. This diversification demonstrates one of the positives we achieved through scale. In the Upper Midwest, the strong ag economy and the ongoing build out of the Bakken adjacent oil reserves and related infrastructure continue to support the construction industry. In the Southwest, a strong increase in year-to-date housing permits reflects a recovery in the housing industry, which is driving the construction industry. First quarter housing permits in our Southwestern footprint increased 37% compared to a 23% year-over-year national increase, and a 9% increase in the remainder of our footprint. We continue to see growth in rental equipment demand, which is in line with industry forecast. Our first quarter rental demand was in line with our expectations. Our utilization rate improved in the first quarter compared to last year. It is important to remember that our first quarter is softer historically due to winter conditions in the northern regions of our footprint. Turning to Slide 5, you will see a summary of our acquisitions and a new store opening thus far in fiscal 2014. In the first quarter, we opened our first dealership facilities in Ukraine. We now have operations in 4 countries in the Black Sea region of Eastern Europe. This year, we are focusing on the build out of our distribution network in the assigned regions of Ukraine and establishing a European operations center in Vienna, Austria. In addition, we have completed 2 construction acquisitions in the United States. Both acquisitions helped establish our presence in the Southwest. One acquisition was in Arizona, which was our second acquisition in the state, and we have an additional acquisition in New Mexico. As you can see on the map, showing the states we have locations in, we now have a contiguous case construction footprint from Mexico to the Canadian border. Geographically, we have one of the largest construction equipment distribution footprints in North America. This strategic expansion represents a meaningful investment, and we believe this is a structural component of our company's long-term growth strategy as the construction industry recovers and we improve operations across our footprint. Now that we have expanded our Construction segment footprint, for the immediate future, we are focusing on improving operations, growing our rental business and achieving financial targets for the segment. We will continue to evaluate selective acquisitions and store openings on an opportunistic basis both domestically and internationally. 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 2014 first quarter grew 4.7% to $441.7 million, reflecting growth from acquisitions, a strong revenue increase in our International segment, partially offset by negative same-store sales in both North American segments due to delayed spring weather combined with cautionary agriculture customer sentiment and the challenging construction industry conditions, as David mentioned. All of our revenue sources increased quarter-over-quarter, with the largest percentage growth occurring in our Rental and Other category. This increase was primarily due to a larger rental fleet and a slightly high -- higher utilization rate. On Slide 7, our gross profit for the quarter increased 5% to $73.9 million, reflecting higher revenue. Our gross profit margin was 16.7%, flat compared to the same quarter last year. The first quarter equipment margin of 9.2% was in line with our annual guidance but slightly lower than prior year quarter's equipment margin of 9.4%. Our operating expenses as a percentage of net sales in the first quarter of fiscal 2014 were 15.6%, compared to 13% for the same quarter last year. The increase in operating expenses as a percentage of revenue reflects lower fixed operating cost leverage. This 260-basis point increase was primarily a result of negative same-store sales due to weather and higher expenses associated with the construction stores acquired in fiscal 2013 and the first quarter of fiscal 2014. These recently acquired stores are currently operating at a much higher operating expense ratio than our average Titan construction stores because of the acquired run rate of lower revenue, as they are underperforming in the markets where they are located. We expect operating expenses as a percentage of sales to benefit from our anticipated sales growth in coming quarters and improve our pretax margins. Our overall interest expense increased 60 basis points. As a percentage of sales, our floorplan interest expense increased 10 basis points, and our Other interest expense increased 50 basis points as a result of our April 2012 convertible debt offering. Our pretax loss was $1 million, or a pretax margin of negative 0.2% compared to pretax income of $12.4 million and a pretax margin of 2.9% in the first quarter of last year. The quarter-over-quarter decline primarily reflects the lower-than-expected revenue in Equipment, Parts and Service and the lower pretax margins from the construction acquisition stores I mentioned earlier. Loss per diluted share for the fiscal 2014 first quarter was $0.02 compared to earnings per diluted share of $0.36 in the first quarter of last year. Turning to Slide 8, we provide an overview of our balance sheet highlights at the end of first quarter of fiscal 2014. We had cash of $114.3 million as of April 30, 2013. Our inventory level was $1 billion as of the end of the first quarter, compared to $929 million as of the end of fiscal 2013. Of the $71 million inventory increase, approximately $22.1 million was from acquisitions. New inventory, including acquisitions, increased $66 million from the end of fiscal 2013, and our used equipment inventory, including acquisitions, decreased $2 million from the end of fiscal 2013. On Slide 9, I will provide additional color on our equipment inventory. We increased our rental fleet assets to $137 million compared to $106 million at the end of fiscal year 2013 to support our expansion of this growth platform. The fleet increase was primarily in our newly expanded footprint in Colorado, New Mexico and Arizona. As of April 30, 2013, we had $205 million available on our $975 million floorplan lines of credit. Slide 9 provides an updated overview of our company's equipment inventory levels on a quarterly basis. This year's first quarter increase in inventory was primarily due to our less-than-anticipated equipment sales in the quarter that I mentioned earlier. The adjusted inventory levels for April on the graph demonstrate the impact on our actual inventory levels as a result of lower first quarter sales. Our actual change in inventory was similar to last year's quarterly change. Had we achieved our targeted sales for the first quarter, we would have reduced our seasonal increase compared to the prior year period, reflecting progress on our long-term strategy to achieve our target of a 3x inventory turn. We will continue to focus on our inventory strategy in fiscal 2014. However, it is important to remember that our inventory levels typically increase during the front half of the year to support our back half sales volume. With our improved inventory management, we expect fiscal 2014 second and third quarters to have a lower percentage increase from the first quarter than what we experienced last year over those same quarters. Slide 10 gives an overview of our cash flow statement for the first quarter of fiscal 2014. When we evaluate our business, we look at our cash flow related to the equipment inventory, net of financing activities. With both manufacturers and other sources, including non-manufacturer floorplan notes payable which are reported on our Statement of Cash Flow as both operating and financing activities. When considering our non-manufacturer floorplan proceeds, our non-GAAP net cash use for inventories was $28.4 million in the first quarter of fiscal 2014. Our GAAP net cash use for inventories was $42.3 million in the first quarter of fiscal 2014. In our Statement of Cash Flows, the GAAP reported net cash used for operating activities for the first quarter was $6.3 million. We believe including all equipment inventory financing as part of our operating cash flow better reflects the net cash flow of our operations. Making these adjustments, our non-GAAP adjusted cash used for operating activities was $2.1 million. Now I would like to turn the call over to Peter to discuss the Agriculture, Construction and International operating segments in more detail and to discuss our fiscal 2014 annual guidance. Peter?

Thanks, Mark. On Slide 11, you'll see an overview of our segment results for the first quarter. Agricultural sales were $360.3 million, up 1.9%. This growth was driven by acquisitions and was offset by negative same-store sales results in the quarter. We generated Ag pretax income of $8 million, compared to $14.7 million in the prior period. As Mark and David mentioned, our Ag business was impacted by abnormally late spring weather which affected sales from all 3 of our revenue sources: Equipment, Parts and Service. The reduced sales drove our lower pretax income. Turning to our Construction segment, our revenue was $82.8 million, up 1.5%, which reflects acquisition growth offset by negative same-store sales. The abnormally late spring weather, in addition to the challenging industry conditions, led to less-than-anticipated revenue for our Equipment, Parts and Service. Our Rental business performed as expected in the first quarter. The pretax loss of $6.5 million was primarily the result of low revenue and pressure on equipment margins. In addition, our Construction pretax income was impacted by increased floorplan interest expense. Although we have not achieved our operating targets, we believe this segment of our business represents significant future earnings leverage as we are able to improve operating margins going forward. I will review our key initiatives to improve this segment of our business in a moment. Beginning with the first quarter of this year, we are now segmenting our International results. We are establishing our operations in this market and believe our international business represents an additional structural component of our long-term growth strategy. In the first quarter of fiscal 2014, our International revenue was $27.7 million, a 367.6% increase compared to the prior period -- prior year period. This increase reflects the acquisitions and new store openings made in fiscal 2013 and the first quarter of fiscal 2014 to establish our international presence, as well as higher same-store sales for our dealerships that have been in our network for the full year. Our pretax loss for International, including the startup costs for the Ukraine operations, was $0.5 million compared to $0.4 million in the same quarter last year. It's important to remember that the seasonality of this market is different than the North American market. The first and fourth quarters are seasonally softer and the second and third quarters are stronger. Now turning to Slide 12. I'd like to provide an update of key initiatives we are focusing on to improve our Construction business in fiscal 2014. First, we're focused on increasing utilization of our rental fleet. Our target for dollar utilization improvement is to increase the annual rate to 35% from 31%. We're on track with this improvement and despite the recent challenging Q1 weather, our utilization rate improved to 23.4% compared to 22.5% for the same period last year. We recently hired a Senior Manager of Rental Operations to drive this business. Second, we are recruiting and hiring key operation managers to support or improve execution of our operating targets. Third, we're focusing on increasing the sales volume per location to leverage operating expenses and drive operating margins. We are expanding our retail sales force for better market coverage. We've added personnel to increase our focus on government and major account sales. We've created an additional sales region dedicated to the Bakken area for increased focus. We have expanded our rental fleet, $31 million, to $137 million to drive rental revenue. Lastly, we are focusing on improving inventory turns, which will result in lower floorplan interest expense. In Q1, we reduced our construction equipment inventory by $30 million. We believe the successful execution on these key initiatives will lead to significant improvements in our Construction segment profitability in fiscal 2014 and will position us to participate when the industry begins to recover. Turning to Slide 13, this shows our same-store results for the first quarter of fiscal 2014. Our overall same-store sales decreased 5.1%. The Agriculture same-store sales decrease of 6.4% was due to the unfavorable weather conditions and an impact on our customer sentiment. Our first quarter fiscal 2014 Construction same-store sales decreased 7.1%, reflecting the weather, as well as challenging industry conditions. Our International same-store sales increased 149%. This improvement underscores the potential of the operations of our acquired international business locations and gives us confidence in our long-term potential in the international market. For the first quarter of 2014, overall same-store gross profit decreased 4.2%, compared to the same quarter last year, in line with our 5.1% same-store sales decrease. For modeling purposes, it is important to remember that we calculate same-store sales by including stores that were with Titan for the entire period in which we are comparing. In other words, only stores that were part of Titan for the entire 3 months of the first quarter of fiscal 2013 and the first quarter of fiscal 2014 are included in first quarter same-store comparison. In the first quarter of fiscal 2014, a total of 23 locations were not included in our first quarter same-store results, consisting of 6 Agriculture stores; 8 Construction stores and 9 International locations. Slide 14 shows our fiscal 2014 annual guidance. We are reiterating our recently updated annual guidance. Our revenue guidance remains unchanged from what we outlined on our fourth quarter conference call. We continue to expect fiscal 2014 revenue to be in the range of $2.35 billion to $2.55 billion. As you recall, we believe the first quarter Ag segment revenue shortfall was more of a timing issue and will be recovered later in the year. We expect our annual net income attributable to common stockholders to be in the range of $36.4 million to $42.8 million, resulting in an earnings per diluted share range of $1.70 to $2, based on an estimated average diluted common shares outstanding of 21.4 million shares. Our recently updated earnings range primarily reflects the lower operating results from our Construction segment. Our modeling assumption supporting our guidance are as follows: we continue to expect our Ag same-store sales to be in the range of 0% to 5%; we are revising our Construction same-store annual growth to be in the range of 0% to 5% from the previous range of 10% to 15%. Our equipment margins modeling assumption for the full year is in the range of 9% to 9.5%. We're modeling annual rental dollar utilization in the range of 34% to 36%. It is important to remember that utilization fluctuates throughout the year. We are entering our seasonally stronger second and third quarters. This concludes the prepared comments for our call. Operator, we are now ready for question-and-answer session of our call.

[Operator Instructions] And we'll take our first question from Mig Dobre with Robert Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: I guess my first question is on the Rental business. I mean, I'm trying to understand a couple of things. First, that you added $31 million to the rental fleet in the first quarter. I'm trying to understand, when you add to the rental fleet, does that flow to your Construction segment as equipment sales?

No, no, Mig. This is Mark. It doesn't go through. It's a transfer to our fixed assets. And then the rental sales coming from those fixed assets from that fleet show up in the Construction segment. But no retail sales for putting that into our fleet. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Okay, okay. And as a follow up to that, I'm trying to understand exactly why it is that you continue adding to the fleet if the fleet is already underutilized. Because I'm looking, for instance, at your utilization of 23.4%. And your goals, if I look at that full year guidance of 34% to 36% for the full year, would imply a very meaningful ramp in utilization as the year is progressing. So can you help me understand sort of the dynamic there? Why, for instance, not take some of the equipment that you currently have and maybe send it to locations where you think is needed or could be better utilized?

Yes, Mig, there is a definite seasonality to our rental business. For instance last year for the full year, we achieved 31% of utilization which is below our expectations for the full year but well above what we experienced in the first quarter of last year of 22.5%. So the seasonality of that rental fleet really comes in -- the high seasonality comes in, in the second and third quarters where we achieve -- expect to achieve higher than that 35%, especially in the third quarter -- our third quarter. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Great. And last one for me before I jump back in the queue is I'm glad to see the International segment starting to be broken up. I guess, I'm wondering, can you give us any color on your revenue and margin expectations that are factored into your top line and earnings guidance for the year?

Yes. For our International segment, we haven't provided individual guidance, or we haven't provided modeling assumptions on the International side yet. It's a much smaller segment of ours right now. We'll look at that going forward. For last year, our full year was about $72 million in International sales, and we do expect a meaningful increase from that as we bring Ukraine on board and we get a full year out of our Bulgarian operations. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Do you expect to be above breakeven though for the year?

Yes. To add on that a little bit. There is a seasonality, as Peter mentioned, there is some seasonality in the profitability of that International business as well, where our second and third quarter are much more profitable quarters than the first quarter in that International segment.

And we'll take our next question from Brent Rystrom, with Feltl.

Actually, Mark, as a follow on to that. You and I exchanged emails a couple months back about some special financing that Deere was putting in to some of those markets. Did you see any impact from that on your business there?

This is Peter. We continue to grow that business over in the international region. And from time to time, the different manufacturers will come out and they'll have additional programs on the finance side to facilitate retail sales. And that's kind of a back-and-forth in the market, Brent. So we are aware of those dynamics in the market, and we feel like we can grow our business over there based on bringing in some of our Titan operating model metrics and working on the stronger Parts and Service side.

Great. And then 2 quick questions. How do you guys feel about second quarter comp expectations for the 2 main segments? Do you feel you'll see a recovery in either or both to breakeven to positive? Do you think one or both could still be negative?

Yes, from a -- from the Construction side first. Construction side, we do. Because there's some seasonality improvements, we do see improvement in the operating results. But we don't expect any kind of meaningful profitability until we get into our third quarter. And in our Ag...

Mark, what I'm asking is on comps. Do you think comp expectations will stay negative or comp performance will stay negative? Or do you think they will approach breakeven or positive?

Yes, as -- so from a same-store sale -- from a same-store sale perspective?

Yes.

Yes, we expect that. Weather definitely impacted our first quarter equipment sales, which is the largest part of our sales. We expect that to improve then and become positive in the second quarter.

All right. For both segments, CE and Agriculture?

Correct.

All right. And then final question, just as a -- refresh our memory. It looks like we have a similar level of wheat acres lost in North Dakota this year. Can you remind us in 2011 when we had proportional, almost the same reduction acres how your business in North Dakota performed that year?

Well, our business performed pretty well in 2011. But in our markets, first of all, the year-over-year the model of small grain or wheat, barley acres are gradually being replaced by corn and soybean acres. So in many cases, they're going to be shifted to soybeans if the season gets late, Brent. So really, no...

So you're talking about 30% of the wheat acres in North Dakota can be lost this year which is about what happened in 2011. So I was just curious if...

If you look at the state of North Dakota, where the majority of the Titan Machinery dealerships are, they're in the River Valley or the southern part of the state so we don't have ag locations up basically in the North and the Northwest where you're in the predominant wheat countries. We're looking at mostly corn and soybean market in our footprint.

And we'll take our next question from Rick Nelson with Stephens.

I'd like to ask you about the strategies that you discussed to improve the profitability in the Construction segment, how quick you think that will swing that segment to profitability?

Well, we see those improvements contributing to each one of our quarterly results. And of course, you do still factor in the seasonality on the construction industry where you've got the second and third quarters being stronger -- seasonally stronger quarters. But we see those contributing throughout the year as we bring some of these initiatives online. Like, I talked about recruiting and hiring key operational managers, and they're getting in our Titan operating model and we've expanded our retail sales force. So we see those things coming on throughout the remainder of the year, Rick.

Okay. And the acquisition pipeline, I'm wondering if you're seeing more willing sellers on the Ag and the Construction side, given some of the pressures there. And might we see an accelerated acquisition pace developing?

Well, Rick, I said on our comments here right now, on the Construction side of the business, we're focused right now on the operations of our current footprint. So I would not say we're aggressively looking at construction acquisitions at this time. The other hand, I would say that the Ag acquisition, I'd say it's a normal pace out there. There's a number of potential acquisitions out there, and I'd say -- I don't see any changes in the Ag acquisitions from what we've had in previous years. So we continue to be discussing with potential sellers on the Ag side of the business.

Right. And finally, if I can ask you when you think the industry supplies on the Construction side would come more into line with the underlying demand?

I would say it's going to take a couple of quarters here. A little bit depends on what the manufacturers -- where they produce according to retail. But I would say you're going to definitely take the majority of this year to get this thing where I feel it's in line.

And we'll take our next question from Neil Frohnapple with Northcoast Research.

Can you provide some more granularity on what really changed in your construction end markets to warrant the 10% reduction in your Construction same-store sales forecast? Are there any particular end markets that are deteriorating? Or is it more of a function that we're a few more months into the year and the outlook just doesn't look as robust as it did previously?

Well, first of all, I'm not sure if we're going to get that revenue back that we lost from the first quarter. So I think that's going to drive a lot of it as opposed to the Ag business. I think that's -- was a lot of the timing and we're looking at our customers' annual production cycle. But we may not get that first quarter back from the Construction side. So I think that's driving a lot of that. Plus, we still have a fairly weak economy on the construction side of the business, the overall general economy.

Okay, got it. And then, Mark, I think you started to discuss when you think you can get the Construction segment back to breakeven. I think you mentioned maybe the fiscal third quarter. So if you can just kind of clarify that as you guys continue to make improvements there and seasonality helps the business as we move through the year.

Yes, our third quarter, with the size of our fleet and the utilization we're expecting and just the overall seasonality in that third quarter, third quarter is really where we are expecting it to get into that profitability.

Great. And then 1 final one. You mentioned operating expenses of the newly acquired CE stores are higher than corporate average. And I would imagine that would be the case throughout the time that you guys have made CE acquisitions. So can you just give us a sense for how long it takes to improve market share and get the operating expenses as a percentage of revenue, kind of down to corporate averages? Or is there something different about these 2 that could preclude you guys from doing so?

I'll kind of comment on the numbers somewhat as far as the operating expense. Yes, so first of all, we brought on a number of these this past year. If I remember right, I think we brought on like 8 construction stores in the past year. And when we brought those on, they were in -- they were lower-performing stores as far as market share goes. So it will -- and the other thing is on these construction stores, they are in urban areas where there are higher occupancy costs, higher operating expenses overall than kind of a typical ag store. So the combination of higher expenses in a lower-performing market store is what's driving that.

And we'll take our next question from Michael Cox with Piper Jaffray.

My first question is on the rental side of the business. Your guidance assumes a fairly significant improvement in the rental utilization. And I'd say it's maybe more pronounced than what we saw in Q1. So my curiosity is what sort of visibility do you have into driving that level of improvement in rental utilization? And does being at the lower bound of your guidance of 34% to 36% put you at the lower end of your earnings guidance? And conversely, if you're in the upper bound of that, does that put you at the upper end of your earnings guidance? Just in terms of what sort of sensitivity that has to your model.

First of all, just looking back, I'll just kind of provide some historical perspective as far as that utilization, the utilization that we experienced last year. In the first quarter, we had that 22.5%. That ramped up to just over 30% in the second quarter and up as high as 41% in the third quarter and then to 28.4% to get to that average of 31%. So there is definitely -- again with us kind of being in the northern footprint, a good part of that rental fleet in the northern footprint here, it really ramps up in those summer quarters. As far as sensitivity to the overall results, I don't have it -- I don't have an exact number for you. I think that we gave the range of 34% to 36% utilization. I'd have to kind of look at it a little closer, I guess, to look at that sensitivity on that 2% utilization.

Okay. Well, I guess maybe the -- if I maybe rephrase the first question. So your utilization was up 100 basis points year-over-year in Q1 from 22% to 23%, and your guidance assumes going from 31% up to 35% at the midpoint, so 400 basis points. So my question is, what sort of visibility do you have into driving a more pronounced improvement in utilization over the next 2 seasonally stronger quarters?

Well, one of the things that we certainly felt impacted our first quarter was some of that -- some of the weather impact in the first quarter. That's also holding back some of that utilization.

In addition to that, if you recall last year, we were just ramping up our business and brought that online. The rental revenues came in less than anticipated last year as we ramped the business up, and we've got a lot of these account managers and the people in place now so that -- that's why we're modeling, improving that rental utilization, because we've got the people in place and we've got the fleet on the ground.

Okay. That's helpful. One last -- besides with the sort of change in expectations in construction in particular, have you adjusted your order patterns for the balance of the year so that inventory levels can be worked lower even absent a significant improvement in the Construction side of business?

Well, I think right now if you look at all our store managers and our stores out there, they're really -- they are focused on their inventory, they are focused on their profitably targets and they're doing the things to place -- to get this type of results at each location. So I think we've got a number of steps we put into place. I think everybody's really focused and we're optimistic. I think we're going to see some improved results as we get into the third quarter.

And we'll take our next question from Steve Dyer with Craig-Hallum.

I don't want to beat the construction thing to death, but just kind of curious from a bigger which level, and I realize the economy and the rebound hasn't been robust. But certainly the levels, particularly of residential construction and so forth, haven't been worse than last year. And your business is off pretty markedly from last year. So what -- is there something else kind of going on there just in terms of your footprint specifically? Or why -- last year, you had a pretty respectable year in the Construction segment. What's changed year-over-year?

Well, I think some of this again is timing in the first quarter and some of the weather things. So that's the first thing you have to look at. But again, we're optimistic especially in this rental piece. If you look at demand, what we're seeing down in the Denver and the Phoenix markets and some of the housing starts, and then some of these markets that have been soft the last couple of years, I think are starting to pick up. And then to add that, we still have some really solid strength in all -- in our energy areas, in the Bakken, specifically. So I think what most of you could see it's going to be the timing on that first quarter and there is an oversupply of inventory out there, which probably had a negative effect on some of our margins in that first quarter.

Okay, and then another question. How should we think about floorplan interest in light of kind of the rising rates that we've started to see? And depending on how that shakes up going forward, what impact would that have on your -- on that line?

Yes. We don't expect any meaningful increase in the interest rates on our floorplan lines. We're not expecting anything like that. We do -- because of this lower first quarter, we do expect the sales to come back on the Ag side later in the year. But since we are carrying that inventory for a longer period of time because of higher inventory levels earlier in the year, we do expect the overall floorplan interest expense to increase, but more based on inventory levels as opposed to increases in interest rates.

Okay. And then floorplan was down quarter-over-quarter quite a bit despite inventory not being down that much. Was it just kind of shifting around on how you financed some of it or...

No. I think some of it is just older inventory that is out of the system and some of the newer stuff still being non-interest-bearing -- or interest-bearing. Our interest-bearing percentage is a little lower this quarter than last quarter.

And we'll take our next question from Larry De Maria with William Blair. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Just -- can you discuss maybe the -- you touched on a little bit here and there, but the used and new equipment prices, how they've changed, how they're holding up and how that change is factored into your guidance?

I'll comment a little bit on energy factors we see on pricing right now, and then I'll let Mark follow up on some of the guidance numbers. But first of all, as I think everybody is aware through both the Ag and the Construction you see, there's been the introduction of the Tier 4 component, which is definitely adding to the pricing. Tier 4 B now is going to be the next round of it. So with each of these additions of more Tier 4 engines into the industry, and this is all manufactured, you're seeing definitely increases in pricing due to that stuff. So I think that's helped stabilize a little bit of the used pricing. We see strength in both on -- both the Ag and the Construction side on the used pricing, especially tractors on the Ag side. So that all continues to be really healthy. So Mark, I'll let you comment on the impact on guidance there.

Yes. As far as our -- we still have that range out there of 9% to 9.5% on equipment margins. And I guess fine-tuning of the models, I'd say it's a little weaker on the Construction side and stronger on the Ag side but still within that 9% to 9.5% range that we indicated. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Okay. And then following up on the Tier 4 B, what do you expect for the new equipment? How much more is that going to cost farmers? And then are you going to be able to capture and commit on that pricing on top of the Tier 4 cost?

Just some numbers out -- and it's going to vary by product a little bit, but you're going to see is somewhere between that 5% to 10% with maybe some -- 8% being the midpoint, just depending on where -- which models and where they are in the evolution of those engine technology. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Okay. And same-store sales for Ag, should we have them -- or as far as fine-tuning the model, are we assuming down fourth quarter on the tough comp? Or should we assume that they're up for the remainder of the year after the weaker first quarter?

We talk about our outlook on an annual basis. And with the seasonality that's involved, the revenue can shift from quarter-to-quarter. So we will comment on that as we get more visibility and we get closer to the fourth quarter. It's just so seasonal based on weather patterns that we like to give you how we model our business but we look at it on an annual basis, just the way our customers run their businesses on an annual production cycle. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: But as of right now, so we shouldn't assume that every quarter from here is up at this point, based on your guidance?

I think just -- fourth quarter there are some tougher comps that we have for the last couple of years. So that would be a little tougher to get as positive in.

Sure, okay. And then, I guess, this maybe the final question. We noticed the share count's creeping up. Can you just explain why that's creeping -- why that's moving higher? I would think that maybe this should be more constrained given the softer start to the year on the incentive comp. But is there something else behind that?

No. I think if you're -- I don't think there's any kind of meaningful increase in the share count. Yes... Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Because you go from 20.9 million to over 21 million for the full year number.

Yes. Our diluted share -- our diluted shares outstanding last year first quarter was 20.962 million, and at the end of the first quarter this year it's 20.854 million.

Right. In then end -- but full year guidance is 21.4 million which implies it's obviously higher as you go through the year. I'm just trying to figure out what's driving that higher through the year.

Yes, there's just -- so there's just -- there's outstanding options where there is some dilution based on assumed stock prices. There's restricted shares. So a small level of increase. We don't -- we think is reasonable to model in there.

[Operator Instructions] And we'll take our next question from Mig Dobre with Robert Baird. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: I saw the line here in the slides that you hired a Senior Manager of Rental Operations. Maybe you can talk a little bit more about the recruiting efforts that you currently have ongoing, some background maybe on this person would be helpful.

Well, understanding that we think this is going to be a really good growth platform for us, but we've got a fellow with significant experience in the industry, came from a former public company, had managed a fleet similar to the size of us, both from the rented equipment and -- so we put a pretty extensive search out and I think we've got a really high quality individual, strong, and the logistics side of it and the detail side of it, I think it's really important in this business and just to complement the strength we see. And if you look at the disciplines in the pricing out there in the industry right now and what some of the other large rental companies are doing, we just want to make sure we had a really good person in here to align us to we think what are the opportunities. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: Okay. And last one is on inventory. I'm trying to understand something here. How -- what exactly are your expectations for inventory progression through the year? Where do you expect to see inventories, say at the end of fiscal 2014? Do you expect them to be flat or down year-over-year, excluding any acquisitions that you might make between now and the end of the year? Or have your expectations changed, and you still expect it to be up?

Well, I think overall we expect -- as we explained on the call, we expect the increase to be less for the next couple of quarters because of our lower sales that happen in the first quarter, but we do expect a -- it to drop off nicely in the fourth quarter, similar to last year. Mircea Dobre - Robert W. Baird & Co. Incorporated, Research Division: So just to be clear, do you expect inventories to be up or down by the end of fiscal '14 on a year-over-year basis?

Right now, we're expecting them to be down overall.

And we'll take our next question from Larry De Maria with William Blair. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Just a quick follow up. You guys obviously did get some good color back to the construction markets, and now you think they're going to improve. I'm just curious about when you look around in your region, what is the inventory like at this point in the channel, not just yours, obviously, but the industry? And how close to being right-sized is the field inventory? That's number one. And number two, obviously you're doing a lot of strategic initiatives on the construction side mostly aimed at driving revenue. Are there anything you guys are doing to cut the operating costs? Just curious if there's anything there because it looks like there's a lot of hiring to drive revenue but I'm not sure if there's anything on the cost side you're doing.

Well, first of all on the inventory, I think that there's just -- there's a lot of inventory and I think a lot of manufacturers overproduced last year. So I think you're going to see inventory throughout the balance of this year, and it's going to take a while to get this through the system. It's going to be competitive and there's, like I said, an ample supply of inventory out there. So now as far as, if you look at our -- from an expense reduction, we're always looking at ways we can cut the expenses, but right now our biggest challenge out there on our construction right now is to get to the scale so we get the leverage of our fixed expenses out there and we're not even close right now to getting that type of scale we think we need to be in this industry. So as you do acquisitions and sometimes you're acquiring stores that have some opportunities out there in the growth side and maybe have been pretty flat in growth for a number of years and stuff and typically that's what we end up with in those acquisitions. And if you look at our track record over the construction side [ph], we purchased, going back to 2003, 2004, we've got a really good pattern of growing the revenue, then your expenses as a percent of revenue really started going down. So we want to do that with these newly acquired acquisitions, because we think we're in some really, really nice markets and the market's improving out there. So really it is a function of scale and revenue right now at this point. Because there is no -- absolutely no fluff out there at all other than some of the major operating initiatives wanting to do -- cut interest expense on floorplan, things like that, that are normal course. But, like I said, this is -- we're really going after the revenue right now on those stores.

And that does conclude today's question-and-answer session. I would now like to turn the conference over to David Meyer, CEO and Chairman.

Okay. All right. Thank you for your interest in Titan, and we look forward to updating you on our progress on our next call. 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 does conclude today's conference. Thank you for your participation.