Good day and welcome to the Titan Machinery Incorporated Second Quarter Fiscal Year 2016 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Mills of ICR. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to the Titan Machinery second quarter fiscal 2016 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, 2015, which went out this morning at approximately 6:45 AM Eastern Time. If you've 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 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. Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The 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 Annual Report on Form 10-K. These risk factors contain 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. 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 results of operation, particularly when comparing underlying results from period to period. We have included reconciliation of these non-GAAP measures for today's release and have provided as much detail as possible on any addendums that are added back. Lastly, due to the number of participants on the call today, we ask that you keep your question period to two questions and then rejoin the queue. The call will last approximately 45 minutes. David Meyer will provide highlights of the company's second quarter results and a general update on the company's business, and then Mark Kalvoda will discuss the company's financial results and the fiscal 2016 annual modeling assumptions. At the conclusion of our prepared remarks, we will open up the call to take your questions. Now, I'd like to introduce the company's Chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our second quarter fiscal 2016 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we provided a slide presentation which you can access on the Investor Relations portion of our website at titanmachinery.com. If you turn to slide three, you'll see our first quarter financial results. Revenue was $334 million, primarily reflecting lower Agriculture equipment sales in North America as the segment continues to face industry headwinds. We substantially completed the implementation of our previously announced realignment plan and our second quarter results benefited from cost structures that are better aligned with current sales volumes. We generated adjusted EBITDA of $9.8 million and adjusted pre-tax loss was $500,000. These results were in line with our expectations and reflect the challenges in our Agriculture business, as well as pressure resulting from lower oil prices at a number of our construction locations and the positive results from our international business. On today's call, I’ll provide an industry overview for each of our business segments. Mark will review financial results for the second quarter and first half of the year and discuss the status of our inventory reduction plan for fiscal 2016. He will then conclude with an update of our modeling assumptions for fiscal 2016. Now I'd like to provide some more color for you today on the agriculture and construction industries and international markets in which we operate. On slide four is an overview of the agriculture industry. We are experiencing good crop conditions in the majority of our footprint, with yields project to be better in the western Corn Belt, compared to the eastern Corn Belt. The August WASDE report increased projected 2015 crop yields and raised the 2015, 2016 projected ending stocks, which is reflected in lower…

Thanks, David. Turning to slide seven, our total revenue for the fiscal 2016 second quarter was $334 million, a decrease of 25.9% compared to last year, primarily due to the lower same-store sales in the Ag and Construction segments, which reflect the challenges in both segments David previously mentioned and strong year-over-year comparisons in the Construction segment. The decline in equipment sales of 31% quarter-over-quarter, was higher than the overall decrease in revenues as equipment revenues are more affected by the current market conditions compared to our more stable and higher margins parts and service business. Our parts revenue decreased 12% in the quarter and service revenue decreased 14.6%, primarily driven by the decrease in our Ag segment. The lower parts and service revenue in the Ag segment was a result of the decreased amounts of customer presentative maintenance as well as reduced service business associated with the pre-delivery of sold new equipment. Rental and other revenue decreased 16.8% in the second quarter, primarily due to the lower utilization and a reduced rental fleet, reflecting the lower activity in our energy producing markets and the fleet relocation to the surrounding regions as David discussed earlier. Our rental fleet dollar utilization was 26% for the current quarter, compared to 29.6% in the same period last year. In addition to the lower utilization, we reduced our fleet by $10.9 million in the current year. On slide eight, our gross profit for the quarter was $62 million, compared to $80 million in the same quarter last year, primarily reflecting the lower revenue I just discussed. Our gross profit margin was 18.6%, an increase of 90 basis points compared to the same quarter last year. The improvement in gross margin was due to a change in gross profit mix through our higher margin parts…

[Operator Instructions] We'll take our first question from Steve Dyer with Craig-Hallum

As you look at your inventory reduction, the vast majority of that comes from new, with used levels have been pretty much flat for the last I guess probably about three years. Is this just a comfortable level of used inventory across your network or is that stuff that’s tough to move at this point? Maybe a little color on the balance there.

You see Steve, we’ve had some pretty aggressive retailing of our new equipment and there is a high percentage of the sales that involve a trade-in. So as you see this accelerated new retail and pulled out of the new, then you’re going to have that much used. So there’s always going to be a lag. So as used keeps coming down at some point in time there, then the used will track with that. But we need to get the new down to a certain level, then there is a lag time, then the used will come in right after that then.

Okay, that’s helpful. And then just as you look across your store network, either construction or Ag, are there any additional rooms there for -- room for rationalization et cetera, or are you sort of at a level where you think this is good given the demand environment?

We continue to evaluate that all the time. I think we’ve put a lot of thought into what we did this spring and we feel pretty comfortable. We know where our market is today. Like I say, we continue to evaluate that on ongoing businesses as the industry continues to consolidate.

Okay, I’ll hop back in the queue. Thanks.

We’ll take our next question from Rick Nelson with Stephens.

Good morning. Can you remind me what you said with the net, covenants, I believe there is some pre-tax requirements?

Sure Rick, Mark here. Yes, our pre-tax, on an adjusted pre-tax basis for the second quarter to date, it was $9 million was the covenant; a $9 million loss on a pre-tax adjusted basis and where we came in was at about a $6.8 million, just under $7 million pre-tax loss. Going forward for the third quarter on a nine month basis, it’s a profit of $1 million and by the end of the year, again on adjusted pretax basis the covenant is $10 million pretax.

So if my math is correct, you made an $8.7 million pre-tax profit in the third quarter to remain compliant and then obviously $10 million for the year. How do you feel about your ability to renegotiate those covenants if need be?

First of all I think going into the back half of the year, we feel pretty good given in the third quarter we’ve got, it’s a seasonally strong period for some aspect of all of our segments of our business. We’ve got the harvest, which brings in a lot of parts and service, which is that high margin business that happens in the third quarter, which helps profitability greatly, as well as on the construction side, rental. That’s the peak for our rental business. As you know any incremental dollar through rental revenue generates a lot of profit, 85% of it typically goes to the bottom-line. In international with their harvest over there as well, they tend to have the strong third quarter as well. So we are moving into a seasonally strong period. That being said, if we do run into any type of challenges with the covenant, as in the past, we’ve successfully negotiated that with the banks and with some of the balance sheet strengthening that we are doing and the deleveraging, that makes those conversations much easier to have.

Got you. Thanks a lot and good luck.

We’ll take our next question from Brent Rystrom with Feltl.

Just a quick question on the inventory. If you draw down by $150 million and you’ve got 20% equity in it, that implies another $30 million in cash on the balance sheet, all other things being equal by the end of the year?

Yes, that’s correct but as we said, we are going to take that cash and just create more equity into the inventory that we do have on the books. But yes, looking at it from like an apples to apples basis, that’d be correct.

And then from an overview perspective, over the last year you’ve talked about trying to change your customer, your agriculture customer buying patterns where you want to shift more purchases to product that’s either pre-ordered or sold while it’s either being manufactured or in transit. Can you give us an update on your progress on that topic?

So yeah, we continue -- We think that pre-sale long-term that’s the best go to market strategy. I don’t think it’s a matter of changing our customers. I think we’ve got to make sure that we understand what their buying needs are and what they need for their farm operations. I think you’re going to see a trend away from some of these one year rolls where customers are trading their whole fleets off. And I think we saw that one, there was a big demand for equipment, especially the used. We were able to do some of that. From an industry standpoint; I think you saw an increase in that. You’ll probably go back to customers owning their equipment for two, three years and getting that trade cycle more backlog to a normal situation. I think there are some customers that bought late model used over the last couple of years they maybe switched to a new piece. I think they’re going to go back and buy a late model used again. So I think you’re going to see some of those trends from an economic standpoint really driven by the customer needs for their operation and looking at better economics. So I think you’ll see those trends go back to a more normal situation.

One quick follow up on that. Does case allow you to do one year rolls?

It’s up to us. They don’t control that. We control that as a detail. So it’s totally up to us. I think there is room in the marketplace for some of those. I think it has to be managed though.

Okay, thank you guys.

We’ll take our next question from Neil Frohnapple with Longbow Research.

Hi, good morning guys. Within the construction segment, you called that industry, new equipment inventory levels are increasing. Do you think this will be short-lived or you think this could start negatively impacting used equipment pricing which you guys continue to indicate remains strong?

It continues to be positive. We’re seeing especially in the metro markets in some of our larger market spaces. For example the Phoenix markets, Denver markets, we are seeing some residential housing startups. There are some real positives out there, but from an industry standpoint, we are seeing, with the price of oil coming down, that is affecting the industry. At the same time, investment and infrastructure, the residential, some of the commercial is going on, tends to temper that a little bit. So I think there is a little bit of a wait and see, but I don’t think it’s going to be drastic. But again, I think the industry is up a little bit more than everybody anticipated in the beginning of the year, but I wouldn’t say it’s something that’s alarming at this point.

Okay, great. And then Mark, the decline in dollar utilization within the rental business, were rental rates actually down year over year and if so, are you able to quantify the magnitude, or was the decline mainly time utilization driven and just moving fleet around?

For us it’s by far the time utilization. Our pricing has remained relatively constant. Each region might be just a little different, but overall pricing has remained relatively constant and the drag on dollar utilization is coming from time utilization down.

Okay great and then just a quick follow up. The decrease in the size of your rental fleet, is the rental fleet right sized now or do you anticipate further reducing the size of the fleet in the coming quarters? Thanks.

I think what we see for right now is, we are constantly monitoring it based on the situation that we see out there in our markets, but for the time being I think we’ve got it pretty close to where we need it to be. With that, there’ll always be some level of de-fleeting but then fleeting back up. But for the most part, this is the size of fleet that we are expecting for the remainder of the year.

Got it. Thanks very much guys.

We’ll take our next question from Mig Dobre with Robert Baird.

Good morning guys. First question, when I’m looking at your guidance, you brought down same store sales just slightly in construction and international. All the other assumptions are pretty much the same. I’m wondering what gives here in order for you to maintain the profitability assumption. And maybe related to this, Mark, how should we think about the SG&A run rate into the back half of the year? That number continues to surprise me positively in terms of what you were able to do on the cost side.

Yeah, I think -- Yes, like you said, there hasn’t been a lot of changes. We did tweak down both construction. It’s a little softer given some of the energy situation and international with the weather over there affecting that fall harvest. So I don’t know. I guess our assumptions really haven’t changed too much from operating expense standpoint. It does get a little bit higher in the back half of the year I believe, just due to some of the variable expenses like commission with higher level of equipment sales going on. So if you adjust that variable expense and kind of look at where the first half of the year more so maybe even the second quarter on some of those more fixed expenses, that should get you close by the end of the year.

I’m sorry, I’m looking to clarify here because if I’m looking at SG&A, your average was about $56 million for the last six months per quarter and you’re saying there is going to be a seasonal uptick in the back half. But can you help us in terms of understanding the magnitude?

I would say from where -- from that average of $56 million, it’s a relatively small uptick for the back quarters and it’s driven that higher commission expense. You can, within $2 million, $3 million, $4 million, something like that I think for the last two quarters.

That's really helpful. Thanks. Then my second question really has to do with price progression through the quarter. What we've heard is when corn spiked earlier in the year, that really started to have a positive impact on used Ag prices. Have you guys seen any of that? Is that part of the reason why we're seeing pretty strong gross margin in equipment this quarter? Now that corn has given up a lot of those gains, are we starting to see softness creep back again? Thanks.

I think -- yeah, there was some optimism towards the end of June, first part of July on some of the used equipment. I think right now, even though there's a little bit of a spike there, I think this whole year there's been a level of conservatism by both our Ag customers and the Ag lenders out there that’s carrying through. I think we’re continuing to look at that. We're not being over optimistic that anything's going to happen from the price side. So we just manage our business in line with commodity prices where we're seeing them today. The positive out there is that the crops in our footprint right now, Nebraska, Iowa, North, South Dakota, Minnesota really look good. I think that's a positive. You see some of the older equipment is actually having some pretty good strength in the pricing and the new equipment pricing, there’s some discipline in that. Like I said, I think the main thing is that not to get over optimistic that we're going to see big jumps in prices and manage the business under this current level of commodities.

Great. Thank you guys

We’ll take our next question from Joe Mondillo with Sidoti & Company.

Good morning guys. I just had a question regarding the agriculture segments. In the last two quarters of last year, could you remind me why the pre-tax earnings fell sequentially in the third and fourth quarter and do you anticipate that, the same trend this year?

Last year a big driver of what happened on Ag was the same store sales as the lower corn prices really took hold. Our third quarter last year same store sales for Ag segment was off 24% and for the fourth quarter it was off about 38%. These are some of those easier comps that we're talking about when we're talking about the back half of the year. In regards to revenues, yes, with those easier comps in the back half of the year and with our realignments, particularly this last realignment that took place, we don't expect earnings to have that fall off in earnings like we did last year within the segment. We've gotten the expenses down and we don't expect as much of a decrease in that revenue reduction. In regards to the fourth quarter, you go back a few years, fourth quarter used to be our strongest quarter. We don't see that as much anymore because of that fourth quarter was heavily reliant on equipment sales. With equipment sales being kind of that most volatile piece that's off right now, we don't see that being the most profitable quarter. That's kind of shifted to that third quarter with the harvest in there and the parts and service associated with that harvest. Hopefully that helps, Joe.

Yeah, that was very helpful. And then also just a second question regarding the construction segment and the guidance that you provided. It still seems like -- so it sounds like the second quarter came in below your expectations. You tweaked the guidance down a little bit in terms of same store sales. Having said that, the same store sales guidance still implies it looks like a relatively pretty strong rebound in the back half of the year, if I'm doing the math correctly. Are you anticipating any infliction point here going into the back half? Because it looks like you are looking for a pretty good rebound in regard to the same store sales.

Here again it's similar to what I just talked about on the Ag side, where last year those first what we just thought that what I just talked about on the Ag side where last year those first two quarters were very difficult comps for the construction segment. They were both around 25%, 26% same store sales comps last year in the first and second quarter. You get to the back half of the year where it was at about 11% last year in the third quarter and about 3% in the fourth quarter. Much easier comps and again it's a higher seasonal period, third quarter being good rental activity, a lot of construction jobs going on and the fourth quarter being better from any equipment standpoint with yearend buying. But I think yeah, the infliction is just much easier comps compared to the prior year, combined with some of those realignment adjustment that we had earlier in the year.

It still seems like you have to get to, I think if I'm doing the math correctly, a 10% growth rate to get to the high end of the flat same store sales for the year. Is the math correct or?

I think my numbers show a little bit lower than that, but we got that 0% to 5% down. I think you’re a little high on that.

Okay, but to get to the 0%, you need at least mid to high single digit same store sales growth as opposed to the 10% to 12% decline that we saw in the first half of the year?

Yes. We would need positive same store sales to get to that.

Okay, thanks.

We'll take our next question from Tyler Etten with Piper Jaffray.

Hey guys. Thanks for taking my question. I was just wondering, given the difficulty with grain price not cooperating with farmers, how long do you think it'll be before we see a more normalized industry wide inventory work down?

So right now if you look at -- when you talk about normalize, I believe that the production you are going to start seeing coming from the manufacturers is going to be somewhat consistent with the commodity prices and projections, the more normalized situation. I think it's a matter of moving the existing inventory on hand and then make sure our orders are less than retail until we can get our new machinery and used machines to the level where we feel is that normal situation.

Okay, thanks. With used pricing, you guys obviously have a lag in the used equipment and have to deal with trade-ins. Where are we sitting on used pricing compared to last year in terms of percent basis?

I think last year we saw the big change. We brought a lot of used equipment in the year before that, six to nine months before that. That's where we saw -- we started seeing a lot of compression on the used equipment. What we have now has gone through a period where we've had lower corn prices for quite some time and lower expected net farm income. I think that's, it's running its course unless we take another level down here in some of the commodity prices. I think it's -- where we're at is I think starting to trend better from a year ago, just because we've gone through a good part of the cycle. If the cycle trends down from lower levels from where it's at today, we could see some additional pain, maybe more than last year, but if it stays relatively steady, we should be on the back side of it.

Great, thanks for taking my questions.

I'll take our final question from Larry Maria with William Blair. That question has been withdrawn and we have no further questions. I would now like to turn the conference back over to management for any additional or closing remarks.

I want to think everyone for your interest in Titan and looking forward to update you on our progress on our next call. Have a good day.

This concludes today's conference. Thank you for your participation. You may now disconnect.