Good day and welcome to the Titan Machinery Inc’s Fiscal Third Quarter 2017 Conference Call. Today's call is being recorded and at this time, I’d like to turn it over to Mr. John Mills of ICR. Please go ahead.

Great, thank you. Good morning ladies and gentlemen and welcome to the Titan Machinery third quarter fiscal 2017 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 third quarter ended July 31, 2016, which went out this morning at approximately 6:45 AM 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 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 on them. These statements are based on current expectations of management and involve inherent risks and uncertainty, including those identified in the risk factor 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. Except as may be required by applicable law Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call. Please note that during today's call, we will be discussing 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 in the Titans ongoing results of operation, particularly, when comparing underlying results from period to period. We've included reconciliations of these non-GAAP financial measures in today's release and have provided information regarding the adjustments that are added back or excluded in these non-GAAP financial measures. The call will last approximately 45 minutes. At the conclusion of our prepared remarks we will open the call to take your questions. Lastly, due to the number of participants on today's call, we ask that you keep your question period to two questions and then please rejoin the queue. Now, I would like to introduce the company's Chairman and CEO, Mr. David Meyer. Go ahead David.

Thank you, John. Good morning everyone. Welcome to our third quarter fiscal 2017 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 3, you will see an overview of our third quarter financial results. Revenue was $332 million, primarily reflecting the continued industry challenges in the agriculture segment. Adjusted pretax loss was $700,000 and our adjusted loss per diluted share was $0.01. During the third quarter our agriculture customers realized high crop yields and despite continued lower commodity prices the yields improved customer settlement which created an opportunity to increase equipment sales. We took this opportunity to accelerate our used equipment reduction efforts by aggressively reselling our used equipment inventory during the third quarter. While this temporarily affected our overall equipment margins in the quarter, we are pleased with our reduction of used equipment inventory which was down $47 million or 20% in the third quarter on a sequential basis and down a total of 32% in the first nine months of fiscal 2017. We now expect to exceed our previous year or fiscal year 2017 inventory reduction goal by 25% and end this fiscal year with a $125 million reduction in equipment inventory. On today's call, I will provide an industry overview for each of our business segments. Mark will review financial results for the third quarter of our fiscal 2017, and update you on the status of our expanded inventory reduction plan. We will then conclude with the review of our updated modeling assumptions for fiscal 2017. Now I'd like to provide color for you on the agriculture and construction industries in the international markets in which we operate. On…

Thanks David. Turning to Slide 7, our total revenue for the fiscal 2017 third quarter was $332 million, a decrease of 3.7% compared to last year, reflecting the challenging Ag industry conditions that David just discussed. Equipment sales declined 1.6% compared to the same period last year. In the third quarter Ag customer sentiment was boosted as a result of harvesting high-yielding crops. We used this opportunity to more aggressively drive sales of our used equipment. Our parts revenue decreased 6.2% in the quarter and service revenue decreased 1% reflecting similar trends we experienced in the first half of the year. Our rental and other revenue decreased 20.1% in the third quarter primarily due to lower demand in the oil production areas and a reduction in inventory equipment rental. Our rental fleet dollar utilization decreased to 28.4% for the current quarter and compared to 29.6% in the same period last year. Slide 8, our gross profit for the quarter was $58 million compared to $67 million in the same quarter last year. Our gross profit margin was 17.6% a decrease of 190 basis points compared to the same quarter last year. The decline in gross profit and gross margin was primarily due to a decrease in equipment margins of 300 basis points resulting from our aggressive pricing and retailing of used equipment inventories to accelerate our used inventory reduction efforts in the third quarter of fiscal 2017. The notable increase of used equipment sales also created a higher mix of used versus new revenue in our total equipment sales contributing to the compressed equipment and overall gross profit margins as used margins are lower than new given the current Ag environment. We are pleased with our success of reducing our used inventory despite difficult market conditions. This enabled us to…

Thank you. [Operator Instructions] We will take our first from Steve Dyer, Craig Hallum.

Thanks, good morning guys.

Good morning, Steve.

As you look into, I guess your fiscal 2018 or calendar 2017 Deere last week was talking about Ag and Turf being down sort of negative 5 to negative 10, does that generally feel like what sentiment is shaping up at the moment or do you see any reason based on your footprint et cetera to be better or worse than that?

No, I would say that's probably consistent with our thinking.

Okay and given that when you sort of get to the end of this inventory reduction plan, I guess right around Q1 of fiscal 2018, do you feel like – do you feel good about where your inventory levels are there both new and used or do you feel like there is potentially more to do there next year from a cash flow standpoint?

I think what Deere is suggesting for next year holds true. I think there is some still level of opportunity for us to decrease our inventories and we kind of look at things from a three time churns for sure 2.5 time churn, but even at the levels that we're ending the year given our new projection down $125 million, it still leaves us some opportunity to further take down inventory, generate cash and still be not quite at that targeted level of churns of 2.5 to 3 times.

Okay. All right, I will hop back in queue. Thanks guys.

Next is Rick Nelson with Stephens.

Thanks, good morning.

Good morning, Rick.

You guys have made great progress reducing the used equipment inventory. As I look at Slide 16, it looks like that improvement sort of comes to an end in the fourth quarter with inventory coming down in the new but stable in used?

Rick I think it's a couple of things, I think one of the things is we're not anticipating being as aggressive as we were in the third quarter in the fourth quarter in some of the used inventory that we have and therefore we do expect some of the margins to come back on our equipment margins. But secondarily in the fourth quarter is typically where we have a higher percentage of new equipment sales and as you know all of those new equipment sales we have generally produced, we procure used inventory on trades at that time. So we generally don’t see a lot of improvement in the fourth quarter on our used. Now it is turning over, we are selling used and also taking in used that we are getting fresh used as part of that inventory balance as well.

Got it. So you do expect some uptick in the margins in the fourth quarter in the used category?

Yes I'd say yes, overall in our equipment margins, we expect higher in the fourth quarter compared to third, yes.

And the values have the option however coming in relative to the reserve that you took initially for that inventory?

Yes, I think actually they are coming in as expected. I don’t think there is, that's certainly not any of the reasons for the margin decrease, that's definitely on the aggressive retailing that we had on our used that we had in inventory. So it continues to come in as we expected and not having a major impact on our overall equipment margins.

Okay, got it, good to know. Thanks and good luck.

Our next question comes from Mig Dobre, Baird.

Yes good morning. Just first maybe a little bit of color on your guidance for equipment margins in the fourth quarter. I mean, we're talking about really wide range here, just rough math, I mean you are talking anywhere between 5% and/or 7.2% equipment margins. So I understand that things are going to get better sequentially from the third quarter, but I'm trying to get your sense for the puts and takes as to what puts us at 5 or puts us at 7?

Well I think – I think you can look back to first quarter was relatively high given the environment we are in at 7.9%. I think we're talking about going back closer to what happened in the second quarter which is around 7.2%, right around that range is to maybe a little bit lower than that in the fourth quarter is what we're thinking.

Okay and I guess going back to the Deere question and their outlook, if that comes to be, how do you think about your equipment margins in an environment like that?

I think that would be showing if that holds true if you are down 5% to 10% that is more stabilization in the equipment sales than we've seen in the last, call it three years here, so that should provide some help to our overall equipment margins and on top of that just with our inventory being in a healthier positioning entering the year that should also provide some lift in the equipment margins going into next year.

So if I understand this correctly, you are saying that equipment margins are going to be up versus fiscal 2017?

Given those factors if that holds true where we see some more stabilization and we're only down only 5% to 10% compared to where we've been down much higher than that. You've got to remember when we give our range for the Ag segment that includes parts and service which is more stable. So the equipment is actually down quite a bit more than that, so yes that stabilization would help generate stronger equipment margins for us.

Okay. If you allow me one last question, we haven’t talked about parts and service and we've seen declines here now for seven, eight consecutive quarters, how do you think about this business going forward if say planted acres remain flat next year?

I think we're starting to see a little stabilization and we're not down as much as we were last year. Again, with new equipment maybe and that is the most volatile part of our business from a revenue standpoint, but if that starts stabilizing we have not as much drag if you will on some of that PDI that we have talked about in the past, some of that warranty work that we get through our parts and service that starts to not cause us much pressure on that parts and service business, I do think we're going to some offset in some of the preventative maintenance should start improving somewhat as the equipment becomes older in the field out there and farmers are less likely to continue to prolong some of their maintenance on their equipment. So, I think it's, it sets up for some good stabilization in that year-over-year, so not continuing to have declines in parts and service.

Great, thank you.

Our next question comes from Joe Mondillo, Sidoti & Company.

Hi guys, good morning.

Good morning, Joe.

Just, also I had a question regarding pricing as well and in terms of equipment margins just wondering if there is any way you can quantify sort of what your normalized equipment margins would be if you weren’t so aggressive on the used equipment pricing? And also in relation to that Deere has talked for a couple of quarters now how their used equipment pricing has been relatively stable. So I’m just wondering, if you could comment on that, are you just taking more of an aggressive stand to try to work out your inventory or just wondering what your thoughts are on that?

Yes, I’d say we did take an aggressive position in the quarter to move more. I think as we indicated we exceeded our revenue expectation and that was because we did get aggressive on the use. As far as quantifying it, I think an easy, relatively easy way to quantify it is looking at our margins for the quarter, the equipment margins and if it would've been, if we weren’t have been as aggressive, it would've probably been more similar to what we had in that Q2 timeframe for equipment margins.

Okay and then in relation to that, outsider, so if you weren’t so aggressive and margins were, call it low 7% range, are you still able to get improvement do you think next year or is it sort of the year-over-year improvement because you are just not going to be aggressively as discounting next year.

No, I think, again I think that some of it has to go back to what’s the overall assumption for next year and we'll be talking in more detail about that as we get into our next call, but certainly with the inventory, the health of our inventory going into this next year gives us an advantage over how we entered this past year. Now, the market continues to trend down, that kind of works against us somewhat, but certainly the structural thing that we have in place right now is healthier inventory entering next year than what we did this past year.

Okay, and then one just last question if you will, your guidance for the construction segment implies a pretty decent improvement in the fourth quarter. I’m not sure if you mentioned that in your prepared commentary, my apologies if you did, but am just wondering if you could comment on why you think you're going to see such a big improvement in the fourth quarter and if that's not a one-off type thing are you anticipating this kind of strength to continue into fiscal 18?

I think with construction, so going into the fourth quarter, if you look at the last three quarters that we had in our same store sales we were down a little bit Q1 up a little bit Q2 and then down a little bit more at 7.7% in Q3. Yes, this would imply that it’s going back to something closer to what we just had in Q2 and being up somewhat. Yes I mean it is a difficult environment out there. I think we’re doing a lot of good things in our construction segment and we’re going to have to do good things to hit that, but it will be up single digits over the last year. In this environment I think it’s doable with some of the efforts that we're making on our construction segment of our business.

Okay, thanks a lot, I appreciate it.

We’ll go next to Neil Frohnapple with Longbow Research.

Hi, good morning guys. I was hoping you can provide more granularity on the lower rental fleet dollar utilization and what’s going on in that business. I mean I would have thought the worse. What is sort of be behind that at this point and you would have anniversaried some of the lower volumes and a little surprise you are continuing to reduce the fleet. So, any thoughts there I mean are rental rates just declining more than previously expected or just anything you can help us out with that would be great.

Yes, it was down a little bit for the quarter and year-to-date I think we're relatively flat on rental utilization. We still have, I know there has been discussion about rig counts out there and maybe some improvement on the energy side. We’re not seeing that so much in the Bakken I think most, more that’s happening down in the Texas in some of the oil fields down there. So we’re certainly not seeing any lift here. I think there's still some level of lower activity happening. There may be some opportunity for that to increase here if oil prices stabilized further and hopefully go up to some more. I think what’s affecting us is some of when we push this inventory and we move it to some of the surrounding markets, we're seeing continually more pressure in those areas. Its aggressive competition that’s happening from others that are moving equipment out of energy areas and into the surrounding areas and pricing is under pressure and that’s part of the dollar utilization that’s coming down. So I think and when we talk about our fleet going down, we’re not talking about big dollars here. I think we’re projecting another five or so million here to come down in original equipment cost and it's really getting it to where we can be more efficient and have – have that higher dollar utilization coming out of the fleet that we do have in service.

Okay, that’s helpful Mark thanks for that and then could you just comment on what drove the uptick in operating expenses sequentially? I mean gross profit for equipment sales were down. I realize that parts and service gross profit were up, so maybe there is a variable component there, but how should we think about operating expenses for the fourth quarter?

Yes, there is nothing, I would do say nothing material that is kind stood out in there I think we put initiatives in place last year, during the year that helped benefit and a lot of that kind of anniversaried by the end of the third quarter, I think that’s part of it. And the other part of it is some of the level of commission even though we didn't sell, we didn’t get a much of a profit out of some of these used pieces that went for the quarter. We did have some commissions to make sure we move the equipment during the quarter. So I think the combination of those two are the biggest factors.

Okay, thanks very much guys.

We’ll go next to Brent Rystrom with Feltl.

Thank you. Just couple of quick questions. A lot of the OE suppliers are saying that Deere is losing reasonably good market share to be Case. So when we think about Deere's guidance for minus 5 to minus 10 next year, do you see a reason that you should do better than that given that situation or are you just comfortable at this point saying just what Deere is saying?

Yes, Brent just for competitive reasons we really don’t disclose the market share and talk about that how we’re doing compared to the other OEM, so we just do stay away from that if we can.

Okay and from a big picture perspective, if we're in the position where the, I think it’s reasonable to say after years of minus 20, 30, 40 type declines we're probably close to a bottom. How should we think about your plans for the next year or two when it comes to cash utilization how are you going to – are you going to look at strategically starting to expand the business, are you going to look at if you do strategically expanding the business geographically or within the existing footprints? Are you thinking about primarily expanding in the domestic agriculture segment or where are you with construction and the international as far as expansion, could you give us an overview on that?

Well, first of all we might, we did reduce our convertible debt by $50 million and given the challenging industry conditions we believe it is best to use our cash to de-lever our balance sheet at this time and I think we’ve been doing a good job of doing that Brent. We’re keeping steady level of equipment equity which I think is important in this environment. We’re really setting ourselves up for the long-term opportunities for different options – capital allocation, ones like you talked about do acquisitions and I think there are going to be some opportunities. And again we still have some more left on that converts that's out there. We, the board we continue to evaluate buying back convert what we discussed potential stock buyback that is the topic you talked about. So I think they're all on the table and I think we just have to keep progressing and grow that cash from our balance sheet, from moving our used and at that point in time, I think we'll have some really good options out there and we have got a lot of faith on our management team and our board and they'll pick the right decisions there.

So specifically those options looking at agriculture, construction and international, where do you see the greatest focus and is it a overwhelming focus or are you going to grow the three businesses proportionally, how do you think about that, when that time comes?

I think we're going to have more visibility on to that, we just had an election and I think we're going to see some there's a lot of things on the table out there, specs but I think we have to give this a little bit of time out there. We definitely have to watch what is going to start happening with the trends and the commodity prices and what is going to happen in the near term for Ag and infrastructure investment, what that is going to amount to. I think we need to start we've had some really good stability and we've got a great team internationally see where that progresses and I think it's difficult to really forecast that at this point in time. I think what we're going to do is there is going to be a little more visibility on some things six months from now Brent and like I say what's important now I think is to really get this solid balance sheet and to have the cash and then I think there is going to be a number of opportunities.

Thank you.

[Operator Instructions] We will go next to Brett Wong of Piper Jaffray.

Hi guys, thanks for taking my questions. I just wanted to – want to ask kind of Ag in general for farmers in the U.S. next year kind of how are you viewing grains and seeds?

Right now, our growers I would say if you look at corn for example at the elevators this is less than $3 and I would say in most cases depending on what the land costs are they are probably losing money at that, so that is not a good situation. I think there has been some more stability in soybean prices what I think is better. So overall I think it's a little bit of situation of have and have nots out there, there is record yields in a lot of our footprint which is good. And I think some of the growers took advantage with some selling opportunities last May and June. Corn is closer to $4 in that during that timeframe, so I think marketing is going to be a big part of that, but definitely at these levels, I think a lot of these growers out there are going to be struggling to at this breakeven level are having some positive cash flows in our operations. So, but I think we have to be considering that in the way we model our business.

Okay. And I mean, I guess from next year as you look at the Ag environment, do you think grain caps or seeds are going to be flat to where they are, are they going to be down, are they going to be up?

If I had the answer to that, there is a lot of – there is some real volatility out there and I guess there is – that is going to be a tough call. I guess right now we're modelling our business to say that we are not going to see much movement in commodity prices through calendar year 2017. So I think that is the best way to approach it. If the commodity prices gets better than that, that is going to be our advantage, but I think we need to model this under the assumption that we're going to have pretty stable commodity prices for the next near term.

Okay. Thanks and in the picture that you just painted David about the farmer continuing to struggle, are you expecting to see any increase for closures as farmers struggle to breakeven and how that might impact your business and just Ag in general?

We're starting to see some farmer auction sales which we haven’t seen in quite a few years, some of these are retirement sales and I would say there is probably some of the farmers making decisions that get out of the business, a lot of that is driven by the banker, it's hard to tell, but we're seeing a little bit of an uptick of farmer sales out there going on and I think we're continuing to see some level of those as we go into next year.

Do you think that level is going to increase going into next year in terms of farmers going through more bankruptcies or?

I think right now farmer's balance sheets for the most part are pretty strong. I think if you go back even two years ago, I think there are conversations with their bankers and as pretty conservative and so I would say for the most part they're in the position to survive this. We saw a global interest rate environment out there. If you look at where some of the land sales have taken place at, they've been fairly stable down somewhat but really stable. So for the most part I'd say the general health of the Ag producer out there, both production, corn, bean, production agriculture and also your livestock market for the most part are pretty healthy from what has happened over the last five, six years.

Okay. That is really helpful, David. Thanks and just one last one from me. Just wondering if you can talk about your international business and expectations that you have next year compared to this year?

I think we will talk more about fiscal 2018 on our next call, but again I think some of the structural things that we've done internationally sets us up well for the next year regardless of what revenue levels are due and by that it's the level of inventory and the expense level that we have over there. But I think we've got some good structural things going into the year, so regardless of the revenue side, we should see good results from the business over there.

Great, thanks so much guys.

We will take our next question from Larry De Maria with William Blair.

Hi thanks, good morning everybody.

Good morning, Larry.

Obviously we're seeing a rally in oil today but regardless, I'm curious about the relocation of the equipment for the energy markets and you talked about it a little bit, but is that something that you imagine will be under pressure through all and most of next year? And rest being equal, when did this market get closer to equilibrium in terms of the excess inventory that has moved around from the oil base into other areas that is affecting overall markets?

I think this has been going on for some time. So if oil prices, let's just say if oil prices stay where they're at today and don't move much, I do think it starts working out in those surrounding areas somewhat. I think others are de-fleeting some as well overall and I think that helps take out some of the availability of the rental fleet and will help pricing down the road in overall dollar utilization or utilization of fleet. So I think with stable oil prices from here and not any other factors that are influencing whether it's res or non-res or different types of activity, I think it does lead to a little bit less pressure going into next year.

Okay. But all else being equal and in the market if the overall, I guess I'm curious about how much excess inventory is there still in the market, is there very much or would we work through most of that, that has been around and then the market can stay flat at this point?

I think it's still – I think the fleet, I think it is still working through that a little bit, if you're referring to like overall equipment inventory or retail inventory, I think there is some of that too, but all else being equal with more time you start working through that some more. So I don’t see any big, with everything kind of stable like what we're talking about, there wouldn't be any big change, but I think with time you do get some less pressure as you work through this.

All right, thanks. And then just switching gears on the Ag side, what do you see for your competition on the used market front and where do you stand versus them? Obviously you accelerated your sales in the last quarter, was that kind to get ahead of the competition or is everyone doing that and do they still have excess levels similar to you or are they in better shape, worse shape or how do you think about it?

Well I think it is overall industry, if you drive around and look at equipment used lots would be red, green, yellow there is a lot of inventory sitting on the lots Larry, so it's a pretty challenging market out there. I would say you've got more inventory than the buyers right now. So that tends to put – make it very competitive out there and so we feel good about our inventory, we want to get ahead of the ball game like you said and then in addition to that there is some lease returns that are coming back into the channel not only in our Q4, but then you are going to see them all through next year. So, I think as the better shape we can get out inventory in, I think that as Mark talked to earlier that creates more opportunities for margins as we go ahead in our new and used inventory and actually we wanted to get into that position as quickly as we can.

Alright so, lease returns will happen for a while then I guess. Okay, that’s I guess is the last thing, the buyers of the equipment now are they typically of the used equipment, are they typically the buyers that would be buying new equipment? In other words as we move towards the replacement cycle, I’m just curious if that gets pushed out because most of the guys, the farmers that would be buying new equipment have just replaced with used at this point?

I think there are some, some previously new equipment buyers that are looking at some late model used. And there is some often nice model used out there and some of those equipments have advanced a lot in the last two, three years, higher horsepower, there's more technology, and more sophistication. So, I think as farmers start looking at their assets and their business and their business model and if they can buy a two year old, a three year old piece machinery that our higher person runs that’s going to do the same job for them, the same amount of productivity and yes, I would say definitely they are going to look their used and we're more motivated to sell that used piece also.

Okay, thanks very much. Good luck.

We’ll go next to Joel Tiss, BMO.

Yes, just everything’s been all pretty much about the short term and I just wondered if you take a step back and you look at your peak earnings in the last cycle and can you talk a little bit about some of the structural changes that you’ve made and what that would do to potential peak earnings 10 years from now or whenever we get to a brighter period?

Yes, I think some of the structural things that we've done you don't see it as much this year and what we’ve done with operating expenses, but certainly last year in taking down our operating expenses $52 million, $53 million was significant a good chunk of that some of that was variable but a good chunk of that was structural in nature which sets us up well going forward. The other big item of course is inventory levels with lower and more efficient asset utilization in that inventory category that should allow better margins, equipment margins overall and of course lower levels of interest or financing costs associated with that as well. So I think those are some of the bigger items. I think there are some good things done certainly on the construction side and international we are seeing signs of kind of turning on those as far as operating those segments in the last peak that we had those cylinders weren’t firing on all cylinders there in those two segments. So, that should help us get to, back to similar when we talk about peak, it is on the revenues having about a 5% pretax as a percent of revenue. And I think with some of the structural things that we've done and some of the improvements, specifically on the other segments, meaning construction and international sets us up well to achieve that type of target as we move down the road a few years.

At this time I’d like to turn it back to David Meyer for closing remarks.

Okay, well thank you everybody for your questions and your interest in Titan Machinery and we look forward to updating you on our progress on our next call. Have a good day everyone.