Titan Machinery Inc. (TITN) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Titan Machinery, Inc. Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Mills, Managing Partner at ICR. Thank you. You may begin.

Great. Thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery second quarter fiscal 2019 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, 2018, 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 page of Titan’s Web site at ir.titanmachinery.com. This call is being webcast and a replay will be available on the company’s Web site as well. In addition, we are providing a presentation to accompany today’s prepared remarks. You may access the presentation now by going to Titan's Web site at ir.titanmachinery.com. The presentation is directly below the webcast information in the middle of the page. You will see on Slide 2 of the presentation our Safe Harbor statement. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These forward-looking statements are based upon 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 a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as maybe required by applicable law, Titan assumes no obligation to update any forward-looking statements that may be made in today’s release or call. Please note that during today’s call, we’ll also 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 Titan’s ongoing financial performance, particularly when comparing underlying results from period-to-period. We have included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today’s release. Today’s 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, but then if you have additional questions please rejoin the queue. 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 2019 earnings conference call. On today’s call, I will provide a summary of our results and then an overview of each of our business segments. Mark will then review financial results for the second quarter of fiscal 2019, and conclude with a review of our updated modeling assumptions for fiscal 2019. If you turn to Slide 3, you will see an overview of our second quarter financial results. Our second quarter revenue was $300 million with adjusted pre-tax income of $9.1 million and adjusted earnings per diluted share of $0.28. We are pleased with our second quarter results. Increased year-over-year revenues and margins coupled with the operating leverage from reduced expenses from our fiscal 2018 restructuring efforts have all contributed to a profitable quarter. Improved industry equipment inventory levels have not only helped us achieve improved margins but also helped us improve the quality of our inventories. After a slow start to the spring, we were able to pick up some of the delayed parts and service revenues in the second quarter. This along with ongoing efforts in our parts and service businesses combined with lower operating expenses resulted in the second quarter absorption rate of 88.6% compared to 80.1% in last year’s second quarter. With this solid quarter, we have updated our full year modeling assumptions from a diluted earnings per share range of $0.35 to $0.55 per share to a range of $0.45 to $0.65 per share. I will now provide additional detail for our three operating segments consisting of our domestic Agriculture and Construction segments and our international segment. On Slide 4 is an overview of our domestic Agriculture segment. We were seeing excellent growing conditions of much of our Ag footprint resulting in the potential for above-average yields for corn and soybeans. We typically see farmers’ optimism and improved demand associated with good yields and we looked at this as an opportunity to retail new and used on-hand equipment inventory along with parts, service and precision offerings. Along with our customers, we expect to benefit from our stockings of new equipment in advance of announced new model year price increases. Our customers continue to be negatively impacted by low commodity prices in the face of projected higher corn, soybean yields, increased ending stocks and ongoing trade talks. Somewhat offsetting this are announced USDA support programs, new tax laws, and positive year-to-date marketing and hedging activity by our customers. Industry equipment inventory levels continued to improve allowing equipment margins to trend towards more normalized levels. We believe replacement demand is real. We attribute this demand to the extended aging [ph] of existing fleets along with the increased yields and productivity associated with the technology and precision of today’s new and late model used equipment. We were able to recover early season parts and service business in the second quarter due to a late spring and we’re ready to kickoff our successful annual uptime inspection program which drives parts and service revenue while providing added value to our customers. With the extended hours in age of fleets, we expect a high customer take rate with our Uptime inspection program. Overall, our farmers continue to maintain strong balance sheets despite the challenges in low commodity prices and fairly flat year-over-year net farm income projections. Turning to Slide 5, you’ll see an overview of our domestic Construction segment. In the second quarter, we’ve seen growth in our major metro markets and in residential and infrastructure projects. More recently, we have experienced increased rental demand in Western North Dakota driven by an increase in Bakken oil production. Similar to our North American Ag segment, we are seeing some pickup in parts and service revenues after the late spring. This combined with the increased parts and service demand resulting from higher machine usage resulted in higher year-over-year parts and service revenues in our construction segment. With the strong economy, the construction equipment industry is healthy, industry inventory levels are improving and we are seeing a positive trend in our rental utilization. With our ongoing CE operational initiatives, our CE segment is positioned for year-over-year second half and top and bottom line improvement. On Slide 6, we have an overview of our international segment including markets within the countries of Bulgaria, Romania, Serbia, Ukraine, and recently announced Germany. We are beginning to realize the returns in these developing economies as worldwide demand for agriculture products continues to grow and farmers are realizing the return on investment from yield increases and productivity gains from the use of modern machinery. Yields of cereal crops are below average as a result of dry conditions across much of Europe with the more severe conditions across Northern Europe. There have been recent rains in much of our footprint providing benefit to late season crops and improved soil conditions for the fall exceeding [ph] the winter crops. In Ukraine, we continue to see steady growth, a stable geopolitical environment in our markets and ongoing demand for modern machinery and product support. We are developing key accounts, investing and targeting inventories and building out our parts and service capacity and capabilities to meet these growing needs. In the Balkan countries of Bulgaria, Romania and Serbia, the economic and financial conditions are generally favorable with Romanian demand particularly strong, buoyed by economic stability and the EU funds. Investing in key account development, high demand inventory and aftermarket coverage to maximize our growth for long-term profitability. We closed on the four store [ph] German AGRAM acquisition in July and look forward to fully integrating the newly acquired German locations in the second half of the year. So in summary, it’s good to see the positive impact of improved revenues and margins and reduced expense structure to our bottom line. The potential of our high yields in our North America Ag footprint with continued replacement demand gives us confidence for the back half of our fiscal year for our North America Ag segment. Our strong economy with ongoing improvements in our CE segment will reduce year-over-year second half top and bottom line improvements. Our international segment continues to execute providing solid financial contributions to our second quarter results and the results for the first half of our fiscal year. Finally, I’d like to thank our expert team of employees in the U.S. and Europe for your commitment to our customers and to our company. I’ll now turn the call over to Mark to review our financial results and provide you with our expanded modeling assumptions. Mark?

Thanks, David. Turning to Slide 7. Revenue in each of our businesses was up in the quarter generating total revenue for the fiscal 2019 second quarter of $300 million, an increase of 11.5% compared to last year. Our revenue increase was primarily the result of an increase in agriculture and international segment equipment revenue and increased parts and service revenue resulting from the late spring planting season that shifted some parts and service revenue from the first to the second quarter of fiscal 2019. Our rental and other revenue increased 6.7% in the second quarter. Most of this increase was due to a higher level of inventory rentals. Our dollar utilization of our designated rental fleet in our Construction segment improved to 25.2% for the current quarter compared to 24.7% in the same period last year. On Slide 8, our gross profit of $59 million for the quarter was an increase of 11.6% compared to the same period last year, primarily driven by higher revenues. Our gross profit margin remains flat at 19.6%. We continue to generate higher equipment margins, however, this was offset by a change in our revenue mix. More revenue was generated from lower margin equipment sales compared to our higher margin parts, service and rental sales during the quarter. Our operating expenses decreased by $2.9 million to $48 million for the second quarter of fiscal 2019. As a percentage of revenue, operating expenses in the second quarter were 15.9% compared to 18.8% for the same quarter last year. The decrease in operating expenses and the improvement in our expenses as a percentage of revenue are largely the result of cost savings from our fiscal 2018 restructuring plan that was completed early in the third quarter of fiscal 2018 as well as the impact of operating expense leverage in the quarter resulting from higher second quarter fiscal 2019 sales volumes. For the second quarter of fiscal 2019, we recognized $700,000 in restructuring and impairment charges compared to 5.5 million in the same quarter last year. Floorplan and other interest expense decreased approximately 9% to $4.2 million in the second quarter of fiscal 2019 compared to $4.6 million in the same quarter last year. This decrease was primarily due to a decrease in the level of interest-bearing inventory and a decrease in interest expense on our senior convertible notes resulting from a lower outstanding balance. These decreases were offset by a $600,000 loss on our most recent repurchase of our senior convertible notes in the second quarter of fiscal 2019. We repurchased $20 million of face value of our convertible notes during the quarter. The second quarter of fiscal 2019 adjusted EBITDA improved to $16.8 million compared to $6.5 million in the second quarter of last year. In the second quarter of fiscal 2019, our adjusted net income was $6.3 million compared to an adjusted net loss of $1 million in the prior year. Our adjusted earnings per diluted share was $0.28 compared to an adjusted loss per diluted share of $0.04 in the second quarter of last year. You can find a reconciliation of the adjusted EBITDA and adjusted net income or loss and adjusted diluted EPS in the appendix to the slide presentation. On Slide 9, you will see an overview of our segment results for the second quarter of fiscal 2019. Agriculture revenues were $153 million, an increase of 10.3%. Revenue benefitted from the increased equipment revenue as well as an increase in parts and service activity due to the late state to planting season that shifted some parts and service revenue from the first to second quarter of fiscal 2019. Our Ag segment achieved adjusted pre-tax income of $5.2 million compared to an adjusted pre-tax loss of $1.7 million in the prior year period. The improvement in our adjusted Ag segment profitability primarily reflects higher equipment revenues with improved margins as well as lower operating expense structure. Turning to our Construction segment. Our revenue was $79 million, which was an increase of 1.7% compared to the same period last year. Our adjusted pre-tax income for our Construction segment was $300,000 compared to adjusted pre-tax income of $1.2 million in the same period last year. The decrease in segment profitability was primarily due to lower gross profit margins from our rental business versus the prior year period. In the second quarter of fiscal 2019, our international segment revenue was $68 million, an increase of 29.4% compared to the same quarter last year. The revenue increase was driven by higher sales volumes in each of our equipment, parts and service businesses. Similar to our experience in our domestic operations and delayed planting season in our European markets also resulted in a shift of parts and service revenue from the first to the second quarter of the fiscal year. Our adjusted pre-tax income was $3.9 million compared to pre-tax income of $300,000 in the same quarter last year. The increase in segment results was due to overall increased revenues as well as increased gross profit margins on equipment sales. Turning to Slide 10, you’ll see our year-to-date results. Total revenue increased 2.4% compared to the same period last year. Year-to-date equipment sales increased 4.1%, parts and service revenue decreased slightly and rental and other revenue was flat. Turning to Slide 11. Our gross profit for the first six months was $106.5 million, a 4.7% increase compared to the same period last year. Our gross profit margin increased by 40 basis points year-over-year to 19.5% for the year-to-date period. We realized an improvement in our gross profit margin despite a higher mix of lower margin equipment revenue compared to that of higher margin parts, service and rental revenues. Our operating expenses declined by $8.2 million or 7.9% for the year-to-date period to $94.4 million due to cost savings from last year’s restructuring plan. As a percentage of revenue in the first six months, operating expenses decreased 190 basis points to 17.3% compared to 19.2% in the same period last year, reflecting the leveraging of our lower cost structure over higher revenues in the first six months of fiscal 2019. Restructuring and impairment charges were $700,000 for the first six months of 2019 compared to $7.9 million in the same period last year. Floorplan and other interest expense decreased $1.8 million or 19.1% to $7.6 million in the first six months reflecting a decrease in our average interest-bearing inventory compared to the first six months of fiscal 2018, as well as interest expense savings resulting from the repurchase of our senior convertible notes. Adjusted diluted earnings per share was $0.21 for the first six months of fiscal 2019 compared to an adjusted diluted loss per share of $0.23 in the prior year period. On Slide 12, we provide our segment overview for the six-month period. Overall, our adjusted pre-tax income was $7 million for the first six months of fiscal 2019 compared to an adjusted pre-tax loss of $7.7 million in the same period last year. This improvement is primarily the result of strengthening equipment margins and lower operating and floorplan interest expenses in our Agriculture segment as well as increased equipment revenues in our international segment. On Slide 13, you will see the progress we have made in our expense structure and a corresponding improvement in our absorption rate. As you recall, absorption is a metric that reflects the ability of our parts, service and rental gross profits to absorb fixed operating costs. We have reduced our annual operating expenses from fiscal 2014 to the trailing 12 months ended July 31, 2018 by $94 million or 32% and over the same time period increased our absorption rate from 71% to 82%. Operating at this expense level near the trough of the Ag cycle positions us to be profitable during challenging times while enabling us to significantly leverage our operating expenses when industry conditions recover and revenues increase. Our absorption for the second quarter of fiscal 2019 improved to 88.6% compared to 80.1% in the same period last year due to the strength in our parts and service businesses combined with lower operating expenses. Future success in growing our absorption rate will be more dependent on growing our parts and service business as we reach the anniversary of the completion of our restructuring plan and our corresponding lower cost structure which occurred in the third quarter of fiscal 2018. Turning to Slide 14. We provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2019. We had cash of $50 million as of July 31, 2018. Our equipment inventory at the end of the second quarter was $474 million, an increase of $74 million from January 31, 2018, made up of an $88 million increase in new equipment partially offset by a $14 million decrease in used equipment. The increase in new equipment inventory is primarily in core products for seasonal stocking and purchasing equipment ahead of steel surcharges later in the year. Our equipment inventory turns improved to 1.7 from 1.6 in the prior year comparable period. Included in the appendix to this slide deck is our equipment inventory chart with inventory levels and turns for the past five years. Our rental fleet assets at the end of the second quarter were $119 million compared to $123 million at the end of the fourth quarter of fiscal 2018. We expect our rental fleet size to reduce to around $115 million by the end of the year as we focus on improving our utilization results in fiscal 2019. We had $366 million of outstanding floorplan payables on $612 million of total discretionary floorplan lines of credit as of July 31, 2018. We continue to have ample capacity in our credit lines to handle our equipment finance needs. Our total liabilities to tangible net worth ratio is a healthy 1.6. The current outstanding balance of our senior convertible notes is down to $46 million. During the second quarter of fiscal 2019, we repurchased $20 million of face value of our convertible notes for $20 million in cash. We have now retired $104.4 million or approximately 70% of the original $150 million face value of our senior convertible notes with $95 million in cash. The remaining balance of our convertible notes are due on May 1, 2019 and we are confident in our ability to fully satisfy these notes at maturity. Slide 15 provides an overview of our cash flows from operating activities for the first six months of fiscal 2019. The GAAP reported cash flow used for operating activities for the period was $14 million, primarily the result of cash used for the stocking of inventory, net of manufacturer floorplan payable financing and cash used for other working capital needs. As part of our adjusted cash flow used for operating activities, we include all equipment inventory financing including non-manufacturer floorplan activity. Our adjustment for non-manufacturer floorplan payables amounted to a change in cash flow of $50 million for the first six months of fiscal 2019. We also adjust our cash flow to reflect the constant equity in our equipment inventory which enables us to evaluate operating cash flows exclusive of changes in equipment inventory financing decisions. The equity in our equipment inventory decreased to 22.8% during the six-month period ended July 31, 2018 and represents a $73 million adjustment to our cash flow used for operating activities. We reduced our equity equipment inventory during the six-month period ended July 31, 2018 as we increased inventory levels and we drew on our floorplan lines to repurchase our convertible debt and pay down other long-term debt. After all adjustments, our adjusted cash flow used for the operating activities was $36 million for the first six months ended July 31, 2018 compared to $19 million used for the same period last year. We do anticipate generating positive adjusted cash flow from operating activities in fiscal 2019. You can see on this slide that our cash generation from last year occurred in the back half of the year. This is typical for our business and we expect this trend to continue in the current year as well. Slide 16 shows our updated fiscal 2019 annual modeling assumptions. We are updating some of the modeling assumptions to reflect our current forecast for all segments in our equipment margin. We are leaving our segment revenue growth assumptions constant for Agriculture at up 0% to 5% and international constant at up 10% to 15% which includes revenue contribution from the AGRAM acquisition, which closed in July of 2018. As a reminder, AGRAM produced $30 million in revenues during the prior fiscal year and we expect it to accretive to our fiscal 2019 earnings. We are revising our revenue modeling assumptions for Construction down to reflect slightly lower expectations in this segment and see revenues up 0% to 5% instead of the prior range of 3% to 8%. For the back half of the year, we do expect improved top and bottom line results in this segment compared to the second half of fiscal 2018. We continue to see strength in our equipment margins, particularly in our Ag segment and with a larger portion of our equipment revenues coming from our international segment where we typically experience higher margins. We are now forecasting equipment margins to be in the range of 8.7% to 9.2% versus prior year expectation for the full year in the range of 8.2% to 8.7%. Given these modeling assumptions, we are raising our diluted earnings per share expectations for fiscal 2019 to a range of $0.45 to $0.65 from the previous range of $0.35 to $0.55. Operator, we are now ready for the question-and-answer session of the call.

Thank you. [Operator Instructions]. Our first question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your questions.

Thank you. Good morning, guys.

Good morning.

Just a question I guess on farm sentiment. A lot of others in the industry and some OEMs and so forth have expressed I guess some fear that conversation around tariffs and the ensuing prices in commodities and so forth have really sort of put buying decisions on hold or maybe dampened sentiment. But it doesn’t sound like you’re seeing necessarily a lot of the same things. Can you just sort of elaborate on the mood and farm sentiment kind of in your neck of the woods these days?

Well, the farm sentiment – yes, definitely farmers are really concerned about the current level of commodity prices right now. And then I think it’s going to continue that way. So they’re basically on a hunker-down mode, wait and see, being in a very conservative posture. But with that, that’s balanced by this replacement demand out there what we said is real. So balancing these two things, it’s good to see there is some good USDA support programs not only the ones recently announced but some ongoing ones, the ability to take out crop loans and there’s a wide range of these USDA support programs. But I think the biggest thing is this ongoing yield trends that we’re seeing. Year-after-year, it seems despite different weather challenges we’re seeing with some of the seed genetics out there and some of the new technology out there, some of the better farming practice we’re seeing this ongoing yield increase which I think is a positive. So balancing all that out, farmers have a lot of storage and that’s a positive. I think there were some really good marketing moves earlier in the year, forward contracting, hedging some of the crop which I think is going to be beneficial. But it’s pretty conservative posture. And I think the real banks have a conservative posture. And until we see some upward moving commodity prices, I think there’s going to be continued challenges out there.

Yes, I think generally the results in your commentary would suggest things are better and it sounds like maybe that’s just a function of just pure necessity and replacement demand. Is that right?

Yes, I’d say that’s pretty much driving it. And some of the yield in productivity increases we’re seeing with some of the technology in the new models out there. So I think that combined with the replacement demand, the two of them added together is what’s driving the new equipment purchases and some of the late model used purchases.

Got it, okay. And then just as it relates to equipment margins, they’ve been really, really strong in the first half of the year. Your guidance for the second year I guess if I sort of back into the numbers would imply a tick lower on those in the second half of the year. Is that just conservatism on your part or mix or is there a reason to think that those would back up a little bit? That’s it for me. Thanks.

Yes, Steve, Mark here. Yes, the equipment margin, certainly they continue to be better than we had originally anticipated. Not a lot of that is due to benefitting from – us benefitting from a cleaner inventory position if the industry continued to be better overall and supply and demand were balanced there. Like you said, I think mix is part of it certainly with international having a strong quarter. International typically has stronger equipment margins to it so that mix did help our results and that will certainly tail off more to the back end of the year. Particularly when we get into the fourth quarter, we have a higher equipment revenue quarter domestically here driven by tax-induced purchases where that’s not the case overseas. So that and just combined with some bigger deals that happen at the end of the year domestically, those tend to have a little bit thinner margins as well. So yes, we do have some implied lower margins for the back end of the year to fit within that range that we put out there for equipment margins.

Got it. Thanks.

Thank you. Our next question comes from the line of Rick Nelson with Stephens Inc. Please proceed with your questions.

Thanks. Good morning. I’d like to follow up on the Construction segment what you think is holding back the recovery there? You took down your same-store sales guidance, it looks like there is some margin pressures there and the outlook for Construction as well would be helpful?

Well, as we talked about, Rick, it’s a pretty challenging industry out there. I think if you look at some of the commentary by some of the competition, I think everybody comments on that it is a challenged industry. The good thing is we’ve got a strong economy, we’ve got GMP growth. What we’ve done is we positioned ourselves right now not only with our ongoing operational improvements but the age and quality of our seed inventory is really much better going into the second half, so we’re positive about that. We’re expanding some of our digital and ecommerce capabilities. If you look at our sales coverage across our footprint, we’ve increased sales people and they’re gaining much more experience and building those customer relationships. So combining all like we said is we’re very confident that our second half here from both a revenue and bottom line standpoint for our second half is going to be better than it was a year ago in the second half.

Fair enough. Thanks. Also I’d like to ask you about the acquisition environment. Now with the recovery in Ag especially on the margin side likely some of these acquisition candidates are seeing some of that as well. Is there any less willingness to tell at this point in the cycle on your appetite for acquisitions at the present time?

I think exactly opposite, Rick. I think that probably appetite is growing. As you see this increased sophistication business, the complexity of the machines, look at the age of the dealer principals, you look at some of the balancing changes out there and some of these dealerships. So I’d say it’s actually accelerating and we’ve got an appetite and I think right now we’re – I do that every day as really look at opportunities in domestic. Ag right now is what we’re focusing on and therefore we have a big appetite for that right now. And I think we have willing sellers out there and conditions are right to do some M&A in the United States.

Okay, very good. Thanks a lot and good luck.

Thanks, Rick.

Thank you. Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your questions.

Hi. Good morning, guys.

Good morning, Mig.

Good morning. I’d like to go back to equipment margins if we can. So I understand what you’re saying in terms of the mix being a little bit different in the back half. Maybe you can help us understand how you’re thinking about the low end versus the high end of the guidance? So what takes us to 8.7 versus 9.2? Is this a factor of still mix or is there something else that we should be aware of?

Yes, I think it’s mix both in the type of products that we’re selling. There’s certain products that we have that fits a little bit on the lower side of the revenue range, probably have a higher mix of some of the lower dollar value item units where we tend to garner a higher percentage margin than on higher dollar value units. I think the mix between U.S. and international is part of it, which I spoke of before. And some of it too is just I think some of the unknown risks what we talked about with the tariffs and the commodity prices and how everything just kind of comes in for the year and the cash position for our customers at the end of the year that can sway that from one end to the other.

Right. I guess on your very last comment here though I don’t know how that would exactly impact your margin, right? It might impact your sales, your top line guidance. Would it have any sort of impact on the markup that you would make on used and new equipment?

It could on new, used as well. We’re on this lifecycle management where we really want to keep that inventory moving and not let it sit around. So if a piece has been sitting around for a period of time, again this is probably more on used than it is on new. But if a piece has been sitting around for a period of time and the market softens somewhat, we’re still going to want to try and move that and we may give up some pricing to do that.

Okay, that’s helpful. Then if we can switch to parts and service, a good quarter there but as you mentioned a couple of times maybe some of this was a factor of Q1 being as slow as it was and there was a bit of catch up. I would imagine it’s pretty difficult to separate exactly what the catch up would have been. I don’t know if you can help with that. What I am wondering though bigger picture is, how do you think about – what’s embedded in your guidance for the back half of the year? How do you think about this business going forward?

Yes, so we did – so we had a good quarter on parts and service. We definitely believe as we said that some of it came from Q1 with that delay. But on a six-month basis we’re down slightly now on parts and service. And what we’re kind of expecting for the back half of the year is to be positive in the back half that should bring us slightly positive I would say overall for parts and service for the year. And some of the confidence in that too is in the back half of the year we have more apples-to-apples comps with our store closures that happened in the first part of the year last year and the continuing aging of some of that fleet that’s out there. So that’s kind of what’s in our guidance. Embedded in there is some slight uptick in parts and service for the full year.

Thank you. And last question, on this point the aging of the fleet I guess what I’m wondering here is as you look especially at tier 4 equipment that now was a few years old, are you getting the sense that farmers are able to service some of this equipment themselves if they choose to or is it that this equipment would get predominately serviced by someone like yourself and is now – we’ve seen a few seasons on this equipment, we can actually start to see some momentum build in the parts and service business into fiscal 2020? You had a rough time here for the last four years. I’m just wondering if we’re finally turning the corner in a sustainable manner.

Yes, I think a lot of that diagnostic is maybe to get into some of today’s sophisticated hydraulics and electrical and you’ve got specific diagnostic tools and some of the telematics that we’re starting to see right now and the GPS and the precision, definitely a lot of this equipment that 15 years ago, the farmers could service in their shops, so it was mostly about engines and transmissions and change in fluids. Now with this level of sophistication complexity, they’re definitely looking to us. Keep in mind, when you’re looking at these large four-wheel drive tractors, combines and heads, $0.5 million a unit that to have a farmer bring that in and that’s his livelihood to spend $10,000, $15,000, $20,000 to make sure that it’s reliable, it’s uptime, it is keeping up with the latest upgrades from a business-to-business standpoint, it’s just smart. So yes, that’s – that really ties in that we’ve got a very successful Uptime inspection program where we go through these machines and all recommended updates. We’ve got a lot of experience with that and have been very successful and we’re going to continue to do that. And we are seeing a lot more of these machines come into our shops because of this level of sophistication and the cost of them and the uptime and the reliability and it all ties in.

Right. Thank you, guys.

Thank you. We have one final question from the line of Larry De Maria with William Blair. Please proceed with your questions.

Hi. Thanks. Good morning, guys.

Good morning.

Just to clarify, maybe I missed this but obviously you adjusted the CE same-store sales down slightly, not that much and you expect a better second half. But was there a specific reason behind the lower same-store sales for the full year?

Well, even though we’re going to see a second half year-over-year improvement in CE revenue and profit improvement, we pulled the full year back a bit as a result of the disappointing first half. So that’s why you’re seeing the full year like that basically. And like I say – but we are very confident in that second half being improved over last year both from a top and bottom line.

And did that maybe disappointment come from the Ag side not buying construction equipment or was it specifically to construction buyers or what would drove that slightly softer?

If you look at our total CE footprint, we do have a number of CE stores in fairly rural areas that are impacted by farmer purchases and not only farmer purchases but also the Ag-related businesses that are out there. So farmers are investing much less in construction equipment with the depressed commodity prices, probably favoring the need of tractors, combines, sprayers and planters. So yes, we are seeing a big difference. And I think if you look at the total industry, you are seeing higher increases from an industry standpoint in areas along the Coast and maybe some of the larger metro areas as you are in some more of the upper Midwest rural markets.

Okay. That makes sense. Thanks. And then curious about the inventory increased to get ahead of the surcharges you talked about or wrote about. Can you elaborate on what you’ve seen competitors doing in your area and if you think this will pull forward demand for you this year and therefore be a tougher comp for next year? And finally what kind of surcharges are you seeing or expecting to see, I guess incorporate? Thank you.

So if you look at it from an industry standpoint with the new model years coming off, there’s two things that are going on here. First of all, with the new models you tend to see price increases included with more operator comfort. You see improvements in performance, you see [horsepower] things, you see definitely in the case of technology out there today. So some of that’s tied in. And at the same time I think it’s pretty apparent that we’ve got steel tariffs coming in, also some probably steel increases from the domestic steel prices, freights getting a big item both on inputs coming into the OEMs, but also on the delivery of the equipment, freights and item. And in addition the steel is probably from what I’m reading different things of other components, electrical components of things like that. So with that and from what I’m just – conversations I’ve had with some of my competitor friends, things like that, I’m hearing numbers in the middle single digits based on freights, steel, technology improvements, new model year improvements. So that’s the kind of numbers I’m hearing. So with that said, I think that really positions us well for stock we brought in prior to these increases which I think is going to be a benefit to us going ahead and hope – and it helps us I think stabilize the values from this late model used equipment also. So I think those are both positives that we look into our second half of the year. You’re talking about what that’s going to do for comps for next year and things like that, I think that’s [indiscernible]. But typically if you go back over the last 15 years, you get price increases with new model years and they pull through the system and tractors and combines get higher horsepower, they get bigger capacities out there. There’s more technology advances. I think our growers out there are seeing definitely a return on investment and on better performance, better productivity. Some of the returns they’re getting on some of the technology are definitely out there. So at the end of the day, there’s some of those benefits and their willing enables us to pass that through. So there is a good return on their investment.

You bring up a good point and if I can ask a final question. Thank you for that color. We were at Farm Progress this week and there seemed to be much bigger uptake of precision Ag technologies and obviously a principal competitor has kind of more of a solution approach for green-on-green, let’s say. Your corporation that you represent, the CNHi, maybe it’s a little bit further behind. So I’m curious what you’re seeing in your territory in terms of farmers? Are they gravitating more towards solutions? Do you feel like you’re farther behind because of the lack of investment at corporate, let’s say? And just how do you think about that overall, the competitive dynamics given that precision Ag uptake now?

Well, I guess I would say if you look at our OEMs, I would not say, I’d say we’re on par with [indiscernible] general marketplace. If you look at – suppose you got a chance to look at some of the AFS, AFS Connect, the Harvest Command with the automation, the combined and all. So in the field, it’s going to get less grain going out the back like combine and a higher quality AFS Soil Command with the AIM Command on our self-propelled sprayers, water technology out there. What we’ve done is tightened what the Farmers Edge – we’re partnering with them for both the data and the analytics. I think we’re definitely bringing the best solution out there to the customers of that. We’re a Raven distributor where we’re getting the field computers, the application controls, the guidance in steering, the wireless connectivity, the call-based data management. So I think we really have an excellent solution for our customers out there. And as you talked about – you mentioned one of our competitors out there which tends to be a close system and some proprietary things there. What we’re offering – if you look at the farmers and talk to the growers out there, they don’t want to be locked in to any one crop input company, one seed company, particularly one OEM. So the fact that we’re supplying open architecture out there so that they can move around and it’s our customers’ data, yes, I think there’s a lot of positive on that. Right now, I will say we’ve got one of the best solutions out there. So I’m confident where we are with the precision and some of the things we’ve done that really brings value and return for our growers to make these in-season and on-the-farm decisions to get the higher yields in the lower cost and a better return to their bottom line. So we’re in good shape on that, Larry.

Okay. That’s really good. I appreciate all the color and good luck, David. Thanks.

Okay.

Thank you. Ladies and gentlemen, we have come to the end of our time for questions. I’ll turn the floor back to Mr. Meyer for any final comments.