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…

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…

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.