Greetings, and welcome to Titan Machinery's Fourth 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] Please note this conference is being recorded. I will now turn the conference over to your host, John Mills with ICR. Mr. Mills, you may begin.

Great. Thank you. Good morning, ladies and gentlemen, welcome to Titan Machinery fourth quarter fiscal 2019 earnings conference call. On the call today from the company are David Meyer, Chairman and CEO; and Mark Kalvoda, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal fourth quarter ended January 31, 2019, which went out this morning at approximately 6:45 a.m. Eastern time. If you have not received the release, it is available on the Investor Relations tab of Titan Machinery's website at ir.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 at ir.titanmachinery.com. The presentation is directly below the webcast information in the middle of the page. You'll 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 on current expectations of management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Titan's most recently filed annual report on Form 10-K. These risk factors contain 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 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'll discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measure 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. 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 fourth quarter fiscal 2019 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 tab of our website at ir.titanmachinery.com. On today's call, I will provide summary of our results and then an overview for each of our business segments. Mark will then review financial results for the fourth quarter, and full year of fiscal 2019 and conclude with an overview of our fiscal 2020 modeling assumptions. If you turn to Slide 4, you will see an overview of our fourth quarter and full year financial results. Our fourth quarter revenue was up 6.6% to $359.6 million compared to the same period last year and the adjusted pretax loss improving to $500,000 versus the $2 million loss in the prior year. For the full year, we generated revenue of $1.26 billion, which was up 5.8% compared to fiscal 2018. Our adjusted net cash flow provided by operating activities was $47.4 million and our adjusted pretax income was $19.3 million versus a loss of $2.2 million for the prior year. We successfully finished the fourth quarter and full year with increased revenues in all three of our operating segments, North America Agriculture, North America Construction and International. In the face of some challenging industry dynamics, we are proud to be able to post a solid profit number to our bottom line. This is a testament to the strong performance of our team, and it's rewarding to see dramatically improved profitability in fiscal 2019, reflecting the positive impact of our previous expense reduction efforts. I will now provide more detail around our three operating segments. On Slide 5, it's an overview of our North America Agriculture segment.…

Thanks, David. Before I discuss our fourth quarter and fiscal 2019 full year results, I want to point out an immaterial correction to our previously reported amounts, which we also addressed in our earnings release that was sent out this morning. The reported amounts for the fourth quarter and fiscal 2018 year that I will be reviewing today had been adjusted to reflect this change. This adjustment was the result of incorrectly eliminating certain internal parts, service and other transactions in prior periods, primarily related to internal parts and service revenue and cost of revenue associated with predelivery inspections and reconditioning work, which were previously eliminated against equipment revenue and cost of revenue, instead of revenue and cost of revenue of parts and service. Adjusting for this correction, decreases total revenue and cost of revenue by approximately 1% in each period and had no impact on total gross profit, operating or net income, earnings per share or our balance sheet or cash flow statements. The change does impact our mix of revenue and margin percentages associated with these individual revenue categories. Further details of this matter will be included in our annual report on Form 10-K for the year ended January 31, 2019. For modeling purposes, we have also included, as an appendix to our presentation materials, corrected quarterly amounts for fiscal years 2019, '18 and '17, as well as full year 2016 and '15 amounts. Now to our results. Turning to Slide 8. Our total revenue for the fiscal 2019 fourth quarter was $360 million, an increase of 6.6% compared to last year. Our revenue increase was across all business segments, primarily driven by equipment sales within our Agriculture segment. Our revenue growth was also supported by increased parts revenue of 7.8% compared to the prior year. Our service…

Thank you. [Operator Instructions] Our first question is from Steve Dyer with Craig-Hallum Capital. Please proceed.

Good morning, guys. Ryan Sigdahl on for Steve Dyer.

Good morning, Ryan.

In your prepared remarks, you mentioned Ag equipment finishing strong, up 11% in Q4 driven by replacement demand primarily. Has farmer sentiment changed recently or what are the puts to give you more caution for flat Ag outlook in fiscal '20?

Well, to be fair, I'd say if you look year-over-year today, I think most of the environment stay about the same. The only thing that probably changes, all the input of the tariffs and the trade disputes going on right now, which has really impacted soybeans. So I'd say we continue yield trends, that's a positive out there, and we're seeing it that across the board. But I think it was really weighing on a lot of our growers [ph] is the soybean prices. So that would be the major change to the settlement.

But - so was there a change from Q4 maybe to Q1 or now? Or was it just maybe some pull forward or something in Q4? Because 11% growth there to now flat, just trying to bridge that gap.

So I think the $1.65 you know, that USDA market facilitation program I talked to that came at the end of the year, that was pretty - that was big for a lot of our growers. So that was real positive in there. Again, replacement demand kicked in. But also if you look around right now, the country and all, there's a really tough winter. There was a lot of snow. You're seeing flooding and - like the Missouri River corridor, the Minnesota River corridor. We're anticipating Mississippi River corridor much of our footprint is usually wet right now. You're seeing some issues of some of the livestock out there. I think you've already read about some of these disasters in Nebraska and all with the dams breaking and some of the floods. So - and you're not seeing a lot of movement in the commodity prices right now, and their ability to hedge or forward contract this year's crop is really going to be important. And so we have - we're early in the season. We have to wait and see, but - so basically there's a lot of the same other than there's just the whole - the one dynamic that changes all this trade discussion that's going on right now.

Okay. Moving on to equipment margins, I realized you're not giving guidance anymore. But as we think about fiscal '20, the 10.6% that you achieved in fiscal '19, is that the right run rate? Or is there opportunity to edge out a few - I mean a little bit of incremental improvement there?

I've kind of try to give a little bit more color to that on the call. Yes, the 10.6% that we reported here in - for the fiscal year, looking at a kind of that old way would have put us right in that range at about 9.2%. So I guess, that it's about right around 150 basis point different. Historically, we always talk about a 9.5% equipment margin for historical under the old way. So 11% is kind of what we're talking about. It's kind of that normalized range going forward right around there. So that would signify a little bit of improvement over that 10.6% that we experienced for this year.

Great. Thanks for that color Mark. Lastly, two kind of housekeeping questions. What was the $2 million long-lived asset impairment related to? And then secondly, could you elaborate on the timing of the ERP-related costs when those will flow through? Thanks.

Yeah. So as far as the long-lived asset impairment, so every quarter, we have to go through by store. We have to analyze all of our long-lived asset for impairment. So from time to time, there are some underperforming stores that we have. And going through that analysis for the quarter, for this particular quarter, we had a few of them that did not pass that impairment test, and that's why we took the $1.7 million expense here for the quarter. As far as the ERP, I think the other question was on the timing of the ERP. So with the timing of the ERP, we're beginning the implementation now, but we're not expecting the cutover to be until like the first half of fiscal year 2021. So as you know there's a lot of work involved to do one of these successfully. So we're going to begin those efforts on almost - in the next month here within the next month, and cutover expected to be next year. As far as the expenses associated with that, I mentioned on the call as well just some part of that difference between adjusted EPS guidance and GAAP EPS, where there some accelerated depreciation on or amortization on the existing system that we have and then other like consulting fees, outside consulting fees that we'll have. And we're going to carve those out separately as nonrecurring items. There will be some internal expenses that will - that's part of our adjusted numbers as well, just regular operating expense items, but those are in that regular $0.75 to $0.95 number.

Great. Thanks, guys. I’ll hop back in the queue.

[Operator Instructions] Our next question is from Mig Dobre with Baird. Please proceed with your question.

Good morning, guys. Just sticking with this discussion on the ERP. How much of this would be cash expense versus the non-cash component?

About one third of it would be cash, one of that, so it's about, I think, that $0.25 is about the equivalent of $7 million, about one third of it is cash related.

Okay.

The balance is pretty much that accelerated depreciation or accelerated amortization of the old system that I mentioned.

Okay. All right. That's helpful. Going back to equipment margin. So if I understand your comment properly, you're hoping for maybe about 40 basis points of margin expansion in fiscal '20. Maybe a little bit of color as to what gets us there. I guess what I'm wondering about is what are you seeing on the used equipment front. How are those prices progressing in Ag and Construction?

Yeah. I think on the Ag side, I think we continue to see progression on that side where the overall supply that's out there is more imbalanced as we've seen that move that way for the last couple of years here. The lease returns coming back into the system out there is - continues to be less year-over-year, so that's helpful as well. But I think another probably even larger part is just the condition of our inventory, both on the Ag and Construction side where the quality of our inventory, the aging of our inventory continues to be improved versus the prior year, and that's where we kind of expect that basis point improvement on the equipment margins.

On the new equipment side, obviously, there is been price increases that have flown through. How did that play into your margin? Are you able to pass that to the customer wholly? Or is there potentially an impact on you sometime in fiscal '20?

Mig, this is Dave. So historically, price increase have passed on to the end users. So many times, there's performance, productivity, operator comfort, technology that are built into these year-over-year price increases. So typically that's what happens here or there, level of margins. We need to stay fairly consistent with that and pass those on, on the sale.

Okay. So no real impact on you in that regard?

Well, no impact on ours.

Okay…

That's assuming that the competitiveness, you know, of what we're selling is consistent what - why everything else is on the marketplace, which it has been historically.

I see. Okay. Then maybe we can talk a little bit about parts and service, too. I mean, I don't know for you, but at least versus my model, both of these categories were weaker than we expected for the quarter. I guess, I'm wondering not only what happened in the quarter, but how do you think about parts and service into fiscal '20, particularly given your comments earlier about an older fleet out there on the Ag side.

Yeah. I think parts came in about what we had anticipated, but the service was lower for us. It was lower than anticipated. We had a pretty good quarter last quarter, so it's hard to judge it I think just by one quarter. I think we continue to see some of the tightening of the belt, you know, some of the commentary that we provided in the past around that where our customers are trying to hold off as much as they can and perhaps on the service side, do some of that work themselves that historically they had us do. So I think that is something that we're watching for and something that we're guarding against them being aggressive. A little bit of the disconnect, if you will, where we did have higher parts and service was down a little bit in the quarter. We did have some of those customer appreciation events, so I think that's a good example of some of these proactive measures that we're taking in this environment to help ensure we get that parts and service business and provide that service to the customer out there. But in that case that's what helped the parts revenues, but didn't have the service attached to it with those over-the-counter sales. So I think as far as going forward, I think we're still optimistic that with the older fleet and this will be with relatively stable commodity prices that we can grow this area of the business. It's not going to be - we're not anticipating big growth here, but we do expect some level of growth in parts and service in those EPS numbers that we provided.

Great. Thank you.

Our next question is from Rick Nelson with Stephens. Please proceed.

Thanks. Good morning.

Morning, Rick.

All are guiding to flat revenues in the Ag segment. I'm curious what sort of industry backdrop that assumes for industry equipment sales up, down and sideways?

Well, so there's a couple, you know, I think if you hear what the OEMs have reported especially in the big equipment, you're just seeing flat to slightly up for zero to 5. So I think we're in that same range. So from an industry standpoint, fairly consistent, and the year started off a little that the - some of the combines and forward drive industry is up in January and February. That 100-horsepower-plus model, they're actually - they're down, what, 2.9% for January and February. So you're seeing that for kind of that - those trend lines going on. So like I say, there aren't a lot of - this a very challenging environment out there. So I think it's appropriate to be prudent as we go into this, so you'll get more visibility on what happens with the trade discussions and what that's going to do to the industry. But we're working off some really low industry numbers, so it wouldn't take too much of a shotgun to get those up a little bit. But I think we have to start off the year, you know, like I say, being fairly prudent in our assumptions.

Got you. So overall, you're not guiding much on the top line growth, but you've got 30% EPS growth at that to midpoint. If you could discuss the drivers there to the insurance group?

Sure. I think, Rick, we mentioned a couple there with - we are expecting some level of growth on that parts and service business that we have out there. So that's going to help drive bottom line improvement there, some additional equipment margin expansion. We talked about essentially that 10.6% [ph] moving up around to that 11% historical rate. We also have the convert that is going to be paid off in just a couple of months here, actually like a month. So that - the way the accounting works on that is there's higher interest rate assigned to that, and we'll be able to save there as we use cash and use some of our lower rate floorplan lines to pay that off. I think continued improvement on CE is another area, again, with some of the blocking and tackling that's being done in that area of the business, some improvement there just overall, and then a full year contribution from AGRAM. And so AGRAM was accretive this last year. We expect them to be even more so this next year and hopefully under more favorable growing conditions that they can work through a drought this past year. So I think those are some of the bigger drivers that necessarily don't affect the top line as much, but pull through to the bottom.

Okay. Great, thanks. And thank you for that. If you can hit these EPS targets, what sort of free cash flow do you think you'll generate? And if you can discuss the planned uses of any free cash. You mentioned that pay down interested in your appetite for acquisitions at this point?

Yeah. I think from a cash flow perspective, so the last 2 years have been relatively consistent with the relatively flat inventory levels. We've been right around that, call it $50 million in cash - adjusted cash from operating activities. I would expect it to be maybe a little higher than that, just given the lift to the P&L. Some of it, we are investing a little bit more into our current business with CapEx, so that's some of the use of capital there and capital allocation. We'll be doing some more of that. And then as you mentioned, paying off [ph] the convert, I think after - we get beyond that, we have the capacity for some acquisitions. And I think, as Dave talked in the past, North American Ag acquisitions are - we feel it's a good use of capital, and it's something that we're seriously looking at here.

Yes, to add on to that, Rick, too, is we're currently engaged with multiple principal owners. I'm talking about the succession solutions domestically. So I think we're in a pretty awkward - pretty good opportunities, I think, as we're moving ahead in this current environment.

Great. Thanks for the color. And good luck.

Thanks, Rick.

We have reached the end of our question-and-answer session. I would like to turn the call back over to David Meyer for closing remarks.

Okay. Thank you, everyone, for your time today and we look forward to seeing you - listen to you here on our next call or next quarter. So thank you. Bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.