Titan Machinery Inc. (TITN) Q4 2019 Earnings Report, Transcript and Summary

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. Despite a difficult and unprecedented late harvest, customers in the majority of our markets finished off the year with above average yields. Our customers continue to face depressed commodity prices, particularly within soybeans, which are being disproportionately impacted through the ongoing trade disputes. Producers were able to counterbalance some of these market-driven headwinds by taking advantage of early season soybean and corn hedging opportunities and capturing the $1.65 per bushel USDA market facilitation program payout in response to the tariff-induced pressure on soybean prices. However, the challenges remain as we move into the spring planting season of uncompleted fieldwork due to the late harvest last year, followed by areas of flooding, which combined for a likely late planting season this spring. While net farm income is forecast to be flat to up slightly year-over-year, we believe that a prudent approach to the near-term outlook is appropriate given the market uncertainty. Broader trend such as replacement demand and the growing adoption of technology and precision equipment will continue to support equivalent revenues in fiscal year 2020. However, as we've seen in the prior business cycles, customers tend to extend the age of the existing equipment. Our dealer network is ideally positioned to take care of these customers and will support incremental parts and repair service demand. We believe the more efficient operational framework we've put in place at Titan Machinery will ensure that we manage through this extended cycle profitably, and we are optimally positioned when the cycle turns more favorable. Turning to Slide 6, you'll see an overview of our North American Construction segment. Similar to our position within Agriculture with a more efficient and nimble platform that are supported by a much improved inventory position, our Construction business is realizing improved profitability. The macro backdrop remains fairly consistent with a steady economy, a stable interest rate outlook, oil recovering to the $60 per barrel range, commercial and residential construction activity in the major metro markets continuing and consistent demand for rental equipment across our footprint. However, as we noted previously, a more rural store footprint is exposed to the market forces driving agriculture profitability for our customers who also participate in the construction category. So as a result, we are managing the business prudently with a focus on driving improved profitability. On Slide 7, we have an overview of our International segment, including territories within the European countries of Bulgaria, Romania, Serbia, Ukraine and Germany. Our International segment was a strong contributor to our bottom line for the fiscal year 2018 crop yields, and our International footprint were mostly average with the exception of Germany, which experienced drought conditions during the 2018 season. The volume [ph] yield experienced in Germany were partially offset by government payments, crop insurance and locally higher crop prices. Winter cereal crops, for the most part, in a good condition across our footprint as we approach the spring growing season. We have seen relative stability in our Ukrainian markets, and farmers in the Balkan countries continues to address modern protective machines and are embracing precision and technology. Looking ahead, we continue to see long-term growth opportunities in our International markets. For our regional solvation [ph] fund availability has become more limited in select markets, we have seen global investment in the Eastern European region, which is fueling demand for high horsepower products. Consistent with this trend, we continue to invest in the aftermarket parts and service businesses as we build our footprint in the Balkan markets. In summary, it is great to see the improved top and bottom line performance of our company. In April, we will begin converting to a new dealer management system in our North America footprint with tight over anticipated in the first half of fiscal 2021. Dealer systems have progressed rapidly over the past 10 years, and we are eager to play the latest data-driven and mobile-enabled sales and support tools to improve employee efficiency and engagement while delivering a best-in-class customer experience. Before I turn the call over to Mark, I'd like to thank our employees in the United States and Europe for a great year and their continued commitment to our customers. Now I would like to turn the call over to Mark Kalvoda, our Chief Financial Officer, to discuss our financials. Go ahead, Mark.

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 revenue was down slightly compared to the prior year. Our parts business trended stronger than service, due to increased over-the-counter part sales activity, driven by customer appreciation events, which occurred at our Ag stores in the fourth quarter. Our rental and other revenue decreased 8.1% in the fourth quarter, primarily due to a decrease in rental fleet and inventory rentals in our Construction segment. Despite the decrease in rental fleet rentals, we experienced modest quarter-over-quarter improvement in our rental fleet dollar utilization from 22.8% in the fourth quarter of last year to 23.7% in the current quarter. This improvement is the result of our focus on rightsizing our rental fleet assets to improve our utilization rates. On Slide 9. Our gross profit for the quarter increased by 6.7% to $56 million and our gross profit margin improved by 10 basis points from last year to 15.5% this year. The benefit of higher equipment margins was largely offset by a change in gross profit mix, which was the result of the higher portion of equipment revenue as compared to higher margin parts and service revenue. Our operating expenses increased by $3.6 million to $53.9 million for the fourth quarter of fiscal 2019, which was largely the result of variable costs associated with higher levels of equipment sales and the impact of our AGRAM acquisition in the third quarter of fiscal 2019. Our operating expense margin remained relatively flat at 15%. Restructuring and impairment costs were $1.7 million for the fourth quarter of fiscal 2019 compared to $700,000 last year. Floorplan and other interest expense decreased $800,000 to $2.8 million compared to the same period last year. This reduction was due to a lower level of interest-bearing inventory and a decrease in interest expense on our senior convertible notes, resulting from the $20 million repurchase of this debt earlier in the year. In the fourth quarter of fiscal 2019, our adjusted net loss was $800,000 compared to an adjusted net loss of $2.1 million for the prior year. Our adjusted loss per diluted share was $0.04 for the fourth quarter of fiscal 2019 compared to an adjusted loss per diluted share of $0.10 in the fourth quarter last year. For the fourth quarter of fiscal 2019, adjusted EBITDA was $6.7 million compared to $6.1 million in the prior year. You can find a reconciliation of adjusted net loss, adjusted loss per diluted share and adjusted EBITDA to the most comparable GAAP amounts in the appendix to the slide presentation. On Slide 10, you will see an overview of our segment results for the fourth quarter. Agriculture sales were up 9.2% to $223 million. We had a strong finish to fiscal 2019, driven by continued customer replacement demand, despite difficult industry conditions. This was visible in the almost 11% increase in Ag equipment revenue for the quarter. Our parts and service business did not keep pace with the equipment sales in the fourth quarter, resulting in a lower gross profit margin due to product mix, which was the primary reason, along with variable expenses associated with higher equipment revenue for slightly lower Ag-adjusted pretax income of $1.7 million for the quarter compared to adjusted pretax income last year of $2 million. Turning to our Construction segment. Revenue increased 2.5% to $86 million compared to the prior year period. The segment's adjusted pretax loss improved by $1.1 million to an adjusted loss of $1.5 million compared to an adjusted pretax loss of $2.6 million in the same period last year. The improvement in segment results was primarily the result of improved equipment margin performance versus the prior year. In the fourth quarter of fiscal 2019, our International segment revenue was $50 million, an increase of 2.9% compared to the prior year period. The revenue increase was driven by the contributions from our AGRAM acquisition, which was completed in the third quarter of fiscal 2019, along with stronger parts revenue in the fourth quarter of fiscal 2019. Partially offsetting this growth was lower equipment revenue in certain of our other European markets, which faced a difficult year-over-year comparison against the fourth quarter of fiscal 2018, in which revenues were up nearly 40%. Our adjusted pretax loss in the fourth quarter was relatively unchanged versus the prior year at $1.1 million. Turning to Slide 11. You will see an overview of our full year revenue results. Fiscal 2019 revenue increased 5.8% compared to last year, driven by solid growth of equipment revenue and steady contribution from our parts business. Our service and rental and other revenue saw a modest decline for the year. On Slide 12, our full year gross profit was $232 million, a 7.6% increase compared to the prior year. Our gross profit margin increased 30 basis points to 18.4%, driven by higher margins on our equipment revenues, partially offset by a changing revenue mix with a higher percentage of equipment revenue and a lower percentage of our higher margin parts, service and rental businesses in fiscal 2019 as compared to last year. Operating expenses declined by $1.7 million or 0.8% for the full year fiscal 2019 compared to the prior year period. Our operating expense level benefited from last year's restructuring plan, but the benefits were partially offset by an increase in variable expenses associated with higher levels of equipment revenue and the impact of our AGRAM acquisition. This reduced level of operating expenses along with a growing base of revenue led to an improved operating expense margin of 100 basis points for the year to 16% as a percentage of revenue compared to 17% in the same period last year. Restructuring and impairment charges were $2.6 million for full year fiscal 2019 compared to $11.2 million in fiscal 2018. Floorplan and other interest expense decreased $3.1 million or 18.4%, reflecting the decrease in our average interest-bearing inventory and lower levels of convertible debt in fiscal 2019. Lower operating expenses previously mentioned as well as the decreased floorplan interest expense improved our overall company-wide absorption rate by 2.7 percentage points as compared to the prior year. You can see the trending of our absorption rate for the past 5 years in the appendix to the slide presentation. For the full year of fiscal 2019, our adjusted net income was $14.7 million compared to an adjusted net loss of $2.7 million for the full year of fiscal 2018. Our adjusted earnings per diluted share was $0.67 for fiscal '19 compared to an adjusted loss per diluted share of $0.12 in the prior year. For fiscal 2019, adjusted EBITDA was $49.8 million compared to $30.8 million in fiscal 2018. Our improved financial results for the year were largely driven by the structural improvement in inventory, leading to equipment margin expansion and reduced floorplan interest expense, as well as the full year impact of the fiscal 2018 cost restructuring efforts. Turning to Slide 13. Here, we provide our segment results for the full year fiscal 2019. We achieved growth in all three of our segments for the year, and our adjusted pretax income was $19.3 million for the full year fiscal 2019 compared to an adjusted pretax loss of $2.2 million last year. This top and bottom line improvement across all of our business segments was primarily the result of strengthening equipment margins on higher sales volumes in all three segments, combined with lower operating and floorplan expenses in our Agriculture and Construction segments. Turning to Slide 14. Here, we provide an overview of our balance sheet highlights at the end of the year. We had cash of $57 million as of January 31, 2019. Our equipment inventory at the end of fiscal 2019 was $417 million, an increase of $17 million from January 31, 2018. Our new equipment inventory level was flat to last year. Our used equipment inventory is higher than the amount at January 31, 2018, due to a higher level of used equipment that we took in as trades during the seasonal year-end sales activity in fiscal 2019. Excluding equipment inventory of our AGRAM business, our equipment inventory at January 31, 2019, is down slightly compared to the prior year. Equipment inventory turns remain consistent with the prior year. These historical inventory levels and turns are included in a chart within the appendix to this slide presentation. Our rental fleet assets at the end of the fourth quarter decreased to $111 million compared to $123 million at the end of fiscal 2018. We anticipate our fleet size to remain relatively flat in fiscal 2020, right around at $110 million level. As of January 31, 2019, we had $274 million of outstanding floorplan payables on $640 million of floorplan lines of credit. We continue to have ample capacity in our credit lines to handle all our equipment financing needs. Our total liabilities to tangible net worth is a healthy 1.4. In the first quarter of fiscal 2020, we will be adopting a new lease accounting - the new lease accounting rules, which require for most leases, recognizing a lease asset and liability on the balance sheet. Upon adoption, we anticipate recognizing lease assets and liabilities of approximately $110 million. Adoption of this rule will have a minor impact on our total liabilities to tangible net worth ratio. We have worked proactively with our banking partners and have modified our leverage ratio financial covenants to account for this change. The current outstanding balance of our senior convertible notes remains at $46 million. We have retired a total of $104 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 intend to fully satisfy these notes at maturity using our existing cash and available capacity under our various lines of credit. Slide 15 provides an overview of our operating cash flows for fiscal years 2019 and '18. The GAAP reported cash provided by operating activities for fiscal 2019 was $47 million compared to $96 million last year. We view our cash flows from operating activities on an adjusted basis, including an adjustment to include all equipment inventory financing, including non-manufacturer of floorplan activity in our adjusted cash flow measure. We also adjust our cash flow to reflect the constant equity in our equipment inventory, which enables us to evaluate operating cash flow, exclusive of changes in equipment inventory financing decisions. The equity in our equipment inventory decreased 3.8% to 34.4% as of the end of fiscal 2019 from 38.2% in the prior year comparable period and represents a $16 million use of cash. After all adjustments, our adjusted cash flow provided by operating activities was $47 million for the full year fiscal 2019 compared to $46 million for the - for our prior year period. Slide 16 shows our fiscal 2020 annual modeling assumptions. We are providing the following initial forecast for fiscal year 2020. We expect our Ag segment revenues to be flat, our Construction segments sales to be in the range of flat to up 5% and our International segment revenue to be up in the range of 10% to 15%. Including within our International segment revenue is the full year contribution of our AGRAM acquisition that was completed last July. We are no longer providing a modeling assumption for equipment margins as we are now back in the normal range of our historical equipment margins. It's important to remember that with the elimination change I spoke to earlier, our equipment margins are approximately 150 basis points higher than previously reported. So the historical margin that we referenced in the past of approximately 9.5% is now about 11%. We expect adjusted diluted earnings per share to be in the range of $0.75 to $0.95 for fiscal 2020. This EPS range excludes approximately $0.25 per share for anticipated incremental amortization of our current ERP platform and incremental external cost to be incurred in implementing a new ERP platform that David spoke to earlier. The midpoint of our adjusted diluted EPS guidance is a 27% increase compared to our results in fiscal 2019. This guidance includes an estimated full year effective tax rate of approximately 25%. This rate may vary by quarter, as profit and loss mix fluctuates due to seasonality within our various tax jurisdictions. We will update you on our income tax expectations as we progress through the year on future calls. This concludes the prepared comments for our call. Operator, we are now ready for the question-and-answer session of our call.

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.