Titan Machinery Inc. (TITN) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Titan Machinery Incorporated Second Quarter Fiscal 2020 Earnings Conference 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, Manager Partner of ICR. Mr. Mills, you may begin.

Great, thank you. Good morning, everyone and welcome to the Titan Machinery second quarter fiscal 2020 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, 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 page of Titan’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. You may access the presentation now by going to Titan’s website at ir.titanmachinery.com. The presentation is available 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 will 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 have included reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today’s release. The 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 second quarter fiscal 2020 earnings conference call. On today’s call, I will provide a summary of our results and then an overview for each of our business segments. Mark will then review financial results for the second quarter of fiscal 2020 and conclude by reviewing our updated modeling assumptions for fiscal 2020. If you turn to Slide 3, you will see an overview of our second quarter financial results. Our second quarter revenue was $315 million with the adjusted pretax income of $9.1 million and adjusted earnings per diluted share of $0.31. We generated solid topline and bottom-line results during the fiscal second quarter by achieving healthy growth in our Agriculture and Construction segments despite challenging industry conditions that continue to persist. We are particularly pleased with strong continued increases at our higher margin parts and service businesses which grew double digits in the quarter. These results were slightly offset by our International segment which I will discuss shortly. 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. As we pointed out on our Q1 earnings call, across most of our Ag footprint our farmer customers experience some abnormally late cold and wet spring. This caused the late plating and in some cases farmers elected a Preventive Plan Action. For the crops that didn’t get planted, some would find it less than ideal conditions which combined with reduced yield potential of late planted crops and the acres lost the midseason heavy rains, we anticipate lower overall corn and soybean yields. The good news is that most of the western corn belt fared better than the eastern corn belt from a spring planning perspective. Summer growing conditions have been favorable in most of Titan Machinery's footprint. With the late planting, corn and soybeans are growing in the heat, sunshine and later than normal freeze dates to reach maturity and yield potential. The uncertainty at the end of growing season frost dates along with the negative grain prices resulting from ongoing trade issues are weighing heavily on farmers sentiment. On a positive note, the strong corn prices we saw in June and July allowed farmers the opportunity to sell carryover crops and market portions of current year crops. In addition, USDA is starting to make payments to farmers under round two of the Market Facilitation Program announced in 2019 which will be an added shot in the arm for most of our farmer customers. Replacement demand and technology are catalysts for new equipment sales and we're reporting a true parts and service revenues as the age and hours of our customers' fleets are continuing to grow. Margins from the aftermarket parts and service businesses are integral to our business model and creates sustainability through the macroeconomic cycles and the interruptions to the business. We are experiencing demand for quality used equipment and we are seeing continued stability in used equipment values. Turning to Slide 5, you will see an overview of our domestic Construction segment. The strong economy continues to positively impact the construction equipment industry. Stable oil prices have spurred demand for construction equipment for oil related activity. Federal, state and municipal infrastructure projects are creating work for large construction contractors and smaller subcontractors. While we are seeing stronger demand in the metro areas, the rural construction equipment market has continued to be negatively impacted by the depressed farm commodity prices. We continue to target our farmer customers as an outlet for used construction equipment. Our rental business continues to support our CE byline and the operational improvements we have been implementing in our construction stores are producing results as evidenced by our year-over-year second quarter and first half improvements to our top and bottom line results. We are confident in our full year assumption that construction revenue will be up 5% to 10% and expect continued improvement in our bottom line performance. On Slide 6, we have an overview of our International segment including our markets within the countries of Bulgaria, Germany, Romania, Serbia and Ukraine. We experienced a pull back in the revenues in our International segment in the second quarter which we attribute to farmer concerns over softening European economies, the impact of Brexit, weather issues in some markets and volatility in commodity prices due to trade issues and growing global supplies. While most of the late season crops are experiencing favorable warm weather, early season crops experienced excessive moisture in the Balkans, especially in Romania with record heat and drier weather to the North. Our Germany business is experiencing some carryover from last year's draught related poor yield. The weather in the Ukraine has been favorable to both their early season grain crops and late season corn, soybean and sunflower crops. We were disappointed with our second quarter in International segment performance but continued to focus on our aftermarket parts and service business as we look for opportunities in connection with the fall harvest as customers continue to invest in modern farm equipment in these developing countries. Before I turn the call over to Mark, I want to comment on the increase in North America Ag dealer M&A activity. We are fully engaged in the pursuit of quality in North American Ag acquisition opportunities as the Ag dealership ownership continues to consolidate. I want to thank all our employees for their efforts in executing a solid second quarter. Our operating model allows us to operate profitably under difficult industry conditions and we are well positioned to leverage our business as the industry conditions improve. Now I would like to turn the call over to Mark to review our financial results in more detail.

Thanks David. Turning to Slide 7, we generated total revenue of $315 million for the fiscal 2020 second quarter, an increase of 6% compared to last year. Our revenue increase was primarily the result of an increase in our Agriculture and Construction segments which increased 9.1% and 8.4% respectively. While the equipment category achieved double-digit revenue growth in each of these segments, the performance of our service business was the highlight of the quarter which grew 15.5% on a consolidated basis. Our parts revenues were up 6.7% and our rental and other revenue was down slightly compared to the same period last year. Rental and other revenue was down primarily due to a smaller average rental fleet which was offset by a slightly higher dollar utilization of 25.5% for the current quarter compared to 25.2% in the same period last year. We were pleased with the quarterly revenue increase in our parts and service businesses. Approximately 2% to 3% of the increase is from our AGRAM acquisition completed in the third quarter of last fiscal year with the balance of the revenue growth resulting from our increased focus in these areas and a customer fleet that is continuing to age. On Slide 8, our gross profit of $64 million for the quarter was an increase of 8.7% compared to the same period last year, primarily driven by higher revenues. Gross profit margin increased by 50 basis points to 20.3% versus the prior year period due primarily to a shift in gross profit mix toward a higher margin service business. Our operating expenses increased by $7.3 million to $55 million for the second quarter of fiscal 2020. The increase was primarily the result of higher International segment operating expenses resulting from our AGRAM acquisition, ERP transition costs incurred in the quarter and increased costs associated with supporting increased activity levels in our Agriculture and Construction segments. The ERP transition costs along with the decrease in equipment revenue in our International segment that negatively affected our ability to leverage our fixed operating costs within this segment contributed to an increase in our operating expenses as a percentage of revenue from 16% in the second quarter last year to 17.4% in the second quarter of fiscal 2020. Floorplan and other interest expense, decreased 42.9% to $2.4 million in the second quarter of fiscal 2020, compared to $4.2 million in the same quarter last year. Most of the decrease was due to lower interest expense resulting from the May 1, 2019 retirement of the remaining balance of our convertible notes. In the second quarter of fiscal 2020 our adjusted net income grew 9.5% to $6.9 million compared to adjusted income of $6.3 million in the prior-year. Our adjusted earnings per diluted share for the quarter was $0.31 compared to $0.28 in the second quarter of last year. For the second quarter of fiscal 2020 adjusted EBITDA was $15.8 million compared to $16.8 million in the second quarter of last year. You can find the reconciliation of adjusted net income, EPS and EBITDA to their most directly comparable GAAP amounts in the appendix to this slide presentation. On Slide 9 will see an overview of our segment results for the second quarter of fiscal year 2020. Agriculture revenues were $166 million, an increase of 9.1%. We carried the sales momentum we generated in the first quarter through the second quarter despite ongoing industry headwinds and uncertainties. Revenue increases were achieved across equipment, parts and services sales. The increased revenue drove a 19.2% increase in pretax income to $6.2 million for the quarter compared to $5.2 million in the prior year period. Turning to our Construction segment, revenue increased 8.4% to $84 million compared to the prior year period driven by increases in our equipment, parts, and service businesses. The segment's adjusted pretax income improved by $1 million to $1.3 million in the second quarter of fiscal 2020. This marks the fourth consecutive quarter of increased quarter-over-quarter top and bottom line results in this segment as we continue to drive towards profitability within this segment. In the second quarter of fiscal 2020, our International segment revenue was $65 million, a decrease of 3.7% compared to the same quarter last year. The revenue decreased was the result of a 19.8% decrease in same-store sales partially offset by the revenue contribution from our AGRAM acquisition which closed in the third quarter of last fiscal year. Income before income taxes for the second quarter of fiscal 2020 was $500,000 compared to $3.9 million in the second quarter last year. We were up against a tough quarterly comp in this segment with revenues increasing 29.4% in the prior year second quarter. However segment revenues for the second quarter of fiscal 2020 still came in below our expectations as the difficult industry conditions that David discussed earlier weighed on our customers' equipment purchase decisions. As we have previously highlighted our International business contains a lower mix of parts and service revenue as compared to our domestic business. As a result fluctuations in equipment revenues will have a larger impact on profitability which is what we are seeing in the current quarter on down equipment revenues. Turning to Slide 10, you see our first six months results. Total revenue increased 9.7% compared to the same period last year. First six months equipment sales increased 10%, parts increased 8.6%, service revenue increased 15%, and rental and other revenue was essentially flat. Turning to Slide 11, our gross profit for the first six months was $118 million a 10.7% increase compared to the same period last year. Our gross profit margin increased by 20 basis points year-over-year to 19.9% for the first six months of fiscal 2020. We realized a small improvement in our gross profit margin primarily due to a change in gross profit mix with the higher percentage of our revenue coming from our service business. Our operating expenses increased by $13.1 million or 13.8% for the first six months of fiscal 2020 to $107 million. As a percentage of revenue these expenses were 18.1% of revenue compared to 17.4% in the prior year period. The drivers of this expense increase was similar to what I discussed for the second quarter. Floorplan and other interest expense decreased $2.7 million or 35.5% to $4.9 million in the first six months, largely due to the interest expense savings resulting from our repurchases and full repayment of our senior convertible notes, as well as a decrease in our average interest-bearing inventory compared to the first six months of fiscal 2019. Our adjusted diluted earnings per share was $0.33 for the first six months of fiscal 2020 compared to $0.21 in the prior year period. On Slide 12 we provide our segment overview for the six-month period. Overall our adjusted pretax income was $9.8 million for the first six months of fiscal 2020 compared to $7 million in the same period last year. This improvement is primarily the result of higher revenues across all our segments, combined with gross margin improvement in Agriculture and Construction and lower floorplan and other interest expense. These results were partially offset by higher overall operating expenses as well as reduced contribution from our International segment. On Slide 13 we provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2020. We had cash of $50 million as of July 31, 2019. Our equipment inventory at the end of the second quarter was $547 million, an increase of $130 million from January 31, 2019 reflecting a $152 million increase in new equipment partially offset by $22 million decrease in used equipment. Equipment inventory turns were flat year-over-year at 1.7. I will provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the second quarter increased to $118 million compared to $111 million at the end of fiscal 2019. We increased our fleet size before seasonal busy period, but still anticipate our fleet size will decrease to around $110 million by the end of the current fiscal year. As of July 31, 2019 we had $452 million of outstanding floorplan payables on $640 million of total floorplan lines of credit. 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 2.1. This ratio continues to be impacted by the adoption of the new lease accounting standard which went into place in the first quarter this year and will continue to influence the comparisons for the balance of fiscal 2020. Importantly, the ratio of 2.1 is well below 3.5 which is the leverage covenant required of our larger bank facilities. We expect this ratio to strengthen as our normal equipment inventory destocking occurs in the back half of the year. As a reminder, on May 1, 2019 we repaid the outstanding principal balance on our convertible note using cash on hand and borrowings under our existing lines of credit. Significant cash generation over the past few years allowed us to repay these notes in full without having to replace them with another long-term debt instrument. With the retirement of this debt behind us and our expectation of another good year of cash generation, we are in a solid liquidity position during this period of volatility and uncertainty within the largest segment of our business. Turning to Slide 14 we will provide some additional information on our equipment inventory. Consistent with the expectations that we provided last quarter, we experienced continual seasonal stocking of new equipment inventory and sequentially flat used inventory levels in the second quarter. The amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide. We continue to maximize our non-interest bearing terms from our suppliers. The percentage of our non-interest bearing inventory to our total equipment inventory is reflected in the black line of the graph. As an example, in the current quarter we had total equipment inventory of $547 million of which $269 million or 49% was non-interest bearing. Since fiscal 2017 the chart demonstrates increasing levels of noninterest bearing percentages within our equipment inventory. The primary driver of this improvement is the reduced aging of our inventory, as a result of our ongoing life cycle management efforts, as more of our inventory remains under non-interest - under interest free terms from our suppliers. This improvement has been the primary reason for the reduction in our floorplan interest expense over the past few years. At this point, we believe we have hit our seasonal peak in our level of equipment inventory. We expect to reduce inventory throughout the next two quarters of the fiscal year which will result in significant cash generation. Slide 15 provides an overview of our cash flows from operating activities for the first six months of fiscal 2020. The GAAP reported cash flow used for operating activities for the period was $6.3 million. As part of our adjusted cash flow used for operating activities we include all equipment inventory financing, including non-manufacturer floorplan activity, our adjustments for non-manufacturer floorplan payables was $50 million for the first six months of fiscal 2020. We also adjust our cash flow to reflect a 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 717.4% during the six-month period ended July 31, 2019 and the adjustment for constant equity in equipment inventory represents a $93 million use of cash. The decrease in equity in our inventory is primarily due to the seasonal stocking of new equipment inventories in the first half of the fiscal year and higher level of floorplan financing available on such inventories, as well as borrowing more on our floorplan lines in connection with the repayment of our outstanding balance of our convertible notes which occurred on May 1. After all adjustments our adjusted cash flow used for operating activities was $49 million for the first six months ended July 31, 2019 compared to $36 million for the same period last year. As I just mentioned on the previous slide, we expect cash generation to begin in our fiscal third quarter as we be begin our seasonal destocking of equipment inventory and enter our most profitable quarter of the year. Slide 16 shows our updated fiscal 2020 annual modeling assumptions. We are updating our revenue modeling assumptions for Agriculture and International segments, but are maintaining our estimates for Construction at up 5% to 10%. Our updated Agriculture segment assumption is for growth of 2% to 7% versus our previous expectation of flat, primarily reflecting the relative strength we experienced during the first half of the year and despite the ongoing uncertainties remaining for the rest of the year. Our updated International segment assumption is also for growth of 2$ to 7% versus growth of 10$ to 15% previously reflecting the challenging environment we are facing in our international markets. While we are disappointed with the deceleration in growth within our International segment, our domestic business is performing well with profitable growth in our Ag segment and continued growth and improvement initiatives driving our Construction segment towards sustained profitability. Given these offsetting factors, we continue to expect adjusted diluted earnings per share to be in the range of $0.75 to $0.95 for fiscal 2020. Operator, we are now ready for the question-and-answer session of our call.

[Operator Instructions] Our first question is from Steve Dyer, Craig-Hallum. Please proceed with your question.

Thank you. Good morning, guys. So the strength in your Ag outlook going forward, I'm just kind of curious, obviously corn was well above $4 a bushel here for quite awhile or earlier this year. How much of the benefit you guys think you saw from that or is it just more that yields might not be as bad due to flooding as initially feared or, so what's driving that more optimistic outlook in Ag?

Hi Steve, this is Mark. The outlook, the change in the outlook that we had, really just implies about flattish results for the back half of the year. It's really just the increases because of that - in that range is because we are up 9% in the first half of the year. It's just with those factors that you mentioned, know these frost dates, trade war, commodity prices, all of the above, all those variables and uncertainties out there in the industry, we’re leaving the back half of the year at flat and that's implied in that range of the 2% to 7%.

Okay, got it. Service was really strong in the quarter, up 16% year-over-year. What drove that strength specifically, what are you seeing there?

Well, it's Dave, Steve. So if you remember, last fall there was a long dried out harbors and some role demanding conditions. Crops were being combined [ph] wind in December it was frozen muddy snowing conditions. These conditions are tough on equipment and we've been putting some good parts into services work into that equipment to getting ready for not only the spring planting but also the harvest season we're continuing – we're working on com lines. So as indicated by our parts and service growth in the first half of the year, that's been a good plus for that. I think to look at, there's going to be probably a little bit less acres harvest, because of the problem in plant and some of that drowned-out, but our equipments, our fleet continues to age more hours and we're seeing just a lot of demand in our service departments as this fleet continues to get more hours and age on it.

Okay. And then Dave, you've talked more recently about the M&A environment and your desire to sort of stoke that up again, balance sheet and inventories has come a long way. You guys are in a good spot. What's the thought there going forward given all the uncertainty with trade wars and everything?

Well, I think there's some really nice deal or potential acquisitions. Owners are, they're getting aged; looking for succession solution. And so I think we want to take this opportunity right now and I think there's some good opportunities out there and we're really seeing that pick up. So I am going to spend a lot of time on that and also I think that's - long-term to be able to get in some good markets with large industry potential is going to be good for Titan, long-term.

Got it. Okay, thanks guys.

Our next question is from Larry De Maria, William Blair. Please proceed with your question.

Thanks. Good morning, everybody. Just going back to the point of looking for a flattish second half, you guys also made the point that farmers had sold some and when obviously markets surged earlier this year, and that they're going to get MF-2 payments, payments et cetera. So why have - is there just a conservative outlook into the second half given the uncertainties or are we not expecting farmers to allocate them their cash off the taxes into the end of the year?

Well, I think, Larry, you really need to look at soybean prices right now. And I'd say with the current level of soybeans and they've been there for a while, they're probably losing money right now with these current prices. So it's going to be really difficult. It's a high percentage of our customers crops are soybeans in most of our markets, so that's really being hurt. So gradually [ph], yes, I think that was a real positive that late June or early July a lot of our growers emptied out their bins with all their carryover crop to be able to contract some of this year's crop, but I do think that's been offset somewhat by the soybean prices. And I think the biggest thing too is, there's going to be a big wait-and-see, so when is the first killing frost is going to hit and I think that's really weighing everybody right now and that's – so we really going to need to watch the weather through the month of September and that's going to make a big impact on yield, farmer income. It's kind of a make or break year this year. So I think there's a big wait-and-see not only with our growers but also with the Ag lenders out there.

Okay, guess, I understand. And as we start to think about into next year, correct me if I'm wrong, but you guys are already starting to take orders and build an order book for planters into next year? So I'm kind of curious how an initial look on orders of the seasonal stuff that maybe would give a hint about what's going to happen next year or are shaping out?

Yes, there's - even things are a little bit delayed this year. Yes, there's definitely porting [ph] going on, there is interest, all that activity for pre-sold business going into next year not only planters but also some of the high horsepower tractors and combines, all that stuff. But there again, I think a lot of the growers before they really pull the trigger on some of that, they're going to want to see what their yields are going to be this year, and if the crop reaches maturity.

Okay. So it's not really enough to tell you directionally what's going on, but the [indiscernible] stuff is and whatnot is fairly to the point?

The replacement of the band is real and with some of the technology and some of the productivity that's coming out right now, the customers, there's a big interest in the equipment out there. So, if fleet is getting aged and you need to get more hours on it, we've got a great planter with all the precision and stuff and some of the big planter bars. And people are excited. They just want to make sure that they're doing this hand-in-hand with their bankers and they know what their yields are and it fits their, basically their abilities to pay off the notes on those big equipment purchases.

Got you. And if I could ask one final question. Farm progress is weak and now DO [ph] is giving way JD link [ph] for free for the next five years with all the new large Ag equipment. So just curious about the uptake that you guys have seen with the farmers hedge and climate engagement now that you guys are offering that. Are you seeing real uptake from that or is it wait-and-see and how are farmers kind of reacting to some of the data management things that are out there right now?

Well, no, precision farming, those became mainstream with all our growers out there now. So there's a conversation about tractor combine or a planter that doesn't involve either precision or technology or digital, connectivity, all of the subjects. So case such as (ph) leading edge and technology out there right now, guidance systems for our tractors and combines, harvest combined [ph], it's a big combine feature. There's high speed precision planters with variable speed prescription capabilities, the industry leading the AFS Soil Command, which is real unique with the sensors are provided at even seabed. AIMS [ph] command and the raven hawk eye [ph] technology have the self-propelled sprayers. Our AFS Connect, all of that is providing that telematic connectivity. And then as you talked about the farmers edge, that's really an exciting offering, have the integrated digital platform for both their current and legacy equipment, you know that can bus functionality in the farmers edge, that's really attractive if you've got mixed fleet and legacy units, that'll make them all work. And you know, if you have farm progress too, you probably saw all the excitement on the introduction that AFS Connect Magnum tractor that flagship world crop tractor for Case IH, so yes that's definitely all this technology and the fact that case cited. So that's definitely - all this technology and the fact the replacement demand tied together, that's really driving the interests of our customers right now.

Okay, thank you. Good luck, guys.

Our next question is from Mig Dobre, Baird. Please proceed with your question.

Good morning, guys. David, I'm just looking for a little more perspective from you because there's so many cross currents here and I'm kind of wondering what you're hearing from your large farm customers. Like what's really driving purchase decisions and sentiment here? Is it that – is it commodity prices that they are focused on, is it these facilitation programs from the USDA, is it something else like technology? And I'm asking that because, I mean obviously, you're talking about higher commodity prices earlier in the summer, that situation changed pretty dramatically with the recent WASDE report. So I'm trying to understand if essentially we need to prepare ourselves for sort of a different environment going forward or if there are other factors here that might be supporting demand? Thanks.

Well, I think the main factor is basically the customer’s needs moderate up-to-date reliable equipment right? And if they look at their cost probably of the equipment, they are going to find that they need to trade their equipment in three years cycles, maybe it’s a five-year cycle. We continue to be in a low interest rate environment. I think that's going to continue. We've been seeing good yield trends, but also the tax aspect of it. And we talked a little bit earlier about there was some pretty significant amounts of commodities I believe sold in late June or early July could potentially trigger some tax volumes that's going to lead it from them. So I think it's a combination of taxes and that the machinery and all that they need on their farm to get the job done. So these Market Facilitation Programs I think is going to be a shot at the arm, but it’s not that big in the whole scheme of things. So, I guess, we’re going to probably put them in order, its taxes, it’s the technology out there and what that's going to do for productivity and yield increases and all the commodity prices are going to weigh in and there is a little more bounce in all of our growers steps back in June/July when that corn was in that $4 range. The new technology and then definitely it’s a replacement demand. So I think there's a lot anticipation for the August 12th WASDE report out there and because I think many of our growers thought that the July USDA report did not reflect the total impact of preventive plant acres, the drowned out acres and the loss of yield potential from the late planting of crops. Not to mention the difficulty of forecasting yields with the potential of crops not reaching maturity to normal or early frost date. So I don’t if you are aware of that Mig, but last week Pro Farmer finished their Annual Farm Tour and they reported that last Friday, the results of their tour and they toured the states of Ohio, Indiana, Illinois, Iowa, Nebraska, Minnesota and South Dakota. So in their analysis when it all got said and done they picked that U.S. corn production issued at an average of like it was 13.35 bushels in all and that’s compared to that 30.9 million bushels the USDA did back on that August 12th report. And that reflects – the national current average of 163.3 bushels per acre compared to that 169 that USA did. So that's a pretty big difference and will that or will not impact prices once guys get into the harvest, but I think that's a big question out there. So there's a lot of time it has to heat up here between – now in 1st of October, but I think a lot of our growers are looking for no frost until October 1, and ideally between 10th and 15th of October will be better. So we're really going to need to watch those weather dates and that's what a lot of our growers are doing. So, like you say, there are a lot of variables out there, a lot of moving pieces, but it's going to be about pricing and their ability to make the profit on the farm and that's really going to be driven by some of these actual production numbers and global supplies and our ability to export ethanol use, so just so a lot of variables out there. So hope I covered most of them for you.

No that was great color, and I would agree with you that healthy skepticism ought to be had at this point on that recent WASDE report. But as far as your outlook is concerned what I'm trying to understand here is, do you feel that given what’s happened with prices earlier in the year and the marketing that farmers might have done, do you have enough visibility in this flattish back half outlook or does your outlook embed some kind of recovery in commodity prices or other factors that we need to be aware of?

I think we’re thinking that we don’t see anything that’s really going to drive soybean prices a lot higher right now or at least in the near-term I mean. So we’re not factoring that in. I think we did factor a little bit that hey there was a pretty good job shot in the arm – when corn got above $4 for a pretty good period of time they allowed not only selling the carryover crop plus also they locked in some of this year's crop. We did take that into consideration. We have to remember to is – we’re going out some really low industry numbers. So and look at the last four years, I mean this is like it has been wonderful out there. So to hit those industry numbers they could have been use to, I mean that’s not going to take a lot. So we think if those industry numbers based on some of the marketing activities that happened earlier in the year, all the continued yield trends. So barring, I guess we did not figure in –really early frost and but some type of normal the later frost is which we’ve been getting in the last few years. I think we feel really good about our numbers, but like I say we’re coming out of some really low industry numbers in the last two, three years and that's kind of what we’re basing it all out from.

Okay, a couple more questions from me. I want talk a little bit about SG&A, it came in a little higher than we expected and I remember I think Mark mentioning that you guys were thinking SG&A would be relatively flattish sequentially Q2 versus Q1. So I'm wondering what the moving pieces were in a quarter if there were any inefficiencies related to ERP or anything else we need to be aware of and how do you think about SG&A for the full year?

Yes, so I kind of mentioned some of the reasons or some of the items that affected the ERP for the quarter was higher this quarter than last quarter, but it's just kind of ramping up. There is nothing new expected there. There is about $1.7 million in the number. For that again as a reminder AGRAM was in - this year was not in. Last year in the second quarter we started seeing apples-to-apples in that third quarter. As far as, so we did say flat or I did mention relatively flat Q1/Q2 if you just look at the adjusted expenses, so that's excluding the ERP costs. It was about 52 million in the first quarter, 53 million here in the second quarter and just over 53 million in the second quarter. So it did come up a little bit, but I guess not to terribly bad. As we look forward, and this is where I indicated before there will be a rise sequentially here in third, fourth quarter just because of the higher level of activity and some of the seasonality that those quarters see. Call it a couple, $2 million to $3 million higher in those quarters, and if you look back it won't be as much of – and I am talking on an adjusted expense basis excluding those ERP items. But then if you look back to last year you won't see as much of a growth because you have AGRAM now in the prior year quarters.

Got it, understood, lastly on inventory, you are talking about bringing that number down in the back half seasonally, that makes sense. I guess in your plan how do you contemplate exiting fiscal 2020 from an inventory standpoint? Maybe you can give us perspective year-over-year say exiting fiscal 2020 versus exiting fiscal 2019 that will be really helpful? Thank you.

Yeah so I mentioned yeah we have hit our seasonal peak though we believe it was the best seasonal peak here at around $550 million. I think pulling that down we could take it down a good $100 million, $125 million and that would probably take us a little bit above last year and around $420 million last year. So of course this is excluding any acquisitions that may happen. So I think a little bit up maybe from last year, but down a good $100 million, $125 million from here. And maybe just a comment, the inventory here again especially domestically is very good. You can see that – some of that non-interest bearing inventory percentages with the lower expectations on international from a sales standpoint. We’re going to be monitoring those inventories closely as we adjust to those lower levels of revenue, but for the most part overall we’re sitting fine with inventory and yes expected to come down of course but it will probably a little bit more than where we ended the year last year.

Excellent, thank you guys

Our final question is from Rick Nelson with Stephens. Please proceed with your question.

Hey guys Nick [indiscernible] on for Rick here. I’ll focus on the International segment. I know this segment typically fluctuates quarter-to-quarter and you had a strong positive comp in the first quarter followed up with the negative comp in the second. But can you just – can you talk through the back half of the year from an International perspective, any tailwind you might see and I know you listed quite a few headwinds but we talk about how you expect those to persist going through the back half of the year?

Yes, so I think as we look in the back half of the year maybe just a little bit talking about the first half of the year and Dave mentioned some of this. But from a market standpoint Romania – had some very tough comps, Ukraine had some tough comps to last year that’s what drove some of that higher sales growth that same-store sales growth that you referred to in Q2 in particular. But those are two markets that we do expect both of those to moderate some going forward and Romania there was the weather that was impacting the small grains crop. The results of the no subvention funds we don’t see that changing so that headwind will be there. But the weather was more conducive to some of the low crops over there and some of the fall harvesting. So we do expect some of those headwinds to alleviate somewhat in Romania. And Ukraine just kind of had a slower start to the year and we do expect some improvement there as we move into the back half of the year. Germany it’s – was accretive last year we expected to be accretive this year, but it is starting out slow as well and not hitting its stride yet. Germany, I think just a little longer. We get passed the integration bringing them on. The better it is and the further we get away from some of those of poor drought conditions that we had at the end of last year that still affecting some of our customers ability or desire to purchase equipment this year. So the further we get away from that have some reasonable weather over there that will help that. That being said it's a difficult market I think for anybody to predict it is for us over there. And with the assumptions that we have out there with that 2% to 7% from a same-store sales standpoint it is relatively flat at this point for the back half of the year. Given some of these upticks here we expect to hit that. And we did have some particular good third quarter last year that will be hard to match, but we do expect some seasonal uptick here in Q3 versus what we just saw in Q2. So hopefully that helps some.

Sure I understand and then I guess taking that into consideration and the inventory positioning that you mentioned from an international perspective full year equipment margins on a consolidated basis. Do we still think that 11% is attainable or any fluctuations from potentially hitting that target?

Yes, I think the 11% at this point is going to be tough given that we’re at about that year-to-date so far and 10.9 year-to-date in Q4 is generally a softer quarter. I do think fourth quarter is the quarter where we have opportunity to do better than last year. But I think all of that said and done I think we’ll probably end up somewhere in between where we end up last year at that 10.6 and that kind of 11% long-term, you know longer-term target if you will. So it's more likely we won't hit 11% but somewhere in between where we ended up last year in that 11%.

Great thank you very much very helpful guys.

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

Okay, thank you everybody for being on the call today and thanks for your interest in Titan Machinery and we look forward to update you on our progress on our next call. So have a good day everyone.

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