Titan Machinery Inc. (TITN) Q3 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Titan Machinery Inc's Fiscal Third Quarter 2020 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, Manager Partner at ICR. You may begin.

Great, thank you, Darrel. Good morning ladies and gentlemen and welcome to the Titan Machinery third 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 third quarter ended October 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, and the presentation is available directly below the webcast information in the middle of the page. You'll see on Slide two 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 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. And 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 third 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 third quarter of fiscal 2020 and conclude by reviewing our updated modeling assumptions for fiscal 2020. If you turn to Slide three, you will see an overview of our third quarter financial results. Our third quarter revenue was $361 million with adjusted pretax income of $14.5 million and adjusted earnings per diluted share of $0.44, which is $1.6 million improvement over the prior year period. Prior to getting into the more detailed discussion of our segment performance, I wanted to share a few high-level comments. First, for the third quarter in a row, we experienced another solid quarter of growth in our important parts and service business. This growth was led by our domestic agricultural segment which also performed well on equipment sales and a challenging environment. Second, we're happy to announce the October 1st closing of the acquisition of the Uglem-Ness, Case IH dealership located in Northwood, North Dakota. The Northwood dealership is contiguous to our existing stores in the Northern Red River Valley and has a legacy of strong sales of high-horsepower equipment backed by superior parts and service support for their customers. In addition to this acquisition, we have seen that M&A pipeline for domestic farm equipment dealerships start to heat up. We're engaged in discussions with owners of quality in North American ag dealerships. I expect these efforts to yield additional acquisition opportunities. Finally, while we had a profitable third quarter in our international segment on reduced revenues, the financial performance overseas did not meet our expectations which I will discuss in greater detail in a few minutes. 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 four, is an overview of our domestic agricultural segment. To say the least, 2019 has been a very challenging year for our farmer customers. Spring planning was abnormally late followed by a cool wet summer continuing with late-season rain and snowstorms, saturated fields and a wet harvest. Fortunately, the delayed killing frost states in our footprint allowed crops to reach reasonable levels of maturity and respectable yields. But September and October rain and snow have delayed harvest and have created some very difficult harvest conditions. The corn has being combined at high moisture levels requiring drying. There are serious propane shortages in the Upper Midwest which is causing further harvesting delays as this year's crop needs to be dried and propane is the main fuel used by - on the farm grain dryers. While there are pockets of [prevented] [ph] plant and drowned-out crops, the yield reports for the fields at reached maturity has been good with our highest yields coming from growers in Iowa followed by Nebraska. We anticipate the completion of the corn harvest in Minnesota, North Dakota and South Dakota to extend into Q1 of calendar 2020 due to the extreme conditions, propane shortages and the high-corn moisture levels. Farmer sentiment has being impacted by late harvest, along with the uncertainty with trade issues and its effect on exports and commodity prices. The USDA market facilitation payments have been a shot in arm for our customers. In addition, some of growers took advantage of the spike in commodity prices in June and July by selling carryover crops, locking in at good prices on this year's crop. As the age and hours of the farmer equipment fleets continue to increase, we believe that replacement demand along with farmer's desire for upgrades in technology and equipment performance and year-end tax buying will support our new and used equipment revenues. As I noted above, we have three consecutive strong quarters in [domestic] [ph] parts and service fueled by the ag segment. We anticipate continued growth in our aftermarket parts and service business due to the aging of our customer's equipment fleet along with parts and service needs associated with tough harvest and field conditions. Turning to slide five, you'll see an overview of our domestic construction segment. The strong economy continues to positively impact the construction equipment industry, continued stable oil prices is creating 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're seeing stronger demand in the metro areas, the overall construction equipment markets continue to be negatively impacted by the depressed farm commodity prices since farmer customers represent an important outlet for our construction equipment. Our fleet rental business continues to improve supporting our CE bottom line. The operational improvements we have implemented in our construction stores are producing positive results. Although there are some industry comments that the CE equipment industry is softening, we believe the mid-range product segment that we focus on will continue to be healthy and we're confident in our full-year modeling assumptions that construction revenue will be up 5% to 10%. On Slide six, we have an overview of our International segment including our markets within the countries of Bulgaria, Germany, Romania, Serbia and Ukraine. This is our third year in a row of our International segment is producing positive contributions to our bottom line. However both Q2 and Q3 of our current fiscal year have performed behind the prior year second and third quarters. All our Q3 year-over-year variances and improvement over the Q2 year-over-year variance, we have updated full-year revenue modeling assumptions to be flat for international segment compared to our prior-year guidance that assumed being up within the range of 2% to 7%. Yields of late season crops are average to above average across most of our international footprint but softening global commodity prices are impacting customer sentiment. Calendar 2020 will be the final year of the five-year European Union Subvention Fund program. This program is administered by the participating EU countries which includes our markets of Romania and Bulgaria. Romania used all of its funds in the first three years of the program and was without funds in calendar 2019. Bulgaria has unused funds, which has causing Bulgarian farmers to speculate that the unused funds will become available in calendar 2020 the last year of the program, which is creating a wait-and-see situation on equipment purchases. With approximately 30% of the world's black soil in the Ukraine, we look at doing business in this country as a long-term opportunity. The sale of farmland is currently forbidden in the Ukraine. President, Zelensky is actively promoting land market reform and has pledged to lift the long-standing ban on the sale of farmland. We believe that land market reform would be a boost to our business and has the potential of injecting billions of dollars of capital into the Ukrainian economy providing an improved credit environment for the financing of farmer purchases. We expect improved returns in this upcoming year from our German dealership based on continuous improvement initiatives particularly in our parts and service businesses we have in place for these stores. Align with our strategy of growing the aftermarket parts and service business in our international segment, parts and service revenue grew year-over-year in the third quarter. We continued to invest in people and processes as we work to improve operations in these developing markets in Eastern Europe, Ukraine and the Black Sea region. Before I turn the call over to Mark, I want to thank our employees for their efforts and supporting our customers during this very critical fall season. It's a privilege to work with such a great team. So with that, I'll turn the call over to Mark to review the financial results in more detail.

Thanks David. Turning to slide seven, we generated total revenue of $361 million for the fiscal 2020 third quarter, which is flat compared to last year. We experienced modest revenue growth in our agriculture and construction segments, which was offset by a decline in our International segment revenue. Our higher margin parts and service businesses performed very well during the third quarter, increasing 9.6% and 11.3% respectively. We were able to drive parts and service growth in each of our three segments in this seasonally strong quarter reflecting our increased focus in these areas, a difficult harvest environment and a customer fleet that is continuing to age. As David noted our equipment business within our agriculture and International segments continues to be impacted by ongoing macroeconomic uncertainty and challenging weather conditions in certain areas of our markets. Equipment revenue decreased 3.1% in the quarter versus the prior-year period. Rental and other revenue was down 6.2% primarily due to lower inventory rentals, but offset by increased dollar utilization of our rental fleet. The dollar utilization of our construction segment rental fleet improved 160 basis points to 30.4% for the current quarter compared to 28.8% in the same period last year. The higher utilization of the fleet positively impacts revenue, but also the incremental revenue helped enhanced margins by 460 basis points in the rental and other category. As fixed depreciation costs have been covered and therefore more revenue contributes to bottom-line performance. On slide eight, our gross profit of $72 million for the quarter was an increase of 3.3% compared to the same period last year, primarily driven by the change in revenue mix towards our higher-margin parts and service businesses. This is apparent in our gross profit margin, which increased by 60 basis points to 19.9% versus the prior year period. Our operating expenses increased by $4.9 million to $58 million for the third quarter of fiscal 2020. The increase was primarily the result of $2.1 million of ERP transition costs incurred in the quarter and higher costs associated with the increased business in our agriculture and construction segments, including one month of additional costs associated with the operation of our newly acquired Northwood store. These higher expenses combined with lower equipment sales particularly in our International segment negatively affected our ability to leverage our fixed operating costs. As a result our operating expenses as a percentage of revenue increased from 14.8% in the third quarter last year to 16.1% in the third quarter of fiscal 2020.Excluding the ERP transition costs in the third quarter of fiscal 2020, the increase in operating expenses was $2.8 million or 5.3% versus the prior-year period. Floorplan and other interest expense decreased 31.4% to $2.4 million in the third quarter of fiscal 2020 compared to $3.5 million in the same quarter last year. Most of the decrease was due to the lower interest expense resulting from the May 1, 2019 retirement of the remaining balance of our convertible notes along with the decrease in our level of interest-bearing inventory in the third quarter of fiscal 2020 compared to the same quarter last year. In the third quarter of fiscal 2020, our adjusted net income increased 9.2% to $9.9 million compared to $10.9 million in the prior year. Our adjusted earnings per diluted share for the quarter was $0.44 compared to $0.49 in the third quarter of last year. Our quarter-over-quarter adjusted net income and EPS were negatively impacted by a higher effective tax rate of 33.8% in the current year, which was 18.2 percentage points higher than the comparable quarter in the prior year representing about an $0.11 impact on our adjusted EPS comparison. Our current year third quarter was higher due to foreign currency gains that created the higher taxable income than book income in our Ukraine business. These foreign currency gains caused our effective tax rate to increase by approximately seven percentage points, which negatively impacted our adjusted diluted EPS by $0.04 for the current quarter. With the assumption of the Ukrainian currency remains relatively stable for the remainder of our fiscal year, we would now expect a full-year effective tax rate of approximately 33%. This rate can move for a variety of reasons such as the Ukrainian currency impact I just described, as well as changes in profit and loss mix between our various tax jurisdictions as well as adjustments and valuation allowances on our deferred tax assets including net operating loss carryforwards among other items. For the third quarter of fiscal 2020 adjusted EBITDA was $21.8 million compared to $21 million in the third quarter of last year. You can find a reconciliation of adjusted net income, EPS and EBITDA to their most directly comparable GAAP amounts in the appendix to the slide presentation. On slide nine, you'll see an overview of our segment results for the third quarter of fiscal 2020. Agriculture revenues were $214 million, an increase of 2.1%. The revenue increase was the result of strong double-digit growth in parts and service revenue. Higher mix of parts and service revenue drove a 4% increase in adjusted pre-tax income to $10.3 million for the quarter, compared to $9.9 million in the prior-year period. As a reminder, on October 1, the company closed on its acquisition of Uglem-Ness Company which consists of one CaseIH agriculture dealership locations in Northwood, North Dakota. And it's most recent fiscal year Northwood generated revenue of approximately $25 million. We expect the acquisition to be accretive to earnings within a year. Turning to our construction segment; revenue increased 1.3% to $78 million compared to the prior-year period. Revenue results were similarly driven by solid parts and service growth. The segment's adjusted pretax income decreased to $400,000 in the current quarter due to higher operating expenses and increased floorplan and other interest expense. This bottom line performance was below expectations and will likely fall short of achieving profitability in fiscal year 2020. However, we are optimistic about future improvement in this segment, as we build off of the initiatives we have focused on over the past few years, which we believe will help us achieve sustained future profitability in this segment. In the third quarter of fiscal 2020, our International segment revenue was $69 million, a decrease of 7.3% compared to the same quarter last year. The decline was primarily the result of lower equipment revenue resulting from the industry conditions, David discussed earlier. The lower equipment revenues negatively impacted income before income taxes causing a decrease of $500,000 compared to the prior year third quarter. Turning to Slide ten; you'll see our first nine month results. Total revenue increased to 5.8% compared to the same period last year. For the first nine months of the 2020 fiscal year, equipment sales increased 4.7%, parts increased 9%, service revenue increased 13.5% and revenue and other revenue decreased 2.4%. Turning to Slide 11. Our gross profit for the first nine months was $190 million, a 7.8% increase compared to the same period last year. Our gross profit margin increased by 40 basis points year-over-year to 19.9% for the first nine months of fiscal 2020. Higher gross profit margin was a result of a changing mix with a greater percentage of revenue generated by our higher margin parts and service businesses, as well as improved rental and other gross profit margin due to our year-to-date dollar utilization of our rental fleet which improved 150 basis points to 25.5%. Our operating expenses increased by $17.9 million or 12.1% for the first nine months of fiscal 2020 to $166 million. In addition to the reasons I discussed for the third quarter expense increase in expenses, we also incurred increased operating expenses in the first six months of fiscal 2020 relative to the prior year six-month period due to our German acquisition early in the third quarter of fiscal 2019. Floorplan and other interest expense decreased $3.8 million or 34.2% to $7.3 million in the first nine months of fiscal 2020, largely due to the interest expense savings resulting from the repayment retirement of our senior convertible notes. Decrease in our interest-bearing inventory in the first nine months of fiscal 2020 as compared to the same period last year also contributed to the lower level of interest expense. Our adjusted diluted earnings-per-share was $0.77 for the first nine months of fiscal 2020 million compared to $0.71 in the prior-year period. Our effective tax rate was 31.3% for the current nine-month period, compared to 22% for the comparable prior-year period. On Slide 12, we provide our segment overview for the nine-month period. Overall, our adjusted pre-tax income increased 22.1% to $24.3 million for the first nine months of fiscal 2020, compared to $19.9 million in the same period last year. This improvement is primarily the result of higher parts and service revenues across all three segments and lower overall floorplan and other interest expenses. These results were partially offset by higher overall operating expenses, as well as a reduced contribution from our International segment. On Slide 13, we provide an overview of our balance sheet highlights at the end of the third quarter of fiscal 2020. We had cash of $52 million as of October 31, 2019. Our equipment inventory at the end of the third quarter was $544 million, an increase of $127 million from January 31, 2019 reflecting $160 million increase in new equipment partially offset by a $33 million decrease in used equipment. Equipment inventory turns were 1.7 versus 1.8 in the prior-year period. I will provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the third quarter increased to $115 million compared to $111 million at the end of fiscal 2019. We still anticipate decreasing our fleet size to around $110 million by the end of the current fiscal year. As of October 31, 2019 we had $446 million of outstanding floorplan payables on $660 million of total floorplan lines of credit. Subsequent to the end of our quarter, we increased our floorplan line with our primary supplier by $50 million, resulting in current floorplan lines of credit totaling $710 million which has ample capacity to handle our equipment finance needs. Our total liability to tangible net worth ratio is a healthy 2.1. As a reminder this ratio was impacted by the adoption of the new lease accounting standard, which went into place in the first quarter of this year and will continue to influence the year-over-year comparisons for the balance of fiscal 2020. Importantly, the ratio of 2.1 is well below 3.5, which is the leverage covenant requirement of our larger bank facilities. We expect this ratio to strengthen as our equipment inventory levels and associated floorplan payables decreased in the fourth quarter. Turning to slide 14. The amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide. Third quarter amounts include approximately $11 million of equipment inventory associated with the October 1st acquisition of our Northwood location. Although down sequentially and including the acquired store inventory, our current level of inventory is higher than we had planned primarily due to higher levels of equipment purchases, as well as lower international equipment sales. We now anticipate an ending inventory for fiscal 2020 around $485 million excluding additional acquisitions. This represents about a $60 million reduction in our equipment inventory from current levels. Although inventory levels are elevated, the quality of our inventory remains healthy as evidenced by good equipment margins and a high percentage of non-interest bearing inventory which is reflected in the black line on the graph. The primary driver of the improvement in this metric is the reduced aging of our inventory as a result of our ongoing lifecycle management efforts, as more of our inventory remains under interest-free terms with our suppliers. This improvement has been the primary reason for a reduction in floorplan interest expense over the past few years. Slide 15 provides an overview of our cash flows from operating activities for the first nine months of fiscal 2020. The GAAP reported cash flow used for operating activities for the period was $8.3 million. As part of our adjusted cash flow used for operating activities, we include all equipment inventory financing including non-manufacturer floorplan activity. Our adjustment for non-manufacturer floorplan payables was $62 million for the first nine 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 18% as of October 31, 2019, and the adjustment for constant equity and equipment inventory represents an $89 million use of cash. The decrease any equity in our inventory is primarily due to the stocking of new equipment inventories in the first nine months of the fiscal year and the higher level of floorplan financing available on such inventories, as well as borrowing more on our floorplan lines in connection with the repayment of the outstanding balance of our convertible notes, which occurred on May 1, 2019. After all adjustments, our adjusted cash flow used for operating activities was $35 million for the nine-month period ended October 31, 2019, compared to $2 million of adjusted cash flow provided by operating activities for the same period last year. Cash-generation is down due to the higher levels of equipment inventories compared to the prior year. We expect to generate significant cash in the fourth quarter as we anticipate a substantial reduction in our equipment inventory levels. Slide 16 shows our updated fiscal 2020 annual modeling assumptions. We are maintaining our revenue modeling assumptions for our agriculture and construction segments, but are reducing our international revenue modeling assumption from up to 7% to flat. We're also tightening our diluted EPS assumptions to the lower half of our prior expected range to reflect the challenges within our International segment, as well as an expected higher consolidated effective tax rate of approximately 33% that I discussed earlier. Although our International business underperformed to our expectations, our Ag business which is our largest segment continues to perform well in difficult market conditions. Despite lower current quarter profitability in our construction segment, we're pleased with the broader internal improvements we are seeing within this segment as we drive towards sustained future profitability. Operator, we're now ready for the question and answer session of the call.

Thank you. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Steve Dyer of Craig-Hallum. Please proceed with your question.

Thanks good morning guys. Just was hoping you could talk a little bit more about sort of the acquisition strategy going forward. It was [indiscernible] lot of it a number of years ago and then there were some rationalization. Are you thinking maybe what's different this time? Are you thinking there's different regions? Is it going to be primarily ag-related? Maybe what's pricing that guys are asking? What's the lay of the land there going forward?

Well, like I – Steve, good morning and like I said on the call here is that there's a lot of interest. It's all – it's heating up. There's a lot of dealer principals looking for a succession solution out there. So we're fully engaged with that. And I guess what we're really focused on right now is this North America production agriculture areas, quality Case IH dealerships is our preference right now for doing acquisitions. So there's a good pipeline. I think what you're seeing from a lot of dealers, it's an [age] [ph] dealer principal owner group. There's an increased demands from the OEM. There's requirement on the capital side of the business, the fleets out there, the sophistications taken to support these, in many cases lack of succession, driving a lot of these acquisitions. So, like we said in our comments we hope to have some future announcements based on all of our efforts we're doing and working on a lot of this potential. And I guess its -- we like this Upper Midwest area production agriculture. And we understand that we've got a lot of experience in and contiguous to our existing footprint is also a deal.

Got it. Okay. And then just what are you hearing from growers sort of into the end of the year here just around tax purpose buying of equipment is that, do you expect -- do you expect some of that this year or is it more a little bit sitting on their hands given some of the spotty harvest and some of the trade stuff?

Growers, they're really focus, I mean they've got a really tough grind in the harvest here, so they're really trying to focus on. There's still some beans out there and there's quite a bit of corn and they really -- they want to get some volatility done if at all possible. So they're really focused on that. There was some good selling of carryover crop done in late June, early July, actually with some pretty decent commodity prices. So, there is some crops sold on that and wholesale farmers are on a cash accounting system. So I think there will be some purchasing based on the ones that are not only able to sell carryover crop but also lock in some of this year's crop with so some better prices That, in addition to the payments from the market facilitation program, that's going to be taxable income. So to combine that I expect some tax buying. I think -- but overall I think the lot of growers are probably seeing better yields than what they probably were expecting back in late July, early August. So the main thing is get the crop off, but I do think there will be some tax buying yet this year.

Got it. Okay, All right thanks.

Our next question comes from the line of Mig Dobre of Robert W. Baird & Co. Please proceed with your question.

Good morning guys.

Good morning, Mig.

I've got several questions here, but maybe starting with where you just left off. I guess I understand the potential for tax buying in the fourth quarter, all of that makes sense. But knowing what we know today how should investors think about your fiscal 2021 calendar 2020, and I'm asking about the North American, the U.S. Ag business specifically. Can we see growth next year based on what's currently going on in the farm space? Or should our expectations be a little more modest than that?

Well, first of all, Mig, we're working off of some pretty low comps and pretty low industry numbers at these levels. So we saw some positive things out there. I think as you look at these long-term yield trends even this year I mean its difficult things were -- some pretty respectable yields out there. So year-after-year with the seed genetics and some of the farming practices and some of the farm decisions out there, the tillage practices and all these guys -- some of the precision out there, these guys are year-after-year just putting up some better yields. So, I think long-term I think that's something that we can all be excited about, but I think we have to straighten out some of these trade issues. We have to get some decent prices up there. It will be great [indiscernible] got passed. I think -- this replacement demand is not going away, every year the equipment, the fleets are getting more hours on them, more age on them and so we've got the replacement demand and I guess for the growers that don't trade, I mean, as you get that kind of hours and the duty cycle that parts and service is really evidenced by – look at this last year, and I think a lot of is driven by the age and hours and some of these really tough conditions, field conditions and harvest conditions our growers have been going through is driving that part of the business. So I think definitely that's -- I think that's key to some of our strategies is an aftermarket business.

Well, right. I mean, on parts and service, I guess what I'm wondering is how much of this is an older fleet versus some unusual things would whether that might have driven parts and service which I guess in essence could establish some tough comps for you as we look forward?

I'd say both, Mig. I'd say as difficult as last year's harvest was I think the general consensus of most, of course, is this one is not only much more widespread, but I'd say, even more difficult than last year. Even a lot of our very best farmers out today where a year-ago would've had all their corn combined, today they still have corn out on the field. So I'd say, as you look into next year, I don't see any pullback on that parts and service business based on what we're seeing.

Got it. Okay. And in terms of equipment orders that you guys might be taking in now for delivery into fiscal 2021, I guess I'm just wondering how that's trending versus your expectation or versus say last year at this time?

I'd say maybe on that, we're consistent with last year. Let's say, had slight improvement of where we've got that. I guess we'll call it pre-sell on that order book for retailers to be delivered in the next year.

So slight improvement. Okay. Then, I want to ask a couple of margin questions. If I look at your equipment gross margin, 10.8% in a quarter ticked down a bit sequentially was a little different frankly in the way we model. But I guess I'm wondering here, how should we think about the fourth quarter versus the third? And was there anything unusual from a mix standpoint that might have impacted the third quarter?

Yes. From the margin -- from equipment margin standpoint, one of the things that affected us was the tougher conditions in international this quarter that did have an impact that probably made up a good chunk of that sequential reduction and kind of the quarter-over-quarter where last year was at about that [11.1] [ph] in the third quarter. In regards to the fourth quarter, the fourth quarter is typically when we have -- when we have some of these tax buying decisions, these tend to be some larger deals that tend to have a little bit thinner margins to them at the end of the year. I do -- we do anticipate that it's going to be a little better than last year. And not down to the level that we achieved in fourth quarter last year, but certainly sequentially down from what we just saw here in our third quarter, so all of that kind of leads to a similar to maybe a slight improvement in full-year equipment margins compared to the prior year.

Okay. That's very helpful. And in terms of either used equipment pricing or maybe some of the things that you have to do to move new equipment, I guess the question is the pricing environment getting tougher? Or would you say it's sort of pretty much what you've seen thus far this year?

I would say what we saw in the third quarter was tougher on the International side, where International was a stronger headwind than what we saw earlier in the year. And similar expectations are similar on the new ag side. So we saw some of that pressure throughout the first, second quarter, that continued into the third quarter this year. Used still looks good.

Got it. Couple of more and then I'm done. One on the acquisition itself, I guess I'm looking to clarify something here. You said accretive within a year, I heard you on the call that to me implies that it's not accretive in the near-term. And maybe, Mark, you can remind me here. Do you have like an inventory step-up or something of the sort that is impacting your financials in the near-term? It's been a while since you've done one of these larger acquisitions.

So to your first question, yes, we typically talk about the first year of operations because there can be some level of disruption or whatever as we get into the first months of an acquisition with the implementation or the integration and that type of thing. We've actually got -- this is modeled to be accretive day one. I think the other thing to remember is we are getting into a -- when you get into the fourth quarter and first quarter those are the seasonally low periods where there isn't near as much parts and services there is in that second and third quarter. So, we like to talk about it in the full-year that way the timing of the acquisition that really doesn't play a part in kind of that -- the outlook for that particular store when we're talking about that acquisition. So this was a good acquisition. I think from a revenue standpoint that's actually about 25 million. It's about twice the size of our average store out there which makes for good metrics at a well-run store.

No. But sure, I'm just looking to clarify if you have some deal specific or whatnot costs early on that we need to sort of be aware of in factoring to our model?

No, nothing to that regard. And I think your second question was I think was unlike inventory levels related to the new acquisition.

No. Inventory step-up – the inventory step-up I was asking about if you have one of those before you're acquiring?

Yes. So the inventory we acquired is in our numbers right away. We purchased between the manufacturer and dealership. It's all onboard and it's -- the impact was about 11 million to us here in October.

So it was an asset deal and not a stock deal. So basically would've been the purchase accounting at the price we paid for the inventory, there wouldn't be – if that's -- you're referring to that.

I was referring to exactly that. Thank you for the clarification.\\

Okay.

And then last question is on the other segments. The rental business, you commented on the gross margin improvement as your depreciation related expenses are coming down. So I guess what I'm wondering about is given the way you're thinking about the fleet into year-end, right? If in fiscal 2021 we just have flat rental revenues what would gross margins look like for this business?

With flat rental revenues on a similar size fleet, the margins would stay the same if the mix stays the same. So the other component that you are seeing in that line is those inventory rentals. But if all else is equal or the mix is equal, utilization is the same, the margin should be the same as well.

Okay. That's it for me. Thank you so much.

[Operator Instructions] Our next question comes from the line of Larry De Maria of William Blair. Please proceed with your question.

Thanks. Good morning everybody. Two questions. First, obviously you guys noted you have a pretty good pipeline for I guess CaseIH dealers in North America. And you noted principally it's mostly it's a principal dealers that it looks pretty succession. Just curious, is there any stress in distribution channel given what's going on this year and over the last few years. Just curious if some of the opportunities are arising because of maybe some financial stress?

Yes. I think, I don't know if you want to call it stress, but I think the capital needs are going to start increasing and some of these dealer groups say, they expanded from say, three stores to six stores. Your capital needs are exponentially increase as you bring in trade-ins and knew that much more inventory out of the stores, the reconditioning, the people, the shop tools equipment. So, yes, I think potentially there could be some capital needs. And I think most of the dealerships are in pretty good shape, but it takes a lot of capital to t run these things. So I wouldn't say that you might be looking at our problem dealerships, but other than the fact that say, hey the age of the dealer principal, a lot of work of sophistication and say, all of sudden, now they're looking at higher levels of credit, more exposure and more personal guarantees, some of those type of things is going to drive them and make them say, hey, maybe it's time that you sort of spending our winters in Arizona and Florida and things like that.

Okay. That makes sense. And as it relates to MFP payments, just update us on the timing of when farmers received it? And if that is directly translating into orders or it's more on the comp. I'm just curious how that's flowing, if it's more discussions or guys -- people are receiving the checks and going out to spend it?

They received the first tranche of this stuff. So it basically about 50% of their allocation that they would have received that probably back in that September and October timeframe. Okay. Now the second tranche has been released, and its that -- they should receive that payment if they haven't already pretty quick here. I think I heard and talked about even yesterday some of those showed up in the mail yesterday. So they shouldn't -- those should be before the end of the year than as far as – and that would be about 25% of the allocated amount then fourth --or that third payment would be the last 25% payment, that hasn't been 100% operator approved yet. I think they are still waiting to see what post-harvest soybean prices end up being and stuff. And I'd say it's a shot in the arm. I guess it's one of these safety net things. But I would say standing by itself that's not going to tend to make people go and buy a whole bunch of equipment. I think it's helped us support some of these depressed soybean prices predominantly and little bit overshot armed to get those back up this. Maybe some levels of profitability for the people who raise a lot of soybeans.

Got you. And as it relates to Ukraine, I guess, I wasn't expecting to hear Zelensky on this call. But can you give us maybe a little bit further color on the timing of these reforms. That sounds like they are pretty optimistic for that market and how material that might be for obviously Ukraine equipment market?

Well, yes, we've been hearing on and off discussions over ever since we've gone there to Ukraine. The fact that growers are -- they don't own the land and the landowners are forbidden to sell it. And then that becomes difficult to who's – financing, so that's non-existence. So you can imagine right now if the farmers in the United States weren't allowed to use land as part of their balance sheet, part of their security for their operating noise and stuff. So if you go and read about the land reform in Ukraine, well, there's just a lot of discussion on it. There's a lot of interest in that like people say, Ukraine doesn't need aid. They just have a tremendous amount of this black soil, [Indiscernible] soil. They've got more of it than any other country in the world right now. And that's some soil it's really high in humorous, phosphoric acid, phosphorus ammonia and it's just really hyper fertile that retains moisture really well. And well that's just a huge asset there. And all of a sudden farmers can own that land. There are people invest in that land, create some good basis for equipment financing for the balance sheets. So I think, I said it was positive. And I think just as a lot of you hear comments that they'd like to get some stuff done next April or by the end of the year just a lot of ongoing, but there again it's some you get into that political arena and what's going to actually happening, I mean definitely some level of aspirational thoughts but boy, there's just a lot out there on that, Larry. And hopefully I think for the best interest of that area that that happens I think it's going to be good for the farmers in that region.

Yes. It sounds good. And then thank you. And then last question, you talked about aftermarket parts and service I guess being pretty stable, replacement demand being pretty stable. I mean, from a very high level I recognize you don't have guidance. So is I base case then for next year we can think about North America being flattish based on those comments? Is that the implication recognizing that obviously trade gets pushed down and stuff?

Well, so as I look at -- right now, all the equipment next year is going to be another year older and it does have – the tractors is going to have another $300, $400 comments, you're going to have another $300, $400 on them. But say, like right now if you go and watch these combines out working in these fields right now. Where they're getting stuck and they're getting – its frozen ground and it's muddy ground and headers are running on the ground. And they've got to bring it in at night and thaw and melt. I mean you've got big rats in the field and tractors are getting stuck and they've got tall cables on them, I mean – and the sieves are plugging up. And I mean, things are freezing up and you're starting this equipment up in sub-freezing temperatures out in the middle of the field. That is tough on our equipment, Larry. So, we're seeing that. If you look at our parts and service this year, lot of that was attributed to that. I think some really tough harvest conditions and fuel conditions last fall. And again now I mean it's not even -- it's wider. And I think it's much more severe this harvest than it was last summer. So I don't see any reason all that in the combination of both replacement demand and really that tough duty cycle that we're going to see. I'm very confident we're going to see a continuation of that parts and service business going into next year.

Fair enough. And would you say the same about the replacement demand of OE equipment? Or is that much more about maybe jump all depending on trade crop prices?

I'd say – definitely I'd say we're working off with some really low industry numbers and a lot of this equipment needs to be replaced. So that's not going away.

Okay. Thanks very much. Good luck guys.

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

Okay, good. Well, thank you for interest in Titan Machinery. 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 and have a great day.