Titan Machinery Inc. (TITN) Q4 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to Titan Machinery's Fourth Quarter and Fiscal Year 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, John Mills at ICR. Thank you. You may begin.

Great. Thank you. Good morning, ladies and gentlemen. Welcome to the Titan Machinery fourth quarter fiscal 2020 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 third quarter ended January 31, 2020, which went out this morning at approximately 6:45 AM Eastern Time. If you have not received the release, it is available on the Investor Relations tab 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're 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 in the 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 their most directly comparable GAAP financial measures in today's release. The call will last approximately 45 minutes today, and at the conclusion of the 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 2020 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 a 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 2020 and conclude with some commentary around our fiscal 2021 outward. 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 down 2.4% to $351 million compared to the same period last year with adjusted pre-tax income improving to $1.3 million versus a $500,000 loss in the prior year period. Adjusted EPS was $0.02 compared to a loss of $0.04 in the same period last year. For the full year, we generated revenue of $1.31 billion, which was up 3.5% compared to fiscal 2019. Our adjusted pre-tax income was $25.6 million versus $19.3 million for the prior year. Adjusted EPS was $0.79 compared to $0.67 last year. Fiscal 2020 was a successful year with a revenue growth across 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 commitment and performance of our team. I will now provide more detail around the three operating segments. On Slide 5 is an overview of our North America Agriculture segment. Calendar 2019 was a very difficult climate year for our customers. It started with a late and wet spring causing delayed planting, followed by a cool and wet summer and culminated with an extremely late and wet harvest. In fact, there was a substantial number of acres of unharvested corn left in Minnesota, North and South Dakota at the beginning of this year. Farmers are now waiting for snow to melt and [indiscernible] to allow corn buying. These conditions provided support to our equipment business, spring demand for units with tracks [indiscernible] and vertical tillage equipment. However, with our parts and service business, which realize the greatest benefit with double-digit growth in both categories for fiscal 2020 to be at extended age and hours of equipment fleets and tough duty cycle from the late and wet conditions. Despite the adverse conditions, the USDA forecasts 2019 net farm income to be up 11.7% buoyed by USDA programs, good yield from the acres that did get harvested and stronger commodity prices earlier in June and July. Farmer sentiment remains balanced. Current low commodity prices and concerns with the unknowns surrounding COVID-19 are offset by continue to improve yield trends, recent payment of the third and final trans of the USDA 2019 market facilitation program, selling a Phase 1 of the US-China trade agreement, completed USMCA bill and the continued low interest rate environment. Working into this upcoming farming season, there will be a compressed spring planting season window due to the lack of tillage and fuel preparation done last fall, which will put demands on our parts and service departments. Further, we expect the broader trends such as an increase in age of equipment fleets will continue to support growth in our parts and service business. Replacement demand and technology will remain a catalyst for new machinery purchases, and we see continued stability and use equipment pricing in the near-term. Our net farm income is forecast to be up 3.3% year-over-year. We believe that a prudent approach to the near-term outlook is appropriate, given the market uncertainty and potential implications from the COVID-19 crisis. Broader trend such as replacement demand and the growing adoption of technology and the precision equipment will continue to support equipment revenues in fiscal year 2021. However, as we've seen in prior class [ph] of market 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 efficient operation framework we put in place at Titan Machinery will ensure that we manage through this extended cycle profitably and that we are optimally positioned when the cycle returns more favorable. As you may have seen, we continue to be more active on the M&A front. In addition to the Northwood, North Dakota Case IH dealer acquisitions that we announced in the fourth quarter. We entered into an agreement to acquire the HorizonWest three-store complex locations in Sydney and Scottsbluff, Nebraska and Torrington, Wyoming, which is expected to close on May 4th. These three Case IH dealerships fit our profile perfectly and are contiguous to our existing North Platte and Imperial Nebraska dealerships. We are looking to additional -- to do additional domestic ag acquisitions in the future as we see an increased pipeline of motivated sellers. Turning to Slide 6, you will see an overview of our North American Construction segment. Similar to our position with Agriculture, our Construction business is realizing improving profitability with its more efficient and nimble platform. The macroeconomic backdrop remain fairly consistent through the fiscal fourth quarter and the month of February until being negatively impacted by the global COVID-19 pandemic, along with the steep drop in global oil prices. Prior to this, we were enjoying a stable economy, continued commercial and residential construction activity in the major metro markets, potential infrastructure spend and consistent demand for rental equipment across our footprint. However, the oil production war taking place within OPEC countries, coupled with the decreases in oil demand due to the impact of COVID-19, has created a sharp decrease in oil prices, which we believe will negatively impact the construction equipment industry. In addition, construction storage in our rural areas are being negatively impacted by the lower commodity prices and farmer rancher demand for construction equipment. As a result, we are managing the business cautiously with the focus on driving improved profitability. Late in the fiscal fourth quarter, we divested of our construction equipment store in Albuquerque, New Mexico. Not only will this be advantageous to our CE segment profitability but also supports our strategy of operating and acquiring locations in core markets where we can leverage logistics, similar equipment specifications and customer synergies. On Slide 7, we have an overview of our international segment, including storage within the European countries of Bulgaria, Romania, Serbia, Ukraine and Germany. While we were not happy with our European fiscal year '20 results, these results are negatively impacted by undesirable weather in some of our key markets, lack of European Union intervention funds, Brexit and an overall lackluster European economy. However, recent spring rains in most of our European footprint have put the winter cereal crops in good condition after a very warm and dry winter. We are seeing relative stability in our Ukrainian markets as land reform legislation is front and center and farmers in the Balkan countries are continuing to invest in modern, productive machines and embracing precision technology. Looking ahead, we continue to see long-term growth opportunities in our international markets. While regional subvention and fund availability has become more limited in select markets, we are seeing global investment into the Eastern European region, which is fueling high demand for high horsepower products. Consistent with this trend, we continue to invest in the aftermarket parts and service business as we build out our footprint in Germany to Balkan markets and the Ukraine. Before I turn the call over to Mark, I would like to make a few comments on COVID-19 and address its effect on our employees, customers and operations, including an update on our dealer management system migration. We are taking COVID-19 outbreak very seriously and we believe that our organization is prepared. We are proactive in our efforts by adapting best practices from the CDC canceling large events, canceling business air travel, promoting social distancing, providing work from home options and limiting access to our employees from vendors, suppliers and customers. While we've temporarily closed off customer access to our facilities, we are fully staffed and using technology, lower service fleets and alternative delivery solutions to provide equipment, parts, service and rental to our customers during this important spring season. Our business is categorized by the US Department of Homeland Security as critical and it's an essential industry, which allows us to continue to operate and support our customers who are critical in maintaining global food supplies and national infrastructure. We believe we are taking precautions to ensure the safety of our employees and customers alike. Our farmer contractor customers for the most part independently operate large off-road equipment with a minimum close quarters contact. We believe we are well positioned to weather this pandemic as we are able to utilize our technological capabilities to support our customers without close personal interaction, minimizing the risk of exposure to our employees. Titan Machinery's retail outlets are generally located in rural and sparsely populated communities. Tax -- service tax operate, our field service vehicles and in-service departments of large spaces and distances between employees due to the size and equipment they're working on. Via destination locations, they have an active dialogue with our customers. Our sales process and engagement is highly planned due to the size of investment and equipment that our customers are making, which allows for minimal customer for traffic and a variety of parts delivery systems that do not involve customer contact. With regard to the supply chain, we feel good about our ability to complete on-time deliveries to customers of sold and needed equipment. With respect to parts, we've proactively increased our stock of critical high demand parts to ensure that we're able to maintain our high levels of service throughout these challenging times. Concerning our fiscal 2021 outlook, due to the uncertainty that COVID-19 is creating within our industry and business, we believe it is prudent to temporarily withhold our fiscal 2021 modeling assumptions that we usually introduce during our year-end reporting. Mark will provide additional color regarding fiscal 2021 in his remarks. As part of our risk mitigation efforts, we're also delaying the roll out of our new ERP dealer management system conversion within our North America footprint. Our revised plan is more measured with the launch of a pilot location this summer followed by a full system implementation of companywide in the first half of fiscal 2022. During this time of global uncertainty, we're proud to be an integral part of the central industries to support farmers who are critical to the food supply and construction equipment operators who build and maintain infrastructure. Before I turn the call over Mark to discuss the financials, I like to thank our employees in the United States and Europe for a great year and their continued commitment to our customers. Go ahead, Mark.

Thanks, David. Turning to Slide 8, our total revenue for the fiscal 2020 fourth quarter was $351 million, a decrease of 2.4% compared to last year. Ongoing strength in our high margin parts and service business led to improved profitability during the quarter, but was not enough to completely offset top-line softness in equipment sales that we experienced during the quarter. Equipment revenue decreased 7.5% during the current three-month period, which is predominantly driven by lower equipment sales in our Agriculture segment, and to a lesser degree within our Construction and International businesses. As David noted, our Equipment business within our Agriculture and International segments continues to be impacted by ongoing macroeconomic challenges. Our recent trend parts -- of strong parts and service growth continued in the fourth quarter, increasing 19.2% and 16.6% respectively. The growth in these revenue categories reflects our increased focus on customer care across all segments and was supported by the difficult harvest environment as well as an aging customer fleet within our ag business. Our rental and other revenue increased 7.3% in the fourth quarter due to an increase in rental fleet and inventory rentals in our Construction segment. We experienced a 130 basis point improvement over the prior year quarter in our rental fleet dollar utilization from 23.7% in the fourth quarter last year to 25% in the current quarter. This improvement is the result of our focus in this area as well as rightsizing our rental fleet assets to improve our utilization rates. On Slide 9, our gross profit for the quarter increased by 10% to $61.1 million and our gross profit margin improved by 190 basis points year-over-year to 17.4%. These improvements were driven by increased equipment margins and a greater proportion of higher margin parts and service revenue as compared to the prior year quarter. Our operating expenses increased by $6.3 million to $60.1 million for the fourth quarter of fiscal 2020. Current quarter expenses were impacted by ERP transition costs and expenses associated with our newly acquired Northwood location, both of which were not in the prior year quarter. This expense increase combined with lower revenue caused our operating expenses as a percentage of revenue to increase to 17.1% from 15% in the prior year quarter. Impairment costs were $3.6 million for the fourth quarter of fiscal 2020 compared to $1.7 million in the prior year. The majority of the current quarter costs were related to the impairment of right of use assets, which were identified after the initial adoption of the lease accounting rules earlier this year. Floorplan and other interest expense decreased $300,000 to $2.5 million compared to the same period last year. This reduction was due to the lower interest expense resulting from the May 1, 2019 retirement of the remaining balance of our convertible notes, partially offset by a higher level of interest-bearing inventory. In the fourth quarter of fiscal 2020, we realized adjusted net income of $500,000 compared to an adjusted net loss of $800,000 for the prior year quarter. The adjusted figure excludes a gain of $4.6 million related to a release of our domestic income tax valuation allowance as well as the impairment and ERP transition cost that I just mentioned. Our adjusted earnings per diluted share was $0.02 for the fourth quarter of fiscal 2020 compared to an adjusted loss per diluted share of $0.04 in the fourth quarter last year. For the fourth quarter of fiscal 2020, adjusted EBITDA was $8.1 million compared to $6.7 million in the prior year. You can find a reconciliation of adjusted net income, adjusted income 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 segment sales were down 3.5% to $215.5 million, but we were able to increase adjusted pre-tax income to $2.5 million in the fourth quarter compared to adjusted pre-tax income last year of $1.7 million. We were able to achieve this through improved equipment margins and continued strength in our parts and service business in this segment. Turning to our Construction segment, revenue increased 0.9% to $87.2 million compared to the prior year period. The segment's adjusted pre-tax loss improved $500,000 to $1 million compared to $1.5 million in the same period last year. Similar to our Ag segment, the bottom line improvement was driven by increased equipment margins and strong parts and service growth over the prior year. This segment also benefited from the improved rental results that I spoke to earlier. In the fourth quarter of fiscal 2020, our International segment revenue was $48.2 million. A decline of 3.4% compared to the prior year was the result of lower equipment revenue caused by the industry condition as David discussed earlier. The lower equipment revenues combined with higher operating expenses resulted in a loss of $2.3 million compared to a loss of $1.1 million in the prior year fourth quarter. Turning to Slide 11, you will see an overview of our full year revenue results. Fiscal 2020 total revenue increased 3.5% compared to last year, driven by strong contributions from our parts and service businesses, which were both up double digits for the year. Equipment realized a slight increase and rental was essentially flat for the year with increased dollar utilization offsetting a smaller fleet. On Slide 12, our full year gross profit was $250.8 million, an 8.3% increase compared to the prior year, and our gross profit margin increased 80 basis points to 19.2%. Both of these metrics were primarily driven by growth in our higher margin parts and service businesses in fiscal 2020 compared to the prior year. Operating expenses increased by $24.2 million or 12% for the full year of fiscal 2020 compared to the prior year period. In addition to the fourth quarter expense explanation I provided earlier, the higher full-year expenses reflect the full 12 months of expenses that were incurred for our operations in Germany as compared to a partial year in fiscal 2019. Restructuring and impairment costs increased $1.6 million to $3.8 million in the current full-year period as a result of the fourth quarter impairments mentioned earlier. Floorplan and other interest expense decreased $4.1 million or 29.3% primarily due to the interest expense savings resulting from the repayment of our senior convertible notes earlier in the year. For the full year of fiscal 2020, our adjusted net income was $17.7 million compared to $14.7 million for the full year of fiscal 2019. Our adjusted earnings per diluted share was $0.79 for fiscal 2020, representing a 17.9% increase compared to $0.67 in the prior year. For fiscal 2020, adjusted EBITDA was $53.1 million compared to $49.8 million in fiscal 2019. As a reminder, our adjusted numbers exclude ERP transition cost, impairment and restructuring expenses as well as gains from the release of our domestic income tax valuation allowance. All of these adjustments can be found in the appendix to the slide presentation. Turning to Slide 13; we provide our segment results for the full year fiscal 2020. Overall, we achieved growth across all three of our segments and our adjusted pre-tax income increased 32.3% to $25.6 million for the full fiscal year 2020 compared to $19.3 million last year. This improvement is primarily the results 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. Turning to Slide 14. Here we provide an overview of our balance sheet highlights at the end of the year. We had cash of $43.7 million as of January 31, 2020. Our equipment inventory at the end of fiscal 2020 was $515.9 million, an increase of $98.8 million from January 31, 2019 due to higher levels of new equipment inventory versus the prior year. The equipment inventory turns declined to 1.5 in fiscal 2020 from 1.8 in the prior year. I will provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the fourth quarter decreased to $104.1 million compared to $111.2 million at the end of fiscal 2019. We anticipate our fleet size will decrease slightly by the end of fiscal 2020. As of January 31, 2020, we had $371.8 million of outstanding floorplan payables on $717 million of floorplan lines of credit. We continue to have ample capacity in our credit lines to handle our equipment financing needs. Our current $200 million Wells Fargo credit facility, which consists of $140 million of floorplan line and $60 million working capital line matures in October 2020. We have been working on a new credit facility and anticipate successfully replacing the current facility within the coming weeks. We will share more information with you when the new agreement is finalized. Our total liabilities to tangible net worth ratio is a healthy 1.9. 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 fiscal 2020 and will normalize on a comparable basis beginning in the first quarter of fiscal 2021. Importantly, our ratio is well below 3.5, which is the leverage covenant requirement of our larger bank facilities. Turning to Slide 15. The amounts of new and used equipment inventories are reflected in the size of the red and blue bars on the slide. While our current level of inventory is down sequentially, it ended notably higher than the prior year and over our plan. We are committed to driving inventory turns higher in fiscal 2021. Importantly, the quality of our inventory remains healthy as evidenced by solid equipment margins and an improved non-interest-bearing inventory percentage over the prior year end -- prior end of year percentages, which are reflected by the purple bars on the graph. In fiscal year 2020, fourth quarter percentage decreased sequentially due to seasonality. We would expect this to increase again as we operate through the first half of fiscal year 2021. Slide 16 provides an overview of our operating cash flows for fiscal years 2020 and 2019. The GAAP reported cash provided by operating activities for fiscal 2020 was $1 million compared to $46.6 million last year. As part of our adjusted cash flow provided by operating activities, we include all our equipment inventory financing, including non-manufacturer floorplan activity and adjust our cash flow to reflect the constant equity in our equipment inventory, allowing us to evaluate operating cash flows exclusive of changes in equipment inventory financing decisions. After applying these adjustments, our adjusted cash provided by operating activities was $17.8 million for fiscal year 2020 compared to $47.4 million in the prior year. We generated over $50 million in adjusted cash from operating activities in the fourth quarter as working capital levels came down. However, full year cash generation was below the prior year due to the higher year-over-year inventory levels that I discussed a few minutes ago. Turning to Slide 17. As David mentioned earlier, due to the uncertainty in our business as a result of the COVID-19 breakout, we are not providing our fiscal 2021 modeling assumptions at this time. However, I would like to provide some color on how we view our business in these uncertain times, as well as point out other noteworthy items for you to consider as you look at our business for fiscal year 2021. In our Agriculture segment, we currently expect a more limited overall impact from the COVID-19 crisis as our farmer customers are operating in sparsely populated rural areas and are essential to maintaining a stable global food supply. Therefore, we anticipate that they will continue to plant and harvest normal levels of acres, which in turn could help continue to drive growth in our ag parts and service businesses. However, it is critical our employees remain healthy and part supply chains remain intact. That said, we do expect our equipment business in this segment to be negatively impacted as a result of this crisis, which we believe is having an impact on customer sentiment and may enter into their equipment purchasing decisions. When considering any assumptions for the Ag segment in fiscal 2021, remember to account for a full year contribution from our recently acquired Northwood location, which closed on October 1, 2019 and our anticipated closing of the HorizonWest acquisition, which is expected to close in May of 2020. Both of these businesses had revenues of approximately $25 million in their most recently completed full fiscal year. Within our Construction segment, we expect a more significant impact on our business, given that a prolonged outbreak could very well delay, cancel or prevent customer projects as a result of the slowdown in overall economic activity. Additionally, lower oil prices negatively impact activity in the energy markets we serve. Also consider the January 2020 divestiture of our Albuquerque New Mexico store that David mentioned. The sale of this single store location will negatively impact year-over-year revenue comparisons as this construction store generated approximately $8.5 million of revenue in fiscal 2020, but will help in our overall efforts to achieve profitability in this segment. Our International segment faces additional challenges and perhaps more uncertainties than our domestic Ag business. For example, our international teams are already dealing with logistical challenges at the borders. There are higher risks associated with farmer liquidity in our Eastern European footprint as access to credit is more limited, particularly in Ukraine. Also, there is uncertainty regarding the ability and willingness of these developing countries to financially support their farmers if the need should arise, given the overall economic stress put on these economies due to the COVID-19 outbreak. Some additional considerations for models include the implementation expenses associated with our ERP project, which is now expected to be fully implemented in the first half of fiscal 2022. We currently expect about $0.12 of ERP-related expenses for fiscal 2021. These will be excluded from our adjusted EPS calculation for fiscal 2021. Regarding tax, we anticipate an effective tax rate for fiscal 2021 of approximately 27%, which represents a more normalized long-term rate as we have now released all domestic valuation allowances. We still expect that this rate will vary quarter-to-quarter as profit and loss mix fluctuates due to seasonality within our various international tax jurisdictions where corporate tax rates vary and some valuation allowances exist. We will update you on our income tax expectations as we progress through the year. Finally, a comment on the higher level of equipment inventories that I mentioned earlier. We aren't seeing any disruption in equipment deliveries today. Our higher inventory position will help mitigate any future supply chain disruptions in equipment sourcing should they arise. In addition, we have already begun sourcing a safety stock of critical and high volume parts to ensure uptime for our customers. We are convinced that restricting customer access to our stores during this outbreak is the right course of action. It protects our employees, but still enables them to work on our customer's machinery and provide them the necessary parts and equipment they need to continue to be successful. We're cognizant that limiting our customer's access to our stores may have some short-term revenue implications on our business, but are encouraged by initial customer responses to our safety measures. This concludes our prepared remarks. 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. Please proceed.

Thanks. Good morning, guys. Very detailed prepared remarks. I don't have much but curious as to how your capital allocation changes or how you think about that in this environment, are you are you bunkered down for a bit. On one hand, you can buy your own stock for half of tangible book value, are you still looking opportunistically at acquisitions? Thanks.

Good morning. Yes, we are looking at different alternatives for capital allocation. The HorizonWest deal that we announced this morning has been in place for a while. We actually struck that deal some time ago. So we do look and we share -- we talk with the Board about different capital allocation opportunities, some which includes the price of our stock and the potential share repurchase. But in these times, we think there's a lot of value as well just maintaining a high level of liquidity during these uncertain times. So, I think we'll continue to kind of be conservative in that regard until we gain more understanding of the situation that's before us today around this COVID-19 outbreak.

Got it. And then, the only other one for me, I guess, Mark, you touched a little bit on part supply. With so much manufacturing shutdown, what's sort of your confidence level either on the equipment or the parts side of having a steady flow? Thanks.

Yes. So far -- this is Dave, Steve. So far so good. We're getting -- things are coming in. China is actually coming back online, I guess so, which is pretty helpful, and as we said in our remarks, we looked at our critical high demand parts and upped our stock inventory than those. And we're starting out the year with really good whole goods inventory. And from our visibility to our orders, everything is coming on plank, our pre-sold equipments come in on plan, and some of the products that we were getting short on, we ordered up, looks like, they come on plan. So, what we can see at least for the first half of the year, it looks pretty good. And like I say, we were started off the year with ample inventory. So we really -- feel really good probably for pretty much the whole year with our current level inventories and parts situations we're seeing.

Got it. Great. Good luck, guys.

Our next question is from Mircea Dobre with Baird. Please proceed.

Thank you. Good morning, guys. I guess, my -- I guess my first question. This coronavirus is a very recent occurrence, and I understand that most of the data points out there still failed to properly take it into account. So, I'm wondering, can you give us some color on how your equipment sales have trended in the past week or two weeks to sort of gauge what the impact of this crisis might be. And I'm also wondering, have you seen any of the equipment that's been pre-ordered, being canceled or farmers trying to essentially say, hey, look, I want to take delivery later than it originally planned given the uncertainty?

Yes. I mean, well, so as I said, we're fully staffed right now. So, our parts and service departments are busy getting all equipment out there for spring work, so that's a good thing. So, parts and service revenues should begin [ph], and like we said in our comments, all the -- obviously everything kind of turned upside down here a little bit, but the farmers' settlement, I think it's probably a natural instinct to see -- let's see how we come out of this thing a little bit. So -- but there's pre-sold equipment that's being settled out that was bought -- customers put their names on it, and we're delivering that. I think to-date, we've only seen one cancellation so far, which is good. I think typically when we see the farmers getting the fields and the contractors getting their job site, let's get the crop planned and that gets going. And then they look at their equipment, need to get the job done. And so, we anticipate that still to continue. Our sales people are staying fully engaged. And I think things were up until if we look at the industry, you've probably seen the industry numbers, they really haven't backed off in January and February. So, the trends were looking good. And I can say that net farm income year-over-year is good, so it's pretty good carryover. So, I guess, we're cautiously optimistic. As we come out the other side, this is going to be pretty good. But the main thing is that we keep our people healthy and we keep this parts and service business going.

No. I understand that. I mean, January and February, this is all very much lagging, which is why I'm asking for equipment specifically in the last couple of weeks. Sorry to press you on this, but I think really at this point it's pretty important if you can provide that perspective.

We typically don't disclose that. And another thing was just a lot of -- as you've probably been aware that in these industries too there is a lot of negotiations of the customers and the OEMs and the pricing, really it goes on, and there's a lot of business gets done in the last two, three days of a month. And we can continue look at that. So we don't really -- this is like from every day, what's written in the cash the whole good deal, a lot of stuff kind of back-end loaded, that's typical of the industry. So we really, really don't have these, but we're still selling equipment every day. Worse [ph], we're getting daily sales sheets. And the guys are out there getting the job done. Our sales people who are out in the farms, in the construction sites, and we're seeing important sales every day. So, we're going to continue with that. But I don't -- we don't track those exact numbers. It's very difficult every day on that because that was a pretty back-loaded in the month on those numbers.

Okay. Then maybe a question for you, Mark. Can you give us a little more color on what you're doing to preserve and enhance the liquidity of the company at this point? Maybe comment on your covenants as well. Are there any actions that you're looking to take down the line here to further bolster the company's liquidity position?

And I think one of the things that we talked about our inventory turns, we're certainly managing our working capital. There's a lot of discussions internally with domestic and our international business to pull down working capital levels. Overall, managed the higher turns, particularly on our inventories. I mentioned as far as our credit facility, we are looking to finalize that in a couple of weeks -- within a couple of weeks. And that should allow us a greater level of liquidities and higher advance rates, should be part of that deal as well. And I think there's always some level of just expense management and discipline, and none higher than where we're at today, given the situation. So I think those are three of the items that we're really focused on with working capital probably being the biggest one to ensure that we maximize our liquidity.

Yes. So I'm curious on working capital and inventories specifically. You said that you exited the year maybe with a little more inventory than you wanted. As you're thinking about 2020, where do you see yourself exiting this year? And have you changed your order patterns to the OEM at this point in order to reflect on this clear need for de-stocking?

We have, so that has been we are in the process of adjusting that some of the orders have been adjusted here and the plans for that throughout the year. Yes, I think it's a big focus for us. We mentioned the parts on the parts side, we are bringing in more. So there will be more parts on that just to make sure that we don't run into any type of supply chain challenge there. But on the equipment side, we are managing that to more of just-in-time inventory here as we move throughout the year. As far as ending the year, I think that's a little bit -- it's a little bit -- whatever it be, very tough I think to give that at this point, given all the uncertainty that's out there. What I would say is, with us ending at 1.5 with our inventory turns, that we're planning to pull that up. So, we certainly do expect that to improve this year. So even on a flat level of sales, we should be able to maintain or pull down that inventory overall a little bit from the current year.

Okay. And I'm sorry, I don't think you mentioned the covenant. Maybe you can help us there and then I'm done. Thanks.

Yes. So, our covenants that we have with our banks, 3.5 is that total liabilities for tangible net worth. We're sitting at a 1.9 right now. So that's one of the bigger covenants that we have with our banks. And the other one is just kind of around excess availability that we have. It's kind of the liquidity measure, and we're in very good shape. We're not close to testing that at this time. And with a new agreement out there, we should have even more of a cushion there, more room there, if you will, as we expect higher advance rates in the new facility.

Great. Thank you.

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

Thanks. Good morning. I have a follow-up in terms of customer behavior that you're seeing since COVID-19, really all of that did embarge [ph]. I know some of the car dealers [indiscernible] seeing big declines in new and used sales, this morning or last night equipment sales down 50% to 70% since March, if you could comment on overall behavior which you're seeing?

Well, Rick, also I don't know that as business of that consumer, we're -- I'd say, we're more a B2B or business-to-business, so probably not a good comparison. And like we said in our comments, we don't get a lot of customer floor traffic. These are planned purchases, high ticket items. A lot of times, our sales people are out to the farm, out to the construction site. So I think it's a whole different business model out there. There again, it's not a lot of spontaneous type decisions, like I said, it's more planned. So, I just hear, before we just recently cut access outdoor to our customers in our facilities. But the restaurants, coffee shops were closed all of a sudden, the farmers are coming in just coming back from Florida, coming back from Hawaii, coming back from Arizona, talking about where they've been. That's one of the reasons -- and like business usually for them get ready go in the fields, getting their equipment ready to go, talking about what they're going to need, talking about the commodity prices all that kind of stuff. So, they've acted pretty normal. If you look at like the number of COVID-19 cases in some of our footprint, that there's a -- down there, there's some pretty low numbers in some of these. I'll give you some examples. I think, we've got a lot of our head there are store count, South Dakota is 30 cases. This is as of noon yesterday, 30 cases in North Dakota, Wyoming 30, North Dakota 37, Montana 48, Nebraska 53, Iowa 124, so those states were really compared to some of the tougher states like Colorado we have three stores like 921. So really some big variances out there. But where our core AG markets are -- I think due to probably the sparse populations and how dispersed everybody are. We're not seeing that's all. I'd say, from the farmers, the business is as usual. I think the contractors there, that business a little bit goes with the economy. I think there's enough jobs that were built last fall last winter, they've been funded. There's still [indiscernible] some project, there's some infrastructure stuff, there's diversions or something like that. I anticipate it looks like there's going to be some still pretty good risk for some floods in certain areas, and that drives some of that business. But like I say, we're not -- we're business-to-business, planned purchases, customers want to get their equipment that they need for their operations fixed. So it's just more of a necessity. So that's what we're seeing out there right now and I think this is a distraction. It's a distraction and we want to make sure our customers stay healthy and our people stay healthy. But I think we're prepared as we get through this.

Perfect. That's helpful, Dave. And then, some parts right now allowing Ags to the stores. How do you think that affects that segment of your business?

Well, not that much because right now there has been quite a bit of -- people called on the phone, hey, do you have this at all, can you tell stay away we have drop boxes scattered all throughout our footprint, so many times our customers send their hired people in and to pick up the parts of somebody's driving by. And so basically what we're seeing instead of hanging out in our dealerships not knowing what kind of exposure it might have or say, hey, call us up first, pull up in front of the dealerships, let us know what you need and we'll take them out the back door for you, we'll come load up your pick up. So that's what we're kind of doing. So really it's not much different than what happened before. And it's just like whether we're just trying to minimize the exposure because at the end of the day, it's really, really important as we have to keep our employees safe and healthy through the spring season, right. And we don't want to take the risk of unknown people. Some of our customers know what we know, some we don't know. Our vendors, they come in and they happen to expose one of our stores, that's not good. So we're trying to stay away from that. But really the way they we do business and probably half our parts are installed on the equipment by our service tax [ph]. They're on their mobile service trucks, and they're going out to their farms and the construction sites or they're working on that equipment at the big shops. So a lot of that's going out that way too. So really we don't see a lot of interruptions, it's not like it's a spontaneous type business. It's what they need to get their equipment to get their jobs done.

Right, right, right. And on the used equipment side, any changes you're seeing of late in terms of pricing?

No, we're still seeing that good amount and even people wanting because there's been a pretty low new machinery industry numbers for the last two, three years, right. So that means less trades coming back in. We're not seeing the level of lease returns coming back in right now. And the ones that are it seems like the residuals are priced about right. So, like I say, there's good demand right now for good late model good use equipment, and we're seeing that. So, for the near-term, we don't see a lot of things changing because, like I say, the new industry numbers are still staying pretty low, and so the amount of good news coming back into the pipeline is limited.

Okay. Very good. Thanks and good luck.

Okay. Thanks, Rick.

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

Thanks. Good morning, everybody. Hey, hope everybody is doing okay and safe. I guess, just maybe finish up on the prior conversation that I'm having. I'm just curious, I know you guys are being careful about what you say because you have ongoing customer conversations, but let's look at it differently. How have the customer conversations changed, let's say, from a month ago to now, where they're extending, are they much more cautious or are the customers looking this as a short-term disruption that thought to figure out how to get through. So curious how the tone to the conversations have changed, and if so how materially?

Well, I think the tones -- I think to the certain level, probably distraction frustrated most of our customers, whether it be farmers or contractors, they're in the go mode. They want to go. This kind of takes away from that, but I think that's probably weighing on the farmers more than anything is this continued level of depressed commodity prices. So, the China phase of the China trade deal, getting that done is a good thing. The USMCA bill is good, but at the same time, we've got to get -- we've got to get this corner up closer to $4, and we need to get the soybeans up closer to $10. I think that's probably weighing on our growers more than anything, Larry, right now. So, I'd say, that probably trumps -- I think we have to put a good eye on what's going on with ethanol right now, with this low --with the low oil prices, that's definitely impacting the profitability of ethanol plants, and there is a lot of corn that goes into the ethanol plants. So I'd say, that probably is weighing on the growers more than the COVID-19, because they're not really seeing much of the COVID-19 in their farming operation on their markets.

Well, yes, that's sort of where I was trying to get to also. It looks, we obviously [indiscernible] guidance, and I think with more due to COVID-19 than anything else. But $3 -- sub-$3.50 corn, sub $9 beans, that would take COVID outside of everything, that would imply fairly challenging year ahead, wouldn't it? I mean, you guys are talking cautiously optimistic, but just the commodity prices ended up themselves would probably be more balanced negatively than your technology placing upgrades, right. I'm trying to understand, how negatively balanced that would be and how you're thinking about...

Yes. I guess, that -- there's a direct relation between industry, high horsepower equipment and corn price, right. So, yes, I think that definitely weighs in there. Like we talked -- I talked in my comments, it was a really late harvest, there's still farmers out there combing corn right now, but there is a lot of field work that needs to get done even before they can begin thinking about planting right now. And I think that's front in mind of a lot of these guys to get that -- to get the corn combine, to get the residue off and get those fields in shape, and get the planning done. But definitely the commodity prices for our growers and ability to buy new farm equipment. But there -- with that said though that, that just extends away from that parts and service business that we can do. But if you look back a year ago, Larry, if today compare to a year ago, prices are pretty similar. And all what happened last year, we had that nice pop in late June early July, that's still a little bit unforeseen. But I know exports to China is starting to pick up a little bit. They're starting to get some -- so basically if we see the impact from the trading fees, one of the trade deal of the USMCA, some of the benefits from that, let's see what happens here.

Okay. Understood. And just to clarify, you talked about only one cancellation and you have some visibility on the pre-orders, right. How much visibility do you think you have? I mean, obviously some of your competitors tend to pre-sell a lot of equipment, case pre-sell less in general. So how much visibility do you think you have at this point [indiscernible]?

Well, we've got good visibility to our pre-sells, and our pre-sells are up year-over-year this year. So we think that's a good trend going forward. So, I'd say, we've got -- we've got good visibility, basically we're getting, I think on the orders pretty good visibility. I told you we could get out into that August-September timeframe for sure. And I'll keep reminding too, we're starting the year with almost $100 million of inventory on hand that we didn't have a year ago. So that's going to add to what we've got. So, I think we're really in good shape on what's coming in, and what we have on hand to meet the needs of our growers.

Okay. And then, maybe you could talk about the Senate bill and the impact on ag and a couple of things in there. And maybe it's more payments that end up being like MFP, I'm not sure, but can you talk about how you think the Senate bill plays in for Ag? A – David Meyer: Well, I guess, they just signed in the middle of night last night. And I think it's got to get through the House here right, Larry. So I guess I'm not really in a position to comment. I know last year, if you look at that 11% that focus a lot -- goes on that 01:01:10 payment helped a lot. There is -- in the regular Farmville, some good safety nets in addition to that too. So, yes, I think it supported their businesses last year, the farmers and any help this year, I am sure that they're going to appreciate.

Okay. I'll need to sneak one more in here and then -- that's it. I'm just curious, the average farmer as we're going into planning season, do they have the tools, the working capital loans, the parts sounds like you guys get parking, not worried about that technician seat out there in the supply chain in general. You think that they are fully locked and loaded to be able to plant a big crop or at least that's their intentions are. Or do you see so many stress in the system in the working capital loans, credit, availability of parts and other things in the supply chain. How are you thinking about that?

No, I think they are in really good shape. I was talking to the grower this morning, and he is buying some huge propane storage tanks right now because this price of propanes are rock bottom. I think you're going to see good diesel fuel and gas prices is going to help them out. Fertilizer has already come down because a little bit of lack of demand, so some of the crop inputs are coming down. I think probably if you look at the yields, a lot of times when they don't get that volatility is done and they are doing a lot of that in the spring, a big ruts in your field. Sometimes the yields on that ground isn't as good as if they get normal tillage. So that's probably a little bit of a risk from the yield side on those. But I think the corn is starting to come off in the last three weeks, some of this corn that hadn't -- generally once 40% of the corn was still in the fields in North Dakota. So they've been banging away at that and getting some of that off. So that's been helpful. But overall, I'd say, from -- they've got good -- strong balance sheet yet, they had a fairly decent year this year, like I'd say net farm income was up. I think for the most part, the relationships with their banks are in good shape. And as far as the equipment we sell, we've got good CNH Industrial Capital, we've got good financing plans for the new and used equipment. So, you combine all that up, I think it's business as usual. We want to keep our employees safe. I have to say that as of this morning in both Europe and North America, we've yet to have one employee test positive for COVID-19. So that's real plus. And like I can say, I think that's really important because the farmers don't have a lot of hired people right now. A few family members, maybe one, two hired man, and a lot of progress coming make sure we keep everybody healthy. And I'd say, with that, it's business as usual, but it is something we just have to be aware of and more so on the construction side and just get through this of the back end, I'm healthy and back working.

Okay, great. Thanks. That was good to hear. Best of luck this year and be safe.

Okay. Thanks, Larry.

We have no more questions at this time. I would like to turn the call back over to David Meyer for closing comments.

Okay. All right. Thank you, everyone, for your time today and your time in our call. And we look for updating on our progress ahead and everybody stay healthy.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.