Greetings and welcome to the Titan Machinery Second Quarter 2022 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] As a reminder, this conference is being recorded. I will now turn the conference over to your host Mr. John Mills of ICR. Thank you. You may begin.

Thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery second quarter fiscal 2022 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; Mark Kalvoda, Chief Financial Officer; and Bryan Knutson, Chief Operating Officer. By now everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2021, which went out this morning at approximately 6:45 AM Eastern Time. If you’ve 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're providing a presentation to accompany today's prepared remarks. You may access the presentation now by going to Titan's website at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You'll see on slide 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 and updated in subsequently filed quarterly reports on Form 10-Q. 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, maybe, 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 today 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. Please go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our second quarter fiscal 2022 earnings conference call. On today's call, I will provide a summary of our results and then Bryan Knutson, our Chief Operating Officer, will give an overview for each of our business segments. Mark Kalvoda, our CFO, will then review financial results for the second quarter of fiscal 2022 and provide an update to our full year modeling assumptions. If you turn to slide three, you'll see an overview of our second quarter financial results. Equipment demand momentum continued through our second fiscal quarter, which all drive a 24% on increase on the second quarter consolidated revenues. Our healthy inventory position coupled with robust demand, along with continued strength in our Parts and Service business grow strong consolidated pretax income growth of 89% and record second quarter adjusted diluted earnings per share of $0.57, which represents an increase of 97% compared to the prior year period. From a segment perspective, our Agriculture business was well-positioned and produced exceptional growth as high commodity prices offsetting drought conditions in areas of our footprint. Likewise, we're especially pleased with improved performance for both our Construction and International segments. Construction pretax income grew 105% versus prior year. And our International segment is pretax profitability this year compared to a loss in the prior year. This environment is providing us the opportunity to showcase the improvements we've made to our business over the past several years. Our inventory turns are continued to trend upward and we're receiving inventory shipments in a timely manner, allowing us to surpass our revenue targets. While supply chains remain tight, we are confident in our ability to drive growth through the second half of our fiscal year and, as a result, we are raising our modeling assumptions accordingly. Our team is ready to support our customers through the very busy harvest and end of year construction seasons in the second half of our fiscal year. Now, I will turn the call over to Bryan Knutson.

Thank you, David and good morning, everyone. I'm excited to provide a brief summary of our Agriculture, Construction and International business segments this morning. On side four is an overview of our domestic Agriculture segment. The business climate for farm equipment is extremely healthy, primarily due to the continued high prices for Ag commodities. As a result, the strong financial performance we delivered in Q1 continued into our second quarter. While we are managing through the supply side challenges and yield reducing drought conditions in some of our markets, demand for new and used equipment is very strong. The existing Ag equipment fleets are not only requiring parts and service repairs are being upgraded to models with newer technology. Meanwhile, Section 179 tax deductions are further supporting demand as customers look to offset higher net farm incomes. We currently have customer commitments for the majority of our new machinery orders being shipped in Q3 and Q4 of FY 2022, and we're also finishing pre-sell customer orders for production slots into the first half of FY 2023. There is currently a very strong demand for used equipment, which is reflected in our improved inventory turns and margins. Finally, the most recent USDA WASDE report was bullish for commodity prices and provides us incremental confidence in raising our full year fiscal 2022 modeling assumptions. Turning to slide five, you will see an overview of our domestic Construction segment. Similar to Ag, we saw a continuation of the positive Q1 results into our second quarter. We are seeing increased construction activity in most of our markets being driven by the reopening of the economy, low interest rates, new housing starts, farmer and rancher purchases, improved oil prices and pending final infrastructure legislation. With that said, we are most excited about our operating improvements…

Thanks, Bryan. Turning to slide seven. Total revenue increased 24.4% to $377.6 million for the second quarter of fiscal 2022. Our equipment business increased 34.6% versus prior year, which was driven by each of our segments with notable 40 plus -- 40%-plus growth coming from both our Agriculture and International businesses. Our parts and service business generated consistent growth once again, increasing 6.3% and 6% respectively compared to the prior year period. Rental and other revenue decreased 12.9% versus prior year due to a decrease in inventory rentals, a smaller rental fleet in our current construction footprint and a reduced fleet due to the January, 2021 divestiture of our construction stores in Arizona. The dollar utilization of our Construction segment, rental fleet improved nicely to 26.6% for the current quarter compared to 22.2% in the same period last year. The improved utilization helped increase margins in this revenue category. On slide eight. Our gross profit for the quarter increased 19.7% to $75 million. Our gross profit margin decreased by 80 basis points due to a significant increase in equipment revenue mix compared to the higher margin parts, service and rental revenue. Somewhat offsetting the impact of the mixed shift on margins were increased equipment margins, which were supported by favorable end markets, coupled with our healthy inventory. Operating expenses increased $4 million versus the prior year to $57.1 million for the second quarter of fiscal 2022. This increase was more than offset by revenue growth and led to 240 basis points of operating expense leverage compared to the prior year, reducing our operating expenses to 15.1% as a percentage of revenue compared to 17.5% in the prior year period. In the current quarter, we recognize $1.5 million of impairment costs, which were related to the impairment of the remaining intangible…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Rick Nelson with Stephens. Please proceed.

Hi.

Hi. Good morning. Nice quarter. Want you to follow-up on the equipment margin with expansion sequentially and year-over-year, if you could speak to what's happening with on the new side, as well as the used side. And your expectation, what's built in to the guidance in terms of margin?

Yeah. Good morning, Rick. Mark, here. Equipment margins continue to be a good story for us. No doubt. A lot of factors kind of driving the increased margins. Obviously, the strong demand and supply environment, particularly that we're seeing today, I think some of the things that maybe impacting the first quarter and second quarters a little bit more, or some of the mix items affecting it, use sales, which tend to have a higher equipment margin to them continue to be strong in outpacing new sales for us. You see the international numbers as well, international, and that's primarily new on the international side. But that's also outpacing higher growth rate on -- more so than the domestic side of and on the equipment sales that's helping from a mixed standpoint, as well. So both of those kind of carrying higher margins help lift that first and second quarter even higher, combined with that overall good particularly Ag environment. I think the other thing maybe just to mention here is the health of our inventory combined with good industry backdrop has also resulted in a very historic low -- lower cost to market adjustments that we have when we review that on a monthly basis. So that -- clean inventory has really helped and should continue to help drive those margins going forward. So, as we look going forward and kind of what we're seeing and what we're putting into the -- to our modeling assumption, it's not going to be quite as high as what we saw in the first and second quarter. Some of those mix items, the rest of those should continue, that I'm mentioned, but the mix we anticipate changing and the mix, particularly in the fourth quarter where we have a higher level of new and some bigger ticket items, we'll likely see some lower margins as well. So, I think we were at like 11.7, 11.9 here, Q1, Q2, backing down to kind of that mid 11 range, 11.4 11.5 is probably where we see it for the year, which is still much better than the 10, 10.3 much improved from the prior year of 10.3.

That’s a great color. Appreciate that. Also like to follow-up on inventory. Do you think your size and scale is helping you secure inventory when maybe some of your competitors are more challenged that way?

Hi, Rick. This is Bryan. I think on a -- in a different way, our size and scale helps us keep the inventory flowing in between our stores, which helps -- it's -- one market has received more rain than another, or has a little more demand. We can transfer that product around. And so our size and scale really benefits us as well as just a nice wide selection of used and lease returns. But then, probably the biggest benefit has been some of the changes we've done in our processes around our order planning and focus on more presale with the customers, better planning with our customers, more energy around forecasting and getting those orders right. So, that -- there's pretty long lead times right now, as you know, Rick. So, a lot of time and energy goes into that with both our team here at our shared resource center and in the field.

Thanks. That's very helpful as well. Like to finally ask about the acquisition environment, what you're seeing there? Are there active discussions and how willing are sellers -- these guys given the strength of the market?

This is David, Rick. We have a number of acquisitions targets in the pipeline. We've got the balance sheet to support some serious acquisition goals. I add on a little bit, now the PPP loans and loan forgiveness is behind most dealers, I think the biggest motivator analogies potentially increases to the capital gains tax is, having a lot of dealer principles as they're exploring potential exit strategies. At the same time, we see OEMs encouraging consolidation of owner groups. Those principles continue to age and the dealerships of the future are going to need a higher level of capital and people resources to support the highly technical and sophisticated equivalent used in today's product and operations. So, overall, we're pretty optimistic on what is in front of us while we think when you get north through the pipeline there.

Thanks for that as well and good luck as we push forward.

Good. Thanks, Rick.

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

All right. Thank you. Good morning, guys. So, I guess my first question, can you remind us what the ERP drag is in your fiscal year 2022 here? And as we think about next year, what we should be sort of baking into our assumptions for ERP?

Yeah. Good morning, Mig. As far as the expenses for the year, this year, I think we've kind of mentioned in the past around $4.5 million is what we have in there for the year. I actually add it might come in a little bit lower this year and some of this is going to get pushed out into next year with the go-live anticipated to be in next year's results. So, there'll be a little bit more ramping up of expenses to support the go-live and then subsequent to the go-live to support that -- to support our team out there as well. So, probably be closer to that $4 million this year and up, call it, maybe $4.5 million next year.

Okay. So $4.5 million for next year? All right. Then, I'm curious you have updated, obviously your modeling assumptions in -- the changes to your segment revenues are clear. I'm just wondering if there is anything else in terms of, for instance, how you thought about margin. Have you adjusted that at all on equipment gross margins? Are there any other components like SG&A, for instance, that would have been adjusted relative to your prior expectations? Can you give us some context there?

Yeah. I think, first of all, with the equipment margin, it has been a more favorable to us than what we initially anticipated. So, in the last two increases that we have here in our guidance range, we did tweak that up. I kind of mentioned -- right now, we're at kind of that mid 11 area in equipment margin. So that is an increase from what we expected before. As far as expenses goes, we usually like to talk about that in terms of revenue. So as a percent of revenue and with the revenue continuing to increase, we should be able to continue to obtain some of that operating leverage that we get with that. Initially I think we are -- I think last time we were talking around 15, 15.1, I think with these numbers, if we can hit these ranges in these modeling assumptions for each of our segments, it'll be around, call it, that 14.5 we should be able to do, so better than what we've seen year-to-date with some of that year-end equipment selling. And particularly with International going up in revenue, a decent amount to your expectation there, they've done well for the first half of the year. And we continue to see that happening, or we'd expect to see that happen in the back half. That helps because their operating model over there is a little bit more fixed than what the domestic model is on that, less variable expenses, so more of it pushing to the bottom line over there. So, around that 14.5 call it for the year is what we're seeing today.

Thank you for that color. I'm wondering -- and this, I guess, to some extent goes to the prior line of questioning as well. As we're thinking about equipment gross margins specifically, are there some sort of limiting factors to this metric other than mix? I mean, you called out mix, but if say used equipment prices remain upward bias, obviously demand for new equipment is strong. Is it feasible that equipment gross margins can remain on an upward trajectory even relative to your updated expectations?

Well, I think it's always possible. I would say, some of the additional lift that we saw in the current quarter, quite frankly, I mentioned the lower cost of market, those adjustments are at historic lows. They're very low. It's -- I mean, it's hard to imagine those providing additional lift as we move forward. But if the used market gets even tighter out there, certainly our used inventory is down. We'll replenish that as some of the new -- more than new gets out in the second half of the year. But that could push some of that -- that could be a positive there as well with less supply out there on that use side. And that's been a big positive story for us this year is the level of use sales that we've had and the margins on them.

I would say, Mig, still as -- a new machine, it's still a very highly competitive marketplace out there. So, you're always need to be cognizant of that, but I think with our strategy of driving that the parts and service aftermarket business, and continue with that, that's a positive to that margin number, so.

Sure. No. I respect all that. And then my last question, I'm curious if you can maybe give us a little bit of context on your pre-selling activity. How big of a role is pre-selling plan these days in driving your business? And related to this, the OEM -- your OEM recently reported earnings and they were commenting on the order books. They're quite strong. I mean, if I recall correctly, backlog was more than five X, relative to the prior year in tractor or to ForEx [ph] in combines. So, I'm curious A, how big of a business is this for you? What are you seeing in terms of pre-sells relative to the prior year? And then lastly, maybe Mark, what does that mean as we're thinking about the next fiscal year for Ag revenue? Thank you.

Yeah. Mig, this as Bryan. Just to talk to how important is it for us, it's extremely beneficial for us as the dealer and for the OEM and for the customer, really to all be able to plan our business. Just a lot of residual benefits that come along with us from the impact that it has to our inventory turns, helping with our forecasting and planning, obviously reducing our interest carrying costs, allowing us to get the right specs for the customer and get it delivered at the right time and have them, get the best deal, plan their business with their bank or their account. Just really helps us manage our business overall. So, in line with all those benefits, we have a lot of initiatives internally here to grow that and continue to put more focus on that. And in these types of times, that becomes really critical because with the supply being so tight, the limitations that the OEMs have on the production with the benefits for them, as well with pre-sells those get priority over all of their orders then also. So just another reason it's imperative that we drive that. It's not as easy in practice to do. There are some challenges with it just because the typical historical model, the grower, of course, likes to plant the crop and then care for the crop and then take the crop off and then sit down with their accounts and bankers in that November, especially December timeframe and see how the year shaped up and then make their capital purchases accordingly. So, we're really shifting the dynamic there and really asking the grower to mid-year or before they've even got the crop in the ground to forecast out nine months, 10 months and take a chance on that. So one of the benefits is -- again, these are big capital purchases, so a lot of planning goes into it. Most of our growers nowadays are in this for the long haul. And so, even if they don't quite get the crop they want to cover it, obviously there's some backstops with some of the government support programs and insurance and stuff that helps. And then, really it's a matter of just -- they shift that into the next year. So, again, lots of benefits. It's not easy. We continue to really push for that though, because of the -- all those benefits for us and the customer and the OEM.

Well, to go back to my question now, how big is this for you? If I look at the Ag segment, what percentage of revenue there, it was associated with equipment that was pre-sold.

So, what we're seeing so far this year, Meg, is it's climbing. So a percent of our new sales that have been booked, which obviously this would be on -- for both Ag and CE, it's climbing up over that 40% now. We're just over 40% of our new sales are under pre-sell and that has increased nicely.

Okay. And in terms of your inbound orders, so the orders that you you've taken, I'm trying to triangulate it back to what CNH was talking about. How are your inbound orders on pre-sells for next year looking like at this point?

Yeah. I don't know that we've got any amounts on that, that we're ready to share at this point. I would say -- I think we mentioned the last call, it is earlier than usual that they're starting to fill in those -- kind of the first, second, I think maybe some into the third already. But it's a little difficult for us because we've been really pushing this and it's hard to -- we don't want to speculate on the overall sales for next year, based on some of these early orders here for the pre-sells into next year.

Yeah. I think I'm comfortable saying Mark, that what we have to date for next year is significantly higher again.

All right. Well, I appreciate that. Good luck guys.

Our next question is from Steve Dyer with Craig-Hallum. Please proceed.

Good morning, guys. Just a couple that haven't been asked and answered already. Sounds like you're fairly well booked out into the first part of next year. But as the lack of rain and the drought across most of your footprint has really intensified over the last month or two, have you seen -- are the conversations changing at all, or is demand just given more corners in particular is still really, really strong?

Hey, good morning, Steve. In our footprint, certainly the better growing conditions have been in Iowa and Nebraska. And we definitely anticipate and have strong demand in those markets. Certain areas in the Dakotas and Western Minnesota have definitely been more impacted by the drought, but we also have irrigation on -- a good chunk of that, that offset some of that. And we have received a little bit of rain as of late. So, you just look at the big drivers and net farm income being a commodity price, being one of the bigger ones and then yield. And so, yeah, the yields are certainly impacted here a bit and we're not anticipating any bumper crop by any means and a lot of our footprint, but certainly offset a lot by the higher commodity prices really help as you look back to corn and the other commodity prices here being nearly double what they were last fall.

Okay. And then just -- I know the cycle world, we are in the cycle of questions. So a tough one to answer. But I guess as you look at it, a couple questions around that, one, do you still feel like most of your sales are just replacement from the long period 4, 5, 6, 7, 8 years of sort of low commodity prices? Or are you starting to see farmers go on the offense a little bit just in terms of their purchases? And then I guess, secondly, as you look at sort of this cycle versus the last, is there any structural reason why you couldn't see similar revenue and earnings numbers, or even better, I guess, of previous cycles I think maybe you have a fewer locations, but how do you think about sort of how this can shape up if corn prices and row crop prices stay strong for the next year, two years, three years?

Yeah. So, to the first part of your question, Steve, again, the high commodity prices are really helping drive demand there. And -- but then replacement demand, just as you mentioned, is still a big factor. So, that's what we were -- was really the main driver here for about the last six, seven years and along with technology. So, those two are still big factors, but then now on top of that, just again, due to the commodity prices, especially we've got a lot of growers that have much higher net farm income and can really then take advantage of the Section 179 tax benefits. So that's just adding on top of that demand, which I think is even with some of these drought conditions really keeping that farmer sentiment up. And then, on the last heavier question you asked, how it compares to the 2012 to 2014 cycle, a lot of similarities. The commodity price levels are certainly very similar in the net farm income levels should be very similar, assuming similar yields. However, I think, because some of the differences are the interest rates are lower. As Mark pointed out, the used inventory levels are tighter for us, especially are healthier. There is some carryover from the healthy government payments, that the growers got last year. Also overall, the fleet is still older going into this cycle than the last one. And then, just lastly, internally on our end, we spent several years making a lot of internal improvements here, which we feel very competent position us better for this cycle. So, we're optimistic that there could be a lot of similarities there.

Steve, just to give you some numbers to kind of put it in perspective. In 2013, from a U.S. industry, there are 10,700 combine sold and last year there were 5,000 combined sold. So, I think year-to-date combine industry numbers in U.S. are up 12%. So, you take 5,000 times, 12%, your source still way under what half of what it was in 2013. So forward drivers similar 2013, there were 6,904 forward drivers sold in United States, last year or just started at 3,000 sold. So, definitely forward drivers year-to-date U.S. are up 38%. But even with that, long -- just to get back to 2013 numbers, there's a lot of room yet. So, I think some of this is the production schedules are limited -- a little bit of some of the supply side from some of the COVID related stuff. So, it could definitely maybe extend this for a period of time, which would be pretty beneficial.

Great. That's very helpful. Thanks guys.

Thank you. We will take one more question from Larry De Maria with William Blair. Larry, please proceed.

Hi. Thanks. Good morning everybody. As far as the inventory shipments catching up, and I think you're booked through the first half of next year to submit in the third quarter you said. So curious with pricing like on -- looking at the next year and all the new models, I believe your competitor set up five to eight on what I think you're comparing to. So just curious, what [technical difficulty] and do you expect to be able to keep some portion of that, or is that flowed through mostly to the OEM partner? Thanks.

Hi, Larry. This is Bryan. Yeah. Similar price increases there amongst OEMs as they have similar supply side challenges and added freight costs and increases in and so on. Yeah. Generally, as you mentioned, pass through, a lot of our margin improvements would be the thing that Mark referenced earlier to Mig's questions.

Okay. Thanks. And then, second question, trying to understand precision, obviously, a big driver, but trying to understand the impacts to the bottom line for precision shares. I know you're making money from proceeding that's embedded into the equipment, but are you -- are there other ways you're making revenue in precision? So ultimately is there a cost center that we built out or a profit center aside from the embedded into the equipment sales and how might driving [ph] impact this for you guys? Thank you.

Yeah. Exactly. So, as we go forward, besides the aftermarket sales being a big one, that's really out there today, the retrofit of things like planters and sprayers, Larry. But then as we get into subscription-based services here and continue to do more and more of that on the data side, machine held monitoring side, maintenance side and so on, and really does the telematics allow us to do a lot with increasing grower uptime and really preventative maintenance. And then, also just providing the future consulting services, working with their data to help them make the better decisions on their farm. So I think, a few different streams there really from the hardware that the whole good side coming right out of the factory, things like auto-steer and harvest command, soil command, aim command on the sprayers. And then, the retrofit side after that, and then the subscription side, and then really the service, maintenance side of it as well.

Okay. Thank you.

Ladies and gentlemen, there are no further questions at this time. And I would like to turn the call back to David Meyer for closing remarks.

Alright. Well, thank you everybody for your time today. You're interested in Titan Machinery and we look forward to updating you on our progress on our next call. So, have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.