Greetings, and welcome to the Titan Machinery Inc. Third Quarter Fiscal 2024 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 would now like to turn the conference over to your host, Mr. Jeff Sonnek of ICR. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's third quarter fiscal 2024 earnings conference call. On the call today from the Company are David Meyer, Chairman and Chief Executive Officer; Bryan Knutson, President and Chief Operating Officer; and Bo Larsen, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2023, which went out earlier morning at approximately 6:45 a.m. Eastern Time. If you've not received the release, it's available on our 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 this presentation now by going to Titan's website again at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You will see on slide two of the presentation or a safe harbor statement. We'd 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 as updated in subsequent 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 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. The call lasts approximately 45 minutes. At the conclusion of our prepared remarks, we will open the call to take your questions. With that, I would now like to introduce the Company's Chairman and CEO, Mr. David Meyer. David, please go ahead.

Thank you, Jeff. Good morning, Welcome to our third quarter fiscal 2024 earnings conference call. On today's call, I will provide a summary of our results then Bryan Knutson, our current President and Chief Operating Officer, who will be transitioning to the CEO post on February 1st, will give an overview for each of our business segments. Bo Larsen, our CFO, will conclude the call with a review of our financial results for the third quarter of fiscal 2024 and some commentary around our updated fiscal 2024 full year expectations. We accomplished a great deal this quarter, completing our acquisition of the Australia-based O'Connors Group in October and solidifying our leadership succession plan, which we announced last month, while delivering solid financial results. Bryan and his team have instrumental in jump starting our integration with O'Connors, and we couldn't be more pleased with the quality of the O'Connors team. We recognize an alignment of our strategies during the O'Connors due diligence process, and the first couple of months of operations have proven out how well our organizations mesh. We are thrilled to have them on board and look forward to a bright future together. As it relates to CEO succession, I am very proud of what our team at Titan Machinery has achieved since my early days in a dealership nearly 50 years ago, and the breadth and depth of our operation is a testament to the talent that we have attracted to the organization. Through the process of planning for this transition over the last several years with our Board of Directors, we felt it was critical to fill the role with someone who deeply understands the dealership business and our customers. Bryan is a natural leader with a successful track record and has proven his ability to excel…

Thank you, David, and good morning everyone. Today, I will provide a recap of our fiscal third quarter segment drivers and then review some of our high level expectations for the balance of fiscal year 2024 across our respective segments. I'll begin with our domestic agriculture segment. We achieved another record revenue performance on top of last year's outstanding results driven by a combination of positive same store sales and contribution from the Pioneer acquisition from earlier in the year. As you heard from David, these results were constrained by a few factors. While improving, limited OEM production remains a factor preventing us from meeting the existing demand for high horsepower tractors and self-propelled sprayers. And for those new units that we are receiving, our service team is having to spend more preparation time on each pre-sold new unit before delivering it to our customers due to supply side challenges. While this isn't a new phenomenon for us, as the additional prep time has been something we face throughout this fiscal year, our service department capacity was stretched in the third quarter, given the seasonally higher volumes and a need to prioritize our supportive existing customer equipment throughout harvest. Now that our customers are mostly done with harvest activities, we expect to catch up on delivering some of the incremental buildup of pre-sold units throughout the fourth quarter. Bolstering our service network and capacity remains a key priority for our organization, and as such, we will continue to focus on recruiting, hiring, and training skilled technicians. With respect to harvest and customer sentiment, favorable crop development in the later part of the growing season, produced average to above average yields throughout our footprint. Although corn pricing has softened throughout the year, there was quite a bit of corn that was…

Thanks, Bryan. Good morning everyone. Starting with our consolidated results for the fiscal 2024 third quarter. Total revenue was $694.1 million, an increase of 3.8% compared to the prior year period. Our equipment revenue increased 2.5% versus the prior year period, led by incremental revenue from our recent acquisitions as well as positive same-store sales growth in our Agriculture segment. Growth was also visible across our other revenue streams as well, with our parts revenue increasing 5.7%, service up 14.9%, and rental and other revenue up 4.2% versus the prior year period. Gross profit for the third quarter was $138 million, and as expected gross profit margin decreased by 100 basis points to 19.9%, driven primarily by lower equipment and parts margins, partially offset by higher service and rental margins. It is worth noting that the equipment gross profit in the prior year, benefited from the recognition of $2 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in this year's third quarter results. As a reminder, we recognized $6.4 million of manufacturer incentives in the prior fiscal year, spread across Q2, Q3 and Q4. Our guidance which I will talk about further in a few minutes includes a similar level of manufacturing incentives for the current fiscal year, all of which if earned would be recognized in the fourth quarter. The difference in timing relates to the progress in achieving related targets. Thus, our updated guidance includes the full year's impact of manufacturing incentives to be recognized in the fourth quarter and part of the reason for keeping our EPS guidance unchanged. Operating expenses were $92.1 million for the third quarter in fiscal 2024 compared to $84.9 million in the prior year. The year-over-year increase of 8.5% was led by additional operating expenses…

[Operator Instructions] Our first question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Thank you. Good morning. So I have got two questions. The first one is just going into the issues with regards to prep time, which I just wanted to get a little more color around. Is it just a labor issue and you are trying you need more people? Is it equipment that's being delivered and needs extra work for some reason because it is coming in a lesser state than is normal? Just kind of what's driving that aspect if you would with regards to delay in top-line?

Sure. Ted, it is really a combination of all the things that you mentioned. As an example, we are to fly over the global flywheel drive plant here in Fargo, you see a lot of units outside and typically what you are going to find is they are either waiting on a truck for delivery due to the shortage of truckers out there right now and/or they are missing a component, some of the supply chain challenges that are still out there, and they got to keep the assembly line moving or the quality of the component that CNH received from one of the suppliers what didn't pass inspection. So, again, they kept the line moving, they caught it at the plan. So they are having those delays on their side, and that creates some of these timing issues we have talked about. Then as we get those units, as far as the additional prep time that we are seeing on our end is anytime you have had one of those units where you can't go through the normal build process, and you have heard a lot of commentary from Deere and CNH and AgCo on this in previous quarters. You always have a risk then of quality issues or other things. So, we just take a lot of pride in our commitment to our customers and excellence in the units when we deliver to them. And so, that's really increased the inspection time to make sure we go through a multipoint inspection. We are catching things and it's just then we got to fix those things and so it just adds to the time. And then as we have also mentioned, we do add a lot of different technology and things that's very commonplace for us to do for our customers, and the supply chain is still constrained and deliveries are delayed on certain components, both within technology, but also with certain casting components like weights and tires and wheels and so on. So still you are waiting on some of those components. But collectively, that all is what's leading to that significant increase in prep time.

And I would just add to that, general supply chain, I think everybody said over time has continued to improve and that's definitely the case. As we look into next year and kind of get past the first half of the year, we largely see a lot of these issues being behind us and getting us back towards normalized conditions. We specifically called it out here because given the higher seasonality volumes, it did create a bit of a pinch point in terms of the amount of equipment we could get delivered kind of prevented us from reaching the full potential for the quarter.

And then my -- sorry, I woke up with something today. But my second question is around O'Connors in Australia. And I mean, I'm just kind of curious, you narrowed your guidance range taking the top down by 10 million and is that a result of a change in kind of macro dynamics within Australia? Is that a result of having gotten further into the weeds with regards to the business and a better understanding of it? Just kind of a little color in terms of what prompted you to take the top end of that range down?

It is definitely the latter. It is really just getting in the weeds, understanding what equipment is in inventory, what equipment needs to get in the country and expected timing of delivery to customers. So really just being able to take the time as we got through close to just sharpen the pencil on exactly what would unfold for these three months was just the narrowing on that range there.

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

Just a quick clarification. I thought I heard you talk about inventories coming up again sequentially in 4Q, and if I heard that correctly, I guess what I'm trying to figure out is when I look seasonally in your business, typically inventories come down sequentially in the fourth quarter. And that feels a little bit different right this year. And I guess I'm also wondering if you sort of had these disruptions that kind of prevented you from delivering some machines in Q3, wouldn't you be able to hopefully catch up on some of that in Q4, which again, at least in theory, should bring inventories down sequential?

First of all to start with and maybe a clarifier, right, as we talk about pre-sold equipment awaiting delivery to customers, that's always turning, right? So, the unit that was there in the first quarter has been delivered to a customer. It's not still sitting there. Units that were there in Q2 aren't still sitting there, but what we're seeing right, is a continued delivery from the OEMs and we're needed to process everything through the chute. So definitely in the fourth quarter, we look to be able to chip away at the amount of pre-sold that we have in that inventory balance. But again, as we looked at how timing looks to be for everything and with OEM deliveries, right? And the OEMs are looking to finish their year strong and get as much out as they can, I think we're still seeing some push to make up for some of those supply chain challenges that had otherwise held them back in parts of the year. If you recall last year, we received a tremendous amount of equipment toward the end of the calendar year between really Christmas and the end of December, right, and then a short period of time to really be able to turn that around and deliver to customers. So, it's really those factors that we're talking about, you did hear it right. We expect another incremental increase on inventory there and that kind of stabilizing in that range and looking to continue to normalize that pre-sold backlog as we work through the first part of next year.

Yes. Mig, I would just point out to this BJ adding, O'Connor's to the balance sheet as Bo mentioned in the prepared remarks as well as our other acquisitions, but also just the timing that we've talked about here. So, you're right historically, we would come down by fiscal year end. But everything's kind of delayed on especially on certain products a quarter or so. So I build that in as you look with your modeling, we typically would then be more flattish, and then build back up throughout the year again. So I think just delay in all that as we get into the end of the year and into Q1.

Understood. Thank you for that. So my follow up, if we're sort of looking at inventories going up again in the fourth quarter, I guess I'm curious as to how you're thinking about fiscal ‘25, and I'm not looking for you to provide your own guidance in terms of the top line, but obviously Deere, commented on next year DNH, your OEM is thinking that volumes are going to be down as well. So I guess with the inventory built that you have, if indeed volumes are going to be a little bit lower in your fiscal ‘25, how do you think about managing that inventory and your own order placing with the OEM? Thank you.

Yes. And you're right. I think the OEMs in their latest earning calls provided some color, and Deere being the end of their fiscal year provided some more granular color on their outlet for the next12 months. For us, I mean, it's not something -- we've been continually managing and estimating where things are going. You're always looking out a year ahead. So in terms of dialing things in and what we're ordering for next year, that's stuff that we've been working on already for quite a while, and are filling really good about where we're sitting and the dials that have been turning over time. We will absolutely manage inventory and focus on that. But overall, as we've said, we do feel good about where our levels are at. On the Ag side, we want more four-wheel drive tractors. On the CE side, we want some more wheel loaders. But one data point for you, just comparing it to say the prior cycle, right? The number of combines that we have in inventory is about 55% lower than it was in the prior peak. So I think some of that's reflective of the industry and the constraints that we're out there. But then also, our back-office team that's focused on managing inventory levels, both what we're ordering from a new side and also the used equipment valuations. So, the dollars that people are making comparison to in terms of prior peak, I think you need to consider the decade of price increases, the acquisitions that we've done and otherwise. I mean, overall, we feel really good about the inventory levels, but appreciate the comment and we'll certainly, as industry volumes trended downwards, we'll be managing our inventory accordingly. We want to keep inventory terms high, we want to keep interest free terms, and we want to keep our balance sheet really healthy.

Yes, and Mig, I would just add, as Bo mentioned, when you're talking about 6 to 12 and greater months lead time here, you better already have done the actions in place, and we've done that and we feel really good about that and heading into next year, and just as he mentioned, our professional team that just focuses on that for a living, that's all they do really watching a lot of the analytics and metrics and running the dials on our inventory. So, we feel really good about the actions we have taken. I think as we mentioned on our previous call and as Scott Wine mentioned on the CNH call, there is a little bit of pockets with some of that lower took, horsepower tractor inventory, real life style stuff that we're a little bit longer on than we'd like, but we have got actions in place on that as well to clean that up. And then as we mentioned with four wheel drives and wheel loads and so on, there is some pockets that we are still a little short on some certain categories. But other than that, we feel really good about where we are positioned to deliver the fourth quarter results that we need to and then as we transition into next year and what we anticipate the market is going to do next year.

Our next question comes from the line of Alex Rygiel with B. Riley Securities. Please proceed with your question.

Thank you and good morning, gentlemen. A couple of quick questions here, first, your full EPS guidance includes a range of $0.65 of which I believe $0.22 could be from the incentives. So if you could maybe talk about some of the catalysts being at high-end or low end of that $0.43 difference?

This isn't going to sound overly sophisticated, but it is related to the revenue and where that comes in took in terms of whether it is toward the top end or the low end of the range. We feel pretty good in terms of where we are going to be operating from a margin perspective. Operating expenses are pretty well, honed in right. So it really is just a function of how much of that equipment gets delivered.

That is helpful. And then, as it relates to sort of inventory kind of walking up a little bit in fourth quarter, I believe you might have thought that it would kind of tail off from the third quarter and decline into the fourth quarter, but now it sounds like you are expecting it to increase a little bit. Maybe I guess my question is. What has changed? And then, what's the mix of inventory across Ag versus construction is? Is one higher or lower than where you would like the optimal level to be?

Maybe addressing the latter first. I don't think so. I mean, in general, we are feeling pretty good about our inventory levels. On the CE side, the one that's short as well orders like we mentioned, but otherwise across the board in general, it is good. There are probably a couple areas just like on the Ag side, for example, low horsepower tractors, where we want to continue to look to trim just as we anticipate, trends going into next year. On the Europe side, also some areas there that we would be looking at to try to trim as we are seeing some softness specifically in Bulgaria and Romania, but on the whole, there is not a drastic difference, in terms of our take thoughts or level of health between Ag and CE as you were asking there.

Thank you. Our next question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Hey guys, and thanks for the question. We were just wondering how much visibility do you all have into these OEM deliveries improving, as we move into like the fourth and first quarter, and since we are going to have a similar dynamic to last year with maybe a heavier fourth quarter, do you foresee maybe delivery timing being a problem again in the first quarter, since you might get a large influx in the fourth quarter?

So, we definitely anticipate being a strong fourth quarter revenue wise compared to the prior year. And even a bit, if you do the math from where we were in the third quarter. Obviously, we have more equipment available and we have backlog there, right? So in terms of the confidence in the fourth quarter, we're feeling good about that stuff. And I think at the same time, we have talked a little bit about today in terms of anticipating that the inventory increases a bit from where we're at. So I think both of those we're saying is what our expectation is, right? And then we're in terms of setting up for next year, again, we are feeling like we're ending the year to healthy spot inventory wise. We'll provide more context guidance wise as we get into the March year end call. Did that answer your question?

Yes. That's perfect. And then on the service delay side, you said mentioned wanting to hire more technicians. How is that going? How is the technician availability? And are you having any trouble there that could limit your ability to catch up on this throughput?

Yes, there's a real shortage out there, just technicians in general, whether you're talking about the airline industry or trucking industry or marine power sports, wherever, automotive, and we really hit hard into this with our customer care strategy several years ago and have just a lot of actions in place that we feel really good about and have been the pilot and the cutting edge for many people in our industry that are trying to follow suit and keep up with us on a lot of the things we're doing. We just now came out with the first accredited apprentice program for our industry. We have the first student tech scholarship sponsorship program that we started years ago that we're really starting to see the fruits of now. And then our internship programs as well as the recruiting efforts that we're doing, the sponsoring that we're doing with tech schools and relationships we have with the high schools, and again, those tech schools. And so, it all takes time and thankfully we put a lot of the actions in place that we did that we're now able to see some of the fruits of the labor on because you got a lot of baby boomers, a lot of workers that are retiring now exiting the workforce. And so as you can imagine, it takes in order to grow the base and add the amount of technicians we need and then you to offset the retirements it takes quite a bit and we feel good about the traction momentum we've got in that, and that's going to remain an absolute front and center priority for us as we go forward.

Our final question this morning comes from the line of Steve Dyer with Craig Hallum Capital Group. Please proceed with your question.

Curious on the 6 million of manufacturer incentives that you expect to achieve in Q4, I guess, is that dependent on CNH and your OEM partners meeting their delivery schedules to you? Or is that fully within your control?

And for competitive reasons and others, we don't really get into a lot of the mechanics on that, but I guess what I would say right, is we have it in our guidance and that reflects our confidence in achieving the number. There are definite timing differences between this year and last year and that's why we put a little bit more perspective on that.

Then for a second question, what percent of equipment is leased versus sold today? And I guess how has that mix trended over the past several years?

Right now, we're in single digits on leasing versus sold just a tremendously low amount being leased. And that has trended way down. I think Deere mentioned also on their call, you look at that's a big difference between 10 years ago and today is not only the level of leasing, but the quality of the leases. So one in two year leases, everybody was doing those. They were very problematic back then. And then of course, when the downturn had hit, then those lease returns were coming back in addition to a glut of supply of used from the overbilling, overselling a new, that all happened, and none of that trifecta is in place today. So, we have way less leases. We have the leases -- we do have our minimum three year, mostly five year very quality leases. And then again, as Bo mentioned with a combine example, you just got a lot lower levels of used equipment in play today. And then unfortunately, it constrained our revenue opportunity, the last year or two here. But the limited production capabilities just didn't put out the amount of new units. So it results in an older fleet and most categories except to a degree, combines and so that helps with the dampening. And then with less new sold, you just didn't get the amount of used. And so again, back to the shortage of used supply. So, all those components are tremendously healthy and very supportive factors as we go into next year.

Thank you. Ladies and gentlemen that concludes our time allowed for questions. I'll turn the floor back to Mr. Meyer for final comments.

Okay, well thank you everybody for your time today and your interest in Titan Machinery.

Thank you. This concludes today's conference call.

That concludes our call.

Thank you. This concludes our conference call. Thank you for your participation. You may now disconnect your lines.