Greetings. Welcome to Titan Machinery's First Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, today's conference is being recorded. I'll now turn the call over to Jeff Sonnek with ICR. Jeff, you may now begin.

Thank you. Welcome to Titan Machinery's first quarter fiscal 2025 earnings conference call. On the call today from the company are Bryan Knutson, President and Chief Executive Officer, and Bo Larson, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal first quarter ended April 30, 2024. If you've not received the release, it's 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, which can be found on Titan's website again at ir.titanmachinery.com. The presentation is directly below the webcast information in the middle of the page. 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. 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 may discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures in today's release. At the conclusion of our prepared remarks, we will open the call to take your questions. With that, I'd now like to introduce the company's President and CEO, Mr. Bryan Knutson. Bryan, please go ahead.

Thank you, Jeff. Good morning, everyone. I'll begin today's call by providing a brief summary of the current market environment, then I will offer some thoughts on our results and updated fiscal 2025 outlook before passing the call to Bo for his financial review and incremental thoughts on our modeling assumptions. Our first quarter results reflect an industry transition to a more challenging market environment. We have rapidly moved out of a period characterized by restricted supply and high demand into one that reflects lower demand and excess supply of inventory in many product categories. This shift is mainly a product of two influencing factors. First, manufacturing delivery times have rapidly returned to normal following multiple years of supply chain constraints that significantly limited their production volumes. Second, we are seeing a softening of demand across our geographic footprint as ag fundamentals weaken. The combination of suppressed net farm incomes, extended duration of higher interest rates and broader macroeconomic uncertainty is impacting farmer sentiment and in some cases delaying equipment purchasing decisions. As a result of these incremental headwinds, we experienced a slower than expected start to fiscal 2025, which contrasts with the strong demand for equipment purchases that persisted throughout fiscal 2024. So while the normalization of supply chains and production schedules among our suppliers has enabled us to convert sales from our backlog, which in some cases have been delayed by more than a year, we are sensitive to the increase of new equipment inventory available for sale as well as used equipment stemming from trade-ins. Therefore, we are adopting more aggressive tactics to manage our inventories down to healthier levels, more aligned with softening industry demand. Big picture and longer term, we are laser focused on managing to healthy inventory levels, which correspond with whole good inventory…

Thanks, Bryan. Good morning, everyone. Starting with our consolidated results for the fiscal 2025 first quarter. Total revenue was $628.7 million, an increase of 10.4% compared to the prior year period. Growth was driven by contribution from our O'Connors and other acquisitions with the balance reflecting a 1.1% increase in same-store sales, which was driven by our agriculture segment. Our equipment revenue increased 9%, parts revenue increased 12%, service revenue increased 29%, and rental and other revenue was down 16.1% all versus the prior year period. Gross profit for the first quarter was $122 million and as expected, gross profit margin contracted by 140 basis points year-over-year to 19.4% driven primarily by lower equipment margins. Operating expenses were $99.2 million for the first quarter of fiscal 2025 compared to $81.3 million in the prior year period. The year-over-year increase of 21.9% was led by acquisitions that we've executed in the last 12 months, but also reflects an increase in areas like salaries and benefits due to merit increases in incremental headcount as we continue to focus on increasing service capacity in support of our customer care strategy. Floorplan and other interest expense was $9.5 million as compared to $2.5 million for the first quarter of fiscal 2024 with the increase led by a higher level of interest-bearing inventory, including the usage of existing Floorplan capacity to finance the O'Connors acquisition. Net income for the first quarter of fiscal 2025 was $9.4 million or $0.41 per diluted share and compared to last year's first quarter net income of $27 million or $1.19 per diluted share. Now turning to our segment results for the first quarter. In our agriculture segment, sales increased 5.8% to $447.7 million. Growth was driven by same-store sales increase of 4.3%, which was further supported by contributions from…

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Now our first question is from the line of Ben Klieve with Lake Street Capital. Please proceed with your questions.

All right. Thanks for taking my questions. Plenty to talk about. I'll just leave it with a couple here. First of all, Bo, you lined out expectations for inventory decreases starting in the second half of this year with more substantial decreases, I think is how you framed it in fiscal '26. I'm wondering if you can first of all help us frame your expectations for inventory levels ending this fiscal year and maybe more notably ending fiscal '26.

Yeah. So in terms of how we see inventory continuing to progress and probably not inconsistent with what we talked about on our earnings call in March, we see inventory levels exiting the year similar to where we started the year. So again, it will climb in the first two quarters as we saw in Q1 and then kind of take back some of those increases, get back to about where we started. And then in terms of FY'26, the reason for the more substantial decreases, right, is just the timing of inventory ordering and then when things are coming in. So going back to a year ago now, even before that, kind of anticipating and turning down the dial in terms of order activity and then it was a matter of playing it out, right? So orders are coming in through the first half of this year pretty rapidly as lead times have compressed. Then we start to see that slowdown in the back half of the year. And then based on our order activity from here forward that really dictates how much is coming in next year. And with really good visibility to where we think demand is and where we want to see targeted inventory levels go, we're going to be able to see those levels decreasing faster again through FY'26. In terms of the exact dollar figure, that's going to be dependent, right, on our view on where industry demand is going because ultimately the targets that we're looking for are exactly what Bryan laid out a little bit earlier, right? So one of the -- number one things is you want to make sure that you're not incurring Floorplan interest expenses that's not a value added activity. But from an inventory turns perspective that range of 2.2 to 3.2, clearly, we want to be in the middle to the higher end of the range, but certainly the lower end of the range is reflecting transitionary periods that are slower and which you need to adjust inventory levels. So as we work through '26, get a good feel on what industry demand is at that point, that's the kind of target that we're looking to hit exiting that year.

Okay. That's helpful. And then one other one for me, I'll get back in line regarding Australia. Understood all the various macro dynamics facing the entire industry broadly in Australia specifically. Can you comment on the performance of Australia in this quarter versus your expectations and in particular if seasonality in this business is maybe more pronounced than you were maybe expecting?

Well, I would say that from a seasonality perspective, the expectation is and historically it has been the 45%, 55% split, perhaps a bit more pronounced in terms of the difference between Q1 and Q2 and then the difference between Q3 and Q4. So Q2 and Q4 being kind of outsized quarters and Q1 and Q3 being a little bit slower quarters there. But overall, the first quarter came very much in line with expectations. Entering the year, they had a significant amount of backlog and pre-sold equipment that was either on the ground or continuing to be delivered. So there's some good comfort in terms of a level of revenue that's going to be progressing through the year and that's a matter of PDI-ing that equipment and getting it in customers' hands. So thus far in line with expectations, loving the leadership team, excited about the branding launch this summer and just moving forward to be on that, talking about longer synergies with 24/7 service call centers and the like.

Yeah. Ben, Bo covered it well. I would just add, we talked last call here and the call before about very recently in the back half of last year and especially in the final quarter of last year is when deliveries finally started catching up and really started rapidly increasing and we've talked about how we'll see that continue through the especially the first half of this year. Well, in Australia, there are still a couple product categories that have been the slowest to recover and then you add in the transportation time as well. So as Bo pointed out, we do have some -- a good amount of order backlog there and good pre-sales that have just been delayed a little bit, and then also the time to get those through the shop as they're coming a bit delayed. So that will all bode well for us for our Australia segment the rest of the year.

Very good. I appreciate that context. All right. Very good. I'll get back in line. Best of luck here in coming quarters.

Thanks.

Our next question is from the line of Mig Dobre with Baird. Please proceed with your questions.

Yes, good morning. I got a couple of questions on ag and some on construction as well. I guess, I'm looking to clarify first and foremost your comments around equipment gross margin. Can you be maybe a little more specific in terms of how you're -- what's embedded in the guidance for the full year?

Yeah, absolutely. Specific to ag, our equipment gross margins embedded in the guidance are about 9%, which is a step back year-over-year of about 320 basis points. If you look at that historically in the broader context taking the past decade into consideration, that's really moving our assumed margins to the low end of what we've experienced over the last decade with the exception of FY'16 and FY'17. Those particular years, we were in a significantly different inventory health position. Specifically, at that point in time, we had inventory that was aged greater than 12 months at 50%. So half of our inventory was sitting on the lot for more than 12 months, whereas today that's 9%, right? So a significantly different health of inventory, and that's why those two are a bit more of an outlier. But taking that into context and again looking at the past decade, we're really moving our margins. So the low end of the range of what we've experienced, all in the name of driving the top line and getting to a healthier inventory position. I mean, could you theoretically maintain higher equipment margins and a little bit lower sales and perhaps end up in the same spot from an earnings perspective? Probably. But in terms of what's best for the company going forward, it's really getting that inventory level to targeted levels as quickly as possible. That's why we're embedding this in the guidance, that's why we're wanting to get a bit more aggressive. One more data point for the first quarter and this is for the company as a whole, equipment margins were down about 230 basis points. While our guidance implies for the rest of the year that equipment margins will be down 330 basis points. So incrementally about 100 basis points the rest of the year. And again, that's reflective of the incremental softness on what we've seen on demand, but even more specifically the actions that we want to drive to achieve our inventory outcomes.

Understood. I guess, what I'm personally struggling with a little bit though is if we're taking the gross margin on ag down to near decade lows, this is happening though as you're still not fully destocking in fiscal '25. I mean, you're basically saying that the destock is going to be a fiscal '26 event. So the margins are coming down while inventories are still going to be relatively elevated. I guess, how do you think about that, right? Like what's the incremental risk here to margin going forward as you truly go into destock mode? Should we maybe expect another move lower as we contemplate fiscal '26 or not?

Well, the difference here I think that maybe you didn't quite articulate there, right, is the order volume coming in year-over-year. So the significant amount of order volume as lead times collapsed from 18 to 24 months down to the normal four to six month timeframe is bringing in more than a year's worth of orders in a two or three quarter period of time. So now as we drastically change the order flow, next year is more of playing that through and seeing a significantly less inflow. And then the outflow will be what it is based on demand to get you to your objectives. This year what we're saying is that we want to take those more aggressive actions at the expense of margin to get to the best endpoint that we possibly can, right? So more of that hit is this year to absorb all of those orders that again is more than a year's worth of order activity in a shorter period of time.

Okay. Then, I guess, moving on to construction, there is on a slide where you're kind of talking about market conditions in the outlook. You mentioned in there that you're taking an aggressive stance to lower inventories, maybe you can comment a little bit on that. I also thought it was quite interesting that the rental fleet utilization has been down -- has been lower, significantly lower, actually 500 basis points. So maybe a little bit of context as to what's going on there as well.

Yeah. So certainly, there's different extents across our segments, but from a CE perspective and then the industry in general, right, I mean, we are at similar thematics in terms of moving past supply chain constraints and then equipment availability increasing significantly and the compression of lead times. So the same story applies a different extent. So that's where we're just saying. Similarly, we want to make sure that we get to the targeted inventory levels that we want for CE in similar fashion. From a rental utilization perspective, maybe Bryan you want to add some comments.

Yes, Mig. Just up in our footprint combination of as Bo talked about the lack of snow obviously up here in the upper Midwest, snow is a big part of what we do. And so that impacted the utilization. The lack of snow cover created some deep frost and cold temperatures we had throughout the winter, which caused a delay to a lot of the spring start to the construction season that's now well underway in full swing. And then just add in there some of the things around uncertainty around residential interest rates, some of the softening in commercial and the like. And so a little bit of softening there is also impacting, but -- so a combination of a late start. So we expect a good uptick here in our rental as we go forward now, but also it is overall a little softer environment than the last two years.

Understood. Final question, maybe another clarification on the action that you're taking here. When -- we're seeing the impact on margin reflecting the guidance discussion. So I understand that, but I'm sort of curious as to what the actions per se are. I mean, does that mean that you're essentially cutting price or are there some incentives that are being offered in both construction and ag? How does that dynamic work on your end? What do you have to do to get this equipment moving off the lot? Thank you.

Yeah, Mig, all the above. That's what's embedded in a lot of different tools. As you know, I've been doing this a long time and been through downturns before and I personally sold a lot of iron. We've got an extremely good team that we've put together now, our leadership team and our entire team that's experienced and been through this. It's a very scripted approach. You're going to pull different levers depending on what product category, what customers, what their needs are. But yeah, some of those examples would be some things you mentioned, whether it's interest buy down, interest waiver, a split rate program, whether it's an extended warranty or sometimes just straight up price. But every one of those is going to ultimately map back in the accounting to the margins. And so that's what we've got embedded in. And it's just -- what is it that for the grower contractor works for them and their banker and makes their operation better by updating that piece of equipment and again a simple example can be moving from a current rate contract of a 4% fixed or something into an interest free contract or being out of warranty and moving into a machine that now has warranty or technology advancements making them more efficient, et cetera, et cetera. So we're very cognizant of arming our team with those tools, communicating those tools and being very aggressive here. And as I mentioned in my prepared remarks, it is our single biggest initiative right now.

Thank you.

Thank you. Our next question is from the line of Ted Jackson with Northland Securities. Please proceed with your questions.

All my questions have been asked and answered. Thanks very much.

Thank you. At this time, I will now turn the floor back to management for closing remarks.

Okay. Thank you for your time today, everyone, and we look forward to talking to you all again in our Q2 call.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.