Greetings, and welcome to Titan Machinery Inc. Second Quarter Fiscal 2025 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. It is now my pleasure to introduce your host, Jeff Sonnek. Thank you. You may begin.

Well, thank you. Welcome to Titan Machinery's Second Quarter Fiscal 2025 Earnings Conference Call. On today's call from the company are Bryan Knutson, President and CEO; and Bo Larsen, CFO. By now, everyone should have access to the earnings release dated July 31, 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 also be found on Titan's Investor Relations website 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. Those statements do not guarantee future performance, and therefore, undue reliance should be placed upon them. These forward-looking statements are based on management's current expectations 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 the most comparable GAAP financial measures in today's release and presentation. At the conclusion of our prepared remarks, we'll open the call to take your questions. And with that, I'd now like to introduce the company's President and CEO, Mr. Bryan Knutson. Bryan, please go ahead.

[Technical Difficulty] our second quarter performance and our near-term outlook. Then I will pass the call to Bo for his financial review and incremental thoughts on our modeling assumptions for the remainder of the year. As we shared two weeks ago in our second quarter pre-announcement, the agriculture equipment industry is adjusting to the softening demand as the agriculture fundamentals have materially weakened, driven by the anticipated decrease in net farm income and sustained higher interest rates. The decrease in net farm income is largely being driven by significantly lower commodity prices for most key cash crops in our footprint, which have steadily declined since the beginning of the year. These elements, combined with mix growing conditions across our footprint, are negatively impacting farmer sentiment and have manifested in lower retail demand for equipment purchases. Through this period of softening demand, we have shifted to a much more proactive and aggressive approach as we actively work to reduce inventory to targeted levels, especially on the used equipment side, will in turn reducing floorplan interest expense. This strategy requires compression to our near-term equipment margins. However, the actions we are implementing will inherently shorten the impact on our performance during this period of lower demand and will accelerate our return to a more normalized margin profile as the industry cycle progresses. As we navigate the current cycle, it's worth highlighting the significant differences from the last downturn, which underscore the improved health and preparedness of the entire sector. Unlike the previous cycle, we are seeing a coordinated, proactive approach to inventory management across the industry by both dealers and the OEMs. At Titan, we are particularly focused on efficiently aligning inventory with demand by carefully analyzing market trends, adjusting pricing strategies and working closely with our suppliers on financing terms for…

Thanks, Bryan. Good morning, everyone. Starting with our consolidated results for the fiscal 2025 second quarter. Total revenue was $633.7 million, a decrease of 1.4% compared to the prior year period. Underlying this performance was a same-store sales decrease of 12.5%, driven by lower demand for equipment purchases due to the expected decline of net farm income this growing season. This was largely offset by the acquisition of O'Connors that we completed in October 2023. Gross profit for the second quarter was $112 million and gross profit margin contracted by 310 basis points year-over-year to 17.7%, driven primarily by lower equipment margins resulting from higher levels of inventory across the industries we serve and our proactive stance on managing our inventory down to targeted levels, as Bryan discussed earlier. Operating expenses were $95.2 million for the second quarter of fiscal 2025 compared to $88.8 million in the prior year period. The year-over-year increase of 7.2% was led by acquisitions that we've executed in the last 12 months. This year's second quarter operating expenses also included a $1.5 million noncash impairment expense related to certain assets in our European segment. Floorplan and other interest expense was $13 million as compared to $3.7 million for the second 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. GAAP reported net loss for the second quarter of fiscal 2025 was $4.3 million or $0.19 loss per diluted share and compares to last year's second quarter net income of $31.3 million or $1.38 per diluted share. The current quarter's reported net income includes $11.2 million or $0.36 per diluted share impact related to the onetime noncash sales leaseback financing expense we incurred in the quarter. Excluding this…

Thank you. We will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ted Jackson from Northland Securities. Please proceed.

Thanks very much. I have two questions. My first question is just with regards to ag spending and seasonality. When you look at the second half of 2024, do you think that it's likely that we will still see some level of flush or spend in the fourth quarter as is typical -- in a typical kind of seasonal pattern? Or are you thinking that the market is so challenged that we will not see that kind of seasonal flush that we typically get? That's my first question.

Thank you, Ted, and good morning. Yes. So we're still anticipating fourth quarter spending here by farmers and contractors as they see how the year shaped up, meet with their accountants. And as we go back to those varied crop conditions that we talked about, certain areas of our footprint, if you look in the western half of South Dakota, all throughout Nebraska, pockets of Minnesota and North Dakota and Iowa, there's really, really good yields. So those farmers, even with the subdued prices, will have some spending needs as well. And we'll be looking to update some equipment. Also because of the supply constraints that we had, a lot of those growers weren't able to update certain equipment the past couple of years. So those growers that do get the yields, we will see some traditional good purchasing from them. But subdued to the levels that we've got in the modeling here. So I think the trend, the timing patterns will be very similar, but just, yes, definitely lower than normal purchases here in the -- towards the end of the year.

Yes. So as you take a look at the guidance and then look at the back half of the year in terms of what's implied, as he said, seasonality is very similar there. So if you drill down to our domestic ag business specifically, we've got full year total equipment sales being down about 11%. In the first half of the year, that was down about 4%. But again, we were coming into the year with a lot of presales there, right? So we're essentially applying about a 15% decrease in the back half of the year, which is a little bit more of a decrease than we saw in the second quarter, but not significantly. So kind of stabilized at this point in terms of year-over-year comps, but the cyclicality and timing of purchases remains.

Okay. My next question is just on inventory. And so actually, I thought it was good news to hear that you think you're at peak inventory and you'll start to see that come down. And with it accelerating in 2025, when you look into your crystal ball, and I'm sure it's sharp and clear like a high-definition television, when do you think you can get your inventory to what would be a normalized level vis-a-vis demand? Is that something that we could expect to see before we get -- by the second half of 2025? Or is that something that's going to take longer? And then I actually do have one more behind this.

Yes, I'll let Bo take that one, Ted. But maybe just to set the stage, a couple of points that are now working into our rearview mirror is leading up to this, you look at just the unprecedented confluence of abnormal factors that came together to lead to this inventory spike, driven by the COVID supply chain issues, the plant strike at CNH, which all led to record long lead times. And really in my nearly two dozen years of doing this, the most unpredictable order boards over the past 18 months or more that we had. So now we have much more clear order boards, shorter lead times. And secondly, we have not placed an order for inventory stock in over six months. However, what we've been facing in the end of last year, all throughout this year is finished working through those orders that, in many cases, were placed back in 2022. And so we are now just starting to receive the last of those orders. So now we can actually start to plan the business accordingly. And the task at hand is very clear now as we just have to work through what we've got, and we don't have any more of these old orders, if you will, that were placed before things started changing coming in to deal with and work through.

Yes. And then maybe a little bit more color. So as I talked about in the opening comments, we're at about $1.3 billion in total equipment inventory. Roughly speaking, call it $900 million would be a good targeted level. That would assume about a 2.5 times turn on the domestic side, and then there's some regional differences in terms of how that shakes. But -- so call that about a $400 million difference. As we look through the rest of the year, working towards executing on and achieving close toward $100 million decrease for the year, leaving about $300 million to go, we'll have to provide more commentary at the end of the year in terms of what the next year really looks like. But I mean the idea to be able to get to those target levels by the end of next fiscal year, I think, is a good base point for us. Just as a comparison, looking back in history, if we went back to the last downturn in FY 2014, so at the end of FY 2014, by the time we got to FY 2016, we drove an inventory reduction of about $350 million. So about $50 million less than we're talking about here. And what we're talking about doing is being more proactive, right, in driving that $50 million incremental change in an 18-month period of time instead of a 24-month period of time. So it's something that we've done in the past since we know the playbook to execute, and that's the guidance I would give you today, and we'll certainly provide more color on that as we progress through this year and then as we set the stage for guidance for next year.

Okay. And I’ll just skip my last question. It’s irrelevant. Thanks for the time. Talk to you soon.

Our next question comes from Mig Dobre from Baird. Please proceed.

Good morning. I guess I'd like to maybe just start with a couple of points of clarification about the quarter itself. So two items here. If I'm looking at the margins in rental and other, the gross margin there was quite a bit lower than what we had in the prior year. And I'm trying to understand what's happening with that subsegment and how you see that progressing going forward? And also related to the quarter, we've seen a higher level of other expense. I think it's north of $7 million, if I'm not mistaken. And I'm kind of curious as to what that line item is specifically and how that plays out in the back half?

Yes. No, I appreciate the question and the chance to clarify that. That $7 million is essentially, for all intents and purposes, it's the net of the $11.2 million sales leaseback expense, netted against that $3.5 million new market tax credit completion. So that gets you to that $7 million. And really, there shouldn't be a significant amount of activity in that account otherwise. So that's what you're seeing there. From a margin perspective, on the rental and other side, I mean I would say probably similar to what you've seen elsewhere, rental fleet utilization is certainly down for us this year. It's something that we're focused on in managing fleet size. And we would expect that to persist through the back half of this year. Again, we're doing similar thanks to what you've heard others in the industry. We'll probably work to manage the fleet down somewhat as we finish developing our outlook as we get into next year as well.

And why is it that your utilization is down in rental? Can you maybe remind me if you've experienced a significant increase in fleet? Or there are other factors here?

Our fleet is basically flat. So it's purely a function of the physical utilization, Mig. So just in that tie directly to the softening in the construction industry, softening in residential and warehouse in some of the areas -- other areas that, especially our rental business really plays. Good news about the rental sector for us is it can be a very high-margin business and very much a function of utilization. So a slight dip in utilization can lead to a pretty big swing in margin and vice versa. So just really got to keep pushing and keep the machines out there working on the job sites. But that's what you'll typically see when there is a softening. Our contractor customers have their core fleets. And when things really swing up quicker or stronger economy, that's where they really rent. And then as it softens, they pull back in and use their core fleets and -- so I think you're seeing some similar swings with the Uniteds and some builds of the world.

And I think he's pretty much got it covered there. But underlying that, right, is the rental is largely a construction business. And our rental fleet size is about $80 million, and it's pretty much flat.

Very helpful. Maybe going back to the equipment inventory discussion. I appreciate the color in terms of how you see progression down $100 million in the back half and then more work to do in fiscal 2026. But I'm sort of curious as to why we're only seeing $100 million of inventory decline here. Can you maybe help me understand what's going on with the shipments that you're getting from the OEM in the back half of this year? And related to this, the margin compression, as you talked about, is pretty notable on a relatively small inventory decline. What is it that you actually have to do to generate this inventory decline, such as it is in the back half of fiscal 2025?

Yes. So in terms of -- I'll make sure that we address both of those points, right? But in terms of how this plays out, right, is -- at the beginning of the year, we talked about the orders that we had placed going back in time. Bryan earlier mentioned on the extension and then compression lead times. So I think we're all familiar with that. But in March, if you go back and listen to the call, we talked about projecting forward based on receiving those orders that we had already placed. Inventory increases in Q1 and Q2, and then we'd start to see an inventory decrease in the back half of the year. The first half of the year pretty much played out how we had expected, despite the revenue miss. Back half of the year, right, we're going to finish. In the Q3, we're going to finish receiving kind of the rest of the orders that were placed previously. And then you really start to see that tail off. So what we'll be doing, right, is we'll be selling through that new equipment that we've received in the first half of the year and Q3, a lot of which is presold, but you got to receive it and deliver it. Once you receive in that new, you sell it, you get to use trade in. Once you sell that use, do you get to use trade in, right? So there's a bit of an effect where we'll see our new whole goods decrease more substantially than the numbers we're prescribing here, but we're going to see that partially offset by an increase in used equipment, which is typical for us as you move into a downward portion of the cycle, right? And then for the next two years, that used sales will be a larger portion of our equipment mix as you work through that and then get everything normalized and back to targeted levels. So that's exactly how it's going to play out, and there's a bit of a two stage effect to that. And that sort of also answers, why don't you see a more prescribed decrease in the back half of the year? Well, going into the year, we would have, right? But certainly, our latest guidance has taken quite a bit of sales out of the back half of the year. So assuming that new outlook, that's why you're not seeing a larger decrease.

I would just add to you. It's a function of the lead times very much as well. So we were dealing with unprecedented record long lead times. And so as I mentioned, Mig, you just got to -- you also -- we also have to work through these orders that have been coming in all year since you shut the fascia. So basically add that to it. And that's what's all baked into our modeling, and we've got all of our inventory aggressively priced, and that's also baked in -- that's in the modeling -- the margin modeling as well. So we feel positioned very well to hit the task at hand and hit our time line goals that we have. And to your point, and unfortunately, because of those long lead times and the orders that I'll add to that, that come in after we've started down this path, it just takes longer than we all want.

Is that being the case, as we're looking at calendar 2025 or in your case, your fiscal 2026, you're basically saying that the bulk of your inventory normalization is going to occur then, right? So it's going to occur next year? But you're already experiencing pretty significant margin pressure this year in the back half of 2025. So I guess the question is, if most of the destock is happening in fiscal 2026, should investors expect further margin compression in 2026 because, frankly, that's where most of your destock is actually going to happen?

Yes, I think that the dynamics will have in terms of needing to work targeted inventory down what we have in the back half of the year persists into next year, right? But the biggest move that's going to make in terms of the decrease in inventory is actually going to be less coming in at the top. So I think we'll see similar -- right now, we're not providing guidance for next year. But right now, what I would prescribe is margins we're seeing in the back half of the year. Base cases you assume that those carry forward into next year until we -- shall we see more of that inventory decline. But generally speaking, I would suggest it would be similar to what we're guiding to as opposed to more compressed -- and again, we're going to see a lot of the inventory decline next year come on the back of simply less -- substantially less inventory coming our way. And we'll really be focusing on that same population of used equipment, a good portion of which we'll already have in our inventory and price right here before we exit the year.

Okay. Last question for me. In terms of the orders that you're placing today with the OEM, given the circumstances of the industry that we already covered here, are any of these orders that are for your inventory? Or do you actually have a customer name associated with each one of these orders that you're placing? And again, these are orders that you're placing today for future delivery sometime into fiscal 2026 or whenever?

Yes, very much a customer name. An extremely minimal amount, Mig, of stock units for loaner purposes to keep customers going and some demo units, but much, much less than any other year we would do. So the great majority of them are all presale customer name. We're just not ordering units for stock or display or for the walk-in sale. Any of the stock units we're ordering are extremely limited and very intentional, again, with the purpose of keeping customers going.

Yes. And I mean, I think you heard that clearly and you asked a good clarifying question. Just to emphasize that, right? We're absolutely still focused on generating presale activity, and that's what we always want to be leading on. So we're going to continue to place presale orders that have a customer's name on them, and we have been throughout the year. And it was -- as Bryan mentioned and then you're asking about here, it's the stock side of things that we really pulled back on, and there's little to no activity there. And all of that kind of comes together right in the stock is what you get targeted and will take down as we progress through the next 18 months.

And then, Mig, I'll just go back to one more thing on your margin question. Really a function of orders coming in as baked up against the inventory reduction targets. And so if you look at what we've done and what we've got baked into the back half of this year, we've been outpacing the industry. And we've needed to because of those legacy orders that are coming in. And so as we transition into next year, because we haven't placed these stock orders and we don't have those legacy orders coming out to deal with, we can now start to sell in line with the industry and also not have that margin pressure that we have from outpacing the industry and still work our inventories down further.

Understood. Thank you for taking my questions.

Thank you, Mig.

Our next question comes from Ben Klieve from Lake Street Capital Markets. Please proceed.

Thanks for taking my question. A couple from me. First of all, one more on the equipment margin front. You talked about kind of an explicit focus on your inventory control being one of the contributing factors to margin compression. I'm wondering if you can kind of talk about the range of equipment margins from maybe those categories that you are kind of almost intentionally driving down in the current environment, to -- on the high end, the categories that are much more balanced from a supply-demand perspective, perhaps on the precision side? Is the range of margins in equipment materially expanding, is the high-end staying firm? Or are you seeing compression really across the board throughout your product line?

Sure. Thanks, Ben. It is generally across the board on the equipment. However, again, I go back to it's a function of which specific product categories were a little longer on is where we're being more aggressive to outpace the market. So depending on to what degree we need to outpace the market to reduce those faster, there is a little more margin compression in those categories. And then typically, your higher cash crop products would have a lower margin percentage, but higher dollar ticket items, so higher dollars overall. And then third is just there are still -- again, I go back to the amount of inventory in any category. So there are still some products that were really underproduced that are still in demand and still seeing some decent margins on some of those product categories. So we're being very prescriptive on that. And again, really looking at every product category, every bucket and be more aggressive, certainly in some areas than others depending on how quickly we need to outpace the market here.

Yes, you were asking a little bit on the precision side, and I think we alluded to it a bit. Certainly, automation, continued precision technology that's help driving efficiencies and profitability for farmers. It is something that is a net positive in terms of driving purchasing decisions, and we see really good take rates on that. Relative dollars-wise to the whole goods equipment themselves, you don't necessarily see as much of what we're talking about here. But it's absolutely a positive factor, and it's something that's going to continue to grow as we progress over the next several years, just like all the OEMs have alluded to.

Very good. Okay. That's very helpful. And then one other one for me. It's good to see you still being so optimistic about the state of the service business. I'm wondering in this kind of weak ag environment here, kind of what the impact of this ag economy is on that business, both in terms of -- are you seeing farmers in any way less compelled to outsource service? And does this -- is this at all a benefit for you in securing much-needed labor given the challenging environment that individually are facing kind of throughout the ag economy?

Yes, yes. So yes, Ben, it's certainly their mindset and their banker's mindset is to spend as little as possible right now. So they are not wanting to do as much in repairs. However, they're certainly mindful of the stakes are so high, the planting windows and the harvest windows are so short. On construction side, the job sites, one piece of equipment goes down, can tie everything up and the deadlines and the penalties. And so again, downtime is so expensive for them and they get that. And we've really done a great job partnering with our customers, and they really see the value in us working with them on that. So that, combined with for quite a few years now, we have not been able to keep up in our shops, and that's why we've had such a push to add technicians. So even if it falls off a little bit, our shops are still generally really full across the board. And then third, as the general economy has tightened, you've seen some changes in the job markets and the unemployment rates and so on, that has helped. We are getting some additional applicants. You combine that with the actions that we're doing at Titan. We've got the first-ever diesel camp program, which has been huge success. First internship program in our industry. We've got our student tech sponsorship program that's been -- we pioneered has been industry leading, that's led to about 80 new technicians for us this year. We've got the first-ever accredited federal apprenticeship program in our industry, which we're getting a lot of good candidates in there. And so we're really starting to see some of the fruits of our labor there. And that's been our biggest constraint to our service revenues. So we feel optimistic, again, about that being a long-term growth initiative for us. And again, the customers just really see the value of it because the downtime is so critical.

Got it. Very helpful. I appreciate you taking my question. Best of luck here in the back half of the fiscal year and I’ll get back in the queue.

Thanks, Ben.

Our next question comes from Alex Rygiel from B. Riley Securities. Please proceed.

Hi, there. Good morning. This is actually Min, on for Alex. And just a couple of quick questions here. Just first, I know that this will probably come out in the queue, but what was the average rate on your floorplan financing in the quarter?

Yes. I mean, it's roughly 7.5, 7.45.

Okay. And also just given that you're the largest CNH kind of dealership, do they provide you or have they in the past, provide you with any additional concessions in a down market like extending the noninterest-bearing time frame? Or just anything there? I know you guys have obviously a strong relationship with them.

Yes. CNH certainly wants to see their dealers healthy and to see their dealers be able to perform through this down cycle and be able to reinvest in the business and again, stay strong and profitable and healthy. So yes, they certainly partner with us where they can and help us out with exactly the levers that you mentioned are good examples of things like helping with floorplan interest or extended terms and partnering together on financing programs, et cetera.

Yes. And ultimately, big picture, right? The win-win is to get inventory sold through and manage production, I think what we're focused on. So we were also alluding earlier in the comments, a lot of focus on in providing financing for customers to drive that pull-through, which is really what we want.

Excellent. Also in terms of your cost-cutting initiatives, I understand that you've cut a lot of costs since the last downturn. But can you quantify how much cost you're looking to take out maybe in this fiscal year or the next? And are you considering any divestitures at this point?

Yes. So from an overall expense perspective, if you set Australia to the side, we will have -- our forecast assumes about a 2% increase in OpEx year-over-year, about $8 million. And that still even includes our Scott Supply acquisition, which added a couple of million dollars. So generally speaking, we're saying we're flat year-over-year. When you think about our cost structure, so much of our OpEx is people. and our people aren't focused on producing equipment, right, which is decreasing. Our people are focused on selling the equipment that we have and providing the customer service and support. So we have some different dynamics at play than the OEMs do. And we want to make sure that we're maintaining that staff. But certainly, we're -- got a sharp pencil. Any discretionary spending has certainly been whittled down and we'll continue to keep a tight eye on that. Hiring, we're also looking at very closely. And generally speaking, managing headcount down somewhat as we progress through, say, the next 18 months, again, depending on where the industry continues to go. But not -- no big moves there. We'll give better guidance on OpEx for next year as we get through the rest of this year. But that kind of lays the groundwork for you on what we're focused on. And I just wouldn't expect some drastic change there. We need to continue to drive. We're seeing that high single-digit growth in our service department. We need to continue to lean into our people in order to get that done. And so that's what I would say on operating expenses.

Okay. No, that definitely makes sense. And then also, can you just remind us what percentage of your Construction segment revenue comes from non-agriculture related kind of sales and rentals?

It's just over half.

Okay. And that's obviously the segment where you're still seeing some stability and hopefully some growth kind of going into fiscal 2026 given all the infrastructure spending that hopefully will kind of start at that point?

Yes. Yes.

All right. That’s it from me. Thank you very much.

Thanks.

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

Hi, guys. This is Matthew Raab on for Steve. Just one question on the P&S business. Thanks for the color on the service growth. Is that just second half? Or is that for fiscal year 2025? And then secondly, any outlook for the parts business?

Yes. So no, I mean, we saw a good service growth in the first half of this year as well. And so second half is a bit of a repeat of what we saw. And just to clarify as well, right, those growth assumptions are more of the same-store basis. So Australia obviously, adds their own component as well. So no, I mean, it's everything we've been building up on and talking about customer care strategy, it's driving increase in service tax. It's the focus on providing best-in-class customer service and support. It's the people that we have in the field. It's making sure that we have the right parts. It's everything that the company has been working on for years that will continue to pay dividends for the long term, and that's what we're really excited about regardless of where you're at in the cycle, what we'll be able to deliver for our customers and then ultimately, what that means for our shareholders as we go forward.

Yes, it was kind of a good affirmation to see. Recently, one of our competitors has laid out that one of their top three initiatives is on the parts side, and especially to increase their fill rates and have the parts in the right place at the right time. And that's actually exactly the one of the components of our customer care strategy that we've been aggressively going after here for quite a few years now, and we're really starting to see the fruits of that. And as I look at the industry numbers, our counter fill percentages are higher than what has been laid out. And so industry leading there. And that's -- our customers are really seeing the benefits of that, too. So it's starting to pay off, starting to get a reputation for having the right part and having the parts on hand for them and competitive pricing, too.

Okay. Thanks, guys.

This concludes our question-and-answer session. I would like to turn the floor back to management for closing remarks.

Thank you for your interest in Titan, and we look forward to updating you with our progress on our next call. Have a great day, everyone.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.