Titan Machinery Inc. (NASDAQ:TITN) Q2 2024 Earnings Call Transcript

Titan Machinery Inc. (NASDAQ:TITN) Q2 2024 Earnings Call Transcript August 31, 2023

Titan Machinery Inc. beats earnings expectations. Reported EPS is $1.38, expectations were $1.15.

Operator: Greetings, and welcome to the Titan Machinery Inc. Second 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. Thank you. Please go ahead.

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Jeff Sonnek: Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery second quarter fiscal 2024 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; Bo Larsen, Chief Financial Officer; and Bryan Knutson, President and Chief Operating Officer. By now, everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2023, which went out this morning at approximately 6:45 a.m. Eastern Time. If you’ve not received the release, it’s available on our Investor Relations page on 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. 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 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 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. At the conclusion of our prepared remarks, we will open the call to take your questions. And with that, I’d now like to introduce the company’s Chairman and CEO, Mr. David Meyer. David, please go ahead.

David Meyer: Thank you, Jeff. Good morning, everyone. Welcome to our second quarter fiscal 2024 earnings conference call. On today’s call, I’ll provide a summary of our results, then Bryan Knutson, our President and Chief Operating Officer, will give an overview for each of our business segments. Bo Larson, our CFO, will then review financial results for the second quarter of fiscal 2024 and conclude with some commentary around fiscal 2024 full year expectations. We will also follow-up on the O’Connors acquisition that was announced yesterday with a high-level overview. We carried a strong momentum into the second quarter with revenue increasing 29.4% to $642.6 million. This performance reflects double-digit same-store revenue growth across all three of our operating segments combined $86 million contribution from the Heartland and Pioneer acquisitions.

Our organic revenue growth was also balanced across equipment, parts and service, each of which performed well and also delivered healthy gross margins. Taken together, we generated a consolidated pretax margin of 6.5% and diluted earnings per share of $1.38, which is more than a 25% increase over last year’s second quarter earnings performance which once again demonstrates the strength of our organization and the efficiency which we are operating in the business. Next, I’d like to provide an update on our equipment inventory. Consistent with our prior expectations, we are seeing some improvement in equipment availability of several equipment categories, but do not anticipate receiving shipments of high horsepower tractors, self-propelled sprayers or wheel orders in excess of customer retail units.

We continue to see demand for these products sustained at high levels and expect that to continue into next year. With our suppliers’ production capacities being limited, we do not anticipate replenishment towards targeted minimum stocking levels for these equipment categories until at least the second-half of calendar year 2024. This is on doubly limiting our sales levels. I’m very proud of the team for achieving these record results given all of these constraints. Now as you may have seen last night, we are also very excited about our definitive agreement to acquire O’Connors, the largest Case IH dealership group in Australia and a market leader in high horsepower equipment. O’Connor’s has a seasoned management team with a proven track record of driving solid financial performance through a combination of organic and acquisitive goals for over nearly six decades.

Additionally, the operating metrics, core values and customer-centric focused highly aligns with our own, making them a great partner for our entry into the Australian agriculture market. In their fiscal year, which ended on June 30, 2023, O’Connor’s generated revenue of $258 million and an EBITDA of $21.4 million, which demonstrates the scale of the network they’ve developed. Combined, the Titan Machinery enterprise, including the O’Connors acquisition, is expected to generate annualized revenue of approximately $2.9 billion, and approximately $200 million in adjusted EBITDA, which makes us an even more formidable player as a global agriculture and construction equipment dealer. Australia is the largest wheat producer in the Southern Hemisphere and the third largest wheat exporter only behind Europe and Russia.

O’Connor stores are located in Australia’s highly productive grain belt, which produces 60% of Australia’s wheat. The Australian market is benefiting from strong fundamentals that are being driven by enhanced productivity, economies of scale and farmer profitability. O’Connor’s focus on high horsepower cash crop production equipment and Australia’s grain belt region is being supported by combined farm expansions and increasing adoption of precision ag technology that enhances productivity and crop yields. These trends are very similar to that of Titan’s domestic and European agriculture business and coupled with Australia’s native English language and comparable legal system, this transaction bodes well for a seamless integration that carries over into our shared values and customer-centric focus.

We believe it also provides Titan with the unique operational synergy opportunities to expand our global customer service capabilities and capacity across the network. The Australian market is at the early stages of dealer consolidation and through a combined approach where we are able to leverage O’Connor’s existing leadership team and bring Titan’s broader capabilities and resources to bear, we believe we are well positioned to capitalize on continued opportunities to unlock network synergies while driving market share gains. Together, we believe we will be able to build upon their presence in the heart of the Australian Grain Belt and capitalize on operational synergies across our 3 continent footprint consisting of some of the best global agricultural markets generating significant value for our shareholders.

We are excited to welcome the O’Connors management team and employees to the Titan Machinery family, and we look forward to a smooth transaction closing and integration process. We expect closing to be completed in Q4 of calendar year 2023. In closing, we remain highly encouraged by the ongoing demand we are seeing in our business, and we’re looking — working hard to get our customers their equipment as OEM production and delivery schedules allow. Our team is ready to support our customers through a very busy harvest and year-end construction seasons in the second-half of our fiscal year. With that, I will turn the call over to Bryan Knutson for his segment review.

Bryan Knutson: Thank you, David. And good morning, everyone. Today, I will provide a recap of our fiscal second quarter segment drivers and then review some of our high-level expectations for the balance of fiscal year 2024 across our respective segments. I will begin with our domestic agriculture segment, which produced strong organic growth with same-store sales that increased 10%. As you heard from David, we continue to be acquisitive and the O’Connors transaction is particularly exciting. Our organic growth in the ag segment was further bolstered by revenue contributions from our recent acquisitions in our domestic market. We are also particularly pleased with our ability to maintain our strong pre-tax margin execution, which remained consistent with the prior year period at 7%.

Although spring planting got off to a late start this year in some of our Northern markets, crop progress across our footprint is largely back on track following some timely precipitation. Although this precipitation was inconsistent across the Upper Midwest, yield potential has improved from earlier this summer, which is encouraging and is helping improve farmer sentiment. Additionally, with the planting delay, we realized some additional parts and service activity that moved from Q1 into Q2, which is also reflected in the strong growth that we reported today. As David touched on in his commentary, we are still experiencing tight supply in several of our highest selling equipment categories. Our dedicated inventory procurement team continues to work tirelessly to obtain as many of those units as we can from our OEM partners, other dealers, lease returns and through the used market.

Most other categories of equipment have returned to more normalized levels, and this same inventory procurement team has been monitoring inventory trends and have made the appropriate adjustments to purchasing volumes to optimize inventory levels and will continue to do so on a forward-looking basis. While we remain focused on presell, especially for cash crop equipment, we feel good about where we have landed and are happy to have replenished stocking levels for many equipment categories that we can serve our customers well, despite not yet being able to procure enough equipment in our key cash crop product categories. We also have a team dedicated to our inventory valuation process in regards to ongoing mark-to-market, as well as determining what price we should offer a customer for a trade-in unit.

This team also intensely monitors internal and external market trends and is continually adjusting our trade in pricing on a real-time basis to ensure healthy margins on future used equipment sales. Our used equipment inventories are in a very healthy position. Due to our industry-leading inventory management processes, which are the result of our scale, decades of experience and continuous improvements. Looking to the balance of fiscal 2024 for our Agriculture segment, we remain on track with the modeling assumptions that we laid out at the beginning of the year. Net farm income remains well above historical averages and continues to support demand for equipment purchases. Further, with healthy farmer profitability remaining in place, coupled with continued tax incentives throughout in Section 179 and bonus depreciation, the environment is setting up well for a strong second-half of the year.

Although equipment shortages in cash crop categories are expected to persist, we do foresee an increase in available slots as we move through calendar year 2024. Nonetheless, long lead times, coupled with strong fundamentals have our order board consistent with our prevailing expectation that the industry is well positioned heading into next year. Now shifting to our domestic construction segment. Construction activity was strong throughout our footprint during our fiscal second quarter, and we generated another great performance in all areas of the business with same-store sales growth of 18.5% and excellent pre-tax margin expansion of 60 basis points to 6.2%. We also achieved rental fleet dollar utilization of 30.2% and absorption of 91.2%.

General construction activity remains strong and infrastructure, energy and agriculture projects continues to support demand for construction equipment, which has resulted in year-to-date segment revenue growth of 13%, which is above the initial modeling assumptions we provided at the beginning of the 2024 fiscal year. Although equipment availability is also a limiting factor in the near term for certain types of construction equipment, we continue to see a favorable backdrop as a result and as a result, are increasing our full year modeling assumptions for this segment today. Now moving to an overview of our International segment, which represents our business within the countries of Bulgaria, Germany, Romania and Ukraine. Same-store sales increased 15.9% in the fiscal second quarter, and pretax margin remained very healthy at 6.1%.

Conditions varied across our European footprint with excellent growing conditions in Germany and Ukraine, contrasting with those of Bulgaria, which is experiencing dry growing conditions, which are also present in Southeastern Romania, although to a lesser extent. As a part of our footprint build-out strategy in our current German market, we acquired an adjacent two-store dealership complex in Germany during the second quarter. Looking forward to the balance of the year, we are updating our modeling assumptions to reflect somatic conservatism given our year-to-date growth of 7.8%, which was at the low-end of our prior range. We continue to expect European ag fundamentals to moderate with flat industry volumes given the ongoing conflict in Ukraine and the challenges with equipment availability that we see across the other segments of our business.

Before I turn the call over to Bo, I’d like to echo David’s comments with respect to the O’Connors team. A few months back, I had the privilege of touring all their stores and traveled their entire footprint. Doing so, confirm my expectations of their highly productive agriculture landscape, and I met a number of wonderfully talented people who make their organization so special. Throughout my visit, I was very encouraged by how similar our company cultures are, which is a testament to the focus that their leadership team has brought to their business over the years. We are extremely excited to welcome them to the Titan family and look forward to a smooth integration. With that, I just want to thank all the members of our Titan family for their hard work and dedication to our customers which have produced fantastic year-to-date results.

Now I will turn the call over to Bo to review our financial results in more detail.

Bo Larsen: Thanks, Brian. And good morning, everyone. Starting with our consolidated results for the fiscal 2024 second quarter, total revenue was $642.6 million, an increase of 29.4%, compared to the prior year period. Our equipment revenue increased 28% versus the prior year period, led by incremental revenue from our recent acquisitions, as well as double-digit same-store sales growth across all three of our reporting segments, which combined for a 12.1% increase on a same-store basis. This growth was also visible across our other revenue streams as well, with our parts revenue increasing 39.7% service up 27.3% and rental and other revenue, up 11.6% versus the prior year period. Gross profit for the second quarter increased 29.9% to $133 million.

Gross profit margin increased by 10 basis points to 20.8%, driven primarily by a slight mix shift to higher-margin parts sales relative to equipment sales. Operating expenses were $88.8 million for the second quarter of fiscal 2024, compared to $68.8 million in the prior year. The year-over-year increase of 28.9% was primarily additional operating expenses due to acquisitions that have taken place in the past year, as well as an increase in variable expenses associated with the increased sales. That said, we are pleased to achieve some modest operating leverage of 10 basis points versus the prior year as a percentage of sales. Floor plan and other interest expense was $3.7 million as compared to $1.6 million for the second quarter of fiscal 2023, primarily due to higher interest-bearing floor plan borrowings driven by higher inventory levels.

Net income for the second quarter of fiscal 2024 was $31.3 million or $1.38 per diluted share and compares to last year’s second quarter net income of $25 million or $1.10 per diluted share. Now turning to our segment results for the second quarter. In our Agriculture segment, sales increased 34.4% to $469.1 million. This growth was driven by our acquisitions of Heartland Ag Systems and Pioneer equipment, as well as same-store sales growth of 10%, which was achieved on top of a strong performance in the prior year period. Despite the strong quarterly performance, second quarter revenues continue to be constrained by the equipment availability of high-demand cash product categories has already touched on during this call. Agriculture segment pretax income was $33 million and compared to $24.9 million in the second quarter of the prior year, which implies a pretax margin decrease of 10 basis points to 7%.

Our Construction segment continued its momentum in the second quarter and grew sales to $82.9 million, up 18.3%, compared to the prior year period. Benefiting from broad-based construction activity and improved equipment availability in some equipment categories. Pre-tax income was $5.2 million and compared to $3.9 million in the second quarter of the prior year and our year-over-year pretax margin increased by approximately 60 basis points to 6.2%. In our International segment, sales increased by 16.9% to $90.6 million which reflects a 2.1% currency tailwind on the strengthening euro. Net of the effect of these foreign currency fluctuations, the segment achieved sales growth of 14.9%, which included a modest year-over-year decline in Ukraine as it remains impacted by the ongoing conflict.

Pre-tax income was $5.6 million and compares to $5.9 million in the second quarter of fiscal 2023 and which implies a pretax margin decrease of 150 basis points to 6.1%. Now on to our balance sheet and inventory position. We had cash of $53 million and an adjusted debt to tangible net worth ratio of 1.0 as of July 31, 2023, which is well below our bank covenant of 3.5. Our total inventory balance at the end of the second quarter was $979.4 million, an increase of approximately $275.5 million during the first six months of this fiscal year. This increase came via growth in equipment and parts inventories of $259.1 million and $15 million, respectively. Of the total increase, $22 million is attributable to the Pioneer acquisition, which was made during the first quarter.

The primary driver of the increase is the improvement in new equipment availability from our OEM partners as they have largely caught up on production outside of those key high horsepower equipment categories that David and Brian both mentioned, which are still on allocation. Overall, we are still a bit short of targeted stocking levels of available-for-sale inventory. Driving by some of our ag store locations, the lack of high horsepower display units is clearly notable. To put it in perspective, we have 74 ag dealerships domestically. And at today’s industry volumes and cost of equipment we target a combined $7 million of new and used whole good inventory on average per location, which is the minimum we need to have one or two stocking units for sale demonstration or loaner for our highest demand categories.

Add in a couple of weeks’ backlog to account for predelivery inspection work and you get to our target of about $600 million versus the $540 million we are at today for our domestic ag segment, which implies a shortage of about $60 million. However, if you then consider that backlog remains above targeted levels, while we continue to normalize those turnaround times, our available-for-sale inventory is actually about $100 million short of targeted levels. As for other segments, while there are still key shortages impacting construction and international, their current inventory levels are more or less aligned with targeted levels. But again, do have a few key categories that are still short. Overall, we want to continue to normalize the amount of backlog in inventory and replenish stocking levels of those key equipment categories.

Note that these targeted inventory levels take into consideration that we remain focused on those presale activities that Brian touched on earlier and presale is an excellent opportunity to provide more visibility into future sales as well as maintaining higher levels of inventory turns. With that, I’ll share a few comments on our fiscal 2024 full-year guidance which we have updated to reflect the year-to-date performance of our businesses and to include an assumption for the partial year impact of the O’Connor’s acquisition, which we expect to report as a fourth business segment. The year-to-date performance of our Agriculture segment has been consistent with our expectations, underpinned by strong organic growth and operating performance.

We expect that to continue through the back half of this fiscal year. Our Construction segment has been exceeding expectations, and we expect construction activity to continue to support that trend for the rest of the year. As for our International segment, it is performing well but toward the lower end of our previous guidance range. As such, we are reaffirming our assumptions for our Agriculture segment of up 20% to 25%, increasing our assumption for construction to be up 5% to 10% as compared to the previous guidance of flat to up 5%. And modifying our international segment assumption to be up 5% to 10%, as compared to the previous guidance of up 8% to 13%. This adjustment for Europe brings us more in line with industry volume forecast for that region.

Before adding the partial year impact of the O’Connor transaction, we are maintaining our expectation for diluted earnings per share with the midpoint of $4.80. Our first-half performance has added to our confidence in achieving the numbers that we presented at the beginning of the fiscal year, and we remain focused on execution for the remainder of the year. With respect to the anticipated partial year impact of the O’Connor transaction, we expect for it to close in the fourth quarter of this calendar year. And for purposes of this estimate, we are assuming a closing date of October 1. Their results will be reported on a one-month lag, so these assumptions would result in three months of activity being reported in our fiscal 2024 results. With all of that said, we have provided an initial revenue estimate of $70 million to $90 million, which translates to a diluted earnings per share contribution in the range of $0.10 to $0.15.

Win factoring in financing and integration-related expenses. Adding the acquisition to our guidance, the range has arised to $4.60 to $5.25. Seasonality in the O’Connor business is similar to historical tightened seasonality in that for O’Connors, about 45% of revenues have historically come in the first-half of the year and 55% come in the second-half of the year. O’Connor’s business for fiscal year ended June 30, 2023, produced revenue of $258 million pre-tax income of $18.7 million and EBITDA of $21.4 million. Adding estimated financing and integration expenses for the first 12-months of ownership to these results, provides for a run rate pro forma pre-tax income of $13 million or $0.40 of earnings per diluted share. We are excited to welcome the O’Connor’s team members to Titan and look forward to providing further updates on this business segment on future earnings calls.

This concludes our prepared comments, and we are now ready to take questions.

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Q&A Session

Operator: Thank you. At this time we’ll conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

Ben Klieve: Hi, thanks for taking my questions and congratulations on a great quarter and it looks like a great acquisition as well. I’d like to start with the acquisition. I’m curious kind of the genesis of this acquisition. Was this a function of you guys actively looking to move into Australia and considering a lot of options? Or was O’Connors kind of a kind of unique opportunity that you decided to act on?

David Meyer: Yes. This is Dave. So I actually got to wind a little bit. I think it’s one of these classic situations where you had the two family owners, two brothers had both retired. They’ve been out of the business. I know Dennis O’Connor, I think has been off for 10-years. And put a professional management team in and really didn’t have that family succession. So I knew a couple of new years ago that they were probably going to be looking for — so some of it, they could sell their shares of stock to. And I think as you recall, we just — last year, we were — had some Heartland in systems is a pretty important and strategic acquisition. And we didn’t — I didn’t really want to come with those two together. But once we got that completed, we got that integrated, I reach out Dennis O’Connor earlier this year and tried to understand the business a little bit, but when you get into that, when you — definitely, if you look at the case size business in Australia, O’Connor was hands down the market leader in high horsepower equipment.

Every year, all the Australian and New Zealand dealers, they get together for an annual meeting, and they have a top dealer award well, O’Connor have won that for the last five years in a row. So you couple that with operating down in the Southeastern of the country and the grain belt and arguably the best farmland in Australia. And I think most important is that proven in the experienced professional management team has been in place for over five years now. Add all of this together, really an old brainer. So we met with the team. Brian went down there and turn the dealership. And it’s just on Candy their metrics or financial metrics or cultures or people, the products, everything just almost identical to ours and English language, English base law, low in the corruption scale.

I mean just — it was just really made a lot of sense for us.

Ben Klieve: Yes, it sounds like that’s very helpful color. Thank you. Follow-up unrelated to O’Connors but just kind of general kind of sentiment farmer sentiment. I appreciate your comment on kind of the state of the state in your backyard and understand the inventory dynamics that you guys are facing. But I’m wondering if farmer sentiment and buying patterns are being impacted right now at all by the interest rate environment. If you can elaborate on how interest rates over the last, especially six months are impacting their buying patterns, that would be helpful.

Bryan Knutson: Yes. This is Brian. We’re still actually having historically higher amount of cash transactions right now and then on a lot of these larger ticket items, we do have manufacturer-supported programs as well and especially as you get into some of the lower horsepower or the more rural lifestyle products. And so definitely, it’s an impact and something our farmers are — producers are watching. It is cutting into their net farm income a little bit. It’s one of the contributing factors, along with just a lot of other things which have the price up. But urea and fertilizer being down is helping, and we’re still on pace for a really good year. Maybe a lot of different estimates out there around between 15% and 20% below last year’s record depending on where yields come in but still on pace for a really good year.

They did push a lot of income into this year from last year. And there’s a lot of tax incentives still in place, and we’re anticipating that farmers are even going to be pushing income from this year into next year. And there was a lot of forward contracting. So still pretty robust, still a fair amount of cash out there, but yes, interest rates are on people’s minds, and we do have a lot of different financing tools to help with that.

David Meyer: Yes. The only thing I’d add to that — the only thing I’d add to that, too, and I think some of the OEMs maybe earlier this year broken down pretty nicely. Interest expense is a fairly small portion of the cost when you’re talking about the equation for farm income. So while it has increased, it’s — there’s other factors that are much more at play here.

Ben Klieve: Yes, yes. No doubt about that. Very good. Well, that’s all very helpful. Congratulations again on a great quarter, and I’ll get back in queue.

David Meyer: Thanks, Ben.

Bryan Knutson: Thank you, Ben.

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

Alex Rygiel: Thank you and good morning gentlemen and congratulations on the O’Connor transaction.

David Meyer: Good morning, Alex.

Alex Rygiel: Questions here. You talked a lot about inventory and that was all very, very helpful. But taking a quick step back, why do you think being at a target inventory level that’s comparable to historical levels is appropriate in this higher rate environment that we’re in right now?

David Meyer: I would start with saying that the levels we’re talking about aren’t comparable to historical so if you want to take it back to a prior peak, which I think some people are naturally doing and comparing our total inventory level. I think you have to factor in the cost per unit, right? So we’re talking about a significantly smaller number of units per location than we were a decade ago. If you simply ran the math on a 3% increase over a decade, you’d be talking about a like-for-like equipment being 35% higher. And we know with the pricing that we’ve seen over the past couple of years has been much larger than that. So even on a very conservative basis, you’re talking about one-third less number of units out at the locations.

And then from there, as we talk about targeted levels, right, we’re really focused on our main categories, and it’s making sure, again, that we have one or two that are available for demonstration, loaner or display units. And that’s just what you need in order to drive the high volume of sales, right? And so that’s really what we’re talking about. We’re missing out on sales opportunities because we don’t have those high horsepower items on our lots. And if we did, our sales would be even higher than they are today. So taking a step back, I think it’s important to keep all of that in perspective. So we continue to improve our business model, and we want to be as efficient as possible, and we certainly want to focus on presale activities and all of that is good business practices that we’ll continue to do going forward.

Alex Rygiel: That’s very helpful. And then back in January, you had some delivery delays. I know it’s kind of hard to quantify those, but do you think you’re all caught up in those delivery delays?

Bryan Knutson: No, not yet, Alex. In fact, Bo spoke to his prepared comments, our backlog is actually up a little bit sequentially. So no, we anticipate likely at least another couple of quarters before we can get caught up on that. Just our shops are really busy, which is a good thing and we’re selling a lot of iron, which is a good thing. And it will just take a little time up. But Bo, anything to add on your end?

Bo Larsen: No. Yes. I think that that’s right. We talked about our mix and available-for-sale inventory and wanting to normalize that backlog, and we continue to see opportunity to focus on that at the back half of the year.

Alex Rygiel: Thank you very much.

David Meyer: And one more comment I had to, with some of the supply side issues and some of the conditions, some of the equipment when it’s coming out of the factories, too, it’s taken us substantially longer per unit to get them through our shops right now. And we’re seeing that it started to improve a little bit, and we do think that’s going to be probably back to normal towards the end of the year, too. So that will help a lot.

Alex Rygiel: Thank you.

Operator: Thank you. Our next question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Ted Jackson: Thank you and good morning. So I’m going to throw my two questions back as it relates to the O’Connor acquisition. And the first one is just maybe a little more color on the Case IH Australia dealer network. Can you give us some sense in terms of how many locations there are across Australia like kind of maybe the average locations per dealer kind of like who’s the next largest dealer, now that you have the largest kind of who’s number two, just some metrics to kind of give us a sense with regards to how it compares to the domestic dealer network for Case International Harvester.

David Meyer: So in our discussions with the management team there, they had a pretty well-defined future growth strategy through acquisitions like identified locations. They’ve been in conversations with different owners. But I’d say it’s much different in the United States. You’ve got — you don’t have a lot of really big dealer groups, at least on the case side, maybe more so on some of the competition. So a lot of family business, smaller businesses. And what I say, I think it’s a much more robust consolidation story than what we’ve even experienced here in the United States. And a lot of smaller groups, family owned. And I think that’s just right for consolidation as you continue to adjacent from where they are now. And I think there’s really good relationships between our team and some of the existing owners and some good camaraderie.

And so — we just want to do that on a timely and managed approach. But no, I think we — that’s one of the positives about the story is future M&A opportunities.

Bryan Knutson: Yes. And Ted, I would just add on to David. I think you asked what’s the next largest. And so O’Connor’s footprint in the grain belt there would be there’s a CNH dealership with six rooftops. And then you asked what the average is. And so the average is more around two to three locations per.

Ted Jackson: Okay. And do you have any kind of sense in terms of just, I don’t know, like the number of locations that are in Australia, just bit of curiosity, just the kind of the whole size of that market, at least from like a location standpoint?

Bryan Knutson: Yes. We know the number definitely in the grain belt and in O’Connor’s footprint where we’re where our interest level is. There’s just — as David mentioned, I’ll just go back to there will likely be a fair amount of consolidation in that area over time here. And we’re seeing that with the Deere side as well. RDO equipment that is headquartered out of Fargo here as well. That’s a very large John Deere dealer, has 25 locations in Australia has for a long time. You know what, I remember way back when they entered the Australian market, and they continue to add locations and continue to build their presence every year in Australia. And then service equipment, large John Deere dealer just North of us here in Canada has 15 locations, so they’re now on basically either side of us. So there is a fair amount of North American presence there now between us and RDO in service.

Ted Jackson: My second question just is in terms of O’Connor’s revenue mix. When you look at it from sort of equipment parts, services, rental, et cetera, I mean would you — is it a mix that’s similar to your domestic business here in ag? Or is it more like the international business? I mean, not that they’re that much different, but you have a bit more of a skew towards equipment relative to some of the higher-margin stuff internationally than you do domestically. And so I’m just kind of curious if you could give some color on kind of the mix of O’Connor’s business and then I’ll get in queue again. Thanks.

Bo Larsen: Yes. It’s pretty similar to our domestic ag business. The supplemental deck that we posted on our website breaks that down pretty nicely. So looking at a three-year historical average there, equipment sales mix was 82% versus on the U.S. side, ours is more like 77%, 78%. So a couple of percentage points different, but very similar. And that’s just one of the many similarities that their business profile and metrics have to our domestic ag business.

Ted Jackson: Okay. Congrats on the quarter and the acquisition.

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

Reid Seay: Hey, guys. This is Reid on for Daniel. Just a couple of questions on margins here. As you noted, we’re seeing a lot lower inventory, which should translate to a better gross margin and that should benefit your SG&A to gross margin ratio. Is this a sustainable ratio going forward, assuming inventory stays low? Or how should we be thinking about that?

Bo Larsen: I mean, in talking about back half of the year and our expectations, we touched on fact that we do expect some moderation in the gross margin perspective. But from an operating expense perspective, we expect to remain in line or below prior year as a percentage of sales. And for the full-year, that same story would be true at this point is to be in line or probably a little bit below last year’s percentage of sales from those operating expenses.

Reid Seay: Okay, thank you. And on the O’Connors acquisition, it looks like last fiscal year today, finished with gross margin slightly a bit low. Do you all expect to see some synergies uplift that gross margin? Or can you touch on maybe some margin synergies? Just a little more color there would be great.

Bo Larsen: Yes. So in the financials that we provided in the supplemental deck, they had gross margin of 18.7%. I think that’s what you’re referencing, slightly below ours and then actually had a pretax margin of 7.2%. So the profitability of their business is one of the many things that really attracted us to the management team and their operating model. That margin, if you factor in the fact that they are a little bit more skewed to equipment sales makes a lot of sense and is pretty similar to us. In terms of synergies, I mean, what we’re really looking at is focused on a consolidated executive leadership team looking at the business from a global perspective. We want to continue to support that senior management team to execute on the growth strategy that they had in front of them.

And then there are some unique opportunities from a service model perspective and being able to provide customers 24/7 type support as we look at the different time zones that we’re now operating in as well.

Reid Seay: Right. Thank you all for the color.

Operator: Thank you. Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre: Good morning. And thank you for the question here.

Bo Larsen: Hi, Mig.

Mig Dobre: I want to go back to the inventory discussion. And I’m sort of curious as to how you think inventories will progress for you for the remainder of the year. It sounds like you’d like more inventory, if available. So as the supply chain is getting better for the OEM, are you sort of inferring here that you’re going to continue to build inventories through year-end. So I guess that’s part number one. And then related to this, given that so much of your business is now presell, can you comment at all about your presale activity on model year ’24 equipment in North America? And then I have some follow-ups. Thanks you.

Bo Larsen: Yes, I’ll maybe start with the inventory question, and then Brian might touch on the presales. So from an inventory perspective, we would expect the inventories probably will increase sequentially in the third quarter and then come down a little bit from there in the fourth quarter. We typically see that to be the case. We did mention that largely speaking, from a high horsepower perspective that most of everything that we’re going to receive is retail to customers, Of course, we need to turn that around with predelivery inspection. So again, we’ll see what we’re able to do with normalizing that backlog. And those are really the factors that are at play from a bigger picture perspective in terms of the increase that we’ve seen year-to-date versus what we would expect in the back half of the year, the back half would — should be a lot less than what we saw in the first-half.

And again, the first-half was kind of — very welcome to get us replenished levels on some of these other categories, back half, a smaller modest increase, and again, focusing on normalizing that backlog.

Bryan Knutson: Yes. Mig, this is Bryan. I would just add we’re definitely trying to be really clear that we are short in certain key product categories, and those are the areas that we’re looking to get more in. But as you know, there are other product categories where we’re finally feeling pretty good about where we’re at. We’ve been running low for quite a while now. And then there are a couple of other product categories that we talked about last call that we have a little bit excess of smaller tractors in some of those. And so I think you see it implied in our guidance is us being proactive about just in the second-half here, cleaning up that mix a little bit. So we’re positioned really well for next year and hope that some of these key product categories will open up.

And so we’re proactively addressing these few smaller categories where we’re a little long, and that’s what you see in the anticipated margins that we’ve got reflected most dealers, I know they wouldn’t do that. They wouldn’t be feeling the pressure yet that stuff isn’t aged. And so we really just want to — are cognizant of our healthy mix and are being proactive there. And to your presale question, as you know, the OEMs are keeping the order books really tight here. They’re not out very far — these key product categories are on allocation. And so as Bo said, we’re we just finally are out into ’24 now. And with our first tranche of early orders there, we’ve got names on all those key product category units.

Mig Dobre: But again, do you get a sense that volumetrically demand for model year ’24 is up relative to 23. And I ask the question because it matters within the context of inventories building on your balance sheet and in the industry more broadly.

Bryan Knutson: No, I would say demand is still very similar to how it’s been in those key product categories. But importantly, demand has been outpacing supply now for a long time on those. And then normalized in the other product categories. So yes, I don’t see demand increasing here as we’ve got a little bit lower net farm incomes and likewise on the construction side, but demand is still strong. And again, as I mentioned, our order boards in those key product categories, we’re still selling everything we can get for the allocation we have so far.

David Meyer: David, I’ll just reiterate my comment. I don’t see us getting sold sprayers, all wheel orders or forward-drive tractors, in any quantities of stock until at the earliest second-half of 2024, that’s how tight it is.

Operator: Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

Larry De Maria: Yes, thanks. Good morning. First question, let’s just pick up where we left off there. On the early order programs in presales — and what is the message that you’re — we’re sort of seeing on calendar 2024. I mean I understand that obviously, there’s orders and there’s short supply. So first of all, are there any cancellations out there that we’re seeing? And to BJ’s question point about demand not getting stronger, are we seeing I don’t know talking about a flat calendar 2024 at this point. What’s the specific messaging on what the order programs are telling you about next year?

Bryan Knutson: Yes, I think so, Larry, so to answer your first question, no cancellation still and yes, ’24 is a long ways out at this point but that’s flattish is kind of our anticipation at this point for demand perspective. But again, then you got to work in the fact that we need production availability to increase in these key product categories, and we haven’t been able to keep up there with demand and that fleet continues to get older in those certain product categories.

David Meyer: Maybe what you’re asking a little bit, I’d say farmer sentiment might be tempered a little bit, like you say, there’s a lot of noise out there. There’s interest rates, things like that. But it said so much demand before and the production levels were so much below previous peaks that the demand is still good. But maybe farmer settlement might be off a little bit, but I have a deal with farmers for over 40 years. They’re always pretty negative. But there is some noise out there in that, but still the demand is still outpacing supply and high horsepower.

Bryan Knutson: Yes, good point, Dave.

Larry De Maria: Okay. Thank you. And then can you give us some color on the second-half? Obviously, a good quarter. Construction looking stronger and you’re actually a little lower. It seems like the core guide, ex-O’Connor should be going up, not staying flat for the year, which would imply maybe a lower second-half than the expectations in the consensus numbers? So can you talk about expectation in the second-half? Or is there a deceleration? Or is it just really about not getting production or not having confidence in the production and then a fiscal 3Q versus 4Q sales split? Thanks.

Bo Larsen: Yes, a couple pieces of commentary on that, right? I’d say — from a top line perspective, if you look at same-store sales growth on our domestic ag business, it’s been about 7% in the first-half of the year. We expect something similar in the second-half of the year. Then you layer on any growth expected from a Heartland perspective, which given some of the commentary about sprayer production, we’d expect their growth to be north of those levels. Mathematically speaking, from a margin perspective, we’ve been touching on it, right? But that’s where some of the math comes into play to get to the results. So the top line is very much what we’ve been discussing and reiterated the guidance. And gross margin moderation is something we’ve been talking about since the beginning of the year.

So year-over-year in Q3 and Q4 we would expect margins to be lower than they were in the prior year. And that would be for a number of reasons, including what Bryan was touching on a little bit earlier. And then from a split perspective, we would expect Q3 to be our highest quarter and Q4 to be a little less than that, but more than what we just saw in the second quarter. So that’s also consistent with the expectations that we had put out there previously. The other thing just to help you out and doing your math and getting to where we come out to from an expectation perspective is you did see other interest expense higher in the second quarter, and we would expect that in the third and fourth quarter as well, certainly, as you’re comparing to the prior year period.

So put all that together and take a step back, what we’re really doing is reiterating a guidance midpoint of $4.80, which is outside of the O’Connors acquisition, which is on top of last year’s record results. And if you really zoom out and talk about where we’re at today, with our earnings power versus where we were in the prior peak, we were talking about $2 per share looking good. So again, we’ve spoken this year about higher confidence in achieving average pretax margins north of 5% through the cycle. The reasons why we have confidence in getting there, focusing on our organic growth through market share gains and continuing to execute on our pipeline. So for us, and I hope you hear it, we’re nothing but excited about how the rest of the year shapes up and how we’re going to be well positioned to continue to execute next year.

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

Ryan Sigdahl: Good morning, Brian, Bo. Ryan on for Steve. Just want to follow up on that last time. And I guess when you say Q3 highest, is that the core business, excluding the acquisition just made of O’Connors or is that all in Q3 will be the highest revenue?

Bo Larsen: Yes. No, that’s a great point, and thanks for allowing me the opportunity to clarify that. That was our expectation, excluding the O’Connors acquisition. So then we layer the O’Connor’s acquisition on top of that. So I appreciate that.

Ryan Sigdahl: Good. And then just a quick follow-up. Could you realize any manufacturing incentives in Q2? And then what are your assumptions within guidance for the back half of the year regarding incentives?

Bo Larsen: Yes. Another opportunity for me to clarify there. So last year, we started to accrue for manufacturer incentives in the second quarter to the tune of $2.6 million. This year, we haven’t yet done that, just aligning again with the cadence of production that we’re expecting and for that to continue to increase in the back half of the year, and we just talked about our expectations in the second-half from a volume perspective, i.e., the second-half being larger than the first-half. So we definitely expect to recognize similar levels. Overall for the year, it will just fall in the back half of the year as opposed to starting incrementally last year to recognize that $2.6 million a year in the quarter.

Ryan Sigdahl: Great. Thanks, Bo. Good luck guys.

Bo Larsen: Thank you.

Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Meyer for any final comments.

David Meyer: All right. Thanks, everybody, for your participation and your interest in Titan Machinery, and we look forward to updating you on our progress on our next call. So have a great day.

Operator: Thank you. This concludes our conference today. You may disconnect your lines at this time. Thank you for your participation.