Titan Machinery Inc. (NASDAQ:TITN) Q3 2023 Earnings Call Transcript

Titan Machinery Inc. (NASDAQ:TITN) Q3 2023 Earnings Call Transcript November 30, 2022

Titan Machinery Inc. beats earnings expectations. Reported EPS is $1.83, expectations were $1.16.

Operator: Greetings, and welcome to the Titan Machinery’s Third Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Sonneck of ICR. Thank you. Please go ahead.

Jeff Sonneck: Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery third quarter fiscal 2023 earnings conference call. On the call today from the Company are David Meyer, Chairman and Chief Executive Officer; Mark Kalvoda, Chief Financial Officer; and Bryan Knutson, President and Chief Operating Officer, Bo Larsen will be officially transitioning in the CFO seat tomorrow is also on the call with us today. By now everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2022, which went out this morning at approximately 6:45 AM Eastern time. If you’ve not received the release, it’s available on the investor relations page of Titan’s website at ir.titanmachinery.com.

Copyright: budabar / 123RF Stock Photo

This call is being webcast and 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 to the presentation now by going to Titan’s website again at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You’ll see on Slide 2 of the presentation our Safe Harbor statement. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These forward-looking statements are based on current expectations of management and involve inherent risks and uncertainties including those identified in the risk factor section of Titan’s most recently filed annual report on Form 10-K, and updated and subsequently filed quarterly reports on Form 10-Q.

These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as maybe required by applicable law, Titan assumes no obligation to update any forward-looking statements that may be made in today’s press release or call. Please note that during today’s call, we’ll discuss non-GAAP financial measures, including results on an adjusted basis. I believe these adjusted financial measures can facilitate a more complete analysis and greater transparency in the Titan’s ongoing financial performance, particularly when comparing underlying results from period to period. We’ve included reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures in today’s release.

The call will last approximately 45 minutes. At the conclusion of our prepared remarks, we will open the call to take your questions. Now, I’d like to introduce the Company’s Chairman and CEO, Mr. David Meyer. David, please go ahead.

David Meyer: Thank you, Jeff. Good morning, everyone. Welcome to our third quarter of fiscal 2023 earnings conference call. On today’s call, I will provide a summary of our results and then Bryan Knutson, our President and Chief Operating Officer who will give an overview of each of our business segments. Mark Kalvoda, our departing CFO will then review financial results for the third quarter of fiscal 2023 and provide an update to our full year modeling assumptions. On that note, I’d like to take a moment and recognize Mark’s contributions over his 15 years here at Titan Machinery. Mark has been a valued member of our executive team and was instrumental in establishing the solid financial position we enjoy to-date. We appreciate all this help assisting Bo Larsen with his transition to the CFO post, which will become effective tomorrow, December 1st.

Bo will bring substantial financial and technical leadership experience from his time with CNH Industrial, Raven, and PricewaterhouseCoopers, and we look forward to his future contributions. I’ll turn the call over to Bo so he can introduce himself.

Bo Larsen: Thank you, David. I’m excited to join Titan Machinery. This is a great company that has been well managed, as demonstrated by our strong balance sheet, expanding pre-tax margins, and important strategic acquisitions that position the business well for future growth. My transition has been going extremely smooth with the benefit of Mark’s guidance. And I am looking forward to engaging with the investment community and working with our team to execute on our strategic plan and deliver value to our shareholders.

David Meyer: Thank you, Bo, and welcome. With that, if you turn to Slide 3, you will see an overview of our third quarter financial results. We delivered another consecutive quarter of record financial results with third quarter adjusted earnings per share of $1.83. The ongoing strength of the Agriculture sector combined with our customer centric focus drove consolidated revenue growth of 47% to $668.8 million. This performance is supported by strong contributions across each of our revenue streams, equipment, parts and service. Our business continues to operate with greater efficiency, allowing us to drive significant operating leverage on the higher levels of revenue that we have achieved. This is demonstrated in our record a consolidated pre-tax margin of 8.2% that we delivered in the first the fiscal third quarter, with each of our operating segments experiencing and pre-tax margin expansion.

At the segment level, our Agriculture segment continues to thrive in the current environment. While equipment revenue was a primary driver in terms of third quarter growth and dollar contribution, increasing 85%. We’re especially pleased with our parts and service business would really shine to the quarter increase in revenue by a combined 48%. Taking into account the higher margin profile of the parts and service business, relative to that of equipment, the strong growth was a significant driver and our ability to achieve these record quarterly earnings results. Our Construction segment also performed well in the third quarter and delivered a 34% increase on the same-store sales basis. Due to the improved operating efficiency that we’ve been focused on driving over the last several years across our optimized footprint, we continue to realize a commensurate lift in our pre-tax margin as a result, which for third quarter reached 7%.

With respect to our International segment, we remain focused on driving higher segment pre-tax margins, which for the quarter reached 9.8%. We’re very pleased with this result even though sales are down slightly in the third quarter. Our business continues to be quite resilient despite facing obstacles associated with the ongoing conflict in Ukraine and headwind from the recent currency movements. The farm ministry in Ukraine is adapted to the food environment and Titan is doing its part to help keep valuable equipment up and running. There’s a majority of the cropland in our markets continues to be farmed. In summary, our results showcase the improvements we’ve made to our business over the past several years to drive higher levels of profitability through the cycle and demonstrate the value we’ve added through organic growth and accretive acquisitions.

This is translated to results in excess of our guidance, which we are increasing again today to enable a new full year EPS range of $4.55 to $4.85. With that, I will turn the call over to Bryan Knutson for his segment review.

Bryan Knutson: Thank you, David. And Slide 4, you’ll see an overview of our domestic Agriculture segment where customer demand for new and used equipment continues to outpace supply, primarily due to continued elevated levels of net farm income. The majority of our customers experienced excellent harvest conditions with yields that were for the most part at or above pre-harvest expectations with minimal drying costs. Furthermore, today’s new equipment technologies and the efficiencies those generate become even more critical in these times of higher input costs for producers and are another key factor driving new equipment demand. Additionally, the current aged and higher-houred fleet remains a catalyst for parts and service revenue growth.

And our service departments have a full book of uptime inspections that we typically perform in the offseason. Transitioning to our Heartland Ag Systems acquisition, I’ve been intimately involved with the integration process, which is progressing well, and I’m continually impressed with the quality of the Heartland organization and leadership team. Overall, for our domestic Ag segment, we anticipate a strong finish to our fiscal year as we continue to receive presold equipment and delivery existing on hand inventory. We have a positive outlook with a customer waiting list to purchase calendar year 2023 units as allocation becomes available. Turning to Slide 5, you’ll see an overview of our domestic Construction segment. We are proud of our same-store sales increase of 34.2%, which was primarily due to increased equipment demand.

I want to thank our teams for another quarter of pre-tax margin growth, which has grown to 7% and is a testament to our team’s ability to execute on our multiyear operational improvement plan. Similar to our North American Ag segment, CE equipment demand outpaces supply and is also experiencing long lead times and allocation for new equipment. Although, the residential market is slightly moderating, we are still seeing good residential housing activity along with robust commercial construction taking place in our footprint. Other key drivers for our CE business continued to be energy related construction activity in our oil and natural gas producing markets in the Colorado Front Range and Western North Dakota Bakken fields. Road construction and other infrastructure related projects continued throughout our markets, farmers and ranchers are purchasing equipment for land improvement, feedlots, and material handling.

Furthermore, the strong overall industry backdrop also continued to drive demand for rental equipment, which produced another solid quarter for fleet utilization. On Slide 6, we have an overview of our International segment, which represents our business within the countries of Bulgaria, Germany, Romania and Ukraine. Similar to North America, our European customers are also benefiting from the higher global commodity prices. But the availability of new cash copy coming in Europe remains very tight. We are pleased with the continued strong performance of Romania and Bulgaria and are seeing improvement in our operations in Germany as we continue to execute on our operational improvement initiatives. Our Ukrainian customers continue to farm and we’re supporting them with parts and service and limited equipment sales.

In addition to domestic use, Ukrainian farmers are currently able to move green through cross border routes and Black Sea shipping corridors although at risk of interruptions, and with increased transportation and logistics costs. Despite the adversity of the prolonged war and disproportionate fuel and fertilizer costs increases, our Ukrainian customers remained resilient. It’s great to see the continued pre-tax profit contribution from our International segment due to solid new and used equipment margins, and growth in the important parts and service product support business. Next, I will turn the call over to Mark to review our financial results in more detail, but before I do, I’d like to thank our employees who work tirelessly through the busy fall season, supporting our customers and their equipment.

The technological advancements of our new machines are incredible, but nothing compares to the essential value our employees bring to our customers operations. With a very promising Q4 ahead of us, I’m extremely proud of all three of our segments as each of them have persevered remarkably through the supply side challenges, driving to record earnings, and overall outstanding performance year-to-date. Now, I will turn the call over to Mark to review our financial results in more detail.

See also 10 Best Space Stocks To Invest In and 10 Best FTSE Dividend Stocks To Buy.

Mark Kalvoda: Thanks, Brian. Turning to Slide 8. Total revenue increased 47.3% to $668.8 million for the third quarter of fiscal 2023. Our equipment business increased 54.3% versus prior year, driven primarily by strong same-store sales in our Agriculture and Construction segments and further supported by contributions from our Jaycox, Mark’s Machinery and Heartland acquisitions, which were not in the prior year’s third quarter results. As David noted, growth in our parts and service business was also strong in the third quarter, increasing 35% and 21.7% respectively, reflecting our continued focus and efforts in this critical area of our business. Rental and other revenue increased 4.2% versus prior year with dollar utilization of our Construction segment rental fleet increasing to 34.3% compared to 31.4% in the prior year quarter.

This material improvement and utilization allowed us to grow revenues on a smaller fleet and expand rental margins compared to the prior year. On Slide 9, our gross profit for the quarter increased 50.9% to $140 million and gross profit margin increased by 50 basis points, driven primarily by stronger equipment and parts margins. Equipment margins were supported by a $2 million benefit recognized on the expected achievement of our annual manufacturer incentives, healthy inventories and favorable end market conditions. The higher margins in these revenue categories were partially offset by a shift in sales mix toward equipment. Operating expenses increased $21.9 million versus the prior year to $84.9 million for the third quarter of fiscal 2023, primarily due to the inclusion of Heartland operating expenses, starting in August 2022, as well as higher variable expenses on increased revenues and some remaining acquisition related costs associated with the Heartland transaction.

This increase was more than offset by revenue growth and lead to 120 basis points of operating expense leverage compared to the prior year, reducing our operating expenses to 12.7% as a percentage of revenue. Given the strength in parts and service and our discipline on expenses, we continue to achieve higher absorption rates. A chart reflecting this annual progress can be found in the appendix to this slide presentation. Floorplan and other interest expense was $1.8 million compared to $1.3 million in the prior year period. The slightly higher interest expense was due to the utilization of our bank syndicate line in the short-term to help fund the Heartland acquisition. We would expect to be fully out of the line by the end of our fourth quarter.

In the third quarter of fiscal 2023, our adjusted net income nearly doubled to $41.5 million, which equated to adjusted earnings per diluted share for the quarter of $1.83 and compares to last year’s $0.96 performance. Adjusted EBITDA increased 79.8% to $63.5 million compared to the third quarter of last year. You can find a reconciliation of adjusted net income, adjusted earnings per diluted share and adjusted EBITDA to their most comparable GAAP amounts in the appendix to the slide presentation. On Slide 10, you will find an overview of our segment results for the third quarter of fiscal 2023. Agriculture segments sales increased 75.2% to $493.3 million, which once again helped drive nice operating leverage and resulted in segment pre-tax income increasing 114.3% to $42 million, representing a pre-tax income margin of 8.5%.

Beyond the extensive improvements we’ve made to our operations since the last cycle. The third quarter strong margin performance was also supported by the aforementioned recognition of the manufacturing sentence. Turning to our Construction segment, revenue increased 8.4% to $86.4 million compared to the prior year period. Growth was driven by a same-store sales increase of 34.2%, primarily due to the increased equipment demand, partially offset by loss sales contribution from divestitures. Pre-tax income grew 70.2% to $6.1 million versus the prior year period, representing a margin of 7% which was 250 basis points improvement versus the prior year quarter. We are proud of the continued improvement in this segment and look forward to further margin expansion, as we continue to drive improvements in this segment of our business.

Our International segment, revenue decreased by 4% to $89 million, which reflects a 14% currency headwind on a weakening euro as well as the ongoing disruption within our Ukraine footprint. Despite the revenue decline, our adjusted pre-tax income increased 42% to $8.7 million. This represents a robust adjusted pre-tax income margin of 9.8% and reflects improved margins across the equipment, parts and service. Turning to Slide 11, you can see our first nine month results. Total revenue increased 35% compared to the same period last year. Year-to-date, equipment sales increased 41.2%, parts increased 22.3%, service revenue increased 13.9% and rental and other revenue increased 3.6%. The nine months dollar utilization of our dedicated rental fleet improved 490 basis points to 30.7%.

Turning to Slide 12, our gross profit for the first nine months was $331 million, a 38.8% increase compared to the same period last year. Our gross profit margin increased 60 basis points to 20.4% for the first nine months of fiscal 2023. Our operating expenses increased by 23.5% for the first nine months of fiscal 2023 to $217.8 million which was influenced by the integration of our heartland acquisition and increased revenues. However, this increase was more than offset by revenue growth and led to 130 basis points of operating expense leverage compared to the prior year, reducing our operating expenses as a percentage of revenue to 13.4%. Adjusted diluted earnings per share increased 87.9% to $3.72 for the first nine months of fiscal 2023 compared to $1.98 in the prior year period.

Our nine month adjusted EBITDA increased 70.3% to $133.9 million compared to $78.6 million in the prior year. On Slide 13, we provide our segment overview for the nine month period. Overall, our adjusted pre-tax income increased 88.7% to $112 million for the first nine months of fiscal 2023 representing a margin of 6.9%, which is 200 basis points higher than the prior year period and demonstrates improvements across all segments of our business. On Slide 14, we provide an overview of our balance sheet highlights. We had cash of $46 million as of October 31, 2022. Our equipment inventory at the end of the third quarter was $474 million, an increase of $150 million from January 31, 2022, which was essentially driven entirely by an increase in new equipment inventories coming from both our supplier deliveries and current year acquisitions.

Strong sales continue to drive high equipment inventory turns, which increased to 3.6 versus 3.1 in the prior period. I will provide a little more color on our inventory on the next slide. Parts inventory increased to $150 million at the end of the third quarter of fiscal 2023 from $96 million at the end of fiscal 2022. This higher level of parts inventory is the result of a concerted procurement effort to better ensure availability for our customers as well as parts acquired in the acquisitions of Mark’s Machinery and Heartland Ag Systems, which also has a small manufacturing component to its business requiring additional parts and materials. Our rental fleet assets at the end of the third quarter increased to $78 million compared to $65 million at the end of fiscal 2022.

We expect our fleet to remain relatively flat at this level for the balance of the year. With respect to our Ukraine business and related assets, total assets into the third quarter at $29 million of which $24 million reflects our in country assets and customer receivables. These amounts are down 10 million and $4 million, respectively from the onset of this conflict. To-date, we have had no material loss or damage to our inventories or dealership locations. I will update you on the top and bottom-line income statement expectations for Ukraine in a few minutes. Turning to Slide 15, the amount of new and used equipment inventories are reflected in the size of the blue and red bars on this slide. We continue to be pleased with the level of inventory shipments received from our suppliers.

The receipt of these orders generated the higher sales performance and are reflected in the $150 million increase in new equipment inventory, which includes a high percentage of presold units awaiting pre delivery setup from our service team, with deliveries to customers expected in the fourth quarter. At the end of the third quarter, inventory turns were 3.6 times. Given the favorable industry conditions, health of our inventory and ongoing supply chain challenges, I continue to expect we will operate at higher turn levels throughout the balance of the year. Slide 16 shows our updated fiscal 2023 annual modeling assumptions, which we are raising today. For the Agriculture segment, we are increasing our revenue growth assumption to up 55% to 60% from up 50% to 55%.

As you consider the growth rates versus prior year, please keep in mind that growth is benefiting from the full year revenue contribution from our Jaycox acquisition which closed in December 2021 and the partial year revenue contributions from the Mark’s Machinery and Heartland Acquisitions, which closed in April and August 2002 respectively. For the Construction segment, we increased our assumption for revenue to improve from a range of down 5% to 10% to our current assumption of flat to down 5%. Impacting this assumption is the divestment of our five construction equipment stores in Montana, Wyoming and North Dakota in January and March of calendar 2022, which accounted for approximately $73 million of combined revenue. Excluding these revenues from the prior year base, our assumption equates to same-store sales growth of approximately 25%.

For the International segment, we are reiterating our revenue growth assumption of down 0% to 5%. Considering the circumstances with the currency headwind and Ukraine conflict, we are pleased with our year-to-date performance of down 1% as such I think this range continues to represent full year expectations. Regarding Ukraine, we are now modeling revenues to be down approximately 40% versus 45% previously. On an EPS basis, we are expanding our expectations for a loss per share in Ukraine to be in the range of $0.05 to $0.10, as we have accounted for additional accounts receivable and inventory impairments associated with the ongoing conflict. Given our strong year-to-date performance and our expectation for a solid finish to the fiscal year, we are increasing our consolidated diluted earnings per share assumption by $0.85 at the mid-point to a new range of $4.55 to $4.85 for fiscal 2023.

Finally, I wanted to quickly recognize my departure and Bo’s arrival as CFO. He has been a great pleasure to work with the wonderful team here at Titan for the past 15 plus years. It is especially rewarding to see the robust expansion of our pre-tax margins across all segments of our business, following the years of hard work that are providing the foundation for the results we are generating today and the additional operating leverage that we expect in the future. Bo is a great addition to the team and I look forward to watching him and the rest of the Titan team continue these efforts for the years to come. This concludes our prepared remarks. Operator, we are now ready for the question-and-answer session of our call.

Q&A Session

Operator: The first question is coming from Steve Dyer of Craig Hallum. Please go ahead.

Steve Dyer: Thanks. Good morning, guys. Nice quarter. Clearly, farm sentiment has improved pretty significantly from the spring just on the back of much better yields, I think than people were expecting. What is sort of your visibility in the order book next year? I guess, I’m trying to figure out, is this a scenario where growers are making sort of multiyear decisions or if this is a you know, we made a bunch more money than we thought we would this year we need to sort of spend it?

Bryan Knutson: Yes, thank you Steve. What we’re seeing is that still on allocation, still have long lead times still have demand while outstripping supply. So we continue our concerted effort here are teams out on the ground communicating daily with growers where we’re getting with those customers booking pre sells, watching for any more allocation as it becomes available, as anything changes, there are drought impacted areas in the country. So, our teams are ready and also watching to see if dealers do not take any of their allocation or allowed some allocation of free up due to that. And then likewise some of the, with the rising interest rates, and that impact on dealer balance sheets, we’re also watching that. We’re in a great position here with our strong balance sheet and our strong cash position as well as our professional team to be able to make decisions quickly and react very quickly as anything becomes available.

So right now, you as you heard on the CNH call, they are keeping the order windows is pretty tight, and we’ve got presold and locked in the allocation we do have so far. And it’ll be March at the earliest, maybe into that April, May time period before we start to get our final allocation for the end of the year.

Steve Dyer: Thanks Bryan. I think safe to say that sort of demand and your visibility into the next year’s order book from a demand perspective is much better than it typically is this time of the year?

Bryan Knutson: Yes. Just, from — it’s actually a lot more about managing the allocation and matching up the name so with what we do have, and staying close with our customers and being ready to jump on those opportunities, when they come. But very positive on the demand that that’s out there, it’s a good problem to have.

Steve Dyer: As you look at inventory, it’s obviously it looks a lot better than it was a couple of quarters ago. Are there any particular areas either sort of by product line or by geography where you wish you had a lot more?

Bryan Knutson: Yes. Certainly, in the cash crop equipment where we really shine is in, up here in the upper Midwest, corn and soy territory, especially planters, high horsepower, tractors, four wheel drives, magnums, the sprayers and floaters. And so, all the cash crop equipment is really tight. And so we would certainly take more of any of that.

Steve Dyer: Last one for me and then I’ll pass it along. Just the M&A environment whether it’s other dealers, other more strategic acquisitions sort of what’s your view on that at the moment?

David Meyer: Yes, Steve. This is Dave. We’re currently talking to a number of owners. As you’re aware, this continues to be a fragmented dealer network out there, aging dealer principals, as you look at the growing sophistication, equipment and the needed support services to support this seasonal equipment today. The growing dealer capitalization requirements and lack of succession alternatives out there, it’s still a long runway of acquisitions out there. Another driver with the, on that second, third generation that you all, you don’t hear the solid date their dealerships into a larger group is that increasing complexity and regulations on the backside of the business, looking at HR, accounting, systems and some of this regulation compliance.

So our model, we leverage these backroom functions with dedicated professionals along the stores to focus on the customers employees and this is really appealing to like I say that second generation, third generation operator at these dealerships. So, we anticipate an orderly flow and quality acquisitions in the years ahead.