Titan Machinery Inc. (NASDAQ:TITN) Q3 2024 Earnings Call Transcript

Titan Machinery Inc. (NASDAQ:TITN) Q3 2024 Earnings Call Transcript November 30, 2023

Titan Machinery Inc. misses on earnings expectations. Reported EPS is $1.32 EPS, expectations were $1.51.

Operator: Greetings, and welcome to the Titan Machinery Inc. Third Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Sonnek of ICR. Please go ahead, sir.

Jeff Sonnek: Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery’s third quarter fiscal 2024 earnings conference call. On the call today from the Company are David Meyer, Chairman and Chief Executive Officer; Bryan Knutson, President and Chief Operating Officer; and Bo Larsen, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2023, which went out earlier morning at approximately 6:45 a.m. Eastern Time. If you’ve not received the release, it’s available on our Investor Relations page of Titan’s website at ir.titanmachinery.com. This call is being webcast, and a replay will be available on the Company’s website as well. In addition, we’re providing a presentation to accompany today’s prepared remarks.

You may access this presentation now by going to Titan’s website again at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You will see on slide two of the presentation or a safe harbor statement. We’d like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These forward-looking statements are based on current expectations of management and involve inherent risks and uncertainties, including those identified in the risk factors section of Titan’s most recently filed annual report on Form 10-K as updated in subsequent filed quarterly reports on Form 10-Q.

These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as may be required by applicable law, Titan assumes no obligation to update any forward-looking statements that may be made in today’s release or call. The call lasts approximately 45 minutes. At the conclusion of our prepared remarks, we will open the call to take your questions. With that, I would now like to introduce the Company’s Chairman and CEO, Mr. David Meyer. David, please go ahead.

David Meyer: Thank you, Jeff. Good morning, Welcome to our third quarter fiscal 2024 earnings conference call. On today’s call, I will provide a summary of our results then Bryan Knutson, our current President and Chief Operating Officer, who will be transitioning to the CEO post on February 1st, will give an overview for each of our business segments. Bo Larsen, our CFO, will conclude the call with a review of our financial results for the third quarter of fiscal 2024 and some commentary around our updated fiscal 2024 full year expectations. We accomplished a great deal this quarter, completing our acquisition of the Australia-based O’Connors Group in October and solidifying our leadership succession plan, which we announced last month, while delivering solid financial results.

Bryan and his team have instrumental in jump starting our integration with O’Connors, and we couldn’t be more pleased with the quality of the O’Connors team. We recognize an alignment of our strategies during the O’Connors due diligence process, and the first couple of months of operations have proven out how well our organizations mesh. We are thrilled to have them on board and look forward to a bright future together. As it relates to CEO succession, I am very proud of what our team at Titan Machinery has achieved since my early days in a dealership nearly 50 years ago, and the breadth and depth of our operation is a testament to the talent that we have attracted to the organization. Through the process of planning for this transition over the last several years with our Board of Directors, we felt it was critical to fill the role with someone who deeply understands the dealership business and our customers.

Bryan is a natural leader with a successful track record and has proven his ability to excel across all aspects of the business and our company culture, and our employee engagement has never been better. I am extremely confident in Bryan’s capabilities and watch his development over the last 20 years as he has excelled in both store and central leadership roles, which makes them uniquely qualified to lead Titan Machinery in our next stage of growth. Moving to our fiscal third financial performance, we achieved record revenues of $694 million and diluted earnings per share of $1.32. These results came in below our full potential due to delayed OEM deliveries, prioritizing customer uptime throughout the harvest and end of season construction projects and increased preparation time to complete pre-delivery inspections of new machinery.

This dynamic is also visible in our inventory balance at the end of the quarter, as the amount of on hand pre-sold inventory being prepped in our service shops, continues to trend above normal levels. Notwithstanding, customer uptime is our top priority, and our team did a great job on meeting our customers’ immediate service needs and minimizing downtime during the all important fall season. Heading into year end, we continue to see demand in excess of OEM production for high horsepower tractors and wheel loaders, which we expect will continue to at least the first half of calendar year 2024. Well, we are positioned well for a strong fourth quarter. Our recognition of equipment revenue will be dependent on both the timing of new machinery received from the OEMs, as well as our ability to manage service department workflows.

We continue to experience substantially longer preparation time to complete the quality pre-delivery inspection and setup process required before delivery to our customers due to the supply same chain challenges. Overall, we expect year over year revenue growth in each of our segments in the fourth quarter, and we have narrowed the range of our revenue modeling assumptions to reflect our latest expectations for fourth quarter OEM deliveries and demands on our service departments. Looking forward, both our Ag and CE customers are experiencing the carryover of three exceptionally strong years, putting in excellent financial position and creating optimism as I look to the future. Additionally, over the last 24 months, we have completed some high quality and strategic acquisitions, which will strengthen our bottom line as they get fully integrated into our system.

With that, I’ll 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 third quarter segment drivers and then review some of our high level expectations for the balance of fiscal year 2024 across our respective segments. I’ll begin with our domestic agriculture segment. We achieved another record revenue performance on top of last year’s outstanding results driven by a combination of positive same store sales and contribution from the Pioneer acquisition from earlier in the year. As you heard from David, these results were constrained by a few factors. While improving, limited OEM production remains a factor preventing us from meeting the existing demand for high horsepower tractors and self-propelled sprayers.

And for those new units that we are receiving, our service team is having to spend more preparation time on each pre-sold new unit before delivering it to our customers due to supply side challenges. While this isn’t a new phenomenon for us, as the additional prep time has been something we face throughout this fiscal year, our service department capacity was stretched in the third quarter, given the seasonally higher volumes and a need to prioritize our supportive existing customer equipment throughout harvest. Now that our customers are mostly done with harvest activities, we expect to catch up on delivering some of the incremental buildup of pre-sold units throughout the fourth quarter. Bolstering our service network and capacity remains a key priority for our organization, and as such, we will continue to focus on recruiting, hiring, and training skilled technicians.

With respect to harvest and customer sentiment, favorable crop development in the later part of the growing season, produced average to above average yields throughout our footprint. Although corn pricing has softened throughout the year, there was quite a bit of corn that was forward contracted in the $5 to $6 per bushel range and current prices for soybeans, sugar beets, potatoes, and edible beans remain very attractive as well as cattle prices. Yield trends continue to be positive and some input costs have been decreasing and with three consecutive years of historically high net farm income, farmers’ balance sheets are in great shape with debt equity ratios historically low and are furthered by increasing land values. Overall, our customers are in a great position to post another solid year of income.

Looking to the balance of fiscal 2024 for our agriculture segment, we remain in a position to deliver a strong fourth quarter based on positive fundamentals such as healthy farmer cash receipts, which is supporting net farm income at levels well above historical averages, continued tax incentives surrounding Section 179 and bonus depreciation, and the additional backlog of pre-sold units awaiting pre-delivery, inspection, and final delivery to our customers. Shifting to our domestic construction segment, similar dynamics to what I just described for agricultural segment are also relevant here. OEM wheel loader production does not yet meet demand. Preparation time to get new units ready for delivery to customers is longer than normal, and with a busy fall construction season to complete projects ahead of winter, our service departments were balancing competing demands, but always keeping existing customer machinery running as the top priority.

I’d also note that there was a shift in timing of equipment deliveries this year versus last, which has some influence on the comparable growth rates. For instance, last year, we had a really strong third quarter performance whereas we expect a stronger fourth quarter performance in the current year. As a result, we realized a year-over-year, same store sales decrease of 10.3% in the third quarter this year. Despite third quarter year-over-year comparisons, we achieved rental fleet dollar utilization of 33.2% and absorption of 88.5%, both of which are very high compared to historical levels for this segment and showed the sustained improvement in these areas. General construction activity across our footprint remains at healthy levels and infrastructure energy and agriculture activity continue to support demand for construction equipment.

Looking ahead to the fourth quarter, we expect the timing dynamic I mentioned to be a tailwind for us, and as a result and result in year-over-year growth on a same store basis and finish this fiscal year at a high note for our construction segment. Now moving to an overview of our Europe segment, which was formerly known as our international segment prior to our acquisition of O’Connors in Australia. Our Europe segment represents our business within the countries of Bulgaria, Germany, Romania, and Ukraine. Rainfall throughout the growing season varied across these countries, which help drive above average yields in Germany and Ukraine. But dry conditions in Bulgarian Romania cause yields to be below average. These lower yields negatively impacted farmer profitability, and as a result, we saw a softening in demand for new equipment purchases in these two countries.

Overall, same store sales decreased 7.5% in our fiscal third quarter. Looking to expectations for the rest of the year, we continue to expect European egg fundamentals to moderate. However, last year’s fiscal fourth quarter was significantly impacted by limited equipment availability and did not follow normal revenue season only patterns for our Europe segment. This dynamic should normalize this year and is the basis for our expectation to achieve year-over-year growth in this year’s fourth quarter. Last but not least is our new Australia segment. Although, we closed on the O’Connor’s acquisition October, those results won’t be consolidated into our financials until the fourth quarter. Harvest has now started in Australia and is providing evidence that the O’Connor’s footprint is one of the most consistent areas in the country.

Growers in our footprint are seen above average yields as they begin harvest activities, while the same cannot be said for much of the rest of the country. Recent moisture is presenting some challenges to the current harvest, but it is helpful to restoring moisture levels in the region for next year’s crop. We continue to be extremely excited about the Australian market and the opportunity to build upon what the O’Connors team has accomplished. We are working through our integration strategy and are grateful for the entire team’s eagerness as we come together. With that, I just want to thank all the members of our Titan family for their hard work and focus, as we kept growers and contractors up and running during the important fall season. Now, I will turn the call over to Bo to review our financial results in more detail.

Bo Larsen: Thanks, Bryan. Good morning everyone. Starting with our consolidated results for the fiscal 2024 third quarter. Total revenue was $694.1 million, an increase of 3.8% compared to the prior year period. Our equipment revenue increased 2.5% versus the prior year period, led by incremental revenue from our recent acquisitions as well as positive same-store sales growth in our Agriculture segment. Growth was also visible across our other revenue streams as well, with our parts revenue increasing 5.7%, service up 14.9%, and rental and other revenue up 4.2% versus the prior year period. Gross profit for the third quarter was $138 million, and as expected gross profit margin decreased by 100 basis points to 19.9%, driven primarily by lower equipment and parts margins, partially offset by higher service and rental margins.

It is worth noting that the equipment gross profit in the prior year, benefited from the recognition of $2 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in this year’s third quarter results. As a reminder, we recognized $6.4 million of manufacturer incentives in the prior fiscal year, spread across Q2, Q3 and Q4. Our guidance which I will talk about further in a few minutes includes a similar level of manufacturing incentives for the current fiscal year, all of which if earned would be recognized in the fourth quarter. The difference in timing relates to the progress in achieving related targets. Thus, our updated guidance includes the full year’s impact of manufacturing incentives to be recognized in the fourth quarter and part of the reason for keeping our EPS guidance unchanged.

Operating expenses were $92.1 million for the third quarter in fiscal 2024 compared to $84.9 million in the prior year. The year-over-year increase of 8.5% was led by additional operating expenses due to acquisitions that have taken place in the past year as well as an increase in variable expenses associated with increased sales. Additionally, the inconsistent OEM deliveries and longer preparation time for pre-delivery inspection of new equipment have created some temporary inefficiencies that we are tackling with an eye toward return into normal conditions in these areas as soon as possible. On a consolidated basis, I would expect operating expenses as a percentage of sales in the fourth quarter to be similar to or modestly lower than the 13.3% realized in the third quarter.

Over the past two years, we have made seven acquisitions that accounted for approximately $670 million in annualized revenue. Overall and as is typical, those acquisitions came with a higher operating expense as a percentage of sales than our base business, albeit some with favorable gross margin offsets. As David and Bryan have touched on already, we are focused on integration activities and resource reallocation, so the business is optimized to deliver operational efficiencies through the cycle. We have a long track record of acquiring businesses and improving their financial metrics over time to be in line with our overall financial targets, and I’d expect that we’ll be able to demonstrate that in the future as well. Floor plan and other interest expense was $5.5 million as compared to $1.8 million for the third quarter of fiscal 2023, primarily due to higher interest bearing floor plan borrowings driven by higher inventory levels.

Additionally, we used the capacity of our existing Bank Syndicate floor plan facility to finance the O’Connor’s acquisition. Net income for the third quarter of fiscal 2024 was $30.2 million or $1.32 per diluted share and compares to last year’s third quarter net income of $41.3 million or $1.82 per diluted share. Now turning to our segment results for the third quarter. In our agriculture segment, sales increased 7.7% to $531.4 million. This growth was driven by our acquisition of Pioneer Equipment as well as same store sales growth of 3.5%, which was achieved on top of a very robust 46.4% same store sales increase in the prior year, and same store sales growth of 28% the year prior to that. As previously discussed, third quarter revenues were constrained by the delayed OEM deliveries and capacity constraints of our service department.

Agriculture segment pre-tax income was $35.1 million and compared to $42 million in the third quarter of the prior year, which implies a pretext margin decrease of 190 basis points to 6.6%. In our construction segment, sales declined 10.3% to $77.5 million. As Bryan already mentioned, the timing of equipment deliveries in the back half of this year versus the back half of last year creates some variability in the year over year comparability. We expect this headwind to shift to a tailwind in the fourth quarter where we anticipate generating year over year growth. Pre-tax income was $4.1 million and compared to $6.1 million in the third quarter of the prior year, and our year over year pretext margin decreased by approximately 180 basis points to 5.2%.

In our Europe segment, sales decreased by 4.3% to $85.2 million, which reflects a 7.9% currency tailwind on the strengthening Europe. Net of the effect of these foreign currency fluctuations, revenue decreased 10.4%, reflecting a softening of demand in Bulgarian and Romania, which were negatively impacted by the aforementioned dry conditions and lower yields. Pre-tax income was $5.1 million and compares to $8.5 million in the third quarter of fiscal 2023, which implies a pretax margin decrease of 350 basis points to 6%. Given some of the timing and constraint related items we mentioned, it’s useful to look at year to date margins across our segments to get a better sense of things. Through the first nine months of the year, the AG segments pre-tax margin is 6.5% or 70 basis points lower than the prior year.

CE’s pretext margins are 5.9%, which are flat with the prior year, and Europe’s pretext margins are 6.8% or 90 basis points lower than the first nine months of the prior year. Now, on to our balance sheet and inventory positions, we had cash of $70 million and in an adjusted debt to tangible net worth ratio of 1.1x as of October 31, 2023, which is well below our bank covenant of 3.5x. Equipment inventory increased $98.8 million in the third quarter. As we discussed in detailed during our second quarter earnings call, our domestic Ag segment was still a little short of targeted inventory levels at that time, and we expected inventories to increase modestly during the third quarter based on planned OEM ship dates and projected customer deliveries.

We also expected to start working down the amount of pre-sold equipment and inventory back toward normal levels; however, as David touched on earlier, given the dynamics of longer preparation times and prioritization of service for customers existing equipment, our progress on reducing the amount of pre-sold equipment and inventory stalls. Given that we are largely past the busy fall season, we should have more time to dedicate toward delivering pre-sold equipment to customers in the fourth quarter. But the inventory balance at the end of the fiscal year will be dependent on both the timing of incremental equipment deliveries from OEMs, as well as the pace of our pre-delivery inspection work. Overall, we expect there will be like — there will likely be an increase in our total ending inventory on the balance sheet, similar to the increase we saw in the third quarter, and then stabilize within arrange thereafter, as things normalize.

We will also see the O’Connor’s balance sheet added to our financials in the fourth quarter as well. With that, I’ll finish sharing by — I’ll finish by sharing a few comments on our fiscal 2024 full year guidance, which we have updated to reflect the year-to-date performance of our businesses. We are positioned well for a strong fourth quarter, and we have narrowed the range of expected revenue for each segment, contemplating the continuation of limited availability of a few key equipment categories and the longer prep times for pre-delivery inspections we have been experiencing. We now expect our Ag segment to finish up 20% to 23%, our construction segment to be at 4% to 7%, and our Europe segment to be at 4% to 7%. With respect to our new Australia reporting segment, we completed the O’Connor’s transaction on October 2nd.

Similar to Europe, these results will be reported on a one-month lag, and as anticipated, this will result in three months of activity being reported in our fiscal 2024 results. With all of that said, we are refining our fiscal 2024 revenue estimate to be $70 million to $80 million with a diluted EPS contribution in the range of $0.10 to $0.15, when factoring in financing and integration related expenses. As a reminder, fourth quarter gross margins are typically a few 100 basis points lower sequentially than the third quarter, largely driven by mix and larger tax incentivized purchases with multi-unit discounts. The same is expected to hold true this year. Additionally, we continue to expect modest normalization of equipment margins consistent with improved inventory levels and equipment availability.

Gross margin in the third quarter was about a hundred basis points lower than the prior year’s third quarter, and I would expect a similar 100 basis point normalization year-over-year in the fourth quarter, partially offset by the anticipated incremental manufacturer incentives that I already mentioned. Overall, with margin strength offsetting slightly lower sales expectations for the year, our underlying EPS guidance, excluding the positive impact from the O’Connor’s transaction, remains unchanged as compared to the guidance that we established at the beginning of the fiscal year. We look forward to finishing the year strong and delivering on the record results that we committed to nine months ago, and we are really proud of that. This concludes our prepared comments and we are now ready to take questions.

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

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

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Q&A Session

David Meyer: Sure. Ted, it is really a combination of all the things that you mentioned. As an example, we are to fly over the global flywheel drive plant here in Fargo, you see a lot of units outside and typically what you are going to find is they are either waiting on a truck for delivery due to the shortage of truckers out there right now and/or they are missing a component, some of the supply chain challenges that are still out there, and they got to keep the assembly line moving or the quality of the component that CNH received from one of the suppliers what didn’t pass inspection. So, again, they kept the line moving, they caught it at the plan. So they are having those delays on their side, and that creates some of these timing issues we have talked about.

Then as we get those units, as far as the additional prep time that we are seeing on our end is anytime you have had one of those units where you can’t go through the normal build process, and you have heard a lot of commentary from Deere and CNH and AgCo on this in previous quarters. You always have a risk then of quality issues or other things. So, we just take a lot of pride in our commitment to our customers and excellence in the units when we deliver to them. And so, that’s really increased the inspection time to make sure we go through a multipoint inspection. We are catching things and it’s just then we got to fix those things and so it just adds to the time. And then as we have also mentioned, we do add a lot of different technology and things that’s very commonplace for us to do for our customers, and the supply chain is still constrained and deliveries are delayed on certain components, both within technology, but also with certain casting components like weights and tires and wheels and so on.

So still you are waiting on some of those components. But collectively, that all is what’s leading to that significant increase in prep time.

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

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

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

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

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

Bo Larsen: First of all to start with and maybe a clarifier, right, as we talk about pre-sold equipment awaiting delivery to customers, that’s always turning, right? So, the unit that was there in the first quarter has been delivered to a customer. It’s not still sitting there. Units that were there in Q2 aren’t still sitting there, but what we’re seeing right, is a continued delivery from the OEMs and we’re needed to process everything through the chute. So definitely in the fourth quarter, we look to be able to chip away at the amount of pre-sold that we have in that inventory balance. But again, as we looked at how timing looks to be for everything and with OEM deliveries, right? And the OEMs are looking to finish their year strong and get as much out as they can, I think we’re still seeing some push to make up for some of those supply chain challenges that had otherwise held them back in parts of the year.

If you recall last year, we received a tremendous amount of equipment toward the end of the calendar year between really Christmas and the end of December, right, and then a short period of time to really be able to turn that around and deliver to customers. So, it’s really those factors that we’re talking about, you did hear it right. We expect another incremental increase on inventory there and that kind of stabilizing in that range and looking to continue to normalize that pre-sold backlog as we work through the first part of next year.

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