Good day everyone and welcome to the Titan Machinery Inc.'s Fiscal Fourth Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to the Titan Machinery fourth quarter fiscal 2017 earnings conference call. On the call today from the company are David Meyer, Chairman and CEO; and Mark Kalvoda, Chief Financial Officer. By now everyone should have access to the earnings release for the fiscal fourth quarter ended January 31, 2017, which went out this morning at approximately 6:45 AM Eastern Time. If you have not received the release it is available on the investor relations tab of Titan's website at 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. We suggest you access the presentation now by going to Titan's website and clicking on the Investor Relations tab. The presentation is directly below the webcast information in the middle of the page. Before we begin, 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 factor section of Titan's most recently filed Annual Report on Form 10-K. These risk factors contain more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as may be required by applicable law Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call. Please note that during today's call, we'll discuss non-GAAP financial measures including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency in the Titans ongoing financial results, particularly, when comparing underlying results from period to period. We have included reconciliations of these non-GAAP financial measures in today's release and have provided information regarding the adjustments that are added back or excluded in these non-GAAP financial measures. The call will last approximately 45 minutes. At the conclusion of the prepared remarks, we will open the call to take your questions. Lastly, due to the number of participants on today's call, we ask that you keep your question period to two questions and then rejoin the queue. Now, I'd like to introduce the company's Chairman and CEO, Mr. David Meyer. Go ahead David.

Thank you, John. Good morning everyone. Welcome to our fourth quarter fiscal 2017 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we've provided a slide presentation which you can access on the investor relations tab of our website at titanmachinery.com. If you turn to Slide 3, you will see a quick overview of the fourth quarter and full year financial results which were consistent with our previously announced modeling assumptions. Revenue was down 5% to $318 million compared to the same period last year, primarily reflecting the continued industry challenges in the agriculture and construction segments. The adjusted pre-tax loss was $9.6 million which excludes $4.1 million of non-recurring pre-tax cost primarily associated with previously announced dealership restructuring plan. For the full year we've generated revenue of $1.2 billion. Our adjusted net cash provided by operating profits activities was $88.8 million and adjusted pre-tax loss was $22.3 million. For the fourth quarter and full year, our financial results were impacted by continued headwinds in the Ag and construction industries. Despite these challenges, we have successfully reduced our inventory position and are in the process of reducing structural costs to better align our business with the current environment. During the third quarter call, we raised our total fiscal 2017 equipment inventory reduction goal. I'm pleased to tell you that we exceeded our annual forecast and delivered a total equipment inventory reduction of $196 million in fiscal 2017. In fiscal 2018 as we anticipate a more stable environment we expect the reduction in equipment inventory of approximately $50 million. Slide 4 lists the discussion points for today's call. First of all we'll discuss the conditions we are facing in our agriculture and construction industries, as well as provide an update on our international segments. Then I will…

Thanks David. Turning to Slide 9, our total revenue for the fiscal 2017 fourth quarter was $318 million, a decrease of 5.3% compared to last year. Equipment sales decreased 6.9% quarter-over-quarter which is primarily impacted by the industry factors David discussed. The decrease in equipment revenue was slightly offset by a more stable and higher margin parts in service business. Our parts and service revenue increased 1.6% and 1.5% respectively. The stability of our parts and service business in the fourth quarter was primarily due to customer preventative maintenance and a smaller reduction in pre-delivery work on new equipment. Our rental and other revenue decreased 13.6% in the fourth quarter primarily reflecting a reduced rental fleet and the factors David discussed. Our rental fleet dollar utilization was 22.7% for the current quarter compared to 22.5% in the same period last year. On Slide 10, our gross profit for the quarter was $49 million and our gross profit margin was 15.4% compared to 4.8% for the same period last year. As a reminder, in the last year's fourth quarter we recognized a $27 million impairment charge related to our decision to market certain aged equipment inventory through alternative channels rather than our normal retail channels as part of our expanded equipment inventory reduction plan. Our operating expenses as a percentage of revenue in the fourth quarter of fiscal 2017 was 16.4% compared to 16.3% for the same quarter last year. Although our operating expenses as a percentage of revenue increased slightly due to the lower revenue in the current quarter, we decreased our operating expenses by $2 million on an absolute dollar basis. Floor plan and other interest expense decreased $2.4 million or 31.7% which is primarily due to a decrease in our average interest bearing equipment inventory and a reduction…

Thank you. [Operator Instructions] We'll go first to Steve Dyer with Craig Hallum.

Thanks. Good morning. Your modeling assumptions for Ag being down 10% to 15% this coming year obviously includes the store closings. How should we think about or how are you thinking about sort of the same store sales type number within that?

I think our same stores sales exclusive of any of what we would call reverse cannibalization from those closed stores would be very similar to what the OEMs are indicating out there. I think they're all fairly consistent around 5% to 10% down. If we just look just at our same store, it would be a little bit better than that because of these closed stores and that reverse cannibalization. But all being equal, we're in line with what the OEMs are saying out there.

Okay. And then just as we think about equipment gross margins going forward and as it relates to inventory, how are you thinking about how close are we to the [indiscernible] of that? I know you're going to try to take another $50 million out this year, but just in terms of gross margins, would you expect continued weakness in the first half of '18 and then firming up in the back half? Any color on that would be great. Thanks.

I think just maybe a couple of comments on that. Fiscal '18 is still another challenging year. We mentioned net from income continues to be projected down to a difficult end market. I think as we get through the first half of the year, I do think the second half of the year will be a little bit better. But given these challenging market conditions, also any kind of price increases from the OEMs that we have on new equipment, they become difficult to pass onto our customers in this type of environment especially when we're three or four years to this downturn. That is adding to some of that pressure on our equipment margins. And lastly as David discussed early in the call, too, we've got some of these lease returns coming back into the market, too, which also adds to the supply of used equipment. But considering all that, we're still anticipating some level of improvements in our equipment margins for the current year. Midpoint this year at around that 6.5% to 6.6%, which is up a little bit from that 6.4% overall last year and up to a greater degree from what we've experienced in the last couple of quarters and about 5.2% and 5.8%. So hopefully that provides some additional color on that for you.

Yes. Thanks Mark.

We'll go next to Neil Frohnapple with Longbow Research.

Hi. Good morning, guys. Could you talk about the construction segment sales outlook, more of downside to 10% this year? I know you called out store closures having an impact. But again, it sounds like it's only one store and as you mentioned, there seems to be growing optimism and higher activity in the channel. So if you could just help us understand the outlook more whether it's further expected declines in energy or what else we might be missing here?

You're right. There's only the one closed store, but we've seen a slowdown in starting probably in the third quarter and I think some of the OEMs out there on the construction side, too, are commenting on a more difficult environment out there. I think there is some positive talk, but nothing has really translated to increased sales. You saw our numbers for the quarter, our same store sales were down for the quarter here on the construction side to the tune of about 11%. The combination of both and most of it is going to come. We think parts and service will be relatively stable. Rental as well, we indicated the fleet size will be about the same, but it will be more on the equipment revenue side where we still see some headwinds on the construction side.

Okay. Thanks Mark. And then sorry if I missed this, but did you provide an outlook for cash flow this year given the inventory reduction? You mentioned holding the rental fleet size flat this year. Any thoughts there?

We didn't provide any specific guidance on that, but I think you can infer basically a breakeven on the P&L side. We get the ad back of course for the depreciation. That, combined with some additional inventory reduction, we will be cash flow positive again for the next year. As far as CapEx goes, there will be some level of defleeting and refleeting that offset each other on the rental fleet and indicated the overall fleet size would remain relatively constant with where do we ended fiscal 2017. And as far as other CapEx, I do see a little bit higher CapEx in this next year. Probably right around that $15 million mark. But all that being said, it's another cash flow positive year for fiscal '18.

Great. Thank you very much.

We'll go next to Mick Dobre with Baird.

Yes. Good morning, everyone. A couple of quick questions on SG&A and floor plan, how you're thinking about these light items as embedded in your fiscal '18 guide?

Yes. On the SG&A side, we talked about this restructuring plan and its impact on expenses, basically indicating for the fiscal year '18, since it's happening partway in the year, it's going to result in an expense reduction of about $20 million. So I think, going to our year-end number, you have to add back -- there's a little nonrecurring non-GAAP items that we pull out of there. But close to the end of -- or it's close to the amount that's in our operating expenses at the end of the year. If you take $20 million off of that, for this next year, that's kind of how we're thinking about it. In terms of floor plan, floor plan should continue to trend down as we've seen during the current year -- or during fiscal '17. We should see that continue to trend down as we go through '18 because of the lower inventory levels that we have.

So when we're looking at floor plan interest in the fourth quarter, is that kind of the right baseline for expense modeling that we should use going forward?

I think you could -- it'll even come down from there as we go. That'll probably be similar to that for the first part of the year. And then we should -- once we get toward -- more toward the end of the year, we should see that trend down.

Got you. Okay. And then I want to go back to the question asked earlier about the equipment gross margin. I guess, I'm trying to think about the moving pieces here, because you're guiding for a little bit of improvement, but frankly, not a lot. Fiscal '17, you've had some pretty major activity in terms of inventory destocking. You've had that $74 million aged inventory reduction. So you've done a lot, which impacted that gross margin. Can you help us understand sort of the moving pieces maybe to a greater degree as to what's really hampering gross margin in fiscal '18? Is it really all on the new equipment side in terms of your inability to pass pricing? Or how did lease returns play into this? That guidance just doesn't quite add up to me.

Yes. I think the first thing to clarify, Mig, is the -- that $74 million inventory reduction, as you know, we took a -- we took the write-off in fiscal '16 on that. And I think as we move throughout the year, and the fourth quarter was no different, where that really had no impact in our overall margins. The reserve that we took -- or the write-off that we took in fiscal '16 was sufficient to allow for normal margins to occur on those -- all those pieces of inventory that we sold on that expected -- on that expanded marketing -- aged equipment marketing program. So that really didn't have any impact. Yes, we do -- we did -- I mean, in our assumptions, we are expecting some decrease in the amount of new equipment margins because of what we've talked about. It's, again, we're 3, 4 years into a down cycle here with net farm income continually trending down. And any kind of pricing increases, which the manufacturers are placing on the equipment, which is a result of their increased input cost, it's difficult. We're finding it more and more difficult to pass that on to the end customer, so there is some of that going on. It is true though. We are -- I mean, our inventories are in very good shape relative to what we've had in the last couple years. We still have some aged inventory, though, that we continue to work through. So it's not, what I would call, pristine at this point. But all those factors to us kind of add up to a slight improvement on our equipment margins, but certainly sets us up well once we get -- even -- once we get past 2018 for even cleaner inventories and improved margins as move forward.

And on this lease return issue, how exactly do these lease returns impact your economics? What exactly is your exposure on the return?

So this is Dave, Mig. So basically, some of these lease returns we're selling back to the original customer, on those that -- and they've got a set residual that they can buy those back on. So there's basically no exposure for us on those. But then also on some of these lease returns, because our inventory is in good shape, we're opportunistically purchasing select units to meet retail demand, and we definitely realize our margin on those pieces. But for the most part, most of our financing business is done with third parties and nonrecourse, so we don't have that financial exposure, other than the fact from a macro look, if you've got from all the OEMs the lease returns coming back into the channel, just going to create that much more supply.

We'll go next to Joe Mondillo with Sidoti & Company.

So most of my questions have been answered already. I did want to touch on the International segment, if you will. Just seems like things are trending the most positive actually amongst the 3 business segments. So just wondering if you could provide a little more color on what's going on over there. And going forward, once we get into fiscal '19, considering the overall environment for your business will improve, is that an area where you would want to expand your footprint? Or how are you thinking about growth and expansion within that International segment?

Well, I think, first of all, we're starting to capitalize on some of the investment we've done over there. We've built out our distribution network in a number of countries, and I think we've done a good job of that. I think we're really -- feel really good about our team we have in place, the senior management, the country managers and the people we have put in place. There seems to be a level of stability over there. Like we said in the release, credit's starting to free up in Ukraine. They're just some good positive things. I think we're just starting to see a return on some of the investments we've been putting over there. Things are becoming more stable. So that's good. So as we do with all of our expansion, whether it be domestically in the United States or in Europe, I guess, we look at all those and evaluate those and talk with our board. So I mean, I'm not going to comment on those today, but I guess we're always looking at opportunistic opportunities. But we feel good about the stability and what we've developed for our footprint over internationally. And I think we're starting to see some of the returns on that.

So once we get into sort of closer to fiscal '19 and we're thinking about maybe the industry overall maybe returning to modest growth and thinking about the recovery, is that an area or a focus that you would want to focus on? Or is it more so domestically, expanding your footprint there? How are you thinking about sort of long-term growth? Or is it just too -- still too far away to sort of think about that? You're more focused still on inventory and this restructuring that we're going through right now?

I think we've gotten past that right now, and I think we're in a good position right now. I believe that -- to look at future growth through some acquisitions. I think we still want to focus on organic same-store growth, but also go through acquisitions. So I think we're definitely interested. And we've got three segments. I guess, we look at all three of these segments. But I know in North America Ag right now, we are beginning to be contacted from dealers looking for succession solutions. And we've got a proven track record of really providing that out there. So we're definitely looking at that at this point in time.

Okay. Lastly, Mark, can you provide the book value of the new and used equipment at year-end?

Yes, just bear with me one minute. New equipment is about $235 million and used about $161 million at the end of the year.

Okay, great. And I imagine that $161 million of used has -- in terms of a quality-wise, has overall improved over the last several years, considering...

Yes. I'd say the efforts that we had, particularly on the -- that expanded marketing of aged equipment that we talked about, that we reserved for at the end of last year, yes, that cleared out some of the more -- the most undesirable used pieces that we had.

And does your aggressive pricing implementation -- you cited the fourth quarter, just this last quarter, gross margins weighed because of aggressive pricing on the used equipment side of things. Do you anticipate that implementation or that aggression of pricing on used equipment will subside a little bit this year? Or are you going to continue to be pretty aggressive to try to bring that $161 million down even further?

I think it's more on targeted units. We're really looking at kind of this life cycle management of our equipment inventory. And some more of the aged pieces we'll get more aggressive on. But I think there's less of that compared to what we had in the past. So yes, I think some of that is subsiding somewhat, especially, again, because of take -- us taking a big chunk of that most undesirable stuff out of that marketing program.

We'll go next to Tyler Etten with Piper Jaffray.

I was wondering if you could quantify or have any metrics around the lease returns and the timing of those lease returns this year.

So you break -- broke up there a little bit. Can you repeat that?

If you have any metrics or anyway to quantify how these lease returns compared to previous years and then the timing of those lease returns this year.

Well, so I think you're going to have -- the lease returns are going -- they're going to come throughout the year. So I don't -- from what the visibility we have, you're not going to see -- we have visibility just to our customers, but we don't have total visibility to the whole industry. But I anticipate some consistency year-over-year as far as the timing of which quarters are going to be coming through on the system. So from a regulated -- from what we see, if we look at ours from what we have visibility to, we probably see some consistency year-over-year from what it was last year to this year. So we don't see a huge increase or a huge decrease, or we'll see some consistency year-to-year. So it's probably business as usual. If you look a little bit of what happened last year, what's going to -- look forward to happening this year.

Got it. And then after this $15 million of reduction in inventory in fiscal '16, would you be satisfied with those inventory levels at that point? And then also with the rental fleet assets being down 10% year-over-year, was that similar with volumes? Or does that include pricing as well?

So first of all, to the first part of your question, again, so in regard to our inventory level, I think it's always a function -- we always look at it from a forward turn standpoint. And we always plan more to that, call it, 2.5, 3x turn on equipment inventory. So by ending the year at this amount, it'll probably set us up for a flat sales, probably in the low 2s. So I would think -- and I haven't ran the numbers on that, but just with $50 million now on this year, it will show some improvement over that 1.7x that we're showing on the slide for our projection for this year. But if we're in the low 2s, we still have some opportunity to improve that to overall get up in that 2.5, 3x turn. So it's -- but it's always a function more of what we anticipate sales to be as far as what we believe the right inventory levels to be. And your other question that you asked, I didn't quite follow it. It was on the rental fleet. Could you [indiscernible].

Yes, the rental fleet assets were down 10%. Does that include pricing? Or is that volumes? I guess, just to...

No. Yes, the rental fleet, when we show that number rental fleet, that's strictly the OEC, the original equipment cost. So that's the amount of rental fleet that we have available for rent out there. So it's basically what we purchased that -- those group of assets for.

[Operator Instructions] We'll go next to Rick Nelson of Stephens Inc.

This is Nick Zangler on for Rick. I was wondering if you could just walk us through an example of a store that you -- that you've closed or are closing where you do expect to retain a meaningful proportion of those revenues. What indicators you might have used to close the store? Was it operating at a loss? And just how close a nearby Titan store may be where you expect customers to migrate to?

Okay. So I can talk to that. So things we look at is, we look at the market size, we look at the distance from that store to our existing store, we look at the level of parts and service that's being done out of that store, we're looking at the size of the community, if it's a regional trade center and customer traffic patterns and the ability to attract and retain families to live in those communities. Those all come into play. So the typical situation is you're looking at a store with revenue of definitely under $10 million or probably under that $8 million-type range were adjacent or within -- it could be 20 miles, it could be 40 miles, it could be 30 miles, depending on what part of the country, away from an existing store. So -- or it could be right in the middle of 3 of the existing stores. So probably the most any one customer will have to drive is potentially maybe 15, 20 miles, something like that, to get to the neighboring store. So -- and the neighboring store typically is going to have larger revenues. It's going to have more scale. It's going to have more technicians, a broader breadth of parts. There's -- you're going to have more of a selection of equipment, so all those things -- a lot of this is about scale and our ability to better serve the customers with -- especially with this level, larger, more sophisticated, more complex equipment. How can we better serve our customers out of the stores from a service technician or parts availability standpoint, equipment selection? So those all weighed in the decision to do this. And we spent a lot of time -- I'd say, we spent probably going on 12 months of really analyzing each market very carefully, the business, the industry potentials, all the different revenue streams in that store, whether it be new equipment, used equipment, parts, service, rental and spent a lot of time doing this. And really -- I feel really good with the decisions we made, I think, are really good -- not only going to be good for Titan Machinery, but I think in the long run, they're going to be -- give us the ability to better support our customers with our expert teams in those markets.

Great. And then you said the store closings are expected to reduce revenue by $40 million. I'm basically trying to get at how much revenue you're expecting to retain. So is there any commentary just on the trailing 12-month revenue generated from these 15 stores? Or any commentary there to help us understand that?

I think, what we put in the release, first of all, the $40 million is a full year number, the amount anticipated to impact the current fiscal year. Fiscal 2018 was $30 million. But in the release, we talked about retaining a majority of the revenue from those closed stores. So 50% to 70% is ballpark.

We'll go next to Aaron Steele with Feltl and Company.

I was just wondering if you could talk a little bit more about the restructuring effort with your expert team operating model and that focus on the parts and service and how that contributes to your equipment margin guidance going forward.

So the question was on expert team.

Yes, talking really about our parts and service -- so basically, our parts margins, that margin, I said that 30% range, service margins in that 60-something percent range. So really, those are, in addition to rental, are our highest margin areas. So by putting the expert teams together, as opposed to, say, a store manager that has responsibility for not only parts and service, but new and used equipment sales, to have dedicated teams across complexes of 2 to 3 stores that put the resources in for the parts and the service department, and we need to include precision in this also, to put that resources in our company, so we've got the dedicated team that report up through people that are specifically focused, they wake up every morning, all they worry about is product support, the parts business, the service business, our up-time inspections, the training and all the support that goes with that, the extended hours in either department and how we can better serve the customers and what that translates into. And then in addition, there's a big growth that's going along with precision in the higher margin dollars and a better mix in our stores by increasing that amount of business with that type of business. So that's what we're looking at. And then in turn with that, if you look at the -- having our best sales people in charge of that new and used equipment business to really be able to focus on that. Again, a complex of 2, 3 stores in bigger areas really gives us better expertise in the new and used equipment business also. So it's kind of a win-win in both those areas.

Great. And then what are you seeing from the farmer right now in terms of the activity that you've seen? Or just the confidence level kind of looking forward into 2018.

Well, fortunately, we're coming off, in most of our markets, record crops last year. So I think from a sentiment from that point, yields were good. I mean, a lot of bushels. And that -- I think there was a good confident feeling that's helped a lot of our customers' bottom lines going into this year because of the good yield [indiscernible]. But right now, I looked at -- on Tuesday, I looked at corn price in Iowa. The average corn price in Iowa was $3.17. And so -- I think soybeans is just under $9, like $8.91 was the average price in Iowa for corn. Well, if you look at Iowa State, they do a really good job of that, what's the cost of production. And basically, corn on corn grown, they're saying it's $4.08. So they're about $1 an acre loss at these current commodity prices. And on soybeans, the cost of production in Iowa is $9.66, according to Iowa State. When you look at $8.91, right at the elevators today. So when you look at that, all of a sudden, yes, our customers are definitely concerned about -- if we don't see a spike or a weather scare or something that's going to help drive these commodity prices this year, they're probably, at best, maybe looking at breakeven, a little bit depends on land costs, but they're -- are probably going to go negative or something if we don't see something on these commodity prices. So they're going to spend money on crop inputs and fertilizer, compost and some of these easy things, but if they can delay that equipment purchase one more year, two more years, right now, I think that's the direction they're getting from their lenders and their bankers and just being somewhat prudent. So -- but as we work through that, but the positive for us on that is these trade cycles getting spread out, there's more hours of use on the equipment, there again that leads to the parts and service business. And so we really want to capitalize on that in this down cycle, but there's definitely a sensitivity right now to farmer income at this current level of commodity prices.

That will conclude our question-and-answer session. I would like to turn the call over to David Meyer for any additional or closing remarks.

You're welcome. I want to thank everybody for your interest in Titan. We look forward to updating you on our progress on our next call, and we wish everybody have a great day today.

That does conclude the Titan Machinery Inc. Fiscal Fourth Quarter 2017 Conference Call. Thank you for your participation.