Greetings and welcome to the Titan Machinery Third Quarter Fiscal 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, John Mills of ICR. Please go ahead, sir.

Thank you. Kevin. Good morning, ladies and gentlemen, and welcome to the Titan Machinery third quarter fiscal 2019 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; and Mark Kalvoda, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2018, 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 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 are providing a presentation to accompany today’s prepared remarks. You may access the presentation now by going to Titan's website at ir.titanmachinery.com. The presentation is directly below the webcast information in the middle of the page. You will see on the 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 Factors section of Titan’s most recently filed Annual Report on Form 10-K. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as maybe 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 Titan’s ongoing financial performance, particularly when comparing underlying results from period-to-period. We have included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today’s release. The call will last approximately 45 minutes. And 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. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our third quarter of fiscal 2019 earnings conference call. On today's call, I’ll provide a summary of our results and then an overview for each of our business segments. Mark will then review financial results for the third quarter of fiscal 2019 and conclude by reviewing our updated modeling assumptions for fiscal 2019. If you turn to slide 3, you will see an overview of our third quarter financial results. Our third quarter revenue was $364 million, with adjusted pretax income of $12.9 million and adjusted earnings per diluted share of $0.49. We're pleased with revenue growth across all segments and the operating leverage we are generating in our business. Our third quarter results are indicative of the efforts we've made over the past couple of years to position our business for improved profitability across all segments. The increase in our agriculture segment revenue is encouraging, given the continued industry challenges. Our improved inventory position is helping drive increases in equipment margins, which combined with our lower operating expenses, is generating improvements in profitability. As a result of these improvements and revenue growth in all segments, adjusted earnings per diluted share grew significantly over the prior year period. Given these current results and expectations for our fourth quarter, we are raising our modeling assumptions for fiscal 2019 adjusted diluted earnings per share to a range of $0.65 to $0.75. I’ll now provide additional detail for our three operating segments, consisting of our domestic agriculture and construction segments and our international segment. On slide 4 is an overview of our domestic agriculture segment. To say the least, it has been a challenging harvest across most of our ag footprint. Due to an abnormally warm October wet spell, the progress of crop harvest has…

Thanks, David. Turning to slide 7, revenue in each of our businesses was up in the third quarter, generating total revenue of $364 million, an increase of 10.1% compared to last year. Our revenue increase was across all segments, primarily driven by equipment revenues within our agriculture segment. Parts and service were up 8.3% and 6.7%, aided by the addition of our AGRAM stores in the current quarter. Excluding AGRAM, our parts and service business were still up between 4% 5%, demonstrating continued growth in this high margin area of our business. Our rental and other revenue increased 3.9% in the third quarter, due to a higher level of inventory rental. Our dollar utilization of our designated rental fleet in our construction segment improved to 28.8% for the current quarter, compared to 27.2% in the same period last year. On slide 8, our gross profit of $70 million for the quarter was an increase of 13% compared to the same period last year, primarily driven by higher revenues and improved equipment margins. The higher equipment margins also increased our gross profit margin by 50 basis points versus the prior year to 19.1% despite a revenue shift to a higher mix of equipment revenues in the current quarter. Our equipment margins continue to benefit from stable pricing and our improved equipment inventory position. Our operating expenses increased by $2.9 million to $53 million for the third quarter of fiscal 2019, primarily as a result of increased variable expenses such as commissions due to increased levels of equipment gross profit. Our current quarter also includes a full quarter of operating expenses from our AGRAM acquisition. Despite these increases, we were able to achieve operating leverage during the quarter, due to our leaner, more efficient operating structure. As a percentage of revenue, operating…

[Operator Instructions] Our first question is coming from Steve Dyer from Craig-Hallum.

Ryan Sigdahl on for Steve Dyer. You mentioned replacement demand helping the ag segment. Do you think it's a normal replacement demand going on right now or is there some of that occurring, but farmers are hunkering down with the low corn and soybean prices, trade uncertainty, et cetera.

Yeah. They are hunkering down, but the replacement demand is really, I mean, we're getting the age, we're getting the hours on machinery and when you look at the importance of uptime and reliability in the field, especially during the peak planting season and harvest season, the growers need updated equipment sold. They are going to make those purchase decisions, whether it's our new piece or a late model used. And if they don't with their higher hour usage, there is also that, if they decide to keep it and really want to get that in top shape, then it's that parts and service business that is keeping. But [indiscernible] since say 2013, so they’re definitely getting some age on some of this equipment.

Maybe just said differently or a follow up on that, so the ages of fleets is that, call it, 5 year lows or since 2013, is that continuing to trend down or is that kind of at a stable point now where replacement demand is offsetting that?

I would say it's flat but maybe extending longer. It's that same plateau a little bit longer. It's not improving. It's getting more hours or more age on the equipment. And one more comment on that too is from a depreciation standpoint, with all the accelerated depreciation and the length of the fleet, typically the growers like to have some depreciation basis in their fleet and they're at some of the lowest levels they’ve ever been. So from a tax standpoint and the advice they get from their banks and their tax people is to try to have as much depreciation basis in their fleet as possible. So, that's another motivating factor for that equipment purchase.

Switching gears to construction, have you seen any impact from the recent declines in oil and talking mainly October November here?

You know, there has been some volatility, but we're seeing -- we got [indiscernible] in the western North Dakota that the infrastructure is built, there's still fracking going on. There's oil -- there's not only the well themselves, but then there is new wells going in and -- but it's the infrastructure behind them, it's the roads, it’s the communities, it's the pipelines are going in, some refineries going in and just -- in building out some of the infrastructure to support that area. So we continue to see some business, even though there has been some volatility in the oil prices. It's improved for us in those markets.

Last one for me and then I'll hop back in the queue. Equipment margins have been steadily improving with guidance being raised. I mean without getting too much in the weeds for next year, do you think there's room for continued improvement or are we kind of at a normal level here at that kind of low 9% range?

Yeah. We've kind of talked about, if you go back and look at it, our historical averages there, it's right around that 9.5%, maybe a little bit north of that, so we're nearing those, I think, the midpoint of our guidance here is around 9.25 now. So I think there's some level for -- some level of improvement there, but certainly not to the level that we've experienced year-over-year here. So I think we're reaching those historical averages there.

Our next question is coming from Mig Dobre from Robert W. Baird.

It’s [indiscernible] on for Mig this morning. This was a second quarter in a row of nice growth in parts and service, looks like maybe we’ve turned the corner there. What kind of are the drivers of the improvement in growth rates and what’s the outlook going forward?

Yeah. We were happy, so parts and service up 8.3, 6.7% respectively. Part of that growth that’s in there is the addition of AGRAM in there for the quarter, but despite that still up around that 4% to 5%. As far as going forward, I think that aging fleet that David mentioned earlier, that's certainly something that's providing some opportunity for us here that there continues to be some more parts and service opportunity on that. I think as we move forward, that 4%, 5% is probably a little bit stronger than what we expect, but it's kind of in the ballpark there. Certainly, our international business has had some good opportunity for parts and service growth. That's a less mature business over there and we continue to maximize the parts and service opportunities over there. Also just with our new structure that we’ve had here with the expert team, there is a heavy focus on that parts and service businesses as well as you know.

And you talked about the drivers of the uptick in SG&A. Is this perhaps like a new run rate going forward or maybe there were some unusual drivers in the quarter?

Anytime you have a higher level of equipment gross profit, some of those variable expenses such as the commissions are going to ride up with that. I think for the year, I think we've been talking just over that 200 million and I don't think that's changed. I think we're still around that level. So certainly with Q3 and Q4, we expect a little higher level of operating expenses here, because of that higher contribution of equipment gross profit.

If I can maybe sneak in one more quick one. You mentioned outlook for inventory at the end of the year being sort of flattish versus prior year, ex AGRAM. How much inventory is coming from AGRAM?

AGRAM inventory I think is right around, I think, in the acquisition right around 20 million, maybe just shy of 20 million.

[Operator Instructions] Our next question is coming from Larry De Maria from William Blair.

You guys obviously now that you’ve discussed this replacement demand, maybe can you put in some numbers, David, around maybe the average hours that farmers or your customers are willing to put on equipment and where they are now to give us a sense of the level of replacement that's going on and the need?

Well, historically, if I look at this, well, let’s break this segment, there's probably that 20% that comes from farmers out there that are -- buy an 80% of that new equipment. For a combine, for example, once all those combines get the day be 2 to 3 years old, 1000 hours on them, they'd like to have those replaced. I mean that seems to be historically and I talked to a grower the other day that who has been financially very solid, been a longtime new buyer, he had combines that were 7 years old and approaching 3000 hours on them. So to put in context and you see a lot of those similar situations out there where the life of these combines are in the hours on them are way farther than what they really feel comfortable from a reliability standpoint. Then couple that with some of the newer technology out there, some of the precision, some of the -- some of that that’s in the newer equipment, so that coupled on the higher age and hours is really driving some of these new equipment purchases.

Is it same for tractors or the combines more greatest?

Yeah. I think the combine is definitely something they want fairly updated, self-propelled sprayers a little bit the same way, but then tractors as they start approaching that $5000 or $4500, 5 years old, you don’t run into the same, we need to upgrade that. And they’re again a tremendous amount of technology, fuel efficiency, higher horse powers, some of the technology and then some of the newer forward drives. So again, driving those purchases.

Now you mentioned technology, can you give maybe some further examples of where customers are upgrading around technology, I mean, maybe [indiscernible], but are you getting the same level that some of the other companies are talking about? Is that leading to better mix and better revenue opportunities for you?

Well, we've had the auto guidance systems for a while. So, we're seeing pretty -- become mainstream in the tractors and combines or these two themselves. So, on the combine front, you have got the harvest command with the combine automation, on the planner side, high speed precision planners, you've got the variable speeds prescription capabilities. Something that’s industry leading from the KSIH, there is AFS soil command [indiscernible] applications. If you look at that, the whole AFS connectivity and we’re providing that telematics to be able to access that machine connectivity with the AFS platform. And I think, we recently announced a digital agreement with farmers, that's really exciting Larry that’s offering the customers, there is an integrated digital platform for their -- not only their current machine, but their legacy equipment. The farmers, functionality which is not only for the new equipment, but they can put it all into that mix fleet. The other thing that it does too is that with that open architecture is that you can have a mix fleet, you can have the older equipment and get all that on that whole software platform with that technologies. So those are a few things I think are really exciting and that's – and there definitely is, growers are seeing the return on investment on all that technology out there, higher yields, more efficiency and more productivity and some time, more fuel savings and all those things are really driving that and better ergonomic decisions in season from what these people, from all that data collection and data software.

So in other words, some of the stuff that your green competitor talks about with their software platforms, you're able to mitigate that with the farmer’s edge, it sounds like, just if you can kind of confirm that, that would be helpful. And then just from a top line and I'll leave it here, a high level perspective. It sounds like replacement and technology are obviously driving things. We know that, but does that imply that despite the low commodity prices and some of the trade concerns that all else being equal, we can consider that the replacement cycle and technology lead to further, let's say, moderate growth in ag over the next couple of years, unless something bad happens with trade. Is that fair or no? How do you think about it?

Well, I think that we’re working on an awful lot of numbers, right. If you look at where these industry are -- numbers are right and we’re working off some really low numbers, so to be able to sustain that, it's not going to take a lot of units in order to stay at the same numbers. So, we've experienced these low commodity prices and at this level right now and we feel that at the levels of unit sales are fairly sustainable and that's really what's driving that business is the replacement demand and in a way, if we saw some uptick in commodity prices, then we could probably see some improvement. So getting back to the precision, Titan Machinery has always been the leading edge and the technology, early days related to our network and what we have right now from KSIH and definitely leading edge technology and it is open architecture, it accommodates fleets, leading edge stuff and if you take some of the partnerships, they have a tremble, the partnership with Raven, the partnerships with Farmer’s Edge, I definitely think we've got a very affordable precision platform that delivers go to the marketplace with. Definitely ADRAM as good as anything that Deere has out there.

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Meyer for any further closing comments.

Okay. Well, I want to thank everybody for participation on the call and looking forward to a good fourth quarter. So, thank you.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.