Greetings, and welcome to the Titan Machinery Second Fiscal Quarter 2023 Earnings Call. At this time all participants are in 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, Jeff Sonneck of ICR. Thank you. You may begin.

Thank you. Good morning ladies and gentlemen and welcome to Titan Machinery second 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. By now everyone should have access to the earnings release for the second quarter ended July 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 and Titan's website at ir.titanmachinery.com. This call is being webcast and replay will be available on the company's website as well. In addition to providing a presentation to accompany today's prepared remarks, you may access the presentation now by going to settings website at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You'll see on slide two 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 Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've 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. At the conclusion of our prepared remarks. We'll open the call to take your questions. With that, I'd now like to introduce the company's Chairman and CEO, Mr. David Meyer. David, go ahead.

Thank you, Jeff. Good morning, everyone. Welcome to our second quarter fiscal 2023 earnings conference call. On today's call, I'll provide a summary of the results. And then Bryan Knutson, our President and Chief Operating Officer will give you an overview for each of our business segments. Mark Kalvoda, our CFO will then review financial results for the second quarter of fiscal 2023 and provide an update to our full year modeling assumptions. If you turn to slide three, you will see an overview of a second quarter financial results. This was a great quarter for Titan across the board and demonstrates the continued momentum we're enjoying in connection with a strong farm economy. Revenue grew 32% to $496.5 million in fiscal second quarter, and we're pleased to deliver a second quarter earnings per share of $1.10, which marks the highest quarterly earnings performance in our 42-year history. This is a result of our team's unrelenting focus on customer service and operating efficiencies, which translated into a consolidated pre-tax margin of 6.7%, which is a great accomplishment. At the segment level, our agriculture segment was a clear beneficiary of a strong demand we are seeing, which was supported by timely deliveries of inventory. Our construction segment also experienced strong same-store sales growth driven by robust demand for equipment, notable strengths and parts service and rental. Likewise, the improved pre-tax margin in our construction segment reflects the improved operating efficiency that we've been focusing on driving over the past several years across the optimized footprint. While revenue goals in our international assignment remains impacted due to the ongoing conflict in Ukraine, our business continues to be resilient as demonstrated by the same-store sales growth in second quarter. Further, our ability to drive higher segment pre-tax margins is also notable, while this…

Thank you, David. Good morning and good afternoon, everyone. I will start with an update on our domestic agriculture segment, which is our largest segment, and then we'll follow with some additional color on our domestic construction and international business segments. On slide four, you'll see an overview of our domestic agriculture segment. To-date, we continue to see exceptionally strong demand for both new and used agricultural equipment, primarily supported by the continued elevated levels of commodity prices. Furthermore, today's new equipment technologies and precision components, which increase yields productivity, and efficiencies become even more critical in these times of higher end user input costs, and as a result another key factor that is driving new equipment demand. As our customers continue to look for solutions to upgrade their Aged fleets with new and late model used equipment with today's advanced technology, the current aged and higher-houred fleet that is out there remains a catalyst for parts and service revenue growth. As a reminder, even with the strong industry volumes we have experienced, the current fleet age is still well above historical average. Crop development and yield potential varies across our footprint depending on weather events and rainfall timeliness. While dry conditions persist in some of our markets, the moisture situation overall is better than last year. Additionally, for those customers that have prevented plant acres or experienced other crop losses, most have available multi-crop insurance and USDA safety net programs. While corn and soybeans are the primary crops grown in our markets, we have growers that raised sunflowers, edible beans, canola, wheat, barley, alfalfa, potatoes and sugar beets. This crop diversity allows growers the flexibility to adapt crops to the field conditions, moisture levels, timing of planting and seeding, variable input costs and end markets. As most people are…

Thanks, Bryan. Turning to slide eight. Total revenue increased 31.5% to $496.5 million for the second quarter of fiscal 2023. Our equipment business increased 37.6% versus prior year, driven primarily by strong same-store sales in our agriculture segment and further supported by contribution from our Jaycox and Mark's Machinery acquisitions, which were not in the prior years second quarter results. Growth in our parts and service business improved in the second quarter, increasing 18.9% and 12.4% respectively, which was anticipated given the later start to the planting season this year. Rental and other revenue increased 3.7% versus prior year with dollar utilization of our construction segment rental fleet increasing to 31.9% compared to 26.6% in the prior year quarter. This material improvement and utilization allowed us to grow revenues on a notably smaller fleet, which in turn drove strong margin expansion. On slide nine, our gross profit for the quarter increased 36.9% to $103 million and gross profit margin increased by 80 basis points driven by the expansion of equipment, parts and rental margins. Equipment margins were supported by a $2.6 million benefit recognized on the expected achievement of annual manufacturer incentives. Higher margins in these revenue categories were partially offset by a shift in sales mixed toward equipment. Equipment margins continued to be supported by very good end market conditions and healthy inventories. Operating expenses increased $11.8 million versus the prior year to $68.8 million for the second quarter of fiscal 2023 due to higher variable expenses and acquisition related costs associated with the Heartland Ag Systems transaction that closed earlier this month. However, 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 13.9% as a percentage of revenue…

Thank you. At this time, we'll be conducting a question and answer session. [Operator Instructions]. Our first question comes from line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Hey, guys, this is Reed [ph] on for Daniel. Construction has seen multiple years of improved profitability. David, what levers do you have left to pull internally to drive margins further there?

Hi, Daniel, this is Bryan, I'll take it and then Dave can weigh in with anything I missed here. Yes, appreciate, as Mark pointed out, we're really proud of the continued year-over-year improvements in our construction business. I think that's showing through in the numbers here. And if you look at the rental fleet, was a strong contributor again this quarter. A lot of initiatives we've had there in improving our rental fleet utilization, the mix of our fleet. And so, that'd be another lever we will continue to work driving, increasing our fleet with demand and as the supply chain opens up a little bit, but as appropriate with the utilizations and again focusing on those higher utilization products. Likewise, with parts and service, Mark mentioned, our absorption rates continue to have good year-over-year growth and our absorption coverage on the construction side. And a lot opportunity there as we -- if we can get that near where our agriculture segment levels are. And so a lot of initiatives on the parts and service side that continue to focus on that and drive that side of the business. And then also, just with our suppliers working closely with them, they've got a lot of great products coming out here, and continue to fill with some product gaps that we've had. And so good opportunity on the equipment side. And then just finally, with what you've seen with our inventory turns and the return on assets on that side of the business. So the initiatives we've done around inventory management and also driving through to the higher margins that you see in our numbers. And on every one of those, we believe we've got more room on the construction side.

Right. And I guess, touching on those inventory turns, as supply starts to normalize, where can we expect the inventory turns to stabilize in the future going into like the back half of next year and forwards?

Yes. I think once we get back to more of a normal supply side timeframe, I think what we've always talked about is that three times turn. I think we're very comfortable at three times. You get to, especially on the Ag side, you get to some of our international and construction where there is some rental within our inventory. Maybe it's just under that. So I would say comfortably call it to 2.75 to 3.25. So right around that three time turn is what we're targeting for normal time.

Awesome, congrats on the quarter.

Thank you.

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

Hey, thanks. Good morning, everybody. And nice job. Hi guys. First thing first, obviously, strong same-store sales. You always had some significant supply chain challenges like everybody else. So I'm just kind of curious, like about what the driver is that we're getting better -- you are getting better allocations than other dealers. Is it used equipment being the big driver or is it price or what's behind the surge of same-store sales considering the supply chain challenges?

Yes. I think, Larry, this is Brian. I think you just hit on a number of them there. So you do see pulling through in the margin. So it's certainly price has been a bit of a factor both in our ability to certainly pass that through to the customer, and then actually a little bit of an increase in our margins that you see. And then just, as I mentioned on prepared remarks, a great effort by our team getting out of the gate early, and doing pre-sales, and just staying really close with our customers and getting our orders in early. Our team here in Fargo really staying close to those order books and the pricing and when the windows open up having the knowledge from our teams in the field, again staying close with the customers to get those orders in right away. And then just working with the customers to know what their needs are and then to procure the equipment that is available. As you know, there's pockets, some of the plants experience different components shortages versus other plants. And so, planning the business really with our customers and capitalizing on those opportunities. So you see it, I think both in revenue, and margin, and the inventory turns, all really pulling through to that higher same-store sales.

Okay, thanks. And then obviously expressed optimism in the next fiscal year. Can you discuss kind of current orders, how they're shaping up year-over-year maybe? And as it relates to the allocations, which they're opening up I guess, periodically. How's the allocation tie in to your ability to successfully bundle with Heartland, which is obviously a big sales engine next year? So any update in the allocation with synergy outlook and your ability to execute on that and the orders that we're seeing maybe year-over-year?

Sure. Yes, Larry we feel really good with our modeling assumptions here too for this fiscal year. So as we look at FY 2024 and the end of FY 2024, being 18 months, it gets to be a long look, as I mentioned, we'll be coming with guidance here, as we usually do at the end of our Q4. But we feel good about the order windows that have opened up so far. As you know, with like C IH as an example, through Q1. And we don't have allocations for the rest of the year yet. But as I mentioned, just, we control what we can control on that. Our team works really hard to stay close with the customers and be ready to jump on those opportunities. And again, I just want to credit our team for what they have done and with the presale and also with the manufacturers as I mentioned, just a ton of challenges you heard it on Deere's call and AGCO's call, CNH's call and what they're all managing through and so real credit to our suppliers, and again, want to thank them for what they've been able to produce. It's quite a challenge right now. And as you can see in our numbers, they are getting us the inventory. And we anticipate just working in lockstep with them as we go over the next balance of this year and through next year.

Thanks. Last quick question. I can sneak one more in. As it relates to the Germany business and I guess, you're upwardly onto Germany small. But any change in sentiment you're seeing there from the energy rationing, energy shortages, and any concerns about the ability for this day and age produce, I don't know if they have rolling shutdown et cetera. So, just an update on Germany specifically, and the ability to produce that you've heard?

Yes. Take the small grain crop was pretty good in Germany, and I think the southern was good, Larry. Definitely the economic backdrop and all of Europe as challenge right now, you can see the devaluation of the Euro. And then also we've got some of this drought kind of creeping in the eastern part of Germany, Romania, southern part of Ukraine, just some of those areas. So, yes, we continue to watch that a little bit. But one thing about Germany, I think we've got -- we've been making some pretty serious improvements in our operation in that country. So that's a positive. But I think we have to continue to watch the weather and the development of the late season crop. I think this is going to be the biggest variable in Germany this year.

Okay. Thanks and good luck.

Thank you. Our next question comes from the line of Steve Dyer with Craig Hallum Capital Group. Please proceed with your question.

Good morning guys. Ryan on for Steve. Nice quarter.

Yes. Good morning.

Mark, I think I heard you mentioned Ag size manufacturer incentives again this quarter. If that's right? I guess how much was that benefit in the quarter? And then secondly, is there any incremental for that assumed in the second half guidance?

Yes. Hi, Ryan. Yes, we did. I did mention the manufacturer incentives. So at this point, we're expecting to earn them for this year. It looks very good. And as it looks very good and probable we did book $2.6 million into the second quarter. We do have some baked in for the full year, if you recall last year. And this is just for our domestic business that we're talking about just our Ag segment. Last year, we had, like $5.1 million that we booked on the Ag side and $1.3 for the full year in international. This pertains just to the Ag segment and so $2.6 is what we booked so far, I would expect at least that for the back half of the year. So call it at least like $3 million is what we would have assumed in the guidance for the remaining six months period.

And then maybe Mark, what were you previously assuming? Or was is that all incremental relative to the previous guidance?

It is all incremental. As you know, as we talked about last year, these manufacturing incentives are kind of a cliff type situation that either you hit them or you don't hit them. And so, we're very conservative and not putting them in the guidance or not booking them until there's a high degree of certainty there. And yes, we hit it. So it's all incremental at this point to what we had in our previous guide.

Good. Makes sense. On the -- so for the full year guidance on sales, you gave the construction segment, you gave the same-store sales 15% to 20%. There was a lot of moving pieces in Ag, I can try and do the math, but you have kind of what the implied same store sales is within the Ag guidance on the sale side?

Yes. There are with all those acquisition, acquisition we had last year, acquisition we had in the second quarter, and then obviously, the big Heartland acquisition. Adjusting for all that or putting that in there, and we kind of provided the numbers for that, it would equate to about assume 30% for the full year in Ag for same-store sales growth.

Helpful. Last one for me. You mentioned a lot of pre-sold for the second half of this year. How much visibility? You mentioned some kind of stuff that needs configuration that's just waiting to be shipped. But how much visibility do you have to getting the equipment from your OEMs and there's Case IH or others but getting the equipment you need to fulfill those pre-orders?

We're in constant contact with our suppliers as well as the different systems we have in place to have good visibility to that. With that said, as I mentioned, you do see movement from quarter-to-quarter and then -- and potentially as we get closer to the end of the year here then movement from one quarter to another. So, we feel really good about that we will receive those. It does certainly get choppier, which quarters there will be an or again as we get to the end of the year, which year there will be in as there does tend to be some movement just as you've seen with the OEMs and their reporting.

Great. Thanks guys. Good luck.

Thank you.

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Mig Dobre with Baird. Please proceed with your question.

Good morning. Thanks for putting me in here. I guess, I'd like to ask a question on the guidance as well. So, you raised your core assumptions on Ag by 13%. And I'm sort of curious if you can kind of help us understand the moving pieces here. How much of this was maybe incremental realized pricing? How much of this is really kind of driven by new equipment versus used? Because obviously this is a pretty material raise with just kind of six months left.

Yes. So first of all, Mig, with that 13%, I would say about half of it happened in the current quarter. The remaining half is for the back half of the year. And I would say, it's kind of across the board mostly not necessarily as much on the pricing. I don't think that's changed as much in our assumptions. But between new and used, it was kind of across the board. As you know, as the new comes in, we get the used. And it kind of frees up the used with the trade to sell to the customer there as well. Maybe just as far as the same-store sale that was kind of on the last call to or the last caller there. So 30 -- about 30% right now we're at about 36% same-store sale growth for the year. So, again, there's just -- there's still some level of uncertainty as far as the deliveries, the timing as BJ mentioned on the call between quarters between fiscal years, but that's kind of our best estimate at this point.

That's helpful. Thank you for that. And then, on the discussion that you had on manufacturer incentives, the way I heard it is 2.6 obviously in a quarter, you expect at least 3 million. But that seems to be more or less the same amount that you've recognized last year in incentives. And maybe this is where you can educate me a little bit as to how these work. Isn't it fair to assume that your incentives would actually be higher this year, since you're obviously selling a lot more equipment?

So yes , so first of all, the three -- So last year, we had 5.1. So with the 3 million on the back, that would be five, six up a little bit. And we can't get into how these manufacturer incentives are for competitive reasons. We just we don't get into the makeup and the details of it. But yes, I would expect that there would be some growth there. We have some growth kind of built in from last year and the numbers in our guidance now. And certainly it could grow from there.

Okay. I'm sorry, I have two more. One of them, you talked about your supplier being able to ship equipment, and it was pretty clear in a quarter. When I'm looking at new equipment inventory this is really the highest inventory you've had in a couple years now. And I guess, I'm wondering, why is it that you're seeing this? Because it strikes me that everything that we've heard from the OEMs broadly not just your supplier is that frankly things have remained pretty difficult, pretty choppy, and production still struggle to ramp sequentially. So you seem to be in better shape in terms of your deliveries than pretty much anybody else that I've seen. And I'm wondering why that is?

Yes, Mig, you are right. And again, really pleased with the deliveries we have gotten and the effort from our suppliers and really, like I said back to our team. So a lot of pre-sales coming through here. And a lot of those go back to ordered a long time ago and our team got out of the gate really early. And also when order books came out in some cases here, we're looking at well over a year ago, and ordered up right away and got orders in early again from staying close to our customers, as well as a lot of the initiatives we've had around inventory management here and just closely monitoring what our needs are, and again, getting those orders in really early. So we're starting to see some of those shipments come through on those orders that were placed a long time ago. And then a little bit of that uptick, of course, that you see on the inventory is sales whip that is built into our modeling that then will come through and book through here in the second half of the year as well as it just takes us a little bit of time to get the machines pre-delivered and get them out to the customer. And so during that transition period those used been on our balance sheet even on the pre-sales. But yes, just working really closely with our suppliers and really managing what we can control as tightly as we can and hope to continue to execute that going forward and hope this supply chain starts to open up here, one of these days, it's as you know, certainly been a challenge for manufacturers.

Understood. Last question. And I understand that you're not providing fiscal 2024 guidance. But I am curious as to how you're managing into business as you're looking at fiscal 2024, right. Because presumably, the conversations you're having with customers right now, they're not really involving near term equipment deliveries. If people are putting in an order now, they probably don't get billed until 2024. So, are you able to pre-sell equipment right now? If you're not, how are you managing the demand pipeline? And can you give us more context in terms of how that demand pipeline is shaping up your customer conversations into fiscal 2024 or calendar 2023 as it were? Thank you.

Yes. So our team like you said, staying really close to the customers having those conversations, planning the business. We do as we know, our current pricing today stay close with our manufacturers, a lot of conversation around anticipated price increase and then work with our customers as best we can to anticipate price and anticipate deliveries and both of those have been very fluid. So, just doing the best job. We can give them a directional idea on price in their businesses, knowing what they need and pay directly here's the price, this will work for them in that area, and then the timing, just securing it as fast as we can then and clarify expectations with the customer, so that they know, hey, this is may not make it in time for harvest as an example, with a combine or spring planting with a planter, but then working with them proactively to make provisions for using their old one or whatever we need to do if the deliveries do get delayed, which has been a very common thing that our teams are getting pretty good at working through now.

Sorry to press you on this just, but I understand this. Are you able to sort of take a firm order and a firm commitment from customers now for fiscal 2024 deliveries? Are you able to do that? Or is it just sort of a indication of interest and you'll come back to it when the OEM decides that they're kind of opening the order books?

So firm orders for Q1, Mig, we can take. And then as you get beyond that, so if you go the other end of the spectrum, Q4 starts to be as I describe more of a business planning together and directional if you will, will get the orders and then caution them and just work together and hey, we know they want it. They know here's about the price and we're going to get it as soon as we can and we're going to work with them on the timing. But yes, as far as firm just comes as the order books release, if you will, and so we'll get into Q2 and Q3 order books here anticipated sometime soon in Q3 here.

Understood. Okay. Thank you guys.

Thanks, Mig.

Thank you, ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Meyer for final comments.

Well, thank you, everyone for your interest in Titan Machinery and your timing to call today and we look forward to updating you on our progress on our next call. So have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.