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

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery third quarter fiscal 2023 earnings conference call. On the call today from the Company are David Meyer, Chairman and Chief Executive Officer; Mark Kalvoda, Chief Financial Officer; and Bryan Knutson, President and Chief Operating Officer, Bo Larsen will be officially transitioning in the CFO seat tomorrow is also on the call with us today. By now everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2022, which went out this morning at approximately 6:45 AM Eastern time. If you've not received the release, it's available on the investor relations page of Titan's website at ir.titanmachinery.com. This call is being webcast and replay will be available on the Company's website as well. In addition, we're providing a presentation to accompany today's prepared remarks, you may access to the presentation now by going to Titan's website again at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You'll see on Slide 2 of the presentation our Safe Harbor statement. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These forward-looking statements are based on current expectations of management and involve inherent risks and uncertainties including those identified in the risk factor section of Titan's most recently filed annual report on Form 10-K, and updated and subsequently filed quarterly reports on Form 10-Q. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as maybe required by applicable law, Titan assumes no obligation to update any forward-looking statements that may be made in today's press release or call. Please note that during today's call, we'll discuss non-GAAP financial measures, including results on an adjusted basis. I believe these adjusted financial measures can facilitate a more complete analysis and greater transparency in the Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures in today's release. The call will last approximately 45 minutes. At the conclusion of our prepared remarks, we will open the call to take your questions. Now, I'd like to introduce the Company's Chairman and CEO, Mr. David Meyer. David, please go ahead.

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

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

Thank you, Bo, and welcome. With that, if you turn to Slide 3, you will see an overview of our third quarter financial results. We delivered another consecutive quarter of record financial results with third quarter adjusted earnings per share of $1.83. The ongoing strength of the Agriculture sector combined with our customer centric focus drove consolidated revenue growth of 47% to $668.8 million. This performance is supported by strong contributions across each of our revenue streams, equipment, parts and service. Our business continues to operate with greater efficiency, allowing us to drive significant operating leverage on the higher levels of revenue that we have achieved. This is demonstrated in our record a consolidated pre-tax margin of 8.2% that we delivered in the first the fiscal third quarter, with each of our operating segments experiencing and pre-tax margin expansion. At the segment level, our Agriculture segment continues to thrive in the current environment. While equipment revenue was a primary driver in terms of third quarter growth and dollar contribution, increasing 85%. We're especially pleased with our parts and service business would really shine to the quarter increase in revenue by a combined 48%. Taking into account the higher margin profile of the parts and service business, relative to that of equipment, the strong growth was a significant driver and our ability to achieve these record quarterly earnings results. Our Construction segment also performed well in the third quarter and delivered a 34% increase on the same-store sales basis. Due to the improved operating efficiency that we've been focused on driving over the last several years across our optimized footprint, we continue to realize a commensurate lift in our pre-tax margin as a result, which for third quarter reached 7%. With respect to our International segment, we remain focused on driving higher segment pre-tax margins, which for the quarter reached 9.8%. We're very pleased with this result even though sales are down slightly in the third quarter. Our business continues to be quite resilient despite facing obstacles associated with the ongoing conflict in Ukraine and headwind from the recent currency movements. The farm ministry in Ukraine is adapted to the food environment and Titan is doing its part to help keep valuable equipment up and running. There's a majority of the cropland in our markets continues to be farmed. In summary, our results showcase the improvements we've made to our business over the past several years to drive higher levels of profitability through the cycle and demonstrate the value we've added through organic growth and accretive acquisitions. This is translated to results in excess of our guidance, which we are increasing again today to enable a new full year EPS range of $4.55 to $4.85. With that, I will turn the call over to Bryan Knutson for his segment review.

Thank you, David. And Slide 4, you'll see an overview of our domestic Agriculture segment where customer demand for new and used equipment continues to outpace supply, primarily due to continued elevated levels of net farm income. The majority of our customers experienced excellent harvest conditions with yields that were for the most part at or above pre-harvest expectations with minimal drying costs. Furthermore, today's new equipment technologies and the efficiencies those generate become even more critical in these times of higher input costs for producers and are another key factor driving new equipment demand. Additionally, the current aged and higher-houred fleet remains a catalyst for parts and service revenue growth. And our service departments have a full book of uptime inspections that we typically perform in the offseason. Transitioning to our Heartland Ag Systems acquisition, I've been intimately involved with the integration process, which is progressing well, and I'm continually impressed with the quality of the Heartland organization and leadership team. Overall, for our domestic Ag segment, we anticipate a strong finish to our fiscal year as we continue to receive presold equipment and delivery existing on hand inventory. We have a positive outlook with a customer waiting list to purchase calendar year 2023 units as allocation becomes available. Turning to Slide 5, you'll see an overview of our domestic Construction segment. We are proud of our same-store sales increase of 34.2%, which was primarily due to increased equipment demand. I want to thank our teams for another quarter of pre-tax margin growth, which has grown to 7% and is a testament to our team's ability to execute on our multiyear operational improvement plan. Similar to our North American Ag segment, CE equipment demand outpaces supply and is also experiencing long lead times and allocation for new equipment. Although,…

Thanks, Brian. Turning to Slide 8. Total revenue increased 47.3% to $668.8 million for the third quarter of fiscal 2023. Our equipment business increased 54.3% versus prior year, driven primarily by strong same-store sales in our Agriculture and Construction segments and further supported by contributions from our Jaycox, Mark's Machinery and Heartland acquisitions, which were not in the prior year's third quarter results. As David noted, growth in our parts and service business was also strong in the third quarter, increasing 35% and 21.7% respectively, reflecting our continued focus and efforts in this critical area of our business. Rental and other revenue increased 4.2% versus prior year with dollar utilization of our Construction segment rental fleet increasing to 34.3% compared to 31.4% in the prior year quarter. This material improvement and utilization allowed us to grow revenues on a smaller fleet and expand rental margins compared to the prior year. On Slide 9, our gross profit for the quarter increased 50.9% to $140 million and gross profit margin increased by 50 basis points, driven primarily by stronger equipment and parts margins. Equipment margins were supported by a $2 million benefit recognized on the expected achievement of our annual manufacturer incentives, healthy inventories and favorable end market conditions. The higher margins in these revenue categories were partially offset by a shift in sales mix toward equipment. Operating expenses increased $21.9 million versus the prior year to $84.9 million for the third quarter of fiscal 2023, primarily due to the inclusion of Heartland operating expenses, starting in August 2022, as well as higher variable expenses on increased revenues and some remaining acquisition related costs associated with the Heartland transaction. This increase was more than offset by revenue growth and lead to 120 basis points of operating expense leverage compared to the prior…

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

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

Yes, thank you Steve. What we're seeing is that still on allocation, still have long lead times still have demand while outstripping supply. So we continue our concerted effort here are teams out on the ground communicating daily with growers where we're getting with those customers booking pre sells, watching for any more allocation as it becomes available, as anything changes, there are drought impacted areas in the country. So, our teams are ready and also watching to see if dealers do not take any of their allocation or allowed some allocation of free up due to that. And then likewise some of the, with the rising interest rates, and that impact on dealer balance sheets, we're also watching that. We're in a great position here with our strong balance sheet and our strong cash position as well as our professional team to be able to make decisions quickly and react very quickly as anything becomes available. So right now, you as you heard on the CNH call, they are keeping the order windows is pretty tight, and we've got presold and locked in the allocation we do have so far. And it'll be March at the earliest, maybe into that April, May time period before we start to get our final allocation for the end of the year.

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

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

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

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

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

Yes, Steve. This is Dave. We're currently talking to a number of owners. As you're aware, this continues to be a fragmented dealer network out there, aging dealer principals, as you look at the growing sophistication, equipment and the needed support services to support this seasonal equipment today. The growing dealer capitalization requirements and lack of succession alternatives out there, it's still a long runway of acquisitions out there. Another driver with the, on that second, third generation that you all, you don't hear the solid date their dealerships into a larger group is that increasing complexity and regulations on the backside of the business, looking at HR, accounting, systems and some of this regulation compliance. So our model, we leverage these backroom functions with dedicated professionals along the stores to focus on the customers employees and this is really appealing to like I say that second generation, third generation operator at these dealerships. So, we anticipate an orderly flow and quality acquisitions in the years ahead.

I guess I could sneak one more and you guys were very acquisitive kind of before the top of the last cycle. I guess, what did you learn or what would you do differently sort of as you look at the footprint and your appetite for acquisition with commodities at near all time highs?

I think we've totally, we continue to look at quality acquisitions, we'd like to see upper Midwest footprint, we like these strong growing areas, areas where we got synergies in our equipment, and we'll continue to look at that. But I think with this tightening of equipment and seeing, how we can leverage across these acquisitions with our current backroom staff that we already have in place it, that's really working. But with that said, these increased turns really focused on the margins, making sure, we're moving that user equipment out of the system fast. I think you don't see any overhang of equipment or on both the Ag and the Construction side. And to continue that way, I think that just going to be really good for not only Titan, but for the industry.

Thank you. The next question is coming from Daniel Imbro of Stephens Inc. Please go ahead.

Yes. Hey, good morning, guys. Congratulations to Bo on the new role and then to Mark for a great career. I want to start of question on the Heartland acquisition. It sounds like integration is going well. I'm curious to know how your customers are responding. Remember back at the time of the deal, you guys talked about potential revenue synergies, just as we head into a seasonally higher time of the year. How are you feeling about that revenue capture target you initially laid out?

Yes. Hey, Daniel, this is Bryan. Yes, like you said, there's a lot of work to do. Even back to Steve's question, what we learned from the past replacement cycle and acquisitions, just how important integration is, right? And so, a lot of time going into that, but going really well, we feel even more confident today about the potential synergies and all the shared opportunities that we had with the two great organizations. So, we're hearing from our customers, they're excited about all the additional service points, now available to them, all the additional parts points available to them, the additional equipment available to them, quicker reaction times from us than and less downtime for them. So really excited about that. If anything maybe a little timing on those synergies just because, as you know, we're struggling to get enough equipment to meet the demand for our legacy or historical customers, but we definitely reiterate and feel really strong about our synergy opportunities that we've laid out, again, we just got to get the equipment to be able to do it.

That's helpful. And as I think about you mentioned the service and parts opportunity and to follow-up on Steve's question. There's not enough supply demand continues to outpace it. That should be good, I would think for service and parks into next year. But how are you feeling about parts supply, you got to build them inventory? Should we expect given this supply demand backdrop, continued service and parts tailwinds into next year, maybe above historical trend growth rates just as we think about that part of the business?

Yes, you see supply chain, some signs of improvement here and there, a little bit and we feel some of that will pull-through earlier on the part side. But as Mark mentioned, primarily, we really stepped up and going back several quarters here. And you see, it reflected our balance sheet, but we've proactively ordered up on parts. We're going to continue to do that through the supply chain, it's just part of our customer centric strategy and it's helping drive increased part sales as well, and we continue with our parts initiatives. And so, we definitely feel good about the parts opportunity next year. It won't be easy. The supply chain is still very disrupted in the part side is as well. But again, we another thing with our operating model is we have a dedicated team there as well, just like on the whole good side where with the parts that, that's all they do for a living. So, they really have the relationships and really understand the systems well and are watching their screens every day and that's all they do is procure parts for a living for us. So, we feel good about that going into next year.

Last one for me. I wanted to ask on the Construction side. I think on Slide 5, you mentioned the residential construction is moderating. I mean, it makes sense given the backdrop. But could you frame up your exposure to the residential side? Like how much of construction is purely residential? And then within the guidance or are you assuming the residential construction continues to slow from here, given what's happened with rates? Or how -- what's your outlook for the residential segments?

Yes. We are considering it to continue to slow a bit. But remember that all throughout the year here and as we go into the foreseeable future, we've had demand way outpacing supply. We've got a pent up demand from our contractors. We've got a waiting backlog and that's an aging fleet out there because of that. So that'll also help on the parts and service side. And then, you typically see on the on the horseshoe impacted, more by this type of thing as well as on the opposite way on positive. So, the Midwest being a little more insulated by that in our markets, we're still seeing pretty good activity, even with the slowdown in other parts of the country due to the rising rates. And so, we still have a lot of activity. We feel good about it, our exposure, we also were very diversified on the on the construction side. We do a lot with farmers and ranchers, as I mentioned for feedlots and land improvement, and so that end is still very strong, as well as with the infrastructure spending. So, we really work with a wide variety of contractors.

Thank you. The next question is coming from Larry De Maria of William Blair. Please go ahead.

First, can you maybe elaborate a little bit on the allocations? I mean, at this point, we expect to have significantly more availability next year, and with allocations, you risk losing any sales at this point?

Larry, it's awfully far out to save for this point for next year yet. We really only have our allocations for the first part of the year at this point. It's hard to say on the OEM side, certainly in my opinion, plant capacity is there. They're not free of the labor challenges that the rest of the U.S. is facing right now. And then, you also have some other labor impacts there and then the supply chain. So, as it continues to improve, it could open up right now. And as we look at the business, we're not seeing any material changes or improvement. And so with demand is strong as it is, to your question, we certainly do miss some opportunities. Now on the flip side as you know that that does elongate out the cycle that does cause the fleet to get more age does help our parts and service business as well. And so, there are some positives on that side especially with the higher margin parts and service business.

So, I hear you correctly. You might lose some sales or delay some sales, but you don't think you're risking losing to competitors that have maybe more availability or allocations differently? And is there any impact from the strike that you're seeing on availability?

At this point where we're seeing the supply challenges really impact everybody let's say fairly equally, and all the manufacturers and all the OEMs. So, yes, more of a, as you said, more about timing or more of a delay on the purchases for the customers versus and overall share loss at this point.

Okay. And then secondly, can you talk with the average price increases you're seeing this year, on new orders that you're taking in on the age, predominately on the large ag?

Yes, it really depends on by piece and by product category, but overall, it's in that high single digits on average as they come through, but, again, it does really vary by product, even Larry.

Okay. And last question, one more, sorry. You talked about M&A and good runway. Are there some of the larger deals still out there? Are we kind of done most of the larger deals and things now we're kind of onesie-twosie in the footprint or there's some meaty things out there still?

No, I think there's, there's both out there, Larry. As you just looking at some of these larger deals, the capital increases, you starting to see in this equipment between that $5.5 million up to $1 million for a combine and heads, right. So, if you take a dealer, maybe he's grown from three stores, also as eight stores, and also you start taking in trade-ins and everyone, the cap on these exponentially increases. So, yes, I definitely think there's going to be so motivated larger groups, but and then there's some of the one, two store of tuck-in operations through it. So, I think they're both out there. So, I think we there's going to be opportunities on all different sizes of acquisitions here.

Thank you. We're showing time for one final question today. Our final questioner is going to be Mig Dobre of Baird. Please go ahead.

Thank you for squeezing me in. Mark congrats, all the best in next step in your career, and Bo welcome. I guess my question is. I'm trying to get a better sense for the updated guidance and the variance versus the prior one. What surprised you the most basically what led to this guidance increase? Can you talk a little bit through that?

Sure. Thanks Mig for the congrats there. Yes, I think the two biggest areas was in equipment than it was the equipment revenue side. Again, this kind of comes to goes to the level of deliveries coming in, that it was better than what we had projected. And when it's coming in, they're going out fairly quickly. So from a revenue standpoint, mostly on the equipment side, there was some -- and I would say that was across both Ag and Construction. From a margin standpoint than it would be on the equipment, margins as well. So we did pull that up. I think even on the manufacturer incentive. And we talked about recognizing 2 million here in the quarter. The model assumes about another 2.5 in the fourth quarter, so that it's higher than what we expected. But just overall, margins continued to trend higher and look better on the equipment side. And that's and those two are the primary increases here for the fourth quarter and what happened in the third quarter as well.

And in terms of your comment on equipment availability being the and maybe better than you anticipated. As you talk to the OEM, was there some clarification as to what led to that and whether or not this is sustainable on a go forward basis?

Yes, I think what it was, again, I think we've kind of go back to a fourth quarter last year, and we have some. Fourth quarter last year, there was some cancellation of orders. There were some delays of orders that went into first quarter this year. So we anticipated some level of delays for the most part this year. And particularly here in the third quarter, and that, it didn't come to pass as much as what is actually happening here. So, it's better than what we expected. I think what you're hearing from the OEMs out there as well is that it's moderately improving. And that's showing up and it's helping some of that equipment show up in our yards here.

And maybe the final question since you talked about margin being better than you expect to certainly better than I expected. As you think about the fourth quarter and your updated outlook. What sort of equipment margins, do you guys have embedded in there? How should we think about those margins sequentially or year-over-year, however you want for me?

So year-to-date, we're right around that 13.7, so a quarter was particularly high at over 14, but 13.7for the year. And we do expect that in the modeling. Anyways, what we've got modeled is for the full year to be down off that a little bit down to about 13.4 is what we have projected. And again, it's some of those typical fourth quarter, mostly mix items that that happened where we're expecting it to be down somewhat from what we've experienced, some of that mix would be less on the international side, less equipment revenues, and then just some of the bigger deals and higher price tag units going out more so in that fourth quarter that would bring it down. But for full year, the model has ended about 13.4.

And if I remember correctly in the prior year, in the fourth quarter, you had a little over $6 million of manufacturer incentives and now you're only factoring in 2.5 for the fourth quarter. So that's a theoretical headwind relative to the model, correct?

Relative to fourth quarter last year, that's correct. So our fourth quarter last year was quite high in the fourth quarter, as you pointed out. It had some of those unusual items. And yes it was like 6.4 million total of manufacturer incentives, some of some of which was on the international side, I think 1.3 was on the International side and 5.1 on the Ag side. So yes, that compares to more like 2.5 this year, in our fourth quarter. That's correct.

Then if I may, one final question. I'm wondering why manufacturing incentives would be lower this year than they were in a prior year given the fact that the volumes are better and your business has obviously done quite well in '23?

Yes, and when you add, so we booked 2.6 and starting in our Q2 this year. So, the answer is we really started recognizing it earlier this year because of our confidence in achieving that incentive. So, we've got a total of 4.6 books so far and with the additional 2.5, we're at like 7.1 total compared to 5.1 that was booked on the Ag side last year. So it is higher when you look at the whole year. It's just the timing of when we began booking into our results.

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Great. Thank you for your interest in Titan Machinery, and at the time on the call today, and we look forward to updating you on our progress on our next call. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.