Titan Machinery Inc. (TITN) Q1 2027 Earnings Report, Transcript and Summary

Greetings, and welcome to the Titan Machinery Inc.'s First Quarter Fiscal 2027 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Sonnek of ICR. Thank you. Please go ahead.

Thank you. Welcome to Titan Machinery's First Quarter Fiscal 2027 Earnings Conference Call. On the call today from the company are Bryan Knutson, President and Chief Executive Officer; and Bo Larsen, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal first quarter ended April 30, 2026, which is also available on Titan's Investor Relations website at ir.titanmachinery.com. In addition, we're providing a supplemental presentation to accompany today's prepared remarks, along with webcast and replay information, which can also be found on Titan's Investor Relations website within the Events and Presentations section. We'd also 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. The statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These forward-looking statements are based on management's current expectations and involve inherent risks and uncertainties, including those identified in the forward-looking statements section of today's earnings release and the company's filings with the SEC, including the Risk Factors section of Titan's most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q. These risks and uncertainties 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 may 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 into 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 and supplemental presentation. At the conclusion of our prepared remarks, we'll open the call to take your questions. And with that, I'd now like to introduce the company's president and CEO, Bryan Knutson. Bryan, please go ahead.

Thank you, Jeff. I will start today with an overview of our first quarter performance and our continued progress on the operational priorities we set heading into fiscal 2027. I will then walk through what we are seeing across each of our segments before turning the call over to Bo for his financial review and comments on our fiscal 2027 modeling assumptions. Fiscal '27 first quarter results came in slightly ahead of our expectations. Equipment margin improvement arrived sooner than anticipated, and we view this as a direct result of the disciplined work our team has done over the past several quarters to clear aged inventory and position the business for the next phase of the cycle. We are still well below the normal range for equipment margins, but it is good to see continued improvement, which is reflective of the work we have done to improve inventory health. Overall, we had a relatively strong start to the year due to timing of deliveries, but the underlying demand environment for our customers remains challenged as their margins are under pressure from a combination of low commodity prices and higher input costs. As such, we are maintaining our full year guidance. As we discussed last quarter, our focus has shifted from absolute inventory reduction to mix optimization. The disciplined work our team has executed over the past 2 years has strengthened our foundation, and we believe has positioned the business well for the next phase of the cycle. Total inventory at the end of the first quarter was modestly higher than year-end, which was in line with our expectations and reflects the normal seasonal cadence. Most importantly, our aged equipment inventory has continued to decline each month so far this year, and this is a critical leading indicator of sustained equipment margin improvement. We still have work to do across certain use categories and select slower-moving seasonal new equipment categories, but the overall health of our inventory continues to trend in the right direction, and we believe this focus has put Titan in an advantageous position relative to our dealer industry peers. Our customer care initiative remains central to our operating strategy as we navigate what we expect is the bottom of the equipment cycle. Our parts and service businesses delivered another quarter of stability, which is a meaningful accomplishment in an environment where many growers have increasingly shifted to a fix-as-fail mentality. Holding the parts and service business steady at trough industry volumes is a credit to the partnerships our team has built with our customers across our footprint. And we believe this engagement will continue to translate into share of wallet gains as growers return to more normalized purchasing patterns. With that, I'll now turn to our segments. In Domestic Ag, the environment for our grower customers remains very challenging. Commodity prices continue to sit below breakeven for many producers. And while we have seen some positive movement in corn prices over the past several weeks, grower profitability remains challenged. Government funds remain a critical near-term variable to provide support, and we continue to be active in Washington advocating for farmers. Year-round E15 adoption remains a top policy priority for our customers, and we are also encouraged by ongoing momentum around biodiesel and sustainable aviation fuel, each of which would help alleviate the structural oversupply of corn and soybeans. We expect the presale order period, which begins this month to be an important indicator for back half activity, and we will continue to monitor OEM programming and grower sentiment closely to identify where deals can be made. In Construction, infrastructure and data center activity continues to provide a healthy baseline of demand across our footprint, and residential activity has tracked in line with our expectations. As a reminder, a meaningful portion of our construction segment sales go to farmers, and that portion of the business is where we are experiencing the same softness we are seeing in our domestic agriculture segment. Setting that aside, there are generally good market conditions for our construction segment. In Europe, we completed the majority of our wind-down activities for our German operations during the first quarter, marking an important milestone in our footprint optimization efforts. We are pleased to have this work behind us, and our team remains focused on the markets where we believe we can deliver the strongest long-term returns. As expected, Romania will have challenging year-over-year comparables as we lap last year's European Union subvention program activity, while Bulgaria and Ukraine are expected to achieve modest growth for the full fiscal year. In Australia, our customers are facing disproportionate pressure from elevated input costs, particularly in diesel fuel and fertilizer, both of which have experienced pronounced cost increases in the country following the onset of the conflict in the Middle East. While substantial input inflation is top of mind for growers, increased rainfall across most of our footprint in Australia is setting up more favorable growing conditions relative to recent years. We continue to like our long-term position in this market and our dual brand strategy with Case IH and New Holland continues to expand our reach. Before turning the call over to Bo, I want to thank our team for the continued discipline and execution they have demonstrated in the first quarter. The strategic work we have been doing over the past several years to strengthen our business is becoming more visible in our operating results with each passing quarter, and I am convinced that our position today is setting us up for stronger performance as industry conditions improve. With that, I will turn the call over to Bo for his financial review.

Thanks, Bryan, and good morning, everyone. Starting with our consolidated results for the fiscal '27 first quarter. Total revenue was $522.4 million compared to $594.3 million in the prior year period, reflecting a 10.4% decrease in same-store sales driven by softer demand in our Domestic Ag, Construction and Europe segments, partially offset by growth in our Australia segment. Despite the sales headwinds in the first quarter, gross profit was down only slightly at $89.3 million compared to $90.9 million in the prior year period, while gross profit margin expanded 180 basis points to 17.1% as compared to 15.3% in the prior year. This year-over-year improvement primarily reflects stronger equipment margins driven by the continued benefit from our aged inventory reduction efforts, alongside a higher mix of parts and service revenue in our consolidated total. Equipment margin in the fiscal '27 first quarter increased approximately 100 basis points year-over-year to 7.8%. Operating expenses were $94.4 million for the first quarter of fiscal '27, from $96.4 million in the prior year period. Our headcount and discretionary spending continued to be down year-over-year as a result of disciplined expense management, partially offset by higher variable expenses tied to driving sales. Floorplan and other interest expense was $8.2 million, a decrease of 26% from last year's $11.1 million, reflecting the significant reduction in interest-bearing inventory levels over the past year. In the first quarter of fiscal '27, net loss was $12.6 million with loss per diluted share of $0.55 compared to a net loss of $13.2 million with loss per diluted share of $0.58 in the prior year period. Adjusted EBITDA was $1 million compared to $2.6 million last year. Now turning to a brief overview of our segment results for the first quarter. Our Domestic Ag segment achieved sales of $344.2 million, reflecting a same-store sales decrease of 8.2%, driven by continued softness in equipment demand against a challenging industry backdrop. However, these results were stronger than our initial expectations and benefited from a pull forward of deliveries to customers relative to our expected quarterly cadence. As Bryan alluded to, we are leaving our full year revenue guidance intact as we think this balances out throughout the rest of the year. Segment pretax loss improved to $6.2 million compared to a pretax loss of $12.8 million in the first quarter of the prior year, reflecting the actions we have taken to accelerate inventory reductions and the resulting improvement in equipment margins that we have achieved. In our Construction segment, same-store sales decreased by 6.5% to $67.5 million, driven primarily by the timing of equipment deliveries. We are leaving our full year revenue guidance intact and expect modest year-over-year growth for the balance of the year. Pretax loss narrowed to $0.6 million compared to a pretax loss of $4.2 million in the first quarter of the prior year. In our Europe segment, sales declined to $60.4 million for the quarter, which included a $4.2 million net benefit related to foreign currency fluctuations. On a constant currency basis, revenue decreased approximately 40%, primarily reflecting the expected softening of demand in Romania following the prior year period, which had benefited from a strong response to European Union's subvention program activity. Additionally, I'd like to call out that our Germany divestiture had an immaterial impact in the segment revenue decline year-over-year, but it will have a larger year-over-year impact in future quarters. Pretax loss for the segment was $0.9 million compared to a pretax income of $4.7 million in the first quarter of last year. In our Australia segment, sales increased 14% to $50.3 million compared to $44 million in the first quarter of last year, which included a $5.1 million net benefit related to foreign currency fluctuations. On a constant currency basis, revenue increased $1.2 million or 2.8% with the current period benefiting from additional revenue related to the BelleVue Machinery acquisition completed last fall. Pretax loss for the segment was $1.8 million compared to a pretax loss of $0.6 million in the first quarter of last year. Now on to our balance sheet and inventory position. We had cash of approximately $30 million and an adjusted debt to tangible net worth ratio of 1.6x as of April 30, 2026, which is well below our bank covenant of 3.5x. Total inventory at quarter end was $914.8 million, a modest increase of $12 million compared to year-end. This increase was in line with our expectations and reflects the normal seasonal cadence. As Bryan noted, our focus in fiscal '27 is on mix optimization rather than inventory reduction, and we expect total inventory to fluctuate seasonally throughout the year. Turning to our fiscal '27 modeling assumptions. We are reaffirming each of the modeling assumptions for fiscal '27 we introduced on last quarter's call. While our first quarter performance was modestly better than our expectations, the underlying demand environment remains consistent with our prior outlook. As a reminder, our segment revenue assumptions are: For agriculture to be down 15% to 20%; construction, flat to up 5%, Europe, down 20% to 25% and Australia up 10% to 15%. From a margin perspective, we continue to expect consolidated full year equipment margin to be approximately 8.4%, which compares to 7.3% in fiscal 2026. This expected year-over-year improvement is a direct reflection of the work we have done to rightsize our inventory and reduce aged equipment, and the progress we have demonstrated in the first quarter supports our confidence in delivering against this expectation across the balance of the year. Operating expenses are expected to decline year-over-year, although we intend to continue to invest in our customer care strategy, which is supporting stability in our parts and service businesses. We continue to expect operating expenses to be approximately 17% of sales. On floorplan interest expense, we have continued to see aged inventory and floorplan interest expense decline quarter-over-quarter on a sequential basis, and we reiterate our prior expectation of an approximately 25% year-over-year decline because the great work our team is doing to manage healthier levels of inventory and improved inventory turns. Bringing it all together, we are reaffirming our full year adjusted EBITDA range of $17 million to $29 million and our adjusted diluted loss per share range of $1.25 to $1.75. In summary, the first quarter unfolded about as expected and the soft demand backdrop continues to suggest our expectations for the full year remain prudent. We remain focused on executing our near-term initiatives while continuing to lean into our customer care strategy with exceptional discipline and operational excellence to accelerate our earnings power as market conditions improve. This concludes our prepared comments. Operator, we are now ready for the question-and-answer session of the call.

[Operator Instructions] And the first question comes from the line of Liam Burke with B. Riley.

Bryan, could you give us some sense on the competitive pricing environment out there? I mean it looks like things are stable, but could you give us some color on that, please?

Yes. Used equipment values is a big piece of that as most of our customers, especially in North America, have a trade-in. So it's really about the trade difference and what boils down to their payment and their -- ultimately, the cost per acre on the ag side. So definitely, within the -- this year, we've seen stability in the used equipment prices after about 18 months of -- almost going on 2 years of sequentially falling used equipment values. So that stability all throughout the year here has been good in the used side. Also, we had some large price increases post-COVID and over the recent years. And also that's stable now, very low single digits. You're hearing CNH and Deere and AGCO, all talking that 1% to 2% range, a couple of select categories maybe being as high as 3%. But generally, 1% to 2%. They're managing through the tariffs as well. So ultimately, the pricing has stabilized, Liam, and it's really at this juncture about getting commodity prices up and inputs down and returning our farmers on the ag side to profitability here.

Sure. And then you discussed, I believe, in the parts and service section about how your customers are pushing hard on existing assets rather than maintaining them. But I guess my question is, as those assets are being pushed harder, does that have a cyclical impact on new equipment purchases down the road?

Yes, absolutely. So that bodes well for us as we go through the cycle here and as things start to turn, the fleet is getting older, the hours on the machines are getting higher. Also, as we mentioned, in these tougher times, producers are having a bit of fix-as-fail mentality, which is a testament, as we said, to our parts and service businesses that we have the strength that we do there when -- frankly, they're trying to spend as little money as possible. And so they're not doing some of those upgrades that they would typically do as well as certainly -- through the parts and service side as well as trading the machines. So that will bode well both on the parts and service side for us and especially on the machine trade cycle as we go forward.

Our next question is from the line of Mig Dobre with RW Baird.

It's Joe Grabowski on for Mig this morning. So I wanted to start with the delivery pull forward. Maybe could you tell us what drove that? And then you said that it kind of balances out the rest of the year, but would it be safe to assume that maybe if Q1 was down less than the full year guidance, maybe Q2 would be down a little more than the full year guidance or your thoughts on the cadence for the rest of the year?

Yes. So ultimately, that came down to timing of when we receive the equipment and then we're able to turn around and deliver to customers. I think it kind of pulls through the rest of the year. And really, as we play it out, I anticipate that most of that offset really comes in the back half of the year, a little bit in the second quarter. Assuming we continue to receive and turn equipment around, essentially the same sort of thing will happen in Q2, Q3, and then you'll get to Q4 at the end of the year there. So the messaging there was intentional. And obviously, it wasn't massive, but we didn't want anybody to overread into Q1 expectations. And then of course, setting our full year expectations consistent with what we said at the beginning of the year. That's really what it came down to. We were able to get more of that equipment turned around in customers' hands sooner than we thought we would.

Got it. Okay. That's helpful. And then my follow-up question, you mentioned equipment margin has been improving sooner than expected, but you kind of left your full year guidance on equipment margins the same as last quarter. I guess sort of what would the drivers be to maybe get the equipment margin into the high 8% versus the 8.4% guidance?

Yes, for sure. So if we continue to make additional progress beyond what's anticipated from an aging profile perspective, as we already talked about, absolute dollar value, we felt pretty good, still a little work to do in some select new categories and on the used side. We are making progress quarter-over-quarter. We anticipate we'll continue to do so. At the same time, right, I think we preface that a little bit with the fact that we're in really a trough-type environment with the lowest TIVs in multiple decades. So not anticipating that we'd see a sharp inflection. To start, at the beginning of the year, we were thinking from a domestic ag perspective that margins would be more like 5.25%. In this quarter, it was 6%. We were expecting it to be more like 5.25% first half of the year and then closer to 7%, 7.5% in the back of the year. I think what we're really seeing is kind of a pull forward in the leveling in first quarter was 6% for domestic ag, and we're expecting the rest of the year to be in that 6.5% to upwards of 7% for the rest of the quarters. So just a little bit more flat than we originally anticipated. Glad to see that improvement coming. But again, just comparing that to the backdrop and what the demand has been and what we're expecting that to be the rest of the year, not getting out ahead of ourselves in where we think it'll go. That said, again, really good to see that progress, feeling good about where inventory is going and definitely feel like we'll see a sharper inflection as we see demand normalize here.

At this time, I'll turn the call back to management for closing remarks.

Thank you, everybody, for joining us on our call today, and we look forward to updating you next quarter.

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