Titan Machinery Inc. (NASDAQ:TITN) Q2 2024 Earnings Call Transcript

Titan Machinery Inc. (NASDAQ:TITN) Q2 2024 Earnings Call Transcript August 31, 2023

Titan Machinery Inc. beats earnings expectations. Reported EPS is $1.38, expectations were $1.15.

Operator: Greetings, and welcome to the Titan Machinery Inc. Second Quarter Fiscal 2024 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 Sonnek of ICR. Thank you. Please go ahead.

Jeff Sonnek: Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery second quarter fiscal 2024 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; Bo Larsen, Chief Financial Officer; and Bryan Knutson, President and Chief Operating Officer. By now, everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2023, which went out this morning at approximately 6:45 a.m. Eastern Time. If you’ve not received the release, it’s available on our Investor Relations page on 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’re providing a presentation to accompany today’s prepared remarks.

You may access this 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. We’d like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These forward-looking statements are based on current expectations of management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Titan’s most recently filed annual report on Form 10-K as updated in 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 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. At the conclusion of our prepared remarks, we will open the call to take your questions. And with that, I’d now like to introduce the company’s Chairman and CEO, Mr. David Meyer. David, please go ahead.

David Meyer: Thank you, Jeff. Good morning, everyone. Welcome to our second quarter fiscal 2024 earnings conference call. On today’s call, I’ll provide a summary of our results, then Bryan Knutson, our President and Chief Operating Officer, will give an overview for each of our business segments. Bo Larson, our CFO, will then review financial results for the second quarter of fiscal 2024 and conclude with some commentary around fiscal 2024 full year expectations. We will also follow-up on the O’Connors acquisition that was announced yesterday with a high-level overview. We carried a strong momentum into the second quarter with revenue increasing 29.4% to $642.6 million. This performance reflects double-digit same-store revenue growth across all three of our operating segments combined $86 million contribution from the Heartland and Pioneer acquisitions.

Our organic revenue growth was also balanced across equipment, parts and service, each of which performed well and also delivered healthy gross margins. Taken together, we generated a consolidated pretax margin of 6.5% and diluted earnings per share of $1.38, which is more than a 25% increase over last year’s second quarter earnings performance which once again demonstrates the strength of our organization and the efficiency which we are operating in the business. Next, I’d like to provide an update on our equipment inventory. Consistent with our prior expectations, we are seeing some improvement in equipment availability of several equipment categories, but do not anticipate receiving shipments of high horsepower tractors, self-propelled sprayers or wheel orders in excess of customer retail units.

We continue to see demand for these products sustained at high levels and expect that to continue into next year. With our suppliers’ production capacities being limited, we do not anticipate replenishment towards targeted minimum stocking levels for these equipment categories until at least the second-half of calendar year 2024. This is on doubly limiting our sales levels. I’m very proud of the team for achieving these record results given all of these constraints. Now as you may have seen last night, we are also very excited about our definitive agreement to acquire O’Connors, the largest Case IH dealership group in Australia and a market leader in high horsepower equipment. O’Connor’s has a seasoned management team with a proven track record of driving solid financial performance through a combination of organic and acquisitive goals for over nearly six decades.

Additionally, the operating metrics, core values and customer-centric focused highly aligns with our own, making them a great partner for our entry into the Australian agriculture market. In their fiscal year, which ended on June 30, 2023, O’Connor’s generated revenue of $258 million and an EBITDA of $21.4 million, which demonstrates the scale of the network they’ve developed. Combined, the Titan Machinery enterprise, including the O’Connors acquisition, is expected to generate annualized revenue of approximately $2.9 billion, and approximately $200 million in adjusted EBITDA, which makes us an even more formidable player as a global agriculture and construction equipment dealer. Australia is the largest wheat producer in the Southern Hemisphere and the third largest wheat exporter only behind Europe and Russia.

O’Connor stores are located in Australia’s highly productive grain belt, which produces 60% of Australia’s wheat. The Australian market is benefiting from strong fundamentals that are being driven by enhanced productivity, economies of scale and farmer profitability. O’Connor’s focus on high horsepower cash crop production equipment and Australia’s grain belt region is being supported by combined farm expansions and increasing adoption of precision ag technology that enhances productivity and crop yields. These trends are very similar to that of Titan’s domestic and European agriculture business and coupled with Australia’s native English language and comparable legal system, this transaction bodes well for a seamless integration that carries over into our shared values and customer-centric focus.

We believe it also provides Titan with the unique operational synergy opportunities to expand our global customer service capabilities and capacity across the network. The Australian market is at the early stages of dealer consolidation and through a combined approach where we are able to leverage O’Connor’s existing leadership team and bring Titan’s broader capabilities and resources to bear, we believe we are well positioned to capitalize on continued opportunities to unlock network synergies while driving market share gains. Together, we believe we will be able to build upon their presence in the heart of the Australian Grain Belt and capitalize on operational synergies across our 3 continent footprint consisting of some of the best global agricultural markets generating significant value for our shareholders.

We are excited to welcome the O’Connors management team and employees to the Titan Machinery family, and we look forward to a smooth transaction closing and integration process. We expect closing to be completed in Q4 of calendar year 2023. In closing, we remain highly encouraged by the ongoing demand we are seeing in our business, and we’re looking — working hard to get our customers their equipment as OEM production and delivery schedules allow. Our team is ready to support our customers through a very busy harvest and year-end construction seasons in the second-half of our fiscal year. With that, I will turn the call over to Bryan Knutson for his segment review.

Bryan Knutson: Thank you, David. And good morning, everyone. Today, I will provide a recap of our fiscal second quarter segment drivers and then review some of our high-level expectations for the balance of fiscal year 2024 across our respective segments. I will begin with our domestic agriculture segment, which produced strong organic growth with same-store sales that increased 10%. As you heard from David, we continue to be acquisitive and the O’Connors transaction is particularly exciting. Our organic growth in the ag segment was further bolstered by revenue contributions from our recent acquisitions in our domestic market. We are also particularly pleased with our ability to maintain our strong pre-tax margin execution, which remained consistent with the prior year period at 7%.

Although spring planting got off to a late start this year in some of our Northern markets, crop progress across our footprint is largely back on track following some timely precipitation. Although this precipitation was inconsistent across the Upper Midwest, yield potential has improved from earlier this summer, which is encouraging and is helping improve farmer sentiment. Additionally, with the planting delay, we realized some additional parts and service activity that moved from Q1 into Q2, which is also reflected in the strong growth that we reported today. As David touched on in his commentary, we are still experiencing tight supply in several of our highest selling equipment categories. Our dedicated inventory procurement team continues to work tirelessly to obtain as many of those units as we can from our OEM partners, other dealers, lease returns and through the used market.

Most other categories of equipment have returned to more normalized levels, and this same inventory procurement team has been monitoring inventory trends and have made the appropriate adjustments to purchasing volumes to optimize inventory levels and will continue to do so on a forward-looking basis. While we remain focused on presell, especially for cash crop equipment, we feel good about where we have landed and are happy to have replenished stocking levels for many equipment categories that we can serve our customers well, despite not yet being able to procure enough equipment in our key cash crop product categories. We also have a team dedicated to our inventory valuation process in regards to ongoing mark-to-market, as well as determining what price we should offer a customer for a trade-in unit.

This team also intensely monitors internal and external market trends and is continually adjusting our trade in pricing on a real-time basis to ensure healthy margins on future used equipment sales. Our used equipment inventories are in a very healthy position. Due to our industry-leading inventory management processes, which are the result of our scale, decades of experience and continuous improvements. Looking to the balance of fiscal 2024 for our Agriculture segment, we remain on track with the modeling assumptions that we laid out at the beginning of the year. Net farm income remains well above historical averages and continues to support demand for equipment purchases. Further, with healthy farmer profitability remaining in place, coupled with continued tax incentives throughout in Section 179 and bonus depreciation, the environment is setting up well for a strong second-half of the year.

Although equipment shortages in cash crop categories are expected to persist, we do foresee an increase in available slots as we move through calendar year 2024. Nonetheless, long lead times, coupled with strong fundamentals have our order board consistent with our prevailing expectation that the industry is well positioned heading into next year. Now shifting to our domestic construction segment. Construction activity was strong throughout our footprint during our fiscal second quarter, and we generated another great performance in all areas of the business with same-store sales growth of 18.5% and excellent pre-tax margin expansion of 60 basis points to 6.2%. We also achieved rental fleet dollar utilization of 30.2% and absorption of 91.2%.

General construction activity remains strong and infrastructure, energy and agriculture projects continues to support demand for construction equipment, which has resulted in year-to-date segment revenue growth of 13%, which is above the initial modeling assumptions we provided at the beginning of the 2024 fiscal year. Although equipment availability is also a limiting factor in the near term for certain types of construction equipment, we continue to see a favorable backdrop as a result and as a result, are increasing our full year modeling assumptions for this segment today. Now moving to an overview of our International segment, which represents our business within the countries of Bulgaria, Germany, Romania and Ukraine. Same-store sales increased 15.9% in the fiscal second quarter, and pretax margin remained very healthy at 6.1%.

Conditions varied across our European footprint with excellent growing conditions in Germany and Ukraine, contrasting with those of Bulgaria, which is experiencing dry growing conditions, which are also present in Southeastern Romania, although to a lesser extent. As a part of our footprint build-out strategy in our current German market, we acquired an adjacent two-store dealership complex in Germany during the second quarter. Looking forward to the balance of the year, we are updating our modeling assumptions to reflect somatic conservatism given our year-to-date growth of 7.8%, which was at the low-end of our prior range. We continue to expect European ag fundamentals to moderate with flat industry volumes given the ongoing conflict in Ukraine and the challenges with equipment availability that we see across the other segments of our business.

Before I turn the call over to Bo, I’d like to echo David’s comments with respect to the O’Connors team. A few months back, I had the privilege of touring all their stores and traveled their entire footprint. Doing so, confirm my expectations of their highly productive agriculture landscape, and I met a number of wonderfully talented people who make their organization so special. Throughout my visit, I was very encouraged by how similar our company cultures are, which is a testament to the focus that their leadership team has brought to their business over the years. We are extremely excited to welcome them to the Titan family and look forward to a smooth integration. With that, I just want to thank all the members of our Titan family for their hard work and dedication to our customers which have produced fantastic year-to-date results.

Now I will turn the call over to Bo to review our financial results in more detail.

Bo Larsen: Thanks, Brian. And good morning, everyone. Starting with our consolidated results for the fiscal 2024 second quarter, total revenue was $642.6 million, an increase of 29.4%, compared to the prior year period. Our equipment revenue increased 28% versus the prior year period, led by incremental revenue from our recent acquisitions, as well as double-digit same-store sales growth across all three of our reporting segments, which combined for a 12.1% increase on a same-store basis. This growth was also visible across our other revenue streams as well, with our parts revenue increasing 39.7% service up 27.3% and rental and other revenue, up 11.6% versus the prior year period. Gross profit for the second quarter increased 29.9% to $133 million.

Gross profit margin increased by 10 basis points to 20.8%, driven primarily by a slight mix shift to higher-margin parts sales relative to equipment sales. Operating expenses were $88.8 million for the second quarter of fiscal 2024, compared to $68.8 million in the prior year. The year-over-year increase of 28.9% was primarily additional operating expenses due to acquisitions that have taken place in the past year, as well as an increase in variable expenses associated with the increased sales. That said, we are pleased to achieve some modest operating leverage of 10 basis points versus the prior year as a percentage of sales. Floor plan and other interest expense was $3.7 million as compared to $1.6 million for the second quarter of fiscal 2023, primarily due to higher interest-bearing floor plan borrowings driven by higher inventory levels.

Net income for the second quarter of fiscal 2024 was $31.3 million or $1.38 per diluted share and compares to last year’s second quarter net income of $25 million or $1.10 per diluted share. Now turning to our segment results for the second quarter. In our Agriculture segment, sales increased 34.4% to $469.1 million. This growth was driven by our acquisitions of Heartland Ag Systems and Pioneer equipment, as well as same-store sales growth of 10%, which was achieved on top of a strong performance in the prior year period. Despite the strong quarterly performance, second quarter revenues continue to be constrained by the equipment availability of high-demand cash product categories has already touched on during this call. Agriculture segment pretax income was $33 million and compared to $24.9 million in the second quarter of the prior year, which implies a pretax margin decrease of 10 basis points to 7%.

Our Construction segment continued its momentum in the second quarter and grew sales to $82.9 million, up 18.3%, compared to the prior year period. Benefiting from broad-based construction activity and improved equipment availability in some equipment categories. Pre-tax income was $5.2 million and compared to $3.9 million in the second quarter of the prior year and our year-over-year pretax margin increased by approximately 60 basis points to 6.2%. In our International segment, sales increased by 16.9% to $90.6 million which reflects a 2.1% currency tailwind on the strengthening euro. Net of the effect of these foreign currency fluctuations, the segment achieved sales growth of 14.9%, which included a modest year-over-year decline in Ukraine as it remains impacted by the ongoing conflict.

Pre-tax income was $5.6 million and compares to $5.9 million in the second quarter of fiscal 2023 and which implies a pretax margin decrease of 150 basis points to 6.1%. Now on to our balance sheet and inventory position. We had cash of $53 million and an adjusted debt to tangible net worth ratio of 1.0 as of July 31, 2023, which is well below our bank covenant of 3.5. Our total inventory balance at the end of the second quarter was $979.4 million, an increase of approximately $275.5 million during the first six months of this fiscal year. This increase came via growth in equipment and parts inventories of $259.1 million and $15 million, respectively. Of the total increase, $22 million is attributable to the Pioneer acquisition, which was made during the first quarter.

The primary driver of the increase is the improvement in new equipment availability from our OEM partners as they have largely caught up on production outside of those key high horsepower equipment categories that David and Brian both mentioned, which are still on allocation. Overall, we are still a bit short of targeted stocking levels of available-for-sale inventory. Driving by some of our ag store locations, the lack of high horsepower display units is clearly notable. To put it in perspective, we have 74 ag dealerships domestically. And at today’s industry volumes and cost of equipment we target a combined $7 million of new and used whole good inventory on average per location, which is the minimum we need to have one or two stocking units for sale demonstration or loaner for our highest demand categories.

Add in a couple of weeks’ backlog to account for predelivery inspection work and you get to our target of about $600 million versus the $540 million we are at today for our domestic ag segment, which implies a shortage of about $60 million. However, if you then consider that backlog remains above targeted levels, while we continue to normalize those turnaround times, our available-for-sale inventory is actually about $100 million short of targeted levels. As for other segments, while there are still key shortages impacting construction and international, their current inventory levels are more or less aligned with targeted levels. But again, do have a few key categories that are still short. Overall, we want to continue to normalize the amount of backlog in inventory and replenish stocking levels of those key equipment categories.

Note that these targeted inventory levels take into consideration that we remain focused on those presale activities that Brian touched on earlier and presale is an excellent opportunity to provide more visibility into future sales as well as maintaining higher levels of inventory turns. With that, I’ll share a few comments on our fiscal 2024 full-year guidance which we have updated to reflect the year-to-date performance of our businesses and to include an assumption for the partial year impact of the O’Connor’s acquisition, which we expect to report as a fourth business segment. The year-to-date performance of our Agriculture segment has been consistent with our expectations, underpinned by strong organic growth and operating performance.

We expect that to continue through the back half of this fiscal year. Our Construction segment has been exceeding expectations, and we expect construction activity to continue to support that trend for the rest of the year. As for our International segment, it is performing well but toward the lower end of our previous guidance range. As such, we are reaffirming our assumptions for our Agriculture segment of up 20% to 25%, increasing our assumption for construction to be up 5% to 10% as compared to the previous guidance of flat to up 5%. And modifying our international segment assumption to be up 5% to 10%, as compared to the previous guidance of up 8% to 13%. This adjustment for Europe brings us more in line with industry volume forecast for that region.

Before adding the partial year impact of the O’Connor transaction, we are maintaining our expectation for diluted earnings per share with the midpoint of $4.80. Our first-half performance has added to our confidence in achieving the numbers that we presented at the beginning of the fiscal year, and we remain focused on execution for the remainder of the year. With respect to the anticipated partial year impact of the O’Connor transaction, we expect for it to close in the fourth quarter of this calendar year. And for purposes of this estimate, we are assuming a closing date of October 1. Their results will be reported on a one-month lag, so these assumptions would result in three months of activity being reported in our fiscal 2024 results. With all of that said, we have provided an initial revenue estimate of $70 million to $90 million, which translates to a diluted earnings per share contribution in the range of $0.10 to $0.15.

Win factoring in financing and integration-related expenses. Adding the acquisition to our guidance, the range has arised to $4.60 to $5.25. Seasonality in the O’Connor business is similar to historical tightened seasonality in that for O’Connors, about 45% of revenues have historically come in the first-half of the year and 55% come in the second-half of the year. O’Connor’s business for fiscal year ended June 30, 2023, produced revenue of $258 million pre-tax income of $18.7 million and EBITDA of $21.4 million. Adding estimated financing and integration expenses for the first 12-months of ownership to these results, provides for a run rate pro forma pre-tax income of $13 million or $0.40 of earnings per diluted share. We are excited to welcome the O’Connor’s team members to Titan and look forward to providing further updates on this business segment on future earnings calls.

This concludes our prepared comments, and we are now ready to take questions.

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Q&A Session

Operator: Thank you. At this time we’ll conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

Ben Klieve: Hi, thanks for taking my questions and congratulations on a great quarter and it looks like a great acquisition as well. I’d like to start with the acquisition. I’m curious kind of the genesis of this acquisition. Was this a function of you guys actively looking to move into Australia and considering a lot of options? Or was O’Connors kind of a kind of unique opportunity that you decided to act on?

David Meyer: Yes. This is Dave. So I actually got to wind a little bit. I think it’s one of these classic situations where you had the two family owners, two brothers had both retired. They’ve been out of the business. I know Dennis O’Connor, I think has been off for 10-years. And put a professional management team in and really didn’t have that family succession. So I knew a couple of new years ago that they were probably going to be looking for — so some of it, they could sell their shares of stock to. And I think as you recall, we just — last year, we were — had some Heartland in systems is a pretty important and strategic acquisition. And we didn’t — I didn’t really want to come with those two together. But once we got that completed, we got that integrated, I reach out Dennis O’Connor earlier this year and tried to understand the business a little bit, but when you get into that, when you — definitely, if you look at the case size business in Australia, O’Connor was hands down the market leader in high horsepower equipment.

Every year, all the Australian and New Zealand dealers, they get together for an annual meeting, and they have a top dealer award well, O’Connor have won that for the last five years in a row. So you couple that with operating down in the Southeastern of the country and the grain belt and arguably the best farmland in Australia. And I think most important is that proven in the experienced professional management team has been in place for over five years now. Add all of this together, really an old brainer. So we met with the team. Brian went down there and turn the dealership. And it’s just on Candy their metrics or financial metrics or cultures or people, the products, everything just almost identical to ours and English language, English base law, low in the corruption scale.

I mean just — it was just really made a lot of sense for us.

Ben Klieve: Yes, it sounds like that’s very helpful color. Thank you. Follow-up unrelated to O’Connors but just kind of general kind of sentiment farmer sentiment. I appreciate your comment on kind of the state of the state in your backyard and understand the inventory dynamics that you guys are facing. But I’m wondering if farmer sentiment and buying patterns are being impacted right now at all by the interest rate environment. If you can elaborate on how interest rates over the last, especially six months are impacting their buying patterns, that would be helpful.

Bryan Knutson: Yes. This is Brian. We’re still actually having historically higher amount of cash transactions right now and then on a lot of these larger ticket items, we do have manufacturer-supported programs as well and especially as you get into some of the lower horsepower or the more rural lifestyle products. And so definitely, it’s an impact and something our farmers are — producers are watching. It is cutting into their net farm income a little bit. It’s one of the contributing factors, along with just a lot of other things which have the price up. But urea and fertilizer being down is helping, and we’re still on pace for a really good year. Maybe a lot of different estimates out there around between 15% and 20% below last year’s record depending on where yields come in but still on pace for a really good year.

They did push a lot of income into this year from last year. And there’s a lot of tax incentives still in place, and we’re anticipating that farmers are even going to be pushing income from this year into next year. And there was a lot of forward contracting. So still pretty robust, still a fair amount of cash out there, but yes, interest rates are on people’s minds, and we do have a lot of different financing tools to help with that.

David Meyer: Yes. The only thing I’d add to that — the only thing I’d add to that, too, and I think some of the OEMs maybe earlier this year broken down pretty nicely. Interest expense is a fairly small portion of the cost when you’re talking about the equation for farm income. So while it has increased, it’s — there’s other factors that are much more at play here.

Ben Klieve: Yes, yes. No doubt about that. Very good. Well, that’s all very helpful. Congratulations again on a great quarter, and I’ll get back in queue.

David Meyer: Thanks, Ben.

Bryan Knutson: Thank you, Ben.

Operator: Thank you. Our next question comes from the line of Alex Rygiel with B. Riley Securities. Please proceed with your question.

Alex Rygiel: Thank you and good morning gentlemen and congratulations on the O’Connor transaction.

David Meyer: Good morning, Alex.

Alex Rygiel: Questions here. You talked a lot about inventory and that was all very, very helpful. But taking a quick step back, why do you think being at a target inventory level that’s comparable to historical levels is appropriate in this higher rate environment that we’re in right now?

David Meyer: I would start with saying that the levels we’re talking about aren’t comparable to historical so if you want to take it back to a prior peak, which I think some people are naturally doing and comparing our total inventory level. I think you have to factor in the cost per unit, right? So we’re talking about a significantly smaller number of units per location than we were a decade ago. If you simply ran the math on a 3% increase over a decade, you’d be talking about a like-for-like equipment being 35% higher. And we know with the pricing that we’ve seen over the past couple of years has been much larger than that. So even on a very conservative basis, you’re talking about one-third less number of units out at the locations.