Titan Machinery Inc.
Q3 2009 Earnings Call Transcript

Published: 16 Dec 2008

[Operator:]

Welcome to the Titan Machinery, Inc. third quarter 2009 financial results conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday December 15, 2008. I would now like to turn the conference over to John Mills, Senior Managing Director ICR.

[John Mills:]

Welcome to Titan Machinery’s third quarter conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer and Peter Christianson, President and Chief Financial Officer. By now everyone should have access to the third quarter earnings release for the period ending October 31, 2008 which went out this afternoon at approximately 4 pm Eastern Time. If you have not received the release, it is available on the investor relations portion of Titan’s website at www.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 slide presentation to accompany today’s prepared remarks. We suggest you access the presentation now by going to Titan’s website and click on the investor relations tab and the presentation is directly below the webcast information in the middle of the page. Before we will begin, we’d like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in regards to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of management and involve inherent risk and uncertainties including those identified in the risk factor section of Titan’s most recently filed 10Q and 10K. 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. Titan assumes no obligation to update any forward-looking projections that may be made in today’s release or conference call. With that, I’d like to turn the call over to the company’s Chairman and Chief Executive Officer Mr. David Meyer.

[David J. Meyer:]

Welcome to our third quarter call. In today’s call I will provide some highlights of our third quarter and year end results, discuss our recent acquisitions and longer term unit growth opportunities and then provide a general overview of the environment in which we are operating. Peter will review the financial results for the third quarter and the first nine months of fiscal 2009 in more detail and update our full year guidance. I will then provide some brief closing remarks and we’ll open up the call to take questions. As John mentioned, to help you follow today’s prepared remarks we have prepared a slide presentation which you can access on the investor relation portion of the website at www.TitanMachinery.com and click on the investor relations tab on the right hand side of the page and you’ll see the presentation directly below the webcast in the middle of the page. I will pause for a few minutes to allow you to access the presentation on our website. I am very pleased to report another strong quarter and first nine months of fiscal 2009 for Titan Machinery. Slide Two gives an overview of our third quarter. Our revenue for our third quarter increased to $214 million, up 62% from the third quarter of last year. We saw growth in all three of our revenue streams

[Peter Christianson:]

Turning to Slide 10, our total revenue for the third quarter ended October 31, 2008 was $214 million. It was primarily made up of the following three sources

[David J. Meyer:]

We are very pleased with our year-to-date results and results we have achieved during our 28 year history. We believe that we are well positioned to continue to grow our business through organic growth and strategic acquisitions. Before I open up the call to take questions, I want to conclude by thanking all of our employees for all their hard work and our valued customers for their support. Operator, we are now ready for the first question.

[Operator:]

(Operator Instructions) Our first question comes from Robert Evans – Craig-Hallum Capital.

[Robert Evans:]

First, can you talk about the acquisition pipeline that you are currently seeing and how maybe its changed with the recent changes in the economy and maybe a slower macro outlook? Can you give us some more color there?

[David J. Meyer:]

Right now this acquisition pipeline Bob has been really steady for a number of years now. I think basically if you look at the demographics of the existing dealer out there where you’re looking at not only a fragmented dealer organization right now but it’s aged, the sophistication of this machine with all the GPS technology and some of these things is increasing so you’re seeing some of the investment is going to take these dealerships to support that type of sophistication that we have in today’s equipment. You’re seeing a lack of succession so that really hasn’t changed so like we’ve talked about call after call here we’ve got a huge pipeline out there and a number – also what the [inaudible] investor market is out there right now and we’re working with some high priced equipment, we’re looking for $300 combines, $250,000 tractors, this is a highly capital intensive business so you take all these combinations and it remains a full acquisition pipeline on managing number of potential sellers right now and it stays on track and it’s definitely not diminishing any from where it has been.

[Robert Evans:]

Since we’ve had the last call there’s certainly been changes in the economy since then, would you say that pipeline or at least pricing and maybe willingness to sell has gotten better, worse or stayed about the same?

[David J. Meyer:]

I think things have stayed about the same. I think the reason these guys aren’t really wanting to get out of business right not isn’t really much because of the economy it’s just because when you’re 65 years old, 68 years old, when you’re 70 years old there’s a lack of succession in the dealership. You’re customers are looking for 24/7 support, we’ve got some very sophisticated equipment, that really hasn’t changed any Bob. To tell you the truth, we don’t want it to accelerate much more than it is right now because we’re handling these things at a really high rate right now. You’ve seen what we’ve done in the last nine months and I don’t know if we’d want them coming at us faster than that in the future. You’ve got to understand too that we’re buying these dealerships on their asset value. I think they’re priced right, you’re not seeing a large amount of goodwill and acquisitions so really if it stays at the same place we’re satisfied with that.

[Robert Evans:]

Also, can you comment on availability of financing for dealers? I get that question a lot. What are dealers saying or what are the options for financing for their equipment?

[David J. Meyer:]

You’re talking about dealers? We’re kind of two things dealers and customers –

[Robert Evans:]

I’m saying for the customers.

[David J. Meyer:]

Well, right now the manufacturers provide the floor plan financing but as far as our customers are concerned, like we talked in [inaudible] you’re looking at leverage ratios of these guys at 9% to 10% range, there aren’t too many consumers out there in the financial position as our farmer customers right now. In talking with our growers, especially our large growers, they’ve got no less than three to four lending institutions knocking on their door wanting their financing business right now. They’re sitting in excellent financial condition. They’re in great shape. I think that regional banks in our market here didn’t participate in the subprime and some of these issues and some of this derivative stuff that some of these other banks around the nation did and I think they’ve got access to capital, they want these farmers business and I think they’re aggressive going after it. You’ve got a very strong farm credit service group in this agency which they’ve got some implicit guaranteed government bonds from where they’re borrowing their funds from. So, I think we’ve got a good source of financing and I am seeing no slowdown. You’ve got Deere Credit, Cash IH or CNH Capital is actively after that business plus the local banks want to keep as much business as they can. So, between those three organizations there’s a real aggressiveness out there to get every financing dollar that is out there from these farmers right now.

[Robert Evans:]

Final question, I just want to clarify on the same store sales, I believe a year ago you had lease revenue of around I think it was $16 million or so. In your same stores sales calculation is that comparing against that lease revenue in there as well?

[Peter Christianson:]

Bob, we included that $16 million when we did our comparison.

[Robert Evans:]

So if you were to average that out, I don’t have the numbers in front of me, it would obviously be considerably higher?

[Peter Christianson:]

Yes, it would.

[Operator:]

Our next question comes from Rick Nelson – Stephens, Inc.

[Rick Nelson:]

A question for you Peter, related to the guidance, you implied fourth quarter guide would assume a slowdown from what you’ve seen in the third quarter year-to-date. I’m wondering if there’s something you see in the business here in the current quarter or is it just a desire to be conservative?

[Peter Christianson:]

I talked about it in the call where our customers are all on an annual production cycle and the weather played such a role in our business and in their business. We had an extremely delayed fall harvest this year and so we saw them having more of a chance to make some of those equipment purchases and of course they’ve got the economic stimulus that they’re looking at and the tax benefits of that and so they had more time to do that. We saw the same thing in our parts and services business and we are just modeling our business conservatively. We still look at it on an annual basis and we think we’re going to finish out the year with our guidance at $1.11. We feel pretty confident on that.

[Rick Nelson:]

I want to also ask you about the gross margin improvement in equipment and the parts segment, what are the big drivers there?

[Peter Christianson:]

The gross margin increases on the equipment sales primarily came on the used side of the business and one of the drivers is definitely the current market that we’re in but I want to mention that we have our sales people all compensated with a variable commission and basically our compensation and our operating model is driving them to get the results where we’re achieving a little better margins and in the parts area we’ve been leveraging across all of our stores and doing a better job on our ordering.

[Rick Nelson:]

A question also about same store growth, I know in the last call you had talked about a target of 10% for the second half. You put up substantially more growth than that in the third quarter. How do you think about the remaining quarter?

[Peter Christianson:]

Rick, that’s why earlier in the call I mentioned that our three year average was 11.5% and we’re very pleased with the strong same store results that we’ve been achieving so far this year. It’s very good results, we’re still modeling that 10% model for the rest of the year. Like I said we still have to look at this thing on an annual basis and we need to keep in mind that we had the delayed harvest and see how the year goes from there based on our guidance.

[Rick Nelson:]

I realize you don’t have 2009 or fiscal 2010 guidance out there yet but how do you think about it in terms of same store growth? Do you think you will be able to grow given what’s happened to the macro environment and commodity prices?

[David J. Meyer:]

Right now what we’re concentrating on is finishing out our fiscal 2009 year and what we’ll do is we’ll be studying on that a lot and when we make our fourth quarter call then we’re going to give the outlook for fiscal year 2010 and give you some good information on that call.

[Operator:]

Our next question comes from Chris [Retlzer] – Robert W. Baird.

[Chris [Retlzer]:]

A couple of questions, I guess we’ll start with some pricing questions. Up first, judging from your gross margin in equipment this quarter it looks like used equipment pricing is still positive. Is that still increasing on a year-over-year basis for you or is used equipment pricing starting to level off at all?

[Peter Christianson:]

It has been through the third quarter that we’re reporting on here. We’ve seen strong demand in the marketplace and the margins are reflecting that.

[Chris [Retlzer]:]

What are you hearing from customers as far as their willingness to accept some of the 5% to 10% sort of prices increases that have been put in place for coming in to next year?

[David J. Meyer:]

Well, if you look at all these farmer inputs, I think the machinery increases are probably the smallest of any of them out there right now and also with some of these increases you’re seeing some technology increases, you’re seeing some of this GPS of equipment, you’re seeing more fuel efficient engines, you’re seeing some difference in tires, you’re seeing larger capacity combines. So, there’s a lot of things that go with that right now. At the same time we talked about this increase in values of used equipment of what they’re trading in is worth more money so right now I think like I said before of all the inputs out there we’re seeing in the farming sector right now the farm equipment is the lowest increase of all those inputs.

[Chris [Retlzer]:]

Of the price increases we’ve seen over the last six months or so, where any of CNH’s specifically steel surcharges and is there any risk that those disappear as steel prices come down?

[David J. Meyer:]

We had a steel surcharge that was put on earlier in the year right now and I think some of that surcharge got incorporated in some of the 2009 pricing. From my discussions from CNH they’re talking pretty optimistic about steel prices going ahead, we’re seeing a decline right now. So, I continue to say CNH is very aggressive right now in the marketplace and I continue to see them to be as competitive as possible with their equipment pricing.

[Chris [Retlzer]:]

Then have you heard of any changes in your floor plan financing terms on tap for next year as far as the length of your interest free period or the interest rate being charged?

[David J. Meyer:]

We have not seen any changes right now in the scheduled terms and discounts. As for the terms of the financing right now, when you start talking about when you go outside of the standard floor plan window and when you go outside of that I think you could see some possibilities there could be some different rates charged but we have some provisions in place that we’ve made proactively a long time ago. We put some things in to place that we’re in great shape and right now we have no risk here through a good portion of 2009 right now because of some things we did earlier to provide for an event some things we saw take place happened.

[Chris [Retlzer]:]

I’m sorry I’m not quite following you here.

[David J. Meyer:]

What we did is we managed some of the risk by procuring some credit lines from some of the competitive nature, some of the things, I just don’t want to disclose certain things but basically we’ve got the same floor planning rates we had all through 2008 guaranteed as well through some various sources through the second quarter and third quarter of 2009. Then you’ve got your standard interest free floor plan period. When you have that with CNH there is no change in that because there is no interest so it doesn’t matter what the rate is because you don’t pay interest.

[Chris [Retlzer]:]

But, the length of the term hasn’t changed?

[David J. Meyer:]

The length of the term has not changed.

[Chris [Retlzer]:]

Then last question, I’m just trying to get a sense for the stability of parts and services revenue through a equipment downturn if you will. When you look back we have industry retail sales data and we can see what happened to new equipment volumes at least, what happens to parts and services revenue typically over the same time? Is it much more stable, I’d imagine?

[David J. Meyer:]

The parts and service side of our business is probably the biggest differentiator between us and the manufacturers and the thing of it is if equipment sales go down all of the existing installed base still has to be used, the duty cycle is still the same, all the acres are still farmed so if you would sell less new equipment ultimately it results in needing more parts and service repair and so it’s much more stable than what the equipment is.

[Chris [Retlzer]:]

But still would likely decline modestly in a new equipment downturn or would it stay flat or grow? What has it done historically?

[David J. Meyer:]

It’s remained pretty flat.

[Operator:]

Our next question comes from Robert Evans – Craig-Hallum Capital.

[Robert Evans:]

Can you give us the mix of new versus used equipment this quarter in terms of equipment sales?

[Peter Christianson:]

I don’t know that we break that out in our 10Q. We don’t report that breakout.

[Robert Evans:]

Can you just give us a general idea? I’m just wondering –

[Peter Christianson:]

I guess I would say it’s following historical trends.

[Robert Evans:]

And remind me what that is Peter? I apologize, I don’t have it in front of me.

[Peter Christianson:]

Well, we look at probably 60% on the new.

[Robert Evans:]

Dave or Peter can you comment in terms of the grower attitudes in terms of how the market has changed in the last quarter or two in terms of commodity pricing an input costs? You’re coming off of record incomes, you’ve had your commodity prices spike up and then come down as again as well as input costs, what are the general attitudes that you’re hearing kind of as we head in to ’09?

[David J. Meyer:]

Well, if you’ve dealt with farmers very much over the year, even in good times they kind of don’t really tell you they’re good. They always find negatives out there. This is also this is kind of par for the course. I think I’ve got to remind you that a lot of these guys took advantage of the high commodity prices from late 2007 in to a good share of 2008 and not only did they sell all their existing inventories that they had in their bins they also forward contracted this 2008 crop. I know some individuals even went out in to 2009 or 2010 so I think your good marketers out there I think they’re pretty happy that as late as the growing season was we’re seeing some good yields that came through this year. There were some real home run hits in the wheat crop this year with $70 bushel, $80 bushel wheat and a lot of that wheat got sold somewhere between that $10 and $20 mark so there’s been some real positives out there. I think that these farmers all understand the cycles, they’ve lived through the cycles. I think this time of year historically right off the combine you tend to see a little lower grain prices this time of year so this is nothing new for our growers. Their main concern is that they’ve got the best equipment and they are able to maximize their yields, manage their expenses and get the highest amount of productivity and they’re going to do it from the equipment side what it takes. So, if they can get their crop in on a timely basis and off on a timely basis, if you go around the country and watch people in the last two weeks combining their corn in this frozen field and falling through the ice and the mud and the cold, and it gives you a real sense of appreciate for late model reliable equipment to get their crop in and off on a timely basis.

[Robert Evans:]

Can you also comment on year-to-date I think you’ve got 5%, a little bit more than 5% operating margin which was what we held as maybe a target operating margins when you got closer to a billion in sales. It looks like you might get there with a much lower revenue number. I guess as you continue to grow and scale up should we continue to see operating margin expansion over time here?

[Peter Christianson:]

Right now we look at it two ways, one of it is us improving our operating margins through driving best practices through all of our stores but the other one no doubt we are experiencing strong margins right now so we’ll monitor that as we go forward. But, we feel like as we scale the business that we can continue to work on improving our margin based on leveraging those best practices throughout the stores.

[Operator:]

There are no further questions at this time. I’d like to turn the conference back over to David Meyer.

[David J. Meyer:]

Thank you everyone for being on our call today. Just as a reminder, we will be attending a number of conferences and marketing road shows throughout the upcoming months here. We hope to see you at these events and both me and Peter, if you have any questions would be happy, call our numbers on our website there and we’d be happy to help you with any questions you might have. Again, thanks for being on the call today.

[Operator:]

Ladies and gentlemen this concludes the conference call. This conference will be available for replay today through December 29th at Midnight. You may access the replay system at anytime by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 3947934. Thank you for your participation.