Titan Machinery - Q3 2024

Transcript

Operator (participant)

Greetings, and welcome to the Titan Machinery Inc. Q3 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Please go ahead, sir.

Jeff Sonnek (Managing Director of Investor Relations)

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's Q3 Fiscal 2024 Earnings Conference Call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer, Bryan Knutson, President and Chief Operating Officer, and Bo Larsen, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal Q3, ended 31 October, 2023, which went out earlier this morning at approximately 6:45AM 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 webcasted, and a replay is available on the company's website as well. In addition, we are providing a presentation to accompany today's prepared remarks. You may access the presentation 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 two of the presentation our safe harbor statement. 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 subsequent 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. The call will last approximately 45 minutes. At the conclusion of our prepared remarks, we'll open the call to take your questions. With that, I'd now like to introduce the company's chairman and CEO, Mr. David Meyer. David, please go ahead.

David Meyer (Chairman and CEO)

Thank you, Jeff. Good morning, everyone. Welcome to our Q3 Fiscal 2024 Earnings Conference Call. On today's call, I will provide a summary of our results. Then Bryan Knutson, our current President and Chief Operating Officer, who will be transitioning to the CEO post on February first, will give an overview for each of our business segments. Bo Larsen, our CFO, will conclude the call with a review of our financial results for the Q3 of fiscal 2024 and some commentary around our updated fiscal 2024 full-year expectations. We accomplished a great deal this quarter, completing our acquisition of the Australia-based O'Connors Group in October and solidifying our leadership succession plan, which we announced last month, while delivering solid financial results.

Brian and his team have been instrumental in jumpstarting our integration with O'Connors, and we couldn't be more pleased with the quality of the O'Connors team. We recognize an alignment of our strategies during the O'Connors due diligence process, and the first couple months of operations have proven out how well our organizations mesh. We are thrilled to have them on board and look forward to a bright future together. As it relates to CEO succession, I'm very proud of what our team at Titan Machinery has achieved since my early days in a dealership nearly 50 years ago, and the breadth and depth of our operation is a testament to the talent that we've attracted to the organization.

Through the process of planning for this transition over the last several years with our board of directors, we felt it was critical to fill the role with someone who deeply understands the dealership business and our customers. Bryan is a natural leader with a successful track record and has proven his ability to excel across all aspects of the business and our company culture, and our employee engagement has never been better. I'm extremely confident in Bryan's capabilities and watched his development over the last 20 years as he has excelled in both store and central leadership roles, which makes him uniquely qualified to lead Titan Machinery in our next stage of growth. Moving to our fiscal Q3 financial performance, we achieved record revenues of $694 million, with earnings per share of $1.32.

These results came in below our full potential due to delayed OEM deliveries, prioritizing customer uptime throughout the harvest and end-of-season construction projects, and increased preparation time to complete pre-delivery inspections of new machinery. This dynamic is also visible in our inventory balance at the end of the quarter, as the amount of on-hand pre-sold inventory being prepped in our service shops continues to trend above normal levels. Notwithstanding, customer uptime is our top priority, and our team did a great job on meeting our customers' immediate service needs and minimizing downtime during the all-important fall season. Heading into year-end, we continue to see demand in excess of OEM production for high horsepower tractors and wheel loaders, which we expect will continue through the, at least the first half of calendar year 2024.

While we are positioned well for a strong Q4, our recognition of equipment revenue will be dependent on both the timing of new machinery received from the OEMs, as well as our ability to manage service department workflows. We continue to experience substantially longer preparation time to complete the quality pre-delivery inspection and setup process required before delivery to our customers due to the supply chain challenges. Overall, we expect year-over-year revenue growth in each of our segments in the Q4, and we have narrowed the range of our revenue model assumptions to reflect our latest expectations for Q4 OEM deliveries and demands on our service departments. Looking forward, both our Ag and CE customers are experiencing the carryover of three exceptionally strong years, putting them in an excellent financial position and creating optimism as I look to the future.

Additionally, over the last 24 months, we have completed some high quality and strategic acquisitions, which will strengthen our bottom line as they get fully integrated into our system. With that, I'll turn the call over to Bryan Knutson for his segment review.

Bryan Knutson (President and COO)

Thank you, David, and good morning, everyone. Today, I will provide a recap of our fiscal Q3 segment drivers and then review some of our high-level expectations for the balance of fiscal year 2024 across our respective segments. I'll begin with our domestic agriculture segment. We achieved another record revenue performance on top of last year's outstanding results, driven by a combination of positive same-store sales and contribution from the Pioneer acquisition from earlier in the year. As you heard from David, these results were constrained by a few factors. While improving, limited OEM production remains a factor preventing us from meeting the existing demand for high horsepower tractors and self-propelled sprayers. And for those new units that we are receiving, our service team is having to spend more preparation time on each pre-sold new unit before delivering it to our customers due to supply side challenges.

While this isn't a new phenomenon for us, as the additional prep time has been something we face throughout this fiscal year, our service department capacity was stretched in the Q3, given the seasonally higher volumes and a need to prioritize our support of existing customer equipment throughout harvest. Now that our customers are mostly done with harvest activities, we expect to catch up on delivering some of the incremental buildup of pre-sold units throughout the Q4. Bolstering our service network and capacity remains a key priority for our organization, and as such, we will continue to focus on recruiting, hiring, and training skilled technicians. With respect to harvest and customer sentiment, favorable crop development in the later part of the growing season produced average to above-average yields throughout our footprint.

Although corn pricing has softened throughout the year, there was quite a bit of corn that was forward contracted in the $5 to 6 per bushel range, and current prices for soybeans, sugar beets, potatoes, and edible beans remain very attractive, as well as cattle prices. Yield trends continue to be positive, and some input costs have been decreasing. With 3 consecutive years of historically high net farm income, farmers' balance sheets are in great shape, with debt-to-equity ratios historically low and are further aided by increasing land values. Overall, our customers are in a great position to post another solid year of income.

Looking to the balance of fiscal 2024 for our agriculture segment, we remain in a position to deliver a strong Q4 based on positive fundamentals such as healthy farmer cash receipts, which is supporting net farm income at levels well above historical averages, continued tax incentives surrounding Section 179 and bonus depreciation, and the additional backlog of pre-sold units awaiting pre-delivery inspection and final delivery to our customers. Shifting to our domestic construction segment, similar dynamics to what I just described for our agricultural segment are also relevant here. OEM wheel loader production does not yet meet demand. Preparation time to get new units ready for delivery to customers is longer than normal, and with a busy fall construction season to complete projects ahead of winter, our service departments were balancing competing demands, but always keeping existing customer machinery running as the top priority.

I'd also note that there was a shift in timing of equipment deliveries this year versus last, which had some influence on the comparable growth rates. For instance, last year we had a really strong Q3 performance, whereas we expect a stronger Q4 performance in the current year. As a result, we realized a year-over-year same-store sales decrease of 10.3% in the Q3 this year. Despite Q3 year-over-year comparisons, we achieved rental fleet dollar utilization of 33.2% and absorption of 88.5%, both of which are very high compared to historical levels for this segment and show the sustained improvement in these areas. General construction activity across our footprint remains at healthy levels, and infrastructure, energy, and agriculture activity continue to support demand for construction equipment.

Looking ahead to the Q4, we expect the timing dynamic I mentioned to be a tailwind for us and as a result in year-over-year growth on a same-store basis and finish this fiscal year on a high note for our construction segment. Now moving to an overview of our Europe segment, which was formerly known as our international segment prior to our acquisition of O'Connors in Australia. Our Europe segment represents our business within the countries of Bulgaria, Germany, Romania, and Ukraine. Rainfall throughout the growing season varied across these countries, which helped drive above-average yields in Germany and Ukraine. But dry conditions in Bulgaria and Romania caused yields to be below average. These lower yields negatively impacted farmer profitability, and as a result, we saw a softening in demand for new equipment purchases in these two countries.

Overall, same-store sales decreased 7.5% in our fiscal Q3. Looking to expectations for the rest of the year, we continue to expect European ag fundamentals to moderate. However, last year's fiscal Q4 was significantly impacted by limited equipment availability and did not follow normal revenue seasonality patterns for our Europe segment. This dynamic should normalize this year and is the basis for our expectation to achieve year-over-year growth in this year's Q4. Last but not least is our new Australia segment. Although we closed on the O'Connors' acquisition in October, those results won't be consolidated into our financials until the Q4. Harvest has now started in Australia and is providing evidence that the O'Connors' footprint is one of the most consistent areas in the country.

Growers in our footprint are seeing above-average yields as they begin harvest activities, while the same cannot be said for much of the rest of the country. Recent moisture is presenting some challenges to the current harvest, but it is helpful to restoring moisture levels in the region for next year's crop. We continue to be extremely excited about the Australian market and the opportunity to build upon what the O'Connors' team has accomplished. We are working through our integration strategy and are grateful for the entire team's eagerness as we come together. With that, I just want to thank all the members of our Titan family for their hard work and focus as we kept growers and contractors up and running during the important fall season. Now, I will turn the call over to Bo to review our financial results in more detail.

Bo Larsen (CFO and Treasurer)

Thanks, Bryan. Good morning, everyone. Starting with our consolidated results for the fiscal 2024 Q3, total revenue was $694.1 million, an increase of 3.8% compared to the prior year period. Our equipment revenue increased 2.5% versus the prior year period, led by incremental revenue from our recent acquisitions, as well as positive same-store sales growth in our agriculture segment. Growth was also visible across our other revenue streams as well, with our parts revenue increasing 5.7%, service up 14.9%, and rental and other revenue up 4.2% versus the prior year period.

Gross profit for the Q3 was $138 million, and as expected, gross profit margin decreased by 100 basis points to 19.9%, driven primarily by lower equipment and parts margins, partially offset by higher service and rental margins. It's worth noting that the equipment gross profit in the prior year benefited from the recognition of a $2 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in this year's Q3 results. As a reminder, we recognized $6.4 million of manufacturer incentives in the prior fiscal year, spread across Q2, Q3, and Q4. Our guidance, which I'll talk about further in a few minutes, includes a similar level of manufacturer incentives for the current fiscal year, all of which, if earned, would be recognized in the Q4.

The difference in timing relates to the progress in achieving related targets. Thus, our updated guidance includes the full year's impact of manufacturer incentives to be recognized in the Q4 and part of the reason for keeping our EPS guidance unchanged. Operating expenses were $92.1 million for the Q3 of fiscal 2024, compared to $84.9 million in the prior year. The year-over-year increase of 8.5% was led by additional operating expenses due to acquisitions that have taken place in the past year, as well as an increase in variable expenses associated with increased sales. Additionally, the inconsistent OEM deliveries and longer preparation time for pre-delivery inspection of new equipment have created some temporary inefficiencies that we are tackling with an eye toward returning to normal conditions in these areas as soon as possible.

On a consolidated basis, I would expect operating expenses as a percentage of sales in the Q4 to be similar to or modestly lower than the 13.3% realized in the Q3. Over the past 2 years, we have made 7 acquisitions that accounted for approximately $670 million in annualized revenue. Overall, and as is typical, those acquisitions came with a higher operating expense as a percentage of sales than our base business, albeit some with favorable gross margin offsets. As David and Brian have touched on already, we are focused on integration activities and resource reallocations, so the business is optimized to deliver operational efficiencies through the cycle.

We have a long track record of acquiring businesses and improving their financial metrics over time to be in line with our overall financial targets, and I'd expect that we'll be able to demonstrate that in the future as well. Floor plan and other interest expense was $5.5 million, as compared to $1.8 million for the Q3 of fiscal 2023, primarily due to higher interest-bearing floorplan borrowings driven by higher inventory levels. Additionally, we use the capacity of our existing bank syndicate floorplan facility to finance the O'Connors acquisition. Net income for the Q3 of fiscal 2024 was $30.2 million, or $1.32 per diluted share, and compared to last year's Q3 net income of $41.3 million or $1.82 per diluted share.

Now turning to our segment results for the Q3. In our agriculture segment, sales increased 7.7% to $531.4 million. This growth was driven by our acquisition of Pioneer Equipment, as well as same-store sales growth of 3.5%, which was achieved on top of a very robust 46.4% same-store sales increase in the prior year, and same-store sales growth of 28% the year prior to that. As previously discussed, Q3 revenues were constrained by delayed OEM deliveries and capacity constraints of our service department. Agriculture segment pretax income was $35.1 million and compared to $42 million in the Q3 of the prior year, which implies a pretax margin decrease of 190 basis points to 6.6%.

In our construction segment, sales declined 10.3% to $77.5 million. As Bryan already mentioned, the timing of equipment deliveries in the back half of this year versus the back half of last year creates some variability in the year-over-year comparability. We expect this headwind to shift to a tailwind in the Q4, where we anticipate generating year-over-year growth. Pretax income was $4.1 million and compared to $6.1 million in the Q3 of the prior year. Our year-over-year pretax margin decreased by approximately 180 basis points to 5.2%. In our Europe segment, sales decreased by 4.3% to $85.2 million, which reflects a 7.9 currency tailwind on the strengthening euro.

Net of the effect of these foreign currency fluctuations, revenue decreased 10.4%, reflecting a softening of demand in Bulgaria and Romania, which were negatively impacted by the aforementioned dry conditions and lower yields. Pretax income was $5.1 million and compares to $8.5 million in the Q3 of fiscal 2023, which implies a pretax margin decrease of 350 basis points to 6%. Given some of the timing and constraint-related items we mentioned, it's useful to look at year-to-date margins across our segments to get a better sense of things. Through the first nine months of the year, the AG segment's pretax margin is 6.5%, or 70 basis points lower than the prior year.

CE's pretax margins are 5.9%, which are flat with the prior year, and Europe's pretax margins are 6.8% or 90 basis points lower than the first nine months of the prior year. Now on to our balance sheet and inventory positions. We had cash of $70 million and an adjusted debt to tangible net worth ratio of 1.1x as of 31 October, 2023, which is well below our bank covenant of 3.5x. Equipment inventory increased $98.8 million in the Q3. As we discussed in detail during our Q2 earnings call, our domestic AG segment was still a little short of targeted inventory levels at that time, and we expected inventories to increase modestly during the Q3 based on planned OEM ship dates and projected customer deliveries.

We also expected to start working down the amount of pre-sold equipment and inventory back toward normal levels. However, as David touched on earlier, given the dynamics of longer preparation times and prioritization of service for customers' existing equipment, our progress on reducing the amount of pre-sold equipment and inventory stalls. Given that we are largely past the busy fall season, we should have more time to dedicate toward delivering pre-sold equipment to customers in the Q4. But the inventory balance at the end of the fiscal year will be dependent on both the timing of incremental equipment deliveries from OEMs, as well as the pace of our pre-delivery inspection work.

Overall, we expect there will likely be an increase in our total ending inventory on the balance sheet, similar to the increase we saw in the Q3, and then stabilize within a range thereafter as things normalize. We'll also see the O'Connors' balance sheet added to our financials in the Q4 as well. With that, I'll finish by sharing a few comments on our fiscal 2024 full year guidance, which we have updated to reflect the year-to-date performance of our businesses. We are positioned well for a strong Q4, and we have narrowed the range of expected revenue for each segment, contemplating the continuation of limited availability of a few key equipment categories and the longer prep times for pre-delivery inspections we have been experiencing.

We now expect our AG segment to finish up 20% to 23%, our construction segment to be at 4% to 7%, and our Europe segment to be at 4% to 7%. With respect to our new Australia reporting segment, we completed the O'Connors transaction on 2 October. Similar to Europe, these results will be reported on a one-month lag, and as anticipated, this will result in three months of activity being reported in our fiscal 2024 results.

Bryan Knutson (President and COO)

...With all of that said, we are refining our fiscal 2024 revenue estimate to be $70 to 80 million, with a diluted EPS contribution in the range of $0.10 to 0.15, when factoring in financing and integration-related expenses. As a reminder, Q4 gross margins are typically a few hundred basis points lower sequentially than the Q3, largely driven by mix and larger tax-incentivized purchases with multi-unit discounts. The same is expected to hold true this year. Additionally, we continue to expect modest normalization of equipment margins, consistent with improved inventory levels and equipment availability. Gross margin in the Q3 was about 100 basis points lower than the prior year's Q3, and I would expect a similar 100 basis point normalization year-over-year in the Q4, partially offset by the anticipated incremental manufacturer incentives that I already mentioned.

Overall, with margin strength offsetting slightly lower sales expectations for the year, our underlying EPS guidance, excluding the positive impact from the O'Connors transaction, remains unchanged as compared to the guidance that we established at the beginning of the fiscal year. We look forward to finishing the year strong and delivering on the record results that we committed to nine months ago, and we are really proud of that. This concludes our prepared comments, and we are now ready to take questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning.

Bryan Knutson (President and COO)

Morning.

Bo Larsen (CFO and Treasurer)

Good morning, Ted.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Hey, so I've got two questions. The first one is just going into the issues with regards to prep time, which I just wanted to get a little more color around. You know, is it just a labor issue and you're trying... You need more people? Is it, you know, equipment that's, you know, being delivered and needs extra work for some reason because it's coming in, you know, in a less, you know, a lesser state than is normal? Just kind of what's driving that aspect, if you would, with regards to delay in top line?

Bryan Knutson (President and COO)

Sure. You know, Ted, it's really a combination of all the things that you mentioned. You know, if you, as an example, were to fly over the global four-wheel drive plant here in Fargo, you'd see a lot of units outside, and typically what you're gonna find is they're either waiting on a truck for delivery due to the shortage of truckers out there right now and, or they are missing a component, you know, some of the supply chain challenges that are still out there, and they got to keep the assembly line moving, or the quality of the component that, you know, CNH received from one of the suppliers, you know, what didn't pass inspection. So again, they kept the line moving. They caught it at the plant.

So they're having those delays on their side, and that creates some of these timing issues we've talked about. Then, as we get those units, as far as the additional prep time, that we're seeing on our end, is any time you've had one of those units where it can't go through the normal build process, and you've heard a lot of commentary from Deere and CNH and AGCO on this in previous quarters, you know, you always have a risk then of quality issues or other things. So we just take a lot of pride in our, you know, commitment to our customers and excellence in the units when we deliver them to them.

So, you know, that's really increased that inspection time to make sure we go through a multi-point inspection, we're catching things, and it's just then we got to fix those things. And so it just adds to the time. As we've also mentioned, we do add a lot of different technology and things. That's very commonplace for us to do for our customers. The supply chain is still constrained and deliveries, you know, are delayed on certain components, both within technology, but also with certain casting components like weights and tires and wheels and so on. So still, you know, waiting on some of those components, but collectively, that all is what's leading to that significant increase in prep time.

Bo Larsen (CFO and Treasurer)

Yeah, and I would just add to that, you know, general supply chain, I think everybody said over time, has continued to improve, and that's definitely the case. You know, as we look into next year and kind of get past the first half of the year, we largely see a lot of these issues being behind us and getting back towards normalized conditions. We specifically called it out here because given the higher seasonality volumes, right, it did create a bit of a pinch point in terms of the amount of equipment we could get delivered. Kind of prevented us from reaching the full potential for the quarter.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Okay. And then my... Sorry, I woke up with something today. So, but my second, my second question is around O'Connors in Australia. And, you know, I mean, I'm just kind of curious, you know, you narrowed your guidance range, taking the top down by $10 million, and, you know, is that a result of a change in kind of macro dynamics within Australia? Is that a result of, you know, having gotten further into the weeds with regards to the business and a better understanding of it? Just kind of a little color in terms of, you know, what prompted you to take the top end of that range down?

Bo Larsen (CFO and Treasurer)

Yeah, absolutely. Appreciate the question. It is, it's definitely the latter. It's really just getting in the weeds, understanding what equipment is in inventory, what equipment needs to get in the country, and expected timing of delivery to customers. So really just being able to take the time as we got through close to just sharpen the pencil on exactly what would unfold for these three months was just the narrowing on that range there.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Okay. All right. I'll get out of the queue. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.

Mircea Dobre (Managing Director and Associate Director of Research)

Good morning, everyone. Thank you. Thank you for taking my question. Just a quick clarification. I thought I heard you talk about inventories coming up again sequentially in Q4. And if I heard that correctly, I guess what I'm trying to figure out is when I look seasonally, in your business, typically inventories come down sequentially in the Q4. And that feels a little bit different, right, this year. I guess I'm also wondering if you sort of had these disruptions that kind of prevented you from delivering some machines in Q3, wouldn't you be able to hopefully catch up on some of that in Q4? Which again, at least in theory, should bring inventories down sequentially.

Bo Larsen (CFO and Treasurer)

Yeah. Hey, Mig, good morning, and thanks for the question. First of all, to start with, and maybe a clarifier, right? As we talk about pre-sold equipment awaiting delivery to customers, that's always turning, right? So the unit that was there in the Q1 has been delivered to a customer. It's not still sitting there. Units that were there in Q2 aren't still sitting there. But what we're seeing, right, is a continued delivery from the OEMs, and we're needing to process everything through the shoot. So definitely in the Q4, we look to be able to chip away at the amount of pre-sold that we have in that inventory balance. But again, as we looked at how timing looks to be for everything and with OEM deliveries, right?

And the OEMs are looking to finish their year strong, and get as much out as they can. I think we're still seeing some push to make up for some of those supply chain challenges that had otherwise held them back in parts of the year. If you recall, last year, we received a tremendous amount of equipment right toward the end of the calendar year, between really Christmas and the end of December, right? And then a short period of time to really be able to turn that around and deliver to customers. So it's really those factors that we're talking about. You did hear it, right?

We expect another incremental increase on inventory there, and then kind of stabilizing in that range and looking to continue to normalize that pre-sold backlog as we work through the first part of next year.

Mircea Dobre (Managing Director and Associate Director of Research)

Okay.

Bo Larsen (CFO and Treasurer)

Yeah, Mig, I would just point out to this, BJ, adding the O'Connors to the balance sheet, as Bo mentioned, the prepared remarks as well as our other acquisitions, but also just, you know, the timing that we've talked about here. So you're right, historically, you know, we would come down by fiscal year end, but everything's kinda delayed on, especially on certain products, you know, a quarter or so. So I'd build that in as you look with your modeling. We typically would then be, you know, more flattish and then build back up throughout the year again. So I think just delay in all that as we get into the end of the year and into Q1.

Mircea Dobre (Managing Director and Associate Director of Research)

Understood. Thank you for that. So my follow-up, if we're sort of looking at inventories going up again in the Q4, I guess I'm curious as to how you're thinking about fiscal 2025, and I'm not looking for you to provide your own guidance in terms of the top line, but obviously, Deere commented on next year, CNH, you know, your OEM is thinking that volumes are gonna be down as well. So I guess with the inventory build that you have, if indeed volumes are gonna be a little bit lower in your fiscal 2025, how do you think about managing that inventory and, you know, your own order placing with the OEM? Thank you.

Bo Larsen (CFO and Treasurer)

Yeah. And you're right. I think the OEMs in their latest earnings calls provided some color, and Deere being the end of their fiscal year, provided some more granular color on their outlook for the next 12 months. For us, right, I mean, it's not something we, we've been continually managing and estimating where things are going. You're always looking out a year ahead, right? So in terms of dialing things in and what we're ordering for next year, you know, that's, that's stuff that we've been working on already for quite a while and are feeling really good about where we're sitting and, and the dials that have been turning over time. You know, we'll absolutely manage inventory and focus on that. But overall, right, and as we've said, we, we do feel good about where our levels are at.

You know, on the ag side, we want more four-wheel drive tractors. On the CE side, we want some more wheel loaders. But you know, one data point for you, just comparing it to, say, the prior cycle, right? The number of combines that we have in inventory is about 55% lower than it was in the prior peak. So I think some of that's reflective of the industry and the constraints that were out there, but then also, you know, our back office team that's focused on managing inventory levels, both what we're ordering from a new side and also, you know, the used equipment valuations. So.

The dollars that people are making comparison to the in terms of prior peak, I think you need to consider the decade of price increases, the acquisitions that we've done, and otherwise, right? I mean, overall, we feel really good about the inventory levels, but appreciate the comment, and we'll certainly, you know, as industry volumes trend downwards, we'll be managing our inventory accordingly. We wanna keep inventory turns high, we wanna keep interest-free terms, and we wanna keep our balance sheet really healthy.

Bryan Knutson (President and COO)

Yeah, and Mig, I would just add, you know, as, as you know, and as Bo mentioned, you know, when you're talking about 6 to 12 and greater months lead time here, you know, you better already have done the actions in place. You know, and we've done that, and we feel really good about that and heading into next year. And, and just as he mentioned, our professional team that just focuses on that for a living, that's all they do, really watching a lot of the analytics and metrics and running the dials on our inventory. So we, we feel really good about the actions we've taken.

I think as we mentioned on our previous call and as Scott Wine mentioned on the CNH call, you know, there's a little bit of pockets with some of that lower horsepower tractor inventory, real lifestyler stuff, that's we're a little bit longer on than we'd like, but we've got actions in place on that as well to clean that up. And then, as we've mentioned, with four-wheel drives and wheel loaders and so on, there's some pockets that we're still a little short on, on some certain categories. But other than that, we feel really good about where we're positioned to deliver the Q4 results that we need to, and then as we transition into next year and what we anticipate the market's gonna do next year.

Mircea Dobre (Managing Director and Associate Director of Research)

Appreciate it.

Operator (participant)

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

Alex Rygiel (Senior Managing Director and Associate Director of Research)

Thank you and good morning, gentlemen. A couple quick questions here. First, your full EPS guidance includes a range of $0.65, of which I believe $0.22 could be from the incentives. So if you could maybe talk about some of the catalysts being at the high end or low end of that $0.43 difference.

Bo Larsen (CFO and Treasurer)

Yeah, I mean... Well, this isn't gonna sound overly sophisticated, right? But it's related to the revenue and where that comes in, in terms of whether it's toward the top end or the low end of the range. We feel pretty good in terms of where we're gonna be operating from a margin perspective. Operating expenses are pretty well honed in, right? So it really is just a function of how much of that equipment gets delivered.

Alex Rygiel (Senior Managing Director and Associate Director of Research)

That is helpful. And then, as it relates to sort of inventory, kind of walking up a little bit in the Q4, I believe you might have thought that it would kind of tail off from the Q3 and decline into the Q4, but now sounds like you're expecting it to increase a little bit. Maybe, I guess, my question is: What has changed? And then, what's the mix of inventory across ag versus construction? Is one higher or lower than where you'd like the optimal level to be?

Bo Larsen (CFO and Treasurer)

Yeah, maybe addressing the latter first. No, I don't think so. I mean, in general, we're feeling pretty good about our inventory levels. On the CE side, you know, the one that's short is wheel loaders, like we mentioned, but otherwise, across the board, in general, it's good. There are probably a couple areas, just like on the ag side, for example, low horsepower tractors, where we wanna continue to look to trim just as we anticipate trends going into next year.

You know, on the Europe side, also some areas there that we'd be looking at to try to trim as we're seeing some softness, specifically in Bulgaria and Romania. But on the whole, there's not, you know, a drastic difference in terms of our thoughts or level of health between ag and CE, as you were asking there.

Alex Rygiel (Senior Managing Director and Associate Director of Research)

Very helpful. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Daniel Imbro (Managing Director and Equity Research Analyst)

Hey, guys, and thanks for the question. I believe we were just wondering, how much visibility do y'all have into these OEM deliveries improving, as we move into, like, the fourth and Q1? And, since we're gonna have a similar dynamic to last year, with maybe a heavier Q4, do you foresee maybe, delivery timing being a problem again in the Q1, since you might get a large influx in the Q4?

Bo Larsen (CFO and Treasurer)

So we definitely anticipate being a strong Q4 revenue-wise compared to the, the prior year, and even a bit if you do the math from where we were in the Q3. Obviously, we have more equipment available, and we have backlog there, right? So in terms of the confidence in the Q4, we're feeling good about that stuff. And I, I think at the same time, you know, we have talked a little bit about today in terms of anticipating that the inventory increases a bit from where we're at.

So I think both of those, we're saying, is what our expectation is, right? And then we're in terms of setting up for next year, again, we're feeling like we're ending the year at a healthy spot inventory-wise. We'll provide more context, guidance-wise, you know, as we get into the March year-end call. Yeah. Did that answer your question?

Daniel Imbro (Managing Director and Equity Research Analyst)

Yeah. Yeah, that's perfect. And then, on the service delay side, you said, mentioned wanting to hire more technicians. How's that going? How is the technician availability? And are you having any trouble there that could limit your ability to catch up on this throughput?

Bryan Knutson (President and COO)

... Yeah, good, good question, Dan. You know, there's a real shortage out there, just technicians in general, whether you're talking about the airline industry or trucking industry or marine powersports, wherever, automotive. And, you know, we really hit hard into this with our customer care strategy several years ago and have just a lot of actions in place that we feel really good about. And, you know, have been the pilot and the cutting edge for many people in our industry that are trying to follow suit and keep up with us on a lot of the things we're doing. We just now came out with the first accredited apprentice program for our industry.

We have the first student tech scholarship sponsorship program that we started years ago that we're really starting to see the fruits of now. And then our internship programs, as well as the recruiting efforts that we're doing, the sponsoring that we're doing with tech schools and relationships we have with the high schools and again, those tech schools. And so, you know, it all takes time, and thankfully, we put a lot of the actions in place that we did, that we're now able to see some of the fruits of labor on. Because, you know, you got a lot of baby boomers, a lot of workers that are retiring now, exiting the workforce. And so, as you can imagine, it takes a...

In order to grow the base and add the amount of technicians we need, and then to offset the retirements, you know, it takes quite a bit, and we feel good about the traction and momentum we've got in that. That's gonna remain an absolute front and center priority for us as we go forward.

Daniel Imbro (Managing Director and Equity Research Analyst)

All right. Awesome. Thanks for the color, guys.

Operator (participant)

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

Steve Dyer (Senior Research Analyst)

Hey, morning, guys. Curious, on the $6 million of manufacturer incentives that you expect to achieve in Q4, I guess, is that dependent on CNH and your OEM partners meeting their delivery schedules to you, or is that fully within your control?

Bryan Knutson (President and COO)

For competitive reasons and others, we don't really get into a lot of the mechanics on that, but I guess what I would say, right, is we have it in our guidance, and that reflects our confidence in achieving the number. There are definite timing differences between this year and last year, and that's why we put a little bit more perspective on that.

Steve Dyer (Senior Research Analyst)

Good. Then for a second question, what percent of equipment is leased versus sold today? And I guess, how has that mix trended over the past several years?

Bryan Knutson (President and COO)

Yeah. Right now, we're in single digits on leasing versus sold, just a tremendously low amount being leased, and that has trended way down. I think Deere had mentioned also on their call. You look at that's a big difference between 10 years ago and today, is not only the level of leasing but the quality of the leases. So one- and two-year leases, everybody was doing those. They were very problematic back then. And then, of course, when the downturn had hit, then those lease returns were coming back, in addition to a glut of supply of used from the overbuilding, overselling of new, that all happened. And none of that trifecta is in place today. So we have way less leases. We have the leases we do have our minimum 3-year, mostly 5-year, very quality leases.

And then again, as Bo mentioned with the combine example, you just got a lot lower levels of used equipment in play today. And then, you know, unfortunately, it constrained our revenue opportunity the last year or two here, but the limited production capabilities just didn't put out the amount of new units, so it results in a older fleet, you know, in most categories, except to a degree, combines. And, you know, so that helps with the dampening. And then with less new sold, you just didn't get the amount of used, and so again, back to the shortage of used supply. So all of those components are, you know, tremendously healthy and very supportive factors as we go into next year.

Steve Dyer (Senior Research Analyst)

Thanks. Best of luck, guys.

Bryan Knutson (President and COO)

Thank you.

Operator (participant)

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

David Meyer (Chairman and CEO)

Okay, well, thank you, everybody, for your time today and your interest in Titan Machinery.

Operator (participant)

Thank you. This concludes today's conference call.

David Meyer (Chairman and CEO)

That concludes our call. Yep.

Operator (participant)

Thank you. This concludes our conference call. Thank you for your participation. You may now disconnect your lines.