Q4 2021 Titan Machinery Inc Earnings Call
Greetings and welcome to the Titan machinery and fourth quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation and.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and.
The remainder of this conference is being recorded.
I'd now like to turn the conference over to your host Mr. John Mills of ICR. Thank you you may begin.
Thank you and good morning, ladies and gentlemen, and welcome to the Titan machinery fourth quarter fiscal 2021 earnings conference call on.
And on the call today from the company are David Meyer, Chairman and CEO.
Mark Gilbert our Chief Financial Officer.
And Brian Knudsen, Chief operating officer.
By now everyone should have access to the earnings release for the fiscal fourth quarter and the January 31, 2021, which went out this morning, and approximately 645 a M eastern time.
If you've not received the release it is available on the Investor Relations tab of Titans website at IR Dot Titan machinery Dot 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, we suggest you access the presentation now by going to the Titans website and.
The IR dot Titan machinery Dot com.
The presentation is directly below the webcast information and the middle of the page.
You'll see on slide two of the presentation of our Safe Harbor statement.
Like to remind everyone that the prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions. The <unk>.
Payments do not guarantee future performance and therefore undue reliance should not be placed upon them.
These forward looking statements are based.
Excuse me. These forward looking statements are based on current expectations of management and and involve inherent risks and uncertainties, including those identified and the risk factors section of Titans. Most recently filed annual report on form 10-K. These.
These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected and 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 for call. Please note. The during today's call, we'll discuss non-GAAP financial.
<unk>, including results from the adjusted basis. We believe these adjusted financial measures can facilitate the more complete analysis and greater transparency in the Titans ongoing financial performance, particularly when comparing underlying results from period to period.
We've included a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today's release.
The call will last approximately 45 minutes at the conclusion of the prepared remarks, we will open the call to take your questions now I'd like to introduce the company's chairman and CEO Mr. David Meyer go ahead David.
Thank you John good morning, everyone.
Welcome to our fourth quarter fiscal 2021 earnings conference call on.
Today's call I'll provide a summary of our results and then Bryan can loosen our chief operating officer will give an overview for each of our business segments.
Mark <unk>, our CFO will then review for the actual results for the fourth quarter and full year of fiscal 2021 and.
Conclude with some commentary around there of fiscal 2020 two modeling assumptions.
If you turn on to slide three you will see an overview of our fourth quarter and full year of financial results.
We generated fourth quarter revenue of $436 $7 million worth of.
And exceeded our expectations, increasing 24% versus prior year due to the strongest.
Sales of our agriculture and construction of segments.
The stronger revenue combined the Lauren interest expense resulted in a $5 $6 million increase and our adjusted pretax income to $6.8 million and a significant lift on our adjusted earnings per diluted share to 23 cents compared to just two cents last year.
The strong finish on the fourth quarter made for an exceptional year for Walker.
Does the otherwise consider to be a challenging operating environment with the well documented complexities associated with the Covid pandemic.
We're extremely proud of our accomplishments on a priority of results demonstrate our team's commitment to stay focused on our customers who are working in the fields and on job sites.
We generated full year revenue of one point for $1 billion, which was up the way.
For the up eight 1% compared to fiscal 2020.
Our adjusted pretax income grew 52, 5% to $38 $1 million versus $25 million for the prior year.
Driving the adjusted EPS of $1 26, compared to <unk> 84 cents last year.
Before I turn the call over to Brian I want to thank all of our customers the employees on the face of of pandemic and while the weather challenges and.
Demonstrated the resilient nature, which is fundamental to the industries on which we operate here.
I will now turn the call over to Brian to review, our three segments and more detail.
Yeah.
Thank you David and good morning, everyone I'm excited to cover our three business segments. This morning, and will be available for Q&A. After our formal presentation on.
On slide four is an overview of our domestic agriculture segment.
We are seeing much improved farmer sentiment due to the progressive strength and commodity prices to our fourth quarter and continuing to date. In addition to the stronger commodity prices favorable yields and much of our AG footprint combined with the USDA payments led to improved net farm income for calendar year 2020 of.
Additionally, fall harvest conditions were ideal for most of our farm and ranch customers to get their fields in great shape for the upcoming spring planting season.
Our business is well positioned to support the ageing fleet of equipment with our focus parts and service strategies, we continue to pursue consistent growth and parts and service revenue, which is supporting strong gross profit margins and a healthy pretax income contribution and.
In addition to the stronger net farm income and improved farmer sentiment, we continue to see replacement demand and precision technology and connected machines is the ongoing catalyst for new equipment purchases and.
As a result, we anticipate the momentum within our AG segment to continue throughout our fiscal 2020 two.
Turning to slide five you will see an overview of our domestic construction segment.
Although our construction equipment segment continues to feel the economic impact of Covid, we are seeing improving industry trends due to low interest rates economic stabilization net farm income growth improved oil prices and continued optimism for future infrastructure investment.
The operational improvements that our team has implemented over the past couple of years produced improved fourth quarter pre tax profit and full year adjusted pre tax income.
Late in the fiscal fourth quarter, we divested two of our C stores, and Phoenix and Tucson, Arizona.
And not only will this be advantageous to our CS segment profitability, but also supports our strategy of operating and acquiring locations and core markets, where we can leverage the logistics similar equipment specifications and customer synergies.
Before we turn to slide six international overview I want to share a couple of comments on the ERP implementation, which impacts our domestic AG and CE business. We have been successfully operating one pilot store and our new ERP platform since July of 'twenty, and 'twenty with an expected full rollout and the next 12 months with the cash.
All of the year, 2020 Covid challenges along with additional ERP development, we are experiencing an extension of our original timeline, resulting and some additional fiscal 2020 two expenses that will be incurred which mark will discuss later.
Now moving to slide six we have and it overview of our international segment, which represents our business within the countries of Bulgaria, Germany, Romania, Serbia and Ukraine.
In addition to Covid related disruptions are and a national segment is being impacted by extremely dry weather, and Romania, and parts of Bulgaria, and Ukraine, which negatively affected summer and fall crop yields.
The sentiment of the European farmers, improving due to improved global commodity prices and the winter crops, receiving some much needed moisture and creating a better outlook as our customers approached the 2021 growing season.
We continue to focus on the parts and service areas of our international business as customers and these developing markets are looking for higher levels of product support and equipment becomes more sophisticated and technologically advanced and.
As with our North American AG business, new equipment demand is being driven by precision technology and connected machines and the performance and reliability of modern farm machinery.
Before I turn the call over to Mark I'd like to thank all of our employees for a very successful fiscal 2021 and the face of adversity, our employees stepped up and outperformed on all levels of the organization producing outstanding results, while supporting our customers and their operations with that I will turn the call over to Mark to review our financial results and.
More detail.
Thanks, Brian.
Turning to slide seven.
Our total revenue for the fiscal 2021 fourth quarter was $436 $7 million and increase of $24 four per cent compared to last year.
Exceptional strength and our equipment business was the main driver of the strong revenue results and our fourth quarter, which increased 34, 7%.
While we experienced solid equipment growth and both of our both our agriculture and construction segments agriculture was particularly strong due to the improved and market conditions, Brian discussed earlier.
As I mentioned on the call on the last call, we had very difficult comps for our fourth quarter parts and service businesses or parts and service were up 19.2, and 16, 6% respectively.
Due to the very difficult harvest conditions.
This past fall harvest was quite different as weather conditions allowed for a much quicker harvests and with less stress on equipment.
As a result parts sales were down four 7% and service was up four 5% and our current year fourth quarter.
Our rental and other revenue remained under pressure due to headwinds within our construction segment and decreased 28, 8% and the fourth quarter.
As a result, we experienced the 260 basis point compression and our rental fleet dollar utilization from 25% and the fourth quarter last year to 22, 4% and the current store.
Rental revenue was also down due to a smaller fleet size, where we ended the year at $77 $5 million compared to $104 $1 million and the prior period.
On slide eight our gross profit for the quarter increased by 10, 8% to $67 $7 million due to the significant increase and our revenue.
But the mix of sales, what's your favorite equipment.
Our gross profit margin to decrease by 190 basis points to 15, 5%.
Our operating expenses were essentially flat at $65 million for the fourth quarter of fiscal 2021.
Flat expenses, coupled with the strong revenue growth, we experienced generated significant operating leverage during the quarter.
Operating expenses as a percentage of sales improved 320 basis points to 13, 9% for the fourth quarter of fiscal 2021.
Compared to 17, 1% of revenue and the prior year period.
Impairment costs were $400000 for the fourth quarter of fiscal 2021, compared to $3 $6 million and the prior year.
Floorplan and other interest expense decreased $1 million to $1 $5 million compared to the same period last year.
The decrease was due to a lower interest rate environment of lower interest rates spread under our new amended credit agreement that was finalized and April 2020, and lower borrowings on our line of credit.
And the fourth quarter of fiscal 2021, we realized adjusted net income of $5 $3 million compared to $600000 for the prior year quarter.
Our adjusted fourth quarter of fiscal 2021 net income.
Excludes the $3 $3 million charge for Ukraine income tax valuation allowance adjustments, while the prior year figure excludes a $4 6 million dollar benefit for domestic income tax valuation adjustments.
Our adjusted earnings per diluted share was 23 cents for the fourth quarter of fiscal 2021 compared to two cents and the fourth quarter last year.
For the fourth quarter of fiscal 2021, adjusted EBITDA increased 69, 1% to $13 $7 million, which compares to $8 $1 million and the prior year.
You can find the reconciliation of adjusted net income adjusted income per diluted share and adjusted EBITDA to the most comparable GAAP amounts in the appendix to the slide presentation.
On slide nine you will see an overview of our segment results for the fourth quarter.
Agriculture segment sales increased 47%.
$303 $2 million, which drove a significant increase and our adjusted pretax income to $8 million and the fourth quarter.
Which is of $5 $5 million improvement from the $2 $5 million, we generated last year.
Strong equipment sales combined with lower floor plan interest expense drove the robust increase and adjusted pre tax income.
Turning to our construction segment.
Revenue increased one 9% to $88 $9 million compared to the prior year period.
Lower operating expenses combined with lower interest costs drove a $1 $6 million of improvement in segment adjusted pre tax income to $600000.
Compared to a pretax loss of $1 million and the same period last year.
And the fourth quarter of fiscal 2021, our international segment revenue was $44 $6 million.
The decline of seven 5% compared to the prior year period was the result of lower equipment revenue caused by the industry conditions, Brian discussed earlier.
Partially offset by an increase and parts and service revenue.
The overall lower revenues caused our adjusted pretax loss to increase $400000 to $2 $7 million compared to $2 $3 million and the prior year.
Turning to slide 10.
You'll see an overview of our full year revenue results for.
2021, total revenue increased eight 1% compared to last year, driven by 10, 8% growth and equipment revenue and was further supported by solid contributions from our parts and service businesses, which were both strong contributors through the first nine months of the of the year.
Air and finished up $4, five and eight 1% respectively for the full year.
The rental and other was down 28% due to the smaller fleet and lower dollar utilization.
On slide 11.
Our full year gross profit was $261 $4 million of four 2% increase compared to the prior year.
While our gross profit margin decreased 70 basis points to 18, 5%.
Similar to the dynamics, we realized and our fourth quarter. We also see the effects of the strong equipment revenue growth driving gross profit dollars, but diluting overall margins due to mix.
Operating expenses decreased by $4 $9 million or two 2% for the full year of fiscal 2021.
Paired to the prior year period.
We were successful and decreasing our operating expenses during the year, primarily due to the expense reductions and our construction segment.
As well as benefiting from lower operating costs caused by the pandemic.
As a result of lower expenses and higher revenues operating expenses as a percentage of revenue decreased 170 basis points to 15, 6% and fiscal 2021.
Impairment costs decreased $600000 to $3 $2 million and the current full year period compared to $3 $8 million and the prior year.
Floorplan and other interest expense decreased $2 $6 million or 26, 8% due to a lower interest rate environment of lower interest rates spread under our amended credit agreement and the overall lower borrowing levels.
For the full year of fiscal 2021, our adjusted net income was $28 $2 million and increase of 51, 5% from the prior year.
Our adjusted earnings per diluted share was $1 26 for fiscal 2021, representing a 50, 50% increase compared to 84 and the prior year.
For fiscal 2021 and.
Adjusted EBITDA grew 24, 6% to $65 $4 million compared to $52 $5 million and fiscal 2020.
Yeah.
Turning to slide 12, we provide our segment results for the full year fiscal 2021.
Overall, our adjusted pretax income increased 52, 5% to $38 $1 million for the full year.
This improvement was largely due to the strength of our agriculture segment. We discussed earlier, but we are also happy to see our construction segment achieved profitability despite lower revenues.
Our construction segment team continues to build the off of focused initiatives, which we believe will enable us to achieve sustained future profitability and this segment.
The AG and construction results were modestly offset by the top and Bottomline and softness in our international segment.
Turning to slide 13.
Here, we provide an overview of our balance sheet highlights at the end of the year.
We had cash of $79 million as of January 31, and 2021, which is higher than normal due to the very strong cash generation and fiscal year 2021 that I will discuss in a few minutes.
Our equipment inventory at the end of fiscal 2021 was $338 $1 million a decrease of $177 $8 million from January 31, and 2020.
The substantial decrease and both new and used equipment inventories.
As a result of strong year end of your equipment sales combined with inventory and.
That was sold and the divestiture of our Phoenix, and Tucson, Arizona locations, which also occurred and our fourth quarter of fiscal 2021.
Strong sales combined with lower inventory levels accelerated our equipment inventory turns to 2.0 and fiscal 2021 from 1.5 and the prior year.
And we'll provide a little more color on our inventory on the next slide.
Our rental fleet assets at the end of the fourth quarter decreased to $77 $5 million compared to $104 $1 million at the end of fiscal 2020.
In addition to the de fleeting earlier and the year. We also sold rental fleet of assets as part of our fourth quarter divestiture of the two Arizona construction stores.
We anticipate our fleet size to increase slightly by the end of fiscal 2022 to around $80 million.
As of January 31, 2021, we had $161.8 million of outstanding Floorplan payables on $773 million of Floorplan lines of credit, which leaves us with considerable capacity and our credit lines to handle our equipment financing needs.
Our adjusted debt to tangible net worth ratio is a strong 1.0 compared to one three and the prior year period and is well below three five which is the leverage covenant requirement of our two largest floorplan facilities outside of our bank Syndicate credit agreement.
Turning to slide 14.
The amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide.
As I mentioned strong fourth quarter sales combined with the divestiture drove a $151 $7 million decrease and new equipment and the $26 $1 million decrease and used equipment as compared to January 31, 2020, generating the higher equipment turn of too.
No.
Supply chain disruptions due to the pandemic and strong customer demand, particularly in the agriculture has created and overall tighter industry supply of equipment.
Our equipment orders and level of pre sales and used equipment inventory have us well positioned to meet our revenue targets for fiscal year 2022.
Given the lower inventories starting point for the year and the strong end market and AG, We expect our inventory turn and we'll continue to increase throughout fiscal 2022.
The overall quality of our inventory remains very healthy.
Our inventory under noninterest bearing terms, which can be seen by the gray bar on the slide and ended the year at 29, 2%, reflecting a higher mix of international inventory compared to that of the prior year.
We have longer non interest bearing terms available with domestic inventory purchases than we do with purchases and our international business.
On procurement levels increase and fiscal 2022, we would expect to see this noninterest bearing percentage rise as well.
Yeah.
Slide 15 provides an overview of our operating cash flow is for fiscal years 2021 and 2020.
The GAAP reported cash provided by operating activities for fiscal 2021 was $173 million compared to $1 million last year.
As part of our adjusted cash flow provided by operating activities. We include all of our equipment inventory financing, including non manufacturer floorplan activity and adjust our cash flow to reflect the constant equity and our equipment inventory.
Allowing us to evaluate operating cash flows exclusive of changes and the equipment inventory financing decisions.
After applying these adjustments our adjusted cash provided by operating activities was a record $148 $5 million for fiscal year, 2021, compared to $17 $8 million and the prior year.
Solid bottom bottom line performance combined with good working capital management, including the reduction of equipment inventory I just discussed drove this robust cash flow metric.
The strong cash generation has allowed us to pay off all of our domestic interest bearing credit lines and and fiscal year 2021 with cash on the balance sheet of $79 million.
We have never generated this level of cash flow before and our balance sheet has never been stronger.
On slide 16, we are introducing our fiscal 2022 full year modeling assumptions.
Our business is performing well and we are bullish on our prospects for this fiscal year, given the improving macro backdrop, particularly in AG.
However, we believe areas of our business could continue and could continue to be impacted by the challenging global economy due to COVID-19, creating a higher degree of uncertainty and needs of assumptions compared to a normal environment.
For the agriculture segment.
Our initial assumption is for revenue growth and the range of up 10% to 15%, which compares to our fiscal 2021 performance, where we generated growth of 18, 3%.
The fiscal 2022 growth range and <unk>.
The full year revenue contribution from our horizon and West acquisition that closed in May 2020.
For the construction segment, our initial assumption assumption is for revenue to decrease and the range of flat to down 5%.
Impacting this assumption is the divestment of our two construction equipment stores and Arizona at the end of fiscal 2021, which accounted for approximately $27 million of combined revenue.
Excluding these revenues from the prior year base, our assumption results and our same store sales range of up 3% to 8%.
And this divestiture reduces invested capital and will further strengthen the bottom line results of our construction segment.
For the International segment, Alright initial assumption is for revenue growth and the range of up 12% to 17%.
This segment is coming off of very challenge fiscal 2021, where the pandemic and weather weighed on revenues.
Our assumption anticipates transitioning back to a more normal operating environment with some strength anticipated from higher global agriculture commodity prices.
From the diluted earnings per share perspective, we are introducing of fiscal 2022 range.
The $1 25 to a dollar of 45 cents.
This range now includes all ERP implementation expenses.
And in addition to normal variable expenses increases on higher revenues anticipates expenses rising as we transition to a post pandemic business environment, and incur higher costs and areas like travel and fuel and employee medical expenses.
Considering these variables, we would not expect to see as much operating expense leverage on increased sales as we normally would but still estimate our expenses as a percentage of revenue will improve slightly relative to fiscal 2021.
Regarding tax, we anticipate and effective tax rate for fiscal 2022 of approximately 29%.
We still expect this rate will vary quarter to quarter as profit and loss mix fluctuate due to seasonality.
And within our various international tax jurisdictions, where corporate tax rates vary and valuation allowances exist.
We will update you as necessary on our tax rate expectations as we progress through the year.
This concludes our prepared remarks.
Operator, we are now ready for the question and answer session of our call.
Thank you if you'd like to ask a question. Please press star one on your tariff on keypad. The confirmation tone will indicate your line is and the question queue.
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And for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Rick Nelson with Stephens, Inc. Please proceed with your question.
Thanks, a lot.
Morning, guys.
I'd like to.
I guess, the brokers harm and inventory.
The big Red Dog and we've Oh.
Improved turns.
You brought from scar from supply chain.
Our challenge here.
And if you could.
Speak to that Tim.
When you the current current.
Inventories are will normalize from there and I guess the implications are for margins.
And when supplies are tight do you think occurs more on our pricing flexibility.
Okay.
Sure. Thanks, Greg This is Brian.
We do have of as we mentioned of a good inflow of pre sales coming in.
Net a nice amount of late model used inventory on hand.
Lease returns that'll be coming back throughout the year.
And as well as a R.
Our current inventories and then our our Q4 order book that are open soon here so.
And we're positioned well.
And we feel good obviously there are some supply chain disruptions as you mentioned a lot of them due to COVID-19 some of them due to the.
Fairly rapid uptick and the commodity prices.
And but yeah that will.
And potentially help margins as well.
Out of the growers are aware of the longer lead times of course of the manufacturers are ramping up production and so again, we feel of we're pretty well positioned there and are looking to capitalize on that as we mentioned also the improved our inventory turns they can come along with the.
Great.
So it kind.
On March two.
The quarter, well boy, Oh flat I don't know where plows for sure.
First of all to SAP.
Separate Kurt can you comment on kind of what true.
And what on the new equipment side, you know the used.
Corporate Park.
Yeah, I can take that Rick this is mark.
And I think this kind of goes for next year as well so with the with the higher level of revenues that we're expecting on the new well what happens is some of these bigger ticket items of combines the four wheel drives and so even in a tighter environment.
Big ticket items typically don't garner the same level of margins that some of the smaller lower priced equipment is.
So that is a little bit of the lower results for the quarter was on on that and some of our expectations for next year and overall I think we can improve those equipment margins, a little bit, but there's going to be because of the tighter environment that you referenced and particularly on used some should be able to see some nicer margins on used.
But then from the new standpoint will be somewhat held back because of those higher ticket items, making up a larger mix of of.
What we're selling.
Okay.
Inventory turns of two times I believe your objective for targets have been two to three times.
How do you see that shaking out from our fiscal 'twenty two.
And we potentially would be at the upper end or even above the.
The targets given the type of acquired and said shortage.
And so it's hard to know exactly how that's all going to play out with the timing of the with the inventories coming in but overall with the with the lower inventory levels to start the year and the strong and markets, particularly in the AG.
And I could easily see us approaching that two five this year.
But again I think it's somewhat depends on the timing of that inflow of of the equipment.
Hmm.
That's true.
The follow up on the camera on China.
What are you hearing in terms of zone.
For your ability to source of the other corporate.
The timing has to one year current.
And the trends will normalize.
And generally more towards the Q for most of it is baked.
Baked through through this point of again, we've got a good level of pre sales.
Through that point, and the C and H and and the other manufacturers have been ramping up quite a bit so.
Yeah, generally and the end of the Q4 time period.
Great.
Thanks for the common per hour.
And good luck codes and push forward.
Thanks, Rick.
Thank you. Our next question comes from the line of Larry de Maria with William Blair. Please proceed with your question.
Thanks, and good morning, everybody.
I wanted to start off.
And construction question I mean, I don't think and it would be.
Thanks.
And your fiscal 'twenty, two and this calendar 'twenty one to be a huge construction here.
But still look for look conservative.
And you know the segments like housing and AG, which you play into.
Look a bit more favorable for what's holding that back and I would think we have obviously you have an easier comp on the energy side, too, which could potentially be a little bit better so what's holding back their concern.
<unk> performance at this point.
Well Yeah. This is David Larry I think we are guiding you know pretty much in line with what we're hearing from the industry and.
And our targets of the small to midsized store.
And of equipment, which is tens of.
I think the expectation of a little bit higher but.
You know on infrastructure Bill stool on the.
Loans and they're in and the timing of when that could potentially happen and the stuff. So again I think we're guiding pretty much in line with the industry and and we're optimistic and.
To that segment.
But it's a little bit gonna be the timing on both the.
The COVID-19 and the.
And the oil the only starting to pick up of the you know whether there is still a little bit of caution out there and how long does that go on the last and workers all of those energy of going to go and so I think of them and the most part and we're in line and and we're optimistic.
Okay, Thanks and.
Obviously, we expect chill out of new AG equipment to share Marcia on them in a while.
Can you talk for the conversations and I know you've mentioned.
The technology upgrades, but they have and old fleet and when.
And when growers are coming in to buy equipment are they coming in more for the tech upgrades on more because they need to replace older equipment.
And also could you talk about take rates on these higher tech piece of equipment.
And maybe the last season and how much more of the higher tech stuff for you are they taking this year.
Yeah. Thanks, Larry This is Brian.
You know it is a mix of of.
The tax purchasing it as well as the upgrading older equipment, Tamara Fischer and equipment and then also the technology. So.
And really a mix of all of those technology is.
A big driver.
We were getting higher take rates as you mentioned.
Some of the things like of the harvest command and has become extremely high take rate, which automatically adjust the the comment for the conditions to optimize the combine.
Also of our soil command.
Is increasing take rate.
And quite rapidly.
Adjusting the the til has to make a better see Ben.
A lot of the precision planting components have also been very high take rate.
And growing as well and then.
Steering and and precision of the have.
You know very high take rate as well so and then the the connected machines are the <unk>.
<unk> also continued.
<unk> to really ramp up so.
There's a there's a lot of drivers on the technology side the.
We continue to see that.
Ongoing throughout the year.
So with that in mind and that's really helpful.
Two follow up questions for that first of if you're selling more.
The bigger expense of equipment that has all of this extra technology shouldn't you be able to capture more margin or of CD, capturing that and with this kind of the telematics and connected machines.
How does this kind of impact your aftermarket capture rates for that impact mix for the positive over the next few years.
Yeah and there.
For a couple of components to it too Larry there's there's the initial.
Transactional and price of it and which again is the.
The driver of the purchase right now and then the ongoing revenues associated with it so anywhere from annual subscription fees at the farmer pays to get that data as well as the the the other things the telematics can do for our parts and service business, allowing us to really help the grower and help the cons.
Tractor.
With their uptime and and.
Just to keep the machines going preventive maintenance.
And then help us to really partner with them and make them more profitable so.
There are several addition, and additional revenue streams there.
For the precision on the parts and service side as well for us.
Okay, but it just seems like the teenagers not sharing as much on this higher tech stuff and keeping more than they're letting you guys do with selling it.
And I don't know if that's the right or not but it seems like you should be capturing more margin upfront. If you guys are selling all of these higher tech.
For the equipment and some of them for brokers.
Yeah, Yeah, I think I think.
And the opportunity that we're really excited about the ongoing.
Incremental revenue opportunities again through subscriptions and through the additional revenue sources that it provides for us with parts and service. The couple of examples of that.
Okay. Thank you.
Thank you. Our next question comes from the line of Mig <unk> with Robert W. Baird. Please proceed with your question.
Good morning, everyone.
And I want to continue with Larry's train of thought here.
And Youre talking about this this kind of lifecycle opportunity that you have.
Given the precision technology, and so on being added to the.
The machine.
And as you Brian ran your own analysis on this is there a way for us to understand how much higher is the opportunity on the service and maybe parts maintenance on these upgraded machines versus equipment that was not you know smart for lack of a better term I mean, hey.
Is it is it 10% higher opportunity over the life of the of the machine is the 20th at 50 <unk> how would you describe it.
Hey, good morning.
Yeah.
We've got the additional and parts and service opportunity and then as we go forward.
Our Titan Tech support teams.
And we'll continue to offer.
On the tech support services so.
I don't have specific numbers for you at this time in terms of will that.
Incrementally drive our parts business, 10% per se or whatever it is difficult to the breakdown you always was that the parts purchase or the service purchased specifically due to the technology or piano replacement of our walking.
The et cetera. So.
At the point of sale, we don't specifically break down our purchase of parts purchases as the example like that.
No and I understand that but I would imagine just like you say right. There is going to be a support of revenue stream here associated with this equipment, it's more complex it's perhaps.
Less less user friendly without without the proper support from the dealer. So I think we're all trying to understand is the industry's evolving here what your part in this ecosystem is and how youre going to be profiting and benefiting from it.
And I think I think all of us and really kind of asking the same question.
Yeah and and.
Frankly, we're probably in the same boat with you there, but where we believe it definitely makes the customer stickier to us we're adding resources to.
The handle the tech support side of it.
The sales of it.
And we are optimistic again to the what it'll do for our parts and service.
It just has been difficult to model out at this point exactly what impact it will have on on parts and service as the example for us.
Well, what when you do have a model out I think.
All of the here and.
Mark a question for you maybe it's interesting that you're no longer excluding your your ERP related costs.
So.
I'm curious as to as to why you've made the decision and I'm also curious as to what what do you anticipate these costs are going to be in fiscal 'twenty two.
Yeah. So we've been adjusting these these ERP transition costs out now for the last two years and we're close here and closing in on the full and implementation. So yes, we just decided to put this in our R and not just adjust these I'll put them into R. R.
Regular operating cost here.
Some of the incremental costs that we're going to be incurring this year as we get close to the go live is going to be internal resources to help and the training and support and those types of things and those of the type of things that we wouldn't be adjusted adjusting out any ways that we haven't adjusted out in the in the past.
Last year.
And what you can see and our and our tables. There that we did adjust out was a little over I think it was a little over $3 million of about $3 million of 11.
We would expect that to ramp up a little bit.
The next year, just for the reasons, I said and putting more internal resources.
To this again for and for training support.
After go live and going into the go live that type of things so.
Call it and other.
The millions of millions and a half so roughly around probably for $5 million is what we're looking at for like incremental ERP cost over over the last year is what was in the adjusted numbers.
Okay.
Right.
And then.
If I may I wanted to ask a question on construction.
Maybe I missed this but.
The the two dealerships debt that you've divested.
It was implied there that debt. This is going to be margin margin positive with MB and being gone can you give us a sense for.
What these two dealerships.
How much of a drag maybe they work for your fiscal 'twenty one.
Or is the benefit that we could get from margin from just the used to being gone and 'twenty two.
Yes, it gets a little tricky to answer that I mean, we allocate out the src or corporate expenses here to those locations with the allocating those expenses out on.
Those stores did lose like maybe a half million something like that but they did absorb some of the corporate our corporate costs, so taking that out it wouldn't be that much.
But it was overall.
And like I said with Src allocation out there it was about a $5 million.
Okay.
You know it kind of begs the question on construction here, where we're starting to see some growth.
Somebody was pointing out earlier, maybe maybe your guidance is conservative in terms of how you're thinking about same store sales.
For for 'twenty two.
But look you know the the margin and construction is still.
Not probably where you want it to be.
Can you remind us what the long term vision is here I mean, what are you guys working towards I'm presuming that it's more than zero point of 3% and how do we get there.
Also of <unk> our.
Our strategy here is to really grow that parts and service business and are on the construction business and I think we've made some really good progress on that area and also the.
For cause of the focus on the key products I mean, when you look at construction and are you got a huge range you've got.
<unk> got aggregate, you've got the really the heavy and mining stuff you've got the really large road building equipment and they are more of our carbon space where were targeting the the homebuilder the.
On the commercial building and that you know a lot of of the subcontractors.
And all your landscape people and stuff like that sort of really focus on that.
And that sweet spot.
Got some I think some.
Really solid progress from good heritage legacy.
The lower backhaul of Maniacs later, and some of the midsize will orders you don't know of.
The focus on that product and then and then.
As I see it as we get into some of our core footprint, where we've got some of the.
The farmers use of lot of equipment equipment, and <unk> and all of the feedlots.
<unk> lots and all you're seeing.
The seed and chemical starting to come on cold So you're looking on the skid steer loaders and.
All terrain forklifts.
The land improvement the Libra growers.
Providers and all of the room and rocks are putting in pilot and irrigation. So that takes the mini excavator loader backhoes with orders for like I said for free lots, but also on the AG related businesses.
Some of your crop inputs company and some of your AG processing plants of the salt big buyers of the construction equipment. So the focus that and some of the.
Key areas. So we've got the synergies of both of our people.
And the upper Midwest.
Rest of World with you've got the a and we've got and you also I think from some decent talent and we look at.
It sounds like des Moines, and Omaha.
Minneapolis, St Paul and some of it right and our footprint and software we could get some of the subs.
The synergies with our people with our customers.
And also the related business sold and the at the same time and Youll continue to grow the some higher margin product support business, So and so I'd say, that's the sort of strategy.
Right I mean I appreciate that.
And it's just that you know we've been through a couple of cycles here with construction and.
We are yet to see actual margin momentum out of this business and you know we're at the beginning of what probably is going to be of pretty good demand up cycle right. So just.
Just as your David as you're thinking strategically about this portion of the business.
Do you see this business getting to the point, where it can be as profitable or close to as profitable as your AG business or is there something and here that will still hold it back and we should keep our expectations in check.
No we definitely have it and theres been years, where we've got some of our C stores of actually been some of our top.
And our top profitable stores.
The percentage so yeah I think it's definitely if you look historically, there's been a lot of wealth created and the construction equipment distribution channel healthcare and all of them.
And on creative and be on Multimillionaires. So, yes, it's definitely a very.
And firewall of segment and.
Like I say it is cyclical and there are some difference between AG, but I think when we get in the some of these common markets and stuff I think of it works really well for us so not but you can say of what we've done with some of our divestitures, we're trying to really focus on the markets and where we think.
And it's a good environment to be profitable in the newness and the REIT space and I guess, that's the way we've made some of these divestitures too.
Get ourselves on the better position.
Alright, one final question for me.
Yeah.
You spent a good amount of time talking about.
<unk> and <unk> and talking about tightness and in the channel.
I guess, what I'm wondering here is this.
If demand is better than what you're anticipating right now and agriculture, So you know better than 10% to 15%.
Do you think you have the ability to get inventory to satisfy that demand for our things so tight now debt.
You would simply have too.
To say, Hey, look I'm going to take the order, but I might not be able to deliver the machine until fiscal 'twenty three.
Can you help me understand that dynamic.
Yeah, Hey, Nik.
We.
As we go throughout the year here that could happen there there's.
A lot of growers the pre sold crop last year, you know and and.
And I are just going to start recognizing the entire prices as we go throughout the year of some of them, maybe not until harvest time, and and and so on but.
If we got into that opportunity again, we do have a pretty good supply of late model used we've got pre sales that are coming in throughout the year. We've got some larger customers that we roll with the generate quite a bit of nice late model used for us.
So that also is another good opportunity for us.
And the lease returns that I mentioned earlier, we've got quite a few of those coming back really nice supply of those.
The new itself.
Could get tight so if you got into that situation you could see a bit of a change of mix of revenue for us from.
And to more used.
But and then we do have the opportunity to pre sell into next year as well which are.
It's very common and with the lead times.
That would and it and a big uptick like that could end up potentially being captured for its next fiscal year when that equipment would ship and then.
Okay, Okay, just to clarify because I think I heard you and.
Answer another question, saying that you know.
Youre kind of expecting to be able to kind of catch up from a equipment availability and supply standpoint somewhere around the fourth quarter.
But that's using current assumptions for for growth and demand if things are better than that and that's essentially the thing that kind of pushed to start pushing the penguin into fiscal 'twenty three right did I get that right.
Right.
Understood. Okay. Thank you so much.
And Thanks me.
Thank you our last question today comes from the line is Steve Dyer with Craig Hallum Capital Group. Please proceed with your question.
Good morning, guys Ryan on for Steve.
I want to go on technology, a little bit different direction and others have here, but we know there is increasing demand for greater technology and equipment that should boost parts and service accelerates the replacement cycle et cetera for you guys.
But what are you seeing as far as consumer desire for greater Digitization of the retail and service experience and and you guys the ability to.
By cell service and do more online and I guess, what are you guys doing from an investment standpoint.
Your customers pushing for there.
Yes, we continue to see a higher adoption of any of that all of the time, especially with the younger generation farmers there.
Turning to come into play.
And these farms are starting to turn over more and more and so we go forward.
We've done a lot with our website.
And working on developing further our customer portal as.
And as well as our E Commerce site.
So, giving our customers the ability to purchase parts online scheduled service online.
And we've got a number of things built into our new ERP that will go with that when we do the full rollout as well.
So we're making a lot of investments here on the on the technology side too.
Continue to.
And we'll get more and to.
The.
Better equipped I should say too for that with our customers.
And then on the M&A market, where do you guys see and on the AG side domestically here, what's the pipeline look like multiples et cetera, and then secondly, and.
Is there more opportunity to optimize and divest construction stores.
Yes.
Okay. So first of all on.
And on the AG.
And there's been a little bit of a pause on that.
I think the basically of the basic fundamentals out there I think we're on on the front of the edge of our.
Another round of consolidation do you know the ageing dealer principals are the let's.
Sophistication of the equipment on the capital requirements out there lack of succession of alternatives and things like that so so with COVID-19 and all of the.
And get this is the difficult to get totally engaged.
And you know the travel restrictions people and people.
And mass of little awkward to go on and auto dealerships and the same time and most of the dealerships out there received PPP loans in there and the whole forgiveness process right now and with that said we.
We've got a number of volume.
Really quality and and I didn't see large on the acquisition targets that were actually working through the owners and the principles right and also so I'm optimistic about that and.
And again on on construction, we get the we look at we look at the market. The we don't really disclose exactly locations, but I guess we.
We want their company and be profitable on it and if it means the best in the right markets and the vessels moving out of markets aren't working we continue to look at that and and do what we think some of the best interest of our shareholders on that.
But definitely you'll.
We're engaged John we've got the balance sheet to do some some acquisitions out there and we're really look on us doing this on some larger quality acquisitions and we're fully engaged with that and we do think there's going to be of pretty good runway of consolidation and and we're right in the middle of that and we've got the balance sheet that will support it.
Great Thanks, and for US guys nice results.
I'll turn it over.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Meyer for any final comments.
Okay. Thank you and everyone for participating on the call and your interest and Titan machinery, and and we look forward to updating you on our progress on our next call. So have a good day everybody.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.