Q2 2022 Titan Machinery Inc Earnings Call
Quarter 'twenty 'twenty two earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host.
John Mills of ICR. Thank you you may begin.
Thank you good morning, ladies and gentlemen, and welcome to the Titan machinery second quarter fiscal 2022 earnings conference call on the call today from the company are David Meyer, Chairman and Chief Executive Officer, Mark <unk>, Chief Financial Officer.
Mr. Brian can knutson Chief operating officer.
By now everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2021 which went out this morning at approximately 645 a M eastern time.
If you've not received the release it is available on the Investor Relations page of Titans.
And upset site 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, you may access the presentation now by going to Titans website.
<unk> web at IR Dot Titan machinery Dot 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 would like to remind everyone that the prepared remarks contain forward looking statements and management.
So I 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 Titans. Most recently filed annual report.
Management Form 10-K.
As updated in sequential filing quarterly reports on Form 10-Q.
These risk factors contain 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 law Titan assumes.
On no obligation to update any forward looking statements that may be made in today's release or call.
Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis.
We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency in the Titans ongoing financial performance.
Particularly when comparing underlying results from period to period.
We've included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measure in today's release.
The call today will last approximately 45 minutes and at the conclusion of our 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. Please go ahead David.
Thank you John Good morning, everyone welcome to our second quarter fiscal 2022 earnings conference call on today's call I will provide us a summary of our results and then Brian Knutson our chief.
An officer will give an overview for each of our business segments.
Mark told our CFO will then review financial results for the second quarter of fiscal 'twenty tied to provide an update to our full year modeling assumptions.
If you turn to slide three you'll see an overview of our second quarter financial results.
Operate equipment demand momentum continued through our second fiscal quarter.
Helped drive a 24% increase on our second quarter consolidated revenues.
Our healthy inventory position, coupled with robust demand along with continued strength in our parts and service business grow strong consolidated pretax.
Excellent from growth of 89%.
And record second quarter adjusted diluted earnings per share of <unk> 57.
Which represents an increase of 97% compared with the prior year period.
From a segment perspective, our agriculture business was well positioned and produced.
Pre tax growth is high commodity prices offsetting drought conditions in areas of our footprint.
Likewise, we are especially pleased with the improved performance of both our construction and international segments.
Construction pretax income grew a 105% versus prior year in our international.
Except as pre tax profitability this year compared to a loss in the prior year.
This environment is providing us the opportunity to showcase the improvements we've made to our business over the past several years.
Our inventory turns are continuing to trend upward and we're receiving inventory shipments in a timely manner.
Segments to surpass our revenue targets.
While supply chains remain tight we are confident in our ability to drive growth through the second half of our fiscal year and as a result, we are raising our modeling assumptions accordingly.
Our team is ready to support our customers with a very busy harvest and end of Europe construction seasons.
And out in the second half of our fiscal year.
Now I will turn the call over to Brian <unk>.
Thank you David and good morning, everyone.
I'm excited to provide a brief summary of our agriculture construction and international business.
This segments this morning.
On slide four is an overview of our domestic agriculture segment.
The business climate for farm equipment is extremely healthy primarily due to the continued high prices for AG commodities.
As a result, the strong financial performance, we delivered in Q1.
And you'd into our second quarter.
While we are managing through the supply side challenges and yield reducing drought conditions in some of our markets.
Demand for new and used equipment is very strong.
The existing age equipment fleets are not only requiring parts and service repairs are being upgraded to models.
Newer technology.
Meanwhile, section 179 tax deductions are further supporting demand as customers look to offset higher net farm income.
We currently have customer commitments for the majority of our new machinery orders being shipped in Q3 and Q4 of FY 'twenty two.
And we're also finishing pre sell customer orders for production slots into the first half of FY 'twenty three.
There is currently a very strong demand for used equipment, which is reflected in our improved inventory turns and margins.
Finally, the most recent USDA was the report.
Models was bullish for commodity prices and provides us incremental confidence in raising our full year fiscal 'twenty two modeling assumptions.
Turning to slide five you will see an overview of our domestic construction segment.
Similar to AG, we saw continuation of the positive Q1.
One results into our second quarter.
We are seeing increased construction activity in most of our markets.
Driven by the reopening of the economy low interest rates, new housing starts farmer and rancher purchases improved oil prices and pending final infrastructure legislation.
With that said.
We are most excited about our operating improvements above.
About C&I operating improvements translate into significantly enhanced pre tax profitability.
On slide six we have an overview of our international segment, which represents our business within the countries of Bulgaria, Germany, Romania, Serbia and Ukraine.
Our European customers are benefiting from the higher global commodity prices along with excellent yields from early season grain crops.
Adequate moisture and favorable growing conditions should produce average to above average yields in the late season row crops.
These favorable yields along with higher prices.
Contributing to an improved European business climate.
The Covid situation is improving we are experiencing residual supply side issues, causing interruptions and delayed deliveries.
We continue to focus on aftermarket parts and service business in Europe, and our European customers are also adopting to equipment.
Our latest precision technology.
Before I turn the call over to Mark I want to sincerely. Thank our employees, both domestically and abroad for an impressive quarter. As we look ahead to the busy fall season, we are extremely thankful for and proud of our team that continues to go above and beyond in supporting our customers.
With that I will turn the call over to Marc to review our financial results in more detail.
Thanks, Brian.
Turning to slide seven total revenue increased 24, 4% to $377.6 million for the second quarter of fiscal 2020.
With you.
Our equipment business increased 34, 6% versus prior year.
Which was driven which was driven by each of our segments with notable 40, 40, plus 40% plus growth coming from both our agriculture and international businesses.
Our parts.
Parts and service business generated consistent gross growth once again.
Increasing six 3% and 6% respectively compared to the prior year period.
Rental and other revenue decreased 12, 9% versus prior year due to a decrease in inventory rentals.
<unk>, a smaller rental fleet and our current construction footprint and a reduced fleet due to the January 2021 divestiture of our construction stores in Arizona.
The dollar utilization of our construction segment rental fleet improved nicely to 26 six.
6% for the current quarter compared to 22, 2% in the same period last year.
The improved utilization helped increase margins in this revenue category.
On slide eight our gross profit for the quarter increased 19, 7% to 70.
<unk> $5 million.
Our gross profit margin decreased by 80 basis points due to a significant increase in equipment revenue mix.
Compared to the higher margin parts service and rental revenue.
Somewhat offsetting the impact of the mix shift on margins were increased.
Creased equipment margins, which were supported by favorable end markets, coupled with our healthy inventory.
Operating expenses increased $4 million versus the prior year to $57.1 million for the second quarter of fiscal 2022.
This increase was more than offset by revenue growth and led to 240 basis points of operating expense leverage compared to the prior year reducing.
Reducing our operating expenses to 15, 1% as a percentage of revenue compared to 17, 5% in the prior year period.
In the current quarter, we recognized $1.5 million of impairment costs, which were related to the impairment of the remaining intangible and some fixed assets of our Germany reporting unit within our international segment.
Floorplan and other interest expense decreased 20.
One 9% to $1.5 million in the second quarter of fiscal 2022 compared to the same quarter last year due to lower borrowings.
In the second quarter of fiscal 2022, our adjusted net income increased 97, 5% to 13 million.
The adjusted second quarter fiscal 2022, net income excludes the $1.5 million asset impairment I mentioned a moment ago.
$278000 income tax valuation allowance and a 53000 dollar Ukraine remeasurement gain.
<unk>, while the prior eight prior year excluded approximately $200000 of expenses net of taxes.
Our adjusted earnings per diluted share for the quarter was a record 57.
And nearly double last year's 29 performance.
Adjusted EBITDA.
Increased 49, 1% to $23.5 million compared to $15.8 million in the second quarter of last year.
You can find a reconciliation of adjusted net income adjusted income per diluted share and adjusted EBITDA to their most comparable GAAP amounts in the.
Appendix to the slide presentation.
On slide nine Youll see an overview of our segment results for the second quarter of fiscal <unk> fiscal year 2022.
Agriculture.
Segment sales increased 29, 8% to $219.4 million.
Helping to drive a significant increase in segment adjusted pre tax income of 78, 7% to $12.1 million.
Segment pretax income was further supported by the improved equipment margins I referenced earlier as well as lower Floorplan interest expense.
Turning to our construction segment.
Revenue increased four 1% to $80.9 million compared to the prior year period. Despite the January divestiture of two stores in Arizona.
On a same store basis, excluding those stores' revenues were up $14.
1% for the quarter.
We are pleased with the continued improvement in segment adjusted pre tax income, which doubled to $2.8 million compared to $1.4 million in the prior year period.
Our international segment also benefited from the improved agriculture market.
With revenue growth of 36, 4% to $77.3 million.
As Brian discussed in his in his remarks the.
Improved growing conditions and strong global AG fundamentals have generated heightened equipment sales activity across our international footprint.
The combination of strong equipment sales and margins coupled with nice double digit growth in our higher margin parts and service businesses yielded at $2.4 million improvement in adjusted pre tax income to a positive $1.9 million.
Turning to slide 10.
You will see our first six month results.
Total revenue increased 22, 3% compared to the same period last year.
Year to date equipment sales increased 33%.
<unk> increased eight 4% service revenue increase.
Seven, 1% and rental and other revenue decreased 21, 9%.
The six month dollar utilization of our dedicated rental fleet improved to 22, 9% compared to 25% in the same period last year.
Turning to slide.
N.
Our gross profit for the first six months was $146 million or 26% increase compared to the same period last year.
Our gross profit margin was relatively flat with a 20 basis point decrease versus prior year at 19, 5%.
<unk> 11 for the first six months of fiscal 2022.
The impact that revenue mix is having on the overall gross profit margins is largely being offset by higher equipment margins.
Our operating expenses increased by seven $4 million or 7%.
<unk> for the first six months of fiscal 2022 to $113.5 million.
This increase was more than offset by revenue growth and led to 220 basis points of operating expense leverage compared to the prior year.
Reducing our operating expenses as a percentage.
<unk> revenue to 15, 1%.
Impairment expenses increased from $216000 in the prior year to $1.5 million in the current six month period.
Floorplan and other interest expense decreased 25, 2%.
To $3 million in the first six months, primarily due to overall lower borrowings.
Our adjusted diluted earnings per share increased 136% to $1 four for the first six months of fiscal 2022 compared to <unk> 44 in the prior year period.
Our six month adjusted EBITDA.
Increased 61, 3% to $43.3 million compared to $26.9 million in the prior year.
On slide 12, we provide our segment overview for the six month period.
Overall.
Our adjusted pretax income was $36 million for the first six months of fiscal 2022 compared to $13.8 million in the same period last year.
This 122, 3% increase was a result of strong performance in our AG segment that was further supported.
Sorted by improved results from both our construction and international segments.
On slide 13, we provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2022.
We had cash of $66 million as of July 31, 2000.
'twenty one.
Our equipment inventory at the end of the second quarter was $336 million a decrease of $3 million from January 31.2021.
Reflecting the net effect of a $31 million increase in new equipment that was more than offset by a $34 million decrease in.
And used equipment.
Strong sales and lower inventory levels continue to drive equipment inventory turns which increased in the second quarter to $2 seven versus one six in the prior year period.
I will provide a little more color on our inventory on the next slide.
Our rental fleet assets at the end of the second quarter increased slightly to $83 million compared to $78 million at the end of fiscal 2021.
We still anticipate our fleet size to be around $80 million at the end of fiscal 2022.
As of July.
<unk> 31 in 2021, we had $186 million of outstanding Floorplan payables on $771 million of total floor plan lines of credit, which leaves us with considerable capacity in our credit lines to handle our equipment financing needs.
Our adjusted debt to tangible.
Tangible net worth ratio was a strong eight compared to $1 two in the prior year period.
It 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.
Are reflected in the size of the blue and Red bars on this slide respectively.
As we've discussed during the past couple of quarters.
Current resurgence in AG commodities increased customer demand and a tighter industry supply of it.
Equipment has helped us generate a higher inventory turn of two 7% in the current quarter.
We believe our equipment orders delivery schedule.
Level of pre sales and used equipment inventory have us well positioned to meet our revised revenue modeling assumptions for fiscal year 2020.
<unk> 22.
Given current inventory levels and stronger end markets and each of our segments.
We expect our inventory turn will continue to increase through the second half of fiscal year 2022, and is on pace to exceed our long term goal of a three time turn.
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.
Ended the second quarter at 44, 3%.
Slide 15 provides an overview of our cash flows from operating activities for the first six months of fiscal.
Fiscal 2022.
The GAAP reported cash flow provided by operating activities for the period was $28.6 million compared to $13 million in the comparable prior year period.
As part of our adjusted cash flow provided by operating activities. We include all our equipment.
Inventory financing, including non manufacturer floorplan activity and.
And adjust our cash flow to reflect a constant equity in our equipment inventory.
Allowing us to evaluate operating cash flows exclusive of changes in equipment inventory financing decisions.
After applying these adjustments our adjusted.
Cash used by.
Operating activities was $19 million for the six month period ended July 31.2021.
Compared to adjusted cash provided by operating activities of $16.1 million for the same period last year.
Slide 16 shows.
Our updated fiscal 2022 annual modeling assumptions.
Each of our business segments performed well in our second quarter with particular strength in our agriculture and international segments.
Given these solid results and increased expectations for the back half of our fiscal year, we are raising our assumptions.
<unk> for these two segments and are increasing our diluted earnings per share range.
For the agriculture segment.
We are increasing our revenue growth assumption, two up 18% to 23% from up 15% to 20%.
The fiscal 2022 growth range.
<unk> includes a full year revenue contribution from our horizon West acquisition that closed in May 2020.
For the construction segment, we are maintaining our revenue assumption of up 2% to 7%.
As a reminder, this assumption includes the divestment of our two construction equipment.
Shipment stores in 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 modeling assumption equates to the same store sales range of approximately up 10% to 15%.
For.
The International segment, we are increasing our revenue assumption to up 27% to 32% from up 17% to 22%.
The strong year to date performance combined with the good crop conditions in our international footprint and strong global AG commodity prices led.
Led to this significant increase in expectations.
From an earnings per share perspective, we are increasing our diluted earnings per share assumption by 35 cents at the midpoint to a new range of $2 to $2.20.
For fiscal 2022.
As a reminder, this.
This range includes all ERP implementation expenses.
This concludes our prepared remarks, operator, we are now ready for the question and answer session of our call.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone.
Also in 2000.
So long as you keep that your line is in the queue.
Press Star two if he would 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.
Please while we poll for questions.
Yeah.
Our first question is from Rick Nelson with Stephens.
Please proceed.
Good morning.
Nice quarter.
To follow up on.
Equipment margins.
Sequentially.
And year over at Europe, She could speak.
What's happening with the new.
Ooh.
Our site as well as the used.
Great.
It.
<unk> build trend too.
Guidance.
In terms of margin.
Yes, good morning.
Mark here.
Equipment margins continue to be a good story for us no doubt.
A lot of factors kind of driving the increased margins obviously.
The strong demand and tight supply environment, particularly that we're seeing.
I think some of the things that may be impacting the first quarter and second quarter is a little bit more some of the.
<unk>.
<unk> items.
Affecting it used used sales.
<unk> tend to have a higher equipment margin to them.
Continue to be strong and healthy.
<unk> for us.
You see the international numbers as well international and Thats, primarily new on the international side, but.
But thats also.
Outpacing.
Your growth rate on more so than the domestic side on the equipment sales that helping from.
From a mix standpoint, as well to both of those kind of carrying higher margins help lift that first and second quarter even.
Higher.
Bind with that overall good.
Good, particularly the AG environment.
I think the other thing maybe just to mention here is the health of our inventory combined with good <unk>.
Good industry backdrop.
It has also resulted in a very historic low.
Lower of cost or market adjustments that.
When we review that on a monthly basis, so that clean inventory has really.
Helped and should continue to help drive those.
Margins going forward, so as we look going forward and kind of what we're seeing and what we're putting into the.
To a modeling assumption, it's not going.
We had as high as what we saw in the first and second quarter.
Of those mixed.
Mix items.
The rest of those should continue that I mentioned, but the mix, we anticipate changing in the mix, particularly in the fourth quarter, where we have a higher level of new and some bigger ticket items.
We will likely see some.
Lower margins as well so I think we were at like 11.711 nine here in Q1, Q2 and backing down kind of that mid 11 range. At 11.411, five is probably where we see it for the year, which is still much better than the 10.10, three much improved from the prior year.
To be quite 10 three.
Yes.
Okay.
Great color.
But also want to follow up on them.
Victoria.
Do you think your size and scale.
Helping you.
Take care of them.
At your competitors or are more challenged that way.
Hi, Rick this is Bryan.
Hi.
You know I think on it in a different way our size and scale helps us.
Keep the inventory flowing in between our stores.
Which.
That helps.
One market has received more rain than another you know it has a little more demand we can.
Transfer that product around.
So in.
In that Avenue, our size and scale really benefits us as well as just a nice wide selection of used and lease returns.
But then probably.
The biggest benefit has been.
Some of the changes we've done in our processes.
Around our order planning and focus on more pre sell what the customers are better planning with our customers.
More.
Energy around forecasting.
And getting those orders right. So.
You know that.
It's a pretty long lead times right now as you know Rick so.
A lot of.
Time, and energy goes into that with both our team here at our shared resource center and in the field.
So, it's Oh boy was well like to try.
Finally ask about the acquisition environment, what you're seeing there are there are active discussions.
Yeah.
Are willing sellers.
Sellers are these COVID-19 just given the strength of the market.
De risked we have a number of acquisition targets in the pipeline and you know we've got the balance sheet.
<unk> some serious acquisitions Olson.
You know add on a little bit you know not the P. P P loans and loan forgiveness is behind most dealers.
I think the biggest motivator and all of these potential increases.
Capital gains taxes.
Having a lot of dealer principals theyre exploring potential exit strategies.
At the same time, we see Oems encourage the consolidation of owner groups.
Those principles continue to age and the and the dealerships the future are going to need a higher level of capital and people resources to support that.
To call it sophisticated equipment used in todays primary operations. So so overall, we're pretty optimistic about what is in front of US right. We think we can get through the pipeline here.
Thanks for that that's well and good luck as we push forward.
Thanks, Rick.
Our next question is from Mig <unk> with Baird. Please proceed.
Thank you good morning, guys.
So I guess my my first question.
Can you remind us.
What what the.
ERP drag is.
In your fiscal year 'twenty, two here and as we think about next year.
We should be sort of baking into our assumptions were for ERP.
Yeah, good morning, Mig as far as expenses for the.
A year.
This year I think we've kind of mentioned in the past around $4.5 million is what we have in there for the for the year.
I actually had it might come in a little bit lower this year than in some of this is going to get pushed out into next year with the with the go live.
Anticipate anticipated to be in.
In next year's results, so there'll be a little bit more ramping up of expenses.
To support the go live and then subsequent to the go live to support that.
To support our team out there as well so probably.
Closer to that $4 million this year and up.
Call It maybe four and a half next year.
Okay, So $4.5 million for next year.
Alright.
Then.
And I'm curious.
You have updated obviously your modeling assumptions.
The changes to Europe.
Your segment revenue.
Our clear I'm just wondering if there is anything else in terms of.
For instance, how you thought about margin have you have you adjusted that at all.
On equipment gross margins are there any other components like SG&A.
For instance that would've been adjusted relative to Europe to your prior expectations can you can you give us some context there.
Yes, I think.
First of all with the equipment margin.
It has been more favorable to us than what we initially anticipated.
So in the last.
Two increases that we have here in our guidance range we did.
Tweak that up I kind of mentioned right now we're at kind of that mid 11.
<unk> and equipment margin. So that is an increase from what we expected before as far as expenses goes we usually like to talk.
About that in terms of revenue so as a percent of revenue and with the with the revenue continuing to increase we should be able to continue to obtain some of that operating leverage that we get with that.
Initially I think we are.
I think last time, we were talking around 15.
In one I think with these numbers if we can hit these ranges.
In these modeling assumptions for each of our segments it'll.
It'll be around call. It that 14, 5%, we should be able to do so better than what we've seen year to date with some of that year end.
Equipment, selling and particularly with.
Phil.
Going up in revenue a decent amount your expectation there as they've done well for the first half of the year and we continue to see that happening or we would expect to see that happen in the back half that helps because their operating model over there is a little bit more fixed than what the domestic.
<unk> model is on that less variable expenses, some more of it pushing to the bottomline over there. So so around that 14 five call. It for the year is what we're seeing today.
Yes.
Thank you for that color.
No.
I'm wondering and this is I guess to some extent grows too.
The prior line of questioning as well.
We're thinking about equipment gross margins specifically.
Are there some sort of limiting factors to this to this metric other than mix I mean, you called out mix, but.
If say used equipment prices remained upward bias.
Yeah.
Obviously demand for new equipment is strong.
Is it feasible that debt.
Equipment gross margins can remain.
On an upward trajectory <unk> been relative to your updated expectation.
Well I think it's I think it's.
Possible I would say some of the additional lift that we saw in the current quarter quite frankly, I mentioned, the lower of cost or market.
Those adjustments are at historic lows they are very low.
It's hard to imagine those.
Providing additional lift.
As we move forward.
But if the used market.
Gets even tighter out there.
Certainly our used inventory is down we will replenish that as some of the new <unk>.
That new gets out in the second half of the year.
But that could.
Pushed some of that that could be a positive.
Is there as well with <unk>.
Less.
Supply out there on that side and that's been a big.
Positive story for US. This year is the level of used sales that we've had and the margins on them.
Mig.
So it is on the new machine is still very highly competitive marketplace.
It's out there so we need to be cognizant of that but.
Continuing with our strategy of driving that the parts and service aftermarket business to continue with that.
That's a positive to that margin number so.
Sure.
Alright respectful of that.
And.
My last question.
I'm curious if you can maybe give us a little bit of context on your on your pre selling activity.
Yeah.
How big of a role is pre selling playing these days and driving your business and related to this.
And then Michael your OEM recently reported earnings they were commenting on the order books.
There are quite strong.
Yes, if I recall correctly your backlog was more than buybacks.
Relative to the prior year and trapped or tractors for exiting combine.
<unk>.
So.
I'm curious a.
How big of a business is this for you.
What are you seeing in terms of.
Pre sales relative to the prior year and then lastly, maybe mark.
Yes.
What does that mean as we're thinking about the next fiscal year.
Okay.
For AG revenue. Thank you.
Yes, Mike this is Brian.
Just to talk to how important is it for us.
Extremely beneficial for us as the dealer and for the OEM and for the customer really.
<unk> or be able to plan our business.
Just a lot of.
Residual benefits that come along with us from the impact that it has to our inventory turns.
Helping with our forecasting and planning obviously.
Reducing our interest carrying cost.
Allowing us to get the right.
Opex for the customer and get it delivered at the right time and have them.
Get the best deal plan their business with their bank or their town.
Just.
Really helps us manage our business overall.
In line with all of those benefits, we have a lot of initiatives.
<unk> internally here to to grow that and continue to put more focus on that and in these type of times that becomes really critical because.
With the supply being so tight the limitations that the Oems have on the production with the benefits for them as well with pre sell those get priority.
<unk>.
Over all of their orders then also so just another reason, it's imperative that we drive that.
Not as easy and practice to do there are some challenge with it just because the typical historical model the grow of course like to plant their crop.
Crop.
And then care for the crop that take the crop off and then sit down with their accounts.
And.
Bankers in that November, especially December timeframe, and see how the year shaped up and then make their capital purchases. Accordingly, So we're really.
Shifting the dynamic there and really.
Asking the grower to.
<unk> mid year or before they've even got the crop in the ground.
To forecast out nine months, 10 months and and take a chance on that.
One of the benefits is.
Again these are big capital purchases, so a lot of planning goes into it.
Most of our growers nowadays are.
For the the long haul and so even if they don't quite get the crop they want or to cover. It. Obviously there is some backstops with some of the government.
Support programs.
And insurance and stuff that helps and then really it's a matter of just they shift that into the next year. So.
So again lots of benefits, it's not easy we continue to to really push for that though because of the all of those benefits for us and the customer and the OEM.
Well to go back to my question now how big is this business for you if I look at the AG segment.
What percentage of revenue there.
It was associated with equipment that was pre sold.
So what we're seeing so far this year Mig as it's climbing so a percent of our new sales that have been.
Been booked which obviously this would be on.
For both AG and CE, it's climbing up over that 40% now we're at just over 40% of our new sales are.
Under presale.
And that Hasnt coastal nicely.
Okay and then.
And in terms of your <unk>.
Inbound orders so the orders that you've taken I'm trying to triangulate back to what <unk> was talking about how are your inbound orders on pre sales for next year looking like at this point.
Yes, I don't know that.
I don't know that.
We've got any amounts on that that we are ready to share at this point I would say I think we mentioned in the last call. It is.
Earlier than usual that theyre starting to fill in those kind of those first second I think maybe some into the third.
Already.
But it's a little.
Because for us because we've been really pushing this and it's hard.
Don't want to speculate on the overall sales for next year based on some of these.
Early orders here for the pre sells into next year.
Yes.
Comfortable say mark that.
What we have to date.
It'll definitely is significantly higher again.
Alright, well I appreciate that good luck guys.
Yes.
Our next question is from Steve Dyer with Craig Hallum. Please proceed.
Okay.
Good morning, guys.
Just a couple that haven't been asked and answered already it sounds like you're fairly well booked into the first part of next year, but as the lack of rain in the drought across most of your footprint is really intensified over the last month or two have you seen or the conversations changing at all or.
As demand just given.
For next quarters in particular still really really strong.
Hey, good morning.
Yes.
In our footprint certainly the better growing conditions have been in Iowa and Nebraska.
And we definitely anticipate.
We have strong demand in those markets.
Certain areas in the Dakotas and Western Minnesota.
Have.
Definitely been more impacted by the drought, but we also have irrigation on.
Good chunk of that that offset some of that.
And we have received a little bit.
Of rain as of late so.
You just look at the big drivers of net farm income being <unk>.
<unk> price being one of the bigger ones and then yield and so yes.
The yields are certainly.
Impacted here a bit and we're not anticipating any bumper crop.
Crop by any means and a lot of our footprint, but certainly offset a lot by the higher commodity prices.
Really help as you look back to.
Corn and the other commodity prices here being.
Nearly double what they were last fall.
Okay.
And then just I know the cycle, where are we on the cycle of questions. Those are a tough one to answer but.
I guess as you look at it a couple of questions around that one do you still feel like most of your sales are just replacement from the long period for 5678 years.
Sort of low commodity prices.
Or are you starting to see farmers go on the offense a little bit just in terms of their purchases and then I guess secondly as.
As you look at sort of this cycle versus the last is there any structural reason.
Why you couldn't see similar revenue and earnings numbers.
Or even better I guess.
Previous cycles, I think maybe you have a few fewer locations, but how do you think about sort of how this can shape up if corn prices in a row crop prices stay strong for the next year or two years three years.
Yeah. So.
To the first part of your question Steve.
Again.
<unk>.
The.
The high commodity prices are really helping drive demand there, but then replacement demand just as you mentioned is.
Still a big factor so that's what we were.
It was really the main driver here for <unk>.
The last six seven years.
Along with technology. So those two are still big factors, but then now on top of that just again due to the commodity prices, especially we've got a lot of growers that.
Have much higher net farm income and can really then take advantage of the section 179.
<unk> benefits. So that's just adding on top of that demand, which I think is even with some of these.
Joe conditions really keeping that farmer sentiment up.
And then on the last half of your question you asked how it compares to the 2012 to 2000.
14 cycle.
A lot of similarities.
The commodity price levels are certainly very similar.
Thus the net farm income levels should be very similar assuming similar yields.
However, I think because some of the differences or the interest.
Interest rates are lower.
As Mark pointed out the used inventory levels are tighter.
For us, especially are healthier.
There is some carryover from the healthy government payments.
Growers got last year also overall the fleet is still older going into this cycle than the last.
And then just lastly internally on our end we spent several years, making a loss.
Lot of internal improvements here, which.
We feel very confident of position us better for this cycle. So.
So we're optimistic that there could be a lot of similarities there.
Steve just to give you some.
The numbers are kind of put it in perspective in 2013 from a U S industry, either 10700 <unk> sold.
And last year there were.
5000 tonne line sold so I think year to date topline industry numbers in U S are up 12%. So you take 5000 times, 12% Youre still way under what.
About half of what it was in 2013. So four wheel drive is similar to 2013. There were 60.904 will drive sort of the United States last year.
Just under 3000 so.
We'll definitely four days year to date or U S are up 30%, but even with that long just to get back to.
Teen numbers or there is a lot of room yet so.
I think some of this.
As the production schedules or eliminate a little bit from the supply side from some of the COVID-19 related stuff. So good definitely maybe extend this for a period of time, which would be pretty beneficial.
Great.
That's very helpful. Thanks, guys.
Okay.
Thank you.
We will take one more question from Larry de Maria with William Blair. Larry. Please proceed.
Hi, Thanks, good morning, everybody.
As far as the English noticed inventory shipments catching.
<unk> 20th Randy I think you are booked through the first half of next year.
Third quarter said, so curious what's pricing like.
Looking into next year, although the new models.
I believe your competitor set up 5% to eight on what I think youre hearing too so just curious what.
The presentation of <unk>.
Do you expect to be able to keep some portion of that is that flow through mostly two OEM partners.
Hi, Larry this is Brian.
Yes.
Similar price increases there amongst the Oems as they have similar supply side challenges.
Added freight costs.
Steel increases and so on.
Yes generally.
As you mentioned.
Pass through.
A lot of our margin improvement would be.
Things that mark referenced earlier to make a question.
Okay. Thanks.
And then.
That's the question.
Have you seen precision.
Obviously, the big driver, but trying to understand the impacts to the bottom line decision shales.
And are you making money from.
Because you didn't have embedded into the equipment, but are there other ways youre, making revenue precision.
And ultimately if it's okay.
<unk> Center, that's being built out or profit center aside from the embedded into the equipment sales and how might Raven impact. This for you guys. Thank you.
Yeah.
Yes, exactly so as we go forward besides.
The aftermarket sales.
A big one that's really out there today the retrofit.
Things like planters and sprayers Larry.
But then as we get into subscription based services here and continue to do more and more of that on.
On the data side machine health monitoring site maintenance side and so on it really does.
The telematics allows us to do a lot with.
Increasing grower uptime and.
Really.
Preventative maintenance.
And then.
Also just.
Providing.
The future.
Consulting.
So is it working with their their data to help them make better decisions on their farm.
So I think.
Few different streams are really from the.
The hardware.
The whole goods side coming right out of the factory things.
Things like auto steer and.
Harvest command.
Soil command aimed command on the on the sprayers.
And then the retrofit side after that and then the subscription side and then really the service.
The maintenance side of it as well.
Okay. Thank you.
Ladies and gentlemen, there are no further questions at this time I would like to turn the call back to David Meyer for closing remarks.
Alright, well. Thank you everybody for your time today your interest in paint machinery, and we look forward to updating you on our progress on our next.
Next call so have a good day.
This.
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