Q3 2025 Titan Machinery Inc Earnings Call
Greetings welcome to Titan Machinery, Inc. Third quarter fiscal 2025 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.
A reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Jeff Sonic of ICR. Thank you. Please go ahead.
Speaker Change: Oh, Thank you and welcome to Titan machinery third quarter fiscal 2025 earnings conference call on the call today from the company are Brian <unk>, President and CEO and Bill our CFO.
By now everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2024, which is also available on <unk> Investor Relations website.
Speaker Change: IR Dot Titan machinery dot com and.
Speaker Change: In addition, we are providing a supplemental presentation to accompany today's prepared remarks, along with the webcast and replay information all of which can be found on tightened investor relations website within the investor within the events and presentation section.
Speaker Change: We would 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.
Statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
These statements are based on management's current expectations and.
Current expectations and involve inherent risks and uncertainties, including those identified in the forward looking statements section of the earnings release and the risk factors section of Titans. Most recently filed annual report on Form 10-K. These risk factors contained a more detailed discussion of the factors that could cause actual.
Speaker Change: <unk> results to differ materially from those projected.
Speaker Change: Any forward statements.
Speaker Change: 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.
Speaker Change: Please note that during this call we may discuss non-GAAP financial measures, including results on an adjusted basis.
Speaker Change: We believe that the financial measures can facilitate a more complete analysis and greater transparency into Titans ongoing financial performance, particularly when comparing underlying reasons.
Speaker Change: Okay.
Speaker Change: We included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures.
Speaker Change: In today's release and supplemental presentation at the conclusion of our prepared remarks, we'll open the call to take your questions and with that I'd now like to introduce the company's President and CEO, Brian Smith. Please go ahead.
Brian Smith: Thank you, Jeff and good morning to everyone on the call.
Brian Smith: I'll start today by covering the current market environment, our priorities as we manage through this challenging market cycle and some commentary in each of our operating segments.
Brian Smith: Then I will pass the call to bowl for his financial review and incremental thoughts on our modeling assumptions for the remainder of the year.
Brian Smith: And the anticipated the industry continues to experience softer demand conditions, reflecting the combination of challenging agricultural fundamentals, which include lower net farm income due to the decline in commodity prices across key cash crops high input costs and the lagging effect from high.
Brian Smith: Your interest rates.
Brian Smith: Our domestic agriculture segment performance was generally in line with our expectations and the weaker demand environment played out as anticipated.
We continue to be highly focused on managing our inventory levels downward.
Brian Smith: We have made some early progress.
Brian Smith: But we are only just beginning to move the needle and still expect the majority of inventory reductions to be realized as we progressed through fiscal 2026.
Brian Smith: Nonetheless in the third quarter, we were able to decrease our total inventory by approximately $115 million.
This result was achieved through our aggressive strategy geared toward enhanced sales incentives to drive retail demand.
Brian Smith: As anticipated these proactive measures are compressing our equipment margins in the near term.
And margins could see further compression as we move through the first half of calendar 'twenty 25, depending on market conditions, and if we see the opportunity to move more quickly toward our target of equipment inventory levels.
Brian Smith: However, we believe these actions are critically important to lessen the impact that higher inventory and lower demand has on our financial performance and eventually will accelerate our return to a more normalized margin profile as the industry cycle progresses.
Brian Smith: Turning to our European operations in which we experienced more challenging conditions in the third quarter than previously anticipated.
Brian Smith: This is particularly true in Romania, where demand continued to weaken due to severe drought conditions, which have reduced some crop yields to the lowest levels in more than a decade.
Brian Smith: Bulgaria in Ukraine have demonstrated more resilience relative to Romania, but eastern Europe in general was soft and we continue to monitor these markets closely.
Brian Smith: In Australia, we experienced well below average rainfall and an early frost event during the critical growing season.
Brian Smith: This had a negative impact on yields and as a result, we anticipate a softening of demand through the fourth quarter relative to our prior expectations.
Brian Smith: Finally in our construction business our performance reflects a more normalized demand environment, which was consistent with our expectations.
Brian Smith: We achieved a 10% same store sales increase however, much of that is timing related and we still generally expect our construction business to finish the year flattish compared to the prior year.
Brian Smith: Looking further ahead, we remain optimistic on the segments outlook as a federal infrastructure Bill provides healthy healthy support for the industry over the long term while near term support is provided by improved equipment availability and new product introductions from our suppliers.
Brian Smith: As we navigate the current industry cycle. We believe it is important to highlight several key differences from the last downturn in the mid 20 tens that underscore why both the industry and our company are better positioned this time.
Brian Smith: At the industry level farmers entered this cycle with considerably healthier fundamentals.
Brian Smith: Stronger balance sheets, following multiple consecutive years of good profitability and increased land values, providing some buffer against current headwinds.
Brian Smith: Additionally, the North American fleet age continues to support replacement purchases and today's precision agriculture solutions are helping farmers achieve higher returns on their operations through greater productivity further supporting equipment investment.
Brian Smith: It is also encouraging that each of the major manufacturer or agricultural manufacturers had been lowering production levels to help right size inventory levels across the industry.
Brian Smith: At Titan, specifically, although we can't control the demand environment, we've made structural improvements that enhance our resilience.
The last downturn, we have had footprint optimization and other cost out restructuring efforts centralized inventory control execute on strategic M&A that helps leverage our scale and drive higher levels of profitable growth and we've doubled down on our customer care strategy, which has allowed us to build them.
Brian Smith: A more robust reoccurring revenue stream through our higher margin parts and service businesses.
The fruits of this important initiative can be seen in absorption levels that have increased over time, and we will continue to improve moving forward.
Brian Smith: We've also taken earlier and more decisive action on inventory management this cycle.
Brian Smith: As I covered a few minutes ago.
Brian Smith: Finally, we are also evaluating a variety of prudent measures as we worked through our budgeting process for fiscal 'twenty 'twenty six to navigate this industry cycle, while continuing to lean into our growth initiatives.
Brian Smith: In closing we are encouraged by the early progress we are making with our inventory reduction strategy to reach targeted levels as quickly as possible.
Brian Smith: We are confident that the structural improvements to our business combined with the decisive actions, we are taking position us well to navigate the cycle and a decidedly more efficient manner than in the past.
I want to sincerely, thank our employees for their dedication to supporting our customers. During these more challenging times.
Their efforts remain crucial to the success of our customer care strategy and our ability to do liver best in class service.
Brian Smith: With lessons learned from the previous cycle and are now stronger foundation, we are positioned well to deliver significant value to our shareholders over the long term.
With that I will turn the call over to Bo for his financial review.
Bo: Thanks, Brian Good morning, everyone.
Bo: Starting with our consolidated results for the fiscal 2025 third quarter total revenue was $679 $8 million a decrease of two 1% compared to the prior year period.
Bo: Underlying this performance was the same store sales decrease of 10.5% driven by lower demand for equipment purchases due to the challenging industry conditions that Brian reviewed.
Bo: This same store decline was largely offset by the acquisitions of O'connor's that we completed in October of 2023.
And Scott supply in January 2024.
Gross profit for the second quarter was $110 million and gross profit margin contracted by 360 basis points year over year to 16, 3% driven.
Speaker Change: Driven primarily by lower equipment margins, resulting from higher levels of inventory across the industry. It's me, Sir and our proactive initiatives on managing our inventory down to targeted levels.
Speaker Change: Underlying equipment gross margin percentage for our domestic AG business was 30 basis points below our expectations heading into the quarter with all other segments at or modestly above their respective equipment gross margin expectations.
Consistent with the guidance, we gave on our second quarter call. The midpoint of our updated guidance contemplates another 50 basis points of compression sequentially and our domestic AG equipment gross margins for the fourth quarter.
Speaker Change: Okay.
Speaker Change: Operating expenses were $98 $8 million for the third quarter of fiscal 2025 compared to $92 $1 million in the prior year period.
Speaker Change: The year over year increase of seven 2% was led by acquisitions that we've executed in the last 12 months.
Speaker Change: On this note I'd remind you that our o'connor's acquisition was consolidated into our operations in the fourth quarter last year.
Speaker Change: We'll provide a more consistent year over year comparison, when we report the upcoming quarter.
Floorplan and other interest expense was $14 $3 million.
As compared to $5 $5 million for the third quarter of fiscal 2024.
Speaker Change: Reflecting the impact of a higher level of interest bearing inventory, including the usage of existing floor plan capacity to finance the <unk> acquisition.
Speaker Change: It's also worth noting that the quarter had about $900000 of incremental interest expense that was previously classified as rent expense and this classification will continue moving forward as it is a direct result of the accounting for the purchase agreement of the 13 leased facilities that was executed and disclosed in the prior.
Laura.
Speaker Change: Net income for the third quarter of fiscal 2025 was $1 $7 million or seven cents per diluted share.
Speaker Change: And compares to last year's third quarter, net income of $32 million or $1 32 per diluted share.
Speaker Change: Okay.
Now turning to a brief overview of our segment results for the third quarter. Our agriculture segment realized a sales decrease of nine 3% to $482 million driven by a same store sales decline of 10, 8% in the third quarter.
Speaker Change: This decrease was partially offset by contributions from our acquisition of Scots supply in January 2024.
Speaker Change: Agriculture segment pretax income was $1 $9 million compared to $35 $1 million in the third quarter of the prior year.
Speaker Change: The year over year decrease in profitability reflects the softer retail demand environment due to lower farmer sentiment as well as higher levels of inventory, we are actively managing down to targeted levels.
Speaker Change: In our construction segment.
Speaker Change: Same store sales increased 10% to $85 $3 million from $77 $5 million in the prior year.
Speaker Change: And benefited from some favorable timing of equipment deliveries relative to the back half of the prior fiscal year.
Speaker Change: Overall, we continue to see year over year stability in this segment, however supply chain catch up has driven inventory levels higher for both the construction industry as a whole and for Titan.
Speaker Change: While this isn't as acute as what we are experiencing in our agricultural segment our inventory.
Speaker Change: Reduction strategy is nevertheless, weighing on equipment margin in this segment as well.
Speaker Change: Pretax loss for the segment was <unk> $9 million, which compares to pretax income of $4 $1 million in the third quarter of the prior year.
In our Europe segment sales decreased 26, 8% to $62 $4 million.
Speaker Change: Which included a same store sales decline of 27, 1%.
Speaker Change: And compares to a seven 5% same store sales decrease in the prior year.
This significant divergence exemplifies the severity of the drought conditions that Brian commented on in addition to the broader softness of the AG industry fundamentals.
Speaker Change: Pretax loss for the segment was $1 $2 million, which compares to pretax income of $5 $1 million in the third quarter of fiscal 'twenty 'twenty four.
Speaker Change: Yeah.
Speaker Change: And our Australia segment sales were $51 million and pretax loss was <unk> $3 million.
Speaker Change: In addition to weather related impacts this segment is facing very similar and customer dynamics as those we've discussed today across our enterprise.
Speaker Change: Now onto our balance sheet and inventory position.
We had cash of $23 million and an adjusted debt to tangible net worth ratio of one eight as of October 31 2024.
Speaker Change: Which is well below our bank covenant of three five times.
Speaker Change: Regarding inventory in the third quarter, we managed to reduce our equipment inventory by approximately $101 million sequentially to $1 $2 billion.
Speaker Change: Which is a good start and as expected were driven by decreases in our new inventory levels.
Speaker Change: As for the rest of the year, we anticipate making more progress on inventory reductions, but there are a few offsetting variables as well.
Speaker Change: We have inventory order for Q under Liberty to customers, some of which will be invoiced far before the end of our fiscal year.
Speaker Change: And as I discussed previously.
Speaker Change: Our used equipment will grow through the end of the fiscal year as we take trade ins on our Q4 new equipment deliveries.
Speaker Change: As I mentioned during our last quarterly update we anticipate that our inventory reduction will evolve in the coming quarters and a shift to a more significant reduction I've used equipment as we get into next fiscal year.
Speaker Change: This dynamic hasn't changed and we are on track to realize more substantial decreases in fiscal 2026.
Speaker Change: Toward our goal of reducing equipment inventory by approximately $400 million from the $1 3 billion dollar peak at the end of the second quarter.
Speaker Change: With that I'll finish by reviewing our updated fiscal 2025 full year guidance.
Speaker Change: Relative to our prior expectations, our revisions are limited to the Europe, and Australia segments, which we are lowering our outlook given some of the isolated challenges those markets are facing.
Speaker Change: Following the previously discussed weather related impacts.
Speaker Change: For the Europe segment, our updated assumption is for revenue to be down 20% to 25%.
Speaker Change: As compared to down 12% to 17% previously.
Speaker Change: And for the Australia segment.
Speaker Change: We expect fiscal 2025 revenue to be in the range of $220 million to $230 million.
Speaker Change: As compared to a range of $230 million.
Speaker Change: $250 million previously.
Speaker Change: Each of these segment assumptions reflect the more challenging environment, we're facing.
Speaker Change: And Cascade down to our revised expectations for fiscal 2025 consolidated adjusted diluted earnings per share.
We now expect full year adjusted EPS to be approximately breakeven at the midpoint of our updated range that calls for a loss of 25 per share.
Speaker Change: So earnings 25 cents per share.
Speaker Change: As a reminder, our adjusted figure excludes the 36 noncash impact of the salaries backed financing expense recognized in the second quarter.
Speaker Change: More broadly our base assumptions remain intact, we continue to expect growth in our service business in the high single digit range for the full fiscal year.
Speaker Change: Which speaks to progress with our ongoing customer care strategy.
Speaker Change: From a gross margin perspective, we remain committed to improving our inventory position, which provides the basis for our consolidated equipment margins to compress further in the fourth quarter.
Speaker Change: We anticipate equipment margin compression will persist through fiscal 2026, as we worked through our inventory reduction initiatives and.
Speaker Change: And we will provide more guidance on what to expect for next year.
Speaker Change: Fourth quarter earnings call in March.
Speaker Change: While our focus on inventory reduction is impacting short term performance.
Speaker Change: We believe our aggressive approach to managing inventory will help accelerate our return to normalized profitability levels.
Speaker Change: Regarding operating expenses, given the revised sales expectations, our guidance implies full year operating expense to be about 14, 6% of sales.
Speaker Change: Our assumption for other income expense, which includes floor plan interest expense.
Other interest expense and interest and other income and expense.
Speaker Change: Remains consistent with prior guidance and we expect to finish the year at approximately $53 million of expense.
Speaker Change: It will take a more substantial decrease in inventory as we progress through next fiscal year before we begin to see more normalized levels of floor plan interest expense.
Speaker Change: The third quarter confirmed many of our forecast assumptions in terms of market conditions, and what it takes to reduce inventory levels and a softer retail demand environment.
Speaker Change: We remain convinced in our approach through this down cycle, what's prioritizes these inventory reduction initiatives.
Speaker Change: While driving growth with our customer care strategy and that is what we're focused on delivering.
Speaker Change: This concludes our prepared comments operator, we are now ready for the question and answer session of our call.
Speaker Change: Thank you if he would 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 he would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before.
Speaker Change: Pressing this dark he is.
Speaker Change: One moment, while we poll for questions.
Speaker Change: Our first question is from Alex Rygiel with B Riley Securities. Please proceed.
Alex Rygiel: Thank you and good morning, gentlemen.
Speaker Change: Couple of quick questions here have you seen have you seen farmer sentiment change post the election in early November.
Oh good morning, Alex.
Speaker Change: Yeah, I think you know just primarily with any election, just the certainty around it being <unk>.
Speaker Change: Completed now regardless of who the winner is you know as provided more certainty for them in and allowed them to plan their business better so.
Speaker Change: Some improvement around that.
Quite a bit of uncertainty around what will happen with tariffs, so well be watching closely to see how that plays out.
Speaker Change: Also if you recall back the last time President Trump was in office.
And and there was some retaliatory impacts from the tariffs that hit on the commodity prices and you know he's subsidized.
Speaker Change: And in the form of payments to the growers, which really you know in the end played out.
Speaker Change: Quite well for.
Speaker Change: Overall for the growers and for the equipment dealers and so.
Speaker Change: Certainly you know if it if it played out again that way.
Speaker Change: That would be good but.
Speaker Change: I think that that's the main uncertainty you know also.
Speaker Change: Some things that our customers have talked about regarding some of the potential.
Tax.
Speaker Change: Things associated with tax cuts and jobs Act reinstatement of the 100% bonus depreciation would be the the biggest one and there very much.
Speaker Change: Hopeful and looking forward to the reinstatement of of that so overall, Alex I would say positive sentiment across the generally speaking for our customers.
Speaker Change: That's helpful. And then what is your sort of target days of inventory that you're looking for.
Speaker Change: Yeah. So generally what we're trying to achieve over time as get to about a two and a half times turn on our inventory give or take and certainly that'll.
Speaker Change: Flex a bit prior to different points in the cycle, but on average across new and used about two and a half times turn.
Speaker Change: That's not something that we've achieved and sustained over a long period of time historically.
Although in recent years, we've certainly been well above that in the mid threes.
Speaker Change: But as we look at the efficiency of our footprint and the centralization of our inventory control. We can we believe we can continue to drive higher returns than we had historically.
Speaker Change: And is that a target you think his insight in fiscal 'twenty, six or does that stretch into 'twenty seven.
Speaker Change: Yeah, I think that just the realities of calculating your turns if we're starting the year with a big objective on inventory reductions you know mathematically, we're not going to get there for turns in FY 'twenty six but the objective when we talk about targeted levels.
Speaker Change: Is to end the year such that our that is the type of returns we can achieve in fiscal 2027.
Speaker Change: Very helpful. Thank you very much.
Speaker Change: Our next question is from Ben <unk> with Lake Street Capital markets. Please proceed.
Alright, Thanks for taking my questions first of its kind of a follow up on the kind of farmer selling my question that you just addressed I'm wondering if you can elaborate a bit on this dynamic.
Speaker Change: In that you know are you seeing.
Speaker Change: You know kind of any tangible effect of improved farmer sentiment you know in the form of like you know greater foot traffic to your.
Speaker Change: To your stores.
Speaker Change: Any kind of early indications of of a renewed enthusiasm for equipment purchases or is this sentiment more just kind of a reflect more seeing just an overall tone without any tangible benefits as of yet.
Speaker Change: Sure I think many of them are looking at our near term and mid term here in the near term. We definitely are seeing some more positive sentiment or a brief uptick here and an increase in foot traffic as you mentioned generally because yields.
Speaker Change: Speaking across the U S footprint came in better than expected.
Speaker Change: Again, it wasn't what they call a bin Buster or anything but was better than expected. So.
Speaker Change: So if you look at through the growing season. They spent all you're planning on lower yields and that pleasantly surprised I think it really speaks to the genetics of the of the seed nowadays and and so that's led to.
Speaker Change: Some near term positivity that.
Speaker Change: We are going after hard here as part of our inventory reduction.
Speaker Change: In Q4, and then as you look a little bit longer term, we still have a.
Speaker Change: Reduced commodity prices.
Speaker Change: The increase sorry elevated input costs are continuing to persist, although easing a bit interest rates are still much higher than they were the last 20 years, even though theres been a little relief there for them.
Speaker Change: So a little bit of bright spots, there, but again still looking challenging for next year, especially as you know there does not look to be.
Speaker Change: A real increase in commodity prices on the horizon anytime soon so that is certainly the biggest factor that that both us and our growers will be watching in it and so that's U S. Based Europe as we talked about was was quite impacted by drought and weather conditions.
Speaker Change: So sentiment is still tough there, Romania, which is our biggest segment over there it has been.
Speaker Change: There have been some government funds now that have been coming into play will continue to watch how that plays out and then in Australia not only.
Speaker Change: They had the drought impact alright.
Speaker Change: Drier conditions, but also.
Speaker Change: The Frost event there so.
Speaker Change: That's been quite impacted they're still in harvest in Australia. So again, we'll see how that plays out but are they growing season rainfall in our western branches ended up being in the bottom 16% of historical years, our eastern region.
Fared better and so you know overall, we're looking at what we believe to be below average slightly below average yields.
Speaker Change: So again sentiments tougher in Australia, and Europe, a little bit of near term positivity in the U S. Here, but farmers are definitely concerned about next year as well.
Unless we see something change on the horizon with commodity prices.
Speaker Change: Very good that's helpful.
Speaker Change: One more for me and I'll jump back in queue.
Speaker Change: Prepared remarks, you guys talked about sales incentives on a that youre pushing pretty hard I'm wondering if you can somehow kind of break down the year over year performance or sequential margin decline some some some way or.
Speaker Change: Just kind of general supply demand versus accelerated our movement driven by your your initiatives and you know regarding sales.
Speaker Change: Yeah. That's that's a good question, it's pretty hard to give you an exact number on that I mean, I think just overall I'll take the opportunity to talk overall on margins here.
Speaker Change: As we talked about at the end of the second quarter back half of the year, we were forecasting to get in those historical lows in that 16, and 17 period. So those are loans that we had seen before in a different cycle that we said was more challenging not having quite the aggressive posture that we have today, we're in a better cycle relatively speaking and we're wanting to ask.
Speaker Change: Celebrate there so still getting down to that level.
Speaker Change: To exactly split how much is the acceleration versus what it would be if we just let this thing play out.
Speaker Change: I can't give you an exact number on that I mean, certainly it would be higher than there. So we've talked about and this is domestic AD for you we've talked about how longer term equipment margins for domestic and about 10%.
Speaker Change: And the third and fourth quarter here, we were talking in the six 5% range.
You know if we had healthier inventory levels are probably north of that 7%, but certainly south of the 10 that we would expect on average through a cycle.
Yeah, I think Ben as you know.
Speaker Change: Both just hit it well there that that's the easiest way to think of it as as he described look at the Delta between our margins right now than our historical average margins and that'll get you close and then they the Delta there is primarily attributable.
Speaker Change: Attributable to the decrease in used equipment values combined with our acceleration and as he said it.
Speaker Change: It's quite detailed to dive out exactly.
Speaker Change: Which is.
Speaker Change: From the lower used equipment values in which is due to the acceleration, but it those are.
Speaker Change: The main two factors that comprise that delta.
Speaker Change: Yeah, no very good and certainly related so I understand.
Speaker Change: Very helpful context, I. Appreciate you guys, taking my questions. Good luck here the rest of your fiscal year I'll get back in queue.
Speaker Change: Thanks Ben.
Speaker Change: Our next question is from Mig <unk> with Baird. Please proceed.
Speaker Change: Good morning. Thank you so just a clarification here.
Speaker Change: In terms of how you think about inventories in the fourth quarter.
Speaker Change: Hmm.
Speaker Change: Should we expect another decline in Q4 or is that all something that's going to happen in fiscal 'twenty six and related to this when you look at your inventory underneath reductions can you comment at all about what's happening in Europe, Australia versus North America is this all sort of a north American destock or do you have some some work.
Speaker Change: Do you in your other geographies as well.
Speaker Change: Yeah, certainly to start with by geography, I would say overall, Australia is in really good shape and not much work to do there certainly.
Speaker Change: Certainly probably a little but not a whole lot from a Europe perspective, we do have some work to do there are dollars wise, obviously significantly less than on the U S side, but.
Speaker Change: But in terms of where we are today versus where we want to go.
I Pride prescribe about 70 million there are in Europe, the rest of it being on the U S side.
Speaker Change: We are we obviously made about $100 million decrease it was all on new and that was all domestic in the third quarter are you.
Speaker Change: You asked if we expect to see another decrease in the fourth quarter, Yeah and I do.
Speaker Change: It is simply stating that Theres a couple of moving factors. There, we'll certainly continue to see sell through of what we have.
Speaker Change: As we have some pre sales are getting invoiced to us by the end of the quarter that will partially offset that and then some growth in use will partially offset that but we will see another step in the right direction, which will put us a little ahead of where we were you know prescribing to be as we sat here on our second quarter call and said, we'd be down about 100 million so will be incrementally better.
Speaker Change: Other than that and poised to continue to accelerate this thing as we worked through next fiscal year.
Speaker Change: Jasmine between the new and used mix relatively speaking right I mean, the U S is where they used equipment dynamic exists Oh, we don't do a lot of used equipment sales in Europe, so that would be from a new equipment inventory perspective, so yeah, I think I've answered everything down.
Yeah, No that's that's very helpful.
Speaker Change:
Speaker Change: You know the dynamic on margins.
Speaker Change: Okay.
Speaker Change: At least to me in the third quarter your equipment margins were maybe a little bit better than what I anticipated considering the fact that you did take inventories down and we all kind of know the pressure on used equipment prices.
Speaker Change: Can you put a finer point on margins going forward.
Speaker Change: Can you hold this call it 7% level.
Should we think something something less than that.
Speaker Change: And related to this.
Speaker Change: Is there risk that on the used equipment portion of your inventory.
Speaker Change: That we could be seeing some kind of a more significant write down are at a point in time in early 'twenty six physical things like.
Speaker Change: Yes, I'll start with a little clarity on margins you mentioned, the 7% I referenced back to Ben's question right now like on print right AG domestic AG equipment margins in Q3 were about five 9% and our midpoint of our guidance implies about five 4% for the fourth quarter, which is right in line with.
That six 5%, we talked about from those historical lows.
Speaker Change: As we are not providing guidance today, but as we projected FY 'twenty six we were basically trying to say that we expect these similar levels in that 5% range in fiscal 'twenty six perhaps through the full year will finished sharpening our pencils and give you a full outlook on that in March.
Speaker Change: You know that potentially it could be a little south of that in the first half of the year and north of that in the back half of the year, but directionally speaking kind of in line, probably with what we're seeing in the fourth quarter.
Speaker Change: The difference between how we manage inventory and particularly used inventory today versus the prior cycle kind of gets at the heart of your last question and we're consistently continuously I should say are looking at it and and revising our equipment on the books down to market pricing, we didn't have that same exam.
Our consistent dynamic in the prior cycle and you did see a larger onetime write down event. So given the nature of what we're doing here, we've really been seeing that play out through this year and that is reflected in the margins. So we're in a much better position there in terms of where ramp versus market.
Speaker Change: In terms of continuing to be aggressive and actually trying to get incremental buyers off the sidelines.
Speaker Change: Why do we talk about additional sales incentives and actually even selling below some of that pricing.
Speaker Change: For us it's a matter of gauging can we get incremental buyers off the sidelines and at what price point and that determines how much we keep our foot on the gas overall, we're going to be in an aggressive position in and you'll see these used equipment declines as we progress through next year, but that's how we're thinking about it and a little bit of color.
Speaker Change: On on what we would expect for margins next year.
Yeah, No. That's that's great. Thank you for that.
Speaker Change: You know I'm also I'm wondering what sort of support or help you're getting from the OEM on both the new and used equipment side.
Whatever you can comment on that I think would be helpful.
Speaker Change: Are you mostly for lack of a better term on your own in dealing with this problem or are there specific programs that are helping you out and especially into fiscal 'twenty six five I'm wondering.
Yeah. Thank you might you know Oh, Dear mentioned on their call, helping their dealers through pool funds C. N. H is doing the exact same thing. So we certainly get help from from them on that side.
Speaker Change: Just like Dear to they're trying to protect their margins as much as they can they're trying to be prescriptive on.
Speaker Change: No.
Speaker Change: Putting more dollars towards the specific problem areas and in addressing different mix issues.
Speaker Change: And we're working very hand in hand with <unk> on the same prescriptive approach and then internally, we're doing that as well so.
Your margin compression or how aggressive we're getting as botox with our our pricing.
Speaker Change: So relative to byproduct category specific turns in aging and stocking levels and at what pace and how much we're trying to destock. So it is quite prescriptive.
Speaker Change: We are getting help you know I I think the last time, we talked I mentioned you know we just.
Speaker Change: We're seeing all the dealers in all of the Oems and a real concerted effort come together this time something like I haven't seen in the last few decades.
Speaker Change: Early much earlier in the cycle are much more aggressively.
Speaker Change: I'll I'll call it a much more professionally and.
Speaker Change: And that's going to ultimately get us all where we need to be faster. So I think that's really healthy and then just also.
Speaker Change: Dear touched on this too but you just don't have the lease returns coming back like we had at the previous cycle and and we don't have any of the short term leases.
Speaker Change: That we had in the previous cycle. So both of those leasing factors are also going to help us get out of this quicker as well.
Speaker Change: Along with just you know not having them.
Speaker Change: The glut of new equipment sold we never did have the Spike you know of course with the supply chain constraints and so on so there are a lot of positive factors there and we're just going to keep working with our our OEM and we're going to keep staying really aggressively priced here.
Speaker Change: And as Bo mentioned really look to have.
Speaker Change: Have our inventory right sized and.
You know by next year here and a return to more normal.
Speaker Change: Margins in <unk> and.
Speaker Change: As we move into 2006.
Speaker Change: Got it a final question for me speaking of Dear you know they provided their outlook for calendar 'twenty five I guess their fiscal 'twenty, five and and what was interesting to me in that outlook, they're expecting a pretty significant contraction in industry retail demand in north American.
Jack I think it was down 30% are certainly a tougher year in in calendar 'twenty five than what we experienced in calendar 'twenty four.
Speaker Change: I'm curious as to what your perspective is on that outlook, if you're willing to comment, but you know if that actually comes to pass and derisk correcting their forecast.
Speaker Change: Is your targeted inventory reduction of 400 million enough to truly get you to the level of stocking that's appropriate for that level of demand. Thank you.
Yeah.
Speaker Change: So they have people smarter than me on that stuff. So you are generally everything we're looking at them. It seems very plausible that what their.
Speaker Change: Talking about it and looking at for next year there.
Speaker Change: You just look at it again, and it's really going to depend on what happens with these commodity prices and and if if they don't see some increase here or potentially even go lower.
You know then the numbers like Theyre talking certainly look plausible a also a difference being <unk>.
Speaker Change: Farmers had a really good year in in 2022, one of the most profitable years ever and then 23 down about 20% from that but still quite good year. So in 'twenty four here they've had some of that to fall back on again, we had pretty good yields. So we'll also be watching yields in in 'twenty five, but you know they're there.
Speaker Change: Cash reserves are depleting a little bit.
Speaker Change: But at the same time again, they are getting some relief in input costs some relief in interest costs.
Meg: They did have a little bit better yields than expected and the fleet is getting a little bit more aged as we go here. So a lot of factors, we'll be watching and in 25, Meg as far as the $400 million reduction I would keep in mind also the cost of the equipment. So once we reduce down that 400.
Speaker Change: Yeah.
Speaker Change: Are you starting to get to a pretty reasonable amount of actual units on the lots in and starting to look at you know some of those levels that we need just for loaner units and demo units and and things.
Speaker Change: Anything else to add.
Speaker Change: Yeah, I mean from a target perspective, I think as Brian laid it out that makes a lot of sense certainly we'll continue to look at it right and again, our overall theme here is that we want to average two five times turns over time, so if that wherever demand is sustaining or is averaging over a cup.
Speaker Change: The year periods, where we're trying to guide our our inventory levels to but yeah. If it does dip like that we would potentially look at taken even a more aggressive approach on inventory reduction I guess, one thing I'd take the opportunity for again, we'll provide guidance in March but assuming that third.
30% down on high horsepower is a reasonable starting spot.
Speaker Change: Just wanted to reflect on you know the reality of <unk>.
Speaker Change: Our business in P&L. So we got we have new equipment, which perhaps that's a reasonable starting spot a used equipment. We will certainly be looking to be driving year over year increases as we're seeing those reductions.
Our service business is growing.
Speaker Change: We're expecting to finish the year high single digits, if not a little bit better than that.
Speaker Change: And then parts Oh next year, we should be able to get you know low single digit growth. So.
Speaker Change: Our P&L and our total revenue it would look quite a bit different than that 30%, but that's how like if youre looking at your modeling I'd, probably break it down into those pieces and just be reflective of what those growth rates should be.
Speaker Change: No. That's that's very helpful. If I may squeeze one last one on construction.
Okay.
Speaker Change: I'm trying to make to make sense of your comments in terms of the competitive environment. Here. You. You. You. Obviously you had good revenue in a quarter. The margin was was soft so.
Speaker Change: Is it is it used equipment that is dragging that down is it is it a new equipment and you know some pricing erosion or some some some discounting that has to happen there.
Speaker Change: You know what why is this going on in construction and at what point in time do you think we would get to a more normalized cadence of margin in that segment. Thank you.
Speaker Change: Yeah, sorry, it's from an equipment margin perspective, it's multiple factors we've touched on the fact that the industry saw an increase in inventory levels as did we and we're working that down again, not as acute as egg, but that's there.
Speaker Change: There's also a mix you know last year, we couldn't get our hands on wheel loaders, which are higher ticket items higher ticket items tend to have a little bit lower margin have plenty of those this year. So that there is more inventory out there. So dealers are more competitive with that pricing.
Speaker Change: And then there's a little bit of used inventory to clean up as well you mix that all together and that's kind of where we're at.
Speaker Change: Certainly feel good about getting to targeted levels that we want to see through next year.
Speaker Change: And certainly the margins so construction.
Speaker Change: Construction margins in Q3 were.
Speaker Change: 10, 2%.
Speaker Change: Expecting something in a similar level in the Q4 so.
Speaker Change: You know almost double that of of AG, but they're usually quite a bit stronger I guess my point there is we'd probably expect similar levels.
Speaker Change: As we progressed through next year, but maybe as we get towards the end of next year, where you're getting to those target levels are a little bit quicker on the CE side and start to see some return to normalization along with the industry kind of clearing to where everybody is at a healthy spot.
Speaker Change: Great. Thank you good luck.
Speaker Change: Our next question is from Ted Jackson with Northland Securities. Please proceed.
Speaker Change: I'm actually pretty much every question on my list was just asked.
Speaker Change: At analyst and checked off so it was pretty.
Speaker Change: Tony the only thing I have left is based on some commentary that you put out though and that is.
Speaker Change: You talked about the construction and I haven't seen the breakout in terms of the line items for construction, but that had benefited in the quarter from some equipment deliveries.
Speaker Change: So my question is so it was the equipment side of construction, a tad better than you expected and then what is the implications of that for the fourth quarter as it relates to equipment.
Speaker Change: Sales for construction typically its a seasonally stronger quarter for you.
Speaker Change: It for me thanks.
Speaker Change: Yeah, No I appreciate the question and an opportunity to clarify there.
Speaker Change: Overall in terms of the environment, that's pretty consistent with what we're expecting.
Speaker Change: Are you expecting what I was trying to get out of bed is essentially are the third quarter. This year relative to the split in the back half of last year as stronger we saw that good amount of growth are particularly or specifically on total equipment. We grew 13, 5% year over year.
Speaker Change: <unk> in order to get back to flattish year over year, you're going to see a mid single digit decline in the fourth quarter, that's kind of what were prescribing and the guidance again.
Speaker Change: Again, not because of a dramatic shift or anything in centimeter activity, but simply because of some of the larger deals pulling in getting delivered in the third quarter relative to some real strength on some larger deals in the fourth quarter of last year, causing a better that timing overall.
I'd I'd consider it kind of flattish year over year.
Okay. That's it for me.
Speaker Change: I I would just add too you know Mig asked about.
Speaker Change: Some of the construction margins and so on.
Speaker Change: Also as you if you just look at what's happening with the a b I and so it would be down 18 19 months in a row now and just some of that softening in recently.
Speaker Change: Recently you have.
Speaker Change: Non res is down about 10% with the largest of that being an in warehouse down nearly 40 or excuse me in manufacturing and then warehouse down about 10 and so.
Speaker Change: There are some definitely theres some momentum and some positivity again, just with certainty of an election being over and you see things that are happening in the market of course, right now and so we're certainly hearing.
Speaker Change: Some renewed positivity from our contractor customers, there and and we see stability as we as we look forward here.
Speaker Change:
Speaker Change: I would say at least.
Speaker Change: Flattening or bottoming out of that steady decline that we've had in demand and the C side as we as we look to next year. So there's there's less inventory reduction work to do on that side of the house and there is also again a little more.
Speaker Change: Some more positive signs on that side of the house as well.
Speaker Change: Thanks for the additional color.
Speaker Change: You bet.
Speaker Change: We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
Speaker Change: Well. Thank you for joining us this morning to everyone and we look forward to talking to you on your Q4 call. Thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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