Q2 2020 Earnings Call
Greetings welcome to the Titan machinery incorporated second quarter.
Vehicle until 2020 earnings conference call.
At this time all participants are in a listen only mode. A question answer session will follow the formal presentation if anyone should.
Our operator assistance during the conference.
I started here on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host John Mills, managing partner of IC are Mr. Mills, you may begin.
Great. Thank you good morning, everyone and welcome to strike machinery second quarter fiscal 2020 earnings conference call.
On the call today from the company are David Meyer, Chairman, and Chief Executive Officer, and Mark Kalvoda Chief Financial Officer.
By now everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2019, which went out this morning at approximately 645 am Eastern time. If you have not received the release. It is available on the Investor Relations page of Titans website at <unk>.
Our 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 are providing a presentation to accompany today's prepared remarks, you may access the presentation now by going to Titans website at IR Dot Titan machinery Dot com.
The presentation is available directly below the webcast information in the middle of the page page you will 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 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 risk and uncertainties, including those identified in the risk factor section of Titans. Most recently filed annual report on Form 10-K .
These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward looking statements, except as may be required by applicable law Titan assumes no obligation to update any forward looking statements that may be made in todays release or call.
Please note that during today's call, we'll 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 have included reconciliations 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. After 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 go ahead David.
Thank you John Good morning, everyone welcome to our second quarter fiscal 2020 earnings conference call.
On today's call I'll provide a summary of our results and then an overview for each of our business segments.
Mark will then review financial results for the second quarter of fiscal 2020, and conclude by reviewing our updated modeling assumptions for fiscal 2020.
If you turn to slide three.
You will see an overview of our second quarter financial results.
Our second quarter revenue was $315 million for the adjusted pre tax income was $9.1 million and adjusted earnings per diluted share of 31 cents.
We generated solid topline.
And bottom line results during the fiscal second quarter, while achieving healthy growth in our agriculture and construction segments, despite challenging industry conditions that continue to persist.
We are particularly pleased with strong continued increases our higher margin parts and service businesses, which grew double digits in the quarter.
These results were slightly offset by our international segment, which I will discuss shortly.
I will now provide additional detail for our three operating segments, consisting of our domestic agriculture, and construction segments and our international segment.
On slide four.
As an overview of our domestic agriculture segment.
As we pointed out on our Q1 earnings call across most of our AG footprint.
Our farmer customers experienced an abnormally late cold and wet spring.
This caused delay planning and in some cases farmers elected up preventive plant option.
For their crops. It didn't get planted some are planted and less than ideal conditions, which combined with the reduced deal potential of late part of crops and the acres lost amid season heavy rains, we anticipate lower overall corn and soybean yields.
The good news is that most of the western corn belt fared better than the eastern corn belt from a spring planning perspective.
Summer growing conditions have been favorable and most of Titan machinery footprint.
With the late planting corn and soybeans are going in the heat Sunshine and later than normal freeze dates to reach maturity and yield potential.
The uncertainty of the end of growing season Frost states, along with a negative grain prices, resulting from ongoing trade issues.
Our weighing heavily on farmers settlement.
On a positive note the strong corn prices, we saw in June and July allowed farmers opportunity to sell carryover crop our market portions of current year crop.
In addition, ustašas starting to make payments to farmers on a rolling two of the market Facilitation program announced in 2019, which will be an added shot in the arm for most of our farmer customers.
Replacement demand and technology catalyst for new equipment sales and we were reporting approved parts and service revenues as the age and hours of our customers fleets are continuing to grow.
Margins from the aftermarket parts and service businesses are integral to our business model and create sustainability through the macroeconomic cycles and interruptions to the business.
We are experiencing demand for quality used equipment and we are seeing continued stability in used equipment values.
Turning to slide five.
You'll see an overview of our domestic construction segment.
The strong economy continues to positively impact the construction equipment in industry stable oil prices have spurred demand for construction equipment for oil related activity.
Federal State and municipal infrastructure projects are creating work for large construction contractors and smaller subcontractors.
While we are seeing stronger demand in the metro areas. The royalton structure core markets continue to be negatively impacted by the depressed farm commodity prices.
We can continue to target our farmer customers as an outlet for used construction equipment.
Our rental business continues to support our CE bottom line and the operational improvements we have been implementing in our construction stores are producing these results as evidence by our year over year second quarter, and first half improvements to our top and bottom line results.
We are confident in our full year assumption that construction revenue will be up 5% to 10% and expected continued improvement in our bottom line performance.
On slide six we have an overview of our international segment.
Including our markets within the countries of Bulgaria.
Germany, Romania, Serbia and Ukraine.
We experienced a pullback in the revenues in our international segment in the second quarter, which we attribute to farmer concerns over softening European economies, the impact of Brexit weather issues in some markets and volatility and commodity prices due to trade issues and growing global supplies.
Well most of the late season crops are experiencing favorable growing weather early season crops experienced successful moisture in the Balkans, especially in Romania with record heat and drier weather to the north.
Our Germany business is experiencing some carryover from last year's drought related poor yields.
Whether in the Ukraine has been favorable to both the early season grain crops and late season, corn soybean and sunflower crops.
We were disappointed with our second quarter International segment performance, but continue to focus on our aftermarket parts and service business as you look for opportunities in connection with the fall harvest as customers continue to invest in modern farm equipment in these developing countries.
Before I turn the call over to Mark on to comment on the increase in North America AG dealer M&A activity.
We are fully engaged in the pursuit of quality in North American rig acquisition opportunities as a dealership ownership continues consolidate.
I want to thank all our employees for their efforts in executing a solid second quarter.
Our operating model allows us to operate profitably under difficult industry conditions, and we are well positioned to leverage our business as industry conditions improve.
Now I will like to turn the call over to Mark to review our financial results in more detail.
Thanks, David.
Turning to slide seven.
We generated total revenue of $315 million for the fiscal 2022nd quarter, an increase of 6% compared to last year.
Our revenue increase was primarily the result of an increase in our agriculture, and construction segments, which increased 9.1% and 8.4% respectively.
By the equipment category achieved double digit revenue growth in each of these segments. The performance of our service business was the highlight of the quarter, which grew 15.5% on a consolidated basis.
Our parts revenues were up 6.7% and our rental and other revenue was down slightly compared to the same period last year.
Rental and other revenue was down primarily due to a smaller average rental fleet, which was offset by a slightly higher dollar utilization of 25.5% for the current quarter compared to 25.2% in the same period last year.
We were pleased with the quarterly revenue increase in our parts and service businesses.
Approximately 2% to 3% of the increases from our AG them acquisition completed in the third quarter of last fiscal year with the balance of the revenue growth, resulting from our increased focus in these areas and a customer fleet that is continuing to age.
On slide eight.
Our gross profit of $64 million for the quarter was an increase of 8.7% compared to the same period last year.
Primarily driven by higher revenues.
Gross profit margin increased by 50 basis points to 20.3%.
Versus the prior year period, due primarily to a shift in gross profit mix toward our higher margin service business.
Our operating expenses increased by $7.3 million to $55 million for the second quarter of fiscal 2020.
The increase was primarily the result of higher International segment operating expenses, resulting from our aggregate acquisition.
ERP transition costs incurred in the quarter.
And the increased costs associated with supporting increased activity levels.
In our AG agriculture, and construction segments.
The ERP transition costs, along with the decrease in equipment revenue in our international segment.
That negatively affected our ability to leverage our fixed operating cost within this segment.
Contributed to an increase in our operating expenses as a percentage of revenue from 16% in the second quarter last year to 17.4% in the second quarter of fiscal 2020.
Floorplan and other interest expense decreased 42.9% to $2.4 million in the second quarter of fiscal 2020.
Compared to $4.2 million in the same quarter last year.
Most of the decrease was due to lower interest expense, resulting from the May one 2019 retirement of the remaining balance of our convertible notes.
In the second quarter of fiscal 2020, our adjusted net income grew 9.5% to $6.9 million compared to adjusted income of $6.3 million in the prior year.
Our adjusted earnings per diluted share for the quarter was 31 cents compared to 28 cents in the second quarter of last year.
For the second quarter of fiscal 2020, adjusted EBITDA was $15.8 million compared to $16.8 million in the second quarter of last year.
You can find a reconciliation of adjusted net income EPS and EBITDA to their most directly comparable GAAP amounts in the appendix to this slide presentation.
On slide nine you will see an overview of our segment results for the second quarter of fiscal year 2020.
Agriculture revenues were $166 million, an increase of 9.1%.
We carried the sales momentum we generated in the first quarter through the second quarter, despite ongoing industry headwinds and uncertainties.
Revenue increases were achieved across equipment parts and services sales.
The increased revenue drove a 19.2% increase in pre tax income to $6.2 million for the quarter compared to $5.2 million in the prior year period.
Turning to our construction segment.
Revenue increased 8.4% to $84 million compared to the prior year period.
Driven by increases in our equipment parts and service businesses.
The segment's adjusted pre tax income improved by $1 million to $1.3 million in the second quarter of fiscal 2020.
This marks the fourth consecutive quarter of increased quarter over quarter top and bottom line results. In this segment as we continue to drive towards profitability within this segment.
In the second quarter of fiscal 2020, our international segment revenue was $65 million.
A decrease of 3.7%.
Compared to the same quarter last year.
The revenue decrease was the result of a 19.8% decrease in same store sales, partially offset by the revenue contribution from our Agrium acquisition, which closed in the third quarter of last fiscal year.
Income before income taxes for the second quarter of fiscal 2020 was $500000 compared to $3.9 million in the second quarter last year.
We were up against a tough quarterly comp in this segment with revenues increasing 29.4% in the prior year second quarter.
However segment revenues for the second quarter of fiscal 2020 still came in below our expectations as the difficult industry conditions that David discussed earlier weighed on our customers' equipment purchase decisions.
As we have previously highlighted our international business contains a lower mix of parts and service revenue as compared to our domestic business.
As a result fluctuations in equipment revenues will have a larger impact on profitability, which is what we are seeing in the current quarter on down equipment revenues.
Turning to slide 10.
You see our first six month results.
Total revenue increased 9.7% compared to the same period last year.
First six months equipment sales increased 10%.
Parts increased 8.6%.
Service revenue increased 15% and rental and other revenue was essentially flat.
Turning to slide 11.
Our gross profit for the first six months was $118 million, a 10.7% increase compared to the same period last year.
Our gross profit margin increased by 20 basis points year over year to 19.9%.
For the first six months of fiscal 2020.
We realized a small improvement in our gross profit margin, primarily due to a change in gross profit mix with a higher percentage of our revenue coming from our service business.
Our operating expenses increased by $13.1 million or 13.8% for the first six months of fiscal 2000 $20 million to $107 million.
As a percentage of revenue these expenses were 18.1% of revenue compared to 17.4%.
In the period prior year period.
The drivers of this expense increase was similar to what I discussed for the second quarter.
Floorplan and other interest expense decreased $2.7 million or 35.5% to $4.9 million in the first six months largely due to the interest expense savings, resulting from our repurchases and full repayment of our senior convertible notes as well as a decrease in our average interest bearing inventory compared to the first six months of fiscal 2019.
Our adjusted diluted earnings per share was 33 cents.
For the first six months of fiscal 2020.
Compared to 21 cents in the prior year period.
On slide 12, we provide our segment overview for the six month period.
Overall, our adjusted pre tax income was $9.8 million for the first six months of fiscal 2020.
Compared to $7 million in the same period last year.
This improvement is primarily the result of higher revenues across all our segments.
Combined with gross margin improvement in the agriculture and construction.
And lower floor plan and other interest expense.
These results were partially offset by higher overall operating expenses as well as reduced contribution from our international segment.
On slide 13.
We provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2020.
We had cash of $50 million as of July 31, 2019.
Our equipment inventory at the end of the second quarter was $547 million, an increase of $130 million from January 31 2019.
Reflecting a $152 million increase in new equipment.
Partially offset by a $22 million decrease in used equipment.
Equipment inventory turns were flat year over year.
At 1.7, 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 to $118 million.
Compared to $111 million at the end of fiscal 2019.
We increased our fleet size before our seasonal busy period, but still anticipate our fleet size will decrease to around 110 million by the end of the current fiscal year.
As of July 31, 2019.
We had $452 million of outstanding Floorplan payables on $640 million of total floor plan lines of credit.
We continue to have ample capacity in our credit lines to handle our equipment finance needs.
Our total liabilities to tangible net worth ratio is a healthy 2.1.
This ratio continues to be impacted by the adoption of the new lease accounting standard which went into place in the first quarter. This year and we'll continue to influence the comparisons for the balance of fiscal 2020.
Importantly, the ratio of 2.1 is well below 3.5.
Which is the leverage covenant required of our larger bank facilities.
We expect this ratio to strengthen as our normal equipment inventory destocking occurs in the back half of the year.
As a reminder, on May one 2019, we repaid the outstanding principal balance on our convertible note using cash on hand, and borrowings under our existing lines of credit.
Significant cash generation over the past few years allowed us to repay these notes in full without having to replace them with another long term debt instrument.
With the retirement of this debt behind us and our expectation of another good year of cash generation. We are in a solid liquidity position. During this period of volatility and uncertainty within the largest segment of our business.
Turning to slide 14.
He'll provide some additional information on our equipment inventory.
Consistent with the expectations that we provided last quarter, we experienced continual seasonal stocking of new equipment inventory.
And sequentially flat used inventory levels in the second quarter.
The amount of new and used equipment inventories are reflected in the size of the red and blue bars.
On this slide.
We continue to maximize our noninterest bearing terms from our suppliers.
The percentage of our noninterest bearing inventory to our total equipment inventory is reflected in the black line of the graph.
As an example in the current quarter, we had total equipment inventory of $547 million of which $269 million or 49% was noninterest bearing.
Since fiscal 2017, the chart demonstrates increasing levels of noninterest bearing percentages within our equipment inventory.
The primary driver of this improvement is the reduced aging of area in inventory.
As a result of our ongoing lifecycle management efforts.
As more of our inventory remains under noninterest.
Under interest free terms from our suppliers.
This improvement has been the primary reason for the reduction in our floor plan interest expense over the past few years.
At this point, we believe we have hit our seasonal peak in our level of equipment inventory.
We expect to reduce inventories throughout the next two quarters of the fiscal year, which will result in significant cash generation.
Slide 15 provides an overview of our cash flows from operating activities for the first six months of fiscal 2020.
The GAAP reported cash flow used for operating activities for the period was $6.3 million.
As part of our adjusted cash flow used for operating activities. We include all equipment inventory financing, including non manufacturer Floorplan activity.
Our adjustment for non manufacturer Floorplan payables was $50 million for the first six months of fiscal 2020.
We also adjust our cash flow to reflect a constant equity in our equipment inventory, which enables us to evaluate operating cash flows exclusive of changes in equipment inventory financing decisions.
The equity in our equipment inventory decreased to 17.4%.
During the six month period ended July 31 2019.
And the adjustment for our constant equity in equipment inventory represents and $93 million use of cash.
The decrease in equity in our inventory is primarily due to the seasonal stocking of new equipment inventories in the first half of the fiscal year and higher level of floor plan financing available on such inventories as well as borrowing more on our floor plan lines in connection with the repayment of our outstanding balance of our convertible notes, which occurred on May one.
After all adjustments our adjusted cash flow used for operating activities was $49 million for the first six months ended July 31, 2019 compared to $36 million for the same period last year.
As I just mentioned on the previous slide we expect cash generation to begin in our fiscal third quarter as we begin our seasonal destocking of equipment inventory and enter our most profitable quarter of the year.
Slide 16 shows our updated fiscal 2020 annual modeling assumptions.
We are updating our revenue modeling assumption for our agriculture and in and international segments.
But our maintaining our estimate for construction at up 5% to 10%.
Our updated agriculture segment assumption is for growth of 2% to 7%.
Versus our previous expectation of flat.
Primarily reflecting the relative strength.
We experienced during the first half of the year and despite the ongoing uncertainties remaining for the rest of the year.
Our updated international segment assumption is also for growth of 2% to 7%.
Versus growth of 10% to 15% previously.
Reflecting the challenging environment, we are facing in our international markets.
While we are disappointed with the deceleration in growth within our international segment.
Our domestic business is performing well with profitable growth in our AG segment.
And continued growth and improvement initiatives driving our construction segment towards sustained profitability.
Given these offsetting factors we continue to expect adjusted diluted earnings per share to be in the range of 75 to 95 cents for fiscal 2020.
Operator, we're now ready for the question and answer session of our call.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one under telephone keypad, a confirmation tone. We indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment it may be necessary.
To pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question is from.
Steve Dyer Craig Hallum. Please proceed with your question.
Thank you good morning, guys.
So the strength in your in your AG outlook going forward I'm, just kind of curious obviously corn was well above four four bucks a bushel here for quite a while earlier this year how much of the benefit you guys think you saw from that or is it just more that yields might not be as bad due to flooding is initially feared or sure what's driving that more more optimistic outlook in AG.
Hi, Steve This is mark.
The outlook the change in the outlook that we had really just implies.
About flattish results for the back half of the year, it's really just.
The increases because of that in that range is because we are up 9% in the first half of the year. It's just with those factors that you mentioned you know these fry state.
Trade war commodity prices all of the above.
All those variables and uncertainties out there in the industry, we're leading the back half of the year at flat and Thats implied in that range of the 2% to 7%.
Okay got it.
Service was really strong in the quarter up 16% year over year, what drove that strength, specifically what are you seeing there.
Well this is Dave Steve. So if you remember last fall as long and drawn out harbors in some real demand conditions.
Crops will be income line, we ended December frozen multistory acquisitions and now these conditions our trough on equipment on.
We've been putting some good parts and service.
Work into that equipment and getting it ready for not only the spring planning, but also the harvest harvest season, we continue to.
We are working on Columbine Saul.
So as indicated by our parts and service gross in the first half of the year that that's been a good plus for that.
No I think the look at theres going to be probably a little bit.
Or less acres harvest should because of the prevented plant in some of the drowned out.
But our equipment fleet continues to age more hours in we're seeing gysle.
A lot of demand in our service departments annualize. This fleet continues to get more more hours and.
Age on it.
Okay.
And then Dave Youve talked more recently about the M&A environment and your desire to sort of Stoke that up again balance sheet and inventories has has come a long way you guys are in a good spot what's the thought there going forward given all the uncertainty with trade wars and everything.
Oh, I think there's some some really nice dealer potential acquisitions, John owners are they getting aid to John looking for succession solution and also I think we want to take this opportunity right now and I think there are some good opportunities out there and we're we're really seeing that pick up solid John I've spent a lot of time on that and also.
I think thats, the long term that to be able to get in some good markets of large industry potential.
Is going to be good for Titan long term.
Got it okay. Thanks, guys.
Our next question is from Larry.
Tim area.
William Blair. Please proceed with your question.
Hi, Thanks, good morning, everybody.
Just go back to the point of looking for flattish second half you guys also made the point that farmers had sold sold some and win.
Obviously market search earlier this year.
And if they're going to get in as two payments transplant payments et cetera. So why have is there just a conservative outlook into the second half given the uncertainties or not expecting farmers to allocate some of that cash off the taxes into the end of the year.
Well I think Larry you really need to look at all soybean prices right now and I'd say that the current level of soybeans and they've done that while for a while.
They are probably losing money right now at these current prices and also it's going to be really difficult all in all its a high percentage of our customers crops or soybeans and most of our markets. So that's really being hartsell Grad I think that was a real positive that you don't.
Late June early July .
So a lot of our growth as you know emptied out their bids with all their carryover crop was able to contract. Some of this year's crop cycle, but I do think that it's being offset somewhat by.
The soybean prices on I think the biggest say too is there is going to be a big wait and see.
So when the.
You know the first killing prostate is going to hit.
I think thats really way and everybody at all and that so we're really going to need to watch the weather through the month of September .
And that's going to make a big impact on yield farmer income would kind of make or break year. This year. So I think theres, a big wait and see not only with our growers, but also with the AG lenders out there.
Okay I understand.
And as we start to think about into.
Next year.
I remember you guys already starting to take orders and build an order book for planters into next year. So kind of curious how an initial look on.
Orders of seasonal stuff that maybe would give a hint about what's going to happen next year or are shaping up.
Yes, there is.
Even think that things were a little bit delayed this year were yes, definitely I'm quoting going on there is interest.
It all.
All that activity for pre salt business going into next year. The only planners, but also as you also know high horsepower tractors and combines.
All that starts but there again I think I'll allow the gores before they really pull the trigger on some of that they're going to want to.
You will see what their yields are going to be this year and if the crop reaches maturity.
Okay. So that really is enough to tell you directionally whats going on but the quoting stuff is and what not if it's fairly.
Yes, Thats right.
The replacement demand real in there and with some of the technology and some of the productivity of the equipment right. Now you know the customers are big interest in the equipment out there than you know Seoul, the fleets getting age is getting more hours on it.
Well, we've got a great platter.
All the precision and stuff and all that some of the big platter bars and people are excited they just want to make sure that they are doing this hand in hand with or bankers and they know what their yields are and that is some fits there.
You know, they're basically their abilities to payoff the notes on those big equipment purchases.
Got you and if I could ask one final question.
At farm progress if we can now do you is giving way JD link for free for next five years with all the new large AG equipment. So just curious about the uptake that you guys have seen with the farmers hedge in climate.
Engagement.
Now that you guys are offering offering that are you seeing real uptake from that or is the wait and see and our farmers kind of reacting to.
The data management things that are out there right now.
Well precision farming those became mainstream.
You know with all our growers are better and also there is a conversation about tractor calm line or a planner that doesn't involve.
You, the precision or technology or.
Digital connectivity all of the subjects so.
Case ages.
All leading edge in.
Technology out there right now.
No guidance systems in all for our tractors and combines harvest come band.
But that being combined feature hype digital high speed precision planners with their variable speed prescription capabilities.
All that industry, leading the fs soil from man, which is real Nick with the centers are provided.
Even seabed.
Ames command and they're even Hawkeye technology on a self propelled sprayers.
RFS connect allows us providing that telematic from activity and then you talked a lot of the farmers edge, it's really exciting offering.
Have the integrated digital platform for both their current and legacy equipment that the canbus functionality in the in the farmers address that really attractive if you've got mixed fleets and legacy units that will make them all work and no if you're from prior progress show to you probably saw the excitement around the introduction of the Fs connect Magnum tractor that flag trip flagship row crop tractor for for K side. So yes, Thats definitely you all this technology in the fact that replacement demand tied together, that's really driving the interests of our customers right now.
Okay. Thank you good luck guys.
Our next question is from Mig Dobre Baird. Please proceed with your question.
Good morning, guys.
David.
I'm just looking for a little more perspective from you because there's so many crosscurrents here and I'm kind of wondering.
What you're hearing from your from your large farm customers.
What's really driving purchase decisions and sentiment here is it that is the commodity prices that they are focused on is it these facilitation programs from the U.S.D.A.
Is it is it something else like technology, and I'm asking that because I mean, obviously you are talking about higher commodity prices earlier in the summer that situation changed pretty dramatically with the recent WASDE report so I'm trying to understand if essentially we need to prepare ourselves for.
Sort of a different environment going forward or if there are other factors here that might be supporting demand. Thanks.
Well I think some of that you all the main factors draws as basically the customers need modern up to date.
Reliable equipment right and.
If they look at their cost probably their equipment. They are going to find that they need the trade that equipment on three year cycle is maybe it's a five year cycle.
We continue to be in a low interest rate environment, I think thats going to continue.
We've been seeing good yield trends, but also to.
The tax aspect of it and you talked a little bit earlier about all of the.
There was also some pretty significant amounts of commodities I believe sold in late June early July could potentially trigger some old.
Tax buying that thats going to need from them. So so I think it's a combination of taxes other than that.
The machinery and all that they need on their farm.
To get the job done.
So.
These MF MD these market facilitation programs I think it's going to be a shot in the arm, but but.
It's not that big in the whole scheme of things. So so I guess, we're going to probably put them in order its taxes. It's the.
The technology out there and what thats going to do for productivity and yield increases in all of the commodity prices are going to earlier and then there was a little more balanced and all of our growers steps back in June July when that corn was of that $4 range.
The two that new technology, and then indefinitely as the replacement demand so.
Yes, I think there if you know there's a lot of them to anticipation for the August 12 for Wiser report out there and.
And because I think many of our GOR assaulted the July you Sta report does not reflect the total impact of preventive plant acres that drawn on acres in the loss of yield potential from the late planted crops.
Not to mention the difficulty of forecasting yields with the potential.
With the potential of crops, not reaching maturity to normal or early for us Dave So.
I don't know if you are aware or not make but.
Last week Profarma finish your annual farm tour.
And they reported that last Friday, the results of their tour and they turn to states of Ohio, Indiana, Illinois, Iowa, Nebraska, Minnesota, and South Dakota. So.
Interim analysis when they also got said and done you know they pick that us corn production. This year at an average of that it was 13.358 bushels and thats compared to that 30.9 billion bushels. The U.S. da did Bakken on that August off report.
On in that that reflects that.
National current average of 163.3 bushels per acre compared to 169 that you USA did so that's a pretty big difference and all in all we will that it will not impact price. Once you guys get into harvest, but I think thats a big question out there so.
Theres a lot of time that has the heat up here between.
Tim Nollen and first of October , but I think a lot of our growers are looking for.
No for us until October one and ideally all but tweeting attempt and 15th of October we better. So we're really going to need to watch those weather dates and that's what a lot of our growers are doing so like you say there are a lot of variables out there are a lot of moving pieces, but the other day as you know it's going to be about you know.
Price and their ability to make the profit on a farm and thats really going to be driven by.
Some of these for talk to production actual production numbers and global supplies and our ability to export ethanol use theres just a lot of variables out there. So I hope I covered most of them for you.
No that was great color and.
I would agree with you that healthy skepticism ought to be at this point on that on that recent WASDE report.
But as far as your outlook is concerned what I'm, what I'm trying to understand here is you know do you feel that given what's happened with prices earlier in the year and the marketing the farmers might have done you have enough visibility in that flattish back half outlook or does your outlook embed.
Some kind of recovery in commodity prices or other factors that we need to be aware of.
I think we're thinking that we don't see anything that's really going to drive soybean prices a lot higher right now or at least in the near term I mean, so we're not factoring that in we I think we did factor in a little bit that hey, there was a.
Pretty good shot in the arm with the with that when coring up or $4 for pretty good period of time that allowed not only to sell in the carryover crop plus also to lock in some of this year's crop we did take that into consideration.
You have to remember too is we're going to have some some really low industry numbers. So on and look at the last four years. I mean this is like it hasn't been wonderful out there so to hit those industry numbers that group and used to I mean, it's not going to take a lot. So so we think it's those industry numbers based on.
Some of the market activity that happened earlier, you know the continued yield trends. It all so barring I guess, we did not figure in all.
Really early frost in but some type of normal the leader Frost dates, which we've been getting in the last few years.
I think we feel really good about our numbers, but like I say were recovered houses are really low industry numbers. The last two three years and thats kind of what were basing it all off from.
Okay. A couple more questions from me I want to talk a little bit about.
As DNA it came in a little higher than then.
We expect that in I remember I think mark mentioning that you guys were thinking as DNA would be relatively flattish sequentially Q2 versus Q1. So.
I'm wondering what the movies moving pieces were in a quarter. If there were any inefficiencies related to ERP or anything else, we need to be aware of and how do you think about its gionee.
For the full year.
Yes, if I kind of mentioned some of the some of the reasons through some of the items that affected the ERP for the quarter was higher this quarter than last quarter, but it's just kind of ramping up there is nothing.
New expected there there is about $1.7 million in the number for that again just as a reminder, agrium was in this year was not in last year in second quarter, we start seeing apples to apples.
In that third quarter.
As far as so we did say flat or I did mentioned relatively flat Q1 Q2. If you just look at the adjusted expenses, So thats, excluding the ERP costs.
It is about $52 million in the first quarter 53 million here in the second quarter I think just over $53 million in the second quarter. So it did come up a little bit, but I guess not too terribly bad as we look forward and this is where I indicated before there will be a rise.
Sequentially here in third fourth quarter, just because of the higher level of activity in some of the seasonality that.
That those quarters see.
Call. It a couple two 3 million higher in those quarters and if you look back it won't be as much of a REIT and I'm talking on an adjusted expense basis, excluding those ERP items.
But then if you look back to last year, you won't see as much of a growth because you have agrium now in the in the prior year quarters.
Got it understood lastly on inventories.
You are talking about bringing that number down in the back half seasonally that makes sense I guess in your plan how do you.
Contemplate exiting fiscal 20 from an inventory standpoint, maybe you can give us perspective year over year say exiting fiscal 20 versus exiting fiscal 19 that'd be really helpful. Thank you.
Yeah. So we've I mentioned, we we've hit our seasonal peak or we believe we've cut that seasonal peak at around $550 million.
I think pulling that down we can take it down.
Good 100 million 125 million that would probably take us a little bit above last year, and I think were around 420 million.
Last year.
So of course this is excluding any acquisitions that that that may happen. So I think a little bit up maybe from last year, but down a good 100 hundred $25 million from here.
And maybe just a comment the inventory here again, especially domestically is very good you can see that in some of that non interest bearing.
Inventory percentages.
With the lower expectations and international from a sales standpoint, we're going to be monitoring those inventories closely.
As we adjust to those lower levels of revenue.
And but for the most part overall, we're we're sitting fine with inventory and yes expect it to come down.
Close, but it will probably a little bit more than where we ended the year last year.
Excellent. Thank you guys.
Our final question is from Rick Nelson Stephens. Please proceed with your question.
Hey, guys, Nick Zangler on for Rick here I'll focus on the International segment I know this segment typically fluctuate quarter to quarter and you had a strong positive comp in the first quarter, followed up with the the negative comp in the second but can you just.
Can you talk through the back half of the year from an international perspective, any tailwinds you might see and I know you you listed quite a few headwinds, but can you talk about how you expect those.
So first just going through the back half of the year.
Yes, so I think.
As we look in the back half of the year and maybe just a little bit talking about the first half of the and Dave mentioned some of this but.
From a market standpoint.
Romania was had some very tough comps Ukraine had some tough comps to last year, that's what drove some of that higher.
Sales growth at same store sales growth that you referred to it in Q2 in particular.
But those are two markets that we do expect both of those to moderate some going forward in Romania. There was the weather that was impacting the small brains crop.
And there was also the no subvention funds, we don't see that changing so that headwind will be there.
But the weather was more conducive to some of the row crops over there and some of the fall harvesting.
So we do expect some of those headwinds to alleviate somewhat in Romania, and Ukraine, just kind of had a slower start to the year and we do expect.
Some some improvement there as we as we move into that to the back half of the year.
Germany its.
We still it was accretive last should we expect it to be accretive this year, but it is it is starting out slow as well and that hitting its stride yet.
Germany, I think just the longer we get past the integration.
Bringing them on.
And the better it is in the further we get away from some of those poor drought conditions that we had at the end of last year, that's still affecting some of our.
Customer's ability or desire to purchase equipment. This year. So the further we get away from that and have some reasonable weather over there.
That will help that that being said, it's a it's a difficult market. Thank for anybody to predict it is for us over there.
And.
With the assumptions.
That we have out there with that said 2% to 7%.
From a same store sales standpoint, it is relatively flat at this point for the back half of the year and.
Given given some of these upticks here, we expect to hit that then we did have some.
Particularly a good third quarter last year that will be hard to match.
But we do expect some seasonal.
Pick here in Q3 versus what we just saw in Q2, so hopefully hopefully that helps.
Sure understood and then I guess taking that into consideration.
The inventory positioning that you that you mentioned from an international perspective.
Full year equipment margins on a consolidated basis should we still think that 11%.
Is attainable or.
Any fluctuation from.
Potentially hitting that target.
Yeah, I think the 11% at this point is going to be it's going to be tough.
Given that we're at about that.
Year to date, so far I think at this 0.9 year to date and Q4 is.
Generally a softer quarter.
I do think that fourth quarter is the quarter, where we have opportunities better than last year.
But I think all that said I think we'll probably end up somewhere in between where we ended up last year at that 10, six and that kind of 11% long term longer term target. If you will so its more likely we wont hit 11, but somewhere in between where we ended up last year in that 11.
Great. Thank you very much very helpful guys.
We have reached the end of the question answer session I will now turn the call back over to David Meyer for closing remarks.
Okay. Thank you everybody for being on the call today and thanks for your interest and Titan machinery, and we look forward to update you on our progress on our next call. So have a good day everyone.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.