Titan Machinery Inc.

Greetings. Welcome to Titan Machinery first quarter fiscal 2022 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. Please note this conference is being recorded. I will now turn the conference over to John Mills with ICR. Thank you. You may begin.

Thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery first quarter fiscal 2022 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer, Mark Calvota, Chief Financial Officer, and Brian Knudson, Chief Operating Officer. By now, everyone should have access to the earnings release for the fiscal first quarter ended April 30th, 2021, which went out this morning at approximately 6.45 a.m. Eastern Time. If you have not received the release, it is available on the investor relations page of Titan's website at ir.titanmachinery.com. This call is being webcast, and the 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 Titan's website at ir.titanmachinery.com. The presentation is available directly below the webcast information in the middle of the page. You'll see on slide two of the presentation our safe harbor statement. We 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, underreliance 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 Titan's most recently filed annual report on Form 10-K and updated in subsequently filed quarterly reports on Form 10-Q. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as may be required by applicable law, Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call. 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 into Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today's release. The call will last approximately 45 minutes, and at the conclusion of our prepared remarks, we will open the call to take your questions. Now, I'd like to introduce the company's chairman and CEO, Mr. David Meyer. Go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our first quarter fiscal 2022 earnings conference call. On today's call, I'll provide a summary of results, and then Brian Knudson, our chief operating officer, will give an overview for each of our business segments. Mark Calvota, our CFO, will then review financial results for the first quarter of fiscal 2022 and provide an update to our full-year modeling assumptions. If you turn to slide three, you will see an overview of our first quarter financial results. The fiscal first quarter exceeded our expectations on all fronts with impressive operating leverage that showcases the earnings power of our efficient dealership network. On a consolidated basis, we grew revenue by 20% to $373 million, driven by continued momentum in equipment sales, which is visible across each of our segments. The strong sales coupled with a modest increase in operating expenses and lower interest expense resulted in a 179% improvement to our adjusted pre-tax income of $13.5 million and 207% growth in our adjusted earnings per annum share of 46 cents. I'm proud of our team's performance and pleased to share this success with all our stakeholders. We'll now turn the call over to Brian to review our three segments in more detail.

Thank you, David, and good morning, everyone. I'm excited to cover our agriculture, construction, and international business segments with you all this morning. On slide four is an overview of our domestic agriculture segment. The big news is that during our first quarter, we saw large increases in corn and soybean prices, which have reached levels not seen since 2013. These commodity prices, in conjunction with carryover from healthy 2020 government payments, and favorable planting conditions have driven extremely positive customer sentiment. And as a result, we currently have a very robust demand for both new and used farm equipment. Further adding to this demand is the ROI from the new precision technology available on our cash crop equipment, the fact current equipment fleets are becoming aged, and the tax benefits provided by equipment purchases collectively making for compelling reasons to upgrade equipment. While we have production slots for delivery in this fiscal year for all types of equipment we sell, we are starting to book orders for pre-sold high-horsepower equipment into Q1 and Q2 of fiscal year 2023. Our focus on the aftermarket parts and service business continues to pay dividends, and the repairs and maintenance needed on the H fleets mentioned earlier, along with precision technology retrofits, continue to bolster our parks and service business. While our customers will need timely rains during the growing season, and some of our Dakota markets are experiencing excessively dry conditions, there is a tremendous amount of optimism in our North American Ag business. Turning to slide five, you will see an overview of our domestic construction segment. We are seeing increased construction activity in most of our construction equipment footprint. Demand for new and used equipment continues to increase due to the opening up of the economy, low interest rates, new housing starts, construction equipment demand from farmers and ranchers for land improvement, livestock operations and material handling, along with improved oil prices and potential for infrastructure investments. The market factors I just mentioned, along with our internal rental initiatives, make us optimistic about improved rental utilization with our smaller rental fleet. The operational improvements that our team has implemented to date have helped produce another consecutive quarter of profitability, and we look forward to continued bottom line contributions from our construction segment going forward. On slide six, we have an overview of our international segment, which represents our business in the countries of Bulgaria, Germany, Romania, Serbia, and Ukraine. As we saw drought conditions and poor yields in some of our key European markets last year, this year is starting off much better with early crop development, along with improved moisture conditions in areas affected by last year's dry weather. Also, our European customers are benefiting from the strong global commodity prices, creating robust demand for equipment purchases. As you can see, this strong demand is reflected in our international segment Q1 top and bottom line results. As we are also experiencing domestically, there is a growing adoption rate for equipment with new precision technology in Europe. Also similar to the U.S., there are supply-side challenges causing some interruptions in timing of deliveries. We continue to focus on the parts and service areas of our international business, as customers in these developing markets are looking for higher levels of product support as equipment becomes more sophisticated and technologically advanced. Before I turn the call over to Mark, I would like to sincerely thank all of our employees for another great quarter as they support our customers through this busy and important spring season. With that, I will turn the call over to Mark to review our financial results in more detail. Mark?

Thanks, Brian. Turning to slide 7, total revenue increased 20.1% to $372.7 million for the first quarter of fiscal 2022. Our equipment business increased 26.3% versus prior year, which was driven by significant year over year growth across each of our segments, agriculture, construction, and international. Our parts and service business also performed well against solid performance in the prior year. Parts generated growth of 10.6% versus a 9% increase in the prior year, and service increased 8.2% compared to a 12.1% increase last year. Rental and other revenue decreased 32.6% versus prior year due to a smaller rental fleet in our current construction footprint as well as a reduced fleet due to the January 2021 divestiture of our construction stores in Arizona. Despite the decrease, our dollar utilization of our construction segment rental fleet improved slightly to 19.2% for the current quarter compared to 18.9% in the same period last year. On slide 8, our gross profit for the quarter increased 21.5% to $71 million, and our gross profit margin increased by 20 basis points. The current favorable end markets coupled with our healthy inventory led to enhanced equipment margins, which offset the impact of sales mix away from our higher margin parts and service businesses. Operating expenses increased $3.3 million versus the prior year, to $56.4 million for the first quarter of fiscal 2022. This modest increase was more than offset by revenue growth and led to 200 basis points of operating expense leverage compared to the prior year, reducing our operating expenses as a percentage of revenue to 15.1%. Floor plan and other interest expense decreased 28.1% to $1.5 million in the first quarter of fiscal 2022 compared to the same quarter last year. The decrease was due to lower borrowings and our lower interest rate environment. In the first quarter of fiscal 2022, our adjusted net income increased 207.9% to $10.4 million. The adjusted first quarter fiscal 2022 net income excludes a $100,000 Ukraine remeasurement gain, while the adjusted first quarter fiscal 2021 net income excluded $1.1 million of expenses, net of taxes. Our adjusted earnings per diluted share for the quarter was 46 cents compared to 15 cents in the first quarter of last year. Adjusted EBITDA increased 78.8% to $19.8 million compared to $11.1 million in the first quarter of last year. You can find a reconciliation of adjusted net income, adjusted income for diluted share, and adjusted EBITDA to their most comparable GAAP amounts in the appendix to the slide presentation. On slide nine, you will see an overview of our segment results for the first quarter of fiscal year 2022. Agriculture segment sales increased 18.6% to $229.6 million, helping to drive a significant increase in our adjusted pre-tax income of 82.1% to $11.2 million. In addition to the strong sales across equipment, parts, and service, the bottom line also benefited from higher equipment margins and lower floor plan interest expense. Turning to our construction segment, revenue increased 14.1% to $68.6 million compared to the prior year period. The stronger revenue, despite the January divestiture of two stores in Arizona, combined with lower interest costs, drove a $2.8 million improvement in segment adjusted pre-tax income to positive $100,000 compared to a loss of $2.7 million in the first quarter of the prior year. Our international segment revenue rebounded in first quarter and increased 32% to $74.5 million. As Brian discussed in his remarks, the improved growing conditions and strong global ag fundamentals have generated heightened equipment sales activity across our international footprint. The strong equipment sales and solid equipment margins yielded a $2.2 million improvement and adjusted pre-tax income to a positive $2.7 million. On slide 10, we provided an overview of our balance sheet highlights at the end of the first quarter of fiscal 2022. We had cash of $89.7 million as of April 30, 2021. Our equipment inventory at the end of the first quarter was $330 million, a decrease of $8 million from January 31, 2021, reflecting the net effect of a $5 million increase in new equipment that was more than offset by a $13 million decrease in used. Strong sales and lower inventory levels continue to drive equipment inventory turns, which increased in the first quarter to 2.3 versus 1.6 in the prior year period. I will provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the first quarter increased slightly to $79 million compared to $78 million at the end of fiscal 2021. We still anticipate our fleet size to be around $80 million at the end of fiscal 2022. As of April 30, 2021, we had $169 million of outstanding floor plan payables on $770 million of total floor plan lines of credit, which leaves us with considerable capacity in our credit lines to handle our equipment financing needs. Our adjusted debt to tangible net worth ratio is a strong 0.9 compared to 1.3 in the prior year period, and is well below 3.5, which is the leverage covenant requirement of our two largest floor plan facilities outside of our bank syndicate credit agreement. Turning to slide 11, the amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide. As we discussed last quarter and earlier on this call, supply chain disruptions due to the pandemic and strong customer demand due in part to the resurgence of agricultural commodities, has created an overall tighter industry supply of equipment and helped us generate a higher inventory turn of 2.3. We believe our equipment orders, level of pre-sales, and used equipment inventory have us well positioned to meet our revenue modeling assumptions for fiscal year 2022. Given current inventory levels and stronger end markets in each of our segments, we expect our inventory turn will continue to increase for the full fiscal year 2022. The overall quality of our inventory remains very healthy. Our inventory under non-interest bearing terms, which can be seen by the gray bar on the slide, ended first quarter at 36.4%. Given our current cash position, we have elected to forego certain non-interest bearing terms with our suppliers in exchange for cash discounts on equipment purchases. This practice enhances equipment margins but decreases our level and percentage of non-interest bearing inventory. Slide 12 provides an overview of our cash flows from operating activities for the first three months of fiscal 2022. The GAAP reported cash flow provided by operating activities for the period was $27 million compared to cash used for operating activities of $5.4 million in the comparable prior period. As part of our adjusted cash flow provided by operating activities, we include all our equipment inventory financing, including non-manufacturer floor plan activity, and adjust our cash flow to reflect a constant equity in our equipment inventory. allowing us to evaluate operating cash flows and specific changes in equipment inventory financing decisions. After applying these adjustments, our adjusted cash provided by operating activities was $7 million for the three-month period ended April 30, 2021, compared to adjusted cash used for operating activities of $3.6 million for the same period last year. Slide 13 shows our updated fiscal 2022 annual modeling assumptions, which we are raising across the board. Each of our business segments are performing better than expected and are off to a great start in fiscal 2022. Improving end markets combined with years of operational improvements are combining to generate strong bottom line results. For the agriculture segment, we are increasing our revenue growth assumption to up 15 to 20 percent from up 10 to 15 percent. The fiscal 2022 growth range includes a full-year revenue contribution from our Horizon West acquisition that closed in May 2020. For the construction segment, we are increasing our revenue assumption to up 2 to 7 percent from flat to down 5 percent. Impacting this assumption is the divestment of two of our construction equipment stores in Arizona at the end of fiscal 2021, which accounted for approximately $27 million of combined revenue. Excluding these revenues from the prior year base, our modeling equates to a same store sales range of up 10 to 15%. For the international segment, we are increasing our revenue assumption to up two up 17 to 22% from up 12 to 17%. From an earnings per share perspective, we are increasing our diluted earnings per share assumption by 40 cents at the midpoint to a new range of $1.65 to $1.85 for fiscal 2022. As a reminder, this range includes all ERP implementation costs. This concludes our prepared remarks. Operator, we are now ready for the question and answer session of our call.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question is from Steve Dyer with Craig Hallam Capital Group. Please proceed.

Good morning, guys. Ryan Sigdalen for Steve. Congrats on the results. I'm curious how much benefit you think you've seen from higher corn and soybean prices driving equipment purchases now, realize there's some, but versus the expectation of potentially greater demand this fall after harvest and the sale of futures. that may be already locked in from a pricing standpoint. You mentioned bookings, quarter was good, but can you break those two out of kind of a benefit?

Hey, Ryan, this is Brian. Yeah, I think definitely the customer sentiment has been positively impacted by the corn and soybean prices, which have been up significantly here. And Then you've got, as I mentioned, the tax benefits, which are going to come into play here, like you said, as they continue to book more sales. It really helps to put together a solid year for this year for them and really next year as well. And actually out into calendar year 2023, you can lock in some really good prices right now. So Yeah, I think that's driving a lot of it, but then also just the age fleet and then the, you know, the opportunity to update to the newer technology and the efficiency benefits and, you know, what that can do for their bottom line. So, you know, I definitely think it's a combination of both. But, yeah, long overdue and, you know, these commodity prices are really helpful.

And then how much of the do you think it's new equipment buying versus replacing that old equipment, kind of the maintenance that's kind of long overdue, like you said?

You know, it's sometimes hard to discern exactly what's because of a technology purchase versus, you know, wanting to update their age fleet from a maintenance perspective because really the grower picks up the benefit of both at the same time, you know, along with the tax benefits. So, you know, the three together really make for compelling reasons. But, you know, the downtime is really expensive too. So, you know, the age fleet becomes problematic for the growers from that standpoint. So, you know, all three are really big drivers, but definitely the updating to the newer technology

getting the precision technology and then you know just the the newer equipment requiring less maintenance and downtime would be the biggest two and then john deere so their u.s and canada large ag industry sales outlook for 2021 was plus 25 percent year over year uh your ag updated ag guide is for 15 to 20 percent how should we think about the delta between those two um between kind of the OEM versus the retailer side?

Yeah, good question, Ryan. You know, it's like you said, it's not apples to apples on the dealer-retailer versus the OEM. Deer's commenting on large egg production precision North America there. Well, we're looking at all egg business, including the lower horsepower tractors, hay, and forage. Also, in our guidance is our parts and service, which are more stable and don't typically have the large equipment growth swings. Deer's guidance also includes Canada, which is experiencing stronger growth right now than the U.S. And then also keep in mind that our Titan FY21 Q4 was up 39% as we reported our prior year results compared to that same three-month period for deer. which is reflected in their current year guidance. So just kind of that timing between the fiscal years there and the reporting with us being a quarter-legger to them. Mark, anything to add on that? No, I think you covered it all. Good.

Great. Helpful. Thanks, guys, and good luck. I'll hop back in the queue. Thanks, Brian.

Our next question is from Ming Dalbray with Baird. Please proceed.

Good morning. I guess the way I would ask the guidance question is maybe slightly different. When you're looking at your increase in agriculture segment revenue relative to the previous assumptions, I'm wondering if there was any limiting factor behind this guidance increase, meaning Is this 500 basis point increase your view of sort of where true retail demand is going to be based on incoming orders and so on and so forth? Or does this reflect some degree of constraint vis-a-vis equipment availability for fiscal 22 that could carry into fiscal 23?

Yeah, I think this is Brian. I think you're right. I mean, we've got that. modeled in to our assumptions. You know, generally we believe industry demand will exceed current year production a bit, but we do have some on hand inventory to sell down as well. Also some access to lease returns and defleet inventory, but that unfilled demand will move into calendar year 2022 production. as we continue to pre-sell those customers into those units. So, yeah, we've modeled that into our guidance. We're in constant communication with C&H on that. Obviously, there are supply chain issues, limit component availability. labor shortages and so on. Their logistics guys are jumping through a lot of hoops to keep enough material and components to keep the plants going. We're really proud of them. They're doing a really good job of that to this date and, again, stay in close communication with us. So, yeah, we've guided that in. And then, again, any of those lease returns or additional dealer transfers or, you know, any additional orders we get would be then, you know, increased incremental.

Just to clarify, because I'm still a little bit confused here, you know, you're saying that you're taking EOPs into Q1 and Q2 of fiscal 23. I mean, that's great. I'm just trying to understand if this is sort of different than a year ago or different than normal.

And

is this a factor of, you know, customers saying, hey, look, you know, I need the equipment, and you basically saying, well, I'm going to have to put you in backlog, basically, and deliver in Q1 and Q2 of 23, or is it that just sort of the customer's demand naturally is associated with those two quarters? I don't know if I'm making sense here, but I'm trying to understand if we're really dealing with you know, supply constraints on your part in terms of equipment availability?

Yeah, it's a little bit of both what you said there, Meg, but more so the first bullet point. It is, you know, the production lead times are longer. You know, a lot of the order slots are filled up, so depending on the product category and then other times depending on customer desire that will get us out into that Q1 and Q2. But more prevalent would be the production schedules are getting out there in some product categories.

All right. Then I guess my second question is on just the normal seasonality of the business relative to your guidance. I mean, historically, from what I can see, Q1 is not one of the seasonally strong quarters. And you've done quite well, right, 46 cents in earnings, better than I guess all of us expected. So as you look relative to your full-year guidance, how do you think about Q1 relative to other quarters? Is there a reason to think that the fourth quarter, for instance, has – is in any way lower than Q1 has been.

Yeah, you know, some of the things that we've done over the years, you know, we've talked about this for a while, but promoting that pre-sell and really pushing the pre-sells, and we've done a nice job of that and have moved that. And by doing that, we have kind of moved some of that fourth quarter, what we had done in the past, and this has been done gradually over the years. more so into that first quarter. So we have kind of shifted the seasonality, if you will, somewhat on some of that equipment from the fourth quarter to the first quarter and somewhat into the second quarter as well with the pre-sale activity. So yeah, the first quarter, certainly this year, doesn't appear to be our soft quarter.

Okay. Well, I guess I'll talk to you more about this, Mark, offline. But, you know, my final question, and I'm kind of going back a few years here, back to 2017. I remember the last analyst day you guys put together. At the time, you were talking about right-sizing the cost structure to be able to deliver pre-tax margin of 5%. on about a billion and a half of revenue. And clearly we're talking about revenue here that's better than a billion and a half. And if we're looking at your equipment margins, they're also in better shape than I think you anticipated back in 2017 when you put those targets together. So my question for you, Mark, is, you know, how have things changed over the past four years and how, realistic is it for you to be able to attain these kind of pre-tax margins on volume that's better than a billion and a half of revenue? Thank you.

Yeah, I think, you know, so when we gave that presentation back in 2017, we talked about kind of mid-cycle conditions, and I think we're I think we're entering that or we're getting very close to that on the on the egg side and, quite frankly, I think I think we've got a good shot of getting there this year on the egg side and maybe even surpassing it a little bit. Where we still need some level of improvement to get to the total what we talked about a $2 EPS at the time. is we still need further traction, and we've come a long way, I think, on both international and our construction segment. But we still need to get more traction there to get us up to that total 5% for the company. So I think as Brian mentioned on the call, I think we've got four quarters now of profitability on construction. We're certainly looking to build on that. and there's been a nice resurgence here from international moving in the right direction. So I think what we talked about back then is certainly within reach, maybe a possibility for this year, but probably more likely another year or two with similar market conditions, and we could be there.

All right. Good luck, guys. Thanks, Bing.

Our next question is from Rick Nelson with Stevens. Please proceed.

Thanks. Good morning and congrats on a terrific start to the year. I'm curious if you could update us on the acquisition environment. I know COVID kind of slowed those discussions. But now with COVID easing, are things starting to heat up there?

Well, I think if you look at some of the demographics or the profiles of the age dealer principles out there, Rick, and looking at the sophistication of equipment, the capital requirements, OEM requirements, lack of succession alternatives, That hasn't really changed much right now, but dealers, for the most part, are doing really well right now financially. And considering we're on the cycle, which both impacts both timing and the pricing of acquisitions, so they're not going away. Like I've talked about in the last couple of calls, there is a little bit of pause right now as many of the dealers are working through the PPP loan forgiveness process. And I don't think there's... There just hasn't been a lot of activity from... from some of the banks to get that all through and processed. So we continue, we're engaged. We've got a number of targets out there. There's a lot of discussions going on. So like you say, the demographics aren't changing under the deal principle. I think there's still a lot of opportunity. We're seeing industry consolidation taking place. So yeah, we're definitely all over doing acquisitions and You know, we had a nice, that Northwood acquisition was nice, the Horizon West one we did last year, and we want to definitely, we've got a strong balance sheet, we've got some cash we want to deploy, so we're all over that. So it's going to happen, we've just got to be smart about it and discipline in the pricing and make sure that the timing is right for both the motivated seller and our team.

Thanks for that, Tyler. Also, with the inventory, you talked about those supply constraints. It would seem that has positive implications for margins. I'm curious what level of equipment margins you're building into that fiscal 22 guidance.

Yeah, so first quarter was a very good quarter from an equipment margin perspective, better than we were anticipating as well. So it was at like 11.7%, and certainly some of the end market conditions that we're talking about helped both in pricing and limiting inventory adjustments. We did also in the first quarter, we did benefit from some very strong used sales kind of in the mix for ag, and then on the international side, the new equipment sales there were quite strong, which they generally get higher equipment margins than we get over here. So certainly mix had something to do with it as well. So we don't anticipate maintaining this 11.7%. However, we still expect some nice improvement off of last year, which I think was kind of in that mid to lower tens. I think closer to that 11% overall. is going to be where we're landing, right around that 11%. When we get toward the end of the year as well, we still have some of those bigger deals that happen that have some of those higher ticketed items that will take down the full year number as well. So overall, kind of a blended right around 11% is what we're looking at.

Great. Inventory turn 2.3 times. I know the top end of your goals has been three times. Do you see that potentially with the tight inventory situation potentially going above three times or?

I think getting above this year is still going to be difficult. It's possible in this environment, certainly with the with the tightness of supply, but probably probably just South of three is where we're looking at right now for the for the full year. Nonetheless, you know some good improvements certainly limits the amount of write downs, but we also need that equipment this year to get. especially with these supply chain challenges. So we're looking to get that equipment as much as possible.

Great. And with timing of inventory normalizing, I think last call you were suggesting fourth quarter. Now it sounds like maybe not until early next year. Your thoughts on that?

Well, just a little bit of both, Rick. The build schedules and the lead times continue to move and evolve, but a lot of that that we talked about last quarter did get ordered, and we did get those sales, and so we've got a lot of equipment coming into Q4, and now as the calendar rolls forward, we're starting to insert product category books on those pre-sales into Q1 and Q2.

Makes sense. Thanks, and good luck. Thanks, Rick.

As a reminder, this is R1 on your telephone keypad if you would like to ask a question. Our next question is from Larry DiMaria with William Blair. Please proceed.

Thanks. Good morning, everybody. Good morning, Larry. Just to clarify, on the pre-sales that you're doing already for next year, Is this part of a new program or just a function of the environment we're in? I think it's the latter. But can early orders become the norm? Is this something we can build on? And do you have to put discounts in to get those orders in place now, or are they full retail price? Thank you.

Yeah, Larry, you're right. It's more so the latter. It's more so a function of the environment and just the lead times and the demand. But as Mark mentioned, also a little bit of our internal initiatives to drive more pre-sale, which also helps our inventory turns, helps cash flow, helps us get more visibility to the guidance and to the future revenues. So yeah, we're going to continue to drive that. You know, as far as margins there, we incentivize the customer. You know, there's often OEM incentives there for the customer to commit, put their name on it. But more so, the bigger driver would be, you know, then they get to spec out the equipment the way they want it. There's lots of different options. The equipment on the equipment today, very similar to when you order, you know, an automobile, oftentimes even more so. So they get to... expect it all how they want with their farm. They get to plan their business with their banker, and then they get to help ensure availability of when they want it.

Okay, that's very helpful, and maybe that'll turn into more of the rules. As far as the equipment growth margins, I know, and he talks about margins a little bit, but Delta was obviously on the equipment side. He mentioned a couple factors, international and new, but Can you help us understand the difference between maybe, you know, the impact from cost cuts that are a little bit more structural and maybe some are temporary, but also maybe more importantly, the mix of new versus used equipment in the equipment sales? You know, what is it now? What is it historically? And is it sustainable? Because, you know, obviously you would have to think that you're making much more money on the used equipment prices that are surging, and that's leading to some of the upside margins. So can you just help kind of pull that all together?

Yeah, I'll try and elaborate a little bit more specifically on the equipment margins there, Larry. Yeah, so it's on the used. So every month we have and quarter for external purposes, but we have write-downs that happen on our used. We have a lower cost of market process. So certainly in this environment where pricing is strong because of the limited demand, the level of some of those write-downs are much lower than what they are in different parts of the cycle. So when you're swinging up, there's a lot less pressure on those types of adjustments. And then same with the pricing side. You know, the pricing can hold together quite nicely. And that combined with the aging of our equipment, we don't have – The level of aging, it's very healthy inventory at this point where there's not giving on pricing there to the extent we've had in the past. So those are certainly factors that lift the overall equipment margins. On the new, I kind of mentioned just the different product and maybe segments between the segments, and new was particularly strong there with international, where we do get higher equipment margins, so certainly that mix is helpful there as well. And then I think you asked about just kind of overall margin in the business. And so this year, relative to last year, we certainly took on some more expenses anticipated some more expenses, some of those expenses are moving through. But we're certainly benefiting from some of the cost initiatives that we had in prior year and, you know, two, three years before that with different you know, initiatives that were done to help bring that, you know, more to the bottom line there. And then finally on the floor plan and interest expense, you can see that's come down significantly over the years. just with cash generation paying off the convert from a couple years ago and basically out of our domestic lines at this point as well. All of that contributing nicely to the bottom.

Okay, great. Thanks for that detailed answer. Last question. Just trying to get a sense of inventory now and at year end. My guess is obviously you'd like to have more inventory, the industry would like to have more inventory, but I'm curious to hear from you. If you could have your way, how much higher would inventory be now and would you like the inventory maybe at year end going into next year? Just wanted to get a sense of how short the industry is and how short you guys think you are and where you think you need to be to really satisfy the industry demand and feel comfortable going into next year.

Maybe I'll start it out, Larry, and then BJ or Dave can add on. I think... I think right now things have been fine as far as the inventory coming in and getting to the customer and getting the sale done. I think it's more about the unknown and the risks that we're hearing about and that type of thing that would cause us, I think, to want more new equipment at this time to kind of take out some of that risk for the back half of the year. We don't know the exact level of demand that's going to be there, and we'd certainly want enough to get every sale done. And then, you know, if demand even, you know, increases or something like that, that we've got the available inventory for that. So if things stayed steady the way they are and we end, you know, the year with, you know, whatever, around $400 million, something like that, I think we'd be fine. It's just getting it in in kind of time for that. So I don't know that there's a magic number for that. for inventory, 400 kind of feels about right to me as long as we're getting it to satisfy those sales in between.

Okay, understood. Thank you and good luck.

And we now have a follow-up question from Meg Dobre with Baird. Please proceed.

Just a quick one. Thanks for taking a follow-up. Can we get a quick update on the ERP rollout here? Where are you in terms of progress? When do you think you'll be done with this? Maybe an updated view as to what the benefits for the enterprise are going to be out of this initiative and a quick update on cost and how much of a drag we have in fiscal 22.

Dave, I'll start off and also some of the benefits. We're going to see increased functionality, improved customer experience. We're going to see more BI. I think if you look at the ability to add on and integrate different apps out there and some of the things that we tie into what we're seeing in movements with the digital, even the precision, some of the telematic stuff, I think it's all going to tie up, tie in much better and from both a functionality standpoint and long-term enterprise value. So we're pretty positive about that. As we talked about our last call, we've got one test store that's running very well right now. We're continuing with the development. I know it's, you know, when we do a full rollout, I think, you know, potentially try to bring on a few more stores, you know, in Oliver, you know, both the CE and the egg segment, you know, be able to get some of the rental, you know, tested and then, Then for the full rollout, we definitely want that to happen sometime in calendar, you know, I'd say within the next, you know, 12 months for sure for that full rollout. So it's all about timing when we really feel comfortable about it, you know, minimizing any risk of what could potentially happen in that rollout. So that's where we are, and, you know, we're excited about that. So, I mean, I'll let Mark talk a little bit to how you should be looking at the financial side of it.

Yeah, from a cost perspective, similar to what we talked about last quarter. So last year we had just over three million involved with the ERP. This year it's going to be a little bit higher than that. We talked about four, four and a half still looking to be about that. That's in our guidance numbers and hasn't changed really a lot as far as the expectation for the current year.

I see. And just to clarify here, though, the progress is, still sort of in line with your expectations. There are no issues or delays or something like that. And Mark, should we expect these costs to be, I'm presuming they're gonna be coming down in fiscal 23 based on what David was saying as far as the schedule rollout. How should we think about it?

Yeah, I think from a cost perspective, I don't see, well, yes, it should come down some, I would expect next year if we get this done, let's say in 12 months. Costs would come down in the area of like external consulting and that type of thing. And, you know, not, you know, whatever, building as much and capitalizing as much into, you know, to an ERP asset. But yeah, I wouldn't expect any kind of big you know, decrease or anything like that in the initial year when you go live. There'll be a lot of support that's necessary, a lot of support that's, you know, we want to, you know, make sure that our teams are, you know, well supported as they roll on to the new system.

Yeah, like, I'm sure any ERP, you know, never happens fast enough, you know, but I think just we're really making sure our testing, you know, and our training of our team and how to really, you know, just have a robust rollout there and minimize any risk of any type of interruption or anything. So, you know, we want to make sure we've got that dialed in. So, you know, I think everything's fine and it's progressing. And like I say, it never happens fast enough, but we want to get it right. So, you know, that's where we are.

Great. Thank you for that, Greg.

We have reached the end of our question and answer session. I would like to turn the conference back over to Mr. Meyer for closing comments.

All right. Thank you, everybody, for being on the call and your interest in Titan machinery. We look forward to updating you on our progress on our next call. So have a good day, everybody.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.