Titan Machinery Inc.

Greetings and welcome to the Titan Machinery Inc. third quarter fiscal 2024 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Sonick of ICR. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Titan Machinery's third quarter fiscal 2024 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer, Brian Knudson, President and Chief Operating Officer, and Bo Larson, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2023, which went out earlier this morning at approximately 6.45 a.m. Eastern Time. If you've not received the release, it's available on the investor relations page of Titan's website at ir.titanmachinery.com. This call is being webcasted and a replay is 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 by going to Titan's website, again, 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'd 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 risks and uncertainties, including those identified in the risk factors section of Titan's most recently filed annual report on Form 10-K, as updated in subsequent 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. The call will last approximately 45 minutes. At the conclusion of our prepared remarks, we'll open the call to take your questions. With that, I'd now like to introduce the company's chairman and CEO, Mr. David Meyer. David, please go ahead.

Thank you, Jeff. Good morning, everyone. Welcome to our third quarter fiscal 2024 earnings conference call. On today's call, I will provide a summary of our results, then Brian Knudsen, our current president and chief operating officer, who will be transitioning to the CEO post on February 1st, will give an overview for each of our business segments. Bo Larson, our CFO, will conclude the call with a review of our financial results for the third quarter of fiscal 2024 and some commentary around our updated fiscal 2024 full-year expectations. We accomplished a great deal this quarter, completing our acquisition of the Australia-based O'Connor's Group in October 2021, and solidifying our leadership succession plan, which we announced last month, while delivering solid financial results. Brian and his team have been instrumental in jump-starting our integration with O'Connor's, and we couldn't be more pleased with the quality of the O'Connor's team. We recognize an alignment of our strategies during the O'Connor's due diligence process, and the first couple months of operations have proven out how well our organizations mesh. We're thrilled to have them on board and look forward to a bright future together. As it relates to CEO succession, I'm very proud of what our team at Titan Machinery has achieved since my early days in the dealership nearly 50 years ago. And the breadth and depth of our operation is a testament to the talent that we've attracted to the organization. Through the process of planning for this transition over the last several years with our board of directors, We felt it was critical to fill the role with someone who deeply understands the dealership business and our customers. Brian is a natural leader with a successful track record and has proven his ability to excel across all aspects of the business and our company culture, and our employee engagement has never been better. I'm extremely confident in Brian's capabilities and watched his development over the last 20 years as he has excelled in both store and central leadership roles, which makes him uniquely qualified to lead Titan Machinery in our next stage of growth. Moving to our fiscal third quarter financial performance, we achieved record revenues of $694 million, worth earnings per share of $1.32. These results came in below our full potential due to delayed OEM deliveries, prioritizing customer uptime throughout the harvest and end-of-season construction projects, and increased preparation time to complete pre-delivery inspections of new machinery. This dynamic is also visible in our inventory balance at the end of the quarter as the amount of on-hand pre-sold inventory being prepped in our service shops continues to trend above normal levels. Notwithstanding, customer uptime is our top priority, and our team did a great job on meeting our customers' immediate service needs and minimizing downtime during the all-important fall season. Heading into year end, we continue to see demand in excess of OEM production for high horsepower tractors and wheel loaders, which we expect will continue through at least the first half of calendar year 2024. While we are positioned well for a strong fourth quarter, Our recognition of equipment revenue will be dependent on both the timing of new machinery received from the OEMs, as well as our ability to manage service department workflows. We continue to experience substantially longer preparation time to complete the quality pre-delivery inspection and setup process required before delivery to our customers due to the supply chain challenges. Overall, we expect year-over-year revenue growth in each of our segments in the fourth quarter, and we have narrowed the range of our revenue modeling assumptions to reflect our latest expectations for fourth quarter OEM deliveries and demands on our service departments. Looking forward, both our ag and CE customers are experiencing the carryover of three exceptionally strong years, putting them in an excellent financial position and creating optimism as I look to the future. Additionally, over the last 24 months, we have completed some high-quality and strategic acquisitions, which will strengthen our bottom line as they get fully integrated into our system. With that, I'll turn the call over to Brian Knutson for his segment review.

Thank you, David, and good morning, everyone.

Today, I will provide a recap of our fiscal third-quarter segment drivers and and then review some of our high-level expectations for the balance of fiscal year 2024 across our respective segments. I'll begin with our domestic agriculture segment. We achieved another record revenue performance on top of last year's outstanding results driven by a combination of positive same-store sales and contribution from the Pioneer acquisition from earlier in the year. As you heard from David, these results were constrained by a few factors. While improving, limited OEM production remains a factor preventing us from meeting the existing demand for high horsepower tractors and self-propelled sprayers. And for those new units that we are receiving, our service team is having to spend more preparation time on each pre-sold new unit before delivering it to our customers due to supply side challenges. While this isn't a new phenomenon for us, as the additional prep time has been something we face throughout this fiscal year, our service department capacity was stretched in the third quarter given the seasonally higher volumes and a need to prioritize our support of existing customer equipment throughout harvest. Now that our customers are mostly done with harvest activities, we expect to catch up on delivering some of the incremental buildup of pre-sold units throughout the fourth quarter. Bolstering our service network and capacity remains a key priority for our organization, and as such we will continue to focus on recruiting, hiring, and training skilled technicians. With respect to harvest and customer sentiment, favorable crop development in the later part of the growing season produce average to above average yields throughout our footprint. Although corn pricing has softened throughout the year, There was quite a bit of corn that was forward contracted in the $5 to $6 per bushel range, and current prices for soybeans, sugar beets, potatoes, and edible beans remain very attractive, as well as cattle prices. Yield trends continue to be positive, and some input costs have been decreasing. And with three consecutive years of historically high net farm income, farmers' balance sheets are in great shape with debt-to-equity ratios historically low, and are further aided by increasing land values. Overall, our customers are in a great position to post another solid year of income. Looking to the balance of fiscal 2024 for our agriculture segment, we remain in a position to deliver a strong fourth quarter based on positive fundamentals such as healthy farmer cash receipts, which is supporting net farm income at levels well above historical averages. continued tax incentives surrounding Section 179 and bonus depreciation, and the additional backlog of pre-sold units awaiting pre-delivery inspection and final delivery to our customers. Shifting to our domestic construction segment, similar dynamics to what I just described for agricultural segment are also relevant here. OEM wheel loader production does not yet meet demand. Preparation time to get new units ready for delivery to customers is longer than normal, And with a busy fall construction season to complete projects ahead of winter, our service departments were balancing competing demands, but always keeping existing customer machinery running as the top priority. I'd also note that there was a shift in timing of equipment deliveries this year versus last, which has some influence on the comparable growth rates. For instance, last year we had a really strong third quarter performance, whereas we expect a stronger fourth quarter performance in the current year. As a result, we realized a year-over-year same-store sales decrease of 10.3% in the third quarter this year. Despite third-quarter year-over-year comparisons, we achieved rental fleet dollar utilization of 33.2% and absorption of 88.5%, both of which are very high compared to historical levels for this segment and show the sustained improvement in these areas. General construction activity across our footprint remains at healthy levels, and infrastructure, energy, and agriculture activity continue to support demand for construction equipment. Looking ahead to the fourth quarter, we expect the timing dynamic I mentioned to be a tailwind for us and result in year-over-year growth on a same-store basis and finish this fiscal year on a high note for our construction segment. Now moving to an overview of our Europe segment, which was formerly known as our international segment prior to our acquisition of O'Connor's in Australia. Our Europe segment represents our business within the countries of Bulgaria, Germany, Romania, and Ukraine. Rainfall throughout the growing season varied across these countries, which helped drive above average yields in Germany and Ukraine. But dry conditions in Bulgaria and Romania caused yields to be below average. These lower yields negatively impacted farmer profitability, and as a result, we saw a softening in demand for new equipment purchases in these two countries. Overall, same-store sales decreased 7.5% in our fiscal third quarter. Looking to expectations for the rest of the year, we continue to expect European ag fundamentals to moderate. However, last year's fiscal fourth quarter was significantly impacted by limited equipment availability and did not follow normal revenue seasonality patterns for our Europe segment. This dynamic should normalize this year and is the basis for our expectation to achieve year-over-year growth in this year's fourth quarter. Last but not least is our new Australia segment. Although we closed on the O'Connor's acquisition in October, those results won't be consolidated into our financials until the fourth quarter. Harvest has now started in Australia and is providing evidence that the O'Connor's footprint is one of the most consistent areas in the country. Growers in our footprint are seeing above-average yields as they begin harvest activities, while the same cannot be said for much of the rest of the country. Recent moisture is presenting some challenges to the current harvest, but it is helpful to restore moisture levels in the region for next year's crop. We continue to be extremely excited about the Australian market and the opportunity to build upon what the O'Connor's team has accomplished. We are working through our integration strategy and are grateful for the entire team's eagerness as we come together. With that, I just want to thank all the members of our Titan family for their hard work and focus as we kept growers and contractors up and running during the important fall season. Now I will turn the call over to Bo to review our financial results in more detail.

Thanks, Brian. Good morning, everyone. Starting with our consolidated results for the fiscal 2024 third quarter, total revenue was $694.1 million, an increase of 3.8% compared to the prior year period. Our equipment revenue increased 2.5% versus the prior year period, led by incremental revenue from our recent acquisitions, as well as positive same-store sales growth in our agriculture segment. Growth was also visible across our other revenue streams as well, with our parts revenue increasing 5.7%, service up 14.9%, and rental and other revenue up 4.2% versus the prior year period. Gross profit for the third quarter was $138 million, and as expected, gross profit margin decreased by 100 basis points to 19.9%, driven primarily by lower equipment and parts margins, partially offset by higher service and rental margins. It's worth noting that the equipment gross profit in the prior year benefited from the recognition of a $2 million accrual on the expected achievement of annual manufacturer incentive programs, which is not included in this year's third quarter results. As a reminder, we recognize $6.4 million of manufacturer incentives in the prior fiscal year spread across Q2, Q3, and Q4. Our guidance, which I'll talk about further in a few minutes, includes a similar level of manufacturer incentives for the current fiscal year, all of which, if earned, would be recognized in the fourth quarter. The difference in timing relates to the progress in achieving related targets. Our updated guidance includes the full year's impact of manufacturer incentives to be recognized in the fourth quarter and part of the reason for keeping our EPS guidance unchanged. Operating expenses were $92.1 million for the third quarter of fiscal 2024, compared to $84.9 million in the prior year. The year-over-year increase of 8.5% was led by additional operating expenses due to acquisitions that have taken place in the past year, as well as an increase in variable expenses associated with increased sales. Additionally, the inconsistent OEM deliveries and longer preparation time for pre-delivery inspection of new equipment have created some temporary inefficiencies that we are tackling with an eye toward returning to normal conditions in these areas as soon as possible. On a consolidated basis, I would expect operating expenses as a percentage of sales in the fourth quarter to be similar to or modestly lower than the 13.3% realized in the third quarter. Over the past two years, we have made seven acquisitions that accounted for approximately $670 million in annualized revenue. Overall, and as is typical, Those acquisitions came with a higher operating expense as a percentage of sales than our base business, albeit some with favorable gross margin offsets. As David and Brian have touched on already, we are focused on integration activities and resource reallocation so the business is optimized to deliver operational efficiencies through the cycle. We have a long track record of acquiring businesses and improving their financial metrics over time to be in line with our overall financial targets, and I'd expect that we'll be able to demonstrate that in the future as well. Floor plan and other interest expense was $5.5 million as compared to $1.8 million for the third quarter of fiscal 2023, primarily due to higher interest-bearing floor plan borrowings driven by higher inventory levels. Additionally, We use the capacity of our existing bake syndicate floor plan facility to finance the O'Connor's acquisition. Net income for the third quarter of fiscal 2024 was $30.2 million, or $1.32 per diluted share, and compares to last year's third quarter net income of $41.3 million, or $1.82 per diluted share. Now turning to our segment results for the third quarter. In our agriculture segment, sales increased 7.7% to $531.4 million. This growth was driven by our acquisition of Pioneer equipment, as well as same-store sales growth of 3.5%, which was achieved on top of a very robust 46.4% same-store sales increase in the prior year, and same-store sales growth of 28% the year prior to that. As previously discussed, Third quarter revenues were constrained by delayed OEM deliveries and capacity constraints of our service department. Agriculture segment pre-tax income was $35.1 million and compared to $42 million in the third quarter of the prior year, which implies a pre-tax margin decrease of 190 basis points to 6.6%. In our construction segment, sales declined 10.3% to $77.5 million, As Brian already mentioned, the timing of equipment deliveries in the back half of this year versus the back half of last year creates some variability in the year-over-year comparability. We expect this headwind to shift to a tailwind in the fourth quarter, where we anticipate generating year-over-year growth. Pre-tax income was $4.1 million and compared to $6.1 million in the third quarter of the prior year. And our year-over-year pre-tax margin decreased by approximately 180 basis points to 5.2%. In our Europe segment, sales decreased by 4.3% to $85.2 million, which reflects a 7.9% currency tailwind on the strengthening euro. Net of the effect of these foreign currency fluctuations, revenue decreased 10.4%, reflecting a softening of demand in Bulgaria and Romania, which were negatively impacted by the aforementioned dry conditions and lower yields. Pre-tax income was $5.1 million and compares to $8.5 million in the third quarter of fiscal 2023, which implies a pre-tax margin decrease of 350 basis points to 6%. Given some of the timing and constraint-related items we mentioned, it's useful to look at year-to-date margins across our segments to get a better sense of things. Through the first nine months of the year, the ag segment's pre-tax margin is 6.5%. or 70 basis points lower than the prior year. CE's pre-tax margins are 5.9%, which are flat with the prior year. And Europe's pre-tax margins are 6.8%, or 90 basis points lower than the first nine months of the prior year. Now on to our balance sheet and inventory positions. We had cash of $70 million and an adjusted debt to tangible net worth ratio of 1.1 times as of October 31st, 2023, which is well below our bank covenant of 3.5 times. Equipment inventory increased $98.8 million in the third quarter. As we discussed in detail during our second quarter earnings call, our domestic ag segment was still a little short of targeted inventory levels at that time. And we expected inventories to increase modestly during the third quarter based on planned OEM ship dates and projected customer deliveries. We also expected to start working down the amount of pre-sold equipment and inventory back toward normal levels. However, as David touched on earlier, given the dynamics of longer preparation times and prioritization of service for customers' existing equipment, our progress on reducing the amount of pre-sold equipment and inventory stalled. Given that we are largely past the busy fall season, we should have more time to dedicate toward delivering pre-sold equipment to customers in the fourth quarter. but the inventory balance at the end of the fiscal year will be dependent on both the timing of incremental equipment deliveries from OEMs, as well as the pace of our pre-delivery inspection work. Overall, we expect there will likely be an increase in our total ending inventory on the balance sheet, similar to the increase we saw in the third quarter, and then stabilize within a range thereafter as things normalize. We'll also see the O'Connor's balance sheet added to our financials in the fourth quarter as well. With that, I'll finish by sharing a few comments on our fiscal 2024 full-year guidance, which we have updated to reflect the year-to-date performance of our businesses. We are positioned well for a strong fourth quarter, and we have narrowed the range of expected revenue for each segment, contemplating the continuation of limited availability of a few key equipment categories and the longer prep times for pre-library inspections we have been experiencing. We now expect our Ag segment to finish up 20 to 23 percent, our construction segment to be at 4 to 7 percent, and our Europe segment to be at 4 to 7 percent. With respect to our new Australia reporting segment, we completed the O'Connor's transaction on October 2nd. Similar to Europe, these results will be reported on a one-month lag, and as anticipated, this will result in three months of activity being reported in our fiscal 2024 results. With all of that said, we are refining our fiscal 2024 revenue estimate to be $70 million to $80 million with a diluted EPS contribution in the range of 10 to 15 cents when factoring in financing and integration-related expenses. As a reminder, fourth quarter gross margins are typically a few hundred basis points lower sequentially than the third quarter, largely driven by mix and larger tax-incentivized purchases with multi-unit discounts. The same is expected to hold true this year. Additionally, we continue to expect modest normalization of equipment margins consistent with improved inventory levels and equipment availability. Gross margin in the third quarter was about 100 basis points lower than the prior year's third quarter. and I would expect a similar 100 basis point normalization year over year in the fourth quarter, partially offset by the anticipated incremental manufacturer incentives that I already mentioned. Overall, with margin strength offsetting slightly lower sales expectations for the year, our underlying EPS guidance, excluding the positive impact from the O'Connor's transaction, remains unchanged as compared to the guidance that we established at the beginning of the fiscal year. We look forward to finishing the year strong and delivering on the record results that we committed to nine months ago, and we are really proud of that. This concludes our prepared comments, and we are now ready to take questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Thank you. Good morning. Good morning.

Good morning, Ted.

Hey, so I've got two questions. The first one is just going into the issues with regards to prep time, which I just wanted to get a little more color around. Is it a labor issue and you need more people? Is it equipment that's being delivered and needs extra work for some reason because it's coming in you know, in a less, you know, lesser state than is normal. Just kind of what's driving that aspect, if you would, with regards to delay in top line.

Sure. You know, Ted, it's really a combination of all the things that you mentioned. You know, if you, as an example, were to fly over the global four-wheel drive plant here in Fargo, you see a lot of units outside and Typically, what you're going to find is they're either waiting on a truck for delivery due to the shortage of truckers out there right now, or they are missing a component, you know, some of the supply chain challenges that are still out there, and they've got to keep the assembly line moving, or the quality of the component that, you know, CH received from one of the suppliers, you know, what didn't pass inspection. So, again, they kept the line moving. They caught it at the plant. So they're having those delays on their side, and that creates some of these timing issues we've talked about. Then as we get those units, as far as the additional prep time that we're seeing on our end, is anytime you've had one of those units where it can't go through the normal build process, and you've heard a lot of commentary from Deere and C&H and Agco on this in previous quarters, you always have a risk then of of quality issues or other things. So we just take a lot of pride in our, you know, commitment to our customers and excellence in the units when we deliver them to them. And so, you know, that's really increased that inspection time to make sure we go through a multi-point inspection. We're catching things. And it's just, then we got to fix those things. And so it just adds to the time. And then, as we've also mentioned, we do add a lot of different technology and things that's very commonplace for us to do for our customers. And the supply chain is still constrained and deliveries are delayed on certain components, both within technology, but also with certain casting components like weights and tires and wheels and so on. So still... you know, waiting on some of those components. But collectively, that all is what's leading to that significant increase in prep time.

And I would just add to that, you know, general supply chain, I think everybody said over time has continued to improve, and that's definitely the case. You know, as we look into next year and kind of get past the first half of the year, we largely see a lot of these issues being behind us and getting back towards normalized conditions. We... Specifically called it out here because given the higher seasonality volumes, right? It did create a bit of a pinch point in terms of the amount of equipment we could get delivered Kind of prevented us from reaching the full potential for the quarter Okay, and then my sorry I Woke up with something today.

So but my second my second question is around O'Connor's in Australia and And, you know, I mean, I'm just kind of curious, you know, you narrowed your guidance range, taking the top down by 10 million. And, you know, is that a result of a change in kind of macro dynamics within Australia? Is that a result of, you know, having gotten further into the weeds with regards to the business and a better understanding of it? Just kind of a little color in terms of, you know, what prompted you to take the top end of that range down?

Yeah, absolutely. Appreciate the question. It is definitely the latter. It's really just getting in the weeds, understanding what equipment is in inventory, what equipment needs to get in the country, and expected timing of delivery to customers. So really just being able to take the time as we got through close to just sharpen the pencil on exactly what would unfold for these three months was just the narrowing on that range there.

Okay. All right, I'll get out of the queue. Thanks.

Thank you. Our next question comes from the line of Mig Dolbre with Robert W. Baird. Please proceed with your question.

Good morning, everyone. Thank you for taking my question. Just a quick clarification. I thought I heard you talk about inventories coming up again sequentially in 4Q. And if I heard that correctly, I guess what I'm trying to figure out is when I look seasonally in your business, typically inventories come down sequentially in the fourth quarter. And that feels a little bit different right this year. And I guess I'm also wondering if you sort of had these disruptions that kind of prevented you from delivering some machines in Q3. Wouldn't you be able to hopefully catch up on some of that in Q4, which, again, at least in theory, should bring inventories down sequentially?

Yeah. Hey, Mick. Good morning, and thanks for the question. First of all, to start with, it may be a clarifier, right? As we talk about pre-sold equipment awaiting delivery to customers, that's always turning, right? So the unit that was there in the first quarter has been delivered to a customer. It's not still sitting there. Units that were there in Q2 still sitting there. But what we're seeing right is a continued delivery from the OEMs and we're needing to process everything through the chute. So definitely in the fourth quarter we look to be able to chip away at the amount of pre-sold that we have in that inventory balance. But again as we looked at how timing looks to be for everything and with OEM deliveries right and the OEMs are looking to finish their year strong. and get as much out as they can. I think we're still seeing some push to make up for some of those supply chain challenges that had otherwise held them back in parts of the year. If you recall last year, we received a tremendous amount of equipment right toward the end of the calendar year between really Christmas and the end of December, and then a short period of time to really be able to turn that around and deliver to customers. It's really those factors that we're talking about. You did hear it, right? We expect another incremental increase on inventory there and then kind of stabilizing in that range and looking to continue to normalize that pre-sold backlog as we work through the first part of next year.

Yeah, Mick, I would just point out to this, BJ, adding the O'Connors to the balance sheet, as Bo mentioned, the prepared remarks as well as our other acquisitions. But Also, just the timing that we've talked about here. You're right, historically, we would come down by fiscal year end, but everything's kind of delayed, especially in certain products, a quarter or so. I'd build that in as you look with your modeling. We typically would then be more flattish and then build back up throughout the year again. I think just delay in all that as we get into the end of the year and into Q1.

Understood. Thank you for that. So my follow-up, if we're sort of looking at inventories going up again in the fourth quarter, I guess I'm curious as to how you're thinking about fiscal 25, and I'm not looking for you to provide your own guidance in terms of the top line, but obviously Deer commented on Next year, CNH, you know, your OEM is thinking that volumes are going to be down as well. So I guess with the inventory built that you have, if indeed volumes are going to be a little bit lower in your fiscal 25, how do you think about managing that inventory and, you know, your own order placing with the OEM? Thank you.

Yes. And you're right, I think the OEMs and their latest earning calls provided some color and deer being the end of their fiscal year provided some more granular color on their outlet for the next 12 months. For us, right, I mean, it's not something, we've been continually managing and estimating where things are going. You're always looking out a year ahead, right? In terms of dialing things in and what we're ordering for next year, that's stuff that we've been working on already for quite a while and are feeling really good about where we're sitting and the dials that have been turning over time. We'll absolutely manage inventory and focus on that. But overall, as we've said, we do feel good about where our levels are at. On the ag side, we want more four-wheel drive tractors. On the CE side, we want some more wheel loaders. But one data point for you, just comparing it to say the prior cycle, the number of combines that we have in inventory is about 55% lower than it was in the prior peak. So I think some of that's reflective of the industry and the constraints that were out there, but then also our back office team that's focused on managing inventory levels, both what we're ordering from a new site and also the used equipment valuations. The dollars that people are making comparison to in terms of prior peak, I think you need to consider the decade of price increases, the acquisitions that we've done, and otherwise. I mean, overall, we feel really good about the inventory levels. But I appreciate the comment, and we'll certainly, you know, as industry volumes increase, trended downwards, we'll be managing our inventory accordingly. We want to keep inventory trends high. We want to keep interest-free terms, and we want to keep our balance sheet really healthy.

Yeah, and, Meg, I would just add, you know, as you know and as Bo mentioned, you know, when you're talking about 6 to 12 and greater months lead time here, you know, you better already have done the actions in place, you know, and we've done that and we feel really good about that and heading into next year and just, as he mentioned, our professional team that just focuses on that for a living. That's all they do, really watching a lot of the analytics and metrics and running the dials on our inventory. So we feel really good about the actions we've taken. I think as We mentioned our previous call, and as Scott Wine mentioned on the CNH call, there's a little bit of pockets with some of that lower horsepower tractor inventory, rural lifestyler stuff that we're a little bit longer on than we'd like. But we've got actions in place on that as well to clean that up. And then as we mentioned with four-wheel drives and wheel lowers and so on, there's some pockets that we're still a little short on. on some certain categories. But other than that, we feel really good about where we're positioned to deliver the fourth quarter results that we need to, and then as we transition into next year and what we anticipate the market's going to do next year.

Appreciate it.

Thank you. Our next question comes from the line of Alex Regal with B. Reilly Securities.

Please proceed with your question.

Thank you, and good morning, gentlemen. A couple of quick questions here. First, your full EPS guidance includes a range of 65 cents, of which I believe 22 cents could be from the incentives. So if you could maybe talk about some of the catalysts being at the high end or low end of that 43 cent difference.

Well, this isn't going to sound overly sophisticated, but it's related to the revenue and where that comes in in terms of whether it's toward the top end or the low end of the range. We feel pretty good in terms of where we're going to be operating from a margin perspective. Operating expenses are pretty well honed in, so it really is just a function of how much of that equipment gets delivered.

That is helpful. And then as it relates to sort of inventory kind of walking up a little bit in the fourth quarter, I believe you might have thought that it would kind of tail off from the third quarter and decline into the fourth quarter, but now it sounds like you're expecting it to increase a little bit. Maybe I guess my question is, what has changed? And then what's the mix of inventory across ag versus construction? Is one higher or lower than where you'd like the optimal level to be?

Yeah, maybe addressing the latter first. No, I don't think so. I mean, in general, we're feeling pretty good about our inventory levels. On the CE side, you know, the one that's short is wheel loaders, like we mentioned. But otherwise, across the board, in general, it's good. There are probably a couple areas, just like on the ag side, for example, low horsepower tractors, where we want to continue to look to trim just as we anticipate trends going into next year. You know, on the Europe side, also some areas there that we'd be looking at to try to trim as we're seeing some softness specifically in Bulgaria and Romania. But on the whole, there's not, you know, a drastic difference in terms of our thoughts or level of health between ag and CE, as you were asking there.

Very helpful. Thank you very much.

Thank you. Our next question comes from the line of Daniel Embro with Steven Zink.

Please proceed with your question.

Hey, guys, and thanks for the question. We were just wondering how much visibility do you all have into these OEM deliveries improving as we move into like the fourth and first quarter? And since we're going to have a similar dynamic to last year with maybe a heavier fourth quarter, do you foresee maybe delivery timing being a problem again in the first quarter? since you might get a large influx in the fourth quarter?

So we definitely anticipate being a strong fourth quarter revenue-wise compared to the prior year, and even a bit if you do the math from where we were in the third quarter. Obviously, we have more equipment available and we have backlog there, right? So in terms of the confidence in the fourth quarter, we're feeling good about that stuff. And I think at the same time, you know, we have talked a little bit about today in terms of anticipating that the inventory increases a bit from where we're at. So I think both of those we're saying is what our expectation is, right? And then in terms of setting up for next year, again, we're feeling like we're ending the year at a healthy spot inventory-wise. We'll provide more context guidance-wise, you know, as we get into the March year-end call. Yeah, did that answer your question?

Yeah, that's perfect. And then on the service delay side, you mentioned wanting to hire more technicians. How's that going? How is the technician availability? And are you having any trouble there that could limit your ability to catch up on this throughput?

Yeah, good question. There's a real shortage out there, just technicians in general, whether you're talking about the airline industry or trucking industry or marine power sports, wherever, automotive. We really hit hard into this with our customer care strategy several years ago and have just a lot of actions in place that we feel really good about and You know, have been the pilot and the cutting edge for many people in our industry that are trying to follow suit and keep up with us on a lot of the things we're doing. We just now came out with the first accredited apprentice program for our industry. We have the first student tech scholarship sponsorship program that we started years ago that we're really starting to see the fruits of now. and then our internship programs as well as the recruiting efforts that we're doing, the sponsoring that we're doing with tech schools and relationships we have with the high schools and, again, those tech schools. And so, you know, it all takes time, and thankfully we put a lot of the actions in place that we did that we're now able to see some of the fruits of the labor on because, you know, you've got a lot of baby boomers, a lot of workers that are retiring now exiting the workforce, and so, as you can imagine it, It takes, in order to grow the base and add the amount of technicians we need, and then to offset the retirements, it takes quite a bit, and we feel good about the traction and momentum we've got in that. That's going to remain an absolute front and center priority for us as we go forward.

All right, awesome.

Thanks for the color, guys.

Thank you. Our final question this morning comes from the line at Steve Dyer with Craig Hallam Capital Group. Please proceed with your question.

Hey, morning, guys. Curious on the $6 million of manufacturer incentives they expect to achieve in Q4, I guess, is that dependent on C&H and your OEM partners meeting their delivery schedules to you, or is that fully within your control?

For competitive reasons and others, we don't really get into a lot of the mechanics on that, but I guess what I would say, right, is we have it in our guidance and that reflects our confidence in achieving the number. There are definite timing differences between this year and last year and that's why we put a little bit more perspective on that.

Good. Then for a second question, what percent of equipment is leased versus sold? today? And I guess how is that mix trended over the past several years?

Yeah, right now we're in single digits on leasing versus sold. Just a tremendously low amount being leased. And that has trended way down. I think Deirdre mentioned also on their call, you look at that's a big difference between 10 years ago and today is not only the level of leasing, but the quality of the leases. So one and two year leases are Everybody was doing those. They were very problematic back then. And then, of course, when the downturn had hit, then those lease returns were coming back in addition to a glut of supply of use from the overbilling, overselling anew that all happened. And none of that trifecta is in place today. So we have way less leases. The leases we do have are minimum three-year, mostly five-year, very quality leases. And then, again, as Bo mentioned with the combine example, you just got a lot lower levels of used equipment in play today. And then, you know, unfortunately, it constrained our revenue opportunity the last year or two here. But the limited production capabilities just didn't put out the amount of new units. So it results in an older fleet, you know, in most categories except to a degree combines. And so that helps with the dampening. And then with less new sold, you just didn't get the amount of used. And so again, back to the shortage of used supply. So all those components are tremendously healthy and very supportive factors as we go into next year.

Thanks. Best of luck, guys. Thank you.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Meyer for final comments.

Okay. Well, thank you, everybody, for your time today and your interest in Titan Machinery.

Thank you.

That concludes our conference call.

Thank you.

This concludes our conference call. Thank you for your participation. You may now disconnect your lines.