Titan Machinery Inc.

Welcome to Titan Machinery's first quarter fiscal 2025 earnings conference call. At this time, all participants are in listen-only mode. Your question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, today's conference is being recorded. I'll now turn the call over to Jeff Sonick with ICR. Jeff, you may now begin.

Thank you. Welcome to Titan Machinery's first quarter fiscal 2025 earnings conference call. On the call today from the company are Brian Knutson, President and Chief Executive Officer, and Bo Larson, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal first quarter ended April 30, 2024. If you've not received the release, it's available on the Investor Relations tab of Titan's website at ir.titanmachinery.com. This call is being webcast and a replay will be available on the calls on the company's website as well. In addition, we're providing a presentation to accompany today's prepared remarks, which can be found on Titan's website, again, at ir.titanmachinery.com. The presentation is directly below the webcast information in the middle of the page. 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. 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 included, including those identified in the risk factors section of Titan's 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 today's release or call. Please note that during today's call, we may 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 measures in today's release. At the conclusion of our prepared remarks, we will open the call to take your questions. With that, I'd now like to introduce the company's president and CEO, Mr. Brian Knudson. Brian, please go ahead.

Thank you, Jeff. Good morning, everyone. I'll begin today's call by providing a brief summary of the current market environment. Then I will offer some thoughts on our results and updated fiscal 2025 outlook before passing the call to Beau for his financial review and incremental thoughts on our modeling assumptions. Our first quarter results reflect an industry transition to a more challenging market environment. We have rapidly moved out of a period characterized by restricted supply and high demand into one that reflects lower demand and excess supply of inventory in many product categories. This shift is mainly a product of two influencing factors. First, manufacturing delivery times have rapidly returned to normal following multiple years of supply chain constraints that significantly limited their production volumes. Second, we are seeing a softening of demand across our geographic footprint as ag fundamentals weaken. The combination of suppressed net farm incomes, extended duration of higher interest rates, and broader macroeconomic uncertainty is impacting farmer sentiment and in some cases, delaying equipment purchasing decisions. As a result of these incremental headwinds, we experienced a slower-than-expected start to fiscal 2025, which contrasts with the strong demand for equipment purchases that persisted throughout fiscal 2024. So while the normalization of supply chains and production schedules among our suppliers has enabled us to convert sales from our backlog, which in some cases have been delayed by more than a year, we are sensitive to the increase of new equipment inventory available for sale, as well as used equipment stemming from trade-ins. Therefore, we are adopting more aggressive tactics to manage our inventories down to healthier levels, more aligned with softening industry demand. Big picture and longer term, we are laser focused on managing to healthy inventory levels, which correspond with whole good inventory turns in the 2.2 to 3.2 times range, and minimizing our floor plan interest expense. As we described on our Q4 FY24 earnings call, We believe the path to achieve targeted inventory levels will likely carry through into our fiscal year 2026. But we have a direct line of sight into what we need to do, and I will reiterate one more time, it is currently our highest priority and will remain so until we execute to these desired levels. Turning to some comments on our Q1 results. Although the first quarter performance was below our expectations, we were pleased to deliver positive same-store sales growth in our agriculture segment. And despite demand being incrementally softer than we anticipated heading into the year, we were able to generate first quarter revenue growth of over 10% to $629 million, a record number for the first quarter, even when excluding the contribution from the O'Connor's acquisition. We also experienced a margin compression due to our efforts to proactively manage inventory levels through this transition period. Although this was anticipated, when combined with higher operating expenses, higher floor plan interest expense, and lower sales demand, the combination resulted in an earnings and pre-tax margin performance below the levels we achieved over the last two years, albeit still significantly better than compared to the last down cycle. That said, I want to emphasize that we are very cognizant of the impact that this cycle shift is having on our business, and we are scrutinizing all expenses while prioritizing our growth initiatives. For example, in the near term, we are being vigilant in the hiring of non-revenue generating positions while making sure that we are supporting those areas of the business that are strategically important over the long term, such as our ongoing focus on bolstering our capacity of our service departments. Attracting and retaining skilled technicians is of critical importance given the industry-wide shortages and our desire to grow this reoccurring revenue aspect of our business. Nonetheless, throughout the duration of the cycle, we will continue to look for ways we can maximize operating leverage against the realities of the lower gross profit levels. In response to the softer than anticipated market environment, We felt it was prudent to adjust our foliar modeling assumptions. Bo will cover this in greater detail, but in summary, we are lowering our revenue assumptions modestly while adopting a more aggressive stance than we previously had with respect to equipment margins to further ensure success in managing inventory levels. Our rationale here is straightforward. Staying ahead of the demand curve puts us in a position to be efficient regardless of what happens to industry volumes in FY26. Given the sluggishness in equipment, we continue to lean into our customer care strategy to fuel our reoccurring parts and service businesses. And this is an area where we believe we can continue to drive growth this year and create sustainable growth longer term. In terms of seasonal farming activity, At this stage in the year, planting progress among corn and soybeans is still in full swing. While some of our southern markets got off to a strong start with the early spring, recent precipitation slowed progress over the past few weeks. Within our European markets, both winter and spring crops look very healthy due to optimal moisture levels. And in Australia, while subsoil moisture levels are supportive of the growing season, Recent precipitation has been sparse, and as such, rainfall is still needed in the near term to foster seed germination. Overall, on a global level, our farmer customers remain in pretty good shape, both in terms of growing conditions as well as from a balance sheet perspective. Although net farm income is expected to decline this year, farmers' financial health remains strong with favorable land values further supporting grower balance sheets. In closing, as the cycle progresses, our entire team remains focused on advancing our customer care strategy to ensure we meet our customers' needs and continue to grow our more stable reoccurring parts service and precision businesses while controlling the aspects of the business that we can, such as our fixed overhead and managing our inventory to align with demand. We believe that the combination of these levers will allow us to generate significantly improved financial results versus the prior down cycle, demonstrating the numerous strategic improvements we've made to our business over the past several years. Before turning the call over to Beau, I want to sincerely thank our entire team who remain focused on serving our customers and operating the business with discipline as we face these shifting cycle dynamics. Additionally, our thoughts are with our employees and communities that we operate in, that have recently been impacted by tornadoes and flooding. Safety and health for all of them and their families is our priority as they recover from these recent weather events. I said all of you keep them in your thoughts as well. With that, I will turn the call over to Beau for his financial review.