Titan Machinery Inc.

Greetings. Welcome to Titan Machinery Inc. Third Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Thank you. Please go ahead.

Thank you, and welcome to Titan Machinery's third quarter fiscal 2025 earnings conference call. On the call today from the company are Brian Knudson, President and CEO, and Bolar CFO. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2024, which is also available on Titan's Investor Relations website at ir.titanmachinery.com. In addition, we are providing a supplemental presentation to accompany today's prepared remarks, along with the webcast and replay information, all of which can be found on Titan's Investor Relations website within the events and presentation section. 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. The statement did not guarantee future performance, and therefore, undue reliance should not be placed upon them. Forward-looking statements are based on management current expectations and involve inherent risks and uncertainties, including those identified in the forward-looking statement section of the earnings release and 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 to assume no obligation to update any forward-looking statements that may be made in today's release or call. Please note that during the call, we may discuss non-GAAP financial measures, including results on an adjusted basis. We believe the financial measures can facilitate a more complete analysis and greater transparency into Titan's ongoing financial performance, particularly when comparing underlying results from the previous period. We included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures in today's release and supplemental presentation. At the conclusion of our prepared remarks, we'll open the call to take your questions. And with that, I'd now like to introduce the company's president and CEO, Brian Knudson. Please go ahead, Brian.

Thank you, Jeff, and good morning to everyone on the call. I'll start today by covering the current market environment, our priorities as we manage through this challenging market cycle, and some commentary on each of our operating segments. Then I will pass the call to Beau for his financial review and incremental thoughts on our modeling assumptions for the remainder of the year. As anticipated, the industry continues to experience softer demand conditions, reflecting the combination of challenging agricultural fundamentals, which include lower net farm income due to the decline in commodity prices across key cash crops, high input costs, and the lagging effect from higher interest rates. Our domestic agricultural segment performance was generally in line with our expectations and the weaker demand environment played out as anticipated. We continue to be highly focused on managing our inventory levels downward. We have made some early progress, but we are only just beginning to move the needle and still expect the majority of inventory reductions to be realized as we progress through fiscal 2026. Nonetheless, In the third quarter, we were able to decrease our total inventory by approximately $115 million. This result was achieved through our aggressive strategy geared toward enhanced sales incentives to drive retail demand. As anticipated, these proactive measures are compressing our equipment margins in the near term. And margins could see further compression as we move through the first half of calendar 2025. depending on market conditions, and if we see the opportunity to move more quickly toward our targeted equipment inventory levels. However, we believe these actions are critically important to lessen the impact that higher inventory and lower demand has on our financial performance, and eventually will accelerate our return to a more normalized margin profile as the industry cycle progresses. turning to our European operations, in which we experienced more challenging conditions in the third quarter than previously anticipated. This is particularly true in Romania, where demand continued to weaken due to severe drought conditions, which have reduced some crop yields to the lowest levels in more than a decade. Bulgaria and Ukraine have demonstrated more resilience relative to Romania, but Eastern Europe in general was soft and we continue to monitor these markets closely. In Australia, we experienced well below average rainfall and an early frost event during the critical growing season. This had a negative impact on yields, and as a result, we anticipate a softening of demand through the fourth quarter relative to our prior expectations. Finally, in our construction business, our performance reflects a more normalized demand environment which was consistent with our expectations. We achieved a 10% same store sales increase. However, much of that is timing related, and we still generally expect our construction business to finish the year flat as compared to the prior year. Looking further ahead, we remain optimistic on the segment's outlook as the federal infrastructure bill provides healthy support for the industry over the long term. while near-term support is provided by improved equipment availability and new product introductions from our suppliers. As we navigate the current industry cycle, we believe it is important to highlight several key differences from the last downturn in the mid 2010s that underscore why both the industry and our company are better positioned this time. At the industry level, Farmers entered this cycle with considerably healthier fundamentals. Stronger balance sheets following multiple consecutive years of good profitability and increased lamb values providing some buffer against current headwinds. Additionally, the North American fleet age continues to support replacement purchases and today's precision agriculture solutions are helping farmers achieve higher returns on their operations through greater productivity, further supporting equipment investment. It is also encouraging that each of the major agricultural manufacturers have been lowering production levels to help right-size inventory levels across the industry. At Titan specifically, although we can't control the demand environment, we've made structural improvements that enhance our resilience. Since the last downturn, we have had footprint optimization and other cost-out restructuring efforts, centralized inventory control, execute on strategic M&A that helps leverage our scale and drive higher levels of profitable growth, and we've doubled down on our customer care strategy, which has allowed us to build a more robust reoccurring revenue stream through our higher margin parts and service businesses. The fruits of this important initiative can be seen in absorption levels that have increased over time and will continue to improve moving forward. We've also taken earlier and more decisive action on inventory management this cycle, as I covered a few minutes ago. Finally, we are also evaluating a variety of prudent measures as we work through our budgeting process for fiscal 2026 to navigate this industry cycle while continuing to lean into our growth initiatives. In closing, we are encouraged by the early progress we are making with our inventory reduction strategy to reach targeted levels as quickly as possible. We are confident that the structural improvements to our business, combined with the decisive actions we are taking, position us well to navigate this cycle in a decidedly more efficient manner than in the past. I want to sincerely thank our employees for their dedication to supporting our customers during these more challenging times, as their efforts remain crucial to the success of our customer care strategy and our ability to deliver best-in-class service. With lessons learned from the previous cycle and our now stronger foundation, we are positioned well to deliver significant value to our shareholders over the long term. With that, I will turn the call over to Beau for his financial review.

Thanks, Brian. Good morning, everyone. Starting with our consolidated results for the fiscal 2025 third quarter, total revenue was $679.8 million, a decrease of 2.1% compared to the prior year period. Underlying this performance was the same store sales decrease of 10.5% driven by lower demand for equipment purchases due to the challenging industry conditions that Brian reviewed. This same store decline was largely offset by the acquisitions of O'Connor's that we completed in October 2023 and Scott Supply in January 2024. Gross profit for the second quarter was $110 million, and gross profit margin contracted by 360 basis points year-over-year to 16.3%. driven primarily by lower equipment margins resulting from higher levels of inventory across the industries we serve, and our proactive initiatives on managing our inventory down to targeted levels. The underlying equipment gross margin percentage for our domestic ag business was 30 basis points below our expectations heading into the quarter, with all other segments at or modestly above their respective equipment gross margin expectations. Consistent with the guidance we gave on our second quarter call, the midpoint of our updated guidance contemplates another 50 basis points of compression sequentially in our domestic ag equipment gross margins for the fourth quarter. Operating expenses were $98.8 million for the third quarter of fiscal 2025, compared to $92.1 million in the prior year period. The year-over-year increase of 7.2% was led by acquisitions that we've executed in the last 12 months. On this note, I'd remind you that our O'Connor's acquisition was consolidated into our operations in the fourth quarter last year, which will provide a more consistent year-over-year comparison when we report the upcoming quarter. Floor plan and other interest expense was $14.3 million as compared to $5.5 million for the third quarter of fiscal 2024. reflecting the impact of our higher level of interest bearing inventory, including the usage of existing floor plan capacity to finance the O'Connor's acquisition. It's also worth noting that the quarter had about $900,000 of incremental interest expense that was previously classified as rent expense, and this classification will continue moving forward as it is a direct result of the accounting for the purchase agreement of the 13 leased facilities that was executed and disclosed in the prior quarter. Net income for the third quarter of fiscal 2025 was $1.7 million, or $0.07 per diluted share, and compares to last year's third quarter net income of $30.2 million, or $1.32 per diluted share. Now turning to a brief overview of our segment results for the third quarter. Our agriculture segment realized a sales decrease of 9.3% to $482 million, driven by a same-store sales decline of 10.8% in the third quarter. This decrease was partially offset by contributions from our acquisition of Scott Supply in January 2024. Agriculture segment pre-tax income was $1.9 million, compared to $35.1 million in the third quarter of the prior year. The year-over-year decrease in profitability reflects the softer retail demand environment due to lower farmer sentiment, as well as higher levels of inventory we are actively managing down to targeted levels. In our construction segment, same-store sales increased 10% to $85.3 million from $77.5 million in the prior year, and benefited from some favorable timing of equipment deliveries relative to the back half of the prior fiscal year. Overall, we continue to see year-over-year stability in this segment. However, supply chain catch-up has driven inventory levels higher for both the construction industry as a whole and for Titan. While this isn't as acute as what we are experiencing in our agriculture segment, our inventory reduction strategy is nevertheless weighing on equipment margin in this segment as well. Pre-tax last for the segment was $0.9 million, which compares to pre-tax income of $4.1 million in the third quarter of the prior year. In our Europe segment, sales decreased 26.8% to $62.4 million, which included a same-store sales decline of 27.1% and compares to a 7.5% same-store sales decrease in the prior year. This significant divergence exemplifies the severity of the drought conditions that Brian commented on, in addition to the broader softness of the ag industry fundamentals. Pre-tax loss for the segment was $1.2 million, which compares to pre-tax income of $5.1 million in the third quarter of fiscal 2024. In our Australia segment, sales were $50.1 million and pre-tax loss was $0.3 million. In addition to weather-related impacts, this segment is facing very similar end-customer dynamics as those we've discussed today across our enterprise. Now on to our balance sheet and inventory position. We had cash of $23 million and an adjusted debt to tangible net worth ratio of 1.8 as of October 31, 2024, which is well below our bank covenant of 3.5 times. Regarding inventory, in the third quarter, we managed to reduce our equipment inventory by approximately $101 million sequentially to $1.2 billion, which is a good start. And as expected, we're driven by decreases in our new inventory levels. As for the rest of the year, we anticipate making more progress on inventory reductions, but there are a few offsetting variables as well. We have inventory ordered for Q1 delivery to customers, some of which will be invoiced for before the end of our fiscal year. And as I've discussed previously, our used equipment will grow through the end of the fiscal year as we take trade-ins on our Q4 new equipment deliveries. As I mentioned during our last quarterly update, we anticipate that our inventory reduction will evolve in the coming quarters and shift to a more significant reduction of used equipment as we get into next fiscal year. This dynamic hasn't changed and we are on track to realize more substantial decreases in fiscal 2026 toward our goal of reducing equipment inventory by approximately $400 million from the $1.3 billion peak at the end of the second quarter. With that, I'll finish by reviewing our updated fiscal 2025 full year guidance. Relative to our prior expectations, Our revisions are limited to the Europe and Australia segments, which we are lowering our outlook given some of the isolated challenges those markets are facing following previously discussed weather-related impacts. For the Europe segment, our updated assumption is for revenue to be down 20 to 25 percent, as compared to down 12 to 17 percent previously. And for the Australia segment, We expect fiscal 2025 revenue to be in the range of $220 million to $230 million as compared to a range of $230 million to $250 million previously. Each of these segment assumptions reflect the more challenging environments we're facing and cascade down to our revised expectations for fiscal 2025 consolidated adjusted diluted earnings per share. We now expect full year adjusted EPS to be approximately breakeven at the midpoint of our updated range that calls for a loss of $0.25 per share to earnings of $0.25 per share. As a reminder, our adjusted figure excludes the $0.36 non-cash impact of the sale leaseback financing expense recognized in the second quarter. More broadly, our base assumptions remain intact. We continue to expect growth in our service business in the high single-digit range for the full fiscal year. which speaks to progress with our ongoing customer care strategy. From a gross margin perspective, we remain committed to improving our inventory position, which provides the basis for our consolidated equipment margins to compress further in the fourth quarter. We anticipate equipment margin compression will persist through fiscal 2026 as we work through our inventory reduction initiatives, and we will provide more guidance on what to expect for next year on our fourth quarter earnings call in March. While our focus on inventory reduction is impacting short-term performance, we believe our aggressive approach to managing inventory will help accelerate our return to normalized profitability levels. Regarding operating expenses, given the revised sales expectations, our guidance implies full-year operating expense to be about 14.6% of sales. Our assumption for other income expense, which includes floor plan interest expense, other interest expense, and interest in other income and expense remains consistent with prior guidance, and we expect to finish the year at approximately $53 million of expense. It will take a more substantial decrease in inventory as we progress through next fiscal year before we begin to see more normalized levels of floor plan interest expense. The third quarter confirmed many of our forecast assumptions in terms of market conditions and what it takes to reduce inventory levels in a softer retail demand environment. We remain convinced in our approach through this down cycle, which prioritizes these inventory reduction initiatives while driving growth with our customer care strategy, and that is what we are focused on delivering. This concludes our prepared comments. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Alex Regal with B Reilly Securities. Please proceed.

Thank you. Good morning, gentlemen. A couple quick questions here. Have you seen farmer sentiment change post the election in early November?

Good morning, Alex.

Yeah, I think, you know, just primarily with any election, just the certainty around it being completed now, regardless of who the winner is, you know, has provided more certainty for them and allowed them to plan their business better. So some improvement around that, you know, quite a bit of uncertainty around what will happen with tariffs. So we'll be watching closely to see how that plays out. Also, if you recall back the last time President Trump was in office, and there was some retaliatory impacts from the tariffs that hit on the commodity prices, and he subsidized in the form of payments to the growers, which really in the end played out quite well overall for the growers and for the equipment dealers. Certainly, you know, if it played out again that way, that would be good. But I think that's the main uncertainty. You know, also some things our customers have talked about regarding some of the potential tax, things associated with Tax Cuts and Jobs Act, reinstatement of the 100% bonus depreciation would be the biggest one. And they're very much hopeful and looking forward to the reinstatement of that. So overall, Alex, I would say positive sentiment across the, generally speaking, for our customers.

That's helpful. And then what is your sort of target days of inventory that you're looking for?

Yeah, so generally what we're trying to achieve over time is get to about a two and a half times turn on our inventory, give or take. And certainly that'll flux a bit prior to different points in the cycle, but on average across new and used about two and a half times turn. That's not something that we've achieved and sustained over the long period of time historically, although in recent years we've certainly been well above that in the mid threes. But as we look at the efficiency of our footprint and the centralization of our inventory control, we believe we can continue to drive higher turns than we had historically.

And is that a target you think is in sight in fiscal 26, or does it stretch into 27?

Yeah, I think that's just the realities of calculating your terms. If we're starting the year with a big objective on inventory reductions, you know, mathematically we're not going to get there for terms in FY26. But the objective when we talk about targeted levels is to end the year such that that is the type of terms we can achieve in fiscal 2027.

Very helpful. Thank you very much.

Our next question is from Ben Cleave with Lake Street Capital Markets. Please proceed.

All right, thanks for taking my questions. First, kind of a follow-up on the kind of farmer sentiment question that you just addressed. I'm wondering if you can elaborate a bit on this dynamic in that, you know, are you seeing, you know, kind of any tangible effects of improved farmer sentiment, you know, in the form of, like, you know, greater foot traffic to your to your stores, you know, any kind of early indications of kind of renewed enthusiasm for equipment purchases, or is this sentiment more just kind of a reflect, kind of more seen just in, you know, overall tone without any tangible benefits as of yet?

Sure. I think, Ben, you know, looking at near-term and mid-term, in the near-term, we definitely are seeing some more positive sentiment to or a brief uptick here, and an increase in foot traffic, as you mentioned, generally because yields, broadly speaking, across the U.S. footprint came in better than expected. Again, it wasn't what they call a bin buster or anything, but was better than expected. So, you know, if you look at through the growing season they spent all year planning on lower yields than that, pleasantly surprised. I think it really speaks to the genetics of the seed nowadays. And so that's led to some near-term positivity that we are going after hard here as part of our inventory reduction in Q4. And then as you look a little bit longer term, we still have reduced commodity prices. The increased or elevated input costs are continuing to persist, although easing a bit. Interest rates are still much higher than they were the last 20 years, even though there's been a little relief there for them. So a little bit of bright spots there, but again, still looking challenging for next year, especially as there does not look to be a real increase in commodity prices on the horizon anytime soon. So that is certainly the biggest factor that both us and our growers will be watching. And so that's U.S.-based. Europe, as we talked about, was quite impacted by drought and weather conditions, so sentiment is still tough there. Romania, which is our biggest segment over there, has been impacted. There have been some government funds now that have been coming into play. We'll continue to watch how that plays out. And then in Australia, not only have they had the drought impact or the drier conditions, but also the frost event there. So that's been quite impactful. They're still in harvest in Australia. So again, we'll see how that plays out. But yeah, The growing season rainfall in our western branches ended up being in the bottom 16% of historical years. Our eastern region fared better. So overall, we're looking at what we believe to be below average, slightly below average yields. So again, sentiment's tougher in Australia and Europe. A little bit of near-term positivity in the US here, but farmers are definitely concerned about next year as well. unless we see something change on the horizon with commodity prices.

Very good. That's helpful. One more for me, and I'll jump back in queue. In the prepared remarks, you guys talked about sales incentives that you're pushing pretty hard. I'm wondering if you can somehow kind of break down the year-over-year performance or sequential margin decline some way for just kind of general supply-demand versus accelerated movement driven by your initiatives regarding sales?

Yeah, that's a good question. It's pretty hard to give you an exact number on that. I mean, I think just overall, I'll take the opportunity to talk overall on margins here. You know, as we talked about at the end of the second quarter, back half of the year, we were forecasting to get in those historical lows in that 16 and 17 period. So those are lows that we had seen before and in a different cycle that we said was more challenging, not having quite the aggressive posture that we have today. We're in a better cycle, relatively speaking, and we're wanting to accelerate this, so still getting down to that level. To exactly split how much is the acceleration versus what it would be if we just let this thing play out, I can't give you an exact number on that. It'd be higher than this. So we've talked about on, and this is domestic ag for you. We've talked about how longer term equipment margins for domestic ag are about 10%. In the third and fourth quarter here, we were talking in the six and 5% range. You know, if we had healthier inventory levels, you know, probably north of that 7%, but certainly south of the 10 that we would expect on average through a cycle.

Yeah, I think Ben is, you know, Bo just hit it well there. That's the easiest way to think of it is he described, look at the delta between our margins right now and our historical average margins, and that'll get you close. And then the delta there is primarily attributable to the decrease in used equipment values combined with our acceleration. And as he said, it's quite detailed to dive out exactly which is from the lower used equipment values in which is due to the acceleration. But those are the main two factors that comprise that delta.

Gotcha. Yeah, no, very good. And certainly related. So I understand. Very helpful context. Appreciate you guys taking my questions. Good luck here the rest of your fiscal year. I'll get back and kill.

Thanks, Ben.

Thanks, Ben.

Our next question is from Meg Dobro with Baird. Please proceed.

Good morning. Thank you. So just a clarification here, in terms of how you think about inventories in the fourth quarter, should we expect another decline in Q4, or is that all something that's going to happen in fiscal 26? And related to this, when you look at your inventory and the needed reductions, can you comment at all about what's happening in Europe, Australia versus North America? Is this all sort of a North American D-stock, or do you have some work to do in your other geographies as well?

Yeah, certainly. To start with by geography, I would say overall Australia is in really good shape. Not much work to do there. Certainly probably a little bit, not a whole lot. From a Europe perspective, we do have some work to do there. Dollars-wise, obviously significantly less than on the U.S. side. But in terms of where we are today versus where we want to go, I'd probably prescribe about $70 million there in Europe. The rest of it being on the U.S. side, we obviously made about a $100 million decrease. It was all on new, and that was all domestic in the third quarter. You asked if we expect to see another decrease. decrease in the fourth quarter. Yeah, and I do. You know, I was simply stating that there's a couple of moving factors there. We'll certainly continue to see sell-through of what we have. As we have some pre-sales get invoiced to us by the end of the quarter, that will partially offset that. And then some growth in use will partially offset that. But we'll see another step in the right direction, which will put us a little ahead of where we were you know, prescribing to be as we sat here on our second quarter call and said we'd be down about 100 million. So we'll be, you know, incrementally better than that and poised to continue to accelerate this thing as we work through next fiscal year. I guess, Justin, between the new and used mix, relatively speaking, right, I mean, the U.S. is where the used equipment dynamic exists. We don't do a lot of used equipment sales in Europe, so that would be from a new equipment inventory perspective. So, yeah, I think I've answered everything there.

Yeah, no, that's very helpful. You know, the dynamic on margins, at least to me, in the third quarter, your equipment margins were maybe a little bit better than what I anticipated, considering the fact that you did take inventories down and we all kind of know the pressure on used equipment prices. Can you put a finer point on margins going forward? Can you hold this, call it 7% level? Should we think something less than that? And related to this, is there risk that on the used equipment portion of your inventory that we could be seeing some kind of a more significant write-down at a point in time in early 26, fiscal 26?

Yeah, so to start with a little clarity on margins, you had mentioned the 7% I referenced back to Ben's question. Right now, like on print, right, domestic ag equipment margins in Q3 were about 5.9%. And our midpoint of our guidance implies about 5.4% for the fourth quarter, which is right in line with that 6% to 5% we talked about from those historical lows. You know, as we, not providing guidance today, but as we project through FY26, we were basically trying to say that we expect, you know, these similar levels in that 5% range in fiscal 26, perhaps through the full year. We'll finish sharpening our pencils and give you a full outlook on that in March. You know, that potentially could be a little south of that in the first half of the year and north of that in the back half of the year. But directionally speaking, kind of in line probably with what we're seeing in the fourth quarter. You know, the difference between how we manage inventory and particularly used inventory today versus the prior cycle kind of gets at the heart of your last question. And we're consistently, continuously, I should say, looking at and revising our equipment on the books down to market pricing. We didn't have that same exact consistent dynamic in the prior cycle, and you did see a larger one-time write-down event. So, Given the nature of what we're doing here, we've really been seeing that play out through this year, and that is reflected in the margins. So we're in a much better position there in terms of where we're at versus market. In terms of continuing to be aggressive and actually trying to get incremental buyers off the sideline, that's where we talk about additional sales incentives and actually even selling below some of that pricing. for us it's a matter of gauging can we get incremental buyers off the sidelines and at what price point and that determines you know how much we keep our foot on the gas overall we're going to be in an aggressive position and you'll see these used equipment declines as we progress through next year but that's how we're thinking about it and a little bit of color on on what we would expect for margins next year

Yeah, no, that's great. Thank you for that. You know, I'm also wondering what sort of support or help you're getting from the OEM on both the new and the used equipment side. Whatever you can comment on that I think would be helpful. Are you mostly, for lack of a better term, on your own in dealing with this problem, or are there specific programs that are helping you out, especially into fiscal 26, I'm wondering?

Yeah, thank you. You know, as Deer mentioned on their call, helping their dealers through pool funds, C&H is doing the exact same thing. So we certainly get help from them on that side. Just like Deer, too, they're trying to protect their margins as much as they can. They're trying to be prescriptive on, you know, putting more dollars towards the specific problem areas and addressing different mix issues. And we're working very hand-in-hand with C&H on the same prescriptive approach. And then internally, we're doing that as well. So, you know, our margin compression or how aggressive we're getting as Bo talked with our pricing, you know, is also relative to byproduct category specific terms and aging and stocking levels. and at what pace and how much we're trying to destock. So it's quite prescriptive. We are getting help. I think the last time we talked, I mentioned we're seeing all the dealers and all the OEMs in a real concerted effort come together this time, something like I haven't seen in the last few decades. Much earlier in the cycle, much more aggressively, I'll call it much more professionally. And that's going to ultimately get us all where we need to be faster. So I think that's really healthy. And then just also, you know, Deer touched on this too, but you just don't have the lease returns coming back like we had at the previous cycle. And we don't have any of the short-term leases that we had in the previous cycle. So both of those leasing factors are also going to help us get out of this quicker as well, along with just, you know, not having the glut of new equipment sold. We never did have the spike, you know, of course, with the supply chain constraints and so on. So there are a lot of positive factors there, and we're just going to keep working with our OEM, and we're going to keep staying really aggressively priced here and, as Bo mentioned, really look to have our inventory right-sized and, you know, by next year here and return to more normal margins and as we move into, you know, 26.

Got it. Final question for me. Speaking of deer, you know, they provided their outlook for calendar 25, I guess their fiscal 25. And what was interesting to me in that outlook, they're expecting – pretty significant contraction in industry retail demand in North American large ag. I think it was down 30%. Certainly a tougher year in calendar 25 than what we experienced in calendar 24. I'm curious as to what your perspective is on that outlook, if you're willing to comment. But if that actually comes to pass, and Deere is correct in their forecast, is your targeted inventory reduction of $400 million enough to truly get you to the level of stocking that's appropriate for that level of demand? Thank you.

Yeah. So they have people smarter than me on that stuff. So generally, everything we're looking at, it seems very plausible what they're talking about and looking at for next year there. You just look at, again, it's really going to depend on what happens with these commodity prices. And if they don't see some increase here or potentially even go lower, then numbers like they're talking certainly look plausible. Also, a difference being farmers had a really good year in 2022, one of the most profitable years ever, and then 23 down about 20% from that. but still quite good year. So in 24 here, they've had some of that to fall back on. Again, we had pretty good yields. So we'll also be watching yields in 25, but their cash reserves are depleting a little bit. But at the same time, again, they are getting some relief in input costs, some relief in interest costs, They did have a little bit better yields than expected, and the fleet is getting a little bit more aged as we go here. So a lot of factors we'll be watching in 25 May. As far as the $400 million reduction, I would keep in mind also the cost of the equipment. So once we reduce down that $400 million, you're starting to get to a pretty reasonable amount of actual units on the lots and starting to look at, you know, some of those levels that we need just for loaner units and demo units and things. Bo, anything else to add?

Yeah, I mean, from a target perspective, I think, as Brian laid it out, that makes a lot of sense. Certainly, we'll continue to look at it, right? And again, our overall theme here is that, you know, we want to average two and a half times turns over time. So if that wherever demand is sustaining or is averaging over a couple year period is where we're trying to guide our inventory levels to. But yeah, if it does dip like that, you know, we'd potentially look at taking even a more aggressive approach on inventory reduction. I guess one thing I'd take the opportunity for, again, we'll provide guidance in March, but assuming that 30% down on high horsepower is a reasonable starting spot, I just wanted to reflect on the reality of our business in P&L. So we have new equipment, which perhaps that's a reasonable starting spot. Used equipment will certainly be looking to be driving year-over-year increases, as we're seeing those reductions. Our service business is growing. We're expecting to finish the year high single digits, if not a little bit better than that. And then parts... you know, next year we should be able to get, you know, low single-digit growth. So our P&L and our total revenue would look quite a bit different than that 30%. But that's how, like, if you're looking at your modeling, I'd probably break it into those pieces and just be reflective of what those growth rates should be.

No, that's very helpful. If I may squeeze one last one on construction. I'm trying to make sense of your comments in terms of the competitive environment here. You obviously had good revenue in a quarter. The margin was soft. So is it used equipment that is dragging that down? Is it new equipment and some pricing erosion or some discounting that has to happen there? Why is this going on in construction? And At what point in time do you think we get to a more normalized cadence and margin in that segment? Thank you.

Yeah, so it's from an equipment margin perspective, it's multiple factors. You know, we touched on the fact that the industry saw an increase in inventory levels, as did we, and we're working that down. Again, not as acute as ag, but that's there. There's also a mix, you know, Last year we couldn't get our hands on wheel loaders, which are higher ticket items. Higher ticket items tend to have a little bit lower margin, have plenty of those this year. So there's more inventory out there. So dealers are more competitive with that pricing. And then there's a little bit of used inventory to clean up as well. You mix that all together and that's kind of where we're at. Certainly feel good. about getting to targeted levels that we want to see through next year. And certainly the margins, so construction margins in Q3 were 10.2%. You know, we're expecting something in the similar level in the Q4. So, you know, almost double that of ag, but they're usually quite a bit stronger. I guess my point there is we'd probably expect similar levels as we progress through next year, but maybe as we get toward the end of next year, getting to those target levels a little bit quicker on the CE side and start to see some return to normalization along with, you know, the industry kind of clearing to where everybody's at a healthy spot.

Great. Thank you. Good luck.

Our next question is from Ted Jackson with Northland Securities. Please proceed.

Actually, pretty much every question on that list was just asked to the Baird analyst and checked off. So it was pretty funny. The only thing I have left is based on some commentary that you put out, Bo, and that is you talked about the construction, and I haven't seen the breakout in terms of the line items for construction, but that it benefited in the quarter from some equipment deliveries. So, my question is, so was the equipment side of construction a tad better than you expected? And then, what is the implications of that for the fourth quarter as it relates to equipment sales for construction? Typically, it's a seasonally stronger quarter for you. And that's it for me. Thanks.

Yeah, and I appreciate the question and an opportunity to clarify there. I'd say overall, in terms of the environment, it's pretty consistent with what we're expecting. What I was trying to get at a bit is essentially the third quarter this year relative to the split in the back half of last year's is stronger. We saw that good amount of growth, particularly or specifically on total equipment. We grew 13 and a half percent year over year. In order to get back to flattish year over year, you're going to see a mid single digit decline in the fourth quarter. That's kind of what we're prescribing in the guidance. Again, not because of a dramatic shift or anything in sentiment or activity, but simply because of some of the larger deals pulling in, getting delivered in the third quarter relative to some real strength on some larger deals in the fourth quarter last year, causing a bit of that timing. Overall, I'd consider it kind of flattish year over year.

Okay, that's it for me.

I would just add to, you know, Meg asked about some of the construction margins and so on. You know, also, as you just look at what's happened with the ABI, and so it'd be down 18, 19 months in a row now, and just some of that softening. And, you know, recently, you know, you have non-res down about 10%, with the largest of that being in warehouse down nearly 40, or excuse me, in manufacturing, and then warehouse down about 10%. And so, Um, there are some, uh, definitely there's some momentum and some positivity again, just with certainty of an election being over and, uh, you see things that are happening in the market, of course, right now. And so we're certainly hearing, uh, some renewed positivity, uh, from our contractor customers there. And, and we see stability, you know, as we, as we look forward here and, and, um, I would say at least, um, flattening or bottoming out of that steady decline that we've had in demand on the sea side as we look to next year. So there's less inventory reduction work to do on that side of the house, and there's also, again, a little more, some more positive signs on that side of the house as well.

Thanks for the additional comment. You bet.

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

Well, thank you for joining us this morning, everyone, and we look forward to talking to you on your Q4 call. Thank you.

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