John Mills - ICR David Meyer - Chairman and CEO Mark Kalvoda - CFO

Steve Dyer - Craig Hallum Capital Group Rick Nelson - Stephens Mircea Dobre - Baird Tyler Etten - Piper Jaffray Larry De Maria - William Blair

Good day ladies and gentlemen, and welcome to the Titan Machinery Inc.'s Second Quarter 2018 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to John Mills of ICR. Please go ahead.

Thank you. Good morning, ladies and gentlemen and welcome to the Titan Machinery second quarter fiscal 2018 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; and Mark Kalvoda, Chief Financial Officer. By now everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2017, which went out this morning at approximately 6:45 AM Eastern Time. If you have not received the release it is available on the investor relations portion of Titan's website at titanmachinery.com. This call is being webcast and a replay will be available on the company's website as well. In addition, we're providing a presentation to accompany today's prepared remarks. And you can access the presentation now by going to Titan's website and clicking on the Investor Relations tab. The presentation is directly below the webcast information in the middle of the page. You will see on Slide 2 of the presentation our Safe Harbor Statement. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These forward-looking statements are based on current expectations of management and involve inherent risk and uncertainties, including those identified in the risk factors section of Titan's most recently filed Annual Report on Form 10-K. These risk factors contain 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. And please note that during today's call, we'll discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency in the Titans ongoing results of operation, particularly, when comparing underlying results from period to period. We’ve included reconciliations of these non-GAAP financial measures in today's release and have provided information regarding the adjustments that are added back or excluded in these non-GAAP financial measures. The call today will last approximately 45 minutes. At the conclusion of our prepared remarks, we will open the call to take your questions. Lastly, due to the number of participants on the call today, we ask that you keep your question period to two questions and then rejoin the queue. Now, I'd like to introduce the company's Chairman and CEO, Mr. David Meyer. Go ahead David.

Thank you, John. Good morning everyone, welcome to our second quarter fiscal 2018 earnings conference call. On today's call, I’ll provide a brief summary of our results and then an overview of each of our business segments. Mark will then review financial results and provide an inventory update for the second quarter of fiscal 2018 and conclude with a review of our updated modeling assumptions. If you turn to slide 3, you will see an overview of our second quarter financial results. Our second quarter revenue was $269 million, with an adjusted pretax loss of $1.2 million and adjusted loss per diluted share of $0.04. Overall sales are in line with expectations with continued progress in gross margins, operating expenses and interest expenses, leading to improved adjusted pretax results in all three of our operating segments; agriculture, construction and international. Our current year restructuring to reduce operating expenses and gain efficiencies is working at a reduced level and pace versus our initial projections. In particular, we sustained and even increased product support resources in key areas to continue to serve and retain customers along with increased expense resources associated with the strong growth in our European business. I believe that as our US ag and construction market stabilize and begin to improve and European business continues to mature, we will begin to see the sustained positive impact of our expense and efficiency initiatives delivering profitable growth. Now I’d like to provide additional detail for our three operating segments, including our domestic agriculture and construction segments and our international segment. On slide 4 is an overview of our domestic agriculture segment. Drought through the early summer in North and South Dakota is likely to impact yields, although we’ve recently seen more rain in the eastern half of both states. Conditions outside of the Dakotas have been favorable and in line with yearly averages. Overall market conditions were in line with expectations with equipment demand slightly down versus last year due to ongoing low commodity prices. Used equipment margins are improving, whereas new equipment demand and margins are slightly down to the trade economics of higher new prices combined with lower trade-in values. Overall trade-in value is a result of customers trading higher [indiscernible] equipment and the continued oversupply versus demand. However, we have early indications that many of our customers are approaching the point of new equipment replacement. We’ve continued to market a broad range of price points with lease options, flexible financing and extending warranties to generate demand. We're also increasing our focus on the product support side of the business through our new operating structure and with expanded field service and parts drops and improved parts availability. Turning to slide 5, you’ll see an overview of our domestic construction segment. Housing starts and light construction are continuing to grow and we're increasing our participation in early phases of infrastructure development, particularly transportation spending in our major metro areas. We will continue to target light construction contractor demand with flexible rentals and a range of construction allied equipment. We're growing key earthmoving and aggregate accounts as well as exploiting pockets of opportunity in energy, agriculture and heavy construction. As continued optimism transitions to more demand, we're well positioned with a more efficient and focused construction business. On slide 6, we have an overview of our international segment including Ukraine and the Balkan countries of Bulgaria, Romania and Serbia. The overall business environment in Eastern Europe remains strong and the growing conditions in our territories have been favorable in all but Serbia which has been impacted by drought. We're seeing significant growth across our territories except in Bulgaria where a down market persists awaiting the release of EU subvention funds. Romania, Ukraine and Serbia each continue to demonstrate strong equipment demand, buoyed by available financing and in some cases government funds. We are targeting specific programs and products by territories to meet customer needs while continuing to grow our sales and product support coverage and capabilities. Altogether we’re seeing market demand in our domestic ag and construction segments closely in line with expectations with our international segment growth continuing to outpace earlier expectations. As I mentioned briefly, we're having success with reducing our structural cost, well not to a level where initial projections. We've been conservative in reducing expenses that would impact customer support and retention along with increasing expenses in Europe to support continued growth. Mark will review the numbers in more detail, but I want to reiterate that these delivered steps are setting the stage for profitability built through strong customer relationships and operational efficiencies. Finally, I’d like to thank our dedicated employees in the United States and Europe, thank you for improving our service to our customers while continuing to raise the bar on company performance. I will now turn the call over to Mark to review our financial results and provide an inventory update for the second quarter of fiscal 2018 and conclude with a review of our updated modeling assumptions. Mark?

Thanks David. Turning to Slide 7, our total revenue for the fiscal 2018 second quarter was $269 million, a decrease of 3.4% compared to last year. This decrease was primarily due to store closings associated with our fiscal 2018 restructuring plan and the industry factors that David discussed. Equipment sales declined 3.1% quarter over quarter which was primarily driven by the points I just discussed. Our parts revenue decreased 4.7% quarter over quarter and service revenue decreased 2.5%. These decreases occurred primarily in our agriculture segment where closed stores and difficult industry conditions were the primary factors. Our rental and other revenue decreased 3.2% in the second quarter primarily due to a smaller rental fleet than the prior year as well as a slightly lower rental fleet dollar utilization of 24.9% for the current quarter compared to 25.3% in the same period last year. On Slide 8, our gross profit for the quarter was flat versus the comparable period last year at $53 million. Our gross profit margin was 19.6%, an increase of 60 basis points compared to the same quarter last year. The gross profit margin increase was primarily due to higher equipment margins particularly in used equipment as this market continues to stabilize and we continue to rightsize our used inventory levels. Our operating expenses decreased by $1 million to $51 million for the second quarter. As a percentage of revenue, operating expenses in the second quarter of fiscal 2018 were 18.7% compared to 18.5% for the same quarter last year. As David mentioned, operating expenses did not decrease at the same rate and to the level we initially projected. We completed nearly all of our restructuring efforts in August and now believe we will achieve an approximate annual expense reduction of $20 million compared to the previously expected $25 million. Domestic headcount reductions amounted to approximately 13%, but was partially offset by headcount increases in our international segment. Approximately 40% of our domestic headcount reductions occurred in the month of August and all planned store closings had occurred by the end of the second quarter enabling operating expense savings for the remainder of the year and into the future. The two primary reasons for the less than anticipated annual savings are, one, higher expenses in our international segment due to materially higher revenues and a stronger euro and two, lower restructuring savings in our domestic operations resulting from our decision to commit more resources to customer support. The extent and timing of these reductions will result in approximately $200 million of operating expenses exclusive of restructuring costs for our current fiscal year. For the second quarter of fiscal 2018, restructuring costs were $5.5 million. We estimate we will incur an additional $4 million of restructuring costs over the remainder of fiscal 2018. Floor plan and other interest expense decreased approximately 30% to $4.6 million in the second quarter of this year compared to $6.6 million in the same quarter last year. Our floor plan and other interest expense shows a meaningful improvement year over year due to the large decrease in our average interest bearing equipment inventory and reduced level of senior convertible notes. For the second quarter of fiscal 2018, we generated adjusted EBITDA of $6.9 million which compares to $4.7 million in the second quarter of last year. We calculate adjusted EBITDA by adding back our floor plan interest expense and exclude non-recurring items. You can find a reconciliation of adjusted EBITDA in the appendix to the slide presentation. In the second quarter of fiscal 2018, our adjusted net loss including non-controlling interest was $1 million compared to $2.7 million for the second quarter of fiscal 2017. Our adjusted loss per diluted share was $0.04 for the second quarter of fiscal 2018, which excludes certain non-GAAP items as outlined in the reconciliation table in the appendix of the slide presentation. This compares to adjusted loss per diluted share of $0.12 in the second quarter of last year. At the bottom of the page, you will see our absorption which reflects the ability of parts, service and rental gross profits to absorb fixed operating costs. We believe this is a good metric - we believe this metric is a good indicator of our progress towards growing our higher margin product support business while also achieving more cost effective operations. This makes us more resilient to both the current and future market downturns and associated equipment pricing pressures and delayed equipment purchasing. Our absorption for the second quarter of fiscal 2018 was 80.1% compared to 77.8% in the same period last year as a reduction in fixed operating costs and floor plan interest expense more than offset our decrease in gross profit from parts, service and rental and other. We expect continued improvement in our absorption rate for the remainder of the fiscal year as we realize cost savings from our restructuring plan and continue to focus on our parts, service and rental business. On slide 9, you will see an overview of our segment results for the second quarter of fiscal year 2018. Agriculture sales were $139 million dollars, a decrease of 9.9%, primarily due to the impact of store closings. Our ag segment had an adjusted pretax loss of $1.7 million compared to an adjusted pretax loss of $4.3 million in the prior-year period. Although sales were down, same store sales were essentially flat and same store gross profit improved by 12.5% for this segment. This illustrates the success we are having retaining customers from closed stores which is exceeding our expectations at this point. The improvement in our adjusted pretax loss was substantially driven by lower levels of operating expenses which resulted from our restructuring initiatives as well as lower levels of floor plan interest expense resulting from a lower base of inventory. Turning to our construction segment, our revenue was $78 million, a decrease of 6.3%. The reduction in revenue versus the prior year was primarily due to the incremental revenue associated with our expanded marketing of aged equipment inventory that occurred in the second quarter of fiscal 2017. Our adjusted pretax income for our construction segment was $1.2 million compared to $600,000 in the same period last year. The improvements were driven by lower floor plan interest expense and a decrease in operating expenses related to cost savings from our restructuring plan. In the second quarter of fiscal 2018, our international revenue was $52 million which increased 26.4% compared to the same quarter last year. Growth in our international markets continued to exceed our expectations primarily due to the build out of our distribution footprint, availability of subvention funds in certain markets and positive crop conditions. Our adjusted pretax income was $300,000 compared to an adjusted pretax loss of $200,000 in the same quarter last year. Increase in segment pretax income was primarily due to an increase in revenue, partially offset by an increase in operating expenses resulting from the continued build out of our footprint. Overall, despite lower revenues in our two largest segments, we were able to achieve improved adjusted pretax results in all three segments of our business. Turning to Slide 10, you see our first six months results. Total revenue decreased 5.4% compared to the same period last year, primarily due to the lower equipment sales of 6.2%, year to date parts were down 3.2%, service was down 4.8% and rental and other was down 4.2%. The six month result reflects similar trends to those in our second quarter. Turning to Slide 11, our first six months gross profit was $101.7 million, a 4.5% decrease compared to prior year, primarily reflecting lower revenue. Our gross margin increased 20 basis points year over year. Our operating expenses decreased $3.5 million or 3.3% to $102.5 million. As a percentage of revenue in the first six months, operating expenses were 19.2% compared to 18.9% reflecting the lower revenue. As I indicated earlier, we anticipate lower operating expenses as compared to the prior year in the remaining quarters of fiscal 2018. Floor plan and other interest expense decreased by $1.9 million or 16.9% to $9.4 million in the first six months reflecting a decrease in our average interest bearing inventory compared to the first six months as well as interest expense savings resulting from repurchases of our senior convertible notes. Our adjusted diluted loss per share was $0.23 for the first six months of fiscal 2018 compared to an adjusted diluted loss per share of $0.33 in the prior year period. On Slide 12, we provide a segment overview for the six-month period. Overall adjusted pretax loss improved by 35.6%. At the segment level, agriculture revenues were impacted by store closings associated with our fiscal 2018 restructuring plan. Agriculture and construction segment revenue comparability was also impacted by the incremental revenues associated with our expanded marketing of aged equipment inventory in fiscal 2017. Approximately $46.8 million of equipment revenue was recognized in the first six months of fiscal 2017 as the result of our expanded marketing plan. The decrease in agriculture and construction segment revenue was partially offset by an increase in revenue in our international segment. Turning to slide 13, here we provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2018. We had cash of $58 million as of July 31, 2017. Our equipment inventory at the end the second quarter was $441 million, an increase of $45 million from January 31, 2017. This reflects a seasonal increase in new equipment inventory of $70 million partially offset by a $25 million or 15.6% decrease in used equipment inventory. In a few minutes, I will provide additional color on our inventory outlook for the remainder of fiscal 2018. Our rental fleet assets at the end of the second quarter were $128 million compared to $124 million at the end of the fourth quarter of fiscal 2017 and $126 million at the end of the first quarter of fiscal 2018. We continue to expect the size of our rental fleet to remain relatively flat in the current year. We had $308 million of outstanding floor plan payables on $741 million total discretionary floor plan lines of credit as of July 31, 2017. As a reminder in May, we lowered our floor plan capacity by $70 million due to our successful equipment inventory reduction in fiscal year 2017 and current inventory plans. We continue to maintain a healthy total liabilities to tangible net worth ratio of 1.5 and have now retired $74.5 million or 50% of our senior convertible notes over the past year and a half. Slide 14 provides an overview of our cash flow statement for the first six months of fiscal 2018. The GAAP reported cash flow provided by operating activities for the period was $67 million, primarily attributable to a changing mix of manufacturer versus non-manufacturer floor plan financing. As part of our adjusted cash flow provided by operating activities, we include all equipment inventory financing including non-manufacturer floor plan activity. Our adjustment for non-manufacturer floor plan payables amounted to a reduction of cash of $38 million. To accurately reflect cash flow provided by operating activities, we adjust our cash flow to reflect a constant equity in our equipment inventory. By providing this adjustment, we are able to show cash flow provided by operating activities exclusive of changes in equipment inventory financing decisions. The equity in our equipment inventory decreased 11% during the six-month period and represents a $48.2 million adjustment to our cash flow provided by operating activity. Making these adjustments, our adjusted cash flow used for operating activities was $19 million for the first six month period ending July 31, 2017 compared to $1 million provided by operating activities for the same period last year. The decrease in adjusted cash flow from operating activities is primarily the result of new equipment inventory stocking in fiscal 2018 and the impact of the cash generated from the sale of no trade equipment sold as part of our expanded marketing of aged equipment inventory in fiscal 2017. We do expect strong positive cash generation in the back half of the year as inventory levels come down resulting in positive adjusted cash flow from operations for fiscal 2018. Turning to Slide 15, I would like to provide an update on our equipment inventory. This chart outlines our ending equipment inventory position for five years including our ending inventory target for fiscal 2018. In the second quarter of 2018, our equipment inventory increased $45 million which I indicated earlier consisted of $70 million increase in new inventory and a decrease in used inventory of $25 million or 15.6%. Our quality of inventory continues to improve and we anticipate further improvements with a $50 million reduction of equipment inventory in fiscal 2018 compared to the end of fiscal 2017. By the end of fiscal 2018, we expect to have reduced our equipment inventory by $600 million or 63% compared to the end of fiscal 2014 representing a major improvement in our balance sheet in the face of very challenging market conditions. The improvement in our inventory level is generating improved equipment inventory turns as we have now moved up to a 1.6 times turn in the current quarter despite lower revenues and this is reflected in the black line in the chart. The benefits of a higher inventory turn are lower carrying costs and less compression in our equipment margins. We will continue to see floor plan and other interest expenses as a result of our efforts in this area and expect to continue to see some modest strengthening of used margins as well. Slide 16 shows our updated fiscal 2018 annual modeling assumptions. We are updating some of the modeling assumptions to reflect our current forecast for operating expenses and current visibility into market conditions. We continue to expect our ag segment sales to be down 10% to 15% and our construction segment sales to be down 5% to 10%. As a reminder, the expected declines in the ag and construction segments include the impact of closed stores. We are updating our expectations for our international segment following better than expected performance during the first half of fiscal 2018. Forecasted sales growth is now anticipated in the range of positive 20% to 25% compared to our prior expectations for growth of 13% to 18% reflecting the ongoing strength in some of our core international markets. From a margin standpoint, we are maintaining our equipment margins for the full year in the range of 7% to 7.5%. We are updating our expectations for diluted earnings per share to be in the range of a loss of $0.15 to $0.35 from our earlier expectation of being slightly profitable. As a reminder, this range excludes any charges associated with our restructuring. The primary difference from our previous assumption of generating a slightly positive EPS was due to the change in the timing and amount of expense savings from our restructuring plan that I spoke to earlier. Although the expense reduction fell short of original expectations, we are confident that our restructuring efforts with better than anticipated customer retention combined with inventory reductions over the past few years of very solid structural improvements that will benefit our business into the future. Operator we are now ready for the question-and-answer session of our call.

[Operator Instructions] And we’ll go first to Steve Dyer of Craig Hallum Capital Group.

A couple quick ones from me first as it relates to international that seems to really be kind of catching its stride here for the first time in a while. Maybe a little more color on what you're seeing there and is that an area that you’d look to expand going forward.

Well, first of all we’re seeing and understanding these are developing countries and with some of the reforms in place, we’re just seeing a pick up especially for some of the pent up demand, the increased credit availability and then actually we built on our footprint both Romania and Ukraine. So all these are contributing to that and all -- excellent crops last year and I think we’ve seen some of the carryover effect from that. So like we’ve talked about all our acquisitions and continue to look at the international and domestic United States in the same ways, so we continue to evaluate that on an ongoing basis.

Great. Although based on what you're seeing there, is that -- as you look big picture of the company, is that something that you’d consider to be a growth area, or an area for greater buildup or are you sort of, generally speaking, happy with your footprint there at the moment.

Yeah. We're happy with our footprint over there. Also, I think we need to look at all our opportunities. We are in some of the Eastern Bloc countries over. I think, there are maybe markets in Europe too that maybe a little more mature market, a little bit more western type thing. I think those are something we should also put on the radar screen. So I guess from a confidential standpoint, some of the sensitivity to talk about specific reasons is a little bit tricky, but yeah, I guess we continue to look at that and yeah, it is a potential growth opportunity, it will give us some geographical diversification and like I say that we’ve got a great team over there and you can see that definitely very brisk business over there and things are going really well and there are opportunities long term.

Okay. Great. And then just a quick question on the equipment gross margins, you came in sort of above the guided range this quarter and [lapped][ph] the full year, 7% to 7.5%. Just curious kind of some of your thoughts there, I would think as your inventory gets to be in a better spot, I mean, is there any reason why that would necessarily go lower in the back half of the year versus this quarter.

Right. So we did see some improvement over the prior year. As we move into the back half of the year, particularly in the third quarter, let’s say, big used combine market that's out there for that time of the year seasonally, that's an area we're still looking to decrease our overall inventory levels on used combines. We made a big effort last year. You could see that in the results of our equipment margins last year, went down, we did not expect them to be down to the level that they were last year, but sequentially they could come off of what we experienced here earlier in the year, because of some of those efforts to work down that used combine. We made a lot of significant progress in that area, but still expect some more of that in the third quarter and somewhat going into our fourth quarter as well.

And we will now go to Rick Nelson of Stephens.

Curious how 2Q came in relative to your expectations where that might have been three months ago and what caused the change in your thinking about some of the restructuring savings in ag and construction.

Well, in terms of the numbers, some of the things that happened I think first from the restructuring standpoint, the timing and to the extent that it happened and Dave can maybe can talk about some of those customer support decisions that were made, but that was part of it. Certainly, international was more impressive, more brisk than what we thought it would be. So international caused some higher level of variable expenses that came through in the quarter as well. And I think there were some expenses in getting those stores fully closed, closed and getting all the assets moved and everything kind of set up, ready to go in finding real estate answers for those facilities that we had out there as well and I think just overall, we’ve kind of erred on the side of the customer support side of things and I think that’s showing in some of the retainage that we're having, the customer retention from those closed door areas that’s really going to pay off in the longer term, even though in the shorter term in Q2 and maybe early here in Q3 where it's, we're not going to have some of those expense savings that we initially expected.

Yeah. Rick, and I can respond to that a little bit. So, as we’ve told the story, we didn't really exit the markets. We’ve retained all the markets. So as we closed ag stores and retained those customers, we retained a lot of the employees that we had to do with the product support, service tax, parts of the people, all of the sudden, runners and hard stops and things like that. So we wanted to ensure we had a smooth transition to the customers, so then really there was a second wave of the restructuring or the rightsizing that really happened in July and August and that was where a lot of the headcount savings came from. So at the end of the day, I think we did do a good job of the customer retention. We’re keeping the people and then also as we did the restructuring, the whole area of product support, a lot of efforts on the headcount to go along with that.

Just to follow-up on that, Dave, what are your thoughts about the ag cycle here, same store sales in ag were basically flat for the first time with overall same store sales increased I think for the first time we’ve seen in three years. Any signpost to recover in this business and is that part of your thinking with retaining some of these people?

Well, we’re seeing this [Indiscernible] starting to experience stabilized margins, so we’re not necessarily calling a bottom of the ag cycle, but we’ve done a good job of maintaining our discipline regarding our inventory levels. So that’s been our main focus. So what we’re starting to see is we’re getting to the point of nearing this replacement demand, we’re seeing the parts and service business, we’re getting high reviews on some of the equipment, we’re seeing some of that’s attributable to that parts and service business, we’re seeing from that and also I think that’s going to be that demand created by that replacement cycle as we get higher used machines, older machines from a reliability uptime standpoint, cost of ownership and all that comes into play and that’s how we’re looking at this current trough - we’re in the cycle right now.

And you think you’re starting to see some of that or that’s still out there to come?

No. I think we’re starting to see some of that. We’re starting to see our machines getting up there, we’re starting to see older, we’re starting to see some concerns about reliability and the uptime thing and yeah, all that’s starting to come to place. So, we’re seeing that point where it makes more sense from a cost of ownership to also making payments and something becomes a better than ongoing parts and service expense and stuff like that and to keep this machine up and to keep the fleets newer and yeah, we’re definitely starting to find that, we’re approaching that point.

And now, we’ll go to Mircea Dobre of Baird.

Several questions really surrounding guidance for me. Mark, maybe you can help me with this, but high level, when I'm looking at your original guidance, you started with slightly positive EPS, we're halfway through the year and now you're providing what I perceive to be a pretty wide range, $0.15 to $0.35 loss. So, it seems to me like the variability, if you would in earnings, the $0.15 to $0.35, that implies more variability and outcomes than the slightly positive that you started the year with. So I guess I'm just wondering what’s embedded here, why with six months under your belt, you would actually have more uncertainty on your outlook if you would than you had six months ago.

I think, Mirc, I think it comes down to one of the earlier questions on our equipment margins. I think with some of the efforts that we're trying to make to continue to improve the quality of that inventory, particularly with what I had mentioned as far as used combine season upon us here and this third quarter being a big quarter for that, that can really provide some variance and results that we're having. I think there's still some level of uncertainty as to how strong international is going to continue to be and if that comes off somewhat, so I think there's part of that range in the sales revenue there that can really swing things as well for us. And so I think those are and quite frankly, the third quarter is a big quarter for us for parts and service as we come into the harvest and this year with some of the variables like drought conditions and over much of our footprint for a period of time, there's just some level of uncertainty of how much of that parts and service is going to come through on that area, which is a big component of our third quarter results. So I think those are some of the bigger variables that we're thinking about and that were considered when developing this range that we put out there.

Well, fair enough, but some of these seasonal items, I think you've known all along that you have to deal with in terms of combines and so on, I guess look, we all know that corn prices have come down significantly here, we're looking below 3.30 a bushel now. What I’m wondering is this. Is your updated outlook essentially baking in a more challenging environment going forward, given this pull back in prices? Is that what's embedded here? Is that what you’re telling us?

No. I think, first of all, the decrease that we've had in our guidance is primarily around the change in the restructuring outlook. That's the largest part of it. There are some other things I think with taxes and our effective tax rate as we go into a loss position, there's certain valuation allowances and things like that that come into play and hurt some of that. So that -- those are some of the bigger reasons for the change in the number and as to the, how wide our range is for the remainder of the year, I think it's not so much commodity prices, I would say. It's, I guess, it maybe allows us to be like with these combines that we may decide to get more aggressive or not depending on how we can move our pieces of used out there and we may choose to be more aggressive or we may not depending on the conditions as we see them out there. And the other thing I think is with something that we didn't know is our area was affected for a period of time by drought conditions and what kind of sentiment impact that has to our customers when it comes to decisions made on their parts and service choices as they move through their harvest period is something that still has some uncertainty in our mind and thus causes some type of a change or a range of possibilities that can happen in that area and that's our higher margin business.

So when you're looking at the back half of the year, how do you think about the parts and service business? Is that going to be down again or are you thinking flat?

I think similar to where we started the year, we still expect it to be down somewhat at the midpoint, call it down 5-percentish and a lot of that is because of the closed stores where we're not retaining 100% of that parts and service. But again, that could -- we could hit the ball out of the park and customers come to our doors and we could be up in parts and service a little bit or we could be down more and that’s some of that variability I was talking to.

We can follow up offline, but basically I'm having a pretty difficult time seeing how the $0.35, given all the guidance elements that you provided really comes into play here without assuming actual deterioration in business conditions. But again, we can follow up offline. I want to ask one last question on international and that business is definitely doing better, I think, on track of having a record year revenue wise over there. And even though revenues are looking good, profitability doesn't seem to follow that much. So I guess my question is if not now, then when? If not in an environment where you're seeing a lot of growth, when will this business be profitable and what changes do you need to make in order to get it to be so or alternatively should even be involved here unless -- given that operating income is still relatively weak considering the revenue?

Yeah. I think it's, here you definitely have some operating targets that we're getting to I think with our management team and we're spending a lot of time all getting down from, first of all, growing the parts and service businesses as you look in that market compared to what we've seen in the United States, it’s not anywhere near, if you look at the mix and things like that. So as we start moving that parts and service business, you may get up to the -- even somewhat close to where we’re in North America. You’re going to see a huge difference because basically that was nonexistent when we went over there. So that's one area and I think as we develop, continue to develop our people and our processes and controls as I said, you’re going to see that continue to get better and like I said, we’ve got a really good team over there and we’re going to see that and we have been investing, as these are basically developing markets. We built our footprint, hired people, entered in, we had in all locations, Ukraine, so we built it up basically from all greenfield, expanded our footprint and our store locations in Romania. And we’ve been experiencing some of that and now, we’re going to start benefiting from that as we see increased parts and service business, we see, I think, better managed people, better managed processes, quality of people, all those things that we’re starting to see and I think we’re just right on the threshold of that ready to takeoff.

Well, I appreciate that, but let me be a little more targeted here. This is a business generating, call it, $180 million worth of revenue and it's basically breakeven. What sort of operating income or profitability level do you envision down the line? What sort of margin should this business earn in your mind and on what sort of revenues, given your position in those markets internationally?

Well, I think as a benchmark, that we look at all our locations, we feel that talking about pre-tax 5%, bottom like pretax, we think it’s attainable in both our North America ag and construction and also international And actually, we feel because there's a certain amount of risk involved internationally that that number should even be a little bit higher than that basically.

I would agree with that, on what sort of revenue can you generate those types of margins?

I’d say with the right disciplines and the right mix and stuff, I’d say we can get closed on this level of revenues and as we get more scale in some more expense leverage as we increase revenues, it will be that much easier.

We will now go to Tyler Etten of Piper Jaffray.

Some of the construction OEMs have talked about, put out some more favorable guidance than maybe previously expected. Have you started to see a little bit strength more recently in that market or I guess can you provide a little bit of color on how the construction market is looking.

I think if you look at that, overall the OEMs, first of all, you’re looking at some worldwide numbers and I think you've seen some growth in some international areas and also we're definitely -- the businesses around, I want to call the [indiscernible] so the Midwest and a lot of our markets are still affected by just the ag and commodity prices and also the oil prices. So you’re seeing a kind of two different areas. So I know the settlement on the construction is really positive. It all goes back to kind of, we talked about infrastructure spend and I think that’s still out there and a lot of people are gearing up. We’re seeing in the metro markets that that’s picking up, but as we’ve taken some of the -- more of the Midwest markets, there is still a huge impact because both from the oil business and the construction equipment sold into the ag sectors, it’s a big number and that’s been affect by both depressed commodity prices and oil prices.

And then I know you’ve touched on used combine inventories being a little higher, other competitors are, I guess, farm equipment OEMs have talked about high horsepower tractors of still needing to be worked down, I guess could you just break out maybe how you see your used inventory by type and where the real problem issues are or where you feel that you’re comfortable with in terms of type of equipment?

Yeah. Tyler, Mark here. I think, first of all, I just want to make sure it's understood that we’re, relatively speaking, in a much better position than we were a year ago, two years ago and so on. So relatively speaking, and you can see that in our turns coming up quite a bit this year compared to the prior year. We're much better off. I think some of the areas still where we think we want to make progress certainly as mentioned before, was the used combines. I think as you indicated, there's still some of those, there's plenty of the high horse power forward drives that are out there that we continue to focus on. I think those are some of the least returns from the OEMs that are out there too that are causing a higher supply. So those, I think, those are probably two of the -- and focusing on the ag side here, but those are probably the two areas, big larger areas that we're focusing on and that the industry is probably still a bit heavy on.

We will now go to Larry De Maria of William Blair.

There is a lot of optimism in construction, which you just talked about briefly. Curious what kind of level of orders you're seeing, if that's the best way to look at it to kind of gauge how to think about it and also you do seem a little bit less enthusiastic than others in the space. Is this because of your -- the competitive position of your portfolio do you think with this ag equipment is potentially disadvantaged versus some of your competitors. So curious about some color on CE. Thanks.

We're pretty proud of our product line. I think very high performing, reliable, a lot of heritage, a lot of legacy, a lot of very happy customers and so I think we’ve got a good product line up. Also, some of our allied equipment, some of our Ukraine business, some of our pull type scrapers, some of our Forestry equipment, some of our aggregate, so I think we’ve got a good range, good line up of equipment out there and then again, I mean the impact in the Midwest and oil I think, oil prices is probably, if you look at construction equipment business from an industry standpoint, highly related to oil prices and that reflects not only our, the Bakken and our North Dakota, but our Wyoming and the front range of Colorado. So a lot of our markets are affected by that and some of the ancillary business and t then not to mention that we do have some markets where 30% or 40% of the construction equipment actually gets sold in to the ag sector. So that does I think adversely affect us. With that said, I think we’re well positioned with what we're doing in our rental business and some of our metro markets and some of that is in -- we're starting to see good signs and so I’m upbeat. I just think we need to be realistic in some of our markets and again, we’re putting our resources in the metro areas and where we’re seeing some infrastructure investment and some of these continued strong markers right now, we’re seeing good results on those.

And Larry maybe just to add to that a little bit too, so we're down about 5 million for the quarter in our construction revenues, but keep in mind we did have that aggressive selling efforts last year on that aged equipment and that was about 14 million to construction in the second quarter. So it's hard to know exactly how much of that 14 million was incremental sales last year or not, but certainly, I would say some of it was. Though at first blush, our results don't look real good from a revenue standpoint on construction, but I think when you factor that, it doesn't look as poor as you might first think.

And I wanted to move over to ag and the credit side, hearing more and more about challenges with access to credit in parts of the Midwest, even the summer with getting credit for applications, for putting on more applications and then thinking about next year with some of the loans as farmers are looking for. So can you give us some thoughts about what you're seeing on the credit side, whether you expect farmers to be fully funded, how they’re doing and then obviously that does into whether or not they can pay their installment loans on equipment, so can you give us your thoughts on how you see ag credit, not just for equipment, but broadly speaking for working capital.

Well, I’d say, first of all, balance sheets are very strong and they remain that way. So it’s a good part, but I think even, not even -- the reason we're just going back two or three years, I think, a lot of the rural lenders went on to their growers and say, hey listen, you need to be very diligent and watch your CapEx, your expenses. The rural banks for the most part have a first security interest in all the farmers’ farm machinery. So if they're going to create a piece, they need to get a release from the bank, from that security interests. So really, the bankers are a big player and I think they've been cautious and they've talked to their growers about, hey, let’s pull back, let’s maybe shed some extra equipment and some of those things. So I think, this just isn't a recent phenomenon. I'd say, this probably started in 2014. A lot of the lenders talking to their customers and working through this. And, but other than that, you’ve got with these strong balance sheets and you've got some good producers, you've got crop insurance, you've got the safety nets in the farm programs. You've got customers that have two to three years of grain storage on hand and we've had some spikes on some of the client work as people have done. We’ve had bumper crops last year all over and we’re getting some carryover effect from that. So for the most part, I think the customers that are -- have the solid balance sheets, are in good financial shape, they've got a number of banks that they can go and do business with. They’re definitely going to get I would say a good chance of getting good approval through the industrial capital financing, where we go to, whether it be a lease or retail and some of the contract, we're having good luck with that and like I say, we're dealing with a customer base I think is more capitalized and their debt to equity positions are excellent, they’re leveraged, their balance sheets are in good shape and then they’ve got some buying power, but they’re just, it’s a little bit of cautious settlement out there coming from the bankers and I think people just want to be really, really careful and we’re experiencing that and that's baked into our numbers.

Right. I get that and that’s good color. Thanks. But I know, obviously bankers are more cautious. I guess I’m concerned or worried about and asking about whether or not you expect all the growers in your region specifically the farmers who are maybe known to have as much equity build in to be able to get access to financing to actually plant going into next year and where is all this capital coming from, the CNH Capital stepping in, are you guys doing more to help with working capital loans that some of the banks pull back.

Yeah. I would say we definitely have an opportunity with the CNH Industrial capital to, like I say, we’ve got a variety, whether it be retail contracts or leases, we have a number of price points we can reach at depending on how we wanted to extend the warranties. So I’d say for the high majority of people, we’re going to be able to get financing on piece of equipment from that. Let’s get to accept to make sure that whoever has the security interest on the trade-in is willing to release that, whether it is one of the OEMs or one of the local banks. So right now, we're not seeing the repossessions, we're not seeing people on that paying the bills, we’re not seeing – we’re not getting phone calls from banks that say, hey, you go pick up this equipment. So I think for the most part, people are making their payments. They’re continually going to make payments on the future. I think they've got some staying power based on some of the money that’s been made in the last four or five years, some of the yields, some on the crop and I think there’s some pretty good operators out there. So I don't see credit as being a problem right now in the near term.

Specifically for planting, et cetera, not just for equipment, but for getting working capital loans to plant crop, you don't see that as an issue going into next year.

Yeah. I think there could be some growers that have for whatever reason, if they’re poor marketers, poor yields, maybe, they're not the best farmers, yeah, I think, you're going to see maybe a small fallout of some farmers, but then in turn, they'll be absorbed by somebody else. So all are going to get a farm, but you could see a small percentage of some of the poor operators or retirements or whatever just coming up or following on our business, but I think it is going to be a smaller piece in the near term.

And at this time, we have no further questions. I'd like to turn the conference back over to management for any additional or closing comments.

Well, thank you, everybody for participating on the call today and your interest in Titan Machinery and we look forward to updating you on our progress on our next call. Have a good day.

And with that, ladies and gentlemen, that does conclude today's call. We’d like to thank you again for your participation. You may now disconnect.