Titan Machinery Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 21, 2024

There are 8 speakers on the call.

Operator

Greetings. Welcome to the Titan Machinery Inc. 4th Quarter Fiscal 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I'll now turn the conference over to your host, Jeff Sonnich from IR. You may begin.

Speaker 1

Thank you, and welcome to Titan Machinery's 4th quarter fiscal 2024 earnings conference call today. We have from the company Brian Knudson, President and Chief Executive Officer and Bo Larsen, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal Q4 ended January 31, 2024. If you've not received the release, it's available on the IR tab of Titan's website at ir.titanmachinery.com. This call is being webcast and a replay will be available on the company's website as well.

Speaker 1

Additionally, we're providing a presentation to accompany today's prepared remarks, which can be found also on the same website, ir. Titanmachinery.com. The presentation is located directly below the webcast information in the middle of the page. 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 statements do not guarantee future performance and therefore undue reliance should be placed upon them.

Speaker 1

These forward looking statements are based on current expectations of management and involve inherent risks and uncertainties including those identified in the Risk Factors section of Titan's most recently filed annual report on Form 10 ks. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward looking statements. Except as may be required by applicable law, Titan assumes no obligation to update any forward looking statements that may be made in today's release or call. Please note that during today's call, we may discuss non GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Titan's ongoing financial performance, particularly when comparing underlying results from period to period.

Speaker 1

We've included reconciliations of these non GAAP financial measures to their most directly GAAP measures in today's release. At the conclusion of our prepared remarks, we'll open the call to take your questions. And now I'd like to introduce the company's President and CEO, Mr. Brian Knutson. Brian, please go ahead.

Speaker 2

Thank you, Jeff. Good morning, everyone. I want to begin today's call by providing some historical context, which will help put our recent earnings performance into perspective. Then I will offer some thoughts on our fiscal 2025 outlook that we are providing today and finish with a summary of our segment performance before passing the call to Beau for his financial review and incremental thoughts on our modeling assumptions. We finished fiscal year 2024 with a strong performance that was driven by growth across all of our legacy operating segments and resulted in record revenue of $2,800,000,000 and record earnings per share of $4.93 This marked the 3rd consecutive year of achieving record earnings per share, while achieving a pre tax margin of greater than 5%.

Speaker 2

Our business remains in a position of strength and we expect to demonstrate the durability of our earnings through this cycle following a multiyear effort to implement greater efficiency across our organization. Moreover, this is exactly the level of execution that we outlined at our 2017 Investor Day. I'd remind everyone that back then we were working hard on expense and inventory optimization as a means to driving higher levels of profitability through the cycle. At that meeting, we also outlined a path to $2 earnings per share. Conceptually, we wanted to ensure we made the adjustments necessary to drive an acceleration in operating leverage so that we were in a strong position once the next cycle arrived.

Speaker 2

Our business today is nearly twice as large as those projections from 2017 in terms of revenue and I'm proud to say our earnings power of nearly $5 per share is higher by 2.5 times. Those principles remain in place today that is positioning the business to drive greater and more sustainable levels of profitability in all demand environments, which leads me to some brief commentary on our outlook for fiscal 2025 that we are introducing today. First of all, I'd like to highlight a few key differences between this cycle and the last one for both Titan and the industry in general and why both are at a healthier position today than the previous cycle. 1st for the industry as a whole. As has been well documented, supply chain constraints significantly limited OEM production volumes restricting the amount of new equipment that was going into the market over the past few years.

Speaker 2

Because of this fleet age for categories such as high horsepower tractors are still above long term averages. There has been less short term leasing activity further limiting the amount of late mile used equipment for sale. Farmers have had 3 highly profitable years to bolster their balance sheets and advancements in precision ag technology continue to drive productivity gains providing ROI and new equipment and aftermarket upgrades. For Titan specifically, as the industry continues to consolidate with larger higher horsepower and more technologically advanced equipment, we optimized our footprint and remove costs from the business through these restructuring efforts during the last cycle. We doubled down on our customer care strategy, driving more sustainable growth in our parts and service business and we bolstered our professional back office team who focus on managing inventory levels and use trade in valuations.

Speaker 2

While all of these factors I just mentioned put us in a healthier spot today than we were a decade ago, net farm income is expected to be at or possibly below the 20 year average in calendar year 2024 and interest rates don't appear to be dropping as fast as our customers would like to see. General consensus by industry participants is that ag volumes will be around mid cycle levels this year. As such, we don't expect to repeat the success we enjoyed over the past 2 fiscal years, but we remain in a strong position heading into our current fiscal 2025. We believe this year will prove to be best described as year of transition. We have rapidly moved out of a period characterized by restricted supply and high demand to one that reflects ample to even excess supply and mid cycle demand.

Speaker 2

We continue to have good visibility into demand for the first half of the fiscal year given healthy backlog and pre sell activity. However, the supply chain has caught up quickly in recent months and OEM lead times have normalized whereas they had extended out 12 to 18 months not that long ago. In a broader sense, this normalized supply environment is a welcome change after years of excessive delays and the additional uncertainty with allocations. This allows us to significantly improve our in stock levels of high horsepower equipment, self propelled sprayers and wheel loaders across our footprint. But the pace of the improved supply creates challenges in the near term as we will be working through a rapid influx of equipment deliveries, which will be visible in our new and used inventory balances throughout this fiscal year.

Speaker 2

As we meet demand from our existing backlog, those new unit sales to customers also generate trade ins of used equipment. The guidance we are providing today reflects anticipated margin compression in part so that we can manage inventory levels through this transitional period. Our team will proactively manage through these factors in order to drive strong financial results and position us to maintain the higher levels of pre tax margin that we've worked so hard to produce. Bo will provide some additional depth on the assumptions that underpin our modeling guidance for fiscal 2025. But before I pass the call to him, I want to briefly walk through our customary update on each of our reporting segments, starting with domestic agriculture.

Speaker 2

We had a great finish to the year growing segment same store revenue by 36% in the 4th quarter. This was largely a function of the team's strong execution on improving the pace of customer deliveries following a concerted effort to complete pre delivery inspections on new machinery. As we've discussed during the past several quarters, balancing the limitations of our service capacity between our ongoing needs of customers with incremental demands for pre delivery inspections has been a challenge. So with that in mind, in addition to the strong equipment deliveries, I'm particularly pleased with our ability to continue to advance our customer care strategy and drive a double digit same store sales increase in our reoccurring parts and service business. Investing in people and CapEx to increase our service network capacity remains a key priority for our organization.

Speaker 2

As such, we will continue to focus on recruiting, hiring and training skilled technicians in the coming fiscal year as well as investing in related capital expenditures to support that growth. Shifting to our domestic construction segment. As expected, our construction segment produced a strong 4th quarter with same store sales growth of 18%. This was due in part to timing of OEM deliveries this year versus last and our focus on getting these units turned around and out to our customers. We are pleased with the execution of our construction team who have continued to drive growth and maintain healthy pre tax margins.

Speaker 2

Although there's been some recent softening, as we look ahead, we see general stability in the construction markets that we serve. Further, we also anticipate benefiting from improved availability of equipment from our OEM partners. Now moving on to an overview of our Europe segment, which represents our business within the countries of Bulgaria, Germany, Romania and Ukraine. As discussed on our Q3 call, the growing season varied this year with timely precipitation driving above average yields in Germany and Ukraine, while dry conditions create some headwinds in Bulgaria and Romania. As expected, we saw a slowdown in demand in the 4th quarter, but still achieved modest year over year sales growth on a same store basis.

Speaker 2

Turning to our new Australia segment, the O'Connor's acquisition is now consolidated into our financials for the first time this quarter, so you will be able to monitor our progress in our segment reporting going forward. The segment's 4th quarter came in as expected and plentiful rainfall has provided healthy subsoil moisture across our footprint heading into the next growing season. We've completed initial integration discussions across departments, sharing best practices and setting the stage for future collaboration. In the coming months, we will initiate the branding transition to Titan Machinery. And I'd like to reiterate how excited we are to have O'Connor's join the Titan team.

Speaker 2

Finally, I want to sincerely thank our employees for their tremendous efforts that drove our record revenue and earnings. With that, I will turn the call over to Beau for his financial review.

Speaker 3

Thanks, Brian, and good morning, everyone. I'll start with a brief review of our fiscal 2024 full year results. As Brian noted in his commentary, we had another exceptional year and are proud of the performance the team delivered. While we don't expect to repeat this performance in the coming year, we are focused on improved results relative to that of the previous cycle as we move forward. Total revenue increased 24.9% to a record $2,800,000,000 driven by balanced growth across each of our revenue categories.

Speaker 3

Equipment grew 25.3% for the full year and was complemented by solid contributions from our recurring parts and service businesses, which increased 25.6% and 21.2% respectively. Additionally, rental and other was up 10.4%. Earnings per diluted share increased 9.8% to $4.93 for fiscal 2024. This was a record for Titan and it was also right in line with the midpoint of the guidance we established at the beginning of fiscal adjusting for the O'Connor's acquisition. Shifting to our consolidated results for the fiscal 2024 Q4.

Speaker 3

Total revenue was $852,100,000 an increase of 46.2% compared to the prior year period. Growth was driven by a 29.9% increase in same store sales with the balance reflecting the contribution from the O'Connor's and other acquisitions. Our equipment revenue increased 51.6% versus the prior year period. Both parts and service revenue each increased 25.7 percent and rental and other revenue was up 3.1% versus the prior year period. Gross profit for the 4th quarter was $141,000,000 and as expected, gross profit margin contracted year over year to 16.6 percent driven primarily by lower equipment margins, which are experiencing some normalization as expected at this stage in the cycle.

Speaker 3

The 4th quarters of fiscal 2024 and fiscal 2023 included benefits related to manufacturer incentive plans of $7,800,000 $1,800,000 respectively. Operating expenses were $100,300,000 for the Q4 of fiscal 20 24 compared to $83,700,000 in the prior year period. The year over year increase of 19.9% was driven by additional operating expenses related to our acquisitions that have taken place in the past year as well as an increase in variable expenses associated with increased sales. Floorplan and other interest expense was $9,300,000 as compared to $2,100,000 for the Q4 of fiscal 2023, with the increase led by a higher level of interest bearing inventory, the usage of existing floorplan capacity to finance the O'Connor's acquisition and higher interest rates. Net income for the Q4 of fiscal 2024 was $24,000,000 or $1.05 per diluted share, which included approximately $0.26 of benefits associated with manufacturer incentive plans.

Speaker 3

This compares to last year's 4th quarter net income of $18,100,000 or $0.80 per diluted share, which included approximately $0.06 of benefits associated with manufacturer incentive plans. Now turning to our segment results for the 4th quarter. In our agriculture segment, sales increased 40.8 percent to $620,600,000 Growth was led by strong same store sales increase of 35.5%, which was further supported by contributions from the acquisitions of Pioneer Farm Equipment in February 2023 and Scotts Supply in January 2024. Agriculture segment pretax income was $28,800,000 and compared to $19,300,000 in the Q4 of the prior year. In our construction segment, same store sales increased 17.7 percent to $100,100,000 led by the timing of equipment deliveries, which shifted some revenue into the Q4 of this year as compared to the timing of deliveries to customers in the second half of last year.

Speaker 3

Pre tax income was $4,600,000 and compared to $5,400,000 in the Q4 of the prior year. In our Europe segment, sales increased 8.1 percent to $61,600,000 which reflects a 5.5% currency tailwind on the strengthening euro. Net of the effect of these foreign currency fluctuations, revenue increased $2,100,000 or 3.6 percent. Pre tax loss was $600,000 and compared to pre tax income of $1,500,000 in the Q4 of fiscal 2023. The decrease in profitability was driven primarily by a partial normalization of equipment margins and higher operating pre tax income was $4,100,000 This was in line with the lower end of the range we provided on the Q3 call, primarily due to timing of OEM deliveries.

Speaker 3

This segment is well positioned to start fiscal 2025 with a good amount of pre sell orders on hand. Now on to our balance sheet and inventory position. We had cash of $38,000,000 and an adjusted debt to tangible net worth ratio of 1.5 times as of January 31, which is well below our bank covenant of 3.5 times. Equipment inventory increased approximately $200,000,000 in the 4th quarter, of which approximately $87,000,000 is attributable to acquisitions made during the Q4. As Brian mentioned, we were pleased to be able to improve the pace of customer deliveries following a concerted effort to complete pre delivery inspections of new machinery.

Speaker 3

But as expected, our high volume of deliveries to customers was more than offset by receipts from our OEM partners as they were rapidly catching up on production backlog as they finished the calendar year. With that, I'll finish by sharing a few on our fiscal 2025 full year guidance, which we are providing today. First, some segment specific color on the top line. For the agriculture segment, our initial assumption is for revenue to be flat to up 5%. This includes a full year revenue contribution from Scotts Supply, which closed in January of 2024 and achieved revenues of approximately $40,000,000 for calendar year 2023.

Speaker 3

It also assumes mid to high single digit growth on our parts and service business as we continue to advance our customer care strategy. As for equipment revenues, it assumes industry equipment volumes to be down 10% to 15% and pricing on new equipment to be up low single digits. The underlying growth for equipment revenue is expected to be driven by market share gains aided by improved availability of high horsepower equipment as well as proactive posture on selling through the used equipment that will be generated through trade ins. The construction segment has diverse exposure to various end markets and construction activity in Titan's Midwest footprint remains at levels supporting healthy demand. Our initial assumption is for revenue growth in the range of up 3% to 8%.

Speaker 3

Here again, we assume mid to high single digit growth of our parts and service business and the low single digit increase of pricing on new equipment. Construction should also benefit from improved availability of key equipment categories for which we have been not been able to fulfill demand in recent years. For the Europe segment, our initial assumption is for revenue to be flat to up 5%. Our European business being predominantly ag based has most of the same semantics as we laid out today for our ag segment. One difference being that each country has its own nuances and are at different points in terms of maturation of our business operations.

Speaker 3

For instance, while our operations in Romania and Bulgaria are more mature, Ukraine is being impacted by ongoing conflict with Russia and in Germany we are in the earlier innings of establishing our presence across our footprint. As for the Australia segment, which made its debut in Q4 with the acquisition of O'Connor's, we currently expect FY 2025 revenue to be in the range of $250,000,000 to $270,000,000 which is right in line with the $258,000,000 dollars that they achieved in their most recently completed fiscal year prior to acquisition. This business has a strong foundation in place with a focused operations team and is positioned well to deliver a solid 1st year performance as part of Titan Machinery. Now on for some overall commentary across our segments. From a gross margin perspective, we expect equipment margins to normalize across all four of our segments as there is now ample supply of inventory available for sale on dealer lots.

Speaker 3

An additional impact on the agriculture side is the U. S. Net farm income is expected to decrease approximately 25%, which has started to impact demand for equipment purchases. As such, we expect incremental compression on equipment margins in this transitionary period. As for operating expenses, we continue to take action to retain and recruit talent in a consistently tight labor market, especially with service technicians.

Speaker 3

We also expect a ramp up in IT expenses as we look to complete the rollout of our new ERP across our remaining U. S. Locations. From a year over year comparison perspective, it's also worth noting that our Australia segment has a similar level of operating expenses as a percentage of sales as the rest of the business, implying an annualized run rate of about $30,000,000 for that segment. Taken together, these impacts are expected to result in operating expenses as a percentage of sales about 40 basis points higher than was realized in fiscal 2024 across the company as a whole.

Speaker 3

Moving to interest expense, I would expect similar levels of quarterly floorplan interest expense in the first half of fiscal twenty twenty five as we incurred in the Q4 of fiscal 20 24. And then see it reduced from there as OEM interest returns normalize and interest rates are expected to reduce modestly in the back half of the year. What I mean by normalization of interest returns is that in recent years due to low equipment availability, OEMs provided shorter than typical interest free periods, but that has started to shift back to more normal terms and is expected to be a benefit to interest expense. Bringing it all together on a diluted earnings per share basis, we are introducing a fiscal 2025 range of $3 to $3.50 per share, which implies a pre tax margin of 3.2% to 3.5%. Overall, we believe the variables just discussed are reasonably factored into the ranges we are providing today, though both risk and opportunity still exist.

Speaker 3

The midpoint of our guidance at $3.25 earnings per share, which reflects a mid cycle ag environment along with some added transitional pressures would be the 3rd highest EPS in company history and continues to build on a solid foundation for more sustainable and profitable growth through the cycle. To provide more color on this important topic, we have added a slide in the back of our earnings presentation, which provides a comparison of recent years versus the prior ag cycle. It also summarizes some of the key reasons for the improved profitability as has already been discussed today. Overall, we are focused on executing the plan and driving higher levels of profitability through the cycle. This concludes our prepared remarks.

Speaker 3

Operator, we are now ready for the question and answer session of our call.

Speaker 4

Thank you.

Operator

Our first question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Speaker 4

Thanks very much. Congratulations on the quarter and congratulations on all the work you've done in the last several years to position yourself to work your way through change in the cycle, if you would. I just wanted to touch base quickly on some of the commentary around margin. I know you highlighted that you were going to see more pressure on margin on the equipment side as farm income goes down and there's lesser demand. First of all, with regards to that, is this across the board with regards to both new and used?

Speaker 4

I assume that a bigger driver of this would be used more than new. My second point within margin is what does it mean with regards to rental? And then in my 3rd, kind of looking at your parts and services in the last quarter, was a little below margin relative to kind of recent periods. Will we see margin pressure with regards to parts and services also? Thanks.

Speaker 4

Yes.

Speaker 3

Good morning, Ted. Thanks for the question. From an overall margin perspective, in terms of new and used, we don't really split that out and it's really a function of how you evaluate the used, which impacts the new. Overall, your commentary makes sense, right? The pressure comes from selling through the used side.

Speaker 3

So we don't really split it out, but I mean that's how we're thinking about it. And overall, that's why we talk about a total equipment margin. From a parts and service perspective, I would expect similar margins this next year as we had in fiscal 2024, maybe slightly down, but we're not talking about the same factors that are impacting our equipment margins. And then from a rental perspective, also feeling good about where that's at and would expect similar margins to last year. I think you're maybe also referencing there margin changes in Q4 specifically for parts and service and maybe mainly service.

Speaker 3

Some of that can really be a function of the seasonality, which we really see in the business and where our team is focusing their time between delivering new equipment versus service revenue. And I wouldn't read anything into that. The margins we've seen are pretty similar to what we would expect, perhaps slightly down again as we've seen some pressure and then we're wanting to make sure that we're one of the ones in front leading the labor market and recruiting and retaining our service techs.

Speaker 4

Okay. That's really it for me. Thanks very much.

Speaker 3

Yes. Ted, this is Brian.

Speaker 2

I would just add on the rental as Bo commented. Recall that if you go back to FY 2018, we had a much higher rental fleet and we've gotten that really lean and reduced it down by over 35% down to just under that $80,000,000 that we have today and really driven over the last few years much higher utilization rates and both in terms of dollar and physical utilization. And so we expect that to continue again with our very lean and agile rental fleet that we have today.

Speaker 4

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Larry De Maria with William Blair. Please proceed with your question.

Speaker 5

Thanks. Good morning. I have a few questions. First, I guess, can you talk about I know you talked about lead times to some degree. Can you talk about other any pockets where they're still extended or is everything normal at this point?

Speaker 5

And are you guys significantly slowing down or canceling orders at this point?

Speaker 2

Hey, Larry, this is Brian. Good morning. Thank you for the question. Yes, generally everything across the board is now normalized, Larry. As you know, domestic Midwest plants versus overseas production plants, always have very lead times.

Speaker 2

But the supply chain, as we mentioned, has really quickly caught up here. And so going from even towards the last at the end of last year still being extended out to now generally everything normalized.

Speaker 5

Okay. Even though it's large four wheel drive and staggered and all that stuff is relatively easy to get?

Speaker 2

Yes. There's not easy for the OEM, still some production challenges for them. But yes, now no longer allocation I believe from any of the OEMs on any product categories.

Speaker 3

Yes. And just to make sure we addressed the one point. I mean, there's not a cancellation of orders here. What we've done right is adjust the dials and that started last year. So we're just we've kind of referred to this as a transitionary period when the supply chain catches up and you see kind of a condensing of when that equipment arrives, right.

Speaker 3

So it's kind of a matter of timing and it'll play itself through, but feel good about our ability to do so. And that's one of the main focuses this year.

Speaker 2

And Larry, I'd just add. As you know, we were short on inventory for in many categories for 2 plus years. We've talked a lot about that over the past 2 years. And so it took us a long time to get here. And so as things have rapidly normalized, it's going to take a while to manage through these.

Speaker 2

And so that's why you hear us talking about the transition year. And just it's become a lot of equipment coming in a short period of time, orders that we have placed all throughout 2023 and even back into 2022 coming in a short period here. But just to your point about the dialing back and as Bo said, as we saw some of the markets starting to soften late last summer, we started to pull levers and dial things back and put actions into place. So we feel really good about the proactive measures we've taken and the visibility we have into the order board for the first half of the year and the strong pre sales coming in. And so again, there's just will be a lot of inventory that's recently come in and will be coming out in throughout this year that we've got built into our modeling that we are just going to get after and sell through.

Speaker 5

Got you. Thanks for that color. And then maybe asking from the customer's perspective, how did orders kind of come in through the quarter? I guess, I'm trying to understand, have they fallen off a cliff? Are they slowly continuing to get weak?

Speaker 5

And have they sort of felt like their bottom stabilized? And are you seeing any cancellations from customers?

Speaker 2

Yes. So the cancellations are very low. Generally, as we talked in the past that ties back to a death or a divorce or unexpected health issues. And so those just continue. But it has not fallen off a cliff by any means.

Speaker 2

Commodity prices have been pretty steady here for the last few weeks. And so farmers again had 3 really good years here and balance sheets are really strong, recording a lot of record land sale prices throughout our footprint. And they're carrying over a lot of good income into this year and that will help stabilize as well. And then just a lot of the new products from our OEMs and the technology that's really helping with the productivity and supporting demand as well.

Speaker 5

Okay, fantastic. And if I could just ask one final question, sorry, for asking more more. But in your chart where you show the margins, future trough in revenue and you have breakeven margins as sales about half of where we're looking now. Is that meant to be indicative of where you think the market is going? Or is that more illustrative of what you've of the work you've done cycle to cycle?

Speaker 3

Yes. And I appreciate the opportunity to clarify that. And it was a bit challenging to perfectly capture something that you could digest relatively quickly. That future state in that trough there, right, is not trying to provide any indication on the level of revenue. It's simply trying to provide the pretax margin percentage range.

Speaker 3

So and we also have the budget in there as a reference, right. So we're coming off of our recent peaks and we saw an ability to produce pre tax north of 6% this year budgeting a mid cycle assumption with some added transitionary pressure at the midpoint at about 3.4%. The guidance range here from 0% to 3% is supposed to be indicative of kind of that pretax range. And in terms of where it falls in that range, right, all comes down to kind of the timing and the factors at the time, right? Like what is the trough?

Speaker 3

What does that look like? Where equipment inventory levels at where interest rates at, at that point in time? But overall, what we're trying to illustrate is both from peak to peak perspective and then trough to trough perspective and all the way through the cycle, delivering significantly higher profitability. And that's what we're excited and focused on executing here over the next few years.

Speaker 5

Okay, perfect. Thank you very much. Good luck.

Speaker 2

Thanks, Larry.

Operator

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

Speaker 6

Hey, good morning guys. It's Joe Grabowski on for Mig this morning.

Speaker 2

Hi Joe. Hi Joe.

Speaker 6

Hey, good morning. So I guess I wanted to start with the quarter. The guidance you gave in late November would have implied your ag revenue would have been up about 20% in the 4th quarter. It came in up over 40%. I guess I'm just checking, did the equipment availability really improve that much more than you were expecting in late November?

Speaker 6

Kind of what played out in the quarter? And did you maybe pull any revenue forward that you might have gotten in the current fiscal year?

Speaker 2

Yes. I think just quickly for me and I'll Bo expand further Joe. But to your question, yes, the equipment has been really tricky to forecast timing of deliveries the past 2 years. And so with supply chain improving and so on, it did come in better than anticipated. So that certainly was a part of it.

Speaker 2

And then also, again, as I mentioned in our prepared comments, just credit to our team who really worked hard to reduce our backlog that has been at a record levels of past 2 years and putting in the hours and getting that equipment out to our customers.

Speaker 3

Yes, yes, I don't think I have anything to add there. I think you covered it well.

Speaker 6

Okay, great. Thank you. And my next question is you walked through why your ag revenue guidance for the current fiscal year is so much better than the OEMs industry forecasts? And it seems like a big component of that is the market share gains that you're expecting. Maybe talk about your confidence in those market share gains.

Speaker 6

And I guess if it's predicated on better equipment availability, I mean isn't equipment availability improving for everybody? So just your thoughts on that.

Speaker 3

Yes. So stripping everything back and setting the acquisition to the side, right, equipment revenues on the Ag segment is about flat to slightly down versus I think you're referencing the industry volume expectation of like 10% to 15%. And yes, we are better positioned with our equipment, right, and specifically for customers we serve. So it's really looking at those relationships and the equipment that they're looking for and in some cases our inability to get it in previous years and now our ability to execute and serve those specific customers. So it's not just a broad statement and we feel pretty good with line of sight and as we mentioned with our pre sale activity through the first half of the year, what we're looking to achieve here.

Speaker 6

All right. And my last question, any early learnings from the O'Connor's acquisition and your maybe your broader thoughts about the Australia market?

Speaker 2

Yes. I think just as we continue to get to know the team better and collaborate with them on our best practice sharing and leveraging each other's knowledge and skill sets. It's just all been extremely positive. We're really pleased with the acquisition. We're really pleased with the leadership team and the employees over there and very similar business philosophies that our 2 companies have.

Speaker 2

And so that's really helped with the integration and transition. We really like the market over there. We're very excited to grow over there and continue to invest over in Australia. And yes, we just couldn't be happier Joe and really pleased with that acquisition, excited about going forward.

Speaker 6

All right. Great. Thank you.

Speaker 5

You bet.

Operator

Thank you. Our next question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

Speaker 7

All right. Thanks for taking my question. A couple for me. First of all, regarding the 2025 outlook, I'm wondering if you can kind of help us a bit with top line seasonality. Last year was a very lumpy one.

Speaker 7

I'm wondering if you can kind of point to any historic year to give us kind of a bit of a benchmark for kind of how we should look at seasonality here in fiscal 2025 because I suspect it's going to be off quite a bit from fiscal 2024.

Speaker 3

Yes. So certainly when you look at it and things like the strength of the 4th quarter definitely come into play there with your comments. Big picture wise, surprisingly, and as you we look at things average over the last 6 years, last 3 years, last couple of years, a whole bunch of different ways. But as we see it, traditionally, our revenues are about 45% in the first half of the year, 55% in the second half of the year. And Australia even, when you overlay Australia with our financials, we expect something very similar with 45% -ish in the first half of the year, 55% -ish in the second half of the year.

Speaker 3

The nuance here I think is you're definitely right. There was some strength in the Q4 in our U. S. Ag segment, which kind of made Q4 stand out. So I think that that normalizes a bit and Q3 and Q4 look more similar in FY 2025 than they did in FY 2024, but overall back half of the year about 55%.

Speaker 3

And then from a first half of the year perspective, that first 45%, Q1 is traditionally and expected to be lower than Q2 and a lot of that is seasonality and timing of activity and purchasing. So overall, big picture wise, it won't change drastically from what we've seen, but there is some nuance and certainly more of a level setting between Q3 and Q4 is probably the best expectation at this point.

Speaker 7

Got it. That's very helpful. Thanks, Bo. And then one more for me and I'll get back in queue. I'm wondering if you can talk about the M and A opportunities today and maybe in the context of kind of how the M and A environment was at mid cycle in the midpoint of the previous cycle, as well as the outlook kind of more favorable, less favorable than it was at this point in the prior cycle or any big takeaways you can point to there?

Speaker 2

Yes. Thanks, Ben. Yes, certainly, I believe there's they'll start to be a greater amount of opportunities here as we go forward. And also, we could see a little bit of changing in the multiples and so on as we go more towards mid cycle here and as margins come down a little bit for the other dealers as well. But the real drivers still remain in place.

Speaker 2

All the back office challenges and a lot of the single store, the smaller and the traditional operations struggling with the technology and all the HR and government regulations. And just a lot of that back office function that really ties in nicely with our models. And so those drivers just continue to be ever present. And as we again go towards more mid cycle here, those get highlighted even further. So we do believe there'll be an increased amount of opportunities as we go forward here.

Speaker 2

But I would reiterate for the immediate year here as we laid out in our prepared comments, we're really focused on our customer care strategy and continuing to focus on driving our parts and service business and increasing our parts and service revenues, increasing our support capabilities for our customers. And we're going to continue to invest in that and be really focused on our customer care strategy and just really keen on expenses and again inventory management. So those are the three priorities. We certainly will be opportunistic with acquisitions and as we manage through that inventory that will free up room on the balance sheet. That'll generate quite a bit of cash as we exit the year and go throughout next year as well.

Speaker 2

So we'll certainly be ready and going to be very selective with acquisitions as we go forward.

Speaker 7

Very good. I appreciate that color. Thanks for taking my questions. I'll get back in queue.

Speaker 5

Thanks, Ben.

Operator

Thank you. Our next question comes from the line of Alex Rygiel with B. Riley. Please proceed with your question.

Speaker 4

Thank you. Good morning. A couple of quick questions here. First, can you talk a little bit about your expectations for inventory increasing throughout the year?

Speaker 3

Yes. I mean, from the color we're trying to provide today is generally right that we still have inventory coming in. And obviously, we have expectations for good sales pull through. In terms of quarter to quarter, that remains to be seen a little bit. Again, as we've said, lead times have normalized some, but there's still some inconsistency in terms of when things would arrive.

Speaker 3

But as it stands, I would expect that we do see some uptick in inventory here in the first half of the year assuming that all of those things stay on schedule. And then we would play it out and see some inventory reduction from there in the back half of the year. All of that subject to again the timing of how everything plays out and we'll continue to provide an update for you on a quarterly basis.

Speaker 4

Thank you. And then, what's your appetite these days to increase investment into the rental fleet?

Speaker 2

Yes. So Alex, we monitor that closely on a real time basis. And it just ultimately is a function of our utilization. And so our team does a great job building relationships and being out there in the market and we really look to continue to push and promote our rental fleet. It continues to improve every year.

Speaker 2

And so we're just very mindful though of the utilization rates. And as long as we can keep those up and keep improving those, we'll continue to add fleet. And as we see them start to taper off or pull back a little bit, we'll turn the valves decrease the valves back down. And again, just really a function of the utilizations.

Speaker 6

Thank you.

Operator

Thank you. And our final question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Speaker 4

Thanks. You kind of touched on it a little bit with your inventory comment, but I did want to circle back with regards to kind of working capital levels as we roll through fiscal 2025 and that's obviously tied to inventory levels. I'm a little bit surprised that you would see inventories trending up like in the first half given the jump you had in the Q4. But kind of taking that and all tying it together, is it fair to assume that we'll see a drop in working capital and an improvement in free cash flow during fiscal 2025? And will we what kind of what can we expect in terms of a free cash flow number for the year?

Speaker 4

And how would that be weighted out in terms of sort of first half to second half? Thanks.

Speaker 3

Yes. So I mean overall, at the heart of your question is, would we see better operating cash flow generation, right? And ultimately that all comes down to what the inventory balance is going to look like. So this year we saw a significant increase year over year in inventory. We certainly wouldn't expect to see the same thing occur in FY 2025, right?

Speaker 3

So that's going to be a real positive to the dynamics on the cash flow side. Just a bit more on that, I guess, as we look at this. So again, we mentioned a little bit earlier about 45% of revenue in the first half of the year, 55% in the back half of the year. Well, kind of the inverse is true in terms of expectations for deliveries, again, because of the supply chain cash up, right? So when you have more a larger portion of inventory coming in, in the period where you have a lower portion of your sales, that's just mathematically what's against it that would lead to a continued increase here in the near term.

Speaker 3

But overall, as we step back and take a look at this, right, and we talk about the team that we have in place and the controls we have in place and everything that we focus on, The dynamics that have kind of come together here in terms of the cycle turning and then the catch up with the supply chain, ultimately just lead to a situation where it takes a little time to play through, right? So big picture wise, we talk about maintaining healthy inventory turns and staying out of interest bearing inventory. And I think this year we'll see that inventory turns are lower than our targeted levels. And it probably takes working through FY 'twenty six to get the turns back up, just the dynamics with how those ratios are even calculated. So we see the transitionary period and kind of a 2 year journey to get back on that turn level.

Speaker 3

But very much seeing it play out, something we can manage, deliver the higher profitability that we're talking about today, be well positioned for FY 'twenty six and beyond. And ultimately, all of that is going to lead to better cash flow generation that we had seen recently. But in terms of specifically now in the quarters, I mean, we'll have to continue to see how that plays out here in 2025.

Speaker 4

Do you think you can generate positive free cash flow for the entire year?

Speaker 3

Yes. Again, it ultimately all comes down to inventory levels. But we feel good about being able to manage those and achieve that.

Speaker 4

Okay. Thanks, Bob.

Operator

Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to management for closing remarks.

Speaker 2

Okay. Thank you for your interest in Titan Machinery, and we look forward to updating you with our progress on our next call. Thank you and have a great day everyone.

Operator

And this concludes today's conference and you may disconnect your lines at this time.

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Earnings Conference Call
Titan Machinery Q4 2024
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