Titan Machinery Inc. Q4 FY2020 Earnings Call

Greetings. Welcome to Titan Machinery's Fourth Quarter and Fiscal Year 2020 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to your host, John Mills at ICR. Thank you. You may begin.

Great. Thank you. Good morning, ladies and gentlemen. Welcome to the Titan Machinery fourth quarter fiscal 2020 earnings conference call. On the call today from the company are David Meyer, Chairman and CEO; and Mark Kalvoda, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal third quarter ended January 31, 2020, 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 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. In addition, we're providing a presentation to accompany today's prepared remarks. We suggest you access the presentation now by going to Titan's website at ir.titanmachinery.com. The presentation is directly below the webcast information in the middle of the page. You'll 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 risks 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 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'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 Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today's release. The call will last approximately 45 minutes today, and at the conclusion of the prepared remarks we will open the call to take your questions. 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 fourth quarter fiscal 2020 earnings conference call. As John mentioned, to help you follow today's prepared remarks, we provided a slide presentation, which you can access on the Investor Relations tab of our website at ir.titanmachinery.com. On today's call, I will provide a summary of our results and then an overview for each of our business segments. Mark will then review financial results for the fourth quarter and full year of fiscal 2020 and conclude with some commentary around our fiscal 2021 outlook. If you turn to Slide 4, you will see an overview of our fourth quarter and full-year financial results. Our fourth quarter revenue was down 2.4% to $351 million compared to the same period last year, with adjusted pre-tax income improving to $1.3 million versus a $500,000 loss in the prior year period. Adjusted EPS was $0.02 compared to a loss of $0.04 in the same period last year. For the full year, we generated revenue of $1.31 billion, which was up 3.5% compared to fiscal 2019. Our adjusted pre-tax income was $25.6 million versus $19.3 million for the prior year. Adjusted EPS was $0.79 compared to $0.67 last year. Fiscal 2020 was a successful year with revenue growth across all three of our operating segments: North America Agriculture, North America Construction, and International. In the face of some challenging industry dynamics, we are proud to be able to post a solid profit number to our bottom line. This is a testament to the strong commitment and performance of our team. I will now provide more detail around the three operating segments. On Slide 5 is an overview of our North America Agriculture segment. Calendar 2019 was a very difficult climate year for our customers. It started with a late and wet spring causing delayed planting, followed by a cool and wet summer and culminated with an extremely late and wet harvest. In fact, there was a substantial number of acres of unharvested corn left in Minnesota, North and South Dakota at the beginning of this year. Farmers are now waiting for snow to melt and field conditions to allow corn buying. These conditions provided support to our equipment business, spring demand for units with tracks and vertical tillage equipment. However, with our parts and service business, which realized the greatest benefit with double-digit growth in both categories for fiscal 2020 to be at extended age and hours of equipment fleets and tough duty cycle from the late and wet conditions. Despite the adverse conditions, the USDA forecasts 2019 net farm income to be up 11.7% buoyed by USDA programs, good yield from the acres that did get harvested, and stronger commodity prices earlier in June and July. Farmer sentiment remains balanced. Current low commodity prices and concerns with the unknowns surrounding COVID-19 are offset by continued improving yield trends, recent payments of the third and final tranche of the USDA 2019 market facilitation program, the Phase 1 of the US-China trade agreement, completion of the USMCA bill, and the continued low interest rate environment. Looking into this upcoming farming season, there will be a compressed spring planting season window due to the lack of tillage and fuel preparation done last fall, which will put demands on our parts and service departments. Further, we expect broader trends such as an increase in age of equipment fleets will continue to support growth in our parts and service business. Replacement demand and technology will remain a catalyst for new machinery purchases, and we see continued stability in used equipment pricing in the near term. Our net farm income is forecast to be up 3.3% year-over-year. We believe that a prudent approach to the near-term outlook is appropriate, given the market uncertainty and potential implications from the COVID-19 crisis. Broader trends such as replacement demand and the growing adoption of technology and precision equipment will continue to support equipment revenues in fiscal year 2021. However, as we've seen in prior market cycles, customers tend to extend the age of their existing equipment. Our dealer network is ideally positioned to care of these customers and will support incremental parts and repair service demand. We believe the efficient operation framework we have put in place at Titan Machinery will ensure that we manage through this extended cycle profitably and that we are optimally positioned when the cycle returns more favorable. As you may have seen, we continue to be active on the M&A front. In addition to the Northwood, North Dakota Case IH dealer acquisitions that we announced in the fourth quarter, we entered into an agreement to acquire the HorizonWest three-store complex locations in Sydney and Scottsbluff, Nebraska and Torrington, Wyoming, which is expected to close on May 4th. These three Case IH dealerships fit our profile perfectly and are contiguous to our existing North Platte and Imperial Nebraska dealerships. We are looking to do additional domestic Ag acquisitions in the future as we see an increased pipeline of motivated sellers. Turning to Slide 6, you will see an overview of our North American Construction segment. Similar to our position with Agriculture, our Construction business is realizing improving profitability with its more efficient and nimble platform. The macroeconomic backdrop remained fairly consistent through the fiscal fourth quarter and the month of February until being negatively impacted by the global COVID-19 pandemic, along with the steep drop in global oil prices. Prior to this, we were enjoying a stable economy, continued commercial and residential construction activity in the major metro markets, potential infrastructure spending, and consistent demand for rental equipment across our footprint. However, the oil production war taking place within OPEC countries, coupled with the decreases in oil demand due to the impact of COVID-19, has created a sharp decrease in oil prices, which we believe will negatively impact the construction equipment industry. In addition, construction storage in our rural areas is being negatively impacted by the lower commodity prices and farmer rancher demand for construction equipment. As a result, we are managing the business cautiously with the focus on driving improved profitability. Late in the fiscal fourth quarter, we divested our construction equipment store in Albuquerque, New Mexico. Not only will this be advantageous to our CE segment profitability but also supports our strategy of operating and acquiring locations in core markets where we can leverage logistics, similar equipment specifications, and customer synergies. On Slide 7, we have an overview of our international segment, including storage within the European countries of Bulgaria, Romania, Serbia, Ukraine, and Germany. While we were not happy with our European fiscal year '20 results, these results were negatively impacted by undesirable weather in some of our key markets, lack of European Union intervention funds, Brexit, and an overall lackluster European economy. However, recent spring rains in most of our European footprint have put the winter cereal crops in good condition after a very warm and dry winter. We are seeing relative stability in our Ukrainian markets as land reform legislation is front and center, and farmers in the Balkan countries are continuing to invest in modern, productive machines and embracing precision technology. Looking ahead, we continue to see long-term growth opportunities in our international markets. While regional subvention and fund availability has become more limited in select markets, we are seeing global investment into the Eastern European region, which is fueling high demand for high horsepower products. Consistent with this trend, we continue to invest in the aftermarket parts and service business as we build out our footprint in Germany to Balkan markets and Ukraine. Before I turn the call over to Mark, I would like to make a few comments on COVID-19 and address its effect on our employees, customers, and operations, including an update on our dealer management system migration. We are taking the COVID-19 outbreak very seriously, and we believe that our organization is prepared. We are proactive in our efforts by adapting best practices from the CDC, canceling large events, canceling business air travel, promoting social distancing, providing work from home options, and limiting access to our employees from vendors, suppliers, and customers. While we've temporarily closed off customer access to our facilities, we are fully staffed and using technology, lower service fleets, and alternative delivery solutions to provide equipment, parts, service, and rentals to our customers during this important spring season. Our business is categorized by the US Department of Homeland Security as critical and essential, which allows us to continue to operate and support our customers who are critical in maintaining global food supplies and national infrastructure. We believe we are taking precautions to ensure the safety of our employees and customers alike. Our farmer contractor customers for the most part independently operate large off-road equipment with minimal close quarters contact. We believe we are well positioned to weather this pandemic as we are able to utilize our technological capabilities to support our customers without close personal interaction, minimizing the risk of exposure to our employees. Titan Machinery's retail outlets are generally located in rural and sparsely populated communities. Tax service operates, our field service vehicles, and in-service departments of large spaces and distances between employees due to the size of the equipment they're working on. Via destination locations, they have an active dialogue with our customers. Our sales process and engagement is highly planned due to the size of the investment and equipment that our customers are making, which allows for minimal customer traffic and a variety of parts delivery systems that do not involve customer contact. Regarding the supply chain, we feel good about our ability to complete on-time deliveries to customers of sold and needed equipment. With respect to parts, we've proactively increased our stock of critical high-demand parts to ensure that we're able to maintain our high levels of service throughout these challenging times. Concerning our fiscal 2021 outlook, due to the uncertainty that COVID-19 is creating within our industry and business, we believe it is prudent to temporarily withhold our fiscal 2021 modeling assumptions that we usually introduce during our year-end reporting. Mark will provide additional color regarding fiscal 2021 in his remarks. As part of our risk mitigation efforts, we're also delaying the rollout of our new ERP dealer management system conversion within our North America footprint. Our revised plan is more measured, with the launch of a pilot location this summer followed by a full system implementation company-wide in the first half of fiscal 2022. During this time of global uncertainty, we're proud to be an integral part of the central industries to support farmers who are critical to the food supply and construction equipment operators who build and maintain infrastructure. Before I turn the call over to Mark to discuss the financials, I would like to thank our employees in the United States and Europe for a great year and their continued commitment to our customers.

Thanks, David. Turning to Slide 8, our total revenue for the fiscal 2020 fourth quarter was $351 million, reflecting a decrease of 2.4% compared to last year. The robust performance of our high margin parts and service business contributed to improved profitability during the quarter, although it wasn't sufficient to completely counterbalance the decline in equipment sales we experienced. Equipment revenue fell by 7.5% during this three-month period, largely due to lower sales in our Agriculture segment, and to a lesser extent in Construction and International. As David mentioned, our Equipment business in Agriculture and International is continuing to face challenges stemming from macroeconomic factors. Our recent trends in parts also showed strong growth in the fourth quarter, with increases of 19.2% and 16.6% respectively. This growth is a result of our amplified focus on customer care across all segments and was supported by an adverse harvest environment and an aging customer fleet in agriculture. Our rental and other revenue rose by 7.3% in the fourth quarter, driven by increased rentals in our Construction segment. We achieved a 130 basis point improvement in rental fleet dollar utilization, increasing from 23.7% last year to 25%. This improvement stems from our concentrated efforts in this area and optimizing our rental fleet assets to enhance utilization rates. On Slide 9, our gross profit for the quarter rose by 10% to $61.1 million, and our gross profit margin improved by 190 basis points year-over-year to 17.4%. These enhancements resulted from better equipment margins and a higher share of higher margin parts and service revenue compared to the previous year. Our operating expenses increased by $6.3 million to $60.1 million for the fourth quarter, influenced by ERP transition costs and expenses related to our newly acquired Northwood location, which were not present in the prior year quarter. This rise in expenses, combined with lower revenue, led to an increase in our operating expenses as a percentage of revenue to 17.1% from 15% in the same quarter last year. Impairment costs were $3.6 million for this quarter, up from $1.7 million in the prior year, primarily due to the impairment of right of use assets following the adoption of new lease accounting rules earlier this year. Floorplan and other interest expense dropped by $300,000 to $2.5 million compared to the same period last year, attributed to lower interest expense from the retirement of our convertible notes in May 2019, though partly offset by a higher level of interest-bearing inventory. In the fourth quarter, we realized adjusted net income of $500,000 compared to an adjusted net loss of $800,000 for the previous year. This adjusted figure excludes a gain of $4.6 million tied to a release of our domestic income tax valuation allowance, as well as the impairment and ERP transition costs mentioned earlier. Our adjusted earnings per diluted share stood at $0.02 for this quarter compared to an adjusted loss per diluted share of $0.04 last year. Adjusted EBITDA for the fourth quarter was $8.1 million, up from $6.7 million in the preceding year. You can find the reconciliation of adjusted net income, adjusted income per diluted share, and adjusted EBITDA to the most comparable GAAP amounts in the appendix of the slide presentation. On Slide 10, an overview of our segment results for the fourth quarter is presented. Agriculture segment sales decreased by 3.5% to $215.5 million, but we increased adjusted pre-tax income to $2.5 million in the fourth quarter from $1.7 million last year, thanks to improved equipment margins and strong performance in parts and service. In our Construction segment, revenue saw a 0.9% rise to $87.2 million compared to the prior year. The segment's adjusted pre-tax loss improved by $500,000 to $1 million from $1.5 million last year, with the upturn driven by higher equipment margins and strong parts and service growth. Additionally, this segment benefited from improved rental results. Our International segment revenue was $48.2 million, down 3.4% from the previous year, mainly due to lower equipment sales affected by industry conditions. This decline in equipment revenues, coupled with higher operating expenses, resulted in a loss of $2.3 million compared to a loss of $1.1 million last year. Moving to Slide 11, our full year revenue results for fiscal 2020 showed a total revenue increase of 3.5% from last year, driven by strong contributions from both parts and service businesses, both of which experienced double-digit growth. Equipment sales saw a slight increase, while rental revenue remained flat for the year, as higher dollar utilization balanced out a reduced fleet. On Slide 12, our full year gross profit reached $250.8 million, reflecting an 8.3% increase compared to the previous year, with a gross profit margin improvement of 80 basis points to 19.2%. These metrics were primarily driven by growth in our higher margin parts and service segments compared to last year. Operating expenses rose by $24.2 million or 12% for the full year, reflecting the total expenses recorded for operations in Germany, which were only partially accounted for in fiscal 2019. Restructuring and impairment costs increased by $1.6 million to $3.8 million for the full year. Floorplan and other interest expenses decreased by $4.1 million or 29.3% due to the savings from repaying our senior convertible notes earlier this year. For fiscal 2020, adjusted net income was $17.7 million compared to $14.7 million the previous fiscal year. Our adjusted earnings per diluted share were $0.79 for fiscal 2020, representing a 17.9% increase from $0.67 the prior year. Adjusted EBITDA was $53.1 million compared to $49.8 million in fiscal 2019. These adjusted numbers exclude ERP transition costs, impairment and restructuring expenses, and gains from the release of our domestic income tax valuation allowance, all of which can be found in the appendix of the slide presentation. Turning to Slide 13, we present our segment results for the full year fiscal 2020. Overall, we achieved growth in all three segments, with adjusted pre-tax income increasing by 32.3% to $25.6 million for the full fiscal year compared to $19.3 million last year, driven largely by higher parts and service revenues and lower overall interest expenses, partially offset by increased operating expenses and a reduced contribution from our International segment. On Slide 14, we highlight balance sheet metrics at year-end. We had cash of $43.7 million as of January 31, 2020. Our equipment inventory was $515.9 million, an increase of $98.8 million from the previous year due to a higher stock of new equipment. Equipment inventory turns fell to 1.5 from 1.8 last year. Our rental fleet assets also decreased to $104.1 million from $111.2 million at the end of 2019. We expect our fleet size to decrease slightly by the end of 2020. As of January 31, 2020, we had $371.8 million in outstanding floorplan payables on $717 million of available floorplan credit. We maintain sufficient capacity in our credit lines for our equipment financing needs. Our current $200 million Wells Fargo credit facility, which includes $140 million for floorplan and $60 million for working capital, matures in October 2020. We are working on a new credit facility and plan to replace the current one shortly. More details will be shared once the agreement is finalized. Our total liabilities to tangible net worth ratio stands at a healthy 1.9, lower than the 3.5 leverage covenant required by our larger banking institutions. Slide 15 illustrates our new and used equipment inventories. Although our inventory levels are slightly down sequentially, they remain significantly higher than the previous year and above our planned levels. We aim to improve inventory turns in fiscal 2021. Notably, the quality of our inventory is sound, as evidenced by favorable equipment margins and an improved non-interest-bearing inventory percentage compared to the prior year. We expect the fourth-quarter percentage to increase again in the first half of fiscal 2021. Slide 16 summarizes our operating cash flows for fiscal years 2020 and 2019. GAAP cash provided by operating activities for fiscal 2020 was $1 million, down from $46.6 million last year. Our adjusted cash flow from operating activities, which includes all equipment inventory financing, was $17.8 million for fiscal 2020 compared to $47.4 million in the prior year. We generated over $50 million in adjusted cash from operations in the fourth quarter, supported by a decline in working capital levels, however, full-year cash generation fell below the previous year due to higher inventory levels. Slide 17 notes that due to the uncertainty surrounding COVID-19, we are not providing fiscal 2021 modeling assumptions at this moment. We do want to share some insights regarding our business amid this uncertainty. In our Agriculture segment, we expect limited overall impact from COVID-19 as our farmer customers, essential to the food supply, operate in sparsely populated rural areas. Consequently, we believe they will continue with normal planting and harvesting, potentially aiding growth in our parts and service businesses, provided that employee health and supply chains remain intact. However, the equipment business will likely be adversely affected by diminished customer sentiment towards purchasing. When considering assumptions for the Ag segment in fiscal 2021, remember to factor in a full year of contributions from our Northwood acquisition and the anticipated HorizonWest acquisition, both contributing roughly $25 million in revenue in their past full fiscal years. In our Construction segment, we foresee a more pronounced impact, as prolonged disruptions may hinder customer projects due to an overall economic slowdown and falling oil prices negatively influencing our energy market activities. The divestiture of our Albuquerque store will also affect year-over-year comparisons, as that store generated approximately $8.5 million in revenue last fiscal year and its sale supports our profitability objectives in this segment. Our International segment faces heightened uncertainties, including logistical challenges and financial pressures on farmers in Eastern Europe. We also note concerns regarding these developing countries' capacity to support their farmers amid economic stress from COVID-19. Other factors to consider include ERP implementation expenses, expected to reach about $0.12 for fiscal 2021, which will be excluded from adjusted EPS calculations. We are forecasting an effective tax rate for fiscal 2021 of roughly 27%, representing a normalized long-term rate following the release of domestic valuation allowances. This rate may vary quarterly depending on profit and loss fluctuations due to seasonal variances in our international tax jurisdictions and existing valuation allowances. We will provide updates on our tax outlook as the year progresses. Finally, regarding our higher inventory levels, we are not experiencing disruptions in equipment deliveries currently. Our larger inventory will help cushion any potential supply chain interruptions while we have begun building a safety stock of essential parts to ensure our customers' uptime. While we recognize that limiting customer access to our stores may have some short-term revenue ramifications, we believe that these measures safeguard our employees while allowing them to service customer machinery and provide necessary parts and equipment. We appreciate our customers' positive feedback on these safety protocols. This concludes our prepared remarks. Operator, we are now ready for the question-and-answer session of our call.

Thank you. Our first question is from Steve Dyer with Craig-Hallum. Please proceed.

Thanks. Good morning, guys. Very detailed prepared remarks. I don't have much but curious as to how your capital allocation changes or how you think about that in this environment. Are you bunkered down for a bit? On one hand, you can buy your own stock for half of tangible book value; are you still looking opportunistically at acquisitions? Thanks.

Good morning. We are exploring various options for capital allocation. The HorizonWest deal we announced today has been in development for some time. We regularly discuss with the Board different opportunities for capital allocation, including our stock price and the possibility of share repurchase. However, we believe it is valuable to maintain a strong liquidity position during these uncertain times. Therefore, we plan to be cautious until we have a clearer understanding of the current situation surrounding the COVID-19 outbreak.

Got it. And then, the only other one for me, I guess, Mark, you touched a little bit on part supply. With so much manufacturing shutdown, what's your confidence level either on the equipment or the parts side of having a steady flow? Thanks.

Yes. So far — this is Dave, Steve. So far so good. We're getting — things are coming in. China is actually coming back online, which is pretty helpful, and as we said in our remarks, we looked at our critical high demand parts and upped our stock inventory on those. We're starting out the year with really good whole goods inventory. And from our visibility of our orders, everything is coming on plan. Our pre-sold equipment is coming in on plan, and some of the products that we were getting short on, we ordered up; it looks like they're coming on plan. So, what we can see, at least for the first half of the year, it looks pretty good. And like I say, we started off the year with ample inventory. So we feel really good probably for the whole year with our current inventory levels and parts situations we're seeing.

Got it. Great. Good luck, guys.

Our next question is from Mircea Dobre with Baird. Please proceed.

Thank you. Good morning, guys. I guess, my first question. This coronavirus is a very recent occurrence, and I understand that most of the data points out there still fail to properly take it into account. So, I'm wondering, can you give us some color on how your equipment sales have trended in the past week or two weeks to sort of gauge what the impact of this crisis might be? And I'm also wondering, have you seen any of the equipment that's been pre-ordered, being canceled or farmers trying to say, I want to take delivery later than planned given the uncertainty?

Yes. I mean, well, so as I said, we're fully staffed right now. So, our parts and service departments are busy getting all equipment out there for spring work, so that's a good thing. So, parts and service revenues should begin to pick up, and like we said in our comments, everything kind of turned upside down here a little bit, but the farmers' sentiments, I think it's probably a natural instinct to see — let's see how we come out of this thing a little bit. So, but there's pre-sold equipment that’s being settled out; customers put their names on it, and we're delivering that. I think to date, we've only seen one cancellation so far, which is good. I think typically when we see farmers getting into the fields and contractors getting their job sites, they look at their equipment, need to get the job done. So, we anticipate that still to continue. Our salespeople are staying fully engaged. I think things were up until if we look at the industry, you've probably seen the industry numbers—they really haven't backed off in January and February. So, the trends were looking good. And I can say that net farm income year-over-year is good, so it's a pretty good carryover. So, I guess, we're cautiously optimistic. As we come out the other side, this is going to be pretty good. But the main thing is that we keep our people healthy, and we keep this parts and service business going.

No. I understand that. I mean, January and February, this is all very much lagging, which is why I'm asking for equipment specifically in the last couple of weeks. Sorry to press you on this, but I think really at this point it's pretty important if you can provide that perspective.

We typically don't disclose that. And another thing was just a lot of—as you’ve probably been aware that in these industries too, there is a lot of negotiations of the customers and the OEMs and the pricing that really goes on, and a lot of business gets done in the last two, three days of a month. And we can continue to look at that. So we really don't have these, but we're still selling equipment every day. Worse, we're getting daily sales sheets. And the guys are out there getting the job done. Our salespeople who are on the farms and in the construction sites, and we're seeing important sales every day. So, we're going to continue with that. But I don't—we don't track those exact numbers. It’s very difficult every day on that because that was pretty back-loaded in the month on those numbers.

Okay. Then maybe a question for you, Mark. Can you give us a little more color on what you're doing to preserve and enhance the liquidity of the company at this point? Maybe comment on your covenants as well. Are there any actions that you're looking to take down the line here to further bolster the company's liquidity position?

I think one of the things that we talked about with our inventory turns, we're certainly managing our working capital. There are a lot of discussions internally with domestic and our international business to pull down working capital levels. Overall, we are managing the higher turns, particularly on our inventories. I mentioned as far as our credit facility, we are looking to finalize that within a couple of weeks. And that should allow us a greater level of liquidities and higher advance rates, which should be part of that deal as well. I think there's always some level of just expense management and discipline, and none higher than where we're at today, given the situation. So I think those are three of the items that we're really focused on with working capital probably being the biggest one to ensure that we maximize our liquidity.

Yes. So I'm curious on working capital and inventories specifically. You said that you exited the year maybe with a little more inventory than you wanted. As you're thinking about 2020, where do you see yourself exiting this year? And have you changed your order patterns to the OEM at this point in order to reflect on this need for de-stocking?

We have, so that has been—we are in the process of adjusting that; some of the orders have been adjusted here and the plans for that throughout the year. Yes, I think it's a big focus for us. We mentioned the parts side; we are bringing in more. So there will be more parts on that just to make sure that we don't run into any type of supply chain challenge there. But on the equipment side, we are managing that to more of just-in-time inventory here as we move throughout the year. As far as ending the year, I think that’s a little tough to give that at this point, given all the uncertainty that's out there. What I would say is, with us ending at 1.5 with our inventory turns, we're planning to pull that up. So, we certainly do expect that to improve this year. So even on a flat level of sales, we should be able to maintain or pull down that inventory overall a little bit from the current year.

Okay. And I'm sorry, I don't think you mentioned the covenant. Maybe you can help us there and then I'm done. Thanks.

Yes. So, our covenants that we have with our banks, 3.5 is that total liabilities for tangible net worth. We're sitting at a 1.9 right now. So that's one of the bigger covenants that we have with our banks. And the other one is just around excess availability that we have. It's kind of the liquidity measure, and we're in very good shape. We're not close to testing that at this time. And with a new agreement out there, we should have even more of a cushion there and more room there, if you will, as we expect higher advance rates in the new facility.

Great. Thank you.

Our next question is from Rick Nelson with Stephens. Please proceed.

Thanks. Good morning. I have a follow-up in terms of customer behavior that you're seeing since COVID-19 really all of that did emerge. I know some of the car dealers seen big declines in new and used sales—this morning or last night equipment sales down 50% to 70% since March—if you could comment on overall behavior which you're seeing?

Well, Rick, also I don't know that as business of that consumer, we’re — I'd say we're more B2B or business-to-business, so probably not a good comparison. And like we said in our comments, we don't get a lot of customer floor traffic. These are planned purchases, high ticket items. A lot of times, our salespeople are out to the farm, out to the construction site. So I think it's a whole different business model out there. There, again, it's not a lot of spontaneous type decisions, like I said, it's more planned. So, I just hear, before we just recently cut access outdoor to our customers in our facilities. But the restaurants, coffee shops were closed all of a sudden, the farmers are coming in just coming back from Florida, coming back from Hawaii, coming back from Arizona, talking about where they've been. That's one of the reasons—and like business usually for them get ready go in the fields, getting their equipment ready to go, talking about what they're going to need, talking about the commodity prices, all that kind of stuff. So, they've acted pretty normal. If you look at like the number of COVID-19 cases in some of our footprint, that there's a — down there, there's some pretty low numbers in some of these. I'll give you some examples. I think we've got a lot of our head there are store count: South Dakota is 30 cases. This is as of noon yesterday, 30 cases in North Dakota, Wyoming 30, North Dakota 37, Montana 48, Nebraska 53, Iowa 124; so those states were really compared to some of the tougher states like Colorado—we have three stores like 921. So really some big variances out there. But where our core AG markets are — I think due to probably the sparse populations and how dispersed everybody are. We're not seeing that at all. I'd say from the farmers, the business is as usual. I think the contractors there, that business a little bit goes with the economy. I think there's enough jobs that were built last fall last winter, they've been funded. There's still some jobs that are moving, there's some infrastructure stuff, there's diversions or something like that. I anticipate it looks like there's going to be some still pretty good risk for some floods in certain areas, and that drives some of that business. But like I say, we're not — we're business-to-business, planned purchases; customers want to get their equipment that they need for their operations fixed. So it's just more of a necessity. So that's what we're seeing out there right now, and I think this is a distraction. It's a distraction and we want to make sure our customers stay healthy and our people stay healthy. But I think we're prepared as we get through this.

Perfect. That's helpful, Dave. And then, some parts right now allow AGs to the stores. How do you think that affects that segment of your business?

Well, not that much because right now there has been quite a bit of—people called on the phone, hey, do you have this at all, can you tell stay away? We have drop boxes scattered all throughout our footprint, so many times our customers send their hired people in to pick up parts of somebody's driving by. And so basically what we're seeing instead of hanging out in our dealerships not knowing what kind of exposure it might have or say, hey, call us up first, pull up in front of the dealerships, let us know what you need and we'll take them out the back door for you; we'll come load up your pickup. So that's what we're kind of doing. So really it's not much different than what happened before. And it's just like whether we just trying to minimize the exposure because at the end of the day, it's really, really important as we have to keep our employees safe and healthy through the spring season, right? And we don't want to take the risk of unknown people. Some of our customers know what we know; some we don't know. Our vendors, they come in and they happen to expose one of our stores, that's not good. So we're trying to stay away from that. But really the way they do business, and probably half our parts are installed on the equipment by our service technicians. They're on their mobile service trucks, and they're going out to their farms and the construction sites or they're working on that equipment at the big shops. So a lot of that's going out that way too. So really we don't see a lot of interruptions; it's not like it's a spontaneous type business. It's what they need to get their equipment to get their jobs done.

Right, right, right. And on the used equipment side, any changes you're seeing of late in terms of pricing?

No, we're still seeing a good amount and even people wanting because there's been a pretty low new machinery industry numbers for the last two, three years, right? So that means less trades coming back in. We're not seeing the level of lease returns coming back in right now. And the ones that are, it seems like the residuals are priced about right. So, like I say, there's good demand right now for good late model used equipment, and we're seeing that. So, for the near term, we don't see a lot of things changing because, like I say, the new industry numbers are still staying pretty low, and so the amount of good used equipment coming back into the pipeline is limited.

Okay. Very good. Thanks, and good luck.

Okay. Thanks, Rick.

Our next question is from Larry De Maria with William Blair. Please proceed.

Thanks. Good morning, everybody. Hope everybody is doing okay and safe. I guess, just maybe finish up on the prior conversation that I'm having. I'm just curious, I know you guys are being careful about what you say because you have ongoing customer conversations, but let's look at it differently. How have the customer conversations changed, let's say, from a month ago to now, where they're extending— are they much more cautious or are the customers looking at this as a short-term disruption that they have to figure out how to get through? So, curious how the tone to the conversations have changed, and if so how materially.

Well, I think the tones— I think to a certain level, probably distraction frustrated most of our customers, whether it be farmers or contractors; they're in the go mode. They want to go. This kind of takes away from that, but I think that's probably weighing on the farmers more than anything is this continued level of depressed commodity prices. So, the China phase of the China trade deal, getting that done is a good thing. The USMCA bill is good, but at the same time, we've got to get this corn up closer to $4, and we need to get the soybeans up closer to $10. I think that's probably weighing on our growers more than anything right now. So, I'd say that probably trumps—I think we have to put a good eye on what's going on with ethanol right now, with this low— with the low oil prices, that's definitely impacting the profitability of ethanol plants, and there is a lot of corn that goes into the ethanol plants. So I'd say, that probably is weighing on the growers more than the COVID-19, because they're not really seeing much of the COVID-19 in their farming operation on their markets.

Well, yes, that's sort of where I was trying to get to also. It looks, we obviously dropped guidance, and I think with more due to COVID-19 than anything else. But $3—sub-$3.50 corn, sub-$9 beans, that would take COVID outside of everything; that would imply a fairly challenging year ahead, wouldn't it? I mean, you guys are talking cautiously optimistic, but just the commodity prices ended up themselves would probably be more balanced negatively than your technology placing upgrades, right. I'm trying to understand how negatively balanced that would be and how you're thinking about...

Yes. I guess there's a direct relation between industry, high horsepower equipment, and corn price, right. So, yes, I think that definitely weighs in there. Like I talked in my comments, it was a really late harvest; there's still farmers out there combining corn right now, but there is a lot of fieldwork that needs to get done even before they can begin thinking about planting right now. And I think that's front in mind of a lot of these guys to get that— to get the corn combined, to get the residue off and get those fields in shape and get the planting done. But definitely the commodity prices for our growers and ability to buy new farm equipment. But there—with that said, though, that just extends away from that parts and service business that we can do. But if you look back a year ago compared to today, prices are pretty similar. And all what happened last year, we had that nice pop in late June early July; that's still a little bit unforeseen. But I know exports to China are starting to pick up a little bit. They're starting to get some—so basically if we see the impact from the trading fees, one of the trade deals of the USMCA, some of the benefits from that, let's see what happens here.

Okay. Understood. And just to clarify, you talked about only one cancellation and you have some visibility on the pre-orders, right. How much visibility do you think you have? I mean, obviously some of your competitors tend to pre-sell a lot of equipment; Case pre-sells less in general. So how much visibility do you think you have at this point?

Well, we've got good visibility to our pre-sells, and our pre-sells are up year-over-year this year. So we think that's a good trend going forward. So, I'd say, we've got good visibility, basically we're getting, I think on the orders pretty good visibility. I told you we could get out into that August-September timeframe for sure. And I'll keep reminding too, we're starting the year with almost $100 million of inventory on hand that we didn't have a year ago. So that's going to add to what we've got. So, I think we're really in good shape on what's coming in and what we have on hand to meet the needs of our growers.

Okay. And then, maybe you could talk about the Senate bill and the impact on Ag and a couple of things in there. And maybe it's more payments that end up being like MFP, I'm not sure, but can you talk about how you think the Senate bill plays in for Ag?

Well, I guess they just signed in the middle of the night last night. And I think it's got to get through the House right, Larry. So I guess I'm not really in a position to comment. I know last year, if you look at that 11% that focuses a lot—goes on that payment helped a lot. In the regular Farm Bill, there are some good safety nets. So, yes, I think it supported their businesses last year, the farmers, and any help this year, I am sure that they're going to appreciate.

Okay. I'll need to sneak one more in here and then that's it. I'm just curious, the average farmer as we're going into planting season, do they have the tools, the working capital loans, the parts sounds like you guys get parking, not worried about that technician seat out there in the supply chain in general. Do you think that they are fully locked and loaded to be able to plant a big crop, or at least that their intentions are? Or do you see so many stress in the system in working capital loans, credit, availability of parts, and other things in the supply chain? How are you thinking about that?

No, I think they are in really good shape. I was talking to the grower this morning, and he is buying some huge propane storage tanks right now because this price of propane is rock bottom. I think you're going to see good diesel fuel and gas prices is going to help them out. Fertilizer has already come down because a little bit of lack of demand, so some of the crop inputs are coming down. I think probably if you look at the yields, a lot of times when they don't get that volatility is done and they are doing a lot of that in the spring, a big rut in your field. Sometimes the yields on that ground isn't as good as if they get normal tillage. So that's probably a little bit of a risk from the yield side on those. But I think the corn is starting to come off in the last three weeks; some of this corn that hadn't—generally once 40% of the corn was still in the fields in North Dakota. So they've been banging away at that and getting some of that off. So that's been helpful. But overall, I'd say from—they've got a good strong balance sheet yet; they had a fairly decent year this year. Like I'd say net farm income was up. I think for the most part, the relationships with their banks are in good shape. And as far as the equipment we sell, we've got good CNH Industrial Capital; we've got good financing plans for the new and used equipment. So, you combine all that up, I think it's business as usual. We want to keep our employees safe. I have to say that as of this morning in both Europe and North America, we've yet to have one employee test positive for COVID-19. So that's a real plus. And like I can say, I think that's really important because the farmers don't have a lot of hired people right now. A few family members, maybe one or two hired men, and a lot of progress coming, making sure we keep everybody healthy. And I'd say, with that, it's business as usual, but it is something we just have to be aware of, and more so on the construction side and just get through this healthy and back working.

Okay, great. Thanks. That was good to hear. Best of luck this year and be safe.

Okay. Thanks, Larry.

We have no more questions at this time. I would like to turn the call back over to David Meyer for closing comments.

Okay. All right. Thank you, everyone, for your time today and your time in our call. And we look forward to updating you on our progress ahead, and everybody stay healthy.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.