Titan Machinery Inc. (TITN) Q1 2021 Earnings Call Transcript

Greetings. Welcome to Titan Machinery's First Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to John Mills with ICR. Thank you. You may begin.

Great. Thank you. Good morning, ladies and gentlemen and welcome to the Titan Machinery first quarter fiscal 2021 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer and Mark Kalvoda, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal first quarter ended April 30th, 2020, which went out this morning at approximately 6:45 A.M. Eastern Time. If you have not received the release, it is available on the Investor Relations page 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. You may 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 two 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. 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 first quarter fiscal 2021 earnings conference call. Today, I will summarize our results and provide an overview of each of our business segments. Mark will then review the financial results for the first quarter of fiscal 2021. Please turn to slide three for an overview of our first quarter financial results. Our first quarter revenue was $310 million, representing a $32 million improvement compared to the same period last year. Adjusted pretax income rose by $4.2 million to $4.9 million, leading to adjusted earnings per diluted share of $0.15. Before I discuss the segments, I would like to make some high-level comments regarding COVID-19. As I mentioned during our Q4 earnings call in March, we took early guidance on COVID-19 seriously, considering potential risks and, most importantly, the safety of our employees and customers. We actively communicated with employees and customers, educated them, and implemented CDC recommended safety procedures. Thankfully, our employees remained healthy, and we managed to support our customers during the crucial spring planting and construction season. This allowed us to achieve a solid quarter, particularly in our domestic ag equipment business. We operate in a critical industry, supporting farmers, ranchers, and contractors who play vital roles in feeding the world. We have kept all our employees fully employed, secured a new bank syndicate credit facility, and positioned our company strongly in terms of liquidity and finance. I will now provide additional details about our three operating segments: domestic agriculture, domestic construction, and international. On slide four, you will see an overview of our domestic agriculture segment. Due to the late 2019 harvest and cautious farmer sentiment regarding unharvested crops and commodity prices, we believe some of the delayed Q4 equipment business moved into our fiscal 2021 first quarter. This also benefited our parts and service business, as corn was harvested in February and March, and many pieces of equipment required servicing after the difficult harvest. Additionally, aging fleets necessitate ongoing service and repairs. Mark will detail the double-digit increase in our domestic ag, parts, and service revenues, which not only provides stability during downturns but is also key to our long-term strategy. As indicated on the slide, crops in our southern agriculture regions are in excellent condition due to favorable spring planting and growth conditions. However, in the northern areas, many fields remain wet, delaying planting, and some farmers are opting for preventive plant payments through crop insurance for wet lands. The primary concern for farmers is low commodity prices. According to the May 12th USDA WASI report, both corn and soybean acres and yields are expected to rise, exerting downward pressure on average season prices. The WASI report anticipates a year-over-year decrease of $0.40 for corn and $0.30 for soybeans, both from already low price levels. Corn prices may face additional challenges due to a strong dollar and significantly reduced ethanol production, as roughly 40% of U.S. corn production is for ethanol. With schools and restaurants closed, milk prices have dropped, and livestock producers are worried about lower prices due to COVID-19 disruptions at slaughterhouses and in meat demand channels. However, it is worth noting the recent announcement of a $16 billion USDA Coronavirus Food Assistance Program, which will provide direct payments to farmers and ranchers suffering from declining commodity and livestock prices due to the pandemic. Furthermore, farmers are benefiting from lower fuel and propane costs, a low interest rate environment, and participation in the PPP program of the CARES Act. While the commodity price impacts from Phase 1 of the U.S.-China trade agreement may not be fully realized until the 2020 harvest, the signing of the USMCA Trade Agreement is regarded positively by our customers. Demand for new and late-model equipment continues to be driven by replacement needs and precision technology, as improved yields and data-driven solutions are increasingly valued. We completed the acquisition of the HorizonWest three-store CaseIH complex at the beginning of May and anticipate more domestic ag acquisition opportunities as the year unfolds. Moving to slide five, you'll see an overview of our domestic construction segment. With a robust economy in February, the first month of our quarter, our construction equipment business started strong, but this was affected by the economic impact of COVID-19 and significant declines in oil prices. Despite being categorized as an essential industry, our contractor customers faced disruptions due to business closures and state shutdowns. We have continued to see some construction activity by focusing on aftermarket parts, service, and rentals. We believe our recent operational improvements position us for profitability in the construction equipment sector when the industry normalizes. Slide six presents an overview of our international segment, which includes markets in Bulgaria, Germany, Romania, Serbia, and Ukraine. Similar to our experience in the construction equipment sector, our international business began the year strongly but has seen some pullback as countries where we operate responded to the COVID-19 pandemic. While our stores in Europe have been classified as essential, we have faced challenges from border shutdowns, delays in equipment shipments, and local regulations. Farmers continue planting crops, creating demand for parts and services. However, there are very dry conditions reported in the Balkans, Ukraine, and Black Sea regions, with some reports of winter wheat and rye crops being ruined or used as feed in Romania due to excessive heat and lack of moisture. We have the fundamentals necessary to succeed and become profitable in these developing markets. Our focus will remain on parts and service while managing new and used equipment inventories as we support our end-user customers through the difficulties of dry weather and low commodity prices. Before I hand over the call to Mark, I want to express my gratitude to all our employees for their hard work during this challenging COVID-19 crisis while also achieving excellent financial results. I wish all our employees, customers, suppliers, and their families the best as we navigate the aftermath of the pandemic. Now, let's turn the call over to Mark for a more detailed review of our financial results.

Thanks, David. Turning to slide seven, we generated total revenue of $310.2 million for the fiscal 2021 first quarter, which was an increase of 11.5% compared to last year. Our parts and service business continued to generate solid results in the first quarter, increasing 9% and 12.1% respectively. The agriculture segment led the way with another quarter of double-digit growth compared to the prior year quarter. Our focus in this area continues to be complemented by an aging customer fleet and the addition of the Northwood locations also added to the year-over-year results. International parts and service also performed well but were offset by the softness we are seeing in our construction segment as a result of the pandemic. However, the upside for the quarter was largely driven by our equipment business, which increased 12.7% versus the prior year. Equipment growth was driven by our agriculture segment where we believed delayed fourth quarter sales were realized in the first quarter as farmers were late harvesting last year's crop. In addition, we aggressively moved some used agricultural equipment during the quarter. Rental and other revenue was essentially flat versus the prior year. The dollar utilization of our construction segment rental fleet declined 160 basis points to 18.9% for the current quarter compared to 20.5% in the same period last year. The lower utilization was the result of the weaker end market conditions in oil and construction that David spoke to earlier. On slide eight, our gross profit for the quarter increased 8.4% to $58.4 million due to increased sales. The decrease in gross profit margin was partially due to revenue mix in two ways. First, equipment revenues made up a larger portion of overall revenues relative to the higher margin parts and service business. And second, our total equipment sales mix was more weighted to agriculture, which generally experiences lower equipment margins than equipment sold in our construction and international segments. Finally, our ag used equipment margins also decreased over the prior year as we accelerated efforts to sell this inventory. Our operating expenses were nearly flat versus the prior year, increasing by $500,000 to $53.1 million for the first quarter of fiscal 2021. Our operating expenses as a percentage of revenue decreased from 18.9% in the first quarter of last year to 17.1% in the first quarter of fiscal 2021. Despite the additional year-over-year costs associated with our new Northwood store, expense growth was limited due to specific expense control efforts, such as overall salary and overtime reductions, as well as COVID impacted expense areas, such as fuel and travel expenses. This expense control combined with higher revenues resulted in much improved operating expense leverage. Floorplan and other interest expenses decreased 15.9% to $2.1 million in the first quarter of fiscal 2021 compared to $2.5 million in the same quarter last year. The decrease was due to lower interest expense resulting from the May 2019 retirement of the remaining balance of the company's convertible notes. In the first quarter of fiscal 2021, we realized a $2.9 million increase in our adjusted net income to $3.4 million. This adjusted figure for the first quarter of fiscal 2021 excludes $1.1 million of adjustments, net of taxes related to ERP transition costs, impairment charges, and Ukraine re-measurement costs resulting from the recent devaluation of this currency to the U.S. dollar. This compares to the prior year where we excluded $900,000 of similar adjustments net of taxes. Our adjusted earnings per diluted share for the quarter was $0.15 compared to $0.02 in the first quarter of last year. For the first quarter of fiscal 2021, adjusted EBITDA increased 76.1% to $11.1 million compared to $6.3 million in the first quarter of last year. You can find a reconciliation of adjusted net income, adjusted income per diluted share, and adjusted EBITDA to their most comparable GAAP amounts in the appendix to the slide presentation. On slide nine, you will see an overview of our segment results for the first quarter of fiscal year 2021. Our agriculture segment drove solid overall top and bottom-line results in the first quarter. We do not feel the effects of the pandemic are fully reflected in these results. More on this and future expectations in a few minutes. Our agriculture segment had a strong quarter with total sales increasing 25.9% to $193.6 million, driven by strength in equipment sales and supported by ongoing momentum in parts and service revenue. The significant sales growth coupled with moderate increases in operating expenses created significant operating leverage at the segment level. For the quarter, adjusted pretax income increased to $6.2 million compared to $1.9 million in the prior year period. Turning to our construction segment, revenue decreased 15% to $60.1 million compared to the prior year period. The decrease in revenue was primarily the result of lower equipment demand due to macroeconomic challenges and uncertainty, which also impacted parts, service, and rental to a lesser extent. The segment's adjusted pretax loss widened by $600,000 to $2.7 million in the first quarter, despite reductions in operating expenses. In the first quarter of fiscal 2021, our international segment revenue increased 5% to $56.5 million. However, strong early first quarter results have been largely offset by late quarter weakness, which we are seeing continue into our second quarter. Nonetheless, equipment, parts, and services revenues were all up compared to the prior year first quarter and drove a $300,000 increase in adjusted pretax income. On slide 10, we provide an overview of our balance sheet highlights at the end of the first quarter of fiscal 2021. We had cash of $50.8 million as of April 30, 2020. Our equipment inventory at the end of the first quarter was $501 million, a decrease of $15 million from January 31, 2020, reflecting a $12 million decrease in new equipment and a $3 million decrease in used equipment. Equipment inventory turns were 1.6 versus 1.8 in the prior year period. I will provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the first quarter increased slightly to $104.9 million compared to $104.1 million at the end of fiscal 2020. We still anticipate our fleet size will decrease to about $100 million by the end of fiscal 2021. As of April 30, 2020, we had $378.3 million of outstanding floor plan payables on $762 million of total floor plan lines of credit. On April 3rd, 2020, the company entered into a new five-year amended and restated credit agreement maturing in April 2025, replacing the previous credit facility scheduled to expire in October 2020. The new facility provides for an aggregate $250 million financing commitment by the lenders consisting of floor plan capacity of $185 million and working capital financing capacity of $65 million. The floorplan facility features improved flexibility with higher advanced rates on new and used inventory and the working capital facility provides for a greater breadth of assets that can be utilized in the borrowing basis, such as vehicles and real estate in addition to higher advanced rates compared to the prior facility. The amended and restated credit agreement does not obligate the company to maintain financial covenants, except in certain circumstances with terms that are similar to those in the previous credit facility. The interest rate for borrowings under the credit facility will be equal to LIBOR plus an applicable margin based on the company's liquidity position. Overall, our borrowing costs under this facility should decrease by at least 50 basis points compared to the prior facility. Our total liabilities to tangible net worth ratio is a healthy 1.9 compared to 2.1 in the prior year period. As of the first quarter, we are now back to an apples-to-apples comparison, given the effects on the ratio from the adoption of the new lease accounting standard that went into effect on February 1, 2019. Importantly, the ratio is well below 3.5, which is the leverage covenant required for our most restrictive bank facilities. Turning to slide 11, the amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide. We are pleased to finish the first quarter with a $15 million reduction in inventory versus fiscal year-end levels, which demonstrates early progress in our plan to drive inventory turns higher in fiscal 2021 through prudent inventory management. Historically, we have increased our new equipment inventory levels in the first quarter, which can be seen in the prior year. Solid equipment sales and lower procurement levels of new equipment allowed us to decrease our inventories and slightly increase our turns to 1.6 from 1.5 for the rolling four quarters ended April 30, 2020 and January 31, 2020. The overall quality of our inventory remains healthy with 40.3% of our inventory under non-interest bearing terms, which can be seen by the gray bar on the slide. This is a good percentage, but it's below the prior year comparable quarter percentage of 47.4% as we had a lot of new inventory stocking in that quarter, which carried new non-interest bearing terms. Slide 12 provides an overview of our cash flows from operating activities for the first three months of fiscal 2021. The GAAP reported cash flow use for finance for operating activities for the period was $5.4 million compared to cash provided by operating activities of $2.9 million in the first quarter last year. As part of our adjusted cash flow provided by operating activities, we include all our equipment inventory financing, including non-manufacturer floor plan activity and adjust our cash flow to reflect a constant equity in our equipment inventory, allowing us to evaluate cash flows exclusive of changes in equipment inventory financing decisions. After applying these adjustments, our adjusted cash use for operating activities was $3.6 million for the three-month period ended April 30, 2020 compared to $37.4 million for the same period last year. The much lower use of cash in the first quarter compared to the prior year was due to the substantially lower equipment stocking I referred to on the previous slide combined with the stronger bottom-line results. Consistent with our practice thus far in fiscal 2021, we are not providing modeling assumptions due to the continued uncertainty in our business as a result of the COVID-19 outbreak. That said, I'll provide some updated color on a few noteworthy items for you to consider as you look at our business for the balance of fiscal year 2021. As you may recall, in mid-March, we began restricting customer access to our stores amid COVID-19 concerns. As of a couple of weeks ago, we began allowing customers back in our facilities with safety protocols in place. We felt very good about the uninterrupted service levels provided to our customers during that time. Regarding our agriculture segment for the remainder of fiscal 2021, we do not believe our solid first quarter results are a good proxy for the rest of the year. As I mentioned earlier, we believe our first quarter equipment results were lifted by some delayed customer purchases and some aggressiveness on our part in selling used equipment. Our first quarter results far exceeded total U.S. industry retail sales, which are down year-to-date through April. Overall, COVID-19 has created industry challenges and uncertainties in areas such as ethanol, livestock, and international trade which we believe will put pressure on equipment sales and push them lower than the prior year. It is difficult to know the extent however, given all the variables and uncertainties. We still feel good about the potential parts and service opportunities for the year, but will likely not be able to sustain the growth we achieved in our first quarter. May results are already showing parts and service while off the pace realized in the first quarter. Additionally, please remember to account for a full year contribution from our recently acquired Northwood, North Dakota location, which closed on October 1, 2019 as well as the HorizonWest acquisition that closed on May 4, 2020. Both of these acquisitions had revenues of approximately $25 million in their most recently completed full fiscal year. Within our construction segment, we expect continued headwinds to persist, but the magnitude and duration are difficult to predict, given the overlap we have with the energy markets. All revenue categories were impacted in this segment and we expect this to continue while macro-economic stress and uncertainties persist. Keep in mind the first quarter was only partially impacted as COVID-related shutdowns started occurring in mid-March. We expect to continue to achieve some offset to the lower revenues through reduced expenses. Additionally, as we referenced during our fourth quarter call, please consider the January 2020 divestiture of our Albuquerque, New Mexico store, which generated approximately $8.5 million of revenue in fiscal 2020. With regards to our international segment, we witnessed a good start in the first two months of our first quarter and then experienced deterioration in April results. April revenues were 20% to 25% below the prior year. We're also seeing parts and service being impacted in these markets in current months. As David mentioned earlier, in addition to the COVID-19 challenges and uncertainties, our European customers are currently facing difficult growing conditions. We believe these factors will weigh on future quarters. Expense controls will help mitigate pressured revenues, but this segment has less room for variable expenses, such as our domestic equipment commissions and overtime, which are not as prevalent in Europe. This concludes our prepared comments. Operator, we are now ready for the question-and-answer session for our call.

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

Thanks. Good morning, guys. Hope you're well. Just, as it relates to the first quarter it sounds like within ag there were some, I guess, some things moving around, it's maybe not indicative of the rest of the year. How much of the strength do you feel like was just sort of a crop still standing and a push from Q4 versus maybe government programs or some of these other things just trying to get some sense as to what drove how much strength in the quarter?

Yes, the overall demand and what's happening sort of the industry, with what's happening on the ground. In a normal year, you'd typically see those Q4 sales aligned, but given the setup from last year, I think it allowed some of that demand to filter into Q1. A lot of those factors did come into play.

Got it. Okay. And then, since you've reopened some of the stores and things like that, have you noticed any change in sort of behavior? I mean, it sounds like on the whole, it's softer than the first quarter but the first quarter only really had probably half a quarter of COVID impact. But what have you seen since some of the stores have reopened to customers?

We have seen positive trends since reopening, but it's tough to gauge long-term impacts because of the changing conditions in the market. There's still some cautious behavior from our customers with respect to their buying patterns.

Got it. And then I guess just given the challenges that you guys are seeing, while most people are seeing here, going forward, does that change your thinking on M&A strategy? Does that make some of these dealers more apt to sell and sort of what's your view on how aggressive you want to be there? That's it for me. Thanks.

Yes, I'd say even before the COVID-19, you could see we were starting to be pretty active with the Northwood and HorizonWest acquisitions happening before COVID-19. So, there were already some motivated sellers. And I see that continuing, and this might even accelerate at some point.

From your perspective, are you still very interested in active buyers, and does that remain unchanged?

Yes, definitely, especially, I think we like Upper Midwest, Case IH, good quality, successful accretive type acquisitions and there's a number of potential candidates out there.

Primarily on the ag side?

Yes, primarily on the ag side, the CaseIH, right.

Yes. Okay. Thank you.

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

Yes. Good morning. Thank you. So, I guess my question, I'm trying to understand how you're thinking about the business, your core ag business in North America on a go-forward basis. I recognize that you're not providing guidance, but at the same time, you're quite clear about Q1 trends not being sustainable for the rest of the year. Can you maybe give us a little bit of context in terms of how demand trended in April, maybe similar to what you talked about in your international segment? And I'm curious as to what you're seeing in the month of May that informs or frames your view for the rest of the year?

If you examine the industry numbers from April, combines are down 10% and forward drives are down 7%. Overall, April shows a continued decline, and there's a clear connection between commodity prices and retail levels in the industry. If commodity prices remain low, and if the USDA WASI report holds true indicating a potential drop of $0.30 to $0.40 in average selling price as the year goes on, it will be challenging for customers to commit to purchasing high-horsepower equipment priced at $500,000 to $700,000. This makes us somewhat cautious, as the situation hinges on commodity prices and farmers' ability to finance their operations while also acquiring new equipment. However, there is potential for replacement demand. If farmers see the option of making payments on a new tractor or combine at low-interest rates instead of facing a hefty repair bill of $50,000 to $70,000, that could incentivize them to make purchases. While we expect industry levels to remain lower in comparison to last year, some business will still occur; yet, without an improvement in commodity prices, it may be tough. A year ago, there was a significant rise in commodity prices towards the end of June and early July, with corn prices exceeding $4 and soybeans over $9. Many growers took the opportunity to sell their excess stocks or contract future crops during that period, which may not happen this year. Thus, looking at the year-over-year comparison, we are approaching with caution regarding the industry's performance moving forward.

Well, I appreciate that. All the macro relationships that you discussed. I mean, I think we all understand that. What I'm trying to understand is what you're actually seeing in your business today, right, through the month of May? Is there a way to frame that? Maybe put differently, are your forward expectations simply based on your view of commodity prices in future behavior or have you actually started to see some softness in May that leads to this more cautious outlook?

Yes, Mig. Mark here. Regarding April, it showed strong performance for our ag business, which is particularly important as February and March typically don't meet high expectations. April exceeded our expectations. However, we're feeling a cautious sentiment for May, noting a clear decline in parts and service activity. We're still figuring out the timing discrepancies in planting across our regions, particularly between the North and the South. We'll monitor how that develops. There is a noticeable change in the trend for parts and service in agriculture. As for equipment sales, it's tough to determine right now. Activity has decreased compared to last month, but since there are still a few days left in the month, we know that the last week generally accounts for a significant portion of our equipment revenue. Thus, we do see a marked difference between April and May.

Okay. You also talked about used equipment having been more aggressive in maybe getting rid of some of this equipment through the quarter. Can you maybe help us understand how the magnitude of what you've done in the quarter was maybe different than the normal or maybe what you've done last year? And I'm also curious in terms of how used equipment prices are holding up, especially as you're trying to move more of that inventory?

Yes, I believe that as we progressed later into the quarter, given the current environment and various risks for the year, we thought it wise to proact on some of our inventory. Consequently, we pushed more used equipment into the market. Overall, I think we saw an increase of approximately 25%, with our used equipment sales possibly even exceeding that margin for the quarter, which gives you an idea of the scale. In terms of pricing, aside from some competitive pricing strategies we employed, prices have remained fairly consistent. We did experience some margin compression to facilitate moving additional volume. Nevertheless, pricing for used agricultural equipment appears to be stable.

That's great. Last question, on international. First, I guess, when I'm looking at this segment, you're up 5% revenue-wise in spite of a very weak April. So I'm sort of surprised as to the variability month-to-month I mean, that would basically imply your first couple of months being extremely strong in international. So, I'm kind of curious as to what maybe drove that outsized strength if you have any color on that early on? And then my, the second part of my question is really on margins here. If let's assume that down 25% is a trend that kind of sticks through the next quarter. How should we think about your breakeven levels or segment margins within that kind of volume decline context? And that's it for me. Thank you.

Yes, I can talk Mig a little bit about what was going on in Europe and then I'll let Mark answer the second part of your question here. But it's all these individual countries, if in Europe, we have border closings and we actually had shipments we couldn't get across the borders because of the boarding. So that delayed some of the things. At the same time, a lot of regulations within countries, there's curfews, there's times you could be on the street or couldn't be on the street. Our employees getting to work and getting out to the customers had to be back before sunset or some places before 6 o'clock. I mean, so all these things took quite a bit of a toll or just a way to do business. Like I say, developing countries, developing markets probably don't have quite the level of maturity we see in domestic United States business. So, that impacted the business in Europe.

Yes. As far as how International may play out and what that level of reduction that I mentioned in April, what that would have, we wouldn't see, I don't think we would see that for the whole rest of the year. At least, we would hope it wouldn't stay that negative as we get further along and things open up more over there. But I think with those type of numbers for the next quarter, maybe quarter and a half, something like that. And some adjustments to expenses, I think I mentioned on the call as far as us being able to adjust those expenses naturally just through variable expenses coming down, it's not as easy to do that over there as naturally over there as it is over here with some of the different expenses that are in our model over there, a business model. But overall, I think with this level of decrease for the next quarter, quarter and a half, you're probably looking at around a breakeven similar to last year, maybe just a little bit lower if things continue for that long.

It means to you really need to watch those weather situations over there. You're seeing pictures of big cracks in the ground in Ukraine, some of the rivers are down to the lowest levels in decades, some of them are even drying up. I saw pictures in Romania where they're baling up the wheat crop for feed. Definitely, there's a huge pocket in the Black Sea region, the Balkans, some in Ukraine, even touching in Germany a little bit. Some really, really dry conditions. So we need to track that to actually.

Right. But just to confirm, Mark you think you're able to remain above breakeven with those kinds of volume declines because looking at Q1, you were barely positive from an income standpoint on what really was kind of a nice quarter.

There are a couple of points to consider. First, Q1 is usually a more challenging period. We typically generate more revenue in Q2 and Q3 for international markets. Additionally, if the current adverse weather conditions persist, it will certainly be tough to maintain a breakeven point. While there may be a downward trend from there, I believe we could remain close to breakeven if we experience lower revenue levels over the next three to four months and then see a recovery later in the year.

Yes, exactly. And the really heavy rain, floods, and just lack of moisture, depending on crops in the various regions can greatly affect how the business functions there.

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

Hi. Good morning, everybody.

Good morning, Larry.

Hi, everyone. I have a question about any cancellations that may have occurred and what the availability looks like for your large agricultural products regarding the supply chain disruptions caused by COVID. I'm interested in your current orders and when you can accept deliveries. I'm trying to understand how far ahead you can see and the extent of cancellations that may have happened.

On the ag side of the business, you'll have very minimal cancellations that were all working great. We did a little bit; this probably more had to do with that decrease in oil prices that we did see a little bit on the construction side of the business earlier due to the oil piece. Now as you are aware, we started off the year pretty strong on high horsepower equipment from an inventory standpoint. So, we think we're in good shape and all the factories that are all up and going and we think that right now we've got the lead time stuff in order to meet our customer demand with our current inventory. Let's come around the plants we think we're in good shape.

And the availability of equipment and you're kind of your own internal order boards and dealer wants and also customer wants. Does that put you out a few months from now or if somebody walks in do you have that inventory to satisfy?

Yes, I’d say we definitely have equipment to take us into the third quarter and then right now our inventories; we've got some open slots available in the Q4. So I think we're in good shape.

Okay. That's good to hear. Can you discuss take rates on precision ag products, what would be the main ones and how maybe they're trending year-over-year?

Well, it seems like there's a real interest in the customers for equipment that's technically advanced equipment, whether it's planters or tractors, that's what the customers are looking for right now. So all the products, then, are aftermarket, like I say for precision planting equipment on our aftermarket. Last year that business was double, so that continues, like I say, in all whether it's tractors or combines, planters, sprayers that technically advanced equipment is definitely what the growers are looking for right now.

And they’re paying up for maybe the software, premium software packages and things like that?

Yes, it doesn't seem like the prices, if you've got what they want and you've got all of the stuff that works, the price does not seem to be quite the object, considering all the value added.

Okay. Two more quick ones. First, what would - the comparable tractor be to the 8R that Deere has because that seems to be pretty well adopted or starting to be well adopted new product for the industry? Is that a near-term risk or how do you combat that new product by them with your own teenage product?

I think we are competitively positioned in our markets and have offerings that address the same customer needs. There’s always competition, but we have strong value propositions.

You wouldn't expect a significant change, I suppose. If I could ask one final question, I'm interested in the digital tools you are using for service and whether they are effective. What approaches are you taking to ensure service delivery, especially considering that growers are in the fields and stores have been closed for internal traffic? Given this situation, do you reconsider your operational footprint in terms of possibly reducing square footage or servers, or do you think it will remain business as usual as things move back towards normal?

No. I think, definitely our customers are using technology and e-commerce. We had Dropbox, curbside pickup where some of our salespeople were delivering parts. So that's going to continue. A lot of our growers have really nice shops and we have a lot of big field service trucks and that's going to continue. But again, I think, with the size of the equipment and some of the things we do, need to do in our service locations, those are going to exist. But three years ago we made some major footprint changes and stuff, so now we're servicing bigger markets and bigger territories and I think we'll continue. I think the industry is going to see some level of consolidation and that all is going to happen. But I think we learned a lot from this; it’s really nice that we could produce this type of aftermarket support for the parts and service support with closed front doors and be able to use technology and be really smart about how we did business. It's really good to see we could deliver these type of results under the whole COVID-19.

Okay. Thank you guys and good luck.

This concludes our question-and-answer session. I would like to turn the conference back over to David Meyer, CEO for closing remarks.

Okay. Thanks everybody for your time this morning and your interest in Titan Machinery. I look forward to updating you on progresses on our next call.

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