Titan Machinery Inc. (TITN) Q2 2022 Earnings Call Transcript

Greetings and welcome to the Titan Machinery Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the conference over to your host Mr. John Mills of ICR. Thank you. You may begin.

Thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery second quarter fiscal 2022 earnings conference call. On the call today from the company are David Meyer, Chairman and Chief Executive Officer; Mark Kalvoda, Chief Financial Officer; and Bryan Knutson, Chief Operating Officer. By now everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2021, which went out this morning at approximately 6:45 AM Eastern Time. If you’ve 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 available 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 and updated in subsequently filed quarterly reports on Form 10-Q. 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 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 today will last approximately 45 minutes, and at the conclusion of our 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. Please go ahead, David.

Thank you, John. Good morning, everyone. Welcome to our second quarter fiscal 2022 earnings conference call. On today's call, I will provide a summary of our results and then Bryan Knutson, our Chief Operating Officer, will give an overview for each of our business segments. Mark Kalvoda, our CFO, will then review financial results for the second quarter of fiscal 2022 and provide an update to our full year modeling assumptions. If you turn to slide three, you'll see an overview of our second quarter financial results. Equipment demand momentum continued through our second fiscal quarter, which drove a 24% increase in the second quarter consolidated revenues. Our healthy inventory position coupled with robust demand, along with continued strength in our Parts and Service business, resulted in strong consolidated pretax income growth of 89% and record second quarter adjusted diluted earnings per share of $0.57, which represents an increase of 97% compared to the prior year period. From a segment perspective, our Agriculture business was well-positioned and produced exceptional growth as high commodity prices offset drought conditions in areas of our footprint. Likewise, we're especially pleased with improved performance for both our Construction and International segments. Construction pretax income grew 105% versus the prior year, and our International segment achieved pretax profitability this year compared to a loss in the prior year. This environment is providing us the opportunity to showcase the improvements we've made to our business over the past several years. Our inventory turns continue to trend upward, and we're receiving inventory shipments in a timely manner, allowing us to surpass our revenue targets. While supply chains remain tight, we are confident in our ability to drive growth through the second half of our fiscal year, and as a result, we are raising our modeling assumptions accordingly. Our team is ready to support our customers through the very busy harvest and end of year construction seasons in the second half of our fiscal year. Now, I will turn the call over to Bryan Knutson.

Thank you, David, and good morning, everyone. I'm excited to provide a brief summary of our Agriculture, Construction, and International business segments this morning. On slide four is an overview of our domestic Agriculture segment. The business climate for farm equipment is extremely healthy, primarily due to the continued high prices for agricultural commodities. As a result, the strong financial performance we delivered in the first quarter continued into the second quarter. While we are managing through supply side challenges and yield-reducing drought conditions in some markets, demand for new and used equipment is very strong. Existing agricultural equipment fleets are requiring parts and service repairs and are also being upgraded to models with newer technology. Meanwhile, Section 179 tax deductions are further supporting demand as customers look to offset higher net farm incomes. We currently have customer commitments for the majority of our new machinery orders being shipped in the third and fourth quarters of fiscal year 2022, and we're also finishing pre-sell customer orders for production slots into the first half of fiscal year 2023. There is currently very strong demand for used equipment, which is reflected in our improved inventory turns and margins. Finally, the most recent USDA WASDE report was bullish for commodity prices and provides us incremental confidence in raising our full year fiscal 2022 modeling assumptions. Turning to slide five, you will see an overview of our domestic Construction segment. Similar to Agriculture, we saw a continuation of the positive first quarter results into our second quarter. We are seeing increased construction activity in most of our markets, driven by the reopening of the economy, low interest rates, new housing starts, farmer and rancher purchases, improved oil prices, and pending final infrastructure legislation. With that said, we are most excited about our operating improvements translating into significantly enhanced pretax profitability. On slide six, we have an overview of our International segment, which represents our business within Bulgaria, Germany, Romania, Serbia, and Ukraine. Our European customers are benefiting from higher global commodity prices along with excellent yields from early season grain crops. Adequate moisture and favorable growing conditions should produce average to above-average yields in the late season row crops. These favorable yields, along with higher prices, are contributing to an improved European business climate. While the COVID situation is improving, we are experiencing residual supply side issues causing interruptions and delayed deliveries. We continue to focus on the aftermarket parts and service business in Europe, and our European customers are also adopting equipment with the latest precision technology. Before I turn the call to Mark, I want to sincerely thank our employees, both domestically and abroad, for an impressive quarter. As we look ahead to the busy fall season, we're extremely thankful for and proud of our team that continues to go above and beyond in supporting our customers. With that, I will turn the call over to Mark to review our financial results in more detail.

Thanks, Bryan. Turning to slide seven. Total revenue increased 24.4% to $377.6 million for the second quarter of fiscal 2022. Our equipment business increased 34.6% versus the prior year, which was driven by each of our segments with notable over 40% growth coming from both our Agriculture and International businesses. Our parts and service business generated consistent growth once again, increasing 6.3% and 6% respectively compared to the prior year period. Rental and other revenue decreased 12.9% versus the prior year due to a decrease in inventory rentals, a smaller rental fleet in our current construction footprint, and a reduced fleet due to the January 2021 divestiture of our construction stores in Arizona. The dollar utilization of our Construction segment rental fleet improved nicely to 26.6% for the current quarter compared to 22.2% in the same period last year. The improved utilization helped increase margins in this revenue category. On slide eight, our gross profit for the quarter increased 19.7% to $75 million. Our gross profit margin decreased by 80 basis points due to a significant increase in equipment revenue mix compared to the higher margin parts, service, and rental revenue. Somewhat offsetting the impact of the mixed shift on margins were increased equipment margins, which were supported by favorable end markets coupled with our healthy inventory. Operating expenses increased $4 million versus the prior year to $57.1 million for the second quarter of fiscal 2022. This increase was more than offset by revenue growth and led to 240 basis points of operating expense leverage compared to the prior year, reducing our operating expenses to 15.1% as a percentage of revenue compared to 17.5% in the prior year period. In the current quarter, we recognized $1.5 million of impairment costs, which were related to the impairment of the remaining intangible and some fixed assets of our Germany reporting unit within our International segment. Floorplan and other interest expense decreased 21.9% to $1.5 million in the second quarter of fiscal 2022 compared to the same quarter last year due to lower borrowings. In the second quarter of fiscal 2022, our adjusted net income increased 97.5% to $13 million. The adjusted second quarter of fiscal 2022 net income excludes the $1.5 million asset impairment I mentioned a moment ago, a $278,000 income tax valuation allowance, and a $53,000 Ukraine remeasured gain, while the prior year excluded approximately $200,000 of expenses net of taxes. Our adjusted earnings per diluted share for the quarter was a record $0.57 and nearly double last year's $0.29 performance. Adjusted EBITDA increased 49.1% to $23.5 million compared to $15.8 million in the second 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 second quarter of fiscal year 2022. Agriculture segment sales increased 29.8% to $219.4 million, helping to drive a significant increase in segment adjusted pretax income of 78.7% to $12.1 million. Segment pretax income was further supported by the improved equipment margins I referenced earlier, as well as lower floorplan interest expense. Turning to our Construction segment, revenue increased 4.1% to $80.9 million compared to the prior year period, despite the January divestiture of two stores in Arizona. On a same-store basis, excluding those stores, revenues were up 14.1% for the quarter. We are pleased with the continued improvement in segment adjusted pretax income, which doubled to $2.8 million compared to $1.4 million in the prior year period. Our International segment also benefited from the improved agriculture market, with revenue growth of 36.4% to $77.3 million. As Bryan discussed in his remarks, the improved growing conditions and strong global Ag fundamentals have generated heightened equipment sales activity across our international footprint. The combination of strong equipment sales and margins coupled with nice double-digit growth in our higher margin parts and service businesses yielded a $2.4 million improvement in adjusted pretax income to a positive $1.9 million. Turning to slide 10, you will see our first six-month results. Total revenue increased 22.3% compared to the same period last year. Year-to-date equipment sales increased 30.3%; parts increased 8.4%; service revenue increased 7.1%; and rental and other revenue decreased 21.9%. The six-month dollar utilization of our dedicated rental fleet improved to 22.9% compared to 20.5% in the same period last year. Turning to slide 11, our gross profit for the first six months was $146 million, a 20.6% increase compared to the same period last year. Our gross profit margin was relatively flat with a 20 basis point decrease versus prior year at 19.5% for the first six months of fiscal 2022. The impact that revenue mix is having on overall gross profit margins is largely being offset by higher equipment margins. Our operating expenses increased by $7.4 million or 7% for the first six months of fiscal 2022 to $113.5 million. This increase was more than offset by revenue growth and led to 220 basis points of operating expense leverage compared to the prior year, reducing our operating expenses as a percentage of revenue to 15.1%. Impairment expenses increased from $216,000 in the prior year to $1.5 million in the current six-month period. Floorplan and other interest expense decreased 25.2% to $3 million in the first six months, primarily due to overall lower borrowings. Our adjusted diluted earnings per share increased 136% to $1.04 for the first six months of fiscal 2022 compared to $0.44 in the prior year period. Our six-month adjusted EBITDA increased 61.3% to $43.3 million compared to $26.9 million in the prior year. On slide 12, we provide our segment overview for the six-month period. Overall, our adjusted pretax income was $30.6 million for the first six months of fiscal 2022 compared to $13.8 million in the same period last year. This 122.3% increase was a result of strong performance in our Ag segment that was further supported by improved results from both our Construction and International segments. On slide 13, we provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2022. We had cash of $66 million as of July 31st, 2021. Our equipment inventory at the end of the second quarter was $336 million, a decrease of $3 million from January 31st, 2021, reflecting the net effect of a $31 million increase in new equipment that was more than offset by a $34 million decrease in used equipment. Strong sales and lower inventory levels continue to drive equipment inventory turns, which increased in the second quarter to 2.7 versus 1.6 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 second quarter increased slightly to $83 million compared to $78 million at the end of fiscal 2021. We still anticipate our fleet size to be around $80 million at the end of fiscal 2022. As of July 31st, 2021, we had $186 million of outstanding floorplan payables on $771 million of total floorplan lines of credit, which leaves us with considerable capacity in our credit lines to handle our equipment financing needs. Our adjusted debt-to-tangible net worth ratio is a strong 0.8 compared to 1.2 in the prior year period, and is well below 3.5, which is the leverage covenant requirement of our two largest floorplan facilities outside of our bank syndicated credit agreement. Turning to slide 14. The amount of new and used equipment inventories are reflected in the size of the blue and red bars on this slide, respectively. As we've discussed during the past couple of quarters, the current resurgence in Ag commodities, increased customer demand, and a tighter industry supply of equipment has helped us generate a higher inventory turn of 2.7 in the current quarter. We believe our equipment orders, delivery schedule, level of pre-sells, and used equipment inventory have us well-positioned to meet our revised revenue modeling assumptions for fiscal year 2022. Given current inventory levels and stronger end markets in each of our segments, we expect our inventory turn will continue to increase through the second half of fiscal year 2022 and is on pace to exceed our long-term goal of a three-time turn. The overall quality of our inventory remains very healthy. Our inventory under non-interest bearing terms, which can be seen by the gray bar on the slide, ended the second quarter at 44.3%. Slide 15 provides an overview of our cash flows from operating activities for the first six months of fiscal 2022. The GAAP reported cash flow provided by operating activities for the period was $28.6 million compared to $13 million in the comparable prior period. As part of our adjusted cash flow provided by operating activities, we include all our equipment inventory financing, including non-manufacturer floorplan activity, and adjust our cash flow to reflect a constant equity in our equipment inventory, allowing us to evaluate operating cash flows exclusive of changes in equipment inventory financing decisions. After applying these adjustments, our adjusted cash used by operating activities was $19 million for the six-month period ended July 31st, 2021 compared to adjusted cash provided by operating activities of $16.1 million for the same period last year. Slide 16 shows our updated fiscal 2022 annual modeling assumptions. Each of our business segments performed well in our second quarter, with particular strength in our Agriculture and International segments. Given these solid results and increased expectations for the back half of our fiscal year, we are raising our assumptions for these two segments and are increasing our diluted earnings per share range. For the Agriculture segment, we are increasing our revenue growth assumption to 18% to 23% from 15% to 20%. The fiscal 2022 growth range includes a full year revenue contribution from our HorizonWest acquisition that closed in May 2020. For the Construction segment, we are maintaining our revenue assumption of 2% to 7%. As a reminder, this assumption includes the divestment of our two construction equipment stores in Arizona at the end of fiscal 2021, which accounted for approximately $27 million of combined revenue. Excluding these revenues from the prior year base, our modeling assumption equates to a same-store sales range of approximately 10% to 15%. For the International segment, we are increasing our revenue assumption to 27% to 32% from 17% to 22%. The strong year-to-date performance, combined with the good crop conditions in our international footprint and strong global Ag commodity prices, led to the significant increase in expectations. From an earnings per share perspective, we are increasing our diluted earnings per share assumption by $0.35 at the midpoint to a new range of $2 to $2.20 for fiscal 2022. As a reminder, this range includes all ERP implementation expenses. This concludes our prepared remarks. Operator, we are now ready for the question-and-answer session of our call.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question is from Rick Nelson with Stephens. Please proceed.

Hi. Good morning. Nice quarter. Want you to follow up on the equipment margin with expansion sequentially and year-over-year, if you could speak to what's happening with on the new side, as well as the used side. And your expectation, what's built in to the guidance in terms of margin?

Good morning, Rick. Equipment margins are performing well for us. Several factors are contributing to the increased margins, including strong demand and the current supply environment. In particular, used sales, which generally yield higher margins, continue to outpace new sales. The international sales numbers also show higher growth rates compared to our domestic equipment sales, which supports a favorable mix for us. This combination of higher-margin segments is enhancing our performance in both the first and second quarters, alongside a positive agricultural environment. Additionally, our healthy inventory, coupled with a favorable industry backdrop, has resulted in historically low market adjustment costs during our monthly reviews. This clean inventory will help sustain our margins moving forward. Looking ahead, we project that margins won't be as high as those we experienced in the first and second quarters. While we expect some mix factors to persist, we foresee a change in the mix in the fourth quarter, where we'll have a larger number of new products and bigger ticket items, likely resulting in lower margins. We previously recorded margins around 11.7 to 11.9 in Q1 and Q2, and we expect them to settle in the mid-11 range, approximately 11.4 to 11.5 for the year, which is still an improvement over last year's 10.3.

That’s great color. Appreciate that. I'd also like to follow up on inventory. Do you think your size and scale is helping you secure inventory when maybe some of your competitors are more challenged that way?

Hi, Rick. This is Bryan. I believe our size and scale allows us to maintain a steady flow of inventory between our stores, which is beneficial. When one market experiences more rain or higher demand, we can redistribute products accordingly. Our extensive selection of used and lease returns also contributes to our advantage. However, the most significant benefit comes from the improvements we've made in our order planning processes and our focus on engaging with customers early, enhancing our forecasting, and ensuring we fulfill orders accurately. As you are aware, lead times are quite lengthy right now, so a substantial amount of effort is dedicated to this by both our team at the shared resource center and in the field.

Thanks, that's very helpful as well. Lastly, I'd like to ask about the acquisition environment. What you're seeing there? Are there active discussions and how willing are sellers given the strength of the market?

This is David, Rick. We have a number of acquisition targets in the pipeline. We've got the balance sheet to support some serious acquisition goals. With the PPP loans and loan forgiveness behind most dealers, I think the biggest motivator potentially for increases to the capital gains tax is prompting a lot of dealer principals to explore potential exit strategies. At the same time, we see OEMs encouraging consolidation among owner groups. Those principals continue to age, and the dealerships of the future are going to need a higher level of capital and people resources to support the highly technical and sophisticated equipment used in today's product and operations. So, overall, we're pretty optimistic about what is ahead of us while we think we’ve got a healthy pipeline.

Thanks for that as well and good luck as we push forward.

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

All right. Thank you. Good morning, guys. So, I guess my first question, can you remind us what the ERP drag is in your fiscal year 2022 here? And as we think about next year, what we should be sort of baking into our assumptions for ERP?

Yeah. Good morning, Mig. As far as the expenses for the year, this year, I think we've kind of mentioned in the past around $4.5 million is what we have in there for the year. I actually think it might come in a little bit lower this year and some of this is going to get pushed out into next year with the go-live anticipated to be in next year's results. So, there'll be a little bit more ramping up of expenses to support the go-live and then subsequent to the go-live to support our team out there as well. So, probably be closer to that $4 million this year and up, call it, maybe $4.5 million next year.

Okay. So $4.5 million for next year? All right. Then, I'm curious you have updated your modeling assumptions. The changes to your segment revenues are clear. I'm just wondering if there is anything else in terms of, for instance, how you thought about margin. Have you adjusted that at all on equipment gross margins? Are there any other components like SG&A, for instance, that would have been adjusted relative to your prior expectations? Can you give us some context there?

Yeah. I think, first of all, with the equipment margin, it has been more favorable to us than what we initially anticipated. So, in the last two increases that we have here in our guidance range, we did tweak that up. I mentioned before that we're at kind of that mid 11 area in equipment margin. So that is an increase from what we expected before. As far as expenses go, we usually like to talk about that in terms of revenue. So as a percent of revenue and with the revenue continuing to increase, we should be able to continue to obtain some of that operating leverage that we get with that. Initially, I think we were talking around 15, 15.1, I think with these numbers, if we can hit these ranges in these modeling assumptions for each of our segments, it'll be around, call it, that 14.5 we should be able to do, so better than what we've seen year-to-date with some of that year-end equipment selling. And particularly with International going up in revenue, their expectation there, they've done well for the first half of the year. We expect to see that happen in the back half, which helps because their operating model is a little more fixed than what the domestic model is on that, so it's less variable expenses, more of it pushing to the bottom line over there. So, around that 14.5 call it for the year is what we're seeing today.

Thank you for that information. I'm curious about equipment gross margins specifically. Are there limiting factors to this metric aside from mix? You mentioned mix, but if used equipment prices continue to rise and demand for new equipment is strong, is it possible for equipment gross margins to also trend upward in line with your updated expectations?

Well, I think that's always possible. I would say some of the additional lift that we saw in the current quarter, quite frankly, I mentioned the lower cost of market, those adjustments are at historic lows. They're very low. It's hard to imagine those providing additional lift as we move forward. But if the used market gets even tighter out there, certainly our used inventory is down. We'll replenish that as some of the new items get out in the second half of the year. But that could positively impact margins as well with less supply out there on that use side. And that's been a big positive story for us this year is the level of use sales that we've had and the margins on them.

I would say, Mig, still as a new machine, it's still a very highly competitive marketplace out there. So, you always need to be cognizant of that, but I think with our strategy of driving the parts and service aftermarket business and continuing with that, that's a positive to that margin number.

Sure, I appreciate that. My last question is about your pre-selling activity. How significant is pre-selling in driving your business at the moment? Additionally, your OEM recently shared their earnings and mentioned strong order books, with backlogs reportedly over five times higher than last year for tractors and combines. I'm interested in how important this segment is for you and what changes you're seeing in pre-sells compared to the previous year. Lastly, Mark, how should we interpret this when considering Ag revenue for the next fiscal year? Thank you.

Yeah. Mig, this is Bryan. Just to talk to how important that is for us, it's extremely beneficial as the dealer and for the OEM and for the customer, really to all be able to plan our business. Just a lot of residual benefits that come along with us from the impact that it has on our inventory turns, helping with our forecasting and planning, obviously reducing our interest carrying costs, allowing us to get the right specs for the customer and getting it delivered at the right time helps them plan their business with their bank or their accountant. It just really helps us manage our business overall. So, in line with all those benefits, we have a lot of initiatives internally here to grow that and continue to put more focus on that. In these types of times, that becomes really critical because with the supply being so tight, the limitations that the OEMs have on production mean that those pre-sells get priority over all of their orders. So, that's just another reason it's imperative that we drive that. It's not as easy in practice to do. There are some challenges just because the typical historical model, the grower, of course, likes to plant the crop and then care for the crop, and then take the crop off and then sit down with their accounts and bankers in that November, especially December timeframe to see how the year shaped up and then make their capital purchases accordingly. So, we're really shifting the dynamic there and really asking the grower to mid-year or before they've even got the crop in the ground to forecast out nine months or ten months and take a chance on that. So, one of the benefits is these are big capital purchases, so a lot of planning goes into it. Most of our growers nowadays are in this for the long haul. And so, even if they don't quite get the crop they want to cover it, there are some backstops with some of the government support programs and insurance that help. And then, really it's a matter of just seeing how they shift that into the next year. So, again, a lot of benefits. It's not easy, but we continue to really push for that because of all those benefits for us, the customer, and the OEM.

Well, to go back to my question now, how big is this for you? If I look at the Ag segment, what percentage of revenue there was associated with equipment that was pre-sold?

So, what we're seeing so far this year, Mig, is it's climbing. So a percent of our new sales that have been booked, which obviously this would be for both Ag and CE, it's climbing up over 40% now. We're just over 40% of our new sales are under pre-sell and that has increased nicely.

Okay. And in terms of your inbound orders, so the orders that you've taken, I'm trying to triangulate it back to what CNH was talking about. How are your inbound orders on pre-sells for next year looking like at this point?

I don't have any specific amounts to share right now. I think we mentioned in the last call that it's earlier than usual for them to start filling those orders. It's a bit challenging for us because we are really pushing this, and it's difficult to predict overall sales for next year based on these early pre-sell orders.

Yeah. I think I'm comfortable saying Mark that what we have to date for next year is significantly higher again.

Our next question is from Steve Dyer with Craig-Hallum. Please proceed.

Good morning. I have a couple of questions that haven't been asked yet. It seems like you have a strong booking outlook for the beginning of next year. However, given the recent intensification of the drought in your area, have you noticed any changes in customer conversations, or is demand still robust in specific areas?

Hey, good morning, Steve. In our footprint, certainly the better growing conditions have been in Iowa and Nebraska. And we definitely anticipate and have strong demand in those markets. Certain areas in the Dakotas and Western Minnesota have definitely been more impacted by the drought, but we also have irrigation on a good chunk of that to offset some of that. We have received a little bit of rain as of late. You just look at the big drivers, and net farm income is a key driver, commodity price being one of the bigger ones along with yield. So, yeah, the yields are certainly impacted here a bit, and we're not anticipating any bumper crop by any means in a lot of our footprint, but certainly offset a lot by the higher commodity prices that help as you look back to corn and the other commodity prices being nearly double what they were last fall.

Okay. I know we're in a cycle of questions, so this might be challenging to answer. Looking at the situation, do you still believe that most of your sales are just replacements resulting from a long period of low commodity prices? Or are you beginning to see farmers making proactive purchases? Additionally, when you compare this cycle to the last one, is there any underlying reason you couldn't achieve similar or even better revenue and earnings, particularly with fewer locations? How do you see this developing if corn prices and row crop prices remain strong over the next few years?

Yeah. So, to the first part of your question, Steve, again, the high commodity prices are really helping drive demand. But then replacement demand, just as you mentioned, is still a big factor. So, that's what we were seeing was really the main driver here for about the last six, seven years along with technology. So, those two are still big factors, but then now on top of that, just again, due to the commodity prices, especially we've got a lot of growers that have much higher net farm income and can really take advantage of the Section 179 tax benefits. So that's just adding on top of that demand, which I think is even with some of these drought conditions is really keeping that farmer sentiment up. And then, on the last heavier question you asked, how it compares to the 2012 to 2014 cycle, there are a lot of similarities. The commodity price levels are certainly very similar in the net farm income levels should be very similar, assuming similar yields. However, I think because some of the differences are the interest rates are lower. As Mark pointed out, the used inventory levels are tighter for us and are healthier. There is some carryover from the healthy government payments that the growers got last year. Also overall, the fleet is still older going into this cycle than the last one. And then, just lastly, internally on our end, we spent several years making a lot of internal improvements here, which we feel positions us better for this cycle. So, we're optimistic that there could be a lot of similarities there.

Steve, to provide some context with numbers, in 2013, 10,700 combines were sold in the U.S., while last year the figure dropped to 5,000. Year-to-date, combine sales in the U.S. are up by 12%. However, even with this increase, we are still significantly below the 2013 levels. For forward drivers, there were 6,904 sold in 2013, compared to just 3,000 sold last year. Year-to-date, forward driver sales in the U.S. are up 38%, but we still have a long way to go to reach the 2013 numbers. Some of this can be attributed to limited production schedules and some supply chain issues stemming from COVID-19, which might prolong this situation but could be beneficial overall.

Great. That's very helpful. Thanks, guys.

Thank you. We will take one more question from Larry De Maria with William Blair. Larry, please proceed.

Hi. Thanks. Good morning everyone. Regarding the inventory shipments catching up, I understand you're booked through the first half of next year, with submissions expected in the third quarter. I'm curious about the pricing for next year and the new models, especially since your competitors have set up five to eight that you might be comparing with. What are the technical challenges you're facing? Do you anticipate being able to retain some portion of that, or will it primarily go to the OEM partner?

Hi, Larry. This is Bryan. Yeah. Similar price increases there among OEMs as they have similar supply side challenges and added freight costs and increases in and so on. Yeah. Generally, as you mentioned, pass through, a lot of our margin improvements would be the things that Mark referenced earlier to Mig's questions.

Thank you. For my second question, I would like to understand precision, which is clearly a significant factor. Specifically, I want to know how it affects the bottom line for precision shares. I recognize you generate revenue from the components embedded in the equipment, but are there additional revenue sources associated with precision? Essentially, have you established a cost center or profit center beyond the equipment sales, and how could driving this impact your operations? Thank you.

Yeah. Exactly. So, as we go forward, besides the aftermarket sales being a big one, that's really out there today, the retrofits of things like planters and sprayers, Larry. But then as we get into subscription-based services here and continue to do more and more of that on the data side, machine held monitoring side, maintenance side and so on, really does the telematics allow us to do a lot with increasing grower uptime and really preventative maintenance. And then, also just providing the future consulting services, working with their data to help them make better decisions on their farm. So I think a few different streams there really from the hardware that the whole goods coming right out of the factory, things like auto-steer and harvest command, soil command, aim command on the sprayers. And then, the retrofit side after that, and then the subscription side, and then really the service maintenance side of it as well.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the call back to David Meyer for closing remarks.

Alright. Well, thank you everybody for your time today. You're interested in Titan Machinery, and we look forward to updating you on our progress on our next call. So, have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.