Titan Machinery Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to Titan Machinery Inc. Second Quarter Fiscal 2025 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. It is now my pleasure to introduce your host, Jeff Sonnek. Thank you. You may begin.

Well, thank you. Welcome to Titan Machinery's Second Quarter Fiscal 2025 Earnings Conference Call. On today's call from the company are Bryan Knutson, President and CEO; and Bo Larsen, CFO. By now, everyone should have access to the earnings release dated July 31, 2024. If you've not received the release, it's 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, which can also be found on Titan's Investor Relations website directly below the webcast information in the middle of the page. We'd 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. Those statements do not guarantee future performance, and therefore, undue reliance should be placed upon them. These forward-looking statements are based on management's current expectations 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 may discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Titan's ongoing financial performance, particularly when comparing underlying results from period to period. We've included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in today's release and presentation. At the conclusion of our prepared remarks, we'll open the call to take your questions. And with that, I'd now like to introduce the company's President and CEO, Mr. Bryan Knutson. Bryan, please go ahead.

Thank you. Good morning, everyone. I want to start by discussing our second quarter performance and our near-term outlook. Then I will pass the call to Bo for his financial review and incremental thoughts on our modeling assumptions for the remainder of the year. As we shared two weeks ago in our second quarter pre-announcement, the agriculture equipment industry is adjusting to the softening demand as agriculture fundamentals have materially weakened, driven by the anticipated decrease in net farm income and sustained higher interest rates. The decrease in net farm income is largely being driven by significantly lower commodity prices for most key cash crops in our footprint, which have steadily declined since the beginning of the year. These elements, combined with mixed growing conditions across our footprint, are negatively impacting farmer sentiment and have manifested in lower retail demand for equipment purchases. Through this period of softening demand, we have shifted to a much more proactive and aggressive approach as we actively work to reduce inventory to targeted levels, especially on the used equipment side, which will in turn reduce floorplan interest expense. This strategy requires compression to our near-term equipment margins. However, the actions we are implementing will inherently shorten the impact on our performance during this period of lower demand and will accelerate our return to a more normalized margin profile as the industry cycle progresses. While navigating the current cycle, it's worth highlighting the significant differences from the last downturn, which underscore the improved health and preparedness of the entire sector. Unlike the previous cycle, we are seeing a coordinated, proactive approach to inventory management across the industry by both dealers and the OEMs. At Titan, we are particularly focused on efficiently aligning inventory with demand by carefully analyzing market trends, adjusting pricing strategies, and working closely with our suppliers on financing terms for our customers. The result of these collective actions will not only reduce inventory, but will also reduce our interest expense. Importantly, I would like to reiterate that it is the early recognition and quick implementation of these strategies that marks a significant adjustment in our approach relative to previous cycles. While inventory levels in terms of absolute dollars are currently higher than we want them to be, on a units-per-store basis, it is important to note that we have significantly less inventory than we did heading into the last downturn. At the end of the second quarter, we had an average of approximately $8.9 million of inventory per store. This is up approximately 6% from the high watermark of the prior cycle. However, as I mentioned, we have significantly fewer units per store as OEM price increases over the past decade have been substantial. For example, the cost of a four-wheel-drive tractor is up approximately 80% since the last downturn. Another key difference between this cycle and the last is that industry fundamentals heading into the cycle are much healthier. Farmers entered this cycle coming off consecutive years with excellent profitability and stronger balance sheets, further bolstered by more favorable land values, providing them some buffer against the current headwinds. Secondly, please recall the supply chain disruptions that severely limited OEM production volumes over the past two years. In aggregate, these production levels were closer to mid-cycle averages. Thus, the fleet age in North America continues to support replacement purchases as we progress through the cycle. Thirdly, and as I mentioned earlier, both dealers and OEMs are aligned in aggressively managing inventory levels to demand and are being more proactive earlier in the downturn. Fourth, as mentioned on previous calls, we do not have short-term lease returns, which further exacerbated the impact of the last cycle. And finally, I would note that precision agriculture solutions were not as developed in the previous cycle, and today’s solutions are helping farmers garner higher returns in their operations, further supporting future equipment investment. While inventory remains our primary focus, we are also taking decisive actions to control costs and grow the other areas of our business. We continue to lean into our customer care strategy to fuel our recurring high-margin parts and service businesses. This is an area where we believe we can not only drive growth this year, but more importantly, create long-term sustainable growth. These factors, combined with the efficiencies and process improvements we've integrated since the last downturn, will undoubtedly enhance our ability to mitigate the impacts of this cycle. That said, we know that to achieve through-cycle performance of our optimized business, it is imperative that we reach targeted inventory levels as quickly as possible. Now I'd like to change gears and provide an update on crop conditions within our footprint. As previously mentioned, there have been abnormally wide variations in growing conditions within each of our regions. In North America, significant spring rainfall delayed the planting season. In some cases, fields were too wet to plant altogether or did get planted but then drowned out and did not recover. Overall, in North America, all of this will lead to widely varying yields from even one store to another. In Australia, plentiful rainfall in some areas of our footprint is leading to an exceptional crop, while other areas are experiencing drought conditions, and those areas are looking to produce average to below-average yields. In Europe, Romania and Bulgaria continued to be negatively impacted by severe drought conditions, whereas conditions are overall much better in Germany and Ukraine. We are looking to produce average to above-average yields in these regions. Finally, regarding our construction business environment, we believe underlying industry fundamentals have moderated somewhat off of recent highs due to the extended period of higher financing costs and uncertainty around the economy. However, our revenue outlook for our Construction segment is stable versus the prior year and is supported by equipment availability and new product introductions from our suppliers. In closing, I want to reiterate that we are taking decisive actions to navigate this cycle effectively, and we remain committed to delivering long-term value to our shareholders and to providing best-in-class service to our customers. I want to sincerely thank our employees for their hard work and dedication to support our customers during these more challenging times. Their efforts have been crucial to the success of our customer care strategy, and I am highly confident that with our lessons learned from the previous cycle, combined with the actions we have taken now, which have made us a stronger company, we will ensure we can effectively navigate through this downturn. With that, I will turn the call over to Bo for his financial review.

Thanks, Bryan. Good morning, everyone. Starting with our consolidated results for the fiscal 2025 second quarter. Total revenue was $633.7 million, a decrease of 1.4% compared to the prior year period. Underlying this performance was a same-store sales decrease of 12.5%, driven by lower demand for equipment purchases due to the expected decline of net farm income this growing season. This was largely offset by the acquisition of O'Connors that we completed in October 2023. Gross profit for the second quarter was $112 million, and gross profit margin contracted by 310 basis points year-over-year to 17.7%, driven primarily by lower equipment margins resulting from higher levels of inventory across the industries we serve and our proactive stance on managing our inventory down to targeted levels, as Bryan discussed earlier. Operating expenses were $95.2 million for the second quarter of fiscal 2025 compared to $88.8 million in the prior year period. The year-over-year increase of 7.2% was led by acquisitions that we've executed in the last 12 months. This year's second quarter operating expenses also included a $1.5 million noncash impairment expense related to certain assets in our European segment. Floorplan and other interest expense was $13 million as compared to $3.7 million for the second quarter of fiscal 2024, with the increase led by a higher level of interest-bearing inventory, including the usage of existing floorplan capacity to finance the O'Connors acquisition. GAAP reported net loss for the second quarter of fiscal 2025 was $4.3 million or $0.19 loss per diluted share and compares to last year's second quarter net income of $31.3 million or $1.38 per diluted share. The current quarter's reported net income includes $11.2 million or $0.36 per diluted share impact related to the one-time noncash sales leaseback financing expense we incurred in the quarter. Excluding this impact, net income on an adjusted basis was $4 million or $0.17 per diluted share. Reported net income for this year's second quarter also includes a $2.7 million gain related to the completion of a new market tax credit program, which was anticipated and included in our forecast throughout the year. As we mentioned previously, the lease accounting expense reflects our entering into an agreement for the future purchase of 13 of our lease facilities on expiration of the current leases. The purchase closing date for each leased facility will occur on or before the expiration of the respective lease, all of which expire over the next several years through calendar year 2030. While the initial impact of this purchase agreement temporarily reduces GAAP reported earnings, this is a noncash expense, and I'd like to emphasize that the transaction is financially strategic and supports the company's long-term customer care strategy by investing in facilities and shop space required for continued growth in our high-margin parts and service businesses. Now turning to a brief overview of our segment results for the second quarter. In our Agriculture segment, sales decreased 9.6% to $424 million, which included a same-store sales decline of 11.2% in the second quarter. Agriculture segment adjusted pretax income was $6.7 million as compared to $33 million in the second quarter of the prior year. This adjusted figure excludes $6.1 million of noncash sales leaseback financing expense that I mentioned previously. The underlying year-over-year decrease in profitability reflects the softer retail demand environment, which manifested in lower equipment sales, lower equipment margins, higher inventory levels, and higher floorplan interest expense. In our Construction segment, same-store sales declined 3.2% to $80.2 million versus an increase of 18.5% in the prior year. We are generally seeing year-over-year stability in this segment. However, supply chain catch-up has driven inventory levels higher for both the construction industry as a whole and for Titan. So we are proactively managing inventory down to targeted levels and are seeing margin compression in this segment as well. Adjusted pretax income for the segment was $0.2 million, which compares to pretax income of $5.2 million in the second quarter of the prior year. This adjusted figure excludes $5.1 million of noncash sales leaseback financing expense that I mentioned previously. In our Europe segment, sales decreased 24.8% to $68.1 million, which included a same-store sales decline of 27.7% versus 15.9% growth in the prior year. Severe drought conditions in Eastern Europe started to impact retail demand in the back half of last year. These subdued demand levels have persisted through the first half of fiscal 2025, and we expect that to continue through the rest of this fiscal year. Pretax loss for the segment was $2.3 million, which compares to $5.6 million income in the second quarter of fiscal 2024. The current year second quarter results for Europe include approximately $1.5 million of noncash impairment expense related to certain assets. Excluding these impacts, pretax loss for the segment was $0.8 million in the second quarter. The underlying year-over-year decrease in profitability reflects similar dynamics, as I just mentioned, with our domestic ag segment regarding the softer retail demand environment, higher inventory levels, and higher floorplan interest expense. In our Australia segment, sales were $61.3 million, and pretax income was $1.4 million. This segment is facing very similar customer dynamics as our domestic ag segment, but with a substantial mix of presales, which is helping maintain sales figures similar to the prior year comparative period, which was pre-acquisition. Now, on to our balance sheet and inventory position. We had cash of $31 million and an adjusted debt to tangible net worth ratio of 1.8 times as of July 31, which is well below our bank covenant of 3.5 times. Regarding inventory, we believe that our equipment inventory level has recently peaked at approximately $1.3 billion. This aligns with our expectation from the beginning of the year regarding the normalization of lead times from our OEM partners and the timing of order arrivals. We expect to begin demonstrating the results of our inventory reduction actions in the back half of this year, with inventories moving modestly lower in the second half of this fiscal year before we realize more substantial decreases in fiscal 2026. With that, I'll finish by reviewing our fiscal 2025 full year guidance, which we recently updated concurrent with our pre-announcement on October 15 to account for our second quarter performance, our latest view on the industry environment, and to account for the one-time noncash sales leaseback financing expense we recognized in the second quarter. Current market conditions, characterized by lower commodity prices, sustained high interest rates, and mixed growing conditions across our footprint have negatively impacted farmer sentiment. This resulted in noticeably softer retail demand in the second quarter compared to the expectations we shared during our first quarter earnings call. Given the current backdrop, we now see these more subdued demand levels persisting throughout the rest of the fiscal year. As such, for domestic agriculture, our revenue assumption is in the range of down 5% to 10%, which includes the full year contribution from our Scott Supply acquisition, which closed in January 2024. For the Europe segment, our assumption is for revenue to be down 12% to 17%. And for the Australia segment, we expect fiscal 2025 revenue to be in the range of $230 million to $250 million. Each of these segment assumptions reflects the more challenging environment we're facing, partially offset by our efforts to stimulate demand. Despite these headwinds, we expect to continue to see growth in our service business in the high single-digit range for the full fiscal year. For the Construction segment, our updated assumption is for revenue to be flattish in the range of down 2.5% to up 2.5%, which similarly reflects a more cautious outlook than our prior assumptions given the overall macroeconomic environment, but generally stable compared to the prior year. Now for some broader commentary. From a gross margin perspective, we remain committed to improving our inventory position, particularly in used equipment. Given the excess supply of inventory in the channel and softer equipment demand, we are now building in expectations for further equipment margin compression such that our updated assumptions for consolidated equipment margins are approximately 540 basis points lower in the back half of this year as compared to the back half of last fiscal year. For comparison, consolidated equipment margins were approximately 330 basis points lower in the first half of this year compared to the first half of last fiscal year. We now anticipate equipment margins for our domestic ag business to approach the historical lows we realized in fiscal years 2016 and 2017. While this will impact our short-term performance, we believe this approach to managing inventory will shorten the duration of this downturn compared to the previous cycle. Regarding operating expenses, we are focused on implementing cost controls where we can, optimizing resources, and being vigilant with any headcount decisions. Our guidance now implies operating expenses to be about 14.4% of our revised sales outlook. Moving to interest expense. Given our revised revenue expectations and the commensurate impact on inventory levels that we are working to improve, we are incurring higher floorplan interest expense than previously anticipated. Although we continue to expect that improved interest returns will provide a tailwind for interest expense in the back half of the year, we believe this benefit will be more than offset by the industry dynamics at play. It will take more substantial decreases in inventory as we progress through next fiscal year before we begin to see more normalized levels of floorplan interest expense. Our assumptions for floorplan and other interest expense for the full year is now approximately $47 million and compares to approximately $21 million in fiscal 2024. Taking all of these factors into account, our guidance for fiscal 2025 GAAP diluted earnings per share contemplates a range between a loss of $0.36 to earnings of $0.14. On an adjusted basis, excluding the $0.36 noncash impact of the sales leaseback financing expense recognized in the second quarter, which was not originally contemplated in our modeling assumptions, we expect adjusted diluted earnings per share to be in the range of breakeven to $0.50. We believe the decisive actions we are taking with respect to managing inventory will help shorten the impact of this cycle on our performance, potentially accelerating our return to a more normalized margin profile, and that is what we are focused on delivering. This concludes our prepared comments.

Thank you. We will be conducting a question-and-answer session. Our first question comes from Ted Jackson from Northland Securities. Please proceed.

Thanks very much. I have two questions. My first question is just with regards to ag spending and seasonality. When you look at the second half of 2024, do you think that it's likely that we will still see some level of flush or spend in the fourth quarter as is typical in a typical kind of seasonal pattern? Or are you thinking that the market is so challenged that we will not see that kind of seasonal flush that we typically get? That's my first question.

Thank you, Ted, and good morning. Yes. We're still anticipating fourth-quarter spending here by farmers and contractors as they see how the year shapes up and meet with their accountants. As we go back to those varied crop conditions that we talked about, certain areas of our footprint, like the western half of South Dakota, all throughout Nebraska, and pockets of Minnesota, North Dakota, and Iowa, there are really good yields. So those farmers, even with the subdued prices, will have some spending needs as well. They will be looking to update some equipment. Also, because of the supply constraints that we had, a lot of those growers weren't able to update certain equipment in the past couple of years. So those growers that do have good yields, we will see some traditional good purchasing from them, but subdued compared to the levels that we've got in the modeling here. I think the trend, the timing patterns will be very similar but definitely lower than normal purchases here towards the end of the year.

Yes. As you take a look at the guidance and then look at the back half of the year in terms of what's implied, as Bryan said, seasonality is very similar there. If you drill down to our domestic ag business specifically, we've got full-year total equipment sales being down about 11%. In the first half of the year, that was down about 4%. But again, we were coming into the year with a lot of presales there, right? So we're essentially applying about a 15% decrease in the back half of the year, which is a little more of a decrease than we saw in the second quarter but not significantly. So kind of stabilized at this point in terms of year-over-year comps, but the cyclicality and timing of purchases remains.

My next question is about inventory. I was pleased to hear that you believe you're at peak inventory and that it will begin to decrease. Looking ahead, when do you anticipate being able to reduce your inventory to a level that aligns with demand? Can we expect to see that happen before the second half of 2025, or will it take longer?

Yes, I'll let Bo take that one, Ted. But maybe just to set the stage, a couple of points that are now working into our rearview mirror is leading up to this, you look at just the unprecedented confluence of abnormal factors that came together to lead to this inventory spike, driven by the COVID supply chain issues, the plant strike at CNH, which led to record long lead times. In my nearly two dozen years of doing this, those were the most unpredictable order boards we've seen in the past 18 months or more. So now we have much clearer order boards and shorter lead times. And secondly, we have not placed an order for inventory stock in over six months. However, we have been facing the end of last year and all throughout this year is finished working through those orders that, in many cases, were placed back in 2022. We are now just starting to receive the last of those orders. So now we can actually start to plan the business accordingly. The task at hand is very clear now as we just have to work through what we've got, and we don't have any of these old orders, if you will, that were placed before things started changing coming in to deal with and work through.

Yes. And then maybe a little bit more color. So as I talked about in the opening comments, we're at about $1.3 billion in total equipment inventory. Roughly speaking, call it $900 million would be a good targeted level. That would assume about a 2.5 times turn on the domestic side, and then there's some regional differences in terms of how that shakes out. So call that about a $400 million difference. As we look through the rest of the year, we are working towards executing on and achieving close to a $100 million decrease for the year, leaving about $300 million to go. We'll have to provide more commentary at the end of the year in terms of what next year really looks like. The idea is to be able to get to those target levels by the end of next fiscal year, and I think that's a good base point for us. Just as a comparison, looking back at the last downturn in FY 2014, by the end of FY 2014, when we got to FY 2016, we drove an inventory reduction of about $350 million, which was about $50 million less than we're talking about here. So what we're talking about doing is being more proactive, right, in driving that $50 million incremental change over an 18-month period instead of a 24-month period. So it's something that we've done in the past since we know the playbook to execute, and that's the guidance I would give you today, and we'll certainly provide more color on that as we progress through this year and then as we set the stage for next year.

Okay. And I’ll just skip my last question. It’s irrelevant. Thanks for the time. Talk to you soon.

Our next question comes from Mig Dobre from Baird. Please proceed.

Good morning. I guess I'd like to maybe just start with a couple of points of clarification about the quarter itself. So two items here. If I'm looking at the margins in rental and other, the gross margin there was quite a bit lower than what we had in the prior year. I'm trying to understand what's happening with that subsegment and how you see that progressing going forward? And also related to the quarter, we've seen a higher level of other expense. I think it's north of $7 million, if I'm not mistaken. I'm kind of curious as to what that line item is specifically and how that plays out in the back half?

Yes. I appreciate the question and the chance to clarify that. The $7 million is essentially, for all intents and purposes, it's the net of the $11.2 million sales leaseback expense, netted against that $3.5 million new market tax credit completion. So that gets you to that $7 million. There shouldn't be a significant amount of activity in that account otherwise, so that's what you're seeing there. From a margin perspective, on the rental and other side, I would say probably similar to what you've seen elsewhere, rental fleet utilization is certainly down for us this year. It's something that we're focused on in managing fleet size. We would expect that to persist through the back half of this year. Again, we're doing similar efforts that others in the industry are implementing. We'll probably work to manage the fleet down somewhat as we finish developing our outlook as we get into next year as well.

And why is it that your utilization is down in rental? Can you remind me if you've experienced a significant increase in fleet? Or are there other factors here?

Our fleet is basically flat. So it's purely a function of the physical utilization, Mig. This ties directly to the softening in the construction industry, the softening in residential and warehouse in other areas that especially our rental business really plays in. The good news about the rental sector for us is that it can be a very high-margin business and very much a function of utilization. So a slight dip in utilization can lead to a pretty significant swing in margin and vice versa. We need to keep pushing and get the machines out there working on the job sites. That's what you'll typically see when there is a softening. Our contractor customers have their core fleets, and when things swing up quickly or there is a stronger economy, that's when they really rent. As things soften, they pull back and use their core fleets. I think you're seeing some similar swings with some competitors in the market.

I think Bryan covered that comprehensively. But underlying that, rental is largely a construction business. Our rental fleet size is about $80 million, and it's pretty much flat.

Very helpful. Maybe going back to the equipment inventory discussion. I appreciate the color in terms of how you see progression down $100 million in the back half and then more work to do in fiscal 2026. I'm sort of curious why we're only seeing a $100 million of inventory decline here. Can you help me understand what's going on with the shipments that you're getting from the OEM in the back half of this year? Related to this, the margin compression, as you talked about, is pretty notable on a relatively small inventory decline. What is it that you actually have to do to generate this inventory decline in the back half of fiscal 2025?

Yes. In terms of how this plays out, at the beginning of the year, we talked about the orders that we had placed going back in time. Bryan mentioned the extension and subsequent compression of lead times. Inventory increases in Q1 and Q2, and then we start to see inventory decrease in the back half of the year, as we projected. The first half of the year played out as we expected despite the revenue miss. In the back half of the year, we're going to finish receiving kind of the rest of the orders that were previously placed. You will now see a tail-off. What we'll be doing is selling through the new equipment that we received in the first half of the year and Q3, much of which is presold. Once you sell this new equipment, you get trade-ins. Once you sell that used equipment, you get to some trade-ins. There’s a bit of an effect where we'll see our new whole goods decrease more significantly than the numbers we’re prescribing here, but that will be partially offset by an increase in used equipment, which is typical for us as you move into a downward portion of the cycle. The sales of used will be a larger portion of our equipment mix as we work through that and get everything normalized back to targeted levels. So that's how it's going to play out, and there's a two-stage effect to that. That also answers your question about why you're not seeing a larger decrease in the back half of the year; we would have, had we not, but certainly, our latest guidance has taken quite a bit of sales out of the back half.

I would just add that it's a function of the lead times as well. We are dealing with record long lead times. We also have to work through these orders that are coming in all year since you shut the fascia. We are making progress on this front. Most importantly, we have been pricing the inventory aggressively, and that's also part of our margin modeling. We feel well-positioned to hit our timeline goals. Unfortunately, due to long lead times and legacy orders coming in, it takes longer than we all want.

Given the circumstances of the industry that we already covered, are any of these orders for your inventory? Or do you actually have a customer name associated with each of these orders that you're placing? And again, these are orders that you're placing today for future delivery sometime into fiscal 2026 or whenever?

Yes, very much a customer name. An extremely minimal amount of stock units are for loaner purposes to keep customers going and some demo units, but much less than any other year we have seen. The majority of them are presale customer names. We're not ordering units for stock or display purposes or for walk-in sales. Any stock units we are ordering are extremely limited and very intentional, again, with the purpose of keeping customers going.

We are indeed focused on generating presale activity, which is exactly what we want. We are continuing to place presale orders that have customer names on them and have been throughout the year. The stock side of things has really seen a significant reduction, so we have little to no activity there. All of that kind of comes together, and stock is what you get targeted and adjusted to as we progress through the next 18 months.

Going back to one more thing on your margin question, it is really a function of these orders coming in as we face inventory reduction targets. If you look at our actions, we have been outpacing the industry, which is necessary due to those legacy orders. As we transition into next year, because we haven't placed stock orders and do not have legacy orders coming in, we can now begin to sell in line with the industry and also not face the margin pressure that we currently have from outpacing the market while still working our inventories down further.

Understood. Thank you for taking my questions.

Thank you.

Our next question comes from Ben Klieve from Lake Street Capital Markets. Please proceed.

Thanks for taking my question. A couple from me. First of all, one more on the equipment margin front. You talked about an explicit focus on your inventory control as a contributing factor to margin compression. I'm wondering if you can talk about the range of equipment margins from categories that you are intentionally driving down in the current environment to the high-end categories that are much more balanced from a supply-demand perspective, perhaps on the precision side? Is the range of margins in equipment materially expanding, is the high-end staying firm? Or are you seeing compression really across the board throughout your product line?

It is generally across the board on the equipment. It's a function of which specific product categories are longer where we're being more aggressive to outpace the market. Depending on how quickly we need to reduce those, there is more margin compression in those categories. Your higher cash crop products often have a lower margin percentage, but in terms of higher dollar ticket items, they result in higher overall dollar margins. There are still products that were severely underproduced that are seeing decent margins on some of those product categories. We’re being very prescriptive and examining every product category in each bucket to be more aggressive in certain areas than others, depending on the urgency to outpace the market.

You were asking a little bit on the precision side, and I think we alluded to it. Certainly, automation and continued precision technology are helping drive efficiencies and profitability for farmers. It's a net positive in terms of driving purchasing decisions, and we see good take rates on it. Relative dollars-wise to the whole goods equipment themselves, you don't necessarily see as much of what we're talking about here. But it is indeed a positive factor, and it's something that's going to continue to grow as we progress over the next several years, just like all the OEMs have alluded to.

Very good. Okay. That's very helpful. That's all I have for now.

Thank you.

Our next question comes from Alex Rygiel from B. Riley Securities. Please proceed.

Hi there. Good morning. This is actually Min, on for Alex. Just a couple of quick questions here. First, I know that this will probably come out in the queue, but what was the average rate on your floorplan financing in the quarter?

Yes. It's roughly 7.5% to 7.45%.

Okay. And also just given that you're the largest CNH dealership, do they provide you or have they in the past provided any additional concessions in a down market, like extending the noninterest-bearing time frame? Or just anything there? I know you guys have obviously a strong relationship with them.

Yes. CNH wants to see their dealers healthy and perform through this down cycle. They have helped us with relevant levers such as helping with floorplan interest, extended terms, and partnering together on financing programs, etc.

Ultimately, the big picture is to get inventory sold through and manage production, which is what we are focused on. We're also alluding to providing financing for customers to drive that pull-through.

Excellent. Also, can you just remind us what percentage of your Construction segment revenue comes from non-agriculture-related sales and rentals?

It's just over half.

Okay. And that's obviously the segment where you're still seeing some stability and hopefully some growth kind of going into fiscal 2026 given all the infrastructure spending that hopefully will start at that point?

Yes.

All right. That's it from me. Thank you very much.

Thanks.

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

Hi, guys. This is Matthew Raab on for Steve. Just one question on the P&S business. Thanks for the color on the service growth. Is that just for the second half? Or is that for fiscal year 2025? And then secondly, any outlook for the parts business?

We saw good service growth in the first half of this year as well. So second half is a repeat of what we saw. Importantly, those growth assumptions are more of a same-store basis. Australia obviously adds their own component as well. Everything we've been building on in our customer care strategy is driving an increase in service tax. It's the focus on providing best-in-class customer service and support. It's the people we have in the field, making sure we have the right parts in stock. That's what the company has been working on for years and will continue to pay dividends.

It’s good to see that our competitors have laid out that one of their top three initiatives is on the parts side, especially to increase their fill rates and ensure that the parts are in the right place at the right time. This has been one of the components of our customer care strategy that we have aggressively pursued for several years now, and we are starting to see the rewards from that. Our counterfill percentages are higher than what has been laid out, making us industry-leading there. Our customers are truly seeing the benefits. So, it's starting to pay off; we're earning a reputation for having the right parts on hand, competitive pricing too.

Okay. Thanks, guys.

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

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