April 15, 2018 Vol. 24, Issue 4 • Tariffs are Bad News • Impact of Rate Hikes • Sources of Ag Loans Ranks of Biggest Ag Equipment Dealerships Continue to Swell While there are fewer “big” North American farm equipment dealer- ‘Big’ North American Farm Equipment Dealers — 2011-18 187 188 192 193 189 principals or ownership groups at 184 171 181 this point in 2018 than there were 200 a year ago — 189 vs. 193 — this in 180 160 no way signals a slowdown in deal- 140 er consolidation trends of the past 120 decade. In fact, a quick review of 100 the numbers shows that growth of 80 the “biggest” big dealers continues 60 40 to escalate, while the number of the 20 “smallest” big dealers continues to 0 2017 2018 decline, according to the 2018 edition 2011 2012 2013 2014 2015 2016 The total number of big farm equipment dealers (with 5 or more store locations) declined in of the annual Big Dealer report. 2018 as the biggest dealers acquired other big dealers. Last year at this time there were 70 Ag Equipment Intelligence, in part- dealer groups with 10 or more stores. This year there are 85. nership with the Machinery Advisors Source: Ag Equipment Intelligence, Machinery Advisors Consortium Consortium, has compiled and pub- lished the “Big Dealer” report annually stores and 5-9 stores — held steady store locations, grew steadily over the since 2011. During the period of 2011- during the first 7 years of the study, past 7 years. Starting at 17% in 2011, 18, “big” farm equipment dealerships, but significant shifting has taken place by 2017 it had increased to 21% of which are defined as those organiza- between the 2017 and 2018 studies. the total and stands at 23% in 2018. tions that own and operate 5 or more Generally, the dealer groups with While dealers in the smallest group, farm equipment dealer locations, have 20 or more stores were in the 5-6% 5-9 locations, held at about 75% of grown by more than 11%. But this range between 2011-17 but increased the total through 2013, the following doesn’t accurately reflect what’s really to 8% in 2018. Dealers in the next cat- year its percentage dropped to about happening within the farm machinery egory, 15-19 stores, is where much of 66%, where it stayed until the cur- retail distribution channel. the shifting has taken place. In 2011, rent year. In 2018, the smallest “big” ‘Biggest’ Groups Growing. this group represented only 3% of dealers’ percentage of the total fell to Overall, the percentage of dealers in the total. This grew to 9% in 2017 and about 55% of all big dealers. Clearly, each of the 4 different size categories then jumped to 15% in 2018. it has been dealers in the 15-19 store — 20-plus stores, 15-19 stores, 10-14 The next tier, dealers with 10-14 Continued on page 8 Titan Machinery’s 4Q18 Sees Top and Bottom Line Growth Titan Machinery, one of North for the period were above both the parts dropped 7%, service revenue America’s largest equipment dealer- $315.1 million consensus and Baird’s was down 5% and rental and other ship groups, posted its first strong $318.7 million estimate. revenues improved by 7%. earnings report since sales of farm Overall, the dealership group’s ag One of the most noticeable machinery turned down in 2014. sales increased 2.1% year-over-year, improvements in Titan’s fourth quar- Fourth quarter revenue topped construction equipment sales rose ter was a decrease in floorplan inter- $339 million, up 7% year-over-year. by 5% and international sales grew by est expense, which dropped to $1.4 According to Mig Dobre, analyst 39.4% during the period. Equipment million during the period compared for RW Baird, Titan’s revenue levels sales were up 11%, revenue from Continued on page 2 The contents of this report represent our interpretation and analysis of information generally available to the public or released by responsible individuals in the subject companies, but is not guaranteed as to accuracy or completeness. It does not contain material provided to us in confidence by our clients. Individual companies reported on and analyzed by Lessiter Media, may be clients of this and other Lessiter Media services. This information is not furnished in connection with a sale or offer to sell securities or in connection with the solicitation of an offer to buy securities. Titan Machinery’s 4Q18 Sees Top and Bottom Line Growth...Continued from page 1 to $2.7 million for the same period Titan Machinery 4QFY18 & Full Year Revenue last year. (millions of $) Gross profit for the fourth quarter improved to $52.1 million vs. $48.8 4QFY18 4QFY17 Change FY2018 FY2018 Change million in the same period last year. Total Revenue $339.6 $317.6 +6.9% $1,202.9 $1,213.1 –0.8% The company’s gross profit margin Equipment $252.6 $226.9 +11.3% $804.4 $797.3 +0.9% was relatively flat at 15.3% com- Parts $45.5 $48.7 –6.6% $222.4 $233.8 –4.9% pared to 15.4% in the fourth quar- Service $26.5 $28.0 –5.4% $117.3 $124.1 –5.4% ter of FY2017. Gross profit margin remained relatively flat as the impact Rental & Other $15.0 $14.0 +7.3% $58.9 $57.9 +1.7% of higher equipment margins was Source: Company reports offset by a change in Titan’s gross profit mix, which was the result of U.S. replacement demand is starting market sales. “Parts and service is additional equipment revenue as to manifest, and U.S. combine and where the money is made, an inflex- compared to higher margin parts 4WD tractor volumes are still 50% ion here is around the corner: this and service revenue. below what we would consider nor- business contributed half of the gross Operating expenses were $50.3 mal demand levels.” profit dollars in FY18 with revenues million, or 14.8% of revenue, for the Referencing the ongoing tariff declining for 4 years in a row while fourth quarter of fiscal 2018, com- discussions, Dobre says higher steel the fleet has gotten older. This is pared to $52.2 million, or 16.5% of prices are a headwind for ag and con- unsustainable in our view; once parts revenue, for the fourth quarter last struction OEMs, but Titan “provides and service return to growth mode, year. The company said restructuring exposure to improving end market earnings should accelerate as incre- efforts that were completed in fiscal demand while minimizing risk stem- mental margins are significant,” Dobre 2018 are expected to continue to ming from higher steel costs. They says. (See table below for typical reduce operating expenses on a going will have to push through aftermarket gross margins.) forward basis. OEM price increases, but risk to the Titan Machinery’s outlook for the Segment Results. Ag revenue for dealer in our view is lower than to year ahead calls for a 0-5% improve- the quarter was $205.3 million vs. the manufacturer.” ment in ag equipment, a 3-8% $201.1 million for the same period a Dobre sees the biggest gain for increase for construction and a 0-5% year ago. Revenue from CE sales was Titan coming from improving after- bump in international sales. $85.8 million compared to $81.7 mil- lion last year. International revenue rose to $48.5 million vs. $34.8 in the Average Gross Margins for Ag Equipment fourth quarter of Titan’s fiscal 2018. Parts, Service & Wholegoods Reflecting on Titan’s improved per- formance, David Meyer, chairman Sales of parts and service is where farm equipment dealers achieve their best gross margins as shown in the table below. Many industry experts suggest a 60/40 and CEO, said, “We were well posi- ratio (wholegoods/aftermarket) for dealership sales is the benchmark that machin- tioned to capitalize on the increase ery dealers should shoot for to optimize overall profitability. in ag equipment demand that result- ed from improved grower sentiment Gross Margin Gross Margin Gross Margin Gross Margin because of better than anticipated New Used Parts Service crop yields in our footprint. As a Wholegoods Wholegoods result of our improved inventory 2011 30.3% 65.5% 7.5% 7.4% position, we continue to experience 2012 28.8% 65.0% 7.4% 5.1% increased equipment margins com- pared to the prior year.” 2013 28.6% 64.1% 8.2% 4.2% FY2019 Outlook. Dobre, the 2014 29.9% 61.0% 6.7% 5.1% Baird analyst, anticipates an improv- 2015 29.4% 61.2% 6.8% 2.7% ing scenario for Titan Machinery 2016 30.6% 61.8% 7.2% 1.6% and the ag equipment business gen- 2017 30.2% 60.2% 7.3% 2.5% erally with plenty of room to run. “Commodity prices are still soft, but Source: Western Equipment Dealers Assn. Cost of Doing Business Studies AG EQUIPMENT INTELLIGENCE is published monthly for the sible to the address shown above. U.S., Canada and Mexico farm equipment industry by Lessiter Media, 16655 W. Wisconsin print subscriptions are $699 per year. International print sub- Ave., Brookfield, WI 53005. © 2018 by Lessiter Media. All rights scriptions are $799 per year. Send subscription orders to: Ag reserved. Reproduction in any form of this newsletter content Equipment Intelligence, P.O. Box 1024, Skokie, IL 60076-1024. is strictly forbidden without the prior written consent of the Phone: (800) 277-1570, (847) 513-6059.