TITN - NASDAQ

Greetings. Welcome to Titan Machinery Inc. Third 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Jeff Sonnek of ICR. Thank you. Please go ahead.

Thank you and welcome to Titan Machinery's Third Quarter Fiscal 2025 Earnings Conference Call. On the call today from the company are Bryan Knutson, President and CEO; and Bo Larsen, CFO. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2024, which is also available on Titan's Investor Relations website at ir.titanmachinery.com. In addition, we are providing a supplemental presentation to accompany today's prepared remarks, along with the webcast and replay information, all of which can be found on Titan Investor Relations website within the Events and Presentations section. 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 management's current expectations and involve inherent risks and uncertainties, including those identified in the forward-looking statements section of the earnings release and 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 the 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 their most directly comparable GAAP measures in today's release and supplemental 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, Bryan Knutson. Please go ahead, Brian.

Thank you, Jeff, and good morning to everyone on the call. I'll start today by covering the current market environment, our priorities as we manage through this challenging market cycle and some commentary in each of our operating segments. 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 anticipated, the industry continues to experience softer demand conditions, reflecting the combination of challenging agricultural fundamentals, which include lower net farm income due to the decline in commodity prices across key cash crops, high input costs and the lagging effect from higher interest rates. Our domestic agriculture segment performance was generally in line with our expectations and the weaker demand environment played out as anticipated. We continue to be highly focused on managing our inventory levels downward. We have made some early progress, but we are only just beginning to move the needle and still expect the majority of inventory reductions to be realized as we progress through fiscal 2026. Nonetheless, in the third quarter, we were able to decrease our total inventory by approximately $115 million. This result was achieved through our aggressive strategy geared toward enhanced sales incentives to drive retail demand. As anticipated these proactive measures are compressing our equipment margins in the near-term. And margins could see further compression as we move through the first half of calendar 2025 depending on market conditions and if we see the opportunity to move more quickly toward our targeted equipment inventory levels. However, we believe these actions are critically important to lessen the impact that higher inventory and lower demand has on our financial performance and eventually will accelerate our return to a more normalized margin profile as the industry cycle progresses. Turning to our European operations in which we experienced more challenging conditions in the third quarter than previously anticipated. This is particularly true in Romania where demand continued to weaken due to severe drought conditions, which have reduced some crop yields to the lowest levels in more than a decade. Bulgaria and Ukraine have demonstrated more resilience relative to Romania, but Eastern Europe in general was soft and we continue to monitor these markets closely. In Australia, we experienced well below average rainfall and an early frost event during the critical growing season. This had a negative impact on yields and as a result we anticipate a softening of demand through the fourth quarter relative to our prior expectations. Finally in our Construction business, our performance reflects a more normalized demand environment which was consistent with our expectations. We achieved a 10% same-store sales increase. However, much of that is timing related and we still generally expect our Construction business to finish the year flattish compared to the prior year. Looking further ahead, we remain optimistic on the segment's outlook as the federal infrastructure bill provides healthy support for the industry over the long-term, while near-term support is provided by improved equipment availability and new product introductions from our suppliers. As we navigate the current industry cycle, we believe it is important to highlight several key differences from the last downturn in the mid-2010s that underscore why both the industry and our company are better positioned this time. At the industry level, farmers entered this cycle with considerably healthier fundamentals. Stronger balance sheets following multiple consecutive years of good profitability and increased land values providing some buffer against current headwinds. Additionally, the North American fleet age continues to support replacement purchases and today's precision agriculture solutions are helping farmers achieve higher returns on their operations through greater productivity further supporting equipment investment. It is also encouraging that each of the major manufacturer agricultural manufacturers have been lowering production levels to help right size inventory levels across the industry. At Titan specifically, although we can't control the demand environment, we've made structural improvements that enhance our resilience. Since the last downturn, we have had footprint optimization and other cost out restructuring efforts, centralized inventory control, execute on strategic M&A that helps leverage our scale and drive higher levels of profitable growth. And we've doubled down on our customer care strategy, which has allowed us to build a more robust reoccurring revenue stream through our higher margin parts and service businesses. The fruits of this important initiative can be seen in absorption levels that have increased over time and will continue to improve moving forward. We've also taken earlier and more decisive action on inventory management this cycle, as I covered a few minutes ago. Finally, we are also evaluating a variety of prudent measures as we work through our budgeting process for fiscal 2026 to navigate this industry cycle while continuing to lean into our growth initiatives. In closing, we are encouraged by the early progress we are making with our inventory reduction strategy to reach targeted levels as quickly as possible. We are confident that the structural improvements to our business combined with the decisive actions we are taking position us well to navigate this cycle in a decidedly more efficient manner than in the past. I want to sincerely thank our employees for their dedication to supporting our customers during these more challenging times, as their efforts remain crucial to the success of our customer care strategy and our ability to deliver best-in-class service. With lessons learned from the previous cycle and our now stronger foundation, we are positioned well to deliver significant value to our shareholders over the long-term. 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 third quarter, total revenue was $679.8 million a decrease of 2.1% compared to the prior year period. Underlying this performance was the same-store sales decrease of 10.5%, driven by lower demand for equipment purchases due to the challenging industry conditions that Bryan reviewed. This same-store decline was largely offset by the acquisitions of O'Connors that we completed in October 2023 and Scott Supply in January 2024. Gross profit for the second quarter was $110 million and gross profit margin contracted by 360 basis points year-over-year to 16.3% driven primarily by lower equipment margins resulting from higher levels of inventory across the industries we serve and our proactive initiatives on managing our inventory down to targeted levels. Underlying equipment gross margin percentage for our domestic ag business was 30 basis points below our expectations heading into the quarter with all other segments at or modestly above their respective equipment gross margin expectations. Consistent with the guidance we gave on our second quarter call, the midpoint of our updated guidance contemplates another 50 basis points of compression sequentially in our domestic ag equipment gross margins for the fourth quarter. Operating expenses were $98.8 million for the third quarter of fiscal 2025 compared to $92.1 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. On this note, I'd remind you that our O'Connors acquisition was consolidated into our operations in the fourth quarter last year, which will provide a more consistent year-over-year comparison when we report the upcoming quarter. Floorplan and other interest expense was $14.3 million as compared to $5.5 million for the third quarter of fiscal 2024, reflecting the impact of our higher level of interest bearing inventory including the usage of existing floorplan capacity to finance the O'Connors acquisition. It's also worth noting that the quarter had about $900,000 of incremental interest expense that was previously classified as rent expense and this classification will continue moving forward as it is a direct result of the accounting for the purchase agreement of the 13 leased facilities that was executed and disclosed in the prior quarter. Net income for the third quarter of fiscal 2025 was $1.7 million or $0.07 per diluted share and compares to last year's third quarter net income of $30.2 million or $1.32 per diluted share. Now turning to a brief overview of our segment results for the third quarter. Our agriculture segment realized a sales decrease of 9.3% to $482 million driven by a same-store sales decline of 10.8% in the third quarter. This decrease was partially offset by contributions from our acquisition of Scott Supply in January 2024. Agriculture segment pre-tax income was $1.9 million compared to $35.1 million in the third quarter of the prior year. The year-over-year decrease in profitability reflects the softer retail demand environment due to lower farmer sentiment as well as higher levels of inventory we are actively managing down to targeted levels. In our Construction segment, same-store sales increased 10% to $85.3 million from $77.5 million in the prior year and benefited from some favorable timing of equipment deliveries relative to the back half of the prior fiscal year. Overall, we continue to see 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. While this isn't as acute as what we are experiencing in our Agriculture segment, our inventory reduction strategy is nevertheless weighing on equipment margin in this segment as well. Pre-tax loss for the segment was $0.9 million which compares to pre-tax income of $4.1 million in the third quarter of the prior year. In our Europe segment, sales decreased 26.8% to $62.4 million which included a same-store sales decline of 27.1% and compares to a 7.5% same-store sales decrease in the prior year. This significant divergence exemplifies the severity of the drought conditions that Bryan commented on in addition to the broader softness of the ag industry fundamentals. Pre-tax loss for the segment was $1.2 million which compares to pre-tax income of $5.1 million in the third quarter of fiscal 2024. In our Australia segment, sales were $50.1 million and pre-tax loss was $0.3 million. In addition to weather related impacts, this segment is facing very similar end customer dynamics as those we've discussed today across our enterprise. Now on to our balance sheet and inventory position. We had cash of $23 million and an adjusted debt to tangible net worth ratio of 1.8 as of October 31st, 2024, which is well below our bank covenant of 3.5 times. Regarding inventory, in the third quarter, we managed to reduce our equipment inventory by approximately $101 million sequentially to $1.2 billion, which is a good start and as expected were driven by decreases in our new inventory levels. As for the rest of the year, we anticipate making more progress on inventory reductions, but there are a few offsetting variables as well. We have inventory ordered for Q1 delivery to customers, some of which will be invoiced for before the end of our fiscal year. And as I've discussed previously, our used equipment will grow through the end of the fiscal year as we take trade-ins on our Q4 new equipment deliveries. As I mentioned during our last quarterly update, we anticipate that our inventory reduction will evolve in the coming quarters and shift to a more significant reduction of used equipment as we get into next fiscal year. This dynamic hasn't changed and we are on track to realize more substantial decreases in fiscal 2026 toward our goal of reducing equipment inventory by approximately $400 million from the $1.3 billion peak at the end of the second quarter. With that, I'll finish by reviewing our updated fiscal 2025 full year guidance. Relative to our prior expectations, our revisions are limited to the Europe and Australia segments, which we are lowering our outlook given some of the isolated challenges those markets are facing following previously discussed weather related impacts. For the Europe segment, our updated assumption is for revenue to be down 20% to 25% as compared to down 12% to 17% previously. And for the Australia segment, we expect fiscal 2025 revenue to be in the range of $220 million to $230 million as compared to a range of $230 million to $250 million previously. Each of these segment assumptions reflect the more challenging environments we're facing and cascade down to our revised expectations for fiscal 2025 consolidated adjusted diluted earnings per share. We now expect full year adjusted EPS to be approximately breakeven at the midpoint of our updated range that calls for a loss of $0.25 per share to earnings of $0.25 per share. As a reminder, our adjusted figure excludes the $0.36 non-cash impact of the sale leaseback financing expense recognized in the second quarter. More broadly, our base assumptions remain intact. We continue to expect growth in our service business in the high-single-digit range for the full fiscal year, which speaks to progress with our ongoing customer care strategy. From a gross margin perspective, we remain committed to improving our inventory position, which provides the basis for our consolidated equipment margins to compress further in the fourth quarter. We anticipate equipment margin compression will persist through fiscal 2026 as we work through our inventory reduction initiatives and we will provide more guidance on what to expect for next year on our fourth quarter earnings call in March. While our focus on inventory reduction is impacting short-term performance, we believe our aggressive approach to managing inventory will help accelerate our return to normalized profitability levels. Regarding operating expenses, given the revised sales expectations, our guidance implies full year operating expense to be about 14.6% of sales. Our assumption for other income expense, which includes floorplan interest expense, other interest expense and interest and other income and expense remains consistent with prior guidance and we expect to finish the year at approximately $53 leaseback of expense. It will take a more substantial decrease in inventory as we progress through next fiscal year before we begin to see more normalized levels of floorplan interest expense. The third quarter confirmed many of our forecast assumptions in terms of market conditions and what it takes to reduce inventory levels in a softer retail demand environment. We remain convinced in our approach through this down cycle, which prioritizes these inventory reduction initiatives, while driving growth with our customer care strategy and that is what we are focused on delivering. This concludes our prepared comments. Operator, we are now ready for the question-and-answer session of our call.

Thank you. [Operator Instructions] Our first question is from Alex Rygiel with B. Riley Securities. Please proceed.

Thank you and good morning, gentlemen. Couple of quick questions here. Have you seen farmer sentiment change post the election in early November?

Good morning, Alex. Yeah, I think, just primarily with any election just the certainty around it being completed now regardless of who the winner is, has provided more certainty for them and allowed them to plan their business better. So improvement around that quite a bit of uncertainty around what will happen with tariffs. So we'll be watching closely to see how that plays out. Also if you recall back the last time President Trump was in office and there was some retaliatory impacts from the tariffs that hit on the commodity prices and he subsidized in the form of payments to the growers, which really in the end played out quite well for overall for the growers and for the equipment dealers. And so certainly if it played out again that way that would be good. But I think that's the main uncertainty. Also some things our customers have talked about regarding some of the potential tax things associated with Tax Cuts and Jobs Act reinstatement of the 100% bonus depreciation would be the biggest one and they're very much hopeful and looking forward to the reinstatement of that. So overall, Alex, I would say positive sentiment across the generally speaking for our customers.

That's helpful. And then what is your sort of target days of inventory that you're looking for?

Yes. So generally what we're trying to achieve over time is get to about a 2. 5 times turn on our inventory give or take. And certainly that will flux a bit prior to different points in the cycle. But on average across new and used about 2.5 times turn. That's not something that we've achieved and sustained over the long period of time historically. Although in recent years, we've certainly been well above that in the mid-3s. But as we look at the efficiency of our footprint and the centralization of our inventory control, we believe we can continue to drive higher turns than we had historically.

And is that a target you think is in sight in fiscal '26 or does it stretch into '27?

Yeah, I think that just the realities of calculating your turns, if we're starting the year with a big objective on inventory reductions, mathematically, we're not going to get there for turns in FY '26. But the objective when we talk about targeted levels is to end the year such that, that is the type of turns we can achieve in fiscal 2027.

Very helpful. Thank you very much.

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

Thanks for taking my questions. First kind of a follow-up on the kind of farmer sentiment question that you just addressed. I'm wondering if you can elaborate a bit on this dynamic in that. Are you seeing kind of any tangible effects of improved farmer sentiment in the form of like greater foot traffic to your stores? Any kind of early indications of kind of renewed enthusiasm for equipment purchases or is this sentiment more just kind of reflect kind of more seen just in overall tone without any tangible benefits as of yet?

Sure. I think, Ben, looking at near-term and midterm, in the near-term, we definitely are seeing some more positive sentiment or a brief uptick here and an increase in foot traffic as you mentioned. Generally because yields broadly speaking across the US footprint came in better than expected. Again, it wasn't what they call a bin buster or anything, but was better than expected. So if you look at through the growing season, they spent all year planning on lower yields than that, pleasantly surprised. I think it really speaks to the genetics of the seed nowadays. And so that's led to some near-term positivity that we are going after hard here as part of our inventory reduction in Q4. And then as you look a little bit longer term, we still have reduced commodity prices. The increased or elevated input costs are continuing to persist, although easing a bit. Interest rates are still much higher than they were the last 20 years even though there's been a little relief there for them. So a little bit of bright spots there, but again still looking challenging for next year especially as there does not look to be a real increase in commodity prices on the horizon anytime soon. So that is certainly the biggest factor that both us and our growers will be watching. And so that's US based. Europe as we talked about was quite impacted by drought and weather conditions. So sentiment is still tough there. Romania, which is our biggest segment over there has been there have been some government funds now that have been coming into play. We'll continue to watch how that plays out. And then in Australia, not only have they had the drought impact or the drier conditions, but also the frost event there. So that's been quite impacted. They're still in harvest in Australia. So again we'll see how that plays out. But the growing season rainfall in our Western branches ended up being in the bottom 16% of historical years. Our Eastern region fared better. So overall we're looking at what we believe to be below average, slightly below average yields. So again sentiments tougher in Australia and Europe little bit of near term positivity in the US here, but farmers are definitely concerned about next year as well, unless we see something change on the horizon with commodity prices.

Very good. That's helpful. One more for me and I'll jump back in queue. In the prepared remarks, you guys talked about sales incentives that you're pushing pretty hard. I'm wondering if you can somehow kind of break down the year-over-year performance or sequential margin decline some way for just kind of general supply demand versus accelerated movement driven by your initiatives regarding sales?

Yes, that's a good question. It's pretty hard to give you an exact number on that. I mean I think just overall I'll take the opportunity to talk overall on margins here. As we talked about at the end of the second quarter, back half of the year we were forecasting to get in those historical lows in that 2016 and 2017 period. So those are lows that we had seen before and in a different cycle that we said was more challenging not having quite the aggressive posture that we have today. We're in a better cycle relatively speaking and we're wanting to accelerate this. So still getting down to that level. To exactly split how much is the acceleration versus what it would be if we just let this thing play out? I can't give you an exact number on that. I mean certainly it would be higher than this. So we've talked about on and this is domestic ag for you. We've talked about how longer term equipment margins for domestic ag are about 10%. In the third and fourth quarter here, we were talking in the 6% 5% range. If we had healthier inventory levels, probably north of that 7%, but certainly south of the 10% that we would expect on average through a cycle.

Yes I think, Ben, Bo just hit it well there. That's the easiest way to think of it is as he described, look at the delta between our margins right now and our historical average margins and that'll get you close. And then the delta there is primarily attributable to the decrease in used equipment values combined with our acceleration. And as he said, it's quite detailed to dive out exactly, which is from the lower used equipment values and which is due to the acceleration, but those are the main two factors that comprise that delta.

Got you. Yes, no, very good and certainly related, so I understand. Very helpful context. Appreciate you guys taking my questions. Good luck here the rest of your fiscal year. I'll get back in queue.

Thanks, Ben.

Thanks, Ben.

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

Good morning. Thank you. So just a clarification here. In terms of how you think about inventories in the fourth quarter. Should we expect another decline in Q4 or is that all something that's going to happen in fiscal '26? And related to this, when you look at your inventory and the needed reductions, can you comment at all about what's happening in Europe, Australia versus North America? Is this all sort of a North American destock or do you have some work to do in your other geographies as well?

Yes, certainly. To start with by geography, I would say overall Australia is in really good shape, not much work to do there. Certainly, probably a little bit, not a whole lot. From a Europe perspective, we do have some work to do there. Dollars wise, obviously significantly less than on the US side. But in terms of where we are today versus where we want to go, I'd probably prescribe about $70 million there in Europe. The rest of it being on the US side, we obviously made about $100 million decrease. It was all on new and that was all domestic in the third quarter. You asked if we expect to see another decrease in the fourth quarter. Yes, and I do. I was simply stating that there's a couple of moving factors there. We'll certainly continue to see sell through of what we have as we have some presales get invoiced to us by the end of the quarter that will partially offset that and then some growth in used will partially offset that. But we'll see another step in the right direction which will put us a little ahead of where we were prescribing to be as we sat here on our second quarter call and said we'd be down about $100 million. So we'll be incrementally better than that and poised to continue to accelerate this thing as we work through next fiscal year. I guess just in between the new and used mix relatively speaking, right, I mean the US is where the used equipment dynamic exists. We don't do a lot of used equipment sales in Europe. So that would be from a new equipment inventory perspective. So, yes, I think I've answered everything there.

Yes. No, that's very helpful. The dynamics margins, at least to me in the third quarter, your equipment margins were maybe a little bit better than what I anticipated considering the fact that you did take inventories down and we all kind of know the pressure on used equipment prices. Can you put a finer point on margins going forward? Can you hold this, call it, 7% level? Should we think something less than that? And related to this, is there risk that on the used equipment portion of your inventory that we could be seeing some kind of a more significant write down at a point in time in early 2026 fiscal 2026?

Yes. So to start with a little clarity on margins, you had mentioned the 7%. I referenced back to Ben's question. Right now like on print, right, ag domestic ag equipment margins in Q3 were about 5.9% and our midpoint of our guidance implies about 5.4% for the fourth quarter, which is right in line with that 6% to 5% we talked about from those historical lows. As we not providing guidance today, but as we project through FY'26, we were basically trying to say that we expect these similar levels in that 5% range in fiscal '26 perhaps through the full year, we'll finish sharpening our pencils and give you a full outlook on that in March. That potentially could be a little south of that in the first half of the year and north of that in the back half of the year. But directionally speaking kind of in line probably with what we're seeing in the fourth quarter. The difference between how we manage inventory and particularly used inventory today versus the prior cycle kind of gets at the heart of your last question. And we're consistently continuously, I should say, looking at it and revising our equipment on the books down to market pricing. We didn't have that same exact consistent dynamics in the prior cycle and you did see a larger one time write down event. So given the nature of what we're doing here, we've really been seeing that play out through this year and that is reflected in the margins. So we're in a much better position there in terms of where we're at versus market. In terms of continuing to be aggressive and actually trying to get incremental buyers off the sideline, that's where we talk about additional sales incentives and actually even selling below some of that pricing. For us, it's a matter of gauging can we get incremental buyers off the sidelines and at what price point and that determines how much we keep our foot on the gas. Overall, we're going to be in an aggressive position and you'll see these used equipment declines as we progress through next year. But that's how we're thinking about it and a little bit of color on what we would expect for margins next year.

Yes. No, that's great. Thank you for that. I'm also wondering what sort of support or help you're getting from the OEM on both the new and the used equipment side. Whatever you can comment on that, I think would be helpful. Are you mostly, for lack of a better term, on your own in dealing with this problem or are there specific programs that are helping you out especially into fiscal '26 I'm wondering?

Yes. Thank you, Mig. As Deere mentioned on their call helping their dealers through pool funds, CNH is doing the exact same thing. So we certainly get help from them on that side. Just like Deere 2, they're trying to protect their margins as much as they can. They're trying to be prescriptive on putting more dollars towards the specific problem areas and addressing different mix issues. And we're working very hand-in-hand with CNH on the same prescriptive approach. And then internally we're doing that as well. So our margin compression or how aggressive we're getting is Bo talked with our pricing is also relative to byproduct category specific turns in aging and stocking levels and at what pace and how much we're trying to destock. So it's quite prescriptive. We are getting help. I think the last time we talked I mentioned we just we're seeing all the dealers and all the OEMs in a real concerted effort come together this time something like I haven't seen in the last few decades. Much earlier in the cycle, much more aggressively. I'll call it much more professionally. And that's going to ultimately get us all where we need to be faster. So I think that's really healthy. And then just also Deere touched on this too, but you just don't have the lease returns coming back like we had at the previous cycle. And we don't have any of the short-term leases that we had in the previous cycle. So both of those leasing factors are also going to help us get out of this quicker as well. Along with just not having the glut of new equipment sold, we never did have the spike, of course, with the supply chain constraints and so on. So there are a lot of positive factors there and we're just going to keep working with our OEM and we're going to keep staying really aggressively priced here. And as Bo mentioned really look to have our inventory right sized and by next year here and return to more normal margins and as we move into '26.

Got it. Final question for me. Speaking of Deere, they provided their outlook for calendar 2025, I guess, their fiscal 2025. And what was interesting to me in that outlook, they're expecting pretty significant contraction in industry retail demand in North American large ag. I think it was down 30%. Certainly a tougher year in calendar 2025 than what we experienced in calendar 2024. I'm curious as to what your perspective is on that outlook if you're willing to comment. But if that actually comes to pass and Deere is correct in their forecast, is your targeted inventory reduction of $400 million enough to truly get you to the level of stocking that's appropriate for that level of demand? Thank you.

Yes. So they have people smarter than me on that stuff. So generally everything we're looking at, it seems very plausible that what they're talking about and looking at for next year there. You just look at again it's really going to depend on what happens with these commodity prices. And if they don't see some increase here or potentially even go lower than numbers like they're talking certainly look plausible. Also a difference being farmers had a really good year in 2022, one of the most profitable years ever and then 2023 down about 20% from that, but still quite good year. So in '24 here, they've had some of that to fall back on. Again, we had pretty good yields. So we'll also be watching yields in '25, but their cash reserves are depleting a little bit. But at the same time, again, they are getting some relief in input costs, some relief in interest costs. They did have a little bit better yields than expected and the fleet is getting a little bit more aged as we go here. So a lot of factors we'll be watching in '25, Mig. As far as the $400 million reduction, I would keep in mind also the cost of the equipment. So once we reduce down that $400 million you're starting to get to a pretty reasonable amount of actual units on the lots and starting to look at some of those levels that we need just for loaner units and demo units and things. Bo anything else to add?

Yes. I mean from a target perspective, I think as Bryan laid it out that makes a lot of sense. Certainly, we'll continue to look at it, right. And again our overall theme here is that we want to average 2.5 times turns over time. So if that wherever demand is sustaining or is averaging over a couple of year period is where we're trying to guide our inventory levels to. But, yes, if it does dip like that, we'd potentially look at taking even a more aggressive approach on inventory reduction. I guess one thing I'd take the opportunity for, again, we'll provide guidance in March. But assuming that 30% down on high horsepower is a reasonable starting spot, I just wanted to reflect on the reality of our business in P&L. So we got we have new equipment, which perhaps that's a reasonable starting spot. Used equipment, we'll certainly be looking to be driving year-over-year increases as we're seeing those reductions. Our service business is growing. We're expecting to finish the year high-single-digits if not a little bit better than that. And then parts, next year we should be able to get low-single-digit growth. So our P&L and our total revenue would look quite a bit different than that 30%, but that's how like if you're looking at your modeling I'd probably break it into those pieces and just be reflective of what those growth rates should be.

That's very helpful. If I may squeeze one last one on construction. I'm trying to make sense of your comments in terms of the competitive environment here. You obviously had good revenue in the quarter, the margin was soft. So is it used equipment that is dragging that down? Is it new equipment and some pricing erosion or some discounting that has to happen there? Why is this going on in construction? And at what point in time do you think we get to a more normalized cadence and margin in that segment? Thank you.

Yes, so it's from an equipment margin perspective it's multiple factors. We've touched on the fact that the industry saw an increase in inventory levels as did we and we're working that down again not as acute as ag but that's there. There's also a mix, last year we couldn't get our hands on wheel loaders which are higher ticket items, higher ticket items tend to have a little bit lower margin have plenty of those this year. So there's more inventory out there. So dealers are more competitive with that pricing. And then there's a little bit of used inventory to clean up as well. You mix that all together and that's kind of where we're at. Certainly feel good about getting to targeted levels that we want to see through next year. And certainly the margin. So construction margins in Q3 were 10.2%. We're expecting something in the similar level in the Q4. So almost double that of ag, but they're usually quite a bit stronger. I guess my point there is we'd probably expect similar levels as we progress through next year, but maybe as we get toward the end of next year, we're getting to those target levels a little bit quicker on the CE side and start to see some return to normalization along with the industry kind of clearing to where everybody's at a healthy spot.

Great. Thank you. Good luck.

Our next question is from Ted Jackson with Northland Securities. Please proceed.

Actually pretty much every question on that list was just asked to the Baird analyst had checked off. So it was pretty funny. The only thing I have left is based on some commentary that you put out, Bo, and that is, you talked about the construction and I haven't seen the breakout in terms of the line items for construction, but that it benefited in the quarter from some equipment deliveries. So my question is, so was the equipment side of construction a tad better than you expected? And then what is the implications of that for the fourth quarter as it relates to equipment sales for construction? Typically, it's a seasonally stronger quarter for you. That's it for me. Thanks.

Yes. No, I appreciate the question and an opportunity to clarify there. I'd say overall in terms of the environment, it's pretty consistent with what we're expecting. What I was trying to get at a bit is essentially the third quarter of this year relative to the split in the back half of last year is stronger. We saw that good amount of growth particularly or specifically on total equipment. We grew 13.5% year-over-year. In order to get back to flattish year-over-year, you're going to see a mid-single-digit decline in the fourth quarter. That's kind of what we're prescribing in the guidance. Again, not because of a dramatic shift or anything in sentiment or activity, but simply because of some of the larger deals pulling in, getting delivered in the third quarter relative to some real strength on some larger deals in the fourth quarter last year causing a bit of that timing. Overall, I'd consider it kind of flattish year-over-year.

Okay. That's it for me. Thanks so much.

I would just add to Mig asked about some of the construction margins and so on. Also as you just look at what's happened with the ABI and so it would be down 18 months, 19 months in a row now and just some of that softening. And recently you have non-res down about 10% with the largest of that being in warehouse down nearly 40% or excuse me in manufacturing and then warehouse down about 10%. And so there are some definitely there's some momentum and some positivity again just with certainty of an election being over. And you see things that are happening in the market of course right now. And so we're certainly hearing some renewed positivity from our contractor customers there and we see stability as we look forward here. And I would say at least flattening or bottoming out of that steady decline that we've had in demand on the C side as we look to next year. So there's less inventory reduction work to do on that side of the house and there's also again a little more some more positive signs on that side of the house as well.

Thanks for the additional color.

You bet.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, thank you for joining us this morning everyone and we look forward to talking to you on your Q4 call. Thank you.