Titan Machinery (TITN) Q2 2021 Earnings Call Transcript

Titan Machinery (TITN -0.99%)
Q2 2021 Earnings Call
Aug 27, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Titan Machinery Inc. second-quarter 2021 earnings call. [Operator instructions] I would now like to turn the call over to your host, John Mills with ICR. John, please go ahead.

John Mills -- Investor Relations

Great, thank you. Good morning, ladies and gentlemen, and welcome to the Titan Machinery second-quarter fiscal 2021 earnings conference call. On the call today from the company are David Meyer, chairman and chief executive officer; and Mark Kalvoda, chief financial officer. By now, everyone should have access to the earnings release for the fiscal second quarter ended July 31, 2020, which went out this morning at approximately 6:45 a.m.

Eastern Time. If you have not received the release, it is available on the investor relations page of Titan's website at ir.titanmachinery.com. This call is being webcast, and a replay will be available on the company's website as well. In addition, we are 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 2 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 upon current expectations of management and involve inherent risks and uncertainties, including those identified in the risk factors section of Titan's most recently filed annual report on Form 10-K. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Except as may be required by applicable law, Titan assumes no obligation to update any forward-looking statements that may be made in today's release or call.

Please note that during today's call, we'll discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency 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 financial measures in today's release. The call 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. Go ahead, David.

David Meyer -- Chairman and Chief Executive Officer

Thank you, John. Good morning, everyone. Welcome to our second-quarter fiscal 2021 earnings conference call. On today's call, I will provide a summary of our results and then an overview for each of our business segments.

Mark will then review financial results for the second quarter of fiscal 2021. We are also providing modeling assumptions for the full year as the visibility has improved. If you turn to Slide 3, you will see an overview of our second-quarter financial results. Our second-quarter revenue was $303 million, which is an $11.5 million decrease over the prior-year period.

Adjusted pre-tax income decreased $100,000 to $8.9 million, resulting in an adjusted earnings per diluted share of $0.29. Before my segment overview, I wanted to address a few high-level comments related to COVID-19. As I shared on our Q1 earnings call in May, we took the early COVID-19 guidance, potential risk and, most important, the safety of our employees and customers very seriously. We're very active in employee and customer messaging, education and putting the CDC-recommended safety procedures in place.

Fortunately, our employees stepped up, stayed healthy, and we were able to support our customers through the important spring and summer season. As a result, we were able to deliver on a solid quarter, especially with our domestic ag equipment business. We are in a critical and essential industry as we support the farmers, ranchers and contractors who build and feed the world. On Slide 4 is an overview of our domestic agriculture segment.

Spring planting conditions were ideal across most of our footprint, with the exception of some extremely wet areas within our northern footprint, where farmers elected a preventable plant option in conjunction with their multi-parallel crop insurance. Likewise, the crop development that followed this summer was excellent with record or near-record yield potential across Titan's markets. While there's a lot of optimism for an above average yield potential, there are areas of our footprint that will need additional rainfall to finish the crop. With the potential for high yields and resulting oversupply scenario developing, USDA in its August 12 WASDE report, reflecting crop conditions as of August 1, reported season average price for both corn and soybeans.

As you are probably aware, there was a rare directional windstorm on August 10 that started in Eastern Nebraska, hit Iowa hard, and continued through Wisconsin, Illinois and Indiana. With straight-line winds of over 100 miles per hour, it's estimated over 8 million acres of Iowa corn and approximately 5.6 million acres of Iowa soybeans were impacted. In addition, there was a widespread damage in both farm and commercial grain storage facilities, which could be problematic this close to harvest. USDA will have updated post-storm Iowa data for corn and soybeans in its September 11 crop production report.

President Trump also recently signed a $4 billion disaster declaration for Iowa. Not only do we expect a difficult corn harvest in Iowa with the mangled fields, but there was also substantial damage to equipment from the directional windstorm as wind damage, collapse machine shops, fallen trees took its toll on equipment, which will require either parts and service repairs or total replacement. While application dates are still open for farmers and ranchers to submit applications for the $16 billion USDA Coronavirus Food Assistance Program, CFAP, providing direct payments to farmers and ranchers for drop in prices of commodities and livestock due to coronavirus, early applicants have received a final 20% CFAP payment and current applicants will receive 100% payments upon approval. There are also a number of farmers and ranchers who participate in the Payroll Protection Program, PPP, of the CARES Act.

Farmers are receiving assistance from these federal support programs and are benefiting from today's low interest rate environment, along with reductions in input costs, such as phosphate and nitrogen fertilizer, propane and diesel fuel. As equipment fleets age, we see continued replacement demand for new and late-model used equipment. In addition, the increased aging hours of the current fleet continue to drive our aftermarket parts and service business. Growers are excited about our new Case IH AFS Connect, a New Holland PLM intelligence tractor models with the latest in precision, data and connected technology in these high-performance machines.

As you can see, there are multiple dynamics affecting agriculture, crop yields, commodity prices and our customers' end markets. We continue to provide the equipment, technology and support that enables our customers to maximize yields, productivity, efficiencies and equipment costs due to the life cycles of their fleets. Turning to Slide 5, you'll see an overview of our domestic Construction segment. Construction equipment segment continues to fuel the economic impact of COVID-19 and depressed oil prices.

However, through the operational improvements that our team has been implementing over the last couple of years, we were able to reduce expenses and generate a slight improvement in second-quarter pre-tax income despite the reduction in revenue. Even though we are in a central industry and our construction equipment customers are experiencing a lower interest rate environment, there have been disruptions from COVID-19 due to business closings and state shutdowns. We continue to experience some level of construction activity and stay focused on inventory management, the aftermarket parts and service business and rental. We believe that our recent operational improvements position us well to be profitable in the construction equipment business when the industry returns to normal.

On Slide 6, we have an overview of the international segment, including our markets within the countries of Bulgaria, Germany, Romania, Serbia, and Ukraine. International segment is also being impacted by the disruptions associated with the weather and COVID-19. There are pockets of very dry conditions in the Balkans, Ukraine and Black Sea regions, where the growers are experiencing below average wheat yields. Summer rains were welcome, but were ultimately too late to benefit the important wheat harvest, partially offsetting the impact of wheat -- the precipitation has benefited development of late season roll crops in most of our markets.

As the business model of these developing countries continues to mature, we continue to invest in the parts and service business to support our customers as we grow our part and machine base. Before I turn the call to Mark, I'd like to everyone know we successfully integrated our new ERP dealer management system into our pilot store and are on track for a full domestic implementation next fiscal year. I want to thank all our employees for their efforts in staying safe and supporting our customers during this very challenging COVID-19 crisis, and at the same time, producing some excellent financial results. Now, I'd like to turn the call over to Mark to review our financial results in more detail.

Mark Kalvoda -- Chief Financial Officer

Thanks, David. Turning to Slide 7. We generated total revenue of $303.5 million for the fiscal 2021 second quarter, which was a decrease of 3.7% compared to last year. After a very slow start in May to our second quarter, we saw our revenues pick up in June and July.

Improvements from May were noted in all segments and highlights the month-to-month volatility, given current macroeconomic conditions. Our parts and service business continued to grow in the second quarter, increasing 3.8% and 4.3%, respectively, slightly offsetting the contraction we experienced in our equipment category. The increase in parts and service revenue came from our agriculture segment as this area of our business continued to benefit from an aging customer fleet and recent acquisitions that were not in our prior-year numbers. Our equipment business decreased 5.5% versus prior year, which was largely driven by our international segment and to a lesser extent, our construction equipment segment.

Equipment revenue within our agriculture segment continues to be supported by replacement demand regardless of an overall difficult business environment. Rental and other revenue decreased 21.6% versus prior year due to a smaller rental fleet and lower utilization compared to the prior year. This was driven by difficult construction industry conditions, such as lower oil prices impacting our energy markets and an overall slowdown in the economy due to the pandemic. The dollar utilization of our construction segment rental fleet declined to 22.2% for the current quarter compared to 25.5% in the same period last year.

On Slide 8, our gross profit for the quarter decreased 2.1% to $62.7 million due to the lower equipment and rental sales. However, we realized a 40-basis-point increase in our gross profit margin due to revenue mix, which benefited from the growth in our higher-margin parts and service business. We reduced operating expenses by $1.8 million versus the prior year to $53.1 million for the second quarter of fiscal 2021, which as a percentage of revenue was essentially flat versus the prior year at 17.5%. Despite the additional operational costs associated with our recent acquisitions of Northwood and HorizonWest, which consists of four store locations, operating expenses were more than offset by managed expense reductions in our construction and international segments and various lower operating expenses caused by COVID-19, such as travel and fuel costs.

Floorplan and other interest expense decreased 20.5% to $1.9 million in the second quarter of fiscal 2021 compared to $2.4 million in the same quarter last year. The decrease was due to a lower interest rate environment, as well as a lower interest rate spread under our new five-year amended and restated credit agreement that we finalized in April 2020. In the second quarter of fiscal 2021, our adjusted net income decreased by $300,000 to $6.6 million. The adjusted figure for second-quarter fiscal 2021 excludes $200,000 of adjustments, net of taxes, related to ERP transition costs and Ukraine remeasurement gains resulting from exchange rate changes in Ukraine's currency compared to the U.S.

dollar. This compares to the prior year where we excluded $1.4 million of similar adjustments net of taxes. Our adjusted earnings per diluted share for the quarter was $0.29 compared to $0.31 in the second quarter of last year. The second quarter of fiscal 2021 adjusted EBITDA increased 2.6% to $15.8 million compared to $15.4 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 9, you will see an overview of our segment results for the second quarter of fiscal year 2021. Our agriculture segment revenue increased 2% to $169.1 million, driven by ongoing momentum in parts and service, as well as the addition of the four acquisition stores I previously mentioned. A higher level of parts and service, combined with the relatively flat operating expenses, increased our pre-tax income to $6.8 million compared to $6.2 million in the prior-year three-month period.

Turning to our construction segment. Revenue decreased 7.5% to $77.7 million compared to the prior-year period. The decrease in revenue was primarily the result of lower equipment and rental demand due to macroeconomic challenges and uncertainty, David and I spoke to earlier. Managed expense reductions, including lower interest costs, combined with lower COVID-related expenses, allowed a slight improvement in segment adjusted pre-tax income of $1.4 million compared to $1.3 million in the second quarter of the prior year despite the decrease in revenue.

In the second quarter of fiscal 2021, our International segment revenue decreased 13.1% to $56.7 million. We began seeing the softness in this business late in our first quarter, and it persisted throughout the second quarter. Equipment results drove the overall decrease in this segment while parts and service were more stable, but still down slightly. The lower sales are the result of difficult end market conditions, including the pandemic and lower crop yields in areas of our footprint.

Adjusted pre-tax loss declined to a loss of $600,000 in the second quarter versus income of $400,000 in the prior-year period despite operating and interest expense reduction. Turning to Slide 10. You see our first six-month results. Total revenue increased 3.4% compared to the same period last year.

Year-to-date equipment sales increased 3.1%, parts increased 6.2%, service revenue increased 7.9%, and rental and other revenue decreased 13.4%. A strong first quarter in our ag segment drove the increases in the equipment, parts and service categories of revenue while decreased rental revenue in our construction segment generated the lower results in rental and other. Turning to Slide 11. Our gross profit for the first six months was $121.1 million, a 2.7% increase compared to the same period last year.

Our gross profit margin decreased by 20 basis points year over year to 19.7% for the first six months of fiscal 2021, which was primarily due to lower equipment margins versus prior year. Lower equipment margins occurred in the first quarter of fiscal 2021 and were driven by increased efforts to move used agriculture equipment. Our operating expenses decreased by $1.3 million or 1.2% for the first six months of fiscal 2021 to $106.1 million. As a percentage of revenue, these expenses were 17.3% of revenue compared to 18.1% in the prior year, reflecting the leveraging of slightly lower expenses over increased revenues.

Floorplan and other interest expense decreased $900,000 or 18.1% to $4 million in the first six months due to the interest expense savings resulting from our retirement of the remaining balance of the company's convertible notes, as well as overall lower interest rates on our floor plan payables. Adjusted diluted earnings per share was $0.44 for the first six months of fiscal 2021, compared to $0.33 in the prior-year period. On Slide 12, we provide our segment overview for the six-month period. Overall, our adjusted pre-tax income was $13.8 million for the first six months of fiscal 2021, compared to $9.6 million in the same period last year.

This improvement was a result of a strong performance in our agriculture segment, somewhat offset by lower performance in construction and international as market conditions drove down revenues in those two segments. On Slide 13, we provide an overview of our balance sheet highlights at the end of the second quarter of fiscal 2021. We had cash of $44.5 million as of July 31, 2020. Our equipment inventory at the end of the second quarter was $483 million, a decrease of $33 million from January 31, 2020, reflecting a $24 million decrease in new equipment and a $9 million decrease in used equipment.

Equipment inventory turns were 1.6 versus 1.7 in the prior-year period. I'll provide a little more color on our inventory on the next slide. Our rental fleet assets at the end of the second quarter decreased to $101.9 million, compared to $104.1 million at the end of fiscal 2020. We anticipate further reducing our fleet to around $100 million by the end of fiscal 2021.

As of July 31, 2020, we had $352.2 million of outstanding floor plan payables on $763 million of total floor plan lines of credit. Our adjusted debt to tangible net worth ratio is a healthy 1.2 compared to 1.3 in the prior-year period and is well below 3.5, which is the leverage covenant requirement of our two largest floor plan facilities outside our bank syndicate credit agreement. Turning to Slide 14. The amount of new and used equipment inventories are reflected in the size of the red and blue bars on this slide.

We made additional progress on managing our inventories down in the second quarter with a $33 million reduction versus the beginning of the fiscal year. We are pleased with this reduction since historically, we have increased our inventory levels in the first half of the year. We are sitting in a good position to end the year with decreased inventory levels compared to the end of fiscal 2020 despite our May acquisition and pressure on revenues. The overall quality of our inventory remains healthy.

Currently, 38.3% of our inventory is under noninterest-bearing terms, which can be seen by the gray bar on the slide. We are satisfied with this level given the current lower levels of equipment stocking. Once procurement levels increase, we should see this noninterest-bearing percentage rise as well. Slide 15 provides an overview of our cash flows from operating activities for the first six months of fiscal 2021.

The GAAP reported cash flow provided by operating activities for the period was $13 million compared to cash used for operating activities of $6.3 million in the fiscal 2020 year-to-date period. As part of our adjusted cash flow provided by operating activities, we include all our equipment inventory financing, including non-manufacturer floor plan activity and adjust our cash flow to reflect the 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 for operating activities was $16.1 million for the 6-month period ended July 31, 2020, compared to cash used for operating activities of $49.3 million for the same period last year. The material change versus the prior year is due to the destocking of equipment inventory in the current fiscal year compared to the stocking of this inventory in the first half of the prior year.

Slide 16 summarizes our modeling assumptions that we are initiating for fiscal 2021, following a temporary suspension of guidance during the first half of this fiscal year due to uncertainty around the COVID-19 pandemic. We believe our modeling assumptions will continue to be impacted by the challenging global economy due to COVID-19, creating a higher degree of uncertainty to these assumptions compared to a normal environment. We are providing revenue growth expectations for full-year fiscal 2021, as follows: agriculture segment revenue segment revenue growth of flat to up 5%. This assumes a deceleration from the first half of fiscal 2021 and as our first-quarter results were unusually strong, up 26% due to delayed customer purchases from the prior year.

Additionally, please remember to account for a full-year contribution from our recently acquired Northwood, North Dakota location, which closed in October 2019, as well as the HorizonWest acquisition that closed in May 2020. Both of these businesses had revenues of approximately $25 million in their most recently completed full fiscal year. In the construction segment, we are assuming revenues decrease 5 to 10% for the full year. We expect segment revenue to remain challenged through the third quarter, primarily due to pandemic induced macroeconomic weakness and to improve in our fourth quarter.

As you saw in the second quarter, we will continue to mitigate some of our -- some of the pressure from lower revenues through expense reduction efforts. Additionally, a reminder to consider, the January 2020 divestiture of our Albuquerque, New Mexico store, which generated approximately $8.5 million of revenue in fiscal 2020. In the international segment, we are looking for revenues to decrease 10 to 15%. Similar to construction, we continue to expect the third quarter to be more impacted by macroeconomic conditions with some easing occurring in the fourth quarter.

Expense controls are expected to help mitigate pressured revenues to a degree, but this segment has a lower proportion of variable expenses that can be reduced compared to our domestic operations. From an earnings per share perspective, we are expecting adjusted diluted earnings per share to be in the range of $0.65 to $0.85 for fiscal 2021. This excludes approximately $0.10 of anticipated ERP-related expenses that is under way with an expected completion date in the first half of fiscal 2022. We believe that our earnings guidance reflects the realities of the present operating environment, where we expect to see some headwinds on the top line that are being offset by expense reductions.

It is important to stress that these modeling assumptions contain more risks and uncertainties than past outlook estimates due to the pandemic. We noticed a higher amount of variability in our revenues on a month-to-month basis than we have historically realized due to the uncertainties and changing business outlook of our customers during this unprecedented global event. This concludes our prepared remarks. Operator, we are now ready for the question-and-answer session of our call.

Questions & Answers:

Operator

[Operator instructions] Our first question today is coming from Steve Dyer from Craig-Hallum. Your line is now live.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Thanks. Good morning, guys.

Mark Kalvoda -- Chief Financial Officer

Good morning, Steve.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

I guess, we'll start in the ag segment margins there. Equipment margins were exceptionally strong in the quarter. Is that something that you see as sustainable as you sort of draw down inventory throughout the rest of the year, or was there anything sort of unusual there? I guess, what I'm trying to figure out is, what's a good modeling assumption for equipment inventory the rest of the year.

Mark Kalvoda -- Chief Financial Officer

Yeah, Steve, Mark here. As far as the quarter goes, it was a little bit stronger than we had anticipated. As we indicated on the last call, last call it was lower because we did kind of push on some of the used equipment on the agriculture side. But as far as going forward, typically, I think -- recall in the fourth quarter, we had softer equipment margins because of some of the bigger deals that happened at the end of the year and more on the new side and in ag, where we tend to have a little bit smaller equipment margins.

So I think overall, for the year, last year, we ended up around at 10 7. We're probably just a little bit south of that for the full year, is what we're looking at. So, kind of that mid-10s.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. And then, the parts and service business seems to have a little bit of sustained kind of momentum and strength here. Is there anything structurally that you guys are doing to drive that? Is there -- I mean, or is that just sort of age of the fleet or timing? Maybe help me understand if that's something we should expect to continue.

David Meyer -- Chairman and Chief Executive Officer

Yeah. Steve, it's definitely as we get this aged fleet, I think as you recall too, we've had some pretty challenging fall seasons, harvest seasons, into the December, even into the first quarter, where they're all combined in corn, there is snow in the mud and the ice, and I think that's helped drive that business. But I think it was an overall strategy of a company. I think from -- I mean, how we can improve the customer care.

Our customers also drive that high-margin parts and service business, I think, is an overall strategy. And so we've got a lot of internal initiatives going on to continue to drive that business.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

OK. And then, just last for me, as you kind of look forward, how do you sort of think about M&A, I guess, particularly within ag? Are you feeling like the disruption is causing more opportunities, or what's sort of your approach there right now?

David Meyer -- Chairman and Chief Executive Officer

Well, I think there's a little bit of a pause out there, Steve. I know a lot of my dealer principal friends and stuff, I think they all apply it for. We see running out of the payroll protection plan, the PPP, I think working through some of that and just some of the less travel and social distancing and some of that, so I think they're definitely out there. You've got an aged dealer principal group, the sophistication of equipment.

Many of these groups are looking for succession solutions. So yes, we're definitely engaged. We're talking to a number of people. But like I say, I think they have to kind of work through some of this PPP stuff and get through that and get through this year, and we're definitely, like I say, engaged with a number of potential sellers out there.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

OK. Got it. That's it for me. Thanks, guys.

Operator

Thank you. Our next question today is coming from Rick Nelson from Stephens. Your line is now live.

Rick Nelson -- Stephens Inc. -- Analyst

Hey. Good morning, guys.

Mark Kalvoda -- Chief Financial Officer

Good morning, Rick.

Rick Nelson -- Stephens Inc. -- Analyst

So for guidance, what is your plan looking at third quarter and fourth quarter, it seems like it's relatively flat with last year from the midpoint. If you could speak to that. And any seasonal factors that we should be thinking about as we look at third quarter and fourth-quarter estimates?

Mark Kalvoda -- Chief Financial Officer

Yeah. I think to kind of break it out, looking at the seasonality of the business. Obviously, Q3 is a seasonally better period. So, we would expect much better results in our third compared to our fourth.

However, when you compare the last year, we do expect -- I think, as we indicated, more pressure from some of this macroeconomic stress that's out there in the third quarter, particularly in our construction and international business. So, when you look at it relative to last year, I think you're going to see more pressure in the third quarter, relative to last year, but obviously, still being third quarter coming in stronger than fourth. So as you kind of look at, call it, the midpoint of our guidance, you're looking at probably closer to a breakeven in that fourth quarter and third quarter kind of being the balance.

Rick Nelson -- Stephens Inc. -- Analyst

Yeah. Got it. OK. That's helpful.

The ERP system you rolled it into a pilot store successfully. If you could discuss your plans for continued rollout in kind of the first half of next year, and you expect completion. But what sort of ramp should we expect in store numbers that come on to the ERP?

David Meyer -- Chairman and Chief Executive Officer

Well, the pilot store was fully integrated in early July. Very successfully, a lot of really good positive comments on some of the efficiencies and the functionality of the system. So, in all, the next steps are to go across our full footprint. It's the data transfers, it's training.

All that. And now, we're starting to work on that. We're sensitive to some of our really busy months. Like, the fourth quarter, I know with a lot of the equipment business, some of the stuff.

So, we're really targeting in that first-quarter time frame over next fiscal year when things are a little bit quieter and it's the off-season and to roll it out. And between now and then, I'm going to say, it's going to be the data transfer, the training, getting everything so we can have a really, really nice successful rollout in that -- early in that fiscal 2022 then.

Rick Nelson -- Stephens Inc. -- Analyst

OK. So, finally, I'd like to ask you about service and parts. Very nice growth. I think you mentioned acquisitions being part of the driver of that growth.

If you could speak to same-store sales, what you're seeing in service and parts and are that still sustainability could you see as we push forward?

Mark Kalvoda -- Chief Financial Officer

I don't have the numbers right in front of me on that, Rick. But overall -- so our parts was up 3.8% for the quarter, service up 4.3%. We did benefit in those numbers from all four of those locations as Northwood wasn't in last year and our HorizonWest wasn't in last year as well. It was pretty much in for the full quarter.

So, I would estimate that it's pretty close to that full amount that came from those acquisitions, so relatively flat overall. With -- from a same-store standpoint on parts and service, with still up in the ag segment on same-store and down a little bit in both international and construction.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks a lot and good luck.

Mark Kalvoda -- Chief Financial Officer

Thanks, Rick.

Operator

Thank you. Our next question today is coming from Mig Dobre from Baird. Your line is now live.

Mig Dobre -- Robert W. Baird -- Analyst

Thank you. Good morning, guys, and well done on the quarter.

Mark Kalvoda -- Chief Financial Officer

Good morning, Mig.

Mig Dobre -- Robert W. Baird -- Analyst

Yeah, good morning. So, I guess my first question, I want to talk a little bit about construction and maybe get a little more of a flavor from you in terms of what's happening from a demand standpoint. And really, I mean, look, your revenue was down 7%. I mean, we all know kind of what's going on out there in terms of the heavy hit that this vertical is taken from COVID? And you obviously have a lot of energy exposure through your customers in the Bakken.

I guess, where I'm going with this, my expectation would have been for a far sharper decline than what you've seen -- than one you've experienced in a quarter. So, can you give us a sense here for kind of what's been helping your business? Is there any onetime items that we need to be aware of? Or, I don't know, anything else that you think is relevant?

Mark Kalvoda -- Chief Financial Officer

Sure, Mig. Yes, I think -- first of all, I think it did surprise us a bit as well, especially as we sat here about three months ago, and saw how our May was coming in, both on the -- across the board in all segments, but construction included. Some of the things that we heard from the field as far as that rebound in June, because it did come back pretty strong in June for us, is that there is just a lot of uncertainty and kind of holding back on purchases. And things opened up then, and there was a bit of a pent-up demand that ended up happening in June, and they executed on some purchases and our sales at the time.

I think when you look at us compared to maybe some of the OEMs that are talking about bigger down numbers, I think we are a little bit more insulated, if you will, in the interior of the country from some of the COVID. Obviously, it's here as well, but in the smaller communities, things aren't probably locked down as much. And then, I also think it's kind of where we're coming from as well. I don't think we were as high as maybe some of those coastal areas that's driving -- that drove some of the positives in recent years for like the OEMs that maybe we didn't see, but I think those are a couple of the big drivers.

Also, ag is a part of our construction store sales as well, and that's been relatively depressed, as well as we're at kind of the bottom of the cycle there. So, going down much further from there isn't and -- there isn't as much stress there as well. So, I think those are some of the things that we think about it and what we've seen in the quarter. And no, no unusual items, no big deals to speak of or anything like that.

Mig Dobre -- Robert W. Baird -- Analyst

Got it. When you're kind of looking at your construction footprint sort of geographically, have you noticed any variances for instance, between your exposure in some of the larger cities versus, like you said, the purely rural community and the demand coming out of there?

Mark Kalvoda -- Chief Financial Officer

Yeah. I think there is some of that. I think we did see in certain pockets in certain larger cities in the interior that we service that -- those were stressed more. Certainly the Bakken, as you mentioned before, was affected more particularly with rental for us.

But yes, I think you get into the smaller communities, where we have some of our construction stores, we didn't see as much pullback.

Mig Dobre -- Robert W. Baird -- Analyst

OK. And in terms of your outlook, down 5 to 10%. I guess I'm wondering what informs your view for the second half? And again, this is construction. What informs your view for the second half of the year? How you sort of came up with this outlook?

Mark Kalvoda -- Chief Financial Officer

First of all, it was difficult, right? And it's -- I'm sure it's not 100% accurate in these times. But as we did look at it, we did expect to see some probably additional pressure in the third quarter. We don't think we're through things here at all. But overall, I think additional pressure in Q3 and that easing in Q4.

And I think it's just a -- yes, go ahead.

Mig Dobre -- Robert W. Baird -- Analyst

No, I was going to say, so in theory, at least, we could be seeing the fourth quarter close to flat year over year, revenue-wise.

Mark Kalvoda -- Chief Financial Officer

Yeah, I think we still have it down a little bit, but yes, close -- getting close to flat year over year.

Mig Dobre -- Robert W. Baird -- Analyst

I see. And then, if I may, one last question, still on construction. I'm looking at your margin at 1.8, right? And you talked about cost management in the quarter. So, I'd love to hear a little bit more about what you've been doing there and how sustainable that might be on a go-forward basis.

Also related to this, I'm wondering how pricing in this vertical is looking for both new equipment and used equipment and what role that might have played in the margin in the quarter?

Mark Kalvoda -- Chief Financial Officer

Yeah. Maybe the first -- the last part first. As far as -- overall, on the construction side, our margins have been, I would say, good, average to good. Except maybe on the rental side, where we're seeing some of that rental fleet utilization go down.

So, that's creating some pressures. Otherwise, the margins are just fine. On new and used on the ag side, they strengthened some from the first quarter. Because of being less aggressive on some of that used that we did in the first quarter.

And international still kind of remains challenged year over year, both first and second quarter because of the conditions over there and everybody trying to kind of move inventory, it's down some. As far as expenses goes on the construction side, so some of the areas that we're really looking at and managing down in what's some level of lower revenues here. Headcount, really looking at headcount, looking at overtime, promotional activity with some of those kind of a lower level of sales out there and just being diligent on those. And then, there are those, kind of what I would call, COVID-related items that are coming down kind of naturally with the lower fuel prices out there.

And then, of course, travel and entertainment with more of a lockdown on some of our travel practices here in Titan. As far as -- some of those could be maintained for a period of time, if revenues come up, all of these are kind of variable, I would say, over time. But I would say there's a little bit of level of structural expense reductions when it comes to some of that headcount at certain locations.

Mig Dobre -- Robert W. Baird -- Analyst

But, Mark, just to be clear here, in terms of the actual equipment pricing, right -- I mean, because if pricing deteriorates, that would have a negative impact on your margin here, I would presume. Is it that equipment pricing in construction, would that be sort of in line? Is it better? Is it worse than what you envisioned earlier in the year. Because the margin itself, I mean, this is probably the best construction margin that you posted in, like, what, almost four years, right? So I'm trying to understand how much of that is what you have done to take out costs versus what's happening with equipment prices in the market? That's what I'm getting at.

Mark Kalvoda -- Chief Financial Officer

Yeah. And I would say most of that is coming through -- so the -- it's in line as far as the equipment pricing is going. What we're seeing thus far is in line pricing. So, we're getting like no enhancement there and where we're saving in the bottom line is on operational expenses, like I talked about and also on like floor plans.

So, with the lower rates out there, with our new credit facility, the lower rates on that. And quite frankly, our inventor is getting more in line on the construction side as well. All of that is helping on the bottom line.

Mig Dobre -- Robert W. Baird -- Analyst

Great. Thank you.

Operator

Thank you. Our final question today is coming from Larry De Maria from William Blair. Your line is now live.

Larry De Maria -- William Blair -- Analyst

Hi. Good morning, everybody. A couple of questions. First, if I heard you guys right, you mentioned the directional as a potential positive.

But are you viewing this now as a net positive for demand of new and used? And are you seeing it already? And do you have anything in the model for that? If you could just parse through what kind of impact you would expect to see from that vertical.

David Meyer -- Chairman and Chief Executive Officer

Well, we're -- Larry, we're still kind of getting through, I mean -- insurance adjusters, there just aren't enough insurance adjusters that have been gone wrong. So, I know some of our shops in Iowa, they're already bringing in tractors and combines to replace hoods, replace cabs, so we're definitely going to see. We haven't factored any of this into our guidance because, typically, our shops are full. We're doing uptime inspections and we're working on equipment anyways.

But I do think there's going to be a big demand, not only to get equipment ready for harvest that has been damaged. But then there is some of the stuff that gets passed up, whatever. And then, as we get into the fourth quarter and the first quarter, and I think it's going to be continuing because there is a lot of damage done out there. But it's really early to tell right now because people are just getting through all this stuff and they're trying to get the insurance adjusters out there to see what they've got.

But I know we've moved some -- there's a pretty good demand going on right now. Our shops are really busy. And we've actually moved some technicians around to handle the workload and stuff. So, it's definitely out there, and it's going to continue for a while.

Larry De Maria -- William Blair -- Analyst

OK. That's good. And then, obviously, you're doing a lot of this in the middle of the pandemic in terms of parts and service and drop spot, I assume, for parts and things like this. And it sounds like you guys did a good job, obviously, by the revenue and bottom line on parts and service.

Did you guys do things very differently in digital connectivity helping? And in other words, I'm trying to understand if the way you guys have done business historically, if that's on the cost of change to using the digital tools, et cetera, because of what's going on. Or if it's going to go back toward business as usual, what's your expectations?

David Meyer -- Chairman and Chief Executive Officer

Well, really Lawrence, there's definitely that traditional piece that's come in to play. But definitely, the digital world and the e-commerce, and we're investing in that and parts drop boxes and some virtual things that we're doing, and when we're doing some of these even before the pandemic. But yes, I think you're going to see those increased trends. We're doing that.

We're investing in that. And I think you're going to see kind of a balance of some continued traditional-type peek room where the farmer comes into the contractors, and our stores have picked up the parts, but then also through the whole networking of the e-commerce and all the digital space is definitely -- that's not going away, and we continue to invest in that.

Larry De Maria -- William Blair -- Analyst

Which could be a net positive for margins, you think, or is it neutral?

David Meyer -- Chairman and Chief Executive Officer

No, I'd say it's going to be pretty neutral. We've got some pretty lean and mean parts departments right now. I don't see being able to displace a lot of people with that. But I can say, you're still going to have a certain amount of traditional, and you still have to receive the parts and ship the parts and inventory the parts and all the inventory management, all those types of things still go with that.

Larry De Maria -- William Blair -- Analyst

OK, David. And the last thing I wanted to ask about was precision ag take rates. How are the take rates trending? What are they taking? And what are the kind of the up charges that you're seeing versus base. So, if you could just parse that out a little bit more.

David Meyer -- Chairman and Chief Executive Officer

Well, if you look at the new machinery, it's becoming pretty much mainstream. Pretty soon, it's going to be like air conditioning, right? It's just going to be standard equipment. So, take rates are -- I think the growers are all seeing the return on investment and also -- yes, the take rates are definitely up. Then in the aftermarket, the retrofitting planners with precision and some of the tools out there that, we're seeing on some of the application of equipment with the insecticides, herbicides and the self-propelled sprayers and some of the things we're getting with the monitors and the seed size and aims command with -- we've got a good partner with not only the equipment we're getting from Case IH New Holland also, raven from that area.

Harvest command -- with our combines, there was a big uptake on that equipment, too. And with the automation that goes at that. So, yes, you're going to see across the board, whether it's the precision on the planners, it's a connected tractors with the AFS Connect and the PLM intelligent tractors from New Holland, yes, the huge take rates on all that technology. And really, that's in addition to replacement demand.

It's the technology that's driving a lot of these equipment purchases. The soil command on our tillage equipment is another one that big take rate on. So yes, we're definitely seeing increases on that, and that's driving a lot of the equipment purchases. And like I say, I think that some of the stuff is going to just start to be standard equipment, Larry.

Larry De Maria -- William Blair -- Analyst

Yeah. That makes sense. And I guess where I'm going with this is it's becoming standard over time, but obviously, it's becoming more expensive. Is that incremental value? Are you capturing any of that, or that goes more toward the OE and you have to capture your extra margin in dollars with parts and service or the higher piece of it.

David Meyer -- Chairman and Chief Executive Officer

I think we're definitely capturing it on the aftermarket and the retrofit side. And I think as we get the expertise with our precision people out there and the relationships and how our -- the growers out there are really leading us to help them through some of this, I think. And as you build these relationships and be able to want to maintain and increase your margins based on this level of sophistication, I think this is going to continue to drive that. Because, like I say, if you can provide that type of relationship and how you can really add to the bottom line of your customers out there and the benefit with this equipment and partnership with the OEMs and stuff, I think, yes, I think it's going to be a real positive for margins going ahead.

Larry De Maria -- William Blair -- Analyst

But more likely on the aftermarket side than on the new side, right?

David Meyer -- Chairman and Chief Executive Officer

Well, that's an immediate. That's increased revenues. And some of these are -- that's big dollars out there. If you're going to retrofit a planer or a precision, you're seeing 30, 40, $50,000 a plant easily out there.

And that tends to be higher-margin business.

Larry De Maria -- William Blair -- Analyst

Got you. Alright, thank you, David and Mark. Good luck.

David Meyer -- Chairman and Chief Executive Officer

Thanks, Larry.

Operator

Thank you. We appreciate our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

David Meyer -- Chairman and Chief Executive Officer

OK. Again, we want to wish all our employees, our customers and suppliers, along with their families, all the best as we work through the challenges of this COVID-19 pandemic. And I want to thank everybody for your interest in Titan Machinery and look forward to updating you on progress on our next call. Have a good day, everyone.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

John Mills -- Investor Relations

David Meyer -- Chairman and Chief Executive Officer

Mark Kalvoda -- Chief Financial Officer

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Rick Nelson -- Stephens Inc. -- Analyst

Mig Dobre -- Robert W. Baird -- Analyst

Larry De Maria -- William Blair -- Analyst

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