Titan International, Inc. (DE)

Ladies and gentlemen, thank you for standing by and welcome to this morning's presentation. I would now like to introduce Todd Shoot, Senior Vice President of Investor Relations and Treasurer at Tyson International. Sir, please go ahead.

Thank you. Good morning and welcome everyone to our first quarter 2020 earnings call. On the call with me today I have Titans President and CEO Paul Reitz and David Martin, Senior Vice President and CFO. I will begin with the reminder that the results we are about to review were presented in the earnings release issued this morning, along with our Form 10-Q, which was also filed with the Securities and Exchange Commission this morning. As a reminder, during this call, we will be discussing certain forward-looking information, including the company's plans and projections for the future that involve risk, uncertainties, and assumptions that could cause our actual results to differ materially from the forward-looking information. Additional information concerning factors that either individually or in the aggregate could cause actual results to differ materially from these forward-looking statements can be found in the Safe Harbor Statement included in today's earnings release attached to the company's Form 8-K, filed earlier today, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the Securities and Exchange Commission. In addition, today's remarks may refer to non-GAAP financial measures The earnings released which accompanies today's call contains financial and other quantitative information to be discussed today as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures. Today's earnings release is available on the company's website within the investor relations section under news and events. Please note today's call is being recorded. A copy of today's call transcript will be made available on our website. I would now like to turn the call over to Paul.

Thank you, Todd. Good morning, everyone. I hope all of you and your families are safe and healthy. and just resolve of Titan and the people at our company in dealing with the many cycles we've seen in our industry and end markets over the past 35 years. 2019 was one of those challenging years in Titan's long history, but we worked hard and believed we were positioned well entering 2020 to see a good earnings rebound driven by our internal actions on what we saw as relatively flat expected sales levels. Needless to say, we now find ourselves in the midst of a pandemic of historic proportions, and much has changed in the two months since our last earnings call. On today's call, we're going to discuss the impact of COVID-19 on our business operations during the first quarter, and then the continuing impact in the Q2, along with the actions that Titan is taking to deal with the crisis. Titan was impacted early on with our undercarriage plant in Shenzhen, China. Our facility experienced an additional shutdown period after the China New Year. It resulted in a few million dollars of lost sales and a little over $500,000 in lost gross profit. We monitored that situation closely. We adapted as required. However, as we all know now, the virus rampantly spread from China and hit central Italy in a major way, where Titan has a total of three undercarriage plants and one wheel plant. Then it moved into Spain, where we also operate a foundry and a casting facility. So as a result of that, the negative impact from the virus in our first quarter expanded, especially within our earth-moving and construction segment, where we saw volumes fall 23% and segment operating income decrease by $12.5 million due to that much lower volume resulting from the crisis and the unabsorbed overhead, along with the additional virus mitigation costs. As the virus spread into North America in early to mid-March, the federal government decreed our manufacturing plants part of the critical infrastructure necessary for agricultural production. I do want to state that Titan is proud of the role that we play in our nation's critical infrastructure. That really pales in comparison to the pride we have with our employees throughout our global operations that have stepped up during this period to keep our plants operating. Since our U.S. plants did not experience a shutdown, we quickly adapted to these circumstances by creating a COVID-19 team consisting of management, operations, and union reps to meet multiple times a day and execute on plans to keep our employees safe without missing our production needs. In the first quarter for North America, we saw our aftermarket business hold up quite well on the tire side. While OEMs for both our tire and wheel businesses were down significantly due to production closures at their plants stemming primarily from the pandemic. The virus was slower to reach our Brazil location, so the biggest impact there in Q1 was really the weakness in the REI. Absent the currency devaluation, our sales in Brazil were flat in the first quarter with improved gross margins. The government stay-at-home decrees related to the virus didn't take effect until early April, which did result in our plant closing for two weeks. I do want to state our team in Sao Paulo worked diligently during that shutdown period, really developing new operating processes, procedures, got the agreement and the buy-in from the union, and as a result we were able to resume operations with nearly 100% attendance. In response to the virus pandemic, Titan has managed our business operations during the first quarter quite successfully, and we really adapted to a changing marketplace quite well. However, overall visibility into demand remains quite limited as OEMs continue to adjust their production schedules. We do have certain customers stating they believe the second half of the year will make up for a good chunk of lost sales, So in light of this view combined with being deemed critical infrastructure in a number of locations that I previously noted, we will keep our plants operational while also adjusting to these fluctuating demand levels. However, we fully understand it's crucial we maintain our skilled employees to ensure that Titan is able to capitalize on these upside opportunities with the pent-up demand that will certainly present themselves later in the year. So to accomplish that balance, we are reducing working hours, eliminating temp staff, shutting down operations as needed, really to ensure that we're matching the cost of our operations with the current demand, and also to protect our efficiencies and our working capital levels. It's obviously a constant juggling act, but again, Titan's been through many of these cycles before, and we are able to react quite quickly to the fluctuations with our staffing levels. The only caveat, as we've mentioned in this call and in the prior call, you run into weaker absorption levels when that happens. While broader OEM demand remained low on a global basis at this time, Farmers are jumping into the fields. They're quite active. Our food supply chains, as we've seen quite heavily on the media, must continue to operate. So we do have good reason to believe that second half demand in the ag sector will strengthen to meet both existing and pent-up demand and also to start looking to build back some inventory levels for 2021. The ultimate impact of the pandemic on our 2020 results is uncertain and will be based on a number of factors regarding the duration of the virus and the impact on our customers' operations and demand. We've recently seen the U.S. Ag Dealer Sentiment Index record its biggest drop on record, but on the flip side, 2020 dealer sales expectations are only down 6%. We expect the pandemic impacts to be more significant in the second quarter, with the second half of the year looking to gain back some of the lost sales seen during the height of the pandemic. As a result, we're looking at 2020 EBITDA levels to be relatively in the range of what our 2019 performance was. Now, with that being said, the challenges and the uncertainty brought on by the COVID-19 global health pandemic and the difficult market conditions for most businesses and industries clearly reinforce the importance of mitigating risk and having a strong supply chain. That's where Titan is clearly a business partner that our customers can win with in the long term. We have an extensive global network that operates on a regional basis near many of our customers' plants. We build good products with strong brands that continue to lead the way in innovation. Thus, we are an excellent solution for our customers as they look to mitigate risk. It's much clearer now to many that risk is an element that has been undervalued as globalization took off, especially in our end markets where we've seen demand be under constraints and supply continue to grow. I recall a professor I had in grad school some 20 plus years ago I'll never forget him preaching in class on a regular basis that the biggest business mistake we will all make in our careers will be to underestimate beta and risk, no matter what we ended up doing as a living or where we worked. Looking back, he was right. I firmly believe Titan is now well positioned to be an excellent solution for our customers as they will certainly seek to reduce risk in their supply chains in the future. We've seen a major trend in all of our lives over the past two months to buying things online. That's not a case in our industry. We still rely on an extensive distribution network. But the point is the same. People are changing their buying behaviors and that will happen in our industry as well. The importance of a solid, less risky supply chain will be increasingly important in our industry. We've all noticed that companies in May have started taking longer shutdowns due to supply chain issues, not just a slowdown in customer demand or other pandemic issues that have impacted demand. Also, as you think beyond OEMs to our tire business where, again, as I stated earlier, we operate through dealers and a distribution network, they are also going to be looking to operate with less inventory to mitigate their risk and their capital costs. And that's putting a premium on tire manufacturers that can get the right tire to the right place at the right time. Think about how much harder that is to do with a supply chain that's some 5,000 miles away. As we've been discussing on prior calls, we've made extensive investments in the 80-20 process to manage our inventory and our production processes. That will and has made us better at having the right inventory available to serve our customers and, once again, mitigate their risks. Let's not forget, through all this noise, I said it on the last call and I'm going to say it again on this one, at the end of the day, Titan builds good products that are important to our customers. Now, there's no question that in the near term, trends in our business will be shaped by the COVID-19 pandemic. The impact of this crisis goes far beyond the financial and operational impacts I just noted. It hits everyone with both personal and societal challenges that are simply unprecedented. As we all know, you learn a lot about people when the rubber hits the road and challenges are all around you. I personally can say I've been impressed with our team. and how they've really risen to these incredible challenges and how we've been able to adapt. In a short timeframe, we've essentially changed how we work and operate to adapt our company to the changing times and most importantly, protect the safety of our people. I would like to extend my sincere appreciation to each and every Titan employee for their determination, their resilience in the midst of this global pandemic that has impacted all of us in our work and our personal lives. Keeping operational during these times comes with great responsibility for both Titan and every employee working hard. We have and will continually strive to ensure the safety of our people while maintaining business continuity. Again, I am proud of our workforce and our leadership team. I want to finish with a couple quick comments on liquidity as David will dive into that deeper later in his comments. In 2019, our actions to protect our balance sheet resulted in working capital improvements of $53 million and non-core asset sales of $31 million. On prior calls, we've noted our ability to generate more than $30 million from non-core transactions and also discussed our underperforming businesses that have the potential to generate additional cash beyond these non-core asset sales. We have been keenly focused on protecting our balance sheet, and the pandemic highlights the critical importance of continuing to do that. I'll leave it there and let David do a thorough update on liquidity later. We know the time will come when mobility and commerce gets back on a path to normalcy. We believe ag will be a key part of that return in the broader economy. Our team is experienced in dealing with volatility and challenges in our end markets and I'm confident that we'll continue to take the needed actions to work through this crisis. I want to close again. was stating my appreciation to the One Titan team and our thousands of employees around the world working every day to manufacture our products.