Titan International, Inc. (DE)

Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants have been placed under listen-only mode, and we will open the floor for your questions and comments after the presentation. If you should need assistance, please dial star zero, and an operator will assist you. It is now my pleasure to turn the floor over to Todd Shoot, Senior Vice President, Investor Relations, and Treasurer for Titan. Mr. Shoot, the floor is yours, sir.

Thank you Rocco. Good morning and welcome everyone to our fourth quarter 2020 earnings call. On the call with me today we also have Titans President and CEO Paul Reitz and Titans Senior Vice President and Chief Financial Officer David Martin. I will begin with a reminder that the results we are about to review were presented in the earnings release issued this morning along with our form 10-K which has been filed with the Shares and Exchange Commission. 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 within the Safe Harbor Statement included in today's earnings release attached to the company's Form 8K filed earlier today. as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC. In addition, today's remarks may refer to non-GAAP financial measures which are intended to supplement but not be a substitute for the most directly comparable GAAP measures. The earnings release 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, everybody. You know, we're only at March 4th, and this year is already looking like a completely different story compared to 2020. Late in the fourth quarter, we started to see demand trend in a positive direction, and that's really evidence that our Q4 results exceeded expectations. And 2021 has really kept on rolling as we've seen the U.S. Farmer's Sentiment and Farmer's Capital Investment Index levels spike to all-time highs already. The $25 billion in government payments late in 2020 certainly helped move these indexes in a favorable manner, combined with, of course, strong commodity prices with corn hovering around $5.50 and soybeans up above $14 billion. Another significant positive indicator for 2021 is the low levels of inventory that exist in most channels, especially in the dealer networks. Therefore, a market uptick at the retail level should get that additional boost from inventory replenishment. It's definitely great to see ag moving in a positive direction in 2021, and it seems that the market upturn should have some pretty good legs on it as well. Looking back a year ago, I don't think there's many people who thought the coronavirus would turn into a global pandemic that impacted really every country and every facet of society. I do want to take a second and reiterate our Titan team did an excellent job working hard to continue safely operating our businesses during the pandemic, and our 2020 performance positively reflects those efforts of our team around the world. It also demonstrates the strength and resiliency of our people and our products. During times like that, those items really show, and again, it's our people and our products that make Titan unique in our industries. However, I think it's important to go a step further with those comments to give credit for how well Titan remains focused on our imperative We really had at the beginning of the year to improve our financial position. It was clear we didn't enter the pandemic in a position that allowed us much room for error. Our 2020 results clearly illustrate that Titan has strengthened our financial position and we were able to make those improvements while dealing with the onslaught of the challenges from the pandemic. I think the success of that is seen in our 2023 bonds, which have been trading around far in recent months. It also gives us an opportunity to explore the potential of a refinancing. Now let's take a step back and look at the fourth quarter. We finished the year with a significant turnaround, especially in ag, as demand for many of our customers continued to strengthen as the quarter progressed. During the quarter, our adjusted gross margin of 11.8% was the strongest margin achieved over the previous 10 quarters. Also, our adjusted EBITDA over $17 million was our highest since the first quarter of 2019. Along with these gains in financial performance, Our continuing efforts and focus to improve our financial position resulted in a strengthening cash position along with net debt. We delivered our sixth consecutive quarter with positive operating and free cash flow and reached levels of cash and net debt that haven't been achieved since the end of 2017. Now, as we look deeper into the business going forward, the positive trends in ag that we saw in late 2020, especially in North and South America, have only increased during the first couple months of 2021. In North America, the growth in our small ag customer base continues at a rapid pace as we've seen our customers increase orders to address the need to restock inventory on top of their already expected growth this year. Large ag is historically a strength of Titans as our plants and tooling are well equipped to handle the volume and complexity of SKUs related to that business. The signs are forming that suggest large ag is beginning to move in a favorable direction as well. The challenge for us, which is similar to many manufacturers these days, is that coming off the lower production levels of the pandemic, the surge in demand has created a high degree of volatility for our customer base and for Titan as well. We are dealing with the constraints in labor as we are hiring rapidly. We're dealing with raw material issues pretty much all over the map, and we're dealing with logistical challenges that pertain to shifting containers and trucking that have sprung up as of late. Titan has, and I want to make this clear, Titan has a long history of being flexible to adjust to market volatility, and we have the robust production capabilities that can meet the needs of our customers. In order to do that, we are hiring aggressively at all of our ag and wheel and tire plants in the U.S., along with South America, and we will continue to do that throughout this year. However, there is a training curve to onboarding people into our operations. Therefore, we need to hire systematically during the ramp-up process to mitigate our training liability as our positions do require a vigorous training program. The flexibility and scalability in Titan's production base is a core strength, and we do expect to earn a good return on providing this to our customers during the times that we are in and currently entering deeper into. Anyone who has seen our plants, especially our wheel, our tooling for our wheel business, would understand what I'm saying. We are currently in discussions with major OEMs on long-term supply agreements that would be a win-win for both sides in today's changing world. Now, turning over to South America, we've seen the market really jump to life in Q4 and then really proceed to keep on running into 2021. Since we acquired Titan Brazil in 2010, we've consistently invested in large radio ag and OTR capacity that at the time of the acquisition was really only a small part of the portfolio. We've seen the rewards from those investments through the years as we've significantly grown our output in both those areas along with expanding our market share. The reality is that this rapid increase in orders coming off the back of the pandemic means that we do have to allocate our production across our customer base. We will continue to invest in capacity, and we are investing in capacity, I should say, in 2021. And we'll do that through both hiring, but as capital investments as well, as we do believe the favorable volume trends that we are seeing will continue. Looking over at earth moving and construction, The full year 2020 results show a drop in sales driven by the pandemic. But I do want to state that we finished the year with fourth quarter sales really moving in a positive direction. And we continue to see those trends in the first quarter as sales in our undercarriage business have exceeded budget by over double digits. This is really good to see early in 2021 as our thoughts were more for growth to come later in the second half of the year when the pandemic effects on this sector start to fade away and you start to see infrastructure and development spending kick into gear. So the early gains in construction and mining for undercarriage really only point to an even stronger year as it progresses. Now coming back to ag, over the past five to six years, we've been in a softer ag market that has put pressure on our pricing and margins. So these market improvements are really welcome from a pricing perspective for Titan. And when I say pricing, I'm looking at it from three angles. First, recovering your raw material costs. Second, recovering other production-related costs. And then third, pricing leverage. We do have some raw material agreements with key OEMs that automatically modify pricing based upon raw materials. However, I don't think I have found anyone that can recall a time when we've seen steel go from $445 a ton to $1200 in such a short duration and then also be in short supply as well. So the challenge for us is that our raw material agreements don't always protect us in these rapidly changing moments. and we will work to ensure we get raw material cost recovery throughout 2021. Our agreements in North America and Europe typically only pertain to raw material fluctuations, so the next piece of our pricing strategy focuses on the recovery of other production costs related to overtime, shipping, energy, etc. Again, we believe this market provides us an opportunity to attack pricing beyond just raw materials to address areas of production that are also facing cost increases. The third piece of pricing that we look at is related to leverage as demand improves. We certainly feel that Titan produces valuable products and with strong production capabilities that are quite unique in our space. And we believe as the market continues to progressively improve, we should see an opportunity to approach pricing with more leverage than we've seen in recent years. Looking at the market again, the market is really moving in a positive direction. There's no doubt about that. But it has shifted quickly in such a short time period that it is difficult to provide a reasonable full-year 2021 forecast for sales in EBITDA like we've done in prior years. Based on our strong finish in the fourth quarter and what we're seeing already in 2021, we are targeting good growth in sales EBITDA along with margin expansion. We intend and we will remain diligently focused on protecting our balance sheet and realize that cash is going to be needed to fund inventory. As noted in the pricing discussion that I referenced, the market landscape gives us opportunity to do things differently than we have in prior years, and we intend to set production schedules using payment terms as a criteria. Therefore, we'll be looking for customers to adjust their payment terms. So wrapping up here, I just want to conclude once again by thanking Titan's 6,000 people around the world for their continuing hard work During these challenging times and really their determination has enabled us to improve our financial position and performance. And most importantly, support our customers throughout the pandemic and now beyond. These efforts have enabled Titan to be in a really good position for 2021 as the markets are moving in a very positive direction. So with that, I'd like to turn the call over to David.