Titan International, Inc. (DE)

Good morning, ladies and gentlemen, and welcome to the Titan International Incorporated first quarter 2021 earnings conference call. At this time, all participants have been placed in a 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. Please note, this event is being recorded. 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.

Thank you, Betsy. Good morning and welcome everyone to our first quarter 2021 earnings call. On the call with me today, we have Titan's President and CEO, Paul Reitz, and Titan's Senior Vice President and CFO, David Martin. 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 has also been 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 these 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 8-K filed earlier today, as well as our latest Form 10-K and Form 10-Q, all of which have been filed with the SEC. In addition to 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 Thank you for joining us today.

I would now like to turn the call over to Paul. Thank you, Todd. Good morning, everyone. Since our last earnings release in early March, Titan has really continued to move further in a positive direction, which I feel is definitely reflected in our solid first quarter financial results. On a currency-adjusted basis, we had our strongest quarter since the first half of 2018 with our sales up over 18% to $403 million and adjusted EBITDA coming in at $26 million. Along with that, we had a return to profitability this quarter. Those results are all on the high end of our outlook that we had provided for the first quarter. We were also able to leverage that growth into a 450 basis point gain in gross margin to a more reasonable level of 13.2% this period. This is definitely a good start to the year as all of our business units posted sales gains and again, overall this quarter was our best since the first half of 2018. So let's start by taking a look at where this growth came from. The strong recovery that we began to see in ag earlier this year has only accelerated further as our Q1 sales are up over 20% in this segment. The drivers behind the growth in ag do not appear to be short-term duration and are showing increasingly positive signs to support the strength of the market. For example, let's take a look at inventory levels with both new and used equipment, which is clearly a strong indicator of where things are going. The prices in the used market have continued to rise to their highest levels since 2012. This will help keep the new market turning as well with the higher trading values. You also need to combine those facts on inventory with the positive aspect that the large ag fleet age is on the high side in most large grain countries. You take those elements, you combine it with the commodity prices, which has skyrocketed from what were already good levels a couple months ago, where corn was around $5.50, soybeans around $14 already. As concerns have popped up around weather in both North and South America, this has propelled corn now to the $6.50 range and soybeans to $15. Farmers' income and balance sheets were already strong after the 2020 subsidies from the government. So with these higher commodity prices this year, along with land values that are continuing to climb, farmer sentiment should remain at very strong levels. Also, I think these noted positive market trends are being balanced in a good way by the slower production levels and many OEMs, as this helps avoid the euphoria that can run into the ad market, and then that leads to longer-term market distortions that you have to deal with. All of us in this industry have been waiting a long time, a number of years, for this upswing in ag. So it's definitely good to see things off and running in an excellent direction to start 2021. And it does seem that the market upturn we're experiencing should have some legs on it as well. Shifting directions, the ag market is clearly going strong. But we've also seen demand with our earth moving and construction businesses exceed our expectations as we reported sales growth over 20% this quarter with volume gains exceeding 19% in this segment. As we stated before, a large percentage of our EMC sales come from our undercarriage division, ITM. Back in December, we had forecasted a good year of growth for ITM, but we did expect it to be more towards the back half of the year. Therefore, it's been really good to see the order books start the year strong. This has led to solid growth this quarter in construction revenues from both the OEM and aftermarket side of the business. And this has primarily been coming out of Europe and the Far East. Also, as ITM has seen significant sales gains in Latin America, which is coming from the ag segment, as I just discussed previously. As we have noted on prior calls, our ITM business in recent years has increased its diversification across our customers and our channels. Overall, I do want to comment that this is a well-managed business that has adapted well to changing market conditions over the past few years. We have been increasing our undercarriage capacity in China, Spain, and Brazil, where we have continued to see higher utilization levels. and then we already have sufficient capacity throughout other parts of our main production facilities with undercarriage that can support future growth in the marketplace. So turning down to South America and Brazil, Our demand down there has exploded since late last year as the strong ag market conditions in the large grain and sugar countries, obviously Brazil, but also including Argentina. We've also seen good, strong export demand out of our Brazilian plant, which certainly comes with a good margin profile with that. Favorable currency and aging fleet, good farmer income in Brazil. really are supporting what appears to be a strong market that will continue through, all indications are, at least through 2022. I want to note though, when it comes to Titan Brazil, it will require further investment from us in 2021 to meet this expected market growth and really to protect our share of the market. I do want to kind of spend a second here and just reiterate that since we acquired Titan Brazil in 2011, We have consistently been investing and increasing our large radial ag and OTR capacity, which at the time when we made the acquisition was really only a small part of the product portfolio. These investments we've been making over the past decade have already been successful as we've grown our output in ag and OTR. But most importantly, we've expanded our market share. So we expect to continue on a favorable path with these investments that we will continue to make and to tighten Brazil's production capabilities. These days, it doesn't seem like you can turn on CNBC, Wall Street Journal, or any type of financial news without noticing that costs are rising across the spectrum. I noticed even Norm Ruffin railed about it in some of his comments at the Berkshire Annual Meeting this past weekend. We, like everybody else, are experiencing an increase in many costs for our business, including raw materials, with steel now floating around $1,500, which is just crazy to say out loud. The polar vortex that everybody saw had a pretty big significant impact across production plants in parts of the country. For us, that did have an impact on synthetic rubber, nylon fabric, some of the chemicals in our tire business. As a result, we've seen these commodities go up in price. Titan continues to believe that we have the ability to pass through the increase in costs, and we remain committed as a management team to do so. I think our first quarter results also support that our actions are doing that as well. In this current market, we should not be selling products to customers that refuse to take price increases related to raw material costs. I do want to remind folks, however, though, that we do have some contracts that create a lag in timing related to price versus raw material costs that could show up in our results. At this point, though, we have not had to hold any shipments due to pricing disputes. We certainly feel, you know, in the bigger picture, we certainly feel that Titan produces valuable products with strong production capabilities and really make us a valuable partner to our customers, especially in times like this. Therefore, we believe as the market continues to progressively improve, we should see an opportunity to approach pricing with more leverage than what we've had in recent years. Well before the pandemic started, which is hard to think back to after what has gone on over the last 14, 15 months, but in the third quarter of 2019, Titan's management team had outlined both internally and externally our strategic goal to protect our balance sheet, which was really in order to position ourselves to refinance our 2023 bonds. This critical strategic initiative, clearly not as glamorous as developing new products or growing the business, was of the utmost importance to protect our balance sheets and really essence to protect our heartbeat as a company. I can't say enough about how well our management team has responded. David Martin, our CFO, Todd Shoot, our treasurer, we've all done an excellent job over the past 18 months to make consistent progress on improving our balance sheet. We've been highlighting the external markets on that progress throughout 2020. and really excited that based upon these efforts and the improving market conditions last month, we found a good opportunity to approach the market to refinance our 2023 bonds and really our entire executive team, our board are pleased that our efforts resulted with a successful refinance of our $400 million 2023 bonds to a 2028 maturity date. So let me conclude here today by stating Some things about Titan to start with. First, Titan has a long history of being flexible to adjust to market volatility. We have tremendous and robust production capabilities around the world that are designed to meet the needs of our customers. These are definitely difficult times we are currently operating in. I want to give credit to our Titan team that is working hard to adjust to the current surge in demand. and really be in a good position to serve as a long-term business partner to our customers. Our solid first quarter results clearly support their end markets and tighten their moving in a favorable direction. As I noted earlier, there are numerous positive indicators that provide support towards the broader strength of our end markets, especially when you look at ag However, Titan, similar to many companies, is dealing with various supply chain and labor challenges as business ramps up while we're also dealing with some impacts of the pandemic. Titan is world-class in our industry with production and tooling capabilities to handle growth. We intend to be in position to do so as our labor capacity increases. At this point, we are effectively dealing with these challenges, whether it's related to supply chain or labor. And we continue to believe we can effectively manage through these challenges. This year is off to a strong start. Orders are good. Our operations are performing well. And there are positive signs in our end markets. But we feel the range of possible outcomes continues to be too wide to provide guidance today for the remainder of 2021. So with that, I'd now like to turn the call over to David Martin.