Titan International, Inc. (DE)

Good morning, ladies and gentlemen, and welcome to the Titan International Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on 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. It is now my pleasure to turn the floor over to Alan Snyder. Vice President of Financial Planning and Analysis and Investor Relations for Titan. Mr. Snyder, the floor is yours.

Thank you, Lara. Good morning. I'd like to welcome everyone to Titan's second quarter 2023 earnings call. On the call with me today are Paul Reitz, Titan's President and CEO, and David Martin, Titan's Senior Vice President and CFO. I will begin with a reminder that the results we are about to review are presented in the earnings release issued yesterday. along with our Form 10-Q, which was also filed with the Security and Exchange Commission yesterday. 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 risks, 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 the earnings release attached to the company's Form 8-K filed earlier, as well as their 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. The Q2 earnings release is available on the company's website. A replay of this presentation, a copy of today's transcript, and the company's latest quarterly investor presentation will all be available soon after the call on Titan's website. I would now like to turn the call over to Paul.

Thanks, Alan, and good morning, everyone. Our OneTitan team delivered again this quarter with solid performance. I'm really pleased with our Q2 results as we executed effectively to take care of our customers and with that delivered $59 million in adjusted EBITDA. We further strengthened our balance sheet with free cash flow of $49 million in the quarter. This capped off our highest first half free cash flow in more than a decade and pushed our cash balance up to almost $200 million with EBITDA leverage at just one turn. The significantly improved strength of our balance sheet, along with a team delivering solid performance, illustrates that Titan is in a good position for future growth opportunities. Look, we've had a good start to 2023. We've been working our way through the previously communicated inventory impact. It's primarily within our ag customer base, and our guidance that we put out does illustrate we expect to have an overall strong year that will rank as one of titan's best years in our history before diving into that though i want to like to really provide some context around how much we've accomplished as a company over the past four years if you look our strong financial results from 2021 22 and the first half of 23 demonstrate the strength of our one titan core values and how we have operated effectively in challenging times to meet the needs of our customers and along with that, drive strong financial performance. David and I have always believed that the foundation built around Titan's plants, people, products, and our entrepreneurial can-do culture is strong at Titan. But if you look back to 2019, our financial performance and our balance sheet were at a point where significant improvement was critical. At that time, we developed and communicated a strategic plan to shareholders that would drive growth via product development, the divestiture and reorganization of certain business units, and the closure of underperforming plants to improve profitability, while we are also going to address the critical need to fortify our balance sheet. If you now flash forward to today in 2023, we have executed successfully upon these initiatives and we have accomplished much more. So exactly what have we done over the past four or five years? I will start with the accomplishments we have made to strengthen our balance sheet by significantly reducing net debt, managing working capital effectively, and generating strong cash flow. For example, we have reduced our net debt from $433 million at the end of 2019 to $234 million as we sit here today. This came from a solid combination of paying down debt and generating cash growth. That means in three and a half years, we have nearly halved our net debt. Also during that period, we have invested significantly in our plants, products, systems, and people. Since 2019, we have invested over $125 million in product development, plant efficiencies, capacity growth, while also embarking carefully on a global ERP implementation that is well underway. The strength in our balance sheet that we now have in place gives us the opportunity to develop a longer-term strategic plan for future growth and plant enhancements. We are working on that multi-year plan as we speak and are excited about the prospects for our customers and shareholders that will come from it. Another example of what we've accomplished in recent years is the improvement in our working capital management. As a company, we historically were stuck at a level of net working capital around 27% to 28% of sales. At the end of 2019, our working capital had crept up to nearly 30%. Our board put a challenge in front of us to get this down in the 20% range. Our current working capital now sits currently at 22%, and we were actually under 20% for most of last year. Clearly, the Titan team has met the board's challenging goal and along with that has driven improved cash flow to our business. Another example I want to highlight this morning is back in 2018 and 19, David and I told investors we would improve our performance by restructuring and divesting the underperforming businesses that at that time were sending us back about $40 million a year in operating losses. These are never easy processes. They require significant planning, communication, and effort to successfully execute. The Titan team over the past few years has accomplished our restructuring goals and therefore has really improved our financial performance profile. Therefore, going forward, we will be a better positioned company to withstand any cyclical market pressures and maintain a healthy balance sheet during those times. We have illustrated this in our updated IR presentation to help investors understand the benefits this brings to our company and our shareholders. Additionally, and this is really an important one to us, innovation has inherently been part of our entrepreneurial culture and really a core strength of Titan's founder, but it's a skill that requires significant attention and investment to keep strong. Over the past few years, I've been impressed with the amount of organic growth that we have driven at Titan by continually introducing innovative products into the marketplace, such as our market-leading LSW products, the R14, the Agra Edge R1W line, the Supreme line in Brazil, the single piece high speed wheels in Europe, and ITM's trust integrated undercarriage monitoring system, just to name a few. I encourage all of you to go check out our website or YouTube page to see a bunch of our satisfied end users that get to see their equipment perform better because they choose Titan Goodyear or ITM branded products. The bottom line is Titans performance and our customers have benefited from Titans, innovative products through the years. And we intend to continue to do that. So look, the past few years have been transformational for our company in a meaningful and positive way. It's evidence in our financial results over the past 10 quarters, we have delivered over 514 million in adjusted EBITDA along with 260 million of operating cashflow. and $240 million of adjusted net income. The shareholders and bondholders three or four years ago that believed in the potential of a successful transformation of Titan have been well rewarded. Look, these highlights show where Titan has come from, what the team is capable of, and where we are going. Now turning to our 2023 guidance, we clearly have gotten off to a strong start to the year. From a macro perspective, demand in large ag remains strong. This is a major part of our business. The North American large ag segment is on firm ground with solid fundamentals that stem from strong farmer income, low grain stocks, and pent up demand for equipment needed to fill used and new inventory. We have seen North America small ag volumes decrease throughout the year. That is more correlated to interest rates and consumer behavior. But I do want to point out that lower horsepower ag equipment is used significantly in commercial, agriculture, and municipal activities. So demand does not only come from hobby farmers. Therefore, a bounce back in demand in due course is a reasonable expectation. Overall, the European ag market continues to be steady and our business there has performed very well with volume growth that has come from the solid ag market fundamentals along with share gains. We have seen short-term ag demand in Brazil slip from prior year. There's been a lot going on there with uncertainty driven from the election. The government ag support has been going through some question marks here recently, but it does appear to be getting solidified in place going forward. And really just the interest rate environment there. So our Titan Brazil's Q2 and second half demand has decreased due to OEM dealer inventory destocking. along with some tire destocking at the OEM supply chains. And I will really talk about ag inventory more later. Moving over to construction demand, it's really been supported by solid activity in infrastructure, non-residential spending. Our undercarriage business had another strong quarter and overall a tremendous first half. We have seen Brazil construction sales slow down in a manner resembling what we are seeing in ag. As a reminder, though, I want to point out that Titan does produce construction tires in Brazil, but really our main construction related business in Brazil primarily comes from undercarriage. That is an exceptional business that we have there. It's a business that we believe strongly in the long-term prospects and have been investing aggressively into it. So again, we look at what's going on in Brazil with the uncertainty really related more to some local issues there in long-term. the market in Brazil will still be very strong. Earlier this year, we did not issue our guidance as our customers were unable to provide clarity with their forecast due to elevated wheel and tire inventory in their supply chains. We did say we would do that. We would put out guidance mid-year when we felt comfortable that we had our arms around that issue. It does remain a challenging factor in our business operations, but we are seeing our customers take actions to reduce inventory levels. These actions do directly impact our production levels and will continue to do so for the remainder of 23. You'll see that reflected in our second half guidance. I would also like to note that the inventory issue I am referencing is specific to off-road agricultural tires and wheels. So why is that? Look, there are a number of reasons that stem from that are related to our industry and really stem from a fear that an OEM won't have a wheel or tire available to ship on equipment. That's also combined with the fact that the ag tire industry overall has a higher number of SKUs that are required for the varying sizes of equipment and different applications, but they are produced in much smaller production runs than that of an on-road tire. Also, if a customer is waiting on other non-tire or wheel supply chain components, it helps to have wheels or tires on the ag equipment so you can move it around the yard while you wait for those other incoming components. All that adds up to getting ag wheels and tires is a priority for OEMs. And we have heard that repeatedly that Titan has done a better job of getting tires and wheels to customers when compared to the suppliers of other components. Now, another factor has been that retail demand has far exceeded OEM production output. the agriculture sector and that is that as they were experiencing constraints from labor and supply chains that means our OEM customers were sensitive to ensuring they had the correct wheels and tires on hand to ship again I want to remind everybody a agriculture wheel is specific to not just that brand of manufacturer but to that specific line within that manufacturer so it obviously is critical that you have the right wheels and tires on hand once the equipment has finished production. So to sum it all up, OEMs had stockpiled wheels and tires in North and South America in 2022, and they have been unwinding the excess in 23. For example, with the recent results coming out from the large OEMs in Brazil, we are seeing that our shipments to ag OEMs are below their reported sales figures and their expectations for the full year. And our Titan Brazil business has a very high market share. And we are seeing the OEMs being more transparent with us about the situation. And that's really helping us manage our way through it. Based on direct conversations with customers, we believe that inventory reduction process will take to the end of the year. And we are expecting our demand to be more in line with retail demand in 2024. And I want to add on another note that in North America, large ag oems are saying dealer inventories are still below their targeted levels and expected to be that way through the end of 23 and that's going to provide a good starting point for 2024. you know i do want to highlight one area in small lag again you know we are seeing environment where retail sales have slowed while production output got caught up and we've seen dealer inventory in that sector go from a level of about three months to eight to nine months in pretty quick order it's pretty well known that small ag retail demand has slowed in 23 along with that correct inventory correction that is that is underway you know we are seeing that demand have decreased in 23 for small lag and again this is reflected in our our second half guidance that we just issued so I realize there are a lot of moving parts to what I just said. I think it's important to understand it. Some of the specific inventory correction issues that that we are dealing with in our industry. I think it's important that you understand our guidance. But the bottom line is that the macro environment is still strong and 2023 is going to be a really good year for Titan. We expect our revenue to be in the range of 1.85 billion. to 1.9 billion with adjusted EBITDA of 200 to 210 million. And once again, generating strong free cash flow of 110 to 120 million. Clearly, I think a lot of what I said today demonstrates there's fundamental reasons to be positive about Titan as we look towards the future. Our customers in large ag are confident based on market fundamentals and a replacement cycle that's been curtailed by labor and supply chain issues. That has really kept their production volumes at a lower level when you look at prior replacement periods, so kind of taking some of that cyclical volatility out of large ag that we've seen historically. Also, the new and used equipment inventory levels remain below target. The fleet has continued to age out for tractors, and farmer income is still at a nice, high, elevated level. All this bodes well for large ag to continue at a positive pace for the near future. You know, we have a strong customer base in small lag, and I keep referencing that sector. They will work their way through dealer inventory levels, and we are expecting they will perform better next year as those inventory issues are behind them. The earth moving and construction markets see solid support from infrastructure and non-residential projects, along with solid mining capital and operational budgets. You know, these fundamentals form the basis for our 2023 guidance. It reflects another strong year for Titan and really puts us in a strong position as we look to 24. Wrapping things up this morning, our One Titan team has done an exceptional job reaching our stated goals, tackling challenges to serve customers, and really driving improved performance financially. We are confident that the transformational changes we have made to our business, including our strong One Titan culture, will enable us to navigate the dynamic conditions that I highlighted today to once again this year deliver near historic highs and strong results into the future. With that, I'd now like to turn the call over to David.

Hey, thank you, Paul, and good morning, and thank you to everyone joining us today. The results we achieved this quarter are very satisfying in a number of ways. We anticipated the more challenging environment in 2023 with our customers, and we were able to put together a good plan of action surrounding production, inventory control, and cost management. And you see that in the results that we reported yesterday. Now let's hit a few key financial highlights for the second quarter. Net sales were $481 million, and we delivered consistent profitability with an income of $32 million, gap EPS of $0.48, and adjusted EPS of $0.43, and adjusted EBITDA of $59 million. We continued to strengthen the balance sheet, as Paul said earlier, with $49 million of free cash flow, which increased our cash balance to $196 million. Again, as Paul noted, free cash flow for the first half of $61 million was the highest first half performance in more than a decade for the company. Additionally, we maintain our net debt to trailing 12-month EBITDA leverage at one times. It's worth talking about the tax credits we received over the last year in Brazil. We recorded indirect tax credits of another $3 million during the second quarter, and that relates to the indirect tax credits we received for the full year of $32 million. This has also been part of our ability to drive strong cash flow. In both cases, we've excluded it from adjusted EBITDA and adjusted net income. Now let's talk a bit about the performance at the segment level starting with agriculture. Agricultural net sales were $269 million compared to $319 million last year. The decrease was primarily due to overall lower sales volume in North America and Latin America. as a result of the elevated inventory levels with customers, most notably OEMs, as Paul discussed earlier. Also, the decrease in net sales was driven by negative price related to lower steel prices in the market and an unfavorable impact from currency translation. The agricultural segment gross profit for the second quarter was $49 million. This was down from the record last year in the second quarter. It's difficult to replicate in the current environment where excess inventory with our customers in their supply chains has been prevalent. The agricultural gross profit margin was strong at 18.1%. However, the decrease in gross profit and profit margin versus last year is primarily due to lower steel prices and sales volume, which resulted in lower fixed cost leverage. It's important to note that the quarterly operating performance for the segment remains still one of the strongest on record for Titan. Earth moving and construction net sales were $175 million, a decrease of 17% to last year. The decrease in EMC sales was primarily due to lower volume in the Americas, caused by similar high inventory levels at select OEM customers, most notably Brazil. Sales in Europe and other parts of the world for the segment were steady, reflecting continued stronger construction and mining markets. Gross profit in our EMC segment for the second quarter was $29 million, and a gross margin remained strong at 16.7%. The decrease in gross profit dollars compared to last year was primarily due to the lower sales volume, which resulted in a lower fixed cost leverage similar to ag. Again, this quarter's performance was strong considering the pressure on sales in the quarter, and that comes from pricing discipline and cost management, which have been paramount to our financial performance. And our global teams are focused on these initiatives across the business. Consumer segment net sales in Q2 of 37 million were 15% lower to last year, primarily due to lower demand for light utility truck tires in Latin America relative to a strong demand period in Q2 last year. Consumer segment gross profit for the second quarter was 8 million, and our gross profit margin was 21.6% for the second quarter. We were down compared to last year in this segment due to lower sales in the quarter due to the effect of cost leverage across the various production facilities. Remember, consumer sales are generated from the same facilities where we produce ag and EMC products. Overall, this result was still very strong, reflecting improved mix and our growth initiatives in the U.S. surrounding third-party custom rubber mixing. Our SG&A expenses in the second quarter were right under $35 million, which compares favorably to where we were last year. We continue to focus on managing our operating costs and mitigating inflationary cost increases surrounding salaries across the business. Our R&D costs were up a million in the current year versus last year due to increased investments in product development. Our income tax expense for the quarter was $9 million compared to $19 last year due to lower pre-tax income. Our effective rate was relatively stable compared to the prior year at 22.8% compared to 21.6% last year in the second quarter. Now let's move over to the balance sheet and our cash flow. Supportive demand levels and strong performance also translated into continuation of our elevated free cash flow generation in the quarter. Free cash flow in the quarter was 49 million, which was the second strongest quarter of free cash flow that we've had in the past decade. Total cash grew by 32 million to 196.5 million, while we also paid down 10 million of debt and repurchased 6.4 million of common stock during the quarter. We will continue to evaluate any debt payments opportunistically, reflecting judgment as to relative interest rates versus our cash investment rates. We're in a good position relative to debt levels currently. As I stated last quarter, we continue to believe that our share price does not fully reflect the transformative actions we've taken to significantly increase our profitability profile and our capabilities for the future. And we'll continue to our share repurchase program in a similar fashion. As a reminder, we have 50 million authorization from the board. Capital expenditures for Q2 2023 were approximately $16 million compared to $12 million in the prior period. CapEx will support our multi-year capital programs in place to manage maintenance in an organized way to improve efficiencies with the plan.

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