Titan International, Inc. (DE)

Ladies and gentlemen, the Titan International Inc. Third Quarter 2024 earnings call and webcast will begin shortly with your host, Alan Snyder. We appreciate your patience as we prepare your session today. During the call, we encourage any participants that may have questions to raise them. You can raise a question by pressing star followed by one on your telephone keypad. And to remove yourself from the questioning, it's star followed by two. We will begin shortly. Good morning, ladies and gentlemen, and welcome to the Titan International Inc. third quarter 2024 earnings conference call. At this time, all participants have been placed on listen-only mode, and we will open the floor for comments after the presentation. If you need assistance during the call, please press star followed by zero on your telephone keypad to connect to an operator. It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning and Investor Relations for Titan. Mr. Snyder, the floor is yours.

Thank you, and good morning. I'd like to welcome everyone to Titan's third quarter 2024 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 were presented in the earnings release issued yesterday, along with our Form 10-Q, which was also filed with the Securities 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 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 the reconciliation of the non-GAAP measures to the most comparable GAAP measures. The Q3 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. The value proposition created by our products and our OneTitan operating environment continues to support our third quarter results, which included several bright spots against the backdrop of continued challenging conditions in our end markets. One of the things I really enjoy doing is spending time with customers and end users. I've been doing a lot of that lately. And during these visits, I frequently hear how our innovative products bring solutions to our customers that improve their operations and really differentiate us from the competition. For a number of years now, Titan has been using that valuable interaction with customers and the feedback we get to really propel our future innovations and has provided a strong path, not just for today, but also for the future. I'll talk more about that later, but I want to start off with some context on market conditions. current cyclical ag bottom is really one of the deepest we've seen in many years. Despite the challenges that poses, we really have been able to maintain gross margins well above levels from prior downturns. I think you can look at our assertive management actions and the cost control that we've put in place, along with a balance sheet these days that is much better than it has been in the past. These factors have really enabled us to continue to deliver free cash flow that's above our guided levels. David, of course, will spend more time on that with the financial discussion later. What I want to do now is focus on market conditions as we wrap up 2024 and really provide some insights on key drivers for 2025, really especially focused on the initiatives we're going to pursue to drive growth. You know, despite these challenging end markets, we do see a number of areas of opportunity that we're excited to share our thoughts on. Everybody's favorite topic when you think about anything at the macroeconomic level is next week's presidential election. Obviously, that's a significant event, really as it pertains to trade policy. Like most businesses, as we manage our operations, what we desire most is a policy direction with some clarity. as that will heavily influence both the import and export of many goods, including a lot of what we do related to agriculture products. Once the rules of the game are known, industry participants can and will adjust their business plans accordingly, and we expect that to help underpin improving transparency when it comes to capital equipment demand, and in turn, OEM production plans for 2020-25. In the near term, What we're seeing for the fourth quarter is our normal seasonal low. This year, it's being compounded by the OEMs and the dealers in the markets that continue to slash inventories. The commentary we're hearing from leading OEMs has centered on a desire to enter 2025 with lean inventory in place. Thus, they're able to better match their production with demand. We saw initial round of destocking post-pandemic that we've been talking about. But then what we've also now seen is a second round of destocking that has taken place this year as OEMs and dealers work to get goods off their lots. For Titan, we actually think this is a positive, as it will hopefully mark the end of this second stage of destocking and will then be what we see as the low point of the cycle for us. One thing I really want to be clear with on today's call is we are by no means standing still while this plays out. In our earnings release, I provided several examples of how we are busy working on ways to drive growth for the present and future. We are attacking a variety of opportunities across our business, again, led by our connection to end users, which has developed our highly successful LSW tires, which we have been putting into the marketplace and getting tremendous results for many, many years now. But to date, though, That focus of our LSW marketing and sales programs has been primarily on larger tractors and combines, where we see a lot of opportunity in the future to expand into more of the mid-sized tractors. The bottom line is, and this has been reinforced with our discussions with farmers time and time again, this isn't just me telling you this, is that LSWs continue to meet and exceed their expectations. The fuel savings is one performance that is readily quantifiable And we are seeing field results coming in above the 10% to 15% range that we had predicted. This is a very significant impact for farmers and a strong selling point. On top of the fuel savings, you also get the improved field performance with LSWs being able to handle just about every condition thrown at them. And then, of course, you get one of the most important things to farmers is the reduced soil compaction. So as we increase our efforts to target more of the midsize tractor market, which I want to emphasize is a big market. We're talking about 25,000 tractors roughly on an annual basis. So if you look at that, just tapping into a fraction of that will help move the needle in our sales in EBITDA. Moving away from LSW, another new innovation we're excited for this quarter is our BPO technology. It's a versatile solution as an alternative to TWEA wheels. and can operate machinery at various inflation pressures, even down to zero PSI. We issued a press release on that several weeks ago, highlighting these advantages and where this technology can be used. It has a variety of end-use applications, which really fits well in our consumer segment. We're also working hard to reclaim our presence in the military market. Going back a number of years, Titan was a meaningful supplier of wheels and tires to the U.S. military. So if you take these technologies I just mentioned with LSW and VPO, we're really optimistic about our potential to restore the sales in this channel and become an important contributor for Titan again. We continue to focus on these top line synergies that are stemming from our acquisition of Carlstar earlier this year. Some of these key opportunities include the first Titan branded high-speed trailer tire. It's a category where Carlstar has performed very well, which is their brand in the past. Along with doing that, we're going to be focused on continuing to expand Carl Star products into new geographies that have been opened up since the Titan acquisition earlier this year. But then also taking the new offerings that the Carl Star team being combined with the Titan team has across the entire consumer tire and wheel business. And so, again, really good opportunities for us to grow, not just in our historical ag sector, but in this consumer business as well. An important element of our ability to drive improved results through the historically weak part of the cycle is our aftermarket business. Again, this is something that we've talked about in the past, but I want to highlight the benefits that come from this as we see this strategy really helping offset some of the OEM-centric weakness that we've seen in the marketplace. And we expect this to really be a strong attribute through all phases of the economic cycle. So if you look at it, year to date, inclusive of Carlstar on a pro forma basis, our aftermarket business is down high single digits as compared to a roughly 25% decline in OEM sales. This year, aftermarket sales now account for more than 45% of our total revenue and remain accretive to our overall results. Switching gears and touching briefly now on market conditions, starting with ag, farmer incomes continue to be under pressure. especially in the U.S. At the same time, we are guardedly optimistic that two of the primary headwinds plaguing purchasing activity, the election and interest rates, will abate and calm down as we get into 2025. Recent reports we have seen point to finished goods destocking extending into early 2025. As we talked about earlier, the sooner that reaches the conclusion, it's a positive for Titan and obviously the better for our sales. On a positive note, similar to that comment, we do expect tire and wheel orders to lead production of finished goods at OEMs because of the impact of that destocking. So it's reasonable for us to see some growth resumption before the OEMs would see that. Secondly, we expect our aftermarket business to remain solid as farmers continue to use their equipment. That's going to drive demand for replacement tires. It also bears noting that the equipment fleet also continues to age, and those machines will ultimately need to be replaced. Additionally, population growth, increase in protein consumption, those are things we've talked about many times in the past, that will support an increase in farmland planting acreage on a global basis. Over the long term, we still see the structural demand drivers for us are very much intact. You combine that with our one-stop shop strategy, providing our customers from OEMs to farmers a comprehensive product catalog and solution to the OEMs and aftermarket. In our consumer segment, the aftermarket portion of the business is also seeing better relative demand as compared to the OEMs. Although interest rates have started to come down, they still remain higher than they have for many years. That does put a dampening effect on things like recreational vehicles and riding mowers, other what you would see as consumer-type purchases, and these consumers are being squeezed by the impact of gas and food prices. So again, these discretionary items are naturally going to suffer in that type of environment. So looking ahead, leading off-road equipment OEMs have noted that a series of further interest rate cuts would be a positive demand, as would a further cooling of inflation. Switching over to the last segment, focusing on EMC, Same things we just mentioned, the higher interest rates and higher levels of inventory are primary drivers. In terms of the underlying strength for the EMC market, aside from the impact of destocking, the fundamentals do remain relatively strong in comparison to the other two segments. While construction activity in Europe is fairly stagnant, U.S. non-residential construction continues to grow in 2024. Additionally, within the EMC segment, it is worth pointing out that mining is one key area for growth, especially within the aftermarket channel. Let me kind of start closing off things here, and I'm going to do that by talking about an important initiative underway at Titan, which is to expand our tire and wheel product portfolio via strategic supplier partnerships. Until now, Titan has primarily positioned itself as a manufacturer and supplier of premium, larger-sized products. As we continue to strengthen and expand the one-stop model that we've really brought on from the Carlstar acquisition, we now recognize that many of our customers also buy products in many different size ranges and product categories. Therefore, we are really seeing some good opportunities ahead to leverage our brand, our strong distribution platform, and extend that product base and ultimately command more wallet share. Our ability to identify and partner with top suppliers in more segments of the market will benefit our customers, and of course, in turn, that'll benefit Titan and its shareholders. In summary, although macroeconomic conditions are continuing to be difficult, I'm really proud of the work of the Titan team. It's positioned as well to get through the downturn and not just do it by controlling costs, but set the stage via product development for future growth. So with that, I would now like to turn the call over to David.