Titan International, Inc. (DE)

Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Third Quarter 2026 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 need assistance during the call, please press star followed by zero on your telephone keypad. On the call today are Paul Reitz, Titans President and CEO, and Tony Eheli, Titans Senior Vice President and CFO. We will begin with a reminder that the results management is about to review were presented in the earnings release issued this morning, along with Titans Form 10-Q, which was also filed with the Securities and Exchange Commission this morning. As a reminder, during this call, management 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 Harbour Statement included in the earnings release attached to the company's Form 8-K filed earlier, as well as the 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 be available soon after the call on Titan's website. I would now like to turn the call over to Paul.

Thanks and good morning. Our third quarter results were solid. Revenue was $454 million and adjusted EBITDA was $28 million, both consistent with our guidance. Delivering with that range despite the prolonged cyclical downturn in our end markets reflects our focus on the factors we can control and the value our one-stop-shop strategy provides to our customers. As we reported in mid-September, we signed a definitive agreement to divest our ITM undercarriage business. This transaction is an important step in our capital allocation and overall strategy as a focused tire and wheel company because it will allow us to reduce debt, invest in core growth initiatives, including M&A. We expect the sale to close in January, subject to customary regulatory and closing conditions. Until then, we are managing ITM to contribute as much as possible to our overall results, even though accounting rules require us to report it as discontinued operations. In particular, we expect ITM to generate positive cash flow during the fourth quarter. Tony will cover the financial details later. ITM has been an important business for Titan, but its products and operating model do not offer the same natural synergies as our wheel and tire businesses, including those we have realized through the recent Carlsar acquisition. After evaluating the strategic fit and the offer presented by USCO, Our board concluded that divesting ITM would better position Titan to grow its wheel and tire businesses organically, pursue potential synergistic acquisitions, and, of course, reduce debt. We believe we can create greater long-term value by directing capital toward our strong position in off-road wheels and tires. In the press release announcing the transaction, we said we intend to use the ITM proceeds to reduce debt while pursuing accretive acquisitions and strategic partnership that expand and tighten capabilities over time. Let me dig into that just a little bit further. We do not have an imminent transaction on the scale of Carl Starr pending. We already hold strong positions in wheels and tires in North America, tires in South America, and wheels in Europe, supported by deep experience in those markets. Our focus is therefore on disciplined opportunities that expand our product footprint Strengthen our customer offering and are accretive through organic investment or selective M&A. I'll give you a recent example, which is the Roderas transaction that we mentioned last year that illustrates that approach. Through that deal, we partnered with the second largest manufacturer of agricultural wheels in Brazil, investing only $4 million for an initial 20% ownership stake, and then committing to acquire the remaining 80% in 2029. with the final enterprise valuation based on the financial performance criteria. I used that Roderas example and our Titan-Yusheng joint venture to demonstrate the kind of opportunities we see ahead. Targeted investments and partnerships that close product gaps, strengthen our market position, and expand our capabilities with disciplined capital commitments. With that being said, let's shift gears and spend some time discussing how we view our businesses strategically going forward. We intend and will continue to report EMC as a reportable segment. During Q3, the segment revenues from continuing operations in EMC accounted for 17% of sales, so that is still a meaningful segment within the broader context of our business. From a product perspective, our remaining EMC business consists of wheels and tires that are used primarily on construction and industrial equipment. Although steel undercarriage is the majority of revenue in that segment, There is still a good range of equipment in that area that we believe has growth potential within our wheels and tires businesses and therefore is still a good accretive business for Titan. Shifting over to the consumer segment, we delivered a solid quarter despite the difficult comparison with last year. End market demand remains pressured by high interest rates and inflation. Common stories, our sizable aftermarket business has been a bright spot because consumers continue to use and maintain existing equipment. even as demand for new equipment remains weak. On the OEM side, though, we have been winning new business with our product innovation and that new business has been coming on both existing and new equipment platforms and that was on full display at the Quip Expo in Louisville last week. You know, those wins are supporting sales in 2026 despite the weaker OEM markets and they will contribute even further to sales gains in 2027. Moving over to the ag sector, we face the strongest headwinds in this quarter of all our segments, driven by many of the same pressures affecting consumer. Although ag has a sizable aftermarket business, our OEM sales represent a larger share of that segment's revenue, therefore resulting in a year-over-year decline for this quarter. Buyers remain on the sidelines this quarter. Even as many industry participants view 2026 as a potential floor, I think we agree with that comment and we looked at 2027 with cautious optimism. We believe the conditions for recovery are developing and that Titan would see demand rebound quickly when customers begin investing again. The grain prices have improved from a year ago. That's a definite positive. And there are reports that farmers may use less fertilizer because of the remaining high costs of high fertilizer. All else being equal with that being said, lower fertilizer would reduce crop yields and again, help further support crop prices. Along with that, the government has announced continuing support into the sector. So again, we do hold that position that this is a floor period in 2026 and look to 2027 with cautious optimism. With all that being said as well, that's positive for farmer incomes. enables them to replace aged equipment. Interest rates are always tough to predict. They're changing daily. But you do see an environment where interest rate cuts in a more improved environment for interest rates would be available and appropriate for 2027, and that would also spur demand. In addition to the macro wind shifting to drive demand, we also note that low inventory levels throughout our channels mean that any uptake and demand should flow through to the orders for wheels and tires pretty quickly. As machinery is built, wheels and tires are normally fitted fairly earlier in the process. They allow units to be moved through a plant station to station. So again, Titan would be well positioned to be beneficial, early beneficiary of demand resumption. And again, I want to remind everybody, we don't need the market to return to peak for us to benefit from a market. We need the market to improve, and the volumes and the flow through will help us at the production absorption cost level quite meaningfully. So with that, sum things up. The remainder of this year will remain challenging, but we expect to enter 2027 with optimism for two reasons. First, we expect the ITM sale to close in January. strengthening our balance sheet and positioning us to invest in core growth initiatives. And secondly, as I was just talking about, the conditions for recovery are taking shape and our market position of low channel inventories would allow Titan to respond quickly when demand returns. So with that, I will turn it over to Tony.

Thank you, Paul. Good morning, everyone, and thank you for joining us today. Against the macro backdrop and inclusive of ITN, We delivered solid results with revenue above the midpoint of our guidance range and adjusted EBITDA within our guidance range. The adjusted EBITDA was just below the midpoint of the guidance range due to the delayed receipt of some tariffs. Key figures from the third quarter included sales of $454 million, gross margin of 15%, adjusted EBITDA of $28 million, and Free Cash Flow of $10 million. As Paul noted, following the announced sale of ITM, we are reporting that business has discontinued operations in accordance with applicable accounting requirements. My remarks on the third quarter business performance will therefore focus on continuing operations that is excluding ITM. Turning to segment performance, Our agricultural segment continued to face pressure from elevated financing, oil, and fertilizer costs. Segment sales declined 12% from the prior year period as activity in the U.S. remained subdued and Brazil slowed notably. This impacted fixed cost leverage, together with higher input costs, resulted in segment gross margins of 7.6%. compared with 13.2% in the prior year period. On a positive note, grain prices, particularly corn and soybeans, remain above prior year levels, which could support former income in 2027. Looking specifically to Brazil, we noted last quarter that activity levels were sluggish for several reasons, including uncertainties surrounding the presidential election expected. to significantly affect agricultural policy, along with the higher interest rates there and broader inflationary pressures tied to the Iran war. Inventories also remain elevated following the cautious approach many market participants adopted ahead of the Brazil presidential election, and we expect those inventories will need to clear before demand resumes. Moving on to our consumer segment, I want to first note that last year's third quarter benefited from strong sales due to the impact of U.S. trade policies on tariffs. And I've explained this during the last earnings call. As those policies were implemented in the second quarter of 2025, many market participants focused on drawing down existing lower-cost inventory, thereby suppressing sales temporarily. As that inventory fled, purchasing activity resumed in the third quarter. setting up a difficult comparison this year. As a result, segment sales declined 3% year over year. The gross margin for the quarter expanded to 27.6% and included 3.5 million of net tariff reforms. Excluding those reforms, gross margin improved to 24.7% from 23.4% last year. For EMC, which now represents wheels and tires only, Sales grew 5% to $57 million, driven primarily by growth in our Europe business and complemented by U.S. product sales sourced externally from our strategic suppliers. And this is a growth strategy we had shared in the past. We launched several of these new products this year, and these have been well received by the market and allow us to compete and gain market share in areas in which we previously did not participate. The EMC gross margin for the quarter improved to 7.1% from 6.1% last year. SG&A, including R&D expenses, was $46 million for the quarter, compared with $49 million in the prior year period, primarily due to our continued focus on cost reduction initiatives. As a percentage of sales, expenses were relatively flat at $13.8%. Operating cash flow from continuing operations was $29 million in the third quarter, compared with $19 million in the prior year period. This favorable cash flow performance reflected focused execution by our team to optimize working capital investment. Capital expenditures were $6 million in the third quarter, compared with $8 million in the prior year period. Capital expenditures are $25 million compared with $30 million in the prior year period as we continue to make prudent, measured investments in the business. Tax expense was approximately $200,000 for the quarter, well below the $4 million to $5 million expectation we provided last quarter. And this is primarily due to the classification of ITM as discontinued operations. For the fourth quarter of 2026, We expect tax expense to be similar to the third quarter. Inclusive of ITM, net debt was $406 million at the end of the quarter, down from $430 million at the end of the second quarter. Upon closing the ITM sale, we intend to use a significant portion of the proceeds to further reduce debt. Turning now to our financial guidance, Inclusive of ITM, for the fourth quarter of 2026, we expect revenue of $410 million to $430 million and adjusted EBITDA of break-even to $7 million. This fourth quarter guidance includes ITM's operations forecast of revenue of $115 million to $120 million and adjusted EBITDA of around $10 million. For fiscal year 2026, are revised financial guidance inclusive of ITM's revenue of $1.85 billion to $1.87 billion and adjusted EBITDA of $91 million to $101 million. This full-year guidance includes ITM operations forecast of revenue of $465 million to $470 million and adjusted EBITDA of around $40 million. With respect to additional tariff reforms, we expect approximately $6 million of refunds net. We currently expect to receive the refunds in the fourth quarter, but the timing remains subject to applicable government review and processing procedures. We intend to reinvest the proceeds back into the business with a focus on initiatives that enhance our product offerings and deliver greater value to our customers. Looking ahead, Any improvement in macroeconomic conditions, including lower interest rates and easing input cost pressures, could support a more robust demand environment in 2027. I will now turn it over to the operator for the Q&A session.