Q2 2020 Titan International Inc Earnings Call
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International Inc. second quarter 2020, <unk> earnings conference call.
That's fine all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
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It is now my pleasure to turn the floor over to talk cute senior Vice President Investor Relations and Treasurer for Titan Mr. Shoot the floor is yours.
Thank you Mariano.
You're welcome everyone to our second quarter 2020 earnings call on the call with me today I have tightens Chairman Maurice Taylor, our President and CEO, Paul Reitz, and David Martin Senior Vice President and see that flow.
I'll begin with the reminder, that the results we were about to review were presented in the earnings release issued this morning, along with our form 10-Q, which was also filed with the Securities <unk> Exchange Commission. This morning as a reminder, during the call we will be discussing certain forward looking information, including the company's plants in projections for the future that involve risks uncertainties and assumption.
That could cause our actual results to differ materially from.
Looking information additional information concerning factors that either individually or in the aggregate could cause actual results could differ materially from these forward looking statements can be found in the safe Harbor statement included in today's earnings release attached to the Companys form 8-K filed earlier today as well as our latest form 10-K and form.
Thank you all of which had been filed with the FCC.
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 todays call contains financial and other quantitative information as discussed today as well as a reconciliation.
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 turn the call over to Paul.
Thank you Todd I hope all of you and your families are state safe and healthy.
Let's start by expressing my appreciation to our global one Titan team for their tremendous efforts and successes during the second quarter I'm going to start today by going through some business updates from the Q2, and then I'll have our chairman more retailers share his thoughts from the board's perspective.
And then we'll follow up and wrap things up would they be going through the financial results.
Made it seemed like an attorney to <unk> are turning to your goal. It's sitting here today, but tighten started dealing heavily with the coburn 19 around five months ago with our plants in Italy in China, and what then May have looked like a 200 yard dashes now clearly turned into a global marathon from Mr. article that we've been heavily focused on the safety of our people well probably certainly are cut.
Drummers ended his day, we continue to do a good job in both of these crucial areas.
Similar to many companies in industrial space as we entered this quarter, we expected to encounter challenges. Unlike anything we've experienced before.
And we most certainly did our sales levels and order flow patterns through were heavily impacted by Colby this quarter as we experienced the revenue decrease of 27%.
But we were able to navigate successfully through this top line volatility to achieve adjusted EBITDA over $13 million.
This exceeded level sequentially from the first quarter 2020 and year over year from the second quarter 2019, most importantly, our second quarter free cash flow exceeded expectations coming in around $7 million and we also increased our cash levels by nearly $20 million from last quarter.
Our gross profit was only down $8 million, which resulted in gross profit margins, increasing the 10.4% from 9.8% last year. We also apply diligent efforts towards controlling corporate costs and were able to reduce as gionee by over 7 million this coupon quarter compared to last year.
Again altogether. This means on 100 million dollar drop in sales, we were able to not only keep EBITDA in the ballpark in 2019, but actually grew at a bit to 13.3 million from 12.8 million last year.
Across all of our business units, we did a really good job in tackling this difficult situation head on and taking swift decisive actions to accomplish what we did this period operationally and also with the balance sheet.
We're still clearly in the midst of a difficult coal that pandemic environment impacted environments.
We all know this this virus has no boundaries no time limits.
Therefore, it's difficult to predict expectations for the second half of this year.
Our customers are providing limited visibility to future orders as they quite simply just don't know exactly what's coming down the pipeline.
As we scan the limited horizon that we have of our businesses. We are seeing nice improvements coming out of Brazil to start Q3 as compared to the activity from the first after the year looking at the European AG market in the early part of the second quarter, we really saw customers in parts of Europe, especially Turkey for example that had forecast.
Huge declines in orders.
And then throughout Q2, we saw these these order decks improve.
Therefore, relatively speaking we feel that Europe is performing better than expected.
It has become fairly stabilized as we entered the second half, but it's still at levels lower than prior year.
In the U.S. sell low horsepower continues to be the headline and lead the charge in North America. This was a good business for US we certainly do benefit from that but large AG, which is a major sweet spot for our wheel division continues to be hampered by soft commodity prices that have trended.
Lower as as of late.
The continuing challenges from farm economics, combined with the uncertainty from the pandemic.
Is weighing on commodity prices it continues to make forecasting.
In North America AG difficult one thing we still do believe in is I think most others do is that pent up demand and large AG.
Remained sidelined for the time being.
But there will come a point, where that pent up demand does get really released into the marketplace.
One point I want to add specific to tighten, though as as large AG suites continued age outs.
This is a very good situation for our Ellis W. solutions that quite simply can provide a significant upgrade to the performance of a 10 year old tractor.
Overall for AG, we expect our normal seasonality impact us in the second half and this is this is due to plant maintenance again normal scheduled plant maintenance.
And then also the holidays that occur in the second half of the year.
And then along with the continued uncertainty from the Oems. So again, the second half of the year is difficult at this time to predict across most of the AG space.
Looking at the Earth, moving construction segment, where our volumes were down 37%, we saw weakness nearly everywhere this quarter, except for road building and our European foundry cast product business.
As much as we like to get more volume and or undercarriage plants, which is primarily earth moving construction driven for US. We just don't believe there's volume out there to chase at this time and we've been holding airline on pricing.
Therefore, we have than we will remain keenly focused on managing costs in this segment.
Along with headcount, while while demand remains depressed in the Earth moving construction segment. This time.
To wrap things up.
Our job it tighten and again it many companies in the industrial space is to keep your company positioned to navigate a volatile.
Cobot induced environment in our end markets. The rest of 2020 is clearly difficult to the bricks with the impacted duration to pandemic.
Remain highly uncertain as well as the potential government actions that would impact the market I think we do all believe their government actions that will come into place that will support the market, but again thats still remains highly uncertain.
So as we sit here today, we continue to see an unusually high level of dropping orders, we must remain nimble flexible to respond to meet these customer needs as we have been doing along with managing the operational aspects of the business to handle this volatility we will remain committed to managing our balance sheet to not only.
Get through the crisis, well positioned ourselves for future growth. We are doing that successfully through to determine focused on working capital controlling costs in generating cash from noncore in underperforming assets.
Looking beyond 2020, we believe that the positive changes made within our company. This year end in prior years, we'll have a lasting impact and we also strongly believe in the long term fundamentals of our end markets as demand will be turned in due course.
I just want to close by stating again my appreciation to the one Titan team and our thousand deployed everyday that are around the world working hard to manufacture our products.
I'd now like to call turn the call over to Morry for his comments.
Thank you Paul.
Good morning, everyone.
Wondering.
Why this loan land is on fall.
Now.
This has been very in the quarter okay.
Right now has a lot of assets.
Has value is much greater than workday.
On the book.
Yep.
Right.
Acquired.
Some stock in the company called wheels, as India, when we acquired type.
I tried to.
Get agreement with South zones ship back then.
But we needed a proof.
We're also then as large as shareholder.
Who would not given to us.
And I was trying to sell it was around 10 million.
And they wanted to.
Only.
Make it so that we would have on has gotten sub.
So we never sold.
This past quarter.
Well international sold its final interest.
And lives of India and receives the fundamental payment.
Let's talk a little time tighten really seeds.
Over the past.
Excellent nine months.
Total around $3 million.
Tightens Board and myself.
I wish to congratulate as CEO while rates.
Great job.
And.
Sounds simple.
So.
A lot of time over the last few years.
Going to India.
We get system.
Tighten as other.
Noncore assets that will sell at a fair price.
And the largest.
Non wheel and tire asset.
Of course as I'll just mention.
Correct, we're blessed said ITM.
We believe over the next 18 months.
Tighten will have the opportunity.
This now or spin off.
I see now.
We have spent time in the last two years.
Domain, I cans business up, especially in for the aftermarket.
And now everything and look for Us result.
Situation.
The Colgate 19.
Worldwide is.
Knocked everything down when we believe what's going to happen.
Is that.
The other structure.
Both in Europe and.
In the U.S.
Welcome to start moving right after the App.
Election, no matter, who the heck lens advancing.
We expect this business.
How to grow.
And now the sales of.
Ladies and our aftermarket business.
Well.
Increase its revenue up to around 500 before this period and the shutdown was bouncing right around the 400.
Plus.
We believe that will bring the Titan.
Three now.
Hello.
Value of three to 400 no.
So.
We're in a weren't really putting good shape.
And Titan has the world's greatest capacity and prime wheels, and tires from wall. So as Paul just mentioned.
We believe in the future.
And we think it's very bright.
For what we have.
And we also believe.
And our CEO and President Paul and his team.
The right loans to lead us in the coming years.
Neither real leadership comes.
And tough time.
Titan has had its share.
From the outside forces.
But we think that's going to change.
And that this next year they time.
I want all thank all of you for your patience on that.
And I'll turn it back to you all.
No. Thank you more I really appreciate.
Your comments for everyone. This morning.
With that now, we'll we'll turn the call over to David for the financial review.
Thanks, Bob and good morning, everyone.
I want to start by Ecolink Paul's and Moyes comments regarding our Titan team and the exceptional leadership that was shown across the organization. During these very unprecedented times.
Strong and Swift actions were taken back to protect our employees adjustments were made to production levels to meet very very unpredictable demand adjust and finally and her team managed to even improve liquidity during the quarter. In spite of all the forces that we're going against us.
The second half the year, we'll continue to be a significant challenge for us and in fact in or could be more challenging in some ways.
Notwithstanding this we are in a strong position now to manage.
That said, let's get into the numbers.
Net sales for the second quarter were down 20%, 27%.
The 104 million less than the second quarter last year, and 55 million worse than the first quarter of this year.
Reflecting the impacts of covered 19, and the sluggish markets across the world most notably construction.
We estimate the direct impact of cover 19 effects on that sales force 31 million in the second quarter, meaning the impact from closures and disrupted markets in Europe Asia and Latin America.
Constant currency basis revenues would have been down roughly 22% from the second quarter last year.
Or 85 million.
The negative currency impact was nearly 20 million or 5% with much of the impact coming in Latin America in Europe.
Again this quarter the largest impact on sales was in earthmoving and construction.
And where sales declined by 72 million from last year, the drivers of the decline in and see where across the board and the biggest centex coming from undercarriage.
The remaining declines were primarily in the U.S. UK and Australia.
Our agricultural net sales were down 17 million or 10%.
With 11 million coming from the negative currency impacts, which is a testament to the resiliency of AG market.
The consumer segment experienced a decline of 15 million in the quarter, reflecting continued sluggishness in the utility trucks attire sector in Latin America, along with North American sales related partially to deemphasize product lines on top of the impacts from the pandemic.
Our North American wheel sales were down 27%, mostly due to volume on the early from our OE customers.
Our North American tower sales were down 19% again, mostly OEM volume.
Our aftermarket tire sales around were down 8% relative to the prior year.
Year to date, we are very close to 2019 levels. After a very strong Q1 start.
Our Latin America sales were down 37%.
From the second quarter last year with half of it coming from lower currency translation effects.
And the other half coming on volume.
Australian sales were down almost $10 million with a decline all coming in and see as mining replacement activity remained slower but as we discussed we've also deemphasized.
Tire distribution entire servicing since the first quarter of last year, including the sale and closure of some unprofitable branches.
Sales in Australia are actually up modestly in the second quarter as the over a market conditions are improving.
Similar to Q1, Russia was inline with last year sales despite currency headwinds of approximately 13%.
Overall market conditions remain very challenging there with significantly depressed economic conditions in the region. However, AG dealers did increase volume year over year somewhat.
Our overall sales volume on a consolidated basis was down lower.
24% from last year price and mix in the second quarter was positive for us at 2.4%.
Our reported gross profit for the second quarter was 30 million versus 38 last year.
In the second quarter 2020, we recorded a $1 million.
Asset impairment charge related to inventory in our North American wheel operations, which came on the closure of our saw feel for junior production facility.
Reported gross profit margin for the second quarter was 10.4% versus 9.8% last year. This also compares favorably to the reported gross margin in the first quarter of 8%.
Without the impairment charge the gross profit margin would have been 10.8%, which is a strong result, obviously considering the significant that point decline in sales.
Tailwinds on our raw materials were among the factors, which led to the increase in margins.
While our operating teams also manage the workforce production schedules and strongly controlled factory overhead costs in response to the pandemic and the need to adjust to them the market demand that we faced.
Now I'll touch on some segment, Rick and numbers for the quarter.
Our agriculture segment net sales were down 17 million or 10% on a year over year basis lower currency translation.
In fact, the sales by roughly 7% this quarter volume was down 8.4%, while we had pickups in pricing and mix at 4.9% similar to Q1, which was somewhat reflective of aftermarket sales holding up in with some selective price increases.
Sales in North America were down 5% as OE customers kept production levels down.
Early wheel sales in North America were down the second quarter as I stated earlier.
Entirely on lower volume as pricing and mix was slightly favorable this quarter Russian sales in the AG segment were up 13%, while European AG sales were down 18%.
Latin American AG sales were down more than 32% from the last year was 75% of that decline coming on currency.
Our agriculture segment gross profit for the second quarter was 15.6 million up 14.2 million up from 14.2 million last year.
Gross margins in the second quarter for AG were 10.6%, which wasn't an improvement from the margin produced in Q2 last year of 8.7% and 8.1% for the first quarter.
Improvements and plant efficiencies with strong management actions, along with lower raw material costs enabled this improvement.
It's important to note that the North American wheel operations delivered stronger results at the second quarter as we continue to improve our operations after significant headwinds that existed in 2019 surrounding raw material and inventory management.
Which led to operational leadership changes, we made last year.
Our Earth moving construction segment experienced a decrease in sales of 39% or 72 million.
On a constant currency basis, net sales would have decreased 36% versus a year ago.
And the direct impact from Coven 19 on sales was 26 million in the quarter.
Volume was down by 37.5% in the AMC segment, what price and mix was slightly favorable 1.5%.
Axioms undercarriage business was the largest portion of the decrease in the quarter as construction Oems accelerated their sharp decline as a result of the compounding effect of covert 19 on already in they make demand.
We saw the biggest impacts in Europe, and China again, this quarter, but keep in mind. The construction industry only started to see contraction towards the middle part of last year and really it was during the second half the year. So Q2 2019 sales still reflected a reasonably healthy construction market.
Our European wheel business also saw a decline of 55% in the quarter due to the construction market essentially shutting down in the UK due to the pandemic.
Australian AMC sales dropped 65% as we close and branches during 2019 and continue to pivot from mining tire distribution.
Items in North America were down 34% this year.
Merely on weaker construction markets again on the early side.
The decline in most of the came on the tire side of the business this quarter.
Gross profit in the Earth moving construction segment in the quarter was 11.6 million, which represented an $8 million decline year over year.
This includes a $1 million asset impairment charge without the.
Charge, the gross profit would have been 12.6% 12.6 million sorry.
The gross margin in the AMC segment without the impairment charge was 11.2% versus 10.7.
Obviously, the largest driver of the decline in gross profit was due to lower volume and the impact on fixed cost absorption, but considering the dramatic decline in sales of business performed well with improvements in efficiency and improved pricing occurring in a number of our facilities as a countermeasure depressed sales in addition.
How material costs are down relative to the prior year.
Finally, with the consumer segment and the second quarter net sales were down 36% from the second quarter last year.
Negative impact from currency translation was 6.9% and volume decreased by 25.7% while mix and pricing was negative at 3.8%. The most significant impact on volume related to lower demand in the Latin America utility truck segment, which is very low during the first two months of the.
Quarter from the impact of coated 19.
And then sales in North America were also down significantly if we deem as we add deemphasize certain product lines, such as specialty products enter a TV tires.
This segment's gross profit.
For the second quarter was 2.6 million similar to the first quarter result, and as but was down 1.7 million from a year ago.
Gross margins were 10%, which was a decline from tenant and a half percent last year again margins held up as we took actions to manage our plant costs, which carried into the segment.
Selling and.
General and administrative and R&D expenses for the second quarter were 30.6 million.
Which is well below the first quarter of 2020 and down 20% from last year.
The decline came as a result in concerted efforts across the business to control our costs. The largest areas of decline came on lower employee related costs, including travel as we cut across the organization.
We also continue to reduce our sales and marketing costs and we've experienced much lower I T support costs versus one year ago.
We made a demonstrable progress discuss.
That I've been discussing over the last few quarters.
Because of the pandemic, we accelerated our efforts, which is what shows up this quarter.
The second quarter operating costs also included 400000 of restructuring costs, primarily from actions taken at the corporate level to reduce our costs.
More permanently and to consolidate certain functions, most notably in information technology and finance.
We're now on pace to see full year, SDMA and R&D costs at approximately 130 to 135 million, which is lower than the target I outlined last quarter.
We experienced recovery in the foreign currencies in the second quarter and as a result, there was a foreign exchange gain of almost 9 million. As a reminder, there was foreign exchange loss in the first quarter of 17.2 million.
In the second quarter 2019, there was a foreign exchange loss of 1.2 million, so, bringing a big difference year over year of 10 million to the positive.
In the second quarter, we as we've discussed earlier, we completed the sale of our remaining shares in wheels, India, and we recorded a $2 million loss and other expense. The net proceeds from the transactions year to date from wheels, any ishares were 31.2 million.
Since we started or selling our shares in late 2019, we generated 50.3 million in net proceeds approximately $18 million net proceeds were received after the second quarter ended in early July we use the net proceeds to pay down debt in the us.
We recorded tax expense in the quarter of 2 million on a pre tax loss of 2.7 million during the during the quarter normally we have Rick.
Tax expense and the reason or two and a half the $3 million per quarter to reflect normalized cash taxes, we pay in foreign jurisdictions. So this is an airline but there were some noise in the system. This quarter with some reserve adjustments offset that capital gains taxes on the sale of the wheels, India shares.
Now moving over to Q2 cash flows.
As we prominently noted at the beginning our balance sheet improved this quarter on a number fronts. Now described the actions that have been taken relative to the liquidity in the remaining remainder of my comments. This morning.
Start where the fact, the cash ended the quarter at 80 million at 20 million from the first quarter, there's really no impact from currency changes on cash during the second quarter.
We generated approximately 1 million in operating cash flow and we generated $5 million positive cash flow for the year so far.
Versus a negative 10 million in the first half last year.
This is despite significant negative impacts from lower earnings.
As we continue to drive more efficiencies and working capital and selling noncore down assets the impact of noncore assets and related transactions of nearly 8 million in the quarter. So we generated free cash flow in the second quarter of 7 million.
Again. This does not include the proceeds from the sale of shares on wheels, ending in June which is ultimately received in early July.
Our receivables decreased by almost 20 million in the second quarter from March as we experienced the $55 million decline in that sales in the first quarter from the first quarter to the second quarter.
Our dsos did tick tick up a little bit this quarter at 61 days, we did experience pockets of extended payments from certain customers as a result of the pandemic.
But we don't currently have any significant concerns relative to credit risk of customers.
And we watch these exposures very carefully every day.
Our ending inventory at the end of June declined by 11.5 million from the in the March and it declined by 39 million since December.
Our accounts payable balances dropped at a very high pace this quarter.
As our supplier payments came due on higher volume from the first quarter.
I continue to have confidence in our ability to generate cash from improvements in working capital of approximately $25 million for fiscal 2020 and that will come from continued improvements in inventory management across the business I'll say it again as it is important but we have strong focus within our operating teams to manage inventory very key.
Closely and we collectively no there is a balance between managing.
Long term visibility with customer demand when recovery happens, we will need to ensure that we can meet customer expectations continually we've done that throughout the second quarter.
Despite the deep decreasing our inventory.
This has been the legacy of tightens performance in our mission to serve customers well so that it will remain so.
Capital expenditures for the first half of 2020 were $8 million versus almost $17 million last year in the first half we've taken necessary steps to manage our capital spending programs and to invest where is important to manage production.
Safety.
Environmental.
And so forth and we continue to.
Investing.
Product development as well to bring innovative products to the market may be competitive and to maintain our market leadership.
We will continue to balance our priorities in the near term well I anticipate that our capital spending for 2020 will be close to 20 million.
Well below what our original targets were in the prior year as well.
Our oil net debt level.
Our debt level for the second quarter did increase as we took measures to increase liquidity in our European operations I will talk more about that in a moment as of June Thirtyth 28 million was outstanding on our domestic Avi airline down from 30 million it from the in the March.
With the completion of the final tranche of the sale shares in Wales Indian July coupled with excess domestic cash flow during the month, we paid down another 22 million.
In the month of July in the balance today is only 6 million.
Short term debt at the end of July was 41 million, which is down over 20 million since year end and five down 5 million from March. This decline is primarily due to repayments on normal maturities of loan arrangements concern.
Foreign operations.
Primarily Russia in Europe.
A portion of this plant decline also relates to extending loans in.
In Latin America for one year in response to liquidity initiatives in late March our first quarter call. We described our actions to work with our banking partners in Europe to give us additional credit capability in Europe.
In May and June we completed arrangements to draw down on select long term credit facilities of approximately 20 million with favorable market terms for Titan.
The market maturities on these credit arrangements or approximately two years with options to prepay after one year.
The annual interest rates range from 1% to 4% while the majority is under 2% again favorable for Titan in the midst of the pandemic.
This is among them a steps that we are taking to ensure that we had a stable and flexible structure to manage in these volatile times.
With significant reductions on borrowings from our domestic ABL credit facility over the last several quarters, we now have more flexibility to manage our us in corporate operations when recovery occurs.
Remember just 10 short months ago, we had outstanding borrowings on this facility a 59 million.
Our intent for this facility going forward, we will be to keep borrowings very low if not zero and demands our working capital as markets return with some semblance of normalcy. This has been a very important target for us and we are now close to that achievement.
The sale the wheels any shares were a big part of our non core asset sale initiative over the last several quarters, while we still have a few discreet items that remain outstanding and I anticipate completing transactions over the.
The second half of the year that could deliver up to 20 million more in proceeds.
Now as evidenced in the results and our current improved financial position, we have navigated well in very challenging circumstances. It. Unfortunately this crazy world. We're living is going to continue recurring all of US continue to devise plans to adjust and be in position to respond to whatever we face.
We remain steadfast in our resolve to do so in there's still much work to be down to position tightened for the long term future and we remain committed to that.
That said I'll turn back over the call to the operator for any questions you have this morning.
We will now begin the question answer session. You asked the question Press Star then one on your touched one pound.
Even with Speakerphone, please pick up your handset.
Yes.
Yes, John your question had Cyrusone Q.
Your first question comes from Joseph Mondillo, what your body and call. Your line is open.
Hi, good morning, everyone.
And Jim.
So I wanted to sort of just talk a little bit about or ask you about sort of some of the brief comments that you made on your outlook for the back half a year and I understand.
Visibility is limited and of course with the pandemic no one can really sort of certainly.
I guess, what's going to happen with that but.
You sort of made a couple brief comments that you anticipate the back half of the year to be like I know seasonality, usually place to that I thought potentially given that.
You had such significant amount of plant closures and just with overall economy shut down for a period of time in the second quarter.
I thought potentially second quarter could be a bar that you could still need.
The third or fourth quarter.
Could you just address.
So to your comments for the back half of the year and relative to your sort of typical seasonality or are you expecting typical seasonality in the third quarter and fourth quarter.
Thanks.
Yeah, Joe it's a it's a good question.
It's one that we spent a lot of time year is well trying to forecast, what's what's coming down the road in its ongoing challenge and so.
There's two ways to.
Look at it.
And I'll, let David at his comments, our financial side I mean, obviously is the financial side of the trying to predict what your results are going to be but.
I'm going to comment from from the operational perspective.
We have to remain nimble and flexible in our business quite frankly like nothing we've seen before.
Our order decks in the flow of the order deck.
Is changing rapidly. So if we were to prepare to forecast at the beginning the second quarter.
It would have looked much in it did look much different than what the actual results were in so.
As we sit here today, we only know what we know now and we know that we're going to get impacted by our own plant shutdowns and our customers plant shutdowns and thats the normal seasonality that we keep referencing along with a higher level of vacation holidays that take place in the US. This time of year before school starts and then obviously.
In Europe, where they take a heavier time off in.
In July and August.
That is the normal part of our business, where we see those swings in the back half of the year.
From there we just continue again just remain flexible we're constantly in communication with with all of our business leaders multiple times a week.
Try to compare nodes and trying to find some sort of.
Baseline that we can use to.
Put into a financial forecasts and to be obviously, it's difficult. We just don't know right now and so again, our focus is on the operational side.
And what we have seen what I will say in the back half of second quarter, what we've seen.
Is that we've consistently exceeded our forecast because of the drop in orders that have come in.
Can I sit here today and guaranteed that will continue every single month, the rest to 2020 I just don't know.
But I do think that there is a pattern that we've seen that there are more orders that come in in certain markets. This isn't across the board. It's a very are making a very general comment, but it's very specific how I would have to answer it across every single product line and across the different geographies, but we are seeing certain products.
In certain geographies, we've seen a trend that.
Incoming orders that are more I'm using were dropped in its kind of a loose term, but as colleges later than normal orders that come in.
On a consistent pattern in the back half of the second quarter.
We certainly are hopeful that there will continue for the rest of the year.
But sitting in my shoes today.
Our job is operationally, we just got to remain flexible and our teams are doing that we will continue to do that we will keep headcount where they need to be while keeping our transco force available that when the market turns because it's not an if its win.
The market will turn we also got to be prepared for that so.
Maybe you want to add on that David Yes.
I can't say, a whole lot more than that other than the visibility we get from our customers in terms of long term projections or even beyond what the initial orders that they give us.
We're not seeing that being on the quarter to be honest with you. So Q4 it'd be is is a real wildcard from my perspective, so understanding how Q4 is going to be but normal seasonality would suggest that you can be pretty busy through at par supported in the quarter. Then your holiday period interferes with that and you take your production levels down message.
The way it has been.
But without that visibility in our ability to forecast within any.
Any part of the precision is very challenging.
Yes, we do see normal patterns and seasonality that's not we're not seeing is any different because of the pandemic.
Is that nothing's changing from with with regard to our customers buying behaviors at this point, it's not changing as a result of pent up demand or anything like that so.
It's important that we maintain our flexibility like Paul said, and but giving any reliable forecast at this point is very challenging it changes every week for us.
No I totally appreciate that.
Very much appreciate the color.
Yeah, I know you guys don't have a lot of visibility. So I'd appreciate that how about on the cost side of things where are we.
Regarding raw materials in the inventory that you have I know I think the first that the year certainly saw pretty big year over year benefit there.
So how does that look for the back half of the year and then just in general cost structure.
How does that change.
Going into the back half of the year.
Do you see any temporary costs coming back online from second quarter.
Just give us sense of how that should maybe be a positive or negative.
Sure back half.
Ill start with the backdrop of the raw material markets you know the raw material prices remain relatively low comparatively.
And so that has been a benefit in the first half of the year and we anticipate that it will remain a call it stable.
For the for the back half, but obviously those things do change can change rapidly as demand comes back meal prices will come back to and so we had that you have to watch that but right now it's allocate is call. It stable with respect to how it was in Q2.
But the relative low comparatively year over year.
We are it's over the Oliver the math between synthetic rubber natural rubber steel and all those things, but all said.
As a benchmark.
And a pretty good territory for us to manage.
And as far as our overall cost structure, we have taken a lot of the toss out of our facilities to reflect the current demand we have received some support.
Some of our foreign markets regarding.
On.
Support for payroll.
We expect that to continue maybe a little bit into Q3, but it's uncertain as to whether they extend those kinds of on.
Opportunities for for companies like us so and again.
I don't want to say, it's going to trade as a strong big benefit to us. It is offsetting our cost if you will.
And we haven't had increased cost related to our factories in our Sanitization efforts and in also just trying to manage our shift shifts and so forth and so it's not come without a costing at least support programs to help us to offset that.
We do expect it to continue in the short term, but I don't anticipate it could be in a long term thing.
And then.
Relative to SDMA, we've taken our cost down in lease off this quarter I think we're relatively to get territory I don't anticipate any further decreases from here because we've taken the actions we feel like we need to.
So I think I would call that again stable at this point.
Yeah the into support we get is in our European operations, primarily you know where we operate in Italy, we're getting the benefits in UK North America, we don't get any support.
And so again some of these questions are hard to answer without getting specific location by location, but to David's point I mean, the cost of coal that are not being covered by the government.
That helps offset and keep some people on the payroll like you've seen in the us with the PPP, which we don't qualify for.
It keeps people on the payroll and going through the pandemic.
But again if it because the programs are there we will we will take advantage of them, if they're not than we will reduce our cost structure accordingly.
That's the European programs have just been better at doing that for companies like Titan in the US company like Titan get nothing.
Were too big to matter and we are too small be big enough to matter. So it were caught no man's land.
All right just to clarify in the raw materials side and just.
The year over year are you, saying the year over year benefit into Q will be similar to the year over year benefit in the second half are you, saying the benefit just on absolute basis into Q.
We'll be similar.
Prices will be sort of similar in the back.
Absolutely basis, if you will fit what we saw in Q.
Okay, and we did we do believe model we did it Joe just starting reps you, but the in the second half we didnt start to see some of those declines.
Typically in steel so.
Right year over year comparison.
Okay relatively safe.
All right and.
I guess just also lastly, just a follow up and I'll hand, it off to someone else.
Regarding sort of structural changes.
Consolidation footprint consolidation.
Heavy lifting tight structural changes where are we there is that still an ongoing.
Process help us understand where you are with.
The structure of the company overall.
Yes, I think I think the structural changes are ongoing.
From my perspective, we certainly had very good discussions at the board level and I believe that the management team has the full support of the board to structure that the company accordingly for where we need to be position for the future and so.
Those are good on an ongoing healthy discussions between.
Management in the board and I, certainly feel good that where those discussions are leading to the future and we'll continue to you know with our ongoing efforts to the two again positioned the company the right way for the for the long term and certainly provide updates.
As we're going through that process.
And Ken just on that no.
Can you say that theres.
Definitely.
Opportunity or sort of built through the analysis.
And we'll wait and see kind of thing.
Well I think there theres definitely opportunity if you look at some of our utilization levels, they're not where.
We need them to be for the long term and so there's different ways. You can you can restructure.
It's not always necessarily just.
Black and white Theres, only one option and so what we're doing with the board is discussing those various options and taking actions to see.
Which options may play out going in certain directions in.
I think we're out on a good healthy path with that.
But it's definitely not black and white, so it's not something where we can say yet here's the issue. This is exactly what we're going to do.
But again I think those discussions for.
For the recent time period definitely has been very healthy between the board I think we all see ITI and we realize that there are structural changes that need to take place, but again, they have various options and different facets to them and we're certainly going down those pass and.
I think long term they will they will turn out successful for the company.
Alright, well, thanks for taking my questions and good luck with.
Thanks, Jeff Thanks, Jeff.
Yeah.
Okay. Thank you have a question. Please press Star then one.
Your next question comes from lines Maria with William Blair. Your line is open.
Hi, good morning, everybody and.
Like nothing more recently.
Greetings.
Looking at doing well sell online.
The one thing.
The recent announcement and then you mentioned briefly Lfw.
Sounds like you've got the price down to the competitively dual and his dog eat dog now, let's just kind of the maybe potentially that tipping points w. or is this just one more.
Step function towards greater adoption there.
Well its lfw is not about price LS w.'s about the value of brings to the end user repositioning of that way from the beginning.
It's a product where farmers when they look at the value proposition and they do as we all know farmers are very good at running their business.
As seen from the very beginning that there is tremendous value in l. SW. So has nothing to do with price.
Really what you're seeing from the Oems and with that recent.
Announcement regarding the H series, a beer, which was a very strong announcement for for the company, but also for gear.
We've been going to the end market and being very successful connecting to the end users with LSW W.
So I don't look at the is it nets announcement coming.
Years down the road is also in its a tipping point for LS Wsw has continued to grow by double digits year over year. It attracts.
Strong value to the end customer and repositioning the quarterly in the market. So as nothing do with price, we don't need to change the price to sell SW, we're going to continue on the path we are.
Been successful from the beginning so there is not that theres not going to be that tipping point moment in the announcement doesn't reflect that.
Our our position with Ellis W.'s, we got a benefit the and user.
And that's what we've been very successful out so I think what that announcement does says we will continue on a very strong path forward.
And that value from Ellis W will continue to be realized in the market for both Titan and the ultimate end users of Dallas W. solutions.
Okay.
And then.
Okay.
Yeah.
Hi incremental margins.
Well when volume.
Obviously, how do you think about given the clock you've taken out.
Operating income more permanent does not incremental margin.
Open obviously next year.
No focused at the level of what kind of magnitude and just trying to understand that temporary cost versus more permanent cost and how that plays and.
Okay.
Okay.
It's a very challenging question to answer Larry in terms of how I don't how quickly the recovery happens you have to be agile at every point in time, you see recovery I would say that within our.
Overall production facilities a lot of the.
The costs, you take out or more on the temporary side as you think you're just taking out then labor and there are some overhead opportunities that we havent had done on a more permanent side of things and we're going to be very very careful as we go go back up.
In managing those costs, but I I feel pretty strongly that are incremental margins are going to be really solid next year. When we start to see some sales impact.
I think we're just similar to how it's been in the past you go back to 2018 and look at the incremental incremental margins, we got node that year with growth in sales that we saw I think it could be it could be better.
It's going to depend upon which part of the business to season, most recovering in the timeframe I think there's a couple of things that we know for certain that does that next year as volumes improve you will get better cost absorption. So you get that that net net natural benefits your incremental margins just was just with your existing.
Capacity levels being our but they are today, but I think the other part I would add is and this is true.
I think for a lot of business leaders right now is that for every dollar thats coming out in 2020 in 2021, Theres not a dollar or $1.10 going back and there's going to be some factor less 80 cents 90 cents on the dollar I guess at this point, we don't know.
But.
Confident that our businesses the restructuring and the changes that we may now.
Just the processes, we've gone through and doing it.
Not just just in the last few months, but the changes we made as a management team David made a comment.
In his his remarks about North America wheel.
We've been able to accomplish a number of things this quarter.
By actions that we took in prior years and so that's where I get the confidence on next year, we will be big benefits from what we're going through now.
And again, it's not just the changes last few months as the changes in prior years, our team is making better decision today because of what we did in the past and I'm very confident that in the future. We will continue to make even better decisions by what we learned from what we're going through during coded. So for every dollar that came out I can I can guarantee you we're not putting another dollar.
Back in come 2021.
Okay, that's sort of leading and then.
In the quarter. The business does does tempering furloughs that was a big benefit does that sort of reverses and was incentive comp a headwind vendor neutral.
I would say now.
Okay fair enough for a benefit and incentive compensation until.
Nothing significant when you consider everything else. This it was going on with the cost structure and everything else.
Okay.
One question.
We didn't seem to tie reclamation businesses added maybe some of the you factory down south of that where we think about the last 20 million did come from or is that something hi reclamation different.
Well I mean, it's high reclamation, we've gone through a lot with the fire that took place a few years ago.
Yes, there's there's there's been a tremendous amount of effort just on handling the insurance claim.
It's unfortunate that with the type of operation like that.
The insurance companies are not easy to deal with.
David and his team has done a good job of nearly finalizing that could claim we're not quite there on on all pieces of it but on the BDI side, we've settled the property.
Where that goes into future is you know we are we are discussions with other partners or how we can grow that business.
I don't see that as a core business that tightened should invest in I think theres a lot of potential in it with what we're doing the concept of recycled components getting into the marketplace and what you can do.
But with our balance sheet, where it's at today, we're going invest in our core businesses and we're going to grow and be successful.
In the future then.
I don't see Trc is a business trc needs investment to really get to the scale it needs for the future it and we're looking for partners that could do that.
And so there's again, it's one of those areas I would say.
We're habit healthy discussions with the board on what those options ARD, we're pursuing different passed but.
From a balance sheet perspective. This is not something that we're going to invest capex and we need to run. It as is we're doing a good job with that we're taking care of our our partners with the oil companies up their suncor, primarily since obviously, we're in their property.
So we got to do that for contracts, but from a business standpoint.
We're going to protect our balance sheet to invest in our core businesses.
The only thing go ahead, Larry I'm going to add Larry is if you talk about the $20 million alluded to earlier.
You're talking about the BDI claim as part of that the longer term solutions for.
RC are not included in there.
Okay. Okay. Thanks, good luck.
Okay. Thanks, Larry.
Yeah.
We'll take that question and answer your question I would like to turn the conference back over to Mr. me for any closing remarks.
I appreciate everybodys participation in today's call and wish you all stay safe and healthy take care.
Ladies and gentlemen, this concludes today's conference call.
Please note that the webcast replay of this presentation will be available Seattle within the Investor Relations section section on our website and then use antibody. Thank you for attending todays presentation. The conference call has now concluded.
Okay.
[music].
Yes.