Q3 2021 Titan International Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Titan International Inc. That's cool 2021, adding his conference cool 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.
And an operator will assist <unk> is now my pet you have to cancel able to towards she senior Vice President Investor Relations and Treasurer for Titan Mr. <unk> full is yours.
Good morning, and welcome everyone to our third quarter towards 21 earnings call on the call. Today. We also have tightened president and C E O Paul writes.
Senior Vice President and C F O David Martin.
Again with a reminder, that the results we were about to review were presented and the earnings release issued yesterday, along with our Form 10-Q, which has also been filed with the Securities and Exchange Commission. This morning as a reminder, during the call we will be discussing certain forward looking information, including the company's plans and projections for the future that involve risks.
Certainties 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 companies form 8-K filed earlier today as well as our latest Form 10-K and forms 10-Q all of what.
She had been filed with the S. P C.
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.
Earnings release, which accompanies today's call contains financial another quantitative information to be discussed today as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures. The cute to three 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.
[noise] recorded a replay of this presentation will be available soon and the call. After the call with the Investor Relations section of our website a copy of today's call transcript script will also be made available on our site. In addition, our latest quarterly investor presentation will be available on our website. After today's call I would now like to turn the call over to Paul.
[noise] like side and good morning, everyone.
[noise] tightened definitely got a good quarter as our results exceeded expectations as we posted our strongest third quarter for revenue and profitability. Since 2013, we had adjusted EBITDA of 35.1 million. This quarter on sales that were up 48% to 450 million.
This quarter's adjusted EBITDA has been exceeded only twice in any quarter since 2014, and one of those occurred just last period, when we posted $37 million adjusted EBITDA.
We are now expected to see our full year jetson EBITDA coming in above 130 million, which is our highest annual total since 2013.
Our global team has been working very hard to produce the results in increased production levels to meet growing customer demand as we continue to drive forward to grow our production capabilities further in coming quarters. It really is impressive to see our one tightened team continue to perform well building on that strong foundation, we built in recent years and I want to thank all of our tightened employ.
Around the world for doing a great job and their dedication to our company.
So looking at our segments tightened again this quarter experienced strong sales growth in each of our segments with agriculture, leading the way with a 60% increase compared to last year. Our order books continue to strengthen especially on the AG side, where commodity prices remained good levels with corn above five soybean above 12 and cotton there.
Record highs, thus ensuring another year of farmer incomes strong farmer incomes for 2022, yes, I realize that commodity prices have dip from their peak levels earlier, this year and far farmer sentiment has dipped as well, but let's not get caught in the trees and miss the abundant forest around us times are good farmer incomes are still.
High levels again this year there is pent up demand sitting on ordered eggs. There is an age large AG fleet, there's historically low inventory levels that all our dealers, whether it's small AG large egg or the aftermarket dealer and also throw into that equation that current sales levels and large egg are still well below historical average and do not forget that large.
AG is Titans longterm sweet spot.
We believe this all adds up to a good tailwind for business that we see continuing throughout 2022.
So moving from an over to Earth movie in a construction we have seen demand continued to be above our expectations that we had at the start of the year with sales growth sales growth this quarter of 36% on a year over year basis.
R. M. C segment continues to look and creams decreasingly promising as we round the corner to next year.
Just like an order books are strong, but we also see those infrastructure investments coming into place coming into many places and you know as we've stated before we are a global business and R. E. M. C. E. M C segment, and a large part of our business. It from that segment does come from a undercarriage division ITM ITM.
ITM as a business that has a good global footprint has a strong OEM an aftermarket channel for distribution and then we have a market leading and almost unique I think I'm pretty sure. It's unique I'm gonna I'm gonna use that word today foundry in Spain, and I mean unique for our undercarriage type operations, where we have our own foundry in Spain.
That enables us to customize cast products that meet the specific needs of our customers again, just a strong business for us and and a large part of where we get our EMC growth and performance from.
You know David will spend some more time today talking about our financial results, but I do want to offer a couple thoughts first while our business operates in many different global geographies and produces three married three primary products wheel tires, and undercarriage, which ended up touching various and markets are we again this quarter saw growth and improved financial performance.
Form it's in all of our business units so good solid consistent growth.
Second we have and continue to operate with a disciplined mind say mindset to control, our thoughts and SG&A and within our overall operational structure and you see that reflected in our results next we have invested our capex wisely and strategically in recent years to continue driving or innovative products into the marketplace and two <unk>.
Kris capacity in our core businesses, where the market needs. It. We've also made the necessary investments into safety environmental and maintenance and we will continue to ensure that happens in the future. My point with all that is is while tightened has reduced our capex over the prior few years to ensure we protect our balance sheet, we have invested properly into our company.
And have not under invested in recent years Lastly, we will continue to make the investments incur the expenses into expanding our production capabilities and increasing our head count areas meet demand, we're not simply going to sell our existing production capacity ended the market, but rather take advantage of this existing opportunity to get.
More of our market leading products into the hands of our customers.
So let me conclude by saying something that we all know I mean this is without a doubt one of our most dynamic business environments. All of US are in business have faced.
Titan you know India. In addition to our solid operation results again, this quarter and really for all of 2021 for that matter tight has strengthened our financial position. This year by refinancing our 400 million dollar bonds. We've also this year further improved our liquidity with our recently announced ABL extension and upsizing.
We believe that tightened is in a position of strength within our industries with our global production footprint that is second to none in our business and our plants that are well suited geography, jot geographically excuse me for our customers.
We also have an expansive an innovative product portfolio with an arsenal of highly engineering engineered tooling. These attribute enable us to deliver a strong value proposition to our customers and as a result for tightened to to continue to benefit from the current trends that are in today's markets.
With that being said our order books are strong as we've seen really in years. There are continuing positive signs in our end markets, which puts tight in a good position as I stated earlier to post adjusted 2021, EBIT adjusted EBITDA of over $130 million and on top of that we see a path to further growth for next year.
Again tightened is in a good position at this time to capitalize on our reinvigorated strength.
Which makes me think about a comment this week that I heard from our audit Committee chair, who happens to be a leader in the private equity space. The comment he made during our meeting. This week was that tightened as reported strong results throughout 2021, we afford to fight our balance sheet. This year.
And has all this positive going on yet our stock is trading at only around 6.5 times current your adjusted EBITDA.
He's a pretty smart guy by the way so with that let's jump into the financials and I'd like to turn the call over to David now.
Hey, Thanks, Paul and good morning, everyone I appreciate everyone joining us today.
Well the third quarter was just another significant step in the right direction for the company and we were able to deliver a very strong result, and build on the momentum that we've started more than a year ago.
Our global management team is is manage this concurrent environment.
Very well and we believe we have solid plans in place to continue to do that moving forward.
Well, let's start with some highlights for the quarter and then I'll get into more details the.
Sales grew at a very nice clip at 48% this quarter.
Again, a very very strong result for a Q3.
Our growth.
Was led by the AG segment with a 60% increase from Q3 last year at the same time. The EMC segment was also very strong at a growth of 37% and a growth in the consumer segment was nothing to sneeze at with an increase of 32%.
Our gross private increased by 93% in the quarter in a margin improved to 13.4% compared to only 210, 3% last year.
Adjusted EBITDA for the quarter was 35 million, representing the strongest third quarter performance since 2013, it bears repeating.
On a trailing 12 month basis are adjusted EBITDA stands at 116 million as of this quarter and we expect queue for performance to be strong and proving that run rate to over 130 million for fiscal 2021.
Our cash position remains stable again this quarter at 95 million. Despite some growth in working capital will continue to do a very good job managing our inventory levels as well.
With our improvement in profitability and our strong management of the balance sheet, our that our net debt leverage as of the end of Q3 stands at 3.3 times are trailing 12 month. Adjusted EBITDA. This is obviously a dramatic improvement from a year ago.
Now, let's get into more detail for the Q3 performance.
Again, our sales levels for the third quarter were strong and we saw another sequential increase.
2.5%, notwithstanding the normal seasonal variation from holidays in plant maintenance that reduces our production days.
Sales increase relative to last year by $146 million and $104 million or 30% from the third quarter of 2019, a more normal third third quarter period.
Volume was up over 25% with all of our business units, except Australia seeing significant double digit percentage growth year over year.
Gross profit for Q3 was 60 million versus only $31 million in adjusted gross profit in the third quarter of last year gross profit margin in the third quarter again was very strong at 13.4%.
We believe our visibility a solid in terms of being able to nowhere our costs are and where we can continue to see challenges that we in supply and we intend to manage it in a very strong way.
Just as we've proven over and over again and our track record as strong.
Now on to segment performance or AG segment, net sales were $244 million, an increase of $91 million or 60% from third quarter last year, which makes it the strongest quarter for the segment in the last eight years, beating last quarter sales by 5.5%, reflecting strength in North America and Latin America.
Volume in the segment was up 30%, 36% just like Q too.
Again this this quarter the principal driver the volume increases related to the OAS sales across the business, while aftermarket sales were made very solid.
Every one of our business unit saw increases year over year in the AG segment in our order decks reflect strength across the globe for the egg demand for the foreseeable future.
Our agricultural segment gross profit in the third quarter was $33 million up from only $16 million last year, representing 105% improvement.
Gross margins in egg, where 13.6%, which is another significant improvement from the margin produced last year of 10.6%.
This is reflective of the increased volume and if the effect on efficiencies across our plants along with continued strong cost control actions, we have taken over the last couple of years.
These are timing there are timing impacts related to pricing actions in alignment with our costs as they flow through production as we know.
Again, we've done a great job with this very effective job getting in front of these increases and and and I expect that we can remain in very strong territory overall on our margins in the segment and as a whole.
Earth, moving construction segment experiences and other strong quarter as well overall net sales for the AMC segment grew by 45 million or 37% from last year.
As well the third quarter is traditionally the lowest as we experienced enormous loma summer slowdowns with holidays across Europe, and our customer schedules. This.
This year was no different and we know saw a small sequential dropped from Q2.
This is not a statement on the overall demand in the sector just the normal seasonal cycle that we.
All of the major geography's experienced year over year growth during the quarter with the largest growth coming from ITM are undercarriage business, which grew 38% from third quarter last year.
<unk> primary growth came from Latin America and Europe.
Gross profit within our Earth moving in construction, saying it for the third quarter was $21 million, which represents an improvement of $9 million or 71% from gross profit last year.
Gross profit margin in the empty segment was 12.7% versus only 10.1% last year, a very healthy increase.
Again, the largest driver of our increased profitability came from the increase in sales and I T M a world.
Growth occurred across all of our businesses and geographies across the globe year over year.
The consumer segments Q3, net sales were up 32% or $9 million compared to last year volume was up very nicely in the quarter and currency was also a positive tailwind.
As we discussed our primary priorities production priorities have been with our agony EMC segments.
And our customers, but we did see healthy increases related to a Latin American your utility truck tire business and increase mixed stock rubber sales in the U S.
The segments gross profit for the third quarter was five 8%.
Very healthy improvement from last year as well.
Most margins, where at 15%, which was an improvement from 9.5% last year, reflecting some positive mix and pricing improvements with our products. This is the best margin performance in the segment since Q2 2018.
Our SG&A and R&D expenses for the third quarter were $34 6 million down about a half a million sequentially from the second quarter.
Most importantly, SG&A in Rd expense was 7.7% a third quarter sales are very nice improvement from a year ago third quarter, SG&A and R&D increased for from Ah from the prior year by about $4 million.
As a as a reminder, we've taken strong spending control measures over the last few years. This year's expenses included some variables spending in compensation levels, reflecting the increase in sales and our profitability during the period.
During the third quarter, we recorded tax expense of 5.3 million somewhat higher than in the quarter than originally expected, but reflective of increased profitability in certain high textures decisions for tightened, including Latin America, Turkey, Germany and parts of Asia.
Obviously this is higher than what we stated in our guidance earlier in the year and again. This is entirely due to increased profitability expected for the full year.
And now expect taxes on income to be about approximately $15 million for the year and again. This approximates are expected cash tax payments for the year as well now.
Now, let's move over to cash flow, our overall cash balances remains solid in the quarter at 95 million again. This is despite the sequential growth in sales and necessary continued investments in inventory.
<unk> excuse me to support and sustain our sales levels moving forward.
Are operating cash flow for the quarter was positive.
At $15 million, and we generated positive free cash flow of over $5 million in the quarter.
Strong growth in sales throughout 2021, we remain in slightly negative territory on cashflow overall, but when you look at all of our key metrics, including cash conversion cycle and working capital as a percent of sales we've made healthy improvements from a year ago through the focus and control.
During the third quarter inventory grew by approximately 28 million sequentially from Q too much like the rest of the year almost half of this increase came on higher raw material costs and the other coming from volume mix in other currency changes as a percentage of the most recent quarterly sales inventory stands at 27%. This.
Compares favorably to 23% over 23% from a year ago. At this time again. This is again very strong focus across the business from our management team.
Our overall dsos in the business improved sequentially from Q2 about two days and now stands at 53 days compared to 55, and Q2 and 58 from this.
Very time last year.
I continue to believe that we will maintain and improve our cash flow and working capital metrics as we head toward year and traditionally this is the time of the year, where we build cash, particularly in the back half a Q4.
We will not likely get back to break even free cash flow for the full year I do expect queue for to be in positive territory, like Q3, which brings us much closer to that goal.
And our teams are very focused on driving a strong balance between production efficiency and working capital management.
Capex for the quarter was up sequentially at 9.6 million is expected we've.
We've been making strategic decisions as to the investments to increase capacity reduce costs and improve plant efficiency, along with putting tooling in place to drive production related to new product innovations.
As of the first nine months, we capex stands at 24 million.
Based on our latest forecast expect full year 2021 capital investments of around $35 million at the low end of the previous estimate for the year is Paul discuss earlier, we are targeted and measured in the investments, we're making the business for the long term.
As we disclosed last Thursday, we took another positive step for the business of renewing our domestic ABL credit line.
The credit facility was increased to 125 million and his extended until October October of 2026.
It still has the option of.
To expand by another 50 million through and an accordion provision the.
The amended agreement is substantially similar to the previous agreement, while we attain improved terms surrounding pricing and other enhancements to improve the availability within the borrowing base a.
I'm very pleased with to be able to get this in place for the next five years and to provide stability for our liquidity on top of our healthy cash position across the globe.
Our overall debt level at quarter end decreased by 5 million from June all of this decrease came on Paydowns on the international borrowings.
Borrowings on the ABL stands at 30 million roughly in line with last quarter.
Ah continue to expect there won't be any significant cash requirements related to that in the near term and it remains substantially at our discretion to pay down.
Overall net debt decreased in the quarter about two $387 million down $4 million from last quarter again, I expect a trim that number overtime as cash flow increases and we were able to pay down on revolving credit lines as stated it earlier, but it bears repeating that are that leverage at the end of September based on 12th trailing 12 months.
Adjusted EBITDA has decreased to three three times, which is right in the target range that we have been discussing our balance sheet as in solid position now which allows us much more flexibility to manage the business for growth.
Now, let me wrap up with a few thoughts on the remainder of the year and some concluding remarks.
We stated it earlier in the earnings release, but we know anticipate full year adjusted EBITDA of over $130 million.
As everyone should know the fourth quarter of our year brings within a number of normal disruptions due to holidays and year and maintenance in order to be prepared for the first quarter, which is expected to be strong our fourth quarter performance is expected to be at a continued high level and steady with what we've been experiencing so far in 2021 in terms of customer demand.
We've come a long way in the last year with the business and because of the effective decisions. We made during tougher times and our ability to improve our liquidity are bound our situation has normalized and strengthened even into dynamic environment that we were in we continue to fight hard every day and it is making a difference in the trajectory for our business performance.
The future is right for us and we are as a leadership team remain highly focused on managing the opportunities in front of us.
That's our story for now I'd like to turn it back over to the operator for any questions you have.
Of course, they will now begin the question and answer session.
Ask a question you may pass that one on attached Hangsang.
If you're using a speaker fine please pick up your handset false passing the case cause I have toiled question <unk> and then <unk>.
First question today comes from having to mirror of William Black Larry. Please go ahead. Your line is a <unk>.
Okay.
Okay.
Today question on the outlook first of all the over $130 million adjusted EBITDA. Just curious how we have sensitized that too that obviously the strike situation and the possibility of you know plus down or indifferent to that based on what's going on and obviously from our customer.
Yeah, No I mean, you look to your like you said, Larry as a as a large customer they're a great customer for us are very important they're they're ah, they're great company as well.
For us the comments we made this this morning it implies.
The that there are actions that could continue with deer, and their strike situation and with that we we understand that our numbers are still going to be.
Quite quite solid for the fourth quarter, and we can adjust our approach production as needed based upon what may or may not happen with the situation with dear so definitely in the comments we made this morning it implies.
With the full knowledge of the situation with deer that it could go a number of different directions.
Okay, and then staying.
Staying there kind of curious about how easily you can shift capacity and you can move your tie.
[noise] tires from going O E to the aftermarket or to another one.
Probably a little bit easier on tires, and then also wheels, which are more of a <unk> product.
How important are the wheels to.
The overall numbers being held together this year even into next year, if the strike continues.
Can we just shift more capacity to tires different Oems or how can you manage that.
Given those two important component.
[noise] component of your business.
Right right now look we've spent a lot of time talking about it you know we dedicated a lot of time, just yesterday to kind of looking at the different scenarios and in reality from a financial perspective, the products can be adjusted easily.
But from a production perspective, there are there are there are some decisions. We gotta make there are some things we have to do you have to change. Some tooling you have to be prepared to you know at the front of the line rod different.
The wrens may be the same but the disc need to be stamped differently. So you know you have some against some adjustments you have to make with your your your equipment to modify that soon a big picture. It all could be handled quite easily but you know you gotta be prepared for it and you have to have some planning and you have to have you have to be aligned with your.
With your operational team to make those adjustments. So we are discussing it and we are prepared to do you know take care of our our leading customer, but also do what's best for tightened and.
We'll see how that plays out.
Perfect. Thanks, Paul Fair enough last question you guys talked about you won't even Tori did you mentioned, maybe I missed it channel channel inventory of tires in the aftermarket, which obviously can maybe absorb some access to higher production if that ends up happening.
Yeah.
We haven't made any specific comments about that but it's a good question Larry the last last couple of months I've gone around with our V. P of sales and we we visited quite a quite a few of our large aftermarket dealers and.
What I've seen you know again I don't have any quantification to this I am just tell you what I saw with my eyes is that dealer dealer inventory levels are low.
And clearly we're hearing that from them as well, we're seeing that reflected in our order books and so we see this pent up demand that exists not just for Q4, but carries us in the next year. So you got the harvest cycle. Then next thing you know you're going to be back into planting.
So there's some inventory levels that need to be replied us not to mention that you've got to continue to produce product just to meet existing demand existing retail demand. So.
Definitely what I've seen over the last couple of months is that inventory levels are not not.
Not just low at the Oems, but they're they're they're low in the replacement side as well.
Okay, Thanks, and good luck.
Thankfully.
Thank you I'm Gonna ask question today comes from Steve have envy of today T. Steve. Please go ahead you line as a pattern.
Wandering over one sweat.
Just wanted to get your thoughts on obviously, a supply chain issues are becoming a much bigger part of this quarter's cost throughout companies that weren't having problems now are a couple of questions about whether you've still managed and then in terms of your customers that may be running into more of the supply chain challenges.
Even if you're okay are you expecting any kind of slow down.
Some them cause they run into production problems.
Good question, Larry we face it all around us, but our teams have done a very effective job at managing any of those challenges on a daily basis. It's part of our DNA. We were always very flexible with how we how we manage and plan ahead and make sure that we have taken care of it you know there there's a lot a lot of work that goes on.
Every single day across the the many many operations we have globally.
A lot of strong coordination with our global supply chain teams and we've done a very good job managing through that we do it like I said every single day, there's things that come at you and we overcome it and we've been able to manage it very well today now with respect to what are some of our customers are dealing with their obviously there's.
There have been a lot of things that have been going on across the globe, but again, we are able to calibrate our production to make sure that we're we're staying in step with are are they expectations from customers and the diversity of our customer base helps us do that while some are moving in one direction. So maybe move in another direction and we can put.
Where we need to we done again everybody's done a very nice job with that.
To date, and we have good plans in place for the fourth quarter and beyond so.
Have you seen any slowdown as the years gone on in terms of order books and I know you have a significant backlog, but in terms of order books, giving your customers supply chain issues or do you have a wide enough customer base. It he just not seeing.
And we certainly see pivots, one way or and.
Can't.
There's definitely customers that take weeks or days out of production and we deal with that but again, we have a good diversity of our customer base to manage that so we've done it we've been able to manage it very well.
In terms of earlier in the year, you and every company was having issues with.
Workforce hiring and retention where would you say you are on that.
Well in a global a year to date, we've increased our labor force bad almost 12%.
And so I think we've done an effective job with that it's [laughter].
It's dynamic out there very much they really dynamic out there, but you know again, we it's like everything else. So you have to you have to manage and calibrated according to.
The customer demand wasn't and we've done we've done we've.
We've had to reinvigorate a lot of things, we're continuing to invigorate are on boarding their training and and making sure that we have good retention plans in place for our employees and.
It's a very dynamic market, there's all the things around us, but you know again, we've been able to do that very effectively today.
Would you say you were you would need to be given demand and also I know in past quarters. You've indicated is you've got so D. New workers sort of trained in on boarded you expect greater efficiency next year through those efforts would you say that still holds.
I definitely believe that to be true that we've done a lot of work this year to get get the the staffing levels at the right spots and they will always improve as time goes on.
So.
We can always be better.
But we've.
I feel like we've been very again I I use the word effective to date, but you know, it's it's a relative term and we can always see improvement.
In terms of material costs are you seeing are you getting any kind of confidence that we're seeing some stabilization, which could theoretically with you the price increases through the year provide a benefit in future quarters.
Stabilization of price.
Raw materials accomplishes costs yeah.
I mean, we are seeing some places where it's you know it's it started to stabilise if not plateau in some cases, it's coming down.
And again, we have to do a very very strong job.
Seeing that where it's at today, and where it's going to be in the future and.
Managed pricing accordingly, but again as you can see through our results.
We've been able to manage our margins very well and that was the full expectation is that that will be the case as we move forward as well.
And the last one for me you certainly have addressed it through the call, but I just want to get some clarification in terms of your view on where beat on us entering a multiyear replacement cycle.
In terms with bolster segments is that.
Your position right now and you've seen no no reason to change it despite the.
The the pullback crop prices.
Right No I I that is definitely our view you know we see demands strong through throughout 2022, and that's based upon a number of indicators and yeah. Like I said my comments you got to look beyond just the dip in the commodity prices and farmers sentiment, it's where we see demand being driven as a lot deeper than that you know.
I've spent a lotta time with our customers at the OEM level and in the replacement side of the business as well and and the message I keep hearing is consistent there's there's strong orders that are that have a lot of pent up demand sitting there for the short term and then when you look at the long term.
Farmer incomes and in construction related incomes are very good there's a lot of projects in the pipeline for the construction side. The farmer income levels of we've mentioned many times are still very robust and then you combine all of that together look at the dealer channels are light on inventory. So you have an inventory ripped.
<unk> cycle, you have retail driven demand uhm and kind of what you and David were just talking about you also have production levels that are that are somewhat constrained either by labor supply chains or whatever forces may be there I think that the way I see it and I think the way, we see it a titan and in many.
Others as well as that puts demand very strong.
2022 looks really good.
Okay. Thanks, so much for calling.
Thanks, Steve.
Thank you Alan that question today comes home Cat and that Cat of Imperial Capital Cat. Please go ahead, you line as a pattern.
Good morning, guys.
Good morning.
Well congratulations.
<unk>.
On the corner.
Really accomplished a lot.
Got.
I'd like to maybe follow up and three topics one is.
2022.
Another is.
Capital allocation and then the third would be.
Steel prices.
With with respect to 22, you mentioned that.
The orders are strong and.
And it looks like your off.
22 at least the early part of 22 looks looks to be strong.
Can you give us a sense for how much.
Visibility you have <unk>.
Are you sold out through a certain date are you taking orders for certain month in 2022 can you just give us a little bit more color on that.
Yeah and it it varies made all our products have different lead times and they go to different channels and and so the question can't be answered for me a simple quantification level, but I will say the order books compared to our production levels are very strong so.
We can look into the future next year and have a pretty good idea of exactly what we need to produce.
And then on top of that we know that consistently you're gonna get additional levels. The additional orders that that need to match with the production levels. Our customers. So there. There's a number of different factors you look at Kirk one you Gotta look at what your order books are worthy compared to historical levels, which we send our comments are extremely high levels compared to storycorps.
But also we want to make sure our order books are in line with what our our customer's production capabilities are.
And so when you look at those different factors Uhm, you can look well into next year and go Okay. We feel very very confident that the demand is going to be strong for 2022, and I'm not even really starting to address the inventory replenishment needs to take place. If you look at one of our primary customers I was.
I was out there they're national dealer meeting recently I mean their their inventory levels at the beginning of the year, we're at historical lows and they've dropped further.
And again. This is this is their dealers and so I see demand just being robust at the retail level based upon our order books and then again you throw in the inventory replenishment that needs to take place and I think that pretty well takes you through 2022.
Fantastic.
I know, you're not providing specific guidance earnings guidance, yet but.
Can you give us a sense for cash requirements next year, maybe maybe capex any other.
Any other and I'm I'm real obviously, I'm thinking about what what free cash flow might be.
Next year.
Any any unusual cash requirements.
I would say there aren't there aren't any unusual cash requirements from a depth respected there's very little that's required you know in terms of current maturities its normal stuff related to a credit lines and outside of the U S and we will pay down as cash flow dictates, but to the broader question about capital expense.
Pitchers and investments in the business is that we've been maintaining with them.
A decent range as a percentage of sales and we will continue to do that I would expect to see.
We're predicting 30 $35 million in capital expenditures. This year it will be increased a bit next year, but again as a percentage of the sales. It will remain in a very healthy banned for us to be able to manage.
Manage our cash flow.
Honestly with robust profitability means that we will have positive free cash flow. That's my expectation for next year.
So as far as giving strict predictions on what that number is I'm not I'm not prepared to do so yet because we're still going through all of our planning for next year.
We're going to continue.
Continue to invest in the business in a healthy way and I think from a broader capital allocation perspective, we're going to continue to invest in the business to try to drive innovation on the products that we are producing.
And making sure that we have the efficient plants that are.
Producing products that we need for for the future. So we're we're going to continue to invest in a very similar pattern to what we have been doing.
This year, particularly.
That's helpful. Thank you do you do you have a do you have we used to talk about four times I think is a net leverage target have you updated that number.
No I haven't updated it obviously, we're at three three times I've said it earlier I expect us to be in that kind of territory for the reasonable future. There's no reason to be any different.
Our EBITDA is at a very robust level and will continue to be so.
And that is stable.
So.
That's great. Thank you and then lastly on steel prices.
<unk> has come up just a little bit, but it's still a multiple of the.
Historical mhm.
<unk> pricing and you manage the the spike in steel prices very well.
How.
How would a collapse in steel prices impact your results.
What I would say a couple of things is that we obviously have to manage the cost of those materials and then and know how that is going to flow through our our production. The good news is we don't maintain as.
As high a level of inventory that than what we're used to be and so that the cycle time is faster with respect to help you know.
Steele flows through our.
Production.
So we kind of model that and we know that and we manage our pricing with our customers as well cause there are mechanisms within that that process and we were very clear to our customers that there are lead times and lag times, if you will with respect to win.
When the when.
That material flows. So again you can see through our results again this year that it's been managed in a pretty healthy way with our margin improvements and I fully expect if there is a significant drop in and steal.
We will be able to manage it on the way down like we managed to going out.
Awesome. Thank you and then just one follow up on that.
On that.
The the the.
Capital structure.
Now that liquidity is so much stronger.
Then it has been leverages down.
How much cash do you need.
To run the business I know I know, there's always been a lot of cash overseas, but.
<unk> is it to supplement your working capital requirements, but does that.
And what kind of cash requirements would you say you need to have to run.
Yeah, I can go back to where it was two years ago, and we managed at lower levels and what we have today and so we can manage it.
A little bit lower but I think I feel like we're where we're at right now we are able to manage the pretty effectively and this is kind of where we like like to be in the obviously, it's gonna go up and when we when we have the opportunity to see continued.
Cash nice overall cash flow enables us to make more strategic decisions about the future in terms of.
Yeah things are ways to be able to invest in the business for long term growth.
Great. Thank you for taking my question great job Yeah.
Yeah. Thanks, Kurt.
Thank you. Our next question comes from before I came in all 4000 and company. The Fries. Please go ahead you line as a pattern.
Hey, Thanks for taking my questions.
Kind of a newer shareholder bit of watch the stock for quite a number of years back one more he was C O.
I agree to stock is extremely undervalued I think as a shareholder one of the ways you can help people think about.
You know why the stock is undervalued and some of the things that you guys have been doing to improve things you know it might be a good time to talk about what you're seeing on the productivity side with the employees that you hired it's important to understand your card employees you could you discuss that.
But as a shareholder when you think about the the the.
The backlog and and the order book that you've laid how any color that you can provide in terms of you know line right productivity revenue per employee.
That would be very helpful for shareholders to kind of understand you have for sending in front of you and livestock sort of value that any comments you can give in terms of.
What you used entirely as it relates to incremental margins on sales would be very helpful. I think you're seeing it over the last two quarters, but if you could.
You know definitively talk about some of those metrics and how you know higher revenue outlook flows through to the bottom line for shareholders I think it's it would be very beneficial to.
People's understanding what the upside opportunity is I'll pause, there and I have all of your questions as well.
Yeah <unk> your <unk> your comments are certainly valid and important.
I think our results, though this year do support some of the comments you made and maybe they're not spelled out exactly with the matrix and the indicators that you highlighted but.
David mentioned, our head counts up over 12% since since last year at this time, that's our global head count.
And we're doing that in a very dynamic challenging environment and so let's clearly pointed to a high degree of success that Titan has has a company to to recruit and retain people.
On top of that are volumes have grown quite significantly this year and so we're doing that with the a team of people around the world that are working extremely hard and effectively and so.
Our comments about the <unk> you know the actually our audit committees chairs a cloud our <unk> our stock trading at six and a half times you.
Look at you Gotta look at where where you're at today by looking also at where are you Ben.
And you look at this tightened team that in this dynamic environment. The accomplishments. We had this year you know you go back a couple of years ago.
This was a stock that was trading very low or bonds were trading well under par we put together a strategy that emphasized some things as a company that.
Weren't necessarily that exciting, but they were stuff that we knew we had to get done which was protecting our balance sheet and this is going back Prepandemic and you see what we've done this year to protect our balance sheet as both David and I've mentioned.
Oh, that's that's huge all our bondholders got paid back at a 100%.
And then some we've driven our stock up from that point and then the pandemic hits us and you know throughout the pandemic.
All our plants were declared critical.
Infrastructure of the <unk> of the governments and their respective countries and so this team kept our plants operational throughout the pandemic you know we got hit in the hot spots of the Globe. You know we've got four plants in central Italy, we have a plant in Spain right outside Madrid.
We've always through this whole time, we've always kept operational and so our team has done a tremendous job and then you look at our results. This year, what we've been able to accomplish in and you see the growth on the top line, but you also see a fallen through to EBITDA and and and the rest of the business. So.
While we haven't spelled that out an exact metrics as as you highlighted the results speak for themselves and more importantly, what I'm really highlighting is its the foundation that we've built with this team and how hard we've worked through these different different battles and challenges that we've encountered.
We again, we've restructured the balance sheet, we've gotten through the pandemic operationally taken care of our customers and now is our customers have grown their demand. We've continued to grow with him to be more of their demands and and what what we intend on doing going forward is more of that and you know I'm really proud of what the tightened team has done as I said my opening comments I'd.
Thank them for all their their efforts that they they.
I have had not just this quarter, but what we've had throughout the last few years and so for me that goes way deeper than any metrics, we could provide for ya, but certainly understand your comments. They they are valid and something that David David Todd and I need to.
Talk about further.
Yeah, I would I would encourage you to to think about that and then you know just trying the comments as it relates to the order book and there's a very dynamic.
Environment is it really surround materials that you've touched down to some extent, but I believe there are some past comments that were made when there was a very dynamic move higher and somebody input costs that we actually went to the order book repriced. Some of the order book to ensure that we had good margins can you help the <unk>.
Masters understand how the order book is structured is it time.
Tied to committed volumes with committed price or is it more along the lines of the customers are looking for volume, but pricing is contingent upon where those raw materials are at any given point in time.
<unk> point production starts or can you just help us understand some of those dynamics as it relates to pricing inside the backlog.
Well I would I would tell you that it's it's very it's fairly calibrated with with were expected production costs and material costs are we have.
You have firm order decks within a given period of time. It does vary across the business and then there's forecast that are out and they can be repriced, particularly with the where they have to market is in and in some cases, you your price protect certain things, but most of that in most of the case. It is it does move with where.
Our production costs are are going to flow and we plan for that and we communicate with our customers regularly about where that's at in an environment that we've seen in the last year with the spike in raw materials, that's been very dynamic and our customers understand.
And we've been working with it it's going to work the same way as it when it when it went up as it goes down or blue or at least plateaus at least for now so.
Uhm.
Again again, you can't just make a a generic statement as to that it's you know a lot of on the side, it's customer by customer.
And we do Ah I think our teams do a great job, making sure that our customers are aligned with where it costs are and so we can make sure that they're both.
They're getting products and we're making the right margin that we need to.
Okay understood and then on low sidewall players I think we've spent years trying to educate the add community in terms of the benefits of those Tigers compression of the soil and then there was some period of time or solve all out fuel savings over time, we're seeing a pretty high spike and the price of it.
Diesel fuel.
Does it make the sales pitch for little cycle tires, even better than it's been over the last few years and then just from you know very high level. If if we're selling more low seibold tires from a mix perspective is at beneficial to grasp.
Large and performance then I have one question I have for that.
Yeah, and I mean, the the low sidewall product is really developed a strong reputation through the years, but to your to your comment and question I mean the the.
The rapid rise in energy prices certainly helps.
The cause for low sidewall, but.
To be honest with you we feel very strong about the way that product is already positioned in the market. It's proven itself consistently time time after time and I and again I think that energy situation will will only help that sales pitch, but we don't we don't necessarily need that to have a good sales pitch.
Is basically what I'm, saying, so we are very.
Very impressed with the performance of low sidewall as far as the low sidewall products as far as what it means to our financial results. It. It is a premium product it's price in a way that's beneficial to to the company, but it's also a win win for the end users. It makes their equipment perform better so really ultimately it's it's to the <unk>.
Fax number and user that's gonna drive the the financial performance of L. S. W and so far for the end users and for Titan, It's been a tremendous products and a tremendous platform for our company and certainly we see that continuing to build into the future.
Okay. Thank you and then just can you clearly lay out what the capital allocation priorities are in the reason I'm asking that is.
You you have done a very good job improving profitability and the debt metrics it definitely.
Definitely move in the right direction, you have made a bond transaction to turn out your debt.
Doesn't really seem to be a big urgency to.
Lowered that but I don't want to put words in your mouth, but you're coming into a situation, where you know high level problem lots of free cashflow, you kind of laid out a cat that story for next year, you start to dot the I's and cross it seems a lot of free cashflow. So as a shareholder can you explain.
To me what your what do you plan to use it for go forward.
Yes, yes, it's obviously a deep question.
Where we have had a lot of discussion at the board level strategically about where we can go in the future and there's there's definitely could be some opportunities on how we can grow for the long term and invest in those those those discussions around going.
Again, we.
Very quickly come from a tough situation to a very good situation and so it's all still very fresh we obviously can't just sit still and think about okay. We've done a good job what do we do now, but so it has been ongoing.
Again, it's going to be about investing for growth in the future.
Come in the form of a number of different things, which could including acquisitions as well.
Can't deny that and we want to be very focused on what could be.
Something that is very very central to the core business that we have.
And no I think that's a that's where we're going to focus as far as that goes yeah, yes, we will be able to take advantage of some of this free cash flow debate pay down some of the the call. It. The lines are the term that that we have outside of the United States. We still have about 30 million outstanding on the ABL and we'll do that as well I.
Do feel like we want to I mean at the same time. This debt is also very cheap.
[laughter] I'll, just say that and so yeah, we will play that out and determine what's best for us and and where to use that cash most beneficially in the business, but again, it's all about investing into the core business that we have.
Okay. Thank you for taking all my questions.
Yep.
Thank you get some take out of the question and answer session I would like to turn the conference call back type it to Mister pull right for any closing remarks.
Yeah. Thank thank you everybody for your time and your attention today [noise] certainly we're proud of our accomplishments or performance this quarter and really throughout 2021 for that matter.
Look forward to touch base with you all soon take care of good day. Thank you.
Thank you for attending today's presentation.
Has now how can you <unk>.
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