Q2 2022 Titan International Inc Earnings Call
Ladies and gentlemen, thank you for your patience this call as Jude starts in a couple of minutes time.
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Sure.
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Good morning, ladies and gentlemen, and welcome to the Titan International Inc. Second quarter 2022 earnings Conference call.
At this time, all participants have been placed on listen only mode and we will open the floor for your questions and comments after the presentation if.
If you should need assistance, please dial star zero and an operator will assist you.
It is now my pleasure to turn the floor over to coach Todd shoot Senior Vice President Investor Relations and Treasurer for Titan Mr. <unk> the floor is yours.
Thank you Elliot and good morning, and welcome everyone to our second quarter 'twenty two earnings call.
Joining me on the call today are Paul Reitz Titans, President and CEO , and David Martin Senior Vice President and CFO .
Just a reminder that the results. We are about to review were presented in the earnings release issued yesterday, along with our Form 10-Q, which was also.
As Jason mentioned yesterday.
As a reminder, during this call we will be discussing certain forward looking information, including the company's plans and projections for the future that will involve risks uncertainties and assumptions that could cause the actual results to differ materially from the forward looking information.
Additional information concerning factors that either individually or in the aggregate could cause actual results to differ materially from these forward looking statements can be found within the safe Harbor statement included in the earnings release attached to the company's form 8-K filed earlier as well as our latest Form 10-K and forms.
10-Q, all of which have been filed with the SEC.
Additionally, today's remarks may refer to non-GAAP financial measures, which are intended to supplement but not be a substitute for the most directly comparable GAAP measures. The earnings release, which accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the non-GAAP measures.
And the most comparable GAAP measures.
The second quarter earnings release is available on our website and a replay of this presentation will be available soon after the call was that in the Investor Relations section on our website as well.
A copy of today's call transcript will be made available.
On the investors site afterwards, as well I would now like to turn the call over to Paul Thanks, Todd and good morning.
As a reminder, we updated our expectations for 2022 in mid June at that point.
That's a reflection of the momentum that we saw in our business continuing in a positive direction and I have to say our Q2 results certainly did not disappoint on that front.
This quarter Titan had sales of $573 million up 31% from last year with a strong adjusted EBITDA of $82 million, which compares to $37 million last year.
I think we also did a good job of translating the earnings into cash flow with with our free cash flow coming in at 56 million for this quarter.
As indicated with updates to our 'twenty to 2022 forecasts and also with our Q2 results today, we feel good about our business our end markets and really the overall performance level of the tightened team.
I have noted before and I'm going to do it again, our Titan team has done a very good job adjusting to the challenges of the past few years and our results clearly have supported that we have a strong foundation in place with our people our products and our production footprint that is well connected to our customers you combine that with a management team that's going to continue running hard.
Like a good long distance runner again, we feel good about the direction of where our company is going.
David will share more about the financial information and I'm going to switch gears now to the market landscape.
In simple terms, you could say our position remains bullish there and there are a number of positive aspects that support that both within Titan and then externally in the end markets that really line up well for 2022 and even beyond that.
Again, our press release issued yesterday afternoon shows results and updated guidance at that illustrate that belief. So despite some of the recent noise around agricultural construction. There is a picture that looks good for the future.
What I mean by that comment is the headlines will tell you that the farmer sentiment index in AG capital spending index of slipped in recent weeks.
As a result, primarily of corn and soybeans the commodity prices dropping from record highs you combine that with the input cost inflation and then you combine that with the OEM supply chain concerns. It has helped it's helped fuel some some like I said drop in the index as it concerns with some folks yes, those headlines of statements or.
Accurate, but no they do not illustrate the complete accurate picture.
So let's start with farmers are clearly going to still make a lot of money. This year and if you look at the indications from the USDA that is going to continue in coming years. That's a really good place to start to feel good about where things are going the sky is not going to fall from the rising input cost farmer income is going to be good and it's going to compare very.
Really to where its been at historically.
Not to mention the farmer balance sheets are in good order as well and Youre going to continue to get good government support around the world for this for the AG sector.
Next if you look at the global supply demand economics for the primary grains. They look good not just for this year, but well into the future and that again is going to provide support for elevated commodity prices and strong farmer income.
These economic factors combined with an age AG fleet that needs updated, especially if they're going to take advantage of the improved technologies that are coming along with the continuing historically low inventory levels that we're seeing in large AG both in used equipment and new equipment at dealers all this really pushes and forms.
A strong foundation for solid demand for large AG to continue into the foreseeable future.
So elaborating a bit further on that these market forces combined with the delays in order deliveries from the Oems due to related production challenges provide further indication of good support momentum for a multiyear demand cycle in large AG.
On the other side of the equation with the shortfalls in OEM new equipment deliveries, we are seeing in our business solid aftermarket demand, reflecting the needs for replacement tires in the midst of the shortages and available equipment, but it also illustrates the strength of our L. S. W product portfolio that simply makes existing equipment perform better.
As reiterated recently by the major Oems is still does not appear likely that youre going to see 2022, OEM production levels really move the needle much with the low the historically low dealer inventories in large AG.
So therefore, you're really looking at 'twenty three before meaningful inventory replenishment could take place and that unmet 22 demand retail demand is going to carry forward into the future again the point being there are a good number of positive forces in the AG sector.
It definitely appears as positive way is it going to keep flowing.
Now <unk> is clearly an important driver of our company, but let's move over from the AG World to Earth moving construction.
As a reminder, that's a little over 35% of our business.
Our undercarriage business ITM is a significant driver of this segment for us.
ITM had just flat out an excellent quarter.
The strong results were driven by solid OEM demand in all major geographies and along with that OEM performance. We had good growth in our aftermarket business. We stated last quarter and still believe the outlook for EMC or EMC segment looks promising as we were basing that foundation on a good order book.
And we're also seeing continuing growth in our mining replacement parts, where that market looks favorably supported by the production activity that's taken place.
So looking into the future you're going to get some infrastructure investments that will kick into gear and that will provide some further support beneath that demand.
Similar to AG. There is the continuing production pressure at the Oems to meet current orders and that really does again like AG provide a longer tail to this current demand cycle.
So wrapping things up our expectations for 2022 remains strong and we expect continued topline and bottomline expansion relative to prior year.
Obviously the business climate. These days has a lot of moving pieces that require attention and the ability to adjust rapidly.
We have been consistently demonstrating our ability to navigate through these challenges and we have confidence in our team to continue to take the appropriate timely actions as needed most.
Most importantly, I'm confident in the quality products are people build around the world every day and the important role. These products play in meeting the evolving needs of our customers and the end users.
So given our strong Q2 performance and our current visibility in the second half of the year. We now expect 2022 full year sales of around $2 2 billion and we have increased our target for adjusted EBITDA to be between 240 and $250 million.
This will also drive improvements to free cash flow performance that is now expected to be in the range of $90 million to $100 million.
With that I'd now like to turn the call over to David.
Thanks, Paul and good morning to everyone on the call today.
The momentum we have seen in our business as significant as you can see our sales remained very strong but more importantly, our margin performance was of note in our cash flow came through <unk>.
We expected as our teams continue to drive very hard.
So here are few key stats on this quarter's performance, we saw our eight quarter of sequential sales growth and was the strongest sales quarter since Q2 of 2013.
Net sales grew 3% sequentially from Q1, and 31% from Q2 last year keep in mind, we sold the Australian business at the end of March which had a 2% impact on sales this quarter.
Our gross profit grew by 78% from last year, and our margin reached 19% our.
Our adjusted EBITDA was 182 million, which increased $25 million from last quarter and $45 million from Q2 last year.
On a trailing 12 month basis adjusted EBITDA now stands at $210 million.
Our cash balances increased this quarter to $117 million with strong operating and free cash flow in fact free cash flow for the quarter was $56 million as Paul said earlier.
Thats very significant for us our net debt dropped significantly in the quarter to $368 million down from $4 24.
$424 million last quarter, and our debt leverage now stands at one eight times adjusted EBIT down a trailing 12 month basis coming from improved profitability and our strong working capital management.
Let me take just a few moments to address margin performance, which occurred in the second quarter and for that matter over the last year. It's a complete testament to the team's strong efforts to manage everything from top to bottom from supply chain to production scheduling from logistics to sales management with our customers, which includes pricing in this inflationary and volatile.
Environment. It isn't just one thing that has led to our exceptional performance in each of our business units across all regions.
Are performing well with no exceptions.
Paul gave a solid update on the world around us and the market indications in our outlook I will update you on a few other key metrics for 2022, including all things cash flow here in a minute, which includes which is continuing to improve as well now let's talk about performance at the segment level starting with agriculture.
Sure.
Our agricultural segment net sales were about 56% of total sales again this quarter were $319 million, an increase of $87 million for me from Q2 last year and was up sequentially from Q.
One by almost $9 million, representing 3% sequential growth.
We had strong growth from both aftermarket and OE this quarter with healthy production balance will continue to balance between growth and volume and the impact of higher pricing, reflecting cost of raw materials and other inflationary costs.
Currency devaluation impacted sales by 3% in the quarter.
And I had a similar effect on the first half sales.
Our agricultural segment gross profit in the second quarter was $62 million up from $35 million in the prior year, representing a 75% improvement year over year.
Gross margins were 19% for AG in Q2 up from 15%, 15% in Q2 last year and 15, 5% last quarter.
It goes without saying our growth in gross profit margin was impressive in the quarter driven largely by improved efficiencies across all of our production facilities, along with pricing and favorable product mix, including healthy growth in MSW and other new and updated product lines in the U S.
Our Earth moving construction segment experienced a solid quarter overall net sales and EMC grew by $34 million or 19% from Q2 last year. This also compares favorably to the first quarter 'twenty to 'twenty two levels.
With sequential growth of $9 million or four 5%.
All of the major geographies experienced year over year growth during the quarter with the largest growth coming from Itm's undercarriage business, which grew 20% from Q2 last year.
Q2 represented the strongest revenue quarter for ITM in its history.
Growth for this segment was driven by increased volume and pricing.
To raw materials.
And other costs.
Of inflation.
And we again, we had healthy volume increases across the segment as well.
Which was partially offset by currency devaluation of 5%.
Gross profit within the Earth moving construction for the second quarter was $36 million, which.
And an improvement of $14 million or 63% from gross profit last year.
The gross profit margin in the EMC segment was significantly better at 17% versus the prior year of 13%.
Again, the largest driver of profitability came across.
From increased sales in Itm's undercarriage business, while growth occurred across all of our businesses and geographies from last year.
The consumer segment Q2, net sales were 44 were up 44% or $13 5 million compared to Q2 last year similar to last quarter, our specialty growth.
Product growth initiatives are kicking in most notably are accustom mixing rubber stock here in the U S.
Gross profit in the segment for the second quarter was very strong at $11 $11 million.
An increase of $7 6 million from last year gross margins were at 26% improved from Q2 'twenty. One margins are 13, reflecting positive mix of products, which carry higher margins.
Our SG&A and R&D expenses.
Q2 was $37 million, which represent.
Six 4% of net sales for the quarter. This was down from last year's last quarter spend as well.
Again like recent quarters, our expenses included variable spending new compensation, reflecting the significant increase in sales and our profitability during the period as.
As a percent of sales our operating costs dropped 160 basis points year over year in the second quarter.
For the first half it's dropped to 180 basis points as a percent of sales compared to last year.
During the second quarter, we recorded $22 $5 million related to indirect tax credits in Brazil, Our Brazil operation prevailed in a legal action regarding non income indirect taxes that had been previously charged and paid all supporting documentation was submitted and approved during the second quarter.
And income was recorded we also recorded a $7 8 million in income taxes related to the recognition of those tax credits.
We expect to utilize the majority of the credits against future tax obligations over the next 12 months. This recognition was excluded from adjusted EBITDA for the period and as Youll see in the reconciliation in the earnings release.
During the third quarter, we will be filing supporting documentation to the tax stores for another Brazilian subsidiary and we could receive approximately $10 million of additional indirect tax credits to be applied to future tax obligations. We will record these benefits upon approval from the tax authorities.
Our reported taxes on income in the second quarter were $19 million, which is fairly large include increase from last quarter again.
$7 8 million of the provision related to income from the indirect tax credits are just talked about as a percentage of pre tax profits. The overall effective tax rate was 21, 6% in the quarter and if you include the exclude the income and the tax relative to the indirect tax credits the effective.
<unk> rate would've been approximately 17% in the second quarter.
With improved full year profitability expectations income tax expense for the full year.
Are expected to be in the range of $35 million to $40 million inclusive of the impact from recording the indirect tax credits.
As a percentage of pre tax income I anticipate the effective rate to be around 23% to 24% for the full year our.
Our cash taxes are expected to be around $20 million for the full year, reflecting some positive impact from the Brazilian tax credits.
Now, let's talk about cash flow.
Our cash balance improved nicely this quarter and jumped to around $117 million up from $98 million last quarter. Our operating cash flow was strong at $67 million in the quarter, which was driven by a healthy increase in our bottom line along with continued working capital management.
Even with the sequential quarterly sales growth our capital spending was inline with expectation.
At close to $12 million, which means we generated $56 million in free cash flow in Q2.
Bringing year to date free cash flow that $29 million.
Full year capital expenditures, our full year capital expenditures are targeted to be around $45 million to $50 million, which is the same as our original guidance for the year.
Our programs for managing ongoing maintenance projects in our plants, along with investments to bring about increased efficiencies.
<unk> selected.
Capacity expansion are going very well.
It was stated earlier in our press release.
We expect free cash flow for the year to be around $90 million to $100 million. This reflects the overall improvements in our profitability and continued working capital management focus.
And I've talked a lot about it on previous calls we remain very focused on working capital management across our business and again that was very clearly evident in the first half of this year.
At the end of second quarter, our liquid working capital as a percentage of annualized sales.
Based on this.
Most recent quarter was 19%, which was improved from Q1 and much better than a year ago.
Our entire management team is aligned around cash.
Cash flow generation and all of our efforts to date have come together to deliver this result, and we intend to keep the splits of the pedal in this regard we will focus on continuous improvements in our processes, most notably our inventory management.
I mentioned that the asset that our debt leverage at the end of March at.
At the end of June .
The one eight times.
Trailing 12 month adjusted EBITDA down from two nine times at year end.
We've made a marked improvement this quarter from last quarter as well due to the improvement in EBITDA, but we also paid down debt by $34 million in the quarter using our strong free cash flow generation, we're in a very manageable debt position and we're well poised to manage the business for future growth.
I continue to get the appropriate questions.
We're going to allocate capital in an era, where we are.
Much more significantly free cash flow positive.
I will continue to state publicly that we intend to manage our debt position across the business globally.
And then we will look to the appropriate investments in our business to put us in a position to grow profitably on a sustained basis as far as cash to our investors. We will continue to evaluate our best opportunities to deliver the best returns for the company on a long term basis.
Our financial performance in the second quarter was exceptional and it was it clearly showed the power of the business and the collective decisions that have been made as we generated strong cash flow coupled with and in line with our increased profitability. Our full year outlook has continued to improve through the year and we expect to deliver.
Growth and expanded margins in the second half relative to the prior year.
We are increasing our expectations for the full year once again this quarter the.
To restate, we continue to anticipate full year sales of $2 2 billion with an EBITDA range of $240 million to $250 million.
I've already given you what we expect in terms of capital spend in our free cash flow.
We expect that we will continue to generate cash flow progressively from here through the rest of the year and it should be the strongest cash flow generation year in our history.
I've been saying that for a while now but our story continues to bill and it is exciting to share what we have going on at Titan.
Now I would like to turn over the call back to Elliot the operator for any questions you have today.
We will now begin the question and answer session to ask a question you May Press Star and then one on your touch timeframe.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Our first question today comes from Steve Zhang from Central thing commodities. Thanks go ahead.
Good morning, Paul David appreciate all the.
Color on the call did want to ask about guidance coming off of what was a really really strong quarter. I know <unk> is typically seasonally your strongest point of last year, given the demand and backlog you didn't really have that much seasonality the guidance raise seems to indicate you're.
<unk>, either something is going to weaken or much stronger seasonality or are you just being really conservative can you walk us through how you're thinking of the second half of the year.
Yes, we're thinking obviously.
Expanded margins in the second half relative to last year.
We believe that the.
We will have our traditional type of year end.
And that our second half is going to be really solid.
Have you seen any shift in what you're hearing from customers, particularly from Europe that would would caution you a bit or I know you mentioned the mining youre still getting pretty good replacement demand that those would be the two obvious places where there could be some cracks in outright Europe in mining anything there youre seeing.
No no we're really not.
We've done a pretty extensive deep dive into our order book and ensuring that what we are.
What we're expecting for the back half of the year is there and really actually looking already into 2023 at the order book and we're seeing really good signs in all directions that.
The met him that exists in our business and our end markets is still in place and so.
Our main focus has produced the products and get them in the hands of our customers.
Okay.
In terms of the numbers in the quarter. The one that really stood out to me and I know, it's a smaller one but in the consumer segment you generated a really nice margin. In Q1, you said it was going to be sustainable and actually was much much better in Q2, our non seasonal revenue growth, what's going on with mix, there and how sustainable is it.
Off of this level.
Yes, I would say that it is pretty sustainable we have a significant amount of improvement that where that's coming from products that carry higher margins in the business, most notably our a rubber mixing here in the U S and we had an exceptional quarter.
We have good strong order books for the second half of the year as well.
And so you think rubber mixing continues at this type of levels to overall revenue because I'm, assuming that's what's driving margin or I could be wrong, but driving the substantial growth in margin comparatively.
When I when I think about margin expansion, yes.
Our.
Our Q2 performance in that area, specifically should be sustainable.
And in the second half of the year.
Okay.
Mentioned the strength in Youre seeing developing in low sidewall I know that was something you were you were bullish on it was kind of slowly developing have you seen a ramp now that youre getting into a much stronger replacement cycle are you seeing greater.
Adoption of <unk> and what do you think that means longer term.
Look I mean, as we've been saying our <unk> product is continues to gain momentum.
It's a reflection of the investments we've made to connect to the marketplace that are connected to end users and ensure that the value prop route proposition is a win win from all sides of the equation from the Oems to dealers and users from Titans and so to answer your question, Yes, we have seen that continue to accelerate.
As one of the OEM production delays have.
Limited the amount of available used equipment in the marketplace.
So we've been able to get really good traction through through the used market, but also we're getting the traction through the Oems and so the growth is really all around now.
I would say if you look back historically, we really connect more directly to the dealers and the end users, but now the growth is coming again Oems dealers.
And so.
There is absolutely no reason why that won't continue to grow.
The reason.
I say that is and it goes back to <unk>.
The basic foundation of what it is it makes equipment perform better what it does is an improvement for the end user.
It brings a good value to its anybody that puts the MSW onto their equipment.
Okay.
I appreciate the detail thanks, Paul David.
Yes.
Thank you.
Our next question comes from Kirk Ludtke from Imperial Capital. Your line is open. Please go ahead.
Hello, everyone.
Hey, good morning, Laura.
Can you congratulations on the quarter. Thank you for the presentation just a couple of follow ups on the.
On a couple of topics one is the guidance what type of <unk>.
Working capital assumptions do you have built into that second half guidance.
Working capital source use.
Flat.
Yes, very similar in fact, as we head towards the end of the year I think we have some improvements that we still expect to see but as a percent of sales.
It continues to be very strong.
No significant inventory build or anything like that.
Excellent.
I did go back in time and look at your inventory turns.
Over the last few years and Youre, turning inventory a lot faster.
Than you have historically.
Despite the fact that commodity prices are high. So you really made a lot of progress. There is that would you attribute that progress too.
Some of the things you've done.
In terms of your systems or or is that more a function of end market demand.
Or both.
I will tell you that we have a significant amount of analysis that goes into our production planning and making sure that we have the right type of raw materials and a lot of focus in that regard and then as far as finished goods inventory goes.
Our new a much better job of just getting product to our customers and not having.
Not having to hold as much inventory in stock so.
Again, it's across the board, but a lot of focus inside the company against across all business units globally in that regard. So we have we have teams that are focused very heavily on specific.
Hi, running Skus, if you will and making sure that we have.
The increase those turns and it's been pretty dramatic in some regards so.
<unk>.
Yes, it's just a lot of hard work.
I bet, so I guess maybe.
At the risk of oversimplifying this it sounds like.
These terms are sustainable.
I firmly believe so yes, yes.
Yeah, we haven't done it with smoke and mirrors are some secret sauce, I mean like David said, it's been good hard work and we have improved our forecasting systems in some key parts of our business. So we're seeing that the information that we have internally is leading where our customers are going and so it's a great accomplishment for the Titan team that were.
We've put in the work not just this year. So that's something we just put a focus on this year, it's something we've really been emphasizing through the years and again.
Our people have gotten really much improved and doing a good job, but also we've improved some system. So the one thing I've seen is when we talk to customers. The information that we have.
Is valuable to them.
That's again, a strong comps for the Titan team.
Thanks.
Yeah, No that's fine.
Bond money right.
Yes.
While we knew that.
On capital allocation, we knew that a number of years.
Yes go ahead, yes.
Yes, that's all that's along I know, that's a long term project.
A follow up on capital allocation you did mention you are your priorities here.
Managing debt.
Back cement and then returning cash to shareholders do you still have <unk>.
$25 million left on your authorization.
Yes, we still have that available to us.
But.
It's certainly not something thats, the highest priority for us today.
We are looking at.
A number of different opportunities too.
Make sure that we deliver the highest returns with possibly a lot to be analyzed over the next call. It two months six months or so so we're really focused on.
Really just continuing to find ways to grow the company.
Got it that's helpful. Thank you being conservative on it.
Being conservative as to.
Paying down some low.
The low hanging fruit on our debt levels.
Right.
A couple of quarters ago, you mentioned I guess the last time you reiterated your.
Your leverage target I think it was still three to four times that seems.
Dated now but is that still I mean are you.
Are you still targeting net leverage of three to four times.
On a normalized basis, well I was saying.
Those are some initial targets given the where we had come from.
We're going to maintain a conservative posture as far as a specific number.
If we see opportunities to grow the company, we're not going to go out and go crazy on the debt level.
You get past these three or four times I think thats, we don't want to be any worse than that but we're going to certainly be in a much more favorable territory.
At this point in time so.
It is.
It's a great position to be and we have it gives us a lot more flexibility and a lot more opportunities to grow the company.
Got it got it that's helpful. And then and then I guess the last topic is how long does this last.
And I know you don't you don't share backlogs and things like that but can you give us some.
Some color.
Color as to how far out you are taking orders anything that would cause.
Give us a sense for how much runway, we have and then thats. It I really appreciate it. Thank you.
Yeah, I mean, I think the market conditions are favorable for a multiyear period here and that's that's supported in a number of different ways.
I think when you look at AG you can you can find again I could put a laundry list together of exact reasons why I believe it's multi year and I think the activity Youre seeing.
With commodity prices related to the mining sector are going to be favorable with the driving activity. So what we're looking at kind of taking that debt market.
Information, what we look at internally is what trends Youre seeing in your order books, what youre hearing from your customers and.
We spent a lot of time, just last week diving into that and so are the order books strong the answer is yes.
Are we seeing anything that says our business is going through any changes that we need to be concerned about the answer is no.
We do spend a lot of time as we answering the prior question about working capital. We spent a lot of time on the forecast. We spent a lot of time on understanding the information of where we need to go how we manage our production how we manage inventory. So this isn't something that the P&L just given you. The end result at the end of the quarter.
As a heck a lot more that goes into it before that and we need to be right and that's important.
Higher management team and so so far you've seen in our results. This year I mean this is the this is the best quarter in the history of tightened the guidance that we're putting out there is going to make this one of.
If not the strongest financial year in the history of the company.
Do we see strong momentum going into the future guess if here right now.
Are we concerned about where things are going.
Like I said, it's our job to make sure we're prepared to take care of our customers our customers needs and right now our customer needs are very strong and we got to be we got to be continuing to take care of them and that's our main focus so again the P&L at the end of the quarter is going to give you the results, but it's us understanding where the market is going to be prepared for our customer.
<unk> is the most important thing.
We put it and again, we put a lot of effort into that and we see market conditions that are very favorable.
Great. Thank you very much.
This.
A question and answer session I would now like to turn.
The conference over to Mr reach for closing remarks.
Well, thank everybody for their time and attendance. This morning, and certainly appreciate the results of our Titan team for the second quarter look forward to talking to you again for the.
Updated in Q3, thank you.
Thank you for attending today's presentation conference call has now concluded.
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