Q3 2022 Titan International Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Titan International incorporated third quarter 2022 earnings Conference call. At this time, all participants have been placed on a listen only mode and we will open the floor for questions and comments. After the presentation. If you should need assistance. Please dial style.
Star Zero and an operator will assist you. It is now my pleasure to turn the floor over to Todd shoot senior Vice President of Investor Relations and Treasurer for Titan Mr. Shoot the floor is yours.
Thank you Matt Good morning, I'd like to welcome everyone to tightened third quarter 2022 earnings call on the call with me today are Paul Reitz Titans, President and CEO and David Martin Tightened senior Vice President and CFO I.
I will begin with a reminder, that the results. We are about to review were presented in the earnings release issued yesterday, along with our Form 10-Q, which was also filed with the Securities and Exchange Commission yesterday.
As a reminder, during this call we will be discussing certain forward looking information, including the company's plans and projections for the future that involve risks uncertainties and assumptions that could cause our actual results to differ materially from the forward looking information additional information.
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 Companys form 8-K filed earlier as well as our latest Form 10-K and forms 10-Q.
All of which have been filed with the SEC.
In addition, today's remarks may refer to non-GAAP financial measures, which are intended to supplement but not be a substitute for the most directly comparable GAAP measures.
The earnings release, which accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the non-GAAP measures.
Most comparable GAAP measures.
The Q3 earnings release is available on our website.
A copy of the replay of this presentation will be available soon after the call with the invest within the Investor Relations section on Titans website, and a copy of today's call transcript will also be made available. In addition, our latest quarterly investor presentation is now available on our website as well.
I would now like to turn the call over to Paul.
Thanks, Todd Good morning, I get the pleasure of starting the call by saying this was another quarter, where the Titan team has demonstrated our operational resilience.
And our determination to produce solid financial results with most importantly, satisfy the needs of our customers our high level of execution with throughout all of our businesses as our global team continues to overcome challenges as they are presented our third quarter results were led by a solid topline growth of 18% to $531 million that was supported with healthy.
Volume gains our gross.
<unk> expanded to 16, 5% that led to strong adjusted EBITDA of $61 million in EPS generation of 68 per share. It is also good to see our financial performance translated into strong free cash flow, which was $40 million for this quarter and that puts us at $69 million year to date.
A whopping $96 million year over year increase in free cash flow is truly impressive compared to the strength of our balance sheet today to where it was just a few years ago.
We have confidence in our business our end markets and of course, the performance of our Titan team in 2022, finishing at the top end of our previously communicated targets along with that we expect free cash flow to exceed $100 billion for the year.
Really good to see our team overcome the challenges of the past few years and serve our customers as well as we have during this period of challenges. Our company has a solid foundation in place with our people product at our production footprint, David will of course share more information on the financial side, but right now the switchover to the market landscape.
It's real it's reasonable to say that the business climate is a noisy place these days.
We do continue to believe that our end markets are still standing on firm ground, especially when you look at the large AG segment and there really are a number of positive indicators that support the fundamentals of our end markets.
Let's start with the farmers that are in a good financial position with their balance sheets and their income levels. The recent USDA report illustrates that corn and soybean supply to supply demand factors along with the low low stocks, we will bring good pricing levels into 2024 at a medical.
With good crop prices and income farmers will continue to invest in upgraded new equipment and the latest technology and replacement tires.
The strong farmer income for recent years combined with pent up large equipment demand from supply chain and labor disruptions Oems along with the continuing low levels of available used equipment bodes very well for 2023 large AG demand. We believe that the bigger picture view is that large AG is in a solid position and we expect this sector to work through the current.
Supply chain challenges to a good future ahead.
Looking at small AG. It appears that inventory is starting to normalize to pre COVID-19 levels. However, overall inventory is still below longer historical norms and there is a need to maintain current production levels in order to normalize their dealer operations.
We at Titan have a strong customer base and small lag and we'll watch the inventory order levels closely as we prepare our 2023 plants.
Moving over to earthmoving and construction, we had a strong Q3 with sales growth of 19% with solid increases in demand are.
Our earthmoving construction segment continues to perform at a high level and meeting our customers' growing demand, especially during this quarter that is traditionally heavily impacted by the August holidays.
The strong results were driven by solid OEM demand in all major geographies and we had healthy growth in our aftermarket business as well, we stated last quarter that our order book and EMC is good and that remains true and this quarter. Other companies have really started this maintenance is positive comments as well as they look towards the end of this year end.
Next so we still believe that the outlook for the E&C segment looks promising for 2023.
I have to say over the last few weeks I've met with quite a few customers dealers and our peer group with some industrial Ceos and I have to say the overall market landscape for heavy industrials, especially when you look at our primary end markets of agriculture, and construction remains in a solid healthy place.
So rapid things up our expectations for the fourth quarter remained strong for sales adjusted EBITDA and free cash flow and with our performance year to date and current visibility for the remainder of the year, we expect to finish the year at the top end of our previously communicated targets.
Obviously the business climate. These days has a lot of moving pieces that require attention and the ability to adjust rapidly.
Titan has been consistently demonstrated our ability to navigate through these challenges and we have confidence in our team to take the appropriate timely actions as needed. Most importantly, I am confident our team is confident our customers are confident in the quality products that we build around the world every day and really the important role these products play in meeting the evolving needs of.
Not just our customers, but the end users using that equipment.
We continue to believe that the key elements are in place to drive continued positive momentum at Titan and I really want to take a moment, though to express appreciation to our Titan team for delivering tremendous results this quarter and really over the past couple of years. Our team is committed to taking care of our customers. We see healthy demand from them that will require us to continue to work.
Very hard here.
With that I would like to turn the call over to David.
Thanks, Paul and good morning to all of you joining us today.
Our business continue to thrive during the third quarter as Paul said, we had strong results compared to the prior year, let's not forget the third quarter last year also was a strong result, and we beat that by a nice margin this quarter.
Let's run through the key stats from this quarter's performance.
We had net sales of $531 million in Q3, which represents the strongest Q3 in our history and the first time, it's exceeded $500 million in a third quarter.
Net sales grew 18% from Q3 last year, even with a 5% headwind on currency devaluation against the dollar also keep in mind, we sold the Australian business at the end of March which also had an impact of lowering sales this quarter as compared to the prior year and that was it.
Another 2% <unk>.
Excluding the impact of FX and the Australia divestiture Q3 sales grew by 25%.
Our gross profit grew by 45% from last year, and our margin reached 16, 5% versus 13, 4% last year.
Adjusted EBITDA for the quarter was $61 million up 74% or 26 million from Q3 last year and.
And more importantly, our trailing 12 month adjusted EBITDA now stands at $236 million more than doubling where it was at this time last year.
Our earnings per share growth was also impressive on both reported and adjusted basis on.
On an adjusted basis. It went from <unk> 17 in Q3 last year to 54 this year in Q3.
Our cash balances were also stable this quarter at $117 million and free cash flow for the quarter was $40 million, bringing year to date free cash flow to almost $70 million.
As a result of further debt pay down this quarter, our net debt dropped to $330 million down from $368 million last quarter and our net debt leverage now stands at one four times trailing 12 months adjusted EBITDA coming from the dramatically improved profitability and our continued focus on working capital management.
Before I get into the segment discussion I want to clarify a few things about our business seasonality. The last couple of years have been exceptional because of the pandemic and then the market recovery in.
In Q3, as we saw a return to traditional ordering patterns and plant maintenance by our customers and we had fewer production hours for our plants.
And that's what you see in the results in length compared to the first and second quarters. This year at the same time, it's important to see that we had continued expansion of top and bottom line relative to last year in the third quarter, which is impressive given what I just said.
Now, let's get into the performance at the segment level, starting with agriculture agricultural niche segment net sales were up about 50% of total sales this quarter and were at $289 million, an increase of $45 million or 18% from Q3 last year. This growth came from a healthy balance of volume <unk>.
<unk> and the impact of higher pricing.
Reflecting cost of raw materials, and other inflationary costs, which includes logistics and energy currency devaluation impacted sales in the second quarter in the third quarter in this segment by 3% relative to Q3 last year.
The agricultural segment gross profit for the third quarter was $46 million.
Up from $33 million in the prior year, representing a 38% improvement year over year and gross margins were strong for AG at 16% in Q3 up from 14% last year.
Our earthmoving and construction segment experienced a very solid quarter overall net sales in the segment grew by $32 million or 19% from Q3 last year, a similar growth to what we achieved in Q2 last this year.
<unk>, which represents the majority of the sales in this segment grew 24% within this segment from the third quarter last year similar to AG growth for this segment was driven by increased pricing relative to raw materials and other cost inflation as well as healthy volume increases the.
The strong dollar relative to the rest of the World was impactful in Q3 for this segment.
Sales were negatively impacted by currency devaluation of approximately 8% or $13 million.
Gross profit within our EMC segment for the third quarter was $35 million, which represents an improvement of almost $14 million or 64% from gross profit last year.
The gross profit margin in the segment was significantly better at 17% versus the prior year of 13% again, the largest driver of increased profitability came on the increase in sales within ITM.
While growth occurred across all our businesses and geographies from last year.
The consumer segment Q3, net sales were up 10% relative to last year in Q3.
Like last quarter, our specialty growth initiatives are taking off most notably our custom mixing of rubber stock in the U S. While we had some offset from slightly lower consumer sales across all regions due to normal seasonality. This year, most notably our Latin American utility truck tire sales.
This segment's gross profit for the third quarter was solid at $6 7 million or <unk>.
16% improvement year over year.
Gross margins expanded to 16% compared to 15% last year in Q3, and this improvement in dollars and margin are primarily reflective of the positive mix of products that we sold.
SG&A and R&D expenses for Q3 were $34 million, which represents six 4% of net sales for the quarter. This was down from last quarter's spend as well as the prior year, reflecting some savings in legal fees and other variable expenses and the effect of the <unk>.
Sale.
The Australian wheel business.
Earlier in 2022.
For the first nine months, our SG&A and R&D costs, excluding royalties were six 6% of net sales compared to eight 2% last year.
We continue to have very strong focus on managing our operating costs within our operations and that has had an even more of a positive effect on overall profitability.
During the third quarter, we recorded an additional $9 5 million related to indirect tax credits in Brazil, Our ITM, Brazil operation prevailed and its legal action regarding non income indirect taxes that had been previously charged and paid similar to what we have with our Titan Brazil operations in Q2 during a.
The third quarter, we recorded $1 6 million and income taxes related to that recognition on a year to date basis, we have recorded $32 million in total indirect taxes for Brazil.
Other income and $9 4 million and income taxes associated with that recognition of the tax credits, we expect to utilize the majority of these credits against future tax obligations over the next 12 months.
The tax credit recognition was excluded from adjusted EBITDA for Q3, and the first nine months as <unk> seen in the reconciliation in the earnings release.
Our reported taxes on income in the third quarter were $11 4 million as I, just stated $1 6 million of the provision related to income from the indirect tax credits recorded during the quarter as a percent of pre tax profits. The overall effective tax rate was 21, 1% in the third quarter, which was slightly less than what we saw in Q2.
Cash taxes are expected to be around $25 million for the full year, reflecting the positive impact of the utilization of a portion of the Brazilian tax credits. This is higher than the guidance I gave last quarter as we've seen increased full year expectations of profitability in Europe and other countries.
And our cash flow continues to be a strong part of our performance this year.
Our cash balances held steady this.
This quarter at $117 million, our operating cash flow was at 15 $353 million in the quarter, which was driven by strong earnings and stable working capital.
At the end of the third quarter, our liquid working capital as a percent of annualized sales based on the most recent quarter was at 21% slightly up from Q2, while it improved from the prior year about 40 basis points. We are on track with our expectations and I expect us to continue to improve our working capital management as we closed the.
A year out while maintaining a strong view of setting up 2023, well from an inventory perspective.
Our capital spending in the third quarter was also within expectations at $13 million and the full year capital expenditure target continues to be at around $45 million to $50 million, which is the same as our original guidance for the year.
We are already underway with our review of next year's capital expectations and I believe we are near the sweet spot for spending.
With focus on ongoing maintenance in our various plants, along with investments to bring about increased efficiencies and selective capacity expansion.
It is also important to note that we have that with the continued technology innovations for our products. We are investing in the necessary tooling to manufacture the highest quality products for our customers.
When you put all this together, we expect free cash flow for the year to be at $100 million or more.
The strongest yearly cash flow in our history with the volatility that we're dealing with on an ongoing basis. This is tremendous performance from our team.
I mentioned that the asset that our net debt leverage at the end of September improved to one four times trailing 12 months adjusted EBITDA down from one eight times at the end of the Q2 and two nine times at last year end.
We made another nice improvement this quarter as we paid down debt by $35 million using our free cash flow generation.
We have put ourselves in a very strong position as a company to have options on allocation of our capital.
As we've discussed previously we intend to manage our debt position across the business globally first and then when we look at the appropriate investments in the business to put us in position to grow profitably on a sustained basis. We will also continue to evaluate the best opportunities to deliver the best returns for the company on a long term basis from acquisitions to cash return.
The shareholders.
Our financial performance this quarter was exceptional once again and it is reflective of the strong market that we're in and the our ability to manage well through what has been an ever involving.
Ever evolving environment.
Our full year outlook has continued to improve throughout this year and we expect to deliver growth and expanded margins in the fourth quarter relative to the prior year as Paul discussed at the beginning today, we are driving towards the high end of the targets that we discussed last quarter in sales profit and cash flow expectations.
No nothing is simple these days, but our operating and management teams are bringing it all together to deliver very strong performance and the best in our history.
Thats our story for now and it just keeps getting better now I would like to turn off the over the call back to Matt.
For any questions that you have today.
Yes.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
The first question comes from the World.
He says there's army with Sidoti Your line is now open.
Good morning, everyone. Appreciate all the detail on the call.
I wanted to ask.
Address some of Paul's early commentary, which seem to.
Reporting a little bit later this quarter. So we've heard from your customers. It seems to match up a lot with what we're hearing from customers which is.
Order books on AG remains healthy, but maybe not growing at this point after a very strong year, whereas heavy construction appears to be very very strong which would seem to be counterintuitive given.
Recessionary.
Global Recessionary concerns can you sort of walk us through those two segments and how youre thinking about some.
We're closing in on entering 'twenty three.
Yes, absolutely.
I'll start with Earth, moving construction Youre right that that segment for us outperformed really in the third quarter and we're seeing that.
The order books continue to remain healthy as we close out the <unk>.
'twenty two would move towards 'twenty three so.
Your point that might be a little bit counterintuitive to what one would be thinking looking back six months ago, but certainly feel thats. The position were in in our Q3 results support that so youre EMC looks good as we as we roll the calendar.
When you look at AG, specifically looking at large AG I think the fundamentals.
Where we thought they would be six months ago, three months ago, and they continue right on that pace, you get a little bit of noise going on with supply chains and labor at the Oems as they get caught up on production but.
All indications with the fundamentals with the farmer the farmers perspective from their balance sheets income look at the inventory levels in the marketplace I think the reports coming out of.
The supply demand economics for the crops look good for not just 'twenty three 'twenty four into the future. So I look at large AG and feel really good about where where things are positioned and those have been consistent with the comments, we have been saying really throughout most of this year. So that's that.
That is something that we certainly see see continuing in the trends as we move the calendar again into 'twenty three.
Small AG is something we'll keep an eye on I think small AG.
Misperceived in a way where you look at it is it is just a toy that everybody ran out and bought some land and they drive around and take the grandkids for right now.
Because it's been induced heavily through pandemic spend and.
I just don't think that's the case I think you got to really look at some small AG closely from the commercial perspective and understand that debt.
Some of the fundamental drivers that you see in large AG are also applicable for small AG there.
There is definitely a strong strong commercial element to small AG. So I don't want to sit here and create a perception that again that that was just pandemic induced.
<unk> toy spending going on it really is something that we see much different in that our customer base with small AG is very strong. We've been spent a lot of time with them kind of understanding where they see things.
Going in the early parts of 'twenty, three and they see a marketplace, where there are dealers do need to continue to build their inventory levels.
You have some unmet retail demand and clearly the impact of inflation on small AG is going to be have a bigger impact than it would on other parts of the business. So I think thats one thing you've got to look at closely as inflation and interest costs go up will that slow down some parts of small AG for next year.
But at this point again, there's unmet retail demand and inventory the DCP replenish so they still got.
Good healthy production levels as we move into 'twenty three.
Alright, great I appreciate the color.
When we look at steel and rubber prices over the last six months plus.
That seemed to be down pretty substantially can you talk about your aftermarket pricing and how that might impact margins over the next couple of quarters.
Well I think the way to think about.
This in terms of pricing versus cost is just maintaining alignment with that so that we protect dollars up and down as things fluctuate over time.
We've done a really good job of managing those expectations with our customers and is managing through the date those kinds of cycles and so we feel still very strongly comfortably that we maintain that alignment and we're going to we'll continue doing that going forward, yes, youre right. The steel has had been at a lot more volatility.
To it.
And down but again, we've done a pretty good job managing that and managing that cycle.
And specifically.
Specifically to aftermarket.
<unk> very carefully aligned on both aftermarket and OEM with that regard.
Great and last one for me in terms of maintaining your cash flow guidance for the year. So it's still.
I mean, if you exceed that number be down a little bit, but still a significant number after two very strong free cash flow quarters whats. The focus now I mean, it seems like you can still pay down some more data here are comfortably and get the balance sheet prepared.
<unk> eventually hopefully it's two years out of cycle were to turn with debt reduction still remains the priority.
Yes that still remains a priority, but we paid a lot of our debt down our ABL facility in the U S is at zero now, which was a priority for us to get to make that happen we've taken the opportunities on some higher cost debt.
With respect to variable interest rates.
And we did.
Did that during the third quarter and so but those things aside that we're in a very stable position.
We may still we may build cash a little bit in.
In advance of 2023.
We'll be very careful to align everything with respect to inventory.
Working capital side during Q4 as well to protect production for next year and making sure that we have more level load everything that we need to so overall I think we're in a very healthy position to have options.
Order to quarter, there'll always be some fluctuations with that and but long term we're building towards.
Continued.
Strong balance sheet and managing towards any cycle.
That's in front of US and also there will be opportunities in the future to do acquisitions and also do some maybe even some larger investments in the business as well and we'll obviously communicate those.
When we see those priorities come to fruition. So I think that's really the story.
Would there be any increase in Capex next year I know, it's early to start making budgetary announcements, but in terms of how you're thinking about capex anything major.
Jim.
Well, we have ongoing programs that we'll be carrying over to 2023 and beyond that we have multi year kind of approach to some of our larger investments and those continue.
Said it in my comments earlier I think we're in a reasonable range of where we expect to spend from a capital perspective, certainly with from a cash flow perspective, we're in a comfortable position there too so.
I wouldn't expect it to be dramatically different.
Great. Thanks.
Thanks, Paul Thanks, David appreciate the color.
Thanks, Susan.
Thank you for your question.
The next question is from the line of Kurt <unk> with <unk>.
Imperial capital your line is now open.
Hello, everyone. Thank you for the call.
Congratulations on another great quarter.
Just.
I'm curious about.
Couple of follow ups one is.
The split between large and small AG my impression is pretty heavily weighted towards large AG, but I just wanted to.
Are you sharing the split revenue wise.
That's not something we've shared publicly but.
I think the market, obviously with the prices on large AG are going to lead towards a split that's heavy towards large AG and we certainly feel that our production capabilities are as strong attribute when you talk about large AG, meaning we have that depresses, both both tires and wheels capable.
Of servicing the large AG market and obviously, we got the <unk> portfolio that is an excellent fit for large AG. So certainly that the dynamics of large AG. It obviously the values with it are going to lead us to.
To focus more on that but.
I think to add tightened we're very proud of the small AG portfolio, we built through the years and we've seen some customers in that space, who have done a really good job building their own infrastructure around small AG.
David Best it heavily in the market and they have built excellent resources internally for product development.
Their own footprints with their dealer networks, and so my comments about small AG and our customer base are really driven towards the fact, we have some excellent customers that space, who do a great job servicing that that portion of the market and so we have a tendency to look at it differently because those customers that really focus on small AG. They don't they don't get into the.
The large AG space as much. They go up to 150, 175 horsepower and Thats kind of where they cut off with the majority of their portfolio is going to be 75 horsepower or less and so again, it's not it's a bifurcation of the kind of just naturally happens within some of our customers, but so.
Anyway, that's where we direct the comments and clearly small AG has been on a tear for for a number of years and again, our customers have done a great job, helping really expand that market and building the strong base within it.
I think those trends have been very positive for Titan as well so.
Yes.
We believe.
Really really strongly and at our capabilities our portfolio of both small and large AG.
But it was what's your question.
I'll stop talking and let you ask questions.
I was just wondering if there was anything you could share on the split night, that's fine I think I think I've got it.
Good sense there I appreciate it thank you and then.
Yes.
The returns that you've put up here are impressive and im sure Theyre getting.
The attention.
Others I'm just curious have you noticed any.
Any changes any moves by competitors or would be competitors out there that would.
The competitive landscape.
<unk>.
Well I mean, I think our goal has been through really the last three years is just keep continuing to take care of our customers needs and if you can stay one step ahead of the competition in doing that that's how you win the race and our team has done a great job doing that the results clearly support that and so we build products that meet the.
The end users' needs better than anybody in the marketplace, we have done a great job connecting.
To the end users through our customers and so our strength is really just to continue doing what we're doing.
Any marketplaces competitive and youre going to see things change and go through different periods.
Or are we seeing anything dramatic change in our landscape at this point no.
But really our focus is I mean, I think we have a competitive advantage we need to continue keeping the foot on the pedal doing what we're doing.
Got it okay. Thank you and then last one for me.
The comment about.
Market fundamentals strong into 2024.
I'm just curious if how does how does that.
Optimism.
Impact your capital allocation do you have a net leverage target or any more clarity on.
On that front.
I'll take the front part of that I'll, let David jump in.
We are also expresses expressly that optimism is really on the farmer income side. When you look at the stock levels, they've really come down and so the supply demand economics.
The grain space has really improved I would say in the last few months.
So really I think the indications are strong through 'twenty four that farmer income strong crop prices is going to be very healthy and so with that they're going to have the capital to continue to invest in new technology, new equipment and along with that there is the technology that we offer with our products, but also obviously the new equipment that I'll have Bob.
Impact on our sales as well so that's the front part of the question David when you take the risk.
Great Great question.
<unk>.
As we progress through this year and we.
We haven't been in this era for very long so we've been looking at all of the <unk>.
Opportunities that are sitting in front of us with respect to how we allocate capital.
We will continue those discussions at the board with the board.
Right times.
As we're going into 2023 planning we're in the middle of it right now and we will have the right discussions at the right times with them, but just looking at whatever the landscape that's sitting in front of us.
As we look at this year and next year, we're going to be in a very strong position from a balance sheet perspective.
Either either through further debt reduction or increase cash both both mean the same thing in that regard. So we believe we will have a multitude of options and we will take advantage of.
Of those things to make sure that we deliver the right return for all shareholders and all constituents all investors.
So those decisions haven't been made at this point.
To evaluate all of those things and we will do those things and communicate appropriately at the right time, but right now we're still in the middle of all of that plan.
Got it and then with respect to the capital structure.
<unk> got the most of it is the fixed rate notes I'm just curious as the rest of the debt all floating rate.
We have a couple of pieces of debt that are in Latin America that are fixed but most of it is floating yes.
It's different so you still have.
Yes, you still have some debt some.
Debt thats floating rate that's pre payable.
And again it is pre payable at various points not exactly everything right now there are some opportunities there, but we did a little bit in Brazil. This quarter. There were some higher rate pieces that we paid off.
Got it I appreciate it thank you guys.
Yes, Thanks, Eric.
Thank you for your question.
Concludes our question and answer session I would like to turn the conference back over to Mr. Rich for any closing remarks.
I appreciate everybody's participation and tightened Q3 call today and look forward to bringing the yearend results to you in 2023. So I appreciate everybody's participation. Thank you.
Yes.
Thank you for attending today's presentation. The conference call has now concluded.
Yes.