Q2 2023 Titan International Inc Earnings Call

August 3, 2023

Since have been placed in a listen only mode and it will open the floor for your questions and comments after the presentation.

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 Allan Snider, Vice President financial planning and analysis and Investor Relations for Titan Mr. Snyder the floor is yours.

Thank you Laura good morning, I'd like to welcome everyone to tighten in the second quarter 2023 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'll begin with a reminder, that the results we are about to review 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 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.

From 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 a reconciliation of the non-GAAP measures to the most comparable GAAP measures.

The Q2 earnings release is available on the company's website at.

A replay of this presentation a copy of today's transcript and the company's latest quarterly investor presentation. We will all be available soon after the call on Titans website, I would now like to turn the call over to Paul.

Thanks, Alan and good morning, everyone.

Our one Titan team delivered again this quarter with solid performance.

Really pleased pleased with our Q2 results as we executed effectively to take care of our customers and with that delivered $59 million and adjusted EBITDA.

We further strengthened our balance sheet with free cash flow of $49 million in the quarter. This capped off our highest first half free cash flow in more than a decade and pushed our cash balance up to almost 200 million with EBIT leverage at just one turn.

<unk> improved strength of our balance sheet, along with the team delivering solid performance illustrates the tightened is in a good position for future growth opportunities.

Look we've had a good start to 2023, we've been working our way through the previously communicated inventory impact is primarily within our AG customer base and our guidance that we put out does illustrate that we expect to have an overall strong year that will rank as one of the Titans best years in our history.

Good morning, ladies and gentlemen, and welcome to the Titan International Inc. Second quarter 2020 to be earnings conference call.

At this time, all participants have been placed in a listen only mode and it will open the floor for your questions and comments after the presentation.

Before diving into that though I want to like to really provide some context around how much we've accomplished as a company over the past four years.

If you should need assistance, please dial star zero and an operator will assist you.

If you look our strong financial results from 2021 22 in the first half of 'twenty three demonstrate the strength of our one Titan core values and how we have operated effectively in challenging times to meet the needs of our customers and along with that drive strong financial performance.

It is now my pleasure to turn the floor over to Allan Snider, Vice President financial planning and analysis and Investor Relations for Titan Mr.

The floor is yours.

David and I have always believed that the foundation built around tightens plants people products and our entrepreneurial can do culture is strong at Titan, but if you look back to 2019, our financial performance and our balance sheet. We're at a point where significant improvement was critical.

I'll begin with a reminder, that the results we are about to review presented in the earnings release issued yesterday.

At that time, we developed and communicated a strategic plan to shareholders that would drive growth via product development, the divestiture and reorganization of certain business units and the closure of underperforming plants to improve profitability. While we're also going to address the critical need to fortify our balance sheet.

Along with our Form 10-Q, which was also filed with the Securities and Exchange Commission yesterday.

Flash forward to today and 2023, we have executed successfully upon these initiatives and we have accomplished much more so.

Additional information concerning factors that either individually or in the aggregate.

So exactly what we've done over the past four or five years.

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.

I will start with the accomplishments we have made to strengthen our balance sheet by significantly reducing net debt managing working capital effectively and generating strong cash flow.

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.

For example, we have reduced our net debt from $433 million at the end of 2000 $19 million to $234 million as we sit here today.

This came from a solid combination of paying down debt and generating cash growth.

That means in three and a half years, we have nearly halved our net debt.

Also during that period, we have invested significantly in our plants products systems and people.

As well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures.

The Q2 earnings release is available on the company's website at.

2019, we have invested over $125 million in product development plant efficiencies capacity growth. While also embarking carefully on our global ERP implementation that is well underway.

A replay of this presentation a copy of today's transcript in the company's latest quarterly investor presentation. We will all be available soon after the call on Titans website, I would now like to turn the call over to Paul.

This strengthened our balance sheet that we now have in place gives us the opportunity to develop a longer term strategic plan for future growth in plant enhancements. We are working on that multiyear plan as we speak and are excited about the prospects for our customers and shareholders that will come from it.

Thanks, Alan and good morning, everyone.

Our one Titan team delivered again this quarter with solid performance.

Really pleased with our Q2 results as we executed effectively to take care of our customers and with our delivered $59 million and adjusted EBITDA. We further strengthened our balance sheet with free cash flow of $49 million in the quarter. This capped off our highest first half free cash flow in more than a decade and pushed our cash.

Another example of what we've accomplished in recent years as the improvement in our working capital management as a company. We historically were stuck at a level of net working capital around 27% to 28% of sales.

At the end of 2019, our working capital had crept up to nearly 30% our board put a challenge in front of us to get this down in the 20% range.

Cash balance up to almost 200 million with EBITDA leverage at just one turn.

The significantly improved strength of our balance sheet, along with the team delivering solid performance illustrates the tightened is in a good position for future growth opportunities.

Our current working capital now sits currently at 22% and we were actually under 20% for most of last year.

Clearly the Titan team has met the boards challenging goal and along with that has driven improved cash flow to our business.

Another example, I want to highlight this morning is back in 2018, and 19, David and I told investors, we would improve our performance by restructuring of divesting underperforming businesses.

Before diving into that though I want to like to really provide some context around how much we've accomplished as a company over the past four years.

At that time were sending us back about $40 million a year in operating losses.

These are never easy processes, they require significant planning communication and effort to successfully execute.

The Titan team over the past few years has accomplished our restructuring goals and therefore has really improved our financial performance profile. Therefore going forward, we will be a better <unk>.

<unk> company to withstand any cyclical market pressures and maintain a healthy balance sheet during those times.

We have illustrated this in our updated IR presentation to help investors understand the benefits that this brings to our company and our shareholders.

Additionally, and this is really an important one for US innovation is an inherently been part of our entrepreneurial culture and really a core strength of Titans founder, but it's a skill that require significant attention and investment to keep strong over the past few years I've been impressed with the amount of organic growth that we have driven a tightened by.

At that time, we developed and communicated a strategic plan to shareholders that would drive growth via product development, the divestiture and reorganization of certain business units and the closure of underperforming plants to improve profitability. While we are also going to address the critical need to fortify our balance sheet.

If you'd now flash forward to today and 2023, we have executed successfully upon these initiatives and we have accomplished much more.

Newly introducing innovative products into the marketplace such as our.

Market, leading <unk> products the <unk>, the <unk> edge <unk> line to Supreme line in Brazil, the single piece high speed wheels, and Europe in Itm's Trust integrated undercarriage monitoring system.

So exactly what we've done over the past four or five years I.

I will start with the accomplishments we have made to strengthen our balance sheet by significantly reducing net debt managing working capital effectively and generating strong cash flow.

To name a few I encourage all of you to go check out our website or Youtube page to see a bunch of our satisfied end users that get to see their equipment perform better because they choose Titan Goodyear or ITM branded products.

For example, we have reduced our net debt from $433 million at the end of 2000 $19 million to $234 million as we sit here today.

This came from a solid combination of paying down debt and generating cash growth.

The Bottomline is Titans performance and our customers have benefited from Titans innovative products through the years and we intend to continue to do that.

It means in three and a half years, we have nearly halved our net debt.

Also during that period, we have invested significantly in our plants products systems and people.

So look the past few years have been transformational for our company in a meaningful and positive way, it's evidenced in our financial results.

Since 2019, we have invested over $125 million in product development plant efficiencies capacity growth. While also embarking carefully on our global ERP implementation that is well underway.

Over the past 10 quarters, we have delivered over $514 million and adjusted EBITDA, along with $260 million of operating cash flow and $240 million of adjusted net income this.

This strengthened our balance sheet that we now have in place gives us the opportunity to develop a longer term strategic plan for future growth and planned enhancements. We are working on that multiyear plan as we speak and are excited about the prospects for our customers and shareholders that will come from it.

As shareholders and bondholders three or four years ago that believed in the potential of a successful transformation of Titan had been well rewarded.

Look these highlights show, where Titan has come from what the team is capable of and where we're going.

Another example of what we've accomplished in recent years as the improvement in our working capital management.

Now turning to our 2023 guidance, we clearly have gotten off to a strong start to the year from a macro perspective demand in large AG remains strong. This is a major part of our business.

As a company, we historically were stuck at a level of net working capital around 27% to 28% of sales.

At the end of 2019, our working capital had crept up to nearly 30% our board put a challenge in front of us to get this down in the 20% range.

The North American large AG segment is on firm ground with solid fundamentals that stemmed from strong farmer income low grain stocks and pent up demand for equipment needed to fill used in new inventory.

Our current working capital now sits currently at 22% and we were actually under 20% for most of last year.

We have seen North America small AG volumes decrease throughout the year that is more correlated to interest rates and consumer behavior, but I do want to point out that lower horsepower AG equipment is used significantly in commercial agriculture and municipal activities. So demand does not only come from hobby farmer.

Clearly the Titan team has met the boards challenging goal and along with that has driven improved cash flow to our business.

Another example, I want to highlight this morning is back in 2018, and 19, David and I told investors, we would improve our performance by restructuring of divesting underperforming businesses.

Therefore, a bounce back in demand in due course is a reasonable expectation.

At that time were setting us back about $40 million a year in operating losses.

Overall, the European AG market continues to be steady and our business. There has performed very well with volume growth that has come from the solid AG market fundamentals along with share gains.

These are never easy processes, they requires significant planning and communication.

We have seen short term AG demand in Brazil slipped from prior year Theres been a lot going on there with uncertainty driven from the election.

The government AG support has been going through some some question marks here recently, but it does appear to be getting solidified in place going forward and really just the interest rate environment. There. So our Titan, Brazil, Q2, and second half demand that has decreased due to OEM dealer inventory destocking along with some tire.

Stocking at the OEM supply chains, and I will really talk about AG inventory more later.

Moving over to construction demand, it's really been supported by solid activity in infrastructure and nonresidential spending our undercarriage business had another strong quarter and overall a tremendous first half we have seen Brazil construction sales slowdown in a manner resembling what we're seeing in AG.

As a reminder, though I want to point out that tightened does produce construction tires in Brazil, but really our main construction related business in Brazil, primarily comes from under carriage that is an exceptional business that we have there. It's a business that we believe strongly in the long term prospects and have been investing aggressively into it so again.

We look at what's going on in Brazil, with the uncertainty really related more to some local issues there and long term the market in Brazil will still be very strong.

Earlier this year, we did not issue our guidance as our customers are unable to provide clarity with their forecast due to elevated wheel and tire inventory in their supply chains.

Did say, we would do that we would put out guidance midyear. When we felt comfortable that that we had our arms around that issue. It does remain a challenging factor in our business operations, but we are seeing our customers take actions to reduce inventory levels. These actions do directly impacts our production levels and will continue to do so for the rig.

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You'll see that reflected in our second half guy.

Guidance I would also like to note that the inventory issue I am referencing is specific to off road agriculture tires and wheels. So why is that.

Look there are a number of reasons that stem from.

That are related to our industry and really stem from a fear that an OEM won't have a wheel tire available to ship on equipment.

That's also combined with the fact that the AG tire industry overall has a higher number of skus that are required for the various sizes of equipment of different applications, but they are produced in much smaller production runs than that.

<unk> of an on road tire.

Also if a customers waiting on other non tire or wheel supply chain components. It helps to have wheels tires on the AG equipment. So you can move it around the yard while you while you wait for those in other incoming components.

All of that adds up to getting AG wheels, and tires is a priority for Oems and we have heard that repeatedly the Titan has done a better job of getting tires and wheels to customers when compared to the suppliers of other components now another factor has been the retail demand has far exceeded OEM production output in the agriculture sector and that is that.

As they were experiencing constraints from labor and supply chains that means our OEM customers were sensitive to ensuring they have the correct wheels and tires on hand to ship.

Again, I want to remind everybody a agriculture wheel is specific to not just our brand or manufacturer, but to that specific line within that manufacturer.

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Obviously, it's critical that you have the right wheels and tires on hand once the equipment has finished production.

So to sum it all up Oems had stockpiled wheels, and tires in North and South America in 2022, and they have been unwinding the excess in 'twenty three.

For example, with the recent results coming out from the large Oems in Brazil, we are seeing that our shipments to AG Oems are below their reported sales figures and their expectations for the full year and our tightened Brazil business has a very high market share and we are seeing the Oems being more transparent with us about.

The situation and Thats really helping us manage our way through it.

Based on direct conversations with customers, we believe that inventory reduction process will take to the end of the year and we're expecting our demand to be more in line with retail demand in 2024.

And I want to add on another note that in North America.

Large AG Oems are seeing dealer inventories are still below their targeted levels and expect it to be that way through the end of 'twenty three and that's going to provide a good starting point for 2024.

Yes.

I do want to highlight one area in small AG again, we are seeing an environment, where retail sales have slowed while production output.

Got caught up and we've seen dealer inventory and that sector go from a level of about three months to eight to nine months in pretty quick order.

It's pretty well known that small AG retail demand has slowed in 'twenty three.

Along with that correct inventory correction that is that is underway, we are seeing that demand.

Decrease in 'twenty three for small AG and again this is reflected in our second half guidance that we just issued so I realize there are a lot of moving parts to what I. Just said I think it's important to understand it.

Some of the specific inventory correction issues that we're dealing with in our industry.

I think it's important that you understand our guidance, but the bottom line is that the.

The macro environment is still strong and 2023 is going to be a really good year for Titan.

We expect our revenue to be in the range of $1 85 billion to one to $1 9 billion with adjusted EBITDA of $200 million to $210 million and once again generating strong free cash flow of $110 million to $120 million.

Clearly I think a lot of what I said today demonstrates there is fundamental reasons to be positive about Titan as we look towards the future our customers in large AG are confident based on market fundamentals and a replacement cycle thats been curtailed by labor and supply chain issues.

That has really kept their production volumes at a lower level. When you look at prior replacement period, so kind of taking that some of that cyclical volatility out of large AG that we've seen historically.

Also for the new and used equipment inventory levels remain below target. The fleet has continued to age out for tractors and farmer income is still at a nice high elevated level.

All of this bodes well for large AG to continue the positive pace for the near future.

Have a strong customer base and small lag and I keep referencing that sector. They will work their way through dealer inventory levels and we are expecting may will perform better next year as those inventory issues are behind them.

There is moving into construction markets see solid support from infrastructure nonresidential projects, along with solid mining capital and operational budgets. These fundamentals form the basis for our 22023 guidance and reflects another strong year for Titan and really puts us in a strong position as we look to 'twenty four.

Sure.

Wrapping things up this morning, our one Titan team has done an exceptional job, reaching our stated goals tackling challenges to serve customers and really driving improved performance financially.

We are confident that the transformational changes we have made to our business, including our strong one Titan culture will enable us to navigate the dynamic conditions that I highlighted today to once again this year delivered near historic highs and strong results into the future.

With that I'd now like to turn the call over to Dave.

Hey, Thank you Paul and good morning, and thank you to everyone joining us today.

The results, we achieved this quarter, a very satisfying and a number of ways, we anticipated a more challenging environment in 2023 with our customers and we were able to put together a good plan of action ceramic production inventory control and cost management and you see that in the results that we reported yesterday.

I'll just add a few key financial highlights for the second quarter net sales were $481 million and we delivered consistent profitability with net income of $32 million GAAP EPS of <unk> 48.

And adjusted EPS of <unk> 43, and.

And adjusted EBITDA of $59 million, we continue to strengthen the balance sheet as Paul said earlier with $49 million of free cash flow, which increased our cash balance to $196 million.

Again as Paul noted, we free cash flow for the first half of 61 million was the highest first half performance in more than a decade for the company.

Additionally, we maintained our debt net debt to trailing 12 month EBITDA leverage that one times.

It's worth talking about the tax credits, we received over the last year in Brazil.

Recorded indirect tax credits at another $3 million during the second quarter and that relates to the indirect tax credits we received for the full year of $32 million. This.

This has also been part of our ability to drive strong cash flow in both cases, we've excluded from adjusted EBITDA and adjusted net income now.

Now, let's talk a bit about the performance at the segment level starting with agriculture.

Agricultural net sales were $269 million.

Compared to $319 million last year. The decrease was primarily due to overall lower sales volume in North America and Latin America.

As a result of the elevated inventory levels with customers, most notably Oems as Paul discussed earlier also the decrease in net sales was driven by negative price related related to lower steel prices in the market and an unfavorable impact from foreign currency translation.

The agricultural segment gross profit for the second quarter was 49 million. This was down from the record last year in the second quarter.

When performance, it's difficult to replicate in the current environment, where excess inventory with our customers and their supply chains has been prevalent.

The agricultural profit gross profit margin was strong at 18, 1%. However, the decrease in gross profit and profit margin versus last year is primarily due to lower steel prices and sales volume, which resulted in lower fixed cost leverage it's important to note that quarterly operating performance for this segment remains still one of the.

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Earthmoving and construction net sales were $175 million a decrease of 17% to last year. The decrease in <unk> sales was primarily due to lower volume in the Americas caused by a similar high inventory levels at select OEM customers, most notably Brazil.

Sales in Europe , and other parts of the World for the segment were steady reflecting continued stronger construction and mining markets.

Gross profit in our <unk> segment for the second quarter was $29 million and our gross margin remained strong at 16, 7%.

The decrease in gross profit dollars compared to last year was primarily due to lower sales volume, which resulted in lower fixed cost leverage similar to AG.

Again this quarter performance was strong considering the pressure on sales in the quarter and that comes from pricing discipline and cost management, which have been paramount to our financial performance and our global teams are focused on these initiatives across the business.

Consumer segment net sales in Q2 of $37 million were 15% lower to last year.

Primarily due to lower demand for light utility truck tires in Latin America relative to a strong demand period in Q2 last year.

<unk> segment gross profit for the second quarter was $8 million and a gross profit margin or gross profit margin was 21, 6% for the second quarter.

We were down compared to last year in this segment due to lower sales in the quarter due to the effect of cost leverage across the various production facilities remember consumer sales are generated from the same facilities, where we produce AG AMC products. Overall. This result was still very strong reflecting improved mix and our growth initiatives in the U S surrounding third party customer.

<unk> rubber mixing.

Our SG&A.

<unk> in the second quarter were right under $35 million, which compares favorably to where we were last year.

We continue to focus on managing our operating costs and mitigating inflationary cost increases surrounding salaries across the business. Our R&D costs were up $1 million in the current year versus last year due to increased investments in product development.

Our income tax expense for the quarter was $9 million compared to <unk> 19 last year due to lower pre tax income our effective rate was relatively stable compared to the prior year at 22, 8% compared to 21, 6% last year in the second quarter.

Now, let's move over to.

The balance sheet and our cash flow.

Supported demand levels and strong performance also translated into continuation of our elevated free cash flow generation in the quarter.

Free cash flow in the quarter was $49 million, which was the second strongest quarter of free cash flow that we've had in the past decade.

Total cash grew by $32 million to $196 5 million, while we also paid down.

$10 million of debt and repurchased $6 4 million of common stock during the quarter.

We will continue to evaluate any debt payments opportunistically, reflecting judgement as to relative to interest rates versus our cash investment rates. We're in a good position relative to debt levels. Currently as I stated last quarter. We continue to believe that our share price does not fully reflect the transformative actions we've taken.

To significantly increase profit our profitability profile.

Our capabilities for the future and we will continue our share repurchase program in a similar fashion as a reminder, we have $50 million authorization from the board.

Capital expenditures for Q2, 2023 were approximately $16 million compared to $12 million in the prior period Capex will support our multiyear capital programs in place to manage maintenance in an organized way to reflect improved to improve efficiencies with the plants.

Please standby, while we reconnect the speakers.

Q2 2023 Titan International Inc Earnings Call

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