Q3 2023 Titan International Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the Titan International incorporated third quarter 2023 earnings Conference call. At this time, all participants have been placed on a listen only mode and we will open up 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 Investor Relations for Titan Mr. Snyder the floor is yours.
Thank you Meghan good morning, I'd like to welcome everyone to Titans third 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 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 concerning factors that either individually or in the aggregate could cause actual results.
Uh huh.
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.
<unk> 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 Q3 earnings release is available on the company's website. A replay of this presentation a copy of today's transcript in the Companys 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.
One Titan team delivered another solid quarter on multiple fronts position us well to finish the year with good momentum and financial results that will rank as one of the best years in Titans history.
Overall I have to say I'm pleased with our Q3 results, especially when you look at our financial performance and cash flow and most importantly, our service to our customers to help them derisk their supply chains.
Adjusted EBITDA for the quarter was $41 million, enabling us to continue fortifying our balance sheet with free cash flow of 37 billion.
That allowed us to push our cash balance up to approximately 212 million with EBITDA leverage as just one term.
The significantly improved strength of our balance sheet, along with the team delivering solid performance illustrates the tightened as in good position for future strength and growth.
Overall 2023 is generally playing out as we expected with certain puts and takes across business units that really does illustrate the ability and strength of our geographic and product diversification to deliver solid results in these type of conditions.
Recall that 2022 was an exceptionally good year Titan as we enjoy our highest revenues and free cash flow in history that enabled us to accelerate the paydown of our debt, leaving our balance sheet in excellent shape. While we certainly enjoyed the success 2022 broad has also impacted the optics around our 'twenty three results as industry <unk>.
NAMIC simply did not support.
<unk> of last year's activity levels really driven by the OEM inventory Destocking that is taking place throughout this year.
However, viewed relative to longer term financial performance transfer tighten 2023 is shaping up to be a very good year for the company.
As we approach year end, we're also optimistic that this destocking dynamic that we have been discussing in previous periods as well.
And has impacted.
Thanks.
Our operations throughout 2023 is really starting to work its way towards its conclusion.
This will allow us to enter 'twenty four with relatively normal market conditions and the benefits of seen our production levels now return to being more in line with retail market sales.
So, let's let's flip over to business conditions in our markets and the overall farmer income remains healthy is underpinning a solid demand picture in large AG, which is a major part of our business.
North American large AG demand is further supported by factors such as solid farmer income Youre seeing lower grain stocks combined with pent up demand for equipment, that's needed to fill used inventory and you still have a fleet that's on the older side.
Moving into large AG deeper, though I want to talk about it more specifically from Titans perspective, and it illustrates the strength that we have and goes beyond just looking at the overall market picture one of the factors that sets us apart as a leader and partner of choice in this sector of the market.
Innovation.
It's led by a strong technical connection with end users, that's coupled with our massive production capabilities in wheels and tires. So what does that mean it led to the creation of our low sidewall wheel and tire assemblies, we've introduced that directly to farmers and we've proven to them. They can save up to 6% in fuel efficiency and up to 5% yield.
Gains this easily makes it a wise investment decision for a farmer, that's looking to increase profitability.
Since we've introduced <unk> in the markets, we have seen them prove to our dealer partners into Oems that is a win win solution for everyone.
As <unk> has and will continue to get larger <unk> are a perfect match and keep in mind that tightens plants have the very large presses building equipment and tooling required to meet these growing needs.
Also I want you to bear in mind too that our <unk> user of great retrofit for used equipment, because it will simply improve the performance.
Of that equipment and also what it has done is help underpin a strong aftermarket business for Titan that we built over the last four to five years.
So moving directions away from large AG, we have discussed in prior periods of Titan has a strong small OEM AG business with some really good key customers in that space.
Last quarter, we noted that north American small AG volumes have been decreasing throughout the year I mean, thats expected you look at the rise in interest rates and inflation. So it's going to have an impact on consumer behavior and that dynamic has continued throughout this quarter as well.
Our primary customers in this segment are starting to see market conditions stabilize as excess dealer inventories are subsiding, but more specifically, we will see tightened business start to rebound is that destocking subsides and our production levels will benefit from that so again just to just think of it. This way we've been we've been paddling uphill and small.
Lag.
Is that he'll flattens out we feel like we're almost coast, even when we get the boost from inventory.
Inventory Destocking Society.
Other uses I do want to mention for small lag is it goes beyond just these these hobby farmers in the typical applications that may be thought of when you think of that equipment. It does include other uses in commercial light agriculture dairy municipal activities. So really it's a varied set of end users with each X.
<unk> different drivers and mark conditions for their cases, but again Titan is extremely well positioned in this market place with our wheel tire assemblies that will mitigate the risk of supply chain for these types of customers in this sector.
Looking at the European AG market. It continues to be steady as it has been last quarter and throughout this year. Our business. There is performing very well when you look at it from the perspective is from wheels as our market position has continued to improve.
Conversely, if you move down to South America, and look at Brazil, you have the headwinds coming in from the political shift that brought changes and uncertainty too in AG.
AG market that has around the government support for their AG markets I should say, but our business. There has really been more impacted again by OEM destocking, especially in that region.
In response, our tightened Brazil team, which has incredibly deep experience and knowledge of not just our business, but the entire marketplace, along with strong customer relations and really good market share they've taken swift actions as they normally do and with that.
We've really adjusted to these conditions well, we've protected our financial performance and along with that we continue to provide exceptional service to our customers.
Globally moving over to construction when you look at overall construction activity.
The markets have remained relatively firm is leading construction operators continue to report solid backlogs, it's really buoyed by the infrastructure and non residential spending in investment coming in.
As a result, it is expected heavy equipment is poised to continue to see high use levels, our undercarriage business with more specifically makes up a big part of our <unk> segment had another solid quarter their margins were pressured a little bit by the volumes that I mentioned in Brazil related to the actor.
<unk> taking place there.
As inventory stabilizes in Brazil, we're already seeing our ITM, Brazil business see a solid order book kind of rounding the corner into 'twenty four.
As we look towards 24 overall, our undercarriage business is poised to have another strong year.
So summing all this up.
Look it goes it goes without saying, but I'm going to go ahead and say, it's tightened is executing well I mean, our business is on track to record one of the best years in company's history. Despite this OEM inventory destocking dynamic.
Just on customer meetings that we do.
Do see this issue winding down and we expect to enter 'twenty four with conditions relatively normal confirming our view that the overall macro environment is still good when viewed on a multiyear basis.
So although the appreciation for our 'twenty three results could be somewhat obscured by the difficult comparisons to last year. This really is an exciting time at tightens history over the past several years, we have put a lot of work to position the company for sustainable growth.
Our global product development and innovation like I highlighted earlier, coupled with favorable industry conditions in our end markets that are expected to persist over the mid and long term supports the view that the opportunity at Titan is attractive.
The investments we've made in our people plants and products along with an unwavering commitment to serving our customers has us well positioned to mitigate the risks for our key customers.
Underpinning the AG market is good farmer income is supported by solid supply demand fundamentals. When you look at corn and soybeans. This will provide sufficient support for investment in equipment, especially equipment that has leading technology on it.
Our introduction of leading technology in the wheel and tire undercarriage space, such as <unk> into our undercarriage tracking device enables our partners to offer their end users enhancements to the equipment that will improve performance and in turn their profit.
So wrapping up we are on track to deliver financial results that will rank among the best years in company's history. Our one Titan team continues to execute at a high level and lead the way.
We have a keen focus on serving our customers through innovation and reliable products that comes from a strong global manufacturing footprint that really is at the core of what we do and as we excel at this mission, we fully expect the results to show in our financial performance.
So with that let's turn it over to David.
Thank you Paul and good morning, everybody that's joined us today.
Paul noted this but it bears repeating our Q3 results were solid and it leaves us in a really good position to finish the year well with results again that are going to rank amongst the best that we've ever had.
Given the relatively unusual business conditions in our industry that success is especially noteworthy.
And reflected that both of the hard work by everyone at Titan and also the multi year transformation for the business.
And we've outlined many of those actions and our Investor presentation, and then we're going to continue to talk about all of those things that are really going to drive the business going forward.
This transformation has positioned us well.
And we're in.
Best position, we've ever been with an excellent balance sheet and a business that we fully expect to be more resilient through all market cycles.
Which we've experienced this year to a certain extent.
I'd like to remind everyone that our press release issued yesterday afternoon, and our Form 10-Q filed with the SEC both contain a good amount of detail on our operating results, including segment performance discussion with that in mind I'll focus my remarks today on select highlights and the key items in the quarter.
Starting with net sales, which were $402 million.
It was generally in line with what we expected for the quarter.
Our sales continued to be impacted by all the things that Paul talked about this morning, including the OEM de stocking and the impacts on the Brazilian operations with more significant local <unk>.
Economic headwinds.
We overcame those challenges in our business is performing well our gross margin of 16, 4% in the third quarter is reflective of our ability to hold margins.
Even during the period of temporarily reduced sales volume.
Through the many actions we have taken and the focus on bringing product innovation to the market.
On a shorter term basis gross margin in the third quarter of last year was 16, 5%.
Meaningfully higher sales so our ability to hold margin at 16, 4%. This quarter is exceptional on a year to date basis. Our gross margins are a 17, 3%. It's actually tracking ahead of where we were a year ago at this time, which was 17, 1%.
SG&A in the third quarter was $33 6 million up from last year, we're seeing normal inflation with SG&A, especially on salaries and related benefits.
There is a bit of seasonal fluctuation as on a year to date basis, SG&A is up less than $1 million versus the prior year.
Our R&D costs were up roughly 800000 in the quarter versus last year due to the increased investments in product development as Paul noted technological innovation is a key differentiator differentiator for us and we will continue to prioritize those investments in R&D.
Strong operating performance allowed us to deliver net income of $20 million.
GAAP EPS of <unk> 31, and.
And adjusted EPS of <unk> 29.
And then adjusted EBITDA of $41 million all very good results.
In terms of segment level highlights I wanted to add just a few just a few thoughts on the details that we gave in the release again agriculture is at the heart of who we are and our product innovations and solid management and production operations have enabled us.
Hold gross margins in the segment.
Really nice level at 710, 4%.
In the midst of the OEM destocking.
Our AMC margins were somewhat lower in the third quarter at 14, 4% due to the more impact of the lower OEM demand in the U S and Brazil.
During the quarter, we had some favorable tax developments.
Which led to lower taxes on income as a percentage of pre tax profits at 19, 1%. We now expect full year taxes on income to approximate 25% of pre tax income. These.
These positive developments are primarily centered around tax credits that we can utilize in the U S surrounding income in Brazil, and this comes as a result of Brazil opting into the global tax standards.
Previously we couldnt utilize these credits.
Now, let's take a look at cash we.
We continued to strengthen the balance sheet with 37 million of free cash flow generation.
We used a little under $13 million of that cash to repurchase just over 1 million shares during the quarter.
None of that activity, our cash balance increased to $212 million from $196 million.
At the last quarter end and up from $160 million at last year end.
We were active with the share repurchase program, even after quarter end purchasing an additional 299000 shares for approximately $3 9 million after the blackout period.
We have approximately $27 million remaining on our current <unk> as of today and we intend to be active in Q4 and beyond.
Solid cash our solid free cash flow during the quarter allowed us to maintain our net debt to trailing 12 month EBITDA leverage ratio at one times, which is.
Very impressive results considering.
All the actions that we've taken as a company.
Turning toward year end.
We continue to anticipate full year results that are in line with our previous guidance highlighted by solid margins and profitability and strong free cash flow generation.
As a reminder, the second half of the year has approximately 15% fewer production days and with the traditional late year holiday periods across the globe, we don't see any material deviation from that seasonal pattern. This year.
While we will be driving our near term production to be fully prepared for the seasonal uptick in the first quarter next year.
Now wrapping up our balance sheet is in great shape, when we talked about it quite a bit.
But that affords us the ability to have the balanced capital allocation our markets are favorable and should provide solid mid and long term support for our business.
We currently expect 2024 to be another solid year for Titan and we expect to add to the strength that we've already built over the last number of years with that in mind, we firmly believe that our stock is a good long term investment for the company and we intend to be very active with our share repurchase program in the future <unk>.
Utilizing our capital to fund acquisitions joint ventures, or our internal capital investments are also things that are we are constantly looking at and we will evaluate on a case by case basis for their ability to drive long term value for our company.
That said we are in the midst of updating our long term strategic plan and the investments that we were going to prioritize for the business in the future. We expect to communicate with you soon and I as to these key priorities and our targets.
For the future and I firmly believe it is truly an exciting time for that.
Everyone in Titan and for our investors as well.
So thank you for your time this morning, and your attention to what matters for the to the future of Titan and I'd like to turn the call back over to Meghan for our Q&A session.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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 Steve <unk>.
With Sidoti and company.
Hey, good morning, Paul Good morning, Dave I appreciate the commentary.
On the presentation. This morning.
Big question right is really just for a couple of quarters, you are saying destocking should be completed by year end and production picks up in early Q in early 2024.
<unk> is the last time, we did just three months ago versus now right. The key is.
Has anything changed in your customer communications in terms of where they R&D stocking and their plans to ramp up again in terms of orders of tires and wheels, what are you hearing.
Yes.
Spent a lot of time out that customers lately, Steve and trying to get to that the answer to the question, you're asking and I have been pleased with what I've seen.
Just recently I was up at a customer driving around their yard where they store their wheels and tires and they've had very significant movement on where it used to be to what I was looking at that date and what they thought they would where they thought they would be at at year end and so.
Again, I can think of two customer visits in the last week large customers of ours that I've been pleased with what I've seen with my own eyes, and the conversations I've had with their upper management. So this.
He'll we've been climbing up all year long in pedaling really hard I mean, our team has done a great job.
<unk> with the volatility of this.
Meaning.
The forecasts have been fluid and you can always look at what's going on in the marketplace and to know exactly where our production levels need to be and primarily I'm talking about Brazil, and small lag when I say this too I think we need to zero in on those areas and not create the perception that every situation is exactly the same so if you <unk>.
Look at Brazil, like David and I talked about.
The destocking.
First off the OEM, but way too much too many wheels and tires, especially tires in Brazil. They do that for reasons that are specific to their business, but.
We have extremely strong market share in Brazil. So the Destocking has an impact on us from that perspective, and you combine with the turmoil that was caused by the election. So it's really those two factors, where we saw our customers have to deal with this issue more abruptly and so when you look at what's reported with Brazilian retail.
Sales that's.
Thats not directly.
Hi to what is our orders are for tires in Brazil, right and so what we've seen as those come closer together now as especially as we get towards the end of the year. So.
At the end of the day, we need and we want our customers to take care of this issue. It's just been the how they go about doing it this year.
It varies by customer and it varies by region and so small AG. The same think small AD got hit by inflation by interest rates and so it's not just the Destocking. That's also the market conditions as well. So if you take those scenarios in Brazil.
And small lag and as those markets now appear to be stable.
As they round the corner from 'twenty three 'twenty four instead of biking upheld malware back on flat ground, if not cruising at a little bit more downhill. So our vantage point is improving for us.
Is that Destocking is stabilizing and so going back to your question, Yes, I mean, we.
We are hearing we are seeing the inventory levels come down at our customers because they have to they cant operate with excess inventory at those like they did and they've done a good job handling it so feel good about things being at a stable point.
<unk> the corner at the end of this year into next year.
Great. Thanks, that's helpful.
Question on the gross margins one the obvious question, which is very surprising given the significant revenue decline.
Gross margins were as resilient as they were and Im sure Theres a lot of internal hard work, but a little bit more color because you would have expected some.
Deleveraging from our reduced production.
Not seeing that in your numbers and you add onto that is significant variability in three segments consumer and AG actually better year over year, whereas EMC was much lower even though similar revenue declines.
Yes, Steve with the AMC that we've set out a little bit earlier, Brazil has a.
Had a bigger impact on that with the lower demand there.
And it's a very high margin area for us. So you saw more impact there again.
Again, a lot of factors go into the delivery of the margin that we had a good good discipline in the business and our ability to manage through it.
Yes, it's really it of course on the consumer side, we have some of our.
Efforts to grow business parts of the business that are higher margin as well. So that's impactful to the overall performance of that segment as well so again part of our business being agriculture.
We talked a little bit about that theres, a good mix level in terms of the <unk>.
Product innovations, we brought to market as well so you have that impact.
Impact holding margins at least.
So with a different pricing actions taken depending on the segment.
Pricing is very dynamic in terms of that impact from raw materials and other inflationary factors and so forth and there's again very good discipline in that and how we approach it.
Does vary by city.
Even more than that when you get into this SKU levels and things like that.
Okay.
If I get one more in you didn't change your guidance. What's your revenue was a little bit lower than we might have expected in <unk> the guidance implies <unk> a little bit higher.
It was <unk> in line with your expectations and do you. Indeed think <unk> has a little bit of uptick sequentially.
I mean look we we see our order to X been stabilizing as we go from.
<unk> three into four and then as we round the corner into next year.
We see the boost coming from some of the Destocking being done and again, our end markets being in good condition as well so.
We see things as being fairly stable.
I talked about earlier on the previous question, we see the inventories levels coming down at the Oems.
They just thought we were.
<unk> too many tires, especially in that happens, it's not anything new that we haven't seen in prior years, but.
It just gives you the visibility into that does take some time and getting them to work down through it. So we're watching our production levels, making sure we stay aligned with where we see the forecast in the market demand, but as.
Again, we see it we see a world with the Destocking being <unk>.
Relatively behind us if not behind us by the end of the year like we already talked about creating a nice world is stability for us and so it's good to be on flat ground instead of feel like we're going up Hill, So, yes, I think that.
The position we're in is stabilized nicely as we get near the end of the year.
Great. Thanks, Paul Thanks, David.
Thank you.
Thank you.
Our next question comes from Kirk Ludtke with Imperial capital.
Oh, Paul David.
Good morning.
Thank you for the call.
And congratulations on another another good quarter.
Just a couple of follow ups.
With respect to the gross margin.
Can you expand maybe on.
On.
What has changed and.
And.
Are you are you have you reduced capacity.
Utilization up are you.
Pricing things.
Differently is there is there any.
Any kind of color as to.
So what youre doing differently.
We've got a lot differently and we'd go and we've done a lot of things really well.
It's been a journey to get to that question and the point, we're at with our Q3 results and really throughout all of 'twenty three I mean, we've got a really good job this year.
And so David has mentioned in his comments earlier.
It's not one simple thing it's a lot of things he combined what I keep mentioning.
And some of my comments as well I mean, we are.
Innovation is tremendous.
And with innovation. So it's a win win for everybody. It's increases the profits of the end users our dealers and our Oems love being able to sell a product that makes their customers happy and in return. We can we can earn better margin on that as well. So the innovation leads to better margins. It leads to more stable demand both with.
The Oems and also with the aftermarket again, a lot of products that we produce this innovation can go directly to the aftermarket as well it doesn't have to go through an OEM. So the changes we made at the company with innovation David mentioned, the pricing dynamics, we've gotten really good understanding pricing understanding our costs and combined.
The two of them and we have.
I've said it 100 times in our price add 100, more I mean, the technical connection we have to the marketplace. It's not just engineers boots on the ground it's people that.
Are involved with pricing and financial analysis. They don't just look at it as a number on a piece of paper they understand the equipment that goes on they understand the impact that has to the end user they understand how that flows through our operations and the costs in our plants and so we've created a tremendous environment around pricing and thats.
<unk> stabilize and improve our margins through these cycles and along with that we manage our plants effectively.
Taking everything I said, a strong connection to the marketplace. We have forecast that we know where things are going and we know what to do within our plants and we take the appropriate actions and we've got an.
Awesome team of plant operators around the world.
I've said, it again 100 times I might as well make it 101 right now are our one Titan team has done an exceptional job for the last four years, we've had very little turnover, if any at all and amongst our key management team. So our knowledge our experience our connection to the customer.
Second to none in our industry and it's good to see us be able to handle these cycles.
Like you've seen through 2023, we've had a really good year.
That's great that's very encouraging.
Just shifting shifting topics here.
To the competitive landscape.
Are any of your competitors, making moves.
That are noteworthy.
Do you view.
Any trends in market share.
You're always looking out over the landscape.
What your competitors are doing.
I think the big dynamics, what we've been talking about is just just the OEM destocking.
If we keep doing what we're doing if we manage our plants effectively keep introducing innovation understand.
The market better than the competition have that connection to the end users if we keep doing what we're doing.
We'll be in a good position with the competition so.
Haven't seen anything that has been a significant change to really answer your question directly I feel good about.
What what our moves have been this year, especially in Europe, I feel like our our position in Europe has continued to strengthen.
But again the innovation, we have in North America has been tremendous and our Brazilians.
Have extremely high market share because they do an exceptional job there so in our undercarriage business.
<unk> strong brand keep keep innovating keep pushing into the marketplace.
More distribution better geographical footprint, our ITM Brazilian business, we talked about the impact this quarter from some destocking, but again their market share under carriage in Brazil is exceptional and that business is phenomenal. So no I think we look at it I look at it two ways. One we got to always be looking at the competition like I started the answer to that.
Question, but too.
I got to look at our strengths and you've got to make sure we keep getting better on our strengths and I think.
I think we've been doing that this year.
Great. Thank you and the market shares are stable.
Yes market shares have been stable again, you've got the destocking dynamic, but yes, there hasnt been.
Has it been much.
Anything significant and much more to talk about other than really just watching our customers manage manage through that.
Got it I appreciate it thank you.
You bet.
Kurt.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Reitz for any closing remarks.
Well. Thank you I appreciate everybody's time and interest in our Q3 results today and look forward to talking to you in the new year's we highlight the results from the fourth quarter. Thank you.
Thank you for attending today's presentation of the conference call has now concluded.