Q3 2024 Titan International Inc Earnings Call

Good morning ladies and gentlemen and welcome to the title of International Enchester Court It's by 2024 earnings conference call at this time all participants have been placed on listen only mode and we will open the floor for the comments after the presentation.

Speaker Change: Base and gaining tremendous results for many many years now but to date, though that focus of our MSW marketing and sales programs has been primarily on larger tractors and combines where.

Speaker Change: Where we see a lot of opportunity in the futures to expand into more of the mid sized tractors.

Speaker Change: The bottom line is and this has been reinforced with our discussions with farmers time and time again. This isn't just me telling you. This is that <unk> continued to meet and exceed their expectations. The fuel savings is one performance that is readily quantifiable and we are seeing field results coming in above the 10.

Speaker Change: The 15% range that we had predicted.

This is a very significant impact for farmers and a strong selling point.

Speaker Change: Top of the fuel savings you also get the improved field performance that can with <unk> being able to handle just about every condition thrown at them and then of course, you get one of the most important things to farmers is the reduced soil compaction.

Speaker Change: So as we increase our efforts to target more of the midsize tractor market, which I want to emphasize is a big market. We're talking about 25000 tractors roughly on an annual basis. So if you look at that just tapping into a fraction of that will help move the needle on our sales and EBITDA.

Speaker Change: One of the down cycle.

Speaker Change: On the other hand customer demand was even weaker than we anticipated in our Q3 guidance, which also weighed on our bottom line due to the impact of reduced fixed cost absorption.

Speaker Change: Stepping back I want to reiterate a thing that Paul touched on which is the relative success that we've had in navigating through what has turned out to be a very unusual deep cyclical bottom 2022 was a similarly unusual year for us on the positive side of the ledger and while some reversion to the mean was expected the downside we've seen.

Speaker Change: <unk> has been rather unprecedented in recent memory.

Speaker Change: We took advantage of the excellent conditions in 2022 by aggressively paying down debt and growing our cash levels. While also continuing to invest in our product development, which has enabled us to enter this downturn with a net debt leverage ratio of approximately one times adjusted.

Speaker Change: Adjusted EBITDA that resulting flexibility was a critical asset, allowing us to acquire call star, while still maintaining a relatively modest interest expense level.

Speaker Change: The key thing is our balance sheet remains solid.

Speaker Change: Car Saar has brought in an important diversification to our business in the form of significant aftermarket business, which put as Paul touched on and a larger consumer segment.

Speaker Change: Over the long mid to long term, we expect those larger aftermarket and consumer segment contributions to be less cyclical than the legacy AG business on top of this we are driving product innovation and are focusing on significant growth opportunities across all aspects of our business. Despite the current conditions.

Speaker Change: But turning back to the results for the third quarter. Our adjusted gross margin was 13, 3% compared to 16, 4% a year ago.

Speaker Change: Your opinion.

They haven't been through these cycles before.

Yeah, I mean, that's the heaviest driver I mean, we all.

I think at this point I understand that there is a strong correlation between farmer income.

And then the pull through of purchases of equipment and so.

Speaker Change: I think the.

Focus because well let me, let me say that Youre right on the comment you made Titan has been through a lot of cycles and so we do have a tremendous amount of experience and we've seen this and we don't overreact, but where we are reacting in a favorable way going beyond just cost control and the measures that need to be done is.

Speaker Change: It is really making sure that we're putting the right changes in place with product development and how we how we're doing that is really two pronged. There's there's the internal development of things that I've mentioned, which are you know either new products going into different direction or extension of existing products, but we're really also.

Looking at again, the possibilities of what we can do to expand our portfolio.

Speaker Change: That can be done via our joint ventures or strategic partnerships our own plants looking.

Looking at how we can move into underserved geographies. If you look at the legacy tightened business and how we see the world now with Carla Star and tightened coming together the one stop shop model.

Again really opened our eyes and theres opportunities in markets that currently or I should say previously.

Speaker Change: We just did not have exposure to and couldn't gain that exposure and so I think we're using this time, Steve instead of waiting for crop prices to come up.

Which is going to require some catalyst could be interest rates could be the presidential election could be a SaaS.

Sandstorm that wipes out crop somewhere I have no idea, but.

Waiting for that to happen just isn't the right answer for us and we are.

We know how to take all the actions needed in a downturn, but we're going beyond that and taking the actions that set us up well for the future.

Speaker Change: Yeah.

Understood appreciate that response.

To combine a couple of questions.

As we saw in that level at a call. It a mid cycle peak those are the margins that we expect to be able to deliver and now we're sitting at levels well below that.

That's the pressure, we're seeing now, but so theres no reason why if we as we see.

Recovery that we can't get that operating leverage back.

Speaker Change: Understood.

So we'd look at the balance sheet, you mentioned some of the trade working capital that you reduced in the quarter, how low how much more opportunity you have to squeeze out more trade working capital out of the balance sheet.

Speaker Change: Inventories of key obviously.

Obviously, the key component there we haven't really good control over <unk> and then how we pay our suppliers. So that's really a balance but inventory levels Theyre always there is always opportunity and we watch it very closely.

Speaker Change: As a percent of sales in the current environment. It is heavier than what you wanted to be but it's also with the mindset towards what the next 90 days 120 days of production will be or the demand levels that we will see as well so.

Speaker Change: I would say, we're a relentlessly pursuing optimal inventory levels are in any given period of time.

So I'm never satisfied right, but at the end of the day.

We have managed it well.

But so as you go into 'twenty, five and you expect to see an improvement in profitability.

We will continue to pursue working capital optimization, so that can still be a contributing factor to our cash flow.

So again, all plays together and driving a healthy balance sheet.

Speaker Change: Understood and just.

Maybe this is a cash balances obviously you drew just a fortunate cash to repurchase the shares post quarter end and you draw on the revolver the rest on.

Speaker Change: Good to assume that most of that cash is overseas, sorry, didnt dig into the queue that closely today.

Speaker Change: Yes, traditionally we've carried the majority of our cash offshore.

Have some call it limited opportunities to bring cash move cash around without any tax impact and we will continue to do that we did that earlier in 2024, and we will continue to do that and replace cash that we use for the transaction or pay down debt.

Speaker Change: As well so.

We're looking at those opportunities right now and expect to see some some things happen over the next 60 days.

Got it and the last question for me.

Has been mentioned in a while but from time to time over the last bunch of years.

Speaker Change: It's been discussion about potential sale of the <unk> tractor business.

Is that something that you guys still consider as a possibility. These days or is that more a core business within tightened will going forward.

Speaker Change: Tightening national sorry.

From a management perspective, we view it as a core business I mean, it's a business that we've invested well into so they've had.

Good growth in margin profile in recent years. It performs at a very good level does a great job with a strong brand and taking care of our customers, which fits the tightened profile of the core business.

As you mentioned in the past we have been approached with.

Discussions pertaining to divesting ITM and.

I'd, just say on behalf of the board.

If approached we always not always but in the case of <unk>, we feel like Thats the right.

Thing for our shareholders to engage in those discussions and then if they reach a point, where we have to talk about them publicly than we do.

So I would say our.

Our position really Hasnt changed if approached them I think our board would engage in those discussions, but how David and I see it from a management standpoint, along with the management team at ITM, which is fueling an Oscar is that it's a core business and we treat it as such in fact, David and I will be there next week talking about <unk>.

125 strategic plans with them.

Great I appreciate all the color. Thank you so much.

Thank you.

Speaker Change: Thank you very much as a reminder, if you would like to ask a question. Please press star followed by one telephone keypad and submit yourself in that line of questioning is flip I T.

Speaker Change: Our next question comes from Brian Lantana Zacks Research, Brian Your line is not what happened.

Good morning, It's Brian Lynch here Subbing in for Tom Curran. This morning, I think you've touched on a couple of these already but I just wanted to ask for a little bit more color.

Speaker Change: If you have any feedback from recent trade shows in the AG market specifically.

Speaker Change: Do you feel like there is a.

A tipping point in interest rates potentially where it could jumpstart the market.

Speaker Change: And.

Is there any talk or was there any talk.

Speaker Change: Hum.

Speaker Change: Tradeshows about potential for demand pull forward.

Did you.

Prospect of new tariffs being implemented after the elections.

Yes, I think interest rates and a lot of industries.

Folks are waiting for them to come down and drive activity in a meaningful way.

In our business, what we hear is I mean interest rate is impacting their their purchasing decisions and then also the amount of inventory they want to they want to keep in the channel.

Speaker Change: I would say at this point I mean, the trade show discussions haven't been meaningful difference from January through currently.

And pertaining to the market.

Speaker Change: I think what I would highlight though and what we're seeing in our particular business. When you talk about wheel tires is that impact of Destocking.

What we believe is taking place with this destocking again, partly due to interest rates, partly due to the post pandemic effect wearing off.

Is that in our business, we think the Destocking is over.

Larger burden on us relative to the market and so as the Oems get their production and their inventory back in line, we see 2025, having some positive uplift in our sector.

Because youre going to get back to just inventory.

Our purchase our our our sales being in line more with what's going on in the marketplace.

Speaker Change: We've been overly impacted this year by the inventory Destocking and so.

I think that is an effect that is positive for us in 2025, regardless, where the market goes I would say this in relation to the market.

The catalyst is out there and it's going to happen in times when things are this bad you have a tendency to extrapolate too far that it appears to us through the trough it just keeps going.

Do you feel like we're at the bottom of the trough.

I do think theres going to be a catalyst out there I think the election being done whatever direction. It goes we'll provide at least certainty and clarity towards future pass and so I do think we are at a point, where you can start seeing things break through at some point in 2025.

But again I think for US the key thing is we do think the.

Speaker Change: Destocking.

Subsidizing subsiding excuse me in 2025, we will have a positive impact in catalyst for us in 'twenty five.

Speaker Change: Okay great.

The military obviously the trade shows where we are fine I got it I got to just add one more comment where we have thought as a team is just is just talking about our innovations.

The tightened booth at the farm progress show.

Matt on the environment and the energy use just as good this year has been in the past I mean, we have.

Speaker Change: Tremendous energy around what we're doing and where we're going.

Not just making that upper saying it I think there is enough witnesses that would support that comment so.

Again, I think in downturns like this your innovation can stand out more because people arent just looking to replace what they currently have they're looking for ways to get better and we have innovations that can clearly do that and so.

Speaker Change: This is really the time, we start telling them about the fuel efficiency. The savings we can bring to their bottom line. We can make their equipment perform better we can help solve their soil compaction. The new GPO technology. If you can run out and do your job on a golf course, and not have to worry about going flat.

That's pretty awesome stuff and so I think the energy around the innovation is actually gets a little bit stronger during the downturn so ill.

I will stop I think I've said enough.

Speaker Change: That's great.

Well I guess to sort of piggyback on that when you work with the new go to into the military market.

Speaker Change: Is it.

The sales pitch the same as it typically.

The increased efficiencies that they're looking for is it more a performance driver.

You know as part of those conversations.

Speaker Change: Yes.

It's both but it is different and I think that's why I keep highlighting military as a great opportunity because we've done all of this innovation, we brought it into our core segments.

And like I said earlier, we've lost as military sales and but yes. We have this great technology and I think we can combine the two so we do need to have the right contacts in order to do that and I think where youre seeing more excitement come through as we him and I.

Now getting our team involved we're seeing these contacts start to open up.

Speaker Change: And then we get in there and we start talking about our technology and what we can do different than the competition, but to be honest with you just being candid with you. It's just a part of our business that is really.

Speaker Change: For a number of different reasons changing changes within the military.

And then obviously changes here within Titan where.

We lost some of our key salespeople and military through the years, just weren't able to replace them with the same experienced the same same knowledge.

We try we try to put some folks in there and military you do need those deep deep experience and knowledge and so for me, that's where I think our team being able to bring more into the fold and use his experience and knowledge is what we're doing.

He is excited about because he's like Holy cow.

Speaker Change: Used to be a really nice part of tightened let's go get it back but again the sales were lost 15 years ago, it's not like we're talking about it because these are lost two years ago. This is something that again, a change that took place a while ago, but now we see some avenues, where we can go we can go get it back in again, it will be all accretive to future earnings.

Speaker Change: Great.

Just a housekeeping one for the model I don't do you guys provide any guidance on where you think the share count maybe at the end of the year.

Speaker Change: Yes.

Speaker Change: I can certainly give that to you I don't want to quote off the top of my head on that but it is in the $63 million range.

Because of the because of the recent repurchase.

Speaker Change: Perfect.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Thank you.

Our next question comes from patent is key.

Speaker Change: Imperial capital.

Speaker Change: Your line is now.

Speaker Change: Hello, Paul David Allen. Thank you. Thank you for the call.

I am sorry, I had to drop off for a couple of minutes.

I apologize in advance if these are repeats but.

Speaker Change: You mentioned <unk>.

Speaker Change: Synergies with Carl Sorry, I was I was curious have you are you.

Are you able to share.

The magnitude of the either the cross sell.

Speaker Change: I think as we've continued to drive heart in the business. There's no reason that that is still not true if not.

Speaker Change: If not better.

Speaker Change: Got it and that's just that's just on the cost save side.

Well the 25 to 30 is mostly cost and efficiencies productivity those types of things.

With some commercial opportunity I think we've been pretty conservative on that that's what I'm, suggesting is that that commercial opportunities even more on top of the things that Paul even mentioned this morning. Some of these growth opportunities are not just synergies with Carl star, but just the continued.

Speaker Change: Initiatives that we have on growth that are pretty exciting.

Got it. Thank you if I remember correctly Carl start has a.

Facility in China is that where you're planning on sourcing the smaller tires.

Speaker Change: Yeah, we continue to drive efficiencies in that plant, we have opportunities across the entire business. We have a lot of flexibility we're already starting to see some production.

You call It cross pollination perspective, starting to build some tires there that we previously may have produced here.

Speaker Change: Yeah.

Speaker Change: Got it.

Speaker Change: And I I I know you've talked about the fourth quarter guidance that you gave us a tax number.

And I I missed what you might've said about working capital and Capex for the fourth quarter.

Yeah, we did it in Capex is it kind of the same general direction that we have seen in the past probably a little bit a little bit lower in Q4.

Where we're being very pragmatic about that but as far as working capital. We that'll continue to be a good driver for our cash flow in Q4.

Speaker Change: And but tax rate.

It's a really challenging wanted to put a hard number on it but it's we.

Brazil, playing a bigger role in exporting grains too.

The far east and the U S used to but.

Those things can change.

Things can change overnight to be honest with you. So I think you've got you've got it you got to assume that.

Those equations are going to work out over the long run because a couple of things one protein consumption is too important to people's diets or not.

Not just today, but for the future that's going to continue to push.

Pull through demand for grains.

Speaker Change: But then also government has got to be aware of what's going on in the farm sector.

You can't just let it.

Go basically the wins of the what direction. The wind is blowing in one day you are exporting here importing there I mean, you got to control.

Your food sources within your government structure of your society, and I think thats.

Over the long run that's going to balance itself out and so again I don't think its.

Things are going to go negative in a direction for so long that all of a sudden what we're seeing today just can be extrapolated into the future again, I think people people or protein consumption people are going to continue to eat well or better I should say in the future and the governments are going to make the right decision for the long run regardless of the short run.

On making sure that theyre, taking care of their food production and their sources in relation to having a peaceful.

Satisfied society. So I think again I think over the long run the prices will improve for whatever reason it may be theres catalysts out there that are going to happen, whether it's interest rates politics.

Speaker Change: But farm is not something that you can constantly just have year after year declining prices that won't continue.

Got it I appreciate that's it for me I appreciate the time.

Speaker Change: Thanks Kurt.

Speaker Change: Yeah.

We currently have no further questions. So I'd like to hand back to Mr. Reitz for any closing remarks.