Titan International, Inc. (NYSE:TWI) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Titan International, Inc., First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning and Analysis for Titan. Mr. Snyder, the floor is yours.

Alan Snyder: Thank you, Matt. Good morning. I’d like to welcome everybody to Titan’s first quarter 2023 earnings call. On the call with me today are Paul Reitz, Titan’s President and CEO; and David Martin, Titan’s Senior Vice President and CFO. I will begin with the 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. 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 Company’s Form 8-K filed earlier, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC. 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 to the most comparable GAAP measures.

The Q1 earnings release is available on the Company’s website, a replay of this presentation, a copy of today’s transcript and the Company’s latest quarterly investor presentation will all be available soon after the call on Titan’s website. I would now like to turn the call over to Paul.

Paul Reitz: Thanks, Alan, and good morning, everyone. Over the last few years, we have spoken extensively about the strengths, execution and impressive performance of our 7,000-plus One Titan global team. Titan’s entrepreneurial spirit guides our vision, strategy and culture, which leads us to a strong technical connection with our end users of off-road equipment. That transforms itself into significant value for our customers as we consistently engineer and manufacture market-leading products that make off-road equipment perform better. Our financial results for 2021, ’22 and the first quarter of ’23 illustrate the strength of our One Titan core values and how we have operated effectively in challenging times to meet the needs of our customers to drive strong financial performance.

Myself, our board, our employees have always believed that the foundation of our plants, people, products and entrepreneurial can-do culture is strong at Titan. But if you look back a few years ago, our financial performance and balance sheet were not where they needed to be. At that time, we developed and then implemented a strategic plan to drive growth via product development, improve our portfolio through divestments and by reorganizing several of our businesses and plans to improve profitability and to fortify and reposition our balance sheet. Flash forward now to 2023, we have executed successfully upon each and every one of these initiatives and have even surpassed many of them. I’d like to take a few minutes and add a little more color to each one of those thoughts.

First, we haven’t just strengthened our balance sheet, we’ve transformed it. We did this by significantly reducing net debt, effectively managing working capital and generating strong cash flow. Our balance sheet has shifted from being a drag to an asset, an asset we believe that can be leveraged to support future growth. We have driven growth over the past few years by introducing numerous innovative products into the marketplace, which we regularly highlight on our annual reports and on our website to showcase how we help our end users’ equipment perform better, because they choose to use Titan, Goodyear or ITM branded products. Our market-leading LSW wheel/tire assemblies continue to increase in popularity and our patented Waffl e Wheel is growing at a rapid pace in Europe.

Our continuing commitment to innovation shows the connection and trust we’ve developed with our customers, and this will be critical in supporting our future organic growth initiatives. If you look around, we’ve also divested and restructured underperforming businesses and plans to improve our profitability. For example, we’ve improved our Australian tire and wheel business. First, we improved its profitability, and then we were able to divest it for $20 million. We have shuttered an unprofitable OTR wheel plant. We’ve reorganized products and operations of our U.S. OTR tire plant to restore it to profitability and success. And we’ve improved our TTRC operations to make that an attractive asset in the marketplace. These strategic initiatives helped us successfully tackle the unique challenges of the past few years with the pandemic and supply chains.

As we all know, many of these are truly unique events and circumstances we couldn’t have planned for, but it’s the execution against our plan that allowed us to deliver on our commitments, meet the intense demands of our global customers and rise above the headwinds. But most importantly, during this period, we have enhanced our competitive position. We’ve grown market share. We’ve set new heights for financial performance, and we’ve repositioned the business for long-term success. Despite all these significant improvements to Titan’s fundamentals, our stock continues to lag our performance and trade is now at around 3.5x trailing 12 months adjusted EBITDA. I fully realize as everybody else on this call does that stock values are based upon future performance and cash flows.

However, it is clear based on the new heights and performance we achieved that Titan has built a stronger company for the future. We are going to spend a lot more time talking about this going forward, and I will — I believe it will resonate with you as well. Moving over to our first quarter results now, I am pleased to report that our adjusted EBITDA was $68 million on healthy sales of $549 million. This is up approximately 2% that excludes FX in our Australian divestiture that I mentioned earlier. Our gross profit performance was also very good. We managed SG&A effectively, and this led to a strong adjusted EBITDA performance. Our free cash flow was elevated again at $12 million for this quarter. Working capital continues to be well managed at an impressive level of 20% of sales.

That has been our long-term target set by our Board a number of years ago. And all of this drove our net debt down to $273 million this quarter. Quite simply, our financial performance was excellent again this quarter. Our balance sheet further strengthened, and let us not forget that was on top of very strong 2021 and 2022 performance. Our One Titan team continues to execute well, and I want to thank them for their hard work and commitment. So if you look, we’ve clearly gotten off to a strong start for this year. Like I said last quarter, and I’ll say it again this quarter, it’s reasonable to say the overall business climate continues to kick out a fair amount of noise. You look at the macro level, you’re getting hit with inflation, consumer confidence, supply chains, geopolitics and on and on.

The biggest factor we face is how we — our customers are dealing with managing their supply chain inventory, and we are seeing them take actions to reduce levels. This will impact our production levels for a part of 2023. But let us not take our eyes off the bigger picture. The large Ag segment is still standing on firm ground with stronger farm income, low grain stocks, there’s equipment that’s needed to meet new demand, along with that, there’s equipment that’s needed to fill used and new dealer inventory. ITM, our undercarriage business had its best year in its long history in 2022, and we’re seeing the Earthmoving and Construction segment continue to have a strong favorable backdrop, along with a good start in Q1, we’re seeing Earthmoving and Construction in a good position for the rest of ’23.

Mining aftermarket is poised for growth, non-residential construction market is in a good place, and it always has the backdrop of infrastructure support behind it. Moving beyond the short term, I do want to provide some framework and context around, who we are, what we’ve done and where we’re going in the future is, I feel this is extremely important to understand. Titan continues to have numerous opportunities to drive growth. The core of which is our ability to win via product development and innovation. We are confident and remain passionately committed to continuing to innovate and bring new products to the market that exceed the demanding expectations of our customers and, of course, the end users. The products we manufacture are essential to the industry and customers that we serve.

We have definitely seen that over the last few years. Titan has and does continue to demonstrate its ability to serve as a reliable supplier that can mitigate the risk of supply chains around the world, and we do that despite the ongoing dynamic operating conditions that exist. This strong combination of product innovation, operational agility and a well-positioned global production footprint positions Titan well for the future so that we can continue to evolve and grow with our customers’ needs. I’m going to give just a brief example of what that looks like, we have — is the evolution in Turkey. I think a lot of people may forget that’s the world’s 5th largest agriculture market. We have launched the Goodyear Farm Tire brand there. It’s into that marketplace in a successful manner.

And you combine that with the strength of our existing wheel plant in Turkey. It enables us to grow even further because now we can do what Titan does very well, we can deliver wheel tire assemblies to the OEMs. Here at Titan, we have spent decades building a strong collection of brands to support our high-quality wheel tires and undercarriage products. We view our brands as the heartbeat of our company, and we work diligently ensuring that they endure health — in a healthy position into the future. For example, we have improved our cost of quality in North America in our tire business by over 60% over the last four years from 2019 to 2023 versus the period of 2010 to 2015. This meaningful improvement supports exactly what I just said. It has strengthened our Goodyear and Titan Tire brands.

It’s improved our plant operating costs. It’s reduced wasted raw materials. And of course, that’s helped from an ESG perspective as well. So let me wrap things up here. In recent years, as I’ve said many times, our One Titan team has done an exceptional job. We have reached our stated goals. We have tackled challenges to serve our customers, and we have driven improved financial performance. I already stated that I believe our financial performance justifies a trading multiple higher than where we are today. But I also want to emphasize that we believe the floor on our financial performance during the next cyclical downturn is higher than what our historical financial performance would suggest. We have fundamentally changed the business, our competitive position and our balance sheet, all of which makes us a much more resilient and opportunistic company during short-term down cycles.

We will update our investor materials to reflect that and the message is to amplify — continue to amplify the message in [undelivering] today to illustrate the positive changes and actions that have taken place at Titan to drive long-term value for our customers and shareholders. With that, I’d now like to turn the call over to David.

David Martin: Thank you, Paul, and good morning, and thank you for everyone joining us today. I’m pleased to report another quarter of strong financials as we continue to benefit from the collective contributions from our One Titan team to advance our performance. I talked about this last quarter, but it is worth repeating, our team has established new standards for operations planning, financial forecasting and most importantly, discipline and focus. In the midst of volatility, that has created a stronger foundation for us as we move forward. Now let’s review the key highlights for the first quarter compared to the same period last year. Sales remained at a high level at $549 million. We achieved continued improvement in profitability with gross margins of 17.4%, an increase of 180 basis points.

Net income increased by 36% to $33 million, and we reported EPS of $0.50 and adjusted EPS of $0.53, increases of 35% and 20%, respectively. Adjusted EBITDA of $68 million increased 19% and was our highest first quarter performance since 2013. We continue to strengthen the balance sheet with $12 million of free cash flow, which increased our cash balances to $164 million. Notably, this was the first time since 2014 that Titan generated positive cash flow in the first quarter. Additionally, we further reduced our net debt leverage to 1x. Now let’s talk about the performance at the segment level, starting with agriculture. Ag segment net sales were $306 million, which was near what we achieved last year in Q1. When you exclude the impact of unfavorable currency translation and the effect of price mix related to the steel market and freight declines that we passed to customers, we experienced slight growth from volume.

We continue to see solid demand in the segment from the continued robust farming market backdrop. Our European sales were particularly strong in the segment this quarter. The Agricultural segment gross profit for the first quarter was $49 million, an increase of $1.3 million compared to the first quarter a year ago, and the gross margin increased to 16.1% versus 15.5% last year. The improvement in gross profit and the margin was due to cost reduction and productivity initiatives across our global production facilities as well as lower input costs. Again, we have expanded margins from year-to-year. Earthmoving and Construction net sales were comparable with prior year and at a very robust level. The slight decrease in net sales was partially offset by favorable sales volume and price and product mix across the segment.

The sales volume increases were primarily in Europe, North America and Latin America and were mainly due to recovery in the construction markets and strong mining commodity prices. Excluding the FX impact and the disposition of the Australian wheel business, EMC sales grew by 5%. Our ITM business had a very strong quarter and one of its best quarters in history coming from robust market conditions globally. Our gross profit in the EMC segment for the first quarter was $37 million, which represents an improvement of $6 million compared to first quarter last year. What’s more important is our gross margin reached 18.6%, which is a very strong quarter of performance for this segment. The increase in gross profit and the margin was primarily driven by continued improvement in production efficiencies from the strong actions we took to improve long-term profitability levels across the business, and this came from all of our regional businesses, but most notably, ITM in Europe and Latin America.

Consumer segment net sales in Q1 were slightly lower than last year. The decrease came due to the lower sales volume, mainly in Latin America and Russia. More specifically, in Latin America, demand for light utility truck tires was lower in the quarter while declines in other geographies were related to the shift in focus to Ag and EMC. Our third-party specialty custom mixing operations in the U.S. performed very well with growth of 20% year-over-year. Consumer segment gross profit for the first quarter was $9 million, an increase of 22%. Gross profit margin expanded to almost 21% compared to 16.5% last year, driven by positive product mix, most notably the custom mix in the U.S., which carries stronger margins. Our SG&A and R&D expenses in the first quarter were $37.5 million compared to $39 million last year.

That represents 6.8% of sales, and that’s lower than where we were a year ago. This decrease was primarily driven by the disposition of the Australian wheel business in the first quarter of last year and strong cost control by our business. Income tax expense for the quarter was $14 million compared to $9 million last year due to higher pretax income in the countries with higher tax rates, resulted in an increase in our effective rate to almost 30% compared to 26% last year. Our strong earnings performance continues to translate to free positive cash flow. Free cash flow in the quarter was $12 million, which was our strongest first quarter free cash flow generation since 2012. The total cash grew by approximately USD4 million to USD164 million, while we also paid down $11 million of debt and repurchased $1.3 million of common stock during the quarter.

CapEx for the first quarter was around $12 million compared to almost $8 million last year. CapEx will support our multiyear capital programs in place to manage maintenance in an organized way and to improve efficiencies with selective capacities, expansion in our global production facilities and continued tooling improvements from our product development efforts. We are on track with our full-year guidance of USD55 million to USD60 million in capital expenditures. As I mentioned earlier, our net debt leverage at the end of March improved to 1x trailing 12 months adjusted EBITDA, down from 1.1x last — from the end of last year and down from 2.6x a year ago at this time. This is an incredibly important as we pursue future growth and improved returns with a stronger balance sheet.

We continue to expect our financial performance to remain at a high level in 2023 due to the healthy market conditions globally across the markets we serve, particularly in large Ag. Additionally, we remain keenly focused on navigating the near-term impact stemming from the inventory adjustments within our customer base and mitigating these effects by temporarily adjusting our production schedules to align with our customers’ needs. I expect that the improvements in how we manage the business will translate in continued strong performance going forward. We’ll provide updated information about our forecasted performance as the inventory situation normalizes throughout the year. We also affect free cash flow to continue at a high level based on the continued expectations of strong EBITDA performance and stable working capital.

Year-to-date, as of April 14, we opportunistically repurchased 310,000 shares for approximately $3.3 million under the $50 million authorization. We firmly believe our share price is deeply undervalued and does not reflect the transformative actions that we have taken significantly to increase the profitability profile of Titan and our capabilities for the future. We expect to be more aggressive with repurchases in the next quarter as cash flow remains strong, and we firmly believe in our prospects and our stock is a good investment for the Company. For 2023, we anticipate continued cash growth with strong profitability and solid working capital management, as I’ve already mentioned. The question I get most often is what we expect to do with it.

First, we will utilize cash for stock repurchases. There are no significant pieces of debt that we need or want to pay down this year, so we will have cash and credit availability to accomplish our growth plans, either through acquisitions, joint ventures or internal capital investments. Now to wrap up, Paul talked about this, but I just want to reinforce that our long-term demand drivers remain positive, supported by strong sector trends and key macro indicators, and we remain encouraged by the solid underlying fundamentals in our markets that we serve. So thank you for your attention today. And now I’d like to turn the call back over to Matt, our operator, for the Q&A session.

Q&A Session

Operator: [Operator Instructions] The first question comes from Steve Ferazani with Sidoti & Company.

Operator: The next question comes from the line of Kirk Ludtke with Imperial Capital.

Operator: The next question is from the line of Larry De Maria with William Blair.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Reitz for any closing remarks.

Paul Reitz: Well, I just want to say thank you, everybody, for your attention and attendance this morning. I wish you all a good day, and talk to you next quarter. Thank you.

Operator: Thank you for attending today’s presentation. The conference call is now concluded.