Titan International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Titan International Inc. 2nd 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. It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning and Analysis and Investor Relations for Titan. Mr.

Operator

Snyder, the floor is yours.

Speaker 1

Thank you, Lara. Good morning. I'd like to welcome everyone to Titan's Q2 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 a reminder that the results we are about to review are presented in the earnings release Issued yesterday along with our Form 10 Q, which was also filed with the Securities and Exchange Commission yesterday.

Speaker 1

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 ks filed earlier as well as our latest Form 10 ks 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.

Speaker 1

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.

Speaker 2

Thanks, Alan, and good morning, everyone. Our ONETITON team delivered again this quarter with solid performance. I'm really Pleased with our Q2 results as we executed effectively to take care of our customers and with that delivered $59,000,000 in adjusted EBITDA. We further strengthened our balance sheet with free cash flow of $49,000,000 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 $200,000,000 with EBITDA leverage at just one turn.

Speaker 2

The significantly improved strength of our balance sheet Along with the team delivering solid performance illustrates that Titan is in a good position for future growth opportunities. Look, we had a good start to 2023. We've been working our way through the previously communicated inventory impact. It's 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 Titan's Best years in our history. 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 4 years.

Speaker 2

If you look, our strong financial results from 2021, 2022 and the first half of twenty 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. David and I have always believed that the foundation built around Titan's 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 were at a point where significant improvement was critical. 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 now flash forward to the day in 2023, We have executed successfully upon these initiatives and we have accomplished much more.

Speaker 2

So exactly what have we done over the past 4 or 5 years? 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. For example, we have reduced our net debt from $433,000,000 at the end of 2019 to $234,000,000 as we sit here today. This came from a solid combination of paying down debt and generating cash growth. That means in 3.5 years, we have nearly halved Our net debt.

Speaker 2

Also during that period, we have invested significantly in our plants, products, systems and people. Since 2019, we have invested over $125,000,000 in product development, plant efficiencies, capacity growth, while also embarking carefully on a global ERP implementation that is well underway. The strength in our balance sheet that we now have in place gives us We are working on that multi year plan as we speak and are excited about the prospects for our customers and shareholders that will come from it. Another example of what we've accomplished in recent years is 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.

Speaker 2

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. 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 board's 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 2019, David and I told investors we would improve our performance By restructuring and divesting the underperforming businesses that at that time were sending us back about $40,000,000 a year in operating losses.

Speaker 2

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 And therefore has really improved our financial performance profile. Therefore, going forward, we will be a better We have illustrated this in our updated IR presentation to help investors understand the benefits this brings to our company and our shareholders. Additionally, and this is really an important one to us, innovation has inherently been part of our entrepreneurial culture and really a core strength of Titan's founder, But it's a skill that requires significant attention and investment to keep strong.

Speaker 2

Over the past few years, I have been impressed with the amount of organic growth that we have driven By continually introducing innovative products into the marketplace, such as our market leading LSW products, The R14, the AGREDGE R1W line, the Supreme line in Brazil, the single piece high speed wheels in Europe And ITM's Trust Integrated Undercarriage Monitoring System, just 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. The bottom line is Titan's performance and our customers have benefited from Titan's innovative products through the years and we intend to continue to do that. 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.

Speaker 2

Over the past 10 quarters, we have delivered over $514,000,000 in adjusted EBITDA along with $260,000,000 operating cash flow and $240,000,000 of adjusted net income. The shareholders and bondholders 3 or 4 years ago that believed in the potential Of a successful transformation to Titan have been well rewarded. Look, these highlights show where Titan has come from, What the team is capable of and where we are going. 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.

Speaker 2

This is a major part of our business. The North American large ag 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 farmers. Therefore, a bounce back in demand in due course is a reasonable expectation. 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.

Speaker 2

We have seen short term ag demand in Brazil slip from prior year. There's been a lot going on there with uncertainty driven from the election. The government ag support has been going through Some question marks here recently, but it does appear to be getting solidified in place going forward and really just the interest environment there. So our Titan Brazil's Q2 and second half demand has decreased due to OEM dealer inventory destocking along with some tire destocking at the OEM supply chains. And I will really talk about ag inventory more later.

Speaker 2

Moving over to construction demand, it's really been supported by solid activity in infrastructure and non residential 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 As a reminder though, I want to point out that Titan does produce construction tires in Brazil, But really our main construction related business in Brazil primarily comes from undercarriage. 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.

Speaker 2

So again, we look at What's going on in Brazil with the uncertainty really related more to some local issues there in long term, the market in Brazil will still be very strong. Earlier this year, we did not issue our guidance as our customers were unable to provide clarity with their forecast due to elevated wheel and tire inventory in their Supply chains, we did say we would do that. We would put out guidance mid year 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 impact our production levels and will continue to do so for the remainder of 2023.

Speaker 2

You'll see that reflected in our second half 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 or 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 varying sizes of equipment in different applications, But they are produced in much smaller production runs than that of an on road tire.

Speaker 2

Also, if a customer is waiting on other non tire or wheel supply chain components, it helps to have wheels or tires on the ag equipment, so you can move it around the yard All that adds up to getting ag wheels and tires is a priority for OEMs. And we have heard that repeatedly that 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 that 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 had the correct wheels and tires on hand to ship. Again, I want to remind everybody, a agriculture wheel is specific to not just that brand of manufacturer, but to that Specific line within that manufacturer. So, it obviously is critical that you have the right Wheels and tires on hand once the equipment has finished production.

Speaker 2

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 2023. 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 And our Titan Brazil business has a very high market share and we are seeing the OEMs being more transparent with us about the situation And that's really helping us manage our way through it. Based on direct conversations with customers, we believe the inventory reduction process will take to the end of the year And we are 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 saying dealer inventories are still below their targeted levels and expected to be that way through the end of 2023 And that's going to provide a good starting point for 2024. 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 3 months to 8 to 9 months in pretty quick order.

Speaker 2

It's pretty well known that small ag retail demand has slowed in 2023. Along with that inventory correction that is underway, We are seeing that demand have decreased 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 are dealing with in our industry, I think it's important that you understand our guidance, We expect our revenue to be in the range of $1,850,000,000 to $1,900,000,000 with adjusted EBITDA of $200,000,000 to 210,000,000 And once again generating strong free cash flow of $110,000,000 to $120,000,000 Clearly, I think a lot of what I said today demonstrates there's fundamental reasons to be positive about Titan as we look towards the future.

Speaker 2

Our customers in large ag are confident based on market fundamentals and a replacement cycle that's 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 periods. 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 this bodes well for large ag to continue at a positive pace for the near future. We have a strong customer base in small ag and I keep referencing that sector.

Speaker 2

They will work their way through dealer inventory levels and we are expecting they will perform better next year as those inventory issues are behind them. The earthmoving and construction markets see solid support from infrastructure and non residential projects along with solid mining capital and operational budgets. These fundamentals form the basis for our 2023 guidance. It reflects another strong year for Titan And really puts us in a strong position as we look to 2024. 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.

Speaker 2

We are confident that the transformational changes we have made to our business, including our strong One Titan culture, will enable us to navigate dynamic conditions that I highlighted today to once again this year deliver near historic highs and strong results into the future. With that, I'd now like to turn the call over to David.

Speaker 3

Thank you, Paul, and good morning and thank you to everyone joining us today. The results we achieved this quarter are very satisfying in a number of ways. We anticipated the more challenging environment in 2023 with our customers, And we were able to put together a good plan of action surrounding production, inventory control and cost management. And you see that in the results that we reported yesterday. Now let's add a few key financial highlights for the Q2.

Speaker 3

Net sales were $481,000,000 and we delivered consistent profitability with net income $32,000,000 GAAP EPS of $0.48 and adjusted EPS of $0.43 and adjusted EBITDA of $59,000,000 We We continue to strengthen the balance sheet, as Paul said earlier, with $49,000,000 of free cash flow, which increased our cash balance to 196,000,000 Again, as Paul noted, free cash flow for the first half of $61,000,000 was the highest first half performance in more than a decade for the company. Additionally, we maintain our debt net debt to trailing 12 month EBITDA leverage at one times. It's worth talking about the tax credits we received over the last year in Brazil. We recorded indirect tax credits of another $3,000,000 during the Q2 and that relates to the And direct tax credits we received for the full year of $32,000,000 This has also been part of our ability to drive Strong cash flow. In both cases, we've excluded it from adjusted EBITDA and adjusted net income.

Speaker 3

Now let's talk a bit about the performance at the segment level, starting with agriculture. Agricultural net sales were $269,000,000 compared to $319,000,000 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 to lower steel prices in the market and an unfavorable impact from currency translation. The Agricultural segment gross profit for the 2nd quarter was $49,000,000 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, in their supply chains has been prevalent.

Speaker 3

The agricultural gross profit margin was strong at 18.1%. However, the decrease gross profit and profit margin versus last year was primarily due to lower steel prices and sales volume, which resulted in lower fixed cost leverage. It's important to note That's quarterly operating performance for the segment remains still one of the strongest on record for Titan. Earthmoving and Construction net sales were $175,000,000 The decrease of 17% to last year. The decrease in EMC sales was primarily due to lower volume in the Americas, caused by similar high inventory levels at select OEM customers, most notably Brazil.

Speaker 3

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 EMC segment for the 2nd quarter was $29,000,000 and our gross margin remained strong at 16.7%. The decrease in gross profit dollars compared to last year is primarily due to lower sales volume, which resulted in Lower fixed cost leverage similar to ag. Again, this quarter's 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 $37,000,000 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.

Speaker 3

Consumer segment gross profit for the 2nd quarter was $8,000,000 and our gross profit margin was 21.6% for the 2nd 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 and EMC products. Overall, this result was still very strong, reflecting improved mix and our growth initiatives in the U. S.

Speaker 3

Surrounding 3rd party custom rubber mixing. Our SG and A and expenses in the 2nd quarter were right under $35,000,000 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 and D costs were up $1,000,000 in the current year versus last year due to increased investments in product development. Our income tax expense for the quarter was $9,000,000 compared to $19,000,000 last year due to lower pretax income.

Speaker 3

Our effective rate was relatively stable compared 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 $49,000,000 which was the 2nd Strongest quarter of free cash flow that we've had in the past decade. Total cash grew by $32,000,000 to 196,500,000 while we also paid down $10,000,000 of debt and repurchased $6,400,000 of common stock during the quarter.

Speaker 3

We will continue to evaluate any debt payments opportunistically, reflecting judgment as to relative 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 our profitability profile and our capabilities for the future, and we'll continue our share repurchase program a similar fashion, as a reminder, we have $50,000,000 authorization from the Board. Capital expenditures for Q2 2023 were approximately $16,000,000 compared to $12,000,000 in the prior period. CapEx will support our multiyear capital programs in place to manage maintenance in an organized way to reflect To improve efficiencies with the plant,

Operator

Please standby while we reconnect the speakers. One moment. The guys are now back in the main room. Please go ahead.

Speaker 3

Sorry about that. We got cut off and so I apologize. I'll wrap things up pretty quickly here before we get to Q and A. I was talking about inventory management, and our teams did a very efficient Work during the quarter, we'll continue that in the second half with a keen eye on where we believe future demand will be, So we can remain nimble and responsive to customers just as we have been in the first half. This requires a tremendous resolve and a constant analysis by our For 2023, we anticipate solid profitability and good freight cash flow generation as indicated And our guidance, in terms of capital allocation priorities, we remain focused on maintaining our strong balance sheet and a low leverage level.

Speaker 3

And We will also repurchase shares opportunistically and believe that our stock is a good long term investment for the company. Further, the company will continue to evaluate our growth opportunities such as acquisitions, joint ventures or internal capital investments in a strategic and a very disciplined fashion. Again, we look at these things with which we can create value and are within our core strengths as a company. Paul touched on this earlier, but regarding our guidance for 2023, we continue to expect our financial performance to remain at a very solid level Due to steady overall market conditions globally across the markets we serve, particularly in large ag, but reflective of the destocking that's taking place And we'll continue in the second half of the year. As we enter this period of time, we continue to handle our customer demand levels and overall performance of the business.

Speaker 3

As a reminder, the second half of the year also has approximately 10% fewer production days and with the traditional Late year holiday periods across the globe, which plays into the full year guidance as well. Just to restate, we're providing full year 2023 guidance of revenues to range between $1,850,000,000 to $1,900,000,000 adjusted EBITDA to range between $200,000,000 $210,000,000 And free cash flow to range between $110,000,000 to $120,000,000 and CapEx to range between $55,000,000 to 60,000,000 Very strong performance for the company. Now to wrap up, Paul talked about this, but I will reinforce it that the medium and long term demand drivers remain healthy, supported by strong sector trends and our key macro indicators. And we do remain very encouraged by the solid underlying fundamentals of the end markets we serve. Through these drivers and our transformed business, we'll continue to deliver heightened value to all stakeholders.

Speaker 3

And I thank you for your attention and sorry for the delay that we had, but I'd like to turn the call back over to Lara, our operator for the Q and A session.

Operator

Thank you, sir. We will now begin the question and answer session. Your first question comes from the line of Steve Farizzani from Sidoti. Please go ahead.

Speaker 4

Good morning, Paul. Good morning, David. Appreciate the detail on the call. I was having some technical difficulties early, so I might need some clarification on what I think is the Crux of the call. Paul, it sounded like you said the destocking issue, the stockpiling that has now resulted in Oversupply with wheels and tires with OEMs was exclusive to large ag.

Speaker 4

Did I mishear that because clearly EMC was Year over year just as weak?

Speaker 2

Yes. It's specific more to our industries was the point. So it's Yes. The point I wanted to drive today is because we are really the only stand alone public company that serves these specific So if you look at our competitors, they're divisions of larger companies, and they really don't have to get into the granular detail of Really ag and construction the way we do. And then more specifically with wheels and tires, The nature of our business is that we saw our customers stockpile inventory and there's a number of reasons behind that.

Speaker 2

Part of it is just our tires are produced in a large number a large proliferation of SKUs with smaller production runs. So the nature of our industry is different than other tire businesses. And so There is a protective nature to that because if your tires are not being ran, especially when you're going through a period Of a lot of volatility that has clearly been in the marketplace here recently. You get protective and you want to make sure you have those right tires and wheels on hand. The other thing is the equipment is large.

Speaker 2

I really should say this, it's large equipment for large ag, but also small equipment. You need to move it around a yard while you're waiting for other And so our tire and wheel volume got ahead of other components required in their supply chain. So as they're getting their supply chain caught up, They already had the tires and wheels on hand and we're seeing that impact play out in 2023. So the macro environment is still very good Overall, especially in large ag, construction, our primary segments are still performing at a high level. You heard that from the major OEM customers.

Speaker 2

And so really what I needed to highlight today is the fact that there's some specific actions that are taking place That are really related just to our business. And we again, we are the only public company in this sector that has to talk about it. And so it gets confusing. And so really what I'm trying to do is eliminate some of the confusion or really eliminate some of the uncertainty And be honest and frank with our shareholders to tell them what's going on related to our specific business.

Speaker 4

Okay. That's helpful.

Speaker 3

Just to add on to that, Steve, before we get into the next question is, as you alluded to, It does happen. It is happening a little bit across ag and EMC, but primarily related to Brazil When it comes to EMC.

Speaker 4

Okay.

Speaker 3

So it's, there's a variety of factors that are leading to the uncertainty in Brazil that's leading to people to Make decisions about inventory and demand levels, overall demand levels, because of the uncertainty around the election and support For farmers and things like that. So there's a little bit more effect in Brazil. In North America, it's primarily our Ag business.

Speaker 4

So does that mean that you would expect EMC to pick up faster given you know this problem runs through ag at least through the year, EMC Could be a little bit play out a little bit differently.

Speaker 3

I think the second half you'll continue to see the same trends Across it because you tend to have the seasonality effect of EMC with the European centric part of the business. Yes. So, yes, nothing different than last year per se, but the same effects though, 2nd half to first half.

Speaker 4

So the big question becomes, how good of a handle do you have On how far ahead you got from your to your customers in terms of the and obviously you were rolling For multiple quarters, you did not have the supply chain challenges, right? You didn't have the we didn't see the inflationary pressures. You've got ahead of pricing. I mean, you crushed it for multiple quarters. And now that's coming back to, unfortunately, you were too successful early.

Speaker 4

But the question is, How far ahead are you really? Do you have a handle on that? Is this a 2023 problem? Or do some of those Large ag suppliers have enough wheels and tires to get them into at least part of 2024.

Speaker 2

We spent a lot of time on this. Myself and the team have been out in front of customers extensively Really trying to get to the answer to your question and what we're seeing Steve is that this is a situation that they want resolved by the end of 2023. They want to be able to give us forecasts that are more in line with their retail demand, get our production levels back to a normalized level. They know that has created a disruption for us. And to your point, we've done a great job serving them over the last few years during very difficult times.

Speaker 2

And unfortunately, the penalty for doing a great job has been that we're out ahead of other parts of their supply chain. And it's just a reality we have to deal with and we have to work our way through. I would say when we started the year, we didn't know exactly the extent of it. That's why We made the determination to not put out guidance at the beginning of the year. It wasn't a demand issue.

Speaker 2

We felt very good about the markets. We still feel very good about the markets. We Very good about our relationships with our customers. We feel extremely good about everything we've accomplished over the last few years. The reality is the situation was unknown at the beginning of the year.

Speaker 2

It has become more clear now. We feel comfortable obviously enough to put out the guidance that we did today. And again, we do see our customers wanting and working towards getting this issue resolved by the end of the year.

Speaker 4

So based on the information you have right now, you would think your wheel and tire sales would Closely track your customer deliveries in 2024?

Speaker 2

That's what our customers and Titan are working towards, yes.

Speaker 4

Okay. And given that they're all still very positive with the order books into 2024, 2024 could be a significant rebound from the levels you're at right now.

Speaker 2

That's we definitely agree with the comments they're making that the markets are in a good position. And again, we're through this issue that's specific to our industry.

Speaker 4

And

Speaker 2

again, we are the only public company that has to talk about this. So it's a challenging topic to try to explain. But I agree with how you phrased it, Steve.

Speaker 4

Okay. That's helpful. Would you talk about I mean, the one place where you're still performing well is in cash And you noted the working capital. I'm trying to think that you noted opportunistic stock buybacks and the fact that you didn't think the stock reflects The transformation you've been under, how do you evaluate when to buy back stock? Obviously, looking at the stock this morning, is it on a price basis or?

Speaker 3

Yes. I think it's when we see weakness, a decline for no reason. Obviously, a lower price We'll get back in, obviously, after we get out of this frozen period or blackout period.

Speaker 4

So That

Speaker 3

would be the expectation is that the stock remains weak that we can be opportunistic.

Speaker 4

Okay. That's helpful. Just one last for me. It looked like EMC OpEx was up a bit. Is that are we going to be at an elevated level or was there anything This quarter?

Speaker 3

Yes. That was more of the it was a hit more with a little bit of inflation. Okay. So I think we're generally in a pretty good area on that.

Speaker 4

Perfect. Thanks, Paul. Thanks, David.

Speaker 2

Okay. Thank you, Steve.

Operator

Thank you. Your next question comes from the line of Kurt Lutke from Imperial Capital. Please go ahead.

Speaker 4

Hello, Paul. Hello, David.

Speaker 3

Hey, good morning. Good morning.

Speaker 5

Good morning. Congratulations. Another quarter, another great quarter. I'm just curious, you mentioned the ERP and that it's been a long term project. I'm curious, how does the business change as that's implemented?

Speaker 5

And do you for instance, I suspect that working capital is one of the focus areas. You mentioned you're down to what As a percentage of sales, 22%. Does that come down once the you see further improvement in working capital turns as the

Speaker 2

Yes. Look, I think what I want to highlight with the ERP implementation and working capital is a great example. Look at what the Titan team has been able to do with working capital without the system support. A business that historically, like I said, has Been hovering in the upper 20s, approaching 30%, and that's historically. We've been around a long time.

Speaker 2

We had Driven a significant amount of cash flow, a significant benefit to our customers, our ability to serve them, Significant benefit to the streamlining our operations and we've done that through people. I mentioned extensively the value of our Titan Team, so just think about what we've done with working capital in a very complicated business with people. The ERP implementation is intended to give our Better tools. I believe strongly in the capabilities of what we've been able to do without tools that are Market leading and so we are going in a direction with an update to the ERP cloud. We are not going to risk the business stumbling in any way.

Speaker 2

We are taking it in a manner that we're very comfortable with to ensure that our customers are served and our shareholders don't pay the price because we're jumping into A new ERP system. Now with the ERP system in place, because we have a strong balance sheet and we have the ability to invest, we plan on making Continual investments into our plants and our people and our systems. So with that, as you get into AI, as you get into the ability to utilize data, Use information to manage your plant operations. We are going to be in a much better position in the future than we are today. But let's not forget what we've accomplished getting to today.

Speaker 2

So this is all accretive. This is good for the shareholders. The Titan systems are very antiquated and we've been able to do a hell of a lot with the people that we have. So personally, I can say we're very committed to only advancing forward in a meaningful way to take care of our shareholders and our customers And give our people tool to do a really good job in the future.

Speaker 5

That's helpful. Thank you. What is there Are you sharing timing and what a Working capital to sales target might be once it's done?

Speaker 2

We're building out a strategic plan With more information that we'll get into kind of what the future looks like. Again, I think we think that level of What the Board put in front of us that working capital level of around 20% was a very challenging goal and is a good place to be. I think our goal will be to keep it in that range and feel that we can comfortably take care of our customers while effectively managing cash flow in the balance sheet. I think what the ERP system is going to do is really allow us to invest in the future in a meaningful way with technology, Plant enhancements and again better ability to take care of our customers. So I think working capital, to answer your question, that target of 20% that the Board put in front of us is probably a good

Speaker 5

Got it. Okay. And then any other benefits you want to talk about when you get it in place?

Speaker 2

Again, benefits to our plants. Think of the technology that's going into plants these days. You got to have a good foundation with Good system. And so with that, we get the system in place and then we have incredible people. Our technical engineers are brilliant.

Speaker 2

They know their way around the plant Our plants are large, couple of 1000000 square foot facilities. These people are awesome. So again, we give them the best Tools in the business, I'm really confident of what they can do. And so what I see is our plants only continue to enhance and get better. And we'll continue to build really high quality products at good prices that lead the market in innovation.

Speaker 2

So Again, this ERP implementation is not meant to scare anybody. It's really truly meant to highlight the accretive nature of what we can

Speaker 5

And so 2021, very good year. 2022, fantastic year. 2023, another good year. Sounds like 2024 is it's early, but shaping up to be another good year. Has the strength of this market Changed the competitive dynamic.

Speaker 5

Do you see anybody any of your competitors making moves to add Capacity or do anything different?

Speaker 2

Well, I think the strength of the market is going to come from the fact of Almost what you just said that we haven't gone off the map in a crazy direction like you have seen in So I think that's the benefit to keep the competitive dynamics in a very stable nature. What's happened in the past is you would see not just Subsequent good years like you highlighted, you would see incredible years and then you would get these concerns about not having enough Capacity in the industry and then people would run off in different directions. So I think the nature of your question kind of helps answer the question that it's been very good To see the stability and I've referenced it in my comments, it's very good to see the stability in the marketplace where there's unmet retail demand and Production schedules have been constrained, whether it's labor or supply chains. It's kept things in a very balanced order. And so it's allowed the strength of the market To come through in a much more stable manner.

Speaker 2

So I think we see our competitors acting rationally in that regard. And I think again it's good very good overall for the industry, just again the nature of your question to have subsequent good years Instead of having 1 or 2 incredible years.

Speaker 5

Got it. Great. Thank you.

Speaker 3

You bet. Thanks, Kurt.

Operator

Thank you. Your next question comes from the line of Larry De Maria from William Blair. Please go ahead.

Speaker 6

Okay. Thanks. Good morning, everybody. Good morning, Ryan. First question, can you talk about just the cadence in the second half, Sales and EBITDA in 3Q versus 4Q?

Speaker 3

Yes, that's a great question. I we only really With the full year guidance out, but you'll see this typical seasonality come to play in Q3 with our European business and then Q4, you got the holiday periods here more in North America. As far as sales go, I don't expect it to be a totally different Between Q3 and Q4, it's not going to be your traditional big step between the two quarters, to be honest. Just because of the destocking that we believe will be more prevalent in Q3 and then less prevalent in Q4 and then you have your holiday period. So It's kind of even things out more importantly.

Speaker 6

Okay. And then probably a similar Well, I guess your point is that probably similar level to EBITDA too then if similar sales and you have the European headwind 3Q and the North American 4Q, I guess, right? Okay. Yes. Can you talk about, I guess, in the guidance, What are you embedding for OEM and aftermarket, I guess, volume?

Speaker 6

Because I think that aftermarket should be strong and partially offsetting some of this, but Kind of curious how you're seeing aftermarket OEM volume in the year?

Speaker 2

Yes. I mean, you bring up a good point. I mean, the aftermarket business has been more steady, Less impacted by the inventory destocking that I mentioned. I mean there's a little bit of that going on just because of interest rates, but nothing to the extent that I was And one of the things we've been talking about internally, in fact, I had somebody, one of our plant leaders mentioned it to me yesterday, just The great job we've done with serving the aftermarket over the last 5 years has provided a level of stability that Really, they appreciate as a plant leader, because of what it's meant to keep things, Again, operating in a more efficient effective way because of the aftermarket. So yes, that's something actually again, we talked about that internally.

Speaker 2

We're very grateful that we've built A strong aftermarket business. We continue to keep doing that. So more of what we're talking about, Larry, to answer Your question is driven by the fluctuations in OEM demand as they work through the inventory.

Speaker 6

Okay, thanks. And then last question, I mean, obviously, it seems probably over earned last year and you're going to under earn this year. And if we think about, let me say, next year's flattish retail market, right? Maybe construct EMC is up, maybe small ag is down a little and large ag is okay. I mean, high level, do you think the best way to think about 2024 is like an average of the 2 years?

Speaker 6

Or is it more likely to be flat with 23? Or Just trying to kind of parse through the message of, because we're under earning this year, but we probably over in last year, kind of maybe produced to retail sales next year, And there could be some catch up. So maybe it's an average of the 2 years or I mean how are you thinking about it?

Speaker 2

Yes. I mean We're looking at more at a higher level than being able to answer your question that specifically. I mean, we're looking at the macro perspective right now. So Using the assumption that the inventory issue gets resolved, then you're operating more in line with retail sales levels. And so right now at this point, Larry, to be honest with you, we haven't gotten into the granularity to kind of to see what that means.

Speaker 2

I mean, but I will look I will reference the comments that came out You look at the large OEMs over the last week, they're very positive about where the markets are at and how they see 2024 starting. I know The early order books are off to a good start from everybody I've talked to. So I think there's a lot of very positive signs that Our specific and not just at the macro level talking about fundamentals. And so, I think there's a lot of good momentum starting 'twenty four. Now, Binod, to articulate that into full year results, we're just Quite there yet, but I do think there's a high level of confidence that the year will the demand will carry over into 'twenty four and the year will start off very well.

Speaker 2

So Give us a little bit of time, maybe next quarter we can come back to you and talk a little bit more about the full year 2024. But I certainly see, Again, the carryover effect from the strength in the markets in 2023 starting off very well for 2024.

Speaker 6

Okay. Thanks very much and good luck for the rest of the year.

Speaker 2

You bet. Thanks, Larry.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Wright for any closing remarks.

Speaker 2

Yes. Look, I want to thank everybody for attending the call. Also want to let you know that we got a busy schedule coming up with In August September with conferences that we will be attending, I'd like to list those real quick. It'd be great to get the opportunity to connect with investors or any folks there at these meetings, but listen, I'm out here, the 3 part advisor event, it's their Midwest Ideas Conference. Then we'll also be attending the TD Cowen Annual Global Transportation Conference, the Barrington Fall Investment Conference followed up by the C.

Speaker 2

L. King, Their Best Ideas Conference will also be attending the Sidoti Small Cap event and then wrapping up the cycle here in September At the D. A. Davidson Diversified Industrials Conference. So again, we'd love to be able to connect in person with anybody that will be attending these events.

Speaker 2

And

Operator

Thank you, sir. Thank you for attending today's presentation. The conference call has now concluded.

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Key Takeaways

  • Q2 results delivered $59 million in adjusted EBITDA and $49 million in free cash flow, capping the strongest first-half cash generation in over a decade and lifting cash balances to almost $200 million with net debt at just one turn of EBITDA.
  • Since the end of 2019, Titan has reduced net debt from $433 million to $234 million and improved working capital from nearly 30% to 22% of sales by year-end 2022, driving stronger cash flow and balance sheet resilience.
  • Lower Q2 volumes were driven by off-road agriculture tire and wheel inventory destocking at OEMs and dealers, which management expects to be largely unwound by the end of 2023, with demand normalizing to match retail sales in 2024.
  • Full-year 2023 guidance anticipates revenues of $1.85–$1.90 billion, adjusted EBITDA of $200–$210 million, free cash flow of $110–$120 million and capital expenditures of $55–$60 million.
  • A multi-year ERP implementation is underway to modernize systems, enhance plant efficiencies and better support working capital management and customer service through digital transformation.
A.I. generated. May contain errors.
Earnings Conference Call
Titan International Q2 2023
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