Titan International, Inc. (TWI) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining this year's UBS Industrials and Transportation Conference. I'm Ashley Grand from UBS, and I'll be moderating today's session with Titan International, leading global manufacturer of off-highway tires, wheels and undercarriage equipment. Representing the company today is David Martin, Senior Vice President and CFO. David, thank you for joining us today.

Great to be here. Thank you.

To start today's session, David will walk through a short presentation, then we'll move into Q&A. With that, David, I'll hand it over to you.

Very good. Well, thank you for this opportunity to talk about Titan's story. It's a good one. And I want to start off by saying now, obviously, what we do is off-road tires, wheels and carriage equipment. And that's a basic term. But there's a lot to that when you get into it with -- the relationships with customers and key -- being a key provider of those solutions to our OEM customers and a very strong aftermarket presence. So that comes after decades of serving customers well. Having a quality brand. We are the -- in many of our markets, we're the leading provider of those solutions, whereas we have competitors from all over the world that come in and do it, but it's a secondary part of their business. We're truly dedicated to the sectors that we serve. And with that, we have a strong reputation in brand through the Goodyear Farm brand as well as Titan branded products. And we have also done a lot of innovation in the market. Being dedicated to the market, you have the focus to be able to do that. And it's been important because our customers continually upgrade and update the equipment that they're putting out to their customers, and we have to move along with that. But the more important aspect of it is we feel we have a deep connection with the end user. So let's talk about the farm or the users in the mines or the construction equipment that's being used out there. So we have spent decades of looking at those solutions and developing those connections that help us and then drive it all the way back to the OEM. And so we've done a lot over the years in terms of developing our products, but -- over the last 5 years, we've gained a tremendous amount of focus inside our company on not just taking that to the customer, but also serving them well during the pandemic, deepening those connections, if you will, continuing to invest in our business in a time when it was really challenging. So we've had some dark days in our company over the years where our financial performance wasn't as strong but we've now come full circle with that, with a tremendous amount of focus, driving a culture that is continually trying doing -- move forward through -- we're looking inside the plants and making sure that we operate efficiently investing in the products that you think can drive better throughput through our plants, eliminating things that don't make sense for us, taking assets or plants that don't make the money that it may have used to. And so thinning all that out, eliminating loss-making operations have helped us to transform our financial performance to where we were 5 years ago to where we are in the last year where we had a record performance in 2022. So we've -- we've come a very, very long way and that's taken a tremendous amount of focus inside the company. And it's been nice because we've had obviously a backdrop in our markets: agriculture, construction, mining that have been much more supportive of where we're heading. And so that's obviously lifted our performance as well. But the important aspect is that we're used to see where our margins used to be -- where we were prior to the pandemic and so forth, we're now at a much higher level because of the things that we've been able to accomplish. And so we feel like we're in a strong position, and we're moving forward in a much stronger way. And we now have a balance sheet that's also supportive of playing offense and being much more assertive with the returns that we can deliver to our shareholders. So that's really our story. There's a lot to it, but there's a lot of good things that have been happening in Titan.

Great. Thank you very much, David. I will kick us off with a few questions, and then we will open the floor to any questions from the audience. So to start, we're finally beginning to see some light at the end of the tunnel in terms of the persistent supply chain issues that have challenged really all suppliers in the off-highway and specialty vehicle market over the past couple of years. Could you please discuss a bit the market backdrop across your different segments and how it's setting you up for continued momentum as the year progresses?

Yes, it's a great question. One of the good things that we've been able to accomplish over the last 5 years is that we have a diverse supply base across the world. And even during the times where we were in the middle of pandemic and everything was going crazy and fallen off the map, we were able to continue to have assurance of supply going into our plants because we were considered an essential industry. So we were able to operate all the way through all of that, and we were required to. That's what people wanted from us. Our OEM customers definitely demanded that because farmers were still planting crops. Things were continuing to happen. We had -- there's food supply and all of that. So we've been able to accomplish that throughout. We've certainly had our moments when we're dealing with some of those constraints. But we've continued to do a lot of work to diversify our supply base to actually give us better performance and you're starting to see some tapering of the costs associated. We saw some crazy highs and now we've come back to more normalization, which is good. So I would contrast that with how our customers are performing. So obviously, our OEM customers have a very diversified supply base. There's a lot of stuff that goes into a tractor, particularly now as you have a lot of technology going into it. And so one of the things that has been good for us is that we've been able to give them a good flow of our products, which helps them to continue to drive their production, while other parts of it didn't. And so it's good and bad, right? Because we've been able to perform very well for them, and they were able to get wheels and tires on their tractors, their construction equipment and move it to places while they wait for other parts, other components. And so you can say that was good, but it's obviously bad because now we have to kind of normalize those inventory levels that they have. And so we're now spending time adapting our production levels this year to reflect where that's going and we're having to move things around a little bit. So that's a short-term thing. That's -- the normalization will happen over the course of a couple of quarters, we hope so.

Great. That brings me to my next question because you noted in your Q1 earnings that inventory destocking, particularly with the small ag customers, it's been a drag on volume. How is this trend progressing over the course of Q2? And how are recent volumes trending with these customers?

Yes. You can see, as we did first quarter, there's a lot of work that goes in Q1 because you've got planned things easing ahead. So people are continuing to push hard on that. But now they're starting to normalize their inventory levels. So it's going as expected. There's -- we believe -- we knew that sequentially, we're going to be able to drive as much sales throughQ2 and it's going as we anticipated it would. The question is, is that because every customer is different in terms of how much inventory they have and how that's going to play out through the rest of the year. Our visibility is getting better, but we believe things are moving along at the right clip. So an important aspect of that, too, is that -- we've done a lot of good things inside our house, if you will, to plan ahead. And we kind of saw this coming. And so we've been able to adapt our workforce for it as well as other things that we need to do, the supply chain and all that kind of thing. So that we don't have too much inventory. So there's a lot of things that we're working on to make sure that's happening, plus the margins that we have, the discipline we have in our pricing across all -- all the way through is helping us to maintain good, strong margins through this tell a few quarters of normalization of their inventory.

Now the fundamentals for the ag market point to a very promising outlook, particularly relative to the macro headwinds that you're seeing in other segments of the economy. How do you expect to see this play out in H2 now that you have greater visibility into your performance year-to-date?

Yes. The overall market, as a backdrop, you've got good, strong fundamental drop prices. And you've got support from -- on the farmers' sentiment, if you will. It may not be at the high level, it may have been 6 months ago or so. But ultimately, there's -- the grain inventories are low and the crops are going to continue to be good, and that's going to be good for the farmer, right? So plus they have financial support. Their balance sheets are in the best that they've seen in a long time. So that is very supportive of the overall market trend for large ag. So if you think about contrast, large ag from small ag, is there's a lot of room still left in the market. We're not hitting normal supply levels of tractors in the agricultural market on large ag. And so there's a lot more to come, we believe. So that's supportive of not just 2023, but 2024 as well. Contrast that with small ag, inventory levels at the dealers have been filling up, and they've been filling up at more rapid rates than anybody thought that they would. So there's a little bit more of an impact towards that part of the market, which is a smaller portion of our overall sector, but ultimately, it is impactful, and we have good strong customer relationships there. We're managing around on top of the inventory levels that we're managing through as well. But that market trend we may be past a little bit of the peak, if you will, in that part of the business. So -- and then construction. Our exposure to construction is more towards road building, nonresidential construction with government support or spending. Our undercarriage business is more than 50% of that -- of our earthmoving and construction segment. And so they have global exposure to all of those types of things. So if you think about infrastructure spending that's starting to come, then so the market should be supportive there as well. And then there's mining -- there's a lot of mining activity. Commodity prices have moved around a lot and have come down. But ultimately, there's still spending and fleet replenishment that's continued to happen. And so that's been supportive of a good market trend for us and should continue.

That's great. Just to shift gears a bit. So you can boast significant margin and cash flow improvements in 2023 thus far, owing to the successful execution of your productivity initiatives as well as some positive trends in mix. Could you comment on the sustainability of these changes and how we should think about your go-forward margin profile and free cash flow generation?

Yes. Another great question. This is part of that whole story I was talking about where we came from to where we are today, a lot of strategic actions that took place over the last 5 years. And we're -- so we sold off assets that weren't productive for us. We -- so when you think about margins where they were in 2018, 2019, the people think that if you see a market trend goes down, that's where we go too. But there's so much that we've been able to accomplish. We're taking out assets that weren't producing. So our margins were hit with those things. Plants that weren't utilized in the right way. And we closed some plants. We've sold some operations. And then all along, we continue to invest in the innovation to products that we're bringing on with our customers. And when you do that, you're taking costs out of the product naturally because you're refreshing these tire lines or whatever you were doing and then you also are able to price it because you have a stronger connection to the customer. And so those things are more sustainable, right? Because you now have really good products that our customers want and you're able to price it appropriately. So we gained a lot of discipline through that process as well across all of our portfolio enabling us to drive a higher margin in the business and then taking out things that aren't productive, like SKU rationalization, better supply chain management, better quality, reducing scrap, all the operational excellence things that you do. And so all of those things lead us to where our baseline of performance, if you have variability in sales, it's at a much higher level than where it was 5 years ago. And so as we come into 2023, we expect to have a really strong performance, notwithstanding some quarters where we may not have sequential growth and maybe some decline, but our margins should hold up in the same general territory. That's kind of what we're looking at. So when you do that, we still have strong profitability. We have stability in our working capital. That means we have operating cash flow and we have free cash flow as well, which we'll continue to build and grow. Over the course of this year, and we expect good financial performance even beyond that.

That's excellent. Now have you seen or do you foresee any continued stress related to raw material input costs or labor in this environment?

Like I said earlier, we've done a lot to secure our supply. We haven't had any major moments where we felt like we were going to not be able to support production with raw materials. And the variability in price has come back, a decent amount over the course of the last year, in particular, this year. And with the exception of steel. Steel is obviously a large component of our wheel making and a certain amount of tires as well. And so you've had a decent amount, a lot of variability over the last 2 years in steel. So what we deal with there is trying to manage our inventory levels. I talked about working capital earlier, but we don't maintain high levels of raw materials with anything we do today. We've taken a couple -- call it another -- an excess of a month out of our inventories over the last several years. So we are able to manage the lag, if you will, with lead times associated with raw materials. And that's come as a result of a lot of analysis, our deeper thinking around these things, more scientific thought about how we manage inventory and systems as well to help us manage that. So we're in a pretty good position. I'm never happy where we're always going to be looking to try to improve our capabilities around that and how we manage inventory, not just raw materials, but ultimately finished goods as well in supporting our aftermarket operations as well. So it's good and -- but we're in a good position as we speak. So...

That's great. So pivoting to Titan's excellent track record of innovation. You've demonstrated a clear ability to introduce new products to solidify our market leadership position and drive demand that way. Can you speak a bit to your strategic focus in terms of innovation and which new products do you anticipate will be the primary drivers of growth in the near-term?

Yes. So it never ends for us. Any good company that has product innovation has a good pipeline in front of us. So we continue to have, particularly on the tire side. When we think about what's touching the ground that we're dealing with, either trying to handle harsh conditions or traction or less compaction, okay? So -- that's -- we started -- our biggest innovation has been our LSW tire product. So that's led the way, but it also gave us a lot of connections with customers in who we have a lot of back and forth with them. And so the -- this is what we need, this is what we want. And so it led us down a path of product development to get -- help them improve in areas where the market was lacking. So we've been able to continue to push that. That was probably where the forefront of where we go. But at the same time, the great thing about Titan is that we don't just do the wheels, definitely do the tires, but we do the wheels too. And so that connection the way we can get the complete product to the customer is also a differentiator for us. But I don't want to leave out undercarriage because undercarriages, there's -- it's a steel track, and so that's very important to a lot of big customers in the world, construction road building and mining as well. And they've been doing a lot of things about how the track interacts with a big machine. The sensors that are on these things that can drive and understand wear and tear and monitoring of that. So -- because asset life is extremely important. So they're working on those kinds of things to be able to track real time and another digital things that we can connect with the customer as well. So and then on the -- a lot of large tractors today have these a lot of technology inside the cab and a lot of technology on the tractor itself. And so we're obviously got to be working alongside them even in electrification and how everything interacts together. So we'll continue to work hard on that as well. But we've gained a nice reputation in the market because of the innovations that we brought to the market in the last decade. So that's a really strong for us as we move forward.

That's great. And then finally, we're beginning to see the impacts of your portfolio rationalization strategy as you streamline the business and shore up your strengths. Are you able to share any areas you're targeting in the near-term as you continue this -- to pursue the strategy and focus your resources on the areas of your business where continued investment will yield the highest return?

Yes. So we took a lot of low-hanging fruit. There was a lot of things that we needed to attack back a few years ago. So we don't have a lot of things that are just sitting out there to divest or diminish or fix or restructure or anything like that. There's always going to be things that you could continue to push hard on and optimize, but we don't have a significant amount of that left we have a tire recycling operation in Canada. It's really small. It's been dormant for a number of years. There's opportunities for us to move forward and potentially divest that. But -- it's not something that as a big a drag as it was 5 years ago when it was operating. So we're moving forward in a good way there. But as we invest in the business to drive forward, that's the more exciting part is what -- things I talked about on the product innovation side are obviously key to it. We've always -- we never trade away from that even in our tough times. We will continue to drive product innovation, but also invest in our plants. So obviously, we work in cycles. There's a lot of things that can go up and down in our markets. But we continue to optimize our plants, look at -- manage our utilization the best way we can. But more importantly, capacity that we have around sectors of the market are important. So we have good capacity across all of our geographic locations. We're key in all the major markets of the world. But we can improve our capability, our capacity around like, call it, large ag. So radials are becoming more important. On the tire side, we're going to continue to increase our capacity there. The way we produce wheels and more efficiently there are things we're investing in the plants as well. And so we're -- we have a good program in front of us to be able to drive that. So it should help us maintain margins, improve margins but also give us the capacity where the market is moving; tractors get bigger, machines get bigger all the time, and we need to be prepared for that.

That's great. Well, thank you very much, David, for sharing your perspectives with us. Now I'd like to open the floor to any questions that we have in the audience. Well, again, thank you so much. We really appreciate your time and...

Yes. Well, since we have a couple of minutes, I just want to take one quick round trip, if you will, in terms of where Titan is today because it's important because the story that we're trying to make sure is really clear to our investors is that Titan has been around for a while, okay? So we've got a rich history of a legacy of a company and a lot of good things, and we created it through a lot of acquisitions over the years, and we've won some, we lost some. But over the last 5 years, we've done a lot inside the company to make it different. And there's a lot of good focus inside the company to continue to drive performance. There's a discipline, there's a culture that's continually trying to improve. We're in a different position in the market with our customers, with the market-leading innovation that we have. So our path future is really strong. And I want to make sure it's really understood that while we're going to continue to live in a volatile world and there's secular things that can go up and down, we're going to perform well. And we're going to continue to pivot where we need to, to drive performance. And we think, exciting times at Titan, and we're excited to tell the story. So thank you for your time, and thanks, everybody, for their time and their investment in Titan.

Great. Thank you very much.

Thank you.