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

Thank you, everyone, for joining. Today, on the stage, we have Titan International and their leaders. We have Paul Reitz, CEO; and David Martin, CFO. [Operator Instructions]

[Operator Instructions] Just maybe to start off, like it's been quite an interesting last few years, post-pandemic. Can you just maybe kind of give us an update and maybe say how the business has changed since COVID time period? How the business changed, how it's operated pre and post synergies?

I think one of the key things when you look at Titan is you got to look at the pre-COVID period, and that's where we really built our strength, we developed our muscles, and that's something that I think is unique compared to other industrial companies. So it's no secret. You look at our stock price, you look where bonds are trading. That period pre-COVID, we're at a very difficult moment. And so because of it, there was a lot of work being done before COVID came running in, in March of 2020. I mean, we went through our portfolio of our businesses, and we restructured businesses that were unprofitable. We discarded parts of our company that we did not see path of profitability. We sold off businesses that were losing money, then started becoming profitable, but we found a better return by selling it. So anyway, all this was part of -- we had $400 million of capital that had been invested pre-COVID, that was losing $40 million. So we needed to find a way to get that into a better position to strengthen our balance sheet. Along the path of strengthening our balance sheet during tough markets, we went through and looked at our pricing strategies around the world. We looked at our portfolio. We optimized both. Strategically dove in with our knowledge of the business and knowledge of our products, our customers dove in deeply to really make changes fundamentally in those parts of our business. And the reality was the markets were still poor. So volumes were weak in heavy manufacturing. It's tough to see it flow through the financials. So then the pandemic comes in, we've got a great team, plants that are regionally located building excellent products to serve the marketplace in this highly volatile period. We came in, we tremendously served our customers, mitigated the risk of this pandemic, saw the volumes increase. And so it's a combination of volumes and all the pre-pandemic work that now puts us post-pandemic with a strong balance sheet, excellent customer base and products at the market value.

So one aspect is some of these restructuring actions or maybe ways to addressing the cost structure, right? I think historically, you've talked in the past about maybe the number of SKUs you have, maybe your fixed costs, maybe improving utilization of your plants. Maybe can you just dive a little bit deeper on kind of what you've done to your cost structure, and how you've actually lowered it sustainably?

Yes. I mean, it's a combination around all those aspects. I mean, it -- one of the things that we've done when we redesign products, we go in there and we reduce the costs. So we look at it from how can we improve the product cost from a perspective of raw materials that go into it. And then at the same time, how can we better utilize our plants. I mean, so basic industrial manufacturing. If we can be more efficient, we can forward that through to our customers, to our investors, to our bottom line. And we've done a very good job of making those strategic investments along with improving the portfolio optimization. Also -- and this is something is -- the key is understanding the pricing of our products. We have a really complex, deep portfolio that's very specifically targeted to a niche business. And it's easy to get in a [rut] over a period of time as your pricing becomes more cost plus and strategically driven. And so again, I think it's an element of all those things. The plants get more efficient, taking out some of the material costs, better utilizing our labor, but also understanding the strategic pricing of our products that kind of led to the margin performance.

That leads me right into my next question, your contracts with your customers. I mean, you have very large customers, Caterpillar, Deere, et cetera, so what's actually changed within that contract? Like is there more inflation protection or even just being paid in higher absolute price? Maybe talk about kind of how contracts have specifically changed with your customers?

Several elements have changed over the course of the pandemic. The pandemic helped us get better leverage over what those cost elements are. We've always had raw material mechanisms, but we also got new contracts with customers that enable us to put more indices around inflation such as freight, energy, even to a certain extent, labor. But one thing that also happened was some of the time element of when that happens. So 90-day repricing, so it's tighter around where -- when you have those kinds of fluctuations in those indices, how they change and the lead in the lag with respect to how we have to buy. And I think it's important to note that we have to -- we have long lead times, sometimes with steel and things like that. So we changed some of those with the course of new contracts with the customer.

So it seems like you already had some raw materials, but now you're kind of including more of variable costs and the inflation, plus maybe you're shortening the reset mechanism, let's say. And then is also the absolute price away from -- is that higher or is that kind of very similar, just more protection?

Yes, more protection overall, but I would say that it's also very tied around the specific products that we produce for them. We've been able to -- as we introduce new products or refresh product lines, those -- that strategic pricing is different. Again, it's a better price and we've also taken cost out of the product, which helps them with respect to the -- what's important to the end user.

This year, it's been -- well, I guess, like kind of the past 3 years, it's been very interesting especially with the whole ordering inventory situation at your customers. It seems like we're almost having this [indiscernible] effect. Can you kind of just describe what's happened this year, and how that's impacting your operations, and how you expect it moving forward?

I mean, part of it is the nature of what we produce. So a wheel and a tire, you think about it from a supply chain perspective, if you're waiting on other components, you need the wheels and tires to move pieces of equipment around. So I think all of us during the pandemic drove by a lot in auto manufacturer and seeing thousands of cars stacked up when they need those wheels and tires to move them around, obviously. And so in our business, the wheel and tire is critically important. But then on top of it, you had other components, the belts, the harnesses, the hoses, the chips, obviously, that were being slowed up further in the supply chain process. And so we were building the production schedules. That's where our orders are coming in. And our customers looked at it from the perspective that we got to protect our ability to have wheels and tires to be able to move our equipment around and also becomes a competitive advantage because of the wheel. I think that's something that gets overlooked is that it's not just steel that's painted a color. There's actually a specific tooling that goes into creating the whole pattern that attaches itself to the axle of a tractor, combine, and sprayer. So if I'm a manufacturer in the Ag space, I need to make damn certain that I got my wheels in place, obviously, you need the tires to go along with it, so that I can take care of my customers, and I can make sure that my supply chain is performing ahead of my competition. And so you kind of have all those elements coming together. And the reality is, and we've heard this a number of times, Titan outperformed other parts of their supply chain. Our plans were deemed critical because of the nature of our -- the products that we produce and the industries that we serve. And so we were producing to their production schedules at a very effective manner whereas some of the other parts of the supply chain were not hitting those production schedules. And so we got out ahead of it with wheels and tires. And so we knew that pullback was coming in '23, didn't have the visibility to understand the extent of it. But we knew in kind of October '22 that we are producing at a level that you're not consuming everything we're producing. But at the same time, if they're ordering it, I don't have the ability to tell them, no, we're only going to give you 78% of what you ordered. So we knew this was coming, the bullwhip effect that you highlighted, where we see this bullwhip effect helping us though is we've gotten through the hard part of '23 with the correction. And so there's one customer, in particular, that has given us the forecast for next year. We're down significantly this year to the tune of over 30%, but we're going to be up 10% next year because of that bullwhip effect. So what it looks like they're going down over that 2-year period in retail sales where actually took a big hit this year and will be up next year. So that bullwhip effect really snapped us, hit us hard this year, will have more of a potential positive effect when you compare it to retail sales for next year.

Maybe this -- so maybe -- can you just talk about just the inventory levels at the OEM dealer side? And I guess when does this kind of destocking and -- when does -- when do we turn to more production and volumes kind of looking similar?

Yes. We're getting close. We're getting close to that point. And there's 2 different sides of destocking. There's the internal OEM destocking and then there's the dealer inventory levels. And so we've seen the dealer inventory levels still hold on to a very moderate level overall in large Ag. Small Ag, they spiked up really fast and aggressive. And so, there's been a dealer destocking taking place in the small agriculture side of the business whereas the large Ag, you still look at inventory levels overall, and they're more moderate. Combines are up a little bit higher. Tractors overall are still a little bit moderate. Now again, this can vary by geography as well. but it's really the small Ag that the dealer inventory went from. They were hovering around 3 months of inventory. They want to be at 6, they spiked to 9 kind of industry-wide. And so now they're bringing it back down to that level. They're right around 6.5, 7 at this point. So there will be some dealer destocking in small Ag, whereas large Ag, the dealer inventory levels will -- they won't need the growth like they did in the past. So they got behind, obviously, on used and new inventory, there was growth that came in building back the dealer inventory levels, but now they're more moderate and so it should be kind of a stable effect going forward.

On the OEM side kind of...

I'm sorry, I missed that, that's key part of the question. The OEMs are getting very close. Yes, that's something I would say if they're not already in the [indiscernible] they're going to be approaching it soon. I've spent some time at a number of customers recently, just touring their yards and looking at things and that whole inventory destocking that we were talking about in your previous question, that's getting near the tail end of the ball game.

Thinking about your sales, like the average this year and last year, is that maybe a good way to think about normalized?

For a large part of it. There's a lot of things that go into it. We did have a little bit of steel deflation in 2023, coming off of very high steel prices and for the large part of 2022. So if you think about our 15% coming down this year, some of that was bad, but at the same time, we protected margins. So it's not -- overall, bottom line performance was fine. But as far as for the destocking effect, I guess that's fair. But maybe from a volume perspective, I think that's, as Paul said, something a little earlier, you see a customer that came down 30%, now up 10% next year for us. Put all 3 years together, it's probably overall growth, right? So that's what we're really looking at.

And I guess that kind of goes into kind of what are you looking in your 2 key end markets as we kind of reach the end of the year, what are we seeing in 2024? What are some metrics or indicators you typically look at as well?

There's kind of the high-level macro and then the more detailed ones. I mean, clearly, you look at dealer inventory, you look at the age of the fleet. Those are things that are going to impact kind of short-term demand and you see that impact starting to come through early part of '24. But I think you got to step back and look at some of the bigger picture, which overall, I mean, the industries we serve, whether it's agriculture and construction, they're in a good position. I mean, the supply/demand of the grains that go into agriculture are just in a tremendously strong position as the protein-based diets continue to grow around the world. Everybody gets freaked out when fertilizer prices spike. At the end of the day, it just come back to simple economics. I mean, when you're when your demand is that strong, the supply is limited to some extent, the prices are going to work themselves out. The farmers are going to make money, governments are going to make sure that farmers make money. And at the end of the day, we're all going to want diets that are nutritious and they're more protein-based. And so we live in a world where I think if you step back and look at the bigger trends, there's some really good things going on. And everybody wants to focus on the micro. Age of the fleet is quite high. It's quite high. And so are we in a -- I think you also got to step back and look at it -- in our industry, everybody thinks that when things go down, it has to go down 25%, right? There's no such thing as it being stable and flat. If it's stable and flat, then you're missing something that you should be looking at. And I think we're in a period where agriculture and construction are good solid businesses, they're going to have good long-term macro trends because of infrastructure support, because of the demand that goes into corn and soybeans. And so at the end of the day, you're going to have more of these micro movements. But I think we got to stop looking at the past. We can't look at the 1980s and think that's going to repeat itself now. I think overall farmer incomes are good. I think that's one of the key metrics that gets overlooked because it's not that exciting to talk about. You talk about farmer sentiment because it's based upon surveys that can be updated every 60 days. But at the end of the day, it comes down to farmer income and balance sheet, the boring stuff. And it's hard to write articles that people read talking about farmer income. Balance sheets are strong, farmer income is good. So I think overall, we're going to be in a good position.

Well, I think you have an audience here that likes looking at balance sheet. How about within the commercial earthmoving? I think you have a few various end markets in there. What are you seeing in 2024 there?

Yes. I mean, I think the -- there for us in that business, we look at operational activity. We're more aftermarket-driven when it comes to earthmoving. And so we're not as tied to the OEM initial demand when it comes to earthmoving. We have a foundry in Spain. We're able to produce some excellent products that fit the aftermarket for earthmoving. And so we see a market there that's more driven by activity and activity levels are remaining at good levels. The mines are going to continue to operate. They continue to extract the resources that are needed for all the reasons that we know, growing population and the demand there is strong. So we're not -- for us, specifically at Titan, we're not as tied to that OEM headline number that you may see and more tied to just overall general operational activity of the mines.

Maybe shifting gears into one of your segments or one of your operations, obviously, last year, the Ukraine-Russian conflict happened. And you do have operations there. Can you just explain the business within there? And is this a long-term part of Titan? How it performed since the conflict started? Kind of just give us a little bit more background and comfort around that.

Yes. That's a good question. I mean, the one thing we're really proud at Titan is our people. And I think it really came through in the pandemic, the way we're able to service our customers is based upon having a strong team. And part of our strong global team is the folks that work for us at our Russian operation. It is the same management team is when we acquired the business 10 years ago. So that's a big important asset to us is that we have a strong group of very good business-minded people running that operation. But the way we see that operation is it serves an important need of the global food supply chain. At the end of the day, we make agriculture tires that go into the global food supply chain. We don't supply to the military. The business -- the products are not exported outside the CIS region. So they're not going into markets where we're facing sanction-related issues. So we service a need of a customer base in that region, and we're servicing what we believe is an important part of the global food supply chain that is done by a really good group of talented Western-minded business people there. So operations have been solid, and obviously, has its complications. But now it's been -- they continue to move forward and serve their customers very similar to how we serve our customers in other parts of the world.

Got it. Got it. Maybe shifting gears now again to capital allocation. You've kind of indicated on kind of some of your last few calls and just given your current leverage and liquidity position that potentially maybe you're ready to grow maybe potentially through acquisitions. Maybe what areas are you focused on? Any idea on kind of the sizes, multiples, maybe capabilities or regions? Kind of give us some more color on.

Yes, first, starting with the allocation. I think we have a balanced view on that. We're taking a really strong focused view on the internal investments we need to make that are driving across the sectors and the segments, if you will, that are going to see growth in the future. So think about large Ag in other elements of agriculture and in construction, either through stronger manufacturing capabilities or distribution. So those internal investments that are required to do that. We increased our investments in 2023, and we expect to see similar types of trends in the future as well. And then we have a capital allocation that is viewed -- a view on return on capital. So we've had some stock repurchase program going on and we would look at a balance of that as well, just again, focused on return. But then when you turn your eye towards M&A, it's something that we think about a lot, but very focused on the things that we can bring value to. So again, the markets that we serve, the manufacturing capability we have, the distribution into those markets are things that we're focused on. We got to this leverage point with a lot of effort and a lot of the things we just already talked about. And so we want to maintain that conservative posture. And we want to have a balance sheet that is enabling us to remain nimble to manage through cycles and all those types of things. And so when we think about companies that we would look to add to the mix, they would be bolt-on types of acquisitions that helps us, again, in all those areas and at multiples that are closely tied to how we operate. We can't go out and spend 10 times EBITDA for business and expect to get a return. So we have to be really closely focused on the type of things that they do, the markets that we serve and ultimately a conservative posture on how much capital we have to outlay for that and the ability to cash flow that little bit to be able to manage an acquisition. We know that we have clear sight on the synergies that come with that acquisition as well as the ongoing strategic earnings that come from that enabling us to manage that leverage position to stay with a very healthy balance sheet for the long term.

So just following up on that. Do you have -- currently, I believe your leverage is 1-ish times. Do you have a target long-term leverage? And maybe are you willing to increase it above your target for the right acquisition?

For the right acquisition and with a strong view towards how we can get that back to the level that we maintain 1x to 2x range is something that we look at. And again, you have to be very opportunistic sometimes. So you have to look at what's the acquisition? How big is it? How -- and then ultimately, how that's going to play out over the next 2 to 3 years? So I think it's going to be in -- as you know, we haven't made any acquisitions recently. So we've -- we're being very careful about what it is and when we do it. And again, maintaining a conservative posture. So we'll lean towards this kind of leverage point to where we are and our ability to get back there fairly quickly if we do one.

Following up on acquisition. I know you have a very strong relationship with Goodyear. Obviously, they made some significant announcements, including putting up their OTR business up for sale. I think they have a plant in Japan and in the United States. Do you have any comments on that business or discussions early on with that?

It's an interesting business, and it's one that does not have a lot of overlap with Titan. So when you look at where we service the marketplace with tires. It's going to be generally small, large Ag, kind of light industrial, but not so much in the heavy construction to earthmoving. So the assets they're referencing with their OTR division do fit very well with Titan. The complexities of it are you have the plant in Japan like you mentioned, they also have a plant in Europe, they have one in Kansas and then one outside Sao Paulo, Brazil. And so just in talking with our Brazilian team yesterday, they're very familiar with the plant outside Sao Paulo, the OTR assets are right in the middle of the plant, okay? Industrial speaking, that's very difficult to operate a business when your business is part of another business right in the middle of the plant. So I think the question for us becomes is what is -- what would the structure of that look like? Is there an opportunity to do something with the assets versus the full business? Is there an opportunity for Titan? Yes. I mean, it does feel very good with our business. Those assets could be deployed in other existing plants that Titan has. And we have a good relationship with Goodyear. I think, Goodyear has got a lot going on as far as activity at the business. But overall, I mean, the brand for us has been incredibly valuable. We've had the brand in the U.S. since 2005, in Brazil since '11 and then kind of Europe a few years after that. But we have a great relationship with Goodyear. We're very protective of that brand, but we do not rely on Goodyear for anything. And that's been that way in North and South America from day one of those agreements. So it's truly just a trademark. We provide all the engineering, the technology, the support, the know-how. It's our assets, we own them. So there is not a risk with the relationship with Goodyear that somehow they go through some changes, and we're relying on them for some part of servicing our business. And then you see our business to grade, there's not a risk of that.

And I know you have acquired some things from them in the past. I think Latin America is one aspect, yes. Maybe kind of looking at your liquidity because you do talk about liquidity as being a source of optionality, I think you have almost $212 million of cash on the balance sheet, which is quite significant. But $168 million of that is foreign location. I guess one, like why so much cash? Is there like a minimum cash threshold? And then is it -- why such a large balance in kind of the foreign accounts? And is it difficult to repatriate that cash? How do you think about that aspect?

Let's start with the fundamentals of where we manufacture the product. And you end up -- basically, you run those operations fairly autonomously. So cash has built up due to the profitability of that operation over time, and you tend to keep the cash where you need it from a working capital perspective. And when you repatriate, ultimately, it could be expensive from a tax leakage standpoint. So we've opted in the past to keep the cash where it's generated. And ultimately, it's been pretty good. We haven't been in this position long term, having $212 million of cash, right? So 1.5 years ago, we were sitting at $100 million, so -- even less than that. So that's not something that we've been in long-term situation. So what we're looking at -- we look at strategies on how we're going to manage our cash globally. Ultimately, when you do bring back cash to manage it, you're going to have to take a look at what those tax impacts are. And in some cases, it's not a whole lot. But in other cases, like a place like Brazil, it's not easy to get the money out. So we're going to be careful about it. At the same time, we're -- right now, we're getting good rates on cash. So we're able to invest it appropriately while we employ the strategies that we're going to play. Keeping also in mind, our U.S. operations includes our corporate as well as most of our debt. So we're going to be needing to do that over time to put the cash in the right places. As far as the overall cash number, again, I want to be careful about how much cash we have to operate the business. We don't certainly need $212 million to operate day-to-day in the business. But at the same time, we need to have a balance sheet that's flexible to manage through cycles as well as take care of some of the M&A that we want to do, too. So we're going to be keenly focused on it.

Yes. It's a good problem to have.

It's a much better problem to have, yes, than where we were 4 years ago.

Maybe last question. I think you kind of touched on this -- on your kind of how you were thinking about M&A and kind of where you're currently being valued at. I think if this maybe less than -- week old, but I think you're currently valued around 5-ish times EBITDA, give or take. Do you think that's a fair valuation? Or is there something maybe you think the market is missing there? And maybe how do you help shareholders kind of realize that valuation?

That's a good point. Now obviously, we're not satisfied where we're currently trading. And we've made a couple of comments about that. We've kind of backed off from doing that recently. But if you look at the business, how we've performed in recent years, it has been very, very strong. We've cleaned up the balance sheet. We've cleaned up our portfolio as well. So it's not just cleaning of our balance sheet, but when you look at the historical results of the company, again, you had $400 million of capital that was losing $40 million, that's been cleaned up. And now we have a core stable business. And so going back to your previous question, we also have a lot of cash that we can deploy into strategic investments to improve our plans, to improve our existing portfolio to then pursue M&A. And so I look at it and go -- I think the market assumes that everything we've done is just going to go away. It's going to go poof, but the cash isn't going to go away. And so we can -- again, we have a strategic plan of where we can invest to improve our margins, improve our company. We're going to go do that. So there's opportunities to grow via M&A, but there's also opportunities to grow organically through deploying our balance sheet, but also a good part of our improvement in our performance is coming from our innovation. We've introduced new products in the marketplace that provide strong value to the end user and in return, we get stronger margins as well. So there's a lot of good core things going on that over time -- yes, the market should give us credit for it. But right now, it's kind of sitting where it's at.

And with that, I think we have about 10 seconds left. So I want to thank both Paul and David for answering our questions and kind of talking more about Titan International. Thank you very much.

Thank you.

Thank you.