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

Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] On the call today are Paul Reitz, Titan's President and CEO; Tony Eheli, Titan's Senior Vice President and CFO; and David Martin, Chief Transformation Officer. We will begin with a reminder that the results management is about to review were presented in the earnings release issued this morning, along with the Titan Form 10-Q, which was also filed with the Securities and Exchange Commission this morning. As a reminder, during this call, management 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 from these forward-looking statements can be found within the safe harbor statement included in the earnings release attached to the company's Form 8-K filed earlier as well as the latest Form 10-K and Form 10-Q, all of which have been filed with the SEC. In addition, today's remarks may refer to non-GAAP financial measures, which are intended to supplement, but not be a substitute for the most directly comparable GAAP measures. The earnings release, which accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the non-GAAP measures to the most comparable GAAP measures. The second quarter earnings release is available on the company's website. A replay of this presentation, a copy of today's transcript and the company's latest quarterly investor presentation will all be available soon after the call on Titan's website. I would now like to turn the call over to Paul.

Thanks, and good morning. Our second quarter results reflect solid improvement from prior year with revenues of $485 million (sic) [ $484 million ] and adjusted EBITDA of $34 million. Our diverse business model is an important part of Titan's ability. We talk about that frequently and enables us to continue succeeding despite continuing difficult end market conditions in the Ag segment. Our one-stop shop product and distribution strategy, which is well executed by our experienced team, places our customers at the center of everything we do. It is really a key element of this business model that is diverse that allows us to continue driving success through a range of different and challenging market conditions. In our earnings release, we highlighted the fact that each of our three reporting segments accounted for between 30% and 40% of revenues in the quarter. Within each segment, we also have further diversification, whether it be geographical, product, or end user profile. Now diving into our Ag business, farm incomes continue to be pressured with lower commodity prices and input costs such as fertilizer due to the ongoing conflict in Iran. And along with that, borrowing costs remain elevated. Those factors are weighing on OEM activity as farmers are hesitant to invest large sums of money in new equipment. For Titan, our Ag aftermarket business and our global footprint continues to provide some offset to that OEM weakness. When you look within the tractor category [Audio Gap] of the differentiated end users as higher horsepower units, as we all know, are used by the large row crop farmers, and they have been most impacted by the turbulent trade policy that has been ongoing. But when you look at the lower horsepower units, they serve a variety of uses around almost any farm, and they also are used quite extensively by hobby users and municipalities. So these equipment owners have fared better than the row crop farms. And as a result, these types of users have been more active buyers on a relative basis. Looking at our Consumer segment, our diversification is really a function of our ability to serve a broad base of customers and end users with our extensive product portfolio. With our wide range of off-road wheels and tires, our customers include recreational users of power sport and off-road equipment, along with trailers that are used to move that equipment. And then you also can throw in professionals like landscapers and golf course operators. As you can imagine, those varied end customers have much different motives when looking to buy tires for their equipment. A recreational user may -- might be highly motivated by a cool tread design, or you counterbalance that with the timing of a purchase based on getting something like a tax refund or a big commission check. On the other hand, the professionals that I mentioned like a landscaper, they depend on the equipment running each day to keep up with their client schedules and make money. So as a result, worn-off -- worn-out tires are often a required immediate replacement, reducing the owner's ability to defer those type of purchasing decisions. So then lastly, looking at our EMC segment, we derive a significant portion of our revenues from Europe. They're driven by infrastructure activity that's influenced by some different factors than what you would see here in the U.S. Our global footprint allows us to be a key partner for global OEMs. And along with that, they focus on areas with -- when they start to focus on areas with stronger demand, we have the ability to follow suit with them. End markets such as construction and mining can also have harsh operating conditions in many cases. That would take a toll on equipment, and that creates demand in the aftermarket. So if you tie that all together, Titan is well positioned to continue succeeding with our diverse business model. Of course, like everyone else, we are looking forward to the day when it comes, and it will come when you have a sustained recovery in demand across the Ag segment. Many of our Ag end markets are characterized by continued usage of machinery and equipment like I've highlighted, and that continues even in softer economic conditions. So given that, worn-out tires and tracks need to be replaced as does equipment when it fails or it ages. Farmers, similarly to the operators I mentioned like landscapers, they're still working their fields. They still got acreage that needs to be tended to. So low grain prices will drive down and have driven down along with the pressure from the input cost, farmer income for this year, but they are continuing to utilize their equipment. Tires and parts wear out, and that is going to necessitate replacement. So with us, roughly 45% of our aggregate sales consist of aftermarket products. And so we are, therefore, well positioned to benefit from that dynamic. In our Ag sector, we are also a secondary beneficiary of government support. I know that gets talked about a lot, all the way up to our President and the Secretary. But if you look at the farmers, I mean, they're independent, pragmatic can-do people here in the U.S. and around the world. Government support, though... [Technical Difficulty]

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Okay. We'll continue. Among our priorities, we are focused on controlling what we can control. And with that, today, we are going to have our Chief Transformation Officer, David Martin, share his perspective and key priorities after we have Tony go through the financials. As many of you know, David recently assumed this role after serving as CFO for 7 years, and this move allows him to focus squarely on ways to improve our business as technology continues to rapidly evolve. Finding ways to reduce costs and improve efficiency is crucial in today's world, while we also continue to prioritize our investments in R&D that bring innovative value-added products to the market and in doing so, further solidify our market-leading position in off-road wheels, tires and undercarriage. So wrapping up, I want to say we remain confident in the durability and diversity of our business model, the strength of our aftermarket position, the breadth of our product portfolio and the dedication of our global One Titan team. Together, these advantages position Titan well to navigate cycles while continuing to create value for our customers and shareholders over the long term. With that, I'll turn it over to Tony now.

Thank you, Paul. Good morning, everyone, and thank you for joining us today. As Paul noted, we delivered solid second quarter results with revenues near the top end of our guidance range and adjusted EBITDA above the top end. This demonstrates the resilience of our portfolio and the continued execution of our team. Compared with last year's second quarter, several financial metrics stand out. Sales increased 5.2%. Consumer segment sales led our growth, increasing 27%. Gross margin was solid at 15.5%. Adjusted EBITDA improved to $34 million, reflecting strong operating performance and $6 million of tariff reforms. Free cash flow generated was $26 million. Turning to our segment performance. The results reinforce the value of Titan's diversified business model that Paul discussed earlier. In recent quarters, EMC has been a primary growth driver. And this quarter, consumer led the way with sales increasing 27% as our Titan specialty line experienced a notable rebound in demand. Reported segment gross margin was 23.7% compared with 20.4% a year ago. The current quarter includes $4.6 million of net tariff reforms, which reduced cost of goods sold. While those reforms benefited the quarter, it is important to note that our margins in recent periods were negatively impacted by higher input costs associated with tariffs. And while we can't really isolate the impact, it does factor into the comparative business performance over the past year. Our EMC segment increased 1.4% in sales compared with the prior year, with gross margin improving 12.5% from 11.5% last year. Foreign currency translation remained a tailwind, contributing 3.2% to segment revenues. While North America construction OEM demand softened modestly for the first quarter, margins benefited from the cost reduction and productivity initiatives implemented across the company's production facilities. Our Agricultural segment continued to face pressure from lower farm income and elevated financing costs, which weighed on end market activity. Segment sales declined 5% from the prior year period. Lower activity levels impacted fixed cost leverage and together with higher input costs resulted in segment gross margins of 11.4% compared with 14.6% a year ago. As we noted last quarter, activity in our Brazil agriculture business remains challenging. High interest rates, political uncertainty ahead of the upcoming presidential elections and elevated input costs, particularly fertilizer costs tied to the Iran war continue to pressure farmer profitability. OEM and dealer inventory levels have also become elevated, creating additional near-term demand pressure. As a result, farmers remain cautious with equipment purchases and activity in the region remains low. Moving on, SG&A, including R&D expenses, was $58.1 million for the second quarter of 2026 compared with $56.7 million in the prior year period. As a percentage of sales, expenses improved to 12% from 12.3% a year ago, primarily reflecting the benefit of cost reduction initiatives. Operating cash flow was $39 million in the second quarter, improving from a usage of $47 million in the first quarter, consistent with normal seasonality in our working capital, but also an improvement from $14 million generated in prior year. This strong performance on cash flow was driven by focused execution by our team to optimize our working capital investments. CapEx was $13 million in the second quarter compared with $10 million in the prior year period, primarily due to timing of capital expenditure. Year-to-date, CapEx remains comparable to prior year period as we continue to make prudent and measured investments in the business. Net debt was $413 million at quarter end, down from $441 million at the end of the first quarter. This reduction reflects progress towards one of our key priorities for the year, which is strengthening the balance sheet and reducing leverage as we move through the year. Tax expense was approximately 0 for the quarter. As we have discussed previously, our effective tax expense can vary based on geographic mix of profits and losses and the applicable tax rules in those jurisdictions. The main driver of the variance versus the range we provided last quarter was setting discrete tax benefits recognized during the quarter and the impact of jurisdictional mix of earnings. I'll reiterate that as market conditions in the U.S. recover, we expect our tax rate to move back toward more normalized levels. For the third quarter of '26, we expect tax expense to be in the range of $4 million to $5 million. Turning now to our financial guidance for the third quarter of 2026. We expect revenue of $440 million to $460 million and adjusted EBITDA of $27 million to $33 million. For fiscal year 2026, our financial guidance remains unchanged with revenues of $1.85 billion to $1.95 billion and adjusted EBITDA of $105 million to $115 million. As Paul and I have noted, our Agricultural segment continues to operate in an uncertain environment. Given current market conditions, our prior expectation that customer activity will accelerate in the fourth quarter ahead of an anticipated agricultural recovery early next year now appears less likely. As a result, we currently expect full year sales to trend towards the lower half of our guidance range, which would represent modest year-over-year growth. With respect to tariff reforms, we expect an additional $7 million to $9 million of refunds net over the remainder of the year. We intend to reinvest the proceeds back into the business with a focus on initiatives that enhance our product offerings and deliver greater value to our customers. Before turning it back over to the operator for the Q&A session, I want to hand the call off to David Martin, our Chief Transformation Officer, who will share some thoughts on key initiatives he's working on.

Thank you, Tony, and good morning, everyone. Well, it's been an exciting 7 months in my new role. And today, I want to share how we are applying AI and transformation at Titan. Titan is a company built by people who know how to get things done with strong industry experience and an entrepreneurial culture. We make complex products, serve tough end markets and operate in places where local knowledge matters. Transformation has to build on that -- the focus of my role in the CTO position is simple: improve performance, move faster and give people better information and take manual work out of our business and functions. It won't be about chasing dreams and shining objects. I'll walk through some of those important focus areas now. First is operations. In the plants, we are connecting production data, machine information, quality data and operator experience so teams can see issues earlier, understand root causes faster and make better decisions on throughput, downtime, scrap, yield and quality, among other things. The second area is supply chain and enterprise visibility. Our footprint creates complexity in forecasting inventory freight and working capital. Analytics and automation can make that information cleaner, faster and easier to act on, helping us lower costs and manage inventory more effectively. Our third area is -- we have a great deal of knowledge that sits in separate systems, spreadsheets, reports or individual experience. We are building a more connected thread from design and testing through quality, production and commercial feedback. We are applying that same mindset in finance, legal, compliance, contract management, workforce planning and reporting. Reducing manual work, standardizing repeatable processes and making information easy to define and use are keys to this. We have several early projects underway or getting started, including plant-level industrial analytics pilots, a new approach to contract life cycle management, supply chain analytics improvements, and AI-driven LSW payback calculator app for sales enablement, product development cycle improvements and a new human capital management foundation through Workday. Our approach is practical. Start with the clear business owner and a real problem, we'll test and learn and then we'll scale where value is clear. That matters at Titan. We are decentralized and very operationally focused with our resources. Corporate can provide tools, standards, oversight and support, but the value has to show up inside the business in the plants, with customers, in engineering, supply chain, finance and across all of our functions. Our people know the bottlenecks, the reports that take too long, the decisions that need better data and the work that can be simplified. My job is to listen, help prioritize these -- the right opportunities and put support behind the areas that really matter. For our employees, the message is very simple. You don't need to become an AI expert. My goal is to have everybody stay open, look for ways to simplify work and help us apply these tools where they can make real difference. I see that momentum building every day in my conversations with our teams across the business. And I'm encouraged by how many people are turning to use AI productivity tools to work smarter and solve practical problems. I want to thank our One Titan team. The progress we make will come from the people closest to the work, our plants, our commercial salespeople, engineering, supply chain, finance, all of our functional leaders and then our business unit leadership. The goal is to be a company that executes with stronger visibility, responds faster, improves productivity and makes even more disciplined decisions. It's about performance at a higher level. Our AI and transformation initiatives are focused on measurable business outcomes across manufacturing, supply chain, engineering, product and business development and administrative functions. We have identified opportunities expected to generate up to $15 million in operating improvements over the next 3 years. This is aggressive and aspirational, but also very grounded in the real opportunities across the business that we are already vetting. We expect to begin realizing benefits in 2027 with a target of $3 million of improvements by the end of next year. Importantly, these investments will be funded through our ongoing capital expenditure programs. So we are not increasing CapEx because of our AI and transformation initiatives. We're being very smart in how we allocate our capital. As we move forward, I will be ready to share more on concrete progress and financial performance against our targets. So I'm really excited about the opportunities in front of us and look forward to getting after it in the second half of the year. So thanks for your time this morning, and I'd like to turn over the call to our operator for our question-and-answer session.

[Operator Instructions] Our first question from the line of Mike Shlisky with D.A. Davidson.

The audio has been a little funny on the call, so I may have missed a few comments along the way. I'm not sure that anybody else, but I may have missed two sentences. Hopefully, I only asked something that was already covered in your prepared remarks.

Mike, yes, I apologize for that. We got noticed in the middle of the call that the audio is bad, and we're trying to correct it. So hopefully, it's clear now. I apologize for that. We became aware of it in the middle of my comments.

Okay. Well, hopefully we will somehow muddle through here. So first, Paul, your comments on commodity prices were interesting. It appears to me as though commodity prices have been improving recently. I think we had corn at nearly $5 just this past week. This is the December futures price. So I was a little surprised to hear that you -- as you are calling commodity prices still kind of struggling. I guess if some of these $4.75, $5 corn prices hold through the end of the year and farmers do actually realize that across a lot of their crop sales, and that includes the old crop, by the way, do you foresee any improvement in 2027 if we see commodity prices hold?

Yes. Totally agree with your comments, Mike. And mine were in the broader scale of the commodity price range over the course of the year. Clearly, like you said, you articulated very well. I mean, we're starting to see some positive things happen. What we've been watching closely, what I've been really spending a lot of time on throughout Q2 is trying to get our feelings for where things are going in the future. We got some indicators early part of Q2 that we thought, as we talked about previously, that we would see more of an uptick later this year. And what we're seeing is exactly what your question is leading towards. I mean we're seeing things building. Commodity prices are more favorable. Equipment is aging. Used inventory is better positioned. So we're seeing the market conditions really, really improve to create that foundation for an uptick that is coming. Again, we just haven't quite seen all the indications that it's going to hit this year, but still remain favorably in position exactly like you stated that the foundation is there for next year.

Okay. Okay. Great. And then maybe can you just go a little deeper, Tony, on the guidance because you guys just said -- Paul, you just said Ag is still a little challenging here for the rest of the year. Which end markets or what part of your other markets that maybe got better for the fourth quarter that maybe kept you from cutting the top line for the full year?

Mike, thanks for that question. So when we look at our business, first, our Europe business continues to do well. The opportunities there, we continue to win new business in Europe. So that's going very well. And we're looking to get some good growth in that part of the business. Now it's not a significant piece of our Ag business, but they are looking very healthy in what we're seeing in the markets there. The second aspect is in our consumer business, where we are winning business, new business with OEs, and that continues to happen, and we expect to see some of that benefit as well help our Q4 results year-over-year.

Your next question comes from the line of Joe Gomes from NOBLE Capital Markets.

So just on the Ag business, I mean, you talked about OMEs continue to reduce inventory. How much further can they reduce inventories to? And is maybe the replacement cycles becoming structurally longer here? Are we really just thinking this is an abnormal cycle what's happening here given all of the impacts that we're seeing between interest rates and geopolitical stuff? And just maybe, Paul, you could touch a little bit on that, I'd appreciate it.

Yes. I mean, Joe, if you think about what's taken place this year, I mean, we live it. Everybody lives it and you kind of get used to it, but it's pretty astounding week-to-week, month-to-month, everything that goes on, creating that envelope of uncertainty in the business activity. So I want to look at what we're facing with the Ag cycle as exceptional, not a change in the norm structural. I do know in spending time out in the field with a number of OEM dealers, they put a ton of effort into managing inventory. This isn't something they just woke up in 2026 and said, let's go try to tackle it, even though it may appear like that from some of the comments. I mean the well-capitalized OEM dealers have been working on inventory for a period of time. I do feel that the ones I speak with have done a great job. They're in a good position to benefit from a recovery. As I mentioned in my comments, the government support is very good and the fact that it solidifies balance sheets, keeps their financial position strong, enables them to keep buying some of our replacement products, our tires. But it doesn't necessarily drive the equipment purchases. And I think that's where that sustained recovery in farmer income is what's going to take -- have to take place in order for that to happen. But I do think inventory is in a good position. Now there may be pockets either geographical or by dealer to dealer or brand to brand that maybe it's a little bit out of balance. But I'm telling you the ones I've spoken to spent a long time just a couple of weeks ago with a quite large dealer, and they've done a tremendous job. And it's personally hard for them to do that, but they've done a tremendous job. And so I think we're in a good position. I think the foundation is there, get a little calmness if that's possible in the world activities. I do think it's possible, I should say. We can't -- I don't think we're going to continue with that. And I think the Ag cycle gets back to more normal trends. And there's great new equipment out there. There's aging equipment that needs to get replaced and eventually, it's going to start happening.

Okay. And then I guess, kind of what are you hearing from the OEM customers on the EMC side of the business going forward here for the second half of '26 and maybe into '27?

Definitely more stability. Again, our OEM business for EMC is a little bit different than others. It doesn't necessarily follow the bellwether of a market leader that you can just look at their comps. But our business, we got really good performance as we exit Q2, and we see that being sustainable through the rest of this year. So that segment has hold the [ hyped ] experienced some good performance and has some stability behind it as we move into the back half of the year. Again, we're exposed a little bit different than the U.S. infrastructure cycle, more positioned towards Europe. We do have some exposure down into Brazil, a really good position in Brazil that's been performing well outside the Ag cycle that we've highlighted. So I think we counterbalance throughout EMC quite well and do see some good performance and stable performance through the rest of this year.

Your next question is from the line of Kirk Ludtke with Raymond James.

Maybe on the consumer side, you mentioned that the revenues were up pretty substantially due to higher volumes in your Specialty business. Can you maybe elaborate on that? Is it partly the rollout of the Goodyear brand? Or is there something driving that growth?

Yes. I think Tony highlighted this earlier, and I'll add a little color and then let Tony kind of wrap up there from more of the financial perspective. But yes, our team has done a great job. I think the one thing I want to highlight and the reason why I say they're doing a great job is since we've moved more heavily into the consumer business with the acquisition 2.5 years ago, we have launched more new products into that segment than they had in the previous 15 years. So Tony mentioned the OEM wins that we're getting. It's not because we just woke up, fell out of bed and OEMs called us and placed some orders. We have done a lot to position ourselves much stronger within that segment, and we're starting to see the payoff, like Tony mentioned. And we feel really good about our pipeline of new products that we're continuing to put into the marketplace. Go online and look up VPO. I'm not a social media expert, but my guys showed me the number of YouTube videos on that is astounding. And we have literally just barely launched that product, literally just barely launched it. And so again, the pipeline of products that we have coming into the marketplace, along with what we've already done has really helped driving some wins despite some market conditions that haven't been as favorable with the OEMs. And so that's kind of getting buried under the scenes, and Tony did a good job explaining that. I mean the OEM wins are offsetting some market conditions. And so again, we're very well positioned for the future when the market does improve. So the Goodyear brand is part of that, like you said in your question, Kirk, we are using that and launching it. That's certainly a premium that will drive nice margin and growth for us in the future as well. But from a positioning in the market, it's been fantastic to see what our team has done with launching new products and the impact it's having.

I mean, Paul has explained everything we're doing great in our business. So that's all -- I mean that's it. And the only other thing I would say is you'll recall where we were last year, Liberation Day, there's a weak comp in there. I would acknowledge that in my role. So -- but that also ties into the Q3 conversation as well because that weak compare in Q2 creates a tough compare in Q3. And so overall, the business is doing well, and that's what Paul has tried to explain in terms of the wins and how we're progressing.

That's great. And then the transformation position is a new one as far as I can remember. Should we expect a more aggressive approach to operational restructuring going forward?

Well, we're constantly vigilant with regard to how our operations are performing and especially given market conditions, if they persist, we're always going to be prepared to make the right decisions. In fact, if we think about the AI and transformation initiatives we have, that's actually going to help us improve even in the midst of a pretty low market that's going to really set us up well for when it does recover. And then when you think about productivity, efficiency and those types of things, it's going to give us better access to make even better decisions about how we allocate our production domestically versus some of our sourcing opportunities as well. So all of that's pretty exciting because it plays together.

Great. And then lastly, on tariffs.

Your next question is from the line of Derek Soderberg with Cantor Fitzgerald.