Yahoo Finance Titan International, Inc. (NYSE:TWI) Q1 2024 Earnings Call Transcript
Titan International, Inc. (NYSE:TWI) Q1 2024 Earnings Call Transcript May 2, 2024
Titan International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Titan International, Incorporated First Quarter 2024 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. [Operator's Instructions] It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning and Investor Relations for Titan. Mr. Snyder, the floor is yours.
Alan Snyder: Thank you, Megan. Good morning. I'd like to welcome everyone to Titan's first quarter 2024 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 were presented in the earnings release issued yesterday along with our Form 10-Q, which was also filed with the Securities and Exchange Commission yesterday. As a reminder, during this call, we will be discussing certain forward-looking information, including the company's plans and projections for the future that involve risks, uncertainties, and assumptions that could cause our actual results to differ materially from the forward-looking information.
Additional information concerning factors that either individually or in the aggregate could cause actual results to differ materially from these forward-looking statements can be found within the Safe Harbor statement included in the earnings release attached to the company's Form 8-K filed earlier, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC. In addition, today's remarks may refer to non-GAAP financial measures, which are intended to supplement, but not be a substitute for the most directly comparable GAAP measures. The earnings release, which accompanies today's call, contains financial and other quantitative information to be discussed today as well as the reconciliation of the non-GAAP measures to the most comparable GAAP measures.
The Q1 earnings release is available on the company's website. A replay of this presentation, a copy of today's transcript, and the company's latest quarterly investor presentation will all be available soon after the call on Titan's website. I would now like to turn the call over to Paul.
Paul Reitz: Thanks Alan. Good morning, everyone. As noted in our last earnings call, we saw our One Titan team step up to get our transformative acquisition of Carlstar over the goal line right at the end of February. Of course, that was just the beginning as we've been full speed ahead over the past 60 days, integrating their operations into Titans. And I have to say at this point, I'm really pleased with how that has gone thus far. Carlstar has a really good team from top to bottom and it's been great to see them embrace the transition, and really envision a good future ahead for the combined companies. On the Titan side, it has been similarly been terrific to see how our new -- the new folks have been welcomed with open arms and have been integrated quickly into our One Titan team.
So, I'll take a minute and thank our entire team, both the existing members and the new ones, for all their hard work and commitment in recent months with the integration efforts. Let me shift gears to look beyond the present towards the future with our newly combined company. We believe Titan is now positioned well to deliver more consistent stronger results throughout various market cycles for a number of reasons. Let me touch quickly on just a few. First, we have made substantial structural changes in recent years, including portfolio optimization, addressing underperforming and non-core businesses, our pricing strategies and fortifying our balance sheet. Next, we have a tremendous focus on product development that's centered around our entrepreneurial culture, which is connected to end users and has built our portfolio with innovative products.
And lastly, the Carlstar acquisition. This was accretive from the onset. As we discussed last quarter, this transforms our company with growth and synergy opportunities. And now, Titan has the broadest wheel and tire product offering in our business that covers everything from ATV and UTVs, to high-speed trailers, to construction and then of course, the entire ag segment from small to large. Carlstar brings to us a one-stop shop that diversifies our customer base with a good balance between OEM and aftermarket. So using that as a basis along with our recent financial performance of Titan and Carlstar, we've discussed with our Board that the combined companies in a typical year would have earnings power of $250 million to $300 million of adjusted EBITDA that also would produce free cash flow of at least $125 million.
Keep in mind that, AIP, the prior owners of Carlstar, believed in the value of the combined company based on the amount of stock they took as part of the transaction. That's a nice positive to see their belief in Titan and our stock. And let's not forget, our Board, also represents a significant shareholder base of Titan. I say all that to bring forward the point that we feel good about the future prospects of our company, and we are currently working on short and long-term actions to deliver those numbers I presented earlier and more. While you won't see that performance this year with softer market conditions, it is good for our investors to have a perspective of where Titan and our Board see the future. For today's call now, I'd like to share some thoughts on a couple of primary themes, before handing the call over to David for his comment on the financials.
I want to talk about current market conditions that's naturally on everybody's mind, so I'll spend some time there. And I'd like to talk more about Carlstar, how we're attacking the opportunities with that acquisition. So, let's start with the market conditions. Most -- everyone in the ag sector is currently characterized in the market as being in a cyclical trough. Although, many expect this cycle to be shallower and shorter lived than previous ones. A fair amount of the reasons behind the cycle that we're in are macro factors, that extend beyond the typical ag sector drivers such as farmer income and inventory levels. We all spent a bunch of time seeing the headlines and understanding the Fed's steady rate increases in 2022 and 2023, are certainly having an impact on credit availability, and in turn spending in parts of our business.
Geopolitical tensions are running high on a global basis, that's stating the obvious, but it also impacts countries that are significant producers of grain commodities, and in turn significant markets for ag equipment. There's also the presidential election this fall. It's everyone's favorite or least favorite topic, I guess. But the reality is that, this may have a material impact on US trade policy. So you put that all together, and it's easy to see why a lot of economic factors are causing more uncertainty in our end markets, than we would otherwise have at this point, in the year. On a positive note, the election is something that's not going to go on forever. It has a known end date, so to speak. And I think it's also reasonable to expect, we'll have more directional clarity with the Fed and interest rates fairly soon.
So, what that means is the uncertainty phase, a pickup in end market demand should translate pretty directly into positive activity for Titan. So, more specific to the ag sector now, is farmer incomes. We've talked about the direct correlation between that and demand. We have seen the estimates for the year trending lower. But let's keep in mind, the overall farmer balance sheets have been and continue to be described as healthy. According to the USDA, we're seeing farmer income is projected to be down around 25% this year. Sentiment has been up or down, but it's somewhat neutral right now. But it really bears note, that farmer incomes have reached an all-time high the past couple of years. So, even though the direction has retreated, they are still at quite healthy levels.
Also, with each passing day, let's not forget farmers are out there in the field, with their equipment, doing the work they need to do and that drives a need for aftermarket replacement tires. I speak with customers on a regular basis, and that uncertainty I noted is something that is weighing on everyone's minds. Of course in ag, there is always some uncertainty, this time of year with the planting season, as dealing with the weather is just part and parcel of being in the ag business. Even so I am consistently hearing our customers say that the visibility at this time of the year is below what they would normally see. Without that visibility from customers combined with the macro factors, the normal and logical reaction for dealers is to adopt a risk-averse positioning, with their inventory, which then flows back to the OEMs who adjust their production accordingly.
We have seen tire and wheel inventory levels improve at the dealer channels and with OEMs, but the slowing of demand has resulted in overall levels, not yet reaching a normal state. Again, we are confident, this is a temporary dynamic as some of the macro factors that I've noted will not simply last. Outside the US, Europe farmer sentiment has weakened. Geopolitical concerns are taking a toll has resulted in reductions in demand and inventory is still running higher than normal. In South America strong harvests have negatively impacted commodity prices. Notably according to some research, we reviewed regional commodity sales there have trended below normal resulting in some farmers still holding unsold grains. So moving away from ag over to the Consumer segment, which I want to remind you, now represents 25% -- approximately 25% of our revenues.
The same macro factors are impacting the market there, as inflation as you expect inflation would. Even though the pace of increase has slowed with inflation, it is apparent that consumers are still feeling the effects of it, with higher gas and food prices. What that ultimately means is someone who might have thought about buying a new riding lawn mower for example is sticking with their old one this summer. Similarly, the off-road ATV UTV vehicle market is feeling the effect of the various economic factors I noted. As with [Audio Gap], our view is that this is more a pause in end market demand than anything else. So that the person that wants a new yard tractor recreational vehicle is still sitting on an aging piece of equipment that they will eventually replace.
So on a positive note, I want to point out that Titan has a robust aftermarket offering in the consumer segment just like we do in ag. We have a one-stop shop in the consumer -- that serves the consumer marketplace. This helps us offset that delayed dynamic that I mentioned as the same customer who has deferred buying a new lawnmower ATV might still act and would be expected to still opt for new tires that would replace the worn out old ones and helps to maximize that performance of that existing equipment that they're still using. We've seen this for years in ag. That's where our LSWs have continued to perform well is in the aftermarket replacement space. So we know the game plan and we know how to maximize our opportunities. Needless to say, we are happy that we've expanded the aspect of our product offering in the consumer segment and what the Carlstar acquisition has brought to Titan.
So moving over to earthmoving construction. We are seeing the broad macro uncertainty impact demand. We do see these mid to long-term drivers for the sector remaining very much intact. In the US, nonresidential construction activity continues to trend higher led by the need for facilities like data centers and the onshore render manufacturing. Outside the US where equipment is used for activities like mining demand for precious metals remains strong, especially with the geopolitical factors driving prices of commodities such as gold to levels no seen in many years. While we face some headwinds, it is definitely worth repeating that we are focused on controlling what we can control. And as a global Titan team, we have extensive experience dealing with market cycles like this.
Again, I want to repeat, our team is very experienced. It understands how to make efficient timely decisions in dealing with cycles and conditions that we have seen to start 2024. David will get into the financial details, but I want to say that we did a good job in a challenging environment this quarter and we've delivered solid financial results that our team is proud of. To close here, I do want to shift back to Carlstar. As I noted previously, I would cover this. This acquisition has really ramped up our aftermarket business is something we expect to benefit on several fronts. You've heard us talk a lot already about the one-stop shop concept and that is our central emphasis. By positioning Titan as a single provider of end-to-end wheel and tire solutions for our customers, we make their lives simpler and processes more efficient.
Adding a robust aftermarket business also helps us control our own destiny a bit more than the past. At Titan, we've done a good job expanding our tire aftermarket business in recent years in both the US and South America. We've done that as well in the mining sector with our undercarriage business. Historically, as expected, our wheel business has been more of an OEM-centric type of operation and therefore relying on the production coming out of their factories to drive our demand. But now Titan has a sizable aftermarket business in all of our end market segments. We have a revenue source that we expect will mute some of the cyclical nature of our end markets and we certainly view that as a positive. Aftermarket sales also lead to a more positive basis with our margins.
So the Carlstar acquisition really is a win-win on all fronts. I've reached out to a couple of our key aftermarket customers right after the closing of the acquisition and the response has been positive about what the combined company is capable of doing to help them better serve their respective marketplace. So putting that all together, we are executing well despite the challenging environment. It has only been two months, but the addition of Carlstar is on track to drive the intended impact on our business we envisioned. We are focused on creating cost synergies and David will talk more about progress in that area. We're also seeing a path to commercial synergies based on the one-stop shop proposition that is really supported by an extensive product offering and we expect to see that accelerate when overall end market activity picks up.
We are pleased to see the solid performance of our aftermarket business, particularly as we contend with weaker demand from our OEM partners. With that, I'd now like to turn the call over to, David.
David Martin: Thank you, Paul and good morning to everybody on the call today. I'm very pleased that the One Titan team felt hard, through more challenging conditions in the quarter. And we put up a respectable result for Q1. As a reminder our first quarter included one month's contribution from Carlstar, so we'll naturally see more benefit in the quarters to come. We are well underway with our synergy plans and we have a clear line of sight into the near and long-term opportunities. For 2024, we're targeting bottom-line contribution of approximately $5 million to $6 million and believe the longer-term opportunity is in the $25 million to $30 million range, on an annual basis. Broadly, we're developing strong plans with actions to improve areas such as procurement, manufacturing and distribution center optimization and more direct cost reductions.
We're being thorough in our analysis, as we look to take advantage of the economies of scale and our buying power, along with ensuring the combined organization is efficient and working on driving value every day. For some opportunities in areas such as raw material supplies there are contracts in place that impact the timing of the changes, we will be pursuing. And the opportunities are significant. There are meaningful commercial synergies as Paul said, stemming from our "one stop shop" strategy and having complete offerings to serve our customers and our teams are very focused on this as we speak. Moving on to our results, we performed well in terms of margins during the quarter. And as we move through the balance of the year we'll see a full year impact of Carlstar's operations.
We expect that it will create some gross margin lift, all else being equal although, offset by a bit heavier SG&A which I'll discuss a bit more. Turning specifically to our financials for Q1, Revenues in the quarter were $482 million with adjusted EBITDA of $50 million and adjusted EPS of $0.29. Our adjusted gross margin for Q1 was 16.7% compared to 17.4% a year ago, but up sequentially from 14.9% in the fourth quarter of 2023. Drilling down into the gross margins a bit, Ag Segment adjusted gross margin was 17.2% compared to 16.1% last year, a very healthy increase. On a comparable basis which excludes the non-recurring inventory step-up charge we recorded in the quarter Consumer segment margins were 21.3%, compared to 20.7% in the prior year.
The step-up charge of $3.4 million was a function of revaluing Carlstar's inventory when we took it into our books at the time of the acquisition. This flowed mostly through to the consumer segment and to a lesser extent the Ag Segment. Earthmoving and Construction segment gross margin in the first quarter was 14% versus 18.7% a year ago. It was a very difficult comparison. The segment margins this year were pressured by reduced sales volume, as our OE customers in Europe and Latin America responded to weaker demand. Again we have a long history of fighting through these issues, and I expect that we're going to manage through this with strong actions to manage costs to get our margins and going in the right direction. Longer term, we continue to see a positive demand picture for that segment and expect margins can expand as activity picks up.
SG&A expense for the first quarter was $39 million or 8.2% of sales, compared to $34 million in the prior year or 6.3% with the change primarily due to the partial year contribution of Carlstar's operations. Recall from our announcement of the acquisition and our discussions on our Q4 call, that Carlstar has historically carried more SG&A expense as a percent of sales than legacy Titan due to the distribution center model. In order to help everyone understand the impact of this particular line item we added an item in our guidance, where we note SG&A including royalty and R&D expense is expected to be 11% of sales for Q2 and should remain at a similar level for the rest of 2024. From Q2 on, the incremental SG&A expense associated with the DCs, adds at 160 to 170 basis points as a percentage of sales.
After that, SG&A would be consistent with our legacy Titan operations. R&D expenses were $3.6 million in the first quarter compared to $3 million a year ago, reflecting our continued and strong emphasis on prioritizing R&D investments. Our adjusted operating income was $25.1 million for the quarter and our operating cash flow was $2 million. Both of those figures were impacted by the reduced sales levels in the quarter as compared to last year's first quarter. If we back out the non-recurring expense stemming from the acquisition along with the non-cash inventory step-up charge adjusted net income would have been $9.6 million higher as would have operating income. Operating cash flow would have been $8.2 million reflecting the removal of those transaction costs.
So this was a solid quarter of cash flow generation when you look deeper into the numbers. First quarter CapEx of totaled $16.6 million in the quarter compared to $11.7 million last year as we continue to invest in improvements in production efficiency and select expansion in strategic areas along with product development. And of course this is inclusive of one month of CapEx related to Carlstar. We also used cash to fund our stock repurchase program in the quarter buying back 100,000 shares for a total of $1.4 million during the early part of the quarter. It's worth noting that given the timing of the Carlstar acquisition, we were blacked out for much of the quarter. After our purchases in Q1 we have approximately $15 million of available capacity on our stock repurchase program.
Net debt at the end of the quarter was $370 million compared to $205 million at the end of the year. Our debt leverage at the end of the quarter was naturally higher after the funding of the Carlstar acquisition in February, while we continue to be in a solid balance sheet position with our stronger cash flow characteristics. Our priorities continue to be the pay down of debt we took on over time and continued a strong focus on the investments in R&D and strategic growth along with opportunistic share repurchases. Our free cash flow so far in Q2 has enabled us to pay down on the ABL line already. Lastly, I want to touch on our financial guidance. As Paul noted there is macro uncertainty right now which is affecting many economic sectors including ours and virtually our discussions with customers that ambiguity is a theme.
As our visibility for the balance of the year is not where they normally expect it to be that is naturally impacting our outlook. Given that dynamic we felt it was prudent to provide second quarter guidance at this time. One additional point to make with respect to our guidance relates to synergies. While we are attacking all the identified synergies it is reasonable to expect that we will get increased traction over the balance of the year and thus more of an impact on our financial results will be in the second half of the year and even more impactful in 2025 and beyond. So our guidance for ranges for the second quarter are revenues of $525 million to $575 million. Our SG&A including royalty and R&D expense of 11% of sales and an adjusted EBITDA of $45 million to $55 million.
Free cash flow of $30 million to $40 million which is a solid contribution from working capital management in the quarter. And then finally our CapEx, we expect to be between $15 million and $20 million in the quarter similar to where we were in Q1. So with that said, we're excited about the future and what holds for Titan and our teams are very focused on driving value for our shareholders. So thank you for your time this morning and your attention to what matters to Titan. We would like to turn the call back over to Megan now, our operator for the Q&A session.
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