Titan International, Inc. (NYSE:TWI) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Titan International Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning and Analysis for Titan. Mr. Snyder, the floor is yours.

Alan Snyder: Thank you, Forum. Good morning. I'd like to welcome everyone to Titan's fourth quarter 2022 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 the reminder that the results we are about to review were presented in the earnings release issued yesterday, along with our Form 10-K, which was also filed with the Securities and Exchange Commission. 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 risk, 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 Q4 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, and good morning, everyone. The Titan team closed out 2022 in excellent fashion with fourth quarter results that push us up over the top for record performance in terms of sales, profitability, and cash flow. How'd we get to this point? It really comes from our global One Titan team that continues to be energized by working relentlessly to engineer and manufacture our market leading products that simply make off-road equipment perform better. Really, our vision and strategy as a company is formed by that premise, and it serves as our guiding light throughout our organization. A core concept of achieving on our vision and meeting the needs of our customers is through our strong technical connection to end users of off-road equipment, especially in agriculture.

At Titan, we have a culture here that is centered around living and learning by playing in the sandbox with end users and really understanding their needs and then bringing that information back into our organization. With that important knowledge, we then let our product and technical engineers run fast, develop, and also our operational teams manufacture these market leading products, and that really creates a cool place for an exciting place to work. This entrepreneurial culture, this is at the root of our company's foundation and has been for decades. We combined with our strong technical and manufacturing knowhow this flows vigorously throughout our day-to-day activities and is the backbone of the company that we are today. Moving over to our financial results.

We simply had an exceptional year. Our revenue reached $2.17 billion, 22% higher than last year, but actually 27% higher if you exclude FX in our Australian divestiture. Along with strong demand in our end markets, this demonstrates our team's ability to recruit, train, and retain people to grow volumes in a difficult labor market. Our 2022 gross profit hit 16.6% that led to an adjusted EBITDA of $253 million, which is a record year for Titan. We manage our cost structure effectively as well with our SG&A coming in a little over 7% of sales and only $2.5 million higher than last year in this inflationary environment that we live in. Looking at the fourth quarter, we closed the year out well with $510 million in revenue, that's up 4.5%, and also the first time we have ever surpassed $500 million in Q4.

As a reminder, this quarter is a period that is always impacted by holidays and plant maintenance shutdowns, so it's good to see our team get through that noise effectively to record gross margin of 15%, which compares to 12.8% last year. That led to our Q4 EBITDA of $53 million, which is our best fourth quarter in history. So overall, from nearly every angle you can look at, all of our business units had an excellent 2022, and I would personally and sincerely like to thank our global team for their efforts in recent years to achieve these accomplishments that I just had the honor of a highlighting. I want to move over to our balance sheet now and spend a few minutes on the critical process €“ progress we've made there. A few years ago, David and I spoke quite a bit that one of our top priorities was to fortify our balance sheet and the two of us and the rest of our team really did a good job getting our management team around the world focused on that objective and over the past few years, we've done what we set out to accomplish.

In 2022, Titan generated $114 million in free cash flow. That's enabled us to achieve net debt leverage of 1.1 times. If you look back a few years ago, our working capital was around 27% of sales. Our Board, I do recall those days where our Board put an objective in front of us to get below 20%, and we've done that for the past couple years now. Most importantly, over the past few years of fortifying our balance sheet, we never stopped investing in product development and innovation as I noted earlier. This is the heart of the culture that what makes us tick, and we do not take our foot off that pedal. Therefore, by being strategic with our investments exiting and improving unprofitable businesses, and by having a motivated workforce moving in the same direction over the past few years, we have executed at a high level to take care of our customers during these challenging times, and we've propelled our financial results to new levels, and we've also accomplished our crucial goal of fortifying our balance sheet.

So now looking towards 2023, it is reasonable to say the overall business climate kicks out a fair amount of noise at the macro level these days. However, when you look at our primary end markets, we are encouraged and believed they're still standing on firmer ground, especially the large Ag segment. The recent USDA report illustrates that corn and soybean supply demand factors along with the low stocks will bring good pricing levels into 2024 at a minimum. That will play a positive role in farmer's decisions about purchasing equipment, especially when they're going to get their hands on the latest precision ag technologies and not to mention getting their hands on our LSWs. The strong farmer income for recent years combined with that pent-up large equipment demand from €“ that is really still lingering from that supply chain and labor disruptions over the past couple of years, this along with continuing low levels of available used equipment, all continues to bode very well for 2023 large ag demand.

Flipping over and looking at small ag, it appears that inventory is starting to normalize to pre-COVID levels, along with the effects of some inflation slowing down demand in smaller horsepower ranges. These factors along with OEMs drawing down their internal inventory leads us to seeing a tapering of small ag demand in 2023. But again, it's still a good strong per segment for our company. Moving over to Earthmoving and Construction. Our businesses in this segment finish the year really strong. In fact, ITM, our undercarriage business had the best quarter in its long history. We see Earthmoving and Construction in a good position to start 2023 with mining aftermarket poised for good growth with solid commodity prices in place and the construction market having the backdrop of some infrastructure support kicking in at points throughout this year.

So we look at this as again a continuation of a strong 2022 to start off 2023. So if you circle back to again to 2022 as exceptional year for the Titan team and the customers we proudly serve. As we turn that page into the next €“ into this year, we expect our financial performance to remain at a high level based on the overall healthy market conditions in our end markets. Farmers will continue to be supported by strong income levels and they have cash to spend on equipment and tires. Weather conditions have been unpredictable, and that bodes very well for our LSW that continue to be the perfect solution for farmers looking to battle through those tough conditions are simply looking to make their equipment perform better and more efficient.

Therefore, we do see our aftermarket demand continuing to remain robust. We also expect to see certain OEMs drawing down their internal inventory levels that will make for a bit of a wild ride. So coming off of record 2022, we see 2023 as another strong year for Titan. And as the year progresses, we're looking to provide more information about our forecast and performance, but we're not going to provide a broad range of expect today €“ expectations on today's call. In closing, it's really cool to see the quality and innovative products we build around the world every day. It makes for a fun and exciting place to work and be as I mentioned earlier, we also really as a company strive and on the fact that our products play an important role in meeting the involving needs of our customers and more specifically the end users.

Along with that, we have a strong footprint of manufacturing locations that are able to mitigate the supply chain risks that exist in today's complicated world. We continue to believe the key elements are in place to drive continued positive momentum for Titan. So with that, I'd like to turn the call over to David now.

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David Martin: Thank you, Paul, and good morning to everyone that's on the call with us today. While we're now closing the book on 2022, and it was quite the ride for Titan, it's truly gratifying to see the success after all the hard work our One Titan team has put into moving the company forward. Financial success is just one aspect of those accomplishments of 2022. Our team has established new standards for operations planning, financial forecasting, and the most importantly, discipline and focus in the midst of tremendous volatility over the last number of years. Now, let's walk through some of the key highlights for Q4 and our 2022 full year performance. Q4 sales continued to expand with our organic growth of almost 10% from Q4 last year after excluding the FX €“ of FX and the sale of Australia, which occurred in the early part of 2022.

Our full year organic growth, excluding those same factors was 27%. Q4 adjusted EBITDA grew by $17 million or 46% from Q4 last year, and it capped off a record year for our earnings as Paul said earlier. Our full year adjusted EBITDA was $253 million, representing growth of 87%. Our earnings per share growth was also very impressive on both reported and adjusted basis. Adjusted EPS jumped from $0.14 in Q4 2021 to $0.44 in Q4 2022, and went from $0.60 per share in the full year of 2021 to $2.20 per share for 2022. Our cash balances increased by $43 million from Q3 on the strength of these earnings and the solid working capital management. And last, we paid down debt by $36 million in 2022 and grew cash by $61 million driving down debt net €“ net debt to $286 million.

Our debt leverage now stands at 1.1 times. In Q4, we experience more traditional ordering patterns and our plant maintenance by customers and fewer production hours for our plants, particularly in the ag segment. It's normal seasonality and it was in line with what we expected. At the same time, it is important to see the continued expansion of top and bottom line relative to last year in Q4, which was a solid result by the team. Now let's look into the performance at the segment level starting with agriculture. Agricultural segment net sales were $275 million, an increase of $10 million or 4% from Q4 last year, excluding FX and the lack of Australian sales, this growth was 7%. Volume and mix were fairly stable when comparing to last year and pricing was a big part of the growth.

This primarily stands from increased costs of raw materials and other inflationary factors present in 2022. Again, we saw a return to normal seasonality across this segment of the business, and we also took advantage to prepare our plants for the needed production levels as we see increased demand in the first part of 2023. Full year organic growth for ag in 2022 was 30% compared to the prior year. Agricultural segment gross profit for the fourth quarter was $38 million, which was level with the result that we saw last year, while there was some negative impact from FX and Australia. The gross margin continued to be solid at 14% similar to last year. Our Earthmoving and Construction segment experienced a very strong quarter. Overall, net sales for the EMC segment grew by $12 million or 7% from Q4 last year.

Excluding those same factors I've been describing from last year or from this year, we were just short of the growth of $30 million or 16%. The majority of the growth for the segment was driven by increased volume, while there was increased pricing relative to raw materials and other cost inflation, most notably, energy cost in Europe. Our growth came from all aspects of the global business, while ITM had one of its strongest quarters ever in Q4. For the full year, organic sales growth in the EMC segment was 24%. Gross profit within the EMC segment for the fourth quarter was $33 million, which represents an improvement of almost $13 million or 62% from gross profit last year. The gross profit margin in the EMC segment was significantly better at 17% versus the prior year at just 11%.

Again, the largest driver of our increased profitability came from the increase in sales in the ITM undercarriage business, while growth occurred across all of our businesses in the geographies from last year, reflecting stronger demand in the global construction markets and solid market conditions and mining. The Consumer segment inQ4 net sales were slightly down in Q4 compared to last year. Sales from the Latin American utility truck tire sales were lower reflecting some tightening of customer inventories in the quarter. Like the rest of the year, our specialty product growth initiatives in the U.S. are taking off, most notably, our custom mixing of rubber stock, which partially offsets some of this decline. For the full year, the consumer segment experienced organic growth of 24%.

This segment's gross profit for the fourth quarter was solid at $5.8 million and gross margins were 15%, improving nicely from Q4 last year. This improvement in dollars and margin are primary reflective of positive mix of products, again, most notably growth from specialty products in the U.S. Our SG&A and R&D expenses were $33 million in the Q4, which represented 6.5% on net sales in line with previous quarter's performance and the full year. For the full year, our SG&A and R&D cost rose less than 1% compared to the prior year. With our growth in sales, this provided very solid leverage on our overall improved profitability and our margin. This was an interesting quarter for our reported taxes on income with a benefit of $16 million. During the fourth quarter, we were able to release valuation allowances of nearly $29 million for U.S. and federal state taxes related primarily to prior net operating losses.

Due to the strong performance over the last several years and the company's projected performance ahead, we are now in position to utilize these net operating losses. When you exclude the impact of the valuation allowance release that we did in the fourth quarter, income taxes as a percent of pre-tax profits were 25.7%. Our cash taxes for 2022 were approximately $24 million for the full year. While earnings has been spectacular, it has translated into exceptional cash flow performance. Free cash flow to up $44 million in Q4, and a tremendous number of $114 million for all of 2022, which is well above any year in our history. We also exceeded our previous guidance of $100 million coming from improved working capital management in the quarter.

This drove our overall cash balance to $160 million at the end of the year. Our capital expenditures for 2022 were $47 million, and it was in the middle of our guidance range for the year. Our focus has been on ongoing maintenance in our various plants, along with investments to bring about increased efficiencies and selected capacity expansion. Along with tooling related to product innovation and other improvements, particularly in large ag. As I mentioned at the outset, our net debt leverage at the end of December improved to1.1 times trailing 12 months adjusted EBITDA down from 1.4 times at the end of Q3 and 2.9 times last year at the end of the year. Now moving broadly to our outlook for fiscal 2023, we're coming off a record performance in 2022, and I truly believe that the underlying and mid and long-term demand drivers of our business remain very solid.

As you heard today from Paul's comments, the business environment remains somewhat uneven in the near-term. We do expect our performance to remain at a high level supported by overall healthy market conditions in all of our end markets. We also expect to see stability in gross margins and we'll continue to control our operating costs. And that should translate into, again, very strong free cash flow performance for this year. Our working capital should also remain stable and our capital expenditures should be in the range of $55 million to $60 million. This increase in CapEx reflects multiyear capital programs in place to manage the maintenance, as I talked about earlier, in a very organized way, and to improve the efficiencies with continued selective capacity expansion of our global production facilities and continuing tooling of improvements from product development.

With this expectation for continued strong cash flow, we expect that our credit statistics to improve. We will be in strong position to enact our strategic initiatives for growth and improving returns. This will include potential stock repurchases, which will be focused on supporting the stock when we need to. It is also potentially could include focused core acquisitions and joint ventures as they present themselves. We will be proactive in this area while remaining focused on building on the strength that has been obtained with our performance. Now I'd like to turn the call back over to Forum, our operator for the Q&A session.

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