Titan International Inc Q2 FY2021 Earnings Call

Good morning, everyone, and welcome to the Titan International, Inc. Second Quarter 2021 Earnings Conference Call. All participants are currently in listen-only mode. We will take your questions and comments after the presentation. Now, I am pleased to turn the call over to Todd Shoot, Senior Vice President, Investor Relations and Treasurer for Titan. Todd, please go ahead.

Thank you, Grant. Good morning and welcome everyone to our second quarter 2021 earnings call. On the call today, we also have Titan’s President and CEO, Paul Reitz, and Titan’s Senior Vice President and CFO, David Martin. I will begin with a reminder that the results we are about to review were presented in the earnings release issued this morning along with our Form 10-Q, which has also been filed with the Securities and Exchange Commission this morning. 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 within today’s earnings release attached to the company’s Form 8-K filed earlier today, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC. In addition to today’s remarks, we 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. Today’s earnings release is available on the company’s website within the Investor Relations section under the News and Events. Please note today’s call is being recorded. A replay of this presentation will be available soon after the call within the Investor Relations section on the company’s website. A copy of today’s call transcript will be made available on our investor website soon after the call. I would now like to turn the call over to Paul.

Thanks, Todd, and good morning. We saw this year get off to a good start in the first quarter. And at that time, we felt confidently that our business was moving in a positive direction in a number of ways. Our second quarter results illustrate that not only have we seen those trends continue this quarter, they have improved. Coming off a good Q1, our second quarter sales grew quarter-over-quarter 9% to $438 million, and our adjusted EBITDA reached $37 million this period as compared to $26 million in Q1. Along with that, our adjusted EPS increased to $0.22 per share from $0.07 in Q1. Overall, our second quarter performance was one of our strongest in a number of years as we did a really good job battling through the heavy noise that exists in today's operating environment, which is challenging for many, if not all, industrial companies. Just think that we've been able to produce an additional $215 million worth of products in the first half of this year for our customers, demonstrating our ability to adjust quickly to meet the growing needs of our important customers. Our strong Q2 results grew on the momentum from Q1 and now at the mid-year point has put us in position for 2021 adjusted EBITDA to be north of $120 million. So diving further into our performance, both our Ag and our earthmoving/construction segments experienced strong sales volume growth in the second quarter. Our end markets continue to look very good and we expect the strong demand levels we have seen in the last couple of periods to continue into the back half of this year and really beyond into next year as well. We feel that Ag continues to show good positive signs of current and longer-term strength. What is important for us is that the primary important drivers behind the growth in Ag continue to show signals of solid support. For example, the continuing tight inventory levels in both new and used equipment have brought large Ag equipment prices to very high levels, if not record levels. In Titan's North America business, we are seeing growing momentum in large Ag where orders have increased throughout the quarter and we believe that this trend should keep moving in the further positive direction as fleets are aged, and the large Ag equipment market is still roughly 25% below long-term averages. Our smaller Ag customer base has been really good the past few years, and so far in 2021, many of those customers have seen their inventory levels depleted to really low levels, if not record low levels. This means these dealers will need to rebuild their inventory, which is going to increase our production demand above retail sales levels for 2022 and should keep the momentum going again in small Ag as we look into the future. Again, these are just a few indicators that illustrate the core strength in the current Ag market and support the case that Ag will have solid longer-term growth. So moving from Ag and looking at our earthmoving and construction segment, we have seen demand continue to be above initial expectations with sales growth over 57% year-over-year and an increase of 7% compared to our first quarter, which again we felt was a good quarter to start the year. As we have stated before, a large percentage of our EMC sales comes from our undercarriage division ITM. ITM has good balanced exposure to global markets and has been something that we have worked hard to build over the years. We saw solid growth this quarter in construction revenues from both OEMs and aftermarket, and this is coming primarily from Europe and the Far East in our business. The word of the month seems to be transitory as the debate rages on whether inflation is transitory or not. A quarter ago, we thought it was crazy that steel was around $1500. Well guess what, it is now floating around $1,800 and appears to be going even higher. This is just an example of the facts of operating in today's post-pandemic world, where costs are rising and everything from raw materials to labor to logistics. Overall, this quarter Titan was able to balance our pricing with these rising costs. And we continue to believe that we have the ability to pass through the increase in costs. I do want to add another comment specific to Titan that we have a long strong history of being very good at managing costs, and you see that in our reported SG&A costs. However, going a step further, we also have a strong culture around managing our operational costs. And we will continue as a management team to work hard to manage our overall cost structure, which is definitely a benefit in times like we're in right now. David will spend some time going through the financials with you but wrapping things up in conclusion today, I'd like to state a few things regarding the actions we have taken to improve our balance sheet, which includes our important long-term debt refinancing that took place in April. These actions have put us in a good position to manage the current and future growth of our company. These are certainly challenging times that we're operating in, but we see in front of us a market with robust and strong broad-based demand that bodes well for this year and clearly beyond in the next. We believe Titan is in a good position with our global production capabilities and our strong product portfolio to deliver a superior value proposition to our customers, and we will be able to benefit from these stronger markets. We are committed as a company to increasing our capacity in key locations and we continue to drive our product innovation to be a strong partner to our customers. Our Titan team is working hard and continues to work hard to effectively deal with the supply chain and labor challenges. And at the midway point of the year, our business is performing very well, with our Q2 results really shining bright. Our order books are solid and there are continuing positive signs in our end markets, which puts Titan in a good position to post 2021 adjusted EBITDA north of $120 million. And on top of that, we see a path forward to future growth for next year. I'd now like to turn the call over to David.

Thanks, Paul, and good morning. I appreciate everybody joining us today. Well, the second quarter continued to show the power of the changes that we have made at Titan and how we can accelerate our financial performance improvements with sales growth. Before I get into the details, I want to highlight the most important aspects from this quarter's performance. First, sales grew over 53% for the quarter from last year in Q2. Of course, this growth is inflated somewhat, as we were deep in the initial throes of the pandemic last year in the second quarter. If you go back to the second quarter of 2019, we grew a healthy 12% or 19% if you exclude the impact of currency fluctuations. All of our regional operations across the segments experienced significant growth in the quarter, leading to the strongest sales quarter since Q2 of 2014. The sales for the first half were up 34% from the first half last year and up 5% from the first half of 2019. Again, 12% growth, if you exclude the impact of currency. Our growth between Ag and the earthmoving and construction segment was very balanced, both grew 57%. The consumer segment reported an increase of 15%. Our gross profit level was significantly improved at $61 million, with a margin of 14%, up from 10.4% last year and it increased sequentially from the first quarter margin of 13.2%. Excluding the impact of the bond refinancing costs and FX losses in the second quarter of $16.8 million, net income for the quarter was $14 million and our diluted earnings per share was $0.22. Adjusted EBITDA for the quarter was $37 million, representing the strongest quarterly performance for us since 2013. On a trailing 12-month basis, adjusted EBITDA stands at $95 million as of this quarter. Finally, our cash position remained stable again this quarter at $96 million, a very healthy level for us, despite the continuing investments in working capital, while we have been very measured in our inventory management to date. Now, I'll get into more details for the quarter. The sales growth for the quarter versus last year stands out as a highlight. But it's also important to note that sales for Q2 jumped nearly 9% sequentially from the first quarter this year. Continuing increases in demand across all of our markets have contributed positively. Currency was a boost to sales this quarter of approximately $8 million or close to 3% versus a year ago, with the strength in the euro and the pound driving the majority of increases. Volume was up year-over-year by 33%, and we also had favorable pricing mix of more than 17% as the cost of materials have risen during the period requiring customer pricing actions. Gross profit for Q2 was $61.5 million versus $31 million in adjusted gross profit in the second quarter of 2020, representing a 99% improvement. Our gross profit margin for the second quarter was 14% versus only 10.8% last year, after adjusting for an asset impairment. Just a quick report on our progress this quarter, in terms of production and cost. We continue to ramp up our production levels during the quarter, which reflected moves to higher trained staff to meet the demand that's coming at us. Again, we are working really hard to calibrate production levels to the demands that we see coming. Raw material and logistic costs would continue to rise across all market sectors, and as you can see in the numbers, we're putting through appropriate price increases to customers to manage the situation. I said it last quarter, but the timing of impacts related to procurement and ultimately the flow-through to production can differ from the price changes that we're making with customers. Obviously, the objective is to align everything from a timing perspective as closely as possible over time. There can be quarterly variations however. Also, while we see our gross margin dollars protected, our margin percentages can vary. We also continue to fight hard to ensure production remains smooth, given the supply chain shortages that we're seeing from steel to fabric to polymers. Our supply chain leaders have done a fantastic job to date, and they will obviously continue their relentless exercise of keeping us moving efficiently. Now, to our segment performance. Our agricultural segment net sales were up $84 million or 57% from the second quarter last year, which makes it the strongest quarter for the segment in the last eight years. Currency impacts were almost negligible in this segment, with only a 0.4% negative impact. Volume in the segment was up 36%, and we had an increase in price and mix of 22%, again relating primarily to the turnaround in raw material costs and other costs associated with production, and the need to increase customer pricing accordingly. The key driver to the volume increase related to OE sales across the business, while aftermarket sales remained very solid. The agricultural segment gross profit in the second quarter was $35.3 million, up from $15.6 million in the prior year, representing a 126% improvement. The gross margins in Q2 were 15% for Ag, which was a significant improvement from the margin produced last year of only 10.6%. Again, this is reflective of the volume and the effect on our efficiencies in our plants, along with the continued strong cost actions that we have taken over the last year. We continue to see the effects of higher raw material costs in the second quarter, while we were able to manage the overall effect on our profitability in dollars through our pricing actions. Much like our first quarter results, we saw significant performance improvements across all of our geographic operations in this segment. Our earthmoving/construction segment exceeded expectations for the quarter, as the construction markets experienced accelerated recovery after the challenges that were taking place in the global construction markets. Overall net sales for the EMC segment grew by $64 million or 57% from last year. On a constant currency basis, net sales would have risen 50% for the quarter versus a year ago, as the euro and the British pound currency strengthen against the US dollar. Volume was up in the EMC segment by 38%, while the price impact of price and mix was positive at 11%. While this had a larger impact than the Ag segment, rising raw material and logistics costs were combated by pricing actions. All geographies experienced year-over-year growth during the quarter, with the largest growth coming from ITM's undercarriage business, which grew 55% excluding FX impacts from the second quarter of last year. ITM's primary growth came in Europe, Asia, and Latin America. Gross profit in the earthmoving and construction segment for the second quarter was $22 million, representing an improvement of almost $10 million or 77% from the adjusted gross profit in Q2 2020. As a reminder, we took a small impairment of $1 million in the second quarter last year in this segment. Gross profit margin in the E&C segment was 12.6% versus an adjusted gross profit last year of 11.2%. Again, the largest driver of our increased profitability came from the increase in sales in ITM's undercarriage business. Moving over to consumer, the segment's Q2 net sales were up 15% compared to last year. For the first time in a while, currency was a non-factor, with a positive tailwind of 1.2% in the quarter. Pricing and mix impact was a positive factor of 17%, reflecting our ongoing raw material and other cost increases. Volume was down in the quarter by about 3%, as our focus has been on our key Ag and EMC customers, and we have shifted some production from consumer products during the period. The segment's gross profit for the second quarter was $3.9 million, a healthy improvement from Q2 2020. Gross margins were also healthy at 12.7%, which was an improvement from 10% last year, reflecting some positive mix changes in the products that we sold. SG&A and our R&D expenses for the second quarter were $35.1 million, down from $1.5 million from last quarter. Second quarter SG&A and R&D costs increased from a year ago about $4.5 million. Again, due to the pandemic last year, we had taken some very strong spending control measures in the quarter last year. This year's expenses included some variable compensation costs, reflecting the increase in sales and profitability during the quarter. Most importantly, SG&A and R&D expenses, as a percent of sales, declined to 8% versus 10.7% last year in Q2. First half SG&A expenses are 8.5% of sales. We recorded a tax expense of $2 million during the second quarter, in line with our expectations. This reflects taxes on increased income from certain foreign jurisdictions, including Latin America, Turkey, and Asia. We remain on track to see between $8 million and $10 million in tax expense for the full year. Alright. So let's move on to cash flow. Our overall cash balances remained steady this quarter at $96 million. Despite the sequential growth in sales, our profitability increased significantly, and we needed to invest in inventory to support our second-half expectations for sales. Our operating cash flow for the quarter was almost breakeven at an outflow of $1.5 million. Our operational teams were very effective in managing working capital this quarter. Our accounts receivable and accounts payable effectively offset each other again this quarter. We had growth in the inventory in the quarter of approximately $32 million. About half of this increase in the quarter came on higher raw material costs, with the other half coming in volume mix and currency changes. When you boil it all down, the overall growth in the inventory during the quarter was 9.2%, with less than 5% coming from volume, which shows the effectiveness of our working capital management discipline. With continued solid focus, I believe the cash flow will increase through the year, and we can move from breakeven to positive free cash flow for the full year. Of course, this will be somewhat dependent on how we view our needs for inventory as we head towards 2022. In any event, any inventory investments will be strategically focused as we plan for business growth. Capital expenditures for the second quarter were $5.8 million, which was in line with quarterly historical levels for CapEx spending. As of mid-year, we stand at $14.6 million in total CapEx. CapEx spending will be higher in the second half, as we have a number of ongoing projects that are focused on facilitating more efficient operations and reducing costs. We have some investments particularly in Brazil that are needed to expand our production capacity to meet the demands of our customers. We also continue to focus on product line innovation, which requires some tooling investments as well. I continue to anticipate this spending for the full year to be around $35 million to $40 million. We talked about the bond refinancing that took place in April, so that is not new news. But it is worth mentioning as it was a very significant step forward for Titan. It's very important for us to take advantage of the opportunity to refinance and secure our financial stability for years to come. So on April 22, we were able to close the new 7% bonds, which will now mature in 2028. Overall, debt level at quarter end increased from March by $15 million. All of this increase came from revolver borrowings related to the refinancing cost of the bonds. We borrowed approximately $19 million to pay the fees and the call premium at closing. Short-term debt at the end of June was up slightly to $34 million. Most of our current maturities at the end of the period relate to foreign credit facilities and term loans, which can be rolled over and extended if needed in the coming year. Therefore, I don't anticipate any significant cash requirements relating to debt in the near term. Our current domestic $100 million ABL credit facility is also secure with a maturity of 2023. At quarter end, we had borrowings of $29 million. None of the current borrowings relate to any working capital needs in the business. With positive operating cash flow expectations in the near term, we should be able to pay down these borrowings over time. That said, at the end of Q2, we had headroom in the capacity on the facility of $59 million, after you deduct current borrowings and outstanding letters of credit. We also have sufficient revolver capacity in Europe. This gives us tremendous flexibility to run the business. Overall, net debt increased in the quarter to $391 million. Again I expect to trim that number through the year as cash flow increases and we're able to pay down the revolving credit lines. It is important to note that our debt leverage at the end of June, based on trailing 12 months adjusted EBITDA, has decreased to 4.1 times, which is nearing our target leverage of less than 4 times EBITDA. Let me wrap up with a few thoughts on the second half of the year and some concluding remarks. First, our view on demand is very strong, as Paul indicated earlier. At the same time, we have certain seasonality and variation in our business, where traditional summer holidays and vacations throughout Europe and the traditional November and December holidays impact our production schedules and our performance. Those factors will be present in the second half of 2021, notwithstanding our continued strong sales expectations. The future remains bright for us. And our leadership team is very focused on managing the opportunities and the challenges that are in front of us. The first half performance demonstrates that commitment. We have a lot of work ahead of us, as the landscape remains volatile. And I look forward to sharing our continued progress again next quarter. So that sums it up. So I'll turn the call back to Grant for any questions you have.

We will now begin the question-and-answer session. Our first question today will come from Steve Ferazani with Sidoti. Please go ahead.

Good morning, everyone.

Good morning.

Paul, you've mentioned that you're expecting over $120 million in EBITDA, which seems to contradict David's comments about typical seasonality in the second half. I would like to clarify whether you are simply projecting the first half figure or if you genuinely expect to exceed $120 million in EBITDA.

David and I share a positive outlook for the company for the remainder of this year. My comments about expecting to exceed $120 million reflect our confidence in our end markets and our strong order books. We feel good about our midyear results, particularly our performance in the second quarter. Looking ahead to the latter half of the year, I am quite confident that our Titan team is committed to overcoming challenges. You are right, there is seasonality to consider along with plant maintenance, vacations, and holidays that may affect our production days in the second half of the year. We are actively working to minimize the impact of plant shutdowns to maximize our production for customers. So, indicating that we expect to be above $120 million simply reflects our overall confidence in the business, and both David and I are in agreement on this.

Okay.

The only thing I'd add is that that is based on real forecasts that we're operating within the company, not just a doubling of the first half performance.

That's a fair question. Given the challenges we've faced with recruitment, training, and retention of labor, which we've discussed extensively, I'm happy to say we've made significant progress in that area. Can you share where you believe we currently stand? Do you anticipate that there's potential for further growth? Do you think we could achieve higher volume in a quarter if we had more labor available? Additionally, could you provide some insights regarding the labor outlook?

I mean, look, it's not as simple as putting a help wanted sign out…

Right.

I think we've done a really good job, and the results support that. If you look at our domestic hiring, we're up about 14% for the year.

That's right.

Overall, as a company, we're up somewhere around 11%, 12%. I mean, I think in today's challenging labor market, as you highlighted, I think we're doing a really good job. We're making the investments to recruit people. We're really committed as a management team to deal with the challenges of retaining people. And I think those numbers support it. It's not just our sales, but again you look at our headcount levels in this type of market to be up 14% domestically is strong. And we're seeing bright lights that certainly support that we can continue to grow well beyond that. And as labor markets see the wage support that has existed from the government side start to pull back, we believe that our ability to continue to recruit and retain people will only get stronger as we finish out this year and look to next year to continue to hire.

Great. And if I could just get one more in, obviously CapEx this year, you need to invest in the plants. I'm just trying to think about longer term. What are your thoughts on cash flow and debt repayments?

Yeah. Also keep in mind a lot of our debt relates to term loans as well as the credit facilities outside of the United States. So we are committed to paying down on the ABL facility in the U.S. and moderating our debt levels within the international operations. So we will continue to do that with cash flow. But it's obviously not a very significant number in the first place. The majority of our debt is obviously with the bonds themselves. So it won't be necessarily big numbers when you see pay down of debt, but you will start to see that as we go through this year and next year.

Great. Thanks so much. Everyone, appreciate your time.

I just want to add one thing. You mentioned CapEx a moment ago, and I believe that will play into our plans to some extent. We will continue to invest in our operations, projecting a total CapEx of $35 million to $40 million this year. As a percentage of sales, that's looking quite good, and I anticipate we will maintain a similar percentage as we continue to grow. However, we will adjust as necessary based on our needs to expand capacity or improve the efficiency of our plants.

Thank you.

Our next question will come from Kirk Ludtke with Imperial Capital. Please go ahead.

Good morning.

Good morning guys. Can you hear me?

Good morning.

Yeah. Hi, Dave, sure. Well, congratulations on some very, very strong execution in a challenging environment. Couple of questions, big picture, does this environment give you an opportunity to make some strategic moves on the M&A front to boost capacity or simplify the product offering? On the capital structure side, does it give you an opportunity to issue some shares, maybe term out some foreign maturities?

You're asking some tough questions there, Kirk. Regarding M&A, it's hard to foresee what the future holds. We see potential opportunities that could benefit Titan, but it's challenging to predict the exact direction. However, our overall capital structure, enhanced by what we've accomplished in April and our effective management of the balance sheet and working capital, positions us well for future growth. We plan to make necessary CapEx investments strategically to expand capacity in targeted markets where we anticipate increasing demand, which is crucial for our customer base. We are committed to this strategy and have a clear plan. We will continue to invest robustly in product innovation, including any engineering and tooling investments needed, as we see this as a key strength for Titan. Overall, I feel confident about our capital structure's ability to support our identity as a company to meet our customers' growing needs effectively, especially on a local and regional level, ensuring they have a reliable supply chain.

That's helpful. Thank you. On a prior call, you mentioned that you were asking customers to sign long-term agreements? How is that going? And can you elaborate on what the benefits of those agreements, to the extent you can get customers signed up to a long-term agreement? What the benefits might be in terms of minimum volumes?

The response from our key customers has been very positive, highlighting the significance of our products in their supply chain and for their end users. Overall, we feel very good about the feedback from the marketplace. We will continue to engage in discussions with customers because I believe that establishing long-term agreements strengthens our relationships with them, which is important. This goes beyond just the volumes; it signifies our commitment as a supplier to deliver high-quality products on time in a competitive landscape, allowing our customers to meet the needs of their clientele. A long-term agreement indicates that we are collaborating for many years with a shared goal of serving the same end users, such as farmers and operators in construction and mining worldwide. From a volume standpoint, securing these agreements aids our scheduling and planning, enabling us to operate more efficiently. I look forward to further discussions with our customers to secure more long-term agreements.

That's helpful. Thank you. Conversely, are your vendors asking you for long-term agreements?

Yeah. If you're going to do something like an LTA, it's got to be a mutual relationship. So yeah, it's a two-way street.

Great. And then lastly, I know you refreshed your ratings before you did your bond deal, but that Moody's rating is looking a little stale. Is there any chance of getting them to revisit?

Well, this is David. I will tell you that we have ongoing dialogue with all of the rating agencies every quarter. So we'll obviously, refresh our financials and have discussions with them. Obviously, it's up to them to decide on that risk and that credit risk associated with it, but now that we are being proactive with that.

Thank you, and a great quarter, guys.

Thank you. Thanks, Kirk.

Our next question will come from Alex Blanton with Clear Harbor Asset Management. Please go ahead.

Hi, good morning.

Good morning, Alex.

Hi. Before I ask my question, I just want to mention that a news service just reported your number at 6:21 a.m., stating that the non-GAAP earnings were $0.29. That's your six months number. They reported it as a quarter at $0.22.

We don't have a lot of power on what they report.

Right. They haven't corrected it yet. Is that the only guidance you're providing for the quarter? I mean for the year, the EBITDA?

That's correct.

Yeah. So we have to go for them. To what extent were the headwinds you've said on labor? Were they really affecting your production rates?

Our order books are very strong, and as we are able to hire, we will put people to work to meet the increasing needs of our customers. Reflecting on our earlier discussion, we've been very effective in hiring. Despite what you might read about challenges in the labor market, our headcount has increased by 14% year-over-year. We are doing well in both recruiting and retaining employees. We are making the necessary investments and commitments to serve our customer base. Entering the market isn't as straightforward as simply needing people; we have to actively recruit them. I believe we are doing a good job in that regard, and we will keep it up. It's likely we will continue discussing hiring and labor for the next 12 months, which is a positive indicator. It shows that our order books are full and that we need to produce more products.

Well, I guess my question was could you have done more had you been able to hire more? Was that the headwind in the quarter?

The answer is yes.

Any idea how much?

No, that's real. That's very challenging to say. I mean that's a big what-if.

Okay. The same question on the materials side.

There are certainly some constraints related to the supply chain. However, during the quarter, it was not as significant and did not substantially hold us back. The challenges we face in the second half of the year will be greater, and we will be working hard to navigate through those difficulties just as we did in the second quarter. Our objective is to maintain efficient operations, although we cannot provide any guarantees.

We're too busy to consider hypothetical situations. We're focused on our work, putting in extra hours, and building as much as we can right now. I think this momentum will continue for several upcoming periods.

Could you give us a quick rundown on foreign business, specifically Europe, South America, and Russia? How are they doing?

I would tell you that if you look at comparative performance, all of them are up very, very significantly. To the levels in Europe, our European wheel operations grew 100% this quarter. In Russia, it grew quite nicely, again, double-digit growth. In Latin America, it grew close to 100% as well.

That's in what metric 100% gross?

Sales.

Yeah. Sales, okay. And then in Russia, you were planning to sell Goodyear tires made in Russia into Europe. Are you able to do that?

Well, our Russian plant has been doing a really good job taking Titan branded tires into the local CIS market there. We've expanded on just the local brand that had been in the marketplace for a number of years, and really have added the Titan brand into the market. We are exporting some Titan branded products out of there. To be honest with you, though right now, the market is really good over there and we have not needed or have the necessarily the capabilities right now to expand beyond the local market. We're doing everything we can to meet the needs there. So what we're doing to meet the needs in Europe is bringing up products from other suppliers. Some of it is off-take out of other countries. Some of it is coming from North America. Some of it comes from Brazil. So we are working on expanding the Goodyear brand in Europe to answer your question. It's coming from multiple outlets. Again, some Titan manufactured, some non-Titan manufactured. We have some really good partners that we're working with on that. But when we look at the Russian plant these days, it's doing a great job servicing the markets we need in that region.

Okay. And finally, could you characterize the state of the aftermarket sales there?

The aftermarket is really good. I think it's one of Titan's strengths over the last five years in some tough OEM conditions. We have a very strong distribution base, dealers that we've really built a strong solid relationship around serving mutual customers. And we continue to see the demand for our products within the aftermarket space continue to grow. As we've been talking about, we are going to continue to increase our production base and really meet the needs of our aftermarket customers, which is certainly a big part of that.

Okay. Thank you.

Thanks, Alex.

Thanks, Alex.

Our last question will come from Brian DiRubbio with Baird. Please go ahead.

Good morning. I have a few questions. Could you provide an update on your current capacity utilization in the plants?

Well, it's going to obviously vary by plant. But I would say from a practical capacity standpoint, very high numbers at this point. Labor is more of a constraint than really physical mechanics. So again, I'd have to go through a litany of different things, but I would say that it's at very high levels at this point.

I guess, maybe put that another way. How much more volume room do you have before you start running into capacity constraints? If you had labor fixed?

The answer will differ depending on the product and region. Given our manufacturing base across various platforms, it's challenging to pin down a specific figure. However, we are confident in our ability to grow significantly beyond our current levels. As we expand our workforce, we are focusing on markets where production capacity is not a limiting factor.

Okay. Very good there. Switching gears on raw materials. It seems like many trends have been fairly consistent. However, as you know, and it hasn't affected you yet, there have been swift changes in certain awarded commodity streams. How should we consider the company's protection in the event of a short-term correction in steel costs?

You mean if steel starts to drop?

Correct.

We have a known lead time for the types of steel we purchase, and we are managing that diligently while trying to anticipate potential changes in steel prices. We monitor these factors daily and control the amount of steel we procure over time. Although we are not completely shielded from fluctuations, we believe we have taken reasonable steps to hedge against the rapid increase in demand. While I wish we could have more steel in the plant, we are currently operating at an optimal level to navigate this situation for the latter half of the year and into the first quarter of 2022.

Okay. That's helpful. And then you mentioned that you're approaching your goal of under 4x leverage. I guess, two-part question there. How do your capital allocation thoughts change or do you get below four times? And given sort of the strength in the equity markets, how are you thinking about ITM?

Well, first of all, capital allocation at this point is obviously continuing to service debt due to the investments that we have to in our plants. It's not significantly different than what we have been doing over the last two years. I think given the types of debt that we have, it's kind of easy to move that along if we need to. I'll defer to Paul on any discussion about ITM. But I think ultimately you're not going to see a dramatic change in how we've allocated capital outside of being opportunistic in the M&A market and taking care of things that could be strategic for the future of timing.

Yes. I mean how I see ITM today is the demand is really good. The business is performing well. We got to continue to increase our capacity in some key locations around production, some production investments we're making. We're continuing to hire in markets where demand is strong. And ITM is a business that we put a lot into through the years. We talked about it before, where we've expanded the aftermarket presence and made the business more balanced around the world, more balanced by customer base. And I feel pretty good about where it's at today. From an ITM perspective regarding capital allocation, again we'll see what the board thinks of what we can do in the future. But right now, I think the present is really where we're focused and things are performing very well. And we got a lot of customer demand out there that we got to work every day to go meet.

So we should consider ITM as part of Titan moving forward? And for now, while I understand the need for qualification, it seems we are not planning to divest that business or pursue an IPO at this time?

I mean, at the time being we got to build as much product as we can for our customers, and that's really where our focus is at. ITM is again, it's a good strong performing business. And how others may look at it, that's up to them. But from a capital allocation from a board perspective, we're not in a position that we need to do anything different with ITM than to continue to invest in it and continue to make it stronger to meet the needs of our customers.

Ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Reitz for any closing remarks.

Well, I just want to say thank you to everybody. I appreciate your time and your attention this morning and look forward to talking to you at the end of Q3. Thank you. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.