Earnings Call Transcript - TWI Q3 2021

Operator, Operator

Good morning ladies and gentlemen and welcome to the Titan International Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And we'll open the floor for your questions and comments after the presentation. Please note today's call is being recorded. A replay of this presentation will be available soon and the call after the call within the Investor Relations section of our website. A copy of today's call transcript will also be made available on our site.

Todd Shoot, Senior Vice President Investor Relations and Treasurer

Thank you, Nadia. Good morning and welcome everyone to our third 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 yesterday along with our Form 10-Q which has also been filed with the Securities and Exchange Commission this morning. As a reminder, during the 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 today, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC.

Paul Reitz, CEO

Thanks Todd and Good morning everyone. Titan definitely had a good quarter as our results exceeded expectations as we posted our strongest third quarter for revenue and profitability since 2013. We had adjusted EBITDA of $35.1 million this quarter on sales that were up 48% to $450 million. This quarter's adjusted EBITDA has been exceeded only twice in any quarter since 2014 and one of those occurred just last period when we posted $37 million of adjusted EBITDA. We are now expecting to see our full year adjusted EBITDA coming in above $130 million, which is our highest annual total since 2013. Our global team has been working very hard to produce these results and increase production levels to meet growing customer demand as we continue to drive forward to grow our production capabilities further in coming quarters. It really is impressive to see our One Titan team continue to perform well building on that strong foundation we've built in recent years and I want to thank all of our Titan employees around the world for doing a great job and their dedication to our company. Looking at our segments Titan again this quarter experienced strong sales growth in each of our segments with agriculture leading the way with a 60% increase compared to last year. Our order books continue to strengthen especially on the ag side where commodity prices remained at good levels with corn above $5, soybean above $12, and cotton at record highs, thus ensuring another year of strong farmer incomes for 2022. Yes, I realize that commodity prices have dipped from their peak levels earlier this year and farmer sentiment has dipped as well. But let's not get caught in the trees and miss the abundant forest around us. Times are good. Farmer incomes are still at high levels again this year. There is pent-up demand sitting on order decks. There is an aged large ag fleet. There are historically low inventory levels at all our dealers whether it's small ag, large ag, or an aftermarket dealer and also throw into that equation that current sales levels in large ag are still well below historical average. And do not forget that large ag is Titan's long-term sweet spot. We believe this all adds up to a good tailwind for business that we see continuing throughout 2022. Moving from ag over to earthmoving and construction, we have seen demand continue to be above our expectations that we had at the start of the year with sales growth of this quarter of 36% on a year-over-year basis. Our EMC segment continues to look increasingly promising as we round the corner to next year. Just like ag, our order books are strong but we also see those infrastructure investments coming into many places. And as we've stated before, we are a global business in our EMC segment and a large part of our business from that segment does come from our undercarriage division ITM. It has a strong OEM and aftermarket channel for distribution. We have a market-leading and unique foundry in Spain that enables us to customize cast products that meet the specific needs of our customers. Again just a strong business for us and a large part of where we get our EMC growth and performance from. David will spend some more time today talking about our financial results, but I do want to offer a couple of thoughts. First, while our business operates in many different global geographies and produces three primary products, wheel tires and undercarriage which end up touching various end markets, we again this quarter saw growth and improved financial performance in all of our business units; so good solid consistent growth. Second, we have and continue to operate with a disciplined mindset to control our costs in SG&A and within our overall operational structure and you see that reflected in our results. My point with all that is while Titan has reduced our CapEx over the prior few years to ensure we protect our balance sheet, we have invested properly into our company and have not under-invested in recent years. Lastly, we will continue to make the investments incur the expenses into expanding our production capabilities and increasing our headcount in areas to meet demand. We are not simply going to sell our existing production capacity into the market, but rather take advantage of this existing opportunity to get more of our market-leading products into the hands of our customers. Let me conclude by saying something that we all know, this is without a doubt, one of our most dynamic business environments all of us in business have faced. Titan in addition to our solid operation results again this quarter and really for all of 2021 for that matter, has strengthened our financial position this year by refinancing our $400 million bonds. We've also improved our liquidity with our recently announced ABL extension and upsizing. We believe that Titan is in a position of strength within our industries, with our global production footprint that is second to none in our business and our plants that are well suited geographically for our customers. We also have an expansive and innovative product portfolio that enable us to deliver a strong value proposition to our customers. And as a result, for Titan to continue to benefit from the current trends that are in today's markets.

David Martin, CFO

Thanks, Paul, and good morning, everyone. I appreciate everyone joining us today. The third quarter was another significant step forward for the company, and we achieved impressive results while building on the momentum we've generated over the past year. Our global management team navigated the current environment effectively, and we believe we have solid plans to maintain this progress moving forward. Sales increased by an impressive 48% this quarter, marking a strong Q3 performance. The Ag segment led this growth with a 60% increase from Q3 last year. Meanwhile, the EMC segment also performed well with a 37% growth, and the consumer segment showed solid results with a 32% increase. Our gross profit rose by 93% this quarter, and our margin improved to 13.4% compared to 10.3% last year. Adjusted EBITDA for the quarter was $35 million, representing the best third-quarter performance since 2013. Over the trailing 12 months, our adjusted EBITDA is $116 million, and we anticipate a strong Q4, increasing that run rate to over $130 million for fiscal 2021. Our cash position remained stable at $95 million this quarter, despite some growth in working capital. We have also effectively managed our inventory levels. With our improved profitability and strong balance sheet management, our net debt leverage at the end of Q3 is 3.3 times our trailing 12-month adjusted EBITDA, a significant improvement from a year ago.

Paul Reitz, CEO

Yes, good question Larry. We encounter challenges regularly, but our teams have been very effective at managing those issues on a daily basis. It's ingrained in our approach. We consistently remain flexible in our management and planning to ensure we address any concerns. There is extensive work happening every day across our global operations, with strong coordination among our teams. We have been successful in navigating these challenges. As I mentioned, we encounter new issues every day, but we find ways to overcome them, and we have managed very well so far. Moving on from ag to earthmoving and construction, we have seen demand continue to be above our expectations that we had at the start of the year with sales growth of this quarter of 36% on a year-over-year basis. Our EMC segment continues to look increasingly promising as we round the corner to next year. I definitely believe that we have done significant work this year to staff appropriately, and there will always be room for improvement over time. We can continuously get better. I think we've been quite effective so far, but that is a relative term and there is always potential for enhancement. I'm really proud of what the Titan team has done. As I said in my opening comments, I thank them for all their efforts that they've had not just this quarter but what we've had throughout the last few years. Our results support the success that Titan has as a company to recruit and retain people.

David Martin, CFO

Well, the third quarter was just another significant step in the right direction for the company and we were able to deliver a very strong result and build on the momentum that we've started more than a year ago. Our global management team has managed this concurrent environment very well, and we believe we have solid plans in place to continue to do that moving forward.

Paul Reitz, CEO

We are very impressed with the performance of low sidewall as far as what it means to our financial results it is a premium product. It's priced in a way that's beneficial to the company, but it's also a win-win for the end users. It makes their equipment perform better. We see that continuing to build into the future.

DeForest Hinman, Analyst

I would encourage you to think about the productivity side with the employees that you've hired. Any color that you can provide in terms of line rate productivity, revenue per employee, that would be very helpful for shareholders to kind of understand the opportunity in front of you and why the stock is undervalued.

Paul Reitz, CEO

It's obviously a deep question. We have had a lot of discussions at the Board level strategically about where we can go in the future. There definitely could be some opportunities on how we can grow for the long-term and invest. Our approach will be to invest in the business for long-term growth.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference call back over to Mr. Paul Reitz for any closing remarks.

Paul Reitz, CEO

Thank you everybody for your time and your attention today. Certainly we're proud of our accomplishments, our performance this quarter and really throughout 2021 for that matter. I look forward to touching base with you all soon. Take care. Have a good day. Thank you.