Earnings Call Transcript - TWI Q3 2025

Operator, Operator

Good morning, everyone, and welcome to the Titan International, Inc. Third Quarter 2025 Earnings Conference Call. It is now my pleasure to introduce Alan Snyder, Vice President of Financial Planning and Investor Relations for Titan. Alan, you have the floor.

Alan Snyder, Vice President, Financial Planning and Investor Relations

Thank you, and good morning. I'd like to welcome everyone to Titan's Third Quarter 2025 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 this morning, along with our Form 10-Q, which was also 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 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 a reconciliation of the non-GAAP measures to the most comparable GAAP measures. The Q3 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, President and CEO

Thanks, Alan, and good morning, everyone. Our Q3 2025 results continue to demonstrate the ability of our business and our team to perform well in a challenging time. Our Ag and EMC segments reported solid sales growth of 8% and 7%, respectively, compared with the prior year. While consumer was off just a little year-over-year, the segment sales rebounded nearly 15% sequentially. As a result, we were able to deliver consolidated revenues in line with guidance, along with adjusted EBITDA near the higher end of our range. Free cash flow was also a highlight in the quarter, allowing us to continue investing in the business while also working to reduce our debt. Stepping back from the quarter for a moment, this has been a year filled with many companies talking about unusual business conditions around the globe. Our end markets, especially Ag, fall into that category. However, there are a number of positives that are taking hold. Maybe they're not fully taking root yet, but they are certainly in place to provide a foundation to help drive more positive market conditions. First, Secretary Bessant provided some details after the Trump-Xi meeting, highlighting an agreement with China to resume purchasing soybeans at a minimum of 25 million metric tons annually, which puts the floor level of purchases right around the average level seen since 2009. After strong positive moves in corn and soy leading up to the settlement, the immediate reactions to the meeting have been muted, a little bit surprising, to be honest, but this agreement should be seen as a positive that will add improvement in market conditions as we move into '26. Moving on to everybody's favorite topic, tariffs. This is a complex and layered topic for Titan. I will remind you that Titan has significant U.S. manufacturing assets, and we are very proud to be the only domestic manufacturer in many of our product categories. Along with our U.S. manufacturing assets, we have significant offshore capabilities and third-party sourcing partners, which help us to serve our customers across the globe. Regardless of the exact outcomes of tariffs, we are well positioned to win. We do believe there is a short-term impact this year that was driven by other factors, not just the tariffs. The Fed actions regarding rate cuts are another net positive as higher interest rates have been impacting purchasing decisions, especially as buyers waited on these Fed actions. Lastly, dealer inventories in the Ag segment are decreasing. We've talked throughout this year about seeing some drop in orders that have been positive for us as inventories get too low with some products and customers. I've been talking about inventory levels quite a bit in recent calls, so I'm simply going to say it's good to see that they're getting better. So given that backdrop, one aspect of our business that I want to emphasize is our competitive positioning. We are positioned as a one-stop shop across the spectrum of tire and wheel size ranges needed in our end markets, along with an undercarriage portfolio that reaches the largest earthmoving equipment. Products that Titan is known for, such as our LSWs and R14 tires and the wheels they are mounted on are not easily mass produced. Building these tires and wheels require skilled labor and significant investment in manufacturing assets. Our SKU runs consist of far fewer units than the passenger vehicle tires we all see on the roads. And when you take that into account, including our long-standing relationships with leading equipment OEMs and aftermarket dealers, we are confident our business has a good moat around it. We are also cognizant of the need to keep reinforcing that moat by innovating and creating new products to add value to our customers and our end users. On that line, we've been working hard to expand on our Goodyear product portfolio following the expansion of our licensing agreement, which we announced last quarter. One initial focus area has been outdoor power equipment tires, like those you find on commercial turf applications. And we've been pleased with the market response. And when demand for new equipment begins to pick up, we're optimistic that this will be another growth driver for Titan. At the same time, professional buyers such as landscapers continue to run their equipment. That's driving demand for aftermarket replacement tires. And again, that is helping offset some of the softness we see with the OEMs. So switching gears and really looking at our three segments at a higher level, our strategic goal of diversifying our business is proving its merit. Year-to-date, Ag has accounted for 41% of our revenues and EMC consumer accounting for 31% and 28%, respectively. Overall, we think our revenue and gross profit split across the three segments is healthy and an important reason we continue to drive profitability and cash flow well above our prior cyclical troughs. Looking at the conditions in each of our segments, starting off with consumer, we see that business benefiting from a couple of primary characteristics relative to our other two segments. First, it has historically included a larger aftermarket business. Equipment owners tend to regularly use their machinery in this segment, especially those that are businesses. As a result, demand for replacement tires is less cyclical than OEM-driven demand. Our consumer sector also includes a wider range of customers and use cases from hunters using ATVs to boat and trailer owners to landscaping companies. That type of diversity also helps us weather macro environments like we're seeing now. Moving over to Ag, which really has represented who we are as a company since our founding. This year's global crop has been a good one. That has continued to increase supply, which is working to suppress the price of leading crops, corn and soybeans. American farmers have also borne the brunt of tariff-driven trade wars. And as a result, U.S. farmers are looking at a less profitable 2025. And as we all know, farmer income is the primary driver of equipment sales. Conversely, what we have seen, though, and we've been talking about this for about a year now, Brazilian Ag interest have picked up much of that slack. And again, our diversity as a leading Ag tire manufacturer in Brazil, Titan has been able to offset some of this U.S.-based weakness. U.S. government also continues to make it clear. We have seen a number of these actions over the last couple of weeks that farmers will be financially supported. Government aid is by no means growth capital, but if it allows farmers to enter '26 with their finances in reasonable order, that would obviously be good for OEMs in the sector. Additionally, that aid would provide the sort of capital needed to support demand for aftermarket tires farmers need to keep equipment like tractors and combines operating. Moving over to our EMC segment. That did experience some growth due to some drop-in orders I mentioned in our last call, most notably in small construction tires and wheels in the U.S. In Europe, where our EMC segment is our strongest area, demand has remained somewhat stagnant on the OEM side of the business, but we are seeing really good demand on our aftermarket mining, which continues to be a good source of growth for Titan. So wrapping these comments up, I want to just conclude by mentioning again, our team is working hard. We're doing a good job servicing our customers. We occupy a strong competitive position in the markets we serve and are a trusted partner to our customers and end users. Titan continues to execute. And as David will discuss, we are continuing to perform at levels well above the last cyclical bottom, and we remain well positioned to benefit when our end markets return to growth. With that, I'll turn it over to David.

David Martin, Senior Vice President and CFO

Thank you, Paul. Good morning, and thanks for joining us today. I'll be quick to the point today. As Paul noted, our results for the third quarter were solid with adjusted EBITDA coming in at the top of our guidance range with strong free cash flow. There are some important financial metrics to highlight this quarter. Sales grew 4% year-over-year, demonstrating that the market may be reaching the bottom. Gross margins expanded 210 basis points to 15.2%. Our operating margin expanded in the third quarter as well. Our adjusted EBITDA grew 45% to $30 million. Strong working capital discipline facilitated operating cash flow of $42 million, and pragmatic CapEx management furthered the quarter's free cash flow to $30 million. Our ability to drive solid profitability and cash flow despite the challenging macro backdrop is something we continue to be proud of. It stands as a testament to the quality of our team, our operations and our strategy. The Ag segment revenues were up over 7% from the prior year, driven by higher volumes, especially in Latin America, where we continue to see positive impacts from solid grain demand and what is anticipated to be another record crop yield in the region due to favorable weather and expansion of planted acreage. Additionally, pricing related to increased input costs contributed to this increase. EMC revenues were up 6% from the prior year to $145 million, which is primarily driven by some drop-in orders from light construction customers in the U.S. as well as favorable FX impacts related to the strengthening of the euro year-over-year. In consumer, we saw some of the deferred purchasing from Q2 come back to us in the third quarter as we had anticipated. Segment sales were $132 million, which was a decline of just under 3% from the prior year, mainly due to lower OEM activity. However, up 14% from Q2, which is very nice to see. Looking at margins in the segment in the quarter, all three showed expansion versus the prior year. Our Ag gross margins were 13.4% compared to only 9.5% last year. EMC gross margins were 10.4% versus 8.5% last year. And then consumer gross margins were 23% compared to 22.3% the year before. With solid cash flow in the quarter, we reduced our net debt to $373 million from $391 million at the end of last quarter and resulting leverage decreased to 3.7 times while we continue to invest in our business. Third quarter income tax expense was $1 million, which was below the range we discussed on our second quarter call. This was primarily due to the effect of tax planning related to deductibility of interest. Looking at Q4, we think that benefit will be somewhat less. And for modeling purposes, I would expect tax expense of $2.5 million roughly as a good number to use. Reiterating my comment from prior quarters, as we see a rebound in market conditions, we expect to get back to normalized tax rate levels as we see our profitability increase. Now moving on to our financial guidance for Q4. Our guidance for the quarter is revenues of $385 million to $410 million and adjusted EBITDA of approximately $10 million. I want to ensure that it's clear. The midpoint of our revenue guidance and our adjusted EBITDA guidance imply growth in both metrics when compared to Q4 last year. Our other operating metrics should also be positive for the quarter. Last year, in the fourth quarter, we had $2.6 million of other income, which was an abnormally high amount for a single quarter. This is the key driver as to why Q4 guidance is only slightly showing a relatively small incremental improvement from the prior year result. It also bears repeating that our fourth quarter typically marks our seasonal low point and with macro conditions continuing. I'm especially pleased to see our business performing well. Reiterating our prior comments on cash flow, we will continue to manage working capital with discipline, allowing us to continue reducing our debt and investing in our strategic initiatives, including our continued product innovations. Our financial condition is good, and it's improving. And I'm fully confident that we're putting Titan in a position to accelerate our future performance. We are positioned well. Thank you for your time this morning. And I'd like to turn the call back over to Becky, the operator for our Q&A session.

Operator, Operator

Our first question comes from Mike Shlisky from D.A. Davidson.

Michael Shlisky, Analyst

Can you start with some agriculture-related questions? What contributed to the year-over-year growth in agriculture? Was it farmers upgrading their old equipment or were the original equipment manufacturers requesting wheels and tires?

Paul Reitz, President and CEO

You're talking about the Q3 performance in terms of the Ag growth, right?

Michael Shlisky, Analyst

Yes.

Paul Reitz, President and CEO

Yes, I want to ensure I addressed your question correctly. We observed nice improvements mainly with customers in aftermarket, which has remained stable. We experienced slight improvements in OEMs, though not significantly. Additionally, our Latin American activity has increased year-over-year. Last year, in the second half, we faced substantial weakness and destocking, whereas this year, you have noticed a much steadier level of activity.

Michael Shlisky, Analyst

Got it. Got it. And we just turn to the Ag outlook for 2026. Paul, is the current plan to expect an upturn in Ag in 2026? And if so, just talk a little bit about the timing and kind of how that might play out? Or has it already started here for Titan given we just saw in the third quarter?

Paul Reitz, President and CEO

We are indeed seeing a return to growth. Specifically for Titan, as David mentioned, we've positioned the company well, diversifying geographically and strengthening our aftermarket position. Titan's growth will continue to be driven by our market innovations and aftermarket performance. We have a robust OEM business that we are monitoring closely to anticipate trends for 2026. I believe we are currently at a low point, but I see potential for a recovery. The positive changes, such as declining interest rates and the supportive actions from Secretary Bessant and President Trump regarding the soybean farmers, are noteworthy. This seems to indicate the administration’s commitment to back farming communities, which play a vital role in our society. In terms of our OEM forecast, there's some hesitance in providing detailed insights for the entire year, with initial expectations indicating a flat start while waiting for new initiatives to take effect. However, I don't see these initiatives negatively impacting 2026; rather, they can only be viewed positively. If we're at a low point with encouraging factors coming into play, I do believe we will see an increase in OEMs for 2026. That said, we'll be cautious in making definitive statements about our OEM outlook for 2026 as we continue to monitor the situation closely. We do recognize opportunities for growth through our product innovations and the Goodyear brand, especially in new markets and through our aftermarket strategy.

Michael Shlisky, Analyst

Great. And a similar question on construction, Paul. Some of the major U.S. players that have reported so far and have talked about '26 are already talking about improvement next year, at least a good number of them are. How might that look for Titan in your EMC business?

Paul Reitz, President and CEO

Yes, I believe we are in a strong position. We are observing the same trends you mentioned, with strong governmental support expected to lead to new legislation that will boost spending. This bodes well for us globally. Our business is well diversified, with exposure to Europe, aftermarket mining, and in the U.S. as well. I believe our early insights into 2026 for the EMC segment indicate solid growth potential for next year, which may even accelerate as the year progresses. I anticipate starting the year on a positive note, and I think several factors may result in more favorable outcomes than initially expected. However, we will monitor how things develop. Overall, I concur that the EMC segment shows promising growth as we head into next year.

Operator, Operator

Our next question comes from Derek Soderberg from Cantor Fitzgerald.

Derek Soderberg, Analyst

Paul, you mentioned OEM inventory levels improving. Any insights to the degree to which that was the case maybe over the past quarter? I was just wondering if you could quantify that at all for us, how much it improved on a quarter-over-quarter basis?

Paul Reitz, President and CEO

Yes, it varies by product and customer. From my perspective, regarding large equipment inventories, we've observed a reduction of about 30 days' worth of inventory, moving it towards a more balanced level. The used equipment market is also improving with existing incentives, which will help boost new sales. We're closely monitoring the decrease in orders, as it can lead to an imbalance in inventory. There has been considerable forecasting involved in managing inventory levels, and we have seen a decline in customer orders in certain areas each quarter this year, requiring us to act swiftly to produce the necessary products. This indicates that our inventory is aligning well, although in some cases it may be slightly too low. Our Titan team has demonstrated flexibility in both manufacturing and labor to ensure we respond effectively to these orders, strengthening our relationships with customers. Looking ahead to the forecast for 2026, inventory is stabilizing at a neutral level. Throughout 2025, we've faced challenges with inventory destocking, which has negatively affected us in our segments. So, for 2026, we're starting off on a solid neutral ground.

Derek Soderberg, Analyst

Got it. That's helpful. And then any additional color on what's driving aftermarket mining? Is it precious metals? Are you guys seeing any demand from some trends in rare earths mining, some of that onshoring? Can you provide any color on any end market demand trends you're seeing in that space?

Paul Reitz, President and CEO

Yes. Clearly, the operating activities of the mine support the business overall. But I think specifically for Titan, it's our position within the market that's allowing us to grab this growth. We do have the ability to produce customized cast products that are made in our foundry in Europe and can really meet the needs of the market in, again, a highly customized way that's very specific to the applications. And so as we see this growth, it's good across the board as far as operating activity, and that's more of our traditional undercarriage parts that we produce in our plants throughout the world. But where we've really been able to outperform and grab additional growth in aftermarket mining is really our ability through our foundry to customize these cast parts and go attack a niche part of the market that others can't quite get to. So there's a little bit of specific growth to Titan that's outside the general trends you may see overall in the mining segment.

Operator, Operator

Our next question comes from Steve Ferazani from Sidoti.

Steve Ferazani, Analyst

Appreciate the call. Given the strength in 3Q, and we were really surprised how strong Ag was in 3Q, a little surprised at the top line guide for 4Q. Can you talk about the slightly different elements? Because that number, we know how dramatic the OEM shutdowns were in the year ago. So if inventories are getting a little bit better, if you're guiding for pretty similar shutdowns on that side, and I know you guys have a pretty good picture on that, a little surprised there. And also, I'm guessing aftermarket is less of a benefit in 4Q, just in general than it would be in 3Q?

Paul Reitz, President and CEO

Yes, we are observing a decline, though not as significant as the previous year, as we transition from Q3 to Q4. OEMs are preparing for the upcoming year, but they won't ramp up production in Q4, so we don't expect an increase. We are experiencing the usual seasonal patterns, with practical decisions being made. Additionally, our aftermarket is weaker in Q4, but we anticipate a solid seasonal increase in Q1. This trend is not only present in the U.S. but also in Brazil, indicating a consistent pattern. While this does not reflect the typical seasonal decline, it is simply a natural cycle of operational activity. We believe we are well positioned to take on orders as needed, but OEMs are exercising caution, and we will do the same.

Steve Ferazani, Analyst

So I mean, following Paul's commentary that maybe the start of the year on Ag is pretty similar. I mean you ran through the macro issues, which we can all see. And hopefully, a trade agreement pumps that up and we start seeing crop prices working. Having said all that, you're clearly doing very well in the aftermarket. It looks like you're even potentially gaining some share there. When we think about the start of the year, we're now going to be another year along without the replacement cycle. You've got more aging equipment. You're clearly gaining in those markets. Can we see a nice uptick on aftermarket first half of the year year-over-year?

Paul Reitz, President and CEO

I recently spoke with our VP of Sales, and he is optimistic about our prospects. Our company's diversification is crucial, especially as we leverage Brazil's strategic position in light of China's purchasing interests shifting in that direction. We have made significant advancements in the consumer segment, driving innovation in the aftermarket, where Titan is well positioned. We've shared with investors how we've transformed our aftermarket splits over the past ten years and continue to see growth in that area. The feedback I received earlier this week indicates a strong start to preordering for next year, and I believe we will begin the year positively in the aftermarket.

Steve Ferazani, Analyst

And then also just kind of following along your commentary and the answer to one of your questions. Historically or at least recent history, Ag and EMC have directionally moved similarly, maybe not at quite the same levels. It sounds like you're indicating that maybe at least in the near term, those may be going into a couple of different directions, which is not what we've seen in recent history.

Paul Reitz, President and CEO

Yes and no. There are different drivers at play. The global agricultural markets have faced significant challenges over the past couple of years. Specifically, in our business, we have gone through inventory destocking in agriculture. However, we have positioned Titan with EMC and agriculture to enhance our aftermarket diversification. Recently, we met in Italy with a leader from a significant segment of our EMC business, and there is strong confidence that this diversification will benefit Titan as we approach 2026. I believe there is potential for a significant recovery in agriculture, especially as the foundational actions begin to take effect. Unlike EMC, which experiences more consistent growth due to government and infrastructure spending, agriculture seems to have a hidden potential for recovery that isn't easily predictable in terms of timing. Strategically, there are similarities across our operations. The tire business in agriculture provides us with greater aftermarket diversification and more options to leverage in North and South America, along with our innovations and relationships with dealers. In contrast, we lack that flexibility with EMC because it's focused on steel-based products. Nonetheless, we have diversified our business with customized aftermarket mining products and have also expanded into other areas of the steel-based aftermarket with EMC. Overall, I believe that the diversification of Titan is giving us significant advantages, as reflected in our results for 2025. This positions us well for 2026, regardless of market directions. I do feel we are at the bottom, with some improvement on the horizon, and we are ready to capitalize on that growth, whatever direction the markets take.

Steve Ferazani, Analyst

That's really helpful. Appreciate it, Paul. Last one for me was just on the royalty expense line. That number being much higher sequentially and year-over-year would seem to indicate you were selling an awful lot of third-party tires. Is that the right way to be thinking about that?

Paul Reitz, President and CEO

Well, certainly, we have the new license agreement, and we had a little bit of true-up to the payments made in Q3 a little bit. But certainly, the mix is certainly favorable towards Goodyear.

Operator, Operator

Our next question comes from Joe Gomes from NOBLE Capital Partners.

Hans Baldau, Analyst

This is Hans Baldau on for Joe. Could you talk about the potential M&A? Do you know what the valuations are looking like or any areas that you all might target?

Paul Reitz, President and CEO

As a company, we have historically sought opportunities when valuations are lower. We operate in a niche industry where such opportunities arise consistently rather than just annually. We continue to adhere to this strategy. David and our team invest significant time and effort into managing the balance sheet, which allows us to consider participating in lower valuations and pursuing growth through mergers and acquisitions. We also prioritize innovation, which we have consistently invested in. I believe current market conditions could provide us with potential opportunities, historically, they have reflected favorable valuations. However, there’s nothing imminent on the horizon; our industry is more about seizing opportunities than following a predetermined strategic plan. If we were to target specific acquisitions, valuations often escalate beyond what has historically aligned with Titan's acquisition strategy. Therefore, we focus on being ready to act when the right chance arises; this has been our approach for many years. Our acquisition from last year serves as a strong example of this strategy in action.

Hans Baldau, Analyst

Okay. I appreciate that. And then could you add some color on the military market? How is your targeting of the military market progressing?

Paul Reitz, President and CEO

The targeting has been effective, but the results are taking time to manifest. They could be better. I have some personal frustrations, and with the opportunity to speak, I want to express them. I've been observing what European countries are doing. I recently learned that Germany plans to purchase military components from its own manufacturers. Similarly, look at Rheinmetall—they are sourcing products from European companies. I need to understand why our U.S. government cannot do the same and buy from American manufacturers. It seems straightforward, and I believe Titan should be able to take part in this as our government recognizes the importance of supporting domestic companies, just like other nations do. So yes, I do have frustrations, but I also see potential opportunities, even if they move more slowly than they should. We are actively pursuing these opportunities and positioning ourselves to expand our military business. However, I don't grasp why European countries are able to make quicker decisions than our U.S. government.

Operator, Operator

Our next question comes from Kirk Ludtke from Imperial Capital.

Kirk Ludtke, Analyst

Just a couple of follow-ups. On the Goodyear deal, I think the idea is to use the brand on more of your products. Can you maybe comment on the potential of that initiative and the timing?

Paul Reitz, President and CEO

I believe we will see more progress in 2026 because we need time to develop the products, introduce them to the market, and conduct testing. I was very excited that we secured additional product categories with Goodyear. During negotiations, you can't predict the outcome, and while we might have initiated product development earlier, we chose not to. I’m pleased with the results of our collaboration with Goodyear, which I believe strengthens our partnership as we expand into these new categories. We do have some product development and testing to complete, but I'm encouraged by our team's enthusiasm regarding the potential of adding this brand. The Goodyear brand enables us to enter a premium market segment with our high-end innovations, allowing us not only to gain market share but also to enhance our profit margins. Our intention isn't to merely rebrand our existing products with the Goodyear label, as our brands are already well-established. Instead, we are focusing on entering market segments that were previously more challenging to access, a strategy that's already proving effective in agriculture in North and South America. We anticipate a gradual increase in traction rather than immediate, dramatic sales figures associated with Goodyear, but over time, we will position ourselves with premium products that yield good margins. This is beneficial for both us and Goodyear, and our two decades of experience supports this approach.

Kirk Ludtke, Analyst

Got it. I appreciate it. On the net sales, we had another strong quarter in Latin America. I think you mentioned the reasons for that. However, Asia experienced a decline of over 20% year-over-year. Are there any insights or takeaways regarding that?

Paul Reitz, President and CEO

Yes. I think it's just timing more than anything. That's going to be your typical sales from our ITM business in the EMC segment. And you'll see shifts in manufacturing to various customers. I think we had a stronger Q2. So I think it's just timing more than anything.

Kirk Ludtke, Analyst

Okay. Got it. And then lastly, did your Brazilian JV close? Rodaros?

Paul Reitz, President and CEO

Closed. Yes. We issued a press release last week, actually. So we're really happy about that.

Operator, Operator

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

Paul Reitz, President and CEO

Well, thanks, everybody. Appreciate your participation in our Q3 call, and we'll talk to you again here soon with an update on the fourth quarter and 2025. Thanks, everybody.

Operator, Operator

Thank you for attending today's presentation. The conference call has now concluded.