Earnings Call Transcript - TWI Q3 2020

Operator, Operator

Good morning, everyone, and welcome to the Titan International Inc. Third Quarter 2020 Earnings Conference Call. I am pleased to hand it over to Todd Shoot, Senior Vice President, Investor Relations and Treasurer for Titan. Todd, please go ahead.

Todd Shoot, SVP, Investor Relations and Treasurer

Thank you, Debbie. Good morning, and welcome, everyone, to our third quarter 2020 earnings call. On the call with me today, we have Titan's President and CEO, Paul Reitz; and David Martin, 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 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 in the safe harbor statement included in 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 Securities and Exchange Commission. 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. Today's earnings release is available on the company's website within the Investor Relations section under News & Events. Please note, today's call is being recorded. A copy of today's call transcript will be made available on our website. I would now like to turn the call over to Paul.

Paul Reitz, CEO

Thank you, Todd. Titan has done a good job again this quarter navigating through the uncertainty and challenges of the pandemic to report another period of solid financial results. We continued on what we achieved in the second quarter with stronger margin performance, good working capital management and improvements to our balance sheet. Diving into the business, I believe we had a really good quarter on nearly all facets of our business that are within our full control. We did see a top line decrease of nearly 12% when compared to last year as some of our end markets continue to be heavily influenced by the COVID pandemic, along with about half of that decrease coming from the impact of negative currency fluctuations. However, despite this decline in sales, we were able to deliver a 250 basis point increase in our gross margin percentage to 10.3%. Also, as we've seen throughout this year, we have been and we will remain diligent in managing our controllable costs. This period, excluding the $5 million Dayco legal accrual, we were able to reduce SG&A by over 12%. The positive actions by the Titan team throughout all of our businesses resulted in adjusted EBITDA of $14.2 million, which is an increase over last year's third quarter and this year's second quarter as well. Perhaps most importantly for Titan was the continuing progress we made with our balance sheet as we increased our cash by $18 million from last quarter and continue to lower our debt. In fact, our net debt represents the lowest level we've had since Q3 2018 and has been reduced by over $85 million over the past 12 months. Our third quarter results demonstrate our solid operational and financial execution in dealing with COVID and obviously, the many business-related challenges that go along with that. We now anticipate our full year adjusted EBITDA to exceed 2019 levels and be in the range of $40 million to $44 million, assuming no further unexpected COVID-related shutdowns. On that COVID front, we all are experiencing the daily barrage of news, which has tilted negative in recent days with the concerns over a second wave that has resulted in additional lockdown measures in parts of Europe and here in the U.S. with increased hospitalizations. There are clearly global business risks associated with this concerning trend that can't be overlooked. However, looking specifically at Titan's end markets, we definitely feel there are reasons to be positive as we look towards the near future. So starting right here in North America. Over the past couple of months, we've seen positive trends in North America as conditions have continually been on the upswing. We noted in the last quarter that we were seeing more drops in orders, but that momentum has grown stronger as we now see more firm orders as corn has also been hovering in that $4 range and soybeans have reached multiyear highs. Throw on top of that, $14 billion in direct government payments going to farmers prior to year-end, all this leads to net farm income around $103 billion, which is an increase of over 20% from last year. Farmers’ sentiment levels are reflecting this as they are now reaching a 5-year high. In addition, there have been solid improvements in dealer sentiment with 30% of Ag dealers now reporting current inventory levels are too low. This is the first time this has occurred since mid-2012, reversing a trend of too much reported inventory for the past 8 years. Farmers are not going to run out and start spending the money just because corn is at $4, but there is really good momentum that should be kick-started in the replacement cycle. For example, we started to see that in some recent information where 42% of Ag dealers already see their sales going up by at least 2% in 2021, with close to 10% of the dealers expecting sales to increase over 8%. Keep in mind, 2020 actual sales levels have exceeded the initial dealer forecast at the start of this year. Moving down to Latin America. I spoke extensively for good reason about the strong business improvements that have been made in Titan Brazil through the years. Unfortunately, financially speaking, they've been somewhat impacted in our results by the continuous weakening of the real. Nonetheless, we have made extensive investments in recent years to significantly improve our capacity in key product sizes. And just in the past 2 years, we have developed over 60 new products. These actions have paid off well already with increased sales and increased gains in market share as well. But as we enter 2021 with demand at really high levels already, the prior investments position Titan Brazil extremely well for the near future. So sliding away from Ag over to earthmoving and construction, clearly, the segment remains challenged. We saw our sales slide 19% this quarter. As I said earlier, though, we've done a good job of managing margins. It's evident in this sector as well, where we were able to push up our margin 180 basis points to over 10% from 8.3% last year. While these market conditions currently remain tough, there are market signals that are starting to bode well for next year as dealer inventories are low, global housing continues to show growth. Plus, we already have Europe on leasing and infrastructure spending bills, which will likely put pressure on other economies to feel that they need to do the same as well. Our ITM business is well-positioned geographically to benefit from the regionalization of supply chains, which will be a continuing trend. Despite these market conditions, in recent months, our ITM business has solidly beaten our internal forecast as order patterns have consistently improved. With that being said, we do see 2021 as being a rebound year for our undercarriage business, perhaps not as much in the first half, but by the second half, market conditions should demonstrate really good signs of life. We aren't just going to sit back and ride the market condition improvements to increase our sales. We do expect our efforts in product development within North and South America tire businesses, along with what we've done to develop new products in our undercarriage business to drive a fair amount of new business in 2021. You put all these pieces together, and it's really starting to perform a good foundation with a good backdrop for growth heading into 2021. So sitting here today, we know and we will need to keep on positioning Titan to navigate through the pandemic and the new challenges of today's business climate. Over the past 6 to 7 months, our results have indicated our ability to do just that. Along with managing the operational aspects of a very fluid business environment being heavily shaped by COVID, we will remain committed to managing our balance sheet to not only get through the crisis but position ourselves for expected future growth. Looking beyond 2020, we believe that the continuing positive actions here at Titan, our development of new and innovative products, combined with the underlying improvements in market conditions, should drive good financial improvements and put us in a strong position for the refinancing of our 2023 bonds. I want to close by once again just expressing my appreciation to the One Titan team and our thousands of employees around the world working hard every day to manufacture our products. And so with that, I'd now like to turn the call over to Dave.

David Martin, CFO

Thanks, Paul, and good morning to everyone participating on the call today. Several things really stand out with respect to what is happening in the business over the course of this pandemic. Economic impacts are abundant across all the markets we serve, but we have managed to push through with great resolve. As Paul discussed earlier, we're building an improved foundation for a brighter future for Titan as the markets recover. I'll get into some detail regarding this quarter's financial performance in a minute, but I want to review the most important things here at the outset. First, operating cash flow during the third quarter was stellar at $42 million, helping us to bring global cash balances to almost $99 million. Second, with the improvements in cash flow, both from an operating perspective and from the additional sources of noncore asset transactions, we lowered debt levels to the lowest level since mid-2018. And now net debt now stands at $366 million, an improvement of $67 million from the end of last year. Third, the gross margin improvements, coupled with operating cost control that we've undertaken, have enabled us to increase our financial performance over the prior year with adjusted EBITDA improving by 68% in the third quarter from last year. Finally, the slope of the decline in sales that we've seen throughout 2020 has diminished somewhat during the third quarter, with almost half actually coming from currency devaluation. And we're seeing positive trends as we head towards next year. Now let's review the details of the quarter. Net sales for the third quarter were slightly improved over what we expected at the beginning of the quarter as Q3 normally represents a seasonal low in the business. That was certainly true, but we also saw an uptick in the order drop, which translated to sales improvements toward the end of the quarter. Net sales declined 12% or $41 million less than the third quarter last year but were $19 million improved over the second quarter. We estimate the direct impact of COVID-19 effects on net sales was $8 million in the third quarter, meaning the impact from plant closures in disruptive markets in Europe and Asia. On a constant currency basis, revenues would have been down only 6% from the third quarter of 2019 or $21 million. The negative currency impact was approximately $20 million or 6% with much of the impact coming from Latin America and Russia. Again, this quarter, the largest impact on sales was in the Earthmoving/Construction segment where sales declined by $32 million from last year. The drivers of the decline in EMC were across the board, with the biggest impact coming from North America and ITM business. The remaining declines were primarily in the U.K. and Australia. Agriculture net sales were down $3.6 million or 2.3% with $13 million coming from currency impacts, which again is a testimony to the resiliency of the Ag market with an increase in volume during the third quarter. The consumer segment experienced a decline of $5 million in the quarter, reflecting primarily U.S. sales and specialty markets where we had deemphasized certain product lines in recent months. The utility truck tire sector in Latin America actually rebounded during the third quarter after several consecutive quarters of decline. Our North American sales were down relative to last year, while we have generally seen the agriculture sales on par or improved in recent months. The areas of decline have mostly come in the construction and earthmoving markets. Our aftermarket tire sales in North America in Q3 were up relative to the prior year, and year-to-date are very close to the 2019 levels at the same point. Another major highlight for the quarter relates to our Latin American operations. While reported sales were down 3.6% for the quarter on a constant currency basis, sales would have actually increased by 29%, reflecting a strong rebound in demand, particularly in the Ag segment in Brazil. As Paul described earlier, the market is coming back strong after weakness that was brought on rapidly by the pandemic in the first half of the year. Our Russian sales were down 13% from the prior year, but currency headwinds were the entire story as volume and pricing were slightly favorable compared to the prior year. The overall market conditions haven't changed dramatically with continued depressed economic conditions in the region, but we continue to perform at or better than the market, and dealer sentiment is also currently positive. Our overall sales volume on a consolidated basis was lower by 10% from last year. Price and mix in the third quarter was positive at 3.6%. Improvements in gross profit remain one of the key stories for us this quarter. Gross profit for the third quarter was $31 million versus $27 million in the third quarter of 2019, representing a 15.6% improvement, despite a decline in sales. Our gross profit margin for the third quarter was 10.3% versus only 7.8% last year. This performance was also in line with what we experienced in the second quarter this year. Tailwinds on raw materials remain the primary driving factor in our improvement year-over-year, while we have made nice improvements in reducing our overheads in response to the downturn in sales and ongoing production levels. It's important to note that while raw materials are a positive factor, our customer pricing also moves in relative tandem, making it very important for us to manage our other cost of production, which we have done this year. Let's move over to segment performance. The Agricultural segment net sales were only down $3.6 million or 2% from the third quarter of last year. The reality is we saw organic growth of 6% in the quarter. Currency translation was significant and affected sales by almost 9%, primarily in Latin America and to a lesser extent, Russia. Volume in this segment was up 2.3%. And while we have also had an uptick in pricing and mix of 4%, similar to the Q1 and Q2 impacts. Our aftermarket sales have continued to be strong, and there have been positive impacts from selected price increases. Our Ag sales overall in North American tires were up 2.8% for the quarter as aftermarket trends remained strong, partially offset by some OE customers continuing to drive lower production. Our OE wheel sales in North America were down somewhat in the third quarter as well. Russia's Ag sales levels were virtually flat year-over-year, while the European Ag sales were up almost 29% from last year. One of the most significant impacts or highlights for the quarter related to the Latin American Ag market, which I alluded to earlier. Reported Ag sales for Latin America were virtually flat to last year, but volume was up 23% in the third quarter with lower currency levels wiping out all those gains. The market has rebounded significantly in the second half of the year, and trends are looking strong for near-term market demand, including the first half of next year. While a smaller component of overall sales performance, Australia also saw nice increases in Ag sales in the quarter compared to last year, as market conditions have improved from better weather conditions as well as stimulus coming from the government. The agriculture segment gross profit for the quarter was $16.2 million, up from $10 million last year, representing a 55% increase. The gross profit margins in the third quarter were 10.6% for Ag, which was an improvement from the margin produced in Q3 of 6.7% and also similar to the reported result in the second quarter. We discussed this last quarter as well, but we have seen improvements in plant efficiencies from the strong internal actions we've taken, along with lower raw material costs, enabling this improvement. A key component of this improvement came from North American wheel operations, which delivered strong results in the third quarter as we continued to improve the operations after significant headwinds that existed in 2019 surrounding raw material and inventory management. The turnaround accelerated in the third quarter for this business. That said, each of our geographic businesses experienced expansion in gross profit and margins in the third quarter compared to the prior year. Our earthmoving/construction segment continues to see the most impact from the challenging year that we faced being not only hit by the economics caused by the pandemic, but also the global construction slowdown. Overall, the EMC segment decline was $32 million or 21% from the third quarter of last year. On a constant currency basis, net sales would have decreased 19% for the quarter versus last year, which meant that currency was really only a minor impact in the quarter. Volume was down in the EMC segment by 19.4%, while price and mix were almost negligible at 0.1% favorable impact. North America saw the largest decrease year-over-year with a decline of $14 million. ITM's undercarriage business continues to be impacted as well in the segment with a decline of $11 million from last year. As a reminder, this business has significant operations in Europe, and activity in Q3 tends to be lighter due to the holiday and vacation season, which has been more impactful this year due to the extenuating circumstances that we live in. In recent months, we've seen improvements in the order book for the ITM business, and indications are favorable for the markets in the upcoming period. Gross profit within the earthmoving and construction segment for the third quarter was $12.4 million, which represents only a $526,000 decline from a year ago. The gross profit margin in the EMC segment was 10% versus just over 8% in the prior year. With lower sales, margins could have been stressed but we expanded margins by controlling our production costs very well. In addition, raw material costs continue to be a tailwind for us relative to the prior year. The Consumer segment's Q3 net sales were down 15% compared to Q3 last year. The negative impact from currency translation was 12% for the quarter. Volume decreased by 20.8% and pricing mix were favorable at 17%. The largest negative impact from a volume perspective was in North America as demand dropped significantly due to market economics, but also the deemphasis on specialty product lines. Demand in Latin America related to the utility truck segment improved, but currency devaluation wiped out all these gains in the quarter. The segment's gross profit for the third quarter was $2.7 million, similar to the first and second quarters but declined $1 million from a year ago. Gross margins were 9.5%, which was a decline from 11% last year. Again, this entirely relates to the mix of products sold. Let's move over to our SG&A costs. SG&A and R&D expenses for the third quarter were $35.7 million, but this included $5 million from the legal accrual for the anticipated litigation settlement of the long-standing Dayco case, which I will discuss in a few minutes. If you exclude the legal accrual from these costs, we spent $30.7 million, which was in line with our Q2 spending levels and 12% below the third quarter of 2019 adjusted spending level of $35 million after you exclude the ITM IPO costs that were expensed last year. Again, this decline came as a result of concerted efforts across the business to control costs. The largest areas of decline came from lower employee-related expenses, including travel as we continue to contain costs across the organization. Similar to Q2, we also managed our sales and marketing costs and our IT spending and investments that we make. I expect our SG&A costs to continue to be on a fairly tight band around this level, while Q4 levels may be somewhat higher due to the timing of certain initiatives. If you exclude the $5 million impact from the legal settlement accrual in the third quarter, we continue to be on pace for full year SG&A and R&D costs around the low end of the previous range I discussed of $130 million to $135 million. Now just a bit more on the $5 million legal accrual. We move forward to settle the long-standing Dayco property litigation with the federal government. This litigation has been outstanding for many years. And it is in our best interest to resolve this for Titan and for the city of Des Moines and all parties involved. This matter is more fully described in the 10-Q, but we anticipate final settlement in the near term, which would require a payment of approximately $11.5 million. Once the court takes the next step to issue the final order and then we obtain all the necessary government approvals. While we continue to have significant impacts from currency fluctuations on our P&L, the currency revaluation impacts on intercompany loans were fairly muted in the quarter. We had a foreign exchange loss in the third quarter of $1.3 million versus a loss last year of $2.3 million. We recorded tax expense of only $342,000 in the third quarter on a pretax loss of $13 million. Our expectations for full year taxable income in non-valuation allowance jurisdictions have been reevaluated this quarter, which resulted in lower taxes recorded in the quarter. Now let's talk Q3 cash flow. We have made strong strides relative to our balance sheet and the overall liquidity picture in the midst of a challenging year, particularly this quarter. I'll start with the fact that cash ended at $99 million, up $18 million from the second quarter, and up almost $32 million from last year-end. Cash levels are at the strongest since mid-2018. Most importantly, this increase came from strong operating cash flows in the third quarter. We generated approximately $42 million in operating cash flow in the third quarter, one of the best quarterly performances in many years. Year-to-date, we have generated $47 million in operating cash flow. Including the impact of the final sale of shares in Willis, India of $17 million early in the third quarter, we generated free cash flow in the third quarter of $54 million. I continue to have confidence in our ability to generate cash from improvements in working capital for fiscal 2020, excluding the effects of lower sales volume that will come from continued improvements in inventory management across the business. As you see in our cash flow statement for the first 9 months, working capital has been a source of cash flow of approximately $44 million, which is partially due to lower sales volume, as I mentioned earlier. Lower inventories have been a $37 million source of operating cash flow in this time period as well. We had strong focus with our operating teams to manage inventory very closely and collectively know that there's a balance to manage due to the lack of long-term visibility of customer demand, which is challenging for us, but we are managing through. We remain focused on having the necessary production levels and inventory in place to meet customer expectations for timely delivery. Capital expenditures for the first 9 months of 2020 reached $13.4 million, which reflected continued control of investments in the midst of the pandemic. This compares to $26 million last year for the first 9 months. We have continued to tightly manage our capital spending programs and to invest in areas important for maintaining production, maintenance of our equipment and the safety and welfare of our employees. Of course, we can't hold these investments back forever but it has been prudent to manage cash carefully during this time. We do anticipate spending to increase next year, but only as we see sustained improvements in our markets and the business. We will continue to bring innovative products to the market to be competitive and maintain our market leadership. For this year, we will maintain the expectation of full year capital spending of approximately $20 million with one quarter to go. Overall debt level decreased by almost $39 million from the end of June to the end of September. As of September 30, there are no borrowings on the domestic ABL credit line as a result of the strong operating cash flow and the results of the noncore asset sales. Short-term debt at the end of September was $32.6 million, which is down by over $29 million since last year-end and $8 million from June. This decline is due to the repayments of normal maturities of the loan arrangements in certain of our foreign operations, primarily Russia and Europe. A portion of this plan also related to extending a loan in Latin America by 1 year in response to the liquidity initiatives late in March this year. Our debt levels have not only declined this year, but the complexion of our overall long-term debt has improved as well with measures we took in Europe, Latin America and Russia with our banking partners to secure facilities that are more flexible and cost-effective for our operations. Cash flow was strong across all of the international operations in the third quarter, which added to the flexibility for our business to manage for the future, along with the actions we've taken throughout the year. We now have more flexibility to manage our U.S. and corporate operations as well. We freed up the borrowing capacity on the domestic credit facility, and we've been able to maintain our good solid cash flow in North America. Currently, the borrowing capacity when you take away the letters of credit and adjust for the borrowing base calculations of AR and inventory, our capacity is at $61 million at the end of September. We continue to pursue transactions surrounding some discrete noncore assets representing approximately $16 million to $20 million in additional cash flow. We made more progress on these items in the last 30 days, and I anticipate completing these transactions during the fourth quarter, which will further benefit our financial flexibility. To wrap up, we continue to make nice progress on our path to stability as a company during this last quarter, notwithstanding the turbulent times that we move in. This is paramount for us as we head into what we hope and believe will be a brighter market ahead. Our financial position is improving. I will restate it again, cash has increased by almost $40 million since Q1, and our net debt is down by over $67 million since last December. This is very important as we progress towards 2023 and the maturity of our bonds and the flexibility we need to manage our business and manage the refinancing decisions. We are taking care of both our liquidity and how we manage our business to see top line and bottom line improvements in the future. As I said continuously on these calls, there is much work to be done to position us for the long-term future, but I am pleased with our progress so far. This race doesn't have a finish line, and we are continuing to run hard. That concludes my remarks, and so I'll turn it back over to the operator for any questions you have.

Operator, Operator

Our first question today comes from Joseph Mondillo with Sidoti & Company.

Joseph Mondillo, Analyst

Just a question on your guidance first. It looks like it implies a tick down from the third quarter in the fourth quarter. Is there anything there beyond the normal seasonality that we usually see in the fourth quarter?

David Martin, CFO

No, not really, no. We have to be very prudent as to how production levels go in late November and December. And it does play havoc with the scheduling and so forth. And so there is traditional seasonality going down in particular, here in the EMC segment. So we were just being very prudent about that guidance in Q4. It's you also manage towards the beginning of what will be our busiest quarter in Q1. So we're trying to manage the schedules very tightly right now.

Joseph Mondillo, Analyst

Okay. And I guess the second question would be related to the pandemic. I'm assuming in North America right now, operations are running smoothly, but Europe, we're hearing about partial sort of lockdowns. What are you seeing, I guess, maybe primarily in your European operations and the overall pandemic? And how that may affect Q4 and maybe potentially Q1?

Paul Reitz, CEO

Yes. I mean, it's something we're obviously watching really closely on a daily basis. And as I noted in my comments, I mean there are some concerning trends that can't be overlooked. However, you kind of look back to where we're primarily located in Europe with 4 plants in Italy and Spain and then up there in the U.K. We've been through pretty hard times already, and we've been managing through the heart of the crisis over there since March. We've seen and continue to see good government support even this morning, the U.K. put out some additional announcements on support they're going to provide to the marketplace. And so I can't speak on behalf of the government, but I do think you see in Europe a stronger unification within their countries to support the economy. They're able to take quicker actions to do that than what we see here in the U.S. And so I approached this quarter and then going into next year with a level of concern, but also a stronger sense of optimism that we will find our way through it. There's good demand out there, and I think the local and national government officials realize that they just can't turn the economies off. And so we will operate safely. We will do everything that's required and make sure our employees are safe on a daily basis, which does require some additional costs, and you do take on some additional inefficiencies. But at this point, I don't think we have anything that would cause us to believe that we can continue to see some good growth going into not just this quarter but into next year.

Joseph Mondillo, Analyst

Okay. And just to clarify, all your operations are sort of fully operating currently?

Paul Reitz, CEO

That is correct.

David Martin, CFO

Yes, we're certainly operating under the protocols of the restrictions mandated by the local authorities, but we are managing and are open.

Joseph Mondillo, Analyst

I wanted to discuss the overall agricultural environment or sentiment. You mentioned that farming sentiment is at a 5-year high. I'm curious about how you measure that or what metrics you are using. Additionally, we've noticed that corn prices have increased over the past 4 to 5 years, reaching the $4 mark several times before dropping again. It seems this time may be different, with indications that prices might hold stronger than in previous instances when they reached these levels. Can you provide more insight into how you view the overall agricultural market as we move into 2021?

Paul Reitz, CEO

Yes, absolutely. The seven levels we track consist of various services we subscribe to along with national polls. We have always monitored these closely. Our observations are not solely driven by the current pandemic; we are noticing a positive shift in sentiment among both farmers and dealers. This optimism is largely influenced by commodity prices. For instance, corn prices have fluctuated around the $4 mark, while soybeans have performed better. However, the key driver we see is the low inventory levels in agriculture. Inventory levels are critically low, which means even a slight sense of optimism can lead to significant growth. Current corn prices near $4, combined with these low inventory levels, give us confidence for growth in the coming year. Particularly, our primary customers are showing historically low inventory, and replenishing this will naturally lead to growth. Additionally, government incentives, which we discuss regularly, contribute to this trend. The ongoing support for the agricultural economy is evident, especially with $14 billion being directed to farmers in North America by year-end, and this trend may be seen globally. Furthermore, the situation in Brazil is especially promising despite some currency fluctuations impacting financials. Demand is robust in Brazil and Europe, and there are positive signs for an upswing in North America. To directly address your question, the dealer inventory levels appear to be a key factor driving growth for next year.

Joseph Mondillo, Analyst

Okay. Great. And then one last question, and I'll hop back in queue. Just related to cash flow. I think, David, you mentioned $16 million to $20 million of further noncore asset sales expected to be completed potentially in the fourth quarter. Are there any other sort of noncore assets as we look into '21 that you're looking to sell? And then you've also talked about some underperforming businesses. Could you update us on that? And then just lastly, related to free cash flow. In an upturn environment, how do we think about sort of free cash flow? Because depending on how strong the upturn would be, you probably have to invest in working capital and CapEx has been at low levels. So I'm just curious if you would anticipate operating maybe in the initial upturn on a negative free cash flow basis. Just wondering what your thoughts are on that.

David Martin, CFO

Yes. Great questions. I'll start with the noncore assets. The $16 million to $20 million represents very discrete opportunities we are working on, and those are very distinct. We continuously evaluate the assets we have in place and some noncore operations or assets. And those will continue. That's a never-ending process for us, but they're not included in the $16 million to $20 million, so we will continue to look at those things well beyond 2020. Again, I feel very confident on the $16 million to $20 million because of the progress we've made on some of these transactions. So we'll move on from that. Great question with respect to what we're looking at for next year as recovery happens. Yes, I do expect that there's obviously going to be further investments in working capital, particularly in inventory as we need to have inventory in place to manage customer expectations. There will be some investment there. I don't think it's going to be dramatic when that will create stress for us because I think it will turn on over time. So we're going to manage that very carefully. The same goes with investments in capital expenditures. We will not just turn it off or turn it on overnight. We'll be managing it prudently so that we can maintain free cash flow that's at least neutral or positive. That's the goal. And so we're going to be really, really focused on that and trying to manage that very carefully with our business unit managers.

Operator, Operator

The next question comes from Komal Patel with Goldman Sachs.

Komal Patel, Analyst

We hit on a lot of points that I wanted to touch on, but maybe a follow up on the farmer sentiment. I guess just given the political landscape, can you add some color about some of the implications for farmer sentiment or incomes into '21 based on kind of some of the different political outcomes, whether a Democrat President and mixed legislature. How do you think there could be any influence there into next year?

Paul Reitz, CEO

Yes, I believe we are fortunate to be in the industries we are currently involved in. The size of infrastructure projects and government programs can vary depending on which party is in control. However, we are in sectors that require government support, and no matter who is in charge, construction, infrastructure, and agriculture cannot be overlooked. The payments for this year are already secured. I don't think a divided government and president will affect the necessity to support our agricultural sector. We seem to operate in a largely nonpolitical environment within our industries, and it is crucial that we work together to maintain these areas. I believe there's also pressure from European actions that influence North America. When European governments act swiftly to support agriculture and infrastructure, it compels our politicians to act in the best interest of their citizens as well. While I cannot deny the existence of risks, I feel they are relatively manageable.

Komal Patel, Analyst

Okay. That's fair. That's really helpful. And then maybe just the second thing. I wanted to check in on minimum cash target and leverage. Given that the business is on better footing now, can you remind us on minimum cash balance? And then how quickly you think you can get to your leverage target of around 4x?

David Martin, CFO

Great question. We've navigated the year quite successfully. Our cash balances have increased, with a minimum cash balance around $55 million to $60 million, which is what we managed last year and earlier this year. I don’t foresee negative cash flow reducing us to those levels. We've effectively managed our debt levels, with most of our debt being in bonds, so there shouldn't be significant changes on that front. The focus has to be on earnings, and we have also taken necessary steps to improve our earnings as the markets recover. The margins we aim to achieve in the future should help us reach those levels sooner rather than later. As for a timeframe to achieve around 4x leverage, it is definitely a goal of ours, contingent on market recovery. We're also implementing internal measures to address underperforming assets to eliminate their negative impact. All our planned actions are set for 2021, and as we move beyond this year, we expect to resolve that drag, depending on market conditions and our performance.

Operator, Operator

The next question comes from Kevin O'Brien with Imperial Capital. Achieving around 4x is certainly a target of ours, and it does depend somewhat on the recovery of the markets. However, we are also implementing internal measures on the underperforming assets to eliminate the negative impact they cause. Our goal is to have all the necessary actions completed by 2021. As we move beyond 2021, we expect that negative impact to be eliminated, and then it will just be a matter of our market conditions and our performance within them.

Kirk Ludtke, Analyst

This is Kirk Ludtke from Imperial. Can you hear me?

Paul Reitz, CEO

Yes.

Kirk Ludtke, Analyst

As the outlook improves, can you provide an update on the initiatives you’ve been discussing to enhance utilization rates? Where do those stand? Are they still a priority? What potential obstacles might exist?

Paul Reitz, CEO

Yes, we definitely still see this as a priority. There are changing circumstances with demand, and we are constantly assessing the situation. We have not made any final decisions yet, but we face challenges related to our capacity utilization since each location produces different products. This means we may need to consider either transferring products or introducing new ones to improve our capacity utilization, or possibly stopping the production of certain products. In summary, yes, this remains a priority for us. We are continuing to examine it, and as we conclude this year and plan for next year, it will be a key topic of discussion among management and with the Board.

Kirk Ludtke, Analyst

Could you provide us with an update on LSW? How have the take rates changed, and when do you expect to see significant movement in that area?

Paul Reitz, CEO

It has made a significant impact. LSW is the most innovative product to enter the agricultural industry. I want to address some of the challenges we've faced historically. We have completely redefined agricultural tires and wheels, similar to the advancements seen in SUVs today. Without low sidewalls on SUVs, the rides would be bumpy, and we have transformed equipment performance through the redesigned wheels and tires associated with LSW. We are very satisfied with the product's performance, which is crucial. It is important to provide value to the end user, as well as to enhance sales and the margin profile for LSW. We have noticed a shift in our sales approach, selling significantly more directly to tire dealers and end-users rather than through OEMs. The only question for the future is how we can further encourage OEMs to incorporate LSW in their offerings. They have a different viewpoint on LSW since they also make tracks and various components. Nonetheless, we remain highly impressed with LSW's ongoing performance. It is important to note that our focus extends beyond LSW. We have introduced several new product lines in South America that are also making an impact. In the U.S., we launched a major new product this year that is expected to drive sales into the next year. As we conclude this year, more new product lines are set to be introduced for next year. This evolution is about more than just LSW, but LSW remains a key focus of our new product development over the past five years. Products that enhance equipment performance will continue to sell well, and our dealers are accepting these innovations at a very high rate.

Kirk Ludtke, Analyst

Great. Lastly, could you revisit the question regarding how working capital may become a cash use as volumes rise? Can you discuss the initiative to reduce SKUs, how that has progressed, and perhaps provide some numerical insights on that progress?

Paul Reitz, CEO

Yes, it's a great question and a significant priority for us. It’s not only about introducing new products; we also need to eliminate some underperforming ones, which we have been working on for the past couple of years. Regarding our tire business, the inventory we hold of our top-performing products has improved considerably, although I don’t have the specific number at hand. Perhaps David and Todd can provide that information later. We are now managing the right inventory, and this has led to notable improvements in our working capital and cash flow, making our operations more efficient. We've been able to enhance our capacity utilization by redesigning our processes as a result of these portfolio improvements. For instance, our largest tire plant in the U.S. is undergoing a complete redesign, with about 35% of it dedicated to producing our best-performing products continuously. These enhancements stem from our focus on improving our product lineup. Currently, we are making unprecedented progress in our wheel business, and there's more work to do. I believe that the wheel business holds significant potential benefits that we haven't fully tapped into yet in 2020, but we expect to see more in 2021. Our team is enthusiastic and receptive to these changes, despite the challenges with some customers. We can’t always inform every customer that a product will be discontinued immediately; in some cases, it requires a longer approach. However, I've been very impressed with our wheel team over the last 3 to 4 months; they have truly embraced these initiatives and are taking decisive actions.

David Martin, CFO

Yes, those actions will benefit us next year. And so yes, it's very good progress.

Operator, Operator

Our final questioner is Justine Ho with Mesirow Financial.

Justine Ho, Analyst

I wanted to ask about raw materials and the trends you're currently seeing or what you're expecting considering, I guess, this past quarter, there were some tailwinds relating to better margins because of the lower raw materials?

David Martin, CFO

That's a good question. As anticipated, raw material costs have decreased this year. However, there is some lag in how these costs are reflected in our plants. Additionally, pricing isn't directly proportional, so we must manage this carefully with both our customers and suppliers. As demand continues to rise over time, we can expect an increase in pricing as well. We're actively managing this situation. I still believe that raw material costs, compared to historical prices, will remain relatively favorable, at least at the same level. Therefore, concerning margins, the situation will be similar to what we've previously experienced.

Operator, Operator

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

Paul Reitz, CEO

Well, I appreciate everybody's time and participation this morning. I look forward to talking to you again as we report our next quarter's results. Everybody stay safe and stay healthy. Take care.

Operator, Operator

Please note that a webcast replay of this presentation will be available soon within the Investor Relations section on our website under News and Events. Thank you for attending today's presentation. The conference has now concluded.