Titan International, Inc. (TWI) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Titan International Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. Any statements made in the course of the conference call that state the company's or management's intentions, hopes, beliefs, expectations or predictions for the future are considered forward-looking statements. Please note that the Safe Harbor statements contained in the company's latest Form 10-K and Form 10-Q filed with the Securities and Exchange Commission extend to this conference call, and any forward-looking statements involve risks and uncertainties as detailed therein. At this time, I would like to introduce Titan Chairman and CEO, Maurice Taylor. Please go ahead, sir.

Thank you. Good morning, everyone. As you know, all of you on the call now have already received our press release and everything for the third quarter -- I mean, for the year of 2013. As I said in my statement, we ended it much more, hoping for certain things than what it ended up coming out as. But there's a lot of good things that came through it and there were some things that were not going good, and we've made a lot of changes in 2013. To cut through the things. The biggest stumbling block in 2013 was the mining business and it's -- everybody understands what's going on there. They're spending much lower than they expected, and they had a great deal of inventory. And as I said in my release, that most of them are trying to deplete it as far down. There's no problem with supply any place in the world. And they're trying to bring everything down because they're going to replace it with tires that are going to cost them probably in the range of 30% or better, less, and the reason being is simple: the price of the natural rubber has been falling for the whole year. I believe, right now, it's pretty well stabilized, and unless something drastic happens, it should probably stay right in that range where it's at right now. The -- whenever we have a situation where the commodity prices go down, especially on the tire side, because of the amount of time for natural rubber and the amount of natural rubber we use, it has a tendency to take us approximately -- we have to give the OEs with our contracts, it takes approximately a quarter, and everything is passed on then. But it takes awhile to…

Great. Thanks, Morry. Good morning, everyone. Let me start by going through the year-end financial results. And after that, I would like to spend a few minutes just talking about what I'm seeing as I transition into a different role. And then, of course, we'll introduce you to the new guy, Mr. John Hrudicka, that joined us as our CFO a few weeks ago right in the middle of all the year-end excitement. For 2013, we broke through the -- the $2 million -- $2 billion barrier on revenue and came in at $2.2 billion. It compares to $1.8 billion last year, so up 19% for the year. If you look at Europe, which we closed in October of 2012, that added $485 million of incremental revenue to our '13 sales. Looking at Europe and their performance, really a fairly solid year for those guys. It was down from the 2012 levels, but it certainly performed up to our internal goals that we had set for the year. And that's in the face of what they dealt with in Italy, which was a major earthquake that impacted the plant, and we still were dealing with the lingering effects of that as we entered into 2013. So some good performances by the other European wheel plants. When you look at our undercarriage business, same thing, right in line with what we expected for the year with all our goals for the year and they really finished the year strong. In the fourth quarter, they were up 9% from the third quarter and really saw some good OEM activity, it was picking up, and some good traction coming out of Brazil. The only thing out of the European acquisition that I would say was off track for 2013 was really the Australian…

Thank you, Paul. Good morning. I'm very happy to have joined Titan International. I thought I'd just share a little bit about my background. I've worked primarily for large publicly held companies: Motorola for 11 years where I was an expatriate in both Hong Kong and Beijing, China; 3Com and Baxter Healthcare before joining Elkay Manufacturing, a privately held family-owned company for which I was the CFO for the past 4 years before joining Titan in February. I don't think I could've come at a more exciting time. The company has experienced tremendous growth through global expansion and continues to be very aggressive and involved with change. In the 2.5 weeks I've been here, I've learned a great deal of being part of the year-end process. I will continue to make it my initial focus to learn more about the company's business, strategy and decision-making processes to determine how I can best align myself to bring value to Titan. While it's been just a short time in the seat, I'm already excited by the opportunities to carry on and contribute further to Titan's success. I'm looking forward to meeting and getting to know each of you. And with that, I'll turn it over to Betty, the operator, to begin taking questions.

[Operator Instructions] Our first question comes from Schon Williams with BB&T Capital Markets. Christopher Schon Williams - BB&T Capital Markets, Research Division: Congratulations, Paul, on the promotion. Looking forward to good things.

Thank you, Schon. Appreciate it. Christopher Schon Williams - BB&T Capital Markets, Research Division: I just want to see -- I mean, given that we're a good bit through the first quarter already and the fact that you guys are reiterating the guidance, I mean, generally, the first quarter is a very strong quarter from you from an earnings standpoint just seasonally. I mean, do you feel confident that kind of get -- based on what you've seen in Q1, that we should see a fairly strong results -- fairly strong result in Q1 here? Just kind of talk about what you've seen here so far in the quarter.

Well, Schon, let me tell you -- this is Morry -- that as I spoke earlier, there's a situation where I think January was probably much softer than what we expected. But we've seen some uptick starting in February. And I believe that with March coming, we should be in a real good focus now in looking at what our board gets in reference to the budget. We already know that some of our groups have gotten a much better order deck than they had forecasted back in November, early part of December when it was presented to the board, and we expect it to continue to grow. And so when you mention the first quarter, the history goes in the ag that the ag is strong -- the strongest in the first, but there's been some times when it's been the second quarter that became the strongest. So -- but if you average the 2 of them out, it's pretty reasonable that, that's the strong part as you start going. The difference that's going to affect Titan is the difference that we are globally now. So you get -- as time goes, things are going to start balancing, I believe, more evenly through. The situation that -- I'll give you an example. Everybody -- a lot of farmers in the big area of the farming all the way from Illinois, all the way out through Washington, Oregon and in Canada, and these are huge farms, a lot of them have gone into what you'd call the CNH or the track vehicles. But there's on YouTube, there was a fellow at Sackett ranch. He did a demonstration, and this is from one of our big farms that was all rubber, and he buys millions of equipment each year. He --…

No, no. I agree with you, Morry. I think that the opportunities in front of us with LSW and what we can do in the marketplace are fantastic and we're going to run with it. And I agree with your comments as well about where we see things going in 2014. Christopher Schon Williams - BB&T Capital Markets, Research Division: And maybe just as a quick follow-up. Could you maybe talk about what's driving some of these units that are seeing orders maybe coming a bit better than budget? What geographies or end markets would that be?

Well, your -- number one, we, not only, Schon, are we doing this from implement wheels all the way through the biggest tractors produced. In fact, this year is the Big Bud is back in the market. And Big Bud is running our dual 1100 by 46 tires. Now when I say a Big Bud, what the hell is that? That's a great big tractor built out in, I believe, Montana. And this is for these huge farms. It's a 950-horsepower 4-wheel drive tractor. Now what you have is if you turn around and look at our friends at Deere, their largest tractor is what you call a 9560, which means it's a 9000 series tractor and has 560 horsepower. Now they're going against the one that's got 950 horsepower. So everything is getting larger. Now I was just up and met with 3 of the largest farmers in Saskatchewan who buy -- the one fellow is buying 6 brand-new sprayers. Now what he's going to put on those sprayers are either -- are 800 by 46s or he's going to put the 900 by 46s. Now those are for he can get out there in the spring. Now if you turn around, as soon as he gets out, they put the fertilizer, the ground is wet, but they're locked in by a period of time. They have to get their crop in there. It does them no good to turn around and worry about the field being wet. So they're going out. They need that to run across the ground as soon as the spring thaw is out. Then they turn around, they take them off and then they have to spray because they're mainly grains. They're canola seed for oil, they're doing oats, they're doing wheat. What they…

Our next question comes from Larry De Maria of William Blair. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Morry, congratulations to Paul and John. Morry, can you talk about some of the puts and takes, unions, inventory destocking, rubber, et cetera? Didn't really talk too much about the market share. It looks like you guys lost a little bit of the OE and quite a bit in the replacement share, especially to BKT, in the aftermarket. Can you just explain what's going on there and what the plan is?

Yes. Well, the first thing, Larry, is that if you called up the people at Modern Tire and get to the guy at the top, he'd tell you that they end up with 150% of the market share, okay? So they started attacking [ph] their cut. So if you really want to know what the share is, go look. Everything has to be imported. So you got to go through the Customs department. You got to go through there, total it all up, and you'll be amazed that the numbers don't add up. So on the OE side, our OE side is pretty well governed. We know exactly because we make the OE wheels. So I -- have they come into the market? Yes, but I don't consider it earth-shattering. Their market share is not even close to what that's been forecasted at. That's a fact, okay? And if you -- if they start to bother me, then I'll sue India, too. I did it to China. It's the same thing. You can't -- we're a dumping ground. And at this point, I wasn't really worried about it. But there's enough -- you don't file suit when you've got the market and the capacity is being stretched. Today, you got excess capacity and so it'll be a big change, so -- and that's why also you change products. So that's my answer. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Okay. Where do you think -- I appreciate that, Morry. You guys use Modern Tire in your presentation, too. So if you're looking at the legacy import/export data, how do you rectify where maybe the share might actually be because -- if the Modern Tire information is wrong?

Well, I'd say that the -- I think, in the aftermarket, because we're so strong on the OE, I think we dropped a couple points on that because we just didn't come to the market with it, all right? And their pricing was lower than what it -- we were willing to go to at that point. I think that the same is true at our friends at Firestone. I think Firestone pretty well maintained where they were. And there's no question, there's other players in that field. But I think, on the OE side, that we've done pretty good. I do believe that we got hurt when Goodyear said they would close the factory over in France because everybody, all the tractors that get shipped in October, all the tractors for Case Magnum 8000, 9000 and Case 4-wheel drive that are shipped around the world, they've turned around and we produced probably most of all of those tires with a Goodyear brand. And I think that there was a panic that there wouldn't be any Goodyear tires for replacement around the world. And we were limited what we could say because of the situation with our friends at Goodyear. But I believe that we've rectified that now. And I think they found that, even with Goodyear, our contract with Goodyear, if we put the tires on over here, no matter where they are in the world, Goodyear -- if we're not there, like in Europe or Africa, Goodyear will handle the warranty on them, the service of them. So that's pretty much, I think, is what governed that. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: Okay. And then you talked about, obviously, the fall and the winter, at the end of the year, about the potential divestiture of, I guess, the undercarriages and potentially some of the mining business and maybe even Bryan, I don't know. But I think we're looking for 1Q decision. Can you just let us know where we stand in that process, if there's a delay, if you're close to a decision or just the update on what you're thinking there?

Well, I think what's happening is, I think, that the study on -- because, as you know, I asked a lot of shareholders what they thought, what they thought if you took the mining group and you spun it off at a separate situation or if you just up and sold it or you just stick it out. And it's like 1/3, 1/3 and 1/3, okay? Well, we found out that under the tax laws, you cannot spin it off at as a tax-free situation, okay? So all of these things are being looked at. But if you look real close, you'll find that we've also paid a tax rate of 42%, which is nuts. So what we've been doing is looking at how to -- we've had PW in. They've laid out a plan. Now it's sent to the legal people. We've got to reset it up so that we can manage, like everybody else, a different situation of what we have to do so that we're not a simple manufacturing company that's going to pay a ridiculous 42% of the taxes. So I believe in the next board meeting that we have with the board members, which will be the end of March it's scheduled, they'll be giving a presentation to approve it and -- or comment or change or whatever they wish to be done. And I believe that, at that point, a decision will be made how to do it. And at that same time, then there'll be probably more information gathered on the whole mining sector, how you can do it. So I expect the first half of the year that everything will be clarified what to do, one way or another. Lawrence T. De Maria - William Blair & Company L.L.C., Research Division: And when you say there's going to be a presentation to approve it, you mean approve the divestiture?

Whatever the option -- whatever the options are. There's 3 options, okay? I've got 1/3 of you that say, "Hey, it's at the low. Hang in there and build." Hell, Teck Resources was one of the first places we put the big loader tire, the 58 by 63. The only radial loader tire performance. Well, last -- 10 days ago, the tire went past 10,000 hours. That's the longest they've ever, that company, ever got a life of a tire. And it's still got like about 1/3 of its tread left on it. So there's good stories, there's bad, there's horror stories. So we're going to concentrate on where we do real good because I've said before and I said in my comment, you're going to look at 30 to -- I think in the big mining trucks, haul truck tires, you're going to see tires that are going to go from 55,000 down into the 30s. And there's not a lot of money left in those suckers, so -- and that's just because of the amount of capacity that is coming on between now and -- it's already starting up. Pricing is falling like hell. And I think that's -- so as I tell my people, I'm shying away from that. We made a lot of investment, we've learned a lot and we did get our investment back. But I think now it's time to concentrate, like John, on the loaders and what we're doing there. And that's -- the hindrance there has been able to be able to make -- be able to produce the wheel. Contrary to the ag side and the construction, we've been able to turn around -- we make our own wheels there. But in the big stuff, we don't have the equipment, so we have to go load ranks. We've made that investment and we're excited about it.

And your last question comes from Joe Stivaletti of Goldman Sachs.

I was just wondering, you said that you were still comfortable with your 2014 goals that you set out. In December, you talked about EBITDA like $240 million to $270 million. I just wondered if you could, in your calculations, tell us where you came out for EBITDA in 2013 and just maybe talk a little bit about the bridge from 2013 actual to that type of guidance that you've put out there for 2014 just in terms of maybe the major buckets that will contribute to the improvement you're expecting.

Well, number one, we -- the number we had for the 2013, we kept figuring like with our purchasing department, is the rubber going to stabilize? Well, everything you did at that time to find out, yes. Otherwise, you wouldn't be buying damn rubber out 90 days and putting an LC out and then it takes you 2 months to get the damn stuff, okay? You'd be better off just sticking in the spot market. Well, it's quite obvious that their numbers weren't right. And so as that thing kept banging down, you can just -- that's a big -- a big, big hit not only in our friggin' earthmover, but it's a hell of a hit in the ag. I mean, we buy an awful lot of rubber, okay, natural rubber. So that is what the biggest impact, and if it was not for that, we would have been real close to where we wished, okay, where we thought we'd be for the EBITDA. We turned around and the question was asked last week. People went back, and I appreciate that there are some foreign governments that are promising to buy up the rubber, to maintain it where it's at now. Do I know if that's going to hold? Hell, no, I don't know. If I did, I would either go long or short on the damn thing. But I don't know. I do know that, as I mentioned to Larry, that I have seen and I know what we're doing in reference to our new product and how much better our margins are for that. I do believe where the rubber is that it's probably within very close, it's low. But if it goes down, then there's going to be -- our tire side will end up getting hit again. If it stays where it is, then we're in good shape to do a little better than we thought. Price of steel is up $20, $30 a ton. And is it going to stabilize there? If it does, then our wheel business is going to do a little bit better worldwide. When Paul talked about Australia, he forgot to mention that Australia is total mining wheels. Total. So -- the number. So what happens, you just get your -- when they shut it all down and they just start using what they have on hand, which is also inventory. So they took the hit. So there's a lot of moving parts. And to be able to forecast it, I'm not smart enough for that, okay? That's my answer to you. I should know. I know you -- next question you should ask me, well, if I hired Goldman, Goldman's smart enough. You guys would figure it all out for me or you would turn around and collar everything for a certain fee, correct or incorrect? Yes, don't answer that, don't answer that.

So could you just verify, though, the -- so we were -- I'm just trying to figure out where -- if versus that $240 million to $270 million goal for 2014, what was your 2013 EBITDA number? We were calculating about $198 million based on the types of calculations you've used in the prospectus. I just wanted to verify that was the way you're looking at it, just so we could...

We're looking at it the same way. I don't put everything together. You got your salespeople, you spend -- this doesn't come off on a paper napkin. The sales guys go through every account, what they can see and go for. Aftermarket's the hardest thing to do. The easiest thing to do is the OEs, all right? So when you go look at the situation, let's just take the green machine, okay? Well the red machine's got a Quadtrac. The Quadtrac originally was built for pulling pan scrapers. But then, everybody -- farmers like to try something different so they get burned. That's what Larry Sackett told me, all right? But Deere doesn't have one yet, okay? So I don't know how Deere does their internal, but I do know, from the dealers I speak to, and one of them is Tom Sloan, that when he did the test against the Quad, it was his customer's Quad. His customer only bought the red piece of machine because it wasn't at Deere. So now his customer is going back to Deere. I have no idea how Deere figures big 4-wheeler is down. Is it because they're going to lose market share to the Quad? Well, then you can ask him the question. We can run right with them and save money. But I don't know where -- I haven't been every place in North America, around the world. So big organizations move much slower than we do. But I know what we're doing and I know the results of what's happened. And my salespeople are looking at it. If you looked at -- we make the standard 800 by 38. If you turned around and you were to say, "Okay, what would be the standard?" Well, I can tell you that…

This concludes our question-and-answer session. I would like to turn the conference back over to...

I just want to say thank you to you there, and thank you to everybody out there. Have a great winter wherever you're at, and we look forward to the action in spring. Talk to you in another month or so. Bye.

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