Ladies and gentlemen, welcome to the Titan International Third Quarter 2017 Earnings Conference Call. During this session all lines will be muted until the question-and-answer portion of the call. [Operator Instructions] As a reminder, certain statements made in the course of this conference call are considered forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995, and reflect the Company's or management's intentions, hopes, beliefs, expectations or predictions for the future. The Company's actual results may differ materially from the intentions, hopes, beliefs, expectations and predictions contemplated in these forward-looking statements, as a result of various factors, including those discussed in the Company's latest Form 10-K and Form 10-Q 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, and is available within the Investor Relations section of our website. Participating from Titan International on today's call will be Mr. Paul Reitz, Titan's President and CEO; Mr. Jim Froisland, Titan's Chief Financial Officer and Chief Information Officer. Please note, today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Reitz.

Good morning, and appreciate you joining us today. I'll run through some highlights of our business then turn it over to our CFO, Jim, to go through the financial world, and we'll conclude by taking your questions. 11%, 10%, and 21%, those figures represent our year-over-year revenue growth for the first three quarters of this year. These growth figures clearly illustrate that the decisions and actions that Titan has taken over the past few years are working effectively and have enabled us to jumpstart this growth engine. We started the year on a positive note with the first two quarters exceeding double-digit growth after 18 periods of revenue decline. But the third quarter for us really kicked it up another gear, breaking through that 20% level. What we're seeing is good diversified growth that reaches across all our geographies, segments, and many of our products. Our undercarriage division, ITM, and our North American tire division continued to benefit in the aftermarket from our strategic business decisions and the investments that we put into them over the past couple of years. We're seeing our North American wheel business kick it up another gear, which is a good indicator for the OEM market conditions. Look, I think it's clear that the Titan team has done a good job, generating sales growth into 2017. But I'd like to take a few moments here now, add some commentary around margins. First, let's step back and look at what's gone on in our industry in the cyclical end markets that we serve. After the super commodity cycle ended, we've seen our sales growth decrease by over 40% from the peak. During this downturn period, we've commented and reiterated that Titan is making sound, quick decisions to adapt our operations to these changing market conditions. We've…

Thanks Paul. I will begin with a reminder that the results we are about to review were presented in a news release issued this morning and will be discussed in more detail in our Form 10-Q which was filed this morning. Let's start with the income statement. Net sales for the third quarter of 2017 came in at just under $371 million. This was up more than 21% or almost $65 million from a year ago. This is the third consecutive year-over-year increase we have seen after 18 quarters of declines, adjusted for acquisitions. Sequentially, net sales grew almost $7 million, up approximately 2% from the second quarter of 2017. I will note that this is not our normal seasonal trend, as we often see net sales declining from the second quarter to third quarter with plant shutdowns and summer holidays. Here is what it meant in terms of our segments. Net sales were higher in all segments when compared to the same quarter last year. Overall, net sales volume was up 14% with higher volume across all segments and all geographies. Our Agricultural segment saw the biggest improvement in net sales of just over $32 million or 23%. Moving on to the gross profit and margin. Gross profit for the third quarter was $39.7 million, up 14% and 10.7% of net sales, versus $34.9 million and 11.4% of net sales in the same quarter a year ago. The decrease in gross profit as a percent of net sales was a result of pricing initiatives to selectively grow market share, primarily in the agricultural segment. Now let's take a closer look at our three segments. Our agricultural segment net sales for the third quarter were $170.9 million, up $32.3 million or almost 23% over the comparable prior year period. The…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Stephen Volkmann of Jefferies.

Good morning, guys.

Good morning, Stephen.

Thanks for the outlook on 2018, that's very helpful to get a sense of how you think things are coming along. So certainly appreciate that. Curious, Paul, maybe you can dig into that a little bit. What are you thinking in terms of price/cost in 2018 sort of built into your thoughts that you've given us and maybe also mix?

It's a good question. We feel good about price/cost situation now. As we move into 2018, I would say, if anything it moves to the positive side, meaning that there is a little more pricing power that we're starting to get in certain products and certain segments. Some of that pricing power just comes from our own internal due diligence that we've been doing. I've been talking about this quite a bit on a number of calls, but we've really worked hard on improving our intelligence on pricing, and we're getting to that point where we're starting to see some benefits from that, not just in the sales side of it. As you've seen in our filings, we've referenced some of the strategic moves that we've made with pricing and what that's done with obviously driving sales. But we're also finding that we can generate some additional benefit with pricing on margins. Now that's assuming that the raw material situation stays fairly consistent where it's at today. Can we mitigate the situation again like we experienced this year? I think we can do a better job at it. But you'll never be able to mitigate that extreme volatility that we had, Steve. We have contracts in place that require us to – in essence hold pricing firm, and there's a little bit of a lag that we just can't cover through those contracts, through any type of our purchasing decisions. So absent that, I think going into 2018, I think pricing remains neutral to on the basic premise, but then some positive things we can do internally to generate a little bit more pricing power. And looking at the split that you're referencing, I am in the field quite a bit with dealers and I think large ag, when you…

A little bit better mix of large versus smaller ag in 2018, is that fair?

I think so. Yeah, I agree with that.

But it also sounds like maybe a little bit more OE versus replacement, which maybe isn't great.

No. I still see some good trends in the replacement side. I think there's been a lot of new equipment that came into the market as we all know, kind of that four, five years ago time frame. And for us on the replacement side that gives you a good replacement business that's got some legs behind it. So now we're not hearing anything from our dealers that's leading down the path of 2018 looking any different than 2017. I got a big dealer meeting come up here in a few weeks, get a little more indication on where 2018 is going to look precisely, but now I think what you're going to see is good, solid growth out of both those areas. The question is, can you tip into that double-digit range? I am not sure I am quite ready to go there yet, go have enough information on what we're seeing. But I feel pretty good that you're looking in the upper single digits in both areas.

Okay, great. And then if I can just go back to pricing one more time, and then I'll pass it on. I think Jim mentioned that pricing was sort of a headwind in the quarter here, because you were doing some stuff to gain share, which looks like it's kind of working. But I'm trying to just true that up, that would seem to be sort of a pricing headwind and you're talking about sort of pricing tailwind opportunities. Can we just sort of true all that up?

Yes. No, he is exactly right there. There is a headwind that we've been experiencing, because we have made some strategic pricing decisions and initiatives that really goes back to the end of last year, we did a pretty heavy study of the marketplace and really gathered some good intelligence. And so we made some strategic decisions that impacted pricing. Not a big number, but he is exactly right. There's definitely been a headwind. And so what I'm saying is, we feel comfortable that we can remove that headwind. So in essence, we're creating our own tailwind Steve. Did that make sense? Yeah, so that we can take away some of those pricing decisions that we've made in just getting back to more of a neutral point, which would be a positive for us.

Great. Thank you.

And our next question will come from Joe Mondillo of Sidoti & Company.

Hi, guys. Good morning.

Good morning, Joe.

So I wanted to ask about the SG&A, which I have to say you've done extremely good job on reducing SG&A in the face of seeing such strong revenue growth. But going forward, relative to your 2018 guidance, wondering how much ERP expenses in the budget for 2018 versus 2017?

Yeah, that's a good question. We're going through that process right now. In terms of total IT costs, as I said, the cloud versus on-premise are much lower cost, we'll have some overlap, but we'll have a better insight to that after we finish our planning process. But I think that actually towards the tail end of 2018, our total IT cost should start trending down, which is good news.

Okay. I guess what I'm trying to actually end up getting at is, relative to your guidance for 2018. So if you sort of use the midpoint of your revenue guidance, call it 10% growth over 2017 and then using the midpoint of your SG&A percent of sales guidance, looks like it comes up to be somewhere around $163 million of SG&A. And if you exclude the one-time items in 2017, you're looking at SG&A of $135 million in 2017. So $163 million of $135 million is about 20% growth of SG&A expenses, which I would think with all your initiatives that seems sort of high. So could you just sort of – is there something I'm missing, or if it is ERP costs that are baked in there that are pushing SG&A up in 2018, if you could just sort of clear that up, I'd appreciate that?

Well, as you recall, we had what I'll call a couple of unusuals. In this quarter we had the legal and then in the first and second quarter, we had some extra legal costs. You have to back those out to get a base case. But I think the best way to answer your question is what is our overall goal for SG&A and R&D and I think thinking out long-term, not only into 2018, but in future as we develop these systems and lower our cost, our goal is to be below 10% as a percent of revenue. And as I alluded to, we are looking at all SG&A costs. Clearly with best practices moving from a decentralized situation globally to a more shared service best practice model, which by the way, every company is trying to do, you need technology to facilitate that. So I feel confident, very confident in that goal that we've set before.

The other part of your question about actually SG&A dollars going up, we're still going through the 2018 planning process and I guarantee you, we're not allowing any of our business units to increase their SG&A costs. The only thing that will be baked in there would be your sales-related costs as revenue goes up that are somewhat, I would say, directly tied, or uncontrollably directly tied to sales growth. But the cost for what we have, what we're going to have in the budget for the system implementation it will be fairly insignificant in the big picture and it will also be offset by some other costs going away with the existing system. So we'll give you a little more color once we get that 2018 budget process done. And like Jim said, our goals for the future are less than what I'd stated in the 2018 comments. So there's probably a little bit of conservativeness in there. But we want to leave ourself enough room to make sure we are making the right investments in the systems and the decisions we're making, but really looking at that number for the system. From what Jim and I've talked about, it's not a huge number. We're going to break it out years, it's cloud-based.

Yes, you can't compare – lot of people have in their mind about back to Y2K, on premise, lot of programming, lot of changes. Cloud is a completely different animal. There's no programming. It's all built in. So right there…

Actually, Jim, the other thing I just thought of too is, in my comments I said SG&A, but that actually includes R&D as well, [indiscernible] mouthful to say SG&A and R&D, but that maybe another part of it as well.

Okay. I also wanted to ask just regarding the balance sheet. I know over the last 12 to 15 months, maybe even longer, it's certainly been something to focus on and just wondering how you're thinking about that, what your sort of goals are? Are you comfortable where the balance sheet is right now and looking where your business is trending and looking at your guidance for 2018, obviously leverage will come down just on as EBITDA improves? So are you sort of comfortable where it is right now and just going to try to ride that trend with EBITDA? And then also if you could update us on TTRC and what you're thinking about that asset up in Canada, how that's going? I know at one point in time we were thinking about a potential sale, just update us on the balance sheet goals, I guess. Thanks.

Jim, why don't you take the balance sheet part, and then I'll jump in on TTRC after that?

Well, first off, as it relates to the balance sheet, it's very important and I've talked about the working capital focus. As it relates to our debt, we are looking at different alternatives there, which we shared with the board. But as you said, with EBITDA improving that's a good thing. And our working capital management will continue, we'll focus on that and look at as we go into 2018.

From an operational perspective, Joe, we have made investments in inventory, which obviously includes AR, as well as sales have increased this year. My goals for 2018 with the team are that, I really don't expect inventory levels to continue to increase, meaning, we've already made those strategic investments that are needed to have the right inventory in the right place, and I'm clearly not looking for the team to be increasing inventory levels anywhere. We may have to reposition some inventory on where we think sales are going differently next year, depending on the mix, as we had talked earlier with Stephen's question. But I definitely am not releasing the checkbook to grow inventory in 2018, like we did in 2017. Now, I'm going to jump to TTRC. If you had a follow-up question on balance sheet, go ahead.

No. I was just going to actually remind you about that or maybe – yes, TTRC, if you could provide an update there? Thanks.

TTRC, the first thing I want to say on that is our team did a great job in handling the situation. Everybody is safe, they handled it very, very well, very conscientious, followed protocol. The first responders did a great job with the situation. And so we haven't had to deal with any injuries, we haven't had to deal with any environmental situations, anything that could go down a very serious, difficult, challenging path. So that part again, lot of credit goes to our team and the first responders to handle that situation. Where we are at now, things are progressing well with the discussions with – the first part is with our customers up there, we have contracts that we need to address for the situation. Those discussions have all taken place and been handled well. I can't say a lot about where things sit with the insurance company, as you're working through the claim process. But I am comfortable to say today, Joe, that that process is going well. The discussions with the insurance company, they understand the situation, the importance of getting the operation up and running, so that we can take care of our customers up there. They've been very respective of the importance of timing. Our team is very confident in a couple of things. One, what they have learned about the situation, meaning that there is not user error involved. They're very confident with how their team was operating the unit and very comfortable that we will get a good understanding of the situation and it's something that we will fully be able to rectify and get the business up and running successfully. So they are very confident about that. So I would say the best way to characterize it, we've – sensitive event has taken place, we haven't been thrown any curve balls, haven't been thrown any kind of nasty, ugly situations we have to deal with. We're just going through the process, working with the insurance company and the adjusters, and kind of having those discussions. But again, I want to reiterate the team is very confident that the business will be up and running and they will get to that point. It's just we can't adhere to the timing on it yet till you get the insurance claim and you get everything settled, and so I'm not able to – on today's call to give you really a guidepost as to when we'll have that officially up and running. But again, they're confidence levels is extremely high that we'll get to that point.

Okay. I also wanted to ask a question on just the consumer side of the business. I know this is like non-core sort of type of a business. I think it's a large part of it is small trucks in Brazil, if I recall. But that seems to be trending really well. The gross margins have been standing well, so a little bit – every little bit counts. I'm just wondering sort of how you're looking at the trend for the first three months of this year or three quarters this year and how you're thinking about it going into 2018 regarding sort of revenue growth and gross margins?

The consumer basket for us catches a lot of different areas, and like you said, a big component of it is the truck business down there in San Paolo. I also look at it a little bit differently as we moved into the future, 2018 and beyond is that – I think we got some good potential there to continue getting into other rubber-related products. So at this point in both North America and South America, we sell often mixed rubber. So if you could imagine in the tire plant, one of your most important assets or most expensive assets is going to be the front-end processing and mixing of that rubber. There is a lot of companies out there that do not make the investment in these expensive Banbury units, because they'll just purchase the rubber from somebody that can do a forum. And so we're seeing opportunities to mix and process more rubber for other companies that are in any type of rubber-based industry. We're also expanding the business, because we have all this mixing capability, expanding into other rubber related products that are kind of mat, farm-related, horse, cattle type products that really do have good margins associated with them. Looking to expand our small ATV tire business, again because we have the mixing capability, we have the ability to do it. So I look at it as kind of a sleeper for us to grow. Now, it may not be big revenue dollars. But as you said, it's going to be every dollar counts and these products that we do produce in that consumer area, generally speaking, have good margin associated with them. So I signed a team that is really for the – probably the first time in a long time, truly going to be looking at some of these opportunities further, and hopefully will be able to capitalize on them, as we move, not just in 2018, but definitely beyond into the future.

Okay. And then just lastly, I wanted to ask, similar to Steve's question regarding mix at the ag segment. Just wondering where we are in terms of mix, constructs – earthmoving construction, the gross margins, unlike ag, gross margins have expanded. I don't think maybe mix is as big of a deal, except when you're talking about maybe the large mining products. But if you could talk about, has mix been a positive the last quarter or so, and sort of where that trend is going?

In certain parts of our business, yes, that mix has been a positive. In the undercarriage business, we've seen certain parts of the world where the heavy earthmoving business is doing well and gaining steam that helps us down in Australia as well. Their margins have seen a good increase this year, good improvement this year from last year's levels, primarily due to the heavy mining industry that's obviously big down there. As you move into the tire part of the business, Joe, I mean we have not seen a big mix shift with that product. We're still more heavily focused on the construction and light earthmoving, not necessarily the heavy mining, hasn't been a focus of our business on the tire side. So kind of depends which product you are talking about, in answering your mix question, but I would say, definitely the mix trend in certain parts of the world and with certain products that we produce has created a positive in that segment.

Okay, thanks a lot. Appreciate it.

You bet. Thanks Joe.

The next question comes from Larry De Maria of William Blair.

Sorry if I missed this earlier, obviously the 2018 outlook, which is fundamentally encouraging? Can you give us the base case for 2017 or the fourth quarter, so that we can put that into perspective?

Jim, I don't know if you happen to have any comment on that in front of you. I don't have that information in front of me right now, Larry.

Okay. This obviously we're going to grow of off this year. But I mean the fourth quarter, maybe headwinds, tailwinds going into the fourth quarter from the third quarter, just so we can kind of calibrate it.

Yes, I think the fourth quarter is looking to be fairly consistent where we've, been the first few quarters of this year. You do have obviously some seasonality in the fourth quarter with holidays and plant shutdowns. We have seen raw material stabilize in the third quarter, and would expect that trend to continue in the fourth quarter. Pricing levels – price to cost levels, I would expect to be fairly consistent with Q4. To my knowledge, I don't see any significant deviations in SG&A either, absent any type of legal costs or something like that that kind of can spring up. But as far as the structure of the business or what we've been talking about with Oracle implementation, there's not going to be any significant deviations in the SG&A base. So I think to answer your question, I think things remain fairly consistent with what we've seen in the first few parts of the quarter, or first few quarters of this year and don't really anticipate any significant deviations from them.

Okay. Thanks. And then on – for next year with the guidance, is it safe to assume we'll have ag outpacing the other segments, and specifically in Brazil how are you thinking about Brazil, because obviously we had a strong first half generally with the market in Brazil, and then obviously things have softened out. So curious what you're thinking about Brazil for next year and if you have wheels in place there as well.

Yes. With Brazil, clearly they had a really good 2017. So you are going to have some stronger comps moving into 2018. You're starting to see the OEM business shift a little bit, some of the recent announcements and I would agree with that as well for the impact to us. We do believe the replacement business in Brazil will continue to be strong, however. The government is going to continue to support the farm sector down there. With all the economic and political uncertainties, the last thing that Brazil can afford to do at this moment is do anything to slow down their farm sector. So I don't think you're going to experience any significant disruptions where the government pulls the plug and really sends things crooked. But you are going to be facing obviously some tougher comps and any other – some inventory questions that are going to need to be addressed in 2018. For us and our business in particular in Latin America, we're also starting to find some good opportunities with exporting. Argentina with their new regime has opened up. I don't want to say they've opened up the borders. That's a little too far of a statement, but they've made their borders more open and that's been a benefit to us. Clearly it's still not a free-based economy, but with our products, our good brand name, it's something – our products are definitely desired across the border there in Argentina, coming out of Brazil. We continue to see Colombia and some of the other ag-based economies there as good areas for us to export, depending how you treat Mexico if you call it, South America or North America, it depends who you ask that question. We also see some opportunities coming out of South America, import into Mexico. We've expanded our reach in Mexico and again believe with the strong brand name that we have and the good distribution channel that that should also pay off for us in 2018 with some growth in sales.

Okay. So do you have – based on your guidance for next year, your initial outlook growth in Latam, and also will you have your wheels in place down there?

On the wheel side, so Latam, again we're still finalizing everything for 2018. But with all those factors for Latam, I do see – still see it as a market that will grow in 2018. As far as the wheel business goes, no, we do not have that currently in our projections for 2018, that's something we're continuing to look at. And we'll continue to evaluate when the right time is there to make the investment and when we believe we'll be able to get a good return on it. So we're being – as we've talked about previously, we're being prudent with our capital investments and that's an area where we have the equipment ready. We certainly believe that there is merit to having a wheel business in Latin America, but at the same time we know we're not looking just to run down there to do it for the sake of saying we've done it. And so when we look at the current projections right now as we sit here today for 2018, we have not included any expectations for a Brazilian wheel business adding incremental revenue to our business. Now could it happen? Yes, that's still to be determined, but sitting here today we've not included that.

Okay. [Indiscernible] impression would have that maybe by end of the year. And then finally one last question, a follow-up on your price comments. I just wanted to clarify. Is there increased competition in the market that's pressuring things or this is really going back to competitive price next year, and now you're trying to reset at better prices and drive efficiencies to capture more in that, or is there increased competition into your incumbent position?

No, really what we did for 2017 was internally driven. The world's always been a competitive place, so there's not a dynamic that shifted that caused this. I'm going to point back to kind of summer of last year where we really looked strategically at where we thought we could make some decisions that would help the company and this was an area that we believed by really doing a thorough analysis of our pricing, specifically in North America, more so than other places, but really – we really locked down for a few months and what we concluded is that if we strategically price some products. And again, this wasn't across the Board. This was intended to growing some of our weaker spots and lease our stronger areas alone and it's been effective. I mean, we've done a good job with that. And so where I see us being able to get some relief moving forward isn't driven necessarily by the markets, it's really driven by us pulling back on some of those strategic pricing decisions and still believing that we can keep the volume that we have in place. Obviously, in certain areas when you're making these decisions you might overshoot on some of your pricing decisions that you made and I think we're fine-tuning where we can correct it and get back a little bit of margin.

Okay, understood. Thank you.

And next, we will take a follow-up question from Stephen Volkmann.

Hey, guys. Paul, I think you mentioned that rubber costs like – what was it $10 million in the first quarter, $9 million in the second quarter. Do we have the third quarter number for that?

Jim, do you have that specifically? I think I just referenced it's been stabilized. I don't know if there is a specific...

Yes to your point, it's stabilized rather. We haven't calculated on the same rationale as we did in first quarter. But as you said, it's come down. I mean, it went up 30%, 40% in those first and second quarter, and it's come back down to where it was in December. So we haven't calculated that.

It didn't have a material impact, so we haven't really pulled that number out and isolated it, like we did in the first two quarters.

Sorry, just so I understand, does that mean it was somewhere close to zero, or does that mean it's somewhere close to $10 million, which has been the run rate?

No it's neutral. Maybe it was $1 million, a small enough number that it wasn't material. So I would call it basically neutral concluded.

And then what are you thinking with this Oracle thing, assuming like, I don't know, 2019 or 2020 whenever it kind of gets to normalcy on this. Have you thought about sort of the annual run rate or cost saves associated with this project?

Yes we did – I mean first off, I wonder if the Oracle guys will like it, you called it an Oracle thing.

It's a technical term I know.

Actually you might show up in their next ad campaign with that company.

Yes.

Actually we did, we did a thorough analysis, Jim and his team that we put in front of the board that did show a significant cost savings by doing this. And again, this isn't – we're not changing how our plants operate. You've been following us Steve, you know us, we grew in a lot of different areas in a fairly short period of time. So we've been operating from a back office from a systems perspective very decentralized and we've been effective in running the business that way, but it's just inefficient. So by going to a cloud-based system – luckily, by delaying this a little bit, we move beyond having to do this on premise and make all those significant upfront investments in mainframes and servers, and then you have to deal with all the customization of the software, what we're doing is reaching up into the cloud, we're pulling the software off the shelf and we're going to use it to run our back office. So it's not going to be a risk to our plants and our operations, but it's going to – it's going to allow us to become less decentralized and be able to come more centralized in certain areas, which is going to drive down cost. So the overall software itself will ultimately drive down costs, because you'll be able to remove the servers and remove some of these inherent legacy ERP costs that we have, plus we have a lot of disparate systems, you got a lot of nickel and dime type costs that just add up. So we'll be able to consolidate that, use a cloud-based system and overall, it's going to make the company more efficient, but it's also going to drive a significant cost saving. So that is built into the – so even the conservative budget or plan that we gave to the board, I believe will do better, but it was still a pretty nice looking number.

Maybe another way to ask it is that upside as we go forward or is that sort of the way that you get to your SG&A below 10% type of bogey?

Yes, to answer your question, it's a way clearly on the out years to get below the 10% bogey. I think there will be some savings towards the end of 2018. Again, as I mentioned, in the cloud you're not dealing with programming, you're not dealing with AS-400, you're not dealing with the decentralization of having IT at every site. We did the calculation as Paul said and one simple metric is payback it's less than a year and that was conservative. And as I mentioned, the benchmarking out there, cloud usually it can be up to 50% savings over a five-year period or versus on premise. Again this is studies by people smarter than me, but that's just a study, we're going to have to put our actions in place and deliver what we plan on doing.

Thank you. End of Q&A

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

I certainly appreciative everybody's time and interest today and look forward to talking to you again on the next call. Have a good day. Thank you.

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