Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Second Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and we will open the floor for your questions and comments after the presentation. [Operator Instructions] It's now my pleasure to turn the floor over to Todd Shoot, Senior Vice President, Investor Relations and Treasurer for Titan. Mr. Shoot, the floor is yours.

Thank you. Brandon. Good morning and welcome everyone to our second quarter 2019 earnings conference call. On the call with me today, I am pleased to have our President and CEO, Paul Reitz; David Martin, Senior Vice President and CFO; and Maurice Taylor, Chairman of Titan's Board of Directors. Mr. Taylor will be available to respond to any questions concerning the company's update on ITM strategic evaluation. I will begin with a reminder that the results we are about to review were presented in the earnings release issued this morning, along with our Form 10-Q, which was also filed with the Securities and Exchange Commission this morning. As a reminder, this morning, 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 those. 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 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 the reconciliation of the non-GAAP measures to the most comparable GAAP measures. The earnings release is available on the company's website within the Investor Relations section under News and 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.

Thanks, Todd. Good morning, everyone and appreciate you listening to our call. Unfortunately, our second quarter was a continuation of the difficulties we've seen from the global trade battles and more specifically this quarter from the poor conditions in the U.S. farming sector. This was a tough and disappointing quarter as we experienced decreases in operating income in all of our businesses. The downturn in ag conditions particularly accelerated as we got into late May and definitely hard into June. This reverse the moderate improvements that we had seen in March and had noted on our first quarter call. I spent a bit of time driving throughout the Midwest over the past month and it's really shocking what the fields look like out there. In a quarter mile, you'll see a field with wheat that wasn't even attempted to be planted. Next to it, you'll see a field that is sulking corn already and then followed by a quarter mile down the road, you'll see field with corn is not even knee high. It's been brutal current demand, but it has driven corn prices above $4 and soybean prices into the $9 range. We entered this year believing that the ag market had pent-up demand and higher horsepower equipment. That's our sweet spot. That was sitting there, waiting to be released this year. And these higher prices should bear well for that to happen in the not too distant future. Looking at Titan's business, we saw a 5% decrease in revenues on a constant currency basis that was driven by a 6.5% decrease in ag volumes. A big reason for that was our North American tire aftermarket business that experienced a significant drop off in demand in the back half of Q2, as demand really stalled along with the deteriorating…

Thanks, Paul and good morning to everyone on the call. As usual, I'll go through some of the most important items for the second quarter performance, and I'll discuss some key issues that we're managing as we progressed over the second half of the year, particularly how we're going to aggressively manage cash flow for the future stability of the company. Net sales in the second quarter of 2019 were $391 million, representing a decline of almost 9%. On a constant currency basis, however, revenues would have been down roughly $22 million from the second quarter of 2018 or 5%. The currency impact of $16.5 million or 3.8% was the most dramatic in Europe. Historically this quarter related to the issues that Paul underscored in his discussion in agriculture, particularly in the US. Our ITM undercarriage business performed well once again this quarter and while we continue to see OEMs push out orders due to isolated regional inventory surpluses in Asia and Europe, coupled with what is believed to be short-term tempered demand. Our North American tire sales declined 12% from Q2 of 2018 and it was primarily isolated to the last month of the quarter, as Paul described. This was the most significant in the aftermarket. Our sales challenges always -- also came from Russia and Europe, and with continued ag market sluggishness as well. 1 bright spot was in Latin America, which is up for the quarter before negative currency impacts in the ag segment. Our sales volume on a consolidated basis was lowered by 4.3% from last year with the largest declines being in North American tire, Russia and Europe due to the market headwinds in Ag. Overall, we saw a slight decline in sales due to price and mix in the quarter, resulting principally from the…

[Operator Instructions] Our first question comes from Chirag Patel with Jefferies.

I just want to get into a little bit of the guidance for the topline there, the revenue guide of flat to down 3%. The way I was looking at this is that kind of implies the idea of the back-end being either up by 1% on the low end of the guide or about 12% on the high end. Can you just walk me through the cadence of that and by segment as well, if you could, just to kind of get a better sense for where you're seeing that growth and where you're seeing that opportunity?

Yes. So I think on the high end, we expect to see a little bit at the similar levels to what we saw in terms of volume -- sales volume in the first half of the year. That does represent a bit of an uptick from what we saw last year, but particularly as a comparability to Q4, we had pretty low sales volume than Q4 last year. And as we saw that things got -- kept getting pushed out. I would say that, overall, we're expecting to see a little bit of improvement in AG particularly as we do -- go through Q4 construction and earthmoving/construction should be fairly close to what we -- in terms of volume that we saw in the first half as well. So -- but as far as the range of guidance, we want to be very careful on the ag side. And so any downside levels that we have built into our forecast really relates to that and not construction.

Okay. And then…

Consumers are still small, it doesn't really play a big part in it.

Right, right. How much of that guide for that flat to down 3%? What was the price mix kind of baked into that piece of the pie?

Well, we expect pricing to be fairly stable. Mix can get -- we do expect a bit of a better mix, and when I say that, the impact of price and all that has a pretty good impact on our margin, right. So I think the margins will be dramatically better because of the one-off or the anomalies that we saw in production in the first half are largely behind us. So with steady pricing and with no material changes in our raw material prices and our production cost, we expect to see improved margins.

So you are looking at from the gross margin standpoint, you're looking at it as being roughly flattish for the next quarter and then maybe about a little bit of an uptick into the fourth quarter, or am I think about that incorrectly?

I think in terms of margins, I would expect to be fairly -- we're certainly not seeing improved margins both quarters, but it's going to be more noticeable against what we experienced last year. We saw margins dropped around 10% last year in the fourth quarter. And I don't anticipate it dropping any significant amount this year at this point.

Just given where the raw material pricing is coming going forward?

And that's a big part of the improvement, because if you look at last year, we had elevated steel price as it still rolling through everything at this point in time last year.

Our next question comes from Larry De Maria with William Blair.

A few questions, but first on -- related to the wheel inventory build, which, as far as I understand was 90% plus OEM, just curious I understand maybe some of the build with peak of the ERP implementation, but you're sick of the growth. So did you guys build inventory on spec anticipating growth? Because couldn't you have visibility from the OEMs and exactly what you should be building? So just trying to understand why that happened?

We were building on to spec, we build the order in the wheel business, Larry. What happened there is that you have a lead time that requires you to start bringing in the raw materials for the specific deals that are required for the various components in there. So it didn't have any to do with spec, it had to do with the expectations that we and many others in the industry believed we're going to be pretty favorable as we started this year and then you combined it. As we noted with the ERP implementation, where we are carrying some extra cushion, as we worked our navigate our way through that implementation to make sure that we weren't going to miss any orders and that is just kind of married itself up there with the changes in the steel prices. So it was up kind of a perfect storm of various events that came together and impacted what has always been a very stable business for us through many years.

Therefore I assume OEM changes there, production builds and orders would you guys through the quarter which affected that, is that right. And how are the second half builds, are they stable changing positive negative, given that obviously there's a lot going on in the market and potential for upside later in the year?

Right. I'd say, right now it's stable. And as we move into the back half of the year, kind of looking to looking at the market very carefully to see some -- while we believe and again what many others believe are some potential favorable conditions that would come from the higher commodity prices.

Okay. OEMs haven't changed anything yet, I guess? And as it relates to the ITM business, that's been on kind of hold now. We're moving into a potential cyclical peak for probably some of their end markets, especially in Europe and even here in the US maybe the exception of mining, but how they also -- therefore with the window kind of closed, given the Brexit uncertainty et cetera. That window maybe closed for a while now. Are you guys prepared to keep this for a long period of time, or how do we think about really the timing of monetizing ITM and are we definitely going to monetize this in the relative near to medium term future?

Yeah, I mean what I'll say, and I'll turn it over to Morry to talk on behalf of the board, I'll say as a business, we're very pleased with how tight, or [indiscernible] has performed as part of tightened through the years, and we fully believe it will continue on a good path. I'll turn the floor over to Morry now to talk on behalf of the board in the postponement.

Thanks, Paul. Larry. the situation I came with you, just go back to the '16 -- in the end of '16 and we were putting it out at that time. And at that time, everybody remembers that there was concern of liquidity referenced the bond back then. And what happened was Goldman was the one that was handling that sale and they basically gave a report to the Board that their recommendation was, you should resolve this, you're better off the way you do with your bonds and hold this for a couple of years because the orders and what they were coming out with new and if you remember back down ITM was real big into OE sales. Your aftermarket they had not really attempted to go strong, so what happened then those 2016 as they were approved at various mines around the world, the larger crawlers and shovels and everything else and the product was outstanding. So what's happened is, they have increased their sales, they've increased their EBITDA, so when the Board met and looked at putting a back-out because the future looks so good, the situation was that's where we decided to go and the range they have -- the Board was given a range and the minimum was around the 300 and it went up. Now what happened is like, that ITM rules and we were going on the AIM, which is all of different than what's going on in American markets, well what transpired was there was a delay that was fast in getting all the -- setting it up as the stand-alone and everything else and that 30-day delay, which we were trying to get done by before the June 1, so that we could go off and then make the end of…

So it's not put often definitely, we just have to get through this kind of periods now. Okay, I understand. Morry, while I have you and then I'll jump off and obviously their representing the Board. Is the board considering any other kind of more drastic actions such as I don't know selling company, hiring somebody has come in and help turn around the company because obviously the performance hasn't been that great. Not all your fault, the market there hasn't been great. But I think more drastic things, the board is considering at this point given where the stock prices to get it going.

Well, if you look over the history, and I've been with it since over the history, the situation is, it's a cyclical business, but the investments in what we bought over all the years, Paul and the team are basically taking a different look at every time and if someone who come with -- there is older public business. So there is no question that if someone come, they will probably look at it. In fact if you look to our current president, he's basically taken the trade we have watched most of your life, you watch the American industry get the hell kicked out of it, Larry, and so, he said, enough was enough and it is true and what happen people forget it was back in '11. Titan had someone that stepped up and sued the Chinese, they were dumping tires in here and we won both including some 30% to 200%. So it was little 25% that present along is the only mean enough and they got everybody's attention, but a year ago -- but as soon as that went into the fact that the Indians they opened 2 factories over there, brand new for Europe and the US that some of these players though. And so the Indians where you can't ship nothing to that, their strategy of 40% or more. So what's happened is, I think that the president's already let everybody notified [indiscernible] everybody else created, Democrats and Republicans and so I think in the future, this business a little bit. There is only two large manufacturing facilities in the US that make large farm and OPI there's more, but basically farm is still, that's players down. So, if all the rest of the world players are play in this market, we are going…

Our next question comes from Joseph Mondillo with Sidoti & Company.

I just wanted to follow up on the wheel one of the major issues to the quarter was the higher cost of goods sold related to the inventory or the revenue that you sold in the wheels in the quarter. I'm just curious I understand the lag in steel prices and how you build up inventory early in the year and you don't realize the current spot prices, which are much lower then compared to when you're buying that inventory and how that works? My sort of question is in May when you were a month into the quarter already how are we surprised today of this, I would think, how did you guys not know that this is going to be an issue in the second quarter?

Well, I guess the way I look at it, we looked at, we knew we had elevated levels, and we kind of -- I kind of consider that we have had additional sales in June and I think this will be spread out over time. It's really it is all came to roost in 1 quarter. We also thought with -- there would be a better blending, if you will, in terms of current production versus old production. So [indiscernible] potential for hang, but it really wasn't necessarily going to all get one?

All right, and then, so that on the segment levels price/mix missed my estimates. Is that weakness, especially in the ag segment price/mix, is that related to the wheels?

Because we also because of steel prices being down, our prices took a hit because of surcharges being down.

All right. And then, so that brings me to, I guess pricing. If steel prices continue to -- you're talking about how gross margins are going to be better in the back half or maybe in the fourth quarter with steel prices falling, but doesn't your pricing get reset, so that you really don't make up the higher steel prices from last year, the way your business is positioned. You have to reset your pricing with the OEs. And so, when your pricing be in line with the lower steel prices, so you won't recognize that?

It's closer to a certain extent, yes. But in our projections, we are not projecting margins at the same level that we saw a year ago.

Okay, All right. Okay. So, and then I wanted to ask how much was your ag aftermarket down in the first half of the year, percentage wise?

I don't have that exactly. We have some business, but I want to say that I think digits down in the second quarter. I don't have first half. I would --

Okay.

I think aftermarket was pretty on par in the first quarter. So this time actually this quarter anyway.

All right. And, how are you thinking about the back half of the year, do you think, I mean I wouldn't expect you make up all that sort of aftermarket but because some of the farmers, there was a late spring and then on top of that, there was certain locations where flooding caused the late spring and prevented farmers to get out there until maybe now that the water drying up, so do you anticipate now that there more sort of equipment usage that you'll make up a little bit of what you lost in terms of aftermarket in the back half of the year?

Yes, Joe. We do believe that will happen. We've been working very closely with our dealer network, which we certainly know is the strongest in the industry. And so we haven't lost position with our dealers. We have certainly kept close to home and what we're hearing is that farmers with all the concerns they're seeing looking out there window into the fields, business just dried up and so after they get done working through the cycle, it's kind of a question of timing, when you get the harvest outlook, I think right now we're all still trying to figure out exactly what that means like I noted in my comments, when you drive around you just see so many different scenarios, it's really tough to pinpoint exactly what their harvest is going to be right now. You combine that with the government and their talk on a different form of programs, they'll have to assist the farmers, then of course the insurance that will kick in. So what we believe is those scenarios start to become clearer to the end users, their pent-up demand that has to get filled in the aftermarket. As David said, were down in that mid-teen range for aftermarket, it's still the show, they got to take care of business and it will happen, it's just has not been happening in the back half of Q2 dramatically.

Okay. And I would imagine, looking at the first half of 2020, I know you're not going to put out guidance or anything, but I would imagine it's safe to say, if we are even close to sort of a normal year in terms of weather that the aftermarket and maybe even probably even on the OE, but certainly on the aftermarket side of the business, you should have a very easy comp. Would you agree with that?

Yes, definitely.

All right. And then just go and sort of back to pricing. I understand you're not going to make up much pricing or sort of what you lost in terms of wheels business in terms of fuel prices, but what are you seeing within synthetic and natural rubber, which is your main raw materials for tires?

Both of those are down relative to where we were at this time last year and actually down from the first quarter. Synthetic obviously is based on oil prices primarily sold at and fluctuate a little bit more, but natural rubber is down as well. I would say most of our raw materials are down, steel is down as well with the exception of carbon black.

Okay. And sort of any sort of degree that you can sort of help us understand synthetic and natural rubber? How much are they down, roughly?

I don't have it off the top my head, but I can get that to you.

Okay. And so if aftermarket does, the revenue sort of starts to improve, and you should get a good spread on the price cost situation in terms of aftermarket tires with volume and that spread being nice, that should be certainly a gross margin benefit in the back half of the year?

Yeah, that's correct and that's what we've built into the outlook for the second half of the year that there is a combination of improvements in the market and then the pricing in relation to our costs and again. So, you highlighted it correctly about there is a direct pass-throughs, but we're talking about as we had a higher than normal production costs that will normalize and we'll get back to a normal relationship between our production costs and pricing. And when I say production cost, obviously I include raw materials in that mix as well. So, I agree with what you've stated.

Okay. And then I wanted to just follow-up on the issues in the earthmoving/construction business. I thought it was -- I thought those issues in the first quarter were related to the mining business, but I guess is on the construction side regardless, maybe you can clear that up and then also, I'm really just want curious of sort of what your sort of update there is, I mean you made it seem like the delays are continuing, but do you think we'll actually see them in the third quarter, potentially on the back half of the year or is it sort of an indefinite delay?

Right. Well, on the first part of it, yes, it was in relation to construction and we brought in shortfalls, and it's as David mentioned in his comments I mean it's specific to certain regions and customers, it's not a widespread issue, but it was in that part of the business that we did see the shortfalls. Mining has grown and continues to grow, especially our mining aftermarket business and so that part of again we combine them into 1 segment, as you know but when you bifurcate in those 2 categories, it's construction that did cause the shortfall. We've been talking about the delay of orders. The way we've approached our outlook for this year is that, we're pushing those orders back into 2020 and kind of looking at 2019 as still too much uncertainty to really include that in our estimates for this year. So we, again I think we've talked about that now for the last 2 quarters. We don't have enough visibility to say that we see those coming back in there in Q3 or Q4, to answer your question. So our outlook basically looks at that is a pushing into 2010.

Okay. Last question from me, I just wanted to sort of an update on the reorganization, restructuring or however you sort of whatever terminology you sort of use for the improving of the efficiency in the business. You mentioned in your prepared commentary that includes reconciling the footprint of the company and square footage. Where are we within this overall strategy? It seems like it's been sort of an ongoing living, breathing, types of thing where you don't necessarily have a set strategy or maybe you do. I'm not really certain, but could you just provide an update on sort of the overall strategy -- growth strategy of the company?

Well, it's been living and breathing for a while, because it's been part of our strategy. We've closed a major facility in Italy. We've closed locations in Australia. We sold off 2 branches in Australia this year already. We've been looking at rightsizing that footprint for a while. So the reason why we're talking about it is because we've been doing it. In relation to the comment that I made today, is we're looking more specifically at what I would say going beyond just lower hanging fruit that we've already addressed. And so those discussions involve the board. They involve significant changes to how we may look at our business and so I would say to update you on where we stand with that clearly by talking about on the call today and making it part of the strategy that we're rolling out that means we are having ongoing discussions with the board. And as Morry said, we have a strong board that certainly will gear us in the right direction. So when I say, it goes to the board, that means they're going to look at all the facts and all the information and collectively, we will make the best decision for the shareholders. And so, yes, so I want to make sure you understand that. I mean we've been talking about, we've been doing it, and we've been taking the proper action. But now we're going to that next level of consideration and that's not impossible.

Okay. Over the last -- just a follow-up real quick over the last year and a half totally, I agree that SG&A -- certainly looking at the SG&A relative to the topline, it's been reflected in what you've been doing. Is there any point in time where we should expect that some -- many companies sort of do coming out and say, we're going to be doing this and this, restructuring plan and we could see this kind of savings. Is that a possibility down the line just to see what the potential is and quantify it for us? Or are you sort of handling this on a quarter-to-quarter basis and you'll continue to improve and maybe we won't necessarily hear any quantified numbers? Just wondering how you're directing that to the Street?

Well, there is probably a few parts of that answer. And the first off, the first part of that Morry did address in his comments where he referenced the strategic reviews that are ongoing with the board and I think we're having so. As far as bringing in the outsize look and kind of putting out a public announcement, which is, if you noted companies respond, I think Morry addressed that in his comments. So I won't comment on that any further, but for us, different than other companies is that many of our plants make different distinctive products. So the decisions to close the plant are not consolidation plants or you can just close the facility and manufacture everything elsewhere and that's what we've already tackled in the past. So now, when we talk about making changes to our footprint, it involves us potentially making changes to our strategy. And so we're different than other companies in that aspect and so it's nothing we can do. Close the facility in 1 location and manufacture it elsewhere and Just keep on going down the road, like nothing happens. So that's why it does involve the board and really a higher level discussion to address that. As far as that is quantified and put it out there in the market again as soon as we get that through the board, we will. And I could really don't think we can add much more than what we've said, Dave and I both commented about the what we believe the range of value of selling non-core assets represents. I did mention that I think we can go beyond that which I do, but we are actively pursuing all those avenues and there is a level of discussion taking place at many different facets, and we know want [indiscernible] we'll take care of the current cycle, we will work very diligently to protect the balance sheet and at the same time, we'll also make sure that we're making the proper investment for the future and building the right product portfolio on a global basis, both our leadership position. So we're addressing it from all the angles, but we'll continue to put information out there, I think as quickly as we can and I think today is a good job of it.

I'm sorry. Go ahead, sir.

No. I let you know to close it. I was just going to say the same thing.

All right. Well this concludes our question-and-answer session. And I would like to turn it back over to Mr. Reitz for any closing remarks.

I certainly appreciate everybody's time and participation in today's call, and we will talk to you again at the end of the third quarter. Thank you.

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