Good morning, ladies and gentlemen, and welcome to the Titan International Inc. Fourth Quarter 2019 Earnings Conference Call. At this time, all participants have been on placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. [Operator Instructions] It is 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, Andrew. Good morning, and welcome, everyone, to our fourth quarter 2019 earnings call. On the call with me today, I have Titan’s President and CEO, Paul Reitz; and David Martin, Senior Vice President and CFO. I will begin with a reminder that the results we are about to review were presented in the earnings release issued this morning, along with our Form 10-K, which was also filed with the Securities and Exchange Commission this morning. As a reminder, during the 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, including 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 Form 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. 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, and 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, and appreciate you joining our call. 2019 was certainly a challenging year for Titan and our industry. Looking back a year ago, we viewed 2019 as a year of continuing growth, coming off of a really strong 2018 that had our sales increased 9% to $1.6 billion, with adjusted EBITDA gain of 64% to $119 million. Instead of the further gains we expected and prepared for, 2019 brought uncertainty and volatility with the China-U.S. trade war; North America farming concerns driven by weather; Brexit; Trump tariff battles; a crazy U.S. steel market; and then all of that spilling over in Q4, when OEMs produced well below retail sales levels. That list wasn't meant to sound like Billy Joel's song, We Didn't Start the Fire, but merely a reflection of the realities of 2019. These compounding matters unfortunately have heavily impacted our financial results where we encountered a challenging pricing and volume environment in nearly all aspects of our business, along with the issues we had noted in Q3 related to our North America steel purchasing and cost. Our fourth quarter is a period that normally has maintenance shutdowns and holidays. And then when combined with the falloff at the OEMs, it triggered a Q4 sales decline of 17% to $302 million. Again, a prime factor driving the sales decline was the major OEMs destocking their inventory channels in both large ag and construction. Looking outside our OEM business, I want to note that our undercarriage aftermarket sales that are primarily focused on mining and our North American tire aftermarket sales were at a much better level than what we experienced with the OEMs. With overall Q4 volumes down 19%, we reached a level of this period where our plant efficiencies and overall cost absorption took a…

Thanks, Paul, and good morning. This morning, I'll go through some of the more important items from the fourth quarter 2019 performance and discuss current and ongoing actions to manage our financial position, which includes working capital management, but also the noncore asset sales. As I noted – as noted, there was – this was one of the most challenging quarters in some time for the business and with a strong decline in customer demand into what can only be described as a major destocking event for the industry for both ag and construction. Net sales for the fourth quarter of 2019 were $302 million, representing a $62 million decline of 17% from the prior year. The first part of the quarter was much more reasonable, but the last two months sales were among the lowest we've seen in the last five years, with December sales being the lowest since December of 2015. On a constant currency basis, revenues would have been down 15% from the fourth quarter of 2018 or $55 million. The negative currency impact of $6 million or 1.8% came primarily from Europe and Latin America. While ag sales lagged the prior year by 6.6%, the biggest impact on sales this quarter was in our earthmoving/construction segment, where sales declined by $42 million from last year. The drivers were all around the globe and all the business units, but the largest impact was felt in ITM's undercarriage business, with a decline of $21 million year-over-year in the EMC segment. The remaining declines were primarily in North America, the UK and Australia. The consumer segment experienced a decline of nearly $10 million in the quarter, reflecting the continued sluggishness in the utility truck sector – truck tire sector in Latin America along with North America. ITM's construction sales…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joseph Mondillo of Sidoti & Company. Please go ahead.

Hi, guys. Good morning.

Good morning.

Hi, Joe.

Just a question on the guidance and sort of the expectation of flat revenue. I'm just wondering how you come to that conclusion, given the visibility that you have. And I know you don't have tremendous visibility. But one thing that we do know is that the OE production rates are going to be down anywhere from 5% to 15%. So if OE is down so much, how are you going to achieve flat revenue?

Well, I think, Joe, how we get to flat revenue, there's – is through a multitude of different approaches. One, I mean, the aftermarket business, as I mentioned in some of my comments, is doing well. The replacement market, farmers are continuing to farm, operators are continuing to operate. And we have a strong aftermarket business that supports the sales that we projected for 2020. I would also say, when you look at the OEM forecast for the year, I think it's a little bit aggressive to characterize it that they're saying – down 5% to 15%. I think in certain geographies, they're saying it's going to be relatively flat. And I would say looking at the actions they took in the back half of Q4, really producing well under retail sales levels, that there are enough triggers in place that the market really is right to uptick beyond what they're forecasting now. And I think the comments from the OEMs would support that. And now they're cautious with what they're saying. But you look at the inventory channels, they're pretty clean. Dealer sentiments improving, farmer sentiments improving. And I know in today's world, we're extrapolating all the bad things that are going on and assuming that that's just going to continue. But I definitely think, as we get into the spring season, you're going to see a lot more planting going on in the U.S. with the first phase of the China deal signed. And I definitely think there's the opportunity to see the numbers uptick beyond again, kind of the flat to down 5% that they're projecting to get us back into that, at least a flat level, if not possibly into a little bit of growth in the back half of the year.

Okay. And can you remind us what the OE versus aftermarket is, the breakout amongst your – the two major segments, ag and earthmoving and construction?

Well, I can answer it from my perspective. It may be a little bit different than what Dave and Todd have kind of used to answer it. So if I’m off a little bit with what you guys have said, please correct me. But anyways, I see the business this way. In tire, in the U.S., we're around 50/50 now between aftermarket and OEM. Our aftermarket strength is continuing to grow with the success of LSWs. We do see the R14 really improving our OEM volumes in 2020, especially with the way Kubota is embracing that. So if you look at the tire business, I see it generally as 50/50 in the U.S. Now if you go to South America, where we have the number one market share in the OEM businesses down there, we're tilted a little bit more heavily towards OEMs. So I call it more a 60-40 split with OEM aftermarket. In our wheel businesses, we're typically right around 90% OEM, 95% OEM in Europe. And then ITM has been continuing to develop their aftermarket channels, really successfully mining area over the last few years. And so they're around a 70-30 split between OEM and aftermarket space.

Okay. You don't have just a general – between – in the Ag segment, generalized OEs this, aftermarket is this, and the same thing with EMC?

Well, I think you described all the businesses and how they operate. Obviously, in North America, we're primarily ag. And if you think about ITM being a bigger portion of the EMC business, you have a little bit of a different mix there.

Okay. Can you tell us what's going on with your pricing strategy? In the Ag segment, pricing was up 10%. Volume's off 15%, which really was a big inflection relative to the trends that we've seen. Are you changing strategy at all with your pricing?

We're just getting more intelligent and better at doing it. We build good important products to our customers. And I think over the last five years, we've seen a stagnant – relatively stagnant ag market, where everybody is chasing and trying to protect volumes. And so what we've done a really good job with through the 80/20 initiative as we've layered on a real strong depth of market intelligence to what pricing actions are going on within really almost every corner of the market. We started that a few years ago. And so quite frankly, when you come to the aftermarket tire business in the U.S., I mean, we're really good at what we're doing. So strategically, we're building a very important product to our customer. We're pricing it accordingly. And that can be a low-volume product, it could be a high-volume product, it really just depends. And what we're doing now in 2020, now that we've kind of built the strength of that intelligence and bringing 80/20 to other parts of our organization, we're also looking at doing that with businesses that are tied directly to OEMs, so that would really be our wheel businesses when I referenced that and following the same approach. It's not just about cleaning up the portfolio. It's about strategically looking at our pricing. Where's the value in that product that we're producing for our customers? And are we getting the right price for what we're doing. And again, we are important to our customers, and we need to develop a strategy around that. It's – Joe, it's not an easy path, but I think we have the depth and the intelligence now to go do it and in more fads of our business than what we've done over the last couple of years.

Great. And just a follow-up to that. With the market off and your volumes off because of just the general market. And then you guys probably taking out some products with the 80/20 and then your pricing strategy probably adding to that, where are you on capacity utilization? And do you anticipate more footprint or capacity being opened up? And what do you do with that? Is there any sort of consolidation plans at all as a result of all of this?

I'm going to answer that simply because that's about all I can do on that one, Joe, but it's a good question. Quite frankly, our capacity utilization is too low. And it's – when I talk about the actions where we're not aligned with the Board where we just can't sit still, that's definitely an area that we're looking at, and that can be a number of different steps that, in past, we could go down. And we're looking at all of them. But I will say our utilization is too low, and we're not just going to sit back in 2020 and let it stay where it's at. And we're aligned with the Board on the actions that we're undertaking. We're not announcing it today, meaning we're just starting that path. We're already looking at things. And as soon as we can update you further on that, we will.

Okay. And last question, I just wanted to clarify sort of your comments regarding noncore asset sales. It sounds like you still have the $30 million to $50 million roughly that you're still expecting. Is that correct?

Well, we've had about $30 million of noncore asset sales, which we've used to decrease our debt. And roughly, we have another $20 million remaining.

Okay. And then regarding the underperforming assets, could you just repeat some of the metrics? I thought you said potentially sales of underperforming assets could attract $80 million to $90 million. Is that correct? And could you repeat what the underperforming businesses weighed on the 2018 results? I thought you said $20 million, but if you could repeat that.

Yes. No, absolutely. So if you look back to 2018, we did $119 million of EBITDA on $1.6 billion of sales. The underperforming businesses reduced our EBITDA by $20 million on sales of $170 million. And then if you look at the net book value of just those underperforming businesses that I included in that hit of $20 million to EBITDA, the net book value is $80 million to $90 million.

Okay.

But that's tied to the noncore assets that David's been mentioning, the $30 million to $50 million that don't impact operations. So the $30 million to $50 million is nonoperational. What I'm saying here is these are operational underperforming businesses and are being treated as such where we need to look at alternative solutions.

Great. And just a follow-up, I would assume – so if they were realizing a $20 million EBITDA loss in 2018, I would think that loss is even greater in 2019? Is that fair?

Not in all cases. We have mitigated that. In some cases, it kind of varies by each individual business unit. So what I'm trying to say is, look, our EBITDA margin was 7.4% in 2018, obviously, much better than it was in 2019. But really, that EBITDA in 2019 could have been 9.7% if we get this restructuring in place.

Okay. And just last question regarding this, are these businesses that you can – that are already set up where you can sell them today? Or are they intertwined within your facilities?

We've now structured them as such, where, in my opinion, they are not intertwined and they could be divested.

Okay. All right. I will hop back in queue. Thanks a lot.

Okay.

The next question comes from Komal Patel of Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for the time. A couple of follow-ups from us. On the point of liquidity and some of these noncore asset sales. Again, for liquidity, you said that you don't need to repatriate any of the cash given noncore asset sales and availability under the revolver. So I guess the first question is, is that up to the $50 million level that you called out that you expect for the first half? Or is it including this potential $80 million to $90 million? And I guess just the second question, more broadly is, just your confidence in getting these asset sales done. What's the risk of them taking longer or not coming to fruition that could potentially hurt or jeopardize the liquidity position?

Well, first of all, the first – in the $30 million to $50 million of asset sales, we've already done $30 million. And we have, again, like I said earlier, about another $20 million. None of it would need to be repatriated. So it's – and as far as the risk goes around it, we feel very confident about where we're headed with that. We're not expecting it to be – we do expect it to be a first half of the year. And – but if it does move a little bit, we're still okay. We managed our ABL line down to roughly $20 million, $25 million level. And we still have capacity on that line as well if we ever needed it. But at this point in time, we don't think we're going to need any cash utilization on that. So we feel like we're in an reasonable position. But as far as the – that does not include anything that Paul talked about in terms of the $80 million, $90 million related to these other underperforming assets.

Okay. Got it. Thanks.

We'd further – our position – our liquidity position would be even improving more than that.

Okay. Got it. Thank you. That's helpful clarification. And then second one, on the initiatives that you've outlined, the $37 million to $39 million. How can we think about the cadence of these benefits flowing through the year and beyond? Is it safe to assume that most of this would be pretty much back half-loaded? Or how can we kind of think about it from a quarter-to-quarter basis?

That's a good question. I would say that it would probably over Q2, Q3 and Q4 probably be fairly equal, but with the largest being the second half of the year.

Okay. Got it. And then last one for me. It seems like weather is a big differentiator this year versus last year. Can you talk about the impact that you expect weather to have for the first half of the year? Any kind of read-throughs or data points that you might be seeing early on as you kind of – we're a couple of months into the year now, but anything that you'd want to call out, particularly on the weather front or differences this year versus last year?

Just – I think we're all hoping it's a lot better than last year, and I think we believe it will. I think last year was a complete anomaly. I think what you're seeing is that the snowfall levels have moderated. So I think there's definitely less risk going into the year, and I think you're seeing that in the farmer sentiment indexes that are quite hopeful for the planting cycle for this year. So I don't want to jinx things by getting ahead of ourselves by saying that we're okay on the weather, but it's definitely looking like it will be much better than last year. And I think farmers are excited to get in the field, again, especially with that Phase 1 of the China deal in place, I think get things in the ground and there's going to be a lot of demand for it.

Understood. Thanks for the color.

Thank you.

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

Thanks. Good morning.

Good morning, Larry.

I'm just trying to think through a little bit about corona and also the destocking that obviously occurred last year and still continues now. Curious how your – first, I guess, your OEM order rates have changed, say, in the last six weeks. Has there been a noticeable change?

Yes. I think both David and I referenced that Q1, we've seen the order deck pickup with the OEMs, especially in our businesses that are tied to the OEMs, and I'm talking mainly on the Ag side and I say that. Construction has been a little bit more volatility. As they continue to destock, as you've mentioned, I think the corona impact is more severe in the construction side of the business. And that's more heavily reliant on a Chinese supply chain. The impact of corona is still yet to be determined for most companies. But I will say for Titan, our exposure to China is much, much less than many. We do have – our ITM business does have a plant there. It's a fairly small operation that does feed into other parts of our business that sell some product domestically. They, obviously, were shut down for their new year, extended that shutdown a period of time beyond that, but they've been back up and running. And there will be an impact that we experienced in Q1. But again, our exposure to China is much less than others. So I guess, we got to kind of wait and see what the read-through is on the overall construction market. But again, I think in election cycle in the U.S. and a lot of other economies around the world, you got to protect your GDP. So I don't see the construction cycle just falling off a cliff. It'd be political suicide for a lot of folks. And I think the farming sector has still got a lot of pent-up demand. I think if you look back at the end of 2018 going into 2019, that pent-up demand didn't go away. It's still there. And you layer in that the Chinese-U.S. trade situation is abating, I think especially on the farm side. Obviously, we all know what's going on with the swine flu over there in China. So I think there's positive triggers there and there's just a lot of negative ones that are in front of us today. But I think the OEMs have the ability with their retail channels now being more properly aligned with demand to see an uptick. So we're seeing – we saw a good start in our OEM business as far as the orders to the year and kind of wait to see how that plays out.

Okay. I guess maybe I would have thought that there'd be some incremental concerns over corona and the impact on the economy that would have potentially lower production. But I guess you're probably right that there is some pent-up demand out there, too, especially on the ag side. I guess, alternative to that is either you I guess you mentioned regionalization and production. Are you seeing – or is there an opportunity that you guys have to get bigger with your OEMs or even in the aftermarket channel because of your domestic production? Or is most of what's being sold and sourced at this point domestic at this point?

No. I think there's a really good opportunity there. And it's a great sales pitch for us when we walk in the door. They obviously already know it. We build good high-quality products. We've been a reliable partner to them for decades. And now you layer in the risk of having a supply chain that's connected to China and India and other far-reaching places around the world. The way Titan is set up, as I mentioned in my comments, it can be challenging from an SG&A perspective because we have a decentralized framework with heavy manufacturing that's regionally positioned around the world. When I look at what's going on with the corona, and don't mean to make light of it, but it definitely brings the reality to the forefront that there is a lot of risk in global supply chains. And a lot of our customers have been able to sit back and increase their margins and increase the risk of their supply chains and not really think about it too much. Now they got to think about it. And we are regionally positioned to be a fantastic partner to them. Wherever they're based, we can supply them with high-quality products, and we can derisk their supply chain in a fairly significant way. And that's something we're definitely going to be pushing to the forefront with all our customers in 2020. And it should be at the front of their minds already.

Yes. Just a follow-up. When you mentioned better, I guess, order rates from OEMs through the first quarter here, are you referencing large ag or small ag, specifically?

I guess I didn't really – I can't really characterize that. I think definitely for us, small ag has been strong. That is definitely part of it, Larry, to answer your question. I think large ag is better than it was in Q4. So to answer your question, clearly, I think there's an uptick in both. But for us, the small ag business has definitely been a strong source for growth for us throughout 2019. In South America – South America finished 2019 pretty volatile. But again, I think they'll pick things back up. They have and they will historically in the past. So again, to answer your question, I don't think – I don't – we can't really break down our Ag segment that carefully to say small or large ag and exactly which is going which direction, but definitely small ag is continuing in a very favorable trend at the beginning of the year.

Well, that's good. And I guess where this goes to is that are we seeing a seasonal uptick in ordering? Or is this above and beyond the change in order rates that what would have been expected at this time? I'm just trying to understand if there's an inflection or if this is a seasonal uptick that is normal.

No. It's going above and beyond that. But again, I think part of that is we're doing a really good job with some of our customers, the products we're introducing and the direction we're going. So I can't speak on behalf of everybody in our industry. But especially on the small ag, as I alluded to before with our product introductions, I mean, we are seeing an uptick. And what we're seeing to start this year, I'd characterize as being above and beyond just a seasonal uptick. Because small ag doesn't have that same seasonal cycle as large ag because you do have a lot of small ag equipment that ends up in the snow belt. You have a lot of small ag equipment ends up in the south. And then obviously, it's used as utility equipment throughout the Midwest. So it's not typically going to follow that same pattern as you see in large ag. So yes, I've been very pleased with where we're seeing small ag start the year. And again, I think large ag has got a ton of pent-up demand. Larry, you know it, we all know it, and I've spoken to the Chairman of a large ag company two years ago, and he said, just look at the trends, look at the 30-year trend lines. I mean large ag is well below the 30-year trend lines. At some point, it's going to get back up to those levels. And it seems like in 20 – definitely, the back half of 2019, that's all been forgotten. And I think there's going to be triggers out there in the future that are going to get us back moving towards that 30-year trend line. I can't sit here today and point out exactly when that is, but I think that whole historical trend of where large ag is has been totally pushed off into a corner. And again, I think we need to pull it out, look at it and realize that there's a lot of pent-up demand there that will get released into the market.

Right. And that's all very fair. It just sounds like the small ag increases are probably seem to be fairly Titan-specific because you guys have kind of a Kubota and introducing new products and stuff. I guess I'm understanding that correctly. And I'll leave it there, if you can confirm that or not. But it sounds like it's very Titan-specific that you guys are doing a good job in that segment and obviously, penetrating Kubota, et cetera.

Yes, we're very pleased.

The next question comes from Keith Hogan of Amundi Pioneer. Please go ahead.

Hi. Good morning. How are you?

Good morning.

Good. A lot of my questions have been answered, so I don't have that many more. It shouldn't take too long. The R14 tire that you talked about with Kubota, I'm pretty sure you're highlighting that because that's an LSW tire wheel. Is that correct? Wheel tire?

It's both. It has an LSW – it can be an LSW tire, but it's also a redesign of really taking R-1 tire and R – you really take an ag tire or turf tire and construction tire and put them into one. And so a lot of small ag equipment operates in multiple conditions. And so if you have – if you need an aggressive tire, then you would have one design for that. And then if you need a less aggressive tire where you don't want to turf the ground or you want to road it, then you would have to put on a separate set of tires. And so what we're giving our customers like Kubota and their end users the ability to do is to put on the R14 and be able to run through the entire season, whether you're dealing with turf ag, roading or even snow conditions, which a lot of customers with that utility equipment uses up in the snowbelt, we're enabling them to do with one tire.

Okay. Great. So I guess two follow-ups to that. One is, so when you say it's kind of both, is the wheel component of it designed around an LSW tire, but then you can put a high side wall tire on that same wheel? Or is it just multiple configurations that get you to this? You're saying it's one tire.

As the equipment gets – as R14 goes on larger equipment, then it's an LSW. Now on some of the smaller equipment that the R14 is suitable for as well, that it's just going to be what we would call a standard-dimension tire. So that's where you end up with having both LSW, fitments and standards. So we don't want to – on a small tire, if you LSW it, you're going to have a sidewall that makes it impossible to mount. So you reach a point where you can't put an LSW. It's hard to put an LSW. You can LSW also you anything. But we don't want to make it to the point where it's too difficult for our end users to mount it So we're able to offer both options. But definitely, as we get into the larger sizes, then that's when we bring in that LSW technology. And we do have a different-sized wheel that would go in that application along with the smaller sidewall turret.

Okay. And my second follow-up on that. The mechanics of this contract, are you guys the standard wheel tire package for this Kubota line? Or do they need to check a box to find themselves with an R14 tire package on their equipment?

Sure. They check a box.

Okay. And from your perspective, I mean, you talked pretty positive on it. Can you talk about percentage of the sales that they're checking the box on this? Is it a 5% hit rate? Is it a 20% hit rate?

Look, I’ll let Kubota – Kubota has done a great job promoting it. Absolutely fantastic partner, has done a great job promoting it. I can't talk to – I'm not authorized to release those types of – that type of information on their behalf. I do know it, and I will say that the take rates are beyond what I had expected. So I think – I think Kubota has done a great job promoting them. And I think you can tell by their promotional material are well made.

Okay. Great. On the 20 – roughly $20 million that's left on the noncore asset sales, I know at this point, you did some tire India share sales in the fourth quarter. You also indicated you did some share sales in the first quarter, like – it sounds like $7 million. How is the $20 million that's left – is that fact – does that include the potential to sell more tire India? Or are you done there? And this is other noncore assets?

Go ahead, David.

I’ll go ahead. No, it would not include any additional shares sold at this point in time. And just to clarify, it's Wheels India, which is a public company in India, big wheel producer. So what we're talking about are just some other transactions that we're looking at primarily in the U.S., some low-hanging fruit on some assets that are just not productive today.

Okay. Great. You highlighted early on that the bonuses for this year are tied to that $75 million EBITDA target. What about – you also had highlighted a goal of $25 million of additional working capital improvement this year. Are the bonuses tied to that working capital goal as well?

Yes. That will be normally in the program, yes.

I'm sorry. sorry, you broke up a little.

I'll answer it. It is a definite yes, it is part of our incentive program for this year.

Okay.

And not just an overall perspective, but it will be within our operating units plans as well. Working capital management is a component of their plan.

Okay. Great. And just sort of working off of the whole working capital concept, in the fourth quarter, it looks like you've made a lot of really great progress on inventory from the third quarter, the fourth quarter, almost $20 million. So kind of when I look at the fourth quarter, you talk about your customers underproduced to retail demand. And the fact that you reduced inventory by $20 million, it would argue that you also underproduced to your customer, the OEs. If you hadn't sort of underproduced to your customers' demand, or maybe I'm misreading this somehow, what would the EBITDA look like if you could produce to the – to your customers' demand versus sort of underproducing to focus on the working capital contribution?

To be clear, we sold what we could sell to the customer. And obviously, we manage our inventory levels to manage to that demand specifically. So we're not going to produce – I mean, even if we had produced it, it would have stayed in inventory, it wouldn't have been part of the sale anyway. So we couldn't – that this is exactly – we just met the demand of our customers. And that's what…

Well, if you produced to your – if you had produced everything you could sell, then your inventory should have – what was left over, your inventory should have been flat. But didn't – wouldn't you say you underproduced to the – what you could sell because your inventory was down by $20 million? So internally, you didn't produce as much as you could sell? You sold as much as you could sell, but you didn’t produce as much as the same amount. So just to me, that would mean you're actually further underutilizing the production facilities in the fourth quarter, i.e. decremental contribution from reducing inventory. You wouldn't look at it that way?

Yes. I would say that there is a portion of that. I don't – I can't argue that. As far as what that means in terms of EBITDA production, I'd have to think through that and analyze that a little bit to figure that out. But again, we try to manage our inventory levels to the demand that we had as well as expectations for Q1, okay? So we looked at our inventory levels to make sure that we could meet the increase in demand going forward in the early part of Q1.

Okay. Okay. No, that's fair. You don't want to be caught short going into the season either. I get that. And then the second part of my sort of working capital thought process here is, as it relates to that sort of $25 million goal for 2020 it can come from the accounts receivable, the inventory, the accounts payable. The biggest line item there is still, after all the progress you've made, the inventory line. But I don't want to make any assumptions. How should I look at how that $25 million comes out? Is it extending payables? Is it accounts receivable? Is it inventory?

It's inventory.

Okay. Got it.

And one thing I'd just – to be clear, some of the reasons why we can do that as we put – we're putting in or have put in better tools to help us manage lead times. We've also done things within – obviously, the 80/20 program will also help us reduce inventory as well, not having as many SKUs in hand to have as much in stock to manage demand. And we will continue to improve that through the year. And our procurement teams are doing a better job managing raw materials.

Great. Just one second. Okay. Yes. So the 80/20, I think all of us generally understand the whole concept of the 80/20, trying to take out inventories or SKUs that just don't move, that kind of thing. How do you – and I like the thought process and the logic behind it. How do you sort of manage that against – you specifically called out in the press release that, we are the only global company that can produce tens of thousands of unique wheels and thousands of different tires. So that's the exact opposite approach of sort of an 80/20 kind of let's get rid of all the lower-volume SKUs? How are you going to balance that?

It's actually the fact that we are the global leader and have the massive product portfolio that we do gives us the ability to really put in an effect of 80/20. So you're right, the simple 80/20 that everybody understands is you pare down your product portfolio. But what we're doing, because we have the ability to produce basically everything our customers need, both fields and tires, we're looking at it as those customers and those products that are in the BB, look, we'll produce them, but we're going to charge the right price for them. And if our customers say they want them, we have the ability to do it. But what we're looking at as we go through 80/20 is that our portfolio – our pricing on our portfolio is not always matched to the right quadrant of where it should be in 80/20. So I think I would look at it as – if I had a limited portfolio, 80/20 would scare me because I’m basically taking away potential volume and just saying, what's more important is to manage the efficiency of my production. We're able to do both. We can manage efficiency of production. We can transition customers to an alternative product where they choose not to pay a more reasonable price for a lower volume product. Or if they choose to take that low volume product, they will pay the right price for it. So because of that large portfolio, I think 80/20 fits perfectly for us, where we can benefit on both sides, be more – get more margin out of the products we do produce but also get more efficient in the ones we eventually don’t produce.

Got it. Okay. That’s really helpful. I guess I was looking at the 80/20 much more from a SKU reduction perspective as opposed to there's multiple ways of looking at that 20%. So that makes a lot of sense. Thank you. That's it for me.

Thank you for the questions.

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

I just want to thank everybody for joining the call today and look forward to giving you an update at the end of the first quarter. Thank you.

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