Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Second Quarter 2020 Earnings Conference Call. At this time all participants have been 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 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, Mariana. Good morning, and welcome, everyone, to our second quarter 2020 earnings call. On the call with me today, I have Titan's Chairman, Morry Taylor; our President and CEO, Paul Reitz; and David Martin, Senior Vice President and CFO. I will begin with the reminder that the results we are about to review were presented in the earnings release issued this morning, along with our Form 10-Q, which was also filed with the Securities and Exchange Commission this morning. As a reminder, during 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 forward-looking information. Additional information concerning factors that either individually or in the aggregate could cause actual results to differ materially from these forward-looking statements can be found in the Safe Harbor statement included in today's earnings release attached to the company's Form 8-K filed earlier today as well as our latest Form 10-K and forms 10-Q, all of which have been filed with the SEC. 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 as discussed today as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures. Today's earnings release is available on the company's website within the Investor Relations section under News & Events. Please note, today's call is being recorded. A copy of today's call transcript will be made available on our website. I would now like to turn the call over to Paul.

Thank you, Todd. I hope all of you and your families are staying safe and healthy. I want to start by expressing my congratulations to our global One Titan team for their tremendous efforts and successes during the second quarter. I'm going to start today by going through some business updates from Q2, and then I'll have our Chairman, Morry Taylor, share his thoughts from the Board's perspective. And then we'll follow-up and wrap things up with David going through the financial results. It may have seemed like an eternity ago, sitting here today, but Titan started dealing heavily with the COVID-19 around five months ago, with our plants in Italy and China, and what then may have looked like a 200-yard dash has now clearly turned into a global marathon. From the start of COVID, we've been heavily focused on the safety of our people, while proudly serving our customers and to this day, we continue to do a good job in both of these crucial areas. Similar to many companies in the industrial space, as we entered this quarter, we expected to encounter challenges unlike anything we've experienced before, and we most certainly did. Our sales levels and order flow patterns were heavily impacted by COVID this quarter as we experienced a revenue decrease of 27%, but we were able to navigate successfully through this top line volatility to achieve adjusted EBITDA over $13 million. This exceeded levels sequentially from the first quarter of 2020 and year-over-year from the second quarter of 2019. Most importantly, our second quarter free cash flow exceeded expectations, coming in around $7 million, and we also increased our cash levels by nearly $20 million from last quarter. Our gross profit was only down $8 million, which resulted in gross profit margins increasing to…

Thank you, Paul. Good morning, everyone. If you are wondering why this old man is on the call, well, this has been a very unique quarter for Titan. Titan has a lot of assets that have values much greater than what they show on the book. The - Titan acquired some stock in a company called Wheels India when we acquired Titan Europe. I tried to get agreement to sell Titan's ownership back then, but we needed approval from Wheels India's largest shareholder who would not give it to us. And I was trying to sell it for around $10 million, and they wanted to only make it so that we would have only gotten $7 million. So we never sold it. This past quarter, Titan International sold its final interest in Wheels India and received the final payment. The total Titan received over the past approximately 9 months comes to around $50 million. Titan's Board and myself wish to congratulate our CEO, Paul Reitz on a great job. And it sounds simple, but it took a lot of time over the last few years of going to India to get this done. Titan has other non-core assets that we'll sell at a fair price and the largest [non-] wheel, tire asset is, of course, as Paul just mentioned, our tractor wheel business at ITM. We believe over the next 18 months, Titan will have the opportunity to either sell or to spin off ITM. We have spent time in the last two years building ITM's business up, especially into the aftermarket. And now everything, of course, with the situation with the COVID-19 worldwide has knocked everything down. But we believe what's going to happen is that the infrastructure, both in Europe and in the US, will come to start moving right after the election, no matter who the heck wins the damn thing. We expect this business to grow, both in the sales of the OEs and our aftermarket business. We believe that we'll increase its revenue up to around $500 million. Before this period and the shutdown, it was bouncing right around the $400-plus million. We believe that will bring to Titan between a total value of $300 million to $400 million. So we're in really pretty good shape, and Titan has the world's greatest capacity in farm wheels and tires. And we also, as Paul just mentioned, we believe in the future. And we think it's very bright for what we have. And we also believe that our CEO and President, Paul, and his team are the right ones to lead us in the coming years. Real leadership comes in tough times and Titan has had its share from the outside forces but we think that's going to change and that, this next year, big time. I want to thank all of you for your patience in that and I'll turn it back to you, Paul.

Morry, really appreciate your comments for everyone this morning. With that, now we'll turn the call over to David for the financial review.

Thanks, Paul, and good morning, everyone. I want to start by echoing Paul's and Morry's comments regarding our Titan team and the exceptional leadership that was shown across the organization during these very unprecedented times. Strong and swift actions were taken by - to protect our employees, and adjustments were made to production levels to meet very, very unpredictable demand. Just - and finally, the team managed to even improve liquidity during the quarter in spite of all the forces that were going against us. The second half of the year will continue to be a significant challenge for us. And in fact, it could be more challenging in some ways. Notwithstanding this, we are in a strong position now to manage. That said, let's get into the numbers. Net sales for the second quarter were down 27%, it was $104 million less than the second quarter last year and $55 million less than the first quarter of this year, reflecting the impacts of COVID-19 and the sluggish markets across the world, most notably, construction. We estimate the direct impact of COVID-19 effects on net sales was $31 million in the second quarter, meaning the impact from closures and disrupted markets in Europe, Asia and Latin America. On a constant currency basis, revenues would have been down roughly 22% from the second quarter last year or $85 million. The negative currency impact was nearly $20 million or 5%, with much of the impact coming in Latin America and Europe. Again, this quarter, the largest impact on sales was in earthmoving and construction, where sales declined by $72 million from last year. The drivers of the decline in EMC were across the board and the biggest impacts coming from undercarriage. The remaining declines were primarily in the US, UK and Australia.…

[Operator Instructions] Our first question comes from Joseph Mondillo with Sidoti & Co. Your line is open.

Hi. Good morning, everyone.

Good morning, Joe.

So I wanted to sort of just talk a little bit about or ask you about sort of some of the brief comments that you made on your outlook for the back half of the year. And I understand visibility is limited. And of course, with the pandemic, no one can really sort of certainly guess what's going to happen with that. But you sort of made a couple brief comments that you anticipate the back half of the year to be light. And I know seasonality usually plays to that. I thought, potentially, given that you had such a significant amount of plant closures and just with overall economies shut down for a period of time in the second quarter, I thought potentially second quarter could be a bar that you could still meet in the third or fourth quarter. Could you just address sort of your comments for the back half of the year in - relative to your sort of typical seasonality? Are you expecting typical seasonality in the third quarter and fourth quarter? Thanks.

Yes. No, Joe, it's a good question. It's one that we spend a lot of time here as well trying to forecast what's coming down the road, and it's an ongoing challenge. And so there's two ways to look at it. And I'll let David add his comments on the financial side. I mean, obviously, there's the financial side of trying to predict what your results are going to be. But I'm going to comment from the operational perspective. We have to remain nimble and flexible in our business, quite frankly, like nothing we've seen before. Our order deck and the flow of the order deck is changing rapidly. So if we had prepared a forecast at the beginning of the second quarter, it would have looked much and it did look much different than what the actual results were. And so as we sit here today, we only know what we know now, and we know that we're going to get impacted by our own plant shutdowns and our customers' plant shutdowns, and that's the normal seasonality that we keep referencing, along with a higher level of vacation holidays that take place in the US this time of the year before school starts, and then obviously, in Europe, where they take heavier time off in late July and August. And so that is the normal part of our business where we see those swings in the back half of the year. From there, we just continue to, again, just remain flexible. We're constantly in communication with all of our business leaders' multiple times a week, trying to compare notes and trying to find some sort of baseline that we can use to put into a financial forecast. And to be honest with you, it's difficult. We just don't know…

Yeah. I can't say a whole lot more than that other than the visibility that we get from our customers in terms of long-term projections or even beyond what the initial orders that they give us, we're not seeing that beyond the quarter, to be honest with you. So Q4 is a real wild card, from my perspective. So understanding how Q4 is going to be, but normal seasonality would suggest that you can be pretty busy through a portion of the quarter, then your holiday period interferes with that and you take your production levels down. That's just the way it has been. But without that visibility and our ability to forecast with any part of precision is very challenging. Yes, we do see normal patterns and seasonality. That's not - we're not seeing it any different because of the pandemic. It's - nothing's changing with regard to our customers' buying behaviors at this point. It's not changing as a result of pent-up demand or anything like that. So it's important that we maintain our flexibility, like Paul said. And - but giving any reliable forecast at this point is very challenging, and it changes every week for us.

I totally appreciate that and very much appreciate the color. I know you guys don't have a lot of visibility. So I definitely appreciate that. How about on the cost side of things? Where are we regarding raw materials and the inventory that you have? I know, I think the first half of the year, certainly saw a pretty big year-over-year benefit there. So how does that look for the back half of the year? And then just in general, cost structure, how does that change going into the back half of the year? Do you see any temporary costs coming back online from second quarter? Just give us a sense of how that should maybe be a positive or negative issue for the back half.

Yes. I'll start with the backdrop of the raw material markets. The raw material prices remain relatively low comparatively. And so that has been a benefit in the first half of the year, and we anticipate that it will remain, call it, stable for the back half. But obviously, those things do change - can change rapidly. As demand comes back, prices will come back too, and so you have to watch that. But right now, it's - I would just call it stable with respect to how it was in Q2, but relatively low comparatively year-over-year. We are - it's over the - all over the map between synthetic rubber, natural rubber, steel and all those things. But all said, as a benchmark and a pretty good territory for us to manage. And as far as our overall cost structure, we have taken a lot of the costs out of our facilities to reflect the current demand. We have received some support in some of our foreign markets regarding support for payroll. We expect that to continue maybe a little bit into Q3, but it's uncertain as to whether they extend those kinds of opportunities for companies like us. So again, I don't want to say it's been a strong, big benefit to us. It is offsetting our cost, if you will, and we have had increased costs related to our factories and our sanitization efforts and also just trying to manage our shifts and so forth. And so it's not come without a cost, and these support programs do help us to offset that. We do expect it to continue in the short term, but I don't anticipate it to be a long-term thing. And then relative to SG&A, we've taken our costs down. You saw it this quarter. I think we're relatively in a good territory. I don't anticipate any further decreases from here because we've taken the actions we feel like we need to. So I think I would call that, again, stable at this point.

Yes. And the support we get is in our European operations, primarily. Where we operate in Italy, we're getting the benefits in the UK. North America, we don't get any support. And so again, some of these questions are hard to answer without getting specific location by location. But to David's point, I mean, the costs of COVID are not being covered by the government. That helps offset and keep some people on the payroll, like you've seen in the U.S. with the PPP, which we don't qualify for. It keeps people on the payroll and going through the pandemic. But again, if the programs are there, we will take advantage of them. If they're not, then we will reduce our cost structure accordingly. That's - the European programs have just been better at doing that for companies like Titan. In the US, companies like Titan get nothing. We're too big to matter and we're too small to be big enough to matter. So we're caught in no man's land.

All right. And just to clarify on the raw materials side, just the year-over-year - are you saying the year-over-year benefit in 2Q will be similar to the year-over-year benefit in the second half? Or are you saying the benefit just on an absolute basis in 2Q will be similar, the prices will be sort of similar in the back half?

Absolute basis, if you will, to what we saw in Q2. We see, we did - Joe, and just sorry to interrupt you. But we - in the second half, we did start to see some of those declines, particularly in steel. So year-over-year comparisons are relatively the same.

All right. And I guess just also lastly, just to follow up, and I'll hand it off to someone else. Regarding sort of structural changes, consolidation, footprint consolidation, just more heavy lifting type structural changes, where are we there? Is that still an ongoing process? Help us understand where you are with the structure of the company overall.

Yes. I think the structural changes are ongoing. From my perspective, we certainly have had very good discussions at the Board level. And I believe that the management team has the full support of the Board to structure the company accordingly for where we need to be positioned for the future And so those are good ongoing healthy discussions between management and the Board, and I certainly feel good that - where those discussions are leading for the future and we'll continue to - with our ongoing efforts to again position the company the right way for the long term and certainly provide updates as we're going through that process.

And can - just on that note, can you say that there's definite opportunity? Or is this sort of still going through the analysis and we'll wait and see kind of a thing?

Well, I think there's definitely opportunity. If you look at some of our utilization levels, they're not where we need them to be for the long term. And so there's different ways you can restructure. It's not always necessarily just black and white. There's only one option. And so what we're doing with the Board is discussing those various options and taking actions to see which options may play out going in certain directions. And I think we're on a good healthy path with that. But it's definitely not black and white. So it's not something where we can say, yes, here's the issue, and this is exactly what we're going to do. But again, I think those discussions for the recent time period definitely have been very healthy between the Board. I think we all see eye to eye, and we realize that there are structural changes that need to take place. But again, they have various options and different facets to them. And we are certainly going down those paths, and I think long term, they will turn out successful for the company.

All right. Well, thanks for taking my questions and good luck for the rest of the year.

Thanks, Joe.

Thanks, Joe.

[Operator Instructions] Your next question comes from Lawrence de Maria with William Blair. Your line is open.

Hi. Good morning, everybody. Nice to hear Morry's voice for a change. Sounds like you're doing well, Morry. One of the things in your recent announcement and then you mentioned briefly, LSW, have you - it sounds like you've got the price down to be competitive with duals and it's on to AR now. Is this kind of the maybe potentially the tipping point for LSW? Or is it just one more step function towards greater adoption there?

Well, it's - LSW is not about price. LSW is about the value it brings to the end user. We positioned it that way from the beginning. It's a product where farmers, when they look at the value proposition - and they do. As we all know, farmers are very good at running their business. They've seen from the very beginning that there is tremendous value in LSW. So it has nothing to do with price. Really, what you're seeing from the OEMs and with that recent announcement regarding the 8-Series at Deere, which was a very strong announcement for the company, but also for Deere. We've been going to the end market and being very successful connecting to the end users with LSW. So I don't look at this announcement coming years down the road as all of a sudden, it's a tipping point for LSW. LSW has continued to grow by double digits year-over-year. It attracts a strong value to the end customer, and we position it accordingly in the market. So it has nothing to do with price. We don't need to change the price to sell LSW. We're going to continue on the path we are. It's been successful from the beginning. So there is not - there's not going to be that tipping point moment, and the announcement doesn't reflect that. Our position with LSW is we've got to benefit the end user, and that's what we've been very successful at. So I think what that announcement does, it says we will continue on a very strong path forward. And that value from LSW will continue to be realized in the market for both Titan and the ultimate end user of the LSW solutions.

Okay. And then obviously, historically, you guys have had nice incremental margins when volumes drop, obviously. How do you think about, given the cost you've taken out for some temporary and some more permanent, how do we think about incremental margins? Hopefully, obviously, next year, above historical levels. What kind of magnitude? And I'm just trying to understand the temporary cuts versus more permanent cost and how that plays in.

So it's a very challenging question to answer, Larry, in terms of - I don't know how quickly the recovery happens. You have to be agile at every point in time you see recovery. I would say that within our overall production facilities, a lot of the costs you take out are more on the temporary side as you're just taking out the labor. And there are some overhead opportunities that we have done on the more permanent side of things, and we're going to be very, very careful as we go back up in managing those costs. But I feel pretty strongly that our incremental margins are going to be really solid next year when we start to see some sales impact. I think we're - just similar to how it's been in the past. You go back to 2018 and look at the incremental margins we got that year with growth in sales that we saw, I think it could be better. It's going to depend upon which part of the business sees the most recovery in the time frame.

Yes, I think there's a couple of things that we know for certain that next year, as volumes improve, you will get better cost absorption. So you'll get that natural benefit to your incremental margin just with your existing capacity levels being are what they are today. But I think the other part I would add is, and this is true I think for a lot of business leaders right now, is that for every dollar that's coming out in 2020 and 2021, there's not $1 or $1.10 going back in. There's going to be some factor less, $0.80, $0.90 on the dollar. I guess, at this point, we don't know. But I'm confident that our business is, the restructuring and the changes that we've made now, just the processes we've gone through in doing it, not just in the last few months, but the changes we've made as a management team. David made a comment in his remarks about North America wheel. We've been able to accomplish a number of things this quarter by actions that we took in prior years. And so that's where I get the confidence on next year, we will reap big benefits from what we're going through now. And again, it's not just the changes in the last few months, it's the changes in prior years. Our team is making better decisions today because of what we did in the past. And I'm very confident that in the future, we will continue to make even better decisions by what we learned from what we're going through during COVID. So for every dollar that came out, I can guarantee you we're not putting another dollar back in come 2021.

Okay. That's sort of where I was kind of leading. And then specifically in the quarter, was there an effect of temporary furloughs that was a big benefit that, that sort of reverses? And was incentive comp a headwind, tailwind or neutral?

No, I would say no.

Okay. So no furlough benefit and incentive comp is neutral?

Nothing significant when you consider everything else that was going on with cost structure and everything else.

Okay. And last question, and I'll pass this on. Where do we see the tire reclamation business? Is that in maybe some of the R&D factories [ph] down south? Is that where we're thinking about the last $20 million [ph] come from? Or is that something, tire reclamation, different?

Well, I mean, in tire reclamation, we've gone through a lot with the fire that took place a few years ago. There's been a tremendous amount of effort just on handling the insurance claim. It's unfortunate that with the type of operation like that, the insurance companies are not easy to deal with. David and his team have done a good job of nearly finalizing that claim. We're not quite there on all pieces of it. But on the VI side, we've settled the property. Where that goes in the future is we are in discussions with other partners of how we can grow that business. I don't see that as a core business that Titan should invest in. I think there's a lot of potential in it with what we're doing in the concept of recycled components getting into the marketplace and what you can do. But with our balance sheet, where it's at today, we're going to invest in our core businesses, and we're going to grow and be successful in the future with them. And I don't see TTRC as a business - and TTRC needs investment to really get to the scale it needs for the future, and we're looking for partners that could do that. And so there's - again, it's one of those areas, I would say, we're having healthy discussions with the Board on what those options are, and we're pursuing different paths. But from a balance sheet perspective, this is not something that we're going to invest CapEx in. We need to run it as is. We're doing a good job with that. We're taking care of our partners with the oil companies up there, Suncor primarily, since obviously, we're on their property. So we've got to do that for contracts. But from a business standpoint, we're going to protect our balance sheet to invest in our core businesses.

The only thing I'd add, Larry, is if you talk about the $20 million that I alluded to earlier, we're only talking about the VI claim as part of that. The longer-term solutions for TTRC are not included in there.

Got you. Okay, thanks. Good luck, guys.

Thanks, Larry.

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

I appreciate everybody's participation in today's call and wish you all stay safe and healthy. Take care.

Ladies and gentlemen, this concludes today's conference call. Please note that the 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.