Good morning, ladies and gentlemen, and welcome to the Titan International Inc. Third Quarter 2020 Earnings Conference Call. [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, Debbie. Good morning, and welcome, everyone, to our third quarter 2020 earnings call. On the call with me today, we have Titan's 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 this 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 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 Securities and Exchange Commission. In addition, today's remarks may refer to non-GAAP financial measures, which are intended to supplement but not be a substitute for the most directly comparable GAAP measures. The earnings release, which accompanies today's call contains financial and other quantitative information to be discussed today as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures. 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. Titan has done a good job again this quarter navigating through the uncertainty and challenges of the pandemic to report another period of solid financial results. We continued on what we achieved in the second quarter with stronger margin performance, good working capital management and improvements to our balance sheet. Diving into the business, I believe we had a really good quarter on nearly all facets of our business that are within our full control. We did see a top line decrease of nearly 12% when compared to last year as some of our end markets continue to be heavily influenced by the COVID pandemic, along with about half of that decrease coming from the impact of negative currency fluctuations. However, despite this decline in sales, we were able to deliver a 250 basis point increase in our gross margin percentage to 10.3%. Also, as we've seen throughout this year, we have been and we will remain diligent in managing our controllable costs. This period, excluding the $5 million Dayco legal accrual, we were able to reduce SG&A by over 12%. The positive actions by the Titan team throughout all of our businesses resulted in adjusted EBITDA of $14.2 million, which is an increase over last year's third quarter and this year's second quarter as well. Perhaps most importantly for Titan was the continuing progress we made with our balance sheet as we increased our cash by $18 million from last quarter and continue to lower our debt. In fact, our net debt represents the lowest level we've had since Q3 2018 and has improved or has been reduced, I should say, by over $85 million over the past 12 months. Our third quarter results demonstrate our solid operational and financial execution in dealing with COVID and…

Thanks, Paul, and good morning to everyone participating on the call today. Several things really stand out with respect to what is happening in the business over the course of this pandemic. Economic impacts are abundant across all the markets we serve, but we have managed to push through with great resolve. As Paul discussed earlier, we're building an improved foundation for a brighter future for Titan as the markets recover. I'll get into some detail regarding this quarter's financial performance in a minute, but I want to review the most important things here at the outset. First, operating cash flow during the third quarter was stellar at $42 million, helping us to bring global cash balances to almost $99 million. Second, with the improvements in cash flow, both from an operating perspective and from the additional sources of noncore asset transactions, we lowered debt levels to the lowest level since mid-2018. And now net debt now stands at $366 million, an improvement of $67 million from the end of last year. Third, the gross margin improvements, coupled with operating cost control that we've done, have enabled us to increase our financial performance over the prior year with adjusted EBITDA improving by 68% in the third quarter from last year. Finally, the slope of the decline in sales that we've seen throughout 2020 has diminished somewhat during the third quarter, with almost half actually coming from currency devaluation. And we're seeing positive trends as we head towards next year. Now let's review the details of the quarter. Net sales for the third quarter were slightly improved over what we expected at the beginning of the quarter as Q3 normally represents a seasonal low in the business. That was certainly true, but we also saw an uptick in the drop-in orders,…

[Operator Instructions]. Our first question today comes from Joseph Mondillo with Sidoti & Company.

Just a question on your guidance first. It looks like it implies a tick down from the third quarter in the fourth quarter. Is there anything there beyond the normal seasonality that we usually see in the fourth quarter?

No, not really, no. We have to be very prudent as to how production levels go in late November and December. And it does play havoc with the scheduling and so forth. And so there is traditional seasonality going down in particular, here in the EMC segment. So we were just being very prudent about that guidance in Q4. It's -- you also manage toward -- managing towards the beginning of what will be our busiest quarter in Q1. So we're trying to manage the schedules very tightly right now.

Okay. And I guess the second question would be related to the pandemic. I'm assuming in North America right now, operations are running smoothly, but Europe, we're hearing about partial sort of lockdowns. What are you seeing, I guess, maybe primarily in your European operations and the overall pandemic? And how that may affect 4Q and maybe potentially 1Q?

Yes. I mean, it's something we're obviously watching really closely on a daily basis. And as I noted in my comments, I mean there are some concerning trends that can't be overlooked. However, you kind of look back to where we're primarily located in Europe with 4 plants in Italy and Spain and then up there in the U.K. We've been through pretty hard times already, and we've been managing through the heart of the crisis over there since March. We've seen and continue to see good government support even this morning, the U.K. put out some additional announcements on support they're going to put into the marketplace. And so I can't speak on behalf of the government, but I do think you see in Europe a stronger unification within their countries to support the economy. They're able to take quicker actions to do that than what we see here in the U.S. And so I approached this quarter and then going into next year with a level of concern, but also a stronger sense of optimism that we will find our way through it. There's good demand that's out there, and I think the local government officials and the national government officials realize that they just can't turn the economies off. And so we will operate safely. We will do everything that's required and make sure our employees are safe on a daily basis, and that does require some additional costs, and you do take on some additional inefficiencies. But at this point, I don't think we have anything that would cause us to believe that we can continue to see some good growth going into not just this quarter but into next year.

Okay. And just to clarify, all your operations are sort of fully operating currently?

That is correct.

Yes, we're certainly operating under the protocols of the restrictions that are mandated by the local authorities, but we are managing and are open.

Okay. And I just wanted to shift to sort of the overall Ag environment or sentiment. You mentioned farming sentiment is up 5 -- up to a 5-year high. I'm just curious on how you measure that. or what metric you're looking at relative to that? And related to that, we've seen corn prices tick up over the last 4 or 5 years, reached the $4 mark a few times, and then we've seen it sort of come right back down. So what do you -- it sounds like maybe this time around there's invasion that maybe it will be a little stronger than we've seen when corn prices have bounced up to these levels before. Could you just give us maybe some more color on how you're feeling about the overall Ag market as we go into '21?

Yes, absolutely. I mean the seven levels that we measure are different services we subscribe to along with the national polls that are out there. So we follow closely and always have. We're not doing it just because we're in the middle of a pandemic, what's going on with the dealer sentiment and the farmer sentiment. We're really starting to see the positive nature being expressed within both farmers and dealers. It is coming from the price of commodities. And like you said, corn has hovered up and down around that $4 mark, so means has done better. But really, what we see is the main driver, Joe, is inventory levels. Across the board, we're seeing inventory levels in Ag that are just at extremely low levels. And so it doesn't take much optimism within the space. And I think there's enough optimism that exists when corn is in that $4 range combined primarily with the low inventory levels that give us the sense of confidence that next year is going to be a year of growth. I mean, the inventory levels with some of our primary customers that we track closely just almost historical levels -- historical low levels, I should say, and just replenishing that will drive some growth. And then you show in the government incentives on top of it, which I think are consistent. We talk about it on a regular basis. But what government, what economy right now can't support their people through their agriculture economy, and you're seeing it the $14 billion that's being put into the farmers' pockets just here in North America by the end of the year. And I think that's a consistent trend you may see around the world. In April, David mentioned it and I mentioned it, it's how on top of it Brazil, Brazil is just red hot. It gets kind of muted sometimes by the currency and all the other movements associated with that, that impact the financials. But from a business perspective, demand is strong in Brazil. It's solid in Europe, and I think it's got a strong position to continue to go on an upswing in North America. But to answer your question, though, is the dealer inventory levels are really the -- I think could be one of the primary drivers for next year.

Okay. Great. And then one last question, and I'll hop back in queue. Just related to cash flow. I think, David, you mentioned $16 million to $20 million of further noncore asset sales expected to be completed potentially in the fourth quarter. Are there any other sort of noncore assets as we look into '21 that you're looking to sell? And then you've also talked about some underperforming businesses. Could you update us on that? And then just lastly, related to free cash flow. In an upturn environment, how do we think about sort of free cash flow? Because depending on how strong the upturn would be, you probably have to invest in working capital and CapEx has been at low levels. So I'm just curious if you would anticipate operating maybe in the initial upturn on a negative free cash flow basis. Just wondering what your thoughts are on that.

Yes. Great questions. I'll start with the noncore assets. The $16 million to $20 million represents very discrete up transactions that we're working on, the very, very distinct. We continuously are evaluating the assets that we have in place and things like that and some of the noncore operations or assets. And those things will continue. That's a never-ending process for us, but they're not included in the $16 million to $20 million, so we will be continuing to look at those things well beyond 2020. Again, I feel very confident on the $16 million to $20 million because of the progress that we made on some of these -- some of these transactions. So we'll move on from that. Great question with respect to what we're looking at for next year as recovery happens. Yes, I do expect that there's obviously going to be further investments in working capital, particularly obviously inventory would be a key one as we need to have inventory in place to be able to manage customer expectations and so forth. There will be some investment there. I don't think it's going to be dramatic when that will create stress for us per se, because I think it will turn on over time. So we're going to manage that very carefully. The same goes with investments in capital expenditures. We will not just turn it off -- turn it on overnight. We'll be managing it prudently so that we can maintain free cash flow that's at least neutral or positive. That's the goal. And so we're going to be really, really focused hard on that and trying to manage that very carefully with our business unit managers.

The next question comes from Komal Patel with Goldman Sachs.

We hit on a lot of points that I wanted to touch on, but maybe a follow up on the farmer sentiment. I guess just given the political landscape, can you think -- can you add some color about some of the implications for farmer sentiment or incomes into '21 based on kind of some of the different political outcomes, whether kind of a democrat President mixed legislature, How do you think there could be any influence there into next year?

Yes. I think from a political standpoint, we are very fortunate to be in the industries we're in now. You talk about the size of the infrastructure builds and different government programs varying by depending on which party's in control. But I think we're very fortunate the industries that are in that governments have to support and whoever is in charge, you can't ignore construction, you can't ignore infrastructure, and you certainly can't ignore agriculture. And so the payments for this year are already locked in. But I don't see a divided house incented and president having an impact on the fact that you guys take care of your people through agriculture. And so I think we almost get to live in a nonpolitical world in the industries that we serve, and we all got to unite together in making sure we take care of these spaces, and I think they will. And I think the pressure -- the European comments that I made, I think, are important as well to put pressure on North America. So regardless of whatever is going on with our situation, when you have the European governments taking quicker, swifter decisive actions to provide support for Ag and infrastructure, it certainly puts the pressure on our politicians to make sure they're doing the right thing for their people as well. So yes, is there a risk? I can't sit here today and tell you there's not, but I think it's a list that's fairly mitigated.

Okay. That's fair. That's really helpful. And then maybe just the second thing. I wanted to check in on minimum cash target and leverage. Given that the business is on better footing now, can you remind us on minimum cash balance? And then how quickly you think you can get to your leverage target of around 4x?

Great question. We've managed very, very well through the year. Obviously, our cash balances have come up. There's a minimum cash balance of around $55 million to $60 million. That's what we -- where we were managing obviously last year and early this year. I don't expect that we're going to have to -- either we're going to see negative cash flow to the extent that gets us down in those levels at all. The key thing is that we've taken the steps on the debt levels to manage those very well. The majority of our debt is obviously the bonds. So there's not going to be a lot of movement on the debt side. The truth of the matter is it has to be in earnings. And so we've taken also the necessary steps on earnings as the markets recover, and the margins that we should achieve in the future should get us to those levels sooner than later. As far as a specific time frame for getting to, call it, the 4x is -- it's certainly a target of ours, and it depends on a little bit on when the markets recover as well. But we do have internal actions that are also being taken on these underperforming assets to be able to eliminate the drag that they create. And we're looking to get those -- all the actions we want to take are all now in 2021. So as we get out of 2021, that drag that we see has to be gone. And then it's just a matter of where our markets are in our performance in it.

[Operator Instructions]. The next question comes from Kevin O'Brien with Imperial Capital.

This is Kirk Ludtke from Imperial. Can you hear me?

Yes.

As the outlook improves, can you give us an update on some of those initiatives you've been talking about to boost utilization rates? and what -- where those stand? Are they still a priority? What type of gating factors there might be?

Yes. I mean it's something we definitely still see as a priority. There's changing circumstances with demand. We are constantly, I guess, looking at those is the best way to put it. And as far as decisions being made, we have not reached that point. But there are challenges associated with kind of some of our capacity utilization because each location will make different products. And so you have to look at it from the perspective of either transferring products and/or introducing new products to improve your capacity utilization or ceasing the production of products. And so the long-winded answer is to basically say, yes, it's still a priority. It's something we're continuing to look at. And clearly, as we close out this year and look into next year and we do our 2021 planning, there will be a topic that will be discussed -- is being discussed quite heavily with management already and we discussed with the Board at the end of the year as well.

Okay. And on -- could you give us an update on LSW? And what -- how the take rates might have changed? And do you -- when that might really start moving the needle?

It has moved the needle. LSW is by far the most innovative product that comes into the agricultural industry. I'm going to throw some of my hurdle out there has been really the history of our space. I mean, we completely redefined Ag tires and wheels, just like you see in the SUVs on the road today if we didn't have low sidewall on SUVs, we wouldn't be driving them. They'd be bounce up and down the road. And so we have revolutionized how equipment performs and through the wheels and tires that redesigned with LSW. So yes, it has moved the needle. We have been and we continue to be extremely impressed with the performance of the product, which is most important. You got to drive the value to the end user but also the sales and the margin profile on LSW. And so where we've seen a difference perhaps, where we would be selling LSW is we are selling a lot more directly to our tire dealers and directly into the end-user market versus through the OEMs. And so the only question I think out there for the future is, what else we can continue to get the OEMs to sell. Now clearly, they have a different perspective on LSW, because they also manufacture tracks and the quadrant, et cetera. But yes, we were extremely impressed with how LSW continue to perform. So it has moved the needle. But I also want to highlight the fact that it isn't just about LSW. I mean we have a number of new product ranges that have introduced in South America already that are moving the needle. And here in the U.S., we introduced a major new product last year -- or excuse me, this year, that will drive sales into next year. Then as we round out this year, we have another couple of new product lines that are being introduced for next year. So it's a cost evolution has moved way beyond just LSW. But LSW is still the bread butter of our product -- our new product and development that we put into this space in 5 years. And something that makes equipment perform better is going to continue to sell and our dealers continue to accept it at a very, very high rate.

Great. And then lastly, getting -- maybe circling back to the question about how working capital might be a use of cash as volumes increase. Can you talk about the initiative to reduce SKUs and how that has progressed and maybe put some numbers on the progress there?

Yes. I mean it's a good question. It's been a big priority for us as well. It's not just about throwing new products into the plants. We also got to get rid of some ones that are underperforming, and that's something we've been embarking on for the last couple of years. On the tire side of our business, you look at the amount of inventory we now hold in our A products, it's improved significantly. I don't have the exact number in front of me today. Perhaps David and Todd can get back with you later on that. But we are holding the right inventory. So when you look at a company like us managing working capital, managing cash flow, it's driven significant improvements there. But it's also made our plants more efficient. And so we're out -- what we're able to also do and kind of going back to that capacity utilization topic, we are able to improve our capacity utilization by redesigning them because of the improvements we've made in our product portfolio. So if you go through our largest tire plant that we have in the U.S., you'll see that it's being completely redesigned and roughly 35% of that plant now is being geared up to simply run our highest running best A product every single day, all day long. And so -- and that -- those type of changes are coming because we made significant improvements to our product portfolio. And so what it does is it continues to lead to further improvement. So it felt like the switch that we can just turn on overnight, but it does give us that foundation that we will continue to get more efficient. And that reason I mentioned at our largest target plan is Phase 1 of 4. And so we'll continue to do that. But it all started by the fact that we've redesigned our product portfolio. As we speak in this quarter, we've made more progress on our wheel business than we have in any point in history, and we got to do more. So I think the wheel business is where we will pick up the biggest benefits that we haven't really utilized or realized yet in 2020. We'll start to see more of that in 2021. They embrace it, they get it, they want to do it. You got challenges with customers. I mean you can't just go to your customer and say, "Hey, we're just dropping this product tomorrow in every single case." Some cases, yes, other cases to have a longer tail on it. But I've been very impressed with our wheel team. In the last, I would call it, David, let say, last 3 to 4 months, I mean they've really embraced it and they're taking strong actions.

Yes, those actions will benefit us next year. And so yes, it's very good progress.

Our final questioner is Justine Ho with Mesirow Financial.

I wanted to ask about raw materials and the trends you're currently seeing or what you're expecting considering, I guess, this past quarter, there were some tailwinds as it relates to better margins because of the lower raw materials?

Well, good question. Obviously, throughout this year, raw material costs have been lower, as you might expect. The way raw materials flow through our plants, there's a little bit of a lag, obviously, with respect to that. And then there's also pricing. So it's not necessarily a one-for-one kind of a situation. We have to manage that very carefully with our customers as well as our suppliers. And so as demand continues to -- we will continue to uptick over time, there would be an uptick in pricing as well. So we have to manage that very carefully, and we are doing so. I still expect that the raw materials relative to historical pricing will be still somewhat favorable to at least on par with that. So as far as what it means from a margin perspective, it will be similar to what we've seen.

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

Well, I appreciate everybody's time and participation this morning. I look forward to talking to you again as we report our next quarter's results. Everybody stay safe and stay healthy. Take care.

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