Good morning, ladies and gentlemen, and welcome to the Titan International Inc. Second quarter 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning & Analysis and Investor Relations for Titan. Mr. Snyder, the floor is yours.

Thank you, Laura. Good morning. I'd like to welcome everyone to Titan's Second Quarter 2023 Earnings Call. On the call with me today are Paul Reitz, Titan's President and CEO; and David Martin, Titan's Senior Vice President and CFO. I will begin with a reminder that the results we're about to review, presented in the earnings release issued yesterday, along with our Form 10-Q, which was also filed with the Securities and Exchange Commission yesterday. 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 within the safe harbor statement included in the earnings release attached to the company's Form 8-K filed earlier, 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 to be discussed today, as well as the reconciliation of the non-GAAP measures to the most comparable GAAP measures. The Q2 earnings release is available on the company's website. A replay of this presentation, a copy of today's transcript, and the company's latest quarterly investor presentation will all be available soon after the call on Titan's website. I would now like to turn the call over to Paul.

Thanks, Alan, and good morning, everyone. Our One Titan team delivered again this quarter with solid performance. I'm really pleased with our Q2 results as we executed effectively to take care of our customers, and with that delivered $59 million in adjusted EBITDA. We further strengthened our balance sheet with free cash flow of $49 million in the quarter. This capped off our highest first-half free cash flow in more than a decade and pushed our cash balance up to almost $200 million with EBITDA leverage at just 1 turn. The significantly improved strength of our balance sheet, along with a team delivering solid performance illustrates that Titan is in a good position for future growth opportunities. Look, we had a good start to 2023. We've been working our way through the previously communicated inventory impact. It's primarily within our Ag customer base and our guidance that we put out does illustrate that we expect to have an overall strong year that will rank as one of Titan's best years in our history. Before diving into that, though, I want to like to really provide some context around how much we've accomplished as a company over the past 4 years. If you look our strong financial results from 2021, '22, and the first half of '23, demonstrate the strength of our One Titan core values and how we have operated effectively in challenging times to meet the needs of our customers and along with that drive strong financial performance. David and I've always believed that the foundation built around Titan's plants, people, products, and our entrepreneurial can-do culture is strong at Titan. But if you look back to 2019, our financial performance and our balance sheet were at a point where significant improvement was critical. At that time, we developed…

Thank you, Paul, and good morning, and thank you to everyone joining us today. The results we achieved this quarter are very satisfying in a number of ways. We anticipated the more challenging environment in 2023 with our customers, and we were able to put together a good plan of action surrounding production, inventory control, and cost management, and you see that in the results that we reported yesterday. Now let's have a few key financial highlights for the second quarter. Net sales were $481 million, and we delivered consistent profitability with net income of $32 million, GAAP EPS of $0.48 and adjusted EPS of $0.43, and adjusted EBITDA of $59 million. We continue to strengthen the balance sheet, as Paul said earlier, with $49 million of free cash flow, which increased our cash balance to $196 million. Again, as Paul noted, free cash flow for the first half of $61 million was the highest first-half performance in more than a decade for the company. Additionally, we maintained our net debt to trailing 12-month EBITDA leverage at 1x. It's worth talking about the tax credits we received over the last year in Brazil. We recorded indirect tax credits another $3 million during the second quarter, and that relates to the indirect tax credits we received for the full year of $32 million. This has also been part of our ability to drive strong cash flow. In both cases, we've excluded it from adjusted EBITDA and adjusted net income. Now let's talk a bit about the performance at the segment level, starting with agriculture. Agricultural net sales were $269 million compared to $319 million last year. The decrease was primarily due to overall lower sales volume in North America and Latin America. As a result of the elevated inventory levels with…

Please stand-by while we reconnect the speakers. One moment.

Sorry about that. We got cut off, and so I apologize. I'll wrap things up pretty quickly here before we get to Q&A. I was talking about inventory management. Our teams did a very efficient work during the quarter. We'll continue that in the second half with a keynote on where we believe future demand will be, so we can remain nimble and responsive to customers just as we have been in the first half. This requires a tremendous resolve and a constant analysis by our operating teams in the current environment. For 2023, we anticipate solid profitability and good free cash flow generation, as indicated in our guidance. In terms of capital allocation priorities, we remain focused on maintaining our strong balance sheet and a low leverage level. We will also repurchase shares opportunistically, and we believe that our stock is a good long-term investment for the company. Further, the company will continue to evaluate our growth opportunities such as acquisitions, joint ventures, or internal capital investments in a strategic and a very disciplined fashion. Again, we look at these things with which we can create value and are within our core strengths as a company. Paul touched on this earlier, but regarding our guidance for 2023, we continue to expect our financial performance to remain at a very solid level due to steady overall market conditions globally across the markets we serve, particularly in large Ag, but reflective of the destocking that's taking place and will continue in the second half of the year. As we enter this period of time, we continue to handle our customer demand levels and overall performance of the business. As a reminder, the second half of the year also has approximately 10% fewer production days and with the traditional late-year holiday periods across the globe, which plays into the full-year guidance as well. Just to restate, we're providing full-year 2023 guidance of revenues to range between $1.85 billion to $1.9 billion, adjusted EBITDA to range between $200 million and $210 million, and free cash flow to range between $110 million to $120 million and CapEx to range between $55 million to $60 million, a very strong performance for the company. Now to wrap up, Paul talked about this, but I will reinforce it that the medium- and long-term demand drivers remain healthy, supported by strong sector trends in our key macro indicators, and we do remain very encouraged by the solid underlying fundamentals of the end markets we serve. Through these drivers and our transformed business, we will continue to deliver heightened value to all stakeholders. And I thank you for your attention and sorry for the delay that we had, but I'd like to turn the call back over to Laura, our operator, for the Q&A session.

[Operator Instructions] Your first question comes from the line of Stephen Ferazani from Sidoti.

Good morning, Paul. Good morning. David. Appreciate the detail on the call. I was having some technical difficulties early. So I might need some clarification on what I think is the crux of the call. Paul, it sounded like you said the destocking issue, the stockpiling that has now resulted in oversupply with wheels and tires with OEMs was exclusive to large Ag. Did I mishear that? Because clearly, EMC was year-over-year just as weak.

It's specific more to our industries was the point. So it's -- the point I wanted to drive today is because we are really the only stand-alone public company that serves the specific industries. So if you look at our competitors, they're divisions of larger companies, and they really don't have to get into the granular detail of really Ag and construction the way we do. And then more specifically, with wheels and tires, the nature of our business is that we saw our customers stockpile inventory. And there's a number of reasons behind that. Part of it is just our tires are produced in a large number -- a large proliferation of SKUs with smaller production runs. So the nature of our industry is different than other tire businesses. And so there's a protective nature to that because if your tires are not being ran, especially when you're going through a period of a lot of volatility that has clearly been in the marketplace here recently, you get protective and you want to make sure you have those right tires and wheels on hand. The other thing is the equipment is large, I really should say its large equipment for large Ag, but also small equipment, you need to move it around a yard while you're waiting for other components. And so our tire and wheel volume got ahead of other components required in their supply chain. So as they're getting their supply chain caught up, they already had the tires and wheels on hand, and we're seeing that impact play out in 2023. So the macro environment is still very good. Overall, especially in large Ag, construction, our primary segments are still performing at a high level. You heard that from the major OEM customers. And so really, what I needed to highlight today is the fact that there's some specific actions that are taking place that are really related just to our business. And we -- again, we are the only public company in this sector that has to talk about it. And so it gets confusing. And so really, what I'm trying to do is eliminate some of the confusion or really eliminate some of the uncertainty and be honest and frank with our shareholders to tell them what's going on related to our specific business.

Just to add on to that, Stephen, before we get into the next question is, as you alluded to, it does happen -- it is happening a little bit across Ag and EMC, but primarily related to Brazil when it comes to EMC. So it's -- there's a variety of factors that are leading to the uncertainty in Brazil that's leading to people to make decisions about inventory and demand levels, overall demand levels because of uncertainty around the election and support for farmers and things like that. So there's a little bit more effect in Brazil. In North America, it's primarily our Ag business.

So does that mean that you would expect EMC to pick up faster, given you know this problem runs through Ag, at least through the year, EMC could be a little bit -- play out a little bit differently.

I think in the second half, you'll continue to see the same trends across it because you tend to have the seasonality effect of EMC with the European-centric part of the business. So that's nothing different than last year per se, but the same effects the second half to first half.

So the big question becomes how good of a handle do you have on how far ahead you got to your customers in terms of the -- and obviously, you were rolling from multiple quarters. You did not have the supply chain challenges, right? You didn't have the -- we didn't see the inflationary pressures. You've got ahead of pricing. I mean, you crushed it for multiple quarters. And now that's coming back to, unfortunately, you were too successful early. But the question is, how far ahead are you really -- do you have a handle on that? Is this a 2023 problem? Or do some of those large Ag suppliers have enough wheels and tires to get them into at least part of 2024?

And we've spent a lot of time on this. Myself and the team have been out in front of customers extensively really trying to get to the answer to your question. And what we're seeing, Steve, is that this is a situation that they want resolved by the end of 2023. They want to be able to give us forecasts that are more aligned with their retail demand, get our production levels back to a normalized level. They know that has created a disruption for us. And to your point, we've done a great job serving them over the last few years during very difficult times. And unfortunately, the penalty for doing a great job has been that we're out ahead of other parts of their supply chain. And it's just a reality we have to deal with and we have to work our way through. I would say when we started the year, we didn't know exactly the extent of it. That's why we made the determination to not put out guidance at the beginning of the year. It wasn't a demand issue. We felt very good about the markets. We still feel very good about the markets. We feel very good about our relationships with our customers. We feel extremely good about everything we've accomplished over the last few years. The reality is the situation was unknown at the beginning of the year. It's become more clear now. We feel comfortable, obviously, enough to put out the guidance that we did today. And again, we do see our customers wanting and working towards getting this issue resolved by the end of the year.

So your -- so based on the information you have right now, you would think your real entire sales would closely track your customer deliveries in '24?

That's what our customers and Titan are working towards, yes.

Okay. And given that they're all still very positive with the order books into 2024, 2024 could be a significant rebound from the levels you're at right now?

That's -- we definitely agree with the comments they're making that the markets are in a good position. And again, we're working through this issue that's specific to our industry. And again, we are the only public company that has to talk about this. So it's a challenging topic to try to explain, but I agree with how you framed this, Steve.

Okay. That's helpful. Would you talk about -- I mean, the one place where you're still performing well is in cash flow and you noted the working capital. I'm trying to think, you noted opportunistic stock buybacks and the fact that you didn't think the stock reflects the transformation you've been under. How do you evaluate when to buy back stock? Obviously, looking at the stock this morning. Is it on a price basis, or--?

Yes. I think it's when we see weakness, a decline for no reason. Obviously, a lower price, we'll get back in, obviously, after we get out of this frozen period or blackout period, so that would be the expectation is if the stock remains weak, we can be opportunistic.

Okay. That's helpful. Just one last from me. It looked like EMC OpEx was up a bit. Is that -- are we going to be at an elevated level? Or was there anything specific this quarter?

That was more -- it was a hit more with a little bit of inflation. So I think we're generally in a pretty good area on that.

Your next question comes from the line of Kirk Ludtke from Imperial Capital.

Good morning, Paul and David. Congratulations for another great quarter. I'm just curious, you mentioned the ERP and that it's been a long-term project. And I'm curious, that the -- how does the business change as that's implemented? And do you -- for instance, I suspect that working capital is one of the focus areas. You mentioned you're down to what, as a percentage of sales, 22%. Does that come down once you see further improvement in working capital turns as the ERP is implemented?

Yes. Look, I think what I want to highlight with the ERP implementation and working capital is a great example. Look at what the Titan team has been able to do with working capital without the system support, a business that historically like I said, has been hovering in the upper 20s approaching 30%. And that's historically, we've been around a long time. We had driven a significant amount of cash flow, a significant benefit to our customers, our ability to serve them, a significant benefit to the streamlining our operations, and we've done that through people. I mentioned extensively the value of our Titan team. So just think about what we've done with working capital in a very complicated business with people. The ERP implementation is intended to give our people better tools. I believe strongly in the capabilities of what we've been able to do without tools that are market leading. And so we are going in a direction with an update to the ERP cloud. We are not going to risk the business stumbling in any way. We are taking it in a manner that we're very comfortable with to ensure that our customers are served and our shareholders don't pay the price because we're jumping into a new ERP system. Now with the ERP system in place, because we have a strong balance sheet and we have the ability to invest, we plan on making continued investments into our plants and our people and our systems. So with that, as you get into AI, as you get into the ability to utilize data, use information to manage your plant operations. We are going to be in a much better position in the future than we are today. But let's not forget what we've accomplished getting to today. So -- and this is all accretive. This is good for the shareholders, but Titan systems are very antiquated and we've been able to do a hell of a lot with the people that we have. So personally, I can say we're very committed to only advancing forward in a meaningful way to take care of our shareholders and our customers and give our people tools to do a really good job in the future.

Right. That's helpful. What -- is there -- are you sharing timing and what a working capital to sales target might be once it's done?

We're building out a strategic plan with more information that will get into kind of what the future looks like. Again, I think we think that level of -- what the Board put in front of us that working capital level of around 20% was a very challenging goal and is a good place to be. I think our goal will be to keep it in that range and feel that we can comfortably take care of our customers while effectively managing cash flow in the balance sheet. So I think what the ERP system is going to do is really allow us to invest in the future in a meaningful way with technology, plant enhancements and again, better ability to take care of our customers. So I think working capital, answer your question, that target of 20% that the Board put in front of us is probably a good place to be.

Got it. Okay. And then any other benefits you want to talk about when you get in in place?

Well, again, benefits to our plants. Think of the technology that's going into plants these days. You got to have a good foundation with a good system. And so with that, we get the system in place. And then we have incredible people. Our technical engineers are brilliant. They know their way around the plant floor. Our plants are large, couple of million square foot facilities. These people are awesome. So again, we give them the best tools in the business. I'm really confident of what they can do. And so what I see is our plants only continue to enhance and get better, and we'll continue to build really high-quality products at good prices that lead the market and innovation. So again, this ERP implementation is not meant to scare anybody. It's really truly meant to highlight the accretive nature of what we can continue to bring to the table in the future instead of just relying on the incredible people we have at Titan.

Got it. Okay. And so 2021, a very good year, 2022, fantastic year 2023, another good year. It sounds like '24 is -- it's early, but shaping up to be another good year. Has the strength of this market changed the competitive dynamic? Do you see anybody -- any of your competitors making moves to add capacity or do anything different?

Well, I think the strength of the market is going to come from the fact that what -- almost what you just said, that we haven't gone off the map in a crazy direction like you have seen in the past. So I think that's the benefit to keep the competitive dynamics in a very stable nature. What's happened in the past is you would see not just subsequent good years like you highlighted, you would see incredible years and then you would get these concerns about not having enough capacity in the industry and people would run off in different directions. So I think the nature of your question kind of helps answer the question that it's been very good to see the stability. And I've referenced it in my comments, it's very good to see the stability in the marketplace where there's unmet retail demand and production schedules have been constrained, whether it's labor or supply chains. It's kept things in a very balanced order. And so it's allowed the strength of the market to come through in a much more stable manner. So I think we see our competitors acting rationally in that regard. And I think, again, it's good -- very good overall for the industry, just again, the nature of your question, to have subsequent good years instead of having 1 or 2 incredible years.

Your next question comes from the line of Larry De Maria from William Blair.

Hey, thanks. Good morning, everybody. First question, can you talk about just the cadence in the second half, really sales and EBITDA in 3Q versus 4Q?

Yes, that's a great question. I -- we only really put the full-year guidance out. But you'll see this typical seasonality come to play in Q3 with our European business. And then Q4, you got the holiday period here more in North America. As far as sales go, I don't want to expect it to be a totally different between Q3 and Q4. It's not going to be your traditional big step between the 2 quarters, to be honest, just because of the destocking that we believe will be more prevalent in Q3 and then less prevalent in Q4 and then you have your holiday period. So it's kind of even things out more importantly.

Okay. And then probably a similar -- I guess your point is that probably a similar level of EBITDA to then if similar sales and you have the European headwind, 3Q and the North American 4Q, I guess, right? Okay.

Yes.

Can you talk about, I guess, I guess, in the guidance, what are you embedding for OEM and aftermarket, I guess, volume? Because I would think that aftermarket should be strong and partially offsetting some of this, but just kind of curious how you're seeing aftermarket OEM volume in the year.

Yes. I mean, you bring up a good point. I mean the aftermarket business has been more steady, less impacted by the inventory destocking that I mentioned. I mean there's a little bit of that going on just because of interest rates, but nothing to the extent that I was referencing earlier. And one of the things we've been talking about internally. In fact, I had somebody -- one of our plant leaders mentioned it to me yesterday, just the great job we've done with serving the aftermarket over the last five years has provided a level of stability that really -- they appreciate as a plant leader because of what it's meant to keep things, again, operating in a more efficient, effective way because of the aftermarket. So yes, that's something actually -- again, we talk about that internally. We're very grateful that we've built a strong aftermarket business. We continue to keep doing that. So more of what we're talking about, Larry, to answer your question, is driven by the fluctuations in the OEM demand as they work through the inventory.

Okay. And then last question. I mean, obviously, it seems probably over earned last year and you're going to under-earn this year. And if we think about, maybe, say, next year is a flattish retail market, right, maybe construct EMCs up, maybe small Ags down a little and large Ag is okay. I mean high level; do you think the best way to think about '24 is like an average of the 2 years? Or is it more likely to be flat with '23 -- or I'm just trying to kind of parse through the message of -- because we're under-earning this year, but we probably over in last year, you kind of maybe produce to retail sales next year, and there could be some catch-up. So maybe it's an average of the 2 years? Or I mean, how are you thinking about it?

Yes. I mean we're looking at it more at a higher level than to answer your question that specifically. I mean, we're looking at the macro perspective right now. So using the assumption that the inventory issue gets resolved then you're operating more in line with retail sales levels. And so right now, at this point, Larry, to be honest with you, we haven't gotten into the granularity to kind of -- to see what that means. I mean I will look -- I will reference the comments that came out from -- you look at the large OEMs over the last week, they're very positive about where the markets are at and how they see 2024 starting. I know the early order books are off to a good start from everybody I talked to. So I think there's a lot of very positive signs that are specific and not just at the macro level, talking about fundamentals. And so I think there's a lot of good momentum starting '24. Now I've been able to articulate that into full-year results, we're just not quite there yet. But I do think there's a high level of confidence that the year will -- the demand will carry over into '24 and the year will start off very well. So give us a little bit of time. Maybe next quarter, we can come back to you and talk a little bit more about the full year '24. But I certainly see again, the carryover effect from the strength in the markets in '23 starting off very well for '24.

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

Yes. Look, I want to thank everybody for attending the call. I also want to let you know that we got a busy schedule coming up with -- in August and September with the conferences that we will be attending. I'd like to list those real quick. It would be great to get the opportunity to connect with investors or any folks there at these meetings. But listen them out here, the 3-part advisor events, it's their Midwest IDEAS conference. Then we'll also be attending the TD Cowen Annual Global Transportation Conference, the Barrington Fall Investment Conference followed up by the CL King, their Best Ideas Conference. We'll also be attending the Sidoti Small-Cap event and then wrapping up the cycle here in September at the D.A. Davidson Diversified Industrials Conference. So again, we'd love to be able to connect in person with anybody that will be attending these events. And I want to thank you again for participating in today's call.

Thank you, sir. Thank you for attending today's presentation. The conference call has now concluded.