Titan International, Inc. (TWI) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Titan International Incorporated second quarter earnings call. During this session, all-lines will be muted until the question-and-answer portion of the call. (Operator instructions) Any statements made in the course of this conference call that state the company's or management’s intentions, hopes, beliefs, expectations or predictions for the future, are considered forward-looking statements. Please note that the Safe Harbor statements contained in the company's latest Form 10-Q and Form 10-K filed with the Securities and Exchange Commission extend to this conference call and any forward-looking statements involve risks and uncertainties as detailed therein. At this time, I would like to introduce Titan's Chairman and CEO, Morry Taylor.

Good morning everyone and there must be a few open lines there because I'm getting feedback. Good morning everyone and I see most of you in this call probably have all the numbers and everything. We had a good quarter and as you can see, I believe everything is improving. The unique thing about this quarter is that all of this was done as we were bringing the 63 into production this month. And in the future we have a chance to, we believe, do better in the second half due to the 63-inch. The third quarter will be the toughest of course. Why? That's because we'll shutdown for one or two weeks in July for our maintenance and most of our customers will also shut down. But we are looking at going into the future with a very exciting second half and then going into the next couple of years. I mean, everyone can see what's happening in the agricultural side especially with our [brand set] there CNH and AGCO, all of this scheduled for the future are up. In fact Deere has sold out and they are still shoving things up expected and then just blowing everything out just like CNH's and so as AGCO. The farm is going to continue to grow. And the question comes, we haven't figured it out but eventually one of my Board members (inaudible) Wall Street whoever thought we had a liquidation, liquidity problem I'll get it out certainly in the market is a little bit and should get out of the business. Simply put, we are on the move. And with that Kent, you just level off the numbers.

Okay. Thanks, Morry. I just had a few items here because I know everyone wants to get to the questions. As a reminder we filed with the Securities and Exchange Commission the SEC report on Form 10-Q for the second quarter ended June 30, 2008. As the release stated, we had record sales of $269 million. They were 28% higher when you compare them to the second quarter of '07. When you look at the higher sales number you can see that it was helped by, as Morry mentioned, the exceptionally strong demand in the agricultural market and when you look at it, as a percentage, it was up almost 50% with the higher sales number quarter-over-quarter. Looking at the total sales by market you can see the agricultural market was the big mover. It was up $61 million and ended the second quarter for the three months at $185 million. Earthmoving construction was also up. It was higher by $4 million and finished the quarter at $76 million. Our consumer market was down for the quarter and it finished the three months at $7 million. Looking at the gross profit you can see we made a big improvement there. We increased gross profit by over $14.5 million. We recorded $41.9 million of gross profit and that's up from the $27.3 million result in the second quarter of ’07. Our trend of low selling, general and administrative expenses continued in the quarter. We came in at $15.3 million and when you express that as a percentage of net sales that comes in at 5.7% in this year’s second quarter. Moving down to the income from ops. We had over $11 million improvement in the quarter. Income from ops increased to $24.4 million up from last years second quarter of $13.2. When you look at percentage to it, it was at 85% improvement in income from ops. Moving down to the pretax number you can see it more than doubled quarter-over-quarter. We recorded a pretax number of $22.2 million, an increase of over $11.5 million from the pretax number of $10.5 million that we recorded in the second quarter of '07. After taking into account the tax provision, Titan second quarter net income was $13.3 million or $0.48 per basic or diluted per share which comes in the same either way versus the 2007 numbers of net income of $5 million and again $0.18 of earnings per basic or diluted earnings per share. Moving over to the balance sheet at June 30, 2008, you can see we had a large cash balance of $69 million, accounts receivable $139 million, and their inventory was $118 million. Again at the end of June '08, we had no cash borrowings on the company's $250 million revolving credit facility. Total debt at June 30, 2008 was $200 million. All of the debt is long-term, as our short-term debt remained at a zero balance. The only debt that Titan has is the five year $200 million unsecured note, which comes through January of 2012. Pension is up with the stockholders' equity, it moved by 12% during the first six months of 2008. Equity has increased $33 million from the year end '07 and we have surpassed the $300 million mark on the equity account and it now stands at $305 million at June 30, 2008. As a reminder, our company's website is www.titan-intl.com. And with that, Jenny, let's go to the questions.

(Operator Instructions) Our first question comes from the line of Saul Ludwig Go ahead Saul.

Good morning, Morry.

Good morning, Saul.

You are talking about the shipping and 900 of this 'big daddy's in the second half of the year. Will that be heavily skewed to the fourth quarter?

No, it's going to increase

Could you talk in and it's hard to hear you.

Well, I'm talking it to it.

Okay.

In fact you are not hearing me though.

Okay, we'll do that.

[You are] the only one that's older than me pal on this call. So, you should knowledge your age that it's a continuously ramp up. So, you'll end up with more in the fourth quarter than you were in the third.

Did you see it sort of like 300, 600 or 200, 700 or…

No, more than that given out any of that information, as I say our goal is 900 and I think we'll meet that and we have the orders for it. So, I just got to confirm all.

Okay. And the other question, I had in the sales were great in the second quarter that's terrific, we saw a 20% increase. How much of that do you think was units and how much was price, as you were pretty aggressive on the pricing?

Well I don't keep track of the units and I don't keep track of the others. So, you've got the end results also anyhow that's why I have a low SG&A. I'm not trying to figure out whether it's a 15-inch tire is a little bit more or whether it was the 800/38 I just don't keep track in that way, Saul.

Okay. And finally a balance sheet question. I noticed from December till the end of June that the inventories went down by $10 million buck, which reflects the heavy shipments that you had, yet your accounts payable went up by 50% or something. Are you, certainly have enough inventory to make shipments in the second half or did you have to deplete into your units, if you well?

Saul, if you look at it you will see (inaudible) inventory that's over a $100 million.

$118 million, right?

Right

Little down from a $128 million at the end of the year or so?

Yeah. It just means that a lot of the stuff that was sitting there, we got out with our -- truthfully our inventories are little bit of on the high side. When you start [accompanying] the 63 so as soon as they come off you'll improve them and get a wheel and put them in a truck and send them off. So, and that's pretty much lower tire selling in the ag side. So, the inventory hopefully will continue to keep coming down. We surely in this market --we sure don't want to sit there with the $100 some million. [They saw some] the worrying words about the commodity boom and it starts coming down you want to make damn sure that your inventory is down to the skinniest level you can make. I'm not interested in all the new inventory. I want to get it. I would like to see that finish as the inventory from the $118 get down to probably in the $60 $50 to $60 million range.

And finally, you have any idea of what percentage increase you had in raw material costs at the second quarter of this year versus second quarter last year on a sort of a per unit basis or per pound basis really there is changing mix. But you would have some sort of apples-to-an apples. What do you think your raw materials were up?

Well, there is no question. Let's stay still.

I made sort of the [billable] material of a tire and different pieces have sharply different changes but if you put them all in the proper rating, what do you think the bucket cost was up?

I have no ideas. All I know is that we run our rates every January and they run plus or minus. And then we get that every year, every month. And then you love to see that if it's on the negative, if it's material you go out with the price increase. So, that's how I look at. I don't break it down to find out what carbon black did or what nylons did I have got people to do it. But, I'm a little bit busy in trying to make a 63-inch my friend.

Okay. Well, keep profit on that Morry. Thank you very much.

The next question comes from the line of Charlie Rentschler. Go ahead Charlie.

I was wondering Charlie, you are sitting in Indiana today.

I'm, it's starting to rain here its lovely. I was wondering if you still have some more work to do in the pricing arena to get on top of cost pressure so you are pretty well where you want to be?

[You are never], where we want to be. I think if you look at your numbers you'll see that the margins came up. I think we are going to continue to watch the material make sure we surpass that and there is a lot of little money margins that we think we can get just from [along] the tax arena stand point. I think the biggest thing is that everything that we did in the second quarter everyone should realize that was all done at the same time that we brought forward this production of the 63-inch and then it's ramping up and the 63-inch is just not contained to Bryan. There is components that are coming from Des Monies. There is components that are coming from Freeport. So, in doing all of these and increasing the employment and all that those were other facilities evolved and done. They have been expensed and it affects everything. So, we know that once we have it smoothen out in the ramp up that our margin should increase from where they are even today.

Okay.

We are looking forward to a year interesting next year as this thing really starts to build the mass.

Okay. With regard to the 63-inch tires, the 900 you planned to produce in the last half year. Can you share with us your strategy of where these are going, are they going to mines or some of them going to OEM truck builders [what is your] sprinkling around the world, what's your strategy there?

Currently, we have tires going meaningly up to the first probably 100 will go to oil sands and stay in North America various coal mines, various coal copper and the gold. Then the next batch some will go to down under, we have friends in Australia and have friends in some place in Indonesia. Some will go to South Africa. Some are going down to South America. Now these will be, we have publicly stated that we expect the end of October, the first of November to have the 57-inch, that's 'sweet mama' so the 'big daddy's are being roll in and we have I think, we run between 12 and 15 through our task. And we have never been able to sell our carcass of the tires, so we think we got the 'big daddy' this has surprised a hell lot of everybody. And I think the thing that most of you, who are in this phone and I appreciate you are just financial people. But from a manufacturing side, it's quite a challenge in fact a year ago, not in the year ago this past February at the OTR Convention after I gave manual speech. I love the island because they had a panel. And on that panel, there was Bridgestone, Michelin Goodyear, Titan's own whole office. And the first question from the audience was, while we listen to Taylor, do you believe they will be able to [put close] productions within a year? And Michelin radically said no, Bridgestone said no. Goodyear said no often we (inaudible) want them to believe that, who said these it's going to happen and of course it's happened. So, we think that are competitors, they just won't call up to the modern time what can happen when turn people loose. So, we are rocking and we are rolling.

Well, thank you Morry and good luck to you.

Thank you.

And the next question comes from the line of Alex Blanton. Go ahead, Alex? Alex Blanton – Ingalls & Snyder: Good morning.

Good morning. Alex Blanton – Ingalls & Snyder: On the subject of margins the incremental margin, which is the increase in gross profit and what about the increase in sales year-over-year for the quarter was almost 25%, 24.9% were as your gross profit actual totals only 15.6%. So, if you maintain that 25% incremental profit margin then as the sales grow your margin will keep growing up pretty rapidly. But the question is this honestly the entire sales increase for the quarter was in the ag side of the business and in the future there is going to be a lot more on the earthmoving construction side from these big tires. So, is there anything different about the potential incremental profit margin on the construction side with the 63-inch and the 57? Is it less, more or the same, you mentioned the fact that you have startup cost that haven't been recovered yet in talking about the other plans, so that will help. But is it going to be -- can we look forward to the same kinds of incremental margins or maybe even better, who knows?

Well, the answer is real simple. The only reason at my age or even I looked at the super giant is recovered from the margins. We have a shortage on the super giant, which is the 63, the 57 actually the 51 is short (inaudible). The margins are the largest margins of any tire. So, I'm not going to tell you exactly what they are but to answer your question everything should improve in a very expediential fashion going up, okay? Alex Blanton – Ingalls & Snyder: That's a very good answer, Morry. The other question is this you mentioned I think antidumping duties in your statement in the press release but you haven't talked about that. Is that a significant item or not for you going for us?

What happens is that it's not just in the tires it's almost in anything. When you have the Chinese Government -- it's the shame in this country that it takes a smaller [guys] that step up and say enough is enough. It's just like that can we get off the East and the West Coast. So, what happens is -- it was crazy you cannot have tires coming in which have always been at the small side, the high volume you need those to cover your fixed cost and everything. And that the hearing was held the Commerce Department upheld what we struggles happening and they swapped final has been done then we had the hearing, its still isn't done, they are going to make the ruling, I think it comes after him they have all just done that sure. But we brought the testimonial to it and it's doesn't just helps us, it helps all of our competitors in North America., okay. But we didn't seen even though Firestone/Bridgestone supported it, you never see them leading the way and thus supporting that, okay. So, in another words the $3 plus million (inaudible) with the booking and we have to repay it. We had to lean it. So, we are in the fringe of violating the law and even though as a company turnaround and bring it to the government I think that's one thing that power stations will try to figure out how to correct, but I don't think that will happen. So, is it helpless? Yes, it helped. Will it help more in the future then it has in the last two quarters? Yes and you have fixed commissioners, who brought the evidence their staff is compiling it and as they can uphold the Commerce Department findings, they can say, we wanted to go the other way, they can modify things. There is no question the evidence shows what they were doing gusting our positions. So it's, a legal matter that stand enough for what the loss.

Thank you

You are welcome.

Thanks. The next question comes from the line of [Joe Collin]. Go ahead, Joe.

Hi, this is a question for Kent. Kent, are you still with us?

Yeah, I'm here.

Okay. How many options were exercised in the second quarter?

I don't have that in front of me. You can give us a call.

Okay, I guess the reason I'm asking is when I look at the cash flow statement, there is a line item that's an add back to net income, that's excess tax benefit from stock options exercise of $4 million roughly.

Correct.

That is from the second quarter. So, I'm trying to think that's obviously from the income statement and I'm trying to figure out where that lies in the income statement because it's $0.14 of profit. So, I was wondering if you could address that for me?

Not as an -- to the income statement, it's just the equity.

Well if I think I'm pretty sure to hear that it says adjustments to reconcile net income, the net cash provided by operating activities. So, it is an add back to net income?

For the cash flow, not for the income statement…

That's on the cash flow.

When the people exercise the option, they give the cash and get the stock and doesn't run through the P&L?

Okay.

I think you can give us a call and we'll give you the number?

It goes in your cash, Joe.

Okay

So, that's not net income or any income of the statement at all.

Okay. And then I guess my last question how many shares did you buy in the treasury in the quarter?

We didn't repurchase any stock.

Okay, that's it. Thank you.

You are welcome.

[I see] just a number of callers and the next caller I don't have their names but caller your line is open please state your name. Caller, your line is open.

Hi, Ian. Ian Zaffino - Oppenheimer & Co: Yeah, Kent, okay. (inaudible)

Well Ian is on the phone. I happen to be in New York for this conference call and that from 5.30 to 7.30 Ian has some people [up to 21] so if you wish to come and just (inaudible) call me up. Go ahead, Ian? Ian Zaffino - Oppenheimer & Co: Okay. Question would be, I guess from back to the last question though. This shows us nothing is really in the income statement and it was like very a clean number. But I'll what I want to get out is on the earthmoving side, how much of the sales growth was driven by the larger tires 57 etc and what was the rest of the business doing there? Thanks.

Well first thing we didn't ship any of the 57 or 63s into the second quarter. Ian Zaffino - Oppenheimer & Co: Yes.

They started in the third quarter, all right. And we are, so at the end of the third quarter we'll give you a answer to that question. We are not going to start at third quarter and before its there. Ian Zaffino - Oppenheimer & Co: Okay. And then how much of the earthmoving is I guess, construction versus ag?

We have to stop in. You see and this is about the 50th time I have said this. What everybody should understand is that housing and earthmover are two different things. Now, when you look at the Caterpillar, Deere's and all that. John Deere and Caterpillar produce skid steers. They produce backhoes. They produce small graders. There is telescopic handlers there is a lot of other equipment. That all has a tendency referenced from wheels and from tires of all being in the same construction mode and somewhat agricultural tires are. The earthmover tires have a much larger and they are used into load building. They are used into landfills etc cetera and they generally go into a size range of 35-inch and down. Then above that you get into what we consider the real [personally] which is a better terminology doing mining and the mining tires are greater than the 39-inch and above. We'll jump to this point in the second quarter we only went up to the 51-inch. So, w have the 51, the 49 and 45 and the 39 inch and the business has been very, very good. So, that's we only make in those sizes, highest tires and we'll be regularizing them within the next probably 12 month the whole way. Ian Zaffino - Oppenheimer & Co: Okay. And then you also mentioned you are holding back for '08 give us the reason for that? And then you ended the quarter with higher Midwest than you expect to buy

Well because there is a lot of reason. We can't like to add even a little more robust than the second. But as everybody can remember you have seen them at all in the TVs that framing out so much and Bloomberg and CNBC with sometimes a flick of flash. There was a little flooding out in the Midwest. Now none of ours facilities were affecting. But what happens is its just like giving trucks and everything else impeded the shipments currently speaking your inventories if you have made staff you would ship within the second -- you will have shipped it, but every option, should clean your place out when you are at the end of the quarter. But this time, it was a -- we couldn't get to trucks. So, we are going into the third quarter and this will probably be, do we have chance to surpass the second quarter. I think there is a remote chance. My hands are less than 50/50 that because of all the shutdowns and earnings. But we have the opportunity, it's for everybody, it's a vacation generally in July and August. So, but the economy and what we are in is hard enough and with the 63-inch tires, as we'll ramping those and approximately at 50,000 a top that I think that if we shipped the wheels within that it's another 25. So, that you didn't get out a real quick on that. So, we are going to have, there is no question a very, very good third quarter and unless we get snowstorms and shut everything down we should have one hell of the fourth quarter too. Ian Zaffino - Oppenheimer & Co: Okay. Very good. It's weather again.

See you Ian.

Once again, the next caller ID, I don't now their name. Caller, your line is open. Please state your name.

This is Phil Volpicelli.

Hi. How are you doing Phil?

Hey Morry, how are you?

Very good, since you (inaudible) I hope you tell everybody that I don't have the liquidity problem. At the end of the last call I think you talked to somebody, who got on the phone, who was worried about the commodities dropping, oil going to $10 bucks and going to $1.50 buck, [skies] falling and everything else. So, anyhow what I can do for you today.

Well first of all congratulations on getting the tires up. It's a great accomplishment. Just wanted to, if I remember correctly you had some obligations that you have to meet in terms of certain level of production at certain period of time. Have you met all of these obligations or is that something you expect to meet in the third quarter?

We meet those in the third quarter, Phil.

Okay.

And I think we will meet those.

Okay. And in terms of the margins or I guess the selling, general and administrative. How low can you bring those down, they are kind of up a little bit higher than they have been in the past I think some of that might be with regard to the potential acquisition of Titan Europe. When is, there a time still those are intact and when do those SG&A costs starts to come back down?

Well, SG&A it will always should run between the 5% and 7%. There is no way somewhat 5.6% or 5.7% what percent was it is?

5.7%.

5.7% so and these are on my low range correct.

Yep

So that's the only thing you could find and ask at all the stuff out there. How low can we go? You were probably on a limbo contest to note ever see it high low, can we go well we can't get to zero unless I give Hackamack and the accounting people and all my trillion internal auditor and yet (inaudible) to come in and do this stuff for free. I'll switch accountants.

Let me ask at a different way. When you talked about guidance for the year I believe, earlier in the year you said on $120 million to $150 million of EBITDA and $922 billion of sales. Are you still comfortable with that range? Morry Taylor Well I'm comfortable on that for a bottom range. I think we can, like I said everybody looks at where we are cranking. I think we should be able to do that and possibly a little bit better. Things are really starting to click in. I'll have to say that all of the tire plants are starting to hum. We have a lot of excess capacity and our exports just like went to the John Deere [Graph] Holding and I don't think in the past, Deere from a construction site, Deere didn't have to do a lot of offshore. And, but I think what's happened is over the few years I think they have concentrated on improving their distribution of their equipment, their make hood equipment and I was after John Deere (inaudible) Gas. I ran into one of their huge South American dealers for their construction equipment and forestry equipment and we are going to be setting them up as a tire distributor down there and that will be in the construction of forestry sites. So, there is so much more we can do on the export side mainly because of the price of the dollar I appreciate everybody else looking about and I love it. So, we have so many opportunities that up to this point I don't believe and I'll take the responsibility for it. We have been so focused on getting the 63-inch which we have to but because of these events that is going to open the doors big time. And we just South of us and South America it's a huge, huge market. It's like virgin land to us so I got to send my pirates down there.

Sounds great. My last question with regard to Titan Europe I think the company had put out the time line and that we would have more information in August does that spill the plan and is everything still on track?

As far as I know we had to wait till our earnings came out in our public statement. I do not know when those have been the issue, they are not. But once there is our issue then its PW who handles theirs, who handles ours I think convert them all into a gap then its got to go to the SEC and then once the SEC puts it and then we put it out and we go to our shareholders then there will be another conference call which I'll just like this call I'll state what I think, where I think and what I think will be the reasons why? And then I'll answer all questions and even today I got to take somebody from Merrill Lynch in order to make sure I don't talk about anything to give anybody that's because of takeover path in England. So, I walk around with the shadow, the Merrill Lynch shadow, okay, which is in conjunction with you guys, so that' what's happening.

All right, well I'm sorry to say, congratulations on the good quarter.

Thanks.

Thank you. Hey, Morry.

Yeah.

On probably one of the questions, they want to know how many exercise of stock option shares and if you go to page 3 of the form 10-Q you can see it was $226,850 shares. So, this is for everybody on the phone. With that Morry, you want to finish it off or?

Well, take another question and then I'll get out of here.

Okay. The last question then will come from the line of [Wayne Smith]. Go ahead Wayne.

Hi, guys thanks for taking my call, I want to get back to the stock option compensation because there were I guess two callers you referenced that and it remained a little bit …

Hold on just a second. Is that going?

Yes, can I go ahead?

Yeah go ahead.

Okay, great. So, on the stock compensation, if you could go to the cash flow statements in the 10-Q page four?

Right

In the adjustments to net income, there is a line that is excess tax benefit from stock options exercise?

Right

Kent, you and Morry talk about how the cash flow impact was strictly on the financing activity side that's incorrect. There is a line in the financing activities that are proceeds for the exercise of stock option that's $3,220,000. The line in operating activities which is a deduction from net income is related to the tax benefit that companies are to hack when their employees exercise options that have the gain. So effectively…

That's correct but I'm booking at a 40% tax rate. So, I'm taking the full tax expense. I didn't reduce my tax rate.

Well but there the auditors reduced your net income concurrent with that and in addition I'm trying to understand what the right tax rate is because in '07 you were at 55% tax rate?

Right that's going forward, where we take a quarter-by-quarter, but we are booking at a 40% tax rate this year. The reason it was higher last year as we have that non-detectible conversion charge that's $13 million, $14 million.

Right.

Was not tax detectible so that increased our tax rate for last year. But so far this year, we've kind of settled -- we are booking at a 40% tax rate.

Okay. So, you are booking a deferred tax benefit as well?

On the stock options that would be.

I don't see a concurrent increase in your deferred tax benefit on the balance sheet?

Well we'd have used some of that for the tax payments. But going forward, as we told everybody we are going to be booking around the 40% tax rate.

Okay.

Okay.

So the $0.14 related to the tax benefit add back you are saying, we shouldn’t take that in consideration, when we were looking at net income going forward.

No.

Okay.

We are going to be in the 40% rate.

Okay.

Okay.

All right, thanks guys.

You're welcome. With that, Morry.

With that, thanks everybody and like I said [Holley] and if you got some late lingering text questions, you can see me at Taiwan, have a glass of wine. I think you are going to [see cash] on that show up. All right, have a good day. Bye-bye.