Titan International, Inc. (TWI) Q4 2012 Earnings Report, Transcript and Summary

Good day ladies and gentleman, welcome to the Titan International Fourth Quarter 2012 Earnings Conference 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 Statement contained in the Company’s latest form 10-K and form 10-Q filed with the Securities and Exchange Commission extends to this conference call and any forward-looking statements involving risks and uncertainties as detailed there in. At this time I would like to turn the conference over to Titan’s Chairman and CEO Maurice Taylor, please go ahead.

Good morning everyone, we’re up here in [ph]Sunny, Boston today. Actually, we’re at an investor conference. All of you should by now if you’re on the call you would have gotten the release as you probably see one thing -- some of you did not get would have been the 10-K that will be going out Wednesday, the reason that is, we have been putting amount the same time we do the press release, but because of everything in Europe, the acquisition and everything, it’s been a little or more time consuming to get everything gone through the numbers between our internal audit check and everything. Besides our outside auditors, they’ve had a real interesting time, getting everything how we have to do for (inaudible). So, that’s the only reason that’s going to be a day late, so anyhow, they’re working on it. We had a great year. Well ’12 goes down as our record year. The fourth quarter brought us a few surprises, it’s not that we are going too cranked up on it, but I’m going to concentrate first on the fourth quarter, as you seen by now, we added the acquisitions. I made my first trip to Australia, and went through between Titan Australia, and our planet group and between the two of them, they are doing approximately a $130+ million. I expect I have told my board, there is no reason why in a short period of time they should not be able to double that business. And I’m really excited about what’s going down there. The other situation is of course, the Titan Europe, and Titan Europe has problems (inaudible) and earthquake in their wheel business. And in order to take care of their customers, they went out and they contracted with a number of…

Sounds good, thanks Maurice. I just wanted to start by looking back on 2012 whether it really was a transformational year for us where we became a true global player. And really, the segments we serve, but also getting out there closer to the customers we serve, and we did that by getting into Australia with the Planet Group acquisition, we got into Canada with SWT joint venture. This really strengthened our presence out there with these expanding locations, but it also gave us that ability to grow and expand our mining services capability. Then we got into Titan Europe and their worldwide footprint gave us good proximity to our customers throughout Europe, but as Maurice mentioned, it gave us global locations that again gives us that platform that’s out there closer to our mining customers and gives us that ability to really expand into the service side of that business. In Sao Paulo, we had really a good strong finish to the year with our investment there. We got the approval from the government and we are moving forward this year with the implication of a calendar line, we got a state-of-the-art strip winder up in place there. So, things are looking great with the investment we have been able to make in Sao Paulo. And then you look at our US plans in 2012. We increased our mining capacity. We got our Union City rubber mixing facility up and running very successfully. We got new systems in place. We have also been able to put extra R&D investment with really the top farms out there in the US. So, all in all 2012 was a transformational year for us and all that is really good for the company as we build the foundation for the future, but we…

(Operator Instructions) And we have a question from Ian Zaffino. Please go ahead.

Hi, great. Thank you very much.

Good morning, Ian.

Good morning. Paul, can you give the revenue contribution-wise for Titan Europe to the quarter?

Unfortunately here, we cannot break that out separately. You will see in the 10-K that the pro forma information was $2.42 billion for the combined entities for the year, but again, Titan Europe will just get folded into our existing segments, that’s about 75% of that will go into earth-moving construction.

Okay. And then on the overtime in the U.S., can you give their incremental overtime costs were or maybe quarter-over-quarter, year-over-year, how much more are you paying in the fourth quarter compared to a typical year?

As far as quantifying it, we will be able to quantify it. As an operation, we do want our plants to get a significant amount of overtime. That has been our practice and it’s been successful from an efficiency standpoint. We have seen a spike in that as mentioned with the union situation, we have had to – we haven’t been able to adjust headcount. And so, it’s a key talk with demand, we have seen a spike in our overtime, but again as major of our business operations are we are traditionally running with overtime throughout the year anyways.

Okay. And then just final accounting question here. What’s the diluted shared count, if you had a profit for the quarter?

If we had a profit, it would be right around that, getting close to 60 million, it’s about 58 million. Let me get you the exact number on that.

Okay. Thanks guys.

Thank you. And our next question is from Alex Blanton. Please go ahead.

Hi, good morning. Just to continue the last question, what part of that – can you say what part of the pro forma, 242 it Titan Europe?

No, we can’t Alex. Unfortunately, Titan Europe is part of our overall operating segment results.

I understand that, but typically when companies make a sizeable acquisition, they do break out the sales from that’s added for a full year until I loaned it a year, so that people can get a sense of what the organic growth is. And you are not going to do that.

We will have to discuss internally what we may present going forward. Now, keep in mind, we only have two months of results that are in this quarter.

It was two months, what, November and December, right?

Yes, November and December. So, the impact is fairly small at this point, Alex.

Well, but the pro forma numbers are not small?

Right, the pro forma is for the entire year, correct.

Well, I hope that you do disclose that because that would be helpful in understanding the company now. On December 6th in the guidance call, you discussed the outlook for 2015 being 4.0 to 4.5 in sales. With this year being 2.4 to 2.7, well, now we see that the 2.4 really would be flat on a pro forma basis. Correct?

The first thing is, Alex, we are turning around and I gave my guidance, okay. And I said in the earlier part, I know what happened in the fourth quarter. And a question was asked to me earlier today and last night. Am I going to change? I said no. I said if anything I think will go up. I also said, let me finish now. I also said, and I have stated, I have some more acquisitions that are coming, okay. So, if you are asking me, and I know what I said on the 4.5, when I gave that number, I also said to you, that would probably be the maximum that we could go because I will run into regulatory problems, and I am still on trail to do that. And if I stay healthy, and I stay where I am at in this business, that’s what I expect.

I was just trying to get a sense of the numbers here. The 2.4 would be flat. So, actually it’s not increased as it looks like. By the way, the 2.4 does include the shortfall in the fourth quarter from these labor problems and so on, I assume. And it’s the actual number, right?

That’s correct, Alex.

Okay. So, if you don’t have those problems this year, it would really affect more than that, so that the base here of sales, 2.4 to 2.7 that you mentioned in December, really isn’t that outlandish. It’s a reasonable number, correct? I mean, you are already there in effect. Now –

I am a reasonable guy, Alex.

I understand that. Now, do these problems in effective to fourth quarter that you talked about, the labor slowdown and so on, will they affect the first quarter? Because the labor – the vote is until March 4th. So, what’s happened in January and February?

What you are asking me is start commenting on the quarter, we don’t have all of the results, but I think there is a lot of other things that have no bearing, no that, and that’s got to do with Europe and that’s got to do with my real plans. So, they are doing pretty good. The Titan boys should always be doing better, okay. That’s a little bit of a curse that you get, reference to the workforce that you have, and I do believe that we probably run those factories at a better performance level than anyone else does in a country with a unionized workforce. But I think I am confident that going forward, you will have to understand there is a lot of rules and regs when you scroll around in the labor force. It’s not just we would be up on somebody over in a different country, we got the same problem here in the U.S. It doesn’t take a lot. You got a quota of appeals that overturns the National Labor Relations Board, they will just ignore them. So, I can’t quite do that. But we are marching forward.

One more question and I will get off. You didn’t acquire the Goodyear plant at France, but that plant looks like it will shut down. Correct? What will happen to those sales? Will you pick those sales up somewhere else without acquiring that plant?

Well, you have so many – first thing, let’s talk about the Goodyear facility there and which I have said publicly. They try to save 500 jobs. They lost, I think you have probably corrected. So, the closing now and what the losses were about $200 million. The CGT union over there is a very leftist. And the guy, that’s the president of it, Michael something, I call him Spike. It just shows you what has to happen. I answered the letter. It’s quite obvious. The minister put it out public, I did not leak nothing. I told the truth. The whole joke, I probably share to put in the letter, what the hell is he bothering me for, I don’t own the factory. They are not my employees. And why in the hell aren’t you over with Goodyear and them settling it? He even understood his own laws, I can’t talk to him. If I start talking to that Goodyear Union, then I own the problem. That’s how goofball they are. So, the whole thing is goofy over there. And we are going to try to take care of our customers, and at this point in time, it’s premature for me on a conference call to turn around and tell you and everybody on this call which happens to be an awful lot of my competitors what now am I going to do. So, we are going to be in that market. I will leave it at that.

Thank you.

Ian and others on the call, I just want to get back on that diluted share count. If we had a positive result for the quarter, it would have been 58.3 million. Sorry, operator. Thank you.

No problem. And the next question is from Schon Williams. Please go ahead. Schon Williams - BB&T: Hi, good morning.

Good morning. Schon Williams - BB&T: Paul, perhaps maybe you could quantify the impact of the earthquake? I mean, is there a number you want to wrap around in terms of sales or operating earnings impact from that event and did that carry into Q1 of this year?

Unfortunately, the only item we disclosed within our adjusted net income where we did include it in part of our $2.5 million of rationalization costs are the earthquake-related costs. Since we are still negotiating insurance settlement, we are really not in a position to be able to discuss what we view the impact to be or what the actual costs were because we are still in the discussion stage with the insurance company. Schon Williams - BB&T: But the full number is included in that Q4 restructuring?

No, that’s more of the hard costs. That’s more of the costs you could pull out, the overall insurance claim amount will be much larger than that. Schon Williams - BB&T: Okay. And then has that disrupted operations in Q1?

The problem that we ended up having, which I spoke earlier about, is take this example, Titan Europe, orders from Titan U.S. before the acquisition and we ship over to them the 25 container loads of rims. They get the product. Now, we cut the deal, and we own them. That receivable has not been paid. Now, since we own them 100% per se, you turn around and it’s an inventory over there. So, I don’t know exactly which way, but we have a deal which is like, now intercompany transfer pricing. So, you got to go through that whole process. So then, it gets lowered probably over here in our side, we lose, and then what takes effect is it make them look a little rosier than what it would have been the other way. And they got the same situation where they bought a lot of inventory of rims, and they are wearing that off from the standpoint of getting it out of their inventory in the first part of the year. But I believe the cost that was over and above their internal costs was picked up in the fourth quarter. We should have done it, I don’t know if it was done. Schon Williams - BB&T: Okay. And maybe, I know you don’t want to I guess delve too much into the numbers in terms of the labor dispute, but I mean, could you just quantitatively, should I expect the impact that the labor disruptions had in Q4? Should I see something for the same level in Q1 or should I see it essentially kind of trailing off throughout the course of the quarter and essentially, assuming we get a deal done, March, there should be no impact kind of going into Q2?

Well, I don’t believe I think that my belief is that the union negotiated with us with the intent of getting for their members the best deal they could. And we as management of Titan, negotiated so that what we gave that through our efficiencies in what we are doing should not add to the cost of our product because you can’t add to the cost of the product, and I believe that the international and I also believe all the members that were part of that bargaining company at least from what I have been told were probably recommended, and if they do, I think the employees will ratify it, but that’s an unknown. (inaudible) And I can’t talk to the employees, that’s another thing that’s stupid. But that’s the way it is. I can’t – you asked me questions, you know, I know what answer I gave you. It’s an answer that’s going to case many problems. So, we will wait till March 4th. To tell you, it’s a four-year agreement. That’s the only thing I can tell you. Schon Williams - BB&T: All right. Maybe kind of switch gears here and just kind of last question. Maybe positive surprise in the quarter, the fact you have gotten government approval down in Brazil. Can you talk maybe about what your thoughts would be in terms of margin expansion there, now that you have got some of that equipment in place and maybe talk about – are there growth opportunities? At one point, you talked about expanding into the Mexican market. Are there opportunities in Brazil on the consumer side you should start to realize in 2013?

There’s no question that, number one, let me clarify something. Last week is when we had approval. So, we don’t have that equipment even in the containers to ship, and I mentioned that earlier. So, we are working (inaudible) has got a team working on getting that stuff into containers and all the paperwork that will be shipped. So, we are not going to see that equipment probably until the end of the third or fourth quarter there. South America, things are moving up. They are getting their situation down there. We are pleased to see. Of course, the other situation is, as Paul said, currencies headed south. So, I would imagine that’s great for customers. It will give us a bigger leverage for Mexico, but I believe that we are excited about what we are doing in South America. I will be down there in a couple of weeks, and we are going to do some acquisitions down there. Schon Williams - BB&T: All right. Thanks. I will take that.

Thank you.

And our next question is from Philip Volpicelli. Please go ahead.

Good morning, it’s Phil Volpicelli. Maury and Paul, I was just wondering if you guys could give us the pro forma EBITDA that goes with the $2.42 billion of pro forma revenue?

Unfortunately we can’t because Titan Europe only would go through a six-month review where they release public information. So, we have a dark period there from July to September, October that was not reviewed by any accounts, and because of that, we were not able to give up that pro forma information for EBITDA. In a 10-K, you will see information that pertains to the overall bottom line, but again that’s not fully audited or reviewed information. So, we’re pretty limited on what we can present because of that.

Okay, and then Paul, can you walk us through with the proposed change in terms of the $275 million increase to the bonds. What that will do with the cash structure, obviously even if you (inaudible) involve how much and then, what else from the cash structure you are going to pay them? Can you give just give what the pro forma cash structure look like post that transaction?

Yes, we will get into that when we officially launch the deal and at this point we have not, as Maurice said we got the board approval to move forward but we have not launched. But when you look at [ph]our year debt structure, it’s been pretty well known throughout the acquisition process that we were going to do something with it, to get rid of their bank debt that had some pretty stringent covenants and use the ability and the strength of being a global company to improve our capital structure. So, give us a little bit of time, but we will get that out publicly soon.

Maybe I can ask you a different way, pro forma of the transaction, you expected to be leveraged neutral or do you think that leverage goes up slightly?

Well, we are looking to probably keep a little extra cash around, so I would say at this point I would leave us a little room to see the leverage go up slightly.

Not to push, but can you quantify how much of is it? Half a turn or turn, just any kind of guidance you can give?

At this point, I can’t we’ll get more information out there, I mean Titan Europe’s status $265 million at the end of the year. They have a variety of different bank facilities and, clearly you look at our debt structure, it’s a little cleaner and we have a favorable preference issuing bonds. So, at this point, I’ll kind of leave it at that and we’ll move forward with that here in the near future.

Okay, great, thank you.

Thank you and our next question is from the line of [ph]Carl Edwards, please go ahead. [ph] Carl Edwards: Good morning Mr. Taylor.

Well, good morning, the godfather, what I wonder you sitting on in this sunshine. [ph] Carl Edwards: We’re down in Sarasota here. Let’s say, where does the plant managers come in to the act here with regard to the labor issues and back in the third quarter and the second quarter of these workers were working the way they normally work and when did they suddenly, they changed their behavior? I first thought they be hired French workers, but probably as in this case.

You’ve been sitting in that sun, you just couldn’t leave the French out of this, could you? You thought that was so good didn’t you? [ph] Carl Edwards: When did your guys start to notice that there was efficiency issues and…

I don’t think we had efficiency issues, but I would say that, I really didn’t want to hear their excuses when an efficiency issue because of some of the unionized work force off for their negotiation periods, okay. But then when you get into it and you’ll find out that I got a bunch of freaking lawyers that tell me that’s true Maurice, but they told them that they’ll be gone this next week and here’s how many they take and their allowed to do that and now you’ll end up going to this hotel room in Indiana and they are all, approximately 45 of them and chit chatting, you know, they are allowed to do that by federal law, you know that. And then what happens is as long as I got that UB time even though if they – because they are in negotiation under Federal Labor Law, they have the right if they flock out to UB time, they have the right to go see their members and of course there is a little clause in there that says, “you have the right to (inaudible) them and not allow them to disrupt production all this other, but you’ve been around long enough, yes, I can have umpteen arbitration hearings and everything else, but I am trying to run a plant and I am trying to get an agreement for four years. So, I backed off, okay. So, I am not going to blame those people. That falls on me. I would rather end up with a fair deal for four years than just steam roll. If I had to steam roll, I will. [ph] Carl Edwards: There was an earlier question about the lingering effects of those issues into the first quarter.

It lingered in there, mainly into January. But since January the bargaining really then became more language. Everybody – those 45 plus everybody in the international, they are all reading this document, a word at, a word here, or this was off, all these things did take time. So, that’s what they did in the month of February. In fact, last night, a deal came up on – who sits on the freaking trust for the Viva, because Viva has got all those cash in it. I said, I don’t want anybody. Well, lawyers took that, I wanted nobody, but by law the company has to appoint somebody to sit on the Viva Trust. So, I did. [ph] Carl Edwards: Maurice, one other question. I have known you for a long time, you are assuming, you are telling like it is, and you are pretty straight forward. Back in December when you gave your guidance, you kind of knew what was going on here in the fourth quarter, why didn’t you use that opportunity to just alert people that, hey, we got some issues here in the fourth quarter, it’s going to affect the fourth quarter, you will have to wait until February 26, you are surprising everybody.

Well, because number one, in December the other situation that I was doing is I got umpteen lawyers that are telling you, you can’t say deadly crap, alright. You realize that the goals I set that’s why I have to have it so that I can only say the goals that I set for the managers of this business. You think it’s easy to jump and say, hey, here is this or that, it’s not my friend. [ph] Carl Edwards: You can make a complex disclosure as long as it’s a proper disclosure, just say, hey, we are having issues, this is going to impact our fourth quarter or the period. I don’t know what would be illegal about that.

Well, here, you have got a lot of other things that are clicking at the same time. You turn around, I am just giving you what was told to me at that time. I would have just assumed to turn around. Of course, you got two problems when you open your mouth like that. Number one, is you are falling into a trap of who has got power and who don’t have power in reference to your union negotiation, okay. So, there is a lot going on. I appreciate how you are going to look at it sitting in the damn sun, okay. So, I would rather go and do a few months battle and then have it set for the next four years, so, good, better and difference, and with all due respect to you, godfather. [ph] Carl Edwards: Good luck to you. Hopefully you get it set, get it straight, Maurice. Thank you.

I hope to. Is that it? Do we have anymore?

We do have one other question in queue from James [ph], please go ahead. James [ph]: Hi, good morning. Thanks. I will just squeeze it in. Just a question I have, I guess it’s for Paul, I think you mentioned in your comments that you are estimating pro forma net leverage at the end of the year at 1.4 times. I guess, a question that was asked earlier about the sort of the pro forma EBITDA. Is that sort of a number we could use to get a sense of kind of what you are estimating the pro forma EBITDA was for the full year of 2012?

I mean, it’s a very rough estimate, just to give you an idea that our leverage isn’t going crazy. What I am using is just six-month figures that were reported already under Titan Europe’s last filing before the acquisition. It’s just a very rough number again just to illustrate that. Even after acquiring the $265 million, our leverage ratios didn’t go crazy. James [ph]: Perfect, okay. Thanks for clarifying that. The only other question I had is I think you mentioned a 58.3 million share count on a diluted basis. And I was just curious, that doesn’t include I guess maybe the way I ask the question is, we will learn in the 10-K, but what’s the shares outstanding at the end of the year and what were the shares outstanding the pro forma for the convertible bonds exchange, if you have that information?

Yes, the average shares outstanding for the year was 54.6 million, and then the actual shares outstanding is 50.3 million is the actual and then the convertible bond impact, but like I said, the fully diluted number gets you to that 58.3 million. What will change in that, I need to point this out is while you will see in the 10-K, if you haven’t seen already is we did do a convertible debt exchange in January. So, we reduced our convertible debt down another $57 million. James [ph]: Right. And so, that’s just whatever, the number of 4 million or 5 million additional shares on top of the --?

Exactly, 4.9 million shares. So, that’s why our share count numbers are changing. You kind of what we reported in December then we had a loss, so you got another set of numbers and then you have that convertible debt exchange which is creating the updated most recent numbers that aren’t really out there publicly yet. James [ph]: Okay. All right. Thank you for clarifying.

And we do have a follow-up question from Alex Blanton. Please go ahead.

Question on the acquisition, you mentioned, I take it that’s the one that you talked about in December on the guidance call, being about 300 million that you hope to do before the end of the year and that’s been delayed?

It looks like, yes, that’s the revenue that they do, I think spending that. So, we expect –

I mean, the revenue?

Yes, that’s the revenue. And I believe in the next two weeks, (inaudible) final due diligence for signing that should be complete. We are going to sign it, we will announce it, I think in closing this schedule this April.

All right. You said that, it got delayed because of due diligence because you didn’t want to do a caterpillar?

I didn’t say that.

Yes, you did.

I am sorry.

But the point here is – does that indicate –

Now, you are all ticked off that me, you know?

I am not.

No, not you. They will be.

Well, it will be in the transcript. Anyway, the point here is, did that indicate to do some of the Chinese company?

No.

No, because that’s sort of -- they had the problem.

I know where they had the problem. No, not a Chinese, okay.

Okay. Thank you.

I got another shot at it. Is that it?

Thank you. There are no further questions in queue.

Thank you everybody, have a great day. Bye-bye.