Titan International, Inc. (TWI) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Titan International, Inc. Second Quarter 2015 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 states the company 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-K and Form 10-Q 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 Chairman and CEO, Maurice Taylor. Please go ahead, sir.

Thank you, Frank, and good morning, everyone. I think you would all have the press release and so we’ll get into what we see and touch on this past quarter. As you can see, there’s been a big drop in the revenue side, sales and all fronts are still down. I expect that we will compare them to be other years through the rest of the year, the same thing is going to be. There’s a lot of good news. As in the first quarter, we got new bodies in the management stream. They actually, for the company’s benefit, we’re in tough times, that’s one – they wanted the most and I can say they’re doing a good job and we are moving and handling what comes. The cyclical nature of this business, sometimes it moves in one area before it hits another, but this one is pretty close to worldwide. I don’t think anything is moving up in reference to the commodities or referencing to the ag side in earthmoving et cetera. And like always, as I said, generally speaking we always come out pretty good and I think we’ve shown that. We’re in pretty good shape and we’ve gotten a lot of things and John is going to go over the numbers as when he gets on here. But before we get there, you see what’s happened this past quarter, which was just the same thing that happened in the first. Going on to rest of this year, anybody who can project exactly what’s going to happen, God bless him, but none of us can. But what we do believe is that the large farmers will still be buying equipment, new equipment. It’s the other people, mid-size or smaller farmers, they’re going to be sitting not as quick to move up unless we got some piece they have to, the short liners are not the ones – or not down as far as major OEs. But I do believe that the big boys, because that’s just their nature, they buy it and there’s an awful lot of used equipment in North America that’s relatively new that dealers are going to have to try to move. And we’re helping them in that point. What has happened is, we mentioned earlier, reference what we’re doing and reference our LSW. And I’m not exaggerating when I say that the LSW turns and makes all the equipment perform a little better. So we have one – we started with one dealer and that is having good success, where he turned around and said, note to his customers, that he is sold four-wheel drives over the years, that with the LSW takes care of their power hop, road lope and the less compaction, compression, but it also saves them on fuel. The turn on on that has been fairly well and so we’re going to be expanding that through the end of the year. And we’re expecting, of course, there is, with wheel and tire we make a little bit more money selling that into that part of the market. The only negative, I think you want to call them negative, is reference to our working capital. We have plenty of liquidity with our cash and what we have in our receivables. Our receivables were up and that’s mainly a timing issue and we’re watching that and we should be generating more cash as we go if things stay similar to where they were the last two quarters. But the big issue is how we go to market and we have found we’re moving into the construction side and through our large construction dealers, we’re going to them, whether it’s the replace tires on their equipment or they buy it new. When they buy it new, they’re probably buying it without the wheels and tires, because that happens a lot in construction. And we will be going to them and offer the LSW package. That’s what we’re going for. And we expect that to continue to grow. We just left the sales meeting and I think Paul can talk about it, because he was – he called it, to get a feel on how and for everybody is on the same page [indiscernible]. And the next move we’re going to do is in South America. We’re really excited about that, because the farms down there are so huge and that is where we’re going. So even though the OEs are having a rough time and the schedules are moving, and they’re trying to figure out what, where and how. They have more people looking at the wheel, but we’re still positive going forward. We’re positive to how we’re going to market which is what we have been doing for three years, going out there to show people you can’t do this overnight, but we’re excited about them. We expect it to continue. And with that, why don’t you go through your numbers where we got that parked away, John.

I think Paul has some comments.

Thanks, Maurice. Good morning everybody. I’ll start off with talking about some numbers. We’re in good place. We start to highlight our gross margin which was 13.6% this quarter, 3 points higher than last year, which we’re able to accomplish in the phase of the continuing challenges that we all know about in the weak big ag and mining sectors. So that gives us back to back quarters with an increasing gross profit percentage and again, that’s amidst the backdrop of revenue being significantly off pace. The reality is the markets we operate in aren’t throwing us any bones to drive these results. And we do have an advantage. When you look at the real big ag market and that’s with our LSW product. What we offer at LSW is really the ultimate solution for farmers and their equipment to get the most efficiency and in fact it’s out of what they do and the big money they have invested in that equipment. And as you look into the future, we’re continuing to build the base, like Maurice said, with the distribution channels, but as you look into the future, you really can see this taking off by the excitement that you hear from them. This isn’t just coming from inside Titan; we’re working directly with hundreds of big farmers around the US and moving into Brazil. And again, that gives us a big advantage over everybody else in the big ag sector that continues to be in a weak state. But going beyond just the product side of it, we’ve had to really overhaul our entire organizational structure here at Titan to get the right people in the right place, which means we’ve eliminated a fair number of management positions, but we’ve also added some roles that really will help foster improvements to our operating performance. And so what I want to highlight there is that most importantly we’ve generated these improvements to our results by working together, enforcing accountability and really having transparent communications during these tough times. And we’ve labeled this internal initiative One Titan and operating under One Titan has really enabled us to be nimble enough to make these difficult decisions on a timely basis in a tough market to produce these back to back profitable quarters. We’ve also said numerous times over the past 12 months or so that we’ve been diligent in managing headcount in relation to the declines in volume. Most importantly, during the same time period of reducing headcount, we’ve improved the quality of our products. We’ve done that by really working day to day diligently focusing on what we do with root cause corrective analysis in catching issues when they focused on one product before that spreads to tens or hundreds of products got onto the market. And so this has resulted in a significant reduction in our warranty costs and probably most importantly driven a nice improvement to our overall brand perception. That’s really going to benefit us into the future as Maurice was talking about as well. In the mean time, we’re really changing how we go to market and be much more aggressive to make sure we’re getting product into the hands of really every interested potential customer. And again building good products and having a strong brand is critical to the success of that initiative. If you look back five years ago at our company, we were 100% domestic based company. Three years ago, we were a rapidly growing company that changed to be about 50% domestic and 50% international. Of course, during that period of growth, in that period of change, our focus was really on implementing acquisitions in keeping with the demand that existed in the market. And we did that successfully. But then 2014 rolled around and we found ourselves looking at demand prospects turning significantly negative. We really had to adjust our company accordingly and do that quite rapidly. And so the process of implementing and driving good solid changes into a company is never an easy task. We’ve also had to do with the added adversity of the recessionary end markets. So I really just want to take a minute and tip my hat to the Titan team for what we’ve done to drive good meaningful change. This isn’t just about cutting cost, it’s good positive good positive meaningful change that has long term prospects associated here at Titan. And you see that again in our results for the past couple of quarters. And like I just said, we are not here to just manage through the short term and just manage cost on a period by period basis. That’s simply handy. So what we have to do and we have to do that effectively. What we’re doing with One Titan is working beyond the short term to develop a foundation for long-term shareholder value, along with most importantly taking care of our customers with good service and products. We continue to invest, we continue to move forward, we continue to be innovative and we are going to continue to lead the markets and the customers that we serve. And so, Maurice had mentioned a meeting that took place this week. And along with the One Titan pillars we’re putting into build the foundation for the company, we are really improving how we go out to market. This meeting that Maurice referenced, we got our sales group together and we are going to get our product into the hands of the customers and we are going to get good products out to the hands of the customers. But one thing that’s also going along with that that I think is critically important to where we go over the next couple of years is we are going to take a good hard look at how we price our product. And what we have been learning over the past six months at Titan is that we have a high degree of variability in our pricing. Simply put, if you’re too high, you are losing volume. If you are too low, you’re losing margin. And we see a significant amount of opportunity with this initiative to not just improve how we sell products and how we get to market, but ultimately understand how we are pricing that product to be more effective with again either driving margin or driving volume. And so many of us here at Titan really feel like we’re just getting started with what we can accomplish here. We got really good plants located around the world, we got good capacity. This is a multi-year journey that we are on, we’re going to need eventually some tailwinds from our end markets to really see the value of what we’re doing here, but the first two quarters of these results, of these financial results really do serve as a good positive indication for us. So with that, I’d like to turn over to John and he can dive into those financial results deeper.

Thanks, Paul. Good morning everyone. Q2 was a very good quarter for Titan as you’ve heard from both Maurice and Paul, and I understand this is a relative comment. While we were down significantly in sales to both prior year and our internal plan, we improved our gross margin rate performance in both our operating income dollars and rate performance. This was all accomplished by overcoming a significant reduction in sales. And I think this is a testament, building on what Paul said, to the diligent actions that we embarked upon last year, the change initiatives we’ve driven, continue to drive and they’re now materializing in our results. So let’s begin by talking about revenue. Sales for the quarter were at $376 million. This was down $148 million or 28.2% from prior year. The quarter over quarter decrease was driven mostly by currency and reductions in our ag segment, comprising $124 million or 84% of this variance. More specifically, of our ag variance, the majority portion was attributable to North America. So I referenced currency, this drove a reduction in sales of $55 million on the quarter versus prior year. This impact was felt across all our international locations, our undercarriage Russia, Latin America, Europe and Australia businesses. The most significant movements were represented by the ruble 65%, real 43% valuation. If you adjust for currency impact, sales declined 17.6% versus the reported 28.2%. So as we break down our segments, let’s start with ag. There isn’t anything to say here from a driver perspective that isn’t already known or hasn’t already been discussed. From our perspective, sales had deteriorated more than we planned internally; I think, more than most people projected for that matter. The OEM market continues to be sluggish as our large equipment customers have cut production commensurate with the lower demand. All the same negative forces are still at play that are driving ag back to normalcy, namely, lower farm income and high used inventory. Now, as soon as I say that, there is some speculation out there that farm income in the US could rise nearly 20% this year just on the corn crop alone, and this is due to the corn crop conditions and lower production costs. In terms of the used inventory, while it’s still high, there are signs of stabilization out there. On the RFS or renewable fuel standard front, for the first time since its inception a decade ago, the Obama administration EPA proposed this past May that weaken the RFS requirement. So this is a blow to the ethanol industry, namely corn production as it relates to our business. A quick update on Section 179 Bonus Depreciation legislation has – was introduced on July 19 that proposes to – made permanent the 50% bonus depreciation tax benefit. And specifically, the NAEDA is supporting this bill and ask for immediate reinstatement to incentivize equipment purchases. But I would not expect to hear a conclusion to this too soon. Specific to Titan, ag in total was down $90 million or 32%, $69 million when you exclude currency impact. North American ag was down $62 million or 33%, $52 million or 84% of this erosion was driven by reductions associated with our OE customers. So both Maurice and Paul had spoke about that. From a product perspective, ironically $52 million or 84%, the same North American ag reduction was a result of reduced demand for high horsepower equipment. In Europe, the continued decline in ag is driving our large OE customers institute line speed reductions and they have to reduce production volumes. With that being said, we continue to win new business with the OEs in Europe and with Turk Traktor in Turkey. As stated on our Q1 call, our waffle wheel, a unique patented ag solution that combines the two attributes of adjustable track with high speed and strength continues to grow on popularity and gain share. And as stated in Q1, we’re well underway with an effort very much like our LSW solution parts to demonstrate the value proposition in a more analytical manner to drive both adoption and market share gain. Latin America, they continue to suffer from a number of negative forces, uncertain political environment, negative GDP, increasing unemployment, high inflation with CPI gravitating towards the 10% level which will likely result in the Central Bank to continue with its monetary tightening cycle for the rest of the year. I continue to be amazed and the company continues to be amazed of how resilient this business is as they continue to hit their numbers despite the seemingly [indemonstrable] hurdles. Quick comment on undercarriage Russia and Australia businesses, when you exclude currency impact, each of them showed growth for both the quarter and year to date. So let’s turn our attention to our earthmoving/construction, our sales for earthmoving/construction were down $28 million or 17% from prior year. $20 million of this $28 million miss was attributable to currency, mostly the euro and real devaluation negatively impacting our undercarriage business. While our North American business declined 19%, our rest of world earthmoving/construction business grew slightly when adjusting for currency. Bright spot for our Europe wheels business, the construction market has picked up considerably in Q2 and customer demand is being pulled forward. Let’s look at consumer, because the results here could be a little misleading, but it’s very consistent with the story we told in Q1. While we declined $29 million or 39%, $13 million of the sales reduction is from FX. In addition, in Brazil, we are no longer selling compound to Goodyear to produce the treated fabric that we buy back from them. We brought this activity in-house as a profit initiative, so that eliminated $9 million of sales on the quarter, but clearly the right thing to do for the business. And as you can see, our gross margins improved in consumer for the quarter and year to date. So when adjusting for these two items, sales declined only 9.4% versus the reported 39%. Primary drivers of the net decline is further erosion in Brazilian truck carriers offset in part by the high-speed train brake supporting the China railway system development. So with the first two quarters under our belt, that puts sales just under $800 million year-to-date compared to $1.1 billion last year, representing erosion of nearly 27%. And as with Q2, this story is fairly consistent. Ag and currency comprises $256 million or 90% of the total net sales variance. And if you adjust for the $106 million currency impact, our sales erosion dropped to $178 million or 16.8%. So let’s move on to gross margins, because I believe this is where we excelled despite the sales fall off and you heard the commentary from both Maurice and Paul in this regard. While gross margin dollars were actually down $4.5 million to prior year, when adjusting for last year’s asset impairment and inventory value adjustment, this was solely a function of math relative to our significant sales decline. Our gross margin performance at 13.6% was up 300 basis points to prior year on $147 million or 28% less sales. But what makes us more even more impressive is while we battled to overcome the sales decline, we also had to content with the weaker mix, as most of the ag erosion as we stated previously was related to high horsepower equipment, which is a higher margin product category for us. So we’ve actually overcome a lot to perform at this level given the sales decline and the weaker mix that we experienced. We’ve been talking for several quarters regarding our profit optimization framework. We’ve been focused on what we can control, not we can’t. There has been a tremendous amount of diligence relative to ideation, initiative execution, and driving change. And for two quarters running this year, we’ve demonstrated the benefits of our efforts. Net material cost reductions are across the board, natural rubbers, synthetic rubber, fabric and chemicals. And discussed in Q1, we have significantly improved our procurement of natural rubber through the centralization of purchasing and implementation of a hybrid purchasing strategy implemented in Q3 of last year. While it’s old news that we’ve reduced headcount significantly in our plant in response to our end markets, it’s really important to note that we are much more proactive in taking real-time actions in this regard when anticipating lower production levels associated with revenue declines. Our profit optimization framework is working and it’s improving. We only turned this on just a few short quarters ago. To put in perspective, quarter over quarter and year to date, we generated positive productivity variances, improvement in respect of labor and overhead on significantly lower sales. That’s very, very difficult to do. So there is a great amount of focus relative to this framework and accountability for driving results. A quick note on operating expenses, SG&A, R&D and royalty are down $7 million to prior year and $16.5 million year-to-date. While there are a series of puts and takes across these categories, these decreases are primarily a function of profit optimization initiatives and FX. And as I’ve stated in Q1, our operating expense structure has been historically lean. We continue to pursue investment or redeployment so to speak in areas of strategic nature. So we’ve made and we will continue to make investments in technology, skilled resources, coupled with business practice in building out our performance management framework to provide the tools to support and optimize business decision-making. So let’s move down to P&L and I want to discuss other income, specifically foreign currency. We experienced a loss of [$2.1 million] for the quarter, primarily from our intercompany balances. This was $5.8 million unfavorable to prior year. These losses primarily reflect the translation of intercompany loans of foreign subsidiaries, denominated in currencies rather than their functional currency. Now, an offset to this was, we disclosed the reclassification in our 10-Q for a subsidiary investment which was improperly classified as an intercompany liability. As a result, we reclassified currency translation and other comprehensive income to currency exchange gain during the quarter. So this had the effect of increasing other income by $5.7 million for the quarter and $3.1 million year-to-date. We’ve been taking a number of actions. We’ve talked about these for past several quarters to mitigate risk and foreign exchange through balanced reductions, reclassification and our new hedging practice. For 2015 year-to-date, we are in a positive income position of $6.5 million, excluding the reclassification event we just discussed, which is $4.5 million favorable to prior year. And just to remind everybody, we lost $32 million in FX on our intercompany loans and balances last year. So let’s summarize and bring this to the bottom line to profit, we had one adjustment for the quarter with the other income reclassification of $5.7 million that I just spoke about. We also had an adjustment in Q2 of last year for the asset impairment and inventory value adjustment totaling $22.2 million. So our adjusted net income attributable to Titan is at $1 million profit or $0.02 per share and EBITDA at $26.8 billion. That compares to the adjusted net income attributable to Titan of $1.7 million or $0.03 per share and EBITDA at $35.2 million from prior year. Now for the six months ended, adjusted net income attributable to Titan is $4.4 million or $0.08 per share and $57.8 million of EBITDA and this compares to prior year of net income attributable to Titan of $3.8 million or $0.07 per share and $59.3 million of EBITDA. Let’s touch on a few balance sheet items briefly, for the quarter AR is down $15 million from Q1, primarily a function of revenue as DSOs were flat. AR is down $78 million from Q2 of prior year, driven primarily by lower revenue, but also slight erosion in DSOs. Inventory is slightly below Q1 levels, but DSIs have climbed as we’ve been working with some consignment programs to battle for more share. Inventory is down $81 million from prior year, driven primarily by lower sales as DSIs were just slightly up. In our new EVA framework that we’ve talked about over the past several quarters, while the initial focus and emphasis has been on productivity and profitable growth as seen through our gross margin improvement, working capital will also become a key focus for value creation. Regards to PP&E, we continue to spend under our depreciation expense generating cash. We have been carefully scrutinizing capital that ensures strategic alignment and positive EVA returns and cash generation. We expect to spend $25 million to $30 million in the back half, bringing our full year capital spend to a range of $47 million $52 million. This is below our internal plan of $65 million. Cash ended the quarter nearly flat to Q1 at $188 million, but down $14 million to 2014 year end. We are aware of the concerns persist over liquidity and cash flow as we fight through these down markets, we’ve heard it in Q1, Maurice spoke about a little bit in his comments. We continue to be very mindful of our cash position and manage it diligently. I indicated on the last call that our 2015 internal plan called for a small cash generation for the full year. I continue to get questions about that. This obviously gets increasingly challenging with the significant reduction in sales as to what was planned. But with our improvement in profitability in the face of declining sales, we believe we have a fighting chance to be cash neutral for the year. Our most significant negative driver from our 2015 beginning balance was accounts receivable which historically gets worked down significantly by year end. From a debt perspective, while our debt to trailing EBITDA measure has doubled from one year ago, this ratio is stabilizing somewhat, only rising slightly from one quarter ago. While we achieved our internal EBITDA plan, this rise is due to a small dip in EBITDA to the quarter we dropped off in the calculation, while our debt is slightly down. We’re nearly flat to two quarters ago. I will continue to repeat each quarter as we continue to get this question we do not have any financial covenants associated with our debt. So wrapping up, I believe our results are admirable in the face of some very difficult end markets accompanied by significant sales erosion. We’ve improved our gross margin rate performance two quarters in a row on an aggregate 27% reduction in sales year-to-date. And while there has been a lot accomplished, we are in the infancy of these change initiatives that we are driving and the hard work is still ahead of us. And I’ve told many investors we are in a position that when we couple the ultimate market recovery with these significant positive changes we are driving on how we manage the business, this will be a very powerful story for our shareholders perspective. So with that, I’d like to turn the call over to the operator for questions.

[Operator Instructions] First question comes from Ian Zaffino from Oppenheimer.

Good to see the margins coming up very nicely here, even with sales pretty down. Question would be actually on that and when you look at margins and the margin improvement, what I’m really trying to get is, when you talk about the management changes or at least the management reductions and sort of the SG&A reductions in cost reductions, are we at a run rate now? Is there more to take out of the costs? If you were to – maybe if you could run rate the savings in this quarter, what it would look like from a margin perspective, how much more would margins be up? Or are we really done with those initiatives?

We’re not done with the [indiscernible] the optimizing where we’re going. There is a, I think, as outsiders, it’s very hard, as Paul mentioned, One Titan. It’s slightly [indiscernible] they stick in their own world and when they talk to the tire guys, we have [indiscernible] especially on our LSWs and our new product. You guys don’t expect from people the same thing probably years ago. Geez, let’s look here and get something that will improve for the customer, but it also gives us a big time competitive advantage. And I’ll give you an example of that. Up in the underground phosphate mines, we had the opportunity to come in with our new LSW tires. Now, what happened is that they were growing with their same five-piece real that was before my [granddad]. And this did not give a lot of excitement to the people at mining and then we figured out why haven’t we gone in and captured all this business? What happened is the tire boys could have made it a much better LSW, wheel boys had to make a different part number. They still had to roll the equipment, the tooling and we finally got that. And that’s that One Titan. So I think that, as Paul stated, it’s starting to get through and there might be a few more reductions, because there are some people who just – they don’t waste the mold and then they will be moved. And I think it’s a – there is a lot more to be done. And I think there is situation in our sales, the same situation. You can’t just continue and continue to go the same way. We’ve spent three years, we’ve got huge farmers, we’ve got contractors, mining company, up in the oil sands, things are – it’s in the perfect mold for us because I was just up there in mining business, they’re going to dig more oil. They’re going to dig, dig, dig. Yes, we’re up there on a different relationship with this Titan Tire Reclamation, but at the same time now they’re looking at changing vendors and the new LSWs for what we’re showing them, this is going to be our baby. So I’m excited as well about it. So I think that’s what Paul was trying to explain when he said the One Titan. There’s so much opportunity for us. Did I answer your question?

Yeah, that’s helpful.

Next question comes from David Tamberrino of Goldman Sachs.

Couple of questions here. Early in the year, you mentioned an internal target to achieve about $115 million in EBITDA and two quarters of the year through, you’re about halfway there. The prepared comments, those seem to be pretty cautious. Do you still see that internal target as achievable for the year?

That’s a target that we’re pushing for and that’s a target that, as I just mentioned to Ian on his question on the sales level, we all know where it’s at, we all know what we got to try to do. If the market stabilizes or we take a bigger chunk out of it, then you can feel very good. The market just gets in a downfall, it’s going to be how are we going to hit that number at the top. But now we’re halfway there, I’m feeling pretty good for where we’re going right now personally. But the third quarter I think will be the toughest, but that’s because there are the shutdowns which we have baked into this. We’ll know a lot more at the – when everybody gets done with the sound progress shown this year that will give you a good feel where the farmers are. I mean, you go out in the field today, some of them, the corn is unbelievable, but then other fields, there is nothing. That’s just because of the rain. Same with soybeans. Some place, they’ve already harvested soybeans in the south. So in the north, there is some that you’re not even going to run out to harvest. So it’s – I don’t know if anybody can tell you exactly what’s going to happen. But if the price churns up, we have a candy by the door. If it doesn’t, then [indiscernible] return. That’s my answer to this.

I think that’s pretty balanced in share, appreciate the insight. And then secondly on the LSW tires, can you talk about maybe just in orders of magnitude any sequential acceleration in shipments from really the first quarter to the second quarter? And then how do you think about penetration rates heading into the back half of this year?

I think we’ve got the wind on our back. I think we got couple of things rolling for us, because if new equipment doesn’t [last] then the farmer – the farmers have cash, so it’s better then for the farmer to replace the tires and wheels on his unit instead of just going and buying the old tire, he is better off to go buy the whole system. And we have been working with equipment dealers, the first one which is [indiscernible] owner, he will tell you what’s surprising him, the amount. Now we’re going to move that thing all across North America and we got our fingers crossed that it has a nice, which it has been, it’s been increasing, every month we drove a little better. The worst thing that we can do is have it explode on us. And then you can’t get what you had to get out. That’s what we’re trying not to have happen, we’re trying to just pickup, pickup, pickup. And that does two things. It might not be some new equipment to the OEs, but [indiscernible] taking it in the aftermarket and that aftermarket out there is much, much larger than the OEs. So that’s what we’re doing. We just got to continue, we’ve spent three years building this. So once it gets there, we’ll be in good shape.

Understood. But just thinking about the near-term with the last two quarters in review window here, did you or did you not see increasing shipments from the first quarter sequentially and the second quarter?

Yes.

Okay. And then the analytical marketing effort that you guys are going to put together and I was speaking to Todd and John about this, what’s the timeline for that coming out? Is that still third quarter? Is that later in the October timeframe?

I think we’re probably looking at later in the Q3 timeframe. We just hired a new Director of Marketing who is getting actively involved in this as well there is a team effort around this. So I would expect probably Q3 we’d have the outcome of that.

Next question comes from Joe Gomes from William Smith.

Just wanted to – if you can just provide a little detail of exactly what you guys are doing with the equipment dealer on the LSW for this marketing, what exactly is the program that you’re with this specific dealer and then you’ll be looking to roll out?

What they are doing is that they are – it’s an occasion where we’re saying to the dealer, here is the list price. Let’s just say on a big four wheel drive tractor, there is two situations that happen here. You have four wheel drive tractors that are out in the market that for the last five years you could have an 800/38 tire on those tractors. That’s what Case would, Deer would, I don’t know about AGRO, but I believe same with AGRO. And what happens is those tires, and it makes no difference, it’s a Goodyear, Firestone, Michelin, anybody’s tire. If I’m a [indiscernible] put that maybe up and use the horsepower that he bought that tractor for, he can only go at X speed because if he goes over it, the tractor itself will start to bounce. It’ll power-hop. So you have to back up as you can to proceed that way. Now, if you turned around, two things have happened with the LSW. Number one, it works on a much lower air pressure and puts less ground compaction. So what happens is that – but I’ll stick first of all to that 800. Now, if you put in 846 LSW one there, now, you got a lower air pressure and so you got a bigger footprint and you can take that tractor in whatever horsepower is in there, you’re putting it to the ground now and you can just go for whatever – you can go in speed, instead of five, if you can get – that tractor has enough horsepower for seven, then you can go to seven. But there is another item, that’s got tools on it. But we also make the 1100/46, we make the 1250/46 and we’re coming out with 1400. Now, the 1400/46, that tire just one, it’s basically five-seater crust each tire. You put that on a tractor, that take 650 horsepower, that one tire. So if you only got a 560 horsepower, you can only put that on. Now, you got less compaction and better everything. So those two programs are what the dealers – we are working with the dealers that, here, if you’ve got that attractive and this is what happens and we tell everybody here is 5% to 6% extra fuel economy. So that’s a big cost to a farmer. And so what happens is, argument sake, say you had a 1250 which goes up to about 550 horsepower, you buy a set of singles of those, normally you’re going to be looking at – of course, it’s $30,000 on our list price. So there is – you turn around and you say, alright, we’ll take back your other duals that you’re running, we’ll take those back and we’ll give you an $8,000, $1,000 an assembly and everything back. So he’s got $8,000. And we work that with the dealer and then we can use those tires. We know markets that sell the tires for and we can also – we can sell the tire, we can sell the wheels. We feel we’ll get our money back that we got invested in that, but the margins on the other is very good. And the dealer makes money, we make money and we’ve held performance. And that’s what we’re working with them and we wanted to - Van Wall, the dealership in Iowa, which I think he has like eight or 10 dealerships. That was a perfect area because his dealerships go from soil that kind of have some sand in it to clay. We’ve been working with that for the last three years and so we felt great. So we’re scrambling right now as we speak to you to start moving it with more and more dealers.

In the reclamation project, if you can recall you guys were seeking that maybe it would be up and running in the fall of this year. Now you’re saying not until the spring of next year. And I was just wondering what is behind the delay?

Bureaucracy, you have to get permits, alright. You got to get the – all – so not only in your round up there, the fastest permit was given to us by the [many nations up there, first nation]. So we got that through. But the – got the final one which I think we just got. We got from the authorities up there. After 43 years and all the, I’ll call the Conservative side as Alberta, went to the Liberal side. So it took for a while for everybody out, people in place to go see what, where and how. So we’re running that thing right now [indiscernible] as I talked to you. All of that, the buildings will be up, but we will also start to benefit. There were two buildings on the property. So our situation for tractor, situation for wheels and other tires will start in September. So that’s like the side end of the reclamation which we’re going to pick up. So that’s going to help us. But the winner, the equipment is ready and it gets very, very cold. So we should have all the abilities up and everything probably into October and then we will be – the equipment will be in, so wiring, all the safety and everything else that you have to do so that we will be able to kick that thing off for sure right after the 15th of March.

In the last call, you had talked about I think a potential acquisition in Brazil that you were taking to the Board and just wondering what’s the status there?

What we took to the Board, the Board approved management to move ahead on what our plan was and we’re still in the process of doing that. It’s not a big capital intuition for us. We have most of the equipment and we have – probably there is three outcomes that we’re looking at, we’re in with one right now. We’ve signed the proper confidentiality, so I can’t go into that, but we’re still marching [indiscernible] rushing, we’re not rushing in. Everybody in our business knows what we’re planning to do. We’re going in there. We have everything. We make this stuff. So we’ve had it in our warehouse for the past three years.

Next question comes from Brent Rystrom from Feltl.

Maurice, you would love to taking in a sales call to see a farmer earlier this year and sell the LSW tires and I know he’s committed to buy. I was curious after you get a new farmer in a new area, how did your team go back and work with dealers in that area? So I know that particular farmer, he works with [Pulses Implement] which is a Deere dealer left at where we were and there is Nolan Tyres that sells your Goodyear tires just west there. Can you go work with both of them, do you tend to work just the Implement or just the tire guy, or what is your strategy?

Our strategy as you go to the Implement dealer and you tell the Implement dealer, explain to him what you’re doing, you can check with this, they’re going to show what you’re doing, you’ll see him up, but when you’re talking about him combines will be going through, there will be a blow. Physically go out and talk to the guy, he’ll get a copy of the report that I get and Paul gets from our Grizz Squad. The tire dealer now, he will go with the – we offer to the equipment dealer that he can buy direct from us, tire and wheel assemblies if he has other farmers who wish to change out or buy, which as I’ve been mentioning as we’re talking. The second thing, back to the tire guy, the tire guy, we’ll have the Grizz Squad guy and there will be a salesperson that handles the aftermarket tire sales which would not be calling on the equipment dealer, he calls on the tire dealer. And then they will go and talk to them. Generally speaking, the tire guys aren’t really that excited about a new tire because in the aftermarket there is not a big thing for it, because you’re selling a wheel and a tire and you’re dealing with the farmer direct and with the equipment dealer, just so that they know what’s coming, that’s why we go and we see them. But our whole focus is to turn around and to utilize the equipment dealer. And now if we have to change out a lot of tires to somebody else, we will also show that tire dealer how to do it where he is not damaging the tire. So that’s also part of the reason. So we do see him build.

John, can you give a little more detail on the 300 basis improvement in margin, can you be maybe link what were the key drivers in that improvement?

I can’t, it’s more difficult to do because when we talk about the performance management system that we’ve been building, it’s across the board. I would say the lion’s share of it, the focus has been plant productivity. So there is three areas of the EVA framework, we tend to focus on profitable growth, productivity and working capital. Our company, it’s the most – focusing on productivity. So that’s where we focused our efforts relative to the plants. Now, you’ve also heard us talk about becoming more effective in terms of how we procure specifically natural rubber. So that’s benefited us as well. Pricing, Paul spoke about that, we’re going to get some low-hanging fruit this year, Q2 included, but really the biggest impact, the largest impact ahead of us is next year as we just recently embarked on that initiative. Quality improvements relative to warranty, I mean, we had a huge pick up in warranty, favorable warranty last year and we continued to prove even yet this year. So it’s really across the board. As you would expect, it would be given 300 basis points pick up on almost 30% decline in sales.

Next question comes from Larry DeMaria with William Blair.

Some suppliers have talked about a flatting out of ag orders recently into the second half. Are you seeing that? And if so, is it significant or is it more to the timing of production in your opinion?

I think you’ve got the timing of production. I don’t – everybody should know there is – some always are having some – do their dealers, they’re offering a little bit more incentive for them to get your orders in. I think they themselves are trying to figure out exactly what’s the market going to really do. I think the dealers I have talked to, they’re pushing as hard as they can their used equipment, but it’s a – I’ll take the approach of all my years in it, they’ve never seen the uptick and they’ve never seen the downturn. So those are – they’re talking the future, it’s really hard to see. And what happens is when they’re up, they take things really steady and the next thing you got a 10% growth. They think that they’re going to have a 10% growth and you’re 5% down, and it’s going down. So I don’t think anybody can tell you what exactly. And so what I do know is that I think we’re going to have better and better success in change-outs and from the OE side, it picks up, then we’re going to smile and bust our fanny and get it both ways. That’s how I look at it.

So there’s nothing really significant in the order book that would change your opinion in either way at this point, because they’re more of the same which is relatively tough time and you just want the changes I guess?

That’s correct.

Curious, third and fourth quarters, you said third quarter is going to be the toughest most likely because of the seasonal shutdowns, so should we just order of magnitude assume maybe some loss in the third quarter and return to profitability in the fourth quarter? I am just trying to understand the magnitude and check the outlook a little bit better.

We’re getting to a lot of trouble right now, we do because here is why. I know the US side real good, but when you look at the foreign in different period of time, as I mentioned, Russia doesn’t have the shutdown and I guess Europe – Europe does, but Russians don’t. And Russia has made some good strides, but the currency battle is going to be something there, but it’s not going to double like it did in the currency swing. Brazil, Brazil now – it’s going to be interesting to see how down there you’re going to be capturing the planting season in certain parts. So we’ve got some present enquires and our people are positive down there. The other situation is, which we didn’t talk a lot about, is I see construction, as John mentioned, the contraction is doing pretty good and we had a big push in the last 90 days, we’re going to go over the fourth top construction companies in each state. And we’ve knocked down the door on a couple of them, they’re very successful, doing the same LSW program. And in the construction side, that’s even better because big road construction firm, they have their own maintenance, they do everything. So – and that side, we’ve got a real good shot at tying them up. And as you know, they will buy your equipment without wheels and tires in the construction side very well. And so works out real well for them. So that’s the unknown that I don’t know, how fast that’s going to grow, Larry.

Just staying on LSW for a minute here, you guys have been talking about it for a while, just curious if there’s been a drag on the numbers as you’ve been rolling this out, that’s worth calling out, so do you have an idea order of magnitude? And then is it possible to put some numbers around one year, three years in just looking out what kind of opportunity this could be, can you pull it together for us?

Yes. I’d say we could. I’d say what we’re learning right now is, yes, [indiscernible] used our 1250 on his combine last year, year before he had our LSWs on his spare. So he was all track, alright, on his tractors. And the reason being is because he put in the various farm line we had in service that he went – or he travels a big area and in the roads there, you get a tractor [indiscernible] you take out the road. And then you got to inch yourself off the road for traffic and everything, so that’s why he had tracks, okay. Well, after his success with the – on the combine on 1250, going through the water, I was there [indiscernible] driving that, he had many combines, but the one he was driving had our 1250/46s on it. So out of the blue he called me up and he said, I want to know, can you make me a big tire, that’s why we’re doing this 1400. And he ordered five new tractors without tires on them and John Deere knows about it and I got this, obviously get those tires. So that will be brand new. How fast that thing takes off? I have no idea.

Then to your point, we should think about taking in the medium term market is really that taking away from the track market and that’s the addressable market opportunity in the next two years to start with?

No, you have the farmer who is changed, economics are going to rule the path. I think it does take away eventually, but it’s a place where you’re doing, given somebody, it’s like, why am I out not get your automotive, how long did it take automotive to go from the standard size to now that everything. Go look and see if you can buy a pickup with various tires on it. Seven years ago, eight years ago, it was 100%. If you try to drive a pickup, I know you’re doing all here in New York, which should be all over. So you don’t see the old style [indiscernible] looking at 1980, that’s where it was. So that’s what happens. So that’s what’s going on. And I think we’re going to be doing the same thing in most of the markets. Folks, I got to run. I’m in New York and some of you on this phone, I got to get to [indiscernible], but if you want to keep going, Paul and John, go right ahead. But I have to leave and I want to thank everybody.

Operator, if you want to go ahead and take some more calls, we can continue with the queue.

Next question comes from Alex Blanton from Clear Harbor Asset Management.

I noticed somewhere in the press release and early on that productivity question, you said there is more to take out. And I think you’d probably agree with me that when you get into a lean manufacturing which you’re doing with this new productivity program in the factories, you’re never done. It’s called continuous improvement, the Japanese have a word for it, they invented the concept, but you’re never done, you continue to improve. There are companies like Follow, like Caterpillar that have been on this journey now for 29 years and they’re still getting margin improvements even though sales are down year over year. So you’re doing the same thing. Can you just discuss, you said the productivity improvement in the factory is the most important thing. What are some of the specific things that you’re doing? For example, shifting from batch procession to sales, or more rapid delivery of inventory, reducing the amount of inventory you have and inspection at the time instead of radar, can inspect quality in. And so if were to inspection of product, you call it, is that what you’re doing, that kind of thing?

Yes, we are, Alex. Actually I was just meeting with Caterpillar yesterday and their entire team is focused on lean initiatives and it goes beyond just the manufacturing for them. It goes all the way out through the operational, corporate side of their business. For Titan, the answer is a bit more complicated because we have different stages of factories that are at different points of the evolution process, meaning Russia is relatively new to us. And so if you look at what we’ve been able to do with Russia, there’s a lot of low-hanging fruit. So you’re able to go in there and you’re able to tackle things by really just doing the right things that were being overlooked there. The next one I’d reference would be Brazil. We’ve had that under ownership now for four years. And if you look at the productivity measures coming out of Brazil, they are on the magnitude of about 60% higher now today than they were four years ago. And so you go in there and you tackle the low-hanging fruit, and then you start looking at really how the people handle the processes and really you continue to mature on the evolution side. I look at Brazil as being 60% up in four years is fantastic. But if you compare that to a US plant, we still got another – we have plenty of runway to still continue to move forward. And so what we’re doing specifically here in the US, you have a wheel plant here in Quincy. Alex, I believe you’ve been out here to see it, have you been or not?

No, not in Quincy, no.

Okay. That’s a very mature operation, OEM driven. And so what we’re doing here is looking at product flow. Your basis lean initiatives look at material movement and product flow and eliminating ways in how we assemble our product, we’re completely redesigning that area to eliminate the product flow necessary to take the product from final assembly into our paint shop. Our tire facilities specifically are focusing on each individual process of building a tire, because we build thousands of skews on a regular basis, each day we’re touching hundreds of skews. And so if we can take out unnecessary building processes in each tire that we put together, clearly we’re going to be very cost competitive in the market. That’s step one. And we’re going to generate more volume and more margins. And so I think as a company going back to the One Titan initiative, the answer is complicated because each situation is different, but it’s really not complicated because we are all moving in the same direction that we need to be more efficient, we need to be more effective to deal with the slackening demand, the competitive world and I think we’re doing a pretty good job of it.

It is a journey, it’s not a destination. And you can migrate these techniques that you’re talking about in Quincy down to Brazil, to Russia and companies in the future that you might buy, so that you can continue to improve them.

Exactly, that’s the plan.

And the next question comes from Tom O’shea from Castle Hill. Tom O’shea: It looks like in the quarter you generated some cash from working capital, can you give us a sense on what you think 3Q and 4Q might be in terms of cash use or source?

So I think the comments that I made about cash, because I get asked this question often and we’ll be looking at it again this quarter, is that we had planned slightly positive cash generation for 2015, but that was on a sales plan that was significantly higher than what we’re experiencing now. Now, we’re performing better than what we planned. And so my comments that I made earlier is that I think it’s going to be very challenging to get to cash neutral for the year, but with the performance and even the conversation we had around productivity and our focus there, I think we have a fighting chance of being neutral for the year. But the sales erosion is a significant headwind for us in that regard.

This concludes our question-and-answer session. I’d now like to turn the conference back over to Paul Reitz for any closing remarks.

I’d like to thank everybody for their questions and their participation in the call today. We look forward to talking again in the next quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.