Titan International, Inc. (TWI) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Titan International Incorporated Fourth 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 the conference call that states 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-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.

Thank you, there. Good morning, everyone. I assume if you’re on the call, you have already received the press release, and the 10-Q information. 2015 was not a good year, which we all kind of knew going into it. Hoping that would balance out at Titan. This is the third year now for Titan that we have had seen a downward drift in sales and this one was a big one. We believe that in this period of time that we are getting the ship as I say, lean and lean, we have got a lot of people and we have gone and been consolidating. We now are in the phase of where we are reducing cost, and reducing cost from the standpoint of engineering, a lot of cost out of various products. I can get real technical and explain that you have a disc that you put in a wheel and it’s a full 360. If you take that blank and make it smaller and you just have little scallops on it and well enforced thoughts, you have faced a lot, but you have not diminished the strength or the character of that product in anyway, but you will reduce the cost, because you reduce them on the steel and the welding going into it. This is a process that we keep going on. The good thing about what we have seen, as I said in my CEO comment is the price of steel has really dropped, the price of oil has dropped, so price of natural rubber, so we expect that going out into this next year 2016, we believe that it’s going to be pretty close on the revenue side as what 2015 was and that probably because of the situation we did last November for us with Goodyear, we will start to benefit from that territory, which is Europe, Russia, all of Middle East and Africa. So we expect that to actually to progress so that we look forward to 2016 of increasing that revenue even though we think going to be coming on the slight side. We also believe that it’s going to be the year that we don’t have a bracket of negative in our number. So we are - we have been through this before. It comes along every so often. We are a cyclical business. There will be some of you right now that would probably stayed low. Some of the OEs are forecasting 15% to 20% down, well, I would caution you to remember, one of them is already through their first quarter. Number two, the big - they have sucked up the inventories that they carried for both tires and wheels, so that they are down getting real lean that hit us last year. So I expect that the large ag, which we found is basically over $200 par combines and big sprayers. We expect that to be pretty well on the slight side. And then we see a pickup of farmers today that turnaround and say, hey, instead of buying a new piece that’s working, tires wear out, so - and we are picking it up that with the large farmers and with them, with our LSW. So we believe pretty firmly that we can turn this - this baby is going to turnaround for us. And if you look at the charts that everybody puts out of US farm cash receipts, you will notice that their receipts are basically right in there and the higher than anything from 2011 bag. So we think we are pretty good for that part of the business. Moving forward, we have also one of the things that I said in the third quarter, and actually I did at a presentation of Jefferies over a year ago, we have gone and had made the statement that we would look at our track business, which is ITM, which truthfully this first quarter is doing very well. But long-term, it doesn’t flow right with our wheel and tire business. So if we get a number that looks pretty good, we would take it to add more. So we got a lot of activity up in the oil sands. We’re going to have our kick off open house in the latter part of March and that’s moving. We have a wheel - we have made an application to the Brazilian government to bring in our wheel facility into the Brazilian plant and we have turned around and we look for that to be a big boost for us down in Brazil. Brazil, everybody calls Brazil a real basket case right now. But when you look at the farm goods, the commodity prices for corn, soy bean, wheat et cetera, you will know the set price is all in US dollar. So when you have a real that’s gone from 1.6 to 4, everything they sell is in dollars. So we expect Brazil and Argentina to be a big boost for us from the farm side. The construction side and the truck side is still going to be on the lower end even with the real being deflated as much as it has when we took US dollars [indiscernible] outright. But anyhow that’s what we are looking at from our side. And as you can see, our cash, everyone has opinions of what that our cash is basically the same as what it was the beginning of the year. We will be a cash positive in 2016. We are going to bring - we do not have the guidance on our CapEx, so we’re looking to have a good year. After three bad years, it’s a blessing in disguise. A lot of that sales level from our peak, which was I think around $2.3 billion, of course, it was the big hammer that hit in the Russian exchange and everything else. So when he talks about it, John, he will talk about that tax deal, which is just a gap, and if we are positive, we are going to put it in next year, so for the back end, just keep pouncing back and forth, which is to me a little crazy, but that’s moving everywhere. With that I will turn it over to Paul.

Thanks, Maurice. Good morning everybody. I am stating the obvious, when I say 2015 was a challenging year, we got hit with a significant demand reductions in all our end markets that were caused by conditions that is tough as anything we faced in a long, long time. At the end of the day, our financial results are the scorecard that we are measured by. There is a story behind our numbers that isn’t published in the black and white results. I want to take a few minutes this morning to talk about the type of story 2015, and then I will turn over to John, let him dive into the financials. At the start of 2015, we launched a program called our business improvement framework that got our organization and our people focused on making the tough decisions to fight the impact of this significant decline that we were seeing and kind of see in our market conditions and then obviously to our overall sales levels. Basically this program could have called our markets are ugly, we better do something about. This business improvement program has empowered our teams to aggressively with the necessary reductions to our operating cost throughout 2015. So we really spread it far and wide and we empowered our people to take the actions that were needed. For example, as Maurice alluded to in his release, in his comments earlier, we have reduced our headcount by over 2,500 people from the start of 2014 in certain locations and have been able to increase their per person productivity level during that process, during that time period where we are reducing headcount. That’s not easy to do. Another example can be seen in our SG&A costs for this most recent quarter and the fourth quarter of 2015, they were 30% lower than they were last year during this period. But our - this really goes beyond just cutting cash related operating costs. Maurice mentioned earlier, there is a number of initiatives and thoughts that we have with how we can take materials out of our product, reduce our material cost, both on the procurement side and then all the way through the production side, and not really change the quality of our product one bit. Another example is in 2015, our US tire business made improvements in their production processes that reduced our cost of quality and scrap rates compared to the prior year. Again, it’s really impressive to make those type of changes and improve your quality, reduce your scrap, at the same time as reducing the headcounts and adjusting to the change in the revenue levels. Through this business improvement framework, we also got our teams thinking and implementing lot about long-term projects that provide a positive NPV or EVA. We realized that we are in this game to win in the long run. So did our efforts work in 2015? Yes, I definitely think so, and you can see what we achieved directly in our gross margin percentage, which ended 2015 at 10% versus 9.5% last year. That’s in the phase of a 26% decline in our total revenue that we were able to achieve the half percentage point increase in our GP percent. So yes, our business improvement initiatives have worked. But we aren’t done yet and fully envision this being a sustainable lasting program. I was at one of our plants earlier this week and I met with my general manager and his technical engineers. His team of jet eyes walked me through another $5.5 million worth of improvements that are going to be put in place in 2016 and that’s just in this one location, just one plant. So let me jump over, let me move away from the cost side, let me jump over to talk about our brand in LSW. We all noted the brand lives in breath within the company and the customer. You can argue that a brand is your most valuable asset. So we’ve really been putting a lot of emphasis on growing this back to the Titan brand in 2015 and we have done that by building high quality products, taking care of our customers and then leading the way with innovation. In a recent market study, Titan Goodyear tires were recognized, farm tires, were recognized - were a recognized brand amongst 95% of small and large farmers. Simply put at a 95% level, we clearly have a very strong brand to work with. If you were then to take a look at BKT, Mitas, Trailer Board [ph] their recognition scores are all below 35% among small and large farmers, with BKT coming in at just 20% for large farmers, 20% for them, 95% for us. It’s a fact that Goodyear Titan farm tires and Titan wheels are the overall number one farm tire and wheel brands in the world respectively. These strong wheel and tire brands give us the luxury of being able to build upon the strength of our market-leading positions with innovation such as LSW, which we believe will reshape the future of our industry. LSW wheel tire assemblies simply make the market and the equipment in the market perform better. At the end of the year, we put together this book. It comes from all our large test farms that are running LSWs and it’s basically a summary of their thoughts and what has taken place on the LSW they are running on their farm and it’s really awesome to hear what they have to say. So for example, I am going to give you a couple of quotes here: by far the most drastic form of change I have ever seen, rubber tracks are no longer necessary. Another quote is My tractor with LSWs pulls like a SOB and doesn’t struggle in some conditions like it did before, I personally like that one. Here is one more for you, this LSW set up is the ticket, there is no other way to go. Based on some recent market surveys we’ve done, we now find that 23% more farmers recognize LSW compared to IF and VF. And let’s not forget, IF and VF has got about a 10-year plus head-start on LSW. So look our job and responsibility at Titan is to simply move as fast as we possibly can that keeps spreading the word on LSW, keep developing new LSW products and then build quality LSW wheel tire assemblies and sell and market the heck out of them. That doesn’t mean our conventional products are less important to us today as we will continue to be focused on doing exactly what we do now, producing high quality conventional products that meets the needs of our customers. What LSW means to Titan is that we have a really big in our quiver that others don’t and will empower the future for Titan. So let me just wrap up here by talking a few minutes about our organization. The foundation for how we operate is centered around one Titan. In simple terms, this means leveraging our world class global assets by working together to make effective decisions that are best for Titan Inc., and of course taking customer-focused actions on a daily basis. You got to take care of your customers, you got to take care of your people, you got to take care of your shareholders. The market conditions were ugly in 2015, but the Titan team didn’t dwell on that at all. We united as an organization to move forward, we fought the daily battles of a challenging market and again, you see what we accomplished with the increase in our gross margin percentage in 2015 and the fact that our cash balance basically ended the year at the same levels where it started. This is attributable to the many efforts of many people, working harder and working together at Titan. It’s tough up there these days, but we are definitely making significant improvements as a company. So with that I would like to turn it over to John talk through the numbers.

Thanks, Paul. Good morning everyone. Well, as both Maurice and Paul had mentioned, 2015 was a very challenging year, but despite the difficult year, we have adapted well by focusing on what we control. Quality continues to improve, costs have been managed diligently and we continue to reduce headcount commensurate with volume. Our business improvement framework that Paul referred to, best as we pointed, has made 2015 a relative success in terms of being able to mitigate the negative consequence associated with our significant sales decline. While our sales were down 26% to prior year adjusted gross margin, as a percent of sales in 2015 actually improved 40 basis points. Income from operations was a loss of $24 million. This was only $3 million worse versus the prior year after adjustment. So on a $500 million reduction sales, we held operating income nearly flat. This resulted in only 0.6% decremental margin, so it’s less than 1%. So let’s turn our attention to operations and talk about revenue. Sales for the year were $1.4 billion, this was down $500 million or 26%. The year-over-year decrease was driven mostly by currency and ag at $198 million and $208 million respectively. The remaining $95 million variance comprises our earthmoving/construction and consumer segments. I referenced currency, this drove a reduction in sales of $198 million or 40% of our revenue decline. This impact was helped depress all the international locations, our Latin America, Undercarriage, Russia, Europe and Australia businesses. The most significant rate movements were represented by the ruble 59%, the real at 42% and euro 20%. If you adjust for the currency impact that I just outlined, sales declined only 16% versus the reported 26%. As we break down our segment, let’s start with Ag. Ag continues to be the key driver to our sales decline. Ag in total was down $208 million or 20.5% when you exclude currency impact the North American Ag was down $199 million or 29%. $177 million or 89% of this particular erosion is driven by reductions associated with our OE customers. From a product perspective, $176 million or 88% of the same North American Ag reduction was a result of reduced demand for high horsepower equipment. In Europe, the continued decline in Ag is still driving our main OE customers to reduce production volumes. It is the buyer’s market as low demand levels along with falling steel prices and new competition from low-cost producers all put pressure on price and margins. And offset to that we continue to win new business in Italy, France and Turkey that will drive an additional 80,000 units in 2016. We are still the market leader as we continue to be rewarded by the market for providing innovative products that our customers want. The Goodyear tire project is now underway in Europe with the initial orders being supplied from the US. The early reception to the re-entry of Good year is very encouraging and demonstrates the brand still holds tremendous value in Europe. Latin America, Maurice talked about this a little bit, if they continue to suffer from a number of negative forces, deep political crisis, weak GDP, increasing unemployment, high inflation. But in spite of these challenges, Titan has actually gained market share with our OEs increasing from 38% from 44%. Our Titan team in Brazil has been admirable in terms of their performance and perseverance to drive forward in the face of all these obstacles. They had been very diligent to reduce costs and ensure competitiveness in a very difficult market. Quick comment on undercarriage Russia and Australia businesses. When you exclude currency impact both undercarriage and Russia show positive growth for the year, while Australia was basically flat. Let's turn our attention to earthmoving/construction. Our sales for earthmoving/construction were down $39 million or 6.4% when you exclude currency impact. A good portion of the $66 million currency impact was attributable to euro devaluation negatively impacting our undercarriage business. Our North America business experienced a 20% decline, primarily driven by reductions with our OEs. When adjusting for currency, our rest of world businesses were nearly flat year over year. So I want to talk about the consumer segment briefly because I think the reported sales performance results could be misleading. Our sales for consumer were down $56 million or 20.8% when adjusting for currency. Another view of that variance, $82 million of the gross [ph] $103 million miss for our consumer segment is driven by Latin America. 76% of this Latin American miss comprises FX and supply agreements. Supply agreements primarily represented by the Goodyear compound activity broaden has to improve profits. So we had another initiative towards business improvement framework that you heard a lot about. When we adjust for currency and the Latin America supply agreement, sales declined only $10 million or 3.7% versus the reported variance of 38%. So with the book closed on 2015 have put sales just at $1. 4 billion compared to $1.9 billion last year represented an erosion of $500 million. As evidenced by the past couple of years, these markets have been very difficult to gauge. We continue to focus on the delivery and marketing of innovative products that make our customer's equipment better. So let’s move on to gross margin where we have performed exceptionally well despite the significant sales decline. So, as noted a number of times, our gross margin dollars were down $2.8 million to prior year or $43 million on an adjusted basis. Our adjusted gross margin of 9.9% of sales was an improvement of 40 basis points to prior year on $500 million less sales. As I continue to state on these calls we have battled to overcome the sales decline, we've also had to contend with weaker mix as most of the Ag erosion was related to high horsepower equipment which represents a higher margin product category for us. We've been talking for several quarters regarding our business improvement framework, you heard Paul talk about it quite a bit. We continue to realize the benefits of our efforts and the impact of our initiatives continue to accumulate. In fact, this is the only manner in which you could explain or rationalize improved gross margin performance in the face of both significant sales declines and unfavorable mix. Net material cost reduction across the board have enhanced our margins, you heard a lot both from Maurice and Paul in terms of not only are we getting reductions on price of commodities that we pay but we’re also engineering out material costs. So reductions we've seen across steel, natural rubber, synthetic rubber, carbon black, fabric and chemicals, I continue to reference on these calls we have significantly improved the procurement of raw materials through the centralization of purchasing into our new supply chain organization. We've been procuring better than the benchmarks but generally this was not the case historically. We continue to demonstrate that we’ve been proactive in real time in reducing headcount and our plans to measure with anticipated lower production levels. Over the course of 2015, we reduced an excess of 500 headcount across our global plant footprint. Early in 2016, we reduced yet another 100 plus employees at our Bryan plant. Quick note on operating expenses, SG&A, R&D and royalty are down $76 million to prior year, this dropped to $40 million when you adjust for the 2014 goodwill impairment. While there are series of puts and takes across these categories, this decrease is primarily a function of our Business Improvement Framework initiatives or BIF and currency impact. And as I've stated on previous call, our operating expense structure has been historically lean but we continue to drive alignment of our strategic objectives and the elimination or redeployment of lower value expenditures. So moving down the P&L, let's discuss foreign exchange loss. This is a really good story in ‘15. If you recall last year, we lost $32 million to FX on our intercompany loans and balances, but to remind everybody this does not impact cash. In 2015, our foreign exchange loss was only $4.8 million, an improvement to earnings of $27 million. So as we discussed over the course of 2015, we’ve taken a number of actions to mitigate risk in foreign exchange through balanced reductions, reclassification and our new hedging practice. Our hedge settled and positively impacted both earnings and cash by nearly $5 million. In 2015, we re-classed Brazil debt to long-term and by our calculations averted a $5 million loss in doing so. During Q4 and into Q1 of this year, we lowered our ruble exposure by 25 million, this was accomplished through the capitalization of intercompany loan resulting in the purchase of additional shares of Titan Tire Russia. This action combined with US dollar repayments from Voltyre-Prom eliminating nearly three quarters of our total ruble exposure relating to launch. So this will really help us in 2015 in further mitigating risk. And we will continue to explore additional opportunities to mitigate FX exposure, we have a couple of ideas that we're kind of banging on right now. Let's summarize and bring this to bottom line relative to profit. Our income from operations was a loss of $24 million; this is $73 million better than prior year, just $3 million worse after adjustments result in NOI decremental margin of 0.6%. And this is a testament to the diligent effort of our One Titan team to reduce cost and drive profit improvement. Net income applicable to common shareholders was a loss of $93 million or $1.74 per share for 2015 as compared to a loss of $129 million or $2.43 per share for 2014. Adjusted net income attributable to Titan was a loss of $7.1 million or $0.13 per share and adjusted EBITDA at $54 million. That compares to prior year adjusted net income attributable to Titan at $26 million loss or $0.49 per share in adjusted EBITDA at $89 million. In regards to net income and Maurice spoke about this, referenced it a little bit earlier, I’m sure everybody knows our effective tax rate was disproportionate with our pre-tax loss. Under US GAAP Principles, our recent US cumulative losses indicate that Titan needed to report evaluation allowance against US deferred tax assets. Titan evaluated the realization of these deferred tax assets and recorded evaluation allowance of $50 million. In addition, Titan continued to record evaluation allowance on certain foreign entities that resulted in additional $25 million in 2015. So in total, Titan reported evaluation allowance of $75 million in 2015. The reporting of the evaluation allowance does not affect cash and the majority of the deferred tax assets are related to net operating loss carryforwards in various jurisdictions. The US losses have a lifespan of 20 years and Titan expects that it will be able to fully utilize these losses in the future and you heard Maurice reference it and this is what he meant by this. So as Titan generates income in future years, we will be able to utilize this evaluation allowance to offset future tax liabilities, thereby increasing net income. So let’s touch on a new balance sheet items briefly. For the year, AR was down $22 million after the netting of revenue impact and DSO erosion this primarily represents currency translation. Inventory dropped $62 million almost evenly split between inventory reductions and currency translation. We've been using terms consignment programs holding most of the battle for more share. This has had some unfavorable impact on working capital. AP was down $23 million primarily a function of currency translation offset in part by a 5 day improvement in DPO. As I stated last quarter, our EVA framework had the initial focus and emphasis on productivity and profitable growth as evidenced through our strides with gross margin. Working capital has become an acute focus in 2016 for additional value creation and cash flow. In regards to PP&E, we’ve stated in previous quarters, we have been carefully scrutinizing capital to ensure strategic alignment, positive EVA returns and cash generation. As a consequence, we spent $48 million versus $58 million one year ago generating positive cash. Cash ended the quarter nearly flat to 2014 year end at $200 million. What makes this even more impressive, this overcame a currency translation impact of $50 million. So our cash balance would have been $250 million excluding the impact of currency. We are all well aware of the concerns that have existed and continue to persist our liquidity and cash flows as we fight through these down markets. We continue to be mindful of our cash position manage it diligently as evidenced by our performance this year. So let's discuss our debt position for a moment. At 5.38, our net debt to trailing adjusted EBITDA has deteriorated from one year ago at 3.6 but only slightly to the previous quarter. Our actual debt level is slightly down from one year ago. So this is just a function of math as during this downturn, we have dropped off higher earning quarters and substituted lower earning quarters. As I did last quarter, I want to make everybody where our convertible bonds are due January 2017. We are proactively managing this having discussions with our Board and exploring a number of alternatives to address this maturity. So wrapping up, I believe our 2015 results were admirable in the face of some more difficult end markets accompanied by significant sales decline. We have improved our adjusted gross margin performance by 40 basis points on 26% less sales with decremental margin of 0.6%. And while there has been much accomplished by our One Titan team, we fully understand conviction and perseverance will be the necessary ingredients to come through these challenging times a stronger company for our future. And I will continue to say this because I genuinely believe it is true. We One Titan will be in position and couple the ultimate market recovery with the significant improvements we've made and the manner we operate the business that will result in a very possible outcome for our shareholders in the future. So with that I’d like to turn the call over to the operator for questions.

[Operator Instructions] We have a question from Sean Williams from BB&T Capital Markets. Please go ahead sir.

Hi, good morning this is Rob Nichol on for Sean, how are you?

Good morning.

Good morning, so you mentioned revenues are going to be slightly up in 2016. I was wondering if you could just maybe give a little more color and walk us through each segment. What should we be expecting up or down in Ag, earthmoving equipment and consumer?

In our numbers and what was justifies that is the - it’s twofold. Number one, we believe that the tires for Europe, Africa, the Middle East, Russia with the Goodyear brand is going to be bring us more revenue. Paul has been working on that with Bill Campbell, so we expect that sometime before the end of this quarter to be shipping or have it wrapped up sending tires from there, okay, from our overseas facilities. We can start off by backing it up with, out of Brazil which is a low cost producer now, but eventually we’re going to produce some over in Europe. Everyone should understand that when Goodyear was running their French plant, they had a plant in France, two in Turkey, and one in Port Elizabeth and when you look down the year, they generated between 250 million and 300 million in sales dollars. We've had a number of the distributors call us and wanting tires. So, the problem has been in getting the spreadsheet all the work that you have to do because of changes you have a specsheet but you might be using a different nylon for your fabric et cetera. So you have to go through every single one of them and we’ve been doing that. And that will give you, it takes about that long to be able to build tires and test them. We believe that that’s what’s going to bring us on the Ag side. The situation with the ITM, ITM has been working on their [indiscernible] and they were mainly an OE, so they’ve been concentrating the last two years to go much heavier into the aftermarket. And they've been very successful. So, once you get into the aftermarket, as this is first quarter from them is over their budget, so they are doing pretty good. And I also mentioned earlier that at the right price, we will probably exit that business. So, we look at that we figure, we’re - we should be able to anything else that drops a little in the Ag side in North America, you’re going to see on the smaller tractors, 100 horsepower and less, you’re going to have a larger volume with almost all of them. When I was at the [indiscernible] California that the story is that they’re going to be buying a lot of the smaller horsepower tractors. Big iron, we expect to - it could be down a little bit, its early dropped because I feel most probably greater than 50% right now but we believe that’s going to steady and of course that was our real bread and butter for our business both in tires and wheels, but since we started the LSW program, there has been more farmers looking - do they only buy a couple pieces of new equipment and then keep the equipment they have well, big farmers they understand the benefits that they get tires that have relatively new. So, in that case, they will go by the LSW tire and wheel package. So that’s pretty much what we expect that's going to happen. There is we think everything else whether it be mining or whether it be construction. You can’t forecast construction is going to do until you see what happens with all the bidding process that’s going on now for sort of just budgets you name it. So that’s what we see there.

Okay, that's very helpful. Thank you for the detail. And the Canadian reclamation plan that you called out in the press release, how should we be thinking about that in terms of revenue contribution in 2016?

It will contribute. Any time you build something brand new, something that’s kind of like new, what people will say, I will be going up there in the next two weeks. The buildings are all up, the equipment is there except for the special wash machine, which should ship in the next 10 days. The big thing is as you got to clean these tires before you put them into the reactors from the standpoint you want to get the carbon black. You don’t want a lot of dirt in there and all you are doing is heating up dirt, making up so that you got to clear your carbon black and everything else. So we are on schedule. As we said before, they will have that thing up and move them at full bore on April 1. Now, I have a test run in the latter part of March and if everything goes right, this is then - it’s almost five years so we’ve been doing this. I think our friends Suncorp, we are on Suncorp’s property and we’ve worked with them. They are moving the tires into the property right next to us. We expect good things, but as I tell everyone, you are only looking at about a store operation as we got about 40 million in assets, I mean in revenues and actually going to generate there, but it’s got big 50% plus on EBITDA. And so I think we’ve in our numbers, I would say we are pretty close to only looking at about 20 million in revenue of which we own 60% of that business. We have other partners in it.

All right, that’s extremely helpful. Thank you. I will hop back in the queue.

Thank you

Our next question is from Larry DeMaria from William Blair. Please go ahead.

Couple of questions. First, can you give us a hint on maybe how you see the cadence of ag sales throughout the year, I guess for we kind of comp up for year or is it second half or just how you see the cadence throughout in your ag side?

Well, the first thing, as I mentioned, if you look at the cash receipts, I spend an awful lot time on the road and I’ve been with an awful lot of dealers whether they are a Case or a Deere, almost all of them have been moving a lot of used equipment. And I think you have to give the OEs a lot of credit instead of going out and banging up the market with new stuff, they have been sitting up pretty good, taking their punishment and letting the dealers show off a lot of their trade-ins. So the dealers have reduced the pricing of their used equipment, just trying to get it down, mainly because they wish to get it down. You got a lot of big farmers who might trade in 10 big tractors to buy 10 of the newer ones, but now that the price of the trade-ins is way down, so they are probably - they are looking at, well, let’s just use them for another year, but they got the cash. When you look at cash receipts farmers are getting, unless the farmer went out and bought an awful lot of land [indiscernible] it’s pretty good. While I was up in - yesterday I was in Fargo, I was in, here in South Dakota and you can see the - they are getting all ready to plant.

I think you’ve got the - today, yeah, corn planting is going to be up, and prices are going to be down for corn, so I guess we are just trying to figure out if maybe some of the farmers are okay, but will your ag sales be up throughout the year or is it second half loaded or how do we the cadence quarterly through the year?

Well, I think what we are going to see is, in ours, I think that we will probably be stronger in ag sales in quarter-wise in second quarter when we will be first quarter and that’s because we flushed out the inventory. The OEs were switching our ag sales and the second quarter will be dependent on various parts of the country and weather. In other words, if you have a wet spring, our ag sales are just going to jump pretty good, because you got to have bigger flotation tires and that’s the way we make them. Nobody else makes as many as we do and no one has probably the best margins. Then when you - the summer will be like most summers, but then come fall, it turns out too, if it’s a dry fall which it was - fall last year was probably the first time in 20 years it was such a dry fall. We did not have a big rush of taking tires out for combines and tractors because it was so nice. If it gets to be wet, then that’s going to be a real big boom. So we are dependent on weather.

I understand. Let me ask it different way then, maybe what does the order book look like year-over-year I guess at this point?

I would think every quarter because nobody knows what the -

The order book year-over-year.

Yeah, the order book, I will tell you it’s a mixed bag. The big items are not being ordered till the last moment, okay. You are average say from 150 horsepower down, your order deck is moving up. If we are above it which is our bread and butter, it’s more of the last moment. And the same thing is going on in the aftermarket. Now the big cojones for us of course is the law suit we filed on everybody from China, India and everything and that’s going to make a big differential, okay. So now that we’ve - the DLC has already said, hey, we are moving forward. International Trade Commission agreed on India and Sri Lanka. You were around when I did it before and we were pretty successful. There is no doubt we will be successful now. We are going to try it different because the ICT didn’t touch the tire and wheel assemblies because there is not enough volume there. It has to be 3% and it wasn’t. But our point, as my press release said, this is nuts. Steel, you have duties on steel and everything, but technically if you are mixing together there is no duty. So I think with our firms as steel works, we are going to have to do that administratively and I think we are in that too. So line up the cry towels from some people, but it’s the law and I think the law is on our side and we will prevail. And when that happens, you can just throw up the chart, we can figure out how many hundreds of millions of dollars and that’s not outcome of the Titan and my friends fire stone, it’s just we always have to lead and pay the bill. I think that right now everybody has been put on notice, so if you go buy a bunch of stuff now, we win. The duty goes back to the time which you have been given notice if the lawsuit may pick it up.

Okay, it goes back retroactively if -

Yeah.

Okay, that’s good deal. Good luck with. Maurice, last question and I will jump off. Could you just help us with EBITDA and ITM, because you said obviously it could be for sale, but how do we think about maybe trailing 12-month EBITDA something like that just so we get a sense of value? Thanks and good luck this year, Maurice.

Well, I’d rather not, because we never break anything out [indiscernible] but let’s put it this way. It’s north over a nine - I mean in the nine figures then we would be interested in selling it.

Okay, thanks, Maurice. Good luck.

Yes, thank you.

Your next question is from Joe Gomes from William Smith. Please go ahead.

Good morning.

Good morning.

Most of my questions have been answered but just two quick ones.

Then you’ve got four then? Two quick ones.

Given where the stock price is today, the fact that you guys have some nice cash on the balance sheet projecting positive cash flow for this year, what’s the appetitive for buying back stock these days?

Well, I would love to have bought a bunch of stock when it was down around $3, $2.80 whatever it went to, I would love to. The only problem I am restricted. Titan is restricted. We can’t do it, because of the bonds, the big senior bonds, okay. And we’ve had enough lawyers look at it, we’ve looked at it.

Okay. So you can’t do anything in terms of any buyback at all?

No.

Okay.

I can always buy bonds back, that we can do.

And you talked a little bit in the past about making some more strides in the aftermarket and I was just wondering if you might be able to give us a little more color as to what you guys are seeing and how that is going and gaining share in the aftermarket.

Well, you see, you have two situations that we are the only one that has this situation. You have the tires that have been the same tires for the last 40 years, all right. Now you sell on the aftermarket, you sell them to tire dealers, their wholesalers et cetera, so you got a sales force that’s out doing that. Then you have the move which Paul explained in the LSW tires which we have gone out and we have like 180 farmers now who have turned around and found out that you put a set of LSW tires on your tractor, your combines, sprayer, you implement, you can turn around and that equipment will perform better even a frigging grain cart will perform better. So what is happening is that in order to make that channel we only have a couple what I would call very progressive dealers and tires who have taken the LSW because you got a wheel and a tire. Now, so we have gone to equipment dealers, the guys that sell equipment and the farmers. So we're doing both so that we went to the big farmers, the big farmers aren’t buying. We have made them house accounts, we call that our R&D farms. But what happens when other farmers see them, they want the same thing. They go to the equipment dealer whether it’s a Deere, a Case or whoever I call. And then we sell right to that equipment dealer, because you can only - you have to buy a tire and a wheel. Once you got yourself setup, you go set to buy tires. So that's what we're doing there and we're doing the same thing in the construction business, going to big huge construction contractors. So that's the long term, who is going to be our investment, the product or me.

Okay, thanks for insight. Appreciate it.

You are welcome.

Our next question is Alex Blanton from Clear Harbor Capital. Please go ahead.

You talked a lot about gross margin, the gross profit, but I don’t think you mentioned what the decremental margin was in the quarter. Your sales were down $75.5 million and in that your gross profit only were down $6.5 million, which is 8.6%, which is highly unusual and you don't see that very often that kind of sales decline.

Do you want to cut shot that Paul or John?

Yeah I would like to just a little more information on how you achieve that, what are the kinds of things you are doing in your plans? I know you mentioned materials costs and so on, but what about the efficiencies in the plants? What are you doing there?

What is going down if - as Paul talked about - and what happens is, you start reviewing all of the - everything that goes into a tire or everything that goes into the wheel. I mentioned one about the scallops versus a full 360 contact. So in a welding process where you might have - just think of a 46-inch size big wheel, well it’s got 360 valve. You can put four 6-inch valves and that's all you need to keep that center if it’s pressed in there in that wheel. And you would have some scallops on that tank. So what you do is, you are going to buy because it's a circle and punching a circle out of the square if you turn around and make your square little smaller, you are only chopping the corners of the square off and when you form it, those come up and then you weld those. Well, when you are dealing with big steel, you’ve got the situation where you're taking a lot of metal out. So a lot of these items, that's for real. Now, let's get to a tire, you get to a tire and the large, we’re the largest when it comes to all these 100 horsepower and down, let's just say 40 and above tractors and those are going up this year and we supply, whether it's Mahindra, LS Tractor, [Technical Difficulty] Kubota that come in and the body, tire and wheel assemblies. The same situation there when you look at the tires, a lot of times, they just said they want this tire. So when you look at certain equipment that's out in the world, you see that they’ve got various tires where you can take a lot of cost out of that tire, that tire is going to run up to 40 years and so they just got used to it. They don't need that tire on that piece of equipment. So as they are looking at it, you can make for it, it looks the same, but you can take an awful lot of stuff inside of that.

Alex, to answer your question on that Alex, I mean, it's really indicative of all the efforts that we've put in over the last couple of years to get to this point. We've highlighted a number of those factors that have led to this. I mean, our scrap rates are now lower than they were last year, cost of quality through our warranty continues to go down. We have plants that have gotten more efficient as we have reduced headcount and what Maurice is alluding to here, we’re taking out raw materials. Couple of examples on that, we've put in sensors in one of our large tire plants that can take out the variability, as you go and finance any time you got variation, it adds risk and decreases value. Well, we've taken variability out, so now we’re putting less material into our gauges of the calendar rubber. We’re able to spread our fabric better with these sensors and get more out of our fabric than we used to. And so, these are incremental things. So it's not one thing that we can sit here and say, yeah, this is the holy grail that made it all happen, but there is definitely a lot of initiatives that have kind of added up to the secret sauce that has really gotten us to this year where we saw an improvement in our gross margin percent. So I think what we will do in 2016 is see those initiatives roll forward and then continue to build upon them. And so the only thing we got to do is make sure we keep getting the volume into the plants and absorb as much of the fixed costs as we can.

Well, that's a good point, because the fruits are really going to come when the sales start going up, correct?

That's exactly right.

Margins probably above where they've ever been.

The $5.5 million I alluded to in the plant that I was at this week, I mean those are permanent improvements, they don't go away and like I said, it comes from stuff that certainly we have on the table now that did we have it before, I’m not saying we didn't have it before, but what really what the last couple of years has done is we've gotten the team really pushing more aggressively towards the initiatives that benefit the company and so there is good things that come out of the downturn, it's painful living through it, but there is definitely good things that will benefit us in the long term.

Thank you.

Hey, Alex. This is John. I want to make a couple more comments on this. During the course of 2015, we had upwards of 250 projects in play that materialized in our results and the comment you made and I made it during kind of my section was these are accumulative, so these are permanent changes and by the way, it's not just cost reduction, it’s profit improvement. We've delved into areas like pricing, attacking our off-invoice programs, we have growth initiatives relative to sales, operating expense redeployment in terms of driving more value creation. So there is a lot going on here, and that pipeline continues to be filled and replenished and so it's just a machine that continues to turn relative to contribution to the results you're seeing.

And our next question is from Anish Kumar [ph] from Private Investor. Please go ahead, sir.

A quick question on CapEx. Looking at the guidance, CapEx has been kind of up-and-down over the last few years and so wanted to get a sense of what you think CapEx over the long-term should look like on a yearly basis on average?

Well, the first thing is, you have what you call a maintenance CapEx, okay. Maintenance CapEx for all the factories worldwide. We probably only have to be real close to about 20 million [ph], that’s where most of the other stuff you have to keep doing. Safety, environment, or whatever. But in the - then it's like anything else, everybody as both Paul and John. You go to every factory, every factory [Technical Difficulty]

We’ll take our next question. Our next question is from David Tamberrino from Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question. Just wanted to recap on the LSW shipments portion, how much was that as a percentage of your overall sales for 2015?

[Technical Difficulty]

How does that look compared to 2014's level of sales for LSW tires?

I haven't even looked at 2014, so I just didn’t - I don't know.

David, it’s continued to increase. The trend lines look good. In a recent meeting we had with our management team, our ag product managers, extremely confident that the trend line for 2016 will continue to get better than what we saw when you look at ‘14. So we have been very positive.

I can tell you right now that the largest farmer in Illinois who farms soybean corn, there is no tractors from other degreasing machine. They came with new LSWs, all his compounds, I believe he bought, that's either 12 or 14 new compounds and those all have a big 12, 50, 46 [ph] LSWs, both front and stair, the 850s on the back. And I know in Iowa, a dealer out there has been, he's been running a program where he would switch out and he got to use tractor, he will use compound, it will switch him out and put LSWs on for the farmers. So that's too up in Canada, that's moving. Most of the equipment and the big stuff up to there, we’re going to be looking at. The big thing about the LSW is because you work at lower inflation pressure, you land up with less compaction. Number two, you ever see all these compounds, ask yourself, well, why the hell [indiscernible] because they think that's a flotation and they can get them out to be stable, compound. Military for almost 20 years has grown super singles, what a big super single on that, you outperform everything. Instead of having four tires, you have two, you get better pull, better fuel, better ride, less compaction. So it is a big country, so the next show we have right in drive is in Arizona. Most people don't know, but the farmers down there are dairy farmers. We are going to keep going, just like automotive, went to automotive like a brainstorm, took about six, seven years or so.

That's helpful. And then Paul, thanks for the comment on the trend line. I mean, is there anything that you guys are the ag managers seeing from an order book in terms of an inflection or is it just a steady increase from here?

Yes. I think what we’re seeing is a steady increase, David. The inflection point comes from many different sources. I think what Maurie talked about earlier in his comments with the test farms that we have, as that population base grows and the acceptance and I read a few of the comments from those reports, which are just a small subset of the positive comments we get, the inflection point comes when that population base just continues to spread the word and so I think our job is pretty simple from the standpoint that we have a great product that makes equipment perform better, we just got to continue to get it out there in the market, build good products and develop new products to continue to fill up the product portfolio. So I think we were probably more complicated than we needed to at the beginning, we approached it more of a disruptive technology that is tougher to sell, I think we really just got to look at it as just, it's a sustaining technology taking wheels and tires that already exist in the marketplace and just making them better. And so I think we really got the team focus, we got a good group of test farms. Like Maurie said, we've got equipment dealers that are pushing the product hard. We’re in the OEM books, the market recognition of LSW is strong as I mentioned, 23 points higher than IF and VF. So all the trend lines are good and positive. Is there an inflection point, I believe there is one coming, but I don't think there is anything that we could sit here and point to specifically right now.

Okay, thank you. That's very helpful. And then on the working capital side, with the launch of TTRC and the build out of the Goodyear business in Europe, what are you guys thinking or what does it look like for the full year in terms of working cap, because I think that was a pretty meaningful contributor to free cash flow being positive for the year in 2015. I just like to get your thoughts on what that's going to look like for 2016?

Well, I don't think what's happened up in the oil sands has basically been spent and we've already bought the malls and everything for Goodyear. So what we have is a factory, it goes through - you’re just putting at the end. The biggest expense is what you already have, the bodies, the engineering, in fact our Russian plant, just added in the carrying side, they added another shift because of their orders. So that's what it is, you're not talking, this is no big money for big locks yet. Okay.

There is no additional inventory build for the pipeline of orders in Europe for Goodyear branded farm tires?

I can make a couple of comments here. In terms of the tire reclamation, we don't build anything. So we’re recycling tires. So there really shouldn't be much of an effect on working capital there, and in terms of tires, the initial tires that we saw in the Europe are being sourced from North America and I don't see that having a material impact on inventory or working capital as well.

And then just within your expectations I think to be free cash flow positive for 2016, what's embedded in your working capital assumptions?

Working capital, we fully expect to improve as I said during my section. Initially, with the EVA framework, there is a lot of emphasis on productivity and profitable growth, in fact, the business improvement framework that was mentioned, 75% of those initiatives I talked about, 250 some odd that flowed through 2015 were related to the plants and productivity improvements. So that's where our focus has been. In 2016, we have an acute focus on working capital improvement. So I expect working capital to contribute to cash generation in 2016.

Thank you, that's helpful. And then just lastly for the quarter, SG&A cost controls look pretty strong, I think, in total, with R&D and royalty, it's about 36 million, that was down sequentially from around 40 million in the third quarter. Is that 36 million, is that a sustainable level, can we annualize that for the full year in 2016, or should there be any reason for SG&A to move upward from there?

Yeah. I mean with SG&A, you had some currency impact and some one-time items. So no, I wouldn't think that level would be sustainable. But with that being said, we have continued to reduce operating expenses and I've said on previous calls that, relatively speaking, when we - in 2013, certainly higher level of sales, our operating expenses is fairly lean and what we've done, even though we've reduced it, we have also looked for opportunities to redeploy it from lower value opportunities to higher value. So we’ll continue to do that. I mean at the end of the day, it's about profit dollars, at the end of that P&L statement and sometimes we are going to have to invest to produce more profit and so we’ll continue to look for those opportunities.

And our last question for today is Tom O'Shea from Castle Hill. Please go ahead.

Hi, I don't know if you already said it, but could you tell us what the EBITDA was in Q4 and for full-year 2015 EBITDA?

John?

I have it. So adjusted EBITDA for Q4 was 3.2 million, full-year adjusted EBITDA was 54 million.

And do you have the year ago-s?

Yes. For 12 months, the year ago was 89 million and I don't have Q4 of last year at my fingertips. I believe it was roughly about 8 million or 9 million.

Thanks very much. And you said 20 million minimum CapEx and then do you have an idea of what your extra spend might be for 2016 to get to your free cash flow positive number?

Yes. We’re looking at, I think we put out between 30 and 35 in that range.

Thanks very much.

You're welcome and thanks everybody whoever stayed on. Have a good weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.