Good morning, ladies and gentlemen, and welcome to the Titan International Incorporated Third Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. We will open the floor to your questions and comments after the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Todd Shoot, Senior Vice President, Investor Relations and Treasurer for Titan. Mr. Shoot, the floor is yours.

Thank you, Ben. Good morning and welcome everyone to our Third Quarter 2019 Earnings Call. On the call with me today, I have, Titan's President and CEO, Paul Reitz; and David Martin, Senior Vice President and CFO. I will begin with the reminder that the results we are about to review are presented in the earnings release issued this morning along with our Form 10-Q, which was also filed with the Securities and Exchange Commission, this morning. As a reminder, during this call, we will be discussing certain forward-looking information, including the company's plans and projections for the future that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from those forward-looking information. Additional information concerning factors, that either individually or in the aggregate, could cause actual results to differ materially from these forward-looking statements can be found in the Safe Harbor statement, included in today's earnings release, attached to the company's Form 8-K filed earlier today, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the Securities and Exchange Commission. In addition, today's remarks may refer to non-GAAP financial measures, which are intended to supplement, but not be a substitute for the most directly comparable GAAP measures. The earnings release, which accompanies today's call, contains financial and other quantitative information to be discussed today as well as the reconciliation of the non-GAAP measures to the most comparable GAAP measures. Today's earnings call is available on the company's -- release is available on the company's website within the Investor Relations section under News & Events. Please note, today's call is being recorded. A copy of today's call transcript will be made available on our website. I would now like to turn the call over to Paul.

Thanks, Todd. Good morning, everyone, and I appreciate you joining our call. We've already seen other companies in our industry report that they've experienced declines in agriculture and construction sales, really stemming from the continuing effects of the tariff battle, the poor US Ag conditions, and then along with some concerns over the global GDP that are slowing investments. Many OEMs are producing below retail sales, and a number of large OEM dealers have stated that they significantly reduced inventory in recent months. This combined to deliver a head to our sales this quarter. This year has certainly been a wild ride. We started off with strong optimism about growth coming off a good 2018, and then it got turned in the opposite direction late in the first quarter. Our Q3 results have been significantly impacted by these softening market conditions, and we simply need to do better. I'll get into that plan further in a minute, but before that I want to point out an issue that impacted Titan in this quarter, and really throughout 2019. In late 2018, we embarked on an Oracle Cloud ERP implementation in our North American wheel business. The system is now up and running effectively after working through a number of challenging months from -- it really, many unexpected issues, but they primarily related to shipping in the EDI data transferred within OEMs. The issues with the Oracle Cloud implementation caused our North American wheel business to have somewhat limited forecast visibility within the system. And then you combine that with the rapidly shifting market landscape, and that led our wheel team to purchase an excessive level of steel. Throughout 2019, then steel prices have come off significantly from the historic highs in late 2018. This resulted in us having to reduce prices…

Thanks, Paul, and good morning to everybody on the call. I'll try to be a little bit more brief today, and I'll go through some of the most important items from our third quarter performance, and I'll discuss current and ongoing actions to manage our financial position, which includes working capital management, which was a very good highlight from our Q3 performance. To reiterate, net sales for the quarter were $346 million, representing a decline of 10% from the prior year. On a constant currency basis, revenues would have been down 8.5% from the third quarter, or $32.6 million. The negative currency impact of $6 million, or 1.6%, was felt, mostly in Europe, just like the rest of the year so far. While Ag sales lagged the prior year about 4%, the biggest impact on sales this quarter was in our earthmoving/construction segment, where sales declined by $25 million. The biggest driver of this was ITM undercarriage business. We also saw a decline in the Australian business, driven by weak market conditions, and a shift in our focus of the business away from tire distribution in the mining sector. The Consumer segment experienced a decline of $7 million in the quarter, reflecting continued sluggishness in the utility truck tire sector in Latin America. ITM's construction sales experienced a sharp decline in Q3 on lower OEM demand in Europe and Asia, resulting from the global construction slowdown. Our North American tire sales declined 5% from Q3 of 2018, and our North American wheel business saw a decline in sales of 13% from the third quarter of 2018. For the tire sales as mostly a factor of volume, while a more significant impact from lower prices was a key driver for lower wheel sales. Latin America was on par with Ag and…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephen Volkmann with Jefferies. Please go ahead.

Hi, good morning guys. So whole bunch of stuff here, but maybe -- let's just of dramatically, I guess, I'm trying to think about, obviously, there is a lot of moving pieces here, and I know you don't want to give guidance for 2020 yet, which is fine, but we'll make our own conclusions about sort of volume and so forth, but I guess, it feels like there is a number of costs and headwinds that sort of naturally should adjust as we go into 2020 regardless of volume. So I wanted to just kind of go through how we should think about that. So you talked about $15 million year-to-date and kind of steel mismatch, it sounds like you won't have any of that in the fourth quarter. So the $15 million is sort of the right number for the full year. Is that correct?

Yeah, that would be a fair assumption for 2020. And that was -- that's largely behind us. And those were impacts that push through as we lowered the inventory levels. Inventory levels are now rightsized so.

Okay. So sort of -- in a sense, we get $15 million back next year from that, and then you talked about $10 million lower kind of cost basis. I think those were around head count, and there is probably a little more of that to come, is that correct?

Yeah. And will be very -- that's principally in our indirect costs and some of our direct costs inside our plants. And so that's -- that would be helpful for the margin in gross margins in the plants.

But you won't get sort of a full 2020 benefit of $10 million because you got some of it in 2019?

Yeah. Lot of these actions are taking -- have taken place here in this last quarter, and even in the fourth quarter. So it will be largely accruing to 2020.

Okay, all right, fair enough. And then, what's happening like with Australia? It sounds like you're sort of consolidating over there. Will there be some cost saves in 2020 from all that?

There will be, yes, definitely. On top of my head, I don't have that exact figure, but it's several million dollars.

Okay. Several million. And then, you talked about also having to spend some extra money. It sounded like around this whole ERP thing to make sure that it all worked fine. Will that be completed and over by the end of this year?

Our stabilization efforts are largely behind us as well, yeah, then we had a couple of million in the quarter that we had and we probably had a couple million last quarter. So I would suggest that that we should see improvements on the SG&A costs associated with that. Now we do have some costs that will flow through next year related to amortization of the systems that we did implement, and so there may be a little bit of offset there, but, overall, I think it will be a net reduction.

All right. So a few million there then. What am I missing? Is there anything else that you feel that has sort of hit you this year that maybe goes away next year?

Yeah. Obviously, we had the one-time ITM costs this quarter related. That was obviously shown. We pro forma that out in our non-GAAP adjustment, but that's -- that was $2.3 million that we won't.

Yeah, okay. And then also this quarter, you had a gain, right? Was that on the gain of sale on Wheels India, was that?

Yeah, that was reported in other income.

And why was that gain booked this quarter, but you didn't actually sell it?

No. The transaction actually occurred in '20, in September, the sale actually occurred and the transaction closed. Cash hit the bank right after the month, though. So it happened right at the close of the quarter.

So you booked a gain in the third quarter, but you didn't get the cash for accounting purposes till the fourth quarter.

That's correct.

Okay, all right. And let's see, with respect to the Russian put, I guess that is all done and behind us now. Does that change at all the accounting for what's included in consolidated sales and profit, or has that all been consolidated up till now anyway?

It's always been consolidated. You see the residual non-controlling interest in the NCI line below. And the only thing that's changed now is obviously we have a higher ownership of that facility. So will be less of an adjustment at the NCI line now.

Okay, great. And then on Russia, you talked about that business. Can you give us a ballpark of how big that business is these days on a revenue base?

Yes, it's something we haven't disclosed exactly the revenue base on it. Clearly the exchange rate -- it had a big impact on that Steve, so, in the US dollar term, it's shrunk considerably. What I did try to disclose this period though is just where we're at on our operating profit line. And we've seen EBITDA condense over the last few years as the market has continued to shrink, really driven by just working capital constraints within our dealer channels. So it's not an issue where we've seen our business or our market share condense. It's really driven by, obviously, like I said, the currency, but also just the -- right now, the channels -- the capitals moving so slow through it that inventory is just moving at a very slow pace. So, definitely, we think it can come up from those levels. So as we look towards the future, I mentioned, export sales is a way to grow the business, but we definitely believe that you had -- the government has to protect their Ag economy, and they got to get more capital into that industry, and that will help accelerate things as well. But, sorry, for a long-winded answer, but we just can't disclose -- for competitive reasons, we can't disclose the sales level in Russia.

Okay, all right, fair enough. And then my final thing, and I'll pass it on is just -- I assume you have ongoing and often quest discussions with dealers. And I'm just curious what you're hearing from them relative to 2020, because I guess if we assume 2020 normalizes, you could have -- they might want a little bit more inventory to kind of be ready for the spring selling season, or maybe they already have enough, I don't know, but, just, what's the mood of the dealers relative to that?

It's kind of what the mood of everything is these days. It's a tale of two worlds. The good dealers are strong, they're having a good year, they're optimistic for next year. They have the capital to bring in inventory, and they look at towards the future in a world that will definitely get better than where is at now. And then you got dealers that are struggling. They have a lack of capital, they're shrinking inventory as the market's condensing, and I think they're shrinking it below where it needs to be. They're going well below retail sales levels and they're bringing it down to help preserve capital and they kind of have a pessimistic view. So it really depends on who you talk to. I think the consolidations that are going on are good for the industry when you're talking about the dealer consolidations. And I think what you're going to see at some point, Steve, is that inventory levels -- it's happened before in many of our other cycles we've been through, where inventory levels get pulled down too low, everybody get too pessimistic and too conservative, and then things ramp up really fast. And it's going to take, I think, it's going to take just a pretty small trigger to make that happen. I think we're at a point where corn prices are get a little bit more move in corn above four, and you get a little bit of relief on these tariffs, which -- it sounds like eventually that's China is going to have to import something from us. You get the weather conditions moderating. And I think you can get some optimism pretty quick, and at that point, you're going to have a lot of dealers where they're going to -- their inventory is going to be too low, and they're going to start order pretty quick.

Okay, thanks. I'll pass it on.

Our next question comes from Joseph Mondillo with Sidoti & Company. Please go ahead.

Hi guys, good morning.

Good morning.

Hi Joe.

I just wanted to touch also on the steel issue. So last quarter, I recall asking you guys and talking about it. How was it a surprise last quarter, and it seems like the extent of the problem actually escalated in the third quarter, whereas, actually, I was under the assumption that it actually should have improved as we went into the third quarter. So could you just help us understand what the surprise was number one? And then number two, just to clarify exactly what happened because as I understand that you said that the new ERP system was implemented in 2014-ish, and you had a similar problem like this 10 years ago. So I'm just wondering why the new ERP system did not -- as you said, you thought you nullified it. Can you just talk a little bit more in detail of the issue, and why you have the confidence that it won't happen again, and then in terms of the surprise here in the third quarter because the margins were a lot worse than we were expecting, and I thought it was largely behind us in the first half of the year?

Yeah. I think Dave and I would agree with those comments, Joe. Look, we had some personnel that made some poor decisions in their decision-making process. We're doing it was not at all, something that's acceptable acceptable. It is -- we're confident it will change because it's being addressed, and we are changing how we operate. And the reason why the comparison of 10 years ago to today and the reference with the ERP system is when you have a lot of moving pieces with the ERP system, it created a cloudy environment where some people were able to make some decisions in a vacuum, not communicate them necessarily effectively, and to some extent, to your point, we were dealing with some surprises in Q2, as we communicated. What we found in this quarter is kind of, unfortunately, a perfect storm that hit is we had lower prices because steel prices kept coming down in the market. So we had to reduce prices to our customers. And so what -- that continuing effect that you're referencing in Q3 really is just an impact of us having to continue to reduce prices, and we still have inventory that we are relieving from the books, from our inventory at a higher cost base. Things are going to change, and it's going to be addressed, Joe. That's probably all I can say on it for right now. But I can say from David and I, perspective, we are not going to tolerate the actions that took place, and we are going to make effective changes to address it.

Okay. And then in terms of the inventory of steel that you have on hand where we see still a little bit of the higher price steel going through cost of goods sold in the fourth quarter or is that fully behind us at this point?

I would say it's largely behind us. But there are certainly -- the number of pounds on hand have significantly dropped from what we saw in Q1, and early part of Q2. So it's come down pretty nicely. But the overall unit cost of it is still somewhat elevated, but it's not going to -- it would be anywhere to the extent that what we saw in line, in Q2 and Q3. And so I wouldn't -- I would anticipate we may have -- we may not get back to historical margins in the quarter, but we are going to get back a significant amount from what we saw in Q3.

Okay. And then just in terms of general, overall inventory, last quarter you thought that you could reduce inventories by $15 million to $20 million in the second half, and then you did a little bit more than that expected in the third quarter, but it sounds like on your prepared commentary that inventories are sort of back to sort of a more normalized level?

Yes, well, I would say that we still have opportunity. If you look at it on a strict turnover basis -- based on Q3 revenues, which was obviously artificially low, our turnover slowed down a little bit even. So I would expect that we have more room for improvement. Obviously, that's just going to be played out with respect to what demand levels are in there next couple of quarters. But, yeah, we achieved better than I expected in the quarter, but it was certainly not something that we didn't think about. I thought it would just take us a number of different several quarters to get to where we are right now. And I'd say we have another $30 million to -- $30 million of inventory easily that we should be taking out over the course of the next year or so.

Okay. And then just going back to the gross margin just so, I'm clear, generally the fourth quarter -- you generally see a seasonal light, it's usually your weakest quarter in terms of gross margin, at least at the Ag segment, is it right to assume that it will not be the worst quarter of the year because of the third quarter we saw worse -- so weak?

Yeah, I would suggest there are some things that come back to us in Q4 that the -- some of the issues that we saw in Q3 won't recur. So it will be a better margin quarter for us.

Okay. And then just on the SG&A side, I know you've called out the $2 million regarding the ITM potential listing, what was the other, the second bucket of items, I sort of missed that in your prepared commentary, you mentioned some other sort of?

Yeah, it was some of the support costs associated with after our go live on the Oracle Cloud. It's about $2 million of support costs. And that number will come down in Q4 largely.

Okay. And then I guess just high level, Paul, you called out the $4 million -- 4 million square footage of North America tire manufacturing. We've been talking for several years now, and I know you've been looking at it consistently on a regular basis in terms of trying to maximize the efficiency in terms of the square footage. Maybe you could just talk about -- or just try to give us an idea of how complex this business is if you're -- from our advantage point it's easy, your utilization rates are well below under expectations, and you should just start closing consolidating facilities, but maybe you can give us some more color on what the challenges are, what you're thinking timing of certain things? Or anything that you can provide in terms of sort of restructuring the business a little to make it more efficient?

Right. All three of our plants produce different products. And so that's where the challenge is really come into play. So when you look at it from the outside you see three locations 4 million square feet, and you go, why can't you just move one, do something and just increase the utilization, and the challenge really comes to all three plants make different products. And so there are some very complex decisions and analysis that goes around change in the utilization rates, how you could do things differently to improve the flow through the plant and drive greater volumes, etc. There are a number of different ways to approach this, Joe, and the comments I want to make today is that we realize -- it's important, and we realized we need to do something about it. And in due course, we'll certainly share more information. But to answer your question, the complexities come because each plant makes different products. And so, yeah, that's what we're taking a look at. But, what we've done -- the points I want to make earlier today though, I mean, on the cost side, on the efficiencies, I mean, our plants have come a long ways in the last few years. I mean we have driven significant efficiencies when you look at the output per man hour. We've driven down cost of quality that has saved us millions of dollars a year, and now what we're doing with 80-20 to really streamline our inventory management, to streamline our production. What we're doing on the pricing side to make sure that our pricing within the market, we're maximizing the potential that we have to gain volume and margin. I mean, we've taken a number of measures over the last few years, but the one thing we still got to tackle our utilization rates.

Okay. And then just two more quick questions from me. The consumer segment volumes were down 20%. Could you just talk about what's going on there? And then lastly on the RDIF put option, the 4 million -- I thought there was sort of 4 million shares that you're issuing to them, but I read in the Q, that there were maybe some regulatory issues. Could you just update what exactly happened with that sort of agreement?

Yeah, so on the consumer piece, Joe, a lot of the activity that goes through there is related to our bias truck business in Brazil. That business has been experiencing weaker sales with the domestic markets shrinking this year. But also what's going on is the market is really underperforming because of the broader economy. It's -- there is increase in pressure coming from imports on the radial side. So within the marketplace, there is a lot of radial inventory, competitors are selling the radial inventory prices that are closer to bias than they historically have been. And so, you're seeing some shift from bias into radial that's higher than what we've seen in prior year. And so it's something that unfortunate, right now, there's a lot of market forces that are going against us, and you're seeing that the volume through the consumer, now it's a small part of our business. But at the same time, we're looking at what we can do in Brazil to increase the output of the plant and may not come in consumer products. We continue to add OTR products to our line up. We're continuing to utilize that facility in more effective ways. We're increasing our radial Ag output. So the utilization rates in the plant necessarily aren't changing as fast as the sales that you're seeing -- the sales results you're seeing in consumer because where we're adding products and improving the performance of the plant is coming to the other segments.

And Joe, to answer your question about the RDIF, the shares have not actually been issued yet, they are still waiting final regulatory approval to be issued to RDIF. So that obligation remains in redeemable NCI, so and when at such time the shares get issued or get converted to equity.

Okay, all right, great. Thanks for taking my questions today.

Thank you, Joe.

Our last question today will come from Larry De Maria with William Blair. Please go ahead.

Thanks, good morning.

Good morning.

Actually, I wanted to beat a dead horse on the ERP thing. But it sounded like previously when you guys discussed it, you're building out inventory ahead of the rollout, which sounds like kind of normal risk management. Now almost sounds like stakes you made, you had bad information, and now you have to take corrective actions and there was anomaly, so it's different in tone of what you said before, is that right, because it stands a lot worse.

Yeah, I mean it's -- you have the ERP issue that we talked about earlier in the year. And now what you have in this quarter is, in the ERP situation that is really kind of parlay that also some decision making by certain personnel. And part of that is from a lack of information from the ERP, and part of it is that when you take some actions to improve the processes and how some behaviors within just really a small group of people over there, and that's going to be taken care of. So I think when we say it's an anomaly, we're confident that's anomaly because of those reasons. And it's an issue that we had, unfortunately, as a company over 10 years ago. And the reasons behind these are similar, and we know where to fix it, we know how to address it. And we're pretty confident that we'll be taking care of.

So in other words, people -- small group people made a mistake and overbought, but that would not have flowed up to CEO, CFO level to help make that decision, they are able to make that decision before, in other words, the process didn't work?

It's not necessarily just the process. But, and you right, plants have to have the ability to run the plant. And there are certain -- there are certain boundaries that they can make decisions within, and procuring raw materials up to certain levels is definitely within the scope of a typical plant operation, and so what we're going to do is centralize that function more. We're going to have greater oversight over the operations of the business and the purchases that they can make.

Got it. Thanks.

The one thing to keep in mind, Larry, too -- not only we had elevated costs associated with it, we had -- we are pretty inefficient in the plant in terms of trying to catch up on production when we had some shortages. And that coupled with the fact there, actually, our prices to customers are lower now, because of the lower surcharges on the current prevailing prices in the market. It had a double whammy effect on it. And that was more -- it was a bigger impact in the quarter than we anticipated.

Got you. So obviously, pricing was better [indiscernible] might be able

Yes, that's actually a key point right there, Larry, what you just said, as I think.

Yes.

I think there are some thoughts that you could just -- without the pricing changes that you could just skate by and lead the inventory often. That didn't happen.

Got you. Okay. Now you have talked -- having that great market intelligence now and say you have a better view on pricing, ect, and competition has come online, new capacities come online. Do you guys have a good handle, I'm curious, about industry capacity utilization, and your capacity utilization, given that there's has been more online because I was just trying to understand how, if the business is structurally changing, let's say, for the next cycle than the past cycle?

Yes, I mean, it's a good question and I would say this, I mean, some of the announcements that you see on capacity coming online are not reality. It's easy to do a press release, it's a hell of a lot harder to make the investments into tooling and technical product development to put a full product portfolio out there in the marketplace. And so I think some of what you see the read is deceiving. I think the core competitors are still the core competitors. I think there is more that's come online, in particular, from one location, but I don't think the business is at a point where margins and cannot be back at a healthy level as the business improves, in particular, in the Ag and the high horsepower. I would say the competitors for the most part, in those conditions, operate rationally, and they are looking to increase their margins as well every now, and then you're going get irrational decisions by competitors, and it's typically in small lots where they're trying to get rid of excessive inventory in a particular product size. I believe strongly in what we have at Titan, which is we have a strong brand and we have an extremely good distribution channel, and we're very connected to the end users. And so our overall value proposition is good as anybody in the industry. You just get a lot of moving pieces in a down market, where pricing is fluctuating all over the place. And so what we've done extremely, while in the last couple of years, is we're understanding those fluctuations real time. We have built intelligence into our organization where information is flowing on pricing and what's going on in the market on a really, really rapid basis. And so that's where I feel confident that as the market shifts, we can shift, you combine that with 80-20, where we're producing the right products, we're holding the right inventory. And so I don't think it's going to take a lot in this marketplace or in the Ag marketplace, specifically, to help drive incremental margins that are pretty positive, but you got to have volume. And I think all the competitors in our industry right now are kind of have seen the stagnant volume, and that's going to put a little pressure on pricing, obviously.

Understood. And thanks for that color. Last question, and then we'll hang up. The Australia business, when you talked about it, I think losing a little bit of money. What is an annual, I don't know, this year sales and EBITDA kind of look like for Australia, remind us what's in that? Is that mostly buying carrier service business or is there other stuff there now?

Yeah. So the mix of the business is we do wheel servicing. We actually produce and distribute wheels into the Ag sector as well as the mining sector in Australia. We also have in the last few years, taking on a tire distribution strategy, primarily, in the OTR segment over there. So that's been the mix. We're shifting back towards our wheel, and wheel servicing business as a primary part of the core business, if you will. The business is -- let's just call it from $60 million to $80 million in revenue, on a regular basis, and it has shrunk. And it -- I would say it's a barely positive EBITDA this year with the expectation we get back to a pretty reasonable margin going forward.

And is that competitor -- considered core business that's not one that's on the potential for monetization, correct?

I would say our core Ag wheel business is there. I mean that is considered core for us as a company, obviously. So that would be the one thing that we want to continue to protect and grow.

Understood. Okay, thank you very much.

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

I certainly appreciate everybody's attention in joining us for the call today. And we'll look forward to talk to you again when we get year-end results. Thank you.

Thank you.

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