Titan International, Inc. (NYSE:TWI)
Q2 2016 Earnings Conference Call
August 04, 2016 9:00 AM ET
Maurice Taylor – Chairman and Chief Executive Officer
Paul Reitz – President
Brent Rystrom – Feltl and Company
Larry De Maria – William Blair
David Tamberrino – Goldman Sachs
Alex Blanton – Clear Harbor Asset Management
Kirk Ludtke – Cowen
Ladies and gentlemen, welcome to the Titan International, Inc. Second Quarter 2016 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 state the Company’s or management’s intentions, hopes, beliefs, expectations, or predictions for the future are considered forward-looking statements. Please note that the Safe Harbor statements contained in the Company’s latest Form 10-K and Form 10-Q filed with the Securities and Exchange Commission extend to this conference call and any forward-looking statements involving risks and uncertainties as detailed therein.
At this time, I would like to introduce Titan Chairman and CEO, Maurice Taylor. Please go ahead.
Good morning, everyone. You have the second quarter – if you’re on the call, you should have all of the numbers and everything. It was not what we expected, but there’s some good and some bad. I want to take a few moments to cover a few things on it.
The markets at the OE level, especially in the big iron, are down. You can come up with all the reasons people can, but I think the market is not going to move on the big iron until after the harvest this year.
The dealers had, what, first time in 100 years – four straight down years they’re going to have. And Caterpillar – I don’t know how far, but I know it goes back before I was born, and that’s a long time. So what I’d like to do, because there’s a lot of good, and a lot of things that we have been doing and we have been doing them for 18 months. It’s just how far down you have to go to get it.
On the wheel side, the wheels strictly, in our opinion, is mainly an OE business. And with your big majors dropping and dropping, that’s what happens into your wheel business. And 85% of our business is OEs. Wheels – there’s not a large aftermarket whatsoever there.
But our wheel business is wholly up, mainly because the small under-100 horsepower has continued stay pretty steady. In fact, slight upticks with certain companies. We have also – most of you won’t realize that you have a limit to how big you can get at a certain OE. For years, actually went 11 straight years, we were the main almost 100% supplier to our friends at Mother Deere. But since Sarbanes-Oxley, you’re capped at 80%.
The new wheels – we’re coming up, we’re still on the little section. We are going to expand, as we’ve said before, in Brazil. And starting – we’re going to put two rim lines. We are at the final stages of approval from the Brazilian government. And right after the Olympics, our team will be headed there.
Moving into the tires, it’s a little different. OE level is 30% to 35%. So you have a big aftermarket. And what we have doing – and if you notice our expense for our sales force, because it’s one area that we have not cut, mainly because you’re out there going after tire business, so you need to have salespeople out there – we have been able to start looking at a bright spot there.
We have taken on all comers. And the forward months – we are looking at through August, September, into the fall. The order deck, it’s nice to see, has increased in our tire side. And that’s mainly coming from two sources. It comes from the under-100 horsepower, and it’s coming from our aftermarket.
We are pushing real hard, and that’s where we have decided to focus. We are still taking care of the OEs, and we’re going out reference to a lot more short-liners, but we are also pushing it in the aftermarket. And we believe that going forward, it helps offset everything. There’s not a lot of margin in it. That’s the only thing.
The next item that we are looking at is our track business. ITM in North America went into the aftermarket, and they are on track for the North American side to have one of their better years. That, of course – we put that out for bids to see where – if we get the figures we were looking at. There’s a special committee by the Board. And if it comes in, which we have stated previously in the nine figures, the Board will have a decision – the whole Board, and they’ll go with the recommendation of the special committee, I believe – to sell or not to sell. We want to concentrate in the future on our core business, which is wheels and tires worldwide.
The other situation is in the other – that we are doing in our business is the TTRC, which is a tire reclamation using our big reactors. And up in the oil sands, they have – tires are starting to come in, where probably in two weeks it will be about 2,200. These are the supergiant mining tires. Each one generates about 10,000 pounds.
And we have been running the equipment, got all the permits; are due to be yet this week. So by the 15th we are off and running. Our plan up there is to turn around, and that’s got large margins. And we’ve had inquiries on that facility, but we will look again at that as a non-core business, and if the price is right, I believe the Board would move on that.
Now, when you turn around, and as investors, about early this year – maybe it was the last part of the last year – an analyst wrote a deal about our liquidity. If you look at the cash flow, you’ll see we ended with more cash than we started. We have continually been improving the efficiencies within our core business. Are we all finished yet? No. Actually, in our most competitive business you’re in, you should never take your eye off improving. And we’re not.
So when you look at that, and here we are halfway through the year, and our liquidity is very good. In fact, one of the other things I mentioned in there – we have leased out a majority of our Brownsville facility, and we have the last $200,000-some is someone interested in that. Which – to show you value and what happens, this facility will be generating over $2 million of income. And at the same time they are all triple-net leases. So you don’t have to be picking up the property taxes and all the rest of this stuff.
So on anybody’s scale, that property is worth a decent chunk of cash. And then you have ITM and you have TTRC. We are in excellent shape. And if you were to add all those numbers and add it to the $207 million in cash, you don’t have to be too high in mathematics to be able to figure out – wow. So liquidity is not our problem. It might be how we handle and negotiate with buying certain things and our cash situation back, but that is what’s out there. That’s a good thing.
We believe we are – as I said in my release, I’ve been on the road. They’re starting to harvest next week the corn crop in Illinois. And I think they’re going to have an excellent – at least in the Midwest here, the gods up there for agriculture have been pretty good. The soybeans, of course, will come a little bit later.
Our LSW program is going really well, especially on smaller size. You get into the super 500, 600 horsepower tractors, we have a special hub, because our super single LSW tires just make this equipment run so much better. And we are more than happy to take on any of the track vehicles and any measure that anybody wants to go against.
We are in the process of coming out with a much bigger hub, and the reason being for that is because when you get to these high horsepower tractors, you have to have weights in order to be able to transfer that horsepower to the ground, so what you are pulling. And the advantage is once you get over 500 horsepower, if you keep adding, you’ve got to get more and more surface of rubber on the ground if you want to maintain impaction being at the minimum. And we are moving very fast in doing that.
In fact, I was in Saskatchewan. And if you have seen a tractor – it was a Deere, their new 9620, with our single 1,400 by 46s in pulling 70,000 pounds of dirt behind it on a scraper. That’s a real impressive situation. So when you look at our factories, all worldwide, Russians are doing fairly well. And they are on track to add their new equipment that we have sent over to them. And that will just make them much better than they are.
In South America, they are ecstatic over the farmers that have been testing the LSW. So the scramble right now is to get to them the product. And we’re busy tooling so we can produce the tire there. And that is to push on to the wheel business.
So I’m pretty optimistic; I always have been optimistic. I’ve never seen it drop like it did. But in visiting the plants this week with Paul, even the ops managers were impressed with the bookings they have. And that’s the first uptake in quite a long time.
So does that mean we hit the bottom? I actually believe it does, but we’ll probably – in reality it will bounce around between now and the end of the year. And then I don’t expect a great boom but I do believe that our house will be in order, and it will start dropping to the bottom line.
And with that, Paul, you take it over and cover the numbers.
Sounds good, Morry. Thanks, Morry, and good morning, everybody. The story with our markets continues as same. You’ve already heard it today, and you’ve seen it before. As Morry said, it feels like we’re bouncing around somewhere near the bottom. But I’m stating the obvious in saying it would be great to get some help from commodity prices to enjoy some tailwinds.
We had a nice brief run with corn up to about $4.40. U.S. folks here in the central farming belt saw a really hot start to the summer. Real dry as well. And then the rains came, and now we find corn back in the trenches, around $3.30. But I do want to note – I really believe the Titan team and our organization has and continues to do a really solid job at battling these tough market conditions.
This quarter our sales were down over 12%. We did manage to raise our gross profit margin by 10 basis points. I’ve said this before – and will continue to say it – is that our team really has made the difficult decisions on a timely basis that has enabled us to really successfully navigate our way through these continuing challenges in the market conditions.
So that’s enough on the market conditions at the current time. Let me jump over now and talk about some of the good things going on here that will benefit us into the future. Last quarter I mentioned the changes and additions we made to our sales organization as we reached out and were able to snag some talent from the competitors. Those folks are off and running. And one of those new hires has already signed up over 140 new dealers into our associate dealer program that we kicked off this year.
I believe our sales and marketing teams have done a good job, consistently watching what’s going on in the markets and really instituting the programs that help attract business and fight off the competition where necessary. You know, in these oppressed markets, pricing is going to be an ongoing battle that we need to continue to work hard to stay on top of and continually strive to improve our pricing capabilities.
I think we have continuing opportunities there, not just to lower prices to fight off the competition, but to strategically use pricing as a weapon to gain share and increased margin on the products where there is less competition out there, because we are the ones that can produce the products needed for those customers.
But as Morry talked about today and noted in our press release, we’ve been intently focused on reducing our production costs. But kind of continuing those thoughts on our product side, let’s not forget who Titan is on the products – on the products side. And when you look at our portfolio, we have been beating the LSW drum loud and proud for the past couple of years and that’s for good reason. But the strength of our products go way beyond just LSW. We have the most extensive portfolio of tires in the ag industry, and of course we’ve got the power of the global Goodyear brand.
Along with LSW, we offer the complete lineup of premium-quality radials in all sizes to meet the needs of the market and for all ag applications out there in the business. We also have all the tires that are needed for the small and mid-sized equipment. As noted, that’s been a real strong spot for the industry. It’s been a great part for our business. We have a really strong customer base in the small to mid-sized equipment. And again, we make the products that they are geared towards the lighter applications and more towards the bias tires. But quite simply, we cover the ag market from top to bottom in tires like nobody else in the industry – and, of course, wheels.
So now let me shift back to the comments on reducing production costs that were noted earlier and then also in our press release. You know, downturns always present opportunities for change and improvement. We’ve proven over the last couple of years our ability to effectively manage our headcount and efficiencies. When we exit the downturn, that will pay off well for us into the future.
But along with that, we’ve really discovered some untapped potential that lies in our R&D teams and also with our supply chain teams, as they have and will continue to find ways to reduce production costs, take material out of products while, of course, maintaining the high performance and quality of the products that we manufacture. And so that’s the piece that I’m really excited about where we can go in the future to reduce costs, meet the needs of our customers, and ultimately obviously our shareholders.
On today’s call, I’m going to be doing the financial review. But before I do that, I want to provide an update on Titan’s finance and accounting team. As you’ll see noted in our 10-Q, our temp CFO, along with our Chief Accounting Officer and the respective accounting team, have been doing a good job in addressing our material weakness. Titan has hired a top firm to conduct the search for a CFO. We are confident that this process will result in a good candidate coming on board at Titan and in a reasonable period of time. But with that, I do want to note that the finance team in place today has done a really good job the past few months in preparing good, timely financial information for management while working on addressing that material weakness that’s out there.
So with that, let me dive into our financial results. Sales for the quarter came in at $330 million. This was down 12% or $46 million from prior year. So the quarter-over-quarter decrease is primarily from North America ag, which was down $31 million. And then we got hit with the negative impact from currency of about $16 million.
It has been the trend. The majority of the North American ag decline is attributable to high horsepower products. That story has been well told at this point.
The Q2 currency effects were 4% of our sale decline as the U.S. dollar continued to maintain its strength against the major currencies in Brazil; Europe; and, for us, Russia. If you adjust for the currency impact, our sales decline was only 8% versus the reported 12% decline.
As our Q2 sales dipped in North America, that drove a large chunk of the decrease in our gross profit. Also, operationally speaking in North America, the lower production volume does result in an impact to your productivity and your efficiency a little bit in those plants. So if you exclude the effects of currency, on the bright side, the positive news is that we saw gross profit increase in Europe, along with a sales and gross profit increase in both Russia and Australia. So some good stories coming out of those markets.
As we stated in our press release, and then you heard earlier from Morry, there does appear to be some stabilization occurring in the ag sector. So with that being said, Titan had a pretty good Q2 in our sales, as we saw it grow sequentially from Q1 by $9 million. In Titan’s international markets, excluding the impact of currency, our European ag business also grew versus 2015.
So for Q2, looking at Russia, Morry had mentioned that earlier. We posted gains on both a U.S. dollar and a ruble basis. And then, if you look specifically within the Brazilian tire market, we have been consistently growing shares and positioning ourselves really well in Latin America for nice, profitable growth when their economy does start to pick back up a little bit. So again, some good stories coming out from various sectors and geographies that we operate in.
If you break things down by segments, ag was our largest driver in our sale decline. Our ag revenue was down $28 million or basically 94% of the overall sale decline when you back out FX impact. At the gross profit level, North American ag represented nearly all of that decline. But for the second quarter, I do want to note that Latin America ag grew by almost $5 million when you exclude the impact of FX. And that was based upon improved volumes and pricing down there in our Latin America business. So again, some good success coming out of there.
Let me swing over to the earthmoving construction. At this point, everybody has seen the commentary from Cat that has hit the wires regarding this sector. Our sales for earthmoving and construction were down $12 million for the quarter or 8% for the year, but on a positive note, if you back out the reduction in price mix of 7% and the unfavorable FX impact of 2%, our total volume was up by 1% for the period.
Our increase in volume is attributable to our undercarriage mining and aftermarkets growth, as we made some investments and had some projects over there that are now paying dividends. We have been able to gain market share in that sector of business in Latin America, Russia, and the Far East with the new product offerings that we have brought into the aftermarket for undercarriage mining.
In our consumer segment you’ll notice that revenue was down $5 million for the quarter. $4 million of that was driven by FX. I do want to point out to everybody, though, that also contributing to the decline in our consumer business is the absence of our freight businesses that were sold in both U.S. and Europe late last year than the early part of this year.
So moving over to the gross margin side of the P&L, our gross margin dollars were $6 million down compared to the prior year. However, as I noted earlier, our gross margin performance was up 10 basis points to 13.7% from the prior year. And that is despite a 12% decline in sales. That’s a heck of a performance on our team’s part to accomplish that margin improvement here in the second quarter.
For this quarter, our gross margin within ag remained consistent at 16.4% compared to the prior year. And again, that’s despite a 16% decrease in our sales within that segment of our business. Once again, I want to keep reiterating: that demonstrates the efforts we’ve taken to maintain our margins and make the timely decisions in a tough ag market that continues to present its challenges.
We’ve spoken a lot about margin performance, and we’re proud of what we’ve done here. Our One Titan operating model, along with the business improvement framework, have really been instrumental factors for us to be able to maintain and, in this quarter, actually improve our gross margin percent, despite the large reductions in sales that we’ve experienced.
Looking at the operating expense side of the business, SG&A was down around $2 million for the quarter. That was driven mainly by FX. Our strategy with our operating expenses has and continues to be to invest in R&D and sales and marketing during the downturn. That represents a way for us to combat the market conditions as we face them today. But it also represents our pathway to the future with the investments we’re making in R&D.
We’ve also spent some money this period in the anti-dumping case that you’re well aware of that impacted our SG&A. But going forward – Morry mentioned this earlier – we do have further opportunities to reduce SG&A. Looking at some facility consolidations we can do on a global basis, and we’re really kicking off a deeper dive into what we can do on our operating structure to bring down our SG&A. So I think there’s some future advantages out there that we’ll be able to take advantage of.
Let me summarize the P&L results. Our Q2 adjusted EPS came in at $0.04 loss per share. EBITDA for the period was $22.4 million. Compare that to last year: we were at a profit of $0.02 per share, with EBITDA of $23.2 million. Those are adjusted numbers that I am quoting there.
However, I do want to point out that if you look at Q1 of this year, EPS was loss of $0.17, and EBITDA was $11.2 million. So we really had a good overall second quarter when you compare that to the first quarter of this year.
I want to touch just real quickly on a couple balance sheet items for the quarter. AR was down $20 million. That means DSO performance improved 7 days from Q1. And DSO remains similar to Q2 of the prior year. Inventory was up slightly this quarter, and really that was mainly all in finished goods. This was an intentional move on our part, as we adjust the inventory that we have on hand for selective products to really align ourselves with the customer demands for those particular products that are needed in the marketplace on a seasonal basis or due to competitive situations. So that was – again, that was a decision we made to increase finished goods inventory this quarter.
With the downturn, we’ve been focused on managing our inventory levels and really making sure we have the right product on hand to meet our customers’ needs. So the last item of note on the balance sheet: AP did increase $7 million this quarter. So that reflects and 8-day improvement in our DPOs since the start of the year. So good overall balance sheet management for the quarter.
And you see that in our cash balance – end of the year – or end of the quarter, excuse me, at $207 million compared to $200 million at the beginning of the year, and $191 million at the end of this first quarter. You know, let’s also keep in mind that we started the downturn in 2014 with $189 million of cash. So we continue to be diligent managing our liquidity and our cash flows in the midst of these tough market conditions.
Wrapping up, the markets continue to be challenging. But as an organization, as a team, we remain diligent and strong in managing what we control. So with that, I’d like to turn the call now over to the operator for questions. Thank you.
Thank you, very much. [Operator Instructions] And our first question comes from Brent Rystrom of Feltl and Company. Please go ahead.
Good morning, guys.
Good morning, Brent.
Can you give us a little more clarity or update on the reentry into the European market with the Goodyear brand?
Yes. We have picked our dealers. We went over and went through all the dealers. We have the small sizes. We have the molds for that. And we are in negotiations with a company to produce some of those tires down into the, let’s just say, in the southern part of Europe. The molds should start arriving at the Russian facility September/October. And that’s for the larger sizes.
We have selected a few of the – what we would call the radial for the aftermarket with our dealers. But we have been also pushing as fast as we can for our LSWs. And the reason for the LSW is that in Europe, tractors are also used as a pickup. And that’s mainly because of the price of fuel. And when you turn around and you put an LSW on, we can – they have a width limit, but with our LSWs, because of the OD and reducing power hop and road lope, they can take those tires on a tractor. And as fast as that tractor can go, they’ll be able to go.
JCB has a tractor out that – they captured a certain part of the market, because that thing could really roll down the highway besides out in the fields. So with all salespeople over there that we have talked to, and a lot of them are ex-Goodyear people, that’s the way to approach that market. Because, as you might know, that market over there is a very, very competitive market, with not only the Chinese throwing tires in, Indians throwing tires in, and then you have the combination of Trelleborg-Mitas, with Trelleborg buying out Mitas, that’s trying to, I would say, get tire business and try to bring the pricing up.
But I think that’s – when we come in out of Russia, we should have a – we want to do it with a special product that we can make some money with. And that’s what we’re doing there.
Did you see, Morry – will there be sales in the September quarter? Is it more likely December? When will the sales kind of start…
In Russia – the Russian sales, they should start latter part of – well, there will be a little bit in September. But we should see them October, November, and December.
And a quick reminder – how big was Goodyear in Europe at their peak prior to kind of giving it all away?
Goodyear at their peak, I believe, going back, was some $300 million-some. At the last they did about $100 million. But when they announced their closure, that cost us, because of the way they did it, that cost us close to $100 million.
And the big iron that is shipped in, what do you call it, an 8000 or a 9000, those were the vehicles that got shipped over to the – anyplace over there, including Africa and everything. So we had that business, putting it on tractors here in the States, because they are all made in Waterloo, Iowa. And that’s the same with Case.
So that was a big hit. And now that we have it back, as soon as we start getting the dealerships – because whether it’s Mother Deere, whether it’s CNH, whoever, it’s got to do with having the service to take care of the tires. And we have the largest – through the Goodyear dealerships worldwide, we have the largest service working aftermarket warranty situation.
All right. Thank you for that. Can you guys give us a little more clarity on what’s driving the improvement in gross margin on the sales decline? I would assume it’s a combination of getting better at the pricing; Paul, you mentioned some of the things you’re doing as far as improving sourcing costs and other things. But can you give us little more detail on kind of what’s going on there?
Yes. In this type of market, Brent, it’s really – it’s more of a smorgasbord that is driving the improvement than one thing in particular. We did get the improvement in volumes and undercarriage that helped us. We did get a bounce in profit in durability, driven by primarily cost controls. Russia’s up on volume. Australia is up on revenue, along with some cost controls. Then you factor in some of the price, the savings on supply chain. We got a little bit of improvement on the pricing side.
So it’s not a – sorry I can’t just give you one simple answer, because it really – when you look at the bridge from kind of 2015 to 2016, it’s just – and across the board, getting little wins in all the places you can. It’s just a reflection of the market we’re in. You are not going to get anything moving in one big direction. You’re just going to have to go fight a lot of little battles. And I think that’s attributable to what our team has done and how we’ve been doing it, that we are able to get enough of these little wins to offset the significant decline that we saw in revenue.
There’s one other thing that is real big. In all of the plants, back when – prior to the great run-up and everything, as Paul had mentioned earlier, no one has the amount of capacity, let alone the various SKUs, we make. Well, when you get into a situation where you’re really large in the OE side, what happens is when it starts to turn down, your original equipment people do not turn around, and they start hitting their inventory.
So where they used to carry a couple of weeks of inventory, they whittle that down. So it’s like a few, couple days. Well, what happens is they – in our business, they miss. They don’t have any super-wonder-way to guess the market is going to order. So you’re getting these calls: we’ve got to have XYZ, not ABC.
So what was happening is our plants were not – they were jumping to react to that. Well, in the previous, when things are going the other way, you turn around, and you only – we had a system where we ran a schedule; we had a little inventory; but we also – in the wheel business, if for some reason you switched and you wanted wheels, we have ability to do it in 24 hours, but we – necessarily, we have a set-up charge. Because the only way you can make money in that business as if you have a line set, and you run the parts, and your pricing is off of that. Well, it’s the same in the tire business, only the tire guys had never done it.
So we have calls. People have been constantly taking from the wheel, and going over to the tires, and putting tires in a family tire. Like, there might be 10 different part numbers to make a 29-5-25 tire. Well, you can figure out which one, you set it up, then you run. And all you have to do is add something to catch the next one. Add something more to catch the next one, and that gives you volume.
You’re not changing everything. And that cuts your costs down. And we are doing that. And we are going to continue that process, and it will be another year before we ring it out in the tire business, so that you can bring your margins up.
Thank you. But Morry, kind of a little different twist, just going off in a little different direction: can you update us on kind of the LSW penetration? I think on the last call, you guys had said something about kind of a mid-single-digit overall penetration. So 5% maybe in tires being sold or LSW. And I think you said someplace in the 10% to 15% of the OE equipment was shipping with LSW. Is that correct? And how –?
I don’t know the percentages, because I don’t really look at it. I’m out at the – as you know, I go out and I have our test farms all around. And we have started in Brazil.
The U.S. side – when I was up to Saskatchewan, a farmer bought a brand new 9620, and he has the 1250s on, but because he’s doing some other side-hill stuff – and Saskatchewan is pretty flat, but what it is they go down by these – I call them creeks; they probably call them a stream or a river – and he is farming that area. So he actually sent the pictures to us, and he stuck a set of 800 46 LSWs on the outside of the 1250s.
And his son always wanted to try to have a track, so he bought him – this is a very successful, big farmer – a new four-track from Deere, which is a 9620, whatever they come on, to him. And he runs circles around it, even going up and down that slope. The old man drives the tired one. And in the future, I think that’s pretty much all he goes.
So the problem we have is eventually – and I explained it to him, and that’s why we are on a big push to come up with a – I call it a hub or a center casting that can take all the weight, whether it’s John Deere or whether it’s CNH. And we’ve got to get that out there. And we hope to have it in the next 90 days, because the little teeny sleeve that’s inside of there is going to break. And if it breaks, they’re actually going to take a big chance of screwing up the axle.
And our engineers, talking with Deere, talking with our friends at CNH – the hubs they have, they’ve never had the tires. This only approved – the 800 by 46 is the biggest one approved on the tractor side. We’ve got them also approved on the smaller ones. But for big – if you really wish to own the market, you have to come up with the proper – we have what you call a double sleeve on each side. And that’s what makes the thing go. So I expect the LSW to continue to have a steady climb.
Morry, when you mention the double sleeve on each side, are you saying on both outside the vehicle, or a sleeve on each side of each wheel?
The sleeve is – you have a center casting. All the castings you see today, from the outside there’s one sleeve. And what you have to do, we have a double sleeve. And it’s for heavy, heavy operations. And it’s the old, staggered 20 bolt. And you have to have that.
You tighten the sleeve on the inside first, and then you tighten the one on the outside. And you need the double sleeves, because what you’re doing – it’s like having a twin hub, but it’s one. So they’re –.
Is that so you don’t overweight the LSW too heavily on one side?
No, it’s because what happens is that you have to have that hub have a bigger area of the axle, or you’ll sheer that center sleeve. Like, if you look at John Deere, John Deere sells a 9000 scraper application. But if you put a big wheel there, they have one option where you have to have a double disc. You put two hubs on, you bolt it to one – they’re called tier casting. And then what you do is you bolt this other disc in, and you put a sleeve on, and then bolt it up. And that’s just a super mess.
And that’s why Case has captured that in a – most of that market with their quad, whereas we can take any four-wheel-drive product, and we put our double-sleeve hub on it, put a big super-single LSW, we’ll run circles around any of the tracks. But the problem is when you get past the 500 horsepower, you’re in – it’s just a matter of what time that little teeny sleeve in there, which is a wedge – they call it a wedge; I call it a sleeve – that wedge is going to break. And then if you take an axle, then everybody looks at us. So we’ve – we’re going to make sure that when we sell them, we sell the whole thing.
There’s farmers who are buying 1250s and slapping them on 8000 series tractors, and they just want that traction. But the – also, they want the flotation. And you know, that’s way too much tire for just pulling. So it’s basically floating. Armor is used in duals, it’s used for flotation and traction. Now we’ve given them a single tire, they don’t need duals.
All right, thank you guys.
Our next question comes from Larry De Maria of William Blair. Please go ahead.
Larry De Maria
Morry, as it relates to the ITM sales, obviously you already had a bid which spurs the special committee. Just curious, is that bid still good? And have any other bids emerged with this business yet?
At this junction, that special committee, I know that they – whatever the bankers do, like Goldman, they put out a book. And I know they have – they are having a – they’re sorting through whatever it is, first process; then go second process. So I’m not involved in it, Larry, but as I said in the press release and I said earlier, I believe that they will have this thing wrapped up before the end of the year. And that means it goes to the Board. And the Board, if it’s at the number that they think is fair for our shareholders and what they think, then it will proceed.
If it isn’t, then – you know, right now North America is on pace, like I said. And that’s from our oilsands. And we’re – that’s a bright spot, even with oil going down. The word is under $20 is the cost to produce a barrel of oil up there. So we have finally broken in. It’s been like a six-year banging at the wall. Finally, we kind of had the Trojan horse over there and blew the sucker up. So we got inside.
Larry De Maria
Okay, I didn’t realize the cost of production was so low up there.
Yes. They – you’ve got to remember, it’s – the oil companies, they throw billions and billions. And now, when it – they didn’t care. Then when it went down, you know, if you even look at our friends at Suncor, look at their numbers. They are doing okay in there. They’ve got a guy running that place now – I haven’t ever met him, but I’ve seen some clips of his speeches.
He’s snapping the whip. They are pruning their costs down. In fact, he’s the one who basically said that as long as oil is above $20 a barrel, they should maintain a profit.
Larry De Maria
Okay, switching gears a little bit, Morry, your thoughts on the competitive environment in Brazil? I think Michelin is going to open up a factory down there. As it relates to your wheel lines that are going in, do you already have OE contracts down there?
Well, we’ve got enough OEs coming to us. And we’re not worried about the business. The biggest thing for us in looking at Brazil is the situation of the LSW and making sure we can produce the wheels there and making sure we produce the tire. Because the duties are what kill you.
I don’t really look at – Michelin is a great company, and God bless them, but they’re going to have a tough road down there. They wish to do that to be able to give to their dealers. What happens – here’s the tire, blah, blah, blah. Well, Michelin, everything is European. I think that’s what some people in the U.S. forget. The European influence in farming has gotten stronger the last 15 years in the U.S., but the U.S. does not farm like Europe. Europe’s tractors have got to operate like a pickup down the highway.
Everything is snapped on. No OE has ever sold a dual in Europe. Ask them in the U.S. – oh, yes, yes, yes, it’s got to be duals. And the axles are short, so they have snap-on duals. Go to South America. The leading guys down there – that’s all the European design. Those farms are 10 times the size of the biggest farms in the U.S., Larry. If we get 200 farms, think about that. 200 farms in South America, and we won’t be able to produce enough product. And it will all be LSW, the wheel and the tire. And they’re not going to leave you. That’s what’s – y7k that’s what I’m looking to do.
Larry De Maria
That sounds good. So aside from the penetration of LSW, are you seeing any positive signs in the Brazilian market per se? Signs of a turn, a bottom, et cetera?
The funny thing that I see in Europe – I mean in South America is that their biggest problem is trying to get their crop to the market. I’ve been out there to these places, and a lot of times we fly right in and land at the farm. And then you look at the roads – it’s nuts.
Now, you have the sugarcane. And the sugarcane boys, they just switch from sugar to ethanol, which everyone is paying the – they can make the biggest buck. When you turn around and you go to corn and soybeans, the corn – of course, they get one-year crop; but soybeans, they get two.
And the equipment is not made like in the U.S.. So when you go down there, you find out that there’s more spacing between their rows. Because when they get in, they can only go about 3 miles an hour. So you know how long – and sometimes, if it’s rained, they can’t even get into the field, because their tires are 75% filled with water, trying to get the weight.
It’s – I know I’ve got gray hair and a little long, but man, I’m treated like Moses just come down from the mountain down there. And hey, they got the money. There’s a few of them – I’ve seen articles all, they were worried about their cash and that. Well, they are paying everything in reals, and the real has dropped. So they are doing pretty good down there. The only problem is how much they lose going to the ports.
Larry De Maria
Okay. Thanks, Morry.
Our next question comes from David Tamberrino from Goldman Sachs. Please go ahead.
Hi, thank you. Good morning. Just one question for Paul. Wondering what your working capital outlook and needs are going to be for the second half of the year? Obviously been doing a very good job in the first half-year, but with the buildout of tires in Europe, probably need some inventory. Wondering what you’re thinking about that for, again, working capital in 2H 2016?
Yes, we’ve set an internal target for us to basically end the year with a cash balance right around where we started the year. So that $200 million level. We are increasing strategic inventory where needed. As you noted, there would be some European inventory that would need to be on hand for that market. I just think it will be a gradual buildup over there.
We are also taking a look at some of the low-running inventory that we have on hand and trying to trim that to balance the quality inventory that we’re putting in and some of the, as we call it, cats and dogs out there and take those off the balance sheet. So again, I think our internal goal and where we are forecasting ourselves is to be right back around that $200 million level where we started the year.
Okay. Thank you, that’s very helpful. And then just with the looming liquidity needed for the convertible debt, do you feel like you’ll be able to satiate that with a target of $200 million balance at the end of the year? Or do you feel as if some of the strategic actions that were potentially contemplated earlier on the call need to be put through and finalized?
We have the cash right now.
Yes, we feel very comfortable with that. Again, we’ve been a declining market for 2.5 years now. Cash is actually up, continues to be up from those beginning levels. We have the cash to handle the $60 million maturity. We’re very comfortable about where that position is for 2017 to be able to continue to make all the necessary investments, see absolutely no concern with that. And the strategic actions are unrelated to the needs of taking care of that convert. We can do that with cash on hand.
And then, with the start up of TTRC, we – when you look per month, you’re going to – at full bore, you’re going to be between 600 and 700 tires. They pay us to take the tires. So the tires will be built the day they hit our site. And then we just start cranking them. And then what we get out of them, you turn around and you sell the oil.
One of the best news, that up there, is if you read about the $15 billion the Chinese sunk in up there and then actually decided to go home – well, in that refinery of theirs, they produced a, call it, like a kerosene or something. I forget the word they used to do it.
And they mix that all to put their oil on the pipeline. When they get done getting the oil sand, running it through the cokers, they get this real heavy slurry. So to lighten it up, they put – from them, who process that, you put it in the pipeline, and then they ship it down to the refineries. And so they – what they use just runs right through and continues in the process, whether you’re going to make gasoline, kerosene, or whatever – plastics.
Well, the oil – we get a light and a heavy. You mix the two of them now together, and you’re basically what they had. So we struck it – a little bit of luck with the announcement they’re going down. And so everybody’s scrambling, wanting that oil. So it’s bringing our price up. We have samples in, trying to get the official biofuel mark, because that just shoots it through the ceiling.
And then, of course, the carbon black. We have – that’s going to run probably $0.20 a pound. So all that cash, that becomes cash coming in from the end of this month through the end of the year. So cash generators is there, and we spend a lot of time getting money out.
So we are – liquidity wise, we’re really pretty good. And once everyone sees what happens, reference whether we sell the Brownsville facility, if you sell off ITM, and God help if we moved off TTRC. You know, you’re not talking a little bit of cash. We’ll have more cash than what our market cap is worth.
And that’s a danger sign for people wanting to buy your fanny. So we’ll pay off some stuff and do some other things. So liquidity is not a problem.
Appreciate it. Thank you.
All right, thank you.
Our next question comes from Alex Blanton of Clear Harbor Management. Please go ahead.
It’s Alex Blanton. I wanted to ask about the – what you mentioned at the beginning, which was that the TTRC, the delay caused by the fires in Fort McMurray and the permitting, was a drag on the earnings. How much was that? What did that cost you in terms of earnings as opposed to not being there at all – I am not saying there was a shortfall in sales, no. I just want to know how much it hurt you.
Well, it hurt, but yet – you see, what happened was we were trying to get off April 1. That’s what – when you look back last year, that was our kickoff date. And that’s what we just held right to and went cranking. What happened is the permitting – we end up – you have to have a fire permit. And so when you get into the regulation up there, you have approximately 500 pages, Alex, so then – of what? And what they wanted us to do was to put in a water system.
And, you know, I’m dealing in Canada now. So in the meeting we went to with the super-people, I call them, and their 500-page manual of what the inspector wanted, I says, you know, in the sixth grade we were all told that you don’t put water on a grease fire or on oil. You use foam, and you do the same with tires.
And so since we’re in the tire business, in our tire plants we have foam. And if you go to the airport, you turn around and you foam the plane. So it was – and then we had that, and so instead of not having to do everything else, I bought the used fire truck, and –.
I understand all this; can I interrupt, Morry?
Here’s my question: in the earnings release…
We got insurance for interruption – okay.
In the earnings release says TTRC will be filing a business interruption insurance claim which could offset a portion of the cost associated with the delays. How much were those costs, and were they in the quarterly earnings?
Oh, I never looked at it. I know that the claim is going to be in excess of $1 million, okay? I don’t even put anything in there, Alex, because, you know, it’s an insurance company. I’m fighting them.
Maybe Paul can tell me how much the earnings were reduced by the costs associated with the delays, if at all?
Well, I think if we would have gotten things up and started in April, clearly there was a positive benefit to meeting that date. You know, we have talked before previously (multiple speakers).
Oh, yes. You didn’t have the sales and the earnings, but it says there were costs associated with the delays. If you hadn’t been in that business at all, what would the difference be?
I mean, from a cost standpoint, that was – there was a loss, revenue lost income stream. But from a cost standpoint, the fires – we had a little bit of displacement costs, as you had to shuttle your employees around, make sure they’re safe. Get them out of harm’s way. You’re continuing to pay all your fixed costs on something that’s not operating, as they are tending to personal matters. But that is fairly minimal to the grand scheme of what Morry is talking about.
Okay. Revenue – I see where Alex is going. Revenue, Alex, would have been between $2.7 million and $3 million. That’s what you’re looking at per month. That gives you the 36 to 40. That’s Canadian, so whatever the exchange rate, you have to back off of that.
If you’re running a 50% EBITDA, you take that. And then after that, there’s a few things that hit it. But you are looking probably – on an insurance claim, you’re going to be able to – and it goes from May. So it’s May and June. You’ll get a portion of July, and that’s what you’ll get. So when the claim is finally adjudicated, how and what will count, and what they’ll pay you for, and this and that, you know, you might have $1.5 million.
The revenue stream, as you just asked: you could go May, June, July, so revenue would probably have been up anywheres to CAD8 million to CAD9 million.
Okay, thank you. Second question is: you mentioned the peak sales for Goodyear in Europe were about $300 million in the ag market. What was that share? What’s the total size of the market at that time? What market share was that?
That was, like, about 20 – I want to say Goodyear at that time was probably 26%.
They had 26% of the market at the peak?
I would say pretty – 26%, 28%. I don’t think they ever hit 30%.
Okay. Thirdly, rubber prices: that’s a big factor in your tire margins. What’s happening with those?
We did we see this last quarter?
Rubber, Alex, like most commodities at this point, are kind of bouncing around at pretty low levels. What we are looking at doing is how we can take costs out of our supply chain, how we can source better, and also how we can take material out of our products. So at this point I don’t think we are forecasting any big swings within the rubber market that would have a significant impact on us one way or the other.
What would it take, though, to drive those prices back up to where they were before?
I think you’re looking at demand. I’m pulling up a chart right now as we speak. Last year this time we were around $0.75 a pound. And now we find ourself – we dipped up from the bottom a little bit here in the quarter; we are around mid $0.60s, low $0.60s. I just think right now there’s just not the demand out there. There’s still a substantial amount of supply.
Two things happened, Alex. We used a tremendous amount of natural rubber. If the price of oil drops, palm oil drops also. And so does the planting of palm trees. So what happens is that then they switch to rubber, and then the price of rubber will come down.
Oil affects – the price of oil affects the price of natural rubber. The higher oil goes, the natural rubber will go up. If oil goes down, natural rubber goes down.
Okay, thank you.
Finally, one more question. When the sales do start picking up substantially, what’s going to happen to your SG&A? Can that stay relatively flat?
That’ll stay flat. That’s why I went through – when you have wheels, you don’t need a big sales force, because 85% is only – when you turn around – and that same sales force takes care of tires at the OE level. It’s only on the aftermarket do you put bodies to. And if the volume cranks up, everybody in the aftermarket knows who and where you’re at. So it should – percentage-wise, should drop…
Yes, we’d be able to leverage really well on the way up, Alex. I mean, only thing you’re talking about is paying a little bit more salesmen bonus, which is a good thing.
Okay. That looks good. Thank you.
Our next question comes from Kirk Ludtke of Cowen. Please go ahead.
Good morning, everyone.
Morry, at the beginning of the call, you mentioned that bookings were up. And I was hoping maybe you could quantify that. And are we at the point where you can predict that second-half sales will be up?
That prediction I don’t know. Paul and I were up at – I was in Bryan, then flew through – go through the Freeport. We were sitting there with the plant managers, and Bryan is going to 10 hours. They are running ten hours shift. And out through September, they’ve got to do – they’ve got a hump, okay? And they are coming up. When we got to Freeport, the manager, every factory has birthday meetings. Whose ever birthday, they come in and they get the questions.
So you closed on Labor Day, but generally, like in our wheel business, that week after, we’ll just close it down, because we’ll have the inventory. There will be a few people to ship stuff. But you can – if an emergency comes, you’ve got enough people to slap in a few wheels. But on the tire side, and Paul can correct me if I’m wrong, but Bryan is not shutting down, and neither is Freeport. And I don’t believe Des Moines is.
No, no. We – you know, you’ve got your normal seasonal period, where you have – you do your maintenance in late June or early July. Because of the OEM volume, we are taking just one extra week on the wheel plant over Labor Day. But other than that, we are having our normal production runs scheduled for the second half of the year.
So – and most of that is being driven by two things, as I said earlier. It’s being driven by the 100-and-under horsepower and our aftermarket sales of tires.
Right. Is this – is the aftermarket a leading indicator for the OE market?
I don’t believe so. I’m being honest. I’ve been with equipment dealers every week. Dan Wall in Iowa was just named a number-one dealer for – or the elected, or whatever – for the year. And he’s a John Deere dealership, and he runs Iowa selling to Kansas. But he has five states for the turf, reference the golfing item. And he’s had a fairly decent year. He’s a little more creative than maybe some, but he’s been hustling. And he’s moved a lot of used equipment. He bought – it was either two or four more dealerships, and he went in on the used equipment and auctioned it right off.
You look at some other dealers, and the used equipment – they have to take a hit. And some of them are much more aggressive in how they do it than others. So the dealer just sold $2 million worth to the Philippines, all right? Getting it all ready. Then he sell – actually, that same dealer is working on another off-site. Weird. It’s the dealer and how good the dealers are in it, and they are bringing down their costs. And now, when – let’s go to a big farmer.
Big farmers are present probably close to 50% of all big iron on new sales. Well, for a long time they would be able to buy a brand new piece, trade it in a year later, and get almost what they paid for it. So that’s like farming with equipment for free.
Well, that has really stopped. So if they are going to farm on 8000 or 9000 series tractors, then they might decide that, well, I’m going to keep my equipment for three years, and then I’ll trade. I’ll trade a third each year.
So that means we are going to go back to see different type numbers. And that’s why I said earlier, I don’t see any magical booming up at the top. I think it’ll be strictly a gradual uptake. I do not think you going to see – you’ll see a 4% or 5% increase. It might go two years, and then it might stay flat. Then it might drop a couple of percent. Then it’ll go up 5% or 3%. That’s the kind of graph I think we’re going to see for the next 10 years.
That’s helpful. And then, with respect to the cost savings – and you mentioned that it’s a lot of small savings, and there aren’t any big chunks on the horizon, do you have a margin target? When you look at your peers and do best practices and look at benchmarking, do you have a –?
Well, there’s – when you say looking at your peers, number one, there’s no peer in the world that is like us, because we only make farm, OTR, and construction. And we make the wheels with them. And there’s no one in the world that does that. Not a Michelin, not a Bridgestone.
And then you’re left – let’s take our friends at Trelleborg. Trelleborg makes a few wheels, but most of the wheels they make are solid. They make a lot of margin on their solid tires.
The reason they bought Mitas is because they make all this other stuff that we’re looking at now, using our big facility in Union City, to go after some of that business, which is, you know, these bladders they use in sewage – we have an infrastructure project. Those contractors just blow those things up. That’s where you put sewer pipe, and you’ve got water. You don’t want water; then you put these bladders in it. And then you send down, and they connect, and then they pull it out. Well, that just rips them. But in the U.S., you’re laying pipe.
So the margins on those are 40%, 50%. Mitas made all the special bicycle tires. So that – for Europe, that was their big thing. I mean – and margin is really, really good. So when they started buying up all the small guys that used to be in the Houston block, they become a big competitor to Trelleborg. It was 50% of their business. That’s why Trelleborg bought them. So now they’ve got that market in Europe.
The only unique thing about our Russian plant – we can make all that, too. We’re going to make tubes for every LSW tire. Because when you go on hillside, over out in the Western part of this country, you’ve got – those tractors and combines, you cannot have a tire go flat. Sod will come rolling down the hill.
So we’re going to do it just like you do log scooters that run around hitting tree stumps and everything else. We’re going to put a tube in it. And we’re going to make it so the rims have bead humps, where a bead can’t move. And it’s a safety feature. But when you get over there and show it to the farmer, hey, that’s what they want. So we’re going to send it from Russia with love. Okay?
Got it. Thank you very much.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Taylor for any closing remarks.
We just want to say thank you all that listened. Come out and see us. And whatever you do, vote. You want to watch my tweeters you’ll know how I’m going to vote. But I’m an old guy, so you’re going to have to live with the results more than I will. But have a great, great weekend, and thank you all. Bye.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!