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Titan International, Inc. (NYSE:TWI)

Q3 2007 Earnings Call

October 29, 2007 5:00 pm ET

Executives

Maury Taylor - Chairman and Chief Executive Officer

Kent Hackamack - Chief Financial Officer

Analysts

Ian Zaffino - Oppenheimer & Company

Monica Logani - Wall Street Access

Randy Laufman - Imperial Capital

Brad Lutz - Declaration Management

Ian Horowitz - Soleil Securities

Philip Volpicelli - Goldman Sachs

Michael Grossman - MFS Investment Management

Operator

During this session all lines will be muted until thequestion-and-answer portion of the conference (Operator Instructions). Anystatements made in the course of this conference call that state the Company'sor management's intentions, hopes, beliefs, expectations or predictions for thefuture are considered forward-looking statements.

Please note that the Safe Harbor statements contained in theCompany's latest Form 10-K and Form 10-Q filed with the Securities and ExchangeCommission extends to this conference call and any forward-looking statementsinvolve risks and uncertainties as detailed therein.

At this time, I would like to introduce Titan Chairman andCEO, Maury Taylor.

Maury Taylor

Good afternoon everyone. I am assuming that most of you havegotten the press release and that you are busy going through the press releaseand the 10-Q. The 10-Q is out there. It's been a long time in coming, but Ibelieve the farm, I'm going to go through all the segment first here.

The farm side is really coming along and it's coming alongreal nicely. And to give you an idea on the farm, I've stated there's twofactors to the farm. Number one, if you look at the wheel business, 85% of thewheels that we sell go to OE.

Only 15% is used in the aftermarket. The Deers, the CNHs,everyone is ramping up and their ramping up fast. Our October, November andDecember order deck is at a record level from the wheel side.

And of course when you look over to the farm tire side, whatyou have is you've got the reverse. The aftermarket is basically 65% of yourtire sales and 35% goes to the OEs. Well of course the OE sales are going upand we expect the aftermarket and too the tire business to really start roaringalong come January.

And in this process, we have of course gone out and made anannouncement of a price increase because number one, materials have gone up andthis is a case of where you are always chasing it.

But what happens when that starts to go down, you of courseyou pick up what you lost when the market turns the other way on the materialside. With oil at $90 some dollars a barrel, natural rubber up, it's not goingto be a while.

The other segment, the OTR segment is holding real good andwe are the inquiries for both farm and for the OTR business for overseasexports are running real strong. And it's a case now does the offshore marketlend itself to a better return than even some of the domestic markets.

So both, we're going to be running into the first part ofthe year with both the OTR running very well and the farm tire finally after areal long period of time really perking up and perking up heavy.

Now a lot of you on this call have been out to thefactories. You have seen what we're doing. A lot of you I am assuming have not.

But if you turn around and you think about it and for youwho wonder how this market is going to run, let me give you a few numbers. Ifyou look at the corn, which it takes big equipment.

If you look at 1997, ten years ago, the market infour-wheel-drive tractors, these are big tractors, you had a market thatpurchased at that year 9000. Last year, the market was 3600 is what was sold.

Those are all published numbers. This year there will beprobably in the low 4000. So I doubt if we are even halfway back to where wewere in 1997.

Combine sales last year were 6800. These are big hugecombines. In 1997, ten years ago the market consumed 13,000. So again you knowyou are still only in the 50% some of where it was. The difference between nowand back then, is back then you had a shortage and it was like a one year,two-year bang.

I believe now this is going to be a sustained much, muchlonger than anybody has ever seen unless you're older than me and I haven'tseen it in 30 some years. The same can be true on the commodities.

Since oil is going up, up and up, the tire stands, as longas things stay above $45 a barrel, they are going to be digging the ground upthere and of course you can look at all the other commodities. Even with a slowdownthey're still going to be awful good.

So from that side we have seen the sales pick up and ofcourse we're getting to the last quarter here where we are going to finish upwhat we have been doing all year and that is moving the smaller size OTR tirebusiness up to Freeport. And we have pretty, we're within the last $3 millionor so of finishing that off. That will be done mainly in the fourth quarter.

The big project of course is the 63-inch. The building as Istated before, the building will be done so that we can be installing theequipment on the 15th of December. We are expected to produce our first tire,which to our chagrin as you're going to cut that first tire up to see how itcame out once it's cured and we're looking to do that by the 15th of February.

And as we look at it right now, we're going to be real closeto that date. We will have and what we are shooting for is to be able to havesamples out in the first quarter and to start limited production in the secondquarter, which will be very limited.

We are putting in equipment all through '08 in that facilityin Brian with the goal of being able to blow off at a rate of 563-inch tires byJanuary 1 at a run rate of 500 I should say, January 1 of '09.

Hopefully, that by the second, the end of the second quarterwe will be at about 150 run rate of that same tire. So we will get some goodvolume out and get things straight what we are doing in '08 and those big hugesuper giants.

Now a lot of you have spent a lot of time calling everybodyin the world trying to figure who, what and where. To give everybody an idea,our confidence level of what we are doing is real strong, in fact, go over 100%on that.

But the thing that has really come out of this exercise andto developing this new tire is what we have learned in the last three to fourmonths of our ability from a technology standpoint to be able to look at in thefuture of using what we have learned and going back to not only in the otherOTR tires we have been producing, but to go back into even our farm tires. So,we are looking to implement this new ideas, technology that we have come upwith.

And what it will do, it will reduce our cost drastically towhat we do today in building tires, which is all real good things. We in thelast quarter, we’ve hired minimum of 10 engineers and these engineers areworking on the, not only half of them are on the new project, the other half ofthem are in the transfer of what we have done from Bryan up to Freeport.

And we are very excited for where we are going and what wesee. We believe that of our fourth quarter coming up is going to besubstantially much better than last year's fourth quarter. We're going to dowell over our 800, and when you put back what we have attempted to do in thetransfer, the accountants have made us.

It is in the 10-Q. I think it's like $16 million to $20million that we've spent. You add all those with the convert then you're back,we should be excess of $100 million EBITDA.

So it is coming. It has been a long time and it is veryexciting. And with that, go through the numbers, Kent.

Kent Hackamack

Thanks Maury. I'll just take a few minutes and go over someitems for the quarter and to remind everybody, Titan has filed with theSecurities and Exchange Commission a report on Form 10-Q for the third quarterended September 30, 2007.

Looking at the sales line, as everybody probably has seenTitan recorded an all-time record third quarter sales of $195 million. Theywere 25% higher when compared to the third quarter of 2006 of $156 million.

The large sales increase that Maury mentioned was attributedbasically to two areas. First are the higher sales in our agricultural productoffering and second, to our expanded product offering and to the largeroff-the-road or as we refer to OTR, earthmoving construction and mining tiresegment.

Looking at the sales by market, quarter-over-quarter, we areshowing the Ag market was significantly higher by $29.5 million or 33%.Earthmoving construction was up $12.7 million or 22% and the consumer marketwas lower by $2.9 million for the third quarter over last year's third quarter.

The company saw a slight improvement in the quarterincreasing gross profit by dollars by $1.2 million quarter over quarter. Werecorded $18.3 million of gross profit in 2007 up from the $17.1 million resultfor the third quarter of 2006.

As Maury mentioned with the OTR realignment costs for thethird quarter, was impacted by approximately $4 million and that includes costfor retooling and retraining personnel to add our OTR capacity.

Dropping down to the selling general and administrativeexpenses when you express them as a percentage of net sales, they continued ata 7.2% rate in this year's quarter, which is the same as it was in the thirdquarter of 2006.

On the royalty expense line you can see it was $1.5 millionfor the third quarter of ‘07 and that relates to the Goodyear farm tireacquisitions license agreement, and the increase was due to the higher saleslevel in '07 for this year. That compares to the $1.1 million royalty amountrecorded in last year's third quarter.

Looking at the income from ops, it was lower by $2 millionin this year's quarter. Income from ops was $2.7 million compared to last yearof $4.7 million. Again the ops number was impacted by the approximate $4million of OTR realignment cost.

The interest expense line came in slightly lower thisquarter at $4.5 million and that compares to $4.6 million recorded thirdquarter of '06. Going down to the pre-tax line, Titan recorded a third-quarterpretax loss of $800,000 and that compared to pretax income of $813,000 in 2006.

This quarter, the company recorded a $78,000 tax provisionthat was required to bring Titan's year-to-date effective income tax rate is at66%, and the reason that rate is higher for 2007, it relates to the $13.4million non-cash charge taken in connection with the conversion of theconvertible notes in March of ‘07 and the non-cash debt charges is nondeductible for income tax purposes.

With all those items resulted in the company recording an$878,000 net loss or loss per share of $0.03 for the quarter, and that comparesto the third quarter ‘06 numbers of net income of $488,000 and earnings pershare of $0.02.

A quick look at the balance sheet. The company at September30 '07 we had a substantial cash balance of $55 million, Accounts Receivabletotaled $117 million and inventory came in at $132 million.

Titan lowered our debt balances from year-end. At the end ofSeptember of '07 we had no cash borrowings on our company's revolving creditfacility and total debt at September 30 '07 was $200 million and that comparesto $291.4 million at yearend ‘06.

Looking at our short-term debt balances, it is zero. So wehave reduced it 100% and we reduced our long-term debt balance by 31% or $91.4million from the $291.4 at year-end to our current $200 million at the end ofSeptember.

Looking at the company's stockholder equity account it hasincreased by 61% during the first nine months of '07. Equity has increased $113million from yearend and our equity balance is above the $300 million mark andstands at $300.4 million as of September 30, 2007.

As a reminder the company's website is www.titan-intel.com.And with that, John, let's go to anybody's questions.

Question-and-Answer Session

Operator

(Operator Instructions) And this first question we havecomes from the line of Ian Zaffino. Ian, please go ahead.

Ian Zaffino - Oppenheimer & Company

Thank you. Good quarter.

Kent Hackamack

Thank you, Ian.

Ian Zaffino - Oppenheimer & Company

Question would be here revenues were extraordinarily strong.If this was a more normalized quarter without all the retooling and what haveyou going on, what type of incremental margin should we be looking both on theAg and also on the mining side?

Maury Taylor

Well you can't just look at this, you can't figure out whereyou're going to be there until you stop doing what we are doing, okay? Whathappens is you've got product that we're switching to one place to the other.

At the same time, which you have been out you have seen youhave a whole huge factory being put up and like I have said for a milliontimes, there's two ways you can run this world. You can either go out and hirethe people to go do it and sit back and capitalize the whole thing just letyour own people do what you're doing; it takes you forever.

Or you turn around and you get your workforce and you sayhey, we have got to go do this and we have got to do, it in a big hurry andyou've got to wear two hats. And as you have been there the biggest problem ishalf people that want to sit and look at you why that you can't do it and theother half like anything else say hey, you are right and we go do it. Andthat's what we have been doing.

So, our goal and I have stated our goal, our goal is tobuild these businesses so that they are returning between the 15 and 20 pointson an EBIT line, not an EBITDA because once you are done with what we aredoing, you don't have to be spending big time capital. From that point on, you'rejust a maintainer because this stuff will last longer than you and I will everlive. So, that's where it is. Nothing has changed.

Ian Zaffino - Oppenheimer & Company

That's both on ag and mining, this 15 to 20%?

Maury Taylor

Yes, here, we make good money on our wheel business and wemake good money on our OTR, which are probably the two of them are probablyalready in that range. We have gotten our Des Moines plant has done fairly welland they've coming on, on the ag.

The Freeport plant has lost money from the day we walkedinto mother Goodyear's shoes there. In fact, Goodyear is the one making moneynow on ag because we send them a check.

Now, is that going to be changed? Sure. It will change assoon as the volume and the volume is coming. But we're not going to; we put theOTR business up there because the equipment would handle that and we don't wantto slow down on what we're doing there and we found out some opportunities toreduce our cost on all that OTR.

But we're moving the final equipment from Brownsville andFidelity up into Des Moines where we have more curing because we know what'sgoing to happen come this spring and early summer of '08 in the farm end. It isgoing to rocket.

So, the only thing that's going to happen and I have toldeverybody as soon as we start getting jammed, we're going to raise price. We'renot going to sit around and think about it. We're just going to raise prices.

Ian Zaffino - Oppenheimer & Company

Okay.

Maury Taylor

That's what you have to do. Okay, the only difference thistime in the ag side, I think, it's going to last for at least three years.Everybody is all worried about the ethanol. Hey folks, I don't care if ethanolgoes to the bottom. Those plants are going to keep running. The first investorsmight not do very well, but it's no different than office buildings in New Yorkor go out to Vegas some place.

Yes, the bill a lot of it. The second or third owner isgoing to make a fortune because ethanol is going to stay and Brazil has alreadyproved it. Forget whether it is corn or sugar cane?

Ian Zaffino - Oppenheimer & Company

And then you talked about the strong prospects for theexport market. Is this something that you are going to do by yourself? Is thissomething that you're going to…?

Maury Taylor

No, I have get enough stuff to do. I have got a couple ofpeople now and you've just got to tell them hey, let's just get smart and let'sjust make sure, if you look at the pound the pound is $2.06 today. The euro iswhat, $1.40 something? And like I said I have got one guy that was doingexport. Well, he's going to get some help.

And we're going to tell him hey, we were exporting when thedoggone pound was $1.74 and the euro was like a $1.26. And we already know thatEurope is all tight so, let's go show up at their door. That's what I'm talkingabout. Brazil so the difference being I cannot export a Goodyear branded tireto Europe. I have to do a Titan branded tire because of my agreement withMother Goodyear.

Ian Zaffino - Oppenheimer & Company

Okay. Two ways to solve that either do it through TitanEurope or (inaudible) Goodyear. Thank you very much.

Maury Taylor

Okay, yes and no one wants to hear just you and I talk;okay?

Ian Zaffino - Oppenheimer & Company

Thank you, very much.

Maury Taylor

Thank you.

Operator

And the next question we have comes from the line of MonicaLogani. Monica, please go ahead.

Monica Logani - Wall Street Access

Okay. Thank you. Hi, Maury.

Maury Taylor

Hi, Monica. You didn't make the flight the other day.

Monica Logani - Wall Street Access

No. Well, the client canceled. Anyways, I want to talk toyou first of all just about the margins. When I take out I'm just kind oftaking out some of these onetime things the $4 million of retooling, the $2million in SG&A from your stock option award. I'm still seeing very lowmargins just on the gross margin front.

Maury Taylor

That's just what I just told you a few minutes ago becauseyou can't here. You’ve got a machine that what you're doing is you're trying toconvert the machine where you can also make OTR tires.

So, you have got to get it on the machine. So what happensis you cannot have that same machine and run on farm tires. And then whathappens is you make a few of the OTR because it takes some of this goofybusiness like about three months to prove a tire because they take it and theygo samples.

Well you're not going to let the machine sit there and everybodylook at it. You switch it back to the ag and you start back up into the ag. Andas soon as they get the OTR machine it's going to just make OTR tires. And youhave seen all the sizes that have gone up there. You physically have seen itwith your own eyes, but that's the problem. Let me finish now.

What happens is when you stop doing that, then your machinesset and run; the same operator, the same run. And when you do that your marginsstart to improve and you just sit there and it improves. Everything improvesquality improves, your margin improves and that's where it goes.

Monica Logani - Wall Street Access

Right, Okay. I understand that. Now, how much of this iscoming from raw materials prices being higher? If you look at rubber, steel,oil, rubber is up 3% in the quarter. Steel was up 10%. Oil was up 13% in thequarter. I'm just trying to understand how much of this…?

Maury Taylor

Well, then what you do, we have a formula and for all theOEs that you have contracts with, every six months you raise the price by that.It's a format, okay?

Monica Logani - Wall Street Access

Yeah, I understand that but does it look like, it's the rawmaterials are increasing faster than you can pass it through…?

Maury Taylor

No, I don't care where they go to. Here's what happens.Let's just say that you start at a 00 on January 1st. Now, whetherthey went up 10,5,3,2 whatever; pick a number. On June 30th youraise to collect at that price. Okay?

Now let's say that the next six months nothing changed,okay? So, everything stayed. So, then the next 16 months you would start seeingeverything even out and you would have your margins. But then the next January1st they drop 15%. You don't give that back until the end of June;you would then lower by that amount.

Monica Logani - Wall Street Access

So it's a delayed effect…?

Maury Taylor

It's just a delay.

Monica Logani - Wall Street Access

It's a delay so…

Maury Taylor

But what's happened to everybody…

Monica Logani - Wall Street Access

Okay. I understood. So, even though the raw materials mayhave gotten you this quarter we should see some of that, if prices come back,we should see that coming back?

Maury Taylor

Now aftermarket, now let's stop, now aftermarket, you raisethem, you go out and you go do and we have -- are raising prices six pointsthat's -- so if your material cost is 50% of a tire -- I'm just assuming now,okay? And your materials went up 10% -- that means you have got really you'vegot to raise your prices 5% just to breakeven, correct?

Monica Logani - Wall Street Access

Yes.

Maury Taylor

Well, November 1st, they're all going up 6%. Now they don'tgo up to 6% at OEs that you have a contract that runs every six months. Butyour aftermarket they go up and your aftermarket is 65% of your business.

Monica Logani - Wall Street Access

Okay, understood. I'm just…

Maury Taylor

Now, I can raise -- the only thing in aftermarket is you tryto give them 60-day notice. So, if you want to raise your prices again youwould probably do it February 1st.

Monica Logani - Wall Street Access

Okay.

Maury Taylor

And if it gets strong enough as I said on my call, if itgets strong enough you're going to raise them.

Monica Logani - Wall Street Access

So, I just want to make sure I understand this. I know youtalked in the beginning about kind of these efficiencies that still have notcome to fruition.

But looking at an 11% gross margin kind of taking out thoserealignment costs versus 15% last quarter, taking out realignment cost then wasthe sequential decline -- I mean I know there's some seasonal issues here.

But was more of it from the raw materials price increase orit depending…

Maury Taylor

No, no, no, no, you have got John Deere shut a plant down.You got sales that are coming but you have got to realize a lot of those salesI had in certain inventory, okay?

But you have to build certain things. You never -- I mean hey,you come out in August and you go through those plants they're 110 degrees. Younever get your efficiencies that are going.

Now you go watch January the first quarter and all thoseplants located it's cold as hell. So it's real nice and cozy in there. They'renot as fast to get their little tush home. You see what I'm saying?

You never get, I mean, you got all your vacations in thethird quarter. Not all but you've got a hell of a lot of them because that'sJuly, August and September.

Monica Logani - Wall Street Access

One more question just on the EBITDA front. You saidpreviously you're still looking to get to the $100 million goal for the year.

Maury Taylor

Now you put everything at everything back there, it will bethere.

Monica Logani - Wall Street Access

Okay. So, that means that -- you've got to have a really --I mean, the fourth quarter would have to be the best EBITDA quarter of theyear.

Maury Taylor

No it doesn't.

Monica Logani - Wall Street Access

What kind of …

Maury Taylor

No, no, doesn’t. No not here. You sit there and you gothrough your numbers. I'm not sitting here Monica, they have to go right onthrough. When you put all the add-backs, you put the other the conversion whenI had to hit -- you add those back in there, it will be there. Read the whole10-Q, my dear.

Monica Logani - Wall Street Access

Okay. On the revenue side, I just wanted to touch brieflyjust on how Freeport is doing in terms of manufacturing OTR tires. I know that…

Maury Taylor

Freeport -- if you look at the OTRs tires sales what is it?

Monica Logani - Wall Street Access

It was $69.4 million.

Kent Hackamack

That's all of OTR, Maury. We don't break down because we doassembly.

Maury Taylor

I understand, I understand. But if you add that, you look atwhere we are for the year Monica, and you look at where I said we'd be for theyear. I gave you a yearly number, all right, and I get to that yearly number,the only way you could get to that yearly number was if I got base between $60million and $75 million out of Freeport.

Monica Logani - Wall Street Access

it’s correct. And I'm wondering if you are …

Maury Taylor

And if you look at those numbers you'll see I'm really ontrack.

Monica Logani - Wall Street Access

Okay, so if you are really on track that means that ex-Bryanwhich in the Q it says it did about $27 million and Freeport you're saying isgoing according to plan. That means that your year base business was littledown considerably, right? And I mean…

Maury Taylor

That my what?

Monica Logani - Wall Street Access

Everything else other than Bryan and Freeport on the OTRside.

Maury Taylor

I don't understand what your saying.

Monica Logani - Wall Street Access

If you take out Bryan and you take out Freeport, right,you're producing other OTR tires as well, correct?

Maury Taylor

No.

Monica Logani - Wall Street Access

Everything is in those two facilities?

Maury Taylor

Yes.

Monica Logani - Wall Street Access

Okay but just looking year-over-year if you take out Bryanand you take out the new OTR tires…

Maury Taylor

You have to understand now -- be careful when you look atBryan because Bryan was making all of Generals long scale tires and they weredoing all the contract tires for Teleborg and they were doing other tires thatare no longer there; we got them out.

Monica Logani - Wall Street Access

Right, I guess I'm trying to get to in the Q I read that thehome-building business was having a negative impact on some of your OTR tires.And I was just wondering if you could just briefly talk to that point.

Maury Taylor

The home-building? No, the home-building what the -- thehome-building affects back hoes, skid steers and telescopic handlers. Those arenot what we consider the OTR side. Those are farm.

Monica Logani - Wall Street Access

You said declining housing starts is negatively impacting thesales of smaller earthmoving construction equipment used in home-buildingthat's directly…

Maury Taylor

Yes, that's out of Des Moines facility.

Monica Logani - Wall Street Access

Okay so that was down year-over-year, correct?

Maury Taylor

Yes, it's been real down but what's happened there is you'resubstituting it with the farm now. That's all that little -- you didn't see anybaby presses when you were at Bryan. Those are little presses.

Monica Logani - Wall Street Access

Just -- I will be quick. Just two more things. One is --

Maury Taylor

Yes, well you're only supposed to ask one question. Butsince Ian -- you get the same Ian does but you pushed it over.

Monica Logani - Wall Street Access

You're 12-15 deadline for the Bryan expansion -- I was justwondering if you could give us a probability that you think that that willactually get done on time?

Maury Taylor

The probability is just like the sun is going to come up,okay? I said the 12-15 is the building, okay? And if you had been there lastweekend on the plane you would have seen out of the thousand feet we're at 300feet; that's with the metal up.

Monica Logani - Wall Street Access

So you feel very positive that that will get done on time?

Maury Taylor

I don't have a single doubt because the contractor who isdoing it, he gets a kicker. Just like out in California with the freeway.

That's where I figured I'd do the same damn thing. What wasit four weeks they had that freeway rebuilt where the truck burned it up thateverybody said would be down in Oakland for what six months to 18 months? Sothat's what I did.

Monica Logani - Wall Street Access

Okay great, well that's all I have got. Thank you.

Maury Taylor

Thank you, there.

Operator

And the next question we have comes from the line RandyLaufman. Randy please go ahead.

Randy Laufman - Imperial Capital

Good afternoon guys, a couple of questions.

Maury Taylor

Okay, you get two. Let's not take the whole thing. Letpeople -- gosh I've get three analysts that don't own a share of stock. I takethat back to think. I think Monica does. Let people that own the shares ask thequestions. Go ahead

Randy Laufman - Imperial Capital

The price increases that you have already announced -- I waswondering if any of those had gone into effect during the third quarter

Maury Taylor

November 1, November 1st -- that's when the press releasewent out and said they were going.

Randy Laufman - Imperial Capital

No, that's both on the farm and the OTR?

Maury Taylor

Okay, That's on the farm and the large size OTR. I don'tknow which size but the larger size that's in such demand. Okay?

Randy Laufman - Imperial Capital

So, the great sales number for the third quarter was reallyjust the pickup in demand and the pickup in volume -- didn't reflect anypricing improvements?

Maury Taylor

No; there wasn't anything.

Randy Laufman - Imperial Capital

Okay, next question I have is on the SG&A. You talkedabout the couple million of extra SG&A -- $1 million for the increasedselling cost and the CEO bonus.

I'm wondering if you could talk -- whether that's going toshow up in future quarters or if that $1 million selling and the bonus is aonetime thing.

Maury Taylor

No, just go to the end of the year form and I am tied on anoption to the price of the stock, okay. And so, under the new rules, that'sthat nine-year payout.

So, you have to put it there and you have to accrue it withthe stock -- hell, if the stock hit $50 a share they have to accrue it out eventhough it gets paid out -- well it wouldn't be nine years now, but over sevenyears you would still have to accrue it even though you turn around and at theend it might drop back down then I don't know.

What do you do you? Just take it and I will add it back andI guess, it goes up and down. It's like a yo-yo.

Randy Laufman - Imperial Capital

Okay. I got it.

Maury Taylor

And then it gets paid four years out. Every one of theshareholders that ever talked about it said they thought that was great becauseyou're not diluting any stock.

Randy Laufman - Imperial Capital

Right, now quickly going back to the margin target that youtalked about the 15% to 20% EBIT margin. How long – I mean what kind oftimeframe are we looking at? Is that after they the…

Maury Taylor

It's after your turnaround. First thing is with theexpansion we're doing -- and I have told everybody the same thing, once we havefinished this expansion, then what you are going to see is that nothing elsewill be going on and then you can just watch it goquarter-after-quarter-after-quarter.

Okay. Because that's how you start milking it. You can'tmilk this business and go to do that while you are in a ramp-up mode. You justcan't do it, at least I'm not capable. I've done it both ways and when you tryto do it the other way you just go nuts not with expansion -- we're making thelargest expansion in the history of the Company cash wise.

It's real easy to go spend $150 million and have someoneelse do it and we just worry about the margins. Well then all of a sudden youget that -- well, we are going to do it for less than half of that.

So really I am making money that you guys can't even figureout, how I made it, because it's you're really making the money. Do youunderstand what I'm saying?

Randy Laufman - Imperial Capital

Yes.

Maury Taylor

It's like going out and building a house. You can go hirethe contractor to come out and build you the house or if you have enough familyyou can build it yourself, a little bit like the Amish do.

Now you turn around and say wait a minute, I had to write acheck for $0.5 million for the house. But they only spent $55,000. That don'tmean you're going to buy the $55,000 you get their house? And so that's whatwe're doing.

Randy Laufman - Imperial Capital

Got it. So the 15% to 20% includes the giant OTR?

Maury Taylor

No, you can't the giant OTR, once you do that those twotires are off the map; they are something different. Okay. All the rest of itis what I'm talking about. The two giant OTR tires are morphodites, okay?

They are licensed to how long is that going to last? I knowit will last for a few years out through 2012. But after that something has gotto give.

Randy Laufman - Imperial Capital

Okay and then the $41 million…

Maury Taylor

Now you are on about your fifth question. This is your lastquestion.

Randy Laufman - Imperial Capital

Okay. The $41 million that you talked about in the Q isbeing committed for the OTR expansion. Do you I mean -- expect that with thecompletion of the building in December do you expect to spend the most of that$41 million in the fourth quarter or is some of that going to flow into '08?

Maury Taylor

No, there will be stuff flowing all through '08.

Randy Laufman - Imperial Capital

But $41 million, it's all in costs do you expect additionallyfrom the $8 million you spent this quarter?

Maury Taylor

Well, we figure that right now that's where we see it at. Weknow, where we are going with the 63 inch. We know what we are going to spendto do that. But then we've got an awful lot of customers now who want us to --okay, do the 63

But then there's some big boys that want us to do the57-inch and they need the 57 inch. So what we're planning to do is that whenyou are on the call and you say listen, go put to 20 malls in, you go do your 500a month that is your 63-inch, you do that. That's what you figure.

Now you go do 57 inch, you are going to put more malls --for every two tires you build in a 63 inch you have to build three 57s to getthe same cash. Okay? But do you understand what I just told you?

Randy Laufman - Imperial Capital

Yes. Got it.

Maury Taylor

So, we're going to look at that. But I'm not looking -- likeI tell everybody, I'm not looking at any of that until after we build the tireand we get rocking and rolling because then the first question that the threeif you amigos who just were on the phone you're going to want to know, well howcome -- why are you making 57 inch?

The margins aren't as good as the 63. I've known that fromday one folks but I've got a few customers out there, they're in deep doodo forthat too. But now are the margins on the 57 pretty damn good? Yes. Are themargins on a 63 obscene? Yes. All right.

Randy Laufman - Imperial Capital

Thank you.

Maury Taylor

Randy. See you Friday.

Randy Laufman - Imperial Capital

Okay.

Operator

And the next question we have comes form the line of BradLutz. Please go ahead.

Brad Lutz - Declaration Management

Hi, Maury.

Maury Taylor

Hi, brad.

Brad Lutz - Declaration Management

Just a quick question. I think, this is going to follow-upto Monica's question. It seems to me that your at about $68 million a year todate on EBITDA if I'm reading the numbers right here.

And to get to 100 in the fourth quarter and this is whatMonica alluded to earlier -- you're kind of looking at a record setting EBITDApace like $32 million in the fourth quarter, is that right?

Maury Taylor

No…

Brad Lutz - Declaration Management

Can you…

Maury Taylor

First thing is number one, you're EBITDA that you're lookingat when you're running right as of today. Your EBITDA right now when you justgo through and crank it up you should be right around $55 million okay. Rightaway; you see that?

Brad Lutz - Declaration Management

Sure.

Maury Taylor

Now you turn around and add back your convert there'sanother 13. You add at least $20 million back from the re-deal. You are pushingright to there 33. You add that to where you are at just those two, okay?

Brad Lutz - Declaration Management

Yes, but I'm still not getting there. I've got about $28million in the first quarter, got $27 million in the second quarter.

Maury Taylor

Okay. I don’t know…

Brad Lutz - Declaration Management

I'm only showing about $15 million in the third quarter andnone of that includes the cash expense from the convert. None of it includes --I backed out the Bryan realignment charges, I backed out the stock expenses.I'm not sure what else I'm missing. I think Monica was alluding to the samething.

Maury Taylor

Well, you just take the numbers…

Kent Hackamack

Here, I think I can help you out.

Maury Taylor

Sure. It will be great.

Kent Hackamack

If you back off the year to date your income from Ops isright around 31. You add back in the other income, put you right around $33million. Okay. And then, you add in your depreciation of about 21, 22.

That's around we're around 55 and then if you take thecharges Maury is talking about, about 16 and 4 and he's adding another 222,that gets you close to about 80, 78 to 80. And that means around $20 milliongive or take the fourth quarter.

Brad Lutz - Declaration Management

All right, I think, I've got some different numbers here butI will take your word for it and maybe if I can't get there I will give you acall tomorrow.

Kent Hackamack

Okay, just give me a call.

Brad Lutz - Declaration Management

I think that's probably it for me.

Kent Hackamack

Okay.

Brad Lutz - Declaration Management

Thank you.

Operator

And the next question we have comes from the line of IanHorowitz. Ian please go ahead.

Ian Horowitz - Soleil Securities

Hi, Maury.

Maury Taylor

HI, how are you doing, Ian?

Ian Horowitz - Soleil Securities

Too good. How are you?

Maury Taylor

Pretty good.

Ian Horowitz - Soleil Securities

Just a question a little bit, you talked about that you aregoing to be able to take some of this learned experience off these giant OTRsand move them into the OTR and tire I am sorry, farm tire mix to reduce costs?

Maury Taylor

Right.

Ian Horowitz - Soleil Securities

Is that something that is kind of going to occur once youare fully ramped up so I'm looking at an '09 situation? Or will that besomething that you'll be able to flow through the rest of your business more onan ongoing basis?

Maury Taylor

It's going to be an ongoing basis. To give you an example,what we have found is that if we take the steel bead that's down on the bottom,if we precure it, if we make it round on the bottom, right now it is square,rectangle and when you, when the tire is being cured the pressures in there, itautomatically forms to be round. Okay.

Ian Horowitz - Soleil Securities

Okay.

Maury Taylor

And that's the way the Goodyear facility made it, that's theway the Bryan facility, that's the way we made it in Bryan. But if we with ourmachinery we make that bead round and then we run it through a curing ovenwhich is just like a conveyor, like the guy said just like you do at BurgerKing, you just run it through there.

Only got to heat it to 300 degrees, well, actually about 280and it cures. Then when you go and you use that to build your tire, it isalready done so it doesn't move. What that allows you to do is that you watchedhow we build, you take the big sheets of the nylon with the rubber on them.

Well sometimes you have to put five of the sheets that wrapup around, actually sometimes six. But by doing this and another little item wedo, we can take one or two of those sheets out and the tire is as strong as ifwe had those two sheets in it. And everything else is better. It performsbetter.

We have already built some, put them on the bull wheel andtested them.

Ian Horowitz - Soleil Securities

Okay.

Maury Taylor

And then so what you'll have to do is you have hundreds andhundreds of sizes so it's part of the reason we've got like four youngengineers and they'll be going through each one, because there's two things youhave to do. You have to make sure you don't make this switch, first I've got toget two ovens in.

But once you do that, you can't make the switch and end upwith a whole bunch of in process material. You have got to change the specs,change everything and away you go. So, I mean all of these items it's the samewith what we found on biased tires how to take big timeout.

And again it's a case of, you can't have 30,000 differentprojects. Otherwise hell, we'll never get nothing done. So but we found a fewof them so we have hired engineers now to start going through. They're gogetters. Put them in the plants, let them figure it all out. We figured it outtechnically how to do it.

Ian Horowitz - Soleil Securities

Okay. Now it's just putting it into…

Maury Taylor

Just putting it in.

Ian Horowitz - Soleil Securities

All right.

Maury Taylor

As long as they get a couple of tires changed every fewweeks, hey, you start with the big boys first and that's what we are going todo.

Ian Horowitz - Soleil Securities

Okay. And then one last question. We are going to be at 150tires by second quarter of '08 and…

Maury Taylor

No, at the beginning of the third quarter. Under my dealwith some customers I have to have the machinery in place in order, so thatwhen I start up in July I got the molds, I've got all the building equipment,so that I can produce 150, 63 inch tires per month starting in the thirdquarter.

Ian Horowitz - Soleil Securities

Okay.

Maury Taylor

That’s, July 1st.

Ian Horowitz - Soleil Securities

Okay. So then…

Maury Taylor

So the most I could make in the month of July would be 150tires.

Ian Horowitz - Soleil Securities

Right and then 500 on January 1 of '09?

Maury Taylor

You've got it.

Ian Horowitz - Soleil Securities

And so is that fairly linear or is that a pretty lumpyback-end loaded situation?

Maury Taylor

Hey, first thing is getting the building done so we're inthe building by December 15 is like el wrecko time. Everybody has said to beable to build the first tire prototype, which you're going to build a $40,000tire which I'm going to take saws and cut it in two.

So everybody on this phone understands you build this tireand you cut it in two, because you've got to see what it looks like, see how itcame out of the mold and when it was in there and all this rubber was movingaround.

You know it's a 99% positive there's going to be somethingwrong and you're going to build another one and you're going to cut that intwo. Hopefully after three you figured out what you had to do and you got itright.

Then the fourth one you turn around and you send it down toQuincy would put it on our big bull wheel and then we will destroy that suckerprobably in no more than ten days to 14 and then you make any adaptions oranything else but then you send them out to your customers in samples and thenyou just start building tires and you start moving your fanny with installingeverything else and making modifications you need to be. That's what happens.

Ian Horowitz - Soleil Securities

Okay. So traditionally, historically what number tire do youfinally get to the customer? Is it the tenth one…?

Maury Taylor

I would say by the time you send some tires to the customerit's probably from I would say the eighth tire on to maybe 12th at the worst.

Ian Horowitz - Soleil Securities

Those first eight are going to go into your….?

Maury Taylor

The first eight are all going to be cut up. That's $320,000you might as well just jumped in the ocean and realized oops, you had to go.

Ian Horowitz - Soleil Securities

Is it going to go into cost of goods sold?

Maury Taylor

Hell yeah. What else are you going to do with them?

Ian Horowitz - Soleil Securities

R&D, I don't know.

Maury Taylor

R&D gets put in there too.

Ian Horowitz - Soleil Securities

Okay.

Maury Taylor

Wouldn't you be better off, you expense either one.

Ian Horowitz - Soleil Securities

All right. Thanks Maury.

Maury Taylor

Now if you were big company you would put it into your CapExbecause you were busy sampling. But I don't do that, we all know that. Okay.

Ian Horowitz - Soleil Securities

Thank you.

Maury Taylor

You're welcome.

Operator

And the next question comes from the line of PhilipVolpicelli. Philip please go ahead.

Maury Taylor

Hi, Philip. How are you?

Philip Volpicelli - Goldman Sachs

Good and how are you?

Maury Taylor

Philip, How is Goldman's doing?

Philip Volpicelli - Goldman Sachs

Goldman's doing very well. Thank you. I was just, the goalof 15% to 20% EBIT margins…?

Maury Taylor

Hasn't changed since you did my bond deal.

Philip Volpicelli - Goldman Sachs

The that's very true. When do we think we get there becauseclearly right now we're churning a little bit below that….?

Maury Taylor

The first thing is this. We are going to get there, we wouldget there and probably start running that rate I would assume in '08 towardsthe latter third quarter of '08. But then what you have to be careful about isthat because we are not going to book it out, you'll get a big pop from the biggiant tires. Okay. And that's going to disguise it all anyhow.

Philip Volpicelli - Goldman Sachs

All right.

Maury Taylor

I'm being honest about it.

Philip Volpicelli - Goldman Sachs

No, I got you. So basically what you're saying is until weget to the run rate production of the tires which is the third quarter of '08we're probably going to be below that number and then we'd pop up to thatnumber in the third quarter and stay there in the fourth of next year?

Maury Taylor

There's no question but you see that's all because thosesupergiants. If farm stays through '08 you'll be, and if you never made thesupergiants, you would be there in '09 just because of what's happening in thefarm….

Philip Volpicelli - Goldman Sachs

All right. And then I think…

Maury Taylor

And we're going to see a big bang to come right after thefirst of the year, because under our union contract, we can take a 100 somepeople out of Freeport. And we hopefully that will be enough business in therethat we won't have to or they're going to be cranking it out.

Philip Volpicelli - Goldman Sachs

When are you going to be making that decision?

Maury Taylor

Primarily that’s a decision now by the first part ofFebruary.

Philip Volpicelli - Goldman Sachs

Got you and when I look at last year's fourth quarters itwas based on my numbers at 6.7 of EBITDA and about 165 of sales. If Iunderstood you correctly to get to the $100 million you'd need about $20million in the fourth quarter of this year you said. So that's a prettysubstantial increase?

Maury Taylor

Well no because you look at where are you at running what isyour CapEx. You are running with what you have got and also just turn aroundand look at where you've in your fourth quarter is going to be compared to lastyear, going to be like night and day.

Philip Volpicelli - Goldman Sachs

Okay. Maybe I can ask it differently. The third quarteryou're up about 14% I've got you 14.4 of EBITDA versus 12.6 last year. Andtypically you don't see a sequential increase from the third to the fourth, butwe're talking about a pretty serious one here. So I guess I'm just trying tofigure out how we get to that 100 because…

Maury Taylor

First thing is less. Right now already in my wheel business,I am booked out for October, November, and December; all right? There is no waythat is strongest in my 30 some years ever. That's normally not what you see.

Okay but we knew everybody knew going in this year. Thefarmers haven't really started buying, except for some equipment. You guyssitting out in New York you've got to understand, man, and hey, the farmer isharvesting right now.

When people made the trip out they were looking geez, thecorn is not in, the beans are not in. That's right. You have record crops. Soeverybody getting a little nervous while those crops will get pulled in. Butwhen they get pulled in that's when the farmer gets his money and its big, realbig.

Philip Volpicelli - Goldman Sachs

Okay.

Maury Taylor

That's not me. That's what everybody else's is saying. Ijust know when you go to land at the airport and you land and the fieldshaven't been harvested it tells you that's something's up.

Philip Volpicelli - Goldman Sachs

Something up meaning that they're so busy they haven't gotthrough that field yet?

Maury Taylor

Yes, I don't think that the big you say I think so manyfarmers didn't realize exactly how big the year was going to be. So a lot offarmers contract out to custom cutters. So the custom cutter always showed upon October 15 and got him done that in three, four days everything I don'tthink any of the custom cutters are on schedule. That's just me said becausewhy the hell is a crop out there?

Now, you can't just you keep letting it sit there thosebeans, and you get a weather, those beans lay down on the ground yes you hadjust lost your crop.

So there's got to be a hell of a lot of nervous farmers outthere, running combines. I lost two of my good maintenance people I didn't losethem. They just took vacations because they got to go help family members pullthe harvest in. Generally that does not happen. Hopefully family members willpay them.

Philip Volpicelli - Goldman Sachs

Exactly. Kent, you went through the numbers before and Iactually agree with the two previous callers who kind of couldn’t get there onthe EBITDA numbers. So, I don't know if you guys are maybe willing to put out aseparate 8-K or press release walking us through how you guys get to where youare now in either a nine-month or an LTM basis? Because I agree with them on anine…

Maury Taylor

Will get you your numbers.

Kent Hackamack

We're not going to put out a release. Everybody can readwhat we have. Those are Maury's addbacks. Those are not GAAP. So we can't putthat out.

Philip Volpicelli - Goldman Sachs

Okay. Because of $13 million as far as I can tell from theconvert that's below your operating income lines. So, it never was it doesn'tneed to be added back. I guess maybe that's where we've got a bit of adifference.

The rest I think we're all pretty close on. But it might bethat $13 million non-cash debt conversion charge, which as far as I can tellfalls below the line if it doesn't get added back. But why don't we talk offline.

Kent Hackamack

Okay but I'll step you through what I did and when you addthe way Maury is doing he's pushing close to 75 to 80 because we're at 50 Imean you can read our numbers right now we're at 55. I think everyone wouldagree with that…

Kent Hackamack

And then Maury's got addbacks in his mind on what he'ssaying with the OTR, with the SG&A, with the CEO performance bonus that arecoming up.

Philip Volpicelli - Goldman Sachs

Right -- realignment's 14.5 if you take the…

Kent Hackamack

Maury is higher than that. He said that’s on the low-end.The 16 is just what the accountants were doing.

Philip Volpicelli - Goldman Sachs

I think, I'll give you a call afterwards and try to gothrough it because I'm…

Kent Hackamack

Maury is on the phone he can tell you, he's higher than the16. So…

Maury Taylor

I don't want the only thing you've got in there everybodyyou guys all keep beating the same day and don’t think do you know. It's sodumb because number one, you turn around and you can run it if I have to run itall in the CapEx, I can have a CapEx that just blows the number for what we hadto do to get it done. And I've told everybody.

Philip Volpicelli - Goldman Sachs

All right so what you're saying Maury is basically the stuffthat you are expensing that you could have CapEx you're adding that back to getto the $100 million EBITDA number?

Maury Taylor

There are so many under the rules there's so many things.That stand out that they make you CapEx. All right? But everything else if Ican expense it, I expense it. That's the way I always did it. That's why everybodywonders well how did that happen where did that come from? Because I use itmyself, we build it ourselves.

Once you are done with this you can take those samemaintenance people and you turn them into production people, because you surethe hell don't need all of those crews.

And I have tried I've explained when I'm doing. I'veexplained how. Now the accountants have already so far this year approximatedlike $16 million. I would have wished they wouldn’t have done anything.

But there is $16 million is what they are trying to figureout. Do you know what that comes from? That's only come from them trying tofigure out which is fine that's what they are supposed to do. But now if youwant to hire a few more people and you go through it and everything, that 16 isa fraction, is there anyone else would tell you. You could not have done it.

I just had my friends from John Deere in and they arelooking, and they are trying to figure out how much CapEx I spent. You couldn’thave done this. I said well and thanks, but God did it. He came by one day andsaid hey, you need this paint line, you need all this. We fabbed the wholething up. And it's all in there and it's all running real nice.

So, I am just telling you, I can go through it. Okay. Ican't do it by Friday, because I've got too much to do. I've got to be outthere for Randy's deal. But I'll come to New York and I'll get all of you andwe will go sit down, and we will have a drink and I'll put a board and I willdo it for all of you see where it is that.

Kent Hackamack

But our EBITDA as we are saying is $55 million and peoplecan do whatever they wish on their add backs. Okay. That's all on everybodyelse; they can do whatever they wish.

Maury Taylor

And I'll bring Monica out, because she's the woman that cameout and we'll walk her through each one of them. Okay. And she can take hercalculator and figure it all out.

Philip Volpicelli - Goldman Sachs

I think we all be doing the same. So I appreciated it guys.Thank you very much.

Operator

And the question we have comes from the line go MichaelGrossman. Michael, please go ahead.

Michael Grossman - MFS InvestmentManagement

I think if I look at the free cash flow number year to dateit is pretty strong at 25, which is a lot different from your earnings numbers.Are there anyone one timers in there I'm missing, if I'm looking at some of theworking capital movements? Or is that a pretty clean number?

Maury Taylor

I don't know what you mean. There's $55 million in the bank.Okay.

Michael Grossman - MFS InvestmentManagement

Right, less $21 million in CapEx year-to-date.

Maury Taylor

Everything is paid for.

Michael Grossman - MFS InvestmentManagement

Right and I understand that. So on the working capital sidethere is nothing, no moving part that's kind of a onetime contributor there?

Kent Hackamack

We're just running our business so.

Michael Grossman - MFS InvestmentManagement

All right. So then the next question is CapEx for the yearfull impact to the 10-K from last year it was supposed to be I think 17 to 19and you are at 21 already. What is the CapEx look like for the full year? Andhow should...

Kent Hackamack

What you need to do is you need, is that's 21 but you havegot a back off the $8 million that Maury spent so far on the OTR.

Michael Grossman - MFS InvestmentManagement

So that's not included in the number?

Kent Hackamack

So you go back down to the 13 and I think we’re saying weput the statement in the Q. We think CapEx outside of the OTR…..

Michael Grossman - MFS InvestmentManagement

Okay.

Kent Hackamack

Project will be about four for the first quarter, which willput us right in line with what we said a year ago.

Michael Grossman - MFS InvestmentManagement

Great, and then for next year how much of that $8 milliongoes away? Is it all of it or some of it?

Kent Hackamack

No, Maury’s committed to $41 million total. We paid $8million. So that leaves 32 left to be paid, whether it's in the first part orits fourth quarter and as Maury said, some of that will bleed into '08.

Michael Grossman - MFS InvestmentManagement

Okay.

Maury Taylor

Yeah, that's going to flow. Not a great deal will be takencare of in the fourth quarter, a lot of that’s going to flow out through the'08.

Kent Hackamack

But as Maury mentioned that $41 million is as of the thirdquarter that is fluctuated and will fluctuate as he moves forward.

Operator

And at this time we have no further questions.

Maury Taylor

Thank you everybody. Again, if you've got time come on out.We'd love to have you go through the plan and see what we are doing. Thank youall. Have a great day. Bye.

Operator

Ladies and gentlemen this concludes our conference. You maynow disconnect.

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