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Titan International Inc (NYSE:TWI)

Q2 2012 Earnings Call

July 26, 2012 9:00 am ET

Executives

Maurice M. Taylor Jr. – Chairman and Chief Executive Officer

William Campbell – Chairman and Executive Vice President

Paul Reitz – Chief Financial Officer

Analysts

Ian A. Zaffino – Oppenheimer

C. Schon Williams – BB&T Capital Markets

Saul Ludwig – Northcoast Research

Christopher Edwards – Jefferies & Co.

Lawrence DeMaria – William Blair & Company

Operator

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the Second Quarter 2012 Earnings Conference Call. At this time, all lines are in a listen-only mode, and there will be an opportunity for your questions, and instructions will be given at that time. (Operator Instructions)

And as a reminder, this conference is being recorded. And I’d now like to turn the conference over to our host, Chairman and CEO, Mr. Maurice Taylor. Please go ahead.

Maurice M. Taylor Jr.

Thank you (Inaudible). Good morning everyone. Assuming everyone has their press releases it’s been a very active few weeks, this last few weeks. I know there will be a lot of questions, reference what’s coming out, but first I’d like to cover a few things on the quarter. This could have been just an extraordinary quarter reference to shipments et cetera. We had a number I had mentioned in the press release.

The heat was pretty strong when you get into the factory, especially the carrying and everything else and your efficiencies do drop, but we had an opportunity, we’ve been in a specialty and pre-port and into Bryan. We have been adding equipment to increase the amount of capacity and that we could move out of those facilities.

Some of the equipment that was due in March had just arrived and when you make these changes things happen to be, you know Murphy's law is that something will go wrong. So, our hourly workforce is ready and did an excellent job on my side down, I think there was some errors, but the good thing about it is that we’ll pick it all up in the second half. The order deck I’d know that most of you who have been listening to the drought everything out going on in the farming. I have just been out in the field last two and half weeks. I’ve driven to Iowa out on farms, up in Minnesota, up in North Dakota, Illinois, Ohio, and Michigan. And it’s kind of like there is no question there is a drought, but unless you are really bad at it, the reference in the farming. You’ve the situation of crop insurance and that crop insurance is going to make, it’s 85% if you insure for 50 bucks per acre. And that will insure also your pricing so when you go through there is no question in Oklahoma and people who do not have the irrigation, but there is going to be some that just make an outstanding amount this year and there is some who will do pretty good and there is some who probably won’t make it as much.

But overall, I can tell you I’ll be shocked if the net income to the farm is not pretty close or greater than when it was last year. And every dealer I went to revise stop and see the equipment dealers is marching on a record too. And since my friends at John Deere, they are kicking in, they are doing extra 5,000 tractors capacity, which kicks in starting in August, I expect them to be no different than Cat to trump what they did last year, and keep marching. I believe that even though in South America you see a – it's not as robust as it was, but I expect them to take – keep marching because that will take market share.

That was the only – South America was the only place that was not up to what we expected. But the reason for that is because in one of our press releases today, we made a deal with Goodyear to take over the light biased trucks. So we'll just pay them a commission and we'll handle it direct to the dealers that we currently have, and we will also included that into Mexico because they were not shipping much from Brazil. They were – they had supply agreements with other source that they were using. And it is our plan to add that into the Brazilian operation. There is a – when you look at the taking over and the inventory, we agreed to allow them to burn off a lot of that inventory before we started the pipeline because they had inventory in their warehouses where we ship right direct.

So we expect that to make a strongly rebound to the second half of this year, and we expect that to continue to go. We have shipped a total of 81 new part numbers down here for tires for the major OEs. They have all been to the plant and we expect that to continue to march strong and be a very strong earner in the near future.

As the situation in North America, I have a problem because number one, this deal that was announced today, are not announced, but just clarify giving you the specifics, some of the specifics. Those are planned to short time to file a 2S in England and over the takeover platform, whatever is written, is the only thing that can be stated. It’s a big huge gag order. And by their gag order because we are limited to saying anything sure until the prospectus is issued and put out.

And hopefully that will be within the next four to five weeks. Then I believe free to talk about what we are doing, why we are doing, and what we see going forward. They only have had some of the lawyers cautioning what I can say. So what I can say is that on the earthmover, and that’s very – it’s very, very strong, which is no different than what Cat mentioned yesterday. The construction side, which from the home building, road building and whatever, is still fairly decent (inaudible). So we had a very strong positive, we haven’t changed. When you see that the employees, the new employees that we have hired and probably its well over, I think it’s close to 700. As they continue to get more efficient, it’s going to help and the reference to what we see in a situation of our margins. And our margins should continue to grow. And that’s what we see. So go ahead Paul and crack the numbers out.

Paul G. Reitz

It sounds good, thanks Maurice, good morning everyone. I got a few important items from the financials this quarter I want to cover and then we will jump right into the Q&A. The revenue highlights, we were up 14% to $459 million for the quarter, that’s put us up 35% at 922 for the mid-year point with volume being up about 10% for both the quarter and the year-to-date results. As Maurice illustrated, earth moving construction is continuing to leave the way, it jumped up 44% this quarter, and then Ag was up a solid 12% as well. One thing I really want to point out when you are looking at our results is the impact of the weak Reais. If you applied a constant FX rate for our quarterly numbers, you would realize that our revenue was negatively impacted by $80 million when you look at the year-over-year quarterly results. I know all eyes like to look at the sequential comparison of our numbers, and so if you look at our Q2 to Q1 results the $459 million of sales in Q2 compared to $463 million in Q1.

There is a number of items I want to point out that with known events that we definitely talked about publicly and more is illustrated already this morning that impacted our production hours in Q2. Sweden are being down about 3% for our total production hours in our U.S. operations, and that was driven by the ongoing investment into Bryan to build the capacity up there, and then also we’ve known and discussed the fact that Q2 is going to have fewer production hours this is due to vacations and the holidays and the impact of the normal work schedule during the quarter. While we didn’t know was that the intense summer heat would pickup the way we it did and so again we ended up with about 3% fewer production hours and that’s really the difference that you are going to see between the sequential results from Q2 to Q1.

Again I want to illustrate that the weak Reais did have an impact even when you look at just the quarterly results going back to Q1, the negative impact was about $8.5 million for our Q2 results compared to the first quarter. So looking at our gross profit, we’ve reported 17.9%, but if you go ahead and adjust that to backout Latin America, we did 19.6% for the North American operations, that compares to about 17.6% from last year so, are you looking at a nice gain of about 2% in our gross margins for this quarter and you are looking at incremental margins of 32% for the quarter. So really that’s a good gross margin expansion. When you start considering those noted items that we just discussed that impacted our Q2 outlook levels. And I also want to point that this is the first quarter that we really brought Union City online with full activity. As a result, we do incur and have incurred about a few million dollars worth of direct start-up costs, but also we incurred some loss absorption of the plant as we are ramping up Union City and reallocating the resources at our plant. There is some loss absorption during this period as we reallocate those resources between the mixing and the tire producing capabilities at the local plant level as Union City continues to ramp up and get online.

So if you look at ops income, you will notice that we recorded this period a $26.1 million gain for the supply agreement termination. As we already note – already had discussed in late May, we took over the good year truck tire light business, truck tire business white bias and medium bias truck business at Latin America that we are previously reporting under a zero margin supply agreement.

With this agreement being terminated, we had set up a three-year liability at the time of acquisitions that represent the loss margin for having a zero margin supply agreement. But I know that’s a lot of accounting talk. But basically, we have to remove that liability off our balance sheet it results in the income being recorded this quarter. Really, how you can look at those if we did not have that zero margin supply agreement, this liability would not have been set up and instead we would recorded this gain at the time of acquisitions instead of doing so in this quarter.

By looking at operating income, if you back out the impact of this supply agreement, we had a solid 11.9% return in the operating income area compared to 11% last year. This reflects only 6% of operating expenses that means SG&A came in at only 5.1% for the quarter. That’s very impressive when you consider the fact that we did incur this quarter additional professional fees related to the activities that we’ve announced publicly now and also we are going through a major IT system implementation.

And so, again we are keeping the business very lean, very focused and keeping our operating cost only 6% in the quarter. The last item on the P&L I want to get into is tax expense. We reported tax expense of $31 million, which equals a 41% effective rate. If you look back to prior periods we’ve been right around 36%, 37%. So the much higher rate that we reported this quarter is due to this supply agreement termination income in the tax treatment associated that.

We also this quarter recorded $2 million worth of expense for unrecognized tax benefit. You do see the unrecognized tax benefit shown as an adjustment in net income, whereas the tax impact for the supply agreement is not shown as an adjusted item on our net income. And so I do want to point that out to everyone and make sure that when you’re looking at the normalized earnings that you do account for the impact of the taxes on this supply agreement.

Looking at the balance sheet, we’ve been discussing internally and externally that our focus on working capital and ensuring that we’re taking that working capital and converting it to cash in an efficient manner and you really start to see that coming through this quarter. Our cash was up $20 million to $149 million. Our AR and inventory have remained consistent from the prior quarter. The consistency in inventory is a very good result when you consider the fact that we were brining an Union City online and ramping up the inventory levels at that facility. So type of inventory remained level from the prior quarter definitely reflects some good working capital management there. CapEx is that much this quarter came in at $11 million putting it as $19 million we continue to invest in the capacity in our Bryan facility and we do continue to invest in Unit City and get men on line and ramping that Up. With that I now like to turn the call over to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Ian Zaffino with Oppenheimer. Please go ahead.

Ian A. Zaffino – Oppenheimer

Many thanks, I know you guys did this dance once before with PLC what are – excuse me

Maurice M. Taylor Jr.

PLC?

Ian A. Zaffino-Oppenheimer

Titan Europe, you did this one before a couple of years ago what’s different or what we expect this time around?

Maurice M. Taylor Jr.

Well I think the first thing is that it says it on the paper and I think that it’s a if you remember, the last time around what had happened, is that the markets coming like when south in the [big hand] basket, so everybody was running the wrong way plus I’d talked about certain things in reference to the agreement, which put me in a bad situation of with the take over panel. And as you read in that agreement one of the contingencies is the bank agreement, which has a change of control provision and I have to make sure that that is taken care of in way reference to Titan Europe, that’s what is in that release that you’ve just seen. and I believe that this will happen. So we will know in a short period of time.

Ian A. Zaffino-Oppenheimer

Okay. And then how does this impact your bigger Europe thoughts, is this some part of a big brand scheme that you’re going to put all this to get there, this is – are they mutually exclusive?

Maurice M. Taylor Jr.

Well, first thing is you – as it says in that document in fact I had to laugh with the poor people that I was going to put it out, and they didn’t know because if you read at the top, it says, not for release, publication, distribution and/or into the United States, Canada, Australia, and all the rules and regs it cover. So all right, you’ve got an idea how many lawyers had to run around and get approval is on that circular. so there is no way I can turnaround and comment on what you just said, because of the – of the lawyers around this phone.

Ian A. Zaffino-Oppenheimer

Yeah.

Maurice M. Taylor Jr.

Hope you understand that big guy.

Ian A. Zaffino-Oppenheimer

All right. Thank you. And Paul, as far as the reais, what was the impact to operating profit?

Paul Reitz

The operating profit had less of an impact. It was under $1 million for the quarter.

Ian A. Zaffino-Oppenheimer

Okay, all right. Thanks guys.

Maurice M. Taylor Jr.

Yeah.

Operator

Our next question today comes from the line of C. Schon Williams with BB&T Capital Markets. Please go ahead.

C. Schon Williams – BB&T Capital Markets

Hi, good morning guys.

Maurice M. Taylor Jr.

Good morning.

C. Schon Williams – BB&T Capital Markets

I wonder, if you can just talk a little bit in more detail about the Latin American agreement with Goodyear, I mean it sounds like that deal is now off. And I would assume that you would now be selling to them is kind of market price. Can you talk about the effect on earnings going forward from that agreement cancelation?

Maurice M. Taylor Jr.

Well, what I said earlier, I got a gag order, anything going forward, but I sense we did this and this agreement was done in June finalized I think in June. So, let me go back into June, all right. So what happened is that was a manufacturing cost situation, which was $200 some million a year at that facility.

And we would go it – was a setup with Min’s and Max in production. And what transpired is Goodyear was running along in not the higher level, not the bottom. And they would shift this to the warehouses. Their warehouses, [now figure] how many they had. And what happens is there is a group of the other dealers in South America, we have in our agreement we supply them direct with farm tires. Well, what was happening with Goodyear is say that whatever these tires we’re talking about in these truck buyers, you would end up with them in the wrong place, okay, wrong warehouse. So they seem to be going like crisscross the country before they got to the place the dealer they wanted or the store that wanted. So, we had a lot of dealers that came to us and said why don’t you take into this direct while at the same time they were also had Goodyear. So you can appreciate that Goodyear has a much higher SG&A than what we operate. So what we decided to do is we said here Goodyear, we are going to let us handle, we’ll take over the whole thing just like we do the firm but we are going to pay you a royalty.

You don’t have to do nothing but cash to check and let us go. And we believe that we are going to make an awful lot more money all right and we feel Goodyear make more money because they get the royalty. And in this process, we found out that they did sell into Mexico from Sao Paulo.

So in the negotiations, Goodyear agreed we could do Mexico and we believe Mexico will probably get an extra minimum of 20% extra business from the numbers that we see. So in the next four to five weeks when this other situation is filed and we file the perspective than we’re free, and I'm free than to tell everybody where I think we’re going to be by the close of this year and EBITDA and the sales come from. So until then I got to say, hey I’m gagged.

C. Schon Williams – BB&T Capital Markets

Okay, I just want to clarify to what we’re talking about your effect about $200 million a year in revenue.

Maurice M. Taylor Jr.

Correct.

C. Schon Williams – BB&T Capital Markets

Okay. And I apologize, if I missed it earlier, but did you lay out any thoughts for the OTR dealership that you’re purchasing down in Australia any metrics you can give us around that?

Maurice M. Taylor Jr.

I can only talk about, what I’ve talked about previously, and previously I told everyone its public knowledge that we’re doing Titan Mining Services, and that our plan is to expand that Titan Mining Service around the world. We're up in the oil sands now this Planet Group they have the west side of Australia, and what they supply is wheels, tires and the service to various mines, and they are looking to expand. And so we – the same thing it says in the release that went out reference to Titan Europe. They are also in Australia, and they are in Chile, and they are in Peru. So there is a lot of – if you look at it, you’ll see where this thing is marching.

C. Schon Williams – BB&T Capital Markets

Okay then thank you. And then kind of shifting gears a little bit, could you talk about a point you guys have noted that you needed to maybe do a little bit of catch-up on the replacement side of the business, especially with the farm business, maybe get some of that replacement mix up over the next couple of quarters. Where do you think you are in that process and maybe the OEs – the OE is kind of downshifting a little bit and that gives you more opportunity to increase your replacement mix. Can I just get your thoughts there?

Maurice M. Taylor Jr.

Well, my thoughts are that, as I mentioned earlier, the OEs are still marching. I think you’ll see same thing when Caterpillar came out and said that there might be some of the little construction on Cat. So you could translate that over to Mother Deere. I think Deere has more opportunities to expand in that side of business than Cat. Cat is probably pretty much all global where I happen to meet some dealers from South America in their construction group. So they’ve got a lot of activity going on at Mother Deere. We have not seen any significant backlog, the back off of any OE. So what’s going on have to happen in reference to what I stated before. We’re not deviating from that plan. We are going to increase our amount of tires into the aftermarket and we’re going to do that by one of two ways. We are either going to take the added increase of production that we’ve been putting in and it will go to there or we’re going to allocate to BOEs.

C. Schon Williams – BB&T Capital Markets

Okay, thank you. Thank you very much Maurice.

Maurice M. Taylor Jr.

No problem.

Operator

Our next question today comes from the line of Saul Ludwig, representing Northcoast Research. Please go ahead.

Saul Ludwig – Northcoast Research

Good morning, Mr. Taylor.

Maurice M. Taylor Jr.

Good morning godfather, how is the world treating you down in Akron?

Saul Ludwig – Northcoast Research

Terrific, I’m in Cleveland. While your farmers are making all this money with their insurance, what’s this going to do to their need for your products, if the weather is terrible and there’s not a lot of crops to harvest. How do think this is going to affect your demand going forward?

Maurice M. Taylor Jr.

I think it’s going forward; just (inaudible) I’ll give you an explanation. If you should know that if the government in the loan program, okay, for insurance, so that if you were harvesting – let me back up and I’ll do this. This is a conversation with a big farmer in the State of Iowa. And the State of Iowa, I wouldn’t asked on this – I happened to know the fellow and he is one of our experimental farm guys and I’d say, well, what were you’re looking? Well, in the planning, in the spring, they were looking at getting between 185 and 200 bushel an acre. Okay, what do you think, well then I heard all about the heat, and everything about what. But if you get down to the [brass tax], but they didn’t get rain in the next two weeks, then they would be looking at probably 140 to 150 bushels.

So I looked down and I’ll thought for a moment, and I said that's really good. In the spring corn was $5, so that’s 200 bushel taking at the max that’s $1000 an acre. Now you determine we are having corns at $8 and you are only going to get say 150 that’s 1200, we were the only guys that can complain, and you got a 20% increase in your net or gross rather, it's still onto the neck as it goes there.

And then when I was up in North Dakota, they’re just going nuts. The biggest, (Inaudible) another farmer I met, he had sold 40 some thousand bushels of corn, and 44,000 bushels of soya beans that he had on his farm and sore it from last year. So back to your situation about where you are at, you will that corn, if a guy has insurance at 150 bushels, he gets 85%, but it's not all destroyed, he can turnaround, he’s going to get a 100 bushels. So he gets to go sell that. And what he loses he collects on that. So he does pretty good.

I mean even the guy that has this whole feel that you have seen in the Wall Street journal, and he moulds it all down, he keeps that center stock for the guy from the government (inaudible). Oh, yeah, I see. Well he is selling the rest for high feed, so they’ve been pretty good my friend.

Saul Ludwig – Northcoast Research

Okay.

Maurice M. Taylor Jr.

Maybe you will put in the irrigation system. The irrigation boys are just, (inaudible) all of them, they are just locked tighter than (inaudible). You can guess who supplies the wheels and tiers.

Saul Ludwig – Northcoast Research

I will guess on that one. On Goodyear, couple of questions that’s unrelated, Ryan. Any new news on the settlement of the French situation which will allow you to go forward there? And the second unrelated question, if you take $26 million of income, does that show up as $20 million or $26 million of expense for them?

Maurice M. Taylor Jr.

I’m not the one doing their books. They are very creative in their accounting, reference the French thing, I’ve learned a long time ago, is just sit back and when they show me the paperwork of I can read with some signatures on it, that they got it done, then we start our conversation.

Saul Ludwig – Northcoast Research

No I understand (inaudible) until it’s done, but in the past you’ve expressed a view point on sort of what the progress is and …

Maurice M. Taylor Jr.

I guess that didn’t happen.

Paul Reitz

Yeah, I think they think Goodyear things are coming along, all right, but I’ve heard that so many times. This has been a three-year fiasco. So they switch their – the [social] plant is gone and so now it’s a voluntary plant. And I think the only way it’s going to get done is when the Chief Finance Officer goes over there with the (inaudible) and he pays them off.

Saul Ludwig – Northcoast Research

Gotcha. The next thing, I see your stock is getting mangled here today down to the box already. do you think going forward with raw material costs having come off pretty sharply in the synthetic rubber, natural rubber, as you know is down very, very sharply. Are you able to hold your prices and might we see some winding of margins as we look to the second half of the year that because have positive effect on your earnings?

Maurice M. Taylor Jr.,

I think the second part of the year as I had stated from day one is going to be the best that we’ve ever had, and locked into, so what I can talk about future, because of the bulges in London, which I stated earlier. The mango of the stack is, as you very well know, they’re trying to figure how to orb something I believe. I mean we’ve had a great quarter. So anyway you look at it with the offset. So I think we’re having a good run, so the other part, that’s why it’s done. So I don’t know how they’re going to orb it, but they’ll take your way.

Saul Ludwig – Northcoast Research

Have you had a cut any of your prices?

Maurice M. Taylor Jr.,

Have I cut prices?

Saul Ludwig – Northcoast Research

Yes, sir.

Maurice M. Taylor Jr.,

Not yet, why…

Saul Ludwig – Northcoast Research

Okay, that’s good. Well, thank you Morry, we look forward to good second half.

Maurice M. Taylor Jr.,

Thank you, sir. Have a great day.

Operator

And next, we go to the line of Chris Edwards with Jefferies & Co. Please go ahead.

Christopher Edwards – Jefferies & Co.

Good morning, guys.

Maurice M. Taylor Jr.,

Good morning.

Christopher Edwards – Jefferies & Co.

I was wondering if you could just give us maybe a little bit more color or a better explanation of how the heat kind of affected your efficiency in the quarter?

Maurice Manning Taylor Jr.

Let’s just say, you build in tires okay, now generally speaking when you’re in there, if it’s 100 degrees outside, we’re in the 90s, it’s probably about pretty close to 1.5, probably maybe a 1.8 inside those factories, and you don’t realize how it kind of slows you down a little bit. All right and whenever you slowdown, if a guy is building – argument sake he is building 10 tires a day on a machine, you’re lucky if you’re going to get nine. Okay, it’s just everything that just the time that go drink water, you’re looking at NIM that are certain big times. I’ve been in the factories I know exactly what’s happening, and that’s what you got.

Christopher Edwards – Jefferies & Co.

Okay, I just wanted to make sure I understood that correctly. And then my other question I guess just has to do with kind of the – where exactly you are in terms of the capacity expansion at Bryan, I know you can’t talk about stuff going forward, but where are you today, and what have you done so far?

Maurice Manning Taylor Jr.

What we’ve done, we are into the, if you’ve been to Bryan, we are into the second day, we have probably, we had – which we have talked about previous calls, and where we were doing our expansion or not expansion of the factory, it was putting more equipment in, and changing lines. And what happen is, we pulled some lines out starting on the end of March, first part of March I think it was, because the equipment was coming in, and we have to get ready for it. Well, what happens is that equipment did not make it. It got delayed, they had some problems, they had to redo something, in fact that was there at that plant on Monday, and we got the equipment has arrived, and they are putting it in now. We would had originally expected that equipment in the probably in April, and we would have already been running.

So that’s the delay and there is a few other delays we’re behind, the way behind and referenced the shipments to customers that end, so we’re going everything we can. We are running 27X7 and trying to get more out.

Christopher Edwards – Jefferies & Co.

All right. Thank you.

Maurice M. Taylor Jr.

You’re welcome.

Operator

And next, we’ll go the line of Ryan Connors with Janney Montgomery. Please go ahead.

Timothy Feron – Janney Montgomery Scott LLC

This is actually Tim Feron filling in for Ryan. Just wanted to get some color, last call, you mentioned you expected to see gross margins improve in the fourth quarter as some of those new employees have got fully trained and came more productive. Do you still see that as being the case or they up and running in a more efficient level now?

Maurice M. Taylor Jr.

I think they will – this is like the training cycle. It’s different for every individual. But I believe that each quarter going forward that what I said before, I think that they will get better and better, and better. And once you – and that just helps your efficiency. The efficiency you get more, same amount labor, and your margins are going to do well.

Timothy Feron – Janney Montgomery Scott LLC

Okay. And just one last, you color on the aftermarket allocation, I know you guys have been trying to move more sales into the aftermarket. Could you just give us a percentage on where you are with that now in terms of OEMs versus aftermarket sales?

Maurice M. Taylor Jr

Well, we’re upside down, okay. And by that I mean you have a situation where probably the normal situation is 65% of tire sales go through the aftermarket, and 35% go to the OE. And we used all these run at 50/50 because so many of the OEs, we supply the wheel and the tire just in time mounted to them. And we have to maintain that, because we are in the tire. But what’s transpired is that we took care of the OEs, because our main source put them on allocations to put them into the aftermarket because then they like their aftermarket market, dealer makes more money and selling back to the OE. So as you can appreciate, there is a real entrepreneurs out there, and they are all screaming for, because this is just the easy money.

Timothy Feron – Janney Montgomery Scott LLC

Right. Okay, that’s it. Thanks for taking our questions.

Maurice M. Taylor Jr.

You’re welcome.

Operator

And next we’ll go to the line of [Steve Recco] with Bullseye Research. Please go ahead.

Unidentified Analyst

Hey Maury, question I just need to get a little bit more clarity on, I guess the impact of tire usage during these drought conditions. And again as you can tell about a farmer side, I really have no idea. But I would imagine that the harder conditions and the drier land would results in less tire usage, is that right?

Maurice M. Taylor Jr.

Not really, because what you have to do is you plan at your crop. So, now you have to grow and cut it, right. And it’s already, if you got a real back drought situation, it’s like dead woods, how to break the cuts that hell out of the tires. But then once you cut it, okay, so you would find that just how scorching in everything. So, now as a farmer, who was just had record, they loaded with cash, okay.

Now let’s just say he put insurance, and he is the 100% whipped out. He is going to get, if we paid the 50 grant an acre, he gets 85% of what his yield was forecasted to be back and beginning. So, if he forecasted that he was going to have 200 bushels, he’s going to get 85% of that, which is like, well 170 bushels. And if the price of the corn at that time was six bucks, he has done now well. Then what he is going to do is he got a choice. He can think maybe it was just one year; maybe this is a three year cycle and who knows.

So, a lot of the farmers will turn around, and they will breakdown and they’ll go by an irrigation system. And if you fly over Nebraska, you just look everything is got around little circles, also up in that systems. They could never raise corn out there and they didn’t have it very rare. So, they’re going to make a ton of money.

Unidentified Analyst

Okay. And you made referenced to this. So, company like Valmont, it supplies those systems, right? You are supplying some of the tires for those systems?

Maurice M. Taylor Jr.

We supply the tires, and now we don’t.

Unidentified Analyst

Got it.

Maurice M. Taylor Jr.

Same to Reinke, same to T&L, same to Lindsay.

Unidentified Analyst

And as far as like, again kind of breaking down your business mix little finer, what percentage of overall Ag tires would you say go to those type of systems?

Maurice M. Taylor Jr.

I have no idea.

Unidentified Analyst

Okay.

Maurice M. Taylor Jr.

Okay.

Unidentified Analyst

All right, good. And I guess as you said more details on these pending transactions within the next 30 days hopefully?

Maurice M. Taylor Jr.

I know it so.

Unidentified Analyst

Terrific. All right, thank you very much.

Maurice M. Taylor Jr.

Thank you.

Operator

(Operator Instructions) We’ll go to the line of Larry DeMaria with William Blair. Your line is open sir.

Lawrence DeMaria – William Blair & Company

Hi, good morning.

Maurice M. Taylor Jr.

Good morning, Larry.

Lawrence DeMaria – William Blair & Company

Hey, Maury, I was recognized, Maury, if you would think how it’s going to stay strong, and certainly parts there will. But the drop does have an effect on aftermarket and OE going to next year? Yeah, it does have an effect obviously negative is what I’m thinking. How quickly enable or you guys to react in the factories in order to cut production if any do, and when would you think you feel it, because the early order programs aren’t open yet. So when do you think you feel it and how quickly would you think about reacting?

Maurice M. Taylor Jr.

Yes, I think you’re making a lot of assumptions, and I think your assumptions are probably wrong. The last time when the whole financial crisis came out the big time, the world was coming to an end, everybody remembers in ’08. Well, we didn’t even see it ’08, the first six months of ’09 and then all of a sudden somebody was turning the lights off, we thought. But that proved to be a short term situation of everybody, mainly because of banks and then it ramped up and we’ve never been able to get caught upset.

So the difference between then and now though is that, there our union contracts, I don’t have to have people and they’re playing chess or cards and whatever, patent lines or whatever, because we just balance our labor with what our order deck would be and this is what happened. I have not seen anything from the schedule side all right. And I’ve already talked on the call, what I think Mother Deere is gone up. I think what Mother Cat is going up, you might have a normal – there is new products being issued. I have just covered – I haven’t run through Arkansas, I haven’t run through Texas or Oklahoma, but I have been in all of these other states, and those farmers are buying a new equipment. They got new equipment on order and they’re going to do very well. And that if income stays where it is, reference where the drought is, that has no barring in my opinion.

Lawrence DeMaria – William Blair & Company

Okay, thanks. Yeah, I mean, I guess the impact maybe felt, maybe next year, if at all, but I guess we’ll see. Thank you for that. I guess the other thing is, the impact on the Bryan transition. I don’t think you guys quantified it. Could you quantify in terms of maybe on a loss revenue or loss…

Maurice M. Taylor Jr.

I don’t know what?

Lawrence DeMaria – William Blair & Company

The Bryan transition, which is obviously behind schedule, can you talk about how much revenue or how many tires was lost in the second quarter? This should have been there. That maybe moved to the third quarter, and when we should think about that factory being back up and running more normalized levels?

Maurice M. Taylor Jr.

Well, if you look at the numbers, you’ll see that we’re still increasing our revenue, okay, at those facilities. And so, what you’re not seeing is, you are not seeing what we believe with the equipment how fast and how far that thing is going up. And like I said in the beginning of the year, I told everybody that the second half in Bryan would [triumph] the first half, which is generally not the case, but it’s, we are in a real situation of expansion internally in capacity. We’re going to basically come in with double. We’ve double like capacity of output and that’s what I’ve said beginning of the year and I haven’t changed any of that it’s just that’s what happened as I got caught, we’ll get through that and we’d just move a little faster. So…

Lawrence DeMaria – William Blair & Company

Yeah. I guess I recognize that, I guess so the second question on that would be when – if you’re going to get to that double capacity level and maybe we taught about that in the third quarter, it had more pushed out into the fourth quarter now?

Maurice M. Taylor Jr.

I would say the fourth quarter becomes much bigger.

Lawrence DeMaria – William Blair & Company

Okay, gotcha. thanks, Maurice.

Maurice M. Taylor Jr.

No problem.

Operator

And gentlemen, there are no further questions at this time.

Maurice M. Taylor Jr.

Thank you everybody, and have a great day. Bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

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