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Titan International, Inc. (NYSE:TWI)

Q3 2012 Earnings Call

October 25, 2012 9:00 AM ET

Executives

Maurice Taylor – Chairman and CEO

Paul Reitz – CFO

Analysts

Stephen Volkman – Jefferies

Ian Zaffino – Oppenheimer

C. Schon Williams – BB&T Capital Markets

Ryan Connors – Janney Montgomery Scott

Paul Curtner – Canaccord

Larry DeMaria – William Blair

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Titan International Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions)

And as a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Mr. Maurice Taylor, Chairman and CEO, please go ahead sir.

Maurice Taylor

Good morning everybody in the U.S. and I happen to be in Europe so it’s the first time I’ve ever done this in 20 years and now we’re here. And for you from Europe that are on, good afternoon. I’ll do – have seen the numbers and my comments. I want to cover a couple of things in the third quarter that probably have the most pertaining information of what’s going on. We had a good third quarter reference from what was going on at our factories. The problem, we had a hiccup and the hiccup happened to be in our Bryan, Ohio plant which turned around and did not ship amount of orders they should have and not because they didn’t have the orders, because we failed to execute. And the failure I guess I’ve heard every excuse, we put in this LX computer program and what happens is they had been doing the scheduling of that plant manually the same way since the 1970s, and the LX is total computer and I got lot of consultants running around but the problem we have is that on the LX system it tells you to build x parts for part number and you have to build x parts, you have to transfer x parts and what happens is someone didn’t built that same amount and then you have a train wreck all the way down to the end.

So we’re working on it, Mr. Briggs is spending a lot more time, got a new plant manager there, who came out of Freeport. He is a smart good boy but this is the first time a LX program has been put into any of our facilities in the tire side. We have been running that way for years in our wheel business and it made a tremendous improvement in efficiencies and margins. And when I am talking about margins you will notice that the revenue line was down but the margin line increased. Now that’s a contradictory in itself because you’ll see we have so many people your efficiencies for where we should have been but our margins.

Now if it would have been that we would have produced what we should have, I hate to think about what the margins could have been and they will get there. So for those who doubted whether we would get there, that’s – we should have pretty well taken care of your doubt. Now what’s happening in the market? Well construction as you know our friends projects from Caterpillar, same thing is true with Deere, same thing is true with anybody in that, what I call the light construction side, their business is off. Their dealers, they got inventory, they’re backing down. The same is true when you come to small a, which is you’re basically under your 100 horsepower tractors, that should compacts, that’s a lot of it that I mentioned in earlier calls, you don’t have the municipalities, you don’t have the counties out there buying what they normally buy because of money.

The good thing about that is that you really don’t make much profit on that stuff anyhow. And when you get into the Big Iron, the Big Iron is still going very, very good and our mining is going very, very good. And when you see our friends from Cat and others who’re rolling back what they think what they’re doing is they had all booked in this great mining boom of new mines and everything else which takes a few years to get into the volume and it also takes Cat a few years to increase that volume.

Right at this moment, with the mines going, it is actually staying very strong. When we were at the Mining Show in Las Vegas, I must have met at least two dozen mines, in fact I’ll be in Russia Monday morning with the largest mining group in Russia and all I did was get beat up about deliveries and I did say to all of the mines that, I explained what we were doing, explained why. It’s a case of something that we can solve because it’s a management situation. And that I’d be more than happy to wipe out their backlog and wipe out the contract and there was not one mining company that turned around and wanted to do, in fact it was just the opposite.

They actually wanted to get caught up and then they want to increase. Well we know we can only do so many and so it’s kind of like the big break spot in this business. I have also – so our mining side, mining sector is going good, we just got to produce more which I do believe as I stated in the release, we had a heart to heart meeting so to speak on production in the Bryan facility and 20% increase October over September. I believe they are going to hit that, then November will be 20% greater than October and then the big magic number [ph] will be if they can do the same 20% increase in December, and then we’re going to have a meeting to decide whether or not the people that are in-charge have what it takes, so the old peers done, we’ve overshot it.

It sounds below but that’s exactly how it was presented. So we’re looking good and on the big farm side, I have been continuing my travels to North America. North America is strong on the farming side, in fact I went through Arkansas and through Oklahoma and Texas, not only have I been on farms but I was surprised some of those down there, they are doing double crop, the amount of irrigation ramp is increasing all the time.

So with the crop prices still where they’re at, it is a very, very attractive for the North American farmer. And we believe we still got the wind at our back on that big stuff. When you turn around and you look at what else is going on, we are negotiating with a numbers of mines on our new group called the Titan Mining Services, we’re excited about that and with this acquisition now, that I can talk about we had at the close of the offer, we ended up of I believe 97% on the amount of shares that were turned in. So by the rules and everything we will trade off the other 3% so Titan Europe will become totally 100% owned subsidiary of Titan International.

We have – I’m over here now. We’re viewing what is going to happen and what we’re doing. Number one, when you look at the Planet Group, that we also brought in the third quarter in Australia which is in that mining service business. We have Titan Australia, we have Titan Chile, we have Titan Peru, and Titan in South Africa. So we already start with a base to grow with that business. We’re excited about that and we’re also looking to branch out with offering the track and all the components through the mining service to all the mines, so we’re real excited about it. And as we move into this next venture, there is some awful lot of opportunities for us on the wheel side and of course Mr. Salen, who is the President of our Wheel Group is over here.

We have Chris Akers who is the Head of Wheel Group for Europe and they’re traveling to all the various wheel plants that Titan Europe has, so when you combine the two there is – we dwarf anyone else in that line of the business in the agricultural or mining side. Ag over here is slowed up because Europe is in a little bit of a recession, but the fields are all being planted and worked, so I believe that it will take maybe this next year that will work to our advantage, where we got a lot of faith in what we believe we can grow over here also. So we’re contrary of gloom and doom. I think in the U.S. side, a lot of it is just that what you’re seeing and listening to on the TV but after the Presidential Election, I think things are going to really start percolating.

And with that, I’ll turn it over to Paul. Paul, take it away.

Paul Reitz

Thank you, Maurice. Good morning everyone. It was certainly an eventful and productive period this quarter as we built the foundation for the future. Closed the deal in Australia with Planet Group and of course the big deal with Titan Europe but on top of that, we’ve really reported strong margins and profitability this quarter. And you’ll see that our gross margins, they were up 330 basis points with 16.6% and then if you flow through the bottom line very nicely with adjusting net income of $0.49 a share compared to $0.29 a share last year.

When you look at our operating income, if you adjusted for the Titan Europe fees and adjusted for the standard CEO costs, you’re looking at operating income this period of 9.6%, compared to 7.7% last year, so almost 2% growth. All of these are record performances for the third quarter. If you back up these adjustments and you look at our operating expenses for the quarter, we’re looking at 7% of revenue well under 6% for SG&A. It’s clearly very competitive and I would probably think, top of the class for a company, a growing company our size.

We talk about this LX system and what it’s doing for our IT costs as Maurice alluded we do have lot of consultants involved in this project but by no means is it breaking the bank [ph] and it’s going to run us about a $1 million to $1.5 million per quarter in extra IT costs. These costs will continue as we move from the Bryan plant to our other tire facilities but really it’s a drop in the bucket considering the long-term return on this investment we’re going to get, as we convert over from the manual processes to these automated solutions for the shop floor, the data that gives us the improved information gives us the employee that’s real down and understand our inefficiency and bottlenecks and other issues at the operational level, quite frankly we would never get there using our old systems and processes.

So this gives us the opportunity to reach our true potential and we can see the light at the end of the tunnel, we’re getting a taste of the potential improvements and again we’re going to keep moving forward with the LX project and get the results out of this new system.

Looking at our revenue for the quarter, it was just under $405 million. Earthmoving/construction grew 27% to over $100 million at $103 million this period. You couple that growth in revenue for earthmoving/construction was strong margin expansion to over 18% from just under 11% last year. As you saw in our 10-Q and you heard from Maurice of the choppy period for Ag as it was down a couple of percent and again the farmers dealing with the impact of the drought this period and but choppy, I want to point out a couple of facts that are pretty interesting. In July, 50% of the dealers reported flat to negative sales and I happen to be with a dealer early July and he said basically people stop coming through the door. And if you compare that to about six months ago, 24% of the dealers were reporting flat to negative sales.

But on the other side by the time we left the quarter, 82% of the dealers were reporting same or more optimistic dealers’ sentiments and at the same time used inventory values had moved higher. So if we exit the quarter, I think it’s fairly safe to say the farmers, the dealers, they’re in a good frame of mind and concerns over the drought have abated and been put behind us.

Looking to Latin America, strong quarter for Ag in Latin America, up 5%, looks like it’d be a good start to the crop season down there. Truck business that we took over in late May, as our first full quarter having ownership with that business, volume is well moved up 5%. What happened was we got tumbled by the weak Reis and the FX translation so that reduced Latin America revenue by over $20 million this quarter compared to the last. Just want to point out something very positive for Latin America which again with that FX translation it’s hard to see the results, we’ve owned this business now for over a year and a half and we even had no voluntary management turnover from that business and so we’ve acquired a great team, we’ve made them stronger, they’re committed to this, great future that they see with Titan. I know we’ve been talking about the equipment that’s still in progress, that’s getting that down there in Brazil, it is a frustrating lengthy bureaucratical process, part of it is in place, part of it is still waiting for some government approval and we will get it there and it will deliver a strong ROI through the reductions in costs at Bryan.

So looking at Q3 versus Q2, I know all eyes like to dive to the sequential results. Revenue of $405 million as I stated earlier for Q3 compared to $463 million for Q2. And you heard Maurice comments earlier and you read them in our press release so you’re understanding the impact of revenue and production for the quarter. The one point I really want to highlight that I am not sure we’ve really bought out before is that we have shut down for a full week at all our plants in North America in the third quarter. So right off the back, we’re losing over 8% of production compared to Q1 and Q2. On top of that, you need to factor in about $4 million to $6 million of hard costs and fixed costs and the shutdown costs for the maintenance. I’m not including any soft costs from fixed costs origin in that number. So you’re looking at over $35 million of lost revenue, incremental margins on that of about 25%.

If you factor in those additional hard costs and you can see that quite simply you can see our Q3 operating income would have been up over $50 million for the quarter which would have been consistent with the second quarter. Now also in this period, when you’re looking at Q2 versus Q3, this is a period where we do make adjustments to raw materials. We have contracts on the tire side with all our OEMs – most of our OEMs if not all and they have provisions for raw material changes and they are all different provisions, it’s not one standard set of provisions but the point I want to bring out of that is, it does reduce out prices at the beginning of this quarter on average of about 2% to 4%.

As well on the FX translation we did get hit with the weaker Reis so that brings us down about $2.5 million in sequential revenue as well. So with all that being said again, it was still a very strong margin period, operating margins of 9.6% even factoring in that shutdown week. So year-to-date where does that put us? Our guidance for the year, we said our EBITDA would be between $225 million to $300 million. As we sit here today at the end of the third quarter, our EBITDA is up over $200 million and our adjusted net income is $1.83 excuse me, $1.83 on revenue of $1.33 billion.

Last year for the full-year we reported EBITDA of $1.81 and adjusted net income of a $1.31 of revenue of just under $1.5 billion. So our year-to-date results really do highlight the good top line growth we’ve had end of this very strong bottom line performance that we had.

Moving over to the cash flow and the balance sheet, operational cash flow provided about $37 million of cash flow this quarter. We primarily invested that into the Planet Group acquisition which was $33 million and then we put $17 million into CapEx. On inventory you do see that inventory did go up, little over $30 million for the period. The Planet Group accounted for about half of that by adding $15 million with the finished goods through that acquisition. Union City, our mixing facility is up about $5 million this quarter as we continue to ramp up production and work through the balancing at the plants as well.

We ramp up Union City, the plants need to balance their production levels or excuse me, their mixing levels at their facility. So it is resulting at this time in a little extra inventory. Union City is right on track to be full scale, up and running right with the plant that we’d outlined from day one and the quality that’s the main thing we’re getting out of Union City, the quality out of Union City has been very impressive.

We had one of our senior manager from our accounting firm was at one of their facilities recently and he had a chance to see the difference between the Rockwood mix [ph] rubber and the Union City rubber and with the naked eye and by touching it, even he was impressed, and not he was going to impress easily. Other assets you’ll notice we did grow sizably in other assets by about $32 million. I just want to point out that we would quoted $35 million of intangible assets related to the Planet Group acquisition.

Titan Europe, we closed that on October 5th and so all you’ll see in our disclosure is just a little footnote. We’ll certainly get into more of the forecast for 2013 on the consolidated business in our guidance call in December but just a quick look at the pro forma financials using the recent results of the two companies. If you take their approximate $775 million to $800 million of revenue, you’re looking at a combined entity of revenue around $2.5 billion. Their EBITDA is around $75 million combined with ours, we’d put it over $325 million of combined EBITDA.

Their debt level is – we’re bringing over $245 million worth of debt. We at Titan run about the 1.2x multiple on our debt levels so when you combine the two entities, we’re still a very comfortable 1.6 leverage level. And again we’ll get into this more in our 2013 guidance call but rough estimates would put the accretion of this around $0.10 to $0.15 per share. Another exiting quarter, we got two big deals completed, reported some strong margins in profitability and clearly the ride will continue as these deals are going to create a strong cross platform for further opportunities and growth for Titan.

So with that, I’d like to turn it over to your calls, or your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go to the line of Stephen Volkman with Jefferies. Please go ahead.

Stephen Volkman – Jefferies

Hi good morning guys.

Maurice Taylor

Good morning, Steve.

Stephen Volkman – Jefferies

Paul, thanks so much for your kind of sequential, I don’t know mark-to-market, and I am wondering if you can just give us a sense of how we should think about the fourth quarter sequentially vis-à-vis any of those other sort of non-demand related items that you might want to remind us of?

Paul Reitz

Sure, yes. In the fourth quarter, we will have another shutdown. So the shutdown that you can kind of look at is the (inaudible) half of the year. The first half of the year, we don’t have any maintenance shutdowns whereas in the second half of the year we’ll have one in each quarter. This second half of the year, we’ll have a similar number of production days. We do had a fewer holidays that may impact that but beyond that production beyond between Q3 and Q4 will be similar and but you do need to factor in Maurice’s comments about the Bryan and where we’re looking for that production level to go.

Stephen Volkman – Jefferies

Okay, great. That’s helpful. And then on this LX project, anyway it’s kind of give us a sense of the ultimate margin opportunity we’re talking about here once you get this through all the plants you need to do?

Maurice Taylor

Well Stephen, when I sat down with our fellows that’s in-charge of it and they were like a double-digit increase so I say to myself, I said well I wasn’t supposed to have a hiccup so I had the third quarter either you see, you’re taking with a grain of salt, is it going to be a strong single digit? Yes sir. Is it going to hit that double digit? It might on a few items. The biggest thing that you look at what it does is it starts to once you have all the operators bought into it and trained right because it takes it from a paper system to the computer. So the operators themselves see exactly what they got to produce and when they produce it, they have to get that production out and pass it on.

And if it calls for 40 beads of certain size bead they got to get 40 of them out. They can’t do 38, they can’t do a different number or decide to do 65 because there is – it will screw everything up all the way down the line. And so it’s – I look at it and I appreciate that none of our tire facilities had done it, but I also look at it from the standpoint we’ve produced 30,000 different wheels so if the wheel boys can do it, surely the complexity of the tire guys is not as complicated as it is the wheel guys.

So we’ll get there, it’s just that – I’m old school, I believe sometimes you’re better off if call off and give someone a good kick from the backside but clearly correct some people like the child would explain the way through it. So needless to say, we tried it their way, now we’re going my way. So we’ll get this one.

Stephen Volkman – Jefferies

Just one nuance there, is it that these guys aren’t keeping up with what they need to do or is it that they are just not doing kind of the right thing at the right time in the right amount. It is that they accept to run harder or they have to run smarter?

Maurice Taylor

They got to run smarter, all right. What happens to you Stephen is that this. If a guy was supposed to make 40 beads like I told you and he did let’s say just 34, and if the guy that takes the beads, he starts to build the tires, he is up there starting to go and he gets that beads and he gets that the different bands to put around a beads, all right. So if he gets 40 bands but he has only got the 30 some beads, he can’t build the tires. So then he is walking around, where is my rest of the beads.

Well the guy and the bead is off doing something else. So you would have to change the machines, so what happens, your efficiency just goes right down and then you got some guy who decides this is running real good, so I want to run 50 of these because I have to do 10 tomorrow. Well what that guy doesn’t understand is that the gearing presses are set to do 40 and 10. And if he grows off a dozen for the next day, we’re screwed up. And so you have two – you have the operator himself who has decided to take a few liberties and you have the supervisor who has decided that he hasn’t been on the floor watching because he has been in these meetings trying to figure out who is on first and who is on third, so we’re putting on a lot of consultants in this thing and so pretty soon you’re just going to tell the consultants goodbye and you just got to do with your people and you just got to put the hours to get it done, okay?

And Mr. Briggs is there, the ops manager is there and I have been there. Mr. Campbell has been there, so you have the two old boys. Mr. Mitchell [ph] who is in-charge, who did our wheel business, so we got the bodies there and we’ve had our meetings and we – the first thing is everybody looks as yes, we’re doing real good, we get the margins, yes. It wasn’t them sitting there having the mining companies, (inaudible) for not delivery. And so we’re going to get what we’re supposed to do done, and get it done right.

Stephen Volkman – Jefferies

Yes, that’s great color. I appreciate it. And then one more and then I’ll pass it on, anything going on with Goodyear Europe?

Maurice Taylor

Well I’m laughing because I am over here in Europe, okay. And I have not talked to Goodyear so I can’t vote for Goodyear but I could imagine right now that they are probably doing everything that they can to get that matter settled with their union friends and I can assure you that the union is probably looking at it too because there are so many people there that are looking to collect that money which is like a severance pay plus their retirement. So you have a situation where somebody has got to do something and if you noticed their filings, Mother Goodyear did make a filing to take a reserve for that facility.

So I expect something will get done, that’s my own – before the end of the year. So like I’ve said earlier, we got a number of irons still in the pot that we’re trying to get done. I would expect one or two more to come before the end of the year.

Stephen Volkman – Jefferies

Thank you very much.

Maurice Taylor

You’re welcome.

Operator

We’ll go next to the line of Ian Zaffino with Oppenheimer. Please go ahead.

Ian Zaffino – Oppenheimer

Hi great, thank you. Good evening over there I guess or good afternoon.

Maurice Taylor

Good afternoon big guy.

Ian Zaffino – Oppenheimer

Couple of questions, on the Titan Europe, can you talk about the synergies you might get there and what you might look to extract from that perspective?

Maurice Taylor

Well there is a number of things. Number one, we do not have to start from scratch. The situation in either Chile, Peru, South Africa or even though we bought Planet, they’ve had their facility down there, so these system that we have possibilities for Australia is combining everything there, so we will choose what’s the best avenue down there. Then you look at South Africa, what we can do there, and you have to look at all the countries, when I am over here is right now Titan Europe mounts an awful lot of tires on their wheels, same as we do in the U.S.

So now we’re going to pursue not only in Turkey but also South Africa, every place else that we’re making wheels. We’re going to not only look at selling them, we’re going to look at mounting them and we’re going to looking at servicing them. So that is a big item. The other thing is in the track side, ITM which is the brand of their track, they have done an excellent job at the OE, but the aftermarket has been how would we say, more or less left to somebody, he will sell you and they go out. Well when you start looking at not only selling the components but putting them on, you have a big opportunity.

So I believe there is a lot of things especially when you turn around and realize that both, you’ve got Deere, you’ve got Cat, you’ve got AGCO and you’ve got CNH. And they’re basically headquartered in the United States. So I see a lot of opportunities cross breading here, that’s how I look at it.

Ian Zaffino – Oppenheimer

Okay. So I mean if you could quantify a number of maybe is that sort of like a $15 million, $20 million, synergy number?

Maurice Taylor

Well you should probably – the synergies, you’re going to be able to grow some of the things, so you’re going to get a little bit bigger than that because you’re not combining just bodies, okay, you’re actually not adding more costs to expand what you got. See what I’m saying?

Ian Zaffino – Oppenheimer

Okay. And then shifting gears on the Caterpillar contract you signed, can you give us an update on what’s happening over there?

Maurice Taylor

Well I have friends at Cat. I think just as their Chairman said that their construction side is light and that’s pretty much when you look at that, you stop and you think of your backhoes, there is little tiny loaders, you’re looking to small excavators, you look at their buildings product group which is their skid-steers et cetera, their Telescopic Handlers all of those things are light, well actually Telescopic Handlers, they buy from our friends as Oshkosh.

But you see that those schedules are probably down light what I would call the situation of double-digits light but they really believe thereafter the first of the year they are coming back, that’s what we get told. When you look at their mining, whether it’s the big loaders, their big trucks, that’s still pretty strong for them. They’re – when you look at their trucks, they might get a mine that jumped in at here or there but they are still out, they are out until 2015. They would have to add capacity if they wanted to grow that at all.

So I think what they’re doing is just sitting back and they were planning and they are just kind of like holding back. It’s a little bit like BHP, and still they have spent 20 some billion dollars, they are just not out putting out more and more mines. So I think they’re going to wait till the commodity prices gets strong and they are going to just dig right now, I mean that’s the way I see it.

Ian Zaffino – Oppenheimer

Perfect, thank you very much.

Maurice Taylor

Thanks Ian.

Operator

Thank you. We’ll go next to line of C. Schon Williams at BB&T Capital Markets.

C. Schon Williams – BB&T Capital Markets

Hi good morning or good afternoon.

Maurice Taylor

Good morning.

C. Schon Williams – BB&T Capital Markets

Just wanted to maybe revisit the consumer segments, your Brazil division, Maurice, can you talk about what is the one, two or three things that need to happen down there to improve the margins specifically within that consumer division? I mean obviously the 4x not a lot you can do about that but I mean should we continue to see some gains as a result of this new pricing agreement with Goodyear or are there other things internally that you guys can do to get that margin moving higher even maybe in a tepid demand environment?

Maurice Taylor

Well I think there is a couple of things, number one, you’re going to see there is no question as we move forward, the margins are going to improve there. As Paul mentioned, we got to get our calendar aligned in there that makes all the fabric. Right now we have to buy that on the outside. We have to ship the rubber to the place, have it rubberized and ship it back. Just the rubber alone, the freight is over a $1.5 million. Once we get that, we’ve got a whole bunch of avenues that help us.

The other situation down there is that our friends in Argentina, all of our farm tires shipping in there. They way we’re getting them to dealers, we’re getting them because we do not produce anything in Argentina so we’re losing a good margin by having to go through other (inaudible) that all they’re doing is bring them in backing off, some of our profit for us to maintain.

We’ve got a – we’re looking at an avenue of producing or buying certain things out of Argentina so that that will fall back to – we could reciprocate [ph] so that we get our margins. So there is lot of things in South America that we’re looking at, number one is also is to expand the radio production, both in the farm and in OTR that we can do. It’s just that you really need that calendar and we’ll push it anyway we can to try to get it in there. The old way is illegal way, greasing someone palms so you can’t do that anymore so we’re resorting to get our union to put some heat on it. So that’s what we’re up to.

C. Schon Williams – BB&T Capital Markets

And is it possible that over time if you can get those operating margins, I mean where do we go at them here, they are kind of breakeven in that division this quarter, I mean ultimately can we be looking at 5% to 10% operating margins in that division?

Maurice Taylor

No, we didn’t buy it for 5% or 10%, all right. It got to be like couple of those and I think we can get it there, okay. You have to appreciate that they do a great job there all right, but there is room for a lot of improvement and we think we can get it there. I think Paul believes that and I know Campbell believes it without a doubt. So it’s just, you got to get to certain things down there so that you can get the benefit of that and that’s where we’re at. We’ve been fighting this thing for over a year.

C. Schon Williams – BB&T Capital Markets

Okay. And then maybe if I could just follow-up, I mean you talked a little bit about some opportunities coming out of last quarter to expand into the Mexico markets, is that – are you starting to see any gains on that so far or is there going to be more of a kind of first half of 2013 event?

Maurice Taylor

That’s in first half of 2013.

C. Schon Williams – BB&T Capital Markets

Okay.

Maurice Taylor

They got a real good plan. They just got to like anything that should do in New Mexico, you got to be careful because you just start shipping the whole truckloads in there and all of a sudden nobody can find them, okay. So we’re doing our homework there real cautiously.

C. Schon Williams – BB&T Capital Markets

All right, thanks for the color guys. I appreciate it.

Maurice Taylor

Thank you.

Operator

Thank you. Next we’ll go to line of Ryan Connors with Janney Montgomery Scott.

Ryan Connors – Janney Montgomery Scott

Thanks. Thanks for taking my call. Paul, I want to talk a little bit about – you talked about the shift in tone intra-quarter from your dealers, I presume that’s kind of in evaluation of the aftermarket. Can you just kind of give us a similar analysis on the OEM side? Was there any shift intra-quarter in their sentiment or order patterns or communications with you all?

Paul Reitz

No, I think the OE story is pretty simple. They’ve remained right on track and keep plugging along pretty steady. So yes, what I was referencing was definitely just on the dealer side.

Ryan Connors – Janney Montgomery Scott

Okay. And then kind of a related question, so you’ve been talking for a couple of quarters here about this issue of OEM versus aftermarket mix and how you’re lower on the aftermarket than you’d like to be. Can you give us an update on that story just especially in light of the production lower than expected production at Bryan?

Maurice Taylor

Well the first thing, on that matter, we’ve had our Vice President of Sales is being replaced and the reason with the guy coming in is real strong in the aftermarket, the entrepreneurness of dealers. And our other fellow was very good at the OE but it’s a whole different world when you’re dealing with dealers that are basically entrepreneurs. And you made commitments to them, then you better make sure you move heaven and earth to keep your word to them otherwise it will take you three, four years to come out of the doghouse. So last year when we met with our like 50 of our biggest dealers, a lot of things were promised. They were not delivered.

So we’re not going back in a year later and just keep saying the same damn thing and not delivered, that’s not the way this company has been build. So we made the move, so we are going to strengthen all of our dealers in the aftermarket, that is a fact.

Ryan Connors – Janney Montgomery Scott

And you mentioned in the press release, you had this quote, missed the opportunity and you quantified that tens of millions in sales, so just to clarify that’s entirely in the mining side, right, that’s not Ag related?

Maurice Taylor

I would say probably 90% of it was related to the – let’s just call the big mining side but there were some missed opportunities in the agricultural side because what transpired is that if you have a row-crop tractor and you’re building the 50H rear tractors and you will have an order for the fronts. Well the fronts are 38 inch, on a big row-crop tractor. And what you end up with is that some people make the decision that they are going to when they put the big bowls in let’s set up some presses and set up the tire building and let’s run twice as many of the big ones, why we got it because we will really do good.

And then when they switch to go over the 38s, well your problem is you can’t ship tires until you got the freaking fronts. So that’s why the fronts were scheduled, the same time as you do the rears. So that’s a pretty standard format when you’re doing an OE. Now if you were just doing that to the aftermarket, you could get away with it. So these are all basically everyday frequent management, I’ve done it 40 years, every so often people run off the reservation, and you got to go get them back.

Ryan Connors – Janney Montgomery Scott

So the last question from me is just so the LX program at Bryan facility is obviously a unionized facility, I mean are there specific issues that the union has is taking issue here or is that not a factor at all, it’s just more of a learning curve type of thing?

Maurice Taylor

No, it’s a little bit of a learning curve. First thing is the union I believe has been very supportive. This is – a long time ago, in the world of these calls which means a year ago but really last couple of years everybody wanted to see, what are you going to do Maurice, you’re an old guy. Campbell is old, Mitchell [ph] is old, we’re all old, we’re still there but we’re all old. We got to bring in some young lions. Well young lions are in. Now you could either micromanage them or give them what you think and then let them go learn how they get it screwed up.

Well that’s what really happened, okay. So they – and I don’t know any other way. This is strictly the buck stops was me, okay. I should have been mainly make in a few moves a little earlier, who knows but they’ve been made now so I think Paul can confirm that to you so that’s pretty well how it is. Paul would you agree it’s strictly on the top side and not the hourly.

Paul Reitz

Absolutely, I mean you got to change the culture along with the system and we are a little bit slow to change the culture but the union has been very cooperative through the whole process. It’s really been just a management issue of getting there, really putting the heat on the fact that we’re going to use the system and it’s going to be used the right way. And we’re getting there. We’re getting there Ryan, it’s just a little bit longer than we hope for but we are getting there and after we do at Bryan we’re going to do at the other two plants and as Maurice said, we’ve been through this before on the wheel side.

And if you look at that business over the years, it’s definitely benefited very well from having a good shop for system.

Ryan Connors – Janney Montgomery Scott

Good. Well thanks for your time today guys. Very helpful.

Maurice Taylor

Thank you.

Operator

Thank you. We’ll go next to the line of Paul Curtner [ph] at Canaccord [ph]. Please go ahead.

Paul Curtner – Canaccord

Thank you for taking the question. Couple of questions, the first one on the Planet Group, it looks like they had negative net income for this quarter. Could you attribute how much that took away from EPS and maybe give us an EBITDA figure and how you expect that to change going forward?

Paul Reitz

Yes. Well Paul, the issue with the Planet Group, it really comes down to accounting not their performance. So for accounting purposes you have to write up their inventory on the opening balance sheet at the time of the acquisition. And it’s a very profitable business as we put out in the prior press release as they are doing over $10 million of EBITDA on $75 million of revenue. So the write up we had to take through inventory was fairly sizable and then once you use amortize that off and we’re doing that through the end of the year.

So really the Planet Group will not contribute EBTIDA or EPS through the end of the year, not from a cash flow perspective but just from an accounting perspective.

Paul Curtner – Canaccord

Okay, that’s helpful. And then secondly Titan Europe, maybe a different way to tackle the synergy questions, you now don’t need two Boards of Directors, you don’t need two public company listing costs, you don’t need lot of costs like that that are duplicative. Can you give us some kind of ballpark range on when would you look at that business, when you’re going to be able to pull out you’re just eliminating duplicative or no longer necessary functions?

Maurice Taylor

Well you’re 100% right, the Board will be gone, public Board will be gone. It’s not a going to a company anymore but to be very honest about it whether that’s a couple of million dollars a year or whatever and stop changed to the benefit that you’re going get when you start looking at the added outlook for your tire product, the outlook for the engineering for the wheels, all of these things, there is not a lot of synergies that we’re going to bring reference to the ITM part of it, except that we will be able to sell a lot of their components, so increasing them through Titan Mining Services because we’re the first ones that thought about taking the track because we’ve made all this investment into buy an equipment and setting up on their oil sands.

So as soon as I get the pricing of all the stuff, we’re going to be putting people out trying to move it. So that’s pretty good to give you a share number, it’s going to be a sizable one but I can’t – I’ve only been only here couple of days, so we got to have a little time to do that.

Paul Curtner – Canaccord

Well thank you and maybe just finally on Titan Europe, their borrowings were quite fairly short maturity, one or two years, rates where they are and credit market conditions, so forgiving the issuers, I would hope that you’re going to turn that out to U.S. bank debt or maybe do another bond deal or what are your thoughts on that?

Maurice Taylor

Well I went and talked to one of their bankers on yesterday and the other big banker I’m talking to tomorrow. And of course I asked them, they all assured me that they could do a five year or seven year bond and that’s the numbers they gave me sounded good and so then they start talking about two other things and I said well you know I’ve got used lot of my friends at Merrill Lynch but I want to do a bond deal, I want to get done for the end of the year and all the Merrill guys had their bonus money. So they wanted to wait till after the 1st. So that was my first deal with Goldman [ph] and they got it done. So they got right, well we can move real fast too. So I was assured that there would be no problem and that they really and they had been, they’ve done a very strong packer of Titan Europe and so I think that will be done.

Paul Curtner – Canaccord

Why not do a bank deal for the whole company of 1.6 times leverage or better and you’re looking at a very …

Maurice Taylor

Well because I can’t do a whole thing because I can’t call my $200 million in bonds, okay. So once that time comes up that I can do the bonds and call the converts, it’s not my first time I’ve ever been through this, so we probably – history being we probably would do it, okay.

Paul Curtner – Canaccord

Thank you. Thank you for taking the questions.

Maurice Taylor

No problem.

Operator

Thank you. We’ll go next to the line of Larry DeMaria from William Blair. Please go ahead.

Larry DeMaria – William Blair

Hi, good morning Maurice, good morning Paul.

Maurice Taylor

Hi good morning Larry, just little slower to figure, right?

Larry DeMaria – William Blair

No, I got stuffs in the banks [ph]. Question, if I use September as a base and you grow the mining volumes to 20% per month, how does that targets for the year and the quarter for Bryan and are we close to your 6,000 target at that point?

Maurice Taylor

Well Bryan to – we had a number, we don’t give out individual factory numbers so we had a number for Bryan this year that would have pushed them to almost double their volume in this past year. And of course they didn’t hit it, so that’s why we’re in a little trouble. The LX program was supposed to come in March and it didn’t get there till June.

So the situation is that when I looked at September’s numbers of shipments, it’s a case of where I was so because we’re so far behind and I spend enough time there on a week to just go totally bonkers, it’s like – it’s a simple thing as the fellow that does the shipping and you walk over on the 1st of October and you’re looking at all these tires. Why weren’t these tires shipped? Well, there was a credit hold. Well don’t give me that, yes, for that guy an acquisition, it could have been a credit hold but there is 15 guys under him who’ll give you the money to muddle if you shipped them.

So then you get the comment, well you know, we’re shipping more than we ever shipped. Well then you should go find somebody that you enjoy the way it was because you were not my kind of guy.

Larry DeMaria – William Blair

That’s one of the reasons why the fixed costs inventories jumped up right, and I guess because they didn’t ship that?

Maurice Taylor

You got it. Like I need some guy to sit there, everybody has to got to have a little entrepreneur and know that you’re behind so these were not uniform special tires, there is zillion people who were screaming for them [ph]. Anyhow so what happened is that we sat down and looked at it and as I said earlier on this call, I got my own self to blame, you hire a bunch of – you got new management, you got a lot of 200 new employees, you got a lot of things but at a certain point if I stand there and try to micromanage then you’ll never know if the guys are going to do the job.

You only learned by your own mistakes. And I think they found some of their mistakes, I think they are going to make it. I really think I lost faith in these guys but they’re going to do it different than how I would do it. But when we went through everything, I said okay, here 20% more for October than you did in September, 20% more in November than you do October and 20% more in December. And they all bought on because can they do it? Yes, they can do it in October, they’re going to get October done.

They can do it probably for November. Are they going to get it done in December? No. I know that but now I have approved the point so now I know what they are going to keep rolling, why won’t they get it in December? Well because you have Christmas but we also are moving a whole mess of new equipment in through the holidays. So I know that but as long as they get October and they get November, then I know the management problem is moving in the right direction. That’s how I look at it.

Larry DeMaria – William Blair

Thank you. I mean now we want to see you and Paul mixing rubber (inaudible) …

Maurice Taylor

I could do a pretty good job there. Yes, I do a pretty good job, okay. That’s a fact. You might have said that about Paul.

Larry DeMaria – William Blair

If we take that 6,000 target off the table though, just for modeling purposes and taking into consideration also that there is going to be transition at the end of December, it sounds like the end of December, trying to put more equipment in, is there in my entire number we should think about for modeling purposes so that we don’t (inaudible) again in the fourth quarter and secondly, how much further ramp up you have into next year because if you ever thought the most ramped up was it for this year or would you be ramping up over the first year?

Maurice Taylor

No. We don’t get our final hearing process, will come in March.

Larry DeMaria – William Blair

Okay.

Maurice Taylor

Okay? So from March on, as I stated before, probably on April 1st on, I will have the capacity to do 3,663 inch tires and a total of 7,257 inch tires. That’s it folks.

Larry DeMaria – William Blair

That’s good. I was going for that, I didn’t figure it how to (inaudible) going forward.

Maurice Taylor

Now if you want to everybody to figure it out, I even told this to my competitors and this is what the mining companies told me when I was in Vegas, that if I do that we only represent between 12% and 15% of the business. They’re going to keep us there just because it’s better for them to pay us a little extra money than they do my big boys because anybody that’s been in this business the last five years knows one thing.

If you got Titan, you got something to beat the hell out of Bridgestone and Michelin. Without Titan, they would have never done anything. Do you understand what I am saying?

Larry DeMaria – William Blair

Yes, I totally understand and then obviously we spoke to the same people at Mine Expo [ph] as well. And I think when we spoke to them a lot of their volumes locked up, so curious about your net 10,000 number or 10,800 [ph] how much of that volume should we consider to be locked up in another variable versus the (inaudible).

Maurice Taylor

Well the problem is right now I’ve got Mr. Hawkins has been locking it all up and I would prefer to lock up about 8,000 of it and use the other 2,000 just to play around with, okay?

Larry DeMaria – William Blair

Yes.

Maurice Taylor

But we’re also want to make sure with our Titan Mining Service, we’re making sure that we take care of that to the people who were also doing the rest of it. We have a pretty good plan, okay?

Larry DeMaria – William Blair

Okay. And then finally, I know it’s going for a long call, but at this point you guys do have a lot of volunteers in company, at what point do you need to hire more senior management to make sure we don’t have some of these issues and from your (inaudible).

Maurice Taylor

Well, I could have hired – Larry, you went in the wrong business school. I could have hired another 200 execs and I would have just had a bigger cluster screw up, okay? It’s simple as ABC. Once you do that, then what happens, you end up with your freaking 12% to 15% SG&A and you don’t make any money.

Larry DeMaria – William Blair

Do you think you had the senior management then with to handle businesses in Brazil, Europe and Great Europe, the U.S. and (inaudible).

Maurice Taylor

Yes. That’s not a big – first thing is you have to understand, Steve Briggs took over for Campbell. Campbell is heading South America right now in Union City. Campbell is a different exec than Briggs. Briggs is probably smarter than Campbell or I but he has to get a little trained when you got three plants and it’s like when I walk through a plant, I don’t look at the people, I look at what the people are doing. If you walk to and look at people you can smile and talk and everything is great, but if you know what they are supposed to be doing and you’re looking at what they’re doing, then you can see, you can see does the guy have material ahead of him or does he – have they taking the other or is what he has built or what he contributed away or is he going to slowdown. As long as people are working in a factory, you’re going to make good money, you got to keep people working. And if people are standing around, then you’ve got a problem.

Larry DeMaria – William Blair

Okay. Let me just finish up here. You talked about I think you said one or two more acquisitions, just curious by size and scope and secondly I think you have some union negotiations coming up, how you’re approaching them and what should we expect if the people watching the company copy here?

Maurice Taylor

Well if anybody can tell you how unions, the only thing I can say to the union and probably on the call now is sometimes you ran bad luck. They just check bad luck time to turn around and have to come to the table, okay. So there is an shortage of labor that’s a fact of life. Do I have a great work force? Yes. Do the union and back, do they want to do a good job, yes they do, or do we always have a few what I want to call, hot heads and that, yes, but no we’re fair, but we’re not stupid, okay.

So I don’t see that is any problem going forward. Everybody knows that we’re plant people, okay. The other situation is let’s see you asked about the union, acquisitions, well the Goodyear is still out there I imagine, then there is a couple that you don’t muddle it out but magnitude of them would probably be between $600 million and $800 million in revenues, million.

Larry DeMaria – William Blair

Well that’s pretty big. All right.

Maurice Taylor

I’m getting old Larry. I’m getting old. I told you where I was going to be.

Larry DeMaria – William Blair

I know Maurice. Okay, I assume that’s probably in Europe then. It would be more likely than not I guess, if you want to leverage further but

(Inaudible) building out.

Maurice Taylor

There is a lot of opportunities out there, okay. So think of all of those people that were in Europe who when they heard about the savages in America, they didn’t go. How just for the time being we’re down in Mexico. They were all savages up there.

Larry DeMaria – William Blair

Okay, well thanks Maurice a lot.

Maurice Taylor

Europe needs a few barbarians, I’m over here plus I do like the food, love their wine. So we’ll see what happens here too, all right.

Larry DeMaria – William Blair

Maybe you can right now explain – okay, thanks.

Maurice Taylor

We’ll take one more question, that’s it.

Operator

There are no further questions in queue.

Maurice Taylor

Locked out. Thank you there. Bye.

Operator

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

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