Titan International Management Discusses Q4 2013 Results - Earnings Call Transcript

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Titan International (NYSE:TWI) 2013 Earnings Call February 20, 2014 9:00 AM ET


Maurice Manning Taylor - Chairman, Chief Executive Officer and Chairman of Titan Europe Plc

Paul G. Reitz - President

John Hrudicka - Chief Financial Officer


Christopher Schon Williams - BB&T Capital Markets, Research Division

Lawrence T. De Maria - William Blair & Company L.L.C., Research Division

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division


Good morning, ladies and gentlemen, and welcome to the Titan International Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded.

Any statements made in the course of the conference call that state the company's or management's intentions, hopes, beliefs, expectations or predictions for the future are considered forward-looking statements. Please note that the Safe Harbor statements contained in the company's latest Form 10-K and Form 10-Q filed with the Securities and Exchange Commission extend to this conference call, and any forward-looking statements involve risks and uncertainties as detailed therein.

At this time, I would like to introduce Titan Chairman and CEO, Maurice Taylor. Please go ahead, sir.

Maurice Manning Taylor

Thank you. Good morning, everyone. As you know, all of you on the call now have already received our press release and everything for the third quarter -- I mean, for the year of 2013.

As I said in my statement, we ended it much more, hoping for certain things than what it ended up coming out as. But there's a lot of good things that came through it and there were some things that were not going good, and we've made a lot of changes in 2013.

To cut through the things. The biggest stumbling block in 2013 was the mining business and it's -- everybody understands what's going on there. They're spending much lower than they expected, and they had a great deal of inventory. And as I said in my release, that most of them are trying to deplete it as far down. There's no problem with supply any place in the world. And they're trying to bring everything down because they're going to replace it with tires that are going to cost them probably in the range of 30% or better, less, and the reason being is simple: the price of the natural rubber has been falling for the whole year. I believe, right now, it's pretty well stabilized, and unless something drastic happens, it should probably stay right in that range where it's at right now.

The -- whenever we have a situation where the commodity prices go down, especially on the tire side, because of the amount of time for natural rubber and the amount of natural rubber we use, it has a tendency to take us approximately -- we have to give the OEs with our contracts, it takes approximately a quarter, and everything is passed on then. But it takes awhile to purge all that through, basically, 5 to 6 months.

So that's the story there. What do I think about it coming on? I think that the maintenance and what's going on in the next quarter will pretty much forecast what's going to happen for the rest of the year. The snow and the difference what's happening around the country with the weather is probably going to have a little bit of effect. It's delaying some of the purchases, but we expect that the construction side's going to stay more robust moving up, and we've prepared for that.

We had a lot of internal problems in reference to some management and we've made those changes, and we look for those to turn around and become very beneficial to us as we go through.

In the agricultural, the agriculture is remaining fairly strong. We do not see the -- a downturn. Appreciate the price of crops, but it's still very profitable for whether it's corn or soybeans. And those are your 2 big drivers. Wheat's going to stay pretty good, too.

So we expect that, last year, after the -- as I mentioned, we didn't settle the union situation until the end of the first quarter, which we had expected to settle before Christmas of 2012. We did get a situation where there was an inventory buildup in the tire business and probably 1 to 2 weeks in the wheel business because a lot of people thought that we were going to have a strike, which didn't come. So we've got 3 more years of relatively peace in reference to that situation.

So on the other situation, on the agricultural side, is we're starting to receive the benefits of the last 2 years of our corporate farms around the country in Canada where we have built new products, and that includes both new wheels and tires, and it's what we call the low sidewall, keeping the OD the same and making the wheel bigger, which enhances both. It enhances the tire and it enhances the wheel. We expect that to continue through the year and in the future to pay very good dividends.

When you look at our wheel business, and that affects whether it's in Europe or in the U.S. in our ag side, you know that steel is the biggest contributor of our material costs. And in 2013, the price of steel did drop. And since the beginning of this year, steel has went up a couple cents, so we believe they've got to the bottom. So when you turn around and have a little bit of an increase in your cost of steel and the cost of rubber, that ends up affecting and giving us a little bit better margin, not the other way. So we look forward to that, at least, staying the same; if not, it's going to increase.

So that's where we're at. So Bryan was the big problem and we do believe that as we continue to go through, we're going to do better in 2014 surely than what we did this past year.

The other situation that we have out there is that the Russian acquisition that we made at the end in the fourth quarter. We -- when we took over, the maintenance -- generally, the maintenance was -- their normal procedure was to shut down their facility for a month and do all their maintenance. The previous owners, which decided that they did not wish to do that, they continued to run. So when we ended up taking over, we decided that it was best to shut the facility, do all the maintenance, go in and make sure what we got is running fine. And we did that. So we took that in the fourth quarter. In fact, we did not, because the Russian have a long period, 2 weeks, we never even started the Russian facility up until the end of January. So we took a hit for that.

We are looking at 2014 to be a much stronger year than 2013, and we've made a few changes. Paul, who's going to give the numbers to you in a little bit, he's moved up to the situation as a President of our whole Operation. So he's got them. I am still the Chairman and CEO, last I know of it, so working with him as he learns the manufacturing side and some of the customer side a little bit more. But we've -- replacing him is John Hrudicka and he'll be introduced as we go on, and I think you'll find that he is very, very capable. So we're moving in the process of strengthening what we're trying to do to keep this company, as it gets larger, moving in the right direction.

Now to cover a couple questions I should probably talk about because we had a little activity of a larger investment, and I've had an awful lot of people calling me. And this is our MHR Fund. It was -- I have met the Doc and I took to Doc, and he has a young fellow that I've nicknamed Italian Stud, no disrespect to him. But anyhow, they came because when they called me, I mentioned that they put out almost $100 million, at least first come through and look at the facility. So they came, they went through the Bryan, they went through the Freeport facility and they went through the Quincy facility. And I believe that they were relatively impressed about what we're doing. He felt that, the Doc did, that he could help us reference any of the financing for what we're doing -- we're planning to do in the future. He is very, very smart. He went in for an investment. He thinks we're on the right road, contrary to what a lot of people have told me. He did not ask for a board seat. But I can tell you, personally, anytime you can probably get a fellow that smart to come on to your board would be a good thing for any company. Of course, I don't appoint who's in on the board. That's up to my board. When we have the next meeting, hopefully, my board would consider him. But I would be honored if he had came on. He also has a lower handicap than I do in golf. But overall, he is very supportive and one smart fellow that went to Stanford for an M.D. and never practiced. So there's no question that we look upon it as a positive, not a negative.

With that, I will turn it over to Paul, and he'll run through the numbers and introduce John. And then we'll get to your questions.

Paul G. Reitz

Great. Thanks, Morry. Good morning, everyone. Let me start by going through the year-end financial results. And after that, I would like to spend a few minutes just talking about what I'm seeing as I transition into a different role. And then, of course, we'll introduce you to the new guy, Mr. John Hrudicka, that joined us as our CFO a few weeks ago right in the middle of all the year-end excitement.

For 2013, we broke through the -- the $2 million -- $2 billion barrier on revenue and came in at $2.2 billion. It compares to $1.8 billion last year, so up 19% for the year. If you look at Europe, which we closed in October of 2012, that added $485 million of incremental revenue to our '13 sales.

Looking at Europe and their performance, really a fairly solid year for those guys. It was down from the 2012 levels, but it certainly performed up to our internal goals that we had set for the year. And that's in the face of what they dealt with in Italy, which was a major earthquake that impacted the plant, and we still were dealing with the lingering effects of that as we entered into 2013. So some good performances by the other European wheel plants.

When you look at our undercarriage business, same thing, right in line with what we expected for the year with all our goals for the year and they really finished the year strong. In the fourth quarter, they were up 9% from the third quarter and really saw some good OEM activity, it was picking up, and some good traction coming out of Brazil.

The only thing out of the European acquisition that I would say was off track for 2013 was really the Australian wheel business. It's a good business, strong market share there. But the demand across-the-board in Australia was extremely weak, and that really impacted that operation down there.

As Morry said, in October, we closed on Voltyre-Prom in Russia. That did not add that much revenue in the fourth quarter. As Morry said, we were shut down for a long period of time to take care of some maintenance. And also, they follow a selling process that really goes along with the harvest cycle. So this time of the year, there really is not much selling activity. So that only brought in about $50 million of revenue to the fourth quarter for us.

If you look at our gross margins for the year, we finished at 13.6% compared to 16.2% in 2012. And really, to understand the gross margins, I think you need to look at the business on the legacy versus the acquired operations. We've almost become 50-50 now. Our legacy businesses, which I define as our North American plants, make up about 55% of our revenue. And for the year, our legacy gross margins were at 16% compared to 11% at our acquired business. So clearly, there is a gap there and one of the opportunities that we have as we move into the future is to close that gap.

As you break it down in to the segments, looking at our ag business, overall sales, good year, up 9%, volumes up a solid 5%. As we enter '14, we're seeing some good optimistic viewpoints coming from the dealers, lot of new equipment's been pumped into the market over the last few years, and you're starting to hit that tire replacement cycle on that.

Out of Latin America, the ag volumes were really fantastic, up over 30% for the year. We did a good job gaining market share, and we did a really good job pushing through some better pricing. Mix improvements through larger radials. The only downside is that we got hit by some FX down there with the weak reals that reduced our revenue by about 13%.

Looking into '14, Brazil keeps going strong. We got some new equipment improvements that are coming into place there that'll add some capacity. We've put in the new LX system on January 1, and that's up and running successfully. So really see good momentum coming out of Latin America.

Looking at North America. Really, the story is we got killed by raw materials. That brought down our revenue on the price mix by 11% or over $90 million in sales for the year. Unfortunately, it really overshadowed some of the good things that took place at our North American ag plants. For those of you that may have been through our Des Moines or Freeport facilities this year, we've done a really good job of improving the efficiency, the scrap, and most important, the quality. But again, unfortunately, the raw materials killed us this year in that aspect.

On the gross margins for ag, we finished the year at 16.8% compared to 19.1%. The ag business, for us, these are our core franchise businesses, high-market share really around the world where we operate related to ag.

Even though ag is only 25% of the European business, again, that does have an impact on our margins when you're looking at the comparisons for '13 versus '12. And as I said earlier, we certainly have some potential and some work ahead of us to improve those margins coming out of the acquired facilities.

In North America, the decline in the raw materials, specifically, the natural rubber, did hurt our margins by about $15 million for the year. We do see that stabilizing in '14. We're kind of around that $1.10 mark and have some forecast showing that it'll actually go up to about $1.20 so -- and hopefully, that issue is behind us.

And overall, for 2013, it was a solid year in ag. Good volume improvements and good performance overall.

The other side of the story is when you get into earthmoving and construction. Sales were up 49% with the inclusion of Titan Europe that added over $330 million of revenue. But when you look at the volumes, they were down 17% for the year. Really, the story is, as we all know, it's the construction destocking that was painful in '13. We are starting to see some signs. If you look at the retreading carcasses out there, they're starting to run low. Seeing some good comments coming out of Caterpillar about the destocking being over with. So there's some signs positively pointing upwards for 2014.

And really, it was the back half of the year for mining that -- where the demand fell off that really, really pushed us down as far as our margins and our performance goes on that segment. We do look to see that remain weak with some pricing pressure continuing as we enter 2014.

So price mix for the year in earthmoving/construction caused a 7% decline, or $25 million of revenue was knocked off because of that. And it's really a good time to change. As Morry said, it's a time to focus on what we can do better. We've really been doing that in Bryan with removing costs, focusing diligently on plant improvements and putting in a new system to help us with some of the process flows.

And then when you look at the bottom line out of this segment, with the weak volumes, we were down to 11.1% margins compared to 14.8% last year. And the pricing pressure and the volumes in the back half of the year really caused that erosion. We did have -- during the course of the year, in Q2 and Q3, I want to mention that it that did not take place in Q4. We did impact margins about $8 million due to some additional warranty on a particular line of super giant tires.

In the fourth quarter, just real quickly, I want to highlight our sales for the quarter were $494 million, which is basically flat with the fourth quarter of '12 and the third quarter of '13. We did have good volume improvements in ag, up 3%, and earthmoving/construction, up 8%. But really, that was offset by price volume -- or excuse me, price mix declines that offset those volume improvements in the fourth quarter, so that's why you see the revenue coming in basically flat with prior period.

Again, it was a good fourth quarter for our undercarriage business. They were up $17 million from the fourth -- or, excuse me, prior quarter. So really, some good momentum for that business as we enter 2014.

Margins, for the fourth quarter, relatively flat at 10% compared to 10.4% in 2012. We've talked a couple times already, but we did add Voltyre-Prom this quarter and with the way that activity was working with shutting down the plant, clearly that did have an impact on our margins in this period. And then, of course, the weak volumes coming out of earthmoving and construction.

So looking at the operating expense side of the business. Our SG&A for the year came in at 7.7%. Last year, we were at just under 7%, at 6.9%.

Legacy Titan Inc. for 2013 was 6.8%. So really, we're right around the 2012 levels. And that's really a good performance considering we picked up another $3 million of additional professional fees associated with the acquisitions, potential acquisitions in '13. So again, the legacy business continues to operate very efficiently. We do have some cost structure issues that need to be addressed with some of our acquisitions. But again, we're waiting for some of those opportunities -- or waiting to address these opportunities as we kind of see where the business goes in the future, and either we're going to leverage or infrastructure or we're going to have to make some changes. But we'll take care of that as time progresses with our strategy and any other potential acquisitions.

Looking at our interest expense for the year. It came in at $47 million compared to $28 million last year. Titan Europe added $8 million of additional interest expense. And then we had the $525 million bond issuance in March. We did reduce our -- and pay off that debt down to $400 million. So the Q4 interest expense was only $11.2 million, which should be more consistent with the run rates that you'd expect to see us have going forward.

Pulling that all together. EPS comes in at 78% -- excuse me, adjusted EPS comes in at $0.78 per share for the year with EBITDA of $192 million. Really, you look at earthmoving/construction, $25 million less in operating income, which equates to about $0.42 per share coming out of that segment. So it created too much of a drag on the rest of the business to overcome the volume shortfalls that we really had in the back half for the year out of that area.

Jumping into the balance sheet. We finished the year at $189 million compared to $447 million at the end of third quarter. In Q4, we used $160 million to repay debt. So again, our bond debt's down to $400 million from $525 million earlier in the year. We did pay off another $30 million of Titan Europe debt. So we're down under $100 million of total debt associated with the Titan Europe acquisition compared to almost $270 million at the time we made that acquisition.

We have put some working capital into Voltyre-Prom, getting that business up and running and where it needs to be as sales progress in 2014. So we've put about $20 million in that business. So really, our capital structure, clearly, is in good shape as we've knocked off about $300 million of debt from earlier this year.

On the working capital side. DSOs have been pretty stable with a decline down to 48 days from 52. And inventory has been relatively stable at 74 compared to 72 in the prior period. So pretty quiet on that front.

And then CapEx for the year. We finished the year at $80 million, and we did get all the major projects in Brazil. And here in Quincy, finished right on time during the year in 2013. So looking forward to the improvements that can bring to us next year.

To wrap things up, in some aspects, it was an off year in our financial performance, and we got hit by raw material and FX and a downturn in earthmoving/construction that wasn't necessarily all expected at the beginning of the year. But in many other ways, it was a positive, productive year for us as we built a stronger company around our good long-term vision and strategy.

I'm going to switch gears here for a minute now. I've been on the road the last few weeks, getting my fingernails and my shoes dirty out in the plants. And I've learned quickly that the shoes that I used to wear as a CFO aren't going to cut it. I need to get some shoes that hold up a little bit better in the plants. But I'm only a few weeks into the transition from CFO to President, so I'm not going to expound a novel this morning. But I had the luxury over the last few years of really developing a good understanding of our company. The ins and the outs, the good and the bad. So I would like to take a few minutes this morning just to share some of my thoughts on that.

When you look at Titan, our inherent strength is that we manufacture a full product lineup of what makes farm construction and mining equipment move. We own an arsenal of dies, molds and equipment that nobody can match in meeting the changing demand of our customers in the marketplace. But what's really impressive to see about our company is the can-do culture that we have. As a company that was literally created from the ashes of a shutdown factory with no electricity and then really has used other companies' castoffs as our primary engine for growth for the past couple decades, we have a genuine belief at Titan that we can do it and that we will get through any challenges that are put in front of us. We dig deeper into our people. I think some of you would be quite surprised when you walk around many, not all, but many of our plants to see a workforce that is buzzing with activity. In fact, to give you a little bit more quantitative evidence. If you look at our revenue per manufacturing employee, you'll see that we're well above any of our competitors in this important metric.

But not just over the past couple weeks in my new role, but really over the past couple years I've always been impressed with what we got out there in our plants. The local management teams, how good they are at really driving change and doing what they do. But on top of that, you'll find a tight and impressive group of technical people. And the knowledge with our engineering and plant maintenance areas at not only keeping the plants running, but moving us forward is really, really quite impressive to see.

Now, all right, understand it all sounds great. But if it's all so nice and rosy, why don't our financial results always match up with these strengths that we have? In my opinion, the answer to that question lies in the consistent application of the soft stuff in the middle. It's building quality products that are supported by good customer service. It's having the right products available at the right time, delivering to the customers on time. It's pricing our products properly to drive volume and profit. It's successfully promoting our products through coordinated sales and marketing efforts. Quite frankly, we can get loose with the soft stuff, and we can end up moving in inefficient, unsynchronized directions. We end up spending a lot of effort fixing situations, and as a result, standing still or falling backwards while we expend a lot of resources into those efforts.

Our company has been through a lot of change the past few years as we've grown globally while operating in this competitive, complicated, changing marketplace that we're in. And in my opinion, it's more imperative now than ever that our company operates as one unified Titan. And when I say that, I don't mean just all our plants around the globe working together. Of course, for them, for us, operating as one Titan is important on a global basis. But it's also within our own 4 walls. It's across departments, it's across functions to improve the communication, improve the information flow, improve the collective knowledge of our team. In turn, this leads to an improved, more effective decision-making process that's based on doing what's best for Titan International.

We've already taken some of these actions in 2013 to drive this type of change, move the company forward. We launched The Grizz Squad. If you see these guys, you'd be absolutely impressed. They're a group of energetic folks running around farms all over the U.S. They know what's going out -- going on out in the field. They're collecting technical performance, they're providing that feedback to our sales and engineering teams, and at the same time, they're promoting Titan products. It's really a great way for us to increase our organization's overall knowledge of what's going on in the real world and make timely decisions accordingly.

We've talked about putting some new IT systems in Brazil and the U.S. And really, that's to just improve the quality of information at our plants, make better decisions, drive efficiencies and build better products for our customers. We've opened up our sales and marketing teams to work across products and geographies to sell products to our global customer base. This cross-pollination of selling a full suite of wheels, tires and track and to be a one-stop shop for our customers is, again, something the competition isn't able to do.

And perhaps, the biggest change is our recent initiative that Morry was talking about with launching the LSW, just the low sidewall concept. It's already out there. It's on cars and trucks. We all feel it every day in the quality and the performance that we get from it. But we're the only company that can quickly and efficiently drive a big change like LSW because, again, we manufacture the wheel and the tire. LSW is significant for Titan in adding value to our end users and locking in the relationship with our customers. But to be successful for the long run with LSW, it's going to require Titan operating as one unified Titan. And I'm definitely confident we can do that.

So to wrap it up, I see lots of opportunities ahead of us to get better and stronger, I'm excited about our prospects and I really look forward to working with the team to tackle those challenges.

With that, I want introduce you to our new CFO, John Hrudicka. You've got to take it from there. John?

John Hrudicka

Thank you, Paul. Good morning. I'm very happy to have joined Titan International.

I thought I'd just share a little bit about my background. I've worked primarily for large publicly held companies: Motorola for 11 years where I was an expatriate in both Hong Kong and Beijing, China; 3Com and Baxter Healthcare before joining Elkay Manufacturing, a privately held family-owned company for which I was the CFO for the past 4 years before joining Titan in February.

I don't think I could've come at a more exciting time. The company has experienced tremendous growth through global expansion and continues to be very aggressive and involved with change.

In the 2.5 weeks I've been here, I've learned a great deal of being part of the year-end process. I will continue to make it my initial focus to learn more about the company's business, strategy and decision-making processes to determine how I can best align myself to bring value to Titan.

While it's been just a short time in the seat, I'm already excited by the opportunities to carry on and contribute further to Titan's success. I'm looking forward to meeting and getting to know each of you.

And with that, I'll turn it over to Betty, the operator, to begin taking questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Schon Williams with BB&T Capital Markets.

Christopher Schon Williams - BB&T Capital Markets, Research Division

Congratulations, Paul, on the promotion. Looking forward to good things.

Paul G. Reitz

Thank you, Schon. Appreciate it.

Christopher Schon Williams - BB&T Capital Markets, Research Division

I just want to see -- I mean, given that we're a good bit through the first quarter already and the fact that you guys are reiterating the guidance, I mean, generally, the first quarter is a very strong quarter from you from an earnings standpoint just seasonally. I mean, do you feel confident that kind of get -- based on what you've seen in Q1, that we should see a fairly strong results -- fairly strong result in Q1 here? Just kind of talk about what you've seen here so far in the quarter.

Maurice Manning Taylor

Well, Schon, let me tell you -- this is Morry -- that as I spoke earlier, there's a situation where I think January was probably much softer than what we expected. But we've seen some uptick starting in February. And I believe that with March coming, we should be in a real good focus now in looking at what our board gets in reference to the budget. We already know that some of our groups have gotten a much better order deck than they had forecasted back in November, early part of December when it was presented to the board, and we expect it to continue to grow. And so when you mention the first quarter, the history goes in the ag that the ag is strong -- the strongest in the first, but there's been some times when it's been the second quarter that became the strongest. So -- but if you average the 2 of them out, it's pretty reasonable that, that's the strong part as you start going. The difference that's going to affect Titan is the difference that we are globally now. So you get -- as time goes, things are going to start balancing, I believe, more evenly through. The situation that -- I'll give you an example. Everybody -- a lot of farmers in the big area of the farming all the way from Illinois, all the way out through Washington, Oregon and in Canada, and these are huge farms, a lot of them have gone into what you'd call the CNH or the track vehicles. But there's on YouTube, there was a fellow at Sackett ranch. He did a demonstration, and this is from one of our big farms that was all rubber, and he buys millions of equipment each year. He -- a friend of his, a farmer in the same business, turned around, was looking at buying a brand-new track vehicle. And he just says, "Well, we should take a look at what I'm running." And the situation is they did a field test with us against the difference in tires, just as Paul told you. And in the end, the guy is buying a 4-wheel drive because the tracks, after he hit about 3,000 hours, you're into major, major costs. But the biggest difference, not only did they want to go faster, which the track was able to do because of the tires that were on the machines from the OE, they couldn't go that fast. They started power-hopping in the field so they had to back it down. It's like a bucking horse. Now you turn around with the new tires, you stay right with it in the track vehicle. And your initial cost is less, your operating cost is less. But the big thing is when you rode this equipment, you save 5 gallon an hour. So we all saw a big John Deere dealer did the same situation, the same test on the biggest farm in Illinois. And then so one guy said, the son of the owner, "Oh, my gosh. When you have 15 of these tractors out there at 5 gallons an hour, you're talking some serious cash." So when you do this, you end up not only with the large farmer deciding what he wants and he wants that equipment, the tires and wheels on his equipment, but you end up with the other farmers around the same thing. And we have been working on this thing for a long time. And now we're starting to get the orders and the recognition for what we're doing with it. Now the problem you have is you have a lot of the big majors. And of course, we're the only ones that make it and they get worried because you have to deal with the purchasing department. And now it's being driven back up through the marketing people. And we expect it to really start paying the dividends, and you're going to see the differential. And what happens if the OEs decide that there's money for us to be made here, too. Let's just make it an option and quit worrying about this other. Now they'll make more money, and we're going to make a lot more money. So I'm pretty -- I think we'll see the proof of this in the pudding as we start going through the first 6 months of this next year. In fact, to tell you right now, they just approved, at Mother Deere, the option to get the 800 by 46 tires for their spare. It's the first time. The only thing is, by the time it took them to react, we've already gotten a 900 by 46 out. And so the farmers want that bigger one. I mean, so I'm excited about it. I'm really excited about it. I actually showed our new shareholder of considerable size. He's not the largest, BlackRock is, but he understood what we were showing him and what was happening. And we're excited about it. So that's all I can tell you. Paul, you got anything to add to it?

Paul G. Reitz

No, no. I agree with you, Morry. I think that the opportunities in front of us with LSW and what we can do in the marketplace are fantastic and we're going to run with it. And I agree with your comments as well about where we see things going in 2014.

Christopher Schon Williams - BB&T Capital Markets, Research Division

And maybe just as a quick follow-up. Could you maybe talk about what's driving some of these units that are seeing orders maybe coming a bit better than budget? What geographies or end markets would that be?

Maurice Manning Taylor

Well, your -- number one, we, not only, Schon, are we doing this from implement wheels all the way through the biggest tractors produced. In fact, this year is the Big Bud is back in the market. And Big Bud is running our dual 1100 by 46 tires. Now when I say a Big Bud, what the hell is that? That's a great big tractor built out in, I believe, Montana. And this is for these huge farms. It's a 950-horsepower 4-wheel drive tractor. Now what you have is if you turn around and look at our friends at Deere, their largest tractor is what you call a 9560, which means it's a 9000 series tractor and has 560 horsepower. Now they're going against the one that's got 950 horsepower. So everything is getting larger. Now I was just up and met with 3 of the largest farmers in Saskatchewan who buy -- the one fellow is buying 6 brand-new sprayers. Now what he's going to put on those sprayers are either -- are 800 by 46s or he's going to put the 900 by 46s. Now those are for he can get out there in the spring. Now if you turn around, as soon as he gets out, they put the fertilizer, the ground is wet, but they're locked in by a period of time. They have to get their crop in there. It does them no good to turn around and worry about the field being wet. So they're going out. They need that to run across the ground as soon as the spring thaw is out. Then they turn around, they take them off and then they have to spray because they're mainly grains. They're canola seed for oil, they're doing oats, they're doing wheat. What they have to do is they have the spray during the season. So up until now, they would run through their field with a 320 by 80 by 54. Now we came out with a tire that is a 320. So now the 3 8 -- we have the 380, that was a standard. But when you reduce the size of the tire in width, we made it tall. It is 86 inches tall. It just fits under the big, huge booms. They got to actually take the -- all the fenders off and they remodify the fenders. This is $400,000 machines they got to do with. But they save so much of the crop. And when you're farming tens of thousands of acres, you're talking a lot of money. And we got -- that tire came up not because our engineering or our marketing thought this up, it came because, as we've mentioned, our Grizz Squad out there and what we started with these farms. And a young farmer turned around and said, "Hey, can you make this narrower and then taller?" Well, now, in fairness to us, we only could make -- only had the tooling on the wheel to the 54-inch because we had to take the rim line and lift the rim line up because we really should put a 58-inch rim on it. All these things are going on. And I'm not talking that we're coming up with 3 new wheels, 3 new tires. As I -- when they went through the plant, my friends, the Doc, Doc R I call him, I just show him. Here's how many we got. When you go show what we've done for the tooling and how much money we spent for it, it's really impressive. And we're going across the line. Even implement tires. You turn around a farmer, one of the big farmers, he bought a truckload of implement tires. Then when we showed him how, instead of spending $35, $40 for an implement tire, why don't you spend $100-and-some, here it was, in the The Wall Street Journal. He's never, ever heard of it. So this is the other thing. You've got to get out and you've got to go to some ungodly places, and that's what we've been doing for the last 2 years. And I think our -- we're going to start getting the fruits of it from this year. Hope I answered your question.


Our next question comes from Larry De Maria of William Blair.

Lawrence T. De Maria - William Blair & Company L.L.C., Research Division

Morry, congratulations to Paul and John. Morry, can you talk about some of the puts and takes, unions, inventory destocking, rubber, et cetera? Didn't really talk too much about the market share. It looks like you guys lost a little bit of the OE and quite a bit in the replacement share, especially to BKT, in the aftermarket. Can you just explain what's going on there and what the plan is?

Maurice Manning Taylor

Yes. Well, the first thing, Larry, is that if you called up the people at Modern Tire and get to the guy at the top, he'd tell you that they end up with 150% of the market share, okay? So they started attacking [ph] their cut. So if you really want to know what the share is, go look. Everything has to be imported. So you got to go through the Customs department. You got to go through there, total it all up, and you'll be amazed that the numbers don't add up. So on the OE side, our OE side is pretty well governed. We know exactly because we make the OE wheels. So I -- have they come into the market? Yes, but I don't consider it earth-shattering. Their market share is not even close to what that's been forecasted at. That's a fact, okay? And if you -- if they start to bother me, then I'll sue India, too. I did it to China. It's the same thing. You can't -- we're a dumping ground. And at this point, I wasn't really worried about it. But there's enough -- you don't file suit when you've got the market and the capacity is being stretched. Today, you got excess capacity and so it'll be a big change, so -- and that's why also you change products. So that's my answer.

Lawrence T. De Maria - William Blair & Company L.L.C., Research Division

Okay. Where do you think -- I appreciate that, Morry. You guys use Modern Tire in your presentation, too. So if you're looking at the legacy import/export data, how do you rectify where maybe the share might actually be because -- if the Modern Tire information is wrong?

Maurice Manning Taylor

Well, I'd say that the -- I think, in the aftermarket, because we're so strong on the OE, I think we dropped a couple points on that because we just didn't come to the market with it, all right? And their pricing was lower than what it -- we were willing to go to at that point. I think that the same is true at our friends at Firestone. I think Firestone pretty well maintained where they were. And there's no question, there's other players in that field. But I think, on the OE side, that we've done pretty good. I do believe that we got hurt when Goodyear said they would close the factory over in France because everybody, all the tractors that get shipped in October, all the tractors for Case Magnum 8000, 9000 and Case 4-wheel drive that are shipped around the world, they've turned around and we produced probably most of all of those tires with a Goodyear brand. And I think that there was a panic that there wouldn't be any Goodyear tires for replacement around the world. And we were limited what we could say because of the situation with our friends at Goodyear. But I believe that we've rectified that now. And I think they found that, even with Goodyear, our contract with Goodyear, if we put the tires on over here, no matter where they are in the world, Goodyear -- if we're not there, like in Europe or Africa, Goodyear will handle the warranty on them, the service of them. So that's pretty much, I think, is what governed that.

Lawrence T. De Maria - William Blair & Company L.L.C., Research Division

Okay. And then you talked about, obviously, the fall and the winter, at the end of the year, about the potential divestiture of, I guess, the undercarriages and potentially some of the mining business and maybe even Bryan, I don't know. But I think we're looking for 1Q decision. Can you just let us know where we stand in that process, if there's a delay, if you're close to a decision or just the update on what you're thinking there?

Maurice Manning Taylor

Well, I think what's happening is, I think, that the study on -- because, as you know, I asked a lot of shareholders what they thought, what they thought if you took the mining group and you spun it off at a separate situation or if you just up and sold it or you just stick it out. And it's like 1/3, 1/3 and 1/3, okay? Well, we found out that under the tax laws, you cannot spin it off at as a tax-free situation, okay? So all of these things are being looked at. But if you look real close, you'll find that we've also paid a tax rate of 42%, which is nuts. So what we've been doing is looking at how to -- we've had PW in. They've laid out a plan. Now it's sent to the legal people. We've got to reset it up so that we can manage, like everybody else, a different situation of what we have to do so that we're not a simple manufacturing company that's going to pay a ridiculous 42% of the taxes. So I believe in the next board meeting that we have with the board members, which will be the end of March it's scheduled, they'll be giving a presentation to approve it and -- or comment or change or whatever they wish to be done. And I believe that, at that point, a decision will be made how to do it. And at that same time, then there'll be probably more information gathered on the whole mining sector, how you can do it. So I expect the first half of the year that everything will be clarified what to do, one way or another.

Lawrence T. De Maria - William Blair & Company L.L.C., Research Division

And when you say there's going to be a presentation to approve it, you mean approve the divestiture?

Maurice Manning Taylor

Whatever the option -- whatever the options are. There's 3 options, okay? I've got 1/3 of you that say, "Hey, it's at the low. Hang in there and build." Hell, Teck Resources was one of the first places we put the big loader tire, the 58 by 63. The only radial loader tire performance. Well, last -- 10 days ago, the tire went past 10,000 hours. That's the longest they've ever, that company, ever got a life of a tire. And it's still got like about 1/3 of its tread left on it. So there's good stories, there's bad, there's horror stories. So we're going to concentrate on where we do real good because I've said before and I said in my comment, you're going to look at 30 to -- I think in the big mining trucks, haul truck tires, you're going to see tires that are going to go from 55,000 down into the 30s. And there's not a lot of money left in those suckers, so -- and that's just because of the amount of capacity that is coming on between now and -- it's already starting up. Pricing is falling like hell. And I think that's -- so as I tell my people, I'm shying away from that. We made a lot of investment, we've learned a lot and we did get our investment back. But I think now it's time to concentrate, like John, on the loaders and what we're doing there. And that's -- the hindrance there has been able to be able to make -- be able to produce the wheel. Contrary to the ag side and the construction, we've been able to turn around -- we make our own wheels there. But in the big stuff, we don't have the equipment, so we have to go load ranks. We've made that investment and we're excited about it.


And your last question comes from Joe Stivaletti of Goldman Sachs.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

I was just wondering, you said that you were still comfortable with your 2014 goals that you set out. In December, you talked about EBITDA like $240 million to $270 million. I just wondered if you could, in your calculations, tell us where you came out for EBITDA in 2013 and just maybe talk a little bit about the bridge from 2013 actual to that type of guidance that you've put out there for 2014 just in terms of maybe the major buckets that will contribute to the improvement you're expecting.

Maurice Manning Taylor

Well, number one, we -- the number we had for the 2013, we kept figuring like with our purchasing department, is the rubber going to stabilize? Well, everything you did at that time to find out, yes. Otherwise, you wouldn't be buying damn rubber out 90 days and putting an LC out and then it takes you 2 months to get the damn stuff, okay? You'd be better off just sticking in the spot market. Well, it's quite obvious that their numbers weren't right. And so as that thing kept banging down, you can just -- that's a big -- a big, big hit not only in our friggin' earthmover, but it's a hell of a hit in the ag. I mean, we buy an awful lot of rubber, okay, natural rubber. So that is what the biggest impact, and if it was not for that, we would have been real close to where we wished, okay, where we thought we'd be for the EBITDA. We turned around and the question was asked last week. People went back, and I appreciate that there are some foreign governments that are promising to buy up the rubber, to maintain it where it's at now. Do I know if that's going to hold? Hell, no, I don't know. If I did, I would either go long or short on the damn thing. But I don't know. I do know that, as I mentioned to Larry, that I have seen and I know what we're doing in reference to our new product and how much better our margins are for that. I do believe where the rubber is that it's probably within very close, it's low. But if it goes down, then there's going to be -- our tire side will end up getting hit again. If it stays where it is, then we're in good shape to do a little better than we thought. Price of steel is up $20, $30 a ton. And is it going to stabilize there? If it does, then our wheel business is going to do a little bit better worldwide. When Paul talked about Australia, he forgot to mention that Australia is total mining wheels. Total. So -- the number. So what happens, you just get your -- when they shut it all down and they just start using what they have on hand, which is also inventory. So they took the hit. So there's a lot of moving parts. And to be able to forecast it, I'm not smart enough for that, okay? That's my answer to you. I should know. I know you -- next question you should ask me, well, if I hired Goldman, Goldman's smart enough. You guys would figure it all out for me or you would turn around and collar everything for a certain fee, correct or incorrect? Yes, don't answer that, don't answer that.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

So could you just verify, though, the -- so we were -- I'm just trying to figure out where -- if versus that $240 million to $270 million goal for 2014, what was your 2013 EBITDA number? We were calculating about $198 million based on the types of calculations you've used in the prospectus. I just wanted to verify that was the way you're looking at it, just so we could...

Maurice Manning Taylor

We're looking at it the same way. I don't put everything together. You got your salespeople, you spend -- this doesn't come off on a paper napkin. The sales guys go through every account, what they can see and go for. Aftermarket's the hardest thing to do. The easiest thing to do is the OEs, all right? So when you go look at the situation, let's just take the green machine, okay? Well the red machine's got a Quadtrac. The Quadtrac originally was built for pulling pan scrapers. But then, everybody -- farmers like to try something different so they get burned. That's what Larry Sackett told me, all right? But Deere doesn't have one yet, okay? So I don't know how Deere does their internal, but I do know, from the dealers I speak to, and one of them is Tom Sloan, that when he did the test against the Quad, it was his customer's Quad. His customer only bought the red piece of machine because it wasn't at Deere. So now his customer is going back to Deere. I have no idea how Deere figures big 4-wheeler is down. Is it because they're going to lose market share to the Quad? Well, then you can ask him the question. We can run right with them and save money. But I don't know where -- I haven't been every place in North America, around the world. So big organizations move much slower than we do. But I know what we're doing and I know the results of what's happened. And my salespeople are looking at it. If you looked at -- we make the standard 800 by 38. If you turned around and you were to say, "Okay, what would be the standard?" Well, I can tell you that one dealer told me he would order every vehicle with 846s. So if he did that, I can tell you that our volume, if it was an OE option, would just explode. And we know it's already on the sprayer, but it's interesting. Some big companies don't talk to the other side either. Tractor boys talk to tractor, and sprayer boys talk to sprayers. So getting through the layer of their bureaucracy is a time-consuming process. So what I have done is I have, personally, I go to these big farms. We got the Squad, The Grizz Squad, out there and they're learning. They've been in the factories -- our factories to learn something. And now we're giving a service that no one else in the world offers. And we're out there and that's what we're doing, okay? And I believe, with the new product, we are going to reap great benefits from it. And that's the only thing I can tell you. The salespeople turn around and they've been out there. That's what they're supposed to do. I've got enough of them. And the sales group put together, then you have Paul's group gets with them. What does it mean, here's where this says. You've got all the wheel people, you've got all the track people. But when you turn around on a wheel, that becomes -- the wheel's bigger because -- and it's more expensive. So this is how they went through it. The track people, which the track people, versus last year, are under $400 million and they were forecasting a little higher. But with what projects they've got going now and they're coming to fruit, it looks like they're going to go substantially higher. So when you put all these together, that's how you come up with your EBITDA.


This concludes our question-and-answer session. I would like to turn the conference back over to...

Maurice Manning Taylor

I just want to say thank you to you there, and thank you to everybody out there. Have a great winter wherever you're at, and we look forward to the action in spring. Talk to you in another month or so. Bye.


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