Titan International (NYSE:TWI) Q2 2021 Earnings Call

0:00 Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on the listen-only mode, and we will open the floor for your questions and comments after the presentation. If you should need assistance, please dial star zero, and an operator will assist you. It is now my pleasure to turn the floor over to Mr. Todd Shoot, Senior Vice President, Investor Relations, and Treasurer for Titan. Mr. Shoot, the floor is yours.

0:32 Thank you, Grant. Good morning and welcome everyone to our second quarter 2021 earnings call. On the call today, we also have Titans President and CEO Paul Reitz and Titans Senior Vice President and CFO David Martin. I will begin with a reminder that the results we are about to review were presented in the earnings release issued this morning, along with our Form 10-Q, which has also been filed with the Securities and Exchange Commission this morning. As a reminder, during the call, we will be discussing certain forward-looking information, including the company's plans and projections for the future that involve risk, uncertainties, and assumptions that could cause our actual results to differ materially from the forward-looking information. Additional information concerning factors that either individually or in the aggregate could cause actual results to differ materially from these forward-looking statements can be found within the safe harbor statement included and many more.

1:36 In addition, today's remarks may refer to non-GAAP financial measures which are intended to supplement but not be a substitute for the most directly comparable GAAP measures. The earnings release which accompanies today's call contains and other quantitative information to be discussed today as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures. Today's earnings release is available on the company's website within the investor relations section under news and events. Please note today's call is being recorded. A replay of this presentation will be available soon after the call within the investor relations section on the company's website. A copy of today's call transcript will be made available on our investor website soon after the call.

2:27 I would now like to turn the call over to Paul.

2:29 Thanks, Todd, and good morning. We saw this year get off to a good start in the first quarter, and at that time we felt convincingly that our business was moving in a positive direction in a number of ways. Our second quarter results illustrate that not only have we seen those trends continue this quarter, they have improved. David Martin, Maria Cecilia La Manna, Paul Hawkins, Anthony Eheli, James Pach, Max Narancich Overall, our second quarter performance was one of our strongest in a number of years as we did a really good job battling through the heavy noise that exists in today's operating environment that really is challenging for many, if not all, industrial companies.

3:20 Just think that we've been able to produce an additional $215 million worth of products in the first half of this year for our customers, demonstrating our ability to adjust quickly to meet the growing needs of our important customers. Our strong Q2 results grew on the momentum from Q1, and now at the mid-year point has put us in position for 2021 adjusted EBITDA to be north of $120 million. So diving further into our performance, both our ag and our earth-moving construction segments experienced strong sales volume growth in the second quarter. Our end markets continue to look very good, and we expect the strong demand levels we have seen the last couple periods to continue into the back half of this year and then really beyond into next year as well. We feel that ag continues to show good, positive signs of current and longer-term strength.

4:08 What is important for us is that the primary important drivers behind the growth in ag continue to show signals of solid support. For example, the continuing tight inventory levels in both new and used equipment has brought large ag equipment prices to very high levels, if not record levels. In Titan's North America business, we are seeing growing momentum in large ag where orders have increased throughout the quarter, and we believe that this trend should keep moving in a further positive direction as fleets are aged and the large ag equipment market is still roughly 25% below long-term averages. Our smaller ag customer base has been really good the past few years, and so far in 2021, many of those customers have seen their inventory levels depleted to really low levels, again, if not record low levels.

4:54 This means these dealers will need to rebuild their inventory, which is going to increase our production demand above retail sales levels for 2022, and should keep the momentum going again in small ag as we look into the future. Again, these are just a few from a number of indicators to illustrate the core strength in the current ag market and support the case that ag will have solid longer-term growth. So moving from ag and looking at our earth moving and construction segment, we have seen demand continue to be above initial expectations with sales growth over 57% year-over-year and an increase of 7% compared to our first quarter, which again, we felt was a good quarter to start the year. As we have stated before, a large percentage of our EMC sales comes from our undercarriage division, ITM.

5:43 ITM has a good, balanced exposure to global markets and really something that we have worked hard through the years to build. We saw solid growth this quarter in construction revenues from both OEMs and aftermarket, and this is coming primarily from Europe and the Far East in our business. The word of the month seems to be transitory, as the debate rages on if inflation is transitory or not. A quarter ago, we thought it was crazy that steel was around $1,500. Well, guess what? It is now floating around $1,800 and appears to be going even higher. This is just an example of the facts of operating in today's post-pandemic world, where costs are rising in everything from raw materials to labor and logistics. Overall, this quarter, Titan was able to balance our pricing with these rising costs, and we continue to believe that we have the ability to pass through the increase in costs.

6:37 I do want to add another comment specific to Titan that we have a long, strong history of being very good at managing costs, and you see that in our reported SG&A costs. However, going a step further, we also have a strong culture around managing our operational costs, and we will continue as a management team to work hard to manage our overall cost structure, which is definitely a benefit in times like we're in right now. David, we'll spend some time going through the financials with you, but wrapping things up in conclusion today, I'd like to state a few things regarding the actions we have taken to improve our balance sheet, which includes our important long-term debt refinancing that took place in April. These actions have put us in a good position to manage the current and future growth of our company.

7:26 These are certainly challenging times that we're operating in, but we see in front of us a market with robust and strong broad-based demand. It really bodes well for this year and clearly beyond into next. We believe Titan is in a good position with our global production capabilities and our strong product portfolio to deliver superior value proposition to our customers, and we will be able to benefit from these stronger markets. We are committed as a company to increasing our capacity in key locations and we continue to drive our product innovation to be a strong partner to our customers. Our Titan team is working hard and continues to work hard to effectively deal with the supply chain and labor challenges. And at the midway point of the year, our business is performing very well with our Q2 results really shining bright.

8:13 Our order books are solid and there are continuing positive signs in our end markets. This puts Titan in a good position to post 2021 adjusted EBITDA north of $120 million. On top of that, we see a path forward to future growth for next year. I'd now like to turn the call over to David.

8:30 Thanks, Paul, and good morning. I appreciate everybody joining us today. The second quarter continues to show the power of the changes that we have made at Titan and how we can accelerate our financial performance improvements with sales growth. Before I get into the details, I want to highlight the most important aspects from this quarter's performance. First, sales grew over 53% for the quarter from last year in Q2. Of course, this growth has inflated somewhat as we were deep in the initial throes of the pandemic last year in the second quarter. If you go back to the second quarter of 2019, we grew a healthy 12%, or 19% if you exclude the impact of currency fluctuations. All of our regional operations across the segments experienced significant growth in the quarter, leading to the strongest sales quarter since Q2 of 2014.

9:24 Sales for the first half were up 34% from the first half last year and up 5% from the first half of 2019. Again, 12% growth if you exclude the impact of currency. Again, this quarter, Our growth between ag and the earth moving and construction segment was very balanced. Both grew 57%. The consumer segment reported an increase of 15%. Our gross profit level was significantly improved at $61 million with a margin of 14% up from 10.4% last year. And it increased sequentially from the first quarter margin of 13.2%. Excluding the impact of the bond refinancing costs and FX losses in the second quarter of $16.8 million, net income for the quarter was $14 million, and our diluted earnings per share was $0.22.

10:16 Adjusted EBITDA for the quarter was $37 million, representing the strongest quarterly performance for us since 2013. On a trailing 12-month basis, adjusted EBITDA stands at $95 million as of this quarter. Finally, our cash position remained stable again this quarter at $96 million, a very healthy level for us, despite the continuing investments in working capital while we have been very measured in our inventory management to date. Now I'll get into more of the detail for the quarter. The sales growth for the quarter versus last year stands out as a highlight, but it's also important to note that sales for Q2 jumped nearly 9% sequentially from the first quarter this year. on continuing increases in demand across all of our markets. Currency was a boost to sales this quarter of approximately 8 million, or close to 3%, versus a year ago, with the strength in the euro and the pound driving the majority of the increases. Volume was up year over year by 33%, and we also had favorable pricing mix of more than 17%.

11:20 As the cost of materials have risen during the period requiring customer pricing actions, Gross profit for Q2 was $61.5 million versus $31 million in adjusted gross profit in the second quarter of 2020, representing a 99% improvement. Our gross profit margin for the second quarter was 14% versus only 10.8% last year after adjusting for an asset impairment. Just a quick report on our progress this quarter in terms of production and cost. We continue to take up our production levels during the quarter, which reflected moves to hire and train staff to meet the demand that's coming at us. Again, we are working really hard to calibrate production levels to the demands that we see coming. Raw material and logistic costs continue to rise across all market sectors, and as you can see in the numbers, we're putting through appropriate price increases to customers to manage the situation.

12:14 I said it last quarter, but the timing of impacts related to procurement and ultimately the flow through to production can differ from the price changes that we're making with customers. Obviously, the objective is to align everything from a timing perspective as closely as possible over time. There can be quarterly variations, however. Also, while we see our gross margin dollars protected, our margin percentages can vary. We also continue to fight hard to ensure production remains smooth given the supply chain shortages that we're seeing from steel to fabric to polymers. Our supply chain leaders have done a fantastic job today, and they will obviously continue this relentless exercise of keeping us moving efficiently.

13:04 Now to our segment performance. Our agricultural segment net sales were up 84 million, or 57%, from the second quarter last year, which makes it the strongest quarter for the segment in the last eight years. Currency impacts were almost negligible in this segment, with only 0.4% negative impact. Volume in the segment was up 36%, and we had an increase in price and mix of 22%, again, relating primarily to the turnaround in raw material costs and other costs associated with production and the need to increase customer pricing accordingly. The key driver to the volume increase related to OE sales across the business, while aftermarket sales remained very solid. The agricultural segment gross profit of the second quarter was $35.3 million, up from $15.6 million in the prior year, representing a 126% improvement. The gross margins in Q2 were 15% for ag, which was a significant improvement from the margin produced last year of only 10.6%. Again, this is reflective of the volume and the effect on our efficiencies in our plants, along with the continued strong cost actions that we have taken over the last year.

14:19 We're definitely seeing the effects of higher raw material costs in the second quarter while we were able to manage the overall effect on our profitability in dollars through our pricing actions. Much like our first quarter result, we saw significant performance improvements across all of our geographic operations across this segment. Our earth-moving construction segment exceeded expectations for the quarter as the construction markets experienced accelerated recovery after the challenges that were taking place in the global construction markets. Again, that was primarily due to the early days of the pandemic last year. Overall net sales for the EMC segment grew by 64 million, or 57% from last year. On a constant currency basis, net sales would have risen 50% for the quarter versus a year ago, again, as the euro and the British pound currencies strengthened and get to the U.S. dollar. Volume was up in the EMC segment by 38%, while the impact of price and mix was positive at 11%.

15:21 While less impactful than in the ag segment, rising raw material and logistics costs were combated by pricing actions. All geographies experienced year-over-year growth during the quarter, with the largest growth coming from ITM's undercarriage business, which grew 55%, excluding FX impacts from the second quarter of last year. ITM's primary growth came in Europe, Asia, and Latin America. Gross profit in the earth moving and construction segment for the second quarter was $22 million, representing an improvement of almost $10 million, or 77% from the adjusted gross profit in Q2 2020. As a reminder, we took a small impairment of $1 million in the second quarter last year in this segment. Gross profit margin in the EMC segment was 12.6% versus an adjusted gross profit last year of 11.2%.

16:14 Again, the largest driver of our increased profitability came from the increase in sales in ITM's undercarriage business. Moving over to consumer, the segment's Q2 net sales were up 15% compared to last year. For the first time in a while, currency was a non-factor, with a positive tailwind of 1.2% in the quarter. Pricing and mix impact was a positive factor of 17%, reflecting our ongoing raw material and other cost increases. Volume was down in the quarter by about 3%. As our focus has been on our key AG and EMC customers, we have shifted some production from the consumer products during the period. The segments gross profit for the second quarter was $3.9 million, a healthy improvement from Q2 2020. Gross margins were also healthy at 12.7%, which was an improvement from 10% last year.

17:10 reflecting some positive mix changes in the products that we sold. SG&A and our R&D expenses for the second quarter were $35.1 million, down $1.5 million from last quarter. Second quarter SG&A and R&D costs increased from a year ago by $4.5 million. Again, due to the pandemic last year, we had taken some very strong spending control measures in the quarter last year. This year's expenses included some variable compensation costs reflecting the increase in sales and profitability during the quarter. Most importantly, SG&A and R&D expenses as a percent of sales declined to 8% versus 10.7% last year in Q2. First half SG&A expenses are 8.5% of sales.

18:04 We recorded tax expense of $2 million during the second quarter, in line with our expectations. This reflects taxes on increased income from certain foreign jurisdictions, including Latin America, Turkey, and Asia. We remain on track to see between $8 and $10 million in tax expense for the full year. All right, so let's move on to cash flow. Our overall cash balances remain steady this quarter at $96 million. Despite this sequential growth in sales, as our profitability increased significantly and we needed to invest in inventory to support our second half expectations for sales, our operating cash flow for the quarter was almost breakeven at an outflow of $1.5 million. Our operational teams were very effective in managing working capital this quarter.

18:52 Our accounts receivable and accounts payable growth effectively offset each other again this quarter. We had growth in inventory in the quarter of approximately $32 million. About half of this increase in the quarter came on higher raw material costs, with the other half coming in volume, mix, and currency changes. When you boil it all down, the overall growth in inventory during the quarter was 9.2%, with less than 5% coming from volume, which shows the effectiveness of our working capital management discipline. With continued solid focus, I believe the cash flow will increase through the year and we can get the breakeven to positive and free cash flow for the full year. Of course, this will be somewhat dependent on how we view our needs for inventory as we head towards 2022.

19:38 In any event, any inventory investments will be strategically focused as we plan for business growth. Capital expenditures for the second quarter were $5.8 million, which was in line with quarterly historical levels for CapEx spending. As of mid-year, we stand at $14.6 million in total CapEx. CapEx spending will be higher in the second half as we have a number of ongoing projects that are focused on facilitating more efficient operations and reduced costs. We have some investments, particularly in Brazil, that are needed to expand our production capacity to meet the demands of our customers. We also continue to focus on product line innovation, which requires some tooling investments as well. I continue to anticipate the spending for the full year to be around $35 to $40 million.

20:26 We talked about the bond refinancing that took place in April, so that is not new news. But it is worth mentioning as it was a very significant step forward for Titan. It's very important for us to take advantage of the opportunity to refinance and secure our financial stability for years to come. So on April 22nd, we were able to close the new 7% bonds, which will now mature in 2028. Overall debt level at quarter end increased from March by $15 million. All of this increase came on revolver borrowings related to the refinancing costs of the bonds. We borrowed approximately $19 million to pay the fees and the call premium at closing. Short-term debt at the end of June was up slightly to $34 million. Most of our current maturities at the end of the period relate to foreign credit facilities and term loans, which can be rolled over and extended if needed in the coming year.

21:19 Therefore, I don't anticipate any significant cash requirements relating to debt in the near term. Our current domestic $100 million ABL credit facility is also secure with the maturity of 2023. At quarter end, we had borrowings of $29 million. None of the current borrowings relate to any working capital needs in the business. With positive operating cash flow expectations in the near term, we should be able to pay down these borrowings over time. That said, at the end of Q2, we had headroom in the capacity on the facility of $59 million after you deduct current borrowings and outstanding letters of credit. We also had sufficient revolver capacity in Europe. This gives us tremendous flexibility to run the business. Overall net debt increased in the quarter to $391 million.

22:06 Again, I expect to trim that number through the year as cash flow increases and we're able to pay down the revolving credit lines. It is important to note that our debt leverage at the end of June based on trailing 12 months adjusted EBITDA has decreased to 4.1 times, which is nearing our target leverage of less than 4 times EBITDA. Let me wrap up with a few thoughts on the second half of the year and some concluding remarks. First, our view on demand is very strong, as Paul indicated earlier. At the same time, we have certain seasonality and variation in our business, where traditional summer holidays and vacations throughout Europe and the traditional November and December holidays that we have. And that has some impact on our production schedules and our performance.

22:53 Those factors will be present in the second half of 2021, notwithstanding our continued strong sales expectations. The future remains bright for us, and our leadership team is very focused on managing the opportunities and the challenges that are in front of us. The first half performance demonstrates that commitment. We have a lot of work ahead of us as the landscape remains volatile, and I look forward to sharing our continued progress again next quarter. So that sums it up, so I'll turn off the call back to Grant for any questions you have. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

23:40 To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question today will come from Steve Karazhani with Sidoti. Please go ahead.

24:01 Good morning, everyone. Good morning. Paul, twice you said you're on pace for north of $120 million in EBITDA, which to some degree would seem to conflict with David's comments about typical second-half seasonality. And I'm just trying to get an idea of were you simply doubling the first-half number, or is that your actual expectation north of $120 million in EBITDA?

24:29 First off, David and I are both aligned on the positive outlook that we have for the company for the rest of this year. My comments about being north of $120 million really reflect the confidence we have in our end markets and the strong position we have with our order books. We certainly feel good about the results we have through the mid-year, especially the performance in the second quarter. As we look forward to the back half of the year, I've got a high degree of confidence. Both David and I mentioned our Titan team is going to work hard, has been working hard, and is good at dealing with challenges. As we look into the back half of the year, you are correct, Steve, with your comment. We do have seasonality. There's plant maintenance, there's vacation, there's holidays.

25:14 There's typical issues that will impact our production days in the back half of the year. We are working and we will mitigate the plant shutdowns to the greatest extent we can so we can continue to produce as much product as possible for our customers. So really it's I think where we're at to be able to say today that we look like we'll be above north of $120 million just expresses the confidence we have in our business overall. So I think I think both David and I are in alignment on that.

25:46 So the only thing that is based on real forecasts that we're operating within the company, not just a doubling of the first half.

25:59 That's fair. So how much of that, because certainly we've talked a lot about and you've commented a lot about the challenge you had was recruiting training and then retaining the labor. And clearly you've done a great job of that so far. Where would you say you are with that? Do you think there's more to come? Do you think you could be doing more volume in a quarter if you had more labor? And how can you get this sort of outlook on the labor side?

26:29 I mean, look, it's not as simple as putting a Help Wanted sign out and people walking through your door. I think we've done, and the results support that, a really good job. I mean, if you look at our domestic hiring, David, you can confirm this, I think we're up like 14% for the year. That's right. You know, overall as a company, we're up somewhere around 11%, 12%. I mean, I think in today's challenging labor market, as you highlighted, I think we're doing a really good job. You know, we're making the investments to recruit people. We are really committed as a management team to deal with the challenges of retaining people. And I think those numbers support it. It's not just our sales, but again, you look at our headcount levels. Thank you for joining us today.

27:42 and many more.

27:43 If I could just get one more in. Obviously, CapEx this year, you need to invest in the plants. I'm just trying to think about longer term what your thoughts are on cash flow and debt repayments.

28:00 Also, keep in mind, a lot of our debt relates to term loans as well as credit facilities outside of the United States. We are committed to paying down on the AVL facility in the U.S. and moderating our debt levels within the international operations. So we will continue to do that with cash flow. But it's obviously not a very significant number in the first place. The majority of our debt is obviously with the bonds themselves. It won't be necessarily big numbers when you see pay down of debt, but you will start to see that as we go through this year, next year.

28:45 Great.

28:46 Thanks so much, everyone. Appreciate the time.

28:49 I just want to add one thing. You talked about CapEx just a minute ago, and I think that maybe we'll play into that to a certain extent. We will continue to invest in the operations, 35 to 40 million of total CapEx this year. Now, I think as a percent of sales, that's in a pretty good place. And I think as we continue to see growth, I think we'll stay as a percentage of sales pretty close to this. But we will moderate up to a certain extent if we need to based on where we see the needs to expand capacity or just keep our plants running more efficiently. Thank you.

29:36 Our next question will come from Kirk Bloodkey with Imperial Capital. Please go ahead.

29:45 Good morning, guys. Can you hear me? Yeah, sure. Well, congratulations on some very, very strong execution in a challenging environment. A couple questions. A big picture. Does this environment give you an opportunity to make some strategic moves on the M&A front to boost capacity or simplify the product offering? On the capital structure side, does it give you an opportunity to issue some shares, maybe term out some foreign maturities?

30:31 You're getting some heavy questions there, Kirk. Certainly on an M&A front, it's difficult to predict where that future looks. We, and I believe I'm speaking on behalf of the board as well, do see a future where there's some opportunities out there that would be good for Titan, but it's difficult to predict exactly where that goes in the future. I will say this, our capital structures overall with what we've completed in April and how well we've managed the balance sheet and working capital, as David has highlighted, You know, puts us in a very good position to handle growth for the future and make the key investments where we need to in CapEx to do it strategically to increase capacity in those target markets where we see growing demand and we see the importance of what we do being critical to our customer base.

31:21 We are committed to doing that and we have a plan to do that. We will continue to invest aggressively in product innovation. Whatever investments are needed there on the engineering front, the tooling front, we feel that that's a strength of Titans that we will continue to invest in for the future. As I look at our capital structure, I feel very good about where it positions us, regardless of M&A, for who we are as a company to continue to meet the growing needs of our customers and do it, most importantly, on a local or regional basis where it's We can give them a supply chain that they can feel confident in.

32:03 That's helpful. Thank you. On a prior call, you mentioned that you were asking customers to sign long-term agreements. How's that going? And can you elaborate on what the benefits of those agreements to the extent you can get Thank you for joining us today.

32:53 We will continue to pursue further discussions with customers because in my opinion, the long-term agreements really solidify the relationship between our customers and Titan. That's important. I'm going to go beyond just the volumes and maybe some of the simple things, but it really says to each other that we're committed to David Martin, Paul Hawkins, Anthony Eheli for a number of years. Again, we share an end desire that our products go and meet the needs of the same end users, the farmers, construction operators, mine operators around the world.

33:47 I think that long-term agreement just says, hey, we're both in this together. From a volume perspective, it helps us with our scheduling and our planning to know that we have I certainly can't say there's a negative to that at all. The more we can secure the volume and understand what that schedule looks like, the more efficient we can operate our business. I do look forward to having continuing discussions with our customers to have more long-term agreements.

34:20 That's helpful. Thank you. Conversely, are your vendors asking you for long-term agreements?

34:27 Yeah, if you're going to do something like an LTA, it's got to be a mutual relationship. So, yeah, it's a two-way street.

34:38 Great. And then lastly, I know you refreshed your ratings before you did your bond deal, but that Moody's rating is looking a little stale. Is there any chance of getting them to revisit?

34:52 Well, this is David. I will... Thank you. Great quarter, guys. Thank you. Thanks, Kurt. My next question will come from Alex Blanton with Clear Harbor Asset Management. Please go ahead.

35:29 Hi, good morning. Before I ask my question, I just want to mention that Seeking Alpha misreported your number at 6.21 a.m. saying that it was the non-GAAP earnings were 29 cents. That's, of course, your six months They reported it as the quarter instead of 22 cents.

35:58 We don't have a lot of power on what they report.

36:05 Right. They haven't corrected it yet. Is that the only guidance you're giving for the quarter, I mean for the year, the EBITDA?

36:17 That's correct.

36:18 Yeah. So we have to go from there. To what extent were there headwinds, you said, on labor? Were they really affecting your production rates?

36:36 Our order books are very strong, Alex. To the extent that we can hire people, we're going to put them to work and meet the growing needs of our customers. I would look at it this way, kind of going back to what we had talked about earlier. I mean, I think we've been very effective in hiring. You know, when you look at domestically, what you read in the headlines about the challenge with the labor market, I mean, we're up 14% in our headcount year over year. So we've been very good at recruiting and retaining people. What we are doing for our customer base is making those investments and the commitments to do that, to go into the market. Again, it's not as easy as just saying you need people. You've really got to recruit them into the business. And so I think we're doing a good job. We will continue to do that, and we'll probably be talking about hiring and labor for the next 12 months, and that's a really good sign.

37:28 That tells you that our order books are full and we need to build more products.

37:33 Well, I guess my question was, could you have sold more had you been able to hire more? Was that a headwind in the quarter? Any idea how much?

37:49 No, that's very challenging to say. I mean, that's a big what if.

37:53 Okay, the same question on the materials side.

38:00 Certainly there are some constraints with respect to the supply chain, but I would tell you during the quarter it probably was not as much as – it wouldn't have been anything that really truly put us back. Things in the second half of the year will be more challenging, and so we're going to be fighting hard through it just as we did in the second quarter. The goal is obviously to keep things flowing efficiently, but you can never guarantee that.

38:29 Man, Alex, we're just too busy to play what ifs. I mean, we got our heads down. We're showing the work every day and putting in the overtime and building as much as we possibly can these days. And I think we see that continuing for a number of periods ahead of us.

38:46 Could you give us a quick rundown on foreign business, specifically Europe, South America, and Russia? How are they doing?

38:57 I would tell you that if you look at comparative performance, all of them are up very, very significantly. To the levels in Europe, our European wheel operations grew 100% this quarter. Russia grew quite nicely, again, double-digit growth. And Latin America grew close to 100% as well.

39:21 That's in what? Metric? 100% gross?

39:27 In sales. Yeah, sales.

39:29 Okay.

39:30 And in Russia, you were planning to sell Goodyear tires made in Russia into Europe. Are you able to do that?

39:41 Well, our Russian plant has been doing a really good job taking Titan branded tires into the local CIS market there. We've expanded on just the local brand that had been in the marketplace for a number of years and really have added the Titan brand into the market. We are exporting some Titan branded products out of there. To be honest with you though right now, I mean the market is really good over there and we have not We're not needed or have necessarily the capabilities right now to expand beyond the local market. We're doing everything we can to meet the needs there. What we're doing to meet the needs in Europe is bringing in products from other suppliers. Some of it's offtake out of other countries. Some of it's coming from North America. Some of it comes from Brazil.

40:29 We are working on expanding the Goodyear brand in Europe, to answer your question. It's coming from multiple outlets. Again, some Titan manufacturers, some non-Titan manufacturers. We have some really good partners that we're working with on that. But when we look at the Russian plant these days, it's doing a great job servicing the markets we need in the service in that region.

40:51 Okay. And finally, could you characterize the state of the aftermarket, your sales there?

41:01 The aftermarket is really good. It's one of Titan's strengths over the last five years in some tough OEM conditions. We have a very strong distribution base, dealers that we've really built a strong, solid relationship around serving mutual customers, and we continue to see the demand for our products within the aftermarket space continue to grow. As we've been talking about, we are going to continue to increase our production base and really meet the needs of our aftermarket customers is certainly a big part of that.

41:36 Okay, thank you.

41:38 Thanks, Alan.

41:39 Thanks, Alex. Our last question will come from Brian Derivio with Bayer. Please go ahead.

41:50 Good morning, gentlemen. A few questions here. Can you give me any sense, and this has been touched on a little bit, can you give me any sense of what your current capacity utilization is in your plants?

42:04 Well, it's going to obviously vary by plant, but I would say from a practical capacity standpoint, very high numbers at this point. Labor is more of a constraint than really physical, mechanical work. I'd have to go through a litany of different things, but I would say that it's at very high levels at this point.

42:30 I guess maybe put that another way, how much more volume room do you have before you start running into capacity constraints if you had labor ways sort of fixed?

42:43 Again, the answer to that is going to vary by product and by region. It's difficult with The manufacturing base that we have across multiple platforms, we certainly believe, not believe, that's the wrong way to put it. We know that we have the ability to continue to grow quite extensively beyond where we're at today. So as we continue to add labor, we are doing it in markets right now where we are not constrained from a production capacity perspective.

43:14 Okay, very good there. Switching gears on war materials, it appears as if many wars have just been sort of one way. But as you know, and it's not impacting you yet, but there have been rapid reversals in certain war commodity streams. How should we think about how well is the company protected if, let's say just for argument's sake, there's a short correction in steel costs?

43:43 You mean if steel starts to drop? Correct. We have a lead time with the types of steel that we buy. We're managing that very carefully, just trying to recognize where steel could go. We look at those futures every single day. We manage the amount of steel that we actually procure over a period of time. We're not 100% protected. We're never going to be 100% protected, but I think we pitched our vets the best we can during this very rapid increase in demand. I'd love to actually have more steel in the plant to operate, but we're operating right at the right level that we need to manage this situation in the second half of the year, as well as what we expect for the first quarter of 2022 at this point.

44:38 Okay, that's helpful. And then, you know, you mentioned that you're approaching your goal of, you know, under four times leverage. I guess two-part question there. How does your capital allocation thoughts, you know, change when you get below four times? And given sort of the strength in the equity markets, how are you thinking about IPMs?

45:05 Well, first of all, capital allocation at this point is obviously continuing to service debt due to the investments that we have to in our plants. It's not significantly different than what we have been doing over the last two years. I think given the types of debt that we have, it's kind of easy to move that along if we need to. I'll defer to Paul on any discussion about ITM, but I think ultimately, You're not going to see a dramatic change in how we've allocated capital outside of being opportunistic in the M&A market and taking care of things that could be strategic for the future of Titan.

45:44 How I see ITM today is the demand is really good and the business is performing well. We've got to continue to increase our capacity in some key locations there. and many more. David Martin, Maria Cecilia La Manna, Paul Hawkins, Anthony Eheli, James Pach, Max Narancich David Martin, Maria Cecilia La Manna, Paul Hawkins, Anthony Eheli, James Pach, Max Narancich An ITM perspective regarding capital allocation, again, we'll see what the board thinks of what we can do in the future.

46:30 But right now, I think the present is really where we're focused and things are performing very well. We've got a lot of customer demand out there that we've got to work every day to go meet.

46:41 So we should be thinking about IPM going forward as sort of part of Titan and, you know, for the time being, I know you need to qualify, but for the time being, probably not looking to divest that business or IPO it or whatever.

46:59 I mean, for the time being, we've got to build as much product as we can for our customers, and that's really where our focus is at. You know, IPM is, again, it's a good, strong, performing business, and David Martin, Paul Hawkins, Ladies and gentlemen, this will conclude our question and answer session. I'd like to turn the conference back over to Mr.

47:45 Reitz for any closing remarks.

47:47 Well, I just want to say thank you to everybody. Appreciate your time and your attention this morning and look forward to talking to you at the end of Q3. Thank you. Have a good day. The conference has now concluded. Thank you for attending our day's presentation. You may now disconnect.