Titan International (NYSE:TWI) Q4 2020 Earnings Call

0:00 Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants have been placed under 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 Todd Shoot, Senior Vice President, Investor Relations, and Treasurer for Titan. Mr. Shoot, the floor is yours, sir.

0:31 Thank you Rocco. Good morning and welcome everyone to our fourth quarter 2020 earnings call. On the call with me today we also have Titans President and CEO Paul Reitz and Titans Senior Vice President and Chief Financial Officer 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-K which has been filed with the Shares and Exchange Commission. As a reminder, during this 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 in today's earnings release attached to the company's Form 8K filed earlier today.

1:26 as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC. 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 financial 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 copy of today's call transcript will be made available on our website. I would now like to turn the call over to Paul.

2:11 Thank you, Todd.

2:12 Good morning, everybody. You know, we're only at March 4th, and this year is already looking like a completely different story compared to 2020. Late in the fourth quarter, we started to see demand trend in a positive direction, and that's really evidence that our Q4 results exceeded expectations. And 2021 has really kept on rolling as we've seen the U.S. Farmer's Sentiment and Farmer's Capital Investment Index levels spike to all-time highs already. The $25 billion in government payments late in 2020 certainly helped move these indexes in a favorable manner, combined with, of course, strong commodity prices with corn hovering around $5.50 and soybeans up above $14 billion. Another significant positive indicator for 2021 is the low levels of inventory that exist in most channels, especially in the dealer networks.

2:59 Therefore, a market uptick at the retail level should get that additional boost from inventory replenishment. It's definitely great to see ag moving in a positive direction in 2021, and it seems that the market upturn should have some pretty good legs on it as well. Looking back a year ago, I don't think there's many people who thought the coronavirus would turn into a global pandemic that impacted really every country and every facet of society. I do want to take a second and reiterate our Titan team did an excellent job working hard to continue safely operating our businesses during the pandemic, and our 2020 performance positively reflects those efforts of our team around the world. It also demonstrates the strength and resiliency of our people and our products.

3:44 During times like that, those items really show, and again, it's our people and our products that make Titan unique in our industries. However, I think it's important to go a step further with those comments to give credit for how well Titan remains focused on our imperative We really had at the beginning of the year to improve our financial position. It was clear we didn't enter the pandemic in a position that allowed us much room for error. Our 2020 results clearly illustrate that Titan has strengthened our financial position and we were able to make those improvements while dealing with the onslaught of the challenges from the pandemic. I think the success of that is seen in our 2023 bonds, which have been trading around far in recent months. It also gives us an opportunity to explore the potential of a refinancing.

4:29 Now let's take a step back and look at the fourth quarter. We finished the year with a significant turnaround, especially in ag, as demand for many of our customers continued to strengthen as the quarter progressed. During the quarter, our adjusted gross margin of 11.8% was the strongest margin achieved over the previous 10 quarters. Also, our adjusted EBITDA over $17 million was our highest since the first quarter of 2019. Along with these gains in financial performance, Our continuing efforts and focus to improve our financial position resulted in a strengthening cash position along with net debt. We delivered our sixth consecutive quarter with positive operating and free cash flow and reached levels of cash and net debt that haven't been achieved since the end of 2017. Now, as we look deeper into the business going forward, the positive trends in ag that we saw in late 2020, especially in North and South America, have only increased during the first couple months of 2021.

5:25 In North America, the growth in our small ag customer base continues at a rapid pace as we've seen our customers increase orders to address the need to restock inventory on top of their already expected growth this year. Large ag is historically a strength of Titans as our plants and tooling are well equipped to handle the volume and complexity of SKUs related to that business. The signs are forming that suggest large ag is beginning to move in a favorable direction as well. The challenge for us, which is similar to many manufacturers these days, is that coming off the lower production levels of the pandemic, the surge in demand has created a high degree of volatility for our customer base and for Titan as well. We are dealing with the constraints in labor as we are hiring rapidly.

6:10 We're dealing with raw material issues pretty much all over the map, and we're dealing with logistical challenges that pertain to shifting containers and trucking that have sprung up as of late. Titan has, and I want to make this clear, Titan has a long history of being flexible to adjust to market volatility, and we have the robust production capabilities that can meet the needs of our customers. In order to do that, we are hiring aggressively at all of our ag and wheel and tire plants in the U.S., along with South America, and we will continue to do that throughout this year. However, there is a training curve to onboarding people into our operations. Therefore, we need to hire systematically during the ramp-up process to mitigate our training liability as our positions do require a vigorous training program.

6:57 The flexibility and scalability in Titan's production base is a core strength, and we do expect to earn a good return on providing this to our customers during the times that we are in and currently entering deeper into. Anyone who has seen our plants, especially our wheel, our tooling for our wheel business, would understand what I'm saying. We are currently in discussions with major OEMs on long-term supply agreements that would be a win-win for both sides in today's changing world. Now, turning over to South America, we've seen the market really jump to life in Q4 and then really proceed to keep on running into 2021. Since we acquired Titan Brazil in 2010, we've consistently invested in large radio ag and OTR capacity that at the time of the acquisition was really only a small part of the portfolio. We've seen the rewards from those investments through the years as we've significantly grown our output in both those areas along with expanding our market share. The reality is that this rapid increase in orders coming off the back of the pandemic means that we do have to allocate our production across our customer base. We will continue to invest in capacity, and we are investing in capacity, I should say, in 2021. And we'll do that through both hiring, but as capital investments as well, as we do believe the favorable volume trends that we are seeing will continue.

8:21 Looking over at earth moving and construction, The full year 2020 results show a drop in sales driven by the pandemic. But I do want to state that we finished the year with fourth quarter sales really moving in a positive direction. And we continue to see those trends in the first quarter as sales in our undercarriage business have exceeded budget by over double digits. This is really good to see early in 2021 as our thoughts were more for growth to come later in the second half of the year when the pandemic effects on this sector start to fade away and you start to see infrastructure and development spending kick into gear. So the early gains in construction and mining for undercarriage really only point to an even stronger year as it progresses. Now coming back to ag, over the past five to six years, we've been in a softer ag market that has put pressure on our pricing and margins.

9:13 So these market improvements are really welcome from a pricing perspective for Titan. And when I say pricing, I'm looking at it from three angles. First, recovering your raw material costs. Second, recovering other production-related costs. And then third, pricing leverage. We do have some raw material agreements with key OEMs that automatically modify pricing based upon raw materials. However, I don't think I have found anyone that can recall a time when we've seen steel go from $445 a ton to $1200 in such a short duration and then also be in short supply as well. So the challenge for us is that our raw material agreements don't always protect us in these rapidly changing moments.

9:59 and we will work to ensure we get raw material cost recovery throughout 2021. Our agreements in North America and Europe typically only pertain to raw material fluctuations, so the next piece of our pricing strategy focuses on the recovery of other production costs related to overtime, shipping, energy, etc. Again, we believe this market provides us an opportunity to attack pricing beyond just raw materials to address areas of production that are also facing cost increases. The third piece of pricing that we look at is related to leverage as demand improves. We certainly feel that Titan produces valuable products and with strong production capabilities that are quite unique in our space. And we believe as the market continues to progressively improve, we should see an opportunity to approach pricing with more leverage than we've seen in recent years.

10:54 Looking at the market again, the market is really moving in a positive direction. There's no doubt about that. But it has shifted quickly in such a short time period that it is difficult to provide a reasonable full-year 2021 forecast for sales in EBITDA like we've done in prior years. Based on our strong finish in the fourth quarter and what we're seeing already in 2021, we are targeting good growth in sales EBITDA along with margin expansion. We intend and we will remain diligently focused on protecting our balance sheet and realize that cash is going to be needed to fund inventory. As noted in the pricing discussion that I referenced, the market landscape gives us opportunity to do things differently than we have in prior years, and we intend to set production schedules using payment terms as a criteria.

11:46 Therefore, we'll be looking for customers to adjust their payment terms. So wrapping up here, I just want to conclude once again by thanking Titan's 6,000 people around the world for their continuing hard work During these challenging times and really their determination has enabled us to improve our financial position and performance. And most importantly, support our customers throughout the pandemic and now beyond. These efforts have enabled Titan to be in a really good position for 2021 as the markets are moving in a very positive direction. So with that, I'd like to turn the call over to David.

12:22 Thanks, Paul. And good morning, everybody. I appreciate all those who are participating in the call and those that are following Titan's progress. Wow. My health times are changing in a flash. While we're still very much in uncertain times and while the pandemic and other global volatility and economic uncertainty continues, Titan's world is changing rapidly. Our response to the crisis last year was critical as we now head into the recovery that is upon us. I'll focus most of my discussion today on the fourth quarter performance, but what is important and what we accomplished in the quarter and for the year puts us in a stronger position as we manage 2021 and beyond. First, our tax position ended at $117 million for the year, up $51 million from last year in, and we accomplished this through strong operating cash flow in Q4 and for the full year, along with our efforts to secure liquidity through non-core asset sales and related transactions.

13:21 Operating cash flow for the fourth quarter was $10 million, which pushed full-year operating cash flow to $57 million. As anticipated, we have completed further transactions of non-core assets of $16 million in Q4, and for the full year, it topped $53 million. Second, related to the cash improvement, our net debt position at the end of the year was $347 million, down from $366 million at the end of the last quarter and 433 million at the end of last year. As we stated in the release, we haven't seen this level since 2017. And third, we took another important step forward last week with the extension of our domestic ABL facility. This facility now has runway for two more years and will run closer to the material on our overall debt structure.

14:14 There are several other takeaways from our P&L performance for the fourth quarter that I want to pay attention to. And normally our fourth quarter is traditionally a seasonally low quarter, but this year was not normal. We had quarter-over-quarter and sequential sales growth in both Ag and E&C. Second, we also continued our strong adjusted gross margin trend with 11.8% for the quarter, the best margin performance we've seen in 10 quarters. Before I get into the normal review of sales, gross profit, and SG&A, I want to get into some of the non-operating items that occurred in the fourth quarter. During Q4, we recorded impairments related to two sets of long-term asset categories for a portion of our smaller operations.

14:59 First, we wrote down certain equipment to fair value related to our tire recycling operation in Canada, and this resulted in a charge of $11.2 million. Secondly, we wrote off intangible assets related to our customer relationships from our acquisition of the Australian operation many years ago, and it resulted in a charge of $6 million. Both of these resulted from recent trends in market conditions triggering a review of our fair value of our long-term assets, specifically to these businesses. In October, we sold our facility in Bramsell, Texas, garnering net proceeds of approximately $11 million and a gain on sale of $4.9 million. And finally, in November, we received further recovery related to an insurance claim from the fire and our Canadian tire recycling operation from 2017 at $3.6 million.

15:50 Now each of these items are included in our reconciliation of our non-GAAP financial measures in the earnings release. From here forward, I will review the results of the fourth quarter and for the full year, excluding these items and the other unusual and non-operational transactions that occurred during the year. Net sales for the fourth quarter were up over 8% from Q4 2019, representing a nice turnaround in a year where we saw an overall decrease in sales of 13%. As the fourth quarter progressed, the stronger operations became, particularly as our OE customers began increasing production and demand for our product. What is even more impressive is that on a constant currency basis, total sales would have been up nearly 15% from Q4 last year, or 45 million.

16:38 The negative currency impact was approximately 19 million, or 6%, with most of the impact coming in Latin America and Russia, as we saw throughout 2020. Our overall sales volume on a consolidated basis was up over 20% from last year, and price and mix in the fourth quarter was down by 6%, mostly reflecting lower raw material costs and related material pricing mechanisms with our OE customers. Consolidated net sales in the agriculture segment improved by 15% in the fourth quarter, with growth coming from all parts of the world. and many more. We also have a list of the most recent trends in the Q4, led by North America, Latin America and Europe. For the full year, the agricultural segment experienced growth on a constant currency basis of 4% on the healthy turnaround in the second half of the year. These trends are accelerating as we progress into 2021.

17:39 The ENT segment saw a nice turnaround in the quarter, what was a soft year for the market. During Q4, the EMC segment should have grew up to 4.5% on a reported basis, and on a constant currency basis, it grew by over 6%. The largest driver of the rebound came from ITM, our undercarriage business, as construction markets in Asia and parts of Europe began to wake up from the effects of the pandemic. To say that we're seeing a recovery in the global construction markets may be premature, but our order decks for the businesses are stronger than they were three, six, and even nine months ago. Our overall North American sales were up over 6% relative to last year. All this growth coming from agriculture while the EMC segment was down slightly reflecting a slower recovery. Our aftermarket tire sales in North America in Q4 were up relative to the prior year and for the full year were slightly better than full year 2019 levels.

18:38 Our Latin America operations have seen a sharp turn upwards in the market in recent months Our aftermarket business was resilient throughout the pandemic, but our OEs sales rebounded sharply in Q4. Reported sales for Latin America in Q4 were up almost 16%, while on a constant currency basis, sales would have increased by over 41%. Our gross margin performance in the segment continued to be an important driver overall for our financial improvement and our stability in 2020. Thank you for joining us today. As sales have trended more strongly, we have necessarily calibrated our labor force to meet rising demand, while it has been more challenging given certain marketplace constraints and the surge of demand that we have seen in recent months.

19:51 We have plans in place to drive production levels up to meet what we see from our customer forecasts and our current order deck. It is important to note that in recent months, raw materials have risen sharply across all market sectors from the more favorable costs that we saw in 2020. and as Paul indicated earlier, we're putting through corresponding price increases to customers to reflect these increases along with other rising costs including labor and shipping costs. We are responding to the significant forces in the market that are moving very rapidly and we're working carefully to calibrate all of our actions. Now let's go through a statement of performance. Our agricultural estate Segment dense sales were up 21.5 million or 15.3% from Q4 2019. Currency translation was significant in the fourth quarter and affected sales by 9.4% particularly in Latin America and to a lesser extent in Russia. Volume in the segment was up 32% while we had a decline in pricing of 7.6% relating primarily to low overall material costs.

20:59 Our aftermarket sales have continued to be strong, while the big driver was the turnaround in OE sales during Q4, particularly late in the period. Overall, ag sales in North America were up 16%. Our Russian ag sales were up somewhat from a year ago and on a constant currency basis. And our European ag sales were up almost 30% from Q4 2019. Reported ag sales in Latin America were up 22% from last year, and while While on a constant currency basis, we're up 47%. Once again, the weak RAI distorts the real contribution of our Latin American business. Again, the ag markets have shown resilience throughout 2020 through the challenging times earlier in the year, and now we're in a totally different ballgame with solid tailwinds across the markets.

21:51 The agricultural segment's adjusted gross profit for the fourth quarter was $21 million, up from 9.2 million a year ago, representing a 127% increase. The gross profit margins in Q4 were 13% for ag, which was a significant improvement from the margin we saw in Q4 2019 of 6.6%. This was the strongest margin quarter since Q3 of 2018 for our ag segment. We discussed it last quarter as well, but we have seen improvements in plant efficiencies from our strong internal actions, along with raw material costs enabling this improvement. A key component of this improvement came from our North American wheel operations as we continue to improve performance after significant headwinds that existed in 2019 surrounding raw material and inventory management.

22:41 The trends have been increasingly stronger throughout 2020 as the new management team's actions and operational strategy began to take hold. Similar to Q3 2020 performance, each of our geographic businesses experienced expansion of gross profit and margins in the fourth quarter compared to the prior year. Our moving and construction segment rebounded in the fourth quarter after seeing the most impact earlier in the year from the economic downturns and the construction market volatility. Overall, the EMC segment experienced an increase in net sales in Q4 of $6 million, or 4.5% from last year. The current currency basis net sales would have been increased by 6.3% versus a year ago, which meant that new currency was only a minor impact at 1.8% for the quarter. Volume was up in the EMC segment by 11%, while the impact to price and mix was negative at 4.6%. North America experienced a small decline in Q4, reflecting a slower market recovery than other parts of the world. Again, global construction markets are only beginning to wake up, and while the order books are steadily improving, we believe that there will be a stronger recovery in the latter part of 2021 and beyond.

24:11 Adjusted gross profit within the EMC segment for the fourth quarter was $14 million, representing an improvement of $6.9 million, or 109% from Q4 2019. The entirety of the TTRC impairment of $11.2 million was reported in mid-segment in the fourth quarter. The adjusted gross profit margin in the EMC segment was 10.4% versus 5.2% of last year, and this was the best quarterly performance in over a year. Again, the largest driver of the increased profitability came on the increase in sales in the IT and undercarriage business, while there were also increases seen in Australia and Latin America. Consumer statements of Q4 sales were down 7.7% from last year.

24:56 The negative impact from currency translation was 13%. So volume increased by 8%, and price and mix was down by almost 3%. The rebound in the business in the fourth quarter primarily related to the Latin America utility truck segment as the markets began to fall out after the pandemic effects. This recent rebound is expected to continue in 2021. The segment's gross profit for the fourth quarter was $3.2 million, a healthy improvement from Q4 2019. Gross margins were 11.5%, which was an improvement from 7.6%. in the fourth quarter last year, reflecting improved production efficiencies from the increased bond. Selling general and administrative and R&D expenses for the fourth quarter were $39.3 million, but this included $6 million in impairment charges related to the Australian customer relationships I described earlier.

25:51 Excluding this, we spent about $33 million in the quarter, which was a bit higher than our Q3 level. Costs related to investments improving our supply chain and logistics processes total approximately $1.3 million in the quarter. We will have approximately the same amount of investment in Q1 2021, and we anticipate that this will drive savings in future quarters on a sustainable basis, well in excess of these investments. For the full year, excluding the unusual charges in 2020 of $11 million, our SD&A and R&D costs were $129.99. coming in below the low end of our range of expectation of $130 to $135 million. Foreign currency reevaluation was less of a factor on the results in Q4 at a $1.3 million loss, but for the full year, the total negative impact from foreign exchange reevaluation totaled $11 million compared to a gain of $4 million in 2019.

26:51 We recorded tax expenses in the quarter of $4.6 million and other members of the Board of Trustees. Thank you for joining us today. and cash generated from non-core operations and related transactions, as I stated earlier.

28:00 We generated approximately 57 million operating cash flow for the full year of 2020, a strong improvement over 2019, and again, this came from our focus on working capital management. Obviously, it was important to manage our inventories in the year of declining sales. With the coupling factor of strong operating cash flow and those non-core transactions, We generated $89 million of free cash flow for 2020. I continue to have confidence in our ability to manage cash levels from focus on working capital in 2021, and that will come from continued improvements in our inventory management across the business. We have strong focus with our operating teams to manage inventory very closely, and we collectively know that there's a balance between managing lack of long-term visibility of our customer demand and our customer demand.

28:52 Very healthy increases in sales are expected in 2021 and I do expect inventories to rise but at a healthy ratio in sales. We continue to improve our forecasting processes to manage demand within our production systems and I expect to get better even as we progress through 2021. Capital expenditures for the fourth quarter were $8.3 million which was more in line with our quarterly historical levels for capital spending. As normal, we put through maintenance For the full year of 2020, we spent nearly $22 million on CapEx, again reflecting the need to control our investments in the midst of the pandemic. This compares to $36 million spent in 2019.

29:40 We anticipate spending to increase in 2021 to roughly $35 to $40 million, but we will carefully calibrate these investments to work closely with our cash flow from operations through the year. I want to stress the fact that while we trimmed our investments, we in no way cut the necessary investments to keep us in front of the innovations to maintain and increase our market leadership. We are in a strong position with our capital program for 2021 to do this as well. Our overall debt level at the end of the year was in a stable position relative to the end of the third quarter, and while for the year, the debt declined by $35 million from the end of 2019. As of the end of the year, there were no borrowings on the domestic ABL credit line because of the strong operating cash flow and results from the non-core asset sales during the first nine months of the year. Short-term debt at the end of December was $31 million, which is down by over $30 million since last year end.

30:39 This decline is primarily due to repayments of our normal maturities of loan arrangements and certain of our foreign operations, primarily Russia and Europe. A portion of this is The majority of our current maturities at the end of 2020 relate to foreign credit facilities and term loans, which will likely get rolled over and extended as needed in the coming year. Just to restate, we took an important step last week to further secure our liquidity in the future with the extension of our domestic ABL facility. The maturity is now February of 2023. We have the flexibility to manage our U.S. and our corporate operations after freeing up borrowing capacity of the domestic credit facility and increasing our cash reserves to a certain extent in Q4.

31:30 At the end of December, the borrowing capacity when you take away letters of credit and adjusting for the borrowing-based calculations of AR and inventory was at $51 million on the ADL line. We also anticipate some letters of credit to expire in the first half of the year, which could free up an additional $8 to $13 million in capacity. We also anticipate additional capacity coming on as our borrowing base grows with the business activity. Our 2020 was a repositioning year for Titan, and it was critical to take the swift and decisive actions in the midst of the pandemic. As the world has turned back on, our improved and stabilized liquidity position enables us to have the flexibility to manage our business. We are staying focused on managing our working capital this year as well. The real job is ahead of us as we manage growth in the business.

32:19 We have to keep a relentless focus on what has gotten us here. The last thing I want to discuss relates to our bonds. The confidence in our Titans financial position has improved and our markets have gotten better. We're now in a stronger position to review our options for refinancing in a more reasonable fashion. In the days ahead, we'll be actually reviewing the opportunities that are in front of us for potential refinancing. And that concludes my remarks today, so I'll turn over the call back to the operator for any questions you have. Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on a touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.

33:05 Today's first question comes from Steve Volkman with Jefferies. Please go ahead.

33:11 Hey, good morning, guys.

33:12 Good morning.

33:15 So, sounds like things are definitely sort of gears are switching here. I guess that's good. Maybe my first question, maybe this is a Paul question, a big picture question. I mean, most of your OE customers have now kind of gotten to the point where they're able to provide us some thoughts around volumes and profitability in 2021. What's different about you guys that you still can't do that?

33:44 Well, I think what's different, Steve, is we touch a lot of different markets with really three different core products, and so there's a different response that would be, you know, different response or different movements going on in the market as we sit here today. You know, you look at what we, where we were at the end of December, what we thought was going to be a pretty good forecast for Q1, we're seeing that quite rapidly, and so the challenge for us is that We see the market trends. We know they're there. They're going in a good direction. We're hiring as fast as we can. We are also seeing indications in the market, Steve, and I kind of talked about it in my comments, with certain customers where the inventory replenishment cycle is not necessarily what you see in some of the numbers they're putting out in their forecast.

34:34 And so there are some discrepancies in forecasts that we get or orders that we're getting that exceed what is out there in the market. And so we are addressing our, as I said in our comments, we're adjusting our allocation, we're hiring, we're moving rapidly. And so it's just really difficult to pinpoint exactly where those order levels are going to be across all our different geographies and market products that we produce, but also just with the amount of labor that we're going to have available. Quite frankly, in South America, you just can't bring on enough people fast enough. to meet all the demand that's there and similar in certain situations as well in North America. We are working on building a better forecast and getting more visibility to the year but right now it's moving rapidly and it's moving rapidly in a good direction.

35:24 I'll just restate that in a way that we're forecasting almost every couple of weeks and the forecasts are improving. I'll say that. I didn't want to get us into a position where we lock in something and then we have to change it pretty rapidly as we get out of Q1. And these things are all moving in a positive direction. I'm not going to say it's a negative direction in any way. So we will come out of Q1 and probably have better clarity about when the year will be and we can talk to you again about it then.

35:58 So let's leave the volume aside and assume that that is going to be better, but A little bit unforecastable, but it sounded, Paul, like in your commentary that there were a number of potential headwinds on profitability, and you talked about price-cost, you talked about labor availability. It sounds like you're actually kind of capacity constrained from what you're describing, but that it would take some time to get new people sort of ramped up, so... Maybe the right way to ask it is, I'll make my own forecast for volume, but how should I be thinking about incremental margin?

36:42 Well, my comments about pricing are in a positive manner related to where the market is moving. Pricing is complicated, Steve, because of steel going from $445 to $1200, because of volatility with other costs related to So, pricing is complicated. So, my comments were we are adjusting pricing for raw materials, but also then looking at adjusting pricing for other production costs. And then on top of it, to what you just noted, where demand exceeds capacity in the marketplace, then thirdly, adjusting pricing to leverage where the market sits. And so, again, kind of tying back to your question about forecasting, there's a lot of moving pieces. They are favorable. I mean, sitting here at any point in the last few years, just that first phase of pricing, recovering raw material costs, at times could be a challenge. And we've referenced that in prior years' comments.

37:44 What I'm saying is we are going to recover raw material costs in 2021. But if you look at some of the price increases we've had to introduce in Q1 for steel, again, going from $445 to $1,200, you know, you're talking very sizable price increases. So, again, it makes it difficult to pinpoint exactly where your incremental margins are going to be with all those moving pieces. But I think the point that David and I are really illustrating is that they are moving in a very positive direction, better than we had expected when we put together our own internal forecast and plans for 2021 in mid-December. We know and we believe we will manage all those pieces successfully because of the market strength. But I can't sit here and tell you today that there's not a tremendous amount of work that's going on at Titan to manage all these variables, to hire people, train them, meet the demand. So again, this makes it difficult to pinpoint exactly where it's going to fall. Those are all positive things, but challenges that we need to overcome.

38:42 Last time we saw a spike in commodity prices, there was some timing issues on your side in terms of when you could pass them through and how much inventory you were working off, etc. Is there any scenario where we have a quarter that has a down margin quarter because we're sort of absorbing some of this stuff before we get the price increases through? Is that kind of what you're

39:10 I think there could be certainly certain quarterly variations to these things, but just marginally off of that. I don't expect to see these syndicate swings in margin because I do believe we have a carefully calibrated, you know, how we go to our customers and get more swift reaction to pricing versus where in the past the mechanisms may not have allowed for that. Because we're in We're going to move much quicker with respect to decisions and actions that we have to take. And if you look at our FEE4 result, let's just look at that for a second. 11.8% is a good barometer for where we're going to calibrate around in terms of we should get incremental margins as volume increases and there may be some variations from that related to pricing in a given quarter. But overall the trend will be positive.

40:09 Okay, thank you, guys. I'll pass it on. And our next question today comes from Steve Ferrazani with Sidoti. Please go ahead.

40:19 Hi, good morning, everyone. I'm trying to get, obviously, surprised about the strength in our moving infrastructure. I'm trying to see if you could provide a little bit more detail and color in terms of where the strength was for end markets and geography and just sort of where you see that going.

40:37 Yeah, we're seeing it come out of certain segments of Europe where they're getting ahead of putting more spending into the marketplace than we see here in North America. We're seeing strength coming out of China. And again, I think both David and I said it, we expected that strength more in the back half of the year. Certainly as infrastructure bills kicked into gear and even here in North America, we still plan on second half of the year to be I think we're seeing it in a couple key areas, but as we move into the back half of the year, it'll become more broad-based. and we certainly feel that that momentum in the first half of the year is just really a good sign for the second half of the year.

41:36 So to answer your question, kind of primarily Europe and Asia right now out of the gate is where we're seeing an exceeding budget. Really out of our ITM business. Just to be clear, when we talk about our moving and construction, it's really our undercarriage business that I'm referencing.

41:54 So in terms of ITM, you would obviously Seriously Explored, and we're closed on options for that before the market downturn. Is it too early to reconsider those options?

42:09 Yeah, I think that's a fair statement. I mean, we're sitting here in early March, and it's definitely positive for where that business is going. We've always believed in the core strength that ICM has in the marketplace. They build great, high-quality products with a strong brand. We've been expanding their aftermarket presence through a number of efforts over the last few years. And so, Steve, to really answer that question, I think the cards are moving in a positive direction for what, you know, ITM is capable of doing in a good market. And we're in a good position to sit back now and really reap those benefits. So, really, no thoughts at all right now how we would position it in the marketplace like we have in the past of And then I know you both mentioned potential for debt refinancing early.

43:23 At this point, given your improving cash flow profile and improving its fundamentals, are you engaging with your credit rating agencies at all? I would think an improvement there could make the refinancing that much more positive.

43:38 We have regular discussions with the credit agencies every quarter, and those will continue for sure. And, yeah, that's certainly part and parcel to the entire process of going out there.

43:53 And then the last one would just be on low sidewall, you know, given that if we're going into a replacement cycle for ag, is this the time for, you know, seeing more market share in terms of new equipment using low sidewall? And what's your success rate be seen there as if potentially right during that new replacement cycle?

44:15 Absolutely. It's always a good time for low sidewall, Steve. The benefits it brings to the marketplace have proven themselves. Our aftermarket business in North and South America has done very well over the last four or five years. As you illustrated, I think the opportunity to continue to get more low sidewall placements will only grow as farmer income goes up. The ability to look at these premium products just only enhances The next frontier for us as well is getting more low sidewall into South America. Those farms out there are massive and our low sidewall penetration in South America It's got a lot of opportunity in the future, so I think we've got to take a lot of what we learned in North America, and it does take some time.

45:04 I can't sit here and tell you to turn the switch on and you go sell a little sidewall a couple months later, but I do look forward to what we can do in South America with a little sidewall as well. It's a very small presence right now, and again, I think as farmer income goes up and the market's really moving in a good direction, it's a good time to to go try to chase more share of the South American market. But North America, great time for a little sidewall. Absolutely.

45:31 Fantastic. Thanks, everyone. Appreciate your responses. And our next question today comes from Larry DiMaria with William Blair. Please go ahead.

45:42 Thanks. Good morning, everybody. First, I just wanted to clarify. The ITM is now considered core, and we're not considering Any alternatives, including a listing? Is that a done decision? Then the listing's off the table, etc., and we should just assume ITM stays part of Titan for a long time now?

46:03 Yeah, that's been off the table for over a year and a half.

46:07 Well, it's been off the table, but it's been on again, off again, and now the market's better, so it's in a better valuation standpoint, which is what we were waiting for, and if we're waiting for that, now's the time to think about it. But you're saying, obviously, it's

46:24 It's a really good business. We pulled the listing, as we said, over a year and a half ago. Where we started going to the board in the future is the value of the business goes up is not at all at the table right now here today. What's here today is it's a really good business that's performing well. That's really what we've been We've been exercising for a period of time. I don't think we've talked publicly about another listing with ITM for quite a while.

46:56 No, I agree. I just thought we were waiting for a better market environment to reconsider that, which obviously we're in now. But can you guys talk about the possible debt refi timing, the possible rates that are available to you guys, and just how you're thinking about that debt refinance?

47:16 We're just coming off a year in now. We obviously have some good momentum in front of us and the expectations for the year. We'll have these discussions at the appropriate times with our advisors and look at the market and we'll obviously know in the coming days what that would look like. It's a little early to say.

47:38 Okay, thanks. Last question. You noticed that the dealer channel is short and obviously you're going to refill that. But obviously OEMs are still strong. So the question is, can you fill the OEM demand at your major customers when you have to divert from that to aftermarket? And maybe you could talk about what the mix was between OEM aftermarket in 2020 and what that looks like in 2021.

47:59 Yeah, I mean, our goal as a company is to keep that split very consistent from 19 to 20 and 20 to 21. clearly demand is accelerating in all areas, especially the OEM. The aftermarket is moving strongly as well. So our work and our job and what we've been doing aggressively every day is how we allocate our production and how we allocate our labor constraints across that production portfolio. Now what we are doing is hiring and training rapidly, very aggressively. So my comments were only to illustrate that in our business, If you need 60 people, you don't go hire 60 people and bring them in on Monday as actually our production levels would go down for about the next three months.

48:50 So really what I'm trying to illustrate is you need 60 people, you have to bring them in systematically, train them, get them up to speed and then bring in some more. It's the nature of our business that we build complicated products and so it's true within our industry across the board. You know, us being a public company, we talk about it more, obviously, openly in the marketplace. But it's a good thing. It's not a bad thing. You know, if you could just go hire 100 people and move this switch all over the place, then it kind of devalues our products. And so, from my perspective, it adds value to our products. There is a way you have to bring people in and train them, and that's what we've been doing. So, you know, it's a lot of work. We're getting there. But during that time period where you're hiring and training, You are going to have to make some allocation decisions. And so how we're trying to make those allocation decisions to answer your question is to remain very consistent with how we've done them in prior years. And then from there, you know, as I said in my comments as well, we're pursuing opportunities to make it a win-win relationship with an OEM where if they want to pursue more allocation, then those opportunities are available through a win-win scenario for both the customer and for Titan.

50:06 and many, many more. We can allocate our product potentially differently, but in a broad sense, the active market is a great business for us. We have strong brands, good distribution channels. We've got to honor those dealers and make sure they have product as well.

50:40 Okay, I get it. You're in a much better position than you're ramping. I guess the question really is, are you in position to satisfy the OE demand as the companies that have publicly given their guidance have given? Can you satisfy that demand this year, or is that Do you have to really build to that? In other words, we're going to have a problem already in one queue satisfying that demand, which you'll have strong sales, but obviously it won't flow through all the way, and there'll be supply chains in the industry issues.

51:09 Well, I think everybody in the industry is facing supply chain constraints of some sort. Again, in our industry specifically, when you look at where we were in December, so what both David and I said about what we were forecasting and where we are today, it's moving better than we expected. Let's take Brazil, for example. David said fourth quarter is up over 40%. It's moving even stronger now in the first part of this quarter. The reality is, Larry, you can't go from the tails of the pandemic where you have reduced headcount to that type of growth in three months. I think that's the part that's getting overlooked is that the surge in demand is about three months old. So we, and that's part of the reason why we curtailed our forecast is because we see the demand is growing.

52:00 We will, by the end of the year, be able to meet that demand. Are you going to have hiccups as you move along through those stages? Absolutely. We don't, our plants don't go from, you know, from zero to 120 miles an hour that fast. We will get to 120 miles an hour. We will be capable of running that fast, but we're just, you're not going to be there that quickly. Coming off the end of a pandemic, I think that's the key that Brazil still has a pandemic. Here in North America, we're starting to feel it fade away. Again, I want to I don't want to make that comment. It's a broad comment, not specific. You know, Brazil still has the pandemic. Look at their hospitalization. Look at what's going on there. So, yeah, there's a lot of things you've got to manage.

52:45 It's all positive, but, you know, are you going to have some hiccups in the first quarter as you're ramping up hiring and you're not going to be able to meet all the demand? Absolutely. There will be carryover demand from the first quarter into the second.

52:57 Okay. Fair enough. Thank you. I understand the issues, and good luck. Yeah. Thanks, Larry. And our next question comes from Kurt Lubke with Imperial Capital. Please go ahead.

53:09 Hi. Good morning, guys. Can you hear me? Great. Well, thank you for the call and for squeezing my question in. It sounds like we're headed in the right direction, but as you said, a lot of moving pieces. Maybe stepping back for a second, Titan generated over $100 million of EBITDA as recently as 2018. Just putting steel and staffing costs aside for a second, how would you compare the overall demand of our environment now versus then? And how much structural cost do you think you've taken out between 2018 and now?

53:56 I think as we sit here now, the surge in demand is much better than what we saw in 2018. Now, looking at it from a broader perspective, we are still at what I would say below kind of mid-cycle. So there's plenty of room to run. And I think that's what we're all looking forward to as the year progresses is that you kind of bust through those mid-cycle levels and keep expanding. I mean, as much as Brazil has surged in the last three, four months, it's still – Thank you for joining us. very positive and I think if you take that and extrapolate it through the rest of the year then you start busting through some mid-cycle levels and you get some pretty long tails on it where with the government incentives, the strength of the commodity prices, the low level of the dealer inventory that now you're looking into an opportunity for the market to run favorable for not just the first half of this year but you're looking at a couple multiple two, three year run on this if you just take all those factors combined.

55:16 So I think it's It's dealing with the surge now and then extrapolating that into the future that's really positive.

55:26 Great. That's helpful. And on the cost side, is there a new ballpark, how much you've taken out in terms of structural cost over the last couple years?

55:38 You know, there's a lot of moving parts to that situation, obviously, replacing unfavorable with favorable things that we do within our plants and everything. But I would I would say it's pretty close to $20 million, you know, between SG&A costs that we've taken out as well as some of the costs in some of our operations, both domestically and internationally. It's at least that.

56:02 Got it. Thank you. And on the steel side, how far out can you lock in or are you locking in steel?

56:12 Yeah, so, you know, if you're looking at just, you know, It varies by location and operation. On a domestic basis, we're locking in where we are. There's lead lag on the contracts, if you will, in terms of how pricing versus locking in volume goes. It's a quarter.

56:36 Okay. And in terms of, in the last one, in terms of your orders, How far out are you booked? I mean, what month are you taking orders for at this point? I suspect it varies by business, but can you give us some sense for that?

56:53 It does vary so much by business, and all our businesses have different lead times. We are booked very solid. I'll just kind of leave it there. I know it's a very generic answer to a specific question, but we're booked very solid. We're looking at aggressively, again, how we're going to ramp up to take on More higher production levels, but we are allocating product right now. I can't sit here today and tell you we're not.

57:20 Got it. Well, I appreciate it. Thank you very much. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Reitz for any closing remarks.

57:32 I just want to thank everybody for their attention and time today and look forward to talking again in the future. Thank you. Thank you, sir. Please note that a webcast replay of this presentation will be available soon within the Investor Relations section on our website under News and Events. Thank you for attending today's presentation. The conference call has concluded. You may now disconnect your lines.