Titan International Inc (TWI) 2016 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Titan International, Inc. first-quarter 2016 earnings conference call. (Operator Instructions).

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

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

Good morning, everyone. I appreciate the fact that you are on this call. You've probably gotten the release. And like has been going on for well over the years, there's good things and there's things that aren't so good. But, the first quarter, I think the thing that everybody -- or that we are taking away from it was the -- and Paul will get to it later, but it came out really, really weak. I think that is from the standpoint of where the inventories were, and I think everybody is flushing both January and February. The situation on our side is that you make the adjustments.

March came through, in March kind of like started the uptake. And the situation now is we are going to be -- I just came in from down South, basically northern Florida, Georgia and Alabama. And in the next three weeks, they will start with the situation of the harvest down there and any of the grain crops that were planted. But overall, I think we have muddled around down to the bottom; and whether it was March, beginning of March was the low point, or it's going to do a little bouncy up and bouncy down.

I was with a lot of big dealers down there in the South, equipment dealers and. The farmers are spending money on things that they actually need. They are sitting there, going through -- I think this is going to be a year where they decide are they moving on to a bigger, newer piece of equipment, or they look in at the used equipment? Used equipment is starting to move, if it's good. The equipment that has been beat up, like over the years, that still probably have a lot of dealers who are going to have to take a write-off and move it there.

When you move to the construction, construction is basically -- that we are into is just like in a pause. It is not growing. It is kind of just sitting there. I don't know if everybody is waiting for the election, or what, but that is what we see there.

The same thing is true in the mining side, and all the dealers and North America are at least turning around. They are letting their inventory get way down. The reason is real simple: the one of our dealers that supplied our friends at Peabody -- and with the bankruptcy, small businesses get -- taking a big hit on the chin. So everybody is tightening their belts on that side.

Production-wise, we have the small size, the small tractors, and that's the size that's basically 125 horsepower and down, has been real steady. Actually it has got a pickup. That's the bright side. We've been developing new tires and wheels for that which we should be able to roll out beginning of the -- the end of the beginning of the third and fourth quarter. We think we are positioned very well.

We've -- as they will talk about the numbers, and they will talk about what they have been doing at the factories, we are still -- when you go South, Brazil is a big animal force in the South America. And on the consumer side, which is the biggest side of the Goodyear special bias truck tires we make, that's hurting; and mainly because of the currency situation down there. But we believe that is still going to be coming back. They are in their quiet period right now, because it's basically fall down there for them.

When then you turn around and you look at agricultural side, we have our first farms. I think we are at three of the big farms. We have made our situation with the LSW tires and wheels. That has been a big hit, so we've -- and we expect that. But that is out for about a year, because they are going to try it. They are going to run them. They are going to see what happens with that.

On the US side, as I say in the release, we have been very, very pleased at how many options are out there, how many farmers have stepped up. We think, as we stated all along, it takes a while. And we are referring to -- well, it's increased every month and we are excited about that. It's pretty hard to go out and be able to tell a farmer why you run on duals, because I think John Deere would tell you that probably 80% of everything they sell to basically -- to a farm -- is a set of duals in North America.

And the question, like I was in the South, is why you got duals? But with the super single, it performs much better, especially if it is an LSW, and we have been making penetration with that. It just keeps going up, and eventually that is our home run. So it's up.

And I should touch on the TTRC. If you've watched the news, you would know that there is a tremendous forest fires up in the north of Canada, Alberta, that they have evacuated the city of Fort McMurray. We don't believe that any of our facility up there is in harm's way. But everything up there has been declared an emergency, and we actually have spots where people could stay. But they have no food and no water, because they couldn't come up to the road to supply the town. So everything is shut down, as we speak. And I figure it will probably be another four or five days before they start letting everybody come on back in there.

We are not -- the area we are is just pure dirt. It has nothing to do with forest around their side. But on the south side of town, and I guess all around it, there is -- they've lost some homes; they've lost some businesses. And they are bringing the Canadian Army out when they get there. Actually, we have a fire truck we bought, but it's just sitting there. It runs. I thought we would be able to lease it out, but there is nobody there to drive it at this moment.

But anyhow, with that, we expect to be at this month to ramp up the -- go into production. And we have been running through the reactors, batches of tires. Everything has been successful. And once we have the permit -- this is going to sound a little funny -- once we have our permit for our safety deal for fire, we will have operational permit then, and away we go. So that is from our side.

The good news, I don't want to leave out Russia. Russia is -- people over there are doing an excellent job, and that is coming along. So there is -- the only spot that you have to worry, or we are looking at, that just -- we just have to put more sales into it, and that is North America. And everybody in the world at this point, pricing is headed south, but so is almost everything that we do or buy to put into the tires.

So, last night we were with two large dealers, and they have seen a considerable pickup in everything except the big iron. And we believe that falls right with what we've stated. And we do think, though, that come fall, we believe that there will be a pickup in that. And so we are optimistic that we are doing the right things, and when it comes back, we will be in a great position.

And as I said in the release, Goldman Sachs was the banker for our track business, ITM, that we are looking at to see what success we have in that market; and we've, as I said, had an offer on it. So they are putting everything together and we think that will be very successful. And we think that will probably happen towards the -- in the fall.

So, with that, I will turn this over to Paul.

Great, thanks, Maury. Good morning, everybody. The first quarter was a difficult start to the year. You saw it in our release. We continue to see challenges in many of our markets. This unfortunately did lead to a 20% drop in first-quarter sales compared to last year. If you go even a step further, if you compare Q1 2016 back to 2014, you will see our sales are down right around 40% or $215 million. That is a heavy loss to absorb in revenue operationally. Yet, we have been able to really manage our business successfully, when you look at that $215 million decline in revenue, and we have only seen a little over $8 million decrease in our operating income.

Also with our sales down over 40% the last two-year period, our cash is sitting right around the same levels as it was, just at the start of a couple years ago. Overall, the revenue is not where we want it to be. But the management of the business and the decremental margins, both from a gross margin and operating income perspective, had been quite impressive when you look at it that way.

Look, it's tough out there. And there is definitely no easy path in these difficult markets to change things around easily. I would point out these comparisons from two years ago, not to search for a silver lining, but to show how the Titan team has done a good job battling these market conditions. And again, it takes a team of people working hard and together to see a slip of only $8 million in operating profit on a $215 million decline in revenue.

To do this, we have implemented successful programs like the Business Improvement Framework and the One Titan initiative. We've talked about that on previous calls. These have helped us guide our team to make effective decisions. But at the end of the day, it's really all about people. As a result, we've made a number of changes to our operational team over the past couple of years to battle the downturn and build our team around the One Titan model.

We have eliminated some high-level positions along the way that really didn't fit with the One Titan model, which, in turn, has created some good opportunities for really some good, young, key people within our organization, and they have responded well. We have also had to bring in some new blood from outside the Company to shift gears and gain a new perspective in some new places when I was needed.

These days, the markets continue to be tough, and we realize we need to really work hard together and do everything we can to win sales. Maury had mentioned North America is really where we are fighting a lot of the battles. Our current sales levels, being down 40% over the past couple years, we are clearly where we don't want to be. We know we can make some improvements.

So, what we've been doing recently -- we've made a number of changes within our sales and marketing teams. We brought in Tara Schrock as our North American ag Sales Director. And she has a strong background, most recently as the Vice President of Sales at a John Deere supplier; before that, years of management experience at large companies, including American Express and some very well-known blue-chip companies.

But most impressively, on top of that, she comes from a passionate farming family, and she has been changing the oil on her family's tractors since she was a young kid. So she is a great addition to the Titan team, and really will be able to jump in and make a difference and start running fast to help our overall sales organization.

We also -- there was an announcement that went out this morning -- we also hired Brice Howell to manage our North American Associate Dealer programs. He will oversee our continued efforts to strengthen dealer relationships, and make sure we are really reaching as many customer touch points as possible to drive sales. He also comes from a strong ag background. His family has a background on the equipment side. Plus, he has many years of experience working at dealers, working with dealers; and most recently was the sales development manager at one of our competitors. All you got to do is spend 30 seconds with this guy, and you will see his passion and energy, and understand quickly why he is a strong addition to Titan.

We also brought on [Doug Loney]. He joins us with over 25 years of experience at one of our large competitors to be part of our OEM account management team. He already knows all our customers very well. So we really just need to change the logo on his shirt, and he will be out there strengthening our relationships with our OEM customers.

Now going beyond just the sales team, in the past year, we brought in a new marketing-director, Kim Boccardi. She has already been up and running, spearheading our efforts in that area, has made a nice impact for Titan already. On our last call, I talked about the success we've had in growing our brand, and we really look forward to where her and her team and our marketing efforts will take us in the future.

The last change I want to announce is -- and I want to wrap up by announcing that our CFO, John Hrudicka, is moving into a Senior Vice President of Operations role. It will be focused on our North American tire business. I think many of you know that is our largest, most important business. And as Maurice talked about, and I talked about, there is a lot of emphasis being put on that division within our Company. I've mentioned also on previous calls that our North American tire plants have been very successful in reducing the cost of quality, managing the plant efficiencies against the big volume declines that they have been facing.

So it's really good to have John in this role, not because the tire plants need help building better tires, or improving their efficiencies. What we really look forward to having John in this role do is adding value by really making our tire plants better, more overall holistic businesses. Maury made a comment about pricing in the marketplace today. It is a complicated market. Everybody's out there fighting hard.

The North American tire market is going to continue to be tough. And I mentioned the other changes we made on the sales side. So it's a natural fit getting John into this operational role. And from there, I will let John talk more about his role later in the call.

But really, people are the foundation to everything we do, everything a business does, not just Titan, and is the we foundation for operate is centered around One Titan. The Titan team has done a commendable job in managing our operating income and our margins in tough, tough market conditions, along with our balance sheets and our cash position. You saw that in 2015. We increased our gross margin percentage while revenue was down 26%, not an easy feat, but something the team was really proud to accomplish.

But the reality of the situation is we need more volume. We need more sales in order to leverage the One Titan foundation we have created. You see pockets where the turbulence is going away, and the sunshine is coming out. The recent dealer sentiment reports do echo some of that. Maury talked about a dinner that we had recently with a couple large equipment dealers, and there is a lot of optimism that was coming from those guys. I think what really caught me as a big positive is that they are back to being able to export some equipment offshore. And it has been a long period of time since they have been able to do that, and they've had a couple really big home runs with that recently.

So again, there's pockets of hope out there. And as I noted earlier, we are putting a number of new pieces in place to help drive sales in this market.

And I think with that, I think I'll turn the call over to John.

Thanks, Paul. Good morning, everyone. Well, Q1 was a challenging quarter for us, as stated by both Maury and Paul. The story continues to be the erosion of sales relative to our end markets. So let's jump into the sales story.

Sales for the quarter were at $322 million. This was down $80 million, or 20%, from prior year. The quarter-over-quarter decrease was driven across all segments, with North America ag, and currency impact comprising $58 million or 73% of the variance. As has been the trend, the majority portion of the North America ag decline is attributable to high-horsepower product.

I referenced currency. This drove a reduction in sales of $26 million on the quarter versus prior year. Half of this impact was driven by the Brazilian real, with smaller impacts scattered across our other international businesses. If you adjust for the currency impact, sales declined 13.4% versus the reported 20%.

So let's talk a little bit about ag. As stated earlier, ag was a key driver in our sales decline. Ag in total was down $30 million or 15.5% when you exclude currency impact. At a gross level, North America ag represents this entire decline. Nearly 3/4 of the North America ag decline is driven by OEs as they continue to scale back production commensurate with a lower demand.

As a result, they are putting more pressure on suppliers like us to lower price on the aftermarket side. They are only buying on need, and at the lowest price. So, product availability is critical to realizing these sales, and we are very focused on that. From a product perspective, while we are experiencing just a slight erosion in small ag, the driving force continues to be high-horsepower equipment.

While there is still a long ways to go in terms of recovery, there are some very bright spots to note. The USDA is projecting flat farm income for 2016, so some stabilization appears to be occurring. Used equipment values look as if they are starting to buck the negative trend, as there was a slight increase in Q1 over Q4, a first time since Q2 of 2013. And also on the side of the dealers, and I believe Paul mentioned this, they are becoming more optimistic, based on recent survey results.

Our Europe ag business actually grew slightly, when excluding currency. While the business climate is still challenging, the sales decline appears to have stopped, and we continue to win new business there. Our adjustable track waffle wheel value proposition project continues to progress, with the strong belief there is a real brand infusion that could take us upstream from commodity product categories.

Latin America, namely Brazil, is down significantly to prior year, for reasons I will discuss a little later. Russia has been a great story. They continue to grow in volume and they are realizing price increases as well. The Russian government continues to support agriculture through an increase in monetary support to both the Russian farmers and ag machinery producers.

So, let's turn our attention to earthmoving/construction. Productivity improvements and reducing capital expenditures appear to still be holding court in this segment. Our sales for earthmoving/construction were down $21 million or 14% from prior year, when you exclude currency impact. Our international businesses were either flat to slightly growing, when you exclude currency.

I want to note our undercarriage mining aftermarket projects that were started years earlier are now paying dividends, as we have gained share in Latin America, Russia, and the Far East with our new products and enhancement of existing products. In North America, our large mining tire sales continued to be stagnant, while the sales representing smaller mining applications and construction were down 22%.

A number of the OEs have scaled back purchases commensurate with the continued slowdown. Commodity prices have increased recently, but there is still an excess supply. Is this sustainable, or will it have an impact on new equipment purchases? Nobody really knows this, at this point.

So, let's talk about the consumer segment. Our sales for consumer were down $5 million, or 9% when you exclude currency. The primary drivers of this decline is further erosion in Brazil truck tires and the high-speed train brakes supporting the China Railway system development. Frankly, Brazil is just a mess right now, relative to government corruption and their recession -- worst they've experienced since the 1930s. Government insolvency is a distinct possibility. And regards to the China high-speed train brake, we planned for a decline in 2016 as the slowdown associated with the Chinese market began back in Q3 2015.

I will move on to gross margins. Our gross margin dollars were down $11 million to prior year. Our gross margin rate performance at 9.9% was down 70 basis points to prior year on 20% less sales. Our consumer segment was particularly challenging this quarter, and I will talk about that here shortly. If you were to exclude our consumer segment, our gross margin rate as a percent of sales actually improved slightly at 10.2%.

Another highlight, our ag gross margin improved 84 basis points on a 21% reduction in sales. So, there has been a lot of effort in improving profitability on that side of the business.

Paul spoke about this, and we spoke a lot about this at the year-end call relative to our Business Improvement Framework being integral to improve -- actually improving our 2015 gross margins despite a 26% reduction in sales. We continue to leverage this framework to drive profitability improvements in the face of declining revenues and unfavorable mix.

I mentioned our consumer segment earlier, relative to gross profit. Our consumer segment gross profit eroded $4 million, with gross profit as a percent of sales falling to 7.6% from 14.1%, one year ago. There are three primary drivers behind us: first of all, overall lower sales and lost leverage; secondly, lower China high-speed train brake sales. These are -- come with very high margins. Brazil, unfavorable mix and higher raw materials linked to the US dollar there, as well.

Our overall material costs declined from prior year, driven mostly by North America, comprising reductions in steel, natural rubber, synthetic rubber, and carbon black. And as a function of our long-term agreements, we passed a good portion of this back to our OEs, mostly neutralizing the positive impact to our P&L.

Under our Business Improvement Framework, there are a number of design and sourcing initiatives underway on both wheel and tire to take costs out of the material content of our products. And it is fully anticipated these design changes will also lower the cost to manufacture these products and improve quality, as well.

Quick note on operating expenses: SG&A, R&D, and royalty were down $2 million to prior year. At 12.4% of sales, we are up 200 basis points up to prior year; this being just a mathematical function of lower sales. There are a series of puts and takes across the various expenditure categories. Paul mentioned the addition of Kim Boccardi. We are investing more heavily in marketing, specifically in support of LSW, as well as our investment in the anti-dumping case. We have reduced spending in other areas in order to fund these investments and achieve a net overall reduction in our spending.

Moving down the P&L, let's discuss foreign exchange gain. These gains primarily reflect the translation [within] our Company loans at foreign subsidiaries denominated in currencies other than their functional currencies. You'll notice in Q1, we generated an FX gain of $5 million. Over the course of 2015, we took a number of steps to mitigate exposure to currency, as it impacts our intercompany loans and balances. We did this through balance reduction, debt classifications, conversion, and hedging. And as a result of these actions, we fully expect significantly less volatility to earnings, now and going forward.

So, let's summarize and bring this to bottom line for profit. Our Q1 adjusted net income attributable to Titan stands at a $9.2 million loss, and EBITDA at $11.2 million. This compares to adjusted net income attributable to Titan of $3.2 million, and adjusted EBITDA at $25 million from prior year.

So, I want to touch on a few balance sheet items briefly. We typically experience a build in both AR and inventory coming off lower Q4 levels. While this occurred with AR, our inventory went down. For the quarter, AR is up $39 million from 2015 year-end, but down $23 million from Q1 the prior year.

The increase in Q1 from year-end was driven in part by an increase in sales. But we are also using terms to selectively battle for business in these very competitive markets, which has had an unfavorable impact on our DSO performance. Our DSO performance typically erodes approximately 7 days from year-end to Q1. This quarter is consistent in that regard.

Inventory -- inventory actually went down in Q1, defying the customary Q4 to Q1 pattern. With the downturn, we have been steadfast in managing inventory levels more efficiently. We kicked off a series of initiatives this year that are starting to impact us favorably, and fully expect the impact to grow over the course of the year. AP has also increased $15 million, primarily from a five-day improvement in DPO. We just kicked off a supplier financing program that we believe could generate another $10 million to $15 million of cash when fully executed.

In regards to the PP&E, we continued to spend under our depreciation by scrutinizing our capital appropriations to ensure strategic alignment, positive EVA returns, and cash generation. You may have noticed the PP&E went up $8 million total beyond the net capital reduction. This is due to $16 million of CTA.

Cash -- so we talk about cash a lot. Cash ended the quarter at $191 million compared to $200 million at the beginning of the year. We continue to be aware of the concerns over our liquidity and cash flow as we fight through these down markets, and we are very mindful of this and continue to manage it diligently. Outside any exceptional liquidity events, we are planning to be roughly flat to our prior-year balance. In fact, we are back over $200 million as I speak.

In regards to Q1, there are just a handful of key drivers comprising our $9 million reduction in cash flow. Primary drivers of the cash reduction are accounts receivable at $32 million and our $9 million net loss. This was in part offset by $10 million accounts payable growth, $12 million of inventory reduction, and $8 million net capital reduction, as I indicated earlier.

From a debt perspective, while our net debt to trailing EBITDA measure has risen, our actual debt level is slightly down from a year ago. So this just a function of math, as during the downturn, we have dropped off higher-earning quarters and substitute lower earning quarters.

So, wrapping up, our markets continue to be challenging, but we remain diligent in managing what we control.

I wanted to make a few comments relative to the new role which I am very excited about. But first before I get into those comments, Mr. Jim Froisland has joined us in an interim capacity as CFO. He is -- he has extensive experience as a Chief Financial Officer, Chief Information Officer, Chief Operating Officer, Corporate Secretary and Board member, for both domestic and international public and private equity owned companies. So he has joined us effectively yesterday, in fact.

So, turning to comments about the new role, we have actually been talking about a business leadership role almost from the time I joined Titan. And I have had experience in executive business leadership roles in a prior life before Titan. I am an operational CFO with a strategic bent. This is what I enjoy. While in a CFO role, I have had significant engagement with many operational aspects of the business as the IT, pricing, and supply chain functions all reported to me as CFO. I believe I can contribute significantly to the Company, coupling my financial acumen with my operational mindset.

Over the next 6 to 8 weeks, I will be spending a lot of time at the plants, the sales, marketing, the other business functions, listening and learning as much as I can about the business and operations. And at the end of that time, I will present a plan to Paul comprising my ideas, thoughts, and strategy in how to move forward in this new business leadership role.

With that, I would like to turn the call over to the operator for questions.

(Operator Instructions) Larry De Maria, William Blair.

A few questions; first, as far as the improved gross margin, can you just delineate the -- maybe how important the material costs were versus the productivity improvements and cost cutting you have done? Just curious how important the material costs being lower year-over-year were.

Well, material costs always helps, okay? But it generally helps when you are going up. When material cost is going down, it hurts you, because really what you are pushing off into the market is higher price. So, on the margin side, once it stops going down, it should actually then turn around. If it just stays flat, you will probably get a little tick-up again in margins. Then what happens is it starts to go up, it reverses, and you get to pick it up every month as it keeps going up. So, in reality, it is what you can call that productive improvement. And that is pretty much what you've got there.

Okay, so the lower material costs; but it was a net positive, obviously, in the quarter. You are able to recapture that as opposed to losing on pricing.

Well, yes, there is no question because you're getting -- the material costs today is the differential before what you got stuck in working inventory and everything else. The drop in the material, it is not as great in this last quarter as it was, say, three quarters ago. But have we hit the bottom of it? It is hard to say, because what happens is you have the bouncing around right now of oil prices. I am referring to tires right now, but I am also referring to the price of steel in our wheel business. So it's a moving -- in the wheel business, you will really get a pickup in efficiencies if the price starts going up. So that's -- I'd would always rather see the price of material go up.

Larry, this is John. Just maybe another comment in that regard. We did not give all the price back, and I made mention about the long-term agreements with the OEs, and so we do have to pass back. But the other portion of our business is aftermarket, and I think we have done a much more effective job in terms of managing price there. We've got a number of initiatives that are focused on price management. So I think that has been the way we have not been passing back all the reductions in material costs that we were able to realize.

Okay, thanks. And then maybe switching gears a little bit here. Obviously market share has been under a bit of pressure the last couple of years. And we noticed now some competitors such as GKN are now offering wheel/tire combinations. I think that has historically been one of your main playgrounds. Is that something that you're looking at as a competitive threat? Or how are you thinking about that?

I just actually met with one of the companies that would be doing -- potentially doing the mounting for GKN. And I think what GKN is doing is just blowing a bunch of smoke in the air, trying to create a nice press release that gets attention. I have not seen any validity to that. We have done some channel checks. Like I said, I met in person with a mounter that would have definitely been contacted, has been contacted by GKN. There's no -- I don't want to get into too much detail -- but let's just say it seems like a lot of smoke and mirrors right now.

To add a little thing, this is not the first time, Larry. This is --.

Okay.

There is nothing new, except that they must have fired somebody who thought this was a great thing to publish. It has been out there for a long time. GKN has teamed prior with our competitor in France, Firestone. They have been a bag of anybody's tire, anyplace in the world. But when you get down to it, in the range, there is no one in the world that can produce 50,000 different SKUs in the wheel business. And there's no one else in the world that has the range of the various SKUs in tires.

So, it is a -- do you have them picking at you on certain high runners; they all figure it out; and each are going to drop two if they can get their foot in the door? Yes, you're always going to have that. We have had that since we've been in this business. But, we also know from the OE side, our customers, that when they decide to go with just a whole mounted program, is not just the four sizes that have some volume. It is the other 200 that you don't have that volume.

And so it is real simple. If you're going to take them around and lose the fourth one, then you might as well take the others. Someone's got to do it. So everything else will is rocket up. I mean that's not how it runs. So --.

Okay, you're still in a good spot there. Last question (multiple speakers).

The guy I was talking to, that's exactly the same thing that we talked about. I mean, he does an extensive amount of mounting. And what he does, though, he does it across the board with a whole product portfolio. GKN getting this and doing very limited, selected products with a limited lineup of manufacturers, it really goes nowhere. It doesn't have the potential to go anywhere.

Got it. Last question and I will jump off, guys. The current offer for ITM, if no other bidders emerge, is this the real offer that you will consider and probably negotiate and close? What would you do with the cash? And then I will jump off, thanks.

Well, the cash, the cash will come in and then -- well, the first thing is the end of this year, I think it is, right close at the end, we are going to pay -- we will pay off our $60 million in converts. All right? That still leaves us an awful lot of cash. And we will probably -- I am just one vote in a group, whether you buy back your bonds, a good chunk of your bonds. Or depending on how you have all these various things in bond covenants, my own personal belief is if we have excess cash, to just pay it out in the dividend.

So, there is no big acquisition that we are looking at, as of today. We believe we've got ourselves pretty well situated. We believe our internal cash, and what we are doing with that, we think it will be very positive over the next couple years.

I hope that answers your question.

Brent Rystrom, Feltl.

Maury, when I went out with that sales call with you last year, and we met with that farmer, he put the tires on, the LSW tires -- he had been extremely happy with the tires, and really thought the performance has helped him a lot, both tractors and combines. But in his case, he told me that he kept the tractor tires and returned the combine, not because of performance, just where his capital is right now.

When we cycle out of this tough farmer environment, how do you think the uptake in the aftermarket will be for LSW? Will we see that uptake accelerate considerably quickly?

I think you're going to see the uptake. And we have -- I think it was in the press release. We probably -- we have a great number of LSW tires and wheels. In fact, at this point today, we -- I'm headed off after this call, back up to one of our tire factories, because we are going to have to start ramping up production on some of the bigs. And the reason being is the fruits of our labor for the last three years, just like you talked about with that farmer, the situation is -- and it's not a sales tool or anything, but we make every piece of equipment run better.

I am not going to say the OE, otherwise I get -- because they're on the phone and they are going to get mad. But to show you the difference, a farmer -- a fellow in Louisiana -- and he runs scrapers where they pull pans and he wanted to put our LSW tires on this big four-wheel-drive scraper. Well, the OE: oh, well, we have not approved it there. Well, it is so asinine, because it not only will make their scraper perform better, you can turn around and put a regular sized tire, which is the same old D. And Their people thought well, we don't understand this, this and that. So it would take them three years to get it through unless somebody from the top banks them.

But, what has happened is we put less -- the tractor won't bounce. So you're putting less strain into the tractor. But they said: no, you can't, and we won't let you warrant that. Well, it's being at the OE now, that once we found out about the situation, the guy's going to turn around, he is buying our other LSW tires, but it's really a waste of money. It would perform so much better.

So the big problem is trying to educate OEs, and they make a lot of money when they sell our LSWs. It's just that, you know, OEs have a problem. They get so large that pretty soon, they don't want you to talk to their engineering. They don't want to talk to their marketing and sales. So, you are trying to help them, but they are so arrogant, they don't want it.

So, what we do is just like you mentioned. You've got the crazy guy, and I go see the big farmers, who all have more than one piece of equipment, and away they go. Earlier this week, on Monday -- Monday or Tuesday? Tuesday, I was at a farmer in Alabama, and what does he do? He's had a farm for 100 years -- pickles. I never thought I would run into pickles, peanuts. And I looked at this pickle harvesting machine, and I just kind of smiled. And he was showing me how fast he could go with it, and this and that.

And I says, well, you've got a couple of these harvesters; here's what I will do. I'm going to put this on for six months. If you like them, here is your price. And I know for a fact that we'll do that and he will buy those. And then he will have to buy them for his other machine, because it's going to improve -- hell, they will pay for themselves in less than a season.

So, it's coming. It's like -- as you just talked about that farmer up in Minnesota, I told him, why are you running duals? You run duals so you can get more flotation and you can get more power to the ground. But the joke is on LSW, super single is like the military. They have done that like 15, 18 years ago. You put it on there, you get it all. And it makes the tractor perform better. So in all, it's moving.

Right now, as I just told you, on the ones that fellow has in Minnesota, our orders are coming in. I got orders last night with Paul. We were at dinner and we got -- the wheel business is no problem. We can do it. We've got to jack it up on the other. So, that's my story there, so I'm happy with it and it's going to -- it keeps growing. Every month, it has grown. And when it's (multiple speakers), it's big.

A couple of other quick questions. Can you guys give us a sense of kind of the detail of the process and timing for the ITM activity? And then, are there any debt covenants tied to the assets that ITM holds?

I don't believe so. What happens is most of the debt is issued to us. What happens on that is -- they met this week, over there, the team from the banker and the management team over there. And then I expect that within probably 30 days, they will have their book and the data room set up. They've already -- they have a list that is -- I never even thought of a lot of the people on that list; a few of them, I would think we will cross. But I would expect them by first of September to be able to have it narrowed down to two or three real, real serious people. And I think that, come October, they should be able to move on it. And I think it will be done this year.

All right, that was going to be my question. And then a final question for you guys: can you give us a sense of just what are the primary activities in timing for ramping up European sales?

The European sales?

Yes.

Europe is -- our business in Europe is governed on two things: number one, the biggest chunk, outside of ITM, is wheels. We are turning around, and Russia equipment is -- some containers, I believe, have left. The rest of them should leave by between now and June 1, so we will turn around over there.

I would say that Europe, when they get back in -- when they go off for the whole of August, and they finally get back in September -- I would expect that their sales will probably pretty much stay where we have forecast them. But I think they will start to produce a little bit better profit. Because there's going to be a little bit more, as Paul talked about, is One Titan. So, even when you go to Europe, even though they've been there for a long time, it's what happens in England stays in England. What happens in France stays in France. What happens in Italy stays in Italy; and then the Turkish facility.

What we have been doing already, like Maury said, we've got some really good equipment coming over here from the States to Russia that will increase their -- not just their capacity and their efficiencies, but their quality as well. And so we are looking over there to bifurcate the brand. We've got the leading aftermarket brand in Russia, so you don't want to screw that up. So you are really going to need to bifurcate it, go more upstream with anything we produce under the Goodyear label. And so that equipment is -- some of that is already on the water. The rest is shortly coming after that.

Our strategy thus far has been in Europe, we started seeding the market. We do have a sales group already set up over there. It works out of our wheel plant there in Birmingham. And we have done some seeding into the market with US product to let them know we are here and alive, and doing that with sizes that match the European market. We've recently gone over to our Russian plant and said, all right, give us the products that -- from the OTR, some of the light industrial and then kind of the smaller -- like where the industrial and the ag overlap, where we can start getting some of that product in there just to get our distribution channels warmed up; and then get things rolling, or prepare to roll, once we get Russia up and running. And then looking at some other opportunities to get some product manufactured that would be able to hit the good markets over there on the smaller horsepower tractors that are run into smaller bias-sized tires. That's a very attractive market over there. So we are moving some molds around, also moving shipments of molds down to Brazil, take advantage of the weak real.

So the only issue we are running into right now is just the timing of ramping it up. But I think that plans are being laid out, and we will keep moving forward on it. So, to answer your question specifically, with dates in dollars and time frames, not exactly at that stage yet. But there's a lot of pieces that are moving forward.

Quick question then, Paul, third-quarter revenue, with that kind of when we should expect the first revenue? Or will there be some maybe in June?

I would agree with later in the back half of the year.

All right. And finally, John, best wishes. It has been a pleasure working with you as CFO.

Thank you very much.

Joe Gomes, William Smith and Company.

I just wonder if you might be able to just give us a little more color, a little more detail; maybe some data points, if possible, on your aftermarket efforts. I know last year you had mentioned that it was a really -- area of focus for you guys, in trying to capture more of the aftermarket. I was just wondering -- you talked a little bit about it. If you could just provide a little more deeper dive into what kind of efforts and results we are seeing in the aftermarket.

Well, the aftermarket in the climate that you have today is the situation where you are dealing with everything that is out there for tires that are -- have been made for years, years, and years, which we make, and almost every place in the world can make those sets. So what happens on that is prices probably -- you could get on the higher end, but it is still related to price. And it is how far they drop the price, and how far you're going to go down with it. Because consistently, tire dealers work on much lower margins than an equipment dealer will.

We have very few dealers that we sell the LSW package through by our choice. And the reason being is that we believe that the situation is that because it's a tire and wheel, it is going to command a greater market, because it makes everything perform better, as you heard the fellow from before. So we are working with the equipment dealers. And the situation there is that that is growing much faster in the aftermarket today than we really anticipated.

Because what happens is the fellow that is in South right now, and he's had -- let's just say a 520/46s on his combine, and they are getting the combines ready, because in probably 30, 45 days, they are going to be out there in the field. But what happens is we walk up now with a great big 1250, but he bought this combine a couple years ago. And his problem is that if it's wet, he can't jump in there as quick as he can. Time is money. So we have set up a program with equipment dealers -- here they are. They are certainly not going to buy them for the aftermarket through the OE, because they would lose four, five months just trying to get an order processed. The OEs aren't going to keep them on hand. They never do.

So, what we do is going through them, they make some fair margins; and, of course, so do we. And it's a bolt-on. So they are not, per se, mountain tires or anything else. It comes -- and it is going to replace those duals. We are finding out now that as we start rolling this out, we've got to kick up production. And we will pick up that, going through this year, much higher than we forecasted it in December.

Number two is it was an equipment dealer who basically said to us, you know, the big harvesters, the big custom cutters, they are going to -- we have -- the OEs have a traveling team with them, covering something like 100 miles apart or something. So we are trying to figure out how we can do that and stage that. Because what happens with custom cutters, if they hit rain, they hit wet conditions, sometimes it stops them. And with our LSWs, you can -- big super singles -- you throw them on, they can do the harvest. So we have a plate full of how to go about it, but that is pretty much how.

So on the other side, your older tires, you go through the tire dealers. And that is price-driven. The other, you've got to go through the equipment and get them there for -- they can sell them to the people who have the more-than-a-year-old equipment. That's what we're doing. That's the new part for us, right there.

Okay, thanks for that. On the fourth-quarter call, Maury, you mentioned that you thought revenues would grow in 2016. Four months into 2016, do you still think that is achievable?

I would say to you that the first two months, we are way off our target. If we can continue what we started from March on, my answer is yes. And also, I would throw the caveat out there that the starting of the TTRC up in oil sands, the thermal reactor, we were -- we have contracts. We have the business there. And we are off probably 30 to 45 days because of permitting. And right now, we are going to lose probably a week or so with the fire. You can see the flames are right in Fort McMurray. We are north of up in the oil sands. It's about 30, 35 miles north. But that is what's going on. But do we have a shot at it? Yes, and I think the shot is in the aftermarket.

Okay, great, and two other quick ones. For John, in the fourth quarter, you were talking about SG&A was around the $36 million level. You said that was not sustainable. And in this quarter, we were again right around that $35 million, $36 million level. Just trying to get a little more color onto that as -- are your plans that -- or expectations that SG&A will increase off of these levels here? And then for CapEx, are we still looking at the $30 million to $35 million range? Thanks.

Sure. So for CapEx, I think we are looking from $28 million to $33 million, $34 million range. We continue to redo those projects, those discrete projects, one at a time. So that's the range that we are looking at right now. In terms of SG&A, I think we have been more successful in funding needed investments by reducing spending in other areas that are not either a priority to our business or adding less value. So we are going to continue to try to maintain, if not lower our operating expense -- expenditures while still funding our high-priority initiatives.

Okay, thanks guys, appreciate it.

David Tamberrino, Goldman Sachs.

I have a follow-up questions, some things we've already covered, but I just want to understand the thinking here. Raw materials, we've seen natural rubber, which I think is a greater proportion of your tire than synthetic rubbers, bounce up sequentially here. Wondering when is that going to begin to hit your P&L in terms of purchasing. And then just given the competition within the market that you guys have been talking about, are you going to be able to pass on the price increase, again, in what are weak markets?

Well, the first thing is -- very few people tell you this, but the true fact is, which I said earlier -- I love price. It's through material, it's a commodity. So if we have to pay it, my friendly Japanese have to pay it, my friendly -- the Chinese have to pay it, and of course the friends over in India have to pay it. So, it isn't a case when you're dealing with natural rubber that only the US boys get it. So they are going to get it, too. And so then what will happen is it will get passed out. It also depends on a lot of the contracts we have, which are basically OEs on tires. Aftermarket is a much bigger force. It's two thirds of what OE comes to in tires. So, what we would look for is passing it there.

And now to answer your question, that comes also from your competition from across the waterways. And that's an unknown variable. But what I personally believe is that they will try. And of course, we are going to put it out there. So we have, at this stage -- it will give us a bounce. And the reason it gives us a bounce, because as mentioned earlier, one of the things that we have that is pretty good is all of our mounted assemblies that can go in and out. It will give us a bigger bounce there.

So, the problem child, as you go, does it keep going, or does it stop? Or does it do a flip and come back down? And I personally believe that the reason you're going to see -- you're going to see it go up -- is real simple. It is automotive driven. I mean, folks, the pneumatic tire business in the world, it runs about $160 billion, $150 billion -- billion, B. And what your total worldwide, every farm tire, every construction tire, and every mining tire -- and you put them all together, it's probably now as high as was $6 billion. It's probably down to around $4 billion today. So that's -- we are still small into that whole big target which uses and consumes the rubber. So, once automotive moves down, then hell, man, the price of natural rubber is going to drop like a rocket. And that is when you -- that's when I don't want to see it.

I appreciate the thoughts. It sounds as if it really remains on -- your competitors remaining rational, if the move continues to go up. As we think about -- go on.

But the other thing you should understand is there is a duty right now on every Chinese tire basically that -- the main thing coming in. Are there some people that are doing some things cheap? Yes. And are they going to get burned? Yes. And we have the situation of the -- our friends from India. And I believe when the Commerce Department gets done with theirs, then we go before the international, they are going to get walloped, double-digit duties, tariffs, and whatever else that you can throw at them.

And then you have -- everybody can think that the American public are just going crazy because Trump is going to -- I told everybody on this call, he was going to win it, because I run around the country all the time. And now you've got the masses. And you know, you can have the Fortune 500 and executives at the top there and they are going to be sitting on the outside. It's going to make a big difference. I think it's going to be -- we are a basic US manufacturer. I think the future is going to be good for us. And I also think coal is not going to be running out of business. They got the hell beat out of them, but I think it's going to come back. But that is my belief.

Okay, thank you, Maury. Back on the competitive landscape, when we just think about some of the recent announced acquisitions that we've seen in the space with Trelleborg and Mitas; Yokohama buying ATG; do you expect that to impact competition globally for both ag and mining tires? And in that vein, do you think consolidation in the space will be positive for Titan or potential negative, with smaller players doubling their size and getting larger here?

No, I actually think the sanity on some of those companies, they -- well, here, let's take the friends at Yokohama. The mentality of that acquisition is no different than when they ran in and bought Pebble Beach. You talk about overpaying; it's nuts. And then where do they ship all their stuff? They ship basically US and into Europe. And if you think with the election, and what's going on, you can just watch the TV. And it's happening now in Europe. You can't have people who, on the elite side, think all of this, and everybody on this call turns around and you don't really -- you know, the working men and women, they are not going to work at a certain price. And, by God, they are tired of politicians. So, hell's wrath is coming. So for us, I think it's great.

But I can't control what someone goes and pays. And then you look at the Trelleborg, I know both players very well. I think [Tom Nimitz] and his partner, they are just going to sit back there and smile. Poor Peter is going to have to really bust his fanny now, because you pay that top dollar, and what happened? You caught the downdraft. So, you tell me. You are more in the finance thing. How are you going to get it paid back? A business said did $595 million, that's sales. And the sales now are headed south. And so, someone pays them what, $1.1 billion, if the numbers are right? It's (laughter) that puts us at -- if you want to talk about capacity and what you can earn, my God. Our stock should be sitting there at $35, $40, and then probably double that.

I mean it is really crazy, so my comments on it? A lot of people in the coal business went out and spent -- in the mining business, they spent fortunes. Now they are heading to the bankruptcy. I don't understand it. Of course, if you can borrow money at negative interest, then I guess you can't go bankrupt until you have to pay it back. So I will leave them with their own thoughts.

Thanks Maury. I appreciate your thoughts. Good, good work on the working capital, Paul, John, and team.

Is that all the questions?

Operator?

Alex Blanton, Clear Harbor Asset Management.

This is a quick one, because I know we are running over time. But on the reclamation tire -- tire reclamation, you said in the -- I think in the press release that you can do 24 tires a day at that facility in Fort McMurray. Correct? (multiple speakers)

24 tires; each tire weighs, on an average, around 10,000 pounds.

How many days a year are we talking? Are you going to operate seven days a week?

They operate up there seven days a week.

Okay, so that's 8,760 tires the year.

Yes.

How many dollars per tire is the revenue?

Well, if you take what our model -- you get -- well, first, if I tell you all the prices, I'm going to get everybody all excited. You guys are going to put the number. But you get --.

You put the number -- you put the 24 tires.

I put 24 tires, and I am going to go through -- we are going to do 24,000 pounds. You get paid. Your pricing is basically from anywhere from $0.24 to $0.32, and that is all [tuneup] dollars per tire, per pound. That's what you get paid to take this tire. And then you're going to process it. You've got to cut it into four pieces, which are about [2500]. You have got to wash the thing. And it depends on how good you do that; then you put it in your reactor. And what you get out is you get about 600 gallons of an oil. The heavy oil has a flashpoint just below kerosene. The light is just the (multiple speakers).

I can't do all that math. Maury, just tell me how many dollars you're going to get for each tire (multiple speakers).

I figure you're going to -- you're probably going to average right around CAD5,000 to CAD5,500 per tire.

Okay, that's (multiple speakers).

That's your gross revenue.

Now these facilities you are going to put up in Chile, are they going to be the same size?

Everything is the same. One unit -- every unit has three reactors.

Okay, so we could then basically triple whatever number we come up for Canada there. Right?

Here, I will help you with some numbers here. You basically have got to figure every unit will generate approximately -- if you are run them 24/7 -- and I am only using the number that is up there -- there is no problem getting the tires or belting. And both of those have a high content of natural rubber, which then, in turn, makes it a biofuel. So, what happens is you end up with this oil, and carbon black, and so much steel. So I've given you -- so each unit, I would think, is probably between -- a low would be CAD15 million. A max right around CAD20 million in Canadian dollars up in Canada, per unit (multiple speakers). So you've got between CAD30 million and CAD40 million a year is what that unit up there will do.

CAD30 million to CAD40 million a year in Canada?

Yes.

And that is -- what is the CAD15 million to CAD20 million then?

I told you, one unit has three reactors. So you have two units, right now, up in Canada. So you are going to get CAD15 million to CAD20 million per unit. So there's your CAD30 million to CAD40 million in sales.

CAD30 million up to CAD40 million. And then what do you expect this year, because you're just ramping?

I would expect us to be in that range.

But, wait, you can't be in that range for the year, because you are just starting.

Yes, but you've got six months. So I figure it's going to be between CAD15 million and CAD20 million.

Okay, so half of that six months. Okay. And the margin is 50%?

Your EBITDA is that.

EBITDA?

Yes.

Yes, well, okay, that is before interest and taxes. That is basically a pretax, right? Or is there DA (multiple speakers) is the depreciation associated with this?

Yes, you've got depreciation. You depreciate that thing. I've got to look, because we have a situation up there in Canada where we are on Suncor property for the next 10 years, and we pay them for that, and they get a kick. And I don't have that right in front. But they're 10-year agreements, and with that agreement we have a situation for track, wheels, and tires.

Well, the thing is, I need to know what the depreciation is going to be (laughter) on this thing.

I don't have that off my -- we've got about CAD30 million totally into that thing. And I don't know how the accountants have the building, how they have it depreciating. I don't know if Canadian depreciation laws.

Could you get back to me on what that is? Because I wanted to --.

John, can you ask whoever's doing it? I have no idea.

Yes, I can get back with Alex with some of those details.

Okay. Thank you. Very good. Well, that was very interesting. Thank you very much.

Kirk Ludtke, CRT Capital.

Kirk Ludtke, CRT Capital.

You've got quite a bit of liquidity, and particularly if you can complete the sale of ITM. But there's not a lot of visibility into your end markets, and so it is not entirely clear when they will turn. So I am just curious if -- what metrics do you have in mind, at which point you decide to do something maybe more fundamental, like sell additional assets or reduce capacity? Is there a date in mind, or a minimal liquidity level or -- what are the -- how do you (multiple speakers)?

The matrix that we are trying to do, that Paul is busting his fanny with a bunch of his team members and everything, it's real simple. You have to run your factories. The situation that we have is that Des Moines and Freeport can turn around and make whatever, each one. So right now, they reduced their capacity. And the situation is that you take that -- you take it by just dropping it basically down, which is human people. And you condense at a certain point, and you are better off to run it as a breakeven because the fixed costs are going to sit there whether you temporarily shut it down or you don't.

And then the Bryan facility, they knew it could be a positive generator in 2016. But because the determination at the end of the fall, when they listed how they were going to take Bryan down, they crossed the threshold of the -- what happens with the WARN Act. So they didn't -- Bryan did not finish the last reduction of employees until the end of February. So you're looking to 1 March is when they are starting to go.

Now Bryan, because the orders and what we started, Bryan has a number of SKUs that are behind that. So they are starting to go into overtime. And you're going to run overtime up there until such time as you can't produce the tires you've got until you bring -- start bringing people back. But you want to run those 48 hours, because that is the most economical way to run a facility.

So, all of this is being played out. And you're -- so to speak, as you say, you don't really have a strong visibility to it. But we are doing the other things to make it so that you can run this thing. And when it does start to tick up, you just notch it up. And I think we are going to get to there between now and the end of June, we will have this thing pretty well tuned up. You -- like you say, we've got the liquidity. And I think we are going to have a very successful situation with ITM. And the situation from there is there is no other -- except for TTRC, which I mentioned, the Board will have that decision. There's no question it will bring profit.

But, then, you have to -- we've already had contacts from mining companies both in Australia and in Chile that have gone to see what doing on in Canada, and we want to do that. I mean, it takes -- every place is not one of the nice places like New York City. You might be considered a concrete jungle, but it's pretty nifty. My wife even loves it. She was born there. But you -- trust me, it's not where you end up, up in Fort McMurray, even though there so many great people and that is their living and that is where they are going to be.

But the other places, Antofagasta is in Chile. And you go down to Australia, all those places, they are not in Sydney. They are not in Perth. They are not in Melbourne. So right at this moment, you're talking to the guy who has to go to those places. And my feeling is I would rather take a little bit of profit, pay it back, and then I am really flush with cash; and let someone else run with it. And that's just the way I see it.

So you've got another lever to pull with that business.

I will leave that lever -- that lever will end up with environmentalists loving it, everything else. It would be like the fellows from -- who knows. Maybe I will get the Swedes or the Norwegians, who just love this -- or the Danish. Who knows? But they will be running all around. I mean, this works for all these big tire dumps. But when you go to a big passenger car, you don't get the biofuel because it's a synthetic rubber that's used. So that's the story there.

So yes, our future is really -- it's pretty bright. We are taking care of getting anything set. Trust me, I am more positive now after going down and watching the peanut farmers, and watching the guys planting pickles. And it's crazy once you see some of this stuff. But the farmers are pretty happy. They could be sitting in a back room with millions of dollars. And they would still tell you, it could be better. It could be better. And they want a bargain. That's -- but it's an interesting time. I think for manufacturing, everybody is going to be surprised, how things start shaking up. It's about time.

Are you in New York?

No, Stamford.

Oh, you're in Stanford. That's where my grandson wants to go to school. He'll probably get a scholarship there -- or are you up in Connecticut?

I am in Connecticut. I should mention, yes, Stamford, Connecticut.

Okay, you are up in Connecticut. Well, you know, you're in a high tax area. Did you hear what Illinois was trying to pass?

No.

The poor Democrats in Illinois, they felt so bad for California, New York, Connecticut, all the high taxes on all the rich people -- they want to graduate income tax up to 11%. They can't keep it. They're nuts. Like everybody wanting free college, free this, it's -- I guess we are just going to look up, and we are going to beam everybody up. So, interesting.

(laughter) Very interesting. Thank you very much.

That's it. Everybody, appreciate your time. And again if you ever get a chance, come on out here and visit us. We are pretty proud of what we do, and we have a pretty unique team. So with that, from the old man, have a great week. Ciao.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.