Titan International Inc (TWI) 2017 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Titan International Inc. Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions)

As a reminder, certain statements made in the course of this conference call are considered forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 and reflect the company's or management's intentions, hopes, beliefs, expectations or predictions for the future. The company's actual results may differ materially from the intentions, hopes, beliefs, expectations and predictions contemplated in these forward-looking statements and as a result of various factors, including those discussed in the company's latest Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.

In addition, today's remarks may refer to non-GAAP financial measures, which are intended to supplement, but not to be a substitute for, the most directly compared GAAP measures. The earnings release, which accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the non-GAAP measures to the most comparable GAAP measures and is available within the Investor Relations section of our website. Participating from Titan International on today's call will be Mr. Paul Reitz, Titan's President and CEO; and Mr. Jim Froisland, Titan's Chief Financial Officer and Chief Information Officer. Please note, today's call is being recorded.

At this time, I would like to turn the call over to Mr. Paul Reitz. Please go ahead.

Thanks, and good morning, everybody. I appreciate you joining us today. I'll start by going through some highlights on Titan's business, and then I'll turn it over to our CFO, Jim Froisland, to run through the financial side of the house, and then we'll conclude by taking your questions.

To start with, I think we had a really good finish to 2017. Our fourth quarter sales were up 22%, which propelled us to a gain of 16% for the year, and so our total sales landed at just under $1.5 billion. I had a business colleague, from over 20 years ago, that liked to say, "Elephant hunting typically ends bad for the hunter."

So for Titan, it's really good to see the revenue growth this year came from solid gains across all of our business units and segments. This means we built a good foundation with our growth, and we didn't just simply find ourselves 1 big elephant. Another point I'd like to make that illustrates the strength of our 2017 growth is that, this was the first time since Titan became a public company in 1993, that we experienced sequential growth in all 4 quarters throughout the year.

I like to spend time referencing sports frequently when I talk, and I do that because I believe there is a high correlation between winning in sports and what takes place in the business world. The basic premise for success in sports

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and towards the same goals and

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'14, as our company was facing a super commodity cycle that was coming to an end and creating a challenging business environment of which we hadn't seen for many years, if not decades. Clearly, we've been through a lot of cyclical turns, but this one was going to be different. And you look at what Titan's guiding light strategy since our inception, it's really been about accumulating distressed assets and adding value to them.

In the years preceding 2014, you know Titan went outside our historical sweet spot. We embarked on a geographical and product-based expansion. Then the cyclical downturn came roaring in, while we're still in the process of digesting these acquisitions. So as a result, we generally found ourselves operating more like a holding company than a synchronized global business, which was clearly our goal at the time we were doing this.

Therefore, starting the downturn, right in the face -- or staring -- downturn staring at us right in the face, it became imperative that we make some organizational changes to fight these impending challenges. These changes started right at the top with us, with the launching of our One Titan operating framework, and One Titan's essential premise is simply about getting our business units, our diverse business units and plants and operations and all the departments working effectively to make good decisions that were in the best interest of Titan International.

We needed to do that with the situation we faced over the last few years. So basically, anyone or any group not rowing in the same direction of the One Titan mission was not going to succeed. As we sit here today, I firmly believe we have demonstrated the success of our One Titan team over the past few years during this downturn and definitely so this year (inaudible) to drive the growth that we did. As we all saw recently (inaudible) the great Tom Brady could overcome to backup Nick Foles, and the strength of the overall [better] filled up your Eagles team. I don't want to belabor that game any further, but my point is, One Titan has been successful for us in getting us through the downturn, when our stock was down there hovering $3, our bonds were below $0.65 to now get us to the point where we produced the gains and the improvements, we reported for fiscal 2017.

All right, let me go in a different direction and take a few minutes and spin around the globe to recap 2017. So starting in North America, we saw our bellwether wheel business bounce back really well this year with good growth that was also coupled with solid improvements to operating margins.

Our North American wheel plants thrives on volume. So it was good throughout the year to see our small and midsize Ag business perform well, and we started to see our large Ag come around better in -- as we got to the back half of this year.

At the end of 2017, we also completed a consolidation of our OTR wheel plant that was based in Virginia into our large wheel plant in Quincy. This will drive improvements to our future margins in our OTR business.

Then moving over to our tire business in North America. As you know, we got hammered to start the year with a $19 million hit to operating margins from raw materials and the increase was associated primarily with natural rubber that we were not able to pass on to our customers. Every tire manufacturer has addressed this point already, so there's really nothing more to say. But absent the impact of raw materials, our North America tire business definitely saw the positive impact of the initiatives we launched back in 2016.

It helped drive us to double-digit sales gains in our Ag tire business.

Now again, our margins were impacted by the $19 million that

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while Ag moved in a positive direction in 2017 and looked good to start 2018 as well, a primary goal for us this year is to make changes to improve our operating margins at our OTR tire business. This plant was built for higher volumes, much higher volume than what we've had the past few years, and this obviously causes inefficiency and cost absorption issues. We've reduced headcount over the past few years. We've done other cost-cutting measures, obviously, but in 2017, that still has not been enough to provide satisfactory margins. We started to see some improving OTR market conditions at the tail end of 2017.

Along with that, we have launched a number of sales-driven initiatives to drive improvements to both volumes and ultimately to operating margins and this is going to continue to be a primary focus for us, as we move into 2018.

So moving down to Latin America. Overall, in 2017, we posted good solid gains in revenue and operating income. I had said this before, but our Latin American team has done a really good job since we bought this business in 2001. Across the board, they've improved plant efficiency, developed new products, launched a new OTR line, and of course, they jumped into the top spot in Latin America Ag tires and starting a couple years ago with that accomplishment.

Our Latin American operations had really strong gains in the first half of 2017. We did start to see some slowdowns near the tail end of the year, we faced tougher comps in a slowing Ag sector in Latin America. We know that Brazil in 2018 could be hitting some headwinds, but we still remain confident with our plans to continue to grow in 2018 and keep our Latin America business on a good path.

Early in 2017, we expressed our confidence in our ITM undercarriage business when we made a decision not to proceed with the divestiture process. Since that point, our ITM business has lived up to and even exceeded, our expectations. As in 2017, we saw ITM grow handsomely in sales, EBITDA and operating profits.

The heavy commodity market has definitely improved and helped us, but we've also benefited from our own strategic investments we made the past couple of years, to better position ITM in the marketplace. We see ITM's growth continuing in 2018 on a strong path, which further supports our decision to keep this as a key part of Titan.

Now over in the CIS region, Titan Russia has in 2017 faced challenging economic conditions. They were amplified by the raw material pressures that we referenced many times. In the CIS region, it was different than North America, wasn't just a pass-through situation that caused the problem. We also had a competitor that was being aggressive on pricing and really absorbing the impact of raw materials and going after volume. We have a premier product in that region and so we continued to price our tires, our products as such and we did not respond to the competitions' pricing moves. As a result, when you look at 2017, we did take a hit in the CIS to our expected volumes that we had forecasted. But with that being said, Titan Russia still posted double-digit gains in both sales and operating margin. Look, every time you mention the Russia, the CIS region, we all understand the geopolitical sensitivity in this area. But again -- I must state again that our Titan Russia business has come a long way from where it started.

We have a good local management team that has really positioned this business well to continue successfully moving forward into the future and we do have (inaudible) some nice improvements and gains in 2018.

Then moving down under, we acquired the Australian business of the Planet Group in 2012. And since that acquisition, that business has seen its share of internal and external challenges and it has really required us to overhaul the operations and the team for that fact to get things moving in the right path. It's really good to be able to say that in 2017, we beat back those issues and we did achieve positive EBIT in Australia and that has not happened for a long time down there. In fact, probably have to go back to a year or 2 right after acquisitions since that has happened, so again, a good accomplishment for our Australian team.

So looking forward to 2018, as stated on the last call, where we see our business going this year

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and we continue to believe in the outlook that we had discussed earlier, and our strategic investments continue to payoff, along with improving market conditions, so that is definitely encouraging, as we sit here and begin 2018.

In general, we're optimistic about where Titan is going. It's evidenced in how our North America wheel and tire business has finished 2017, along with our wheel and our undercarriage, Earthmoving and Construction segments. They all finished on a strong note and combined with the strength we've seen in the order decks, as we sit here today, we do continue to believe in the outlook that we presented in Q3 of last year.

While we're glad to see these improvements, the Titan team realizes we have a road ahead of us to keep improving our operating margins and the bottom line. Our operating margins must continue to grow in the future.

This means, our One Titan team needs to remain diligent to ultimately reach our goals and win the game that were set out in front of us.

Move over to one last comment here before I turn (inaudible) Jim, and I let Jim talk further about this. But I do want to make a quick comment about the $10 million asset impairment that was recorded, related to our tire recycling operations in Canada.

As we had discussed previously in 2017, we did have a fire there that destroyed 1 building that housed 3 reactors. We do have a total of 6 reactors at that location. Again, I'll let Jim talk about the accounting ins and the outs of why we recorded this and how things work later when the insurance comes back with their settlements, but I do want to state, from a business perspective, our TTRC Canadian team is still confident and remains confident, as they always have been, that our operations will be successful, and we will get this up and running again in the future. They've been working closely with our partners up there in the oil sand to ensure that everyone understands the situation and what our plans are moving forward. That's been communicated across the board with everybody we need to up there. We are, though, still continuing to work with the insurance company to resolve that process. So at this point, we've not encountered any foot -- red flags with the process with the insurance company, but there is really not much more we can state, so that's why you see the accounting treatment that we had to do this quarter. Once we reach an agreement with the insurance company, we will communicate more about that. We'll communicate more about our plan for TTRC in Canada and of course, we'll update our financial records accordingly.

So with that, I would now like to call -- turn the call over to Jim to discuss our -- financial side of our business. Thank you.

Thanks, Paul. I will begin with a reminder that the results we are about to review were presented in a news release issued this morning and will be discussed in more detail in our Form 10-K, which was filed this morning.

Let us start with the income statement. Net sales for the fourth quarter of 2017 were $376 million. This was up more than 22% or almost $69 million from a year ago. This is the fourth consecutive quarter with year-over-year, double-digit increases we have seen. Sequentially, net sales grew $5 million, up approximately 1% from third quarter 2017. This is not our normal seasonal trend, as we often see net sales declining from third to fourth quarter, as you experience plant shutdowns and holidays.

Here is what it meant in terms of our segments. Net sales were higher in all segments when compared to the same quarter last year. Overall, net sales volume was up 16% with higher volume across all segments and geographies. Our Earthmoving/Construction segment saw the biggest improvement in net sales of more than $43 million or 35%. Our Agricultural segment was up 14%, while the Consumer segment increased 12% compared to last year.

Before we discuss gross profit and margin, I'd like to further explain the asset impairment that was reported during the quarter. As we previously announced on September 21, 2017, a fire broke out at the TTRC facility in Fort McMurray, Canada. The facility contained 6 thermal vacuum recovery units, which are large contained capsules used to recycle large mining tires.

Since then, an investigation has been in progress. In February of 2018, as part of the investigation, information became available that the TVR units involved in that fire were a total loss. Therefore, as required by accounting rules, as a result of this involuntary conversion, an asset impairment for the damaged TVR units at net book value was recorded.

It should be noted that, as Paul stated, Titan carries both casualty and property insurance for this facility and the equipment as well as the -- as business interruption insurance. The asset impairment charge or loss was partially offset by an initial $1.6 million advance from the insurance company received to date for a net total of $9.9 million. We anticipate receiving additional insurance proceeds, and we'll reflect such proceeds in our financial results once the cash is received.

Moving on to gross profit and margin. Reported gross profit for the fourth quarter was $35 million or 9.4% of net sales. Excluding the previously mentioned asset impairment, adjusted gross profit for the fourth quarter was $45 million, up 42% and was 12% of net sales versus $32 million and 10.4% of net sales in the same quarter a year ago. The increase in adjusted gross profit as a percent of net sales was driven largely by increased volumes across all segments, with the Earthmoving/Construction segment increasing the most.

Taking a look at our other 3 segments, our Agricultural segment net sales for the fourth quarter were $166 million, up $21 million or 14% over the comparable prior year period. The North American region grew 18% over the fourth quarter 2016, with gains experienced in both OEM and in the aftermarket. Russia was up 33% during the quarter, while Europe experienced 16% growth in net sales during the fourth quarter when compared with the same period a year ago. Our Agricultural segment gross profit in the fourth quarter was $21 million, up from $18 million in the comparable prior year period.

Gross margin improved 62 basis points in the fourth quarter to 2.9 -- excuse me, 12.9% of net sales. When compared to the same period a year ago, the increase in gross profit as a percent of net sales was the result of North American volume increases.

Moving on to the Earthmoving and Construction segment. The segment's net sales for the fourth quarter of 2017 were $166 million, an increase of $43 million or 35% versus a year ago. All regions improved over the prior year quarter, with overall volume gains driving the increase. Investment decision -- the investment decisions were made in our ITM aftermarket business have shown positive returns for more than a year, beginning in the fourth quarter 2016. The segment's reported gross profit for the fourth quarter was $7 million, which represents a $2 million decrease compared to the same period a year ago. Impacting the gross profit in this segment was the previously mentioned $9.9 million asset impairment recorded during the quarter. After excluding the impairment charge, the adjusted gross profit for the fourth quarter was $17 million, up from $10 million or 79% versus a year ago and a 252 basis improvement in gross margin to 10.3% versus a year ago. North America, Europe and Australia, each contributed to this increase.

Now on to our Consumer segment. This segment's fourth quarter sales were $44 million, an increase of $5 million or 12% when compared to the prior year. All regions except Australia improved over the prior year quarter with overall volume gains driving the increase. This segment's gross profit for the fourth quarter was $7 million, an increase of $2.2 million or 48% versus a year ago. Gross margin was 15.4%, an improvement of 370 basis points over the same period last year.

Turning to the operating expenses. Selling, general and administrative and R&D expenses for the fourth quarter of 2017 were $37 million, a decrease of $2 million when compared to the prior year period, or 4.9%. When considering only SG&A expenses alone, the reduction was 5.8%. This decrease was in line with our continuous improvement initiatives that started in the beginning of 2017 and focused on reducing both fixed and variable expenses.

Finishing up on the fourth quarter operating statement. We reported a loss from operations of $5 million, which included the asset impairment of $9.9 million. Income from operations for the fourth quarter of 2017 excluding the asset impairment was $5 million, compared to a loss of $10 million for the comparable prior year period, an improvement of $15 million.

Oil expenses came in at $3 million, which was up $6.6 million or 27% due to higher net sales when compared to the prior year period. Interest expense of $8 million was up $0.3 million or 4%. The loss on the repurchase of our senior notes was $18.6 million during the period. Foreign exchange loss of $2 million was worse by $3 million when compared to the comparable prior year. Other income of $3 million was up 42% on the comparable prior period. This resulted in a reported loss before taxes of $30 million.

Excluding both the asset impairment and the loss on senior note repurchase, the adjusted loss before taxes for fourth quarter 2017 was $2 million, an improvement of $12 million from a $14 million loss from the same period a year ago. Tax expense was $5 million versus $1 million expense in the comparable prior year period. This tax expense was due to losses in the U.S. and certain foreign jurisdictions, where the tax benefit could not be recorded due to a valuation allowance. The net cash tax payments for the fourth quarter were $4 million versus $1 million a year ago. Titan recorded no additional tax expense related to the Tax Cuts and Jobs Act, which was enacted during the quarter. All this led to a reported net loss of $36 million for the quarter, equal to $0.55 loss per basic and diluted shares versus last year's net loss of $15 million, equal to $0.27 loss per basic and diluted share.

Excluding both the asset impairment and the loss on senior note repurchase, the fourth quarter 2017 adjusted net loss attributable to Titan was $5.7 million, equal to $0.10 loss per basic and diluted share. This was a $0.15 per share improvement from the loss of $13.6 million, equal to $0.25 loss per basic and diluted share in the comparable prior year period.

For the fourth quarter of 2017, earnings before interest, tax, depreciation and amortization was $10 million versus $8 million a year ago. On an adjusted basis, excluding both the asset impairment and foreign currency exchange, adjusted EBITDA was $22 million for the current quarter versus $7 million a year ago. This is an increase of more than 3x the prior year same quarter amount. We use EBITDA and adjusted EBITDA as a means to measure the company's performance. We have a full reconciliation of EBITDA and adjusted EBITDA non-GAAP measures to the net income in our press release issued earlier today.

Now I'd like to move onto financial condition and highlight a few key balance sheet, liquidity, capital items. Our cash balance of approximately $144 million as of December 31, 2017, was $54 million below that of the prior comparable period.

When you include the certificates of deposit at the year-end of 2016, this decrease was primarily attributable to the increase in working capital needed to support the sales increase during this year and moving into 2018.

We ended the quarter with inventory accounts receivable and accounts payable balances at a higher level -- at higher levels when compared to the prior year. However, our overall cash conversion cycle remained the same at 97 days when compared to the same period last year. Therefore, we continue to diligently manage our working capital, as our net sales increased 22% from a year ago.

Moving onto comments concerning our debt. Our combined current long-term debt totaled $451 million, which represents an increase of $4 million during the quarter and a decrease of $55 million from the same period in 2016. This reduction, from a year ago, reflects the previously announced conversion of our convertible debt in January.

During the fourth quarter, we announced completing the refinancing of our $400 million principal amount senior secured notes which were due in 2020. These new notes mature in 2023 and are subject to an interest rate of 6.5%, which is lower than the rate of the refinanced notes. Capital expenditures for the year ended December 31, 2017, were $32.6 million versus $41.9 million a year ago. Capital expenditures for 2018 are forecasted to be in the range of $35 million to $45 million.

Cash payments on interest are currently forecasted to be approximately $30 million in 2018, based upon year-end 2017 debt balances and maturity. We believe we have sufficient funds for operating and working capital needs for the foreseeable future.

In summary, there are several positive takeaways from our fourth quarter 2017 results. One, net sales increased by 22% for the fourth consecutive quarter at a double-digit rate. We increased gross profit by $3.4 million or 11% year-over-year improvement. After adjusting for the previously mentioned asset impairment, gross profit increased $13.3 million, a 42% year-over-year improvement.

Two, SG&A expenses decreased by over $2 million or 5.8%, while net sales increased 22%, lowering SG&A to 9% of net sales versus 12% in the prior comparable period.

Three, adjusted EBITDA increased more than 3x the prior year amount to over $22 million. Four, $400 million principal amount of senior secured debt was refinanced, extending maturity to 2023 and reducing future interest cost as a result of reduced interest rate.

With net sales improving for 4 consecutive quarters, our results demonstrate continuing signs of recovery. We are cautiously optimistic heading into 2018, and our previous guidance for 2018 remains the same.

I will be glad to answer any questions you may have on these or other financial matters. In the meantime, I'd like to turn the call back to the operator for questions. Thank you.

(Operator Instructions) And our first question comes from Steve Volkmann with Jefferies.

Paul, you mentioned, I think, at the outset that your order books were looking a little bit better. I'm curious, maybe, if you could just, kind of, bring us up to speed on what you're seeing in the end markets, sort of, Construction versus Ag, replacement versus OE, large versus small, just, whatever kind of color you can give us on how your order book is looking? And how you're, kind of, looking at '18?

Yes. Generally speaking, we've seen good improvements across the board. Now Ag is weaker in certain areas such as Europe, doing better in North America, holding its own in Brazil, kind of, -- for us, I think that's a -- it's divided pretty well between OEM and aftermarket, so I think both areas are functioning very well. It's clearly not a commodity-driven process or improvement. It's not a farmer income-driven improvement. It's really just the industry fundamentals and Titan's business fundamentals improving. And so I think, it's spread across-the-board and definitely

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side of the business, we're seeing that move in good directions in just about every location. And I think that's more driven by industry improvements and, obviously, coupled with some of the changes we have over the last couple of years, but you're seeing more of an industry cyclical improvement there than you are necessarily in Ag. I think Ag is just fundamentals of the business and dealers getting their inventory right-sized, people managing input cost better. So for us, we've seen that, kind of, spread into our order books where generally across-the-board, kind of, like how we saw 2017, things are just fundamentally improving, and it's not, Steve, happening in 1 big area where we could say this is the shining light, and we're going to follow that. I think we're just -- we're spread pretty evenly, seeing things move -- continue what they did in 2017 and continue to move in a positive direction for 2018 with order books. We got to continue to watch it closely, we got to continue to stay on top of it. And I think if we continue to do that, then 2018 will be a very good positive year for us.

Okay, great. And then just a quick, totally unrelated follow-up, but I think that somewhere around mid-'18 is when they potential put option on that Russian deal, kind of, comes to fruition, and I'm just curious if you have any updated thoughts about how that's going to play out? And if you did have to put out cash for that, how would that, kind of, get funded and so forth?

Yes, I mean, we are having discussions with our partners on that, and that will continue as we get closer to the date you mentioned. From our perspective, we're assembling a multitude of plans on how we can address it. And it'll depend on how we end up with our partners and how we move forward with them into the future. So I think, as Jim stated, we're comfortable with whatever solution is drawn up, and it'll -- in all likelihood, it may be a blend of different approaches versus just 1 direction, but it's still early on that, but it's definitely not something that we're waiting to really plan for. It's something that we will continue to work on, Steve, but I just -- we don't have anything concrete that we could talk about here today.

Our next question comes from John Mondillo (sic) [Joe Mondillo] with Sidoti & Company.

So I wanted to talk about the SG&A. First off, wanted to -- in terms of the fourth quarter, so your SG&A fell about 2%, I think, revenue up 22%. Could you explain to me how that's really possible with such strong revenue growth? Essentially, I'm just trying to make sure that we're not eliminating certain costs that will, sort of, hinder future growth?

Yes, this is Jim. Again, as I mentioned in my notes, we set out a number of initiatives at the beginning of last year. One of them was what I call profit leaks, just taking a close look at -- doing the basics, looking at our SG&A expenses, and there was quite a few findings at the corporate level, for example, naturally, when we got -- when we solved or remediated our material weakness, our audit fees came down and cost associated with that. That's just an example. We've taken a close look at our legal spend. So basically, it's taking a hard look at, as I said, every fixed and variable cost. Now to address your question, are we hurting the business? No, I don't believe that. We're increasing our productivity, as Paul said. We are taking a hard look at making sure that what we -- how we invest our money in SG&A. And also, as I mentioned earlier, we've invested some money. It's not only just in people but also in the technology side of things. So in my opinion, all roads in SG&A lead to people and technology.

Okay. So in terms of the 2018 outlook then, what are your expectations? Do we continue to, sort of, see a flattish or declines in SG&A? You put out a target of 10% to 10.5% of sales, SG&A and R&D the last quarter around -- does that, do you see downside -- is that -- could that be lower given revenue trends? And then just in terms of the ERP investment, how does that, sort of, play into it? Do we see higher ERP spend in the first half of this year? Just, sort of, give us outlook on, sort of, SG&A and how that trends?

Yes, well, we stick with our guidance. Those numbers that you mentioned in terms of SG&A as a percent of revenue. In terms of ERP system, as I said before, we'll have additional cost, but at the same time, we're taking costs out. I mean, we're basically going -- as I said before, we're going to the cloud. So we will not -- we will gradually get off our AS/400 legacy-type platforms. But for the -- I would say, for the -- mostly in the third and fourth quarter, you'll see an uptick in IT cost, but you'll also see corresponding as it relates to the cloud but also some reductions in other IT costs as well as other SG&A cost.

Okay. And then in terms of, I guess, gross margins on the Ag side of things, could you, just, maybe walk through some of the puts and takes of mix, price cost, how you are thinking about it heading into the year?

I'll jump in first, Jim, and then you can add on. I -- with gross margins, Joe, we're seeing a mix that's improving in the back half of the year. The first half of the year was really driven by the small and midsized market. We're seeing the large products start to move better, which is a plus for us, as we continue to grow volumes, which we did in '17 and then into '18 as well. We'll see the plants get more efficient. We've been hiring. The only headwind we face right now is just the training cost of getting people up and running and working effectively in the plant. So at all our locations, we are hiring, we have been hiring, and we'll continue to do that, and we're getting them adopted into the plants as quickly as we possibly can. So we're pretty efficient at doing that, but there is, obviously, a learning curve to -- of 2 to 3 months where you really -- before you really get somebody operating at a high level. So for the business overall on margins, I think economically, just fundamental, it's going to continue to improve where we got to watch things closely. It's just the balance between pricing and cost with raw materials and then where you can pick up some additional pricing power. As the markets go in a favorable direction, compared to where we were over the last few years. Many times you have a prolonged downturn, multiyear prolonged downturn. It gives your customers a chance to really focus on their costs and they, in turn, are going to find ways to pit suppliers against each other. And so that's the market.

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kind of mid part of

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to see that change. It's not going at a gang buster level, where you all of a sudden have pricing power flipping all the way over, but we are going to continue to look very closely at how we price our products, where the demand is increasing compared to the supply in the market. We're -- we've been focused on pricing for a while, and we're going to continue to do that. We got a 2-day meeting set up for next week that's just about pricing. So I think on the fringes, you continue to get better on your pricing versus your cost. Again, assuming that raw materials don't have any hiccups like we did in 2017, you put all that together and you keep driving some margin improvement in that direction. Again, I think the big headwind for us, though, is just bringing in headcount. Whenever you're doing that, you got some cost you have to absorb. But other than that, [and then, but that's a] positive. Once you get a trained workforce in place, I mean, now you're really running, you're getting some improved volumes going out the door.

Okay, just as a follow-up on, sort of, mix, where are we in the cycle of small-large mix. Are we still very close to the bottom? And do we still have a big runway of, sort of, the shift in mix? Or where are we within that cycle?

Yes, I mean, the mix is still skewed compared to historical levels towards the small-mid. The large, while it's improving, if you look at historical metrics going back over the last couple decades, it'll tell you that there is definitely runway ahead for the large market to keep going, so I think that's a positive that we're not sitting here. Already, having taken on the improvements in the large market, I mean, we got a lot of runway ahead of us, and for us, our plants operate very well. That's what we're designed to do. We are designed to serve the large Ag market, that's the core of our company. Wherever you look around the world and so as the large markets improve, we definitely have the capacity and the capability that's second to none in our industries to serve customers in ways that not everybody can, and so we're prepared for that. We are going to continually be prepared for that. Again, the only thing we got to do is keep hiring people and training them, but there is -- again, compared to historical levels, there is runway ahead on the large market.

Okay. And I'll just -- one more for me, and then I'll hop back in queue. In terms of taxes, could you understand, or could you help me understand how -- first off, how you're paying cash taxes despite seeing pretax losses in the prior periods? And then, how you see Tax Reform affecting the bottom line?

Yes, this is Jim. In terms of Tax Reform, it all -- it really has no impact. The reason for that, it's the same reason you stated about the tax question. It's our NOL position and the valuation allowances, as it relates to the countries that we're in, and the mix thereof results in the taxes that you see on the -- and reflected in the financials.

And just in terms of the cash taxes that you've been paying, despite pretax losses, why is that? Why are you paying cash taxes? Why are you paying taxes on losses?

Again, it's just the foreign jurisdictions. I mean, in some countries, we're making profits, and we have to pay the governments their due tax.

Okay, and that's offsetting losses elsewhere, I guess?

Well, we are not getting -- I mean, basically we're not getting any benefit on [there].

And Joe, one

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I mean, Jim and our Treasurer and IR, VP Todd are -- they're looking at how we can position ourselves from a tax standpoint. Some moves we could make with how you set the company structure, pretty standard stuff that both -- all of us have been doing for 20-plus years. So I think there's ways where we can reduce that cash tax expense. Also along with that projects, taking a look at how we got our intercompany balances structured with our different entities and try to remove some of that FX volatility, so that project is underfoot and hopefully something that will get locked in here in 2018, but it'll be improving both taxes and FX volatility.

Just a follow-up real quick. The cash taxes seem to be running at about $5 million, the last 2 years. Best guess, if your foreign businesses continue to improve in 2018, should that be similar to, maybe, a little higher in 2018? Is that a good way of thinking about it? Or...

Well, it's -- again, it really depends on mix, but yes, I think that it's going to be around that level.

Over next question comes from Larry De Maria with William Blair.

Looks like sales and adjusted EBITDA, obviously, ended higher-than-expected and you're maintaining the guide for next year. Just want to clarify, was [the look in] 7 to 12 and 50 to 100 [gains] from where we ended the year imply from the 1.47 and the $72 million in EBITDA, that's correct, right? So the new range on EBITDA is $108 million to $144 million, is that right?

Yes, we'll take the outlook issued in Q3 and apply it to the 2017 number that you referenced.

All right, so essentially, probably, a bit higher, okay. Can we narrow that $108 million to $144 million down a bit? Or can you maybe help us supply some kind of a bridge to get to the mid or upper end of there considering, obviously, the starting on a much lower base?

At this point, it's early in the year. What we're looking at from our team's perspective is that we are comfortable with the outlook we put out there. We see the path on how to get there is really, kind of, how we talked about 2017 results is spread across all the business units and segments within our company. So it's -- the bridge is not simply just take A + B and you get C. You're getting revenue gains, you're getting some margin improvements, you're getting cost cuts, you're reducing SG&A, and so it's again -- it's really a broad-based improvement, so what we are looking at is, again, the overall forecast, and the overall picture for 2018 supports the outlook that we put out there. As far as narrowing that down, that something that as year progresses, we could look at doing that, but for today and for now, for the 2017 results, we just keep the 2018 look -- outlook as is.

Okay. It's fine. And then, I guess, how should we think about seasonality? It sounds like you have better results expected in the second half, based on mix and some things, is that right? Or did I hear that wrong? Just wanted to understand first half versus second and make sure we model it correctly.

Well, the seasonality is the nature of the business. You've got plant shutdowns that take place, for the most around the world, midsummer, this is a slower period in the European markets and then around the December holidays, and so you do have some natural seasonality that is built into just the business model. So I wouldn't take that off the table for 2018. I think what we saw in 2017 was just the improving conditions taking effect in the second half of the year that propelled the back half to be strong in a way that we have not typically seen, as Jim had mentioned, but I would not take what happened in 2017 and apply it forward, because you just have fewer working days available in the back half of the year compared to the first half.

Okay. And then, I just had 2 more quick questions, if you could. You mentioned, Paul, I think that Ag order boards in Europe were weaker, was there something fundamentally driving that? Or is that, maybe, driven by the -- some (inaudible) or [other] rules in Europe. If you could clarify that specifically? And secondly, price-cost, can you just help us understand what kind of inflation for steel and rubber you expect this year? And what kind of price increases we should be looking for?

As far as my comments on European Ag, it's weaker compared to the rest of our markets that are growing. It's not in a declining situation that causes panic. It's just -- it, generally speaking, is not as strong as everywhere else, and so it's, again, not a -- not an area of highlighted concern where we're looking back -- that we're looking to have to pull back cost and reduce production levels, but it's just not an area of growth. It's not the same level of growth as the rest of the business. As far as the questions on raw materials, I think our forecast for raw materials on the rubber side of the business, it looks like the supply is in pretty good condition, so the issues that existed in 2017 don't appear to be percolating at this moment. and steel, obviously, there's just a lot of talk going on in the world these days about steel and specifically, from a U.S. perspective. From our North American business, the way we have it structured, we do believe at this time, we have sufficient supply for steel, and we have sufficient capability to pass through any increased cost to our customers in a -- in, what I would call, a timely, efficient manner. So our North American wheel business is much different than our tire business, and so as we sit here today, we clearly are watching it closely, both supply, cost, price in the market, but we don't have any forecasted headwinds for steel. And that's generally true across the world on steel, but it's -- steel is volatile. I mean, the announcements of potential tariffs and what may be going on with price competition, clearly, it's something we just got to stay very close to, but at this moment, the way things are, the rising cost in steel is not the same -- is not a concern, it's not even the same situation, as what we faced last year with rubber, so at this point, again, raw materials appear to be fairly stable, neutral environment, and we don't have any forecast for that to change. And by neutral, I just mean price to cost, not obviously, price -- price of steel is going up, but for us, the price-to-cost ratio seems to be very stable.

Okay. Paul, and then just a follow-up on the Europe comment, so essentially, it's just not as strong on a relative basis than other regions, but you would expect some kind of moderate growth in Europe. Is that basically what you're saying?

Yes. Yes, I mean we do see some parts of the business that are growing. It just -- it's not that same levels, what we're seeing elsewhere.

Our next question come from Justine Fisher with Goldman Sachs.

I just have 1 question on your aftermarket. I know this was a business so you guys had talked about when you were on the bond roadshow in the fall. How is the growth in that business trending? For -- and what are your expectations for 2018?

On the aftermarket is -- we see good trends going forward into the future based upon just the amount of the equipment that came into the world in the early part of the decade, '10, '11, '12, really put a lot of new equipment out there. They're running the equipment longer and harder, so for us, we do believe aftermarket will continue to be an area of growth and opportunity. We've done a number of different measures that we've talked about; with pricing, we did that about 1.5 years ago to make sure that we are priced properly within the market and got our products positioned where we wanted to be. We have LSW, which continues to be a good growth asset for us in the aftermarket, and really from a sales environment, we continue to just look at our sales force in our organization to make sure we got everybody out there hustling as hard as they possibly can to hit every potential customer. And I still see opportunities for us to continue to grow just from a sales organizational perspective. And our dealer network, it's something we got some ideas on how we can continue to do that, and we've already launched some of those early this year. So broad-based speaking, I think the aftermarket will continue to be a positive growth engine for us. Clearly farm incomes, the reports that we've all seen coming out of the USDA are not -- headline-wise, they are not great, obviously, but I don't think there's any reason for a concern at this point that if farmer incomes are flat to down as they project

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farmers have done a good job (inaudible) in cost and [directly] at some point if they (inaudible) going to have to do some replacement and maintenance on that, which is good for our aftermarket business.

What percent of your revenues is aftermarkets? I mean, it's a very small percent now, right?

It's a small percent only on the wheel business. And what we do on the wheel business is primarily more OTR-related, where you have components and you have refurbishment and repair work going on. And that's true for the most part on a global basis, and so the OTR wheel business has some replacement. Ag wheel, there is very minimal replacements, but on the tire side of the business, we really positioned ourselves to be about 50-50 split between OEM sales and aftermarket sales.

Okay, great. And then just my last question is on working capital for this year. I know, there was a decent use in 2017. I see your inventories, and your inventories were up and what's the expectations for working capital in 2018, do you expect it to be more of a source of cash?

Well, I mean, working capital -- Jim made some comment, and, Jim, you can jump in on this as well. I mean, Jim made some comments about the investments we had to make to support the growth in sales. My expectations for the team this year is that we should hold the line, and Jim mentioned that our cash conversion cycle days have remained stable, but from a dollar standpoint, we need to be very aggressively holding the line on what we invest into working capital, so it's an important area of focus for us. It can be a challenge, obviously, when the business is growing on how much you invest in working capital and obviously, what

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continue to convert in a very timely and effective manner. So (inaudible) for the team, are they better -- we're watching it very closely and not just building inventory for the sake of building inventory. They better have a plan, a reason that supports why they are making that investment into the -- into working capital. And I think, we're on that path, but it's going to be something we got to focus throughout the year, and, Jim, if you want to add some further color on it?

Yes, Paul, it's clearly on our scorecard. We look at it, but there was, I'd mentioned that, there was a -- our focus on aftermarket. You have to have the inventory in that area to sell it at the right time, and then heading into the new year, the aftermarket picks up, so we had to build the inventory to make sure that the tire was there, as we meant them to be sold, so we have this build-up at the end of the year going into the 2018. And then as Paul said, we've got initiatives. We both take a close look at it and the businesses too and we look at our cash conversion days, so they've been improving except for this last quarter, where they evened out, and again, that was due to, primarily, stocking and making sure that we can make that sale and continue the double-digit growth.

Our last question for today comes from Justine Ho with Mesirow.

Can you elaborate more on what you experienced with rubber last year? I think you said that cost went up, and you were not able to pass it through in terms of price increases, maybe, if you can just elaborate a little bit more on that, and what was the impact?

Right, we announced in the first quarter of last year, there was roughly a $10 million hit primarily to our North American tire business due to a sharp increase in natural rubber prices. It was driven primarily by some speculation from the market, not driven by a supply constraint issue. For us, we run a higher blend across our total tire portfolio of natural rubber, because of the off-road requirements of natural rubber being put into our recipe for our product. So we came out of that in the first quarter last year, probably one of the first public companies to announce an impact of natural rubber on their results. What happened in subsequent quarters after that is that just about every tire manufacturer around the world expressed concerns and took, really, a hit to their operating margins due to the rising cost of rubber. And so for us, that impacted us again in the second quarter roughly $9 million. So the total for the 2017 was right around $19 million, $20 million, and that was all in the first half of the year. So for us, the back half of the year, the impact of the imbalance between natural rubber cost and the price that we can pass through our customers, really the impact was mitigated. So it was really just the first half of the year phenomenon. But it continues to be a drain on some tire manufacturers, and they continue to talk about just issues with the imbalance between raw material cost and pricing, but for us, Jim and I and Titan have not had that same level of concern over the back half of the year, and we have not talked about it in the back half of the year. So as we sit here today going into 2018, we do not have any -- really any further updates other than that we're, kind of, in a rational world right now as far as price and cost, and hopefully, it remains that way. And then on the steel side of the business, as I talked about earlier, that's a different business model for us, where we do have better capabilities to pass through the impact of any rising steel cost, so as steel prices have [been increasing]

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at this point, we are not giving any.

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disruption to our (inaudible) [months].

And so did rubber costs go back down in second half, that's why there was no impact in the second half? Or was it -- because I don't think you've increased prices, right?

Well, we did, along with the competition. We only had one competitor out in the CIS region that did not increase prices. So what happened in the back half of the year was a combination of pricing coming down on natural rubber and then also the ability to pass-through some of those cost increases. And I would say, to my knowledge, really that's the only competitor that didn't act rationally with cost increases in passing those through to the pricing to customer. So for the most part, it balanced itself out in the back half of the year because of those factors.

Okay, I think, I guess, I must have misheard you. I thought you were not able to pass the rubber cost increases through with the price increases.

Just the first half of the year. If you look at the chart for natural rubber, going back to the tail end of '16, into early '17, it spiked rapidly. So if it had done a gradual increase, it would have been less of an issue, but it did a -- it did one of those runs up the mountain that's scary to look at. And it was just driven by, primarily, speculation going on in some Asian markets. So that's why it wasn't a supply-demand imbalance, so that's why it was able to correct itself in the back half of the year. But again, if you just pull up our natural rubber chart, it has a hockey stick and it's ugly to look at and the way our business model is and the way tire manufacturers, as they've also expressed since that moment, we just don't have the ability to absorb those -- well, we have to absorb the cost, but we don't have the ability to pass them on that quickly and so

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basically, everybody had to face absorbing those costs more so than what we could pass on. But it -- as it happened that -- that hasn't happened that often out of the blue, it's happened before in commodity cycles where rubber costs increased that quickly. But this one came out of the blue in natural rubber and again, it wasn't driven by supply-demand, and the world goes back to normal fairly quickly.

Okay. And I guess, as a last follow-up with that one. If you -- when it spikes that quickly in the first half, then you're able to then increase prices in the second half, do you have to give that back if -- when the rubber costs go down? And then you end up having a permanent loss of that $19 million or do you kind of...

The way we look at it and the way I think, Jim has talked about it in prior calls, you do end up with a permanent loss. Generally speaking, you end up -- the commodity prices and really the components that go into our products are known by our customers. So generally speaking, you end up pricing in an equilibrium manner between your price and your cost and it's just when you get those rapid changes that you get some things get out of whack, but I would say, generally speaking, you end up having permanent losses and then you get back to a rational price cost point, which is where we've been since the back half of the year. Would you agree with that Jim?

Yes, I would just point out that price uptick there at the end of 2016, heading into first quarter, we saw a 30% or 40%, I call it a rocket price increase, it shot up like a rocket. Nobody -- everybody here, as you said, in the industry, was surprised. And then it continued in the second quarter, it took a while to come -- for the rocket to come down, but it totaled about $19 million that we could not pass on or the industry as far as that goes. As a result, we did strengthen our purchase policy, such things as dollar day averaging, going out, et cetera, trying to do what we could within our own 4 walls to control it. So that helped out in the third and fourth quarter naturally. So that's what I did. But as Paul said, it's back to "normal", more normal.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Reitz for any closing remarks.

I just wanted to say thank you to everybody for your time today and look forward to talking to you again here soon. Thanks.

The conference has now concluded. Ladies and gentlemen, thank you for attending today's presentation. You may now disconnect.