Titan International Inc (TWI) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to Todd Shoot, Treasurer and Vice President of Investor Relations for Titan. Mr. Shoot, the floor is yours.

Thank you, Cole. Good morning, and welcome, everyone, to our third quarter earnings call. On the call with me today, I am pleased to have our President and CEO, Paul Reitz; and our Senior Vice President and CFO, David Martin.

I will begin with the reminder that the results we are about to review were presented in the earnings release issued this morning, along with our Form 10-Q, which was also filed with the Securities and Exchange Commission this morning.

As a reminder, this morning we will be discussing certain forward-looking information, including the company's plans and projections for the future that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from the forward-looking information.

Additional information concerning factors that, either individually or in the aggregate, could cause actual results to differ materially from these forward-looking statements can be found in the safe harbor statement included in today's earnings release attached to the company's Form 8-K filed earlier today as well as our latest Form 10-K and Forms 10-Q, all of which have been 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 be a substitute for the most directly comparable GAAP measures.

The earnings release, which accompanies today's call, contains financial and other quantitative information to be discussed today as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures. The earnings release is available on the company's website within the Investor Relations section under News and Events.

Please note, today's call is being recorded. A copy of today's call transcript will be made available within the Investor Relations section on our website.

We're going to start the call this morning with Paul going through some from highlights from Titan's business and our markets from the quarter. And David will walk us through an overview of our financial results. I'd like to now turn it over to Paul.

Okay. Thanks, Todd. Good morning, and we appreciate your time in joining us today. As Todd mentioned, I'll start off by talking about some highlights of the business then turn it over to David. And then, we'll provide some information on the Russian put option before concluding by taking your questions.

So let's jump into the business as Titan had another good quarter of sales growth. This was our seventh consecutive and was led by our earthmoving/construction segment that was up over 15%. Our revenue growth was solid this quarter at 4%, but was hampered by currency fluctuations that absent the impact, would put our growth around 10%, which would have put us north of $400 million versus the reported $385 million. However, we did a good job this quarter, leveraging that revenue growth as we produced 26% incremental gross margins that drove our adjusted EBITDA up by over 35% this period. This puts our year-to-date adjusted EBITDA at $104 million, which is more than double where we finish all of 2016 and double year-to-date 2017 levels.

This quarter, our continuing efforts to drive revenue gain through to the margin improvements and then onto the bottom line resulted in us reporting an adjusted net income of $0.04 per share that compares to a loss last year of $0.09 a share. That's a nice improvement year-over-year, and I should add it's our first profitable third quarter since 2013.

It's important to keep in mind that the only net income adjustment is related to the Russian put option, which is primarily for interests and currency fluctuation. The put adjustment was $4 million for Q3 and $11 million for 2018 altogether.

I'll talk more about the put option later as I noted. And keep in mind, the put option does expire in January of 2019. So the impacts that we're seeing this year is an event that will stop at the end of this year.

I also want to mention that in the third quarter, it is standard practice that we had fewer production days due to plant shutdowns for maintenance and traditional summer holidays. So you can't sequentially compare the third quarter to the second quarter and really need to compare year-over-year results to gain a clear understanding of our performance this period.

Now to expand that horizon and take a look back at the past couple of years, you'd see that Titan has demonstrated good sales growth of 13% so far in 2018 and 16% in '17. I believe in many instances, our growth rate has exceeded the market gains in the areas where we do compete. These solid revenue gains combined with our operational improvements that we've continuously driving has resulted in incremental adjusted EBITDA margins over 37% in 2018. And let's keep in mind, that's against a tough backdrop this year with significant raw material inflation and volatility.

So looking back to 2017's performance, which again was a challenging year with the natural rubber for all tire companies. We still managed to report 13% incremental adjusted EBITDA margins. And if you adjusted 2017, again, for that natural rubber impact that impacted all tire companies, that would've put last year at well over 20% incremental EBITDA margins.

Where I'm going with these comments is that we're confident we've built a good foundation for the future over the past couple of years. And there's still ample room for us to continue drive stronger margins and margin improvements as our sales edge higher in the future. And I do want to take a step back even further to 2015 when we were in the midst of the cyclical downturn and compare that to the period where we are today in 2018. Just to give you a picture of where we've come from since those days a few years ago. If you do that, you'll see that since 2015, our 2018 year-to-date sales are up 14%, gross profit is up 35% and that equals 27% incremental gross margins.

Again, the point is our entire management team is keenly focused and prepared to take advantage of the good opportunities ahead for Titan to continue driving and improving our margins, leverage our existing infrastructure, cut cost where we can and really just continue to drive down our overall cost structure and find ways to improve margins, either through costs or product improvements, enhancements, new product development. There's a number of levers we can pull.

While volumes had continued to improve over the past couple of years, they're still well below the historical average in some of our key -- many of our key product categories, especially here in North America. And I also want to repeat that in 2017 and 2018, we faced a really volatile cost environment with raw materials, logistics that has impacted virtually every company in our industry. So really, with that being said, since the start of 2007 -- '15, excuse me, we've generated 67% overall gross profit growth and 27 -- 23% incremental margin during that period.

Point of all this is, as markets improve, we've got plenty of runway to keep improving. And as we approach the end of 2018, we believe that our prospects for 2019 look to continue on these positive trends of the past couple of years.

As you know, the ag markets around the world had been choppy this year for many reasons. But overall, they remain above sea level. Just recently hearing that Brazil has a new President that is coming into a pro-business mindset. So hopefully, help calm the waters there. Good news coming out of North America. Recent survey show that 45% of ag equipment dealers are expecting revenues to increase by 2% or more in 2019. It's not rampant growth, but it appears that despite the volatile circumstances that many participants in the North American ag sector have been experiencing, many today feel that we're on firm footing, and we really do hear that from many of our customers. I've been on the road quite a bit the last few months and really do think that 2019, there's a good firm foundation, and again, we're hearing that from many of our customers as well.

From Titan's perspective, we aren't sitting around, waiting for the ag markets to improve. Our Brazilian team has done an excellent job, launching initiatives within their operations to control costs, protect share. In North America, we've been working diligently on our 80-20 program, that'll be launched in early 2019 to revamp our product strategy and, really, how we manage our operations in our North American tire business. We believe this program will improve profitability, cash flow, working capital levels and enable us to make better decisions regarding our product portfolio.

We're definitely excited about the prospects of what this can do for us in the future and we'll be adding more clarity on that as we roll that out in 2019.

The Titan is clearly a global company. In 2018, I would say, Titan like many companies that compete in our industry, we have found ourselves focused on concerns here in North America, primarily stemming from the tariffs and the impact on raw materials and how it's driven lower commodity prices that impact the overall ag economy. Yes, Titan's heritage stems from U.S. ag. It's a significant driver of our overall performance. However, I think it's important that I highlight how our company has evolved to diversify beyond North American agricultural business.

If you look back a few years ago, our earthmoving/construction segment comprised 41% of our sales and 31% of our gross margin. Today, in our most recent quarter, earthmoving/construction sits at 47% of sales and 41% of our gross margin. Also, a few years ago, 52% of our sales were outside North America compared to approximately 60% today.

Our ITM undercarriage business that operates primarily in the earthmoving/construction segment and outside North America has been on a strong path in 2017 as we've mentioned and throughout 2018, and has influenced at a shift in our company's operations. We continue to see this part of our business grow in excess of 30% with EBITDA improvements that are exceeding those levels.

Yes, North American ag is a significant part of Titan and our business, but that's clearly not all of who we are today. We worked hard as One Titan to get us through this cyclical downturn. We believe that we've set us and our company and really done a good job with our customers to create a good path for growth over the past couple of years. We more than doubled our adjusted EBITDA this year and believe that we have set a strong foundation for the future to continue driving towards higher and better performance levels.

I'd now like to turn the call over to David. David?

Thanks, Paul, and good morning to everyone on the call. Let's get straight into the numbers for our third quarter and then net performance. I'll also discuss a few things that we're focusing on as we get closer to 2019.

I'll start with net sales. Net sales for the third quarter of 2018 were $385 million. This is up 4% or almost $14 million from a year ago. This is the second -- seventh consecutive quarter with year-over-year increases, as Paul said earlier. On a constant currency basis, revenues would have been up 10% or roughly $22 million in the quarter, which would have been $407 million in total sales.

For Q3, net sales were higher at our earthmoving/construction segment, while ag and consumers segments were lower when compared to the same quarter last year.

Net sales on a trailing 12-month basis has climbed to $1.62 billion, which represents a 15% increase on a comparable basis from a year ago.

Moving on to our gross profit and margin performance. Reported gross profit in the third quarter was $44 million or a 11.4% of net sales compared to $40 million or 10.8% of net sales in the same quarter a year ago. This increase represents a 9% improvement in gross profit versus last year. The increase in gross profit in dollars was driven by increased sales volume, partially offset by material costs as we talked about a lot this year.

The impact from negative currency translation effects on gross profit was approximately $2.9 million for the quarter or 6%. Our overall gross margin improvement was primarily the result of the production efficiencies we've been able to drive with increased volume, offset somewhat by the increased raw material costs. While we're able to pass through the higher material costs in many ways, our overall profit dollars were insulated, but our margins were negatively impacted as a result.

Now just take a look at each of the 3 segments. On our agricultural segment, net sales were $163 million, down 4% year-over-year. That would have been positive if not for a 7% currency translation headwind. Volume in this segment was down 2%, while favorable pricing mix added 4% to the segment net sales. Sales in Europe were down somewhat due to short-term slowness in the market and some customer-directed order delays. Latin America ag sales were low in the quarter, but that was mostly to the currency translation effects.

Our Agriculture segment gross profit for the third quarter was $19.9 million, up slightly from last year at $19.1 million. Despite lower sales, the year-over-year gross margin improved 103 basis points in the third quarter to 12.2%, which was driven by the production efficiencies, primarily in North America and Latin America.

Continuing onto earthmoving and construction segment. Our earthmoving/construction segments experienced an increase in net sales of nearly $24 million or 15% to $180 million. Volume gains in this segment were 15%, while positive pricing mix and negative currencies offset each other at 4%.

On a year-to-date basis, earthmoving and construction net sales remained 28%, above the same period last year. The stronger series of growth in the segment came in Europe with ITM's undercarriage business as we've been talking about all year.

Gross profit within earthmoving and construction for the third quarter was $17.8 million, which represents a $3 million increase from a year ago, as well as a 41 basis point improvement in gross margin, the 9.9%. The increase in gross profit was driven by increased sales, along with production efficiencies related to the improved capacity utilization across our plants, primarily in Europe.

Finally, let me cover our performance in the consumer segment. The consumer segment third quarter net sales were $41 million, decreasing 6% when compared to the last year. Increased volume of 3% and favorable price and mix of 2% could not completely offset the significant FX drag of 11% that we've experienced, with the biggest impact felt in Latin America.

The segment's gross profit for the third quarter was $6 million compared to $6.3 million a year ago. Gross margin was 14.5%, which was an improvement of 22 basis points over the same period last year. Again, it should be noted that absent the currency headwinds, each of our segments would have shown top line growth when compared to the prior year quarter.

Turning to our operating expenses. SG&A and R&D expenses for the third quarter of 2018 were $36.3 million, a decrease of $5.9 million. As of percentage of net sales, SG&A and R&D was 9.4% compared to 11.4% in the comparable prior year period. The decrease in SG&A and R&D costs primarily related to an accrued contingent liability of $6.5 million for the legal judgment in 2017.

During the third quarter, we adopted the provisions of a new accounting standard regarding the cost of implementation around cloud computing arrangements and capitalization treatment. As many of you know, we're in the process of implementing a new cloud-based ERP system, which began in the early part of 2018. Prior to the adoption of the new standard, which is enacted during the third quarter, we incurred approximately $4 million in development and implementation costs in the first half of the year related to the new system.

The impact of capitalizing these costs has been reflected in the financial statements retroactively this quarter, and you'll note that change in our income statement. Approximately $2.1 million of implementation costs were also capitalized in the third quarter of 2018. The amortization period for these costs as well as future costs of implementation will be approximately 10 years, reflecting the same terms as our cloud computing service subscription, including future renewals.

Our implementation is on track and on budget to this point, which includes our corporate financial environment, along with portions of our North American operations. Further rollouts to the operations will take place over the next 12 to 15 months.

Royalty expense of $2.6 million or 0.7% of net sales was consistent with this period a year ago. And we reported income from operations of $4.8 million compared to an operating loss of $4.7 million in the comparable period last year, which is an improvement of $9.5 million.

Our margin of 1.3% is not where we want to be, but it is reflective of the improved volume and is a solid result compared to our recent past. Keep in mind, the third quarter was traditionally -- has traditionally been slower seasonal quarter for the business. So continued improvements in profitability are strong sign of market improvements as well as strides we are making in our operational performance across the business.

Also an important initiative to leverage our operating cost to drive operating margin performance in the future, and we are already getting good focus on this in the organization.

Interest expense was $7.6 million during the quarter, which was similar to a year ago in Q3. Our foreign exchange gain for Q3 was $900,000, which compares to a gain of $800,000 a year ago. I mentioned this last quarter, but I want to point it out again that this is an important initiative for our global leadership team to focus on reducing the volatility that we experience related to currency swings, particularly as it relates to our global treasury strategies. I anticipate that we'll be kicking off portions of our larger initiatives later this quarter.

During the third quarter, our reported income before taxes -- income taxes was $5.5 million, an improvement of $14.3 million from an $8.8 million loss during the same period last year.

Tax expense during the quarter was nearly $2.8 million versus tax expense of $2.4 million in the comparable prior period. The income tax rate of 51% during the quarter is unusually high due to the mix of jurisdictional pretax income and losses. I mentioned it last quarter, but as a reminder, our pre -- quarterly pretax income and losses in various jurisdictions fluctuate due to performance and to a certain extent, seasonal trends. So we may see unusual quarterly tax rates from time to time.

The net cash tax payments for the third quarter were $2.4 million, primarily in the international business.

A final item to note in our third quarter performance discussion relates to the redemption value adjustment of $4 million, which increased from the prior year Q3 amount of $882,000. Approximately $1 million of this adjustment related to the impact of -- current period impact of currency devaluation of the Russian ruble to the U.S. dollar, and the remainder was principally reflected with the interest component to the fair value of the put option.

So on an adjusted basis, net income attributable to Titan was $2.3 million for the quarter or $0.04 per diluted share. This compares to the prior year's third quarter adjusted net loss attributable to Titan at $5.5 million or a $0.09 per diluted share loss. This represents a $0.13 per share improvement compared with the prior year.

Our third quarter adjusted EBITDA performance was $25.5 million, which was an increase of 35% from the third quarter last year. For the first 9 months, adjusted EBITDA was $104 million versus only $51 million a year ago.

Now I'd like to move to our financial position and highlight a few key balance sheet, liquidity and capital items. The continued growth in our business has resulted in the need for increased working capital, which in turn has lowered our cash balance at the end of this quarter. Our cash balance of approximately $97 million was, as of September, decreased $9.7 million from -- during the third quarter and $47 million over the first 9 months.

As I said earlier, our last 12 months sales have jumped 15%, which is over $200 million in dollars in top line growth.

We ended the quarter with accounts receivable and accounts payable balances lower during the quarter, while our inventory balance increased, reflecting the need to buy forward some raw material requirements for the upcoming expected seasonal growth periods and to get more favorable pricing on steel, particularly.

Our overall cash conversion cycle metric came in at 110 days and increased 12 days compared to where we ended the second quarter, driven primarily by the increase in inventory.

I still anticipate some liquidation of working capital into cash during our lowest seasonal quarter in Q4, while still making appropriate decisions surrounding inventory management for our highest seasonal in volumes in Q1 and Q2 next year.

Now for a comment concerning our debt. Our combined current and long-term debt which totaled $461 million at the end of September, which is essentially flat from where we ended the second quarter. Current maturities due with 1 year -- within 1 year totaled $50 million, with $26 million of this amount reporting as due during the final quarter of 2018.

Much of this $26 million coming due during Q4 consists of local overdrafts and working capital facilities, which are considered on-demand for reporting purposes, but are expected to roll over without the use of cash during Q4.

As a reminder, our debt primarily consists of the $400 million of senior secured notes which mature in 2023.

CapEx for the first 9 months of the year were $26.5 million versus $23.6 million during the comparable period a year ago. CapEx for 2018 are forecasted to be in the range of $35 million to $40 million, with the top end of that range reduced from the previous estimate of $45 million.

Cash payments for interests are currently forecasted to be approximately $14 million for the remainder of the year based on September 30, 2018, debt balances.

So summarizing our third quarter performance, there are several takeaways. Net sales increased by $14 million or 4%, the second -- seventh consecutive year-over-year quarterly increase. This is nearly a 10% increase when currency headwinds are excluded, if you look at the last 12 months, sales are over -- up over 15% versus the comparable period last year. So we increased gross profit by $3.6 million from Q3 last year, an 8.9% year-over-year improvement.

As a percentage of net sales, SG&A and R&D expenses were only 9.4% versus 11% during the third quarter 2017. Income from operations was $4.8 million, which is $9.5 million better than a year ago. And adjusted EBITDA increased to $25.5 million, which is up 35% from the prior year. An adjusted EPS of $0.04 per share was $0.13 year-over-year improvement on an adjusted basis.

In closing, I want to reiterate that our full year -- our previous full year 2018 business outlook guidance remains substantially unchanged. Our current 2018 expectation remains within the specified ranges outlined in the previous quarters for sales and gross profit growth and our SG&A and R&D cost as a percent of sales. As a reminder, we're now in our seasonal low-volume quarter of the year, with normal slowdowns due to holidays later in the quarter.

That said, our EBITDA performance expectations for the full year are somewhat higher than previously stated. We believe that straight EBITDA may slightly outperform the previously stated guidance of $98 million to $109 million for 2018, due in part to the adjustments in G&A related to the early adoption of the new accounting standard related to our ERP implementation costs.

After my first 120 days on the job, the priorities I outlined initially remains substantially unchanged. First, there are number of important initiatives already underway with a focus on driving profitability, particularly in our margin performance across the business. There's a lot of work still head to drive operational improvements in our production facilities, particularly in North America.

Our focus is to narrow in on those things that mean the most and to drive collaboration amongst our business leadership from sales to operations to our corporate managers. I mentioned it earlier, but we also have to devise appropriate strategies to reduce the volatility in our performance related to the impacts of currency fluctuations and to drive strong global treasury management practices with focus on appropriately managing capital between our global businesses.

I found that we have focus on cash flow within this leadership team, and what we need is stronger financial acumen and information, not data. And we have been and are making appropriate investments in systems and people to drive this. Each of our initiatives will focus on driving sustainable, profitable growth across Titan.

Now I'll turn the call back over to Paul for a few more comments before we get into Q&A.

Great. Thanks, David. Just a few notes regarding the put options relating to our Russian tire business, Voltyre-Prom. As we stated on our earnings call last quarter and in the Form 10-Q for last quarter, we are now within the 6-month window that started on July 9, where either or both of our partners in our Russian joint venture could exercise their put option. A copy of the shareholders' agreement, which includes this put option, was filed along with our Form 10-Q for this recent quarter and is publicly available.

As we previously disclosed, if the put options were exercised by both of our partners in the Russian joint venture, our total obligation would be approximately $120 million, which Titan would have the option of settling it in either cash or freely tradable Titan common stock. The closing of the put option would be required to occur within 60 days notice of the put or when all necessary regulatory approvals are obtained, if later.

Under the shareholders' agreement, if necessary regulatory approvals are not obtained within 120 days of our receipt of a put notice or if prior to that applicable regulatory authority refuses to grant its approval, that our obligation to purchase the interest in Voltyre-Prom from such partner would cease, and they would retain their at-current equity ownership in the joint venture.

It's important to note that one of the partners with the Russian development investment fund managed by their CEO, Kirill Dmitriev, is on the sectorial sanctions list and should our board decide to satisfy the put-in stock, there are regulatory approvals that we believe will have to be received by RDIF. If RDIF was not to receive proper regulatory approval, then we believe the discussions would take place on other alternative solutions.

Over recent months, we've had some discussions with our partners in the Russian joint venture regarding their plans with respect to their investment in Voltyre-Prom and the put option. These discussions are ongoing. And as of today, we've not received a formal notice from either partner regarding their exercise of the put option. Our board and I, together with our financial advisors, are closely monitoring these matters and will deal with these issues as they develop. And our board will work toward making the best decision in the interest of our shareholders. We continue to believe in the strength of the Voltyre-Prom management team and the prospects of the successful future.

With that, we will be glad to answer any questions you have on the financials or other business matters. And I'd like to now turn the call back over to Cole to begin that process.

(Operator Instructions) And our first question comes from Joe Mondillo from Sidoti & Company.

Just wanted to clarify one of your last comments there, Paul, on the Russian put. The 120 days notice, could you just clarify what exactly that is? Was that at the end of the exercisable period, they get a 120-day notice? Or could you just clear that up? I wasn't...

Yes. It's a 120 days from the receipt of the put notice.

So they choose to put it or your -- so in other words, they choose to exercise it and then within 120 days, they have -- you have to resolve the finances? Is that...

The regulatory approvals, that's correct. So as of today, we've not received the notice regarding the exercise of the put option from either of the partners, so that 120-day period has not started yet. But as noted in the agreement that was filed with the 10-Q, there is a 120-day period that would start upon receipt of the put notice for us and them to obtain the proper regulatory approvals.

Okay. And I know there's not a lot more you probably can say here. There's a lot of different scenarios that could have happen in terms of how much is exercised and who exercises what and how you finance it. But number one, could you tell us if there's a possibility or if there's any possibility that all -- that the $120 million you won't fully be obligated? In other words, one or both may not choose to exercise it. And then also, is there any other sort of color you can provide on sort of how you're thinking about financing, if and when?

Yes. It's a good question, Joe. But given where we're at in this process, we're just not in a position to say more than what we've previously disclosed or discussed already. We plan on providing updates. And certainly, we will do that as further disclosure is appropriate. But unfortunately, at this time, we just can't say anything further.

Okay, I understand. So I wanted to ask about sort of the tariffs, gross margins, pricing. You saw about 2% to 4%, call it, price/mix benefit in the first half of the year. You saw a 4% benefit in the third quarter here in terms of price/mix. And the price increase of 4% was not initiated until September 1. So I'm just curious sort of going forward, looking at the fourth quarter, maybe even into the first quarter, it seems like this sort of price/mix benefit is going to accelerate to maybe 5% or beyond. Could you just -- is that a pretty fair statement? And sort of how are you looking at gross margins considering because they were better than I expected considering the headwinds that you've had?

Right. Let me take that from a business perspective, then I'll let David or Todd talk a little bit more on the financial side of it. From the business perspective, it has been volatile, but I feel good about what we've been able to accomplish this quarter. As you noted with the progress on our incremental margins, there are a lot of moving pieces with commodity prices, both on the input side and the market side of it. I feel like we're in a good spot with it now. It's hard to comment where we think it's going to be the early part of next year. But the one thing I am very confident that we're doing very well in North America is the project we talked about with 80-20 because as we go through that, we're analyzing everything about the business of how we price, what our costs are running through the operational side of the business, looking at our products, make sure we're producing the right products, have the right inventory levels on hand. So we're really spending a lot of dedicated resource to make sure we get this right, as close to right as we possibly can. But understanding that those pieces are going to constantly be changing. So culturally, what David and I are driving through the organization, along with Lester Brewer and Steve Hathaway, our divisional leaders, is that this has to become part of our culture. We have to be constantly looking at these drivers that impact our business and making decisions quickly and rapidly to adjust. And so when we talk about this 80-20, it's not a one-time process, where we put it on the shelf, we feel good about what we accomplished. It's doing what you're getting into, Joe, which is just staying on top of it and trying to maximize as much as we possibly can on the elements that go into our gross margin. So from a business standpoint, that's how I see it. David and Todd, if you want add something on the financial side.

No. I mean, I think, you technically hit everything that's required here. We are seeing a combination of price and mix in some of our products, large versus small ag and things like that. So I think, Joe, I think that it certainly could be accelerating to a certain extent with various price increases, but there's a lot of moving parts to it. So I'm not sure how to get it specifically quantified for you.

I guess, one thing that I'm sort of curious of. The price increase didn't go in place until September 1. So the first 2 months of the quarter, you didn't benefit from the price increase. And so I'm just curious, given what you're you seeing with raw materials, and I know natural rubber has continued to come down, I'm not sure if synthetic rubber has sort of stabilized. But if natural rubber continues to come down, synthetic maybe stabilizes, you get a -- the price increase just went in the last month of the quarter. It seems to me that the fourth quarter's setting up pretty nicely and I'm just -- I know there's maybe some other pieces in there, but I'm just wondering what your thoughts are on sort of that thinking.

Yes, it certainly is a -- it's a piece of a -- in our overall global business as well. We're talking about the price increases really specifically North America and for tire. And certainly, that's been very obviously selective based on where our customers are at as well. So I -- you're certainly -- your intuition is correct. But again, there's a lot of moving parts. You have our various price mechanisms within our international business that are also in a, I guess, in a favorable position as well. So yes, we're setting up. But obviously, this is the seasonal low quarter of the year for sales. So it -- really, the bigger benefit would be more likely Q1 .

Okay. And I wanted a question -- I just wanted to ask about the growth that you saw in the ag segment, specifically the volume. Volume was under 2% growth, slowest in several quarters. Just wondering sort of what you're seeing there geographically, how you're thinking about growth going forward. Do we anticipate sort of some -- this kind of really low single-digit type growth going forward? Or maybe a reacceleration or just wondering what your thoughts are on that?

Yes. We're looking to put our thoughts together for 2019. And the early indications are your growth is going to still be moderate levels. We haven't quite pinpointed exactly how to find that moderate. But I do believe it will be above the 2% we saw this quarter. What we saw this quarter, what David was talking about, it's the mix. Whether you're talking about small versus large, aftermarket versus OEM, you see different results. Latin America is a little different in North America right now. But I would say the indications that are positive though, Joe, are OEMs are still looking for next year to be a good year. Nobody's using the word great. You're not seeing that rampant growth expectations for next year. But you are seeing some good solid levels of expectation for growth continuing for next year. What we saw this year is the mix on the aftermarket this -- I'm sorry, this quarter, not this year. This quarter, we saw the aftermarket pull back some with what's going on with commodity prices concerns, a little bit of challenges out there in the field with the weather conditions. And so I think the mix this quarter where we saw that growth rate come down was more towards the aftermarket in North America. Don't anticipate that being a trend that will continue in the future because there's just a strong level of replacement demand that pent-up. We had some really good LSW sales in the tail end of this quarter. We're talking about our strategy for next year and what we can do with that to make sure we're capturing everything we possibly can. If you go around the Midwest these days, it's extremely wet. And it fits really, really well into our sweet spot with our LSW products. So I think this quarter, you're right. The level of growth was on the low side. But again, I think if you look at the mix part of it, there's definitely some positive aspects. And again, the trends and the expectations for next year, I think, get us back into that moderate range and certainly we'll be pinpointing that definition of moderate as we move forward with our plans for 2019 and share that with you guys. But I think next year will still be a good growth year.

Okay. Yes, not surprising to hear a little bit of weakness in North America, especially with the tariffs and everything that, that caused. Outside of North America, has -- it sounds like North America certainly was a little bit of a cause to the slowdown. Outside of North America, though, any sort of shift in growth rates or change in activity that you're seeing?

No. As David mentioned, Brazil got impacted by currency translation, but their concerns with their political environment and the weakness they've had in their economy has made the sugarcane market a little more challenging down there for our undercarriage business. So it's not performing at the levels, I think, we expected at the beginning of the year. But again, we talked about ag, there's not anything that's performing at a really negative level. I think disappointing from the standpoint we thought there'll be really good growth, whereas as you mentioned, the growth rate was more like 2%. So nothing's really falling off the cliff. But South America, Brazil specifically, has definitely been a challenging market. I think it's in my comments when I was trying to point out that our team has done a lot of things to react. But part of it is really focusing on the cost side of the business knowing that the revenue side is going to be challenging, protecting your market share, waiting for that moment where the market bounces back as what Brazil seems to do when it goes down, it never seems to stay down too long in these types of situations and has a tendency to bounce back up. So again, I don't think the Brazil trends we're seeing this quarter are indicative of what it's going to be like for the rest of this year going into next year.

Okay. And last question for me and I'll let someone have a chance. On the product mix, just wondering, I know this has been sort of a status quo or things hadn't been changing a ton with product mix. But how -- when do you think some demand for the heavier, larger type of equipment comes back? Do you see any change in the product mix as we head into 2019?

Yes. I would say, I'm definitely hopeful about that. The large dealers I've been talking to recently, they're seeing some good movement in their inventory. But they've done a good job of preparing for that. So it really becomes almost specific down to the dealer to get an answer to that question. Good strong dealers are moving large ag. Some of your weaker dealers that are sitting on inventory levels are trying to get a price for that used inventory are having more of a challenging time with doing that. Yes, I think the short term answer to that is, you're going to see some movement because there's just a pent-up situation there or just an underlying replacement demand there that'll keep things moving at a healthy level. Something obviously we all watch closely is the inventory levels out there in the channels. And those are at good moderate levels. There's not anything that's really shifted significantly here lately. But again, when you talk to some of the big dealers specifically, they are moving big products. I think the answer for 2019, where it gets tough to get that visibility, though, it just -- it depends on where commodity prices are. If you read the recent fed district reports, I mean, you see some activity out there with loans that instead of going into equipment is going into supporting operations. And so you just don't know where exactly things are going to be come March of next year on commodity prices. I think we're all hopeful that some of the nonsense from the tariffs and the concerns and the pullback that we've seen will start to ebb and you'll get the big market moving again. It's still below 30-year trends as we've all discussed before. So there's room for it to definitely get better without really any -- you don't need something dramatic to drive that change. When you're consistently blowing your normal trend lines, if you could just get back up to normal, I think it'll be a really nice growth rate for large ag. And I don't think it's going to take too much to get there. But it's -- it is going to take commodity prices staying at a higher level -- higher sustainable level than where they're at today.

And the next question comes from Chirag Patel from Jefferies.

Hey, so I just wanted to talk a little bit about the ITM business for a few minutes. Just trying to get a better sense for, one, would that level of growth kind of contributed to the overall company? And then just where specifically you're seeing that growth coming from. And I'm really looking into the idea of how -- what the sustainability of that kind of growth is as we move into 2019, 2020 and beyond. How big is that business? And how much further can we grow, really?

Yes. Again, I'll answer from business side. Some of the specific questions in ITM, we don't disclose at that level. So I'll let Dave and Todd jump in on that. But from the business side, where we're seeing ITM grow, has grown well in the European sector. There's a lot of construction activity, road building has been good. We're seeing the Far East perform extremely well. Again, as mentioned on the previous question, about the only softer spot with undercarriage would be Brazil, where it's primarily driven by sugarcane. If you look at our ITM business, it's 90% earthmoving/construction, roughly 10% ag. Is the growth sustainable? What the viewpoint we're collecting right now is that it is. There's enough visibility. Not just in our undercarriage business, but -- excuse me, also our wheel and our tire business, what we're seeing is that there is good visibility and good demand going into 2019. So certainly, for today, I probably can't comment on 2020, but I can say that we feel good about where the growth is for 2019 in relation to ITM. Then, David, I don't know if there's anything you want to add. Some of the specific questions on what we disclosed with ITM, I made some general comments about percents and growth, but we really -- we fold that under our earthmoving/construction segments. So I don't think there's too much that we can add on that.

Yes. I agree with you.

All right. And then, if we can just move a little bit to the ag side of the business for a few minutes as well. Just -- we talked about the sales of volumes just being down a little bit here in Europe. How are the sales overall in the North American business? I know that the mix was a little bit of a driver, but just purely on pure volume itself, the overall decline was about 2%. So just trying to get a better sense for that aspect of it. And then, we talked briefly about it in the last question about the LSWs being a little bit more of a better beneficiary over the weather in recent months here, but just trying to get a sense for, one, how big of a -- is the LSW contribution currently into the ag business? And then, what kind of level of demand have you been seeing in the more recent months?

North American ag, on the OEM side, is still performing very well. It has been throughout 2018 and did again this quarter. That business is growing. We're consistently seeing that on the wheel and the tire side. Really, the only softness in North America was with aftermarket, and again, I think that's just because of the muddy waters right now with all the talk around tariffs and taxes and the farm aid and just a lot of noise. And so again, I don't think there's any underlying fundamental issues with the aftermarket performance. It definitely -- the feedback we're getting from the customers is that it's not. But it's North America that was a really, I would say, where the weakness was. But our wheel business, which is in North America is 90% OEM, is still performing very well this period. In regards to your question on LSW, specifically I know Todd has some numbers at high-level he might have shared. But I would say from my perspective, we haven't given up the granular detail on LSW. But what I've said publicly is that it's consistently through the past few years grown double-digits. We've been very pleased with the performance since we really launched aggressively in the market a few years ago. We're continuing to see those trends. David's talked pretty extensively about working capital needs. And that's one of our working capital needs that you're seeing us investment in, is making sure we got the right inventory available. What we see with LSW is when customers demand it, they want it and they want it now because it's meeting a very specific need in the marketplace, which is it's going to make their equipment perform better in some very tough challenging conditions, which we saw a lot of this fall. So as -- from a high-level performance perspective, it continues to grow and perform right at expectations. And we will continue to invest in LSW, bring out the new models to keep pushing the pieces of the market where we're not touching right now. And we will continue to invest in working capital. I know David is working very aggressively on working capital levels, but him and I have spoken that this is one area we got to definitely make sure that we're investing through Q4 into Q1, so we're ready for next year to capture as much as we can, the market.

And our next question comes with Komal Patel from Goldman Sachs.

A couple of follow-up questions. One, can we talk about your market share trends in the quarter? And given the impact of tariffs, did you see stepped up competition from imports that weren't impacted by the same higher cost? Any kind of customer switching that you noticed, maybe from the low-end farmer?

I would say, look, there's definitely a lot of moving pieces with the tariffs. But I would say the one part of it that -- on the positive side -- look on the low-end farmer, yes. I mean, you got some people who are going to chase price, and I don't think it's the tariffs that are going to cause that. I think they've been doing that for a long time, whether it was wherever the imports were coming from. So you're always going to have that aspect of market, but what I've been seeing in the market is a lot of customers are looking to de-risk their supply chain. And they're looking to remove some of the volatility associated with, not just tariffs, but currency. Obviously, a lot of a number of OEMs, not just in the -- in our space, but just in the broader sectors, have been talking about supply chain constraints and being able to manage that on a global basis. And so I see that there's some positive opportunities that are coming our way from the tariffs and that Titan is a one-stop shop. We can handle many of their needs across the world, across wheels, tires and undercarriage. And so we offer the ability to do something that many companies can't do. So my discussions here over the last few months had been more on the positive side. I know my guys have the experience in that as well that people are interested in getting tight into the mix on maybe some areas where we don't currently have the business and hearing what we can offer to them. So I see some positive things coming from the tariffs. You're going to have, like you alluded to, you're going to have the price shoppers, but there's -- in a lot of products that we deal with, especially on the OEM side and even with our aftermarket customers, I mean, there's an element of not just loyalty, but there's element of cost that goes with just swapping and changing out inventory, changing out products, changing to a new supplier. So I don't think you see that. It doesn't just happen on a dime, it's not something that just happens rapidly. So I think there's always that portion of the market that is going after a lower-priced product that still -- still exists and it will exist. But no, we're not seeing that jumping around, going from 1 supplier to the next just because they can save a couple of pennies because of the tariff situation.

Got it. And then, just a quick one on SG&A. I think the last time we spoke, we discussed some kind of low-hanging fruit around rejiggering the full financial staff you have at each location, some other levers. What kind of operational-related improvements have you been able to unlock so far in the SG&A side?

David, let me say something. You can jump in on that. I think it's -- there's a lot of potential there, and we've passed some of it, but part of it is going to be making the investments that David talked about into our systems to really go get the rest of it. We are going live -- actually, as we sit here today with a couple of big elements of that system being rolled out to our plants and our corporate financial team in the U.S. When we get that in place, then we can really start looking at more aggressively how we approach our corporate infrastructure. I will say we are -- the way we've grown and the way we're positioned now we are decentralized at our business unit level, and with these systems, it's an investment. It's not just a new toy. It's an investment that will improve our ability to access information, make us more efficient, allow us to make better decisions. But in the near future as well, allow us to leverage our infrastructure better and really change how we're set up as a company and be less decentralized down to the business unit levels. But that's why we're making this big investment in the Oracle cloud system that we are rolling out. We went live November 1. So David, anything you want to add on that?

Yes. Just to be clear, we've implemented it in our corporate financial environment over the course of this quarter and in our wheel operations here as well. And we'll be in the midst of doing our North American tire business over the course of next 12 to 15 months. And therefore, take a little bit more time before we get fully into the cost structure, if you will, but I think the important thing is that it not only will help us from an overall SG&A management standpoint is that there is a lot of unlocked opportunity in how we run our production facilities. And obviously, that will improve production efficiency and so forth, and therefore, helping us with our margins as well. There's a lot of benefits that are going to take place over the course of getting this implemented.

And our next question comes from Alex Blanton with Clear Harbor.

Can you hear me?

Yes, Alex.

Could you discuss in general the effects of the tariffs on you so far? And including what's happened to the ag market as a result of the retaliatory tariffs that have been put on and the desire of farmers in view of that uncertainty to buy new equipment. And then, what would happen should the house representative shift to the Democrats and give Congress some leverage on pulling back some of these tariffs because Congress is the one that has, according the Constitution, the tariff power. But they have delegated it to the President through several acts over the last 2 decades. And now the President's exercising that power, but he could lose that power should Congress decide to repeal those acts and then on those tariffs could be reversed or done away with. And given the fact that there are many Republicans in Congress who also do not like the tariffs, there is a possibility that, that could happen. What would happen then to the ag market if that occurred?

It's a good question, Alex. And I think the key component of all this with the ag market is what are you going to do with the export grains? And really, what the tariffs did -- and the steel prices and the impact of the tariffs on that has been what everybody is really focused on. But I think from the ag perspective, it's just what do you do with the grains that need to be exported to really drive the commodity prices here in North America? And I don't know if the answer to that question is directly related to the tariffs being repealed or not. I think the tariffs brought it into the spotlight because then everybody was focusing in on the fact that if you're going to put tariffs on our products, then we're going to stop taking your grains. But are those markets where our grains are being exported, are they able to find suitable substitutes? And what does that mean for the future? And of course, in the world of ag, the output changes so much from year to year, it's not an easy question to answer. So yes, I think for the markets to be successful in North America, you got to find a way to export some of your large grains and that's the key component of all this. And I think the tariffs, all it did is just -- the retaliatory tariffs were focused on the grain side of it. And if you repealed it, it's tough. Politically, what that would mean, but I think -- go ahead, Alex. You were going to say something.

Well, I was going to say the soybean prices had plunged because of what China did in retaliation. They aimed their retaliation at the red states, obviously, which are the farm states, a lot of them. So it's retaliatory actions that go away because our actions are reversed. Then, when we think that the demand for the grains would come back from the people who have taken it away for the time being. And so wouldn't that be a real positive to the ag market if that happened.

Yes, I just avoid making a political statement, is what I'm doing.

Well, this isn't politics. This is economics, not politics.

I agree, but you do with the exports, that's the key component of all of this. If the exports get absorbed, then absolutely. I mean, I think you're going to see a positive impact from that. The prices will be at a higher, more sustainable level.

Well, they could be more easily absorbed if the tariffs were done away with.

Yes, yes.

Isn't it correct?

I think one could conclude that, yes.

Yes, so that -- so what do you think would happen then to the ag market, is what my question, if that happened. Would it stay the same or would farmers buy more equipment?

I think you would see the market go back to where we thought it was going to be the start of this year. If you look back at the start of this year, expectations were more robust, obviously, than where they are now. I think the performance has been good in the ag sector, but there was some really good prospects at the start of this year and we -- a lot of people saw that at the beginning of the year till the tariffs started coming into the picture. I think you would get that -- you'd start moving the markets back up to normal trends. There is a replacement demand cycle that would pick up. I think it's there. All the underlying pieces would tell you that there is availability in the market for it to improve if prices were higher, and I think you would see that happen pretty quickly. And again, all you got to do is look back to the beginning of the year, pretariffs, about expectation levels compared to where they are today.

Okay. So what's the magnitude of the difference between what your expectations were and what they are now? What's the difference percentage-wise?

I don't know if I have that exact number right now, but I think it's probably about a handful of points. It's not -- again, early part of the year, I would say things were looking more maybe right around that double-digit, low-double digit, upper single-digit level compared to where we now. As you saw we reported 2%, so..

And our next question comes from Kyle Krueger from Apollo.

You had a significant headwind in the quarter associated with the strength of the dollar. And David mentioned, the fact that you're going to be reviewing your hedging policies and whatnot. I'll just ask the question straight up. I mean, how do you avoid overreacting to the strength of the dollar, if it is indeed temporary, at a point of maximum pressure as you go forward and set policy? I mean, how do you intend to move forward with respect to hedging? Given that there's a tendency to overreact at the point of maximum pressure. I'm not saying guys will, but there's always that pressure.

Well look, I've looked at it in 2 ways. One, we try to get the natural hedge by producing products in a multitude of different currencies and countries. But really, what we're referencing with the comments made on the call today about the project to reduce our FX volatility is because a lot of our volatility is driven by legacy intercompany balances that exist between various companies around the world that are a number of different reasons. Some of them are just set up at acquisitions, some of them are related to operating -- current operations. But what we want to do is limit that volatility, those intercompany balances. So what really you would see in our P&L is what you're alluding to, which is true operating hedging impacts of foreign currency volatility. So unfortunately, what you see in our P&L is just a lot of intercompany noncash volatility.

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

Well, I appreciate everybody's time this morning, and look forward to talking to you again at our year-end results. Thank you.

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