Titan International Inc (TWI) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. Fourth Quarter and Full Year 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, Allison. Good morning, and welcome everyone to our fourth quarter and full year 2018 earnings call. On the call with me today, I'm pleased to have our President and CEO, Paul Reitz; and David Martin, Senior Vice President and CFO. I'll begin with the reminder that the results we're about to review were presented in an earnings release issued this morning, along with our Form 10-K, 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 those 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 the 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, and a copy of the call transcript will be made available within the Investor Relations portion of our website. I would now like to turn the call over to Paul.

Thanks, Todd. Good morning, we appreciate you joining us today for our call to wrap up 2018. I'm going to run through the business highlights, then our CFO, David Martin, will go through the financial aspects, and then we'll provide some additional comments on our recent strategic announcement before concluding with your questions.

Starting off. As you look back at the past couple of years, I firmly believe Titan International and our global team have accomplished a lot. And the proof of that progress is evidenced in our financial results. Our 2018 sales ended over the $1.6 billion mark and up over 9% from last year or if you back out the negative impact of foreign currency, we actually had an 11% revenue increase. We moved our sales gains well through into EBITDA where adjusted EBITDA finished 2018 at $119 million, representing a solid 64% increase over 2017, $72 million, that equates to an incremental adjusted EBITDA margin of 35% this year. But keep in mind these top and bottom line gains came this year within a volatile business landscape that has seen tariff battles, steel prices at decade highs, sluggish commodity prices that have impacted farmer income and that's just to name a few of the challenges.

I can't say if this type of market or environment represents a new normal or not, but I do know that the financial improvements we posted in 2018 represent a really good year and definitely reflect our extensive efforts over the past couple of years.

As you may recall, we laid out our original 2018 business outlook in November of '17 as we were preparing to refinance our bonds. When you look now considering the volatility of the current bond market, we're very fortunate to have made that decision to get our bonds refinanced at 6.5% through 2023.

So let's recap our 2018 performance against the updated outlook that we provided. As I stated earlier, our 2018 sales were up 9% or 11%, excluding that negative impact of currency. This compares favorably against our noted expectations of 9% to 12% growth. EBITDA was up 98%, well within our guidelines of an 80% to 100% increase. SG&A came in much better at 9.1% of sales, beating the 10% low end of our guidance by $14 million. Our gross profit improved this year by 24%. We were only below our outlook guidance by $2 million. Gross margin this year was, of course, impacted by raw materials. We saw an ag market, as I mentioned earlier, that led us to some to tougher pricing within many parts of the landscape that we compete in as the tariff battles continue to drag on. We're all very familiar with those issues, but again, I think our gross profit improvement by 24% this year reflects a strong performance.

When you look at our outlook that we provided, we did not provide anything for EPS, but I do want to note we returned to profitability this year for the first time since 2013 with income of $16 million or $0.27 per share. All in all, we did a good job this year of accomplishing what we said we were going to do in 2018. As you know, kind of looking back in a different direction, as you know, our end markets entered a heavy cyclical downturn in 2014 that reached its low point in 2016. I'd like to take just a second here to point out where we've come from since that low point.

Titan has posted overall sales growth of 27%, and if you take these solid revenue gains and combine them with the operational and business improvements that we've been continuously driving, that resulted in adjusted EBITDA growth of 152% in that 2-year period. Again, these accomplishments are against a tough backdrop of volatile market conditions and a wild raw material situation that we saw in 2017 with natural rubber. We worked hard and are proud of these improvements we've made over the past couple of years, but as good these gains have been we know we still have more work to do.

First, we need to continue to drive stronger margin improvements. We have to raise our gross margins above today's level. Next, while it was definitely nice to return to profitability this year, we have pieces of our business that quite frankly, performed at unacceptable levels. These particular areas have a negative impact on our bottom line and as a company, impedes Titan from reaching an even higher level of profitability. So first, let's touch on the comment about driving gross margin improvements and talk specifically about North America, our largest business units. Our management team in North America is keenly focused on opportunities to improve our margins. We operate in a competitive landscape. We operate in a challenging market that continues to remain below historical averages. With that being said, we have made good gains in 2018 with North America gross margin gaining over 200 basis points. But we all know, there's still ample room to improve from there.

Last quarter, we announced that an 80-20 portfolio management program would be launched in early 2019. We have done that and formerly put that into place for our tire business on January 1 of this year. The history for both our North America and tire wheel businesses is that they started off as the little guys competing in a big world. And to this day, that spirit is inherent in our entrepreneurial culture. It's a good thing. However, similar to many smaller companies that have been seeking growth for many years, through that period, we've continued to see our product portfolio balloon. That in turn has made us overly complex and less efficient in our processes and really, all the way through to our manufacturing operations.

Our 80-20 program will revamp our product strategy and how we manage our operations in North America. We believe, quite confidently, this program will improve profitability, cash flow and our management of working capital levels, while also enabling us to make effective timely decisions by reducing the burden of our complexity in our daily business activities. Many world-class organizations are already implementing the 80-20 program.

CNH recently announced they are embarking on this program as well. 80-20 is a longer-term journey for us, we're off and running within our tire group and then later this year, we're going to implement it in our wheel division as well.

Continuing on the margin discussion, Russia is another business unit that we're heavily focused on and needs to improve their margin performance. It goes without saying, Russia is a complex arena to operate on many fronts. For us, it was made more complicated as we work through the 5-year put option that came due this year.

Our Russian business is primarily ag-related and within the ag sector in Russia, they have faced many challenges associated with not just the commodity prices, but a banking system that is causing significant working capital constraints within our distribution channels, our dealers, our end users, et cetera. Our Titan Russia business unit is the #1 ag tire producer in the CIS region. 2018 results are much better than they were a few years ago, but as we sit here today, the gross margins are not near where they need to be, and operating income is nowhere near an acceptable return on the investments we've made. We've been prudent through the years with the investments we've made and they had a very positive impact. Titan Russia has increased their efficiency levels well over 50% in the last few years. Along with that, we're putting in other enhancements that are designed to drive quality improvements and that has been going well. We're in the later phases of developing tires that can be exported into EU and other markets as well, that is crucial to the future success within Titan Russia. Our management team there is making good decisions in navigating the challenging Russian market and improving their operational efficiencies as I noted earlier, but we need to and will do more to produce better financial results there.

Next, moving over to profitability. As I mentioned earlier, Titan has seen our operating income improve from a loss of $25 million in 2016 to an operating profit of $42 million just this year in 2018. That is a fairly solid improvement. However, for us to reach our potential, we need to continue to reduce the negative bottom line impact of certain parts of our business.

One area that needs addressing is our TTRC recycling business in Canada. As we previously announced in September of 2017, we had a fire at TTRC, destroyed the building that contained 3 of our 6 reactors. Prior to that fire, we had internal projections that we had shared publicly that TTRC would be a profitable business with healthy EBITDA margins. That has not materialized and due to the fire has placed a fairly sizable negative burden on our financial the past couple of years. We're hopefully nearing a completion point with the insurance settlement from that fire and at that point, Titan will complete a strategic and operational review of TTRC to determine the next steps for the future.

Another area of strategic focus for us is Australia and what goes along with that is our larger mining tire business that is produced here in the U.S. In those 2 areas combined, we've made sizable operating income improvements over -- that tally well over $10 million since 2016. But despite those improvements that we introduced into these businesses, both still operate at an unacceptable level of financial performance, and we need to see better from them.

In 2019, we've already made organizational changes in Australia, and we'll be further analyzing both these businesses this year to determine the strategic plans on what else needs to be done to drive towards acceptable financial performance. The next area I want to jump over to is spending some time on our 2019 outlook that we provided in our press release.

We believe, 2019 total sales will grow 6% to 7.5% with our earthmoving/construction segment leading the way with growth in the 8% to 9.5% range. Like many other companies, we believe there is pent-up demand within the ag market. We're cautiously optimistic about where things would go in 2019. But assuming that the political and commodity pressures that we've all been focused on will remain in place, we still see our ag business growing in the 4% to 6% range, which I should add would represent some market share expansion in certain areas.

As noted earlier, we are committed to driving further margin improvements over the next few years, and we see our 2019 gross margins in the 12.8% to 13.2% range, representing a solid improvement over the 12.4% in 2018 and the 11.6% on an adjusted for some impairment basis that we reported in 2017. As we did this year, we will continue to drive more leverage in our business and into our SG&A structure and therefore, forecast SG&A and R&D combined to be an approximately $150 million or less than 9% on a percentage basis.

This, all said, results in projected 2019 adjusted EBITDA in the range of $124 million to $134 million. Again, this compares favorably to the $119 million that we reported for 2018 and the $72 million that we reported in 2017. All these projections that we've discussed assume that no divestitures will have taken place.

In conclusion, we have worked hard as One Titan in the past couple of years, and I think 2018 is a strong reflection of what we have accomplished as we hit the targets we set for the year. We have more than doubled our EBITDA since 2016. With that, I would now like to turn the call over to David and then I'll follow up later with some comments on our recent strategic announcements.

Thanks, Paul, and good morning to everyone on the call. I'll highlight some of the key items from our fourth quarter 2018 performance, while I don't want to repeat all the numbers from the release that we outlined last night.

Net sales for the fourth quarter of 2018 were $363 million, which represents a decline of 3% from the prior year, but on a constant-currency basis, revenues would have been up nearly $8 million from the prior year or 2.1%.

This currency impact of $20 million or 5.4% was felt most in the Latin America and the European geographies. Our ITM undercarriage business performed very well with revenues increasing 13% from Q4 2017 absent currency devaluation that occurred during the quarter.

Our North American business, primarily tire, experienced a decline in sales as the market softening in the aftermarket continued the trend that we saw throughout the second half of 2018, due to a variety of reasons that Paul described earlier. I already talked about the negative impact of currency on net sales, but our sales volume on a consolidated basis was essentially flat, while we had a pickup in sales from increased price and mix of 2%.

I'd like to take just a second to discuss our fourth quarter performance relative to our own expectations. We experienced some market softening in Russia and Australia during the quarter, which were the 2 largest drivers of underperformance against our expectations for the quarter in terms of revenue and gross profit. The impact on gross profit from these shortfalls approximated $4 million. Obviously, currency impacts also played a major part in the overall profitability versus expectations, which included the impact from currency losses reported in other expense from revaluation of our intercompany loans and balances, which was another $4 million during the quarter. I'll discuss that more in a bit.

Our reported gross profit for the fourth quarter was approximately $37 million or 10.1% of net sales compared to $36 million or 9.6% of net sales in the same quarter a year ago. The impact from negative currency translation effects on gross profit was approximately $2 million for the quarter or 6%. In the prior year, we recorded an impairment on assets related to the fire at our tire recycling business in Canada of $10 million.

When comparing to Q4 2017, adjusted gross profit, excluding the impairment loss, gross profit would have been down. I already alluded to it, but in the fourth quarter of 2018, our North American aftermarket tire sales were slower than the prior year, which also negatively impacted gross profit dollars and margin. Factors behind this were somewhat complex, while our customers have been very cautious after the market disruptions we have experienced due to global trade wars and other impacts on farm income.

I want to point out that for the full year, we experienced a 7% increase in net sales in North America. So some of the decline in Q4 relates to timing and relative dealer inventory levels. We also had some delays relating to shipments in our North American wheel business from temporary challenges related to the startup of our new ERP system in November and December.

These challenges are largely behind us now. We should catch up a majority of our sales volume shortfall this quarter and next. Gross profit and margin both improved significantly in the earthmoving and construction segment, primarily due to ITM's business. The impact year-over-year in gross profit from slower market conditions in Russia and Australia during the fourth quarter was approximately $4 million, which was similar to the impact of the quarter in terms of our own expectations that I described earlier.

Now let's take a closer look at each of the 3 segments. Our agricultural segment net sales were $150 million, down 10% on a year-over-year basis, but would have been down only 3.5% if not for the negative currency impact.

Volume in the segment was down 4.5%, while favorable price and mix added 1% to segment net sales.

Sales in North America were down for the quarter, primarily due to the factors I just discussed. Latin America ag sales, though, were improved in the quarter by 36% year-over-year absent currency headwinds and that is due to some recovery in the market, which experienced challenges for the most of the year.

Our Agricultural segment gross profit for the fourth quarter was $17 million, down from $21.5 million in last year, with a portion of this coming from lower currencies as well. Volume in North America was the largest factor in the decline from Q4 a year ago, while there were market headwinds from Russia as well. Year-over-year margins declined approximately 160 basis points in the fourth quarter to 11.4%, again, driven by the same factors that I just reviewed with you. Continuing to our earthmoving and construction segment, this segment experienced an increase in net sales of nearly $8 million or 5% to $174 million. On a constant-currency basis, net sales would have increased nearly 22% for the quarter. Volume gains in this segment were close to 6%, while volume price and mix was 3%, and negative currency impact of the segment by 4.5%.

Again, the strongest areas of growth for this segment came in Europe with ITM's undercarriage business as we've talked about all year as a trend. Australia experienced a decline in sales from what appears to be a short-term market softening. Gross profit within the earthmoving and construction segment for the fourth quarter was $15.5 million, which represents a $7.9 million increase from a year ago.

Keeping in mind, in the prior year there was a $10 million asset impairment related to the 2017 fire at our tire reclamation operations in Canada.

Now to wrap up with Consumer segment. The segment's fourth quarter net sales were $40 million, decreased 10% when compared to last year. On a constant-currency basis, net sales would have been down only 2%. Volume decreased by almost 5%, while we gained some with favorable pricing mix of 3%. There was a significant FX drag, again, this quarter with negative impact of 4% from the prior year with the biggest impact felt in Latin America. The segment's gross profit for the fourth quarter was $4 million, which was down $2.8 million from a year ago. Gross margin was 10.3%, a decline of almost 500 basis points over the same period last year, which was really reflective of lower sales volume and the impact of fixed cost absorption in Latin America.

Turning over to our operating expenses. SG&A and R&D expenses for the fourth quarter were $35 million, a decrease of $2 million from the prior year. As a percentage of net sales, SG&A and R&D was 9.7% compared to 10% in the comparable period last year. This decrease in operating expenses primarily relates to lower legal spending. Tax expense during the quarter was $3 million in the quarter on a pretax loss of $11 million, which appears to be unusual, but with the portion of our losses coming in tax jurisdictions where we have significant cumulative operating losses we're not able to take a current year tax benefit, which causes an unusual outcome particularly in the quarter.

For the year, the income tax provision was $6.8 million or 34% on pretax income of $19.8 million, which is more normalized. For 2019, I would anticipate our tax rate to fall between 25% and 30% given our expectation of mix of our pretax income and the various tax jurisdictions. A final item of note for our fourth quarter performance discussion relates to the redemption value adjustment of $1.1 million, which decreased from the prior year amount of $2.4 million.

Almost all of this adjustment relates to the impact of the current period currency devaluation of the Russian ruble versus the U.S. dollar. The RDIF portion of the put option is now satisfied, and there will no longer be any impact from the redeemable noncontrolling interest in the Russian operation related to RDIF.

Now I'd like to move over to our financial condition and highlight a few key balance sheet liquidity and capital items.

Going into the fourth quarter, we had an expectation that we would see some turnaround in working capital levels in the business, and we did see an appropriate decline in accounts receivable relative to sales levels as our DSOs remained steady at 61 days.

Our total AR dropped $17 million during the fourth quarter from the third quarter. However, our ending inventory in December grew by $14 million from the third quarter. This growth came in 2 principal areas of the business: our North American wheel operations and our undercarriage business. As discussed earlier, we had some temporary delays in shipments during the fourth quarter related to isolated challenges with our startup of our new ERP system. We have achieved stabilization subsequent to year-end and we anticipate being able to catch up substantially during the first half of the year. As it relates to ITM's undercarriage business, we have experienced dramatic growth in the business over the course of 2018, and they continue to see strong trends in the business climate requiring them to continue to build inventory to meet increased demand.

Inventory turnover for the business has remained relatively steady during the year. Obviously, increases in working capital has continued to impact our cash balances throughout the year. Our cash balance of approximately $82 million -- was approximately $82 million at the end of the year declining $15 million from September 30, 2018.

Working capital growth at the rate we saw in 2018 is not sustainable, and our management teams across the business are increasingly focused on improving our production planning processes, some of this coming from improvements we're making in our financial systems. It also involves simply maintaining the appropriately disciplined and continuous focus by our finance, supply chain and operations management teams.

We're certainly positioned well with our inventory levels to meet the anticipated increased demand in 2019 and with our reinvigorated focus on working capital management throughout the organization, we believe we should be able to see a turnaround in our operating cash flow for this year, and beyond.

Now just a couple more items before I wrap up the discussion starting with debt. Our combined current and long-term debt totaled $461 million at the end of December, which was stable with where we were at the end of last quarter. Current maturities due within 1 year totaled $52 million. A significant portion of the current maturities relates to local overdrafts and working capital facilities, which are generally considered on-demand for reporting purposes, but are expected to be able to rollover with the use of cash during the year.

Again, as a reminder, our debt consists primarily of $400 million senior secured notes, which will mature in 2023. We have increased our borrowing level in the first quarter 2019 to manage the payment to RDIF related to the put option while we anticipate we should improve our cash flow sufficiently in the coming year to pay it down. Some of this will come from improved operating cash flows, while I also believe we will be able to shed some noncore or idle assets into cash in the near term that could deliver between $30 million and $50 million in cash. Given the improvements in cash flow, we expect to have sufficient liquidity to continue to invest in the business appropriately to foster the growth and profit improvement aspirations that we have.

Capital expenditures for 2018 were $39 million versus roughly $33 million in 2017. We came within our range of expectation for the year. Due to anticipated growth in 2019 and specific needs we have in the business, I anticipate to spend a bit more in the range of $40 million to $50 million for the year, targeting areas that can deliver the highest returns through increased planned efficiency and cost reductions.

It's important to note that our depreciation and amortization is running at $58 million, and we believe it'll be on a similar range in 2019. We now closed out the year and where we improved on all of our financial performance metrics. And we believe that our outlook for 2019 is positive and balanced in the view of the global markets that remain unpredictable and volatile at times.

The business is positioned to take advantage of our opportunities. We're committed to driving improved returns to our shareholders as we continue to get long-standing challenges behind us. I want to conclude by restating a few priorities that remain in front of us in terms of financial improvement initiatives. Paul discussed this in some detail, but we have important initiatives underway across the business, focus on driving sales and improving margin performance across the business.

The 80-20 program for our North American operations should be a significant step to drive operational improvements. We're also focusing on the components of our business that are incurring operating losses today by taking steps to eliminate them from the portfolio or by reducing our fixed cost to improve profitability. We've also started out on a path to develop appropriate strategies aimed at reducing volatility in our financial performance related to the impacts of currency fluctuations and to drive stronger global treasury management practices. Last quarter I talked about focus on cash flow and while we didn't make the progress in fourth quarter that I expected, we're working hard to improve visibility and accountability in the organization to drive improved working capital management practices. We're also focused on building our capability to deliver the significantly improved and more timely business analytics in the business through innovations in our base ERP platform. All of these initiatives will take time, but we're committed to making significant progress during 2019.

Now I'd like to turn the call back over to Paul for a few more comments before we get into any questions that you might have.

Good job, David. Appreciate it. I want to close with a few comments on our strategic announcement last week regarding ITM. As you may recall, it was April of 2016 that Titan received a letter of interest for ITM that triggered the formation of a special committee to engage in advisory discussions with a leading investment bank. I won't repeat all that. The one thing that came out of it that we did then announce publicly in March of 2017, is that we announced Titan had determined that selling ITM was not in the best interest of our shareholders at that time. Our strategic focus then became to continue to pursue growth in ITM's business and overall financial performance and as you've heard from both of us this morning that's exactly what we have successfully done.

Since 2016, ITM has been on a strong path that has continued to see excellent growth of sales, operating income, and EBITDA. We don't divulge ITM's financial performance separately in our financial filings, but I will say, as a reminder, and this is what some of the comments we've made previously as well, our undercarriage business operates primarily outside North America and predominantly in the earthmoving/construction segment. As we announced last week, we're now, once again, evaluating strategic alternatives for ITM. We've engaged advisers to assist us with that process. And this does now include the option of a public listing in Europe. I firmly believe that based on ITM's performance the past couple of years, ITM is now worth a much higher value than the offers we received in 2016. We are not declaring ITM a noncore asset and it's not a foregone conclusion that we will dispose this business, but I want to add that ITM can be split apart from Titan without major disruption or cost.

Regardless of our announcements, we continue to believe that ITM is an excellent business with a strong future. However, we also firmly believe it's in the best interest of our shareholders to evaluate our strategic options at this time.

Changing directions briefly from ITM, we've made a couple of recent announcements regarding our Russian put option with RDIF. First, we announced that we've reached an agreement on the RDIF put for a total consideration of $50 million that included an immediate cash payment of $25 million and the issuance of $25 million of Titan's restricted stock that will mature in 3 years.

Completely within our own discretion, we can buy back this stock in cash within 12 months, and we would receive 10% of their ownership in Titan Russia that then would reduce RDIF's holdings to 25%. Our latest announcement on February 25 stated that we closed the transaction by making the $25 million cash payment, and we'll be issuing roughly $4 million -- excuse me 4 million shares of restricted stock that's still subject to regulatory approval.

Our other partner in Titan Russia, One Equity Partners has exercised their put option that would require Titan to pay OEP $46 million later this month in return for their approximately 21% equity interest that would also be subject to a regulatory filing in Russia to approve Titan owning more than 50% of the Voltyre-Prom equity. I want to wrap up by stating that on both these matters, our board and myself and David together with our financial advisers will continue to work towards making the best decisions in the interest of our shareholders.

With that, I'd now like to turn the call over for your questions. Operator?

(Operator Instructions) Our first question will come from Steve Volkmann of Jefferies.

So I guess, maybe lots of questions, but maybe I'll start, Paul and David, with some cash flow questions. And I guess, I'm trying to figure out -- it sounds like we're going to bring down working capital a little bit in 2019. I don't know if there is sort of an order of magnitude. Can we talk about maybe free cash flow relative to net income? Maybe as a way to think about that?

Yes, I'll take that. Our expectation is that from a working capital perspective that while there'll be some sales growth that we'll be able to draw down to a certain extent from the levels that we saw last year, particularly in inventory. While you may not see a big downturn in it, but with the growth levels and the profit levels that we see increase, we should be able to see a significantly different operating cash flow number. Then, of course, our targets are to see free cash flow in the range of 1x net income. And I expect that we can potentially get pretty close to that this year.

Okay. That's helpful. And then I think you mentioned $30 million to $50 million in idle assets that you could potentially dispose of. Can you say a little bit more about what that is? And is the $30 million to $50 million what you'd expect in proceeds or just a little more detail there?

Yes, that's a good question. We certainly have some properties and some assets that we have that have not been producing anything lately, and so there's some opportunities to make the sales of such properties. In addition to the potential for us as we look at the TTRC operations in Canada.

Okay. And again, is the $30 million to $50 million what you're expecting in proceeds or is that what the value of the assets on the books are or?

That will be proceeds.

Our next question will come from Joe Mondillo of Sidoti & Company.

So just to sort of add-on to that questioning in terms of liquidity, just wondering if you could expand on the liquidity, you went through it sort of fast on the prepared commentary. So it sounded like you owe some current debt of about $52 million. You paid the $25 million to RDIF, and you have probably some sort of a liability of $46 million to One Equity, are those the biggest buckets of liability this year?

Yes. I think you outlined that correctly. OEPs $46 million that would be settled at this time. I mean, I guess, we still have the optionality of stock or cash, but we have missed some deadlines. I guess, I would say in regards to notifying OEP we would use stock. So at this juncture that would be $46 million worth of cash. With RDIF, like you said, we've already paid them the $25 million as announced. We will be issuing $25 million worth of restricted stock, but there's -- the optionality exists to trade that restricted stock in using cash which would be another $25 million. So the total cash exposure between the 2 would be right around that $70 million mark.

And just to add to that. So If you look at the $52 million and other debt that we have outside of the -- outside of any capital leases that we have or anything related to the senior notes, those are demand -- on demand and there are obviously working capital and overdraft facilities in our international locations, and not expected to see any significant repayments of those because they're just ongoing demand type of lines of credit, if you will. So it's not immediately due, and we often roll these over with cash flow each year, so...

Okay. And so in terms of paying for the RDIF and One Equity, in the beginning of the year, I imagine, if anything, you'll ramp up working capital a little bit, just seasonally, whether it's not as strong as last year or what not, what means do you have to compensate, I guess, the biggest portion being the RDIF in One Equity? I'm just sort of looking at near-term liquidity aspect?

Yes, so we have the opportunity under our lines of credit that we have in The United States. Overall, we have a $75 million ABL line that we can access. And obviously, we have -- we work closely with our banks to be able to provide sufficient liquidity in the business for any spikes like we're seeing with respect to these payments to our partners. So near-term that we can actually manage these payments through accessing that and then as time moves on, and the cash flow continues to get better we can pay down.

Okay, okay. Great. Could you guys repeat the volume price mix and FX for the ag segment, I missed that?

Yes. The overall -- for the fourth quarter itself, we had a 1% improvement in price and mix and a decline of 4.5% related to volume and a currency -- negative currency impact of 6%.

Okay, great. So looking at, I guess, the volume at the ag segment, I just wanted to sort of expand on that. I think you touched on that aftermarket revenue was a little lite there. Your guidance certainly suggests that things will bounce back, but just sort of, could you provide any more color, regarding what happened in the fourth quarter, and why you sort of have some confidence going into 2019 that things will get better then from where you were in the fourth quarter in terms of that growth rate there in terms of volumes?

I think David mentioned one of the items that impacted us is the implementation of the ERP system. So we had some shipments that rolled over from the period into the next as we were going through that implementation process. And the other item, of note, in the fourth quarter, on the volume side, is that if you recall back in Q4 '17, there was a much more aggressive ramp-up going into 2018 with expectations of stronger year that was pre-tariffs and commodity prices really doing what they did throughout 2018. And so we saw more of an inventory build coming from our OEMs in the last quarter of 2017 compared to where we sit today. Kind of lean into then 2019 why we feel good about where we're at and where we're going is that foundation for the ag sector is still -- it's still firm. And in fact, I think most operators, most dealers are used to this type of environment, the good ones have gotten better. The weaker ones have -- continue to have problems and some of them have been acquired by either larger farms or larger dealers. And so what we're seeing from our customers is that cautiously optimistic outlook that even in this tougher environment, the businesses continue to -- can continue to grow. And then with that, if you get some changes that are favorable, there is definitely a pent-up demand when you look at nearly every type of metric on the replacement side in North America that can drive things even further than what we projected. But with all that being said, I think everybody is cautiously optimistic. We see ourselves outgrowing the market in certain areas. If I look back to some of the initiatives that we put in place that we've talked about and I look back at the dealer meetings that we hosted as we're wrapping up 2018, we feel good that our dealer network is strong, the products we're producing are well-received in the markets. We're working on how we can continue to push more products into the markets, again, through the 80-20 initiatives and the different activities that we have going, but I think, we're going to gain some market share here with our initiatives and I feel like we're well positioned and definitely our dealers are feeling good about 2019. And so we put out the outlook that, I think, reflects all that. And it's, again, cautiously optimistic that 2019 will continue on a good path.

Okay. And just a follow-up, the volume -- the share gains that you're referring to is mainly on the aftermarket side then, is that correct?

Yes. I would say that. I think that's correct. Certainly, we also see some opportunities where we positioned ourselves well with OEMs. And so -- but yes, I would agree mainly your comments with 80-20 will have more of a direct impact -- your comments are correct that 80-20 will have more of a direct impact on what we do with the aftermarkets.

Okay. And then on the price cost side or -- the price mix relative to revenue growth, it actually decelerated from the third quarter, which was -- I was a little surprised given that I think you put a price increase in September. So I was actually assuming that might accelerate, I'm not sure what happened with the mix side of things, but on the price cost side of things, where are we relative to sort of getting back to where we were 5 or 6 quarters ago. Do you still see a benefit starting in the first quarter or going forward in terms of that price cost spread?

I think what we projected and how we built our models for 2019 is that it will be neutral. Trying to predict all that is challenging. We've seen the market grow. If you look at the mix side of it, not necessarily the price cost element, but just on the mix side, definitely over the last few years, we've seen the smaller horsepower grow quicker than the large. We are well positioned in that market. I think we've done a very good job servicing our customers that play heavy in that arena. So for us, there's been some mix change that's taking place that's actually good as -- again, because that's the part of the market that's been performing well. And we're doing a good job with our customers in that area. On price to mix, I mean, I think we're at a better point now as far as the lack of volatility in raw materials, I think, they've stabilized. As far as price mix -- excuse me price cost, we made the assumption that it's going to be neutral. I don't see us, at this point, being -- getting a benefit or being hurt. And again, actually I saw some price increases come out from, not competitors that are in the off-road space, but on the on-road tire space that were pretty sizable. So it's a tough question to answer because we -- at this point we just don't know where raw materials are going to go, but we do have contracts within the OEM sector that help protect us on the raw materials. Within aftermarkets, I think, at this point, we're fairly neutral on pricing, and again, it's something you've just got stay on top of on a regular basis.

Okay. And then -- so in terms of the price mix aspect relative to the revenue growth, I assume the mix off -- the unfavorable mix, I guess, in the fourth quarter will offset the price increases that you put in September?

Yes, I think we -- what where we David? Was it 1%?

Yes. But that was just for ag, 2% for the overall business. We saw a little bit better impact in our EMC segment. But yes, I think it's fair to say any -- a portion of our price increases was impacted by unfavorable mix.

Okay, and just a clarification on the guidance in terms of the EBITDA. Do you guys -- is the other nonoperating income included in that EBITDA guidance that you provided?

Yes.

And can you quantify how much you're sort of looking for, for that nonoperating income?

Are you talking about other kind of below the line or the operating line?

Yes, yes.

Yes, I would expect, obviously, last year we had some significant onetime things that happened during the year. So that number is not reasonable, but I don't know, normal basis, you would expect to see about $5 million to $6 million.

Yes, we don't have built into our 2019 EBITDA expectations the large number that you see in 2018. We -- what we forecast in the outlook would be the standardized routine things that are cemented by either cash flow or a contract something like that.

The other thing would be our joint venture income. Some of the minority investments that we have all over the world. So that's what that represents as well.

Our next question will come from Komal Patel of Goldman Sachs.

First, if I could just clarify I might have misheard it earlier, but the missed deadlines on the OEP side, does that mean you're definitely using cash to settle it and not restricted stock or anything? Again, apologies, I might have missed it.

Yes. I mean, at this time, it's really just -- we're in the middle of discussions. We've not settled with OEP, but what I meant by my comments is legally we had a deadline where if we were going to utilize stock, we had to notify OEP of that. And we did not make that notice to them. So on a strict legal basis, the answer would be yes, it would have to be settled in cash.

Got it. Okay. And I guess, a follow-up question is that, could you consider settling them -- with them in a manner similar to RDIF as in you're trying to keep them in the business and maybe that's why discussions have been lasting longer than maybe originally anticipated?

At this point, I can't make any comments on that.

Okay. All right. That's fair. And I guess just maybe touch on the ITM business as well. What's kind of the rationale for selling the business now? Is it fair to think about as a way to increase some of the liquidity that you need? Or just given how much growth that you've experienced already, are you expecting slower growth in Europe for next year or beyond?

No, I think it'd be more of the liquidity question -- or liquidity issue. Clearly, as David has highlighted and what we've been talking about with the put option, we've made a lot of good investments in working capital that will translate into positive cash flows as we move to 2019. But clearly, there's a lot of debt that is required to settle the put option. And so you look at this business, we certainly see great prospects with ITM. Not just what we've seen in the last couple of years, but well into the future. The business has become very well positioned in the areas where we're seeking expansion. We do believe we can continue to grow in those areas. We believe that the valuation is much higher than what it was in 2016. So at this point, we just believe it's the right time to seek some strategic alternatives, possibly with ITM, and have those discussions with the advisers. But clearly, the liquidity issue is something that would drive us to make the announcement that we did here last week.

Got it. Okay. And then if I can just switch gears a bit. Some of the cost-cutting comments that you made, can we talk a little bit about the cadence of the some of the cuts that you're expecting, back-half weighted, is it beyond that? Any kind of just quarter-to-quarter information that you could share with us? And what kind of cost do you expect to incur to achieve some of these savings?

So in terms of -- some of the cost reductions we talk about are related to fixed cost absorption in our plans, and so forth. So that cadence is more ratable, if you will, as we go through the year, it wasn't anything significant that we have to do to one quarter versus another one. It comes over time. And I'll also say there is the 80-20 initiative, which basically helps us achieve better production runs, long production runs versus the small runs that take up a lot of time in our facilities today, create a lot of indirect costs in the business, changeovers, and so forth. And so these are the kind of costs that we're looking to avoid moving forward. As far as SG&A costs go, we're not looking at any significant cuts here, but we're actually being more prudent with how we invest our SG&A and directing them towards those value-added activities. So you may see some trade-offs. As far as significant cost to achieve the savings, I wouldn't say it's anything significant at this point.

Got it. Okay, and last one from me. Have -- I guess, recent discussions politically on the tariff side of things changed or updated the outlook at all for your customers, any kind of willingness to invest in equipment, any kind of change in the sentiment that you've seen so far?

I wouldn't say there is any dramatic shifts yet, but certainly, I think there is some optimism that's coming back into the markets with the positive discussions that have been taking place. And I think some of the other comments recently about other noted countries as well, including India and Turkey, are favorable for us and our business. So yes, there's some good trends. But I think overall, the good customers whether, again, it's dealers investing in inventory or OEMs investing in expansion and seeing a bright future or the end-users that are willing to invest in equipment, I think, overall, the good ones are continuing to do that. Some of the results coming out of the Kansas City Fed are slightly painted the other way where you see some debt being brought onto the books for end-users to cover operating expenses. And I think that's true for the weaker operators in all parts of our business. But I think overall, things have the potential to get better, and I think that's what we're reflecting in our guidance. Our overall guidance for 2019 reflects that.

Our next question will come from Justine Ho of Mesirow Financial.

Actually most of my questions have been answered, but I just wanted to get double check and get clarification. You mentioned that the deadline passed regarding notifying OEP about if you were to do restricted stock. So just to make sure I understand you -- that means you have decided to settle that all-in cash, the $46 million?

Yes, at this point I really can't say anything more other than just from a legal standpoint, OEP has exercised the put option, which means that we owe them $46 million of consideration. Up to a certain date, a couple of weeks ago, we could have settled that $46 million in either stock or cash. The Board of Directors and myself made a decision that we were not going to notify OEP that we were going to utilize stock. So from a strict legal perspective, we have let that date pass, and so at this point, as soon as we start -- just like we do with RDIF as soon as we have a final conclusion on everything and we start transacting the final results with OEP, we certainly will make an update. But at this point, those are just strictly the legal situations is where we stand, and we'll update you as soon as we can.

Okay. And can you make any comments regarding ITM in terms of, I guess, your thoughts on any -- has there been any interest that you see so far right now or is it too early in the process?

Yes. We really can't say too much more than what we put in our press release, but clearly, putting out the announcement reflects a strong belief that we see a good valuation -- a very good valuation for the company. And that clearly, we have engaged some advisers that feel pretty good about those prospects as well. But at this point, we won't be able to provide any more updates until we get to a further point in the process as we said in both our comments last week and with our press release today. And I think that's about all we can say at this point.

Okay. And lastly, we're in -- 2 months into the first quarter, do you -- from what you're seeing now in current conditions, do you still -- I guess, I'm just wondering about the ag -- particularly, the ag business, do you feel that it is still cautiously optimistic that -- based on your guidance of growth there?

Yes, absolutely. I think our outlook reflects that cautious optimism and what we're seeing is certainly reflected in our full year 2019 outlook. We're a cyclical business so there will be ups and downs throughout the year for different reasons. Some of them are standard as far as how our business flows throughout the year and some of them are going to be just as the market changes, but I think at this point, yes, we do see things that are moving in a positive direction. And again, I think our revenue guidance for next year reflects that. It's a good growth in all areas, both earthmoving/construction obviously on a higher end of that single-digit range and then ag being in the midpoint of it. But I think, overall, it's definitely good growth. And to answer to your question, it reflects what we certainly feel and believe at this point in the year.

Our next question will come from Alex Blanton of Clear Harbor Asset Management.

I was looking at your change in your gross profit from the third quarter, and it was about a $7 million decline from the third quarter on a $21 million decline in sales. So that's 32.9%, which is about what one would expect on that kind of a sales decline, 32.9% incremental. So it doesn't look like you had a much greater impact from raw material costs in that quarter than would be normal. Is that correct?

I would say, that's correct. Yes.

Okay. But how much impact is there in total, let's say, in the past year from steel cost increases and the other raw materials? And what's the prospect for offsetting that? I know you said that your cost increases and your price increases would be about in balance for this year. So are you saying that there's no recouping of those cost increases?

You got to take it two-fold. Certainly, if you look at the steels prices, there are certainly some mechanisms built in for how we deal with steel pricing up or down on that. So for the most part, we're covered with respect to any changes in those prices quarter-to-quarter, and so forth. So -- but as far as the pricing that you see on other raw materials, we have to be very cautious about how we price our products all the time and reflecting that in the given period of time, you can see some volatility. But based on what our expectations are and what we saw in the marketplace over the second half of last year, we became much closer in line with what our expectations were. We saw some -- the first half of the year is where we saw the significant steel price increases and synthetic rubber. The other prices, we are kind of working together in terms of where we think we can price them -- price our products in the market. So, I don't know if Paul wants to add anything to that, but it really is, we feel like the forecast for raw materials this year, we believe we can cover within the confines of how we're pricing today, particularly on the tire side.

Okay. Going back to the fourth quarter. That was a very negative quarter from many standpoints. The stock market was down, in early October, Citi came out and said that 25% of the executives expected a recession, and by the end of 2019 an 8%, expecting a recession by the end of 2020, had a very negative frame of mind overall among corporate executives. And I assume that, that extended to your dealers, and the people at your OEMs who were probably reducing inventory, and so forth. So how much impact was there on the sales because it looks like if you're not seeing a greater negative impact from raw materials increases and you're getting some improvements in efficiencies as indicated by the incremental results from third quarter if the sales improved, it ought to have a pretty good bottom line impact. It looks like your biggest problem here is really the sales volume. Is that correct?

Yes. I think you're exactly right with that, Alex. I mean, just look at what we've done over the last couple of years on a 20-- I think, it's 27% revenue increase, EBITDA has more than doubled. And that's because we've driven efficiencies. We've gotten better. We've driven efficiencies in the business. We've reduced our cost of quality. We're very well set up. We managed our product portfolio better, and we continue to do that as we talked about with the 80-20 program. And so you're right. I mean, it becomes an issue of volume. And then when you see that shift in volume, as you mentioned in Q4, where there's a lot of heightened concern for a number of reasons. It seemed like in Q4 and early 2019, it was one day they're saying we're going into recession and the next day they say, "You know, it's not going to happen." So it's just -- it creates that level of uncertainty that does impact the order flow. So for us what we keep focus on is what we control, which is getting as much volume as we can and that's exactly what we're doing, but also realizing we got to be prepared to manage a business that is operating in an environment that is highly volatile. And again, we've done a good job. I mean, you look at EBITDA in 2016, it's $52 million; and in 2018, we do $119 million, on less than 30% revenue growth. I think that continues to get lost at our company. Our stock is down half of what it was at that point, and there's so much focus on the RDIF and the put option, the fire at TTRC, and all these negative issues, but if you look at the underlying business like what your question is alluding to, we have done a really good job. And it gets frustrating because that message gets lost in all these other topics and it's unfortunate that the put option has us focusing on liquidity and that's why we have made this announcement with ITM. We have ways to make sure we are solid. We have a great asset that, again, we're seeing what the strategic options are. David mentioned that we got $30 million to $50 million of additional liquidity that we can tap with some other assets. We have a line of credit that's ample and it's only based upon North America assets. So AR and inventory. We have access to capital all around the world that we aren't tapping into. So, yes, it's frustrating. What gets lost in all these comments is what we did in 2018 to leverage this business and do a damn good job growing and performing.

Yes. At this point, at the current price of the stock, your company is valued in the marketplace at less than $300 million. And you are the world leader in your business, in a business that is growing on the construction side, and has tremendous rebound potential on the ag side, if this tariff situation ever gets resolved. Is that a fair assessment?

Absolutely. I mean, like you said, we're -- $300 million valuation that's doing $119 million of EBITDA, and we stated today that we're going to grow that. Yes -- again, that's the part that gets -- and the put option, look, it's tough to sit here today and not be able to give all of you clear indication of exactly what's going to happen and how this is going to be settled and what's going to take place, but we can't. And this is -- unfortunately, it's been something we have been talking about for a long time. And it's, again, all these topics take away from the fact that the business is more than doubled and leveraged itself very well. Again, going back to your original question, less than 30% sales, more than double in EBITDA is completely getting lost in the fact with all the other topics.

One more question. We haven't talked about Latin America today. Could you just give us a summary of what's going on there?

Yes, David, you had some comments on Latin America, why don't you kind of echo some of the things you mentioned earlier?

Well, what I would say, and you can maybe give it backdrop to more to the market and what's happening down there with things, but as far as for the year we held steady with our volume for the year notwithstanding some of the [more] challenges we saw in the first, call it the first 9 months of the year. We had a fairly significant increase in volume in Q4, which kind of offsets some of the trends we saw earlier in the year. So I think, the way we look at it right now is that it's getting more steady and some of the uncertainty in the political climate is gone away and there's a little bit more investment going on. So expectation is that the business is steady to growing now.

And the theme there, Alex, I just like to add one thing. I mean, we've done a good job really growing our share, something we talked about before, but it's worth mentioning, again. I mean, we have taken over the top spot in Latin America, done a really good job growing shares. So amidst all that volatility in 2018, we continue to perform very well, built great products, we got a good great team out there representing ourselves with the customers there. So, we, like David said, we feel pretty good about the stability and continue to see a good trend there.

And our final question today is a follow-up from Steve Volkmann of Jefferies.

Yes, it's me again. So your stock is now down 29% since we have been chatting here and obviously, I think it's a focus on this whole liquidity issue, but I have to confess I'm kind of scratching my head a little bit. So I was hoping we could just sort of do a little big-picture review here. I mean, you guys had $82 million of cash at the end of the year, right?

Yes.

And we have $63 million of availability on your revolver, correct?

That is correct, at the end of the year, yes.

So as we stand here today, we must have roughly $145 million kind of liquidity? Am I doing this right?

Yes. You got that right.

And you basically said somewhere in the neighborhood of one-to-one free cash flow to net income. So we're going to take in $30 million to $35 million of cash this year from the business and then you have $30 million to $50 million of these sort of idle assets where you think you can drive some cash inflows and I mean, those things by themselves are plenty to satisfy the $46 million that you owe to One Equity and the other $25 million potentially that goes to RDIF. That's up to you. You don't have to do that, correct?

Yes, it's in our sole discretion. Yes.

So are there any other cash outflows in 2019 beside the $46 million that -- I mean, I'm assuming basically you're covering CapEx with D&A. Is there anything else that's a cash outflow in 2019?

No. Nothing significant at all. You've outlined it quite well.

So you basically have $145 million on the books of liquidity today plus, call it, $40 million in idle assets, that's $185 million plus $30 million of free cash flow is, what's that, $215 million, I don't know I'm not that good at maths. But that seems like a fair amount of liquidity relative to the $46 million that you owe. And I guess, I just wanted to make sure I had all that right because I don't understand why the stock would be down?

I totally agree with you. I think -- we feel like we have adequate liquidity to manage this business effectively and do the investments that we need to do in the business, and satisfy the obligations that we have for the year. What -- only thing I would extend to exactly that is that we also have access with the banks to go change or increase our line of credit if we needed to. There's an accordion agreement that we have, and we would look at that to do whatever we need from a short-term perspective to get the adequate liquidity that we would need just based on timing. But those things that you outlined in of itself would be more than adequate to handle the things we need to do in the business.

So I guess, just a final point on that then is, you've talked about this ITM potential divestiture and, Paul, you said a couple of times that it was driven by a focus on liquidity, but it doesn't seem like you actually need to do that relative to the numbers I just kind of laid out. So maybe that's part of the mixed message here?

It could be. It definitely could be. I think some of the headlines are picking up on some different issues. Yes, it's -- all we announced is we're looking at strategically, options with ITM, okay? With everything that we've talked about with the put option and you outlined it, David, has outlined it very well, it's not a liquidity crunch. I guess, you're right, it's not. The way we shouldn't answer the question is liquidity to handle the issues, to handle the ongoing liabilities, but to make sure we were positioned well for the future and we're investing in the future, like you said, we can handle CapEx through -- I mean, everything is lining up very good. We're looking at options for ITM, maybe I should just leave it at that.

I mean, I think it's fair for investors to ask you why you're doing that, but, that -- I guess, again, I'll just put that back to you because I do think that's important. I mean, if there's another reason I don't know are there other assets out there that you would rather buy perhaps or something else that might focus you on using that as a source of liquidity?

Yes, not at this point. I think we got to get into the process with ITM, which was -- and then we'll look at it. I mean, I think the answer could -- to that could be, we simply shore up the balance sheet so that we can focus on acquisitions and growing the business. So I think, really what I'm trying to say is liquidity, and I should phrase it differently, and I'll kind of just do that now, we're focusing on that we have a strong foundation with the balance sheet for the future. You walked through the liquidity side of it. We're not any reason to be heightened concerned over liquidity, but we would certainly believe we need to have a foundation with a strong balance sheet so that we can continue to grow into the future and that's what we're looking to do if the valuation is right with ITM. We have made investments in ITM. They have been very good, but we want to continue investing in the business. So in our total global business, I mean, it's really just having a fortress foundation with the balance sheet instead of liquidity of why we're looking at the strategic options for ITM. That's the best way I'd characterize it.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Reitz for any closing remarks.

I certainly appreciate everybody's attendance on the call today and we look forward to catching up with you after the first quarter results. Thank you.

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