Titan International Inc (TWI) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Titan International, Inc. First Quarter 2019 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, Brandon. Good morning, and welcome everyone to our first quarter 2019 Earnings Conference 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 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 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-Q and Form 10-K, 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 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 & Events.

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

I would now like to turn the call over to Paul.

Thanks, Todd. Good morning, and appreciate everybody joining the call. Let's jump right into our business and Q1. Our first quarter was not the start to the year we had planned compared to our expectations, a number of factors impacting our business, really across the board there.

A first major factor impacting North America right now is the weather conditions. We have seen early season flooding in the parts of the Western farming area, followed by late snow across much of the Midwest. Earlier this week, a levee broke in downtown Davenport, Iowa. This clearly highlights the extent of this issue.

At this time, if you look at all major Ag states are reporting that planting is behind 5-year averages. In fact Illinois, which is the second-largest corn-producing state is at approximately 10% corn planted versus a normal pace of 43% by late April.

I realize most folks on this call spend their days on the inside looking out, but tough weather conditions in the spring hit farmers really hard. Has an almost immediate impact on our aftermarket business as farmers aren't going to be spending money when they can't get into their fields, and they are really looking to start pushing out some of those expenses and purchases as long as they can.

Overall, our North American sale (technical difficulty) relatively flat. However, we did implement pricing-related incentives targeted at certain products to combat these weather conditions and the resulting slower pace of sales. Based on all -- nearly all metrics pointing to pent-up demand in the Ag sector, along with our own internal knowledge and the external customer information we're receiving, we had expected higher sales to start this year and had built up the necessary trained staff ready to work, along with some inventory to meet this forecasted uptick in demand.

We believe implementing these targeted sales incentives was the right decision in these particular circumstances, but those actions did weigh on our Q1 margins to the tune of about 1.5% in our North American aftermarket tire business.

Now on a broader perspective, the global Ag sector continued to be hampered by lower commodity prices, driven by the ongoing trade concerns, the unsettled Brexit issue, the big global issues that are on everybody's mind in the media outlets. However, farmers seem to be the collateral damage of that ongoing China-U. S. trade dispute. The result is that all these factors, including the weather, pushed farmer sentiment lower on a global basis as they have seen the foreseeable incomes take a hit.

Now I am going to switch to a positive note. Considering the weather conditions that are ramping across the Midwest in the U.S., our LSW is the ideal solution for farmers that need to get into their fields in these tough conditions, and we do continue to see our LSW sales perform well to the tune of over 40% growth in this quarter. Also, as farmers have been late to plant this season or this spring, that means they have a tight window in the fall to deal with for harvest. We believe this sets us up very well to continue to see the increased demand for our LSW products in the back half of this year.

There is also a couple of other factors impacting Q1 worth mentioning. First, the strong dollar continues to impact many multinational companies. However, for Titan, the negative foreign currency impacts from Europe and Brazil, in particular, this quarter, is significant for us. As a smaller global company, it is significant and that represented the tune of about $25 million of negative -- or I should say negative impact of $25 million in sales and approximately $2.5 million in loss gross margin. Without the impact of FX, our sales would have grown over 2% this period.

I'll let David dive into that further in his comments, and he will also touch on the short-term impact we experienced this period from some North America tire inventory costs.

Changing gears, the Titan team has done a good job implementing changes over the past few years to build a stronger foundation, and that is evidenced in the improvements you've seen in our operating results with adjusted EBITDA more than doubling over the past couple of years. Also, our company has a long history of successfully handling situations like this, when unexpected changes occur in our end markets.

We recently celebrated our 25th year on the New York Stock Exchange, and there aren't many companies operating in a cyclical industry like ours that have accomplished that fact. The Titan management team has demonstrated in the recent past our ability to make effective and timely decisions as market conditions change. We've already taken actions in many of our business units to adjust to the first quarter being softer than we expected.

As discussed in prior calls, we've also implemented the 80-20 program for North American tire. We're in the process of implementing that in North America wheel. We are pleased with the results we are seeing with this program in our tire business and believe that had a positive impact with us being able to keep sales stable in North America in this tougher-than-expected market.

The one market that is different than what I just mentioned is Russia as we've seen their financial markets all but freeze up, making capital a precious commodity. Our strategy has been in Russia to protect our premium pricing on products within the CIS region, while also introducing sufficient sales incentives to protect volume. We are now seeing that dealers shelves are full. Sales incentives have less of an impact on volume than desired.

We will adjust our strategy accordingly in the short term to this factor, but the longer-term opportunity in Russia is to improve our product mix from been roughly 95% aftermarket and highly localized in the CIS region, to have more OEM sales and export-related sales coming out of our Titan Russia operation. We're working hard towards making that happen. We have improvements that have been implemented there. We're pleased with the recent progress, and we got to continue to march forward to, again, make that shift in our sales mix happen there.

We went into this year expecting good growth out of the gate. That didn't happen. As I said earlier, the Titan team is experienced in managing through these changing conditions. We've already taken actions. We will continue to do more if needed. While the first quarter didn't reach our expectations, we believe that end markets are being hit by some soft -- some shorter-term impacts and that the fundamentals haven't shifted to the point that we need to update our 2019 guidance.

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

Thanks, Paul, and good morning to everybody on the call. I'll go through some of the important points for our first quarter 2019 performance, but also spend a little bit of time talking through some of the key issues that we are managing as we progress through the next few months.

Net sales for the first quarter of 2019 were $410 million, representing a decline of 3.5% from the prior year. Net sales were up on a reported basis by $47 million or 13% from the fourth quarter of 2018. It's also important to note on a constant-currency basis, revenues would have been up roughly $10 million on a -- from the first quarter of 2018 or 2.3%. The currency impact of $25 million or 5.8% was felt most in Latin America and Europe.

Our ITM undercarriage business performed well, notwithstanding some customer-directed deferrals to the second quarter that impacted the quarter in sales and profits. The North American sales were reasonably flat year-over-year, while the start of the year was slow, and it only picked up toward the end of the quarter.

Our biggest sales challenges came in Russia, Europe and Latin America. Our sales volume on a consolidated basis were lower by 3.5% from last year, with the largest declines being in Russia and Europe due to market headwinds in agriculture. We're able to pick up sales from increased price and mix in the quarter by 5.8%, resulting principally from the overall rise in raw material costs over the course of last year. Our challenges were not so much in sales, but market headwinds and other temporal issues with gross margins through parts of the business globally.

The reported gross profit for the first quarter was $45.3 million versus $59.6 million in the first quarter of 2018, and our gross margin for the first quarter of 2019 was 11% versus 14% last year. First, the impact of currency devaluation on gross profit was approximately $2.5 million versus the prior year.

There were a number of larger impacts that were described in the earnings release that I'll spend a minute to delineate. First, the North American tire business had challenges getting out of the gate early, as Paul talked about. And we pushed through the focused sales incentives in an effort to stimulate demand, which translated into sales late in the quarter. We also had a short-term impact of higher cost of the inventories being sold into the market from production from the fourth quarter of 2018 when we had much lower production levels and higher unit costs. This is largely behind us now. The combined impact of these items was approximately $4 million on gross profit for the quarter.

Second, our Latin American business has continued to experience headwinds and particularly, in the Argentinian and the Colombian markets, which hurt export sales from our plant in Brazil. In addition, light truck tire sales saw some decline year-over-year. The combined impact of these headwinds was approximately $3 million on gross profit.

Finally, we continue to have challenges in Russia and Europe in the Ag markets, which not only impacted sales and gross profit, but also caused margin decline due to production inefficiencies. That was approximately $3 million in gross profit decline from last year on a combined basis.

Paul talked about this earlier. But given the significant volatility that we've seen in our markets, we are and have been taking the necessary actions to counteract these headwinds. We're taking costs out of the operations globally where necessary, and we'll manage the spend moving forward. However, many of these actions were not able to help us recover the first quarter profitability, unfortunately. We believe we are building sufficient recovery plans to facilitate profit improvements through the course of the year to get us back on track.

Now I'll spend a few minutes on segment performance. Our agricultural segment net sales were $192 million, down 1.3% on a year-over-year basis, but would have been up 4% if not for the negative currency impact. Volume in the segment was down 2.5%, while favorable price and mix added 7% to segment net sales. Ag sales in North America were up 5% due primarily to OEM sales.

Russian Ag sales were down 26% due to the continued market challenges. Dealer inventory levels have remained at very high levels for several quarters, and no amount of incentives have been able to make a dent at this point.

South American Ag sales were down 10%, mainly due to the currency impacts, but would have been up without regard to that. European Ag sales have also lagged the prior year by 22% with the combined -- a combination of the negative currency impacts that we saw in the quarter and volume declines as the market has become more challenging.

Our agricultural segment gross profit for the first quarter was $22 million, down from $30 million in the comparable prior period with a portion of this coming from lower currencies as well. The impact of the North American higher costed inventories and incentive programs had the biggest impact to profitability in the quarter, followed by the headwinds felt in Russia, Europe and South America. Year-over-year margins declined over 390 basis points to 11.5%, again driven by these -- all these factors I just talked about.

Continuing on to our earthmoving/construction segment. It experienced a decrease in sales of $12 million or 6.4% to $177 million. On a constant-currency basis, net sales would have decreased less than 1% for the quarter. Volume was down by 4%, while positive price/mix was 3%, and negative currency impacted the segment by 5.5%.

ITM's undercarriage business experienced a small decline in volume during the quarter, which was attributable to certain customer-directed deferrals of shipments into the second quarter. We saw slight gains in volume in Europe and South America in the E&C segment as those markets remain solid.

Gross profit within the earthmoving/construction segment for the first quarter was $18 million, which represented a decline of -- a little over $4 million from a year ago. The biggest driver of the decline related to the North American tire margins, along with tighter margins in ITM due to delays on shipping higher-margin products into the second quarter.

Now to wrap up, the consumer segment. Consumer segment's first quarter net sales were roughly $42 million, decreasing only slightly when compared to the last year. On a constant-currency basis, net sales would have been up 6.7%. Volume declined by 5%, while we gained some favorable price/mix of nearly 12%.

There was a significant FX drag again this quarter with a negative impact of 8% from the prior year, with the biggest impact felt in Latin America. This segment's gross profit for the first quarter was $5 million, which represented -- which was down $7 million from a year ago. We had very, very strong margins the first quarter last year. Gross margins were 11.9%, which was a decline of almost 500 basis points over the same period last year, which was reflective of lower sales volume in certain areas and the impact of fixed cost absorption in Latin America, particularly on light utility truck sales volume.

Now turning to our operating expenses. SG&A and R&D expenses for the first quarter were $38.5 million, which is higher than what we saw in the fourth quarter as well as the first quarter last year. This was an increase of $1 million from last year in the first quarter. And as a percentage of net sales, SG&A and R&D was 9.4% compared to 8.8% in the comparable prior period. Some of this is due to the sales decline, but we did have increases in spend relating to information technology investments that we're making with our Oracle Cloud ERP upgrades.

Tax expense for the quarter was $1.9 million in the quarter, on a pretax basis income of $2.9 million, which appears to be unusual. With a proportion of our losses coming in tax jurisdictions where we have significant cumulative operating losses, we're not able to take the current year tax benefit. We've talked about this in prior calls. But that causes an unusual outcome, particularly in the quarter. For the full year 2019, I would still anticipate our tax rate to fall between 25% and 30%, given our expectation for the year of -- and the mix of pretax income and the various tax jurisdictions.

The final item of note in the first quarter performance discussion relates to the redemption value adjustment of a little over $800,000, which decreased from the prior year Q1 of $2.3 million. All this adjustment related to the impact of the current-period continuation of the OEP put option. The RDIF portion of the put option has either been satisfied or determined, and there was no ongoing impact from 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 balance sheet liquidity and capital items. Working capital grew in the first quarter again, but at a much lower rate than what we saw in the first quarter last year as sales ramped up. Our receivables were the key driver of the growth as our sales were more compressed toward the end of the quarter. In fact, nearly 40% of our sales for the quarter were in the month of March.

Total AR increased $53 million during the first quarter from the fourth quarter and were on par with balances that we had at the end of the first quarter of last year. Our ending inventory at the end of March grew by $17 million from the end of the year. This growth came in 2 principal areas of the business: our North American wheel operations and our undercarriage business. We built up the inventory in the wheel business as we continue to ramp up production after significant challenges that we faced from the startup of our new Oracle Cloud ERP system in the fourth quarter. We fully expect to see inventory levels taper in the next several months as we continue to catch up on production.

As it relates to the ITM undercarriage business, we have experienced dramatic growth in the business over the course of last year and, as we discussed, in prior quarters. We did experience some customer deferrals on orders into the coming quarter. These orders are fully committed by customers but some shipments have been shifted out of the first quarter.

While we experienced growth in working capital once again this quarter, we are making strides in key areas of the business in our focused efforts to increase capabilities to reduce lead times and to forecast production demand better for our plants.

Capital expenditures for the first quarter were $9.5 million versus little under $8 million in 2018 in the first quarter. We are in line with expectations for capital spending this year, which will be in the range of $40 million to $50 million. Again, we are targeting areas that can deliver the highest returns through increased plant efficiency and cost reductions, while remaining prudent on timing due to the other cash needs in the business.

Now let's look on through where we stand on the debt side of things. Our combined current and long-term debt totaled $499 million at the end of the quarter, which increased primarily due to the line of credit borrowing to settle the RDIF put option in March of $25 million. Current maturities due within 1 year totaled $66 million. A significant portion of these current maturities relate to local overdraft in working capital facilities, which are generally considered on-demand for reporting purposes, but are expected to roll over without the use of cash during the year.

All of the increase in the quarter in the short-term borrowings related to these overdraft facilities in various countries. Our debt primarily consists of our $400 million senior secured notes, which will mature in 2023.

Our cash balance declined by $13 million this quarter to $68 million. As we ramped up sales in the fourth quarter of '18 to the first quarter of 2019, this was anticipated, and we expect to see a turnaround throughout the year as we trim working capital and AR and inventory through our improved focused and the natural seasonality in the business. It should be noted that in the first quarter of 2018, we experienced a much more significant decline in cash after a similar ramp up in sales.

We have adequate cash on a global scale to manage the operations of the business on a daily basis. We also have the capacity to tap into our foreign bank lines and overdraft facilities from time to time to handle various working capital fluctuations for our international business, as we have over the course of last year as our sales volumes have increased. Our U.S.-based ABL line has been in place for some time, and for the first time, we utilized it to handle the RDIF put option obligation of $25 million in the first quarter of 2019. The limit on the credit facility is at $75 million today.

But as we have discussed in the past, there is an accordion feature on the facility for us to upsize the facility to as much as $150 million with the appropriate and customary bank approvals. We maintain a healthy relationship with our banking partners and have been working with them to increase the size of the facility to meet the potential obligations of the company relating to the put option.

As we disclosed in the release, this week, the Board of Directors authorized management to proceed with upsizing the facility from the current level to $125 million. Within the next few weeks, we expect to execute this increase in the facility, and each of our banking partners have already confirmed their increased commitments.

As we stated in the past, with our anticipated cash flow trends throughout the year and our other potential cash flow events through sales of noncore assets that I described last quarter, coupled with this current and enhanced borrowing capacity, we maintain healthy liquidity to manage into the future and to continue to invest to grow the business appropriately.

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

Thanks, David. I've got a couple of quick closing comments. First, regarding the Titan Russia put option. We continue to have discussions pertaining to the put but nothing has been finalized yet. As David just stated, we have sufficient capital and credit availability to settle the put without impacting the plans for Titan.

In late February, we announced that we are evaluating strategic alternatives with respect to ITM, our undercarriage business. This decision was not driven by the situation with the put option as may have been interpreted during our prior earnings call based on my response to a particular question.

ITM is a well-managed business that we've been successful in making investments to spur strong growth over the past few years. We've talked about that extensively. ITM would benefit from further investments or acquisitions to build upon these successes.

However, we also believe that our wheel and tire businesses that have formed the backbone of Titan for many years have a strong future as well that would benefit from further investments or acquisitions to grow these businesses. Our current capital structure would have challenges in being able to do that for wheel, tire and undercarriage, basically all the business units of this company.

So based on that, in early 2019, ITM's CEO and myself started gathering information regarding ITM's potential valuation as a stand-alone enterprise, and indications were that ITM would be valued significantly higher than the bids we received in 2016. I then decided it was a matter worthy for further discussion with our Board. And then as we disclosed in February, the Board approved Titan to engage Shore Capital as financial advisers to carry out further valuation on ITM.

Where we sit today with the ITM process is that we've made positive progress, and we continued to move through the process towards a potential public listing. Ultimately, the Board will convene at the appropriate time to analyze the situation and all pertinent information to make the best decision for our shareholders.

With that, Brandon, I'd like to now turn the call over to questions.

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

So a couple of topics to kick it off. Just first, if we can kind of go back to the liquidity discussion, I just want to make sure I kind of have the pieces right here. You have roughly $68 million in cash at quarter end, I think. How much do you need to sort of run the company on a daily basis?

We're certainly in the range of being able to do it. We managed in this cash level throughout the first quarter. It's always a, I think, our expectation that we'll continue to liquidate inventory and be able to operate at a little higher level than what we have been. But we can still operate the company anywhere in the range of, let's call it, $60 million to $80 million.

Okay. And then that was kind of my follow on. I'm sorry if I missed it. But do you expect to be cash positive this year?

Based on our current estimates and so forth, that would certainly be our expectation toward the end of the year. It won't necessarily happen in the first half of the year. But as we progress through the year, we believe we'll get to a full year expectation of positive cash flow.

Okay. And then on the revolver, I think, right now you have availability in the $40 million range. But you're going to add another $50 million, so that gives us kind of $90 million there, right?

That's right.

And then last quarter, I think, we talked about some kind of noncore assets other than ITM that you were thinking about as having some market value that would bring cash in. Is that still the case? And where do we stand with that?

Yes. There's a variety of different things that we're looking at, all of which can happen within the 3- to 4-month period. And so we're continuing to progress down that path.

If I remember correctly, I think we were talking, what, $30 million or $40 million of potential there.

I believe I said $30 million to $50 million, but, yes.

Okay. And so you're still feeling good about that?

I still feel like we -- some of the timing may push a little bit, but all the things that we described last quarter and then perhaps maybe a few other opportunities continue to present themselves. So yes.

Okay. Great. And on the sort of outflow side, you have not yet paid the $25 million to the Russian deal yet, is that correct?

You mean under the stock settlement -- part of the settlement.

Right. Didn't you have to pay $25 million for...

Yes, we paid the $25 million in cash. We used borrowings for that on the line. And the stock has not been issued yet. We're still awaiting final regulatory approval for the issuance of the stock.

Got it. So cash has been paid, stock not yet.

Correct.

And then on the second put, do we have any update to what's happening there?

Yes. No, we continue to have discussions, as David has highlighted, the -- in our press release highlighted, our Board has authorized the upsizing of the ABL, giving us sufficient capital and availability to handle the put when those discussions do reach a conclusion.

Okay. All right. And then just quickly on the margin side, to switch gears a little bit. It sounds like a fair amount of the margin pressures you had in the quarter were kind of short term, I think. But do we expect the incentives in the market to continue going forward? Or was that kind of a 1 quarter thing?

I think the biggest portion of those incentives would probably push sales in the first quarter, but that is an ongoing program. So there could be some additional amounts in the second quarter as well. The -- as answer your question about most of the issues being short term, a lot of them, particularly the largest ones in the quarter were what I would consider short term, particularly with the inventory in North American.

So is it a leap too far to say that the gross margin should be flat to up each quarter going forward? Or we're not ready to say that yet.

Well, don't want make -- quarterly is a tough thing to always predict. As you know, we had pretty -- a lot of volatility this quarter. But if you go back to our original guidance for the year is that -- the expectation we would have some marginal improvements in margin year-over-year. So inherently, we're -- we believe we can continue to drive margins better as we move forward.

Okay. And then just a big picture, and I'll pass it on is there's been some discussions in the press here about some impending settlement with China, and maybe having some fairly positive impact on various Ag exports possibly. And I guess I'm just trying to get a sense of how you think the incremental margins can look if we actually start to see some improvement at some point finally in these end markets. I mean what should we be thinking about in terms of kind of operating leverage if we actually can get some reasonable growth here?

Yes, I think we've demonstrated in the past, when our business gets the operating leverage going and we get the volume through our plants, that our contribution margins are fairly good. Like you said, we need a catalyst though to make that happen. And as we were preparing for this year and really putting our plans in place near the tail end of '18, we certainly have built up a well-trained staff that was looking at some growth going into the first part of this year. And then like you said, the unsettled trade issues and then you throw the weather on top of it, has pushed that back.

So while sales were flat, we certainly have trained staff that are ready to go to work. So I think to answer your question, the incremental margins would be in that range of the mid-20%, like we've demonstrated in the past when we get the volume running through our plants.

Our next question comes from Komal Patel with Goldman Sachs.

Just a follow on from the earlier question. With the upsizing of the credit facility, does that imply the OEP settlement would more likely be settled in cash at this point? Or it's not fair for us to draw that conclusion?

It's not fair to draw that conclusion. We, obviously, as a management team, we want to be prepared for whatever settlement occurs. And so I want to maintain the right amount of flexibility to -- in the business to run effectively and to manage that potential obligation.

Okay. Got it. That's fair. And then just second, maybe you could provide a little more color on the cadence through the quarter. You had mentioned better performance in March. What were some of the signs that you were seeing? And then also just kind of your take on April, and did the positive momentum from March continue? I know there's some tough weather in April as well. So just some thoughts there?

Yes, obviously, there's a fewer working days and production days in April, but the trends are still fairly positive. March was a strong month for us. And so I believe, as we progress through the quarter, particularly in some of the areas that we saw some weakness, we believe we can get back on track.

Got it. And then you mentioned some contracts were deferred into the second quarter. Is there a way to quantify how large of a deferral that was? And is there anything to call out on canceled orders?

No canceled orders. It's just the timing is -- for delivery was pushed out a decent amount. I would say that looking at it on a profitability standpoint, it was about $1.5 million impact to us this quarter.

Got it. That's helpful. And then last one for me. I guess, maybe can we just touch on that $25 million share repurchase program that was announced in March? I guess, how should we be thinking about it? Obviously, 1Q was weaker than expected, and the stock is opening lower this morning. But then again you're kind of increasing your credit facility. So is it fair to be using the program right now? Or how do you kind of balance the factors that are in motion here?

Well, certainly, the Board is going to take into account where the stock price is at relative to where it's been trading and, obviously, our internal cash flow, among other factors. But I mean, we want to be responsive and ready to support the stock appropriately at the right levels. So this program isn't intended to be just a 1 quarter thing. It's over time, and we're going to manage it appropriately and do what we feel is the best use of our cash.

Our next question comes from Joe Mondillo with Sidoti & Company.

So you guys reported on March 7 your fourth quarter numbers, so you were pretty well into the first quarter. So I'm just curious when you reported and gave the guidance there in March, you must have had a pretty good picture of what the first quarter was sort of looking like.

And so I'm just curious now that we have the results and you see everything, and you're maintaining the guidance, what was sort of a surprise, whether it was positive or negative? And just given these gross margins that we see in the first quarter, it's sort of insinuating if we're maintaining the guidance, that you are going to make up a lot of whatever was a negative surprise in the first quarter later in the year. And I'm just wondering where that comes from.

Yes, as we progress through first quarter, we obviously had seen the weakness that we saw in January and February. We thought we could actually probably even have a better March than we actually did. And there were some -- certainly some margin hits that we took in the quarter that ultimately presented themselves as we got to the end of the quarter versus early part of the quarter. And as we looked at the rest of the year is that we -- if you look at each of the factors that presented themselves, there is certainly opportunity for us to recover.

Certainly, we're going to need some cooperation in the weather category as well as the Ag markets themselves. But given what we see right now at the moment, we certainly believe we can produce the activity to be able to recover our margins and obviously our profitability. So we have to be -- obviously, we're going to watch it very, very carefully as we progress and update everybody as we get through the year. But...

Okay. And the sales incentive that you called out, this is an ongoing program, like you mentioned, I think on a quarterly basis. Did you quantify -- sort of, I guess, there is an abnormal amount of sales incentive in the first quarter? Because I'm assuming that there was some sort of sales incentive in the first quarter last year. So was there an abnormally large amount? And if so, can you quantify how much that was?

Joe, it wasn't that the sales incentives were abnormal. We definitely have planned it. And where that came from is looking at -- our strategic plans for North America related to aftermarket were to introduce these sales incentives in the first quarter. Now with that, we expected that to drive growth.

What ended up happening instead is that the sales remained relatively stable, and so we didn't get the volume and the additional margin that we expected from the incentives. So it's not like it was a unknown cost that we didn't expect. It's just we didn't get the growth that we expected to go along with it, again, due to the weather events and really, the delaying of purchases from farmers at this time.

Okay. And just in terms of, I guess, sort of related to my first question. Could you talk about some factors that we see that are going to improve, whether it's price cost. I'm assuming maybe you'll get back to maybe better volumes, which leverages costs and -- could you just talk about some of the factors that are going to maybe drive better margin compared to these -- the margins that we saw in the first quarter?

Yes, if we talk about North American tire, our expectation is that we'll have stronger production, which is obviously going to lead to -- we get very good incremental margins when we hit a certain production level. The cost of inventory that we experienced in Q1 is obviously largely behind us at this point.

And the -- what we look at in terms of our standard cost of materials, the actual raw material prices are a little bit lower than what we had in our plan. And so we certainly expect to see some incremental margin coming through on that. Now it comes over the course of the year. This doesn't happen all in 1 quarter. But right now, based on where raw material prices are, it's certainly favorable.

If you look across other parts of the business, some of these things were deferrals and, certainly, pushing to late in the year. Volume is obviously going to be the critical factor for our ability to drive sales and then ultimately the higher margins.

Okay. And then what about sort of mix OE sales versus aftermarket in the first quarter? What were the trends sort of like as we go into May?

If you look at OE, OEs obviously, it was -- it trended higher in terms of the mix versus the aftermarket was fairly flat, while we had expected increases in activity during the quarter. And as we progress through the year, I think we'll get a better balance.

Okay. And on the earthmoving/construction side of the business, the volumes continue to sort of surprise me considering what Caterpillar is talking about. And I mean you guys mentioned ITM has been strong, and the mining sector, overall, seems to be very strong. What's going on with the volumes that you've seen over the last 2 quarters relative to what seems to be a pretty positive market?

Well, our international exposure certainly has not helped with the fact that currencies have impacted our overall volume. But this quarter was much more about the fact that we had some deferrals of revenues or sales in the next quarter. I think if not for that, we would have seen an up market.

Okay. So we should expect positive trends starting in the second quarter then, if that's the case.

Certainly. Yes, if we don't continue to see any deferrals out of the quarter, I think the expectation was that we would see some incremental growth, yes.

Okay. And then just on the working capital, and I'll jump back in queue. Inventory increased $55 million last year due to the strong demand that you were seeing. If we're sort of seeing -- we're obviously trending slightly negative here, but if we're seeing slightly positive, say, for the year, it seems like you have opportunity to -- what are you expecting for working capital, the contribution to cash, I guess, what I'm asking.

Yes. As I've stated earlier, the expectation is that we're going to get -- be stronger in terms of our planning cycles to be able to trim the inventory, the amount of days that we have in inventory. I mean, the big growth in working capital this quarter was really on AR. So that's a timing thing with the majority of our billings happening at the end of the quarter. So I'd expect, as we progress through the year and you have -- see more normal, if you will, trends in the market, then we should be able to manage our working capital to drive cash flow.

I think overall this is more of a longer-term project. But obviously, as we continue to make appropriate changes in our planning schedules across the business, we should be able to reduce the number of days that was required for inventory. And -- but there's going to be pockets of the business that are going to be better than others given the mix between OE and aftermarket. So I do expect to see some improvement as we go through the year.

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

You guys obviously talked a bit about ITM. I just want to understand what the message is. Is the most likely scenario a public spin as opposed to a cash-generating sale at this point? Is that right? Or am I thinking about that wrong?

No, I think that's right. The financial advisers that we've hired, engaged, clearly, they'll look at both potential outlets and wherever drives the highest valuation. But as part of the process that we're going through right now, a public offering is part of that.

That will be like a tax-free spin to shareholders?

Well, obviously, we're the shareholder today.

Okay, right. Well, to split the company into the equity -- to the shareholders on the call. Okay, Paul, can you guys understand the -- help us understand the revenue and EBITDA size of ITM, then, if this may have come out?

Yes. I mean at this point, I think, we've given some general indications about the performance of ITM. I think we've been pretty clear with that over the last couple of years. They've been successful. The business has been growing. But at this time, it just gets primarily folded into our earthmoving/construction segment. A very high percentage of it falls directly in that segment with a much smaller percent that goes into Ag. But at this point, Larry, that's all we can disclose.

Okay. And then OE versus aftermarkets, sounds like -- obviously OE production was up and obviously, market's a little bit different, OE versus aftermarket given the weather especially. Have you changed your production plans moving forward as they've gone through the first quarter? And there's been some hiccups, obviously, with the weather and farmer sentiments. So how do you think about OE versus -- and aftermarket production moving forward for the rest of the year? Have we maybe tweaked that down?

Well, I think, through the rest of the year, it depends on the timing when you're looking at it. What David said, we saw March come in very strong, looking to see that continuing to April. Clearly, as you look at things right now the weather is tough. Our -- I was talking to our legal counsel, as we drove last night from Chicago where we're at to our plant in Bryan and you're just looking at water everywhere.

So I think right now, Larry, that's a tough question to answer as we kind of see where the rest of the spring goes, how the planting cycle takes place. But fundamentals that we believe in and we continue to hear from our customers, whether it's OE or aftermarket is that there's a lot of pent-up demand in the system. We do believe that it's a timing issue versus a structural issue.

And at this point, we're going to have to kind of wait and see how the first -- the rest of the first half of the year plays out. But I do believe that it leads into a good-looking second half of the year, especially with the advantages Titan has with our LSW products. The growth we saw in the first quarter was tremendous and I continue -- I believe that will continue on a very strong pace as these wet conditions are absolutely perfect for what Titan can deliver to our -- the end users to help them with these tough conditions.

So again, we all see the OEM forecast for the rest of the year. I mean, we saw some reports yesterday. And I think that's all fairly accurate. But again, I think aftermarket and weather is kind of the wildcard that we're watching closely. But -- again, I do think that's more timing than it is structural.

Okay. So maybe put another way. The OEs are, correct me if I'm wrong, not communicating to you any material change in production plans for you to expect.

No, not anything different than what's been reported publicly.

Okay. Then when it comes to the LSW, Paul, which you guys called out again today, is that mostly in the -- I'm assuming it's just aftermarket level. Or are you getting some traction in the OE level at all, too?

Some good improvements at the OE level. I think that's been a nice movement in trend that we've seen here over recent months. It is primarily an aftermarket product, like you stated. And I think for us, what's been great about it being an aftermarket product is that they've done a tremendous job of handling the changeovers.

If a farmer has a standard product already on their equipment, they've done a great job of getting the standard assembly taken -- wheel, tires taken off, absorbed into the marketplace and really getting them upgraded to LSWs. And once you get them upgraded to LSWs, we feel that the stickiness of that sale is really favorable.

So -- but we are -- to answer your question, Larry, we are seeing some good trends in the OEs. We definitely want to get the OE market going on LSW. But it's just -- it's a different type of sale. I mean, they have different things that they look at when they're putting an option onto a new piece of equipment versus what we are selling through the distribution channel and working directly more with the end users.

Our next question comes from Alex Blanton with Clear Harbor Asset Management.

First, do you have a slide deck with this? I didn't see one on the website.

Alex, we have not prepared slides in the past or today.

Okay. All right. LSW, what percentage of your aftermarket is that now?

At this point, Alex, we aren't disclosing that, I guess, for a number of different reasons. And part of it is definitely competitive. We have a strength with our LSW products and competitively, it's not something that we are disclosing into the market. But we are trying to give you enough color on illustrating what the growth rates have been. But at this point, Alex, for competitive reasons, we just can't talk any further about what the exact number is.

Okay. And the deferrals into the second quarter of the ITM, how much was that? And why did it happen? And why would it continue? You mentioned there's a possibility there might be some further deferrals, but what's the reason for it?

I'm not seeing any indication that they are any. It's just they were just pushing out their expectation for their own equipment deliveries.

This had to do with OE equipment deliveries.

I believe it's a combination. There's probably some aftermarket on that, too.

Well, is there a possibility it was inventory? They had too much in inventory and they reduced their inventory of it.

They were obviously fairly -- these orders were firm, and they just pushed out the timing of their expectation for us needing to get it to their plants to be able to put it on.

Well, I understand it. But why did that happen? That's what I'm asking, why did that happen? Why did they need to do that?

I mean, it was just some shift, just some timing at the end of the quarter is really all it was.

I understand that. But why was it different? Why did it change from expectations? Why did they push it out?

Yes, I think at this point, Alex, I think David's offered about as much information as we can about the situation. I mean, that there's...

Customers made decisions about timing from 1 month to the next.

Right. Okay. You don't know why then. You don't know why they did that.

There is a variety of different reasons.

The discounts that you mentioned, the sales incentives, did you tell us how much that was?

I think we cited it's about, what, $1 million, $1.5 million?

Yes, that was about -- that was the profit impact in the quarter.

Okay. This weather, how is it affecting the OE deliveries that you are supplying? In other words, you do a lot of Deere tires and wheels. Now they normally build up a lot of dealer inventory in the first quarter, that they usually -- they build up a lot of inventory in the first quarter in total in preparation for the selling season. Now what is that buildup today this year versus what normally is? Is there a difference? And how is that affecting you?

Well, I think, at this point there hasn't been enough market intelligence out there to specify exactly what the dealer inventory levels are. I had some recent meetings with our OEM customers and, yes, there is a -- an issue with the weather that is impacting some timing of these orders and these potential shipments. But I think if you look at the -- one of the OEMs that reported yesterday, they're still holding to their outlook for the full year. And so you look at it as a timing issue, driven by the weather versus kind of a structural foundational issue that is just lost demand.

Which OEM reported?

AGCO reported yesterday.

AGCO, okay. You mentioned that you're trying to improve your OEM sales in Russia. What is that going to take? Who's your competition there? What do you have to do in Russia to get more OEM sales?

It goes to the basic premise of getting that -- a Goodyear-made product out of the Russian plant that can be put, not just on the OEM equipment that's being manufactured in Russia, but also could be used as an export into other Western European markets and areas that would be suitable for a Goodyear-branded product.

And so what my discussions have been, there are a number of tractors built in Russia by large OEMs that import their tires from other markets, primarily Europe. And there is a desire to have local content, as most countries do, there is a desire to have local content. And so what we're working towards, Alex, is being able to provide it from our Russian plant.

So we have a number of changes in -- that have been implemented on the compounding side to address that, a number of changes that have been implemented with equipment, some of it new, some of it coming -- a lot of it coming from the U.S. We have our U.S. teams working with our Russian counterparts.

And again, the goal is that we would be able to put -- if we're going to put the Goodyear brand on it, it naturally has to be of the highest quality to support that premium label. And really, that's what we're looking to achieve. And when we do, we think there is a good market for it, again, both with the OEMs and for export sales into other regions.

Well, the OEMs in Russia must be short of foreign currency. Why wouldn't it be to their advantage to source locally rather than be exporting tires -- I mean, importing tires from Europe? That doesn't make a lot of sense.

No, that's what we're trying to do. That's exactly right, Alex. That's what we're trying to do. We need to get the Goodyear brand on it. And again, that means we achieve a certain level of quality, which we are working hard to do that. But when we achieve that level and put the Goodyear brand on it, then exactly what you said is we believe what can happen, where the local market will start taking the Goodyear tires made right out of our Titan Russia plant.

Yes, that makes a lot of sense. So it's a quality issue. They feel that their quality coming from Europe has been good. But if you can match it, you get the sales instead, is that right?

You got it, Alex. That's exactly right.

Okay. Let me see here. This guidance that you mentioned you're not changing, you didn't mention what it was.

Yes. I mean I don't have everything in front of me here, Alex, but we stated our guidance in March 7 for the full year. We can go back and get that for you.

March 7 you had...

Yes, when we did our fourth quarter earnings announcement.

Okay, so whatever was in there has not changed. Okay.

Nothing's changed.

Yes. Todd could help you with that, Alex, if you want to talk to him offline.

Our final question is a follow-up from Joe Mondillo with Sidoti & Company.

Just 2 quick follow-ups. I know we're pretty late in the call here. First question, hopefully a short answer. Just, I noticed in the Q, you had -- you highlighted that your Goodyear licensing agreement in Latin America expires in June of this year. I assume that is usually just recontracted. Or is there any risk to that at all?

It's the licensing agreement for the bias truck tires we produce there. So it's not -- just so everybody is clear, it's not related to the global farm licensing agreement that we have with Goodyear. That's under an automatic renewal process. So this one specifically, we've -- again, it's for the bias truck tires out of Latin America only. We've begun those discussions with Goodyear. Look, I don't want to put words in Goodyear's mouth, but our relationship is strong with them, and I see it as extremely low risk of anything detrimental to Titan happening from that.

Okay. And then lastly, your 80-20 restructuring, you guys have talked about that a lot over the last 18 months. But I think there is still a lot more work to be done, and I'm surprised it hasn't come up really on this call.

Could you talk about where we're at in terms of everything that you're focusing on and sort of give us maybe an update on sort of how we think about timing of all the improvements that you're going to be making over the next year or more.

Yes, with 80-20 on tire, part of the strategic, targeted incentives that we're putting in place, we're able to do that because of 80-20 and what we've learned and garnered through that process. David has been talking about extensively working capital is a top priority, and 80-20 is designed and will be helping us with that.

But part of the rollout of 80-20 is you go through the steps, you get it introduced, but it does take time for your customers to make the changes. You can't exactly tell your customers on day 1, "These products are gone forever. Just live with it." So all our sales reps are working extensively with our customers to adopt the 80-20 premise.

I would say almost universally, it's been well accepted. People are clearly behind it. It makes -- it streamlines their supply chain and their processes. But it takes time for them to roll out the old inventory and start bringing in the new.

But the process is moving along well at tire. And again, I think what we've learned or what we've garnered from it has been tremendous and helped us in more ways than just the obvious of getting rid of 20% of the products. I mean it's helping us make strategic decisions, it's helping us with working capital, and it's going to help us with our plant staffing as well as we move forward.

But I think the big one for us, though, that we're just getting into is going to be on the wheel side. We're working with the OEMs, and if you look at a wheel plant, Joe, I mean, I know you've had the chance to do that, the setup on a wheel line is extensive in what you go through on the changeover in the tooling to manufacture a wheel. As we streamline that operation and make our runs more efficient, I think we're going to see a very nice pickup in wheel almost immediately when we do that.

So what we're doing right now with wheel is going through the process, the analysis, getting our plans put in place. We'll update you more as we move through the year, but I'm really excited about what it could do to the efficiency of how we operate our wheel plants.

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

Thank you, Brandon. I appreciate everybody's time this morning. And we'll catch up with you again on the second quarter. Thank you.

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