Titan International, Inc. (NYSE:TWI) Q4 2023 Earnings Call Transcript
Titan International, Inc. (NYSE:TWI) Q4 2023 Earnings Call Transcript February 29, 2024
Titan International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning ladies and gentlemen and welcome to the Titan International, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for questions and comments after the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Alex Snyder, Vice President, Financial Planning and Investor Relations for Titan. Mr. Snyder, the floor is now yours.
Alan Snyder: Thank you, [Indiscernible]. Good morning. I'd like to welcome everyone to Titan's fourth quarter 2023 earnings calls. On the call with me today are Paul Reitz, Titan's President and CEO, and David Martin, Titan's Senior Vice President and CFO. I will begin with a reminder that the results we are about to review were presented in the 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, during this call, we will be discussing certain forward-looking information, including the company's plans and projections for the future that involve risks, uncertainties, and assumptions that could cause our actual results to differ materially from the forward-looking information.
Additional information concerning factors that either individually or in the aggregate could cause actual results to differ materially from these forward-looking statements can be found within the Safe Harbor statement included in the earnings release attached to the company's Form 8-K filed earlier, as well as our latest Form 10-K and Forms 10-Q, all of which have been filed with the SEC. 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 Q4 earnings release is available on the company's website. A replay of this presentation, a copy of today's transcript, and the company's latest quarterly investor presentation will all be available soon after the call on Titan's website. I would now like to turn the call over to Paul.
Paul Reitz: Thanks Alan and good morning to everyone. As all of you have hopefully seen by now, along with the announcement of our Q4 and year-end earnings this morning, we announced the acquisition of Caraustar. This is an accretive transformative transaction for us, that's a complicated word I tried to say. The addition of Caraustar will significantly expand our customer base and product portfolio, while also adding key manufacturing and distribution assets. With that in mind, I'm not going to spend as much time as normal on our Q4 and year end results today as our business going forward will be substantially different. Instead, I will focus my remarks on the strategic rationale for our acquisition of Caraustar, along with a brief discussion of market conditions.
Then David will provide comments on our reported results, the financial aspects of the Caraustar transaction, and then, of course, we'll have time for transact for questions. I would instead of call it a transformative transaction. I should have said we're really damn excited for the opportunity to make the Caraustar team part of the Titan family. Similar to Titan, Caraustar is a global manufacturer of specialty wheels and tires. The primary end markets for the products are outdoor power equipment, powersports, high-speed trailers, and smaller agriculture equipment. Powersports, trailers, and outdoor power equipment are verticals where Titan has not competed in recent years. So, adding Caraustar's product portfolio in those end markets will add some meaningful diversification to our business.
In addition, Caraustar maintains strong relationships with a number of key national retailers and Commercial Servicing dealers. Caraustar has built a one-stop shop and a connection to customers in their three key segments that is unparalleled. Titan has done the same at our key segment, large ag, where we offer an unmatched arsenal of wheels and tires with a strong connection to our customers and end users. Titan and Caraustar are better together, and we're excited to add these new customer relationships and products into Titan's business. It's no secret that agriculture and construction industries are cyclical. So, the addition of these more retail-centric categories is something we expect will benefit the consistency of our sales, margins, and profitability over time by rates reducing some of that cyclicality.
Caraustar has simply spent years, developing a secret sauce. I'm going to use the word one-stop-shop repeatedly because they have done a tremendous job in the three segments where they operate, again, building the secret sauce around this business model. Part of that formation of that secret sauce is Caraustar has built a world-class portfolio and specialty areas such as outdoor power equipment, serve ATV and UTVs, powersports, and high-speed trailers, along with ag products, primarily for smaller equipment such as tractors, backhoes, and implements. This portfolio dovetails well with our existing Titan lineup. Although we do have some products through these channels. Our bread and butter, Titan's bread and butter has really been innovating the larger wheels and tires that go on the biggest tractors and combines.
Going forward, we really think our combined product line will feature the best in class offerings in these segments. We are pleased really pleased to be extending our market leadership there and to be able to offer the product portfolio that I just mentioned. While we are excited for these top line opportunities with a broad product base, we are really excited about Caraustar's business model that connects their manufacturing and distribution assets with third-party producers in a very effective and efficient manner. Caraustar has a plant strategically located in Beijing, China. It has a long history with an incredible knowledgeable workforce and access to lower-cost materials, Caraustar's three U.S. facilities, two in Tennessee and one in South Carolina, fit well with our existing production base, which are, which is located primarily throughout the Midwest.
The Caraustar locations in combination with Titan's, form a manufacturing base that can produce an extensive product portfolio that, as I mentioned earlier, is unmatched in our industry, while also providing value-added risk mitigation to our valued customers. Complementing that manufacturing platform is Caraustar's one-stop shop operating approach. You're going to keep hearing that word a lot because from the very beginning, I've been impressed with learning more about their market approach and how they developed this connection to customers. From the outside, I've been watching it for many years, but again, getting to know the team and the processes associated with this one-stop shop, it truly is their secret sauce. We're looking forward to the addition of the 12 distribution centers that are connected via an impressive sales inventory and operating planning process that allows them to deliver products to their customers in a timely manner regardless of source of origin.
Internally managed their DC locations are in key strategic areas, including the Central and Southern US, where their domestic manufacturing facilities are, as I had mentioned previously. And they also get a good penetration of that on the West Coast and up into Canada overseas acquisition as a discrete distribution center in Hungary. This is a good opportunity for Titan to expand our existing market penetration there. All-in, we like how well Caraustar is vertically integrated and look forward to having these operations in-house. As I noted earlier, Caraustar's business is more retail-orientated than Titan's. Approximately 75% of Caraustar sales fit within Titan's consumer segment with the remaining 25% going to ag and construction. Retail and even some smaller ag is less correlated with commodities and as such, we expect to see our annual revenues going forward have less volatility than they had in the past.
As you can see from a strategic perspective, Caraustar is a strong fit with Titan, and we are really eager to start rolling up our sleeves to integrate the operations into our entertainment business, but really dive into the growth opportunities that exist for the Caraustar and Titan team as we move forward. David will get into details a bit more in a moment, but I want to highlight the fact that we were able to do this deal at a fair valuation that is around four times adjusted EBITDA. It's accretive and it leaves our balance sheet in good shape. Over the past couple of years, the Titan team has worked hard to reduce our leverage and between that and the modest use of our asset-backed revolver to help fund this acquisition, our post-deal leverage is still a very manageable 1.3 times, net based upon pro forma combined company profitability.
Before handing it off to David, I do want to touch on market conditions. As many of you heard from the market leaders in the ag and construction equipment sectors, expectation for 2024 would be best described as conservative or softer. This is really being driven by the expected declines that are taking place in farmer incomes, combined with global uncertainties from grain supply, government actions and really overall geopolitics, all that's just weighed on current demand. At the same time, the destocking dynamic that impacted 2023 has run its course. So, we are starting this year with inventories in a more normal state. With that, we expect ag market activity over the balance of the year will be down as driven by commodity prices. Again, nothing new or earth shattering with that comment as really being driven by the impacts that we've seen in North America from farmer incomes.
But we do see 2020 for having less impact from the headwind of lagging inventory that has been in the channels throughout 2023. Let's not forget amidst the current market noise that North American farmer balance sheets and land values are still very strong. That bodes well for future prospects as compared to cycles from prior decades. Wrap it up, 2023 was a solid year for Titan, and I'm proud of our ability to navigate challenges, serve our customers, and maintain our margins. The plan we put into place a number of years ago centered around our One Titan team has proven itself is gaining momentum with our dedication, commitment to each other, and relentless focus on serving our customers. I want to thank the Titan team for all their efforts during due diligence to get the Caraustar transaction over the goal line all that hard work is making our flywheel turn and is showing in our financial performance and our ability to seek growth.
In closing, I would like to welcome the Caraustar team to the Titan organization. It's clear they are really good group of people have done an excellent job building Caraustar into the strong business that I talked about earlier. They're world-class and serving its customers and its end markets Titan and Caraustar are better together. With that, I'd like to turn the call over to David now.
David Martin: Thank you, Paul, and good morning to everybody on the call, as Paul noted, the acquisition of Caraustar is a transformative deal as we say it. So, it is very important to say because I all the things it brings to Titan and more importantly, the people that come to Titan. So, we're very happy to have them as part of the Titan family. Our operations and our financial results going forward will look different than they have up to now. And Gini -- Paul said it now with the acquisition multiple was four times and we expect the deal to be immediately accretive, which is certainly something we're excited about. Before I get into more details on that, I will touch on some summary highlights from our fourth quarter and fiscal year 2023 results.
A primary theme to emphasize is that these results provide solid evidence that the work we've done to optimize our operations is driving a better durable gross margin profile. That positions us well to capture the improved profitability over the long-term. Full year revenues came in at $1.8 billion for 2023 as compared to 2022 of over $2 billion and our adjusted EBITDA was $205 million. For the fourth quarter, our revenues were $390 million with adjusted EBITDA of $38 million. Our full year gross margins improved 20 basis points from 16.6% to 16.8% in 2023, despite the sales being driven down year over year through the de-stocking and the other economic factors that have impacted our sales this last year. Elaborating on that dynamic a bit further as one might expect our margins typically follow the ag cycle and our goal has always been to aggressively manage our input costs to the extent we can, while balancing our product pricing in a way that allows us to earn a fair return on our assets.
As a manufacturer, we are naturally impacted by raw material costs for our wheels and tires. With that in mind over the last several years, we have worked really hard to improve our production and our operations. By controlling the things we can control, we have been able to make durable gains in our cost structure, and the result is a higher gross margin floor as our 2023 results show. SG&A expense for the fourth quarter was $32 million compared to $30.5 million in the prior year, with the change in change due primarily to inflation pressures, especially in employee compensation. For the full year, these expenses totaled $135 million, up a modest 1.6% from $133 million in 2022. That is important given the world that we're living in with inflation and things like that, and we're able to really control our costs.
R&D expense was $3.1 million for the fourth quarter and $12.5 million for the full year. Those figures compared to $2.8 million and $10.4 million in 2022 and they reflect our continued emphasis on prioritizing our R&D investments. We are committing to maintain a best-in-class portfolio of products and with farmers increasingly making their decisions based on equipment ROI, our innovations are a significant that's a differentiator for us. Our operating income was $20.7 million for the fourth for the quarter and $149 million for the full year. Our operating cash flow for the year was $179 million, up 11.6% from the prior year. We were very pleased to be able to improve our operating cash flow that given the top line headwinds that we experienced throughout the year.
This shows the discipline by our global operating and finance teams and significant efforts to focus on working capital and all the things that go into driving cash flow. During the year, we had a couple of nonoperating events impact the income statement that I'd like to mention, there was an unusually high devaluation of the Argentinean peso relative to the U.S. dollar. As a result, we applied hyperinflation accounting rules to Argentina and Turkey, which had both been designated as hyperinflationary economies in prior years. We did recognize $21 million in foreign exchange losses for the year. We also -- also we approved a restructuring plan at one of our European businesses to adjust our cost structure and better position the business to outperform in the future.
The cost of the restructuring action was $1.6 million, both the foreign exchange loss and the restructuring costs were adjusted out of EBITDA and net income and EPS. Within the non-GAAP reconciliation schedules, our strong cash flow enabled us to make a variety of key investments in the business during 2023, and our CapEx totaled $61 million for the year compared to $47 million during the prior year. We also used our cash to fund our share repurchase program buying back 1 million shares for a total of $13.5 million during the fourth quarter, bringing the total for the year to nearly 2.7 million shares worth near nearly $33 million. That leaves us approximately $17 million of available capacity on our program. Over the last several quarters, we've also called out our strong free cash flow and intentions to be judicious in deploying echoing Paul's comments, we're excited to have announced the acquisition of Caraustar this morning.
The cost of the acquisition was $296 million, which was composed of $127 million of cash and $169 million as TWI stock in the form of 11.9 million of newly issued shares. Importantly, leverage post transaction stands at a very manageable 1.3 I'm sorry, I had lost my way on my own script here, 1.3 times net debt to adjusted EBITDA on a pro forma basis. Altogether, we expect our cash flow to adequately fund continued debt reduction, along with our share repurchase program and our capital program. Concurrently with closing, we expanded our ABL from $125 million to $225 million. Terms of the expanded ABL are very similar to the existing facility. We have expanded the guarantors and the related borrowing base to include the domestic and Canadian assets of Caraustar.
The pricing on the facility is also similar at SOFR plus 138 basis points to 185 basis points, depending on our fixed charge coverage ratios from time-to-time. The facility will extend to 20 to 200 -- I can't even read my paper anymore. The facility will extend to 2028, maturing concurrently with our senior notes. In terms of margins, Caraustar's results over the last few years have been relatively consistent with Titan's. And as we noted in the press release, we expect there will be areas where meaningful operating cost synergies can be pursued. It's a bit premature to give specific figures, and we anticipate sharing more detailed information as we work through the integration of the two businesses in the coming months. Broadly, with an operating profile similar to Titan, Caraustar is a solid generator of cash, and we expect the combined businesses to produce adequate cash flow to allow us to continue to fund our share repurchase program, while also working down the increase in our ABL borrowing we have taken on today and investing in the future of the combined companies.
Lastly, as we noted in our earnings release, we're not providing fiscal year 2024 guidance at this time. The addition of Caraustar is a significant transformative acquisition and with that, we think it's prudent to get down the integration path a little ways. And as we do that, we expect to gain more clarity on what 2024 will look like for our combined operations. As we do so, we will look to provide guidance for the year during our subsequent earnings reports. And thank you for your time this morning and your attention to what matters to Titan. It is a very exciting day for our team. We would like to -- I'd like now to turn the call back over to [Indiscernible], our operator for the Q&A session.
See also 12 Best Remote Jobs That Pay at Least $50 an Hour and 20 Best Warm Liberal Places to Retire.
To continue reading the Q&A session, please click here.
