Titan International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Titan International Inc. 4th 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. If you need assistance, please disconnect and dial back in, and an operator will assist you.

Operator

It is now my pleasure to turn the floor over to Alan Snyder, Vice President, Financial Planning and Investor Relations for Titan. Mr. Snyder, the floor is now yours.

Speaker 1

Thank you, Jaquisa. Good morning. I'd like to welcome everyone to Titan's 4th quarter 2023 earnings call. 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 ks, which was also filed with the Securities and Exchange Commission this morning.

Speaker 1

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 ks filed earlier as well as our latest Form 10 ks 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 net measures to the most comparable GAAP measures. The Q4 earnings release is available on the company's website.

Speaker 1

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.

Speaker 2

Thanks, Alan, and good morning, everyone. As all of you have hopefully seen by now, along with the announcement of our Q4 year end earnings this morning, we announced the acquisition of Carlsar. This is an accretive transformative transaction

Speaker 3

for us.

Speaker 2

That's a complicated word to try to say. The addition of Carlsdahr 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 year end results today as our business going forward will be substantively different. Instead, I will focus my remarks on the strategic rationale for acquisition of Carlsar, along with some brief discussion of market conditions. Then David will provide comments on our reported results, the financial aspects of the Carlsaar transaction, and then of course we'll have time for questions.

Speaker 2

Instead of calling it a transformative transaction, I should have just said we're really damn excited for the opportunity to make the Carlsar team part of the Titan family. Similar to Titan, Carlsar is a global manufacturer of specialty wheels and tires. The primary end markets for the products are outdoor power equipment, power sports, 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 Carlsar's product portfolio in those end markets will add some meaningful diversification to our business.

Speaker 2

In addition, Carlsar maintains strong relationships with a number of key national retailers and commercial servicing dealers. Carla Star has built a one stop shop and a connection to customers in their 3 key segments that is unparalleled. Titan has done the same in 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 Carlstar 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 reducing some of that cyclicality.

Speaker 2

Carlstar 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 3 segments where they operate again, building the secret sauce around this business model. Part of that formation of that secret sauce is Carlstar has built a world class portfolio in specialty areas such as outdoor power equipment, turf, ATV and UTVs, power sports 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 in 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.

Speaker 2

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 Carlstar's business model that connects their manufacturing and distribution assets with 3rd party producers in a very effective and efficient manner. Carlsar has a plant strategically located in Meiju, China that has a long history with an incredible knowledgeable workforce and access to lower cost materials. Carlestar's 3 U.

Speaker 2

S. Facilities, 2 in Tennessee and 1 in South Carolina fit well with our existing production base, which is located primarily throughout the Midwest. The Carlsar locations in combination with Titan's form a manufacturing base that can produce an extensive product portfolio, as I mentioned earlier, is unmatched in our industry, while also providing value added risk mitigation to our value customers. Complementing that manufacturing platform is Carlsar's 1 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 develop this connection to customers.

Speaker 2

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. This 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 U. S.

Speaker 2

Where their domestic manufacturing facilities are as I mentioned previously And they also get good penetration on the West Coast and up into Canada. Overseas the acquisition as a distribution center in Hungary. This is a good opportunity for Titan to expand our existing market penetration there. All in, we like how well Carlstar is vertically integrated and look forward to having these operations in house. As I noted earlier, Carla STAR's business is more retail oriented than Titan's.

Speaker 2

Approximately 75% of Carla Star 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, Carlstar is a strong fit with Titan and we are really eager to start rolling up our sleeves to integrate the operations into Titan's business, but really dive into the growth opportunities that exist for the Carlsaar 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 4 times adjusted EBITDA. It's accretive and it leaves our balance sheet in good shape.

Speaker 2

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 and that's based upon pro form a 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, expectations for 2024 would be best described as conservative or softer. This is really being driven by the expected uncertainties from grain supply, government actions and really overall geopolitics. All that's just weighed on current demand.

Speaker 2

At the same time, the destocking dynamic that impacted 2020 3 has run its course. So we are starting this year with inventories in a more normal state. With that, we expect the 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, that's really being driven by the impact as we've seen in North America from farmer incomes. But we do see 2024 having less impact from the headwind of lagging inventory that has been in the channels throughout 2023.

Speaker 2

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. Wrapping 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 and 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 Carlaustar transaction over the goal line.

Speaker 2

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 Carstar team to the Titan organization. It's clear they are really good group of people. They've done an excellent job building Carlstar into the strong business that I talked about earlier. They're world class in serving its customers and its end markets.

Speaker 2

Titan and Carlstar are better together. With that, I'd like to

Speaker 4

turn the call over to David now. Thank you, Paul, and good morning to everybody on the call. As Paul noted, the acquisition of Carlsar is a transformative deal as we said. So it is very important to say because of all the things that 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.

Speaker 4

Our operations and our financial results going forward will look different than they have up to now. And again, Paul said it, the acquisition multiple was 4 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 Q4 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.

Speaker 4

Full year revenues came in at $1,800,000,000 for 2023 as compared to 2022, up over $2,000,000,000 Our adjusted EBITDA was 205,000,000 dollars For the Q4, our revenues were $390,000,000 with adjusted EBITDA of $38,000,000 Our full year gross margins improved 20 basis points from 16.6 percent to 16.8 percent in 2023 despite the sales being driven down year over year through the destocking 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 have typically followed 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.

Speaker 4

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 and A expense for the Q4 was $32,000,000 compared to $30,500,000 in the prior year, with the change due primarily due to inflation pressures, especially in employee compensation. For the full year, these expenses totaled $135,000,000 up a modest 1.6% from $133,000,000 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 and D expense was $3,100,000 for the Q4 $12,500,000 for the full year.

Speaker 4

Those figures compared to $2,800,000 $10,400,000 in 2022 and they reflect our continued emphasis on prioritizing our R and 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 differentiator for us. Our operating income was $20,700,000 for the quarter and $149,000,000 for the full year. Our operating cash flow for the year was $179,000,000 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.

Speaker 4

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 non operating events impact statement that I'd like to mention. There was an unusually high devaluation of the Argentinian peso relative to the U. S. Dollar.

Speaker 4

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 $21,000,000 in foreign exchange losses for the year. We also also we approved a restructuring plan at 1 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 $1,600,000 Both the foreign exchange loss and the restructuring costs were adjusted out of EBITDA, net income and EPS within the non GAAP reconciliation schedule. Our strong cash flow enabled us to make a variety of key investments in the business during 2023 and our CapEx totaled $61,000,000 for the year compared to $47,000,000 during the prior year.

Speaker 4

We also used our cash to fund our share repurchase program, buying back 1,000,000 shares for a total of $13,500,000 during the Q4, bringing the total for the year to nearly 2,700,000 shares worth nearly $33,000,000 That leaves us approximately $17,000,000 of available capacity on our program. Over the last several quarters, we have also called out our strong free cash flow and intentions to be judicious in deploying it. Echoing Paul's comments, we're excited to have announced the acquisition of Carlsar this morning. The cost of the acquisition was $296,000,000 which was composed of $127,000,000 of cash and $169,000,000 of TWI stock in the form of 11.9 of newly issued shares. Importantly, leverage post transaction stands at a very manageable 1.3 I'm sorry, lost my way on my own script here.

Speaker 4

1.3 times net debt to adjusted EBITDA on a pro form a basis. Altogether, we expect our cash flow to adequately fund continued debt reduction along with our shaver purchase program and our capital programs. Concurrently with closing, we expanded our ABL from $125,000,000 to 225,000,000 dollars 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 Carlsar. The pricing on the facility is also similar at the sulfur plus 138 basis points to 185 basis points depending on our fixed charge coverage ratios from time to time.

Speaker 4

The facility will extend to 20 I can't even read my paper anymore. The facility will extend to 2028, maturing concurrently with our senior notes. In terms of margins, Carlstar's results 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.

Speaker 4

Broadly, with an operating profile similar to Titan, Carlsar 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 Carla STAR 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.

Speaker 4

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 Chiquita, our operator for the Q and A session. Absolutely.

Operator

We will now begin the question and answer session. The first question comes from the line of Larry De Maria with William Blair. Your line is now open.

Speaker 5

Thanks. Good morning. And congrats on asking the deal. Can you I guess, there's no obviously, you just said there's no guidance in 2024. Can you give some color on you said Carlstar reduced cyclicality.

Speaker 5

What does Carlstar look like in 2024 from where you stand now?

Speaker 2

I think David had mentioned in his comments, I mean, Carlstar is similar to what we're seeing in Titan and really overall what you're seeing in across the complete landscape. So consumer, ag, construction, there is some softness in the market compared to 20 20 3. I think their business though is softer for different reasons than what we've seen. They are exposed to interest rates being more consumer based. But we've talked about it in our and on some of our segments with smaller tractors in the agriculture space, interest rates have had an impact.

Speaker 2

So overall, I don't think there's anything different with Carlsar that's different than Titan, that's different than what you heard from any other release that's been put out there with ag or construction. It's a number of different factors from interest rates to farmer income to geopolitics, government, blah, blah, blah. You could go on and on. So overall, the 2023 results for CarlsStar were exceptional. And they're going to have another good year in 2024.

Speaker 2

They had a good year in 2022. So it's a high quality business. It's been performing well. It's going to continue to perform well. As we've mentioned a number of times, it's they got a tremendous one stop shop, an exceptional team.

Speaker 2

And I think the one thing we should also put on the table, and David mentioned synergies, You take Carlstar's capabilities to service the You take Carlstar's capabilities to service the market, combine that with Titan's existing product portfolio in markets where quite frankly Carlsar isn't touching right now. As we mentioned, Carlsar is primarily in the U. S, a little bit in Europe. You look at our global manufacturing footprint, what Titan is missing is that one stop shop model, that secret sauce of connecting to the customers through distribution centers in a world class SIOP process. So we're excited to get in there starting today and learn from the people there and see how we can not only work together here in the markets that we have in front of us, but also in places where opportunities exist for Titan and Carlsbad moving better together in the future.

Speaker 5

And I was going to ask you about the synergies and the manufacturing facilities and ability to leverage them. I guess first question is, does that go both ways? Is that can you actually get into their facilities and bring some new product through and vice versa, maybe down to South America? And secondly, I don't know if you can confirm it or not, but this seems like this happened rather quickly. Have we really explored the cost and sales synergies?

Speaker 5

Or it's just first it sounds like it came together quickly and we're going to figure that out as we go?

Speaker 2

Yes. It's a good question on the manufacturing footprint. I mean there are opportunities there like you said in your question to leverage their plants more effectively, to leverage ours more effectively. We did get a chance to walk around their facilities. So it did happen fairly quickly, the transaction we announced today.

Speaker 2

But I also want to say that we did a lot of due diligence over the last couple of months. We've been around their plants. The legal and financial teams have worked endlessly getting comfortable with the business. So I would say it's now going forward is learning more about their people and their processes, their strengths, combining that with our strengths. But then like you said in your first question, Larry, we do need to spend some time getting around to their manufacturing locations and give them a chance to see ours too.

Speaker 2

Let those dots connect and the light bulbs turn on and see what their team starts thinking when they see our capabilities, when our team sees their capabilities. And so I think it's an exciting time. But yes, to your point, this all came together quickly. We're pleased to announce it today. We think the timing is right.

Speaker 2

Let's get going. But we certainly have some opportunities out there that we're going to continue to explore and take us a little bit of time to kind of articulate it more clearly back to the investor base.

Speaker 5

Thanks. And just last quick question. Any customer overlap to speak of?

Speaker 2

Mainly our businesses are very complementary. And I think to answer the customer question, you have to look at the products. So because of the differential in the products, the overlap is insignificant to start with. But then where we do overlap with the same customers, the products are different. There are some customers in smaller ag.

Speaker 2

To be honest with you, we really don't overlap. We kind of go different directions here and there. I think we both know each other's business well enough that even where we do have similar products, the overlap at that particular customer is fairly well contained. And so to answer your question, these businesses are highly complementary with a little bit of overlap. Starting at 7:30 this morning, our teams were getting on the phone with customers and making that first call to any of those overlapped customers together.

Speaker 2

So what we want to do say to our customers, we're in this together, you got a combined stronger company. But at the same time, we're still going to continue to service you in the same effective manners and processes that Titan built and Carlsar built and not try to change that. So I think the customer base should see this in a favorable manner. And again, to answer your question, very little overlap when you combine both products and customers. Again, some overlap in each, but when you look at them through a matrix standpoint, very little overlap in both.

Speaker 5

Okay. I'll jump back in. Thanks and good luck.

Speaker 2

All right. Thanks, Larry.

Operator

Thank you. The next question comes from the line of Steve Sarazini with Sidoti. Your line is now open.

Speaker 6

Good morning, Paul. Good morning, David. Obviously, you've been very busy. You had a lot to cover on the call this morning. A couple of more questions on Carlsar.

Speaker 6

Your advantage has always been you're operating in relatively niche markets with less competition. Can you compare the competitive landscape for Caraustar? It looks like a fairly similar margin profile.

Speaker 2

Yes. It's a good question, Steve. And that's something that the early due diligence, the biggest hurdle we had to get over is probably related to your question right there. We needed to be comfortable that their margin profile and the competitive landscape and how they operate in their markets was similar to ours. I mean, we as Titan have built our business around being very connected to the customers with an extensive product portfolio that can risk mitigate our customers in a way that no competitor can.

Speaker 2

Carlstar has that exact same model in the 3 primary segments they serve. They have a product portfolio that's exceptional. They're very connected to their customer. Their margin profile is good. They understand pricing in the marketplace extremely well.

Speaker 2

As I mentioned a number of times, that secret sauce they have with their the process that connects their forecast to their inventory, to their distribution centers, to their manufacturing, Their customers rely on Carlstar in a significant way. So they have a profile that's very similar to Titan's Truthfully, in the segments they operate, there's no competitor that can do it across all three spectrums like they can. So if you look at Titan, what we do with wheels and tires in ag, there's nobody that can do wheels and tires like we do. If you look at the 3 primary segments for Carlsaar, it's very similar that there is not a competitor that can do what they do with this one stop shop across all three segments. So a lot of similarities that are complementary.

Speaker 2

Again Titan and Carlsstar are better together.

Speaker 6

Great. That's helpful. I mean, I have to ask this, Paul, and it's really a question for them more than it would be for you. But given how you've described this business, why would you sell it for 4 times EBITDA?

Speaker 2

I don't know if I can try to even answer that one. Let me try to get a response from them and we'll get back to you on that one. I think look from a Titan's look I will give you some color on it. Again, I don't want to speak on behalf of them. Right.

Speaker 2

It's a great opportunity for Titan's shareholders, employees and customers along with Carlstar, their employees, their customers. And I think the Carlstar Investor Group, it's a tremendous private equity business. They have a long standing reputation. They saw value in becoming a shareholder of Titan. They believed in Titan.

Speaker 2

They believed in Carlsar, but they also believed in the power of the 2 companies together. So if you look at the deal structure, and I'll let David comment more about that, by using cash and stock, we looked at this as a great Carlstar's investors, customers, employees. And so I think on behalf of the owners of Carlstar, which again are tremendous people, they will be having a Board seat on our comp at Titan. They just believed in

Speaker 4

the power of the 2 companies combined. Yes. There's not much more to say than other than that. It makes a fair allocation of that. And obviously, they believed in the upside of the combination and took a significant amount of stock as part of this deal.

Speaker 4

So you look at it that way, I think it will prove out to be a lot of value to them as well.

Speaker 6

Right. Okay. That's helpful. Thanks for that. Just because we do have to model it, can you do you have any idea of the seasonality of that business compared to yours and then geographic distribution?

Speaker 4

Yes, I'll take both of those questions, Steve. It's interesting, they tend to have an early part of the year similar to ours in terms of the spring planting and then also power sports seasons and things like that. So they have a little bit bigger first half and second half, but I wouldn't say it's that significant though. It's not really that different. So you can look at quarter to quarter at being fairly similar, but just a little bit more in the first half than the second half.

Speaker 4

Geographic dispersion is mostly North America.

Speaker 6

Can we get one more in? Okay, go ahead. Yes. A little bit what? I'm sorry, I missed it.

Speaker 4

Okay. It's a little bit nearer.

Speaker 6

A little bit nearer. Okay. You obviously, you ended the year given the really strong free cash flow with a very significant cash balance. You're expanding the ABL, but it seems like and I know we're getting into a softer year, it seems like you could pay down pretty quickly and you haven't been paying down debt lately, you've built that up. How are you thinking about that?

Speaker 4

I think over time, we'll be able to generate the cash in the U. S. To pay down the debt. We haven't fully mapped it out in terms of how quickly that will happen. There were some working capital adjustments at the closing that we had we paid for that will come back us and we'll be able to pay down debt in the, call it, the first half for that.

Speaker 4

And over the second half, we'll be judicious in how we do that and also maintaining our capabilities to invest in the business and continue our share repurchase program where appropriate.

Speaker 6

Great. Thanks, Paul. Thanks, David.

Speaker 7

Yes. Thank you. Thank you.

Operator

The next question comes from the line of Tom Carr with Zacks Investment. Your line is now open.

Speaker 7

Good morning guys.

Speaker 2

Hey, good morning, Todd.

Speaker 7

I was going to comment you guys should start an investment business buying something at 4 times EBITDA. I think the Carlskar has been covered, but is it a less capital intensive business than the legacy business just because of the size of the products? And then secondly on that, you talked about similar margin profiles. Is the gross margin similar in the 15% range?

Speaker 4

Yes. I'll cover both of those, Tom. The first one well, actually, I'll take the second one first. On the margin profile, it's slightly accretive to Titan's margins. They do maintain operating those distribution centers would stand to be more operating cost, a little bit higher there.

Speaker 4

So you end up having a EBITDA margin that's very similar over I think ours has been averaging about 10%, so it's about the same. So that pretty much covers the profile of that. And your first question, I can't remember it now.

Speaker 7

It's a less capital intensive business than the just because of the size of it.

Speaker 4

Yes. The size of the business, obviously, with the products that they produce is smaller. They've been maintaining around 2% of sales, which is not dissimilar to Titan. We've been a little bit higher than that, but about 2% of sales.

Speaker 7

Okay. All right. And I know you guys aren't going to give guidance, but I'm going to try anyway. So we can going forward or year to date with the inventory problem solved, we wouldn't expect massive 20% to 30% declines. That's number 1, if I could take around that.

Speaker 7

And then number 2, even with the softness we're seeing with farmer income, can we still maintain the gross margins in that 15% range do you think this year?

Speaker 4

Yes. On the margin profile, we were over 16% in fiscal year 2023 on our gross margins and we expect to be able to be in a similar ballpark going forward as well. Given all the things we talked about, how we operate, the discipline that we have in managing our input costs and so forth in our pricing, and so everything should be pretty intact with that. Now again, on the pressure side, Paul can address the overall market context, but we believe we're in a position where any softness that we're seeing at a higher level is offset by the fact that we were impacted pretty significantly in 2023.

Speaker 2

Yes. So I think you referenced, Tom, 20% to 30 percent down. No, we're not in a situation like that at all. There's general softness in the marketplace and I think everybody that's talked about it so far this year has said similar comments. And so we're not going to sit here and repeat it.

Speaker 2

I think a lot of what you heard from the large ag companies was 10% -ish, 10% range. And so, no, we're not seeing anything that's indicating that the sky is falling, run for cover down 30%. So we're just we're going to spend some time getting our arms around the Carls' Star forecast and the Titan forecast. We'll be able to provide some additional color as we move through the year.

Speaker 7

Sounds good. And one more quick kind of accounting question. Can you refresh my memory and how big is the business in Argentina that would have that larger currency effect and maybe just quickly explain the hyperinflation rule?

Speaker 4

Okay. We can take it offline later too, Tom. But it's a smaller business, but a very profitable business for us. And it's really the net asset position that creates that FX losses over time. Yes, you got to remember that the devaluation of the Argentinian peso was very significant during the 2023.

Speaker 4

So it was a you have assets that significantly devalued during that period of time. And it's over the course of a longer period of time as well. So we were catching up to hyperinflationary rules. So basically you have to adjust everything to the current rate versus the historical rates for a lot of your assets. Tom, it was stupid.

Speaker 2

Argentina is a great agriculture market. We made good margins. We got a facility there, good connection to the customers. We don't manufacture in Argentina. It's like David said, it's just catching up on years of kind of activity.

Speaker 2

But it makes it seem like it's a terrible business that something tragic happened. Argentina is a good market. It's been part of our Brazilian portfolio output portfolio for a long time. Nothing really changed from a business perspective. It's just I don't know.

Speaker 2

David probably doesn't like me to call it stupid, but it was stupid. Yes. The accounting rules require us

Speaker 4

to do this. And so we obviously call things up with respect to that. And you have to when it hits over the deflation or the inflation over a period of time, if it exceeds 100%, and you have to go to these rules. So we can talk a lot more about it offline if you want.

Speaker 7

Yes. That's kind of what I thought. All right. I'll jump back in the queue. Thanks.

Speaker 4

Yes, all right. Thanks, Ana.

Operator

Thank you. The next question comes from the line of Kurt Luftig with Imperial Capital. Your line is now open.

Speaker 3

Hello, Paul, David, Alan, can you hear me? Yes.

Speaker 7

Good morning.

Speaker 3

Yes, great. Hey, congratulations on the transaction. Couple of follow ups. 1, how would you compare Carlstar to what you're already doing in your consumer segment?

Speaker 2

Not comparable at all. Carlstar is a world class thoroughbred and we're what we do in consumer just doesn't even touch what they do. What we're doing in consumer, and I know David mentioned this quite a few times, is going a different direction than Carls' Star where we were we have a really good mixing facility in Tennessee. And so we were doing some custom mix for other companies along with servicing our own facilities. But in the true consumer space where Carla Star operates and the segments that they are in, yes, I mean we dabbled around, but yes, they were running laps around us.

Speaker 2

So again, Titan and Carlstar are definitely better together.

Speaker 3

Got it. Were you competing with Carlstar? Is that how you learned about them? No. Got to know them?

Speaker 3

You were?

Speaker 2

Well, we yes, I mean, it's a similar world. I mean, competing is probably a little bit of strong word. I mean we did touch each other a little bit in some ag, but we really weren't competitors, but it's just a small world where we were complementary operating in similar spaces and doing it in a different way or with different products, but in a similar way. So a lot of respect for Carlsaar the way they were connected to the marketplace, the customers taking care of the end users and it's a lot of what Titan did. But really the complementary nature of our businesses is very strong.

Speaker 2

And so I would say we know each other because it's a small world, but not directly competing. Like the big trade shows we would go to, they wouldn't have a booth. The big trade shows they go to, we didn't have a booth. So the overlap is minimal.

Speaker 3

Interesting. Okay. And you've been working on the transaction for a couple of months and what precipitated the sale?

Speaker 2

I mean, we've been working on due diligence for about 3 months. I mean, what brought the sale together is just some contacts that really between our Board members, Carl Starr's ownership group and myself, we did start talking well before the last few months. And so there is interest in both parties and seeing this come together. It just takes time though. It takes time and it takes some understanding of each other, of our businesses.

Speaker 2

And so yes, I mean it really came together quickly in the last couple of months and that's tremendous amount of effort on the Titan team to make that happen and a few folks from Carlsar. But if you look at it from a strategic rationale perspective, I don't want to create the impression that this just happened in a few months. There was a lot more behind the scenes that took place. Got it. And we got a great quarter.

Speaker 2

That's helpful. I do want to be clear on that. Yes, I mean, again, with the strength of our Board and the strength of their owners, we were able to get some understandings in place that, again, led us to a transaction that you saw today. So again, I think you get the point. It wasn't just cobbled together in 2 months.

Speaker 3

Got it. Got it. That's helpful. And it's a decent sized deal for you. Is this it for M and A for a while?

Speaker 3

Are you going to focus on this one? Or are there other deals out there you're contemplating?

Speaker 2

Well, I mean, I think as a company, we worked hard to get to this point to pursue growth. We've developed a strong business, good brands, good products, good people, and have a strong balance sheet. So I think at this point, we need to get our arms around Carlskar and maximize the value that this brings to the table for our customers and our shareholders. And we do think it's significant. It's accretive right out of the gate, strong opportunities in growth and synergies.

Speaker 2

So I think there's going to be a period of time that the right thing to do is make sure that we get the maximum value out of this transaction. I do think there's some growth opportunities that could require some investments as we expand the territories, the geographical footprint of the combined company. But you never know when opportunities may present themselves like this one did. So we want to keep our company in a position our balance sheet in a position where opportunities, if they become available, we can pursue them.

Speaker 3

Got it. Is there is the company's change in composition and size, is there a revised leverage target that you're sharing?

Speaker 4

No, I think obviously this transaction enabled us to maintain that conservative profile and it doesn't we're not over our skis with respect to the debt that we took on this deal. And right now, we're on a pro form a basis 1.3x. So we want to stay in this general territory. And as we digest a transaction, obviously, the flexibility we have to pay down debt with cash flow is important as well. We can continue to build strength and then maintain flexibility for the future for growth, not just investments that can come in the form of an acquisition, but also investments inside our business, like Paul has talked about in terms of growth, territories, products, whatever.

Speaker 4

So we I like where we sit with respect to where our leverage is now we'll continue to have that. Again, it's all about flexibility.

Speaker 3

Got it. Thank you. And last follow-up, I know there's no guidance, volumes are down. Are there any other headwinds or tailwinds that we should be thinking about when we forecast 2024?

Speaker 2

I don't think so. I think we've touched on that pretty well. Again, 2023 was a very good year as we reported this morning coming off a really strong 2022. I don't think anything we're seeing at 2024 is different than what you've already seen in the marketplace. So no, I think we've provided enough color.

Speaker 2

You've heard enough from others. And again, what we will work towards is getting a good understanding in place to what Titan and Carlsdorf look like together, articulate that for not just 24, but also work towards articulating that for the future because again, I think the Titan and Carlstar are going to be better together. So we'll put our heads down for a little while and work on getting that information for you.

Speaker 3

Got it. I appreciate. Thank you very much.

Speaker 2

You bet. Thanks.

Operator

Thank you. The next question I'm sorry, follow-up question comes from the line of Steve Farazani with Sidoti. Your line is now open.

Speaker 6

Hey, thanks for taking an additional question. I don't want to harp on this, but it's a question I've been getting for 2 months accelerating over the last couple of weeks. Again, back to is it 10% or 15% decline for large tractors depending on whose call you listen to. But you're down 18% in ag this year, almost entirely on destocking, which accelerated through the second half of the year. Everyone's kind of trying to do the math on this.

Speaker 6

If you were already down that significantly in what was an okay year, that would I mean, the simple math would say that you're more flat and I know don't want to pin you to a number. So the math would say you're kind of flattish in ag because of how much you were hit by destocking this year. I mean, is that a reasonable way to think about it? Look, I'm getting this question all the time I got to ask.

Speaker 4

That's a great question, Steve. Obviously, as we come into the year, it's certainly not I mean, flat isn't probably in the equation, but certainly something less than the full impact of the market being down. We really can't put a fine tune number on that.

Speaker 6

Okay. I have to try to ask. Thanks, guys.

Operator

Thank you. There are no additional questions waiting at this time. So I will pass the call back over to Mr. Wright for closing remarks.

Speaker 2

Thank you. I appreciate everybody's attention to today's call and the opportunity to hear us talk about the Carlsar acquisition and how Titan and Carlsar can be better together. So thank you and look forward to talking to you again soon.

Operator

That concludes

Remove Ads
Powered by Quartr
Earnings Conference Call
Titan International Q4 2023
00:00 / 00:00
Remove Ads