Joined by Tony Eheli, the Chief Accounting Officer, who joined Titan four years ago. Gentlemen, thank you for joining the Wells Fargo Industrials Conference.
Great conference. Appreciate it.
Thanks for being here.
Thank you for having us.
To start off, for those in the audience and on the webcast who may be unfamiliar with Titan, Paul, could you give us a brief overview of the company, talk about how you go to market, and what your strategy is as CEO?
Yeah, absolutely. First off, we make stuff that's cool. Let's start there. We make wheels, tires, and steel track that goes on. Everything is going to be off-road. We do everything getting first moving, starting there, the biggest, largest bulldozers, excavators, going all the way down through the sub-construction farm, large farm, all the way down to small farm. And then we also do some consumer-based products. So you're going to get into Ag, turf, even a little bit of golf carts, that type of arena. But we do the wheels, tires, undercarriage, the stuff that makes cool stuff move. How we make cool stuff, though, and this is something I'll circle back to later, is because we make the wheel and the tire, we're able to innovate and do things. Now, think about it. Wheels and tires work well together, but mostly those are two separate companies.
But when you bring them together the way we do, we're able to bring innovation into the marketplace that is unique for our space. And again, something really exciting that we've been able to really develop on over the last 10 years, and it has a strong foothold in the marketplace. So how we go to market, though, as you can imagine when you're talking about off-road equipment, we do have a strong OEM presence, deal with just about every OEM you could think of in those sectors. But also for us, and this is something we've been working on very aggressively over the last five, six, seven years, is expanding that aftermarket presence.
And so in order to do that, you got to build the right relationships, not just with the dealer, but you really got to go out to the end users and understand the needs of those end users because of the different applications that we touch. It gets a little more complicated than just what you see on-road. Not to say on-road products are simple, but when you think about when you get into farming, you're going to deal with climates all the way down from Texas up to North Dakota, all different types of terrain from soggy to dry, flat to side hills. And so we got to have products that know how to interact with all those different types of applications.
And so we have really done a good job building those technical resources, not just internal, the people that sit behind computers and design it, but getting all the way out to the end users and connecting with them so that information comes from the end users, flows back into our technical department. And again, because we manufacture the wheels and the tires together, we can do some pretty cool, innovative stuff.
Thank you for that introduction. I think the big news for Titan this year has been your first in a decade acquisition in acquiring Carlstar from a sponsor, from AIP. Can you talk a little bit about the details of that transaction and how it's going with the integration and these surprises?
Yeah, I mean, the integration is going really well. I think one thing I do want to back up on before I talk about Carlstar today, and you mentioned it's been 10 years, Titan did go on an acquisition spree from a period of about 2008 to 2013. The reason why we haven't done any acquisitions for a period of time is because those acquisitions are really based upon expanding into new verticals. And unfortunately, as we expand into new verticals, you're really relying on growth to drive your value. And so for us, a lot of that investment, we either had to restructure or we had to divest. And so that period of 2013 through 2018-ish, kind of pre-pandemic, we were really focused on restructuring and divesting some of those investments that weren't really providing the value that they thought they would.
Fast forward to what you just brought up, the recent acquisition of Carlstar. It is an acquisition that is tangential to what we do. It's products that are very similar in nature with the wheels and the tires in applications that are similar to what Titan is already operating in, some similar customers. But really, when you look at it, there's very little overlap, very little overlap with products or geography. The synergy is good. But more importantly, we have a direct line of sight into cost and commercial synergies.
So whereas what I was talking about in the past, what kind of brought us down is relying on growth to drive the value, we felt like getting in with the Carlstar team, making that part of the Titan organization, the commercial synergies were there, the cost synergies were there, customers were going to benefit from it. It makes us more of a one-stop shop across a broader spectrum of products. And at the end of the day, as you mentioned, AIP was the prior sponsor. It was a well-run company. It had been in their ownership for a substantial period of time. They managed the asset very well. We were very patient as we pursued the acquisition, so the multiple is attractive and accretive immediately. And so again, we felt like it was a win-win for Titan shareholders and its customers.
So, anything you want to add on that?
Yeah, and I think Paul really said it all. When we think about the opportunities that are going to be created by this acquisition, I mean, it's really, really huge opportunities for the company. Considering a business like Carlstar, which is quite, did not have presence in certain geographies around the world. The commercial synergies are just significant. It's just a lot. There's really a lot which everyone is excited about within the organization that we can go tap on, that we can go realize and create real value from.
You mentioned synergies. I think what you've said publicly is about $5 million -$6 million this year, but with an expectation of $25 million -$30 million bottom line, I believe, synergies. How's that going this year? And what do you see as sort of the timeline for achieving the full synergies of the two businesses?
Yeah, it's going as expected, very well. I mean, we are definitely on track to be able to achieve what we expected to achieve this year. We're actually identifying more and more opportunities that we're definitely going to realize at the end of the day. So yes, the whole project and the whole tracking is going to work.
You mentioned AIP. At the end of May, you put out a press release stating that AIP, well, to back up, AIP became your largest shareholder as part of the acquisition. There was a stock component of the consideration in the deal. They're your largest shareholder today. There was a press release out at the end of May just stating that the board was considering allowing AIP to take a larger stake in the company, which had been prohibited initially. Can you talk about the details of that or any of the rationale behind those discussions?
Yeah. I mean, I think first, the composition of our board with the experience they have in private equity and hedge funds combined with the ownership our board has in the company drives this discussion in a very favorable manner. And really, the conclusion was if AIP believes in Titan and the combined company, which we think they think they already were showing that by taking a sizable equity portion in the company, then if they want to take advantage of our stock price being down since the announcement of the acquisition, since our Q1 earnings release, it only helps them. And it should be good as well for our shareholders to have a strong company like AIP increasing their position.
Again, they were very long-term in the Carlstar asset and see no reason why that buying more of Titan should not be a positive signal for the marketplace overall. Our stock is trading down significantly since the first quarter. Let's talk about that. Can I get on a sales pitch here right now? Seems appropriate. This is an infomercial too, isn't it?
Of course.
All right. But since our Q1 results, we announced the acquisition with AIP of Carlstar right at the same time as our Q1 results. The AIP announcement, or I should say the Carlstar announcement, we believed along with AIP that it should be deemed as positive. It was at a very low multiple from a perspective of a lot of deals.
You're paid around four times.
Around four times, correct. But unfortunately, you take that information and coalesce it with the market was starting to really get its arms around the downturn that's taking place in Ag. So it had been talked about, but not really fully announced by Deere and CNH and some of the large players in the space. That information started coming out around that time. Along with that, we made a decision because of the world uncertainty, which we all feel. I shouldn't say all, I don't want to stereotype everybody, but I think most of us understand uncertainty around inflation and interest rates, especially interest rates. A lot of our customers are saying, "Depending on the direction of interest rates, it's going to have an impact on the back half of the year." So we did not offer guidance for the third and fourth quarter.
We issued guidance just for the second quarter. I think, unfortunately, the marketplace took all that information at once and said, "There's got to be something really big and bad and ugly that you're not talking about." Our Q1 results were favorable when you look at the perspective of margins and cash flow generation. Amidst a downturn, business is still performing healthy. Balance sheet is strong. Take all those factors I just mentioned. Our stock is trading down. I think Tony's reminded me a couple of times today, 45% in 45 days, something in that ballpark. It's been a tough blow. Again, I think that also leads to AIP's announcement to look to acquire more shares.
Got it. We'll come back to the topic a little bit just about performance and the macro environment, but they might take away my investment banking card if I don't ask about M&A strategy going forward. You've completed this large acquisition. You're still integrating it. But how do you think about growth? How do you think about M&A going forward? What are you looking at? Would you leverage the company further? How do you think about that?
I mean, right now, our leverage is still very healthy post-acquisition. Blend of stock and cash in this recent deal, as you already mentioned. But I think the opportunities for us are there to grow via much smaller targets or acquisitions or entry points, meaning through partnerships, joint ventures, distribution relationships. I mean, we have global geography. We have a product portfolio now that's expanded, but it's not completely filled in. There are some gaps that exist. And so the way I see us being able to drive sizable growth is through those capabilities. And I use the word capabilities because one of the things that I believe, and I'm seeing this in some of these discussions we've had with others, is that because of our global portfolio and our global distribution channels, we are attractive to working with people.
We don't have to go in there and just buy it. Obviously, you're taking on a risk and you're deploying a lot of capital. But we have attributes and assets that are attractive to others. And really, where I'd like to see the company go is use that in a way that's not necessarily a full-scale acquisition. The Carlstar opportunity was different. Again, we worked on it for a couple of years. It presented itself. We went ahead and took advantage of it. But I think we can grow, again, within our current portfolio geography and do that in that manner. And I think the key thing is for shareholders is we're not risking the balance sheet. We're not levering up. We are in a cyclical market. And so I think we can provide attractive growth, again, without taking that balance sheet risk.
Got it. When you talk about those risks, are they in your product line? Are they geographic? How do you sort of think about the gaps in the business?
I would say it's more product line. So if you look at in Latin America, we have a really strong tire business. This is for the farm sector, but we don't have any wheels. And one of the benefits we have in North America is, as I mentioned earlier, making the wheel and the tire. In Europe, we have the opposite. We have a good wheel business, but we don't have a lot of tire exposure. And so finding the right partners to work within that realm, there is some additional geographical expansion that's available for us. But again, I don't think we need to reach into different verticals. It's all staying within that spectrum where we currently operate.
Great. Let's zoom out a little bit. You already talked about this to some degree, but we look at the macro environment. The data keeps coming out. We'll get more data tomorrow. The jobs report Friday was good for the American worker. It was probably challenging information for the Fed. You talked about interest rates being high. It looks like they might be higher for longer than anyone anticipated. Challenges in the Ag market. You have Deere announcing some headcount reductions just recently. So as you think about your verticals, you have your Ag segment. You have your construction, which is really earth-moving, heavy equipment segment. You have the consumer segment. Can you talk about those markets or the macro environment impacting them and how you're responding as a company?
Yeah. You're right. We've all been watching this market. It's difficult to get your arms around it because of the impact that it has on inflation and interest rates. But for us, I would say the fundamentals are still strong. I know it's tough to say when Deere is announcing all these layoffs, but we're tied to good megatrends with production in the farming space that every government's got to protect. You got to protect your farm because of what it means for protein production and consumption. We're tied to big infrastructure projects, not necessarily residential. So I think the trends there tell you that we're going to rebound. This isn't a thing where it's going to keep going down regardless of what the Fed does. It's going to rebound because on top of that, the equipment is heavily aged in Ag.
So you have new technology coming into place that will help the people that buy the new technology and the new equipment, but at the same time, they're waiting on making those decisions. So eventually, you got to get the age of the fleet down. You got to take advantage of the new technologies. You're going to continue to farm. You're going to continue to grow infrastructure. There's no government politician in the world that's going to slow down in those two areas. And so for us, we look at it as, okay, what's going on in the short term? And the biggest factor we continue to hear, and I just heard it last night from a really large dealer of a major OEM, is it's interest rates.
Interest rates are just creating uncertainty where nobody wants to buy and finance a large piece of equipment or even a smaller piece of equipment and run the risk now that it's going to be cheaper six months from today. Unfortunately, all these jobs reports keep delaying that. We're kind of caught in this no-person's land. The other impact it's having on our business, again, having this discussion last night, it's fresh in my mind, is just on used equipment. The financing rates for used equipment are unattractive. It's not just that. It's the ability to get financing on used equipment. You're less inclined to take in that used piece of equipment at attractive valuation to drive that new sale because you as the dealer don't want to take the risk yourself. That's stopping the purchase of the new as well.
So it's not the direct interest rate on the purchase of the new. It's the interest rate risk that the dealer is not willing to take or the financing risk that before they didn't even think about that. That just wasn't even needed. You didn't have to think about getting financing. It was available everywhere. So it's factors like that that over time will clear itself up. It's not something that's permanent. It's not something that we see as being damaging for the long run. But the problem that I highlighted earlier is we're talking about guidance for the rest of the year. Our customers right now just don't have any certainty around that on the timing. And so that's delaying these purchases and hence why we issued just quarterly guidance. But I don't think there's anything right now that's changing that in the near future.
But what I would say by 2025, I think you're going to see market fundamentals trump. I didn't use the word trump. I apologize. I didn't mean to do that. It will overtake the concern of interest rates because you're going to have to start replacing equipment, getting new technology into play.
Do you think that we sort of remain in a trough, if you will, until there's a change in interest rates and the trajectory of interest rates? Is that sort of the catalyst for an inflection?
I think it is. I do.
Your business is about 50/50 OEM, aftermarket. In this environment, are you seeing strength in the aftermarket business and weakness in the OEM market? Can you talk a little bit about those markets?
Yeah. That's exactly what has taken place where the weakness in the OEM came on pretty aggressively in places like Brazil and even before the flooding. I mean, Brazil is cyclical to begin with. The floods, which damaged 12% of their farm GDP, but close to 10% of their overall GDP. So I mean, the impact of some agriculture areas like Brazil, obviously North America OEMs are down significantly, as you mentioned with Deere and CNH. The OEMs are really, really taking a step back. But the aftermarket is still performing.
And I think I hate to use the word megatrends and make it sound that simple, but I think when you are tied to things that are really important to society, which is farming and infrastructure spend, governments are going to continue to protect those areas, meaning there's going to be projects and there's going to be farmland that's planted and harvested. That's not an area of risk. So those drivers are going to keep the aftermarket in a much more stable position. And that's exactly what we're seeing. So as a company, as we were talking about earlier, we've really invested heavily to build those relationships with our aftermarket. And that's, at times like this, that becomes very important. And it's a nice stabilizing effect for the business.
Sure. Whether it's OEMs or the aftermarket channel, talk a little bit about inventory destocking and where you think we are in that cycle.
We're getting there. I use the word getting there because our industry is a little bit different than others with the wheels and tires. During the pandemic, when folks were waiting on belt harnesses, chips, and all the things that go into the supply chain, they needed wheels and tires to move that equipment around. For us, delivery of wheels and tires was viewed critical by our OEMs. We did an exceptional job. Our team really stepped up. The downside is, and we started to hear more of this in kind of mid-2023, is congratulations. We appreciate it. We now got to wait for the chips to come in. Those wheels and tires were already deployed on the equipment. We started to see that supply chain destocking for our particular product that then became a market downturn destocking.
And then you throw on interest rates and dealers wanting to hold less inventory. And so destocking for us had multiple elements driving it. But at the same time, we feel like we're getting to the point that if it wasn't for the market downturn this year, the destocking would have been pretty much over. It was the market downturn that drove a little additional destocking that we're seeing this year.
Got it.
Yeah. Just what I'll add is that when we think about our OEM customers and the levels of inventory they carry relative to our products, at this point, what we see is that they are not stocking too much of our products anymore. So once the market comes back, for them, we would expect that ramp up on our side pretty fast as well. That's the positive thing on our side that we've gone through our phase, and they are now going through their phase with their dealers.
Great. Thank you. Shifting gears a little bit to financial performance and some numbers that you talk about publicly. You have said that you think that sort of Legacy Titan plus Carlstar is about a $250 million -$300 million EBITDA run rate business. I think on a trailing 12 month basis, at the end of the first quarter, you did about $187 million in EBITDA. Talk about the bridge of growth, both in top line and driving profitability that moves the business. And we have the macro factors, of course, at play here, but what moves the business from a $187 million EBITDA business to a $250 million -$300 million business? And when do you think that's achievable?
For us, part of it's already been achieved. When you look at what Legacy Titan was pre-Carlstar acquisition, Legacy Titan had years of $220 million. Carlstar had years of $70 million. So pre-synergies, you're already at the top end of that range. Throw on the synergies that we've talked about, and you're over that range. So we use the words we have proven the business can do $250 million -$300 million. And so we look at it as we've already proven we can do it. Some investors said, "Well, wait a minute. You're signaling something negative, not positive, because you're actually showing numbers that are lower than what you can just do simple math on." The way we looked at it, to your point, we're operating now in a down market. In a normal market, this business has the potential to do $250 million -$300 million.
In an up market, it's above that. But what we're trying to say to investors though is where we're currently trading, at that range, compared to where we're currently trading, it's attractive. The math looks really good. And so we use the words have proven to really just help justify that, but it was misinterpreted to some degree. But again, I think our point is at this point, it's an attractive entry point to our stock, to our company, to a business that has strong market share with important relationships with key customers around the world, trading at a very attractive valuation. So we're trying to maybe there was a better way we could have said it, but that was the message we were trying to deliver.
As you have laid out sort of your strategy for the business, talk to about just sort of cost management, margin management. Where are you focused now in those areas, especially in a more challenging environment?
Yeah. I mean, we're really looking at all fronts at this point. When we think about margin management, we're doing everything we can strategically to be able to sustain our margins. And it's showing because even with the current market, we're holding up very good margins. And that's because we look at our pricing. We think about how we price strategically. We do surgical pricing, if I may use that word, where we're able to, based on market intelligence, determine what products get priced at what level to ensure that it's really competitive in the marketplace. At the same time, there's heavy focus on cost management as well, looking closely at controlling what we can control in areas of the overtime, for example, the cycle, the plant shutdowns, which have to happen, or timing of when they happen, how they happen, just allowing some.
And then just the labor force as well, just looking at things from the perspective of the attrition and saying, "Okay, what do we do about this?" So we're proactively across all plants managing the costs that need to be controlled at this point. And all these activities together help sustain the margins that we are having today.
Great. Thank you. Before we open it up to see if there are any questions in the audience, let's talk a little bit about your capital allocation strategy. I think you said that you're maybe a little bit your balance sheet is healthy, but you want to continue to pay down debt, invest in the business, potentially some opportunistic M&A, but also it seems like share repurchases or you have an authorization outstanding. They seem pretty attractive where the share price is today. Can you just talk a little bit about how you think about capital allocation and your strategy?
Yeah. I mean, it follows exactly the formula you highlighted where we're trying to balance it all. We do have some pretty serious debates with our board, which is what we're supposed to do, about should we be more aggressively repurchasing shares. Maybe I look at it from a perspective that's not always right, but having been burned by a balance sheet that was under a lot of pressure here recently, knowing how hard our team worked to restore the strength of our balance sheet, it's not something that I quickly want to imagine a world where we go back to that. Not saying we would, but I think we have a very good board that helps balance all those perspectives. We have, I said this earlier, strong board ownership, very good representation with understanding capital markets on our board.
And so there is some pressure to say, "Look at the stock price. Why aren't you just purchasing back more aggressively on the shares?" Still with the opportunity to do the deals that I mentioned because they weren't going to be that capital intensive. I think for us, the way we look at the management team was pay down debt just a little bit more before we do that, having taken on some debt with this recent acquisition.
How do you think about sort of your target leverage? It's a cyclical business. Your leverage has to reflect that, right, as you manage the risk in the company. How do you think about where an ideal leverage level is for Titan?
Yeah. The goal is to keep our leverage about 3x EBITDA.
Okay. And is that net leverage?
Net leverage, yes.
Net leverage. Okay. And then on the cash side, how do you think about sort of cash levels, managing cash? Is there a target level that you?
Yeah. It's more around the growth we have to invest in, whether it's funding internal projects for growth or whether it's the opportunistic M&As or projects, some of which Paul has highlighted. It could be any of that. It also could be about the geographies in which we want to grow as well. So when we think about all that, that determines where the cash has to be to be able to leverage those opportunities.
Great. Thank you. I think we'll open up the floor to see if there are any questions. Anyone?
If not, let me tell you about our cool products. Did I mention that yet? All right. So imagine a tire that's five feet wide and about five feet tall. Okay? So when we say LSW, that's what these tires are. So it used to be a world where the tires were about this wide. Now they're five feet wide. And we're able to do that because we're the only company that manufactures the wheel and the tire. But the way to put it in perspective, who's got high heels on? Somebody show me your high heels. No? Somebody has to have high heels. There we go. Okay. So I got size 13 clodhoppers. And if we were Stepon David's foot right now, you and I, I'll take the left foot, you take the right foot, and you do it with your heel.
He's going to wince in pain from you, not me. Okay? So just imagine in the world of agriculture, all that pressure and all that weight from the equipment was going down into the soil, farmer's most valuable asset he has in his family. It's going to pinch the crop, so it's going to damage yields. It's going to compact the ground, so it's going to impact nutrients over the long run. And even more so, from his perspective, it's going to be a very uncomfortable ride. He's going to be bouncing all over that cab, getting jarred around. His teeth are going to hurt at the end of the day. So what we came out with is if you look back at an old pickup truck 30 years ago, tire was this big, wheel was this big, about a 50/50 dimensional proportion.
None of us would be driving SUVs today if that sidewall had not been shrunk down. That's what we've done in agriculture. We've literally revolutionized the performance of wheels and tires in the agriculture space by building these massive tires. Now instead of having multiples, which would be duals, triples, or even quads of these narrow tires, you buy one LSW, you get better performance, better fuel efficiency, protect your land, and you get better yields. These are the types of innovations that we can bring into the marketplace by having the wheels and the tires. It's what makes us special as a company. We build that strong connection to the customers, to the end users. We're doing that in other areas.
One of the things you see with municipalities, when they buy a piece of equipment, they use it for snow removal in the winter. They use it for taking care of fields in the summer, and they do some light construction work with it. Well, you used to have to have multiple sets of tires, or you had tires that didn't perform and allow you to do your job very effectively. What we've done, again, by having the wheel and the tires, we're able to take that LSW concept to start with, but we designed a tread that works in all those applications. So you could buy a set of tire, clear snow, use it on hard gravel, and then use it to do soft fields and do agriculture work, turf work. And so the innovation is what makes us special.
So when I talk about being able to fill in our product portfolio and these product gaps, that's where I think we can continue to grow. And so as Tony said earlier, our capital allocation is not just about funding M&A. It's about making sure we can invest because internally, I think we got a really good growth engine. And what's also special about Titan is, again, we have these for a small-cap company, we have really good, strong, important relationships with customers, but the people we compete against, the companies we compete against, they're small divisions of big companies. We compete against Michelin and Bridgestone, people that could trounce us by size, many multiples over. But the big difference is if you're working in the Michelin Ag division, guess where you don't want to be working if you're at Michelin?
You don't want to be working in the Ag division. You are the least important person on that entire rank and file. Whereas at Titan, because this is all we do and this is what we've been doing for 40 years, we're fully committed to bringing that innovation, connecting to the end users, building the team, and having a passion for what we do. I'm only slightly exaggerating when I say that. I mean, our competitors, thyssenkrupp, Bridgestone, Yokohama, I mean, the divisions that we compete against are small divisions of big companies. And so that's what allowed somebody like Titan, who's been doing this for 40 years, to continue to be able to do it. So we're going to have a lot of cycles. The markets we serve have deep, difficult cycles.
We have a lot of experience handling those, but we also have the ability to play the long game and, again, leverage our market share and our relationships to build pretty cool products.
Appreciate that, Paul. And as you think about some of these innovations and the work that you're doing, are you finding that the OEMs are receptive to those or the LSW, for example? Is Deere putting those on the tractors that they're selling, or is this more of an aftermarket product?
It's both now. Now it starts as an aftermarket product. So if you were just a tire company, you're not going to go to John Deere and sell LSW because you don't have wheels for it to fit on. So John Deere is not going to also work on getting the right wheel and make that all happen. So when we started with LSW, we went to the end users, we went to the aftermarket. We built up such a strong reputation. Literally hundreds and hundreds of testimonials where the farmers themselves said, "This product is revolutionizing the performance of the equipment." Then guess what happens? John Deere comes knocking on your door and says, "I need those." So now when you build your tractor, you just select that as an option.
Do you view that as sort of a model for your innovation?
Yeah.
Putting the aftermarket, have your customers demanding it, the end customer demanding it, the OEMs?
We do. But it takes a little bit of it's easier said than done. You need leverage to be able to do that. If you don't have the leverage we have with John Deere, meaning we do a lot of important things for John Deere, they're not going to let you do that. They will find ways to block it because they don't necessarily want that. They want to be in control. So there's not a lot of examples with a company like John Deere where something like this happens, where the end users are in control in deciding for John Deere what products they offer in their book. We're just in the middle designing these cool products.
Sure. Tony, Paul, thank you very much for your time. Any parting words before we wrap here?
I just want to say that it's been a great journey for the company over the last five years. We've come from a point where there was a lot of work that needed to be done to bring the company to a certain level, and we've been able to do that, putting in place very good operational controls, strategies in place, execute them to ensure that the performance is sustainable going into the future. Even though we're coming through this trough cycle now, we've been on this path before. But the state of the company is significantly different from what it was in the past cycle. That gives us confidence towards what kind of upside we could have as the market comes back.
Paul? Anything?
Somebody said it well. We'll stop there.
Great. Thank you very much. Thank you.
Thank you.