TWI: Titan International Free Cash Flow Generation Over the Long Term Supports Price Target of $16.00

    Date:

    By Thomas Kerr, CFA

    NYSE:TWI

    READ THE FULL TWI RESEARCH REPORT

    3rd Quarter 2024 Financial and Operating Results

    Titan International (NYSE:TWI) reported 3rd quarter 2024 financial results which continued to reflect a difficult macro environment in most of its end markets as the OEM destocking story continues to evolve.

    Net sales for the 3rd quarter were $448.0 million compared to $401.8 million in the prior year period. The increase was primarily due to the Carlstar acquisition which occurred earlier in 2024 as net sales in both the Agricultural and Earthmoving/Construction declined at double digit rates due to lower levels of end customer demand. The aftermarket business continues to be a strong point and represented 45% of revenues in the quarter.

    The Agricultural segment showed a sales decline of 17.6% with sales of $175.4 million compared to $212.9 million in the prior year period. The sales decline was primarily due to the ongoing reduction of global demand for agricultural equipment, particularly in North America, Europe and Brazil which is related to the destocking issue prevalent throughout the year. In addition, despite recent interest rate cuts, higher than average interest rates continue to negatively affect large equipment purchases. High-horsepower agricultural equipment represents a significant purchase for farmers, and they are highly sensitive to higher financing costs. With the possibility of additional rate cuts happening soon, many farmers are choosing to defer major purchases. Agricultural gross profits declined to $16.7 million from $37.1 million and gross margins decreased to 9.5% from 17.4%. The decline in gross profit was attributed to reduced sales volume, lower fixed cost leverage, negative price/mix, and higher material costs.

    The Earthmoving/Construction segment generated revenues of $136.3 million which was a decrease of 12.1% from $155.1 million in the prior year period. The decrease was primarily due to softer demand from its end markets in North America and Europe. Gross profits declined to $11.6 million from $22.3 million in the prior year period. Gross margins deteriorated to 8.5% from 14.4% in the prior year period. The decrease in gross profit was attributed to lower sales volume in North America and Europe as well as reduced fixed cost leverage.

    The Consumer segment generated revenues of $136.2 million which was an increase of 303.4% when compared to $33.8 million in the prior year period. The increase was largely attributed to the revenue contribution from Carlstar. Gross profits increased to $30.4 million from $6.8 million in the prior year period. Gross margins increased to 22.3% from 20.1%. Excluding the impact of the Carlstar purchase price allocation, the adjusted gross margin in the Consumer segment was 22.9% in the 3rd quarter.

    Approximately 75% of Carlstar revenues generated during the quarter were in the Consumer segment and 20% in the Agricultural segment with the remaining in the EMC segment.

    Adjusted EBITDA was $20.5 million in the 3rd quarter compared to $40.5 million in the prior year period. GAAP loss per share in the 3rd quarter was ($0.25) and the adjusted non-GAAP EPS loss was ($0.19). Adjusted EPS exclude the Carlstar inventory step-up, foreign exchange losses, and an investment loss.

    The adjusted net loss of ($13.9) million in the quarter was negatively impacted by higher than normal tax expense of $12.9 million. With lower profitability in the U.S. operations in 2024, the company now faces additional non-deductible interest expense. There are also temporary negative impacts from the tax structure of Carlstar.

    The company continues to maintain a safe and liquid balance sheet with cash of $227.3 million and total debt of $518.5 million as of 9/30/24. Working capital was net positive at $594.4 million at the end of the 3rd quarter. Operating cash flow was $59.9 million in the 3rd quarter and capital expenditures were $18.1 million, which produced free cash flow of $41.8 million. The trailing 12-month leverage ratio was 1.9x. In addition, the company purchased 1,050,000 shares of TWI stock during the 3rd quarter at an average cost of $7.90. As of 9/30/24, Titan had approximately $1.3 million remaining under the current $50.0 million share repurchase program.

    Subsequent to the end of the 3rd quarter, the company repurchased 8.0 million shares from an institutional investor for a total of $57.6 million. The transaction has no impact on the existing share repurchase authorization and was funded using a combination of availability on the company’s revolving credit facility and available cash.

    The company has been commenting recently on potential future opportunities with the U.S. military. The US Army has used super-single tires on trucks for over 15 years, and Titan will soon be building wheels and tires using LSW technology for the military to test. The Army is looking at newly designed transportation vehicles with production levels potentially totaling 100,000 over ten years.

    Current Industry Outlook

    CEO Paul Reitz stated that the large agricultural OEMs and dealers have expressed that taking actions to reduce excess inventory levels by the end of 2024. This is potentially positive as it indicated the major destocking actions taken in 2024 may abate by early 2025. Further interest rate declines may also push further purchasing actions as customer financing becomes more affordable.

    The decline in farmer incomes has also negatively affected the agricultural markets. It is believed that 2023 and 2024 may represent the two largest declines ever in farmer income. The USDA showed in its June 2024 Grain Stocks report that farmers are still holding much of their 2023 crop inventory. The USDA thinks on-farm storage may be the highest since the 1980s. This is because as commodity prices fall, farmers are reluctant to sell below the cost of production.

    On a positive note, equipment currently operating in the field continues to be used and will ultimately need to be replaced. Additionally, as Agriculture OEMs (Deere, Caterpillar, AGCO, etc.) continue to introduce new technologies into their products, the Return on Investment that new equipment can produce, including the latest tire technology, will begin to outweigh the higher financing costs and help drive long term demand.

    Resource industries like mining continue to be active as a technology-dependent world demands an ever-increasing supply of rare earth elements, which should underpin solid demand over the mid to long term. In the construction business, the global need for long-term infrastructure investments also supports long-term growth.

    Most major agricultural OEMs who are customers of Titan have also provided a difficult outlook for 2024. Most of these companies are calling for double-digit declines in production and sales as the production outlooks deteriorated throughout 2024. The earth-moving and construction equipment markets are all calling for lesser declines or even small volume increases, which is being driven by government infrastructure projects and ongoing activity in the mining industry.

    Lastly, another issue that may be affecting farmer purchasing decisions is the upcoming U.S. presidential election. The leading candidates have diverse opinions on global trade, tariffs, and other economic policies. Farmers may be waiting for clarity on these issues before engaging in large purchases.

    VPO Technology

    On October 15th, the company announced the launch of its Variable Pressure Operation (VPO™) Technology. This new flat-proof technology offers a versatile solution as an alternative to tweel wheels (run flat, airless) and other airless polyurethane spoke wheel options. This technology provides the ability to effectively operate machinery at various inflation pressures, even at zero psi.

    The pressure adjustability of VPO Technology allows operators to optimize performance and longevity by adapting the inflation pressure to suit different terrains and applications. With this flat-proof technology, an operator can focus on getting more work done without worrying about flats and related downtime.

    LSW Technology

    The company’s innovative Low-Side Wall (“LSW”) wheel/tire assemblies continue to gain traction in the marketplace according to large customers. These farmers have praised the field performance, reduced soil compaction and highlighted fuel savings – which according to their records, exceeds the 10% to 15% savings that Titan has stated. A recent company visit saw that all of their major equipment on a 25,000 acre farm is using LSWs.

    CEO Paul Reitz stated, “We are also working on tooling up to add the deep drop wheel to our LSW tires, which will improve field performance even further. The bottom line is that I see a big opportunity ahead of us to educate more end-users that LSW is not just for combines and the largest tractors – the technology also works better on almost every piece of equipment, including mid-size tractors. That market size is easily another 25,000 new tractors produced annually, so tapping into a fraction of that would move the needle in our sales and EBITDA. There is simply no reason to run duals and we will be increasing our efforts and resources to reach more end-users to create further awareness of the LSW benefits for all sizes of Ag equipment to capture those significant opportunities.

    Valuation and Estimates

    The company provided a 4th quarter outlook which calls for sales in the $375-$425 million range and adjusted EBITDA between breakeven and $10 million. As noted, the 4th quarter is typically seasonally light, and OEMs are accelerating efforts to clear out excess inventory.

    We adjust our 2024 estimates due to recent management commentary, industry conditions, and a temporarily elevated tax rate. Our 2024 full year adjusted EPS estimate is now $0.06, and our total revenue estimate is $1.86 billion. Our 2025 revenue estimate is $1.9 billion, and our 2025 EPS estimate is $0.40.

    These transitory depressed earnings in 2024 are not reflective of the steady generation of positive EBITDA and free cash flow that is expected as the cycle turns around. The company has positioned itself in recent years to not only survive cyclical downturns but to also thrive and continue to develop advanced technologies that position them as the industry leader.

    We maintain our price target of $16.00 as we believe 2025 will be the beginning of a more normalized operating year and possibly the return to growth at some point throughout the year, based on industry and macroeconomic uncertainty in most of Titan’s markets in which it operates.

    The company recently provided a framework for what a normal year could look like financially post the Carlstar acquisition, when expected synergies occur, and when a rebound in its end markets happens. Adjusted EBITDA could range between $250-$300 million and free cash flow of at least $125 million could be generated.

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