Wet Weather Impacts Titan's 2Q Results

Aug. 1, 2019

Titan International Inc. posted a net loss of nearly $7.1 million on net sales of $390.6 million for the second quarter ended June 30, 2019. That compares to net income of more than $3.7 billion on sales of $428.9 million for the same period in fiscal 2018.

The company said the 8.9% decrease in sales was driven by sales decreases in all segments. Net sales volume was down 4.3% from the comparable prior year quarter, "due primarily to increasingly volatile conditions in the North American agricultural segment, primarily caused by wet weather conditions which have persisted in many of the farming regions, and ongoing global trade issues."

Sales also were negatively impacted by "continued challenging market conditions in Russia and Europe," unfavorable changes in price/mix, and unfavorable currency translation.

"Our second quarter results reflect a continuation of the difficulties we faced in the first quarter from the global tariff battles and challenging farming conditions in the U.S. as we experienced declines in our sales and margins," said Paul Reitz, CEO and president. "All you have to do is spend a little time driving around the Midwest to see how tough things are for farmers right now. Much of the second quarter from an ag perspective was dominated by news involving bad weather, local flooding, prevented planting, poor crop conditions, negative farmer sentiment, and, of course, the ongoing trade battle.

"All this has created short-term uncertainty that has significantly impacted demand within the aftermarket and certain OEMs. It is important to note, however, that we did not see a decline in our market share during this period, and we believe our positioning with customers remains strong.

"Our North American wheel business' revenues held steady compared to the same quarter in the prior year. However, we experienced a decline in margins as steel prices decreased, but these lower costs were not fully realized as a result of our efforts to reduce elevated inventory levels as we prepared for the ERP (Enterprise Resource Planning) transition along with an expectation of increasing first-half demand. Our Russian business continues to face high dealer inventory levels, and local capital markets remain locked in a standstill, which has limited our ability to utilize traditional incentive programs to drive sales during the last several quarters. These two factors weighed most heavily on our second quarter results versus a year ago and from our original expectations for the period.

"The ongoing global tariff battles, along with weather related uncertainties, make near-term visibility extremely challenging for Titan and others within our industry," said Reitz. "We believe that higher corn and soybean prices could lead to improvements in the ag sector in the not too distant future, but weather and trade concerns may continue to mute demand in the short-term.

"Given the volatility that has entered the market, particularly over the last 90 days, coupled with our first half performance challenges across our business, we need to revise our outlook for 2019. Based on our best estimates at this time, we expect to see improved sales and profitability compared to our second half performance in 2018. Assuming currency remains at current rates, we now anticipate 2019 net sales to range between flat to down 3% as compared to full-year 2018. We anticipate gross margins to improve in the second half, which would lead to an 11.2% to 11.6% margin for the full year. This reflects improvements we have made relative to our production costs in North America, lower material costs, along with other improvements we expect in the international businesses."

Financial breakdown by segment

Agricultural $164.3 million $186.8 million
Earthmover/construction  $184.8 million $199 million
Consumer $41.5 million $43 million

For the first six months of fiscal 2019, Titan recorded a net loss of nearly $5.9 million on net sales of $801 million.

ITM strategic evaluation

Earlier this year, Titan announced it had hired a financial advisor to assist in evaluating strategic alternatives with respect to ITM, its undercarriage business.

"We noted that one of the potential alternatives was a public listing of ITM's shares within Europe," said Morry Taylor, Titan chairman. "Although we recently pursued a listing of ITM's shares on the AIM market of the London Stock Exchange, our board of directors has determined to postpone the AIM Listing. ITM's business has performed very well in recent years and during the first half of 2019 with full year 2018 revenue of nearly $450 million.

"Based on this strong performance, Titan's board and our advisor expected an IPO valuation in excess of $300 million. The recent softer conditions of the financial markets in Europe due to Brexit and continued global trade concerns have impacted our ability to obtain a valuation at a suitable level.

"We continue to believe that ITM has a strong future of continued growth, and Titan will execute a plan that is in the best interests of our shareholders," said Taylor.