Zacks Small Cap Research – TWI: Titan International Reports Strong Free Cash Flow in the 2024 2nd Quarter – Technologist

By Thomas Kerr, CFA

NYSE:TWI

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Titan International (NYSE:TWI) reported 2nd quarter 2024 financial results which continued to reflect a difficult macro environment in most of its end markets. Net sales for the 2nd quarter were $532.2 million compared to $481.2 million in the prior year period. The increase was primarily due to the Carlstar acquisition in which the 2nd quarter was the first full quarter of recognizing Carlstar revenues. Revenues declined in the agricultural and earthmoving/construction segments where lower levels of end customer demand occurred due to macro issues including major economic softness in Brazil.

The Agricultural segment showed the largest sales decline at 19.6% with sales of $216.3 million compared to $269.1 million in the prior year period. The sales decline was primarily due to significantly reduced global demand for agricultural equipment, particularly in North America and Brazil. High 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 interest rate cuts happening soon, many farmers are choosing to defer major purchases. Agricultural gross profits declined to $32.3 million from $48.7 million and gross margins decreased to 14.9% from 18.1%. The decline in gross profit was attributed to reduced sales volume, lower fixed cost leverage, negative price/mix, higher material costs and an inventory revaluation step-up associated with the Carlstar purchase price allocation. Excluding the impact of the Carlstar purchase price allocation, adjusted gross margins in the Agricultural segment were 15.5%.

The Earthmoving/Construction segment generated revenues of $165.6 million which was a decrease of 5.2% from $174.7 million in the prior year period. Sales volume was actually higher during the period driven by increased sales in the undercarriage business led by strength in the mining industry. There was also a positive contribution from the Carlstar acquisition. However, these increases were offset by the impact of contractual price givebacks resulting from lower raw material costs, particularly lower steel prices in Europe, as well as the unfavorable impact of foreign currency of 1.5%. Gross profits declined to $21.3 million from $29.1 million in the prior year period. Gross margins deteriorated to 12.9% from 16.7% in the prior year period. The decrease in gross profit was attributed to lower sales volume in North America and reduced fixed cost leverage.

The Consumer segment generated revenues of $150.3 million which was an increase of 302.4% when compared to $37.3 million in the prior year period. The increase was largely attributed to a full quarter of revenue contribution from Carlstar.

Adjusted EBITDA was $48.8 million in the 2nd quarter compared to $59.0 million in the prior year period. GAAP earnings per share in the 2nd quarter was $0.03 and adjusted non-GAAP EPS was $0.10. Adjusted EPS excludes the Carlstar inventory step-up and a property insurance settlement gain.

The adjusted net income of $7.1 million, and adjusted EPS of $0.10 for the quarter were negatively impacted by higher than normal tax expense of $15.5 million. With lower profitability in the U.S. operations in 2024, the company now faces additional non-deductible interest expense. There are temporary negative impacts from the tax structure of Carlstar.

The company continues to maintain a safe and liquid balance sheet with cash of $224.1 million and total debt of $550.5 million as of 6/30/24. Working capital was net positive at $638.2 million at the end of the 2nd quarter. Operating cash flow was $70.8 million in the 2nd quarter and capital expenditures were $17.6 million, which produced free cash flow of $53.2 million. The trailing 12-month leverage ratio declined to 1.8x compared to 2.0x in the 1st quarter of 2024. In addition, the company purchased 775,000 shares of TWI stock during the 2nd quarter. As of 6/30/24, Titan had approximately $9.6 million remaining under the current $50 million share repurchase program.

Current Industry Outlook

Management also commented on current industry conditions. As mentioned above, Interest rates continue to weigh negatively on most of the industries they serve. Large horsepower agricultural equipment represents a significant purchase for farmers and they are highly sensitive to higher financing costs. With the possibility of interest rate cuts on the horizon, farmers are choosing to defer major purchases. Similarly, high interest rates also impact the cost of working capital for both OEMs and Aftermarket dealers who are being extremely cautious about the levels of inventory they are carrying.

The decline in farmer incomes is also negatively affecting 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.

Valuation and Estimates

The company did not provide 2024 annual guidance due to industry and macroeconomic uncertainties but did provide an outlook for the 3rd quarter of 2024. The company expects revenues in the 3rd quarter between $450-$500 million and adjusted EBITDA between $25-$30 million. Free cash flow is expected to be between $20-$30 million. Capital expenditures are expected to be in the range of $10-$15 million.

We adjust our 2024 estimates due to recent management commentary, industry conditions, and a temporarily elevated tax rate. Our 2024 full year EPS estimate is now $0.44 and our total revenue estimate is $1.96 billion. That puts TWI stock selling at 17.5x current year EPS estimates. Our 2025 revenue estimate is $2.2 billion, and our 2025 EPS estimate is $0.96. The forward looking P/E ratio is approximately 8.0x.

These transitory depressed earnings in the 2nd half of 2024 are not reflective of the steady generation of positive EBITDA and free cash flow that is expected. 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 adjust our price target to $16.00 based on industry and macroeconomic uncertainty in most of Titan’s markets in which it operates.

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