Titan International (TWI) is trading lower (-10%) after it reported disappointing Q4 results this morning. In case you're not familiar, Titan is a major supplier of wheels and tires for the agricultural (46% of 2016 revenue), earthmoving/construction (41% of revenue) and consumer (12% of revenue) markets. Titan is one of the few companies dedicated to off-highway wheels and tires (wheels and tires are often used interchangeably, but they are not the same thing, tires are mounted on the wheels).
Its agricultural market includes rims, wheels, tires and undercarriage systems that are used in various agricultural equipment (tractors, combines, skidders, plows, planters and irrigation equipment). Titan's earthmoving/construction market includes wheels, tires and undercarriage systems primarily for OTR (off-the-road) earthmoving, mining, military and construction equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, dump trucks, haul trucks etc. Its consumer market includes bias truck tires in Latin America, products for all-terrain vehicles (ATVs) and recreational/utility trailers.
Turning to the Q4 results, TWI reported a non-GAAP loss of $(0.24) per share, an improvement from the $(0.38) loss in the prior year period. Revenue was roughly flat YoY at $307.3 mln. Both results were below market expectations. There was no guidance provided for 2017.
Titan's markets have been in a cyclical downturn for some time. However, they are in turnaround mode now. A new management team is in place with a new CEO and a new CFO coming on board in the past few months. The new CEO, Paul Reitz, says he understands what needs to be done to continue Titan's improvements. At the beginning of 2016, Titan's management team discussed some assets that Titan should consider selling. These assets included Titan's facility in Brownsville, TX, its recently established business involving Titan Tire Reclamation Corp. (TTRC) in the oil sands, and its Italtractor ITM (ITM) undercarriage business.
Titan is now renting out its Brownsville facility, TTRC is progressing in the oil sands and the company expects that TTRC's operations will add to both sales and EPS. Titan received seven formal bids for its ITM business, but given improvement in the business, Titan has decided to end the formal sales process for ITM.
In terms of its outlook for its business, Titan had said with its Q3 report in November that it thought Titan had reached the bottom on revenue. Today, the company continues to believe this is correct and that 2017 will demonstrate this. Titan's CEO says he is personally excited about the next few years, because Titan has gone through very tough times over the last four years. He is also encouraged by what he is hearing from customers concerning its products, especially the LSW line.
Titan's LSW wheel/tire assembly performs better in the areas of fuel savings (approximately 6%), speed, tire durability and the mitigation of road loping and power hopping. During the farm shows this winter, Titan's sales team saw overwhelming interest from farmers coming into the Titan booth and asking where they can buy LSW assemblies for their equipment. Titan believes that in 2017, it will accelerate the positive growth for LSW tires and wheels now that farmers are more aware of the increase in their yield per acre as a result of less soil compaction from LSW tires.
Although annual sales have continued to decline from Titan's peak of $2.2 bln in 2013 to $1.3 bln in 2016, Titan continues to be encouraged by the operating progress it has made. For example, at the beginning of 2016, there were concerns regarding Titan's liquidity. However, with its 2016 operating performance, as well as its recent convertible debt conversion and maturity, Titan believes that much of that concern has been addressed.
In sum, this was a tough quarter for Titan. The stock had been steadily climbing higher over the past year on the belief that Titan's business is finally turning around after a multi-year downturn. The good news is that management reiterated that it thinks its sales have bottomed. Q4 was definitely a setback, and perhaps investors were disappointed by the decision to not sell ITM, but hopefully there is some improvement in 2017. That's the things with turnarounds, they can be bumpy, the hope is that the longer term trend is positive.