Titan International Inc. Finally Sees Growth on the Horizon

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Selling large tires continues to be a tough business in 2016, and Titan International Inc.'s (TWI -1.68%) second-quarter results show the challenge. However, the company has managed to lower costs and keep the business close to breakeven as sales have fallen. Here are the highlights from the quarter.

Titan International Inc. results: The raw numbers

Data source: Company earnings release. YOY = year over year. 

What happened with Titan International Inc. this quarter?

The decline in sales and earnings continues a trend for Titan International, driven by weak demand from agriculture clients. Management, however, is doing everything it can to keep the company in a strong position for when a recovery occurs. Here are the operational highlights showing that progress.

• The 12% sales decline was due to a negative 4% impact from currency translation and an 8% reduction in prices. Volumes were flat in the quarter.
• Volume in the agriculture market, which has been very weak over the past year, was down but was offset by growth in the earthmoving/construction and consumer segments.
• Gross profit increased slightly from 13.6% of sales a year ago to 13.7% in the second quarter. This shows the company's progress in cutting costs amid the downturn in agriculture demand.
• Income was down by that much because SG&A expenses rose from 10.1% of sales a year ago to 11%, even though absolute expenditures were down $1.5 million to $36.3 million. It's much harder to cut operating costs in a downturn than the cost of goods sold, but the good news is that these costs can be leveraged if the business returns to growth in the next year or two.
• On the balance sheet side, total long-term debt fell from $475.4 million at the end of 2015 to $414.6 million at the end of the second quarter.

What management had to say

Management's hope is that demand is at a trough right now and that late 2016 and 2017 will start to show some improvement. In the agriculture market, in particular, customers can only wait so long before replacing tires, so the cycle should start to turn in the company's favor soon.

Titan is also trying to sell the Italtractor ITM S.p.A. business, which could help the balance sheet. It's unknown when a deal might be reached, but investment bankers are already working as financial advisors.

Looking forward

The hope is that the operational strength will leave the company with a stronger market share than it had a couple of years ago, but the macro environment needs to improve before it bears fruit. In the meantime, investors should bide their time until revenue growth returns. If management is correct that demand is about to rebound, this could even happen within the next few quarters.