Paul Reitz - CEO Jim Froisland - CFO.

Joe Montella - Sidoti & Company Larry De Maria - William Blair Stephen Volkmann - Jefferies Alex Blanton - Clear Harbor Asset Management Aaron Steele - Feltl & Company.

Ladies and gentlemen, welcome to the Titan International Inc First Quarter 2017 Earnings Conference Call. During this session, all lines will be muted until the question-and-answer portion of the call. [Operator Instructions].

As a reminder, certain statements made in this course of the conference call are considered forward-looking statements for the purposes of the Safe Harbor provisions Under the Private Securities Litigation Reform Act of 1995 and reflect the company’s or management’s intentions hopes, beliefs, expectations, or predictions for the future.

The company’s actual results may differ materially from the intensions, hopes, beliefs, expectations and predictions contemplated in these forward-looking statements. As a result, other various sectors included those discussed in the company’s latest Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.

In addition, to this remark, we may refer to non-GAAP financial measures, which are intended to supplement, but not be a substitute for the most directly comparable GAAP measures.

The earnings releases which accompanies today’s call contents financial and other quantities information to be discuss today, as well as the reconciliation of the non-GAAP measures to be most comparable GAAP measures. And it’s available with the Investor Relations section on our website. Please note this call is being recorded.

At this time, I would like to introduce Titan President and CEO, Paul Reitz..

Good morning everybody and thanks for joining us. I am going to start off with a few highlights of our business this quarter then I’ll turn it over to Jim for financial review and of course we’ll then giving your questions.

Cyclical market downturns are never easy and when you find yourself in the middle of one, it can seem like the clock is stuck in place. The duration and severity in this current downturn make it one of the most challenging we've experienced in the history of our company.

Therefore makes it really sweet for us to be able to announce this morning and after 18 consecutive quarters of year-over-year decreases in net sales, that our sales increased 11% this quarter start 2017. Along with that 11% gain in sales we recorded a 40% increased in our gross margin and over 20% in EBITDA.

So we’ll let Jim talk further about that, but again it’s a really nice start for us in 2017 and nice to break that streak. I believe that [Audio Gap] aftermarket. As a result, our Q1 2017 aftermarket gains in North America offset that OEM decreases, resulting in a net overall gain for our North American tire business.

Next over the past couple of years, we’ve been positioning our undercarriage business to capture additional aftermarket business. We have built a good foundation that's really build upon the strong OEM quality brand we have with our ITM products.

And then on top of that, we’ve made investments to improve our distribution channel and that’s really positioned us some of the solid gains that we’re now seeing. We believe there is more opportunity ahead of us in both of those areas.

So on top of those specific gains, we continue [Audio Gap] spent too much time focusing on what-if scenarios, I preferred to stick with what actually happen, but our first quarter had some what-if moments that I definitely believe deserve further explanation. First, raw materials had been fluctuating significantly over the past six months.

We've seen recently both natural and synthetic rubber increase more than 40%. In North America, we have contracts with our OEMs that reprice typically twice a year based on changes in the raw material costs.

Along with that, we follow a disciplined approach to our raw material supply chain that balances forward purchases of varying lines that are tied to demand along with some spot buys. The bottom-line is that, we take a hit when raw materials go up as fast as they recently have.

In Q1, the impact to North America was an increase in raw material costs that we had to absorb of approximately $9 million. The good news is the raw materials are starting to stabilize at lower levels and generally speaking we always -- I can't use word generally and always, but I'm going to do in that sentence.

Generally speaking, we always end up recouping our raw material costs in a reasonable period of time. Again, the OEM contracts reprice twice a year with the aftermarket, it has been announced -- wide spreadly announced in our industry, there has been price increases that took place on April 1st.

So the second, what-if that hurt us this quarter is and you'll see it in the SG&A line, is the additional legal and professional costs we incurred in Q1 for reasons that we are not expected to see as recurring. That impact to our bottom-line this quarter was significant and was the primary reason our SG&A was up over $6 million.

We stated last quarter that G&A is going to be a primary area of focus, as we need to reduce not just our variable SG&A, but also launch a plan to attack some of our fixed SG&A.

Again this $6 million increase in SG&A this quarter was not because we forgot that previous comment and simply lost our minds, but rather driven primarily by non-recurring legal and professional fees. With all that being said, the gross margin increase of $11 million this quarter is still a good result.

But if we could remove the impact of raw materials and legal costs, our quarter clearly would have been much better. Jim will touch later on the SG&A comments and the financials and later in his comments. I also want to bring everybody up to speed some recent positive [Audio Gap] scheduled to be voted upon for ratification in the next few weeks.

We've proudly worked closely with the USW in the past couple of years on the occasions that I mentioned before with China, also with the International Trade Commission case that we did earlier this year with India and Sri Lanka. For more than 20 years, we view the USW and its members as really an integral part of our Titan team.

We truly appreciate their hard work on a daily basis in building quality products in our three North American tire plants. Sorry. I got one more quick item I want to mention before I wrap up. I want everyone to know that we have $50 million of cash sitting in a CD on the balance sheet and cash flow statement.

I know Jim will highlight this as well, but I had to throw that in as a reminder to you all that we didn't just simply make $50 million disappear since last year. So this quarter is a good start to a year.

It really demonstrates the success of our balanced approach we've had over the past few years of investing in crucial areas such as sales and marketing and product development, combining that with substantial cost reductions accomplished through our this framework and it's all while operating under the guiding principles of our One Titan umbrella.

Our balanced plan has led us through the downturn, it's gotten us to the growth we've seen this quarter. It's a competitive world, it's critical we remain diligent with our focus on this balance approach but we definitely feel that there is plenty of runway ahead of us to keep improving from where we are today.

So with that I am going to turn it over to Jim for the financial review..

Thanks Paul. I'll begin with the reminder that the results we are about to review were presented in our news release issued this morning and they're discussed in more detail in our Form 10-Q which was also filed this morning. Let's start with the income statement. Net sales for the first quarter of 2017 came in at just over $357 million.

This was up more than 11% or almost $36 million from a year ago. As Paul mentioned this is a first year-over-year increase we have seen in 18 quarters adjusted for acquisitions. Also sequential net sales grew over 16% from fourth quarter fiscal year '16.

Here is what this meant in terms of segments all segments net sales were higher when compared to the same quarter last year. These increases in net sales were largely driven by higher volume in agriculture and the consumer segments as well as overall favorable [Audio Gap] over prior year comparable.

The North American region grew as sales growth in aftermarket tires outplaced OEM declines. As Paul stated the bright spot for this segment was once again in Latin America where net sales continue to rebound in the first quarter over the prior year first quarter with 102% increase.

We believe our market share in this region continues to increase and we are seeing in this in the results from this region. In addition to triple-digit increases in agriculture net sales, we realized in Latin America we saw double-digit increases, again this quarter in Russia at 39% and Australia at 47%.

Our agricultural segment gross margin improved to 147 basis points in the first quarter to 12% on net sales with most geographical region showing improvements over the same period a year ago. North America improved 93 basis points in spite of significant headwinds as we mentioned concerning raw material cost increases.

Once again this demonstrates the actions taken in the business improvement framework, our paying dividends as we experienced these favorable financial impacts. Moving on to earthmoving and construction segment. This segment's net sales for the first quarter of 2017 were $135.6 million, an increase of $3.9 million or 3% versus a year ago.

Similar to the previous sequential quarter North America showed ongoing softness as we continued to see improvement in other regions. We mentioned this growth the last quarters and it's nice to see that the investments we've made have continued to pay dividend each quarter.

Similar to my comments about the agriculture segment, we experienced a 217-basis points improvement in gross margin within earthmoving and construction, with most regions showing gains in the first quarter as compared to the prior year period. Now moving on to the consumer segment.

This segment's first quarter net sales were $41.4 million which was an improvement of $4.1 million, or 11% when compared to the prior year. The primary net sale increased, including North America and Australia, again we were able to improve margins -- gross margins by 565 basis points on the increased net sales. Turning to operating expenses.

Selling, general and administrative and R&D expenses for the first quarter of 2017 were $44.2 million, up $6.6 million when compared to the prior year period.

The increase was primarily due to non-recurring, legal and professional fees as well as anti-dumping and countervailing duty litigation, which did have, as Paul mentioned, positive outcome for Titan during the quarter. Finishing up on the first quarter operating statement.

Loss from operations for the first quarter of 2017 was $7.1 million compared to a loss of $11.5 million for the comparable prior year period, an improvement of 39%. Royalty expense of $2.6 million was up $0.3 million or 14% when compared to the prior year and this was due to higher sales. Interest expense of $7.7 million was down $0.8 million or 9%.

Foreign exchange gain was $4.5 million was down $0.3 million or 7%. Other income of $3.1 million was down 19%. This resulted in the loss before taxes of $7.1 million for the first quarter of 2017 versus $11.3 million loss in the prior year period, an improvement of 37%.

Tax expense of $3.4 million versus $1.0 million in the prior year period with effective tax rates of 48% and 9%, respectively, was due to losses in the U.S. and certain foreign jurisdictions where the tax benefit could not be recorded due to a valuation allowance and to non-deductible expenses and income adjustments.

The actual cash tax payments for the first quarter were $0.6 million. All this led to a net loss of $10.6 million for the quarter equal to $0.18 loss per share basic and diluted share versus last year's net loss of $12.3 million equal to $0.33 loss for basic and diluted share.

For the first quarter 2017 earnings before interest, taxes, depreciation and amortization EBITDA was $15 million versus $12.4 million a year ago. This is an improvement of 21%. We use EBITDA as a measure to measure the company's performance.

We have a full reconciliation of EBITDA, a non-GAAP measure to net income in our press release issued earlier today. Now I'd like to move on to financial condition and highlight a few key balance sheet, liquidity and capital items. Our cash balance and short-term certificate of deposits balance came to $181 million as of March 31st.

This was $17 million below the December 31, 2016 balance, a $10 million below the balance of March of last year. This decrease was primarily attributable to increased working capital, which was needed to support the higher sales realized during the quarter.

We ended the quarter with inventory and accounts receivable balances at higher levels when compared to the prior year. However, our day sales and inventory was 88 days at both March 31, 2017 and March 31, 2016.

Account receivable days sales outstanding DSO was 59 days at the quarter, compared to 61 days at the end of the first quarter of the prior year. Days payable outstanding increased 11 days from the prior year period to 56 days. What's this all mean? Well there was an improvement of 13 days in our cash conversion cycle from 104 to 91 days.

So you can see, we continue to be diligent in managing our working capital, our liquidity and cash flow, and this remains a key focus for management. Now for a comment concerning our debt, our combined current long-term debt totaled $456 million, which represents a decrease of $50 million during the quarter.

This reflects the previously announced conversions of our convertible debt in January, which also served to reduce interest costs during the quarter. Capital expenditures for the quarter were $8.4 million versus $7.1 million for the first quarter of 2016.

Capital expenditures for the remainder of 2017 are forecasted to be in the $25 million to $30 million range, excluding investments in our new Brazilian wheel plant. Cash payments for interest are currently forecasted to be approximately $31 million for the remainder of 2017 based upon March 31, 2017 debt balances.

We believe we have sufficient funds for our operational working capital needs for the foreseeable future. So to summarize, I would like to say, there are several positive takeaways concerning the financial results of the first quarter of 2017.

During the quarter, we have demonstrated meaningful increase in net sales, gross profit dollars and margins, EPS and EBITDA. As our end markets continue to stabilize and improve, we will remain strongly focused and committed to managing those areas we all control. I'll be glad to answer any questions you may have on these or financial matters.

In the meantime, I'd like to turn the call back to the operator for questions. Thank you..

[Operator Instructions] The first question comes from Joe Montella of Sidoti & Company. Please go ahead..

I want to focus on the gross margin, your two main segments. I was wondering if you could take us through the puts and takes for the Ag segment and construction for gross margin. Obviously, better than I expected.

So if you could take us through sort of volume mix, material, and then looking at second quarter and beyond, with rubber prices actually have turned down since peaking in the first quarter and the price increases that you implemented on April 1, is it fair to expect gross margin expansions year-over-year to be even better than what we saw on the first quarter?.

Go ahead Jim. I will jump in with some of the comments about the margin..

Sure. So first of, in terms of the segments, as I said, we were up $35.7 million in sales and that was in all segments. But again, I mentioned agricultural was driven by volume as well as price mix and currency. Earth construction was primarily pricing mix was a little volume down, negative decline and a positive currency.

And then Consumer, that was driven by volume and currency. So that's the drivers for the top-line. In terms of the raw materials, I guess, clearly, the rubber prices were up over 40% and then we saw some increase in the steel, and as Paul mentioned, the price increase went into effect in the first part of April, so..

Yes. I'll take your question about margins improving later in the year. The answer to that is yes. And I made a comment earlier, I said, generally speaking always, which sounds kind of ridiculous using those two words in the same sentence. And the reason why I did is because history has shown that we always end up recouping the raw material cost.

I used the phrase generally speaking, because you never know if your competition is going to do something irrational and stupid.

I think with the raw materials increases that we've seen being as significant as they were over the last six months, now it is stabilizing, but we've seen competition, generally speaking act very rationale thus far with the increases they put in place in April.

With our OEM customers, we do have contracts in many cases that we'll see repricing in July at the start of the third quarter. So to answer your question, yes, we would expect gross margins absent the raw material fluctuations that we saw in the past six months improve as the year progresses..

And then, so continuing with that one variable that's tough for us to sort of handle on is mix, and I do know some of your products to have higher margins and some have lower margins. So it sounded like, I think, you did highlight that mix was sort of favorable in the first quarter.

How do you think about that going forward? Is that mix sort of sustainable or were there certain, I don't know, large mining tires or even on the Ag side certain products that you may not tend to see strong going forward in the near-term at least, or how do you think about mix going forward?.

Yes. That's a good question. And the two areas that I would highlight on mix that we've seen improvements, didn't just happen overnight. And that would be, first with our ITM business, our undercarriage business. We made a strategic effort to change our mix from where it's historically been 75% OEM to get it more around the levels of 60%, 65% OEM based.

And so we made that strategic move a while back to make investments to improve our distribution channels with the aftermarket, which as Jim highlighted does involved holding more inventory that you see in our working capital.

But we've been working on that an issue for a substantial period of time, getting the foundation in place and we're starting to see that take hold as the OEM market for our segments remains challenged. The aftermarket does present some opportunities.

And so we've benefited in our undercarriage business along with our North American tire business has seen a mix shift, where as we've stated publicly before, we're typically in recent years been about 60% OEM. We're seeing that shift to be about 50-50 between OEM and aftermarket.

And again, that was driven by some strategic decisions we made mid-part of last year to really change our positioning within the market to go capture more in the aftermarket.

So to answer your question, I do believe it sustainable, again, not just because the market has shifted that way, but because the strategic moves that we put in place going back and in some cases going back two years ago..

The other thing, Paul is mentioning the LSW, we're continuing to see double-digit increases in that, which is a nice thing to see in terms of our margins and the mix, et cetera also..

Yes. That's really good point. But this is probably our first call in long time and we didn't mention LSW in any of our comments, which I'm glad, Jim, you put that up there.

That continues on a very positive trend, top line, bottom line and its helping us in many aspects of our business, not just with the direct sales of LSW, but with what it does to our overall brand and the residual sales you get from the strength of your brand..

And then I wanted to ask you on SG&A. So in terms of these legal and professional fees that you sort of cite as onetime, number one, is any of that going to sort of somewhat bleed into to the second quarter? I realize it's going to sort of go away or your expectations are it's going to going away at least by -- maybe the second half of the year.

And number two, aside from those legal and professional fees, I know one of your goals and I don't know how far you're in terms of planning is to reduce SG&A sort of maybe across the board, taking a hard look at SG&A, the core SG&A, and start trying to take that down as much as possible.

Where are you with that? And if you can quantify anything that would be great, but in just overall SG&A..

This is Jim. Sure. First, your first question is, there is going to be a carryover in the second quarter? No, these were truly nonrecurring. It related to, I guess, carryover -- we had to go through with that material weakness, which we talked about, which was a huge effort, glad to have that one behind us.

But there was audit cost as we -- what it was a month ago, that we finished our year-end. So we had the professional fees -- extra professional fees. So that's not going to happen again, number one. Number two, we have the ITM transaction and there were some carryover on that. That will not go into second quarter.

So to answer your question, no, we don't see -- they were truly one-time events. And your second part of the question is, I'm very pleased that the material weakness is behind us and I'm excited about -- its given me time and our team to help to push the business forward profitably.

And this whole business improvement framework, I'm not going to get into a lot of details, but that's been in the company prior to coming. It's very successful, as Paul mentioned and quite frankly. It's taking a look at your processes, building a solid foundation, so that you can build a house upon that foundation.

I was a carpenter when I was going through college, and you go to have a solid foundation. The same thing is for back-office. And we certainly have built -- the one thing good about material weakness, you go to get down in the weeds and look at the foundation and start building processes. So I got a good review of all the processes. That's first base.

Second base is, all roads lead to people and systems. So that's what I'm focusing on now. Our systems, I'll just say this, old. And the nice thing about that is we can leapfrog, and I've done this before in many companies. You can leapfrog forward into, I guess, it's 2017, we're talking about here. So I'm excited about that.

And early indications, these are big numbers, we have, I call it profit leaks, but the committee, one of the four committees that we kicked off and announced last quarter is the profit leaks committee and it's dear to my heart. And the lists are coming in and it's nice because we meet on a regular basis, and we share ideas, best practices.

Not only external, but internal, and it's nice to see people say, you did that, and they say yes, and they say well geez, maybe I should take a look at it. So you're really starting to see fruits for that, and you’re going to see that come out in the next three quarters.

Some of it's hits right away, but other times it takes investment of people and time..

Joe, we nicknamed Jim, The Viking. And so if he shows up on your store caring a club than you know his presence is going to be felt where [indiscernible]..

Just to give you a little detail. My cousin investigated the family tree and I don’t know, if people out there watch the history channel on the Vikings, but I'm related to Ragnar Lothbrok..

Well, I'll certainly keep an eye on my back then. Last question, I’ll get back in queue. Just wondering if you can give an update on the North American OEM part of the business.

You said that was still sort of dragging and the aftermarket actually offset that, but are the declines slowing year-over-year? And can you see at what point in time is it end of the year fourth quarter.

When do you see OEM in North America returning to growth?.

It's a great question that I would say -- I would answer this way, I wish, I knew exactly when it was going to get better just like anything in life, if you could forecast it than I wouldn’t be sitting here on this call today. But I would characterize it this way, what we see is not much change and that's both good and bad.

It's good, because, to answer part of your question, we don't see things getting worse. We see some aspects of the market are positive, where inventory is correcting, dealer channels are starting to improve, used prices are getting stronger. But then on the flipside, you still see there is a lot of grain in storage.

There is some equipment especially on the large horsepower that's not moving very well through the used channels and it's causing some hard burden with dealers. So I would just say, this quarter at this point in time it's not much has changed. And so, like we said, we re-emphasized our business in other ways.

I don't think the OEM market is going to get, I don't see there is a big risk for a significant downturn in the OEM market. I just, all the facets of the business are not pointing in that direction. But as far as seeing some leading indicators just like win, it's going to get better. I don't think we're seeing those signs yet either.

But it's not a of question of if, it's a question of when, it will to get better. And I think that's specifically for North America to answer your question. But you're going to see other parts of the world that the OEM market is doing much better.

Obviously, in Latin America it is some of the European pieces are looking a little bit better, but specifically, North America, I think, it's basically much of the same, as what we've seen before..

Okay.

Are we at single-digit declines in North America OEM or where are we at?.

You were around that ballpark, yes..

The next question comes from Larry De Maria of William Blair. Please go ahead..

Few questions.

First, really it's the SG&A costs which you guys discussed, but just give us what should be the run rate going forward? The normal run rate, is it in that $35 million range or where we should we think about that going forward?.

I think if you back out the nonrecurring that I talked about. I think 35 million is probably a good number. But it depends upon again the profit leaks and what we see good progress in that. And so, I would say that's probably a good ballpark figure, but we're always looking for continuous improvement as it is done on the cost of sales line..

Secondly, on the [indiscernible] OE, which I guess is probably going to get worse from here.

Can you just tell us, what were maybe year-over-year orders for North American OE up, down, flat, so we can just kind of gauge that?.

I would say it's down a little bit, kind of similar to what we said before, Larry. We offset the modest declines in the OEM business with the aftermarket. So I would say the order trends in -- at this point are pointing downwards with the OEM piece of our business. But it's still sporty.

There are some parts of the OEM business that are looking better, there is other parts that they are still working through some inventory corrections, inventory issues. So, yes, but to answer your question at this point, it's down a bit..

The four divestitures go, obviously, the ITM processes long over at this point. But, I guess, I would hope there was still negotiations based on the folks actually submitted data.

So, and did they update on any divestitures and prospects of actually moving ITM still at this point?.

Look, the ITM business is really performing well. As we talked about on the last call, the special committee of the Board along with the full Board, we made the decision not to sell ITM, the trend lines that were already in place, that were positive, continue on that path.

I think the investments we've made on the business, it's really positioned ourselves well. I see some further opportunities for us to continue improving on that business.

So as far as the divestitures speed goes, my discussions with the management team of ITM have been let's keep the pedal to the metal and keep this moving forward in a positive direction.

So from my perspective, Larry, there is no thoughts on divesting it and certainly believe that there's some really good opportunities ahead for us with that business..

And then last question. You guys keep talking about that business improvement framework. Could you just remind us exactly kind of the impact, I think it's going to be $7 million a quarter, but I'm not sure.

But just going forward maybe through this year then even annualizing to next year, how do we think about the actual dollars as they flow through on -- just what you guys are doing on bips [ph]?.

With bip I think, there is two parts answer of that question. One, we did a really good job under bip, getting our business units to focus on the -- really the gross margin. Focus on what's going on at the plant, at the plant level. And what that's done is allowed us to make a decision on a timely basis, that as the market goes through cyclical terms.

We've been able to keep up with our cost control and our overall level of expense at the plant level very well through bip. And like we said, this quarter it is $7 million, I think, you would see trend line that well continue on that level.

But then as the business starts to improve, you may see that number actually, go down a little bit as we have to start investing again back in bringing people on board and as Jim mentioned earlier increasing inventory. So I think what we're doing is shifting a little bit away from bip, like I said, which was plant level specific.

And as Jim mentioned forming, what we're calling a profit leak recommitted to focused on our operating expenses at the SG&A level specifically. What happened over the last couple of years is, we're going through material weakness period.

As you're looking to sell of ITM, you got a number of distractions that as you'd seen, we've all seen, if costs, our SG&A costs are expected to creep up to a level that historically doesn't fit to Titan culture.

If you look at this business, I mean, we've been 7% to 8% SG&A company going back a long time in our history and I'm excited to have Jim on-board. As he mentioned in his comments, he is now has the time with his team and my team to really focus on the operating expense side of this company.

And we lost that focus over the last couple of years, being in the material weakness was a big hit to us from that perspective. And so we're kind of shifting that focus away from bip and getting into the operating expense line. And certainly, we'll be talking more about that as we move forward.

Our entire organization is going to be focused on how we can reduce SG&A, and some of these one-time events that we had not continuing in the future will be part of it. But it needs to go deeper into that. We got to make some structural changes to our SG&A to get it in line with what historically Titan has been..

So can you get to 7% or 8% by 2018 or is that too much work to do?.

Well, it depends how big of Viking club is. We might have to put some spice on the end of it Larry and we have to start swinging a little harder. We'll give more specific projections on that.

I think, at this point, Larry, let Jim and I continue on the path we are and definitely when we get into the tail end of the year, we'll be able to really pinpoints what those projections are for 2018. And part of it is the variable side of SG&A, the other side that is the fixed side of SG&A.

And all SG&A becomes variable at some point, but it doesn't quite work that way in reality. So that's what we got to spend some time focusing on is, what part that fixed SG&A can we attach and we get the structure really position better for 2018..

Can you just let us know of the percentage, what we stick [ph] was variable?.

I don't think, I don't have information at this point. I don't think Jim and I are at that point, Larry..

The next question comes from Stephen Volkmann of Jefferies. Please go ahead..

Maybe just to stay on this SG&A thing just for a second.

I am sort of feeling like going forward, not quite sure, how to say it, but historically, I think, probably you mentioned sort of 7% to 8% SG&A, but you may not have had the full complement of systems and checks and balances that you will necessarily needed, and obviously, you're building those in at this point.

But that made me feel like the going forward SG&A rate would probably be a little higher than had been historically, as you sort of grow into your sort of more modern footprint, is that the right way to think about it or it sounds like maybe you think there is still opportunity there?.

There's opportunity. We didn't have a material weakness before the last couple of years, so even though we ran lean at 7% to 8% from both internal and external perspective, we were getting the job done. Yes, over the last couple of years in remediating material weakness, we wandered down a path that did influence our SG&A negatively.

We built up an infrastructure as a global company as you mentioned that is bigger than what it was before, when we were at that 7% or 8%. And I think that's what we really got to focus on the fixed side.

The footprint we have is probably because of our IT systems, is largely than it needs to be because we don't have the IT bandwidth in place at the centralized level. So we end up doing a lot more additional work at the business unit level. And so I would think that's what I mean by structure, that's where our additional costs are coming in.

So to stay out of the material weakness we have to invest more, spend more time, I should say, on resources at the business unit level, because we don't have the centralized IT systems that can keep us out of the material weakness.

And so I think that's were, Jim had mentioned in his comments, the focus on IT, that's going to be a big part of our plan going forward.

And that's why, at this point, it's not something that Jim and I can just rattle off and give to you today, but we need to make some investments there, so that we can run more of a centralized approach for IT systems that structurally allow us to change things at the business unit level. So those are kind of how the pieces fit together..

Yes. This is Jim. There'll be some additional investments or costs as it relates to IT. But I've been in CIO and CFO positions. And as I said earlier, all roads lead to people, and technology and I also said, we can leapfrog and I've done that before. So I'm excited about that.

These profit leaks are really just looking at the cherry tree and saying, well maybe that one is easy to pick and some of these aren't. Some of them are more long-term definitely the systems. But we're going to be looking at vendors next leak exactly. So we're moving that along, the project is labeled GLH. And there was a car named after GLH.

So I'm not going to say what that stands for, but we're moving fast down on that path. And as I said, looking at processes and streamlining them, the packages we're looking at, we're looking at the best practices and so I'm excited about that..

Okay. And then different topic, but I think Paul you mentioned that like price mix was positive 3% or 4%, I don’t know the exact number. But I'm curious, how should we be thinking about China tariff in regard to that.

Is that part of what's driving this or is that just too smaller a piece of market to have a major impact, or how do we think about that?.

Yes the price mix improvements we have seen are driven by the mix between OEM and aftermarket. The Chinese tariff is would certainly help in the regard that it keeps the marketplace competitively positioned on an even basis.

So with the tariffs already being in place like they were with China, the recent announcement basically said, look, the tariffs are going to be in place, but at an even stronger level. So I think what that does is that cements a good level playing field in the marketplace for the OTR tires.

And then as you know, as we mentioned earlier, the India and Sri Lankan case, that we got the tariffs put in place, that at a more modest level, but that helps us on the Ag side of the business where the Indian and Sri Lankan manufacturers focus more abroad, where the Chinese business is more the off road OTR construction business..

Okay.

So it doesn't sound like we should be baking in continued improvement from this level in terms of the price cost mix?.

Not from the -- the tariffs certainly helped, there is no doubt about that they helped. But the price mix improvements that you're seeing are driven by mix shift within our own organization between aftermarket and OEM..

Got it. Okay. And then my final one is just on the rubber price issue. Will there be some residual impact in the second quarter? And then you sort of come back to breakeven in the second half.

Is that the right way to think of it?.

Yes, it is Steve and that's why we kept talking about the fact that the contracts reprice twice a year. So yes, what we experienced in Q1 will have some residual that continues through Q2..

Next question comes from Alex Blanton of Clear Harbor Asset Management. Please go ahead. .

I just want to focus on the two items that you mentioned, earlier the lack of your -- the lag in the price increase of $9 million, and let's call it $6 million of legal fees that are non-recurring.

If you add those up and assume a 30% tax rate, you broke even in the quarter if you exclude those, is that correct? It's about $0.18 a share, the two combined?.

I would agree with your math, Jim?.

Yes, simple math. That's not right. All [Multiple Speakers]..

So that's a breakeven versus an estimate of $0.11 loss?.

Right..

And I think, some of that -- would you agree that some of that can be attributed to efficiency improvements, that you will be continuing to have an impact on incremental margins going forward?.

Yes. Absolutely..

Okay. So those incremental margins if you adjust for those items, let's say just the gross profit for the $9 million, which you make back eventually by raising price.

You would -- before that adjustment on an actual basis you had 32% gross margin, incremental gross margin of 32%, but if you add back $9 million, it was almost 57% incremental margin on the gross margin line.

Is my math correct on that?.

It seems right on the top of my head, Alex. So I think [Multiple Speakers]..

Okay. So that’s the kind of thing we can expect going forward that sales increase, to get back to, the peak would have to almost double from last year's level. And as the sales go up you are going to add tremendous amounts of incremental profit, it seems to me.

And even on the operating line if we add back the legal fees to the change there, it's about a $19 million swing, which is on the operating line of 53% incremental margin.

Well my basic question is this, do you expect those kinds of incremental margins then would basically continue as this recovery goes forward?.

I think, Alex, the incremental margins you outlined, definitely that's going to happen [ph], we believe that our incremental margins will be strong because of the improvements we put in place, our plants, generally speaking across the board are more efficient since the cost of quality.

But you got to look at 50% of your costs being tied to raw materials, so you can get 57% number that you quoted, that seems a little heavy as a run rate just on the fact that you got 50% of your materials costs baked in there. So I would keep that in mind as you look at run rate going forward..

If you'd been able to increase your prices to recover those costs, that's what it would have been..

Exactly. And that's the makeshift that we've been talking about. We repositioned the business to benefit a from a mix shift. And pricing remains challenging not because of the market conditions but because of the fluctuations in raw materials.

So it's something that we watch across the Board extremely close, and it certainly will give some benefit back in Q2 and we'll benefit in Q3 as pricing adjust to the cost structure of raw materials..

There is two things I would add to that, Paul. One it's a cyclical business keep that in mind [technical difficulty] fixed as well as variable costs. You mentioned materials costs, but there is labor and there is overhead. So in terms of variable, that's variable by definition and then the fix, it remains fixed relative to not fixed..

Okay. Certainly, could you give us an update on expansion in Russia to serve the Goodyear farm tire market that you'd be getting into.

What is a timing on that? When can we expect some sales from selling Goodyear branded contracts farm tires in Europe?.

The expansion in Russia is moving forward. I just spent a long time on the phone yesterday talking to our comrades in Russia and the gentleman from the U.S. that's leading that effort. And we got equipment in place, that is working and going through the test phases now. We still had some equipment that we need to get [indiscernible] over there.

I'm looking at this being something that's -- by the third quarter we have it in place, and by the fourth quarter we can -- we will be putting product [technical difficulty] clearly, we got to run the -- we got to build the product, we got to through in internal tests and make sure we're building to right specifications.

So that's why it's tough to nail down an exact timeframe, I know what I expect, but I want to allow ourselves some time because of the -- we've dove -- we've come a long way with the Goodyear brand since 2005. What we've in North America, what we've done in South America to make it the number one brand on both continents for farm tires.

And so Alex, I don't want to run out there too fast before we make sure, we're building good product that represents Titan and the Goodyear brand well. So the equipment is there, it's being setup, like I said we got a little bit more still coming.

But we will have the equipment firmly in place by the third quarter and then subject to some testing of the products we're building, when we release them into market.

We have some other ways too that we're looking to build some products for the European market that we'll be discussing in the future, we are building some such products in other locations. So it's not just all Russia, where the European market needs will be filled from.

We'll be able to come into the European markets from a couple of different perspective, not just with the product build in Russia..

The next question comes from Aaron Steele of Feltl & Company. Please go ahead. .

You saw good growth on the agricultural segment for the quarter, but on the volume, in the earthmoving construction, just wondering kind of what's driving that lower volume in that segment and then maybe what you see kind of some trends going for the rest of the year?.

I think earthmoving construction, you're seeing in the impact of the OEM market there. It's still remaining in a tough spot. You've seen some of the operators picking up their activities, parts of the aftermarket, the replacement business for mining, replacement of business for construction improving.

But I think, what you're seeing there is the impact of the OEM markets still being in a tough spot. So to answer your question, if Trump gets his tax bill through and the infrastructure spending bill, maybe North America starts to taking off, we all know, we need to spend some money on infrastructure over here.

But you're starting to see some projects that are in place, that was out West last week it was and you see some activity going on.

So there's part of our business quite frankly, where we're increasing tooling, we're trying to build up some inventory, because we're not meeting all the demand in the market, but it's more region-specific, product-specific than it is across the board.

So to answer your question, I think you're going to need something that kick starts the OEM markets for earthmoving construction. And hopefully that comes through some changes in regulation..

Okay. Excellent. And just maybe an update on the LSW plant in Brazil, is that still slated to begin production in the third quarter here.

And then what are you seen result right now, obviously improving in Latin Americas, Brazil specifically and then any improving trends to call out there?.

The wheel plant we're working on in Brazil is still in progress, got a team that's focused on that. So we're preparing the equipment. Will it be operational by the third quarter, no, it won't. We're still going through some preparation on the equipment and getting it setup.

I think we'll be able to outlined the timeline a little further later in the year giving everybody an update. But at this point, we got a team, it's a mix of Brazilian and U.S. representatives with some of the equipment coming from U.S. and then obviously, the knowledge we have on wheels in the U.S.

So it's coordinated effort, I got a couple of guys that actually going down to Brazil in a couple of weeks and really we'll focus on what that timeline is going to look like. But at this point, Aaron to answer your question specifically, no, it will not be operational for Q3. But that doesn't mean we are moving forward with LSW effort.

We do have the same team we put in the place in U.S. the griz [ph] squad that proved to be very successful in introducing LSW in the market. We're doing the same thing in Brazil right now. We've got a team that is going after the large farmers out there, which are -- I mean, those are farmers, those are large businesses.

And the test results we're seeing on LSW in Brazil have been fantastic, especially considering the equipment they run down there and the way their plantations are set up. So we are moving forward LSW, we are making some investments on the tire side to be able to build LSW tires down there.

The question then would just be that LSW wheels would have to be imported from the U.S., which is, we'll make that work. We're going to make LSW successful in Brazil just like we have in the U.S., but the tires would be built specifically, down there in that project we're tooling up for that.

But as far as planting the seeds with LSW in the marketplace, that is ongoing, and all the updates we get from the farm that have been running LSW has been very positive. As far as the other part of your question, Brazil overall, I think the market there continues to have good trends.

The regularization of the market is obviously been very good for our business. Some of the mission requirement changes going on there have been good for our business. And just to help of the overall farm economy and their output continues to go up every year, which is good and bad. And it's great for Brazil, helps the market down there.

Clearly, the grain markets on a global basis continue to suffer from being -- from having too much inventory out there.

And so I think that's something that if you had some weather events that took place over the next few months kind of disrupted a little bit of the global supply, I think, that would help get things rolling further in the agricultural markets on a global basis, but as far as Brazil, specifically, yes, I do think that we'll continue on a positive trend line..

And on the LSW side, as well, is there still that push to grow that into the earthmoving and construction segment as well and how those efforts continuing on?.

Yes, there is a push. I mean LSW, what it does for the farm segment, it does as well in the construction side. I mean it provides the stability and performance improvements.

We're going through what we did in farm -- the early stages what we did in farm where you just continue to get product out there and get and collect the testimonials that you need to really push it out into the marketplace.

So it's a different time line and what we've done with farm, meaning we had started at the same time we did farm, and farm is clearly, well beyond the testimonial phase, in fact, we're pulling on the testimonials and testing going into just focusing on selling it and marketing it.

With the construction side of our business, we're still in that testimonial testing phase..

And then CapEx for the year. Is it still in that $25 million to $30 million range? And then what do I guess with the kind of lengthy process of off starting both Brazil and then the both in Russia too.

Where do see kind of that range of costs coming for the year?.

Well this is Jim. As I said in my comments, $25 million to $30 million range, excluding Brazil, Paul just talked about Brazil. It's really in the early stages. So we could be north of the 30 million, but it really depends upon how quickly we can proceed with the plant buildout..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Reitz for any closing remarks..

Well, I just want to thank everybody for their attendance and participation this morning. Have yourself a great day. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..