Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Bill Strome – SVP, Strategic Planning and Finance

Dawne Hickton – Vice Chairman and CEO

Bill Hull – SVP and CFO

Mike Wellham – President COO

Analysts

Kuni Chen – Banc of America Securities

Luke Folta – Longbow Research

Edward Marshall – Sidoti & Company

Chris Olin – Cleveland Research

Nick Capuano – Imperial Capital

Brian Jacobs – Muhlenkamp

Gautam Khanna – Cowen and Company

David Campbell – Owl Creek

Steven Corn [ph] – Arch Capital [ph]

Frank Havlick [ph] – AMM [ph]

RTI International Metals, Inc. (RTI) Q3 2008 Earnings Call Transcript November 4, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the RTI International Metals third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Bill Strome. Mr. Strome, you may begin.

Bill Strome

Thank you. Good morning. Thank you for joining us today on this conference call to review the third quarter and year-to-date 2008 financial results for RTI International Metals. I’m Bill Strome, Senior Vice President of Strategic Planning and Finance. The call will be led by Dawne Hickton, Vice Chairman and Chief Executive Officer of RTI; Mike Wellham, Chief Operating Officer; Bill Hull, Senior Vice President and CFO; and I will be available along with Dawne for your questions at the conclusion of our formal remarks.

As always, elements of this presentation are forward-looking and based on our best view of the business as we see it today and I refer you to our detailed Safe Harbor statements set out in the press release and in our filings with the SEC.

Now, let me introduce Dawne Hickton. Dawne, please go ahead.

Dawne Hickton

Thanks, Bill. Good morning everyone and thanks for joining us on the call. As Bill mentioned, I will review RTI’s third quarter and year-to-date results and will discuss how we see the current market conditions impacting RTI as well as our industry.

To begin, let me start off by noting that while we anticipated on our last call that the spot market business for titanium would experience significant weakness heading into the second half of the year as a result of the 787 delay and industry de-stocking. We did not anticipate the extent of the impact to our business as a result of the worldwide financial and economic conditions that accelerated in the third quarter and which unfortunately continue today.

Our results were directly impacted by the softening spot markets which we had previously indicated in our last call. In addition, we were also impacted during the quarter by Hurricane Ike which we had not anticipated. The hurricane significantly interrupted business operations at our two facilities in Houston, two in our fab group and one in the distribution group.

And further, in light of recent events in the credit markets and the global economic crisis, we are also anticipating lower operating income for the fourth quarter. On our last call, we said we would be between 14 million pounds to 15 million pounds in titanium mill product shipments for the year on slightly lower sales in 2007, and we still anticipate that we will meet this forecast, although we may be closer to 14 million pounds as we see the firm orders today. However, we did previously forecast that operating income for the year would be down about 20% to 25% year-over-year.

This guidance, regarding operating income, is no longer valid given the current volatile state of the market and the uncertainty surrounding the health of the global economy. We still see the fourth quarter being profitable. Although for the year, we expect to be down approximately 35% to 40% from 2007 operating income.

Now, having navigated other historic market cycles, we feel confident that we can manage our fixed cost and generate positive operating cash flow and maintain profitability barring any major unforeseen events. It is important to point out that RTI has a team in place that has weathered numerous market downturns. Both Mike and I have been with the company for over 10 years, during which time we have experienced a number of severe down-cycles and six of our top eight executives have weathered at least few previous down-cycles in various executive level positions.

Finally, the long term strategy that we adopted will help us manage through the slowdown in the industry. Specifically, unlike any of the past downturns, RTI has in place several long-term contracts with minimum requirements and take-or-pay [ph] arrangement that will enable us to run our business profitably during a downcycle.

Indeed, we already have in place firm orders on the books for next year than almost double the orders we produced in the lowest part of the last downcycle. And now that the Boeing strike has been settled, we look forward to the opportunity to run several of our fabrication operations in a more efficient manner.

Additionally, our decision to refinance our credit facility just before the lending markets tightened up significantly enhanced our financial flexibility. We have a strong cash position on our balance sheet, with additional revolving credit assets and we will be in a position to weather the downturn without concern for cash. On December 9, we announced that we had amended and restated our credit facility to include a $225 million term loan and $200 million revolving credit facility, increasing total domestic credit availability from $240 million to $425 million.

Now, let me provide the summary of the financial performance. For the quarter, we reported net sales of $150.6 million as compared to $163.4 million in the third quarter of 2007. Third quarter net income was $11.3 million or $0.49 per diluted share and that compares to $24.7 million or $1.06 per diluted share for the same period a year ago.

As I mentioned at the beginning of the call, results for this quarter reflect the continuing impact of the overall negative financial and economic climate which caused the stock market for our business to decline considerably and then the short-term impact of Hurricane Ike on our Texas Facility. In addition, the speed with which sales go off [ph] outpaced our ability to remove cost from the business, but we nonetheless stripped out a lot of costs and plan to continue to do so.

We continue to review SG&A costs and are working to implement manufacturing process improvements to improve yield and we’re also moving outside processing in-house where appropriate to reduce cost.

Year-to-date, the company reported net sales of $451.1 million compared with net sales of $463 million for the same period a year earlier. For the first 9 months of the year, our net income was $52.1 million or $2.26 per diluted share compared with net income of $67.7 million or $2.92 per diluted share for the same period a year ago.

Now, we'll take a closer look at our three operating units. You will recall that earlier this year, we announced we we’re introducing a new operating and financial reporting structure that will start this quarter to further enhance the company’s strategy of supplying a fully integrated offering of titanium parts and sophisticated material solutions to our global customers. I will ask Bill Hull, our CFO, to provide the financial details for those three segments. Bill?

Bill Hull

Thanks Dawne. As Dawne mentioned, our reorganization will allow greater operating focus on value added products and enhance development of new products, services, and markets in support of strategic growth initiatives.

Under the new structure, RTI has separated its Fabrication and Distribution businesses and reorganized into three operating groups; the Distribution Group, the Fabrication Group, and the Titanium Group. The creation of these three separate groups will enhance RTI’s product and solutions offerings providing greater accountability for these individual operations and drive increased transparency for not only management but also for investors.

Let me begin with our largest segment, the Titanium Group. RTI’s Titanium Group reported operating income of $11.9 million on sales of $85.3 million, including intersegment sales of $35.9 million. This compares with operating income of

$25.9 million on sales of $110.4 million, including intersegment sales of $41.8 million for the last year. Mill product shipments for the third quarter were 3.4 million pounds at an average realized price of $23.04. .

Year-to-date, the Titanium Group posted operating income of $58.7 million on sales of $283.5 million, including intersegment sales of $126.6 million. This compares to 2007 operating income of $68.9 million on sales of $320.3 million, including intersegment sales of $135.8 million. Mill shipments for the first nine months of 2008 were 11.2 million pounds at an average realized price of $23.79 per pound compared to mill product shipments of 11.4 million pounds in 2007 at an average realized price of $26.32 per pound.

Now, the Fabrication Group. Net sales in the Fabrication Group increased in the third quarter to $35.7 million versus $34.8 million in the same period a year ago. Fabrication Group had operating income of $1 million compared to $1.2 million in the third quarter of 2007. While we continue to work on cost reduction and improving operating efficiency, we are nonetheless balancing this against the oncoming ramp up of the 787 program. We were able to utilize a small amount of our new capacity with new contracts with both Bell Helicopter and Bombardier, both of which include renewal as well as new business opportunities.

Year-to-date, the Fabrication Group reported net sales of $106.8 million resulting in operating income of $3.4 million compared to net sales of $96.5 million and operating income of $4.6 million for the same period a year ago. We continue to see significant interest from our major customers on the value added side of the business, as they look to the future and then move titanium onto two platforms.

Turning to the Distribution Group. Net sales in the Distribution Group increased for the third quarter to $55.5 million versus $60 million in the same period a year ago. The Distribution Group had operating income of $4.9 million compared to $9.9 million in the third quarter of 2007. Our Distribution Group was directly impacted by the current business climate as well as the lack of spot market activity and the continuing margin pressure due to a volatile pricing environment

Year-to-date, the Distribution Group reported net sales of $197.4 million resulting in operating income of $19.9 million compared to net sales of $182 million and operating income of $28.3 million from the same period a year ago.

At this point, I will turn it back to Dawne.

Dawne Hickton

Thanks Bill. I want to now talk about our capacity expansion projects. Recognizing the current demand trends as they impact overall global demand for titanium production in the near term, we announced today that we will be delaying our capital expansion sponge plant project in Hamilton, Mississippi for one year, and our rolling and forging expansion facility in Virginia for approximately six months.

While we have been on track with our milestones and our budgets for production ramp up sometime during 2010, at this point, we anticipate a start up during 2011 for these projects versus our originally planned startup during 2010. We believe this shift will allow us to better align our production with the anticipated demand given the economic slowdown and the current short-term market conditions. However, it is important to emphasize that the underlying business decision for this expansion still exists, it’s only the timing has changed. All of our original business drivers remain the same and we see no reason to change them – or no reason for them to change, pardon me.

These drivers include the need to have a secure source of metallics, the requirements to support our Joint Strike Fighter and Airbus long-term high volume secured contracts, and the ability to balance our metallics requirements against market forces. The business drivers are still intact for the commercial aerospace markets long-term and this was evidenced recently by American Airlines in their recent order for 787 that was valued over $8 billion.

Now, let me turn for a moment to the sponge price negotiations which were recently completed. During the last quarter, we also agreed to 2009’s pricing with Osaka Titanium on next year’s sponge prices. Those prices will be down approximately 8% to 9% year-over-year. And as we look at the economic trends and recognizing that today, consolidation of cash is paramount, we have reduced non-essential capital projects, that's our estimated capital spend for 2008 is approximately $155 million.

With the deferral of the capital expansion projects, we expect to move about 100 million out of 2009 and into 2010. But I want to note that with our conservative approach to investing our excess cash in this current environment, interest expense will exceed interest income by almost 3%.

Let me comment for a moment on our long-term focus and strategy. We’ve been asked frequently in the past few weeks by shareholders what we will do when it comes to share repurchases and acquisitions, especially noting where the stock price is and where the overall stock market values lie today. Not withstanding the component value associated with our stock price, the executive management and our Board of Directors firmly believe that the significant long-term benefits of our current initiative far outweigh activities that do not generate cash flow, especially in light of the complete re-pricing of risk globally and the current (inaudible).

Given these challenging market conditions, the future growth of RTI is best served by continuing to execute on our strategic plan and the best use of cash would be to continue with our expansions and to seek out accretive bolt-on acquisitions, and we have been proceeding apace in that regard.

We explore acquisitions where we see opportunity. For example, a small bolt-on fabrication acquisition would position RTI further up the value chain and will be consistent with our overall strategy to flatten out and moderate the cycles. More importantly, the feedback from our long-term customers supports this strategy and is consistent with their focus to reduce the number of vendors in the supply chain.

Let me speak to how we see the recent challenges in the global and domestic economy. As I stated on the last call, we expected a lot of uncertainty in the second half of this year as a result of so many sudden delays and the impact that we have not only on our direct business for our Fabrication Group where we’re manufacturing the titanium seat tracks, but also how the impact of the delays would affect mill product stock market business with potential excess inventories in the marketplace.

The spot market weakness continues and orders are few and far between. And with the volatility in the markets today, we’re not in a position to comment on 2009 but we see most of these trends continuing in the near term. Nonetheless, with the current domestic and global financial issues facing us and the recent pressure on the stock markets, we are monitoring the current economic conditions closely and they have been changing rapidly.

For the long-term goals for RTI, we are embarking upon aggressive cost management to weather what we hope is a near term economic event, but are preparing for the longer term. As I said earlier, the fundamental drivers of our core commercial aerospace and our defense business nonetheless remain intact. This includes the 18 domestic fleet that needs replacement, and we anticipate that when the market returns, the older aircraft will be replaced by the newer, more fuel efficient model such as Boeing 787 and Airbus A350.

We also see continued growth in the emerging markets albeit not as strong as we all predicted last year but still significant. And our energy business, which we adopted as part of our long-term plan to contrast the aerospace cyclicality, continue to be strong and would have done very well this quarter but for the hurricane. This is still an exciting time for energy business and we’re looking forward to future opportunities as the global demand for energy continued to remain strong and energy sourcing continues to be a focus.

Thanks. And with that, I’ll now be happy to answer any questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Kuni Chen from Banc of America Securities. Please go ahead.

Kuni Chen – Banc of America Securities

Hi, good morning everybody.

Dawne Hickton

Good morning, Kuni.

Kuni Chen – Banc of America Securities

Thanks for all the detail on the call. That was certainly pretty helpful. I know it's a bit early to comment on 2009, but there’s generally – you’re obviously seeing lower sponge cost, lower spot prices going forward maybe that’s offset by lower pricing in general, can you just talk about how you see that netting out for you guys over the next couple of quarters, do you see that as a net neutral or net positive?

Dawne Hickton

Kuni, as you rightfully know, with the volatility that’s in our world today, it really is too soon to comment on 2009. And frankly I think we would be remiss to do so in light of current condition. Having said that, it’s valid to note that, yes, our sponge pricing has come down and the scraps come down but we are going to experience some lower overall pricing. Having said that, there’s no reason we don’t expect 2009 to be profitable but that’s about all I can say at this point.

Kuni Chen – Banc of America Securities

Okay, but again going back to whether or not that’s a net positive or net negative, you couldn’t comment in general?

Dawne Hickton

At this point, I really can’t comment, Kuni.

Kuni Chen – Banc of America Securities

Okay, that’s fine. I guess, just one follow up question. On the Joint Strike Fighter, I think one of the other service fellows had commented on the build rate for next year somewhere around 30 units, just wanted to get a sense as to what you guys are seeing and whether that’s kind of in line with your view or maybe better than expected.

Dawne Hickton

Well, at this point, we still see the strength in the JSF program and the information we’re getting from Lockheed Martin has not changed. Obviously, today’s an election day, we can’t really comment long-term but when we look at the overall international participation, we still see a lot of strength in that program. I’ll let Mike comment specifically in the short-term, if you have anything to add.

Mike Wellham

Kuni, all information we have is like 30 is a little high, put it between 15 and 20.

Kuni Chen – Banc of America Securities

Okay. Great, I’ll come back in the queue.

Dawne Hickton

Thank you.

Operator

Our next question comes from Luke Folta from Longbow Research. Please go ahead.

Luke Folta – Longbow Research

Hi, good morning guys.

Dawne Hickton

Good morning.

Mike Wellham

Good morning.

Luke Folta – Longbow Research

I wanted to discuss further some of the cost issues that you’re seeing, it seems like both in your fabrication and distribution businesses, it was a (inaudible). Are you able to quantify for us what was the impact from the hurricane was on the fabrication and distribution first?

Dawne Hickton

The total impact is about $0.04 from the hurricane across the board. In terms of the specifics, some of the cost issues, we have a little bit higher SG&A as you look at some of the early ramping up for some of the expansion programs, so we’re going to manage that as we move forward. The other issue you have is that the market slows down pretty quickly and dramatically you have (inaudible) cost absorption. Mike, if you want to comment further?

Mike Wellham

Yes, Luke. In the target group, the big issues for the quarter, particularly when you compare to the second quarter was, you have 420,000 pounds lower volume. The average selling prices were down about 1%. And from an overall cost perspective, it’s just lower absorption and that is going to the P&L statement in the period instead of being absorbed in the inventory as production levels ramp down to meet market demand.

Luke Folta – Longbow Research

And you said overall you are going to profitable for – is that for each of your businesses or are you expecting a segment generating profit in distribution as well as the other segments?

Dawne Hickton

We expect to be overall profitable, but at this time, we gave you the total operating income for the year-over-year.

Luke Folta – Longbow Research

Okay, thanks. I'll get back.

Operator

Our next question comes from Edward Marshall from Sidoti & Company. Please go ahead.

Edward Marshall – Sidoti & Company

Good morning everyone.

Dawne Hickton

Good morning.

Mike Wellham

Good morning.

Edward Marshall – Sidoti & Company

My first question is the push out of the CapEx and what that means to the revenue on the contracts, that are associated with those contracts, will that get pushed out as well?

Dawne Hickton

It will have no impact.

Edward Marshall – Sidoti & Company

You already have any additional capacity?

Dawne Hickton

We did and what we’re really mashing at is looking at the current demand trends globally and when we will need this additional capacity. If the world remains where it was when we first made those decisions, we were going to need this additional capacity by early 2010 and we’re struggling to get ourselves there. With what we’re seeing in the current economic conditions and the pushout of the 787, we’ll see those demand drivers reach out a little bit so we have enough current capacity to manage all of our contract business right now and then some.

Edward Marshall – Sidoti & Company

Excellent, that’s good news. And then the strip out of the cost in the system that you were discussing, is it possible that you can quantify that and what lines – we are talking somewhat of the cost of goods obviously with the sponge coming down, but as far as SG&A as well, is there any quantification that you can give me as far prices coming out or cost coming out of the system?

Dawne Hickton

Not as this point, but I can reassure you that we’re looking at every segment in every department across the board as we manage through this what we hope to be a short-term downturn, but we’re preparing in the event it’s longer.

Edward Marshall – Sidoti & Company

Okay, thank you guys very much.

Dawne Hickton

Thanks, Ed.

Operator

Our next question comes from Chris Olin from Cleveland Research. Please go ahead.

Chris Olin – Cleveland Research

Good morning.

Dawne Hickton

Good morning, Chris.

Chris Olin – Cleveland Research

I guess I’m surprised that your sponge contracts are only looking down 8% to 10%. I mean if you looked at all the spot prices out there in terms of an ingot and scrap and everything’s just collateral, how was it that you weren’t able to get a better contract just for next year?

Dawne Hickton

Well Chris, that’s the negotiations that took place and that’s the pricing we’ve announced.

Chris Olin – Cleveland Research

Wouldn’t you have a leverage on your side? Were there other factors involved that I guess I’m not seeing there.

Mike Wellham

Chris, this is Mike. You have to remember that most of these sponge contracts were renewed in the last upmarket, so just because the spot market is moving around on scrap, doesn’t necessarily mean that the primary sponge producers that are making the quality sponge that we need don’t have any leverage in the discussion.

Chris Olin – Cleveland Research

Okay. Second question I just want to talk about a little bit in terms of your contract rollovers, I'm just wondering if you could help us in terms of your mill business, how much of the mill volumes will be re-priced in January and you have any cost on how low those contracts would go given where the spot is going on ingot?

Mike Wellham

This is Mike again Chris. In round numbers, about 30% of the volume is tied to some type of escalation, de-escalation formula on an annual basis. And depending on the specific contracts, those adjustments could range from 0% up to 9% on a contract by contract basis.

Chris Olin – Cleveland Research

I'm sorry, 0% to up 9%?

Mike Wellham

0% to down 9%. 0% to 9% adjustment.

Chris Olin – Cleveland Research

Okay. Thank you.

Operator

Our next question comes from Nick Capuano from Imperial Capital. Please go ahead.

Nick Capuano – Imperial Capital

Hey guys. Question on CapEx for you. For 2009, you mentioned the pushout of $100 million in CapEx from 2009 to 2010. Where do you think that will lead you just given maintenance CapEx and any other projects you have going on? Where do you think that will lead you for just absolute CapEx spending for 2009?

Dawne Hickton

Yes, Nick. It’s really too soon to say in terms of where we see 2009 for that number with precision, but we’re looking at approximately a $200 million spend on CapEx next year. Now that will include what is our traditional maintenance CapEx that'll probably be somewhere between $40 million and $50 million, and the balance will still be for the capital expansion projects.

Nick Capuano – Imperial Capital

Right. So, that's $200 million after the pushout?

Dawne Hickton

After the push out. We would’ve seen a much higher spend next year on the CapEx. Right now, we’re seeing that closer to about maybe $140 million to $150 million on the CapEx projects.

Nick Capuano – Imperial Capital

Okay, great. With the Boeing strike history now, I don’t know if you can qualitatively speak to the impact that's adding and your work with them and the cycle that you’re looking at for the 787.

Dawne Hickton

Yes. I'll let Mike give you some more specific direction, but suffice it to say that in terms of what we’re doing on the fabrication side and preparing for the ramp up of the production for them, there’s really been no change to the schedule they gave to us after the announcement – the first delay back in the first half of the year. The strike has not had an impact directly. There’s only been the nominal impact that continue to provide softness in the spot market for the Ti Group side. But Mike, you want to comment further in any discussions you've had?

Mike Wellham

Dawne, first of all, we continue to produce 787-related parts at the same rate and based on the same schedule that we received from our customer base four to five months ago. We’ve seen no impact on that to date and don’t really expect to see any substantial impact because the majority of the parts that we’re producing are being produced to a cutover of new design at the point in time, not necessarily tied to a specific number of aircrafts.

Nick Capuano – Imperial Capital

Alright, thank you guys.

Dawne Hickton

Great. Thanks.

Operator

Our next question comes from Brian Jacobs from Muhlenkamp. Please go ahead.

Brian Jacobs – Muhlenkamp

Hi, good morning.

Dawne Hickton

Hi, Brian.

Brian Jacobs – Muhlenkamp

I'm calling just – the last time I talked with you guys, you were 15 million pounds or you estimated that there were 15 million pounds of excess inventory – mill product inventory in the supply chain. Is that still there?

Mike Wellham

Well, like we said, there were two things we said in the last call. We gave a range of 10 million to 20 million pounds of 787 related inventory that was in the supply chain at the time of the delay. We also indicated that because of the delay and because Boeing has said that they were going to take delivery of mill product already on order, that inventory would also be going into supply chain. So if you put those two items together, that number could be somewhere around 25 million to 30 million pounds between now and mid-part of next year.

Brian Jacobs – Muhlenkamp

Okay. And how is the – do you have any indication from Boeing about the pace of the ramp?

Mike Wellham

We continue on the same schedule they gave us which we – on the parts that we produce. At the tail end of ’09, we will be producing depending on part around two to three shifts every month.

Brian Jacobs – Muhlenkamp

Okay. And the last question is what’s your read on the (inaudible) and what they’re ramping up to?

Dawne Hickton

I’m not sure. I know what you mean with respect to what they’re ramping up to. They have announced along with the rest of the titanium producers in the last couple of years, they did announce some additional capacity expansion. And to the best of our information, those capacity expansions have been progressing on the track that they have been along. We see no announcement one way or the other.

Brian Jacobs – Muhlenkamp

Okay. Is that your read on the market or because I think it was somewhere near $1.5 billion in terms of what they were – at least what I've seen. I've seen varying reports, but $1.5 billion they were throwing into sponge mill products expansion. Is that accurate or am I off?

Dawne Hickton

I don’t know where you’re getting your numbers. We know that they have made announcements that they too are making some efforts or taking a stab at changing the value streams. Certainly, we would echo you that necessarily getting accurate information from that source isn't always forthcoming. What we really focus on, however, on our capacity expansion is tracking our requirements against firm contracted business and that’s really what we’re focusing on when we look at the delays we've put in place to really meet current trends, overall global demand, and matching our contract demand.

Brian Jacobs – Muhlenkamp

So you are actually denying business now at low spot prices in order to shift the mix towards contracted?

Dawne Hickton

We are prudent in our commercial approach to taking business.

Mike Wellham

Hey Brian, you need to get back in the queue.

Brian Jacobs – Muhlenkamp

Yes.

Operator

Our next question comes from Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna – Cowen and Company

Thanks guys. Mike, just a follow up on what you said 30% of volume tied to escalators, de-escalators, with the range of 0% to 9%. So does that mean worst case ASPs should drop 3% next year and if you got the third year metallics down 8% to 9%, it's actually a margin plus assuming the utilization doesn’t drop further?

Mike Wellham

Yes. Gautam, I think I want to stick with what I said. I mean there’s a whole mix of contracts in that 0% to 9% down number and I am just going to leave it at that for this call.

Gautam Khanna – Cowen and Company

Fair enough. But I guess, speaking of the gross, could you give us the gross margins on the SG&A margin at Ti Group? At some point, when we have the chance to look at us, but also just when you think about in the EBIT margins growing sequentially, you mentioned kind of the issue with overhead absorption as we take down utilization, that's been in anticipation of weaker Q4 shipments. In Q4, should we be ramping back up because you just start to deliver more in Q1 because of the annual commitments you have with Airbus and the other guys to change [ph]. It that is, so you actually could see a pick up in the fourth quarter?

Mike Wellham

No. I think as we said on the last conference call, we expect the absorption or the negative operating leverage to impact the second half for the year. So we would not expect that to have a positive impact on the fourth quarter.

Gautam Khanna – Cowen and Company

Okay, at the Tronox kind of on the verge of the brink here, how bulletproof is your contract with them and is there an opportunity to be terminated if he’s like [ph]?

Dawne Hickton

Well, we have a very good relationship with Tronox and in terms of moving forward as the supplier of our tickle, the titanium tetrachloride requirements when we will ultimately ramp up the production on the sponge facility, we have in place an existing agreement. Now with everybody else and what’s going on in the marketplace, we certainly understand that Tronox as an overall corporation has got some issues they’re managing too. But I’ll remind you that the particular facility that we are working with is their facility in Hamilton, Mississippi which is the flagship facility. And as part of our overall arrangement, we have confidence in our ability to continue to work with Tronox positively into the future as we move forward.

Gautam Khanna – Cowen and Company

Okay. When you talk about the macro deterioration, are you seeing that more on the fab, distribution or titanium side?

Dawne Hickton

Where we’re seeing it and what we’ve seen, as we pointed in the first half of the year, is really that sort of the global impact that the titanium industry has softened demands in the near term and that really impacts the Ti Group with the mill products and also impacts on a macro basis the Distribution Group.

Our fabrication business, that’s what we’ve embarked upon long-term strategically to weather some of this. We’re seeing a tremendous amount of interest there and certainly as the 787 Program starts to ramp up in meeting the deliveries that Mike referred to, we’re going to continue to see the growth in the Fab Group.

In addition, I think, as I mentioned in my remarks, we have a lot of interest with our global customers for precisely what we’re doing as part of the supply chain approach to add value products to their sourcing. And so, from a macro standpoint, while it may not be ramping up as quickly as we’d all like it to because of current economic conditions, we still see strength in the Fabrication side of the business.

Gautam Khanna – Cowen and Company

Lastly and I’ll get back in, at RTI Energy, are you seeing sort of any push out or delay of projects because of the declining price of oil or when you look at your customers, are any of these guys sort of on the lower-end of the marginal cost curve within the industry?

Dawne Hickton

No, and I’m glad you asked that question because I hesitated when you jumped into it. I mean, fab energy is part of fabrication and that in addition to the aerospace fab side and the defense fabrication opportunities, that’s another area where the opportunities exist and there’s a lot of strength. We’re not seeing any short-term impact because again, when you look at that industry, you’re really looking at long-term decision-making that’s not going to fluctuate kind of by short-term oil pricing. You’re still long-term as global demand and interest in new energy sources.

Mike Wellham

Gautam, you had a question, let me just give you the answer. Our gross profit for the Ti Group for this three months ended is $18.5 million and for the nine months ended is $76.1 and the SG&A expanse in dollars that was applied to the Ti Group is $6.1 million per a three months ended and $15.9 million for the nine months ended.

Gautam Khanna – Cowen and Company

It was a big pickup. Is there a specific reason in SG&A sequentially on absolute terms?

Mike Wellham

It’s just the allocation of the overall SG&A expense.

Gautam Khanna – Cowen and Company

Fair enough. I’ll get back in the queue. Thank you again.

Operator

Our next question comes from David Campbell from Owl Creek. Go ahead.

David Campbell – Owl Creek

Thank you. Do you know how much the (inaudible) for the balance of the expansion programs that you have announced. How much is there in (inaudible)?

Dawne Hickton

It’s really too soon to say that but based upon what we’ve been again estimating, you’re talking about the two programs with the total CapEx of about $400 million and we’re looking at about $150 million of that will be next year, the balance of that will end up in 2010, which is probably about another $150 million.

David Campbell – Owl Creek

Okay.

Dawne Hickton

Upwards of $175 million.

David Campbell – Owl Creek

Can you tell about how you’re going to make sure your current plans for financing that?

Dawne Hickton

We have that in place. You may recall that right before the kind of the credit crisis occurred and the whole liquidity crisis, we actually had gone out and refinanced our credit facility so we have in place $425 million of availability, of which $225 million of that is a term loan that is currently on the balance sheet right now. And then we also have another $200 million in revolver availability and free cash flow. Our cash at the end of the quarter right now is $290 million.

David Campbell – Owl Creek

Got it. Okay.

Dawne Hickton

So, that will handle the capacity expansion along with some free cash flow that we expect to generate.

David Campbell – Owl Creek

Okay. And can you remind me how much the fabricating capacity increases as a result of – just using kind of the current run rate as a benchmark, are you doubling the fabricating capacity (inaudible) through this expansion?

Dawne Hickton

The expansions that we’re referring to impact our Mill Products side or Ti Group business so what we are doing in this, about 300 million of that goes to the raw material production to support the Mill Products contracts for Airbus and JSF. The other expansion in Virginia is a rolling and forging facility that also supports the mill product requirements for those contracts.

We completed at the beginning of this year, a $43 million expansion for our fabrication facility to support the fabrication businesses and a lot of that was in support of the 787 Program where we actually – we don’t supply the titanium mill products, we do the fabrication on the numerous, there is over 130 products that we are actually fabricating and finishing component parts on the 787 Program as well as work we do with Bell Helicopter, Bombardier, and some other customers.

David Campbell – Owl Creek

Got it. Okay. That’s helpful, thank you.

Dawne Hickton

You’re welcome.

Operator

Our next question comes from Kuni Chen from Banc of America Securities. Please go ahead.

Kuni Chen – Banc of America Securities

Hi guys. I guess, just as a follow up on sponge, can you give us a breakdown as far as the percent decreases for premium versus standard grades?

Mike Wellham

Kuni, this is Mike. We basically buy one grade of sponge to support the Airbus at one price and we basically buy one grade of sponge from Osaka to support all of our production activities. So, we don’t have the difference between the entries [ph] of the sponge we’re procuring under those contracts.

Kuni Chen – Banc of America Securities

I guess, just in general though, what have you heard from the market as far as standard grades?

Mike Wellham

Well, if someone like Osaka was purchasing it, I would expect a decrease year-to-year to being in the similar range because obviously the starting point from ‘08 was lower than the premium sponge.

Kuni Chen – Banc of America Securities

Right. Okay. And just on the contract side of the equation, I've heard some scuttlebutt in the trade that some folks out there maybe looking to renegotiate contracts. Has that had any impact on you at all? Got any discussions there?

Dawne Hickton

You haven’t heard that scuttlebutt from us and it’s had no impact on us.

Kuni Chen – Banc of America Securities

Okay. Great. Thanks a lot.

Operator

Our next question comes from Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna – Cowen and Company

Hi, guys, I just wanted to be clear on some things. The next year's sponge cost, will that basically approximate the price you were paying in 2007 for those stocks?

Mike Wellham

Yes. It will relatively (inaudible).

Gautam Khanna – Cowen and Company

Okay. Also in Dawne’s comments, it sounded like you were hitting strongly at a near-term fab acquisition, could you give us a sense for size and sort of what kind of bogey do you have in place aside for cash free deployments for M&A.

Dawne Hickton

We don’t have any particular bogey and we don’t have any particular set aside. We continue to look and certainly, right now in the market place, depending upon what happens as we watch the marketplace, we think there maybe some opportunities going forward and any potential acquisition for us, and we’ve mentioned this before, certainly opportunities be there in the energy side or the general fab side, if there are opportunities that will continue to support what we have already started with some of the work we're doing for instance on the Dreamliner and with other customers to support, really the customer’s interest and their needs also.

Gautam Khanna – Cowen and Company

Where do see a hole? Could you give us some sense of where could you look – that's sort of a generic statement – but where do you think you have the real need to bridge the capability gap?

Dawne Hickton

I wouldn’t say we need to bridge a capability gap per se but certainly we would want to enhance some of the areas where we are already active. For instance, if somebody could bring us some opportunities with perhaps newer customers that we don’t already have strong relationships further up the supply chain, or areas where there may be certain technology or machining applications that may be are slightly beyond our expertise currently at our clear [ph] locations.

Gautam Khanna – Cowen and Company

Why don't we talk about CapEx, of the $300 million to $400 million, what is sort of stunk [ph], you are contractually obligated to spend?

Dawne Hickton

That is not a number at this point that we’ve made public. As I’m thinking out loud, certainly we spent – Bill, you want to comment on what we’ve actually spent to date?

Bill Strome

Yes, we’ve actually spent close to $60 million.

Gautam Khanna – Cowen and Company

Of the $300 million to $400 million?

Dawne Hickton

Of the $400 million total, we’ve actually spent – spend has been about $60 million. There's an additional sum of course that is secured with some of the long lead time equipment. But at this point, I’m hesitating to put a firm number on that.

Gautam Khanna – Cowen and Company

Okay. In terms of your cash balances, you mentioned you’ve invested in low risk securities; do you have any sort tied up in auction rate or other few liquid instruments right now?

Dawne Hickton

No, but I’ll let you – Bill Strome, you want to comment?

Bill Strome

All of our cash is invested in 287 money market bonds and all those amounts are guaranteed against (inaudible) December, so now no constraints.

Gautam Khanna – Cowen and Company

Okay. And lastly, have you guys given any sort of indication, when look at your contract mix, it looks as though at least from the outside, you're healthy A mix at the Ti Group as a percentage of total shipments shipped should rise next year as JSF ramps up? F-22 is flat. DAE is flat. Airbus is flat but you've got the JSF working for you. Is there expectation – does it generally have sort of a recurring amount of spot business with – it is not contracted (inaudible) where you know they’re good for X million pounds a year, could give us a sense for, in '09, what the (inaudible) will be as a percentage of volume at Ti Group and how that compares to '08 please?

Dawne Hickton

Right now, your accurate in the sense that when we speak to our long-term contracted business, a portion of that includes obviously the Airbus and the JSF LTA, but it also includes things like the F-22 program, DAE, and some other contracts that perhaps aren't ten years in length, but are three years and it also includes some annual renewals where we’ve had continued annual business going back for decades. At this point, again, it’s too soon to give you specific guidance on 2009 but I would anticipate that the percentage that you’ve seen in terms of LTA to spot, real spot, isn’t going to change much unless we start see a pick up in the spot market next year.

Operator

Our next question comes from Steven Corn [ph] from Arch Capital [ph]. Please go ahead.

Steven Corn – Arch Capital

Hi Dawne. Just a quick question. I saw the push out in CapEx; it’s the perfect cash management, but the fact is we’re (inaudible) believe you are going to have the delivery on the long-term contracts and what I’m ultimately getting at is given that – by extending that money, you're going to be producing somewhere in the high 20 million pounds a year and which is going to give you a certain volume (inaudible) going forward and that ultimately could be valued on the ultimate equity price that you're looking at today and I just want to explore a little bit as to how you think about doing acquisitions versus even doing 10% buy back that will cost, in my mind, not that much money given the availability that you have in your revolver?

Dawne Hickton

Well, a couple of comments. As I pointed out, certainly if you look at this on a pure short-term basis, you've got a value issue there. You also have an issue where we've got – overall, you're looking at the market and the ability to have cash and to be liquid. We also have firm contracts in place. These are take-or-pay agreements and these are 50-year customers. We know what the trends are. We know what the build rates are. Even with some of the push outs, you're still looking at a ramp up that occurs in 2011 and 2012 with both Airbus and the JSF where we have significant volume requirements that we need to meet. And we need to make sure long term that we can meet those requirements on those contracts. That's what we're focused on.

In the short term, if there was an opportunity that was a small bolt-on, we would analyze that against cash requirements and against any value that could add long-term that could bring us – that could grow our cash as opposed to something that's a short-term value that could ultimately get us later on question our cash availability. I don't want to beat with it. We're very comfortable with where we're sitting today with our cash position.

Male Analyst

Understood. But the point is, the market is not valuing these long-term contracts appropriately given where your stock price is today and why not take advantage of that at least by buying back some of your (inaudible) tremendous value with the (inaudible)?

Dawne Hickton

Well, those are discussions that we have had at the executive level and at the Board of Directors' level, and you heard what I had to say as of right now and today. They're not things we don't continue to look at however.

Operator

Our next question comes from Frank Havlick [ph] from AMM [ph]. Please go ahead.

Frank Havlick – AMM

Yes. Just to go over it again, what will be the impact on you of the end to the Boeing strike?

Mike Wellham

Frank, this is Mike. That strike – we don't supply mill products directly to Boeing. So we don't do direct business with them; it's really the 787 and because of the length of the strike and where that program is and its ramp up profile, we don't think it will have any impact on us. They have not changed their schedules with us in the last four to five months.

Frank Havlick – AMM

Now, one more question. Where do you see the prices of bulk weldable scrap now?

Mike Wellham

$3 to $3.50 a pound. On (inaudible).

Frank Havlick – AMM

How does that compare with last quarter?

Mike Wellham

It's down about $0.50 to $0.75.

Frank Havlick – AMM

Do you still see it declining from here?

Mike Wellham

Yes, it will possibly to go down a little bit more. It really depends on if anyone's going to jump back into the marketplace and start buying it.

Frank Havlick – AMM

Not very much demand, I guess, right?

Mike Wellham

Very low activity overall in the scrap market.

Frank Havlick – AMM

Right. Thank you, Mike.

Mike Wellham

You're welcome.

Operator

(Operator instructions) Our next question comes from Brian Jacobs from Muhlenkamp. Please go ahead.

Brian Jacobs – Muhlenkamp

I guess I want to get something straight. You're still shipping and (inaudible) to Boeing?

Dawne Hickton

You know, Brian, your phone's breaking up. I didn't – you asked if we're still shipping something to Boeing?

Brian Jacobs – Muhlenkamp

You're shipping and billing, so reflected in this quarter's revenues are shipments to Boeing or Boeing suppliers for the titanium (inaudible) 787, is that correct?

Mike Wellham

That's correct, at a very low rate.

Brian Jacobs – Muhlenkamp

Okay. All right. Well, that makes a lot more sense. Thank you guys very much. Glad you're back in Pittsburgh.

Dawne Hickton

Thanks.

Operator

The next question comes from Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna – Cowen and Company

Thank you guys. I appreciate you enduring all these questions. I wanted to ask Mike as a follow-up to your comment that by mid-summer, we could ask as much as 25 million or 30 million (inaudible) Boeing. How long in your opinion does that – will it take to destock that amount of titanium? Second question is really, how long are we going to see spot prices slide? Should we just think of it as a one for one as long as (inaudible) these stocks?

Mike Wellham

Again, I'll go back directly to what I said last quarter. For the inventory that's in the supply base, it is not in the control of Boeing which is the volume that would have been there when they delayed the program. Some of that's going to get held on to use on 787. In my opinion, some of it will make its way into other applications because I just don't see people holding on to that level of inventory for that length of time. The mill product shipments that Boeing is honoring with their contract partners is going into Boeing inventory and will be used on various Boeing programs. So if I look at all that, I think that issue's going to be around probably through the first quarter, first half of 2010.

Gautam Khanna – Cowen and Company

Okay. Fair enough. And also when you mentioned the escalators again and how you priced some of your LTAs, could you remind us again of some of the mechanisms you use, some of the indices you use to link pricing? I know in conference calls past, you mentioned energy indices, the Bureau of Labor statistic graph, etc., just if you could just talk through in a high level, which types of indices you're using and how they may be different from some of the ones used by your competitors.

Mike Wellham

Variety of different indices that we use, some of them are as simple as using a Bureau of Labor statistics indices that drive the change and when the price of others get more complicated, we look at the input cost and weight those changes based on various indices. So it's really a multitude of indices that we use.

Gautam Khanna – Cowen and Company

Is there some commonality among the aerospace platform LTAs that you have? The titanium scrap or other non-ferrous metal?

Mike Wellham

We don't have a lot of indices that are tied to the movement in scrap and ingot prices.

Gautam Khanna – Cowen and Company

Thank you.

Operator

We have no further questions at this time.

Dawne Hickton

Okay. Thank you everybody. We appreciate your joining us today and I do want to just comment that we will continue to manage through the short-term economic conditions as we see them and we'll continue to manage and secure with our long-term strategic plans. We're going to be working hard to execute on the plan to become the supplier of choice for high-end titanium products and as well as becoming a premier fully-integrated producer of value-added strategic materials in the world. And we look at our position and believe we are well positioned to support our customers' demands long term. Thank you.

Mike Wellham

Thank you, operator.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. A replay of this call will be available in one hour and remain until November 11, 2008, using playback numbers 888-843-8996 for USA and Canada, or international at 630-652-3044 and your pass code of 23015206. This concludes today's call. Thank you for participating. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: RTI International Metals, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts