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RTI International Metals (NYSE:RTI)

Q4 2012 Earnings Call

February 06, 2013 10:00 am ET

Executives

Richard E. Leone - Director of Investor Relations

Dawne S. Hickton - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

William T. Hull - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

James L. McCarley - Executive Vice President of Operations

Analysts

Kuni M. Chen - CRT Capital Group LLC, Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Arun S. Viswanathan - Longbow Research LLC

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Avinash Kant - D.A. Davidson & Co., Research Division

Christopher Brown - BofA Merrill Lynch Petrie Divestiture Advisors

Christopher Brown

Jonathan Sullivan - Citigroup Inc, Research Division

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Christopher David Olin - Cleveland Research Company

Frank Haflich

Operator

Welcome to the RTI 2012 Annual Results Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Richard Leone. Mr. Leone, you may begin.

Richard E. Leone

Thank you, John, and good morning, everyone. Joining me today are Dawne Hickton, Vice Chair, President and Chief Executive Officer of RTI; Jim McCarley, Chief Operations Officer; Bill Hull, Chief Financial Officer; and Bill Strome, Senior Vice President of Finance and Administration.

As always, elements in this presentation are forward-looking and based on our best view of the business as we see it today. Please refer to our detailed disclaimers included in today's press release.

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

Dawne S. Hickton

Thanks, Rich. And before I talk about RTI, let me just take a moment for those of you that have followed us for a long time to join me in offering our congratulations to Rich Leone, who is going to be retiring. This is his last call for us. He has been our Director of Investor Relations for quite some time, and we wish him the best in this last call and as he moves on to greener pastures. So, thanks, Rich, and good luck in your retirement.

Richard E. Leone

Thank you.

Dawne S. Hickton

Okay. So thank you all for joining us today. So let me turn to RTI. As is our usual practice, I'll open with some financial and operational highlights for the fourth quarter as well as for the full year 2012. Them I'm going to turn it over to Bill Hull, and he will provide the segment financial details. When he is done, Bill will turn it back to me, and I'll talk about our outlook for 2013 and give specific guidance for how we see this full year heading forward.

2012 was a good year for RTI with many accomplishments. From a strategic point of view, the past 12 months continued to validate our business model in the direction we've set for RTI with our long-term strategic plan. Our efforts to become an integrated global provider of advanced titanium products is paying off, especially as we realized positive financial contributions across all of our end markets.

Let me give you some highlights. Our full year revenues of $738.6 million set a record. But what's most important is the mix of our revenue. It completes the RTI going-forward story because the full year revenues are a mix from our Titanium Group and moving forward through our Fabrication Group. Almost half of that revenue came from fabrication, and the balance demonstrates our continuing emergence as an integrated company that meets the customers' needs for advanced titanium products across the entire supply chain.

We also had growing earnings for 2012. Our full year operating income of $55 million was up almost 100% over 2011, with the Fabrication Group, for the first time in several years, delivering profitable performance for the full year. Much of the improvement in the Fabrication Group came from improved operations within our forming business, both the existing operations as well as our Advanced Forming acquisition, also the successful integration of Remmele Engineering and Remmele Medical, and finally, strong growth from our energy market customers.

I'd like to point out that the Remmele acquisition was RTI's largest acquisition ever and it adds important collaborative engineering, precision machining and robotic manufacturing capabilities and scale to the RTI portfolio. It also diversified us into the fast-growing market for medical device components, as well as enhanced our program management and the integration capabilities in our aerospace and defense businesses.

Last year also saw the commercial startup of our $145 million titanium forging and hot grinding facility in Martinsville, Virginia. This highly automated plant adds new productivity and capacity to our Titanium Group to meet growing demand in commercial aerospace. Moving forward we anticipate Martinsville to be a significant supplier to strategic customers like Airbus at their new assembly facility in Mobile, Alabama.

Our energy customers also made positive contribution to diversification in 2012. In fact, the pickup in demand for our subsea oil and gas expertise and engineered components drove record revenues and profitability from this important end market. And 2012 also saw RTI complete early contract negotiations with our union at our plant in Niles, Ohio, and that agreement, which runs through 2018, includes favorable terms for both parties that allows RTI to focus on reducing costs, improving productivity in a stable labor market.

About a year ago on this very call, I described 2011 as a turning-point year for RTI in our ongoing transformation. Last year, that transformation reached the point where management recognized the need to update our organizational structure to best align our resources to support continuing growth. And so this morning, we announced the new organization for our company. We streamlined RTI from 3 operating groups -- Titanium, Distribution and Fabrication Groups -- into 2 business segments. We have combined our Titanium and Distribution Groups into the Titanium Segment, and we have created a new Engineered Products and Services Segment to replace our Fabrication Group.

This new structure will allow RTI to better communicate our entire offering of products and services to our customers. It positions management to maximize our engineering expertise, manufacturing capacity and production capabilities as we take titanium further down the supply chain.

And for those who follow RTI in a regular basis, probably the most visible aspect of the new organization will be how we report financial results. Getting with our first quarter report for 2013, RTI will report aggregate results as usual, along with specifics for its new -- it's 2 newly structured business segments, Titanium and Engineered Products and Services.

Now before moving to other financial and operational highlights for RTI's fourth quarter and full year, I also think it's important to note that our performance for 2012 by the managers and employees of this company was accomplished in the context of considerable business uncertainty. As we all know, issues such as the direction of the U.S. fiscal and monetary policy, debt and deficit and sequestration, the performance of the global economy, whether we were looking at the eurozone or fluctuations in GDP in China, and challenges associated with new aircraft development and other problems that can affect our markets and customers are still there.

The most recent uncertainty with the most potential impact on RTI has been the grounding of the Boeing 787. In that regard, although the investigation into the lithium-ion batteries remains open, RTI's production plan for the 787 has not been changed in any of our businesses. In consultation with our customers at Boeing, including meetings that I attended as recently as last week in Montréal, we have been advised to proceed with our schedule to produce more than 75 ship sets this year, which is an increase of over 30 from 2012.

I'll provide overall guidance and outlook in each of our markets later in the call. But first, let me give some additional highlights for our fourth quarter and full year 2012. For the fourth quarter of 2012, net sales exceeded our expectations, rising almost 40% to $196.4 million year-over-year compared to $141.9 million in 2011. This increase was principally driven by the Fabrication Group's shipment of completed engineered machined components for deepwater application, higher than originally planned seat tracks for the 787 Dreamliner and sales that were anticipated to occur in the first quarter of '23 (sic) ['13] moved into the fourth quarter.

Operating income increased significantly to $17.2 million during the quarter compared to $4.6 million for the prior year. Net income was $7.1 million or $0.23 per diluted share compared to breakeven for the same period last year.

Now for the full year 2012, as I mentioned earlier, net sales rose 40% to a record $738.6 million, and that compared to $529.7 million in 2011. Operating income for the year nearly doubled to $55 million compared to $27.8 million in 2012. And net income almost tripled from (sic) [to] $23.5 million for 2012, or $0.70 (sic) $0.77 per diluted share, versus net income of $6.6 million, or $0.22 per diluted share, for the prior year.

We ended the year with cash of $97.2 million, as well as $230 million of convertible debt that comes due in 2015.

Our backlog increased 16.4% year-over-year from $476 million to $554 million. And Bill will talk about this in more detail, but our mill product shipments exceeded 16 million pounds. That's the second-highest level of production in our history.

Bill?

William T. Hull

Thanks, Dawne. Let me begin with the Titanium Group. For the fourth quarter of 2012, this group posted operating income of $10.3 million on sales of $76.6 million. This includes intersegment sales of $37.1 million. In the same period in 2011, this group had operating income of $6.1 million on sales of $81.1 million, including intersegment sales of $37.3 million.

Gross margin on net sales for the quarter was 41.3%. This compares to 27.2% for the same period last year. The increase in operating income during the quarter was driven primarily by lower scrap input costs and improved operational performance at the Martinsville facility.

Mill product shipments for the fourth quarter were 3.7 million pounds at an average realized price of $19.13 per pound. That compares to 4 million pounds in the fourth quarter of 2011 at an average realized price of $19.11 per pound.

For the fourth quarter of 2012, the Fabrication Group generated operating income of $4.1 million and net sales of $101.3 million. For the same period in 2011, this group had an operating loss of $3.2 million on net sales of $40 million. Gross margin on net sales for the quarter was 16.7% compared to 11.7% for the same period last year.

For the full year, the more than double year-over-year sales increase and transition from an operating loss to an operating profit in 2012 was driven primarily by the acquisition of Remmele Engineering in February of 2012; the full year contribution from RTI Advanced Forming, which was acquired in November of 2011; increased shipments of precision machine titanium components for the Boeing 787 Dreamliner; and a tripling of sales of engineered components for subsea oil and gas drilling operations, primarily in the Gulf of Mexico.

For the fourth quarter of 2012, the Distribution Group reported operating income of $2.8 million on net sales of $55.6 million. The same period in 2011, the group had operating income of $1.7 million on net sales of $58.2 million. Gross margin on net sales for the quarter was 15.3% compared to 14.6% for the same period last year. The group's results reflect increased demand for titanium materials from European customers supporting the Airbus supply chain.

For the full year 2013, we expect our tax rate to be approximately 37.5%. Our interest expense for the year is forecasted at $19.5 million. And finally, for 2012, we contributed $18.1 million to our pension fund.

Dawne?

Dawne S. Hickton

Thanks, Bill. In talking about the outlook for the coming year, the one thing we continue to see is that the largest production ramp in commercial aerospace history does remain intact and on track. As we have discussed in the past, we're in the early stages of this buildup. So as a result, in many ways from a global perspective, we see 2013 as a continuation of some of what we saw in 2012

But despite the current problems with the Boeing 787 battery issue, based on our latest information from our direct contacts at Boeing, we've been instructed to ramp on schedule, and we are expecting to deliver more than 75 seat track ship sets this year versus 44 in 2012.

Now powerful demographic and economic trends continue to drive demand in our medical device markets. And similarly, economic drivers in the oil and gas exploration area are also driving our energy engineered component markets, where we believe we're well positioned for growth. And while uncertainty remains in defense spending, we prepared for contingencies in this sector of our business and don't expect an impact to our 2013 results. But should a worst case scenario materialize, such as full implementation of sequestration, we would expect only modest declines in sales and operating income as a result of that for 2013. We would view that more as an impact going into the future.

In terms of quantitative guidance for the coming year, we expect to see modest growth in both our consolidated sales and our operating income. Sales are currently anticipated to approach and possibly exceed $775 million, with operating income to range between $65 million and $75 million.

Our mill product shipments in the Titanium segment are expected to be about level or perhaps slightly lower than the 16.5 million pounds that we shipped in 2012. And we expect our capital expenditures in the range of $50 million to $60 million. We also expect that our raw material costs should remain flat. However, there could be a slight lowering of those costs as the year moves on.

So in summary, we do see another good, solid year for RTI in 2013. Now at the same time I do want to caution investors that our performance for the year will show some variation on a quarter-to-quarter basis. Specifically, we expect the first half of the year to exhibit lower operating income in the first quarter, dropping potentially below $10 million. As of those of you who have followed us for a long time know, our earnings can tend to be lumpy. And depending upon the mix of the product and associated margins, and certainly, when we look at the first quarter, you've got to take into the fact what's been going on in the economy and concerns during the time we would have ordering for the first quarter, the concerns over the fiscal cliff and other sorts of economic issues.

But in this particular case, while our full year guidance range of $65 million to $75 million would suggest a different number for the first quarter. In addition to some lower margin products that's scheduled in the first quarter, we also had shipments that accelerated in the fourth quarter that would normally have occurred in the first. Thereby, that also had an impact on our first order -- our first quarter, pardon me, operating income forecast.

But we do see strength in the second half of the year, driven by Boeing's ramp, as well as a slight improvements in our raw material costs that I mentioned. And as the year progresses, we're confident that this will drive our full year range that we've given earlier.

And so now at this point, I'm happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Kuni Chen from CRT Capital Group.

Kuni M. Chen - CRT Capital Group LLC, Research Division

I guess, just to start off, on the first quarter guidance, I guess, can you give us a little bit more color on what you're seeing there as far as the volume mix and cost for pricing impacts?

Dawne S. Hickton

Guidance, it's not so much you're going to see a pricing impact. You are going to see a volume mix in terms of the product in the mill. And also as we indicated, it's really more shifting that some of the material we have that would normally would have come in the first quarter ended up getting shipped out in the fourth. So between that blend, we see a slightly more modest first quarter than you would have normally expected here.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay. So kind of sequentially lower volumes?

Dawne S. Hickton

Yes.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay, and then just very quickly, on the fab side of the business. Obviously the seat tracks ramp up in the second half of the year. Can you comment at all on how that may impact margins in the fab group as you look at the second half versus the first half?

Dawne S. Hickton

Well, we definitely see those increasing to the point where assuming this goes forward and you don't have any issues with production, which we're not expecting, I think you could be able to see our operating margins reach that -- meet close to the double digit range.

Operator

Our next question is from Steve Levenson from Stifel.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

It seems like a good idea to focus on the downstream operations that you recently acquired, including Remmele. Could you give us an idea just for forecasting how the intersegment number might look in 2013? Is most of that between Titanium operations and Fab, or was there a portion that went into Distribution that we won't see now?

Dawne S. Hickton

I'm not sure I understand what you're asking. Yes, we've always had -- the Remmele acquisition is all Fabrication. None of that was in Distribution. Maybe that's -- if that's what you're asking, that's the answer.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

That's part of it. I can follow up with Rich after the call. The other thing I would ask is, do you see any G&A savings coming from the restructuring and about how much might you think it would be?

Dawne S. Hickton

We do, but I'm not prepared to comment at this time as to how much. We have continued to bring down our SG&A but for, of course, the acquisitions, obviously, that adjusted it. But in terms of our general overall SG&A, we continue to drive that down, and this restructuring should help bring that down further.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I'll cheat with one more quick one. Do you see opportunities in Fabrication for 3D printing in the future?

Dawne S. Hickton

Well, we certainly are involved in, from a research and development standpoint, with the additive manufacturing in a variety of ways. Near term, I don't see that, but certainly longer term, that's an interesting proposition. And let me just leave it at that.

Operator

Our next question comes from Arun Viswanathan from Longbow Research.

Arun S. Viswanathan - Longbow Research LLC

I guess, I just wanted to see, are you guys experiencing any of the destocking, I guess, that we see in certain areas? Maybe you can talk a little bit about medical and potentially some areas in aerospace?

Dawne S. Hickton

I wouldn't say we're experiencing destocking as much as we are seeing some shortened lead times. But it has not had as much of an impact on us as it may have on others only because of the nature of our long-term agreements. And we work pretty closely with our customers and have a pretty good handle on kind of the management of the forecasting. So that's kind of leveled out in the last couple of years.

Arun S. Viswanathan - Longbow Research LLC

Okay. And I guess the other question I had was what's your outlook? You guys gave us a little bit of an outlook last time on raw materials. Maybe you can parse that a little bit further as far as the bucket how kind of plays out this year.

Dawne S. Hickton

Let me answer it this way: it's not much different than what I've said in the past. We have combination of sponge, scrap, our alloy input on the raw material side for the Titanium segment. We have a combination of a couple of different long-term agreements. We no longer have, at this point, supplied sponge for the Airbus agreement except on an occasional spot basis. And we really do see that our raw material costs are pretty much neutral, although there's potential for some lowering as we get into the second half.

Operator

Moving on, our next question comes from Patrick McCarty from FBR.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

My question is regarding your FY '13 guidance. I just wondered if you could just give me maybe a little bit more granularity. When I look at it, it seems like if you take the $740 million of revenue or so from this year, you add in the incremental from the Remmele not being completed until March and then the incremental from the 787, it seems like you get to your guidance, which to me implies you're looking at relatively 0% growth on the 2012 number, if you will. With backlog up, Martinsville, EB furnace, all that stuff, it seems like that's a little conservative.

Dawne S. Hickton

Well, Patrick, let me put it this way. As we look at going from 2012 to 2013, you're not -- you're only just starting to see the full impact of the Boeing ramp as we get into the second half of the year. So it's really going to be a push to the second half of the year. You've also got -- our Ti Group this year, you're starting to see again back half of the year the impact of us bringing online the EB furnace. So a lot of this is going to be a question of timing. Yes, we see opportunities for Remmele to add to the mix, but at this point, you're really looking at a continuation of a modest ramp and you're really going to hit your stride in the second half of the year.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay. And also just strategically, I was wondering if you can just maybe talk about really what's the next step in the evolution of the company? I mean, is it important for you at this point in time to press the integration or are you looking to try to diversify out into new end markets like you did with Remmele in the medical devices?

Dawne S. Hickton

Good question. A combination. I mean, at the end of the day, we're looking to grow the company and grow the value and continue to focus on the bottom line and what it brings to the shareholders. And what we see in terms of the growth markets, certainly energy right now and medical are some pretty nice growth markets for us. But keep in mind, at the moment they're both less than 10% of the overall business. But I think there's opportunity there, and certainly that's an area we look at. Second, in terms of looking at the ramp on the commercial aerospace side, you still have some programs, whether it's the 787 or the Airbus A350, and we have a big focus on the A350, where there's opportunity on the fabrication side, particularly where we have the expertise in titanium, not only in extruding but in the fabrication and the forming and also in the machining and assembly. So there's a lot of opportunity there, and that's a big strong focus for us in the future.

Operator

Our next question comes from Avinash Kant from D.A. Davidson & Co.

Avinash Kant - D.A. Davidson & Co., Research Division

Quick questions in terms of the numbers. Historically, you have given us some idea about what kind of mill volume did you see from Airbus and on the JSF. Could you give us some idea in terms of these 2 numbers for 2012 and how do you see that in 2013 guidance?

Dawne S. Hickton

Sure, actually we see '12 and '13 looking very similar. In '12, we were right around 2 million pounds on the Joint Strike Fighter. And for '13, we expect it to be right around that same amount, 2 million. And I would tell you that regardless of sequestration, keep in mind that our deal is not with the government. We're supplying to an OEM. We're on long lead time item so that material has been in order. It's in the pipeline, and it's for aircraft that have already got Defense appropriation approval. So we see that as pretty solid. And on the Airbus side, we were a little over 6 million pounds last year, but that included some sort of one-time opportunity that related to one of their other supplies that was unable to supply. So we see this year as being similar, but not sure there's an upside. So it's going to be a little bit less than that 6 million pounds.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And on the Boeing 787, you talked about the 75 planes this year. Could you give us some idea about what run rate did you exit 2012 at and how do you see that ramping throughout the year?

Dawne S. Hickton

Well, at the end of 2012, our run rate was at about 5. We're ramping up to 7 right now. And by the end of the year, we'll be at midway to halfway through the year, we're going to be around 10. We've already shipped through aircraft 100 and 56.

Operator

The next question comes from Chris Brown from Bank of America Merrill Lynch.

Christopher Brown - BofA Merrill Lynch Petrie Divestiture Advisors

Could you walk us through the moving parts in fabrication this quarter? Ship sets were higher, energy demand was better, but profitability fell. So what's sort of going on there?

Dawne S. Hickton

Well, sequentially, recall that in the third quarter, we had some very profitable energy material that we reminded you was going to be kind of a one-shot opportunity at that moment in time. So I think you saw a little bit of that. While we had some pretty good material go-through, from a sequential standpoint, it wasn't quite as profitable as what you saw from the energy side in the third quarter. Yes, I think that's probably about it. We also -- the mix of the mill product you, saw a similar thing, where the year end, kind of the mix of the material we got out in the fourth quarter. I think those are probably the biggest factors.

Christopher Brown

Okay, and then can you update us on any sort of new contract negotiations? You mentioned the fabrication opportunities on the A350. What other opportunities are out there, whether it's jet engine, energy or anything else there?

Dawne S. Hickton

There's actually a lot going on. And in fact, we recently announced our new executive commercial person joining us, Patricia O'Connell, and part of that focus will be on driving a lot of these new opportunities. We can -- there's nothing that I'm prepared to comment on specifically right now, but let me just say that we've got a lot of work going on right now, not only with our traditional aero structure customers but also with some engine opportunities. And we also now have both engine rotor and a non-rotor customer have agreed to qualify our EB furnace this year. So a lot of activity, and certainly as the year goes on as we have things to announce, we will.

Operator

Our next question comes from Jonathan Sullivan from Citi.

Jonathan Sullivan - Citigroup Inc, Research Division

I was wondering, what's behind the guidance for sequential increases in mill shipments throughout the year?

Dawne S. Hickton

Bringing on the EB furnace as we get into the back half of the year and some opportunities we have through that. Jim, you want to comment some additional thoughts on the Titanium Segment?

James L. McCarley

Yes, we've got some material that we'll now be supplying into the Pi-Box program that kicks in, in the second half of the year, really closer to the fourth quarter.

Operator

Our next question comes from Phil Gibbs from KeyBanc Capital.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

I just had a question on the Airbus. The A350 eXtra Wide Body and what sort of visibility do you have there on some of the mill product requirements? I know you talked about gaining some awards in Fab, but what's the talk in that program right now?

Dawne S. Hickton

You mean on the mill side?

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Yes.

Dawne S. Hickton

Well, remember -- I mean, we already have for the A350, we already are the supplier into that program. We are currently under our existing agreement. We are Airbus' North American mill supplier. So we have a market share agreement today, and our material goes on every program. So what we're seeing is as the A350 starts to ramp, because obviously that's a greater user of material, that's why you're seeing the last 2 years you're seeing that poundage starting to increase for us. And we would expect and do have the forecast going forward that you're going to continue to see the mill products for our Airbus contract start to ramp up in the next couple of years as that program ramps. So that's kind of already in place, and that's what I mentioned earlier with the pounds we've shipped the last couple of years.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Yes, that's kind of what I was getting at, so you've already been shipping?

Dawne S. Hickton

Right.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

On this for the eXtra Wide Body?

Dawne S. Hickton

Well, the answer is yes, because our material is across all of their programs. So yes, some of our material will be used for part of the ramp of the A350. We're sort of agnostic to a particular program. It's more our product line is market share across all of their requirements.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Yes. I was just inquiring on that one specifically only because I know it's a big consumer of titanium. And if you really hadn't seen any pull from that, it would be something to look forward to for you guys in '14, '15.

Dawne S. Hickton

Well, we do anticipate. We're going to see the volumes continue to increase. I mean, they've been modestly increasing, but as that program ramps, our expectation is our mill product will ramp. That's why we completed Martinsville this year with a ribbon-cutting with Airbus in attendance. So part of the entire capacity addition in both the Niles facilities, the Ohio facilities and the Martinsville facilities in the last couple of years are to match that ramp, and we're starting to see it. And their forecasts indicate that it will continue to go forward.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

And if I could just ask one more. The Martinsville asset, can you give us an idea of how that ramped through 2012 and maybe how it contributed to the fourth quarter and how you see that unfolding in 2013 and going forward?

William T. Hull

Sure, this is Bill. We talked earlier in the year about how that thing -- how Martinsville is going to roll out and what actually happened was 80% of the ramp costs were incurred in the first half of the year, and then 20% in the second half. And then in the fourth quarter, we had substantial throughput in that plan. So it's a big improvement. I'm not going to quantify it by numbers, by I would tell you that it's even going to better in 2013.

Operator

The Next question is from Chris Olin from Cleveland Research.

Christopher David Olin - Cleveland Research Company

I just have a quick question. You highlighted scrap as driving some of the EBIT. And I was just curious because it doesn't seem like the market prices have moved that much. Is that an inventory situation and how should I think about that in terms of modeling going forward?

William T. Hull

Yes, Chris, this is Bill. The scrap prices are down quite a bit from what we were able to negotiate, so I would view it as a one-time opportunity that we had to take advantage of and particularly to use with the EB furnace. So that had a contribution of around $4 million in the quarter.

Operator

The next question comes from Frank Haflich from AMM.

Frank Haflich

Dawne, could you just go into a little more detail on where you expect to be saving possibly on raw materials this year?

Dawne S. Hickton

Well, in terms of our negotiated agreements and in terms of our current inventory supply demand, we're pretty -- we're looking at kind of a level year-over-year total raw material cost. However, as you get into the second half of the year as we bring in the EB furnace, we're going to have an opportunity to blend using more scrap. And so we see that as adding to some lower overall raw material cost. That's really what's going to be driving us as we get into kind of the tail end of the third quarter and into the fourth quarter.

Frank Haflich

So that would mean you expect scrap prices to remain low throughout the year?

Dawne S. Hickton

I don't know if I'm that good at predicting it, but certainly think we will be opportunistic. And we also have some -- we'll have some positive currency adjustments, we predict, on our contracts also. So both of those together should hopefully look towards some slightly lower raw material costs. And again, we're talking second half of the year.

Operator

Our last question comes from Paulina Sparkes from [indiscernible].

Unknown Analyst

I wanted to ask if you have had any impact on the business from the merger of Precision Castparts and Timet?

Dawne S. Hickton

It's hard to year you, but I think you're asking me about the impact of the recent acquisition of Timet into PCC?

Unknown Analyst

Yes, that's correct.

Dawne S. Hickton

Okay, near-term we haven't seen anything. But certainly longer term, there's going to be pluses and minuses to that. We've already seen some opportunities from circumstances where some competitors to PCC are looking to us as an offset. And certainly we would not expect that as part of their integrated strategy that as PCC goes forward, they're going to want to use more of their own internal sourcing. So certainly longer term, I see that as something that will be a negative to us, but we think it's offset by the positives on the other side. So that's kind of where that sits right now for us.

Richard E. Leone

Thank you for joining us on today's call. The operator will now give you replay information. John, please proceed.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. A replay of this call will be available in an 1.5 hours and remains through February 20, 2013, using playback number (888) 843-7419 for USA/Canada or international at (630) 652-3042, and your passcode of 34069732. Thank you for participating. You may now disconnect.

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