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Executives

Richard E. Leone - Manager, Investor Relations

Dawne S. Hickton - Vice Chairman and Chief Executive Officer

William T. Hull - Chief Financial Officer

Michael C. Wellham - Chief Operating Officer

Analysts

Kuni Chen - Banc of America Securities - Merrill Lynch

Luke Folta - Longbow Research

Edward Marshall - Sidoti & Company

Gautam Khanna - Cowen and Company

Nick Capuano - Imperial Capital

RTI International Metals, Inc. (RTI) Q4 2008 Earnings Call February 3, 2009 11:00 AM ET

Operator

Good morning, ladies and gentlemen. And welcome to the RTI International Metals 2008 Annual Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer. All participants will be permitted one question and one follow-up question for the Q&A. 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. I am Rich Leone, Director of Investor Relations. Today's call will be read by Dawne Hickton, Vice Chairman and Chief Executive Officer of RTI. In addition, Mike Wellham, President and Chief Operating Officer; Bill Hull, Senior Vice President and CFO; and Bill Strome, Senior Vice President of Strategic Planning and Finance will be available along with Dawne for your questions at the conclusion of the 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. I refer you to our detailed disclaimers set out in the press release and our SEC filings.

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

Dawne S. Hickton

Thanks Rich. Good morning, everyone and thanks for joining us on the call. As Rich mentioned I will review RTI's fourth quarter results as well as our 2008 year-end results. And then we'll share some preliminary insights into the industry dynamics and current market conditions for each of our segments.

Let me start by recapping the financial performance for the quarter and the year. I am starting first with the quarter. We recorded net income of $4.1 million or $0.18 per diluted share and that compare to $24.9 million or $1.8 per diluted share in the same period a year ago.

The significant difference in net income is of course a reflection of primarily two key events. One, the impacts of the continued Boeing 787 delays and the unprecedented and dramatic decline in the global economic and business conditions.

Net sales for the quarter were $148.8 million down about 9% as compared to $163.8 million for the comparable quarter last year. Now, for the full year, net income was $56.2 million or $2.44 per diluted share, net sales of $609.9 million. These results compare to net income of $92.6 million or $4 per diluted share on sales of $626.8 million for the previous year.

While sales were down only about 3% the overall income was down 39% again reflecting the impact of the 787 delays directly on our Fabrication Group and the impact of the overall deterioration in short-term titanium market fundamentals which impacted our mill product production.

But despite being one of the most challenging operating environment for everyone in the industry which began and impacted us as early as last April with the first big push out on the Boeing Dreamliner, our operating income for the full year was the third highest in our history, revenues were the second highest, and our operating cash flow was at it's second highest ever in the historically of our company.

This cash flow combined with our third quarter refinancing has enabled us to end the year with a strong balance sheet reflecting $284 million in cash, as well as an undrawn $200 million credit facility. It is important to note, that during 2009, we will only have $1.4 million in loan repayments and those are related to our Canadian borrowings.

Our prudent focus on cash conservation has and will continue to service well until we get clarity into the length and breadth of the current recession. Although we still face near-term challenges throughout 2009, we continue to see strong demand in the next decade for titanium.

This demand for our light product and services recorded by the long-term agreements we've put in place for the future that represent over $5 billion in future revenues under agreements with key customers including companies like Lockheed Martin, Airbus, Boeing, Bombardier and Bell Helicopter.

Three of these agreements including Lockheed Martin stand over ten years and are for the supply of titanium products for future aircraft that are significant users of titanium and provide a solid base of business for our company that will help us weather these current recessionary conditions.

And now we'll look at the operating units and for that I'll turn it over to our Chief Financial Officer, Bill Hull.

William T. Hull

Thanks Dawne. For the Distribution Group, net sales were up 7% from the same period a year ago, while operating income was down 45%, reflecting the rapid overall slowdown in the economy that accelerated toward the end of the year.

Operating income for the fourth quarter was $3.7 million on net sales of $63.6 million versus $6.8 million on net sales of $59.6 million for the same quarter in 2007. For the year, the Distribution Group reported net sales of $261.1 million and operating income of $23.6 million. This compared to net sales of $241.7 million and operating income of $35.1 million for 2007.

I want to note also that pricing for titanium products which were largely contract based were stable. While non-titanium products declined double digits throughout the year primarily as a result of the softening and nickel pricing for super alloys and stainless steel products.

For the Fab Group, the quarterly results reflected direct impact of the Boeing 787 delay announcements. The Group had an operating loss for the fourth quarter of $1.4 million on net sales of $40 million. This compared to an operating loss of $1.1 million on sales of $35.5 million for the fourth quarter last year.

For the year the Fabrication Group reported net sales of $146.8 million and an operating income of $2 million. This compared to net sales of $132 million and operating income of $3.5 million for 2007.

The slower than expected start-up led to lower capacity utilization at our Houston and Montreal facilities. As we said on the last call, we expect this trend to continue for the next couple of quarters. But we should see an improvement in the second half of 2009 based on the latest production schedule updates from Boeing.

For the Titanium Group, sales for the fourth quarter were $70.5 million, including intersegment sales of $25.3 million. Our operating income for the quarter was $3.9 million. This compared to operating income of $33.7 million on sales of $114.1 million including intersegment sales of $45.4 million for the fourth quarter of last year.

For the full year the Titanium Group reported sales of $353.9 million including intersegment sales of $151.9 million. And operating income of $62.6 million. The 2007 results were $434.3 million including intersegment sales of $181.2 million and $102.6 million in the operating income.

Mill product shipments for the year totaled 14.2 million pounds. This was supported primarily by our base long-term contract as this market continued to deteriorate during the year due to the inventory overhang in the market. Mill product shipments for the fourth quarter were 3 million pounds at an average realized price of $22.04.

Titanium Group gross margins were 24.9% on net sales for the fourth quarter as compared to 37.5% on net sales for the third quarter. On a consolidated basis, we had two significant non-recurring items that impacted the fourth quarter.

First, the resolution of a commercial dispute with a customer that resulted in a charge of $1.5 million. In addition, we had a settlement charge of $2 million related to lump sum pension payments made in 2008 for two executives who retired in 2007. Together these items total $3.5 million for the quarter.

Dawne?

Dawne S. Hickton

Thanks Bill. Now I'd like to take a few moments and provide an update on our extension projects and I will start with the Sponge Project in Hamilton, Mississippi. As everyone would recall starting last year we commenced the engineering design and the preliminary environmental permit processing for the building of $300 million premium grade sponge facility.

The decision to built this facility was based primarily this 11 year $1 billion contract expansion with Airbus that is relative to supply materials to support the 14 year $2 billion Lockheed Martin Joint Strike Fighter contract. The ramp up for the Joint Strike Fighter program was expected then even now to commence to higher production levels by 2012.

We see no current changes to that schedule. However, we expected our requirements to support the Airbus demand to be needed as early as 2010 for the expansion contract. Now with the slowdown in the titanium market price and with a lot of inventory in the market, we anticipate that we will have sufficient raw materials through other sources to support our contracts through the end of 2011.

Consequently, we are continuing to monitor our progress on this sponge expansion to match our need as we go forward. We had not set a firm date for completion but as I had indicated on the last call, we don't expect this to occur before sometime in 2011.

So the delay in the sponge that we announced last quarter has a direct impact on pushing out our capital expense. And so for 2009 we expect total CapEx including the expansion projects and maintenance to be approximately $125 million spending level. However, we will watch this carefully during the year and as we did during 2008, we'll align our spending with events that take place in this uncertain marketplace.

In the meantime, we are continuing to explore other market opportunities for our metal and our raw material outsourcing. And depending upon the outcome of these discussions and the market conditions we will balance that with our production requirements and our build schedule.

Before I move on, I would like to note again though that while decisions to take on a major capital project that are never set in stone, it is important to point out why we continue at this time to believe building a sponge plant is still important long-term for RTI. We continue to see very strong long-term demand drivers for titanium in our core commercial aerospace and our defense markets driven primarily by titanium intensive airframe program.

Albeit, these have been pushed at a year or so longer than we had expected last year at this time. But the ability to ramp up sponge production as needed to meet external demands is critical to our customers' requirements. Having said the above, we nonetheless, will continue to review the timing on this project in light of current market trends and the opportunities they may present for alternative strategies.

Now, let me turn to the mill product expansion project. Our company's second major expansion project that's pending is the $100 million melting, rolling and forging facility expansion project, again to support Lockheed and Airbus in our agreements. Due to market conditions, similarly last quarter we announced we were delaying this project by approximately six months. We still expect our Martin's build facility to be operational during the second half of 2010 and early part of 2011 to meet the needs for these long-term agreements.

Now looking to the future, I am convinced that the long-term demand dynamics for titanium are still strong. They're driven largely by a commercial aerospace market that despite the momentary challenges is fundamentally strong. At year-end the total number of large commercial jet aircraft on order for Airbus and Boeing combined to support close to eight years of production at today's rates.

The driver for these aircraft continue to be the future need for aircraft to support growth in Asia, India and the Middle East. And while we all know that the GDP growth has slowed across the world and in particular in Asia and India, the longer term demand still exists albeit at a slower pace.

So while we don't expect to see dramatic pushback on the production schedules neither do we anticipate the accelerated production ramp-ups that were under discussion last year at this time.

Let me start (ph) some orders deferrals or even some additional order cancellations, these all relate to the narrow bodies. For the most part to the extent there had been any deferrals to-date, those orders should stay constant as more profitable airlines have stepped into take earlier deliveries in the schedule.

And I think in addition, the main concern has been the ability of the airlines to obtain financing and the recent announcements by Exim Bank to assist in the financing of Boeing deliveries. And in Europe for the French to support the Airbus deliveries with over €6 billion, I think these concerns have been somewhat minimized.

If all the narrow body orders are to be cancelled, it would only reduce global titanium consumption by about 12%. So again as we look at that this the large driver for future demand is the titanium intense of airplanes for the 787, the A350, the A380 and of course the Joint Strike Fighter for which RTI is well positioned for success.

Regarding 2009 in our guidance with the many uncertainties in the marketplace we're not in a position to provide definitive guidance for the full year. What we do note today is that our current backlog and our contracted business gives us clear visibility to approximately 10 million pounds of titanium mill products for the Ti Group. Whether any additional business is booked for '09 remains to be seen as we move throughout the year.

We anticipate our average realized pricing is going to be down about 10% to 15% depending upon the product mix which as I have noted in the past reflects a long-term nature of our contract with Airbus and also some reduced pricing on our LTAs that's tied to our annual indices.

And as we previously reported our sponge costs will be down from 2008 levels by about 9%.

And finally, our operating income for 2009 will be negatively impacted by our investments in the infrastructure (ph) as we position the company to support the ramp-up long-term, of the Boeing program and the Airbus and JSF contracts.

Now, having said the above we did embark upon a costs reduction program starting in the fourth quarter that will carry over into 2009. This cost reduction program includes the elimination of almost all overtime, the reduction of our processing expenses and the elimination of outside consulting expenses as appropriate.

We also put an hiring freeze as well a wage freeze for all of our salaried worked force and that starts with the executive team also, for 2009. And we have significantly reduced all discretionary spending.

We will continue to balance the near-term cost cutting measures and against longer-term strategic growth opportunities for our company. This includes the growth in our new innovation and technology departments as well as our strong commercial focus as we work with our customers on many new value added opportunities.

Even in this down market, the opportunities for us to participate in the supply chain as a fabricator of parts for new programs, such as the JSF and A350 still exists for us. And they support our strategic plan long-term to become an integrated supplier of titanium and other specialty metals parts and components.

Now in closing, let me comment on some cash spending items. As I mentioned earlier, with respect to our capital expenditures, we expect to spend about $125 million in 2009 of which approximately $75 million of that will be related to the expansion and the remaining $50 million will be for the normal maintenance capital and other strategic investments.

And then the final note on cash expenditure, in '08 we made a cash contribution of approximately $4.9 million into our pension plan. With the declines we've all seen in the stock market values and we've seen in our pension values, we expect to make a cash contribution of $20 million in '09 to remain within our required funding levels.

And with that I am now happy to take any question. And we'll take your questions on the call. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Kuni Chen from BOA Securities - Merrill Lynch. Please go ahead.

Kuni Chen - Banc of America Securities - Merrill Lynch

Hi, good day, everybody.

Dawne Hickton

Hi, Kuni.

William Hull

Good morning, Kuni.

Kuni Chen - Banc of America Securities - Merrill Lynch

How's everyone? I guess just first off on pricing, your comments sort of alluded to down 10% to 15% in '09. Can you talk about some of the sensitivities that drive that obviously we're not going to see a lot of spot sales this year or so.

If you could just talk about how you expect contract prices to potentially move throughout the year. Is there any lumpiness to that, is there kind of a big step down in the first quarter than sort of flattens out for the rest of the year, if you can just give us some color on that? Thanks.

Dawne Hickton

Well, I think you are going to see it's pretty much flattened out throughout the year. But yes, starting with step down in the first quarter when you look at again '08. Having said that, primarily you are looking at the fact that we're looking at today is a very significantly high percentage of our business being contract business as opposed to spot.

And also recognizing that based upon current market conditions, those LTAs that come up for annual renewal are having some lower pricing across the indices. Mike, I don't know if you want to add any more color?

Michael Wellham

Yes, Kuni on the agreement business that comes a larger percentage of the total, that's the part of the answer. The second part is on the annual renewable LTAs tied to escalation, de-escalation formulas. We expect those to be down about 5% on average within the contracts themselves as range anywhere from zero to up to 13% while on average about 5%.

And there is some limited impact due to the spot market but as you said that, that's minimal compared to the other two issues.

Kuni Chen - Banc of America Securities - Merrill Lynch

I guess, can you just help us sort of understand what the sequential change might look like?

Michael Wellham

Versus the fourth quarter?

Kuni Chen - Banc of America Securities - Merrill Lynch

Correct.

Michael Wellham

No, I think we'll just stick to the overall year-to-year number we gave you 10% to 15%.

Kuni Chen - Banc of America Securities - Merrill Lynch

Okay. And as a quick follow-up on the Ti Group margins I guess are some of the one-time items mentions sort of embedded in that margin number and can you kind of talk about the net impact of sort of lower capacity utilization and that drives your cost up versus may be realizing some cost benefit as raw materials and scrap have come down and if you could just discuss how those two net out over the next couple of quarters?

Dawne Hickton

The one non-recurring item was... had an impact across the board, the others related just in the Fab Group. So that had a negative impact on our Fab margin. In terms of, across the board I'm going to let Bill Hull kind of follow-up on that as he sees that.

William Hull

Yes, the capacity utilization that we're talking about is just a fact that we incurred overhead cost to ramp up for the 787 production. And those delays have been pushed back and what that's caused us to do is we've adjusted where we can and we still have that overhead that we have to contain with until that capacity picks up.

Michael Wellham

Kuni, this is Mike. One other thing I think discussed in last quarter but when you look at the decline in average selling prices and also the decline in raw material cost, on average the decline in the selling prices is greater than the raw material cost declines. So net, net that's going to be a negative for us in 2009 versus 2008.

Kuni Chen - Banc of America Securities - Merrill Lynch

Okay. Got you, I will turn it over.

Dawne Hickton

Okay, great, thanks.

Operator

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

Luke Folta - Longbow Research

Good morning.

Dawne Hickton

Hi, Luke.

William Hull

Good morning.

Michael Wellham

Good morning.

Luke Folta - Longbow Research

Just to be clear, you said that there was the one-time expense in your fabrication business, is that the $1.5 million mediation sort of you are referring to?

Dawne Hickton

Yes.

Luke Folta - Longbow Research

So exclusive of that you would have generated positive EBIT in the quarter?

Dawne Hickton

Yes.

Luke Folta - Longbow Research

Okay, all right. Thanks for that. In the Distribution Group can you comment on where you see inventory levels right now and do you expect it to be some sort of cover cost price squeeze moving into the first quarter of 2009?

William Hull

Yes, the inventory levels are still a little bit higher than we'd like. And the short answer to your second question is yes. We continue to see at least a temporary disconnect between selling prices and the market replacement cost.

Luke Folta - Longbow Research

At the current demand what do you think most of that will be through in the first quarter?

William Hull

I'd say it may roll into the second quarter even in the second half of the year.

Luke Folta - Longbow Research

Okay. And just one more follow-up if I may. Can you give us your rough breakout of product type in the Distribution Group and how much of that is titanium versus your super alloys and stainless steel?

William Hull

Yes, it's about 70% titanium and the balance is other materials and the majority of that is super alloy type, Nickel based alloy.

Luke Folta - Longbow Research

Okay. Thanks. I'll get back in the queue.

Dawne Hickton

Sure.

Operator

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

Edward Marshall - Sidoti & Company

Good morning, everyone.

William Hull

Good morning, Ed.

Dawne Hickton

Good morning. Ed.

Edward Marshall - Sidoti & Company

You have spent some time discussing the CapEx projects and I want to thank you for your color. But my question is this 75 million that you are... attributable to the CapEx spend this year. How much of that is directly related to the sponge plant? And can you see a scenario of that somewhere down the line you may find that your plans would be unnecessary to continue?

Dawne Hickton

Let me answer the first part of your question. In terms of the total 70, approximate 75, the majority of that is going to be going into the forging and rolling facility.

Edward Marshall - Sidoti & Company

Okay.

Dawne Hickton

The balance will be related to some long lead time equipment we have on order and some progress fragments as we go through the year from that equipment. And as I indicated certainly looking at today's marketplace long-term the demand ultimately that starts to ramp up for these very large contracts we have in the next decade, indicate that we need a very secure source of raw material.

But in terms of the timing of that project that's clearly been pushed out because of current market conditions, and not just in the titanium industry but overall global economic conditions. And having said that during the timeframe we're going to look and are looking and in discussions with some opportunities for other strategic alternatives. So that will... we'll continue to look at that and see what happens.

Edward Marshall - Sidoti & Company

That's promising. And I think you have... the focus on the second question is on the cost reduction that you had mentioned? Can you quantify for us cost reduction and the timing of when those cost reductions will be realized?

Dawne Hickton

At this point, we're not going to quantify that. One of the things you'll see is actually because we had been last year at this time still in a process of ramping up some of our opportunities, ramping them back down is going to cause some fluctuation and we're working on that. We've taken some immediate steps and taken out some costs. And we are going to continue to monitor that over the course of the year.

Edward Marshall - Sidoti & Company

And so there's no timing either I guess?

Dawne Hickton

We are not going.

Edward Marshall - Sidoti & Company

Right.

Dawne Hickton

But I can't give you timing on when you're going to see some specific large scale impacts.

Edward Marshall - Sidoti & Company

I see. Thank you guys very much.

Operator

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

Gautam Khanna - Cowen and Company

Hello. Thanks for taking the question.

Dawne Hickton

Good morning, Gautam.

William Hull

Good morning.

Gautam Khanna - Cowen and Company

Good morning. Yes, I just wanted to ask Dawne you made a comment about how your metal piece in '10 appear to be... your raw material for metallic inputs. You could have but not so supply without going in the sponge on. So what are you assuming in terms of what your production would be in '10? And are you getting this supply just from metal or is there another agreement in place somewhere?

Dawne Hickton

Well, let me start by saying that with the uncertainty on marketplace right now, we're not willing to give some definitive guidance on our numbers, certainly not going to give you any guidance on '10. Having said that we know what our base contract is for Airbus and Lockheed Martin. And so certainly to support our agreements, the current agreement we have in our place with Osaka and the material we have currently in our inventory should be enough to support those agreements.

And with the marketplace where it sits today there is some other sourcing opportunities available to us out there in the short-term. And we feel confident that we would... can meet our current metallic needs for the next 24 months.

Gautam Khanna - Cowen and Company

Got it. May I ask if you had a... well first of all Mike I think you made a comment that 10 million pounds under the LTAs that you can see kind of what percentage of... how many pounds are under the kind of annual renewal contracts versus the multi-year contract?

Michael Wellham

Well, in some of the annual or renewable actually multi-year contracts the prices just get adjusted on an annual basis. But out of that 10 million pounds the significant majority of that is under one of those two types of contract.

Gautam Khanna - Cowen and Company

Okay. So well over 50%?

Michael Wellham

Yes.

Gautam Khanna - Cowen and Company

And also by delaying the sponge plans by a year or more than that, does that increase the overall cost of the programs of about $300 million?

Dawne Hickton

Actually, we think there are opportunities that may warrant being able to do some cost savings when you look at the total project, because you are looking at different commodity pricing today, and some of the materials that go into that including construction materials, and construction agreements.

So depending upon the marketplace and depending upon what time takes place in the next couple of months or quarters, there is an opportunity. It's not significant but certainly there is opportunity.

Gautam Khanna - Cowen and Company

And with the bankruptcy filing of Tronox how does that affect the contract, does it?

Dawne Hickton

It doesn't really have an effect. We still see the Hamilton facility for Tronox's as we said before that's their flight shift (ph) facility. Our agreement is an agreement that's in place with whether its owned by Tronox or whoever within that facility.

Gautam Khanna - Cowen and Company

Okay. And last one Mike, I think in prior calls you've estimated how much titanium might be in the, excess titanium might be in the inventory supply chain of the aerospace suppliers, do you have an update for that, Bill?

William Hull

Yes, I still think that number is right around 30 million pound, and I think it will take some time for it to get worked off.

Gautam Khanna - Cowen and Company

How long do you think it would take?

William Hull

(inaudible) A couple of years, then I will remove the excess based on other commitments that they have already have for additional supply.

Gautam Khanna - Cowen and Company

All right. Thanks guys.

Operator

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

Nick Capuano - Imperial Capital

Good morning, everyone.

William Hull

Good morning, Nick.

Dawne Hickton

Good morning, Nick. How are you?

Nick Capuano - Imperial Capital

Very well, thanks. Just a couple questions. First of all, on the pricing dynamics in the market from what you've seen from competitors, are there any competitors in particular that are especially sharp whether the domestic or foreign and just trying to get a sense of the potential opportunities in the spot market and you looked at the general competitive pricing dynamics, you are seeing and does they reflect, that'll affect your ability to win incremental business beyond the contract business?

Dawne Hickton

Well, I guess let me answer it this way Nick. We are going to do what we've always done when you enter into economic conditions like this we are going to manage our production and our cost efficiently, and we are not going to chase pricing. And right now as we see the marketplace we have very secure, very good LTAs that provide a nice strong base of business for us, and we are focusing our attention on some of those opportunities I talked about on the value added side of our business. It's strategically, are nice add-ons to that mill product we have with those very customers we have talked about in the past, Lockheed Martin for instance and airbus.

Nick Capuano - Imperial Capital

True. And just any particular aggressiveness out of certain of your competitors or is just tough in general, how do you perceive your competitors are approaching pricing?

William Hull

Well, I'd say it's tough in general but I don't... I think they are probably approaching pricing in the same manner which they have always approached it.

Nick Capuano - Imperial Capital

I know it's a question on parameters of the sponge plant? Is there potential as you look at strategic options there, is there a potential to change the scale of the facility that you are planning or and/or bring in partners or other parties to may be sharing the volume and expense I mean are those among the options that are on the table or that you are considering?

Dawne Hickton

Well, we're looking at all options and all opportunities. But in terms of scaling the size we had always in our plans is a ramp up of production. So you would not... you wouldn't turn the switch on and start that as a 20 million pound facility. Whether you would go, it's not practical to go smaller than 20 million pounds in terms of your overall infrastructure design, whether it went larger those are future discussions I suppose. It's not something that I'd spend a lot of time focusing on in today's marketplace.

Nick Capuano - Imperial Capital

All right. Thank you.

Dawne Hickton

You're welcome.

Operator

Our next question comes from Nate Radley (ph) from Luxor. Please go ahead.

Unidentified Analyst

Hi.

Dawne Hickton

Hi, Nate (ph).

Unidentified Analyst

How are you?

Dawne Hickton

Good.

Unidentified Analyst

How much cash do you guys expect to generate from working capital reductions as you shrink your volumes this year?

Dawne Hickton

We don't expect to be generating a significant amount of cash and perhaps with the current marketplace, it could be negative.

Unidentified Analyst

So the inventory you just expect to build up and day sale there, based on inventories just going to increase there year goes along?

William Hull

Well, we expect to see reductions in our weapon finished goods inventory but that will be offset by our raw material build due to the minimum commitments we had on some of our sponge contracts.

Unidentified Analyst

Okay. All right that's my question, thanks.

Operator

(Operator Instructions). Our next question comes from Frank Havlick from AMM (ph). Please go ahead.

Unidentified Analyst

Yes. With today's extremely low scrap prices, have you been able to change or do you find that, do you find that something you wanted to change the mix of scrap to sponge in your production?

Dawne Hickton

Not currently with our sponge contracts and sponge inventories.

Unidentified Analyst

Okay. Mike what do you see at price now?

Michael Wellham

Well, below the both about a $1.15 and you can... that can vary all over the math, I am starting to seeing numbers as well as $0.40. But quite frankly Frank (ph) there is very little of any buying activity ongoing currently in the scrap markets. So it's hard to get a good read on where that price would be assuming some level of normal buying.

Unidentified Analyst

Right. And that would be for bulk weldable ton per se?

Michael Wellham

That is correct.

Unidentified Analyst

And would that be your buying price or what you sell of that?

Michael Wellham

That would be our buying price.

Unidentified Analyst

Okay. And you say that there is so little activity in the market that it's difficult to watch?

Michael Wellham

It's difficult to gauge what the true price would at some level of normal activity because there is just as no activity currently.

Unidentified Analyst

Thanks.

Operator

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

Luke Folta - Longbow Research

Just a quick follow on the scrap market, you were saying that you probably have enough raw material inventory last year through '09 and likely you tended. Should we imply that you won't be buying any scrap through that time period?

Dawne Hickton

Well, certainly short-term, we don't see ourselves buying it. We'll see what happens as the year goes on and as the... we'll just watch market conditions.

Luke Folta - Longbow Research

Okay. And just one final one. On your depreciation expense, can you give us, to us broken out by division, if possible?

William Hull

No, I don't know we usually, I'll give it to you for the full year. We're looking at 20.2 million for the full year for the company and 5.3 of that was in the fourth quarter.

Luke Folta - Longbow Research

Of the 5.3, can you just give us what was in Fab?

William Hull

We usually do not disclose that individual information.

Luke Folta - Longbow Research

Okay. All right, thanks anyways.

Dawne Hickton

Okay.

Operator

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

Gautam Khanna - Cowen and Company

Yes, hi, guys. I think you have reduced several demand and when can you expect the company will be free cash low positive, like a year in a quarter?

Dawne Hickton

Well, and looking at what we've said, we're not going to say anything beyond 2009. And even 2009 looking out in the second half of the year there is just not a lot of visibility. As to us in particular we do have the capital expansions ongoing. And so we're going to be using that spending a lot of money in those projects not a lot relative to what we would have expected last year, but you still have got some cash on it.

Gautam Khanna - Cowen and Company

Is there any sort of timing with the contract with Osaka where you kind of buy it all in Q1 pertains to Q1 particularly negative quarter relative to last?

Dawne Hickton

No.

Gautam Khanna - Cowen and Company

Seasonal pattern?

Dawne Hickton

No, they are pretty well set across the year on a pretty relatively even basis.

Gautam Khanna - Cowen and Company

Is there any other sort of potential positive like the DoD plough back starting to work in your favor again or something you can talk to incremental?

Dawne Hickton

There is always hope with customs but in all seriousness we do have, we've got about 5 million in filed claims to-date. And as we've indicated that we'll be reporting that when, when those claims are paid. I suspect that it shouldn't be too much longer but short of that we continue to work diligently on that. And we have procedures in place and we're filing the claims and hopefully we'll start getting some payments sooner than later.

Gautam Khanna - Cowen and Company

Mike with Joint Strike Fighter design sort of move around every now and then so kind of what is the buy rate now of titanium for each for the average shares?

Michael Wellham

On average about 40,000 pounds that range is from 27 up to 60 depending on the variant and that's without engines. So for the airplane itself it's about 40,000 pounds.

Gautam Khanna - Cowen and Company

And does that... is the mix being give in terms of delivery schedule, so its not like your sponge is on 20,000?

Michael Wellham

No, no, no it's somewhat mix but it jumps around a lot in the early years of the program.

Gautam Khanna - Cowen and Company

Okay. And is there any, are there any other big kind of potential opportunities out there. New platforms or share gain opportunities than we should be keeping our eyes out for?

Dawne Hickton

When you see... you mean new opportunities on a value added the target here you got them and there is some background noise.

Gautam Khanna - Cowen and Company

I apologize. But yes, are there any other kind of platforms out there that are up for bid and large long-term contracts that are potentially out for competition?

Dawne Hickton

Well, the only next new program will be ultimately when they get around to re-bidding it and its like dates should come out I think you thought it would be in spring, the Tanker program. So that's another opportunity but it's bit of long way delay. Neither design either the Northrop Grumman proposal or the Boeing proposal are aircraft that are titanium intensive if you will but they certainly do have titanium on them.

Gautam Khanna - Cowen and Company

And are you guys getting any sort of early signs of push back on pricing being contracted on long-term contract business kind of beyond the written terms?

Dawne Hickton

No, that's no.

Gautam Khanna - Cowen and Company

Are you hearing noise of that happening else where?

Dawne Hickton

We have not in terms of where we are sitting we have very good relationships, we are very close to our customers and we haven't heard anything.

Gautam Khanna - Cowen and Company

Thank you.

Dawne Hickton

Business as usual.

Operator?

Operator

Our final question comes from Frank Havlick from AMM (ph). Please go ahead.

Unidentified Analyst

This year your FX seems to be down significantly from some earlier estimates am I right or were they just too broad?

William Hull

You mean the titanium content?

Unidentified Analyst

Yes.

William Hull

Yes, I mean Frank (ph) that's jumped all over the math I mean early on it was less than 10,000 pounds later, a little bit later and develop that was up over 70. And now its leveling out at around 40 as they do more work on the engineering side for closure near net and lower buy-to-fly ratio.

Unidentified Analyst

Right. So is that disappointing?

William Hull

No, the way our contract is structured for the first 8 million pound that actually works out pretty well for us.

Unidentified Analyst

Thank you.

Dawne Hickton

Okay. All right if that's it. I want to thank everybody for your continued interest in RTI. And again despite the current economic conditions we still see a pretty bright long-term future. And we're continuing to work hard to execute on that long-term strategic plan, to work on the evaluated side and to be the choice for the high end titanium products.

And with that I'll turn it back to the operator to talk about the replay information. Operator?

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.

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Source: RTI International Metals Q4 2008 Earnings Call Transcript
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