RTI International Metals Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: RTI International (RTI)

RTI International Metals (NYSE:RTI)

Q1 2013 Earnings Call

April 30, 2013 10:00 am ET

Executives

Dan Crookshank - Director of Investor Relations

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

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

James L. McCarley - Executive Vice President of Operations

Analysts

Christopher R. Brown - BofA Merrill Lynch, Research Division

Jonathan Sullivan - Citigroup Inc, Research Division

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

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

Gautam Khanna - Cowen and Company, LLC, Research Division

John Flanagan

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

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

Kevin Money

Frank Haflich

Operator

Welcome to the RTI International Metals Incorporated 2013 First Quarter Result Conference Call. My name is Ellen, and I will 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 Dan Crookshank. Mr. Crookshank, you may begin.

Dan Crookshank

Thank you, Ellen, and good morning, everyone. Welcome and thank you for joining us today for our review of RTI International Metals' first quarter 2013 financial results. I'm Dan Crookshank, Director of Investor Relations. On the line with me today are Dawne Hickton, Vice Chair, President and CEO of RTI; Jim McCarley, Executive Vice President of Operations; Bill Hull, Senior Vice President and Chief Financial Officer; and Bill Strome, Senior Vice President, Administration and Finance. As you are aware, comments made by management on today's call will include comments that are forward-looking and based on our best view of the business as we see it today. So 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

Hello, everyone, and thanks, Dan. And on behalf of all of you listening on the call, we want to welcome Dan as our new Director of Investor Relations to his first call as a member of the RTI team. Welcome, Dan.

Dan Crookshank

Thank you, Dawne.

Dawne S. Hickton

As is my usual practice, I plan on opening with the financial highlights for the full company and then I'll provide some operational insights into our first quarter, and then I'll comment on our recently completed offering of the Convertible Senior Notes.

Bill Hull, our Chief Financial Officer, will then provide segment details, after which I'll have some concluding remarks and we'll take your questions.

To start off, our first quarter performance is pretty much in concert with the guidance we gave you in February and as we updated it earlier this month. While we did do somewhat better than we guided, the overall operating results still reflected the somewhat subdued impact of commercial aerospace as was expected for the first quarter, but as we also continue to expect, that sector should ramp in the second half of this year for our business.

As you know, the commercial aerospace industry continues to be a bright spot in the manufacturing sector. Powerful trends that have produced record order backlog for new commercial aircraft remain intact. For us, that means in our Titanium Segment, we continue to see strong ordering to support our Airbus mill product contract. And in our Engineered Products and Services group, Boeing 787 program is continuing to ramp as we expected toward a 10-ship-set run rate by the end of the year.

On the defense side, also as predicted, while the impacts of sequestration continue to be felt across many sectors, for us, it has so far not turned out to be the instant macroeconomic nightmare some had forecast. Keep in mind that due to our situation as an early lead time product in the supply chain, we have been preparing for the effects of sequestration for some time. Consequently, it is important to note that we do not see any significant impact to our business model as we have set it out this year for sequestration. Of course, longer-term impacts are still to be felt and we will continue to pay close attention to these contingencies.

Now our medical and energy markets continue to be contributors and with energy in particular we continue to see growth opportunities, but keep in mind, these projects tend to be somewhat cyclical quarter-to-quarter and we anticipate they will be dispersed throughout the year.

Now there were other parts to RTI's first quarter earnings story as we briefly noted in our pre-earnings statement, namely sooner-than-expected duty drawback and a charge for the early retirement program we had put in place. Bill Hull will give the details on both of these matters following my remarks. But I wanted to highlight just a few key points about the duty drawback. As you may recall, we pointed out at the end of last year that the several-year investigation into duty drawback had ended with a resolution generally favorable to RTI. Consequently, the payments received this quarter are consistent with our planned duty recoveries for the full year and were already included in our guidance.

But more importantly, we have now been approved for accelerated pay systems. What that means is, going forward we should be in regular receipt of reimbursements, which will improve our cost of sales. Again, I'll leave it to Bill to provide you some detail and color in his report.

Now let me go to the financial highlights and I'll review our first quarter corporate numbers. Net sales were $187.5 million, that's up 21% from $154.6 million in the first quarter of 2012. Our operating income was $12.2 million for the quarter versus $12.1 million for the same period last year. Net income from continuing operations was $5.5 million or $0.18 per diluted share. So it's essentially the same as our first quarter 2012 results of $0.17 per diluted share and a $5.1 million income from continuing operations.

Finally, our backlog at the end of the first quarter remains near record-high levels, growing to over $569 million, up from $554 million at the end of the year.

Now before I turn it over to Bill, let me just make a few comments on the market. First, let me talk about the Boeing 787 and the FAA decision. Obviously, the FAA green light for flight resumption of the Boeing 787s is especially good news for us. The benefit of this decision is the continuity it provides to our acceleration of seat track production for the 787, which as I mentioned earlier, we've been continually ramping since the beginning of the year and we anticipate will be reaching the 10-ship-set run rate well before year end, resulting this year in anticipated delivery of over 80 ship sets.

This program is key to enhance profitability in our Engineered Products and Services Segment and the ramp to higher production will bring us better margins in that area of our business.

Now let me talk about our capital project and that's our EB furnace. I'm also happy to report that our electron beam furnace in Canton, Ohio, is now in commercial production. We brought this new important technology to RTI online ahead of schedule and under budget and we look forward to the production efficiencies we're going to realize from this important addition to RTI's business segment.

And at the end of the first quarter, we've completed the qualification process for internally sourced materials and we are on plan to melt customer-qualified materials by the end of the third quarter.

Now our recently concluded public sale of more than $400 million of Convertible Senior Notes is another reason for confidence in the future. The success of this offering gives us the resources to execute our long-term growth strategy and restructures a portion of our debt at a lower interest rate while extending the maturity of that debt.

Our [indiscernible] offering was in keeping with our conservative approach to managing our balance sheet. We believe that the market's strong demand for our offering can be seen as an endorsement of our growth strategy as we continue to evaluate bolt-on strategic acquisitions in our pipeline, focusing primarily on our Engineered Products and Services Segment.

Let me turn for a moment to the Airbus relationship. As we all know, Airbus recently broke ground on its first U.S. assembly facility in Mobile, Alabama. And we believe this creates wonderful new opportunities for RTI to build on what is already a strong position as Airbus' leading North American titanium supplier. During this upcoming quarter, we will be continuing our strategic review meetings with Airbus executives, this year touring our Montréal machining facility as we look to grow our North American supply chain strategy with Airbus.

One indication of that strength is recently Airbus gave RTI's titanium plant in Niles, Ohio, its highest rating for product quality and on-time delivery. And we amend -- congratulate our employees for that award. And speaking of awards, we've also been recognized by other customers as well. Raytheon recently gave their 4-star award to our Remmele's aerospace and defense facility, its highest quality rating for work on Raytheon's terminal high-altitude anti-missile defense program. And Northrop Grumman gave our hot forming operations in Missouri its platinum award for performance excellence. RTI is proud of these awards and we're proud of our employees as they've earned them, but most importantly, they highlight our positioning with our customers as we continue to focus on our long-term growth strategy to provide precision manufacturing, quality and reliability. Being known as a company that meets and exceeds our customers' needs is a vital component to our growth.

With that, I'm going to turn it over to Mr. Hull and he can give you the details on the segments for the quarter.

William T. Hull

Thanks, Dawne. First of all, I would like to address consolidated operating income for the quarter. Operating income for the 3 months ended March 31, 2013, was $12.2 million. This includes a favorable impact of $4.3 million from import duties under the company's duty drawback program, which was previously expected to be recovered later in the year, as well as $3.3 million in charges related to a voluntary early retirement program and restructuring actions associated with a small, noncore business.

Operating income for the same period in 2012 was $12.1 million, including a $3 million favorable duty drawback accrual reversal. Consequently, operating income adjusted for these specific items for the first quarter of 2013 and 2012 was $11.2 million versus $9.1 million, respectively. We've provided a reconciliation of adjusted operating income in our press release.

Now I will address each of the company's 2 segments. As a reminder, effective January 1, 2013, the company conducts business in 2 segments: the Titanium Segment, that's a combination of the former Titanium and Distribution segments; and Engineered Products and Services Segment, which is the former Fab segment. Previous periods have been recast and presented under the new segment structure.

The first quarter of 2013, the Titanium Segment operating income was $11 million on sales of $115.1 million, including intersegment sales of $16.3 million. This includes $2.4 million of duty drawback recoveries, as well as $2.5 million in charges related to the previously noted voluntary early retirement program and restructuring actions. The same period in 2012, this segment had operating income of $11.8 million on sales of $111.3 million, including intersegment sales of $22.1 million. This operating income included a $3 million favorable duty drawback accrual reversal. The product shipments for the first quarter were 4.3 million pounds at an average realized price of $19.35 per pound. That compares to the same amount of mill product shipments in the first quarter of 2012 with an average realized price of $19.41 per pound.

Gross margin on net sales for the quarter was 21.7% compared to 25.9% for the same period last year. Overall, the improvement compared to the prior year's results, after adjusting for the previously mentioned specific items, was driven by a more profitable product mix and the company's continuing success in reducing production costs.

For the first quarter 2013, the Engineered Products and Services Segment reported operating income of $1.2 million on net sales of $88.6 million. This includes $1.9 million of duty drawback recoveries, as well as $800,000 in charges related to a voluntary early retirement program. The same period in 2012, the segment had operating income of $300,000 on net sales of $65.3 million. Gross margin on net sales for the quarter was 18.7% compared to 16.7% for the same period last year.

In April 2013, the company issued $402.5 million aggregate principal amount, 1.625% Convertible Senior Notes due October 2019. In conjunction with that offering, the company repurchased approximately 50% of its outstanding $230 million, 3% Convertible Senior Notes due 2015 at approximately $133.4 million including accrued interest.

Net proceeds for the company resulting from this transaction were approximately $257 million. We expect to incur interest expense for the full year of approximately $27 million, as well as a second quarter charge of approximately $14 million related to the repurchase of a portion of the 2015 notes. For the full year 2013, we expect our tax rate to be approximately 32%. And since we talked a lot about duty drawback's impact on the quarter, let me provide some additional detail.

The company was reinstated into Customs' accelerated pay program in the first quarter of 2013 and we started to see some benefits there that were planned for the second half of this year. We are continuing to work down our backlog of claims related to exports shipped prior to 2013. These claims are subject to review by Customs and we can't be certain as to the timing and amounts of receipt.

And also, at today's volume and level of exports, and when we worked on the backlog, we would expect that a normalized run rate of claims would generate about $4 million to $6 million per year, which would be a direct reduction in our material costs. Dawne?

Dawne S. Hickton

Thanks, Bill. Let me just at this point give you a brief recap. As I said earlier, our first quarter financial results were better than initially expected and those trends that underpin our growth in all of our markets remain intact. This includes our work on the Boeing 787 seat tracks, which remains on pace to reach that 10-ship-set a month run rate and it also bolsters a positive outlook for continuing growth in our Engineered Products and Services business.

We anticipate improved profitability for the remainder of the year, and we expect to achieve our previously announced full year operating income guidance. But as we stated on our last call and consistent with our overall guidance, these results will improve as we move into the second half of the year. So accordingly, we reaffirm our expectation that full year 2013 operating income will be in the range between $65 million to $75 million, but I will say that we're currently seeing that trending toward the higher end of this range as the year progresses. And we're now happy to take your questions. Let me turn it over to you, Ellen.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Chris Brown with Bank of America Merrill Lynch.

Christopher R. Brown - BofA Merrill Lynch, Research Division

How should we think about the progression of titanium volumes through the year? You have this new capacity ramping up now and I guess more in the third quarter, so should we expect volumes to be maybe more back-end loaded than first-half loaded?

Dawne S. Hickton

Well actually, for this year, we have guided that our pounds are going to be about consistent with last year. So if you look at that, you're looking at a little over 16 million pounds. So it's actually going to be pretty steady throughout the year. Although next quarter we would anticipate it to be a little bit lighter. But I think going forward, I think I would just spread it out over that number we've given you.

Christopher R. Brown - BofA Merrill Lynch, Research Division

And then secondly, could you maybe talk about the mix in greater detail in the first quarter and how that might progress throughout the year?

Dawne S. Hickton

In the mix of the mill products?

Christopher R. Brown - BofA Merrill Lynch, Research Division

In titanium mill products, yes.

Dawne S. Hickton

Other than the general mix of products, recognizing that a large portion of our product shipments are for our base customers including Airbus, there's really not much more we would give in terms of any specifics on product form, if you will. But it fluctuates as a very typical quarter.

Operator

The next question is from Jonathan Sullivan with Citigroup.

Jonathan Sullivan - Citigroup Inc, Research Division

I was just wondering if you could perhaps expand a bit on the energy and defense end markets and how those affected the Engineered Products Segment?

Dawne S. Hickton

Sure. Let me just comment, our defense business, it's been pretty -- interestingly enough, it's been relatively stable. We had already taken into account in the past year some planned focus recognizing that with sequester and some reduction in the defense budgets, there could be an impact in growth opportunities. But our base contract business, particularly the Joint Strike Fighter, remains steady and we're seeing a lot of ordering activity. Energy tends to be, as I mentioned in the script, pretty cyclical. We're working on some projects in that group. We're seeing a lot of opportunity. Jim, I don't know if you want to add any color to the energy side of it?

James L. McCarley

Well, I think the only thing I would add is that the mix of product out of energy varies between some more standard steel-type-related products and services and in some of our titanium products. And depending on which one of those 2 is working through the organization, we can see some large swings in terms of the overall profitability coming out of that business -- or out of those markets.

Jonathan Sullivan - Citigroup Inc, Research Division

Okay, great. And just one follow-up. Is the -- the Engineered Products, is that directly comparable to the Fabrication results or are there any differences that we've got to be aware of?

Dawne S. Hickton

For the most part, the new Engineered Products and Services Group does represent the former Fabrication Group. One modification to that would be you may recall within our Distribution Group, we had multiple distribution centers. Some of them were primarily -- some were nontitanium, some were more focused on titanium and one of those Distribution Groups really was a direct driver within the Fabrication business. So that particular distribution facility is now part of the operating group for the Engineered Products Services Group.

Operator

The next question comes from Steve Levenson with Stifel.

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

With the EB furnace now up and running, what new markets are you potentially looking at and do they include fastener stock?

Dawne S. Hickton

Well, we already do supply into the fastener stock market. But that is an area that we can continue to offer additional opportunity. The primary focus for the EB furnace is actually within the engine markets and also as part of our existing ability for some of our integrated product lines using our own input stock to provide a better value product from the standpoint of a completed integrated product line, such as something like [indiscernible], for example. [indiscernible] we make one continuous flow.

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

Got it. And as a follow-up, with your relationship with Airbus and the new facility in the United States, do you expect to expand the relationship to actual parts rather than just -- or beyond mill products and what you sell them today as they're likely looking for more dollar-denominated parts?

Dawne S. Hickton

Yes and yes and yes. But let me say, we actually already are manufacturing some parts for them in doing that in the prototype format, and that's the goal. That's the strategy.

Operator

The next question comes from Patrick McCarthy with FBR.

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

My first question is on the balance sheet. Obviously, you have some serious flexibility now and I was wondering if you could give us some insight as to what you're seeing out there in the marketplace relative to opportunities. And then maybe just update us a little bit on what your focus is? Is it getting more content on specific aircraft or are you just really focused on kind of being more of an all sorts of supplier to the OEMs?

Dawne S. Hickton

All right. Let me answer that starting with sort of your first question. There -- we're looking at a lot -- yes, there are a lot of opportunities out there in various shapes and sizes. We keep a very active what I will refer to as a pipeline and we focus that primarily on the Engineered Products and Services side of the business. So from that standpoint, similar to, let's say, our Advanced Forming acquisition that we made a little over a year ago and similar to what we've done with Remmele. I think that gives you a flavor. We will continue looking in that -- for those types of opportunities and focus on those types of opportunities. The goal is to provide the additional capabilities and market share that will help us complete -- I don't want to say complete -- but help us continue to grow as an integrated supplier of advanced fabricated parts. We're looking not only in the aerospace sector, but we're also looking in the energy and to a certain extent into some medical opportunities. And that's pretty much it.

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

Okay, great. And could you give us an update -- and if I missed this, I apologize, but an update on where the certifications are in Martinsville? And then maybe just a hint on what the decision

[Audio Gap]

points are for you to put more product through that facility?

Dawne S. Hickton

Well we're continuing -- that's fully certified at this point for -- it's operational. It's contributing. It's now part of that Titanium Segment. And we'll continue to fill that up as we can as the market grows. If the market gets significant enough in the future and we see the ramp in another year or 2, there's the ability to expand some additional capital in there, but at this point in the near future, we don't see that happening.

Operator

The next question comes from Gautam Khanna with Cowen & Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

I just wanted to ask one question on the 787 and a, kind of what was your rate in the quarter, what are your expected shipments for the year and are you profitable, Jim, on these shipments at this point?

Dawne S. Hickton

So let me -- I'll start out. Rate for the year -- rate for the year by -- you get to the back end of this year, we're going to be at 10 ship sets a month. That will be the run rate. And that's what we're working toward. We've also shipped already parts through aircraft 171 and we expect to get over 80 ship sets a month. Now I'll let -- I'm sorry not a month. I just gave Jim a heart attack. 80 ship sets by the end of the year. But I don't know, Jim, if you want to add anything else to that?

James L. McCarley

Gautam, I do believe that we are going to be profitable as we move forward on that product line. We're going to be shipping in excess of 6 ship sets a month and ramping pretty linearly all the way through the end of the year and may even try to get above 10 at some point in time. So -- but I would say that in the second quarter, we do still have to do a little bit of shakedown there or some Dash-9 and Dash-8 configurations that we're having to blend. We can't necessarily get the organization into the most optimal configuration. I don't see that happening until the third quarter, but I think we're moving in the right direction there.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. So are you profitable on that now? Or is that -- you're not expecting to until the third quarter?

James L. McCarley

We're not now, today. But like I said, that's got to -- that's because we continue to have to work some sort of specialty -- the specialty components through helping with making sure we're on track with the Dash-8 and the Dash-9. And those are 2 separate configurations to our shop.

Operator

The next question is from John Flanagan with Fundamental Equities.

John Flanagan

Dawne, can you give us an update on the F-35 program and where it stands production-wise and for you?

Dawne S. Hickton

Sure. Well, our information is consistent with the public information. There's been a lot of news and a lot of support for that program coming out of the Department of Defense. And the current expected build rate continues to be that 36 in 2013, moving up slightly in '14 and continuing to grow. And it certainly has received the appropriate funding. Now for us specifically, we're on track at over 2-million-pound mill product shipping rate for the full year and we're seeing a lot of ordering activity that supports that build -- that shipment rate of over 2 million pounds.

John Flanagan

Okay. Secondly, is the new convertible dilutive to EPS this year?

Dawne S. Hickton

Yes. I don't know. Do you have another follow-up?

John Flanagan

No.

Dawne S. Hickton

Okay.

John Flanagan

Just can you quantify that?

William T. Hull

Yes, really what you have is -- not to get technical here, but the convertible security, it's either you use the additional interest that dilutes the earnings or you use the underlying shares. And if you go either way, but the answer to your question is, yes, it will be dilutive to earnings.

Operator

The next question comes from Mark Parr with KeyBanc.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

When you gave your original guidance, were you including restructuring and early retirement expenses?

Dawne S. Hickton

Yes. Back in the beginning of the year, yes.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Okay. And then could you help us -- or have you given any color on what the net impact on your cost structure will be going forward as these plans are completed?

Dawne S. Hickton

The impact this year, we're not going to start to feel the impact on the reduction of the cost structure until you get into the second half of the year. And then going forward, we're looking at roughly $500,000 per month as you go through the year.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Okay. So that's about a 6 -- a little over $5 million?

Dawne S. Hickton

On an annualized basis going forward?

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Yes.

Dawne S. Hickton

Yes.

Operator

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

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

Just a quick question on the balance sheet items. Of course, post-offering, could you give us some idea after the fees and everything else, where should the cash and long-term debt items come out on the balance sheet maybe at the end of Q2?

William T. Hull

Sure. If you take a look at our net proceeds after the purchase of the 2015 notes that I mentioned, 50% of those, and after fees, you're looking at about $257 million approximately in additional cash. And as you're familiar with our current structure with this convertible, part of this is going to be debt and part of it is going to be equity. So it looks like we're going to pick up about 75% of that $400 million as debt. So additional debt of approximately $300 million. I say approximate because we're still tightening it down. And the other $100 million will go in equity. The other side to that is the debt repurchase, so the fair value on the balance sheet of that was $100 million that we took off. So net add to debt is probably going to be $200,000 (sic). The rest of it is going to get pushed through equity.

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

Okay. So the net impact is $200 million, I believe, on the debt positive and then the $100 million on equity roughly?

William T. Hull

Well some of the other equity comes out on the repurchase. And I don't have that exact number. But when we bought back those 2015 notes, there was an equity piece as well that we bought that option. So that will reduce equity a little bit. But the debt piece is $100 million reduction, approximately.

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

Debt piece is $200 million addition, right?

William T. Hull

Yes, let me simplify it. We added 300 -- approximately $300 million of new debt and we took out $100 million of old debt, so your net difference is $200 million.

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

$200 million, exactly, okay. One different question, though. On the EB furnace, of course, in the past you were talking a little bit about the engine opportunity, now have you been pursuing that aggressively and what kind of expectation do you have from the engine side maybe going forward from 2014 onwards, if any?

Dawne S. Hickton

Yes, we've been pursuing that aggressively. We've already, as you know, started moving into some engine opportunities with the deal we announced last year with MTU. And we've been working with some of the other engine OEMs, on some additional opportunities as we go forward, including not just in aerospace, within aerospace, but also in other engine markets where they will use titanium. So those are some opportunities for us that our commercial team has been working on pretty aggressively.

Operator

Your next question comes from Kevin Money with Cleveland Research.

Kevin Money

Could you tell us how much spot market business you guys are in right now?

Dawne S. Hickton

I did not say that separately, but it's de minimus. There's -- with the current supply and demand for us, the majority of our mill product business is under long-term contract.

Kevin Money

And kind of as we look forward, is there any kind of thought or goal to increase penetration there or is that not really something you're looking at?

Dawne S. Hickton

Well, to the extent that there would be spot activity, we would certainly be in the market. But right now, the way the supply and demand works with all of the additional capacity that's been brought on in the last couple of years, so amongst all of the major titanium manufacturers, there's really not a large spot market today, as you would've seen in the past. Most of the overall demand for the material now is tied up under long-term contracts. The focus for us and that's why the real growth for us is on the value-add side of the business, taking what's already in our long-term agreements and adding value to that through our Engineered Products and Services side of the business.

Kevin Money

And did you talk about what you're seeing on the cost side in terms of scrap and sponge?

Dawne S. Hickton

Well, for us, our sponge is similarly under what I would call matching long-term agreements to our LTAs on the product side. So our sponge costs are pretty much remaining consistent at the moment. And scrap has been continuing to come down modestly. But again, for us, as an integrated supplier, a large portion of the scrap we're using is internally generated. We are out at in the market, but a large portion is internally generated.

Operator

The next question comes from Frank Haflich with AMM.

Frank Haflich

Question, you've estimated this in the past, any estimate now with the amount of titanium in the overall supply chain?

Dawne S. Hickton

Well, we do know that from our perspective, Airbus is very -- pretty much level with their inventories in the sense of what we see through that supply chain. We're still seeing a little bit of higher levels on the Boeing side, but for the most part, we're starting to see some of that level off too. And I think that consistent with what you've heard in the marketplace, most people expect that to be pretty much leveled off by next year. And I'm not going to venture how many millions of pounds though. That's really not something we have a handle on today.

Operator

The next question is from Jonathan Sullivan with Citigroup.

Jonathan Sullivan - Citigroup Inc, Research Division

Just a quick follow-up. So what was the number of 787 ship sets in 1Q? I didn't catch that.

Dawne S. Hickton

How many came out in the first quarter?

Jonathan Sullivan - Citigroup Inc, Research Division

Correct, yes.

Dawne S. Hickton

Over 11. 11 equivalent, is what we refer to it, different parts.

Operator

And the final question comes from Gautam Khanna with Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay, a couple of quick ones. Any change in market dynamics given the PCC [ph] private [ph] acquisition? Are you seeing maybe more aggressive approach to pricing or market share by your competitors? Then I have a follow-up.

Dawne S. Hickton

Generally speaking, we're seeing increasing activity, yes. And it's -- the good news is it's providing additional opportunity for us. But at the same time, there's also increased competitive opportunity as a result of that acquisition. So yes to your question. But from our perspective, it's also opening some additional opportunities.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. So on a net basis, it's not clear. But in terms of pricing, are you seeing any more aggressive pricing posture by some of your competitors just given spot trends and the ownership change?

Dawne S. Hickton

Let me just answer it this way, that to the extent there are opportunities out there, the new competitive marketplace is even more competitive than normal.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. So Dawne, last quarter and you mentioned using a higher mix of scrap, higher percentage of scrap in your melt. I wanted to just follow up on that. How has that trended sequentially, a; and b, with spot rutile coming up, is there any opportunity to kind of reprice some of those contracts that you priced in October this year ahead of waiting for the reset next year?

Dawne S. Hickton

I'll answer your second question first. We don't see that as an opportunity to -- those are annual deals in a long-standing relationship, and while I don't see an opportunity to reset price, we'll manage the volume accordingly and we do have some flexibility there within our relationship. In terms of the mix, we -- especially with the EB furnace coming on, opportunities to utilize more scrap continue to trend favorably.

Gautam Khanna - Cowen and Company, LLC, Research Division

And they did -- they were up sequentially in terms of percentage of your melt mix?

Dawne S. Hickton

Probably about -- modestly to the fourth quarter, we'd already started increasing it a little bit, but we do have a high -- we also have a lot of sponge in inventory. So we use that as we see it fit to run the business.

Gautam Khanna - Cowen and Company, LLC, Research Division

Maybe one last one for Bill Hull. Could you actually refresh us on when the converts actually dilute the share count? At what level of operating income do we get full dilution, if you will?

William T. Hull

Well let me just -- the interest rate on the new debt is probably going to be around 6%. So that's lower than the 8.5-plus percent on the older note. So what that means is that there's a lower hurdle rate to use the shares as dilution. I'm not going to indicate when that would happen, but I think you could have a quarter very soon where that happens. We're going to use the underlying shares.

Dan Crookshank

Thank you, everyone, for joining us on today's call. The operator will now give you the replay information. So Ellen, take it away.

Operator

Thank you, ladies and gentlemen. To listen to a replay of today's conference, please dial 1 (888) 843-7419 and enter the security code of 34706264#. This concludes today's conference. Thank you for participating. You may now 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!