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RTI International Metals (NYSE:RTI)

Q4 2013 Earnings Call

February 27, 2014 10:00 am ET

Executives

Dan Crookshank - Director of Investor Relations

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

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

William F. Strome - Senior Vice President of Finance & Administration and Treasurer

James L. McCarley - Executive Vice President of Operations

Analysts

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

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

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Frank Haflich

Operator

Welcome to the RTI International Metals Inc. Fourth Quarter and Full Year 2013 Financial Results Conference Call. My name is Yolanda, 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 Mr. Dan Crookshank, RTI's Director of Investor Relations. Mr. Crookshank, you may begin.

Dan Crookshank

Thank you, Yolanda. Good morning, ladies and gentlemen. Welcome, and thank you for joining us today for our review of RTI International Metals Fourth Quarter and Full Year 2013 Financial Results. I'm Dan Crookshank, RTI's Director of Investor Relations. And on the call with me today are Dawne Hickton, our Vice Chair, President and CEO; Jim McCarley, our Executive Vice President of Operations; Bill Hull, RTI Senior VP and Chief Financial Officer; and Bill Strome, our Senior Vice President, Administration and Finance.

As you are aware, comments made by management during today's call will include elements 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 set out in today's press release.

Also, please be aware that certain elements of reported results that will be mentioned on today's call are preliminary and are pending the finalization of the company's impairment analysis and deferred tax asset valuation allowance restatement. Specific income statement line items that could be adjusted prior to filing our Form 10-K, which we expect to file on or before March 18, 2014, are detailed in the basis of presentation section of today's fourth quarter and full year 2013 earnings press release.

So with that, let me introduce Dawne Hickton. Dawne, please go ahead.

Dawne S. Hickton

Thanks, Dan. Hello, everyone, and thanks for being with us today as we go over the financial highlights for the fourth quarter of 2013 and for the full year of 2013. I will also discuss some key operational highlights to the year and I'll briefly address our newest family member, RTI Directed Manufacturing. I will then turn it over to our Chief Financial Officer, Bill Hull, he'll provide the segment details. After that, I'll have some concluding remarks. Those will include comments on our outlook and guidance for 2014. And then as usual, we'll take your questions.

Now we ended 2013 with a solid fourth quarter operational performance across most of our business units, capping a third consecutive year at RTI of revenue and operating earnings growth for our company. In fact I would note this is our highest revenue in our history. I will note that this performance was negatively impacted by the noncash impairment charge in our medical device business and Bill Hull will have the details on his portion of this call.

But I do believe it's important to point out at the outset that the medical device business is only about 8% of our total revenues, and that notwithstanding this noncash impairment, we continue to have confidence in the future of this business and the long-term prospects for growth in the medical device market.

Before getting into specifics of our results, I do want to emphasize that for RTI, the overarching message of our 2013 performance is this: RTI continues to grow and grow profitably. We continue to expand our capabilities to meet the emerging needs of our customers and at RTI we continue to improve our positioning to capitalize on large and potentially lucrative market opportunities ahead. In particular, opportunities that are coming our way on several of the new aerospace programs. Excellent examples of these last 2 points, the recent acquisition of RTI Directed Manufacturing, a 3D printing company. We've been driving a culture of innovation in the last couple of years, working closely with our customers on collaborative engineering opportunities and this newest acquisition, allows us to take what we've done internally with prototypes and move it into production.

And I'm also proud to note that just 2 days ago, it was announced through the President's initiative that RTI is a participating funder in the American Lightweight Metals Manufacturing Innovation Institute. This is known as ALMMII and it's a consortium of private companies, nonprofits, academia and the government with the mission to enhance American manufacturing competitiveness.

Now let me give you some highlights for our full year numbers. For the full year of 2013, net sales increased to $783.3 million, which is a 12% increase over 2012 revenues. Our reported operating income of $59.4 million includes the estimated $18 million impairment charge, as well as $16.3 million of cost recoveries from the collection of our prior period duty drawback claims backlog. If we exclude the impairment charge, our operating income was $77.4 million, exceeding the range of our annual guidance. Now our operating income, excluding the impairment charge and the prior period duty drawback cost recoveries, was $61.1 million, and that compares to the $47.4 million the year before. Reported net income attributable to continuing operations was $13.2 million or $0.43 per diluted share. And again, excluding the impact of the estimated impairment charge, our net income attributable to continuing operations was $29.3 million or $0.95 per diluted share.

Mill product shipments from the Titanium Segment for the year were 16.3 million pounds compared to 16.5 million pounds in 2012, basically flat. The Boeing 787 seat track deliveries totaled 78 equivalent ship sets for the full year, and we ended this year by delivering 10 equivalent ship sets at the end of December. And we ended the year with a strong backlog, totaling $516 million.

So if I can sum up, our growth continues and we're executing on our strategic plan advancing RTI as a leading vertically integrated supplier of advanced titanium and specialty metals products and services across the entire supply chain.

To put this in context, I think it's appropriate to take a few minutes to review the substantial progress in this strategic direction over the past several years and through 2013. As you know, RTI's plan is built on a mix of organic growth and strategic acquisitions to achieve our financial goals and enhance our shareholders' value long-term. Most recently, as I referenced above, we completed the acquisition of RTI Directed Manufacturing in Austin, Texas. This transaction was the product of more than 2 years of research and development work in the fast-emerging field of additive manufacturing and it immediately establishes RTI as a leader in the exciting field of 3D printing. 3D printing is a huge advance in the ability to deliver near-net shape product, which is increasingly the name of the game for supply chain companies like RTI. And it's especially important to note that RTI Directed Manufacturing is not just doing prototype work, but is among a small number of companies in our industry that deliver commercial product today. Its customers include aerospace, medical device and other companies, many of whom are also RTI's current customers. And at RTI, we have the financial strength, expertise, track record of performance and industry reputation to help grow this business and we're committed to maximizing the opportunity in this field. I think you can see the possibilities here. We think they're enormous.

And the acquisition of RTI Directed Manufacturing is part of completed capital investments and acquisitions that have totaled approximately $500 million in the last 5 years. These investments have driven our transformation.

Let me review a couple of key examples. Our greenfield forging facility in Martinsville, Virginia, a $145 million investment, has been operational now for more than a year and is RTI's strong link in our titanium supply to Airbus, a key strategic customer of ours.

And our electron beam furnace in Canton, Ohio, a $20 million investment, became operational last year. It is improving margins in our Titanium Segment and will make RTI a competitive supplier of rotor-quality titanium for the jet engine market and supports our new customer relationship with Pratt & Whitney.

And our acquisition of RTI Remmele Engineering has given us world-class precision engineering and robotic manufacturing capabilities that have enhanced our Aerospace & Defense product offering and diversified our reach into the medical device market. As noted, there have been growing pains in medical devices this past year but the problems are fixable and we continue to see that business as attractive moving forward.

And then, of course, our acquisitions in Europe of RTI Advanced Forming Limited and RTI Extrusions Europe Limited in the United Kingdom have made us more global while adding highly specialized component manufacturing capabilities to our customer offerings.

The combination of these acquisitions and capital investments has led to sales growth and operational efficiencies that have continued to translate into improving operating margins. Now we still have a lot of work to do in that area and we know it. We also think it's important to recognize both the progress and the direction. Our teams of people at RTI are committed to delivering improving operational performance. In that regard, I think it's important to emphasize that in the markets we serve, aerospace, defense, energy and medical devices, there's very little margin for error if you want to keep your customers and grow your business. Our employees are asked to produce to some of the most demanding technical specifications in the world. There's no substitute for the highest-quality, the best possible reliability and the ability to innovate to meet the customers' needs.

We earn our reputation every day, and I'm very pleased to say that in terms of RTI's corporate reputation, 2013 was another excellent year.

I just want to give you a taste of some of the recognition we received from our customers. From our strategic customer, Airbus, we won the SQIP Accreditation for the second consecutive year. SQIP stands for Supply Chain and Quality Improvement Program. This is Airbus' highest accreditation status and the cornerstone of its supply chain assessment, management and control process.

And from Boeing, another strategic partner, we reached Gold Supplier Performance rating status. From Northrop Grumman, we have reached the Platinum Supplier status.

I could go on, but the point is the same. RTI is widely recognized for excellence in the products and services it supplies. You won't find this asset on our balance sheet, but it is, in many ways, the foundation for our future success.

Now with that, I will turn it over to Bill Hull for his report on our Titanium and Engineered Products and Services segments and he'll provide additional comment on the medical business impairment and the tax valuation issue. Bill?

William T. Hull

Thanks, Dawne. Looking first at consolidated quarterly results, the company reported net sales of $200 million for the 2013 fourth quarter. That's an increase of 8% compared to net sales of $185.6 million for the same period last year.

Including an estimated $18 million impairment charge, the company reported fourth quarter 2013 operating income of $3.4 million and a net loss attributable to continuing operations of $5.4 million or $0.18 per diluted share.

Excluding the estimated impairment charge, fourth quarter 2013 operating income was $21.4 million compared to the operating income of $17.6 million last year.

Net income attributable to continuing operations was $10.7 million or $0.35 per diluted share compared to $6.7 million or $0.22 per diluted share in last year's fourth quarter.

Results for the 2013 fourth quarter and full year included an estimated $18 million or $16.1 million aftertax noncash goodwill and intangible asset impairment charge related to RTI's medical device manufacturing business unit. This charge is due to operational issues experienced in the back part of 2013 and the impact of uncertainty in the medical device market associated with recent changes in the rollout of U.S. healthcare law and regulations, including a 2.3% excise tax on medical devices. The amount of the charge is based on the company's preliminary estimates, which are subject to further adjustment as the company finalizes its impairment analysis.

Interest expense for the fourth quarter 2013 was $7.5 million compared to $4.7 million for the same period in 2012. The year-over-year increase in the fourth quarter interest expense is due to the April 2013 issuance of $402.5 million of 1.625% convertible senior notes due 2019.

Now looking at our 2013 fourth quarter business segment results. The Titanium Segment reported operating income of $13.7 million on net sales of $78.2 million. This compares to 2012 fourth quarter operating income of $13.2 million on net sales of $84.7 million.

Sales declined in the current year fourth quarter due to the impact of lower prime mill product trade shipments and certain European service center defense program volumes, which were partially offset by favorable product mix.

Operating income was slightly higher as both periods benefited from favorable raw material prices.

Gross margin on net sales for the quarter was 31.1%, which compares to 26.8% for the same period last year.

Fourth quarter 2013 total Titanium mill product shipments were 3.9 million pounds, which compares to 3.7 million pounds for last year.

During the fourth quarter of 2013, the Engineered Products and Services segment reported an operating loss of $10.3 million, which includes the $18 million estimated impairment charge on net sales of $121.8 million. This compares to operating income of $4.4 million on net sales of $100.9 million for the same period last year. Excluding the estimated impairment charge, fourth quarter 2013 operating income was $7.7 million, which was an increase of $3.4 million from the same period last year. This increase in operating income and the higher sales were primarily due to higher commercial aerospace sales, principally related to certain Boeing platforms and higher energy market sales. These were partially offset by lower medical device market sales.

The RTI Extrusions Europe business acquired in October 2013 added $4.8 million of sales to the fourth quarter of 2013.

Gross margin on net sales for the quarter was 18.2% which compares to 17.5% for the same period last year.

Now let me provide a few of our fourth quarter and full year cash flow and balance sheet metrics. Cash flow from operating activities was $5.7 million for the fourth quarter. For the full year, it was $12 million, which compares to $8.1 million for the prior year.

Capital expenditures were $5.9 million in the fourth quarter and $32.2 million for the full year.

Fourth quarter depreciation and amortization expense was $11.4 million in the quarter and $43.9 million for the full year.

Our cash at the end of the year was $343.6 million and our debt balance was $430.3 million. There were no borrowings or repayments of long-term debt in the fourth quarter of 2013.

The full year 2013 provision for income taxes of $7 million includes $3.9 million in discrete income tax benefits, primarily related to the effects of certain statutory rate changes. In addition to these discrete tax benefits, the fourth quarter and full year provision for income taxes also included a $1.9 million tax benefit related to the estimated $18 million noncash impairment charge.

As we noted in our press release, RTI will be recording a valuation allowance against our Canadian deferred tax asset. As previously disclosed in the company's Form 10-Q for the quarter ended September 30, 2013, the company has been in discussions with the SEC staff regarding the treatment of this deferred tax asset. In considering these discussions, and given the Canadian subsidiaries history of cumulative losses, the company determined that it should have established a valuation allowance against this deferred tax asset as of December 31, 2010. However, as of December 31, 2013, the operating results of this facility have improved, driven by the strong demand for the Boeing 787. Assuming this facility's operating results continue to improve as expected, the economic benefits of the deferred tax asset could be realized in future periods and the company would expect to reverse the valuation allowance at some point in the future. The establishment of this valuation allowance will have no cash impact. To establish this reserve, RTI will restate tax expense and the corresponding impact in net income in its prior period financial statements. The estimated impact of the restatements to previously filed 2012 and '13 annual quarterly financial statements is incorporated in the financial results reported in our press release this morning.

Note that further details on this matter, including a summary of the impact on each period and our compliance plans, are available on the Form 8-K that we filed with the SEC earlier this morning.

Now before I turn it back over to Dawne to discuss RTI's full year outlook, I'd like to provide you with few nonoperational and cash flow expectations for 2014.

Interest expense for the year is expected to be about $31 million. On a cash basis, interest expense is expected to be $10 million. Our effective tax rate is expected to be approximately 31%, and that's before considering any discrete tax adjustments. And depreciation and amortization is expected to be approximately $45 million for the full year. Dawne?

Dawne S. Hickton

Thanks, Bill. I'm pleased to say that our outlook for 2014 includes a generally improving global economy. And this brightening picture does include the commercial aerospace sector that continues to produce historic new highs in our order backlog for new commercial aircraft, including coming off the Singapore Airshow with an additional 148 orders.

For RTI, 2014 is off to a good start with our newest acquisition of RTI Directed Manufacturing. However, and similar to our early expectations last year, a majority of our operating income is expected to be generated in the second half of the year. As we see it right now, our customer orders and deliveries are more back-end loaded and our first half results are expected to include some costs in conjunction with process improvement and cost-reduction actions we are currently implementing, as well as some upfront program costs that will be nonrecurring, so a lot of that's hitting us in the first quarter.

So before getting to the specific guidance metrics, let me provide a look at what we're seeing in each of our markets and what we think that means for us as we move into 2014 throughout the year. Starting with our largest market, commercial aerospace, as I noted above, we can see continuing strength as the record ramp remains intact and it's on track supporting the largest commercial jet backlog in history, and we expect this to translate into another year of increased aerospace sales for RTI in 2014 in our Engineered Products and Services segment. But even this business is not going to accelerate until the second half of the year as we see additional opportunities that we are working on with our customers come to fruition.

As for the Titanium Segment, we see modest growth in our aerospace mill products as we continue to drive our own product through our internal supply chain, reaping the benefits of the enterprise level.

Now in the defense markets, budgetary uncertainty for 2014 was put at ease last month with the signing of the new fiscal year 2014 spending bill. But then it resurfaced again this week when we had our remarks from Defense Secretary Hagel. Now the good news for RTI is that we continue to see support for the programs that are significant to us. This includes, as everybody knows, the Joint Strike Fighter, radar modernization programs and certain aircraft production programs, such as the F-15 and the F/A-18 and the V-22, also the foreign military procurements. So overall for us, even with the back and forth noise of the defense budgets, we are expecting our forecast to our defense business to remain stable.

Now energy continues to be a very good long-term growth market for us. However, following the year in which we completed developmental-type product solutions to several major oil OEMs, we expect 2014 to be down in terms of sales. We will look for a couple of meaningful titanium intensive follow-on production orders later this year as a result of our recent and ongoing developmental efforts and as a result of our continuing work with customers on new cost-effective titanium solutions.

Our medical device markets continue to reflect long-term growth opportunity and once the macro issues such as the uncertainty surrounding the rollout of the Affordable Care Act are behind us, we believe the long-term drivers are still intact. These include an aging U.S. population and, of course, the continuing advances in medical technology that will translate into more demand for more of what we make.

So in terms of our financial guidance for 2014 and as I said on our third quarter conference call, we expect 2014 to show overall modest improvement over 2013 results. In that regard, our net sales for the year are anticipated to exceed $800 million and we expect our titanium mill product volumes to approach 17 million pounds this year. We do expect our 787 seat track ship set deliveries to total approximately 120 across the year. And we expect our operating income to be in the range between $75 million and $85 million. But again, similar to the guidance we provided to you at this time last year, we expect the second half to be stronger than the first. And given our anticipated order and delivery profile that's been weighted to the second half of the year, as well as the insight to date from the past 2 months, this is the end of February, we expect it will be a challenge to reach profitable operating margins in the first quarter and, hence, expect the majority of our operating income be in the second half of the year. And then lastly, our budgeted capital expense is between $50 million and $60 million for the year. So with that, we'll take your questions. Yolanda?

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Patrick McCarthy from FBR.

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

I'd like to start off with the first quarter guidance that you've provided. So you've highlighted as the low point from a margin perspective, I'm guessing you might have some low margin production going through there, but could you provide a little bit more color on what specifically that is, and maybe when it normalizes?

Dawne S. Hickton

Sure. There are a couple of things that we see impacting the first quarter right now. And let me just kind of tick them off. First of all, right off the bat, on the defense side, we've got some light defense ordering, and particularly with the JSF, we see a lot of that back ended. But that's pretty solid but it is back ended. We also, as we highlighted earlier, we've got a little bit of soft performance in both our medical and energy units. And then, we also, on the 787, they had a rate adjustment and we're taking most of -- I'm sorry, sorry, thank you guys, the 747, with the rate adjustment, we took all of that in the first quarter. And then a couple of new programs, we've got some nonrecurring costs. Just to give you an example, we have that mirror project with Bombardier and some new opportunities on Gulfstream. And then lastly, well, we don't think there's going to affect shipments ultimately for the quarter, the weather in the Northeast did impact some productivity quite a bit. So it just creates some business interruption. So you put all of that together, and we just see that it's going to be a challenge as we get through the end of March. The full year, back end, looking stronger.

Operator

Avinash Kant from D.A. Davidson and Company.

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

So Dawne, just wanted to understand, did you give out the average selling price of your titanium this quarter?

Dawne S. Hickton

We did not, Avinash, and in fact, what we've determined is that because so much of our product now is moving into intercompany sales and part of the integrated value stream and a lot of that in terms of the price itself adjust periodically, depending upon the mix in a given quarter, we felt that really wasn't beneficial to provide as a -- any indicator of the business.

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

Okay. So I'm looking at the numbers you're giving and I'm trying to reconcile that. So you did like, I think 78 ship sets this year and you expect to do 120. And I believe that you have $1.5 million of content in each ship set. And then if I look at your titanium guidance, the volume guidance alone, that calls for roughly 4% sequential increase year-over-year and you're guiding to flat revenues. So what am I missing here?

Dawne S. Hickton

Well, let me say a couple of things. The -- if we're speaking specifically the seat track content, that's less than $1.5 million, our total content on 787 gets you closer to the $1.5 million across the integrated stream. But having said that, what you're really seeing is the difference in the medical and the energy kind of adding within the softness there on the Engineered Products services. So the aerospace picks up but we have softness in the energy and medical.

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

So is that soft that is going to offset the strength in aerospace and the ship sets?

Dawne S. Hickton

Yes. Well, and also, within the 787 program, that factors in some of the partnering for success step downs. So there is some pressure on the margins there.

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

Okay. And then, of course, the 350 had been ramping in the meantime and I believe you should have meaningful content in there. Do you have something incorporated from that in the 2014 guidance and how much would that be?

Dawne S. Hickton

Most of what we have on the 350 is in the Titanium Segment side. And really, that's been pretty flat. You're not seeing that dramatic ramp. They've been pretty good at leveling that out so you're not seeing that dramatic ramp. Where they are ramping though are programs like the 320 NEO, and those are not as heavy on the titanium content. I mean, it's more titanium than the regular 7 -- A320, but it's not dramatic enough to make a big impact.

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

So in your guidance, you don't incorporate a lot of growth from there but 3 50 in the 2014?

Dawne S. Hickton

Not in 2014, that's correct. We'll see that start to pick up back end of the year and moving into '15 as that program really ramps.

Operator

[Operator Instructions] We have a question from Sohail Tharani from Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

I just want to -- just a quick question. Your operating income, excluding the drawback planes were $61.1 million, and I just suppose -- I want to make sure that the guidance you have given, does it have any drawback in there you expect any or no?

Dawne S. Hickton

No. That's behind us in terms of these recoveries from the past period, date back years ago. So the guidance we're giving today does not have any duty recoveries in it, nor do we expect any.

William T. Hull

On the backlogs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

So that $61.1 million is going to $75 million to $85 million with most of it, if not all of it, coming in the second half. That's ...

Dawne S. Hickton

Normalized, yes.

Operator

Gautam Khanna from Cowen is online.

Gautam Khanna - Cowen and Company, LLC, Research Division

I was hoping, Dawne, you could comment on how we should think about the share count in your guidance for calendar '14 because your operating profit in Q1 obviously wouldn't require to convert dilution but then in the -- how should we think about that in subsequent quarters, and for the year? And then I have a follow-up.

William T. Hull

Gautam, this is Bill. The way I would think about it is, if you look at the third quarter of 2013, where it would be actually -- we had the share count come into play, I think that'd be a good reference point for you to use as you develop your model and see how that affects, '14. So I mean, we actually had it happen on the third quarter of '13, and I would use that as reference point.

Gautam Khanna - Cowen and Company, LLC, Research Division

Right, but not in Q1 presumably, right, just in the subsequent quarters? And then it will be fully -- how would that -- I'm just wondering, are you using 40 million shares for your calendar '14 assumptions on average?

William T. Hull

Well we didn't give that guidance. But you know, as the income number goes up, that's when you would apply it. And what I'm trying to tell you is that, in 2013, in the third quarter, the income was at a level where we triggered that conversion.

William F. Strome

Gautam, this is Bill Strome. One other thing to remember is, as you transition from excess interest to the underlying shares, I mean it's not going to be like a big step change in EPS, absent a big step change in earnings. So just so you know that.

Operator

Our next question comes from Michael Gambardella from JPMorgan.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Just like -- I just like to see your opinion on the competitive environment in the Titanium business. Have you seen a change in the last say 3, 6 months? And I guess specifically, from a the Timet sale to position Casbah, does that change the environment in a competitive environment for you?

Dawne S. Hickton

Absolutely. And as we predicted that initially, we didn't see that there would be a big impact when that first occurred well over a year ago. But in the last 3 to 6 months, we've definitely seen increased competitive activity. And in those areas where we have -- our base as you know about 80% of what we do in the TIE segment is under long-term contracts. But it's that spot market activity that it becomes highly competitive it. And you really do have a supply scenario or a capacity scenario now where that allows that to happen.

Operator

Frank Haflich from AMM is online.

Frank Haflich

Yes, Dawne, 2 things. Number one, you're not giving the average realized price, but I believe you or Bill mentioned the pricing situation in the fourth quarter. Was it the price has come in lower than the same period last year?

Dawne S. Hickton

We didn't say anything about pricing, but what we did say is that we had some -- there was a very typical, there was a mix issue. And then overall, we had some improvement because of our raw material adjustments, but we did not say anything about pricing. And again, keep in mind, most of our shipments are under long-term contract pricing.

Frank Haflich

Okay. What about -- have -- your sponge cost this year?

Dawne S. Hickton

Going into 2014, we expect our overall raw material cost to come down about 5%.

Frank Haflich

And this -- so that would include scrap also?

Dawne S. Hickton

Yes, that includes alloys, scrap, anything we're using in the product mix.

Frank Haflich

Right. Can you talk specifically about sponge? Is that price coming down from last year?

Dawne S. Hickton

I cannot talk specifically about sponge.

Operator

And our last question comes from Gautam Khanna from Cowen.

Gautam Khanna - Cowen and Company, LLC, Research Division

Hopefully, you guys let me ask more than just one. Quick figure. Well, a couple of other questions. I wanted to get a sense for what your inorganic estimate is for the additive manufacturing business you acquired, what would the contribution will be, first. I want to then ask 787 profitability, how are you doing now that you're at 10 a month or you're at kind of that 10% target you guys have put out there? And then when would you expect your shipments to Airbus, your titanium mill product shipments to rise? Do they actually going to be flattish in '14 because you have that kind of unusual order last year that you are delivering on? Are they going to start to grow and when do we see that really pick up? A lot of questions.

Dawne S. Hickton

Sure. No. And let me start with your last one and then I'll turn it over to Jim, since he spent the most time in his hometown down there, it's a home state with Directed Manufacturing and he can pick up there. On the Airbus, absolutely, you're viewing that correctly. We had some one-off opportunities the last year or 2 that increased some opportunities for us above our contract because there were some issues with Airbus' ability to get some deliveries from one of their other long contracted suppliers. So now, we expect '14 to remain pretty flat year-over-year on the Airbus deliveries and we'll start to see that ramp next year. That's how we're seeing that as they start to move into an ultimate production, not just an early production. So that's the Airbus. And then I'm going to ask Jim to comment on profitability on the 787, as well as talking about our new 3-D printing member of the family. Jim?

James L. McCarley

Listen, I'll start with 3D printing. Those revenues in this first year are going to be under the $5 million type range. I mean, that organization has got a really good solid base. We're going to be looking at putting more resources into it throughout the course of the year. But as far as this year's guidance, somewhere under a $5 million type of revenue target is the right way to look at that. On the 787, we've been very successful at both taking on the headwinds of the PFS [ph] and still sitting at the type of profitability level that we've been talking for a while now. Obviously, we're going to still continue to try to work on that. We think there could be ways to improve it somewhere out in the future as we -- you get to these 10 rates and you run there for a while and you start to learn more everyday. So we're hopeful that we can improve on it somewhere into the future. But at this point, we are on track with what we originally said.

Dawne S. Hickton

Okay. Anything else, Gautam?

Operator

That was our last question and concludes the question-and-answer session. Before providing you with replay information, I will turn the call over to Mr. Crookshank with final comments. Mr. Crookshank, please proceed?

Dan Crookshank

Thank you, Yolanda. As I mentioned earlier, we expect to file our final year-end financial statements on Form 10-K on or before March 18. As well, I'll be available throughout the day for follow-up calls, so feel free to give me a ring. Thanks, Yolanda. You can close the call out.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. A replay of this call will be available in an hour and remain through March 13, 2014, using playback number 1 (888) 843-7419 for U.S., Canada and International at (630) 652-3042 and enter the passcode of 36600334 followed by the pound sign. You may now disconnect.

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