RTI International Metals' (RTI) CEO Dawne Hickton on Q1 2014 Results - Earnings Call Transcript

| About: RTI International (RTI)

RTI International Metals (NYSE:RTI)

Q1 2014 Earnings Call

May 06, 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 Risk Officer and Senior Vice President

James L. McCarley - Executive Vice President of Operations

Analysts

Julie Yates Stewart - Crédit Suisse AG, Research Division

Christopher R. Brown - BofA Merrill Lynch, Research Division

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

Philip Ross Gibbs - KeyBanc Capital Markets Inc., Research Division

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

James Daly

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Frank Haflich

Operator

Welcome to the RTI International Metals, Inc. First Quarter 2014 Financial Results Conference Call. My name is Tiffany, 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. You may begin.

Dan Crookshank

Thank you, Tiffany. Good morning, everyone. Welcome, and thank you for joining us today for our review of RTI International Metals' first quarter 2014 financial results. I'm Dan Crookshank, RTI's Director of Investor Relations. On the line with me today are Dawne Hickton, RTI's Vice Chair, President and CEO; Jim McCarley, our Executive Vice President of Operations; and Bill Hull, RTI's Senior Vice President and Chief Financial Officer.

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 disclaimer set out in today's press release.

And 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 is my usual practice, I will open with a financial summary of the first quarter for 2014, I'll discuss our operations during the period and provide some insight into our current guidance. Bill Hull will then provide the segment details. After which, I will provide some summary remarks and we'll take your questions.

So looking first at our consolidated financial results. First quarter revenues totaled $174.5 million, and that compared to $189.2 million for the same period last year. The primary difference in the year-over-year numbers reflects lower mill volumes and mix during the first quarter of this year compared to last year the same time. And you'll see that our Titanium mill product shipments for this quarter were 3.8 million. Last year, it was 4.3 million. But we do expect our full year to still track to approach 17 million pounds.

Operating income was $1.6 million versus $13.6 million in last year's first quarter. And on a net basis, we reported a first quarter net loss attributable to continuing operations of $3.8 million or a negative $0.13 per diluted share, and that compared with net income attributable to continuing operations of $5 million or a positive $0.16 per diluted share in last year's first quarter.

As I mentioned to you on our last conference call in late February of this year, we said that a number of factors were going to lead to a soft first quarter and that we expected it would be a challenge to reach profitable operating margins. Several factors that were impactful during the quarter included build-rate schedule adjustments to certain commercial aircraft programs, which had a negative impact on our Engineered Products and Services Segment. Also in that segment, we incurred higher scrap and production costs associated with the development of new programs for military, regional and business jet and commercial aerospace customers. These development costs are actually related to multiple new vertical integration opportunities as we continue to grow our business. We incurred some severance costs that were related to fixed-cost reduction actions. And as we expected, our energy and medical device market volumes were lower during the first quarter.

And like quite a few other manufacturing companies in the U.S., we did have some operational disruptions at several of our facilities as a result of the difficult winter. As I think you all know, the majority of RTI's operations are in the Midwest and Eastern Canada, which were particularly hard hit by record snow and cold. This resulted in a couple of days of plant shutdowns and/or significantly reduced operations at several of our facilities.

While a majority of the impacts from these items are behind us, we expect dissipating impacts from the build-rate schedule adjustments and the new program development cost to continue as we move forward. However, at the same time, we also continue to expect volume, mix and product costs to turn more favorable in our Titanium Segment in the second half.

Let me just go back to the numbers. As I mentioned, Titanium mill product shipments were 3.8 million pounds comparing that to 4.3 million pounds in last year's first quarter. A visible bright spot to the quarter was that our Boeing 787 seat track deliveries totaled 28 equivalent ship sets, which is more than doubled from the same period of time last year. And our backlog at the end of the quarter was over $508 million. Now this is slightly below year end, but it does reflect what is normal for us, a seasonally light first quarter order activity for our Titanium Segment due to the typical long-term contract customer order patterns, which are heavier in the second and third quarter.

Now let me add some additional commentary on the first quarter and how we see it impacting the rest of the year. As you'll recall from our February discussion of our outlook, we noted that the year would build in strength. With the first quarter behind us and our visibility for the remainder of the year improving, we continue to see that as the overall picture. As we move forward, we are encouraged by improvement in the global economy and a very solid outlook for commercial aerospace. And indeed, we had our semiannual strategic fit meetings with Airbus just last month. That relationship remains strong, and we anticipate growing integration opportunities with that important commercial aerospace partner going forward in addition to the opportunities we're already quoting.

And in addition to airframe opportunities, RTI continues to focus on building our competitive position in the engine market, where we are pursuing a number of opportunities for positions on the next-generation engine platforms. And certainly, our now operational Electron Beam Furnace is allowing us to continue to grow in that market.

Now let me turn to our energy markets, where we continue to be enthusiastic about opportunities in energy, where according to an independent forecast, spending on deepwater exploration and production is expected to grow by 130% between now and 2018, as exploration continues to migrate to deeper water, where titanium components become more desirable.

In the energy market, where we have historically been a participant, namely offshore and deepwater drilling, we have recently shifted our strategic direction. And today, we are aligning our interest more specifically on titanium-intensive products and solutions in this area. We've sharpened our focus in the area of energy titanium products and in doing so, expect to increase our ability to compete in these markets where the interest in titanium solutions is growing.

And during the quarter, ongoing development work related to new titanium products passed initial important development milestone. In the medical markets, we are also expecting medical devices to benefit from growth in demand from minimally invasive surgical devices and spinal implants this year and moving forward. These are just a few examples of where we see program and product opportunities.

Now among other first quarter developments that are advancing our commercial prospects, I would note that we opened a sales office in Japan that will allow us to provide better service to our customers located there. This new office complements our presence in China, giving RTI an expanded footprint and important new visibility in Asia.

And earlier this quarter, we announced -- or should say last quarter, we announced our latest acquisition in Austin, Texas, RTI Directed Manufacturing. This acquisition is adding to our competitive position in pursuit of new aircraft engine opportunities. We expect this latest acquisition to also give RTI significant advantages in winning new business with medical device, energy and commercial aerospace customers as well.

In that regard, in the 3-plus months since taking over ownership, we've had a number of customer encounters at our new Texas-based facility. And we are confident this will lead to commercial product opportunities going forward.

I think it's important to highlight why this acquisition at this time has made so much sense for RTI. First and foremost, we now have the newest technologies in our industry in-house, helping us to shape our relationship with our customers and also helping us internally to drive improvement and internal efficiencies within our own manufacturing processes.

Second, this is where our customers are going, and we want to be going with them. I've been asked on too many occasions over the past 2 years where we stand with capabilities in titanium powders, additive manufacturing and 3D printing. Now we have the answers to those questions with this acquisition, bringing us the manufacturing processes and certifications in place with a solid and growing customer base.

And at the end of the day, is additive manufacturing going to replace all traditional manufacturing for titanium? Absolutely not. In my opinion, there'll always be a place for our other traditional capabilities. But today, we now have a new technology, an innovation and capability to offer the customer to enhance that which we have done traditionally and to position us to grow.

And speaking of positioning, the competitive landscape in our industry has been changing rapidly in the past 12 months, and we have not been standing idly at the sidelines watching this happen. We've continued to examine, focus on and work with key customers on strategic initiatives that will broaden our capabilities as we continue to grow through vertical integration. Indeed, some of these opportunities have started to take root as we saw with our higher-than-expected development cost on several new opportunities.

More importantly, we have already in the past several years put in place sufficient capacity to support our traditional customers with traditional manufacturing processes. So today, we have focused our strategy on new technologies that will support new growth and bring more competitive solutions to our customers and to ourselves as we improve our operation processes and capabilities. Whether it's from 3D printing or other new additive manufacturing using powder in the titanium markets, we are focused on where our customers need us to be tomorrow.

Finally, and particularly in light of the very recent escalation of instability and tension in the Russia, Ukraine situation, I expect many are wondering about our view of the geopolitical events that continue to unfold there and what impact, if any, these developments might be having or could have on our business. What I can tell you is this is, is that we have begun to hear from some of our customers that are considering contingency plans with respect to their titanium supply. We're all watching the situation closely, and it's our belief that the capacity domestically, including ours at RTI, is adequate and available to meet any contingency requirements, should they arise.

With that, I'm going to turn the call over to Bill Hull, and he will provide his report on our segment details. Bill?

William T. Hull

Thanks, Dawne. Let's review our 2014 first quarter business segment results. The Titanium Segment reported operating income of $5.9 million on net sales of $77 million. This compares to 2013 first quarter operating income of $11.2 million on net sales of $96.8 million.

First quarter sales and operating income declined principally due to a less favorable product mix combined with lower shipment volumes due to customer order and delivery timing. Current year first quarter operating income was also impacted by weather-related operational disruptions. Gross margin on net sales for the quarter was 21.2% compared to 22.2% for the same period last year.

Now turning to the Engineered Products and Services Segment. We reported an operating loss in the current year first quarter of $4.3 million on net sales of $97.5 million. And this compares to operating income of $2.4 million on net sales of $92.4 million for the same period last year. Current quarter sales and operating income were positively impacted by higher volumes and improved performance on the Boeing 787 program. This was offset by the impact of absorbing build-rate schedule adjustments to certain commercial aircraft programs and lower energy and medical market volumes. Current quarter operating income was also impacted by higher development costs related to certain new programs, weather-related operational disruptions and severance costs related to fixed-cost reduction actions.

RTI Extrusions Europe, acquired in October 2013, and RTI Directed Manufacturing, acquired in January of 2014, contributed $5.6 million in revenues in the first quarter. Gross margin on net sales for the quarter was 12.5%, which compares to 19.3% for the same period last year.

Now let me provide a few other items for the first quarter. Interest expense for the first quarter 2014 was $7.6 million, which compares to $4.8 million for the same period last year. The year-over-year increase in fourth quarter interest expense is due to the April 2013 issuance of our convertible senior notes that are due 2019.

Cash used from operating activities was $20.7 million for the first quarter. This was principally due to supporting various production ramp-ups in the corresponding inventory demand. During the quarter, we acquired RTI Directed Manufacturing for approximately $22 million. Capital expenditures were $6.9 million in the quarter and first quarter depreciation and amortization expense totaled $11 million. Our cash and short-term investments at the end of the quarter were $296.1 million.

Before I turn it back over to Dawne to discuss her concluding remarks, I'd like to provide you with our current expectations with respect to a few of our nonoperational and cash flow metrics for the 2014 full year. Interest expense for the year is expected to be approximately $31 million. Of that, $10 million will be cash. Our effective tax rate is anticipated to be approximately 26%. Depreciation and amortization for the year is expected to be $45 million, and capital expenditures are expected to be between $50 million and $60 million for the year. Dawne?

Dawne S. Hickton

Thanks, Bill. Let me sum up. While RTI's first quarter financial performance may have been in line with our lowered expectations for the period, I'm certainly not satisfied with our performance and neither do we expect our shareholders to be satisfied.

Consequently, we will continue to focus on strengthening our business moving forward with the majority of RTI's operating income, operating earnings coming in the second half of the year. To drive improvement in our operating performance, we will be focused on costs: cost reductions and cost efficiency. With respect to our full year guidance, we do expect the full year revenues to exceed $800 million. And we continue to expect our full year mill product shipments to approach 17 million pounds. We did, however, refine our expectation for full year operating earning income at this time -- at this moment in time. We continue to anticipate operating earnings in a range of $75 million to $85 million in 2014, and we are maintaining that range. However, due to larger than previously expected impacts from the commercial aircraft build-rate adjustments and the development costs that were related to our new Engineered Products and Services Segment programs, today we expect our full year operating income to be at the lower end of this range, but we will continue to drive to improve as the year progresses.

Now with that, we'll take your questions. Tiffany, if you want to start the questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Julie Yates of Credit Suisse.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Dawne, can you give us a little bit more detail on some of the operational efficiencies you're starting to see on 787? And then where should we expect profitability on that program to shake out by the end of the year?

Dawne S. Hickton

Okay. Let me start with that, but then I'll ask Jim McCarley to comment on some more of the granular detail. What we're seeing, of course, with any -- as that program progresses, just the mere fact that we're operating now at that 10 ship set production rate a month has given to improving what you've seen in the past and has placed us in a profitability mode finally after several years. We're going to continue to see that as we move forward, and we'll gain some efficiencies. But at end of the day, we're still talking margins that will not get to double digits. We also do see that as a result of the partnering for success, is we get a few more step-downs in there, but we've included that in our current forecast. I don't know if you want to add any color to that, Jim?

James L. McCarley

No, I think you've covered it.

Dawne S. Hickton

Yes.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. So it sounds like from the 10% margins that you originally targeted from a couple of quarters ago, that's probably not achievable under the new partnering-for-success environment.

Dawne S. Hickton

No, I would say that is where we're going to be. It's going to be hard to get better than that. So as we get better, we're giving some of that back.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And then just a quick one on the tax rate. I think it was 31% last quarter, it's 26% this quarter. How should we expect the cadence of that over the rest of the next 3 quarters?

William T. Hull

I'd look at it -- Julie, I'd look at it in the 26% to 28%. It's really due to the mix of the domestic and foreign jurisdictions and how that tax rate flows in. You know the U.S. tax rate's higher.

Operator

Our next question is from Chris Brown of Bank of America.

Christopher R. Brown - BofA Merrill Lynch, Research Division

Can you quantify the impact from the higher development costs in the first quarter? And how much of that might carry over into the second quarter? Just to help us get a better idea.

Dawne S. Hickton

Well, let me quantify it this way. The majority of the negative this first quarter was really between the development costs and the adjustments because of the ramps in really, 2 key programs, predominantly the 747-8. The ramp adjustment's behind us, but we're going to see a carryover into the second quarter, for the most part, some of those development costs. But again, this is all new business, so while it's hitting us now, these are opportunities to keep growing the business. Of the major impacts, the weather was the smallest impact, and obviously, that's behind us.

Christopher R. Brown - BofA Merrill Lynch, Research Division

Okay. So you've taken these development costs, and it should turn into new business but from here going forward...

Dawne S. Hickton

It is new business, it's not turning into new business. This is new business. This is when we're -- when you start production on a new product line on business we've acquired, that's part of our vertical integration. The first couple of ship sets out, you always end up with some higher production costs until you get the programs underway. And this kind of goes across multiple opportunities. I would, sort of from a big-picture standpoint, think back to when we first started the seat tracks. That was one large program. But this is a series of smaller in-size opportunities, sorry.

Christopher R. Brown - BofA Merrill Lynch, Research Division

So what else do we need to see to get margins in the Engineered Products business to the double-digit margin level? Is the -- can you put some examples of costs that you can still take out? Or is it just purely going forward just higher volumes from here?

William T. Hull

Well, I think volume's going to be a big part of how we do it going forward, there's no doubt. And we've started to see some -- we've solidified in our medical device business. That's starting to move back in a progressive direction relative to that. And then we've got a pretty aggressive cost-reduction pipeline that we put in place across our businesses to sort of just work the process of expanding our margins just with better overall operating efficiencies. In fact, we've taken some actions in Q1, and we may have to do some things as we go forward in Q2, 3 and 4 to kind of refine what our fixed-cost structure looks like and how we respond to the marketplace.

Dawne S. Hickton

Yes, and I might add one additional sort of overriding comment, Chris. And that is we've gotten better at determining what type of product we will participate in. And so as we've gotten better, we're more selective in the packages we bid on and focusing our vertical integration strategy on what we can do best. So all of those taken together, you'll start to see the improvements.

Operator

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

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

So a few questions related to the Fabrication Group. The first one is that your number of ship sets in Q1 compared to Q4 looks like they were exactly the same as far as Boeing 787 is concerned, right, 28?

Dawne S. Hickton

Yes, right around there.

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

But your revenues are much weaker compared to Q4 so -- and you seem like you are starting to ship some of the new products, so what's the offset there?

Dawne S. Hickton

Well, the offset was really more in our medical side of the business and on the energy. So that's really your offset in the first quarter. The ship set remained pretty good. We also had -- just as we get through the quarter, remember we had that -- the development costs were all related to the Engineered Products and Services group also.

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

Then following that up, you have all these costs that you are talking about, initial costs in the Fabrication business, which should of course, lead to future business. Now given the costs that you are taking in Q1 and Q2, what's the level of additional business or new business you are expecting in the Fabrication side and which programs are they coming from?

Dawne S. Hickton

Well again, remember, most of -- this is business we actually have one and we're now working it through the ramps. Some of this is on military packages, in particular, being able to take where we already supply the mill product and now performing additional fabrication on it. So some of those are on our military programs that we currently work on. Some of it is in the business in regional jet with some new opportunities that we have gained in the last year and new relationships in the biz jet area. And then even in commercial aerospace, some of our traditional business, new opportunities within the traditional players, the Boeing programs and the Airbus programs.

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

But you're not able to give specifics at this time?

Dawne S. Hickton

I'm sorry. You mean in terms -- you're going to see these grow over time. But they're -- it's not any one major contract we would announce like we did the seat tracks where you have $1.5 million revenue on a program. These are multiple opportunities, multiple packages that are filling our Engineered and Products Services business as we grow it.

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

But for the segment on a quarterly basis, the investments in Q1 and Q2 would be able to increase that segment revenue by $10 million, $15 million, $25 million a quarter?

Dawne S. Hickton

I think as you see us going forward, you'll see that increase. I think you're going to start to see upwards of -- through this year, I'm just looking at it across the year, you'll start to see low 5% to 10% to 15% increases as we move forward.

Operator

[Operator Instructions] And our next question is from Phil Gibbs of KeyBanc.

Philip Ross Gibbs - KeyBanc Capital Markets Inc., Research Division

I just -- I had a just a general question, I guess, for Dawne. You'd made a comment that the competitive landscape is changing rapidly and then you made some other comments as to how you're adjusting to that. I just wanted to get a little bit insight what you mean on the competitive landscape changing rapidly just as far as what you're seeing out there.

Dawne S. Hickton

Sure. Clearly, we have gone from -- when you look at us as a pure titanium player, we've gone in the last couple of years from being somebody who has embarked upon a vertical integration strategy where our competition was on the mill side, other mills; but on the vertical integration side, it was not other mills. We were competing in really 2 arenas: one, with the OEMs themselves whether it was an in-house decision or a subcontract-out decision, or with smaller multiple competitors across the globe. Today, there's been a lot of consolidation within the titanium industry. And so that has changed how we see our customers approaching us, and it's changed how we see the competitive landscape. What we have focused on is more of the vertical integration strategy where we have the relationships with the customers at the level to obtain the long-term opportunities, not kind of the -- how shall I say this, a one-off opportunity. You've seen us change in a certain direction over the year when we are less interested in spot business. We're more interested in the long-term ability to grow us and to grow with the customer. And then the other area where I think you see the biggest switch for us is really focusing on the technology. We started a couple of years ago working closely inside our major customers with their technology teams and looking at what are the new processes they're looking at, what are the new opportunities they're looking for. They're driving out costs just as we're trying to drive out costs. And we don't want to be doing that in a fashion where we're just giving up margin, if you will. We want to be part of the team to grow the business and improve our own opportunities. And I guess maybe just a quick example of that is really looking at the additive manufacturing opportunities we're focused on today. Hope that was helpful.

Philip Ross Gibbs - KeyBanc Capital Markets Inc., Research Division

Yes, definitely. And just a follow-up on the Engineered Products business. Are you expecting that business to be based on the start-up costs with these new programs and the rate adjustments? Are you still anticipating that to be in the loss territory in the second quarter as well?

Dawne S. Hickton

From an operating margin standpoint, no. In fact, we'll see that continue to move. And by the end of the year, we should get that to the high single digits.

Philip Ross Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. So back in the black. I just try to -- trying to think of the magnitude of maybe some of the hits that you experienced in the first quarter. And Bill, I missed what you had said on the gross margin for the Titanium business.

William T. Hull

Sure, Phil. It's 21.2% versus 22.2% last year.

Operator

And our next question comes from Steve Levenson from Stifel.

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

Could you just please give us your opinion on trends for scrap prices and lead times, please?

Dawne S. Hickton

Sure. We -- certainly, if you look at scrap pricing that came out in the first quarter, it's actually, was slightly lower than what you saw a year ago, but modestly up from December. And so from that standpoint, we don't see a lot of movement one way or the other. Certainly, if there are opportunities, we'll purchase scrap. But for the most part, I would actually say the scrap trend at the moment is kind of consistent with where we've seen it for the last couple of quarters.

Operator

Our next question is from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

So I wanted to understand the 787 comments a little better. You guys are now using some of your own titanium, if I recall, for the seat track production...

Dawne S. Hickton

Correct.

Gautam Khanna - Cowen and Company, LLC, Research Division

When you talked about -- okay. And you talked about double digit being capped at that margin, 10%. Does that include the titanium you're self-directing or is that separate?

Dawne S. Hickton

No, that includes it.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And does the pricing then, as we move through the year, does it step down kind of at a certain number of units? Or is it as you reach that 10% or better, that's when you share it?

Dawne S. Hickton

No, no. It's -- this is really harkening back to the original contract. There are negotiated step-downs at certain aircraft numbers, and we're starting to reach those. Obviously, had the program not had the delays it had for so many years, we would have been at what I would consider to be -- we were, at least, assuming we would be at a better production rate, if you will. But we're now just reaching those contractual step-downs. And within that, our ability to get to the 10% is why we really wanted to push to use our own material. I may -- I hope I answered you, Gautam. But what I was saying is we don't need to give -- under the PFS and the pricing, that's already forecasted into the numbers we're giving you, the 10%, getting us to 10%.

Gautam Khanna - Cowen and Company, LLC, Research Division

Understood. But it's all in, including your own titanium melted for the...

Dawne S. Hickton

Yes, yes. That's right.

Gautam Khanna - Cowen and Company, LLC, Research Division

And just can you remind us whether you have the capacity now to handle 12 a month and eventually, 14 a month on the 787? And if so, kind of does the -- do the economics improve at that point...

Dawne S. Hickton

The answer is yes. And in fact, within the quarter, it wasn't an even exact number each month. So we've actually been able to exceed 10 in a given month. So we have the capacity to do that. Certainly, if you do it on a consistent and continual basis as we move into, say, next year and the year after, yes that will help us improve. At some point, if you go beyond the '13 or '14 you're talking about, then you're talking about additional equipment.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. Last question, Dawne. Can you remind us -- I think you said in the past, it's about 1 million pounds internal now on the Boeing side for the 787. Could you remind us if that is the number? And just conceptually, I used to think that, that...

Dawne S. Hickton

Yes, that's roughly about what we're talking about at the 10 ship set rate.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And what does that confer for the next year in terms of mill product shipments? I mean that number will not rise presumably, right?

Dawne S. Hickton

You mean on that particular product?

Gautam Khanna - Cowen and Company, LLC, Research Division

Right.

Dawne S. Hickton

I wouldn't expect it to rise much on that particular product unless they're making a pushing to go to the 12 or 13 a month.

Gautam Khanna - Cowen and Company, LLC, Research Division

So does that -- should that inform us to think that really the growth next year in mill product will just be on the Airbus side?

Dawne S. Hickton

Well, you're really pushing me to give you a 2015 guidance, Gautam. But I'll tell you what I see now without -- just giving you a trend. We really -- next year, the Joint Strike Fighter should be one of the programs that could add a little bit more to our mill actually more than Airbus. We still see Airbus moving. The pickup there could be another year out.

Operator

[Operator Instructions] And our next question is from James Daly of Lazard.

James Daly

So as I kind of sit here and try to absorb all the moving pieces in the recent results and as importantly, your recent stock performance, I kind of look at it and I look across the space, I look across anything in aerospace, in metals. And you kind of, you still screen as being a very inexpensive stock. My question for you is, as you think about these investments and with all the cash you have in the balance sheet, you have $800 million market cap, you have $300 million of cash, at what point do you come in and start buying your own shares? Is there anything really better investment than your own stock at this point at these levels?

Dawne S. Hickton

Well certainly, we focused strategically on all of the appropriate long-term opportunities to grow the company for our shareholders. And at this point, we still think there are opportunities out there that meet what our customers are driving us from a growth standpoint. And obviously, if we reached a point where we thought the better use of our cash was to buy our own stock, then that's what we'd be doing. But at this point, we have some strategic opportunities we're pretty clearly focused on that will drive us to grow with our customers.

James Daly

There's clearly a disconnect between the equity markets and that growth opportunities. And we've kind of been hearing about it for a while now. So I think that's something, as an investor, that one avenue -- if not buying back the shares are possible, maybe selling off. I don't know, there's an opportunity to maybe divest the medical device business or other ways to kind of create equity value here because it seems to be -- doesn't matter what you guys do these days.

Dawne S. Hickton

Well, there's certainly a lot of ideas that you've mentioned, and there's certainly all of those ideas that are considered at the executive level. And we'll continue to consider them, so appreciate your insights on that.

Operator

Our next question is from Sal Tharani from Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

I'm sorry I missed a couple of your -- some of your early remarks. I just was wondering, can you give us a color on the visibility of the second half in terms of what portion of your business is in contract and what is spot? And how do you think you can get from -- where you -- what you expect in the first half to the second half?

Dawne S. Hickton

All right. In the mill group, when we talk about spot business, the mill group, the overwhelming majority of our business is long-term contract. And the ordering pattern and what we actually have already in place with our backlog and our customer-derived forecast, clearly, we expect our mill group between the first quarter and the fourth quarter, you're going to see a 20% in volume increase. So the mill is set, and that group is going to move up. And in terms of the full year, they're about 2/3 of the operating margin for the business. And then in the EP&S segment, we're continuing to see -- obviously, we've got some development costs that hit us this first quarter. They'll continue to hit us to a lesser extent in the second quarter. But then you'll see that quarter -- or you'll see that segment continue to move forward reaching high single digits by the end of the year and roughly making up 1/3 of the operating margin as we get to the range we indicated.

Operator

Our next question is from Frank Haflich from AMM.

Frank Haflich

Your shipments to the JSF program and Airbus this year, what will they be for each one?

Dawne S. Hickton

Well, we're looking at right around that 2 million pounds from the JSF. And Airbus is going to be very similar to last year. I think what we've said, 5...

William T. Hull

5.5.

Dawne S. Hickton

Between -- around 5.5, maybe slightly above. So that's a large chunk of our total mill.

Frank Haflich

Right. And on the previous question, I missed that. Did you say -- you talked about a 20% increase in volume between the first and fourth quarters. Is that titanium shipments?

Dawne S. Hickton

Yes, that was just mill product shipments. Yes, we shipped 3.8 million pounds this quarter, and we still are forecasting to get pretty close to 17 million pounds. So that's telling you that as we move forward, we're back-end weighted.

Operator

[Operator Instructions] And our next question is from Phil Gibbs from KeyBanc.

Philip Ross Gibbs - KeyBanc Capital Markets Inc., Research Division

Dawne, my question was answered.

Dawne S. Hickton

Okay, sure.

Operator

We do have our final question from Frank Haflich from AMM.

Frank Haflich

Dawne, can you just speak a little bit on the outlook for the JSF? As you -- it's gone through a lot of budgetary and political issues. And what's it going to take to get that program going and your shipments above 2 million pounds?

Dawne S. Hickton

Well frankly, certainly, when I look at it, a lot of the sequester and the defense budgets you've seen in Washington, a lot of that has really already taken place. And while they're continuing to adjust budgets and they're continuing to focus on cost reductions in all of the programs, the Joint Strike Fighter has really gotten the -- whatever approvals it needs to be the program going forward at this point in time. Now clearly, we all agree, it's not going to reach the same number of aircraft that was originally suggested back in -- at the time we signed our contract. But they're currently at -- they're currently producing. And they've delivered 12 already. They've got a pretty solid build rate of 32 aircraft and those build rates as we've been -- as been reported to us are increasing. And so we're going to continue to see that increase over the next couple of years. And like I said, we were at about 1.5 million pounds last year, we'll get to 2 million or slightly above that this year. And we'll continue to see that grow into next year. So for us, that's become a pretty solid program. And I guess that's all I should really say about it. Anything else should really be up to Lockheed to say. But from what we have been told and what we are forecasting for our production coming from our customer, is to continue to move forward.

Frank Haflich

Do you still estimate it as about 45 million pounds body [ph] weight on each -- 45,000 pounds of body [ph] weight on each JSF?

Dawne S. Hickton

On the airframe, actually, it's a little bit lower than that. It's anywhere -- depending upon which of the aircraft you're referring to, it's anywhere from 20 to 35. And the other thing I would say to you is keep in mind, we're also starting to do, bid on opportunities to do more than just supply the mill. So we do see that as a program that is beneficial to our company.

Operator

And that was our last question. Before I provide replay information, I will now turn the call back over to Mr. Crookshank for final remarks.

Dan Crookshank

Thank you very much, Tiffany, for helping us out today. I'll be available throughout the day for follow-up calls if you need to make a phone call into the company here. And in addition, we anticipate filing our Form 10-Q sometime later this week.

So with that, I'll turn it back to you, Tiffany, to end the call and provide the replay information. Thanks. Tiffany?

Operator

Yes. Thank you, ladies and gentlemen. We will have a replay of today's conference available until May 20, 2014, at 11:59 p.m. Eastern time. This concludes today's conference. Thank you for participating. You may now disconnect.

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