Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

RTI International Metals (NYSE:RTI)

Q2 2014 Earnings Call

August 05, 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

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

Analysts

Julie Yates Stewart - Crédit Suisse AG, Research Division

Christopher David Olin - Cleveland Research Company

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Christopher R. Brown - BofA Merrill Lynch, Research Division

David Charles Fondrie - Heartland Advisors, Inc.

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

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

Guy Shapira

Kathy Walton

Frank Haflich

Operator

Welcome to the RTI International Metals, Inc., Second Quarter 2014 Financial Results Conference Call. My name is Joe, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is also being recorded.

I will now turn the call over to Mr. Dan Crookshank. Mr. Crookshank, you may begin.

Dan Crookshank

Thank you, Joe. Good morning, ladies and gentlemen. Welcome and thank you for joining us today for our review of our RTI International Metals' Second 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; Mike McAuley, RTI's new Senior Vice President and Chief Financial Officer; and Bill Hull, RTI's Senior Vice President and newly appointed Chief Risk 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 disclaimers set out in today's press release and in our other SEC filings.

Now let me introduce Dawne Hickton.

Dawne, please go ahead.

Dawne S. Hickton

Thanks, Dan. Hello, everybody. Thanks for being with us today. Before I begin, I would like to formally welcome Mike McAuley to his first quarterly earnings call for RTI. We look forward to working with Mike and we believe the investment community will as well.

Now as is our usual practice, I will open with a summary of RTI's consolidated second quarter results. After that, I'll give some highlights for the quarter and Bill Hull will provide the segment details and then I'll come back with my final remarks and we'll take your questions.

RTI's second quarter was a good one and it was led by improved performance by our Engineered Products and Services segment. Increased production in the Boeing 787 seat track program, as well as contribution from certain energy market projects underpinned the EP&S segment's return to profitability during the quarter.

Overall, results for the period conformed to our outlook for growing strength in our second quarter, as well as the second half of the year.

So let me just summarize. Our revenues totaled $205.3 million and that compared to the second quarter revenues of 2013 of $199.1 million. Operating income was $17.5 million and that compared to $20.5 million in last year's second quarter results, which I would just want to remind you included last year $8.3 million more of duty drawback cost recoveries than in the current quarter. This is a reminder that last year's second quarter duty drawback collections were elevated as we were collecting a number of years of claims of backlog through 2013 as our filing and collection process was getting back on track.

Now net income attributable to continuing operations was $7.3 million or $0.23 per diluted share, and that compared to the second quarter net income last year of continuing operations of $1.1 million or $0.03 per diluted share.

In addition to the benefit of a higher level of duty collections last year, the second quarter results last year also included $13.7 million of a pretax charge to interest expense that related to the early extinguishment of a portion of our long-term convertible debt.

Total titanium mill product shipments were 3.9 million pounds for the quarter compared to 4.1 million pounds last year.

And our Boeing 787 seat track deliveries totaled 36 equivalent ship sets, and that compared to 18 delivered in the same period last year. Now for the rest of the year on this program, we expect to deliver to the 787 seat track systems at a rate of approximately 11 per month for the remainder of the year, and we've included that in our full year outlook.

We ended the second quarter with a backlog of $577 million. This is an increase from $508 million in the first quarter. And you may recall, as I said on our first quarter call, we expected the second quarter to be seasonally strong with respect to booked orders and it was.

Now let me focus for a moment on some operational highlights for the just past quarter. I'll begin with a brief recap of RTI's experience at the Farnborough Airshow. I think that provides a good barometer of the big picture trends in the aerospace industry. The message from Farnborough again this year was that the growth cycle in the commercial aerospace business remains healthy and intact. New orders and commitments announced at Farnborough by Airbus and Boeing totaled about $115 billion. This in turn is driving further growth in the commercial aircraft backlogs at each OEM as both have already achieved year-to-date net orders that are expected to result in book-to-bill ratios of greater than 1 for the full year.

In this context, at RTI, we met with major OEMs at the show and other customers, as well as our key sponge suppliers. Our discussions covered subjects that included long-term agreements, as well as implications of the recent difficult events in Ukraine and the Middle East, which as we all know, have amplified geopolitical risk.

Let me just comment that with respect to our meetings with Airbus, both at the show and earlier in the quarter through our strategic meetings, reinforced our outlook for essentially flat titanium volumes for the whole of 2014 compared to last year, but with low single-digit growth expected next year as the aerospace production ramp starts to gain momentum. So consequently, discussions with our sponge suppliers reinforced our confidence in both the stability of supply and price moving forward.

I can also tell you that during the quarter, we continued to make progress in winning vertically integrated packages, utilizing both our legacy business, as well as our newly acquired, near net shape manufacturing capabilities in 3D printing and powder materials. Let me just give several recent developments that exemplify each of these attributes.

In June, RTI announced that it was chosen by Boeing for expanded titanium parts manufacturing, machining and assembly for the 787 seat track system. Under this agreement, RTI's Engineered Products and Services Segment will perform subassembly activities to prepare RTI manufactured center fuselage seat track components for final airplane installation, as well as manufacture additional parts required in the subassembly. This work will be done at several RTI facilities. For instance, RTI in Houston and Canada will continue to perform our original scope of work of extruding, final machining and finishing the base seat track components. We will expand our raw material use to include new titanium parts used in the expanded assembly work scope. And final assembly work will be done at our Montreal location and consists of creating an assembly-ready structure. This agreement represents a market share win on the 787 platform and also shows our customers' confidence in the ability of RTI to deliver integrated supply chain solutions.

Now also in June, we announced the acquisition of RTI Advanced Powder Materials, formerly Dynamet Technology, Inc. of Burlington, Massachusetts. Advanced Powder Materials brings to RTI a new source of innovation in titanium and composite powder metallurgy, as well as new capability in near net shape manufacturing of preforms and components for aerospace, defense, biomedical and industrial customers. And just last week, one of the long-time medical device customers of this business announced FDA approval of a product that uses a special patented alloy of RTI Advanced Materials.

Now Advanced Powder Materials builds on our acquisition of RTI Directed Manufacturing, which brought 3D printing expertise to RTI earlier this year. These additions enhance our strategic positioning to capitalize on increasing customer demand for lower-cost materials and innovative near net shape solutions across all of our markets.

We also positioned RTI well to begin to grow our market share of complex titanium components with capabilities beyond traditional mill products and material conversion methods. With each passing month, we are experiencing increasing levels of interest from our customer base. Some new customers, some not so new, in exploring the value proposition that these new capabilities of ours can bring to their product offerings and projects.

And also during the past quarter, we were awarded new business by yet another aerospace engine OEM customer, this time as a major supplier of one of our new and innovative titanium alloy products. This award is particularly important for RTI in that it adds another key customer relationship for our company with another player in aerospace while also adding to our growing presence in the jet engine market. You'll recall that last year, RTI was chosen to supply rotor-quality titanium mill products for Pratt & Whitney's pure power family of geared turbo fan jet engines. As part of that agreement, Pratt & Whitney agreed to be the engine launch customer for our electron beam furnace in Canton, Ohio.

So in addition to further increasing our market share in this growing market area, this new award also demonstrates our capability and capacity for product development and innovation in the materials area. I can't give any more details on this selection other than to note, we are currently in the process of finalizing a long-term supply agreement with this new customer and would expect to announce this officially in more detail in the coming weeks. Production for this opportunity is expected to start in late 2015 or early 2016 and will benefit our titanium segment long-term.

As the commercial aerospace ramp develops, I think it's important to note that this market is going to see lots of innovation moving forward in both materials and manufacturing.

And before I turn it over to Bill Hull, I do want to just take a moment to talk about our recent reorganization in our management team. As we noted at the beginning of the call, Mike McAuley has joined us as our new Chief Financial Officer and Bill Hull, who had been our CFO, moves to the newly created position of Chief Risk Officer at RTI. In addition, we've welcomed Dr. Kathryn Jackson as our new Chief Technology Officer. We see these changes as necessary to meet the growing challenges we face as a company in order to reach our financial goals in an increasingly competitive and complicated business environment.

As a global vertically integrated supplier, we are entering into more comprehensive agreements than ever before that bring with them more opportunity, but also more risk. To manage most effectively and continue our growth in this dynamically changing business environment, we need to allocate resources, promote innovation and execute with more skill, efficiency and strategic precision than ever before.

Mike McAuley's experience in the aerospace industry at Goodrich Corporation, now part of United Technologies, will be very important in helping us maximize opportunities in that growing sector of RTI's business. While Bill Hull's new role recognizes the new realities of risk that RTI is assuming as a vertically integrated company with contracts that span continents and touch the entire supply chain. And our addition of Kate Jackson from Westinghouse gives us a blue-chip asset in the race to keep RTI's products and manufacturing technologies on the leading edge of innovation.

We're fortunate to have this talent on our executive team and I'm looking forward to working with everyone to reach our business and financial goals.

Now with that, I will turn it back to Bill Hull who will discuss the second quarter segment details. Bill?

William T. Hull

Thanks, Dawne. Let's review our 2014 second quarter business segment results.

The Titanium Segment reported operating income of $7.9 million on net sales of $83.3 million. This compares to 2013 second quarter operating income of $17 million on net sales of $83.5 million. 2014 second quarter operating income was lower by $5.9 million due to the benefit in last year's second quarter from the collection of a substantial portion of the company's prior period duty drawback claims backlog.

Second quarter 2014 sales were flat with last year as the impact of higher trade customer shipment volumes was offset by a lower priced product mix. In addition, the second quarter 2014 operating income was lower due to the impact of a lower-margin product mix and severance costs related to fixed cost reduction actions implemented in the current year second quarter.

Gross margin on net sales for the quarter was 21% compared to 31.5% for the same period last year.

Now turning to the Engineered Products and Services segment. It reported operating income in the current year second quarter of $9.6 million on net sales of $122 million. This compares to operating income of $3.5 million on net sales of $115.6 million for the same period last year. Improved performance was driven by a higher contribution in the current quarter from certain energy market projects, as well as higher volumes on the Boeing 787 seat track system program. This was partially offset by build-rate schedule adjustments for certain commercial aircraft programs and a continued impact of higher new program development costs, which began to abate from 2014 first quarter cost levels.

RTI Extrusions Europe, acquired in October 2013, and RTI Directed Manufacturing, acquired in January 2014, contributed $6.2 million in net sales in the second quarter. The increase in operating income from last year's second quarter was achieved despite of a $2.4 million reduction in duty drawback cost recoveries. Gross margin on net sales for the quarter was 20.3% compared to 15.1% for the same period last year.

Now let me provide a few other items for the second quarter. Interest expense for the second quarter 2014 was $7.7 million. This compares to $20.7 million for the same period in 2013. Second quarter 2013 interest expense included a $13.7 million pretax charge related to the early retirement of a portion of the company's convertible senior notes due 2015.

Cash provided by operating activities was $19.4 million for the quarter. That's principally due to strong earnings and improving working capital management.

Also during the quarter, we acquired RTI Advanced Powder Materials for approximately $15.5 million in cash. Capital expenditures were $6.8 million for the quarter. Depreciation and amortization expense was $11.2 million. Our cash and short-term investments totaled $292.6 million as of June 30, 2014.

Now before 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 non-operational and cash flow metrics for the 2014 full year.

Interest expense for 2014 is expected to be approximately $31 million. Of that, about $10 million will be cash. Our effective tax rate is anticipated to be approximately 25%, that's before considering any discrete tax adjustments. Depreciation and amortization expense is expected to be about $45 million for the year, and our capital expenditures are expected to be between $40 million and $50 million for the year.

Dawne?

Dawne S. Hickton

Thanks, Bill. After posting solid second quarter financial results that were in line with our expectations, it's clear that RTI still has a fair amount of ground to cover to achieve the full year operating income outlook that we updated you on the last quarter. So to conclude this morning, I'd like to discuss the key contributors we see shaping RTI's financial performance in the second half that we expect will enable us to do just that.

Given our performance to date and the anticipated results for these sequential trends, we are maintaining our previously committed outlook for operating income to be at the lower end of the range of $75 million to $85 million for the full year.

Now in regards to sales and mill product volumes, we see ourselves trending to the -- approach the $800 million revenue mark with total mill product shipments still expected to approach 17 million pounds. There are, however, a number of moving parts that do support this outlook. So let me start with the Titanium segment.

As I pointed out on our last earnings call, we expect our Titanium segment to be the main catalyst in the second half as our mill product volumes, mix and product costs continue to become more favorable in the second half. In particular, we expect the Titanium segment's contributions to sales and earnings to be substantially weighted to the fourth quarter.

Now in contrast, our Engineered Products and Services segment, we expect the second half sales to be relatively flat compared to the first half and fairly balanced across the remaining quarters. Although we are looking for improving operational performance trends that will continue across most of those segment businesses in the second half, we do expect to see a couple of second half headwinds. Some of the those headwinds include significantly lower energy market projects sales, as well as the impact of price downs on the seat tracks for the Boeing 787 from our partnering for success participation.

But I would note, these partnering for success impacts have already been factored into our guidance for the second half. So altogether, this is expected to result in the continuation of solid profitability in the EP&S segment.

So with that, let me turn it over for -- to all of you for questions.

Joe?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question here comes from Julie Yates from Crédit Suisse.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Dawne, can you elaborate a little bit more on what you're seeing in the energy markets? You noted some strength in the release and you talked about that, but then you also just highlighted that there'll be some headwinds in the second half of the year. So just help us understand some of the trends that you're seeing in that business.

Dawne S. Hickton

Sure, Julie. And I think, as you will recall, and it continues to be the case, this is what we refer to, our favorite financial word, as a lumpy market. These are project-based opportunities that we work on. And so as we complete a project, we recognize the revenue and then we may be starting on either newer projects or expanded projects that may take us into next year. So while we're seeing solid activity, it's really a question of, we finished up some opportunities in the first half, what we're working on today will probably carry us into the second half. Really a lot of good opportunities with titanium stress joints and some other of the products that we work on. But it's really just a function of timing of those projects. And I don't know, Jim, if you want to add anything to that or elaborate further?

James L. McCarley

Well, I think the only thing I would add is that on the ordering side, we see a very similar type of pattern where our backlog is going to fluctuate with sort of project type of ordering patterns. And that businesses is really best looked at almost on an annual basis as opposed to a quarter-on-quarter basis.

Dawne S. Hickton

Hope that answers it. It's a good business. It's just that it's a little lumpy at the moment. So that will be one of our headwinds in the second half.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Well maybe just then on an annual basis, how is it comparing to 2013? And then how should we think about it going into 2015 if you have that level of visibility at this point?

James L. McCarley

Well, it's off from 2013, probably down about 25% from what we did in 2013. And going into 2014, we kind of see it stabilizing at the number that we're at this year going into 2015 with some opportunity for growth towards the '16, '17 range.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay, great. And then just last one, just any update on the medical business?

Dawne S. Hickton

We're seeing improvement in that market. And certainly, what's really interesting for us, actually -- so we're starting to see that market improve. But our new technologies, both 3D printing and our powder materials, our Advanced Powder Materials business, are providing a lot of opportunity for innovation. So we continue to see that as a good benefit for us.

Operator

And our next question comes from Mr. Chris Olin from Cleveland Research.

Christopher David Olin - Cleveland Research Company

I just wanted to make sure I understand the volume guidance we're talking about on the titanium mill side. You referred to Airbus and you were talking about single-digit growth, I believe. And I guess, I wanted to make sure, was that demand from the Airbus channel itself? Or was that your overall guidance or thoughts on the mill business in total?

Dawne S. Hickton

We're talking about our mill product -- production. So we're looking at that from -- for that 1 customer alone. Because as you know, they represent a substantial portion of our mill product in the Titanium Segment. So we're seeing that this year's total volume, we're going to approach 17 million pounds, and a large chunk of that is Airbus. And we'll see the modest increase in that next year.

Christopher David Olin - Cleveland Research Company

When you look at the Airbus platforms, it seems like as we get into '15 and '16, the A350's going to be a bigger contributor. And I guess, I'm wondering why demand wouldn't be bigger going into that channel given the way your contract structures work.

Dawne S. Hickton

Well, you'll start to see that pick up for us as you get into the end of next year and you get into 2016. So some of that is we're already building that volume today as we move to those programs. Remember, we're kind of across the spectrum. And then, I guess, I would also remind you that you have to recognize that last year and the year before, we actually had our volumes included material above our market share.

Christopher David Olin - Cleveland Research Company

And in terms of how the long-term market share would work, if I would take my assumptions on, like, Airbus demand for the 2016 and 2017, would you be about a 30% market share of that?

Dawne S. Hickton

Contractually, we have a base of 30%, that's correct. And there are opportunities for us to go above that market share on occasion.

Christopher David Olin - Cleveland Research Company

Okay. And then final question, is there any fabrication business tied to the A350? Or can you win anything on the new A330 design?

Dawne S. Hickton

Yes and yes. We actually already are doing business on our EP&S side for the 350. That's been ongoing. We continue to work on additional opportunities and we're excited about the 330 Neo. And we definitely, just as we saw with the 320 Neo, we would expect that there will be opportunities for us.

Operator

[Operator Instructions] And our next question here comes from Mr. Phil Gibbs from KeyBanc Capital.

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

Dawne, you said your second half guidance for fabrication contemplated some price downs on the seat track program. Are you factoring any offsets from some of the assembly wins you had discussed? How should we be thinking about that moving forward?

Dawne S. Hickton

Well, those -- so the assemblies move us into next year. So what -- so that's sort of additional for next year's guidance when we get into that point. But what we've already told you for this year, we have factored in. In fact there already have been put in place, we've already been executing on some of the partnering for success opportunities.

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

Okay. So the new contract wins will largely be a help or two to next year then, is that how to think about it?

Dawne S. Hickton

Correct, correct.

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

And then, Bill, I may have missed it, but you talked about the segment gross margins. Can you just repeat what those were again?

William T. Hull

Yes, sure, Phil. Gross margins for TIE segment were 21% for the quarter and gross margins for the EP&S segment were 20.3% for the quarter.

Operator

And our next question comes from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

I wanted to ask what your current 787 shipment content is, per ship set, was it $1.5 million roughly? And how should we think about that into 2015?

Dawne S. Hickton

Well, from a total enterprise, because we continue to have opportunities that go beyond just the seat tracks. And certainly, we're doing some hot forming in different opportunities across the supply chain, I think if you're looking still, again total enterprise at 1.4 to 1.5 is still a good number. But with the price downs that are specifically related to the production levels at the seat track program, that number's closer to 1, 1.1.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And the EPS segment profits were very high this quarter. Can you talk about what the specific drivers of that and comment specifically also on how profitability on the 787 program has progressed? Where you are now versus perhaps 6 months ago?

James L. McCarley

Okay, Gautam, this is Jim. I'll try to answer that. In terms of what made up this quarter, the energy products or the energy market projects were a pretty significant portion of the quarter results. I can't -- I don't really think it's right to break it out specifically in terms of that content, but it was fairly high. And what we're going to see going forward is sort of the quarter results that we saw in Q2 we expect to continue as an overall operating range in Q3 and Q4. So some of the headwinds that come from the change in energy market's going to be offset with some improvements in our other businesses going forward. Looks like they're going to sort of even each other out. Regarding the 787 profitability, we've given you some general idea around where we think that number is and we're still with that. With the partnering for success, we've certainly tried to take the tack at keeping the profitability intact as we go forward. So there's really not been any expansion on that beyond where we were, say, 2 quarters ago in terms of the targets. We're pretty much right on target with what we said.

Gautam Khanna - Cowen and Company, LLC, Research Division

And target was 10%, if I recall. Is that right?

William F. Strome

I think that was your number. But we're in that range.

Dawne S. Hickton

We're pushing for that. We're working toward that.

Gautam Khanna - Cowen and Company, LLC, Research Division

Dawne, can you talk about why you expect 11 per month on the 787 rate through the end of the year when the assembly rate's 10?

Dawne S. Hickton

Well, again we're talking in terms of equivalent ship sets, and that is the production level at which our customer has us working towards. Now last quarter -- we've gone as high as 12. Some of that was to push to system and some of that is really just getting it to the level of which we're transporting the product to the customer to have that ready for their installation. So that's where we expect to be for the rest of the year, that's where our forecast is.

Gautam Khanna - Cowen and Company, LLC, Research Division

And you wouldn't expect a step down next year?

Dawne S. Hickton

No.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And last one on the Titanium group margins, can you talk a little bit about where these -- actually, 2 questions, 1 on the margins. If you could talk about, you've had quarters last year where you're doing north of 10% EBIT margin. I just wanted to get a sense for does the mix improve substantially in the second half? Or does something get you there north of 10% in the second half? Can you talk about the specifics? And lastly, on the Airbus volumes this year, are you still tracking to under 6 million pounds?

Dawne S. Hickton

Well, let me answer the last one first. We're tracking right around that 6 million pounds an Airbus. And as far as the TIE margins, we'll definitely see the margins improving as the year goes -- progresses. So yes, so operating margins, right now is just under 10, we'll definitely be above that as we move forward with the strength, most of it coming in the fourth quarter. We would expect to get actually double that in the fourth quarter.

Gautam Khanna - Cowen and Company, LLC, Research Division

Is that a mix-driven phenomenon?

Dawne S. Hickton

A large portion of it is mix, a large portion of it is the different contracts under which we'll be producing at that point in time. And also we have been impact -- not impacting, implementing some very significant cost reductions and we will expect the benefit of those to show up in the second half of the year, particularly in the fourth quarter.

Operator

And our next question will come from Mr. Chris Brown from Bank of America.

Christopher R. Brown - BofA Merrill Lynch, Research Division

Engineered Products operating profit jumps around a lot from the lumpiness of the projects in there. But can you provide us with your longer-term margin guidance, especially after some of the more recent bolt-on acquisitions in that segment?

Dawne S. Hickton

Well, we're certainly driving that business to try to reach a low- to mid-teens. So that's the driver, that's what we're pushing for and we can get -- we believe we can get there.

Christopher R. Brown - BofA Merrill Lynch, Research Division

Okay. And then as you look at your Airbus volumes over several years, I mean, is there an opportunity to improve your mix of product there, especially as you start shipping more towards the A350, will we see any sort of positive mix shift from that?

Dawne S. Hickton

We should, but we'll also see continued increase in volume as we get out the next couple of years.

Operator

[Operator Instructions] And our next question here comes from David Fondrie from Heartland Funds.

David Charles Fondrie - Heartland Advisors, Inc.

Could you give us some color on -- you had a nice sequential increase in backlog, at least I think it was 508 to 577. Can you talk where that backlog came from?

Dawne S. Hickton

Significant portion of that is Airbus placing their orders and then you're starting to see some of the other, just I would say, a collection of the rest of our business. Some of it is the 787 as the backlog increases in some of those projects. But most of it's Airbus.

David Charles Fondrie - Heartland Advisors, Inc.

And it would not, I assume it would not include the new engine parts that you spoke to in your prepared remarks?

Dawne S. Hickton

Well, the new engine business is going to start late 2015. That's -- we were just selected, that's a new customer, it's a great new opportunity. But that won't hit until the end of 2015.

David Charles Fondrie - Heartland Advisors, Inc.

Okay. So you wouldn't include that in your backlog?

Dawne S. Hickton

Now we -- the only -- just to clarify, the only thing included in our backlog are actually firm orders that are placed with a delivery date. So for instance, any of our contracted volume whether it's Pratt & Whitney, MTU or this new engine customer, or Airbus for the future, none of that's in the backlog. It's only what they've -- so it's only in the long-term contracts, we don't count that as part of our backlog until it's actually put into production.

David Charles Fondrie - Heartland Advisors, Inc.

So that's, obviously, a fairly conservative estimate in terms of backlog. Have you ever considered providing some view of what that contracts won for the future?

Dawne S. Hickton

That's a good question. When we issue a new contract, we announce what we expect the anticipated revenue news of the life of the contract to be, so that's in our initial press releases. But very good question. So let us think about that and see if we can quantify that, because obviously, those do change going forward. For instance, this new engine opportunity, we expect that, as you look over the life of the program, to be in excess of $100 million in revenue. But that's not occurred in backlog. So that's a good question, let us take a look at that and see if there's some information we can provide going forward.

David Charles Fondrie - Heartland Advisors, Inc.

Great. And then the other question I had, following up a little bit on Julie's comment. I believe in the past, you've talked about developing some new energy products that were more -- well, more maybe more repetitive as opposed to project-oriented. Did I miss interpret that or is that something that you're still working on? And perhaps an update on that?

Dawne S. Hickton

You didn't misinterpret, we are still working. We're making a lot of progress but really don't have more to say at the moment. We've got a couple of key customers that are very excited about these new opportunities, but haven't turned the trigger, if you will. So we're getting close and hopefully, we'll get there.

Operator

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

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

So the quick question, in the past, you had talked about the E-Beam opportunity and of course, you had a key customer and you're now signing up a second customer. Would you give us some idea that with the kind of business that you are expecting from this customer, do you think you'll be at full capacity on your E-Beam Furnace?

Dawne S. Hickton

Not necessarily with those customers. We'll have a significant amount of the capacity tied to the engine market. But we're going to be using that EB furnace for other than engine opportunities. I mean, ultimately, we think we can fill that capacity. But that's not going to happen this year.

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

But this new customer would have orders maybe in the second half instead of next year, right?

Dawne S. Hickton

We'll start seeing production in the second half, but moving into 2016 before that starts to the benefit us. So too soon to say that's going to commit our furnaces. In fact, that's a particular -- that's a particular alloy that we've been developing for that particular project. That would actually not use the EB furnace on that particular case.

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

Okay. And then in terms of raw material pricing, you had a little bit of dip in there that you said the raw material pricing kind of improved a little bit in the Titanium segment. What kind of improvement are we expecting in the second half as you expect higher margins in that segment?

Dawne S. Hickton

Let me just say, we'll see that as part of our overall cost reduction as we go forward in the second half in the TIE segment. So I don't want to break that out separately. But we're continuing to see that the supply is stable and just kind of a more balanced blend as we look at our input materials for the titanium production at the mount level.

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

Okay. Could you talk a little bit about the target on CapEx and depreciation for the year? I think you did give that, right?

Dawne S. Hickton

Sure. CapEx, we're looking at right around $40 million to $50 million total for the year. As you may -- most of our major capital expansion projects are behind us, from the large forging project in Martinsville to the new Electron Beam Furnace. Those are all behind us. So our CapEx now is really focused on some maintenance projects and some may be one-off equipment adjustments, if you will, or new equipment purchases, a machining piece here or there. And I think depreciation is about $45 million.

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

But the linearity of the CapEx, should we expect it to kind of similar in the next 2 quarters or should it keep coming down?

Dawne S. Hickton

I think it'll be -- it's going to be level for the next 2 quarters, that's how I would just put it.

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

And just 1 clarification. I think you -- in your remarks, you said that some of the strength that you saw, because of these energy projects would not be there in the next -- second half, but it will be offset by the mill products, balancing these 2, do you still expect sequential improvement in revenues in the Q3 and Q4 or not?

Dawne S. Hickton

I would expect sequential improvement, but most of it's coming in the fourth quarter. So the third will be a little bit better than the second, but the fourth is where you're going to really see the benefit. And again that's going to come in the Titanium Segment.

Operator

And our next question comes from Patrick McCarthy from FBR Capital Markets.

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

My first question is on the new engine opportunity. And I guess, I've always thought of a P&W contract more as a safety source or a secondary supplier type of relationship. But you're using the word major here, so is it fair for me to assume that from a financial perspective, much more significant than the P&W going forward?

Dawne S. Hickton

Let me answer it this way. It's a different -- it's a specific alloy product. This isn't -- we're not talking about -- with respect to Pratt and Whitney, we're supplying multiple products. And yes, your description of us as a secondary supplier to them is accurate. This is a totally different sort of a way to look at it. We've been selected as a major supplier in a particular product for a new engine program. I really can't give you any more details on that until we, in the next couple of weeks, we're putting the signatures on the final arrangement. I can say that we would see the production of this product starting in late '15 and into 2016. And over the life of that particular contract, we're talking revenues of around $100 million. So it's a pretty -- it's a good program but it's just a different situation. I do apologize that I'm giving you a teaser like that, but it's important enough for us, we want to get out there and when we get you the details next month, we will.

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

Fair enough. I was wondering if you could give us an update on Martinsville. What I'm trying to figure out is whether or not that's having any influence on the better margins or, I'm sorry, the cost reductions you talked about in this quarter, but that also the lower costs that you're looking for going forward. Is something happening there with utilization? Or is it an entirely different set up?

Dawne S. Hickton

Well, it's helping. But I'll let Jim give you some more specifics on that.

James L. McCarley

Yes, I would say the Martinsville facility's helped us with our cycle times and, to some degree, our cost structure. But we're really seeing most of the benefit come through our blend costs and really exploiting on the EB furnace platform in terms of the product that we're making now. So I'd say the bulk of the improvements have come through that type of an arrangement.

Operator

[Operator Instructions] Our next question comes from Mr. Phil Gibbs from KeyBanc Capital.

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

Dawne, as far as the JSF, what's the view there as far as what you're learning from the budgets and what you're seeing from Martin and Lockheed [ph]?

Dawne S. Hickton

Sure. Even though it was regrettable the plane couldn't fly at Farnborough, we're seeing that there are solid strengths for that program in the budget. They're continuing to move forward. We're continuing to be advised by our customer to continue to produce at the levels that we've anticipated, which for this year, is going to be about roughly around 2 million pounds out of the mill in product. And we're continuing to bid on packages on our EP&S side of our business. So from that standpoint, we're still seeing a lot of positives around the program. Now there's a lot of push on cost reductions and we were actually a contributor to that about 2 years ago. And I'm sure, as we move forward with our new EP&S opportunities, a lot of that's driving them looking for opportunities to continue to take out costs for the affordability of that program. But from our standpoint, you see a lot of positive energy around the program.

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

Okay. And I just had a question on the inventory side as well. What are we -- what should we be thinking about there as far as your inventory levels, are they -- your internal inventory levels, are they high right now, expect those to go down in the second half? Or is this a decent level at this sales pace?

Dawne S. Hickton

Well, they are high. But as a vertically integrated supplier, a lot of what we're doing, we're carrying inventory through our own internal supply chain. So we're working on bringing that down, but I don't think you're going to see a modest adjustments because what you're looking at is probably about the level at which you need for this supply chain on the vertical integration. We're seeing a lot -- we get a lot of whip because of things like the 787 program.

Operator

Our next question here comes from Guy Shapira from Birch Grove Capital.

Guy Shapira

Just a quick question here. Last quarter you briefly mentioned the potential impact of the turbulence in Ukraine, Russia. And customers potentially standing for contingency. I was wondering whether you have any more color on that?

Dawne S. Hickton

Well, certainly, as the situation in Ukraine has continued to escalate and of course, the horrible situation with the Flight 17 has created a lot of consternation. So we've certainly seen within our customer base an interest in putting in place mitigation plans. And what I can tell you is that we've had discussions with our major customers and we are part of that process for mitigation planning.

Operator

And our next question comes from Kathy Walton from The Basic Industries.

Kathy Walton

Yes, my question was just as well about the Ukraine and Russia. And of course the previous caller just asked about that. But more specifically, a number of industries are impacted by this, the oil, oil services, and I'm seeing autos. And both Boeing and Airbus are undergoing -- Boeing so far, a 2-month review internally and whatnot. And to follow-up on his question, how would those sanctions -- they're big suppliers to Boeing and Airbus. How would that possibly benefit or hurt you? And what would your capacity be to pick up the extra volume in the event that the VSMPO is sanctioned against?

Dawne S. Hickton

Let me say -- let me answer your last question first. We have adequate capacity that we can support our customers needs if the worst happens. And I say that particularly with respect to our strategic customer Airbus, where we are a critical supplier to them on the mill product side of the business. And I can assure you that we are prepared to assist Airbus in any way that, if necessary, if they were put in a situation where they were not able to get their supply. In terms of your general question, would it hurt or benefit us. Quite frankly, as a -- when you look at our mill product side of the business, we have the raw materials sourcing capabilities, as well as the melting capabilities that we believe, the U.S. -- not only just our company, but the U.S. supply could support any situation that were to occur. So I think it would ultimately be a benefit. I don't know how I could say it otherwise. Now I'd certainly think that that's on the aerospace side. On the -- I don't see it really impacting negatively, any of our other markets, but I certainly see that there are opportunities for us to supply our customers in the event sanctions were such that they shut down production.

Operator

And our final question here comes from Mr. Frank Haflich from AMM.

Frank Haflich

Dawne, 2 questions, one is did you mention a step-down in the value per ship set of the -- on your 787 work from a current $1.4 million to $1.5 million to $1 million to $1.1 million associated...

Dawne S. Hickton

Well, let me clarify that before you ask your second question. So what I was saying, Frank, is on the 787 program for a total RTI value proposition, meaning our multiple business units, our total value is still at that $1.4 million to $1.5 million per plane. When we speak specifically to the seat track program, that -- the value, which is only about maybe 80 or 90 parts out of all of the parts that we're producing for that program, the value of that portion of the package after you put in the step-down pricing is around $1 million, $1.1 million per ship set.

Frank Haflich

Okay. And the second question is, scrap prices have been going up. How are you looking ahead now for how raw material, the relative values of raw material and what impact it may have on you scrap versus sponge, et cetera, do you see any impact as far as you're concerned, how it may benefit you? You're a large sponge consumer.

Dawne S. Hickton

Well, I think as you well know, we have different furnaces and the ability to utilize our blend systems as it benefits us, depending upon the market. So we certainly have long-term sponge supply agreements and our supply of sponge is stable. And we will have an internal revert system for our own scrap, particularly as we continue to expand on our integrated supply chain. And so we're able to use a very nice blend as is appropriate under the circumstances. So if the scrap pricing is advantageous, we can play in that market. If not, we certainly have enough revert to satisfy our needs.

David Charles Fondrie - Heartland Advisors, Inc.

What's your outlook for sponge pricing? I know you're coming up on your negotiation. But in general, what does the outlook look?

Dawne S. Hickton

Well, those -- we will not be discussing negotiations until we get into the next quarter as we come up upon our ITA. But for the most part, we're seeing a stable supply and the sponge producers themselves are seeing a stable supply of their input material. So I would not expect to see major changes one way or the other, but we'll keep you posted as time goes forward.

Operator

And we have no further questions at this time. Before I provide, the replay information I will turn the call over to Mr. Crookshank for final remarks.

Dan Crookshank

Thank you, Joe. Thanks, everyone, for joining us for today's call. I just wanted to let you know that I'll be available throughout the day to take any follow-up questions you might have.

So with that, I'll turn it back to you, Joe, to provide the replay information.

Thanks.

Operator

And thank you. A replay of today's call will be available through August 19, 2014, by dialing 1 (888) 843-7419 or for international callers, you may dial 1 (630) 652-3042 and providing the conference call replay code of 37702474#.

This concludes today's conference. Thank you for participation and 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!

Source: RTI International Metals' (RTI) CEO Dawne Hickton on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts