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

RTI International Metals Inc. (NYSE:RTI)

Q4 2007 Earnings Call

February 19 2008 11:00 am ET

Executives

Richard Leone - Investor Relations

Dawne Hickton - Vice Chairman and CEO

William Hull - Senior VP and CFO

William Strome - Senior VP, Strategic Planning and Finance

Michael Wellham - COO

Analysts

Luke Folta - Longbow Research

Nick Capuano - Imperial Capital

Ray Rund - Shaker Investments

Gautam Khanna - Cowen

Brian Yu - Citigroup

Ron Silverton - Asgard

Talia Hagler - WFMJ

Don Shilling - Vindicator

Larry Ringler - Tribune Chronicle

Operator

Good morning, my name is Cheryl, and I'll be your conference Operator today. At this time I would like to welcome everyone to the RTI International Metals 2007 annual results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions) Thank you. It is now my pleasure to turn this call over to your host, Richard Leone. Sir, you may begin your conference.

Rich Leone

Good morning, ladies and gentlemen. Welcome, and thank you for joining us today on this conference call to review the fourth quarter and year-end 2007 financial results for RTI International Metals. I am Rich Leone, Manager of Investor Relations. The call will be led by Dawne Hickton, Vice Chairman and Chief Executive Officer of RTI. Bill Hull, Senior Vice President and Chief Financial Officer, Bill Strome, Senior Vice President of Strategic Planning and Finance, and Mike Wellham, Chief Operating Officer, will be available, along with Dawne, for your questions at the conclusion of the formal remarks.

As always, elements in this presentation are forward-looking and based on our best view of the business as we see it today. I refer you to our detailed disclaimer set out in the press release.

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

Dawne Hickton

Thank you, Rich. Good morning everyone. As Rich mentioned, I will review RTI's fourth quarter results, as well as our 2007 year-end results, and bring you up to date on a few significant corporate developments. We will also share some preliminary insight into RTI's anticipated financial performance, and the industry dynamics as we see them for the coming year.

Now let's start with a recap of our financial performance for the quarter and the year, and let me address the quarterly results first.

For the fourth quarter, RTI recorded net income of $24.9 million, or $1.08 per diluted share, compared to $26.8 million, or $1.16 per diluted share, in the same period a year ago. This difference in net income was a reflection of the unprecedented strength of the market in the fourth quarter of 2006. Net sales for the fourth quarter this year grew 13.9% to $163.8 million, compared $143.8 million for the comparable quarter last year.

Now for the full year, net income was $92.6 million, or $4 per share on net sales of $626.8 million. These results compared to net income of $75.7 million, or $3.29 a share, on sales of $505.4 million for the previous year. Both our annual sales and our net income were the highest in the history of this company. We also ended the year with cash on hand of $107.5 million.

Now while the closing months of the year saw a more challenging operating environment for everyone in the titanium industry, we met our targets for the quarter and year. I'm very proud of our entire RTI workforce, because we did this while simultaneously setting the stage for unprecedented growth in 2010 and beyond, with the signing of nearly $4 billion in long-term agreements with our key customers, including Airbus, Boeing, and Lockheed Martin. At the same time, we've embarked upon the largest expansion in infrastructure projects in the company's history; projects that are necessary to meet these commitments for decades to come.

Now let's look more closely at the company's two operating units. Starting again with quarterly results, for the Fabrication and Distribution Group, operating income for the fourth quarter was $5.7 million, on net sales of $95.1 million. This compared to income of $15.4 million on sales of $92.9 million for the fourth quarter of last year.

For the year, the Fabrication and Distribution Group reported net sales of $373.7 million resulting in operating income of $38.6 million. This compares to net sales of $300.5 million, and operating income of $36.8 million for 2006.

During the fourth quarter, we saw margins at the Fabrication and Distribution Group decline to 18.5%, from 24.4 in the third quarter. This margin softening during this quarter related mainly to two things. First and foremost it had to do with the common dynamics of our business cycle for distribution. For much of the past several quarters, RTI was in the favorable position of selling into the market inventory we had acquired at low prices. In the fourth quarter, we exhausted this low-cost inventory, which necessitated restocking at the higher prices, and selling this more expensive product into a declining price market, thus putting pressure on margins for distribution.

In addition, during the fourth quarter we experience a slower than expected startup in the 787 program. That led to some lower efficiencies at our Houston and Montreal facilities, leading to higher than expected overhead, including some outside [inaudible] costs. We expect this trend to continue for the next couple of quarters, but should see it settle by the second half of 2008.

Now for the Titanium Group. Again starting with the quarter, net sales for the fourth quarter were $114.1 million, including intersegment sales of $45.4 million. Operating income for the fourth quarter was $33.7 million, and this compares to operating income of $25.2 million on sales of $97.2 million, including intersegment sales of $46.3 million for the fourth quarter last year.

For the year, the Titanium Group reported net sales of $434.3 million, including intersegment sales of $181.2 million, and operating income of $102.6 million. The 2006 numbers were $356.9 million in net sales, including intersegment sales of $162 million, and $78.5 million in operating income.

We reported to you last quarter that we anticipated mill shipments would approach 15.5 million pounds. We essentially reached that target, shipping 15.4 million pounds for the year. Mill products shipments for the fourth quarter were 4 million pounds, at an average realized price of $27.34 per pound. Titanium Group margins were 55% of net sales for the fourth quarter, as compared to 45% of net sales for the third.

Before we leave the financials, quick note on duty drawback. During the fourth quarter, we did start re-filing for valid reimbursements due the company for the period, but we have not included any reimbursement income in the quarter, nor have we included any duty drawback reimbursements in our guidance for 2008. Basically, we've determined at this point to account for any reimbursements on a cash receipts basis. Now, as always, we'll be available after my formal remarks to answer any specific questions you have about the numbers.

Turning now to provide an update on our announced expansion. I'll start with our sponge project. As most of you know, in September we announced our intention to build a $300 million premium-grade sponge facility in Hamilton, Mississippi, in part to support our 11-year, $1.1 billion contract expansion with Airbus, as well as to supply the materials to support the 14-year, $2.1 billion Lockheed Martin Joint Strike Fighter contract.

During the fourth quarter of 2007, we began ground preparation and environmental permitting in connection with the new facility. The environmental permitting is necessary because this facility is located near wetlands, and the permitting process takes several months as we work with various local, state and federal government agencies. With this in mind, we expect to break ground around the end of the second quarter.

We have already placed orders for our long lead time equipment, we have our new engineering team in place, and indeed I can inform you that team is being led by Parsons Engineering, a global engineering firm. We're also beginning to staff the actual management workforce for this facility, and broader general staffing will begin in early 2009.

Our current plan is to begin producing sponge for quality testing in the second half of 2009, and to be operational in the first half of 2010, as we ramp up our long-term agreements. Now actual production levels at that time will be dependent on market conditions in 2010. We're estimating that initial production will be at 7 million pounds, but we have the capacity to move it to 10 million pounds or higher if warranted. Naturally, we'll continue to look at market opportunities for our metallics, and depending on market conditions, we'll balance that with our production requirements.

Before I move on to the next expansion, I would like to take a moment to remind everyone why we, and the entire board of RTI, feel building a sponge plant is important right now and is in the best interests of RTI going forward. First, we continue to see very strong long-term demand drivers for titanium in our core commercial aerospace and defense market. Second, in order to sign billions of dollars, multi-year agreements with our customers, we must be in a position to guarantee these customers that we will have a reliable supply of quality sponge at our disposal from a geopolitically stable part of the world. Third, up to 100% of the sponge produced by our plant will be consumed by RTI, to our Airbus and Lockheed Martin long-term agreements that have profitable, stable margins. Fourth, it provides us the ability to ramp-up sponge production as needed to meet external demand beyond RTI's needs. And finally, the sponge plant is an essential driver towards our goal of becoming a fully-integrated global supplier of choice for all of our customers worldwide.

Now let me turn to our mill product expansion. The company's second major expansion is a $100 million melting, rolling and forging facility project to support, again, the Airbus and Joint Strike Fighter long-term agreements. In January, we announced that this facility will be located in Martinsville, Virginia. We expect Martinsville to be operational also during the first half of 2010, along with our sponge facility, as we meet the long-term agreement demand. We chose this site because the incentive package Virginia offered included a newly-constructed building and the proximity of cost-effective utilities. Long lead time equipment is on order, and hiring for some positions will begin as early as next year. We have a plant manager, and we intend to build a world-class forging and rolling facility that will be supported with melt products from our Ohio melting locations, including Canton and Niles, Ohio, both of which will see additional new melting capacity added in the next 18 months.

As part of our strategy, we also reached an agreement on a new labor contract with the United Steel Workers Local 2155 at our Niles facility, extending our agreement through June 30 of 2013. The previous agreement was set to expire in January of 2010, and now extends over a five-year period into the 2013 timeframe. This is good news for our customers, employees and shareholders, who can now be assured we will be providing the products and services called for in our long-term supply agreements.

Upon completion of all of these expansion, we anticipate titanium mill capacity to go from 23 million pounds annually to 35 million pounds annually by the middle of the next decade.

Now, before I turn to 2008, I want to note that the company’s board of directors recently adopted a new, performance-based, long-term stock and option incentive compensation plan that aligns a significant portion of total executive compensation, up to 60% in several cases, to performance against our peers. We’re essentially even more closely aligning the interest of our executives with those of our shareholders. In short, if we don’t perform and generate shareholder value, our compensation will reflect it.

Now, looking to the future. We are convinced that the long-term demand dynamics for titanium are strong. They are driven largely by a commercial aerospace market that despite the momentary challenges is fundamentally strong. At year-end the total number of large commercial jet air craft on order for Airbus and Boeing, combined to support over seven years of production at today’s rates.

Now with respect to Boeing’s orders, to date, the delays in the 787 dreamliner production have had minimal impact on RTI, because these contracts do not hit full stride for us until 2009, and they’re still trying to get the material from us as fast as we can get it to them. Any further delays could create some indirect inventory impact to the marketplace but it would have no bearing on our direct Boeing agreement. But again the driver for these aircraft long term continue to be the future need for aircraft to support growth in Asia, Indian and the Middle East and do not fully reflect the replacement for the US domestic fleet.

Regarding 2008, we are projecting shipments for our Titanium Group in the range of 17 to 18 million pounds with higher volume in the second half of the year over the first, as we bring the rest of our melting facilities online with our first expansion project that we started two years ago. We expect quarterly volumes to grow from just under 4 million pounds in the next two quarters to close to 5 million pounds by the second half of the year as our first capacity comes in line in the middle of calendar 2008.

We anticipate our average realized pricing will be down from 2007 by about 10%, which as I noted last quarter reflects a couple of things. One, the long-term nature of our 2006 contract with Airbus that’s starting to deliver the higher volumes in ’08. Also two, some expected lower stock market pricing and three, some of the reduced pricing on our LTAs that are tied to annual indices.

We expect operating margin to be approximately 20 to 21% for the full year, but we expect the margins to ramp throughout the year with the first quarter margins in the mid- to high- teens.

Finally, we are looking for 2008 year-end sales to increase in the range of 21% with operating income to increase between 7 and 12% or 7 to 12%. Now, our 2008 operating income growth will be impacted by our continued investments into overhead, people and infrastructure as we position the company to support the ramp up on the 787 and the Airbus and JSF contracts.

Now let me turn to capital expenditures and give you an update since our last call. Our preliminary numbers on last quarter’s call indicate that we would be spending upwards with $250 million in our way, but now that we have placed the equipment orders some of the actual payments extend into ’09 that will not impact our underlying production schedule, but consequently it’s refined, we now plan on incurring approximately $220 million in capital expenditures for 2008, of which the $140 million is related to the announced expansions, while the remaining 80 million is for normal maintenance capital and replacements.

Looking further ahead into 2010 and beyond we continue to move forward on our strategic plan to provide value add to middle products and we are in current discussions with our key customers concerning our ongoing fabrication capabilities. In fact, we continue to work with our customers under new programs to further our value added strategy while creating value for our customers.

We have recently been awarded orders for our developmental parts for the A350, another program for Airbus for new titanium designed parts. And with regards I hope to provide you with further updates as we provide our strategy to become a fully integrated supplier of titanium parts to our customers. At this point we’ll take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is coming from David McGregor of Longbow Research

Luke Folta - Longbow Research

Well this is actually Luke Folta in for David McGregor, how are you today?

Dawne Hickton

Hi Luke.

Luke Folta - Longbow Research

Good. My first question I had revolves around overall margins. Could you talk about where you see margins going in a titanium group in ’08 with respect to where raw material prices are and where finished prices will be just regarding what’s going on with titanium scrap and how the F&D segments plays into that overall forecast?

Dawne Hickton

Sure. With respect to the raw material pricing as we’ve noted, generally we’ve got increasing overall raw materials costs going into ’08 although we are seeing some of the scrap market pricing coming down a little bit. And in terms of overall margins when we look at our gross margins to the Ti group we expect them for the year to look about the same as you'd see in 2008, or 2007.

Luke Folta - Longbow Research

Could you talk about the raw material market there for a second if you’re seeing any scrapping any activity for Ti scrap?

Dawne Hickton

Sure. Generally speaking you’re seeing kind of that market settling down as you’re generating more scrap in the industry. I don’t Mike if you want to comment on any additional trends?

Mike Wellham

Yeah. It’s obviously been declining over the past several quarters but I’ll classify it today as it’s probably stabilized.

Luke Folta - Longbow Research

Okay and if I could, just one more regarding the Airbus supply chain. Has rates been increasing there and could you give us more color on what you’re seeing overall there?

Dawne Hickton

In terms of our contract what we’re seeing on the Airbus supply chain this is the year that we’re ramping up on the contract that we signed in 2006 for the guaranteed memo of 5.2 million pounds so that’s what we’re going to be seeing in our numbers in terms of what they’re ordering. Longer term we’re seeing their needs continuing to grow and meet the demand they have for their new aircraft.

Luke Folta - Longbow Research

Okay thank you and good luck.

Operator

Thank you, your next question is coming from Nick Capuano of Imperial Capital.

Nick Capuano - Imperial Capital

Guys a couple of quick ones for you. Good quarter. First of all on the duty drawback program if you could speak to the range of impact you think it may have, I understand you’re going to be dealing with it on a cash basis, but what - I assume that all your guidance excludes the benefit of that, if you could you clarify that if that’s the case and also just talk about what you might expect in terms of the range of rebate you should get we might get from the program going forward over the next year.

Dawne Hickton

Sure, Nick. Really what we’re looking at is we're probably just in the range of anywhere from 0 to $0.10 for the year in terms of when we get the rebate. And so at this stage what we decided to do is we’ll deal with those cash receipt basis when we’re actually reimbursed under the program, but again any time we’re shipping product out of the country that has material that was from funds imported in we're entitled to the rebate.

Nick Capuano - Imperial Capital

Okay. Understood, that’s not in, if you get that you get that, but that’s not implied in the guidance that you gave. Is that correct?

Dawne Hickton

We did not include that in our ’08 guidance.

Mike Wellham

This is Mike. The other comment that I’d make about that. The upside range of 0 to $0.10. In reality it’s going to be closer to zero just tied to the length of time it takes after you file a claim for customs to process it to reimburse you on a CapEx basis. Our expectation right now is what we’re attaining to, which is no impact on those new claims.

Nick Capuano - Imperial Capital

No, that’s helpful. That’s very helpful. And if you could just go over a little bit, I’m sorry, the close of your comments regarding on the F&D side, regarding the A350 program or the Airbus , I believe you mentioned something about the fabrication arrangement with...

Dawne Hickton

Sure Nick, as you know our strategy long-term has been to continue to be the true value added integrated supplier of titanium component so just as we do on the dreamliner, we’re manufacturing actual titanium components that are fabricated in machine that are at our various F&D facilities and we ultimately supply it the finished titanium parts directly on the aircraft. That is a strategy that we’ve continually embarked upon several years ago. We continually discuss that and look for opportunities with our other customers and most recently we had the opportunity with Airbus to be part of the developmental program in terms of designing additional titanium parts for their newer aircraft. We’re still in the developmental stage but these are opportunities for us to continue to use our fabrication and distribution facilities.

Nick Capuano - Imperial Capital

Okay great. Thanks guys.

Operator

Thank you. Your next question is coming from Gautam Khanna of Cowen.

Dawne Hickton

Good Morning.

Operator

Gautam your line is live. Okay, we’ll go to the next question which is coming from Ray Rund of Shaker Investments.

Ray Rund - Shaker Investments

Yes, thank you. With regard to the 2008 sales growth you’re talking about sales being up 15 to 20 % over 2007 but the operating income you’re saying will only be up 7 to 12 % and I just wanted a clarification on that. Is that due to pricing is that due to higher material costs, higher processing costs or higher overhead costs or a combination of all three of them. I’m just trying to -I’m trying to grasp why the operating income will be increasing at a slower rate than the revenue.

Dawne Hickton

Sure. It really is a combination of all of the above. Keep in mind we’ve got pricing coming in this year to result the increased volume on the airbus contract, we’ll have pricing that is recognized as what you would have as a long-term relationship, you’ll also see some pressure on the stock market pricing and then we’ve had the increase in our raw material costs. In addition to all of that we’re going to have some significant overhead and expansion as we ramp up facilities that aren’t yet fully utilized in 2008.

Ray Rund - Shaker Investments

Is the lion's share of that due to the facilities costs or is it more due to the pricing. Can you just give me sort of an order of magnitude feel?

Mike Wellham

Ray, it’s really of it, it's not like one of those items stick out more than others. One of the issues in the [inaudible] contract that we announced a couple of months ago, for example, as we transition that product onto our equipment we still have to support the old statement of work, which requires us to incur additional outside processing costs in 2008 over 2007, so it’s really a combination of all those factors, but none of them stick out more than the other.

Ray Rund - Shaker Investments

And if I might just ask a quick follow-up?

Dawne Hickton

Sure.

Ray Rund - Shaker Investments

You mentioned manufactured parts ready for the aircraft. Is that part of your current contract for Airbus or is that in the future?

Dawne Hickton

No, that’s what we’re talking about in terms of the future. That’s our current contract on the 787 dreamliner.

Ray Rund - Shaker Investments

I see. Okay, thank you.

Dawne Hickton

We'll also do that for our Montreal facility. We also do similar type work with respect to other customers including [Indiscernible] helicopters.

Ray Rund - Shaker Investments

I see. Thank you for clarifying that.

Dawne Hickton

Sure.

Operator

Thank you. Your next question is coming from Gautam Khanna of Cowen.

Gautam Khanna - Cowen

I’m sorry about that guys, can you hear me clearly?

Dawne Hickton

Yeah, Good morning Gautam

Gautam Khanna - Cowen

Good morning Dawne, how are you?

Dawne Hickton

Great.

Gautam Khanna - Cowen

I just had a couple of questions. In Q4 you had pretty big operating profit margins in the titanium group and how exactly - what is driving the change Q3 to Q4? If I recall in the Q3 call you said we’re likely to have more billet which is usually a little bit lower profitability than sheet in the fourth quarter, but you guys put up pretty big numbers. What was really driving that profitability?

Dawne Hickton

I’m going to let Mike get specific to the Ti group

Mike Wellham

Combination of issues, honestly the the volume was a little bit higher in the fourth quarter over the third by 100,000 pounds or so. Selling prices were up around $0.60 I believe. And then we had some favorable raw material impact on the quarter, and quite frankly we started a good overall operating quarter for that segment of our business. They did a good job.

Gautam Khanna - Cowen

May I ask, it appears as though you also absorbed another 100,000 in those duty drawback claims. Is that true in the quarter?

Dawne Hickton

That’s about the right number, yeah.

Gautam Khanna - Cowen

So I guess the question, when you mentioned favorable raw materials in the quarter, are you adjusting your melt mix include to more scrap, is that a benefit we’re going to see kind of going in ’08.

Mike Wellham

It depends on the market environment. We’re very opportunistic as we buy scrap, if we see the right opportunity, we’ll jump in and out of the market and that can have an impact on the numbers.

Gautam Khanna - Cowen

Also, Mike just as a follow up, in F&D the margins kind of got cut in half sequentially. I’m wondering how much of that was really the D side of the business and how much of that is going to be recurring. What should we think of that with profit margins through ’08 on the F&D side?

Mike Wellham

I think for the year in ‘08, for the full year in ’08 the operating margins in that group are going to be in line for the full year for ’07 and may be slightly higher.

Gautam Khanna - Cowen

Okay and Q4 was basically all D that was driving the short flow?

Mike Wellham

No,it's a combination as we stated in the upfront comments. The distribution, number one, the quarter was disappointing for us. The distribution businesses are operating in a very challenging environment driven primarily by price. The inventories are relatively in balance and so as those higher-cost inventories make their way through the channel, the replacement costs are dropping and there’s a lot of margin pressures. But we also had, as we say, the start-up issues and lower efficiencies and some product development costs on the fabrication side that impacted the quarter.

Gautam Khanna - Cowen

Perfect. Did you guys give us a backlog number for the quarter and what you expect to ship from your backlog?

Dawne Hickton

We did not. Our backlog, though, I can give you that, it's 545 million, and we're going to ship probably upwards of 80% of that in '08. But again, I'd caution, that backlog number just represents that product that we've got on the order books with a scheduled ship date, and also keep in mind that with out long-term contracts, a lot of those have automatic release clauses, PO's as we go through the year, and that's not necessarily included in the backlog at this time.

Gautam Khanna - Cowen

Okay, and I'm sorry to take such a long time, but a last question. I guess, you provided a guidance range that implies anywhere from 4.06 to 4.25 approximately in earnings per share. Is the variance there, is the wide range there key to, if you ship more titanium, you know, you say you're going to ship 17 to 18 million pounds, 18 to 19 million of capacity theoretically, or is there other sources of upside that we should be mindful of? If you could just walk it through, kind of look at, see the high end and look at, see the low end.

Dawne Hickton

Let me address that and I'll let Mike also follow on. But certainly if we get out some more shipments that would put us on the higher end of it. It really is going to depend on what we see in the next two quarters, when we look at our Fabrication and Distribution side of the business and some of the issues we mentioned with the softening on the distribution side.

Also, depending on the 787 program on the F&D side as we get out the ship sets and ramp up and maybe have an impact on the 787 program. If there was any further delay, for instance, that might slow that down and put us on the lower end and then also [less aring on] with respect to how our Capex goes, how we do on our capital expenditures. Mike, I don't know if you want to add anything to that?

Mike Wellham

Yeah, the only thing I would add is to talk about the potential upside and the real question on the F&D side, on the D side is how fast do those distribution businesses come back. They tend to lead the market as there starts to be a demand on balance again, so we'll be watching that very closely and to the extent that it occurs sooner that our expectations are, that kind of a thing, will impact.

Gautam Khanna - Cowen

Okay. Thank you guys.

Operator

(Operator instructions) Your next question is coming from Brian Yu of Citi.

Brian Yu - Citigroup

Great, thank you. My question refers to the guide calling for a 10% climb in realized price in 2008. Can you provide a breakdown on how much of that relates to these LPA's and how much of that is due to pricing environment?

Dawne Hickton

Hi Brian. Generally speaking what we're looking at when we talk about that, we don't give the specific percentage breakdowns. But the two main components of that really are the pricing impact of the additional pounds that are coming in on the Airbus contract, that are pretty significant, and then a large portion, significant number of our other LPA's, the rest of our contracts, that are maybe three and five year contracts, that have the price indices that are going downward this year.

We've got about 70% of our business is on long-term agreement in one form or another, so you can kind of figure that into the other 30% being impacted by the [saw] market.

Brian Yu - Citigroup

Okay. And do these things adjust on a calendar year basis or is it evenly spread throughout the year?

Dawne Hickton

Generally speaking it's a calendar year basis. But keep in mind that not every contract is going to adjust. But a significant number of them are, and it is calendar year.

Brian Yu - Citigroup

Okay, and a question on the F&D business. You mentioned that you were benefiting from low-cost inventory initially, and that's been depleted, but haven't titanium prices been declining for a number of quarters now?

Mike Wellham

It's a combination of titanium and non-titanium and it's really a timing issue. I mean, yes, you're correct. There has been some decline in the titanium prices as well as the nickel prices over the past couple of quarters but you have the timing issue on when you buy the material what the price is when you buy it and when it's actually delivered. And then, you've got to get it out in the marketplace. So replacement costs today are lower. I mean, that's one of the areas that is placing pressure on margins.

Brian Yu - Citigroup

Okay. Thank you.

Dawne Hickton

Sure.

Operator

Thank you. Our next question is coming from Ron Silverton of Asgard.

Ron Silverton - Asgard

Good Morning. I wanted to follow up a little more of the F&D side. Can you just, kind of a two-part question. One, just to understand a little more the [inaudible] in Q4, and I understand a portion of that is relative to development of new products, also some softness in the distribution. If you could just give us a little more granularity on, how much the impact from production costs, from new product development rather, was this quarter and how to think about that going forward, given you're still working on developing some of these exciting new products for programs such as the A-350. And then on a related note, if you could give us a little more color on, where you see things with de-stocking on the service center side. Because certainly the color I've been getting from others in the industry is that things are picking up already.

Dawne Hickton

Sure Ron. Good morning. Let me just say this. With respect to product development, that's a minor impact and those costs would be more within our R&D, or maybe even in some cases that’s something where you work with the customer and they're picking up the costs of that. So, that's less of an impact. The rest of it is as we spoke to the impact of the lower ramp-up with, that basically hit our fabrication facilities down in Houston and Montreal with respect to the 787 program, and then some of the softening on the distribution side. But I'll let Mike address your other question about where we see the de-stocking and where we see that in the future.

Mike Wellham

We did, Ron. We do expect to see, we see some improvement in different areas of the business on that issue. But we would expect, or at least expect sitting here today that that issue will primarily correct itself during the first half of this year.

Ron Silverton - Asgard

Thanks.

Operator

Thank you. Your next question is coming from [Frank Hefferage of CMN]

Unidentified Analyst

Yes, can you tell me what will be the increase in your sponge cost, percentage-wise 2008 versus 2007, and, excuse me, what about, where do you see as the current scrap cost now for say bulk weldable solids either prepared or unprepared basis?

Dawne Hickton

Sure, hi Frank

Unidentified Analyst

Hi Dawne.

Dawne Hickton

Let me take your latter question first. We're seeing the bulk weldable pricing come down about 2% or so from last quarter when you look at the prices. Let me take you back now to the sponge. What we had announced in the last quarter is that we completed our negotiations with Osaka Titanium and our purchase sponge cost for the majority of our purchase sponge is going to be just slightly under 10% increase. But keep in mind we also have sponge that is non-purchase, but part of the Airbus contract, to supply that contract and so we're neutral as to that sponge. And I can't really give you a total sponge cost for the year. We don't provide that because also keep in mind because also keep in mind we're going to balance the use of our metallics over the course of the year as we watch the scrap market.

Unidentified Analyst

Okay. And were to you look at the bulk weldable price now?

Mike Wellham

About $5.80 a pound, Frank.

Unidentified Analyst

Is that prepared or unprepared.

Mike Wellham

Unprepared.

Unidentified Analyst

Thanks very much Mike.

Mike Wellham

Sure.

Operator

Thank you, your next question is coming from Talia Hagler of WFMJ.

Talia Hagler - WFMJ

Hi. I have some much less technical questions for you. First I just want to make sure I understood correctly that 2007 is your highest year on record as far as sales and income.

Dawne Hickton

That's correct.

Talia Hagler - WFMJ

How much can you attribute that to your labor force? We're out here in Youngstown, so, especially, like in the Niles facility.

Dawne Hickton

Well I can tell you that we have a great work force. We've got a great group of employees across the board. The folks at RTI, here in Niles, we're in Canton, down in some of our other facilities across the country and also we've got facilities up in Canada and over in Europe and also [inaudible] Asia. Overall, we have a great group of employees here at RTI. In terms of attributing the sales increase in the year, certainly the strong demand in commercial aerospace is what's driving the growth in company and in our industry in general. And all of that is of course supported by our employees.

Talia Hagler - WFMJ

And you expect 2008 to be even better than 2007? Is that what you're projecting?

Dawne Hickton

We are guiding to an increase in sales next year and an increase in operating income, yes.

Talia Hagler - WFMJ

All right. Thank you.

Dawne Hickton

Sure.

Operator

(Operator instructions) Your next question is coming from Don Shilling of the Vindicator.

Michael Wellham

Don?

Dawne Hickton

Good morning Don.

Don Shilling - Vindicator

I'm just wondering where you stand with the relocation of your senior executives?

Dawne Hickton

Sure. We are just about completed with our facility. It's an office building located outside the Pittsburgh airport, I think you're aware of that. And we expect to start moving the executive staff into there during March and hope to have our official transfer effective April 1.

Don Shilling - Vindicator

And how many people will be moving then?

Dawne Hickton

It looks like it's approximately 50 employees.

Don Shilling - Vindicator

50?

Dawne Hickton

Yes

Don Shilling - Vindicator

Okay.

Dawne Hickton

I should point out, Don, that some of those are actually new hires, since we've even made that announcement, as we've kind of been adding to some of the staffing in terms of some of the fabrication and distribution businesses and our expansion projects we've talked about.

Don Shilling - Vindicator

Is that roughly half of your corporate staff, or am I wrong?

Dawne Hickton

That includes the executive staff, the Fabrication and Distribution Commercial Group, and the corporate accounting Group. We still have located in our administrative offices in Niles, Ohio our engineering, quality, safety, and human resources and our IT, our information systems.

Don Shilling - Vindicator

How many people would be in that? Do you know that offhand?

Dawne Hickton

I don't know off the top of my head but we're, we manage our staff accordingly, more than 100 employees.

Don Shilling - Vindicator

Okay, thanks.

Dawne Hickton

Sure.

Operator

Thank you. We have time for one more question. Your final question is coming from Larry Ringler, of the Tribune Chronicle.

Larry Ringler - Tribune Chronicle

Hello. Actually, my question was just answered.

Dawne Hickton

Okay, Larry. Have a good day.

Larry Ringler - Tribune Chronicle

You too.

Operator

Thank you. This ends our question and answer session. I will turn the phone back to management for any closing remarks.

Dawne Hickton

Thanks. I want to thank everyone for their continued interest in RTI. We see a great future in the company and the industry for the near-term and the long-term, and all of us at RTI will continue to work hard to execute our plan of being the supplier of choice for high-end titanium products as well as becoming the premiere fully integrated producer of value added strategic metals in the world one that is well positioned to meet the growing long term demands of our customers world-wide.

Thanks, and we look forward to speaking with you again in the next quarter, in our first quarter 2008 call.

Operator

Thank you. This concludes today's RTI International Metals 2007 annual results conference call. 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 Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts