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Federal Reserve Bank of Cleveland Inflation Monetary Policy and the Public May 29-30, 2014

Federal Reserve Bank of Cleveland Inflation Monetary Policy and the Public May 29-30, 2014. Company Overview. Titanium mill product manufacturer: 1951 Advanced to titanium fabrication: 1998 24 locations in the U.S., Canada, U.K., France, China and Japan

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Federal Reserve Bank of Cleveland Inflation Monetary Policy and the Public May 29-30, 2014

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  1. Federal Reserve Bank of Cleveland Inflation Monetary Policy and the Public May 29-30, 2014

  2. Company Overview • Titanium mill product manufacturer: 1951 • Advanced to titanium fabrication: 1998 • 24 locations in the U.S., Canada, U.K., France, China and Japan • Approximately $245 million in capital • investment over past 5 years • Completed 4 recent acquisitions • Approximately 2,500 employees • Blue chip customer base • Airbus, Boeing, Bombardier, Lockheed Martin, United Technologies, BP, Chevron, Shell and several large medical device OEM’s • 2013 Sales: $783.3 million • Commercial Aerospace - 55% , Defense - 22%, Energy, Medical & Other - 23% • December 31, 2013 backlog: $516 million

  3. Titanium Segment Overview Titanium Segment • Titanium mill products, including bloom, billet, sheet, and plate • Multiple melt platforms provide for wide range of titanium alloyed products 2013 Revenues: $346.6 million (44%)

  4. Engineered Products & Service Segment Overview Engineered Products & Services Segment • Multiple machining, extrusion and superplastic / hot forming businesses in the U.S., Canada, and Europe • Engineer, design, extrude, 3-D print, precision machine, fabricate, assemble, kit, and install 2013 Revenues: $436.7 million (56%)

  5. Inflation and RTI: Major Cost Drivers Material Costs • Material costs, primarily titanium sponge, are the largest cost incurred by RTI • Currently excess capacity in the sponge market, which continues to put downward pressure on prices • Long-term contracts on both supplier and customer ends are standard in the industry • Contracts include price escalators/de-escalators based on inflation providing some hedge Labor Costs • Labor accounts for the second largest cost to RTI • Wages for private industry in the U.S. increased at 1.7% over the last 12 months ended March 31 • Health care costs in the U.S. increased by 2.4% over the past 12 months • National Health Expenditures are projected to increase by ~6.0% per year through 2022 • RTI Health & Wellness initiative to help counter the growth in health care costs Energy Costs • Energy (gas and electricity) can typically be a large input cost for metals manufacturers, but represents less than 5% of total costs for RTI • RTI has natural gas wells on its facility in Niles, OH, which reduce utility costs

  6. Inflation and RTI: Impact by End-Market Commercial Aerospace • Demand for commercial aircraft is extremely high with record backlog levels • Inflation could have a significant impact on airlines earnings and demand for new aircraft. • Inflation’s impacts on airline costs include: • Fuel prices • Significant costs to airlines, accounting for 31% of operating costs in 2013 • Increasing fuel costs will create incentive to upgrade fleet to more fuel efficient aircraft • Labor costs • Legacy carriers have reduced labor costs through bankruptcy • Pilot shortage putting upward pressure on costs • Infrastructure costs - little competition in terms of airport costs, FAA & flight control Defense • The Budget Control Act (BCA) has put downward pressure on Defense budget. • The gap between the DoD’s plan and BCA average between $60-$90M per year • DoD has put pressure on OEMs to reduce prices • Inflation would likely result in lower margins throughout the supply chain for those that cannot lower manufacturing costs

  7. Inflation and RTI: Impact by End-Market (continued) Energy • Higher inflation results in higher revenues for commodities like the oil and gas industry • Transportation fuel costs are passed along to consumers • Costs of exploration and production may also increase with less opportunity to pass through • Increased cost of commodity inputs (steel and other input materials) • Increase cost of labor • Inflation would likely reduce profitability for suppliers to E&P companies • Use of alternative materials (titanium) and engineering design by E&P companies to reduce the cost of accessing deeper, harsher climates Medical • Health care costs have increased at a higher rate than Consumer Price Index • Affordable Care Act medical device excise tax (2.3%) • Increased cost pressure on suppliers • Reduced investment and spending by OEMs and hospitals • Inflation will dampen demand and profitability further of medical device manufacturers • Efficient manufacturing processes (robotics, etc.) lower the costs of production

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