RTI International Metals Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: RTI International (RTI)

RTI International Metals (NYSE:RTI)

Q2 2013 Earnings Call

July 30, 2013 11:00 am ET

Executives

Dan Crookshank - Director of Investor Relations

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

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

James L. McCarley - Executive Vice President of Operations

Analysts

Julie Yates - Crédit Suisse AG, Research Division

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

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

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

Jonathan Sullivan - Citigroup Inc, Research Division

Christopher R. Brown - BofA Merrill Lynch, Research Division

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Frank Haflich

Operator

Welcome to the RTI International Metals, Inc. Second Quarter 2013 Preliminary Financial Results Conference Call. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Dan Crookshank. Mr. Crookshank, you may begin.

Dan Crookshank

Thank you, John. Good morning, everyone. Welcome and thank you for joining us today for our review of RTI International Metals' second quarter 2013 preliminary financial results. I'm Dan Crookshank, Director of Investor Relations, and on the line with me today are: Dawne Hickton, Vice Chair, President and CEO; Jim McCarley, Executive Vice President of Operations; Bill Hull, Senior Vice President and Chief Financial Officer; and Bill Strome, Senior Vice President, Administration and Finance, all of whom will be available for your questions at the conclusion of our formal remarks. As you're aware, remarks made by management on today's call will include elements that are forward-looking and based on our best view of the business as we see it today. So please refer to our detailed disclaimer set out in today's press release. Now let me introduce Dawne Hickton. Dawne, please go ahead.

Dawne S. Hickton

Thanks, Dan. Hello, everyone. As is our usual practice, I will open with the financial and operational highlights of the second quarter and then I will turn it over to Bill Hull, who will provide the segment details, then I'll have some concluding remarks. We'll include an outlook for the second half of the year, an update on our guidance and then we'll take your questions. However, before I begin, our press release this morning is for preliminary earnings and as we noted in the release, there is a review underway relating to the timing of revenue recognition for certain energy projects. When we complete that review, we will report final numbers, and this may include a possible reinstatement of prior quarters for energy projects based upon the timing of the revenue recognition. However, it is important to point out that this revenue and any correction of accounting relates to the timing of the reporting of the information, and does not impact the amount of revenue or profits from these projects. Bill Hull will address this in more detail during his report. To review some highlights from our preliminary second quarter numbers, let me start out and note that our preliminary net sales were $197.6 million in the second quarter of 2013, excluding the impact of an estimated $18.2 million accounting adjustment and the net sales less the adjustment were a 9% increase over $182.3 million in the second quarter of 2012.

Our preliminary operating income was $20.4 million in this quarter, compared to $11.2 million year-over-year. This result includes the receipt of duty drawbacks sooner than expected, as well as an estimated loss of roughly $400,000 associated with the accounting review. Bill Hull will give you more impact on the duty drawback also during his discussion. Preliminary net income from continuing operations in the second quarter was $1.4 million, or $0.05 per diluted share, compared with $4.7 million or $0.15 per diluted share for the same period last year. But it's important to note that our current year result includes the $13.7 million of nonoperating charges related to the early extinguishment of the long-term debt, as well as $1.4 million of a discrete second quarter tax benefit. The Mill, the titanium Mill shipments during the second quarter, were 4.1 million pounds. Now that was a bit better than our previous expectations called for, but it was also slightly down from the 4.3 million pounds shipped in the second quarter of last year. This favorable performance, compared to our expectations that I told you about on the last call, resulted from the pull-in of some flat-rolled products into Q2 from Q3. So we do not see this as an increase in our incremental -- let me say this right, this is not an increase to the full year volume, and in fact, we now would expect slightly lower shipments in Q3 from the Mill. But we are still on track for the full year guidance of up to 16.5 million pounds shipped for the full year. And lastly, our backlog ended the second quarter solid at an estimated $560 million. That's versus $569 million at the end of the first quarter. Overall, the second quarter results provide continuing evidence of our company's profitable progress in its development as a supplier of advanced titanium solutions to diverse markets throughout the supply chain.

Let me move on to some commercial and operational activity during the second quarter, because there were a number of items that we believe reinforce our message. Of course, the first example of this was the opening day of the Paris Air Show in June, when we announced that we had entered into 13-year contract with Pratt & Whitney, a division of United Technologies, to supply rotor quality titanium Mill product for Pratt & Whitney's PurePower family of geared turbofan jet engines. This agreement signals RTI's reentry into the jet engine market and identifies us as a competitive supplier in this very important segment of the aerospace industry. We will ship our first product under this agreement late next year, with volumes growing over the life of the agreement. All in, we see the potential value of this important agreement to have a value exceeding $100 million in revenue, and as a market share agreement for us, this could have a potential upside growth that's tied to the sales growth of this engine. Today, RTI's estimate of the market for rotor quality titanium used in jet engines is estimated about 30 million pounds a year, and we see this contract, along with our agreement last year with MTU, as meaningful movement back into that business.

Furthermore, and importantly, the materials for the Pratt & Whitney agreement will be qualified to be produced at RTI's new electron beam furnace in Canton, Ohio. I think it's also important to note here that besides the long-term benefits of this technology in the engine market, our team has melted more than 1 million pounds in the EB furnace at the end of June, and we expect to begin internal consumption of this product in the third quarter, and correspondingly, we expect to see improving operational performance comparable to the first half of 2013. In addition to our Mill product contract, we also saw positive commercial activity within our Engineered Products and Services segments. Also announced during the Paris Air Show, we reached a revised long-term agreement with Bombardier Aerospace. Under this 7-year contract, RTI's Canadian subsidiary in Montreal will supply precision machined aluminum components and assemblies for a number of Bombardier's new commercial and business jets. This includes products for use on platforms such as Bombardier's CSeries, as well as biz jets that include the Learjet 85 and the Global 7000 and the Global 8000. And we will continue to supply Bombardier's CRJ Series regional jets, as well as the company's current Challenger and Global business jets.

Our present expectations are to garner about $90 million in revenues from this agreement, of which over $20 million will come from new aircraft platforms or new parts and assemblies on existing platforms. Our present estimate is that this new revenue stream will start by the beginning of 2014, pending the on-time completion of new, state-of-the-art aluminum machining technology that's in construction now. This revised Bombardier contract reflects a second validation of RTI's long-term strategy. The nature of the new component and assembly solutions we will provide, as well as our alignment with the strategy of a major OEM, demonstrates RTI's ability to become an increasingly valuable partner to all customers across all stages of the aerospace supply chain, as the commercial aerospace OEMs seek more solutions from a smaller group of suppliers. Now let me move to a brief report on our participation at the Air Show itself. I'm pleased to report that RTI held a record number of meetings with high-level executives from both existing and potential new customers in Paris. These included all of the major names among the OEMs in commercial aerospace, as well as other high-profile companies within our industry.

And while I cannot give you specifics of these very confidential commercial discussions, I can tell you that the content of our meetings uniformly showed interest in developing long-term strategic relationships with RTI. This is a marked change from our experience in previous years at the annual show, and we believe this signals the sea change in how RTI is viewed by our customer base. RTI's buildout of our portfolio companies, particularly RTI Advanced Forming and RTI Remmele Engineering in 2011 and 2012, respectively, as well as our continued interest in adding manufacturing capabilities and talent via acquisition, are being positively received and stand to underwrite our long-term growth strategies. And in many ways, our meetings with the customer base at the Air Show point to the opportunity for future relationships like the one we have developed with Airbus. In this regard, it was good to see the Airbus A350 fly at the Paris Air Show. And as you know, RTI is a major supplier of titanium Mill products, and now supplying machined parts to that important platform for Airbus.

So we share in the excitement for our strategic customer. And more broadly, the Air Show provided continuing evidence that the ramp in commercial aerospace, as we've noted for some time, remains intact and on track. The backlog of commercial aircraft on order remains at all-time record levels and at the current rate of production, will require more than 8 years to produce the planes. Now let me move on to some final comments. I'm pleased to say that RTI did reach a run rate of 7 seat track ship sets for the Boeing 787 at the end of June, and we are still on track to reach over 80 ship sets for the year. This higher volume level, allowable for profitable contributions from this program at the end of the quarter, for the first time. Now, provided no new headwinds result from our Partnering for Success discussion on the seat track program, we expect to see modest improvements throughout the balance of 2013, as well as strengthening improvements in 2014. Elsewhere, in our Engineered Products and Services business segment, we continue to see new requests for quotes that recognize RTI's global scope, and our broad range of capabilities. Although still in the initial stages of the bidding process, RTI has actively presented proposals that support Airbus, Boeing, Gulfstream, Comac and Bombardier, and that utilize every business unit with RTI that participates in commercial aerospace markets. This includes bids for both vertically integrated Mill product to final form, stocking, service providing, as well as standalone manufacturing in the areas of hot and superplastic forming, extruded shapes, rough and finish machining and component assembly.

And finally, the energy and medical markets continue to present positive opportunities for RTI to grow our participation in these markets, and are expected to provide positive contributions to our earnings over the balance of this year. Specific to the energy market, and in response to our commentary on the revenue recognition review that is currently underway, I would like to add some additional comments on the changing nature of our energy projects, and the potential impacts these changes could produce, by highlighting 1 project in particular. Although RTI has continued to support our historic energy marketplace with the traditional deepwater riser system components, made from both steel and titanium materials, as far back as 2010, RTI began to extend its offerings to highly engineered and complex systems and subsystems. As represented by the BP Macondo Gulf of Mexico oil spill recovery work we performed in 2010, these products and services have come with a much higher revenue stream than previously available, but they also have a much higher development cost structure, significant learning curves, as well as RTI direct contribution to development.

As a case in point, RTI is now in the final stages of completion of a very complex system used in deepwater drilling that is planned to be completed before the end of the year. Given our recent revenue recognition review, the timing of the revenue for this project in particular is under review. As with many development projects of this nature, the final cost and resulting sales price are dependent on performance factors that, of this writing, are not completed and therefore a final selling price is not known. Our present forecasted performance for RTI anticipates this project will have a favorable contribution to our full year performance, as well as provide for an expansion of our assessable energy market within this more highly engineered and complex product line. And on that note, I'm going to turn it over to Mr. Hull, who will provide further segment detail on our second quarter performance. Bill?

William T. Hull

Thanks, Dawne. As Dawne noted, the company is reviewing its revenue recognition accounting policy related to certain energy market projects. The different methodologies being reviewed will result in a shift in the timing of when revenue and related costs are recognized. Any correction in the company's revenue recognition policy related to these projects would have no impact on total contract revenues, profitability or the cash flows of the projects. As the company's review of its revenue recognition policies is not yet complete, including evaluating the impact of this correction on historical results, the company has characterized these results as preliminary. The company expects to complete this review and report final results in its quarterly report on Form 10-Q for the 3 months ended June 30, 2013.

Now I would like to discuss consolidated operating income for the second quarter 2013. Preliminary operating income for the 3 months ended June 30, 2013, was $20.4 million on preliminary net sales of $197.6 million. This excludes an $18.2 million impact of a correction in the company's contract accounting revenue recognition policy. Included in second quarter operating income are import duty cost recoveries collected under the company's duty drawback program, in an amount that exceeds RTI's expected normalized run rate for quarterly duty drawback recoveries by $8.1 million. These import duty cost recoveries were received earlier in the year than we had expected. Operating income for the same period in 2012 was $11.2 million, on net sales of $182.3 million. Next, let me speak to each of the company's 2 segments.

As a reminder, effective January 1, 2013, the company conducts business in 2 segments, the Titanium segment and the Engineered Products and Services segment. All previous periods have been recast and presented under the new segment structure. For the second quarter of 2013, the Titanium segment reported operating income of $17.3 million on net sales of $85.1 million, compared to 2012's second quarter operating income of $8.8 million on net sales of $95.5 million. The $10.4 million decline in sales was primarily due to lower prime Mill product shipments and lower sales to European commercial aerospace customers, as a result of customer order timing in 2012. These were partially offset by higher selling prices. Lower shipments to non-titanium specialty metals markets customers also contributed to the lower sales. The $8.5 million increase in operating income was primarily due to $6.8 million of import duty drawback recoveries in the current year, and modest improvements in operating performance throughout the segment.

Titanium Mill product shipments for the 2013 second quarter were 4.1 million pounds, with an average realized price of $19.57 per pound, compared to titanium Mill product shipments of 4.3 million pounds in the second quarter of 2012, at an average price of $19 per pound. Gross margin on net sales for the quarter was 31.7%, compared to 20% for the same period last year. Now for the second quarter of 2013, the Engineered Products and Services segment reported that preliminary operating income of $3.1 million, on preliminary net sales of $112.5 million, which excludes an $18.2 million impact related to the correction in the company's contract accounting revenue recognition policy. This compares to operating income of $2.5 million on net sales of $86.8 million reported for the same period last year. Second quarter 2013 preliminary operating income includes a $400,000 reduction in operating income associated with the correction that we just spoke of. Excluding the impact of this correction, the increase in net sales was due primarily to higher commercial aerospace, energy and defense market volumes. The preliminary $600,000 year-over-year increase in operating income was primarily attributable to higher gross profit, driven by higher Boeing 787 deliveries across our businesses and higher military sales, as well as $2.8 million of import duty drawback recoveries. These were partially offset by increased production costs and higher SG&A costs associated with the segment restructuring. Gross margin on net sales, excluding the revenue recognition policy correction items for the quarter was 15.5%, compared to 18.3% for the same period last year. In April 2013, the company issued $402.5 million aggregate principal amount of 1.625% convertible senior notes due October 2019. In conjunction with that offering, the company used $133.4 million to repurchase and pay accrued interest on, approximately 50% of its outstanding $230 million 3% convertible senior notes due 2015. As a result of this transaction, we expect to incur interest expense for the full year of approximately $40.4 million, which includes a second quarter debt extinguishment charge of $13.7 million related to the repurchase of a portion of the 2015 notes.

And finally, for the full year 2013, we expect our tax rate to be approximately 32%, plus or minus discrete items. Dawne?

Dawne S. Hickton

Thanks, Bill. We look forward to the strengthening in our business as the year progresses. We continue to see a very solid second half of the year for us, as we continue to ramp on the Boeing 787 Dreamliner seat tracks, and as we continue to drive operational cost improvements throughout the enterprise. The overall trends and business conditions in the markets we serve are also positive, particularly, as I noted, in commercial aerospace. And RTI is well-positioned to take advantage of what we see as expanding opportunities for us in all of our markets.

Based on our year-to-date preliminary results, and our continued expectation for improved core operational performance, in both our Titanium and our Engineered Products and Services business segments in the second half of the year, we're pleased to reaffirm our previously announced 2013 full year guidance. We expect total Mill product shipments, as I mentioned earlier, to approach the 16.5 million pounds shipped in 2012 and we expect our sales to approach and possibly exceed $775 million. Finally, we are also reaffirming our guidance that operating income will most likely trend toward the higher end of the range between $65 million to $75 million, with one caveat. The achievement of the upper end of the operating income full year guidance is subject to the impact of the completion of the ongoing review of the timing of the energy revenues that we currently expect to occur in the back half of the year.

Now, we'll take your questions and I'll turn it back to you, John.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Julie Yates Stewart from Credit Suisse.

Julie Yates - Crédit Suisse AG, Research Division

Just one clarification. The $8.1 million in excess duty drawback, that's embedded in your guidance, but it was just received earlier than expected, is that correct?

William T. Hull

Correct. That's correct, Julie.

Julie Yates - Crédit Suisse AG, Research Division

And then, just on 787, Dawne, have you started using your own input stock yet on this program? And how should that change the profitability curve as it ramps?

Dawne S. Hickton

We haven't started yet, although we are starting to process internally the material for use, and we'll see that going forward in a couple of quarters and we do expect that, that should help us with our profitability, but I'm not going to put any numbers on that just yet.

Operator

Our next question comes from Patrick McCarthy from FBR.

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

My question was on the titanium margins for the quarter. Even after adjusting them for the duty drawback and making some assumptions for the improvement in pricing on a sequential basis, still very, very strong, and I was wondering if you could just give us a little bit more context about what drove that for the quarter?

Dawne S. Hickton

Sure, we've been working on some pretty solid operational performance improvements, and I'm going to let Mr. McCarley, our Ops executive, respond to that for you.

James L. McCarley

Good morning. I think the best way to summarize it is that we are starting to see the benefits of our Martinsville facility. We've been able to drive some better activity through there, as we brought that equipment up and online, which has included a little bit of outside conversion work that we're now doing beyond just our own internal use. And in addition to that, we've been able to bring in some previously outsourced material that supported things like our energy market. We've been able to bring that into the Martinsville operations. So that's clearly been one element, and we expect to continue to build on that. The second one is, is that we're starting to see some positive effects from some of our blending costs related to our EB furnace. And in addition to that, the restructuring that we did at the end of the quarter, last quarter, seeing some modest elements of that benefit starting to show up, and we expect it to continue.

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

On the EB furnace, would it be fair to think about the EB furnace potentially having as much of an impact on your cost structure as compared to your revenues?

James L. McCarley

Our expectation is it will have a meaningful effect on the cost structure.

Operator

Our next question comes from Steve Levenson from Stifel.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Are you seeing any signs that the oversupply in the aerospace supply chain is abating? Are you hearing anything about lead times stretching out a little bit and demand picking up? Or do you think people are still buying at the minimum from the take-or-pay?

Dawne S. Hickton

From our perspective, we're not seeing a lot of change from the past couple of quarters. I think you're still looking at that as a 2014 impact.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Second of all, there's been a lot of talk between some of your peers, or from some of your peers, on destocking in the supply chain generally, and I'm just curious if you think that's going to be a trend, where lead times are going to be expected to come down and inventory levels will be kept low, or do you think as commodity prices or input costs go up, that there will be an increase in demand and some restocking?

Dawne S. Hickton

Let me answer it this way, we focus ourselves on where we're driving our own business with our very specific strategic customers through the value chain. And so to the extent that we focus on the drivers for our supply and demand, that is very specific to us, and we're not focused on the destocking externally, we have put in place very long-term strategic relationships on our -- with our largest customers into the Mill, and candidly, we don't see that as an issue one way or the other impacting us.

Operator

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

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

Some questions on the pricing side. Could you talk a little bit about what do you see in terms of the raw material pricing or the sponge pricing at this time, and when you negotiate the contracts for the next year, what would be your expectations?

Dawne S. Hickton

Let me just say that it's too early for us to talk about our sponge negotiations. That, as you know, will take place toward the end of next quarter into the fourth quarter, and then we will report on that at the beginning of next year. However, in the marketplace, we're certainly seeing that the availability of the material is certainly there. A couple of years ago, we ran into some issues as to availability. But for our purposes, we have a pretty solid relationship. Our long-term contracts are working well for us. We would expect that, as you go forward, not only within the nature of our agreements, as they play out, I think you'll see modest improvements going forward, but too soon to really give you any detail on that.

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

Okay, and you talked about some changes in the industry dynamic. Of course, with the TIE and Allegheny now, working on a slightly different model. Have you seen a change because of that, as TIE got bought by PCP, have you seen some customer shift, one way or the other?

Dawne S. Hickton

Well, we're certainly seeing changes in the marketplace, as you would expect from, frankly a lot of industry consolidation, and really, this has been going on for the past several years and it's something that we positioned ourselves for several years ago by moving into the higher-level integrated values chain, with our capabilities not only at the machining level now, with multiple machining facilities, but also our ability to do some of the other fabrication in our Engineered and Services group, with our hot forming and superplastic forming. So the short answer is, industry consolidation has been having an impact and certainly, the last big consolidation, if you will, has probably accelerated some of that. What we have seen directly is a benefit to us, as some of our customers look to make sure that they can ensure longer-term, a solid relationship, where they're looking for that integrated titanium solution, as opposed to just looking at us as a mill company today.

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

And could you give us CapEx and the depreciation number for the quarter?

Dawne S. Hickton

CapEx and depreciation for the quarter? Bill, do you have those?

William T. Hull

I'll have those.

Dawne S. Hickton

That's not rolling off the top of my tongue, I'm sorry, Avinash. How did we get those? We'll get back on the call, and get those to you in a minute.

Operator

Our next question comes from Jonathan Sullivan from Citi.

Jonathan Sullivan - Citigroup Inc, Research Division

Two questions. One, I was wondering what the total 787 ship set deliveries were in 2Q? And second, I think you mentioned the potential impact of Partnering for Success on 787 downstream margins going forward, I was wondering if you could elaborate on that a bit.

Dawne S. Hickton

Sure. We shipped 18 equivalent ship sets during the quarter, which places us as shipping parts, some parts actually as far as aircraft #188, and so by the end of the month in June, we were at the 7 ship set rate. In terms of -- and June was our first-ever profitable month on that program. So you can imagine that Partnering for Success is an important strategic initiative for Boeing across all its supply chain, but for us, it's an important initiative as we work together with Boeing to try to come up with some win-wins. And we are looking at this from the standpoint of, as we can take out cost, can we share those cost reductions with our customer. And it really just depends on what we can do in the next couple of months, what those headwinds will be. That's something we're always striving to improve our operating efficiency, and we hope to view this as a true partnering for success between us and Boeing and that's how we've approached it.

Operator

Our next question comes from Chris Brown from Bank of America Merrill Lynch.

Christopher R. Brown - BofA Merrill Lynch, Research Division

Based on what you're seeing in the pipeline right now, do you still expect to see double-digit margins in the Engineered Products business in the second half?

Dawne S. Hickton

I think that we have an opportunity to get close. I think we should have a slightly stronger third quarter. I'm really not sure where we're going to end up in the fourth quarter here. We're still working on that. But there's an opportunity, definitely, to continue to improve those operating margins, and that's what we're planning.

Christopher R. Brown - BofA Merrill Lynch, Research Division

And then can you just remind us on your plan of attack to gain market share in the jet engine market, when it sort of seems like existing suppliers are struggling in that market right now.

Dawne S. Hickton

Plan of attack. Not sure I know how to answer that, other than to tell you that I assure you, with our new EB furnace, with our new commercial organization and our approach into the engine markets, we're moving forward. And we are -- we have been pretty aggressively working on what I would call old relationships, as well as new relationships within the engine market. And as the year progresses, and as we move into 2014, we hope those -- we hope that work pays off.

Operator

Our next question comes from Phil Gibbs from KeyBanc Capital Markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Dawne, I'm just getting on a little late here, but did you quantify the top line opportunities for your engine business, and for your new Bombardier contract?

Dawne S. Hickton

Sure. The -- let me just say this, what -- the Pratt & Whitney is the market share agreement, and that's for their new turbofan. And so we see the -- well, that's a contract that's, from our standpoint, we expect revenues in excess of $100 million, but there's really a potential for growth on that, as that -- as there's growth in the sales of that engine. And as you know, that's on the neo, Bombardier 80, MRJ, so there's some real opportunity there longer term. We won't start shipping product under that though, until next year. In fact, about probably the back end of next year. But certainly, we see that as exceeding $100 million. And then the Bombardier is, we see revenues there, about a $90 million deal.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

When does that start, for Bombardier, contract?

Dawne S. Hickton

Well, that's actually ongoing. That's a 7-year -- so some of that's a renewal, and some of that's new business. So that's ongoing, and that's a 7-year deal.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Now what facility does that come out of? Is that Claro?

Dawne S. Hickton

That's predominantly coming out of our Montreal facility. Correct, RTI Claro, our Canadian subsidiary.

I guess I would just say to you that we're not limited to our Canadian subsidiary for that deal. And remember, that we have our new Remmele Engineering operation, so to the extent we can continue to integrate and have our sister companies work together, those are opportunities for us with a deal like this. And frankly, for all of our businesses today.

Operator

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Just wanted to get some more color on the 787 profitability. Last quarter, I think you mentioned the Dash-8 and Dash-9 variations kind of hurt the profitability, I mean, has that normalized? And how should we think about the profitability on the 787 when you get to 10 a month? I mean, is this sort of a double-digit operating margin kind of program, the way you see it, Jim? Or is this going to be tougher because of that variation in the Dash-8 versus Dash-9, and eventually, the 10?

James L. McCarley

Right. Well, what I would say is that, we are somewhat normalized now, the Dash-8 and the Dash-9. Last quarter, what we were talking about is, we were having to sort of expedite some pieces through and working in less than ideal batch sizes, so we felt like June was a pretty good representation of where we could go. Clearly, this is not a double-digit program for us from an overall standpoint. It's -- we think it's a good, stable base to grow from, but it's not a -- it's not -- you'd be improperly modeling that as a double-digit type of setup.

Gautam Khanna - Cowen and Company, LLC, Research Division

Is that true, even next year, do you think, or...?

James L. McCarley

Yes, it really tops out below there, as far as what we see now. Now that's a place we're going to attack. Part of the PFS processes is that we'll need to do everything we can to attack that. But we're going to see a little bit of help from our material, that's really more of a cash flow and bringing that material underneath our -- through our own operations was a big benefit there. So that probably helps us more on cash than on profit, but I see us topping out before we get to a double-digit type number.

Gautam Khanna - Cowen and Company, LLC, Research Division

Dawne, would you mind just directionally opining on next year, with respect to, kind of, price versus cost, because you have escalation and deescalation in your LTAs, which colors how much they can -- the price can move. But clearly, on the sponge side, with the move down in rutile and availability of the sponge, as well as the substitute availability, scrap at much lower prices, presumably, you'd have a big cost tailwind, and just wondered if you could, at least directionally, if you could tell us whether you think price changes will be a net positive, relative to cost next year at the Ti Mill.

Dawne S. Hickton

Well, as you know, Gautam, this is a little early for us to be giving directional guidance into 2014. But with that caveat, our expectations, as we sit here today, barring changes that we don't anticipate in the second half of the year, we would expect that our cost will continue to improve. That is our focus. We're continuing to drive cost out. However, in terms of pricing, while one might expect some positive pricing opportunities, don't forget, you have major consolidation that has just taken place in the industry, that in our view, we are already starting to see. We would project that, that will have an impact, that would not be, as you are suspect [ph] we were suggesting, going forward. Let me just put it that they. While we're on, Bill do you have those numbers we were asked earlier?

William T. Hull

Avinash, the answer to your question is depreciation and amortization is $11 million, and CapEx is $10.5 million for the quarter.

Gautam Khanna - Cowen and Company, LLC, Research Division

So you're suggesting that price will go down, and it's not clear whether that difference is going to be offset entirely by the reduction in cost?

Dawne S. Hickton

Too early to say. But certainly, our focus is going to be on continuing operational performance improvements and cost reduction. That's where we got to be.

Operator

Our next question comes from Patrick McCarthy from FBR.

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

Just a quick follow-up on the defense side of the business. I think in the past, you sized the potential negative impact from sequestration at about $15 million. It doesn't feel like you've seen much in the way of a headwind so far this year. Is that still a fair number to kind of keep in the back of your mind, or do have some updated thoughts on that?

Dawne S. Hickton

Patrick, frankly, from our perspective, we've really -- we spent the last 18 months repositioning ourselves, to have less and less of a direct impact from sequestration. And so I would say what you've already seen in our guidance, we've taken into account any concerns that'll impact us certainly this year. We've also, with Remmele Engineering, to the extent we are still in defense programs, they're in the programs that the Department of Defense and the Pentagon have focuses, those programs for the future, things like cybersecurity and cyber intelligence, and away from some of the heavier platforms now. Now having said that though, obviously, we're still solid on the Joint Strike Fighter, but today's guidance includes all of the prior assumed impact of sequestration for this year going forward. So for us, I think we've already positioned ourselves, and I don't think I would see a major change in what we're talking about. Obviously, if something changed and the Joint Strike Fighter program were suddenly canceled, that would be a different story. But other than that, I think we're pretty solid where we are today.

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

Just looking at JSF, it looks like Lockheed's going to sign the Lot 6 and 7 any day now. Will that change your expectations for how much they demand on the Mill side? Or do you still think you're going to be relatively flat on that portion of the business for the next couple of years?

Dawne S. Hickton

Well, we're still pretty solid for what we're shipping this year, and that's around that 2 million pound number. And when we get into next year, we think there's some opportunities. I just don't want us to get ahead of that when we look into '14 and '15. Once upon a time, that program was double and triple the volume we're shipping today. I'm just not ready to tell you that we're going to see dramatic Mill product level increases going up in the next couple of years. Having said that, certainly good news when they continue to sign and continue with the foreign sales.

Operator

Our next question comes from Frank Haflich from AMM.

Frank Haflich

Dawne, just a question. Martinsville, now your main piece of equipment there is the -- is that the forging press?

Dawne S. Hickton

Yes.

Frank Haflich

Right. But you do -- you wouldn't -- initially, I think planned for some additional equipment, was that either a rolling mill or another furnace?

Dawne S. Hickton

We did plan originally for a rolling mill, and at this point, we have just put that on kind of an indefinite hold until we see how the market picks up.

Frank Haflich

Okay. What would it take for you to start thinking again about putting that in?

Dawne S. Hickton

Well, let me put it this way. We won't think about it in '13, and probably not even in '14. So I think you got to look out a couple of years.

Operator

Our next question comes from Julie Yates Stewart from Credit Suisse.

Julie Yates - Crédit Suisse AG, Research Division

Just a follow-up on 787s. What rate can you support with your current equipment, and then how do you think, going -- how do you think about going to 12 and then ultimately to 14, potentially?

Dawne S. Hickton

Well, we can absolutely support 10, and actually, some of the discussions taking place right now is, with nominal configuration, can you get a few more out? And certainly, we think there are possibilities there. And then, what would it take to do more? And those are some of the discussions we actually are under -- having as we speak, Julie. So there's possibilities, and I think that depending upon the opportunities for us, we can position ourselves accordingly.

Julie Yates - Crédit Suisse AG, Research Division

Okay. And then do you have an updated utilization number, as the EB furnace comes on, in terms of where your Mill product capacity utilization is expected to end the year?

Dawne S. Hickton

Well, let me give you a range on that. Last, before that came on, we were almost at full capacity. Now that we're on, clearly, we have more capacity. So range, I'm going to say, we're between 6% and 7%, 70%. 60% and 70%, I should say, not 6% and 7%.

Operator

Our last question comes from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

Dawne, I wanted to understand kind of, the cash flow calls that you have next year. I mean, do you have any sort of additional projects in the works, once we're through this CapEx, the projects you've already cited, or is there -- is this going to be kind of -- we're at a point where we're generating cash next year?

Dawne S. Hickton

The latter, in terms of cash projects, certainly, we are continuing to bid and actually receive opportunities on machining packages. But when you're talking about CapEx there, you're talking about a couple of million, as opposed to the $150 million forging mill project. So positive cash flow, there will be some CapEx, but predominantly geared toward machining opportunities. I could see, anywhere from $10 million, $20 million, as high as $30 million, depending upon the opportunities that we win.

Gautam Khanna - Cowen and Company, LLC, Research Division

And I wanted to also just ask about Airbus and your -- shouldn't -- they have been sort of supporting this UCAD [ph] JV, kind of helping it develop over the past couple of years. I was just wondering, should we think about that business taking share, kind of the overall requirement? I know you guys have 30% to 35% share. Or should we think of you guys growing linearly with Airbus' kind of aggregate demand?

Dawne S. Hickton

Certainly, the latter. In fact, we just came off, during this quarter, the other thing we held was our annual strategic meeting with Airbus up in our Claro facility. For us, Gautam, as we've said before, this is, truly the strategic growth for us is to grow with Airbus, not only as their programs grow, our Mill products' going to grow, but our ability to machine is going to grow. And so, for example, we have in place the long-term deal that's market share, that's just on the Mill. And one of the key focuses of our relationship, not only pushed by our side, but expressed now by our customer, is to view us as that integrated opportunity, because they're looking to reduce their buy-to-fly ratios, and the best way to do that is for us to be able to be the people giving them that final component, where that's an opportunity for us to continue to give them the machine parts. And that's what we're working on, not only with the A350, but also with the neo. So I guess what I -- I probably kind of got away from your question. In terms of, certainly UCAD [ph] is a significant supplier to them, but we don't see that as taking share away from us. We see us growing in a different direction, continuing to supply. However, across the board, you're going to continue to see pressures on the buy-to-fly ratio for the Mill, but that's where we have the opportunity to take it further downstream, if you will, as we can make those finished integrated products for them.

Gautam Khanna - Cowen and Company, LLC, Research Division

And do you have a sense for what your Mill shipments will aggregate to, to Airbus next year, and what they will be this year, just an update?

Dawne S. Hickton

Well, I think this year, we're looking at very similar to last year. We're right around that, close to 6 million pounds. I don't have the exact number off the top of my head. But it's right around that 6 million volume number. I think as you go forward, you're going to see similar numbers. You're not going to see huge growth above that in the next year or 2, because a lot of that is as the programs are ramping, they're still working on the buy-to-fly ratios. But that 6 million, 6 million-plus, is a good number.

Gautam Khanna - Cowen and Company, LLC, Research Division

But to your point, that mix improves because you're selling more downstream product.

Dawne S. Hickton

Absolutely.

Dan Crookshank

Thank you very much, everybody, for joining us on today's call. John will now provide you with the information necessary to access the replay of this conference call. So John, please go ahead.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. A replay of this call will be available in an hour and remain through August 13, 2013, using playback number 1(888)843-7419 for U.S.A., Canada or international at 1(630)652-3042 and enter the passcode 35310465, followed by the #. You may now disconnect.

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