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RTI International Metals (NYSE:RTI)

Q3 2013 Earnings Call

November 07, 2013 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 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

Christopher R. Brown - BofA Merrill Lynch, Research Division

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

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

Frank Haflich

Gautam Khanna - Cowen and Company, LLC, Research Division

Operator

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

Dan Crookshank

Thank you, Richard. Good morning, everyone. Welcome, and thank you for joining us today for our review of RTI International Metals Third Quarter 2013 Financial Results. I'm Dan Crookshank, Director of Investor Relations.

On the line with me today are Dawne Hickton, our Vice Chair, President and CEO; Jim McCarley, our Executive Vice President of Operations; Bill Hull, our Senior Vice President and Chief Financial Officer; and Bill Strome, our Senior Vice President, Administration and Finance, all of whom will be available for your questions at the conclusion of our formal remarks.

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.

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

Dawne S. Hickton

Thanks, Dan, and hello, everyone. As has become our standard practice, I will begin today's call with financial and operational highlights of the third quarter. I'll turn it over to Mr. Hull, who will provide some segment details, then I'll come back and provide including remarks and then we'll turn it over for questions from all of you.

So the third quarter marks yet another quarter for us of continued progress here at RTI International Metals. First, we delivered growth in both sales and earnings that were driven primarily by our commercial aerospace business. What we see for us is a solid ramp in that sector that not only remains on track, but continues to build momentum and, of course, for us supports our value-added strategy.

And second, we continue to execute on our growth strategy with a bolt-on extrusion acquisition that enhances our operational capability. I'll talk more about both of those subjects in a few moments, but first, let me give you a review and some highlights of our consolidated third quarter results.

Net sales were $196.5 million in the third quarter of 2013, representing an 8% increase over the third quarter of 2012, which came in at $182.5 million.

Our operating income for this quarter was $21.6 million as compared to $9.3 million in the third quarter of 2012. However, I do want to just point out that last year's quarter did include a nonrecurring equipment outage, and I would also highlight that the strength in this year's third quarter reflects favorable raw material prices, primarily scrap, of which we were able to take advantage.

Net income from continuing operations in the third quarter was $12.3 million, or $0.37 per diluted share, and that compares with $3.2 million or $0.11 per diluted share for the same period last year.

The current year result does include a discrete tax adjustment that benefited our EPS by $0.06 per diluted share.

The Mill product shipments, the titanium Mill product shipments during the third quarter of 2013 were 4.0 million pounds, and that keeps us on track to meet our full year guidance of approaching 16.5 million pounds for the year.

Average realized mill product price during the quarter was $18.57 per pound, compared with $19.01 per pound during the same period in 2012.

The year-over-year decline, as well as the prior quarter, which was $19.57 per pound, was really the result of some customer and product mix, including a delay of some of our expected Joint Strength Fighter Mill product shipments, which is, you can well understand, resulted from the uncertainty related not only to the government shutdown, but then the resulting uncertainty that continues to surround sequestration. We do not, however, anticipate the short-term ordering delays to impact the current status of the program overall.

All in all, our third quarter results were solid and demonstrate our ability to continue to develop as a vertically integrated, advanced titanium and specialty metals provider for our customers throughout the supply chain.

To this point, there were several noteworthy events and announcements during the quarter that demonstrate our progress in this direction. Let me briefly highlight the following subjects: Our new contracts with United Technologies, our newest acquisition, the Annual Titanium Industry Conference, the commercial aerospace ramp, and our energy and medical markets.

So let me start with our newly signed contracts. We entered into long-term direct titanium mill product supply agreements with 3 United Technologies Corporation business units. This included Sikorsky, Pratt Canada and the UTC aerospace sector. These agreements add to the direct supply agreement we completed in June to provide rotor quality titanium mill products to Pratt & Whitney for their pure power family of geared turbofan jet engines. In addition to enhancing and expanding our commercial relationship with multiple UTC business units, we are now positioned to be provided with downstream, highly engineered processing and machining opportunities from this key strategic customer.

Second, we closed on our acquisition of Osborn Metals Ltd. in the U.K. While small in size, it does represent an important strategic addition to our titanium processing capabilities and to the production of near-net shape profile parts. Now operating today as RTI Extrusions Europe Limited, this acquisition complements our Houston-based extrusion operation, giving RTI capability to provide a full complement of hollow and solid-shaped extruded parts in the small- to mid-size range, and we welcome aboard RTI, our team now over in the U.K.

We expect these sizes in Osborn, now RTI Extrusions Europe, to present future opportunity among our current customers, as well as new opportunities in smaller-sized aerospace engine components.

Now with respect to acquisition activity generally, we continue to evaluate possible acquisitions for Engineered Products and Services Segment, and we have a robust pipeline of potential opportunities. Our focus continues to be in the size range between that of our most recent purchase and larger acquisitions the approximate size of our Remmele Engineering acquisition of 18 months ago.

Now let me turn to some ITA highlights. As most of you are aware, the Annual International Titanium Association Conference and Exhibition was held last month in Las Vegas. It is the titanium industry's largest annual event, this year attracting more than 1,100 attendees from more than 30 countries. This year's ITA provided continuing evidence that the historic ramp in aerospace remains intact and on track. Both Airbus and Boeing made presentations showing current total commercial passenger plane backlog of approximately 10,000 aircraft with a total of approximately 30,000 airplanes needed to meet the forecasted growth in passenger traffic over the next 20 years. And both of these OEMs emphasize that commercial air travel demand is among the most powerful economic trends in the world. The need to replace aging aircraft is yet another strong driver of demand, and both of the major OEMs again emphasized that titanium will have an important place on their advanced aircraft model for the future. In fact, both companies noted that titanium will continue to be a good fit with the composite materials that are used extensively on these aircraft.

Now the forecast of the major OEMs were important elements, as we develop our own forecast, and are indeed consistent with our long-term view for titanium, as well as the integrated products we manufacture in our supply chain. Of course, in the near term, we see slow but steady growth that we expect will begin to accelerate in the second half of 2015.

With respect to RTI, our commercial profile at the ITA conference this year was a strong one. In addition to meetings with Airbus and Boeing, RTI met with other customers and suppliers, including a very well-attended meeting with our newest customer, UTC, and our meeting with Boeing at the ITA built on our first Boeing long-term strategic alignment meeting that was held earlier in the quarter in Seattle. This meeting was very successful. And combined with RTI's cooperation with Boeing on its partnering for success program, which in our case means sharing future savings and our understanding of Boeing's desire to reduce the number of suppliers that it deals with directly, we are well positioned to benefit from increasing opportunities with Boeing as we move forward.

And we are also recognized today, by Boeing, as part of a critical supplier group. And those of you who follow the industry are aware, this is an important designation. So RTI is now well positioned in this regard, both with Boeing and Airbus, and we will continue to drive our supplier-partnering strategy with the rest of our key customers.

And finally, at the ITA, as is our annual custom, we also met with our sponge suppliers to finalize negotiations for next year's requirement. Based upon these meetings, we would expect our overall raw material cost for 2014 to be approximately 5% below 2013.

Now before I turn it back to Bill, let me make a couple of comments on what we're seeing in our medical device and energy markets. First, with respect to energy, our long-term outlook for this business continues to be promising and our backlog remains solid. This is being driven by major projects with our key customers for our subsea components, production risers and titanium stress joints. As exploration continues to migrate to deeper water, longer drilling strings and harsher environment, the energy market is pursuing alternative materials like titanium to provide the technical solutions.

Now looking at our medical device markets. Given that our attempts to repeal the 2.3% medical device excise tax have continued to fail, that business has slowed down in terms of overall demand in new project development. We expect this to persist into the fourth quarter and early next year, but we believe we'll turn the corner shortly thereafter begin to see positive effects from pent-up demand in this market.

Now with that, let me turn it over to Bill Hull, who will discuss results from our Titanium Segment and our Engineered Products and Services Segment. Bill?

William T. Hull

Thanks, Dawne. On a consolidated basis for the third quarter 2013, RTI reported net income attributable to continuing operations of $12.3 million, or $0.37 per diluted share on net sales of $196.5 million and operating income of $21.6 million.

For the third quarter of 2012, RTI reported net income attributable to continuing operations of $3.2 million or $0.11 per diluted shares on net sales of $182.5 million and operating income of $9.3 million.

A few items to note regarding 2013 third quarter consolidated results. Our operating income includes duty drawback cost recoveries that exceeded our expected normalized run rate by approximately $2.5 million. We expect these excess recovery levels to continue to tail off and come to an end in Q4, where we will return to our normalized run rate.

Additionally, the current year third quarter results included discrete income tax benefit of $2.6 million, or $0.06 per diluted share, primarily related to the effects of certain statutory rate changes.

Also, in accordance with the if-converted method for calculating diluted earnings per share, the company's 2013 third quarter diluted earnings per share amounts are calculated assuming the conversion of the company's 1.625% senior convertible notes due 2019. This means we include all 9.9 million shares of common stock and exclude after-tax interest expense in the calculation of diluted earnings per share.

As I mentioned on the first quarter conference call, we were expecting to have a quarter where the assumed conversion of the 2019 convertible notes would be more dilutive than its current quarterly interest expense of $4.8 million pretax or $2.9 million after-tax. This happened in the current quarter partially due to the contribution to net income of the $2.6 million discrete tax benefit.

Going forward, we will continue to use the more dilutive of either the full share count under the notes or the associated interest expense in the calculation.

Now looking at our 2013 third quarter business segment results. The Titanium Segment reported operating income of $16.8 million on net sales of $89.7 million compared to 2012 third quarter operating income of $5.5 million on net sales of $90.1 million. Net sales were essentially flat year-over-year as the impact of lower prime mill product shipments were offset by higher sales from our European service centers to our European commercial aerospace customers as a result of customer order timing. The $11.3 million increase in operating income was primarily due to favorable raw material prices, including the benefit of lower scrap costs of about $6.8 million and modest improvements in operational performance.

The third quarter of 2012 included a charge of $2.4 million related to an equipment fire and associated outage. Gross margin on net sales for the quarter was 29.8%, compared to 18.5% for the same period last year. Titanium mill product shipments for the 2013 quarter were 4 million pounds at an average realized price of $18.57 per pound. That compares to titanium mill product shipments of 4.2 million pounds in the third quarter of 2012 at an average realized price of $19.01 per pound.

The Engineered Products and Services Segment reported third quarter 2013 operating income of $4.7 million on net sales of $106.9 million, compared to operating income of $3.7 million on net sales of $92.5 million for the same period last year. These increases were primarily due to higher commercial aerospace sales, principally related to Boeing platforms, which were offset by lower medical device and military market sales.

Gross margin on net sales for the quarter was 17.2% compared to 18.4% for the same period last year.

Now let me provide you with a couple of metrics that go into our operating and free cash flow for the quarter. Capital expenditures totaled $6.7 million for the third quarter and are $26.4 million for the first 9 months of the year. Third quarter depreciation and amortization expense totaled $10.7 million and is $32.5 million year-to-date. We expect full year D&A of $44 million.

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.

For the full year 2013 and the foreseeable future, we expect our tax rate to be approximately 31%, excluding the positive or negative effects of periodic discrete items. Dawne?

Dawne S. Hickton

Thanks, Bill. As you can tell, the third quarter and the year-to-date represent continued progress for RTI. And this is our overall progress from our focus on improving safety and improving our employee training and career opportunities, advancing our health and wellness program, as well as improving on the financial health and the bottom line.

We completed an acquisition that enhances our capabilities in a growing and important area of our business. We continue to build and develop strong relationships with important OEM and tier 1 commercial aerospace customers that are critical to our future growth as an integrated supplier across the supply chain, and we continue to see favorable conditions across most of our markets, particularly, as I mentioned earlier, the commercial aerospace markets, where Boeing and Airbus, as well as others, reiterated their bullish tone for the growth of this market segment at meetings earlier this year.

From a financial performance perspective, we, once again, are reaffirming our 2013 full year guidance for total Mill product shipments approaching 16.5 million pounds, with revenues approaching or possibly exceeding 775 million pounds, and our operating income in the high end of the range of 65 million pounds to 75 million pounds.

William T. Hull

Dollars.

Dawne S. Hickton

Dollars, sorry. $65 million to $75 million. In addition, our 2013 full year projection for capital spending, as Bill pointed out, is now expected to be approximately $40 million, which was below our previous full year guidance range of $50 million to $60 million.

Now, as we look to 2014, it is too early to give any firm guidance, but we are expecting 2014 to be modestly better than 2013. We would expect to see our revenues continuing to increase, potentially by as much as 10%, and we'll continue to work on improving our operating margins. Although I would note, we do expect mill volumes to only modestly improve, as we see the ramp accelerating as we move into 2015 and, of course, recognizing some uncertainty around Joint Strike Fighter volume. But our strategic direction is aligned with the major trends in the diverse markets we serve, and we look forward to continuing the growth and profitability as we realize the benefits of the positioning for RTI.

Now let me take your questions.

Question-and-Answer Session

Operator

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

Julie Yates - Crédit Suisse AG, Research Division

Dawne, can you comment on the 787 learning curve and how you're progressing as the rate moves up? I think this is the second quarter that you've been profitable here. And so as we move into 2014, I think last quarter you said modest improvement in 2013, strengthening in 2014. So just how should we think about you guys coming down that learning curve, and how that improvement can translate into higher margins in the Engineered Product Segments?

Dawne S. Hickton

Sure, Julie. And yes, as you pointed out, we -- once we passed the 6-ship-sets-a-month rate, this program has moved into profitability for us. We really got by the end of the quarter to a 9-ship-sets-a-month rate, and we expect to be at 10 by the end of the year. So you'll continue to see that improve. There's always ongoing learning curve. And one of the things that we would expect going into next year that we will be at that full 10 ship set rate. And so we'll continue to see that adding profitability. One of the things, though, you'll see that as we move into the partnering for success program, a lot of what we'll be doing to continue to focus on that learning curve will be sharing any improvements with Boeing. So the incentive is for us to improve but also to share that with our partner. So long way of saying that program is profitable today, and we continue to see it improving as we go forward.

Julie Yates - Crédit Suisse AG, Research Division

Okay. And do you anticipate any challenges with the Dash-9 coming in?

Dawne S. Hickton

Not -- I would actually say we've already had some challenges with the Dash-9 and that we kind of dealt with those earlier in the year. So for us, that's kind of moving forward consistent with our plans. I would not say at the moment we would expect anything significant. I think, let me put it this way, we're pretty confident most of that is behind us as we move forward. There were some adjustments we had to make earlier in the year.

Operator

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

Christopher R. Brown - BofA Merrill Lynch, Research Division

It looks like pretty impressive cost performance in the Titanium Group in the third quarter. And other than lower scrap prices, what's really going on there, whether it's lower conversion costs or anything from an operating perspective? And then how sustainable is that on a go-forward basis?

Dawne S. Hickton

Well, first of all, the -- yes, the crap was a big part of that for the third quarter, so I would not expect that level of benefit to continue as we go forward, although we'll see some benefit. But we've had a very strong focus under Jim McCarley's organization on overall cost improvements, moving to drive out cost. And I don't know, Jim, if you want to add anything to that?

James L. McCarley

I think the only thing I would add is we are taking a lot of advantage of our new EB furnace. That offers us opportunities to do some things with material blends and material costs that we didn't have available to us before. So as the team learns more about how to really bring that online, we're expecting to see an improvement trend continue in that area.

Christopher R. Brown - BofA Merrill Lynch, Research Division

Okay, great. And then, secondly, what's the capability for ramping up 787 ship sets past the 10 per month level? As the 787 ramps to 12 per month and 14 per month, are you guys able to fulfill those needs as well?

Dawne S. Hickton

We don't really anticipate a significant problem. In fact, going to 12 shouldn't be an issue at all. We think we have the capability to work up even further than that. We're working with Boeing today. Some of the concerns will actually be not so much our facilities as within the supply chain we manage, and so those are the things we're working on.

Operator

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

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

So quick question on the JSF. You talked a little bit about JSF with respect to the growth that you expect in 2014. Could you give us some idea in terms of what your expectations were for 2013? And have they tracked in line? And then qualitatively, what are you thinking in 2014?

Dawne S. Hickton

Yes. Well, we were expecting -- you may recall, I've said we would be upwards of 2 million pounds on our JSF. Well, we saw a little bit of weakness in the ordering that kind of centered around the timing when you had the government shutdown and people were wondering what was going on with defense and how long it would last. So we didn't quite reach those numbers that we expected, and so I don't think you'll see those orders get that -- to that higher level this year. And so the question for next year, candidly, and it's really kind of a we-have-to-wait-and-see, but we would have expected next year to be similar to that 2 million. So the question is, what are those headwinds? Will we get there and maybe even catch-up with what we lost this year? Or alternatively, will we continue to see January budget shutdowns and questions about sequestration? Those are things, quite frankly, out of our control. But we would assume that there's a lot of support for the underlying program. It's really one of just the timing of when we get the orders in.

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

Okay, and another one on the margin front maybe, of course, you do see positive traction on the Boeing 787 going forward into 2014. And if you were to kind of talk qualitatively of maybe 10% growth or something in overall revenues, what kind of margin leverage can we see year-over-year in 2014?

Dawne S. Hickton

Yes, I don't want to give -- let me just say, you're going to see us continuing to work on improving, Avinash. But it's really too early for us to give you some firm guidance. We've got a lot of moving parts we're working on right now. So let me just say, we expect '14 to be better. I just don't want to go out that far yet.

Operator

Our next question online comes from Mr. Steve Levenson from Stifel.

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

Could you please tell us if you see 3D printing as disruptive, an opportunity or, really, no impact to the fabrication business and if you expect to get involved in the production of titanium powders?

Dawne S. Hickton

Sure. Let me say this: We see it as an opportunity. I don't know that we view it as the disruptive technology for our particular product line that others may see in theirs. But for us, we absolutely see it as an opportunity. I'd also say that we've actually been in the powder business in the past, going back well over 20 years. We continue to be focused on powder metallurgy, and we're actually pretty active today as part of the group in the Namee [ph] organization here in Northeastern Ohio and Western Pennsylvania. And we've actually been doing some additive manufacturing prototyping for our some of our customers. So bottom line, we see it very much opportunistic. And at the end of the day, a lot of it is going to be, can you make parts more cost effectively using that type of technology or manufacturing than traditional? And that, at the end of the day, is what's going to be the difference.

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

Okay. And just in relation to powders again, the sort of things that I've been reading suggests that demand for powder metals is going to grow tenfold over the balance of the decade. If that's the case, do you think your capital requirements would be finer or significant?

Dawne S. Hickton

Well, I'm not sure what you're seeing. I guess, the question is it, is it powder in titanium, or is it powder generally across additive manufacturing for different parts? So there's -- I think it's really just too soon to tell, but to the extent we would continue to see some of the opportunities on the titanium side, I think your capital investments, at this point, are modest.

Operator

Our next question online comes from Mr. Frank Haflich AMM.

Frank Haflich

Yes, Dawne, can you give us an idea of your scrap versus sponge mix this year versus last year?

Dawne S. Hickton

I'd rather not give the details on that, Frank, but let me just say that certainly you could assume that more scrap and less sponge this year. But in terms of specific ratios, that's proprietary, and I won't be disclosing that.

Frank Haflich

Right. And since so much of your product that sold on long-term contract basis is based on indices, will the much lower scrap prices you're paying this year and lower prices for raw materials, will they have an impact on the price you get next year for titanium?

Dawne S. Hickton

We would expect that in some of our contracts. It really just -- each contract is different. Keep in mind that some of our very long-term contracts do not -- are not tied to those indices. So it's really a mix. There will be some that will be impacted with the lower impacts, and there'll be others that will not.

Frank Haflich

And can you clarify the $6.8 million figure that Bill gave? Lately, I think that relates to -- does that relate to scrap savings or what?

William T. Hull

That relates to lower material costs due to lower input cost as we bought -- as we were able to secure those at a lower price. So they feed right into the material cost.

Operator

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Last quarter, if I recall, Jim made a comment about 10% operating margins being sort of the high-end of what is feasible on the 8 7 work [ph] statement you guys have. And then, Dawne, I think you made a comment about partnering for success with Boeing. Was that comment last quarter made with PFS [ph] in mind or do you have a revision to that kind of...

Dawne S. Hickton

No, no. That is the number we'll stick with. That's a consistent number. So I guess, the answer is yes, it was made with PFS [ph] in mind.

Gautam Khanna - Cowen and Company, LLC, Research Division

Understood, okay. And then the -- just if you could comment on what you're seeing in the titanium spot market, both in terms of opportunities as well as pricing dynamics. And actually we've heard that Timet's out there bidding at very low price points. Is that what you're seeing? And what's your strategy kind of around that, if you have one?

Dawne S. Hickton

Yes, they're -- part of it, from our perspective, there's really not a lot of activity in the spot market, so there's not a lot out there. So what is out there, I would say, there has been some very aggressive opportunistic approaches to it, particularly if people want to be able to get it -- get an order material out before year-end. As you certainly know, the supply and demand scenario, as I've said, there's some open capacity out there, so people are willing to fill that capacity if there is a market for it. But frankly, there's not a lot out there in the market right now. For us, we're more focused on our long-term relationships and -- rather than chasing some of this, I guess, what I would refer to as kind of one-off hollow spot. We're more focused on looking longer term strategically with our customers and trying to secure opportunities that take our mill product into the integrated supply chain of finished products. That's where we're really focused, Gautam.

Gautam Khanna - Cowen and Company, LLC, Research Division

And last one related to that. Your downstream work at Boeing seems mostly limited to the 787. I just wonder have new opportunities emerged for RTI in the fab business at Boeing?

Dawne S. Hickton

Absolutely.

Gautam Khanna - Cowen and Company, LLC, Research Division

And if so, could you comment on where you're seeing those? What types of products, and which platforms?

Dawne S. Hickton

Well, the 777 -- 777X, the 747-8. Also, we've been talking about 737 MAX. And then even -- that's Boeing commercial, but also on Boeing defense some opportunities. So we've actually -- we've got some opportunities across-the-board, particularly as we now are part of the partnering for success team.

Gautam Khanna - Cowen and Company, LLC, Research Division

And are these big in aggregate? Could you size how big they might be relative to A320 or something else [indiscernible]

Dawne S. Hickton

It's -- I would say it's consistent. I mean there's some key opportunities for us. A lot of it's going to be focusing on our capabilities. And by the way, it's not just in machining. Some of this is continued opportunities, growing our hot forming. So it's kind of across-the-board. And a lot of this comes in packages, so you don't see it as -- this isn't signing a 10-year Mill product deal. So some of these are anywhere from $15 million to $100 million in revenue over the life of these opportunities, these contracts and packages.

Gautam Khanna - Cowen and Company, LLC, Research Division

And when would you expect to hear whether you've succeeded or not succeeded? Is it over the next couple of months, next year? What's the time frame?

Dawne S. Hickton

Yes. To be candid, they're ongoing. I mean, we've won some packages. But because of the size, we don't always go out and announce that there is an opportunity in a package. I mean, just this last quarter alone, within the supply chain, we had several packages we have won within the supply chain.

Operator

Our final question comes from Ms. Julie Yates Stewart from Credit Suisse.

Julie Yates - Crédit Suisse AG, Research Division

Just back to the question on the margins in the Titanium Segment, what is the underlying level of performance in Q3 that we should be thinking about going forward as sustainable, keeping in mind the duty drawbacks and the scrap benefit?

Dawne S. Hickton

You mean as we look into -- you're talking about going forward into next year?

Julie Yates - Crédit Suisse AG, Research Division

Correct.

Dawne S. Hickton

Well, I think where -- what you saw for full year this year, we're going to continue to look to improve on it. I wouldn't focus on this quarter as the number, but I would look at our full year number for the group and then look at us working to continue to improve on that.

Julie Yates - Crédit Suisse AG, Research Division

Okay, great. And then I think last quarter, you had one caveat on your guidance for the upper end of the operating income range. It was timing of completion on energy revenues. Is there any update on that? Or any better visibility on that today?

Dawne S. Hickton

Well, we've completed the review of the revenue recognition process and that's -- I'm pretty confident that's behind us. But what it means is that on some of the current energy projects, it's really just a question of whether we'll get the revenue in year end or whether it shifts into the first quarter. But at the moment, I'm still -- we're guiding to that upper end. So, I'm confident that that's where our guidance is. We've got one quarter to go, and that's where we see it.

Julie Yates - Crédit Suisse AG, Research Division

Okay, great. And could we expect you to give some more granular guidance on '14 with your full year...

Dawne S. Hickton

Yes. We'll do that like -- I just wanted to give you a little bit of direction right now to let you know that we have -- definitely see next year as an improvement over this year. It's just that we really don't see the big acceleration starting to hit until 2015. But when we get into January on our next call when we give our full year, we'll give you more definitive guidance for the full year of 2014.

Operator

Thank you. We have no further questions at this time.

Dan Crookshank

Great. Thank you, Richard. We'll probably -- we'll be filing our 10-Q next week and our -- Richard, I'll just turn the call back to you to provide the replay information.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. A replay of this call will be available in 1 hour and remain until November 26 using playback numbers 1 (888)843-7419 and 1 (630)652-3042, or international at 001(630)652-3042 and your passcode of 35995914. This concludes today's call. Thank you for participating. You may all disconnect.

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