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Executives

Mark Donegan - Chairman & Chief Executive Officer

Shawn Hagel - Chief Financial Officer & Principal Accounting Officer

Analysts

Robert Stallard - Macquarie

Robert Spingarn - Credit Suisse

Elizabeth - Bank of America

Joe Nadol - JP Morgan

J.B. Groh - D. A. Davidson

Peter Arment - Broadpoint AmTech

Gary Liebowitz - Wachovia Securities

Eric Hugel - Stephens Inc.

David Strauss - UBS

Precision Castparts Corp. (PCP) F4Q09 (Qtr End 03/31/09) Earnings Call May 5, 2009 ET

Operator

Good morning and welcome to Precision Castparts’ webcast and conference call, to discuss its fourth quarter earnings for fiscal 2009. As a reminder, you may listen to this morning’s presentation and view the accompanying slides through real time by going to www.vcall.com and locating Precision Castparts Corp. in the Investor Events calendar.

Additionally, this event is being recorded and will be available on Precision Castparts website at www.precast.com shortly after the conclusion of the presentation and discussion. Following the remarks by members of PCC management, the dial-in access lines will be opened for questions. (Operator Instructions)

Now, I like to turn the floor over to Mr. Mark Donegan, Chairman and Chief Executive Officer of Precision Castparts.

Mark Donegan

Thank you and thank you all for listening in. I’m sure you’re all familiar with the forward-looking statements and need to take into consideration on analyzing the information I’m going to go through.

As you can imagine Q4 certainly presented a number of moving pieces for our operation. We’ll get into those on the following pages, but if I look at the company as a whole, in the quarter we saw our sales decrease year-on-year by 9% from $1.76 billion last year to $1.6 billion this year. We saw operating income decrease by 3.8% from $415 million last year, to just under $400 million this year.

We did see solid margin expansion on lower sales and against this kind of a drum beat that we’ve been talking about for a while now. We saw margins go from 23.5 last year to 24.9 this year and all this generated an EPS from continuing operations of $1.87 this year versus $1.88 last.

So I think we did a solid operating performance, but we certainly have a heck of a lot more to do. If you look at some of the key drivers beginning with sales, it kind of falls into two categories where the first grouping is kind of looking at an apples-to-apples comparisons, so those items had kind of affected the year compared to last.

Three primary drivers what we saw, $87 million negative impact to sales from the weakening foreign currency or the strengthening dollar; we saw lower selling prices of roughly $38 million from our three primary mills as a result of elemental pricing points, mainly a nickel and we saw a $21 million decrease in contractual material pass-through and again, this is mainly nickel and titanium.

If I look at the key market for us as it kind of impacted the quarter, we still have not seen Boeing’s full recovery yet to the pre-strike levels, really across our forgings and castings operations. On the flip side, we did see very solid and fast growth; again, I think it’s a key of us really attacking the market share over the course of the last couple of years and getting the value of that and we also saw very solid growth in our power markets, mainly driven by IGT and seamless extruded pipe.

If I look at kind of how all that impacted our earnings, Q4 was a quarter that sort of in my focus was to take the operations and drive through the process that can get some looking away from some of the negative and where the opportunities are. I think they were able to make that transition in Q4 and it really comes down just relently attacking every single area of opportunity.

I think we got great operating systems; I think we’ve had good operating systems throughout the course of last six years, but what we try to do is, we find them and shorten them up, so they’re looking with a laser focus and allows us to get good immediate response to the changing environment either on a daily or weekly basis.

As a result I think we got very solid productivity gains across majority of our businesses. I kind of talked about that in the past when the sales rate went slow or flattened that we’d be expecting to see productivity gains and we saw very solid gains across all of our operations and we’re able to get good variable costs and fixed cost reductions. As a result we are able to counter the currency impact and if I look at the company in total, it was roughly $17 million on EBIT lines from the weakening currency.

If you look at our market withdrawal and where the sales come from, it’s fairly consistent for pretty much the whole year. 54% of our sales came from the aerospace, 29% from power, 17% from general industrial and the biggest changes that came in the quarter as we saw a bigger shift to power and less in general industrial and other, as you imagine we’re kind of getting some of those as we move through.

If I take a snapshot of the year, I think even with all the moving pieces, certainly in the second half of the year we saw sales growth year-over-year of 1.2% going from $6.75 billion last year to $6.8 billion this year. We saw 6% growth in operating income going from $4.5 billion last year, just under $1.6 billion this year.

Again, for the year we saw margins improved from 22% last year to 23.4% this year and all this generating an EPS of $7.38 this year versus $6.84 last year. As a result, we generated new license sales, operating income and margins. Having said that, we still got tremendous amount of opportunity moving forward in terms of what we can do with these operations.

If you look at the same chart for the year and the primary drivers for us, you can see again that aerospace was 53% of our sales, power 25% and general industrial for the year was at 22%. If you look at the segments or the pieces of our two primary one’s being aerospace and power; aerospace breaks down to 68% comes from large commercial, 22% from military and 10% from its own business.

In the power, we get a little closure grouping where the IGT is the largest segment at 49%, seamless through the pipe of 31% and oil and gas at 20%. We continue to find areas to grow these few primary segments and there will be kind of attention that we keep putting our effort on as we move forward.

Moving into the segments now and beginning with Investment Cast, Investment Cast’s Q4 sales decreased by 6.7%, going from $578 million last year to just under $540 million this year. We saw operating income basically flat, going from $145 million last year to $143.4 million this year, and again, kind of a general turn throughout the course of our Q4 (Inaudible) is even with the sales decrease, we saw margins expand from 25.1 last year to 26.6 this year.

If you look at the primary drivers, Investment Cast beginning with sales, in the headwind side we’re basically overcoming three primary drivers with a weakening currency and again Investment Cast that was $17 million; and there was $17 million less of material contractual pass through and again, for them it’s primarily nickel and titanium versus ‘08. We are still in this particular segment have an impact of about $39 million short fall from pre Boeing strike levels. So those are the three primary ones that were driving us on the downside.

Here on the flip side, we saw good IGT growth versus last year growing by greater than 7% and in our macro IGT whether it’s continuing to be the same, we’ve been having a good market share, we’ve been able to expand our customer base and the value for engine continues to go up. So again the IGT for us, Investment Cast continues to be a strong story.

Looking forward in the Investment Cast, kind of the way we see, IGT is moving in production on the development parts that we won for the second half of the year and again, we’ll get the benefit. The new plant is qualified, we are running production but we move throughout the course of the year and as we move through the second half of the year, we start getting the bulk of our new product into production moving from that stand point. Again, as you’d expect, an Investment Cast of 787 is a significant contributor to and so as we again move into the second half of the year with 787, with their market position, tends to be a good contributor from that stand point.

If I look at EBIT in Investment Cast, again certainly there are a number of items to tackle. The currency impact was $3 million versus foreign currency and we had to overcome the last leverage from the Boeing strike. TO counter these again, each one of these segment has kind of a different feel to it.

Investment Cast, productivity is the one we go after, extremely diligently and if I look at kind of the shift from Q3 to Q4, we saw a very, very, very strong performance productivity wise from our operations. I think we are able to get our workforce to be much more cross trained, nimble and responsive work force and we did a good job controlling variable costs. So, I think we made solid progress, but again, we are going to see this kind of across the bulk of our businesses.

Having said that, again it’s going to be a common thing throughout this presentation; I think we did a good job of making a shift, but we still have numerous opportunities to drive cost out and again our goal right now is to have a very clear line of sight as to where those are and I think that our operations know where they are and certainly what the task is kind of ahead of them.

Moving into Forged; in total we saw Forged sales decrease by 16.3%, going from $810 million last year to $670 million this year. We saw operating income decrease by 12%, going from $184 million last year to $162 million this year, but again this is a kind of a conversation I’ve had a number of times when I’ve been out in the market. We saw margins expand from 22 point last year to just under 24 this year.

If I look at the key drivers, from the sales side again we had a number of moving pieces negatively impacting sales. The effect of currency in Forged products is $43 million. Again, we’ve talked about the lower selling price of the three mills of $38 million from lower earning mills and we had a lower value of reverts. When I look at what we were outselling our waste streams on the open market versus kind of what the value of those streams are this year, an impact of $15 million. Again, we still have the 29,000 ton pressed down all quarter long in Houston, and with that, we also had the loss of the Boeing related project.

So again, Forged had a number of items they needed to overcome. Hoping to counter this, if we saw another very solid quarter of seamless extruded pipe growth that grew by 37% versus last year’s Q4 and I think its important to note that our backlog, at this point in time is still holding steady at that roughly $1 billion. So even with our opportunity to develop, the backlog is still holding very well. We were able to get some market share gains in oil and gas out of SMC with new products that are basically growing in the market. So, I think we were able to put our resources in the right areas to continue to create value for the company.

Now, looking forward we still have additional serving market share in pipe and again that’s basically in our base business which should be Houston, which should be more of our traditional and new applications coming out of SMC’s, though seamless extruded price still has a fair amount of legs on it and so we are acting lavish on it’s growth in both market expenses for patents existing product offering and moving it globally, as well as pulling across the new alloys that we deal, as to moving them up the value stream. So even in this environment we are not at a loss for opportunities and are just going to keep attacking them when they come up.

On the operating income side for Forged, certainly the impact from the lower volume and again we are dealing with the inefficiencies. We were able to offload and meet our customer demand with the 29 being down, but certainly we are using less than optimal means to do that, and the impact of currency for this Forged segment was $8 million versus last year.

Again, the goal is to focus where we have opportunities to get the operations looking at where they are. Certainly in the Forging group, material is the key piece of the product. I think we’ve been able to utilize Caledonia very well to go out and extract more revert from the global community corpuses and gas parts. We are able to see metal efficiency and that’s all the way through the stream in converging and forging and I think we responded to those market conditions very well in a kind of a pretty heavy fixed business, and all this resulted in solid productivity gains.

I think Forged had good performance, but we still have a number of opportunities to test. Again, our primary focus is going to be on the material and it is getting every person in that operation to understand the value of every single ounce of excess material that we need. I think that, again, our systems have extracted that. We know where to go get it and with a clear line of sight to what we need to do.

Last week, if I look at our Fastener Products, I think Fastener Products have overcome a number of challenges, but in total they saw a sales growth of 2.3% year-over-year, going from $377 million last year, to roughly $386 million this year. It continues to see good operating growth just under 12%, going from $106 million last year to $118.5 million this year and they continue to see margins expand from 28% last year to 30.7% this year.

If I look at the primary drivers in Fasteners, from a sales stand point, we saw $27 million negative impact from currency and the sales one area in the Fasteners, that we actually did see in the quarter, an effect from the softening business jet market, it was really in one of our product lines; it didn’t go across the whole spectrum, just one particular product line we had. Again, as you can imagine we had very week industrial and this includes the nemec auto [Ph] where we saw a 33% decrease versus last year.

Certainly the strength that have carried all that has been our aerospace businesses where we saw a 14% growth versus last year and our key drivers has been to just go attack our cost structure and then go back in the market place and solve solutions for our customers and grow our market share. If I kind of look at that, we still have got a number of opportunities to grow share across pretty much all of our product lines. I think the kind of value is we continue to utilize our growing portfolio to help our customers provide an effective solution. So again I think Fasteners, from the sales standpoint continues to do a very solid job.

Operationally, again, I think they got strong operating performance and are reemphasizing headwinds of $6 million in negative currency and a significant downturn in general, but again focusing on the right areas. We got very solid leverage on our aerospace side of our business. I think we got good improvement on productivity and variable cost and we did expect to be right sized in the non-aerospace businesses.

Having said that, these businesses still have opportunity to approve and again we’re going to every operation and we look at every opportunity no matter where they are or how far they’ve come, so there’s still abundant area moving forward.

Moving on to cash, for the quarter we had a positive change in our cash position of $283 million and we had cash-on-hand at the end of the quarter of $554 million and debt of $306 million. After the quarter, we did make a voluntary contribution to our pension of roughly $190 million and the primary goal there was to reduce our pension expense moving into fiscal year ‘10. So again, I think it’s a good utilization of our cash at this point in time and it helps our expense moving forward.

If I look at ‘10, it contemplates into two facets; it is two fields to it. If I look at on a high level, I look at Q1 and really coming into Q2 we’re seeing a strong destocking, primarily from the engine, the land and gear and kind of the Boeings subs. I think its taking on two pieces of puzzle.

I think we are seeing the previous growth that have been expected, that we’re building to that and put into that inventory stream. It’s going to be taken out and at the same time I think there’s a correction or anticipated corrections for kind of what’s going to happen over the course of the next 12 months. I think we had a couple of choices; I think we could have spread it out and put the paying throughout the course of the year, but I think the smarter choice was to take it in the timeframe it is and get it behind us.

On the non-aerospace side, in the power, we see modest growth in IGT carrying on through the year. I think the key component of that is the expanding customer base that we have and moving into production throughout the course of this year and again as well as having some of the new facility in Painesville, Ohio and the seamless extruded pipe is remaining stable. So on the power side we’re seeing a good solid stable picture at this point in time.

Again, if I look at kind of Q1, Q2 timeframe, looking at where we are, certainly the impact of the volume and the lost leverage, the fixed absorption. After the Boeing strike, when we have the manpower we can certainly adjust and attack areas of opportunity that we have, but we also have to make sure which schedule is increasing in the second half of the year at this point in time and we got to make sure we have the resources in place to handle that. So it’s kind of a delicate balancing act that we work through. I think we work through it very effectively during the Boeing strike and we’ll work through it effectively.

Now having said that, we still have a number of opportunities to go work operationally and again of which we’re going to continue to go after the productivity, revert utilization yields and if I look at last quarter, there wasn’t anything there that we can’t continue to carry forward in terms of operation, so no doubt about it. It’s going to be a tough Q1 and Q2, but then as we move into Q3 and Q4, we got to move on.

I look at Q3 and Q4; at this point in time we got base loads, schedules come back, they’re actually loaded in there after the inventory adjustments taken out and we begin to see the impact of the 787. We actually see schedules coming in and with the value of that 787 for us, it is a significant contributor moving beyond that. Again, we kind of talked about these numbers a number of times; one 787 for us as a business is equivalent to a four to five narrow body. So it is a significant contributor and we are seeing it kind of roll in, in the second half of the year.

If I look at power, again we took a benefit from the parts moving into production and ramping up in terms of the IGT and again we see steady demand through the year seamless extruded pipe on our base business, with upside opportunity on new platforms for our seamless extruded pipe.

If I look at the EBIT, I think we have demonstrated for a long period of time the value we can create. I think we have kind of a new cost structure that we reestablished in our Q4 and certainly as we move forward with once the destocking is out, have a tremendous amount of improvement for operational; with sales coming back we can get solid leverage on that volume; we have a significant number of opportunities in terms of variable cost, materialization, productivity gains and I think from that standpoint we can see margins basically go to new level from where we finish Q4.

At the same time, I think we’re in the position to generate strong cash. So I think we’re looking at a challenging Q1 and Q2. I think we’re right now looking at a good solid second half of the year. I think as the 787 moves into production, it gives us a heck of a lot of up-sight from that.

So with that, I will open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Robert Stallard with Macquarie.

Robert Stallard – Macquarie

Good morning. Mark, just first of all on fiscal 2010, can you walk us through sequentially how you think EPS is going to progress. Do you think it’s going to go down in Q1 and Q2, then improve after that?

Mark Donegan

Yes, you know we don’t give guidance. Certainly, the way I look at it is, Q1 and Q2 would be comparable and then yes, we see Q3 up and then Q4 up over that. Q1 and Q2 for different reasons; obviously Q1, we are seeing the destocking. Like I said, we could have spread it, spread the pain or tried to spread the pain, but I think we are better off going to be on this in Q2.

We come back with typical forging outages in the European and right now our schedules are loaded in, so we can actually track where they are, what the drivers are and our schedules do start to get good acceleration in Q3 and then going into Q4, again, with that 787 and our numbers moving into some production, tend to give us another bump.

Robert Stallard - Macquarie

Do you think, given you just posted your Q4 number, we could see something similar to that in the first two quarters; is that right?

Mark Donegan

What I would say Rob is that it’s going to feel similar to the Boeing strike. So, I think that if you kind of look at the performance, we got the upper wing put in and I think we’ve established a good productivity gain, so I think we’ll carry that forward, but certainly it feels and looks very similar to that Boeing strike. It’s an inventory correction; we can see it, we get a lot of our business and we can track the build rates and engines and it is an inventory corrections, no doubt about it.

Robert Stallard - Macquarie

And second is, I was wondering if you could tell us what the LIFO adjustment was in the quarter and how you expect that to progress through 2010?

Mark Donegan

We are not going to give you the LIFO, but what I would say is, as materials comedown we certainly get a LIFO benefit and when materials go up, we kind of go the other way. So depending on what materials do, we’ll kind of dictate where that LIFO number goes?

Robert Stallard - Macquarie

Then just finally on ITP, some of the OEMs that you’ve been talking about, power demand heading down this year, what are they saying to you about the strengths of their backlogs and what visibility do you have on ITP looking out over the next 18 months?

Mark Donegan

I think Rob, that if we’re just sitting and looking at the exact same engines and the exact same customer base, I think I’d probably tell you that we’d probably see some weakening throughout the course of the year. At the end of last year we actually made good market penetration with an expanding customer base, that’s part of the Forged.

So we’re going to be picking up; even if their programs are going down, we’re increasing our share. Really in those situations we didn’t have a good presence and then as the new programs come in we have even a stronger position than that.

Then the value, kind of the newer engines coming out have a better value for us, again because of technology going into the newer engines; it’s got a higher value to us. Again if I was looking at just the exact same engines, the same customer base, I think I’d say we have one in, but we have those things at this point in time that kind of over come it.

Robert Stallard - Macquarie

So assuming it’s really in 2010, it’s going to be backend loaded as well?

Mark Donegan

Correct.

Robert Stallard – Macquarie

Great. Okay, thanks a lot now.

Operator

And next we’ll go to Robert Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

Good morning Mark.

Mark Donegan

Hey Rob, how are you doing?

Robert Spingarn - Credit Suisse

Pretty good thanks. I wanted to ask you, just following along Rob’s question of 2010, but more from a revenue perspective; during the strike you did about $1.6 billion per quarter, here in this March quarter and the December quarter. It sounds like we should be thinking that way; you said this several times for June and September?

Mark Donegan

I think that the reasonable estimate again, depending on where materials are. If materials go up a little bit we got a pop, if materials come down a little bit, but I think it’s probably a reasonable assumption that you said.

Robert Spingarn - Credit Suisse

That’s an important part of it, because when I tried to strip out the pass-throughs in the FX, it looks like on a clean basis you had about a 10% revenue decrease in the quarter, because there are a lot of moving parts there, but when we look forward next year, if we look at consensus revenues the anticipation is about 4% growth, clearly that first half is going to be down. So can we actually get some quarters at the back end of next year that are above anything we saw this year on the revenue side?

Mark Donegan

Yes, I think the opportunity is there in the back side. Yes.

Robert Spingarn - Credit Suisse

And then just more specifically, with regard to 787, which we know is just a terrific program for you and you talked about a 5X ship set increase on 787 versus I supposed a 737 you mentioned, narrow bodies?

Mark Donegan

Yes, narrow bodies in general.

Robert Spingarn - Credit Suisse

Yes, now how do we think about that in the context of Boeing ratcheting down, 777 starting in June, it’s a pretty good program for you, and then a lot of us are looking for expecting perhaps a modest decrease to narrow body at Boeing; is there an offset there?

Mark Donegan

Yes, again the way I have viewed it and the way laid in is again, right now as we take the destocking out, we kind of go back to that base level, the second half of the year. The 787 would be kind of a plus for us. On the flip side, if you start doing the math, we can get to a build rate of two or three as we exit our Q4 which would be to support sometime mid to late ‘10 in the whole stream. That would in the case of a narrow body start overcoming 15’ish, so you could take a 20% whack in the narrow bodies or you could take a 10% whack on narrow bodies and 777.

So we certainly look at it, and again it’s important to know Rob, we don’t have people or equipment or buildings aligned to 737, 777 or 787, all the assets are completely interchangeable. So, it’s either going to be an accelerator for us or it’s going to be a tremendous counter wait.

Robert Spingarn - Credit Suisse

So if we see nothing more than a 15%, 20% adjustment on 737, you’re flat to up with 787.

Mark Donegan

Correct.

Robert Spingarn - Credit Suisse

Okay, and then just on the press in Houston, how would you assign revenue or loss to that for the quarter?

Mark Donegan

I think from a revenue stand point, we met our customer deliveries. We did it probably in a less efficient way; we put them over the Livingston press; we brought them up to grafting; we set outside; we did a number of different things; we move work to McWilliams. So I think that we are able to meet our customer, but we were less than efficient in the way we met our customer. I think we called out what that number was, kind of what we thought the inefficiency was going to be last quarter.

Robert Spingarn - Credit Suisse

Okay, and then just lastly on cash; it looked like you had very nice cash flow in the quarter, you built the net cash position here. How should we think about working capital and cash flow as we move further into this destocking demand environment, and how should we think about your inventory and receivable levels as we head into the June quarter?

Mark Donegan

The people in the factory certainly don’t feel like you feel right now. I think that we generated good cash, but we certainly we certainly left a lot on the table. Some of that was by design and what I mean by that is we certainly had a situation where we could help our customers to some degree.

In the past where we may have helped through deflation and gotten benefits, I think we have the ability to potentially use our balance sheet a little bit, so we certainly did some of that, but I think there’s opportunity that we’re going to extract out of this business. I think we got inventories that can come out and again, we are going to do that in Q1.

Some of the large volume I’m talking about, we’re going to try to keep extracting that inventory out. I’m not going to build inventory to keep people busy, so I think we need to respond to that. So, I would expect to see cash generation still holding up strong in Q1 and Q2, so we are not going to build inventory to keep people busy.

Robert Spingarn - Credit Suisse

Excellent. Thanks Mark.

Operator

And next we’ll go to Ron Epstein with Bank of America.

Elizabeth - Bank of America

Hi, this is actually Elizabeth for Ron. I just got a couple of questions. One, on the 37% growth in the seamless pipe, can you talk to how that compares to the previous quarter growth?

Mark Donegan

It’s been in 30s to 40s. It’s been somewhere between 30 and 40 really year-over-year for the last; I know at least all four quarters of this year and I’ll have to go back probably high 20s for the next two, three quarters before that. So, it’s kind of been consistent in that range.

Elizabeth - Bank of America

Okay, and then secondly, the impact of the different number of days in the quarter on your operating margins?

Mark Donegan

For?

Elizabeth - Bank of America

For this quarter?

Mark Donegan

This quarter, we had a full allotment of days. The short days for us come in Q3 which would have been October, November, December, and then again we pick up short days in our Q2 because the press is, the forging shops go down for basically two weeks and the European holiday’s kind of shutdown.

Elizabeth - Bank of America

Great, okay. Great, thank you.

Operator

And next we’ll go to Joe Nadol with JP Morgan.

Mark Donegan

Hey Joe.

Joe Nadol - JP Morgan

Hey Mark, good morning. My question is on the first couple of quarters here in FY ‘10. You characterized it like the strike environment, but you generated margin improvement during the strike over the last couple of quarters, and you’re kind of implying at least in the press release that the margins are going to be down year-over–year in the first two quarters. So I was wondering if it’s also consistent.

Mark Donegan

We certainly have margin opportunity. I think that we’re able to grow margins in the volume strikes from where we were in Q2, because Q2 kind of came up of a fairly low point. I will say that I certainly don’t think we’re going to give back a whole heck of a lot of the margins we got in Q4.

Joe Nadol - JP Morgan

Okay. I mean because your margins really improved in the second half of the year, particularly in the Forged business.

Mark Donegan

Again, there’s certain things, obviously to leverage and there’s lot that we faced during the Boeing. I mean we can adjust to a certain degree, but at the time we’re going to come back and certainly our schedule for second half of this year comes back. So we have to kind of walk that tight rope, but we have other opportunities that we certainly can go get.

So we’re not just going to sit back idly and say “Well, if we get these schedules coming back, we aren’t going to do anything.” We will adjust and we will aggressively drive cost and our opportunity is to go get that. I mean we came up with a record, so I don’t think the Q1 and Q2 feel exactly like Q4, but I don’t intend to give back a whole heck of a lot.

Joe Nadol - JP Morgan

Right. What were your sales from your three acquisitions in the quarter?

Mark Donegan

I don’t know of the top of my head; about $44 million.

Joe Nadol - JP Morgan

Okay, and in the fourth quarter you highlighted aerospace and power; it looks like the general industrial other was down quite a bit and you know that of course auto was down 33% looking at the Fastener business, but is that part of you’re thinking also in the first half year of the year, as you’re going to see weakness in the variety of end markets there. Maybe if you could give us a little more color there and in any of your special metals?

Mark Donegan

With all honesty, special metal has opportunities. We kind of took a step down to Q4 to see where the sales were kind of down. So, I think we have opportunity. I don’t see at this point in time a huge shift from that standpoint. I think we get opportunities that kind of hold our own and kind of tread water from that standpoint.

So I’m not looking at a massive, massive fall. Certainly we’ll see some head pressure, but at the same time I think we got things out there that we can overcome. We got some market shares we can go after; we can get some new product offerings we can go into.

So I think that we do have things to go work on. Probably in the aerospace side is that we do have some fairly strong positions, so it’s tougher to get some headroom, but if I look at special metals and the pipe at Hackney Ladish, there are opportunities to go counter some of the market with share opportunities and that’s what we’re focusing on right now.

Joe Nadol - JP Morgan

Just a follow-up question. Are there any share gains that you’ve made in recent quarters that you can characterize or quantify in any way, in special metals or in IGT, because we’re really looking for these to kind of help support your sales as your end markets deteriorates?

Mark Donegan

G&A, yes; I want to be a little careful. Obviously there’s a lot of people who are kind of listening to this call and at the same time, do we have opportunities that we can grow and there are things like certainly seamless extruded pipe for our business. Utilizing all of the assets is an area we can continue to grow.

Seamless extruded pipe goes beyond Wyman-Gordon. It certainly is a bigger piece of the puzzle, but there is a wider array of seamless extruded pipe that we can utilize. Our Wyman facilities, our SSC facilities and the interface of those two facilities together; and those are the areas. I really don’t want to get any more into that. I don’t want to protect some of our intellectual knowledge.

Joe Nadol - JP Morgan

I think I see where you’re going. Alright, thank you.

Operator

And next we’ll go to J.B. Groh with D. A. Davidson.

J.B. Groh - D. A. Davidson

Good morning guys.

Mark Donegan

Hey J.B.

J.B. Groh - D. A. Davidson

Thanks for the additional detail. I was wondering on business, you mentioned that it’s 10% of the overall business. Is that more exposed in the Fastener area or is …?

Mark Donegan

It’s more exposed from the standpoint that if I look at $1 of sales in Fastener and $1 in sales of a large and small that tends to be more comparable, versus if you go to structural castings or whatever, $1 of sales of a compressor front frame is drastically different from a big to large. So, you see a closer line of slide so it has a closer one-to-one relationship in Fasteners and it also has more exposure in one product offering and it really did hit one product offering.

J.B. Groh - D. A. Davidson

Obviously, automotive is in that right?

Mark Donegan

Yes automotive, it’s pretty much all set in the Fasteners segment.

J.B. Groh - D. A. Davidson

Okay. Now on the balance sheet, could we expect those levels to continue to come down marginally each quarter?

Shawn Hagel

We got it fixed at this point, so we won’t see a lot of decline in our debt.

Mark Donegan

Did you hear Shawn?

J.B. Groh - D. A. Davidson

Yes clearly, I thought your voice changed there a little Mark.

Mark Donegan

Now the debt is fixed, so that’s why we so deserve a really good utilization of cash right now, it’s for the pension. Again, nobody’s asked me yet about the acquisitions. We’re not at a loss of ideas, so certainly continue to put cash on the balance sheet, make it sure we are positioned when things come right. Those are two primary goals that we want to do. I mean, if I can wave a magic wand, we’ll certainly have a use for our cash.

J.B. Groh - D. A. Davidson

That was my next question; could you address maybe the number of opportunities you are seeing and maybe the asking valuations relative to the last eight or nine months or a year as they’re into it. Can you give some significant changes there on what the asking multiples are?

Mark Donegan

Yes, I think that there has been a change, but the problem is that the market is still moving that the dealt maybe closing, but it’s not closed all the way. So, if we had a delta of X%, I think it’s X% less something and that whole is shifted down, but it’s still trying to figure out with the bull side, what’s reasonable, what’s real, where is the market going to be, how long is it going to be in that whole things?

So yes, I think it’s come down. I think the gap between the ask and the bid is closing and there are five things that I would just think make great sense for possessing cash parts. I think a stronger supply base from our standpoint and that’s kind of what we are looking at.

J.B. Groh - D. A. Davidson

Okay. Lastly, any thoughts on kind of the revert market and that strengthening or kind of turning around in ‘10?

Mark Donegan

That’s stabilized, that’s a good thing. Right now I don’t think we are seeing any great rate in the revert market, so the scrap seems to be holding kind of at a level that it was and we see people holding onto scarp. We’re different that we have a use still. On the plus side, we can actually take it, put it through, use it and bring it all the way to finish product work. I think we are seeing people that don’t have that ability are kind of holding on to the market. I hold some along the way that it frees up and then that kind of works as a benefit to us.

J.B. Groh - D. A. Davidson

Okay. Thanks for your time. Congratulations.

Operator

And next we’ll go to Cai von Rumohr with Cowen and Co.

Cai von Rumohr - Cowen & Co.

Yes, thanks a lot. Could you tell us; you said you are going to put $190 million into the pension plan in the first quarter. What do you expect for the year; what was it last year and what should we look for pension expense?

Mark Donegan

Yes. I’ll answer what I can answer and Shawn can answer the rest. I think we view that as being everything we’re going to put in for the years, so we put it into one fell swoop. So we put something less than 50 in last year Cai, and by putting their money in, our incremental expense is less than $5 million bucks year-over-year.

Cai von Rumohr - Cowen & Co.

Okay, and then you had mentioned that, you hope to bring those inventories down in the first quarter. Should we expect that you are going to eat into some of the lower inventory levels, so we’ll basically get into some of the higher cost inventories and that will have an adverse impact on your margins in the first quarter?

Mark Donegan

No, from that standpoint I think that we have to make sure that we keep a clear line of sight under how we balance all of our inventories out and I think we had a very clear line itself. So there are a number of things we can do on particular line items that we can get a benefit. So, if we just strip out across the board equally, I’d say your comment will be true. If we manage it and know how we are going to manage it effectively, I think we can protect that to a large degree.

Cai von Rumohr - Cowen & Co.

Okay, and then where are we looking for CapEx for the year?

Mark Donegan

Probably $160 to $180.

Cai von Rumohr - Cowen & Co.

Then you had mentioned you put the $190 million in the first quarter, but given if the inventories are coming down and the pay up and your receivables are a little more moderate, it looks like you could get some working capital source of cash. Would we expect free cash flow to be positive in the first quarter, even after the $190 million contribution?

Mark Donegan

Yes, I think you could expect that.

Cai von Rumohr - Cowen & Co.

Okay, great and then when you look at your sales breakdown, I think you were 17% in the fourth quarter for general industrial and 22% for the year. So it sounds like that really came off sharply. Could you give us a little bit more color on kind of what happened there and where that might be as a percent as we look into 2010?

Mark Donegan

Yes, I think obviously the automotive for us start off by roughly 40% year-over-year and then probably the other we saw was just more in the general industrial, kind of the SNC side of the business. We probably saw that those are the two biggest players we saw fall off.

Cai von Rumohr - Cowen & Co.

How big is auto now Mark, as a percent of your total?

Mark Donegan

Its about $130 million, $140 million bucks.

Cai von Rumohr - Cowen & Co.

Okay, terrific. Thank you very much.

Operator

And next we go to Peter Arment with Broadpoint AmTech.

Peter Arment - Broadpoint AmTech

Hey, good morning Mark. So, back to just pipe quickly, I mean the growth has been tremendous in excess of 40% I think for most of the quarters and the last one at 37%, but I mean your backlog has been fairly stable and I know that it would be much higher, if you didn’t have such a ramp in production. Should we except 20% growth again in fiscal 2010?

Mark Donegan

I think that we have an extremely solid backlog, but the problem is we’re at a rate now that we kind of come up against capacity. So that’s on the plus side that backlog is going to take a while to bleed out. We do have some upside, but if you take Q4 as a step up point, it’s certainly not where it is, but I don’t know off the top of my head and I think somebody can get back to you, Peter. I’ll have to go back and look at what Q1, Q2 and Q3 were. They were obviously lower, so if you just take Q4 and look forward, Q1 will be higher than Q1, Q2 and so on, but I don’t know what that year would be. So if you call right back we can get that information.

Peter Arment - Broadpoint Am Tech

Okay. So the growth will come down as we get to the fourth quarter?

Mark Donegan

Yes, because we are not going to go and investing capacity. Now we are always finding ways to extract more capacity out of our assets, and we’re going to always find the way to do that. We got a number of ways we can pickup speed, but I don’t see that we’re going to be able to do 38% year-over-year. On the basis on the foot side, we got the other section of seamless extruded pipe which comes out of the SNC side of the business, we get capacity there. So that’s kind of the balancing act we got to do.

Peter Arment - Broadpoint Am Tech

Okay and then quickly just a headcount. I believe it was close to 500 people coming into the third quarter that you had in terms of reduction. Are you right sized now for this weakness going forward or should we expect a further headcount reduction?

Mark Donegan

Well we’ve been taking out all the year through, so we took out in Q4 too. Again, I think that we actually have got an ability that we would look every week at kind of a rolling forecast. So we take a four to five months snapshot and we add or we can drop. So we are consistently reevaluating our man power needs, looking out four months and so we adjust. So, we did adjust all the way through Q4 and yes, we’ll adjust again in Q1.

Peter Arment - Broadpoint Am Tech

Would you say that the lion’s share has been done, given where you stand now?

Mark Donegan

Yes, I think we’ve been through a pretty big bulk of it so far.

Peter Arment - Broadpoint Am Tech

Okay. Well, great marginal performance. Thanks Mark.

Operator

Next we’ll go to Samuel Pearlstein with Wachovia Securities.

Gary Liebowitz - Wachovia Securities

Hi this is Gary Liebowitz for Sam.

Mark Donegan

I was going to say Garry. I haven’t heard Sam’s voice in a long time.

Gary Liebowitz - Wachovia Securities

Okay. I might have missed it, but did you say what the pension expense headwind is going to be in 2010, you mentioned the contribution?

Mark Donegan

Yes. We said less than $5 million over fiscal year ‘09.

Gary Liebowitz - Wachovia Securities

Okay. Also were there any restructuring type expenses that you incurred during the quarter they did necessarily call out, but don’t repeat going into FY ‘10?

Mark Donegan

Well we did downsize to some degree. I mean it obviously wasn’t big enough that we would call it out, but yes, we did do that, but I mean we’ll adjust off and on as we need to do. So I wouldn’t say it won’t occur again, but I would say that there is nothing out of the ordinary; that we aren’t going to see some positive, that we would see a positive benefit moving forward.

Gary Liebowitz - Wachovia Securities

Okay, thanks. Every thing else has been answered.

Operator

And next we’ll go to Eric Hugel with Stephens Inc.

Eric Hugel - Stephens Inc.

Hey Mark, good morning. Can you talk about in terms of the inventory destocking, are there any segments that we should think about in terms of the product that they are making that I think impacted more than others?

Mark Donegan

Yes, definitely it’s falling squarely in the investment cast and forged without a doubt. So engine, turbine blades, compressor cases, rear cases, front cases; discs on the forging side, compressor disc, turbine disc, chaff, airflow blades, landing gear. So that’s kind of the biggest areas we are seeing it.

Then the Fastener side, like I said, except we have one operation that’s kind of feeling the pain. With other ones, we came in with a pretty, pretty healthy over due situations. So we are seeing it on one of there aerospace assets, but the other one’s still get opportunity.

Eric Hugel - Stephens Inc.

Do you believe that opposed to the last downturn, when sort of people just sort of shut off their Fastener business, because I guess they lost sort of track of their inventories there; that the amount of inventory in the supply chain of Fastener is much more rational this time.

Mark Donegan

I think it’s more rational. Is rational than it needs to be, I don’t know, but again on the plus side, there was a lot of Fastener people struggling to keep up with the demand. I mean we had a substantial overdue. So, what we did see is, we saw that come down. I don’t think we’re the only ones with the overdue.

So again, except for that one product line, we are still seeing opportunities in our other Fastener businesses, but I mean, you’re right. There is an element to the business that you can drop. I think once you dropped and hopefully I’m sure they’ll see that we’re kind of responding to that right now.

Eric Hugel - Stephens Inc.

Okay great. Can you talk about I guess the more recent acquisition and the two Fastener businesses. Can you talk about sort of how the integrations are going, any things going better than expected, any pick-up there?

Mark Donegan

No, I think that steel is performing very well for us. I think that again, it’s an asset that I think we can kind of put with our portfolio in providing more complete solutions. If you kind of look at what type of solution we provided moving forward, it’s certainly a key piece of the cogs.

So from that standpoint, Airdrome acted just as a review. I think it’s a lot of good ideas in Airdrome; I think there’s a lot of opportunities from that standpoint, and then as lag, it’s just going to take us time, because as we re-qualify and try to move into a new hours, it’s just going to take us time to qualify their assets to do that. So I think that they’re all about where we thought they were, but I think that they all still have upside growth from kind of where there are or we are bottoming where they are right now.

Eric Hugel - Stephens Inc.

How long should we think about this taking sort of the business to be able to get that part of synergy with the seamless pipe business?

Mark Donegan

Probably going to take us about six to eight months to get us qualified on the new alloys.

Eric Hugel - Stephens Inc.

Great, and lastly should we expect any change in the tax rate for next year on the 34%, 35%?

Mark Donegan

No.

Eric Hugel - Stephens Inc.

Great, thanks a lot guys.

Mark Donegan

Okay Eric.

Operator

And next we’ll go to David Strauss with UBS.

David Strauss - UBS

Good morning Mike; it’s actually David Strauss.

Mark Donegan

Hey David.

David Strauss - UBS

Good morning. So I’m trying to multitask at the Northrop Conference as well. I apologize if any of these have been asked; the 77, the margin profile there, how are you thinking about that relative to let say the 777 and when would you see or how great would you have to be out on the 77 to kind of see a comparable margin as to what you’re doing on the 777.

Mark Donegan

There is no disproportion one way the other; the 787 to the 737. So we don’t have any real cut back as we kind of look at this platform when the other one doesn’t; we’re kind of equally distributed from that standpoint. I guess that’s the way I would categorize it. The 787 is kind of all incremental. So the developments behind us, depending on where we are in the (Inaudible) lets say where through Q1, Q2 and our base loads have come back in Q3, the 787 will be incremental.

So you’d get good incremental from that standpoint. On the flip side if there’s been any additional softening, 787 would be equal to in terms of a revenue dollar and a margin dollar, that a 737, 777. So it’s not one that carriers more weight than the other one.

David Strauss - UBS

Okay, and then on the 777, in terms of your guidance, talking about kind of a down Q1, Q2 and then coming back to Q3, Q4, what are you assuming for when you’re going to get a five a month rate on the 777?

Mark Donegan

My assumption based on the loads is, we’re kind of taking that inventory correction right now and we will exit at that level.

David Strauss - UBS

Got it. Okay, thanks a lot Mark.

Operator

And we’ll take our final question from John Richards with Michigan Pension Funds.

John Richards - Michigan Pension Funds

Thanks, but my questions already been asked.

Operator

On behalf of Precision Castparts, Mr. Donegan and PCC management, I would like to thank you for joining the call today. As a remainder, a webcast and call has been recorded and will be available on Precision Castparts’ website at www.precast.com for approximately 30 days. This concludes today’s meeting.

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Source: Precision Castparts Corp. F4Q09 (Qtr End 03/31/09) Earnings Call Transcript
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