Precision Castparts Corp. F1Q10 (Qtr End 06/30/09) Earnings Call Transcript

Jul.21.09 | About: Precision Castparts (PCP)

Precision Castparts Corp. (NYSE:PCP)

F1Q10 Earnings Call

July 21, 2009 10:00 am ET

Executives

Mark Donegan – Chairman and Chief Executive Officer

Shawn Hagel – Chief Financial Officer and Principal Accounting Officer

Analysts

Ronald Epstein – BAS-ML

Robert Stallard – Macquarie Research Equities

Joe Nadol – JP Morgan

Howard Rubel – Jefferies & Co.

Cai von Rumohr – Cowen and Company

J.B. Groh – D. A. Davidson

Robert Spingarn – Credit Suisse

Peter Arment – Broadpoint AmTech

Sam Pearlstein – Wells Fargo Securities

Noah Poponak – Goldman Sachs

Howard Rubel – Jefferies & Co.

David Strauss – UBS

Operator

Welcome to the Precision Castparts first quarter earnings for fiscal 2010. (Operator Instructions) Now I'll turn the floor over to Mr. Mark Donegan, Chairman and Chief Executive Officer of Precision Castparts.

Mark Donegan

I'm sure you're all very familiar with the forward-looking statement and you need to take this consideration when you're analyzing the following information. I got a look at where Q1 was over all I think it was a solid operating performance in an extremely challenging environment. I'm going to go through on this presentation and try to provide as much clarity and maybe some more bits and pieces than we normally do to kind of go over what some of the key drivers were in each one of the segments.

If I look at the company in total, I saw a sales decline of 23.8% going from $1.8 billion last year to roughly $1.38 billion this year. We saw operating income decrease by 12.4% going from just under $422 million last year to $370 million this year. Even though we had lower sales, we saw margins expand from 23.3% last year to 26.8% this year, and all this generating EPS of $1.70 versus $1.94 last year.

If I look at some of the high level key drivers, and beginning with sales looking at fiscal year '09 and '10, on a kind of putting it on an apples-to-apples basis, we saw a negative currency impact of $60 million versus fiscal year '09. And we saw a negative impact really from a combination of low material prices versus '09 of $107 million, and that was made up of roughly $60 million less in external sales from our three primary mills, $37 million less on material structural pass-through, and $10 million less in revert sales. So it kind of puts us on a comparable basis of $1.64 billion versus $1.38 billion this year.

From there, if I look at certainly some of the major drivers, without a doubt the destocking that we saw across all of our three segments was significant. In Q1 and in Q2, as we stated last quarter, we see a significant disconnect between the current build rates and our current schedules, and then we'll get into the balance of the year later on the presentation. And then also we saw a continued softness in the oil and gas and the general industrial and the automotive was basically anemic, looking at year-over-year.

So in total, sales certainly provided a number of moving pieces for us to respond to. If I didn't carry that through kind of at a high level operationally and again look on a comparative basis, currency had a negative impact of roughly $12 million. And then the biggest challenge facing all of us certainly was the significant headwinds that we got from loss volume through our factories.

To counter this, we saw solid operational improvements really across all of our factories. We saw strong productivity gains on the labor intensive side. I think we responded very rapidly, as needed, in the fixed reduction side, and we saw solid year of improvements across our largest scrap and rework areas, and were able to see good increase and revert volumes across all of our business.

And I've stated this over and over again and we talk about it, we get our job clearly, and that is to let our systems extract where the opportunities are and then relentless drive that to a drumbeat every single solitary day. And I think as a result of that kind of daily metric, daily drumbeat, I think that we're able to deliver strong margins in the face of declining sales.

The chart that we've shown over the last year or so, kind of looking at what made up our sales by the end markets, we had it a little different. To put a comparison, we put '09 versus '10 and you can see that our aerospace sales were at 55% this year versus 53% last year. Power gen, saw a bigger piece of the puzzle at 28% versus 22% last year, and general industrial was kind of recipient of the growth and power where they went from 25% last year to 17% this year.

So if I breakdown now and look at each one of the segments and kind of take a closer look at what drove both the top line and the bottom line, beginning with investment cast, we saw sales decrease by 18%, went from just under $598 million last year to just under $489 million this year. But in that line we saw operating margins decrease by roughly 5.7%, going from $151 million last year to $142.5 million this year. And we saw solid margin expansion year-over-year going from 25.3% last year to 29.1% this year.

If I look at the key drivers beginning with the sales and, again, kind of put it on a constant basis, currency had a negative impact in this segment of $12 million, and lower material pass-through in the segment had a negative impact of $17 million.

From there, certainly this segment saw squarely in the chin the destocking really across the entire baseline of customers in this. And we have the ability, certainly, in the large structural side where you're not looking at any spare parts, to be able to get a clean line of sight to what are our schedules against what are the build rates, and we do have a substantial disconnect between our order rates and the current commercial build rates.

And in this segment we also have Cannon-Muskegon, which is a metal provider to us and the outside. Again, they kind of got a double whammy because they got the decreased requirements from Precision, as well as kind of destocking across their other customers in the component side.

In this segment, operationally currency had a minimal impact of roughly $2 million in the quarter versus last year. And again, you're going to hear this as kind of a constant theme as you can imagine, that these factories had to step up to overcoming significant volume reductions as a result of the destocking. And again, it's kind of the core makeup of our company, I think every employee deserves a lot of credit because there wasn't anybody that just didn't stand up and take this challenge head-on.

As I look back kind of over the last six months and look at some of the questions a lot of you asked me, you know what could we do, what operational levels and we certainly covered what some of them were, I think you're going to hear from this point forward kind of what some of the primary drivers were.

In the investment cast side, certainly the largest cost component tends to be labor and, again, I think we saw extremely, extremely strong improvement kind of across all of our operations in the productivity side. And as we've said in the past, you expect to see this. When we're not hiring and training and bringing on a number of employees, we're able to take our workforce that is highly skilled, highly efficient and kind of put them focused on what they do best. So, again, you get a very cross-trained, highly functional workforce.

We also saw solid improvements in scrap and rework and, again, as we focus our engineers on attacking the cost versus new product sales growth, we're able to get tremendous amount of traction in that and we're able to see good revert utilization. Again, these are the type of things we would expect to see from that as the market kind of resides where it was. And I think that we were very successful in focusing our resources in the areas that give us the proper bang for the buck. So I think investment cast, from that standpoint, did a good job.

I'm going to say it again and again and again, we're not sitting in a situation where we're scratching our heads saying, boy where do the opportunities reside now. Our process extracts where they are, we see them, we know where we can go get, and we still have opportunities on all fronts.

Moving into Forged, and again I think in this environment, this Forged group had to step up to a significant challenge and we'll kind of go through that. But kind of looking overall, they saw a sales decrease year-in-year by 34% going from $816 million last year to $539 million this year. We saw operating income decrease by 22.8% going from $182 million dollars last year to $141 million dollars this year.

And as with the investment cast, we saw solid emergent expansion in a very, very tough environment going from 22.4% last year to 26.2% this year. If I look at the major drivers on a sales front, again, this had a lot of moving pieces in terms of kind of comparing last year to this year. But if I look at the combination of currency, lower selling price of our three primary mills, low material pass-through, and lower revert sales, we sold roughly $114 million impact on top line from these. If I then go from that and we also saw currency, excuse me, of $27 million in this piece of the puzzle.

So if I go from there, obviously, the biggest challenge was the, as with investment casting, the destocking, and we got it really across the landing gear and the engine is where we saw the most significant destocking. And, again, we have a significant disconnect between the schedule and the build rate and with landing gear it's very easy to look at one main landing gear, one plane so we can match up fairly well to what our schedules are versus what the build rates are.

And then also in this segment as with Canon, the S&C Aerospace piece of the business so I know the impact from Precision, but also the destocking through some of the other, their customers, which would be our competitors on the component side. And then we also, again, saw a softening certainly across the oil & gas world, and again, this is mainly destocking at the distributor's side of the business.

Taking that sales base and, again, operationally we've all talked about this a number of times, this certainly provides us with a very, very significant challenge being the highly fixed nature of our business, this kind of provides the biggest challenge for us. If I look at some of the drivers operationally, negatively to kind of put it apples-to-apples, currency had a $5 million dollar negative impact. And then after that squarely we are looking at kind of holding the margins in spite of the volume going down.

If I look at the primary drivers in this business, certainly material becomes a very, very key component. I think we are able to see good increase in revert utilization, and I think having Caledonia in our portfolio at a time like this is significant. Getting their tentacles out there, being able to access screens of revert that we on our own could not have gotten, is significant for us.

I thing the ability of us to continue to clamp down across all of our operations on the waste stream and again, if I look at kind of a benefit PCC has is the ability to close that and keep that stream closed loop is significant for us. When we get components machining, we get to put it right back into our process. And I think we responded, again as we did with casting, very rapidly to adjusting our manning levels to current demand.

And then, even though our variables are a smaller piece of the puzzle, we did see some productivity gains, again as you would expect with a well cross-trained workforce on the variable front. And then I think another piece of the puzzle is this is the first quarter and last two or three where we didn't have any major press down. We had the 29,000 ton that was down for two quarters. We had the isothermal press that had the melted [inaudible] before that. So you are kind of looking at the pureness of the facilities at least running without significant pieces of equipment being down.

And again, this segment always provides us in this environment the most challenging environment but, as with everything else, our process continues to identify where are the opportunities, and we still have more to do on this front from the standpoint of attacking on the cost.

If I look at the last segment for Fasteners, Fasteners saw a sales decrease by 11% year-end-year going from just under $396 million last year to $352 million this, but given that sales drop, they actually saw operating income improve by 1.2% going from $112 million last year to $114 million this year. And as with the other two segments, I think I saw solid margin expansion going from 28.4 last year to 32.4 this year. If I look at the key drivers in this segment, sales again on an apples-to-apples comparison saw a negative impact in currency of $21 million versus last year.

And then in this segment we kind of saw to some degree, a double whammy. We saw the same destocking across the large commercial supply chain and impasses we certainly have a couple of our businesses that are exposed to the biz jet, and they certainly saw the results of the tough situation in the biz jet market this point in time.

And then general industrial, this is what we have remaining in auto this is where it is and, again, it was just anemic, abysmal. You can pick any word with an A and it will fall into that category. But on the flip side, I think that if you kind of pull up the auto and you look at the currency, this business did a fairly good job of tackling on some of the sales challenges. And again, I think the way they've expanded their portfolio, the way they continue to go after market positions certainly helped them take on some of the challenges.

Operationally, currency had a negative impact of $5 million versus last year, and then right after that they faced the same challenges as the other segments did in terms of the lower volume to the shop. I think that they were able to get great traction. And again, this tends to be more of a variable cost, kind of a cost attack plan, saw very, very solid productivity gains really across all the operation. And again, we got the seasoned workforce, we're not hiring, we're not training so we're able to focus our resources in the production aspect.

And there are other drivers too from this standpoint. Scrap, they did a good job improving that, but there's a lot of outside sourcing we were doing. As we were going through a lot of growth, we were able to pull a lot of that back in. We were able to get some good traction from that standpoint. And again, I think they responded very well to align the fixed cost structure to support the demand.

And if I look at the fastener segment, even in this environment, this is an area where as contracts come up I think we have the opportunity to keep trying to reposition ourselves and take advantage of some of the opportunities, and we certainly are focused on being able to do that. So I think, again, I kind of get there operationally. I think we had a solid quarter. I think every employee responded with the urgency, the intensity and the desire they needed to have, but there's still a tremendous amount to do.

If I move into the cash, I think we continue to really work at providing a very solid balance sheet. At the end of the quarter, we finished with cash on hand of $632 million, and this is after we made a voluntary contribution of $190 million. So, again, we had a real strong Q1 and Q1 tends to be the quarter that we have the lowest cash of the quarters throughout the four. So, again, I think we started off with a really solid focus on that.

So in summary, again, if I look at the year, we're coming into Q2 which is the second piece of the first half, I think it's kind of a feeling of a tale of two cities. We kind of said last quarter we were going to see destocking Q1 and Q2. I think that that's held up true and we certainly see that continuing through our Q2s as we look at the continued disconnect between our schedules and the build rates.

And then with that, every Q2 provides its own set of challenges. We do our preventive maintenance across really our forging operations and, basically, we take our major piece of equipment down for roughly an average of two weeks. And then we face the European vacation across our operations with that two to three week shutdown there.

If I then look at the second half of the year, and taking a snapshot of where we see right now, look at where our schedule supports what's out there, I think we certainly see from the aerospace side where our schedules come back much closer in alignment to what the build rates are. So again, the destocking looks to go away.

The unknown at this point and time is certainly the 787. Really as of today we have minimal production going through at all. We're kind of keeping what we have to go through to keep our processes qualified. But on the flip side, I think we have the ability to surge very effectively to pretty much whatever build rate our customers would want to go to. We have the equipment, we got the processes, we got the tooling, we got the parts behind us. Now it's just a matter of what transpires and what schedules we're being asked to go do.

In terms of the operating margins, we are not at the end of what we can do. I think every one of us has a clean line of sight on where the next opportunity comes from. I think we have to continue to go after everything that stands there with vim and vigor. I think we still have opportunity in our productivity. We've still got more room in internal utilization, yield, scrap and rework, variable costs. Our job is to go after every dust particle that can help drive our bottom line, and I think we understand that.

Clearly, I think our process extracts that, and I think that you have a group of people and [inaudible] employees here that are certainly focused on that. This is our skill set. This is what we do. We're a manufacturing company. We take great pride in that. And again, I think our toolbox goes after that and addresses it.

I think our balance sheet is positioned well. We certainly are doing this with a clear line of sight as to what our objective is. We want to make sure that we are positioned on continuing to expand our capabilities. I think it's something that's very valuable at out our company. I think it's been very valuable to our customers. And I think we have very, very solid opportunities. And again, focused in our primary markets, which is aerospace and power.

So I guess in a nutshell we're not going to let up. It's a tough challenge, a tough environment. It's kind of what we want, what we excel at. And with that, I'll open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ron Epstein – Bank of America/Merrill Lynch.

Ronald Epstein – BAS/ML

Mark, I guess a broad question. When I look at many of your competitors in a declining revenue environment, it's very challenging for them to, not just to stay in margins, but their margins tend to go down. When you talk about the toolkit, what exactly are you guys doing to, I mean, it's amazing how you grew margins facing the revenue declines that you did.

Mark Donegan

It's not a fancy thing. I think what it is it's a very detailed process. It's very standardized. It has the ability, you've heard about our infamous quarterly review process. There is roughly 25 pages I'd say you get two pages to say look how good I did, and I think the other 23 then begin to say, okay, what did you leave on the table and it breaks it down into excruciating detail. So it just doesn't look at cost. It breaks out fixed cost, every segment of fixed cost, salary, depreciation. It goes into variable. It would look at labor, material, supplies, overtime.

It then would go into a number of the cash generators or balance sheet items. It looks at every piece of inventory. It looks at receivables. The thing that makes it different is I think the time we put into it. So if you look at a time that myself, my division presidents, it's kind of all encompassing. So if you look at the way of life, supervisors are going to get that same breakdown every day. How did you do? What did you get? Where's your opportunity? What did you miss on?

And he would have, he or she would have very, very excruciating detail in terms of every element they have out there. It's not fancy. It's not fun. And it takes a tremendous amount of effort on everybody's time, but it is geared to really knowing where it is. And then I think besides that you get a group of people that get it. I mean I don't fight a lot of battles as where should it be, people get we want to improve margins. We want to fight through it. Sometimes it's just trying to figure out what it looks like to get that. So it's kind of it in a nutshell.

Ronald Epstein – BAS/ML

With the uncertainty around 787, if the 787 deliveries get pushed out and there's all kind of speculations floating around, but significantly, okay. What's that mean for your business, right, because you had that 5 to 1 ratio between 787 and narrow bodies? If we think there's going to be a narrow body cut out there somewhere, which given traffic figures might not be an unreasonable assumption. What's that mean for you?

Mark Donegan

Let me answer that in two pieces of the puzzle. If the rates are stable, it certainly is a loss of opportunity. I mean for all intensive purposes we have really nothing going through the shop. We have been asked in several operations we certainly are part of the solution for what their looking for, so I think that there is some short-term opportunity from that standpoint.

If in fact we go down the road of a narrow body cut, yes, certainly it's not the counterweight that we want it. Having said that, I think that we have certainly demonstrated that we get what to do and we get what's expected in an environment. Would I like to have a 787 there to counter it, sure? If you kind of go back to where we thought we were six, eight, nine months ago, that 787 probably would've let us weather pretty much whatever the market threw at us

But I think that what we've done is we geared ourselves to say we got what we got, we're dealing with what we have and we'll respond accordingly. So certainly we're not sitting back on a hope and a prayer and saying let's do nothing and wait for the 787 to come and I think that we are responding as operations do we need to do, and then if the 787 comes it's all a plus to us.

Operator

Your next question comes from Robert Stallard – Macquarie.

Robert Stallard – Macquarie Research Equities

First, I would like to hit on the margin topic again. Would you think it's safe to assume that you can sustain these levels of margins going forward given what you talked about with the particular reference to Q2 and the volume of the holiday pressure there?

Mark Donegan

I think that we are going to face a little extra pressure because, again, for press shut downs and press outages we won't do any manning adjustments, I mean that's just kind of a fact of the life. Do I see significant fall off? I think the answer would be, no. I think that with nothing abnormal in the margin this quarter, they were solid operating performances. So, yes, are we going to face a little headwind from outages and downages in some volume, sure we are, and just no overcoming that. But are these margins to build off of as we kind of look beyond that, yes, I think they're margins to build off of.

Robert Stallard – Macquarie Research Equities

So, on an annualized basis you feel comfortable with these levels of margin being protected forward to the base, right.

Mark Donegan

Given the environment as we see today, certainly there's a number of scenarios out there from life's okay to doom and gloom. I mean given the schedules what we see the way we match up, yes, I think that, again, there's nothing in those margins that were out of the ordinary and Q2's going to have its challenges. Again, I cannot overcome bringing a 50 down to 29 down, it's just the cost it's the infamous Jiffy Lube. If we don't bring them down, it becomes a multiple. When you move beyond that, again, there is nothing in there abnormal. And we can either respond to the market getting softer or we will get some benefit in the schedules coming back.

Robert Stallard – Macquarie Research Equities

On the doom and gloom front, the power OEM's are saying some pretty negative things about order rates [inaudible]. How do you see this going through to their build rates and your schedules and what sort of offset do you see there on the market share front?

Mark Donegan

If we were just depending solely on OEM build rates, there's no doubt about it we'd be taking it on the chin. So I would say that, yes, we align pretty clearly with the OEM's. Having said that, I think Ken and his team did a really good job, kind of leading up to this, of really expanding their customer base, working their tail off to try to get the new customers in and get the product developed.

And what all that's transpiring to is we're holding our own in a very challenging environment. So what we're really doing today is kind of overcoming all the OEM build rates with share, some aftermarket new parts, hired content programs running through. But if Ken and his team had not done that, yes, we'd be taking the OEM market right on.

Robert Stallard – Macquarie Research Equities

And then just finally on the metal front, it looks like nickel has started to move off the bottom again. How long do you think it'll be before this flows through to some of the metal numbers such as SMC external sales and LIFO adjustment and things like that?

Mark Donegan

Well, again from the LIFO standpoint, metal moving up is not a bad thing from what the opportunities reside for us. But in terms of, I mean as we look forward, you start looking at the stainless steel some of the stainless steel is coming back, that's usually a precursor to the kind of materials going up. I look kind of at our second half I'd expect to see some of that higher priced material moving through. Kind of some of that negative headwind we've gotten certainly will balance out or get some pick up from that standpoint.

Operator

Your next question comes from Joe Nadol – JP Morgan.

Joe Nadol – JP Morgan

Mark, on the inventories they picked up in the quarter, just wondering if you could give a little color on why that happened with the sales decline?

Mark Donegan

Yes, and we kind of, if you kind of go back a little bit I think that we certainly try to work with our customers to the fullest extent. We said that we may use our balance sheet a little bit to kind of help our customers out. So, even though contractually may have an opportunity to do something, I think that it's incumbent on us to make sure that we do that so I think we made some conscience decisions to let our inventories rise a little bit. I think as we look to the second half of year we can probably purge some of that out but, yes, we intentionally let some of the, really some of the raw material come in is what we did.

Joe Nadol – JP Morgan

In the LIFO reserve, did that get more negative in the quarter?

Mark Donegan

I need Shawn here.

Shawn Hagel

It didn't move them very much.

Mark Donegan

No movement was significant.

Joe Nadol – JP Morgan

So the build was purely just taking on a little bit more of the real inventory?

Mark Donegan

Yes.

Joe Nadol – JP Morgan

On the aero sales, you talk about them being kind of below the current build run rate and I assume you're factoring in the 777 cut that's coming next year into that. You did I guess 760 of aero sales in the quarter just using your percentages you were at 3.6 billion last year. So would you say, I mean what do you think the current run rate is if it weren't for this destocking, is it 100 million?

Mark Donegan

I would say we're at probably 12% to 15% right now below. Yes, I think the destocking's kind of hitting us to that degree.

Joe Nadol – JP Morgan

On the pipe business, were your sales down sequentially or were they flat?

Mark Donegan

They're basically flat.

Joe Nadol – JP Morgan

So the decline in growth rate was simply because of the ramp up a year ago?

Mark Donegan

Yes, we're getting to the point, and again this is a conscience decision we made. As we were kind of coming to last year we were faced with two kinds of decision points. Do we go spend X hundreds of millions of dollars to put a complex in or do we just kind of get that rate, hold it and carry it forward, and that's kind of what we done. So stability right now is really what we can get out and it's working out well because the demand and the output are matching up right now, so it's kind of where we want to be.

Joe Nadol – JP Morgan

And book-to-bill was 1.0, I guess, in the quarter roughly?

Mark Donegan

Yes, pretty much.

Joe Nadol – JP Morgan

Finally last quarter, Mark, you talked about new applications for pipe or oil and gas, I guess, but specifically putting together the capabilities of Wyman-Gordon in special metals. You didn't mention that this quarter, just wondering how that's going.

Mark Donegan

That's proceeding on target. And, again, kind of remember where we were last quarter is that we said we were going to take this time to build a couple strings to put them on the ground. We are in the process of doing that and the process itself is working out very well.

Joe Nadol – JP Morgan

When do you think that might be a top line?

Mark Donegan

If I start looking at that move to production, you're looking probably the end of Q3, Q4 and going into next year is when it really starts to get, because we have to put on the ground, prove our capabilities that we can do the volume, and then we'll start seeing the run rate from there.

Joe Nadol – JP Morgan

Can you tell us any more about what that product is, or is it you still kind of keeping it under wraps?

Mark Donegan

Honestly, I'd rather not, somewhere along the way. If you ask the question a couple quarters from now, I'll probably be more than happy to tell you.

Operator

Your next question comes from Howard Rubel – Jefferies & Co.

Howard Rubel – Jefferies & Co.

First, when we look at Forged Products with the metal, excuse me with the flat pipe sequentially or even year-over-year rather, the decline then in sales probably on even at volume basis is closer to 40%. Is that sort of fair, so you know what I'm saying, as though you take up pipe and I look at the rest of the business you're on the order of 40% down is what you're able to cope with?

Mark Donegan

I'd have to back out I don't know if I can answer your question. It feels to me a little high, but if I look at the numbers, Howard, we're probably looking at on a comparable dollar-to-dollar with the same sales value same currency probably, again, that 15%-ish in aerospace and maybe 25% to 30% in the general industrial world.

Howard Rubel – Jefferies &Co.

It just seemed that it was a little bit sharper then that but you have some of those.

Mark Donegan

Again, I am more than happy, Howard, I'll re-look at that and certainly Dwight or I or somebody can get back to you. I don't want to give you a kind of a half-baked, let us look at it and we'll certainly get back and talk to you about it.

Howard Rubel – Jefferies & Co.

No, because it is pretty impressive to be able to hold the margins with that sort of decline is pretty impressive.

Mark Donegan

Again, you and I have talked a number of times certainly Forged group really, really took one in the chin and I think stood up. So I would agree with you from that standpoint but, again, we'd much rather go the other way but I think they did okay.

Howard Rubel – Jefferies &Co.

Was revenues overall below plan when you kind of looked at where you thought the year started and where you are today?

Mark Donegan

Yes, through the quarter we saw more destocking in Q1 then we probably would've been in the plan, yes.

Howard Rubel – Jefferies & Co.

Are you doing something, are you talking to your customers sort of putting some special effort on people to sort of get to the bottom of this?

Mark Donegan

I mean, again, the one advantage we have is we do have some product, landing gear, structural parts that really is one-to-one. So we use that kind of as a baseline to then go back and make sure, so yes. We engage our customers in a number of conversations to make sure they know what we're doing and what our response is going to be so we don't get caught on the flipside as the destocking unwinds and we go back that we're not going to be the position that we want them.

So, yes, we spend a lot of time talking to our customers. And, again, I think that through that conversation to a T the numbers and what you're telling us today, yes, we're destocking. We had put in, if you go back a year ago, we were building at an increased rate that was going to be the narrow bodies were going to go up across both end customers and we had to put the raw material on order and we had to get our systems up.

So they're just basically saying that's all coming out of the stream right now and Ken and Ross and Kevin spend a lot of time with their customers understanding exactly where it is and where it is coming from. So we just don't sit back as a recipient and kind of say, okay give us what you got. I mean we certainly have a good strong relationship with our customers to be able to go back and have a fairly face-to-face conversation.

Howard Rubel – Jefferies & Co.

And then last, well you knew I was going to ask this eventually. Could you talk a little bit about materials variance I mean there's two parts to it, one is efficiency is, which you have been pretty keen on highlighting. And then there's sort of a second, which comes from just a value stream both from Caledonian and then also what you're able to buy in the marketplace?

Mark Donegan

Yes, we break into three categories, Howard. So, if I look at the infamous quarterly review process, it breaks into price, usage and revert. So if I look at the three pieces, I think that we're doing very well at revert. Again, I think Caledonia, as well as our close looping, is helping us. I think we're doing very well at usage, and that usage kind of goes across at, it can be all different categories. It could be the amount of material and a [build it] that goes into a finished shape.

In Forging, it can be the amount of material we pour into a casting. So usage for us is a big piece of puzzle. I think we've been able to get better in usage. And price is pretty much on track exactly at this point in time where we thought we'd be. So, we're kind of flat from where we've been sequentially.

Now price, again, it's a lag so we're not seeing today baked in $7 and whatever the price is today, $7.40, $7.50, something like that. Our average all in rate's going to be something less than that because we bought it for $50, we bought at $5.10, we bought at $6. So it takes it probably six months before it gets to the point that you'll be seeing that $7 kind of in the number.

Howard Rubel – Jefferies & Co.

So there is, you did a really nice job of sort of breaking out the differentials there. I mean, can you give us a sense of the percentages like is it 2/3 usage and 1/3 revert?

Mark Donegan

The biggest driver is always going to be price. If we get, probably the savings, so price we're getting nothing right now. And then if I look at where we're getting the benefit right now between revert and usage, it's probably 70% revert benefit over and 30% usage. It's harder to move the usage.

Operator

Your next question comes from Cai von Rumohr – Cowen And Company

Mark, I just have to say very good for four months on the margins, very impressive. Were there any LIFO profits in the quarter?

Mark Donegan

No.

Cai von Rumohr – Cowen and Company

No LIFO profits. You know, you gave your --

Mark Donegan

Nothing material, nothing at all that would be material to any stretch of the imagination. To say no, I mean, there could be 100 here, 100 there, but nothing --

Cai von Rumohr – Cowen and Company

It's not like $10, $15 million.

Mark Donegan

No, God, no.

Cai von Rumohr – Cowen and Company

So, you gave us guidance on your fourth quarter call, kind of in what first, second week into April and you kind of said margins will be down from the fourth quarter's 24.9 and you beat that by 190 basis points. And you kind of said volume as I heard you kind of post to the fourth quarter may be a little light. And it looks like you had a negative variance on volume and you kind of had this huge variance positively on margin. I mean, were you being conservative at that point, or what happened in the last –

Mark Donegan

No, I think that what I, not to nitpick, somebody asked me a question would the margins be somewhere in the range of Q4, I said, yes, that's reasonable. So, were they dollar for dollar, no, but I think what happened in the quarter is that the destocking kind of kept rolling through. And, again, on the flipside, division presidents and the plant managers and every single employee stepped up and said alright here is where we got to be and that's [inaudible]. And what that transpired to is, again, we start seeing this in Q4. We just got really, really strong movement in productivity. I mean we just got tremendous traction.

So we went as drumbeat driven and you know pretty well the drumbeat we go to. When we get into times like this, the drumbeat just becomes very intense. So there's a lot more touching. There's a lot more interfacing. There's kind of a lot, we go to a 16-week manning model that we look at the volume. So we add a week, drop a week.

So, we take our systems and actually extract it to a new level. And I think that to your point, as we saw kind of the quarter move we saw that there's more moving pieces. And we just said listen we should expect to see improvement for some of the following reasons. We can redirect our engineers. We got a better workforce. So I think you're right. I think that after the conference call, sales got a little worse and operating margins got better.

Cai von Rumohr – Cowen and Company

And so you did say looking at the second quarter that we will have a vacation, the headwinds of European vacations and kind of making a cutback.

Mark Donegan

I cannot, again, I won't adjust the vacations. I won't adjust the Forging presses being down, so as you – and you know us very, very, very well. I mean these are just things we have to do. And we don't adjust manning to Q2, so I don't think it's – it's there. It's real, but we're not going to give away large amounts of what we've got.

Cai von Rumohr – Cowen and Company

I guess the question is – the question is if I look at last year you had more pressure in forge. You were about flat sequentially in casting and you had some improvement in fasteners. So if I just think about the relative pressure compared to the first quarter is it fair to assume that maybe forgings which is a fixed cost business has the most pressure headwind?

Mark Donegan

Yes.

Cai von Rumohr – Cowen and Company

High cast has –

Mark Donegan

Well, not only are they the most pressured due to volume they're going to have the cost of maintenance.

Cai von Rumohr – Cowen and Company

Yes, okay.

Mark Donegan

So we still have our – I mean where – what – it's tough for people. You've seen some of our shots. We can spend $1 million on a bolt for a 50,000-ton press. So I mean, it's just a fact of what happens.

But yes, I would say that your assumption is that we're going to face a toughest challenge because that's where the costs are coming in, in that forge group. And I certainly – even with things like vacation I can go back to a cast and the fasteners and say okay, listen, I hear that but you've got opportunities that are out there. Let's go get those.

Forging becomes a little tougher saying, oh, by the way the volume and forget the main steel in those presses. So I mean there has to be some leeway but you can rest assured that there will be ample – I was going to say pressure, but there'll be ample time to figure out where the opportunities lie in the forging world.

Cai von Rumohr – Cowen and Company

But the fasteners should have the easiest compare of the three segments, correct?

Mark Donegan

If my buddy Kevin's listening to this I'm sure he's probably come crawling out his skin right now. But I mean certainly in terms of casting and fasteners you're not facing major pieces of equipment going down where you're going to spend millions of dollars to repair and to overhaul them.

So I mean, yes, there's a different road there, but castings and fasteners face their own. Fasteners have got a major operation in England. Casting has a major operation in France. Europe is what it is from a standpoint of holidays/vacations. But I think your base assumptions are pretty true.

Cai von Rumohr – Cowen and Company

Okay, and last one, you've talked in the past of share gain opportunities in fasteners. Maybe enumerate if you could like a couple of the major opportunities. You talked about one with Joe but in terms of share gains.

Mark Donegan

Again, I think if you kind of look at where they – let me just take Q1. If you look at where they were in Q1 when you kind of back out the automotive and you back out the currency in an environment where the business jet was abysmal and they were seeing the same destocking, our sales are relatively flat. So I think they saw the same challenges as that 12% to 15%, but they were able to kind of weather some of that.

I really don't want to get into a lot of by part, by opportunity, by customer. First of all my customers would have a real problem with that so I don't want to give away where we are, but I think that if you kind of look at the numbers, auto is down in that segment 25, 30 million bucks. So you take that, you take currency you get a feel for what has that operation been able to do.

I don't know, that may help you a little bit Cai. I just don't really want to go into a lot about what our strategies are and that type of thing. I think that kind of performance – we get it. You know we get it and we're going to keep driving right after it.

Operator

And we'll take our next question from J.B. Groh – D. A. Davidson.

J.B. Groh – D. A. Davidson

I just want to have another question on the inventory. I guess when I hear your comments about the disconnect between the order and the bills and the fact that inventory's up a little bit I guess we're implying that pick up in the second half. But theoretically inventory could kind of go up a little bit in Q2 as well, correct?

Mark Donegan

Yes.

J.B. Groh – D. A. Davidson

Okay, and then maybe you could talk about within that fastener segment, have you guys ever given the business jet exposure there in terms of a percentage or is that something you'd be willing to share?

Mark Donegan

We don't, I'm trying to think of what we've kind of been out there. We --

J.B. Groh – D. A. Davidson

I mean, I guess most of the business area exposure is in fasteners, correct?

Mark Donegan

Well, it's in two basic, it kind of falls – the reason why we don't call it out is because typically the value of it is proportionally skewed the other way and what Dwight says is you could lose one regional jet, you could lose 20 regional jets and get one 777 and we, as a company would be whole, so that's the reason why.

The reason why I felt as though, Warren, is we have a couple of facilities in the fasteners that kind of got hit very hard. Having said that, proportionally for fasteners in total, it's not tremendously significant, but it did see kind of a huge fall off. But you have [Adair], you kind of pick up some of the Pratt Canada, Allison at McWilliams and then in a couple of our smaller, San Leandro, Carson City, you'll pick up again that same customer base there.

So again it tends to be – I'm just trying to give you something of value. If I look at San Leandro, Carson City, you're probably looking at $80 million. If you look at McWilliams, you're probably looking at $50 million, $60 million, so it's not a big number but if you start seeing those things get whacked in half, it tends to be somewhat significant.

J.B. Groh – D. A. Davidson

Right, okay, that's helpful. And then one of your customers mentioned some opportunities in Gaston-Preston; is there any seamless type opportunity there or is that –

Mark Donegan

Anywhere, and again our pipe kind of pops up anywhere that it's either got extreme temperatures, highly corrosive, lot of pressure, that's going to be where we play no matter what the application is, down hole, natural gas, nuclear, oil, so I don't know what they're talking about. But if, in fact, it is of those magnitudes, if you ask them, the answer would be yes, we'd benefit from it.

Operator

Your next question comes from Robert Spingarn – Credit Suisse

Robert Spingarn – Credit Suisse

Mark, can you talk about this destocking and what kind of visibility you have to see that it might end by September?

Mark Donegan

I think we have a clean of sight for things like landing gear and large structural components, to some degree I think airfoils, but it gets harder to see the airfoils fly. I think Wyman-Gordon is a piece of, if we get a clean line of sight in terms of the disk.

But right now what we see is we start seeing it, literally, we see schedules coming in on us, as we move through Q3 and then by Q4 we kind of come back to where we were.

Robert Spingarn – Credit Suisse

So you actually have the orders in hand?

Mark Donegan

What we get is we get replace material, that'd number one, as you back away, and then we get kind of a – yes, we get schedules put in on us. Now the customers can move them, but they start firming them up. For the most part they tend to be pretty accurate.

Robert Spingarn – Credit Suisse

So what's the lead time?

Mark Donegan

Pardon me?

Robert Spingarn – Credit Suisse

What's the lead time, Mark? When are they firm? When do you know what you're going to do?

Mark Donegan

It depends. Anywhere from 6 to 16 weeks, depending on what the product is.

Robert Spingarn – Credit Suisse

Looking at this, I don't see any way that the September quarter isn't below this quarter in both sales and earnings, with the vacation time --

Mark Donegan

Well, say, again if you look at kind of what we said in terms of destocking continues and then to that we will add the forging presses being down and two to three weeks outage in our European plants, I would say that you're not wrong.

Robert Spingarn – Credit Suisse

Right and it would seem to me that you can't adapt to get delta in the December quarter from September.

Mark Donegan

At least in December you start picking up a couple of things. You start picking up the – you aren't going to have the presses that go down, you have less days, but again you have more of the volume going through the shop so you get a pick up from that even though your sales, based on the data, may not be like Q4 or Q1, you do start picking up items like that and then to your point, you have less days and then when you roll into Q4 and you start moving forward from there.

Robert Spingarn – Credit Suisse

Yes, no, Q4 seems to me the time when things maybe get back to where we see a semblance of normalcy.

Mark Donegan

Yes, and I don't think that statement's that far out of whack but there are just different things driving it. You've got Q1, Q2 destocking, Q2 on top of destocking and, of course, your presses being out on European vacation. You go back to Q3, destocking starts to go away. Towards the end of Q3 you are down, but you get more volume but you're right in the number of days and, then Q4, you've got destocking pretty much gone, you've got the full complement of days, so yes, I think that's kind of a reasonable analysis.

Robert Spingarn – Credit Suisse

Is there anything that you can isolate in terms of the after-market performance aero?

Mark Donegan

No.

Robert Spingarn – Credit Suisse

Do you see any kind of recovery there?

Mark Donegan

Honestly, it just feels really flat the way it is right now so, no, I do not see any tremendous after-market recovery going on right, no. I think what we see is our OEM building rates come back.

Now, on the IGT side, we see after-markets because we got a bigger base, so I think the fact that we've been out there, we've grown our share, we've got more customers, that all helps, but if I look at the purity of a part we have today we had five years ago, no, I think it kind of feels flat at this point in time.

Robert Spingarn – Credit Suisse

Two more quick things; can you talk about or quantify where this efficiency's coming from, in terms of the margin expansion, at least the component that's cost driven. Is it headcount, is it procurement, is it lower overtime; how do we think about that?

Mark Donegan

It varies by operation. Casting, number one, is going to be variable and in that you're going to get labor. So it's going to be productivity driven and plain and simple. What we get is you get double whammy, we're running at a negative labor rate variance because we have a higher skilled, higher paid group of people, but we're overcoming that and more with just shear productivity. Again, you have a higher skilled, higher paid, higher capable workforce, you get more performance. So that would be the number one, in terms of casting.

Number two, you'd have other variables, outsourcing, all those things that when you're kind of running just to get the product through, you do a lot of things, and you pull that back in. So following that category, the third piece of the puzzle would be scrap and rework. And I think that all those got great traction in the quarter.

If I move into forging, your most significant cost component is material and we talked about that with, I can't remember who was asking this, I think Howard was asking me the three prong, so you're looking at revert utilization, usage and price. I think we're getting really good traction on revert utilization. I think we're getting good opportunities on usage. Price is what it is.

So I mean I think that our ability to go after the cost stream and closing the loop, taking our scrap and casting and moving it over to forging and vice versa, going to Australia getting Caledon, I think all those work extremely well for us.

Then you go into fasteners, you kind of get a mixed bag. Certainly labor variable is the biggest piece of the puzzle, but they had a lot of costs in outside processing that they can pull back in, so I think they saw a lot of benefits in that. They again get the benefit from productivity, labor movement. Again, they would spend a lot of time training, they kind of got out of that training mode and then scrap metal could be their pieces. As long as we lower the cost components we've got scratch at the end of the quarter.

Robert Spingarn – Credit Suisse

This last thing, CapEx in the quarter seemed a bit high. What's going on there?

Mark Donegan

Well, I think that what happened is everybody just gets ahead of it and gets in line. In this environment, to their credit, what they basically try to do is get it in to get the gains in, so in a lot of situations, you have to get it in, put it and move it through to get the productivity back. So I think they're being very aggressive to make sure they're getting out ahead of it.

Operator

Your next question comes from Peter Arment – Broadpoint AmTech

Peter Arment – Broadpoint AmTech

Just following up on what Rob's comment about the CapEx, so given the destocking issues, have you changed any sort of your projections for this year?

Mark Donegan

When we came into the year, from a capital standpoint, our – again, this tends to be a company that doesn't play a lot of games, so it's a fairly in-your-face style of management. But I think that the operations clearly knew what the payback regimen was going to be. And there's no doubt about it, as we look at this year and coming off what the last couple of years was our payback model throttled back significantly.

So no, I don't think we changed anything. We went into this year saying you know we better find a one to a year and a half max payback and that's what capital projects is going to do. So I don't think anybody came in with a giant wish list.

I think what they've gotten on their own accord is very surgical and what they have to do. So if I look at division presidents there's very little that gets to me that these guys have not excruciatingly torn apart, and so no, I don't think there's any change at all.

I think that we came in with what it is and they're kind of making sure they know what it – now what they are doing is they're getting in really quick, very aggressive because they want to make sure again to look at these margins, there are reasons why we get them.

We don't just magically figure out ways to get more out of people. Somebody puts in a request they become more efficient. They put in a new casting for instance, I mean and heat treatments. There's things that they identify that coming in this year fell into one of two camps.

Either it was a productivity improvement or it was a maintenance safety. That was it. That was what the capital plan was going to be for the year.

Peter Arment – Broadpoint AmTech

Got it. No, that's very helpful. And then you've hit on a lot of it, the issues, but how about just on M&A what's your view there on just given the environment?

Mark Donegan

I will be disappointed if we've not deployed the cash we're going to generate this year.

Peter Arment – Broadpoint AmTech

Okay, that sounds very safe.

Mark Donegan

I really – you know we've been working on things hard. We –

Peter Arment – Broadpoint AmTech

Are you still targeting the kind of same size deals that you were, that we saw last year, or is it the range?

Mark Donegan

I think last year was probably smaller. I think that certainly we've been focusing on – nothing's changed. We know the businesses that make great sense for Precision Castparts. Again, I think if I could wave a magic wand I could deploy $1 billion to $1.5 billion and I mean I think it's that type of transactional value.

Peter Arment – Broadpoint AmTech

Okay, that's very helpful. Congratulations to the team on the margins. It's really great.

Operator

And our next question will come from Sam Pearlstein – Wells Fargo Securities.

Sam Pearlstein – Wells Fargo Securities

Can I ask you, what were the contributions from the acquisitions this quarter in terms of revenues?

Mark Donegan

Yes. Hold on. Ask another, do you have another question and we can come back to you?

Sam Pearlstein – Wells Fargo Securities

Sure. In the K you mentioned that some of the cuts in terms of the workforce and other things were going to result in restructuring charges or the cost is going to get absorbed and it was going to continue into Q1, was that a material amount and can you quantify it all, kind of what you absorbed this quarter?

Mark Donegan

It was in there and I mean I wouldn't say – it's all a matter what your perspective was. We probably had $2 million to $3 millions of dollars of severance to some degree that we picked up in our operating results.

Sam Pearlstein – Wells Fargo Securities

Okay, and then you mentioned a bunch of times the savings and scrap rework and the revert utilization, is there any way you can quantify anything in terms of percentage drop in scrap?

Mark Donegan

Could I by plant, yes, I mean I see it broke in those categories. Do I know the summation of those across my head, no I don't.

Sam Pearlstein – Wells Fargo Securities

Okay.

Mark Donegan

Going back to the acquisitions, it was about $30 million in sales.

Operator

Our next question comes from Noah Poponak – Goldman Sachs

Noah Poponak – Goldman Sachs

Mark, I wondered if you might give us your own personal view of what's going to happen with narrow body rates in the cycle?

Mark Donegan

Well, obviously that's kind of a double edged sword. I mean you know I've at least been shown enough data that for a six to eight-month horizon, given the current economic environment I think that there's enough overbooking that that they stay okay.

What happens after that I don't at this point in time have a real strong feeling one way or another. I need to be careful and what I mean by that is I don't want to get caught second guessing. I mean we spend a lot of time with our customers. We understand what they're doing. We know that this destocking in going on, but at the same time I can't go back and start saying, well I'm just not going to deliver to you.

So to some degree I have to take that that they give me and I need to move with it. You know again I think that some of this destocking, if I kind of look at not necessarily the end customer, but kind of the intermediate people, I think there's some of this destocking is making sure that that stream is very, very, very lean if there are any reductions.

So I think if we do see some narrow body work, I think we are seeing some of it right now. I think we're coming down destocking-wise that's probably in excess of what's out there, but I can only go with what my customers give me at this point in time.

Noah Poponak – Goldman Sachs

I appreciate the color, and on the BizJet regional jet side you allude to significant cuts, did you see something in the quarter much worse than expected or is it just kind of the scheduled declines coming through?

Mark Donegan

No, it's just – we saw it coming. We saw it in there. It's just – it's very consistent with kind of what's happening at the BizJet guys. We're seeing on the small to mid, we're seeing just almost no demand. We move up into the heavy, and very heavy, we're seeing some still, some decreases but not anything significant.

So it's aligning very well to Cessna and Hawker, and Bombardier. It doesn't seem like it's a significant disconnect so we saw it, but it kind of is what it is.

Noah Poponak – Goldman Sachs

And last question the cash flow number was pretty solid in the quarter given the pension contribution, the sway you have with your CapEx was alluded to, can you maybe give us a target for what kind of free cash flow generation you guys can hit in fiscal '10?

Mark Donegan

Yes, I think we can carry Q1 a little better all the way through.

Noah Poponak – Goldman Sachs

Including or excluding the pension contribution?

Mark Donegan

Once you then say the pension was in – so you're looking at the numbers in the three to kind of carrying their way through.

Operator

Our next question comes from Eric Hugel – Stephens Inc.

Eric Hugel – Stephens Inc

Hey Mark, solid margin performance again, to follow along with everybody else. Question with regard to those margins, if you look at how you got those, I mean obviously some of that was from things like personnel reduction, other things from decreased utilization or things like that.

When volumes though, in the near term I understand you are not – you're expecting your margins to remain okay, but as you go farther out and volumes begin to recover, there's a difference and I'm just trying to think about sort of the margin improvement that you got on a year-over-year basis.

As volumes improve how much of that is sustainable from the standpoint of you're going to have to hire these people back or increase the number of hours and all that fun stuff, but things like utilization is maintainable?

Mark Donegan

Let me try to give you some of the pieces and certainly certain things we won't let go of. Productivity we won't let go of. Variable costs per hour we won't let go of. Now the pieces may move a little bit. So you may lose a little bit in productivity but you're going to pick it up in labor utilization.

So there's very little we're going to, that we'll give back on the variable side, and again we'll target operations. And then again some of our variable is fixed to some degree. You know if you look at some of the lights and some of the inspection and some of the shipping that tends to be more of a fixed type of cost to some degree. So again you'll get some economies of scale as they move up.

On the fixed side, we'll treat it – we'll try to treat it as variable, so – excuse me as fixed. On the downside we treat it as variable. On the upside we treat it as fixed.

So there'll be a period of time when schedules do move up that we'll do nothing on fixed, and we'll get some benefits. And you can kind of look over the last five or six years and you can kind of see those periods of time where we did nothing, you can see where the kind of the drops we got. We got [reds] and you can see we had to respond and then it kind of fell back a little bit.

So you know you see that type of movement but we're not going to give back. From the standpoint of the shop we're not going to give anybody a pass and say well, they'll give everybody a pass on either side of it. So I think you can see, if you go back and look at the past five years, I think you see good times where we said we're not going to do anything we can get well we got and then you can see times where we had to add and bring fixed people on and do whatever we had to do.

Eric Hugel – Stephens Inc

Great, and just one more question. On the fastener side of the business, how much of that business goes through, on the aerospace side, goes through distribution and are there any sort of, can you sort of give us any sort of conditions of the distribution chain, sort of is the inventory still coming out? Is there destocking there? I guess going through aftermarket.

Mark Donegan

About fifty-fifty. So if I look at the – we go past the distribution. I think – it fell into two categories. I think with we saw kind of a double hit. There's been some consolidation out there. I think where there was consolidation we probably saw a rationalization. So we got a – certainly, a much deeper whack from that standpoint. Where there wasn't a consolidation we saw probably a consistent 15 type of one falloff. So I think we had a couple moving pieces of the puzzle.

Operator

Our final question is from David Strauss – UBS Financial.

David Strauss – UBS Financial

Hey. Apologize if anything's been asked, but I've been kind of skipping back and forth between your call and another one that started at 11:00.

On the IDT side, I think Rob asked it a while ago, you said you're not seeing anything. The business is growing. Given the longly nature of that business, what have you seen on the new equipment order side. I mean, GE is talking about pretty weak orders. Their delivery levels are still flat but they're talking about really, really weak order activity. So I'm just wanting to see what you're seeing on the order side?

Mark Donegan

Let me try to – what actually the way Rob asked the question and kind of what was said, if we were solely dependent on the existing customer base, on the OEM bill rates, we'd be getting whacked very hard right now. So from the OEM standpoint, yes, we are seeing demand and signals from our customers that say the OEM bill rate's down.

What we also said is countering that, the fact that the whole airflow team had worked their tail off to develop an expanding customer base, get a better presence on all the new programs across, again, the customer base. That all being in is kind of holding us flat, so we are seeing the OEM bill rates fall off.

You'd love to say everything was just well thought out, but the fact that they were hungry went after share and went after new customer base has been able to let them stay stable in a very challenging environment. That's kind of what I –

David Strauss – UBS Financial

So, when you say flat, Mark, you're saying new – I guess, first of all, what's your lead time on the IDT side, and are you seeing that your new equipment orders are flattish?

Mark Donegan

No, new equipment is down. So if I had just new equipment and the exact same parts and the exact same customer, I'd be down. The reason why I'm flat right now is because I have a bigger basket of customers. I have a bigger presence in that basket of customers. I have a lot of the programs they're building from a dollar content is higher, so though all those in are letting me hold flat.

So I get a giant leak in, but I get as much water coming in as a leak going out. The leak is OEM, the water going in is dollar content, new customers, expanding base, that's what the water going in is.

David Strauss – UBS Financial

And just so I'm clear, so you're referencing order activity?

Mark Donegan

Yes.

David Strauss – UBS Financial

Okay. And then on the sales side, I think this was asked a bunch of different ways Q3 and Q4 what's going to happen? I think prior to this quarter, you've been talking about getting back to pre-strike levels, like 18 a quarter. Your release, your comment seems to refer that you're going to get back to kind of the pre-destocking but not the pre-Boeing strike level. So are you talking kind of, more of the 16 level or still more of the 18 level?

Mark Donegan

Well, let me – I'm not going to give you the number, obviously, but let me answer your question. I think when you go back to where we were when we were pre-strike, I think certainly we saw the 787s starting to roll into the – certainly the Q3, Q4.

Saying that's just a big unknown right now, I think what we're looking at is going to the pre-stock – what, destocking levels, and then whatever happens to the 87 will be – if it stays on, it keeps going, and they're going to build production. We'll start moving more towards pre-strike. If they don't, we'll probably hunker down those pre-stock destocking levels.

David Strauss – UBS Financial

Okay, and then, I think Sam asked, but on the productivity side, can you quantify, I think you – when I met with you before, you targeted kind of 10% to 15% productivity gains. Is that kind of what you saw in the quarter?

Mark Donegan

We saw that, and in some cases more.

Operator

On behalf of Precision Castparts, Mr. Donegan and PCP Management, I would like to thank you for joining the call today. As a reminder, the webcast and call have been recorded and will be available on Precision Castparts' website at www.precast.com in approximately 30 days. This concludes today's meeting.

Mark Donegan

Thank you, operator.

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