Precision Castparts F1Q11 (06/27/2010) Earnings Call Transcript

Jul.23.10 | About: Precision Castparts (PCP)

Precision Castparts (BATS:PCP)

F1Q11 (06/27/2010) Earnings Call

July 22, 2010 10:00 am ET

Executives

Shawn Hagel - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Assistant Secretary

Mark Donegan - Chairman, Chief Executive Officer and President

Analysts

Cai Von Rumohr - Cowen and Company, LLC

J. B. Groh - D.A. Davidson & Co.

Eric Hugel - Stephens Inc.

Howard Rubel - Jefferies & Company, Inc.

Joseph Nadol - JP Morgan Chase & Co

Richard Safran - Goldman Sachs

Robert Spingarn - Crédit Suisse AG

Noah Poponak - Goldman Sachs Group Inc.

Samuel Pearlstein - Wells Fargo Securities, LLC

David Strauss - UBS Investment Bank

Peter Arment - Gleacher & Company, Inc.

Operator

Good morning and welcome to Precision Castparts Webcast and Conference Call to discuss its first quarter earnings for fiscal 2011. This event is being recorded and will be available on PCC's company website at www.precast.com shortly after the conclusion of the presentation and discussion. Following remarks by members of PCC management, the dial-in access line will be open for questions [Operator Instructions]. Now I will turn the floor over to Mr. Mark Donegan, Chairman and Chief Executive Officer of Precision Castparts.

Mark Donegan

Thank you, operator. I'm sure you're all very familiar with the forward-looking statement and PCP's [ph] consideration when you're analyzing the following information. If I look at Q1, Q1 is certainly kind of tailed to two cities. We saw some very strong traction in some of our core markets, but we also had to face one last significant hurdle with our seamless extruded pipe and we're going to get into all that as we move on. I'm going to try today to provide probably more clarity than we've done some moments in the past. I also have Shawn Hagel, who will go over to some of the questions that kind of came up continuously throughout the course of the quarter. So we'll go through all that.

But if I start and looking at the company in total, we saw sales increase of roughly 5% versus last year, going from $1.37 billion last year to $1.45 billion this year. We saw operating income decreased by 5.1%, going from $371 million last year to $352 million this year. And we saw margins decreased year-on-year, going from 27% last year to 24.3% this year. All of this generated an EPS of $1.65 versus last year of $1.71. If I look at the key drivers, and beginning with sales versus last year, we did see good improvement in our OEM aerospace sales, mainly in our castings and our Wyman-Gordon forgings operation. These two businesses were kind of the leaders as the market turned down. So again, we'd expect these to be kind of the leaders as the market recovers, and they were. We also saw good general industrial sales versus last year, where they're up by roughly 50%. But there are kind of two significant items that are putting pressure on those two items. If I look at the first, certainly, there was continued weakness. In our core Fastener Products, we saw a 15% reduction versus last year. And again, when I talk about core Fasteners, it's high complexity, high value. We would have seen a more significant downturn in Fasteners, but I think they have been very good at expanding their market in the more non-core products. And then again, you kind of see the start of the presentation in a second, the most significant decline that occurred was our seamless pipe down by 50% versus last year as that temporary realignment from the Chinese inventories.

If I look sequentially, in aerospace, we saw again that closure of our base businesses to the build rates, we saw growing by 2% versus last year. And you'll see later on that the castings saw a much stronger gross rate than that. Industrial products, sequentially, saw a good growing demand by increasing 10% versus last quarter, and then remain flat in our aerospace aftermarket, the distribution side of our core Fastener Products and IGT [industrial gas turbine]. But again, sequentially, the most significant part that we had overcome versus last quarter was that 50% decrease and yes, that is sequentially versus Q4 in our seamless extruded pipe. We added basically a choice to make, we could have spread some of that over a couple of quarters. We decide to take the hit all in one quarter, get it behind us and move on and we kind of go back. As we get through this, you'll see that our order book is starting to recover extremely strong and rapidly. Certainly, we had to drive very aggressively on all fronts to take over that headwind from that pipe. But we were successful in that, we did it in a much different product mix. If I look operationally, and what that impact was, you're going to see we had good leverage on our casting volume across our current cost structure. We saw solid improvement in Wyman-Gordon operations, again, from the volume, but providing the significant headwind from the temporary loss of seamless pipe volume, and we were able to offset that. We offset it with the growth in general and industrial. These are two very distinctly different product lines. General industrial is a product line we want, we've grown it and it's key to us moving forward. But they are two different, so replacing the dollar sales for general and industrial to dollar sales of pipe is a significant difference. If I put a number on it or the value of what we had overcome, you're looking at a range of probably roughly $15 million to $20 million counted to the bottom line of comparable sales dollars. So again, it's something we had to work our tails off to overcome the effects of that.

So when I look at Q1, to play it all basically, what we had expect to sitting on our 13 weeks ago, if I look at Q2, I think we're looking at similar trajectories on kind of the castings in the Wyman-Gordon forgings, but we still have that normal Q2 events of the forging outages and this mainly impacts throughput. Again, we put inventory in the ground to make sure we support our customers, same with European holidays, so we're really looking somewhere in that leverage impact. And again, as I look to the second half, we're moving up through this by segment, we do see strengthening solid schedules moving to the second half of the year, and we'll get it into those and other segments. If I take a quick look at our sales by segment, aerospace grew from 55% last year to 58% this year. It's kind of driven by two fronts, I think the first one is certain we're continually to see that closure of those build rates and that destocking going away. But equally was the reduction of power going from 29% to 21% last year, kind of grew that market segment too. And then, we did see, again, that solid growth in our general industrial, growing from 16% last year to 21% this year.

If I move on to the segments, beginning with Investment Cast product sales, sales year-over-year were basically flat versus last year, going from $485.6 million last year to $486.7 million this year. But we saw a solid leverage across our current cost structure, with the operating income up by 10% versus last year. Probably from just under $142 million of last year to $155 million-ish. We saw margins expand from 29.2% last year to just on its 32% this year. If I look at the key drivers, on the sales year-on-year, certainly, as you expect, the key positive drive was the 20% increase in our OEM aerospace demand. And again, we're seeing that closure of the destocking and matching better to the bill rates of the OEM airframe build rates. And we did begin to see some early stages of the aftermarket growth. I think it's a lot more of that to come, but we did start to see some traction in that. Countering that, year-on-year, we saw IGT down by 20%. And as I've talked in the past, we probably would've seen a significantly more larger reduction than the 20%. But the fact that we did expand our customer base and did gain shares kind of help to weather that, but that was what the year-on-year was. If I look sequentially, we saw solid aerospace growth versus Q4, with our OEM sales increasing by roughly 10%, and this is again driven by the fact that we're kind of working our way back to align with the OEM bill rates. And weighing on that are kind of diluting that 10% in the aerospace was again the continuously flat sales versus Q4 in both the aftermarket and the IGT.

Accounted for it, now what we're seeing in the casting side in the back half of the year, we do have the schedules in place. But for the first time, we have a line of sight with that based demand is back to pre-stocking levels, well we do match the OEM bill rates and the order book is in place for the 787. Kind of into two phases, it certainly as we move in to the initial deliveries. But as we start looking toward the back half of the fiscal year and the next year, we do see the schedules on us from ramping up into that more aggressive production as we move into calendar year '11. And we certainly expect to see a continued pickup on our aerospace aftermarket as we move into calendar year '11.

Operationally, I think castings laid the groundwork for kind of demonstrating what our potential is as our base volume comes back across our operations. I think we effectively leveraged our recovery of those volumes against that. We've talked about this is that really some of the improvement with guide and productivity scrap and rework material used was to get that and leverage that as that base volume comes back. And I think castings is kind of the leader in that, they're the leader in the way down and the kind of the leader on the way back. And again, the goal is abundantly clear to all of us, to hold onto those gains as the volume recovers and handle the growth in an effective manner.

And I think we are keenly focused on continuing to get that leverage to the bottom line. If I move on to Forged Products, Forged products certainly had a number of moving pieces. I'm going to try to take my time and go through them as clear as I can. And again, we've taken a look at this earlier, but I want to go a little deeper, but kind of looking in at the top level. And sales, we saw 17.1% increase year-over-year, going from $539 million last year to $631 million this year. We saw operating income dropped from $141 million last year to $120 million this year. And the margins year-over-year went from 26.2% last year to 19% this year. Looking at the primary drivers on sales versus last year, putting everything on an apples-to-apples comparison, to begin with, we saw our selling price of a three primary mills remain relatively flat. We saw lower material contract passthrough of roughly $22 million. From there, again, in the Wyman-Gordon side of our business year-on-year, we a 5% organic growth on those. Again, as that base continues to destocking goes away. And compared to last year, we had full quarter of column. We did see a substantial recovery in the general industrial, growing by 70%. But again that Q1 of last year was the rock-bottom of bottom in terms of the general industrial. And to that, we saw a significant counterweight, which was the 50% reduction on our seamless pipe from last year.

If I look sequentially versus Q4, we have steady demand in both our aerospace and OEM aftermarket, and the continue to see a reasonable recovery in our general industrial, going up 15% versus Q4. But again, encountering that was the tremendous pressure that we have to overcome on the 50% reduction quarter-over-quarter on an seamless extruded pipe. If I look towards the second half, in Forged Products, as with castings and aerospace, we have the demand loaded in now on us and the OEMs schedules have close the build rates. So as with castings, as we move to the back half of the year, the schedules do now match up to the build rates of the OEMs. And again as with castings, we do have that load on us now for the initial production and the ramp up of the 787. On the pipe, we have seen a significant change from where we sat 13 weeks ago. When we sat 13 weeks ago, our backlog pretty much was drying up, and we're kind of facing what we've just went through. But if I look at where we are today, we do have the recovery back inside again. We have quoted and been awarded a significantly amount of demand for delivery, beginning Q3 and strengthening into Q4, and our backlog has more than doubled from where we sat 13 weeks ago. So again, that backlog is starting to fill up strong again. And the other advantage we now have with Chengde is the boiler side of these project awards are six to nine months ahead of what our interconnected pipe awards are. There is still a substantial amount of already awarded boiler orders that we've yet to see the interconnected pipe come through. So again, that backlog should continue to grow through this quarter.

Operationally, again, story is the same, the key driver for us was to fight our way through that reduction seamless pipe. We did fill those orders with the general industrial. But again, that provided us significant challenge in terms of the value of that, and I kind of gave that headwind we overcome as roughly that $15 million to $20 million. And also in Q1, we aggressively started moving Chengde down the path to qualification, so we did divert a fair amount of product that would have been destined for Wyman-Gordon to Chengde to get that qualification in going along. And again, as we look to the back half of the year, this is something we're going to need. But this has probably would have put over the Wyman-Gordon assets. If I look at the second half again, we kind of talked about some of these. Now the growth we have seen in general industrial, it is the product we certainly have in our portfolio, it's probably want to come back. So this is a baseline of which we can now start moving off with. And now, we now on our hand kind of that aerospace side, the closing of the gap and the destocking. We have the 787 demand as I've talked about load inputs' production schedules, and we have the schedules coming back to previous levels as we get the second half of this fiscal year, and really as we get into Q4 as one of those seamless pipe orders kind of come back.

Chengde is on track to qualification. And again, as we get into that Q4 timeframe and into next year, we need Chengde to be fully qualified to handle the volume that will be seen. So again, I know you all have some questions. We'll certainly we try to cover more than I normally do in terms of the Forged Products segment, but we'll answer what other questions you have later on.

Fasteners, again, looking kind of a top-level, sales decrease by just under 5%, going from $345 million last year to $329 million this year. We saw operating income go from $115 million last year to roughly $104 million this year, and margins went from 33.5% last year to 31.7% of this year.

Looking at the primary drivers, on a year-on-year, we did see, again, the Aerospace year-on-year decline by roughly 15%. And our core products, and again, our core products to me are highly complex, high value product offerings. We saw a more substantial fall off, but we haven't been able to offset a portion of that with the growing share of non-core products. Now these non-core products, Mark, as we've always said on the radar screen, they been part of our market penetration plan, but at the same time, they were offsetting some of our core complexity. If I look at the primary drivers of kind of that decrease, they remain the same. Really two fronts, the destocking at the OEMs. But probably the more significant one we're seeing right now is the consolidation of that distribution base. If you look at a year ago, we roughly had three different distributors that were supplying the same product. Into the event [ph] they have consolidated into one and that consolidated distributor now is working through the excess inventory.

And then, we certainly have certain parts of our, really, one primarily plant that year-over-year, we took a significant hit from the regional and business jet. If I look sequentially, the story stayed pretty similar sequentially, we're basically flat OEM and distribution sales, and we did see in there some replacement of our core sales with less complexity. And again, when I say our typical complexity, you're looking at complex bolts, very complex threading mechanisms, and in some case, as we've been able to change that out with nuts or a less complex product offering. As with the other two, if I look towards the second half, as you can imagine for Fasteners, that 787 is an extremely strong catalyst, we're now in the range of $2.7 million per aircraft. It's highly engineered, highly complex, highly valued products for us. Though, again, having that catalyst out there is just essential, and we do see the orders now loaded in on top of us. If I look at the distribution, again, kind of what it feels to us is that Q3, Q4 we're back in getting that distribution business coming back.

Operationally, impact really came on two fronts. Lost leverage on the lower sales and, again, kind of that offsetting our core components with the expanding market penetration to lower complexity, that's been a primary challenge we faced in the Fastener side of our business. Looking towards the second half of fiscal year '11, I think again as with the forging and the general industrial, the expanded product offering, the non-core as we would say is product we've been going after. So we want this, it's in our baseline, it's something we've been working hard to get and certainly wanted to grow our market share on. And on top of that, we want to add the growing markets in the recovery. The most significant component for us is that 787 moving into production up to delivery curve and, again, the distribution coming back in our core. So that's what I had on the segments, and again, I'm sure you'll have a fair amount of questions as we move into that later on.

If I move into cash now and take a quick look. We had $174 million of positive change in cash in the quarter. And in the quarter, we also made $100 million voluntary contribution. So you're really looking at a cash generation in the quarter of roughly $273 million. Having said that, there is still numerous opportunities on future quarters to improve that number. So I am in no means satisfied with that. At this point in time, what I really want to do is kind of throw it over to Shawn. And again, the goal is there has been a number of question that came up, so Shawn will kind of go through some of those and then come back to me.

Shawn Hagel

Good morning. Over the last month or so, we've received a lot of questions with regards to our inventory. Hopefully, the next several slides are intended to help clarify and clear up some of that confusion that exists with regard to how we measure, manage and report our inventories.

We begin calling out material pass through in fiscal 2004, 2005 time period when nickel prices began to rise sharply at levels we have not seen before. At that point, we do not have metal escalators and a number of our contracts, and those that did, generally had annual repricing that crosses versus the quarterly or monthly ones that now exist, which subjected the company to great pricing risk. Now substantially, all of our contracts have escalators that reset relatively quickly or replace by forward that add inception of the contract. The escalators are generally based on London metal exchange pricing, or if necessary, some other index. And again, these are based on a 2004 time periods, so that we can compare apples-and-apples across periods. It's not a difference each year, it's a baseline measurement. When we talk about the fact that our metal is hedged, what we mean is that we generally hedged it by placing by forward contracts for future delivery based in our customer requirements, not traditional or financial instruments. We are not a metal speculator. Almost all of purchases will be exception or revert based on contractual or forecasted demand. Price, in effect, which is primarily used at our mills works in basically the same way as metal passthrough. Metal pricing is locked at either the price when ordered, with metal delivery secured at that time, or is locked based on the lead time requirements. None of this finds out perfectly, but it significantly lowers the price risk to PCC.

The majority of our operations report inventory based on last in first out, LIFO accounting guidelines. Exceptions include our distribution and sales operations in certain small international operations. If an operation is not on LIFO accounting, it utilizes average costing for its inventory. We get the question a lot as to why the PCC utilize LIFO accounting. The reason is we believe that better matches performance to the P&L by immediately recognizing productivity, material usage and other metrics when they occur, either good or bad, not overtime as inventory turns.

The other area that creates confusion is that LIFO is not just metal cost changes. It represents all aspects of cost of sales for the company, including labor, material, material being virgin metal and revert cost scrap and rework material utilization as well as overhead. Therefore, we talk about overall performance as it to a more accurate representation of results rather than China split it apart in to the FIFO and LIFO components. Finally, we perform a lower of cost-to-market analysis each quarter in order to ensure that our inventories are not overvalued. In FY '10 the majority of our inventory income, which we estimate at approximately $20 million came from productivity improvements. No more than a third of that came from material purchases.

As we discussed previously, we decided to utilize our balance sheet in FY '10 to help our customers to the destocking and general economic downturn. We could have required that our customers take delivery, but instead, we use a situation to better position ourselves for opportunities to extend or increase long term contracts and market share.

In addition, we stockpile as much revert as possible, so that we could utilize more on our manufacturing processes and help drive our costs down. We've also seen our internal requirements grow since the acquisition of the special metal in Caledonian, with the internal sales growing by more than 140% between the FY '07 and FY '10, peaking at almost 200%. This growth requires more on hand inventory and has another reason for our growing inventory balance.

Finally, our acquisitions are at a significant amount of inventory when they are consolidated. To give you an example, Carlton Forge, which it was completed last year, added an additional $70 million, of which $9 million represented profit that was included in our LIFO reserve balance. FY '09 acquisitions, there were three, added approximately $15 million to the LIFO reserve balance when they were required, none of which actually runs through the P&L.

Although we stated that our plan is to hold inventories flat in fiscal 2011, we did see some measurable increases in the first quarter as indicated by this table. As sales volumes increased, we believe we'll be able to start to drive them back down. I might be useful to give you some details as to what drove this increases. We had certain new products, which required investment and additional inventories during the quarter. The largest of which is that one we've discussed with you previously are non-implied plane [ph] pipe business, in which we need to have inventory on the ground in order to successfully penetrate that market.

We also saw additions in our Thai Alumnite [ph] business, in our China and pipe wests [ph] , and our Medical business, as well as certain new alloy requirements that require that we put more inventory into position. As we discussed previously, the remaining outstanding purchase for nickel, which were placed before volume dropped off were delivered during the quarter. It represented an approximate addition of 1 million pounds of nickel, coupled with certain other material deliveries that Howard [ph] Has been contracted for as well. These items will be consumed as volumes pick up in the latter half of the year.

Certain of our operations, as mentioned earlier, are preparing for the European shutdowns that will take place this quarter, and they built inventory in anticipation of that shutdown. Those amounts will be consumed during the quarter and we'll see that inventory drop.

When we acquired Carlton Forge, they had consigned inventory agreements with outside suppliers. As those contracts have expired, we have been effectively moving that business inside, creating a build of inventory because it's no longer consigned. We will continue to see this balance grow this year as we successfully bring more and more volume in-house.

During the quarter, we experienced some increases in the steel surcharges within the Fastener segment which created higher inventory balances. Those are coupled with some small strategic purchases, which allow us to bring certain inventories, which are required in the fiscal year at lower pricing, which we'll be able to realize as we consumed it throughout fiscal 2011.

Finally, as we continue to work on qualifying Chengde, we've seen an increase in the in-trends of inventory between Forged Products in Chengde as we move more and more product through that process. As demonstrated in the commitment we've had to this partnership and helping us successfully position ourselves for the anticipated upturn in the pipe industry in the latter half of the fiscal year and beyond as were discussed previously.

In conclusion, I hope the last several slides have helped to provide a little more clarity and transparency in our inventory balances. And with that, I'm going to turn it back over to Mark for a summary of the quarter.

Mark Donegan

So, I'm sure you have a fair amount of questions for Shawn as we go through the question-and-answer period time. But, again, I think the key there is in the LIFO, that the total effect of LIFO during all of fiscal year '10 was roughly $20 million, of which three quarters came from operational improvements and only roughly 25%, 30% came from any metals. So we are ready to answer your questions, but I want it at least try to take some time, get some clarity to that. I think we're going to continue to try to work as we move forward and other quarters to try to keep providing some sort of clarity. So we'll keep trying to refine that particular process. So getting back to where we were, if I look in summary, Q1 was a quarter where we continue to see improving. Aerospace market, we are in fact gaining traction there at our castings and our forgings. On the flip side, we also saw kind of that flatness on aerospace side with our fasteners, I will kind of look to those particular limits. Power, IGT remained flat, didn't get worse, didn't get better. So kind of at this point in time, it's kind of what it feels like looking forward. But as I've talked throughout this significant event, we have to come through in the quarter was a stop of seamless extruded pipe, and that really impacted the lost leverage from that. General industrial, again, we saw a continued rebound nicely in that particular area and some we've been waiting for. If I look at Q2, I think the market conditions in Q2 remains somewhere at Q1. We did see the bottom of the pipe, talked about the backlog expanding and we still have more to come from that standpoint. So again, I would expect to see some recovery in pipe. I think we still see flat in IGT and we see flat-flat in distribution on that business on our core Fastener business.

To that, we have our typical Q2 events. We have the forging shutdown and we have extended holiday season in Europe. That really comes in terms of throughput to the shop. We do put inventory on the ground to be able to handle our customer needs, so it falls mainly in that category. If I look into the second half of the year and we touched this, but just kind of to summarize. In aerospace, we see solid schedules on the castings and Wyman-Gordon, and that's mainly driven by closure of the bill rates, and they do close. So we do match back up at the end of the second half of the year. And again the 787 for our company is just a significant, significant driver. And that starts to get traction, really across the whole company, mid-Q3 and then certainly by Q4, we're getting in. As we look into our next year, we start supporting that growth of volume to handle those development of the aircraft. After market continues to recover and we certainly expect the Fastener schedules, again, on two fronts and their core markets to come back in 787, but also that distribution base as we start getting into the back half of the year. Starting to see some indications now that they're kind of getting towards kind of the end of their destocking and the consolidation of the market.

We do see a significant recovery of seamless pipe. Again, the major activity today is underway in both China and India, and we have a long runway for Chengde in that. That Chengde is an asset. We will need as we get into calendar year '11 to handle kind of what's out there, and what markets we're going after and what we see. We do see that the general industrial continue to gain strength. And you know, I think, that as a general rule, we kind of took the last death blow in this quarter. Now we have to ensure that we continue to drive through this volume as it comes back moving into Q3 and Q4. Our core product offerings come back and you can rest assure that there's not a single person in this company that doesn't get kind of that challenge in what we're trying to do in the back half of the year. So with that, that's all we had. I know it's a little longer, but we took a little more than normal. But I'll open up the questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from JB Groh with D. A. Davidson.

J. B. Groh - D.A. Davidson & Co.

So it sounds to me like this seamless pipe weaknesses one or two quarter issue that rebounds rather quickly. Is that the safe summarization of what you said?

Mark Donegan

If you go back, I can't remember exactly. I know, I believe in kind of the Q3, we started talking about Q4. But what we're really looking at was a realignment of where we had a blended out rate of 300 megawatts, 600 megawatts with 1000-megawatt plants. The 300 megawatts, 600 megawatts are not as efficient, and certainly their admissions is not as clean as the higher supercritical. So what we saw was a drastic and a way the orders usually come is this kind of a yearly lap. And we saw a bleeding down of that 300 megawatt, 600 megawatt, and we had not yet seen kind of the transition to 1000-megawatt plants. What you saw was kind of the effect of that bleed. Now I'm not getting the awards, but we're now seeing, really on two fronts, is in China, kind of the awards coming out on that 1000-megawatt plants, and we're seeing the demand coming from India, which we have been kind of seeing all along. The key indicator process kind of going back to the better days, our backlog was $800 million to $1 billion. We got as low as $200 million. We're now moving back up into that $550 million, $600 million, we still have a lot more to come. So the fact that we have the orders, we've got the awards, we still see more to come, it was a probably a three-quarter that we pulled into two quarters.

J. B. Groh - D.A. Davidson & Co.

You talked about the transition, I think, last quarter. But is the magnitude of that, was that outside of the realm of your sort of expectation in 50% decline?

Mark Donegan

Yes, it was a little deeper than we thought. Again, looking at it, what I didn't want to do is I did not want to stretch it out and die from a thousand cuts. So versus going back to our customers, and I don't want to say demand but kind of adhere to the contracts. We basically said fine, we'll take it and we'll kind of move on and get it behind us. It was more painful than I wanted to. We have a general industrial that was kind of coming back. So I just said, let's get it behind us and move on. So yes, it was a little deeper than I would have wanted, but a lot of it we manage to be in that manner. I didn't want to be here talking about a quarter after quarter after quarter.

J. B. Groh - D.A. Davidson & Co.

It look like there had to be some pretty good strength at some other areas just to make up that decline and that was margin-dilutive in terms of the general industrial, correct?

Mark Donegan

Yes, absolutely. General industrial, if you go back to a year ago, I know we're kind of reliving some of the old stories. But we would enter the quarter of 15% to 20% book in general industrial. So if I go back to Q1 in '10, it was a gut-wrenching battle. We saw and are continuing to see very strong growth in terms of the general industrial, but there's no doubt about that the dollar of sales in general industrial, in terms of that leveraging isn't dropping through a dollar of pipe. The pipe is a much more complex high-end asset-intensive product offering, so there's a reason why it kind of is what it is. But you're right, a dollar of general industrial doesn't work. Now what we want is we want that general industrial to keep growing is to bring back the pipe on top of it and that's kind of what we see look back half. Yes, it's kind of what it is.

Operator

Our next question comes from Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC

Could you quantify the 50% reduction? I mean, just doing the math, it looks like that would be about $65 million drop in the seamless pipe. And kind of give us what the decremental margin would be? Given the fixed cost, I would assume it would have been something like 50% or higher.

Mark Donegan

Well, I think your sales are a little high, but all your assumptions are pretty true.

Cai Von Rumohr - Cowen and Company, LLC

And then, you mentioned -- so the backlog got to a bottom of $200 million and now it's back to $400 million?

Mark Donegan

It was down about $200 million, $250 million. It's now $556 million.

Cai Von Rumohr - Cowen and Company, LLC

Now at $556 million. Okay. And then, so do you expect.

Mark Donegan

Hey, Cai, just one thing I wanted to add. That backlog usually from when we get it awarded, it's kind of looking at a six-ish type of months. So again, that's why it kind of falls into the second half of the year. So it doesn't immediately follow through.

Cai Von Rumohr - Cowen and Company, LLC

The final question was going to be, should seamless pipe, if it was down $60 million-ish or $55 million, $60 million in the quarter, from your first quarter level, what kind of improvement should we see if any in the fact that the second the going to be even worse?

Mark Donegan

No, I don't think the second will be worse at all. I think that -- I don't think second is worse. It probably wants to go up a little bit. But again, we face the forging outages. So you'll see a little, little bit of growth in that. Mainly starts growing back at Q3, Q4. And again, some of that is driven by the fact that we bring the primary presses out for two weeks. So you're going to lose some of that. But no, it will not be worse.

Cai Von Rumohr - Cowen and Company, LLC

And usually you build inventory in anticipation of the shutdown. So should we expect that in Forged, the aerospace shipments would be better in the second quarter than the first because you built the inventory or with the shutdown, will that be off?

Mark Donegan

To answer your question, we do build inventory. There is probably some very, very, very slight, more flat. But you are correct, we do build inventory. What we really face is the lost leverage. So if you kind of go back to where Shawn as you can see where we would put inventory on the ground and that's the support. So we do see slight increases, but it doesn't erode in terms of the sales line.

Operator

And we'll take our next question from Robert Spingarn with Credit Suisse.

Robert Spingarn - Crédit Suisse AG

You've got so many moving pieces, and I think you have a nice job trying to put that together. But all things being equal, just from a very high level, is the next quarter, the current fiscal second quarter, is this going to be flat with Q1, given the shortages or will it actually improve from an earnings perspective?

Mark Donegan

I think it's somewhere to flat to slight improvement. I think that demand is there to want to do better. When you start taking forging complexes down for two weeks, and you take European facilities down for two to three weeks, the dynamics become difficult to offset and you're taking all of the expense in the quarter. Years ago, you were allowed to kind of spread that whole maintenance over a course of the year. Obviously, the accounting rules have changed. So beside the loss of leverage, you're also kind of picking on that. Having said that, I think it's a fight but it's flat to somewhat slight up, and then you start kind of picking traction in Q3 and then obviously, you know the business as well as I do, you start kind of accelerating very rapidly through Q4.

Robert Spingarn - Crédit Suisse AG

Right, and so that being the case, you've got some headwind from an operations perspective in Q2. And so the incrementals will get somewhat pressured there but Q3, it sounds like you've got a lot of runway, a lot of volume starts to flow.

Mark Donegan

And certainly the OEMs, destocking goes away. I think we start to see the baseload in the 787 coming in. The wildcard is still -- I think the one item I do not have the line of sight yet to is that Fastener Core business reignition whether that is Q3 or Q4. It happens somewhere in there -- it's probably the only thing I still don't have a very clean line of sight. Everything else, seamless pipe, we've got orders in place. The OEM bill rates to close, we got the orders in place, 787, we got the orders in place. So that's kind of the last thing. But yes, I think that's kind of the way it feels.

Robert Spingarn - Crédit Suisse AG

Well on the Fasteners, the distributors, at least BE is seeing growth there. So is it just a question of getting them to clean out their inventory and start reordering?

Mark Donegan

BE, it's not just a BE when I'm buying a bunch of inventory per month. So again, BE went out on kind of an acquisition binge, and they took themselves and two other major distributors and brought it to one. So if you think about the way the distribution network works, it's not uncommon that you'll have three distributors with the exact same product on hand going to market and trying to compete in the same market. I think what BE is doing is getting through all of that duplicate and triplicate inventory that was out there, and then, we start to see the orders come back in. I mean I think BE, I would agree BE is saying that, "Yes, they're seeing their demand come.” It's just getting that consolidation out of play, and then we'll go right back to kind of where their levels are too.

Robert Spingarn - Crédit Suisse AG

How long till we have a 2-dollar quarter?

Mark Donegan

If I start looking at next year, you really start getting into a very, very, very strong dynamics. And what I mean by that is, all destocking's gone away, the distribution networks should be coming back. The 787 somewhere for us in the course of the year, this is calendar year '11. We're going to be going from today of zero to a rate of somewhere five, six, seven. The model works really good when you start getting that type of leverage in the core products across our business. So I'll give you that much knowledge. How's that?

Robert Spingarn - Crédit Suisse AG

Okay.

Operator

And we'll take our next question from Richard Safran from Buckingham Research Group.

Richard Safran - Goldman Sachs

You've been making some interesting points about the visibility you have. There's obviously a bunch of concerns about macro conditions could do the Aerospace business. Could you mix us some comments about how often your business is for the second half?

Mark Donegan

Well again, should the market completely implode, I think we'd have to respond accordingly. But if I look at what type of visibility we have in terms of schedules, demand, I mean we go out with our customers and we place material on order, Shawn kind of went through that. So you look at nickel, cobalt, uranium, tantalum and all those type of things, we are out there placing to support kind of the schedules Q3, Q4, Q1. So I think that from that standpoint, we have a clean line of sight. And then when I come back to our customers in terms of schedules, we typically get 16 to 18 weeks firm and then we get very solid forecast of kind of the type of demand they're looking at. Should the world implode, obviously with our customers we'd have to work our way through that. And kind of if I go through the whole destocking we went through in calendar year '09, we had to work through with our customers, and we've talked about that, we used our balance sheet in some extent. But in terms of the schedules blowing on us, and what it looked, we get a pretty long line of sight to some of that stuff. Six to nine months.

Richard Safran - Goldman Sachs

Shawn, I just want to know if you could talk just a little bit about the pricing spread, relative to like nickel and titanium, revert versus virgin metal? And how you see that trending as volume going up, et cetera?

Mark Donegan

It varies. And I hate to sound a little nebulous but it's a moving target based on the type of revert we get. Son if we get pure chips, we can pick up substantial benefit. If we get dust, we have to go to a purifying heat. But it's somewhere in the 50% to 60% range of virgin kind of all-in blended, it's of whatever the price is trading at that particular day.

Richard Safran - Goldman Sachs

On the 787, I think last quarter you were talking about that you were looking at the ship set on 25-ish, if I'm not mistaken. Just want to know if you can provide an update on where you're at now?

Mark Donegan

Well I think what I said is we probably hit out there roughly 25 sets. That number is probably still true. We really haven't yet turned on to any great degree. Again, we start turning on in Q3 so what I would say is that kind of what it feels like is the amount of material that we shipped can support the first 25 planes and then we'd have to start accelerating and that's again wide for us, it starts coming in Q3 and then Q4 to support going beyond that 25 to a bill rate of one or two or three or four moving up the road. We haven't shipped, to any degree, we haven't shipped any 787 hardware to date. Hence, the original lot.

Operator

And we'll go next to Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co

Mark, on the inventory income, those are the words you used Shawn. How do you define that, the $20 million?

Shawn Hagel

That's really looking at the net benefit generated out of our inventory balances in the year that went to the P&L. So it include FCA, it would include LCM adjustments, E&O, that will include LIFO adjustments to that which would include all productivity changes, material costs, that kind of thing. We look at it all in. That's what we do when we put together the information for today's quarters. We look at that total storyline and make sure that we're giving you any of the material movements. And that's why if you go back and look at FY '10, you'll see that we really focus on productivity, because at the end of the day, that's really what drove the majority of that, what I would put in, in quotes "inventory income".

Joseph Nadol - JP Morgan Chase & Co

I mean if I look at the LIFO reserve, it was up $75 million roughly I think, during the year. Now you had the non-P&L impact of Carlton and maybe a couple of the moving parts but are those apples and oranges? Or can you help me get from $75 million or say $65 million down to $20 million?

Shawn Hagel

Well, except there's the other components of inventory, they're moving at the same time. As you make adjustments to LIFO, you also have to look at your lower cost and market reserves. And those will flow through inventory as well, which will impact the P&L. You need to look at your adjustments that you're booking relative to your material variances in FIFO. There's a lot of pieces and because we've got so many different pools. I can't necessarily break it down into individual components for you. But we did try to at least quantify what we saw as being the net benefit that we got in the year, just to give you a little bit more clarity to it.

Joseph Nadol - JP Morgan Chase & Co

The way you're defining it, the way you're looking at it, what was the inventory income in Q1?

Shawn Hagel

We're still working on that. Because again, it's such a complex -- I can't give you an exact number but what I can tell you is that there was not a lot of change in the quarter. The productivity improvements are pretty flat, as you can see except for our Investment Cast products group, materials are relatively flat. So really, the storyline that we gave you which shows improvement going through Investment Cast, is really where you're going to see that what I would call inventory-income generated.

Mark Donegan

It will be negligible, but maybe if you could ask the question later on in the quarter, maybe I'll give you better -- a bit more clear line.

Joseph Nadol - JP Morgan Chase & Co

That might be helpful, just to really kind of hone in on what you guys see as important, and how we should be thinking about this. Second question just on the pipe, Mark, I thought you said it was $15 million to $20 million of EBIT's impact? Is that kind of a year-on-year if we take say $60 million of sales, it maybe 1/3 drop-down, you get to $20 million?

Mark Donegan

What that is, is that's kind of the delta between kind of a replacement value of general industrial against what we took out in the pipe, that's kind of...

Joseph Nadol - JP Morgan Chase & Co

So it's the net?

Mark Donegan

It's the net.

Joseph Nadol - JP Morgan Chase & Co

So as we step back and look at the storage margins, for a few quarters kind of got into the 24% to 26% range and now we're at...

Mark Donegan

What you had here is the opposite effect. You had the general industrial which again, has lower margins to it, falling off to nothing and pipe becoming a more significant piece. I kind of think a more reasonable nutshell was probably Q3 and Q4 was more of a proper-blended end rate. And I think on the front side of it, you had disproportion of pipe to general industrial and on this side, I think you get disproportion general industrial to pipes. Did you understand what I just said?

Joseph Nadol - JP Morgan Chase & Co

So the normalized margin, so to speak, is maybe somewhere between Q1 last year of 26%, and Q1 this year of 19%, as pipe normalizes in the second half of the year?

Mark Donegan

Yes.

Joseph Nadol - JP Morgan Chase & Co

You don't think this is a mid-20s business, it's more kind of like a low 20s? Maybe getting it towards mid in good quarters?

Mark Donegan

No. I think that's the baseline. It's kind of that low heading towards mid. But I don't think anybody is going to say we can't continue to move beyond that. I think again, we will hit various sweet spots based on market conditions and market demands and as the economy continues to heat up. I don't think in the long haul, looking through the next strong cycle, I'm not going to sit back and say that's the end. I think we've got to strive to get back to where we were. Because somewhere along the way the economics will get back to that point. But I think looking for two or three quarters, yes, I think your assumptions got some bullet. I think your probably thinking the right way, but I have no intentions of stopping because there are economics that come back that will drive that up over that. And making sure we get that is the key.

Joseph Nadol - JP Morgan Chase & Co

Chengde had a very good quarter, I think but higher than I thought it would be this quarter. And can you help us put into context where this can go? Because you really said several times in the press release and on the call that this is just the beginning. I mean help us understand maybe, you get half of economics, what kind of sales is this business capable of, what kind of margins?

Mark Donegan

If you start going out, I mean we've talked about this in the past. We walked away from a lot of business during the last talk time because we met the capacity. So the capacity of that plan is in the hundreds of millions of dollars. I mean it's a very well-capitalized modern asset. So again our key has been to get them qualified to what we recall Wyman-Gordon standards and sell the product. But this is the tip of the iceberg in terms of the capability of this. And we also -- the capability with that of the moving into other markets that we had to walk away from. So you're looking in the long haul three or four or five years from now of hundreds of millions of dollars of upside.

Joseph Nadol - JP Morgan Chase & Co

I understand and the margins their though, when you get up to that point, they're higher than the company average, I would imagine?

Mark Donegan

It did very well. When their poker [ph](55:19) product to the facility, they're very efficient. Again it's a very, very -- it's a great asset and if they were certainly closer, I'd run a tour through it. It's a phenomenal asset. But again, the key is kind of laying the groundwork. I think working hard to get them qualified and get their capability across a wider range of product, that's kind of our long-haul goal. So we have to keep diverting product that's destined for Wyman-Gordon. Now on the flip side, we're selling product today that we are planning on it being approved. So if you get any Q4, or Q1, we're selling that Wyman-Gordon chinese product, we're out there selling in the marketplace today.

Joseph Nadol - JP Morgan Chase & Co

I mean the backlog is coming back up, as you crank the seamless pipe back up, are you moving some of that work back to Houston? Or is that going to all accrue to Chengde?

Mark Donegan

No, we're good of blending it out. What we'll do is we'll turn this next two quarters, we'll keep giving Chengde a profile of work that will let them get qualified over a large number of sources. But as we start getting into next year, we need Chengde. We will not be able to handle kind of the demand without Chengde. We have to have them.

Operator

And we'll take our next question from Peter Arment with Gleacher & Company.

Peter Arment - Gleacher & Company, Inc.

The operating margin, so if we think about pipe, we know Houston is very strong but as we transition to the more volume to the China facility, is there any -- I mean will you view there's not going to be any gap in terms of learning curve or productivity as we -- particularly given that you're going to see maybe a smaller diameter pipe coming out of there?

Mark Donegan

No. Again, the currently small diameter, they have the assets to do the whole product offering. So if you kind of looked it, they would call the Phase 1 and a Phase 2. The Phase 1 was small diameter, up kind of eight to some teens. They just completed two months prior our partnership with them. It has completed an asset that will go up to 36-inch in diameter. So what we'll do is, we're kind of looking at the product and we're treating it as whoever can make more money on the product is who kind of move the work to. So we're trying to create this as a, what's the best place to put it now. If you look, there are certain sweet spots that Wyman has based on their way of converting into pipe. Certain alloys, certain qualities, you just can't officially get the same yields that you can out of Chengde. Other ones, it's more cost strait to go to Chengde. So I think we're trying to balance that out. But again if I look out next year, we need both assets to handle the volume potentials that are out there.

Peter Arment - Gleacher & Company, Inc.

You mentioned that the quoting activity continues to pick up and China and India are coming back. How about on the oil and gas, sort of the 9.5 diameter pipe that you guys have developed now?

Mark Donegan

There's actually two significant projects that we quoted on. And again that was a significant milestone because you got to remember, it's just not the pipe, it's all the connections and the valves and everything that the industry had to kind of rethink and redesign to get to the 9 and 5/8. So there is activity, that's where we are. There is great interest. It's just a matter of now getting those orders to kind of pull through.

Operator

And we'll go next to Howard Rubel with Jefferies & Company.

Howard Rubel - Jefferies & Company, Inc.

One way to think about it is it's just variances versus in terms of your inventory gains and that you would report at any point along the way. Is that fair?

Mark Donegan

Yes. It's a very clear, concise way of putting it together.

Howard Rubel - Jefferies & Company, Inc.

On headcount, Mark. it looks like given some of the needs in the business, where do you stand with that? And what are you doing in terms of training people for the upturn?

Mark Donegan

Well we're actually bringing some people in now, maybe prior to when we need them. What we've done by some of our key assets is we've identified what we think is the effective rate at which we can train. So it's by plant and it may be two a week, three a week, five a week depending on the plant. So what our goal would be through Q2 is to make sure we're going through that and bringing the people on board. So as we move into Q3, we have the capability and then certainly, during Q3 we got to be a little more aggressive to bring the people in, to be ready for Q4. But at the same time, we're also building in, so we're hiring at continued improved productivity gains. So we're not out there bringing kind of bringing in a static. But we have what we call manning model by plant that we look at future, it depends. It could be four to six months worth of load. We put the productivity in there and then we put the manning model we need, then we back away into it. So we are hiring, it's slow. So we're not out there hiring a lot. I don't know the exact number but I'll bet we brought back maybe a couple of hundred people, kind of 4,000.

Howard Rubel - Jefferies & Company, Inc.

When you talk about general industrial coming back, can you characterize what markets they are? And are there opportunities to grow your share or your position in those markets?

Mark Donegan

Yes. They typically tend to be chemical, oil & gas material product reprocessing, automotive, kind of on all fronts, we're seeing it. So yes, I would expect to see continuation as the economy there is more tied to the economy in total. Again, if you kind of go back to Q1 of fiscal year '10, the world was going to implode. So we just dried up, and I mean dried up completely. There was no distribution work, there was nothing. So I think what we're seeing is kind of a comparison against that. And then kind of a restocking but as the economy continues to move, we expect general industrial to keep -- I don't think we're going to grow 10% sequential quarter of a quarter of a quarter, but again, kind of what we said is that 2% to 3% is what we expect to come out of them.

Howard Rubel - Jefferies & Company, Inc.

And then last, you know about 20% of your total volume is non-U.S. and a chunk of it's in the UK. And we've seen a big FX swing. Should we also be a little cautioned or is there any caution we should worry about? Because some of your cost are in Sterling but some of you revenues were also that way. How should we think about that?

Shawn Hagel

The FX impact when you look at either sequentially or year-over-year was pretty flat, which is why we didn't call it out this quarter. So from a P&L perspective it really didn't have a lot of impact when you're comparing apples to apples. When we look at FX risks and swings that happen in the economy, what we do is we hedge any kinds of transactions that are outside of businesses functional currency. So if you got sales in Sterling and your doing purchases in Sterling, you're reporting in Sterling, we don't necessarily hedge those because they're going to translate directly with each other. But for example, if you're a Sterling-based business and you've got euro purchases we hedge so that they don't give an impact if the currencies come in as they shift, or if there's Sterling business that's buying in dollars. So that's the piece of the puzzle that we protect through hedging. But the actual translation, we don't protect it, it hasn't been a big impact this quarter.

Operator

And we'll take our next question from Sam Pearlstein with Wells Fargo.

Samuel Pearlstein - Wells Fargo Securities, LLC

Mark, can you just talk a little bit about the $5.5 million or so of equity income from Chengde? Is that somewhat higher because you were moving business in there to qualify them or is it lower? How should we think about what that line looks like on a going forward basis?

Mark Donegan

Well I think that there's two things. I think we are moving work into their, so they're getting some of the benefit. Having said that, I think they're also seeing a recovery and what they would consider their core which is the boiler market. Again, they've also had some nice wins, they're going to come through with the back half of the year. So I think it's probably a combination of both. Both their core market recovering in as moving some product over there. I think as we move forward, it's going to be a blend of both of those two. So their core markets will keep continuing and we're just going to keep uploading and putting work to them and we're also going to be going in their new markets for them too.

Samuel Pearlstein - Wells Fargo Securities, LLC

Should I think about it as this $5 million, $6 million range? Or is this the beginning and it's going to grow from here in terms of how we look at it.

Mark Donegan

It will grow. You're not going to see wild acceleration, but no, it has a long-term value creation for us and we should expect to see it continue to grow.

Samuel Pearlstein - Wells Fargo Securities, LLC

And then just on the revert, you had talked I guess throughout last year in terms of buying that in anticipation of needing it as the volume starts to grow. Would you say, if you look at the total inventory levels of revert, in this quarter versus last, is it still growing? Or are were starting to see that shrink? Or is it still flattish?

Mark Donegan

We're going the other way now. We're eating into it. And again, it's kind of ebb and flow. You'll find sweet spots where you can get it, and it all depends on what could be happening. But I would say Q4 to Q1, no. We do not increase our revert, and we do not stay flat. We went down.

Samuel Pearlstein - Wells Fargo Securities, LLC

And then on the SG&A, I know it's not a big number but it is up a couple of million dollars from the March quarter. Is it simply a function of sales or is all the leverage in the gross margin area? Can you see that number, get back to kind of the 5.5%, 5% of sales that you were doing back in '08 and '09?

Mark Donegan

I think that's a big driver behind. It really is kind of fact that we're up in the air more and the plane is going to China every four or five weeks and that would be number one, and the second piece would be deferred compensation based on the performance of kind of the market. As the market performs better we got to take more lack to the deferred comp.

Samuel Pearlstein - Wells Fargo Securities, LLC

The fact that you shut down some of the presses at Carlton in the last quarter or I guess the last calendar quarter of last year, does that make the impact somewhat less for the Carlton presses as you shut them down on with the rest of the company this year?

Mark Donegan

Yes.

Samuel Pearlstein - Wells Fargo Securities, LLC

Is it noticeable?

Mark Donegan

No. They're not big enough of doing less to overcome a Houston, Huntington, New Hardford. In terms of maintenance and capital they dwarf the craft and they dwarf Carlton. That's not just -- if you expect Carlton to pay, I know people listen to me. It's just the fact that a 50,000 ton press get a lot of maintenance on it. It's the bottom line, a 35,000 ton press. We're now looking at presses that are 6,000, 7,000, 8,000 tons. It's just the shared dynamic and economics of what it takes and how they tear themselves apart every single time they push.

Operator

And we'll go next to Eric Hugel with Stephens.

Eric Hugel - Stephens Inc.

On the Fastener business, you talked about offsetting some of the weakness with some non-core products. Is this stuff that as volumes recover and may be you'd come a little more capacity constrained that you wouldn't do? Or is this bet you have and you just build on top?

Mark Donegan

No we build on top. We won't give up. It's not, go out there picking up crumbs. That we're on an island or eating coconuts and then we got saved, we're going to eat stake. The reality of it is it's product that's always been on the horizon on our radar screen, and it's products we're out there working to get. It just so happened that as it came in, it is actually replacing some of these destocking of our core products but no, this is product we want. And it typically is going over another set of assets so again if I look at bolt and a nut, they're different assets. So what we find is we can't put a nut over bolt asset. So whether its machinery or depreciation or whatever it is, we're kind of carrying that without the same product mix. But we've always been going after this product. It just kind of came in. So to some degree the fact they are out there getting it, trying to grow the market and chasing, has been a benefit. But it's just not, typically, it's not a value like a complex bolt holding a wing together.

Eric Hugel - Stephens Inc.

In the past, in terms of the levers that you had to pull, when you bought SMC you talked about increasing the amount of metal that you would supply through to your forging operations. Can you talk about sort of where you are right now? Opportunities to sort of increase that? And do acquisitions like, let's say Carlton or Chengde sort of give you more opportunity there?

Mark Donegan

Well again, our typical planning horizon, we target 8% to 10%. As a general rule, all of our operations had 8% to 10% that we target them to go get. So that's the kind of the baseline entry point. Now what we hit is, we hit sweet spots once in a while with a Carlton or an SPS that we buy a business, and we can get better traction then. It tends to go up under the team's type of number. But we are not -- I am not satisfied at all. I'm going to leave here in 45 minutes and I'm going to get in a plane and fly us two hours, I'll guarantee that people I'm going go see, get clearly that they're not performing, they don't even want to perform. So we are not sitting in a situation that we're scratching our heads saying now, what do we do.

Eric Hugel - Stephens Inc.

No, Mark. I guess the question I'm sort of asking is if you look at the amount of material that let's say SMC supplies through to let's say Wyman or something like that. I mean you've always talked about wanting to get from nothing when you bought it up to maybe 60%, 70%, 80% range.

Mark Donegan

In terms of material, in terms of the Wyman-Gordon transaction, we're probably about 60%, 65%. In terms of Carlton, we're just starting down that venture. I don't think everybody kind of pick up on it. But we are now on the migration of moving probably 70% to 80% of Carlton's, which had been done the outside to the inside. As part of that transaction, we had to take all of the inventory that was on consignment from the other material supplier. We had to take that into our inventory in the quarter. But Carlton, were just days in the woods in terms of moving down that rope. So as we move over the next three or four quarters, we will transition from 15%, 20%, to 70% to 80%.

Eric Hugel - Stephens Inc.

Can you explain where Hackney Ladish, sort of the connection type fits into this whole sort of pipe, Chengde boiler pipe? Can you explain sort of where that fits in? Or does it?

Mark Donegan

What happened is when we buy Hackney Ladish, they are more of a carbon-steel type of operation support. You're really supporting the kind of the gas world. What we've been doing is qualifying them on the more complex high-chrome alloys, we called it the P91/P92s. They're kind of going through that. And we are now quoting and winning completed packages with that in it. So they've been evolving from a low commodity to a higher commodity special 3 alloy, we had to get them qualified. We're now probably 60% to 70% on the way there in terms of qualification. We'd probably have another 40% to go and our future packages, we're quoting that as a completed product.

Operator

And we'll take our next question from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc.

If I look at the past, I guess, maybe eight quarters, it's about three or four quarters of sequential revenue declines but margins getting better and then three or four of sequential revenue improvement but margins getting worse. If I hear everything you're saying correctly, does it imply that the biggest reason for that is simply mix?

Mark Donegan

Yes. And again, there's two. I think the castings you're seeing a line of sight to what do we do with our basic product growing and coming across a low cost structure. So I think that's what castings is. But if you look out forgings, yes. We've taken 5,000 changes that what general industrial do. And if you look at Fasteners, we've had to scramble and run like heck to recover our volume loss for the quarter with non-core. So yes, I don't like to use the word mix but that's certainly what, I think, that's pretty good assumption.

Noah Poponak - Goldman Sachs Group Inc.

And it sounds like this, the June quarter was probably the last quarter of seeing that phenomenon? Maybe the September margin looks a lot -- looks very similar to the June margin, and then in the back half, you start to finally get those?

Mark Donegan

Yes, I think that's a good way to look to it.

Noah Poponak - Goldman Sachs Group Inc.

And the core Fastener inventory that your customers have that you discussed, depending on your source, I guess we've heard that some of the distributors have more than a year. Sometimes close to two years of inventory depending on the product. Is that just inaccurate or does it wind down at a faster pace as the market recovers?

Mark Donegan

There's typically, if I look across our product offerings, I think the worse in terms of predictability is the Fastener side. And it kind of comes in waves. It will come at you faster and quicker than you ever thought and it comes at you on the flip side it disappears. So what would typically happen, we've been kind of in a year of these doldrums in terms of that world. That's what I'm saying, whether it's Q3 or Q4, it's coming. The way this is coming is that destocking goes away. I have heard numbers, we had heard a number of a year to year and a half, so we've been into it a year now. Again whether -- we've been into this for a good solid year in terms of this destocking.

Noah Poponak - Goldman Sachs Group Inc.

So the one to two year was your starting point? You're a year into it so you only got to see more quarters.

Mark Donegan

Right. And that's what I'm saying. If I look across our product offerings, the one that's still, I know it's there and I know when it come. It's going to come. I know like 77 products, we have a line of sight to that. You can see that getting late in Q4, Q1, Q2. What we don't have a line of sight the distributor and typically, will come at me, will start coming at me fast and hard, but that is the one I don't have a line of sight to.

Operator

Our next question comes from David Strauss with UBS.

David Strauss - UBS Investment Bank

With all these moving pieces on the aerospace side, just wanted to see if this was the right way to think about it. The Aerospace business looks like it was like 36 billion, 37 billion in revenues per year before everything started to happen. So call a 900 million of quarter before you acquire Carlton. Are those the levels that we kind of get back to late this year and then you start leering 8 7 and 4 7-8 on top of that? Is that the right way to think about it?

Mark Donegan

Yes, I think as you enter this year, yes. We should be kind of getting back in that range, yes.

David Strauss - UBS Investment Bank

On the pipe side, that looks like $125 million a quarter roughly. Are we going to go right back to those kind of levels Q3, Q4? Or is it going to take a little bit of time before we get back to those levels?

Mark Donegan

Towards the end of Q4, but certainly by Q1 you're kind of back into that range.

David Strauss - UBS Investment Bank

And then on the revert side, you said you started to eat into that a little bit, the inventory that you build up. How do you think that inventory, or the inventory that you have, how long can you run kind of it at the -- benefiting from the cost difference revert versus version that you've seen? I mean when does that benefit start to reverse on you potentially?

Mark Donegan

Well, it obviously doesn't reverse all the way to zero. It's a constant evolution, it's a constant kind of replenishing off it. What typically happens is when revert streams starts to dry up, we start to kind of pickup the volume impact. And again, when you talk about the leverage. You start getting the absorption level and all that kicking in. I don't think we ever get -- we don't go below 55% and we probably get as high on average of 75%. So I think we bounce and cycle in and around that. We can hit quarters based on the particular mix that a customer is wanting in terms of 718 or 706 or whatever it maybe. So they may come in and get a certain blend that we have to revert on the ground, and it will go back up to 80. And then we'll have another one, if the mix goes the other way. But I think it bounces between kind of the 55, 75 as it bounces back and forth between that.

David Strauss - UBS Investment Bank

And where are you right now, you think?

Mark Donegan

We're probably in the 65%, 68% range.

David Strauss - UBS Investment Bank

And does that come down at all? Where you were closer to 75?

Mark Donegan

If I go back to probably Q3, we're probably bumping up against at 75%.

Operator

That does conclude our question-and-answer session. On behalf of Precision Castparts, Mr. Donegan and PCP management, I would like to thank you for joining today's call. As a reminder, the webcast and call had 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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