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Precision Castparts (NYSE:PCP)

Q3 2011 Earnings Call

January 27, 2011 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

Kenneth Herbert - Wedbush Securities Inc.

Eric Hugel - Stephens Inc.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Joseph Nadol - JP Morgan Chase & Co

Ronald Epstein - BofA Merrill Lynch

Chris Denny

Robert Spingarn - Crédit Suisse AG

Richard Safran - Buckingham Research Group, Inc.

Jason Gursky - Citigroup Inc

Samuel Pearlstein - Wells Fargo Securities, LLC

Noah Poponak - Goldman Sachs Group Inc.

Myles Walton - Deutsche Bank AG

Rob Stallard - Banc of America Securities

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 third quarter earnings for fiscal 2011. [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 statements, and you need to take these consideration when you're analyzing the following presentation.

If I look at Q3 in general, I think it's another quarter we continue to claw our way back if we saw solid growth in a number of fronts but obviously, we'll get in the presentation, we still saw continuing weakness in a couple of our end markets. But in general, for the company, we saw sales growth of roughly 16% versus last year going from $1.36 billion last year to right just under $1.6 billion this year. We saw operating income increased by 9.2% going from roughly $354 million last year to roughly $387 million this year and we saw margins go up from 26% last year to 24.3% this year. And all of this drove EPS from $1.61 last year through $1.80 this year.

If I look at the significant drivers, first in the sales front versus last year, we did see very strong Aerospace growth, and our Cast and Forging increasing by roughly 20%. We saw some growth of roughly 5% in our Aero Fasteners. And again, this is driven more by our expanding market push versus growth in our core Fasteners.

IGT saw roughly a 10% increase versus last year. And this basically was in the Forging segment. And we continue to see solid general investor growth of roughly 30% versus last year. On the flipside, as we did in Q2, continue to see that comparison year-on-year, a drop on our seamless extruded pipe, showing significant decrease from last year of roughly 35%.

And then rounding out and comparing kind of an apples-to-apples, we saw a decrease in our contractual material pass-through of roughly $5 million and we saw a higher nickel selling price of roughly $27 million.

If I look sequentially, we did continue to see Aerospace growth of roughly 5%. I think we've now basically eliminated that disconnect we have from the de-stocking between our customer schedules and the build rates in that Casting and Forging world. So we're kind of in alignment now with where we should be.

We did see some small growth in our seamless pipe but again, this was off a very significant reduced space. And we saw a stable volume in IGT and our Fastener distribution sales also remained flat.

If I look at the key drivers on operating income, on year-on-year, we did see solid drop through on our Aerospace growth in both Cast and Forgings. But again, Forgings also continue to see their margin impact of replacing the lower pipe sales with strong general and industrial sales.

And to the same extent, we're seeing in the Fastener impact, we are replacing last year the distribution of the 787 sales that hit our numbers last year with general, industrial and that expanding Fastener Products, but again, we'll get into it as we look at the Fasteners.

If you look at the sales profile for the company, same trend we saw last quarter. Aerospace continues to make up a large piece of the puzzle, with a score of 57% of our sales versus 55% last year. In the flipside, power accounted for roughly 23% versus last year's 26%. And then general and industrial makes up a difference going from 19% last year to 20% this year.

Moving on to the segments now. Investment Cast Products saw sales growth compared to last year of 18.3% going from just under $455 million last year to roughly $538 million this year. And operating income increased by roughly 24.2% this year going from $137.5 million last year to $171 million this year. We got solid margin expansion going from 30.2% last year to 31.8% this year.

If I look at the key drivers in the Investment Cast segment, looking at sales year-on-year, certainly the main story line is a solid Aerospace growth. We saw a 30% increase versus last year. The two primary drivers on this on both fronts, we saw the OEM demand increased by roughly 35%. And again, I think in this Casting, we have finally close that gap on the disconnect we had between the schedules and the build rates and we did see a rebound in the aftermarket with the roughly a 25% increase versus last year.

On the flip side, we also saw basically flat sales in IGT and we did see pa small increase in contractual material pass-through versus last year of only $3 million.

If I look at the sales sequentially, on Aerospace, we did continue to see sequential growth. We saw a roughly 10% versus last quarter and IGT saw modest growth but as the story has kind of been all year, it moves around, this particular growth was seen by the growth in the aftermarket. And again, it kind of off setting the reduced OEM deliveries.

And IGT has been kind of all throughout this year, it's been a trade-off. Market share help offset kind of declined early in the year. Now we've got the aftermarket offsetting the OEM. It's basically to keep us relatively flat throughout the year.

Operationally, year-on-year primary drivers as you can imagine is the incremental leverage on the Aerospace sales. We saw a roughly a 40% drop. And I think it's important to note to that this point in time that in the Castings, it is really the only segment at this point that we are seeing comparable growth. So if I go back to where we were last year, it's the same products, just growing at a larger rate and kind of see the value of that when we get that growth coming in our core products and how we can drop that through.

We also continue to see solid performance improvements. It's an area we continue to attack. In this particular segment, that variable cost is a big piece of the puzzle. It's not material. We've seen solid productivity gains across our operations. We've seen a decreasing variable hourly rate and we continue to utilize in some of our operations, we've continued to grow Mexico substantially over the course of the last 12 months. So I think that we are -- given this growth, focused on continuing to attack that cost model and there are still a number of opportunities so that when we can face available to us moving forward.

If we look forward at Investment Cast, I think that if you look at the next 12 to 16 months, we certainly have some large catalysts that are out there in the horizon. Even though we are now matched up, I think as we move forward, we have to support the already announced increased bill rates on 777, 737 and the A320. And for us, a good timing is to take those announced bill rates and back up roughly four to six months. So if you kind of look at the announcements in back up, that's when we should expect to see that acceleration.

On the 787 story, you're going to kind of hear throughout this presentation, we have seen those schedules, pushed to the right, roughly four to six months across is kind of in correlation to the latest polling change, but you'll see later on this presentation that 787 is a significant catalyst in the Casting, Forging and Fasteners, and I'll go through that in a little bit later in detail.

Moving on to Forgings. Net sales saw a 20.7% increase versus last year going from roughly $587 million last year to $708 million this year. We saw operating income marginally increase versus last year by 4% going from $136.4 million last year to just under $142 million this year. And we saw operating income decreased from 23.2% last year to 20% this year.

Looking at the key drivers. On sales, first putting on an apples-to-apples comparison, we had a decline in our contractual material pass-through of roughly $9 million versus last year. And we had higher average nickel selling point price out of our primary mills of roughly $27 million. From there, basically the same effects in the Aerospace as we did in Castings, we saw that recovery from destocking grow by roughly 25%.

And in there, we also saw, extremely saw a growth from Carlton. And again, Carlton has really continued to perform very well. And going down in the integration path, we saw a 40% increase from Carlton. But counting as with Q2, we saw a major decline in our seamless pipe reduced by roughly 35% versus last year and we continue to see very strong growth versus last year. And again, it's coming off an extremely, extremely low baseline but we saw a 50% increase versus last year on general and industrial.

Sequentially, we had slight Aerospace growth so we saw a continued 2% growth. We did see some growth in our pipe but again, it's off a significantly reduced base at this point in time. We'll kind of talk about where we see that growth coming in the future.

We continue to see an increased level in general and industrial going by 5% sequentially. On the flip side, kind of out of a very strong base at this point in time.

Operationally, we had good contribution drop through from our Aerospace on growth and our turbine operations dropping through in that 35% to 38%. And again, we saw a double impact from Carlton in both volume increases and the continued integration synergies. And we are well on track to certainly meet or exceed kind of our synergies that we have laid out at the time we acquired Carlton.

And then on the flip side, applying downward pressure on the margin performance is a replacement of our higher-margin pipe in fiscal year '10 with the strong demand but a significantly lower margin in general and industrial. And again, as with Fasteners, this market in the general and industrial we are getting, it was market that we identified, we have to go with qualifications. At the time, it would have been additive but what it's doing right now is again, it's just making up for the shortfall at the pipe at this point in time.

Looking forward as with Castings, kind of in the next 12 to 16 months, I think we have a number of Aerospace catalysts. Again, the same, we have the announcement of the rate increase, about to support the 777, 737, A320. And the 787 even though it has the same short-term effect that slip to the right of four to six months does provides significant upside as it move into the production and into the rates. And again, I'll show you the value of this in these segments in a little bit.

And then in Forging, through this, we certainly have recovery over the calendar year '11 of our seamless pipe shipments, which we are, the orders are being led. It's just a matter of them getting into construction. And we have continued growth and opportunities in the general and industrial.

Moving into Fasteners. On sales, we saw a 6.6% increase going from just under $323 million last year to $344 million this year. We saw operating income decrease from just under $106 million last year to roughly $105 million this year and we saw margins decreased year-on-year from 32.8% last year to 30.5% this year.

If we look at the key drivers, on the sales front we've not seen -- even though we have a 5% growth, we're not seeing it from our core Fastener business. What we are seeing growth from is we are seeing some recovery in that biz jet and regional. But if I go back to a year ago, it was from really, zero delivery. But a lot of it is coming kind of from the market penetration, our Aerostructures business has been in operation that has grown steadily throughout the supplier time, the market share gains, they saw a 26% increase versus last year.

And again, we continue to expand our market presence in product families but we still have not seen any real strong change in our baseline. And we did continue to see growth in our remaining general and industrial. We saw a 15% growth kind of in the remaining biz we have in that general and industrial.

If I look sequentially, it's the same basic drivers that we saw year-on-year. And the only thing I would add to that is in the general and industrial, Q2 to Q3 were basically flat. Operationally, we saw the benefits in the drop through from the increase in the general and industrial volume but we had to offset in that Aerospace at base volume.

If I look back at and look at what that base volume was last year, we had strong demand in the 787 hardware. And both to the OEM and to the distribution network, and this has basically gone to zero. So if you kind of look at how to put reference around that core, what I consider that core hard works that complex highly engineered Fastening that goes on products like the 787, it's basically gone to zero. And again, we've replaced that with an expanding market beyond our sweet spot, and what I consider more non-core nuts and that type of product.

And again, these are markets we've been working to grow, market share and they're going to be additive and now, they're just kind of replacing out some of that volume that we are still waiting to come back.

If I move forward, still looking at that mid-calendar year '11 you'd see that those strong catalyst from both through the distribution. And again, that 787, the fact that we are at zero today as it does move, has a very significant impact in this particular business, both in terms of volume and in the products we manufacture.

So that kind of takes the segments. If I move on to the cash. I think we had an extremely strong cash quarter. We generated roughly $413 million during the quarter and that leaves us with an ending position of debt of $237 million and cash of $823 million.

And our, as we state this over and over again, our target is clear. It's to put that cash on the balance sheet, stay disciplined in our acquisition strategy but be very well-positioned to take advantage of the acquisitions as they continue to move forward.

So with that, I'm going to turn it over to Shawn for a one page and then I'll come back

Shawn Hagel

We want to give you a little snapshot of what our inventory did from last quarter to this quarter. As you can see from the slide, it was up just slightly about 1% going from $1,521,000,000. That's in conjunction with sales of about 5%. So we are holding our inventories relatively flat.

Raw materials started to work their way through as orders have realigned with build rates so you saw a slight decline there. The increase within finished goods is a function of the higher sales that we had during the quarter coupled with a certain builds in anticipation of the fresh outage in Houston, as well as some other repair and maintenance we did over the holiday. That will work itself out over this next quarter.

And the LIFO increase is just a small amount, $6 million. It is due to the result of the improved cost structures that you saw that came through both in the Investment Cast and Forged Products, as well as some of our metal position still giving us some slight value difference between current market rates. But overall, really, inventory stayed roughly flat quarter-over-quarter.

Mark Donegan

Okay. So to kind of look at it in summary, in Q3, I think we basically again, have closed the gap between the bill rates and the schedules in Forge and Casts. Fasteners, we saw no real change in our distribution demand on those base products and we did see some small increase in OEM schedules. We did see solid share gains from that Structural Airframe business and in the expanding product families, and we also in the Casting, did see recovery and improvement in the aftermarket. And we continue to have flat sales on IGT.

Again, we've made up on this particular quarter of kind of softer OEM schedules, countered by increasing aftermarket. And then as we have stated, in the seamless pipe, we saw that drop versus quarter-over-quarter.

And we saw a strong recovery in general and industrial, really off that miserable point. So if I look at the bottom, that Q2, Q3 last year was the bottom. But at general and industrial is recovering and does show some long-range opportunities and move through the next 12 months.

If I look forward, in Casting and Forging again, we now have tracked the bill rates as we move in the mid-calendar year, into the mid calendar year, '11 and early '12, left at ramp up to support the announced rate increases already again in the 777, 737 and A320.

And even though we've been delayed another four to six months that 787 is just a major catalyst for us. If I kind of look in the Casting and Forging world, what does it mean? You can kind of see the significance of the value of this program as we ramp up. If I look at today, we're probably in the range of one -- three quarters to one a month. If I look at moving forward to roughly a rate of four months, we'll see the value grows with that $35 million or $40 million per quarter. As we approach seven, that number grows to roughly $60 million, $65 million a quarter. And if you look at supporting a build rate of '10, you can see it puts through in the vicinity of $90 million a quarter.

So as you move into that '12 and then I'm going to ramp up the way the current projections are, it certainly has a significant catalyst. It's just now a matter of getting kind of those build rates to lock-in and move forward.

If I look at Fasteners, it continues to fall into two primary drivers, the recovery of the distribution set of our business in the core products. And then if I look at with Castings, kind of the impact of that 777, and again, this product is kind of that real sweet spot for our Fastener business.

If I look at where we are today, we're basically at zero. Like I said, if we go back to last year at this time, we had a decent rate run through our operations. So we've gone back down to zero. So on this particular case, if I look at moving to supporting to a month, for us, it's roughly $15 million to that $18 million per quarter in sales going to four month, it goes to $30 million to $35 million per quarter. And seven a month puts us in that $50 million to $55 million a quarter. And then if I go all the way to 10 a month, it's in that roughly $70 million, $75 million. So if you look at the combination of the two, you're looking at a very substantial rate of business on a program. And again, the fact that it's gone four to six months, it is what it is, but when it does come for us as these products are already developed, tools are in the shelf, capital is in place. So again, it continues to be the most significant growth driver we have kind of in the period.

If I look at Power, from the Forging standpoint, obviously, the key to recovery is in kind of recovery in our pipe tend to gain traction at the end of Q4 and accelerate through our fiscal year '12. And I think a longer range continues to be the key is to utilize that new capacity at Chengde, penetrate these growing markets in oil and gas and refining petrochemical.

Chengde is going to be an operation that will work, will qualify, we'll start building some product, we'll move it over. So it is a business, as we said it has a long-term horizon for us and opening up opportunities. But it will have a situations where we'll get some surges and then some easing, some surges and some easing as we continue to qualify and work on products like the 9 5/8 in that side.

And then in the Casting, certainly supporting the current aftermarket in IGT but longer-range kind of gets the power side of the castings is the re-emergence of the OEM demand on the IGT and that currently look somewhere in the calendar year '12.

And then general and industrial, I think it continue to get the benefit as the general economy grows. We will benefit along with continued market penetration.

So I think that in general, the 787 is kind of a push. It's a lost opportunity, but if I look at all the key drivers that we have, we are still positioned extremely solid. We are in the right programs, the ramp up in the aerospace is going to be a positive to us. Pipe coming back. So if I look over the next 12 to 16 months, I think we're positioned well. It's just a matter of again as I would say continuing to claw our way to those points when we get those catalysts. It actually does feel like clawing our way. So with that, I guess we'll pause and we'll open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Robert Stallard with Royal Bank of Canada.

Rob Stallard - Banc of America Securities

Can you kick it off on the -- maybe the sequential profile from me, you highlighted that there's still some top line headwinds in the third quarter, yet you're able to grow revenues roughly $80 million in this quarter. As things pick up from here, do you expect to be adding revenues quarter-to-quarter at a higher rate than what you did this quarter?

Mark Donegan

No, not necessarily. I think that when you get out certainly into where we are supporting those build rates on the announcement on the narrow-body and the 777, I think we'll get a pop there. I think as we get into the kind of that pipe roll coming back in the Q1, Q2, I think we'll start moving a little bit there. And now, obviously the 787. So I don't think you're going to be looking at kind of a straight line. Again, I would categorized it as last quarter even though to you, it may look like, "Oh, it was a nice pop." To me, again, I use the word claw. It certainly came with a lot of drive and effort. I think as I look out when you start getting the rates like the narrow-bodies in that going and 787, I think it becomes a lot more like supporting versus kind of the effort right now. So I mean if I go back to kind of last quarter at this time, certainly, we would've hoped to be kind of supporting some of that 787 volume would've been really nice popping in. That is just something we have to deal. We have to deal for that four to six months slip. But I think that when you get out further into again, like I say that Q1, Q2, Q3 you start to see a flow of true demand coming in from the narrow-body, the 787 going in, the pipe, some of those distribution. So that's kind of like categorize it. I think it does have a movement of acceleration and has some movement that's tougher to come by.

Rob Stallard - Banc of America Securities

And is the fourth quarter is still expected to be one of your better quarters across the year, because you usually have like some seasonal challenges in the Q2 and Q3?

Mark Donegan

Yes, this Q3 was a little different than that. We actually picked up in the quarter -- we have an extra week, so the holidays didn't hit us as hard though it was probably a more comparable quarter. We do pick up a couple more days in Q4 than Q3 but Q3 wasn't as hollow as it was in previous times.

Rob Stallard - Banc of America Securities

You got like roughly $0.5 billion of cash in the balance sheet here. Looking at the deployments and the M&A, has anything has changed necessarily there, are you seeing multiples moving too high? You're not seeing as many opportunities that you like?

Mark Donegan

You know what it is and kind of the way I would categorize it is there is -- usually the things we're looking at somehow the 787 and the narrow-bodies kind of come into play obviously as you can all imagine. So kind of the flux of where is the 787 and when it's going to go, tends to create one side and saying, "I'll wait a little bit." And for us, it's saying, "Well, there's risks there." So it's kind of finding that point where either there is more stability in that or there gets more flex. It's kind of meeting those two points in the middle. And I think that it will come. It's just a matter of this gap that is narrowing is still there and it's just being patient. I think for us the key is to -- I mean our acquisition strategy, as you well know, Rob, is very disciplined. We adhere to it rigidly. I don't want to find myself saying, "What's $50 million?" $50 million is $50 million. If I look at our operations and what I owe them to be disciplined because $50 million for them is a ton of work. I have to make sure that we adhere to that and I think we're pretty good at that. So they are there, we know what they are, we know what the right assets are. Nobody is saying no, we're not saying no. It's just a matter of finding the right point.

Rob Stallard - Banc of America Securities

You're not feeling anymore inclined to start, say, a share buyback program and all that?

Mark Donegan

Not as long as we have got the assets. I mean if I could get all the assets, I'd be out borrowing money. So it's not as I'm saying, "Okay, I can see these things that make sense and I still have this extra cash. I think then your comment would be valid." The fact that I see that if I can suck up all these cash and need to go borrow, tells me that I still want to keep putting on my balance sheet. And so either they go away or we lose them or we keep accelerating the cash at some point in time in the future. But right now, if I could wave my magic wand, I could deploy every bit of cash plus more.

Operator

Moving on, We'll go to J.B. Groh with D.A. Davidson.

Chris Denny

This is actually Chris Denny in for J.B. Can you guys talk about the seamless pipe backlog? What's that number at right now?

Mark Donegan

Actually, looking -- I would say the backlog itself is in the $0.5 billion type of range right now.

Chris Denny

So you've kind of seeing a gradual increase on...

Mark Donegan

Yes, again, we're seeing a couple things. We're seeing the projects we're bidding on coming in a longer range so we're winning, the awards are coming out. But if I kind of go back to the glory days of pipe, that backlog was kind of getting loaded into everything is overdue, we need it all right now. And again, we're struggling to get it out. What we're seeing now is a more thoughtful process, longer lead times so the backlog is in there. And it is growing, it's just a matter of the projects coming due and shipping.

Chris Denny

And what market do you guys have seen strength in general and industrial markets? It's been a while since you kind of been highlighting that market?

Mark Donegan

Again, it's kind of that petrochemical, the oil and gas, kind of the whole spectrum of auto. We are seeing auto pick up, medical is picking up. So it's not one particular. I'd say, it's kind of the blend of the world is just slowly getting better. And again, it's kind of coming off a time where the world was going to implode. So I think it's probably half of it is that the world isn't going to implode and the other half is that it's actually going to get a little bit better. But it's pretty equally spread across our general and industrial categories.

Operator

And now we'll go to Peter Arment with Gleacher and Company.

Peter Arment - Gleacher & Company, Inc.

Just following on back up on the seamless pipe question, that backlog number is all kind of interconnect pipe, right, that you're quoting for down in Houston or is it you rolling in Chengde...

Mark Donegan

No. That would be our -- our backlog for us is our interconnected Houston pipe.

Peter Arment - Gleacher & Company, Inc.

And so how is Chengde right now? I mean the -- below the line contribution this quarter was a little slower, but it sounds like there was some pause. Maybe you could give me a little color on that?

Mark Donegan

Sure. Chengde, again, I'm going to try to give you some more color. The next conference, I'm going to kind of say, what are we trying to do with that business. But Chengde is a long-term play. It was basically a boiler pipe manufacturer in China, that with Chengde want to grow into all sorts of new markets. So the lower end of interconnected pipe. Chengde is going to have more ups and downs. As we qualify, bring on new equipment, we may go into a time we're using the 9 5/8. It's been a hell of a lot of time this last quarter kind of working the production capabilities in the 9 5/8 pipe. So you won't see necessarily a straight-line quarter-over-quarter or sequentially. You may see some strong quarters. Some weak quarters. We have some new equipment we're bringing onboard, as we bring that on. We'll take some pauses. So it's got all different averages, but again, the long term goal of Chengde is to -- between the combination of Chengde, Wyman and again, our Livingston operation, so Houston, Scotland and Chengde is to go after roughly the $1 billion of other high-end seamless pipe that we had to completely walk away from, because our sole focus prior to Chengde was interconnected. And I'm going to kind of go through those I think in February, is the next time we're out there, is kind of what those markets are with the sizes. But it will have some strong and some pullback, again, as we qualify and work at new products and moving through and start shipping different products.

Richard Safran - Buckingham Research Group, Inc.

But it sounds like you're actually bookings some of the larger 9 5/8 opportunity is getting much closer?

Mark Donegan

Yes, I would agree with that.

Peter Arment - Gleacher & Company, Inc.

And then just last quarter I think you give us some color that you're currently negotiations are kind of working your longer-term contracts with the engine OEMs. Where does that stand out?

Mark Donegan

I would say that in general, we are either have or very close to kind of renewing all of our and extending all of our engine contracts. So they've all gone well as they go. But for the most part, they've all gone. We're in place. We've extended. We continue to gain opportunities in those deals. So I'd say that we're either through or in the final throes of kind of completing all those.

Peter Arment - Gleacher & Company, Inc.

On then just lastly on Carlton, you've kind of given us some targets previously on the synergies or the gains that you're seeing there and you indicated they had some really nice growth. How are things, where do things stand on the synergies front there?

Mark Donegan

Better. Carlton, that team has done as good as any acquisition we've done in terms of incorporating, moving, grabbing and growing. Carlton is doing very, very well for us and if I look at their position on some of those programs of 787 and certainly the programs that those narrow-bodies are growing. Those are very strong positions for Carlton. So as they grow, it helps us compared to where we were before because they get very strong positions, so we get the growth plus we get Carlton thrown in too.

Peter Arment - Gleacher & Company, Inc.

And market share opportunities for them also?

Mark Donegan

Yes. They've actually done pretty well in market share. We've kind of set a target out for them. And it’s a different mentality, you know, the mentality of the previous ownership was certainly not as aggressive as we would want to be. So I think again, the team has accepted it and we're doing pretty good on the opportunities as they come up.

Operator

Moving on, we'll now go to Goldman Sachs’, Noah Poponak.

Noah Poponak - Goldman Sachs Group Inc.

In an effort to understand or better project the margins going forward. We can see that Investment Cast has kind of getting the 40% incremental. You would expect Forged and Fasteners are not, and at Forged, it seems like because pipe is higher margin and the Fastener is as you discussed, the higher engineered stuff sliding out. Should we start to -- we can just model the 40% continuing at Investment Cast in '12? And should we start to just comfortably do the same in the other two segments as pipe and 78 come back? And maybe if you could even kind of peg of what you think the right longer-term margins are in Forged and Fastener just because they're fairly different than where they have sort of gotten themselves to eight or nine quarters ago?

Mark Donegan

I'll to answer those somehow sequentially, how is that? What I would say is I think Investment Cast is going to see the same type of product moving. There's not any real shifts in product mix so I think you can take Investment Cast and say they're going to kind of move in a logical manner as sales continue to grow. So you can take kind of a catalyst of those some of the announced rate increases and back them out four to six months and then you'll kind of put that growth in the 787 for the growth in for that one. So I think that one was a clean line of sight. If you move into Forge, there's a couple piece of the puzzle. I actually looked at this yesterday. If you go back to '09, we had a kind of a similar mix in terms of general and industrial and pipe, but pipe was a much higher level. The margins were more reasonable in there, in that roughly at 21, 22. Then we hit '10, where general and industrial fell on it’s face. And we're shipping a disproportionate amount of pipe and you could see where the margins pop back up. Then we came in to, now, when the pipe fell off, we shipped disproportion. So I think that '10 was disproportion of pipe. I think now is a disproportion of general and industrial. I think kind of that reasonable baseline to start from when we get the basic blend is that 21.5 type of number and then from there, you can start saying, we'll go through. Fasteners, what I would say in Fasteners is until we get that 787 work and that distribution, we are going to kind of grow and feel the way we're feeling right now. We need to get that core back, that complex, highly engineered Fasteners. So what I would say is it's going to kind of go along the way it is now. And then as the distribution comes back I think it will be right to expect a pop and the 787 comes in, I think you have a right get a pop to that one. So hopefully I covered, the bulk of what you asked.

Noah Poponak - Goldman Sachs Group Inc.

And as a follow-up in the Fastener business on the distributor side, your biggest customer there at an Investor Day that I think was now a couple months ago, specifically answered a question about when they start ordering faster than they're selling by saying, if you're looking for good news for PCP, you'll get it soon. And then in your press release and in your prepared remarks, you just discussed seeing minimal attraction there. Where is that disconnect? And could this be something that surprised you earlier?

Mark Donegan

I think that sooner is all relative. If you kind of look at the horizon of what either an OEM is doing or what a distributor is doing, they're looking at over kind of the year. And as long as it's on the horizon I think they will tell you soon. I think Boeing will tell you the same thing. I think if you sat with kind of buying out Boeing they will say, "Oh, yes, it's coming." And they would say soon. And again, the reason why I don’t say soon is raw material lead times are extending. If I go back to last year, our lead times and raw material was probably 12. We are now moseying up to the 20s. So the time to kick off is approaching. So when they say soon, it's when they have to give us the order. It doesn't necessarily mean that's when we get the ship. But yes, all of them will say get ready, it's coming, and we're sitting there with our catcher's mask, our glove, in the kneeling position waiting and nobody has taken the field yet.

Operator

And now, we'll hear from Bank of America's Ron Epstein.

Ronald Epstein - BofA Merrill Lynch

With the push out of 787, what are the things you've talked about in the past just how you're going to manage labor as you got 787 going up and then the 73 going up? Potentially you have a lot of end markets ramping at the same time. Any more recent thoughts on how you're going to handle that? Because that's one point of risk you pointed out in the past?

Mark Donegan

I think it's a good point. It is a point of risk and it's a point of risk we're going back to our customers right now and saying, "Hey, listen. We're kind of on that razor edge right now." And over time is where we're kind of leading our overtime move up a little bit. If I go back to where we were a year ago, we're probably in that eight to 10. We're probably now on average in that 14 to 16. So what we're making sure they know is a clean line of sight is here's manning I have, here's the capabilities I got. You better make darn sure you give me the schedules because if you don't, I think where we're going back and saying is I'm not just going to go on a free for all and hire people. We've shown that, that's a recipe that does not work. So I think kind of in this quarter, we're going to have to do a lot of work with our customers as to what this Q1 and Q2 and kind of Q3 and how do we balance that out. So that's kind of what we're trying to do. And it's a push on a shove, because our customers would love nothing more than to say, "wait, and then okay, grow now we want it all in 12 weeks." So we just kind of work and bouncing up but right now what we're doing is we're holding off and we're just -- let our overtime run higher.

Ronald Epstein - BofA Merrill Lynch

When you do your quarter reviews and maybe the last time you just did, where are the biggest opportunities in the company so kind of as we think about modeling the company...

Ronald Epstein - BofA Merrill Lynch

I'll tell you what, Ron. They are endless. I can take, if I think of the last week, I'd cover probably one of our best performing plants and I covered one that is certainly where we are consider tons of opportunity. It's going to be in productivity. It's going to be in scrap and rework. I'd say our material utilization, it's pretty solid right now. I think we're just continuing -- I think we've been able to continue longer with higher revert blends than I thought we're going to be able to. So we are continuing to find ways of extracting that so staying adhering on that. But there is not a single operation that will tell you they don’t have further opportunities. What we typically do is if you think of a plant and it has 26 departments and each department gets a P&L. And in that P&L, there are maybe 15 line items. What the general, what the overall does is say, "Okay, what's the blend of all that?" What we try to do to extract where's the value is we only add up the negative. So it says the positives should've been plus. The negatives are ones we still left coming and that helps the plans focus on where is our opportunity? And it's always going to be in variable, materials, utilities. It's going to fall under those particular categories but there is a plant that doesn't have opportunity today. Let me put this thing, nobody has all positives in every single line item, not even remotely closed.

Ronald Epstein - BofA Merrill Lynch

I guess my question is the ones that has a little more negative, where you might see a little more less over time as they improve?

Mark Donegan

No. No, I don't think there is. I think we have plants that are not performing where we want them to. So I'd say there is probably four or five plants that have got decent upside and so where they should be at this point in time. And they're pretty substantial. If I look at some of them, you get plants that leave what I call leaving in the table $1 million to $1.5 million, so it's not small from where they thought they'd be.

Operator

Kenneth Herbert with Wedbush is next.

Kenneth Herbert - Wedbush Securities Inc.

First question, I just was specifically on IGT, I mean you talked about aftermarket there doing well but the recovery on the OE side seems to be pushed out. Now I think you mentioned calendar 2012. Can you just talk about over the next sort of three to four quarters, how much stronger you think the aftermarket can get there? And when, what should we be looking for on the original equipment side with an IGT when that turn might start to pick up and what kind of strength do you see there?

Mark Donegan

I think that from the OEM side, we don't really see any growth whatsoever throughout this entire calendar year. And you're probably looking at sometime mid '12 before we see any real change today to that OEM model. Now what typically happens in IGT is when it starts, it tends to go pretty quickly because it tends to be capacity that utility can bring on in a very short period of time and it comes fast. But today, I would say, mid '12 on the OEMs schedules. On the aftermarket, right now I would tell you it comes and goes. This quarter, we saw a very solid pop. We'll probably hold flat at that level and then we may see another one. A lot depends on how they are running, how are they surging, the cold in the East is a good thing. The heat in the summer is a good thing that kind of goes -- fills that. So the aftermarket is a surge and a hold and a surge and a hold. So I'd say we saw a good pop, we'll probably go through couple quarters holding it then, and then maybe another pop.

Kenneth Herbert - Wedbush Securities Inc.

And if I remember well, on the original equipment side, the OE side, your deliveries are pretty much in line now with shipments. I mean through the de-stocking that you saw over the last year, correct?

Mark Donegan

On the Aerospace side?

Kenneth Herbert - Wedbush Securities Inc.

No, within IGT.

Mark Donegan

Yes. Without a doubt IGT now, the de-stocking from the European side is gone. We are at and supporting the current rates. So correct, all of the de-stocking really across the entire customer base is now gone.

Kenneth Herbert - Wedbush Securities Inc.

And then into the Aerospace side, just a question on the aftermarket. I mean it looks like we've heard about some really good surge in activity there and I'd imagine you're modeling or expecting that business to be a little more consistent with everything we are seeing. What kind of growth do you think is sustainable there and do you see any risk that a few quarters out once we've crossed through maybe this initial sort of spike because we've addressed about a deferred maintenance that growth might slow there? Or is it something that, okay, things are really moving now and there's no need to expect anything to change?

Mark Donegan

Well, I don't think we'll see a 25% -- that will eventually start to close so what I would say is that you kind of take this baseline and it will probably follow an increase in rate. But I think you start seeing 2%, 3%, 4% sequentially, in that aftermarket piece is probably a reasonable number, giving kind of today's world. And again, I think when you get into the end of '11 and beginning of '12, you start picking up kind of the OEM build schedules. So that's about where I look at it.

Kenneth Herbert - Wedbush Securities Inc.

And then finally within the Aerospace on the aftermarket side, is there any specific pockets of strength or anything you point to? Or is it across-the-board, geographically and obviously with customer-engine type?

Mark Donegan

No, it's not one particular area and obviously, it's got to be tied to the big programs. So the 737, 320, so you're looking at the 2500 it's all take off and landing related. So as long as planes keep going up and coming down, that's going to keep driving that aftermarket. I think there's reasons as the airlines get healthy, they're probably more comfortable increasing those spare parts and I think the engine guys can probably give you a lot more articulate. We go through the engine guys, but it's just kind of the overall health and take off and landing but the health of the airlines comes into play too.

Operator

And now, we'll hear from Rob Spingarn with Credit Suisse.

Robert Spingarn - Crédit Suisse AG

Factor the IGT OE side, Mark, all of the power generator manufacturer reported book-to-bills nicely above 1.0 in this latest quarter. So it's like the first time in two years, could this ramp come sooner?

Mark Donegan

It typically does. I would say that unlike the Aerospace industry where a Boeing or an Airbus will announce two years out, we're going to increase the rates. The IGT, when it comes, and it says, I'm winning these orders and I need them. So we have less clean line of sight at the rate up or down on the IGT than we do in the Aerospace side of our business. Today, with what I know, it feels like '12 could have come in. Yes, again, it typically when it does come, it comes sooner but that's what we know today, from what the orders we have on us.

Robert Spingarn - Crédit Suisse AG

Can you frame the peak and trough in your IGT OE for us, the rough dollar amounts?

Mark Donegan

I could but what I would rather do is if you're okay, I'd rather have you call Dwight. We'll get them for you. I don't want to give you a flip number on peak to trough off the top of my head. I mean we can get it, yes we know just if you call Dwight later on today or he'll call you. We'll provide that information. I just don't have it off the top of my head.

Robert Spingarn - Crédit Suisse AG

And then question for Shawn, how do you hedge the fixed-price contracts?

Shawn Hagel

With regard to metal or?

Robert Spingarn - Crédit Suisse AG

Yes, with regard to metal.

Shawn Hagel

If it's a fixed-price contract what we do is we do buy forward with regard to the metal requirements on that. And so once we negotiate the contract, we lock in metal deliveries that lineup with it. The fixed-price contracts are fairly modest amount of the total that we have though. They generally are within our Fastener business where metal is a really small component of the overall cost.

Robert Spingarn - Crédit Suisse AG

So the majority of the big metal contracts are pass-through?

Shawn Hagel

Correct.

Mark Donegan

They are either pass-through, there's pricing effect.

Robert Spingarn - Crédit Suisse AG

And so one other question, back to you Mark.

Mark Donegan

The only thing I would add to that too is a typical conversation we have with our customers, if they want or if they're trying to get us to go to a fixed-price, what we'll say is, "okay, you give me the volume, I'll go buy the material. If you're short, you're going to pay spot. If you're over, you're going to have to do something with the material you told me to order." And that's typically what leads us back to okay, let's go more to a pass-through, that type of conversation. So to Shawn's point, if we have a big metal, I can't think of something that on the large metal usage business that we've accepted a fixed-price contract. I just can't think of one.

Robert Spingarn - Crédit Suisse AG

There's just not a lot of risk here.

Mark Donegan

No.

Robert Spingarn - Crédit Suisse AG

Just to go back to the IGT question I asked you earlier, if you do get a surge in OE demand or frankly an aftermarket or anywhere else, do you think the margins can kick off on a strong basis? Or is that going to take you a little time to get efficient?

Mark Donegan

Again, it all depends on what I think we can handle a surge. What I tell people typically I think we can handle surge of 8% to 10%. We can handle because we'll do with over time and those types of things. If you want to surge more than that, we'll become less efficient. And again, I think when I say less efficient, you're hovering around that 30 drop is what I would -- 25 or 30 I consider less efficient and then more efficient obviously goes 35 to 40.

Robert Spingarn - Crédit Suisse AG

And last thing is high-level question. You've always been a market share taker in general in your businesses. But are there some areas where there's some share erosion either because competitors are getting more aggressive or these are non-core areas maybe that you'll pick up the focus on?

Mark Donegan

I actually need to think about that. I would say that in our Aerospace I really can't think of anything where we -- to date are losing share. Most of the contracts we've negotiated, we are gaining share. I don't want to say none. I'm sure that somewhere along the way on the lower end, we look at some pricing model and say, "Okay, somebody could have it. We're not going to chase that. "I looked at one the other day that our metal costs was a number and somebody out there quoting below the metal costs and these are product that we've been making for years. So okay, they can have it. I'm not going to chase that type of situation. But as a general overall strategic contractual, no. Typically, we're holding or gaining. And then if I go into the non-contract, I think we're doing really well in that general and industrial world. I think we're growing fairly well. So I want to say never, no. I mean I'm sure there are those situations. But overall, directionally, no, we've continued to gain as we've done these contracts.

Operator

Moving on, we'll now hear from Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co

Chengde, what was the meaning or the practical implications I guess of the bump up to 50% ownership?

Mark Donegan

Well, again I think that the goal has always been to at least make sure we're on an equal footing. So at this point in time, we are. I mean as you can well imagine, we typically are not partners. So at least making sure 50 for us was a desired point we wanted to get to. So I mean for us, it was something of value. Do I think...

Joseph Nadol - JP Morgan Chase & Co

The accounting is going to be the same?

Mark Donegan

Yes, it is. And that may change over time, but for now, the accounting stays the same. Again, I think Chengde is a great business, the good people, the good management but I think strategically, there's a tremendous amount of upside and opportunity that we want to make sure we can get together. So I think for us, that 50-50 allows us to make sure that we're equal. And I think that's an important thing.

Joseph Nadol - JP Morgan Chase & Co

If the management of the plant is going to be the same or has that changed effectively?

Mark Donegan

No, it's been the same. I mean the two key players are the Chairman, who's the Founder and was running the company. And then we have somebody that's worked for Precision for five or six years, who was running with our Chinese operations moving in so. I think that the management is the combination of the Chairman and our person Bob Penn, and that's a relationship that will move over time. But Bob is kind of the PCC guy and I think it's balancing out. Bob with the Chairman looking forward is what we needed to do.

Joseph Nadol - JP Morgan Chase & Co

Can you share -- since the earnings bump around and was down this quarter and you've explained why. Mark, can share roughly what the sales are up to now at the Chengde level so we can think about how to model this and what the earnings might be?

Mark Donegan

Again, that's not what I'd like to do. I'd like to take some time and think about that one if you could get back with Dwight or me later on, I'm going to have to kind of go through that with you.

Joseph Nadol - JP Morgan Chase & Co

And on the pipe, you said backlog, the Houston pipe, backlog is up to about $0.5 billion...

Mark Donegan

That's the U.S. So that's the Houston Livingston which is always what it's been.

Joseph Nadol - JP Morgan Chase & Co

But how much of that is China versus India at this point and where were those various markets going? Are you putting...

Mark Donegan

I don't know the exact number but I will guess that probably today, 70% is coming out of India and 30%, 25% is coming out of China. It's a very disproportionate right now to India.

Kenneth Herbert - Wedbush Securities Inc.

Is some of that because you're just putting more the Chinese volume through Chengde? Or is market related?

Mark Donegan

No, I'd like to go back to where we were two or three years ago, China was not going to keep running at the rate it was running and India was identified. So we had to qualify with India. I think that China is down from where we thought it was going to be but I think India -- so I think we probably would've told you a year and a half ago, it was going to be 60 China, 40 India. And now, because China is down, it's that 40's kind of the equivalent of 70 type of number.

Joseph Nadol - JP Morgan Chase & Co

The Ladish deal, any thoughts on implications for PCC?

Mark Donegan

No. I mean Ladish has been out there as a competitor and I don't see any real change from our standpoint. I mean we supply a tremendous array of products across every possible material type and have got a very extensive footprint. So this is a business in one segment that it's there and we will aggressively attack and grow market share where we have.

Joseph Nadol - JP Morgan Chase & Co

So it seems like you guys made the decision a few years ago to vertically integrate and go kind of upstream to -- for alloy. And now, it seems like the alloy guys are going downstream for product and the trend that you think is going to continue or?

Mark Donegan

We went for a different reason. I mean for us, being a significant component supplier, having control of our cost stream was very important to us and will continue to be very important to us. But our primary goal is being a component supplier. So designs, tolerances, process control, being able to take all of our know-how across Casts and Forgings and Fasteners and attack that cost model on any number of fronts is how we want our Component business. One of the element of our Component business is getting material supply. So for us, it was taking our core competency which is making opponents, making highly engineered, crossing that technology across the businesses we bought has been our strategy. And oh, by the way, we would like to get control of our metal stream because the metal guys at the time were taking full advantage of us. So that was the reason. I think it's -- from my vantage point, it's easier to make that move than it is to go say, I'm now going to make material and I'm going to go make components. I mean making components has its own and being fully integrated up and down the stream I can tell you that making components is a much tougher task than it is making alloy.

Operator

And now, we'll hear from Cai Von Rumohr with Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC

Back to the subject of the 14-week quarter, I mean you had a couple vacation days but it was a 13-week quarter in the prior quarter. So kind of on paper, it looks like you had 3% more days. And you talk about the fourth quarter having more days but you have one less week. So how should we think about this on sales per day? Or how do you think about it? Help us understand.

Mark Donegan

We have roughly two more days because even though with an extra week we still pick up five days of vacation time. So yes, I do think of it more of a sales per day type of model.

Cai Von Rumohr - Cowen and Company, LLC

So you have two extra working days in the fourth quarter versus the third, about?

Shawn Hagel

It varies but yes.

Mark Donegan

One to two, it varies. But we have one to two more, yes.

Cai Von Rumohr - Cowen and Company, LLC

Even with a 14-week quarter?

Mark Donegan

Yes, because again, we have Thanksgiving, we had Christmas, we had New Years, all fell into that quarter.

Cai Von Rumohr - Cowen and Company, LLC

And how many more days did the third quarter which had 14 weeks have compared to the second quarter, which was...

Mark Donegan

Now you're getting all sorts of other metrics that we shut the Forging presses down for two weeks. We have European vacations for two weeks. That's a fairly convoluted. I'd have to start going actually by plant to give you the answer.

Cai Von Rumohr - Cowen and Company, LLC

At CRS on the recent call indicated they are starting to sell titanium wire for Fasteners to you and others. So are you buying this, because you are seeing a pickup in some of the existing planes or is this in anticipation of the 87 bill?

Mark Donegan

No. That wire, as you would refer to goes into any number of products. Certainly, there is more of a content of titanium Fasteners which is what the wire kind of goes into in 787. But no, we currently buy from Carpenter on titanium coil, I would refer to it as coil, for today's products. And yes, when the 787 does come and play, we will buy more without a doubt.

Operator

And now, we'll hear from Myles Walton with Deutsche Bank.

Myles Walton - Deutsche Bank AG

Just a quick question for you on the revert blend, you commented, Mark, that you are pleasantly surprised at staying longer, higher through hard work. I'm just curious, was it working against you on an incremental margin basis in Forgings in the quarter? And then if not, do you anticipate it to on a go-forward basis or will you continue to be pleasantly surprised?

Mark Donegan

No, I think that what I would strive now is to hold on to what we've gotten because that's kind of our model is when you get it, you don't give up. So I think that our upside opportunity is less. But I don't think at this point in time we necessarily have to give. So what I would say is what we've gotten, we'll cling onto. And no, when I say I'm pleasantly surprised, is usually when you start picking up schedules, your blends just go down to some degree. We were able to hold our blends high because we're scouring the world harder and I think it gets back to Caledonia. Caledonia gives us more opportunity than we had during the last time the cycle so I think I may have to readjust my brain as we go in these cycles as to what it looks like.

Myles Walton - Deutsche Bank AG

And then just a quick one on energy, it looks like there is maybe 10% sequential growth there and IDC sounds like it was maybe up a little on aftermarket but flat OE. What was the sequential growth, and that sequentially up 10%, what's the sequential growth of seamless pipe?

Mark Donegan

It was probably in the high-single-ish type of digits but again, it's kind of far from a pretty low baseline but it was the highest singles.

Operator

Sam Pearlstein with Wells Fargo is next.

Samuel Pearlstein - Wells Fargo Securities, LLC

Just wanted to follow-up on a question just in terms of -- you talked about some of these trends and I think about Q3 to Q4 earlier in the year, you talked about a heavier second half of the year. If I just look other than a pickup in some of the pipe towards the end of the fourth quarter, is there any reason why the fourth quarter should look much different than this third quarter?

Mark Donegan

No, I think it's pretty reasonable assumption.

Samuel Pearlstein - Wells Fargo Securities, LLC

And then in terms of the Fastener pickup mid-year, the calendar year, are you talking about just 787 pick up or is that across all?

Mark Donegan

No. The distribution network was obviously well overstocked. So if you kind of go across the big guys, they are still eating up a lot of that stock. So it would be them ordering to support once they kind of get their inventories worked down coming back and then to that, you'd also get the pop for 787. So we're looking for two catalysts in the course of this year. The base ordering of the distributors that have been de-stocking and the 787.

Samuel Pearlstein - Wells Fargo Securities, LLC

Just for Shawn, just looking at where the tax rate is here down, I guess low 33% range, is there any reason why we should see that shift as we go into the fourth quarter and into next year?

Shawn Hagel

No, I don't think so. I mean we did get some benefits with some of the tax legislation that was passed right at the end of the year but it shouldn't move the rate too much at all going forward.

Operator

And now, we'll hear from Steve Levenson with Stifel, Nicolaus.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Just a question on IGTs, do you think the enforcement of the Clean Air Act could pull in some of the activity on the OE side?

Mark Donegan

Natural gas is obviously besides kind of the power -- of the wind and the solar tends to be the cleanest line of sight. I would hope, again, if you ask GE, Simmons and Austin people I think they'd probably give you a better line of sight. But it's quick, it's clean, it's becoming much more efficient. So yes, I would hope it is an avenue. What I actually had talked to one of the power guys, he came and saw me here and he was saying as they look to de-commissioning some of the coal that they are, it will be a blend of natural gas, wind and type of things. So yes, I would hope somewhere in the way, it would give us some pop.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

And on the Aero side, could you contrast a little bit what the demand picture looks like between airframe and jet engine now and where do you think you'll be maybe two quarters from now?

Mark Donegan

Well, on the Aerospace side, we will always be weighted heavily towards the engine. If you kind of look at the Casting, Forging world, the bulk of what we supply is inside the engine shaft, disks, blades. So we'll always be weighted heavily towards that. In the airframe side, you're really coming down to the landing gear. And then on the 787, we do pick up some team or frames and that type of thing, but we're always going to be disproportionate to the engine. On the Fastener side, we're always going to be disproportionate to the airframe. I don't know the exact number but I'd say, probably 85% of our Aerospace Fasteners is airplane related and if I look at the Forging, Casting side, we're probably 90% engine.

Stephen Levenson - Stifel, Nicolaus & Co., Inc.

Has there been lag in jet engine orders relative to airframe up to now? Did you think the...

Mark Donegan

Well, yes, there was. There was a huge de-stocking. So if you kind of go through that massive downturn, we took through the end of '09 or all of '10, it was the engine guys just leaning out the build that we've had put in place that didn't occur. So if you go back to ‘08, we were building probably 15%. Anticipation going into nine growth rates, and the growth rates didn't happen and so we have to pull it all that out, really in the end of '09 and '10. So yes, there was a significant disconnect. That's kind of what we talked about this quarter we match back up for first time where our shipment rates and the build rates matchup.

Operator

And now, we'll hear from Eric Hugel with Stephens.

Eric Hugel - Stephens Inc.

Mark, you talked earlier about long-term contracts with the engine OEMs being sort of renewed towards the end of renegotiations. Is the sort of the timing of sort of how they roll on sort of concentrated? And is the impact meaningful enough that we could see some notable margin degradation as a result? How should we think about that?

Mark Donegan

No. You know again, we -- there's a not been any structural change. We weren't -- if you go back over the last five, six years, we weren't getting price on those long term Aerospace contracts. We were giving up deflation. We were getting material protection, we were gaining share. So as I look at all these contracts rolling forward, they feel, taste and smell pretty much the same.

Eric Hugel - Stephens Inc.

With regards to the seamless pipe, so you're talking about right at the end of Q4. So probably not much there, but can you may be give us some sort of order of magnitude maybe as you get into the fourth quarter of the year sort of where are we going from and to so that we can sort of in terms of dollars of incremental pipe being shipped?

Mark Donegan

I think your statement is right for this quarter. If you start getting into the kind of the Q1 time frame, you're probably getting into that high single -- mid- to high single digits and then as you accelerate towards the back half of the calendar year, you'll probably get into the double digits.

Eric Hugel - Stephens Inc.

In terms of growth off the base?

Mark Donegan

Yes.

Eric Hugel - Stephens Inc.

And I guess lastly, you talked about in terms of the Fastener distributor sort of coming in midyear based on their schedules but I mean I guess their schedules are their schedules. Maybe can sort of game for us maybe on the scale of one to 10 or how we want to do it, but how much confidence do you actually have in those schedules?

Mark Donegan

The one thing they've been pretty consistent. I think the thing that kind of has everybody a little up-and-down is the position on the 787 is going to be key when it finally goes. The whole distribution and OEMs is going to have to man up in terms of product offering and that. But I'd say that for the other side of the business, they've been pretty consistent as the way they haven't kind of moved up so we'll see because it hasn’t happened yet, but they've been pretty consistent with that.

Operator

Moving next to Jason Gursky with Citi.

Jason Gursky - Citigroup Inc

On the energy side, you mentioned that the OE pickup is going to come. Can you give us a little bit of sense of how long it might last?

Mark Donegan

Typically on the energy side, it's a three-year runs. And again, you hate to use the word typical because every cycle tends to be a little bit different. But we are usually three up, one flat, one and half to two down and that's typically what the cycle looks like.

Jason Gursky - Citigroup Inc

And then on the aftermarket side, I think utilization rates of gas facilities have continued to inch up. You have made a comment earlier that historically, the aftermarket pops and then levels off and maybe steps back up again. I'm just wondering if the trend might be a little bit more stable this time in light of the fact that the utilization rates of the gas facilities are kind of moving up and to the right?

Mark Donegan

And I would say that would bode well for us. Again, I think the GE's, and the Simmons in that could give you better understanding but a lot of intensity dynamic is the power requirements and the price of natural gas so I think that as long as the price of natural gas stays stable and down to some degree, I think they will go up and that does bode well for us. If natural gas goes to the time were it spikes like it did three or four years ago, they typically shut them down and we see it go back the other way. So I think it's all intertwined around that.

Jason Gursky - Citigroup Inc

Could you just handicap the risk to the timing and the magnitude of the ramp on the seamless pipe?

Mark Donegan

No, I don't think -- I think it's there, the orders are there. They're coming from India. So I don't think that there is risk. It's just that it's probably, again, they're placing the orders with a longer lead times. So it's not coming to us as quick as we like and they don't want any sooner, so as far as maybe pulling it in. But no, I think that the orders right now are pretty -- I mean they're solid orders.

Operator

Your last question comes from David Strauss with UBS.

David Strauss - UBS Investment Bank

Did you seem to imply at Forge that we can get back when pipe comes back then we can get back to these kind of 30% to 40% incremental margins, was that inclusive of potentially having nickel prices much higher? And maybe talk about pass-through didn't really pick up at all this quarter and LIFO was actually up, when do higher nickel prices kind of impact those two things?

Mark Donegan

Well, when I talk incrementals, I think I'd have to give you a line of sight too. So it's the material is passed through. So I would have to say that yes, when we start getting back to the more reasonable mix, I think that the mid-30s is a good number and then we'd have to provide for you any dilution that comes from the higher nickel price. We just would tell you, hey, there's a dilution from higher nickel prices. So again, it wouldn't be in effect in terms of operating costs because they are pass-through from that standpoint but we would have to give you a line of sight. So yes, I think when the next comes back I think it's a fair statement to make. And then I look for you for the other question.

Shawn Hagel

I wasn't quite sure, can you repeat the part about LIFO again?

David Strauss - UBS Investment Bank

Yes, so given the pick up in nickel prices, I would've thought that we would see a move down on LIFO rather than a move up?

Shawn Hagel

Right, and we are seeing that in some of our operations that are more price and effects where the nickel prices are rolling through right now. But we continue to have some metal delivery contracts and those are keeping the overall costs a little bit disproportionate to current prices because of the deliveries on those and that's driving the difference, that's why you're not seeing it move the other way.

Mark Donegan

If you look at our engine contracts, there's going to be a four to six month lag before the all-in blended rate equals more of what it is today. So I guess that we'd be seeing that as we get four to six months out is when you'd see that blended rate. But we typically in that Aerospace world, we have got six to nine months that we've laid in three months, three months, three months at a time. So you're looking at a blended rate of probably the last nine months.

David Strauss - UBS Investment Bank

So it's fair to think that half through should pick up as we go out to the next quarter or two pass-through should pick up and LIFO will...

Mark Donegan

Yes. I think it starts seeing in Q1, Q2 is when it will probably catch-up to today's market prices.

Shawn Hagel

That's dependent on what it does in the next couple of months.

Mark Donegan

Right and then on the flip side, if it goes up higher, we're still going to be lagging, if it comes down we'll be kind of pass through that higher until we blend out there.

David Strauss - UBS Investment Bank

We keep going back and forth on when the Aerospace is going 787 is going to come through and all that. But is it fair to think about -- I kind of asked something similar to this in the past but is it fair to think about that the business used to be $3.5 billion, $3.6 billion. And you now got Carlton on top of that, and you got between 787 and the rate increases on 37 and A320 and 787 coming through that the business, could be the Aerospace could grow to be a $5 billion business appear over the next couple of years?

Mark Donegan

Yes, I think if you look down the road certainly you are in that 4.5 or higher, yes. Given what we know today, a build rate of 8 to 10, to 787, the narrow-body has gone through. All the announcements that they have said in '13, I think that's a fair assessment in Carlton, sure.

Operator

That concludes 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 has been recorded and will be available on Precision Castparts website at www.precast.com for approximately 30 days. This concludes today's meeting.

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