Precision Castparts Corp. F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

Precision Castparts Corp. (PCP)
F2Q08 Earnings Call
October 23, 2007, 10:00 AM ET

Executives

Mark Donegan - Chairman and CEO

Analysts

Rob Stallard - Banc of America Securities
Howard Rubel - Jefferies and Company
Rob Spingarn - Credit Suisse
Joe Nadol - JP Morgan
Gary Liebowitz - Wachovia Securities
Ron Epstein - Merrill Lynch
J.B. Groh - D.A. Davidson
Cai von Rumohr - Cowen and Company
Peter Arment - AmTech
Noah Weisberger - Goldman Sachs
Eric Hugel - Stephens Inc.
David Strauss - UBS
Anthony Rizzuto - Bear Sterns

Presentation


Operator

Please standby we are about to begin. Good morning and welcome to Precision Castparts Webcast and Conference Call to discuss its Second Quarter Earning for fiscal 2008. As a reminder, this event is being recorded and will be available on Precision Castparts website at www.precast.com, shortly after the conclusion of the presentation and discussion. After remarks by members of PCP management, the dial-in access lines 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 - Chairman and Chief Executive Officer

Good morning. Thank you all for listening in and let's begin. I am sure you are all familiar with the forward-looking statements and you need to take into consideration when you are analyzing the following information.

You can look at Q2, again one of the primary stories has been the overall growth. Continue to see solid demand from our end markets, the sales growing by 31% year-over-year from $1.3 billion last year to $1.73 billion this year. Continue to see good improvement in our operating income growing by 58.6%. We saw year-on-year margins expand from 17.6% last year to 21.4% this year. All that generating EPS growth of 62% from last year going from 103%... excuse me, $1.3 to $1.67 this year. I think overall it was a solid quarter, but we still may have a lot more to build on moving forward.

Looking into segment performance beginning with investment cash products, again primary driver there is sales growth by growing greater than 25%, year-on-year going $441 million last year to $553 million this year with some margins improved by 34.3% and operating going with.... operating income, excuse me, going from $97 million last year to $130 million this year. Some margins expand from 22% last year to 23.6% this year. Look at the primary drivers, as you would expect continue to see extremely strong demand on the aerospace side and that's again from both OEM and aftermarket. Also in the quarter, we saw very strong development demand on the 787 from both of the engine manufacturers and their partners. On a 787 to-date we've seen no significant pushups or changes in our schedules at all.

And we are again trying to get a clear understanding from our customers, but we are not seeing any changes at this point of time. This program looking on the future will be an extremely solid contributor to us. Basically with the market shares we want across all of our businesses. So, 787 will be a very important program to us moving forward. As we saw last quarter, we continue to see very strong demand on the IGT side and know the schedules are going through the second half of this year and carrying in the next year. Two primary drivers are we're seeing extremely strong increase in our requirements and our base business. We've also had some significant wins in some more non-traditional customer, so we continue to expand our customer base. In order to support this, we will be adding capacity... additional capacity in both our aero and our IGT facilities. We'll be adding an additional four airfoil furnaces over the next six months. And We'll also be constructing a new facility for the IGT outside of Mentor, Ohio to handle the future demand. So again, I think that it was a good quarter for Investment Cast, but we certainly have a lot of opportunity moving forward.

Forged Products saw a significant year-on-year growth increasing by 38.5% going from $573 million last year to just under $794 million this year. This operating income grow by 86% from $92.5 million last year to $172 million this year, and we saw margin expand from $16.1 last year to $21.7 this year. Key drivers, again as you would expect is what the casting, the strong aerospace volumes have been a significant contributor. We are also seeing good growth on our non-aerospace markets. We've had good solid wins over the course of the last six months in non-traditional markets for us. We've got some major project wins in our tubing operations to support the China gas wells. We are seeing some significant demand from the gold cast, as I was little surprised to continue to grow, it certainly plays. And some of the sweet spots of special metals. And we've been able to open up a customer that we have not really been able to be a good supplier to in the past, Eaton, which is supplying valve bar.

I think the key reason we maybe successful, if I look at the capital products capital products we have put in over the course of last year certainly in special metal side, it's enabled us to get a cost structure, we have been able to get before. So we have been able to take the cost structure and come back in the marketplace and be competitive, where we couldn't have been competitive. Seamless extruded pipe continues to see extremely strong demand. Our backlog is now up $500 million and we see no signs of this demand easing at all at this point time. We also did have in the quarter two non-recurring event in the forging operations. We had a six-week plan outage of our 50,000 ton press. This was planned major maintenance work, and again this is versus our two weeks. So we did bring basically all of our forging operations now for two week. But we had our 50,000 ton press down for six weeks. Basically, it resulted in a lower, throughput absorption in our largest press, and we did experience some inefficiencies during the week strike in Houston. The combination of both of these was in the range of $6 million impact on forging operating income.

Moving on to fasteners, again I think we continue to see very solid growth growing by 25.3% year-on-year going from $303 million last year to $318 million this year. We saw good improvements in the operating income growing by 47% from 62.3 last year and 91.5% this year. And we saw again good margin improvement year-over-year growing from 20.5% last year to 24.1% this year. Primary drivers behind the fasteners story is the aerospace growth, where we saw a 43% increase year-over-year. Again we are seeing this on all fronts, the OEM and the aftermarket. And we've been able to capitalize very effectively on the market share as the opportunities have come up. I think it is important to note that since the acquisition we have been able to grow our aerospace business by 2X.

I think there's still good opportunities both short-term and long-term for the fastener business. And we expect to capitalize on those as they continue to come up. And we are making sure that in the fastener side that we have the strategic capital put in place to support the market share we are winning. So unlike the casting or forging, where we are basically looking at large major piece of capital equipment. The fasteners is the business that we can strategically put in pieces in a fairly short order to support the increasing demand.

Moving onto the cash. We are basically generated $168 million of cash from operations during the quarter. And what this allowed us to do, it allowed us to basically pay for Caledonian alloys from cash generated in the quarter. Looking ahead, again it's kind of the same story we've been seeing. We see very, very, very solid demand in our two primary end markets being aerospace and the power. And as I said in the forging piece, we are continuing to see good opportunities in the non-aero nickel sale. We are continuing to see good opportunities in the faster side, both current needs from the 787 and also as the contracts continue to come up in the fastener, we would expect to continue to gain in our market share.

And IGT at this point of time is showing growth certainly throughout the next two years at a very aggressive rate. So being able to capitalize that is very important to us. And the forgings continue to show us opportunities on all sides. We will be making additional capital investments to support their growing market demand. We are looking at roughly that IGT business will be in the $30 million range for a new plan and the four additional airfoils furnaces will be in a $4 million range, and again this is for all product that is under contract today. So again we look forward and see tremendous demand on our operations. We stay keenly focused on driving the leverage to the bottom line, and that is something that we don't intend to let up on one iota.

And again, I think it's important to note that in Q3, we will have on average five less manufacturing days in Q3 due to holidays and the various shutdowns. I think we continue to stay positioned extremely well in terms of our cash position and our debt to being able to capitalize on the acquisition opportunities as they come up. And it's a relentless attack every day to make sure that we capitalize and continue to drive every opportunity that we can through the business through the bottom line.

So with that, I'll open it up to questions.

Question And Answer

Operator

The phone lines will now be open for questions. [Operator Instructions]. We'll take our first question from Robert Stallard with Banc of America.

Rob Stallard - Banc of America Securities

Hi guys.

Mark Donegan - Chairman and Chief Executive Officer

Hey Rob.

Rob Stallard - Banc of America Securities

Just a couple of quick ones for you. Mark, first of all in Q3 in the past, you've seen an issue with titanium, costs of sales adjustment. Do you expect to see that again this year?

Mark Donegan - Chairman and Chief Executive Officer

We don't see any significant ahead at this point of time Rob, materials has been... had leveled out over the course for last four or five or six months; and looking forward, it's not making a lot of movements. So we don't expect to see that real big strike we've gotten in the past.

Rob Stallard - Banc of America Securities

Okay. Flipping to raw material pricing as well, you have a big... I think it was $88 million of cost through this quarter. How are you expecting to see that progress over the rest of this year?

Mark Donegan - Chairman and Chief Executive Officer

It will start to come down if you think of the way we bring material in, it's overlaid. So we basically would have... the old pricing prepared to time and it will blend its way out and move down. So, I would expect as we move through Q4 end of the beginning and next year that that material pass through will actually start coming down year-over-year.

Rob Stallard - Banc of America Securities

Okay. And just moving over to the M&A side, I was wondering if you could give us an update on your latest plans there. Can we expect to see the tuck in deals are all, is that the realistic opportunity for a major deal within the next, say, three or four months?

Mark Donegan - Chairman and Chief Executive Officer

Well. Again kind of what we talked about in the past is that, I think that we are very active in looking at tuck-ins. Again what a tuck-in to us means is, changing in the past of tuck-in besides seeing a business that rolled under one of our operations. It was typically $100 to $300 million in sales. A tuck-in now could go north of $1 billion, but again it would still be defined as a business that fits squarely underneath one of our existing operations. Again, I would be disappointed if in the next six to eight months, we weren't active in the tuck-in world.

Rob Stallard - Banc of America Securities

What about this... what you call a game change in the past? Do you think that's a real estate opportunity out there?

Mark Donegan - Chairman and Chief Executive Officer

Yes, they are. I mean, certainly businesses that I think the combination makes a lot of sense, but again finding the right time and how we can execute a transaction is kind of what we stay disciplined to. I think just doing a transaction, but the sake of doing the transaction is not a good thing for our shareholders, but I do think there are businesses that make good sense for us and good sense for our customers.

Rob Stallard - Banc of America Securities

Is it pricing that's the biggest issue you are seeing over?

Mark Donegan - Chairman and Chief Executive Officer

It's not so much now pricing; I think it's... it could be more of what the expectations are moving forward, where they feel they are in the cycle, when they think the time is right, it's more of that. Pricing is, in my opinion certainly the expectations have become more reasonable over the course of last five or six months. So just finding the right time that it makes sense for the businesses.

Rob Stallard - Banc of America Securities

That's great, Thanks very much.

Mark Donegan - Chairman and Chief Executive Officer

Okay Rob.

Operator

Next is Howard Rubel with Jefferies and Company.

Howard Rubel - Jefferies and Company

Thank you very much. Couple of things, Mark; first, could you... you talked about IGT doing very well; could you give us a sense of what that means, is it 20% growth?

Mark Donegan - Chairman and Chief Executive Officer

Well. If I kind of look year-over-year, yes, it's in that 20% growth range.

Howard Rubel - Jefferies and Company

And as you look forward, what do you think happening that's causing it to be fairly sustainable?

Mark Donegan - Chairman and Chief Executive Officer

Well. Right now again, it's kind of similar to what was going on the aerospace. It's coming from non-U.S. markets at this point of time. It's coming from the Middle East, it's coming from China, it's coming from India. So, there is a very real need for these parts of the world to put in power requirement to support their infrastructure. The North American if we kind of look out and think about the way this is, at least the way it feels to me, we are going to see growth for the next year and next two years of the non-North American and then, the North American market probably starts laying in over that. If I kind of look at what our customers is saying, they need, they are now laying plans out to 2010 and 2011, was growing demand, but again it's being driven today by non-North America, and then North America would kind of overlay at that point in time.

Howard Rubel - Jefferies and Company

Two more things, one is outside of that; you highlighted even are there some other... are there other target customers as you are looking for... I mean I am not asking for names, but you sort of said in general if you look at your incremental sales growth, is there a... I'd describe it as a target audience...

Mark Donegan - Chairman and Chief Executive Officer

Yes, there is... it's more of the type of product, and traditionally special metals really is not at a process to go after rounds. They have been enable to provide large... fill it, but getting down to various round shapes going down from anywhere to 2-inches, 2, 4, 6, 8 type of inches, they've not been competitive. If you look at the capital, we have put in place over the course of the last 60 months, it's kind of bending attack that end of the market and there are other... tubing is another area. So if you look basically rounds and tubing, anywhere with that would apply is kind of what we are going after.

Howard Rubel - Jefferies and Company

And in terms of market size, this is multi-billion, I would guess.

Mark Donegan - Chairman and Chief Executive Officer

Yes, globally, it's certainly very, very large number. But there is hundreds of millions of dollars that is available.

Howard Rubel - Jefferies and Company

And then finally, I wouldn't do this without disappointing Dwight, but just to talk about LIFO accounting for a moment.

Mark Donegan - Chairman and Chief Executive Officer

Ask by the way, Howard.

Howard Rubel - Jefferies and Company

Pardon, what?

Mark Donegan - Chairman and Chief Executive Officer

Dwight is the wrong one to ask on LIFO accounting, but go ahead.

Howard Rubel - Jefferies and Company

Well. I have been bothering him on this a little bit and I know that you are going... with the lower prices going forward, you will see some benefit of lower nickel and lower tie show up in the numbers. How are you making sure that you can capture that benefit and that also maybe share a little bit with the customer?

Mark Donegan - Chairman and Chief Executive Officer

Well. What I... let me kind of break that. I am going to answer the last one you asked last time. With our customer, we have two or three things; certainly we have pricing structures that are locked in for a period of time, and in that is a material formula, so as material does come down, where our customers were certainly helping us on the way up. They will get a benefit on the way down. The way it comes in though it will not come through as one razor edged event. It's a blend, if you kind of look at what we do with our customers, we overlaid requirements with them that would buy X amount, probably a 100% hedge for six months, and 50% hedge for nine months, and 25% for a year and so on, so it's kind of a blend. You will see it evolve over the course of next 12 months as material comes down. Now on the flip side, the way, the bulk of our formulas work, where there is lag on the way up, there is also a lag on the way down. So, where we were absorbing on the way up, because we're looking back. So the average period of time was always lower than the actual we were paying. On this side, the average is going to be a little higher than what we are actually paying. So it's kind of a blend all the way down.

Howard Rubel - Jefferies and Company

So, We'll get some EPS benefit in the next couple of quarters?

Mark Donegan - Chairman and Chief Executive Officer

Yes. Really, please think about it, again materials moved down really the last two or three months. We were probably six months hedged strong. So you're probably looking more in the Q1 and the Q4, Q1, Q2 timeframe.

Howard Rubel - Jefferies and Company

Thank you very much.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

Robert Spingarn with Credit Suisse.

Rob Spingarn - Credit Suisse

Good morning. Mark, could you talk perhaps a little bit. You mentioned your markets share doubled on the fastener side. Could you give us an update of what... how we should quantify that? What's your share on critical fasteners?

Mark Donegan - Chairman and Chief Executive Officer

Well, it's probably approaching the 30s.

Rob Spingarn - Credit Suisse

Okay. And then with regard to the 787, maybe a little bit more detail on what your opportunity could be there. It sounds like you've got the capacity and the expertise to get a little bit more involved, perhaps help the shortage situation?

Mark Donegan - Chairman and Chief Executive Officer

Yes. What we are trying to do Rob is from our standpoint, we want to make sure we're there for whatever, Boeing or the partners would need, so we are in very, very, very close contact, making sure we know what they need. And our position is to kind of do what we need to do to support the customer. So I think that there is a short-term opportunity for us of being able to respond effectively, quickly, and support Boeing with what they need. And certainly we would like to then roll out into it a longer-term position. But there is certainly short-term need of which our obligation as a supplier to make sure we deliver, but we see more certainly 787 process is a viewed opportunity versus anything else at this point in time.

Rob Spingarn - Credit Suisse

I think you said in the past that your 787... and between fasteners and airframe and engine all together is maybe about 5 million per aircraft.

Mark Donegan - Chairman and Chief Executive Officer

It depends on what the engine manufactures is. Rolls Royce has their own single crystal facility. So that brings it down, but on an average we are roughly $5 million.

Rob Spingarn - Credit Suisse

Okay. And how do your contracts work on that from a cash prospective. The number of the suppliers at least pre-certification, they book sales, but not cash until the aircraft delivered to the end customer. How did that work for precision?

Mark Donegan - Chairman and Chief Executive Officer

We have no revenue sharing deals. Everything is for us is business is normal; so as we deliver, we get paid for the product.

Rob Spingarn - Credit Suisse

As long as that product line keeps moving?

Mark Donegan - Chairman and Chief Executive Officer

As long as the product keeps them in demand, we'll keep getting paid.

Rob Spingarn - Credit Suisse

Okay that's fantastic. Thanks very much.

Mark Donegan - Chairman and Chief Executive Officer

No problem.

Operator

Joe Nadol with JP Morgan. Your line is open.

Mark Donegan - Chairman and Chief Executive Officer

Hi Joe.

Joe Nadol - JP Morgan

Hi good morning. Mark, first of all, I guess back on IGT. You give us some numbers. Anymore you could give us maybe in terms of the backlog growth, how big you expect the sales to be overall next year. And you talked about your view of the aerospace cycle before. It's just the tip of the iceberg, or is it going be a shorter cycle?

Mark Donegan - Chairman and Chief Executive Officer

Well. What we're going up come up again, Joe is the demand is going in a short-haul is going to exceed what our capacity is. We are not going to be able to supply for the next 12ish type of months, everything that our customer wants. And so you get our new facilities built. Again what we're seeing from our customers and kind of the way we look at capital is we would need a longer-term horizon than a year or something like that. We're seeing a demand today that is going out into the 10 to 11 timeframe with growth. And it' s averaging out probably in the teens during that period of time. Now again, there's a couple of things that are driving that. The base units are off, but also what the customer is wanting tends to be a much higher value product for us. That value translates into obviously more costs, which is more machine time, more casting time. So we probably wouldn't need the number of furnaces. We are going to need, if we were to back five years and they were doing the more simple machines or the less technical driven machines. The fact that we have... everything is coming in with the DS, the single crystal in it, right now, is putting tremendous load on our furnaces. And again as a result, our value, our value, our account that we building the engines, we've got of lot of dollar content for engine.

Joe Nadol - JP Morgan

Okay. Secondly on the nickel side, you already told us what basically the impact on your core forged business. I am wondering if... what impact you might, you think you might see as special metals in the fastener business. Is there any other impact with nickel down massively the last few months?

Mark Donegan - Chairman and Chief Executive Officer

The biggest one is always going to be on the forging side and special metals what I would expect to see moving forward is we will be putting continue put through more poundage. But we could find ourselves that the sales... rate will not be growing at what the poundage will be. Now don't make money on that pass through. So you would expect to see the same type of effect that you see in forging, the margin will continue to go up type of thing.

Joe Nadol - JP Morgan

Okay.

Mark Donegan - Chairman and Chief Executive Officer

On the fasteners side, you get more of a blend, it's nickel, and titanium, and steel, and it's certainly not to the degree, the material content fasteners is probably is 18% to 22% versus forging anywhere between 60% and 80%. So it's just doesn't rise to the magnitude of anything that would kind of be called out at this point in time.

Joe Nadol - JP Morgan

: It might help a little bit.

Mark Donegan - Chairman and Chief Executive Officer

Yes, it will help. I think whenever material comes down, it's going to help you a little bit. We are in the materials business, it's going up, it's hurting us; when it's going down, it will help us.

Joe Nadol - JP Morgan

Okay. And then finally over on Caledonian, you have that now for a few months, and you were planning on doing some things with the business once you acquired in terms of spreading around maybe some new facilities; just wondering what you've done there so far, and what you've found in the few months since you've owned it?

Mark Donegan - Chairman and Chief Executive Officer

Yes, what we have been able to find is that we've had them to everyone of our operation. So we've already taken all of our revert streams, and we are now controlling them basically 100%. More in the past, they were leaking everywhere. What Caledonian has done is they put in a system that has enabled us to move, revert from spot-to-spot; and what I mean by that they capture all the revert, and then everybody puts in a need, if they haven't revert also. So they have ability to match a need in a particular operation or plant with the stream coming from either an internal PCC or beyond the open market finding it. We are now looking at putting in a couple additional locations that will be able to consolidate; one in North East, one in the kind of South that will be able to get all the material and bring it back in. What we have seen to-date is it's been everything we expected to be in terms of given us a lower cost material into our operations.

Joe Nadol - JP Morgan

Okay, thank you Mark.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

Next we'll go to Gary Liebowitz with Wachovia Securities.

Mark Donegan - Chairman and Chief Executive Officer

Hi Gary.

Gary Liebowitz - Wachovia Securities

Mark for the $25 million to $35 million capital invested in your plant for IGT airfoils, do you have the sense what that could yield on incremental revenue base there?

Mark Donegan - Chairman and Chief Executive Officer

Yes, when it's at its full capacity, it's about $65 million.

Gary Liebowitz - Wachovia Securities

Okay, thanks. And also do you have an organic growth number for the quarter?

Mark Donegan - Chairman and Chief Executive Officer

We do not.

Gary Liebowitz - Wachovia Securities

And I might have missed it, but did you give the pass through for the... for the Investment Cast segment?

Mark Donegan - Chairman and Chief Executive Officer

I don't think we did, Investment Cast pass through, no. It was... year-over-year. One second,

Unidentified Company Representative

22 compared to about 11

Mark Donegan - Chairman and Chief Executive Officer

It's about 10 or 11 incremental.

: Gary Liebowitz: Okay, thanks. Also you mentioned that the extruded pipe backlog continues to grow, I presume you are still down to that product for at least maybe a year and a half or two years. At what point do you consider incremental capital investments in that area?

Mark Donegan - Chairman and Chief Executive Officer

We probably wouldn't. The problem is the incremental would be an entire new complex, which should be in hundreds of million of dollars. When we do have the opportunity to do what we are doing is we have the ability to outsource the non-forging, so we can outsource the back end of it, which would be grinding, pulling the inside of the pipe, putting the ends on properly. We also have the ability to ship, what we call, black pipe, which is unfinished and have partners, we have a range of it to set up with that. And then if we really get against it, we have the ability probably for about $20 million to decouple the Livingston Scotland press. The way it's set up right now, it can't run different furnaces in tandem, we would have the ability to do that, if we got to that point, but that would not give us another $500 million. It probably give us $50 million to $60 million worth of additional output. But a new complex again would be in the... I'm guessing $350 million to $500 million.

: Gary Liebowitz: Okay. Thank you.

Mark Donegan - Chairman and Chief Executive Officer

Yes.

Operator

Next, we'll go to Ron Epstein with Merrill Lynch.

Ron Epstein - Merrill Lynch

Hi, good morning guys.

Mark Donegan - Chairman and Chief Executive Officer

Good morning.

Ron Epstein - Merrill Lynch

So Mark, what do you think that price is going to go when you look out over the next year or so?

Mark Donegan - Chairman and Chief Executive Officer

Yes, if I knew that, I probably wouldn't be doing what I'm doing, to tell you the truth. What we're seeing right now is the availability of scrap in the cost of scrap is, there is a lot of it available and the cost coming down. That tends to be an indicator to historically again things may change, but historically, that's an indicator of what's going to happen to the price of titanium. At this point of time, I don't feel it get rid of spike on the foot side, I don't think it's going to drop to any great degree. So, it feels to me like it's kind of an equilibrium point and if you look at the demand, if you look out forward in the increasing demand, but you look at the capacity is being brought on line, it kind of feels like it's the capacity brought on is equaling to demand requirements. It kind of feels like it's an equilibrium today. Again that could change and there's been time in the metal world that I couldn't begin explaining to you why metal did what it did.

Ron Epstein - Merrill Lynch

Sure.

Mark Donegan - Chairman and Chief Executive Officer

But nickel is the prime case, I would have told you six to 16, let's hold off and we told you 18 let's hold off, we told you 22 let's hold off.

Ron Epstein - Merrill Lynch

Okay in the past you've expressed interest in prime. Would you ever think about doing a greenfield bunch of holdings?

Mark Donegan - Chairman and Chief Executive Officer

You never say never, but for us being a non-titanium manufacturer to start a greenfield, you still have to go through somebody to get your sponge to the end place, which again will be us. So it doesn't make a lot of sense for us to go out and do anything on greenfield and sponge. That's what we are prepared to do greenfield on the entire process. If you think of that, time spent for a non-titanium manufacturer today to greenfield the entire process and get the customer to qualify, it would be a very, very long... I mean it would be 5, 6, 7 years at the timeframe for us to greenfield.

Ron Epstein - Merrill Lynch

Okay. And then just a follow-up on the comments you made in your prepared remarks. Can you just give more color on some of the other Investment Cast opportunities that you haven't spoken about yet?

Mark Donegan - Chairman and Chief Executive Officer

Well. There are still an Investment Cast or still some 787 engine hardware that we'd like to get hands on. And that's both from the structural casting side and airfoil side. We continue to see opportunities in the aluminum side on the fact that we have our Tilton operation and our Golden State both have full capability, which in the past previous to Golden State, we did not have the large aluminum capabilities. We are seeing our customers looking for us to step up, so we are seeing quite a bit of opportunities coming in on that side. And then on a small casting side, there is always opportunity on that neck of the woods.

Ron Epstein - Merrill Lynch

Okay, great. Thank you.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

We'll next to J.B. Groh with D.A. Davidson

J.B. Groh - D.A. Davidson

Good morning guys. Most of my questions have been answered, but do you have depreciation, amortization number for the quarter?

Mark Donegan - Chairman and Chief Executive Officer

We do, if you hold on a minute.

J.B. Groh - D.A. Davidson

Sure.

Mark Donegan - Chairman and Chief Executive Officer

How about if I give it to you for six months?

J.B. Groh - D.A. Davidson

Sure. That's fine.

Mark Donegan - Chairman and Chief Executive Officer

$65 million.

J.B. Groh - D.A. Davidson

$65 million. And, Mark, in the past you had given us your comments on where you thought the peak of the cycle was, I am guessing that that's continuing to get pushed out into right. Is that a fair statement?

Mark Donegan - Chairman and Chief Executive Officer

Yes, it is. We are just... if I share with our customers and again we have some very, very significant market share positions. So, we spend a lot of time with our customers understanding what their demands are, what capacity they have put it in place and there is... right now it just keeps going to the right. Again that could change tomorrow morning, but we are looking well through 2011 right now as answering questions to our customers on how we are going to handle the growth.

J.B. Groh - D.A. Davidson

You may have addressed this, but in terms of deals coming across your desk in asking prices that sort of thing competition from private equity, what's the environment like there?

Mark Donegan - Chairman and Chief Executive Officer

Well. Certainly the private equity... I think the grand visions of private equity money coming in and paying an absorbent amount of kind of gone by the way side. What we have seen is a more reasonableness and a more openness to what I would consider very fruitful real conversations and strategic people seem to be coming more in the play than the financial sponsors at this point of time.

J.B. Groh - D.A. Davidson

Okay, thanks for your time.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

Next we will go to Cai von Rumohr with Cowen and Company.

Cai von Rumohr - Cowen and Company

Thanks a lot. Good quarter, Mark.

Mark Donegan - Chairman and Chief Executive Officer

Thanks Cai.

Cai von Rumohr - Cowen and Company

You mentioned the positive of kind of nickel prices coming down, but some other suppliers have same situations, where there has been de-stocking as customers think the price is going down, so they wait and buy. Have you seen any kind of trend like that and kind of what you do to protect against something like that?

Mark Donegan - Chairman and Chief Executive Officer

Yes, we had seen that. I think when nickel is up in that 22 to 24, some of these large projects like the ones that have kind of broken loose the last quarter were being... so, we knew the projects are there. I think they were on hold at that point of time. As nickels come back down to that 14% to 16% range, from our standpoint, we've certainly seen less of a hold back. We've seen people start to place their orders. Again, some of the opportunities we have on the market share, we still see things we can go, get that for us our growth opportunities that the somebody else maybe lost opportunities. So coming from where we were and our market share position. My advantage point is that there's enough there for us to get that should be able to overcome that. But in the last month or so, we've seen a lot less of that. I am going to hold off and wait more of, I'm going to get these projects going in. Like I said, some of that bar work and the gasification project, those are all things we saw; they were on hold, but now have been let loose.

Cai von Rumohr - Cowen and Company

Right and 787, you mentioned that you are working with Boeing now; as I recall at one point you said, you were not so interested in helping them out of their near term problems without a long-term agreement. Where do you stand with Boeing on getting a long-term agreement?

Mark Donegan - Chairman and Chief Executive Officer

Well. Again, what our position has always been is, we will do whatever it takes to support our customers and what we would like to do is we'd like to transition that into a longer-term position. While we have been with Boeing and quite closely it's tough to sit in a situation when they have need like that right now and kind of get them with their brains wrapped around, putting long-terms deals a place. What we've basically told all of our fasteners group and it's kind led us very aggressively, is let's do what Boeing needs us to do. Let's be the supplier they need us to be, and we will then circle back around at later point of time. I think that's kind of where we are right now. We want to make sure that we are doing what they need to be done, really turning the shops upside down some cases, the given hardware very rapidly.

Cai von Rumohr - Cowen and Company

Okay. And you mentioned SMC that you are increasing the use of your own nickel alloy produced at SMC in your forged operation. What percent of SMC output approximately are you using internally and kind of what is the plan that increase that number going forward?

Mark Donegan - Chairman and Chief Executive Officer

It's still a miniscule number. If I look at total piles that we are using today over the entire SMC basis, it's going to be less than 5%, it's a very, very small number. If I... again if I look at our internal, I mean what is it in the forging side, probably in that 20% range of what we buy, that we are gaining from ourselves right now, and that again over times should move its way up to 40, 50, 60, 70, 80, the end goal would be 80%.

Cai von Rumohr - Cowen and Company

Okay. And you mentioned these additional capital projects; have you changed your CapEx fourth half for the year and if so, what is it?

Mark Donegan - Chairman and Chief Executive Officer

We are probably still in that $240ish million, it's kind of budget now. The ability... what you are going to find is the ability for these businesses to get it in and on order. Even though, we still are going to spend $30 million in the IGT front [ph], a lot of that will probably roll into next year. What I would expect that maybe get spend this year is probably half the building, and some initial deposits of the furnaces. What I probably would have told you is that probably would have started to subside in our fiscal year '09. And based on the volumes we are seeing, it's probably going to see a flat year '09, and '08, is what I would expect to see at this point in time. We had expected, Cai, if I look at that IGT project, and we look to what the market forces were telling us, we expected to build a new plant, but we expect to kick it off in fiscal year '09, so we just had to pull in one year.

Cai von Rumohr - Cowen and Company

Terrific. Thank you very much.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

Next is Peter Arment with AmTech.

Peter Arment - AmTech

Yes, good morning, guys, great quarter, Mark. You have answered most of the questions, so I just wanted to follow-up regarding just your general outlook related to 787. I know it's been. You've mentioned the fastener opportunities there. Could you just give us sort of more color what you are seeing in terms of whether there is any design changes you are seeing, or is it more on the production side that you think the issues are?

Mark Donegan - Chairman and Chief Executive Officer

Well. We actually from the design standpoint, this program has been no better, no worse than the 777. So I mean we've not seen any major retools. We've been making tweaks, and thinning, and thickening, or whatever maybe. So there hasn't been any major redesigns at all. We've seen tremendous pressure from the day the program started to hit deliveries. We... everybody is concerned about the ramp up, so kind of the conversation we have with our customers right now is that for anybody to slow us down for three or four months, and then to try to get us to ramp up even more aggressively kind of concerns everybody including myself. So the conversation we're having right now is how can we keep ourselves moving at the same pace we were, so when it gets to the bill rates that they want to get to that we are okay. I mean, we could, we would struggle to go from nothing to four months to six months, to eight months in a year, we just couldn't do that. So we are having conversations with our customers to see how we balanced that out. And I think most of our customers understand that clearly. They've certainly face the same types of loads in themselves, but they understand that for us to lay people off and then bring them back in would be disastrous. That's kind of where we are right now.

Peter Arment - AmTech

Okay. That's great color, and a just get a quick housekeeping one. Last year your tax rate came down sort of the second half of the year little bit. Should we expect this is kind of the same run rate or do we expect any pull in there?

Mark Donegan - Chairman and Chief Executive Officer

In the flattish range, I don't think it's going to be higher than it was this quarter.

Peter Arment - AmTech

Okay. Great, thank again, Mark.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

We have question from Rich Safran from Goldman Sachs.

Noah Weisberger - Goldman Sachs

Hi. It's actually Noah for Rich.

Mark Donegan - Chairman and Chief Executive Officer

Hi Noah.

Noah Weisberger - Goldman Sachs

Good morning. How are you?

Mark Donegan - Chairman and Chief Executive Officer

Good.

Noah Weisberger - Goldman Sachs

Question on your organic growth, I have your latest projection to do 10% to 15% for the full year. By my calculation, it looks like you came in about 16%, 17% in the first half, and when I look at the book-to-bill that you finished here at last year sort of indicates that you can easily come in much higher than 10% or 15%. Can you just give us maybe some indication or some update on where you expect full year organic growth to come in?

Mark Donegan - Chairman and Chief Executive Officer

I don't necessarily look in terms of organic growth. I don't see any reason why your logic, you just said is wrong.

Noah Weisberger - Goldman Sachs

Okay. Maybe thinking to FY '09, I doubt you would want to give a number, but can you just maybe say directionally, is there any reason given the aerospace ramp particularly on 787 and the good things you are telling us about the non-aero side of the business. Any reason why organic growth can't accelerate in '09 versus '08?

Mark Donegan - Chairman and Chief Executive Officer

: No, and again, if you think of the capacity, we are putting in place in four furnaces, and the IGT will be coming in throughout the second half of '09. Yes, with the ISO press, they will be running at full capacity for a year. So all... again, all of the capacity, we have put in place is fully sold out. So if you look at the capacity put in and then take that as a base and move forward and assuming '09 feels a lot better than '08.

Noah Weisberger - Goldman Sachs

So it sounds like you are saying and correct me if it's unfair, you will be surprised if organic growth did not accelerate in '09 versus '08.

Mark Donegan - Chairman and Chief Executive Officer

: Yes.

Noah Weisberger - Goldman Sachs

Okay great. Same question on your incremental margins, the last projection I have you giving is something around 30%. It looks like you did maybe in the high 30s this quarter when you take out the metal pass through that you gave us in the press release. So, same question there, how high can that go. Any update on the full year and then again '09 versus '08? Any reason why the incremental margin can't accelerate in '09 versus '08?

Mark Donegan - Chairman and Chief Executive Officer

: I think that again I am comfortable with that kind of number we've put out there. If you look at, we don't add a lot of fixed heads. We do have some capital that's going to be going in. But I don't see anything that should change that up or down drastically. Obviously, the more we put across our fixed asset basis, the more we should incrementally drop through. We are putting new forging press complex, and we are not in major master casters. And there is not big, big piece of equipment. But one thing it is going in, again is that IGT plan that will come in towards the latter half of... saying, 12 months from now, whatever that would be. So the second half of this fiscal year '09 is when that would be coming in the play. But again the overall volume have gone through should offset that.

Noah Weisberger - Goldman Sachs

What about the mix shift to the single crystal; how much of an affect can that have on the over all incremental margin?

Mark Donegan - Chairman and Chief Executive Officer

Usually that the higher the value, again the more... we don't have any major swings one way or the other. What we have tried to work ourselves over... if I go back to 10 years ago, we just had a situation, where whatever they program or a product line or a part number or a single crystal DS, we have these wild swings in our margins. So, I think we have tried to work hard over that period of time to not get ourselves in. So there is not any wild swings as we would move up to DS and crystal, what you find that as we make margins on a much higher dollar content is what we get.

Noah Weisberger - Goldman Sachs

Right.

Mark Donegan - Chairman and Chief Executive Officer

I don't think we try to take advantage of our customers. So our customers know what we do; know what it costs to manufacture the product. They are very smart buyers, they are very smart customers. So again I think our position always has been to try not to go in and take advantage of our customers, but be a good long-term supplier and get more market share and growth. So, I don't think we have any disproportion that we may count to one in one product that will make a lot of money in that one.

Noah Weisberger - Goldman Sachs

Okay. Thanks for the color and great quarter.

Mark Donegan - Chairman and Chief Executive Officer

Yes, thanks.

Operator

Next we will go to Eric Hugel with Stephens.

Eric Hugel - Stephens Inc.

Hi good morning guys, good quarter.

Mark Donegan - Chairman and Chief Executive Officer

Hi Eric.

Eric Hugel - Stephens Inc.

Just a couple of questions; most have been answered, but Mark, when you think about the $5 million or so roughly in content for the 787, when we think about timing, when should we think about really the inflection point? When we really start to see bulk of that creep in?

Mark Donegan - Chairman and Chief Executive Officer

I think we just went through a real heavy development quarter, so we have quite of a... the last six months have been a lot of delivery to give the development engines in place. I think what you can look at is probably seven and nine months before, the delivery of the aircraft sort of a rate Boeing, whoever would be delivering, it kind of back yourself up from there, and that's how you should see it coming. But usually six to nine, but we probably get a little more as we begin to ramp this probably, we get little longer and probably a little bit more inventory in the system in typical.

Eric Hugel - Stephens Inc.

Okay. You have a cash flow from operations number? Six months or first three months.

Mark Donegan - Chairman and Chief Executive Officer

Hold on a minute.

Unidentified Company Representative

Yes, about 350 for six months.

Eric Hugel - Stephens Inc.

Thanks. Are there any other, I guess following up on the labor issue at line and are there any other upcoming labor issues that we need to just sort of keep track of?

Mark Donegan - Chairman and Chief Executive Officer

Well, the other major contract we went through we did go through prior to the use, then we went through a graph contract and that was signed without any problems.

Eric Hugel - Stephens Inc.

Okay. And finally, are there any upcoming for the long-term, for the contract opportunities out there, where we negotiate get better market share pricing on the horizon?

Mark Donegan - Chairman and Chief Executive Officer

I think right now probably, the nearest ones we are seeing would be on the IGT side in our non-typical, non-GE, we're seeing some opportunities come up contractually with the other major players. And again I think the fastener side is providing opportunities that we are being asked to look at right now.

Eric Hugel - Stephens Inc.

Great, thanks a lot guys. Good quarter.

Mark Donegan - Chairman and Chief Executive Officer

Thanks.

Operator

Next will go to David Strauss with UBS.

David Strauss - UBS

Thanks. Good morning Mark.

Mark Donegan - Chairman and Chief Executive Officer

Good morning David.

David Strauss - UBS

Could you talk about, SMC when you brought the deal in, obviously at a pretty big opportune on the cash flow side. Can you talk about progress has been made there, and how much of an opportunity you still think is apart from the cash flow side?

Mark Donegan - Chairman and Chief Executive Officer

We're probably about 80% of the way there. This probably still about 20% more to do, and I think when it's all said and done, we'll probably come close to paying the deal off with the cash that we are going to... we'll pull out of the business.

David Strauss - UBS

Okay and thanks. And on forge price, obviously the business grew 30% plus this quarter. Can you give us some sort of idea kind of breaking it down by relative end market between aero, power, and kind of industrial; how the business grew?

Mark Donegan - Chairman and Chief Executive Officer

I don't have the data in front of me, but aero would probably be number 1; and seamless extruded pipe would be probably number 2, so power. But I don't really... I couldn't give you numbers that I may just don't break it up their way in my brain.

David Strauss - UBS

Okay. And then within fasteners, obviously their aerospace part of the business is going very well. We haven't talked much about the auto piece, which I know is getting small and small, but how is that business going? It looks like it's flattish to down and...

Mark Donegan - Chairman and Chief Executive Officer

It's flat. I just went through some of it yesterday, it's just flat. What we've been able to do, is we've been able to get new parts and with new share to overcome the down market or where the product lines are being phased out, the de-stocking or the closure of plants. So it is flat, flat.

David Strauss - UBS

Okay, thanks a lot Mark.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

We'll take our last question from Tony Rizzuto with Bear Sterns.

Anthony Rizzuto - Bear Sterns

Thanks very much for taking my question. I was intrigued by your comments about special metals and what you were talking about doing more business in rounds versus billet. I was wondering, Mark if you could discuss maybe what the incremental margin opportunity is in rounds versus billet, and then maybe talk about some of... maybe who your main competitors are in that business?

Mark Donegan - Chairman and Chief Executive Officer

Let me back up. Let me answer the last part of your question first. Certainly, our main competitors will be Carpenter, Allvac, and then super alloys side and Haynes [ph] would be kind of the lower end of what we go after. Again, we have tried to get special metals into a position, where they could be cost competitive. I think that our margins would have been horrendous if we try to compete free on the capital we put in place. We probably would have basically been a break even business. I think the capital we have put in place is the capital we're going to finish putting in place. We'll make the margins on the part we're going at comparable to what special metals is making elsewhere.

Anthony Rizzuto - Bear Sterns

Okay, that's very helpful. I appreciate it. Thank you.

Mark Donegan - Chairman and Chief Executive Officer

Okay.

Operator

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


Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.